Construction & Installation of Cellular Tower sites and leased out

PJ/Case Laws/2011-12/1560

Construction & Installation of Cellular Tower sites and leased out - applicability of VAT

Case: Essar Telecom Infrastructure Pvt. Ltd. Vs. Union Of India

Citation: 2012 (275) E.L.T. 167 (Kar.)

Issue: - Whether Erection and construction of tower sites and leasing out space on such sites to various telecom/cellular operators is liable to VAT as transfer of right to use goods?

Brief Facts: - Petitioner-company is engaged in providing infrastructure service in relation to cellular telephones. They have entered into contract with various telecom/cellular operators is required to render service in relation to passive telecom network including operating and maintenance. They erected and constructed tower sites and leased out the space on such sites to various telecom/cellular operators such as BSNL, Airtel, Vodafone, etc. Petitioner are service providers falling with the category zzzq defined under Sec 65(105) r/w Sec. 65(105)(104c) of the Finance Act, 1994. Petitioner also holds a registration certificate issued by the Centralized Service Tax authority at Bombay and is having centralized billing and accounting system and is filing periodical returns and paying proper tax due to the Union.

Revenue department proceeded under Section 39 of the Karnataka Value Added Tax Act, 2003 to levy tax on petitioner on the ground that there was a transfer of right to use the telecom network towers.

Show cause notice was issued for the assessment years 2007-08 and 2008-09 proposing to impose VAT on providing of cellular telephony towers on rent to various service providers stating that the transaction falls under the definition of 'deemed sale' under S. 2(29)(d) of the Act r/w Sec 3 and 4(1)(b) of the VAT Act, 2003.

Petitioner took the stand that the said activity is considered as 'service' as per the definition provided under the Finance Act, 1994 and that activity cannot be considered as sale within the meaning of Sec 2(29)(d) of the Act. It is also stated, cellular telephony towers are pat of immovable property.

The Adjudicating Authority passed the orders for assessment years 2007-08 and 2008-09 stating that the equipment is fixed on earth on the top of roof of a building just to enable it for functioning. Just fixing the equipment on the building or on earth does not lose its form of equipment.

Against the Orders of the Assessing Authority, petitioner filed writ petition under Art. 226 before the High Court for exercising efficacious remedy. It is prayed that insistence should not be for redressing the issue before statutory Appellate forum as the matter involved a Constitution stipulation and since substantial question of law of public importance is involved.

Petitioner’s Contention: - Petitioner contended that as per Art. 246(1) of the Constitution, it is the exclusive domain of the Centre to make laws in respect of matters enumerated in List I in the VII Schedule and having enumerated imposition of 'service tax' on service element of a contract, the levy of Service tax on the facility of providing mobile telephone towers for various service provider would oust the jurisdiction of the State to impose VAT on such immovable structure and they have already remitted the entire Service tax due to the Centre. It was contended that directing the petitioner to pay tax as per Section 2(29)(d) of the VAT Act is impermissible and also it would be in the form of double jeopardy.

Petitioner relied upon decisions given in following cases: -

- CCE, Mumbai v. Hutchison Max Telecom Pvt Ltd [2008 (224) ELT 191 (Bom)]
- Triveni Engineering & Industries Ltd & Anr v/s CCE & Anr [2007 (7) SCC 29 (sic)]
- Karthik Engg Works v/s State of Karnataka [2000 (119) STC 88]
- Dy. Commr. of Sales tax (Law), Board of Revenue (Taxes), Ernakulam v/s Bobby Rubber Industries [1998 (108) STC 410]
- CST, UP, Lucknow v/s Prahlad Industries [1999 (112) STC 0548W]
- Tata Consultancy Services v/s State of A.P. [2004 (178) ELT 22 (SC)]
- Rashtriya Ispat Nigam Ltd v/s CTO, Vishalhapatnam [1990 (77) STC 0182]
- State of AP & Anr v/s Rashtriya ispat Nigam Ltd [2002 (126) STC 114]
- BSNL & Anr v/s UOI & Ors [2006 (2) STR 161 (SC)]
- Lakshmi Audio Visual Inc & Anr v/s Asst. Commr. of Comml. Taxes & anr [2001 (124) STC 0426]
- Imagic Creative (P) Ltd v/s Commr. of Comml. Taxes & Ors [2008 (9) STR 337 (SC)]

In Hutchison Max Telecom Pvt Ltd’s case, the High Court has held that the equipment installed cannot be considered as movable goods as they are embedded in the earth or on a building and cannot be shifted without damage and, adopting the test of damage, shifting cannot be done without damage, the act of dismantling from a permanent site would render such goods not marketable and accordingly contended that the activity involved is in the nature of service and more a permanent structure by way of movable property over which the VAT Act cannot be made applicable.

