The Karnataka High Court on February 18 dismissed a series of petitions filed by companies such as ACT, Tata Play, Den Network among others, challenging the levy of sales tax on Set-Top Boxes (STBs) provided to subscribers by cable network operators [Atria Convergence Technologies and ors v. Deputy Commissioner of Commercial Tax and ors].

The Court upheld orders of the Karnataka Appellate Tribunal, which had ruled that the transfer of the right to use STBs for consideration amounts to a "sale" under the Karnataka Value Added Tax Act, 2003 (KVAT Act) making the levy of sales tax valid.

A Division Bench of Justices Krishna Dixit and G Basavaraja held,

"The authorities having accumulated expertise in the matter have formed a considered opinion that a sum of Rs.2,000/- is the consideration for transferring the right to use the STBs. A Court exercising a limited revisional jurisdiction cannot run a race of opinions with the authorities and Tribunals which have recorded concurrent findings.”

Earlier, the Karnataka Appellate Tribunal had ruled that the transfer of the right to use STBs to subscribers (customers) for consideration constitutes a "sale" as defined under Section 2(29)(d) of the KVAT Act. Consequently, the tribunal held that the levy of sales tax on such transactions was justified.

The petitioners (cable service providers) had argued that STBs are merely information appliance devices and do not qualify as "goods" under Section 2(15) of the KVAT Act. They claimed that STBs are incapable of being used independently by subscribers and are only tools for receiving signals.

The petitioners contended that there was no transfer of the right to use STBs to subscribers, as ownership remained with the cable operators. They argued that the subscription charges were not consideration for the use of STBs but rather for the activation services.

The petitioners also argued that the KVAT Act of 2003 was repealed by Section 173 of the Karnataka Goods and Services Tax Act, 2017 (KGST Act), thereby rendering the sales tax demand invalid (non-est or not existent).

The petitioners further challenged the retrospective application of a government notification dated March 15, 2021, issued under Section 174(2) of the KGST Act.

This notification stated that the authorities mentioned in certain Acts that were repealed by Section 173 of the KGST Act of 2017, would continue to hold certain powers under laws saved by Section 174 of the KGST Act. It added that the notification would be effective retrospectively, from July 2017 onwards.

The petitioners argued that the notification could not be applied retrospectively, as the parent statute did not grant such powers.

The Revenue maintained that STBs are "goods" under the KVAT Act, as they are movable property used by subscribers to access cable services. The transfer of the right to use STBs for consideration constitutes a sale under Section 2(29)(d) of the Act, the authority contended.

The Revenue further argued that subscribers have exclusive control over the use of STBs, and the subscription charges include consideration for the right to use the devices. The Revenue contended that the government notification issued under Section 174(2) of the KGST Act was valid and could be applied retrospectively, as the parent statute allowed for the same.

The Court found merit in the Revenue's stance and ruled that STBs qualify as "goods" under Section 2(15) of the KVAT Act. The Court noted that STBs are movable property used by subscribers to access cable services, and their transfer for consideration falls within the definition of “sale."

“The definition is too wide. Its building blocks would make it wider than what conventionally a 'means and includes' definition would import. The expression 'all kinds of movable property' employed by the legislature lends support to this view. What is significant is the choice of term namely 'all kinds of' and not 'all types of.' It is intended to be all pervasive, barring the specified exclusions in the definition. Apparently, STB does not fall into any of these exclusions," it observed.

The Court held that the right to use STBs is effectively transferred to subscribers, who have exclusive control over the devices. The Court rejected the argument that subscription charges were merely activation fees, stating that the charges included consideration for the use of STBs.

The Court further upheld the retrospective application of the 2021 government notification. It rejected the petitioners' argument that a notification was required to kickstart the operation of Section 174, under which the notification was issued.

“If legislature intended to make operation of subsection (1) of Sec.174 KGST dependent upon a notification to be issued under sub-section (2), the language of the provision would have been much different. An argument to the contrary would offend the tax jurisprudence evolved over centuries, in civilized jurisdictions. Therefore, the vehement submission made on behalf of the Assessees that the notification of 2021 could not have been issued with retrospective effect, pales into insignificance,” the Court held. 

The Court added that Section 174 itself indicated that "there is a limited deeming of non-repeal of the (KVAT) Act, at least in effect."

The Court also rejected the argument that levying both service tax and VAT (Value Added Tax) on the same transaction amounted to double taxation. It held that the two levies were on different aspects of the transaction—service tax on the service component and VAT on the sale of goods (STBs).

“There can be levy of more than one tax on a subject matter, if incidence of each of the taxes is different from the other and such taxes may be imposed under different statutes,” the Court ruled. 

The Revenue authorities were represented by Additional Government Advocate Aditya Vikram Bhat.

ACT and Kaizen Digital Cable Services were represented by Advocate YC Shivakumar. 

Tata Play Limited was represented by Senior Advocate T Surya Narayana with Advocates Ishi Prakash and Manu Kulkarni from Poovayya & Co. 

Den Networks was represented by Senior Advocate T Surya Narayana and Advocate Mahima Goud. 

Den was also represented by Advocates Siddharth Bavle and Ravi Raghavan.

[Read Judgment]