The Commissioner Of Sales Tax vs Unknown
2012 Latest Caselaw 266 Bom

                                     1



            IN THE HIGH COURT OF JUDICATURE AT BOMBAY
                ORDINARY ORIGINAL CIVIL JURISDICTION




                                                                       
                SALES TAX REFERENCE NO.9 OF 2003




                                               
                               IN
           REFERENCE APPLICATION NO.24, 25 AND 26 OF 2001

     The Commissioner of Sales Tax,




                                              
     Maharashtra State, Bombay.                ...Applicant.
               v.
     M/s.Ramdas Sobhraj.                       ...Respondent.




                                  
     Mr. V.A. Sonpal, Special Counsel for the Applicant.
     Mrs. N.R. Bhadeka for the Respondent.
                     
                           CORAM : J.P. DEVADHAR AND
                    
                                    M.S. SANKLECHA, JJ.
                           DATE       : 25th October, 2012.
      

     JUDGMENT ( Per M.S. SANKLECHA, J.):

This reference at the instance of the applicant has been made by the Maharashtra Sales Tax Tribunal (Tribunal) under Section 61(1) of the Bombay Sales Tax Act, 1959

(hereinafter referred to as the "said Act") for the opinion of this Court on the following question of law:

On the facts and circumstances of the case and in the true and correct interpretation of sub-section (l) of section 2 of the Maharashtra

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Sales Tax on the transfer of property in goods involved in execution of Works Contracts (re-

enacted) Act, 1989, read with the 46th Amendment of the Constitution of India, whether

the Tribunal was justified in holding that there is no transfer of property in ink, lacquer and paper

in the transaction effected in post 46 th Amendment era?

The Advocate for the applicant and respondent state that the word "paper" in the question is a mistake. Therefore, the

question framed is only with regard to transfer of property in ink and lacquer.

2) The facts leading to the present reference are as

under:

a) The respondent-assesses is registered as a dealer under the Maharashtra Sales tax on transfer of property in goods involved in execution of Works Contract (Reenacted) Act,1989

(Works Contract Act) and also under the said Act.

b) The respondent-assesses carries on business as a

manufacturer as well as job worker. So far as manufacturing activities are concerned, there is no dispute between the parties.

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The job work which is undertaken by the respondent-assesses is as under :

(i) plate making wherein plates are supplied by the

customers and the same are returned after forming an image on the plates.

(ii) Pure labour job which involves the job of Film Making (Positive Making) out of design supplied by the customers in black and white.

c) In the job work of plate making the customers of the

respondent-assesses supplies to the respondent-assesses duly grained zinc or aluminum plates. On receipt, plates are coated by

dipping in water wherein gun bio chromate is dissolved. Thereafter positives are exposed on the treated plates by halogen

lamps. The image is formed by the positives on the plates and the same is developed in the solution of calcium, lactic acid ferric

chloride, cupric chloride and hydrochloride. The plates are thereafter washed in industrial solvent, as a result of which all the

chemicals are washed out and only the images remain on the plates. Thereafter, lacquer and ink are applied on the plates. On a specific query, we were informed that lacquer and ink are applied

on the plates so as to ensure that the images on the plates do not get disturbed/smudged by constant use. After the above process the plates are dried and again washed with water and returned to

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the customers.

d) The activity of pure labour job consists of positive making. In this activity, the customer supplies a design to the

respondent-assessee for the purpose of positive making. The respondent-assessee thereafter takes a photograph of the design

in four different colours i.e. yellow, red, blue and black for obtaining the final negatives. Out of the aforesaid final negatives the respondent-assessee obtains/prepares a number of positives

as required by its customers . It is the case of the respondent- assessee that the aforesaid activity is highly skilled activity

requiring expertise and skill.

e) By an order dated 31/3/1993 the Sales Tax Officer for the period from 11/11/1989 to 31/3/1990 held that the respondent-

assessee is liable to tax under the Works Contract Act. This was on the ink, lacquer and chemicals used in the aforesaid process

of plate making and positive making.

g) In first appeal, the Assistant Commissioner of Sales Tax (Appeals) held that there was a deemed sale on transfer of property in goods in the form of chemicals while doing the work of

positive making and also deemed sale on a transfer of property of ink and lacquer to its customers under Works Contract Act while doing the work of plate making.

