Constitutional Validity of Entry 25 of Schedule VI to Karnataka Sales Tax Act upheld in its third litigating innings : Dominant Intention test held invalid

A three judge bench comprising of the Chief Justice and Justice A.K.Sikri and Arun Mishra have held Entry 25 of Schedule VI to Karnataka Sales Tax Act, 1957 to be constitutionally valid. In an appeal preferred by the state after the High Court struck the said entry for the third time with different reasons every time, the state finally succeeded to protect it even after vehement arguments against it by Senior Advocates Patil and Salman Khurshid.The impugned entry as inserted w.e.f. 01/07/1989 stated -Sl. No.Description of WorksContractPeriodRate of Tax u/s 5-B25Processing andsupplying ofPhotographs,Photo Prints andPhotonegatives1.7.1987 to31.3.1996 1.4.1996 to31.3.1998 from1.4.19986% 8% 10%The effect of the entry is that a large number of businessmen involved in photography material supply will have to bear additional costs as mentioned above.Earlier challenges and brief facts The entry was first challenged in Karnataka High Court which declared it invalid in 2000 reasoning 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 List II of Schedule VII of the Constitution to impose sales tax on such a contract.( M/s Keshoram Surindranath Photo –Bag (P) Ltd. and others v. Asstt. Commissioner of Commercial Taxes (LR), City Division, Bangalore and Others - 121 (2001) STC 175). The SLP preferred by the state against this judgment was dismissed following a two judge bench decision in Rainbow Colour lab’s case (Rainbow Colour Lab and Another v. State of Madhya Pradesh and others, (2000) 2 SCC 385)authored by Justice Hegde with Justice Bharucha. However soon after, in ACC Ltd’s case, the correctness of Rainbow colour lab was questioned by a 3 judge bench.After ACC Ltd. case, 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 was again challenged in Karnataka High Court in M/s Golden Colour Labs’ case which allowed the writ petition in 2003 holding that a provision once declared unconstitutional could not be brought to life by mere administrative instructions. However the Court observed that Entry 25, Schedule VI to the Act, declared ultra vires the Constitution in the 2000 High Court’s judgment, cannot be revived automatically, unless there is re-enactment made by the State Legislature to that effect.This observation by High Court paved way for the enactment of the Karnataka State 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 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 by the current respondents before the Supreme Court. Vide impugned judgment dated 19.08.2005, the High Court again declared the said amendment as unconstitutional without taking into consideration the events that followed after Rainbow Colour Lab's case, namely, over-ruling of the said judgment in ACC Ltd. The reason given by the High Court, this time, is that the ratio laid down in Keshoram's case (2000 High Court’s judgment) continues to be binding on the State of Karnataka.Precedential conflicts and the dominant intention testThe judgment authored by Justice Sikri dealt with legislative competence of the state to insert like entries, permitted sphere of legislative powers under Art 366 (29-A) and challenge to the retrospectivity of the legislation.In Gannon Dunkerley’s case, a constitutional bench dealing with Entry 48 of the List II of Schedule VII in the Government of India Act, 1935 answered that whether there could be levy of sales tax on the sale of goods involved in the execution of Works Contracts in negative holding that in the building contract, there was no sale of goods and it was not within the competence of the Provincial State Legislature to impose tax on the supply of the materials used in such a contract treating it as a sale. This implies 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 pursuant to that agreement, are satisfied.Notably, this judgment laid down the ‘dominant intention test’ to find out whether a particular contract involved transfer of property in goods. The Court held 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, 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,...

Constitutional Validity of Entry 25 of Schedule VI to Karnataka Sales Tax Act upheld in its third litigating innings : Dominant Intention test held invalid

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