Creative Pvt. Ltd. Vs. Commissioner of Commercial Taxes & Ors.  Insc
27 (9 January 2008)
Sinha & Harjit Singh Bedi
out of SLP (C) No.6499 of 2007) S.B. Sinha, J.
Whether the charges collected towards the services for evolution of prototype
conceptual design (i.e. creation of concept), on which service tax had been
paid under the Finance Act, 1994 as amended from time to time is liable to tax
under the Karnataka Value Added Tax Act, 2003 (the Act) is the question
involved in this appeal which arises out of a judgment and order dated
29.11.2006 passed by a Division Bench of the Karnataka High Court in STA No.7
Appellant is an advertising agency. It provides for advertisement services. It
creates original concept and design advertising material for their clients and
design brochures, annual reports etc. The Contract between the appellant and
their clients does not appear to have been entered into in writing as no
written contract as such has been placed before us.
may notice a purchase order and the invoice which have been produced before us
and the authenticity whereof is not in question :
P & PR Unit M/S ISRO HEADQUARTERS , Antariksh Bhavan, New BEL Road ,
Bangalore , Estimate No. 014F Date : 26.04.2003 , Job No.: 051/APR/ 03 ,
by : Mr. C.S. Ramachandran Particulars GSAT 2 POSTER Qty.
Amount Rs. P. Rs. P. 1.
Design and Production of Computer Artwork of size A3, front back 1 No. 1 No.
00 00 1,500 1,500 00 00 2.
Line drawings in back page Artwork of size A5 4 Nos. 100 00 400 00 3.
Inkjet Output on Photoglossy Paper for Layout of size A3 (1.5 sq. ft.) @ Rs.
100/- per. sq. ft. front back 1 No. 1 No. 150 150 00 00 150 150 00 00 4.
Separated Positives Size: A3 @ Rs. 250/- per colour x 4 Nos. = 1,000 front back
5% Service Tax on item 1 5% KST on item 3 1.5% Resale Tax on item 4 1 Set 1 Set
1,000 1,000 00 00 1,000 1,000 150 15 30 00 00 00 00 00 Rupees Five Thousand
Eight Hundred Ninety Five Only Total Rs. 5,895 00 INVOICE Consignee M/S MORRIS
TOOLING PVT. LTD.
Bangalore Co-ordinated by Mr. Muniswamy Invoice No. 707 Dated 31.01.2004
Delivery Note/Date 531/23.01.04 Job No. 1175/DEC/03 Purchase Order No.
MTP/PUO/2004/00002 Dated 21.01.2004 Sl. No.
of Goods Quantity Rate Amount Rs. P. Rs. P. HSK TOOL HOLDER 1.
and System Charges 9,000 00 2.
Separated Positives for Cover Size: A3 1 Set 1,728 00 3 Two Colour Separated
Positives Size : A4 21 Sets 468 00 9,828 00 4 Four Colour Offset Printing on
300 GSM Matt Art Card for Cover Two Colour Offset Printing on 170 GSM Matt Art
Paper for Inner pages with centre pinning 500 Nos. 31,850 00 8% Service Tax on
Resale Tax on item 2-4 720 651 00 00 TOTAL 53,777 00 Rupees Fifty Three
Thousand Seven Hundred Seventy Seven Only
They filed their returns both under the Finance Act, 1994 as also the Act. An
order of assessment was passed by the Assessing Authority in terms of Section
12 of the Karnataka Sales Tax Act and Rule 3 of the Karnataka Sales Tax Rules,
material portion whereof reads as under :
view of the above discussions, I hereby complete the assessment for the year
2003-2004 under section 12(3) of the KST Act 1957 by confirming the turnovers
proposed in the proposition notice.
turnover Rs. 1,97,72,296-00 Add. Towards omissions as per. Int. report Rs. 6,07,840-00
Gross turnover determined Rs. 2,03,80,136-00 Less : Exempted turnover
collected Rs. 2,43,848-00
Discount allowed Rs. 80,332-00
Service charges, design & art work charges collected in which no transfer
of property in goods is involved Rs. 54,27,260-00
charges for Newspapers collected Rs. 80,12,976-00
Sales outside the state Rs. 62,400-00 Rs. 1,38,26,816-00 Taxable turnover Rs.
