Bombay High Court
Maharashtra State vs M/S. Page Point Service (P) Ltd on 24 September, 2014
Author: A.K. Menon
Bench: S.C. Dharmadhikari, A.K. Menon
Shiv
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IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
SALES TAX REFERENCE NO.3 OF 2005
The Commissioner of Sales Tax
Maharashtra State, Mumbai
8th Floor, Vikrikar Bhavan,
Mazgaon, Mumbai 400 010 .. Applicants.
Vs.
M/s. Page Point Service (P) Ltd.
Dr. Ashoka Pavillion No.21,
Dr. Ambedkar Road,
Pune - 411 001. .. Respondent.
Mr. V.A. Sonpal, Special Counsel for the Applicants.
Mr. P.V. Surte and Mr.V.P. Patkar as Amicus Curiae.
CORAM : S.C. DHARMADHIKARI AND
A.K. MENON, JJ.
RESERVED ON : 9TH SEPTEMBER, 2014
PRONOUNCED ON : 24TH SEPTEMBER, 2014
JUDGMENT (PER A.K. MENON, J.)
1. This reference arises pursuant to decision of the Sales Tax tribunal, Maharashtra at Mumbai in Reference Application No.92 of 2002 whereby the following question of law has been referred to this Court :
"(i) Whether on the facts and in the circumstances of the case was Tribunal justified in holding that the "Airtime charges" and "License fees" charged under an contract of selling activated pager do not form a part of sale price within the meaning of Section 2(29) 1/12 ::: Downloaded on - 24/09/2014 23:17:31 ::: str3.05.sxw of the Bombay Sales Tax Act, 1959 ?"
2. Before dealing with the question at hand it would be convenient to enumerate few facts : The Respondent is a registered dealer under Bombay Sales Tax Act, 1959 having its registered office in the State of Karnataka, Bengaluru. It attended the office of the concerned Revenue Officer, in response to notice issued under section 33 of the Act. The Respondent is an importer and reseller of hardware in general and radio pagers in particular.
After hearing the Respondent, its general turnover of sales was determined at Rs.1,33,99,555/- including tax collection of Rs.4,33,947/- and collection of other charges such as license fees, airtime charges and service tax amounting to Rs.39,78,768/-.
It was the Applicants' contention that the Respondent - dealer could not explain the difference between the sales as per annual returns and sales disclosed in the statement. During the course of verification of the sales bills the applicant found that the dealer had charged separately for pagers under the heading "Hardware less discount add Sales tax". Separate charges were levied for "License fees and airtime charges less discount plus service tax".
The sum total of all the amounts were collected in cash or by cheque.
3. It transpires that the dealer had collected sales tax only 2/12 ::: Downloaded on - 24/09/2014 23:17:31 ::: str3.05.sxw on value of the hardware, viz the pagers and no sales tax was collected on the amount of license fees or airtime charges. The Applicants have proceeded to take into consideration gross sales to include extra charges such as license fees and airtime charges.
The Appellants apparently relied upon observations in the case of Hindustan Sugar Mills vs. State of Rajasthan (1979) 43 STC 13 and claim to have applied the test set out in the said judgment, namely, that of consideration passing from the purchaser to the dealer for the sale of goods. That it is immaterial to enquire as to how the amount of consideration is made up, whether it included excise duty or sales tax or freight. The only relevant fact to be ascertained is as to what amount is payable by the purchaser to the dealer as consideration for the sale.
4. The Respondent in the instant case submitted that it had distinct agreements for providing of air time and for sale of hardware. In support of this contention the Respondent have produced a copy of the order form on record wherein separate prices were made for the equipment and the service. According to the Applicant, there cannot be separate agreement for each of them and the pager is of no use if it is not equipped with the facility of service. Once the pager is sold, the purchaser becomes a permanent customer for future service. Later on the purchaser pays only for service.
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5. The Assistant Commissioner of Sales Tax concluded that the charges for airtime alone cannot be subject matter of sales tax. He relied upon the judgment of this court in M/s.Sun- N-Sand Hotels. Vs. State of Maharashtra (1969) 23 STC 507 and proceeded to hold that the service charges constituted part of sale price as defined in section 2(29) of the Act. He concluded that in cases where any charge is optional it would not form part of the sale price and found that in the present case, the payment of consideration for airtime charges or license fees was not optional and therefore had to be accounted as part of sale price.
6. On behalf of the Respondent dealer it was contended that the company is established to earn profit and it has sold pagers at a loss by giving discounts and in anticipation of future collections through airtime charges and on this basis had levied sales tax and issued a demand notice for Rs.6,04,230/- The Respondent dealer filed a first appeal before Deputy Commissioner of Sales Tax (Appeals) I, Pune who partly allowed the appeal and reduced quantum of tax and reduced interest under section 36(3)
(b). However, he confirmed the order of assessment as regards airtime charges and license fees. The Respondent dealer then filed the second appeal before the tribunal, which in its judgment on 7.6.2012 allowed the appeal and held that airtime charges and 4/12 ::: Downloaded on - 24/09/2014 23:17:31 ::: str3.05.sxw license fees were not part of the sale price. It is in this background that the question has been referred to this Court.
