TaxTMI 
TaxTMI 
2015 (2) TMI 388
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.... 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 (121 (2001) STC 175), 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 others ((2000) 2 SCC 385). 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 the Constitution to impose sales tax on such a contract. 3) It so happened t....
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....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. 7) At this stage, we take note of the exact phraseology used in Entry 25 of the Act which reads as under: Image No. 1 8) We may also record at this point itself that legislative competence of the State to insert th....
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....eneral 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 a sale. Since, Entr....
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....ifically 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 another ((2014) 1 SCC 708), 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 expr....
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....le 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 s....
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....n 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. 11. 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 serv....
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.... producing visible images on sensitive bodies by action of light or other form of radiant energy. Duration of action of light and also use of the chemical is highly a technical expertise therefore taking into consideration the various decisions referred to above it could be considered that it is a works contract where property which is transferred in paper is only incidental to such contract. In strict sense, it is a service where the main object is not transfer of property in goods. The good photograph as observed by the apex Court is a thing of beauty and revives nostalgic memories. It is a work of art. In B.C. Kame's case [1977] 2 SCR 435 it has already been held that there is no sale involved and in spite of the fact that it is a works contract it could not be subjected to tax because the intention of the parties is not to transfer the goods in the execution of said works contract. It is only ancillary and incidental to service contract. The photographs are not marketable or saleable commodity and as such no tax can be levied. Entry 25 of the Sixth Schedule to the Karnataka Sales Tax Act, 1957, therefore is beyond the scope of Article 466 of the Constitution of India. Writ....
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....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....
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....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 that the Court was of the firm view that two Judges Bench judgment in Rainbow Colour Lab's case did not lay down the correct law....
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....l cases of composite transactions the 46th Amendment would apply" 20) 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 contr....
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....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 ....
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....e 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 Fortysixth 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." 21) 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....
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....egative 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. O....
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....(1)(g) which guarantees freedom to carry on trade, business or profession. 25) 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 the said 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. 26) Positi....
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....operation S.S. Gadgil v. Lal & Co., [1964]53ITR231(SC) . J.C. Jani, Income Tax Officer, Circle-IV. Ward-G Ahmedabad v. Induprasad Devshanker Bhatt, [1969] 72 ITR 595 (SC). The second is that the retrospectively must be reasonable and not excessive or harsh, otherwise it runs the risk of being struck down as unconstitutional Rai Ramkrishna and Ors. v. The State of Bihar, [1963] 50 ITR 171 (SC), 915; Jawaharmal v. State of Rajasthan and Ors., [1966]1SCR890, 905, Supreme Court Employees Welfare Association v. Union of India and Anr., (1993) ILLJ 1094 SC. The third is apposite where the legislation is introduced to overcome a judicial decision. Here the power cannot be used to subvert the decision without removing the statutory basis of the decision Shri Prithvi Cotton Mills Ltd. v. Broach Borough Municipality and Ors. [1971]79ITR136(SC), Lalitaben v. Gordhanbhai and Anr., AIR 1987 SC 1315; Janapada Sabha Chhindwara v. The Central Provinces Syndicate Ltd., [1970] 3 SCR 745 : Indian Aluminium Co. and Ors. v. State of Kerala and Ors., [1996]2SCR23 . xx xx xx 16. There is no fixed formula for the expression of legislative intent to give retrospectivity to an enactment. "Sometimes this i....
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....as General Sales Tax 1959 Act (as it stood) provided under Entry 47 for tax on "lubricating oils, all kinds of mineral oils (not otherwise provided for in this Act) quenching oil and greases w.e.f. 1.4.1964". The question was whether this entry covered furnace oil. The Madras High Court construed the phrase and came to the conclusion that it did not. The Legislature then enacted an Amendment Act in 1967. Entry 47 was amended - so as to expressly provide that furnace oil would be subjected to tax. The Act was made effective from 1964. The Act was challenged as being unreasonable since it retrospectively made the dealers liable for sales tax which they had not passed on to others. The challenge was negatived and it was said that "The object of such an enactment is to remove and rectify the defect in phraseology or lacuna or other nature and also to validate the proceedings, including realisation of tax, which have taken place in pursuance of the earlier enactment which has been found by the court to be vitiated by an infirmity. Such an amending and validating Act in the very nature of things has a retrospective operation. Its aim is to effectuate and carry out the object for which t....