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TMI Blog1992 (12) TMI 206X X X X Extracts X X X X X X X X Extracts X X X X ..... is so done by the employment of special skill. The copyright of the photographs always belongs to the customers; sometimes the photographs are confidential in nature. Photographs supplied by the applicants are neither goods, nor marketable commodity. The applicants have been carrying on the business since 1956. There was no difficulty prior to 1985 in the matter of obtaining declaration forms for carrying on the business. They were assessed to tax up to the 4th quarter ending March 31, 1986. On October 28, 1986, they applied for issuance of declaration forms which were orally refused by the Commercial Tax Officer on the ground that the forms would be issued only after assessment for the year ending March 31, 1983, was completed. The applicants had been duly assessed on March 26, 1987. An appeal and a stay petition were filed before the appellate authority from the assessment order for the year ending March 31, 1983. Another application for declaration forms filed on April 9, 1987, was not allowed by the Commercial Tax Officer who directed deposit of the assessed tax, although the appeal and stay petition were pending. A show cause notice under section 7(5a) of the 1941 Act under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s attract sales tax under section 6D, the amount of tax for the three years ending March 31, 1987, March 31, 1988 and March 31, 1989, would amount to Rs. 43,000 approximately, whereas bank guarantee to the extent of Rs. 74,500 had already been furnished. Allegedly, taking photographs of customers and supplying prints to them are not covered by section 6D. 5.. Apart from prayers for issuance of declaration forms and permits and release of bank guarantees, there is a prayer in this application for declaration that no part of the transactions of the applicants falls under section 6D of the Bengal Finance (Sales Tax) Act, 1941. According to the applicants, section 6D does not enlarge the definition of "sale" as envisaged in the Constitution and does not empower the State to impose sales tax on such transactions. The work of photo-taking does not allegedly constitute any transfer of property of goods involved in execution of works contract. Use of materials is stated to be only incidental to the execution of work of an artistic nature, subject to the restriction of article 286 of the Constitution and to the pronouncement of the Supreme Court on the subject. The State has no power to l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lete photographs, apart from the sale of photographic materials. Allegedly, the applicant is confusing the issue by emphasising the question of taxability or otherwise of photographs as such. The allegation of the applicant that the Commercial Tax Officer did not entertain application for issuance of declaration forms is said to be not borne out by the records. On April 29, 1986, when the officer issued declaration forms to the applicant No. 1, he instructed it to produce the ledger for a certain period on the next occasion. In spite of that, on January 27, 1987, application for declaration forms was made without production of ledger. While the proceedings under section 7(5a) were initiated on February 11, 1988, those under section 20A were commenced on December 4, 1987. There was no question of causing harassment. After obtaining information that applicants had shown a larger quantum of turnover in the income-tax returns than those in the sales tax returns during the years ending March 31, 1984, March 31, 1985 and March 31, 1986, the Commercial Tax Officer issued the notice under section 20A. The other notices demanding payment of arrear taxes were issued, as the firm had defaulte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... products, namely, the photograph is supplied to customers against consideration according to a contract, the photographer is liable to pay tax. If the materials like papers, films and chemicals are processed, treated or adapted within the meaning of section 2(b)(iv) of the Act of 1941, there is a transfer of property in the goods involved in the execution of works contract between the applicant and its customers. The customer is not required to pay the value of the materials separately in order to attract sales tax under section 6D. A photograph, being the finished product, is different from the materials used in its production and is the ultimate form of the goods. On examination of the final accounts and relevant documents produced, it was found that in the years 1985-86 and 1986-87 the applicantfirm was liable to pay tax under section 6D in respect of colour processing, studio snap, outdoor snap and paper and film purchased for the aforesaid jobs. Thus, applicant has been allegedly avoiding payment of considerable amount of tax payable under section 6D since April 1, 1985. It is denied that services rendered by the photographers are of identical nature as those rendered by solic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the chemicals used gets diffused with emulsion, creating light and shade on the negative of the film. Then the dried negative is taken to printer processing machine for printing. The artist examines the negative and by his own judgment decides the colour and density thereof to be given to that film for obtaining the optimum result. This stage is crucial and, according to the applicants, the final outcome depends upon the skill and talent of the artist concerned. An error of judgment on his part will cause a wastage of the film. After colour and density are selected, the print, on being placed before the paper processor, undergoes further two stages requiring precise timing and accurate temperature. Here chemicals are used in course of processing, getting diffused on deep emulsion for obtaining good finish and obtaining all colours on the print, which is then