In spite of the enunciation of law in ACC, Entry 25 has not stood revived or restored into the Sixth Schedule of the Act. Therefore the Authorities under the Act cannot levy tax under the Act in regard to transfer of property in goods involved in processing photo negatives and supplying of photo prints and photographs, as if Entry 25 has stood restored in the Sixth Schedule to the Act.
Karnataka High Court
Golden Colour Labs and Studio and others
The Commissioner of Commercial Taxes
Dated- 30 July, 2003
Equivalent citations: ILR 2003 KAR 4883, 2003 134 STC 570 Kar
Bench: R Raveendran, K Manjunath
1. Petitioners are all assesses under the Karnataka Sales Tax Act, 1957 (for short, the Act). They are in the business of developing photographic films brought by the customers, making positive prints thereof and supplying positive prints to the customers. Some of them also undertake the works of taking photographs, enlarging prints, etc.
2. Section 5B was inserted in the Act by Act 27 of 1995 with effect from 1.4.1986. It enables the State to levy tax on transfer of property in goods (whether as goods or in some other form), involved in the execution of work contract. The said Section is extracted below:
5-B Levy of tax on transfer of property in goods (whether a goods or In some other form) involved in the execution of works contracts – Notwithstanding anything contained in Sub-section (1) or Sub-section (3) or Sub-section (3-C) of Section 5, but subject to Sub-section (4), (5) or (6) of the said section, every dealer shall pay for each year, a tax under this Act on his taxable turnover of transfer of property in goods (whether as goods or in some other form) involved in the execution of works contract mentioned in column (2) of the Sixth Schedule at the rates specified in the corresponding entries in column (3) of the said Schedule.
3. The term ‘works contract’ is defined in Section 2(1)(v-l) as including any agreement for carrying out for cash, deferred payment or other valuable consideration, the building, construction, manufacture, processing, fabrication, erection, installation, fitting out, improvement, modification, repair or commissioning of any movable or immovable property.
4. Sixth Schedule enumerates the description of works contracts involving transfer of property in goods in regard to which tax is payable under Section 5B. Entry 25 of Sixth Schedule, with which we are concerned is extracted below :
|Sl. No.||Description of Works||Contract Period||Rate of Tax|
|Rate of Tax U/S 5-B
|Processing and supplying of photographs, photo prints and photonegatives||1.7.1987 to 31.3.1996||6%|
|1.4.1996 to 31.3.1998||8%|
5. The challenge to the constitutional validity of Entry 25 in Sixth Schedule was considered by a Division Bench of this Court in KESHORAM SURINDRANATH PHOTO-MAG (P) LTD. v. ASSISTANT COMMISSIONER OF COMMERCIAL TAXES (LR), CITY DIVISION, BANGALORE 121 (2001) STC 175. It was contended by the Appellants therein that they carried on the business of taking photographs, supplying prints, making enlargements and preparing positive prints from negatives (exposed film) brought by the customers; that customers approach them because of their expertise/expert knowledge, and the paper on which the positive print is taken or the chemicals used for developing negatives or making positive prints is only incidental to the service rendered by them; that photographs taken for a customer or photo prints taken by them for a customer are of interest and value only to that particular customer and are not otherwise marketable commodities. In view of the 46th Constitutional Amendment, though not only transactions of sale of goods, but also transfer of property in goods involved in the execution of works contracts can be subjected to sales tax, contracts described under Entry 25 were not works contracts; and that the work of a photographer is that of an artist involving imagination, taste and expertise and in a contract relating to processing of photo films, the film roll belongs to the customer and it is taken back by the customer after development without any addition or accretion thereto and that therefore processing of photo negatives does not involve any transfer of property in goods. It was therefore contended that Entry 25 was beyond the competence of State Legislature, as there was no transfer of property in goods involved in the execution of a contract relating to processing and supplying of photographs, photo prints and photo negatives. Reliance was placed on the following observations of the Rajasthan Taxation Tribunal in SPECTRUM FOTO COLOR LABS PVT. LTD., v. COMMERCIAL TAX OFFICER, ANTI-EVASION, JODHPUR 1998 (110) STC 145.
“9. A Customer going to a photographer for getting his exposed film developed does not ask to purchase the negative but asks to develop exposed film and to give him the negative obtained therefrom. Similarly, a customer approaching a photographer with his negative for obtaining positive prints does not ask for purchase of positive prints but requests for giving him positive prints from his negative. Both of them, i.e., exposed film and negative are not marketable commodities. They have no market value for other persons while taking out positive prints from the negative with the help of photo papers and chemicals, there is no accretion on the basic material, i.e., negative.
10. The main object of the work undertaken by the petitioner was not to transfer the photo papers upon which the positive prints were taken. The transfer of paper was simply incidental to the said transaction. Payment was made to get the positive prints and not to get the photo papers. Customers had interest in the positive prints and not in the photo papers. The contracts in between the petitioner and its customer were neither the contracts of sale nor the direct or indirect works contract involving supply of photo papers. No sale of photo papers was involved which could be taxed under the Act.”
The Division Bench of this Court upheld the contention of the assessees, and declared that Entry 25 was unconstitutional, on the following reasoning:
“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 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. A 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 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 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, therefore is beyond the scope of Article 366 of the Constitution of India.
