TMI Blog2011 (2) TMI 1296X X X X Extracts X X X X X X X X Extracts X X X X ..... . Asokan For the Respondent : No Appearance ORDER K.M. Joseph, J. The matter comes up before us on the basis of a Reference by a Division Bench. We extract the Order of Reference as hereunder: The question raised is whether the service rendered by the petitioner in the form of chemical treatment of effluent water for the awarder amounts to sale of goods in the execution of works contract. Petitioner has developed a chemical product by name Envirofloc which is used as a chemical for effluent treatment. During the years 1988-89 and 1989-90, for which the issue arises, the petitioner carried out pollution control treatment for Madura Coats Limited, Koratty, which is a known company engaged in manufacture of yarn. There may be massive pollution of water on account of dye-application on yarn. In the course of effluent treatment entrusted to the petitioner, the petitioner applies the chemical Envirofloc and it either gets used up in the treatment of effluent water probably by neutralising colour, ordour, etc. Petitioner's case is that no transfer or sale has taken place in the execution of works contract. The department's case is that material is consumed i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f this Court in AJANTA COLOUR LAB V. STATE OF KERALA, (1999) 2 KLT 445 and another judgment of this Court in SOUTHERN CABLE AND ENGINEERING WORKS V. STATE OF KERALA, (2002) 1 KLT SN.67. We feel these judgments do not reflect the correct law by virtue of later decisions of the Supreme Court referred above. Moreover, petitioners' is a case where the product used in effluent treatment is not transferred to the awarder, but consumed in the course of treatment. Having regard to the importance of the issue and since Division Bench judgments above referred apparently are against later decisions of the Supreme Court referred above, we feel the matter requires to be decided by a Full Bench of this Court. Accordingly these cases are referred for decision by Full Bench.Registry will place the matter before the Chief Justice for posting the matter before a Full Bench. 2. The petitioner in both these cases stands assessed to tax under the Kerala General Sales Tax Act, 1963 (hereinafter referred to as the Act) on the alleged sale of materials involved in the execution of works contract. The works contract involved is one of effluent treatment at the Madura Coats Limited (hereinafter r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the execution of works contract, no sales tax is leviable. He relied on the decisions of this Court in The Deputy Commissioner of Sales Tax (Law), Board of Revenue (Taxes), Ernakulam v. M.K. Velu (89 STC 40), Dynamic Industrial And Cleaning Services (P) Ltd. v. State of Kerala And Another ((1995) 97 STC 564) which have been referred to by the Division Bench in the Order of Reference, as laying down the correct law. He would further contend that the law laid down in Tata Consultancy Services v. State of Andhra Pradesh (137 STC 620), Bharat Sanchar Nigam Ltd. And Another v. Union of India And Others ((2006) 145 STC 91), Associated Cement Companies Ltd. v. Commissioner of Customs ((2001) 124 STC 59) and Rainbow Colour Lab And Another v. State of Madhya Pradesh And Others (2000) 118 STC 9), namely that there need not be transfer of any tangible goods, is inapplicable to the facts of this case. He would submit that he has no quarrel with the proposition (and he can have none) that sales tax can be levied even on the transfer of intangibles. He took us through the Judgments of the Apex Court in Builders Association of India And Others v. Union of India And Others ((1989) 73 STC 370) and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the facts of this case. 6. Petitioner has been entrusted with a works contract. A works contract can be an indivisible contract consisting of components of labour and service, as also sale of goods. Entry 54 of List II of the VIIth Schedule to the Constitution enables the State Legislatures to enact legislation providing for levying and collecting tax in respect of sale or purchase of goods. A Constitution Bench of the Apex Court in State of Madras v. Gannon Dunkerley Co.