washed and dried and cut into proper sizes. The applicants maintain that the customer is not interested in purchasing paper, chemicals or raw film; his interest is in obtaining the photographer's expertise in getting the film properly developed and printed. The amount received is said to be for the expert knowledge without invo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... learned State Representative, to a judgment of this Tribunal to which two of us were parties, namely, the case of Photovisual v. Commercial Tax Officer, RN-319 of 1990, delivered on November 16, 1990*. But, in that case the question for decision was of a different nature. The question was whether tax under section 6D of the 1941 Act is payable on sales of goods which are liable to tax on the first point of sale alone and which have already suffered such tax at the first point. The issue in that case was not whether the activity of a commercial photographer amounts to a works contract under the Bengal Finance (Sales Tax) Act, 1941. It was not contended by the applicant of that case that section 6D or 2(b) of the 1941 Act was not applicable. Let us be very clear that the decision in the case of Photovisual* has no relevance to the issue involved in the present case. 13.. I start with the assumption that the said two kinds of activities of the applicants constitute works contract, as defined in section 2(b) of the 1941 Act and as dealt with in section 6D thereof. If the activities are of the nature of works contract, then in the first category of activity, where the photographer ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... photographer takes the photograph of a customer with a film supplied by himself, he supplies the film, no doubt; but no immediate transfer of property in the film, namely, the negative takes place. If the contract is that the negative will be retained by the photographer, in that case there is no transfer of property at all. But in a contract where the terms are such that the negative film should be delivered to the customer, a transfer of property in the negative film takes place. Therefore, it will depend on the nature of the particular contract as to whether transfer of property in the negative films supplied by the photographer takes place or does not take place. Accordingly, assuming that it is a works contract, exigibility of the tax under section 6D will depend on the terms of contract and no such tax can be levied, where the negative film is retained by the photographer. 16.. From the submissions and contentions of the rival parties before us, we know that the only other goods supplied by the photographer in both the categories of activity already stated, is photographic paper which is used for the final print of the photograph or enlargement thereof, as the case may b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) the overhaul or repair of- (1) any motor vehicle, (2) any sea-going vessel, (3) any other vessel propelled by internal combustion engine or by any other mechanical means, (4) any aircraft, (5) any component or accessory part of any of the items mentioned in paragraphs (1), (2), (3) or (4) above, or; (iv) the altering, ornamenting, finishing, furnishing, improving or otherwise processing, treating, or adapting of any goods;" 18.. Mr. Gupta, appearing for the applicant, submitted that the power of the State Legislature to impose tax on sales or purchases of goods emanates from entry 54 of List II of the Seventh Schedule to the Constitution. He rightly contended that the 46th Amendment bringing in article 366(29A)(b) did not confer an independent power. As far as works contract is concerned, article 366(29A)(b) has included it within the meaning of "sale or purchase of goods" under entry 54, which is reproduced below: "Taxes on the sale or purchase of goods other than newspapers, subject to the provisions of entry 92-A of List I." Mr. Gupta also correctly argued that in spite of article 366(29A)(b), the power under entry 54 of List II is subject to the conditio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with article 366(29A)(b). In other words, the definition in section 2(b) should be interpreted and appreciated with reference to entry 54 of List II read with article 366(29A)(b). 20.. In article 366(12) of the Constitution an inclusive definition of "goods " has been given to include all materials, commodities and articles. According to the new definition in article 366(29A)(b) a tax on the transfer of property in goods involved in the execution of a works contract is also a tax on the deemed sale of goods. Here, the definition of "goods" already given earlier in article 366(12), has been, as it were, enlarged to the extent that the transfer of property in goods may be as goods or in some other form in the case of a works contract. 21.. As in article 366(29A)(b) of the Constitution, so in section 6D(1)(a) of the 1941 Act, what is taxable is "any transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract" which shall be "deemed to be a sale of those goods by the person making the transfer and the purchase of those goods by the person to whom such transfer is made." According to Mr. T.N. De, learned State Representative, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... treated as sales. We are considering whether the photographer's activities in question bring about transfer of property in goods involved in the execution of a works contract. Clause (iv) of section 2(b) is doubtless widely worded, but all the processes described therein relate to some original or pre-existing goods. The peculiar character of a works contract is that such a contract is for execution of certain works in relation to pre-existing immovable or movable property. The question of works contract does not naturally arise, where the transaction does not relate to a basic goods or a nucleus in relation to which some works have to be executed. Similarly, the concept of works contract