Customs, Excise and Gold Tribunal - Bangalore
Shilpa Color Lab vs Commissioner Of C. Ex. on 30 October, 2006
Equivalent citations: [2007]8STT102
ORDER T.K. Jayaraman, Member (T)
1. In respect of all the above mentioned appeals, the issue involved is one and the same. Therefore, we are passing a common order.
2. The appellants render Photography services, which are liable to Service Tax under the Finance Act, 1994. The issue involved in all these appeals is the correct valuation of the services rendered by the appellants for the purpose of discharge of Service Tax. The contention of the appellants is that the value of materials, consumables, etc., used for providing the photography services should be deducted from the gross receipt in order to arrive at the correct value of services for the purpose of calculating the Service Tax. On the other hand, Revenue contends that such a deduction is not available as there are no sales of the materials, consumables, etc. by the appellants.
3. At the outset, Shri K.S. Ravi Shankar, the learned Advocate, argued on behalf of M/s. Shilpa Colur Lab and Spectrum Colour Lab.
(i) The attention of the Bench was invited to the decision of this Bench in the case of Adlabs v. CCE Bangalore 2006 (2) S.T.R. 121 (Tri.-Bang.) wherein it is held that deduction is available in respect of materials, consumables, etc. used for providing photography service under Notification No. 12/2003-S.T., dated 20-6-2003.
(ii) When the departmental representatives contended that the Northern Bench of CESTAT, in the case of Laxmi Color (P) Ltd. v. CCE, Jaipur-II 2006 TIOL 918 CESTAT-DEL, has disagreed with the views of this Bench on account of the Hon'ble Apex Court's ruling in the case of C.K. Jidheesh v. UOI 2006 (1) STR 3 (SC) and Rainbow Colour Inb v. State of Madhya Pradesh , Shri Ravi Shankar informed the Bench that the two Supreme Court decisions relied by the Delhi Bench have been overruled by the Apex Court in the case of Bharat Sanchar Nigam Ltd. and Anr. v. UOI and Ors. 2006 TIOL 15 SC CT LB.
(iii) In view of the decision of the Apex Court in the BSNL case, the value of material used in providing the service and sold to customer by the appellants cannot in law, be subject to Service Tax, and it would only be the value of service which ought to be taxed in law.
(iv) Further, the Apex Court in the above decision examined the 'aspect theory' in the light of the landmark decision in State of Madras v. Canon Dunkerly & Co. Ltd. and held that the aspect theory would not apply to enable value of services to be included in the sale of goods or price of goods in the value of services. In the above decision, the effect of the 46th amendment to the Constitution was also considered in regard to the definition of 'sale' of goods in works contract.
(v) The Revenue has erred in demanding Service Tax under Section 68 of the Act, because Section 68 is only the charging section and the provision in law for demanding of Service Tax is under Section 73 of the Act. Therefore, the entire demand is untenable. The Bombay High Court, in the case of Bhor Industries Ltd. v. UOI , has held that Show Cause Notice issued under Rule 9(1) and the contents of the said Show Cause Notice were based upon the requirements contemplated under the said Rule. The requirements as regards the Show Cause Notice under Rule 10 read with Rule 173J are different. So the contents of the Show Cause Notice issued to the petitioner cannot be read as if fulfilling the requirements of Rule 10 as amended by Rule 173J and hence, the Show Cause Notice was bad in law. The impugned order is liable to be set aside on this ground also.
(vi) The Service Tax is a levy on service element and, therefore, any attempt to charge service tax on cost of materials would amount to taxing the goods, which is a subject matter of State levy under the Sales tax law or VAT law, as the case may be.
(vii) The Revenue has grievously erred in invoking the extended period of limitation mechanically without even adducing a shred of evidence to justify its invocation.
(viii) None of the ingredients under proviso to Section 73(l)(a) of the Act were present in the instant case so as to demand Service Tax by invoking the longer period.
