ORDER
Bilal Nazki, J.
1. Show-cause notices were issued to the petitioners by the respondents as they were treated to be dealers within the meaning of provisions of A.P. General Sales Tax Act, 1957. After show-cause notices, demands were raised for the year 1996-97 against the petitioners on the basis of provisional assessment orders. In respect of petitioners in WP No.25864 of 1997 show-cause notice was issued in proceedings No.9997/96-97/APGST, dated
8-8-1997. Assessment order was passed vide Rc.No.9997/96-97/APGST, daied 9-9-1997 and the Demand notice was issued on
9-9-1997.
2. With respect to petitioners in WP No.11826 of 1997 show-cause notice was issued in proceedings No.9997/96-97/APGST dated 3-2-1997, Provisional Assessment Order was passed in proceedings No.9997/ 96-97/APGST, dated 25-2-1997. The petitioners in this writ petition moved an appeal which was rejected by the appellate authority and they filed a revision and the Additional Commissioner (CT) and Joint Commissioner (I-egal) who was the revisional authority granted stay on the disputed tax but subject to payment of Rs.50 lakhs.
3. In another Writ Petition i.e., WP No.6742 of 1996 show-cause notices were issued vide proceedings No.9997/96-97/ APOST, dated 27-2-1996 for the period from April, S993 to March, 1994 and vide proceedings No.9997/94-95/APCST, dated 27-2-1996 for the period from April, 1994 to March, 1995, and proceedings No.9997/95-96/APGST, dated 27-2-1996 for the period from 1-4-1995 to 31-1-1996; Assessment order was issued vide proceedings No.9997/ 95-96/APGST dated 19-3-1996 and the Demand notice was issued vide proceedings No.9997/95-96/APGST, dated 27-3-1996.
4. These proceedings have been challenged by way of these writ petitions. When these writ petitions came to be filed, this Court passed interim directions suspending tlic operation of impugned demand notice challenged in WP. No.25864 of 1997 on condition of petitioners depositing Rs.12.00 lakhs within two weeks from Ihe date of that order, that order was passed in WP MPNo.30101 of 1997 on 16th October, 1997. In other writ petition being WPNo.11826 of 1997 the Court confirmed the conditional stay order passed by the revisional authority. In the third writ petition i.e., WP No.6742 of 1996 the Court gave liberty to the petitioners to file an appeal.
5. It appears that, various State Governments treated the Telecommunications department as a dealer and started charging them with Sales tax for use of Telephones by subscribers. Various High Courts dismissed the writ petitions. This High Court entertained the writ petitions but stayed the recovery of demands subject to certain conditions. The matters went to the Supreme Court. ‘Hie petitioners in WP No.25864 of
1997 also approached the Supreme Court. The Supreme Court took various similar matters from different States together and passed an order in Civil Appeal No.4253 of
1998 on 25th August, 1998. The order which pertains to the petitions in this Court reads as under:
“Leave granted.
Here in these matters the respective I ligh Courts have kept pending before them t|ie writ petitions, but by interim directions had ordered the appellants to pay 50% of the demand before the disposal of the writ petitions. The respective State Governments had filed their counter affidavits. On approaching this Court, the appellants had obtained stay orders regarding payment of 50% of the dues. Tliese orders of the respective High Courts would stand reversed for identical reasons as given in the above cases. It would now be expected of the respective High Courts to decide the writ petitions on merits. The appeals would stand allowed in these terms. No costs.”
6. While disposing of the appeals from other Courts which had been filed against the dismissal orders of the High Courts, no orders were passed by the Apex Court on merits of the appeals. The Supreme Court was of the view that those Courts had dismissed writ petitions only on the ground that the Telecom department had an alternative remedy available. But, the Supreme Court found that certain important legal questions had been raised in the petitions therefore High Courts should have decided those questions.
7. In this background these writ petitions are being heard. We have heard the three writ petitions together, therefore they are being decided by this common order. One of the writ petition is taken as a model because the controversy is the same in all the writ petitions.
