Tuesday, October 11, 2016

STATE OF GUJARAT Versus BHARAT PEST CONTROL - 22/09/2016

O/TAXAP/706/2013 JUDGMENT
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
TAX APPEAL NO. 706 of 2013
 FOR APPROVAL AND SIGNATURE:

HONOURABLE MR.JUSTICE AKIL KURESHI
and
HONOURABLE MR.JUSTICE A.J. SHASTRI
==========================================================
1 Whether Reporters of Local Papers may be allowed
to see the judgment ?
2 To be referred to the Reporter or not ?
3 Whether their Lordships wish to see the fair copy of
the judgment ?
4 Whether this case involves a substantial question of
law as to the interpretation of the Constitution of
India or any order made thereunder ?
==========================================================
STATE OF GUJARAT....Appellant(s)
Versus
BHARAT PEST CONTROL....Opponent(s)
==========================================================
Appearance:
GOVERNMENT PLEADER for the Appellant(s) No. 1
MR. APURVA N MEHTA, ADVOCATE for the Opponent(s) No. 1
==========================================================
CORAM: HONOURABLE MR.JUSTICE AKIL KURESHI
and
HONOURABLE MR.JUSTICE A.J. SHASTRI
Date : 22/09/2016
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ORAL JUDGMENT
 (PER : HONOURABLE MR.JUSTICE AKIL KURESHI)
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1. This   appeal   is   filed   by   the   State   Government
challenging judgment of the Value Added Tax Tribunal.
While   admitting   the   appeal,   following   substantial
questions of law were framed:
“1. Whether in facts and circumstances of the
case,   the   works   contract   for   pest   control
would involve sale and supply of goods as per
Section   2(13)   and   2(23)   of   the   Value   Added
Tax Act, 2003?
2. Whether a works contract for pest control
would lead to transfer of property in goods
making   the   transaction   exigible   to   value
added tax?
3. Whether the learned tribunal has erred by
holding that in execution of a works contract
for   pest   control,   there   is   no   transfer   of
property   in   goods   because   the   chemicals   are
consumed   and   are   not   present   in   a   tangible
form? ”
2. The questions arise in the following background.
Respondent   assessee   is   a   proprietary   concern   and   is
engaged   in   the   business   of   providing   pest   control
service   to   various   commercial   establishments.     The
assessee is registered as a service provider for the
purpose   of   service   tax   in   the   category   of   cleaning
activity   service.     The   assessee   was   awarded   a   work
order   by   Reliance   Industries   for   carrying   out   pest
control measurements in the premises of the company.
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The State Government holds belief that the pesticides
and   other   raw   materials   used   by   the   assessee   in
execution of such contract would be exigible to value
added tax, on the basis that in the process, there has
been   sale   of   such   goods.     The   assessee   however
contends   that   the   contract   is   one   for   providing
service, it is a skilled service which also involves
providing labour.  Use of pesticides is incidental. In
any case, such material is consumed during the course
of the work.  The title in the goods therefore, never
passed   from   the   assessee   to   the   company   who   has
awarded such contract.  
3. The assessee in view of such debatable issue had
approached the Joint Commissioner of Commercial Tax by
filing an application under section 80 of the VAT Act
asking for his determination on the question whether
value added tax would be payable on such goods.  The
said authority by its order dated 26.10.2009 held that
the assessee had entered into service contract of pest
control.  Various pesticides used in the process were
transferred   to   the   Reliance   Petroleum,   the   company
which had awarded the contract.  According to him thus
the   title   in   goods   passed   to   the   purchaser.     This
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transaction would therefore, fall within clause­(b) of
sub­section   (23)   of   section   2   of   the   VAT   Act   and
exigible   to   tax.     This   order   of   determination,   the
assessee   challenged   before   the   Value   Added   Tax
Tribunal ('the Tribunal' for short).  The Tribunal by
the   impugned   judgment   dated   28.10.2010   reversed   the
decision   of   the   Joint   Commissioner.     In   a   detail
consideration,   the   Tribunal   came   to   the   conclusion
that the assessee had to carry out activities as per
the   terms   of   the   contract   awarded   by   Reliance
Petroleum.     As   per   such   contract,   the   assessee   was
providing   service   of   anti­termite   treatment,  rodent
control,     pest   control   etc.     The   activity   of   the
assessee was only in the nature of service and no sale
of goods was involved.   The pesticides and chemicals
used by the assessee were for the purpose of treatment
