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REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 1145 OF 2006

STATE OF KARNATAKA ETC. .....APPELLANT(S)

VERSUS

M/S PRO LAB & ORS. ETC. .....RESPONDENT(S)

J U D G M E N T

A.K. SIKRI, J.

Constitutional  validity  of  Entry  25  of  Schedule  VI  to  the  

Karnataka Sales Tax Act,  1957 (hereinafter  referred to  as the  

'Act') is the subject matter of the present appeal.  It is the third  

endeavour  to  resurrect  this  entry,  when  on  the  first  two  

occasions,  the  steps  taken  by  the  State  were  declared  as  

impermissible.  Even this time, the High Court has dumped the  

amendment as unconstitutional.  However, the reasons advanced  

by  the  High  Court  in  all  three  rounds  are  different.   While  

traversing  through  the  historical  facts  leading  to  the  issue  at  

hand, we shall be referring to the same for clear understanding of  

the controversy involved.   

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2) This entry was inserted in the said Act by an amendment which  

came into effect from 01.07.1989, thereby providing levy of tax  

for processing and supply of photographs, photo prints and photo  

negatives.  The validity of this entry was challenged by means of  

a writ  petition filed in the High Court of  Karnataka.  The High  

Court in that case titled  M/s Keshoram Surindranath Photo –   

Bag  (P)  Ltd.  and  others v.  Asstt.  Commissioner  of   

Commercial  Taxes  (LR),  City  Division,  Bangalore  and   

others1, declared the said Entry to be unconstitutional.  State of  

Karnataka had challenged that judgment by filing special leave  

petition in this Court.  This special leave petition was dismissed  

vide order dated 20.04.2000, following its earlier judgment in the  

case of Rainbow Colour Lab and Another v. State of Madhya  

Pradesh  and  others2.   The  reason  for  holding  Entry  25  as  

unconstitutional  was  that  the  contract  of  processing  and  

supplying of photographs, photo frames and photo negatives was  

predominantly  a  service contract  with  negligible  component  of  

goods/material and, therefore, it was beyond the competence of  

State Legislature given in Entry 25 of List II of Schedule VII of the  

1

121 (2001) STC 175 2 (2000) 2 SCC 385

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Constitution to impose sales tax on such a contract.

3) It so happened that within one year of the judgment in Rainbow  

Colour Lab's case,  three Judges Bench of this Court rendered  

another judgment in the case of ACC Ltd. v.  Commissioner of   

Customs3, wherein it expressed its doubts about the correctness  

of the law laid down in Rainbow.  We may point out at this stage  

itself  that  during the course of  hearing of  the present  appeal,  

there was a hot debate on the question as to whether judgment  

in Rainbow Colour Lab's case was over-ruled in the case of ACC  

Ltd. case or  not.   This  aspect  will  be gone into  by us at  the  

appropriate stage.

4) After the judgment in  ACC Ltd. case, a circular instruction was  

issued  by  the  Commissioner  of  Commercial  Taxes  to  the  

assessing authorities to proceed with the assessments as per  

Entry 25.  This became the subject matter of challenge before the  

High Court of Karnataka in the case of M/s Golden Colour Labs  

and Studio and others v.  The Commissioner of Commercial   

Taxes4.  The High Court allowed the writ petition vide judgment  

dated  30.07.2003  holding  that  a  provision  once  declared  

3 (2001) 4 SCC 593 4 ILR 2003 Kar 4883

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unconstitutional  could  not  be  brought  to  life  by  mere  

administrative instructions.  However, at the same time, the Court  

observed that Entry 25, Schedule VI to the Act,  declared  ultra  

vires  the  Constitution  in  Keshoram's case,  cannot  be  revived  

automatically,  unless there is  re-enactment  made by the State  

Legislature to that effect.

5) The appropriate procedure indicated in the aforesaid judgment  

emboldened the State to come out with the required legislative  

amendment.  This paved way for the enactment of the Karnataka  

State Laws Act,  2004 by the State  Legislature that  came into  

force  with  effect  from  29.01.2004.   Section  2(3)  of  the  said  

amendment  re-introduced  Entry  25  in  identical  terms,  as  it  

appeared  earlier,  and  that  too  with  retrospective  effect  that  is  

w.e.f.  01.07.1989,  when  this  provision  was  inserted  by  the  

amendment made in the year 1989 for the first time.

6) As was expected, this amendment was again challenged before  

the Karnataka High Court by the respondent herein as well as  

many others.   Vide impugned judgment dated 19.08.2005, the  

High  Court  has  again  declared  the  said  amendment  as  

unconstitutional.  It would be pertinent to mention that the High  

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Court has not taken into consideration the events that followed  

after Rainbow Colour Lab's case, namely, over-ruling of the said  

judgment  in  ACC  Ltd.   Since  the  basis  of  Keshoram's  case  

decided in the first calm by the High Court was same as given in  

Rainbow  Colour  Lab,  obviously  Keshoram also  no  longer  

remains a good law.   However,  the reason given by the High  

Court, this time, is that the ratio laid down in  Keshoram's  case  

continues to be binding on the State of Karnataka.  As per the  

High Court, “the re-enactment of the said provision is possible in  

the  event  of  a  subsequent  declaration  made  by  the  Hon'ble  

Supreme Court re-considering or pronouncing a similar question  

in terms of the findings in para 23 of the  Golden Colour Lab's  

case.  This is, thus, the chequered history of the litigation amply  

demonstrating  as  to  how  the  State  of  Karnataka  is  making  

desperate attempts to ensure that provision in the form of Entry  

25 in the said Act survives, empowering the State Government to  

levy sales tax  for processing and supply of photographs, photo  

prints and photo negatives.

7) At  this  stage,  we take note  of  the exact  phraseology used in  

Entry 25 of the Act which reads as under:

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Sl. No. Description  of  Works  Contract

Period Rate of  Tax U/S  5-B

25 Processing and  supplying of  Photographs,  Photo Prints and  Photonegatives

1.7.1987  to  31.3.1996 1.4.1996  to  31.3.1998  from  1.4.1998

6%

8%

10%

8) We may also record at this point itself that legislative competence  

of the State to insert the aforesaid Entry is primarily challenged  

on the ground that the State Government is not empowered to  

levy sales tax on the processing and supplying of photographs  

which is predominantly in the nature of “service” and the element  

of “goods” therein was minimal.  The respondents argue that the  

State  Legislature  does not  have any power  to  impose tax  on  

“services” inasmuch as the sales tax can be levied only on “sale  

of  goods”  as  permitted  under  Article  366  (29-A)  of  the  

Constitution of India.  Challenge is also laid on the retrospective  

effect  given to the said Entry by arguing that  such a move is  

violative of Article 265 of the Constitution of India as subjecting  

the  assessees  to  such  a  tax  from  retrospective  effect  is  

confiscatory in nature and, therefore, unconstitutional.

9) We  have  projected,  in  nutshell,  the  chequered  history  of  the  

litigation by referring to the judgments of this Court pronounced  

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from time to time which have a direct bearing on the outcome of  

this appeal.  Therefore, we are simply required to do a diagnostic  

of the sorts in revisiting these judgments.  As we proceed with  

this exercise to notice and spell out the principle of law laid down  

in  these  judgments,  contextually,  the same would  analogously  

facilitate in concluding the cases with  very little discussion at our  

end.

