Transfer of Property and Taxability Revisited

October 13, 2025 - By Ashdreams

Background

The Supreme Court revisited the principles governing works contract taxation—particularly when property in goods is deemed to be transferred in the course of such contracts.
The case involved printing of lottery tickets where the appellant used its own ink and chemicals on paper supplied by the customer. The key question:

Whether these materials were consumed or transferred in execution of the works contract under Section 3F of the U.P. Trade Tax Act, 1948?

🔹 Key Legal Issue

Can tax be levied on ink and processing materials used in printing, on the ground that property in such goods stands transferred to the customer at the time of incorporation?

🔹 Supreme Court’s Findings

Constitutional Foundation:
- The Court retraced the evolution from Gannon Dunkerley (1958) to Larsen & Toubro (2014), confirming that post-46th Amendment, even an indivisible works contract can involve a deemed sale of goods.
- States can tax only that portion of the contract value representing goods incorporated in the work.
Section 3F Conditions:
To attract tax under Section 3F, three elements must coexist:
- A works contract;
- Involvement of goods in its execution; and
- Transfer of property in such goods, either as goods or in another form.
Application to the Present Case:
- The Court held that the ink and chemicals used during printing were incorporated into the paper and thus formed part of the final product.
- The property in these goods was transferred at the moment of printing, satisfying the test of a taxable works contract.
- Consumables that do not become part of the output (like electricity or water) remain outside tax purview.

Landmark Precedents Cited

State of Madras v. Gannon Dunkerley & Co. (1958)
Builders Association of India v. Union of India (1989)
Gannon Dunkerley (II) (1993)
Larsen & Toubro Ltd. v. State of Karnataka (2014)
Kone Elevator India Pvt. Ltd. (2014)
Rainbow Colour Lab v. State of M.P. (2002)

Key Takeaways

Transfer Timing: Property in goods is deemed transferred when incorporated into the works, not upon delivery or completion.
Dominant Nature Test Irrelevant: After the 46th Amendment, it no longer matters whether the contract’s dominant intention is service or sale—any incorporation of goods triggers taxability.
Consumables vs. Incorporated Goods: Consumables that merely aid the process (like water or fuel) are non-taxable, but goods forming part of the final output (like ink on paper) are taxable.
Valuation Principle: Tax is computed on the value of goods at the moment of incorporation, consistent with Gannon Dunkerley (II).
Doctrinal Continuity: The judgment bridges the pre-GST and GST eras, reaffirming the central role of “transfer of property in goods” in works contract taxation.

GST Perspective

Section 2(119) of the CGST Act mirrors the pre-GST concept of works contracts.
The same test—incorporation equals transfer—continues to govern GST treatment.
Taxpayers must accurately bifurcate material and service components in composite supplies to avoid classification disputes.
The decision reinforces interpretative continuity between the erstwhile Trade Tax and GST frameworks.

Conclusion

The Supreme Court’s ruling in Aristo Printers Pvt. Ltd. decisively clarifies that the essence of a works contract lies in incorporation—the moment goods merge into the final product, their property stands transferred.
By harmonising decades of jurisprudence from Gannon Dunkerley to Larsen & Toubro, the Court provides a timeless principle for both pre-GST and GST regimes:

“Transfer occurs not when goods are delivered, but when they become part of the work.”

This decision cements the doctrinal link between traditional sales tax law and modern GST interpretation—ensuring consistency and legal certainty in the taxation of works contracts.