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Saturday, January 31, 2015

The Tribunal rightly held that the appellants - service providers discriminated between subscribers of the same class; one on the ground that the call ends with the private parties and another on the ground that the call ends with BSNL/MTNL. The classification of the subscribers into two categories on the basis of calls made by them from private network to another private network and from private network to BSNL/MTNL network is arbitrary as it fails to satisfy the twin test for reasonable classification laid down by this Court in State of West Bengal v. Anwar Ali Sarkar & Anr. AIR 1952 SC 75. Therefore, the Tribunal rightly dismissed the appeal.

                        IN THE SUPREME COURT OF INDIA
                        CIVIL APPELLATE JURISDICTION

                        CIVIL APPEAL NO.1563 OF 2007

OF INDIA & ORS.                              ... APPELLANTS


OF INDIA & ORS.                         ... RESPONDENTS

                               J U D G M E N T


      This appeal has been preferred by the  appellants  against  the  order
dated 22nd December, 2006  passed  by  the  Telecom  Disputes  Settlement  &
Appellate Tribunal, New Delhi (hereinafter referred to  as  the  'Tribunal')
in Appeal No.2 of 2006 (with M.A. No.58 of 2006).  By  the  impugned  order,
the Tribunal while dismissing the appeal disposed of the M.A.No.58  of  2006
with certain observations.

2.    The factual matrix of the case is as follows:

      Appellant Nos.2 to 10 are  private  GSM  cellular  operators  and  the
first appellant is their Association. They have been issued licences by  the
Central Government, Department of  Telecommunication  (hereinafter  referred
to as 'DoT') under Section 4 of Indian Telegraph  Act,  1885  to  establish,
maintain and  operate  cellular  mobile  telephone  services/unified  access
services  in  their  respective  service  areas.  The  first  respondent  is
Regulatory Authority established under Section 3 of the  Telecom  Regulatory
Authority of India Act, 1997 (hereinafter referred to as 'TRAI Act').

3.     The  first  respondent-Authority  issued  a  directive   dated   27th
February, 2006 wherein appellants - private mobile service providers in  the
four States of Maharashtra, West Bengal, Tamil Nadu and Uttar  Pradesh  were
directed to discontinue differential tariffs levied in  the  aforesaid  four
States for calls terminating in the network of Bharat Sanchar Nigam  Limited
(hereinafter  referred  to  as  'BSNL')/Mahanagar  Telephone  Nigam  Limited
(hereinafter referred to as 'MTNL') as compared to calls terminating in  the
network  of  other  private  operators  in   another   citing   it   to   be
discriminatory and inconsistent with the amended licence condition  notified
by the DoT on 20th May, 2005. The appellants  complied  with  the  directive
dated 27th February, 2006 and submitted compliance report to the Authority.

4.    Subsequently, by its directive  dated  22nd  March,  2007,  the  first
respondent-Authority, inter alia, directed the appellants-service  providers
to assess the total excess amount charged from  the  subscribers;  keep  the
entire amount in a separate Bank Account  and  intimate  the  Authority  the
names of the Banks in which such amount has  been  kept.  After  receipt  of
such notice dated 22nd March, 2007 the appellants preferred an appeal  under
Section 14 read with Section 14A of the TRAI Act challenging  the  direction
dated 27th February, 2006. The challenge was made on  the  ground  that  the
direction was discriminatory  and  inconsistent  with  the  amended  licence
conditions notified by the DoT on 20th May, 2005.  The main plea  raised  by
the appellants justifying  the  differential  half  of  calls  from  private
operator to another private operator vis--vis calls from  private  operator
to BSNL network was that  direct  connectivity  could  be  achieved  between
networks of private operators but it could not be achieved  between  private
operators and BSNL network.

5.    Initially, BSNL/MTNL was not party to the said appeal.   The  Tribunal
having noticed that the appeal pertains to the differential tariff of  calls
from private operator to another private operator vis--vis calls made  from
private operator to BSNL/MTNL network directed  the  appellants  to  implead
the BSNL/MTNL as respondent. After hearing the parties, the Tribunal  passed
the impugned order dated 22nd  December,  2006  dismissing  the  appeal  and
disposing of the M.A.No. 58 of 2006 with the observations and directions  as
quoted above.

6.    In appreciation of the case, it is relevant to  notice  the  following

      For grant of licences, India  was  divided  into  four  metro  service
areas of Delhi, Mumbai, Kolkata and  Chennai  and  various  telecom  circles
which were roughly contiguous to the State of India.  In  the  first  phase,
licences were  granted  for  the  four  metro  service  areas  in  1994  and
thereafter in the Circles/States in 1995 defining  the  geographical  limits
within which the licensee may operate and offer the  services.  For  Mumbai,
Chennai, Kolkata and Delhi, in the aforesaid manner, separate licences  were
issued by the DoT. Separate  and  distinct  licences  were  issued  for  the
States of Maharashtra, Tamil  Nadu  and  West  Bengal  excluding  the  three
metropolitan cities of Mumbai, Chennai and Kolkata  respectively  for  which
licences were given to MTNL. As far as State of Uttar Pradesh is  concerned,
it was divided into two Telecom circles, i.e., U.P.  (East)  and  U.P.(West)
with separate licences for U.P.(East) and U.P.(West).

7.    The first respondent-Authority has laid down  Inter  Connection  Usage
Charges (hereinafter referred to as 'IUC') with respect to the changing  for
the use of network elements of other  operators  which  include  termination
charges, carriage charges and access  deficit  charge  for  use  of  network
elements of other  operators.  These  charges  for  inter-circle  calls  are
different from  those  for  intra-circle  calls.  On  20th  May,  2005,  the
Government of India notified that inter-service  area  connectivity  between
access  providers  within  Mumbai  Metro  and  Maharasthra  Telecom  Circle,
Chennai Metro and Tamil Nadu Telecom Circle, Kolkata Metro and  West  Bengal
Telecom Circle and U.P.(East) and U.P.(West) Telecom  Circle  service  areas
respectively, is permitted subject to condition  that  the  access  provider
will operate within the existing licensed service  area  and  shall  not  be
permitted to create infrastructure outside their licensed service  area  for
the purpose of inter-service area  connectivity.  It  was  further  provided
that the access provider may take leased lines for such  connectivity.  With
the above arrangement, calls within a State  in  the  above  mentioned  four
states would be treated as intra-service area  calls  for  the  purposes  of
routing as well as ADC.

8.    The final result of the above said notification was  that  the  metros
were merged with the respective State circles and the calls from  metros  to
the remaining areas of the respective States and in case of  U.P.(East)  and
U.P.(West) circles from one to the other,  were  to  be  treated  as  intra-
circle calls.

9.    The appellants  were  charging  higher  tariff  for  calls  made  from
appellant's network in the metros to the  BSNL  and  MTNL  networks  in  the
remaining areas of  the  State  compared  to  calls  made  from  appellant's
network in the metros to another appellant's network in the remaining  areas
of the State. For example, a subscriber  on  a  private  operator's  network
calling from Mumbai to another private operator's subscriber  at  Nasik  was
being charged at low rate as compared to a call made by the same  subscriber
from the same  place  to  BSNL  subscriber  at  the  other  place.  In  this
background, the first respondent  by  Circular  dated  27th  February,  2006
observed that this differential tariff was discriminatory  and  inconsistent
with the amended licence condition notified by the DoT  on  20th  May,  2005
and, therefore, directed the  appellants  to  immediately  discontinue  such
differential tariff and asked for compliance of the same within 15 days.

10.   As noticed above, the first respondent-authority vide  Circular  dated
No.101-15/2005-MN dated  27th  February,  2006  observed  that  differential
tariff  was  discriminatory  and  inconsistent  with  the  amended   licence
conditions notified by the DoT on 20th May, 2005  and,  therefore,  directed
the appellants to immediately discontinue such differential tariff  and  ask
for compliance within 15 days.

11.   The aforesaid direction was challenged by the  appellants  before  the
Tribunal with a prayer to set aside the directions issued  by  the  Circular
No.101-15/2005-MN dated 27th February, 2006. The appellants also sought  for
an interim relief granting ex-parte stay of operation of the said  circular.

12.   The Tribunal having not granted any  interim  relief,  the  appellants
moved before the High Court in a Writ Petition,  being  W.P.(C)  No.5428  of
2006. The High Court observed that no punitive or coercive action  shall  be
taken by the first respondent Authority at  least  till  the  next  date  of
hearing before the Tribunal and disposed of the writ petition. The  Tribunal
by the impugned order dated 22nd December, 2006 held as follows:

"26.  Having gone through the documents produced by  both  the  parties  and
having heard arguments we are of the view that the appellants did  not  make
adequate effort to provide direct connectivity between the appellants'  MSCs
and the BSNL/MTNL's MSCs which would have brought tariffs at part for  calls
made within the appellants' network. We are also left  with  the  impression
that DoT and BSNL could have taken a  more  pro-active  approach  to  ensure
that the requisite leased  lines  and  Ps  of  I  were  made  available  for
establishing direct connectivity in a time bound  manner  which  would  have
helped achieving the transition sought  to  be  brought  about  by  the  DoT
notification of 20-5-2005 in a more smooth manner. Be that as it may, we  do
not  agree  with  the  argument  put  forth  by  the  appellants  about  the
protection  to  them  for  charging  higher  tariff  under  the  clause   of
forbearance. The clause  of  non-discrimination  is  very  clear  and  self-
explanatory which has been defied by the appellants.  We  do  not  find  any
merit in the appeal and the same is dismissed. M.A.  No.  58  of  2006  also
stands disposed."

