2016 (10) TMI 85 - HC - VAT and Sales Tax

Pest control works contract deemed service, not sale of goods. Chemical consumption prevents property transfer. Tax appeal dismissed.

State of Gujarat Versus Bharat Pest Control

The High Court held that a works contract for pest control primarily constitutes a service contract and not a sale of goods. The chemicals used were ... Works contract for pest control at SEZ - sale and supply of goods as per Section 2(13) and 2(23) of the Value Added Tax Act, 2003 - registered in the category of cleaning activity service - taxation of pesticides and chemicals used in the cleaning and pest control activity under the VAT Act - 'sale' under section 2(23) of the Act - whether execution of the works contract for pest control amount to transfer of property in goods and exigible to VAT? - Held that: - this was a contract for carrying out the pest control service which would require special know-how 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. Similar issue decided in the case of Pest Control India Ltd. v. Union of India and others [1989 (9) TMI 356 - PATNA HIGH COURT]. NO transfer of property in goods involved - No VAT liability - appeal dismissed - decided against Revenue. Issues Involved:1. Whether the works contract for pest control involves 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 leads to transfer of property in goods making the transaction exigible to value added tax.3. Whether the tribunal erred in 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.Detailed Analysis:Issue 1: Sale and Supply of Goods in Works Contract for Pest ControlThe State Government contended that the works contract for pest control involves the sale and supply of goods, specifically the pesticides and chemicals used. The respondent, a proprietary concern engaged in pest control services, argued that the contract is primarily for providing a skilled service, with the use of pesticides being incidental. The Tribunal supported the respondent, concluding that the activity was purely a service, and the materials used were consumed during the process, thus not constituting a sale of goods.Issue 2: Transfer of Property in GoodsThe State argued that the title in the goods (pesticides and chemicals) passed from the service provider to the client, making the transaction subject to VAT. The Tribunal, however, found that the chemicals used in pest control were consumed and ceased to exist, meaning there was no transfer of property. The Tribunal referred to the amended definition of 'sale' under Article 366(29A) of the Constitution, which allows taxation on the transfer of property in goods involved in the execution of works contracts. Despite this, the Tribunal concluded that the transaction did not involve a transfer of property in goods, as the materials were not present in a tangible form after use.Issue 3: Tribunal's Error in JudgmentThe State challenged the Tribunal's decision, arguing that the consumable nature of the chemicals should not preclude the transfer of property in goods. The Tribunal, however, maintained that since the chemicals were consumed and did not remain in a deliverable form, there was no transfer of property. The Tribunal emphasized that for a transaction to be taxed under the VAT Act, there must be an actual transfer of property in goods, which was not the case here.Conclusion:The High Court upheld the Tribunal's decision, stating that the pest control contract was a service contract and did not involve the sale of goods. The chemicals used were consumed and did not remain in a tangible form, thus no transfer of property occurred. The court referenced several precedents, including the Supreme Court's decisions in Gannon Dunkerley & Co. and Rainbow Colour Lab, which supported the view that contracts primarily involving service, even if they use consumable goods, do not constitute a sale of goods. Consequently, all three questions were answered against the State, and the tax appeal was dismissed.