Case Summary
| Citation | State of Karnataka and Ors. v. Pro Lab and Ors.AIR 2015 SC 1098 |
| Keywords | constitution, entry 25, sales tax, validity, article 19, amendment |
| Facts | The case concerns the constitutional validity of Entry 25 of Schedule VI to the Karnataka Sales Tax Act, 1957, which levies sales tax on processing and supplying photographs, photo prints, and photo negatives at varying rates from 1987 to 1998 and thereafter. This was the third challenge to Entry 25, which had previously been declared unconstitutional twice by the courts. The High Court declared the provision unconstitutional then the State of Karnataka preferred an appeal before the Supreme Court. |
| Issues | Whether the Entry 25 of Schedule VI the Karnataka Sales Act, 1957 constitutionally valid? |
| Contentions | |
| Law Points | The Supreme Court upheld the constitutional validity of Entry 25 of Schedule VI to the Karnataka Sales Tax Act, 1957, allowing the state to levy sales tax on the processing and supplying of photographs, photo prints, and photo negatives. The Court found that the 46th Constitutional Amendment, which introduced clause (29-A) in Article 366, empowers states to tax goods involved in works contracts, making the previous dominant intention test irrelevant. The Court also validated the retrospective imposition of the tax from 1989, stating it was justified to correct earlier judicial misinterpretations and did not violate Article 19(1)(g) of the Constitution, which guarantees freedom to practice any profession or business. |
| Judgement | Consequently, the Supreme Court set aside the Karnataka High Court’s judgment and dismissed the writ petitions challenging Entry 25, confirming the state’s legislative competence to enact the law with retrospective effect. No order as to costs was made. |
| Ratio Decidendi & Case Authority |
Full Case Details
Constitutional validity of Entry 25 of Schedule VI to the Karnataka Sales Tax
Act, 1957 (hereinafter referred to as the ‘Act’) is the subject matter of the present
appeal. It is the third endeavour to resurrect this entry, when on the first two
occasions, the steps taken by the State were declared as impermissible. Even this time,
the High Court has dumped the amendment as unconstitutional. However, the reasons
advanced by the High Court in all three rounds are different. While traversing through the
historical facts leading to the issue at hand, we shall be referring to the same for clear
understanding of the controversy involved.
2.This entry was inserted in the said Act by an amendment which came into effect
from 01.07.1989, thereby providing levy of tax for processing and supply of photographs,
photo prints and photo negatives. The validity of this entry was challenged by means of a
writ petition filed in the High Court of Karnataka. The High Court in that case titled
M/s Keshoram Surindranath Photo – Bag (P) Ltd. and others v. Asstt.Commissioner of
Commercial Taxes (LR), City Division, Bangalore and others
, declared the said Entry to
be unconstitutional. State of Karnataka had challenged that judgment by filing special
leave petition in this Court. This special leave petition was dismissed vide order dated
20.04.2000, following its earlier judgment in the case of Rainbow Colour Lab and Another
v. State of Madhya Pradesh and others2. The reason for holding Entry 25 as
unconstitutional was that the contract of processing and supplying of photographs, photo
frames and photo negatives was predominantly a service contract with negligible
component of goods/material and, therefore, it was beyond the competence of State
Legislature given in Entry 25 of List II of Schedule VII of theConstitution to impose sales tax
on such a contract.
3.It so happened that within one year of the judgment in Rainbow Colour Lab’s case,
three Judges Bench of this Court rendered another judgment in the case of ACC Ltd. v.
Commissioner of Customs, wherein it expressed its doubts about the correctness of the law
laid down in Rainbow. We may point out at this stage itself that during the course of
hearing of the present appeal, there was a hot debate on the question as to whether
judgment in Rainbow Colour Lab’s case was over-ruled in the case of ACC Ltd. case or
not. This aspect will be gone into by us at the appropriate stage.
4.After the judgment in ACC Ltd. case, a circular instruction was issued by the
Commissioner of Commercial Taxes to the assessing authorities to proceed with the
assessments as per Entry 25. This became the subject matter of challenge before the High
Court of Karnataka in the case of M/s Golden Colour Labs and Studio and others v. The
Commissioner of Commercial Taxes. The High Court allowed the writ petition vide
judgment dated 30.07.2003 holding that a provision once declared unconstitutional
could not be brought to life by mere administrative instructions. However, at the same
time, the Court observed that Entry 25, Schedule VI to the Act, declared ultra vires the
Constitution in Keshoram’s case, cannot be revived automatically, unless there is reenactment made by the State Legislature to that effect.
5.The appropriate procedure indicated in the aforesaid judgment emboldened the
State to come out with the required legislative amendment. This paved way for the
enactment of the Karnataka State Laws Act, 2004 by the State Legislature that came
into force with effect from 29.01.2004. Section 2(3) of the said amendment re-introduced
Entry 25 in identical terms, as it appeared earlier, and that too with retrospective effect
that is w.e.f. 01.07.1989, when this provision was inserted by the amendment made in the
year 1989 for the first time.
