Nayan Colour Lab vs State of Madhya Pradesh

Sanjay Yadav, J.—Principal controversy as to whether the activity of the petitioner, i.e., business of photography, developing and carrying out job work amount to sale resulting in assessing the petitioner of taxable purchase of Rs. 55,00,000/- during financial year 1.4.2000 to 31.3.2001 by order dated 31.1.2004 and the exigibility of entry tax over purchase of Rs. 10,35,000/- during the said assessment year and a penalty proceeding under Section 69 in respect of evasion of tax of Rs. 4,80,000/- was imposed by order dated 25.1.2007, by treating as a sale and not service is no more res integra with the amendment caused in Article 366 of the Constitution of India vide 46th Amendment by incorporating clause 29 A and the decision thereon in Bharat Sanchar Nigam Ltd. and Another Vs. Union of India (UOI) and Others, .

As evident from the pleadings that on 26.12.2002 search was carried out in the petitioner establishment. The Assessing Officer vide order dated 31.1.2004 found undisclosed sale of Rs. 70,00,000/- during financial year 1.4.2000 to 31.3.2001 resulting in imposition of Tax of Rs. 4,80,000/- with a further direction for initiation of separate proceedings under Section 69 of 1994 Act for imposition of penalty. A revision preferred against the order dated 31.1.2004 under Section 62(1) of Madhya Pradesh Commercial Tax Act, 1994 culminating into an order dated 17.9.2004; whereby the matter was remitted to the Assessing Officer for reconsideration after affording an opportunity of hearing to the petitioner. On reconsideration, the petitioner was found liable for tax of Rs. 4,80,000/, on a taxable sale of Rs. 57,93,000/. Revision preferred against the order dated 25.1.2007 was affirmed in revision which was dismissed on 21.3.2008.

Assailing the order on bedrock of the law laid down in M/s. Rainbow Colour Lab and Another Vs. The State of Madhya Pradesh and Others [OVERRULED], , it is contended by the petitioner Assessee that the work carried out by the petitioner being a job work and not the work contract, therefore, was not exigible to tax under the Act, 1994 and Entry Tax Act, 1976.

The decision in Rainbow Colour Lab (supra) relied on by the petitioner was subjected to scrutiny by Three Judges Bench in M/s. Associated Cement Companies Ltd. Vs. Commissioner of Customs, ; wherein it was held:

"26. In arriving at the aforesaid conclusion the Court referred to the decision of this Court in Hindustan Aeronautics Ltd. Vs. State of Karnataka, and Everest Copier (supra). But both these cases related to pre Forty-sixth 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 conclusion arrived at in Rainbow Colour Lab case, in our opinion, runs counter 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 (UOI) and Others, .

True it is that the aforesaid verdict has been treated to be per incuriam in C.K. Jidheesh Vs. Union of India (UOI) and Others, ; wherein Their Lordships were pleased to observe:

"12. We are unable to accept this submission. In Associated Cement Companies'' case, the question was whether or not custom duty could be levied on drawings, designs, diskettes, manuals etc. The argument there was that these were intangible properties and not goods as defined in Section 2(22) of the Customs Act. The question of levy of service tax did not arise in that case. The observations relied upon are mere passing observations and do not overrule Rainbow Colour Lab''s case. Even otherwise, the questions raised in this Petition are fully covered and answered by the decision of the Kerala High Court, which we confirm as laying down the correct law."

However, thereafter the issue as to correctness of law laid down in Rainbow Colour Lab (supra) came up for consideration in Bharat Sanchar Nigam Ltd. and Another Vs. Union of India (UOI) and Others, , wherein it is held:

"49. We agree. After the 46th Amendment, the sale element of those contracts which are covered by the six subclauses of clause (29 A) of Article 366 are separable and may be subjected to sales tax by the States under Entry 54 of List II and there is no question of the dominant nature test applying. Therefore when in 2005, C.K. Jidheesh Vs. Union of India (UOI) and Others, held that the aforesaid observations in Associated Cement (supra) were merely obiter and that Rainbow Colour Lab (supra) was still good law, it was not correct. It is necessary to note that Associated Cement did not say that in all cases of composite transactions the 46th Amendment would apply."

