Madras High Court
Tvl.Bharat Offset vs The Tamil Nadu Taxation on 5 April, 2010
Author: Prabha Sridevan
Bench: Prabha Sridevan
IN THE HIGH COURT OF JUDICATURE AT MADRAS
DATED: 05.04.2010
CORAM:
THE HON'BLE MRS. JUSTICE PRABHA SRIDEVAN
AND
THE HON'BLE MR.JUSTICE P.P.S. JANARTHANA RAJA
W.P. Nos.30036 to 30038 OF 2002, 25391 and 9552 of 2005
and
WP. MP. Nos.34890 and 34891 of 2002
Tvl.Bharat Offset,
rep. By its partner
G.K.Rathnavel ...Petitioners in W.P.Nos.30036 and 30037 of 2002
Tvl.Zig Zag Desigers & Printers
rep. By its Proprietor
T.Rathnavel ...Petitioner in W.P.No.30038 of 2002
Tvl.Auto Print
rep. By its Proprietrix
Mrs.Rajashree Ashok ...Petitioner in W.P.No.25391 of 2002
The State of Tamil Nadu
rep. By
The Deputy Commissioner(CT)
Chennai East Division
Chennai ...Petitioner in W.P.No.9552 of 2005
Vs.
1. The Tamil Nadu Taxation
Special Tribunal rep. By its
Registrar
Singaravelar Maligai
Collectorate Compound
Chennai 600 001.
2. State of Tamil Nadu
rep. By its Secretary
to Government,
Commercial Taxes &
Religious Endowment Department,
Fort St.George, ...Respondents in all
Chennai 600 009. the W.Ps.
. . . . .
Petitions filed under Article 226 of the Constitution of India praying to issue a writ of Certiorarified mandamus calling for the records on the file of the 1st respondent herein in his order in O.P.NO.831,832,886,709 of 2001 dated 18.3.2002 and quash the same and direct the 2nd respondent herein to declare the G.O.Ms.No.66 Commercial Taxes (B1) dated 16.8.2001 of the 2nd respondent herein subejcting all the printed materials executed on specific orders exigible to Sales Tax under Section 3 of the TNGST Act, 1959 as that of sale, is outside the purview of the powers of the State Legislature and violative of the consistent principles in law laid down by the Hon'ble High Court of Madras reported in AIR 1954 Madras 1130, 39 STC 226, 51 STC 28, 54 STC 382, 97 STC 489 and the Hon'ble Supreme Court of India reported in AIR 1958 SC 560, 16 STC 240, 29 STC 438, AIR 72 ASC 113, STC 1 and 55 STC 314.
. . . . .
1.The Central Cooperative Printing
Works Limited,
71 and 77 Anna Salai,
Chennai 02.
2. The Registrar,
Tamil Nadu Taxation Special Tribunal, ...Respondent in
Chennai 1. 9552 of 2005
. . . . .
Petition filed under Article 226 of the Constitution of India praying to issue a writ of Certiorari calling for the records of the second respondent pertaining to the order dated 4.3.2003 made in T.C.(A).No.125 of 1999 and quash the same as illegal.
For petitioners in
W.P.NOS.30036 to 30038/02
& 25391 of 2002: Mrs.R.Hemalatha
For petitioner in
W.P.No.9552 of 2005: Mr.Haja Nazuruddin
Special Government Pleader (T)
For Respondents in
W.P.NOS.30036 to 30038/02
& 25391 of 2002 :Mr.Haja Nazuruddin
Special Government Pleader (T)
For Respondent No.1: Mr.S.Sundareswaran
. . . . .
C O M M ON O R D E R
(Order of the Court made by PRABHA SRIDEVAN, J.) These writ petitions have been filed for a declaration that G.O. Ms. No.66, Commercial Taxes (B1) dated 16.8.2001 of the second respondent herein subjecting all the printed materials executed on specific orders exigible to sales Tax under Section 3 of the Tamil Nadu General Sales Tax (TNGST) Act, 1959 as that of sale, is outside the purview of the powers of the State Legislature and violative of the consistent principles of law laid down by the Hon'ble High Court of Madras reported in A.I.R. 1954 Madras 1130 (Gannon Dunkerley & Co. vs. State of Madras); (1977) 39 S.T.C. 226 (State of Tamil Nadu vs. Anandam Viswanathan); (1982) 51 S.T.C. 28 (Deputy Commissioner (CT), Coimbatore Division, Coimbatore vs. Karthikeya Press); (1983) 54 S.T.C. 382 (The Court Press Job Branch, Salem vs. State of Tamil Nadu); (1995) 97 S.T.C. 489 (State of Tamil Nadu vs. Gunasundari Modern Art Printers) and those by the Supreme Court reported in A.I.R. 1958 S.C. 560 (State of Madras vs. Gannon Dunkerley & Co. (Madras) Ltd.; (1965) 16 S.T.C. 240 (Government of Andhra Pradesh vs. Guntur Tobaccos Ltd.); (1972) 29 S.T.C. 438 (The Commissioner of Commercial Taxes, Mysore, Bangalore vs. Hindustan Aeronautics Ltd.); A.I.R. 1972 S.C. 1131 (State of Punjab vs. Associated Hotels of India Ltd.); (1989) 73 S.T.C. 1 (State of Tamil Nadu vs. Anandam Viswanathan) and (1984) 55 S.T.C. 314 (Hindustan Aeronautics Ltd. vs. State of Karnataka).
