Determination of Value of Taxable service of Photography

PJ/Case Study/2011-12/38

CASE STUDY

Prepared By:
CA Pradeep Jain
Sukhvinder Kaur LLB [FYIC]
And Megha Jain, B. Com

Introduction:-

In the case under study, the issue involved was that whether the cost of goods and material used and consumed while providing Photography service will be included in the value of taxable service. As sales tax and service tax are mutually exclusive to each other, the calculation of service tax on the value of photography service including cost of material used like film, paper etc, will include element of sales tax? Whether the value of hoods and material shown in the bill of service provider if shown separately will be entitled to benefit of exemption under Notification No. 12/2003-St? These are few of the issues involved. While providing Photography service, the goods and material like film, paper etc. are also consumed. Therefore, the aspect of sale as well as service appear to be involved. As sales tax and service tax are mutually exclusive and cannot be imposed simultaneously, it was required to resolve the issue which was done by the Larger Bench of the Tribunal.

M/s Aggarwal Colour Advance Photo System v/s Commissioner of Central Excise, Bhopal
[2011-TIOL-1208-CESTAT-DEL-LB]

Brief Facts:-

- The following issues were referred to the Larger Bench of the Tribunal, since there were conflicting judgments existing:

A. Whether for the purpose of Section 67 of the Finance Act, 1994 the value of service provided in relation to photography would be the "gross amount charged" including the cost of material, goods used/consumed minus the cost of unexposed film?

B. Whether the term 'sale' appearing in exemption Notification No.12/03-S.T., dated 20-6-03, is to be given the same meaning as given by Section 2(h) of the Central Excise Act, 1944, read with Section 65(121) of the Finance Act, 0994 or this term would also include the deemed "sale" as defined by Article 366 (29A)(b) of the Constitution?"

- With regard to the first issue, the view of the Referring Bench was that in case of services in relation to photography, service tax has to be levied on the "gross amount" charged by the service provider for providing such service, which would include value of all materials or goods used/consumed or becoming medium or basis for providing the taxable service being inseparably and integrally connected with such service enabling the same performable or capable of being performed. The only deduction, permissible from the gross amount, will be of the value of unexposed film, if any, sold.

With great respect the judgments of Tribunal in cases of Shilpa Colour Lab [2007-TIOL-340-CEST4T-BANG], Adlab v. CCE [2006-TIOL-415-CESTAT-BANG], Delux Colour Lab & others v. CCE, Jaipur & others [2008-TIOL-1838-CESTAT-DEL] are impediment and appear to be contrary to the law laid down by the Supreme Court in case of CK Jidheesh v. U0I [2005-TIOL-135-SC-ST], which is a direct judgment of the Supreme Court on the issue of valuation of photography service.

- With regard to the second issue, the view of the Referring Bench was that Notification No. 12/03-S.T., dated 20-6-03 fully exempts from service tax, the value of the goods which are sold in course of providing a taxable service. The contention of the appellant in appeal Nos.ST/301, 302 and 303/2006 and of the respondent in appeal No.ST/437/2009 is that the term "sale" in this Notification also includes the "deemed sale" under Article 356(29A) of the Constitution and, therefore, if a service contract is a work contract and hence divisible into service component and goods component for the purpose of charging sales tax on the goods component, no service tax can be charged on the goods component and the same being deemed sale, would be exempt from service tax under this notification. But in a service of photography when there is no sale of goods involved following the ratio laid down in the case of Everest Copiers v. State of Tamil Nadu [(1996) 103 S.T.C. 360 (S.C.)] and service element is dominant, Article 366(29A)(b) of Constitution making a legal fiction by which the scope of the expression "tax on sale or purchase of goods" in entry54 of List-II of the 7th Schedule to the Constitution, has been expanded so as to include certain deemed sales, including the transfer of property in goods involved in execution of work contract does not override provision relating to valuation of photography service under Finance Act, 1994 in view of object of this Act to levy tax on services.

In view of settled legal position on this issue, the contention that the word "sale" in this notification would cover the deemed sale under Article 366(29A) of the Constitution is of no relevance for the reason that Notification does not override statutory provision. The word 'sale' in this notification has to be interpreted on the basis of its definition as given in Section 2(h) of the Central Excise Act, 1944, which by virtue of Section 65(121) of the Finance Act, 1994 is applicable to service tax. When there is no primary intention of parties to sell paper, consumable or chemical in providing photography service there is no room left to plead fiction of Article 366(29A)(b) of the constitution in absence of any such sale of these commodities as goods qua goods. In case of transactions where sale of goods is made in disguise and incidentally while providing service, those transactions call for settling in terms of provisions of sales tax law. But under Finance Act, 1994 providing of service being event of levy, incidence of tax arises on the whole of value of service including materials used in providing such service, the moment event of levy arises.

