Regarding Vat on Photo Color labs
This query is : Resolved
01 January 2008
Respected All,
Happy New Year
I have a query regarding How vat is implemented on Color Labs.We at color Labs purchase vat paid paper and chemical from same state. sfter procesing we sell photographs.Please explain by a example how vat is calculated and how entries should be entered in books.if explain about service tax on color labs.I shall be very thankfull to you.please give answer by a example.
Once Again
Happy New Year
Happy New Year
I have a query regarding How vat is implemented on Color Labs.We at color Labs purchase vat paid paper and chemical from same state. sfter procesing we sell photographs.Please explain by a example how vat is calculated and how entries should be entered in books.if explain about service tax on color labs.I shall be very thankfull to you.please give answer by a example.
Once Again
Happy New Year
02 January 2008
Re applicability of VAT on development of photographs.
I think it is not sales (as u termed that u are selling photographs), for selling some thing one must have the right on such goods. In my opinion at no point of time u have any right on such photographs.
The question which arise is whether it will come under the purview of Works Contract or not may be the subject matter of discussions. Though directly and indirectly courts has said it as a works contract- but still some puzzles are still to be resolved. Theory of chattel qua chattel, theory of accretion or theory of dominating intention are yet to be discussed thoroughly.
Now, assuming that it falls under the ambit of Works Contract (deemed sales), you are eligible for ITC on raw materials and Capital assets as per provisions unmder your State Act. Further avialabilty of ITC on comsumables also varies from state to state.
I think it is not sales (as u termed that u are selling photographs), for selling some thing one must have the right on such goods. In my opinion at no point of time u have any right on such photographs.
The question which arise is whether it will come under the purview of Works Contract or not may be the subject matter of discussions. Though directly and indirectly courts has said it as a works contract- but still some puzzles are still to be resolved. Theory of chattel qua chattel, theory of accretion or theory of dominating intention are yet to be discussed thoroughly.
Now, assuming that it falls under the ambit of Works Contract (deemed sales), you are eligible for ITC on raw materials and Capital assets as per provisions unmder your State Act. Further avialabilty of ITC on comsumables also varies from state to state.
02 January 2008
First of all i say thanx to You sir for answering my query so gently and of course with references.I have read of "Corporate and allied laws" in the may issue of "The Charted Accountant" page no.1743 to 1750 where it is clear written "Supreme Court has observed that
every contract, be it service or
otherwise, may involve using some
materials or other and the States
are not empowered to impose Sales
Tax on such incidental materials
used in such contracts" and also written "Hence, in the above cases there cannot be
any Sales tax/or VAT." U are very much true and right on this point that this is not a sale.as this is a property of a custmer only and only.but i don;t know why states as well as centre is not simplyfying the things.this means it is totaly clear that service tax will be calculated on the whole invoice amount and there will be a no issue of vat.and better way to resolve the problem is purchase raw material from out the state hence no trouble for itc claim and pay service tax whole sale amount and take the benifit of cenvet.
thankyou Agarwalla sir.U r Expert.
if i am wrong please advice me
every contract, be it service or
otherwise, may involve using some
materials or other and the States
are not empowered to impose Sales
Tax on such incidental materials
used in such contracts" and also written "Hence, in the above cases there cannot be
any Sales tax/or VAT." U are very much true and right on this point that this is not a sale.as this is a property of a custmer only and only.but i don;t know why states as well as centre is not simplyfying the things.this means it is totaly clear that service tax will be calculated on the whole invoice amount and there will be a no issue of vat.and better way to resolve the problem is purchase raw material from out the state hence no trouble for itc claim and pay service tax whole sale amount and take the benifit of cenvet.
thankyou Agarwalla sir.U r Expert.
if i am wrong please advice me
03 January 2008
Mr. Yogesh, perhaps you are talking about the following para of the CA Journal:-
“In the case of Rainbow Colour Lab v/s State of Madhya Pradesh (2000), the Supreme Court observed that the deemed transfer of goods in the execution of works contracts can be brought to tax only when the dominant intention of the parties was to transfer the property in goods and not in contracts where the transfer of property in goods takes place incidentally to the contract of service. Further, the court observed that States cannot indulge in microscopic division of contracts involving materials transferred incidentally in contracts. The court further observed that every contract, be it service or otherwise, may involve using some materials or other and the States are not empowered to impose Sales Tax on such incidental materials used in such contracts. The Court held the above contract as a contract in the nature of service not involving any sale of goods.”
