SUPREME COURT OF
Imagic Creative (P.) Ltd.
v.
Commissioner
of Commercial Taxes
S.B. SINHA AND HARJIT SINGH BEDI, JJ.
CIVIL
APPEAL NO. 252 OF 2008
JANUARY 9, 2008
charge of tax
Section 65 of the Finance Act, 1994, read with section 6 of Karnataka
Sales Tax Act, 1957 and article 366 of the Constitution of India - Charge of
tax - General - Whether payments of service tax as also VAT are mutually
exclusive; therefore, 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; it may consist of
different elements providing for attracting different nature of levy - Held,
yes - Appellant was an advertising agency engaged in creating original concept
and designing advertising material such as brochures, annual reports, etc., for
its clients - On basis of purchase order, it filed its returns, both under
Finance Act, 1994 and Karnataka Value Added Tax Act, 2003 for assessment year
2003-04 - Assessing authority completed assessment under Karnataka Sales Tax
Act, 1957 by excluding certain items of exempted turnover, which included
taxes, discount and service charges, design and art work charges and
advertisement charges collected by appellant in which no transfer of property
in goods was involved - After passing of said assessment order, a raid was
conducted and criminal proceeding was initiated against appellant and an order
was passed by Tribunal holding that sale of printed material with a background
of providing concept was an indivisible activity liable to tax at 4 per cent as
a whole - Appellant, in its returns, made three categorical divisions in regard
to its tax liabilities, viz., (1) amount of service tax on specific design and
production; (2) amount of Sales Tax on specified item on first sale; and (3)
when certain items were outsourced, tax payable on resale of said goods in
terms of Sales Tax Act - High Court upheld Tribunal’s order - Appellant
submitted that High Court committed a serious error in passing impugned
judgment insofar as in event contract was held to be an indivisible one,
service element thereof being subject to service tax, no sales tax could have
been levied on incidental transfer of goods unless such transfer falls within
scope and ambit of one of provisions contained in sub-clauses (a) to (f) of
clause (29A) of article 366 - On other hand, revenue submitted that entire
transaction was a composite one inasmuch as all that was transferred was
document containing not only value of goods but also soft skill involved
therein; and taxable value of goods was what buyer was buying and in view of
fact that when by some creativity value of goods was enhanced, entire value had
rightly been held to be taxable - Whether High Court was justified - Held, no
>> 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.
On the basis of purchase order it 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 under Karnataka Sales
Tax Act, 1957, by excluding certain items of exempted turnover, which included
the taxes discount and service charges, design and art work charges and
advertisement 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 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 there against by the
appellant in terms of section 24(1) of the 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 insofar 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 entire transaction
was a composite one inasmuch as all that was transferred was the document
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 were party specific and
issue specific, be it for issuance of a brochure or for 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 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 the Sales Tax Act. [
The Tribunal as also
the High Court opined that the contract was an indivisible one. [
The Parliament amended
the Constitution to insert clause (29A) 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 a 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,
read with Seventh Schedule thereof, is in question, the Court may have to take
recourse to various theories including ‘aspect theory’. [
If the submission of
the respondent was accepted in its entirety, whereas on the one hand, the
Central Government would be deprived of any tax whatsoever under the Finance
Act on the other hand 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. [
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, yet 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. [
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. [
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. [
Consequently, the
impugned judgment could not be sustained and the same was to be set aside and
the appeal was to be allowed. [
>> Case review
Decision of Karnataka High
Court in case of Imagic Creative (P.)
v. CCT [2008] 12 VST 366 (see Annex) reversed.