TaxTMI 
TaxTMI 
2020 (6) TMI 328
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.... Order of Reference 5 - 14 III Judicial Approach Prior to the 46th Amendment of the Constitution of India 15 - 17 IV The 46th Amendment to the Constitution of India 18 & 19 V Vires Upheld 20 & 21 VI March of Law post 46th Amendment to the Constitution of India A) Supreme Court of India 22 & 23 A1) A slight slip up 24 A2) The Law reiterated 25-28 B) Bombay High Court B1) Full Bench 29 B2) A Slip again 30 B3) The Law again reiterated 31 & 32 C) Kerala High Court C1) Full Bench 33 & 34 VII Tamil Nadu State Amendment 35 VIII Interpretation by the Madras High Court 36-45 IX Necessity for Reference 46-56 X The Reference Answered 57 XI Conclusion 58 & 60 I) Introduction:- 2. The writ appellant Tvl.Unique Traders at Viruthunagar, had filed a writ petition in the nature of a Certiorari, calling for the records relating to the final assessment order passed by the respondent, Commercial Tax Officer-I, Viruthunagar in Tamil Nadu General Sales Tax in TNGST 5721309/03-04 dated 07.04.2010, for the Assessment Year 2003 -2....
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....ng reliance on two other decisions of this Court viz., State of Tamil Nadu, rep. By the Deputy Commissioner (CT), Tirunelveli Division, Tirunelveli Vs. Tvl.Vibgyor Process (Tax Case (Revision)No.687 of 2006) decided on 05.11.2008 and State of Tamil Nadu Vs. Premier Litho Works and another, reported in (2009) 26 VST 205 (Madras), the issue was answered against the Revenue. 6. It was also noted by the Division Bench (Amreshwar Pratap Sahi, CJ. and Subramonium Prasad J.) that the judgment in the case of State of Tamil Nadu Vs. Premier Litho Works and another, [(2009) 26 VST 205 (Mad)], was also challenged by the State before the Hon'ble Supreme Court in Civil Appeal No.10162 of 2010 and the Special Leave Petition was dismissed on 03.08.2016. 7. The learned counsel for the appellant had also placed reliance on another judgment of a Division Bench of this Court in State of Tamil Nadu, rep. By the Deputy Commissioner (CT), Tirunelveli Division, Tirunelveli Vs. Tvl.Mahalakshmi Process, Sivakasi decided on 29.03.2019 in Tax Case (Revision) No.495 of 2006, where, following a judgment of the Bombay High Court in Commissioner of Sales Tax Vs. Tvl.R.M.D.C.Press Private Limited, repor....
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....e respondent respectively, and in advancing arguments through video conference, in view of the COVID-19 pandemic prevalent as on date. 13. I must also place my deep appreciation for the erudite views expressed during the discussions by my noble brothers G.R.Swaminathan and M.Dhandapani, J.J. 14. The reference has to be answered tracing the judicial approach prior tothe 46th Amendment of the Constitution of India, wherein, Clause-29A was inserted on Article 366, the vires and scope of the amendment and the march of law subsequent and consequent to the Amendment. III) Judicial Approach Prior to the 46th Amendment of the Constitution of India:- 15. In (1958) 9 STC 353, State of Madras Vs. Gannon Dunkerly & Co. (Madras) Ltd., (Gannon Dunkerley No.1), a Constitutional Bench of the Hon'ble Supreme Court of India examined a building contract to determine whether there could be imposition of tax on the supply of materials used in construction of buildings. It was held that the Madras General Sales Tax Act, 1939, was a law relating not to sale of goods, but to tax on sale of goods. It was held that in the case of a building contract, the property in materials used, does not ....
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....ying and selling photographic goods. After buying photographic goods he either sells them to his customers or uses them in three ways-(1) in taking photographs and supplying prints thereof, (2) in making enlargements for the clients who bring their own negatives, and (3) in preparing positive prints of the same size from the negatives brought by the clients. For doing these various types of works the assessee respondent charges consolidated amount depending upon the work involved and the size and number of prints demanded by the client." (Emphasis supplied) and held in para 9 and 10 as follows:- "9. Keeping the above principles in view, we may now turn to the facts of the present case. When a photographer like the respondent undertakes to take photograph, develop the negative, or do other photographic work and thereafter supply the prints to his client, he cannot be said to enter into a contract for sale of goods. The contract on the contrary is for use of skill and labour by the photographer to bring about a desired result. The occupation of a photographer, except in so far as he sells the goods purchased by him, in our opinion, is essentially one of skill and labou....
