Photography service covered under works contract?

[Vijay Chitte]

The tax on sale of goods are levied by the state as sales tax/vat, whereas taxes on rendering of service as service tax. Section 66E(h) of the Finance Act 1994 use the words “service portion” involved in works contract and such service portion alone is liable to service tax. As per Section 65B(44) of the Finance Act, 1994, service does not include an activity which constitutes merely transfer of title in "goods" or immovable property. Service also excludes such transfer, delivery of supply of goods which is deemed to be sale under Article 366(29A)(b) of the constitution (inserted by the Constitution (46th Amendment) Act, 1982).

Obviously, supply of goods element is not ‘service portion’.  In case of works contract both elements of goods and services are involved and liable to Sale tax/Vat and service tax, In  Photography service, which includes both the elements of goods (photographic paper, chemicals, Ink. etc) and services,  whether such contract would be considered as a composite contract and covered under works contract liable for service tax under revers charge mechanism (Section 68(2) of Finance Act 1994)?. 

Whether photography service attract Article 366(29A)(b) of 46th Amendment Act, 1982? whether dominant nature test apply in photography service?

This article explains how photography shall be covered under works contract, and provides gist of landmark judgments given by the Supreme Court and the various High Courts.

As per Education Guide, published on 20.06.2012 Para 2.6.3 In para 43 of the BSNL’s case, the Supreme Court of India has used term “Dominant Nature Test” which is explained as below in the judgment.

• 43. The reason why these services do not involve a sale for the purposes of Entry 54 of List II is, as we see it, for reasons ultimately attributable to the principles enunciated in Gannon Dunkerley’s case, namely, if there is an instrument of contract which may be composite in form in any case other than the exceptions in Article 366(29-A), unless the transaction in truth represents two distinct and separate contracts and is discernible as such, then the State would not have the power to separate the agreement to sell from the agreement to render service, and impose tax on the sale. The test therefore for composite contracts other than those mentioned in Article 366(29A) continues to be – did the parties have in mind or intend separate rights arising out of the sale of goods. If there was no such intention there is no sale even if the contract could be disintegrated. The test for deciding whether a contract falls into one category or the other is to as what is the substance of the contract. We will, for the want of a better phrase, call this the dominant nature test.”

As per the above para, If the transaction involved both the element of goods and service, dominant nature test (substance of the contract) does attract in Article 366(29A).

Under State VAT Laws works contract transactions too shall be subjected to VAT within the purview of the entry 54 of the List II of the Seventh Schedule of the Constitution.

Deemed Sale of goods – Article 366(29A) – 46th Amendment 1982

Constitutional Validity of 46th Amendment :-

The constitutional validity of the 46th Amendment of the Constitution whereby clause (29-A) was inserted to article 366 has been upheld by the Constitution Bench of the Supreme Court in Builders Association of India v. Union of India 1989 (3) TMI 356 - SUPREME COURT OF INDIA;  holding that the object of the new definition of the word “sale” is to enlarge the scope of “tax on sale or purchase of goods” wherever it occurs in the Constitution so that it may include within its scope the transfer, delivery or supply of goods that may take place under any of the transactions referred to sub-clauses (a) to (f) thereof wherever such transfer, delivery or supply becomes subject to levy of sales tax. So construed the expression “tax on the sale or purchase of goods” in Entry 54 of the State List, therefore, includes a tax on the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract also. The tax leviable by virtue of sub-clause (b) of clause (29-A) of Article 366 of the Constitution thus becomes subject to the same discipline to which any levy under Entry 54 of the State List is made subject to under the Constitution.

In Builders' Association of India v. Union of India, (1989 (3) TMI 356 - SUPREME COURT OF INDIA) Constitution Bench of the Supreme Court was concerned with veers as well as implications of the 46th Amendment and construction of sub-clause (b) of clause (29A) of Article 366 of the Constitution. Supreme Court observed:

"After the 46th Amendment the works contract which was an in-divisible one is by a legal fiction altered into a contract which is divisible into one for sale of goods and the other for supply of labour and services. After the 46th Amendment, it has become possible for the States to levy sales tax on the value of goods involved in a works contract in the same way in which the sales tax was leviable on the price of the goods and materials supplied in a building contract which had been entered into two distinct and separate parts as stated above." (p. 400).

Clause (29-A) (b) of Article 366 of the Constitution :-

Hon’ble Supreme Court pronounced on April 1,1958 in the case of the State of Madras v. Gannon Dukerley and Co. (Madras) Ltd. (1958 (4) TMI 42 - SUPREME COURT OF INDIA) a new clause (29-A) was introduced in Article 366 of the Constitution through the 46th Constitution Amendment Act, 1982 passed on February 2,1983. Clause (29-A) reads as under:

(29-A) “tax on the sale or purchase of goods” includes;

(a) ------------------

(b) a tax on the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract;

(c) -----------------

(d) -----------------

(e) -----------------

(f)  -----------------

and such transfer, delivery or supply of any goods shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and a purchase of those goods by the person to whom such transfer, delivery or supply is made.” Thus sub clause (b) of clause (29-A) of Article 366 of the Constitution defines what works contract is. It is as deemed sale, which involves the transfer of property in goods (whether as goods or in some other form) involved in the execution of a contract.