65,53,320-00 Classification of TTO:
Sale of Computer Printed materials @ 8% from 1.4.03 to 31.5.03 Rs. 4,57,242-00 Rs.
-do- from 1.6.03 to 31.3.04 @ 9% Rs. 16,19,122-00 Rs. 145,721-00
-do- to Government Departments against D forms @ 5% 11,45,034-00 Rs. 57,252-00
Sale of Printed materials as II dealer liable for RST @ 1.5% Rs. 33,31,922-00 Rs.
Addl. Tax after 1.6.03 @ 1% Rs. 27,642/-
@ 15% on tax after 1.2.04 Rs. 5,850-00 Total Tax Rs. 3,23,024-00
After passing of the order of assessment, a raid was conducted. A criminal
proceeding was initiated against the appellant-company. An application was
filed by it before the appropriate authority under Section 60 of the Act for
classification and advance rulings. By reason of the order dated 30th September, 2005, it was held :
issue is examined in detail and it is seen that in the sale of the
advertisement material, the background activity such as conceptualization is no
doubt an idea but creation of advertisement is a comprehensive activity leading
to creation of goods in question. Even when any other goods are produced there
is some idea and thought regarding the shape and size etc. Therefore, to
separate design and concept taking the sale value of merely the advertisement
material as brochure etc. is improper.
further seen that in the bills there is separate charge made as content
development concept, design, photography scanning and other charges such as
system charges including colour sketch pen or computer used design software
etc., Ultimately, the brochures come out. Considering the entire ambit of
activity of the dealer it is seen tht it is a comprehensive contract or supply
of printed material developed by the company. The bills also indicate the
entire activity though separated is a comprehensive work. Such creation of
activity tanamounts to making indivisible contract in a divisible contract.
Therefore, this Authority rules that entire sale value including the creation
of concept etc. done by the company forms a part of the value of sale of such
brochures and liable to tax at 4% on the entire proceeds received including
those relating to concept charges, system charges etc. In short, this Authority
rules that the sale of printed material with a background of providing the
concept is an indivisible activity liable to tax at 4% as a whole.
appeal preferred thereagainst by the appellant in terms of Section 24(1) of the
Kerala Sales Tax Act has been dismissed by a Division Bench of the High Court.
High Court in its judgment noticed the decisions of this Court in Associated
Cement Companies Ltd. v. Commissioner of Customs [(2001) 4 SCC 593]; Tata
Consultancy Services v. State of A.P. [(2005) 1 SCC 132]; and Tata Consultancy
Services v. Municipal Corporation of Greater Bombay & Anr. [(2006) 3 SCC 1]
and held :
the light of the three judgments stated supra, what is clear to us is the
services rendered by the appellant is an indivisible activity and liable to
levy of tax. The aurhotity in Annexure-A after noticing the material facts, has
chosen to hold that in the bills there is a separate charge made as
content development concept design, photography scanning and other charges such
as system charges including colour sketch pen or computer used design software
etc. Ultimately, the brochures come out. Considering the entire ambit of
activity of the dealer, it is seen that it is a comprehensive contract or
supply of printed material developed by the company. The bills also indicate
the entire activity tantamounts to making indivisible contract in a divisible
contract. The subsequent rectification application made by the applicant
dated 24.12.2005 was not considered by the authority in terms of Annexure-H,
after noticing the judgment of the Supreme Court in the case of Associated
Cement Companites Ltd. (Stated supra). Therefore, it is clear that there is no
mistake apparent on the face of the record. We are in full agreement with the
impugned orders at Annexure-A & H.
Joseph Vellapalli, learned senior counsel appearing for the appellant, would
submit that (1) the High Court committed a serious error in passing the
impugned judgment in so far as in the event the contract is 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 of the
Constitution of India.
Appellant being an advertising agency, i.e., providing professional services,
is not liable to pay Value Added Tax (VAT) upon application of dominion nature
test or otherwise.
