2013 (10) TMI 486 - HC - VAT and Sales Tax

Taxability of works contract of Bleaching and dying - transfer of property - Held that - The fact that the chemicals used for bleaching is washed away in the process, by itself, would not be a justifiable ground to accept the case of the assessee that there was no transfer of property of any goods. The very fact of the yarn being bleached by a chemical process, by applying the chemical, will clearly point out that there is transfer of property of the chemical, hence, bleaching contract attracts sales tax as in the case of dyeing contract, when the chemicals are purchased from outside the state - Following decision of Apparels and Handloom Exporters Association and others Vs. State of Tamil Nadu and others 2001 (9) TMI 1114 - MADRAS HIGH COURT - Decided in favor of revenue.

Summary

Issues:
1. Whether the Sales Tax Appellate Tribunal erred in its order regarding the nature of transaction in dyeing and bleaching works contracts.
2. Whether the chemicals used in the execution of works contracts for dyeing and bleaching are subject to sales tax.
3. Whether the levy of penalty in the Tax Cases (Revision) is justified.

Analysis:
1. The High Court addressed the first issue by examining the nature of transactions in dyeing and bleaching works contracts. The Court noted that in the case of dyeing contracts, chemicals used were held to attract sales tax based on previous decisions. The Court also considered a previous judgment related to bleaching of grey cloth, emphasizing that the change in form referred to in the tax law pertains to goods transformed into another form that would not have been taxable otherwise. Therefore, the Court concluded that both dyeing and bleaching contracts are subject to sales tax.

2. Regarding the second issue, the Court referred to a Full Bench decision of the Kerala High Court in a similar case involving the sale of chemicals used in works contracts. The Court agreed with the Kerala High Court's interpretation that the moment chemicals are applied in the execution of works contracts, there is a transfer of property, making the transaction taxable. The Court upheld the decision that the chemicals used in bleaching contracts are subject to sales tax, even if they are consumed in the process.

3. Finally, the Court dealt with the issue of penalty levied in the Tax Cases (Revision). Citing a previous unreported decision, the Court canceled the penalty, stating that there was no suppression of sales in the turnover and that the penalty was based on an interpretation of the tax law. The Court emphasized that the penalty was rejected solely due to the interpretation of the relevant tax law section, leading to the cancellation of the penalty in all the Tax Cases (Revision).

In conclusion, the High Court ruled in favor of the Revenue, upholding that both dyeing and bleaching works contracts are subject to sales tax on the chemicals used. The Court also canceled the penalty levied in the Tax Cases (Revision) based on the interpretation of the tax law section.