Thursday, March 2 2006 16:59 Hrs (IST) - World Time -

New Delhi: In a severe setback to the state governments, the Supreme Court today (Mar 02 2006) held that they cannot levy sales tax on services provided by the telecom companies to consumers.

Holding that the services in the telecom sector cannot be equated with transfer of goods, a Bench comprising Justice Ruma Pal, Justice AR Lakshmanan and Justice Dalveer Bhandari said: "Goods do not include electromagnetic waves or signals."

However, the Bench said the handsets are liable for levy and cannot be kept away from the ambit of sales tax. "In a telecom service, sale confines to sale of handsets only. Hence, transfer of right to use can be there only in handsets and not others."

The Court said a telecom service may be a composite contract only if a discernible sale is involved and maintained that "the value of services cannot be included in the meaning of goods."

"The imposition of sales tax on any facility of telecom service is untenable in law," the Bench said.

With respect to imposition of sales tax on Sim cards, the Bench remanded it to the Assessing Authorities to decide on the principles laid down by it in the judgement. It also did not cover the issue of inter-state transaction.

BSNL and several private telecom service providers had challenged the constitutional validity of the levy of local sales tax, involving crores of rupees by many states on telecom services contending that such levy would saddle the consumers with an additional burden and result in putting the service out of the reach of millions of people.

The state-owned telecom major and others had argued that the facility of providing Sim cards and other goods did not amount to sale.

It was contended that telecom companies are providing services to the people and was charging them on that count alone and there was no transfer of goods to consumers, warranting impositition of sales tax.

The same transaction could not be treated both as sales and service and taxed twice, the telecom companies had submitted.

It was submitted that such a levy was beyond the legislative competence of the States and was not permissible and unconstitutional.