The decision in KESHORAM was rendered by this Court on 6.9.1999. The State challenged the said decision in Special Leave to Appeal (Civil) Petition No. 6136-6163/2000 and connected matters.
6. In the meanwhile an identical question came up for consideration before a Two Judge Bench of the Supreme Court in RAINBOW COLOUR LAB v. STATE OF MADHYA PRADESH Civil 118(2000) STC 9, with reference to the provisions of the Madhya Pradesh General Sales Tax Act, 1958. In that case also the appellants contended that they take photographs of the objects desired by their customers, develop the negatives and supply the prints; that they also develop the films brought by the customers, make positive prints thereof and supply the positive prints and return the negative films back to the customers; and that in some cases, they also undertake the work of enlarging the photo prints. The Commissioner of Sales Tax, MP, issued a circular opining that the activity of photographers amounted to works contract and turnover from such work would be exigible to levy of Sales Tax. When the Assessees challenged the said circular and consequential reassessment, the Madhya Pradesh High Court, relying on the decision of the Supreme Court in BUILDERS’ ASSOCIATION OF INDIA v. UNION OF INDIA 73 (1989) STC 370 held that to the extent of the photo papers used in the printing of positive prints by the appellants in their work, there is a transfer of property in goods and therefore to that extent the job done by the appellants would be works contracts as contemplated under Article 366(29A)(b) of the Constitution of India and as incorporated in the Section 2(n) of the MP Sales Tax Act defining ‘Sale’. On appeal by the Assessees, the Supreme Court set aside the order of the MP High Court holding that the reliance placed by the High Court on BUILDERS’ case was misplaced, and quashed the assessment orders and demand notices, holding that unless there is a sale and purchase of goods, either in fact or deemed, and such sale is primarily intended and not incidental to the contract, the State cannot impose sale tax on a works contract simplicitor in the guise of expanded definition found in the Article 366(29a)(b) of the Constitution read with Section 2(n) of the MP Sales Tax Act. The Supreme Court on facts held that the work done by the photographer is only in the nature of service contract, not involving any sale of goods. The Supreme Court gave the following reasoning:
“Prior to the amendment of Article 366, in view of the judgment of this Court in STATE OF MADRAS v. GANNON DUNKERLEY AND CO. (MADRAS) LIMITED (1958) 9 STC 353, the States could not levy sales tax on sale of goods involved in a works contract because the contract was indivisible. All that has happened in law after the 46th Amendment and the judgment of this Court in BUILDERS’ CASE (1989) 73 STC 370 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 (ii) 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 as an incident of contract of service. The amendment, referred to above, has not empowered the State to indulge in microscopic division of contracts involving the value of material 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 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) 55 STC 314 at page 322 where it was held thus:
“… Mere passing of property in an article or commodity 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 have to be used by the person executing the work, and property in such articles or 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…”
The judgment in the above case was quoted with approval by this Court in the case of EVEREST COPIERS v. STATE OF TAMIL NADU (1996) 103 STC 360 (to which judgment one of us, honourable Bharucha, J., was a party) wherein it was stated:
“Where the main object of the work undertaken by the person to whom the price is paid is not transfer of a chattel as a chattel, the contract is one of work and labour.
The main object of the work undertaken by the operator of a photocopier or xerox machine is not the transfer of the paper upon which the copy is produced; it is to duplicate or make a xerox copy of the document which the payer of the price wants duplicated. The paper upon which the duplication takes place is only incidental to this transaction. The object of the payment of the price is to get the document duplicated, not to receive the paper. The payer of the price has no interest in the bare paper upon which his document is duplicated. He is interested in it only if it bears such duplication. What is involved is not a sale but a contract of work or labour.”
In Bavens v. Union of India (1995) 97 STC 161, a division bench of the Kerala High Court had taken the view that:
“Where a photographer takes a photograph of his customer, develops the negative and supplies positive prints in the desired size to the customer, the photographer uses his own camera and his own film. The negative which is subjected to further processing belongs to the photographer and not the customer. No basic goods are provided by the customer which are subjected to processing, etc., by the photographer so as to make the contract a works contract. There is no accretion to goods or property or the nucleus of a property which originally belonged to the customer. There is no works contract involved in this category of a photographer’s activity. However modernised the camera be the skill of the photographer is still important for getting the best results. It cannot also be treated as a sale of the photograph for the reason that it is not the intention of the customer to buy a photograph from the photographer is his service, artistic skill and talent. If any property passes to the customer in the form of photographic paper, it is only incidental to the service contract. No portion of the turnover of a photographer relating to this category of work would be exigible to sales tax.”
We are in agreement with the view taken by the Kerala High Court in the above case.”
7. When the Special Leave petitions filed by the Karnataka Government against the decision in KESHORAM came up for admission, the Supreme Court dismissed the SLPs by the following order on 20.4.2000, relying on the decision in RAINBOW;
“In view of the decision of this Court in Civil appeal Nos. 5350-51/1997 etc., dated 2nd February, 2000, these special leave petitions are dismissed.”
The decision in KESHORAM declaring Entry 25 of Sixth Schedule was unconstitutional, thus attained finality. As a result, contracts relating to processing photo negatives and supplying photo prints and photographs, were not subjected to any tax under Section 5B of the Act.
