TMI Blog2015 (2) TMI 388X X X X Extracts X X X X X X X X Extracts X X X X ..... aterial. 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. 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. F ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ven 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. - The impugned judgment of the High Court is accordingly set aside - Decided in favour of Revenue. - CIVIL APPEAL NO. 1145 OF 2006 - - - Dated:- 30-1-2015 - H.L. DATTU, A.K. SIKRI AND ARUN MISHRA, JJ. JUDGMENT 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 provid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 judgmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 ((1993) 1 SCC 364). 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 Sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ((1989) 2 SCC 645). In this judgment, the Constitution ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 expressi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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. Rai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rely 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 ((2006) 3 SCC 1). 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 ne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... b-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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 interstate 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hid, 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 ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ineffecti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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.((1973) 1 SCC 216), 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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