Supply of recorded audio cassettes exclusively to the copyright holder was held to be a works contract, not a first sale under the TNGST Act. The holder's open-market sales were taxable first sales. The court upheld the circular and dismissed all three writ petitions, including challenges to revised assessments.
This page shows the compact analysis of this judgement. The full analysis — procedural history, issue-by-issue holdings with ratio and obiter, advocates, and paragraph-level evidence for every claim — is being added to the record in batches and will appear here when this judgement has been through it.
IN THE HIGH COURT OF JUDICATURE AT MADRAS
DATED : 06.09.2021
CORAM
THE HON'BLE MR.JUSTICE S.M.SUBRAMANIAM
W.P.Nos.33462 of 2005, 13514 & 13515 of 2006 and W.P.M.P.Nos.15101 & 15102 of 2006 and W.P.M.P.No.36378 of 2005 and W.V.M.P.No.59 of 2010
W.P.No.33462 of 2005
M/s.Star Audio Represented by Mr.B.Poonam Chand, Partner, 23A, North Boag Road, T.Nagar, Chennai – 600 017. ..Petitioner
vs
1.Commercial Tax Officer, T.Nagar (East) Assessment Circle, 46, Greenways Road, III Floor, Chennai – 600 028.
2.The Special Commissioner and Commissioner of Commercial Taxes, Ezhilagam, Chepauk, Chennai – 600 005.
3.The State of Tamil Nadu, Represented by the Secretary to the Government, Commercial Taxes & Hindu Religious Endowment, Government of Tamil Nadu, Fort St.George, Chennai – 600 009. ..Respondents
Prayer: Writ Petition filed under Article 226 of the Constitution of India praying to issue a Writ of Declaration, to declare the impugned Circular No.Acts Cell-I/76234/2002 dated 16.05.2003 as ultravires the provisions of Section 3(1) and other relevant sections of the Tamil Nadu General Sales Tax Act, 1959 and as being ultravires Articles 14, 19(1)(g) and 265 of the Constitution of India in so far as the petitioner is concerned.
W.P.No.13514 of 2006 M/s.HIT Music Represented by Mr.K.P.M.M.Meeran Mohideen, Partner, No.16, Pandaram Street, Purasalvakkam, Chennai – 600 007. ..Petitioner vs 1.Commercial Tax Officer, Purasalvakkam Assessment Circle, Chennai. 2.The Special Commissioner and Commissioner of Commercial Taxes, Ezhilagam, Chepauk, Chennai – 600 005. 3.The State of Tamil Nadu, Represented by the Secretary to the Government, Commercial Taxes & Hindu Religious Endowment, Government of Tamil Nadu, Fort St.George, Chennai – 600 009. ..Respondents Prayer: Writ Petition filed under Article 226 of the Constitution of India praying to issue a Writ of Certiorari, to call for the records of the First Respondent in pursuant to the revised assessment order TNGST/0482113/2002-2003 dated 28.02.2006 and quash the same. W.P.No.13515 of 2006 M/s.HIT Music Represented by Mr.K.P.M.M.Meeran Mohideen, Partner, No.16, Pandaram Street, Purasalvakkam, Chennai – 600 007. ..Petitioner
vs
3.The State of Tamil Nadu, Represented by the Secretary to the Government, Commercial Taxes & Hindu Religious Endowment, Government of Tamil Nadu, Fort St.George, Chennai – 600 009. ..Respondents
Prayer: Writ Petition filed under Article 226 of the Constitution of India praying to issue a Writ of Certiorari, to call for the records of the First Respondent in pursuant to the revised assessment order TNGST/0482113/2003-2004 dated 28.02.2006 and quash the same.
For Petitioners: Mr.V.S.Manoj For Mr.K.Vaitheeswaran [in all W.Ps]
For Respondents: Mr.V.Veluchamy
Government Advocate [in all W.Ps]
COMMON ORDER
W.P.No.33462 of 2005
The writ on hand is filed, to quash the Circular dated 16.05.2003 as ultravires to the provisions of Section 3(1) and other relevant Sections of the Tamil Nadu General Sales Tax Act, 1959 [hereinafter referred to as 'TNGST Act'] and as being ultravires to Articles 14, 19 (1) (g) and 265 of the Constitution of India.
songs / film songs etc., on the blank cassettes and sell the pre-recorded cassettes to the petitioner, charging the total value of the pre-recorded cassettes and the Sales tax.
“10. According to the appellant the various activities involved in the manufacture of a prerecorded audio cassette are as under:
(i) preparation of a master tape in the studio;
(ii) manufacture of plastic cassette parts, like cassette body, leather case, etc. from plastic raw material with the help of injection-moulding facility; (iii) assembling of cassette parts to make a C-O tape;
(iv) high-speed transfer of music signals from 1/2" master tape to 1/8" pancakes;
(v) assembling of recorded pancakes into cassettes;
(vi) polymeric plate-making for printing machines; (vii) printing of information on cassette body; (viii) printing of inlay cards;
(ix) testing and cellowrapping of the finished cassettes.
