2018 (5) TMI 1797 - HC - VAT and Sales Tax

Levy of tax - chemicals used as consumables in the process of job work of dyeing of fabric - tax is levied irrespective of the fact whether property in goods had been transferred or not. What is the quantum of transfer of property in goods while executing the job work of bleaching and dyeing? Held that - In the process of dyeing, some portion of colour is embedded in the fabric which is passed on to the principals for whom the job work is undertaken whereas certain portion is used as consumable only - Consumables are items which are lost in the course of execution of works contract. Even though consumables are items which are lost to the contractor, but it is not a gain for the awarder. Admittedly, in the present case, the assessee is a textile processor and is engaged in the execution of job work. The grey fabric is received by the processor which is processed into finished cloth by subjecting it to various processes such as bleaching, dyeing, de-sizing and printing. The finished fabric after processing/manufacturing is sent back to the owner of the fabrics - also, certain chemicals are used which are consumables and which do not hold on to the cotton fabrics. After completion of the aforesaid processes, dyeing is undertaken which holds on to the cotton fabric giving lasting impression and ultimately converts the grey fabric into printed fabric which is marketed in the market. In the act of dyeing, as also in printing, certain amount of chemicals, dyes and colours are washed out and they do not remain embedded on the textile or fabric. Thus, the benefit of chemicals, dyes and colours which get washed out to this extent would be extended to the assessee-appellant. It would be pertinent to observe that what is taxable under the HVAT and CST Act is the value of the goods which get transferred to the customer in the execution of 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. The tax on the entire value of chemicals consumed during the process of dyeing and job work are not to be included for the purpose of levy of VAT as substantial portion of the same is not transferred to the principal eventually. In Taktex Processing Complex vs. State of Kerala, 2002 (10) TMI 761 - KERALA HIGH COURT , the issue was whether the Tribunal was justified in holding that the chemicals and dyes used up in the execution of job works was taxable at the hands of the petitioner. It was held that the item dye used in the process of bleaching textile fabrics, could not be treated as a consumable mentioned in Section 5C(1)(c) (iii) of the Act. Having arrived at the conclusion that chemicals used in the job work are taxable but the pertinent question to be answered would be as to how much of dyes/colours are taxable which is transferred to the fabric when the whole quantity of consumable is not transferred - In the present case, it would be essential to determine the value of consumables transferred in the goods on which tax is leviable. While determining the actual loss of chemicals, dyes and colours where the fabric or textile undergoes various processes depends upon factual aspect which can be considered only by the Assessing Officer where parties can produce evidence in respect of their respective claims/contentions. The matter is remanded to the Assessing Officer to work out the details of quantity of chemicals, dyes and colours that would get washed out in the process of dyeing and printing of fabrics undertaken by the appellant - appeal disposed off by way of remand.

Issues Involved:
1. Levy of tax on chemicals used as consumables in the dyeing process.
2. Levy of tax on the entire value of dyes used in the dyeing process.
3. Transfer of property in goods (dyes and chemicals) during the dyeing process.
4. Reliance on the judgment of the Bombay High Court in Commissioner of Sales Tax Vs. Matushree Textiles Limited.

Detailed Analysis:

1. Levy of Tax on Chemicals Used as Consumables in the Dyeing Process:
The appellant-assessee, a registered dealer under the HVAT Act and CST Act, contended that no sales tax should be levied on chemicals used as consumables in the dyeing process. The assessing authority, however, concluded that the property in goods (dyes and chemicals) passed on during the job work process should be taxed, raising a tax demand of ?5,34,516/-. The Tribunal upheld this view, relying on the Bombay High Court's decision in Commissioner of Sales Tax Vs. Matushree Textiles Limited, which held that the property of materials used in dyeing and printing is passed on to the fabric, thus constituting a deemed sale taxable under the Works Contract.

2. Levy of Tax on the Entire Value of Dyes Used in the Dyeing Process:
The appellant argued that not the entire quantity of dyes used in the dyeing process should be taxable since a substantial portion is wasted and not transferred to the principal. The Tribunal dismissed the appeal, upholding the tax on the entire value of chemicals and dyes used in the process. The appellant relied on technical reports indicating that only a small portion of dyes and chemicals are retained in the finished fabric, with the rest being washed out.

3. Transfer of Property in Goods (Dyes and Chemicals) During the Dyeing Process:
The core issue was whether the entire quantity of dyes and chemicals used in the dyeing process constitutes a transfer of property. The court referred to various technical reports which indicated that only a small percentage of dyes and chemicals are retained in the fabric, with the majority being washed out. The court concluded that consumables used in the dyeing process, which do not transfer property to the principal, should not be taxed. The judgment in Gannon Dunkerley vs. State of Rajasthan was cited, which held that the cost of consumables should be excluded from the value of goods on which tax is payable in a works contract.

4. Reliance on the Judgment of the Bombay High Court in Commissioner of Sales Tax Vs. Matushree Textiles Limited:
The Tribunal's reliance on the Bombay High Court's judgment was challenged on the grounds that the case dealt with the applicability of works contract tax and not the quantification of goods on which tax is to be levied. The court noted that the Bombay High Court had not addressed the issue of the quantity of dyes and chemicals to be taxed. The court emphasized that what is taxable under the HVAT and CST Acts is the value of goods transferred to the customer, not the value of consumables used in the process.

Conclusion:
The court set aside the impugned orders and remanded the case to the Assessing Officer to determine the actual quantity of chemicals, dyes, and colors that get washed out during the dyeing process. The Assessing Officer was directed to conduct a factual inquiry, allowing parties to produce evidence regarding their contentions and to add to the value of turnover only the percentage of chemicals, dyes, and colors retained or embedded in the fabric. The appeals were disposed of accordingly.

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