8. The case of the respondents appears to be based on the following factual premise. As can be made out from the show-cause notices given to the writ petitioners, one of the show-cause notices being dated 8-8-1997, it was stated that as per Section 2(e) of A.P. General Sales Tax Act the Central Government was a dealer and in terms of
Section 5-B of the Act a dealer who transfers the right to use any goods for any purpose whatsoever is liable to pay Sales tax of 5% on the amount realised by the dealer for transfer of use of goods. Construing Section 2(c) and Section 5-B in the manner as the respondents constitute, they found that the petitioners were collecting lease rentals every month from its Telephone subscribers and therefore the petitioners i.e., the Telephone Department was liable to pay tax for the rentals collected by them for use of goods belonging to the Telephones Department. Ultimately the assessment orders were passed. One of the orders was passed on 9th September, 1998. In the assessment order, the contentions raised by the Telephones department were discussed and it was held that the respondents were the dealers within the meaning of A.P. General Sales Tax Act and t!ie amounts received by way of rentals for use of ‘telephone was liable to be taxed. So, the net controversy before tiiis Court is, whether the rentals received by the Telecommunications Department from its subscribers on use of a facility of telephone is taxable in terms of the provisions of A.P. General Sales Tax Act, (hereinafter referred as ‘the Act’). Certain provisions of the Act need to be reproduced.
Section 2(e) of (he Act defines the ‘dealer’ as :
“2(e) ‘dealer’ means any person who carries on the business of buying, selling, supplying, or distributing goods or delivering goods on hire purchase or on any system of a payment by instalments, or carries on or executes any works contract involving supply or use of material directly or otherwise. Whether for cash, or for deferred payment, or for commission, remuneration or other valuable consideration, and includes –
(i) local authority, a company, a Hindu undivided family or any society (including a co-operative society) club, firm or association which carries on such business:
(ii) a society (including a co-operative society), club firm or association which buys goods from or sells, supplies or distributes goods to its members;
(iii) a casual trader, as hereinbefore defined:
(iii-a) any person, who may in the course of business of running a restaurant or an eating house or a hotel (by whatever name called), supply by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (whether or not intoxicating);
(iii-b) any person, who may transfer the right to the use of any goods for any purpose whatsoever (whether or not for a specified period) in the course of business to any other person:
(iv) A commission agent, a broker, a del credere agent, an auctioneer or any other mercantile agent, by whatever name called, who carries on the business of buying, selling, supplying or distributing goods on behalf of any principal or principals;”
Explanation-III to the Section 2(e) lays down:
“Explanation-III : The Central Government or the State Government which, whether or not in the course of business, buys, sells, supplies or distributes goods, directly or otherwise, for cash or for deterred payment or for commission, remuneration or other valuable consideration shall be deemed to be dealer for the purposes of this Act.”
9. There is not much dispute and the parties are not al variance to the fact that Central Government is a dealer within the meaning of Section 2(e) read with Explanation-III of the Act.
Section 5-E of the Act provides:
“5-E. Tax on the amount realised in respect of any right to use goods:
Notwithstanding anything contained in this Act:
(a) Every dealer who transfers the right to use any goods for any purpose whatsoever, whether or not for a specified period, to any lessee or licence for cash, deferred payment or other valuable consideration. In the course of his business shall, on the total amount realised or realisable by him by \vay of payment in cash or otherwise on such transfer or transfers of the right to use such goods from the lessee cr licensee, pay a tax at the rate of five paise in every rupee of the aggregate of such amount realised or realisable by him during the year.
(b) the transfer of right to use any such goods entered into by any dealer shall be deemed to have taken place in this State whenever the goods arc used within the State, irrespective of the place where the agreement whether written or oral for such transfer of right is made. Provided that no such tax shall be levied if the total turnover of the dealer including such aggregate is less than rupees two lakhs.”
10. The controversy between the parties is only on the interpretation of Section 5-E. The assessment orders anil the consequential orders passed in appeals and revisions in some cases are challenged by the petitioners mainly on the following grounds:
(1) That, the Telecommunication department is not subject to any tax by the State Government on its properties or on incomes derived from use of such properties in view of the clear mandate of Article 285 of the Constitution of India.
(2) Secondly, it has been contended that even if it is admitted that no exemption is available to the petitioners under Aniclc 285 of the Constitution of India,, even then, the use of telephones is not exigible for tax by the respondent State on (he ground that there is no transfer of use of goods by the petitioners to its consumers.