6.As was expected, this amendment was again challenged before the Karnataka High
Court by the respondent herein as well as many others. Vide impugned judgment dated
19.08.2005, the High Court has again declared the said amendment as unconstitutional. It
would be pertinent to mention that the HighCourt has not taken into consideration the
events that followed after Rainbow Colour Lab’s case, namely, over-ruling of the said
judgment in ACC Ltd. Since the basis of Keshoram’s case decided in the first calm by the
High Court was same as given in Rainbow Colour Lab, obviously Keshoram also no
longer remains a good law. However, the reason given by the High Court, this time, is
that the ratio laid down in Keshoram’s case continues to be binding on the State of
Karnataka. As per the High Court, “the re-enactment of the said provision is possible in the
event of a subsequent declaration made by the Hon’ble Supreme Court re-considering or
pronouncing a similar question in terms of the findings in para 23 of the Golden Colour
Lab’s case. This is, thus, the chequered history of the litigation amply demonstrating as to
how the State of Karnataka is making desperate attempts to ensure that provision in the
form of Entry 25 in the said Act survives, empowering the State Government to levy sales
tax for processing and supply of photographs, photo prints and photo negatives.
- We may also record at this point itself that legislative competence of the State to insert
the aforesaid Entry is primarily challenged on the ground that the State Government is
not empowered to levy sales tax on the processing and supplying of photographs which
is predominantly in the nature of “service” and the element of “goods” therein was minimal.
The respondents argue that the State Legislature does not have any power to impose
tax on “services” inasmuch as the sales tax can be levied only on “sale of goods” as
permitted under Article 366 (29-A) of the Constitution of India. Challenge is also laid on
the retrospective effect given to the said Entry by arguing that such a move is
violative of Article 265 of the Constitution of India as subjecting the assessees to such a
tax from retrospective effect is confiscatory in nature and, therefore, unconstitutional. - We have projected, in nutshell, the chequered history of the litigation by referring to
the judgments of this Court pronouncedfrom time to time which have a direct bearing on
the outcome of this appeal. Therefore, we are simply required to do a diagnostic of the sorts
in revisiting these judgments.
- In order to ensure that we avoid unnecessary burdening of judgments with the
earlier case laws, it is safe to charter the journey by initiating discussion about the
Constitution Bench judgment in the case of Gannon Dunkerley and Co. and othersv. State
of Rajasthan and others. That case pertained to the execution of the Works Contracts.
Question involved was as to whether there could be levy of sales tax on the sale of
goods involved in the execution of such Works Contracts. The assessee, viz. Gannon
Dunkerley, was carrying on business as Engineering Contractors and executing the
contracts pertaining to construction of building projects, dams, roads and structural
contracts of all kinds. In respect of sanitary contracts, 20 per cent was deducted for
labour and balance was taken as a turnover of the assessee for the purposes of levying
sales tax by the assessing authority. Likewise, in respect of other contracts, 30 per cent
was deducted for labour and on balance amount, sales tax was levied treating it as
turnover of the assessee under the Madras General Sales Tax Act, 1939. The question
which arose for consideration was as to whether there was any sale of goods. The
Constitution Bench held that building contract was in the nature of Works Contract and there
was no element of sale of goods in such a contract. In its opinion, in a building contract
where the agreement between the parties was that the contractor should construct the building
according to the specifications contained in the agreement and in consideration received
payment as provided therein, there was neither a contract to sell the materials used in the
construction nor the property passed therein as movables. It was held that in a
building contract, which was one entire and indivisible, there was no sale of goods and it
was not within the competence of the Provincial State Legislature to impose tax on the
supply of the materials used in such a contract treating it as a sale. The Court, thus,
proceeded on the basis that a building contract was indivisible and composite wherein
there was no sale of goods and, therefore, the State Legislature was not competent to
impose sales tax on the supply of material used in such a contract treating it as asale.