From the orders of the assessment passed by the Assessing Authority itself, it
would appear that a portion of the contract is often out sourced in which
event, sale of goods are shown by the appellant as a second sale.
an indivisible contract, in view of the decisions of this Court in The State of
Madras v. Gannon Dunkerley & Co., (Madras) Ltd. [1959 SCR 379]; M/s. Gannon
Dunkerley & Co. & Ors. v. State of Rajasthan & Ors. [(1993) 1 SCC 364], no VAT would be payable.
any event, advertisement not being goods, they cannot be bought and sold in an
open market being customer specific.
Mr. Hegde, learned counsel appearing on behalf of the respondents- State, on the other hand, submitted that
entire transaction is a composite whole inasmuch as all what was transferred is
the documents containing not only the value of the goods but also the soft
skill involved therein; and
Taxable value of goods is what the buyer is buying and in view of the fact that
when by some creativity the value of the goods is enhanced, the entire value
has rightly been held to be taxable.
reliance in this connection has been placed on Associated Cement Company
(supra) as also the Constitution Bench decision of this Court in Tata Consultency
and Bharat Sanchar Nigam Ltd. v. Union of India [(2006) 3 SCC 1].
the outset, we must express our reservation in regard to the question as to
whether the appellant having already undergone the process of regular
assessment before the assessing authority, an application under Section 60 of
the Karnataka Value Added Tax Act, 2003 was maintainable.
purpose for which such a proceeding is taken recourse to is well known.
decision of a competent authority is not known and an entrepreneur intends to
know as to what would be his liability under the taxing statute, such a
proceeding is ordinarily taken recourse to. But it is not necessary for us to
consider the matter any further.
this case, the order of assessment was complete. The State did not prefer any
appeal thereagainst. The process of accounting or the methodology adopted by
the assessee for the purpose of payment of both service tax as also the value
added tax attained finality at least for that year.
that as it may, as the order of the competent authority under Section 60 of the
Act would be binding on the assessing authority, in future also, we may examine
the merit of the matter.
The fact that the appellant is a service provider is not in dispute. It is also
not in dispute that the orders received by it to provide such services is party
specific and issue specific; be it for issuance of a brochure or a year book or
for any other purpose.
in their returns, made three categorical divisions in regard to its tax
The amount of service tax on the specific design and production;
The amount of Kerala Sales Tax on the specified item on the first sale; and
certain items are outsourced, the tax payable on resale of the said goods in
terms of Section 6(4) of the Kerala Sales Tax Act.
The Tribunal as also the High Court opined that the contract was an indivisible
one. The effect of such an indivisible contract, vis-`-vis work contract came up
for consideration before this Court in The State of Madras v. Gannon Dunkerley
& Co., (Madras) Ltd. [1959 SCR 379] wherein it was clearly held :
avoid misconception, it must be stated that the above conclusion has reference
to works contracts, which are entire and indivisible, as the contracts of the
respondents have been held by the learned Judges of the Court below to be. The
several forms which such kinds of contracts can assume are set out in Hudson on Building Contracts, at p.165. It
is possible that the parties might enter into distinct and for money consideration,
and the other for payment of remuneration for services and for work done.
The Parliament amended the Constitution to insert clause 29-A in Article 366 of
the Constitution of India, Sub-clauses (a) to (f) whereof read thus :
"tax on the sale or purchase of goods"
tax on the transfer, otherwise than in pursuance of a contract, of property in
any goods for cash, deferred payment or other valuable consideration;
tax on the transfer of property in goods (whether as goods or in some other
form) involved in the execution of a works contract;
tax on the delivery of goods on hire-purchase or any system of payment by
tax on the transfer of the right to use any goods for any purpose (whether or
not for a specified period) for cash, deferred payment or other valuable
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;
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),
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.
reason of the said provision, therefore, 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 present description was not contemplated.
question came for consideration again in Builders Association of India
& Ors. v. Union of India & Ors. [(1989) 2 SCC 645] and M/s.Gannon Dunkerley
& Co. & Ors. v. State of Rajasthan & Ors. [(1993) 1 SCC 364].