11. In the light of these two arguments, it is contended by the petitioners that the notices, assessment orders or the orders in Appeals and revisions passed in certain cases are all without jurisdiction and are liable to be quashed, whereas it is contended by the respondents that there is no exemption for the incomes derived by transfer of use of moveable property by the department of Central Government to its consumers as it is purely a commercial function where the department is receiving rentals for transferring the use of its goods and is therefore liable to be taxed.
12. The contention of the petitioners is that there is a blanket ban on the States to impose “tax on the properties of the Union of India, whereas the contention of the respondents is that what is being charged from the petitioners is not any lax on the properties of the Union but is a tax charged on the incomes derived by the petitioners from transferring the use of goods.
13. For understanding the rival contentions of the parties, the scheme of the Constitution with regard to the taxation visa-vis Central Government and State Governments has to be understood and a reference to Articles 285 and 289 is imperative. Article 285 lays down:
“285. Exemption of the property of the Union from State taxation.
(1) The property of the Union shall, save in so far as Parliament may by law otherwise provide, be exempt from all taxes imposed by a State or by any authority within a State.
(2) Nothing in clause (I) shall, until Parliament by law otherwise provides, prevent any authority within a State from levying any tax on any property of the Union to which such properly was immediately before the commencement of this Constitution liable or treated as liable, so long as that lax continues to be levied in that Stale.”
Article 289 lays down:
“289. Exemption of property and income of a State from Union iaxation:
(1) The property and income of a State shall be exempt from Union taxation.
(2) Nothing in clause (1) shall prevent the Union from imposing, or authorising the imposition of any tax to such extent, if any, as Parliament may by law provide in respect of a trade or business of any kind carried on by, or on behalf of, the Government of a State, or any operations connected therewith, or any property used or occupied for the purposes of such trade or business; or any income accruing or arising in connection therewith.
(3) Nothing in clause (2) shall apply to any trade or business, or to any class of trade or business, which parliament may by law declare to be incidental to the ordinary functions of Government.”
14. As has already been held by the Supreme Court that the two provisions Article 285 and 289 of the Constitution of India are a result of a same form of inter governmental immunity, therefore these provisions have to be understood in that context. The provisions of Article 285 is a successor provision to Section 154 of the Government of India Act, 1935, whereas Article 289 is a successor provision to Section 155 of the Government oflndia Act. From bare perusal of the text of these two Articles one can come to the following conclusions:
15. Article 285 gives total exemption of property of the Union from State taxation. However, it may be taxed subject to a law made by the Parliament. In the earlier provision i.e., Section 154 of the Government oflndia Act, it was provided that, the properly vested in his Majesty for purposes of the government of the Federation shall, save in so far as any Federal law may otherwise provide, be exempt from all taxes imposed by, or by any authority within, a Province or Federating State. But, after the Article 285 was incorporated into the Constitution, exemption was given to the property of the Union from the State taxation totally and completely. As a matter of fact, taxation over the property of the Union belonging to the State was taken away from the jurisdiction of the State. Similarly, the Union was barred from levying tax on the properties of the State. Rut, there is a difference between Article 285 and 289. Article 285 exempts property of the Union from the State taxation whereas Article 289 exempts not only the property of the Slate but also the income of the State from Union taxation.
16. Now there is no ambiguity as regards the meaning to Article 285 and it is clear that the State has no power to impose taxes on the property belonging to the Union. But, what is important is, what is the taxing event, is it the property or the sale of the property. If the tax is imposed on the property, the State Government is clearly without having any such power, but if the taxing event is the sale of goods, then, the State has the power to impose the tax. The question does not need any detailed consideration or detailed discussion of this Court because the matter has been decided by a Constitutional Bench of nine Judges in In Re Sea Customs Act, Section 20(2). Special Reference No. 1 of 1962, AIR 1963 SC 1760. The question before the Court was, whether Article 289 of the Constitution of India precluded Union of India from imposing Customs duty on the import or export of the property of a State. While considering this
question the Chief Justice B.T. Sinha as his Lordship then was delivering the judgment on his behalf and also on behalf of Justice Gajendragadkar. Justice Wanchoo, Justice Shah and Justice Ayyangar held that, while interpreting Article 285 and Article 289 one has to keep in mind as to what is the taxing event and in this context held:
“25. This will show that the taxable event in the case of duties of excise is the manufacture of goods and the duty is not directly on the goods but on the manufacture thereof. We may in this connection contrast sales-tax which is also imposed with reference to goods sold, where the taxable event is the act of sale. Therefore, though both excise duty and sales tax arc levied with reference to goods, the two are very different imposts; in one case the imposition is on the act of manufacture or production while in the other it is on the act of sale. In neither case therefore can it be said that the excise duty or sales tax is a lax directly on the goods for in that event they will really become the same tax. It would thus appear that duties of excise partake of the nature of indirect taxes as known to standard works on economics and arc to be distinguished from direct taxes like taxes on property and income.”
