1999 (9) TMI 938 - HC - VAT and Sales Tax

Photography service contracts not subject to sales tax under Karnataka law

The court held that contracts for processing and supplying photographs are service contracts involving skill and labor, not sales of goods. It concluded ... Processing and supplying of photographs, photo prints and photo negatives - contract of work and labour - works contract - transfer of property in goods - marketability of goods - 46th Constitutional Amendment legal fictionContract of work and labour - sale of goods - Whether the activity of taking photographs, developing films and supplying prints or negatives amounts to a contract of sale or is a contract of work and labour (not a sale). - HELD THAT: - Relying on precedent (including B.C. Kame) and the substance of the transaction, the Court held that the core object of the transaction is provision of specialised skill and labour to produce a photograph or print, not the sale of the material per se. The paper, chemicals and negatives used remain incidental to the exercise of technical and artistic expertise; the customer pays for the photographic result rather than for the bare materials. Accordingly, the transaction is essentially a contract for work and labour and not a sale of goods. [Paras 5, 11, 31]The transactions constitute contracts of work and labour and are not contracts of sale.Works contract - transfer of property in goods - marketability of goods - processing and supplying of photographs, photo prints and photo negatives - Whether processing and supplying of photographs, photo prints and photo negatives involves transfer of property in goods so as to fall within entry 25 of the Sixth Schedule and attract tax under the State Act (including application of the 46th Constitutional Amendment). - HELD THAT: - The Court examined authorities on works contracts, marketability and the effect of processes on goods. While recognising that in some processing transactions a transfer of property may occur, it found that in the photographic transactions before it the negatives and films remain essentially unchanged and the prints/photographs are not marketable commodities for others; the material used (paper, chemicals) is incidental. Applying the marketability test and the constitutional provisions, the Court concluded that the main object is service and not transfer of property in goods. Consequently, entry 25 of the Sixth Schedule, insofar as it seeks to tax such photographic processing and supply as a transfer of property in goods, is beyond the competence of the State and cannot be applied to levy tax on these transactions. [Paras 9, 13, 31]Processing and supplying photographs does not involve transfer of property in goods for purposes of entry 25; entry 25 cannot sustain taxation of these transactions under the State Act.Final Conclusion: Writ appeals allowed. Photographic developing, processing and supply of prints/negatives are essentially contracts for work and labour (service), the goods used being incidental and not marketable for others; entry 25 of the Sixth Schedule cannot be validly applied to levy tax on these transactions in the cases before the Court. Issues Involved:1. Nature of the contract for processing and supplying photographs.2. Validity of Entry 25 of the Sixth Schedule of the Karnataka Sales Tax Act, 1957.3. Applicability of the 46th Constitutional Amendment.4. Marketability and taxability of photographs, photo prints, and photo negatives.Summary:Nature of the Contract:The appellant, engaged in the business of taking photographs and supplying prints, contended that the contract is one of pure skill and labour, not involving the sale of goods. The process involves technical expertise and controlled chemical processing. The Supreme Court in Assistant Sales Tax Officer v. B.C. Kame [1977] 39 STC 237 (SC) held that such contracts are for work and labour, not for the sale of goods. The occupation of a photographer is essentially one of skill and labour, and the contract does not constitute a sale of goods.Validity of Entry 25:The validity of Entry 25 of the Sixth Schedule, which proposes to levy tax on processing and supplying photographs, was challenged. It was argued that there is no transfer of property in goods involved in the execution of the works contract. The High Court upheld the validity of Entry 25, stating that it is not possible to generally lay down that there is no element of works contract involved in all cases of processing and supplying photographs.Applicability of the 46th Constitutional Amendment:The 46th Constitutional Amendment, which allows for the division of contracts into sale of goods and supply of labour, was discussed. The court observed that the amendment creates a legal fiction by which individual contracts can be divided. However, in this case, the main object is not the transfer of property in goods but the provision of a service.Marketability and Taxability:The court examined various judgments to determine the marketability of photographs. It was noted that photographs have no marketable value as they are not commercial commodities. The Supreme Court in Everest Copiers v. State of Tamil Nadu [1996] 103 STC 360 (SC) held that the main object of such contracts is not the transfer of paper but the duplication of documents, making it a contract of work or labour. The court concluded that photographs are not marketable or saleable commodities, and thus no tax can be levied on them.Conclusion:The court allowed the writ appeals, holding that the contracts for processing and supplying photographs are primarily service contracts involving skill and labour. The photographs are not marketable commodities, and Entry 25 of the Sixth Schedule to the Karnataka Sales Tax Act, 1957, is beyond the scope of article 366 of the Constitution of India.