10) In  order  to  ensure  that  we  avoid  unnecessary  burdening  of  

judgments  with  the earlier  case laws,  it  is  safe  to  charter  the  

journey  by  initiating  discussion  about  the  Constitution  Bench  

judgment in the case of Gannon Dunkerley and Co. and others  

v.  State of Rajasthan and others5.  That case pertained to the  

execution of the Works Contracts.  Question involved was as to  

whether there could be levy of sales tax on the sale of goods  

involved  in  the  execution  of  such  Works  Contracts.   The  

assessee, viz. Gannon Dunkerley, was carrying on business as  

Engineering Contractors and executing the contracts pertaining  

to construction of building projects, dams, roads and structural  

contracts of all  kinds.  In respect of sanitary contracts, 20 per  

cent  was  deducted  for  labour  and  balance  was  taken  as  a  

turnover of the assessee for the purposes of levying sales tax by  5 (1993) 1 SCC 364

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the assessing authority.  Likewise, in respect of other contracts,  

30 per cent was deducted for  labour and on balance amount,  

sales tax was levied treating it as turnover of the assessee under  

the Madras General Sales Tax Act, 1939.  The question which  

arose for consideration was as to whether there was any sale of  

goods.  The Constitution Bench held that building contract was in  

the nature of Works Contract and there was no element of sale of  

goods in such a contract.  In its opinion, in a building contract  

where the agreement between the parties was that the contractor  

should  construct  the  building  according  to  the  specifications  

contained  in  the  agreement  and  in  consideration  received  

payment as provided therein, there was neither a contract to sell  

the materials used in the construction nor the property passed  

therein  as  movables.   It  was  held  that  in  a  building  contract,  

which was one entire and indivisible, there was no sale of goods  

and  it  was  not  within  the  competence  of  the  Provincial  State  

Legislature to impose tax on the supply of the materials used in  

such a contract treating it as a sale.  The Court, thus, proceeded  

on  the  basis  that  a  building  contract  was  indivisible  and  

composite wherein there was no sale of goods and, therefore,  

the State Legislature was not competent to impose sales tax on  

the supply of material  used in such a contract treating it  as a  

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sale.   Since,  Entry  48  of  the  List  II  of  Schedule  VII  in  the  

Government  of  India  Act,  1935  was  under  consideration  that  

empowers  State  Government  to  levy  tax  “sale  of  goods”,  the  

Court held that the expression “sale of goods” in the said Entry is  

to be given the same meaning as given under the Sale of Goods  

Act, 1930.  That would mean that it would be sale of goods only if  

the two essential  ingredients,  namely:  (i)  an agreement to sell  

movables for a price, and (ii) property passing therein persuant to  

that agreement, are satisfied.

11) After the aforesaid Constitution Bench judgment, the Parliament  

amended  the  Constitution  of  India  by  the  Constitution  (46 th  

Amendment)  Act,  1982  which  received  the  assent  of  the  

President of India on 02.02.1983.  By this amendment, clause  

(29-A) was inserted in Article 366 of the Constitution, which reads  

as under:

“[(29A) “tax on the sale or purchase of goods”  includes -  

(a)   a  tax  on  the  transfer,  otherwise  than  in  pursuance  of  a  contract,  of  property  in  any  goods  for  cash,  deferred  payment  or  other  valuable consideration;

(b)  a tax on the transfer of property in goods  (whether  as  goods  or  in  some  other  form)  involved in the execution of a works contract;

(c)   a  tax  on  the  delivery  of  goods  on  hire-

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purchase  or  any  system  of  payment  by  instalments;

(d)  a tax on the transfer of the right to use any  goods  for  any  purpose  (whether  or  not  for  a  specified period) for cash, deferred payment or  other valuable consideration;

(e)   a  tax  on  the  supply  of  goods  by  any  unincorporated association or body of persons  to a member thereof for cash, deferred payment  or other valuable consideration;

(f)  a tax on the supply, by way of or as part of  any service or in any other manner whatsoever,  of  goods,  being  food  or  any  other  article  for  human  consumption  or  any  drink  (whether  or  not intoxicating), where such supply or service,  is for cash, deferred payment or other valuable  consideration;

and  such  transfer,  delivery  or  supply  of  any  goods shall  be deemed to be a sale of  those  goods  by  the  person  making  the  transfer,  delivery  or  supply  and  a  purchase  of  those  goods  by  the  person  to  whom  such  transfer,  delivery or supply is made;]”

12) The challenge laid to the aforesaid amendment was repelled by  

this  Court  in  the case of  Builders Association of  India  and   

others v.  Union of  India  and others6.   In  this  judgment,  the  

Constitution Bench specifically noted that the purport and object  

of  the  aforesaid  amendment  was to  enlarge the  scope of  the  

expression “tax of sale for purchase of goods” wherever it occurs  

in  the Constitution so that  it  may include within  its  ambit  any  

transfer, delivery or supply of goods that may take place under  

6 (1989) 2 SCC 645

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any of the transactions referred to in sub-clauses (a) to (f).  To  

put  it  tersely,  with  the  aforesaid  amendment,  the  States  are  

empowered to make the Works Contract divisible and tax “sale of  

goods” component.  It clearly follows therefrom that the restricted  

meaning which was assigned to the expression “sale of goods” in  

Gannon  Dunkerley's  case  is  undone  by  the  aforesaid  

amendment.  The interpretation which is to be assigned to clause  

29-A of  Article  366  is  stated  with  remarkable  clarity  in  M/s  

Larsen  Toubro  and  another v.  State  of  Karnataka  and  

another7, by a three Judge Bench in the following words:

“60.  It is important to ascertain The meaning of  Sub-clause (b) of Clause 29A of Article 366 of  the Constitution. As the very title of Article 366  shows,  it  is  the  definition  clause.  It  starts  by  saying  that  in  the  Constitution  unless  the  context  otherwise  requires  the  expressions  defined in that article shall have the meanings  respectively assigned to them in the article. The  definition of expression "tax on sale or purchase  of the goods" is contained in Clause (29A). If the  first part of Clause 29A is read with Sub-clause  (b) along with latter part of this clause, it reads  like  this:  tax  on  the  sale  or  purchaser  of  the  goods" includes a tax on the transfer of property  in  goods (whether as goods or  in some other  form)  involved  in  the  execution  of  a  works  contract and such transfer, delivery or supply of  any  goods  shall  be  deemed  to  be  a  sale  of  those goods by the person making the transfer,  delivery  or  supply  and  a  purchase  of  those  goods  by  the  person  to  whom  such  transfer,  delivery  or  supply  is  made.  The  definition  of  "goods" in Clause 12 is inclusive. It includes all  materials,  commodities  and  articles.  The  

7 (2014) 1 SCC 708

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expression, 'goods' has a broader meaning than  merchandise.  Chattels  or  movables are goods  within the meaning of Clause 12. Sub-clause (b)  refers to transfer of property in goods (whether  as goods or in some other form) involved in the  execution of a works contract.  The expression  "in some other form" in the bracket is of utmost  significance as by this expression the ordinary  understanding  of  the  term  'goods'  has  been  enlarged by bringing within its fold goods in a  form other  than  goods.  Goods  in  some other  form  would  thus  mean  goods  which  have  ceased  to  be  chattels  or  movables  or  merchandise  and  become  attached  or  embedded to earth. In other words, goods which  have  by  incorporation  become  part  of  immovable property are deemed as goods. The  definition  of  'tax  on  the  sale  or  purchase  of  goods' includes a tax on the transfer or property  in  the  goods  as  goods  or  which  have lost  its  form as goods and have acquired some other  form  involved  in  the  execution  of  a  works  contract.