Assessee’s Contention:-

- Assessee contended that that controversy has already been resolved. There is no further scope for the Larger Bench again to relook into the matter. Apex Court in Civil Appeal No.263/2008 having dismissed the Revenue's appeal, the issue on the valuation of photographic service has services shall not contribute for the purpose of valuation of such services. When the law does not make any provision for any inclusion of value of the goods, various Benches of the Tribunal have rightly excluded the value of goods used in providing photography service to determine assessable value of such service. Taking into consideration the decision of the Tribunal in Surabhi Colour Lab case, the Apex Court having dismissed Revenue's appeal in the past Reference need not be answered in favour of Revenue and the present reference was unwarranted. Such a view is also supported from the judgment of the High Court of Punjab and Haryana in the case reported in 2010 (18) STR 54 (P&H) which has held that the gross amount charged does not necessarily imply value of the chemicals and other consumables used in the course of providing photography services.

- Appellant contended that the Revenue had went in appeal before the Apex Court on the following grounds: -

A. Whether the value of taxable service for the purpose of Service Tax is not the gross amount charged from the customer for service rendered and whether while valuing the photographic services for the purpose of Service Tax the value/cost of goods which are consumed in the process are not liable to be included in the value of photographic services. Another question raised was as to whether the ratio of the decision of the Court in BSNL case [2006 (3) SCC 1], which pertains to issue of levy of sales tax on "SIM Card" etc. would at all be attracted for the purpose of valuation of the photographic services under Finance Act 1994 and whether the decision of Apex Court in Rainbow Colour Lab v. State of M.P. [(2002-TIOL-373-SC-CD] and C. K. Jidheesh v. Union of India [ (2005- TIOL-135-5C-ST)] do not hold the field on the issue of valuation of the taxable service.

B. Section 67 provides that the value of taxable service shall be the gross amount charged by the service provider for such service rendered by him. The Explanation to Section 67 exempts only the cost of unexposed photography film, unrecorded magnetic tape or such other storage device, if any, sold to the client during the course of providing the service. Whereas Apex Court in BSNL case [(2006 -TIOL-15-5C-CT-LB)] considered the meaning of 'goods' after 46th amendment in para 43-52 and in para 53 thereof, the Court approved the test that for being goods it should be capable of being bought and sold. Thus BSNL decision no where overruled the C. K. Jidheesh case [(2005-TIOL-135-SC-ST)] on any material issue relating to service tax.

Tribunal without appreciating the above mentioned fact allowed the claim of the respondent by holding that the decision of C.K. Jidheesh was overruled by the BSNL. The Tribunal further erroneously held that summary dismissal of SLP against decision of Kerala Colour Lab would not tantamount to affirmation of the decision of the High Court. It is submitted that decision of Kerala Colour Lab was considered by Apex Court in C.K. Jidheesh v. Union of India [2005-TIOL-135-SC-57] on merit and after hearing the parties their Lordships were pleased to hold as under:

“9. The provisions of the Finance Act had been challenged by the Kerala Colour Labs association. That challenge had been repelled by the Kerala High Court and an SLP against that judgment has already been dismissed by this Court. We have read the judgment of the Kerala High Court. In our view, the judgment correctly considers all aspects including the aspect of double taxation. We find no infirmity in that judgment. The principles set out therein fully apply herealso.”

Thus the decision of the Tribunal is totally erroneous and liable to be set aside by this Court. Further the Tribunal failed to appreciate that in case of sale of material the dealer is permitted to claim exemption by producing the invoice and other necessary documents. The provisions of Section 65(47), 65(48), 65(72) (zb), 66 read with Section 67 and its explanation it is abundantly clear that the value of taxable service for the purpose of Service Tax is the gross amount charged from the customer for service rendered and the goods which are consumed in the process of rendering service cannot be an item of sale; therefore, the claim of the respondent was devoid of merit and the Tribunal has erroneously relied on the decision of f3SNL which pertains to sales tax and where the issue of definition of goods for the purpose of sales tax was involved.

