Dilemma: Sale and/or service?
Given the fact, that in India we have a separate legislation each for taxing a ‘sale’ by the States and taxing a ‘service’ under the Union law, tug of war between the two taxing laws victimises many law-compliant business outfits for many complex transactions or even apparently simple transactions like purchase or sale of software, providing telecommunication services, serving food or processing and developing photographs. Despite paying tax on the whole of the transaction under one or both the tax legislations, considering it either sale or service or a composite transaction having both the elements, a business entity is forced into litigation process under one or both the tax legislations on account of conflicting or different views of administrators of different tax legislations. For a simpliciter transaction of a pure sale like a retailer/ wholesaler selling simple goods across the counter or a stand-alone service transaction like a chartered accountant providing tax advisory or a stock-broker buying or selling securities for its client and charging brokerage does not generally cause any issue in determining applicable tax law. However, a very large number of transactions are more complex than this where constantly issues occur over the parentage of the tax law for the transaction and whether or not the transaction can be split into two and have refuge under both taxing statutes. If at all there appears apparent finality on any issue, it is only subjective. The underlying cause of this controversy is separate taxing statute and separate taxing authorities for sale of goods and services and the two administrating bodies never seem to have a meeting point and therefore the least important factor is the assessee in the scenario, who suffers uncertainty and cost of long-drawn litigation.
In the State of Uttar Pradesh v. UOI, 2004 (170) ELT 385 (SC), the Supreme Court observed:
“By calling sale as service or vice versa, the substance of the transaction will not get altered. This has to be determined by discerning the substance of the transaction in the context of the contract between the parties or in a case of statutory contract in the light of relevant provisions of the Act and the Rules. If an activity or activities are comprehensively termed as ‘service’, but they answer the description of ‘sale’ within the meaning of statute, they can nonetheless be regarded as sale for the purpose of that statute. In other words, it is possible that an activity may be service for the purpose of one Act and sale for the purpose of another Act. It may also be that in a given case, on the facts of that case, a particular activity can be treated as ‘service’, but in a different fact situation the same could be ‘sale’ under the same statute”.
The above decision however was overruled by the Supreme Court in the landmark case of Bharat Sanchar Nigam Ltd. & Anr. v. UOI & Ors., 2006 (2) STR-161 (SC) and in respect to a specific question formulated by the Court that “would the aspect theory be applicable to the transaction enabling the States to levy sales tax on the same transaction in respect of which the Union Government levies service tax?” The Court held that “the aspect theory would not apply to enable the value of the services to be included in the sale of goods or price of goods in the value of service”. The law enunciated by BSNL (supra) is a settled position. Whereas in the case of Imagic Creative Pvt. Ltd. v. COL, 2008 (9) STR 337 (SC), the Supreme Court held “the payment of service tax as also the VAT are mutually exclusive. Therefore, they should be held to be applicable having regard to the respective parameters of service tax and the sales tax as envisaged in a composite contract as contradistinguished from an indivisible contract.
It may consist of different elements providing for attracting different nature of levy. It is therefore difficult to hold that in a case of this nature, sales tax would be payable on the value of the entire contract, irrespective of the element of service provided” (emphasis supplied). Does the problem get solved at this point or does it give rise to another issue viz. which contracts are composite contracts and which are indivisible? Or, the seemingly composite contract is held a contract of pure sale or of pure service! The overlap if any in a transaction is not always visible and it can be interpreted as either or both by different administrations giving rise to litigation.
In a few recent decisions, it is noticed that apparently settled position is unsettled. Keeping aside the question of correctness of the same for the time being, the controversy is discussed with reference to photography service.
Issue for consideration
Photography service was introduced in the service tax net with effect from July 16, 2001. Clauses (78) and (79) of section 65 of the Finance Act, 1994 (the Act) r.w.s. 65(105)(zb) of the Act contain the provisions relating to this service. The scope of the service also includes jobs carried out by processing laboratories. This position as of date is not controversial. The Madhya Pradesh High Court in a writ filed by Colourway Photo Lab v. UOI, 2009 (15) STR 17 (MP) held that “colour laboratories would be a part of photography studio or agency involved in providing the service to the consumer and are amenable to service tax”. The controversial issue relates to whether or not paper, chemicals and other consumables used in the creation of photographs is excludible from the value of service chargeable to service tax in terms of Notification No. 12/2003-ST of 20-6-2003, whereby the value of goods sold during provision of service is excluded, provided no CENVAT credit of duty paid on such goods is claimed by the service provider. Before discussing this aspect, it may be noted that Explanation 1(iii) to section 67 as it stood till 17-4-2006 provided that the cost of unexposed photography film if sold to the receiver of service during the course of providing photography service will not be included in the value of service. Section 67 with effect from 18-4-2006 was amended. Rule 6 of the Valuation Rule does not contain any express provision in this regard. However, for the separate supply of unexposed film, the exclusion under Notification 12/2003-ST is not an issue. The issue only centres around excludability of value of paper chemicals and other consumable under the same Notification.