(ix) There is no evidence of suppression of facts. The Tribunal, in the case of Super Security Service v. CCE 2003 (157) E.L.T. 433 (T) has held that in the absence of malafide, the extended period of limitation is not invokable to demand Service Tax. The impugned order is, therefore, bad in law.
(x) The appellants have maintained records to show the cost/value of materials used during the relevant period. Therefore, the demand of tax from the appellant by invoking larger period of limitation is illegal and is devoid of any material or positive evidence and, therefore, is liable to be set aside. Several case-laws were relied on to urge that the longer period cannot be invoked in the absence of suppression of facts, etc. with intent to evade duty.
(xi) The first appellate authority has erred in relying on the earlier Board Circular No. F.N.I1/1/2001-TRU dated 9-7-2001 because the Board Circular dated 7-4-2004 was issued based on Notification No. 12/2003-ST dated 20-6-2003. The Board Circular dated 9-7-2001 was issued before the Notification No. 12/2003 came into force. Therefore, the Appellate Authority erred in holding that the later Board Circular does not supercede the earlier Board Circular dated 9-7-2001. Hence, the impugned order is liable to be set aside.
(xii) When two views are possible, what is more beneficial to the as-sessee should be adopted. Therefore, between the Board Circular dated 9-7-2001 and the other dated 7-4-2004, the one which is beneficial should be adopted. He cited a large number of decisions.
(xiii) The first appellate authority has lost sight of Section 67 of the Act, which specifically provides that cost of un-exposed photography film, unrecorded magnetic tapes or such other storage devices sold to the clients during the course of providing the taxable services would not form part of value of taxable services.
(xiv)The appellants rely on the Board Circular No. 59/8/2003 dated 20-6-2003 in support of the above contention.
(xv) The Board has issued a Circular F. No. 233/2/2003-CX4, dated 3-3-2006 wherein they have clarified contrary to the earlier Circulars that deduction on account of the cost of the materials used is not admissible. It is submitted that this Circular is prospective in nature and that it cannot be applied for the period under dispute.
(xvi)The lower authorities have lost sight of the definition of 'sale' in the Central Excise Act, 1944. The said definition of 'sale' is made applicable to Service Tax law by virtue of the provisions of Section 65(121) of the Act. As per the said section, 'sale' means, any transfer of the possession of goods by one person to another in the ordinary course of trade or business for cash, or deferred payment or other valuable consideration. The fact that the works contract is subject to VAT/Sales Tax itself establishes that sale is involved in the transaction and, therefore, the theory of the Department that there is no sale is legally untenable.
4. S/Shri G. Shiva Dass, the learned Advocate appeared for M/s. Foto Flash. He made the following submissions:
(i) The appellants have maintained records for consumption of the raw materials used/provided by them while rendering photography-services.
(ii) An amount of Rs. 41,69,972/- has been demanded on the ground that the value of the materials consumed are not deductible.
(iii) Section 67 contemplates levy of Service Tax only on the amount chargeable by the service provider for the service rendered by him. It does not provide for levy of Service Tax on the material portion provided during the course of rendering of the service.
(iv) Section 67 makes it clear by providing specifically that the cost of the unexposed photographic films, un-recorded magnetic tapes or such other storage devices sold to the clients during the course of providing the services, is not liable to be included for payment of Service Tax.
(v) Notification 12/2003-ST dated 20-6-2003 has been issued exempting from payment of Service Tax on the value of the goods and materials sold by the service provider during the course of providing taxable service.
(vi) The CBEC Circular dated 7-4-2004 issued in the case of Punjab Colour Lab Association, clarified that the service provider was entitled to claim exemption in respect of the input material consumed/sold to the service recipients. This circular, in favour of the assessee, is retrospective in application as held by the Hon'ble Calcutta High Court in the case of Birla jute and Industries Ltd. v. ACCE (Cal.)
(vii) The decision of this Bench in Adlabs case (cited supra), is in favour of the appellant.
(viii)The Apex Court, in the case of BSNL (cited supra) has held that once it is possible to bifurcate in any transaction the sale or the service portion, the respective Tax is to be levied on the respective portions only.