8. When matter stood thus, a three Judge Bench of the Supreme Court rendered its decision in ASSOCIATED CEMENT COMPANIES LTD. v. COMMISSIONER OF CUSTOMS , considering the question whether drawings, designs, diskettes, manuals etc., relating to machinery or industrial technology were “goods” which could be subjected to customs duty on their transaction value at the time of their import, under the Customs Act, 1942. In that context the Appellant therein contended, relying on several decisions relating to levy of Sales Tax, that in contracts for supply of services, there is no sale of goods and, as such, no customs duty could be imposed on the intellectual property which was obtained. The Supreme Court therefore considered in detail the decisions in STO v. B.C. KAME , STATE OF TAMILNADU v. ANANDAM VISHWANATHAN and EVEREST COPIERS v. STATE OF TAMILNADU as also the decision in RAINBOW COLOUR LAB. After referring to the first three decisions the Supreme Court held as follows:
“24. All the aforesaid decisions related to the period prior to the Forty Sixth Amendment of the Constitution when Article 366(29-A) was inserted. At that time in the case of a works contract it was held that the same could not be split and the State Legislature had no legislative right to seek to levy sales tax on a transaction which was not a sale simplicited of goods. Rainbow Colour Lab v. State of M.P. (2002(2) SCC 385) was however a case relating to the definition of the word “sale” in the M.P. General Sales Tax Act, 1958 after its amendment consequent to the insertion of Article 366(29-A). 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 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 p.391 as follows: (SCC para 15)”
“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 impliciter in the guise of the expanded definition found in Article 366(29-A)(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 involving any sale of goods, we are of the opinion that the stand taken by the respondent State cannot be sustained.”
“25. Even though in our opinion the decisions relating to levy of sales tax would have, for reasons which we shall presently mention, no application to the case of levy of customs duty, the decision in Rainbow Colour Lab case requires considerations. As a result of the Forty-six Amendment, sub-article (29-A) of Article 366 was inserted as a result whereof, tax on the sale or purchase of goods 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 pp. 388-89 observed as follows:
’11. Prior to the amendment of Article 366, in view of the judgment of this Court in STATE OF MADRAS v. GANNON DUNKERLEY AND CO. (MADRAS) LTD., the States could not levy sales tax on sale on goods involved in a works contract because the contract was indivisible. All that has happened in law after the 46th amendment and the judgment of this Court in Builder’s 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 goods involved in the said works contract, and (ii) 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 contract 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 a 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 invention 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 by the amended law to impose sales tax on such incidental materials used in such contracts.’ “26. In arriving at the aforesaid conclusion the Court referred to the decision of this Court in Hindustan Aeronautics Ltd. v. State of Karnataka Everest Copiers (103 (1996) STC 360). But both these cases related to the 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 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 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, in our opinion, runs counter to the express provision contained in Article 366(29-A) as also of the Constitution Bench decision of this Court in Builder’s Association of India v. Union of India .”
The Supreme Court, however, found that the provisions of Customs Act and the provisions of the Sales Tax Act were different and therefore its decisions relating to the levy of Sales Tax in case of works contracts will have no application in that case. The Court observed thus:
“32. In the sales tax cases referred to hereinabove no doubt the question which arose was whether in a works contract, where there was a supply of materials and services in an indivisible contract, but there the question had arisen because the States’ powers prior to the Forty – sixth Amendment to the Constitution, were not entitled to bifurcate or split up the contract for the purpose of levying sales tax on the element of moveable goods involved in the contract. Apart from the decision in Rainbow Colour Lab case which does not appear to be correct, the other decisions cited related to the pre-forty-sixth Amendment period. Furthermore, the provisions of the Customs Act and Tariff Act are clear and unambiguous. Any moveable articles, irrespective of what they may be or may contain, would be goods as defined in Section 2(22) of the Customs Act.”
9. In view of the said decision in ACC, the Commissioner of Commercial Taxes in Karnataka, issued instruction to the Sales Tax Authorities vide Circular No. 17/2002-03, dated 27.9.2002 stating that having regard to the decision in ASSOCIATED CEMENT COMPANY, the earlier decision in RAINBOW COLOUR LAB is impliedly overruled and all authorities under the Act are bound by the Apex Court’s decision in ACC and therefore “the levy of tax in respect of transfer of goods involved in the execution of works contract of the nature of work undertaken by a photographer in taking photographs, developing and printing films is now enforceable”. In view of the above, the Commissioner issued the following instructions to all officers of the Commercial Tax Department:-
i) To levy tax u/s 5B of KST Act 1957 in respect of transfer of property in goods involved in the execution of works contract undertaken by the photographers;
ii) In cases where taxes were levied and subsequent rectification orders were passed based on the decision in Rainbow Colour Lab’s case, the assessing authorities are required to pass re-rectification orders as the same is permissible as per the decision of the Apex Court in the case of ICC P. Ltd. v. CTO Hubli and others (1975) 35 STC 1;
iii) To drop the further proceedings if initiated under Section 18A or 18-AA of KST Act 1957;
iv) To take suitable action to recover the taxes already refunded to the assessees.
v) To drop further proceedings in cases where notices have been issued for rectification of assessments, on the basis of the decision in RAINBOW;
vi) Wherever the assesses have filed application for rectification of assessment order, endorsement may be issued by explaining the above legal position;
vii) In case where the matter is covered by an appeal or revision proceedings, the concerned assessing authority shall make suitable application to the appellate or revisional authority to rectify orders passed by them by relying on the Rainbow Colour Lab’s case.
