IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HON'BLE THE CHIEF JUSTICE MR.H.L.DATTU & THE HONOURABLE MR. JUSTICE K.M.JOSEPH TUESDAY, THE 8TH JANUARY 2008 / 18TH POUSHA 1929 ST.Rev..No. 174 of 2004 ----------------------------------------- (AGAINST THE ORDER OF THE KERALA SALES TAX APPELLATE TRIBUNAL, ADDL. BENCH II, ERNAKULAM DATED 20.12.2002 IN T.A. NO.842/00 & CROSS OBJECTION NO. 73/2000). APPELLANT/RESPONDENT/ASSESSEE: -------------------------------------------------------- M/S.RAMANAND ELECTRO COATS, CHEMBUMUKKU, ERNAKULAM. BY ADV. SMT.K.LATHA RESPONDENTS/APPELLANT/REVENUE: ------------------------------------------------------- THE STATE OF KERALA. BY SR. GOVERNMENT PLEADER SHRI MUHAMMED RAFIQ. THIS SALES TAX REVISION HAVING BEEN FINALLY HEARD ON 04/12/2007 ALONG WITH 184/05, 79/07 & 81/07, THE COURT ON 08/01/2008 PASSED THE FOLLOWING: H.L. DATTU, CJ. & K. M. JOSEPH, J. -------------------------------------------------- ST.REV. NOS. 174/04, 184/05, 79/07 & 81/07 --------------------------------------------------- Dated this the 8th January, 2008 JUDGMENT K.M. JOSEPH, J. Since common questions arise in all these cases, they are disposed of by a common Judgment. 2. ST. Rev. Cases 174/04, 79/07 & 81/07 are filed by the assessee, while ST. Rev. Case 184/05 is filed by the State of Kerala. 3. ST. Rev. No.79/07 relates to the assessment year 1997 - 98. ST. Rev. No.81/07 relates to the assessment year 1998 - 99. ST. Rev. No.174/04 relates to the assessment year 1995 - 96. ST. Rev. No.184/05 relates to the assessment year 1996 - 1997. 4. The assessee is a works contractor engaged in powder coating of metal cabinets. The case of the petitioner/assessee, in brief, is as follows: Various manufacturers entrust their goods ie. different types of unfinished products, like metal cabinets, lift panels, stabilizers, UPS frames, panel board, booster cover, etc. to the petitioner for epoxy powder coating. The assessee carries out powder coating of the cabinets supplied by the customers. This involved sale of paint by the assessee to its customers. The powder coated items are used by the customers in the manufacture of their finished products. It, therefore, became an industrial raw-material or component part of the product of the customers. These set of facts would show that circumstances warranted the issuance of Form 18 Declaration by the customers to the petitioner/assessee, for claiming the benefit of concessional rate of tax, which were issued. 5. The Assessing Officer has proceeded to find that the assessee is STRV 174/04, 184/05, 79/07 & 81/07 2 engaged in a pure works contract. The work is executed by using powder paint and other consumables purchased by the assessee. It is found that the petitioner/assessee is not a manufacturer and hence it is not eligible for concessional rate. The Assessing Officer after issuance of notice and on consideration the reply of the assessee, rejected the claim of the petitioner/assessee for reduced rate of tax at three per cent claimed on the basis of Form 18 Declaration. It is found that the assessee is not a supplier of raw-materials or component parts and it is only a case of execution of works contract. The assessee was permitted, however, to avail the benefit of compounding under Section 7(7A). First Appeals were filed by the assessee. The Appellate Authority found that the denial of concessional rate even after filing Form 18 Declaration obtained from the customers is illegal and against the intention of the legislature. The Assessing Officer was directed to allow the concessional rate under Section 5(3) of the Kerala General Sales Tax Act (for short, the Act) and the Appeals filed by the assessee were partly allowed. The State carried the matter in Appeal. The Tribunal allowed the Appeals filed by the State. The Tribunal reasoned that as held by the Apex Court in Hindustan Transmission Products Ltd. v. State of Kerala ((1998) 6 KTR 259), merely on the production of Form 18 Declaration, the seller is not entitled to claim the benefit of Section 5(3) of the Act, if the goods are not capable of being used as component parts or raw-materials by the purchasing dealer. It was found that in this case, there is no evidence that the assessee is supplier of raw-materials or component parts for the purpose of manufacturing of a new product. The Assessee was only found to use electro coating powder which is purchased by him from outside Kerala. Thus, for the assessment years in question to which they relate, as already mentioned, the Tribunal found that the petitioner/assessee is not entitled to claim the benefit of concessional rate, even though Form 18 Declaration was filed. For the year 1996 - 1997, however, the Tribunal has proceeded to reject STRV 174/04, 184/05, 79/07 & 81/07 3 the Appeal filed by the State, as also the Cross Objection filed by the assessee against the order of the Appellate Authority, directing the grant of concessional rate under Section 5(3) of the Act. 6. The questions of law raised by the petitioner/assessee are as follows: " (i) Whether the decision of the Tribunal that the assessee is not eligible for concessional rate on the strength of Form 18 declarations as per Section 5(3) of the KGST Act, is tenable when it was clear that the epoxy powder transferred by this appellant through executing the work of coating it on the metal cabinets that was supplied by