(Madras) Ltd. ((1958) 9 STC 353) took the view that the expression sale of goods must be understood in the sense in which it is understood under the Sale of Goods Act. It was further held that if there was only an indivisible works contract, the State could not split up the indivisible contract and levy tax on any sale of goods which may take place thereunder. The matter finally engaged the attention of the Law Commission of India and acting upon its suggestions, the Parliament enacted the 46th Amendment whereunder Clause 29A was added to Article 366 of the Constitution. Clause 29A reads as follows: (29A): tax on the sale or purchase of goods includes- (a) a tax on the transfer, otherwise than in pur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esh ((2004) 137 STC 620), the question which arose was whether incorporeal or intangible property can be treated as goods. The Court held, inter alia, as follows: The term goods , for the purposes of sales tax, cannot be given a narrow meaning. Properties which are capable of being abstracted, consumed and used and or transmitted, transferred, delivered, stored or possessed, etc., are goods for the purpose of sales tax. The test to ascertain whether a property is goods for the purposes of sales tax is not whether the property is tangible or intangible or incorporeal. The test is whether the concerned item is capable of abstraction, consumption and use and whether it can be transmitted, transferred, delivered, stored, possessed, etc. In the case of software, both canned and uncanned, all of these are possible. Intellectual property when it is put on a media becomes goods. The Apex court in this regard, followed the view taken in Associated Cement Company Limited v. Commissioner of Customs (2001 (4) SCC 593). In BSNL and Another v. Union of India And Others ((2006) 145 STC 91), the Apex Court was again dealing with the question as to the scope of the word goods . The Court qu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ireworks. As the explosives are consumed, nothing tangible remains, in which property could be transferred. It is a matter of common knowledge that in the display of fireworks, the explosives are spent and do not remain, once the display takes place. In the process of execution of the work, the goods themselves (explosives) ceased to exist. No tangible property remains. So, there could be no transfer of property. We concur with the decision of the Patna High Court in Pest Control India Ltd. v. Union of India ((1989) 75 STC 188. There can be no transfer of property unless the goods themselves exist. That is not the case herein. 8. In Dynamic Industrial And Cleaning Services (P) Ltd. v. State of Kerala And Another ((1995) 97 STC 564), a learned Single Judge of this Court considered the question as to whether when chemicals were used by the petitioner therein in the business of cleaning boilers in thermal power stations and fertilizer plants and the chemicals used as cleaning agent were extinguished in the process, sales tax could be levied in the matter. The Court found that the chemicals used were consumed in the process of cleaning and removing the impurities in the plants, no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roduct, then it can be treated as a consumable. Section 5C itself makes the position clear by specifying not involving any transfer of property in goods and actually incurred in connection with the execution of works contract. In Ajantha Colour Laboratory v. State of Kerala (1999 (2) KLT 445), a Division Bench of this Court was dealing with cases of Photographers and the controversy was whether their activities could be subjected to sales tax under the Act. The Court divided the categories into three. They are: (1) take photograph of customer, develop the negative and supply positive prints in the desired size to the customer; (2) develop the exposed film brought by the customer, take positive prints from them and supply negative and the prints in the desired size to the customer; (3) take positive prints from the negative brought by the customer and supply the prints in the desired size to the customer along with negative. The Court proceeded to hold that in the first category, there was no works contract, while the second and third categories would be works contract. Learned counsel for the petitioner also brings to our notice a recent decision of a Division Bench ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other form) involved in the execution of a works contract shall be deemed to be a sale. Explanation (1A) has been inserted in relation to the definition of the word turnover in Clause 2(xxvii) and it reads as follows: Explanation (IA) (i): The turnover in respect of works contract shall be the aggregate amount received or receivable by the dealer for the transfer of goods (whether as goods or in some other form) involved in the execution of such contract). Works Contract has been defined in Clause 2(xxix-a) which reads as follows: Works Contract includes any agreement for carrying out for cash or for deferred payment or other valuable consideration the construction, fitting out, improvement, repair, manufacture, processing, fabrication, erection, installation, modification or commissioning of any movable or immovable property. The Apex Court in M/s. Gannon Dunkerley And Co. and Others v. State of Rajasthan And Others ((1993) 1 SCC 364) held, inter alia, as follows; The value of the goods involved in the execution of a works contract will, therefore, have to be determined by taking into account the value of the entire works contract and