essentially requires that there will be at least two parties, the contractee and the contractor. The contractee is the person who is the owner of the immovable or movable property with reference to which the works have to be executed. Therefore, "any goods" stated in section 2(b)(iv) means any movable property of a person other than the contractor with reference to which a works contract should be executed. If there is no such goods, there is no question of execution of a works contract. For exam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a transaction. The other type of activity done by the applicants as photographers is developing, printing (and enlarging) the negatives supplied by customers. The negative films belong to the customers. True, the negative belongs to the customer who is a person other than the works contractor. But beyond this, the analogy does not extend farther. Clause (iv) of section 2(b) should, in our opinion, be interpreted in association with the other clauses. In respect of clauses (i), (ii) and (iii) of section 2(b) the works contract is executed in relation to an immovable or movable property belonging to another, while the contractor merely executes the works contract, in course of which he supplies certain goods. What is done by the works contractor is that some repair or construction or improvement is effected to the immovable or movable property belonging to the owner/ contractee. But in the case of a negative film supplied by a customer to a photographer for developing, printing and enlarging the photograph, the works done by a photographer to bring about the finished photograph do not effect any improvement or repair or alteration, ornamentation, etc., to the negative film. An impres ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e its value, utility or beauty, then no question of works contract can arise in relation to it, because no goods could be used in the course of execution of works contract without producing some improvement or some betterment in terms of value, utility or beauty. In our opinion, therefore, the activity of the applicants does not constitute a works contract within the meaning of section 2(b)(iv), where the photographer produces a final photograph or enlargement out of a negative supplied by the customer. Since the negative remained intact at the end of the entire transaction and nothing was added or employed to it to increase its value, utility or beauty, there could be no works contract. 23.. One important ingredient of deemed sale by way of transfer of property in goods involved in the execution of works contract is that a mere processing, treating or adapting is not sufficient. There should be supply of some goods in the course of such processing, treating or adapting (of the nucleus), resulting in transfer of property in those supplied goods. Obviously such transfer should be from the works contractor to the owner/contractee. From this point of view also, the activity of a pho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egative exposed film of the customer in any form whatsoever, there might be a possibility of treating the transaction as one of works contract. The negative having remained as it was before and having been returned to the customer in the same condition, the activities of the photographer, though originating from the negative film, cannot be said to be a works contract. Conceptually, a works contract involves some addition, accretion or accession in relation to a basic goods or nucleus belonging to the owner/contractee. The examples are to be found in the first three clauses of section 2(b) of the 1941 Act. In all those cases, the basic properties belonged to the owner/contractee from the beginning to the end of execution of the works contracts. Moreover, in all those cases, some goods were supplied by the contractor/seller in the course of execution of the works contract, the peculiarity of transactions being that all such goods supplied by the seller had been added to or had gone into the basic property of the owner by way of addition, accretion or accession. It is also interesting that all such supplies by the contractor/seller effected some kind of change, alteration, ornamentat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ] 64 STC 42 (SC); AIR 1986 SC 662. The learned State Representative opposed both these contentions. Like other points, I do not see any need for examination of these points also. The cases relied on by the learned State Representative, namely, the case of Studio Ratan Batra Private Limited [1975] 35 STC 522 (Bom), that of B. Girija [1984] 56 STC 297 (Kar), that of Dolton Press [1990] 76 STC 201 (AP) and Studio Sen Sen [1990] 79 STC 168 (Gauhati), etc., do not come to the aid of the respondents on the main question decided above, namely, whether the activities of taking photograph, developing, printing and if necessary, enlarging a photograph constitute a works contract. Let me make it clear that our decision is confined to the above activities of the applicants. Purchase and sale of photographic goods have been kept out of our consideration. 26.. In the result, let it be declared that the transactions of taking snaps, developing, printing and enlarging a photograph do not constitute a works contract within the meaning of section 6D read with section 2(b) of the 1941 Act, irrespective of the fact whether or not the initial photographic film with which the relevant snap is take ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... process of photography there is no element of works contract as defined in section 2(b) of the Bengal Finance (Sales Tax) Act, 1941 (hereinafter called "the Act"). There is no adaptation, ornamentation, etc. There is no supply of any material involved in works contract. Chemicals used in the process are consumed and do not retain their original character or do not exist at all. The applicant adopts a person or an object, landscape, etc., for the purpose of photographing. The subject which is transferred by skill on film, is discarded in the process. The film is developed and then the image is transferred to bromide paper. The paper and the film are used up in the process of producing the photograph. There is no accretion to the value of the paper; the value is rather exhausted giving a substance, which is known as photograph. The photograph is not goods but a work of art. His job is that of performance of skilled service. The amended definition of "sale" in article 366(29A)(b) does not enlarge the definition of "sale", so as to include the user of such materials in the course of execution of photographic works. 