the customers was used by those customers in the manufacturing of their finished products ? (ii) Whether the concessional rate of sales tax u/s. 5(3) of KGST Act, 1963 against valid Form 18 declaration which is available to normal sale can be denied to the deemed sale, such as, transfer of raw-materials to an industry not in the form of goods (in the form of executing a works contract) ? (iii) Whether all the privileges and concessional rate application allowable to sales are allowable to transfer of goods involved in the execution of works contract which is deemed sales by treating sales and deemed sales at par ? (iv) Whether the Tribunal is justified in non-considering the fact that the same Bench of the same Sales Tax Appellate Tribunal in the case of this appellant itself for the year 1996 - 97 admitted early as per order in T.A. No.341/02 & C.O. No.36/02 dated 19.06.2003 that the appellant is eligible for concessional rate on the strength of Form 18 declarations as per Section 5(3) of the KGST Act, even after the appellant filed a rectification petition and pointed out this irregularity before the Appellate Tribunal ? STRV 174/04, 184/05, 79/07 & 81/07 4 (v) Whether the tribunal can contradict to its own judgment held in early year on the same question of law and fact, without distinguishing and without finding any new facts or reasons for such contradictory view ? (vi) Whether the Tribunal can be justified in denying the concessional rate in Section 5(3) of the KGST Act, 1963, when there is no dispute that the appellant has transferred Epoxy powder to the customer in the execution of works contract as per agreement and that such goods are raw material for the customer in the manufacture of their finished goods and that Form 18 has been obtained ? (vii) Whether the Tribunal can be justified in denying the concessional rate in Section 5(3) of the KGST Act 1963, when the intention of the legislation in Section 5(3)(i) read with Section 5(3)(ii) is that if any dealer purchase goods using Form 18 and fails to make use of such goods accordingly such dealer is liable to suffer for his misuse of Form 18 ie. the selling dealer at concessional rate using Form 18 is having immunity from the misuse of goods by the buyer and his eligibility to get the concessional rate u/s. 5(3) cannot be denied ?" The questions of law raised by the Revenue are as follows: (i) Whether on the facts and in the circumstances of the case, Tribunal is justified in upholding the view of the Appellate Assistant Commissioner that by coating epoxy powder on the material supplied, there is a transfer of epoxy powder from assessee/respondent to customers ? (ii) Whether on the facts and in the circumstances of the case, Tribunal is justified in upholding the view of the Appellate Assistant Commissioner that the assessee/respondent is eligible for concessional rate of tax as provided under sub-section 3 of STRV 174/04, 184/05, 79/07 & 81/07 5 Section 5 of the KGST Act, 1963 ?" 7. We heard Smt. K. Latha, learned counsel for the petitioner/assessee and Shri Muhammed Rafiq, learned Senior Government Pleader appearing on behalf of the State. 8. Smt. Latha, learned counsel would contend that on the facts as they emerge, it is clear that the assessee has transferred the goods, ie. epoxy powder in the execution of works contract and these goods are raw-material/component parts for the products of the customers. Epoxy powder was sold (through transferring it in the execution of the works contract). It is after issuing such Declaration that the customers purchased the raw-material (epoxy powder from the petitioner/assessee). It is the case of the assessee that epoxy powder was never used by the assessee for its own use. It is stated that the petitioner had neither used the epoxy powder for its own use, nor manufactured/sold any finished products by themselves and it has only transferred raw-materials to the industrial units through execution of works contract, thus rendering it eligible to get the concessional rate under Section 5(3) of the Act. It is further contended that once the Form 18 Declaration is issued by the purchaser, then inevitably the assessee to whom the Form 18 Declaration was issued, is entitled to claim the benefit of concessional rate and if there is any misuse in Form 18 Declaration in so far as the purchaser who issued the Form 18 Declaration does not use the goods in the manufacture of other products, then the law contemplates action being taken against the purchaser who issued Form 18 Declaration and the law does not permit denial of the concessional rate to the assessee who supplied the raw-materials by only charging the concessional rate. Per contra, learned Senior Government Pleader would contend that the petitioner/assessee is not entitled to the benefit of concessional under Section 5(3) of the Act. STRV 174/04, 184/05, 79/07 & 81/07 6 9. Originally, Section 5(3) read as follows: "(3) Notwithstanding anything contained in Sub-section (1) or Sub-section (2), the tax payable by a dealer in respect of any sale of the goods mentioned in the First Schedule, by such dealer to another for use by the latter as component part of any other goods mentioned in the said Schedule, which he intends to manufacture inside the State for sale, shall be at the rate of only one per cent on the taxable turnover relating to such sale: Provided that the