(D) On further scrutiny it was found that the respondents have grossly undervalued their tax liability by deducting the cost of raw material from the gross amount received from the customer. It is submitted that as per Section 67 of the Act read with Instruction dated 09.07.2001, the value of taxable service shall be the amount charged by the service provider for the service rendered. Accordingly a show cause notice was issued as to why service tax of Rs. 9,74,050/- should not be demanded and penalty u/s 76 & 77 of the Act should not be imposed.

(E) It is submitted that the value/cost of goods which are consumed in the process are liable to be included in the value of photographic services. The decision of this Court in Rainbow Colour Lab and C. K. Jidheesh were also relied by the Adjudicating Authority.

(F) Relying on the decision of this Court in BSNL case [2006-TIOL-15-SC-CT-LB] it was held that the decisions of this Court which were relied by the appellant herein i.e. Rainbow Colour Lab v. State of M.P. [2002-TIOL-373-SC-CT) and C. K. Jidheesh v/s U0I [2005-TIOL-135-SC-ST] were overruled in BSNL case. It is submitted that the Tribunal quoted para 41 to 49 of the decision of BSNL case which clearly show that said decision pertains to issue of levy of sales tax on "SIM Card" etc. which would not be attracted for the purpose of valuation of the photographic services under the Service Tax Act.

(G) In C. K. Jidheesh case this Court rejected the prayer of the petitioners therein regarding bifurcation of the gross receipts of processing of photographs into the portion attributable to goods and that attributable to services. In the said decision this Court held that "Section 65(47) defines photography as including still photography, motion-picture photography, laser photography, aerial photography and fluorescent photography. Section 65(48) defines photography studio or agency as including any professional photographer or a commercial concern engaged in the business of rendering service relating to photography. Section 65(72)(zb) defines taxable service in relation to photography studio or agency as any service provided to a customer, by a photography studio or agency in relation to photography, in any manner. Section 66 is the charging section. Sub-section (5) levies service tax at the rate of five percent of the value of the taxable services referred to in clause (zb) of Section 65(72).

(H) Section 67 provides that the value of taxable service shall be the gross amount charged by the service provider for such service rendered by him. The Explanation to Section 67 exempts only the cost of unexposed photography film, unrecorded magnetic tape or such other storage device, if any, sold to the client during the course of providing the service. Whereas this Court in BSNL case [2006-TIOL-15-SC-CT-LB] considered the meaning of "goods" after 46th amendment in para 43-52 and in para 53 this Court approved the test that for being goods it should be capable of being bought and sold. Thus BSNL decision nowhere overrules the C.K. Jidheesh case [2005-TIOL-135-SC-ST] on any material issue relating to service tax. The Tribunal further erroneously held that summary dismissal of SLP against decision of Kerala Colour Lab would not tantamount to affirmation of the decision of the High Court. It is submitted that decision of Kerala Colour Lab was considered by this Court in C. K. Jidheesh v. Union of India [2005-TIOL-135-SC-ST] on merit in para 9. Further the Tribunal failed to appreciate that in case of sale of material the dealer is permitted to claim exemption by producing the invoice and other necessary documents. From the provisions of Section 65(47), 67(48), 65(72)(zb), 66 read with Section 67 and its explanation, it is abundantly clear that the value of taxable service for the purpose of Service Tax is the gross amount charged from the customer for service rendered and the goods which are consumed in the process of rendering service cannot be an item of sale; therefore the claim of the respondent was devoid of merit.

- Assessee contended that while deciding Surabhi Colour Lab case adjudicated by Revenue before Apex Court, the court has held as under

"In the case of Adlabs vs. CCE, Bangalore, reported in 2006 (2) STR 121 (Tri. Bang.) = (2006-TIOL-415-GESTAT-BANG), it has been observed as follows:

3. On a careful consideration, we notice that the Commissioner was not justified in taking the view in contra to the Board’s letter and the Notification. The appellants have maintained the records of the inputs used in the photography, nowhere it is stated in the Circular and Notification that the inputs used in the photography should be mentioned in the invoices/bills issued to the customers. The reasoning given by the Commissioner is not sustainable. In view of the clarification given in the Boards' letter and the Notification itself the denial of benefit by the lower authorities is not justified and not correct in law. The appellants are eligible for the benefit of deduction in terms of the Boards' circular and the Notification. The order passed by the impugned authorities is not correct in law as the same is contra to the Boards' letter and the Notification. The impugned order is set aside by allowing the appeal.