Prior to the amendment of Article 366, in view of the judgment of this Court, the States could not levy sales tax on sale of goods involved in a works contract because the contract was indivisible. All that has happened in law after the 46th Amendment and the judgment of this Court in Builders' case is that it is now open to the States to divide the works contract into two separate contracts by a legal fiction:

(i) contract for sale of goods involved in the said works contract, and

(ii) for supply of labour and service. This division of contract under the amended law can be made only if the works contract involved a dominant intention to transfer the property in goods and not in contracts where the transfer in property takes place as an incident of contract of service....

What is pertinent to ascertain in this connection is what was the dominant intention of the contract....

On facts as we have noticed that the work done by the photographer which as held by this Court in STO Versus B.C. Kame 1976 (12) TMI 164 - SUPREME COURT OF INDIA is only in the nature of a service contract not involving any sale of goods.

Thus, after the 46th amendment, it has become possible for the States to levy VAT/ Sales Tax on transfer of right to use any goods for any purpose. State to bifurcate the contract and to levy sales tax on the value of the material involved in the execution of the works contract, notwithstanding that the value may represent a small percentage of the amount paid for the execution of the works contract.

Following judicial views are to support that photography is a works contract

In AGRAWAL COLOUR ADVANCE PHOTO SYSTEM Versus COMMR. OF C. EX., BHOPAL [2010 (5) TMI 227 - CESTAT, NEW DELHI] a detailed analysis of all relevant decisions was made and the Tribunal held that since on issue of valuation of photography service, decisions of different fora in various cases where contradictory, matter was to be referred to a Larger Bench to decide issue.

In Aggarwal Colour Advance Photo System Versus Commissioner of Central Excise, Bhopal  [2011 (8) TMI 291 - CESTAT, NEW DELHI (LB)] It has been held that cost of goods and material used and consumed (paper, consumables and chemicals) in course of rendering photography service is includible in value for purpose of service tax. The value of other goods and material, if sold separately would be excluded under exemption Notification No. 12/2003.  Followed in Commissioner of Central Excise, Raipur Versus M/s. Satyam Digital Photo Lab [2011 (9) TMI 199 - CESTAT, NEW DELHI], Commissioner of Central Excise, Raipur Versus M/s. Centre Point Colour Lab & Others [2011 (9) TMI 269 - CESTAT, NEW DELHI], CCE, Jalandhar/Ludhiana Versus M/s. Classic Colour Lab (P) Ltd. [2011 (9) TMI 408 - CESTAT, NEWDELHI], M/s. Jain Colour Lab Versus Commissioner of Central Excise Bhopal [2011 (9) TMI 366 - CESTAT, NEW DELHI], SHOBHA DIGITAL LAB. Versus COMMISSIONER OF CENTRAL EXCISE, BHOPAL [2011 (8) TMI 721 - CESTAT, NEW DELHI], Commissioner of Central Excise, Allahabad Versus Darpan Colour Lab [2012 (6) TMI 117 - CESTAT, NEW DELHI].

Commissioner of Central Excise vs. M/s Vahoo Colour Lab, [2010 (2) TMI 156] Service Tax Appeal No.21 of 2009 decision Dt. 3 February, 2010 held that “if the nature of transaction involved is composite contract, of service and sale and if the components of sale element are discernible, then both the components cannot be re-mixed for the purpose of relevant tax. Processing of photography cannot be completed without the developing and printing process, to provide the service to the recipient. The photography films, printing papers, chemicals and envelopes are the integral and essential ingredients to complete the process of photography. Meaning thereby, the components of sale of photography, developing and printing etc. are clearly distinct and discernible than that of photography service. Photography is in the nature of works contract and it involves the elements of both sale and service, service tax is not leviable on the sale portion.”

In Bharat Sanchar Nigam Ltd (BSNL) v. Union of India [2006 -TMI - 309 - Supreme court] held that After the 46th Amendment, the sale element of those contracts which are covered by the six sub-clauses of clause (29A) of the 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 and supreme court  has overruled its earlier judgment in the case of  C. K. Jidheesh Versus Union of India And Others [2005 (10) TMI 3 - Supreme Court], wherein after relying on RAINBOW COLOUR LAB versus STATE OF MADHYA PRADESH  [2000 (2) TMI 2 - SUPREME COURT OF INDIA] it was held that photography contracts were pure and simple service contracts and there was no element of sale of goods, and therefore, there was no question of bifurcating the receipts into elements of goods and elements of service. It was not correct finally supreme court (in BSNL case) held that  value of materials can not be include while computing the value of service and that 'sale and 'service' cannot stand in the same box . Sale cannot be treated as service and vice versa. The first view appears to be correct.

