2017 (2) TMI 814 - HC - VAT and Sales Tax

Works contract - Chemicals/Solvents used in cleaning activity - exigibility to tax - whether the consumable chemicals/solvents used in the process of cleaning amounts to transfer of property in the goods between the contractor and the Contractee and is thus exigible to tax? - the chemicals and solvent that are used for the purpose of cleaning, washing etc. and are integral part of the works contract. They are goods, which are integral for the very execution of the service contract and are consumables, that are completely consumed in the contract, and no property in them passes to the Contractee. Held that - The soaps, detergent, chemicals and solvent used purely for the purposes of cleaning and which are completely consumed, in the process of the execution of the above referred tasks, cannot by any stretch of imagination be said to goods in which property could pass to the Contractee. Similarly, water is also used in the above-referred process of cleaning and execution of the contract. Can it be said, that even property in water, that is used and consumed in the said process of cleaning and execution of the contract, is also transferred to the Contractee and the value of the water consumed should be exigible to tax - The mere fact that soaps, detergent, chemicals and solvents are deposited in the store of the Contractee would not make any difference to the exigibility, as is sought to be contended by the Revenue/respondents, because, admittedly, by mere deposit in the store, the property in them is not stated to pass. The property in the consumable chemicals used in the process of cleaning does not transfer to the Contractee/Railways and accordingly the said goods are not exigible to tax. Whether the Commissioner was liable to grant a certificate for NIL deduction of Tax Deducted at Source, is dependent on the answer to the above question? - Held that - Since the said goods are not exigible to tax, the Contractee/Railways is not liable to deduct Tax at Source and the Commissioner VAT is liable to grant a certificate for NIL deduction of Tax Deducted at Source. Petition allowed - decided in favor of assessee.

Issues Involved:
1. Whether the consumable chemicals/solvents used in the process of cleaning amount to a transfer of property in goods and are thus exigible to tax.
2. Whether the Commissioner was liable to grant a certificate for NIL deduction of Tax Deducted at Source (TDS).

Detailed Analysis:

1. Transfer of Property in Goods and Tax Exigibility:

The petitioner, a contractor, challenged the order by the Commissioner of Value Added Tax (VAT) which held that the chemicals/solvents used in cleaning services amounted to a sale of goods. The core issue was whether the consumable chemicals/solvents used in cleaning constituted a transfer of property in goods between the contractor and the Contractee (Northern Railways), making them subject to tax under the Delhi Value Added Tax Act, 2004 (DVAT Act).

The petitioner argued that the contract was purely for services, with no transfer of property, and hence, the activities did not constitute a sale under the DVAT Act. The petitioner also contended that the chemicals/solvents were minimal and got completely consumed during cleaning, implying no transfer of property to the Railways.

The Commissioner (DVAT) relied on the Kerala High Court judgment in ‘Enviro Chemicals Vs. State of Kerala’ to hold that pouring chemicals on the property of the Contractee amounted to delivery and thus was exigible to tax. The Special Commissioner of Trade & Taxes supported this view, asserting that the contract was composite, involving the transfer of property in goods.

The court examined Section 2(1)(zc) of the DVAT Act, which defines 'sale' to include the transfer of property in goods involved in the execution of a works contract. The court noted that the chemicals/solvents used by the petitioner were integral and completely consumed during the execution of the contract, with no independent use to the Contractee.

The court distinguished between consumables required for running equipment and those for servicing it. It concluded that the chemicals/solvents used for cleaning were consumables integral to the service contract and were completely consumed, with no property passing to the Contractee. The court found that the Commissioner (DVAT) erred in relying on the judgments in Enviro Chemicals and Xerox Modicorp Ltd., as those cases dealt with goods used for final output, not integral consumables in a service contract.

2. Certificate for NIL Deduction of Tax Deducted at Source (TDS):

The petitioner sought a certificate for NIL deduction of TDS, arguing that since there was no transfer of property in goods, no tax was required to be deducted at source under Section 36(A) of the DVAT Act. The court agreed, holding that the consumable chemicals used in cleaning did not transfer property to the Railways and were not exigible to tax.

Conclusion:

The court set aside the impugned order dated 30.06.2014 and directed the Commissioner VAT to issue a certificate for NIL deduction of TDS. The writ petition was disposed of with no costs.

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