Scribd
Upload
77 views4 pages

Tax Alert Pro Lab

The Supreme Court upheld the state government's right to levy sales tax on processing and supplying photographs. The court reversed previous high court rulings, finding the work contract can be split into goods and services for tax purposes. The ruling affirms the state legislature's power to tax the goods portion of such contracts.

Uploaded by

KRiti Chouhan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
77 views4 pages

Tax Alert Pro Lab

The Supreme Court upheld the state government's right to levy sales tax on processing and supplying photographs. The court reversed previous high court rulings, finding the work contract can be split into goods and services for tax purposes. The ruling affirms the state legislature's power to tax the goods portion of such contracts.

Uploaded by

KRiti Chouhan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 4

05 February 2015

2013mber 2012

EY Tax Alert
Supreme Court validates the State Governments right to levy
sales tax on processing and supplying of photographs

Executive summary
Tax Alerts cover
significant tax news,
developments and
changes in legislation
that affect Indian
businesses. They act
as technical summaries
to keep you on top of
the latest tax issues.
For more information,
please contact your EY
advisor.

This Tax Alert gives an update on the recent decision by a three judges bench
of the Honble Supreme Court (SC) in State of Karnataka Etc v. M/s Pro Lab &
Others Etc.* SC has held that Entry 25 of Schedule VI of the Karnataka Sales
Tax Act, 1957 which makes part of processing and supplying of photographs,
photo prints and photo negatives, having the goods component exigible to
sales tax, is constitutionally valid.
SC further held that after insertion of clause 29-A in Article 366, the Works
Contract which was indivisible by legal fiction is permitted to be bifurcated into
"sale of goods" and "services" and making the goods component of the
contract exigible to sales tax. SC has also upheld the restrospective power of
State to impose sales tax in the instant case.
The ruling is a significant as it reverses Karnataka High Court (HC) ruling and
also sets aside two prior HC rulings, which favoured the taxpayer and had held
such levy as unconstitutional.

* 2015-TIOL-08-SC-CT-LB

Background and facts

Issue in the instant case arose in the


context of Entry 25, Schedule VI of the
Karnataka Sales Tax Act, 1957.

The said entry pertains to imposition of


sales tax by the State Legislature on the
sale of goods under a works contract for
'processing and supplying photographs,
photo prints and photo negatives'.

Validity of the said entry was earlier


challenged vide a writ petition filed in
Keshoram1 case before the Karnataka
HC, wherein the HC declared Entry 25 as
unconstitutional.

Special leave petition (SLP) filed by


Karnataka State against this order was
dismissed by SC placing reliance on its
earlier Rainbow Colors Lab2 ruling.

It was observed in the Rainbow Colors


Lab decision that 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, to impose sales tax on such
a contract.

However, within one year of the Rainbow


Colors Lab ruling, three judges bench of
SC had rendered another decision in the
case of ACC Ltd3, wherein it had
expressed doubts about the correctness
of the pronouncement in the Rainbow
case.
After the SCs ruling in ACC Ltd, the
Commissioner of Commercial Taxes
issued a circular4 instructing the

M/s Keshoram Surindranath Photo


Bag (P) Ltd. and others v. Assistant
Commissioner of Commercial Taxes (LR), City
Division, Bangalore and Others; 121 (2001)
STC 175
2
Rainbow Colour Lab and Another v. State of
Madhya Pradesh and others
3
ACC Ltd. v. Commissioner of Customs;
(2001) 4 SCC 593
4
Circular No. 17/2002-03 dated 27.9.2002

assessing authorities to proceed with


assessments as per Entry 25.

The aforesaid circular was challenged


before the Karnataka HC by M/s Golden
Colour Labs5. While holding the said
entry again as unconstitutional, the HC
observed that Entry 25, declared ultra
vires the Constitution in Keshoram's
case, cannot be revived automatically,
unless the same is re-enacted by the
State Legislature.

Given the above, the State Legislature


re-introduced Entry 25 in identical terms
in form of Section 2(3) of the Karnataka
Taxation Laws Act, 2004 with
retrospective effect. This amendment
was again challenged before the
Karnataka High Court by the assessee
alongwith others. The High Court once
again held the provision as
unconstitutional. Being aggrieved
Karnataka State approached the SC.

Supreme Courts ruling


Placing reliance on the various rulings 6, three
judges bench of SC set aside the HC
decisions, making the following key
observations:

After insertion of clause 29-A in Article


366, the Works Contract which was
indivisible by legal fiction is permitted to
be bifurcated into "sale of goods" and
"services", thereby making goods
component of the contract exigible to
sales tax.

M/s Golden Colour Labs and Studio and


Others v. The Commissioner of Commercial
Taxes; ILR 2003 Kar 4883
6
Gannon Dunkerley and Co. and Others v.
State of Rajasthan and Others; 2002-TIOL493-SC-CT-LB.
Builders Association of India and Others v.
UOI and Others; 2002-TIOL-602-SC-CT.
Larsen Toubro and Another v. State of
Karnataka and Another; 2013-TIOL-46-SCCT-LB.
Kone Elevator India Pvt. Ltd. v. State of Tamil
Nadu and Others; (2014) 7 SCC 1.
Rainbow Colour Lab & Another v. State of
M.P. and Others (supra).
ACC Ltd. v. Commissioner of Customs (supra)

While going into the 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 empowered to segregate
the goods part of the Works Contract
and impose sales tax thereupon.

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.

The dominant intention theory is no


more valid in view of 46th Amendment
to the Constitution.

