2017 (2) TMI 814 - HC - VAT and Sales Tax

Contractor wins taxability case on chemicals/solvents used in cleaning services

The court ruled in favor of the petitioner, a contractor, in a case challenging the taxability of consumable chemicals/solvents used in cleaning services. ... Transfer of property in goods - works contract - consumable goods consumed in the execution of a contract - exigibility to tax on deemed sale - deduction of tax at source - certificate for NIL deduction - quicquid plantatur solo, solo ceditTransfer of property in goods - works contract - consumable goods consumed in the execution of a contract - exigibility to tax on deemed sale - Whether consumable chemicals/solvents used by the contractor in performance of the cleaning/maintenance works contract result in transfer of property in goods to the contractee and are exigible to tax as deemed sale. - HELD THAT: - The contract awarded to the petitioner required use of soaps, detergents, chemicals and solvents as integral inputs for cleaning, washing and maintenance. Clause 38 shows the contractor supplies chemicals which are kept in the custody of the Railway and issued as required; cost of chemicals is included in unit rates. The court distinguished cases such as Enviro Chemicals and Xerox Modicorp where goods used were not integral consumables of the service or became tangible movables to which property passed (e.g., toners/developers, chemicals poured into effluent treatment). Here the chemicals/solvents are consumed wholly in the process of rendering the service and are of no independent use to the contractee apart from executing the contract. Drawing an analogy with servicing a motor car, the court held that consumables used purely for servicing/cleaning (which are completely consumed and not separately identifiable) do not result in transfer of property. Mere deposit of consumables in the contractee's store for operational control does not effectuate transfer of title. Applying Section 2(1)(zc) of the DVAT Act and the factual matrix, the court concluded that property in these consumable chemicals does not pass to the contractee and therefore there is no deemed sale exigible to tax. [Paras 25, 26, 27, 34, 36]Property in the consumable chemicals/solvents used for cleaning does not transfer to the Railways and such goods are not exigible to tax.Deduction of tax at source - certificate for NIL deduction - exigibility to tax on deemed sale - Whether the Commissioner is obliged to grant a certificate under the DVAT Act directing NIL deduction of tax at source by the contractee in respect of the payments to the petitioner. - HELD THAT: - The petitioner sought a certificate under Section 36(A)(2) of the DVAT Act to avoid deduction of tax at source. This relief is contingent upon the contractual payments not containing any taxable deemed sale component. Having held that consumable chemicals/solvents used in execution of the cleaning contract do not result in transfer of property and are not exigible to tax, there remains no taxable component on account of such goods. Consequently, the statutory basis for TDS by the contractee does not arise. The court therefore directed the Commissioner to issue the certificate for NIL deduction of tax at source. [Paras 36, 37]Commissioner VAT must issue a certificate directing NIL deduction of tax at source.Final Conclusion: The impugned order is set aside: consumable soaps, detergents, chemicals and solvents used and consumed in the course of the cleaning/maintenance works contract do not result in transfer of property and are not exigible to tax; the Commissioner is directed to grant a certificate for NIL deduction of tax at source. Issues Involved:1. Whether the consumable chemicals/solvents used in the process of cleaning amount to a transfer of property in goods and are thus exigible to tax.2. Whether the Commissioner was liable to grant a certificate for NIL deduction of Tax Deducted at Source (TDS).Detailed Analysis:1. Transfer of Property in Goods and Tax Exigibility:The petitioner, a contractor, challenged the order by the Commissioner of Value Added Tax (VAT) which held that the chemicals/solvents used in cleaning services amounted to a sale of goods. The core issue was whether the consumable chemicals/solvents used in cleaning constituted a transfer of property in goods between the contractor and the Contractee (Northern Railways), making them subject to tax under the Delhi Value Added Tax Act, 2004 (DVAT Act).The petitioner argued that the contract was purely for services, with no transfer of property, and hence, the activities did not constitute a sale under the DVAT Act. The petitioner also contended that the chemicals/solvents were minimal and got completely consumed during cleaning, implying no transfer of property to the Railways.The Commissioner (DVAT) relied on the Kerala High Court judgment in ‘Enviro Chemicals Vs. State of Kerala’ to hold that pouring chemicals on the property of the Contractee amounted to delivery and thus was exigible to tax. The Special Commissioner of Trade & Taxes supported this view, asserting that the contract was composite, involving the transfer of property in goods.The court examined Section 2(1)(zc) of the DVAT Act, which defines 'sale' to include the transfer of property in goods involved in the execution of a works contract. The court noted that the chemicals/solvents used by the petitioner were integral and completely consumed during the execution of the contract, with no independent use to the Contractee.The court distinguished between consumables required for running equipment and those for servicing it. It concluded that the chemicals/solvents used for cleaning were consumables integral to the service contract and were completely consumed, with no property passing to the Contractee. The court found that the Commissioner (DVAT) erred in relying on the judgments in Enviro Chemicals and Xerox Modicorp Ltd., as those cases dealt with goods used for final output, not integral consumables in a service contract.2. Certificate for NIL Deduction of Tax Deducted at Source (TDS):The petitioner sought a certificate for NIL deduction of TDS, arguing that since there was no transfer of property in goods, no tax was required to be deducted at source under Section 36(A) of the DVAT Act. The court agreed, holding that the consumable chemicals used in cleaning did not transfer property to the Railways and were not exigible to tax.Conclusion:The court set aside the impugned order dated 30.06.2014 and directed the Commissioner VAT to issue a certificate for NIL deduction of TDS. The writ petition was disposed of with no costs.