61. Viewed thus, a transfer of property in goods  under Clause 29A(b) of Article 366 is deemed to  be a sale of the goods involved in the execution  of a works contract  by the person making the  transfer and the purchase of those goods by the  person to whom such transfer is made.

62. The States have now been conferred with  the power to tax indivisible contracts of works.  This has been done by enlarging the scope of  "tax on sale or purchase of goods" wherever it  occurs  in  the  Constitution.  Accordingly,  the  expression  "tax  on  the  sale  or  purchase  of  goods"  in  Entry  54  of  List  II  of  Seventh  Schedule when read with the definition Clause  29A, includes a tax on the transfer of property  in goods whether as goods or in the form other  than goods involved in the execution of works  contract. The taxable event is deemed sale.

63.  Gannon Dunkerley-I (supra)  and few other  decisions following Gannon Dunkerley-I (supra)   wherein  the  expression  "sale"  was  given  

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restricted meaning by adopting the definition of  the word "sale" contained in the Sale of Goods  Act  has  been  undone  by  the  Forty-sixth  Constitutional  Amendment  so  as  to  include  works contract. The meaning of Sub-clause (b)  of Clause 29A of Article 366 of the Constitution  also stands settled by the Constitution Bench of  this Court in Builders' Association (supra). As a  result of Clause 29A of Article 366, tax on the  sale or purchase of goods may include a tax on  the  transfer  in  goods  as  goods  or  in  a  form  other than goods involved in the execution of  the works contract.  It  is open to the States to  divide  the  works  contract  into  two  separate  contracts by legal fiction: (i) contract for sale of  goods involved in the works contract and (ii) for  supply of labour and service. By the Forty-sixth  Amendment,  States have been empowered to  bifurcate the contract and to levy sales tax on  the value of the material in the execution of the  works contract.”

13) Notwithstanding some clear and pertinent observations made in  

by the Constitution Bench in  Builders Association's case, while  

upholding  the  Constitutional  validity  of  46th Amendment,  there  

was  some  ambiguity  in  the  judicial  thought  on  one  particular  

aspect which was also one of the basis of judgment in  Gannon  

Dunkerley's case.  In Gannon Dunkerley's case, the Constitution  

Bench had laid down “dominant intention test” to find out as to  

whether  a  particular  contract  involved  transfer  of  property  in  

goods.   The  Court  was  of  the  opinion  that  if  the  dominant  

intention of a contract was not to transfer the property in goods,  

but it was Works Contract, or for that matter, a contract in the  

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nature of rendering of services, even if a part of it related to the  

transfer of goods, that would be immaterial and no sales tax on  

the said part could be levied, going by the principle of dominant  

intention  behind  such  a  contract,  which  was  in  the  nature  of  

Works  Contract  in  the  contract  relating  to  construction  of  

buildings.

14) As pointed out above, in  Gannon Drunkerley's case,  the Court  

also held that such a contract was indivisible.  No doubt, insofar  

as indivisibility facet of the contract is concerned, the same was  

done  away  by  46th Constitutional  Amendment.   However,  in  

subsequent  cases,  the  Court  grappled  with  the  issue  as  to  

whether the principle of dominant intention still prevailed.  This  

very aspect came up for discussion before two Judge Bench of  

this Court in  Rainbow Colour Lab's case.   The Court held the  

view that the division of contract after 46th Amendment can be  

made only if the Works Contract involved a dominant intention to  

transfer  the property  in  goods and not  in  contracts where the  

transfer  in  property  takes  place  as  an  incident  of  contract  of  

service.   This  aspect  is  highlighted  by  the  said  Bench  in  the  

following manner:

“10.  Since this was a judgment rendered prior  to  the  coming  into  force  of  the  46th  

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Constitutional  Amendment,  we  will  have  to  consider  whether  the  said  Amendment  has  brought  about  any change so as to  doubt  the  legal position enunciated in the above case. It is  true that by the 46th Constitutional Amendment  by  incorporating  Clause  29A(b)  in  Article  366,  the  definition  of  the  words  "sale"  and  "works  contract"  have  been  enlarged.  The  State  of  Madhya  Pradesh  has  also  brought  about  a  consequent change in the definition of the word  'sale' in Section of its Sales Tax Act but it is to be  noticed that in the said State Act the expression  'works  contract'  has  not  been  specifically  defined.

11.  Prior to the Amendment  of  Article 366,  in  view of the judgment  of  this  Court  In State of  Madras v Gannon Dunkerley and Co., the State  could  not  levy  sales-tax  on  sale  of  goods  involved  in  a  work's  contract  because  the  contract was indivisible. All that has happened In  law after the 46th Amendment and the judgment  of this Court in Builders case (supra) is that it is  now  open  to  the  States  to  divide  the  works  contract into two separate contracts by a legal  fiction (i) contract for sale of goods involved in  the  said  works  contract  and  (it)  for  supply  of  labour  and  service.  This  division  of  contract  under the amended law can be made only if the  works contract involved a dominant intention to  transfer  the  property  in  goods  and  not  in  contracts  where  the  transfer  in  property  takes  place as an incident of contract of service. The  Amendment,  referred  to  above,  has  not  empowered the State to indulge in microscopic  division  of  contracts  involving  the  value  of  materials  used  incidentally  in  such  contracts.  What is pertinent to ascertain in this connection  is  what  was  the  dominant  intention  of  the  contract. Every contract, be it a service contract  or  otherwise,  may  involve  the  use  of  some  material  or  the  other  in  execution  of  the  said  contract.  State  is  not  empowered  by  the  amended  law  to  impose  sales-tax  on  such  incidental materials used in such contracts. This  is  clear  from  the  judgment  of  this  Court  in  Hindustan Aeronautics Ltd. v. State of Karnataka  

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judgment:

“30.  In  words  and  phrases  the  word  "photography" is defined as under :

"Photography" is the science which relates to  action of light on sensitive bodies in production  of pictures, fixation of images and the like.

31.  Photography  is  a  process  of  an  art  of  producing visible images on sensitive bodies by  action of light or other form of radiant energy.  Duration of action of light and also use of the  chemical  is  highly  a  technical  expertise  therefore taking into consideration the various  decisions  referred  to  above  it  could  be  considered  that  it  is  a  works  contract  where  property  which is  transferred in paper is  only  incidental to such contract. In strict sense, it is  a service where the main object is not transfer  of property in goods. The good photograph as  observed by the apex Court is a thing of beauty  and revives nostalgic memories. It is a work of  art. In B.C. Kame's case [1977] 2 SCR 435 it  has  already  been  held  that  there  is  no  sale  involved  and  in  spite  of  the  fact  that  it  is  a  works contract it could not be subjected to tax  because the intention of  the parties is  not  to  transfer  the  goods  in  the  execution  of  said  works contract. It is only ancillary and incidental  to  service  contract.  The photographs  are  not  marketable or saleable commodity and as such  no  tax  can  be  levied.  Entry  25  of  the  Sixth  Schedule to the Karnataka Sales Tax Act, 1957,  therefore is beyond the scope of Article 466 of  the Constitution of India.

