# STATE OF KARNATAKA v. MIS PRO LAB & ORS. ETC

- **Citation:** [2015] 1 S.C.R. 808
- **Court:** Supreme Court of India
- **Decided:** 2015-01-30
- **Case number:** Civil Appeal No. 1145 of 2006
- **Bench:** H.L. Dattu, A.K. Sikri, Arun Mishra
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/state-of-karnataka-v-mis-pro-lab-ors-etc-30427
- **Pages:** 36

## Headnote

Kamataka Sales Tax Act, 1957.· Entry 25 of Schedule VI
- Constitutional validity of - Legislative competence of State
C Legislature to levy tax for processing and supply of
photographs, photo prints and photo negatives challenged -
Challenge also to the retrospective effect given to said entry
- Held: By virtue of clause 29-A of Article 366, the State
Legislature is empowered to segregate the goods part of the
o Works Contract and impose sales tax thereupon - Entry 54,
List II empowers the State Legislature to enact a law taxing
sale of goods - Sales tax, being a subject-matter into the
State List, the State Legislature has the competency to
legislate over the subject -
Thus, Entry 25 of Schedule VI
E which makes that part of processing and supplying of
photographs, photo prints and photo negatives, which have
"goods" component exigible to sales tax is constitutionally
valid - In Rainbow Colour Lab case, Entry 25 of Schedule VI
was declared unconstitutional -
The said judgment was
F declared as not a good law in ACC Ltd. - Thus, the very basis
on which Entry 25 of Schedule VI was declared as
unconstitutional, was found to be erroneous -
In such
circumstances, the legislature will be justified in enacting the
law from the date when such a law was passed originally i.e.
G 01.07.1989 - Constitution of India, 1950 - Articles 366(29A),
List II, entry 54 - Taxflaxation - Sales Tax.
Allowing the appeal, the Court
Held: 1. After insertion of clause 29-A in Article 366
H
808
STATE OF KARNATAKA v. PRO LAB & ORS. ETC. 809
of the Constitution of India, the Works Contract which
A
was indivisible one by legal fiction, altered into a contract,
is permitted to be bifurcated into two: one for "sale of
goods" and other for "services", thereby making goods
component of the contract exigible to sales tax. While
going into this exercise of divisibility, dominant intention
B
behind such a contract, namely, whether it was for sale
of goods or for services was rendered otiose or
immaterial. It follows, as a sequitur, that by virtue of clause
29-A of Article 366, the State Legislature is now
empowered to segregate the goods part of the Works c
Contract and impose sales tax thereupon. Entry 54, List
II of the Constitution of India empowers the State
Legislature to enact a law taxing sale of goods. Sales tax,
being a subject-matter into the State List, the St<:!te
Legislature has the competency to legislate over the
0
subject. [Paras 21, 22] [833-F-H; 834-A, B]
ACC Ltd. v. Commissioner of Customs (2001) 4 SCC 593
: 2001 (1) SCR 608; Gannon Dunkerley and Co. and others
v. State of Rajasthan and others (1993) 1 SCC 364 : 1992
(3) Suppl. SCR 103; Builders Association of India and
E
others v. Union of India and others (1989) 2 SCC 645 : 1989
(2) SCR 320; Mis Larsen Toubro and another v. State of
Karnataka and another (2014) 1 SCC 708; C.K. Jidheesh v.
Union of India (2005) 13 SCC 37 : 2005 (4) Suppl. SCR 862
- relied on.
F
Rainbow Colour Lab and Another v. State of Madhya
Pradesh and others (2000) 2 SCC 385 2000 (1) SCR 594
- overruled.
Mis Keshoram Surindranath Photo Bag (P) Ltd. and G
others v. Asstt. Commissioner of Commercial Taxes (LR), City
Division, Bangalore and others 121 (2001) STC 175; Mis
Golden Colour Labs and Studio and others v. The
Commissioner of Commercial Taxes ILR 2003 Kar 4883 -
referred to.
H
810
SUPREME COURT REPORTS
[2015] 1 S.C.R.
A
2. Entry 25 was inserted for the first time by
amendment of the Act w.e.f. 01.07.1989. This amendment
was post 46th Constitutional Amendment. However, the
High Court of Karnataka declared the said Entry to be
unconstitutional and the SLP was also dismissed.
B Undoubtedly, it was because of the judgment in Rainbow
Colour Lab, which judgment was declared as not a good
law in ACC Ltd. Thus, the very basis on which Entry 2F
of Schedule VI was declared as unconstitutional, has
been found to be erroneous. In such circumstances, the
c legislature will be justified in enacting the law from the.
date when such a

## Text

_Characters 0–39,885 of 67,863. This is a partial read: ask again with offset=39885 for what follows._

A
B
[2015] 1 S.C.R. 808
STATE OF KARNATAKA
V.
MIS PRO LAB & ORS. ETC.
(Civil Appeal No. 1145 of 2006)
JANUARY 30, 2015
[H.L. DATTU, CJI, A.K. SIKRI, ARUN MISHRA, JJ.]
