Review of transactions with outside printing service providers

Bennett, Coleman & Co. Limited 18 September 2012

Background

Bennett, Coleman & Co. Limited („BCCL‟) has entered into contracts with various outside printing service providers („Printers‟) for printing of newspapers, books or magazines. The service of printing is provided to BCCL by various Printers in different states. Central and State Laws will be applicable on the activity of printing based on the nature of contract between the two parties. The contract between BCCL and Printers can be categorized into four scenarios.
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All materials for printing is supplied by BCCL and the printing work is done by the printer. Newspaper and Ink is supplied by BCCL and consumables is supplied by the printer for printing newspapers, books and magazines. Only Newspaper is supplied by BCCL, ink and consumables supplied by the printer for printing newspapers, books and magazines. Nothing is supplied by BCCL, newspaper, ink and all consumables supplied by printer for printing newspapers, books and magazines.

Indirect tax implications have been derived on the basis of each scenario.

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Indirect Tax Provisions - Excise

The activity of printing newspaper results into manufacturing of a new product. The activity converts paper into a newspaper which is altogether a new product which has marketability. The activity falls under purview of the definition of manufacturing. Excise duty is levied on excisable goods. Excise duty 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); (b) a special duty of excise, in addition to the duty of excise specified in clause (a) above, on excisable goods excluding goods produced or manufactured in special economic zones specified in the Second Schedule to the Central Excise Tariff Act, 1985 (5 of 1986) which are produced or manufactured in India, as, and at the rates, set forth in the said Second Schedule

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Indirect Tax Provisions – Service Tax

Service tax is levied on an „services‟ as defined under subsection 44 section 65 of Chapter V of the Finance Act. The activity of printing qualifies as a service as per the definition of service. Though the activity of service falls under the purview of the definition of service it was exempt under the old service tax law under Notification 14/2004. The activity of printing and in relation to printing is specifically under this notification. Likewise, the activity of printing is exempted in the new service tax law under entry number 30 of Mega Notification 25/2012. In the old notification provision of service in relation to printing was specifically exempt under the abovementioned notification, whereas under the new notification intermediate production process as job worker in relation to printing is exempt under the service tax law. The activity of printing performed by the Printer for BCCL if qualifies for service will not amount to levy of service tax as it is exempt in the new as well as the old service tax law.

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Indirect Tax Provisions – State Laws

VAT is like a consumption tax which is leviable on a product whenever value is added at a stage of production and at final sale. In the process of printing newspaper, value is added to the paper which is used as a material in the process of printing in the form of newspaper which is a marketable product. Every state has its own state laws and tax is levied on the basis of the provisions mentioned in the relevant state laws. When there is a inter state transaction CST is levied on the amount of the transaction. Sale tax on Inter State sale is levied by Union Government under Entry 92A of List I (Union List), while sales tax on intra-State sale (sale within State) (now termed as Vat) is levied by State Government under Entry 54 of List II (State List) of Seventh Schedule to constitution of India. Works contract is defined as any agreement for carrying out for consideration, building construction, manufacture, processing, fabrication, erection, installation, laying, fitting out, improvement, modification, repair or commissioning of any movable or immovable property. TDS provision for works contract are defined under laws of each state. The provision have to be followed and a specific percentage of the consideration should be deducted at source.

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Scenario One – All Supplies by BCCL

In the first scenario, everything is supplied by BCCL and the Printer performs only the printing activity in relation to newspapers, books and magazines. The activity of printing is a manufacturing activity as a new and marketable product is formed. The activity of printing of newspaper is defined under chapter 49 of the Central Excise Act, but is exempt as the rate of duty on such activity in the said chapter is „nil‟. Hence, printing of newspaper, books, magazines is exempt under Central Excise. The activity of printing of newspapers, books and magazines if qualifies as service, service tax will not be levied on such service as the activity of printing is specifically exempt under the notification 14/2004 i.e. old service tax law and under mega notification 25 / 2012 i.e. under new service tax law. In this scenario, printing will not be taxable under the relevant state laws as it is a pure service transaction. It does not fall under the ambit of the relevant state laws and hence will not be taxable under VAT or WCT provisions. As per our understanding in this scenario, packaging materials are not supplied by BCCL to Printers.

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Preliminary and tentative For discussion purpose only

Scenario Two – Newspaper and Ink Supplied by BCCL

In the second scenario, newspaper and ink is supplied by BCCL. The Printer uses consumables and performs the printing activity in relation to newspapers, books and magazines. In this scenario as well, the activity of printing is a manufacturing activity as a new and marketable product is formed. Hence, like in the first scenario, printing activity is exempt under Central Excise. The activity of printing of newspapers, books and magazines if qualifies as service, service tax will not be levied on such service as the activity of printing is specifically exempt under the notification 14/2004 i.e. old service tax law and under mega notification 25 / 2012 i.e. under new service tax law. In this scenario, printing will not be taxable under the relevant state laws as it is a pure service transaction as only consumables are used by the printer. It does not fall under the ambit of the relevant state laws and hence will not be taxable under VAT or WCT provisions. As per our understanding in this scenario, packaging materials are not supplied by BCCL to Printers.