Rainbow Colour Lab’s case
[2001 (134) ELT 332 (SC)]
This case came up before the Supreme Court as the Madhya Pradesh High Court decided in favour of levying sales tax on business turnover of photographs considering jobs rendered by photographer in taking photographs, developing and printing films amounted to works contract and exigible to sales tax. The Supreme Court categorically distinguished the decision in Builders’ Association of India v. UOI, 1989 (73) STC 370 relied upon by Madhya Pradesh High Court while holding that to the extent of the photo-paper used in the printing of positive prints, there is a transfer of property in goods and therefore the job done becomes a ‘works contract’ as contemplated under the Article 366(2A)(b) of the Constitution. However, this reliance was expressly referred to as ‘misplaced’ and relying inter alia on Hindustan Aeronautics Ltd. v. State of Karnataka, 1984 (55) STC 314 and Everest Copiers v. State of Tamil Nadu, 1996 (103) STC 360, the Supreme Court held that mere passing of property in an article or commodity during the course of performance of the transaction in question does not render the transaction to be one of sale. In every case, one is necessitated to find out the primary object of the transaction. The Court further held that “unless there is a sale and purchase of goods either in fact or deemed and which sale is primarily intended and not incidental to the contract, the State cannot impose sales tax on a works contract simplicita in the guise of expanded definition of Article read with the relevant provisions in the State Act,” and quoted observation in Builders’ Association’s case (supra) which read, “as the Constitution exists today, the power of the States to levy taxes on sales and purchases of goods including ‘deemed’ ‘sales’ and purchases of goods under clause 29(A) of Article 366 is to be found only in entry 54 and not outside it.” The Court held that the work done by the photographer is only in the nature of a service contract not involving any sale of goods. The contract is for use of skill and labour by the photographer to bring about a desired result. The occupation of photographer, except insofar as he sells the goods purchased by him is essentially one of skill and labour.
[Note: It is interesting to note that in the case of Associated Cement Companies Ltd., 2001 (128) ELT 21 (SC), the Larger Bench of three Judges pointed out that the principle laid down in Rainbow Colour Lab (supra) runs counter to the express provision contained in Article 366(29A), since after the 46th Amendment to the Constitution, the States now would be empowered to levy sale tax on material used in a works contract. It also pointed out that the principle in Rainbow Colour Lab (supra) runs counter to the decision of the constitutional Bench in Builders’ Association’s case (supra) and thus doubted the judgment.]
C. K. Jidheesh v. Union of India’s case [2006 (1) STR 3 (SC)]
In this case, the Supreme Court distinguished Associated Cement’s case (supra) when it was pointed out by the appellant that correctness of decision in Rainbow Colour Lab’s case (supra) was doubted by the Bench of three judges in Associated Cement Companies Ltd. (supra) and thus stood overruled. The Court observed that in Associated Cement Companies Ltd.’s case (supra) the question was whether or not customs duty could be levied on drawings, designs, diskettes, manuals, etc. as they were contended to be intangible properties and not goods as defined in section 2(22) of the Customs Act and the question of levy of service tax did not arise there. The Court further observed that the observations relied upon were mere passing observations and did not overrule Rainbow Colour Lab’s case (supra). While examining the plea of the petitioner for bifurcation of gross receipts of processing of photographs into the portion attributable to goods and that attributable to services, and tax only the portion attributable to services followed the decision in Rainbow Colour Lab’s case and held that “contracts of photography are service contracts pure and simple. In such contracts there is no element of sale of goods and in view of Rainbow Colour Lab’s judgment, the question of directing the respondent to bifurcate the receipts into an element of goods and the element of service cannot and does not arise.”
