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Creation of concept not liable to sales tax: SC
January, 11th 2008
In a reprieve to advertising agencies, the Supreme Court has ruled that charges collected towards the services such as evolution of prototype conceptual design, like creation of concept, is not liable to sales tax.

The apex court said the charges collected towards the services for conceptual designs on which service tax was paid under the Finance Act, 1994 as amended from time to time is not liable to tax under the Karnataka Value Added Tax Act, 2003. It set aside a Karnataka High Court order.

Imagic Creative, an advertising company, had came to the apex court in appeal against the high court order. It creates original concepts and designs advertising material for their clients and also designs brochures, annual reports etc.

It filed returns both under the Finance Act, 1994 as also the Karnataka Sales Tax Act. An order of assessment was passed by the authority in terms of Section 12 of the Karnataka Sales Tax Act and Rule 3 of the Karnataka Sales Tax Rules.

After passing of the order of assessment, a raid was conducted. The appropriate authority had held that creation of advertisement is a comprehensive activity leading to creation of goods in question. Even when any other goods are produced, there is some idea and thought regarding the shape and size.

Therefore, to separate design and concept taking the sale value of merely the advertisement material such as brochures is improper, government had said. It had imposed tax at 4% on the entire proceeds received, including those relating to concept charges, system charges etc on an advertising agency.

Against it, the company had went to the Karnataka High Court, which dismissed its appeal. Then it came to the apex court. SC, while allowing the appeal, said, Payments of service tax as also the VAT are mutually exclusive.

Therefore, they should be held to be applicable having regard to the respective parameters of service tax and the sales tax as envisaged in a composite contract as contradistinguished from an indivisible contract. It may consist of different elements providing for attracting different nature of levy.

It is, therefore, difficult to hold that in a case of this nature, sales tax would be payable on the value of the entire contract; irrespective of the element of service provided.
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