With the verdict in Bharat Sanchar Nigam Ltd. (supra) and the 46th amendment, there remains no iota of doubt that the contract which was singled and indivisible has been altered into a contract which is divisible into one for sale of goods and the other for supply of labour and services and as a result of contract which was singled and indivisible has been brought with a contract containing two separate agreements and as observed by learned Single Judge in M/s. Agrawal Colour Quick System v. State of M.P. and others : W.P. No. 1482/2004 decided on 26.6.2006 that "Even in a single and indivisible works contract there is a deemed sale of goods which is involved in the execution of the works contract. Such a deemed sale has all the incidents of a sale of goods involved in the execution of a works contract where the contract is divisible into one for sale of goods and the other for supply of labour and services."

With these verdicts it leaves no scope for challenge the assessment carried out by the Assessing Officer treating the activities carried on by the petitioner as sale and exigible to the provisions of the Act of 1994 and the Entry Tax Act, 1976.

As regard to the assessment we are not commended to any material as would belie the conclusion or facts arrived at by the Authorities which being not perverse no indulgence is caused.

The only question which now remains for consideration is as to whether the department is justified in initiating the proceedings under Section 69 of 1994 Act for non disclosure of sales for the period 2000-01.

Relying on the decision in E.I.D. Parry (I) Ltd. Vs. Asstt. Commr. of Commercial Taxes and Another, it is contended on behalf of the petitioner that after the decision in M/s. Rainbow Colour Lab and Another Vs. The State of Madhya Pradesh and Others [OVERRULED], wherein, it was held that works contract could not be split and State Legislature has no legislative right to seek to levy Sales Tax on transaction which was not sale simplicitor of goods and 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 and the petitioner having engaged to carry out job works developing and designing the photographs not under an obligation to have declared the detail of sales contemplated under 1994 Act. The omission being not deliberate the respondents are not justified in imposing penalty.

Respondents on their turn deny the contention that there was no evasion. It is urged that on search deliberate evasion of tax was found culminating into proposal for initiation of proceedings under Section 69 of 1994 for imposition of penalty.

In E.I.D Parry (I) Ltd supra it is held:

"22. But so far as levy of penalty is concerned, we do not think that the Sales Tax Authorities were justified in levying it. Till the judgment of the Madras High Court, on 15.7.1991, in Perambalur Sugar Mills Ltd. Vs. State of Tamil Nadu , the correct position of law within the State of Tamil Nadu was not free from doubt. Even thereafter, the Sales Tax Tribunal had in subsequent orders held that transport subsidy was not includible in the taxable turnover. Such a view was held by the Tribunal till 19.3.1993. It appears that on bona fide belief that planting and transport subsidies were not includible in the taxable turnover, the appellants had not included those amounts in their turnover and for that reason non inclusion of these two items in the turnover do not seem to be intentional. Though we have now held that the appellants were not right in not including the amounts of planting subsidy and transport subsidy in the taxable turnover, considering the facts and circumstances of the case, it would not be correct to say that they had acted deliberately in defiance of law or that their conduct was dishonest or that had acted in conscious disregard of their obligation under the Sales Tax Act. The Sales Tax Authorities were, therefore, wrong in passing the orders of penalty and upholding the same. The High Court also, in our opinion, committed an error in upholding the orders of penalty. In the result, these appeals are partly allowed. The order of the High Court and the orders of the Sales Tax Authorities imposing and upholding levy of penalty are set aside. Only to that extent the appellants succeed and their appeals are allowed. The judgment of the High Court in respect to the planting subsidy and transport subsidy is upheld. In the facts and circumstances of the case, there shall be no order as to costs.

Be that as it may.

In the case at hand, no material is being commended at as would suggest that any order has been passed under Section 69 of 1994 Act or even proceedings have been drawn. In case such proceedings are drawn or order passed thereon, the petitioner has a statutory remedy. Since in the present writ petition the challenge to the assessment has been confined to that activities undertaken by the petitioner firm is not sale but a service and therefore, the provision of 1994 Act and Entry Tax Act 1976 is not attracted and the issue having being settled at rest by the decision in BSNL (supra) affirming the view in Associated Cement Co. (supra) that the law laid down in M/s Rainbow Colour Lab is not a good law, we declined to interfere. No other grounds are raised.

Consequently petition fails and is dismissed. No costs.