“Photography” includes still photography, motion picture photography, laser photography, aerial photography and fluorescent photography. Photography Service as defined in Section 65(105)(zb) of the Finance Act, 1994 means any service provided to a customer, by a photography studio or agency in relation to photography, in any manner, that Section 65(79) of the Act defines photography studio or agency.
Since works contracts involves both elements of goods and services and is liable to Sale Tax/ VAT and Service Tax, a question often arises as to whether photographic service, which includes both elements of goods (ink, chemicals, photographic paper, etc.) and services, would be considered as a composite contract and be covered under works contract liable for service tax under Section 68(2) of Finance Act, 1994?
- Definition of Works Contract:
If we consider the definition of the term “Works Contract”, it has not clearly been defined in the Constitution of India. Moreover, no power has been delegated to the Central or State Government to define such contract. However, definition has been given under different laws as:
- Under Central Sales Tax Law:
Section 2(ja) of Central Sales Tax Act, 1956 defines Works Contract as “Works Contract means a contract for carrying out any work which includes constructing, altering, building, assembling, manufacturing, processing, fabricating, erection, installation ,fitting out, improvement, repair or commissioning of any movable or immovable property.
- Service Tax Law – Under New Regime:
Clause (54) of Section 65B of the Act defines ‘works contract’ as “works contract” means a contract wherein transfer of property in goods involved in the execution of such contract is leviable to tax as sale of goods and such contract is for the purpose of carrying out construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, alteration of any movable or immovable property or for carrying out any other similar activity or a part thereof in relation to such property.
Definition of Works contract under some State VAT laws:
- TN VAT:Sec 2(43) defines as
“Works Contract includes any agreement for carrying out for cash, deferred payment or other valuable consideration, building construction, manufacture, processing, fabrication, erection, installation, fitting out, improvement, modification, repair or commissioning of any movable or immovable property.”
Although there is no exact definition of ‘Works Contract’ under MVAT Act, howsoever some indication has been given in the definition of ‘sale’ under section 2(24). Sub-section (b) (ii) provides as follows, (w.e.f. 06.08.2007): “(ii) the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract including, an agreement for carrying out for cash, deferred payment or other valuable consideration, the building, construction, manufacture, processing, fabrication, erection, installation, fitting out, improvement, modification, repair or commissioning of any movable or immovable property.”
Hence, a works contract is an agreement which includes transaction including both rendering of services or labour and transfer of goods. Under such a contract, one party agrees to do a certain job in execution whereof, goods are transferred or services rendered to the other party to the contract. Therefore, it is often defined as: “an agreement of building construction, manufacture, processing, fabrication, erection, installation, repair or commissioning of any movable or immovable property is a works contract. In relation to a works contract only that part of consideration which represents transfer of property in the goods involved in execution of the works contract, shall be taxable.”
However, according to Section 65B(44) of the Finance Act, 1994, service does not include any activity which involves merely transfer of title in goods or immovable property. It also excludes such other transfers, delivery of supply of goods which is deemed to be sale under Article 366(29A)(b) of the Constitution.
- Whether photographic service is included under Works Contract?
It is more often questioned as to whether photography service, which includes both the elements of goods and services, be considered as a composite contract and covered under works contract, thereby being liable for service tax under Section 68 (2) of Finance Act, 1994. Therefore, in order to deal with the same, this paper provides gist of landmark judgments given by the Supreme Court and various High Courts.
In the case of Assistant Sales Tax Officer v. B C Kame, it was held by the Hon’ble Supreme Court that the contract of photography is a contract of service. Hence it would be covered under the term “works contracts.”
Following the Assistant Sales Tax Officer case, in the case of Bharat Sanchar Nigam Limited v. Union of India, the Supreme Court has used the term “Dominant Nature Test” to determine whether the transaction involving both the element of goods and service attracts Article 366(29A).
