S. Kumars Limited vs Commissioner of Commercial Tax and Another

S.R. Waghmare, J.—By this writ petition under article 226 of the Constitution of India, the petitioner S. Kumars Ltd., has challenged the order dated October 19, 2011 passed by respondent No. 2, Divisional Deputy Commissioner, Commercial Tax in Revision Case No. 01/2011/State/remand u/s 62(1) of the Commercial Tax Act, 1994 rejecting the revision petition of the petitioner. The Divisional Deputy Commissioner held that the petitioner was liable for payment of tax under sections 9 and 9B of the Act on the value of dyes and chemicals used/consumed by the petitioner in the job-work contract of processing of grey cloths and Divisional Deputy Commissioner has treated it as transfer on property under the works contract. Briefly stated the facts of the case are that the petitioner is a registered dealer under the M.P. Commercial Tax Act, 1994 (hereinafter called "the Act", for brevity) and engaged in the processing business of the grey cloths for itself (company) and for others on job-work basis. The petitioner has received grey cloths from other manufacturers on job-work basis; finished it and makes it a commercially saleable product.

Counsel for the petitioner has vehemently urged the fact that the process involved is of washing, cleaning, bleaching and dying as per instructions of the petitioner-company and in return the company received process charges or job-work charges. In the process, the petitioner-company requires and uses chemicals and dyes, which are purchased as consumable goods. And for assessment year 2003-04 the original assessment order was passed on January 29, 2007, whereby the assessing officer had levied commercial tax on the value of the chemicals, dyes and packing material consumed while treating the grey cloth, as sale u/s 9 of the Act. Besides the assessing officer also levied tax u/s 9B of the Act on the estimated value with addition of dyes and chemicals consumed in the processing of grey cloths used for manufacture on job-work basis. Thus the tax u/s 9 was levied in addition to the tax u/s 9B of the Commercial Tax Act, 1994.

It is the contention of the counsel for the petitioner-company that u/s 2(t) of the Commercial Tax Act, 1994 "a transfer of property in goods whether as goods or in some other form, involved in the execution of a works contract" is liable to tax u/s 9B of the Act. The assessing authority had erred in treating the job-work as a works contract and moreover no transfer of property in any form of the substance took place while doing the job-work on the grey cloth. Primarily counsel argued that chemicals used in process of grey cloths had not been consumed and could not be termed as being transferred. To substantiate his arguments, counsel stated that there are other materials like water, electricity and manpower, which are also used/consumed in processing of the grey cloths but not liable to tax besides dyes chemicals are akin to washing and cleaning, and, therefore, do not involve "transfer" of any property as alleged. Moreover grey cloth is sent to the petitioner by the owner for, processing only; and that the cloth was returned back and no transfer of property, i.e., dyes and chemicals can be said to have taken place. Thus counsel submitted that basic ingredients for levying tax was missing, despite which, both of the orders of assessment dated January 29, 2011 and August 29, 2007 passed by revisional authority u/s 62(1) of the Act was contrary to the provisions of law. Therefore, counsel prayed that the impugned order dated October 29, 2011 (annexure-P/1) may be set aside holding that the petitioner is not liable for any tax under sections 9 and 9B of the Commercial Tax Act, 1994 on the value of chemicals and dyes used/consumed in processing of grey cloths on job-work.

Counsel for the respondents/State on the other hand, has vehemently urged the fact that the petitioner is liable to pay the tax in accordance with the amendment of the Constitution of India, i.e., vide 46th Constitutional Amendment. According to the amendment sale element to those contracts, which are covered by sub-clauses of clause (29A) of article 366 are separable, and may be subjected to sales tax by the States under entry No. 54 of List II and there is no question of dominant nature test applying after the 46th Amendment of the Constitution of India. All States have incorporated the amendment in the definition of sale or purchase in their said tax laws. The State of Madhya Pradesh has incorporated the changed definition of sale or purchase in clause 2(t) of section 2 of the M.P. Vanijyik Kar Adhiniyam, 1994. Moreover the apex court in the matter of M/s. Associated Cement Companies Ltd. Vs. Commissioner of Customs, , has categorically held that the 46th Amendment was made with a view to empower the State to bifurcate the contract and to levy sales tax on value of the material involved in the execution of works contract notwithstanding; that the value, may represent a small percentage of the amount paid for the execution of works contract. Even if the dominant intention of the contract is the rendering service it will amount to a works contract. After the 46th Amendment the States would now be empowered to levy sales tax on the material used in such contract.

