OCTOBER 20, 2015

By Samsuddha Majumdar, Nameer Khan & Rajat Dosi

THE government has recently announced the telecom spectrum trading guidelines whichallows telecom operators in India to transfer their right to use telecom spectrum granted to them by the Government, to other operators on an exclusive basis.

There is an ongoing debate on whether such trading in telecom spectrum will be subject to Central Sales Tax (CST) / Value Added Tax (VAT) or not.

We have analyzedthis and allied issues in the following paragraphs.

Right to use telecom spectrum - Whether 'goods'

The question of whether trading of right to use telecom spectrum is subject to VAT / CST would depend on whether telecom spectrum rights (in the hands of the telecom operator) would qualify as 'goods' or not.

CST / VAT is levied on sale of goods. 'Goods' are defined under section 2(d) of the Central Sales Tax Act, 1956 to include all materials, articles, commodities and all other kinds of movable property, but do not include newspapers, actionable claims, stocks, shares and securities.

Thus, the definition of 'goods' is very wide as it covers (a) commodities; (b) materials; (c) articles and (d) all kinds of movable property , except for certain specified items.

The Supreme Court in the Vikas Sales Corporation case [2002-TIOL-608-SC-CT-LB] held that the term 'movable property' includes not just corporeal property, but also includes within its ambit, incorporeal property which are rights in rem which are not rights over land.

Basis the same, the Supreme Court held that 'REP Licences', (which gave the right to its holder to import goods into India without payment of applicable customs duty) will fall within the definition of 'goods' for the purpose of levying VAT on its sale.

Further, the test as to what qualifies as 'goods' has been summarized by the Supreme Court in the Tata Consultancy Services (TCS) case [2004-TIOL-87-SC-CT-LB], were the dispute was whether software will qualify as ‘goods' or not. It was held that tangible and intangible properties qualify as ‘goods' if they have the following attributes:

• Utility;

• Capable of being bought and sold; and

• Capable of transmitted, transferred, delivered, stored, and possessed.

In view of the above, it emerges that rights which are intangible in nature can be treated as goods if ithas utility, ready market and are transferrable. Intangibles such as REP licenses, software, copyrights, trademarks, electricity, have been held by the courts to qualify as goods.

In the present context, the spectrum licenses essentially represent a right of the holder to operate / carry on telecommunication services in a particular circle. Right granted by such spectrum licenses represent a movable property in the hands of the transferors. The said property can be owned, transferred and have ready market.

Accordingly, applying the principles summarized above, it is our view that right to use telecom spectrum will qualify as 'goods'.

VAT Implications

Under the State VAT laws, VAT is levied on sale of goods i.e. transfer of property in goods by one person to another for a consideration.

Given this in cases where right to use telecom spectrum is sold, VAT would be applicable.

Situs of Sale

In this context, another element involved is determining the situs of sale to ascertain the State where VAT will payable on transfer of right to use telecom spectrum.

Section 4 of the CST Act provides the mechanism for determining the situs of sale. It provides that situs of sale shall be the place / State where the goods are located at the time of execution of the contract between the parties concerned.

Applying the aforementioned provision to the present case, the situ s of sale will be the State where the telecom spectrum so transferred is supposed to operate. Hypothetically, when right to use telecom spectrum of an area or sector in New Delhi is transferred, then the situs of this transfer shall be New Delhi. VAT will be payable in New Delhi, on rates as applicable. It is to be noted that the same shall not be governed based on the place where the contract is executed between the telecom operators.

Service Tax Implications

Before these guidelines were rolled out by the government, there were speculations that such transfer may even be subject to service tax in certain situations. Such speculations, according to us, have been put to rest by these guidelines.

As is known, service tax is levied on any activity provided by one person to another for consideration. Further, certain specified activities have been deemed to be services under a 'declared list'. Transfer of right to use, by way of hiring or licensing, but which does not qualify as a 'transfer of right to use' (recognized as a 'deemed sale') is stipulated as a 'declared service' . In other words, any activity which transfers the right to use, but does not qualify as a 'deemed sale', would fall within the ambit of a 'declared service', liable to service tax.

The Supreme Court in the BSNL case [2006-TIOL-15-SC-CT-LB], laid down the following guidelines to determine whether a particular transaction falls within the scope of deemed sale or 'transfer of right to use':

•  There must be goods available for delivery;

•  There must be a consensus ad idem as to the identity of the goods;

•  The transferee should have a legal right to use the goods, consequently all legal consequences of such use including any permissions or licenses required thereof should be available to the transferee;

•  For the period during which the transferee has such legal right, it has to be at the exclusion of the transferor and others i.e., it should not merely be a licence to use the goods; and

•  Having transferred the right to use the goods during the period for which it is to be transferred, the owner cannot again transfer the same rights to others .

The factor relevant in the present context is whether the right to use telecom spectrum has been transferred on an exclusive basis or not.The guidelines notified by the government in clause (4) clearly specifies that spectrum trading shall be permitted only on an exclusive basis. Given this it is amply clear that in case of transfer of right to use telecom spectrum, under the subject guidelines, no service tax shall be leviable under the declared service category.

Thus, it is our preliminary view that transfer of right to use by one telecom operator to another for consideration shall be subject to VAT. The situ s of sale shall be the state where the telecom spectrum operates. Further, due to such transfer being on exclusive basis the said transaction shall not be subject to service tax.

(The authors are with Trilegal)