2022 (1) TMI 561 - HC - VAT and Sales Tax

Court rules use of paint in vehicle restoration at service station not subject to VAT under Assam VAT Act.

The court held that the use of paint in the restoration and reconditioning of vehicles at an authorized service station does not constitute a sale under ... Levy of Assam VAT - Nature of activity - sale or service or both - denting and painting job on a vehicle - levy of VAT on paints by treating the nature of works as works contract - transfer of property in paints during the restoration and reconditioning work or not - HELD THAT:- If a new vehicle is considered, a vehicle is made of thousands of components, each having its unique character. Nonetheless, though a vehicle is a composition of numerous unique components, it is impermissible for the taxing authority to tax individual item of the vehicle. Similarly, in the composite work of denting and painting contract, the combination would be a composite contract of labour and service and as in the present case, the petitioner is liable for and is paying service tax as imposed on the work of denting and painting, being a service provided by a “authorised service station” which is covered by the provisions of Section 65(9) of the Finance Tax Act, 1994 (as amended). Therefore, it would not be permissible for the State Taxing Authority to impose VAT on paint separately. There is no dispute that an item taxable by the State under Article 366(29-A) is exempted from being levied with Service Tax and vice-versa. The petitioner, has referred to the provisions of Section 65(9) and Section 65(105)(zo) of the Finance Act, 1994, as amended, and it is submitted that service, repair, reconditioning or restoration of motor vehicle is treated as a taxable service under Finance Act, 1994 (as amended). The learned counsel for the petitioner has also referred to the Circular No. 699/15/2003-CX dated 05.03.2003 (Annexrure-9 of the writ petition), wherein it has been clarified that items such as paints used in painting body, etc., during the course of providing service form intrinsic part and parcel of service in so much as that these are not distinctly and separately identifiable from the services rendered and therefore value of such items, which form intrinsic part of service is included in the value of taxable service. The Court is of the considered opinion that the petitioner has been able to repel the opinion expressed in the impugned orders, thereby holding the use and/or application of paint in a vehicle workshop as a “sale” of paint and thus, taxable under the Assam Value Added Tax Act, 2003 - Application allowed. Issues Involved:1. Legality of the assessment order dated 10.08.2010 and the revisional order dated 18.02.2015.2. Whether Assam VAT can be levied on paints used in restoration and reconditioning of vehicles, considering it as a works contract.3. Whether the nature of the denting and painting job on a vehicle constitutes a sale, service, or both.Detailed Analysis:Issue 1: Legality of the Assessment and Revisional OrdersThe petitioner challenged the assessment order dated 10.08.2010 and the revisional order dated 18.02.2015 issued by the Deputy Commissioner of Taxes and the Additional Commissioner of Taxes, respectively. The primary contention was that the orders erroneously treated the use of paint in vehicle restoration as a transfer of property, thereby subjecting it to VAT.Issue 2: Levy of Assam VAT on PaintsThe petitioner argued that the use of paints in denting and painting services should be considered a contract of service, not involving a transfer of property. The petitioner cited the C.B.E.C. Circular No.699/15/2003-CX, which clarified that the value of items like paints, used during service, forms an intrinsic part of the service and is included in the taxable service value. The petitioner also referenced several legal precedents, including S.S. Photographic Lab Pvt. Ltd. v. State of Assam, to support the argument that such contracts do not involve the sale of goods.The respondent, represented by the Advocate General, contended that paint qualifies as 'goods' under Sections 2(20)(iii) and 2(43)(ii) of the Assam VAT Act and thus, its use in works contracts can be taxed. The State argued that the paint, once applied, becomes embedded in the vehicle, enhancing its value, and thus constitutes a sale.Issue 3: Nature of Denting and Painting JobThe core issue was whether the denting and painting job on a vehicle is a sale, service, or both. The court examined the definitions under the Assam VAT Act and relevant case laws, including Larsen & Toubro Ltd. v. State of Karnataka, to determine the nature of the transaction. The court noted that if the transaction is a sale, the State can levy sales tax, but if it is a service, only the Central Government can levy service tax.The court referred to the legal precedents and constitutional provisions to conclude that the nature of the denting and painting job does not constitute a sale of goods. The court emphasized the marketability test, as discussed in S.S. Photographic Lab Pvt. Ltd., concluding that paint used in such services is not marketable as a separate commodity. Hence, the transaction is primarily a service.Conclusion:The court held that the use of paint in the restoration and reconditioning of vehicles at an authorized service station does not constitute a sale under the Assam VAT Act. The court quashed the assessment and revisional orders, ruling that the transaction is a service, not a sale, and thus not subject to VAT. The court emphasized that taxing such transactions under VAT would result in double taxation, as service tax is already being collected by the Central Government.Order:The assessment order dated 10.08.2010 and the revisional order dated 18.02.2015 were set aside and quashed. No order as to costs was issued.