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     h)         Being aggrieved by the order of the Assistant

Commissioner of Sales Tax (Appeals) dated 31/12/1997 the

respondent filed an appeal to the Tribunal. The Tribunal in the second appeal, by its order dated 31/8/2000 held that there was

no transfer of property in ink and lacquer under the Works Contract Act in the process of plate making on job work basis by

the respondent-assessee.

3) Mr. Sonpal, Special Counsel appearing for the

appellant-revenue in support of the appeal submits that:

(i)

there is a deemed sale by way of transfer of property in ink and lacquer as contemplated under

Section 2(l) of the Works Contract Act;

(ii) this is particularly so as the lacquer and ink are used by the respondent-assessee in the process of

plate making so as to ensure that images formed on the plates are not disturbed/smudged due to constant

use. The lacquer and ink in plate so used get settled on the plate so as to become a part of the plate;

(iii) the Tribunal applied an incorrect test to hold that there is no transfer of property of lacquer and ink viz.

the thickness of the plates continue to remain the

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same both before and after the process; and

(iv) in any case the issued raised in this reference

stands concluded in favour of the applicant-revenue by the decision of this court in the matter of

Commissioner of Sales Tax v. Matushree Textiles Limited reported in 132 Sales Tax Cases Page

4 On the other hand Mrs. Bhadeka, Counsel appearing

for the respondent-assessee submits as under:

(i)

there has been no deemed sale by way of transfer of property in ink & lacquer while executing

the job of plate making as held by the Tribunal.

(ii) the decision of this court in the matter of

Matushree Textiles Ltd (Supra) will not apply in view of

the subsequent decision of the Apex Court in the matter of Bharat Sanchar Nigam Ltd. v. UOI reported in 145 STC 19 which holds that there must be a

transfer of goods as goods for the work Contract Act to be applicable. Similarly, the dominant intention of the transfer viz. whether to provide services or transfer of

goods will be determinative of there being transfer of goods or not as held by the Apex Court in the matter of

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Idea Mobile Communication Ltd. v. Commissioner of Central Excise reported in 43 VST. Page 1. In this

case there is no transfer of goods as goods nor was there any intent to transfer the ink and lacquer to its

customers; and

(iii) the order of the Tribunal is unexceptionable and the court should affirm the view of the Tribunal.

5) Before dealing with the submissions, the relevant provisions of the Works Contract Act are reproduced herein

below:

"Section-2(1)(l)- "sale" means a transfer or

property in goods (whether as goods or in some other form) involved in the execution of a works contract in the State and the work "sell" with all its grammatical variation and cognate

expressions shall be constructed accordingly.

Section-2-(1)(m)-(i) the amount of purchase price of the goods or, as the case may be, the value of the goods, brought or transferred from a place outside the State where such goods are

sold in the same form in which they were purchased, brought or transferred; and

(ii) Where the goods have been sold in the form other than the form in which they were

purchased or as the case may be, brought or transferred from a place outside the State, then the purchase price of the goods or, as the case may be, the value of the goods brought or

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transferred from a place outside the State and so sold.

6) We have considered the submissions. The issue arising in this reference is covered by the decision of this Court in

the matter of Matushree Textiles Ltd. (supra) to which one of us is a party (J. P. Devadhar, J.). In the case of Matushree Textiles

(supra) this Court was concerned with the issue whether the process of dying, bleaching and printing of grey fabrics on job work basis results in a transfer of materials as a deemed sale

within the meaning of Section 2(1)(l) of the Works Contract Act. This Court after considering the ruling of the Apex Court held that

there is a transfer of property in goods i. e. materials used for dying and bleaching under the Works Contract Act has observed

as under:

