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TMI Blog2003 (8) TMI 478X X X X Extracts X X X X X X X X Extracts X X X X ..... he execution of the works contract. Accordingly we hold that in the process of dyeing, the coloured shade passed on to the fabrics constitutes sale of the materials used in dyeing, under the Works Contracts Act. As rightly contended by the counsel for the Revenue, under the Works Contract Act, what is relevant is the passing of property in goods used in the execution of the works contract and not the quantity of the material that passes. It is not the case of the respondents that the chemical solution used for dyeing retains its property even after dyeing. In fact, it is the specific case of the respondents that the solution prepared for dyeing the grey fabrics of one customer, cannot be used for dyeing the grey fabrics of another customer. It is the case of the respondents that on completion of dyeing, of a particular fabric, the chemical solution becomes worthless and is thrown as a waste. Therefore, it is clear that on completion of dyeing, the entire property of the materials used in dyeing are passed on and what remains as solution is nothing but the residue or the waste. In other words, the coloured shade on the fabrics represents the entire property of the materials used in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct, 1989, the Tribunal was justified in law in holding that the activity in which the transfer of property in goods is too insignificant will not attract the provisions of the said Act? 2. Facts relevant for this reference, are, that the respondent is a limited company engaged in the business of dyeing, bleaching and printing of grey fabrics received from the customers. For the purpose of dyeing, bleaching and printing, the respondent uses materials such as colours, dyes and chemicals and these materials are converted into a solution and stored in a tank. Thereafter, the grey fabric is passed through the above solution several times, till the requisite coloured shade is obtained on the fabric as per the specifications of the customer. Thereafter, the dyed fabric is washed through a water solution to drain away the chemical solution remaining on the fabrics. On completion of the job-work, the dyed/printed fabrics with the requisite coloured shade are returned by the respondent to the respective customers. 3. On November 1, 1988, the respondent raised an issue before the Commissioner of Sales Tax, under section 52 of the Bombay Sales Tax Act, 1959 (hereinafter referred to as the BST ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Contracts Act. That under the Works Contracts Act, neither the intention of the parties to transfer the goods is relevant nor the quantity of the property in goods which passes is relevant. That once the property in goods either as goods or in any form passes, then, there is a deemed sale and the provisions of the Works Contracts Act are attracted. That in the present case the dispute is restricted to dyeing and printing only. That in the process of dyeing and printing, the chemical property of the colours, dyes and chemicals are transferred to the fabrics supplied by the customers in the form of coloured shade/print. According to Mr. Bharucha, the fact that the solution of colours, dyes and chemicals used in dyeing and printing, on completion of the process are thrown out is wholly irrelevant. Once the property of the colours, dyes and chemicals are passed on to the fabrics, then what is thrown out is only a waste. 7. Mr. Bharucha submitted that the coloured shade on the fabrics is due to the chemical reaction of dyes and chemicals and that, even if it is held that in the process of dyeing and printing, the dyes and chemicals have ceased to exist as goods, in view of their prope ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3, and submitted that the accretion of coloured shade on the fabrics due to chemical reaction of the materials used in the process of dyeing and printing represents the form of the goods used in the process of dyeing and printing and, therefore, there is transfer of goods within the meaning of the Works Contracts Act. He then relied upon the Full Bench decision of the Punjab and Haryana High Court in the case of East India Cotton Manufacturing Company Limited v. State of Haryana reported in [1993] 90 STC 221 and submitted that after the Forty-sixth Amendment it has become possible for the States to levy sales tax on the property of the goods passing in a composite works contract in the same way in which the sales tax is leviable on the price of the goods and materials supplied in a building contract which had been entered into in two distinct and separate parts. He then relied upon the decision of the Maharashtra Sales Tax Tribunal in the case of Electro Engineers v. State of Maharashtra reported in (2000) 21 MTJ 145, and submitted that in the execution of a works contract, if the property in goods passes in any form, then it is a sale under the Works Contracts Act. Accordingly, Mr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that to constitute transfer of the goods, there must be intention to transfer goods, there must be price fixed for such transfer of goods and there must be actual transfer of goods which are visible and perceivable. In other words, the chattel must pass as a chattel. In the contract for dyeing, neither there is intention to transfer goods nor any intention to transfer the property in goods in any form and in fact on dyeing, neither the goods as goods or in some other form can be seen or perceived on the fabric. Therefore, there is no transfer of goods and consequently there is no sale within the meaning of the Works Contracts Act. 12. Mr. Joshi submitted that both the questions referred at the instance of the Commissioner are questions of fact and not questions of law. Mr. Joshi submitted that the basis of taxability under the Works Contracts Act is transfer of property in goods and unless there is transfer of property in goods, there is no liability for payment of tax. He submitted that the transfer of property in goods may take place by sale, or as ancillary to the service contract or by way of accession in a works contract. Transfer of property in goods, except in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mitted that there is no passing of property in goods, either as goods or in some other form and, hence the Works Contracts Act is not attracted. 