Summary
The Supreme Court held that a printer of lottery tickets on customer-supplied paper is liable to trade tax under Section 3F(1)(b) of the U.P. Trade Tax Act, 1948 on the ink and processing chemicals it uses, because property in the diluted ink passes when it is applied to the paper. The question is whether property in goods was transferred in executing the works contract, not whether the goods were later consumed, and decisions treating consumption as excluding transfer proceeded on a wrong footing.
Issues
- Whether tax under Section 3F of the U.P. Trade Tax Act, 1948 can be levied on the ink and processing material used in printing lottery tickets under a works contract.
- Whether the fact that lottery tickets are actionable claims, excluded from the definition of goods, takes the printing outside Section 3F(1)(b).
- Whether goods consumed in executing a works contract can be the subject of a transfer of property in goods.
Provisions considered
- Section 3F(1)(b), Uttar Pradesh Trade Tax Act, 1948Tax is levied on the transfer of property in goods (as goods or in some other form) involved in executing a works contract; the Court read it as requiring a works contract, goods involved in its execution, and transfer of property in those goods, all of which were satisfied for the ink and chemicals. (¶¶ 20, 34, 38, 69, 73)
- Section 3F(2)(b)(x), Uttar Pradesh Trade Tax Act, 1948Only the cost of consumables in which property is not transferred in executing the works contract is deductible; consumables whose property passes before they are consumed remain taxable. (¶¶ 20, 61)
- Sections 2(d), 2(h) and 2(m), Uttar Pradesh Trade Tax Act, 1948The exclusion of actionable claims from goods was held irrelevant because the tax falls on the goods involved in executing the works contract (ink and chemicals), not on the lottery tickets produced. (¶¶ 17, 18, 19, 36, 37)
- Article 366(29-A)(b) and Article 286, Constitution of IndiaTraced through Builders Association, Gannon Dunkerley-II and Larsen and Toubro: States may tax only the deemed sale of goods involved in a works contract, subject to Article 286 and the Central Sales Tax Act, and the taxable event is the transfer of property when goods are incorporated in the works. (¶¶ 25, 28, 30, 31, 33, 59, 60)
Held
- After the Forty-sixth Amendment, States may tax only the transfer of property in goods involved in a works contract, not the contract itself, subject to Article 286 and Sections 3, 4, 5, 14 and 15 of the Central Sales Tax Act; the term works contract covers all genres of such contracts, and the dominant intention test no longer applies. (¶ 33)
- A levy under Section 3F(1)(b) requires a works contract, goods involved in its execution, and transfer of property in those goods as goods or in some other form; that the end product (lottery tickets) is an actionable claim is irrelevant because the tax is on the goods involved in the execution. (¶¶ 37, 38, 70)
- Whether property has passed is a fact-specific inquiry, but it must start from the taxable event, the deemed sale on incorporation of the goods into the works; incorporation is to be understood in the context of the particular works and is not limited to a tangible presence in a final product. (¶¶ 58, 59, 60, 63)
- Decisions treating goods consumed in executing a works contract as incapable of transfer (Pest Control, M.K. Velu, Dynamic Cleaning, Microtol Sterilization) proceeded on a wrong footing: they overlooked the taxable event and wrongly assumed all consumables are deductible, whereas only consumables in which property does not pass, such as water and electricity, are excluded. Xerox Modicorp and Enviro Chemicals correctly held that later consumption does not negate a transfer that has already occurred. (¶¶ 61, 62, 64)
- Courts and tribunals must be especially careful where goods are consumed or the transfer is intangible, scrutinising the nature of each works contract to decide whether an item was incorporated in the works. (¶ 65)
- As the assessee gave no item-wise breakdown of processing material, the Court treated it as the chemical used to dilute the ink. Property in the diluted ink, a composite of ink and chemicals, passes the moment it is applied to the paper and becomes part of the printed ticket; as the ink cannot be transferred without the chemicals, the assessee is liable to tax on both. (¶¶ 66, 67, 68, 72, 73)
Result
Civil Appeal Nos. 703 and 705 of 2012 dismissed and the High Court's restoration of the levy on ink and processing material upheld; connected Civil Appeal Nos. 9189 and 8313 of 2015 de-tagged and directed to be listed for rehearing in November 2025.