2025 (7) TMI 558 - AT - Service Tax

Exemption from service tax under N/N. 12/2003 dated 20.06.2003 - cost of materials consumed during the course of rendering the photography services is to be included for payment of service tax - HELD THAT - The issue is no more res integra in as much as the reliance placed on by the Revenue on the Larger Bench in the case of Agarwal Colour Advance Photo System Vs. CCE Bhopal 2020 (4) TMI 799 - MADHYA PRADESH HIGH COURT is no more good law as it stands set aside by the Hon ble High Court of Madhya Pradesh wherein it was held that value of photography service has to be determined in isolation of cost of goods such as photography paper consumables and chemicals with which image is printed negatives and other material which has goods component liable to sales tax. Following the ratio of the above decision the appeal is allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal question considered by the Tribunal was whether the cost of materials consumed during the rendering of photography services should be included in the value for payment of service tax, or whether the appellant was entitled to the benefit of exemption Notification No. 12/2003-ST dated 20.06.2003. Specifically, the issue revolved around the classification of photography services and the applicability of service tax vis-`a-vis sales tax on the goods component involved in such services.

2. ISSUE-WISE DETAILED ANALYSIS

Issue: Inclusion of cost of materials in value of photography services for service tax purposes versus applicability of sales tax on goods component

Relevant legal framework and precedents: The issue was analyzed in light of Section 65(78) of the Finance Act, 1994, which governs taxation of services, and Notification No. 12/2003-ST which exempts certain services from service tax. The constitutional provisions under Article 366(29A)(b), introduced by the 46th Amendment, were pivotal. This clause defines "tax on the sale or purchase of goods" to include tax on transfer of property in goods involved in execution of a works contract. The Madhya Pradesh VAT Act, 2002, and Section 2(h) of the Central Excise Act, 1944, which define "sale" and "purchase," were also relevant.

Precedents included the Larger Bench decision in Aggarwal Colour Advance Photo System Vs. CCE, Bhopal, which the Revenue relied upon, and the Supreme Court decision in C.K. Jidheesh Vs. Union of India. However, the Larger Bench decision was subsequently set aside by the Hon'ble High Court of Madhya Pradesh, which held that the value of photography services must be determined separately from the value of consumables and chemicals used in printing photographs, as these consumables constitute goods subject to sales tax.

Court's interpretation and reasoning: The Tribunal accepted the High Court of Madhya Pradesh's ruling that photography services involve both goods and services components and fall within the ambit of a works contract as per Article 366(29A)(b). The Court emphasized that the 46th Amendment to the Constitution removed the applicability of the dominant nature test for such contracts. Consequently, the goods component (photographic paper, consumables, chemicals, negatives) is liable to sales tax under Entry 54 of List II of Schedule II, while the service component is liable to service tax.

The Tribunal reasoned that since the goods component is separately taxable under sales tax, it cannot be included in the value of the photography service for service tax purposes. This interpretation aligns with the Supreme Court's decision in M/s Pro Lab's case, which upheld the constitutional validity of taxing the goods component separately in photography services.

Key evidence and findings: The appellant had availed exemption under Notification No. 12/2003-ST which was challenged by the Department. The Department's reliance on the Larger Bench decision was negated by the subsequent High Court ruling that overruled the Larger Bench. The Tribunal found that the appellant's claim for exemption was consistent with the latest authoritative judicial pronouncement.

Application of law to facts: Applying the High Court's ruling, the Tribunal held that the appellant was entitled to exclude the cost of photographic materials from the taxable value of photography services. Therefore, service tax was payable only on the service portion, not on the goods component.

Treatment of competing arguments: The Revenue argued based on the Larger Bench decision and earlier Commissioner (Appeals) order that the entire value should be subject to service tax. The appellant countered by relying on the High Court decision that overruled the Larger Bench and clarified the legal position. The Tribunal favored the appellant's interpretation, noting that the issue was no longer res integra and the High Court decision was binding and authoritative.

Conclusions: The Tribunal concluded that the appellant was eligible for the exemption under Notification No. 12/2003-ST for the service portion, and the cost of materials used was not includible in the value for service tax. The appeal was allowed accordingly.

3. SIGNIFICANT HOLDINGS

The Tribunal preserved the following crucial legal reasoning verbatim from the High Court of Madhya Pradesh:

"13. From the aforesaid discussion, it would emerge that the crux of the substantial question of law No.1 which has arisen for consideration is: "whether for the purposes of service tax the value of photography service can be determined separately from the value of certain consumables and chemicals which are used on the paper for printing the image and whether such printed photograph can be said to be a sale of goods in terms of Article 366(29A)(b) of the Constitution".

"19. In view of the law laid down by the Apex Court in M/s Pro. Lab's case (supra), it can be safely held that photography service, which has both the elements of goods and services is covered under works contract. Thus, in a works contract which involves transfer of property, the provisions as contained in Article 366(29A) of the Constitution are attracted. Therefore, in the light of sub-clause (b) of Clause (29A) of Article 366 of the Constitution, in execution of a works contract when there is transfer of property even in some other form than in goods, the tax on such sale or purchase of goods is leviable. In this view of the matter, after the 46th Amendment, there is no question of dominant nature test applying in photography service and the works contract, which is covered by Clause (29A) of Article 366 of the Constitution where the element of goods can be separated, such contracts can be subjected to sales tax by the States under Entry 54 of List II of Schedule II. Once that is so, value of photographic paper and consumables cannot be included in the value of photography service for the purposes of imposition of service tax. Thus, in the light of the judgment of the Apex Court in M/s Pro Lab (supra), wherein it is held that part of processing and supplying of photographs, photo prints and negatives, which have "goods" component exigible to sales tax is constitutionally valid, it is held that value of photography service has to be determined in isolation of cost of goods such as photography paper, consumables and chemicals with which image is printed, negatives and other material which has "goods" component liable to sales tax. Accordingly, the substantial question of law No.1 is answered in favour of the assessee and against the Revenue."

Core principles established include:

• Photography services constitute a works contract involving both goods and services components.
• Post 46th Amendment, the dominant nature test is not applicable where goods and services components can be separated.
• The goods component (photographic paper, consumables, chemicals) is liable to sales tax under State law.
• The value of goods cannot be included in the value of services for the purpose of service tax.
• Exemption Notification No. 12/2003-ST applies to the service component excluding the goods component.

Final determination: The appellant was entitled to exclude the cost of materials consumed from the value of photography services for service tax purposes and thus was eligible for the exemption under Notification No. 12/2003-ST. The appeal was allowed accordingly.