CA K. Jitendra Babu

High Court of Tripura in a recent case of BHARTI TELEMEDIA LTD Vs THE STATE OF TRIPURA [W. P.(C) No. 563 of 2010] held that Set-top Boxes (STBs) provided as a part of DTH services are liable for VAT on the following grounds, mentioned in paras 28, 29 and 31 of the judgement:

1. The right to use STBs has been transferred to the customers and they are not given free of cost. The cost of the STB is obviously included in the activation charges and/or the monthly subscription.

2. Under the Tripura VAT Act even where payment of the goods is made by way of deferred payment the goods can be subjected to tax.

3. The main issue is whether the contract can be easily divided and the value of the goods can be ascertained with exactitude.

4. As far as STBs are concerned they are in total control of the customer. Under his effective control the STBs are installed in the house of the customer. He can use the STB when he wants to. He can use the STB to view whichever channel he wants to view. He may or may not use the STB. The company does not even have the power of entering the premises of the customer.

5. Most importantly as per the terms of the agreement, the companies are responsible for the functioning of the STBs only for a period of 6(six) months. The warranty is valid only for six months and thereafter there is no warranty. Therefore, if STB of a customer is spoiled after six months he will have to pay for repair or replacement of the same. We are of the considered view that this amounts to transfer of the right to use goods

6. The State is assessing the tax solely on the basis of the value of the STBs as given in the books of account of the petitioners. The petitioners claim depreciation etc. on these STBs and the valuation given by the petitioners is the value of the goods, the right to use which has been transferred to the customers. This is easily separable and discernible and the State has the full authority to levy value added tax on the sale part of the transaction i.e. the value of the STBs.

The judgement of the High Court will have far reaching consequences as far as levy of VAT is concerned, since the departmental authorities can assume that every transaction wherein use of material is involved is liable for VAT.

In this context, observations of the Hon ‘ble Supreme Court in the case of BSNL are very much relevant [Bharat Sanchar Nigam Limited (BSNL) Vs. Union of India and Others [(2006) 145 STC 91]. At para 51 of the judgment, the Hon ‘ble Court held that “What are ‘goods’ in a sales transaction, therefore, remains primarily a matter of contract and intention. The seller and such purchaser would have to be ad idem as to the subject-matter of sale or purchase. The court would have to arrive at the conclusion as to what the parties had intended when they entered into a particular transaction of sale, as being the subject matter of sale or purchase. In arriving at a conclusion the court would have to approach the matter from the point of view of a reasonable person of average intelligence”.

In the instant case, the intention of the parties is to provide and receive DTH services. The contract between the parties is a service contract, but not for sale of goods. At no point of time, the subscriber intends to purchase anything in the transaction. His intention is only to avail the DTH services. The subscriber knows that subscription charges varies on the basis of Set-top Box (STB) selected by him, and the quality and features of service varies with STB selected by him. The subscriber is not interested in purchasing Set-top Box. He can use the STB only to the extent of changing the channels through remote, but does not have any other control over it. The service provider can stop the services remotely with the help of Smart card placed in the STB. Then STB does not function and the subscriber cannot use it in any other manner or for any other purpose. The Service provider is also not interested in selling STB separately. However, as a commercial concern, the service provider recovers the cost of STB also as a part of rendering DTH services, in the form of subscription charges.

Considering the fact that the Service provider and Service receiver who are parties to the transaction are not interested in selling and buying of STBs, the transaction is outside the scope of VAT/Sales Tax. Service providers are remitting service tax on the entire amount collected from the subscribers.

In this context, is is also relevant to go through the observation of the Hon ‘ble Supreme Court in BSNL’s case at para 44 wherein it was held that “But the 46th Amendment does not give a licence for example to assume that a transaction is a sale and then to look around for what could be the goods. The word “goods” has not been altered by the 46th Amendment. That ingredient of a sale continues to have the same definition. The second respect in which Gannon Dunkerley has survived is with reference to the dominant nature test to be applied to a composite transaction not covered by article 366(29A). Transactions which are mutant sales are limited to the clauses of article 366(29A). All other transactions would have to qualify as sales within the meaning of the Sales of Goods Act, 1930 for the purpose of levy of sales tax”.

Department is assuming a transaction as sale of goods and then resorting to find out what could be the goods involved in the transaction, even though the transaction does not envisage any sale.

In the case of DTH services, the only element involved in the transaction is Service and therefore the amount collected from the subscribers is liable for service tax. Since STBs are provided as a part of rendering services, no element of sale/transfer of right to use is involved in the transaction, to attract VAT/Sales Tax.

Obviously, the service providers would carry the matter to the Supreme Court and required to do so.

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