Kamataka Sales Tax Act, 1957.· Entry 25 of Schedule VI
- Constitutional validity of - Legislative competence of State
C Legislature to levy tax for processing and supply of
photographs, photo prints and photo negatives challenged -
Challenge also to the retrospective effect given to said entry
- Held: By virtue of clause 29-A of Article 366, the State
Legislature is empowered to segregate the goods part of the
o Works Contract and impose sales tax thereupon - Entry 54,
List II empowers the State Legislature to enact a law taxing
sale of goods - Sales tax, being a subject-matter into the
State List, the State Legislature has the competency to
legislate over the subject -
Thus, Entry 25 of Schedule VI
E which makes that part of processing and supplying of
photographs, photo prints and photo negatives, which have
"goods" component exigible to sales tax is constitutionally
valid - In Rainbow Colour Lab case, Entry 25 of Schedule VI
was declared unconstitutional -
The said judgment was
F declared as not a good law in ACC Ltd. - Thus, the very basis
on which Entry 25 of Schedule VI was declared as
unconstitutional, was found to be erroneous -
In such
circumstances, the legislature will be justified in enacting the
law from the date when such a law was passed originally i.e.
G 01.07.1989 - Constitution of India, 1950 - Articles 366(29A),
List II, entry 54 - Taxflaxation - Sales Tax.
Allowing the appeal, the Court
Held: 1. After insertion of clause 29-A in Article 366
H
808
STATE OF KARNATAKA v. PRO LAB & ORS. ETC. 809
of the Constitution of India, the Works Contract which
A
was indivisible one by legal fiction, altered into a contract,
is permitted to be bifurcated into two: one for "sale of
goods" and other for "services", thereby making goods
component of the contract exigible to sales tax. While
going into this exercise of divisibility, dominant intention
B
behind such a contract, namely, whether it was for sale
of goods or for services was rendered otiose or
immaterial. It follows, as a sequitur, that by virtue of clause
29-A of Article 366, the State Legislature is now
empowered to segregate the goods part of the Works c
Contract and impose sales tax thereupon. Entry 54, List
II of the Constitution of India empowers the State
Legislature to enact a law taxing sale of goods. Sales tax,
being a subject-matter into the State List, the St<:!te
Legislature has the competency to legislate over the
0
subject. [Paras 21, 22] [833-F-H; 834-A, B]
ACC Ltd. v. Commissioner of Customs (2001) 4 SCC 593
: 2001 (1) SCR 608; Gannon Dunkerley and Co. and others
v. State of Rajasthan and others (1993) 1 SCC 364 : 1992
(3) Suppl. SCR 103; Builders Association of India and
E
others v. Union of India and others (1989) 2 SCC 645 : 1989
(2) SCR 320; Mis Larsen Toubro and another v. State of
Karnataka and another (2014) 1 SCC 708; C.K. Jidheesh v.
Union of India (2005) 13 SCC 37 : 2005 (4) Suppl. SCR 862
- relied on.
F
Rainbow Colour Lab and Another v. State of Madhya
Pradesh and others (2000) 2 SCC 385 2000 (1) SCR 594
- overruled.
Mis Keshoram Surindranath Photo Bag (P) Ltd. and G
others v. Asstt. Commissioner of Commercial Taxes (LR), City
Division, Bangalore and others 121 (2001) STC 175; Mis
Golden Colour Labs and Studio and others v. The
Commissioner of Commercial Taxes ILR 2003 Kar 4883 -
referred to.
H
810
SUPREME COURT REPORTS
[2015] 1 S.C.R.
A
2. Entry 25 was inserted for the first time by
amendment of the Act w.e.f. 01.07.1989. This amendment
was post 46th Constitutional Amendment. However, the
High Court of Karnataka declared the said Entry to be
unconstitutional and the SLP was also dismissed.
B Undoubtedly, it was because of the judgment in Rainbow
Colour Lab, which judgment was declared as not a good
law in ACC Ltd. Thus, the very basis on which Entry 2F
of Schedule VI was declared as unconstitutional, has
been found to be erroneous. In such circumstances, the
c legislature will be justified in enacting the law from the.
date when such a law was passed originally and that date
is 01.07.1989 in the instant case. [para 25] [836-F-H; 837A-B]
National Agricultural Co-operative Marketing Federation
D of India Ltd. and Anr. v. Union of India (2003) 5 SCC 23: 2003
(3) SCR 1; Shri Prithvi Cotton Mills Ltd. and Anr. v. Broach
Borough Municipality and Ors. (1969) 2 SCC 283 : 1970 (1)
SCR 388; Union of India (UOI) and Anr. v. Raghubir Singh
(Dead) by Lrs. Etc. (1989) 2 SCC 754 : 1989 (3) SCR 316
E - relied on.
Kone Elevator India v. State of Tamil Nadu (2014) 7 SCC
1 - referred to.
3. It is well settled- that subject to Constitutional
F restrictions a power to legislate includes a power to
legislate prospectively as well as retrospectively. In this
regard, legislative power to impose tax also includes
within itself the power to tax retrospectively. [para 27]
[842-D]
G
H
Hirata/ Rattan/al etc. etc. v. State of UP. and Anr. etc. etc.