13.   Learned counsel appearing on behalf of the appellants  submitted  that
the differential tariffs are because of the difference in the cost  elements
involved in the two natures of calls. Insofar as calls  terminating  in  the
network of BSNL/MTNL are concerned, as  direct  connectivity  had  not  been
established between the  appellant's  network  and  BSNL/MTNL  network,  the
appellants  were  obliged  to  pay  carriage  charges  to  BSNL   and   MTNL
(respondent nos. 2 and 3) for calls terminating on their  networks.  But  in
case of a call terminating in the network  of  the  private  operator  these
charges were not applicable as  direct  connectivity  had  been  established
between the private operators. Therefore, the cost elements involved in  the
two calls were different leading to a difference in tariffs charged  by  the
service provider for such calls from its subscribers. The above position  is
explained with the help of a Diagram to show that in  the  case  of  a  call
from a metro like Mumbai to another place like Pune, the  call  between  two
subscribes of private networks is connected directly, which in the  case  of
a call to BSNL subscriber is treated as a STD call as it is first  connected
to Nagpur and then to Pune,  which  is  the  routing  plan  for  STD  calls.
According to appellants, in STD  arrangement,  BSNL  as  the  National  Long
Distance Operator was able to recover carriage charges which  were  as  high
as Rs.1.10 per minute, which charges would no longer be payable once  direct
connectivity was established.

14.   Thus the reason for the differential tariffs as per the appellant  was
that the call between subscribers of private operators was  routed  directly
and costed as a local call while the call  to  a  BSNL/MTNL  subscriber  was
routed through another place and costed as an STD call.

15.   It was further contended that the  aforesaid  position  had  continued
right from July, 2005 in the knowledge of the first respondent  and  now  in
sudden turn around, the first respondent chose to disregard the  compulsions
under which the private operators were  constrained  to  offer  differential
tariffs and directed the private operators to discontinue  the  differential
tariff. Its net effect was to force the operators to increase their  tariffs
for  calls  terminating  on  the  network  of  other  private  operator   or
alternatively reduce the tariff for calls to BSNL/MTNL subscribers  and  pay
the difference from their own pocket. Either of these alternatives would  be
against the fundamental duties and responsibilities of the first  respondent
under the Act and the impugned  action  was  not  only  against  the  public
interest but  would  also  have  put  the  private  operators  in  a  highly
disadvantageous position.

16.   Learned counsel for the appellant further submitted that the  Tribunal
erred in law  in  not  appreciating  that  simply  prescribing  differential
tariff does not violate the mandate of Article 14  of  the  Constitution  or
result in discrimination; the same class has to be determined in  accordance
with the similarity of  features  of  its  constituents.  According  to  the
appellants, the costs involved in the nature of the two calls are  different
and, therefore, though the subscribers belong to the appellants,  they  form
a distinct class when they make a call to the BSNL Cell one  number.  It  is
also submitted that the Tribunal failed to notice that the DoT  decision  of
20th  May,  2005  explicitly  stated  that  the  tariffs  which  were  under
forbearance would continue to be regulated by market forces.

17.   Learned counsel appearing on  behalf  of  first  respondent  submitted
that it was the duty of the appellants  to  arrange  the  leased  lines  for
establishing direct connectivity with the BSNL network as they had  done  to
connect each other's network. The  appellants  no  where  pleaded  that  the
second  respondent  denied  the  provision   of   Points   of   Interconnect
(hereinafter referred to as 'Ps of  I')  and  the  only  pleading  was  with
respect to non-grant of leased lines by BSNL. In fact, the appellants  never
approached the BSNL for provision of Ps of I.

18.   It was brought to the notice of the Court that  immediately  on  issue
of letter by the DoT when the metro circles were merged with the  respective
state circles, BSNL had issued a Circular  on  24th  May,  2005  asking  the
appellants to sign addenda  to  the  existing  interconnect  agreements  for
provision of Ps of I. However, no effort was made by the appellants to  this
effect. In another case before the Tribunal, respondent No.2 had  stated  on
affidavit that wherever the payments have been made, the Ps of I were  being
provided within 90 days. In these four service areas,  no  demand  was  ever
placed on BSNL.

19.   Similar was the stand taken by the appellants and  respondents  before
the Tribunal. The Tribunal observed  that  some  demands  for  Ps  of  I/E-1
connectivity were placed by the  appellants  on  BSNL  but  as  late  as  in
December 2005, January 2006 and February 2006. The Tribunal held that  there
was no reason that in case infrastructure for direct connectivity  could  be
created for connecting amongst themselves the networks  of  the  appellants,
the same could not be done for connecting the MSCs of  appellants'  networks
to those of BSNL/MTNL networks in the four service areas in question.

      The Tribunal rightly held that the appellant could have  made  use  of
the similar leased lines as they had between their networks  and  asked  for
Ps of I from the BSNL for the MSCs  located  in  these  four  service  areas
which was not done. No effort was made by  the  appellants  to  create  this
direct connectivity and they took recourse to the easier way of handing  the
traffic to the  BSNL  as  National  Long  Distance  Operator  and  continued
charging the consumers higher tariffs.

20.    The respondent has prescribed the tariffs for  various  calls/telecom
services under the Telecommunication Tariff Order 1999 as amended from  time
to time. As a general condition clause 6  of  the  Tariff  Order  prescribes
that  no  service  provider  shall,  in  any  manner,  discriminate  between
subscribers  of  the  same  class  and  such  classification  shall  not  be
arbitrary.  Further,  clause  2(k)  of  the  Tariff  Order   defines   "Non-
discrimination" to mean that service provider shall not, in  the  matter  of
application of tariffs, discriminate between subscribes of  the  same  class
and such classification of subscribes shall not be  arbitrary.  Clause  2(k)
and Clause 6 of the Tariff Order are reproduced herein under:

"2(k) Non-discrimination means  that  service  provider  shall  not  in  the
matter of application of tariffs, discriminate between  subscribers  of  the
same class and such classification of subscribers shall not be arbitrary.

Clause 6.   Non-discrimination:   No service provider shall, in any  manner,
discriminate between subscribers of the same class and  such  classification
shall not be arbitrary."

      In terms of the above Tariff Order, the first respondent in  September
2002, introduced forbearance in  prescribing  tariffs  as  far  as  Cellular
calls are concerned and in taking this decision the  first  respondent  took
note of the emerging market scenario and  came  to  the  conclusion  that  a
stage had been reached, when market forces could  effectively  regulate  the
cellular tariff.

21.   The question whether the non-discrimination clause  is  applicable  to
the class of subscribers making call  to  another  private  network  from  a
private network as compared to the class making call from a private  network
to BSNL/MTNL network  was  raised  by  both  the  parties.  The  appellants'
contention was that they were two different classes  since  the  routing  of
the call was different and BSNL was charging higher amount  for  the  latter
category of calls. In reply to the same, it has been  rightly  contended  on
behalf of the respondents that the same subscriber or two  subscribers  from
the same house making  calls  from  the  same  network  to  another  private
network or to BSNL network located at the same  destination  form  the  same
class. The interpretation of the respondents being  more  logical  was  also
accepted by the Tribunal. For the said  reason  the  Tribunal  rightly  held
that the action of appellants amount  to  discrimination  between  the  same
class of subscribers which is against the  basic  definition  laid  down  in
Clause 2(k) of the Tariff Order.

22.   On 20th May, 2005,  the  Government  of  India  announced  that  inter
service area connectivity between Access  Providers  within  four  States  -
Mumbai Metro & Maharashtra  Telecom  Circle,  Chennai  Metro  &  Tamil  Nadu
Telecom Circle, Kolkata Metro & West Bengal Telecom Circle and  U.P.  (East)
& U.P.(West) Telecom Circle  Service  areas  is  permitted  subject  to  the
condition that the  Access  provider  will  operate  within  their  existing
licensed service area and shall not be permitted  to  create  infrastructure
outside their licensed service area for the purpose  of  inter-service  area
connectivity.  The  access  providers  may  take  lease   lines   for   such
connectivity.  This  inter-service  area  connectivity  shall  be  only  for
terminating traffic.  Relevant extracts from  Clause  5.2  and  6.0  of  the
Circular dated 24th May, 2005 are reproduced hereunder:

"5.2. The traffic organized by mobile subscribers belonging to  one  service
area but located in another service area within same state shall be  treated
as home network traffic instead of national roaming traffic. This  principle
shall  be  applicable  for  both  charging  at  POI  as  well   as   traffic
certificates for  ADC  billing.  Further,  since  the  traffic  between  two
service areas within same state  shall  be  treated  as  intra-service  area
traffic, therefore, such traffic shall not be handed over by NLDOs to BSNL.