deducting therefrom the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of a non-resident dealer)whose total turnover for a year is not less than two lakh rupees and every casual trader or agent of a non-resident, whatever be his total turnover for the year, shall pay tax on his taxable turnover for that year,- (iv)(a): In the case of transfer of goods involved in the execution of works contract where transfer is in the form of goods at the rates and at the points specified against such goods in the First, Second or Fifth Schedule. (b) In the case of transfer of goods involved in the execution of works contract (where the transfer is not in the form of goods but in some other form) specified in the Fourth Schedule, at the rate specified against such contract in the said Schedule. 10. Interestingly, we may notice that while Clause 29A of Article 366 which provides that the transfer of property in goods, whether as goods or in some other form, involved in the execution of a works contract, is followed up by incorporation of Explanation 3A to Section 2(21) of the Act on similar lines and the concept of sale is so expanded, when it comes to Explanation 1A to Section 2(xxvii) defining the word turnover in respect of works contract to be the ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... used as raw-materials, then the mere fact that it is consumed, that would not detract from the transfer of goods being exigible to tax. He would, of course, submit that the decisions rendered in Tata Consultancy Services v. State of Andhra Pradesh ((2004) 137 STC 620) and BSNL And Another v. Union of India Others ((2006) 145 STC 91) really dealt with the question as to whether intangibles could be goods and the said principle may not really have a bearing on the issue to be decided by us. Learned Special Government Pleader would contend that the matter should be concluded with reference to the decision of the Apex Court in Xerox Modicorp Ltd. v. State of Karnataka ((2005) 142 STC 209). The facts have been set out by the Apex Court as follows: The appellants are a public limited company doing business in Xerox machines, parts and accessories, as part of its business. After the Xerox machine is sold to a customer, if the customer so desires, the appellants enter into one of the two types of agreements, namely, either a Full Service Maintenance Agreement (FSMA) or a Spares and Service Maintenance Agreement (SSMA). In FSMA the appellants take on the responsibility of fully maintaini ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 to Rule 6(4) of the Karnataka Sales Tax Rules reads as follows: For the purpose of clauses (m) and (n) of sub- rule (4), labour and other like charges include charges for obtaining on hire or otherwise machinery and tools used for execution of works contract, charges for planning, designing and architects, cost of consumables used in the execution of works contract, cost of establishment to the extent relatable to supply of labour and services and other similar expenses relatable to supply of labour and services. The Apex Court has also referred to the decision in Pest Control India Ltd. v. Union of India and Others ((1989) 75 STC 188(Pat). 12. Interestingly, in the Karnataka Sales Tax Act, 1957, the word dealer is defined as including a person engaged in the business of transfer of property in goods, whether as goods or in some other form, involved in the execution of a works contract (See Section 2(k), Clause (viii). Sale is defined as including a transfer of property in goods, whether as goods or in some other form involved in the execution of a works contract (See Section 2 (t)). Turnover is defined in Section 2(v) as meaning the aggregate amount for which goods ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... same function as ink in the printers and the Court also relied on the provision in the contract that the assessees in the said case would charge for the unaccounted stock at prevailing prices. By using the chemical, the petitioner/assessee rendered the effluent compliant with the standards. It could probably be said that in the case of the toner and developers as the function is that of ink in printers, it shows up in the final product of the xerox machines. But, the decision of the Apex Court is not based on there being any requirement that the items which are used should exist in any form in the resultant product which is the principle laid down by this Court in Teaktex Processing Complex Limited v. State of Kerala ((2004) 136 STC 435) and also in Microtrol Sterilization Services Pvt. Ltd. v. State of Kerala ((2009) 26 VST 213 (Ker)). 