The above judgement was delivered by two judges bench of the Apex Court. This above decision was found disapproved by the Supreme Court in the case [2001] 124 STC 0059- - Associated Cement Companies Ltd. Vs. Commissioner of Customs (and other appeals) (SC-3 Judges):-
The Apex Court held that “the decision in Rainbow Colour Lab case [2000] 118 STC 9 (SC); (2000) 2 SCC 385 requires consideration.”
The Court further observed that:-
“The Forty-sixth Amendment was made precisely with a view to empower the State to bifurcate the contract and to levy sales tax on the value of the material involved in the execution of the works contract, notwithstanding that the value may represent a small percentage of the amount paid for the execution of the works contract. Even if the dominant intention of the contract is the rendering of a service, which will amount to a works contract, after the Forty-sixth Amendment the State would now be empowered to levy sales tax on the material used in such contract. The conclusion arrived at in Rainbow Colour Lab case [2000] 118 STC 9 (SC); (2000) 2 SCC 385, in our opinion, runs counter to the express provision contained in article 366(29A) as also of the Constitution Bench decision of this Court in Builders' Association of India v. Union of India [1989] 73 STC 370; (1989) 2 SCC 645.”
Associated Cement’s case does not overrule the ratio of “Rainbow Colour Lab” :-
[2006] 144 STC 0322- - C.K. Jidheesh Vs. Union of India and others (SC-2 Judges)
It was observed that:-
“In Associated Cement Companies' case (2001) 4 SCC 593 the question was whether or not customs duty could be levied on drawings, designs, diskettes, manuals, etc. The argument there was that these were intangible properties and not goods as defined in section 2(22) of the Customs Act. The question of levy of service tax did not arise in that case. The observations relied upon are mere passing observations and do not overrule Rainbow Colour Lab's case (2000) 2 SCC 385..”
It is wrong that Rainbow’s case is still a good Law :-
[2006] 145 STC 0091- - Bharat Sanchar Nigam Ltd. and another Vs. Union of India and others (and other appeal and writ petitions) (SC-3 Judges);
It was observed that-
“We agree. After the 46th Amendment, the sale elements 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 when in 2005, C.K. Jidheesh v. Union of India (2005) 8 SCALE 784 held that the aforesaid observations in Associated Cement were merely obiter and that Rainbow Colour Lab (2000) 2 SCC 385 was still good law, it was not correct.
It is necessary to note that Associated Cement (2001) 4 SCC 593 did not say that in all cases of composite transactions the 46th Amendment would apply.”
In the same judgement, the Apex Court in the casefurther observed;
“Of all the different kinds of composite transactions the drafters of the 46th Amendment chose three specific situations, a works contract, a hire-purchase contract and a catering contract to bring within the fiction of a deemed sale. Of these three, the first and third 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 clauses (b) and (f) of clause (29A) of article 366, there is no other service which has been permitted to be so split.
For example the clauses of article 366(29A) 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 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.
The reason why these services do not involve a sale for the purposes of entry 54 of List II is, as we see it, for reasons ultimately attributable to the principles enunciated in Gannon Dunkerley's case [1958] 9 STC 353 (SC), namely, if there is an instrument of contract which may be composite in form in any case other than the exceptions in article 366(29A), unless the 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 to sell from the agreement to render service, and impose tax on the sale.
The test therefore for composite contracts other than those mentioned in article 366(29A) continues to be—did the parties 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 disintegrated. The test for deciding whether a contract falls into one category or the other is as to what is "the substance of the contract”. We will, for the want of a better phrase, call this the dominant nature test.”
“In the case of Rainbow Colour Lab v/s State of Madhya Pradesh (2000), the Supreme Court observed that the deemed transfer of goods in the execution of works contracts can be brought to tax only when the dominant intention of the parties was to transfer the property in goods and not in contracts where the transfer of property in goods takes place incidentally to the contract of service. Further, the court observed that States cannot indulge in microscopic division of contracts involving materials transferred incidentally in contracts. The court further observed that every contract, be it service or otherwise, may involve using some materials or other and the States are not empowered to impose Sales Tax on such incidental materials used in such contracts. The Court held the above contract as a contract in the nature of service not involving any sale of goods.”
