Supreme Court of India
STATE OF KARNATAKAversusM/S PRO LAB & ORS. ETC.
- Citation
- 2015 INSC 76
- Decided
- 30 January 2015
- Disposal
- Appeal(s) allowed
- Bench
- H L DATTU
Holding
Entry 25 of Schedule VI of the Karnataka Sales Tax Act, 1957 is constitutionally valid and may be applied retrospectively from 01‑07‑1989.
Summary
The Supreme Court examined the constitutional validity of Entry 25 of Schedule VI of the Karnataka Sales Tax Act, 1957, which levies tax on the processing and supply of photographs, photo prints and photo negatives. The issue centered on whether the State could tax the goods component of a works contract after the 46th Constitutional Amendment introduced clause 29‑A to Article 366, and whether the dominant‑intention test still applied. The Court held that clause 29‑A empowers the State to bifurcate a works contract into a sale of goods and a service component, rendering the dominant‑intention test otiose. Consequently, Entry 25 is valid and may be applied retrospectively from 01‑07‑1989. The appeal was allowed, dismissing the respondents' writ petitions.
Issues considered
- Whether Entry 25 of Schedule VI of the Karnataka Sales Tax Act, 1957 is constitutionally valid under Article 366(29‑A) and Entry 54 of List II.
- Whether the dominant‑intention test governs taxability of works contracts after the 46th Amendment.
- Whether the State Legislature may levy sales tax on the goods component of a works contract involving services.
- Whether the retrospective operation of the amendment (effective 01‑07‑1989) is constitutionally permissible.
Legislation cited
- Central Sales Tax Acts. Section 3, s. Section 4, s. Section 5
- Constitution of Indias. Article 286(3)(b), s. Article 366(29‑A), s. Entry 54, List II
- Karnataka Sales Tax Act, 1957s. Entry 25 of Schedule VI
- Karnataka State Laws Act, 2004s. Section 2(3)
- Rajasthan Sales Tax Acts. Section 5(3)
Subjects
sales taxworks contractconstitutional validityArticle 366(29‑A)dominant intention testretrospective legislationKarnatakaphotographyEntry 25State List
Judgment
[2015] 1 S.C.R. 808
A STATE OF KARNATAKA
V.
MIS PRO LAB & ORS. ETC.
(Civil Appeal No. 1145 of 2006)
JANUARY 30, 2015
B
[H.L. DATTU, CJI, A.K. SIKRI, ARUN MISHRA, JJ.]
Kamataka Sales Tax Act, 1957.· Entry 25 of Schedule VI
- Constitutional validity of - Legislative competence of State
C Legislature to levy tax for processing and supply of
photographs, photo prints and photo negatives challenged -
Challenge also to the retrospective effect given to said entry
- Held: By virtue of clause 29-A of Article 366, the State
Legislature is empowered to segregate the goods part of the
o Works Contract and impose sales tax thereupon - Entry 54,
List II 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 - Thus, Entry 25 of Schedule VI
E which makes that part of processing and supplying of
photographs, photo prints and photo negatives, which have
"goods" component exigible to sales tax is constitutionally
valid - In Rainbow Colour Lab case, Entry 25 of Schedule VI
was declared unconstitutional - The said judgment was
F declared as not a good law in ACC Ltd. - Thus, the very basis
on which Entry 25 of Schedule VI was declared as
unconstitutional, was found to be erroneous - In such
circumstances, the legislature will be justified in enacting the
law from the date when such a law was passed originally i.e.
G 01.07.1989 - Constitution of India, 1950 - Articles 366(29A),
List II, entry 54 - Taxflaxation - Sales Tax.
Allowing the appeal, the Court
Held: 1. After insertion of clause 29-A in Article 366
H 808
STATE OF KARNATAKA v. PRO LAB & ORS. ETC. 809
of the Constitution of India, the Works Contract which A
was indivisible one by legal fiction, altered into a contract,
is permitted to be bifurcated into two: one for "sale of
goods" and other for "services", thereby making goods
component of the contract exigible to sales tax. While
going into this exercise of divisibility, dominant intention B
behind such a contract, namely, whether it was for sale
of goods or for services was rendered otiose or
immaterial. It follows, as a sequitur, that by virtue of clause
29-A of Article 366, the State Legislature is now
empowered to segregate the goods part of the Works c
Contract and impose sales tax thereupon. Entry 54, List
II 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 St<:!te
Legislature has the competency to legislate over the 0
subject. [Paras 21, 22] [833-F-H; 834-A, B]
ACC Ltd. v. Commissioner of Customs (2001) 4 SCC 593
: 2001 (1) SCR 608; Gannon Dunkerley and Co. and others
v. State of Rajasthan and others (1993) 1 SCC 364 : 1992
(3) Suppl. SCR 103; Builders Association of India and E
others v. Union of India and others (1989) 2 SCC 645 : 1989
(2) SCR 320; Mis Larsen Toubro and another v. State of
Karnataka and another (2014) 1 SCC 708; C.K. Jidheesh v.
Union of India (2005) 13 SCC 37 : 2005 (4) Suppl. SCR 862
- relied on. F
Rainbow Colour Lab and Another v. State of Madhya
Pradesh and others (2000) 2 SCC 385 2000 (1) SCR 594
- overruled.
Mis Keshoram Surindranath Photo Bag (P) Ltd. and G
others v. Asstt. Commissioner of Commercial Taxes (LR), City
Division, Bangalore and others 121 (2001) STC 175; Mis
Golden Colour Labs and Studio and others v. The
Commissioner of Commercial Taxes ILR 2003 Kar 4883 -
referred to. H
810 SUPREME COURT REPORTS [2015] 1 S.C.R.
A 2. Entry 25 was inserted for the first time by
amendment of the Act w.e.f. 01.07.1989. This amendment
was post 46th Constitutional Amendment. However, the
High Court of Karnataka declared the said Entry to be
unconstitutional and the SLP was also dismissed.
B Undoubtedly, it was because of the judgment in Rainbow
Colour Lab, which judgment was declared as not a good
law in ACC Ltd. Thus, the very basis on which Entry 2F
of Schedule VI was declared as unconstitutional, has
been found to be erroneous. In such circumstances, the
c legislature will be justified in enacting the law from the.
date when such a law was passed originally and that date
is 01.07.1989 in the instant case. [para 25] [836-F-H; 837-
A-B]
National Agricultural Co-operative Marketing Federation
D of India Ltd. and Anr. v. Union of India (2003) 5 SCC 23: 2003
(3) SCR 1; Shri Prithvi Cotton Mills Ltd. and Anr. v. Broach
Borough Municipality and Ors. (1969) 2 SCC 283 : 1970 (1)
SCR 388; Union of India (UOI) and Anr. v. Raghubir Singh
(Dead) by Lrs. Etc. (1989) 2 SCC 754 : 1989 (3) SCR 316
E - relied on.
Kone Elevator India v. State of Tamil Nadu (2014) 7 SCC
1 - referred to.
3. It is well settled- that subject to Constitutional
F restrictions a power to legislate includes a 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. [para 27]
[842-D]
G
Hirata/ Rattan/al etc. etc. v. State of UP. and Anr. etc. etc.
(1973) 1 sec 216 : 1973 (2) SCR 502 - relied on.