6.0.  The access service providers of these four states shall  be  permitted
to seek POIs with BSNL switches in the complete state irrespective of  their
service areas in which they can provide  their  services.  Concerned  access
provider shall have  to  sign  separate  Addenda  to  existing  Interconnect
Agreements with BSNL for establishing these new POIs  with  BSNL.  Till  the
time these Addendas  are  signed  and  new  POIs  established  the  existing
arrangements shall  continue  including  handover  of  such  calls  to  BSNL
through NLDOs  treating  the  traffic  as  inter  circle  and  charging  IUC
accordingly. All the traffic within a state (in these four States  only  and
in case of State of UP it also  includes  State  of  Uttaranchal)  shall  be
treated as intra circle traffic and IUC charged accordingly at  POI  (except
the traffic handed over at POIs of NLDOs) as well  as  for  the  purpose  of
traffic certificates for ADC billing. These new POIs,  as  above,  shall  be
commissioned after concerned access providers sign these Addendas  to  their
existing Interconnect Agreement with BSNL.  These  instructions  are  to  be
implemented w.e.f. 0000 hours of 25th May, 2005."

      The net effect of the aforesaid Circular was that the appellants  were
to sign the Addenda agreements with BSNL and then apply for new Ps of I  and
till  such  time  that  the  new  Ps  of  I  are  established  the  existing
arrangements were to continue.

23.   We have noticed that the appellants took advantage  of  the  aforesaid
provision. But they did not apply before the BSNL/MTNL to apply new Ps of  I
and treating the tariff as inter service charges differently from same  sets
of consumers.  The  access  providers  have  option  to  continue  with  the
existing inter-connected routing of the class  of  service  areas  but  that
cannot be a ground to discriminate, in any manner, between  the  subscribers
of the same class. The Tribunal rightly held that the appellants  -  service
providers discriminated between subscribers of the same class;  one  on  the
ground that the call ends with  the  private  parties  and  another  on  the
ground that the  call  ends  with  BSNL/MTNL.   The  classification  of  the
subscribers into two categories on the basis of  calls  made  by  them  from
private network to another private  network  and  from  private  network  to
BSNL/MTNL network is arbitrary as it fails to  satisfy  the  twin  test  for
reasonable classification laid down by this Court in State  of  West  Bengal
v. Anwar Ali Sarkar & Anr. AIR 1952 SC 75. Therefore, the  Tribunal  rightly
dismissed the appeal.

24.   We find no merit in this  appeal,  it  is  accordingly  dismissed.  No

                               (SUDHANSU JYOTI MUKHOPADHAYA)

                                      (PRAFULLA C. PANT)
JANUARY 30, 2015.

Constitutional validity of Entry 25 of Schedule VI to the Karnataka Sales Tax Act, 1957 (hereinafter referred to as the 'Act') is the subject matter of the present appeal. whether judgment in Rainbow Colour Lab's case was over-ruled in the case of ACC Ltd. case or not


                        IN THE SUPREME COURT OF INDIA

                        CIVIL APPELLATE JURISDICTION

                        CIVIL APPEAL NO. 1145 OF 2006

|STATE OF KARNATAKA ETC.                    |.....APPELLANT(S)            |
|VERSUS                                     |                             |
|M/S PRO LAB & ORS. ETC.                    |.....RESPONDENT(S)           |

                               J U D G M E N T

            Constitutional validity of  Entry  25  of  Schedule  VI  to  the
Karnataka Sales Tax Act, 1957 (hereinafter referred to as the 'Act') is  the
subject matter of  the  present  appeal.   It  is  the  third  endeavour  to
resurrect this entry, when on the first two occasions, the  steps  taken  by
the State were declared as impermissible.  Even this time,  the  High  Court
has  dumped  the  amendment  as  unconstitutional.   However,  the   reasons
advanced by the High  Court  in  all  three  rounds  are  different.   While
traversing through the historical facts leading to the  issue  at  hand,  we
shall be referring to the same for clear understanding  of  the  controversy

2)    This entry was inserted in the said Act by  an  amendment  which  came
into effect from 01.07.1989, thereby providing levy of  tax  for  processing
and supply of photographs, photo prints and photo negatives.   The  validity
of this entry was challenged by means of a writ petition filed in  the  High
Court of Karnataka.  The  High  Court  in  that  case  titled  M/s  Keshoram
Surindranath Photo - Bag (P) Ltd.  and  others  v.  Asstt.  Commissioner  of
Commercial Taxes (LR), City Division, Bangalore and others[1], declared  the
said Entry to be unconstitutional.  State of Karnataka had  challenged  that
judgment by filing special leave  petition  in  this  Court.   This  special
leave petition was dismissed vide  order  dated  20.04.2000,  following  its
earlier judgment in the case of Rainbow Colour Lab and Another v.  State  of
Madhya  Pradesh  and  others[2].   The  reason  for  holding  Entry  25   as
unconstitutional was that  the  contract  of  processing  and  supplying  of
photographs, photo frames and photo negatives was  predominantly  a  service
contract with negligible component of goods/material and, therefore, it  was
beyond the competence of State Legislature given in Entry 25 of List  II  of
Schedule VII of the Constitution to impose sales tax on such a contract.

3)    It so happened that within one year of the judgment in Rainbow  Colour
Lab's case, three Judges Bench of this Court rendered  another  judgment  in
the case of ACC Ltd. v. Commissioner of  Customs[3],  wherein  it  expressed
its doubts about the correctness of the law laid down in  Rainbow.   We  may
point out at this stage itself that during the  course  of  hearing  of  the
present appeal, there was a  hot  debate  on  the  question  as  to  whether
judgment in Rainbow Colour Lab's case was over-ruled  in  the  case  of  ACC
Ltd. case or not.  This aspect will be gone into by us  at  the  appropriate

4)    After the judgment in  ACC  Ltd.  case,  a  circular  instruction  was
issued by the Commissioner of Commercial Taxes to the assessing  authorities
to proceed with the assessments as per Entry 25.  This  became  the  subject
matter of challenge before the High Court of Karnataka in the  case  of  M/s
Golden Colour Labs  and Studio and others v. The Commissioner of  Commercial
Taxes[4].  The High Court allowed the  writ  petition  vide  judgment  dated
30.07.2003 holding that a provision  once  declared  unconstitutional  could
not be brought to life by mere  administrative  instructions.   However,  at
the same time, the Court observed that Entry 25, Schedule  VI  to  the  Act,
declared ultra vires the Constitution in Keshoram's case, cannot be  revived
automatically, unless there is re-enactment made by  the  State  Legislature
to that effect.

5)     The  appropriate  procedure  indicated  in  the  aforesaid   judgment
emboldened the State to come out with the  required  legislative  amendment.
This paved way for the enactment of the Karnataka State Laws  Act,  2004  by
the State Legislature that came into  force  with  effect  from  29.01.2004.
Section 2(3) of the said  amendment  re-introduced  Entry  25  in  identical
terms, as it appeared earlier, and that too with retrospective  effect  that
is w.e.f. 01.07.1989, when this provision  was  inserted  by  the  amendment
made in the year 1989 for the first time.

6)    As was expected,  this  amendment  was  again  challenged  before  the
Karnataka High Court by the respondent herein as well as many others.   Vide
impugned judgment dated 19.08.2005, the High Court has  again  declared  the
said amendment as unconstitutional.  It would be pertinent to  mention  that
the High Court has not taken into consideration  the  events  that  followed
after Rainbow Colour Lab's case, namely, over-ruling of  the  said  judgment
in ACC Ltd.  Since the basis of Keshoram's case decided in  the  first  calm
by the High Court was  same  as  given  in  Rainbow  Colour  Lab,  obviously
Keshoram also no longer remains a good law.  However, the  reason  given  by
the High Court, this time, is that the ratio laid down  in  Keshoram's  case
continues to be binding on the State of Karnataka.  As per the  High  Court,
"the re-enactment of the said provision  is  possible  in  the  event  of  a
subsequent declaration made by the Hon'ble Supreme Court  re-considering  or
pronouncing a similar question in terms of the findings in para  23  of  the
Golden Colour Lab's case.  This is,  thus,  the  chequered  history  of  the
litigation amply demonstrating as to how the State of  Karnataka  is  making
desperate attempts to ensure that provision in the form of Entry 25  in  the
said Act survives, empowering the State Government to levy  sales  tax   for
processing and supply of photographs, photo prints and photo negatives.