7. Mr.Sonpal in the course of his submissions conceded that the airtime charges would not form part of the sale price. He, however, contended that the license fees would definitely form part of the sale price. In support of his contention he relied upon a decision of the Hon'ble Supreme Court in the matter of M/s.Central Wines, Hyderabad vs. Special Commercial Tax Officer Sales Tax ig (1987) 2 SCC 371 which observed in paragraph 7 as under :
"7. .... .... .... Even if therefore the bill or the voucher issued to the purchaser indicates the amount of sales tax separately what is collected by the vendor from the vendee is not tax but is merely a part of the sale price charged by the vendor to the vendee. So far as the statute is concerned it does not cast any obligation on the purchaser of the goods to pay any tax and therefore what is collected by the vendor from the vendee by way of consideration for passing the property in the goods to the vendee is the price charged by him and not tax collected by him from the purchaser. The amount of money which goes from the pocket of the vendee to the pocket of the vendor as a condition or consideration for passing of the property in the goods is thus the sale price and not the tax. It is the amount, but for the payment of which, the vendor 5/12 ::: Downloaded on - 24/09/2014 23:17:31 ::: str3.05.sxw would not transmit his title to the goods in favour of the vendee, and not any amount paid by the vendee towards any tax liability incurred by him on making the purchase of the goods. It is no doubt true that a dealer as a prudent businessman would pass on the burden in the context of the sales tax liability to the buyer. But then he would be doing so in order that he may not make a loss on the transaction. Inasmuch as no businessman carries on business with a view to incur loss, that he would take into account this factor at the time of collecting the sale price from the vendee stands to reason."
Mr.Sonpal therefore submits that the question referred must be answered in the negative and in favour of the Revenue and against the assessee.
8. The Respondent dealer has not appeared before this court and we do not have the benefit of hearing any submission on behalf of the Respondent. The senior members of bar Mr.Surte and Mr.Patkar, who were present in the court at hearing of this reference made a request that they be heard in the matter since the issue involved has far reaching ramifications. We have therefore heard them as Amicus. They submitted that the tribunal has reached a proper and sound conclusion in law.
9. Before we deal with further submissions it would be 6/12 ::: Downloaded on - 24/09/2014 23:17:31 ::: str3.05.sxw appropriate to mention that the use of pagers as a device for communication preceded the advent of mobile telephony in the country. The pager worked on a radio frequency and the unit was purchased by the subscriber of pager services. The airtime charges collected were by way of annual fees. When a subscriber purchased pager unit it would be of no use to him unless there was corresponding paging service. The Respondent dealer was running such services and it was but natural that the subscriber would enroll for the pager service. The airtime charges was thus collected as part of the service. The license fees in question could be two fold, i.e. license fees payable by the Respondent dealer to the Competent Authorities or the pro-rata license fees payable by the subscriber in order to avail of the paging service. The cost of the hardware is thus separate from the cost of airtime and the cost of license fees.
10. It is also convenient for us to now refer to the meaning of the words "sale price". The expression "sale price" is defined in section 2(p) as follows :
".... the amount payable to a dealer as consideration for the sale of any goods, less any sum allowed as cash discount according to the practice normally prevailing in the trade, but inclusive of any sum charged for anything done by the dealer in respect of the goods at the time of or 7/12 ::: Downloaded on - 24/09/2014 23:17:31 ::: str3.05.sxw before the delivery thereof other than the cost of freight or delivery or the cost of installation in case where such costs is separately charged."
Thus, in order to qualify as sale price the amount paid or payable to the dealer must include any sum charged for anything done by the dealer in respect of the goods at the time and/or before delivery thereof when such cost is charged separately. On analyzing the said definition it is clear that in order to qualify as sale price, the dealer must do something "in respect of goods at the time of or before delivery thereof". In the present case applying this test it is not in dispute that the dealer does not do anything to the radio pager at the time of or before its delivery. It merely collects airtime charges and license fees pro-
rata "nothing is done by the dealer in respect of goods at the time of or before delivery thereof" and airtime charges are paid in respect of airtime radio paging services which is activated after the pager is purchased and/or after delivery of the pager. Nothing is required to be done in respect of pager unit itself at the time of such activation. However, what is done is to authorise radio frequency network to access the pager after it is sold to the subscriber. In other words, pager is service activated in respect of the pager sold to the purchaser. This sale of the pager is a stand alone transaction. The activation of the pager comes subsequent to 8/12 ::: Downloaded on - 24/09/2014 23:17:31 ::: str3.05.sxw the incidence of sale. The license fee payable is a necessary corollary and neither the collection of airtime charges nor license fees will constitute "anything done" in respect of the pager. Thus, it cannot be said that payment of airtime charges and license fees can be included in the sale price.
