Sales Tax Review

February  2008

Roving Eye

1. Recent Sc Judgment in Imagic Creative (P) Ltd. vs. C.C.T. and Ors. (2008) 12 VST 371 (SC)

This judgment dated January 9, 2008, is a recent one in the context of “Works Contract” arising out of the Karnataka Sales Tax Act, 1957 (KST Act). The Supreme Court in this case reversed the Karnataka High Court Judgment reported in 12 VST at Page 366, holding that the services rendered by the said ‘Advertising agency’ were an indivisible activity and liable to sales tax on full invoice value.

2. Briefly stated, in this case the appellant, an ‘Advertising agency’, provided for its clients advertisement services by creating original concept and design advertising material and design brochures, annual reports, etc. The Assessing Authority (AO) for the F.Y. 2003-04 assessed u/s 12 of the KST Act, the taxable turnover of the appellant by deducting from the gross turnover the following items: (i) taxes, (ii) discount and service charges, (iii) design and art work charges in which no transfer of property was involved, (iv) advertisement charges and sales outside the State. Thereafter, it appears that the appellant made an application to the competent authority u/s 60 for advance ruling on the same set of facts which ruled that the entire sale value including the creation of concept, etc., done by the appellant formed part of the value of the sale and tax had to be imposed on the entire sale value. Appeal against the order of the appropriate authority was dismissed by the High Court. In this connection, the Apex Court ruled that since the appellant had already undergone the process of regular assessment before the AO, an application u/s 60 to the competent authority for a ruling was not maintainable. The Court noted that the appellant had filed their returns under the Finance Act, 1994 as well as the KST Act.

3. In the appellants case after passing of the order of assessment, a raid was conducted. A criminal proceeding was also initiated. Hence, in these circumstances, it appears that the appellant filed an application u/s 60 for classification and advance ruling. The competent authority vide order dated 30-9-2005 held as under: -
   
   “The issue is examined in detail and it is seen that in the sale of the advertisement material, the background activity such as conceptualization is no doubt an idea but creation of advertisement is a comprehensive activity leading to creation of goods in question. Even when any other goods are produced there is some idea and thought regarding the shape and size, etc. Therefore, to separate design and concept taking the sale value of merely the advertisement material as brochure, etc., is improper.
   
   It is further seen that in the bills there is separate charge made as content development concept, design, photography scanning and other charges such as system charges including colour sketch pen or computer used design software, etc. Ultimately, the brochures come out. Considering the entire ambit of activity of the dealer it is seen that it is a comprehensive contract or supply of printed material developed by the company. The bills also indicate the entire activity through separated is a comprehensive work. Such creation of activity tantamounts to making indivisible contract in a divisible contract. Therefore, this authority rules that entire sale value including the creation of concept, etc., done by the company forms a part of the value of sale of such brochures and liable to tax at four per cent on the entire proceeds received including those relating to concept charges, system charges, etc. In short, this authority rules that the sale of printed material with a background of providing the concept is an indivisible activity liable to tax at four per cent as a whole.”

4. As stated above, the above order of the competent authority was confirmed by the High Court. In these facts and circumstances of the case, the appellant preferred an appeal before the Apex Court, against the decision of the High Court.

5. The Apex Court in the course of judgment observed that the order of assessment in this case was complete. The State did not prefer any appeal thereagainst. The process of accounting or methodology adopted by the assessee for the purpose of payment of both service tax as also the sales tax attained finality at least for that year. Since the order of the competent authority u/s 60 of the Act would be binding on the Assessing authority, in future also, it requires to be decided on merit. The appellant, in their returns, made three categorical divisions in regard to its tax liabilities (1) the amount of service tax on the specific design and production, (2) the amount of Kerala sales tax (?) (it appears that there is a typographical error in the judgment) on the specified item on the first sale and (3) when certain items are outsourced, the tax payable on resale of the said goods in terms of section 6(4) of the Kerala General Sales Tax Act, 1963 (?). in support of this copies of sale invoices/estimates were also produced before the AO. Earlier, the Tribunal as well as the High Court opined that the contract was an indivisible one. The Supreme Court noted that the effect of such an indivisible contract, vis-à-vis work contract came up for consideration before this court on many a times. What, however, did not fall for consideration in any of the judgments is the concept of works contract involving both service as also supply of goods constituting a sale. Both in Tata Consultancy (2004) 137 STC 620 (SC) as also in Associated Cement Companies (ACC) (2001) 124 STC 59 (SC), what was in issue was the value of the goods and only for the said purpose, this court went by the definition thereof both under the Customs Act as also Sales Tax Act to hold that the same must have the attributes of its utility, capability of being bought and sold and capability of being transmitted, transferred, delivered, stored and possessed. As a software was found to be having the said attributes, they were held to be goods.