The above judgement was delivered by two judges bench of the Apex Court. This above decision was found disapproved by the Supreme Court in the case [2001] 124 STC 0059- - Associated Cement Companies Ltd. Vs. Commissioner of Customs (and other appeals) (SC-3 Judges):-
The Apex Court held that “the decision in Rainbow Colour Lab case [2000] 118 STC 9 (SC); (2000) 2 SCC 385 requires consideration.”
The Court further observed that:-
“The Forty-sixth Amendment was made precisely with a view to empower the State to bifurcate the contract and to levy sales tax on the value of the material involved in the execution of the works contract, notwithstanding that the value may represent a small percentage of the amount paid for the execution of the works contract. Even if the dominant intention of the contract is the rendering of a service, which will amount to a works contract, after the Forty-sixth Amendment the State would now be empowered to levy sales tax on the material used in such contract. The conclusion arrived at in Rainbow Colour Lab case [2000] 118 STC 9 (SC); (2000) 2 SCC 385, in our opinion, runs counter to the express provision contained in article 366(29A) as also of the Constitution Bench decision of this Court in Builders' Association of India v. Union of India [1989] 73 STC 370; (1989) 2 SCC 645.”
Associated Cement’s case does not overrule the ratio of “Rainbow Colour Lab” :-
[2006] 144 STC 0322- - C.K. Jidheesh Vs. Union of India and others (SC-2 Judges)
It was observed that:-
“In Associated Cement Companies' case (2001) 4 SCC 593 the question was whether or not customs duty could be levied on drawings, designs, diskettes, manuals, etc. The argument there was that these were intangible properties and not goods as defined in section 2(22) of the Customs Act. The question of levy of service tax did not arise in that case. The observations relied upon are mere passing observations and do not overrule Rainbow Colour Lab's case (2000) 2 SCC 385..”
It is wrong that Rainbow’s case is still a good Law :-
[2006] 145 STC 0091- - Bharat Sanchar Nigam Ltd. and another Vs. Union of India and others (and other appeal and writ petitions) (SC-3 Judges);
It was observed that-
“We agree. After the 46th Amendment, the sale elements 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 when in 2005, C.K. Jidheesh v. Union of India (2005) 8 SCALE 784 held that the aforesaid observations in Associated Cement were merely obiter and that Rainbow Colour Lab (2000) 2 SCC 385 was still good law, it was not correct.
It is necessary to note that Associated Cement (2001) 4 SCC 593 did not say that in all cases of composite transactions the 46th Amendment would apply.”
In the same judgement, the Apex Court in the casefurther observed;
“Of all the different kinds of composite transactions the drafters of the 46th Amendment chose three specific situations, a works contract, a hire-purchase contract and a catering contract to bring within the fiction of a deemed sale. Of these three, the first and third 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 clauses (b) and (f) of clause (29A) of article 366, there is no other service which has been permitted to be so split.
For example the clauses of article 366(29A) 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 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.
The reason why these services do not involve a sale for the purposes of entry 54 of List II is, as we see it, for reasons ultimately attributable to the principles enunciated in Gannon Dunkerley's case [1958] 9 STC 353 (SC), namely, if there is an instrument of contract which may be composite in form in any case other than the exceptions in article 366(29A), unless the 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 to sell from the agreement to render service, and impose tax on the sale.
The test therefore for composite contracts other than those mentioned in article 366(29A) continues to be—did the parties 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 disintegrated. The test for deciding whether a contract falls into one category or the other is as to what is "the substance of the contract”. We will, for the want of a better phrase, call this the dominant nature test.”
03 January 2008
thanx for reply sir.sir please advice me now what i have to do.i am from H.P.State.how i keep my accounts so that i have no trouble in future in Vat and Service taxation .thanx once again expert sir.
04 January 2008
Regarding VAT, I will advise you to have a clarification from the Commissioner of Taxes. You may even think of billing separately for Papers and Service Charges.
04 January 2008
THANX FOR NICE ADVICE THIS IS ONE OF THE BEST ALTERNATE
11 May 2012
The query has been answered. Accordingly closed.
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