In the case of Rainbow Colour Lab & Anr v. State of Madhya Pradesh & Ors., the issue was raised as to whether the job rendered by a photographer in taking the photographs, developing & printing films would amount to ‘works contract’ as contemplated in Article 366(2A)(b) of the Constitution of India read with Section 2(n) of the M.P. General Sales Tax Act for the purpose of levy of sales tax on business turnover of the photographers. Following the judgment by the Kerala High Court in the case of Bavens v. Union of India, the Supreme Court concluded as under:
“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 is held by this Court in Kame’s case (a decision rendered prior to the 46thAmendment), 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.”
This decision was overruled in the case of Associated Cement Companies Ltd. v. Commissioner of Customs as the conclusion arrived runs counter to the express provision contained in Article 366(29A) as also of the Constitution Bench Decision of the Supreme Court in the case of Builders Assn. of India v. Union of India.
Works contracts transactions under State VAT Laws shall be subjected to VAT as according to Entry 54 of List II of the Seventh Schedule of the Constitution, “tax on the sale or transfer of goods” shall 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 also as it was stated in the case of Builders Association of India and others Vs. Union of India and others.
Moreover, in the case of Mela Ram & Sons Vs. Commissioner of C. Ex. & S.T, it was stated that “it is perhaps possible for Revenue to contend that collection of negatives of photographs from customers, for forwarding the same for processing to different photography agencies and re-collection of such processed material for return to the customers, also constitutes the taxable photography service as defined in Section 65(105)(zb).”
In the case of Bharat Sanchar Nigam Limited v. Union of India, one of the landmark cases regarding photography service, it was held that works contract (and also catering contract) involves the element of both sale and service contract and that the service and sale elements can be split up. Hence, if the photography service is a ‘works contract’, it would follow that it involves the element of both sale and service, and the sale portion of the activity or transaction cannot be included in the taxable value of service. Moreover, in view of sub-clause (b) of Clause (29A) of Article 366, that deemed sale of the materials takes place in the rendering of photography service and, therefore, the value of the materials cannot be included while computing the value of the service. Sale and service cannot stand in the same box, meaning thereby that sale cannot be treated as service and vice versa.
This decision was reiterated in the case of Delux Colour Lab Pvt. Ltd. v. CCE, Jaipur and Garg Photo Film v. CCE, Allahabad and Anurag Photo Lab (P) Ltd. and Anurag Colour Lab v. CCE, Bhopal.
Hence, it cannot be said that the judgment in the BSNL case cannot be treated as an authority on the issue of service tax. Also, this judgment would apply to all kinds of composite transactions including element of transfer in title of goods by way of sale and that of involving a provision of service and transfer in title in immovable property or actionable claim.
However, if we look into the State tax laws, controversies have been trending regarding the constitutionality of Entry 25 of Schedule VI of Karnataka Sales Tax Act which provides for the levy of tax for processing and supply of photographs, photo prints and photo negatives. This entry was inserted in the Act by an amendment which came into effect from 01.07.1989. The validity of this entry has been challenged time and again. This entry was declared unconstitutional by the High Court in the case of M/s Keshoram Surindranath Photo- Bag (P) Ltd. & Ors. v. Asstt. Commissioner of Commercial Taxes (LR) and later by the Supreme Court following its reasoning in the Rainbow Colour Lab & Anr v. State of Madhya Pradesh & Ors. The reason being that contracts of processing and supplying of photographs, photo frames and photo negatives was primarily a service contract with insignificant component of goods or material and henceforth it was beyond the competence of State Legislature given in Entry 25 of List II of Schedule VI of the Constitution to impose sales tax on such contracts.