In terms of the above order, the only limited exercise we want the Tribunal to undertake is to ascertain whether the respondent assessee has maintained the records of the inputs used in the photography and only to that extent the matter stands remitted to the Tribunal.

Civil appeal is disposed of No order as to costs."

- It was submitted that in the case of Technical Colour Lab, when the matter was called by the Revenue, that was also dismissed by Apex Court in 2009 in Civil Appeal No.7060 of 2009 dated 21.07.09, following its decision in Surabhi Colour Lab in Civil Appeal No.263 of 2008.

- Citing the decision of Tribunal in case of Adlabs, assessee submitted that the Tribunal has a consistent view that the Assessees are eligible for benefit of deduction in terms of Board's Notification No. 12/2003-ST, dated 20.06.2003 and Board's Clarification in letter No. 233/2/2003-CS.4, dated 7.4.2004 addressed to Punjab Colour Lab Association.

- Relying on the decision of the High Court of Punjab and Haryana in the case of Vahoo Colour Lab [2010 (18) STR 548 (P&H)], submissions of assessee was that processing of photography is a works contract and it involves elements of both sale and service, therefore, service tax is not leviable on the sale portion.

- Assessee submitted that the decision of the Tribunal and the law laid down by Apex Court are 'Stare decisis' basis following the Apex Court's decision in Shankar Raju v. Union of India [IT 2011 (1) SC 49]. Therefore, Revenue has no case in Reference when it has lost its appeals repeatedly before Apex Court and the grounds raised by Revenue as aforesaid were considered by the Court while dismissing Revenue's appeals.

- Assessee submitted that if the goods are held to be used in providing photography services, these goods never being sold to the service recipient, the value of the goods shall be deducted. Such a view can be taken following the basic law laid down in para 47 and 48 appearing at page 68 and 83 of the Apex Court decision in Imagic Creative Pvt. Ltd. vs. Commissioner of Commercial Tax [2008-1101-04-SC-VAT].

- Accordingly, it was submitted that if the value of the goods used in providing photography services is ascertainable that is not liable to service tax since the Finance Act, 1994 only taxes taxable services provided. The authorities below never ascertained the value of goods if sold but mechanically aggregated the value of goods used in arriving service tax. Entire inputs used in providing taxable service were taxed under the provisions of Finance Act, 1994. Under the Constitutional provisions the article as well as goods used in execution of work contract are subject matter for taxation by the State Governments. Therefore, Finance Act, 1994 cannot make any attempt to tax the goods for there being no provisions in that law. The artificial definition of sales is only applicable to State levy and that is not at all applicable to interpret provisions of Finance Act, 1994 while imposing service tax on photography services.

Revenue’s Contention:-

- Revenue submitted that what was taxed under photography services was the gross value received for taxable services provided and no sale of goods if any made and exhibited by invoice issued towards such sale is taxed under Finance Act, 1994. The Revenue Authorities have only levied tax on the value of service depicted on the invoices issued showing the consideration received by the photography service provider as consideration to serve their customer. Every case needs to be dealt on the facts and circumstances of each such case without a general proposition. However, invoices showing sale separately remain untouched under provisions of Finance Act, 1994.

- According to Revenue, providing of photography service is a pure service contract and there is no contract for sale of goods unless the contract brings to notice of Revenue about distinct sale, the consideration received providing photography service becomes measure of value for taxation. Levy of sales tax or VAT does not provide any assistance when legislature has wide latitude to tax every aspect of a transaction within their legislative competence. Gross amount charged is the value received for taxable services that comprise different elements to make photography services available to the recipient and such elements enter into computation of value of such service. If invoice shows break up of value of goods and service charged separately such charge attributable to the respective field of legislation gets its consideration under that legislation. Revenue does not tax goods sold whenever invoice shows sale of goods specifically that is not brought to purview of Finance Act, 1994. The expression gross amount charged used in the Statute provide the measure of value for imposing tax. Such a measure is basis for levy of service tax. Therefore, burden of proof is always on assessee to show that such measure includes sale of goods and such sale has suffered state levy under respective State Sales Tax Law or VAT Law and not taxable under

- Summary arguments of Revenue are as under: -

(A) The High Court of Kerala in the judgment Kerala Color Lab. V. UOI in paragraph 11 of the judgment has observed that the discussion as to whether or not the photography service is work contract involving sale of goods does not really clinch the issue, as once the taxable event is determined to be rendering of service and not the sale of goods, the question of the activity being a work contract does not in any way change the occurrence of the taxable event.