(ix) In the following decisions, it has been held that in the process of consumption of various chemicals, there is indeed a transfer of property from the service provider to the customer.
(a) Commissioner of Sales Tax v. Matushree Textile Ltd. 2003 (132) STC 539 (Bombay)
(b) Live Tone v. State of Tripura and Ors. 2001 (122) STC 0115 (Gauhati)
(c) Xerox ModIcorp Ltd. v. State of Karnataka
(x) The circular issued in March 2006 denying the benefit conferred by earlier Circular can be having only prospective effect.
(xi) The demand of Rs. 31,04,826/- is on account of the Service Tax on the services rendered by the appellant to other photographic studios. In terms of Section 65(105)(zb) of the Finance Act 1944, taxable service in relation to photography is the service provided to the customer by a photographic studio or agency in relation to photography. In the present case, the photographic service is not rendered by the appellant to a customer but to other photographic studios. Therefore, the demand is not sustainable. In the present case, the appellants operate as a sub-contractor to other photographic studios, which provide unprocessed films and the activity is in the same service category. The Board has issued a Circular dated 27-2-2001 clarifying that collection centres, which get the processing done by the lab are not liable to pay service tax, as they are not rendering any service to the customer.
(xii) The fact that the other photographic studios may or may not have paid the Service Tax can be no ground to charge the appellants with Service Tax, when they are not liable to pay Service Tax in law. In any case, the appellants have, vide their letters dated 20-2-2004 and 13-5-2004, provided details based on the information acquired by them of the studios and their Service Tax Registration Nos.
(xiii) The Show Cause Notice has been issued on 9-8-2004 for demand of Service Tax of Rs. 31,04,826/- for the period from July 2001 to September 2002. The entire demand is beyond the normal period of one year. As the appellants provided all the details regarding the main contractor from whom they undertake the act of processing of the photographs, they had not suppressed any facts. When the appellants have disclosed all primary facts and have also filed their monthly returns regularly, invocation of longer period is not sustainable. In this regard, they rely on the decision rendered in the case of Maruti Udyog Ltd. v. CCE, Delhi 2002 (147) E.L.T. 881 (Tri.-Del.).
(xiv) In a recent judgment, the Hon'ble High Court of Madras has held in the case of The Commissioner of Income Tax, Madurai v. Jamal Photo Industries (I) Pvt. Ltd. 2006 TIOL 141 HC Mad IT that the activity of film processing and printing photographs from negatives would amount to manufacture. Once it is held so, then the entire activity would not attract Service Tax.
5. Shri Saju K. Abraham, the learned Chartered Accountant appearing on behalf of M/s. Surabhi Color Lab, urged the following points:
(i) The appellant is running a color lab at Chalakudy and paid Service Tax of Rs. 87,227/- along with returns for the period from June 2002 to March 2004. A demand of Rs. 1,59,185/-on a turnover of Rs. 24,36,009/- has been made when the turnover as per the returns comes only to Rs. 13,95,310/-. A balance of Rs. 71,958/- has been demanded,
(ii) The appellants challenge the levy of Service Tax on (a) the laboratory work of washing the film through chemical process; (b) Photo printing and (c) Disallowing the cost of goods transferred to the customers and also the levy of interest and penalty,
(iii) Photography studio or agency is defined in Section 65(79) as "Any professional photographer or a commercial concern engaged in the business of rendering service relating to photography". 'Agency' refers to any person appointed as an agent of a photography studio. M/s. Surabhi Color Lab, the appellant, is not a photography studio nor agent and hence not liable to tax.
(iv) The business of the appellants is chemical processing of films popularly known as film washing to printing of photo in various sizes.
(v) The washing of film is carried on in dark rooms by chemical process. Hence, the activity of the appellant in this business is only chemical processing and not photographic work.
(vi) The washing of film supplied by the customer is a service for which invoices are raised as developing charges. No goods are transferred in this service.
