2025 (10) TMI 387 - SC - VAT / Sales Tax

Appellant held liable to pay tax under Section 3F(1)(b) on inks and processing and packing materials used in printing

M/s. Aristo Printers Pvt. Ltd. Versus Commissioner Of Trade Tax, Lucknow, U.P.

The SC dismissed the appeal and held the appellant liable to pay tax under Section 3F(1)(b) of the Uttar Pradesh Trade Tax Act, 1948 on the ink and ... Levy of trade tax - value of ink, processing material and packing material used by the appellant for executing the printing work on the basis of Section 3F of the Uttar Pradesh Trade Tax Act, 1948 - Appellant contended that since the customer does not receive the ink or chemicals in any form, but only the service of printing, these items should not be treated as goods that are transferred in execution of the works contract. - HELD THAT:- In Gannon Dunkerley & Co. & Ors. v. State of Rajasthan & Ors., [1992 (11) TMI 254 - SUPREME COURT], once again, this Court was faced with a host of questions pertaining to the imposition of tax on the transfer of property in goods involved in the execution of works contracts. One of the contentions raised herein was that after the enactment of the Forty-sixth Amendment, no amendment was brought to the Act, 1956, applying its provision to the transfer of property in goods involved in the execution of the works contracts. Consequently, Sections 3, 4 and 5 of the Act, 1956 would not be applicable to such transfers. This Court in Gannon Dunkerley -II [1992 (11) TMI 254 - SUPREME COURT] held that the taxable event is the transfer of property in goods involved in the execution of a works contract, and that transfer occurs when the goods are incorporated in the “works”. Consequently, it is the value of goods at the time of incorporation which have to constitute the measure for the levy of the tax. This Court in the Kone Elevator India Private Limited v. State of Tamil Nadu, [2014 (5) TMI 265 - SUPREME COURT (LB)], and in State of Karnataka & Ors v. M/s Pro Lab & Ors., [2015 (2) TMI 388 - SUPREME COURT] respectively, once again reiterated that the dominant intention test is not applicable when determining whether a particular contract is a works contract for the purposes of Article 366 (29-A) (b). In Teaktex Processing Complex Limited v. State of Kerala, [2002 (10) TMI 761 - KERALA HIGH COURT], the Kerala High Court addressed a similar question, i.e., whether dyes and chemicals used in the process of dyeing should be considered as consumables under Section 5C of the Kerala General Sales Tax Act, 1963. The Kerala High Court held that the ‘dye’ used in the process cannot be treated as a consumable. According to the High Court, if an item which is used in the process is not in existence in any form in the end-product, then it is to be treated as a consumable. Since the dyes used existed in the form of colour, the High Court held that it was inevitable that the property in them was transferred. The Courts were primarily dealing with situations where the transfer of property resulted in a tangible and observable presence in the final product. The judicial reasoning focused on how the inherent properties of the goods were physically incorporated and remained as a component of the works delivered to the customer. In the facts of the present case, the levy of sales tax under Section 3F of the Act, 1948, is on the ink and the processing material used by the appellant in printing the lottery tickets. The appellant has, however, not provided an item-wise breakdown of such processing material. The same was also noted by the Assessing Authority in its orders dated 28.10.1999. If the appellant had provided an item-wise breakdown, it would have facilitated in determining whether there was a transfer of property with regard to each such item - As rightly held by the Bombay High Court in Matushree [2003 (8) TMI 478 - BOMBAY HIGH COURT], the transfer of ink and chemicals in their chemically altered form constitutes a valid transfer of property. Therefore, since it is impossible to transfer the ink without also transferring the chemicals it is diluted with, it can be conclusively inferred that the property in both the ink and the chemicals has been transferred. Thus, in the facts of the present case, all conditions required to sustain a levy of tax under Section 3F(1)(b) of the Act, 1948, are fulfilled. Consequently, the appellant is liable to pay tax under Section 3F(1)(b) of the Act, 1948 on the ink and processing material. Appeal dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether tax under Section 3F(1)(b) of the Uttar Pradesh Trade Tax Act, 1948 can be levied on ink and processing materials (chemicals) used in the printing of lottery tickets - i.e., whether there is a 'transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract'. 2. If the taxable event is a transfer of property in goods involved in a works contract, (a) what are the essential conditions for such levy under the statutory and constitutional framework introduced by the Forty-sixth Amendment, and (b) whether consumable items that are consumed in the course of work are taxable where they are involved in execution of the works contract. 3. The applicability of judicial tests and precedents addressing (i) the 'dominant intention' test for works contracts post-Forty-sixth Amendment, and (ii) competing approaches to whether consumption of material precludes transfer of property. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Whether Section 3F(1)(b) permits levy on ink and processing materials used in printing of lottery tickets Legal framework: Section 3F(1)(b) levies tax on 'transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract.' Definitions of 'goods', 'sale', and 'works contract' in the Act 1948 (and the constitutional legal fiction inserted by Article 366(29-A)(b) of the Constitution by the Forty-sixth Amendment) govern the taxable event. State power to tax deemed sales under Article 366(29-A)(b) remains subject to constitutional limits (Article 286) and central sales law principles. Precedent treatment: Post-Forty-sixth Amendment jurisprudence establishes that (i) the taxable event is a deemed transfer of property in goods involved in a works contract; (ii) the 'dominant intention' test has lost relevance where Article 366(29-A)(b) applies; and (iii) the value of goods for tax purposes is the value at incorporation in the works, excluding charges attributable to labour and services. Earlier contrary two-judge formulations that sought to retain the dominant intention test have been displaced by later constitutional reading. Interpretation and reasoning: The Court holds that the statutory tax is not on the end product per se (lottery tickets) but on goods involved in execution of the works contract (ink and processing materials). Three conditions must co-exist to sustain the levy: (i) existence of a works contract; (ii) involvement of goods in execution; and (iii) transfer of property in those goods to a third party as goods or in some other form. In the present facts the first two