Since, Entry 48 of the List II of Schedule VII in the Government of India Act, 1935 was
under consideration that empowers State Government to levy tax “sale of goods”, the
Court held that the expression “sale of goods” in the said Entry is to be given the same
meaning as given under the Sale of Goods Act, 1930. That would mean that it would be sale
of goods only if the two essential ingredients, namely: (i) an agreement to sell movables
for a price, and (ii) property passing therein persuant to that agreement, are satisfied. - After the aforesaid Constitution Bench judgment, the Parliament amended the
Constitution of India by the Constitution (46th Amendment) Act, 1982 which received
the assent of the President of India on 02.02.1983. By this amendment, clause (29-A)
was inserted in Article 366 of the Constitution, which reads as under:
“[(29A) “tax on the sale or purchase of goods” includes –
a tax on the transfer, otherwise than in pursuance of a contract, of property in any
goods for cash, deferred payment or other valuable consideration;
a tax on the transfer of property in goods (whether as goods or in some other
form) involved in the execution of a works contract;
a tax on the delivery of goods on hire-
purchase or any system of payment by instalments;
a tax on the transfer of the right to use any goods for any purpose (whether or
not for a specified period) for cash, deferred payment or other valuable
consideration;
a tax on the supply of goods by any unincorporated association or body of
persons to a member thereof for cash, deferred payment or other valuable
consideration;
a tax on the supply, by way of or as part of any service or in any other manner
whatsoever, of goods, being food or any other article for human consumption or
any drink (whether or not intoxicating), where such supply or service, is for
cash, deferred payment or other valuable consideration; and such transfer, delivery
or supply of any goods shall be deemed to be a sale of those goods by the
person making the transfer, delivery or supply and a purchase of those goods by
the person to whom such transfer, delivery or supply is made;]”
12.The challenge laid to the aforesaid amendment was repelled by this Court in the
case of Builders Association of India and others v. Union of India and others6. In
this judgment, the Constitution Bench specifically noted that the purport and object of the
aforesaid amendment was to enlarge the scope of the expression “tax of sale for
purchase of goods” wherever it occurs in the Constitution so that it may include within
its ambit any transfer, delivery or supply of goods that may take place under any of the
transactions referred to in sub-clauses (a) to (f). To put it tersely, with the aforesaid
amendment, the States are empowered to make the Works Contract divisible and tax “sale of
goods” component. It clearly follows therefrom that the restricted meaning which was
assigned to the expression “sale of goods” in Gannon Dunkerley’s case is undone by the
aforesaid amendment. The interpretation which is to be assigned to clause 29-A of Article
366 is stated with remarkable clarity in M/s Larsen Toubro and another v. State of
Karnataka and another7, by a three Judge Bench in the following words:
“60. It is important to ascertain The meaning of Sub-clause (b) of Clause 29A of
Article 366 of the Constitution. As the very title of Article 366 shows, it is the definition
clause. It starts by saying that in the Constitution unless the context otherwise requires the
expressions defined in that article shall have the meanings respectively assigned to them
in the article. The definition of expression “tax on sale or purchase of the goods” is contained
in Clause (29A). If the first part of Clause 29A is read with Sub-clause
(b) along with latter part of this clause, it reads like this: tax on the sale or
purchaser of the goods” includes a tax on the transfer of property in goods (whether as
goods or in some other form) involved in the execution of a works contract and such
transfer, delivery or supply of any goods shall be deemed to be a sale of those goods by the
person making the transfer, delivery or supply and a purchase of those goods by the person
to whom such transfer, delivery or supply is made. The definition of “goods” in Clause 12 is
inclusive. It includes all materials, commodities and articles. The expression, ‘goods’
has a broader meaning than merchandise. Chattels or movables are goods within the
meaning of Clause 12. Sub-clause (b) refers to transfer of property in goods (whether as
goods or in some other form) involved in the execution of a works contract. The
expression “in some other form” in the bracket is of utmost significance as by this
expression the ordinary understanding of the term ‘goods’ has been enlarged by bringing
within its fold goods in a form other than goods. Goods in some other form would
thus mean goods which have ceased to be chattels or movables or merchandise and
become attached or embedded to earth. In other words, goods which have by incorporation
become part of immovable property are deemed as goods. The definition of ‘tax on the sale
or purchase of goods’ includes a tax on the transfer or property in the goods as goods or
which have lost its form as goods and have acquired some other form involved in the
execution of a works contract.
61.Viewed thus, a transfer of property in goods under Clause 29A(b) of Article 366 is
deemed to be a sale of the goods involved in the execution of a works contract by the
person making the transfer and the purchase of those goods by the person to whom such
transfer is made.
62.The States have now been conferred with the power to tax indivisible contracts of
works. This has been done by enlarging the scope of “tax on sale or purchase of goods”
wherever it occurs in the Constitution. Accordingly, the expression “tax on the sale or
purchase of goods” in Entry 54 of List II of Seventh Schedule when read with the
definition Clause 29A, includes a tax on the transfer of property in goods whether as
goods or in the form other than goods involved in the execution of works contract. The
taxable event is deemed sale.
63.Gannon Dunkerley-I (supra) and few other decisions following Gannon Dunkerley-I
(supra) wherein the expression “sale” was given restricted meaning by adopting the
definition of the word “sale” contained in the Sale of Goods Act has been undone by the
Forty-sixth Constitutional Amendment so as to include works contract. The meaning of
Sub-clause (b) of Clause 29A of Article 366 of the Constitution also stands settled by the
Constitution Bench of this Court in Builders’ Association (supra). As a result of Clause
29A of Article 366, tax on the sale or purchase of goods may include a tax on the transfer
in goods as goods or in a form other than goods involved in the execution of the
works contract. It is open to the States to divide the works contract into two separate
contracts by legal fiction: (i) contract for sale of goods involved in the works contract and
(ii) for supply of labour and service. By the Forty-sixth Amendment, States have been
empowered to bifurcate the contract and to levy sales tax on the value of the material in
the execution of the works contract.”