(B) The entire service of 'photography is an activity where the service element is primary and dominant and this activity also involves the incidental use of paper and chemicals of consumable for printing an image. Most respectfully this contract for rendering the service of photography does not appear to be of the type referred to in Article 366 (29A) (b) of the Constitution.

(C) The question raised by the appellant for divisibility of the service & incidental goods components of the activity is totally unwarranted. Neither on fact nor in law is any contract for sale of goods made between the service provider & the service recipient.

(D) The contract is for rendering of service of photography. No artificial splitting or separation of value of goods not patent from invoices is called for in determining the assessable value under Section 67 of the Finance Act, 1 94.

(E) The questions of law and fact as to whether a particular contract is a work contract, whether divisible, as answered by the Apex Court and various High Courts were in the context of charging sales tax on the goods component involved in the execution of works contract, and most respectfully these questions of law and fact are not material for the purpose of charging Service Tax under Finance Act, 1994 where the dominant service element in the activity is important for the purpose of levy and for determining assessable value of taxable service there under.

(F) The Apex Court in Rainbow Colour Lab. V. State of MP following the ratio of the earlier judgment in Assistant Sales Tax Officer v. B C Kame [1997 (39) STC 237] and applying the dominant intention test, held that a contract for photography is not a work contract referred to in Article 366 (29 A) (b) but it is a service contract referred to in Article 366 (29 A) (b) and the contract cannot be vivisected for charging sales tax on the goods component. The obiter reference in the case of BSNL v. UOI while considering an entirely different question of law & fact (Whether any right to use any goods is involved in telephone connection provided by BSNL to its subscribers could be subject to sales tax) in paragraphs 46, 47, 48, 49 does not in any way affect the ratio decidendi of the Rainbow Color Lab judgment.

(G) In case of services in relation to photography, the service tax has to be levied on the 'gross amount' charged by the service provider which is outcome of including the value of all materials or goods used/consumed or becoming medium or basis for providing the taxable service being inseparably and integrally connected with such service enabling the performance of the service possible. The only deduction, permissible from the gross value will be of the value of the unexposed film, if any, sold.

(H) The authoritative judgment of the Apex Court in C K Jidheesh vs. UOI on the valuation of taxable service for charging service tax under Section 67 of the Finance Act, 1994 cannot be set aside on the basis of obiter comments in the judgment of BSNL v. UOI.

(I) The High Court of Kerala in paragraph 11 of its judgment (Kerala Color Lab. V. UOI) has categorically held that the question of whether photography is a divisible work contract or an indivisible service contract is not relevant for charging Service tax. The obiter references in paragraphs 46, 47, 48, 49 in case of BSNL v. UOI are of no help in deciding on the question of law and fact of determining the assessable value of the photography service.

(J) The questions of valuation of taxable services or vires of Section 67 of the Finance Act, 1994, were not the issues under consideration before the Bench in the case of BSNL. Section 67 of the Finance Act, 1994, providing for the levy of service tax on the gross amount charged by the service provider for the service provided plus/minus the inclusions/exclusions as mentioned in the Explanation.

(K) In several judgments/orders with regard to sales tax it has been held that service tax is chargeable on the gross amount charged. The ratio decidendi of these judgments/orders is squarely applicable to the issue of valuation of the photography service and the appellants have not advanced any cogent reason for taking a different view with respect to the 'photography service'.

(L) In Section 67, the words; " amount charged by the service provider for such service provided by him" are qualified by the adjective "gross", which means without deduction, total, as opposed to the term 'net'. The gross amount charged by the service provider for such services would include besides the value of the service provided labour or skill, the cost of all the input goods and services when service is the dominant object of the contract. If the proposition advanced by the appellant is accepted legislative intent of the use of the term "gross" in Section 67 shall be defeated & will become redundant.

(M) The word 'sale' appearing in the Notification No. 12/2003-ST dated 20/06/2003 has to be interpreted on the basis of its definition as given in Section 2(h) of the Central Excise Act, 1944, which by virtue of Section 65(121) of the Finance Act, 1944 as applicable to service tax. When there is no primary intention of parties to sell paper, consumable or chemical in providing photography service, there is no room left to plead fiction of Article 366 (29A) (b) of the Constitution in absence of any such sale of these commodities as goods qua goods. Under Finance Act, 1944 providing of service being event of levy, incidence of tax arises on the whole of value which is generated by various value additions of service including materials used if any in providing such service, the moment event of levy arises the gross value arrived become measure of tax.

