2005 (8) TMI 633 - HC - VAT and Sales Tax

Levy of tax on the taxable turnover - Works contract of processing and supplying photographs, photo prints and photo negatives - Whether section 2(3) and section 5 of the Karnataka Taxation Laws (Amendment) Act of 2004 has the Constitutional approval or not ? - HELD THAT - A careful reading of the entire judgment in Golden Color Lab 2003 (7) TMI 665 - KARNATAKA HIGH COURT , would show that unless entry 25 is declared to be invalid and unsustainable in any subsequent proceedings, the judgment of Keshoram 1999 (9) TMI 938 - KARNATAKA HIGH COURT continues to be binding on the State Government. Unless and until entry 25 is considered as or unless and until the Supreme Court re-considers and pronounces upon a similar entry 25 of any other State, the Keshoram decision 2001 121 STC 175 (Kar) continues to be binding on the State. In these circumstances, the petitioners are right in their submission that in the light of the binding judgment of Keshoram and in the absence of any declaration in terms of the findings in para 23, the State Government lacks legislative competence in the light of a binding judgment on the parties. We, therefore, find substance in the argument of the petitioners with regard to the unconstitutionality of the impugned Act in the case on hand in the given circumstances. At this stage, we must also notice an argument of the State with regard to re-enactment in the light of the observations of the division Bench in Golden Color Lab case. It is no doubt true that the division Bench did say that the decision in ACC 2001 (1) TMI 248 - SUPREME COURT , at best, may enable the State to re-enact the provisions similar to entry 25. This sentence has to be read along with other findings in paras 22(3), 23, 26 and 27. If read the judgment as a whole, it would be clear that re-enactment is permissible or possible only in the event of a subsequent declaration with regard to entry 25 being invalid and unenforceable and only in the event of the Supreme Court re-considering or pronouncing a similar question in similar term as in entry 25 in terms of the findings in para 23. Admittedly, it is nobody's case before us that entry 25 was re-considered in any other judgment subsequent to Golden Color Lab. In these circumstances, the Golden Color Lab case is binding on the parties. In the light of our discussion with regard to legislative competence in terms of this order, it is unnecessary for us to consider the submission of Sri Naganand, learned Senior Counsel with regard to confiscation. In these circumstances and in the result, these petitions are accepted and we declare that the provisions of section 2(3) as unconstitutional. Respondents are hereby restrained from enforcing the provisions of the Karnataka Taxation (Amendment) Act, 2004. In the light of the declaration in terms of the orders in so far as Act No. 3 of 2000 is concerned, all consequential proceedings including assessment order and consequential demands are also set aside. Parties are to bear their costs. Petitions allowed.

Summary

Issues Involved:
1. Constitutionality of Section 2(3) and Section 5 of the Karnataka Taxation Laws (Amendment) Act, 2004.
2. Legislative competence of the State to levy sales tax on the activities of processing and supplying photographs, photo prints, and photo negatives.
3. Validity of retrospective tax imposition.
4. Impact of prior judgments and Supreme Court rulings on the current case.

Issue-wise Detailed Analysis:

1. Constitutionality of Section 2(3) and Section 5 of the Karnataka Taxation Laws (Amendment) Act, 2004:
The primary question was whether Section 2(3) and Section 5 of the Karnataka Taxation Laws (Amendment) Act, 2004, had constitutional approval. The court delved into the history of the legislation and previous judgments to determine the validity of these sections. The court concluded that the provisions were unconstitutional based on the binding judgment in Keshoram Surindranath Photo-Mag (P.) Ltd. v. Assistant Commissioner of Commercial Taxes (LR), City Division, Bangalore [2001] 121 STC 175, which declared Entry 25 of the Sixth Schedule to the Karnataka Sales Tax Act unconstitutional for want of legislative competence.

2. Legislative Competence of the State to Levy Sales Tax:
The petitioners argued that their activities of processing and supplying photographs, photo prints, and photo negatives did not fall within the ambit of "sales" as defined under Article 366(29A) of the Constitution of India. This argument was supported by the Supreme Court's decision in Rainbow Colour Lab v. State of Madhya Pradesh [2000] 118 STC 9, which held that such activities were service contracts not involving any sale of goods. The court reaffirmed this position, noting that the State lacked legislative competence to levy sales tax on these activities.

3. Validity of Retrospective Tax Imposition:
The petitioners challenged the retrospective imposition of tax, arguing that it was violative of Article 265 of the Constitution of India and confiscatory in nature. The court noted that the retrospective amendment sought to reintroduce Entry 25, which had already been declared unconstitutional. The court held that unless Entry 25 was reconsidered and declared valid in subsequent proceedings, the retrospective imposition of tax was invalid.

4. Impact of Prior Judgments and Supreme Court Rulings:
The court examined the impact of prior judgments, including Associated Cement Companies Ltd. v. Commissioner of Customs [2001] 124 STC 59, which overruled Rainbow Colour Lab. However, the court noted that the decision in Keshoram Surindranath Photo-Mag (P.) Ltd. had attained finality and continued to be binding on the State Government. The court also referred to Golden Color Lab & Studio v. Commissioner of Commercial Taxes [2004] 134 STC 570 (Kar); ILR 2003 Kar 4883, which reaffirmed the unconstitutionality of Entry 25 and held that the State could not proceed on the basis that Entry 25 was restored by virtue of the Supreme Court's decision in Associated Cement Companies Ltd..

Conclusion:
The court declared the provisions of Section 2(3) of the Karnataka Taxation Laws (Amendment) Act, 2004, as unconstitutional. The respondents were restrained from enforcing the provisions of the Act, and all consequential proceedings, including assessment orders and demand notices, were set aside. The court reaffirmed that the decision in Keshoram Surindranath Photo-Mag (P.) Ltd. continued to be binding on the State Government, and the retrospective amendment could not revive Entry 25 without a subsequent declaration of its validity.