(vii) In respect of printing of photo in various sizes, the raw material viz. photographic paper and chemicals are purchased by the appellant and the printing is carried out in sophisticated machinery. It was urged by referring to the Trading Profit and Loss Account that the material cost is more than the labour cost. Hence the involvement of skill is proved to be much less compared to the involvement of materials. Hence, the activity is a transfer of goods to the customers in the form of photograph and amounts to sale and, therefore, should not be subjected to Service Tax.
(viii) In the following decisions, it has been held that printing and supply of labels on paper purchased by the assessee is a sale.
(a) Bharath Litho Press v. State of A.P. 67 STC 53 A.P.
(b) M.P. State Co-operative Press v. Addl. Commissioner 68 STC 245 M.P.
(ix) The providing of service may be categorized as follows:
(a) Goods transferred and the service provided thereafter.
(b) Goods transferred in the execution of a service provided to the customer.
(c) Goods transferred after services provided.
The facts and circumstances of the present case are that the appellants had provided the service of manufacturing photograph on the photographic paper owned by the appellant and thereafter the photograph is transferred to the customer in the form of finished goods. The Supreme Court has held in State of Andhra Pradesh v. Kone Elevators (India) Ltd. 140 STC pg. 32 and also in Hindustan Shipyard Ltd. v. State of Andhra Pradesh 2000 (119) STC 533 (SC) cases that such transfer is a sale. Hence, Service Tax is not attracted.
(x) In the Ad Labs case (cited supra), it is held that nowhere it is stated that the input used in photography should be mentioned in the invoice. Hence, the condition of the lower authorities that the cost of goods sold should be shown in the invoice is illegal. All the records are available to prove that the use of inputs and hence, the deduction may be allowed.
(xi) Metis rea is absent and hence the levy of penalty is illegal.
6. Shri P. Ragunathan, the learned Advocate, who represented the appellants in SI. Nos. 6 to 9, urged the following points:
(i) The issue is covered by Notification No. 12/2003-ST dated 20-6-2003. The lower authorities have erred in refusing to accept the contentions of the appellant.
(ii) The lower authority erred in holding that the deduction claimed is not available on the ground that the cost of materials have not been shown separately in the individual invoices and that there is no sale of materials. He ought to have noticed that Notification dated 20-6-2003 does not lay down any such stipulation.
(iii) The issue has been finally decided in CESTAT's Final Order No. dated 16-1-2006, 2006 (2) STR 121 (T). In the instant cases, the appellants have maintained basic records relating to the inputs used in the photography and hence, deduction should have been allowed.
(iv) The lower authority erred in refusing to follow the CESTAT's decision in Adlabs case (cited supra), on the ground that the same was rendered prior to the latest clarification issued by the Board.
(v) The Appellate Authority relied on a clarification dated 3-3-2006, which was not in existence at the time of passing the Adjudication order by the lower authority.
(vi) The Appellate Authority ought to have realized that he is bound by the decision of the Jurisdictional Appellate Tribunal and his refusal violates the fundamental Principles of Jurisprudence.
7. The learned JDR urged that while rendering photographic services, the service provider does not actually sell the materials consumed. Further, the latest Circular dated 3-3-2006 is reiterating the legal position and is not in favour of the appellants. The learned representative relied on the decisions, which are in favour of the Revenue.
8. We have gone through the records of the case carefully. The main issue in all these appeals relates to the valuation of Photography Services. Section 65 (zb) of the Finance Act defines Photography Services as "Services rendered to a customer, by a photography studio or agency in relation to photography, in any manner." Section 68(78) and (79) of the Finance Act are reproduced below:
(78) "photography" includes still photography, motion picture photography, laser photography, aerial photography or fluorescent photography;
(79) "photography studio or agency" means any professional photographer or a commercial concern engaged in the business of rendering service relating to photography.
