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2008 DIGILAW 4442 (MAD)

SREENIVAS AND CO. v. STATE OF TAMIL NADU.

2008-12-01

K.K.SASIDHARAN, PRABHA SRIDEVAN

body2008
ORDER K. K. Sasidharan, J. - This tax case is at the instance of the assessee, being aggrieved by the order passed by the Tamil Nadu Sales Tax Appellate Tribunal dated May 26, 2000 in T.A. No. 1009 of 1999. The following substantial question of law is raised for our consideration : "Whether the Sales Tax Appellate Tribunal was correct in their conclusion that the chemicals used in the process of tanning raw hides and skins involves transfer of property and liable for tax under section 3B of the Tamil Nadu General Sales Tax Act, 1959 ?" The factual matrix necessary for the disposal of the tax case are as under : The assessee is a dealer in hides and skins and for the assessment year 1995-96, the assessee purchased chemicals and used the same for processing hides and skins quantified at Rs. 7,58,524. The assessee claimed exemption of the cost of consumables under the head "labour charges and other like charges" but the same was not acceptable to the assessing authority and accordingly exemption was denied and the taxable turnover was computed. Challenging the assessment order dated March 27, 1997, the assessee filed a statutory appeal before the Appellate Assistant Commissioner. Before the Appellate Assistant Commissioner, the assessee contended that though chemicals were used for conversion of raw skins into tanned leather, the chemicals have no independent existence and the same were completely washed away in the process and as such it was only a "catalyst". However the Appellate Assistant Commissioner negatived the said contention on the ground that raw skins which are perishable have been converted into dressed leather by using chemicals and in that process, the materials used have improved the product and enhanced the value and as such there has been accretion of property in the finished goods and accordingly rejected the case of the assessee. Aggrieved by the said order, the assessee preferred an appeal before the Tamil Nadu Sales Tax Appellate Tribunal. The Tribunal endorsed the view of the Appellate Assistant Commissioner that there was accretion of property in the finished goods obtained in the process by utilising chemicals and as such the utilised chemicals cannot be equated to a consumable like fuel and accordingly confirmed the order of the Appellate Assistant Commissioner. It is the said order, which is impugned in the present tax case. It is the said order, which is impugned in the present tax case. The learned counsel for the petitioner submitted that there was no transfer of property involved in the matter with the usage of chemicals and it only acted as a "catalyst" and as such the sales tax authorities were not justified in negativing the claim of exemption. The learned counsel also produced a process chart to show the steps involved in tanning in support of his submission that the chemicals used, acted only as a "catalyst" and in the process, the chemicals lost its form. The learned Special Government Pleader appearing on behalf of the Revenue, however, contended that the chemicals have really improved the product and consequently enhanced the value of leather and as such, there was accretion of property in the finished goods and in such view of the matter, the authorities were fully justified in rejecting the claim of exemption. The learned counsel for the assessee relied on the following judgments : (1) Pest Control India Ltd. v. Union of India [1989] 75 STC 188 (Patna). (2) Commissioner of Sales Tax v. R.M.D.C. Press Pvt. Ltd. [1999] 112 STC 307 (Bom). (3) Bavens v. Union of India [1995] 97 STC 161 (Ker). (4) Tamil Nadu Mosaic Manufacturers Association v. State of Tamil Nadu [1995] 97 STC 503 (Mad). The issue involved in Pest Control India Ltd. v. Union of India [1989] 75 STC 188 (Patna) pertains to exemption claimed on the value of the chemicals used in execution of contract for eradication of pests, rodents, termites, etc. The Division Bench of the Patna High Court having found that the involvement of chemicals in the contract of eradication of pests does not involve transfer of any goods held thus : "13. While it is true that in view of the Constitution (Forty-sixth Amendment) Act, 1982, what was earlier considered to be one indivisible contract is by legal fiction altered into a contract which is divisible into one for the sale of goods and the other for supply of labour and services. It is now possible for the State to levy sales tax on the value of goods involved in a works contract. But even so this presupposes the existence of goods, because there can be no transfer of property in goods unless the goods themselves exist. It is now possible for the State to levy sales tax on the value of goods involved in a works contract. But even so this presupposes the existence of goods, because there can be no transfer of property in goods unless the goods themselves exist. In the instant case, it is not disputed that the chemicals are used for the purpose of eradicating pests. The chemicals are sprayed through machines so that when the process ends, nothing tangible remains in which property is transferred. By the process of spraying or applying chemicals, a place is treated against insects and pests but in the process the chemicals are themselves consumed and there remains nothing in which property is transferred. I am of the view that a