No VAT on dyes & chemicals washed away during Job work & get embedded into final product

1. This order shall dispose of a bunch of 94 appeals bearing VATAP Nos. 32, 45 to 81, 83 to 106, 110 to 116, 123, 126, 127, 128, 147, 149 to 155, 158, 159, 165, 166, 179 of 2017, 05, 06, 28, 30, 41, 43, 56, 57 of 2018 as according to the learned counsel for the parties, the issue involved in all these appeals is identical. However, the facts are being extracted from VATAP No.32 of 2017.

Also Read SC Judgment : SC Affirms High Court’s Ruling on VAT Levy for Dyeing Units in A.P. Processors

2. VATAP No.32 of 2017 has been filed by the appellant-assessee against the order 17.03.2017, Annexure A.5 passed by the Haryana Tax Tribunal, Chandigarh (in short, “the Tribunal) for assessment year 2003-04 in STA No. 513 of 2010-11, claiming following substantial questions of law:-

“(i) Whether on the facts and in the circumstances of the case, the learned Tribunal was justified in upholding the levy of tax on chemicals used as consumables in the process of job work of dyeing of fabric by assuming that property in the goods has passed on to the principals?

(ii) Whether on the facts and in the circumstances of the case, the learned Tribunal was justified in upholding the levy of tax on the entire value of dyes used by the appellant in the job work process of dyeing of fabric ignoring the quantity of dyes which are wasted during the process in which property is not transferred to the principals?

(iii) Whether on the facts and in the circumstances of the case, the findings of learned Tribunal are perverse insofar as it has been held that property in the goods i.e. dyes and chemicals is transferred to be principals in the job work of dyeing the fabric?

(iv) Whether on the facts and in the circumstances of the case, the learned Tribunal was justified in placing reliance upon the judgment of Hon’ble Bombay High Court in the case of Commissioner of Sales Tax Vs. Matushree Textiles Limited, ignoring that the said judgment dealt with applicability of works contract tax and not quantity of goods on which tax is to be levied?”

3. A few facts relevant for the decision of the controversy involved as narrated in VATAP No.32 of 2017 may be noticed. The appellant-assessee is a dealer duly registered under the provisions of the Haryana Value Added Tax Act, 2003 (for brevity HVAT Act) and Central Sales Tax Act, 1956 (in short, “the CST Act”). The assessee is a textile processor and is engaged in the execution of job work. The grey fabric comes to the processors and after due processing/manufacturing, the finished product is sent back raising an invoice on which Basic Excise Duty (BED) and Additional Excise Duty (AED) is also leviable although the rate of duty is nil and as per the valuation prescribed in the relevant Act considering cost of grey fabric, processing charges and other incidental charges etc. Thus, the processed fabric falls under the category of declared goods and the sales tax on such fabrics stands already paid in the form of additional duty of excise under the Additional Duty of Excise (Goods of Special Importance) Act, 1957. The assessee filed all the four quarterly returns for the year 2003-04. It claimed that no sales tax should be levied on sale of textile under the provisions of the Sales Tax laws when additional excise duty is leviable as per the provisions of the statutes. For framing the assessment, the assessing authority issued notice in Form VAT N.2. In response to the notice, the assessee submitted sufficient entries pertaining to the purchases and sales with the lists of LP3, LP7 and No.C4 to the assessing authority. While framing the assessment, the assessing authority checked all the records submitted by the assessee. Cross entries from cash book to ledger and vice versa had been checked. Account books produced by the assessee had been examined in detail. Sales invoices, tax invoices had also been verified with the help of account books and lists submitted by the assessee alongwith the returns. The assesseing authority concluded assessment on the basis of observations and findings that all the dyes and chemicals used in the execution of job work of bleaching and dyeing are transferred as in physical form or as their inherent properties. Therefore, the property in goods passed on in the process of execution of job work should be taxed and the Assessing officer raised a tax demand of `5,34,516/- vide order dated 20.3.2007, Annexure A.1. Reliance was placed on decision of the Bombay High Court in Commissioner of Sales Tax Vs. Matushree Textiles Limited, (2003) 132 STC 539. Aggrieved by the order, the assessee filed an appeal before the Joint Excise and Taxation Commissioner (Appeals) [JETC(A)]. It was pleaded that no such tax was payable by the assessee. The order of the Assessing Authority was not supported by any reason/ground or report regarding the portion of the material which could technically be said to have been transferred after the process of dyeing as that there was no transfer of chemical on dyed fabric. Even if sales tax was leviable, at best it could be said that the dyes transferred may be approximately 20%. Vide order dated 4.3.2008, Annexure A.2, the JETC(A) rejected the appeal on the ground that the Assessing Authority was the best judge to ascertain the factual position as to how much transfer of property was involved in the process and it had rightly been ascertained by the assessing authority. Still not satisfied, the assessee filed appeal before the Tribunal, inter alia canvassing that tax on value of chemicals consumed during the process of dyeing and job work was not to be included for the purpose of levy of VAT under the HVAT Act/CST Act. It was also argued that even the dye used in the process would not be entirely taxable as a substantial portion of the same is not transferred to the principal eventually. The assessee also submitted a paper book containing the reports of technical personal certificates issued by various competent authorities justifying the stand of the assessee that chemicals are wasted during the process of dyeing of textiles and only a part of colour is made part of the final product sent to the principal. Vide impugned order dated 17.3.2017, Annexure A.5, the Tribunal dismissed the appeal upholding the levy of tax on the entire value of the chemicals and dyes used in the process irrespective of the fact whether property in goods had been transferred or not. Hence the instant appeal by the appellant-assessee.

