2020 (1) TMI 886 - HC - VAT and Sales Tax

Validity of assessment order - TN VAT Act - taxability of turnover received from the services rendered by the petitioner in regard to digital photography - HELD THAT - Courts have consistently settled the position that the activity carried in this regard would only amount to a contract of skill and labour and not a contract of sale . In a recent decision in the case of IMAGIC CREATIVE PVT. LTD. VERSUS COMMISSIONER OF COMMERCIAL TAXES ORS. 2008 (1) TMI 2 - SUPREME COURT , a Bench of the Supreme Court considered the question of whether charges collected towards service rendered by an advertising agency for evolving of a prototype conceptual design upon which service tax had been collected would also be liable for tax under the Karnataka Value Added Tax Act, 2003 - After considering the nature of services rendered, the Bench concluded that payment of service tax and value added tax are mutually exclusive. Therefore, they should be held to be applicable exclusively having regard to the relevant parameters of the respective levies and bearing in mind the differences envisaged in a composite contact as contradistinguished from an indivisible contract. The former may consist of different elements each providing for, and attracting different levies. The resounding position of law as on date is thus to the effect that the activity of digital photography as carried on by the petitioner herein, is a service as contemplated under the provisions of the Finance Act, 1994 levying service tax and the petitioner is, already, remitting service tax on the said receipts. In such circumstances, there is no justification to subject the receipts to value added tax both on the reasoning that (i) the activity in question is a contract for skill and labour and (ii) the levy of service tax and value added tax are mutually exclusive. Petition allowed.

Summary

Issues:
Challenge to assessment under Tamil Nadu Value Added Tax Act, 2006 for the periods 2006-07 to 2009-10.

Analysis:
The petitioner, a registered dealer running a photo studio, argued that its activities constitute "photographic services" and should be assessed as "works contract" under the Finance Act, 1994, not subjected to VAT. Despite objections, adverse assessment orders were passed. A single judge previously allowed the writ petitions due to a violation of natural justice, directing a reconsideration of objections. The petitioner cited various Supreme Court judgments to support its position.

The main issue is the taxability of turnover from the petitioner's digital photography services. The court referenced the Full Bench Supreme Court judgment in B. C. Kame case, distinguishing between a "contract of skill and labour" and a "contract of sale." It concluded that photography services involve skill and labour, not sale of goods. This view was reiterated in subsequent Supreme Court judgments like Rainbow Colour Lab and Associated Cement Companies Ltd.

The court also referred to the Imagic Creative Pvt. Ltd. case, emphasizing the exclusivity of service tax and value added tax. It highlighted that the activity of digital photography falls under service tax, and the petitioner is already paying service tax on the receipts. Therefore, subjecting the receipts to VAT is unjustified due to the nature of the contract and the mutually exclusive nature of the two taxes.

In conclusion, the court quashed the impugned assessments and allowed the writ petitions, stating that the petitioner's digital photography services are considered a service under the Finance Act, 1994. The court found no basis to subject the receipts to VAT, given the nature of the activity and the exclusivity of service tax and value added tax. The judgment emphasized the distinction between contracts of skill and labour versus contracts of sale, aligning with previous Supreme Court decisions on similar matters.