Thereafter, Supreme Court in the case of ACC Ltd. v. Commissioner of Customs expressed its doubts about the correctness of the ratio laid down in the Rainbow Colour Lab case. After this judgment, a circular was issued by the Commissioner of Commercial Taxes to the assessing authorities to proceed with the assessments as per Entry 25. This was challenged before the High Court of Karnataka in the case of M/s Golden Colour Labs and Studio and others v. The Commissioner of Commercial Taxes and allowing the writ petition, it was held that a provision once declared unconstitutional cannot be brought to life by mere administrative instruction. It was also stated that the said Entry 25 cannot be revived automatically, unless there is re-enactment by the State Legislature to that effect.
In due course, the State Government via enactment of the State Laws Act, 2004 reintroduced Entry 25 with retrospective effect from 01.07.1989. This was again challenged and was declared to be unconstitutional by the High Court. It would be pertinent to note that the High Court while dealing with the cases, did not take into consideration the fact that Rainbow Colour Lab case was overruled by ACC Ltd. v. Commissioner of Customs.
This was again challenged in the case of State of Karnataka Etc v. Pro LAB and Ors contending that re-enactment of the said Entry 25 with retrospective effect is ultra vires the State Legislature and also that the Entry 25 in itself was unconstitutional and hence invalid. It was stated that Entry 54 of List II of Schedule VII 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 State Legislature has the competency to legislate over the subject. Moreover, as far as retrospective validity of Entry 25 is questioned, it was held in the case of Hiralal Ratanlal v. State of UP that “power to legislate includes 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.” Hence, the Supreme Court upheld the levy of Sales tax on processing and supplying of photographs and with a retrospective effect.
Moreover, assesses should no longer be able to have recourse to the ‘Dominant Intention Test’ in case of works contract. However, question still prevails on applicability of ‘Dominant Intention Test’ for the transactions that do not get covered under Article 366(29A) of the Constitution. As a result, if any transaction does not get qualified as a works contract, it would not be open for performing such operations, making it necessary for the assessee to closely examine the transactions in order to determine their true nature.
- Current position of law regarding Photography service
As per the above important judicial views, it has been clear that photography service is a contract for service as laid down by the Supreme Court in Kame’s case. There is no dispute regarding the fact that photography service, which includes both the elements of goods and services, is covered under works contract and hence is liable for service tax under Section 68(2) of Finance Act, 1994. Once a works contract involves transfer of property per se, the provisions of Article 366(29A) of the Constitution of India are attracted. Hence, it may also attract provision of service tax on reverse charge mechanism. Moreover, after the 46th Amendment, the sale element of the contracts which are covered by Clause (29A) of Article 366 are separable and can be subjected to sales tax by the States under Entry 54 of List II of Schedule VII. There would be no question of the dominant nature test applying in photography service. The value of taxable service will be the gross amount charged from the customer for the service rendered. Often a question is raised as to whether the x-ray or the CT scan done using fluorescence photography technique will fall in the category of taxable service. According to various judgments by the High Courts and the Supreme Court it has been clarified that these are not photography studios or agencies in common parlance and so the services provided by them would not come within the ambit. Moreover, value of photographic paper and consumables cannot be included in the value of photography service to levy service tax.
Section 65(47) of Finance Act, 1994 as amended.
Mela Ram & Sons Vs. Commissioner of C. Ex. & S.T., 2014S.T.R.198(Tri. – Del), Para 3.
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 Technical Guide to Service Tax on Works Contracts, available at http://idtc.icai.org/download/BGM-staxt-Works-cnt(10-1-15).pdf (as accessed on February 6, 2016).
 Part IV- Section 2, TAMIL NADU GOVERNMENT GAZETTE EXTRA ORDINARY, Published by Authority No. 348, December 15, 2006, available at http://www.tnvat.gov.in/english/vatact_231206.pdf (as accessed on February 6, 2016).
Govind G. Goyal, Taxation of Works Contracts under MVAT Act, The Institute of Chartered Accountants of India, April 18, 2015, available at https://www.wirc-icai.org/(X(1)S(zik3il45qc1bbxznqfkdp145))/material/Tax_of_Works_Contr_under_MVAT_Act.pdf (as accessed on February 11, 2016).
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