- Notwithstanding some clear and pertinent observations made in by the Constitution
Bench in Builders Association’s case, while upholding the Constitutional validity of
46th Amendment, there was some ambiguity in the judicial thought on one particular
aspect which was also one of the basis of judgment in Gannon Dunkerley’s case. In
Gannon Dunkerley’s case, the Constitution Bench had laid down “dominant intention test”
to find out as to whether a particular contract involved transfer of property in goods. The
Court was of the opinion that if the dominant intention of a contract was not to transfer the
property in goods, but it was Works Contract, or for that matter, a contract in the nature
of rendering of services, even if a part of it related to the transfer of goods, that would be
immaterial and no sales tax on the said part could be levied, going by the principle of
dominant intention behind such a contract, which was in the nature of Works
Contract in the contract relating to construction of buildings.
14.As pointed out above, in Gannon Drunkerley’s case, the Court also held that such
a contract was indivisible. No doubt, insofar as indivisibility facet of the contract is
concerned, the same was done away by 46th Constitutional Amendment. However, in
subsequent cases, the Court grappled with the issue as to whether the principle of
dominant intention still prevailed. This very aspect came up for discussion before two
Judge Bench of this Court in Rainbow Colour Lab’s case. The Court held the view that
the division of contract after 46th Amendment can be made only if the Works Contract
involved a dominant intention to transfer the property in goods and not in contracts
where the transfer in property takes place as an incident of contract of service. This
aspect is highlighted by the said Bench in the following manner:
“10. Since this was a judgment rendered prior to the coming into force of the 46th
Constitutional Amendment, we will have to consider whether the said Amendment has
brought about any change so as to doubt the legal position enunciated in the above case.
It is true that by the 46th Constitutional Amendment by incorporating Clause 29A(b) in
Article 366, the definition of the words “sale” and “works contract” have been enlarged.
The State of Madhya Pradesh has also brought about a consequent change in the
definition of the word ‘sale’ in Section of its Sales Tax Act but it is to be noticed that in the
said State Act the expression ‘works contract’ has not been specifically defined.
- Prior to the Amendment of Article 366, in view of the judgment of this Court
In State of Madras v Gannon Dunkerley and Co., the State could not levy sales-tax on
sale of goods involved in a work’s contract because the contract was indivisible. All that
has happened In law after the 46th Amendment and the judgment of this Court in Builders
case (supra) is that it is now open to the States to divide the works contract into two
separate contracts by a legal fiction (i) contract for sale of goods involved in the said
works contract and (it) for supply of labour and service. This division of contract under
the amended law can be made only if the works contract involved a dominant intention to
transfer the property in goods and not in contracts where the transfer in property
takes place as an incident of contract of service. The Amendment, referred to above, has
not empowered the State to indulge in microscopic division of contracts involving the
value of materials used incidentally in such contracts. What is pertinent to ascertain in this
connection is what was the dominant intention of the contract. Every contract, be it a
service contract or otherwise, may involve the use of some material or the other in
execution of the said contract. State is not empowered by the amended law to impose
sales-tax on such incidental materials used in such contracts. This is clear from the
judgment of this Court in Hindustan Aeronautics Ltd. v. State of Karnataka [1984]2SCR248,
where it was held thus: Mere passing of property in an article or commodity during the
course of performance of the transaction in question does not render the transaction to be
transaction of sale. Even in a contract purely of work or service, it is possible that articles
may have to be used by the person executing the work, and property in such articles or
materials may pass to the other party. That would not necessarily convert the contract
into one of sale of those materials. In every case, the Court would have to find out
what was the primary object of the transaction and the intention of the parties while entering
into it….”
- While considering the validity of Entry 25 in Schedule VI of the Act and holding
it to be unconstitutional, as beyond the powers of the State Legislature, the High Court of
Karnataka in Keshoram’s case examined in detail the business which was carried out by
the petitioner in the said case and the process that was involved in processing and supplying
of photographs, photoframes or photonegatives. By that time, 46th Constitutional
Amendment had already been effected which was also taken note of by the High Court.
However, the High Court took the view that the main object of the work undertaken
by the petitioner in that case was not the transfer of a chattle as a chattle and, in fact, it
was a contract of work and labour and there was no sale of goods involved. - It is manifest from the above that the rationale behind the judgment was to look into
the main object of the work undertaken by the assessee and concluding that since it was
essentially a
Works Contract and transfer of photopaper upon which the positive prints were taken
were simply incidental and ancilliary to the main transactions, that was in the nature of
service contract, and, therefore, Entry 25 was beyond the scope of Article 366 of the
Constitution of India. Apparently, the High Court applied dominant intention test while
holding Entry 25 as unconstitutional. By the time, Special Leave Petition against this
judgment came up for consideration before this Court on 20.04.2000, the judgment in
the case of Rainbow Colour Lab’s case had just been rendered observing that
dominant intention test was still valid notwithstanding insertion of clause 29-A in Article
366 of the Constitution by 46th Amendment. Following this judgment, SLP was dismissed.
