2024 (10) TMI 500 - HC - VAT / Sales Tax

Rate of tax applicable to the tread rubber that was sold by the assessee to the customers in the course of execution of the works contract - transfer of goods not in the form of tread rubber but in some other form - applicable rate would be 12.5% / 14.5% for the assessment years 2011-12 / 2013-14 respectively or not - HELD THAT - It is found that apart from the fact that the clarificatory order dated 7.4.2016 admittedly governed the parties for the assessment years 2011-12 and 2013-14 respectively, the process adopted by the assessee for the purposes of retreading works involved the incorporation of a tread rubber strip manufactured by it on to the old tyres that were brought by the customers for retreading. The process of works contract apparently involved the scraping of the outer layer of the old tyre so as to make it suitable for the affixation/fusion of the tread rubber strips manufactured by the assessee onto it. There may have been other processes including vulcanization which were necessary for the purposes of effective retreading done on an old tyre. In our view, the processes undertaken by the assessee were sufficient to rob the tread rubber strips manufactured by it of their original identity and shape while being incorporated into the works contract of retreading the old tyre. As rightly noticed by the First Appellate Authority and in the clarificatory order dated 7.4.2016, that the transfer of goods involved in the execution of the works contract in the instant cases was not in the form of goods but in some other form. The impugned orders of the Appellate Tribunal cannot be legally sustained. The appropriate rate of tax on the sale of tread rubber by the assessee would have to be taken as @ 12.5% for the assessment year 2011-12 and 14.5% for the assessment year 2013-14. The O.T. Revisions are thus disposed by answering the questions of law raised in favour of the Revenue and against the assessee.

Summary

Issues:
Rate of tax applicable on the sale of retread rubber used in a works contract under the Kerala Value Added Tax Act for assessment years 2011-12 and 2013-14.

Analysis:
The High Court of Kerala considered two Revision Petitions concerning the rate of tax on the sale of retread rubber used in a works contract. The State challenged the Kerala Value Added Tax Appellate Tribunal's decision, which favored the assessee's contention of a lower tax rate. The assessee engaged in retreading tires using tread rubber manufactured by them, incorporating it into old tires provided by customers. The Tribunal accepted the assessee's argument that the transfer of goods was in the form of goods, not in some other form, leading to a lower tax rate. However, the State argued that the goods lost their identity during the works contract process, justifying a higher tax rate.

The Court analyzed the nature of the transaction and the processes involved in retreading. It noted that the tread rubber strips lost their original identity when fused into the old tires during the works contract. The Court referred to clarificatory orders from the Department of Commercial Taxes, emphasizing that the transfer of retread rubber should be seen as a transfer of goods in the form of goods. The State highlighted that newer technologies did not change the applicability of the higher tax rate for the relevant assessment years, as per the 2016 order.

After considering the submissions, the Court held that the processes undertaken by the assessee altered the tread rubber strips' original identity, justifying the higher tax rate. The Court concluded that the transfer of goods in the works contract was not in the form of goods but in some other form, aligning with the 2016 clarificatory order. Consequently, the Court ruled in favor of the Revenue, upholding the higher tax rates for the assessment years 2011-12 and 2013-14. The O.T. Revisions were disposed of in favor of the Revenue, rejecting the assessee's arguments.