Writ appeals are accordingly allowed.”

16) It  is  manifest  from  the  above  that  the  rationale  behind  the  

judgment was to look into the main object of the work undertaken  

by the assessee and concluding that since it was essentially a  

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Works  Contract  and  transfer  of  photopaper  upon  which  the  

positive prints were taken were simply incidental and ancilliary to  

the main transactions, that was in the nature of service contract,  

and, therefore, Entry 25 was beyond the scope of Article 366 of  

the  Constitution  of  India.   Apparently,  the  High  Court  applied  

dominant intention test while holding Entry 25 as unconstitutional.  

By the time, Special Leave Petition against this judgment came  

up  for  consideration  before  this  Court  on  20.04.2000,  the  

judgment  in  the  case  of  Rainbow Colour  Lab's  case had just  

been rendered observing that  dominant  intention test  was still  

valid notwithstanding insertion of clause 29-A in Article 366 of the  

Constitution by 46th Amendment.  Following this judgment, SLP  

was dismissed.

17) Within  one  year  of  the  said  judgment,  this  very  issue  again  

cropped up  for  discussion  and  decision  before  a  three  Judge  

Bench in  ACC Ltd.  case.  The issue arose under the  Customs  

Act,  1962  viz.  whether  the  drawings,  designs  etc.  relating  to  

machinery  or  industrial  technology  were  goods  which  were  

leviable to duty of customs on their transaction value at the time  

of their report.  However, since the issue related to meaning that  

has to be given to the expression “goods”, the case law on this  

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aspect  including  Gannon  Dunkerley  &  Kame's  case were  

specifically taken note of and discussed.  The Court also noticed  

the  effect  of  46th Amendment  and  in  the  process  commented  

upon the judgment in the Rainbow Colour Lab's case.  The Court  

specifically  remarked  that  Gannon  Dunkerley  &  Kame's   

judgments  were  of  pre  46th Amendment  era  which  had  no  

relevance after  the said  Constitutional  amendment.   It  can be  

discerned from the following discussion contained therein:  

“21. All  the  aforesaid  decisions  related  to  the  period prior to the Forty-sixth Amendment of the  Constitution when Article 366(29A) was inserted.  At that time in the case of  a works contract  it  was held that the same could not be split and  State Legislature had no legislative right to seek  to levy sales tax on a transaction which was not  a sale simpliciter of goods. Rainbow Colour Lab  & Anr.  Vs. State of  M.P. and Others,  (2000) 2  SCC 385 was, however, a case relating to the  definition of the word "sale" in the M.P. General  Sales  Tax  Act,  1958  after  its  amendment  consequent to the insertion of Article 366(29A).  The  question  there  was  whether  the  job  rendered  by  a  photographer  in  taking  photographs,  developing  and  printing  films  would amount to works contract for the purpose  of levy of sales tax. This Court held that the work  done by  the  photographer  was  only  a  service  contract  and  there  was  no  element  of  sale  involved.  After  referring  to  earlier  decisions  of  this  Court,  it  was  observed  at  page  391  as  follows:

"15. Thus, it is clear that unless there is  sale and purchase of goods, either in fact  or  deemed,  and  which  sale  is  primarily  intended  and  not  incidental  to  the  contract,  the State cannot  impose sales  tax on a works contract simpliciter in the  

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guise of the expanded definition found in  Article 366(29A)(b) read with Section 2(n)  of  the  State  Act.  On  facts  as  we  have  noticed  that  the  work  done  by  the  photographer which as held by this Court  in Kame case is only in the nature of a  service contract not involving any sale of  goods,  we  are  of  the  opinion  that  the  stand  taken  by  the  respondent  State  cannot be sustained."

22.  Even  though  in  our  opinion  the  decisions  relating  to  levy  of  sales  tax  would  have,  for  reasons to which we shall presently mention, no  application to the case of levy of customs duty,  the  decision  in  Rainbow  Colour  Lab  case  (supra) requires consideration. As a result of the  Forty-sixth Amendment, sub-article 29A of Article  366 was inserted as a result whereof tax on the  sale or purchase of goods was to include a tax  on the transfer of property in goods (whether as  goods  or  in  some other  form)  involved  in  the  execution of a works contract. Taking note of this  amendment this Court in Rainbow Colour Lab at  page 388-389 observed as follows:

"11.  Prior  to  the  amendment  of  Article  366, in view of the judgment of this Court  in State of Madras v. Gannon Dunkerley  & Co. (Madras) Ltd. the States could not  levy sales tax on sale of goods involved  in a works contract because the contract  was indivisible. All that has happened in  law after  the  46th  Amendment  and  the  judgment of this Court in 'Builders' case  is  that  it  is  now open  to  the  States  to  divide  the  works  contract  into  two  separate contracts by a legal  fiction:  (i)  contract for sale of goods involved in the  said works contract, and (ii) for supply of  labour  and  service.  This  division  of  contract under the amended law can be  made only if the works contract involved  a  dominant  intention  to  transfer  the  property  in  goods  and  not  in  contracts  where  the  transfer  in  property  takes  place  as  an  incident  of  contract  of  

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service.  The  amendment,  referred  to  above, has not empowered the State to  indulge  in  a  microscopic  division  of  contracts involving the value of materials  used incidentally in such contracts. What  is pertinent to ascertain in this connection  is what was the dominant intention of the  contract.  Every contract,  be it  a service  contract  or  otherwise,  may  involve  the  use  of  some  material  or  the  other  in  execution of the said contract. The State  is not empowered by the amended law to  impose  sales  tax  on  such  incidental  materials used in such contracts.."

23.  In arriving at  the aforesaid conclusion the  Court  referred to the decision of  this  Court  in  Hindustan  Aeronautics  Ltd.  vs.  State  of  Karnataka  (1984)  a  SCC  706 and  Everest  Copier (supra). But both these cases related to  pre-Forty-sixth  Amendment  era  where  in  a  works contract the State had no jurisdiction to  bifurcate the contract and impose sales tax on  the transfer of property in goods involved in the  execution of  a works contract.  The Forty-sixth  Amendment was made precisely with a view to  empower the State to bifurcate the contract and  to  levy sales  tax on the value of  the material  involved in the execution of the works contract,  notwithstanding that the value may represent a  small  percentage  of  the  amount  paid  for  the  execution  of  the  works  contract.  Even  if  the  dominant  intention  of  the  contract  is  the  rendering of a service, which will  amount to a  works contract, after the Forty-sixth Amendment  the  State  would  now  be  empowered  to  levy  sales tax on the material used in such contract.  The  conclusion  arrived  at  in  Rainbow  Colour  Lab case,  in  our  opinion,  runs  counter  to  the  express provision contained in Article 366 (29A)  as  also  of  the  Constitution  Bench decision  of  this Court in Builders' Association of India and  Others vs. Union of India and Others (1989) 2  SCC 645.” [emphasis supplied]

18) It  is amply clear from the above and hardly needs clarification  

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that  the  Court  was  of  the  firm  view  that  two  Judges  Bench  

judgment  in  Rainbow Colour  Lab's  case did  not  lay down the  

correct law as it  referred to pre 46th Amendment judgments in  

arriving at its conclusions which had lost their validity.  The Court  

also specifically commented that after 46th Amendment, State is  

empowered to levy sales tax on the material used even in those  

contracts  where  “the  dominant  intention  of  the  contract  is  the  

rendering of a service, which will amount to a Works Contract”.

