Ink, Chemical & Other Processing Materials Used In Printing Lottery Tickets Are Liable To Levy Of Tax: Supreme Court
The Supreme Court affirmed that the transfer of ink and chemicals in their chemically altered form constitutes a valid transfer of property.
Supreme Court, Lottery Tickets
The Supreme Court held that the ink, chemical, and other processing materials used in the printing of lottery tickets are liable to the levy of tax under Section 3F(1)(b) of the Uttar Pradesh Trade Tax Act, 1948.
The Court held thus in Civil Appeals filed against the Judgment of the Allahabad High Court by which the Revisions preferred by the Revenue were allowed and the Order of the Trade Tax Tribunal, Ghaziabad was set aside.
The two-Judge Bench comprising Justice J.B. Pardiwala and Justice K.V. Viswanathan observed, “… there is a transfer of property in the ink and chemicals used in the printing of the lottery tickets. 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 Bench affirmed that the transfer of ink and chemicals in their chemically altered form constitutes a valid transfer of property.
Advocate Niraj Kumar appeared on behalf of the Appellant, while AOR Bhakti Vardhan Singh appeared on behalf of the Respondent.
Brief Facts
The Appellant company-assessee namely Aristo Printers Pvt. Ltd. was engaged in the business of printing lottery tickets. It would undertake the work of printing on the paper that was supplied to it by the parties. The ink and processing material, including the necessary chemicals used in the process of printing, were procured by the Appellant itself. The Trade Tax Officer (Assessing Authority) vide orders levied trade tax on the value of ink, processing material and packing material used by the Appellant for executing the printing work on the basis of Section 3F of the Uttar Pradesh Trade Tax Act. The Appellant being aggrieved by such orders, preferred Appeals before the Deputy Commissioner (Appeals)-II, Trade Tax (Appellate Authority). It was argued that the ink, chemicals and other processing materials had not been passed on with the lottery tickets and thus the value of such goods could not have been made liable to tax under Section 3F of the 1948 Act. The Appellate Authority accepted the claim of the Appellant and deleted the tax assessed on the value of ink and other processing materials. However, it upheld the levy of tax on the packing materials.
Resultantly, two sets of Appeals were filed before the Trade Tax Tribunal. One set of Appeals by the Commissioner of Trade Tax against the deletion of tax on the ink and processing material and another set of Appeals by the assessee assailing the levy of tax on the packing material. The Tribunal allowed the Appellant’s Appeals and set aside the levy of tax on the packaging material. It dismissed the Revenue’s Appeals and affirmed the Appellate Authority’s Order. The Revenue challenged this before the High Court, which quashed and set aside the Orders of the Tribunal and Appellate Authority so far as they set aside the tax on the value of ink and processing material, i.e., chemical. It allowed the Revision Applications on the ground that the diluted ink (consisting of the ink and the chemicals) was passed onto the customers and thus the ink and the processing material, i.e., the chemical, could not be considered as consumables. Being aggrieved, the assessee approached the Apex Court.
Court’s Observations
The Supreme Court in view of the above facts, noted, “A summary of the position of law with regard to taxation of goods transferred in execution of works contracts before the enactment of the Forty-sixth Amendment is as follows: (i) works contracts are indivisible, i.e., the revenue could not split a single works contract into two – one pertaining to the provision of goods and another pertaining to the provision of services; (ii) to constitute ‘Sale’ all ingredients as mentioned under the Act, 1930 had to be fulfilled; and (iii) to determine whether a particular contract was a works contract or a contract for sale, the dominant nature of the contract was looked into on a fact specific basis via the terms and conditions of contract and other related aspects.”
Works Contracts
The Court summarised the position of law with regard to taxation of goods transferred under works contracts after the enactment of the Forty-sixth Amendment as under –
a. Vide Article 366(29-A)(b), the States can only tax the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract and not the works contract itself;
b. States cannot exercise the power conferred upon them under Article 366(29-A)(b) dehors the restrictions imposed under Article 286 of the Constitution and the Act, 1956 (specifically Sections 3, 4, 5, 14 and 15 respectively);
c. Indivisible works contracts are now, by virtue of the legal fiction created under Article 366(29-A)(b), divided into two parts, one for the sale of goods and the other for the supply of labour and services;
d. A transfer of property in goods under Article 366(29-A)(b) is deemed to be a sale of the goods. Article 366(29-A)(b) serves to bring transactions where essential ingredients of ‘sale’ defined in the Act, 1930 are absent within the ambit of sale or purchase for the purposes of levy of sales tax. In other words, the transfer of movable property in a works contract is deemed to be a sale even though it may not be considered as ‘sale’ within the meaning of the Act, 1930;
e. The term “works contract” in Article 366(29-A)(b) takes within its fold all genres of works contracts and is not restricted to one particular specie of contract to provide for labour and services alone; and
f. The dominant nature test is no longer applicable and has lost its significance where transactions are of the nature contemplated in Article 366(29-A).