32.. The respondents have countered this position with these observa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y. The job of photography does not involve contractual transfer as contemplated in section 6D of the Act. 34.. The respondents countered these contentions and affirmed that the provisions of section 6D and section 2(b) are in conformity with article 366(29A)(b) of the Constitution. They also made the following submissions: (a) The job of the applicant constitutes a works contract in terms of section 2(b) as films and paper are processed, treated and adapted. These do not lose their existence. (b) The supply of materials in a works contract, even where skill and labour are involved has been made exigible to tax in terms of the constitutional amendment and section 6D read with explanation 1. (c) In the case of "deemed sale" transfer of property in goods involved in the execution of works contract can be said to have taken place when there is appropriation of such goods to the contract, as in the case of contract of sale, the property in unascertained goods passes when such unascertained goods are appropriated to the contract of sale. (d) The application of the principle of accession or accretion will result in a restricted view of the constitutional amendment being taken. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... verturned by the constitutional amendment. It is, however, nobody's case that the delivery of finished prints of photo is sale. It may be pertinent to quote the following observations made by the Supreme Court in the case of Anandam Viswanathan [1989] 73 STC 1; [1989] 1 SCC 613 which has been referred to by both the parties: "The primary difference between a contract for work or service and a contract for sale is that in the former there is in the person performing or rendering service no property in the thing produced as a whole, notwithstanding that a part or even the whole of the material used by him may have been his property. When the finished product supplied to a particular customer is not a commercial commodity in the sense that it cannot be sold in the market to any other person, the transaction is only a works contract." There cannot possibly be any dispute that the impugned transactions of the applicant involves a works contract or a contract of labour and skill. It is certainly not a contract of sale. The main question here, of course, is whether there is transfer of property in goods, which can be taxed under section 6D, while one is executing the contract of makin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... empower the State Legislature to levy sales tax on the value of goods involved in a works contract. Earlier sales tax could not be levied when the contract was an indivisible works contract. Now the same works contract is by a legal fiction treated as a contract which is divisible into one for sale of goods and the other for supply of labour and services. 42.. Armed with the competence as indicated above, the State Legislature made necessary amendments in its laws to levy sales tax on the value of the materials used in the works contract. Thus section 6D came to be introduced in the Bengal Finance (Sales Tax) Act, 1941 with effect from April 1, 1984. The relevant portion of section 6D is reproduced below: "6D. Liability to payment of tax on the transfer of property in goods involved in the execution of works contract and rates thereof.-(1) Notwithstanding anything contained elsewhere in this Act,- (a) any transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract (hereinafter referred to as contractual transfer) shall be deemed to be a sale of those goods by the person making the transfer and the purchase of those go ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y sea-going vessel, (3) any other vessel propelled by internal combustion engine or by any other mechanical means, (4) any aircraft, (5) any component or accessory part of any of the items mentioned in paragraph (1), (2), (3) or (4) above, or (iv) the altering, ornamenting, finishing, furnishing, improving or otherwise processing, treating or adapting of any goods. 44.. Works contract, as is commonly understood, has many variations and ramifications. The Supreme Court in Builders Association case [1989] 73 STC 370; [1989] 2 SCC 645 has observed that "the case-book is full of the illustrations of the infinite variety of the manifestation of works contract ". In this context it has also observed that whatever might be the situational differences of individual cases, the constitutional limitations on the taxing power of the State as are applicable to works contract relating to building would equally apply to other species of works contract with requisite situational modifications. It may also be added that the same principles in respect of building contracts will equally apply to other contracts of the same nature covered by the constitutional amendment. We are unable to agr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... position. It sticks out a mile. The said definition unambiguously posits an agreement between two persons, one owning the property and the other carrying out certain specific works on it. Sub-clauses (i) and (ii) refer to constructions on land belonging to the contractee and installation