2. G.O. Ms. No.66, Commercial Taxes (B1) Department, dated 16.2.2001, reads as follows:
" TAMIL NADU GENERAL SALES TAX ACT,1959-FIRST SCHEDULE-AMENDMENT
Notification G.O.Ms.No.66 CT (B1)
dated 16th August, 2001
No.II(1)/CT/45(a)/2001)- In exercise of the powers conferred by sub-section (1) of Section 59 of the Tamil Nadu General Sales Tax Act, 19509(Tamil Nadu Act 1 of 1959) the Governor of Tamil Nadu hereby makes the following amendment to the First Schedule to the said Act.
AMENDMENT:- In the First Schedule in Part "C" in item 52, for such items (iv) to (vii) and the entries relating thereto, the following sub-item and entries shall be substituted, namely:-
"(iv) all printed materials other than those specified in sub-items (i) to (iii) above, whether made of paper, paper board or other materials, like account books, registers, order books, receipt books, memorandum pads, folders, file covers, book covers, greeting cards and invitation cards of all kinds and trade mark labels including those materials manufactured according to specification of customers whether or not with logo or name or matter".
3. Learned counsel for the writ petitioners submitted that the inclusion of the above sub-items in the entry is unconstitutional. Learned counsel submitted that by just amending the entry by an inclusion of a sub-item, the State cannot bring to tax what is otherwise non-taxable. Learned counsel submitted that in a works contract, the transfer of goods is only incidental and, when goods are made to order according to the specifications of the customers and the materials are so printed, there is no transfer of goods. The legislature has attempted to treat as "sale of goods", what is really a transaction in the nature of "a works contract". Learned counsel referred to Article 366(29A) of the Constitution of India and Section 3(B) of the TNGST Act and the definition of "sale" in Section 2 thereof. The learned counsel submitted that the fact that the "works contract" is a 'deemed sale' will not give the State the power to tax it as if it was a contract for sale of goods. The learned counsel submitted that the State cut into the scope of Section 3(B) of the TNGST Act by a mere amendment of the Schedule. The learned counsel submitted that the entries in the Schedule cannot control or prevail over the provisions of the Act. The learned counsel further submitted that the Supreme Court had repeatedly held that it is not open to the State to define a sale in a manner as to make a sale outside its territory into a sale within its territory, similarly, the State cannot by this G.O. enlarge its power to tax what is really a works contract as though it is sale of goods.
4. Learned Government Pleader submitted that the Legislature or Parliament has the power to classify 'goods', so that they fall in a particular entry. They have the power to amend the entry as well. The real question is, whether the items mentioned in the entry did not involve a simple sale of goods. According to the learned Special Government Pleader, if it was a transfer of chattel as chattel with an incidental works component, then the Government Order is perfectly valid.
5. We extract the changes that Entry 52 undergone in this regard, to bring home the points urged by the petitioners :
"TNGST ACT 1959 FIRST SCHEDULE-ENTRY 52 OF PART -C-8% Entry No.52:- FROM 17-07-1996 to 31-03-1999 (i) Xerox copies (ii) Laser Copies/Printouts (iii) Computer printouts
Provided that if the paper used for taking such copies or printouts has suffered tax under Item 53 in part-B, the copies or printouts shall not again be subjected to tax under any of the sub-items mentioned above.
(iv) All printed materials other than those specified in sub-items (i) to (iii) above.
ENTRY No.52:- FROM 01-04-1999 to 17-08-2001
(i) Xerox copies
(ii) Laser copies/printouts
(iii) Computer printouts Provided that if the paper used for taking such copies or printouts has suffered tax under Item 53 in Part-5, the copies or printouts shall not again be subjected to tax under any of the sub-items mentioned above.
(iv) All printed materials other than those specified in sub-items (i) to (iii) above.
(v) Account books, registers, order-books, receipt books, memorandum pads, folders, file covers and book covers made of paper or paper board
(vi) Greeting cards and invitation cards of all kinds
(vii) Trade mark labels (added vide G.O.Ms.90 dt.30/5/2000 effective from 1/6/2000) ENTRY NO.52 FROM 18-08-2001
(i) Xerox copies
(ii) Laser copies/Printouts
(iii) Computer printouts Provided that if the paper used for taking such copies or printouts has suffered tax under (Item 30 in part-C), the copies or printouts shall not again be subjected to tax under any of the sub-items mentioned above.