expressly been laid down therein that the effect of amendment by introduction
of clause 29A in Article 366 is that by legal fiction, certain indivisible
contracts are deemed to be divisible into contract of sale of goods and contract
of service. In Gannon Dunkerley case (supra), it had been held:
in view the legal fiction introduced by the Forty-sixth Amendment whereby the
works contract which was entire and indivisible has been altered into a
contract which is divisible into one for sale of goods and other for supply of labour
and services, the value of the goods involved in the execution of a works
contract on which tax is leviable must exclude the charges which appertain to
the contract for supply of labour and services.
may also notice that a Constitution Bench of this Court in Tata Consultancy
Services (supra), opined that having regard to the definition of the term
goods contained in clause (12) of Article 366 of the Constitution of
India, a software programme may consist of various commands which enable the
computer to perform a designated task. The copyright in that programme may
remain with the originator of the programme, but the moment copies are made and
marketed, it becomes goods, which are susceptible to sales tax.
regard to the element of intellectual property, it was held that the same
having been incorporated on a media, for purposes of transfer, both tangible
and intangible property capable of being transmitted, transferred, delivered, stored
and possessed etc. would come within the purview thereof.
even unbranded software, when it is marketed/sold, may be goods. We, however,
are not dealing with this aspect and express no opinion thereon because in case
of unbranded software other questions like situs of contract of sale and/or
whether the contract is a service contract may arise.
may, furthermore, notice that therein one of us, in a separate but concurring
judgment, opined as under :
A software may be intellectual property but such personal intellectual property
contained in a medium is bought and sold. It is an article of value. It is sold
in various forms like floppies, disks, CD-ROMs, punchcards, magnetic tapes,
etc. Each one of the mediums in which the intellectual property is contained is
a marketable commodity. They are visible to the senses. They may be a medium
through which the intellectual property is transferred but for the purpose of
determining the question as regard s leviability of the tax under a fiscal
statute, it may not make a difference. A program containing instructions in
computer language is subject-matter of a licence. It has its value to the
buyer. It is useful to the person who intends to use the hardware viz. the
computer in an effective manner so as to enable him to obtain the desired
results. It indisputably becomes an object of trade and commerce. These mediums
containing the intellectual property are not only easily available in the
market for a price but are circulated as a commodity in the market. Only
because an instruction manual designed to instruct use and installation of the
supplier program is supplied with the software, the same would not necessarily
mean that it would cease to be a goods. Such instructions contained
in the manual are supplied with several other goods including electronic ones.
What is essential for an article to become goods is its marketability.
The question yet again came up for consideration before a Three Judge Bench of
this Court in Bharat Sanchar Nigam Ltd. v. Union of India (supra) wherein it
Of all the different kinds of composite transactions the drafters of the
Forty-sixth Amendment chose three specific situations, a works contract, a
hire-purchase contract and a catering contract to bring them 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 sub-clauses ( b ) and
( f ) of clause (29-A) of Article 366, there is no other service which has been
permitted to be so split.
example, the sub-clauses of Article 366(29-A) 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
can it 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
The reason why these services do not involve a sale for the purposes of Entry
54 of List II is, as we see it, for reasons ultimately attributable to the
principles enunciated in Gannon Dunkerley case 5, namely, if there is an
instrument of contract which may be composite in form in any case other than
the exceptions in Article 366(29-A), unless the transaction in truth represents
two distinct and separate contracts and is discernible as such, then the State
would not have the power to separate the agreement to sell from the agreement
to render service, and impose tax on the sale. The test therefore for composite
contracts other than those mentioned in Article 366(29-A) continues to be: Did
the partie s have in mind or intend separate rights arising out of the sale of
goods? If there was no such intention there is no sale even if the contract
could be disintegrated.
test for deciding whether a contract falls into one category or the other is to
as what is the substance of the contract. We will, for the want of a
better phrase, call this the dominant nature test.