Whether the ink, chemical and other processing materials are liable to the levy of tax under Section 3F(1)(b) of the Act, 1948?
The Court further said, “On a close reading of Section 3F(1)(b) of the Act, 1948, it is amply clear that the tax levied is not on the ‘goods’ produced in pursuance of a works contract, i.e., the lottery tickets in the case at hand. The tax under Section 3F(1)(b) of the Act, 1948, is rather on the ‘goods’ which are involved in the execution of the works contract. Thus, the appellant's contention is misplaced, as it equates lottery tickets with goods involved in the execution of the works contract, which is clearly not the case.”
The Court explained that in order to sustain a levy of tax under Section 3F(1)(b) of the Act, 1948, three conditions must be fulfilled: (i) there must be a works contract; (ii) the goods should have been involved in the execution of the works contract; and (iii) the property in those goods must be transferred to a third party either as goods or in some other form.
“… it is clear that the ink, chemical and other processing material were involved in the printing of the lottery tickets. … The primary subject of disagreement is with regard to the third condition. On one hand, the appellant contends that the ink and chemical are consumed in the process of printing the tickets and thus, there is no transfer of property in those goods. Consequently, no tax under Section 3F(1)(b) of the Act is maintainable. On the other hand, the Revenue contends that the ink and chemicals have been transferred to the third party in execution of the work contract, i.e., printing work”, it also noted.
The Court emphasised that the cardinal principle, which must serve as the guiding light for any Court or Tribunal adjudicating such disputes, is that the analysis must be anchored to a singular question: has transfer of property in goods involved in the execution of the works contract occurred?
“The statutory framework only requires that the goods be “involved in the execution of the works contract”. It does not mandate that the works contract must yield a physical end-product or that the transfer must be tangible. To impose such a limitation would not only lead to a gross misapplication of the law but would also defeat the legislative intent of the Forty-sixth Amendment and the dictum of this Court in various rulings. This Court allowed a broad interpretation of the term ‘works contract’ in order to enable the taxing transfer of property in goods in all genres of works contracts”, it added.
The Court remarked that the chemicals, fireworks, and ethylene oxide are the primary goods facilitating the works under the respective contracts and it is in this context that they may said to be incorporated in the ‘works’ of the respective contracts.
“Consequently, it is undeniable that the property in such goods is being transferred when the respective works contracts are executed. These goods differ from consumables such as water and electricity, which merely aid in executing works contracts and the property in them is not transferred before they are consumed”, it observed.
Moreover, the Court said that determining whether a transfer of property in goods has occurred is more challenging when the good is consumed or the transfer is intangible, as opposed to when it is tangibly present in a final product and thus, the Courts and Tribunals must be extra vigilant when faced with such scenarios and must scrutinize the specific facts and the nature of each works contract with great care to make a correct determination as to whether or not a said item has been incorporated in the ‘works’ of a contract.
Conclusion
The Court further noted, “In the facts of the present case, the levy of sales tax under Section 3F of the Act, 1948, is on the ink and the processing material used by the appellant in printing the lottery tickets. The appellant has, however, not provided an item-wise breakdown of such processing material. The same was also noted by the Assessing Authority in its orders dated 28.10.1999. If the appellant had provided an item-wise breakdown, it would have facilitated in determining whether there was a transfer of property with regard to each such item.”
The Court was of the view that there is a transfer of property in the ink and chemicals used in the printing of the lottery tickets and 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”, it observed.
The Court held that since it is impossible to transfer the ink without also transferring the chemicals it is diluted with, it can be conclusively inferred that the property in both the ink and the chemicals has been transferred.
“Thus, in the facts of the present case, all conditions required to sustain a levy of tax under Section 3F(1)(b) of the Act, 1948, are fulfilled. Consequently, the appellant is liable to pay tax under Section 3F(1)(b) of the Act, 1948 on the ink and processing material”, it concluded.
Accordingly, the Apex Court dismissed the Appeals.
Cause Title- M/s. Aristo Printers Pvt. Ltd. v. Commissioner of Trade Tax, Lucknow, U.P. (Neutral Citation: 2025 INSC 1188)
Appearance:
Appellant: AORs Rohit Singh, Satyajeet Kumar, and Advocate Niraj Kumar.
Respondent: AOR Bhakti Vardhan Singh and Advocate Sandeep Singh Somaria.