(iv) All printed materials other than those specified in sub-items (i) to (iii) above, whether made of paper, paper board or other materials, like account books, registers, order books, receipt books, memorandum pads, folders, file covers and book covers, greeting cards and invitation cards of all kinds and trade mark labels including those materials manufactured according to specification of customers whether or not with logo or name or matter.
ENTRY NO.40 :- FROM 27-03-2002
(i) Xerox copies
(ii) Laser copies/Printouts
(iii) Computer printouts Provided that if the paper used for taking such copies or printouts has suffered tax under Item 22 of this part, the copies or printouts shall not again be subjected to tax under any of the sub-items mentioned above.
(iv) All printed materials other than those specified in sub-items (i) to (iii) above, whether made of paper, paper board or other materials, like account books, registers, order books, receipt books, memorandum pads, folders, file covers and book covers, greeting cards and invitation cards of all kinds and trade mark labels including those materials manufactured according to specification of customers whether or not with logo or name or matter."
6. Section 2(n) and Section 3(B) of the TNGST Act are extracted hereunder :-
"2. Definitions. In this Act, unless the context otherwise requires, --
...
(n) "sale" with all its grammatical variations and cognate expressions means every transfer of the property in goods (other than by way of a mortgage, hypothecation, charge or pledge) by one person to another in the course of business for cash, deferred payment or other valuable consideration and includes--
(i) a transfer, otherwise than in pursuance of a contract, of property in any goods for cash, deferred payment or other valuable consideration ;
(ii) a transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract ;
(iii) a delivery of goods on hire-purchase or any system of payment by instalments ;
(iv) a transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration ;
(v) a supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration ;
(vi) a 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.
Explanation (1)-- The transfer of property involved in the supply or distribution of goods by a society (including a co-operative society), club, firm or any association to its members, for cash, or for deferred payment or other valuable consideration, whether or not in the course of business, shall be deemed to be a sale for the purposes of this Act.
Explanation (1-A)--Every transfer of property in goods by the Central Government or any State Government for cash or for deferred payment or other valuable consideration, whether or not in the course of business, shall be deemed to be a sale for the purposes of this Act.
Explanation (1-B)-- The transfer of property involved in the purchase, sale, supply or distribution of goods through a factor, broker, commission agent or arhatia, del credere agent or an auctioneer or any other mercantile agent, by whatever name called, whether for cash or for deferred payment or other valuable consideration, shall be deemed to be a purchase or sale, as the case may be, by such factor, broker, commission agent, arhatia, del credere agent, auctioneer or any other mercantile agent, by whatever name called, for the purposes of this Act.
Explanation (1-C)-- Every transfer of property in goods including goods as unclaimed or confiscated or as unservicable or as scrap surplus, old, obsolete or discarded materials or as waste products, by the persons or bodies referred to in Explanation (3) in clause (g) of Section 2 of this Act, for cash or for deferred payment or for any other valuable consideration whether or not in the course of business shall be deemed to be a sale for the purposes of this Act.
Explanation (2)--[Omitted by Act 28/84 w.e.f. 29th May 1984].
Explanation (3)-- (a) The sale or purchase of goods shall be deemed, for the purposes of this Act, to have taken place in the State, wherever the contract of sale or purchase might have been made, if the goods are within the State --
(i) in the case of specific or ascertained goods, at the time the contract of sale or purchase is made ; and
(ii) in the case of unascertained or future goods, at the time of their appropriation to the contract of sale or purchase by the seller or by the purchaser, whether the assent of the other party is prior or subsequent to such appropriation.
(b) Where there is a single contract of sale or purchase of goods situated at more places than one, the provisions of clause (a) shall apply as if there were separate contracts in respect of the goods at each of such places.
Explanation (4)-- Notwithstanding anything to the contrary contained in this Act, two independent sales or purchases shall, for the purposes of this Act, be deemed to have taken place --
(a) when the goods are transferred from a principal to his selling agent and from the selling agent to the purchaser, or
(b) when the goods are transferred from the seller to a buying agent and from the buying agent to his principal, if the agent is found in either of the cases aforesaid --
(i) to have sold the goods at one rate and to have passed on the sale proceeds to his principal at another rate, or
(ii) to have purchased the goods at one rate and to have passed them on to his principal at another rate, or
(iii) not to have accounted to his principal for the entire collections or deductions made by him in the sales or purchases effected by him on behalf of his principal."
"Section 3B - Levy of tax on the transfer of goods involved in works contract.(1) Notwithstanding anything contained in sub-sections1[x x x], (2-B), (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 taxable turnover of transfer of property in goods involved in the execution of works contract at the rates mentioned in sub-section (2),2[2-A or 2-C]of Section 3 or, as the case may be, in Section 4.