17.Within one year of the said judgment, this very issue again cropped up for
discussion and decision before a three Judge Bench in ACC Ltd. case. The issue arose
under the Customs Act, 1962 viz. whether the drawings, designs etc. relating to machinery
or industrial technology were goods which were leviable to duty of customs on their
transaction value at the time of their report. However, since the issue related to meaning that
has to be given to the expression “goods”, the case law on this aspect including Gannon
Dunkerley & Kame’s case were specifically taken note of and discussed. The Court also
noticed the effect of 46th Amendment and in the process commented upon the
judgment in the Rainbow Colour Lab’s case. The Court specifically remarked that Gannon
Dunkerley & Kame’s judgments were of pre 46th Amendment era which had no
relevance after the said Constitutional amendment. It can be discerned from the
following discussion contained therein:
“21. All the aforesaid decisions related to the period prior to the Forty-sixth
Amendment of the Constitution when Article 366(29A) was inserted. At that time in the
case of a works contract it was held that the same could not be split and State
Legislature had no legislative right to seek to levy sales tax on a transaction which was not a
sale simpliciter of goods. Rainbow Colour Lab & Anr. Vs. State of M.P. and Others,
(2000) 2 SCC 385 was, however, a case relating to the definition of the word “sale” in
the M.P. General Sales Tax Act, 1958 after its amendment consequent to the insertion of
Article 366(29A). The question there was whether the job rendered by a photographer in
taking photographs, developing and printing films would amount to works contract for the
purpose of levy of sales tax. This Court held that the work done by the photographer was
only a service contract and there was no element of sale involved. After referring to
earlier decisions of this Court, it was observed at page 391 as follows:
“15. Thus, it is clear that unless there is sale and purchase of goods, either in fact or
deemed, and which sale is primarily intended and not incidental to the contract, the
State cannot impose sales tax on a works contract simpliciter in the guise of the expanded
definition found in Article 366(29A)(b) read with Section 2(n) of the State Act. On facts
as we have noticed that the work done by the photographer which as held by this Court in
Kame case is only in the nature of a service contract not involving any sale of goods, we
are of the opinion that the stand taken by the respondent State cannot be sustained.”
22.Even though in our opinion the decisions relating to levy of sales tax would have,
for reasons to which we shall presently mention, no application to the case of levy of
customs duty, the decision in Rainbow Colour Lab case (supra) requires consideration. As a
result of the Forty-sixth Amendment, sub-article 29A of Article 366 was inserted as a result
whereof tax on the sale or purchase of goods was to include a tax on the transfer of
property in goods (whether as goods or in some other form) involved in the execution
of a works contract. Taking note of this amendment this Court in Rainbow Colour Lab at page
388-389 observed as follows:
“11. Prior to the amendment of Article 366, in view of the judgment of this Court in
State of Madras v. Gannon Dunkerley & Co. (Madras) Ltd. the States could not levy sales
tax on sale of goods involved in a works contract because the contract was indivisible. All
that has happened in law after the 46th Amendment and the judgment of this Court in
‘Builders’ case is that it is now open to the States to divide the works contract into
two separate contracts by a legal fiction: (i) contract for sale of goods involved in the
said works contract, and (ii) for supply of labour and service. This division of contract
under the amended law can be made only if the works contract involved a dominant
intention to transfer the property in goods and not in contracts where the transfer in
property takes place as an incident of contract of service. The amendment, referred
to above, has not empowered the State to indulge in a microscopic division of contracts
involving the value of materials used incidentally in such contracts. What is pertinent to
ascertain in this connection is what was the dominant intention of the contract. Every
contract, be it a service contract or otherwise, may involve the use of some material or the
other in execution of the said contract. The State is not empowered by the amended law to
impose sales tax on such incidental materials used in such contracts..”
23.In arriving at the aforesaid conclusion the Court referred to the decision of this
Court in Hindustan Aeronautics Ltd. vs. State of Karnataka (1984) a SCC 706 and
Everest Copier (supra). But both these cases related to pre-Forty-sixth Amendment era
where in a works contract the State had no jurisdiction to bifurcate the contract and
impose sales tax on the transfer of property in goods involved in the execution of a works
contract. The Forty-sixth Amendment was made precisely with a view to empower the
State to bifurcate the contract and to levy sales tax on the value of the material involved
in the execution of the works contract, notwithstanding that the value may represent a
small percentage of the amount paid for the execution of the works contract. Even if the
dominant intention of the contract is the rendering of a service, which will amount to a
works contract, after the Forty-sixth Amendment the State would now be empowered to levy
sales tax on the material used in such contract. The conclusion arrived at in Rainbow
Colour Lab case, in our opinion, runs counter to the express provision contained in
Article 366 (29A) as also of the Constitution Bench decision of this Court in Builders’
Association of India and Others vs. Union of India and Others (1989) 2 SCC 645.”