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....ion of India, (1982) 2 SCC 645. 21. The Constitution Bench held as follows in paragraphs 32 and 36:- 32. Before proceeding further it is necessary to understand what sub-clause (b) of clause 29-A of Article 366 of the Constitution means Article 366 is the definition clause of the Constitution. It says that in the Constitution unless the context otherwise requires, the expressions defined in that article have the meanings respectively assigned to them in that article. The expression 'goods' is defined in clause (12) of Article 366 of the Constitution as including all materials, commodities and articles. It is true that in the State of Madras v. Gannon Dunkerley & Co. (Madras) Ltd, (supra) this Court held that a works contract was an indi-visible contract and the turnover of the goods used in the execution of the works contract could not, therefore, become exigible to sales-tax. It was in order to overcome the effect of the said decision Parliament amended Article 366 by introducing subclause (b) of clause (29-A). Sub-clause (b) of clause (29-A) states that tax on the sale or purchase of goods includes among other things a tax on the transfer of property in the go....
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....e contract and another part dealing with the supply of labour and services, sales tax was leviable on the goods which were agreed to be sold under the first part. But sales tax could not be levied when the contract in question was a single and indivisible works contract. After the 46th Amendment the works contract which was an indivisible one is by a legal fiction altered into a contract which is divisible into one for sale of goods and the other for supply of labour and services. After the 46th Amendment, it has become possible for the States to levy sales tax on the value of goods involved in a works contract in the same way in which the sales tax was leviable on the price of the goods and materials supplied in a building contract which had been entered into in two distinct and separate parts as stated above... VI) March of Law post 46 th Amendment to the Constitution of India :- A) Supreme Court of India:- 22. A Constitution Bench of the Hon'ble Supreme Court in (1993) 88 STC 204 (SC), Gannon Dunkerley Vs. State of Rajasthan, (Gannon Dunkerley II), and Larsen and Toubro Limited Vs. Union of India and others, examined the scope of the amendment. The Hon'ble Supre....
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....a contract containing two separate agreements. Since the provisions of Sections 3, 4 and 5 were applicable to such contracts containing two separate agreements, there is no reason why the said provisions should not apply to a contract which, though single and indivisible, by legal fiction introduced by the Forty Sixth Amendment, has been altered into a contract which is divisible into one for sale of goods and other for labour and services. Reference may be made in this context to the oft-quoted observations of Lord Asquith in East End Dwellings Co. Ltd. v. Finsbury Borough Council, [1952] A.C. 109 (HL): "If you are bidden to treat an imaginary state of affairs as real, you must surely, unless prohibited from doing so, also imagine as real the consequences and incidents which, if the putative state of affairs had in fact existed; must inevitably have flowed from or accompanied it... The statute says that you must imagine a certain state of affairs; it does not say that having done so, you must cause or permit your imagination to boggle when it comes to the inevitable corollaries of that state of affairs." 34. If the legal fiction introduced by Article 366(29-A) is....
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....mer for the goods sold. Since a composite works contract involves supply of materials as well as supply of labour and services, the cost of establishment of the contractor would have to be apportioned between the part of the contract involving supply of materials and the part involving supply of labour and services. The cost of establishment of the contractor which is relatable to supply of labour and services cannot be included in the value of the goods involved in the execution of a contract and the cost of establishment which is relatable to supply of material involved in the execution of the works contract only can be included in the value of the goods. Similar apportionment will have to be made in respect of item No. (viii) relating to profits. The profits which are relatable to the supply of materials can be included in the value of the goods and the profits which are relatable to supply of labour and services will have to be excluded. This means that in respect of charges mentioned in item nos. (vii) and (viii), the cost of establishment of the contractor as well as the profit earned by him to the extent the same are relatable to supply of labour and services will have to be....
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....) as follows:- " 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(29-A)(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 Kames case (supra), 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." (Emphasis supplied) A2) ...The Law reiterated:- 25. It must be pointed out that (1977) 39 STC 237, B.C.Kame (referred supra) was a judgment delivered prior to the 46th Amendment to the Constitution. 26. The Hon'ble Supreme Court came to again consider the very same issue in (2001) 124 STC 59 (SC), Associated Cement Companies Ltd., Vs. Commissioner of Customs. A Larger Bench of the Hon'ble Supreme Court referred to Rainbow Colour Lab (referred supra), and held as follows:- "25. Even though in our opinion the decis....
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....nd 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) 27. The matter again came up for further consideration in (2015) 78 VST 451 (SC), State of Karnataka Vs Pro Lab & Ors. Again the Hon'ble Supreme Court after relying on Gannon and Dunkerley-II, (1993) 88 STC 204....
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....re, 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....
