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TMI Blog2018 (5) TMI 1797X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are being extracted from VATAP No.32 of 2017. 2. VATAP No.32 of 2017 has been filed by the appellant-assessee against the order 17.03.2017, Annexure A.5 passed by the Haryana Tax Tribunal, Chandigarh (in short, the Tribunal) for assessment year 2003-04 in STA No. 513 of 2010-11, claiming following substantial questions of law:- ( i) Whether on the facts and in the circumstances of the case, the learned Tribunal was justified in upholding the levy of tax on chemicals used as consumables in the process of job work of dyeing of fabric by assuming that property in the goods has passed on to the principals? ( ii) Whether on the facts and in the circumstances of the case, the learned Tribunal was justified in upholding the levy of tax on the entire value of dyes used by the appellant in the job work process of dyeing of fabric ignoring the quantity of dyes which are wasted during the process in which property is not transferred to the principals? ( iii) Whether on the facts and in the circumstances of the case, the findings of learned Tribunal are perverse insofar as it has been held that property in the goods i.e. dyes and chemicals is transferred to be principa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssment on the basis of observations and findings that all the dyes and chemicals used in the execution of job work of bleaching and dyeing are transferred as in physical form or as their inherent properties. Therefore, the property in goods passed on in the process of execution of job work should be taxed and the Assessing officer raised a tax demand of ₹ 5,34,516/- vide order dated 20.3.2007, Annexure A.1. Reliance was placed on decision of the Bombay High Court in Commissioner of Sales Tax Vs. Matushree Textiles Limited, (2003) 132 STC 539. Aggrieved by the order, the assessee filed an appeal before the Joint Excise and Taxation Commissioner (Appeals) [JETC(A)]. It was pleaded that no such tax was payable by the assessee. The order of the Assessing Authority was not supported by any reason/ground or report regarding the portion of the material which could technically be said to have been transferred after the process of dyeing as that there was no transfer of chemical on dyed fabric. Even if sales tax was leviable, at best it could be said that the dyes transferred may be approximately 20%. Vide order dated 4.3.2008, Annexure A.2, the JETC(A) rejected the appeal on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of the works contract. It was observed that the taxable event is the transfer of property in goods involved in the execution of a works contract and the said transfer of property in such goods takes place when the goods are incorporated in the works. Reliance was also placed on judgment of Karnataka High Court in Sri Krishna Spinning and Weaving Mills Pvt. Limited vs. Authority for clarification and Advance Rulings, Bangalore, (2010) 27 VST 194, wherein it was noted that about 10% to 20% of the dyeing chemicals are consumed by the fabric and the remaining get washed out as per technical reports. In that case, the court while holding that the said aspect had not been considered by the authorities below as to how much would be the actual loss of chemicals, dyes and colours when the fabric undergoes various process, remanded the case back to the Assessing Officer to work out details regarding as to how much of chemicals, dyes and colours get washed out. The Assessing Officer was asked to add to the value of turnover in accordance with law the actual percentage of chemicals, dyes and colours which were retained or embedded on the textile or the fabric. 5. On the other hand, l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mortgage or hypothecation of or a charge or pledge on goods; and includes- ( i) xxxxxxxxx ( ii) the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract; ( iii) to (vi) xxxxxx and such transfer, delivery or supply of any goods shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and a purchase of those goods by the person to whom such transfer, delivery or supply is made; Section 2(g) of the Central Sales Tax Act, 1956 defines Sale , which is in similar terms as under :- With its grammatical variations and cognate expressions, means any transfer of property in goods by one person to another for cash or deferred payment or for any other valuable consideration, and includes, ( i) xxxxxxxxxxxx ( ii) a transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract; ( iii) to (vi)xxxxx but does not include a mortgage or hypothecation of or a charge or pledge on goods. Section 2(d) of the Central Sales Tax Act, 1956 defines Goods : d) goods ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erty in goods (whether as goods or in some other form) involved in execution of a works contract, which shall be an amount arrived at by deduction from the amount of valuable consideration paid or payable, the labour and other service charges incurred for such execution and where it is not so quantifiable, then the cost of acquisition of the goods and the prevalent margin of profits on them plus the cost of transferring the property in the goods and all other expenses in relation thereto till the property in them is transferred to the contractee and where the property is converted into different form, by including the cost of conversion. Similar meaning is assigned to the expression sale price under the CST Act. Section 2(h) of CST Act is in the following terms:- 2(h) sale price means the amount payable to a dealer as consideration for sale of any goods, less any sum allowed as cash discount according to the practice, normally prevailing in the trade, but inclusive of any sum charged for anything done by the dealer in respect of the goods at the time of or before the delivery thereof other than the cost of freight or delivery or the cost of installation in cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the fabric at a higher temperature of 97 degree centigrade. At this temperature, these chemicals remove wax, fatty materials, yellow colour from the fabric and make the fabric more absorbent and white. ( iv) Mercerizing In this process, the fabric is passed through caustic soda solution