8.1 Although the fact that the appellants render photography services which comes within the ambit of Finance Act, 1994 for levy of Service Tax is not in doubt, Shri Saju K. Abraham, the learned Chartered Accountant, appearing for M/s. Surabhi Colour Lab, urged the point that his client M/s. Surabhi Color Lab undertakes printing photograph of various sizes and this should not be considered as rendering any service for the reason that the material cost in printing photograph is much more than the labour cost. He has also cited quite a few decisions. In the light of the definition of Photography services in Section 65(zb), we are not inclined to accept the above contention of Shri Saju K. Abraham. In processing and printing of photos, there is definitely an element of service and it is difficult to accept the contention that the activity is only that of sale. In fact, there is a mixture of both service and sale. We shall be dealing with the other issues holding that all the appellants are rendering photography services.
8.2 The question is how to value the services rendered by the appellants. Section 67 of the Finance Act deals with Valuation of taxable services for charging Service Tax. It is stated that "for the purpose of this Chapter, the value of any taxable service shall be the gross amount charged by the service provider for such service, rendered by him." A careful reading of the above mentioned provision reveals that the amount charged by the service provider for such service is normally taken for purposes of calculating tax. The service provider may charge certain amounts for purposes other than the service rendered by him. In such a case, those charges would not form part of the value of taxable service. Hence, one should not assume that any amount charged by the service provider would be liable for Service Tax. There are two explanations under Section 67. Explanation 1 is for the sake of removal of doubts with regard to valuation for certain specific services. It actually provides clarification with regard to inclusion of certain charges and also exclusions. With regard to Photography services, it is stated that the value does not include "the cost of unexposed photography film, unrecorded magnetic tape or such other storage devices, if any, sold to the client during the course of providing the service". What we understand from the above is that the cost of the items mentioned cannot be added to the value of taxable services when they are sold to a client during the course of providing the service. In case it is included, that would amount to levy of Sales Tax. Sales Tax is actually not a Union subject. The Centre is not competent to levy Sales Tax as per the Constitution of India. Therefore, when an item is sold by a service provider, Revenue cannot demand service tax. The CBEC has issued certain clarifications and there is a Notification also. Let us examine them:
8.3 The following Notification 12/2003-ST dated 20-6-2003 is very relevant for the present appeals and hence, the same is reproduced below:
Valuation (Service Tax) - Goods and materials sold by service provider to recipient of service - Value thereof, exempted In exercise of the powers conferred by Section 93 of the Finance Act, 1994 (32 of 1994), the Central Government, being satisfied that it is necessary in the public interest so to do, hereby exempts so much of the value of all the taxable services, as is equal to the value of goods and materials sold by the service provider to the recipient of service, from the service tax leviable thereon under Section (66) of the said Act, subject to condition that there is documentary proof specifically indicating the value of the said goods and materials.
2. This notification shall come into force on the 1st day of July, 2003. [Notification No. 12/2003-S.T, dated 20-6-2003] In terms of the above Notification, the value of the goods and materials sold by the Service provider to the recipient of the service is to be excluded for the purpose of calculating the Service Tax. However, the Notification is subject to the following condition:
There should be a documentary proof specifically indicating the value of the said goods and materials. In the absence of documentary proof, a service provider may claim deduction in an arbitrary manner. In order to avoid that the above condition has been stipulated, it should be borne in mind that there is no requirement that in each and every invoice, such values of goods and materials should be indicated.
8.4 The Punjab Color Lab. Association, Jalandar, sent a representation to the Finance Minister with regard to exempting the materials consumed by the service providers while providing the taxable service. In response to their representation, the CBEC issued a clarification dated 7-4-2004. That clarification is reproduced below:
I am directed to refer to your representation forwarded to Finance Minister vide letter dated 11-3-2003 and state that in terms of the notification 12/2003-ST dated 20-6-2003, the exemption in respect of input material consumed/sold by the service provider to the service recipient while providing the taxable service is available. However, the exemption is available only if the service provider maintains the records showing the material consumed/sold while providing the taxable service. The value of such material should also be indicated on the bill/invoice issued in respect of the taxable service provided.
Thus, the clarification issued by the CBEC made it abundantly clear that the value of the goods consumed while rendering service need not be included in the value of the taxable service.