(1973) 1 sec 216 : 1973 (2) SCR 502 - relied on.
Case law reference :
121 (2001) STC 175
referred to Paras 2, 28
STATE OF KARNATAKA v. PRO LAB & ORS. ETC.
811
2001 (1) SCR 608
relied on
Paras 3, 6,
17, 19, 20
ILR 2003 Kar 4883
referred to
Para 4
1992 (3) Suppl. SCR 103 relied on
Para 10, 13,
A
14, 17
B
1989 (2) SCR 320
relied on
Para 12
(2014) 1 SCC 708
relied on
Para 12
2005 (4) Suppl. SCR 862 relied on
Para 19
2000 (1) SCR 594
(2014) 1 sec 1
2003 (3) SCR 1
1970 (1) SCR 388
1973 (2) SCR 502
1989 (3) SCR 316
overruled
Paras 2, 14,
16, 17, 18,
19, 28
referred to
Para 23
relied on
Para 26
relied on
relied on
relied on
Para 26
Paras 26, 27
Para 26
CIVIL APPELLATE JURISDICTION : Civil Appeal No.
1145 of 2006.
c
D
E
From the Judgment and Order dated 19.08.2005 of the
F
High Court of Karnataka, Bangalore in W. P. Nos. 8602 of 2004
and 8603 to 8624 2004 (T-KST) c/w W.P. Nos. 10170. 6117,
6220, 6949, 6995, 7246, 8214, 8588, 5175-76, 10002 and
21759 of 2004 c/w 14633 of 2005 (T-KST).
G
P. Vishwanatha Shetty, Anita Shenoy, Neha Singh,
Mahesh Thakur, Vybhav Ramesh, Deepak Shetty for the
Appellant.
Salman Khurshid, Alok Yadav, Mcnish Panda, Somnath
Shukla, M. P. Devanath lmtiaz Ahmed (For Equity Lex
H
812
SUPREME COURT REPORTS
[2015] 1 S.C.R.
A Associates, Ajay Kumar Jha, M. P. Jha, P. R. Ramasesh for
the Respondents.
The Judgment of the Court was delivered by
A.K. SIKRI, J. 1. Constitutional validity of Entry 25 of
B Schedule VI to the Karnataka Sales Tax Act, 1957 (hereinafter
referred to as the 'Act') is the subject matter of the present
appeal. It is the third endeavour to resurrect this entry, when c..n
the first two occasions, the steps taken by the State were
declared as impermissible. Even this time, the High Court has
C dumped the amendment as u11constitutional. However, the
reasons advanced by the High Court in all three rounds are
different. While traversing through the historical facts leading
to the issue at hand, we shall be referring to the same for clear
D
understanding of the controversy involved.
2. This entry was inserted in the said Act by an amendment
which came into effect from 01.07.1989, thereby providing levy
of tax for processing and supply of photographs, photo prints
and photo negatives. The validity of this entry was challenged
E by means of a writ petition filed in the High Court of Karnataka.
The High Court in that case titled Mis Keshoram Surindranath
Photo - Bag (P) Ltd. and others v. Asstt. Commissioner of
Commercial Taxes (LR), City Division, Bangalore and
others1, declared the said Entry to be unconstitutional. State of
Karnataka had challenged that judgment by filing special leave
F
petition in this Court. This special leave petition was dismissed
vide order dated 20.04.2000, following its earlier judgment in
the case of Rainbow Colour Lab and Another v. State of
Madhya Pradesh and others2• The reason for holding Entry 25
as unconstitutional was that the contract of processing and
G supplying of photographs, photo frames and photo negatives
was predominantly a service contract with negligible
component of goods/material and, therefore, it was beyond the
1.
121 (2001) STC 175.
H 2.
(2000) 2 sec 385.
STATE OF KARNATAKA v. PRO LAB & ORS. ETC. 813
[A.K. SIKRI, J.]
competence of State Legislature given in Entry 25 of List II of
A
Schedule VII of the Constitution to impose sales tax on such a
contract.
3. It so happened that within one year of the judgment in
Rainbow Colour Lab's case, three Judges Bench of this Court
B
rendered another judgment in the case of ACC Ltd. v.
Commissioner of Customs3 , wherein it expressed its doubts
about the correctness of the law laid down in Rainbow. We may
point out at this stage itself that during the course of hearing of
the present appeal, there was a hot debate on the question as
C
to whether judgment in Rainbow Colour Lab's case was overruled in the case of ACC Ltd. case or not. This aspect will be
gone into by us at the appropriate stage.
4. After the judgment in ACC Ltd. case, a circular
D
instruction was issued by the Commissioner of Commercial
Taxes to the assessing authorities to proceed with the
assessments as per Entry 25. This became the subject matter
of challenge before the High Court of Karnataka in the case of
Mis Golden Colour Labs and Studio and others v. The
E
Commissioner of Commercial Taxes4 . The High Court allowed
the writ petition vide judgment dated 30.07.2003 holding that
a provision once declared unconstitutional could not be brought
to life by mere administrative instructions. However, at the same
time, the Court observed that Entry 25, Schedule VI to the Act,
declared ultra vires the Constitution in Keshoram's case,
cannot be revived automatically, unless there is re-enactment
made by the State Legislature to that effect.