against   pests   and  rodents  and   were   consumed   in   the
process of rendering service.  The titles of the goods
never   passed   to   Reliance   Petroleum   since   the   goods
ceased to exist.   The Tribunal also referred to the
amended definition of sale under Article 366(29A) of
the Constitution by virtue of 46th  Amendment, but was
convinced   that   even   with   the   aid   of   this   expanded
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definition of term 'sale', the transaction in question
could not be taxed as a sale of goods.  We may recall
the   relevant   expansion   made   by   virtue   of   the   said
amendment was to allow the State to levy tax in the
nature of sales tax on transfer of property in goods
(whether as goods or  in some other form) involved in
the execution of works contract.   The Tribunal noted
that term 'dealer' defined under section 2(10) of the
VAT   Act   contained   a   similar   expression   where   it
provides that a dealer would mean besides other any
person   who   transferred   property   in   goods   where   as
goods   (or   in   some   other   form)   involved   in   the
execution   of   Works   Contract.     The   Tribunal   also
referred to definition of term 'sale' contained in the
VAT   Act   under   section   2(23)   which   in   clause­(b)
contained a similar expression, under which, the sale
of goods would include transfer of property in goods
(whether as goods or  in some other form) involved in
the execution of a works contract.       The Tribunal
concluded as under:
“57. In   my   view   in   the   present   case   the
appellant   is   engaged   in   the   business   of
providing   ”Pest   Control   Services”.   In
execution   of   pest   control   services
Pesticides,   Chemicals   and   Water   is   used   by
the appellant on the space specified by the
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contractee   and   charged   consideration   on
square feet basis.
58. In light of the legal position set out by
the   Hon'ble   Supreme   Court,   though   the
pesticides,   chemicals   and   water   are   used   by
the   appellant   in   execution   of   the   pest
control,   but   still   it   is   not   a   composite
works   contract   as   per   46th  Constitutional
Amendment.   Because   clause   (29A)(b)   provides
that   “a   tax   on   the   transfer   of   property   in
goods   (whether   as   goods   or   in   some   other
form)   involved   in   the   execution   of   a   works
contract”.   Basic   condition   for   levying   tax
under   this   clause   is   that   “there   must   be   a
transfer   of   property   in   goods”,   while   in
execution   of   pest   control   contract   property
in   pesticides,   chemicals   or   water   is   not
transferred either in goods or in some other
form,   because   when   it's   process   ends   on
specific   place,   nothing   tangible   remains   in
which property is transferred.
59. In view of the above facts, goods used in
execution of pest control is neither,
(1) has its utility, nor
(2) has capable of being bought and sold, nor
(3)   has   capable   of   being   transmitted,
transferred, delivered, stored and possessed,
as   stated   in   case   of   Tata   Consultancy
Services vs. State of Andhra Pradesh in 122
STC 198  (see para 56 on page 119 of BSNL).
Hon'ble   Supreme   Court   has   considered
definition of goods in this behalf and which
has   been   approved   by   Hon'ble   Apex   Court   in
BSNL. (page 57)
60. So, when the aforesaid principle applies,
then in present case when goods is ceased its
existence and they are consumed. Further due
to   such   process,   the   place   on   which   such
process is executed is neither ornamented or
enhances   its   appearance,   neither   increased
its   value   or   differs   its   uses,   at   the   end
nothing is deliverable is exist. It is held
in   BSNL   case,   particular   in   para   78,   where
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apex court has observed as under:
60.1 (para 78 on page 125) But if there are no
deliverable   goods   in   existence   as   in   this
case,   there   is   no   transfer   of   user   at   all.
Providing access or telephone connection does
not put the subscriber in possession of the
electromagnetic   waves   any   more   than   a   toll
collector   puts   a   road   or   bridge   into   the
possession   of   the   toll   payer   by   lifting   a
toll gate. Of course the toll payer will use
the   road   or   bridge   in   one   sense.   But   the
distinction with a sale of goods is that the
user   would   be   of   the   thing   or   goods
delivered.   The   delivery   may   not   be
simultaneous   with   the   transfer   of   the   right
to   use.   But   the   goods   must   be   in   existence
and deliverable when the right is sought to
be transferred.
61. In view of the 46th  Amendment, amendment
in the VAT Act and the Judgement in the case
of Builders Association (Supra), 20th  Century
(Supra) and BSNL Ltd. (Supra) following legal
position of law emerged.