4. Learned counsel for the appellant assessee inter alia submitted that the order passed by the Tribunal is based upon judgment of the Bombay High Court in Matushree Textile Limited’s cases (supra), wherein the issue was as to whether process of dyeing of textile would amount to works contract or not and there was no dispute regarding the quantification of goods on which tax would be imposed. It was held by the Court that property of the material such as chemical colours and dyes used in the process of dyeing and printing was passed on to the fabric of the customer and as such, passing of the property of material was a deemed sale and tax was leviable on such materials under the Works Contract. The Court did not decide as to how much quantity of dyes and chemicals would be made subject matter of such tax since such question was not referred to it for an answer. Learned counsel relied upon judgment of the Apex Court in Gannon Dunkerley vs. State of Rajasthan, (1993) 1 SCC 364, wherein it was held that tax is imposed in a works contract on the transfer of property in goods involved in the execution of the works contract. It was observed that the taxable event is the transfer of property in goods involved in the execution of a works contract and the said transfer of property in such goods takes place when the goods are incorporated in the works. Reliance was also placed on judgment of Karnataka High Court in Sri Krishna Spinning and Weaving Mills Pvt. Limited vs. Authority for clarification and Advance Rulings, Bangalore, (2010) 27 VST 194, wherein it was noted that about 10% to 20% of the dyeing chemicals are consumed by the fabric and the remaining get washed out as per technical reports. In that case, the court while holding that the said aspect had not been considered by the authorities below as to how much would be the actual loss of chemicals, dyes and colours when the fabric undergoes various process, remanded the case back to the Assessing Officer to work out details regarding as to how much of chemicals, dyes and colours get washed out. The Assessing Officer was asked to add to the value of turnover in accordance with law the actual percentage of chemicals, dyes and colours which were retained or embedded on the textile or the fabric.

5. On the other hand, learned counsel for the revenue contended that vide 46^thAmendment of the Constitution with effect from 02.02.1983, it was inter alia provided that power to levy tax on sale and purchase of goods included power to levy tax on transfer of property in goods used in execution of works contract. Consequent upon this amendment, most of the States amended their sales tax laws to include transfer of property in goods used in execution of works contract within the ambit of taxation. The Haryana General Sales Tax Act, 1973 was also amended on 18.04.1984 to incorporate such levy of sales tax. There was no change under the HVAT Act in this respect. According to the learned counsel for the revenue, from the above legal position, it is clear that the goods used in bleaching, dyeing, printing etc. by textile processors became taxable from 18.04.1984 where such goods were used in the execution of local works contracts, and from 11.05.2002 where the goods were used in the execution of interstate works contracts. With regard to contention of the assessee whether chemicals used in the job work are taxable or not and whether dyes/colours are taxable only to the extent of the quantity which is transferred to the fabric or not the whole quantity, learned counsel for the revenue submitted that the judgment of the Bombay High Court in Matushree Textiles Limited’s case(supra) relied upon by the Tribunal in its order dated 17.03.2017 is against the assessee, on the issue of taxability of the chemicals, dyes and colours used in the process of dyeing and printing and also, on the quantum of taxability thereof. Learned counsel for the revenue concluded her arguments by stating that the entire property in the chemicals/dyes/colours used in the job work of dyeing and printing the fabric passes on to the fabric because the solution left behind is wastage and is of no use or value and therefore, the value of all chemicals and dyes used in the job works is taxable.

