Transfer-on-Incorporation Doctrine: Consumables used in works contracts are taxable once property passes on application — Supreme Court in Aristo Printers v. Commissioner of Trade Tax, U.P. (2025 INSC 1188)

Introduction

This Supreme Court of India decision resolves a recurring controversy in works contract taxation: whether items that are consumed during execution (such as ink, chemicals, and processing agents used in printing) can nonetheless be treated as “goods” whose property is transferred to the customer and thereby taxed under the State works contract provisions. The Court holds that the taxable event is the transfer of property in goods the moment they are incorporated into the “works,” even if those goods are later consumed or leave no distinct tangible residue.

The appellant, M/s. Aristo Printers Pvt. Ltd., undertook printing of lottery tickets on paper supplied by customers while using its own ink, chemicals, and processing materials. The Uttar Pradesh Assessing Authority levied tax under Section 3F(1)(b) of the U.P. Trade Tax Act, 1948 (“Act, 1948”) on the value of ink, processing and packing materials used in the printing works for AYs 1996–97 and 1997–98. The first appellate authority deleted tax on ink and chemicals but sustained tax on packing material. The Tribunal deleted the tax entirely, relying inter alia on Rainbow Colour Lab and a Bombay High Court decision in RMDC Press. On Revenue’s revisions, the Allahabad High Court restored tax on ink and chemicals, holding that diluted ink as actually used in printing is passed to the customers.

On further appeal, the Supreme Court dismisses the assessee’s appeals and lays down a clarifying doctrine: transfer of property in goods involved in a works contract occurs upon their incorporation into the “works,” and “consumption” thereafter does not negate the earlier transfer. The Court also rejects the plea that lottery tickets are “actionable claims” and hence not “goods,” clarifying that Section 3F taxes the goods involved in execution, not the final printed lottery tickets themselves.

Summary of the Judgment

• Section 3F(1)(b) of the Act, 1948 levies tax on transfer of property in goods (whether as goods or in some other form) involved in execution of a works contract. The Court identifies three cumulative conditions for levy:
  • There is a works contract.
  • Goods are involved in execution of that works contract.
  • Property in such goods is transferred (as goods or in some other form).
• All three conditions are satisfied in the case of printing lottery tickets: printing is a works contract; ink and chemicals are involved; and property in the diluted ink (ink plus processing chemicals) transfers to the customer at the moment of application to paper.
• The taxable event under Article 366(29-A)(b) and Section 3F is the deemed sale at the time of incorporation into the works. Later “consumption” of the goods does not undo transfer that has already occurred.
• The argument that lottery tickets are “actionable claims” is irrelevant: Section 3F taxes goods involved in execution, not the final product. The end-product’s status does not defeat taxability of goods used and transferred during execution.
• “Some other form” in Article 366(29-A)(b) and parallel State enactments includes chemical form; transfer need not be in a visibly separable or traditional physical form.
• The Court explicitly disapproves High Court lines of reasoning that equate “consumption” with “no transfer” (e.g., Pest Control, M.K. Velu, Dynamic Cleaning, Microtol Sterilization), and endorses the approach in Xerox Modicorp and Enviro Chemicals that pin the transfer at the point of application/incorporation.
• Appeals dismissed; High Court’s restoration of tax on ink and processing chemicals is affirmed.

Analysis

Precedents Cited and Their Influence

The Court situates its reasoning within the constitutional and statutory evolution of works contract taxation:

• State of Madras v. Gannon Dunkerley & Co. (1958) (“Gannon Dunkerley I”): Before the Forty-sixth Constitutional Amendment, indivisible works contracts could not be split to levy sales tax on material components because there was no sale as understood in the Sale of Goods Act, 1930. This historic constraint framed the problem-space.
• Forty-sixth Constitutional Amendment (1982): Inserted Article 366(29-A)(b), deeming transfer of property in goods involved in execution of a works contract as a sale, enabling States to tax the material component even in indivisible contracts.
• Builders Association of India v. Union of India (1989): Upheld the 46th Amendment; clarified that States may tax only the transfer of property in goods involved in execution, not the entire works contract; the levy remains subject to Article 286 and the CST Act (Sections 3, 4, 5, 14, 15).
• Gannon Dunkerley & Co. v. State of Rajasthan (1993) (“Gannon Dunkerley II”):
  • Confirmed that the taxable event is transfer of property in goods when they are incorporated in the works.
  • Prescribed the measure of tax as the value of goods at the time of incorporation (not cost of acquisition), excluding charges relatable to labour and services and consumables in which property is not transferred.
• Larsen & Toubro Ltd. v. State of Karnataka (2014), Kone Elevator (2014), and State of Karnataka v. Pro Lab (2015):
  • Reaffirmed the breadth of “works contract” under Article 366(29-A)(b), covering all genres.
  • Rejected the “dominant intention” test; even if the dominant intention is service or transfer of immovable property, States may tax the materials used if the transaction bears elements of a works contract.
• Interpretive anchors for “transfer at incorporation” and “consumption is irrelevant post-transfer”:
  • Xerox Modicorp Ltd. v. State of Karnataka (2005): Toners/developers in maintenance contracts are goods in which property passes when put in the machine; subsequent consumption does not negate transfer.
  • Enviro Chemicals v. State of Kerala (2011) (Full Bench): Chemical poured into effluent water transfers at the moment of addition; later consumption is after-sale consumption and does not defeat taxability.
• Decisions demonstrating that chemical form and non-tangible persistence still constitute transfer:
  • Commissioner of Sales Tax v. Matushree Textile Ltd. (Bom HC, 2003): “Some other form” includes chemical form; dyes and chemicals transferred to fabric even if property passes via chemical reaction.
  • Commissioner of Sales Tax v. Hari & Co. (Bom HC, 2006), Ramdas Sobhraj (Bom HC, 2012), Mohan Offset Printers (Mad HC, 2010), Unique Traders (Mad HC, 2020, 3-Judge Bench): Photocopying and printing decisions treating ink and allied materials as transferred in execution.
• Decisions expressly disapproved for focusing on “consumption means no transfer”:
  • Pest Control India Ltd. v. Union of India (Patna HC, 1989).
  • Deputy CST v. M.K. Velu (Ker HC, 1993) (fireworks display).
  • Dynamic Industrial and Cleaning Services (Ker HC, 1994) (boiler cleaning chemicals).
  • Microtol Sterilization Services (Ker HC, 2009) (ethylene oxide sterilization).
  The Supreme Court holds that these cases proceeded on the wrong footing by treating “consumption” as negating transfer; the correct test is whether property transferred at the moment of incorporation.
• Collector of Central Excise v. Ballarpur Industries (1989): Cited for caution against rigid bright-line formulations; each case turns on facts; nonetheless, a workable principle emerges here: identify the correct taxable event and the moment of transfer.

Legal Reasoning

• Statutory framework:
  • Section 2(d), Act, 1948 defines “goods” to include materials and articles involved in execution of a works contract but exclude actionable claims.
  • Section 2(h) expands “sale” to include the deemed sales in works contracts.
  • Section 3F(1)(b) taxes the net turnover of transfer of property in goods (as goods or in some other form) involved in execution of works contracts.
  • Section 3F(2)(b)(x) allows deduction for the cost of consumables used in execution of the works contract “the property in which is not transferred.”
• Three-condition test under Section 3F(1)(b):
  • Works contract: Printing of lottery tickets is a works contract. The Court notes this is undisputed and consistent with post-46th Amendment jurisprudence.
  • Goods involved: Ink and chemicals are involved in printing; this is factually clear.
  • Transfer of property: The decisive issue. The Court holds that transfer occurs at the precise moment the diluted ink (ink plus processing chemicals) is applied and fixed onto the paper. This is the moment of “incorporation in the works.”
• “Incorporation” is contextual, not limited to visible or separable physical residue:
  • In Gannon Dunkerley II, “incorporation” was used in the context of building works. The Court now clarifies that incorporation is to be read in light of “the works” contracted for. In printing, incorporation occurs when diluted ink adheres to paper to produce the printed ticket.
  • Hence, even where goods operate in chemical form or are later consumed/dissipated, transfer can and does occur at the point of application or integration into the works.
• “Consumption” does not negate transfer:
  • The High Court decisions that equated consumption with absence of transfer analyzed the wrong event. The correct inquiry is: did property pass at any point during execution? If yes, later consumption is irrelevant for taxability. This exactly mirrors Xerox Modicorp and Enviro Chemicals.
  • Consequently, only those “consumables” in which property never transfers (e.g., electricity, fuel, water that aid execution without property passing to the customer) are deductible under Section 3F(2)(b)(x). If property transfers first and consumption happens later, the transaction is taxable.
• “Some other form” includes chemical form:
  • Following Matushree Textile, the Court embraces a purposive reading: goods may transfer in physical, chemical, or otherwise altered form. The dyed shade on fabric and the printed text on paper embody the chemical properties of materials used; property in those inputs is transferred in that form.
• Actionable claims argument rejected:
  • Lottery tickets may be actionable claims and not “goods,” but Section 3F taxes goods involved in execution of the works contract, not the final printed lottery tickets as sale goods. Therefore, the end-product’s classification does not shield the transfer of ink and chemicals used to produce it.
• Quantification note:
  • The assessee did not supply an item-wise break-up of “processing materials.” The Court proceeds on the High Court’s assumption that “processing materials” denote chemicals used to dilute ink. The ruling nevertheless signals best practice: contractors should maintain itemized records to distinguish items in which property transfers from true consumables where it does not.

Impact

This judgment has significant doctrinal and practical implications for works contract litigation under legacy sales tax/VAT regimes and, more broadly, for how courts identify the moment of transfer in composite transactions.