7)    At this stage, we take note of the exact phraseology used in Entry  25
of the Act which reads as under:

|Sl. No. |Description of Works   |Period      |Rate of Tax U/S |
|        |Contract               |            |5-B             |
|25      |Processing and         |1.7.1987 to |6%              |
|        |supplying of           |31.3.1996   |                |
|        |Photographs,           |1.4.1996 to |8%              |
|        |Photo Prints and       |31.3.1998   |                |
|        |Photonegatives         |from        |                |
|        |                       |1.4.1998    |10%             |

8)    We may also record at this point itself  that  legislative  competence
of the State to insert the aforesaid Entry is primarily  challenged  on  the
ground that the State Government is not empowered to levy sales tax  on  the
processing and supplying  of  photographs  which  is  predominantly  in  the
nature of "service" and the element of "goods"  therein  was  minimal.   The
respondents argue that the State Legislature does  not  have  any  power  to
impose tax on "services" inasmuch as the sales tax can  be  levied  only  on
"sale of goods" as permitted under Article 366 (29-A)  of  the  Constitution
of India.  Challenge is also laid on the retrospective effect given  to  the
said Entry by arguing that such a move is violative of Article  265  of  the
Constitution of India as  subjecting  the  assessees  to  such  a  tax  from
retrospective   effect   is   confiscatory   in   nature   and,   therefore,

9)     We  have  projected,  in  nutshell,  the  chequered  history  of  the
litigation by referring to the judgments of this Court pronounced from  time
to time which  have  a  direct  bearing  on  the  outcome  of  this  appeal.
Therefore, we are simply required  to  do  a  diagnostic  of  the  sorts  in
revisiting these judgments.  As we proceed with this exercise to notice  and
spell out the principle of law laid down in these  judgments,  contextually,
the same would analogously facilitate in concluding  the  cases  with   very
little discussion at our end.

10)   In order to ensure that we avoid unnecessary burdening  of   judgments
with the earlier case laws, it is safe to charter the journey by  initiating
discussion about the Constitution Bench  judgment  in  the  case  of  Gannon
Dunkerley and Co. and others v. State  of  Rajasthan  and  others[5].   That
case pertained to the execution of the Works Contracts.   Question  involved
was as to whether there could be levy of sales tax  on  the  sale  of  goods
involved in the execution of  such  Works  Contracts.   The  assessee,  viz.
Gannon Dunkerley, was carrying on business as  Engineering  Contractors  and
executing the contracts pertaining to  construction  of  building  projects,
dams, roads and structural contracts of all kinds.  In respect  of  sanitary
contracts, 20 per cent was deducted for labour and balance was  taken  as  a
turnover of the assessee for the  purposes  of  levying  sales  tax  by  the
assessing authority.  Likewise, in respect of other contracts, 30  per  cent
was deducted for  labour  and  on  balance  amount,  sales  tax  was  levied
treating it as turnover of the assessee under the Madras General  Sales  Tax
Act, 1939.  The question which arose for consideration  was  as  to  whether
there was any sale of goods.  The  Constitution  Bench  held  that  building
contract was in the nature of Works Contract and there  was  no  element  of
sale of goods in such a contract.  In its opinion, in  a  building  contract
where the agreement between the  parties  was  that  the  contractor  should
construct the building according to  the  specifications  contained  in  the
agreement and in consideration received payment as provided  therein,  there
was neither a contract to sell the materials used in  the  construction  nor
the property passed therein as movables.  It was held  that  in  a  building
contract, which was one entire and indivisible, there was no sale  of  goods
and it was not within the competence of the Provincial State Legislature  to
impose tax on the supply of the materials used in such a  contract  treating
it as a sale.  The Court, thus, proceeded  on  the  basis  that  a  building
contract was indivisible and composite wherein there was no  sale  of  goods
and, therefore, the State Legislature was not competent to impose sales  tax
on the supply of material used in such a contract treating  it  as  a  sale.
Since, Entry 48 of the List II of Schedule VII in the  Government  of  India
Act, 1935 was under consideration that empowers  State  Government  to  levy
tax "sale of goods", the Court held that the expression "sale of  goods"  in
the said Entry is to be given the same meaning as given under  the  Sale  of
Goods Act, 1930.  That would mean that it would be sale  of  goods  only  if
the two essential ingredients, namely: (i) an  agreement  to  sell  movables
for a price, and (ii) property passing therein persuant to  that  agreement,
are satisfied.

11)   After  the  aforesaid  Constitution  Bench  judgment,  the  Parliament
amended the Constitution of India by the Constitution (46th Amendment)  Act,
1982 which received the assent of the President of India on 02.02.1983.   By
this  amendment,  clause  (29-A)  was  inserted  in  Article  366   of   the
Constitution, which reads as under:
"[(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

(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

(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

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;]"

12)   The challenge laid to the aforesaid amendment  was  repelled  by  this
Court in the case of Builders Association of India and others  v.  Union  of
India and others[6].  In this judgment, the Constitution Bench  specifically
noted that the purport and object of the aforesaid amendment was to  enlarge
the scope of the expression "tax of sale for purchase of goods" wherever  it
occurs in the Constitution so that it  may  include  within  its  ambit  any
transfer, delivery or supply of goods that may take place under any  of  the
transactions referred to in sub-clauses (a) to  (f).   To  put  it  tersely,
with the aforesaid amendment, the States are empowered  to  make  the  Works
Contract divisible and tax "sale of goods" component.   It  clearly  follows
therefrom that the restricted meaning which was assigned to  the  expression
"sale of goods" in Gannon  Dunkerley's  case  is  undone  by  the  aforesaid
amendment.  The interpretation which is to be assigned  to  clause  29-A  of
Article 366 is stated with remarkable  clarity  in  M/s  Larsen  Toubro  and
another v. State of Karnataka and another[7], by a three Judge Bench in  the
following words:
"60.  It is important to ascertain The meaning of Sub-clause (b)  of  Clause
29A of Article 366 of the Constitution. As the very  title  of  Article  366
shows, it is the  definition  clause.  It  starts  by  saying  that  in  the
Constitution unless the context otherwise requires the  expressions  defined
in that article shall have the meanings respectively  assigned  to  them  in
the article. The definition of expression "tax on sale or  purchase  of  the
goods" is contained in Clause (29A). If the first  part  of  Clause  29A  is
read with Sub-clause (b) along with latter part of  this  clause,  it  reads
like this: tax on the sale or purchaser of the goods" includes 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 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.  The
definition of "goods" in Clause 12 is inclusive. It includes all  materials,
commodities and articles. The expression,  'goods'  has  a  broader  meaning
than merchandise. Chattels or movables  are  goods  within  the  meaning  of
Clause 12. Sub-clause (b) refers to transfer of property in  goods  (whether
as goods or in some other  form)  involved  in  the  execution  of  a  works
contract. The expression "in some other form" in the bracket  is  of  utmost
significance as by this expression the ordinary understanding  of  the  term
'goods' has been enlarged by bringing within its fold goods in a form  other
than goods. Goods in some other  form  would  thus  mean  goods  which  have
ceased to be chattels or movables or  merchandise  and  become  attached  or
embedded to earth. In other words, goods which have by incorporation  become
part of immovable property are deemed as goods. The definition  of  'tax  on
the sale or purchase of goods' includes a tax on the  transfer  or  property
in the goods as goods or  which  have  lost  its  form  as  goods  and  have
acquired some other form involved in the execution of a works contract.

61. Viewed thus, a transfer of property in  goods  under  Clause  29A(b)  of
Article 366 is deemed to be a sale of the goods involved  in  the  execution
of a works contract by the person making the transfer and  the  purchase  of
those goods by the person to whom such transfer is made.

62. The States have now been conferred with the  power  to  tax  indivisible
contracts of works. This has been done by enlarging the  scope  of  "tax  on
sale  or  purchase  of  goods"  wherever  it  occurs  in  the  Constitution.
Accordingly, the expression "tax on the sale or purchase of goods" in  Entry
54 of List II of Seventh Schedule when read with the definition Clause  29A,
includes a tax on the transfer of property in goods whether as goods  or  in
the form other than goods involved in the execution of works  contract.  The
taxable event is deemed sale.

63. Gannon Dunkerley-I (supra) and  few  other  decisions  following  Gannon
Dunkerley-I (supra) wherein  the  expression  "sale"  was  given  restricted
meaning by adopting the definition of the word "sale" contained in the  Sale
of Goods Act has been undone by the Forty-sixth Constitutional Amendment  so
as to include works contract. The meaning of Sub-clause (b)  of  Clause  29A
of Article 366 of the Constitution also stands settled by  the  Constitution
Bench of this Court in Builders' Association (supra). As a result of  Clause
29A of Article 366, tax on the sale or purchase of goods may include  a  tax
on the transfer in goods as goods or in a form other than goods involved  in
the execution of the works contract. It is open to the States to divide  the
works contract into two separate contracts by legal  fiction:  (i)  contract
for sale of goods involved in the works contract  and  (ii)  for  supply  of
labour  and  service.  By  the  Forty-sixth  Amendment,  States  have   been
empowered to bifurcate the contract and to levy sales tax on  the  value  of
the material in the execution of the works contract."

13)   Notwithstanding some clear and pertinent observations made in  by  the
Constitution Bench in  Builders  Association's  case,  while  upholding  the
Constitutional validity of 46th Amendment, there was some ambiguity  in  the
judicial thought on one particular aspect which was also one  of  the  basis
of judgment in Gannon Dunkerley's case.  In  Gannon  Dunkerley's  case,  the
Constitution Bench had laid down "dominant intention test" to  find  out  as
to whether a particular contract involved transfer  of  property  in  goods.
The Court was of the opinion that if the dominant intention  of  a  contract
was not to transfer the property in goods, but it  was  Works  Contract,  or
for that matter, a contract in the nature of rendering of services, even  if
a part of it related to the transfer of goods, that would be immaterial  and
no sales tax on the said part could be levied, going  by  the  principle  of
dominant intention behind such a contract, which was in the nature of  Works
Contract in the contract relating to construction of buildings.