"33 We see no merit in the contentions

raised by the respondents. When the term "sale" in the Works Contracts Act has been

defined to include by a deemed fiction, the transfer of property in goods in any form, there is no reason to restrict the definition to cover only those transactions which involve transfer of

goods in some physical form and not in some chemical form. In our opinion, the words "some other form" used in the definition of "sale" in the Works Contracts Act apply to the transfer of

property in goods in its every form, i.e. physical form or any other form, including the chemical form. In other words, transfer of property in goods used in the execution of a works contract,

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either in its physical form or any other form including the chemical form constitutes sale under the Works Contracts Act. In the present

case, the colored shade is passed to the fabrics due to the chemical reaction of the materials

used in the process of dyeing. Coloured shade may be due to the chemical reaction of one or more materials. The coloured shade represents the inherent chemical property of the materials

used. Once there is passing of the chemical property of the materials used in the execution of works contract, then under the Works Contracts Act, there is a deemed sale of the materials used in the execution of the works

contract. Accordingly we hold that in the process of dyeing, the coloured shade passed

on to the fabrics constitutes sale of the materials used in dyeing, under the Works Contracts Act.

34 It is true, that to constitute sale, wither under the Sale of Goods Act, or under th BST Act, the intention of the parties to transfer the goods by an agreement, determination of

price of the goods to be transferred and the actual transfer of goods as per the agreement is

necessary. However, under the Works Contracts Act, the concept of deemed sale has been introduced, as a result, irrespective of the criteria laid down under the Sale of Goods Act or

the BST Act, if, in the execution of a works contract, the property of the materials used in the execution of that contract passes either in its original form or in some other form, then, there

is deemed sale of those materials under the Works Contracts Act. The definition of "sale" under the Sale of Goods Act and under the BST Act. In other words, to constitute sale under the

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Works Contract Act, the only criteria required to be fulfilled is the transfer of property in goods used in the execution of works contract either in

its original form or in some other form and not the criteria laid down under the Sale of Goods

Act or BST Act."

In the present case at hand lacquer and ink are the materials used in plate making and the property in the same is passed on in the

execution of the contract of plate making under the Works Contract Act.

7) In the case at hand, the Tribunal while allowing the

second appeal held that in the activity of plate making there is no transfer of property in (ink and lacquer) because even after

under going the process of application of ink and lacquer the plates continue to remain plates as they have the same thickness both before and after the process. Further the Tribunal holds that

the same plates can be reused .Thus according to the Tribunal it

cannot be said that any goods have been transferred along with the plates. In support of the aforesaid conclusion, the Tribunal placed reliance upon the decision of this Court in the matter of

Commissioner of Sales Tax v. R.M.D.C. Press Pvt. Ltd. reported in 112 STC 307 in which it was held that there is no transfer of property whether as ink or in any other form when printed material

is given. The aforesaid decision of this Court in the matter of R.M.D.C. Press Pvt. Ltd. (supra) has no precedential value as

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held by this Court in the matter of Matushree Textiles (supra) wherein at Para 38 it is held as under:

"38 The ratio laid down by this Court in the case of R.M.D.C. Press Pvt. Ltd. [1999] 112

STC 307 has no precedential value in view of the decisions of the apex Court in the case of Sarvodaya Printing Press [1999] 114 STC 242 and the Constitution Bench (three-Judge Bench)

decision in the case of Associated Cement Companies Ltd [2001] 124 STC 59. In the case of R.M.D.C. Press [1999] 112 STC 307, this Court took the view that the ink is a tool of the printer and the same is consumed in the process of

printing and looses its identity as goods and, therefore, no property can be said to pass in ink

used in the execution of the contract of printing. This finding is contrary to the Full Bench decision of this Court in he case of Sarvodaya Printing

Press v/ State of Maharashtra reported in [1994] 93 STC 387, wherein it is held that the paper and ink used in printing passes to the customer after printing and become the property of the customer

by theory of accretion. The full Bench decision of his Court has been upheld by the apex Court

which is reported in State of Maharashtra v. Sarvodaya Printing Press Fine Art Printer [1999] 114 STC 242. Therefore, the decision in R.M.D.C. Press case [1999] 112 STC 307 rendered by the

division Bench without considering the Full Bench decision of this Court in the case of Sarvodaya Printing Press [1994] 93 STC 387, (which was binding on the Division Bench) must be held to be

per incuriam. Once it is held that the property in goods used in the execution of the works contract passes incidentally or by theory of accretion, such passing, though not a sale under BST Act, would

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be deemed sale under the Works Contracts Act. In the present case, as the property of the materials used in the process of dyeing and

printing are passed on to the customer in the form of coloured shade and such passing amounts to

sale, the provisions of the Works Contracts Act are attracted."