Case law reference :
H 121 (2001) STC 175 referred to Paras 2, 28
STATE OF KARNATAKA v. PRO LAB & ORS. ETC. 811
2001 (1) SCR 608 relied on Paras 3, 6, A
17, 19, 20
ILR 2003 Kar 4883 referred to Para 4
1992 (3) Suppl. SCR 103 relied on Para 10, 13,
14, 17 B
1989 (2) SCR 320 relied on Para 12
(2014) 1 SCC 708 relied on Para 12
2005 (4) Suppl. SCR 862 relied on Para 19
c
2000 (1) SCR 594 overruled Paras 2, 14,
16, 17, 18,
19, 28
(2014) 1 sec 1 referred to Para 23
D
2003 (3) SCR 1 relied on Para 26
1970 (1) SCR 388 relied on Para 26
1973 (2) SCR 502 relied on Paras 26, 27
E
1989 (3) SCR 316 relied on Para 26
CIVIL APPELLATE JURISDICTION : Civil Appeal No.
1145 of 2006.
From the Judgment and Order dated 19.08.2005 of the F
High Court of Karnataka, Bangalore in W. P. Nos. 8602 of 2004
and 8603 to 8624 2004 (T-KST) c/w W.P. Nos. 10170. 6117,
6220, 6949, 6995, 7246, 8214, 8588, 5175-76, 10002 and
21759 of 2004 c/w 14633 of 2005 (T-KST).
G
P. Vishwanatha Shetty, Anita Shenoy, Neha Singh,
Mahesh Thakur, Vybhav Ramesh, Deepak Shetty for the
Appellant.
Salman Khurshid, Alok Yadav, Mcnish Panda, Somnath
Shukla, M. P. Devanath lmtiaz Ahmed (For Equity Lex H
812 SUPREME COURT REPORTS [2015] 1 S.C.R.
A Associates, Ajay Kumar Jha, M. P. Jha, P. R. Ramasesh for
the Respondents.
The Judgment of the Court was delivered by
A.K. SIKRI, J. 1. Constitutional validity of Entry 25 of
B Schedule VI to the Karnataka Sales Tax Act, 1957 (hereinafter
referred to as the 'Act') is the subject matter of the present
appeal. It is the third endeavour to resurrect this entry, when c..n
the first two occasions, the steps taken by the State were
declared as impermissible. Even this time, the High Court has
C dumped the amendment as u11constitutional. However, the
reasons advanced by the High Court in all three rounds are
different. While traversing through the historical facts leading
to the issue at hand, we shall be referring to the same for clear
understanding of the controversy involved.
D
2. This entry was inserted in the said Act by an amendment
which came into effect from 01.07.1989, thereby providing levy
of tax for processing and supply of photographs, photo prints
and photo negatives. The validity of this entry was challenged
E by means of a writ petition filed in the High Court of Karnataka.
The High Court in that case titled Mis Keshoram Surindranath
Photo - Bag (P) Ltd. and others v. Asstt. Commissioner of
Commercial Taxes (LR), City Division, Bangalore and
others1, declared the said Entry to be unconstitutional. State of
Karnataka had challenged that judgment by filing special leave
F petition in this Court. This special leave petition was dismissed
vide order dated 20.04.2000, following its earlier judgment in
the case of Rainbow Colour Lab and Another v. State of
Madhya Pradesh and others2 • The reason for holding Entry 25
as unconstitutional was that the contract of processing and
G supplying of photographs, photo frames and photo negatives
was predominantly a service contract with negligible
component of goods/material and, therefore, it was beyond the
1. 121 (2001) STC 175.
H 2. (2000) 2 sec 385.
STATE OF KARNATAKA v. PRO LAB & ORS. ETC. 813
[A.K. SIKRI, J.]
competence of State Legislature given in Entry 25 of List II of A
Schedule VII of the Constitution to impose sales tax on such a
contract.
3. It so happened that within one year of the judgment in
Rainbow Colour Lab's case, three Judges Bench of this Court B
rendered another judgment in the case of ACC Ltd. v.
Commissioner of Customs3 , wherein it expressed its doubts
about the correctness of the law laid down in Rainbow. We may
point out at this stage itself that during the course of hearing of
the present appeal, there was a hot debate on the question as C
to whether judgment in Rainbow Colour Lab's case was over-
ruled in the case of ACC Ltd. case or not. This aspect will be
gone into by us at the appropriate stage.
4. After the judgment in ACC Ltd. case, a circular D
instruction was issued by the Commissioner of Commercial
Taxes to the assessing authorities to proceed with the
assessments as per Entry 25. This became the subject matter
of challenge before the High Court of Karnataka in the case of
Mis Golden Colour Labs and Studio and others v. The E
Commissioner of Commercial Taxes4 . The High Court allowed
the writ petition vide judgment dated 30.07.2003 holding that
a provision once declared unconstitutional could not be brought
to life by mere administrative instructions. However, at the same
time, the Court observed that Entry 25, Schedule VI to the Act,
F
declared ultra vires the Constitution in Keshoram's case,
cannot be revived automatically, unless there is re-enactment
made by the State Legislature to that effect.
5. The appropriate procedure indicated in the aforesaid G
judgment emboldened the State to come out with the required
3. (2001 J 4 sec 593.
4. ILR 2003 Kar 4883. H
814 SUPREME COURT REPORTS [2015] 1 S.C.R.
A legislative amendment. This paved way for the enactment of the
Karnataka ~tate Laws Act, 2004 by the State Legislature that
came into force with effect from 29.01.2004. Section 2(3) of
the said amendment re-introduced Entry 25 in identical terms,
as it appeared earlier, and that too with retrospective effect that
B is w.e.f. 01.07.1989, when this provision was inserted by the
amendment made in the year 1989 for the first time.
6. As was expected, this amendment was again
challenged before the Karnataka High Court by the respondent
C herein as well as many others. Vide impugned judgment dated
19.08.2005, the High Court has again declared the said
amendment as unconstitutional. It would be pertinent to mention
that the High Court has not taken into consideration the events
that followed after Rainbow Colour Lab's case, namely, over-
D ruling of the said judgment in ACC Ltd. Since the basis of
Keshoram's case decided in the first calm by the High Court
was same as given in Rainbow Colour Lab, obviously
Keshoram also no longer remains a good law. However, the
E reason given by the High Court, this time, is that the ratio laid
down in Keshoram's case continues to be binding on the State
of Karnataka. As per the High Court, "the re-enactment of the
said provision is possible in the event of a subsequent
declaration made by the Hon'ble Supreme Court re-considering
F or pronouncing a similar question in terms of the findings in
para 23 of the Golden Colour Lab's case. This is, thus, the
chequered history of the litigation amply demonstrating as to
how the State of Karnataka is making desperate attempts to
ensure that provision in the form of Entry 25 in the said Act
G survives, empowering the State Government to levy sales tax
for processing and supply of photographs, photo prints and
photo negatives.
7. At this stage, we take note of the exact phraseology
H used in Entry 25 of the Act which reads as under:
STATE OF KARNATAKA v. PRO LAB & ORS. ETC. 815
[A.K. SIKRI, J.]
SI. No. Description of Period
A
Rate of
Works Contract Tax U/S 5-
B
25 Processing and 1.7.1987 to 6%
supplying of 31.3.1996 B
Photographs,
Photo Prints and 1.4.1996 to 8%
Photo negatives 31.3.1998 from 10%
1.4.1998
c
8. We may also record at this point itself that legislative
competence of the State to insert the aforesaid Entry is
primarily challenged on the ground that the State Government
is not empowered to levy sales tax on the processing and
supplying of photographs which is predominantly in the nature D
of "service" and the element of "goods" therein was minimal.