5. The appropriate procedure indicated in the aforesaid
judgment emboldened the State to come out with the required
3.
(2001 J 4 sec 593.
4.
ILR 2003 Kar 4883.
F
G
H
814
SUPREME COURT REPORTS
[2015] 1 S.C.R.
A legislative amendment. This paved way for the enactment of the
Karnataka ~tate Laws Act, 2004 by the State Legislature that
came into force with effect from 29.01.2004. Section 2(3) of
the said amendment re-introduced Entry 25 in identical terms,
as it appeared earlier, and that too with retrospective effect that
B is w.e.f. 01.07.1989, when this provision was inserted by the
amendment made in the year 1989 for the first time.
6. As was expected, this amendment was again
challenged before the Karnataka High Court by the respondent
C herein as well as many others. Vide impugned judgment dated
19.08.2005, the High Court has again declared the said
amendment as unconstitutional. It would be pertinent to mention
that the High Court has not taken into consideration the events
that followed after Rainbow Colour Lab's case, namely, overD ruling of the said judgment in ACC Ltd. Since the basis of
Keshoram's case decided in the first calm by the High Court
was same as given in Rainbow Colour Lab, obviously
Keshoram also no longer remains a good law. However, the
E reason given by the High Court, this time, is that the ratio laid
down in Keshoram's case continues to be binding on the State
of Karnataka. As per the High Court, "the re-enactment of the
said provision is possible in the event of a subsequent
declaration made by the Hon'ble Supreme Court re-considering
F or pronouncing a similar question in terms of the findings in
para 23 of the Golden Colour Lab's case. This is, thus, the
chequered history of the litigation amply demonstrating as to
how the State of Karnataka is making desperate attempts to
ensure that provision in the form of Entry 25 in the said Act
G survives, empowering the State Government to levy sales tax
for processing and supply of photographs, photo prints and
photo negatives.
7. At this stage, we take note of the exact phraseology
H used in Entry 25 of the Act which reads as under:
STATE OF KARNATAKA v. PRO LAB & ORS. ETC.
815
[A.K. SIKRI, J.]
SI. No.
Description of
Period
Rate of
Works Contract
Tax U/S 5B
25
Processing and
1.7.1987 to
6%
supplying of
31.3.1996
Photographs,
Photo Prints and
1.4.1996 to
8%
Photo negatives
31.3.1998 from
10%
1.4.1998
8. We may also record at this point itself that legislative
competence of the State to insert the aforesaid Entry is
primarily challenged on the ground that the State Government
is not empowered to levy sales tax on the processing and
supplying of photographs which is predominantly in the nature
of "service" and the element of "goods" therein was minimal.
The respondents argue that the State Legislature does not have
any power to impose tax on "services" inasmuch as the sales
tax can be levied only on "sale of goods" as permitted under
Article 366 (29-A) of the Constitution of India. Challenge is also
laid on the retrospective effect given to the said Entry by
arguing that such a move is violative of Article 265 of the
Constitution of India as subjecting the assessees to such a tax
from retrospective effect is cqnfiscatory in nature and, therefore,
unconstitutional.
9. We have projected, in nutshell, the chequered history of
the litigation by referring to the judgments of this Court
pronounced from time to time which have a direct bearing on
the outcome of this appeal. Therefore, we are simply required
to do a diagnostic of the sorts in revisiting these judgments.
As we proceed with this exercise to notice and spell out the
principle of law laid down in these judgments, contextually, the
same would analogously facilitate in concluding the cases with
very little discussion at our end.
A
B
c
D
E
F
G
H
..
816
SUPREME COURT REPORTS
(2015] 1 S.C.R.
A
10. In order to ensure that we avoid unnecessary burdening
of judgments with the earlier case laws, it is safe to charter the
journey by initiating discussion about the Constitution Bench
judgment in the case of Gannon Dunkerley and Co. and others
v. State of Rajasthan and others5 . That case pertained to the
B execution of the Works Contracts. Question involved was as
to whether there could be levy of sales tax on the sale of goods
involved in the execution of such Works Contracts. The
assessee, viz. Gannon Dunkerley, was carrying on business as
Engineering Contractors and executing the contracts pertaining
C to construction of building projects, dams, roads and structural
contracts of all kinds. In respect of sanitary contracts, 20 per
cent was deducted for labour and balance was taken as a
turnover of the assessee for the purposes of levying sales tax
by the assessing authority. Likewise, in respect of other
0
contracts, 30 per cent was deducted for labour and on balance
amount, sales tax was levied treating it as turnover of the
assessee under the Madras General Sales Tax Act, 1939. The
question which arose for consideration was as to whether there
was any sale of goods. The Constitution Bench held that
building contract was in the nature of Works Contract and there
E was no element of sale of goods in such a contract. In its
opinion, in a building contract where the agreement between
the parties was that the contractor should construct the building
according to the specifications cqntained in the agreement and
in consideration received payment as provided therein, there
F was neither a contract to sell the materials used in the
construction nor the property passed therein as movables. It
was held that in a building contract, which was one entire and
indivisible, there was no sale of goods and it was not within
the competence of the Provincial State Legislature to impose
G tax on the supply of the materials used in such a contract
treating it as a sale. The Court, thus, proceeded on the basis
that a building contract was indivisible and composite wherein
there was no sale of goods and, therefore, the State
H s.