Explanation-- Where any works contract 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 June1986, be arrived at after deducting the following amounts from the total turnover of that dealer:--
(a) all amounts involved in respect of goods involved in the execution of works contract in the course of export of the goods out of the territory of India, or in the course of import of the goods into the territory of India or in the course of inter-State trade or commerce ;
(b) all amounts for which any goods specified in the First Schedule or Second Schedule, are purchased from registered dealers liable to pay tax under this Act and used in the execution of works contract in the same form in which such goods were purchased ;
(c) all amounts relating to the sale of any goods involved in the execution of works contract which are specifically exempted from tax under any of the provisions of this Act ;
(d) all amounts paid to the sub-contractors as consideration for execution of works contract whether wholly or partly :
Provided that no such deduction shall be allowed unless the dealer claiming deduction, produces proof that the sub-contractor is a registered dealer liable to pay tax under this Act and that the turnover of such amounts is included in the return filed by such sub-contractor ; and
(e) all amounts towards 'labour charges and other like charges' not involving any transfer of property in goods, actually incurred in connection with the execution of works contract, or such amounts calculated at the rate specified in column (3) of the Table below, if they are not ascertainable from the books of accounts maintained and produced by a dealer before the assessing authority.
THE TABLE Serial number (1) Type of works contract (2) Labour or other charges as a percentage value of the works contract (3)
1. Electrical contracts 15
2. All structural contracts 15
3. Sanitary contracts 25
4. Watch and / or clock repair contracts 50
5. Dyeing contracts 50
6. All other contracts 30
(f) all amounts (including the tax collected from the customer) refunded to the customer or adjusted towards any amount payable by the customer, in respect of unexecuted portion of works contract based on the corrections on account of measurements or check measurements, subject to the conditions that--
(i) the turnover was included in the return and tax paid ; and
(ii) the amount (including the tax collected from the customer) is so refunded or adjusted, within a period of six months from the due date for filing of the return in which the said amount was included and tax paid."
7. Article 366 (29A) of the Constitution of India reads thus :- "366. Definitions. In this Constitution, unless the context otherwise requires, the following expressions have the meanings hereby respectively assigned to them, that is to say- ...
[(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 instalments; (d) A tax on the transfer of the right to use any goods for any 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;]".
8. Now let us refer to the aforesaid decisions mentioned in the writ prayer, both of the Supreme Court as well as those of this Court, since the impugned Government Order is being attacked as being unconstitutional :-
I. Decisions of the Madras High Court :
(a) In A.I.R. 1954 Madras 1130 (supra), this Court held that the expression 'sale' or 'purchase of goods' in Entry 54 of List II of the Constitution had the same meaning as the words 'sale' had in the Sale of Goods Act. It was held that a construction works contract could not be broken into a contract for sale of materials and a contract for payment of works done.
(b) In (1977) 39 S.T.C. 226 (supra), this Court held that the contracts entered into by the Universities and other educational institutions with the printer for printing question papers are not contracts whose main object is transfer of property in the question papers and dismissed the tax revision filed by the State.
(c) In (1982) 51 S.T.C. 28 (supra), this Court held that the orders for printing of ledgers and account books were works contract and the order forms provided separately for the execution of work and held in favour of the assessee.
(d) In (1983) 54 S.T.C. 382 (supra), this Court held that the work of printing done by the assessee in that case was in pursuance of a works contract.
(e) In (1995) 97 S.T.C. 489 (supra), this Court held that the printing of account books for Indian Bank, the assessee in that case, was a works contract.
II. Decisions of the Supreme Court :
(a) In A.I.R. 1958 S.C. 560 (supra), the Supreme Court affirmed the decision of the Madras High Court in A.I.R. 1954 S.C. 1130 (supra) and held that in a sale of goods, the essential ingredients was an agreement to sell movables for a price and the property passed pursuant to that agreement and in a building contract, which is entire and indivisible, there is no sale of goods because in any such contract, the agreement between the parties is that the contractor should put up the construction according to the specifications contained in the agreement and therefore in such an agreement, there was neither a contract to sell the materials used in the construction nor does the property pass therein as movables.
(b) In (1965) 16 S.T.C. 240 (supra), the Supreme Court held that the packing of tobacco in waterproof material must be regarded as an integral part of the process of re-drying and not independent of that process. It was held that in a contract for re-dyeing raw tobacco and supplying it in a packed condition, the packing materials formed an integral part of the process of re-dyeing and there was no independent contract for sale of packing material and it was only an incident of the dyeing process.
(c) In (1972) 29 S.T.C. 438 (supra), where the question was whether the delivery of railway coaches by the assessee to the Railway Board is liable to sales tax, the Supreme Court held that the contract in question is a pure works contract and not subject to sales tax. The Court did not agree with the contention that when all the materials used in the construction of a coach belongs to the railways there can be any sale of the coaches itself. It was held that the difference between the price of a coach and the cost of the material can only be the cost of services rendered by the assessee.
(d) In A.I.R. 1972 S.C. 1131 (supra), it was held that in the case of supply of food and other amenities apart from lodging made by a hotelier to his guests for which a consolidated amount is charged, the contract for services cannot be bifurcated as one for service and another for sale of foodstuff.