19) In view of the above, the argument of the respondent assessees  

that ACC Ltd. case did not over-rule Rainbow Colour Lab's case  

is, therefore, clearly misconceived.  In fact, we are not saying so  

for the first time as a three member Bench of this Court in  M/s  

Larsen  and  Toubro has  already  stated  that  ACC  Ltd. had  

expressly  over-ruled  Rainbow  Colour  Lab while  holding  that  

dominant  intention  test  was  no  longer  good  test  after  46 th  

Constitutional  Amendment.   We  may  point  out  that  learned  

counsel for the respondent assessees took courage to advance  

such an argument emboldened by certain observations made by  

two member Bench in the case of  C.K. Jidheesh v.  Union of  

India8,  wherein the Court has remarked that the observations in  

ACC Ltd. were merely  obiter.  In  Jidheesh,  however, the Court  8 (2005) 13 SCC 37

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did not notice that this very argument had been rejected earlier in  

Bharat  Sanchar  Nigam  Ltd. v.  Union  of  India9.   Following  

discussion  in  Bharat  Sanchar is  amply  demonstrative  of  the  

same:  

“46.  This conclusion was doubted in Associated  Cement  Companies  Ltd.  v.  Commissioner  of   Customs, (2001) 4 SCC 593 saying:

“The  conclusion  arrived  at  in  Rainbow  Colour Lab case (2000) 2 SCC 385, in  our opinion, runs counter to the express  provision  contained  in  Article  366(29A)  as  also  of  the  Constitution  Bench  decision of this Court in Builders Assn. of   India  v.  Union of  India – (1989) 2 SCC  645.

47.  We agree.  After the 46th Amendment, the  sale  element  of  those  contracts  which  are  covered by the six sub-clauses of Clause (29A)  of  Article  366  are  separable  and  may  be  subjected to sales tax by the States under Entry  54  of  List  II  and  there  is  no  question  of  the  dominant  nature  test  applying.   Therefore,  in  2005, C.K. Jidheesh v. Union of India - (2005) 8  SCALE 784 held that the aforesaid observations  in  Associated   Cement (supra)  were  merely  obiter and that Rainbow Colour Lab (supra) was  still good law, it was not correct.  It is necessary  to note that Associated Cement did not say that  in all  cases of  composite transactions the 46th  Amendment would apply”

20) In  M/s  Larsen  and  Toubro,  the  Court,  after  extensive  and  

elaborate  discussion,  once  again  specifically  negated  the  

argument predicated on dominant intention test having regard to  

the statement of law delineated in ACC Ltd. and Bharat Sanchar  

9 (2006) 3 SCC 1

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Nigam Ltd. cases.  The reading of following passages from the  

said judgment is indicative of providing complete answer to the  

arguments of the respondent assessees herein:

“64.  Whether  contract  involved  a  dominant  intention to transfer the property in goods, in our  view, is not at all material. It is not necessary to  ascertain what is the dominant intention of the  contract.  Even if  the dominant intention of  the  contract is not to transfer the property in goods  and rather it  is the rendering of service or the  ultimate  transaction  is  transfer  of  immovable  property,  then also it  is  open to the States to  levy  sales  tax  on  the  materials  used  in  such  contract  if  it  otherwise has elements of  works  contract. The view taken by a two-Judge Bench  of this Court in Rainbow Colour Lab (supra) that  the  division  of  the  contract  after  Forty-sixth  Amendment  can  be  made  only  if  the  works  contract  involved  a  dominant  intention  to  transfer  the  property  in  goods  and  not  in  contracts where the transfer  of  property  takes  place as an incident of contract of service is no  longer good law,  Rainbow Colour Lab (supra)   has been expressly overruled by a three-Judge  Bench in Associated Cement.

65. Although, in Bharat Sanchar, the Court was  concerned with Sub-clause (d) of Clause 29A of  Article 366 but while dealing with the question  as to whether the nature of transaction by which  mobile phone connections are enjoyed is a sale  or service or both,  the three-Judge Bench did  consider the scope of definition in Clause 29A  of Article366.  With reference to Sub-clause (b)  it said: "Sub-clause (b) covers cases relating to  works  contract.  This  was  the  particular  fact  situation  which  the  Court  was  faced  with  in  Gannon Dunkerley-I  and which the Court  had  held  was  not  a  sale.  The  effect  in  law  of  a  transfer  of  property  in  goods  involved  in  the  execution  of  the  works  contract  was  by  this  amendment deemed to be a sale. To that extent  

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the decision in Gannon Dunkerley-I was directly  overcome". It then went on to say that all  the  Sub-clauses of Article 366 (29A) serve to bring  transactions  where  essential  ingredients  of  a  'sale' as defined in the Sale of Goods Act, 1930  are absent, within the ambit of purchase or sale  for the purposes of levy of sales tax.

66.  It  then  clarified  that  Gannon  Dunkerley-I   survived  the  Forty-sixth  Constitutional  Amendment in two respects. First, with regard  to the definition of "sale" for the purposes of the  Constitution in general and for the purposes of  Entry  54  of  List  II  in  particular  except  to  the  extent  that  the  clauses  in  Article  366(29A)  operate and second, the dominant nature test  would be confined to a composite transaction  not covered by Article 366(29A). In other words,  in  Bharat  Sanchar,  this  Court  reiterated  what  was stated by this Court in Associated Cement  that dominant nature test has no application to  a composite transaction covered by the clauses  of  Article  366(29A).  Leaving  no  ambiguity,  it  said that after the Forty-sixth Amendment, the  sale  element  of  those  contracts  which  are  covered by six Sub-clauses of  Clause 29A of  Article 366 are separable and may be subjected  to sales tax by the States under Entry 54 of List  II  and  there  is  no  question  of  the  dominant  nature test applying.

67.  In  view  of  the  statement  of  law  in  Associated  Cement and  Bharat  Sanchar,  the  argument advanced on behalf of the Appellants  that  dominant  nature  test  must  be applied to  find  out  the  true  nature  of  transaction  as  to  whether there is a contract for sale of goods or  the  contract  of  service  in  a  composite  transaction  covered  by  the  clauses  of  Article  366(29A)  has  no  merit  and  the  same  is  rejected.