The respondents argue that the State Legislature does not have
any power to impose tax on "services" inasmuch as the sales
tax can be levied only on "sale of goods" as permitted under
Article 366 (29-A) of the Constitution of India. Challenge is also E
laid on the retrospective effect given to the said Entry by
arguing that such a move is violative of Article 265 of the
Constitution of India as subjecting the assessees to such a tax
from retrospective effect is cqnfiscatory in nature and, therefore,
unconstitutional. F
9. We have projected, in nutshell, the chequered history of
the litigation by referring to the judgments of this Court
pronounced from time to time which have a direct bearing on
the outcome of this appeal. Therefore, we are simply required
to do a diagnostic of the sorts in revisiting these judgments. G
As we proceed with this exercise to notice and spell out the
principle of law laid down in these judgments, contextually, the
same would analogously facilitate in concluding the cases with
very little discussion at our end.
H
816 SUPREME COURT REPORTS (2015] 1 S.C.R.
A 10. In order to ensure that we avoid unnecessary burdening
of judgments with the earlier case laws, it is safe to charter the
journey by initiating discussion about the Constitution Bench
judgment in the case of Gannon Dunkerley and Co. and others
v. State of Rajasthan and others 5 . That case pertained to the
B execution of the Works Contracts. Question involved was as
to whether there could be levy of sales tax on the sale of goods
involved in the execution of such Works Contracts. The
assessee, viz. Gannon Dunkerley, was carrying on business as
Engineering Contractors and executing the contracts pertaining
C to construction of building projects, dams, roads and structural
contracts of all kinds. In respect of sanitary contracts, 20 per
cent was deducted for labour and balance was taken as a
turnover of the assessee for the purposes of levying sales tax
by the assessing authority. Likewise, in respect of other
contracts, 30 per cent was deducted for labour and on balance
0
amount, sales tax was levied treating it as turnover of the
assessee under the Madras General Sales Tax Act, 1939. The
question which arose for consideration was as to whether there
was any sale of goods. The Constitution Bench held that
building contract was in the nature of Works Contract and there
E was no element of sale of goods in such a contract. In its
opinion, in a building contract where the agreement between
the parties was that the contractor should construct the building
according to the specifications cqntained in the agreement and
in consideration received payment as provided therein, there
F was neither a contract to sell the materials used in the
construction nor the property passed therein as movables. It
was held that in a building contract, which was one entire and
indivisible, there was no sale of goods and it was not within
the competence of the Provincial State Legislature to impose
G tax on the supply of the materials used in such a contract
treating it as a sale. The Court, thus, proceeded on the basis
that a building contract was indivisible and composite wherein
. there was no sale of goods and, therefore, the State
H s. (1993) 1 sec 364.
STATE OF KARNATAKA v. PRO LAB & ORS. ETC. 817
[A.K. SIKRI, J.]
Legislature was not competent to impose sales tax on the A
supply of material used in such a contract treating it as a sale.
Since, Entry 48 of the List II of Schedule VII in the Government
of India Act, 1935 was under consideration that empowers
State Government to levy tax "sale of goods", the Court held
that the expression "sale of goods" in the said Entry is to be B
given the same meaning as given under the Sale of Goods Act,
1930. That would mean that it would be sale of goods only if
the two essential ingredients, namely: (i) an agreement to sell
movables for a price, and (ii) property passing therein persuant
to that agreement, are satisfied. c
11. After the aforesaid Constitution Bench judgment, the
Parliament amended the Constitution of India by the
Constitution (46th Amendment) Act, 1982 which received the
assent of the President of India on 02.02.1983. By this
amendment, clause (29-A) was inserted in Article 366 of the D
Constitution, which reads as under:
"[(29A) "tax on the sale or purchase of goods" includes -
(a) a tax on the transfer, otherwise than in pursuance of a
E
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; F
(c) a tax on the delivery of goods on hire-purchase or any
system of payment by instalments;
(d) a tax on the transfer of the right to use any goods for
any purpose (whether or not for a specified period) for G
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; H
818 SUPREME COURT REPORTS [2015] 1 S.C.R.
A (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
B 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
c supply is made;]"
12. The challenge laid to the aforesaid amendment was
repelled by this Court in the case of Builders Association of
India and others v. l)nion of India and others6. In this judgment,
D the Constitution Bench specifically noted that the purport and
object of the aforesaid amendment was to enlarge the scope
of the expression "tax of sale for purchase of goods" wherever
it occurs in the Constitution so that it may include within its
ambit any transfer, delivery or supply of goods that may take
E place under any of the transactions referred to in sub-clauses
(a) to (f). To put it tersely, with the aforesaid amendment, the
States are empowered to make the Works Contract divisible
and tax "sale of goods" component. It clearly follows therefrom
that the restricted meaning which was assigned to the
F expression "sale of goods" in Gannon Dunkerley's case is
undone by the aforesaid amendment. The interpretation which
is to be assigned to clause 29-A of Article 366 is stated with
remarkable clarity in Mis Larsen Toubro and another v. State
of Karnataka and another7 , by a three Judge Bench in the
G following words:
"60. It is important to ascertain The meaning of Sub-clause
(b) of Clause 29A of Article 366 of the Constitution. As the
6. (1989) 2 sec 645.
H 7. (2014) 1 sec 708.
STATE OF KARNATAKA v. PRO LAB & ORS. ETC. 819
[A.K. SIKRI, J.]
very title of Article 366 shows, it is the definition clause. It A
starts by saying that in the Constitution unless the context
otherwise requires the expressions defined in that article
shall have the meanings respectively assigned to them in
the article. The definition of expression "tax on sale or
purchase of the goods" is contained in Clause (29A). If the 8
first part of Clause 29A is read with Sub-clause (b) along
with latter part of this clause, it reads like this: tax on the
sale or purchaser of the goods" includes 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 c
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. The definition of "goods" in Clause 12 is D
inclusive. It includes all materials, commodities and
articles. The expression, 'goods' has a broader meaning
than merchandise. Chattels or movables are goods within
the meaning of Clause 12. Sub-clause (b) refers to transfer
of property in goods (whether as goods or in some o.ther
E
form) involved in the execution of a works contract. The
expression "in some other form" in the bracket is of utmost
significance as by this expression the ordinary
understanding of the term 'goods' has been enlarged by
bringing within its fold goods in a form other than goods.
Goods in some other form would thus mean goods which F
have ceased to be chattels or movables or merchandise
and become attached or embedded to earth. In other
words, goods which have by incorporation become part
of immovable property are deemed as goods. The
definition of 'tax on the sale or purchase of goods' includes G
a tax on the transfer or property in the goods as goods or
which have lost its form as goods and have acquired some
other form involved in the execution of a works contract.
61. Viewed thus, a transfer of property in goods under H
820 SUPREME COURT REPORTS [2015] 1 S.C.R.
;
A Clause 29A(b) of Article 366 is deemed to be a sale of
the goods involved in the execution of a works contract by
the person making the transfer and the purchase of those
goods by the person to whom such transfer is made.
62. The States have now been conferred with the power
B
to tax indivisible contracts of works. This has been done
by enlarging the scope of "tax on sale or purchase of
goods" wherever it occurs in the Constitution. Accordingly,
the expression "tax on the sale or purchase of goods" in
Entry 54 of List II of Seventh Schedule when read with the
c definition Clause 29A, includes a tax on the transfer of
property in goods whether as goods or in the form other
than goods involved in the execution of works contract. The
taxable event is deemed sale.
D 63. Gannon Dunkerley-I (supra) and few other decisions
following Gannon Dunkerley-I (supra) wherein the
expression "sale" was given restricted meaning by
adopting the definition of the word "sale" contained in the
Sale of Goods Act has been undone by the Forty-sixth
E Constitutional Amendment so as to include works contract.