During about past five years however, several decisions were given by the Tribunals on this issue. Beginning with the decision in the case of Adlabs v. Commissioner, 2006 (2) STR 121, the Tribunal relied on the Board’s letter dated 7-4-2004 to Punjab Colour Association (later superseded by Circular dated 3-3-2006) clarifying that exemption under Notification No. 12/2003-ST for excluding input material consumed/sold was available. Based on the letter, the Tribunal held that the appellant was eligible for the benefit of deduction of cost of material used during provision of service. This stand was dissented to by the Delhi Tribunal in the case of Laxmi Colour Pvt. Ltd., 2006 (3) STR 363 (Tri.-Del.) which followed the Supreme Court’s decision of C. K. Jidheesh (supra). Between then and now, Tribu-nals in Agarwal Colour Lab v. CCE, Raipur 2006 (1) STR 41 (Tri.-Del.) and Panchsheel Colour Lab v. CCE, Raipur 2006 (4) STR 320 (Del.) decided in favour of the Revenue i.e., not allowing exclusion of inputs in photography service whereas in umpteen number of cases, the decision was against the Revenue. C. K. Jidheesh (supra) was considered overruled in the case of Bharat Sanchar Nigam Ltd.’s case (supra) and cited by the Tribunal in the case of Shilpa Colour Lab v. CCE, Calicut 2007 (5) STR 423 (Tri.-Bang.) and it followed the decision in the case of Adlabs (supra). The list of decisions against the Revenue included Delux Colour Lab & Others, 2009 (13) STR 605 (Tri.), Technical Colour Lab v. CCE, 2009 (13) STR 589 (Tri.-Del.), Jyoti Art Studio v. CCE, 2008 (10) STR 158 (Tri.-Bang.), M/s. Edman Imaging v. CCE, 2008 (9) STR 91 (Tri.-Bang.), Roopchhaya Colour Studio v. CCE, 2008 (11) STR 125 (Tri.-Bang.), Digi Photo Laser Imaging P. Ltd. v. CCE, 2007 TIOL 1169 (CESTAT-Bang.), Ajanta Colour Lab (2009) 20 STT 395 (New Delhi CESTAT). Savitri Digital Lab v. CCE, (2009) 23 STT 82 (Chennai-CESTAT) and a few others as well. Further, following the views of the Delhi CESTAT in Sood Studios v. CCE, (2009) 19 STT 453 (New Delhi), the Punjab and Haryana High Court in CCE v. Vahoo Colour Lab, 2010 (18) STR 548 (P&H) following BSNL (supra) held that “the components of sale of photography, developing and printing, etc. are clearly distinct and discernible than that of photography service. Therefore as the photography is in the nature of works contract and it involves the elements of both sale and service, the service tax is not leviable on the sale portion in obtaining circumstances of the case”. We summarise below the case of Shilpa Colour Lab (supra) as it contained a number of appellants and it has also been relied upon in a number of later decisions holding that value of goods and consumables was excludible under Notification No. 12/2003-ST while providing photography service.
Shilpa Colour Lab v. CCE, Calicut’s case 2007 (5) STR 423 (Tri.-Bang.)
In this case, a bunch of appeals related to the issue of levying service tax on the amount charged in the case of printing photograph for other than service component. This case had followed earlier decision of the same Bench in the case of Adlabs v. Commissioner, 2006 (2) STR 121 (Tri.). The Tribunal in this case observed that goods sold while providing service are not liable to service tax as that would amount to sales tax which constitutionally is State subject and not that of Union. Decisions in Rainbow Colour Lab (supra) and C. K. Jidheesh (supra) were examined. It was pointed out by the appellants that the Apex Court in Bharat Sanchar Nigam Ltd., 2006 (2) STR 161 (SC) had overruled the decisions in the cases of C. K. Jidheesh and Rainbow Colour Lab. Para 47 of the BSNL decision (supra) was specifically cited to read as follows. “47. We agree. After the 46th Amendment, the sale element of those contracts which are covered by the six sub-clauses of Clause (29A) 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. Therefore when in 2005, C. K. Jidheesh v. Union of India, (2005) 8 SCALE 784 held that the aforesaid observations in Associated Cement (supra) were merely obiter and that Rainbow Colour Lab (supra) was still good law, it was not correct. It is necessary to note that Associated Cement did not say that in all cases of composite transactions the 46th Amendment would apply.”
Based on this, the Tribunal held that the Apex Court had overruled the decisions in Rainbow Colour Lab and C. K. Jidheesh in BSNL’s (supra) case and further observing BSNL’s ruling that “aspect theory would not apply to enable the value of services to be included in the sale of goods the price of goods in the value of service”, the Tribunal held that the implication of BSNL’s case is that in photography service, if value of goods and material are consumed, then such value cannot be included in the value of service for the levy of service tax.
[Note — The Supreme Court dismissed the Departmental appeal filed against this decision].
