Should you pay Sales Tax on Photography?

Composite Contracts and Applicability of Sales Tax: Is ‘Dominant Intention Test’ still hold good?

One of the most remarkable judgments on the issue, whether the job rendered by a photographer in taking photographs, developing and printing films would amount to a ‘works contract’ was M/s. Rainbow Colour Lab and Anr, v. State of Madhya Pradesh (AIR 2000 SC 808). The Supreme Court in this case in the year 2000 had held 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 expanded definition. Therefore, the work done by a photographer is only in the nature of a service contract not involving any sale of goods.  The Court in this case laid down the ‘Dominant Intention Test’ according to which division of a contract can be made only if the 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 a contract of service.

However, this was a two-judge bench ruling which was later overruled by a three-judge bench of the Apex Court in M/s. Associated Cement Companies Ltd. etc. etc. vs. Commissioner of Customs (AIR 2001 SC 862). The Supreme Court in this case held that after the Forty-sixth Amendments to the Constitution even if the dominant intention of the contract is the rendering of service, it will amount to works contract and in the execution of such contract, if the property of the materials used passes, then, it is a deemed sale and sales tax can be levied. Thus the dominant intention test as laid down in is Rainbow Colour Lab (Supra) was negatived by the Apex Court in Associated Cement (supra). The three-judge bench opined that the judgment rendered in Rainbow Colour case was contrary to the express provision contained in Article 366(29A) of the Indian Constitution as well as the decision of this Court in Builders’ Association of India v. Union of India[1]. However, it is to noted that in Associated Cement, the Court did not say that in all cases of composite transaction the 46th Amendment would apply. However, it is to noted that in Associated Cement, the Court did not say that in all cases of composite transaction the 46th Amendment would apply.

Later in Bharat Sanchar Nigam Ltd. v. Union of India[2] it was held that post 46th constitutional 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 thus there is no question of application of the dominant nature test.

The Andhra Pradesh High Court referring to Bharat Sanchar case (supra) in Viceroy Hotels Limited vs. The Commercial Tax Officer and Ors.[3]  in the year 2011 observed that-

“The dominant nature test may, however, be applied to a composite transaction not covered by Article 366(29-A). If there is an instrument of contract which may be composite in form, in any case other than the exceptions in Article 366(29-A), unless the transaction in truth represented two distinct and separate contracts, and was discernible as such, 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 Clauses (a) to (f) of Article 366(29-A), 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” i.e., the dominant nature test.”

In the same year 2011, identical issue came up before the Madras High Court in State of Tamil Nadu Vs. Kannaiah Colour Lab and Ors.[4] The precise question before the Court was whether the order holding that the transaction pertaining to taking of photograph, developing and printing is ‘works contract’ following Rainbow Colour case (supra) is legally sustainable in view of the subsequent judgment rendered in Associated Cement case (supra). In this case, the Assessees were in the business of running photo studio, taking photographs, developing the negatives and giving positive prints. They argued that since there was no outright sale of the developed positive prints, the question of levy of sales tax did not arise. The Tribunal considered the contention in the light of Rainbow Colour case and held that the activity of the photo studio, developing the negative and printing charges could not be assessed under the relevant state Act. In this case, it was observed that Revenue Dept. had not restricted its challenge only to one aspect of the transaction, namely, taking positive print outs of the negatives supplied by the Assessee, but also covered both transactions, including taking of photographs and sitting charges, as well as developing negatives and making positive prints out of it. The Hon’ble Madras High Court in this case, applied R. Mini Colour Lab v. Tamil Nadu Taxation Special Tribunal[5], wherein, Madras High Court had earlier considered the taxability on the processing of negatives taken from the customer and taking prints out of it, as sale. Placing reliance on the same, the Court in Kannaiah Colour Lab (supra), held that, both cases fall under the concept of works contract to be considered under Section 3B of the state Act, i.e. Tamil Nadu General Sales Tax Act.

Author: Adv. Vivek Verma

[1] (1989) 2 SCC 645

[2] Bharat Sanchar Nigam Ltd. v. Union of India (2006) 3 SCC 1

[3] MANU/AP/0202/2011

[4] (2011)42VST130(Mad)

[5] (2008) 14 TNCTJ 81