62. From the plain reading of sub clause (b)
of   clause   (29­A)   of   article   366   of   the
Constitution   of   India   it   appears   that   there
must   be   a   transfer   of   property   in   good
whether   as   goods   or   in   some   other   form
involved   in   the   execution   of   a   works
contract.   Clause   12   of   article   366   and
section 2(12) of the Gujarat Value Added Tax
Act, 2003 give some indication as to what is
meant to be “goods”. The inclusive definition
in the Constitution as well as in the Gujarat
Value   Added   Tax   Act   refers   to   materials,
commodities   and   articles   or   all   kinds   of
movable   property   and   live   stocks,   all
materials,   commodities   and   articles   as   such
or in some other  form. Before a tax can be
levied   on   a   works   contract,   it   must   be
established   that   there   is   transfer   of
property   in   goods   involved   in   the   execution
of   a   works   contract.   The   goods   may   have
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undergone a change of form. But in whatever
form, there must be transfer of property in
goods.   This   presupposes   that   the   goods
existed and that either in its original form
or in some other form, it is transferred to
the principal by the contractor. Transaction
involved   in   the   question   of   the   applicant
does   not   involve   transfer   of   any   goods   as
understood in sub clause (b) of clause (29­A)
of article 366 of the Constitution of India
or under the provisions of the Gujarat Value
Added Tax Act, 2003. It is a service pure and
simple and does not involve any sale of goods
since   there   are   no   goods   in   which   property
can be transferred.
63. Thus the emphasis is on the transfer of
property   in   goods   (whether   as   goods   or   in
some other form). The letter part of clause
(29­A)   of   article   366   of   the   Constitution
makes   the   position   very   clear.   While
referring to the transfer, delivery or supply
of   any   goods   that   takes   place   as   per   sub
clause   (a)   to   (f)   of   clause   (29­A),   the
letter part of clause (29­A) says that 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. Hence, a transfer of property
in goods under sub clause (b) of clause (29­
A)   is   deemed   to   be   a   sale   of   the   goods
involved in the execution of a works contract
by   the   person   making   the   transfer   and   a
purchase of those goods by the person to whom
such   transfer   is   made.   So   for   levying   tax
under 46th Amendment there must exist 'goods'.
If there is no goods the legislature has no
power and jurisdiction to levy tax.
64. In   view   of   the   aforesaid   facts   and
circumstances, in the present case, it is a
pure   skill   based   service   contract,   and   the
appellant is liable to pay Service Tax on it.
The appellant is charged service tax in its
invoices and paying it. In view of  the above
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facts,   the   activity   of   pest   control   service
carried out by the appellant is not liable to
tax under clause (29A)(b) of Article 366 of
Constitution of India and under provisions of
VAT   Act   because   it   ceases   to   exist   and   it
amounts to only simple service contract.”
4. It is this judgment that the State has challenged
in the present appeal.  As noted, revolving around the
same controversy, three separate questions have been
framed.     First   is,   whether   the   contract   of   pest
control   would   involve   sale   of   goods?     Second   is,
whether   such   contract   would   lead   to   transfer   of
property in goods which transfer would be exigible to
VAT.   The last is whether the Tribunal was wrong in
holding   that   there   was   no   transfer   of   property   in
goods because chemicals are consumed? In essence, the
issue   revolves   around   the   question   of   taxing
pesticides and chemicals used in the cleaning and pest
control activity under the VAT Act.
5. Learned   AGP   submitted   that   the   title   in   goods
passed  from  the  assessee  to  the   Reliance  Petroleum.
The term 'sale' contained in section 2(23) of the VAT
Act would cover such a situation and the transaction
would   therefore,   be   exigible   to   tax.         Mere
registration   of   the   assessee   for   the   purpose   of
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service   tax   would   not   be   conclusive.     The   Tribunal
committed a serious error in holding that since the
goods were consumable, no title passed in favour of
the purchaser.
6. On   the   other   hand,   learned   counsel   for   the
assessee   opposed   the   appeal   contending   that   the
assessee had only provided skill based service. There
was no transfer of goods in the process.  At the end
of   execution   of   the   contract,   the   pesticides   and
chemicals   were   fully   consumed.     There   was   thus,   no
sale   of   goods.     In   any   case,   it   was   a   skill   based
service, which also included employment of substantial
labour   force   and,   use   of   consumables   was   wholly
incidental.     There   was   no   intention   to   sale   such
products.     Counsel   relied   on   several   decisions   to
which we would refer to at a later stage.