provisions of this Sub-section shall not apply to any sale unless the dealer selling the goods furnishes to the assessing authority in the prescribed manner a declaration duly filled in and signed by the dealer to whom the goods are sold containing the prescribed particulars in the prescribed form." With effect from 1.4.1978, an Explanation was added as follows: "Explanation:- For the purpose of this Sub-section, "component part" means an article which forms an identifiable constituent of any finished product, which along with others goes to make up the finished product and which is identifiable visually and is separable by a mechanical process and not by chemical process, provided the identity of such articles is not lost by separation." Thereafter, with effect from 1.7.1987, Sub-section (3) came to be substituted and it read as follows: "(3) Notwithstanding anything contained in sub-section (1) or sub-section (2), the tax payable by a dealer in respect of any sale of industrial raw materials, component parts or packing materials which is liable to tax at a rate higher than two per cent when sold to industrial units for use in the production of finished products inside the State for sale or for packing of such finished products inside the State for sale, as the case may be, shall be STRV 174/04, 184/05, 79/07 & 81/07 7 at the rate of only two per cent on the taxable turnover relating to such industrial raw materials, component parts, or packing materials, as the case may be: Provided that this sub-section shall not apply where the sale of such finished products is not liable to tax either under this Act or under the Central Sales Tax Act, 1956 (Central Act 74 of 1956) or when such finished product4s are exported out of the territory of India: Provided further that the provisions of this sub-section shall not apply to any sale unless the dealer selling the goods furnishes to the assessing authority in the prescribed manner a declaration duly filled in and signed by the dealer to whom the goods are sold containing the prescribed particulars in the prescribed form." Later by Act 19 of 1994 and with effect from 1.4.1994 it came to be as follows: "(3)(i) Notwithstanding anything contained in Sub- section (1) or Sub-section (2), the tax payable by a dealer in respect of any sale of industrial raw materials, component parts, containers or packing materials which is liable to tax at a rate higher than two and a half per cent when sold to industrial units for use in the production of finished products inside the State for sale or for packing of such finished products inside the State for sale, as the case may be, shall be at the rate of only two and a half per cent on the taxable turnover relating to such industrial raw materials, component parts, containers or packing materials, as the case may be; Provided that this Sub-section shall not apply where the sale of such finished products is not liable to tax either under this Act or under the Central Sales Tax Act, 1956 (Central Act 74 of 1956) or when such finished products are exported outside the territory of India." STRV 174/04, 184/05, 79/07 & 81/07 8 10. The present provision contained in Sub-Section (3) of Section 5 has come into being with effect from 1.1.2000. Since we are not concerned with the provision as it stands, we do not consider it necessary to extract the same. 11. When we notice the legislative history of the provisions, we would notice that the explanation which is inserted with effect from 1.4.1978 by Act 21 of 1978, is conspicuous by its absence in the provision as inserted with effect from 1.7.1987 by Act 18 of 1987 as also in the provision as substituted with effect from 1.4.1994. Learned counsel for the petitioner would point out that the decision in Hindustan Transmission Products Ltd. v. State of Kerala ((1998) 6 KTR 259) was rendered by interpreting the provision which contained the Explanation. She would submit that in so far as the petitioner/assessee has effected sale of the industrial raw- material/component parts in the course of execution of the works contract, it is clear that the petitioner/assessee is entitled to the benefit of concessional rate. 12. On an analysis of the provisions, we would think that the case of the petitioner/assessee is without merit. Sub-section (3) of Section 5 is intended to promote manufacturing activity within the State of Kerala as also packing of finished products within the State. It is subject to the further condition that the sale of the finished products is subject to tax either under the KGST Act or the CST Act. Thus, when raw-materials/component parts/containers or packing materials are sold to an industrial unit, the elements of the Section can be stated as follows: There must be a sale of industrial raw-materials/component parts/containers or packing materials to industrial units. It must be for use in the production of finished products within the State for sale or for packing of such finished products inside the State for sale. The industrial raw-materials/component parts/containers or packing materials must be exigible to tax at a higher than 2-1/5 per cent. The sale of finished products must be liable to tax either under the KGST Act or CST Act. In such circumstances, if there is a declaration as contained in Form 18 issued by the STRV 174/04, 184/05, 79/07 & 81/07 9 purchaser certifying the facts