2021 (9) TMI 475 - HC - VAT and Sales Tax

Process amounting to manufacture or not - Works contract - manufacturing and selling the recorded cassettes to the petitioner - First sale or second sale - recording the blank cassettes by utilizing the master copy - cassettes not sold in the open market - Validity of Circular dated 16.05.2003 - Central Excise Act and TNGST Act for levying of Tax for sale, are same or not - HELD THAT - In the present case, the right was not given to use goods for any purpose and it is given for a particular purpose that recording the songs in blank cassettes and after recording, such recorded cassettes are to be supplied only to the petitioner. Therefore, the cassette manufacturer's services are utilized to process the recording system and after processing the recording system, the recorded cassettes are handed over or sold to the petitioner and the materials utilized for such recording of cassettes cannot be construed as a sale and even in case, an invoice is raised in this regard i.e., part and parcel of the works contract and cannot be construed as a sale. In the present case, the master copy was allowed to be utilized only for the purpose of recording of blank cassettes by the cassette manufacturers and after recording, he is not permitted to sell the product in the open market, but to handover the recorded cassettes only to the petitioner company, who in turn, reserve their rights to sell the product in the open market. Thus, such sale by the petitioner in the open market cannot be construed as a second sale, but to be taken as the first sale for the purpose of levying tax under the provisions of the TNGST Act. In the present case, there was a works contract between the petitioner and the cassette manufacturers to use the master copy for the purpose of recording the blank cassettes in large scale. Secondly, there is an execution of works contract and such execution is done on certain terms and conditions of the agreement. Thirdly, in the present case, the goods were transferred to the petitioner, who has supplied the master copy and not sold in the open market admittedly. It would have been supplied in the sale form or in any other form. In the present case, it was supplied in the other form by recording the blank cassettes by utilizing the master copy and therefore, all the three conditions stipulated by the Hon'ble Supreme Court of India in the above case has been complied with in respect of the facts and circumstances of the present case. This Court is of the considered opinion that for the purpose of levying tax with reference to the provisions of the tax law, the nature of transactions are of paramount importance for forming an opinion, whether such transaction amounts to sale or works contract or otherwise. In the present case, there is no dispute with reference to the transaction between the petitioner and the cassette manufacturers for recording of blank audio cassettes and supply of the recorded cassettes to the petitioner - this Court has no hesitation in forming an opinion that the first sale as claimed by the petitioner cannot be considered as a first sale, but to be construed as works contract and the sale by the petitioner in the open market is to be taken as the first sale for the purpose of levy of tax under the provisions of the TNGST Act. The impugned Circular passed by the respondents in Circular No.Acts Cell-I/76234/2002 dated 16.05.2003 is confirmed - Petition dismissed.

Summary

Issues Involved:
1. Validity of the Circular dated 16.05.2003.
2. Classification of the transaction between the petitioner and the cassette manufacturers as "first sale" or "works contract".
3. Applicability of the judgment in Gramophone Co. of India Ltd. Vs. Collector of Customs, Calcutta.
4. Applicability of the judgment in M/s. Larsen & Toubro Limited & Another Vs. State of Karnataka & another.

Detailed Analysis:

1. Validity of the Circular dated 16.05.2003:
The petitioner challenged the Circular dated 16.05.2003 as ultravires to Section 3(1) and other relevant Sections of the Tamil Nadu General Sales Tax Act, 1959 (TNGST Act) and Articles 14, 19(1)(g), and 265 of the Constitution of India. The Court upheld the validity of the Circular, dismissing the writ petition and confirming that the Circular was in accordance with the provisions of the TNGST Act.

2. Classification of the Transaction:
The primary issue was whether the transaction between the petitioner and the cassette manufacturers constituted a "first sale" or a "works contract". The petitioner argued that the sale of pre-recorded audio cassettes to end users should be treated as a second sale, exempt from tax. However, the respondents contended that the transaction was a "works contract" and not a first sale. The Court concluded that the transaction was indeed a "works contract" as defined under Section 2(u) of the TNGST Act, which includes manufacturing or processing agreements. Consequently, the sale by the petitioner in the open market was considered the first sale for tax purposes.

3. Applicability of the Gramophone Co. of India Ltd. Judgment:
The petitioner relied on the Supreme Court judgment in Gramophone Co. of India Ltd. Vs. Collector of Customs, Calcutta, which classified the recording of blank audio cassettes as a manufacturing activity. However, the Court found that this case was decided under the Central Excise Act and did not address issues related to "works contract" or sales tax under the TNGST Act. Therefore, the Gramophone Co. case was deemed inapplicable to the present case.

4. Applicability of the M/s. Larsen & Toubro Limited Judgment:
The Court relied on the Supreme Court judgment in M/s. Larsen & Toubro Limited & Another Vs. State of Karnataka & another, which outlined three conditions for a transaction to be classified as a works contract: (i) there must be a works contract, (ii) goods should be involved in the execution of the works contract, and (iii) the property in those goods must be transferred to a third party. The Court found that all three conditions were met in the petitioner's case, confirming that the transaction was a works contract and not a first sale.

Conclusion:
The Court dismissed the writ petitions, confirming the validity of the Circular dated 16.05.2003 and classifying the transaction between the petitioner and the cassette manufacturers as a "works contract". The sale by the petitioner in the open market was deemed the first sale for tax purposes under the TNGST Act. The judgments in Gramophone Co. of India Ltd. and M/s. Larsen & Toubro Limited were analyzed, with the latter being found applicable to the case.