JULY 05, 2013

By Bharat Bhushan, Advocate

PRIOR to 1st July, 2012 Service Tax was levied on specified services. Taxable Service was defined in Sub-section (105) of Section 65. This sub-section was further divided into more than 140 clauses. Each clause defined a distinct activity as taxable service. Photography Services was covered under clause (zb) and was brought under the Service Tax net with effect from 16.07.2001.

Now, with effect from 1 st July, 2012, charging section is Section 66 B of the Finance Act, 1994, which reads as under:-

SECTION [66B] Charge of service tax on and after Finance Act, 2012 - There shall be levied a tax (hereinafter referred to as the service tax) at the rate of twelve per cent on the value of all services, other than those services specified in the negative list, provided or agreed to be provided in the taxable territory by one person to another and collected in such manner as may be prescribed.

The term ‘Service' is defined in Section 65B (44), and there is no dispute that Photography is covered in that definition. There is also no dispute that the contract of Photography is a contract for service as laid down by Hon'ble Supreme Court in the historical judgment in the case of the Assistant Sales Tax Officer Vs. B. C. Kame [AIR 1977 SC 1642], and consistently followed in subsequent cases like BSNL [2006-TIOL-15-SC-CT-LB] and Rainbow Colour Lab [2002-TIOL-373-SC-CT]. The services specified in Negative List are not liable to Service Tax. Negative List is given in Section 66D of the Act, ibid. “Any process amounting to manufacture or production of goods,” is specified in clause (f) of Section 66 D. The phrase ‘any process amounting to manufacture or production of goods' has been defined in clause (40) of Section 65 B which reads as under:

(40) “process amounting to manufacture or production of goods” means a process on which duties of excise are leviable under section 3 of the Central Excise Act, 1944 (1 of 1944) or any process amounting to manufacture of alcoholic liquors for human consumption, opium, Indian hemp and other narcotic drugs and narcotics on which duties of excise are leviable under any State Act for the time being in force;

The above discussions show that the processes on which Central Excise or State Excise Duty is leviable are outside the Service Tax net. Prior to introduction of negative list regime, the processes amounting to manufacture were kept out of Service Tax net only in case of Business Auxiliary Services. Photography Services were independent of Business Auxiliary Services and hence were not affected by the said exclusion. Now, the processes amounting to manufacture has been taken out altogether from the Service Tax net. Therefore, it has to be examined, as to whether duties of excise are leviable under Section 3 of the Central Excise Act, 1944 on the process of photography. The relevant portion of Section 3 of the Central Excise Act, 1944 is reproduced below for ready reference:

SECTION 3. Duties specified in the First Schedule and the Second Schedule to the Central Excise Tariff Act, 1985 to be levied.- (1) There shall be levied and collected in such manner as may be prescribed, -

(a) a duty of excise to be called the Central Value Added Tax (CENVAT)] on all excisable goods [(excluding goods produced or manufactured in special economic zones) which are produced or manufactured in India as, and at the rates, set forth in the First Schedule to the Central Excise Tariff Act, 1985 (5 of 1986);

For covering a process under Section 3, the following conditions are to be satisfied.

a) The end product is specified in the First schedule to the Central Excise Tariff Act.

b) The end product emerges as a result of manufacture.

c) The end product is marketable.

The end product of photography is photograph. Photographs are specifically included in Central Excise Tariff Heading No. 4911 of the First Schedule to the Central Excise Tariff, 1985. The relevant portion of Chapter 49 is as under:

Photographs merit classification under CETH No. 4911 91 00 on which Nil Tariff rate is prescribed. After the judgment of Hon'ble Supreme Court in Collector of Central Excise Vs. Vazir Sultan Tobacco Co. Ltd. [2002-TIOL-215-SC-CX], it is no more res integra that “Nil rate of duty” is also a rate of duty and the goods attracting Nil rate of duty are Excisable goods.