11. A simple test can be applied to ascertain, the correct position. If after purchasing the pager, the subscriber were to lose pager after paying airtime costs and license fees in order to continue to avail of services, the subscriber would need to purchase new pager unit. When he does so, the consideration charged would only be the cost of the pager unit and would not include the cost of license fees or airtime charges. This would establish that the sale price of the pager would not include license fees or airtime charges. We are therefore unable to agree with Mr. Sonpal and even without the concessions that he has made, we are of the view that airtime charges and license fees cannot form part of the expression "Sale Price".
12. Mr.Patkar, learned counsel submitted that the tribunal did not have an opportunity of considering the judgment of the Hon'ble Supreme Court in Imagic Creative Pvt. Ltd. vs. Commissioner of Commercial Taxes and Others (2008) 12 VST 371 SC and submitted that the airtime charges and license 9/12 ::: Downloaded on - 24/09/2014 23:17:31 ::: str3.05.sxw fees are neither the cost paid for the acquisition of pager nor they are charged or incurred prior to the delivery of the pager. There is no question of including them in the sale price of the pager. He submitted that the sales order form represented the contract between the Respondent and their customers and under the product order details there was separate categorisation of the costs of the pager unit and that of the license fee. The sales order clearly mention that there are separate obligations one being of the sale of pager and another of the service which will enable the purchaser of the pager to receive messages on the pager.
13. In the case of Imagic Creative Pvt. Ltd. (supra) the Hon'ble Supreme Court found that those who provide service i.e. service providers, are assessable to the service tax and a distinction can be made in between an indivisible contract and a composite contract. The purport and object for which the constitution had to be amended and clause (29A) had to be inserted in Article 366, must be borne in mind. Mr.Patkar further submitted that the judgments of the Hon'ble Supreme Court in the case of Hindustan Sugar Mills (supra) and M/s.Central Wines, Hyderabad (supra) were rendered prior to the 46th amendment to the Constitution of India and the imposition of service tax by the Finance Act, 1994 and as such judgment in Hindustan Sugar Mills and M/s.Central Wines (supra) cannot now apply to the 10/12 ::: Downloaded on - 24/09/2014 23:17:31 ::: str3.05.sxw facts of the present case. Paging services rendered cannot be included in the cost of the pager for the purpose of taxation and that the tribunal has correctly reached the conclusion.
14. It is also useful to refer to the judgment of State of Karnataka vs. Bangalore Soft Drinks Pvt. Ltd. (2000) 117 STC 413 (SC) wherein the Respondent has effected sales "ex-
works" and had also undertaken transport of the goods to the place of the buyer. The goods were transported in the vehicles of the Petitioners only. However, the High Court of Karnataka held that the transfer of the property in the goods takes place at the factory gate of the Petitioner and the subsequent transportation undertaken by the Petitioner was for and on behalf of the Petitioner as his agent. The obligation of transportation was construed to be as separate contract and therefore, the freight charges cannot be included in sale price of the goods.
15. Furthermore, it may be noticed that in Sales Tax Appeal No.5 of 2011 a Division Bench of this Court had an occasion to consider whether the Maharashtra Sales Tax Tribunal was correct in setting aside the tax on the handling charges or service charges for registration of motor-cycles and interest thereon. It is held that the goods which form part of the subject matter of the contract between the Respondent and its buyer were in a specific 11/12 ::: Downloaded on - 24/09/2014 23:17:31 ::: str3.05.sxw and deliverable state. The transfer of property in the goods in pursuance of the sale contract takes place against the payment of the price of goods. The delivery of the goods is effected by the seller to the buyer and the obligation under law to obtain registration of the motor vehicle is cast upon buyer. The service of facilitating the registration of the vehicle which is rendered by the seller-assessee is to the buyer and in rendering that service, seller acts as an agent of the buyer. The handling charges for this service cannot form part of sale price. Thus, taking overall view of the matter it is clear that the sale price does not include airtime charges and/or license fees.
16. In conclusion, therefore, we are of the opinion that sale price in the facts of the present case will be restricted to that of the hardware, namely, pager units and will not include the cost of airtime and license fees. As a result the question of law is answered in the affirmative and the tribunal was justified in holding that airtime charges and license fees charged under the contract for selling activated pager do not form part of the sale price.
17. There will be no order as to costs.
(A.K. MENON,J.) (S.C. DHARMADHIKARI,J.) 12/12 ::: Downloaded on - 24/09/2014 23:17:31 :::