(1993) 1 sec 364.
STATE OF KARNATAKA v. PRO LAB & ORS. ETC.
817
[A.K. SIKRI, J.]
Legislature was not competent to impose sales tax on the
A
supply of material used in such a contract treating it as a sale.
Since, Entry 48 of the List II of Schedule VII in the Government
of India Act, 1935 was under consideration that empowers
State Government to levy tax "sale of goods", the Court held
that the expression "sale of goods" in the said Entry is to be
B
given the same meaning as given under the Sale of Goods Act,
1930. That would mean that it would be sale of goods only if
the two essential ingredients, namely: (i) an agreement to sell
movables for a price, and (ii) property passing therein persuant
to that agreement, are satisfied.
c
11. After the aforesaid Constitution Bench judgment, the
Parliament amended the Constitution of India by the
Constitution (46th Amendment) Act, 1982 which received the
assent of the President of India on 02.02.1983. By this
amendment, clause (29-A) was inserted in Article 366 of the
Constitution, which reads as under:
"[(29A) "tax on the sale or purchase of goods" includes -
(a) a tax on the transfer, otherwise than in pursuance of a
contract, of property in any goods for cash, deferred
payment or other.valuable consideration;
(b) a tax on the transfer of property in goods (whether as
goods or in some other form) involved in the execution of
a works contract;
(c) a tax on the delivery of goods on hire-purchase or any
system of payment by instalments;
D
E
F
(d) a tax on the transfer of the right to use any goods for
any purpose (whether or not for a specified period) for
G
cash, deferred payment or other valuable consideration;
(e) a tax on the supply of goods by any unincorporated
association or body of persons to a member thereof for
cash, deferred payment or other valuable consideration;
H
A
B
c
818
SUPREME COURT REPORTS
[2015] 1 S.C.R.
(f) a tax on the supply, by way of or as part of any service
or in any other manner whatsoever, of goods, being food
or any other article for human consumption or any drink
(whether or not intoxicating), where such supply or service,
is for cash, deferred payment or other valuable
consideration;
and such transfer, delivery or supply of any goods shall be
deemed to be a sale of those goods by the person making
the transfer, delivery or supply and a purchase of those
goods by the person to whom such transfer, delivery or
supply is made;]"
12. The challenge laid to the aforesaid amendment was
repelled by this Court in the case of Builders Association of
India and others v. l)nion of India and others6. In this judgment,
D the Constitution Bench specifically noted that the purport and
object of the aforesaid amendment was to enlarge the scope
of the expression "tax of sale for purchase of goods" wherever
it occurs in the Constitution so that it may include within its
ambit any transfer, delivery or supply of goods that may take
E place under any of the transactions referred to in sub-clauses
(a) to (f). To put it tersely, with the aforesaid amendment, the
States are empowered to make the Works Contract divisible
and tax "sale of goods" component. It clearly follows therefrom
that the restricted meaning which was assigned to the
F
expression "sale of goods" in Gannon Dunkerley's case is
undone by the aforesaid amendment. The interpretation which
is to be assigned to clause 29-A of Article 366 is stated with
remarkable clarity in Mis Larsen Toubro and another v. State
of Karnataka and another7 , by a three Judge Bench in the
G following words:
"60. It is important to ascertain The meaning of Sub-clause
(b) of Clause 29A of Article 366 of the Constitution. As the
6.
(1989) 2 sec 645.
H
7.
(2014) 1 sec 708.
STATE OF KARNATAKA v. PRO LAB & ORS. ETC.
819
[A.K. SIKRI, J.]
very title of Article 366 shows, it is the definition clause. It
A
starts by saying that in the Constitution unless the context
otherwise requires the expressions defined in that article
shall have the meanings respectively assigned to them in
the article. The definition of expression "tax on sale or
purchase of the goods" is contained in Clause (29A). If the
8
first part of Clause 29A is read with Sub-clause (b) along
with latter part of this clause, it reads like this: tax on the
sale or purchaser of the goods" includes a tax on the
transfer of property in goods (whether as goods or in some
other form) involved in the execution of a works contract c
and such transfer, delivery or supply of any goods shall be
deemed to be a sale of those goods by the person making
the transfer, delivery or supply and a purchase of those
goods by the person to whom such transfer, delivery or
supply is made. The definition of "goods" in Clause 12 is
inclusive. It includes all materials, commodities and
articles. The expression, 'goods' has a broader meaning
than merchandise. Chattels or movables are goods within
the meaning of Clause 12. Sub-clause (b) refers to transfer
of property in goods (whether as goods or in some o.ther
form) involved in the execution of a works contract. The
expression "in some other form" in the bracket is of utmost
significance as by this expression the ordinary
understanding of the term 'goods' has been enlarged by
bringing within its fold goods in a form other than goods.