(e) In (1984) 55 S.T.C. 314 (supra), the contract was one for servicing, repairing and overhauling air force planes. The spare parts were separately built. The question was, whether the contract amounted to works contract and whether the supply of spare parts amounted to sale. The Supreme Court held as follows :-
"It would be appropriate, in our opinion, because it clearly enunciates the principles, to refer to the statement of law in Benjamin's Treatise on the Law of Sale of Personal Property with reference to the French Code and Civil Law Eighth Edn. [1950] pp. 167-168., where the learned Editor has deduced the principles that would be applicable in deciding the controversy before us. These principles are :-
1. A contract whereby a chattel is to be made and affixed by the workman to land or to another chattel before the property therein is to pass, is not a contract of sale, but a contract for work, labour and materials, for the contract does not contemplate the delivery of a chattel as such.
2. When a chattel is to be made an ultimately delivered by a workman to his employer, the question whether the contract is one of sale or of a bailment for work to be done depends upon whether previously to the completion of the chattel the property in its materials was vested in the workman or in his employer. If the intention and result of the contract is to transfer for a price property in which the transferee had no previous property then the contract is a contract of sale.
Where, however the passing of property of merely ancillary to the contract for the performance of work such a contract does not there by become a contract of sale. 3. Accordingly,
(i) where the employer delivers to a workman either by the employer and a contract of work and labour or for work, labour and material (as the case may be), by the workman.
Materials added by the workman on being affixed to or blended with the employer's materials thereupon vest in the employer by accession and not under any contract of sale.
(ii) where the workman supplies either all or the principal materials the contract is a contract for sale of the completed chattle and any materials supplied by the employer when added to the workmen's materials vest in the workman by accession.
The learned Editor has emphasised that where passing of property was merely ancillary to the contract for the purpose of the work, such a contract does not thereby become a contract for sale. This principle can also be deduced from the observations of the decision of Robinson v. Graves. (1935) 1 K.B. 579."
(f) In (1965) 16 S.T.C. 364 [Patnaik and Co. vs. The State of Orissa], the goods mentioned were bus bodies. The majority held that the case of a contract "to construct a building is quite different ..., but under this contract, the bus body never loses its character as movable property and the property in the bus body passes to the Government as movable property", and the majority concluded that the contract is a contract for sale of goods and dismissed the appeal filed by the assessee.
9. According to the learned counsel for the petitioners, these decisions would clearly indicate that when the goods in question included printed materials or where printing was done, there was no question that it was a works contract and therefore, by the impugned Government Order, the Government was bringing to tax as sale, a works contract which could not be taxed as such and therefore, the impugned Government Order is unconstitutional.
10. In (1989) 74 S.T.C. 146 [Elel Hotels & Investments Ltd. vs. Union of India], the Supreme Court held that it is well settled that a very wide latitude is available to the legislature in the matter of classification of objects, persons and things for purposes of taxation. In (1991) 81 S.T.C. 113 [Aphali Pharmaceuticals Ltd. vs. State of Maharashtra], the Supreme Court explained how the Schedule should be used in construing provisions in the body of the Act and it is as much an act of Legislature as the Act itself and it must be read together with the Act for all purposes of construction. The expression in the Schedule cannot control or prevail against the express enactment and in case of any inconsistency between the Schedule and the enactment, the enactment is to prevail and if any part of the Schedule cannot be made to correspond, it must yield to the Medicinal and Toilet Preparations (Excise Duties) Act.
11. In (1975) 35 S.T.C. 24 [T.V. Sundaram Iyengar and Sons vs. State of Madras], the Supreme Court held as follows :-
"The question with which we are concerned, as would appear from the resume of facts given above, is whether the construction of the bus bodies and the supply of the same by the assessees to their customers was in pursuant of a contract of sale as distinguished from a contract for work and labour The distinction between the two contracts is often a fine one. A contract of sale is a contract whose main object is the transfer of the property in, and the delivery of the possession of, a chattel as a chattel to the buyer. Where the main object of work undertaken by the payee of the price is not the transfer of a chattel qua chattel, the contract is one for work and labour. The test is whether or not the work and labour bestowed end in anything that can property become the subject of sale; neither the ownership of the materials, nor the value of the skill and labour as compared with the value of the materials, is conclusive, although such matters may be taken into consideration in determining, in the circumstances of a particular case, whether the contract is in subsistence one for work and labour or one for he sale of a chattel (see Halsbury's Laws of England, Vol.34, p.6 Third Edition).
...
The contract entered into by the Universities and other educational institutions with the printer or any other person for printing question papers and supplying the same to the Universities and institutions cannot be said to be a contract whose main object is the transfer of the property in the question papers from the printer to the Universities and institutions."
in 22 S.T.C. 179 (Vasani Cloth Stores Vs. The State of Maharashtra) dealt with a tailoring contract, wherein the Division Bench of Bombay High Court has held as follows :-
"On a consideration of all the circumstances of the present case, we have found it difficult to accept the view of the Tribunal that, either from the bill or from any other material on record, it can be said reasonably that two separate contracts can be spelt out one for the supply and sale of lining material or hair canvas or, for the matter of that, for the supply and sale of thread and buttons, and the other for service charges. The two are indivisible. Supply is inevitable, for, without either thread or buttons or lining material, it may not be possible to execute the work. That these articles are required to be used need not be determinative of the question whether there is no separate agreement for purchase. Ordinarily, such contracts, where materials to be used are ancillary to the execution of the contracts, do not import agreements to sell materials, as such, If that is so, it cannot be said that the tailoring bill involves the sale of materials as well as the charges for stitching."