The meaning of Sub-clause (b) of Clause 29A of Article
366 of the Constitution also stands settled by the
Constitution Bench of this Court in Builders' Association
(supra). As a result of Clause 29A of Article 366, tax on
F the sale or purchase of goods may include a tax on the
transfer in goods as goods or in a form other than goods
involved in the execution of the works contract. It is open
to the States to divide the works contract into two separate
contracts by legal fiction: (i) contract for sale of goods
involved in the works contract and (ii) for supply of labour
G
and service. By the Forty-sixth Amendment, States have
been empowered to bifurcate the contract and to levy
sales tax on the value of the material in the execution of
the works contract."
H
STATE OF KARNATAKA v. PRO LAB & ORS. ETC. 821
(A.K. SIKRI, J.]
13. Notwithstanding some clear and pertinent observations A
made in by the Constitution Bench in Builders Association's
case, while upholding the Constitutional validity of 46th
Amendment, there was some ambiguity in the judicial thought
on one particular aspect which was also one of the basis of
judgment in Gannon Dunkerley's case. In Gannon Dunkerley's B
case, the Constitution Bench had laid down "dominant intention
test" to find out as to whether a particular contract involved
transfer of property in goods. The Court was of the opinion that
if the dominant intention of a contract was not to transfer the
property in goods, but it was Works Contract, or for that matter, c
a contract in the nature of rendering of services, even if a part
of it related to the transfer of goods, that would be immaterial
and no sales tax on the said part could be levied, going by the
principle of dominant intention behind such a contract, which
was in the nature of Works Contract in the contract relating to 0
construction of buildings.
14. As pointed out above, in Gannon Drunkerley's case,
the Court also held that such a contract was indivisible. No
doubt, insofar as indivisibility facet of the contract is concerned,
the same was done away by 46th Constitutional Amendment. E
However, in subsequent cases, the Court grappled with the
issue as to whether the principle of dominant intention still
prevailed. This very aspect came up for discussion before two
Judge Bench of this Court in Rainbow Colour Lab's case. The
.
Court held the view that the division of contract after 46th
Amendment can be made only if the Works Contract involved
F
a dominant intention to transfer the property in goods and not
in contracts where the transfer in property takes place as an
incident of contract of service. This aspect is highlighted by the
said Bench in the following manner: G
"10. Since this was a judgment rendered prior to the
coming into force of the 46th Constitutional Amendment,
we will have to consider whether the said Amendment has
brought about any change so as to doubt the leQfil position
H
822 SUPREME COURT REPORTS [2015] 1 S.C.R.
A enunciated in the above case. It is true that by the 46th
Constitutional Amendment by incorporating Clause 29A(b)
in Article 366, the definition of the words "sale" and "works
contract" have been enlarged. The State of Madhya
Pradesh has also brought about a consequent change in
B the definition of the word 'sale' in Section of its Sales Tax
Act but it is to be noticed that in the said State Act the
expression 'works contract' has not been specifically
defined.
11. Prior to the Amendment of Article 366, in view of the
c judgment o~ this Court In State of Madras v Gannon
Dunkerley and Co., the State could not levy sales-tax on
sale of goods involved in a work's contract because the
contract was indivisible. All that has happened In law after
the 46th Amendment and the judgment of this Court in
0 Builders case (supra) is that it is now open to the States
to divide the works contract into two separate contracts by
a legal fiction (i) contract for sale of goods involved in the
said works contract and (it) for supply of labour and service.
This division of contract under the amended law can be
E made only if the works contract involved a dominant
intention to transfer the property in goods and not in
contracts where the transfer in property takes place as an
incident of contract of service. The Amendment, referred
to above, has not empowered the State to indulge in
F microscopic division of contracts involving the value of
materials used incidentally in such contracts. What is
pertinent to ascertain in this connection is what was the
dominant intention of the contract. Every contract, be it a
service contract or otherwise, may involve the use of some
G material or the other in execution of the said contract. State
is not empowered by the amended law to impose sales-
tax on such incidental materials used in such contracts.
This is clear from the judgment of this Court in Hindustan
Aeronautics Ltd. v. State of Karnataka_[1984]2SCR248,
H where it was held thus:
STATE OF KARNATAKA v. PRO LAB & ORS. ETC. 823
[A.K. SIKRI, J.]
... Mere passing of property in an article or commodity A
during the course of performance of the transaction in
question does not render the transaction to be transaction
of sale. Even in a contract purely of work or service, it is
possible that articles may hav~ to be used by the person
executing the work, and property in such articles or B
materials may pass to the other party. That would not
necessarily convert the contract into one of sale of those
materials. In every case, the Court would have to find out
what was the primary object of the transaction and the
intention of the parties while entering into it. ... " c
15. While considering the validity of Entry 25 in Schedule
VI of the Act and holding it to be unconstitutional, as beyond
the powers of the. State Legislature, the High Court of Karnataka
in Keshoram's case examined in detail the business which was
carried out by the petitioner in the said case and the process D
that was involved in processing and supplying of photographs,
photoframes or photonegatives. By that time, 46th Constitutional
Amendment had already been effected. which was also taken
note of by the High Court. However, the High Court took the
view that the main object of the work undertaken by the E
petitioner in that case was not the transfer of a chattle as a
chattle and, in fact, it was a contract of work and labour and
there was no sale of goods involved. It is clear from the
following discussion in the said judgment:
F
"30. In words and phrases the word "photography" is
defined as under :
"Photography" is the science which relates to action of light
on sensitive bodies in production of pictures, fixation of
images and the like. G
31. Photography is a process of an art of producing visible
images on sensitive bodies by action of light or other form
of radiant energy. Duration of action of light and also use
of the chemical is highly a technical expertise therefore H
824 SUPREME COURT REPORTS (2015] 1 S.C.R.
A taking into consideration the various decisions referred to
above it could be considered that it is a works contract
where property which is transferred in paper is only
incidental to such contract. In strict sense, it is a service
where the main object is not transfer of property in goods.
B The good photograph as observed by the apex Court is a
thing of beauty and revives nostalgic memories. It is a work
of art. In B.C. Kame's case (1977] 2 SCR 435 it has
already been held that there is no sale involved and in
spite of the fact that it is a works contract it could not be
c subjected to tax because the intention of the parties is not
to transfer the goods in the execution of said works
contract. It is only ancillary and incidental to service
contract. The photographs are not marketable or saleable
commodity and as such no tax can be levied. Entry 25 of
the Sixth Schedule to the Karnataka Sales Tax Act, 1957,
D
therefore is beyond the scope of Article 466 of the
Constitution of India.
Writ appeals are accordingly allowed."
E 16. It is manifest from the above that the rationale behind
the judgment was to look into the main object of the work
undertaken by the assessee and concluding that since it was
essentially a Works Contract and transfer of photopaper upon
which the positive prints were taken were simply incidental and
F ancilliary to the main transactions, that was in the nature of
service contract, and, therefore, Entry 25 was beyond the
scope of Article 366 of the Constitution of India. Apparently, the
High Court applied dominant intention test while holding Entry
25 as unconstitutional. By the time, Special Leave Petition
G against this judgment came up for consideration before this
Court on 20.04.2000, the judgment in the case of Rainbow
Colour Lab's case had just been rendered observing that
dominant intention test was still valid notwithstanding insertion
of clause 29-A in Article 366 of the Constitution by 46th
Amendment. Following this judgment, SLP was dismissed.
H
STATE OF KARNATAKA v. PRO LAB & ORS. ETC. 825
[A.K. SIKRI, J.]
