2020 (6) TMI 328 - HC - VAT and Sales Tax

Transfer of property in goods involved in the execution of the works contract - Taxability - consumable goods - purchase of ink for printing polythene rolls - exemption under Section 3-B(2)(e) of the Tamil Nadu General Sales Tax Act, 1959 - HELD THAT - The judgment in State of Tamil Nadu Vs. Premier Litho Works and another, 2009 (7) TMI 1159 - MADRAS HIGH COURT , examined the question whether a particular transaction is an inter-state sale or a works contract. In the instant case, there is no quarrel that the appellants are involved in works contract. The judgment is distinguishable on facts and on law and reliance placed by the appellant on the said judgment is totally misconceived. The 46th Amendment to the Constitution of India and the insertion of Clause 29-A in Article 366 and Section 3-B(2)(e) of the Tamil Nadu General Sales Tax, 1959, were not brought to the attention of the Division Bench, since the issue involved was entirely different. The correct position of law as repeatedly and consistently pointed out by the Hon'ble Supreme Court, finally in STATE OF KARNATAKA ETC. VERSUS M/S PRO LAB ORS. ETC. 2015 (2) TMI 388 - SUPREME COURT is to sum up, it follows from the reading of the aforesaid judgment that after insertion of clause 29-A in Article 366, the Works Contract which was indivisible one by legal fiction, altered into a contract, is permitted to be bifurcated into two one for sale of goods and other for services , thereby making goods component of the contract exigible to sales tax. Further, while going into this exercise of divisibility, dominant intention behind such a contract, namely, whether it was for sale of goods or for services, is rendered otiose or immaterial. It follows, as a sequitur, that by virtue of clause 29-A of Article 366, the State Legislature is now empowered to segregate the goods part of the Works Contract and impose sales tax thereupon. It may be noted that Entry 54, List II of the Constitution of India empowers the State Legislature to enact a law taxing sale of goods. Sales tax, being a subject-matter into the State List, the State Legislature has the competency to legislate over the subject. Since the question of law has been resolved on the basis of authoritative pronouncements of the Hon'ble Supreme Court, it would be a fruitless exercise to refer the Writ Appeal once again to the Division Bench. Appeal dismissed.

Issues Involved:
1. Whether the purchase of ink for printing polythene rolls is taxable under Section 3-B of the Tamil Nadu General Sales Tax Act, 1959.
2. Examination of judicial approaches prior to and post the 46th Amendment of the Constitution of India.
3. Interpretation of the Tamil Nadu State Amendment and its effect on the taxation of works contracts.
4. Analysis of various relevant judgments from the Supreme Court, Bombay High Court, and Kerala High Court.
5. Necessity for reference to a larger bench due to conflicting views in previous judgments.

Detailed Analysis:

I) Introduction:
The appellant, a registered dealer under the Tamil Nadu Sales Tax Act, 1959, filed a writ petition challenging the final assessment order by the Commercial Tax Officer, which taxed the transfer of ink used in printing as a works contract under Section 3-B of the Tamil Nadu General Sales Tax Act, 1959. The learned Single Judge dismissed the writ petition, confirming the tax levy but granting relief from the penalty.

II) Order of Reference:
The Writ Appeal was referred to a larger bench due to conflicting judgments by different benches of the court. The primary question was whether the purchase of ink for printing polythene rolls is taxable under Section 3-B of the Tamil Nadu General Sales Tax Act, 1959.

III) Judicial Approach Prior to the 46th Amendment:
Before the 46th Amendment, the Supreme Court in State of Madras vs. Gannon Dunkerly & Co. (Madras) Ltd. held that a building contract could not be taxed as a sale of goods unless there was an agreement to transfer property in goods. This principle was reiterated in The Assistant Sales Tax Officer vs. B.C.Kame, where the court held that a photographer's contract was for skill and labor, not a sale of goods.

IV) The 46th Amendment to the Constitution of India:
The 46th Amendment inserted Clause 29A in Article 366, which included tax on the transfer of property in goods involved in the execution of a works contract.

V) Vires Upheld:
The constitutionality of the 46th Amendment was upheld in Builders Association of India vs. Union of India, where the Supreme Court held that the amendment allowed states to tax the value of goods involved in works contracts.

VI) March of Law Post 46th Amendment:
A) Supreme Court of India:
In Gannon Dunkerley II, the Supreme Court held that the 46th Amendment allowed states to tax the value of goods involved in works contracts, excluding charges for labor and services. This principle was reiterated in subsequent cases, including Associated Cement Companies Ltd. vs. Commissioner of Customs and State of Karnataka vs. Pro Lab & Ors.

B) Bombay High Court:
B1) Full Bench:
The Full Bench in Sarvodaya Printing Press vs. State of Maharashtra upheld that consumables in works contracts are taxable. This was affirmed by the Supreme Court.

B2) A Slip Again:
In Commissioner of Sales Tax vs. Tvl.R.M.D.C.Press Private Limited, the court erroneously held that ink used in printing was not taxable, which was later declared per incuriam in Matushree Textiles Ltd.

C) Kerala High Court:
C1) Full Bench:
In Enviro Chemicals vs. State of Kerala, the Full Bench held that chemicals used in effluent treatment, though consumed, are taxable as they are transferred in the execution of works contracts.

VII) Tamil Nadu State Amendment:
Section 3B of the Tamil Nadu General Sales Tax Act, 1959, was examined, which levies tax on the transfer of property in goods involved in works contracts.

VIII) Interpretation by the Madras High Court:
The court examined various judgments, concluding that printing ink used in works contracts is taxable. The judgment in M.S.Mohan Offset Printers vs. State of Tamil Nadu held that printing ink is tangible and its use in works contracts results in a transfer of property, making it taxable under Section 3-B.

IX) Necessity for Reference:
The reference was necessary due to conflicting views in previous judgments. The court noted that earlier decisions did not consider the authoritative pronouncements of the Supreme Court and other high courts.

X) The Reference Answered:
The court answered the reference, stating that the purchase of ink for printing is taxable under Section 3-B of the Tamil Nadu General Sales Tax Act, 1959.

XI) Conclusion:
The court held that the correct position of law, as repeatedly pointed out by the Supreme Court, is that works contracts are divisible into contracts for sale of goods and services, making the goods component taxable. The Writ Appeal was dismissed, and the judgment of the learned Single Judge was upheld.

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