In reply, petitioner submitted that it is not as if they are not paying tax at all and being registered under the Service Tax Act, they are paying tax and for the assessment years 2007-08 and 2008-09, Service tax has been paid. Once again asking the petitioner to pay tax to the State amounts to double jeopardy and double taxation is not upheld or recognised elsewhere. Accordingly, he has sought for quashing the orders passed by the respondent au-thority for those periods stating that petitioner is not at all liable to pay the tax.

Respondent’s Contention: - Respondent-State contended that on the basis of order of the Commissioner of Commercial Taxes as per S. 61 of the Act, respondent-authority visited the premises of petitioner and passed order of reassessment after proceedings had been initiated by issuing notice under Section 39(1) of the Act and sought to levy tax on the leasing of cellular telephone networking equipment alongwith the tower. That a notice was issued and in subsequent proceedings, a finding of fact was given that it amounts to transfer of right to use goods and as such, petitioner is liable to pay tax on the goods lent, though not there is actual delivery and the equipment is constructed and same is provided to different telecom companies on lease/rental for specific periods as per the agreement between the petitioner and the telecom companies. Certain goods are used for erection of towers and thereafter, after assembling the equipment, lease is extended to different telecom companies as per the agreement entered into between into between the parties.

It was stated that as per S. 29 clause 2(d) of the VAT Act, it is permissible to levy tax on transfer of right to use any goods for cash or deferred payment or valuable consideration. The agreement entered into provides for certain identification of terms in infrastructure equipment and on that basis, stating that it is in the form of a lease agreement and infrastructure provider gives right to use the equipment to the parties to the agreement, possession and effective control of those equipment also lies with the telecom companies

According to the Respondent the activities in which Petitioner is engaged is amounts to transfer of right to use goods and as such, petitioner is liable to pay tax on the goods lent, though not there is actual delivery and the equipment is constructed and same is pro-vided to different telecom companies on lease/rental for specific periods as per the agreement between the petitioner and the telecom companies.

As per the conditions of the agreement entered into by the petitioner with the telecom companies, the petitioner company maintains the equipment on behalf of telecom companies and the effective control lies with the telecom/cellular operators only and the cellular operators are having effective control and paying lease rentals and petitioner is liable to pay tax.

Petitioner is not leasing any immovable property and petitioner is liable to pay tax as per Sec. 4(1)(b) of the Act treating this as lease of equipment and transfer of right to use goods. The tower is not embedded permanently and it is a movable property, it can be shifted at any point of time to any new site and rather, land is hired from private parties to make temporary fixation. Any instrument/equipment let out incidentally, exclusively it is taxable as per the agreement. Accordingly, the telecom towers are movable property and leasing of these towers by collecting rentals are deemed to be sale of movable property exigible to tax.

According to the respondent a semblance of service is being rendered but, factually it is a super structure in the form of movable, it being, as per the agreement/contract, is lent to various telecom companies who entered into agreement with the petitioner wherein maintenance and other control over the equipment would be still retained by the petitioner but in fact, till the expiry of the term either for cash or liquidated payment or some other consideration, it will be only a transfer of right to use the goods which attracts the provisions of the VAT Act.

It is contended that the petitioner has leased out the towers to cellular operators in the form of transfer of rights to use the goods and the super structure which cannot be easily dismantled without damage but, can be reinstalled elsewhere. As and when there is termination of the agreement with the land/building owner, necessarily the equipment installed though it was attached to the civil structure i.e., platform, can be easily removed and replaced elsewhere and that stands the test of mobility. The facts and decisions rendered by the Apex Court referred to by the petitioner are in a different context and accordingly, submitted that the re-assessment orders passed by the authority is in accordance with law and it at-tracts the provisions of the VAT Act and not Service tax.

Reasoning of Judgment: - Though towers are fixed to earth and can not be treated as mobile, they can not be treated as immovable property to contend that it is only service rendered and not transfer of right to use goods. Except platform to fix towers, structure does not acquire character of immovable goods to detract application of VAT Act.

Only semblance of service was being rendered and factually it was movable super structure lent to various telecom companies whereas maintenance and other control over equipment was still retained by assessee. Till expiry of term either for cash or liquidated payment or some other consideration, it was only a transfer of right to use of goods, which attracts VAT Act and was within Article 366(29A)(d) of Constitution of India.

Assessee bonafide believing impugned activity to be Service, obtained registration under Service tax and paying same. On de-termination of liability to VAT, amount already deposited by assessee to be adjusted against differential amount if any to be paid by assessee.

Assessee liable to VAT bonafidely believing impugned activity to be Service, obtained registration under Service tax and paying same therefore assessee was not liable to penalty and interest.

Decision: - Appeal partly allowed.

Comments

PJ/Case Laws/2011-12/1560

Post a Comment

Query