14. Mr. Joshi further submitted that the contention of the Revenue that the materials used in the process of dyeing and printing are transferred in the form of coloured shade is not correct. In the case of dyeing, it is the solution made of dyes, chemicals and other reagents which comes in contact with the grey cloth. He submitted that the solution made of dyes, chemicals and colour can be said to be a form of the goods, but that solution itself being not marketable, it is incapable of being sold. Mr. Joshi submitted that the apex Court in a number of cases has held that in fiscal taxation, either in sales tax or excise, the goods can be sold only if they are marketable goods. A solution prepared for use on the spot for a specific job and for a specific customer has no market, and no person would buy the same. He submitted that the term marketability has been interpreted by the courts to mean goods which can be bought and sold in the open market. He submitted that in the instant case, the solution being not marketable, the question of tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ence, there being no transfer, the Works Contracts Act is not applicable. 17. Mr. Joshi referred to the decision of the apex Court in the case of State of Maharashtra v. Sarvodaya Printing Press Fine Art Printer reported in [1999] 114 STC 242. In that case, the respondent who ran a printing press, entered into an agreement with the Madhya Pradesh Electricity Board for the supply of revenue money receipt book at the rate of Rs. 8.88 per receipt book. It was held in that case that the paper and ink used in the process were the property of the respondent before printing but after printing, they became the property of the Board. It was held that the property in those goods, i.e., the paper and ink which was passed on to the Board, was only incidental or ancillary to the contract of printing and, therefore, it was not a case of sale but a works contract and hence sales tax was not leviable under the Bombay Sales Tax Act. 18. Mr. Joshi relied upon the decision of the apex Court in the case of Everest Copiers v. State of Tamil Nadu reported in [1996] 103 STC 360. In that case, while dealing with the Tamil Nadu General Sales Tax Act (prior to 1982) it was held that the work undertaken by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o. Ltd. v. Collector of Central Excise [1995] 97 STC 307, the burden is on the Revenue to lead evidence to show that the goods in question are marketable. He submitted that if the Revenue fails to discharge the burden, then, the case of the Revenue fails. Accordingly, Mr. Joshi submitted that in the present case, neither the revenue has proved that the solution of dyes, chemicals and colours used in dyeing were marketable, nor the revenue has proved that the chemical solution has been transferred to the customer in the execution of works contract and, hence there being no sale, the job-worker/respondent is not a dealer within the meaning of the Works Contracts Act and, therefore, not liable to pay sales tax 21. Mr. Joshi relied upon the decision of the apex Court in the case of State of Uttar Pradesh v. Union of India [2003] 130 STC 1 as well as the decision of the West Bengal Taxation Tribunal in the case of Studio Kamalalaya v. Commercial Tax Officer [1993] 89 STC 307 and submitted that when a finished product produced out of raw materials is delivered, at best a transfer of finished goods takes place and there is no transfer of property of the raw materials used in producing tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case laws, the apex Court held that the expression sale of goods in entry 48 in List II of the Seventh Schedule to the Government of India Act, 1935 (similar to entry 54) must be construed in the same sense it has been understood under the Sale of Goods Act and to constitute sale of goods , the essential ingredients are: (a) there should be an agreement to sell movables, (b) it should be for a price, and (c) passing of goods pursuant to the agreement. It was further held that in a building contract where the agreement is one, entire and indivisible, for construction of a building according to the specifications contained in the agreement, then, in such a contract there is neither a transaction to sell the materials to be used in the construction, nor does the materials used in the construction pass as movables. It was held that the Provincial Legislature was not competent to impose tax on the supply of the materials used in such a contract by treating it as a sale. It was held that in a building contract the title to the materials used in the construction passes to the owner of the land as an accretion and there is no question of title to the materials passing as movables in favou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o far as it imposes, or authorises the imposition of,- (a) a tax on the sale or purchase of goods declared by Parliament by law to be of special importance in inter-State trade or commerce; or (b) a tax on the sale or purchase of goods, being a tax of the nature referred to in sub-clause (b), sub-clause (c) or sub-clause (d) of clause (29-A) of article 366, be subject to such restrictions and conditions in regard to the system of levy, rates and other incidents of the tax as Parliament may by law specify. 28. In the light of the Forty-sixth Amendment to the Constitution, several State Governments amended their sales tax laws. By such amendment, the States adopted a method of determining the taxable turnover relating to works contract by not merely taking the value of the materials supplied by the contractor in connection with the works contract, but also took into account the expenditure they had incurred in securing the services of architects and engineers who had supervised the execution of the works, as also the amount which they were entitled to receive for supervising the execution of the works. While levying sales tax on the price of the materials supplied for the constructio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the States to levy sales tax on the price of the goods and materials used in works contracts as if there was a sale of such goods and materials. Accordingly, while upholding the validity of the Forty-sixth Amendment, it was held that the sales tax laws passed by the Legislatures of States levying taxes on the transfer of property in goods (whether as goods or in some other form) involved in the execution of works contract shall be subject to the restrictions and conditions mentioned in each clause or sub-clause of article 286 of the Constitution. 