The other decision relied upon by the Tribunal is of the

Apex Court in the matter of M/s. Rainbow Colour Lab and another v. State of Madhya Pradesh and others reported in 118 STC Page 9 to contend that it is a contract of service and not

a work contract. Our Court in the matter of Matushree Textiles Ltd.

(supra) has dealt with the same and held that in view of the decision of the Apex Court in the matter of Associated Cement

Companies Ltd. v. Commissioner of Central Excise reported in 124 STC 59 wherein it has been held that even where dominant intention of the contract is rendering of service it would amount to

works contract and in the execution of such contract, if the

property of the material used passes then in such a case it would be a deemed sale and liable to be taxed under Works Contract Act. Our Court in the matter of Matushree Textiles (supra) at

Para 37 deals with the reliance upon Rainbow Colour Lab (supra) as under:

"37 It is true that the decision of the apex Court in the case of Rainbow Colour Lab [2008] 118 STC 9 supports the contention of the respondents.

However, since the ratio laid down therein has

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been doubted by the three-Judge Bench decision in the case of Associated Cement Companies Ltd. [2001] 124 STC 59, we are bound by the ratio laid

down by the larger Bench in the case of Associated Cement Companies Ltd. [2001] 124

STC 59, which is a later decision in point of time. As stated herein above, the larger Bench of the apex Court has held that after the Forty-sixth Amendments to the Constitution even if the

dominant intention of the contract is the rendering of service, it will amount to works contract and in the execution of such contract, if the property of the materials used passes, then, it is a deemed sale and sales tax can be levied. As regards the

other decisions relied upon by Mr. Joshi, the same being rendered in the context of the provisions of

the Sales Tax Act and not under the Works Contracts Act, the ratio laid down therein are clearly distinguishable. The contention of the

respondents that the revenue has failed to establish the marketability of the chemical solution used for dyeing is also without any merit. As stated herein above, what is relevant under the

Works Contracts Act is the passing of the property of goods used for dyeing. Once it is established

that the property of the goods used in dyeing has passed to the consumer in any form, then under the Works Contracts Act there is a deemed sale of those materials and the tests laid down (including

marketability test) under the Sale of Goods Act or the BEST Act cannot be imported into the Works Contracts Act."

8) Mrs. Bhadeka Counsel for the respondent-assessee submits that in view of the subject decision of the Apex Court in the matter of Bharat Sanchar Nigam (supra) and Idea Mobile

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Communication (supra) the decision of this Curt in the matter of Matushree Textiles (supra) is no longer good law. Mrs. Bhadeka

invites our attention to Article 366(29A) of the Constitution of India to submit that before the tax can be levied under the Works

Contract Act there must be a transfer, delivery or supply of goods as goods while executing the works contract so as to enable the

department to contend that there has been deemed sale of goods in the execution of works contract. In Bharat Sanchar Nigam Limited v. Union of India (supra), she contended that even

post Constitution (46th Amendment Act) 1982 there must be a transfer of goods as goods for works contract ig tax to be applicable. It is her submission that in the above Judgment to constitute transfer of property in goods involved in the execution

of the works contract, the dominant intention of the parties must be to transfer goods. In this case, it is her submission that the

respondent-assessee were rendering services, and therefore, supply of any goods was incidental to rendering of services

hence not chargeable to tax under the Works Contract Act. According to her, the dominant intention of the contract has to be

ascertained and in this case dominant intention of the contract for the respondent-assessee was to render services and therefore, no tax under the Works Contract Act is payable on the ink and

lacquer used in the execution of the contract. In our view the reliance upon the above decision is misplaced. In Bharat Sanchar Nigam (supra) the Court was concerned with Article 366(29A)(d)

