Civil Appeal No. 1145 of 2006. Case: State of Karnataka and Ors. Vs Pro Lab and Ors.. Supreme Court (India)
| Case Number | Civil Appeal No. 1145 of 2006 |
| Judges | H.L. Dattu, C.J.I., Arjan Kumar Sikri and Arun Mishra, JJ. |
| Issue | Karnataka Sales Tax Act, 1957; Karnataka State Laws Act, 2004 - Section 2(3); Madras General Sales Tax Act, 1939; Government of India Act, 1935; Sale of Goods Act, 1930; Constitution (46th Amendment) Act, 1982; Customs Act, 1962; Madhya Pradesh General Sales Tax Act, 1958 - Section 2; Central Sales Tax Act - Sections 3, 4, 5; Rajasthan Sales ... |
| Judgement Date | January 30, 2015 |
| Court | Supreme Court (India) |
Judgment:
Arjan Kumar Sikri, J.
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Constitutional validity of Entry 25 of 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 on the first two occasions, the steps taken by the State were declared as impermissible. Even this time, the High Court has dumped the amendment as unconstitutional. 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 understanding of the controversy involved.
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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 by means of a writ petition filed in the High Court of Karnataka. The High Court in that case titled Keshoram Surindranath Photo -- Bag (P) Ltd. and Ors. v. Asstt. Commissioner of Commercial Taxes (LR), City Division, Bangalore and Ors. 121 (2001) STC 175, declared the said Entry to be unconstitutional. State of Karnataka had challenged that judgment by filing special leave 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 Anr. v. State of Madhya Pradesh and Ors. (2000) 2 SCC 385. The reason for holding Entry 25 as unconstitutional was that the contract of processing and 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 competence of State Legislature given in Entry 25 of List II of Schedule VII of the Constitution to impose sales tax on such a contract.
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It so happened that within one year of the judgment in Rainbow Colour Lab's case, three Judges Bench of this Court rendered another judgment in the case of ACC Ltd. v. Commissioner of Customs (2001) 4 SCC 593, 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 to whether judgment in Rainbow Colour Lab's case was over-ruled in the case of ACC Ltd. case or not. This aspect will be gone into by us at the appropriate stage.
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After the judgment in ACC Ltd. case, a circular 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 Golden Colour Labs and Studio and Ors. v. The Commissioner of Commercial Taxes ILR 2003 Kar 4883. 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.
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The appropriate procedure indicated in the aforesaid judgment emboldened the State to come out with the required legislative amendment. This paved way for the enactment of the Karnataka State 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 is w.e.f. 01.07.1989, when this provision was inserted by the amendment made in the year 1989 for the first time.
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As was expected, this amendment was again challenged before the Karnataka High Court by the Respondent 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, over-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 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 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 survives, empowering the State Government to levy sales tax for processing and supply of photographs, photo prints and photo negatives.
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At this stage, we take note of the exact phraseology used in Entry 25 of the Act which reads as under:
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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 confiscatory in nature and, therefore, unconstitutional.
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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.
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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 Ors. v. State of Rajasthan and Ors. (1993) 1 SCC 364. That case pertained to the 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 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 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 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 contained in the agreement and in consideration received payment as provided therein, there 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 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 Legislature was not competent to impose sales tax on the 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 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 pursuant to that agreement, are satisfied.
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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...
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