2007 (8) TMI 765 - HC - VAT and Sales Tax

Summary

Issues Involved:
1. Classification of the transaction as "sale" or "works contract."
2. Applicability of the Supreme Court's decision in Rainbow Colour Lab case.
3. Interpretation of the 46th Amendment and its impact on the classification of transactions.
4. Correctness of the assessment and penalty imposed by the authorities.

Issue-wise Detailed Analysis:

1. Classification of the Transaction as "Sale" or "Works Contract":
The petitioner, engaged in processing and printing films, was assessed by the Deputy Commercial Tax Officer, who classified the transaction as an outright sale, thus levying sales tax and penalty. This decision was upheld by the Appellate Assistant Commissioner and the Sales Tax Appellate Tribunal but was challenged by the petitioner. The Special Tribunal confirmed the tax liability but deleted the penalty. The petitioner argued that the transaction should be classified as a "works contract," not a sale, based on the Supreme Court's decision in Rainbow Colour Lab.

2. Applicability of the Supreme Court's Decision in Rainbow Colour Lab Case:
The petitioner relied on the Supreme Court's decision in Rainbow Colour Lab, which held that the work done by photographers was a service contract, not involving a sale of goods. The petitioner argued that this precedent should apply to their case, as their transaction was similar. However, the respondent contended that the Supreme Court's decision in the Associated Cement Companies case suggested that the Rainbow Colour Lab decision was contrary to the express provisions of Article 366(29-A) of the Constitution.

3. Interpretation of the 46th Amendment and its Impact on the Classification of Transactions:
The judgment emphasized the impact of the 46th Amendment, which allowed states to bifurcate works contracts into two separate contracts: one for the sale of goods involved in the works contract and the other for the supply of labor and services. The court noted that the dominant intention test applied before the amendment was no longer applicable. The judgment in Associated Cement Companies clarified that even if the dominant intention of the contract was service, the state could levy sales tax on the material used in the contract.

4. Correctness of the Assessment and Penalty Imposed by the Authorities:
The court reviewed the factual findings of the lower authorities, which had consistently treated the transaction as an outright sale. However, the court found that the authorities erred in not considering the transaction as a composite one involving both sale and service. The court directed that the transaction should be assessed under Section 3-B of the T.N.G.S.T. Act, which pertains to the levy of tax on the transfer of goods involved in works contracts.

Conclusion:
The court concluded that the authorities had incorrectly classified the transaction as an outright sale. The correct classification should be a "works contract," and the assessment should be made under Section 3-B of the T.N.G.S.T. Act. The writ petition was disposed of accordingly, with a direction to reassess the transaction under the appropriate section, and the penalty imposed was set aside.