10. In view of the said instructions, the authorities under the Act started subjecting the turn over of transfer of property in goods involved in the processing and supplying of photographs and photo prints to tax under Section 5B read with Entry 25 of Sixth Schedule, by treating them as works contracts, while passing assessment orders. In cases where the orders of assessment have already been passed, the authorities concerned have reopened the matters and have passed orders under Section 12A treating the turnover relating to transfer of property in goods involved in processing and supplying of photographs and photo prints, as escaped turnover. In some other cases, suo motu orders have been passed by the Revisional Authority under Section 21 of the Act, on the ground that the orders of assessment earlier passed without subjecting such turnover to tax, prejudiced the interests of the Revenue. In some other cases, orders of rectification have been passed under Section 25A treating the non-subjecting such turnover to tax, as a mistake apparent from the records and passing orders of rectification. In some other cases, matters are still at the stage of notice under Section 12A, 21 and 25A.
11. Feeling aggrieved, the assessees have file these petitions for the following reliefs:
(i) to declare the circular dated 27.9.1992 issued by the Commissioner of Commercial Taxes in Karnataka is contrary to law and/or to quash the same or declare it is unenforceable.
(ii) To declare that the activities of Petitioners of processing and supplying photographs, photo prints and photo negatives is not a works contract and not liable to tax under the Act.
(iii) To quash the orders of assessment passed and/or notices issued under Section 12(3), Section 12B(3), Section 12A, Section 21 and Section 25A of the Act.
12. On the contentions raised, the following two points arise for consideration in these petitions:
i) Whether the pronouncement of law in ACC, in regard of levy of Sales Tax on works contract, will prevail over the decision in RAINBOW.
ii) Even if the decision in ACC prevails over the law declared in RAINBOW and KESHORAM, whether the authorities under the Act can proceed on the basis that Entry 25 of Sixth Schedule is reinstated or restored to the statute, and subject to tax under Section 5B of the Act, the turnover relating to transfer of property in goods involved in processing and supplying of photographs, photo prints and photo negatives.
13. RAINBOW and KESHORAM proceeded on the basis that when a photographer takes photographs, develops the negative and supplies the print, it is a service contract and not a works contract; and photography being a service, the main object is not transfer of property in goods and whatever goods that passes is only incidental to the service contract. It was further held that a works contract can be divided into two separate contracts by a legal fiction (the first for sale of goods involved in the words contract and the second for supply of labour and services), only where the dominant intention is to transfer property in goods and not where the transfer in property takes place as an incident of service contract, and that the 46th amendment to the Constitution has not empowered the State to indulge in microscopic division of contracts involving a value of materials used incidentally in such contracts.
14. Learned Counsel for the petitioners contended that the observations in ACC, in respect of contracts for processing and supplying photo prints, photographs and photo negative and levy of sales tax on the material used in such contracts and about the correctness of the decision in RAINBOW, are only obiter, as the decision in ACC related to customs Act and the decision itself made it clear that the provisions of Sales Tax Act and customs Act were different and decisions rendered with reference to levy of Sales Tax in cases of works contract will have no application to Customs Act. It is also pointed out that in ACC, the Supreme Court did not expressly over rule the decision in RAINBOW, but only observed that the decision in RAINBOW does not appear to be correct, thereby leaving open the question for further consideration in an appropriate matter. Petitioners therefore submit that RAINBOW still holds the field in so far as taxing of the activity of processing of negatives and supply of prints under Sales Tax Laws.
15. ‘Obiter dictum’ is defined as words of an opinion entirely unnecessary for the decision of the case. It is a remark made, or opinion expressed by a Judge, in his decision upon a cause, “by the way, that is, incidentally or collaterally, and not directly upon the question before him, or upon a point not necessarily involved in the determination of the cause, or introduced by way of illustration, or analogy or argument. Such are not binding as precedent – vide BLACK’S LAW DICTIONARY. In MADHAVA RAO SCINDIA v. UNION OF INDIA , the Supreme Court observed that ” it is difficult to regard a word, a clause or a sentence occurring in a Judgment of this Court, divorced from its context, as containing a full exposition of the law on a question when the question did not even fall to be answered in that Judgment”. Following the said decision, in A.D.M.JABALPUR v. S. SHUKLA the Supreme Court, held that observations of the Supreme Court, by way of ‘Obiter’, are undoubtedly entitled to great weight, but do not have any binding effect and cannot be regarded as conclusive on the point. On the other hand, an observation of the Supreme Court on a point raised and argued before it will be binding, if the opinion is final and not tentative. This position was recently reiterated in DIRECTOR OF SETTLEMENTS AP v. M.R. APPARAO 2002 AIR SCW 1504 the Supreme Court held:
“Obiter dictum” as distinguished from a ‘ratio decidendi’ is an observation by Court on a legal question suggested in a case before it, but not arising in such manner as to require a decision. Even though an obiter may not have a binding effect as a precedent, but it cannot be denied that it is of considerable weight. The law which will be binding under Article 141 would, therefore, extend to all observations of points raised and decided by the Court in a given case.”