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Preliminary and tentative For discussion purpose only

Scenario Three – Newspaper supplied by BCCL

In the third scenario, only newspaper is supplied by BCCL. The Printer uses ink and consumables and performs the printing activity in relation to newspapers, books and magazines. In this scenario as well, the activity of printing is a manufacturing activity as a new and marketable product is formed. Hence, like in the first and second scenarios, printing activity is exempt under Central Excise. The activity of printing of newspapers, books and magazines if qualifies as service, service tax will not be levied on such service as the activity of printing is specifically exempt under the notification 14/2004 i.e. old service tax law and under mega notification 25 / 2012 i.e. under new service tax law. Under this scenario, printing activity will qualify as a works contract („WCT‟) as with the activity of printing which is a service, even property (i.e. ink) is getting transferred to BCCL by the Printer. It will be taxable under WCT State Act and the taxability of printing activity should be as per the WCT provisions of the relevant states. As per our understanding, packaging materials are not supplied by BCCL to Printers.

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Scenario Four – No supplies by BCCL

In the fourth scenario, BCCL does not supply any materials except the content to be printed to the Printer. The Printer uses newspaper, ink and consumables and performs the printing activity in relation to newspapers, books and magazines. In this scenario as well, the activity of printing is a manufacturing activity as a new and marketable product is formed. Hence, like in the first and second scenarios, printing activity is exempt under Central Excise. The activity of printing of newspapers, books and magazines if qualifies as service, service tax will not be levied on such service as the activity of printing is specifically exempt under the notification 14/2004 i.e. old service tax law and under mega notification 25 / 2012 i.e. under new service tax law. Under this scenario, printing activity will qualify as a pure sale transaction as only content that is to be printed is supplied by BCCL to Printer. The activity performed by the Printer is a pure sale transaction as no materials are supplied by BCCL and final product i.e. newspapers, books and magazines is a marketable commodity and will become property of BCCL only after delivery on acceptance. The risk will get transferred to BCCL only after the delivery of the prodcut. Hence it is a pure sale transaction subject to VAT. Thus VAT provisions relevant state will be applicable for transaction between the two parties. To support our comments, cases of Sarvodaya, Inland Printers and Hindustan Shipyard should be referred.
Preliminary and tentative For discussion purpose only

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Scenario Four Contd..

As per our understanding, packaging materials are not supplied by BCCL to Printers. To support our comments, cases of Sarvodaya, Inland Printers and Hindustan Shipyard should be referred. In the case of State of Maharashtra Vs Sarvodaya Printing Press Fine Art Printer, the Printer supplied printed material i.e. books to Madhya Pradesh Electricity Board („MPEB‟). The intention of the party was to create work that is specific to the requirement of MPEB. Due to this, there was no commercial market available for the receipt books printed by the Printer and hence the transaction amounted to WCT. In the case of Inland Printers Vs The State of Maharashtra the High Court has held that supplies of printing material as per specifications of a particular customer not being marketable commodity for sale and such supplies by the printer were held to be transactions of works contract not liable to tax under the sales tax law. In case of Hindustan Shipyard Limited Vs State of Andhra Pradesh, only the design was provided to the builder. The ship was prepared as per the design given. The risk was transferred on the delivery of the product.

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Case law – Sarvodaya Printer

Supreme Court decision in case of State of Maharashtra Vs Sarvodaya Printing Press Fine Art Printer [1999] 114 STC 0242 Facts of the case The printer ran a printing press whereby it supplied printed material to Madhya Pradesh Electricity Board („MPEB‟). The material was in the form of receipt books which had the words “Madhya Pradesh Electricity Board” printed in faint colours all over each page of the receipt book as a background, so that the details of the energy bills could be printed on such pages in black. The books were specially designed for MPEB as per its specifications as to size, type, colour, format, background, etc. The printer charged a composite sum (of Rs 8.88 per receipt book) for the entire job and was required to destroy the receipt books in excess of MPEB‟s requirements. The intention of the party was to create work that is specific to the requirement of MPEB. Due to this, there was no commercial market available for the receipt books printed by the Printer. Given the facts and circumstances of the case, and the special type of job work done, it was held as under: The principal object of the MPEB was to get the material printed and not to purchase printed material. Although the paper and ink used were the property of the printer before printing, thereafter they became the property of the MPEB by theory of accretion.