The machines which were the subject of the contract dated 6-11-1989 were required for the fourth-mentioned item, namely, high-speed transfer, of music signals from 1/2" master tape to 1/8" pancakes.
“‘Manufacture’ implies a change, but every change is not manufac-ture 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.”
Ltd. [1994 Supp (3) SCC 662 : (1994) 74 ELT 492] Laminated Packings (P) Ltd. [Laminated Packings (P) Ltd. v. CCE, (1990) 4 SCC 51 : (1990) 49 ELT 326] and Empire Industries Ltd. [Empire Industries Ltd. v. CCE, (1985) 3 SCC 314 : 1985 SCC (Tax) 416 : (1985) 20 ELT 179] ] the view taken consistently by this Court is that the moment there is transformation into a new commodity commercially known as a distinct and separate commodity having its own character, use and name whether it be the result of one process or several processes, manufacture takes place; the transformation of the goods into a new and different article should be such that in the commercial world it is known as another and different article. Prerecorded audio cassettes are certainly goods known in the market as distinct and different from blank audio cassettes. The two have different uses. A pre-recorded audio cassette is generally sold by reference to its name or title which is suggestive of the contents of the audio recording on the cassette. The appellant is indulging in a mass production of such pre-recorded audio cassettes. It is a manufacturing activity. The appellant's activity cannot be compared with a person sitting in the market extending the facility of recording any demanded music or sounds on a blank audio cassette brought by or made available to the customer, which activity may be called a service. The Tribunal was not right in equating the appellant's activity with photoprocessing and holding the appellant a service industry.”
the processing procedures involved in the manufacture of prerecorded audio cassettes was considered by the Hon'ble Supreme Court and in the present case, admittedly, the petitioner is a copyright holder as far as the master recording is concerned, who in turn, allows a third person to purchase blank cassettes and record the songs etc., in a large scale manner and sell those recorded cassettes again to the petitioner alone and the petitioner is selling those recorded cassettes to the end users and therefore, selling of the recorded cassettes by the petitioner is a second sale.
“5........It was held that the moment there is transformation into a new commodity commercially known and recognized as a distinct and separate commodity, it should be considered that manufacture has taken place and thereby recording of a blank cassette gives rise to a new product. In other words, the Apex Court has held that blank cassettes / CDs become commercially new products when they are recorded and known as pre recorded cassettes / CDs. The members of the petitioners' Association are all engaged in similar type of sales of pre recorded cassettes / CDs. On scrutiny of their transactions, it was found out that they were owners of master copy having the audio right for taking copies from the master copy. As blank
cassettes / CDs and pre recorded cassettes / CDs are commercially different goods, sale on blank cassettes / CDs are liable to tax and when they are recorded and sold as pre recorded cassettes / CDs, then such sale also will be liable to tax as different goods. Originally, these dealers were allowed exemption from tax as second sales on the ground that such cassettes / CDs were purchased from local registered dealers. But later on, it was found out that these dealers being copy right owners sent master copy to certain parties who after recording them made sale of pre recorded cassettes / CDs and charged tax as pre recorded cassettes / CDs. The dealers in their turn on having made such taxable purchases, claimed exemption from tax as second sale of pre recorded cassettes / CDs.
6....Such dealer who undertake this work of recording did not have the right to sell recorded cassettes / CDs to persons other than audio right holder. Thus, this transaction of recording audio and supply of such recorded cassettes would only be works contract in nature but the contractors treated the transactions as first sale of pre recorded cassettes / CDs at a lower price. But the assessee who is audio right owners sell pre recorded cassettes / CDs at a much higher price and claimed exemption as second sales. Thus, it was considered that the sale at the hands of the audio right owners is to be first sellers of pre recorded cassettes / CDs since earlier transaction is works contract only liable to tax under Section 3B of the Tamil Nadu General Sales Tax Act, 1959. In the above circumstances, the second respondent issued a circular dated 16.05.2003 against which the present writ petition has been filed.
7.....The petitioners alone have the copy right which cannot be sold by the persons who supply pre recorded cassettes since the master copy belonged only to the petitioners. Using the master copy, the petitioners get the pre recorded cassettes manufactured by others. The petitioners become the first sellers liable to tax as first sellers.
8.......Challenging the revision of assessment made under Section 16 of the Tamil Nadu General Sales Tax Act, 1959, it is submitted that in the instant case, the State would derive tax, once when sale of blank cassettes / CDs are sold and, again, when pre recorded cassettes / CDs are sold. The petitioners by adopting the ingenuous method of avoiding payment of tax twice i.e., at the stage of blank cassettes / CDs and again, at the stage of pre recorded cassettes / CDs made supply of blank cassettes to convert as pre
recorded with the aid of the master copy and then making them sale of pre recorded cassettes / CDs so that they could claim exemption at their hands as second sales on those purchases. This is clear evasion of tax and therefore, Section 16 of the Act has correctly invoked in this case.