[emphasis supplied]
18.It is amply clear from the above and hardly needs clarification Bench judgment
in Rainbow Colour Lab’s case did not lay down the correct law as it referred to pre
46th Amendment judgments in arriving at its conclusions which had lost their validity. The
Court also specifically commented that after 46th Amendment, State is empowered to levy
sales tax on the material used even in those contracts where “the dominant intention of
the contract is the rendering of a service, which will amount to a Works Contract”.
19.In view of the above, the argument of the respondent assessees that ACC Ltd. case
did not over-rule Rainbow Colour Lab’s case is, therefore, clearly misconceived. In fact, we
are not saying so for the first time as a three member Bench of this Court in M/s Larsen
and Toubro has already stated that ACC Ltd. had expressly over-ruled Rainbow Colour
Lab while holding that dominant intention test was no longer good test after 46th
Constitutional Amendment. We may point out that learned counsel for the respondent
assessees took courage to advance such an argument emboldened by certain observations
made by two member Bench in the case of C.K. Jidheesh v. Union of India8, wherein
the Court has remarked that the observations in ACC Ltd. were merely obiter. In
Jidheesh, however, the Court did not notice that this very argument had been rejected earlier
in Bharat Sanchar Nigam Ltd. v. Union of India9.
- In M/s Larsen and Toubro, the Court, after extensive and elaborate discussion,
once again specifically negated the argument predicated on dominant intention test having
regard to the statement of law delineated in ACC Ltd. and Bharat Sanchar Nigam Ltd. cases.
The reading of following passages from the said judgment is indicative of providing
complete answer to the arguments of the respondent assessees herein:
“64. Whether contract involved a dominant intention to transfer the property in goods,
in our view, is not at all material. It is not necessary to ascertain what is the dominant
intention of the contract. Even if the dominant intention of the contract is not to transfer
the property in goods and rather it is the rendering of service or the ultimate transaction
is transfer of immovable property, then also it is open to the States to levy sales tax
on the materials used in such contract if it otherwise has elements of works contract.
The view taken by a two-Judge Bench of this Court in Rainbow Colour Lab (supra) that the
division of the contract after Forty-sixth Amendment can be made only if the works
contract involved a dominant intention to transfer the property in goods and not in
contracts where the transfer of property takes place as an incident of contract of service
is no longer good law, Rainbow Colour Lab (supra) has been expressly overruled by a
three-Judge Bench in Associated Cement.
65.Although, in Bharat Sanchar, the Court was concerned with Sub-clause (d) of Clause
29A of Article 366 but while dealing with the question as to whether the nature of
transaction by which mobile phone connections are enjoyed is a sale or service or both, the
three-Judge Bench did consider the scope of definition in Clause 29A of Article366.
With reference to Sub-clause (b) it said: “Sub-clause (b) covers cases relating to works
contract. This was the particular fact situation which the Court was faced with in Gannon
Dunkerley-I and which the Court had held was not a sale. The effect in law of a transfer
of property in goods involved in the execution of the works contract was by this amendment
deemed to be a sale. To that extentthe decision in Gannon Dunkerley-I was directly
overcome”. It then went on to say that all the Sub-clauses of Article 366 (29A) serve to
bring transactions where essential ingredients of a ‘sale’ as defined in the Sale of Goods Act,
1930 are absent, within the ambit of purchase or sale for the purposes of levy of sales tax.
66.It then clarified that Gannon Dunkerley-I survived the Forty-sixth Constitutional
Amendment in two respects. First, with regard to the definition of “sale” for the purposes of
the Constitution in general and for the purposes of Entry 54 of List II in particular
except to the extent that the clauses in Article 366(29A) operate and second, the
dominant nature test would be confined to a composite transaction not covered by Article
366(29A). In other words, in Bharat Sanchar, this Court reiterated what was stated by
this Court in Associated Cement that dominant nature test has no application to a
composite transaction covered by the clauses of Article 366(29A). Leaving no ambiguity, it
said that after the Forty-sixth Amendment, the sale element of those contracts which are
covered by six Sub-clauses of Clause 29A of Article 366 are separable and may be
subjected to sales tax by the States under Entry 54 of List II and there is no question of the
dominant nature test applying.
67.In view of the statement of law in Associated Cement and Bharat Sanchar, the
argument advanced on behalf of the Appellants that dominant nature test must be applied
to find out the true nature of transaction as to whether there is a contract for sale of goods or
the contract of service in a composite transaction covered by the clauses of Article
366(29A) has no merit and the same is rejected.