(N) The measure of tax in respect of service tax is "gross value" of taxable service and use of goods while providing such service shall not change the nature and measure of tax. Therefore, observations of the Supreme Court in para 28 of its judgment in the case of Imagic Creative Pvt. Ltd are to be read in the context that case was decided. There being no sale of goods in photography service for the peculiar nature of such activity, the service tax has to be charged on gross value of the service which is the outcome due to value addition by cost of paper, chemical and consumables.

Reasoning of the Larger Bench:-

APEX COURT ON SURABHI CLOUR LAB CASE

The Larger Bench of the Tribunal considered the judgment of Apex Court in the case of Commissioner of Central Excise, Trichur Vs. M/s Surabhi Color Lab relied upon by the Assessee. It was noticed that Apex Court had not dismissed Revenue's appeal in that case but has remanded the matter to ascertain whether the respondent-assessee in that case has maintained the records of the inputs used in the photography. Neither side informed as to whether the matter has been concluded by Tribunal upon remand by Apex Court.

The Larger bench perused judgment given in the case of Commr. of Cus & Cen Excise Meerut-I Vs. M/s Technica Colour Lab relied upon by Assessee to submit that the said appeal of Revenue was dismissed by order dated 21.07.2010 by Apex Court in view of dismissal of Civil Appeal Nos. 257-258 of 2008 and Civil Appeal No. 263 of 2008 preferred by Revenue. But when Civil Appeal No. 263 of 2008 was not dismissed by the Apex Court, the Larger Bench perused the order to find out the actual position by an affidavit from the Appellant which reads as under: -

"4. In view of the fact that the order dated 23.4.2009 quoted above speaks of remittance of the matter whereas the order dated 21.7.2010 refers to its earlier order dated 23.4.2009 which is an order of dismissal and yet the appellants insist that the order dated 23.4.2009 referred to in the order dated 21.7.2010 is the same order quoted herein above, it is necessary for the appellants to file affidavit in that regard. Learned Counsel for the appellants prays for time in that regard to file necessary affidavit. Time granted. Affidavit to be filed within 10 days".

- It was noted that against above direction, one Shri Alok Yadav had filed an affidavit stating that he is appearing on behalf of the Revenue in C. A No. 7061 of 2009 before the Supreme Court. This appeal was filed by the department against CESTAT's final order No.ST/286/08 dated 22.10.2008 in Appeal No. ST/333/07. It was stated therein that at the time of hearing of the department's appeal bearing No.7061 of 2009, order dated 23.4.2009 passed by the Supreme Court in C.A. No. 257-258 of 2008 and order dated 23.4.2009 passed by the Supreme Court in C.A. No. 263/2008 were perused by the Supreme Court. Thereafter, the Supreme Court passed order dated 21.7.2010 and dismissed the department appeal being C.A. No.7061/2009.

AFFIDAVIT NOT IN CONFORMITY WITH MISC. ORDER

- The Larger Bench noted that while there was direction by the Tribunal on 23.11.2010 to the Appellants to explain the position in Civil Appeal No. 7060 of 2009 by an affidavit, Sri Yadav instead of explaining the position in that case, explained the position of C.A. No. 7061 of 2009 in his affidavit. Further, the affidavit did not disclose for whom he appeared before the Apex Court and in what capacity and under whose instruction and behalf he filed affidavit before Tribunal remained undisclosed. It appears that none of the parties before the Apex Court could bring to notice of the Court about remand of the matter in Civil Appeal No.263 of 2008 (disposed on 23.04.2009) while Civil Appeal No.7060 of 2009 was disposed on 21.07.2010.

- It was noted that on the basis of order of remand in Civil Appeal No. 263 of 2008, the Revenue's plea was that when Surabhi Color Lab's case was remanded, the Larger Bench has jurisdiction to decide the Reference in favor of Revenue. But emphasis of assessees was on the exemption Notification No. 12/2003-ST dated 2616/2003 (at page 13 of paper book) granting exemption to the value of goods and materials sold by the service provider to the recipient of service from service tax.