9.......Provisions relating to levy Excise duty are different from that of the levy of sales tax. Even persons who are doing job work have to pay excise duty. In the instant case, it was proposed to bring to the tax net, the turnover relating to sale of cassettes and CDs by the petitioner for the reason that the petitioners are copy right owners and hence, others who bring out pre cassettes using the master copy cannot sell them as first sellers, as they have no right to sell the copy right. Only the petitioners have such right. Hence, the contention of the petitioners is not acceptable.
10.......The petitioners being the copy right owner of pre recorded cassettes cannot claim exemption as second sales and they will be liable to pay tax as first sellers of pre recorded cassettes. In respect of the cassettes manufactured using the master copy of the petitioners, the supplier cannot be treated as first sellers because the copy right cannot be sold by the manufactures, but could be done only by the petitioners.”
involved in works contract. As far as the case on hand is concerned, whether the transaction between the petitioner and the cassette recorder in the present case is a first sale or a works contract.
processing the recording system, the recorded cassettes are handed over or sold to the petitioner and the materials utilized for such recording of cassettes cannot be construed as a sale and even in case, an invoice is raised in this regard i.e., part and parcel of the “works contract” and cannot be construed as a sale. The invoice, if at all raised by the cassette manufacturers, that is relatable to the purchase of blank cassettes from open market or manufacturing of cassettes, which cannot be a sale within the meaning of the provisions of the TNGST Act.
“57. Following the above amendment in the Constitution, the sales tax legislations in various States were amended and provisions were made for imposition of sales tax in relation to works contract. The constitutional validity of the Forty-sixth Amendment by which the legislatures of the States were empowered to levy sales tax on certain transactions described in clauses (a) to (f) of clause 29-A of Article 366 of the Constitution as well as the amendments made in the State legislations were
challenged in Builders’ Association4. The Constitution Bench of this Court upheld the constitutionality of the Forty-sixth Amendment. The Court observed that the object of the new definition introduced in clause 29-A of Article 366 of the Constitution was to enlarge the scope of the expression “tax of sale or purchase of goods” wherever it occurs in the Constitution so that it may include within its scope any transfer, delivery or supply of goods that may take place under any of the transactions referred to in sub-clauses (a) to (f). The Constitution Bench*** explained that clause 29-A refers to 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. The emphasis is on the transfer of property in goods – whether as goods or in some other form. A transfer of property in goods under sub-clause (b) of clause 29-A is deemed to be a sale of the goods involved in the execution of a works contract by the person making the transfer and a purchase of those goods by a person to whom such transfer was made.
(a) the contract may be for work to be done, for remuneration and for supply of materials used in the execution of work for a price,
(b) contract for work in which the use of the materials is accessory or incidental to the execution of the work and
(c) contract for supply of goods where some work is required to be done as incidental to the sale. Having regard to the recitals of the contract, the Court then concluded that the contracts in question involved sale of respective vessels within the meaning of clause (m) of the Andhra Pradesh General Sales Tax Act and were not merely the works contract as defined in clause (t) thereof.
(i) there must be a works contract,
(ii) the goods should have been involved in the execution of a works contract, and
(iii) the property in those goods must be transferred to a third party either as goods or in some
other form. In a building contract or any contract to do construction, the above three things are fully met. In a contract to build a flat there will necessarily be a sale of goods element. Works contracts also include building contracts and therefore without any fear of contradiction it can be stated that building contracts are species of the works contract.”
The Hon'ble Apex Court in the above Paragraph 94, have categorically held that three conditions must be fulfilled.
under the provisions of the TNGST Act.
W.P.Nos.13514 & 13515 of 2006
Sd/-
Assistant Registrar(CS-III)
//True Copy//
Sub Assistant Registrar
Kak
To
+3cc to Mr.K.Vaitheswaran, Advocate, S.R.No.45113, 45114, 45115 +1cc to the Special Government Pleader(Taxes), S.R.No.45274,45275
W.P.Nos.33462 of 2005, 13514 & 13515 of 2006
NR(CO) CB(05/10/2021)
3 issues framed by the court
Was recording cassettes from a copyright holder's master copy and supplying them exclusively to that holder a works contract or a first sale under the TNGST Act?
Were the copyright holder's subsequent open-market sales exempt second sales?
Was the circular treating the copyright holder's sales as taxable first sales valid?
Colour shows how this judgement treated each authority
Gramophone Co., of India Ltd. Vs. Collector of Customs, CalcuttaDistinguished¶81
Gramophone Co., of India Ltd. Vs. Collector of Customs, Calcutta, reported in 1999 (114) E.L.T. 770 (SC)
M/s.Larsen & Toubro Limited & Another Vs. State of Karnataka & anotherApplied¶97
M/s.Larsen & Toubro Limited & Another Vs. State of Karnataka & another, in Civil Appeal No.8672 of 2013
3 provisions across 1 enactments
M/s.Star Audio
Commercial Tax Officer, T.Nagar (East) Assessment Circle
The Special Commissioner and Commissioner of Commercial Taxes
The State of Tamil Nadu
M/s.HIT Music
Commercial Tax Officer, Purasalvakkam Assessment Circle
S.M.SUBRAMANIAM
As recorded by the court registry
Judgements on the same questions, provisions and authorities, from every court