conditions are undisputed; the contest concerns the third condition. Ratio vs. Obiter: Ratio - Section 3F(1)(b) taxes transfer of property in goods involved in works contracts; the taxable event occurs when goods are incorporated in the works (deemed sale), and physical persistence in the final product is not a precondition. Observations on constitutional limits and valuation principles follow prior binding authority and constitute ratio. Characterisations of particular earlier lower court decisions as wrongly reasoned on consumption are analytical conclusions supporting the ratio. Conclusions: Section 3F(1)(b) can apply to ink and chemicals used in printing if property in those goods is transferred when incorporated in the printed ticket; the statutory and constitutional scheme supports taxing such transfer even where subsequent consumption occurs. Issue 2 - When does transfer of property occur for goods involved in works contracts and are consumables like ink/chemicals taxable? Legal framework: The Forty-sixth Amendment created a legal fiction deeming transfer of property in goods involved in works contracts to be sale; foundational precedent holds the taxable event is the transfer when goods are incorporated in the 'works'. Statutory deductions exclude amounts representing cost of consumables 'the property in which is not transferred' during execution of works contract. Precedent treatment (followed/distinguished/overruled): The Court follows the line of authority that (a) rejects the continued application of the dominant intention test for works-contract taxation; (b) treats the taxable event as the moment of incorporation/delivery of the contractor's goods into the works (even if in 'some other form'); and (c) declines to follow earlier authorities that equated consumption with absence of transfer where such authorities ignored the taxable-event focus. Earlier decisions that treated all consumption-as-used items as non-transferable are distinguished as incorrectly centring on consumption rather than on the occurrence of transfer. Interpretation and reasoning: The Court emphasises that the decisive question is whether property in goods involved in execution has been transferred - not whether those goods physically remain in the final product. Goods may pass 'in some other form' (including chemical form or by incorporation into another medium). The Court explains that some consumables (e.g., water, electricity, fuel) remain deductible when their property is not transferred; but where the material's inherent property is passed to the awarder (for example colour transferred to fabric or ink forming an image on paper), the transfer occurs even if the material is later consumed or altered. The Court rejects a rigid consumption-only rule and confirms the moment of transfer may precede consumption; subsequent disappearance does not negate transfer already effected. Ratio vs. Obiter: Ratio - transfer can occur at the moment a contractor's goods are incorporated into the works, including where incorporation is chemical or intangible, and such transfer is taxable. Distinguishing earlier consumables-based holdings (which are not followed) is part of the binding reasoning. Observations about the need for fact-specific enquiries and the inapplicability of bright-line rules are ancillary guidance (but necessary to apply the ratio). Conclusions: Consumable status alone does not automatically exclude a material from tax; ink and processing chemicals that are applied to and become part of the printed ticket effect a transfer of property at the moment of incorporation and are therefore taxable under Section 3F(1)(b). Only those consumables whose property is not transferred in execution remain deductible. Issue 3 - Applicability of the 'dominant intention' test and treatment of conflicting precedents Legal framework: Article 366(29-A)(b) and subsequent Supreme Court exposition permit States to treat indivisible works contracts as divisible by legal fiction for taxation of goods involved; valuation and deductibility are governed by established principles developed post-amendment. Precedent treatment: The Court reaffirms that earlier two-judge authority applying the dominant intention/dominant nature test to permit division of works contracts is no longer good law where the constitutional fiction applies; later three-judge and subsequent decisions have disapproved the dominant-intention approach. Precedents that focused incorrectly on consumption and treated all consumed inputs as non-transferable are held to have erred in approach and are distinguished. Interpretation and reasoning: The Court notes the Forty-sixth Amendment empowers States to tax transfers of property in goods involved in works contracts irrespective of the dominant intention of the contract; therefore the character of the contract is to be understood broadly and the works-contract concept reaches many varieties of composite arrangements. The correct enquiry is anchored to the statutory taxable event and the moment of incorporation/delivery of goods into the works rather than to contractual dominant intent. Ratio vs. Obiter: Ratio - the dominant-intention test is inapplicable in the governance of Article 366(29-A)(b) taxable events; prior contrary two-judge rulings are treated as overruled or displaced to the extent inconsistent. Observations about the breadth of works contracts and the practical need for fact-specific analysis are applied as guiding ratio and permissible judicial exposition. Conclusions: The dominant-intention test does not limit State power to tax deemed transfers under the Forty-sixth Amendment; conflicting earlier precedents that relied on that test or equated consumption automatically with non-transfer are not followed when they contradict the statutory and constitutional scheme. Application to the Facts and Final Conclusion Interpretation and reasoning: Applying the principles to the printing of lottery tickets, the goods (ink and the chemicals with which ink is diluted) were involved in execution of the works contract and were incorporated into the printed ticket the moment ink was applied. The processing chemicals are an integral component of the diluted ink and cannot be transferred without transfer of the chemicals; transfer thus occurred notwithstanding later alteration or partial consumption of residual materials. Ratio vs. Obiter: Ratio - where goods (including chemically altered forms) are incorporated in the works and property passes at incorporation, such goods are taxable under Section 3F(1)(b). Ancillary remarks about absence of an itemised breakdown by the contractor and the need for fact-specific determination are guidance for assessment practice. Conclusions: All three statutory conditions for levy under Section 3F(1)(b) are satisfied in the facts: (i) a works contract exists; (ii) ink and chemicals were involved; and (iii) property in those goods was transferred in execution of the works contract. Therefore tax on ink and processing materials is leviable under Section 3F(1)(b).