VALUATION OF TAXABLE SERVICE

It was observed that Service tax is levied on the gross value of taxable service. That is measure of levy. Therefore determination thereof is crucial. Power is vested with Central Government to notify in public interest to grant exemptions from service tax in exercise of power conferred u/s 93 of the Finance Act, 1994. Depending on the facts and circumstances of each taxable service provided, certain elements of cost make value of such services and such elements which are integral, relevant, indispensable and inevitable to provide taxable service and bring that service to the stage of performance, contribute to the value of such service. Service tax being destination based consumption tax, till the taxable service reaches its destination, all elements of cost making the service reachable to such destination contribute to the value addition and form part of value thereof. Agreement or understanding of the parties to deal with the consideration for the service rendered and received does not affect incidence of tax. In whatever manner the recipient and provider of taxable service mutually arrange their affairs for their benefit to deal with consideration that is of no significance to law. Service Tax (Determination of Value) Rules 2006 which came into force from 19.4.2006 is a step towards ascertainment of value of taxable service.

It was noted that the nature and character of service tax has been explained by Apex Court in pare 22 of the judgment Association of Leasing & Financial Service Companies vs. Union of India and others [2010-TIOL-87-SC-ST-LB]. It is an economic concept based on the principle of equivalence in a sense that consumption of goods and consumption of service are similar as they both satisfy human needs. Today with the technological advancement there is a very thin line which divides a "sale" from "service". Applying the principle of equivalence, there is no difference between production or manufacture of saleable goods and production of marketable/saleable services in the form of an activity undertaken by the service provider for consideration, which correspondingly stands consumed by the service receiver. Such principle of equivalence is inbuilt into the concept of service tax under the Finance Act, 1994. It is thus a tax on an activity and it is a value added tax, The value additior is on account of the activity which provides value addition.

VALUE OF GOODS SOLD WHILE PROVIDING TAXABLE SERVICE EXEMPT IN TERMS OF NOTIFICATION GRANTING EXEMPTION

It was noted that Notification No. 12/2003-ST dated 26/6/2003 was issued by Central Government in exercise of powers Conferred by section 93 of the Finance Act, 1994 exempting so much of value of all the taxable services as is equal to the value of goods and material sold by the service provider to the recipient of service.

After perusing the Notification No. 12/2003-ST, dated 20.6.2003, the Larger Bench noted that the term “sold” as appearing in the Notification can only be read with reference to definition of 'sale' as appearing in the Central Excise Act, made applicable for the purpose of levy of service tax under the Finance Act, 1994. It therefore follows that the Notification intends to exempt the value of goods and materials sold by the service provider while providing service. To claim a part of the value charged as exempt in team of the Notification, an Assessee has to discharge burden of proof adducing evidence showing value of goods and material actually sold and satisfy the conditions of Notification. The expression 'sold' can not in our considered view include 'deemed sale' of goods and material consumed by the service provider while generating and providing service.

BURDERN OF PROOF ON THE ASSESSEE

The Larger Bench of the Tribunal further noted that the subject of Notification being exemption, conditions prescribed therein need to be fulfilled. Scrutiny of genuineness of claim is mandated. Determination of assessable value of service being crucial as a measure for levy, there should be documentary proof specifically indicating the value of the goods and material in question sold while providing taxable service. The assessee claiming exemption should not have availed credit of duty paid on the goods and material in question under the provisions of Cenvat Credit Rules, 2004 and where such credit has been taken by the service provider on such goods and materials, he should have paid the amount equal to such credit availed before the sale of the goods and materials in question. Burden of proof is on the assessee to show that the value of goods and materials sold forming part of the gross value charged from the service recipient exempt to the extent
supported by evidence and the conditions of notification fulfilled.

It was held that whether any goods and materials are sold while rendering photographic service is subject to test by tax administration for quantification on the basis of evidence. Burden of proof is on the assessee to prove the claim made. There should be no confusion about scheme of "exemption" in fiscal statutes which is subject to quantification by tax administration through examination of evidence adduced and conditions fulfilled. Grant of exemption depends on factual evidence and differs from case to case depending on the facts and circumstances of each case which has to be left to the domain of Tax Administration for adjudging when burden of proof is discharged by the Assessee fulfilling mandate of exemption adducing evidence.