8.5 This Bench had occasion to deal with this issue when the benefit of deduction was denied on the ground that the value of the goods consumed is not indicated in the invoice in the case of Adlabs v. CCE, Bangalore 2006 (2) STR 121 (Tri.-Bang.). In the above case, this Bench, made the following observations:
3. On a careful consideration, we notice that the Commissioner was not justified in taking the view, in contra to the Board's letter and the Notification. The appellants have maintained the records of the inputs used in the photography, nowhere it is stated in the Circular and Notification that the inputs used in the photography should be mentioned in the invoices/bills issued to the customers. The reasoning given by the Commissioner is not sustainable. In view of the clarification given in the Board's letter and the Notification itself the denial of benefit by the lower authorities is not justified and not correct in law. The appellants are eligible for the benefit of deduction in terms of the Board's circular and the Notification. The order passed by the impugned authorities is not correct in law as the same is contra to the Board's letter and the Notification. The impugned order is set aside by allowing the appeal.
Though the above decision is in favour of the appellants, the Principal Bench, Delhi took a contrary view in Laxmi Color (P) Ltd. v. CCE, Jaipur-II. While taking a contrary view, CESTAT, Delhi relied on the following decisions:
(i) C.K. Jidheesh v. UOI 2006 (1) STR 3 (S.C.) : 2005 (71) RLT 505 (S.C.)
(ii) Rainbow Colour Lab. and Anr. v. State of M.P. and Ors. .
8.6 In order to appreciate the issues, we shall examine the decision in the case of Rainbow Colour Lab. The Rainbow case relates to Sales Tax. The Madhya Pradesh Sales tax authorities took a view that the job done by photographers amounted to "works contract". They took advantage of the 46th Amendment of the Constitution and the consequent amendment to the definition of 'sale' in Section 2(n) of the local Sales Tax Act. The authorities decided that the turnover of the photographers would be exigible to the levy of Sales Tax. This issue was examined by the Hon'ble Apex Court and it was held that the job rendered by a photographer in taking photographs, developing and printing films does not amount to 'works contract' and not exigible to the levy of sales tax. In other words, the work done by the photographer is only in the nature of a service contract and not involving any sale of goods.
8.7 In the C.K. Jidheesh case, the Apex Court followed the decision of the Rainbow Colour Lab case. In the Jidheesh case, the petitioner claimed that the UOI must bifurcate the gross receipts of processing of photographs into the portion attributable to goods and that attributable to services. Then, it must tax only that portion of the receipts, which is attributable to the services rendered. While dismissing the petition, the Apex Court made the following observations in para 11.
11. There is one further difficulty in the way of the Petitioner. This Court has, in the case of Rainbow Colour Lab. and Anr v. State of M.P. and Ors , held that contracts of the type entered into by persons like the Petitioner are nothing else but service contracts pure and simple. It is held that in such contracts there is no element of sale of goods. This Judgment is binding on this Court. In view of this Judgment, the question of directing the Respondent to bifurcate the receipts into an element of goods and the element of service cannot and does not arise. We see no substance in the contention that facts in Rainbow Colour Labs case were different inasmuch as in that case the Court was dealing with a case where photographers take photographs, develop them and then give the photos to the customer. In our view, the ratio of Rainbow Colour Lab's case also applies to cases like the present.
8.8 In the Laxmi Colour (P) Ltd. case, the Tribunal relied on Jidheesh case and held that there is no element of sale of goods in a service like photography. In fact, while deciding the same, the Tribunal extracted para 11 of the Jideesh decision.
Thus, it appeared that the entire issue has been finally settled in view of the decision of the Apex Court in the Jideesh case. But, that was not to be, in view of further developments overruling the above decisions.
