Providing Set-Top Boxes to Subscribers Constitutes Sale”: Karnataka High Court Upholds VAT on Tata Play Limited

Transfer of Right to Use Set-Top Boxes is a Taxable Sale Under VAT Law - Karnataka High Court upheld the imposition of Value Added Tax (VAT) on Set-Top Boxes (STBs) provided by Tata Play Limited and other service providers to their subscribers. The court ruled that such transactions amounted to a “sale” under Section 2(29)(d) of the Karnataka Value Added Tax (KVAT) Act, 2003, as they involved a transfer of the right to use goods for consideration.

Dismissing the writ petitions filed by Tata Play Limited and other Direct-to-Home (DTH) and cable service providers, the bench comprising Justice Krishna S. Dixit and Justice G. Basavaraja observed:

“A Set-Top Box is not a mere instrument enabling service; it is a movable good that is transferred for use. The subscriber has independent control over it, making the transaction a sale under VAT law.”

The decision upholds the tax authorities’ findings that Tata Play and other operators were liable to pay VAT on the provision of STBs, despite their claim that these devices were merely a medium for delivering digital television services.

Tata Play Limited, along with Atria Convergence Technologies Ltd., Kaizen Digital Cable Services (P) Ltd., and Den Networks Limited, had challenged VAT assessment orders issued by the Deputy Commissioner of Commercial Taxes (Audit) and the Joint Commissioner of Commercial Taxes (Appeals). The authorities had ruled that the transfer of Set-Top Boxes to customers for a fee constituted a “deemed sale” under VAT law.

The petitioners argued that their monthly subscription fees covered digital TV services alone and that STBs were merely “information appliances” facilitating access to the service. They contended that since they retained ownership of the STBs, no “sale” took place.

Rejecting this argument, the High Court found that the right to use an STB was effectively transferred to the subscriber, making it a taxable sale. The court remarked:

“The ownership of the Set-Top Box may remain with the service provider, but what is legally relevant is the fact that the customer enjoys uninterrupted control over the device. This constitutes a transfer of the right to use, attracting VAT.”

The petitioners also argued that the imposition of VAT alongside service tax resulted in double taxation. However, the court dismissed this concern, clarifying that VAT applies to the sale component, while service tax applies to the transmission of digital content.

“A single transaction may have both a sale and a service element. VAT and service tax are not mutually exclusive but operate on distinct aspects of the transaction,” the court observed, relying on the Supreme Court’s ruling in Imagic Creative Pvt. Ltd. v. Commissioner of Commercial Taxes (2008).

“Set-Top Boxes Are Goods Under VAT Law”: Court Rejects Tata Play’s Claims
The High Court also ruled that Set-Top Boxes fall within the definition of “goods” under Section 2(15) of the KVAT Act, 2003, which includes all movable property capable of being transferred, delivered, and possessed.

The petitioners had claimed that STBs were “mere technology enablers” and did not amount to “goods” in the traditional sense. The court, however, firmly disagreed, holding:

“A Set-Top Box is not intangible software; it is a physical device with independent functionality, and it can be taxed as ‘goods’ under VAT law.”

The court further observed that the subscriber was required to pay an activation charge, deposit, or rental fee for the STB, which demonstrated that the transaction had all the characteristics of a sale.

The ruling also aligned with the Tripura High Court’s decision in Bharti Telemedia Ltd. v. State of Tripura, which held that providing Set-Top Boxes to customers for a fee amounts to a transfer of the right to use goods and is taxable under VAT laws.

Karnataka High Court Upholds VAT Levy on Tata Play and Other DTH Providers
Concluding the case, the Karnataka High Court ruled that the KVAT Act validly includes the transfer of the right to use goods within its definition of “sale”. The tax assessment orders against Tata Play Limited and other service providers were upheld in full, with the court affirming:

“The imposition of VAT on Set-Top Boxes provided to subscribers is legally justified, as the transaction satisfies the conditions of a deemed sale under Karnataka VAT law.”

With this ruling, Tata Play Limited and other petitioners are now liable to pay VAT on the provision of STBs, setting a strong precedent for DTH and cable operators across Karnataka.

Date of Decision: February 18, 2025