17. Within one year of the said judgment, this very issue A
again cropped up for discussion and decision before a three
Judge Bench in ACC Ltd. case. The issue arose under the
Customs Act, 1962 viz. whether the drawings, designs etc.
relating to machinery or industrial technology were goods which
were leviable to duty of customs on their transaction value at B
the time of their report. However, since the issue related to
meaning that has to be given to the expression "goods", the
case law on this aspect including Gannon Dunkerley & Kame's
case were specifically taken note of and discussed. The Court
also noticed the effect of 46th Amendment and in the process c
commented upon the judgment in the Rainbow Colour Lab's
case. The Court specifically remarked that Gannon Dunkerley
& Kame's judgments were of pre 46th Amendment era which
had no relevance after the said Constitutional amendment. It
can be discerned from the following discussion contained D
therein:
"21. All the aforesaid decisions related to the period prior
to the Forty-sixth Amendment of the Constitution when
Article 366(29A) was inserted. At that time in the case of
a works contract it was held that the same could not be E
split and State Legislature had no legislative right to seek
to levy sales tax on a transaction which was not a sale
simpliciter of goods. Rainbow Colour Lab & Anr. Vs. State
of M.P. and Others, (2000) 2 SCC 385 was, however, a
case relating to the definition of the word "sale" in the M.P. F
General Sales Tax Act, 1958 after its amendment
consequent to the insertion of Article 366(29A). The
question there was whether _the job rendered by a
photographer in taking photographs, developing and
printing films would amount to works contract for the G
purpose of levy of sales tax. This Court held that the work
done by the photographer was only a service contract and
there was no element of sale involved. After referring to
earlier decisions of this Court, it was observed at page
391 as follows: H
826 SUPREME COURT REPORTS [2015] 1 S.C.R.
A "15. 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
B 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 as held by this Court in Kame
case is only in the nature of a service contract not
c involving any sale of goods, we are of the opinion
that the stand taken by the respondent State cannot
be sustained."
22. Even though in our opinion the decisions relating to levy
of sales tax would have, for reasons to which we shall
D presently mention, no application to the case of levy of
customs duty, the decision in Rainbow Colour Lab case
(supra) requires consideration. As a result of the Forty-sixth
Amendment, sub-article 29A of Article 366 was inserted
as a result whereof tax on the sale or purchase of goods
E was to 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. Taking note of this
amendment this Court in Rainbow Colour Lab at page
3Bl1c389 observed as follows:
F
"11. Prior to the amendment of Article 366, in view
of the judgment of this Court in State of Madras v.
Gannon Dunkerley & Co. (Madras) Ltd. the States
could not levy sales tax on sale of goods involved
in a works contract because the contract was
G
indivisible. All that has happened in law after the
46th Amendment and the judgment of this Court in
'Builders' case is that it is now open to the States
to divide the works contract into two separate
contracts by a legal fiction: (i) contract for sale of
H
STATE OF KARNATAKA v. PRO LAB & ORS. ETC. 827
[A.K. SIKRI, J.]
goods involved in the said works contract, and (ii) A
for supply of labour and service. This division of
contract under the amended law can be made only
if the works contract involved a dominant intention
to transfer the property in goods and not in
contracts where the transfer in property takes place B
as an incident of contract of service. The
amendment, referred to above, has not empowered
the State to indulge in a microscopic division of
contracts involving the value of materials used
incidentally in such contracts. What is pertinent to c
ascertain in this connection is what was the
dominant intention of the contract. Every contract,
be it a service contract or otherwise, may involve
the use of some material or the other in execution
of the said contract. The State is not empowered
D
by the amended law to impose sales tax on such
incidental materials used in such contracts .. "
23. In arriving at the aforesaid conclusion the Court referred
to the decision of this Court in Hindustan Aeronautics Ltd.
vs. State of Karnataka (1984) a SCC 706 and Everest E
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 F
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 G
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 H
828 SUPREME COURT REPORTS [2015] 1 S.C.R.
A conclusion arrived at in Rainbow Colour Lab case, in our
opinion. runs cour;iter 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 and Others (1989) 2 SCC 645."
B [emphasis supplied]
18. It is amply clear from the above and hardly needs
clarification that the Court was of the firm view that two Judges
Bench judgment in Rainbow Colour Lab's case did not lay
down the correct law as it referred to pre 46th Amendment
C judgments in arriving at its conclusions which had lost their
validity. The Court also specifically commented that after 46th
Amendment, State is empowered to levy sales tax on the
material used even in those contracts where "the dominant
intention of the contract is the rendering of a service, which will
D amount to a Works Contract''.
19. In view of the above, the argument of the respondent
assessees that ACC Ltd. case did not over-rule Rainbow
Colour Lab's case is, therefore, clearly misconceived. In fact,
E we are not saying so for the first time as a three member Bench
of this Court in Mis Larsen and Toubro has already stated that
ACC Ltd. had expressly over-ruled Rainbow Colour Lab while
holding that dominant intention test was no longer good test
after 46th Constitutional Amendment. We may point out that
F learned counsel for the respondent assessees took courage
to advance such an argument emboldened by certain
observations made by two member Bench in the case of C.K.
Jidheesh v. Union of lndia 8 , wherein the Court has remarked
that the observations in ACC Ltd. were merely obiter. In
G Jidheesh, however, the Court did not notice that this very
argument had been rejected earlier in Bharat Sanchar Nigam
Ltd. v. Union of lndia 9 . Following discussion in Bharat Sanchar
is amply demonstrative of the same:
a. (2005) 13 sec 37.
H 9 (2006) 3 sec 1.
STATE OF KARNATAKA v. PRO LAB & ORS. ETC. 829
[A.K. SIKRI, J.]
"46. This conclusion was doubted in Associated Cement A
Companies Ltd. v. Commissioner of Customs, (2001) 4
sec 593 saying:
'The conclusion arrived at in Rainbow Colour Lab
case (2000) 2 sec 385, in our opinion, runs B
counter to the express provision contained in
Article 366(29A) as also of the Constitution Bench
decision of this Court in Builders Assn. of India v.
Union of India - (1989) 2 SCC 645.
47. We agree. After the 46th Amendment, the sale element C
of those contracts which are covered by the six sub-clauses
of Clause (29A) 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, in 2005, C.K. Jidheesh v. Union of D
India - (2005) 8 SCALE 784 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 E
composite transactions the 46th Amendment would apply"
20. In Mis Larsen and Toubro, the Court, after extensive
and elaborate discussion, once again specifically negated the
argument predicated on dominant intention test having regard
F
to the statement of law delineated in ACC Ltd. and Bharat
Sanchar Nigam Ltd. cases. The reading of following passages
from the said judgment is indicative of providing complete
answer to the arguments of the respondent assessees herein:
"64. Whether contract involved a dominant intention to G
transfer the property in goods, in our view, is not at all
material. It is not necessary to ascertain what is the
dominant intention of the contract. Even if the dominant
intention of the contract is not to transfer the property in
goods and rather it is the rendering of service or the H
830 SUPREME COURT REPORTS [2015] 1 S.C.R.
A ultimate transaction is transfer of immovable property, then
also it is open to the States to levy sales tax on the
materials used in such contract if it otherwise has
elements of works contract. The view taken by a two-
Judge Bench of this Court in Rainbow Colour Lab (supra)
B that the division of the contract after Forty-sixth Amendment
can be made only if the works contract involved a dominant
intention to transfer the property in goods and not in
contracts where the transfer of property takes place as an
incident of contract of service is no longer good law,
c Rainbow Colour Lab (supra) has been expressly overruled
by a three-Judge Bench in Associated Cement.