16. The Supreme Court has repeatedly stressed that it will not normally make any pronouncement, particularly in constitutional matter’s, on points not directly raised for its decision. But nevertheless, where a point is raised and decided by the Supreme Court, such observations would be binding under Article 141, particularly when the Court makes it clear that its remarks are intended to be a decision on the issue. Therefore there is a need to make a distinction between a ‘mere Obiter dictum’ which is a passing remark, and observations made by the Supreme Court after consciously raising and deciding an aspect of law. An observation by the Supreme Court on a point raised, considered in detail and decided after examination will be binding as the law declared under Article 141, eventhough it was not necessary for deciding the case before it.
16.1. Where a larger Bench of the Supreme Court deliberately and with the intention of settling the law, pronounces upon a question by holding that a decision of a smaller Bench is contrary to the decision of a Constitution Bench and therefore not correctly decided, such pronouncement is the law declared by the Supreme Court within the meaning of Article 141 and binding on all Courts, even if such pronouncement was not necessary for deciding the case before it.
16.2. We may in this behalf refer to the observations made in the decision of a Full Bench of this Court in STATE OF KARNATAKA v. H. KRISHNAPPA ILR 1975 KAR 1015 while considering the binding nature of the pronouncement in O.N. MOHINDROO v. BAR COUNCIL, NEW DELHI , relating to a matter which did not directly arise for decision in that matter. In MOHINDROO’s case, the Supreme Court, after referring to the relevant legal provisions and the earlier decision in STATE OF BOMBAY v. NAROTTAMDAS stated that the jurisdiction and powers of the High Courts are not dealt with in Entry 78 in the Union List and that under entry 3 in the State List the State Legislature can confer jurisdiction and powers on all Courts which would include the High Court (Except the Supreme Court). The Full Bench held thus:
“However, Mr. Rama Jois contended that the above observations of the Supreme Court are obiter dicta in as much as the question whether general jurisdiction of the High Court was comprised in Entry 78 in the Union List or Entry3 in the State List, did not arise for decision in that case before the Supreme Court.
In O.N. Mohindroo’s case, the question that directly arose for decision before the Supreme court, was whether Section 38 of the Advocates Act, 1961, which provides for an appeal to the Supreme Court from a decision of the Bar Council of India, fell under Entry 26 in the Concurrent List or under Entry 77 in the Union List. It is true that the question whether jurisdiction and powers of the High Court fall within Entry 78 in the Union List or Entry 3 in the State List, did not directly arise for decision before the Supreme Court in that case. However, the Supreme Court considered the scope of Entries 77, 78 and 95 in the Union List, entries 3 and 65 in the State List and Entries 26 and 46 in the Concurrent List and made the aforesaid enunciation as to whether it is the Parliament or the State Legislature that can confer jurisdiction and powers on the High Courts.
It is not open to the Court not to follow the enunciation of law by the Supreme Court in O.N. Mohindroo’s case on the ground that it is an obiter dictum. As pointed out by this Court in New Krishna Bhavan v. Commercial Tax Officer (AIR 1961 Mys 3), it is not necessary for a proposition of law declared by the Supreme Court to be binding on other Courts that the actual decision of the case should proceed on that proposition. As observed by a Full Bench of Delhi High Court in SUNDERAJAN v. UNION OF INDIA , even the obiter dicta of the Supreme Court when they are stated in clear terms, have a binding force on all the Courts.”
17. Though the decision of the larger Bench in ASSOCIATED CEMENT COMPANIES did not relate to Sales Tax, but to customs duty, the question whether there is any sale of goods in a contract for supply of services, was specifically raised for consideration. The said question was specifically considered with reference to several decision including the decision in RAINBOW in great detail and categorically held that the principle of dominant intention was no more relevant after the Forty Sixth Amendment, and the said Amendment was made precisely to empower the State to bifurcate the contract and to levy sales tax on the material involved in the execution of the work contract, notwithstanding that the value may represent a small percentage of the amount paid for the execution of the works contract. It also in terms stated that the decision in RAINBOW required consideration; and that the conclusion arrived in RAINBOW runs counter to the express provision contained in Article 366(29A) of the Constitution of India and the decision of the Constitution Bench of the Supreme Court in BUILDERS’ ASSOCIATION OF INDIA v. UNION OF INDIA (1989 (73) STC 370). We have extracted the relevant portions of the decision in ACC which shows that what is stated is not intended to be a passing comment or casual observation, but the point was specifically raised and decided by the Court. The Supreme Court considered the entire case law on the matter. It did not merely raise a question and leave open the matter to be decided in some other case. The Supreme Court categorically laid down the principle relating to works contract and held that the decision in RAINBOW ran counter to the Constitution Bench decision in BUILDERS ASSOCIATION and Article 366(29A). The Supreme Court made it clear that even though decisions relating to levy of Sales Tax had no application to the case that was being considered by them (relating to customs duty), they would consider the decision in RAINBOW, and on such consideration, held that RAINBOW ran counter to BUILDERS and Article 366(29A) and laid down clearly the legal principle as to what the State is empowered to do, after the 46th Amendment. We are therefore of the view that the enunciation of law and pronouncement by the three Judge Bench of the Supreme Court in ACC is law declared under Article 141 and will reprevail over the principle laid down in the two Judge Bench of the Supreme Court in RAINBOW.