68.In Gannon Dunkerley-II, this Court, inter alia, established the five following
propositions:
(i)as a result of Forty-sixth Amendment the contract which was single and indivisible
has been altered by a legal fiction into a contract which is divisible into one for sale of
goods and the other for supply of labour and service and as a result of such contract
which was single and indivisible has been brought on par with a contract containing two
separate agreements;
(ii)if the legal fiction introduced by Article 366(29A)(b) is carried to its logical end,
it follows that even in a single and indivisible works contract there is a deemed sale of
the goods which are involved in the execution of a works contract. Such a deemed sale has
all the incidents of the sale of goods involved in the execution of a works contract where
the contract is divisible into one for sale of goods and the other for supply of labour and
services;
(iii)in view of Sub-clause (b) of Clause 29A of Article 366, the State legislatures are
competent to impose tax on the transfer of property in goods involved in the execution of
works contract. Under Article 286(3)(b), Parliament has been empowered to make a law
specifying restrictions and conditions in regard to the system of levy, rates or incidents of
such tax. This does not mean that the legislative power of the State cannot be exercised till
the enactment of the law under Article 286(3)(b) by the Parliament. It only means that in
the event of law having been made by Parliament under Article 286(3)(b), the exercise of
the legislative power of the State under Entry 54 in List II to impose tax of the nature
referred to in Sub- clauses (b), (c) and (d) of Clause (29A) of Article 366 would be
subject to restrictions and conditions in regard to the system of levy, rates and other
incidents of tax contained in the said law; (iv) while enacting law imposing a tax on sale
or purchase of goods under Entry 54 of the
State List read with Article 366(29A)(b), it is permissible for the State legislature to
make a law imposing tax on such a deemed sale which constitutes a sale in the course of
the inter- state trade or commerce under Section 3 of the Central Sales Tax Act or outside
under Section 4 of the Central Sales Tax Act or sale in the course of import or export
under Section 5 of the Central Sales Tax Act; and (v) measure for the levy of tax
contemplated by Article 366(29A)(b) is the value of the goods involved in the execution
of a works contract. Though the tax is imposed on the transfer of property in goods
involved in the execution of a works contract, the measure for levy of such imposition is
the value of the goods involved in the execution of a works contract. Since, the taxable
event is the transfer of property in goods involved in the execution of a works contract and
the said transfer of property in such goods takes place when the goods are incorporated
in the works, the value of the goods which can constitute the measure for the levy of the tax
has to be the value of the goods at the time of incorporation of the goods in works and not
the cost of acquisition of the goods by the contractor.
69.In Gannon Dunkerley-II, Sub-section (3) of Section 5 of the Rajasthan Sales Tax
Act and Rule 29(2)(1) of the Rajasthan Sales Tax Rules were declared as unconstitutional
and void. It was so declared because the Court found that Section 5(3) transgressed the
limits of the legislative power conferred on the State legislature under Entry 54 of the
State List. However, insofar as legal position after Forty- sixth Amendment is concerned,
Gannon Dunkerley-II holds unambiguously that the States have now legislative power to
impose tax on transfer of property in goods as goods or in some other form in the
execution of works contract.
70.The Forty-sixth Amendment leaves no manner of doubt that the States have power
to bifurcate the contract and levy sales tax on the value of the material involved in the
execution of the works contract. The States are now empowered to levy sales tax on the
material used in such contract. In other words, Clause 29A of Article 366 empowers the
States to levy tax on the deemed sale.”
- To sum up, it follows from the reading of the aforesaid judgment that after insertion
of clause 29-A in Article 366, the Works Contract which was indivisible one by legal
fiction, altered into a contract, is permitted to be bifurcated into two: one for “sale of
goods” and other for “services”, thereby making goods component of the contract
exigible to sales tax. Further, while going into this exercise of divisibility, dominant
intention behind such a contract, namely, whether it was for sale of goods or for services,
is rendered otiose or immaterial. It follows, as a sequitur, that by virtue of clause 29-A of
Article 366, the State Legislature is now empowered to segregate the goods part of the
Works Contract and impose sales tax thereupon. It may be noted that Entry 54, List II
of the Constitution of India empowers the State Legislature to enact a law taxing sale of
goods. Sales tax, being a subject-matter into the State List, the StateLegislature
has the competency to legislate over the subject.
22.Keeping in mind the aforesaid principle of law, the obvious conclusion would be
that Entry 25 of Schedule VI to the Act which makes that part of processing and
supplying of photographs, photo prints and photo negatives, which have “goods”
component exigible to sales tax is constitutionally valid.
