Holding

Payments of service tax and VAT are mutually exclusive; VAT is not payable on the portion of a composite contract that is already subject to service tax.

Summary

M/s Imagic Creative Pvt Ltd, an advertising agency, filed returns for service tax under the Finance Act, 1994 and for VAT under the Karnataka Value Added Tax Act, 2003. The VAT authority classified the entire transaction, including the concept‑creation service for which service tax had already been paid, as a single indivisible contract and levied VAT on the whole contract value. The High Court upheld this assessment. The Supreme Court examined whether the service tax paid on the concept‑creation element could also be subject to VAT, interpreting clause 29A of Article 366 of the Constitution and the distinction between indivisible and composite contracts. It held that service tax and VAT are mutually exclusive and that VAT cannot be imposed on the portion of the contract already taxed as service. Consequently, the Court set aside the VAT assessment and allowed the appeal.

Issues considered

The applicability of VAT under the Karnataka VAT Act, 2003 to the entire contract value including the concept‑creation service already subject to service tax.
Whether the contract is an indivisible (works) contract or a composite contract for the purpose of tax liability.
The correct interpretation of clause 29A of Article 366 of the Constitution in relation to works contracts.
The mutual exclusivity of service tax and VAT under the Finance Act, 1994 and the Karnataka VAT Act.

Legislation cited

Finance Act, 1994
Karnataka Sales Tax Act, 1957s. Section 12
Karnataka Value Added Tax Act, 2003s. Section 60

Subjects

Value Added TaxService TaxComposite contractIndivisible contractKarnataka VAT ActArticle 366(29A)Taxability of advertising servicesLegal fictionTax law interpretation

Judgment

[2008) 1 S.C.R. 457

. _., M/S. IMAGIC CREATIVE PVT. LTD. A
v.
""" THE COMMISSIONER OF COMMERCIAL TAXES & ORS.
(C.A. No. 252 of 2008)

JANUARY 9, 2008
B
(S.B. SINHA AND HARJIT SINGH BEDI, JJ.]

- "* Kamataka Value Added Tax Act, 2003 - Value added
tax - Levy of- On the value of entire sale including the creation
of concept whereon service tax already paid - Propriety of - c
Held: In the instant case Value Added Tax is not payable on
the value of the entire sale, irrespective of the element of
service - Service tax and Value Added Tax being mutually
exclusive, have to be made applicable having regard to the
respective parameters of service tax and sales tax as
D
envisaged in a composite contract - Where application of
Parliamentary and a Legislative Act comes up for
consideration, endeavour to be made as to make provisions
of both the Acts applicable - The sale in question does not
attract the legal fiction envisaged in Article 366 (29 A) -
Finance Act, 1994 - Karnataka Sales Tax Act, 1957 - s. 12 - E

- Kamataka Sales Tax Rules- r. 3 - Constitution of India, 1950
-Articles 246 rlw Seventh Schedule, 366 (29 A) - Interpretation
of Statutes.
Appellant-company was an advertising agency. It F
~ used to create original concept and design advertising
material, brochures, annual reports etc. for its clients.
Appellant filed its returns for service tax under Finance
Act, 1994 and also for sales tax under Karnataka Sales
Tax Act, 1957. It was assessed by the Assessing Officer
G
under s. 12 of the Sales Tax Act and r. 3 of Karnataka Sales
~I
Tax Rules. Thereafter raid was conducted and criminal
proceedings were initiated against the appellant. Appellant
filed application uls 60 of Karnataka Value Added Tax,
.
457 H
458 SUPREME COURT REPORTS [2008] 1 S.C.R.

A 2003 for classification and advance rulings. The authority ~ 1

concerned held that the entire activity undertaken by the
dealer is a comprehensive conduct, therefore the entire ..
sale value including the creation of concept, forms part
of the value of sale and is accordingly liable to tax. The
B order was confirmed by Tribunal as well as High Court.
In appeal to this court, the question for determination
was whether the charges collected towards services of

c
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 Karnataka Value Added Tax
t