6. We have heard learned counsel for the parties.

7. Before adjudicating the issue involved in these appeals, it would be apposite to reproduce the relevant statutory provisions:-

Section 2(ze) of the Haryana Value Added Tax, 2003 defines “Sale”. The relevant portion thereof reads thus:-

“Sale” means any transfer of property in goods for cash or deferred payment or other valuable consideration except a mortgage or hypothecation of or a charge or pledge on goods; and includes-

(i) xxxxxxxxx

(ii) the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract;

(iii) to (vi) xxxxxx”

and such transfer, delivery or supply of any goods shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and a purchase of those goods by the person to whom such transfer, delivery or supply is made;

Section 2(g) of the Central Sales Tax Act, 1956 defines “Sale”, which is in similar terms as under:-

With its grammatical variations and cognate expressions, means any transfer of property in goods by one person to another for cash or deferred payment or for any other valuable consideration, and includes,–

(i) xxxxxxxxxxxx

(ii) a transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract;

(iii) to (vi)xxxxx”

but does not include a mortgage or hypothecation of or a charge or pledge on goods.

Section 2(d) of the Central Sales Tax Act, 1956 defines “Goods”:

“d) “goods” includes all material , articles, commodities and all other kind of movable property, but does not include newspapers, actionable claims, stocks, shares and securities.”

8. A plain reading of the above provisions shows that sale means any transfer of property in goods for cash or deferred payment or other valuable consideration except a mortgage or hypothecation of or a charge or pledge on goods. The “goods” means all material articles, commodities and all other kinds of moveable property but does not include newspapers, actionable claims, stocks, shares and securities.

9. Section 2(zg) of HVAT defines “Sale price”, which reads thus:-

“2(zg) “sale price” means the amount payable to a dealer as consideration for the sale of any goods, less any sum allowed at the time of sale as cash or trade discount according to the practice, normally prevailing in the trade, but inclusive of any sum charged for anything done by the dealer in respect of the goods at the time of or before the delivery thereof and the expression purchase price shall be construed accordingly;

Explanation:- (I) in relation to transfer of property in goods (whether as goods or in some other form) involved in execution of a works contract, sale price shall mean amount as is arrived at by deduction from the amount of valuable consideration paid or payable to a person for the execution of such works contract, the amount representing the labour and other service charges incurred for such execution, and where such labour and other service charges are not quantifiable, the sale; price shall be the cost of the acquisition of the goods and the margin of profits on them prevalent in the trade plus the cost of transferring the property in the goods and all other expenses in relation thereto till the property in them whether as such or in any form passed to the contractee and where the property in a different form shall include the cost of conversion.

According to the aforesaid provision, the “sale price” under the HVAT Act means the amount payable to a dealer as consideration for the sale of any goods minus cash or trade discount allowed at the time of sale but includes any sum charged by the dealer in respect of the goods at the time of or before the delivery thereof. Explanation to Section 2(zg) provides the method of determination of sale price in relation to transfer of property in goods (whether as goods or in some other form) involved in execution of a works contract, which shall be an amount arrived at by deduction from the amount of valuable consideration paid or payable, the labour and other service charges incurred for such execution and where it is not so quantifiable, then the cost of acquisition of the goods and the prevalent margin of profits on them plus the cost of transferring the property in the goods and all other expenses in relation thereto till the property in them is transferred to the contractee and where the property is converted into different form, by including the cost of conversion.

Similar meaning is assigned to the expression “sale price” under the CST Act. Section 2(h) of CST Act is in the following terms:-

“2(h) “sale price” means the amount payable to a dealer as consideration for sale of any goods, less any sum allowed as cash discount according to the practice, normally prevailing in the trade, but inclusive of any sum charged for anything done by the dealer in respect of the goods at the time of or before the delivery thereof other than the cost of freight or delivery or the cost of installation in cases where such cost is separately charged.

Provided that in the case of a transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract, the sale price of such goods shall be determined in the prescribed manner by making such deduction from the total consideration for the works contract as may be prescribed and such price shall be deemed to be the sale price for the purposes of this clause.”

10. The Apex Court in Gannon Dunkerley’s case (supra) had held that for purposes of computation of tax, the tax is imposed in a works contract on the transfer of property in goods involved in the execution of a works contract. The taxable event is the transfer of property in goods involved in the execution of a works contract and the said transfer of property in such goods takes place when the goods are incorporated in the works.

11. Having noticed the taxable event in a works contract, we proceed to examine the core issue that arises for consideration as to what

is the quantum of transfer of property in goods while executing the job work of bleaching and dyeing. To put it differently, it is to be seen whether it would be the value of the entire material used for bleaching and dyeing or some portion of the material used for process of bleaching and dyeing which is transferred as property in goods while accomplishing the job work under works contract.