17. Since the law has been declared Ihat the Sales (ax is a tax on the event of sale and not the property, therefore we are of the view that, in view of the law laid down by the Supreme Court in In Re Sea Customs Act (supra), Article 285 does not create an exemption with regard to the payment of sales tax by Union of India towards the State Government, as such the first argument made by the learned Counsel for the petitioners must fail. Let it be noted that although it was not argued with force by the learned Counsel for the petitioners, but we have dealt with it keeping in view the observations made by the Supreme Court while remanding these cases when it stated;
“Having heard learned Counsel for the parlies at length, we are of the view that these are the matters which should not have been dismissed by the respective High Courts in suggesting an alternative remedy. The question raised was pristinely legal which required determination as to whether provision of telephone connections and instruments amounted to sale and even so why was the Union of India not exempt from payment of sales-tax under the respective statutes. The respondents counter such stance. We think the question raised was fundamental in character and need not have been put through the mill of statutory appeals in the hierarchy.”
18. Now, let us deal wilh the second argument that there is no sale within the meaning of provisions of AP General Sales Tax Act. The contentions raised before the respondents were that the entire system of Telecommunications was an integral net work with subscribers contributing their part in the shape of payment of service charges and the entire system was nothing but public utility scn’icc with no quantum of business including transfer of property. This was not accepted by the respondents who claimed that there was transfer of goods and for which the rentals were charged by the department from its consumers.
19. Section 5-F, levies tax on the transfer of the right to use any goods for any duration to a lessee or licensee for casli or other valuable considerations in the course of business. The tax is payable on the total amounts realised or realisable by the transferor on such transfer of the right to use goods from the lessee or the licensee. In State Bank of India v. State of A.P., 70 STC 215, the question arose whether hiring lockers by the Bank to the customers amounts to transfer of the right to use the goods within the meaning of Section 5-E. The question was answered in the negative
and against tlie Revenue. Though the decision rested on several grounds some of which are not directly relevant in the context of the present case, the following observations are quite apposite:
“It cannot, therefore, be gainsaid that persons pay the hire charges for the lockers not only for the right to use the lockers but also for a host of other services referred to above closely associated with the maintenance of lockers by the banks. In that sense the hire charges collected by the banks from the constituent represent a consolidated charge levied by the bank for a variety of services and facilities provided, of which the use of the locker forms a small part. The hire charge is inseparable into various services and because of the impossible nature of relating to any particular amount as hire charge solely for the use of the locker, the proposal to levy lax on such hire should fail. Any endeavour to levy tsx on the aggregate hire charges levied by the hank would amount to levying tax not only on the right to use locker but also on the charges collected by the bank for the provision of strong rooms, providing round the clock watch and ward and employing necessary staff to have a close supervision in the operation of strong rooms. The inseparable character of the hire charged by the banks frustrates any attempt to separate the small sum which is the charge for the right to use the locker, which only can be subject to tax under the Act.”
20. In the light of the rival contentions, it has to be seen as to what is the scheme under the provisions of Indian Telegraph Act and the Rules made thereunder which governs the relationship between the Telecommunications department and its consumers. In order to appreciate the controversy, the definitions of certain provisions as defined in Rule 2 of the Indian Telegraph Rules are reproduced:
“2(y)(i) “Local circuit” means a circuit provided between a telegraph office and the party’s premises.