LETTER ISSUED BY AN OFFICER WITHOUT AUTHORITY OF LAW IS INSIGNIFICANT

It was noted that assessee had relied on the letter dated 07/04/2004 issued by an officer posted in the Board to the Punjab Color Lab Association. That letter has described the terms of the Notification No. 12/2003-ST dated 20/6/2003 and it also states that exemption in respect of input material consumed/sold by the service provider while providing taxable service to the service recipient is permissible subject to maintenance of records showing the material consumed/sold while providing taxable service. It may be appreciated that the word consumed" was not used in the Notification and there is no provision in law to recognize such letter that has no legs to stand in the eyes of law. Further we find that the impugned letter has been subsequently with drawn.

- It was held that Service tax law is not the law relating to commodity taxation. The Notification in question issued under that law seeks to achieve that end by exempting value of goods sold while providing taxable service. There is no doubt that papers, consumables and chemicals are used and consumed to bring photographs into existence. It is also quite true that no service recipient goes to a photography service provider to buy paper, chemicals and other photography materials. What the service recipient expects from the photography service provider is the photograph. No consideration is paid separately for photography service and the goods used and consumed in providing such taxable service. Value of photography service includes all elements bringing that to the deliverable stage. Consumables and chemicals used for providing such service disappear when the photograph emerges.

The Larger Bench noted that Supreme Court in C.K. Jidheesh has upheld levy of service tax on gross value in respect of photographic service after noting in paragraph 14 that in case of photographic service, it is a contract of service pure and simple, and not a composite contract of sale of goods and service. It has also endorsed the decision of the Kerala High Court in Kerala Colour Lab. On the other hand, the decision of the Supreme Court in the case of Surabhi Colour Lab has been rendered remanding the matter purely on the basis of an incorrect clarification issued by an officer of the Board, subsequently withdrawn. The decision of the Supreme Court in the case of Technical Colour Lab merely follows that of Surabhi. Under the circumstances, the Larger Bench felt bound to follow the ratio of the Supreme Court's Judgment in the case of C. K. Jidheesh. As pointed out by Revenue, several High Courts have held that there is no sale or deemed sale of goods and materials such as paper, chemicals etc. in Photographic service and hence disapproved levy of sales tax on part of the gross value of photographic service (vide Amer Kumar Birley vs. State of Bihar C.W.J. case No. 3932 of 1992-Patna High Court, Studio Sujata vs. C.S.T.- Orissa High Court, V.V. Jha vs. State of Mehalaya-Gauhati High Court etc.). In Rainbow Colour Lab, the Supreme Court has also taken the same view. As rightly pointed out by the Revenue, the obiter contained in BSNL does not over-rule either C. K. Jidheesh or Rainbow Colour Lab.

- Accordingly, the Larger Bench of the Tribunal answered the two questions referred to as follows: -

(i) For the purpose of Section 67 of the Finance Act, 1994, the value of service in relation to photography would be the gross amount charged including cost of goods and material used and consumed in the course of rendering such service. The cost of unexposed film etc. would stand excluded in terms of Explanation to section 67 if sold to the client.

(ii) The value of other goods and material, it sold separately would be excluded under exemption Notification No. 12/2003 and the term 'sold' appearing thereunder has to be interpreted using the definition of 'sale' in the Central Excise Act, 1944 and not as per the meaning of deemed sale under Article 366 (29A) (b) of the Constitution.

The Larger Bench held that on the aforesaid analysis of the legal position it can be said that determination of value of taxable service of photography depends on the facts and circumstances of each case as the Finance Act, 1994 does not intend taxation of goods and materials sold in the course of providing all the taxable services.

Decision of the Larger Bench:-

Both questions involved in the Reference are answered accordingly.

Conclusion:-

The Larger bench of the Tribunal held that as service was provided and the value of the taxable service will be the gross value including the cost of materials and goods used. On such gross value, the benefit of exemption under Notification No. 12/2003-ST was available to the assessee. It was held that if the cost of material and goods are shown separately in the invoice, then the benefit of exemption Notification No. 12/2003-ST will not be available. It was also made clear that there was no intention to tax sale of goods. It was held that each and every case will have to be examined on the facts and circumstances involved to determine the value of taxable service of photography.

Tax should not be levied on tax as it is not conducive for the assessee and the economy. Therefore, the Larger Bench of the Tribunal rightly held that each case will have to be examined on its own facts and circumstances.

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PJ/CASE STUDY/2011-12/38
28 December 2011

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PJ/CASE STUDY/2011-12/38 28 December 2011

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PJ/CASE STUDY/2011-12/38
28 December 2011