Imagic
Creative (P.) Ltd.
v.
Commissioner
of Commercial Taxes
S.B. SINHA AND
HARIJIT SINGH BEDI,JJ
CIVIL APPEAL
NO. 252 OF 2008
January 9,
2008
Article 366 (29A) of the Constitution
of India – Tax on sale or purchase of goods – Appellant, advertising agency,
engaged in creating original concepts and designing advertising material filed
its returns both under Finance Act,
1994 and Karnataka Value Added Tax Act,
2003 – Assessing Authority completed assessment by excluding certain items
of exempted turnover which included service charges, design and art work
charges collected by appellant in which no transfer of property in goods was
involved – Subsequently, criminal proceedings were initiated against appellant
and Tribunal held that sale of printed material with a background of providing
concept was an indivisible activity liable to tax as a whole – On appeal, High
Court upheld order passed by Tribunal – Whether since payment of service tax
and VAT are exclusive, they should be held to be applicable having regard to
respective parameters of service tax and sales tax as envisaged in a composite
contract as contradistinguished from an indivisible contract – Held, yes –
Whether therefore, sales tax would not be payable on value of entire contract
irrespective of element of service provided – Held, yes –Whether assessing
authority was correct in law approach and, therefore, impugned judgment was to
be set aside and appeal was to be allowed – Held, yes [Paras 28 and 35]
FACTS
The appellant was an advertising agency
engaged in creating original concept and designing advertising material such as
brochures, annual reports etc. for its clients. The appellant on the basis of
purchase order filed its returns both under the Finance Act, 1994 and the
Karnataka Value Added Tax Act, 2003 for the assessment year 2003-04. The
assessing authority completed the assessment by excluding certain items of
exempted turnover which included the service charges, design and art work
charges collected by the appellant in which no transfer of property in goods
was involved. After passing of said assessment order, a raid was conducted and
a criminal proceeding was initiated against the appellant-company and an order
was passed by the Tribunal holding that
the sale of printed material with a background of providing the concept was an
indivisible activity liable to tax at 4 per cent as a whole. An appeal
preferred thereagainst by the appellant in terms of section 24(1) of the Kerala
Sales Tax Act was dismissed by the division bench of the High Court.
On appeal to the Supreme Court, the
appellant submitted that the High Court committed a serious error in passing
the impugned judgment in so far as in the event the contract was held to be an
indivisible one, the service element thereof being subject to service tax, no
sales tax could have been levied on the incidental transfer of goods unless
such transfer falls within the scope and ambit of one of the provisions
contained in sub-clauses (a) to (f) of clause (29A) of Article
366. The respondent on the other hand
submitted that an entire transaction was a composite one inasmuch as all what was transferred was the
documents containing not only the value of the goods but also the soft skill
involved therein; and taxable value of goods was what the buyer was buying and
in view of the fact that when by some creativity the value of the goods was
enhanced, the entire value had rightly been held to be taxable.
HELD
The fact that the appellant was a
service provider was not in dispute. It was also not in dispute that the orders
received by it to provide such services was party specific and issue specific;
be it for issuance of a brochure or a year book or for any other purpose. The
appellant, in its returns, made three categorical divisions in regard to its
tax liabilities viz, (1) the amount of service tax on the specific design and
production; (2) the amount of Kerala Sales Tax on the specified item on the
first sale, and (3) when certain items were outsourced, the tax payable on resale
of the said goods in terms of section 6(4) of the Kerala Sales Tax Act. [Para 13]
The Tribunal as also the High Court
opined that the contract was an indivisible one. [Para 14]
The Parliament amended the Constitution
to insert clause 29-A in Article 366 of the Constitution, by reason of which a
legal fiction was created so as to make the supply of goods involved in a works contract, subject to tax. A transaction
of the instant description was not contemplated. [Paras 15 and 16]
The appellant admittedly was a service
provider. When it provided for service, it was assessable to a tax known as
service tax. Such tax was leviable by reason of a Parliamentary statute. In the
matter of interpretation of a taxing statute, as also other statutes where the applicability
of Article 246 of the Constitution read
with seventh schedule thereof is in question, the Court may have to take
recourse to various theories including ‘aspect theory’. [Para 24]
If the submission of the respondent was
accepted in its entirety, whereas on the one hand, the Central Government would
be deprived of obtaining any tax whatsoever under the Finance Act, it was
possible to arrive at a conclusion that no tax at all would be payable as the
tax had been held to be an indivisible one. A distinction must be borne in mind
between an indivisible contract and a composite contract. If in a contract, an
element to provide service is contained, the purport and object for which the
Constitution had to be amended and clause 29A had to be inserted in Article
366, must be kept in mind. [Para 25]
A legal fiction is created by reason of
the said provision. Such a legal fiction, as is well known, should be applied
only to the extent for which it was enacted. It, although must be given its
full effect but the same would not mean that it should be applied beyond a
point which was not contemplated by the legislature or which would lead to an
anomaly or absurdity. [Para 26]
The Court, while interpreting a
statute, must bear in mind that the legislature was supposed to know law and
the legislation enacted is a reasonable one. The Court must also bear in mind
that where the application of a Parliamentary and a Legislative Act comes up
for consideration ; endeavours shall be made to see that provisions of both the
acts are made applicable. [Para 27]
Payments 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 was, therefore, difficult to hold that in a case
of instant nature, sales tax would be payable on the value of the entire
contract; irrespective of the element of service provided. The approach of the
Assessing Authority, thus, appeared to be correct. [Para 28]
Consequently, the impugned judgment
could not be sustained and the same was to be set aside accordingly and the
appeal was to be allowed. [Para 35]