What are the goods in a sales transaction, therefore, remains
primarily a matter of contract and intention. The seller and such purchaser
would have to be ad idem as to the subject-matter of sale or purchase. The
court would have to arrive at the conclusion as to what the parties had
intended when they entered into a particular transaction of sale, as being the
subject-matter of sale or purchase. In arriving at a conclusion the court would
have to approach the matter from the point of view of a reasonable person of
may, at this juncture, also notice the decision of this Court in Associated
Cement Company (supra). The question which arose for consideration therein was
as to whether any intellectual property contained in a software would be
subject to custom duty within the meaning of Section 2(22) of the Customs Act,
defining goods. A three Judge Bench of this Court sought to make a distinction
between such a contingency arising under the Customs Act involving a works
contract and a contract of sale stating :
In the sales tax cases referred to hereinabove no doubt the question which
arose was whether in a works contract, where there was a supply of materials
and services in an indivisible contract, but there the question had arisen
because the States powers prior to the Forty-sixth Amendment to the
Constitution, were not entitled to bifurcate or split up the contract for the
purpose of levying sales tax on the element of moveable goods involved in the
contract. Apart from the decision in Rainbow Colour Lab case 11 which does not
appear to be correct, the other decisions cited related to the pre-Forty-sixth
the provisions of the Customs Act and the Tariff Act are clear and unambiguous.
Any moveable articles, irrespective of what they may be or may contain, would
be goods as defined in Section 2(22) of the Customs Act.
Evidently, therefore, the decision of Associated Cement Company Supra)
whereupon strong reliance has been placed by the Tribunal as also by the High
Court seeks to make a distinction between cases arising out of works contract wherefor
sales tax is liable to be paid and the cases under the Customs Act.
attention has furthermore been drawn to the decision of this Court in Bharat Sanchar
Nigam Ltd. (supra) wherein referring to Tata Consultancy (supra) it was
observed that the approach of this Court in the said decision as to what would
be goods for the purpose of sales tax is correct.
What, however, did not fall for consideration in any of the aforementioned
decisions is the concept of works contract involving both service as also
supply of goods constituting a sale. Both, in Tata Consultancy (supra) as also
in Associated Cement Company (supra), what was in issue was the value of the
goods and only for the said purpose, this Court went by the definition thereof
both under the Customs Act as also the Sales Tax Act to hold that the same must
have the attributes of its utility, capability of being bought and sold and
capability of being transmitted, transferred, delivered, stored and possessed.
As a software was found to be having the said attributes, they were held to be
have, however, a different problem at hand. Appellant admittedly is a service
provider. When it provides for service, it is assessable to a tax known as
service tax. Such tax is 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 of India, read with Seventh
Schedule thereof is in question, the Court may have to take recourse to various
theories including aspect theory, as was noticed by this Court in
Federation of Hotel & Restaurant Association of India, etc. v. Union of
India& Ors. [(1989) 3 SCC 634].
the submission of Mr. Hegde is accepted in its entirety, whereas on the one
hand, the Central Government would be deprived of obtaining any tax whatsoever
under the Finance Act, 1994, it is possible to arrive at a conclusion that no
tax at all would be payable as the tax has 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.
have noticed hereinbefore that 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
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.
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 is, therefore,
difficult to hold that in a case of this 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, to us, thus, appears to be
may notice that the concept of aspects theory whcih had found echoes in State
of U.P. Another v. Union of India & Anr. [(2003) 3 SCC
239] has expressly been overruled by a Three Judge Bench in Bharat Sanchar Nigam
Ltd. (supra) stating :
But if there are no deliverable goods in existence as in this case, there is no
transfer of user at all.
access or telephone connection does not put the subscriber in possession of the
electromagnetic waves any more than a toll collector puts a road or bridge into
the possession of the toll payer by lifting a toll gate. Of course the toll
payer will use the road or bridge in one sense. But the distinction with a sale
of goods is that the user would be of the thing or goods delivered. The
delivery may not be simultaneous with the transfer of the right to use. But the
goods must be in existence and deliverable when the right is sought to be
Therefore whether goods are incorporeal or corporeal, tangible or intangible,
they must be deliverable. To the extent that the decision in State of U.P. v.
Union of India held otherwise, it was, in our humble opinion erroneous.
For the reasons aforementioned, the impugned judgment cannot be sustained. It
is set aside accordingly. The Appeal is allowed. No costs.