-
Act, 2003.
Allowing the appeal, the Court
HELD: 1. Payments of service tax as also Value
D Added Tax 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
E providing for attracting different nature of levy. In a case
of this nature, sales tax would not be payable on the value
of the entire contract; irrespective of the element of service
provided. [Para 28] [475-F-G]
..
2. If the case of the State is accepted in its entirety,
F 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
G in mind between an indi"isible contract and a composite
contract. If in a contract, an element to provide service is r·-
contained, the purport and object for which the
Constitution had to be amended and clause 29A had to
be inserted in Article 366 of the Constitution of India, 1950
H must be kE'~t in mind. [Para 25] [474-H; 475-A-8]
MIS. IMAGIC CREATIVE PVT. LTD. v. THE COMMNR. 459
OF COMMERCIAL TAXES & ORS .
• -l
3. By reason of introduction of clause 29A in Article A
.... 366, a legal fiction was created so as to make the supply
of goods involved in a works contract, subject to tax. Such
a legal fiction, 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 B
applied beyond a point which was not contemplated by
1 the legislature or which would lead to an anomaly or
'~ absurdity. A transaction of the present description was
not contemplated. [Paras 16 and 26} [469-G; 475-C-D]
c
4. 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 D
provisions of both the Acts are made applicable.
~
[Para 27] [475-E]
5. 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 E
,,,-,
thereof is in question, the Court may have to take recourse
to various theories including 'aspect theory' [Para 24]
[474-F-G]
Mis.Gannon Dunkerley and Co. and Ors. v. State of F
Rajasthan and Ors. 1993 (1) SCC 364; State of Madras vs.
Gannon Dunerley and Co. (Madras) Ltd. 1959 SCR 378;
Bharat Sanchar Nigam Ltd. v. Union of India 2006 (3) SCC 1
- relied on.
Tata Consultancy Services v State of A.P 2005 (1) SCC G
---., 132; Tata Consultancy Services v. Municipal Corporation of
"
Greater Bombay and Anr 2006 (3) SCC 1; Associated Cement
Companies Ltd. V. Commissioner of Customs 2001 (4) sec
593 - distinguished.
H
460 SUPREME COURT REPORTS [2008] 1 S. C.R.

A Builders' Association of India and Ors. v. Union of India 4.- •

and Ors. 1989 (2) SCC 645; Federation of Hotel and ......
Restaurant Association of India, etc. v. Union of India and Ors.
1989 (3) SCC 634; State of UP Another v. Union of India and
Anr. 2003 (3) SCC 239 - referred to.
B CIVIL APPELLATE JURISDICTION : Civil Appeal No. of
2008
I"
From the final Judgment and Order dated 29.11.2006 of
the High Court of Karnataka at Bangalore in S.T.A. No. 7/2006.
-•
c Joseph Vellapally, Mohit Choudhary, Ashok Kulkarni,
Pradeep Chandel, Manish Jain and Puja Sharma for the
Appellant.
Sanjay R. Hegde for the Respondents.
D The Judgment of the Court was delivered by
S.B. SINHA, J. 1. Leave granted.
......
2. Whether the charges collected towards the services for
evolution of prototype conceptual design (i.e. creation of
E 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
F Karnataka High Court in STA No.7 of 2006.
3. 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
G clients does not appear to have been entered into in writing as
no written contract as such has been placed before us. f #

4. We may notice a purchase order and the invoice which
have been produced before us and the authenticity whereof is
not in question :
H
MIS. !MAGIC CREATIVE PVT. LTD. v. THE COMMNR. 461
OF COMMERCIAL TAXES & ORS. [S.B. SINHA, J]

"ESTIMATE A _
P & PR Unit Estimate No. 014F
MIS ISRO HEADQUARTERS , Date : 26.04.2003

Antariksh Bhavan, New BEL Road , Job No.: 051/APR/ 03
B
Bangalore, Enquirv No.
Co-ordinated by: Mr. C.S. Ramachandran
Particulars - GSAT 2 POSTER Qty. Rate Amount

Rs. P. Rs. P.
c
1. Conceptualising, Design and
Production of Computer
ArtWork of size A3, front 1 No. 1,500 00 1,500 00
back 1 No. 1,500 00 1,500 00

2. B/w Line drawings in back D
page Artwork of size AS 4 Nos. 100 00 400 00

3. Digital Inkjet Output on
Photoglossy Paper for
Layout of size A3 ( 1. 5 sq. ft.)
E
@ Rs. 100/- per. sq. ft. front 1 No. 150 00 150 00
back 1 No. 150 00 150 00

4. Four Colour Separated
Positives Size: A3 @ Rs. 250/-
per colour x 4 Nos. =1,000 F
front 1 Set 1,000 00 1,000 00
back 1 Set 1,000 00 1,000 00

5% Service Tax on item 1 150 00

5% KST on item 3 15 00 G
1.5% Resale Tax on item 4 30 00

Rupees Five Thousand Eight Hundred Total Rs. 5,895 00
Ninety Five Only
H
462 SUPREME COURT REPORTS [2008] 1 S.C.R.