transaction as the one in question really does not involve transfer of any goods as understood in sub-clause (b) of clause (29A) of article 366 of the Constitution of India or under the provisions of the Bihar Finance Act, 1981. It is a service contract pure and simple and does not involve any sale of goods since there are no goods in which property can be transferred. ..." In Commissioner of Sales Tax v. R.M.D.C. Press Pvt. Ltd. [1999] 112 STC 307 a Division Bench of the Bombay High Court considered the issue as to whether in the execution of job-work of printing, there was transfer of property in the ink which was used for the purpose of printing and ultimately held thus : "5. The question that arises for consideration is whether in execution of job-work of printing, any transfer of property in the ink is involved. We have given our careful consideration to this controversy. We, however, find it difficult to hold that in the execution of job-work of printing, there is any transfer of property in the ink which is used for the purpose of printing. In fact, ink is a tool of the printer, it is consumed in the process of printing and loses its identity as 'goods'. No property can be said to pass in ink in execution of the contract of printing, either as ink or in any other form. No customer, is concerned with the ink used in printing, its quantity or cost. It cannot be said that when a customer gets some papers printed, he also gets ink either as ink or in any other form. No customer, is concerned with the ink used in printing, its quantity or cost. It cannot be said that when a customer gets some papers printed, he also gets ink either as ink or in any other form. There is thus no transfer of ink involved in execution of a works contract of printing. It may be pertinent to observe that what is taxable under the Act is the value of the goods which get transferred to the customer in execution of the works contract, either as goods or in any other form and not the value of goods used or consumed in the execution of the works contract, if such user or consumption does not result in transfer of property in those goods in any form to the customer. That being so, in our opinion, the Tribunal was right in holding that there is no transfer of property in ink involved in the execution of contract of printing, either as ink or in any other form." A Division Bench of the Kerala High Court in Bavens v. Union of India [1995] 97 STC 161 observed that when a photographer takes a photograph of his customer, develops the negative and supplies positive prints in the desired size to the customer, the photographer uses his own camera and his own film and the negative which was subjected to further processing belongs to the photographer and not to the customer and no basic goods are provided by the customer which are subjected to processing, etc., by the photographer so as to make the contract as works contract. There was no accretion to goods or property or the nucleus of property which originally belonged to the customer. There was no works contract involved in the category of a photographer's activity and held thus : "11. It is contended by the petitioners that none of the three categories of the photographic work undertaken by them, would come within the term 'works contract' as defined in the Act as it does not involve construction, fitting out, improvement, repair, manufacture, processing, fabrication, erection, installation, modification or commissioning of any movable or immovable property. The contract between them and the customer is only that of skill and labour in the nature of a service contract. The contract between them and the customer is only that of skill and labour in the nature of a service contract. Passing of property in the photographic paper while handing over the positive prints is only incidental to the contract of service and that the concept of the deemed sale has no application in the nature of the transaction. A customer approaching a photographer to take photos and get the photo prints, has no intention of buying a photograph. Apart from the above, it is contended that the general test in relation to a works contract is also not satisfied in the instant case. Peculiar character of a works contract is that such a contract is for execution of certain works in relation to pre-existing immovable or movable property. The question of works contract would not arise when the transaction does not relate to basic goods or a nucleus in relation to which some works have to be executed. 'The goods' means property of a person other than the contractor with reference to which a works contract should be executed. According to the petitioners, the 46th Amendment makes it possible for the State to levy sales tax only on the price of goods and materials used in works contracts as if there was a sale of such goods and materials and not on the value of the materials used incidentally in a service contract. Since the works carried on by the petitioners do not come within the definition of 'works contract' under the Kerala General Sales Tax Act and by applying general tests also it cannot be treated as a works contract, no portion of their turnover can be made exigible to sales tax." A Division Bench of this court in Tamil Nadu Mosaic Manufacturers Association v. State of Tamil Nadu [1995] 97 STC 503 held that whenever a commercial commodity which has suffered sales tax was transformed into another distinct commercial commodity, it becomes a separate and