2020 (4) TMI 799 - HC - Service Tax

Nature of activity - sale or service - use of the paper upon which an image is printed using certain consumables and chemical in the photography service - valuation of photography service to be determined in isolation of cost of such goods or not - meaning of sale appearing in exemption Notification No.12/03-ST dated 20.06.200 - deemed sale - whether the appellant-assessee was entitled to the benefit of Notification No.12/2003-ST dated 20.06.2003? Whether for the purposes of service tax the value of photography service can be determined separately from the value of certain consumables and chemicals which are used on the paper for printing the image and whether such printed photograph can be said to be a sale of goods in terms of Article 366(29A)(b) of the Constitution? - HELD THAT - The view expressed by the Apex Court in Bharat Sanchar Nigam Limited s case 2006 (3) TMI 1 - SUPREME COURT that after the 46th Amendment, the sale element of those contracts which are covered by the six sub-clauses of clause (29A) of Article 366 are separable and may be subjected to sales tax by the States under Entry 54 of List II and there is no question of the dominant nature test applying, was reiterated by the Apex Court in M/s Pro. Lab s case - the finding of the Tribunal that in Bharat Sanchar Nigam Limited s case, the Apex Court has only given the passing remarks and did not overrule either C.K. Jidheesh 2005 (10) TMI 3 - SUPREME COURT or Rainbow Colour Lab and Another vs. State of Madhya Pradesh and others, 2000 (2) TMI 2 - SUPREME COURT , is unsustainable. Whether appellants having once paid the VAT under the State Act as works contractor on the material and chemicals consumed in photography service, can be charged service tax on the same value? - HELD THAT - In view of the law laid down by the Apex Court in M/s Pro. Lab s case, it can be safely held that photography service, which has both the elements of goods and services is covered under works contract. Thus, in a works contract which involves transfer of property, the provisions as contained in Article 366(29A) of the Constitution are attracted. Therefore, in the light of sub-clause (b) of Clause (29A) of Article 366 of the Constitution, in execution of a works contract when there is transfer of property even in some other form than in goods, the tax on such sale or purchase of goods is leviable. In this view of the matter, after the 46th Amendment, there is no question of dominant nature test applying in photography service and the works contract, which is covered by Clause (29A) of Article 366 of the Constitution where the element of goods can be separated, such contracts can be subjected to sales tax by the States under Entry 54 of List II of Schedule II - Once that is so, value of photographic paper and consumables cannot be included in the value of photography service for the purposes of imposition of service tax. The term sale appearing in exemption Notification No.12/03-ST dated 20.06.2003 would also include deemed sale as defined by Article 366(29A)(b) of the Constitution. Appeal allowed - decided in favor of appellant.

Summary

Issues Involved:
1. Whether the use of photography paper and chemicals constitutes a sale of goods under Article 366(29A)(b) of the Constitution, and if the value of photography services should be determined separately from the cost of such goods.
2. Whether the term 'sale' in exemption Notification No.12/03-ST should be interpreted as per Section 2(h) of the Central Excise Act, 1944, or also include deemed 'sale' as defined by Article 366(29A)(b) of the Constitution.

Issue-wise Detailed Analysis:

1. Sale of Photography Paper and Chemicals:
The appellant, engaged in processing, printing, and exposure of color photographic films, argued that the cost of photography paper and chemicals should be excluded from the taxable value of photography services. The appellant contended that these materials fall under the category of goods and thus should be exempt from service tax under Notification No.12/2003-ST. The initial adjudicating authority and the Commissioner (Appeals) rejected this argument, relying on the Supreme Court's decision in C.K. Jidheesh vs. Union of India, which held that such contracts are purely service contracts without any element of sale of goods.

However, the appellant cited the larger bench decision in Bharat Sanchar Nigam Limited vs. Union of India, which overruled C.K. Jidheesh and established that service tax should only be levied on the service portion, not on the cost of materials. The Tribunal's Larger Bench upheld the levy of service tax on the gross value, including materials, unless documentary proof of the value of goods sold was provided.

The High Court, referencing the Supreme Court's judgment in State of Karnataka vs. M/s Pro. Lab, concluded that photography services, involving both goods and services, qualify as works contracts. Consequently, under Article 366(29A)(b) of the Constitution, the value of goods used in photography services should be separated from the service component, thus exempting them from service tax. The court held that the value of photography services should be determined separately from the cost of goods like photography paper and chemicals.

2. Interpretation of 'Sale' in Notification No.12/03-ST:
The appellant argued that the term 'sale' in Notification No.12/03-ST should include 'deemed sale' as per Article 366(29A)(b) of the Constitution. The Tribunal initially held that the term 'sale' should be interpreted as per Section 2(h) of the Central Excise Act, 1944, and not include deemed sales under Article 366(29A)(b).

The High Court disagreed with the Tribunal's interpretation, stating that the term 'sale' in the notification should indeed include deemed sales under Article 366(29A)(b). The court emphasized that after the 46th Amendment, the sale element in works contracts, including photography services, is separable and subject to sales tax by states under Entry 54 of List II. Therefore, the value of goods used in providing photography services should be excluded from the taxable value of services.

Conclusion:
The High Court allowed the appeals, setting aside the impugned orders. It held that the value of photography services should be determined separately from the cost of photography paper and chemicals, which constitute goods. Additionally, the term 'sale' in Notification No.12/03-ST includes deemed sales as defined by Article 366(29A)(b) of the Constitution. The court's decision ensures that the appellant is not subjected to double taxation on the same value of materials and consumables used in photography services.