A INVOICE
Consignee
••
Invoice No. Dated
707 31.01.2004

M/S MORRIS TOOLING PVT. LTD. Delivery Note/Date Job No.
Doddaballapur 531/23.01.04 1175/DEC/03
B
Bangalore Purchase Order No. Dated
MTP/PU0/2004/00002 21.01.2004

Co-ordinated by Mr. Muniswamy

c SI. Description of Goods Quantity Rate Amount

No Rs. P. Rs. P.
HSK TOOL HOLDER

1. Designing and System 9,000 00
D Charges

2. Four Colour Separated
Positives for Cover Size: A3 1 Set 1,728 00

3. Two Colour Separated
E 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
F Art Paper for Inner pages
with centre pinning 500 Nos. 31,850 00

8% Service Tax on item 1 720 00

G 1.5% Resale Tax on item 2-4 651 00

TOTAL 53,777 00

Rupees Fifty Three Thousand Seven Hundred Seventy Seven Only"
-
5. They filed their returns both under the Finance Act, 1994
H as also the Act. An order of assessment was passed by the
M/S. IMAGIC CREATIVE PVT. LTD. v. THE COMMNR. 463
OF COMMERCIAL TAXES & ORS. [S.B. SINHA, J]
• .J Assessing Authority in terms of Section 12 of the Karnataka A
Sales Tax Act and Rule 3 of the Karnataka Sales Tax Rules,
material portion whereof reads as under :
"In view of the above discussions, I hereby complete the
assessment for the year 2eJ03-2004 under section 12(3)
of the KST Act 1957 by confirming the turnovers proposed B
in the proposition notice.
i
Gross turnover Rs. 1,97,72,296-00
Add. Towards omissions as
c
per. Int. report Rs. 6, 07, 840-00

Gross turnover determined Rs. 2,03,80, 136-00
Less : Exempted turnover

1) Taxes collected Rs. 2,43,848-00 D

2) Discount allowed Rs. 80,332-00
;~
3) Service charges, design &
art work charges collected
in which no transfer of E
property in goods is involved Rs. 54,27,260-00
4) Advertisment charges for
Newspapers collected Rs. 80, 12,976-00
5) Sales outside the state Rs.62,400-00 Rs.1,38,26,816-00 F
Taxable turnover Rs. 65,53,320-00
Classification of TTO:
1) Sale of Computer Printed
materials @ 8% from 1.4.03
to 31.5.03 Rs. 4,57 ,242-00 Rs. 36,580-00 G
2) -do- from 1.6.03 to 31.3.04 @ 9%
Rs. 16,19,122-00 Rs. 145,721-00
3) -do- to Government Departments
against D forms @ 5% 11,45,034-00 Rs. 57,252-00 H
464 SUPREME COURT REPORTS [2008] 1 S.C.R.

A 4) Sale of Printed materials I- •
as II dealer liable for RST
@ 1.5% Rs. 33,31,922-00 Rs. 49,979-00
5) Addi. Tax after 1.6.03
@1% Rs. 27,642/-
B
6) Cess @ 15% on tax
after 1.2.04 Rs. 5.850-00
Total Tax Rs. 3,23,024-00"
6. After passing of the order of assessment, a raid was
C 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
301h September, 2005, it was held:
D
''The 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
E 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.
F
It is 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.
G
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
a/so indicate the entire activity though separated is a
comprehensive work. Such creation of activity
H
M/S. IMAGIC CREATIVE PVT. LTD. v. THE COMMNR. 465
OF COMMERCIAL TAXES & ORS. [S.B. SINHA, J]
• _j
tanamounts to making indivisible contract in a divisible A
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, B
system charges etc. In short, this Authority rules that the
1 sale of printed m9terial with a background of providing
the concept is an indivisible activity liable to tax at 4% as
a whole."
(Emphasis supplied) c
7. An appeal preferred thereagainst by the appellant in
terms of Section 24(1) of the Karnataka Sales Tax Act has been
dismissed by a Division Bench of the High Court.

8. The High Court in its judgment noticed the decisions of
D
this Court in Associated Cement Companies Ltd. v.
Commissioner of Customs [(2001) 4 SCC 593]; Tata
••. ..o(
Consultancy Services v. State of AP [(2005) 1 SCC 132]; and
Tata Consultancy Services v. Municipal Corporation of Greater
Bombay & Anr. [(2006) 3 SCC 1] and held :
E
"In 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 F
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
G
seen that it is a comprehensive contract or supply of printed
-1 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
H
466 SUPREME COURT REPORTS [2008] 1 S.C.R.