or repair of machinery affixed to his immovable property by the contractor. Sub-clause (iii) speaks of repair and overhauling by the contractor of motor vehicle, ship, aircraft, etc., belonging to the contractee. Sub-clause (iv) postulates the existence of certain goods of the principal which is required to be altered, ornamented, finished, adapted, etc., by the contractor. In each and every case, there has to be a property owned by somebody, who engages somebody else to carry out certain works involving application or affixation of certain materials to that property. It is the works contract of this nature, which is the subject-matter of section 6D of this Act. 48.. The implication of the argument of the learned advocate for the applicant is substantially this: To interpret section 6D and section 2(b)(iv) in a way to treat the job of photography or the like transaction as exigible under the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... works contract. This is not a tax on raw materials used in manufacture. State cannot be allowed to do so, as there is no element of sale in the consumption of raw materials in manufacture. 50.. There can be a contract where the entire gamut of activities resulting in the production of a specific product may be farmed out. Such a contract involving works is in the nature of manufacture being executed by a contractor. In essence this may turn out to be a contract of sale. This kind of contract is not contemplated under article 366(29A)(b) of the Constitution or section 6D and section 2(b)(iv) of the Act. When raw materials are consumed in the process of manufacture it does not amount to transfer of the property in such materials to constitute deemed sale. There cannot be any sales tax on such materials as their consumption in the process of manufacture is not sale. It is contended by the applicant that a tax on the consumption of materials in making a photographic print is the same as a tax on consumption or use of raw materials in manufacture. 51.. It was forcefully argued by the learned State Representative that in the case of deemed sale as contemplated in the relevant consti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... constitutional amendment in question. Even though there was no such specific agreement, a fiction of sale was created with regard to those goods involved or used in the execution of such works contract. This fiction of sale can only be created on certain preconditions being fulfilled. There has to be a works contract between two parties relating to a particular property and with regard to a particular job or work [the nature of the job or work has been indicated in section 2(b)]; goods have to be involved or used in the execution of such a contract and there has to be transfer of ownership of the said goods during execution as an integral part of the said execution of the contract, such transfer being effected on the principle of accretion. Even in deemed sale these ingredients or prerequisites are essential. It is worthwhile to note in this connection the observation of the Supreme Court in Builders Association case [1989] 73 STC 370; [1989] 2 SCC 645 that "the emphasis is on the transfer of property in goods-whether as goods or in some other form". 53.. It is difficult to accept the proposition that the transfer of property in goods takes place on account of its appropriatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ract of works and labour or skill. It was held in all these cases that predominantly those were either works contract or contract of labour and skill, though materials might have been used incidentally. Mr. De pointed out that the present case is of a similar nature because the use of materials, though not the dominant object of the contract, is incidental or ancillary thereto. He advanced the proposition that after the relevant amendment of the Constitution even in works contract where skill may be involved and supply of a materials is incidental, there can be imposition of tax on the materials supplied by way of appropriation to the contract. We have already indicated that it is not appropriation to the contract which constitutes sale, nor is mere supply of materials in a works contract taxable. What is necessary is occurrence of contractual transfer or deemed sale of such materials. If the ingredients of such sale as indicated in paragraph 52 are there, it becomes exigible. There is some confusion with regard to the taxability of a finished product as a result of the execution of a works contract and transfer of materials used or involved in the execution of works contract. Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the property in goods is transferred on delivery of the final product on or after completion of the said contract are beyond the scope of section 6D, even though there has been use or processing of goods in the execution of the contract. These are the principles and the propositions of law which clearly emerge from the discussion and will serve as acid test in a case relating to the taxation on works contract. These have to be applied to a given set of transactions or activities to determine their exigibility under section 6D of the Act. 58.. Let us now, in the light of the propositions enunciated hereinbefore, examine the facts of the present case. The dealer by using his own camera and films snaps photographs of the customers, develops films so exposed with the use of chemicals and then brings out prints on photographic paper. In this activity all the materials are supplied by the dealer, who employs his skill to bring out the final product, which is a print of a photograph. This is delivered to the customer on his approval and payment of the price for the contract. Though there is supply of films and paper but there is no transfer of ownership in these goods at the time of exe ..... X X X X Extracts X X X X X X X X Extracts X X X X
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