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....ion to examine the issue with specific reference to printing materials in Sarvodaya Printing Press Vs. State of Maharashtra. The Full Bench of the Bombay High Court again upheld the ratio that consumables involved in the execution of the works contract are exigible to tax. The order of the Full Bench had been subsequently upheld by the Hon'ble Supreme Court in State of Maharashtra Vs. Sarvodaya Printing Press Fine Art, reported in (1999) 114 STC 242 (SC). B2) A Slip again...:- 30. In Commissioner of Sales Tax Vs. Tvl.R.M.D.C.Press Private Limited, reported in (1999) 112 STC 307, wherein, it had been held as follows:- "It is difficult that in the execution of job work of printing, there is any transfer of property in the ink which is used for the purpose of printing. In fact, ink is a tool of the printer. It is consumed in the process of printing and looses its identify as "Goods". No property can be said to pass in ink in the execution of the contract of printing, either as ink or in any other form. No customer is concerned with the ink used in printing, its quantity or cost. It cannot be said that when a customer gets ink either as ink or in any other form, ther....
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....riam. Once it is held that the property in goods used in the execution of the works contract passes incidentally or by theory of accretion, such passing, though not a sale under BST Act, would be deemed sale under the Works Contracts Act. In the present case, as the property of the materials used in the process of dyeing and printing are passed on to the customer in the form of coloured shade and such passing amounts to sale, the provisions of the Works Contracts Act are attracted." (Emphasis supplied) 32. However, Tvl.R.M.D.C.Press Private Limited, (referred supra), came to be again examined in Tax Case (Revision) No.9 of 2003, by order dated 25.10.2012, Commissioner of Sales Tax, Maharashtra State, Bombay Vs. M/s. Ramdas Sobhraj. The facts in that case was that the assessee supplied grained zinc and aluminium plates, which were coated by dipping in water, wherein, gun bio chromate was dissolved. Again the issue was with respect to bringing to tax the consumables involved in a works contract. A Division Bench of Bombay High Court answered the reference in favour of the Revenue, relying on Matushree Textiles Ltd (referred supra). C) Kerala High Court:- C1) Full Bench:- ....
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....CES V. STATE OF ANDHRA PRADESH, (2004) 137 STC 620, and BSNL AND ANOTHER V. UNION OF INDIA AND OTHERS, (2006) 145 STC 91 wherein the Supreme Court followed the case in ASSOCIATED CEMENT COMPANIES LTD. V. COMMISSIONER OF CUSTOMS, 124 STC 59 and the case reported in RAINBOW COLOUR LAB AND ANOTHER V. STATE OF MADHYA PRADESH, 118 STC 9. It was held by the Supreme Court that in order to attract sales tax, there need not be transfer of any tangible goods. The contract of the nature arising in this case also involves two stages. One supply of goods and the other services rendered with such goods. The petitioner utilises the chemical for treatment of the effluent and brings out an improvement of the effluent quality, conform it with the parameters prescribed by pollution control board for the awarder to retain their licence. Certainly it is processing of the effluent done by the petitioner with the materials used by him. The point of transfer of goods to the awarder is by way of appropriation to the contract, that is the application of the materials in the water which brings out the desired result, though in the process it gets consumed. Petitioners cited a Division Bench decision of this ....
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....that the assessee must use the chemical in the effluent treatment process. It is equally indisputable that the assessee has actually used it. No doubt, in the Judgment of the Apex Court in Xerox Modicorp Ltd. v. State of Karnataka ((2005) 142 STC 209), the Apex Court found that the toners and developers are liquids put into the Xerox machine and they perform essentially the same function as ink in the printers and the Court also relied on the provision in the contract that the assessees in the said case would charge for the unaccounted stock at prevailing prices. By using the chemical, the petitioner/assessee rendered the effluent compliant with the standards. It could probably be said that in the case of the toner and developers as the function is that of ink in printers, it shows up in the final product of the xerox machines. But, the decision of the Apex Court is not based on there being any requirement that the items which are used should exist in any form in the resultant product which is the principle laid down by this Court in Teaktex Processing Complex Limited v. State of Kerala ((2004) 136 STC 435) and also in Microtrol Sterilization Services Pvt. Ltd. v. State of Kerala (....
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..... Levy of tax on the transfer of goods involved in works contract:- (1) Notwithstanding anything contained in sub-sections ^1[x x x], (2B), (3), (4), (7) and (8) of Section 3, or Section 7-A, but subject to the other provisions of this Act including the provisions of sub-section (1) of Section 3, every dealer referred to in item (vi) of clause (g) of Section 2 snail pay, for each year, a tax on his table turnover of transfer of property in goods involved in the execution of works contract at the rates mentioned in subsection (2), ^2[2-A or 2-C] of Section 3 or, as the case may be, in Section 4. Explanation - Where any works cannot involves more than one item of work, the rate of tax shall be determined separately for each such item of work. (2) The taxable turnover of the dealer of transfer of property involved in the execution of works contract shall, on and from the 26th day of June 1986, be arrived at after deducting the following amounts from the total turnover of that dealer:- (a) ... (b) ... (c) ... (d) ... (e) all amounts towards 'labour charges and other like charges' not involving any transfer ....
