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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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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