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68.  In  Gannon  Dunkerley-II,  this  Court,  inter  alia, established the five following propositions:  (i)  as  a  result  of  Forty-sixth  Amendment  the  contract  which was single  and indivisible  has  been altered by a legal  fiction into a contract  which is divisible into one for sale of goods and  the other for supply of labour and service and  as a result  of such contract which was single  and indivisible has been brought on par with a  contract  containing two separate  agreements;  (ii)  if  the  legal  fiction  introduced  by  Article  366(29A)(b)  is  carried  to  its  logical  end,  it  follows  that  even  in  a  single  and  indivisible  works contract  there is a deemed sale of  the  goods which are involved in the execution of a  works contract. Such a deemed sale has all the  incidents of  the sale of  goods involved in the  execution  of  a  works  contract  where  the  contract is divisible into one for sale of goods  and the other for supply of labour and services;  (iii) in view of Sub-clause (b) of Clause 29A of  Article  366,  the  State  legislatures  are  competent  to  impose  tax  on  the  transfer  of  property in goods involved in the execution of  works  contract.  Under  Article  286(3)(b),  Parliament has been empowered to make a law  specifying restrictions and conditions in regard  to the system of levy, rates or incidents of such  tax.  This  does  not  mean  that  the  legislative  power of the State cannot be exercised till the  enactment of the law under Article 286(3)(b) by  the Parliament. It only means that in the event  of law having been made by Parliament under  Article 286(3)(b), the exercise of the legislative  power of the State under Entry 54 in List II to  impose  tax  of  the  nature  referred  to  in  Sub- clauses  (b),  (c)  and  (d)  of  Clause  (29A)  of  Article 366 would be subject to restrictions and  conditions in regard to the system of levy, rates  and other incidents of tax contained in the said  law; (iv) while enacting law imposing a tax on  sale or purchase of goods under Entry 54 of the  

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State  List  read  with  Article  366(29A)(b),  it  is  permissible for the State legislature to make a  law imposing tax on such a deemed sale which  constitutes  a  sale  in  the  course  of  the  inter- state trade or commerce under Section 3 of the  Central Sales Tax Act or outside under Section  4 of  the Central  Sales Tax Act or sale in the  course of import or export under Section 5 of  the Central Sales Tax Act; and (v) measure for  the  levy  of  tax  contemplated  by  Article  366(29A)(b) is the value of the goods involved  in  the execution of  a  works contract.  Though  the tax is imposed on the transfer of property in  goods  involved  in  the  execution  of  a  works  contract,  the  measure  for  levy  of  such  imposition is the value of the goods involved in  the execution of  a  works contract.  Since,  the  taxable  event  is  the  transfer  of  property  in  goods  involved  in  the  execution  of  a  works  contract  and  the  said  transfer  of  property  in  such goods takes  place when the goods  are  incorporated  in  the  works,  the  value  of  the  goods which can constitute the measure for the  levy of the tax has to be the value of the goods  at  the  time  of  incorporation  of  the  goods  in  works  and  not  the  cost  of  acquisition  of  the  goods by the contractor.

69. In Gannon Dunkerley-II, Sub-section (3) of  Section 5 of the Rajasthan Sales Tax Act and  Rule 29(2)(1) of the Rajasthan Sales Tax Rules  were declared as unconstitutional and void. It  was so declared because the Court found that  Section  5(3)  transgressed  the  limits  of  the  legislative  power  conferred  on  the  State  legislature  under  Entry  54  of  the  State  List.  However, insofar as legal position after Forty- sixth  Amendment  is  concerned, Gannon  Dunkerley-II  holds  unambiguously  that  the  States  have now legislative  power  to  impose  tax on transfer of property in goods as goods or  in some other form in the execution of  works  

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contract.

70.  The  Forty-sixth  Amendment  leaves  no  manner of doubt that the States have power to  bifurcate the contract and levy sales tax on the  value of the material involved in the execution  of  the  works  contract.  The  States  are  now  empowered to  levy  sales  tax  on the material  used in such contract. In other words, Clause  29A of Article 366 empowers the States to levy  tax on the deemed sale.”

21) To sum up, it follows from the reading of the aforesaid judgment  

that  after  insertion  of  clause  29-A in  Article  366,  the  Works  

Contract which was indivisible one by legal fiction, altered into a  

contract, is permitted to be bifurcated into two: one for “sale of  

goods”  and  other  for  “services”,  thereby  making  goods  

component of the contract exigible to sales tax.  Further, while  

going into this exercise of divisibility, dominant intention behind  

such a contract, namely, whether it was for sale of goods or for  

services,  is  rendered  otiose  or  immaterial.   It  follows,  as  a  

sequitur, that by virtue of clause 29-A of Article 366, the State  

Legislature is now empowered to segregate the goods part of the  

Works  Contract  and  impose  sales  tax  thereupon.   It  may  be  

noted that Entry 54, List II of the Constitution of India empowers  

the State Legislature to enact a law taxing sale of goods.  Sales  

tax,  being  a  subject-matter  into  the  State  List,  the  State  

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Legislature has the competency to legislate over the subject.

22) Keeping  in  mind  the  aforesaid  principle  of  law,  the  obvious  

conclusion  would  be  that  Entry  25  of  Schedule  VI  to  the  Act  

which  makes  that  part  of  processing  and  supplying  of  

photographs,  photo  prints  and  photo  negatives,  which  have  

“goods” component exigible to sales tax is constitutionally valid.  

Mr. Patil and Mr. Salman Khurshid, learned senior counsel who  

argued for these assessees/respondents, made vehement plea  

to  the  effect  that  the  processing  of  photographs  etc.  was  

essentially a service, wherein the cost of paper, chemical or other  

material used in processing and developing photographs, photo  

prints etc. was negligible.  This argument, however, is founded on  

dominant intention theory which has been repeatedly rejected by  

this Court  as no more valid in view of  46th Amendment to the  

Constitution.

23) It  was also argued that  photograph service can be exigible to  

sales tax only when the same is classifiable as Works Contract.  

For  being  classified  as  Works  Contract  the  transaction  under  

consideration has to be a composite transaction involving both  

goods and services.  If  a transaction involves only service i.e.  

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work  and  labour  then  the  same  cannot  be  treated  as  Works  

Contract.  It was contended that processing of photography was  

a contract for service simplicitor with no elements of goods at all  

and,  therefore,  Entry 25 could not  be saved by taking shelter  

under  clause 29-A of  Article  366 of  the Constitution.   For  this  

proposition, umbrage under the judgment in  B.C. Kame's  case  

was sought to be taken wherein this Court held that the work  

involving taking a photograph, developing the negative or doing  

other photographic work could not be treated as contract for sale  

of  goods.   Our  attention  was  drawn  to  that  portion  of  the  

judgment where the Court held that such a contract is for use of  

skill  and  labour  by  the  photographer  to  bring  about  desired  

results  inasmuch  as  a  good  photograph  reveals  not  only  the  

asthetic  sense  and artistic  faculty  of  the  photographer,  it  also  

reflects his skill and labour.  Such an argument also has to be  

rejected for more than one reasons.  In the first instance, it needs  

to be pointed out that the judgment in Kame's case was rendered  

before the 46th Constitutional Amendment.  Keeping this in mind,  

the second aspect which needs to be noted is that the dispute  

therein was whether there is a contract  of  sale of  goods or a  

contract for service.  This matter was examined in the light of law  

prevaling at  that  time, as declared in  Dunkerley's case as per  

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which dominant  intention  of  the contract  was  to  be  seen and  

further that such a contract was treated as not divisible.  It is for   

this  reason  in  BSNL and  M/s  Larsen  and  Toubro cases,  this  

Court specifically pointed out that Kame's case would not provide  

an answer to the issue at hand.  On the contrary, legal position  

stands settled by the Constitution Bench of this Court in  Kone  

Elevator  India  Pvt.  Ltd.  v.  State  of  Tamil  Nadu and Ors.10.  