Goods in some other form would thus mean goods which
have ceased to be chattels or movables or merchandise
and become attached or embedded to earth. In other
words, goods which have by incorporation become part
D
E
F
of immovable property are deemed as goods. The
definition of 'tax on the sale or purchase of goods' includes
G
a tax on the transfer or property in the goods as goods or
which have lost its form as goods and have acquired some
other form involved in the execution of a works contract.
61. Viewed thus, a transfer of property in goods under
H
A
B
c
D
E
F
G
H
820
SUPREME COURT REPORTS
[2015] 1 S.C.R.
;
Clause 29A(b) of Article 366 is deemed to be a sale of
the goods involved in the execution of a works contract by
the person making the transfer and the purchase of those
goods by the person to whom such transfer is made.
62. The States have now been conferred with the power
to tax indivisible contracts of works. This has been done
by enlarging the scope of "tax on sale or purchase of
goods" wherever it occurs in the Constitution. Accordingly,
the expression "tax on the sale or purchase of goods" in
Entry 54 of List II of Seventh Schedule when read with the
definition Clause 29A, includes a tax on the transfer of
property in goods whether as goods or in the form other
than goods involved in the execution of works contract. The
taxable event is deemed sale.
63. Gannon Dunkerley-I (supra) and few other decisions
following Gannon Dunkerley-I (supra) wherein the
expression "sale" was given restricted meaning by
adopting the definition of the word "sale" contained in the
Sale of Goods Act has been undone by the Forty-sixth
Constitutional Amendment so as to include works contract.
The meaning of Sub-clause (b) of Clause 29A of Article
366 of the Constitution also stands settled by the
Constitution Bench of this Court in Builders' Association
(supra). As a result of Clause 29A of Article 366, tax on
the sale or purchase of goods may include a tax on the
transfer in goods as goods or in a form other than goods
involved in the execution of the works contract. It is open
to the States to divide the works contract into two separate
contracts by legal fiction: (i) contract for sale of goods
involved in the works contract and (ii) for supply of labour
and service. By the Forty-sixth Amendment, States have
been empowered to bifurcate the contract and to levy
sales tax on the value of the material in the execution of
the works contract."
STATE OF KARNATAKA v. PRO LAB & ORS. ETC.
821
(A.K. SIKRI, J.]
13. Notwithstanding some clear and pertinent observations
A
made in by the Constitution Bench in Builders Association's
case, while upholding the Constitutional validity of 46th
Amendment, there was some ambiguity in the judicial thought
on one particular aspect which was also one of the basis of
judgment in Gannon Dunkerley's case. In Gannon Dunkerley's
B
case, the Constitution Bench had laid down "dominant intention
test" to find out as to whether a particular contract involved
transfer of property in goods. The Court was of the opinion that
if the dominant intention of a contract was not to transfer the
property in goods, but it was Works Contract, or for that matter, c
a contract in the nature of rendering of services, even if a part
of it related to the transfer of goods, that would be immaterial
and no sales tax on the said part could be levied, going by the
principle of dominant intention behind such a contract, which
was in the nature of Works Contract in the contract relating to
0
construction of buildings.
14. As pointed out above, in Gannon Drunkerley's case,
the Court also held that such a contract was indivisible. No
doubt, insofar as indivisibility facet of the contract is concerned,
the same was done away by 46th Constitutional Amendment.
However, in subsequent cases, the Court grappled with the
issue as to whether the principle of dominant intention still
prevailed. This very aspect came up for discussion before two
Judge Bench of this Court in Rainbow Colour Lab's case. The
Court held the view that the division of contract after 46th
.
Amendment 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. This aspect is highlighted by the
said Bench in the following manner:
"10. Since this was a judgment rendered prior to the
coming into force of the 46th Constitutional Amendment,
we will have to consider whether the said Amendment has
brought about any change so as to doubt the leQfil position
E
F
G
H
822
SUPREME COURT REPORTS
[2015] 1 S.C.R.
A
enunciated in the above case. It is true that by the 46th
Constitutional Amendment by incorporating Clause 29A(b)
in Article 366, the definition of the words "sale" and "works
contract" have been enlarged. The State of Madhya
Pradesh has also brought about a consequent change in
B
the definition of the word 'sale' in Section of its Sales Tax
Act but it is to be noticed that in the said State Act the
expression 'works contract' has not been specifically
defined.
c
0
E
F
G
H
11. Prior to the Amendment of Article 366, in view of the
judgment o~ this Court In State of Madras v Gannon
Dunkerley and Co., the State could not levy sales-tax on
sale of goods involved in a work's 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 (supra) 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 (it) 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. The Amendment, referred
to above, has not empowered the State to indulge in
microscopic division of contracts involving the value of
materials used incidentally in such contracts. What is
pertinent to ascertain in this connection is what was the
dominant intention of the contract. Every contract, be it a
service contract or otherwise, may involve the use of some
material or the other in execution of the said contract. State
is not empowered by the amended law to impose salestax on such incidental materials used in such contracts.
