The Supreme Court on Tuesday (October 7) held that the ink and chemicals used in printing the lottery tickets is a taxable item under the Uttar Pradesh Trade Tax Act, 1948 (“Act”).
A bench of Justices JB Pardiwala and KV Viswanathan dismissed the appeal filed by an assessee, who is engaged in the business of printing lottery tickets and had been taxed on the value of ink and chemicals used in the printing process. While the Appellate Authority and Tribunal set aside the levy holding these materials were consumed rather than a transferrable good, the High Court restored the tax leading to an appeal before the Supreme Court.
The appellant’s primary argument before the Supreme Court was that the ink and chemicals were consumed in the printing process. Since they ceased to exist in their original form and were not delivered to the customer as separate items, there was no “transfer of property,” and thus, no tax could be levied. Rejecting this argument, the judgment authored by Justice Pardiwala noted that the moment the lottery ticket is transferred to the consumer, the ink and chemicals used in printing of the lottery ticket also gets transferred, making it taxable not as a consumer goods but as a transferred goods classifying it as a ‘deemed sale’ under Article 366(29-A) (b) of the Constitution incorporated via 46th Constitutional Amendment.
The Court clarified that the tax liability in works contracts attaches at the moment goods are incorporated into the work, even if they later lose identity.
“Applying the principles laid down in the preceding paragraphs to the facts at hand, we have no doubt in our mind that 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 court held.
“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.”, the court added.
Applying the conditions to the facts of the present case, the court observed:
“Thus, in the facts of the present case all three conditions required to sustain a levy of tax under Section 3F(1)(b) of the Act, 1948, are fulfilled : (i) a works contract exists for printing of lottery tickets; (ii) ink and chemicals have been involved in the execution of the works contract; and (iii) the property in the ink and chemicals has been transferred in execution of the works contract. Consequently, the appellant is liable to pay tax under Section 3F(1)(b) of the Act, 1948 on the ink and processing material.”
Core Legal Test Is Transfer Of Goods Not Consumption
The Court said that the moment the ink (a composite of ink and chemicals) is applied to the paper, the property in that good is transferred to the customer. The subsequent drying or chemical change is irrelevant, as the transfer has already happened. The Court referred to its earlier ruling in Xerox Modicorp Ltd v. State of Karnataka, (2005) 7 SCC 380, where it held that toners are “sold” the moment they are loaded into a machine, and their later consumption does not negate the sale.
“The judicial reasoning focused on how the inherent properties of the goods were physically incorporated and remained as a component of the works delivered to the customer.”, the court said.
Also, the Court endorsed the Kerala High Court’s decision in Enviro Chemicals v. State of Kerala, 2011 SCC OnLine Ker 3685 where it was held that the works contract doesn’t mandate that it must yield a physical end-product or that the transfer must be tangible. The High Court held that the items need not exist in any form in the resultant product.
“This Court in Xerox Modicorp (supra) and the Kerala High Court in Enviro Chemicals (supra) correctly identified the taxable event as the precise moment the contractor’s goods are incorporated into the ‘works’, i.e., when the toner is fitted into the machine or the chemical is introduced into the effluent water. The subsequent consumption of these items is irrelevant, as it does not negate the transfer of property that has already occurred. 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 court said.
Accordingly, the appeal was dismissed.
Cause Title: M/S. ARISTO PRINTERS PVT. LTD. VERSUS COMMISSIONER OF TRADE TAX, LUCKNOW, U.P.
Citation : 2025 LiveLaw (SC) 975
Click here to read/download the judgment
Appearance:
For Appellant(s) Mr. Vadlamani Seshagiri, Adv. Mr. Ananya Kukreti, Adv. Ms. Poorvi Avtar, Adv. Ms. P.Khyathi Simantini, Adv. Mrs. Bela Maheshwari, AOR Mr. Rohit Singh, AOR Mr. Niraj Kumar Singh, Adv. Mr. Satyajeet Kumar, AOR
For Respondent(s) Mr. Bhakti Vardhan Singh, AOR Mr. Sandeep Singh Somaria, Adv.