Following observations in that case are apt for this purpose:

“On the basis of the aforesaid elucidation, it has  been deduced that a transfer of property in goods  under Clause (29A)(b) of Article 366 is deemed  to be a sale of goods involved in the execution of  a  Works  Contract  by  the  person  making  the  transfer and the purchase of those goods by the  person  to  whom  such  transfer  is  made.   One  thing  is  significant  to  note  that  in  Larsen and  Toubro (supra), it has been stated that after the  constitutional  amendment,  the  narrow  meaning  given  to  the  term  “works  contract”  in  Gannon  Dunkerley-I (supra)  no  longer  survives  at  present.  It has been observed in the said case  that even if in a contract, besides the obligations  of  supply  of  goods  and  materials  and  performance  of  labour  and  services,  some  additional obligations are imposed, such contract  does  not  cease  to  be  works  contract,  for  the  additional  obligations  in  the  contract  would  not  alter  the nature of  the contract  so long as the  contract  provides  for  a  contract  for  works  and  satisfies  the  primary  description  of  works  contract.  It has been further held that once the  characteristics or elements of works contract are  satisfied  in  a  contract,  then  irrespective  of  additional  obligations,  such  contract  would  be  covered  by  the  term  “works  contract”  because  nothing  in  Article  366(29A)(b)  limits  the  term  

10 (2014) 7 SCC 1

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“works  contract”  to  contract  for  labour  and  service only.”

24) Another  attack  on  the  insertion  of  Entry  25  pertained  to  

retrospectivity given to this provision.  It was sought to be argued  

that amendment to the Act was made by Karnataka State Laws  

Act, 2004 which came into force w.e.f. 29.01.2004 and insertion  

of Entry 25 with retrospective effect i.e. w.e.f. 01.07.1989 was not  

permissible.  To put it otherwise, the argument was that even if  

Entry 25 is held to be valid, it should be made prospective i.e.  

w.e.f. 29.01.2004.  According to the learned senior counsel, Entry  

25 with retrospective effect is onerous on the respondents and if  

the respondents are directed to pay these amounts, they will face  

severe  financial  crisis.   Such  an  onerous  provision,  in  their  

submission,  would  violate  the  fundamental  rights  of  the  

respondents guaranteed under Article 19(1)(g) which guarantees  

freedom to carry on trade, business or profession.

25) We are afraid, even this argument does not cut any ice.  The first  

thing in this regard which is to be kept in mind is that Entry 25  

was inserted for  the first  time by amendment of  the Act  w.e.f.  

01.07.1989.   This  amendment  was  post  46th Constitutional  

Amendment.  However, the High Court of Karnataka declared the  

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said  Entry  to  be  unconstitutional  and  the  SLP  was  also  

dismissed.   Undoubtedly,  it  was  because  of  the  judgment  in  

Rainbow Colour  Lab,  which  judgment  was  declared  as  not  a  

good law in ACC Ltd. (which position is repeated in BSNL as well  

as M/s Larsen and Toubro cases).  Thus, the very basis on which  

Entry 25 of Schedule VI was declared as unconstitutional, has  

been  found  to  be  erroneous.   In  such  circumstances,  the  

legislature will be justified in enacting the law from the date when  

such a law was passed originally and that date is 01.07.1989 in  

the instant case.  We have to keep in mind the fact that on the  

basis of this amendment, there have been assessments made by  

the  assessing  authorities.   This  was  admitted  by  the  learned  

counsel for the respondents at bar at the time of the arguments.

26) Position  stated  above  has  to  be  read  in  the  context  that  the  

legislature is, otherwise, competent to pass amendments of this  

nature from retrospective effect.  The principle that such a power  

exists with the legislature has been reiterated time and again by  

this  Court.  [See:  (1)  National  Agricultural  Co-operative  

Marketing  Federation  of  India  Ltd.  and  Anr. v.  Union  of  

India11, (2)  Shri Prithvi Cotton Mills Ltd. and Anr. v.  Broach  

11 (2003) 5 SCC 23

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Borough Municipality and Ors.12, (3)  Indian Aluminium Co.   

etc. etc. v.  State of Kerala and others, (4)  Hiralal Rattanlal   

etc. etc. v.  State of U.P. and Anr. etc. etc.13 and (5)  Union of  

India (UOI) and Anr. v. Raghubir Singh (Dead) by Lrs. Etc.14].  

It is not necessary to discuss all these judments and our purpose  

would be served by extensively quoting from the case in National  

Agricultural Co-operative Marketing Federation of India Ltd.:

“13.  That  the  Legislature  can  enact  laws  retrospectively  is  not  in  dispute.  Nor  is  it  disputed that the amendment is intended to be  retrospective and that the amendment would at  least  prospectively  exclude  all  cooperative  societies except the primarily society from the  benefit  of  Section  80P(2)(a)(iii)  of  the  Income  Tax  Act.  According  to  the  appellants,  the  amendment  cannot  be  considered  to  have  retrospective  operation  in  the  absence  of  a  validating  provision  nor  could  Parliament  reverse  the  judgment  of  this  Court  by  such  statutory  overruling.  If  the  amendment  is  construed  as  having  retrospective  operation,  then,  it  is  submitted,  the  amendment  is  unconstitutional  because it  seeks to impose a  tax on apex societies for  the last  31 years,  it  was contended that by denying the deduction to  the apex societies, the farmers and the primary  societies would be vitally affected as it would be  reflected in the returns obtained by them. This  would be contrary to the legislative intent which  was  to  benefit  all  societies  which  market  agricultural produce.

xx xx  xx

15.  The  Legislative  power  either  to  introduce  enactments for  the first  time or  to amend the  

12 (1969) 2 SCC 283 13 (1973) 1 SCC 216 14 (1989) 2 SCC 754

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enacted law with retrospective effect, is not only  subject  to  the  question  of  competence  but  is  also  subject  to  several  judicially  recognized  limitations with some of which we are at present  concerned. The first is the requirement that the  words used must  expressly  provide or  clearly  imply retrospective operation S.S. Gadgil v. Lal  & Co., [1964]53ITR231(SC) . J.C. Jani, Income  Tax  Officer,  Circle-IV.  Ward-G  Ahmedabad  v.  Induprasad Devshanker Bhatt,   [1969] 72 ITR  595 (SC). The second is that the retrospectively  must  be  reasonable  and  not  excessive  or  harsh, otherwise it runs the risk of being struck  down as unconstitutional  Rai  Ramkrishna and  Ors. v. The State of Bihar, [1963] 50 ITR 171  (SC),  915;  Jawaharmal  v.  State  of  Rajasthan  and Ors., [1966]1SCR890, 905, Supreme Court  Employees  Welfare  Association  v.  Union  of  India and Anr., (1993) ILLJ 1094 SC. The third  is apposite where the legislation is introduced to  overcome a  judicial  decision.  Here  the  power  cannot be used to subvert the decision without  removing  the  statutory  basis  of  the  decision  Shri Prithvi Cotton Mills Ltd. v. Broach Borough  Municipality  and  Ors.  [1971]79ITR136(SC),  Lalitaben v. Gordhanbhai and Anr.,   AIR 1987  SC 1315; Janapada Sabha Chhindwara v. The  Central  Provinces  Syndicate  Ltd.,   [1970]  3  SCR 745 :  Indian  Aluminium Co.  and Ors.  v.  State of Kerala and Ors., [1996]2SCR23 .

xx xx  xx

16. There is no fixed formula for the expression  of legislative intent to give retrospectivity to an  enactment.  "Sometimes  this  is  done  by  providing for jurisdiction where jurisdiction had  no t been properly invested before. Sometimes  this  is  done  by  re-enacting  retrospectively  a  valid  and  legal  taxing  provision  and  then  by  fiction making the tax already collected to stand  

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under  the  re-enacted  law.  Sometimes  the  Legislature  gives  its  own  meaning  and  interpretation of  the law under which tax was  collected and by legislative fiat makes the new  meaning binding upon courts. The Legislature  may follow any one method or all of them, Shri  Prithvi  Cotton  Mills  v.  Broach  Borough  Municipality,  [1971] 79ITR 136 (SC) .