• Doctrinal consolidation:
  • Establishes the transfer-on-incorporation doctrine: the deemed sale occurs when the contractor’s goods are incorporated into the “works,” regardless of whether the goods persist or are later consumed.
  • Clarifies that “some other form” includes chemical or intangible manifestations; a tangible, separable end-residue is not required.
  • Explicitly disapproves High Court decisions that treated “consumption” as defeating transfer. Those decisions should no longer be cited as good law on this point.
• Practical coverage expansion for legacy disputes:
  • Industries likely affected in pre-GST assessments/reassessments: printing and packaging (ink, coatings, lacquers), textile dyeing/bleaching, painting and surface treatments, laminations and varnishes, photocopying/print services, water and effluent treatment (coagulants, flocculants), sterilization services, pest control, fireworks displays, road works involving binders, and other process-heavy service contracts where inputs are applied and “used up.”
  • Taxpayers can still claim deductions for true consumables under provisions akin to Section 3F(2)(b)(x) only where property never transfers to the contractee (e.g., fuel, electricity, certain utilities). The burden of proof rests on the dealer to show non-transfer.
• Valuation and compliance:
  • Measure of tax remains the value of the goods at the time of incorporation, excluding labour/service elements and the costs expressly deductible under Gannon Dunkerley II and Section 3F(2)(b). Cost of incorporation/labour cannot be included in the measure.
  • Dealers should maintain:
    • Item-wise consumption and issue records distinguishing materials that transfer from those that do not.
    • Contracts and invoices reflecting material values where feasible, to aid proper deduction of labour and service elements.
    • Sub-contractor documentation to claim deductions permitted for amounts paid to registered sub-contractors.
• Actionable claims barrier removed:
  • Where the end-product is an actionable claim (e.g., lottery tickets), contractors cannot rely on that status to defeat works contract tax on materials that are transferred during execution.
• GST-era note:
  • While the case concerns pre-GST law and Article 366(29-A)(b), the transfer-on-incorporation logic may still inform interpretative approaches to composite supplies and to understanding when property in goods passes on application. However, the definition and taxation of “works contract” under GST are materially different and confined to immovable property; any application under GST must be undertaken with care and by reference to the CGST/SGST framework.

Complex Concepts Simplified

• Works contract before and after the Forty-sixth Amendment:
  • Pre-1982: Indivisible works contracts could not be taxed on materials unless there were separate contracts for sale of goods; dominant intention and traditional sale concepts controlled.
  • Post-1982 (Article 366(29-A)(b)): The law deems that there is a sale of the goods component in a works contract, allowing States to tax that component independently of service elements. The “dominant intention” test is irrelevant.
• Deemed sale:
  • A legal fiction that treats the transfer of property in goods involved in executing a works contract as a taxable “sale,” even though the transaction is not a sale in the classical sense under the Sale of Goods Act.
• “Some other form”:
  • Goods need not remain as identifiable movables; property may pass in an altered, chemical, or incorporated form (e.g., dyed colour in fabric, printed ink on paper, chemical treatment within effluent).
• “Incorporation in the works”:
  • The point in time when the goods provided by the contractor are applied or integrated into the subject of the contract so as to execute it (e.g., ink applied to paper, chemical poured into water systems). That is when transfer occurs.
• Consumables and deductions:
  • Consumables are deductible only if property in them is not transferred to the customer in execution (e.g., electricity or fuel used to power machinery). If property transfers first and the item is then consumed, it remains taxable.
• Measure of tax:
  • Value of goods at the time of incorporation, not the cost of acquisition; exclude labour and service components (planning/design fees, machinery hire, labour charges, service-related profit) and true non-transferring consumables.
• Actionable claims vs. goods:
  • Even if the final product is an actionable claim (not “goods”), the levy under works contract provisions falls on goods used and transferred in execution, so the end-product’s status is not determinative.

Conclusion

Aristo Printers establishes a clear, administrable rule for works contract taxation under Article 366(29-A)(b) and cognate State provisions: the transfer of property in goods occurs upon their incorporation into the “works,” and subsequent consumption does not negate the transfer. “Some other form” encompasses chemical and intangible manifestations; insistence on visible, persistent residue is legally unwarranted. The Court disapproves contrary High Court rulings that treated “consumption” as dispositive and reaffirms that only consumables in which property never transfers are deductible.

Applied to printing, the decision holds that ink and processing chemicals are transferred to the paper at the time of printing and are therefore taxable under Section 3F(1)(b) of the U.P. Trade Tax Act, 1948, regardless of whether the printed lottery ticket ultimately represents an actionable claim. More broadly, the judgment harmonizes the jurisprudence on works contracts, shifts focus to the correct taxable event (transfer-at-incorporation), and provides compliance guidance to contractors on documentation and valuation. It is poised to influence resolution of pending pre-GST disputes across sectors where materials are applied and “used up” during execution of works contracts.