18. Learned Government Advocate referred to another aspect. He pointed out that both KESHORAM and RAINBOW have generally proceeded on the factual assumption that in contracts or transactions relating to photography, the value of the material used in processing and developing negatives was so small and so incidental to the total consideration for the contract of service, that microscopic division of the contract to find out the value of materials used is impermissible. The learned Government Advocate pointed out that petitioners are not carrying on the business of ‘photography’ that is taking photographs of a person/object/scene, by using his own camera and film, but are engaged in the business of processing and developing exposed films and making photo prints. He submitted, it is not the assessees, but their customers, who are the photographers (amateur or professional) and that such photographers who take photographs, bring the exposed film (negative) to the assessees for processing and development of the negative and for making photo prints (positives) by mechanical means. It is contended that in the business activity of the petitioners, service element is not the dominant element, and the cost of the chemicals used for the processing negatives and the cost of the paper used for taking positive prints form a substantial and not negligible part of the price/charge received by them from the customer. It is contended that processing photo negatives and printing and supplying photo positives is a regular works contract. It is not however necessary to examine this aspect. Having regard to the decision in ACC, even if the value of the materials involved in execution of the works contract is small, it could be subjected to tax under the Act. Be that as it may.
Re: Point (ii):
19. The second question is whether Entry 25 declared unconstitutional in KESHORAM, stood restored to the statute Book as a consequence of the law laid down in ACC and therefore the Authorities under the Act are entitled to proceed on the basis that Entry 25 has always been in the statute book.
20. A statute or its provision is unconstitutional and void when (a) it is beyond the legislative competence, or(b) it is violative of the fundamental rights guaranteed under Part III of the Constitution, or (c)it is violative of or repugnant to any other Constitutional Provision. If a Statute or its provision is within legislative competence, but does not fulfill some constitutional prescription (other than part 111), it is not considered a nullity, but is unenforceable and becomes enforceable once the Constitutional prescription is complied with.
21. The power of the State Legislature to levy tax on sales and purchases of goods (including deemed sales and purchases under Article 366(29A) of the Constitution) is found only in Entry 54 of List II of Seventh Schedule of the Constitution, and not outside it. Article 366(29A) cannot be considered to be a separate entry in List II enabling States to levy Tax, but is merely a provision enabling the States to levy Tax on the price of goods used in Works Contracts, by deeming that there was a sale of such goods . (vide the decisions of the Supreme Court in BUILDERS (supra), and GANNON DUNKERLEY AND CO. v. STATE OF RAJASTHAN When ‘Processing of Photo negatives and supplying photo prints’ was held by the Court as a ‘Service Contract’ without any element of sale, and not a works contract, Entry 25 treating ‘processing of negatives, and supplying photo prints’ as a works contract that could be subjected to Sales Tax, became unconstitutional, being beyond the legislative competence of the State. Any provision of a Statute declared unconstitutional, as being beyond the legislative competence of the State, is a nullity and void.
22. When a High Court declares a statute or its provision unconstitutional for want of legislative competence and therefore void, is it the end of the Road? Not really.
22.1 In SHENOY AND CO. v. CTO, BANGALORE , the Supreme Court held that when an Act is declared to be constitutionally invalid by a High Court, but in appeal is declared to be valid by the Supreme Court, the Act was under an eclipse for the short duration (between the date of decision of the High Court and the date of decision of Supreme Court); and on the declaration of law by the Supreme Court, holding that the Act was valid, the temporary shadow cast on it by the mandamus issued by the High Court disappeared and the Act stands revived with its full vigour, the invalidity declared by the High Court having been removed by the judgment of the Supreme Court, and as a consequence of the law declared invalid by the High Court, being held to be constitutionally valid by the Supreme Court, the mandamus forbearing the authorities from enforcing its provisions would become ineffective.
22.2. In K. SAHADEV v. SURESH BIR 1995 Supp (3) SCC 668 the Supreme Court dealt with a case relating to the fixation of fair rent under Section 4 of the Andhra Pradesh Buildings (Lease, Rent and Eviction) Control Act, 1960 (‘AP Rent Act’ for short). The Andhra Pradesh High Court has held that the said Section 4 of the AP Rent Act to be unconstitutional in MOHD. ATAUR REHMAN KHAN v. MOHD. KAMALUDDIN AHMED 1987(1) Andh L.T. 216. In spite of the decision in ATAUR REHMAN holding that Section 4 was unconstitutional, the Rent Controller held in respect Appellant’s premises that he had jurisdiction to determine the fair rent taking into account, the existing circumstances of the case. That order was maintained in appeal and taken up by the Appellant in revision. By the time the Revision Petition came up for consideration before the AP High Court, a similar provision in East-Punjab Urban Rent Restriction Act, 1949 was held to be valid and reasonable, by the Supreme Court in SANT LAL BHARTI v. STATE OF PUNJAB . As a consequence, the revision petition was disposed of by the AP High Court holding that the decision in ATAUR REHMAN was no longer good law, in view of the subsequent decision of the Supreme Court in SANT LAL BHARTI with a consequential direction to the Rent Controller to determine the fair rent in accordance with Section 4 of the AP Rent Act. In an appeal by the landlord, against the said order of the AP High Court, the Supreme Court held thus:
“In our opinion, learned Single Judge in recording the finding that the decision in ATAUR REHMAN was no more a good law, did not act properly as unless the decision in Ataur Rehman was set aside by a larger Bench, the declaration given by it that Section 4 was ultra vires could not be put at naught by a decision given by this Court in respect of another Act.”