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of the Constitution i.e. a tax on the transfer of a right to use any goods for any purpose and not with Article 366(29A)(b) of the

Contract Act which deals with a tax on the transfer of property i.e. goods involved in execution of works contract. Further, so far as

the dominant intention is concerned the Apex Court negatived such a test as applicable in its decision in the matter of Associated

Cement Companies Ltd. (supra) and in particular held therein as under:

"47. In Rainbow Colour Lab v. State of M.P. (2000) 2 SCC 385, the question involved was

whether the job rendered by the photographer in taking photographs, developing and printing

films would amount to a "work contract" as contemplated under article 366 (29A)(b) of the Constitution read with section 2(n) of the M.P.

General Sales Tax Act for the purpose of levy of sales tax on the business turnover of the photographers.

48. The court answered the questions in the negative because, according to the court:

"Prior to the amendment of article 366, in view of the judgment of this Court in State of Madras v.

Gannon Dunerley & Co. (Madras) ltd. (1958) 9

STC 353; AIR 1958 SC 560, 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 (1989) 2 SCC 645 is that it is now open to the States to divide the works contract into two separate contracts by a legal

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fiction: Ii) contract for sale of goods involved in the said works contract, and (ii) for supply of labor 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. What is pertinent to ascertain in this connection is what was the

dominant intention of the contract. On facts as we have noticed that the work done by the photographer which, as held by this Court in Assistant Sales Tax officer v. B.C.Kame (1977) 1 SCC 634 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."

49. 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' Association of India v. Union of India (1989) 2 SCC 645.

50. We agree. After the 46 th Amendment, the sale elements 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 when

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in 2005,C.K. Jidheesh v. Union of India (2005) 8 Scale 784 held that the aforesaid observations in Associated Cement were merely obiter and that

Rainbow Colour Lab (2000) 2 SCC 385 was still good law, it was not correct. It is necessary to

note that Associated Cement (2001) 4 SCC 593 did not say that in all cases of composite transaction the 46th Amendment would apply."

9) Mrs. Bhadeka also placed reliance upon the decision of the Apex Court in the matter of Idea Mobile Communication Ltd. v. Commissioner of Central Excise and Customs, Cochin

reported in 43 VST Page 1(SC) wherein according to her the Apex Court held that when dominant purpose of the transaction

was to provide service then in such a case SIM cards which were supplied along with telecommunication service would not be

chargeable to sales tax. Relying upon the aforesaid decision, it was her contention that no works contract tax is payable in

respect of the use made by the respondent-assessee of ink and lacquer while rendering service to its customers. The case

before the Apex Court in the matter of Idea Mobile (supra) was with regard to the charging of service tax under the Finance Act,

1994. The above case was not dealing with transfer of goods as goods or in any other form in the execution of work contract. Therefore, the above decision would in no manner impact the

view of our court in the matter of Matushree Textiles (supra).

     10)        Mrs. Bhadeka, Counsel for the respondent-assessee


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contends that lacquer and ink are similar to packing material and therefore, not taxable under the Works Contract Act. It is pertinent

to note that the Tribunal in its order has not held that no works contract tax is payable on the ink and lacquer on the ground that

they are in the nature of packing material. The only basis on which the Tribunal held that no property in goods is transferred is that

before and after the process the plates continue to have the same thickness and therefore, no property in goods can be said to have been transferred. The question raised in this reference stands

covered in favour of the department by virtue of the decision of this Court in the matter of Matushree Textiles Limited (supra).

11) In view of the above, we are of the opinion that there

was a transfer of property in ink and lacquer in the present case. Consequently, we answer the question in the negative i.e. in

favour of the applicant-revenue and against the respondent- assessee.

12) The reference is disposed of in the above terms. No

order as to costs.

     (M.S.SANKELCHA, J.)                         (J.P. DEVADHAR, J.)





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