distinct commercial commodity for the purposes of levy of sales tax and it can be taxed again. It was further held that when the dealer purchases a commercial commodity which has suffered sales tax and out of such commercial commodity he manufactures another distinct commercial commodity and uses it in the execution of a works contract, the commercial commodity purchased by the dealer was not used in the execution of the works contract in the same form in which it was purchased; what is used in the execution of the works contract is a distinct and different commodity. It was also held that the cost of consumables used in the execution of works contract, the property in which is not transferred in the course of execution of the works contract, will come within the purview of "labour charges and other like charges" contemplated under sub-section (2)(e) of section 3B of the Act and therefore cost of such consumables has to be excluded from the total turnover for the purpose of levy of tax under section 3B(1) of the Act. The learned Government Pleader placed reliance on the judgment of the Bombay High Court in Commissioner of Sales Tax v. Hari and Company [2006] 148 STC 92. In the said case, the assessee was involved in the business of corn-binding, electronic typing, computerised art work and taking out duplicate copies of photocopying and the stand of the assessee with regard to the use of paper and ink being incidental or accessory to the execution of the works contract, was rejected by holding that the value of goods transferred was of no relevance and once there was transfer of property, it shall be deemed as a sales transaction within the execution of the works contract. The issue to be decided in the present case is as to whether there was transfer of property involved in the process. In the event of transfer of property takes place in any form on account of usage of consumable goods, no exemption could be claimed in respect of such cost of consumable goods. A thing can have a form of its own, when it exists. Proof of such existence of a thing is a form in which it manifests itself. Therefore "the form" assumes significance. If it is demonstrated that there was accretion on account of the process involving particular goods, it amounts to "sale". There is no requirement that such accretion has to be in the form of a particular material. Proof of such existence of a thing is a form in which it manifests itself. Therefore "the form" assumes significance. If it is demonstrated that there was accretion on account of the process involving particular goods, it amounts to "sale". There is no requirement that such accretion has to be in the form of a particular material. It could be in the form of colour transformation or any other form and in case it retains the identity of the goods in any form, necessarily there was transfer of property in goods. On the other hand, in case the consumable item is consumed in the process and it completely loses its character as well as identity as goods, it cannot be said that there was transfer of property in execution of the works contract in any form. Therefore no straitjacket formula could be adopted to find out as to whether there was transfer of property in a particular process. Each case has to be decided on the peculiar facts of the said case. Factual materials should be produced before the authorities for claiming exemption by demonstrating that there was no transfer of property in the goods in a particular transaction involving particular goods. In the case on hand, though the petitioner claimed exemption on the value of chemicals, no factual details were furnished before the assessing authority or before the Appellate Assistant Commissioner as well as before the Tribunal about the steps involved in tanning by usage of chemicals. Even though the learned counsel has produced before us the process chart, the fact remains that those particulars were not produced before the authorities below. The appellate authority simply stated that transfer of property can take place in any form but however did not give any factual finding as to how the transfer of property took place in the present case. Therefore we are of the considered opinion that the matter requires to be considered by the assessing authority afresh. Accordingly we set aside the order dated May 25, 2000 of the Sales Tax Appellate Tribunal and the matter is remitted to the assessing authority for fresh consideration. Therefore we are of the considered opinion that the matter requires to be considered by the assessing authority afresh. Accordingly we set aside the order dated May 25, 2000 of the Sales Tax Appellate Tribunal and the matter is remitted to the assessing authority for fresh consideration. The petitioner is directed to produce materials before the assessing authority in support of their contention that there was no transfer of property involved in the process and the chemicals were completely washed away in the process and as such acted merely as a "catalyst". The particulars so furnished by the assessee has to be considered by the assessing officer and a factual finding should be recorded with due opportunity to the petitioner. Since the matter pertains to the assessment year 1995-96, the assessing authority is directed to decide the issue as expeditiously as possible and in any case, within a period of three months from the date of receipt of a copy of this order. The tax case is disposed of with the above direction. No costs.