30. The validity of the Forty-sixth Amendment to the Constitution was once again considered by the apex Court in the case of Gannon Dunkerley Co. v. State of Rajasthan reported in [1993] 88 STC 204. After reviewing all the case law, it was held by the apex Court (at page 228) as follows: If the legal fiction introduced by article 366(29-A)(b) is carried to its logical end it follows that even in a single and indivisible works contract there is a deemed sale of the goods which are involved in the execution of a works contract. Such a deemed sale has all the incidents of a sale of goods involved in the execution of a works contract where th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e goods brought or transferred from a place outside the State, and so sold. 32. In the present case, the principal question that falls for consideration is, whether the coloured shade/print passed on to the fabric in the course of dyeing and printing amounts to transfer of the property of the materials used in dyeing and printing within the meaning of the Works Contracts Act. There can be no dispute that in a dyeing/printing contract, the dominant intention of the parties is to transfer the requisite coloured shade/print on the fabrics supplied by the customer. How the coloured shade/print is to be passed on to the fabrics and what ingredients or materials should be used for obtaining the requisite coloured shade/print may not be specified in the contract. Prior to the Forty-sixth Amendment to the Constitution, in the absence of specific contract for transfer of such materials used in the execution of a works contract (either in their usual form or in some other form), it could not be said that there is sale of the materials used in the execution of a composite works contract. However, by the Forty-sixth Amendment to the Constitution, the concept of sale has been altered and by a d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the process of dyeing. Coloured shade may be due to the chemical reaction of one or more materials. The coloured shade represents the inherent chemical property of the materials used. Once there is passing of the chemical property of the materials used in the execution of works contract, then under the Works Contracts Act, there is a deemed sale of the materials used in the execution of the works contract. Accordingly we hold that in the process of dyeing, the coloured shade passed on to the fabrics constitutes sale of the materials used in dyeing, under the Works Contracts Act. 34. It is true, that to constitute sale, either under the Sale of Goods Act, or under the BST Act, the intention of the parties to transfer the goods by an agreement, determination of price of the goods to be transferred and the actual transfer of goods as per the agreement is necessary. However, under the Works Contracts Act, the concept of deemed sale has been introduced, as a result, irrespective of the criteria laid down under the Sale of Goods Act or the BST Act, if, in the execution of a works contract, the property of the materials used in the execution of that contract passes either in its origin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ief or the defect in the expression sale pointed out by judicial decision led to the Forty sixth Amendment to the Constitution. Once the mischief or the defect is remedied by bringing in the concept of deemed sale in a works contract, then the only criteria relevant for deemed sale is the passing of the property in goods (in any form). In other words, to constitute sale under the Works Contracts Act, the test is, whether the materials used in the execution of a works contract pass to the contractee either in its original form or in some other form? If it passes, then there is deemed sale of the materials used in the execution of the works contract even if there is no specific agreement between the parties for sale of materials, even if the price for such sale is not agreed between the parties and even though the materials are not delivered as materials. In the present case, due to the chemical reaction of colours, chemicals and dyes, the inherent property in those goods are passed on to the fabrics. The fact that after the inherent property in those goods is transferred to the fabrics the remaining solution is thrown out as waste or affluent, does not in any way affect the taxabili ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itution Bench (three-Judge Bench) decision in the case of Associated Cement Companies Ltd. [2001] 124 STC 59. In the case of R.M.D.C. Press [1999] 112 STC 307, this Court took the view that the ink is a tool of the printer and the same is consumed in the process of printing and looses its identity as goods and, therefore, no property can be said to pass in ink used in the execution of the contract of printing. This finding is contrary to the Full Bench decision of this Court in the case of Sarvodaya Printing Press v. State of Maharashtra reported in [1994] 93 STC 387, wherein it is held that the paper and ink used in printing passes to the customer after printing and become the property of the customer by theory of accretion. The Full Bench decision of this Court has been upheld by the apex Court which is reported in State of Maharashtra v. Sarvodaya Printing Press Fine Art Printer [1999] 114 STC 242. Therefore, the decision in R.M.D.C. Press case [1999] 112 STC 307 rendered by the division Bench without considering the Full Bench decision of this Court in the case of Sarvodaya Printing Press [1994] 93 STC 387, (which was binding on the Division Bench), must be held to be per incur ..... X X X X Extracts X X X X X X X X Extracts X X X X
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