65. Although, in Bharat Sanchar, the Court was concerned
with Sub-clause (d) of Clause 29A of Article 366 but while
dealing with the question as to whether the nature of
D transaction by which mobile phone connections are
enjoyed is a sale or service or both, the three-Judge Bench
did consider the scope of definition in Clause 29A of
Article366. With reference to Sub-clause (b) it said: "Sub-
clause (b) covers cases relating to works contract. This
E was the particular fact situation which the Court.was faced
with in Gannon Dunkerley-I and which the Court had held
was not a sale. The .effect in law of a transfer of property
in goods involved in the execution of the works contract
was by this amendment deemed to be a sale. To that
F extent the decision in Gannon Dunkerley-I was directly
overcome". It then went on to say that all the Sub-clauses
of Article 366 (29A) serve to bring transactions where
essential ingredients of a 'sale' as defined in the Sale of
Goods Act, 1930 are absent, within the ambit of purchase
G or sale for the purposes of levy of sales tax.
66. It then clarified that Gannon Dunkerley-I survived the
Forty-sixth Constitutional Amendment in two respects. First,
With regard to the definition of "sale" for the purposes of
the Constitution in general and for the purposes of Entry
H
STATE OF KARNATAKA v. PRO LAB & ORS. ETC. 831
[A.K. SIKRI, J.]
54 of List II in particular except to the extent that the clauses A
in Article 366(29A) operate and second, the dominant
nature test would be confined to a composite transaction
not covered by Article 366(29A). In other words, in Bharat
Sanchar, this Court reiterated what was stated by this
Court in Associated Cement that dominant nature test has B
no application to a composite transaction covered by the
clauses of Article 366(29A). Leaving no ambiguity, it said
that after the Forty-sixth Amendment, the sale element of
those contracts which are covered by six Sub-clauses of
Clause 29A of Article 366 are separable and may be c
subjected .to sales tax lJy the State:; under Entry 54 of List
II and there is no question of the dominant nature test
applying.
67. In view of the statement of law in Associated Cement
and Bharat Sanchar, the argument advanced on behalf of D
the Appellants that dominant nature test must be applied
to tind out the true nature of transaction as to whether there
is a contract for sale of goods or the contract of service in
a composite transaction covered by the clauses of Article
366(29A) has no merit and the same is rejected. E
68. In Gannon Dunkerley-II, this Court, inter alia,
established the five following propositions: (i) as a result
of Forty-sixth Amendment the contract which was single
and indivisible has been altered by a legal fiction into a F
contract which is divisible into one for sale of goods and
the other for supply of labour and service and as a result
of such contract which was single and indivisible has been
brought on par with a contract containing two separate
agreements; (ii) if the legal fiction introduced by Article G
366(29A)(b) is carried to its logical end, it follows that even
in a single and indivisible works contract there is a
deemed sale of the goods which are involved in the
execution of a works contract. Such a deemed sale has
all the incidents of the sale of goods involved in the
H
832 SUPREME COURT REPORTS [2015] 1 S.C.R.
A 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; (iii) in view of Sub-clause (b) of
Clause 29A of Article 366, the State legislatures are
competent to impose tax on the transfer of property in
B goods involved in the execution of works contract. Under
Art.icle 286(3)(b), Parliament has been empowered to
make a law specifying restrictions and con_ditions in regard
to the system of levy, rates or incidents of such tax. This
does not mean that the legislative power of the State
c cannot be exercised till the enactment of the law under
Article 286(3)(b) by the Parliament. It only means that in
the event of law having been made by Parliament under
Article 286(3)(b), the exercise of the legislative power of
the State under Entry 54 in List II to impose tax of the
nature referred to in Sub-clauses (b), (c) and (d) of Clause
D
(29A) of Article 366 would be subject to restrictions and
conditions in regard to the system of levy, rates and other
incidents of tax contained in the said law; (iv)"while enacting
law imposing a tax on sale or purchase of goods under
Entry 54 of the State List read with Article 366(29A)(b), it
E is permissible for the State legislature to make a law
imposing tax on such a deemed sale which constitutes a
sale in the course of the inter-state trade .or commerce
under Section 3 of the Central Sal~.s.Tax Act or outside
under Section 4 of the Central Sales Tax Act or sale in the
F course of import or export under Section 5 of the Central
Sales Tax Act; and (v) measure for the levy of tax
contemplated by Article 366(29A)(b) is the value of the
goods involved in the execution of a works contract.
Though the tax is imposed on the transfer of property in
G goods involved in the execution of a works contract, the
measure for levy of such imposition is the value of the
goods involved in the execution of a works contract. Since,
the taxable event is the transfer of property in goods
involved in the execution of a works contract and the said
H transfer of property in such goods takes place when the
STATE OF KARNATAKA v. PRO LAB & ORS. ETC. 833
[A.K. SIKRI, J.]
goods are incorporated in the works, the value of the A
goods which can constitute the measure for the levy of the
tax has to be the value of the goods at the time of
incorporation of the goods in works and not the cost of
acquisition of the goods by the contractor.
B
69. In Gannon Dunkerley-II, Sub-section (3) of Section 5
of the Rajasthan Sales Tax Act and Rule 29(2)(1) of the
Rajasthan Sales Tax Rules were declared as
unconstitutional and void. It was so declared.because the
Court found that Section 5(3) transgressed the limits of the C
legislative power conferred on the State legislature under
Entry 54 of the State List. However, insofar as legal
position after Forty-sixth Amendment is
concerned, Gannon Dunkerley-II holds unambig_uously that
the States have now legislative power to impose tax on
transfer of property in goods as goods or in some other D
form in the execution of works contract.
70. The Forty-sixth Amendment leaves no manner of doubt
that the States have power to bifurcate ths.contract and
levy sales tax on the value of the material involved in the E
execution of the works contract. The States are now
empowered to levy sales tax on the material used in such
contract. In other words, Clause 29A of Article 366
empowers the States to levy tax on the deemed sale."
F
21. To sum up, it follows from the reading of the aforesaid
judgment that after insertion of clause 29-A in Article 366, the
Works Contract which was indivisible one by legal fiction,
altered into a contract, is permitted to be bifurcated into two:
one for "sale of goods" and other for "services", thereby making
goods component of the contract exigible to sales tax. Further, G
while going into this exercise of divisibility, dominant intention
behind such a contract, namely, whether it was for sale of goods
or for services, is rendered otiose or immaterial. It follows, as
a sequitur, that by virtue of clause 29-A of Article 366, the State
H
834 SUPREME COURT REPORTS [2015] 1 S.C.R.
A Legislature is now empowered to segregate the goods part of
the Works Contract and impose sales tax thereupon It may be
noted that Entry 54, List 11 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
B Legislature has the competency to legislate over the subject
22. Keeping in mind the aforesaid principle of law, the
obvious conclusion would be that Entry 25 of Schedule VI to
the Act which makes that part of processing and supplying of
photographs, photo prints and photo negatives, which have
C "goods" component exigible to sales tax is constitutionally valid.
Mr. Patil and Mr. Salman Khurshid, learned senior counsel who
argued for these assessees/respondents, made vehement plea
to the effect that the processing of photographs etc. was
essentially a service, wherein the cost of paper, chemical or
D other material used in processing and developing photographs,
photo prints etc. was negligible. This argument, however. is
founded on dominant intention theory which has been
repeatedly rejected by this Court as no more valid in view of
46th Amendment to the Constitution.
