Payment of Service Tax as also VAT are mutually Exclusive - SC

[CA. Rahul Bajaj]

Payments of service tax as also VAT are mutually exclusive

SUPREME COURT OF INDIA

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

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. [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 (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'. [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 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. [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, 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. [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 and the appeal was to be allowed. [Para 30]

Decision of Karnataka High Court in case of Imagic Creative (P.) v. CCT [2008] 12 VST 366 (see Annex) reversed.

--
regards,
CA. Rahul Bajaj
Partner - M/s. Rahul Bajaj & Co.
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