Recently, Hon. Bombay High Court has decided issue about nature of Works Contract vis-à-vis Service Contract. The issue pertained to 1989-90 wherein the transaction about plate making was held as not amounting to works contract by Tribunal. From Tribunal judgment, the matter was referred to Bombay High Court by way of Reference in case of
Comm. of Sales Tax, Maharashtra vs. M/s.Ramdas Sobhraj (STR No.9 of 2003 dt. 25.10.2012).
The facts are that the appellant was engaged in plate making activity. Hon’ble High Court recorded facts as under:
“c) In the job work of plate making the customers of the respondent-assessees supplies to the respondent-assessees duly grained zinc or aluminum plates. On receipt, plates are coated by dipping in water wherein gun bio chromate is dissolved. Thereafter positives are exposed on the treated plates by halogen lamps. The image is formed by the positives on the plates and the same is developed in the solution of calcium, lactic acid ferric chloride, cupric chloride and hydrochloride. The plates are thereafter washed in industrial solvent, as a result of which all the chemicals are washed out and only the images remain on the plates. Thereafter, lacquer and ink are applied on the plates. On a specific query, we were informed that lacquer and ink are applied on the plates so as to ensure that the images on the plates do not get disturbed/smudged by constant use. After the above process, the plates are dried and again washed with water and returned to the customers.”
On above facts, the arguments of Department were as under:
(i) there is a deemed sale by way of transfer of property in ink and lacquer as contemplated u/s. 2(l) of the Works Contract Act;
(ii) this is particularly so as the lacquer and ink are used by the respondent-assessee in the process of plate making, so as to ensure that images formed on the plates are not disturbed/smudged due to constant use. The lacquer and ink in plate so used get settled on the plate so as to become a part of the plate;
(iii) the Tribunal applied an incorrect test to hold that there is no transfer of property of lacquer and ink viz. the thickness of the plates continue to remain the same both before and after the process; and
(iv) in any case the issued raised in this reference stands concluded in favour of the applicant-revenue by the decision of this court in the matter of Commissioner of Sales Tax v. Matushree Textiles Limited reported in 132 Sales Tax Cases Page 539.
The arguments on behalf of dealer were as under:
(i) there has been no deemed sale by way of transfer of property in ink & lacquer while executing the job of plate making as held by the Tribunal.
(ii) the decision of this court in the matter of Matushree Textiles Ltd (Supra) will not apply in view of the subsequent decision of the Apex Court in the matter of Bharat Sanchar Nigam Ltd. v. UOI reported in 145 STC 19 which holds that there must be a transfer of goods as goods for the work Contract Act to be applicable. Similarly, the dominant intention of the transfer viz. whether to provide services or transfer of goods will be determinative of there being transfer of goods or not as held by the Apex Court in the matter of Idea Mobile Communication Ltd. v. Commissioner of Central Excise reported in 43 VST. Page 1. In this case, there is no transfer of goods as goods nor was there any intent to transfer the ink and lacquer to its customers; and
(iii) the order of the Tribunal is unexceptionable and the Court should affirm the view of the Tribunal.
The High Court, in relation to argument about dominant object, held that the understanding on the part of the dealer is not correct. The High Court referred to following part in the judgment in the case of Bharat Sanchar Nigam Ltd. (145 STC 19)(SC).
“47. In Rainbow Colour Lab v. State of M.P. (2000) 2 SCC 385, the question involved was whether the job rendered by the photographer in taking photographs, developing and printing films would amount to a “work contract” as contemplated under article 366 (29A)(b) of the Constitution read with section 2(n) of the M.P. General Sales Tax Act for the purpose of levy of sales tax on the business turnover of the photographers.
48. The court answered the questions in the negative because, according to the court:
“Prior to the amendment of article 366, in view of the judgment of this Court in State of Madras v. Gannon Dunerley & Co. (Madras) ltd. (1958) 9 STC 353; AIR 1958 SC 560, 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 (1989) 2 SCC 645 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 Assistant Sales Tax officer v. B.C.Kame (1977) 1 SCC 634 is only in the nature of a service contract not involving any sale of goods, we are of the opinion that the stand taken by the respondent-State cannot be sustained.”