8.9 The learned Advocates brought to our notice that the Hon'ble Apex Court, in the Bharat Sanchar Nigam Ltd. and Anr. v. UOI and Ors. 2006 (2) S.T.R. 161 (S.C), has overruled the decisions in the case of C.K. Jidheesh and Rainbow Colour Lab cases. In order to appreciate the implications of BSNL decision to the present appeals, we like to present the following background information:
8.10 The issue before the Apex Court was the nature of transaction by which mobile phone connections are enjoyed. In other words, it was to be decided whether the transaction is a sale or service or both? Only the States is competent to levy Sales Tax. As regards Service Tax, the Centre alone is competent in view of the constitutional provisions. BSNL maintained that the transaction is purely service and the Union Government supported that stand. However, the States contended that the transaction was a deemed sale and Article 366(29A)(d) of the Constitution read with the charging sections in their various sales tax enactments and, therefore, they are competent to levy sales tax on the transactions.
8.11 The Apex Court, in the above said decision, has delved deep into the legal history of Article 366(29A). The classical concept of sale was held to apply to the entry in the Legislative List and three essential components are required to constitute a transaction of sale. They are (i) an agreement to transfer title; (ii) supported by consideration; and (iii) an actual transfer of title in the goods. In the absence of any one of these elements, it was held that there was no sale. For example, a contract under which a contractor agreed to set up a building would not be a contract for sale. It was one contract and there was no separate agreement for sale of goods justifying the levy of sales tax by the State Government. Similarly, there was difficulty in levying sales tax on hire purchase contracts and catering contracts because they were not considered to be contracts for sale of goods. The decided case-law in the subject was State of Madras v. Gannon Dnnkerly . Various High Court decisions held that the transactions involving work contracts, hire purchase contracts and catering contracts would not come within the purview of Sales tax and, therefore, the State Governments were not in a position to levy sales tax. In order to solve the problems confronting the states, the issue of the power of States to levy tax on the sale of goods was referred to the Law Commission by the Government of India. The Law Commission suggested three methods. One of the suggestions was inserting in Article 366 a wide definition of "sale" so as to include works contracts. The above suggestion of the Law Commission was accepted by the Government of India. Consequently, the 46th amendment was enacted. Article 366 was, therefore, amended by inserting a definition of "tax on the sale or purchase of goods" in Clause (29A). The same is reproduced below:
[(29A) "tax on the sale or purchase of goods" includes, -
(a) a tax on the transfer, otherwise than in pursuance of a contract, of property in any goods for cash, deferred payment or other valuable consideration;
(b) a tax on the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract;
(c) a tax on the delivery of goods on hire-purchase or any system of payment by installments;
(d) a tax on the transfer of the right to use any goods for nny purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration;
(e) a tax on the supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration;
(f) a tax on the supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (whether or not intoxicating), where such supply or service, is for cash, deferred payment or other valuable consideration, and such transfer, delivery or supply of any goods shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and a purchase of those goods by the person to whom such transfer, delivery or supply is made;] We find that Clause (b) covers cases relating to works contract. The problem created by Gannon Dunkerly decision was overcome and, therefore, transfer of property in goods involved in the execution of the works contract was deemed to be a sale by this amendment. In para 40, the Apex Court has observed "the amendment especially allows specific composite contracts viz. works contract [Clause (b)], hire purchase contracts [Clause (c)], catering contracts [Clause (e)] by legal fiction to be divisible contracts where the sale element could be isolated and be subjected to sales tax.
8.12 Para 44, 45, 46 and 47 are very relevant for the present case. They are reproduced below:
44. In Rainbow Colour Lab. and Anr. v. State of M.P. and Ors. , the question involved was whether the job rendered by the photographer in taking photographs, developing and printing films would amount to a "work contract" as contemplated under Article 366(29A)(b) of the Constitution read with Section 2 (n) of the M.P. General Sales Tax Act for the purpose of levy of sales tax on the business turnover of the photographers.
45. The Court answered the questions in the negative because, according to the Court:
Prior to the amendment of Article 366, in view of the judgment of this Court in State of Madras v. Gannon Dunkerley & Co. (Madras) Ltd. the States could not levy sales tax on sale of goods involved in a works 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 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 (ii) 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 service.... What is pertinent to ascertain in this connection is what was the dominant intention of the contract.... On facts as we have noticed that the work done by the photographer which as held by this Court in STO v. B.C. Kame 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.