15. We would think that the principle quicquid plantatur solo, solo cedit is a principle which is apposite in the context of a building and engineering contract. We get the following Account of the principle quicquid plantatur solo, solo cedit : The well-known principle is that the property in all materials and fittings, once incorporated in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is consumed will not detract from the fact that there is delivery of the same to the awarder. The assessee does not have a case that the effluent belongs to the assessee. We do not think that it can be their case that the effluent does not belong to the awarder. Let us pose a question, if a complaint by a third party is raised about the treated effluent, can the awarder absolve itself of the ownership of the same? We would think, it may not be possible. Therefore we would be justified in holding that the effluent and the treated effluent both belonged to the awarder. It is, therefore, into the property of the awarder, namely the effluent that the assessee supplies the chemical. The Apex Court in its decision in Gannon Dunkerley Co. Others v. State of Rajasthan Others ((1993) 1 SCC 364) had, inter alia, held that 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, is to be deducted. In Section 5C also, the words not involving any transfer of property in goods have been incorporated. Just like the toner and developer having been put in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pellate Tribunal accepted the above contention raised by the Revenue and repelled all the contentions raised by the petitioner. 4. There can be no controversy that the cost of consumables used in the execution of a works contract is not exigible to tax. Section 5(C)(1)(c)(iii) introduced in the Act following the judgment of the apex court in M/S Gannon Dunkerley and Co. and others v. State of Rajasthan and Others [(1993) 1 SCC 364] also postulates that the cost of consumables is liable to be deducted while arriving at the taxable turn over of a dealer in respect of transfer of property in the execution of works contract. But the Revenue lays heavy emphasis on the words whether as goods or in some other form employed in the Act in Explanation (3A) under Section 2(xxi) while defining 'sale' and also in Explanation (1A) under Section 2(xxvii) which defines 'turn over' and contends that the chemicals used by the assessee being tangible goods, there occurs transfer of property when the chemicals react with the waste water for the purpose of cleansing it. It is contended by Sri.Vinod Chandran, learned Special Government Pleader (Taxes) that the chemicals used by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Section 2(xxvii) read with Explanation (1A) thereunder, it is clear that the petitioner is liable to be assessed under the Act. 8. Per contra, it is contended by Sri.Mayankutty Mather, learned counsel for the petitioner that the above proposition is totally misconceived and untenable. It is puerile for the Revenue to contend that the chemicals used by the petitioner for treatment of the polluted water is not a consumable as envisaged under Section 5C(1)(c)(iii) of the Act. The chemical product (Envirofloc) that is being used by the petitioner gets rid of all the pollutants in the contaminated water through a chain of chemical action and reaction. In that process, the chemicals get consumed and the polluting agents are removed. Resultantly, there will be no trace of any harmful chemical elements in the pollution free water that is let out to the river. 9. The short question is whether or not the combination of chemicals known as 'Envirofloc' used by the petitioner for effluent treatment is a consumable as envisaged under Section 5(C)(1)(c) (iii) of the Act. 10. In Dynamic Industrial and Cleaning Services (P) Ltd. v. State of Kerala Anr. ((1995( 97 STC 564), the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... emicals are sprayed through machines so that when the process ends, nothing tangible remains in which property is transferred. By the process of spraying or applying chemicals, a place is treated against insects and pests but in the process the chemicals are themselves consumed and there remains nothing in which property is transferred. The Bench held that such a contract is a pure service contract and no sales tax is leviable in relation thereto under the provisions of the Bihar Finance Act 1981. 12. In a recent decision in Microtrol Sterilization Services Pvt. Ltd. v. State of Kerala ((2009) 26 VST 213 (Ker)), a Division Bench of this Court had occasion to consider the question whether in the process of sterilization of goods by using ethylene oxide gas there was transfer of any goods as envisaged under the Kerala General Sales Tax Act. It came on record that the goods to be sterilised were kept in a compact airtight room and thereafter they were exposed to ethylene oxide for around 6 hours. The gas would thereafter be allowed to escape through a chimney after neutralising it with carbon dioxide at a higher level. The Division Bench held that there was no transfer of ethylene ..... X X X X Extracts X X X X X X X X Extracts X X X X
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