12. The decision of our High Court in (1977) 39 S.T.C. 226 (supra) was confirmed by the Supreme Court in (1989) 73 S.T.C 1, wherein it was observed that printed question paper or printed papers cannot be categorised as entailing sale of goods, but it is rather a contract for work done. The Supreme Court held that such contracts that referred to printing of judgments cannot be construed as contract for sale. In (1994) 247 S.T.C. 387 [Sarvodaya Printing Press Vs. State of Maharashtra], a Full Bench of the Bombay High Court had considered the question whether printed materials in question, viz. the multi-coloured triplicate receipt books specially designed, printed and prepared for the State Electricity Board was sale of good or whether it was works contract. The Full Bench observed as follows :-
"If the parties intend to contract for a chattel, then it is a contract of sale even though work or skill and labour may have to be bestowed in bringing into being the chattel. If the parties contract for the rendering of work and labour or skill and labour, it is not a sale, though in the execution of the contract the passing of materials may incidentally be involved."
In those circumstances, the Full Bench held that the supply of receipts was not sale and was a works contract and answered the question in favour of the assessee. It further held, "that having regard to the special type of job-work done and other basic circumstances, the supply represented a works contract. The intention of the parties was material and it was obvious. The principal object of the MPEB was to get the material printed and not to purchase printed material. The charges were composite. The books were specially designed for the MPEB as per its specifications as to size, type, colour, format, background, etc. No space was left blank obviously because the books were valuable and upon misuse could cause terrible loss to the MPEB. Under the contract, the applicant could not retain or use the printed books and the excess, if any, had to be destroyed. Although the paper and ink used were property of the applicant before printing, thereafter they became the property of the MPEB by theory of accretion. The passing of property in the goods used to the MPEB was, by the very nature of things, only incidental or ancillary to the contract of printing. No transfer of chattel qua chattel was involved. The work done was composite or indivisible with separate charges for the material. The applicant was responsible for protecting the goods and preventing them from falling into the hands of third parties. The goods were not standard goods and were not capable of any use to any one else and thus had no commercial value. Material could not be used even as scrap if rejected and had to be destroyed. Therefore, the supply of printed material to the MPEB by the applicant was not a sale, but a works contract."
Here too, we will see that the passing of the property was incidental or ancillary to the contract of printing and they became the property of the Electricity Board only by the accretion factor. It was important that the general public had no access to these receipts, because they could be misused and so, there may also even insist to destroy whatever excess receipts that had been printed over and above the numbers for which MPEB had placed orders. So, the conclusion depends on the nature of the goods in question and the agreement between the parties.
13. Following the decision in (1989) 73 S.T.C. 1 (supra), our Court, in 1997 STC 489 (supra), held that the supply of account books for Indian Bank amounts to works contract.
14. In (1996) 100 S.T.C. 417 [Thomson Press (India) Ltd. Vs. State of Haryana], a Full Bench of the Punjab and Haryana High Court held that in the facts and circumstances of the case, the printing of lottery tickets amounted to execution of works contract. In that case, the lottery tickets were printed in four colours, the material for printing on the reverse was supplied by the customer, the specimen signature of the Director of the State Lotteries was to be printed on the tickets, the art work had to be supplied from an agency and the proof of art work had to be approved by the Deputy Director. In the above case, the Full Bench referred to (1965) 16 S.T.C. 240 (supra) and (1989) 73 S.T.C. 1 (supra) and they too observed as follows :-
"When stationery is printed and sold as such, the transaction would amount to sale of goods. However, where the end-product is not a commercial commodity and cannot be sold as such to anyone or everyone in the market by the printer, the transaction would not normally amount to sale of goods but would be execution of a works contract. The printing of currency notes at Nasik, of cheque books for a bank, question papers for a university, is not the same thing as printing of letter heads or account books etc., Undoubtedly, paper and ink are necessary inputs in both cases. Still the former would be execution of a works contract while the latter would be sale of goods. The use of paper and ink are only incidental in case of a works contract. The printing of lottery tickets also involves not only skill and expertise but also confidentiality and security. Every printer may not be able to be the job.
... Thus, one of the tests us can the product be sold to any person in the market or has it to be supplied to the particular customer? If it cannot be sold in the market and has to be supplied to a particular customer, the transaction can normally be described as execution of a works contract. In such a case, the supply of material is just incidental. Similar appears to be the position in the present case. The petitioner could not have sold the lottery tickets in the market to any person. These had to be supplied to he customer. These involved not only expertise but also confidentiality. The supply of paper and ink in the circumstances of this case was only incidental. As a result, the amount charged by the petitioner for the printing of lottery tickets from different customers could not be included in the taxable turnover."