23.For being classified as Works Contract the transaction under consideration has
to be a composite transaction involving both goods and services. If a transaction
involves only service i.e. work and labour then the same cannot be treated as Works
Contract. It was contended that processing of photography was a contract for service
simplicitor with no elements of goods at all and, therefore, Entry 25 could not be saved
by taking shelter under clause 29-A of Article 366 of the Constitution. For this
proposition, umbrage under the judgment in B.C. Kame’s case was sought to be taken
wherein this Court held that the work involving taking a photograph, developing the
negative or doing other photographic work could not be treated as contract for sale of
goods. Our attention was drawn to that portion of the judgment where the Court held that
such a contract is for use of skill and labour by the photographer to bring about desired
results inasmuch as a good photograph reveals not only the asthetic sense and
artistic faculty of the photographer, it also reflects his skill and labour. Such an
argument also has to be rejected for more than one reasons. In the first instance, it needs to
be pointed out that the judgment in Kame’s case was rendered before the 46th Constitutional
Amendment. Keeping this in mind, the second aspect which needs to be noted is that the
dispute therein was whether there is a contract of sale of goods or a contract for
service. This matter was examined in the light of law prevaling at that time, as declared in
Dunkerley’s case as per which dominant intention of the contract was to be seen and
further that such a contract was treated as not divisible. It is for this reason in BSNL and
M/s Larsen and Toubro cases, this Court specifically pointed out that Kame’s case would
not provide an answer to the issue at hand. On the contrary, legal position stands settled
by the Constitution Bench of this Court in Kone Elevator India Pvt. Ltd. v. State of
Tamil Nadu and Ors.10. Following observations in that case are apt for this purpose:
“On the basis of the aforesaid elucidation, it has been deduced that a transfer of property
in goods under Clause (29A)(b) of Article 366 is deemed to be a sale of goods involved in
the execution of a Works Contract by the person making the transfer and the purchase of
those goods by the person to whom such transfer is made. One thing is significant to
note that in Larsen and Toubro (supra), it has been stated that after the constitutional
amendment, the narrow meaning given to the term “works contract” in Gannon
Dunkerley-I (supra) no longer survives at present. It has been observed in the said case
that even if in a contract, besides the obligations of supply of goods and materials and
performance of labour and services, some additional obligations are imposed, such contract
does not cease to be works contract, for the additional obligations in the contract would
not alter the nature of the contract so long as the contract provides for a contract for
works and satisfies the primary description of works contract. It has been further held
that once the characteristics or elements of works contract are satisfied in a contract, then
irrespective of additional obligations, such contract would be covered by the term “works
contract” because nothing in Article 366(29A)(b) limits the term works contract” to
contract for labour and service only.”
- Another attack on the insertion of Entry 25 pertained to retrospectivity given to
this provision. It was sought to be argued that amendment to the Act was made by
Karnataka State Laws Act, 2004 which came into force w.e.f. 29.01.2004 and insertion of
Entry 25 with retrospective effect i.e. w.e.f. 01.07.1989 was not permissible. To put it
otherwise, the argument was that even if Entry 25 is held to be valid, it should be made
prospective i.e.,w.e.f. 29.01.2004. - We are afraid, even this argument does not cut any ice. The first thing in this regard
which is to be kept in mind is that Entry 25 was inserted for the first time by
amendment of the Act w.e.f. 01.07.1989. This amendment was post 46th Constitutional
Amendment. However, the High Court of Karnataka declared thesaid Entry to be
unconstitutional and the SLP was also dismissed. Undoubtedly, it was because of the
judgment in Rainbow Colour Lab, which judgment was declared as not a good law in
ACC Ltd. (which position is repeated in BSNL as well as M/s Larsen and Toubro cases). Thus,
the very basis on which Entry 25 of Schedule VI was declared as unconstitutional, has
been found to be erroneous. In such circumstances, the legislature will be justified in
enacting the law from the date when such a law was passed originally and that date is
01.07.1989 in the instant case. We have to keep in mind the fact that on the basis of this
amendment, there have been assessments made by the assessing authorities. This was
admitted by the learned counsel for the respondents at bar at the time of the arguments.
- We would also like to refer to the case of Hiralal Ratanlal v. State of U.P.15,
wherein it was observed “the source of the legislative power to levy sales or purchase tax on
goods is Entry 54 of the List II of the Constitution. It is well settled that subject to
Constitutional restrictions a power to legislate includes a power to legislate prospectively as
well as retrospectively. In this regard legislative power to impose tax also includes
within itself the power to tax retrospectively.” - We would like to point out at this stage that the High Court in the impugned
judgment has not dealt with the mater in its correct perspective. The reason given by
the High Court in invalidating Entry 25 is that this provision was already held
unconstitutional by the said High Court in Keshoram’s case against which the SLP was
also dismissed and in view of that decision, it was not permissible for the legislature to reenact the said Entry by applying a different legal principle. According to us, this was
clearly an erroneous approach to deal with the issue and the judgment of the High
Court is clearly unsustainable. The High Court did not even deal with various facets of
the issue in their correct perspective, in the light of subsequent judgments of this Court
with specific rulings that Rainbow Colour Lab is no longer a good law.
29.The impugned judgment of the High Court is accordingly set aside, the present
appeal is allowed and as a result thereof, the writ petitions filed by the respondents in the
High Court are dismissed holding that Entry 25 of Schedule VI of the Act is
constitutionally valid. There shall, however, be no order as to costs.