This is clear from the judgment of this Court in Hindustan
Aeronautics Ltd. v. State of Karnataka_[1984]2SCR248,
where it was held thus:
STATE OF KARNATAKA v. PRO LAB & ORS. ETC.
823
[A.K. SIKRI, J.]
... Mere passing of property in an article or commodity
A
during the course of performance of the transaction in
question does not render the transaction to be transaction
of sale. Even in a contract purely of work or service, it is
possible that articles may hav~ to be used by the person
executing the work, and property in such articles or
B
materials may pass to the other party. That would not
necessarily convert the contract into one of sale of those
materials. In every case, the Court would have to find out
what was the primary object of the transaction and the
intention of the parties while entering into it. ... "
c
15. While considering the validity of Entry 25 in Schedule
VI of the Act and holding it to be unconstitutional, as beyond
the powers of the. State Legislature, the High Court of Karnataka
in Keshoram's case examined in detail the business which was
carried out by the petitioner in the said case and the process
that was involved in processing and supplying of photographs,
photoframes or photonegatives. By that time, 46th Constitutional
Amendment had already been effected. which was also taken
note of by the High Court. However, the High Court took the
view that the main object of the work undertaken by the
petitioner in that case was not the transfer of a chattle as a
chattle and, in fact, it was a contract of work and labour and
there was no sale of goods involved. It is clear from the
following discussion in the said judgment:
"30. In words and phrases the word "photography" is
defined as under :
D
E
F
"Photography" is the science which relates to action of light
on sensitive bodies in production of pictures, fixation of
images and the like.
G
31. Photography is a process of an art of producing visible
images on sensitive bodies by action of light or other form
of radiant energy. Duration of action of light and also use
of the chemical is highly a technical expertise therefore
H
A
B
c
D
824
SUPREME COURT REPORTS
(2015] 1 S.C.R.
taking into consideration the various decisions referred to
above it could be considered that it is a works contract
where property which is transferred in paper is only
incidental to such contract. In strict sense, it is a service
where the main object is not transfer of property in goods.
The good photograph as observed by the apex Court is a
thing of beauty and revives nostalgic memories. It is a work
of art. In B.C. Kame's case (1977] 2 SCR 435 it has
already been held that there is no sale involved and in
spite of the fact that it is a works contract it could not be
subjected to tax because the intention of the parties is not
to transfer the goods in the execution of said works
contract. It is only ancillary and incidental to service
contract. The photographs are not marketable or saleable
commodity and as such no tax can be levied. Entry 25 of
the Sixth Schedule to the Karnataka Sales Tax Act, 1957,
therefore is beyond the scope of Article 466 of the
Constitution of India.
Writ appeals are accordingly allowed."
E
16. It is manifest from the above that the rationale behind
the judgment was to look into the main object of the work
undertaken by the assessee and concluding that since it was
essentially a Works Contract and transfer of photopaper upon
which the positive prints were taken were simply incidental and
F ancilliary to the main transactions, that was in the nature of
service contract, and, therefore, Entry 25 was beyond the
scope of Article 366 of the Constitution of India. Apparently, the
High Court applied dominant intention test while holding Entry
25 as unconstitutional. By the time, Special Leave Petition
G against this judgment came up for consideration before this
Court on 20.04.2000, the judgment in the case of Rainbow
Colour Lab's case had just been rendered observing that
dominant intention test was still valid notwithstanding insertion
of clause 29-A in Article 366 of the Constitution by 46th
Amendment. Following this judgment, SLP was dismissed.
H
STATE OF KARNATAKA v. PRO LAB & ORS. ETC.
825
[A.K. SIKRI, J.]
17. Within one year of the said judgment, this very issue
again cropped up for discussion and decision before a three
Judge Bench in ACC Ltd. case. The issue arose under the
Customs Act, 1962 viz. whether the drawings, designs etc.
relating to machinery or industrial technology were goods which
were leviable to duty of customs on their transaction value at
the time of their report. However, since the issue related to
meaning that has to be given to the expression "goods", the
case law on this aspect including Gannon Dunkerley & Kame's
case were specifically taken note of and discussed. The Court
also noticed the effect of 46th Amendment and in the process
commented upon the judgment in the Rainbow Colour Lab's
case. The Court specifically remarked that Gannon Dunkerley
& Kame's judgments were of pre 46th Amendment era which
had no relevance after the said Constitutional amendment. It
can be discerned from the following discussion contained
therein:
"21. All the aforesaid decisions related to the period prior
to the Forty-sixth Amendment of the Constitution when
Article 366(29A) was inserted. At that time in the case of
a works contract it was held that the same could not be
split and State Legislature had no legislative right to seek
to levy sales tax on a transaction which was not a sale
simpliciter of goods. Rainbow Colour Lab & Anr. Vs. State
of M.P. and Others, (2000) 2 SCC 385 was, however, a
case relating to the definition of the word "sale" in the M.P.