Counsel further relied on M/s. Rainbow Colour Lab and Another Vs. The State of Madhya Pradesh and Others [OVERRULED], and Builders Association of India and Others Vs. Union of India (UOI) and Others, and Bharat Sanchar Nigam Ltd. and Another Vs. Union of India (UOI) and Others, , to submit that the 46th Constitutional Amendment has been upheld by the apex court and sales tax by the State under entry 54 of List II is also upheld. Counsel for the respondent/State cited several other cases India Thermit Corporation Ltd., Gwalior v. Commissioner, Sales Tax, M.P., Indore (2005) 35 TLD 398 (Board) and Gannon Dunkerley and Co. and Others Vs. State of Rajasthan and Others, and Cooch-Behar Contractors'' Association and Others Vs. State of W.B. and Others, to state that all these cases were prior to the 46th Amendment and, therefore, not applicable.

Counsel for the respondent has further contended that it was the material used in the execution of works contract that is liable to tax as held in the matter of Neelam Textiles Industries v. Additional Sales Tax Officer [2000] 25 TLD 76 (MP) by the High Court of M.P. that sizing of yam on job basis is a works contract and the material used in execution of works contract is liable to tax.

Whereas in the instant case even if section 2 of the Central Sales Tax Act, 1956, is considered as under:

(ja) ''works contract'' means a contract for carrying out any work which includes assembling, construction, building, altering, manufacturing, processing, fabricating, erection, installation, fitting out, improvement, repair or commissioning of any movable or immovable property.

Thus in this context, the activity of the petitioner''s company, i.e., dying of grey cloth is process of manufacture and thus the material used is covered under "deemed sales" under clause (ii) of section 2(t) of the M.P. Vanijyik Kar Adhiniyam, 1994 and since counsel for the respondent/State prayed that since the 46th Amendment of Constitution of India will prevail over the old decisions, therefore, the petition filed by the petitioner is without merit and the same be dismissed as such.

Considering the above submissions, the impugned order and record, we find that the sole question that arises for our consideration in this appeal is whether after the 46th Amendment in our Constitution the job-work or processing work involves transfer of ascertained property upon execution of the work and whether the tax u/s 9 and section 9B of the Act is leviable on dyes and chemicals consumed in the processing as "deemed sale".

We find by the 46th Amendment of Constitution of India that transfer of property in goods, which are separable is deemed to be sale u/s 2(t)(ii) of the M.P. Vanijyik Kar Adhiniyam, 1994. Section 2(t)(ii) reads thus: (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 (iv)...

(v)... 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 purchase of these goods by the person to whom such transfer, delivery or supply is made, but does not include a mortgage, hypothecation, charge or pledge.

And thus it cannot be disputed that activities of processing of grey cloths, and its manufacture as works contract and job charges; including value of chemicals and colours, used in executing the works contract would be correct. Although, the arguments of counsel for the petitioner are attractive at the first blush that no material is transferred in the business of processing grey cloth and the material used and involved in processing of grey cloths is just like washing, cleaning, bleaching and dying of grey cloths but such a proposition cannot be accepted, since the fact that cannot be lost sight of is that; the process involved requires the use of chemicals and colours and are separable and the process is itself a works contract and, therefore, the value of the material used in the works contract is a deemed sale under clause (ii) of section 2(t) of the M.P. Vanijyik Kar Adhiniyam, 1994.

Considering these facts, we can safely conclude the tax liability is drawn in the ambit of definition of sales in clause (i) and (ii) of section 2(t) of the M.P. Vanijyik Kar Adhiniyam, 1994 and, therefore, material used and transferred in the same form or otherwise, it is deemed sales and is liable to tax under the provisions of Act that those materials like fuel, water, labour, which are consumed but not transferred to the contractee are not deemed sales whereas materials which are transferred in the same form or in other form are deemed sale, according to the case of Gannon Dunkerley and Co. and Others Vs. State of Rajasthan and Others, and Neelam Textiles Industries [2000] 25 TLD 76 (MP). The High Court of Madhya Pradesh has rightly held that goods used in the process of sizing of yarn is transferred to the contractee and is liable to tax. Consequently we find that no error or fault could be found in the impugned order passed by the Divisional Deputy Commissioner in revision petition and we hold that according to the 46th Amendment of Constitution of India as already held above, the State Governments are empowered to levy tax on the goods transferred otherwise than in pursuance of contract, i.e., in execution of works contract and hence undoubtedly the State is entitled to levy tax on the value of material involved in the execution of job work/works contract. Thus we find that the order of the courts below requires no interference and the petition is without merits and, therefore, dismissed as such.