The Supreme Court further held unless a larger Bench (or Supreme Court) dealing with the very Section 4 of AP Rent Act upheld its validity, Section 4 could not revive. The direction issued by the AP High Court to the Rent Controller to determine the fair rent in accordance with Section 4 of AP Rent Act was therefore set aside.
22.3. The above decisions make it clear that where a statute or its provision, held to be unconstitutional and void by the High Court, is declared constitutional and valid, in an appeal or otherwise, by a larger Bench or by the Supreme Court, such statute or its provision (which is declared unconstitutional) becomes enforceable. The restoration of the statute or its provision, is automatic, without any re-enactment. In the words of the Supreme Court, the statute or its provision, comes out of the eclipse. What if there is no such automatic restoration and the decision declaring the statute or its provision unconstitutional and void for want of legislative competence, attaining finality? Even in such a situation, in two circumstances, such statute or its provision can be brought back to life, by re-enacting it. The first is when there is a constitutional amendment which removes the lack of legislative competence. The second is when the Supreme Court dealing with the constitutional validity of a similar enactment (or provision of an enactment) of another state, declares it to be constitutionally valid by applying or evolving a different legal principle. That is for example, if a provision of Sales Tax Law of State ‘K’ is declared to be beyond the Legislative Competence and void by the High Court or Supreme Court, and later an identical or similar provision of Sales Tax Law of State ‘M’ is declared by the Supreme Court to be valid by applying a different principle, then State ‘K’ can re-enact the provision (Note: for this purpose, where the earlier decision holding the provision of law of State ‘K’ to be void is of the Supreme Court, the later decision holding a similar provision of law of State ‘M’ to be valid should be of a larger Bench of the Supreme Court). In brief the principle emerging can be summarised thus:
(i) Where the very provision, held to be constitutionally invalid is reconsidered in an appeal or otherwise subsequently, and held to be valid, then the provision stands restored to the statute and becomes enforceable, without being re-enacted.
(ii) Where the decision holding the provision to be constitutionally invalid attains finality, and thereafter a similar provision in some other enactment is considered and held to be valid on a different legal principle, then the provision earlier declared invalid does not get revived. But it may be re-enacted if the State Legislature so chooses.
23. Let us apply the said principles to the case on hand. A division Bench of this Court in KESHORAM declared that Entry 25 was constitutionally invalid and the Supreme Court affirmed the said decision by Order dated 20.04.2000 in SLAP (Civil) No. 6136-6163/ 2000 and connected cases. Thus the declaration that Entry 25 was invalid and unenforceable, attained finality. Thereafter the Supreme Court has neither reconsidered nor pronounced upon the validity of Entry 25 in any other decision. It is not, therefore a case of temporary eclipse, as in the case of SHENOY, but a case obliteration of the provision from the statute book, as in SAHADEV. In fact the position in this case is much stronger than SAHADEV, because the decision of this Court in KESHORAM has been upheld by the Supreme Court in SLP (Civil) No. 6136-63 of 2000 and connected matters. Therefore even if Supreme Court subsequently [aid down a different principle in ACC (referring to the decision in RAINBOW which dealt with a similar provision in MP Sales Tax Act), that will not automatically revive Entry No. 25. The decision in ACC may at best enable the State to re-enact a provision similar to Entry 25.
24. The State however fell into an error in proceeding on the basis that having regard to the decision in ACC, Entry 25 automatically stood restored to the statute. The State has placed strong reliance on the decision in C.N. RUDRAMURTHY v. V.K. BARKATHULLA KHAN in support of its contention. In RUDRAMURTHY’s case, the question was whether Section 31 of Karnataka Rent Control Act, 1961, (‘KRC Act’ for short) which had been declared to be invalid by this Court in PADMANABHA RAO v. STATE OF KARNATAKA stood revived on account of the decision of the Supreme Court in SHOBHA SURENDER v. H.V. RAJAN. The question arose this way; Section 31 of Karnataka Rent Control Act, 1961, made the chapter extending protection to tenants against eviction inapplicable to non-residential premises the rent of which exceeded Rs. 500/- p.m. The City Civil Court, Bangalore had decreed a suit for eviction filed by the Landlord Shobha Surender in respect of a non residential premises, the rent of which was more than Rs. 500/- per month. The tenant (H.V, Rajan) challenged the said decree in RFA No. 391/1983. A division Bench of this Court allowed RFA No. 351/1983 on the ground that Section 31 of KRC Act was struck down in PADMANABHA RAO’s case, during the pendency of the appeal. This Court held that the remedy of the Landlord was to file an eviction petition under the KRC Act. The landlord (Shobha Surender) challenged the decision of this Court before the Supreme Court in Civil Appeal No. 13754/1996. By the time said appeal filed by Shobha Surender came up for consideration, the Supreme Court had considered and upheld the constitutional validity of Section 3(1) of the Delhi Rent Control Act (similar to Section 31 of KRC Act) in D.C. BHATIA v. UNION OF INDIA. In view of it, when the appeal by Shobha Surender came up for consideration, the Supreme Court rendered a short judgment following the decision in D.C. BHATIA and reversed a decision of this Court in RFA 351/1983 (which was rendered following the decision in PADMANABHA RAO) without assigning reasons. In other words, SHOBHA SURENDER impliedly held that having regard to the law declared in D.C. BHATIA, Section 31 of KRC Act was valid and therefore stood revived in the Statute Book. In C.N. RUDRAMURTHY’s case, it was contended that there was no specific decision of the Supreme Court declaring specifically that Section 31 of KRC Act was valid or holding that the law declared in PADMANABHA RAO was not correct, and that therefore PADMANABHA RAO should be treated as good law and still holding the field in so far as Section 31 of KRC Act. Negativing the said contention, the Supreme Court held:
“We do not think such an exercise is necessary when this Court applied its mind to the facts of the case (In SHOBHA SURENDER’s case), the law declared by this Court in D.C. Bhatia’s case and applied the same with reference to the provisions of the Karnataka Rent Control Act. The clear pronouncement made by this Court in SHOBHA SURENDER’s case was that D.C. BHATIA was applicable with reference to Section 31 of KRC Act and therefore, in view of that decision, the High Court’s decision was upset in another matter where the High Court had foiiowed Padmanabha Rao’s case. In effect Padmanabha Rao’s case stood impliedly overruled. The law declared by this Court (in SHOBHA SURENDER) is clear that the D.C. BHATIA’s case was applicable to the provision of the KRC Act.”
