2015 Supreme(SC) 73

SUPREME COURT OF INDIA
H.L. DATTU, CJI., A.K. SIKRI, ARUN MISHRA, JJ.
STATE OF KARNATAKA ETC. – APPELLANTS
VERSUS
M/S PRO LAB & ORS. ETC. – RESPONDENTS
CIVIL APPEAL NO. 1145 OF 2006
Decided On : 30-01-2015

IMPORTANT POINTS
After insertion of clause 29A in the Article 366 of the Constitution works contracts are permitted to be bifurcated into two: one for "sale of goods" and other for "services" and the goods component became exigible to sales tax. States held competent to levy sales tax on materials used in works contracts.
Entry 25 of Schedule VI of the Karnataka State Laws Act, 1957 and section 2(3) Karnataka State Laws Act, 2004 having retrospective effect are valid.
State legislature is competent to enact laws/amendments with retrospective effect.

Headnote:(a) Constitution of India – Article 366 clause 29A – Works contract – Goods and services – Determination of – Test – Dominant intention of the contract – Not material – Work contract permitted to be bifurcated into two: one for "sale of goods" and other for "services" – Goods component exigible to sales tax – States competent to levy sales tax on materials used in works contracts. (Para 20, 21)

       (2001) 4 SCC 593; (2014) 1 SCC 708; (2006) 3 SCC 1; (2014) 7 SCC 1 – Relied upon

       121 (2001) STC 175; (2000) 2 SCC 385; (1993) 1 SCC 364; [1984] 2 SCR 248; (2005) 13 SCC 37 – Referred

       ILR 2003 Kar 4883 – Overruled

       (b) Karnataka State Laws Act, 1957 – Entry 25 of Schedule VI r/w section 2(3) Karnataka State Laws Act, 2004 and Article 366(29A), Constitution of India – Making part of processing and supplying of photographs, photo prints and photo negatives having "goods" component exigible to tax – Constitutionally valid. (Para 22)

       (c) Karnataka State Laws Act, 1957 – Entry 25, schedule VI, Article 19(1)(g), Constitution of India – Retrospectivity – Original amendment made in 1989 after 46th amendment to the Constitution inserting Article 366(29A) making goods component exigible to tax declared ultra vires by High Court on basis of Rainbow Colour Lab – That decision having been overruled, the amendment becomes valid retrospectively – The provision inserted in 2004 retrospectively – Not invalid. (Para 25)

       (d) Constitution of India – Article 246 and Seventh Schedule VII – Entry 54, List II – State legislature is competent to enact laws/amendments with retrospective effect. (Para 26, 27)

       (2003) 5 SCC 23; (1969) 2 SCC 283; Indian Aluminium Co.; (1973) 1 SCC 216; (1989) 2 SCC 754; (1973) 1 SCC 216 – Relied upon

       Facts of the case:

       Constitutional validity of Entry 25 of Schedule VI to the Karnataka Sales Tax Act, 1957 is the subject matter of the present appeal.

       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 by means of a writ petition filed in the High Court of Karnataka. The High Court declared the said Entry to be unconstitutional. State of Karnataka had challenged that judgment by filing special leave petition which was dismissed. The reason for holding Entry 25 as unconstitutional was that the contract of processing and 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 competence of State Legislature given in Entry 25 of List II of Schedule VII of the Constitution to impose sales tax on such a contract.

       A circular 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. The High Court allowed the writ petition 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, 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.

       This paved way for the enactment of the Karnataka State Laws Act, 2004 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 is w.e.f. 01.07.1989, when this provision was inserted by the amendment made in the year 1989 for the first time.

       This amendment was again challenged before the Karnataka High Court. The High Court has again declared the said amendment as unconstitutional.

       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 survives, empowering the State Government to levy sales tax for processing and supply of photographs, photo prints and photo negatives.

       Finding of the Court:

       Impugned judgment cannot be sustained.

       Result: Appeal allowed.