The next question is whether the photographs emerge as a result of manufacture. The Hon'ble Supreme Court in Union of India Vs. Delhi Cloth & General Mills Co. Ltd . [2002-TIOL-12-SC-CX-LB], had held as under:-

“Manufacture implies a change, but every change is not manufacture and yet every change of an article is the result of treatment, labour and manipulation. But something more is necessary and there must be transformation; a new and different article must emerge having a distinctive name, character or use.”

In photography, a plain paper is converted into a photograph, which is an altogether different commodity and hence the photograph is a result of manufacture.

The next question is marketability. It is true that the photograph has no value in the eyes of an ordinary person, other than the customer. The photograph carries value only for the person at whose instance the photograph is taken. The Hon'ble Supreme Court in Rainbow Colour Lab. Vs. State of Madha Pradesh [2002-TIOL-373-SC-CT], held as under:-

14. In Bavens v. Union of India & Ors. [1995 (97) STC 161], a Division Bench of the Kerala High Court had taken the view that “Where a photographer takes a photograph of his customer, develops the negative and supplies positive prints in the desired size to the customer, the photographer uses his own camera and his own film. The negative which is subjected to further processing belongs to the photographer and not to the customer. No basic goods are provided by the customer which are subjected to processing, etc., by the photographer so as to make the contract a works contract. There is no accretion to goods or property or the nucleus of a property which originally belonged to the customer. There is no works contract involved in this category of a photographer's activity. However modernised the camera be, the skill of the photographer is still important for getting the best results. It cannot also be treated as a sale of the photograph for the reason that it is not the intention of the customer to buy a photograph from the photographer. The photograph has no marketable value. What is expected from the photographer is his service, artistic skill and talent. If any property passes to the customer in the form of photographic paper, it is only incidental to the service contract. No portion of the turnover of a photographer relating to this category of work would be exigible to sales tax.” We are in agreement with the view taken by the Kerala High Court in the above case.

However, it is respectfully submitted that, the aforesaid observations of Hon'ble Supreme Court has no application in Central Excise Matters. In Central Excise, the terms ‘sale and purchase' has been defined as transfer of possession in total contrast to transfer of property in ‘Sales of Goods Act'. The Hon'ble Supreme Court in AP State Electricity Board Vs. CCE [2002-TIOL-376-SC-CX], had held that even a single buyer is sufficient to constitute marketability. The case of wedding invitation cards is identical to the photographs. The wedding invitation Cards have no commercial value, except for the person who has placed orders for the same. But the Central Excise Duty is levied and collected on such cards. Thus, the photographs are excisable goods on which duty of excise is leviable under Section 3 of the Central Excise Act, 1944 and hence, such photographs are outside the levy of Service Tax.

From the above discussions, it is clear that no Service Tax is leviable on the composite job of taking the photograph and printing hard copy of the same. Now the question arises, if the photographer merely clicks a photo and hand over the said photo in digital form or in Negative form to the customer, then what will be the tax liability. Such process may not amount to manufacture, hence not covered under the Negative List. However, the said processes have been exempted by Mega Exemption Notification No. 25/2012-ST dated 20.06.2012. Entry 30 of the said notification reads as under:-

“30. Carrying out an intermediate production process as job work in relation to -

(a) agriculture, printing or textile processing;

(b) cut and polished diamonds and gemstones; or plain and studded jewellery of gold and other precious metals, falling under Chapter 71 of the Central Excise Tariff Act, 1985 (5 of 1986);

(c) any goods on which appropriate duty is payable by the principal manufacturer; or

(d) processes of electroplating, zinc plating, anodizing, heat treatment, powder coating, painting including spray painting or auto black, during the course of manufacture of parts of cycles or sewing machines upto an aggregate value of taxable service of the specified processes of one hundred and fifty lakh rupees in a financial year subject to the condition that such aggregate value had not exceeded one hundred and fifty lakh rupees during the preceding financial year;”

In the above notification, due care has been taken of the fact that most of the products of printing industry attracts Nil rate of duty and, therefore, condition of payment of appropriate duty by manufacturer has not been imposed in case of printing. The above notification also shows that taking photography out of service tax net is not a drafting error but a considered decision of the government.