(emphasis supplied) Relying on the said decision, the State contends that in RUDRAMURTHY, the Supreme Court held that Section 31 of KRC Act stood restored in the Statute (KRC Act) in view of the decision in BHATIA rendered with reference to Section 3(1) Delhi Rent Control Act; and on the same principle, Entry 25 in Sixth Schedule declared unconstitutional in KESHORAM stood restored to the Statute Book automatically, on Supreme Court rendering the decision in ACC; and therefore the Authorities under the Act are required to proceed on the basis that Entry 25 has always been in the Statute Book.
25. The decision in RUDRAMURTHY, if carefully read shows that it favours the petitioners. In RUDRAMURTHY, the Supreme Court held that the decision of the Supreme in SHOBHA SURENDAR (following the decision in BHATIA, relating to Bombay Rent Act) impliedly held that Section 31 of Karnataka Rent Control Act, 1961 was valid and therefore in the statute book, thereby clearing the eclipse created by the decision in PADMANABHA RAO. Though the decision in PADMANABHA RAO holding that Section 31 was invalid, had attained finality, in RUDRAMURTHY the Supreme Court clarified that the very same Section (Sec. 31 of KRC Act) was considered in SHOBHA SURENDER and its validity upheld. While doing so, it also noticed the distinction between a case where the same provision is held to be valid and a case where a similar provision in some other statute is held valid. The said observations in RUDRAMURTHY which are relevant are extracted below:
“Yet another argument was pressed upon us to the effect that when a provision of law in an enactment has been declared to be invalid and when the Supreme Court declares the law with reference to another enactment of similar nature, it would not be open to the High Court to say that the decision of this Court should be taken to have been overruled or upset the decisions rendered by the High Court declaring the law to be invalid. This principle has no application in the present case at all because this Court itself considered the effect of D.C. BHATIA case with reference to the provisions of trie Karnataka Rent Control Act and applied the same thereto and thereafter declared what the law should be. Though this Court did not specifically refer to the decision in Padmanabha Rao case it is needless to say that the same stood overruled because the law declared by this Court was contrary to what was stated in Padmanabha Rao case. Therefore the argument also is not sound and needs to be rejected.”
(emphasis supplied) RUDRAMURTHY’s case thus related to a case where the same provision was held to be valid in a subsequent decision. In the case before us, as already noticed, the position is otherwise.
26. We are therefore of the view that in spite of the enunciation of law in ACC, Entry 25 has not stood revived or restored into the Sixth Schedule of the Act. Therefore the Authorities under the Act cannot levy tax under the Act in regard to transfer of property in goods involved in processing photo negatives and supplying of photo prints and photographs, as if Entry 25 has stood restored in the Sixth Schedule to the Act.
27. In view of the foregoing, we allow these petitions with the following directions:
(i) The Circular No. 17/2002-2003 dated 27.09.2002 issued by the Commissioner of Commercial Taxes, Karnataka is quashed;
(ii) It is declared that the decision in KESHORAM SURINDRANATH PHOTOMAG (P) LTD., v. ASSISTANT COMMISSIONER OF COMMERCIAL TAXES (LR), CITY DIVISION, BANGALORE rendered on 6.9.1999 (121 (2001)STC 175) affirmed by the Supreme Court in SLAP (Civil) No. 6136-6163/2000 and connected cases decided on 20.04.2000, holding that Entry 25 in Sixth Schedule of the Act, is unconstitutional, for want of Legislative competence, continues to be binding on the Respondents.
(iii) As a consequence, it is declared that the Authorities under the Act cannot proceed on the basis that Entry 25 is restored to Sixth Schedule of the Act by virtue of the decision of the Supreme Court in ACC reported . Nor can they proceed with or decide any proceeding on the basis that Entry 25 in Sixth Schedule is restored to the Act.
(iv) All proceedings initiated or orders passed in the cases of petitioners, by the Authorities under the Act on the basis of Commissioner’s Circular No. 17/2002-2003 dated 27.9.2002 are quashed.
(v) Parties to bear their respective cost.