E
23. It was also argued that photograph service can be
exigible to sales tax only when the same is classifiable as
Works Contract. For being classified as Works Contract the
transaction under consideration has to be a composite
F transaction involving both goods and services. If a transaction
involves only service i.e. work and labour then the same cannot
be treated as Works Contract. It was contended that
processing of photography was a contract for service simplicitor
with no elements of goods at all and, therefore, Entry 25 could
G not be saved by taking shelter under clause 29-A of Article 366
of the Constitution. For this proposition, umbrage under the
judgment in B. C. Kame's case was sought to be taken wherein
this Court held that the work involving taking a photograph,
developing the negative or doing other photographic work could
not be treated as contract for sale of goods. Our attention was
H
STATE OF KARNATAKA v. PRO LAB & ORS. ETC. 835
[A.K. SIKRI, J.]
drawn to that portion of the judgment where the Court held that A
such a contract is for use of skill and labour by the photographer
to bring about desired results inasmuch as a good photograph
reveals not only the asthetic sense and artistic faculty of the
photographer, it also reflects his skill and labour. Such an
argument also has to be rejected for more than one reasons. B
In the first instance, it needs to be pointed out that the judgment
in Kame's case was rendered before the 46th Constitutional
Amendment. Keeping this in mind, the second aspect which
needs to be noted is that the dispute therein was whether there
is a contract of sale of goods or a contract for service. This c
matter was examined in the light of law prevaling at that time,
as declared in Dunkerley's case as per which dominant
intention of the contract was to be seen and further that such a
contract was treated as not divisible. It is for this reason in BSNL
and Mis Larsen and Toubro cases, this Court specifically
0
pointed out that Kame's case would not provide an answer to
the issue at hand. On the contrary, legal position stands settled
by the Constitution Bench of this Court in Kone Elevator India
Pvt. Ltd. v. State of Tamil Nadu and Ors. rn Following
observations in that case are apt for this purpose:
E
"On the basis of the aforesaid elucidation, it has been
deduced that a transfer of property in goods under Clause
(29A)(b) of Article 366 is deemed to be a sale of goods
involved in the execution of a Works Contract by the person
making the transfer and the purchase of those goods by F
the person to whom such transfer is made. One thing is
significant to note that in Larsen and Toubro (supra), it has
been stated that after the constitutional amendment, the
narrow meaning given to the term "works contract" in
Gannon Dunkerley-I (supra) no longer survives at present. G
It has been observed in the said case that even if in a
.contract, besides the obligations of supply of goods and
materials 'and performance of labour and services, some
additional obligations are imposed, such contract does not
10. (2014) 7 sec 1. H
836 SUPREME COURT REPORTS [2015] 1 S.C.R.
A cease to be works contract, for the additional obligations
in the contract would not alter the nature of the contract so
long as the contract provides for a contract for works and
satisfies the primary description of works contract. It has
been further held that once the characteristics or elements
B of works contract are satisfied in a contract, then
irrespective of additional obligations, such contract would
be covered by the term "works contract" because nothing
in Article 366(29A)(b) limits the term "works contract" to
contract for labour and servicd only."
c 24. Another attack on the insertion of Entry 25 pertained
to retrospectivity given to this provision. It was sought to be
argued that amendment to the Act was made by Karnataka
State Laws Act, 2004 which came into force w.e.f. 29.01.2004
and insertion of Entry 25 with retrospective effect i.e. w.e.f.
D 01.07.1989 was not permissible. To put it otherwise, the
argument was that even if Entry 25 is held to be valid, it should
be made prospective i.e. w.e.f. 29.01.2004. According to the
learned senior counsel, Entry 25 with retrospective effect is
onerous on the respondents and if the respondents are directed
E to pay these amounts, they will face severe financial crisis. Such
an onerous provision, in their submission, would violate the
fundamental rights of the respondents guaranteed under Article
19(1 )(g) which guarantees freedom to carry on trade, business
or profession.
F
25. We are afraid, even this argument does not cut any
ice. The first thing in this regard which is to be kept in mind is
that Entry 25 was inserted for the first time by amendment of
the Act w.e.f. 01.07.1989. This amendment was post 46th
G Constitutional Amendment. However, the High Court of
Karnataka declared the said Entry to be unconstitutional and
the SLP was also dismissed. Undoubtedly, it was becau~e of
the judgment in Rainbow Colour Lab, which judgment was
declared as not a good law in ACC Ltd. (which position is
repeated in BSNL as well as Mis Larsen and Toubro cases).
H
STATE OF KARNATAKA v. PRO LAB & ORS. ETC. 837
[A.K. SIKRI, J.)
Thus, the very basis on which Entry 25 of Schedule VI was A
declared as unconstitutional, has been found to be erroneous.
In such circumstances, the legislature will be justified in enacting
the law from the date when such a law was passed originally
and that date is 01.07.1989 in the instant case. We have to
keep in mind the fact that on the basis of this amendment, there B
have been assessments made by the assessing authorities.
This was admitted by the learned counsel for the respondents
at bar at the time of the arguments.
26. Position stated above has to be read in the context C
that the legislature is, otherwise, competent to pass
amendments of this nature from retrospective effect. The
principle that such a power exists with the legislature has been
reiterat€1d time ahd again by this Court. [See: (1) National
Agricultural Co-operative Marketing Federation of India Ltd.
and Anr. v. Union of lndia 11 , (2) Shri Prithvi Cotton Mills Ltd. D
and Anr. v. Broach Borough Municipality and Ors 12, (3) Indian
Aluminium Co. etc. etc. v. State of Kera/a and others, (4)
Hirata/ Rattan/al etc. etc. v. State of UP. and Anr. etc. etc 13
and (5) Union of India (UO/) and Anr v. Raghubir Singh (Dead)
by Lrs. Etc 14 .]. It is not necessary to discuss all these judments E
and our purpose would be served by extensively quoting from
the case in National Agricultural Co-operative Marketing
Federation of India Ltd.:
"13. That the Legislature can enact laws retrospectively is F
not in dispute. Nor is it disputed that the amendment is
intended to be retrospective and that the amendment
would at least prospectively exclude all cooperative
societies except the primarily society from the benefit of
Section 80P(2)(a)(iii) of the Income Tax Act. According to G
the appellants, the amendment cannot be considered to
11. (2003) s sec 23.
12. (1969) 2 sec 283.
13. (1973) 1 sec 216.
14. (1989) 2 sec 754. H
838 SUPREME COURT REPORTS [2015] 1 S.C.R.
A have retrospective operation in the absence of a validating
provision nor could Parliament reverse the judgment of this
Court by such statutory overruling. If the amendment is
construed as having retrospective operation, then, it is
submitted, the amendment is unconstitutional because it
B seeks to impose a tax on apex societies for the last 31
years, it was contended that by denying the deduction to
the apex societies, the farmers a_nd the primary societies
would be vitally affected as it would be reflected in the
returns obtained by them. This would be contrary to the
c legislative intent which was to benefit all societies which
market agricultural produce.
xx xx xx
15. The Legislative power either to introduce enactments
D for the first time or to amend the enacted law with
retrospective effect, is not only subject to the question of
competence but is also subject to several judicially
recognized limitations with some of which we are at
present concerned. The first is the requirement that the
E words used must expressly provide or clearly imply
retrospective operation S.S. Gadgil v. Lal & Co.,
[1964]531TR231 (SC) . J.C. Jani, Income Tax Officer,
Circle-IV. Ward-G Ahmedabad v. lnduprasad
Devshanker Bhatt, [1969] 72 ITR 595 (SC). The second
F is that the retrospectively must be reasonable and not
excessive or harsh, otherwise it runs the risk of being
struck down as unconstitutional Rai Ramkrishna and Ors.
v. The State of Bihar, (1963] 50 ITR 171 (SC), 915;
Jawaharmal v. State of Rajas than and Ors.,
(1966]1 SCR890, 905, Supreme Court Employees
G
Welfare Association v. Union of India and Anr., (1993)
ILLJ 1094 SC. The third is apposite where the legislation
is introduced to overcome a judicial decision. Here the
power cannot be used to subvert the decision without
removing the statutory basis of the decision Shri Prithvi
H
STATE OF KARNATAKA v. PRO LAB & ORS. ETC. 839
[A.K. SIKRI, J.]
