Is there any nexus between service tax and sales tax?

[Surender Gupta]

Yes, the nexus is "SALE"

Sales tax is imposed on sales of goods. Where goods are not sold directly but used in the course of work contract is also constitute sale (or deemed sale) and for the purpose of arriving at the correct valuation of goods sold in the course of work contract, different methods have been prescribed by respective states.

On the other hand, service tax is imposed on the provision of services. Where the services are not pure services but involve cost of goods which are sold in the process of provision of services, then for the purpose of correct valuation of provision of services different methods have been prescribed. Apart from specific methods with respect to certain specific services, a general method has been prescribed by way of exemption notification no. 12/2003 ST dated 20-6-2003.

Under this notification the exemption is available equal to:

"the value of all the taxable services, as is equal to the value of goods and materials sold by the service provider to the recipient of service, from the service tax leviable thereon under section (66) of the said Act, subject to condition that there is documentary proof specifically indicating the value of the said goods and materials."

Thus, this notification constitutes nexus between service tax and sales tax. Because, once it is established that there is sales of goods, the provisions of Sales Tax (Value Added Tax) of the respective states or Central Sales Tax read with Article 366(29A) comes into force. It is immaterial that under the respective act of states, such transaction is exemption from sales tax or not.

Therefore, one can not argue that, since he is using good or material in the course of provision of services, the value of such good or material is exempt from service tax under notification no. 12/2003, even if the use of such good or material is not falling within the preview of sales tax (or value added tax).

On the same analogy, the photography service provider is not allowed to take the advantage of the provisions of two independent laws on the both side.

Whether the job rendered by a photographer in taking photographs, developing and printing films would amount to a 'works contract'?

The above question is not new. The oldest decision of the Apex Court of India on this issue was delivered in 1977 in favor of assessee. At that time the honorable Supreme Court has held that the job of taking photographs, developing and printing films is not sale and consequently not liable to service tax.

After 46^th amendment to the Constitution of India, the question was raised again that is there any tax imposable on the job of photographer as work contract tax.

Again the honorable Supreme Court of India in the matter of RAINBOW COLOUR LAB vs. STATE OF MADHYA PRADESH [2006 -TMI - 383 - SUPREME COURT OF INDIA in 2001] has held that the work done by the photographer is only in the nature of a service contract not involving any sale of goods.

Because of the above favorable decisions the photography service providers were enjoying the freedom from sales tax as well as work contract tax.

But, now these photography service providers came in the service tax net and liable to pay service tax on the full value of services.

Now, finding no other way of escaping from payment of service tax, the photography industry tried to take the advantage of the notification no. 12/2003 supra by reducing the value of services with the cost of goods and material used in the course of providing their services. But, the department was not ready to give such advantage to the assessee and matter went to judiciary.

In C K Jidhees versus Union of India - [2006 -TMI - 288 - Supreme Court] the Apex Court has held against the assessee and restricted the bifurcation because service provided and goods sold on the basis of decision of "Rainbow Colour Lab". Once it is held that photography service is a pure service then the question of bifurcation does not arise.

In the following judgment, the honorable tribunal in LAXMI COLOR (P) LTD. versus COMMISSIONER OF CENTRAL EXCISE, JAIPUR-II - [2006 -TMI - 380 - CESTAT, NEW DELHI] has held that the benefit of notification no. 12/2003 is not available to the photography service provider.

In sum

The decision of Apex Court which was favorable before introduction of service tax on photography service has become adverse after introduction of service tax. And this can be found by comparing the effective rate of service tax (i.e. 12.24%) with effective rate of sales tax (VAT) [obviously after considering the credit under VAT] of the respective states.

Therefore, before making a legitimate tax planning under service tax for getting benefit of notification no. 12/2003 ST dated 20-6-2003, the provisions of sales tax read with article 366(29A) of constitution of India must be kept in mind.