14)   As pointed out above, in Gannon Drunkerley's  case,   the  Court  also
held  that  such  a  contract  was  indivisible.   No  doubt,   insofar   as
indivisibility facet of the contract is concerned, the same  was  done  away
by 46th Constitutional Amendment.  However, in subsequent cases,  the  Court
grappled with the issue as to whether the principle  of  dominant  intention
still prevailed.  This very aspect came up for discussion before  two  Judge
Bench of this Court in Rainbow Colour Lab's case.  The Court held  the  view
that the division of contract after 46th Amendment 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.  This aspect is  highlighted  by  the  said
Bench in the following manner:
"10.  Since this was a judgment rendered prior to the coming into  force  of
the 46th Constitutional Amendment, we will  have  to  consider  whether  the
said Amendment has brought about  any  change  so  as  to  doubt  the  legal
position enunciated in  the  above  case.  It  is  true  that  by  the  46th
Constitutional Amendment by incorporating Clause 29A(b) in Article 366,  the
definition of the words "sale" and "works contract" have been enlarged.  The
State of Madhya Pradesh has also brought about a consequent  change  in  the
definition of the word 'sale' in Section of its Sales Tax Act but it  is  to
be noticed that in the said State Act the expression  'works  contract'  has
not been specifically defined.

11.  Prior to the Amendment of Article 366, in view of the judgment of  this
Court In State of Madras v Gannon Dunkerley and Co.,  the  State  could  not
levy sales-tax on sale of goods involved in a work's  contract  because  the
contract was indivisible. All that  has  happened  In  law  after  the  46th
Amendment and the judgment of this Court in Builders case  (supra)  is  that
it is now open to the States to divide the works contract into two  separate
contracts by a legal fiction (i) contract for sale of goods involved in  the
said works contract  and  (it)  for  supply  of  labour  and  service.  This
division of contract under the amended law can be made  only  if  the  works
contract involved a dominant intention to transfer  the  property  in  goods
and not in contracts where the  transfer  in  property  takes  place  as  an
incident of contract of service. The Amendment, referred to above,  has  not
empowered  the  State  to  indulge  in  microscopic  division  of  contracts
involving the value of materials used incidentally in such  contracts.  What
is pertinent to ascertain in  this  connection  is  what  was  the  dominant
intention of the contract. Every contract,  be  it  a  service  contract  or
otherwise, may involve the use of some material or the  other  in  execution
of the said contract. State is not empowered by the amended  law  to  impose
sales-tax on such incidental materials  used  in  such  contracts.  This  is
clear from the judgment of this  Court  in  Hindustan  Aeronautics  Ltd.  v.
State of Karnataka [1984]2SCR248, where it was held thus:

...Mere passing of property in an article or commodity during the course  of
performance of the transaction in question does not render  the  transaction
to be transaction of sale. Even in a contract purely of work or service,  it
is possible that articles may have to be used by the  person  executing  the
work, and property in such articles or  materials  may  pass  to  the  other
party. That would not necessarily convert the contract into one of  sale  of
those materials. In every case, the Court would have to find  out  what  was
the primary object of the transaction  and  the  intention  of  the  parties
while entering into it...."

15)   While considering the validity of Entry 25 in Schedule VI of  the  Act
and holding it to be unconstitutional, as beyond the  powers  of  the  State
Legislature, the High Court of Karnataka  in  Keshoram's  case  examined  in
detail the business which was carried out by  the  petitioner  in  the  said
case and the process that  was  involved  in  processing  and  supplying  of
photographs,  photoframes   or   photonegatives.    By   that   time,   46th
Constitutional Amendment had already been  effected  which  was  also  taken
note of by the High Court.  However, the High Court took the view  that  the
main object of the work undertaken by the petitioner in that  case  was  not
the transfer of a chattle as a chattle and, in fact, it was  a  contract  of
work and labour and there was no sale of goods involved. It  is  clear  from
the following discussion in the said judgment:
"30. In words and phrases the word "photography" is defined as under :

"Photography" is the science which relates to action of light  on  sensitive
bodies in production of pictures, fixation of images and the like.

31. Photography is a process of  an  art  of  producing  visible  images  on
sensitive bodies by action  of  light  or  other  form  of  radiant  energy.
Duration of action of light and  also  use  of  the  chemical  is  highly  a
technical  expertise  therefore  taking  into  consideration   the   various
decisions referred to above it could  be  considered  that  it  is  a  works
contract where property which is transferred in paper is only incidental  to
such contract. In strict sense, it is a service where  the  main  object  is
not transfer of property in goods. The good photograph as  observed  by  the
apex Court is a thing of beauty and revives  nostalgic  memories.  It  is  a
work of art. In B.C. Kame's case [1977] 2 SCR 435 it has already  been  held
that there is no sale involved and in spite of the fact that it is  a  works
contract it could not be subjected to  tax  because  the  intention  of  the
parties is not to  transfer  the  goods  in  the  execution  of  said  works
contract. It is only ancillary  and  incidental  to  service  contract.  The
photographs are not marketable or saleable commodity and as such no tax  can
be levied. Entry 25 of the Sixth Schedule to the Karnataka  Sales  Tax  Act,
1957, therefore is beyond the scope of Article 466 of  the  Constitution  of

Writ appeals are accordingly allowed."

16)   It is manifest from the above that the rationale behind  the  judgment
was to look into the main object of the work undertaken by the assessee  and
concluding that since it was essentially a Works Contract  and  transfer  of
photopaper upon which the positive prints were taken were simply  incidental
and ancilliary to the main transactions, that was in the nature  of  service
contract, and, therefore, Entry 25 was beyond the scope of  Article  366  of
the Constitution of India.  Apparently,  the  High  Court  applied  dominant
intention test while holding Entry 25 as  unconstitutional.   By  the  time,
Special Leave Petition against  this  judgment  came  up  for  consideration
before this Court on 20.04.2000, the judgment in the case of Rainbow  Colour
Lab's case had just been rendered observing  that  dominant  intention  test
was still valid notwithstanding insertion of clause 29-A in Article  366  of
the Constitution by  46th  Amendment.   Following  this  judgment,  SLP  was

17)   Within one year of the said judgment, this very  issue  again  cropped
up for discussion and decision before a three Judge Bench in ACC Ltd.  case.
 The issue arose under the Customs Act,  1962  viz.  whether  the  drawings,
designs etc. relating to  machinery  or  industrial  technology  were  goods
which were leviable to duty of customs on their  transaction  value  at  the
time of their report.  However, since the issue related to meaning that  has
to be given  to  the  expression  "goods",  the  case  law  on  this  aspect
including Gannon Dunkerley & Kame's case were  specifically  taken  note  of
and discussed.  The Court also noticed the effect of 46th Amendment  and  in
the process commented upon the judgment in the Rainbow  Colour  Lab's  case.
The Court specifically remarked that Gannon  Dunkerley  &  Kame's  judgments
were of pre 46th Amendment  era  which  had  no  relevance  after  the  said
Constitutional  amendment.   It  can  be  discerned   from   the   following
discussion contained therein:
"21. All the aforesaid decisions related to the period prior to  the  Forty-
sixth Amendment of the Constitution when Article 366(29A) was  inserted.  At
that time in the case of a works contract it was held that  the  same  could
not be split and State Legislature had no legislative right to seek to  levy
sales tax on a transaction which  was  not  a  sale  simpliciter  of  goods.
Rainbow Colour Lab & Anr. Vs. State of M.P. and Others,  (2000)  2  SCC  385
was, however, a case relating to the definition of the word  "sale"  in  the
M.P. General Sales Tax Act, 1958  after  its  amendment  consequent  to  the
insertion of Article 366(29A).  The  question  there  was  whether  the  job
rendered by a photographer in taking photographs,  developing  and  printing
films would amount to works contract for the purpose of levy of  sales  tax.
This Court held that the work done by the photographer was  only  a  service
contract and there was no element  of  sale  involved.  After  referring  to
earlier decisions of this Court, it was observed at page 391 as follows:

"15. Thus, it is clear that unless there is  sale  and  purchase  of  goods,
either in fact or deemed, and which  sale  is  primarily  intended  and  not
incidental to the contract, the State cannot impose sales  tax  on  a  works
contract simpliciter in the  guise  of  the  expanded  definition  found  in
Article 366(29A)(b) read with Section 2(n) of the State Act. On facts as  we
have noticed that the work done by the photographer which as  held  by  this
Court in Kame case  is  only  in  the  nature  of  a  service  contract  not
involving any sale of goods, we are of the opinion that the stand  taken  by
the respondent State cannot be sustained."

