2008 (1) TMI 2 - SC - Service Tax

Parliamentary service tax on prototype design excludes state VAT; in composite contracts each levy applies only to its element

Imagic Creative Pvt. Ltd. Versus Commissioner of Commercial Taxes & Ors.

SC held that charges for providing advertisement/professional services (prototype conceptual design) taxed under the Parliamentary service tax regime are ... Liability under the taxing statute - Advertisement services i.e., providing professional services - Whether the charges collected towards the services for evolution of prototype conceptual design (i.e. creation of concept), on which service tax had been paid under the Finance Act, 1994 as amended from time to time is liable to tax under the Karnataka Value Added Tax Act, 2003 (the Act) - HELD THAT:- It is also not in dispute that the orders received by it to provide such services is party specific and issue specific; be it for issuance of a brochure or a year book or for any other purpose. Appellant, in their returns, made three categorical divisions in regard to its tax liabilities (1) The amount of service tax on the specific design and production; (2) The amount of Kerala Sales Tax on the specified item on the first sale; and (3) when certain items are outsourced, the tax payable on resale of the said goods in terms of Section 6(4) of the Kerala Sales Tax Act. Appellant admittedly is a service provider. When it provides for service, it is assessable to a tax known as service tax. Such tax is leviable by reason of a Parliamentary statute. In the matter of interpretation of a taxing statute, as also other statutes where the applicability of Article 246 of the Constitution of India, read with Seventh Schedule thereof is in question, the Court may have to take recourse to various theories including aspect theory, as was noticed by this Court in Federation of Hotel & Restaurant Association of India, etc. v. Union of India& Ors. [1989 (5) TMI 50 - SUPREME COURT]. The Court, while interpreting a statute, must bear in mind that the legislature was supposed to know law and the legislation enacted is a reasonable one. The Court must also bear in mind that where the application of a Parliamentary and a Legislative Act comes up for consideration; endeavours shall be made to see that provisions of both the acts are made applicable. Payments of service tax as also the VAT are mutually exclusive. Therefore, they should be held to be applicable having regard to the respective parameters of service tax and the sales tax as envisaged in a composite contract as contradistinguished from an indivisible contract. It may consist of different elements providing for attracting different nature of levy. It is, therefore, difficult to hold that in a case of this nature, sales tax would be payable on the value of the entire contract; irrespective of the element of service provided. The approach of the assessing authority, to us, thus, appears to be correct. Thus, the impugned judgment cannot be sustained. It is set aside accordingly. The Appeal is allowed. Issues Involved:1. Taxability of charges for prototype conceptual design under Karnataka Value Added Tax Act, 2003.2. Whether the contract for advertising services is indivisible and how it affects tax liability.3. Applicability of service tax and sales tax on the same transaction.Issue-wise Detailed Analysis:1. Taxability of Charges for Prototype Conceptual Design:The main question was whether the charges collected for the services related to the evolution of prototype conceptual design, on which service tax had already been paid under the Finance Act, 1994, were also liable to tax under the Karnataka Value Added Tax Act, 2003. The appellant, an advertising agency, provided services that included creating original concepts and designing advertising materials. The assessment order under the Karnataka Sales Tax Act included turnovers for service charges, design, and artwork charges, which were argued to involve no transfer of property in goods.2. Indivisibility of the Contract and Tax Liability:The High Court and the Tribunal opined that the contract was an indivisible one, meaning that it could not be separated into parts for service and goods. The appellant argued that if the contract is indivisible, the service element should be subject to service tax, and no sales tax should be levied on the incidental transfer of goods unless it falls within the specific provisions of Article 366(29A) of the Constitution. The High Court relied on previous judgments (Associated Cement Companies Ltd., Tata Consultancy Services) to conclude that the entire value, including concept charges, was taxable under sales tax.3. Applicability of Service Tax and Sales Tax:The appellant contended that as a service provider, they should not be liable to pay VAT, especially when part of the contract was outsourced, and the sale of goods was shown as a second sale. The legal framework, including the Forty-sixth Amendment to the Constitution, was discussed to determine the taxability of works contracts and composite contracts. The Court noted that service tax and VAT are mutually exclusive and should be applied based on the respective parameters of service tax and sales tax in a composite contract.Judgment Analysis:The Supreme Court expressed reservations about the maintainability of the application under Section 60 of the Karnataka Value Added Tax Act, 2003, since the appellant had already undergone the process of regular assessment. However, it proceeded to examine the merits of the case. The Court acknowledged that the appellant is a service provider and the services rendered are specific to each client. It highlighted the legal fiction created by Article 366(29A) for works contracts, which allows for the separation of service and goods for tax purposes.The Court emphasized that the payment of service tax and VAT are mutually exclusive and should be applied based on the nature of the contract. It concluded that sales tax should not be payable on the entire value of the contract, including the service element. The approach of the assessing authority, which differentiated between service tax and sales tax, was deemed correct.Conclusion:The Supreme Court set aside the impugned judgment, concluding that the entire value of the contract should not be subject to sales tax. The appeal was allowed, and no costs were imposed. The decision clarified that in composite contracts involving both services and goods, the respective taxes should be applied based on the nature of the transaction, maintaining the exclusivity of service tax and sales tax.