7. As noted earlier, by virtue of 46th amendment, the
term   'sale'   referred   to   in   Article   366   came   to   be
expanded.   Matching provisions have been made in the
State   Sales   Tax   laws.     Currently,   the   VAT   Act,   the
section   2(23)   of   the   Act   defines   term   'sale'   as   to
mean on sale of goods made within the State for cash
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or   differed   payment   or   other   valuable   consideration
and would include various transactions referred to in
clause­(a)   to   (j)   contained   therein,   clause­(b)
thereto reads as under:
“(b)   transfer   of   property   in   goods   (whether   as
goods   or   in   some  other   form)   involved   in
execution of a works contract”
8. The essential question therefore, is in the case
on hand, whether there was transfer of property and
goods involved in execution of a works contract?
9. In   this   context,   we   may   refer   to   the   relevant
terms of the work order, under which, the assessee was
executing   the   contract.     The   work   order   dated
07.02.2009 contained work description as pest control
service to be performed at SEZ office buildings and
factory   buildings.     The   details   of   work   to   be
performed included the job to carry out and to provide
prophylactic   treatment   of   spraying  insecticides,
rodent  control  treatment   etc.     The   work   order
specified the quantity of the work, the rate at which
the assessee would be remunerated for such work, the
total   amount   to   be   paid   for   such   quantity   at   such
rate.  The work order contained at Annexure­A, special
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conditions of the contract.   It essentially required
all works to be performed by the assessee under the
supervision of the engineer of the company.  The scope
of work was further elaborated in this document as to
include   carrying   out   pest   control   activities   in
various facilities in office and factory building as
per the instructions of the company.  It would involve
control   of   adult   mosquito,   control   of   rodent   and
crawling   pests   like   bugs,   ticks,   crickets,
cockroaches, silver fish, red ants, black ants spider
and   poisoned   reptiles   etc.     It   also   required   the
assessee   to   use   approved   brands   of   pesticides,
insecticides   and   chemicals   of   reputed   company   only.
The contract envisaged the assessee to pay the service
tax or the sale tax as may be applicable.
10. From the terms of contract, it can thus, be seen
that the assessee was awarded the contract for pest
control measures at the office of factory premises of
the   company   situated   within   the   SEZ   area.     The
contract   would   include   complete   treatment   of   pest
control  and  rodent  control,  for  which,  the   assessee
would   use   the   pesticides   and   chemicals   of   reputed
companies.  In essence therefore, this was a contract
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for carrying out the pest control service which would
require   special   know­how   and   use   of   pesticides   in
recommended   measures.     The   concentration   of   the
pesticides,   the   amount   of   usage,   the   places   to   be
applied   and   all   other   relevant   aspects   would   be   a
matter of considerable technical expertise.   The use
of   the   pesticides   in   the   process   was   wholly
incidental.     The   dominant   purpose   was   to   provide   a
composite   pest   control   and  rodent  control  service.
The   use   of   pesticides   and   chemicals   was   wholly
incidental.   There was no intention of sale of goods
from the assessee to the company.
11. We may notice how this or somewhat similar issue
has   been   considered   by   Courts   in   the   past.   In   the
Constitution   Bench   judgment   in   case   of  Gannon
Dunkerley & Co. and others v. State of Rajasthan and
others  reported in  88 STC 204,  it was observed that
the   value   of   goods   to   be   involved   in   execution   of
works contract will have to be determined, taking into
account   the   value   of   the   entire   works   contract   and
deducting various charges such as labour charges and
cost of consumable such as water, electricity, fuel,
etc. used in the execution of the works contract, the
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properly in which is not transferred in the course of
execution of a works contract.
12. In   case   of  Rainbow   Colour   Lab   and   Another   v.
State of Madhya Pradesh and others,  reported in  118
STC 9,  the Supreme Court considered a case where the
assessee was in the business of taking photographs for
the customers.  While doing so, the assessee developed
the negatives and supplied the prints.   The assessee
would also develop the films brought by the customers
and provide the prints for the same.  In such context,
it   was   observed   that   all   that   had   happened   in   law
after   the   46th  amendment   and   the   judgment   of   the
Supreme   Court   in   case   of  Builders   Association   of
Indian   and   others   v.   Union   of   India   and   others
reported in 73 STC 370 (SC) is that it is now open to
the State to delve to separate works contract by legal
fiction, i.e. contract for sale of goods involved in
the works contract and supply of labour and service.