22. Even though in our opinion the decisions relating to levy of  sales  tax
would have, for reasons to which we shall presently mention, no  application
to the case of levy of customs duty, the  decision  in  Rainbow  Colour  Lab
case  (supra)  requires  consideration.  As  a  result  of  the  Forty-sixth
Amendment, sub-article 29A of Article 366 was inserted as a  result  whereof
tax on the sale or purchase of goods was to include 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. Taking note of this amendment this  Court
in Rainbow Colour Lab at page 388-389 observed as follows:

"11. 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.  The  amendment,  referred  to
above, has not empowered the State to indulge in a microscopic  division  of
contracts involving  the  value  of  materials  used  incidentally  in  such
contracts. What is pertinent to ascertain in this  connection  is  what  was
the dominant intention of the contract. Every  contract,  be  it  a  service
contract or otherwise, may involve the use of some material or the other  in
execution of the said contract. The State is not empowered  by  the  amended
law  to  impose  sales  tax  on  such  incidental  materials  used  in  such

23. In arriving at the  aforesaid  conclusion  the  Court  referred  to  the
decision of this Court in Hindustan Aeronautics Ltd. vs. State of  Karnataka
(1984) a SCC 706 and Everest Copier (supra). But both  these  cases  related
to pre-Forty-sixth Amendment era where in a works contract the State had  no
jurisdiction to bifurcate the contract and impose sales tax on the  transfer
of property in goods involved in the execution  of  a  works  contract.  The
Forty-sixth Amendment was made precisely with a view to  empower  the  State
to bifurcate the contract and  to  levy  sales  tax  on  the  value  of  the
material involved in the execution of the  works  contract,  notwithstanding
that the value may represent a small percentage of the amount paid  for  the
execution of the works contract. Even  if  the  dominant  intention  of  the
contract is the rendering of  a  service,  which  will  amount  to  a  works
contract, after the Forty-sixth Amendment the State would now  be  empowered
to levy sales tax on the material used  in  such  contract.  The  conclusion
arrived at in Rainbow Colour Lab case, in our opinion, runs counter  to  the
express  provision  contained  in  Article  366  (29A)  as   also   of   the
Constitution Bench decision of this Court in Builders' Association of  India
and Others vs. Union of India  and  Others  (1989)  2  SCC  645."  [emphasis

18)   It is amply clear from the above and hardly needs  clarification  that
the Court was of the firm view that two Judges  Bench  judgment  in  Rainbow
Colour Lab's case did not lay down the correct law as  it  referred  to  pre
46th Amendment judgments in arriving  at  its  conclusions  which  had  lost
their validity.  The Court  also  specifically  commented  that  after  46th
Amendment, State is empowered to levy sales tax on the  material  used  even
in those contracts where "the dominant intention  of  the  contract  is  the
rendering of a service, which will amount to a Works Contract".

19)   In view of the above, the argument of the  respondent  assessees  that
ACC Ltd. case did not over-rule Rainbow Colour  Lab's  case  is,  therefore,
clearly misconceived.  In fact, we are not saying so for the first  time  as
a three member Bench of this Court in M/s  Larsen  and  Toubro  has  already
stated that ACC Ltd. had  expressly  over-ruled  Rainbow  Colour  Lab  while
holding that dominant intention test was no  longer  good  test  after  46th
Constitutional Amendment.  We may point out that  learned  counsel  for  the
respondent assessees took courage to advance such an argument emboldened  by
certain observations made by two member Bench in the case of  C.K.  Jidheesh
v. Union of India[8],  wherein the Court has remarked that the  observations
in ACC Ltd. were merely obiter.  In Jidheesh, however,  the  Court  did  not
notice that this very argument had been rejected earlier in  Bharat  Sanchar
Nigam Ltd. v. Union of India[9].  Following discussion in Bharat Sanchar  is
amply demonstrative of the same:
"46.  This conclusion was doubted in Associated  Cement  Companies  Ltd.  v.
Commissioner of Customs, (2001) 4 SCC 593 saying:
"The conclusion arrived at in Rainbow Colour Lab case (2000) 2 SCC  385,  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 Assn. of India v. Union of India - (1989) 2 SCC 645.

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, 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"

20)   In M/s Larsen and Toubro, the Court,  after  extensive  and  elaborate
discussion, once again  specifically  negated  the  argument  predicated  on
dominant intention test having regard to the statement of law delineated  in
ACC Ltd. and Bharat Sanchar Nigam Ltd.  cases.   The  reading  of  following
passages from the said judgment is indicative of providing  complete  answer
to the arguments of the respondent assessees herein:
"64.  Whether  contract  involved  a  dominant  intention  to  transfer  the
property in goods, in our view, is not at all material. It is not  necessary
to ascertain what is the dominant intention of the  contract.  Even  if  the
dominant intention of the contract is not to transfer the property in  goods
and rather it is the rendering of service or  the  ultimate  transaction  is
transfer of immovable property, then also it is open to the States  to  levy
sales tax on the materials  used  in  such  contract  if  it  otherwise  has
elements of works contract. The view taken by  a  two-Judge  Bench  of  this
Court in Rainbow Colour Lab (supra) that the division of the contract  after
Forty-sixth Amendment can be made only if  the  works  contract  involved  a
dominant intention to transfer the property in goods and  not  in  contracts
where the transfer of property takes place as an  incident  of  contract  of
service is  no  longer  good  law,  Rainbow  Colour  Lab  (supra)  has  been
expressly overruled by a three-Judge Bench in Associated Cement.

65. Although, in Bharat Sanchar, the Court  was  concerned  with  Sub-clause
(d) of Clause 29A of Article 366 but while dealing with the question  as  to
whether the nature of transaction by  which  mobile  phone  connections  are
enjoyed is a sale or service or both, the  three-Judge  Bench  did  consider
the scope of definition in Clause 29A of Article366.  With reference to Sub-
clause  (b)  it  said:  "Sub-clause  (b)  covers  cases  relating  to  works
contract. This was the particular fact situation which the Court  was  faced
with in Gannon Dunkerley-I and which the Court had held was not a sale.  The
effect in law of a transfer of property in goods involved in  the  execution
of the works contract was by this amendment deemed to be  a  sale.  To  that
extent the decision in Gannon Dunkerley-I was directly  overcome".  It  then
went on to say that all the Sub-clauses of Article 366 (29A) serve to  bring
transactions where essential ingredients of a 'sale' as defined in the  Sale
of Goods Act, 1930 are absent, within the ambit of purchase or sale for  the
purposes of levy of sales tax.

66. It then clarified  that  Gannon  Dunkerley-I  survived  the  Forty-sixth
Constitutional  Amendment  in  two  respects.  First,  with  regard  to  the
definition of "sale" for the purposes of the  Constitution  in  general  and
for the purposes of Entry 54 of List II in particular except to  the  extent
that the clauses in  Article  366(29A)  operate  and  second,  the  dominant
nature test would be confined to a  composite  transaction  not  covered  by
Article 366(29A). In other words, in Bharat Sanchar, this  Court  reiterated
what was stated by this Court in  Associated  Cement  that  dominant  nature
test has no application to a composite transaction covered  by  the  clauses
of Article 366(29A). Leaving no ambiguity, it said  that  after  the  Forty-
sixth Amendment, the sale element of those contracts which  are  covered  by
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.

67. In view of  the  statement  of  law  in  Associated  Cement  and  Bharat
Sanchar, the argument advanced on behalf of  the  Appellants  that  dominant
nature test must be applied to find out the true nature  of  transaction  as
to whether there is a contract for sale of goods or the contract of  service
in a composite transaction covered by the clauses of  Article  366(29A)  has
no merit and the same is rejected.

68. In Gannon Dunkerley-II, this Court, inter  alia,  established  the  five
following propositions:  (i)  as  a  result  of  Forty-sixth  Amendment  the
contract which was single and  indivisible  has  been  altered  by  a  legal
fiction into a contract which is divisible into one for sale  of  goods  and
the other for supply of labour and service and as a result of such  contract
which was single and indivisible has been brought on  par  with  a  contract
containing two separate agreements; (ii) if the legal fiction introduced  by
Article 366(29A)(b) is carried to its logical end, it follows that  even  in
a single and indivisible works contract there is a deemed sale of the  goods
which are involved in the execution of a works contract. Such a deemed  sale
has all the incidents of the sale of goods involved in the  execution  of  a
works contract where the contract is divisible into one for  sale  of  goods
and the other for supply of labour and  services;  (iii)  in  view  of  Sub-
clause (b) of  Clause  29A  of  Article  366,  the  State  legislatures  are
competent to impose tax on the transfer of property  in  goods  involved  in
the execution of works contract. Under  Article  286(3)(b),  Parliament  has
been empowered to make a  law  specifying  restrictions  and  conditions  in
regard to the system of levy, rates or incidents of such tax. This does  not
mean that the legislative power of the State cannot be  exercised  till  the
enactment of the law under Article 286(3)(b)  by  the  Parliament.  It  only
means that in the event of law having been made by Parliament under  Article
286(3)(b), the exercise of the legislative power of the  State  under  Entry
54 in List II to impose tax of the nature referred to  in  Sub-clauses  (b),
(c) and (d) of Clause (29A) of Article 366 would be subject to  restrictions
and conditions in regard to the system of levy, rates  and  other  incidents
of tax contained in the said law; (iv) while enacting law imposing a tax  on
sale or purchase of goods under  Entry  54  of  the  State  List  read  with
Article 366(29A)(b), it is permissible for the State legislature to  make  a
law imposing tax on such a deemed sale  which  constitutes  a  sale  in  the
course of the inter-state trade or commerce under Section 3 of  the  Central
Sales Tax Act or outside under Section 4 of the Central  Sales  Tax  Act  or
sale in the course of import or export under Section 5 of the Central  Sales
Tax Act; and (v) measure  for  the  levy  of  tax  contemplated  by  Article
366(29A)(b) is the value of the goods involved in the execution of  a  works
contract. Though the tax is imposed on the transfer  of  property  in  goods
involved in the execution of a works contract, the measure for levy of  such
imposition is the value of the goods involved in the execution  of  a  works
contract. Since, the taxable event is the  transfer  of  property  in  goods
involved in the execution of a works  contract  and  the  said  transfer  of
property in such goods takes place when the goods are  incorporated  in  the
works, the value of the goods which can constitute the measure for the  levy
of the tax has to be the value of the goods at the time of incorporation  of
the goods in works and not the cost of  acquisition  of  the  goods  by  the