17.  By  validating  clause  coupled  with  a  substantive statutory change is  therefore only  one  of  the  methods  to  leave  actions  unsustainable  under  the  unamended  statute,  undisturbed.  Consequently,  he  absence  of  a  validating clause would not by itself affect the  retrospective  operation  of  the  statutory  provision,  if  such  retrospectivity  is  otherwise  apparent.

xx xx  xx

19. In making this change, the Legislature does  not "statutorily overrule" this Courts decision in  Kerala  Cooperative  Marketing  Federation  Ltd.  Supra. as has been contended by the appellant.  Overruling assumes that a contrary decision is  given on the same facts or law. Where the law,  as  in this  case,  has been changed and is  no  longer  the  same,  there  is  no  question  of  the  Legislature overruling this Court.

20. As has been held in  Ujagar Prints v. Union  of India, [1989]179 ITR 317a (SC).

"A  competent  legislature  can  always  validate a law which has been declared  by  courts  to  be  invalid,  provided  the  infirmities and vitiating in factors noticed  in the declaratory judgment are removed  or cured. Such a validating law can also  be made retrospective. If in the light of  

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such  validating  and  curative  exercise  made  by  the  legislature  -  granting  legislative  competence  -  the  earlier  judgment  becomes  irrelevant  and  unenforceable that cannot be called an  impermissible  legislative  overruling  of  the  judicial  decision.  All  that  the  legislature does is to usher in a valid law  with  retrospective  effect  in  the  right  of  which  the  earlier  judgment  becomes  irrelevant".

xx xx  xx

22.  Once  the  circumstances  are  altered  by  Legislation, it may neutralise the effect of the  earlier  decision  of  the  Court  which  becomes  ineffective after the change of the law.

23. Similarly in Krishnamurthi & Co. v. State of  Madras and Anr., [1973] 2 SCR 54 the Madras  General  Sales  Tax  1959  Act  (as  it  stood)  provided under Entry 47 for tax on "lubricating  oils,  all  kinds  of  mineral  oils  (not  otherwise  provided  for  in  this  Act)  quenching  oil  and  greases  w.e.f.  1.4.1964".  The  question  was  whether  this  entry  covered  furnace  oil.  The  Madras High Court construed the phrase and  came  to  the  conclusion  that  it  did  not.  The  Legislature then enacted an Amendment Act in  1967.  Entry  47  was  amended  -  so  as  to  expressly  provide  that  furnace  oil  would  be  subjected to tax. The Act was made effective  from 1964. The Act was challenged as being  unreasonable since it retrospectively made the  dealers liable for sales tax which they had not  passed  on  to  others.  The  challenge  was  negatived and it was said that

"The object of such an enactment is to  remove  and  rectify  the  defect  in  

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phraseology  or  lacuna or  other  nature  and  also  to  validate  the  proceedings,  including realisation of tax, which have  taken place in pursuance of the earlier  enactment which has been found by the  court to be vitiated by an infirmity. Such  an amending and validating Act in  the  very nature of things has a retrospective  operation.  Its  aim is  to  effectuate  and  carry out the object for which the earlier  principal  Act  had  been  enacted.  Such  an amending and validating Act to make  "small repairs" is a permissible mode of  legislation and is frequently resorted to  in fiscal enactments".

xx xx  xx

28. The test of the length of time covered by  the  retrospective  operation  cannot  by  itself,  necessarily  be  a  decisive  test.  Rai  Ramkrishna and Ors.  v.  The State  of  Bihar,  [1963]  50  ITR  171  (SC)  Account  must  be  taken  of  the  surrounding  facts  and  circumstances relating to the taxation and the  legislative  background  of  the  provision.  Jawahamal  v.  State  of  Rajasthan:  [1966]  1  SCR  890  To  recapitulate  the  legislative  background  of  the  particular  statutory  provision  in  question  before  us  -  the  first  authoritative  interpretation  of  Section  80P(2) (a)(iii)  was  made  in  1994  in  Assam  Cooperatives Supra when it held that the word  "of"  must  be  construed  as  "produced  by".  Therefore, the law as it stood from 1968 was,  by  the  decision,  required  to  be  read  in  precisely  this  manner  and  presumably  assessments  of  Apex  Societies  were  commended and concluded on this basis. The  situation  continued  till  1998  till  this  Court  reversed  Assam  Cooperatives  in  Kerala  

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Cooperative Marketing Federation Ltd. Supra.  Before the assessment year was over, by the  1998  Amendment  the  word  "of"  was  substituted  with  "given  by".  In  real  terms  therefore there was hardly any retrospectivity,  but a continuation of the status quo ante. The  degree  and  extent  of  the  unforeseen  and  unforeseeable  financial  burden  was,  in  the  circumstances, minimal and cannot be said to  be unreasonable or unconstitutional.

27) We would also like to refer  to  the case of  Hiralal  Ratanlal  v.  

State  of  U.P.15,  wherein  it  was  observed  “the  source  of  the  

legislative power to levy sales or purchase tax on goods is Entry  

54 of the List II of the Constitution.  It is well settled that subject  

to Constitutional restrictions a power to legislate includes a power  

to legislate prospectively as well as retrospectively.  In this regard  

legislative  power  to  impose  tax  also  includes  within  itself  the  

power to tax retrospectively.”

28) We would like to point out at this stage that the High Court in the  

impugned judgment has not dealt  with the mater in its correct  

perspective.  The reason given by the High Court in invalidating  

Entry 25 is that this provision was already held unconstitutional  

by the said High Court  in  Keshoram's case against  which the  

SLP was also dismissed and in view of that decision, it was not  

15 (1973) 1 SCC 216

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permissible  for  the  legislature  to  re-enact  the  said  Entry  by  

applying a different  legal  principle.   According to  us,  this  was  

clearly  an erroneous approach to  deal  with  the issue and the  

judgment of the High Court is clearly unsustainable.  The High  

Court did not even deal with various facets of the issue in their  

correct perspective, in the light of subsequent judgments of this  

Court with specific rulings that Rainbow Colour Lab is no longer a  

good law.   

29) The  impugned  judgment  of  the  High  Court  is  accordingly  set  

aside, the present appeal is allowed and as a result thereof, the  

writ  petitions  filed  by  the  respondents  in  the  High  Court  are  

dismissed  holding  that  Entry  25  of  Schedule  VI  of  the  Act  is  

constitutionally valid.  There shall,  however,  be no order as to  

costs.

.............................................CJI (H.L. DATTU)

.............................................J. (A.K. SIKRI)

.............................................J. (ARUN MISHRA)

NEW DELHI; JANUARY 30,  2015.

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