to change the structure of cellulose. The fabric becomes more lustrous and the strength increases. After the process is over, the entire caustic is to be removed from the fabric. In this process, 10% of the total value of dyes and chemicals are used. v) Dyeing After all the processes, to make the cloth fabric ready for dyeing the process of applying the colour is undertaken. In this process of dyeing, depending upon the colour of shade, 10 to 30% of the colours are fixed on the fabric. Rest of the colours are washed out. In this process, reactive colours and chemicals on the alkali, sodium silicate and detergents are used. In this process, 10 to 30% depending upon the shade are stuck to the shade and the rest of the colour and chemicals are totally washed out. In this process, about 20% of the colours and 10% of the total chemicals are used. ( vi) Printing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mined speed, all loose fibres on the surface of the fabric are burnt and the surface of the fabric becomes plain without any loose fibres and is ready for the next process. 5.3. Desizing: 5.3.1 At the stage of weaving (converting yarn into fabric) the size (starch) is applied. However, while processing the fabric, all impurities and foreign materials etc., have to be removed from the fabric. The fabric can be processed (dyed or printed) only when it is devoid of all impurities and foreign materials. 5.3.2 Nature of Process of Desizing: In the process of desizing, the size (starch) which was applied at the time of weaving, is removed. The fabric is wetted and certain chemicals are used to remove the size (starch) from the fabric. When certain chemicals are applied to the fabric, the size (starch) is made soluble and removed completely in the final process of washing immediately after desizing. 5.3.3 Chemicals Used Enzymes Wetting Agents Deaerating Agents Sequestering Chemicals In this process of desizing, roughly about 15% of the total dyes and chemicals are used. 5.3.4. Effect of Desizing : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Effect of Mercerizing : As stated earlier, the physical dimension of the fabric changes after this process. The cellulose structure changes from one to two, and the strength of the fabric increases. 5.6 Dyeing or Printing: Dyeing: After Desizing, Scouring Bleaching and Mercerizing the fabric is ready for Dyeing or Printing. At this stage the fabric must be devoid of all impurities and various chemicals that were used and left out in the earlier processes. 5.6.1 Nature of process of Dyeing : In this process, the colour is applied on the fabric either by Pad Batch Technique or Exhaust Process in Jiggers as per the requirement. Here various reactive colours (as per requirement) along with certain chemicals and detergents are used. Depending on the requirement of shades (light, medium or dark) colours are fixed on the fabric. Between 10% - 30% of the total colours used in the process of Dyeing are actually fixed on the fabric. As the process of Dyeing is done in all combinations of shades (light, medium and dark) depending on the customers requirement, it can be assumed that, on an average about 20% of the total colours used in this process of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... powder, HCL, Detergent and acetic acid. This process is conducted at a higher temperature of 97 degree centigrade. After this process, the dimensional change in the width of fabric is further reduced to 2% and weight of the fabric also gets reduced by about 2%. The entire chemicals consumed in this process are washed off as there is no trace or property of the chemicals. ( iv) De-sizing After scouring, the fabric is desized with the help of desizer, HCL and common salt. This process is necessary for removing the size from the fabric, after this again the fabric was thoroughly hot washed with detergent. It was concluded that every chemical used/consumed upto this process was completely washed off. ( v) Dyeing After completion of process no. (iv) of Desizing, the process of dyeing is started with the help of 8% colour (by weight of fabric). After completion, two hot wash with detergent and two hot and two wash of normal water are given. In this process, dimensional width increases by 6% and the weight of fabric increases by about 1.5%. In this process, no trace of chemicals is found leading to a conclusion that every chemical is washed off. It was, howe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case (supra), it was held by the Apex Court that the cost of consumables would not form part of the value of goods on which tax is payable in a works contract. The relevant paras read thus:- 45. Keeping in view the legal fiction introduced by the Forty Sixth Amendment whereby the works contract which are entire and indivisible into one for sale of goods and other for supply of labour and services, the value of the goods involved in the execution of a works contract on which tax is leviable must exclude the charges which appertain to the contract for supply of labour and services. This would mean that labour charges for execution of works [item no (i)], amounts paid to a subcontractor for labour and services [item No. (ii)], charges for planning, designing and architect's fees [item No. (iii)], charges for obtaining on hire or otherwise machinery and tools used in the execution of a works contact [item No. (iv)], and the cost of consumables such as water, electricity, fuel etc. which are consumed in the process of execution of a works contract [item No. (v)] and other similar expenses for labour and services will have to be excluded as charges for supply of labour and ser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by taking into account the value of the entire works contract and deducting therefrom the charges towards labour and services which would cover: a) Labour charges for execution of the works; b) amount paid to a sub-contractor for labour and services; c) charges for planning, designing and architect's fees; d) charges for obtaining on hire or otherwise machinery and tools used for the execution of the works contract; e) cost of consumables such as water, electricity, fuel etc. used in the execution of the works contract the property in which is not transferred in the course of execution of a works contract; and f) cost of establishment of the contractor to the extent it is relatable to supply of labour and services; g) other similar expenses relatable to supply of labour and services; h) profit earned by the contractor to the extent it is relatable to supply of labour and services; The amounts deductible under these heads will have to be determined in the light of the facts of a particular case on the basis of the material produced by the contractor. 