It would appear to us that the assessees have wrongly taken advantage of the observation that if the product is to be supplied to a particular customer, the transaction can normally be described as execution of works contract. We must remember, the words used are 'normally'. It cannot be relied on as a dicta that any product which is supplied by a person to another which cannot be sold in the open market must be a transaction involving works.
15. In a number of cases, the assessees had taken the stand that when there are printing materials which contain labels or logos or names of purchaser, then all such transactions are works contract. In fact, this Court, in (2009) 26 V.S.T. 397 [The State of Tamil Nadu represented by Deputy Commissioner (CT), Tirunelveli Division vs. The Orient Packaging Industries and The Secretary, The Tamil Nadu Sales Tax Appellate Tribunal], held that supply of biscuits and labels made according to the specifications with the name and address of the manufacturer printed thereon by the dealer was a sale or a works contract. But it is clear that G.O. Ms. No.66 was not brought to the notice of the Court in the above case.
16. The apprehension of the petitioners appears to be that by the above Government Order, all transactions which are really works contract would be brought in to tax as a sale of goods and what the State was not permitted to do by the various decisions referred to above, it has attempted to secure by introduction of an entry in the Schedule.
17. The power of the legislature to classify goods in the Schedule has already been referred to in the decisions of the Supreme Court. However, it is undeniable that if the order for printing material is only a works contract, then that can never be brought to tax as a sale of goods, merely by inclusion. The State evidently wanted to make it clear that the mere printing of name or logo would not turn what was essentially a sale of goods into a works contract and since the assessees were relying on Anandam Viswanathan's case (supra) to assert their right that it was not taxable, the State wanted to make it clear by this G.O. But this G.O. does not and cannot change the legal position that the question whether a particular contract is one for sale or is a works contract cannot be decided in the abstract. It has to be done by examination of the terms and conditions of the contract.
18. We will explain this further. It is possible that during festival times, a purchaser may place orders for 1000 diaries or 1000 address books which are readily available with the supplier. Since these address books or diaries will be distributed to the customers for Deepavali or New Year, the purchaser might ask the supplier to print his name or affix the label. Then the mere fact that the labels have been printed bearing the name of the particular customer will not make it a works contract. It is obvious that a diary bearing the name 'XYZ Limited' cannot be sold to anyone else, but when the supplier has stocks of diaries where he merely prints 'XYZ Limited' or 'ABC Limited' and gives them to his customers, that printing will not turn the transaction into a works contract. It is purely and simply a sale of goods. Here, the printing of the logo is incidental to the sale and the transaction between the supplier and the purchaser is not work charged.
19. We have already referred to the tests spelt out in the various decisions. The decision in Anandam Viswanathan's case (supra) cannot be automatically applied to all transactions where printing materials are supplied, There, what was transferred in the transaction was the property in "the questions" which belonged to the University. The white sheets are meaningless without the questions being printed. The question is, whether the property belonged to the Universities. The printer was merely asked to print what is required by the University. The University has no intention to purchase the papers. It places an order for printing of questions. The University required utmost confidence to be maintained, since the questions should not be "leaked" to the students before the actual date of the examination. But the printing of question paper on the request of the University cannot be equated to printing of a name or logo on goods which are purchased. We referred to diary only as an example. There, the subject of the transaction is only purchase of the diary. The printing of name is just incidental. So, what we have to see is whether the word is incidental or the purchase is incidental. The fact that the Legislature has introduced the additional word in Entry-40 will not change the position of law in any manner. The authorities will have to examine each transaction and look at the contract in question and decide whether it is works contract or whether it is only a sale. The mere fact of bearing the logo or name upto the specification to the customer's will not make it a works contract.
20. In (2000) 118 S.T.C. 9 [Rainbow Colour Lab vs. State of Madhya Pradesh], the Supreme Court considered whether the job rendered by a photographer in taking photographs, developing and printing the films amounted to a works contract and observed 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(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 (1977) 39 S.T.C. 237 (SC) [Assistant Sales Tax Officer vs. 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."
They explained the accretion factor :
"However modernised the camera be, the skill of the photographer is still important for getting the best results. It cannot also be treated as a sale of the photograph for the reason that it is not the intention of the customer to buy a photograph from the photographer. The photograph has no marketable value. What is expected from the photographer is his service, artistic skill and talent. If any property passes to the customer in the form of photographic paper, it is only incidental to the service contract. No portion of the turnover of a photographer relating to this category of work would be exigible to sales tax."