69. In Gannon Dunkerley-II, Sub-section (3) of Section 5  of  the  Rajasthan
Sales Tax Act and Rule 29(2)(1)  of  the  Rajasthan  Sales  Tax  Rules  were
declared as unconstitutional and void. It was so declared because the  Court
found that Section 5(3) transgressed the limits  of  the  legislative  power
conferred on the State  legislature  under  Entry  54  of  the  State  List.
However,  insofar  as  legal  position  after   Forty-sixth   Amendment   is
concerned, Gannon Dunkerley-II holds unambiguously that the States have  now
legislative power to impose tax on transfer of property in  goods  as  goods
or in some other form in the execution of works contract.

70. The Forty-sixth Amendment leaves no manner  of  doubt  that  the  States
have power to bifurcate the contract and levy sales tax on the value of  the
material involved in the execution of the works  contract.  The  States  are
now empowered to levy sales tax on the material used in  such  contract.  In
other words, Clause 29A of Article 366 empowers the States to  levy  tax  on
the deemed sale."

21)   To sum up, it follows from the reading of the aforesaid judgment  that
after insertion of clause 29-A in Article 366, the Works Contract which  was
indivisible one by legal fiction, altered into a contract, is  permitted  to
be bifurcated into two: one for "sale of goods" and  other  for  "services",
thereby making goods component  of  the  contract  exigible  to  sales  tax.
Further, while going into this exercise of divisibility, 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.

22)    Keeping  in  mind  the  aforesaid  principle  of  law,  the   obvious
conclusion would be that Entry 25 of Schedule VI  to  the  Act  which  makes
that part of processing and  supplying  of  photographs,  photo  prints  and
photo negatives, which have "goods"  component  exigible  to  sales  tax  is
constitutionally valid.  Mr. Patil and Mr. Salman Khurshid,  learned  senior
counsel who argued for these assessees/respondents, made  vehement  plea  to
the effect that  the  processing  of  photographs  etc.  was  essentially  a
service, wherein the cost of paper,  chemical  or  other  material  used  in
processing and developing photographs, photo  prints  etc.  was  negligible.
This argument, however, is founded on dominant intention  theory  which  has
been repeatedly rejected by this Court as no more  valid  in  view  of  46th
Amendment to the Constitution.

23)   It was also argued that photograph service can be  exigible  to  sales
tax only when the  same  is  classifiable  as  Works  Contract.   For  being
classified as Works Contract the transaction under consideration has  to  be
a  composite  transaction  involving  both  goods  and   services.    If   a
transaction involves only service i.e. work and labour then the same  cannot
be  treated  as  Works  Contract.   It  was  contended  that  processing  of
photography was a contract for  service  simplicitor  with  no  elements  of
goods at all and, therefore, 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
dominant intention of the contract was to be seen and further  that  such  a
contract was treated as not divisible.  It is for this reason  in  BSNL  and
M/s Larsen and Toubro  cases,  this  Court  specifically  pointed  out  that
Kame's case would not provide an answer  to  the  issue  at  hand.   On  the
contrary, legal position stands settled by the Constitution  Bench  of  this
Court in Kone Elevator India Pvt. Ltd. v. State of Tamil Nadu and  Ors.[10].
 Following observations in that case are apt for this purpose:
"On the basis of the aforesaid elucidation,  it  has  been  deduced  that  a
transfer of property in goods  under  Clause  (29A)(b)  of  Article  366  is
deemed to be a sale of goods involved in the execution of a  Works  Contract
by the person making the transfer and the purchase of  those  goods  by  the
person to whom such transfer is made.  One  thing  is  significant  to  note
that in Larsen and Toubro  (supra),  it  has  been  stated  that  after  the
constitutional amendment, the  narrow  meaning  given  to  the  term  "works
contract" in Gannon Dunkerley-I (supra) no longer survives at  present.   It
has been observed in the said case that even if in a contract,  besides  the
obligations of supply of goods and materials and performance of  labour  and
services, some additional obligations are imposed, such  contract  does  not
cease to be works contract, for the additional obligations in  the  contract
would not alter the nature of the contract so long as the contract  provides
for a contract for works and satisfies  the  primary  description  of  works
contract.  It has  been  further  held  that  once  the  characteristics  or
elements of works contract are satisfied in a  contract,  then  irrespective
of additional obligations, such  contract  would  be  covered  by  the  term
"works contract" because nothing in  Article  366(29A)(b)  limits  the  term
"works contract" to contract for labour and service only."

24)    Another  attack  on  the  insertion  of   Entry   25   pertained   to
retrospectivity given to this provision.  It was sought to  be  argued  that
amendment to the Act was made by Karnataka State Laws Act, 2004  which  came
into force w.e.f. 29.01.2004 and insertion of Entry  25  with  retrospective
effect i.e. w.e.f. 01.07.1989 was not permissible.   To  put  it  otherwise,
the argument was that even if Entry 25 is held to be  valid,  it  should  be
made prospective i.e. w.e.f. 29.01.2004.  According to  the  learned  senior
counsel, Entry 25 with retrospective effect is onerous  on  the  respondents
and if the respondents are directed to pay these  amounts,  they  will  face
severe financial crisis.  Such an onerous provision,  in  their  submission,
would violate the fundamental rights of  the  respondents  guaranteed  under
Article 19(1)(g) which guarantees freedom to carry  on  trade,  business  or

25)   We are afraid, even this argument does not cut  any  ice.   The  first
thing in this regard which is to be kept  in  mind  is  that  Entry  25  was
inserted for the first time by  amendment  of  the  Act  w.e.f.  01.07.1989.
This amendment was post 46th Constitutional Amendment.   However,  the  High
Court of Karnataka declared the said Entry to be  unconstitutional  and  the
SLP was also dismissed.  Undoubtedly, it was  because  of  the  judgment  in
Rainbow Colour Lab, which judgment was declared as not a  good  law  in  ACC
Ltd. (which position is repeated in BSNL as well as M/s  Larsen  and  Toubro
cases).  Thus, the very basis on which Entry 25 of Schedule VI was  declared
as  unconstitutional,  has  been   found   to   be   erroneous.    In   such
circumstances, the legislature will be justified in enacting  the  law  from
the date when such a law was passed originally and that date  is  01.07.1989
in the instant case.  We have to keep in mind the fact that on the basis  of
this  amendment,  there  have  been  assessments  made  by   the   assessing
authorities.  This was admitted by the learned counsel for  the  respondents
at bar at the time of the arguments.

26)   Position stated  above  has  to  be  read  in  the  context  that  the
legislature is, otherwise, competent to pass amendments of this nature  from
retrospective effect.  The principle that  such  a  power  exists  with  the
legislature has been reiterated time and again  by  this  Court.  [See:  (1)
National Agricultural Co-operative Marketing Federation of  India  Ltd.  and
Anr. v. Union of India[11], (2) Shri Prithvi Cotton Mills Ltd. and  Anr.  v.
Broach Borough Municipality and Ors.[12],  (3)  Indian  Aluminium  Co.  etc.
etc. v. State of Kerala and others,  (4)  Hiralal  Rattanlal  etc.  etc.  v.
State of U.P. and Anr. etc. etc.[13] and (5) Union of India (UOI)  and  Anr.
v. Raghubir Singh (Dead) by Lrs. Etc.[14]].  It is not necessary to  discuss
all these judments and our purpose would be served  by  extensively  quoting
from the case in National Agricultural Co-operative Marketing Federation  of
India Ltd.:
"13. That the Legislature can enact laws retrospectively is not in  dispute.
Nor is it disputed that the amendment is intended to  be  retrospective  and
that the amendment would at  least  prospectively  exclude  all  cooperative
societies  except  the  primarily  society  from  the  benefit  of   Section
80P(2)(a)(iii) of the Income Tax  Act.  According  to  the  appellants,  the
amendment cannot be  considered  to  have  retrospective  operation  in  the
absence of a validating provision nor could Parliament reverse the  judgment
of this Court by such statutory overruling. If the  amendment  is  construed
as having retrospective operation, then, it is submitted, the  amendment  is
unconstitutional because it seeks to impose a tax on apex societies for  the
last 31 years, it was contended that by denying the deduction  to  the  apex
societies, the farmers and the primary societies would be  vitally  affected
as it would be reflected in the returns obtained  by  them.  This  would  be
contrary to the legislative intent which was to benefit all societies  which
market agricultural produce.

