2006 (3) TMI 685 - HC - VAT and Sales Tax

WORKS CONTRACT DEEMED SALE TAKING OUT XEROX COPIES ON A XEROX MACHINE PROPERTY IN PAPER AND INK PASSES TAXABLE SALES TAX ON THE TRANSFER OF PROPERTY IN GOODS INVOLVED IN THE EXECUTION OF WORKS CONTRACTS.

Issues Involved:
1. Whether the respondents fall within the ambit of "dealer" as defined in the Works Contract Act.
2. Whether the transactions described and evidenced in the cash memo are sales within the meaning of "sale" as defined in the Works Contract Act.
3. If the transactions are sales, what is the sale price in each transaction?

Issue-Wise Detailed Analysis:

1. Definition of "Dealer" under the Works Contract Act:
The respondents, involved in the business of comb-binding, electric/electronic typing, computerized artwork, and photocopying, questioned whether they fall within the definition of "dealer" under the Works Contract Act. The Tribunal, while partially allowing the appeal, held that comb-binding amounted to a sale under the Works Contract Act, thus making the respondent a dealer. However, for electric/electronic typing, computerized artwork, and photocopying, the Tribunal ruled that these did not amount to sales under the Act.

2. Transactions as "Sales" under the Works Contract Act:
The primary legal question was whether the act of photocopying constituted a "sale" under the Works Contract Act. The applicants argued that the process of photocopying involves a transfer of tangible goods (paper and ink) from the assessee to the customer, thus constituting a sale. They relied on the Builders Association of India v. Union of India [1989] 73 STC 370 (SC) and the Associated Cement Companies Ltd. v. Commissioner of Customs [2001] 124 STC 59 (SC) cases to support their argument that even incidental transfers of goods in a works contract can be taxed as sales.

The respondents, however, contended that photocopying is a service contract that does not involve the transfer of property during the execution of the job. They argued that the transfer of paper is a post-execution event and incidental to the primary service of photocopying. They relied on the Assistant Sales Tax Officer v. B.C. Kame [1997] 39 STC 237 (SC) and Government of Andhra Pradesh v. Guntur Tobaccos Ltd. [1965] 16 STC 240 (SC) cases to argue that the primary objective of the contract should determine its nature.

3. Sale Price in Each Transaction:
Given the determination that photocopying involves a transfer of property, the sale price would include the cost of paper and ink used in the process. The applicants argued that the value of the goods transferred is immaterial once there is a transfer of property. The respondents, however, maintained that since the paper and ink are consumed during the process, they do not constitute a sale.

Consideration and Conclusion:
The court emphasized the objective of the Forty-sixth Constitutional Amendment, which allows the bifurcation of a composite contract to tax the transfer of property within its execution. The court referred to the Builders Association of India v. Union of India [1989] 73 STC 370 (SC) and the Associated Cement Companies Ltd. v. Commissioner of Customs [2001] 124 STC 59 (SC) cases to conclude that even if the dominant intention of the contract is to render a service, any transfer of property within it would be taxable.

The court held that the process of photocopying involves the transfer of paper and ink, which constitutes a sale under the Works Contract Act. The court rejected the respondents' argument that the transfer of paper is incidental and post-execution, stating that the transfer of property during the execution of the contract attracts sales tax.

Judgment:
The court answered the question in the negative, in favor of the Revenue and against the respondents. The reference was disposed of with no order as to costs.

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