Cotton Mills Ltd. v. Broach Borough Municipality and Ors. · A
[1971]791TR136(SC), Lalitaben v. Gordhanbhai and Anr.,
·AIR 1987 SC 1315; Janapada Sabha Chhindwara v. The
Central Provinces Syndicate Ltd., [1970] 3 SCR 745 :
Indian Aluminium Co. and Ors. v. State of Kerala and Ors.,
[1996]2SCR23 B
xx xx xx
16. There is no fixed formula for the expression of
legislative intent to give retrospectivity to an enactment.
"Sometimes this is done by providing for jurisdiction where C
jurisdiction had no t been properly invested before.
Sometimes this is done by re-enacting retrospectively a
valid and legal taxing provision and then by fiction making
the tax already collected to stand under the re-enacted law.
Sometimes the Legislature gives its own meaning and D
interpretation of the law under which tax was collected and
by legislative fiat makes the new meaning binding upon
courts. The Legislature may follow any one method or all
of them, Shri Prithvi Cotton Mills v. Broach Borough
Municipality, [1971] 791TR 136 (SC). E
17. By validating clause coupled with a substantive
statutory change is therefore only one of the methods to
leave actions unsustainable under the unamended statute,
undisturbed. Consequently, he absence of a validating
clause would not by itself affect the retrospective operation F
of the statutory provision, if such retrospectivity is
otherwise apparent.
xx xx xx
G
19. In making this change, the Legislature does not
"statutorily overrule" this Courts decision in Kerala
Cooperative Marketing Federation Ltd. Supra. as has
been contended by the appellant. Overruling assumes that
a contrary decision is given on the same facts or law.
H
840 SUPREME COURT REPORTS [2015] 1 S.C.R.
A Where the law, as in this case, has been changed and is
no longer the same, there is no question of the Legislature
overruling this Court.
20. As has been held in Ujagar Prints v. Union of India,
(1989]179 ITR 317a (SC).
B
"A competent legislature can always validate a law
which has been declared by courts to be invalid,
provided the infirmities and vitiating in factors
noticed in the declaratory judgment are removed or
c cured. Such a validating law can also be made
retrospective. If in the light of such validating and
curative exercise made by the legislature - granting
legislative competence - the earlier judgment
becomes irrelevant and unenforceable that cannot
D be called an impermissible legislative overruling of
the judicial decision. All that the legislature does is
to usher in a valid law with retrospective effect in
the right of which the earlier judgment becomes
irrelevant".
E
xx xx xx
22. Once the circumstances are altered by Legislation, it
may neutralise the. effect of the earlier decision of the Court
which becomes ineffective after the change of the law.
F
23. Similarly in Krishnamurthi & Co. v. State of Madras and
Anr., (1973] 2 SCR 54 the Madras General Sales Tax
1959 Act (as it stood) provided under Entry 47 for tax on
"lubricating oils, all kinds of mineral oils (not otherwise
provided for in this Act) quenching oil and greases w.e.f.
G
1.4.1964". The question was whether this entry covered
furnace oil. The Madras High Court construed the phrase
and came to the conclusion that it did not. The Legislature
then enacted an Amendment Act in 1967. Entry 47 was
amended - so as to expressly provide that furnace oil would
H
STATE OF KARNATAKA v. PRO LAB & ORS. ETC. 841
[A.K. SIKRI, J.]
be subjected to tax. The Act was made effective from A
1964. The Act was challenged as being unreasonable
since it retrospectively made the dealers liable for sales
tax which they had not passed on to others. The challenge
was negatived and it was said that
"The object of such an enactment is to remove and B
rectify the defect in phraseology or lacuna or other
nature and also to validate the proceedings,
including realisation of tax, which have taken place
in pursuance of the earlier enactment which has
been found by the court to be vitiated by an infirmity. C
Such an amending and validating Act in the very
nature of things has a retrospective operation. Its
aim is to effectuate and carry out the object for
which the earlier principal Act had been enacted.
Such an amendi~g and validating Act to make o
"small repairs" is a permissible mode of legislation
and is frequently resorted to in fiscal enactments".
xx xx xx
28. The test of the length of time covered by the
retrospective operation cannot by itself, necessarily E
be a decisive test. Rai Ramkrishna and Ors. v. The
State of Bihar, [1963] 50 ITR 171 (SC) Account
must be taken of the surrounding facts and
circumstances relating to the taxation and the
legislative background of the provision. Jawahamal F
v. State of Rajasthan: [1966] 1 SCR 890 To
recapitulate the legislative background of the
particular statutory provision in question before us
- the first authoritative interpretation of Section
80P(2)(a)(iii) was made in 1994 in Assam G
Cooperatives Supra when it held that the word "of'
must be construed as "produced by". Therefore, the
law as it stood from 1968 was, by the decision,
required to be read in precisely this manner and
presumably assessments of Apex Societies were H
842 SUPREME COURT REPORTS [2015] 1 S.C.R.
A commended and concluded on this basis. The
situation continued till 1998 till this Court reversed
Assam Cooperatives in Kerala Cooperative
Marketing Federation Ltd. Supra. Before the
assessment year was over, by the 1998
B Amendment the word "of' was substituted with
"given by". In real terms therefore there was hardly
any retrospectivity, but a continuation of the status
quo ante. The degree and extent of the unforeseen
and unforeseeable financial burden was, in the
c circumstances, minimal and cannot be said to be
unreasonable or unconstitutional.
27. We would also like to refer to the case of Hirata/
Ratanla/ v. State of U. P. 15, wherein it was observed "the source
of the legislative power to levy sales or purchase tax on goods
o is Entry 54 of the List II of the Constitution. It is well settled that
subject to Constitutional restrictions a power to legislate
includes a 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."
E 28. We would like to point out at this stage that the High
Court in the impugned judgment has not dealt with the mater
in its correct perspective. The reason given by the High Court
in invalidating Entry 25 is that this provision was already held
unconstitutional by the said High Court in Keshoram's case
F against which the SLP was also dismissed and in view of that
decision, it was not permissible for the legislature to re-enact
the said Entry by applying a different legal principle. According
to us. this was clearly an erroneous approach to deal with the
issue and the judgment of the High Court is clearly
G unsustainable. The High Court did not even deal with various
facets of the issue in their correct perspective, in the light of
subsequent judgments of this Court with specific rulings that
Rainbow Colour Lab is no longer a good law.
29. The impugned judgment of the High Court is
H 1s. (1973) 1 sec 216.
STATE OF KARNATAKA v. PRO LAB & ORS. ETC. 843
[A.K. SIKRI, J.]
accordingly set aside, the present appeal is allowed and as a A
result thereof, the writ petitions filed by the respondents in the
High Court are dismissed holding that Entry 25 of Schedule VI
of the Act is constitutionally valid. There shall, however, be no
order as to costs.
Devika Gujral Appeal allowed
B
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