Karnataka High Court Upholds Sales Tax On Set-Top Boxes, Rejects Cable And DTH Operators' Plea

The Karnataka High Court has ruled in favour of the state's commercial tax authorities, upholding the levy of sales tax on set-top boxes provided to subscribers by direct-to-home network operators. The court dismissed petitions filed by major service providers, including Atria Convergence Technologies, Tata Play, and Den Networks, who challenged the tax demand under the Karnataka Value Added Tax Act, 2003.

A Division Bench comprising Justices Krishna Dixit and G Basavaraja upheld the Karnataka Appellate Tribunal's ruling that the transfer of the right to use STBs for a fee amounts to a ‘sale' under the KVAT Act, thereby making the sales tax applicable.

Court's Rationale 

The petitioners had contended that STBs were merely devices for signal transmission and did not qualify as ‘goods' under Section 2(15) of the KVAT Act. They argued that ownership of the STBs remained with the service providers and that subscription charges were for activation services rather than consideration for using the devices.

They also challenged the retrospective application of a 2021 government notification under the Karnataka Goods and Services Tax Act, 2017, which reaffirmed tax liabilities under the earlier KVAT regime.

However, the court rejected these arguments, saying that the STBs are movable property used by subscribers and qualify as ‘goods' under the KVAT Act.

The court further ruled that subscribers have effective control over the STBs and that subscription fees include payment for their usage. "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," the judgement said.

Retrospective Tax Notification Upheld

The petitioners had also argued that the tax demand was invalid as the KVAT Act was repealed by the KGST Act in 2017. They challenged the retrospective application of a March 2021 government notification, which reaffirmed the power of tax authorities to recover outstanding dues under repealed tax laws.

The court dismissed this challenge, holding that Section 174 of the KGST Act allowed for a limited continuation of the KVAT Act's provisions. It stated, "An argument to the contrary would offend the tax jurisprudence evolved over centuries in civilised jurisdictions." The court clarified that the notification did not override legislative provisions but merely reiterated existing legal principles.

Double Taxation Argument Rejected

The petitioners also contended that imposing both service tax and VAT on the same transaction amounted to double taxation. The court ruled otherwise, stating that the taxes applied to distinct aspects: service tax on the service component and VAT on the transfer of STBs. "There can be a levy of more than one tax on a subject matter if the incidence of each of the taxes is different from the other, and such taxes may be imposed under different statutes," the bench noted.

Final Ruling

With this ruling, cable and DTH service providers will be required to pay sales tax on STBs supplied to customers. The decision confirms that the government can continue recovering tax dues under the KVAT Act, even after the introduction of the GST regime.