                         xx          xx          xx

15. The Legislative power either to introduce enactments for the first  time
or to amend the enacted law with retrospective effect, is not  only  subject
to the question of competence but is  also  subject  to  several  judicially
recognized limitations with some of which we are at present  concerned.  The
first is the requirement that the  words  used  must  expressly  provide  or
clearly  imply  retrospective  operation  S.S.  Gadgil   v.   Lal   &   Co.,
[1964]53ITR231(SC) .  J.C.  Jani,  Income  Tax  Officer,  Circle-IV.  Ward-G
Ahmedabad v. Induprasad Devshanker Bhatt,   [1969]  72  ITR  595  (SC).  The
second is that the retrospectively must be reasonable and not  excessive  or
harsh, otherwise it runs the risk of being struck down  as  unconstitutional
Rai Ramkrishna and Ors. v. The State of Bihar, [1963] 50 ITR 171 (SC),  915;
Jawaharmal v. State of  Rajasthan  and  Ors.,  [1966]1SCR890,  905,  Supreme
Court Employees Welfare Association v. Union of India and Anr., (1993)  ILLJ
1094 SC. The third is  apposite  where  the  legislation  is  introduced  to
overcome a judicial decision. Here the power cannot be used to  subvert  the
decision without removing the statutory basis of the decision  Shri  Prithvi
Cotton   Mills   Ltd.   v.   Broach   Borough    Municipality    and    Ors.
[1971]79ITR136(SC), Lalitaben v. Gordhanbhai and Anr.,  AIR  1987  SC  1315;
Janapada Sabha Chhindwara v. The Central Provinces Syndicate  Ltd.,   [1970]
3 SCR 745 : Indian Aluminium Co. and Ors.  v.  State  of  Kerala  and  Ors.,
[1996]2SCR23 .

                         xx          xx          xx

16. There is no fixed formula for the expression of  legislative  intent  to
give retrospectivity to an enactment. "Sometimes this is done  by  providing
for jurisdiction where jurisdiction had no t been properly invested  before.
Sometimes this is done by re-enacting  retrospectively  a  valid  and  legal
taxing provision and then by fiction making the  tax  already  collected  to
stand under the re-enacted law. Sometimes  the  Legislature  gives  its  own
meaning and interpretation of the law under which tax was collected  and  by
legislative fiat makes the new meaning binding upon courts. The  Legislature
may follow any one method or all of  them,  Shri  Prithvi  Cotton  Mills  v.
Broach Borough Municipality,  [1971] 79ITR 136 (SC) .

17. By validating clause coupled with  a  substantive  statutory  change  is
therefore only one of the methods to leave actions unsustainable  under  the
unamended statute, undisturbed. Consequently, he  absence  of  a  validating
clause would not  by  itself  affect  the  retrospective  operation  of  the
statutory provision, if such retrospectivity is otherwise apparent.

                         xx          xx          xx

19. In making this change, the Legislature does not  "statutorily  overrule"
this Courts decision in Kerala Cooperative Marketing Federation Ltd.  Supra.
as has been contended by the appellant. Overruling assumes that  a  contrary
decision is given on the same facts or law. Where the law, as in this  case,
has been changed and is no longer the same, there  is  no  question  of  the
Legislature overruling this Court.

20. As has been held in Ujagar Prints v. Union of India, [1989]179 ITR  317a

"A competent legislature can always validate a law which has  been  declared
by courts to be invalid, provided the infirmities and vitiating  in  factors
noticed in the declaratory judgment are removed or cured. Such a  validating
law can also be made retrospective. If in the light of such  validating  and
curative exercise made by the legislature - granting legislative  competence
- the earlier judgment becomes irrelevant and unenforceable that  cannot  be
called an impermissible legislative overruling  of  the  judicial  decision.
All that the legislature does is to usher in a valid law with  retrospective
effect in the right of which the earlier judgment becomes irrelevant".

                         xx          xx          xx

22. Once the circumstances are altered by  Legislation,  it  may  neutralise
the effect of the earlier decision of the Court  which  becomes  ineffective
after the change of the law.

23. Similarly in Krishnamurthi & Co. v. State of Madras and Anr.,  [1973]  2
SCR 54 the Madras General Sales Tax 1959 Act (as it  stood)  provided  under
Entry 47 for tax on "lubricating  oils,  all  kinds  of  mineral  oils  (not
otherwise provided for  in  this  Act)  quenching  oil  and  greases  w.e.f.
1.4.1964". The question was whether this  entry  covered  furnace  oil.  The
Madras High Court construed the phrase and came to the  conclusion  that  it
did not. The Legislature then enacted an Amendment Act  in  1967.  Entry  47
was amended -  so  as  to  expressly  provide  that  furnace  oil  would  be
subjected to tax. The  Act  was  made  effective  from  1964.  The  Act  was
challenged as being unreasonable since it retrospectively made  the  dealers
liable for sales tax which they had not passed on to others.  The  challenge
was negatived and it was said that

"The object of such an enactment is to remove  and  rectify  the  defect  in
phraseology or lacuna or other nature and also to validate the  proceedings,
including realisation of tax, which have taken place  in  pursuance  of  the
earlier enactment which has been found by the court to  be  vitiated  by  an
infirmity. Such an amending and validating Act in the very nature of  things
has a retrospective operation. Its aim is to effectuate and  carry  out  the
object for which the  earlier  principal  Act  had  been  enacted.  Such  an
amending and validating Act to make "small repairs" is  a  permissible  mode
of legislation and is frequently resorted to in fiscal enactments".

                         xx          xx          xx

28. The test of the length of time covered by  the  retrospective  operation
cannot by itself, necessarily be a decisive test. Rai  Ramkrishna  and  Ors.
v. The State of Bihar, [1963] 50 ITR 171 (SC) Account must be taken  of  the
surrounding facts  and  circumstances  relating  to  the  taxation  and  the
legislative background of the provision. Jawahamal v.  State  of  Rajasthan:
[1966]  1  SCR  890  To  recapitulate  the  legislative  background  of  the
particular  statutory  provision  in  question  before  us   -   the   first
authoritative interpretation of Section 80P(2)(a)(iii) was made in  1994  in
Assam Cooperatives Supra when it held that the word "of" must  be  construed
as "produced by". Therefore, the law as it  stood  from  1968  was,  by  the
decision, required to be  read  in  precisely  this  manner  and  presumably
assessments of Apex Societies were commended and concluded  on  this  basis.
The  situation  continued  till  1998  till  this   Court   reversed   Assam
Cooperatives in Kerala Cooperative Marketing Federation Ltd.  Supra.  Before
the assessment year was over, by  the  1998  Amendment  the  word  "of"  was
substituted with "given by". In real terms therefore there  was  hardly  any
retrospectivity, but a continuation of the status quo ante. The  degree  and
extent of the unforeseen and unforeseeable  financial  burden  was,  in  the
circumstances,  minimal  and  cannot  be  said   to   be   unreasonable   or

27)   We would also like to refer to the case of Hiralal Ratanlal  v.  State
of U.P.[15], wherein it was observed "the source of  the  legislative  power
to levy sales or purchase tax on goods is Entry 54 of the  List  II  of  the
Constitution.   It  is  well  settled   that   subject   to   Constitutional
restrictions  a  power  to  legislate  includes   a   power   to   legislate
prospectively as well as retrospectively.  In this regard legislative  power
to  impose  tax   also   includes   within   itself   the   power   to   tax

28)   We would like to point out at this stage that the High  Court  in  the
impugned judgment has not dealt with the mater in its  correct  perspective.
The reason given by the High Court in invalidating Entry  25  is  that  this
provision was already held  unconstitutional  by  the  said  High  Court  in
Keshoram's case against which the SLP was also  dismissed  and  in  view  of
that decision, it was not permissible for the legislature  to  re-enact  the
said Entry by applying a different legal principle.  According to  us,  this
was clearly an erroneous approach to deal with the issue  and  the  judgment
of the High Court is clearly unsustainable.  The High  Court  did  not  even
deal with various facets of the issue in their correct perspective,  in  the
light of subsequent judgments of  this  Court  with  specific  rulings  that
Rainbow Colour Lab is no longer a good law.

29)   The impugned judgment of the High Court is accordingly set aside,  the
present appeal is allowed and as a result thereof, the writ petitions  filed
by the respondents in the High Court are dismissed holding that Entry 25  of
Schedule VI of the Act is constitutionally valid.  There shall, however,  be
no order as to costs.

                                                                (H.L. DATTU)

                                                                (A.K. SIKRI)

                                                               (ARUN MISHRA)

JANUARY 30,  2015.


      121 (2001) STC 175
[2]   (2000) 2 SCC 385
[3]   (2001) 4 SCC 593
[4]   ILR 2003 Kar 4883
[5]   (1993) 1 SCC 364
[6]   (1989) 2 SCC 645
[7]   (2014) 1 SCC 708
[8]   (2005) 13 SCC 37
[9]   (2006) 3 SCC 1
[10]  (2014) 7 SCC 1
[11]  (2003) 5 SCC 23
[12]  (1969) 2 SCC 283
[13]  (1973) 1 SCC 216
[14]  (1989) 2 SCC 754
[15]  (1973) 1 SCC 216