2004 (3) TMI 718 - HC - VAT and Sales Tax

Summary

Issues involved:
- Interpretation of the Karnataka Sales Tax Act, 1957 regarding the tax liability of digital printing services under works contract or service contract.

Analysis:
1. The appellant, a registered dealer engaged in digital printing, sought an advance ruling on the taxability of digital printing under the Karnataka Sales Tax Act. The appellant argued that digital printing does not involve transfer of property in goods but is a skilled job similar to printing photographs. The appellant relied on the Supreme Court's decision in Rainbow Colour Lab case, which held that processing and making photo prints is a service contract, not a works contract.

2. However, the authority ruled that digital printing is a works contract liable to tax under the Act, based on the Supreme Court's observations in Associated Cement Companies Ltd. case. The authority held that even if the dominant intention of the contract is to render a service, the State can levy tax on the material used in such contracts. The authority's decision was challenged in the appeal, arguing that digital printing should be treated as a non-taxable service contract similar to photo printing.

3. The High Court found that the appellant's argument was based on an incorrect premise that photo printing is a non-taxable service contract. The Court noted that the principle laid down in the Associated Cement Companies Ltd. case prevails over the Rainbow case and other decisions. The Court emphasized that the test of dominant intention is no longer relevant, and a contract for digital printing is considered a works contract, even if it involves technical expertise. The value of materials used in digital printing, such as vinyl film and inks, is exigible to tax under the Act.

4. Ultimately, the High Court upheld the authority's decision, stating that there was no error in following the principle enunciated in the Associated Cement Companies Ltd. case. The appeal was dismissed, and the appellant's contention that no part of the contract price for digital printing should be subjected to tax was deemed untenable. The Court clarified that the value of materials used in digital printing forms a perceptible part of the works contract price, making it liable to tax under the Act.