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21 March 2017

Goods used in process of service are integral to execution of service contract

The issue before the Division Bench of the Delhi High Court was whether chemicals/ solvents used in the process of cleaning amounts to transfer of property in goods between the contractor and the contractee and thus exigible to tax. The petitioner, i.e. the contractor, was engaged in the business of providing services of maintenance, cleaning, washing, housekeeping, waste management, etc., and was awarded a contract by the Northern Railways (contractee).

It was contended that in view of the definition of ‘sale’ under Section 2(1)(zc) of the Delhi Value Added Tax Act, 2004, which includes transfer of property in goods (whether as goods or in some other form) involved in the execution of works contract, there is a sale of the chemicals/ solvents by the petitioner.

The Court, in this case VPSSR Facilities v. Commissioner, distinguished the Kerala High Court’s decision in Enviro Chemical v. State of Kerala, and the Apex Court decision of Xerox Modicorp Ltd. v. State of Karnataka, observing that the decisions did not deal with goods which were integral to the service contract and which were completely consumed during the execution of the service contract. The goods were consumed for the purpose of the final output, i.e., the chemical treatment of effluent water, in Enviro Chemicals were spare parts and toners and developers in Xerox Modicorp.

Futher, explaining the distinction between consumables required for running an equipment and those required for servicing or maintaining an equipment, it was held that soaps, detergent, chemicals and solvents used purely for the purposes of cleaning, etc., are goods which are integral to the execution of the service contract and are consumables which are completely consumed in the process of the execution of the contract.

It was held that since no property in said goods passes to the contractee, the said goods are not exigible to tax, and consequently, the contractee is not liable to deduct TDS. It was further held that mere fact that such goods were deposited in the stores of the contractee would not make any difference to the legal position.