Karnataka HC Confirms VAT on Set-Top Boxes, Says Providing Them to Customers is Taxable Transfer of Right to Use [Read Order]

In a recent ruling, the Karnataka High Court has upheld the imposition of Value Added Tax ( VAT ) on Set-Top Boxes ( STBs) provided by digital cable service providers, ruling that their supply to subscribers constitutes a "transfer of right to use", making it a taxable sale under the Karnataka Value Added Tax Act, 2003 ( KVAT Act, 2003 ).

Multiple petitions were filed by major cable operators, including Atria Convergence Technologies Ltd., Tata Play Ltd., Kaizen Digital Cable Services (P) Ltd., and Den Networks Ltd., challenging reassessments by commercial tax authorities, arguing that their supply to customers did not constitute a "sale" under the Karnataka Value Added Tax Act, 2003 ( KVAT Act, 2003 ).

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The Karnataka Commercial Tax Department had reassessed these companies, holding that the provision of STBs to subscribers amounted to a transfer of the right to use goods for consideration, thereby making it a taxable sale under Section 2(29)(d) of the KVAT Act, 2003. The Karnataka Appellate Tribunal upheld the tax authorities’ decision. Aggrieved by this, the petitioners approached the High Court.

The petitioners argued that STBs are not goods but mere information appliances that enable service provision and that subscribers do not receive exclusive control over them. They further argued that charges levied on customers were only activation fees and not consideration for the transfer of STBs. The petitioners claimed that VAT could not be levied on STBs as Service Tax had already been paid under the Finance Act, 1994.

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The revenue argued that STBs fall within the definition of "goods" and that their provision to subscribers involves a transfer of the right to use for a specified charge. The revenue also relied on the Bharti Telemedia Ltd. v. State of Tripura (2015) case, where the Tripura High Court ruled that providing STBs to subscribers constituted a taxable sale.

The bench comprising Justices Krishna S. Dixit and G. Basavaraja ruled that STBs qualify as "goods" under the KVAT Act, 2003 as they are tangible movable property and subscribers receive a right to use STBs, and the activation charge includes consideration for this transfer.

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The court also clarified that VAT and Service Tax are not mutually exclusive, explaining that VAT applies to the sale of goods (STBs), whereas Service Tax applies to the broadcasting service. The court upheld the retrospective application of the Karnataka Goods and Services Tax (KGST) Act, 2017, stating that the law preserves tax liabilities under the repealed KVAT Act, allowing tax authorities to continue enforcing VAT demands.

To Read the full text of the Order CLICK HERE

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