In the midst of the above, the case of Agarwal Colour Advance photo System v. CCE, Bhopal reported at 2010 (19) STR 181 (Tri.-Del.) came up before the Delhi CESTAT wherein detailed analysis of the various decisions including the above deci-sions (both for and against the Revenue) and the decisions referred to in these decisions viz. BSNL (supra ), Imagic Creative (supra), Associated Cements (supra), Rainbow Colour Lab (supra), Everest Photocopier (1996) 163 STC 360 (SC) inter alia were discussed alongside the discussion on sale, deemed sale, etc. On account of there being several judgments against the Revenue and a number of them in its favour, to maintain judicial propriety wherever the Bench differs with the decision of a co-ordinate Bench, the matter was referred to the Larger Bench of the Delhi Tribunal.
The recently reported Aggarwal Colour Advance Photo System’s case
[2011 (23) STR 608 (Tri.-LB)]
In an attempt to end the controversy and conflicting decisions in Aggarwal Colour Advance Photo System, 2011 (23) STR 608 (Tri.-LB), only two questions were decided (agreed by both the parties) to be dealt with by the Larger Bench in the appeal out of 5 questions of law referred to it [as reported in 2010 (19) STR 181 (Tri.-Del.)] are as follows :
- Whether for the purpose of section 67 of the Finance Act, 1994 the gross amount chargeable for photography service should include the cost of material and goods used/consumed and deduct the cost of unexposed films?
- Whether the term ‘sale’ appearing in Notification No. 12/103-ST of 20-6-2003 is to be given the same meaning as given by section 2(h) of the Central Excise Act, 1944 read with section 65(121) of the Finance Act, 1994 or this term would also include deemed sale as defined by Article 366(29A)(b) of the Constitution?
Answering the first question cited above, the Bench expressed its view that in case of services in relation to photography, service tax has to be levied on the gross amount charged for providing such service which would include value of all material or goods used/consumed or becoming medium, it being inseparable and integrally connected and enabling performance of service. The only permissible deduction will be for the value of unexposed film, if any sold. This view was expressed by following C. K. Jidheesh (supra), a direct judgment of the Supreme Court on the valuation of photography service. According to the Bench, decisions of the Tribunal in cases of Shilpa Colour Lab (supra), Adlab v. CCE (supra) and Delux Colour Lab & Others v. CCE, Jaipur (supra) were impediments and appeared contrary to law laid down by C. K. Jidheesh (supra).
The appellant’s key contention inter alia on merits was that on the basis of the settled law, various Benches of Tribunal rightly excluded the value of goods used in providing photography service to determine assessable value of such service. The Finance Act, 1994 could not attempt to tax goods as there did not exist provision in that law to do so and that benefit of excluding sale of goods under Notification 12/2003-ST was not deniable. Among others, and relying on the decision of the High Court of Punjab & Haryana in the case of Vahoo Colour Lab, 2010 (18) STR 548 (P&H), it was contended that processing of photography being a works contract involved both sale and service and therefore service tax was not leviable on the sale portion. Whereas the Revenue contended that providing photography is a pure and simple service contract and there is no contract for sale of goods unless a distinct sale is available, the consideration received for photography service becomes measure of value of taxation. The Revenue inter alia further contended that the word ‘sale’ in Notification 12/2003-ST has to be interpreted on the basis of its meaning as per section 2(h) of the Central Excise Act, 1944 as applicable to service tax by virtue of section 65(121) of the Act. When there is no primary intention of the parties to sell paper or consumables in providing photography service, there is no room for applicability of ‘deemed sale’ concept in absence of any such sale of commodities as goods.
Valuation of taxable service
The Larger Bench of the Tribunal observed that service tax is leviable on the gross value of taxable service and this being a measure of tax, determination thereof was crucial. Service tax being destination-based consumption tax, all cost additions till the service reaches consumer form part of the value of the service. Citing the judgment of Association of Leasing & Financial Service Companies v. UOI, 2010 (20) STR 417 (SC), it was opined by the Bench that the principle of equivalence was applicable and there was a thin line of divide between sale and service and such principle was in-built into the concept of the Finance Act, 1994. It is a value added tax and the value addition is on account of the activity which provides value addition.