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Case Law Contd..
The passing of property in the goods used to the MPEB was incidental or ancillary to the contract of printing. The goods were not standard goods and were of no commercial value as they could not be used by anyone else. The transaction in question amounted to works contract and did not amount to sale of goods. Thus, Supreme Court in this case considered printing job done by printer as a works contract as against sale of printed material. However, the instant case has the following aspects that can be considered as being different from the facts of the aforesaid case:
In order to determine whether a contract qualifies as a works contract or one for sale of goods, the main object or principle intention of the parties must be looked into. In the instant case, from a review of the proposed agreement between TWDC India and the Printer, it is evident that the intention of TWDC India is to procure the printed work from the Printer and not to get the books printed due to the following:
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TWDC India would purchase the final product ie printed book at a decided price per book; The printer would use its own ink, materials, labour and other supplies necessary for printing and production of books;

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Case Law Contd..
Further, the Printer would be responsible for all risks and losses associated with the books. Only on acceptance by TWDC India, the title and the risks associated with the printed books would be transferred, to TWDC India only upon delivery.

Therefore, it is evident that the books would become the property of TWDC India only after delivery on acceptance. Thus the intention is more in the nature of sale of final product by transfer of printed books. Further, in the case of Sarvodaya Printing Press, the books were of no commercial value as they could not be used for any other purpose or sold in the open market. Since the goods were not marketable by the printers, the arrangement seemed to suggest that it was one for getting the books printed for MPEB and was in the nature of a works contract

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Case Law Contd..

Supreme Court decision in the case of Hindustan Shipyard Limited Vs State of Andhra Pradesh [2000] 119 STC 533 Facts of the case: The builder engaged in the activity of building ships for ship owners entered into contracts to build as per the design and specification provided by ship owner. The builder was provided with relevant engineering drawings for building ships by ship owner. The builder would use its own labour, machinery and other materials required for the construction of the ships to make them completely ready. The price of the ship was fixed and payable in installments at different stages of production. As per the article on „property in the vessel‟, it was mentioned that the property in the ship will get transferred to the ship owner on payment of the first installment and such property shall conspicuously marked as belonging to the owner (with hull number of ship owner mentioned on it). To the extent owner makes payment for the ship, the owner can mortgage the ship for loans. Further, the ship builder will have lien on the property to the extent of non payment of consideration. However, as per article on „risk and expenses‟, if before the delivery any damage occurs to the ship, the builder shall make good such loss. Further, the insurance claim shall be filed by the builder and the insurance consideration will be received by builder itself. Where such damage is substantial (ie loss of ship, destruction etc) before the delivery of the vessel, the builder will repay all the installments paid by the owner. Before the delivery, there shall be some trial runs of the ship. Only after the owner is satisfied with the trial runs, the delivery of the ship will be accepted and hence builder will run the risk in the ship during trial runs also.

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Case Law Contd..
The Supreme Court affirmed the decision of the High Court in the said case, and held as
under: While the contract clause on property in vessel suggest that the property passes to the owner as and when the payment is made, such clause also mentions that it is subject to other clauses in the agreement. The insurance is taken in the joint name of builder and owner. However, what needs to be observed is that any loss or damage to the ship before owner taking possession of the ship is to the builder and not owner. The Supreme Court observed that in case the property in goods had already passed on to the owner, the damage or loss also would have been on account of the owner and not builder. While the contract suggests that owner will have rights in the ship to the extent installments are paid, the succeeding clauses suggest that for all practical purposes, the property in the vessel continues with the builder and passes on to the owner only on satisfactory completion of work, on the vessel coming into existence in deliverable state and on satisfaction of owner of vessel being seaworthy. The Supreme Court further referred to the Sale of Goods Act wherein under section20 to 24, when something needs to be done on the date of the contract to bring goods in a deliverable state, the property does not pass until such thing is done and brought to the notice of the buyer. Thus, based on the full reading of the contract it appears that the chattel comes into existence as chattel in deliverable state by investment of components and labour by the seller and property in chattel is passed on to the buyer on delivery of the chattel.

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Case Law Contd..
Given the above, the Supreme Court held that the contract is for sale of goods and
not of works contract and hence, liable to sales tax

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Defintion:

“Manufacture” includes any process, ► ►

incidental or ancillary to the completion of a manufactured product; which is specified in relation to any goods in the Section or Chapter notes of the First Schedule to the Central Excise Tariff Act, 1985 (5 of 1986) as amounting to manufacture; or which, in relation to the goods specified in the Third Schedule, involves packing or repacking of such goods in a unit container or labelling or re-labelling of containers including the declaration or alteration of retail sale price on it or adoption of any other treatment on the goods to render the product marketable to the consumer;

and the word “manufacturer” shall be construed accordingly and shall include not only a person who employs hired labour in the production or manufacture of excisable goods, but also any person who engages in their production or manufacture on his own account; “Excisable goods” means goods specified in the First Schedule and the Second Schedule to the Central Excise Tariff Act, 1985 (5 of 1986) as being subject to a duty of excise and includes salt; Explanation - For the purposes of this clause, “goods “ includes any article, material or substance which is capable of being bought and sold for a consideration and such goods shall be deemed to be marketable.

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