46. This conclusion was doubted in Associated Cement Companies Ltd. v. Commissioner of Customs saying:
The conclusion arrived at in Rainbow Colour Lab case , in our opinion, runs counter to the express provision contained in Article 366(29-A) as also of the Constitution Bench decision of this Court in Builders Assn. of India v. Union of India .
47. We agree. After the 46th Amendment, the sale element of those contracts which are covered by the six sub-clauses of Clause (29A) of Article 366 are separable and may be subjected to sales tax by the States under Entry 54 of List II and there is no question of the dominant nature test applying. Therefore when in 2005, C.K. Jidheesh v. Union of India (2005) 8 SCALE 784 held that the aforesaid observations in Associated Cement (supra) were merely obiter and that Rainbow Colour Lab (supra) was still good law, it was not correct. It is necessary to note that Associated Cement did not say that in all cases of composite transactions the 46th Amendment would apply.
From the above, it is very clear that the apex Court has overruled the decisions in Rainbow Color Lab and C.K. jideesh cases which were relied on by the Tribunal in the case of Laxmi Color (P) Ltd. case.
8.13 There is another issue which has been dealt with by the Supreme Court in the above decision. While dealing with the issues raised by the petitioners, the Apex Court formulated the following questions:
(A) what are "goods" in telecommunication for the purposes of Article 366(29A)(d)?
(B) is there any transfer of any right to use any goods by providing access or telephone connection by the telephone service provider to a subscriber?
(C) is the nature of the transaction involved in providing telephone connection a composite contract of service and sale? If so, is it possible for the States to tax the sale element?
(D) If the providing of a telephone connection involves sale is such sale an inter state one?
(E) Would the "aspect theory" be applicable to the transaction enabling the States to levy sales tax on the same transaction in respect of which the Union Government levies service tax.
In para 85, the questions formulated were answered in the following manner:
(A) Goods do not include electromagnetic waves or radio frequencies for the purpose of Article 366(29A)(d). The goods in telecommunication are limited to the handsets supplied by the service provider. As far as the SIM cards are concerned, the issue is left for determination by the Assessing Authorities.
(B) There may be a transfer of right to use goods as defined in answer to the previous question by giving a telephone connection.
(C) The nature of the transaction involved in providing the telephone connection may be a composite contract of service and sale. It is possible for the State to tax the sale element provided there is a discernible sale and only to the extent relatable to such sale.
(D) The issue is left unanswered.
(E) The aspect theory would not apply to enable the value of the services to be included in the sale of goods or the price of goods in the value of the service.
Presently, what is of interest to us is the answer to question (E). What is 'aspect theory?' This has been stated in Federation of Hotel & Restaurant Association of India v. UOI 1989 (3) SCC 634 as "Subjects which in one aspect and for one purpose fall within the power of a particular legislature may in another aspect and for another purpose fall within another legislative power. They might be overlapping; but the overlapping must be in law. The same transaction may involve two or more taxable events in its different aspects. But the fact that there is overlapping does not detract from the distinctiveness of the aspects." The Apex Court observed that the Kerala High court in the Escotel case erred in including the cost of the service in the value of SIM card by relying on the aspects doctrine. They had categorically answered that the aspect theory would rot apply to enable the value of the services to be included in the sale of goods or the price of goods in the value of services. The implication of the above decision for the present case is that in the services relating to photography, if certain goods and materials are consumed, then the value of those goods and materials cannot be included in the value of the services for levy of Service Tax. In the result, the decision of this Tribunal in the Adlabs case is correct and legal in the light of the Apex Court's decision in BSNL case. Hence, we allow the appeals with consequential relief if any. We also observe that the Circular dated 3-3-2006 is not in accordance with the ratio of the decision of the Apex court in the BSNL case.
(Operative portion of this Order was pronounced in open court on conclusion of hearing)