(ii) “Local Leads” means the circuit provided between a Voice Frequency Telegraph Station, carrier station or Trunk exchange on one side and party’s premises on the other;
2(z) “Measured Rate System” means a system of a charging of telephone under which a subscriber pays a fixed annual rental for the line connecting his telephone-to any exchange within the exchange system and entitles him to make calls free of charge upto a specified number of call units during a fixed period, each call unit in excess of that number being charged at the prescribed rates;
2 (aa) “Message rate system” means a system of charging on telephones under which a subscriber, besides paying a fixed annual rental for the line connecting his telephone to any exchange within the exchange system, is also required to pay call fees for each call from his telephone at rates prescribed for such calls;
21. Part V of the Rules deals with ‘Rules for Telephones’. Rule 414 lays down how an application has to be made for getting the facility of telephone. Rule 434 lays down the schedule of fee and charges. It is significant to note that the preamble to Rule 434 indicates that the charges are for “various services”. Installation is laid down under Section I of Rule 434. It is interesting to note that in case of internal wiring being done by consumer himself he gets a rebate of Rs.250/- as has been laid down in Note 3(a) to Rule 434. It has also been stated in clause (b) to Note 3 that, if the consumer provides his own internal wiring and his own instrument, then he shall be able to get a rebate of Rs.500/-.
22. Section III of Rule 434 lays down scale of charges for departmental exchange
connections under the heading “Measured Rate System” bi-monthly rental and call fee are given and they vary according to the capacity of the exchange. The disputed turnover broadly represents the charges collected from the customers from the subscribers of the telephones provides as per the Measured Rate System. As seen above, Ike definition of Measured Rate System makes it clear that the rental is for the line connecting the telephone to an Exchange. It is further clear from the definition that the charges collected under the Measured Rate System entitles the subscriber to make calls free of charge upto a specified number during a fixed period and each call in excess thereof at the prescribed rates. Thus, the charges are not the rent for the use of telephone instrument as such.
23. Seeing in the light of these Rules, it becomes abundantly cicar that Telephone facility is not merely installation of telephone instrument at the consumer’s residence, it is in fact maintenance of a system at an exchange which exchange is connected by way of the instrument which is placed at the consumer’s place. The instrument in itself is a useless thing unless it is connected to a system. If becomes only a service once it is connected to a system by Telecommunications Department and as such there is no transfer of any tangible thing to the consumer, only a facility is provided which by no stretch of imagination can be transferred as goods. It was contended by the learned Counsel for the respondents that the rentals which are being charged for every two months by the Telephones department is a rental for instrument. That is not correct position, because in terms of the Rules itself a consumer can get his own instrument and by virtue of the relevant rules we have found that the rentals are not being charged for the use of the telephone instrument but are being charged as a maintenance for the wire connecting the place of installation of phone with the system of the Telecommunication Department. This is
clear from definition 2(z) where it has been made clear that ‘Measured rate system’ would mean a system of charging a telephone under which a subscriber pay a fixed annual rental for the line connecting his telephone to any exchange within the exchange system. Apparatus or instrument with its accessories is only a part of the system. The respondents have been labouring hard in suggesting that the rental is being charged on the telephone instrument and flic instrument belongs to the Telephones department which is being transferred for use to the consumer, therefore it is a sale within the provisions of A.P. General Sales Tax Act. Had it been so, perhaps the respondents would have been correct, but, in fact the Telephones department is not charging any rent for the instrument which is being installed at the premises of the consumer. On the other hand, they are charging rentals not for the instrument as such but for the facility and for the wires provided in connecting the instrument with the Exchange. Had it not been so, the rentals would not have been different for different exchanges, because the instrument used by the consumers can always be the same. Besides, Rule 434 gives an exemption of having one’s own instrument and if a consumer has his own instrument installed no doubt he gets a rebate for the installation charges, for rentals he will not be getting any rebate whatsoever.
24. For these reasons, we find that by installing a telephone there is no transfer of goods from the Telephones Department to ihe consumer for any consideration whatsoever and also we find that the rentals are not charged for the telephone instrument as such, therefore the rentals are not subject to Sales ‘fax within the meaning of provisions of A.P. General Sales Tax Act.
25. Therefore, these writ petitions are allowed, the demand notices, assessment orders and the consequential orders passed in appeals/revisions are quashed. No order as to costs.