L I>
A 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
B with the impugned orders at Annexure-A & H."
9. Mr. Joseph Vellapalli, learned senior counsel appearing
for the appellant, would submit that r
(1) the High Court committed a serious error in passing
c 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-
D
clauses (a) to (f) of clause (29A) of Article 366 of the
Constitution of India.
,. -
(2) Appellant being an advertising agency, i.e., providing
professional services, is not liable to pay Value
E Added Tax (VAT) upon application of dominion nature
test or otherwise.
(3) 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
F event, sale of goods are shown by the appellant as _.
a second sale.
(4) On 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];
G
Mis. Gannon Dunkerley & Co. & Ors. v. State of '( ~
Rajasthan & Ors. [(1993) 1 SCC 364], no VAT would
be payable.
(5) In any event, advertisement not being goods. they
H cannot be bought and sold in an open market being
M/S. IMAGIC CREATIVE PVT. LTD. v. THE COMMNR. 467
OF COMMERCIAL TAXES & ORS. [S.B. SINHA, J]

• -I customer specific . A
1. 0. Mr. Hegde, learned counsel appearing on behalf of
the respondents-State, on the other hand, submitted that

(i) an entire transaction is a composite whole inasmuch
as all what was transferred is the documents B
containing not only the value of the goods but also
i
the soft skill involved therein; and

• (ii) 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 c
has rightly been held to be taxable.
Strong 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
D
Sanchar Nigam Ltd. v. Union of India [(2006) 3 SCC 1].
11. At 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 E
Karnataka Value Added Tax Act, 2003 was maintainable. The
purpose for which such a proceeding is taken recourse to is
well known. When a 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 F
l ordinarily taken recourse to. But it is not necessary for us to
consider the matter any further.
In 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 G
-1 the purpose of payment of both service tax as also the value
added tax attained finality at least for that yeaL
12. Be that as it may, as the order of the competent
·authority under Section 60 of the Act would be binding on the
H
468 SUPREME COURT REPORTS [2008] 1 S.C.R.

A assessing authority, in future also, we may examine the merit of I- ~
the matter.
13. 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
B it for issuance of a brochure or a year book or for any other
purpose.
t
Appellant, in their returns, made three categorical divisions
in regard to its tax liabilities (1) The amount of service tax on the
c specific design and production; (2) The amount of Karnataka
Sales Tax on the specified item on the first sale; and (3) when
certain items are outsourced, the tax payable on resale of the
said goods in terms of Section 6(4) of the Karnataka Sales Tax
Act.
D 14. The Tribunal as also the High Court opined that the
contract was an indivisible one. The effect of such an indivisible
contract, vis-a-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
E held:
"To 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
F 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 ~nter into
distinct and for money consideration, and the other for
payment of remuneration for services and for work done."
G
15. 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 :
"(29A) "tax on the sale or purchase of goods" includes-
H
I~

M/S. IMAGIC CREATIVE PVT. LTD. v. THE COMMNR. 469
OF COMMERCIAL TAXES & ORS. [S.B. SINHA, J]
'
.( j (a) a tax on the transfer, otherwise than in pursuance of a A
contract, of property in any goods for cash, deferred
payment or other valuable consideration;

(b) 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; B
,.

t (c) a tax on the delivery of goods on hire-purchase or any
system of payment by installments;

(d) a tax on the transfer of the right to use any goods for
any purpose (whether or not for a specified period) for c
cash, deferred payment or other valuable consideration;
(e) a 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;
D
(f) a 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), where such supply or service,
is for cash, deferred payment or other valuable E
consideration,

"'I 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 F
> supply is made."
16. By 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
G
description was not contemplated.
-1
The question came for consi9eration again in Builders'
Association of India & Ors. v. Union of India & Ors. [(1989) 2
SCC 645] and Mis.Gannon Dunkerley & Co. & Ors. v. State of
Rajasthan & Ors. [(1993) 1 SCC 364]. It has expressly been H
470 SUPREME COURT REPORTS [2008] 1 S.C.R.
'

A laid down therein that the effect of amendment by introduction L '\.
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:
B "Keeping 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
c 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."
17. We may also notice that a Constitution Bench of this
Court in Tata Consultancy Services (supra), opined that having
D
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
E programme, but the moment copies are made and marketed, it
becomes goods, which are susceptible to sales tax.
In regard to the element of intellectual property, it was held
that the same having been incorporated on a media, for purposes
F of transfer, both tangible and intangible property capable of
being transmitted, transferred, delivered, stored and possessed ,,\
etc. would come within the purview thereof. It was opined :
"Thus, even unbranded software, when it is marketed/sold,
may be goods. We, however, are not dealing with this
G 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."
18. We may, furthermore, notice that therein one of us, in a
H
MIS. !MAGIC CREATIVE PVT. LTD. v. THE COMMNR. 471
OF COMMERCIAL TAXES & ORS. [S.B. SINHA, J]

~ .. separate but concurring judgment, opined as under A
"78. 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 B
the intellectual property is con.tained is a marketable
1 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 c
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 D
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 E
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 F
> article to become goods is its marketability."
19. 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 was held;
G
"44. 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
H
472 SUPREME COURT REPORTS [2008] 1 S.C.R.