46. We may, however, make it clear that apart from the deductions re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t prior to this act of dyeing, various processes are undertaken for making the fabric fit for dyeing. The processes normally undertaken are as follows: ( 1) desizing (2) scouring (3) bleaching (4) mercerizing (5) dyeing and finshing 8. While the textile undergoes the aforesaid processes, certain chemicals are used in the process 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 markets. 9. It was contended by the learned counsel for the appellant that in the process of dyeing, as also in the process of 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 could be extended to the appellant. 10. During the course of hearing, learned counsel for the appellant submitted before us a certificate issued by Sri K. P. Bhatt, technical consultant of textile processing industry to su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opinion, the Tribunal was right in holding that there is no transfer of property in ink involved in the execution of contract of printing, either as ink or in any other form. 18. Kerala High Court delving into similar issue in Microtrol Sterilization Services Private Limited Vs. State of Kerala , (2009) 26 VST 213 (Ker.), observed that sales tax is payable only on the value of goods that get transferred from the contractor in the execution of the works contract. Consumables are items which are lost in the course of execution of works contract. In other words they are used up in the process of executing of work. The relevant observations are as follows:- Consumables are items which are lost in the course of execution of works contract. Even though consumables are lost to the contractor, it is not a gain for the awarder. In other words, they are used up in the process of executing the work. Sterilisation is a process by which goods are made free of germs and in order to retain the quality of goods, only packed commodities are subject to sterilization with the use of ethylene oxide. The assessee s representative present in court explained the sterilization process as o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. The work is more or less a labour contract, in which the petitioner utilizes the chemicals just as it uses any other item of its machinery of fuel or power in the performance of the work. There is no transfer of property in goods and no sale is liable for tax under Explanation 3A. Similar decision was taken in M/s Chandok Textiles Enterprises Private Limited Vs. State of U.P. and others, Civil Misc. Writ Petition No. 273 of 2014 decided on 18.05.2016 and State of Jharkhand and others Vs. Voltas Limited., (2007) 7 VST 317(SC). 20. Adverting to the factual matrix in the present case, admittedly, 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. Explaining various stages of dyeing and bleaching process, according to the appellant, the cloth undergoes the following processes:- 1. Process of Washing Washing is conducted with the help of chemicals namely, Desizer, so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hydrogen peroxide, HCL, potassium permanganate, oxalic acid, sodium sulphate and acetic acid. The said process would be akin to washing clothes at home with the help of washing powder. The effect of washing is to ensure that the portion of elements and dirt attached to the cloth is removed before any further process is carried out. It was also claimed that in this process, the weight of the cloth is reduced which shows that no chemical gets stuck to the cloth. The property of such chemicals, if held to be absorbed in the fabric and transferred, the fabric would not remain fit for wearing. The dyeing work undertaken by the appellant on cotton fabrics manufactured by them is the final act, but prior to this act of dyeing, various processes are undertaken for making the fabric fit for dyeing. The processes normally undertaken are as follows: (1) desizing (2) scouring (3) bleaching (4) mercerizing (5) dyeing and finishing. While the textile undergoes the aforesaid treatment, 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 la ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... work of dyeing and printing which is taxable. The Tribunal relied upon the judgment of the Bombay High Court in Matushree Textile Limited s case (supra) which was concerned with the issue as to whether process of dyeing of textile would amount to works contract or not. The issue as to how much quantity of dyes and chemicals would be made subject matter of such tax was not decided. The relevant para of the judgment in Matushree Textile Limited s case (supra) reads thus:- 39. Now, turning to the second question, the Tribunal has held that the coloured shade passed on to the fabrics represents very small quantity of the materials used in dyeing and hence the Works Contracts Act is not applicable. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and others, Civil Appeal No.922 of 2007, decided on 23.2.2007, the question was whether the printing of question papers for examination boards amounted to a works contract in the course of inter state trade or commerce. In M/s Associated Cement Companies vs. Commissioner of Customs , Civil Appeal No.821 of 2000, decided on 25.1.2001, the issue was whether drawings, designs etc. relating to machinery or industrial technology were goods which were leviable to duty of customs on their transaction value at the time of their import. In none of these decisions, the issue was with regard to the percentage/quantum of chemicals, dyes and colours used in the process of job work of dyeing or printing etc., which is taxable. Thus, learned counsel cannot derive any advantage from the said decisions. 26. 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 ..... 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