The Supreme Court of India, in a significant ruling on the taxation of works contracts, has held that ink and processing materials (chemicals) used in the printing of lottery tickets are subject to trade tax, as their use constitutes a “transfer of property in goods” under Section 3F of the Uttar Pradesh Trade Tax Act, 1948. A bench comprising Justice J.B. Pardiwala and Justice K.V. Viswanathan dismissed the appeals filed by M/s. Aristo Printers Pvt. Ltd., upholding the judgment of the Allahabad High Court and confirming the levy of tax by the assessing authority.
The central legal issue before the court was whether the value of ink and chemicals, which are consumed in the process of printing, can be taxed on the grounds that property in these goods is transferred to the customer during the execution of a works contract. The Court concluded that the taxable event occurs at the precise moment the materials are incorporated into the work, regardless of their subsequent form or consumption.
Background of the Case
The appellant, M/s. Aristo Printers Pvt. Ltd., is engaged in the business of printing lottery tickets on paper supplied by its clients. The ink and necessary chemicals for the printing process were procured by the appellant.
The Trade Tax Officer, Ghaziabad, levied trade tax for the assessment years 1996-97 and 1997-98 on the value of the ink, processing material, and packing material used by the appellant, treating the printing job as a works contract under Section 3F of the Act, 1948.
On appeal, the Deputy Commissioner (Appeals), Trade Tax, Ghaziabad, deleted the tax on the ink and processing materials, accepting the appellant’s argument that these items were consumed and their property was not transferred to the principal. The order stated, “These material are film, chemical print etc and these are used for preparing plate for screen printing and after the use, either it becomes a waste or its nature gets changed, but it is not transferred to principal.”
The Revenue appealed this decision to the Trade Tax Tribunal, Ghaziabad, which dismissed the appeal, affirming the deletion of the tax on ink and chemicals. However, the High Court of Judicature at Allahabad, upon revision by the Revenue, set aside the orders of the Tribunal and the Appellate Authority. The High Court reasoned that “both ink and chemical (processing material) are passed on to the customers” and could not be considered consumables. It was this High Court judgment that the appellant challenged before the Supreme Court.
Arguments of the Parties
The appellant’s counsel argued that the High Court had erred fundamentally, submitting that lottery tickets are “actionable claims” and not “goods,” thereby invalidating the entire basis of the tax. The primary contention was that the ink and chemicals were consumables entirely used up during the printing process, and thus, the property in them was never transferred to the customer.
Conversely, counsel for the Respondent, the Commissioner of Trade Tax, argued that the High Court’s order was correct. It was submitted that the ink and chemicals were indeed transferred to the customer in the execution of the printing work and were therefore liable to tax under Section 3F(1)(b) of the Act, 1948.
Supreme Court’s Analysis and Decision
The Supreme Court, in a detailed analysis penned by Justice J.B. Pardiwala, first addressed and dismissed the appellant’s argument regarding lottery tickets being “actionable claims.” The Court clarified that the tax under Section 3F(1)(b) is not levied on the final product (the lottery ticket) but on the “goods which are involved in the execution of the works contract.”
The judgment laid down three conditions that must be fulfilled to sustain a levy of tax under the said section:
- There must be a works contract.
- Goods should have been involved in the execution of the works contract.
- The property in those goods must be transferred to a third party, either as goods or in some other form.
The Court noted that the first two conditions were undisputed. The pivotal point of disagreement was the third condition: whether a transfer of property occurred.
The bench observed that the analysis in such cases must be anchored to a singular question: has a transfer of property in goods involved in the execution of the works contract occurred? The Court held that an emphasis on “consumption” was misplaced. It reasoned that the taxable event is the “deemed sale,” which occurs when the goods are incorporated into the works. The judgment states, “In Gannon Dunkerley-II (supra), this Court clarified that the transfer of property in such goods takes place when the goods are incorporated in the works.”
The Court explained that the word “incorporated” should not be interpreted narrowly to mean only the transfer of a tangible good. Instead, it must be understood contextually based on the specific nature of the works contract.
Applying this principle to the present case, the Court concluded that a transfer of property did occur. The judgment reasoned:
“The works contract in this instance is for the printing of lottery tickets, and ‘the works’ refers to the final, tangible printed ticket. The taxable event, or the ‘deemed sale’, occurs at the precise moment the ink is applied to the paper. This act constitutes ‘incorporation in the works’, as the ink and the chemicals (with which the ink is mixed) are involved in the execution of the work contract and become a part of the lottery ticket. In this process, there is a tangible transfer of the diluted ink, a composite good comprising both the ink and the processing chemicals.”
The Court found that since it is impossible to transfer the ink without also transferring the chemicals it is diluted with, the property in both had been transferred.
Conclusion
Concluding that all three conditions required to sustain a tax levy under Section 3F(1)(b) were fulfilled, the Supreme Court dismissed the appeals. The judgment affirmed that the appellant is liable to pay tax on the value of the ink and processing material used in the printing of lottery tickets, thereby settling the legal position on the taxability of such materials in works contracts.