This division of works contract under the amended law
can be made only if the contract involved a dominant
intention   to   transfer   a   property   and   goods   and   not
where   the   transfer   takes   place   as   an   incident   of   a
contract of service.   The amendment does not empower
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the   State   to   indulge   in   microscopic   division   of
contract.
13. In   case   of  Everest   Copiers   (through   R.A.
Partner)  reported in  [1996] 103 STC 0360,  the facts
were   that   the   appellant   was   running   a   photocopying
business, during which, the appellant would sale the
photocopies or xeroxed documents to the customers. The
question   was   whether   the   making   of  photocopies   with
the use of xerox or other machines and delivering the
copies so taken to the customers amounts to sale of
goods   exigible   to   tax   under   the   Tamilnadu   General
Sales Tax Act.  In this background, it was held that
when   the   main   object   of   the   work   undertaken   by   a
person is not the transfer of chattel as chattel, the
contract is one of work and labour. The main object of
the work undertaken by the operator of photocopier or
xerox machine upon transfer of paper upon which, the
copy is produced; is to duplicate or make a xerox copy
of   the   document   which   the   payer   of   the   price   wants
duplicated.
14. In case of  The Assistant  Sales Tax Officer and
Others v B C Kame,  reported in  [1977] 039 STC 0237,
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the   Supreme   Court   held   that   when   a   photographer
undertakes to take a photograph, develops the negative
or   to   do   other   photographic   work   and   to   supply   the
prints   to   the   clients,   he   cannot   be   said   to   have
entered   into   a   contract   for   sale   of   goods.     The
contract is for use of skill and labour.  Sales tax is
not   payable   by   the   photographer   when   he   takes
photograph or supplies the photographic prints to the
customers.
15. The   Patna   High   Court   in   case   of  Pest   Control
India Ltd. v. Union of India and others, reported in
75 STC 188 Patna, examined a question very similar to
one   on   hand   before   us.    The   Division   Bench   in   the
context   of   pest   control   service   rendered   by   the
assessee held that in execution of such a contract,
the   chemicals   are   sprayed   through   machines   so   that
when the process ends; the chemicals were consumed and
nothing   tangible   remained   in   which   the   property   is
transferred.     Such   a   transaction   does   not   involve
transfer   of   any   goods   as   understood   in
sub­clause (b) of clause (29­A) of Article 366.  Such
a contract is a pure service contract and no sales tax
is   leviable.     This   decision   was   followed   by   Kerala
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High   Court   in   case   of  The   Deputy   Commissioner   of
Sales Tax (Law), Board of Revenue (Taxes), Ernakulam
v.   M.K.   Velu,  reported   in  89   STC   40   (Ker)  in   the
context of levy service tax on the explosives consumed
in exhibition of fire works.   The decision was also
followed by the same High Court in case of Microtrol
Sterilization Services Pvt. Ltd. v. State of Kerala,
reported in  [2009] 26 VST 213  in the context of the
contract   for   sterilization   of   goods.     The   assessee
would   use   ethylene   oxide.     In   the   process   of   such
sterilization,   it   was   found   that   no   trace   of   such
chemical would be left in such sterilized goods and
that therefore, property in the goods did not pass to
the   customers.     Value   of   ethylene   oxide   was   not
exigible   to   tax.     Likewise,   in   case   of   Dynamic
Industrial   and   Cleaning   Service  reported   in  97   STC
564,  learned Single Judge of Kerala High Court held
that   the   chemicals   used   by   the   assessee   in   the
business of cleaning boilers in thermal power stations
and   fertilizer   plants   were   only   in   aid   of   the   work
undertaken by it as a cleaning agent.   There was no
transfer   of   such   goods   and   no   sales   tax   would
therefore be payable.
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16. In view of such overwhelming judicial opinion, we
hold that the Tribunal committed no error.  All three
questions are answered against the State and the tax
appeal is dismissed.  
(AKIL KURESHI, J.)
(A.J. SHASTRI, J.)
ANKIT
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Created On Tue Oct 11 16:07:14 IST 2016

1 comment:

  1. Excellent communication X out Service, easy to use for organizing visits very friendly customer support around the telephone as well as in person. These guys answer all queries and canopy just about all bases prior to going up to now the particular service has been excellent. Absolutely no ant’s yea!!!

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