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....question involved as to whether in the given facts and circumstances of the case, printing ink could be construed to be a consumable one or not and whether such printing ink when used for execution of works contract to printing materials would amount to transfer of property in goods in terms of Sections 2(j) and 2(u) of the TNGST Act and consequently as to whether Section 3-B was attracted. 40. In paragraphs 15, 16 and 18 the Division Bench observed as follows:- "15. The learned counsel for the petitioner-assessee has contended that when once the printing ink is used in the execution of works contract, it would lose the character as a 'good' and thereafter cannot be called within the definition of 'goods' under Section 2(j) of the TNGST Act. In our opinion, the said submission cannot be accepted. The undisputed facts are that the assessee accepts the job of works contract for supply of printed materials like carton, labels and the customers supply only papers. The assessee engages coolies for the printing works. By the above act of the assessee, the job of works contract is not completed unless the actual printing is undertaken. For the purpose of printi....
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....ble. As has been held by the Apex Court in Tata Consultancy Services case (supra), even in cases of intangible goods as well, as the printing ink that is used in the execution of works contract is tangible and is not a consumable, the necessary conclusion would be that by such use of printing ink, the goods are transferred in job contract and therefore is liable to be taxed under Section 3-B of the TNGST Act. The conditions for admitting deduction under Section 3-B of the TNGST Act basically are (i) that the contractor should have purchased the goods from a registered dealer liable to pay tax under the Act and (ii) that the goods should have been used in the execution of the works in the same form in which they were purchased. In this case, though the assessee had purchased raw materials locally and from other States, those raw materials had not suffered any tax. That apart, after the printing ink is manufactured by the assessee, as it is used on printing materials it does not amount to sale and the goods are not subjected to tax. Equally the raw materials purchased by the assessee are not used as such in the execution of the works contract, but the raw materials undergo a differen....
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....Commissioner. That appeal was dismissed. Thereafter, the assessee filed a Second Appeal in MTA No.469 of 2001, before the Additional Bench of the Tamil Nadu Sales Tax Appellate Tribunual. The Tribunal allowed the appeal by an order dated 31.07.2001 and held that the printed materials supplied by the assessee to the customers constituted a works contract and not an outright inter-state sale. The State then filed Writ Petition No.3770 of 2004, which was dismissed by the learned Single Judge by an order dated 08.06.2007. As against the said judgment, the State filed the Writ Appeal before the Division Bench. As seen the issue was whether a particular transaction was an inter-state sale or a works contract. As a matter of fact, the counsels before the Division Bench had not referred to any judgment of the Hon'ble Supreme Court or the Full Bench of the Bombay High Court, which directly dealt with the 46th amendment to the Constitution. There was also no reference to Section 3B of the Tamil Nadu General Sales Tax Act. The said judgment had been delivered on a different context itself. With due respects to the Division Bench, it must be stated that the said judgment is not directly ge....
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....ity, 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 State Legislature has the competency to legislate over the subject." (Emphasis Supplied) 49. This is the law of the land. It is to be reiterated 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. This vital aspect was not brought to the notice of the Division Bench in Tvl.Mahalakshmi Process, Sivakasi, (referred supra). 50. In Tax Case (MD).No.202 of 2012, State of Tamil Nadu, rep. By the Deputy Commissioner (CT), Tirunelveli Division, Tirunelveli Vs. Tvl.Vibgyor Process, Kovilpatti, and in (Tax Case (Revision) No.687 of 2006), State ....
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....ls Vs. State of Kerala.(referred supra). X) The Reference Answered:- 57. The reference is therefore answered as follows:- Question:- Whether the purchase of ink for printing polythene rolls is taxable in terms of Section 3-B of the Tamil Nadu General Sales Tax Act, 1959. Answer:- The purchase of ink for printing is exigible to tax in terms of Section 3-B of the Tamil Nadu General Sales Tax Act,1959. The reference is answered in favour of the Revenue. XI) Conclusion:- 58. We therefore hold as follows:- 1. The judgment in State of Tamil Nadu Vs. Premier Litho Works and another, reported in (2009) 26 VST 205 (Madras), examined the question whether a particular transaction is an inter-state sale or a works contract. In the instant case, there is no quarrel that the appellants are involved in works contract. The judgment is distinguishable on facts and on law and reliance placed by the appellant on the said judgment is totally misconceived. The 46th Amendment to the Constitution of India and the insertion of Clause 29-A in Article 366 and Section 3-B(2)(e) of the Tamil Nadu General Sales Tax, 1959, were not brought to the attentio....