12. It would be apt to refer to various technical reports of the experts relied by the assessee which are as under:-

“1 Report dated 19.11.2004 given by Shri K.P. Bhatt, B.Sc. B.SC. Tech (Textile Chimistry), UDCT, Mumbai, Technical Consultant, Textile Process Industry

In this report, the Technical expert had observed that the dyeing and printing of textile fabric undergoes the following processes:

(i) Stitching

This stage of process is to make the fabric ready for the process. No chemicals or dyes are used in this process..

(ii) Singeing and Desizing

In this process, roughly around 15% of the chemicals are used.

However,all the chemicals are washed out in this process.

(iii) Scouring and Bleaching

In this process, about 15% of the dyes and chemicals are used and all the chemicals are washed out as in this process, the fabric passes through the machine in which the chemicals are applied on the fabric at a higher temperature of 97 degree centigrade. At this temperature, these chemicals remove wax, fatty materials,yellow colour from the fabric and make the fabric more absorbent and white.

(iv) Mercerizing 

In this process, the fabric is passed through caustic soda solution to change the structure of cellulose. The fabric becomes more lustrous and the strength increases. After the process is over, the entire caustic is to be removed from the fabric. In this process, 10% of the total value of dyes and chemicals are used.

(v) Dyeing

After all the processes, to make the cloth fabric ready for dyeing the process of applying the colour is undertaken. In this process of dyeing, depending upon the colour of shade, 10 to 30% of the colours are fixed on the fabric. Rest of the colours are washed out. In this process, reactive colours and chemicals on the alkali, sodium silicate and detergents are used. In this process, 10 to 30% depending upon the shade are stuck to the shade and the rest of the colour and chemicals are totally washed out. In this process, about 20% of the colours and 10% of the total chemicals are used.

(vi) Printing

After mercerizing, dither the fabric is dyed or printed. In case the process of printing is undertaken, the fixation of colours on the fabrics would vary from 20% to 50%. Rest of the colours alongwith entire chemicals are washed out in the subsequent process of washing/soaping. In the printing, around 25% of the total colours and 5% of the total value of dyes and chemicals are used.

(vii) Finishing

Finishing process is done to make the fabric softer or heavier as per the requirement. In this process, no chemical traces remain in fabric and around 10% of the value of total dyes and chemicals are used.

Conclusion: The fabric is used by human beings and traces of chemicals, enzymes, acids and alkalis and excess colours must be removed to make it harm free to wear by human beings. Ultimately, dyed or printed fabrics will have and carry a small portion of colours on it and nothing else.

2. Report of Shri H.V. Krishnaswamy dated 28.01.2005

“1.1 M/s. Sri Krishna Spinning & Weaving Mills Private Limited (SKSWMPL), Subramanyapura, Bangalore- 560061, are engaged in the Textile Processing of cotton fabrics from the first stage of stitching of grey fabrics to the final stage of dyeing/ printing and finishing.

1.2 M/s. SKSWMPL now wishes to have an opinion on this process details and to evaluate the extent of permanent absorption of dyes, chemicals and colours used in different stages, which manifest itself in the final outputted fabrics. This Report analyses this requirement.

2.0, 3.0, 4.0 xxxxxxx…..

5.0 The brief details of the various stages of process, the grey fabrics go through, in chronological order, are as under:

5.1 Stitching

The first stage of process is to make the grey fabric ready for process. The grey fabric is in the form of pieces having a maximum length of about 30 meters each piece. However, the pieces cannot be processed individually and they have to be stitched piece to piece to make it continuous ready for processing. The length of the stitched fabric varies from about 300 meters and above.

5.2. Singeing 

The surface of the fabric contains loose fibres and they have to be removed to make the fabric ready for next process. In the process of singeing the fabric is passed through uniform flame at certain speed. When the fabric passes through flame at a predetermined speed, all loose fibres on the surface of the fabric are burnt and the surface of the fabric becomes plain without any loose fibres and is ready for the next process.

5.3. Desizing:  

5.3.1 At the stage of weaving (converting yarn into fabric) the size (starch) is applied. However, while processing the fabric, all impurities and foreign materials etc., have to be removed from the fabric. The fabric can be processed (dyed or printed) only when it is devoid of all impurities and foreign materials.

5.3.2  Nature of Process of Desizing:

In the process of desizing, the size (starch) which was applied at the time of weaving, is removed. The fabric is wetted and certain chemicals are used to remove the size (starch) from the fabric. When certain chemicals are applied to the fabric, the size (starch) is made soluble and removed completely in the final process of washing immediately after desizing.

5.3.3 Chemicals Used