2011 (2) TMI 1296 - HC - VAT and Sales Tax

Whether the service rendered by the petitioner in the form of chemical treatment of effluent water for the awarder amounts to sale of goods in the execution of works contract? Held that - In both these Revision Petitions, no doubt, a question of law is raised concerning the correctness of the rate of tax applied. This is not mentioned in the Order of Reference as such. This was not argued before us by the learned counsel appearing for the parties. In such circumstances, we answer the Reference by holding that there was indeed a sale of chemical involved in the execution of the works contract, in view of the Judgment of the Apex Court in Xerox Modicorp Ltd. v. State of Karnataka (2005 (8) TMI 359 - SUPREME COURT OF INDIA), as there is delivery of the same to the awarder by virtue of the chemical being poured into the effluent. The Revision Petitions will be posted before the concerned Bench for disposal of the same.

Issues Involved:
1. Whether the chemical treatment of effluent water amounts to the sale of goods in the execution of a works contract.
2. Whether the chemical used in the process is considered a consumable or a taxable good.
3. Applicability of the principle "quicquid plantatur solo, solo cedit" in the context of the works contract.
4. Interpretation of "transfer of property in goods" under the Kerala General Sales Tax Act, 1963.

Issue-wise Detailed Analysis:

1. Whether the chemical treatment of effluent water amounts to the sale of goods in the execution of a works contract:
The petitioner developed a chemical product named "Envirofloc" used for effluent treatment. The department argued that the material is consumed in the process and gets transferred, thus constituting a sale of goods involved in the execution of a works contract. The petitioner contended that no transfer or sale occurred. The court referred to various precedents, including the Supreme Court's decision in Tata Consultancy Services v. State of Andhra Pradesh, which held that sales tax could be levied even without the transfer of tangible goods.

2. Whether the chemical used in the process is considered a consumable or a taxable good:
The petitioner argued that the chemical is consumed during the treatment and does not transfer to the awarder. The court examined the process and noted that the treated water is discharged into the river without containing chemicals. The court referred to decisions like Dynamic Industrial and Cleaning Services (P) Ltd. v. State of Kerala, which held that chemicals used in cleaning processes are consumed and not transferred. However, the court also considered the decision in Xerox Modicorp Ltd. v. State of Karnataka, where it was held that the transfer of property occurs before the goods are consumed.

3. Applicability of the principle "quicquid plantatur solo, solo cedit":
The principle states that materials incorporated or affixed to a property become part of that property. The court noted that this principle is relevant in building and engineering contracts but may not directly apply to the effluent treatment process. The court concluded that the moment the chemical is poured into the effluent, the property in the chemical passes to the awarder.

4. Interpretation of "transfer of property in goods" under the Kerala General Sales Tax Act, 1963:
The court analyzed the definitions of "dealer," "sale," and "turnover" under the Act. It noted that the Act includes the transfer of property in goods involved in the execution of a works contract. The court referred to the decision in Gannon Dunkerley And Co. And Others v. State of Rajasthan And Others, which held that the cost of consumables used in works contracts is not taxable. However, the court concluded that the transfer of the chemical to the awarder occurs when it is used in the effluent treatment process, making it taxable.

Conclusion:
The court held that there was indeed a sale of the chemical involved in the execution of the works contract, as the property in the chemical transfers to the awarder when it is used in the effluent. The subsequent consumption of the chemical does not negate the fact of sale. The court answered the reference by holding that the petitioner is liable to pay sales tax on the chemical used in the effluent treatment process. The revision petitions were to be posted before the concerned bench for disposal.

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