A 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. For
B 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
c 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 cases.
D
45. The reason why these services do not involve a sale
for the purposes of Entry 54 of List 11 is, as we see it; for •
reasons ultimately attributable to the principles enunciated .. ~
in Gannon Dunkerley case 5, namely, if there is an
E instrument of contract which may be composite in form in
any case''other than the exceptions in Article 366(29-A),
unless th~·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
F to sell from t~e 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
G
disintegrated. The 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.
H

\"
M/S. IMAGIC CREATIVE PVT. LTD. v. THE COMMNR. 473
OF COMMERCIAL TAXES & ORS. [S.8. SINHA, J]
;.
• .
50. What are the "goods" in a sales transaction, therefore, A
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 B
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 average intelligence."
20. We may, at this juncture, also notrce the decision of c
this Court in Associated Cement Qompany (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 D
,. sought to make a distinction between such a contingency arising
; ); under the Customs Act involving a works contract and a contract
of sale stating :
"32. In the sales tax cases referred to hereinabove no
doubt the question which arose was whether in a works E.
contract, wher.e 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 F
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
Amendment period. Furthermore, the provisions of the G
,. 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."
H
474 SUPREME COURT REPORTS · [2008] 1 S.C.R.

A 21. 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
B Customs Act.
22. Our attention has furthermore been drawn to the
decision of this Court in Bharat Sanchar Nigam Ltd. (supra) -I'

wherein referring to Tata Consultancy (supra) it was observed
that the approach of this Court in the said decision as to what
c would be 'goods' for the purpose of sales tax is correct.
23. 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
D
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
E transmitted, transferred, delivered, stored and possessed. As
a software was found to be having the said attributes, they were
held to be goods.
24. We have, however, a different problem at hand.
F 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 applicab.ility of Article 246 of the Constitution of India, read
with Seventh Schedule thereof is in question, the Court may
G
have to take recourse to various theories i_ncluding 'aspect
theory', as was noticed by this Court in Federation of Hotel & ....
Restaurant Association of India, etc. v. Union of India& Ors.
[(1989) 3 sec 634J.
H 25. If the submission of Mr. Hegde is accepted in its entirety,
M/S. IMAGIC CREATIVE PVT. LTD. v. THE COMMNR. 475
OF COMMERCIAL TAXES & ORS. [S.B. SINHA, J]

~· whereas on the one hand, the Central Government would be
deprived of obtaining any tax whatsoever under t~e Finance
A

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 B
to provide service is contained, the purport and object for which
the Constitution had to be amended and clau~e 29A had to be
i·
inserted. in Article 366, must be kept in mind.

26. We have noticed hereinbefore that a legal fiction is
created by reason of the said provision. Such a legal fiction, as c
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 absurdity. D

¥ 27. The Court, while interpreting a statute, must bear in
) --i 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 E
be made to see that provisions of both the acts are made
applicable.

28. Payments of service tax as also the VAT are mutually
:,. exclusive. Therefore, they should be held to be applicable having F
~ 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
G
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 correct.
34. We may notice that the concept of aspects theory whcih
had found echoes in State of UP Another v. Union of India & H
476 SUPREME COUR'T REPORTS [2008] 1 S.C.R.

A Anr. [(2003) 3 SCC 239] has expressly been overruled by a _. ..
Three Judge Bench in Bharat Sanchar Nigam Ltd. (supra)
stating:
"78. But if there are no deliverable goods in existence as
in this case, there is no transfer of user at all. Providing
B 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
c 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 transferred.
D
79. Therefore whether goods are incorporeal or corporeal,
tangible or intangible, they must be deliverable. To the
extent that the decision in State of UP v. Union of India
held otherwise, it was, in our humble opinion erroneous."
E 35. For the reasons aforementioned, the impugned
judgment cannot be sustained. It is set aside accordingly. The
Appeal is allowed. No costs.
K.K.T. Appeal allowed.