While upholding the retrospective


amendment, SC placed reliance on
various rulings7 and reiterated that
power to legislate included power to
legislate prospectively as well as
retrospectively.

HC had not dealt with the 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.

State of Karnatakas appeal was


therefore allowed.

National Agricultural Co-operative


Marketing Federation of India Ltd. and Anr. v.
Union of India; 2003-TIOL-96-SC-IT.
Shri Prithvi Cotton Mills Ltd. and Anr. v.
Broach Borough Municipality and Ors; 2002TIOL-479-SC-MISC-LB.
Indian Aluminium Co.etc. etc. v. State of
Kerala and others; (1996) 2 SCR 23.
Hiralal Rattanlal v. State of UP; (1973) 1 SCC
216.
UOI and Anr. v. Raghubir Singh (Dead) by
Lrs.; 2002-TIOL-810-SC-MISC.

Comments
Efforts of the Karnataka High Court to
invalidate the Entry 25 of Schedule VI
on as many as three occasions have
been finally throttled by the Supreme
Court in the instant ruling.

Our offices
Ernst & Young LLP
Ahmedabad
2nd floor, Shivalik Ishaan
Near. C.N Vidhyalaya
Ambawadi,
Ahmedabad 380 015
Tel: + 91 79 6608 3800
Fax: + 91 79 6608 3900

Mumbai
14th Floor, The Ruby
29 Senapati Bapat Marg
Dadar (west)
Mumbai 400 028
Tel + 91 22 6192 0000
Fax + 91 22 6192 1000

Bengaluru
12th & 13th floor
U B City Canberra Block
No.24, Vittal Mallya Road
Bengaluru 560 001
Tel: + 91 80 4027 5000
+ 91 80 6727 5000
Fax: + 91 80 2210 6000
+ 91 80 2224 0695

5th Floor Block B-2,


Nirlon Knowledge Park
Off. Western Express Highway
Goregaon (E)
Mumbai 400 063
Tel: + 91 22 6192 0000
Fax: + 91 22 6192 3000

Prestige Emerald, No. 4,


1st Floor, Madras Bank Road,
Lavelle Road Junction,
Bangalore - 560001
Chandigarh
1st Floor
SCO: 166-167
Sector 9-C, Madhya Marg
Chandigarh 160 009
Tel: + 91 172 671 7800
Fax: + 91 172 671 7888
Chennai
Tidel Park,
6th & 7th Floor
A Block (Module 601,701-702)
No.4, Rajiv Gandhi Salai
Taramani
Chennai 600 113
Tel: + 91 44 6654 8100
Fax: + 91 44 2254 0120
Hyderabad
Oval Office
18, iLabs Centre,
Hitech City, Madhapur,
Hyderabad 500 081
Tel: + 91 40 6736 2000
Fax: + 91 40 6736 2200
Kochi
9th Floor ABAD Nucleus
NH-49, Maradu PO,
Kochi 682 304
Tel: + 91 484 304 4000
Fax: + 91 484 270 5393

NCR
Golf View Corporate
Tower B
Near DLF Golf Course,
Sector 42
Gurgaon 122 002
Tel: + 91 124 464 4000
Fax: + 91 124 464 4050
6th floor, HT House
18-20 Kasturba Gandhi Marg
New Delhi 110 001
Tel: + 91 11 4363 3000
Fax: + 91 11 4363 3200
4th & 5th Floor, Plot No 2B,
Tower 2, Sector 126,
Noida 201 304
Gautam Budh Nagar, U.P. India
Tel: + 91 120 671 7000
Fax: + 91 120 671 7171
Pune
C401, 4th floor
Panchshil Tech Park
Yerwada (Near Don Bosco School)
Pune 411 006
Tel: + 91 20 6603 6000
Fax: + 91 20 6601 5900

Kolkata
22, Camac Street
3rd Floor, Block C
Kolkata 700 016
Tel: + 91 33 6615 3400
Fax: + 91 33 2281 7750

Join India Tax Insights from EY on

EY | Assurance | Tax | Transactions | Advisory


About EY
EY is a global leader in assurance, tax,
transaction and advisory services. The insights
and quality services we deliver help build trust
and confidence in the capital markets and in
economies the world over. We develop
outstanding leaders who team to deliver on our
promises to all of our stakeholders. In so doing,
we play a critical role in building a better working
world for our people, for our clients and for our
communities.
EY refers to the global organization and may
refer to one or more of the member firms of
Ernst & Young Global Limited, each of which is a
separate legal entity. Ernst & Young Global
Limited, a UK company limited by guarantee,
does not provide services to clients. For more
information about our organization, please visit
ey.com.
Ernst & Young LLP is one of the Indian client serving member
firms of EYGM Limited. For more information about our
organization, please visit www.ey.com/in.
Ernst & Young LLP is a Limited Liability Partnership, registered
under the Limited Liability Partnership Act, 2008 in India, having
its registered office at 22 Camac Street, 3rd Floor, Block C,
Kolkata 700016.
2014 Ernst & Young LLP. Published in India.
All Rights Reserved.

ED None
This publication contains information in summary form and is
therefore intended for general guidance only. It is not intended to
be a substitute for detailed research or the exercise of
professional judgment. Neither Ernst & Young LLP nor any other
member of the global Ernst & Young organization can accept any
responsibility for loss occasioned to any person acting or
refraining from action as a result of any material in this
publication. On any specific matter, reference should be made to
the appropriate advisor.

EY refers to global organization, and/or one or


more of the independent member firms of
Ernst & Young Global Limited

You might also like