Notification No. 12/2003, dated 20-6-2003 granting exemption to value of goods sold to the recipient of service
While answering the second question, the Bench observed that to satisfy the said condition of the Notification and claim the part of value as exempt, the assessee was to discharge the burden to show the value of goods and material actually sold. The term ‘sold’ cannot include ‘deemed sale’ of goods and material consumed by the service provider while generating and providing service. Whether any goods or material are sold while providing photography service, there should be documentary proof specifically indicating the value of goods and material in question sold while providing service and this is further subject to condition of non-availment of credit of duty on such goods. Granting an exemption always depends on factual evidence and differs from case to case depending on facts and circumstances of each case which is left to the domain of the Tax Administration for determining whether such burden was discharged by the assessee.
The Bench noted that there was no doubt that papers, consumables and chemicals are used and consumed to bring photographs into existence and it is also true that no person goes to buy paper and chemicals from the photography service provider. Service recipient expects delivery of photograph. Consumables and chemicals disappear when the photograph emerges. Relying on C. K. Jidheesh (supra), it was observed that photography contract was not a composite contract of sale of goods and service. It was also noted by the Bench that since the Supreme Court rendered decision of Surabhi Colour Lab (supra) by remanding the matter to verify whether the assessee maintained records of inputs used in photography and no report was produced as to how the matter was concluded, it could not be relied upon. Further, the decision in Technical Colour Lab (supra) was rendered purely by following Surabhi’s case (supra), they were bound to follow the ratio of C. K. Jidheesh (supra). While accepting the Revenue’s contention, the Bench observed that in terms of the rulings of several High Courts (included inter alia V. V. Jha v. State of Meghalaya, Gauhati High Court etc.), there was ‘no sale’ or ‘deemed sale’ of goods and material in photography service. The obiter reference in the case of BSNL (supra) being a different question of law and fact. (In the case of BSNL, the Supreme Court had to examine whether any right to use any goods involved in telephone connection provided by BSNL to its subscribers could be subject to sales tax), it did not stand to overrule either C. K. Jidheesh (supra) or Rainbow Colour Lab (supra). The Bench accordingly answered the questions as follows:
- For the purpose of section 67 of the Finance Act, 1994, the value of service of photography would be the gross amount charged including cost of goods and material used and consumed during provision of service. The cost of unexposed films, etc. would stand excluded in terms of Explanation to section 67 if sold to the client.
- The value of goods and material if sold separately would be excluded under Notification 12/2003-ST and the term ‘sold’ appearing thereunder has to be interpreted using the definition of ‘sale’ in the Central Excise Act, 1944 and not as per the meaning of deemed sale under Article 366(29A) (b) of the Constitution. The Court further ob-served that based on the above, it can be said that value would be determined based on facts and circumstances of each case as the Finance Act, 1944 does not intend taxation of goods and material sold in the course of providing all taxable services.
Conclusion
From the aforesaid discussion, it appears that generally if the cost of paper and other material appears separately in an invoice during the course of providing service, the issue prima facie of non-allowance of benefit under Exemption Notification 12/2003-ST may not arise. However, appreciating that this practice more often than not, is not followed and also considering the recent controversial decision in the case of Sayaji Hotels Ltd. v. UOI, (24) STR 177 (Del.-Trib.) (Refer Recent Decisions – Indirect Taxes, Part A of this issue) if the facts of a specific case demand examination of applicable provisions of law, the following questions whether can be answered with finality or the controversy may continue on account of conflicting views and interpretations, time alone would decide it:
- Whether contract of photography is indivisible or a composite contract of sale and service or a standalone contract of service?
- If the contract is composite or an indivisible one, whether the value of ‘sale’ is discernible?
- If the value is discernible, whether it amounts to ‘sale’ as defined in 2(h) of the Central Excise Act, 1944 or whether fiction of ‘deemed sale’ under Article 366(29A)(b) of the Constitution would be available considering the contract a works contract?
- As a matter of fact, whether there exists an intention of ‘sale’ in the contract of photography or put in other words, whether there are two distinct or subtle contracts, one of ‘sale’ and another of ‘service’ present?
- Given the fact that paper used for photograph can be bought and sold and the photograph itself can be utilised, stored, possessed, transferred, transmitted and delivered, [and thus the necessary ingredients of existence of ‘goods’ and their delivery are satisfied in terms of the view adopted in Tata Consultancy Services v. State of Andhra Pradesh, 2004 (178) ELT 22 (SC)] should the benefit under Notification 12/2003-ST be not available without examining the intention to purchase and/or sale?
- In a simple contract of providing five copies of passport-sized photograph of an individual, Rs.150 is charged and for providing ten copies, Rs.175 is charged. Isn’t the value addition only on account of ‘value’ of goods? Is ‘deemed sale’ still not applicable?