which warrant the invocation of the provision, the seller of the industrial raw-materials/component parts/containers or packing materials will be eligible for being assessed at the concessional rate. "Sale" is defined in the Act as follows: "S.2(xxi) "Sale" with all its grammatical variations and cognate expressions means every transfer whether in pursuance of a contract or not of the property in goods by one person to another in the course of trade or business for cash or for deferred payment or other valuable consideration, but does not include a mortgage, hypothecation, charge or pledge; Explanation (3A) to the definition of the word "Sale", reads as follows: "A transfer of property in goods whether as goods or in some other form involved in the execution of a works contract shall be deemed to be a sale." 13. Undoubtedly, the petitioner/assessee was in the assessment years in question, entrusted with the works contract. The works contract consisted essentially of the assessee electro-painting the cabinets supplied by the customers. For carrying out electro-painting, the assessee had made use of epoxy powder which is purchased by it. According to the assessee, in so far as the assessee has transferred the property in the paint to the purchasers in the course of the execution of the works contract and the paint being an industrial raw-material/component part, the assessee is entitled to the benefit of concessional rate as held by the first Appellate Authority. She would point out that if instead of entrusting the assessee with the works contract, the purchaser had himself made use of the paint, then the benefit of Section 5(3) would be available. Then, she contends that it does not stand to reason that when the petitioner/assessee has sold its goods in the course of execution of the works contract having regard to clause (3A) of section 2(xxi) and STRV 174/04, 184/05, 79/07 & 81/07 10 the cabinet supplied after using epoxy paint, is used in the manufacture of finished products, the petitioner/assessee could be denied the concessional rate, when Form 18 Declaration has been produced by the assessee. It is also contended by her that if the dealer who has purchased the goods after giving the declaration, has not made use of the goods for the purpose of the declaration, the law as contained in clause (2) of sub-section (3) clearly provides for the remedy for the State to realise the differential tax. 14. It may be true that the assessee in the course of execution of the works contract may have effected sale of the epoxy paint. It is clear that it is neither packing material, containers nor component part. What the petitioner/assessee does is a works contract. The assessee does not carry out any manufacturing activity. The assessee carries out electro-painting by making use of the epoxy paint. Even proceeding on the basis that the paint used by the assessee would amount to an industrial raw-material, we would think that the assessee is not entitled to the benefit of the provision in so far as the provision actually contemplates the sale of industrial raw-material to an industrial unit for use in the production of finished product, no doubt, inside the State. There is no case for the assessee that the paint is actually used by the purchaser in the production of any finished product. It is only when the raw-material or component part is actually used by the purchaser for the purpose of manufacturing of a finished product that the question of applying the concessional rate arises. Admittedly, the manufacturer only makes use of the cabinet to which the paint has been applied by the assessee. We would think that the law contemplates that the manufacturer himself uses the raw-materials or the component parts as the case may be, for production of the finished product. When there is only a works contract by the assessee in the course of which the assessee uses the paint for electro-coating the cabinet, it could not be said that there is use of industrial raw-material or component part, within the meaning of the provision. In STRV 174/04, 184/05, 79/07 & 81/07 11 this view of the matter, we would think that there is no merit in the contention of the petitioner/assessee that the denial of concessional rate is illegal. We also feel that the decision of the Apex Court in the decision in Hindustan Transmission Products Ltd. v. State of Kerala ((1998) 6 KTR 259) would establish the principle that the mere production of declaration will not by itself entitle the assessee to the benefit of the concessional rate under Section 5(3) of the Act, even though it is true that the Court was considering Section 5(3) of the Act, at the time when the Explanation defining the word "component part" was present in the Statute Book. We, therefore, uphold the view taken by the Tribunal in the Revisions filed by the assessee and we reverse the view taken by the Tribunal in ST. Rev. No.184/05. Accordingly, the following order is passed: 1) The questions of law raised by the petitioner/assessee are answered against the petitioner and in favour of the Revenue. The questions of law raised by the State of Kerala in ST. Rev. No.184/05 are answered in favour of the State. 2) ST. Rev. Nos.174/04, 79/07 & 81/07 are dismissed. 3) ST.Rev. No.184/05 is allowed. 4) All pending Interlocutory Applications stand dismissed. H.L. DATTU, CHIEF JUSTICE K.M. JOSEPH, JUDGE kbk.