Works Contract – Sale – Definitions – Contract
for Processing Exposed Photographic Film Rolls and Negatives – Not Works
Contract
Goods – Exposed Photographic Film Rolls and Negatives –
No Marketable Value – Not Goods – S/s. 2(15), (33), (38)(Iv), 8(1)(E) ;
Sch. VI, Entry 24 of The Assam General Sales Tax Act, 1993— Art.
366(12), (29A) of the Constitution of India.
Facts
The
dealer carried on the business of developing exposed photographic film
rolls into negatives and then processing the negatives into positive
photographs. They also processed negatives received from customers into
positive photographs. The developing and processing was done on a
job-work basis. Demands for sales tax under the Assam General Sales Tax
Act, 1993 were raised against the appellants and were affirmed in
appeals. The appellants filed writ petitions which were dismissed by the
single judge. The dealer filed appeal before the division bench of the
High Court against the judgment of the single judge.
Held
The
question that required to be answered was whether the transactions
entered into by the appellants are works contracts (that is composite
contracts having both a service element and a sale element) with deemed
sales or mutant sales of goods for the purposes of liability to sales
tax.
If there is an agreement both for transfer of property in
goods and for processing or otherwise treating or adapting any goods,
then the agreement is a works contract involving a sale, otherwise not.
Therefore, three ingredients are necessary:
(i) the existence of goods,
(ii) the transfer of property in those goods,
(iii) the processing or treating or adapting of those goods.
To
qualify as “goods” as defined in section 2(15) of the Act an item must
have some utility and must be marketable. Exposed photographic film
rolls and negatives are not goods per se they have absolutely no utility
for anyone—not even for the owner. It is only when they are developed
or processed that they have some personal value for the owner of the
photographs.
Therefore, if exposed photographic film rolls and
negatives are not “goods” they cannot be the subject-matter of a works
contract which concerns itself with the processing or otherwise treating
or adapting any goods as defined in section 2(38)(iv) of the Act.
Alternatively, if the transactions entered into between the appellants
and their customers are not works contracts, would the utilisation of
chemicals in developing exposed photographic film rolls into negatives
and then processing the negatives into positive photographs be a “sale”
of such chemicals?
To be a sale, there must be a transfer of
property in goods involved in the execution of a works contract.
Assuming that the chemicals used in developing exposed photographic film
rolls into negatives and then processing the negatives into positive
photographs are “goods”, these chemicals are not used in the execution
of a works contract. Therefore, there was no “sale” of chemicals within
the meaning of section 2(33) of the Act.
Since exposed
photographic film rolls and negatives are not “goods” the provisions of
sections 7, 8 of the Act and Schedule VI thereto do not come into play
at all. When a customer goes to the appellants to have his exposed
photographic film rolls developed or negatives processed, there may be
an agreement for the transfer of property in the chemicals used in the
processing or otherwise treating or adapting the exposed photographic
film rolls and negatives. But since they are not “goods” within the
meaning of the Act, the question of taxing the “sale” of the chemicals
does not at all arise. The conversion of exposed photographic film rolls
into negatives and then into positive photographs or the conversion of
negatives into positive photographs is nothing but a rendering of
service specific to a customer and was a matter of skill and expertise
of the developer – it was not a works contract.
The High Court
further held that the case of the appellants is fully covered in their
favour by the law laid down by the Supreme Court in Bharat Sanchar Nigam
Ltd. [2006] 3 VST 95 (SC); [2006] 145 STC 91 (SC); [2006] 3 SCC 1.
Accordingly, the High Court allowed appeals and the judgment and order
of the learned single judge was set aside.