49. This conclusion was doubted in Associated Cement Companies Ltd. v. Commissioner of Customs (2001) 4 SCC 593 saying :
“The conclusion arrived at in Rainbow Colour Lab case (2000) 2 SCC 385, in our opinion, runs counter to the express provision contained in article 366(29A) as also of the Constitution Bench decision of this Court in Builders’ Association of India v. Union of India (1989) 2 SCC 645.
50. We agree. After the 46th Amendment, the sale elements 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 were merely obiter and that Rainbow Colour Lab (2000) 2 SCC 385 was still good law, it was not correct. It is necessary to note that Associated Cement (2001) 4 SCC 593 did not say that in all cases of composite transaction the 46th Amendment would apply.”
Dealer also referred to the judgment of Idea Mobile Communication (43 VST 1)(SC), to substantiate its point of service nature of transaction. The High court rejected the same on the ground that it is under Service Tax and not relevant to works contract.
In relation to other argument about transfer of property in goods as goods, the High Court relied extensively upon the judgment in case of Matushree Textiles Ltd. (132 STC 539)(Bom) and reversed the judgment of the Tribunal and held the transaction as liable to tax.
Implications
The above judgment decides one of the important aspects about works contract vis-à-vis service transaction. In Bharat Sanchar Nigam Ltd. (145 STC 91). Hon. Supreme Court amongst others, in para 44, 45 has observed as under:
“44.. Gannon Dunkerley survived the 46th Constitutional Amendment in two respects. First with regard to the definition of “sale” for the purposes of the Constitution in general and for the purposes of entry 54 of List II in particular except to the extent that the clauses in article 366(29A) operate. By introducing separate categories of “deemed sales”, the meaning of the word “goods” was not altered. Thus the definitions of the composite elements of a sale such as intention of the parties, goods, delivery, etc., would continue to be defined according to known legal connotations. This does not mean that the content of the concepts remain static. Courts must move with the times. But the 46th Amendment does not give a licence, for example, to assume that a transaction is a sale and then to look around for what could be the goods. The word “goods” has not been altered by the 46th Amendment. That ingredient of a sale continues to have the same definition. The second respect in which Gannon Dunkerley has survived is with reference to the dominant nature test to be applied to a composite transaction not covered by article 366(29A). Transactions which are mutant sales are limited to the clauses of article 366(29A). All other transactions would have to qualify as sales within the meaning of the Sales of Goods Act, 1930 for the purpose of levy of sales tax.
45. Of all the different kinds of composite transactions, the drafters of the 46th Amendment chose three specific situations, a works contract, a hire-purchase contract and a catering contract to bring within the fiction of a deemed sale. Of these three, the first and third involve a kind of service and sale at the same time. Apart from these two cases where splitting of the service and supply has been constitutionally permitted in clauses (b) and (f) of clause (29A) of article 366, there is no other service which has been permitted to be so split. For example, the clauses of article 366(29A) do not cover hospital services. Therefore, if during the treatment of a patient in a hospital, he or she is given a pill, can the sales tax authorities tax the transaction as a sale? Doctors, lawyers and other professionals render service in the course of which it can be said that there is a sale of goods when a doctor writes out and hands over a prescription or a lawyer drafts a document and delivers it to his/her client? Strictly speaking with the payment of fees, consideration does pass from the patient or client to the doctor or lawyer for the documents in both cases.”
Therefore, once again, a controversy was arising as to dominant intention. In case of transaction involving very small value of goods and where skill was more important, there was a feeling that the transaction should not be a works contract but a service contract. However, the above judgment of Hon. Bombay High Court has dispelled any doubt about the nature of transaction and it appears that the ratio of Matushree Textiles Ltd. (132 STC 539)(Bom) will prevail for all purposes for interpretation of nature of works contract transaction.