6. According to the Court, the present case was a different one. What, however, did not fall for consideration in any of the aforementioned decisions including BSNL, is the concept of works contract involving both service as also supply of goods constituting a sale. The Court further observed in paragraph 33 of the judgment that – “Payments of service tax as also the VAT are mutually exclusive. Therefore, they should be held to be applicable having regard to the respective parameters of service tax and the sales tax as envisaged in a composite contract as contradistinguished from an individual contract. It may consist of different elements providing for attracting different nature of levy. It is, therefore, difficult to hold that in a case of this nature, sales tax would be payable on the value of the entire contract, irrespective of the element of service provided. The approach of the Assessing Authority, to us, thus, appears to be correct.”

7. At the end, the Court also observed that the concept of aspects theory which had found echoes in State of U.P. vs. Union of India (2003) 130 STC 1 (SC) has expressly been overruled in paragraph 78 of the judgment, by a three-judge Bench in Bharat Sanchar Nigam Ltd. (2006) 145 STC 91 (SC).

8. Thus, the ratio of this judgment is, as per the constitutional provision in Article 366 (29-A), a composite contract of service and sale of goods can be bifurcated into two parts; i.e., (i) service and (ii) sale of goods and on which service tax and sales tax liability can be discharged by a dealer.

2. TOP SECRETARIES FLOP IN APPRAISALS: CHIEF SECRETARY

Not one scored over 7 on scale of 1-10

Rating Scale	1-2	2-3	3-4	4-5	5-6	6-7	7
No. of Sr. Bureaucrats	2	14	17	15	6	1	1

As per TOI report dated February 7, 2008, they sit in judgment over thousands of minions and hundreds of issues, but how do the mandarins of Mantralaya fare in their own performance appraisals? As many as 46 of the 56 senior bureaucrats in Mantralaya have scored less than five out of ten for the period from July to December 2007. No bureaucrat scored more than 7/10.

2. Among the 16 who got less than 3 / 10 are Additional Chief Secretary (ACS) Chandra Iyengar, who looks after Public Health, ACS Joyce Sankaran, Higher and Technical Education, Medha Gadgil, dairy development and Animal husbandry, and N. Armugam, Social Justice Department.

3. Chief Secretary Johny Joseph had appraised the senior bureaucrats on the basis of five key parameters – disposal of files, financial and physical achievements of development funds, recruitments, compliance of assurances made before the State Legislature and responses to queries raised by the Public Accounts Committee of the State Legislature and Accountant General’s office.

4. The formula, which aims at ensuring greater accountability to the people and the legislature, could in all probability be the first-of-its-kind in the nation and could set the agenda for administrative reforms in other states.

5. S.K. Goel (cooperatives), V.K. Jairath (Industries), Rahul Asthana (energy), K.P. Bakshi (Food and Civil Supplies), N.B. Patil (Agriculture), A.K. Jain (Water Supply and Sanitation) were those who scored less than four in the rating scale of 1/10.

6. Clearly disappointed, the Chief Secretary has conveyed his displeasure to his administrative team and urged them to pull up their socks before the closure of the financial year.

7. In the appraisal for a period from July to December 2007, only seven department heads – Sunil Soni (Reforms), V.K. Kanade (Expenditure), V.V. Gaikwad (Irrigation), E.B. Patil (Command Area Development Programme), Kshatrapati Shivaji (IT), D.K. Jain (Rural Development Department) and R. Gopal (Appeals) have scored between five to seven.

8. Chief Secretary Johny Joseph’s appraisal report indicates that the performance of three ACS level officials – Chandra Iyengar, Joyce Sankaran, Neela Sathyanarayana (Revenue) – has been dismal, with all three rated in the scale of 1-3. Three other ACS-rank officials – Chitkala Zhutshi (Home), V.K. Agrawal (Planning) and J.P. Dange (Forest) scored up to 4 / 10.

9. Thereafter, a top officer expressed her great anguish and displeasure in a note addressed to CS and the manner in which the report was leaked to the press. Immediately thereafter the CS issued a circular clarifying his stand on appraisals and even stated his own appraisal will be done by the Chief Minister under the same rules which were applied by him to the officers subordinate to him. However, still the heat generated is burning up, and according to CS, some of the secretaries did not bother to open up ‘confidential cover’ in which the appraisal reports were sent to them and asked the Dy. Secretaries to deal with the same. It is no wonder then that the appraisal reports were landed at the doorstep of Press. Now, even common man has joined hands with the aggrieved secretaries and openly asking the CS to clarify his contribution during his tenure as the BMC Commissioner. In so far as a common man is concerned, indeed, the whole scenario is quite disturbing !