21. In the judgments referred to above, we find that the Court, be it this Court or the Supreme Court, had examined the contract in question and considered whether it was work charged or whether it was a pure sale, and whether the sale of materials was incidental to the works component or whether the works component was incidental to the sale. Therefore, ultimately, it is clear that when the question to be decided is whether it is a works contract or whether it is a sale, the original authority, the appellate authority and the Tribunal are bound to examine the contract and the terms and conditions contained therein. Merely because in one case it has been held that the printing order that has been undertaken was a works contract will not automatically mean that any contract where printed materials are supplied, even if they bear the name of the purchaser, will without any question be deemed to be works contract. The following extract from (1965) 16 S.T.C. 240 (supra), is relevant for the purpose of the present case :-
"The fact that in the execution of a contract for work some materials are used and property in the goods so used passes to the other party, the contractor undertaking to do the work will not necessarily be deemed on that account to sell the materials. A contract for work in the execution of which goods are used may take one of three forms. The contract may be for work to be done for remuneration and for supply of materials used in the execution of the work for a price; it may be a contract for work in which the use of materials is accessory or incidental to the execution of the work or it may be a contract for work and use or supply of materials though not accessory to the execution of the contract is voluntary or gratuitous. In the last class there is no sale because though property passes it does not pass for a price. Whether a contract is of the first or the second class must depend upon the circumstances : if it is of the first, it is a composite contract for work and sale of goods : where it is of the second category, it is a contract for execution of work not involving sale of goods.
It is true that in business transactions the work contracts are frequently not recorded in writing setting out all the covenants and conditions thereof, and the terms and incidents of the contract have to be gathered form the evidence and attendant circumstances. The question in each case is one about the true agreement between the parties and the terms of the agreement must be deduced from a review of all the attendant circumstances. ..."
22. The works contract could be indivisible as it is in the case of a buildings construction contract or there can be cases where the price of the inputs and the labour charges are separately fixed. The divergent judicial opinion in this regard was settled by the Supreme Court in (1958) 9 S.T.C. 353 [State of Madras Vs. Gannon Dunkerley & Co. (Madras)], where the Supreme Court held that in the case of a building contract, no sale of materials was involved in the construction of the building and therefore, they held the State Legislature was not competent to levy tax on the supply of materials involved in the execution of a works contract. Thereafter, the Law Commission suggested the insertion of a wide definition of 'sale' to cover works contract and consequently, Section 29-A was added in Article 366 of the Constitution by the 46th Amendment. It was held that when the power to tax a sale in the ordinary sense is subject to certain conditions and restrictions, the power to tax a deemed sale under 29-A was also subject to the same restrictions and conditions. In fact, in 88 S.T.C. 40 [Larsen and Toubro Ltd. vs. Union of India], the Supreme Court held that they did not propose to go into the question whether a deemed sale resulting from transfer of property of goods involved in the execution of a particular works contract amounts to a sale in the course of inter-State trade or commerce and that it ... "has to be decided in the light of the particular terms of the works contract and it cannot be decided in the abstract". Therefore, rightly in all the decisions that we have referred to above, as we have stated earlier, this issue has been decided with reference to the particular terms of the contract.
23. So, these are all the special features which would identify for us to see whether the transaction is taxable as one for sale of goods. We are not persuaded by the submissions made by the learned counsel for the petitioners that merely by inclusion the State will bring to tax what is a works contract. Even after the inclusion, it is necessary to prove whether a given transaction is a works contract pure and simple or it involves sale of goods. The Supreme Court held that this is a mixed question of law and fact depending upon the facts of each case vide (1984) 55 S.T.C. 314. On the contrary, the State wanted to check the mischief, where merely because the goods were printed material, the assessees had been able to persuade that the transfer of goods in question were part of a works contract, relying on Anandam Viswanathan's case (supra). Therefore, the challenge to the constitutional validity of the Government Order is rejected.
24. Learned Government Pleader relied only on a decision in State of Andhra Pradesh Vs. Kone Elevators (India) Ltd., reported in 2005 (40) S.T.C. 22 which dealt with the actual work at site for installation of lift. It is submitted that for installation, the test that is applied should be applied here and that is the real standard for determination whether it is a sale or contract.
25. As we have seen from the decisions referred to above, to decide whether a contract in question is a works contract or if it is only a sale, each transaction will have to be examined on the facts and circumstances of the case having reference to the terms of the contract and that question cannot be decided in the abstract.
26. For all the reasons stated above and in view of the various decisions discussed hereinbefore, the writ petitions are dismissed. There shall be no order as to costs. Consequently, the connected miscellaneous petitions are closed.
(P.S.D., J.) (P.P.S.J., J.)
5.4.2010
Index:Yes
Internet:Yes
VJY/ab
To
1. The Registrar,
The Tamil Nadu Taxation
Special Tribunal
Singaravelar Maligai
Collectorate Compound
Chennai 600 001.
2. The Secretary
to Government,
Commercial Taxes &
Religious Endowment Department,
Fort St.George,
Chennai 600 009.
PRABHA SRIDEVAN, J &
P.P.S.JANARTHANA RAJA,
VJY/ab
W.P.NOS.30036 to 30038/02, 25391 and 9552 /05 and WP.MP.Nos.34890 and 34891 of 2002
05.04.2010