2016 (12) TMI 1702 - HC - VAT and Sales Tax

Works contract - whether the transaction referred in the contract to make a serial and transferring the right over the serial would attract the definition of the term goods occurring in the Kerala General Sales Tax Act, 1963? Held that - The question whether making a serial for valid consideration amounts to sale of goods or not, is more or less settled by a large number of decisions of the Apex Court and of this court. It is settled now that goods would include all kinds of movable and immovable property whether it be tangible or intangible. The vesting of copyright is different from divesting the ownership right in the property in which copyright subsists. The divesting of the ownership right essentially depends upon the nature of contract in relation to the transaction. The deemed transfer of copyright as contemplated in law itself will not result in transfer of ownership of the property. To understand transfer of ownership in a particular transaction for the purpose of sale, the court has to differentiate the terms and conditions of the contract. In this case as seen from the contract (clause 11), it was agreed that TV films and materials will become the absolute property of the Government with perpetual copyrights, distribution rights etc., only upon delivery of the film. If that be so, the contract can be easily comprehended as having the characteristics of a sale as contemplated under the Sale of Goods Act, 1930. The tribunal erred in construing the contract as a contract of service - the order of tribunal set aside and the order of the assessing authority restored.

Issues Involved:
1. Determination of whether the transaction between the assessee and Doordarshan constitutes a contract of sale or a contract for work.
2. Interpretation of the term "goods" under the Kerala General Sales Tax Act, 1963.
3. Analysis of the agreement terms to ascertain the dominant intention of the parties.
4. Consideration of Section 17(b) of the Copyright Act, 1957 regarding ownership and copyright.

Issue-wise Detailed Analysis:

1. Determination of whether the transaction between the assessee and Doordarshan constitutes a contract of sale or a contract for work:
The key question was whether the transaction for producing a 13-episode television serial "Mohapashikal" and transferring the rights over it to Doordarshan was a sale or a contract for work. The assessing authority and the Deputy Commissioner initially treated the transaction as a sale, assessing it as such. However, the Sales Tax Appellate Tribunal concluded that the assessee was merely offering its service to produce the serial, and thus, there was no sale involved. This conclusion was based on the tribunal's evaluation that the assessee did not retain any rights over the film, which would attract the transfer of property.

2. Interpretation of the term "goods" under the Kerala General Sales Tax Act, 1963:
The court examined whether the television serial could be classified as "goods" under the KGST Act. The definition of "goods" includes all kinds of movable and immovable property, whether tangible or intangible. The Supreme Court's decision in Tata Consultancy Services vs. State of A.P. was referenced, which held that software programs are "goods" as they possess attributes of abstraction, consumption, use, and can be transmitted, transferred, delivered, stored, and possessed. The court needed to determine if the agreement was for the sale of goods or merely for work and labour.

3. Analysis of the agreement terms to ascertain the dominant intention of the parties:
The agreement dated 4.3.1994 required the assessee to produce the serial, including writing the script, shooting, directing, producing, editing, and completing the serial. The agreement specified that Doordarshan had the authority to reject any materials or workmanship and that the Government would not be liable for expenses if the serial was unsatisfactory. Upon delivery, the serial and materials would become the absolute property of the Government, with all perpetual copyrights and distribution rights. The court analyzed whether the dominant intention was to produce a "television serial" classified as a "cinemautograph film" under the Copyright Act, 1957.

The court emphasized that the essence of the contract should be examined to determine whether it was for the production of articles or merely for providing labour and skill. The Supreme Court's decisions in Hindustan Shipyard Ltd. vs. State of A.P. and State of A.P. vs. M/s. Kone Elevators (India) Ltd. were cited, highlighting that the intention of the parties and the overall reading of the contract terms are crucial in determining the nature of the transaction.

4. Consideration of Section 17(b) of the Copyright Act, 1957 regarding ownership and copyright:
The assessee argued that the contract specified that Doordarshan would be the first owner of the copyright, implying that the ownership of the material article produced was vested with the Government. Section 17(b) of the Copyright Act, 1957, was referenced, which stipulates that a "cinemautograph film" made for consideration at the instance of any person would result in that person being the first owner of the copyright. The court clarified that Section 17 aims to protect the economic interest of the person causing the work to be produced and does not impact the transfer of material property.

The court distinguished between ownership of tangible property and intellectual property rights, explaining that ownership involves a legal relationship with a tangible thing, while intellectual property rights represent a monopoly over intellectual creation. The court concluded that the vesting of copyright under Section 17 does not affect the transfer of ownership of the material property. The agreement's clause that the TV films and materials would become the absolute property of the Government upon delivery indicated a sale transaction.

Conclusion:
The court held that the tribunal erred in construing the contract as a contract of service. The dominant intention of the parties and the nature of the contract indicated that the transaction was a contract of sale. Consequently, the court set aside the tribunal's order and restored the assessing authority's order, treating the transaction as a sale. No costs were awarded.

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