The similar view  has been also held In the case of Commissioner Of Sales Tax vs. Hari And Company 2006 (3) TMI 685 - BOMBAY HIGH COURT Hon’ble High Court held that:-

“We are of the view that RAINBOW COLOUR LAB versus STATE OF MADHYA PRADESH  [2000 (2) TMI 2 - SUPREME COURT OF INDIA] and C. K. Jidheesh Versus Union of India And Others [2005 (10) TMI 3 - Supreme Court] are no longer good law in view of the express Forty-sixth Amendment of sub clauses of clause (29A) of Article 336 to the Constitution of India.

Commissioner Central Excise Versus M/s. Sood Studios - PUNJAB AND HARYANA HIGH COURT -[ 2010 (8) TMI 83 ] it has been held that deduction of value of material used while providing photography service will be available while paying service tax on photography service.

SURABHI COLOUR LAB Versus COMMISSIONER OF CENTRAL EXCISE, CALICUT [2009 (12) TMI 427 - CESTAT, BANGALORE] It has been held that deduction of value of material is available even if not mentioned separately in invoice, If records of inputs used for providing photography service are available.

M/s DELUX COLOUR LAB PVT LTD. and others versus CCE, JAIPUR [2008 (10) TMI 49 - CESTAT NEW DELHI] wherein it has been held that photography service is in the nature of works contract and it involves elements of both, sales and service and the service tax is leviable on the sale portion and also held that, in view of sub-clause (b) of clause (29-A) of Article 366, that deemed sale of the materials takes place in the rendering of photography service and, therefore, the value of the materials cannot be included while computing the value of the service. 'Sale' and 'Service' cannot stand in the same box. Sale cannot be treated as service and vice versa.

DELHI STUDIO COLOUR LAB versus UNION OF INDIA [2006 (10) TMI 10 - HIGH COURT OF PUNJAB & HARYANA (CHANDIGARH)]  and Johny Joseph versus State of Kerala 2007 (8) TMI 631 - KERALA HIGH COURT, the Kerala High Court held that photography work is works contract and it involves transfer of goods involved in execution of works contract.

The Gauhati High Court, in Live Tone Vs. State of Tripura [2000 (12) TMI 874 - GAUHATI HIGH COURT], has distinguished the Supreme Court’s decision in Rainbow Colour Lab and has held that the process applied by a photographer in printing of finished photographs is a works contract and hence taxable. The Court has held that the tax is limited to the price of material used in the works contract provided the said price is identifiable.

[P.A. Prem Kumar vs. Stale of Kerala 1999 (3) TMI 590 - KERALA HIGH COURT]. Hon’ble High Court has held that the developing of exposed film brought by customer and taking positive prints from them and supply negatives and the prints in the desired size and taking positive print from negative brought by customer and returning the negatives to the customer amounts to works contract.

The Gauhati High Court, in S.S. Photographic Lab. Pvt. Ltd. Vs. State of Assam [2006 (2) TMI 593 - GAUHATI HIGH COURT], has held that after the 46th amendment to the Constitution, even if the dominant intention of the contract is to render a service, if such a contract is a works contract, the States are empowered to levy a sales tax on the material used therein. taxmanagementindia.com

Contrary view of the same party:-

The Guwahati High Court in S.S. Photographic Lab Pvt. Ltd. vs. State of Assam & Ors. (2011) 19 STJ  P. 569 held that the conversion of exposed photographic films rolls into negatives and then developing it into positive photograph was not a case of works contract but that of rendering the service involving skill and expertise. The test of marketability was considered to be applicable to the facts of the case.

In Imagic Creative Pvt. Ltd. vs. CCT [2008 (1) TMI 2 - SC], it has been held that service tax and Vat (sales tax) are mutually exclusive. In case of a composite contract, Vat cannot be imposed on portion relating to value of service. As an obvious corollary, service tax cannot be imposed on value of material.

Earlier in case of Associated Cement Companies Ltd. vs. Commissioner of Customs [ 2001 (1) TMI -248-SC] Even if the dominant intention of the contract is rendering of service which will amount to a works contract, after the 46th Amendment, the State would be empowered to levy sales tax on the material used in such contract. it was held that the actual transfer of property is relevant, if it is present, the provisions of customs act are applicable and goods are subject to custom duty. The dominant nature test was held rejected in this case. It is necessary to note that supreme court did not say that in all cases of composite transactions the Forty-sixth Amendment would apply.

In my view, as per the above different important judicial views, it has been clear that in photography service, goods and services can be separable, if not segregated, it would  be covered under works contract. Once a works contract involves transfer of property per se, the provisions of Article 366(29A) of the Constitution of India are attracted. It would be considered that photography is works contract and may also attract provision of service tax on reverse charge mechanism liable for service tax.  It has been also cleared that after the 46th Amendment, the sale element of those contracts which are covered by the six sub-clauses of clause (29-A) 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 in photography service. As per my view, service provider has to pay service tax on 70% of the amount, if he is paying State Vat. Otherwise he should pay service tax on entire amount.(I don't know how far this view will be held valid).