General Sales Tax Act, 1958 after its amendment
consequent to the insertion of Article 366(29A). The
question there was whether _the job rendered by a
photographer in taking photographs, developing and
printing films would amount to works contract for the
purpose of levy of sales tax. This Court held that the work
done by the photographer was only a service contract and
there was no element of sale involved. After referring to
earlier decisions of this Court, it was observed at page
391 as follows:
A
B
c
D
E
F
G
H
A
B
c
D
E
F
G
H
826
SUPREME COURT REPORTS
[2015] 1 S.C.R.
"15. Thus, it is clear that unless there is 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 simpliciter in the guise of the
expanded definition found in Article 366(29A)(b)
read with Section 2(n) of the State Act. On facts as
we have noticed that the work done by the
photographer which as held by this Court in Kame
case 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."
22. Even though in our opinion the decisions relating to levy
of sales tax would have, for reasons to which we shall
presently mention, no application to the case of levy of
customs duty, the decision in Rainbow Colour Lab case
(supra) requires consideration. As a result of the Forty-sixth
Amendment, sub-article 29A of Article 366 was inserted
as a result whereof tax on the sale or purchase of goods
was to include a tax on the transfer of property in goods
{whether as goods or in some other form) involved in the
execution of a works contract. Taking note of this
amendment this Court in Rainbow Colour Lab at page
3Bl1c389 observed as follows:
"11. Prior to the amendment of Article 366, in view
of the judgment of this Court in State of Madras v.
Gannon Dunkerley & Co. (Madras) Ltd. 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 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
STATE OF KARNATAKA v. PRO LAB & ORS. ETC.
827
[A.K. SIKRI, J.]
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. The
amendment, referred to above, has not empowered
the State to indulge in a microscopic division of
contracts involving the value of materials used
incidentally in such contracts. What is pertinent to
ascertain in this connection is what was the
dominant intention of the contract. Every contract,
be it a service contract or otherwise, may involve
the use of some material or the other in execution
of the said contract. The State is not empowered
by the amended law to impose sales tax on such
incidental materials used in such contracts .. "
23. In arriving at the aforesaid conclusion the Court referred
to the decision of this Court in Hindustan Aeronautics Ltd.
vs. State of Karnataka (1984) a SCC 706 and Everest
Copier (supra). But both these cases related to pre-Fortysixth Amendment era where in a works contract the State
had no jurisdiction to bifurcate the contract and impose
sales tax on the transfer of property in goods involved in
the execution of a works contract. The Forty-sixth
Amendment was made precisely with a view to empower
the State to bifurcate the contract and to levy sales tax on
the value of the material involved in the execution of the
works contract, notwithstanding that the value may
represent a small percentage of the amount paid for the
execution of the works contract. Even if the dominant
intention of the contract is the rendering of a service, which
will amount to a works contract, after the Forty-sixth
Amendment the State would now be empowered to levy
sales tax on the material used in such contract. The
A
B
c
D
E
F
G
H
828
SUPREME COURT REPORTS
[2015] 1 S.C.R.
A
conclusion arrived at in Rainbow Colour Lab case, in our
opinion. runs cour;iter to the express provision contained
in Article 366 (29A) as also of the Constitution Bench
decision of this Court in Builders' Association of India and
Others vs. Union of India and Others (1989) 2 SCC 645."
B
[emphasis supplied]
18. It is amply clear from the above and hardly needs
clarification that the Court was of the firm view that two Judges
Bench judgment in Rainbow Colour Lab's case did not lay
down the correct law as it referred to pre 46th Amendment
C judgments in arriving at its conclusions which had lost their
validity. The Court also specifically commented that after 46th
Amendment, State is empowered to levy sales tax on the
material used even in those contracts where "the dominant
intention of the contract is the rendering of a service, which will
D amount to a Works Contract''.
19. In view of the above, the argument of the respondent
assessees that ACC Ltd. case did not over-rule Rainbow
Colour Lab's case is, therefore, clearly misconceived. In fact,
E we are not saying so for the first time as a three member Bench
of this Court in Mis Larsen and Toubro has already stated that
ACC Ltd. had expressly over-ruled Rainbow Colour Lab while
holding that dominant intention test was no longer good test
after 46th Constitutional Amendment. We may point out that
F learned counsel for the respondent assessees took courage
to advance such an argument emboldened by certain
observations made by two member Bench in the case of C.K.
Jidheesh v. Union of lndia8 , wherein the Court has remarked
that the observations in ACC Ltd. were merely obiter. In
G Jidheesh, however, the Court did not notice that this very
argument had been rejected earlier in Bharat Sanchar Nigam
Ltd. v. Union of lndia9 . Following discussion in Bharat Sanchar
is amply demonstrative of the same:
a.
(2005) 13 sec 37.
H 9
(2006) 3 sec 1.
STATE OF KARNATAKA v. PRO LAB & ORS. ETC. 829
[A.K. SIKRI, J.]
"46. This conclusion was doubted in Associated Cement
A
Companies Ltd. v.