REPORTABLE
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
A.K. SIKRI, J.
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
involved.
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
stage.
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,
unconstitutional.
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
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;]"
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
India.
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
dismissed.
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
contracts.."
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
supplied]
18) It is amply clear from the above and hardly needs clarification that
the Court was of the firm view that two Judges Bench judgment in Rainbow
Colour Lab's case did not lay down the correct law 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
contractor.
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
profession.
25) We are afraid, even this argument does not cut any ice. The first
thing in this regard which is to be kept in mind is that Entry 25 was
inserted for the first time by amendment of the Act w.e.f. 01.07.1989.
This amendment was post 46th Constitutional Amendment. However, the High
Court of Karnataka declared the said Entry to be unconstitutional and the
SLP was also dismissed. Undoubtedly, it was because of the judgment in
Rainbow Colour Lab, which judgment was declared as not a good law in ACC
Ltd. (which position is repeated in BSNL as well as M/s Larsen and Toubro
cases). Thus, the very basis on which Entry 25 of Schedule VI was declared
as unconstitutional, has been found to be erroneous. In such
circumstances, the legislature will be justified in enacting the law from
the date when such a law was passed originally and that date is 01.07.1989
in the instant case. We have to keep in mind the fact that on the basis of
this amendment, there have been assessments made by the assessing
authorities. This was admitted by the learned counsel for the respondents
at bar at the time of the arguments.
26) 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
(SC).
"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
unconstitutional.
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
retrospectively."
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.
.............................................CJI
(H.L. DATTU)
.............................................J.
(A.K. SIKRI)
.............................................J.
(ARUN MISHRA)
NEW DELHI;
JANUARY 30, 2015.
-----------------------
[1]
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
