Value Added TaxValued Added Tax cannot be levied on waste Textile by – Products

The Supreme Court, in the case of State of Haryana & Anr. v. A.P. Processors, [Civil Appeal No. 1311 of 2020], decided on 10^th July 2023 upheld the decision of Hon’ble Punjab and Haryana High Court in M/s A.P. Processors v State of Haryana, [VATAP No 32 of 2017 (O & M)], that Value Added Tax (hereinafter referred to as “VAT”) would not be imposed on waste products and only the goods embedded in the final cloth would be subjected to taxation.

FACTS

The State of Haryana & the Revenue Department (hereinafter referred to as “Appellants”) had imposed VAT under Haryana Value Added Tax Act, 2003 (hereinafter referred to as “Haryana VAT Act”) on dyeing units, including the wastage generated during the dyeing process.

 A.P. Processors (hereinafter referred to as “Respondent”), was a textile processor. The assessing officer issued and ordered and confirmed the demand of Rs. 5,34, 516/- (Rupees Five Lakhs Thirty-Four Thousand Five Hundred and Sixteen Only) for the reason that all the dyes and chemicals used in execution of job work of bleaching and dyeing is under the ambit of transfer of goods, therefore is taxable.

Being aggrieved by the said order, the Respondent appealed before the Joint Excise and Taxation Commissioner (Appeals), but the said appeal was rejected and the order of the assessing officer was upheld.

The Respondent then filed appeal before the Tribunal praying that tax imposed on value of chemicals consumed during the process of dyeing and job work should not be included for the purpose of levy of VAT under Haryana VAT Act and Central Sales Tax Act, 1956 (hereinafter referred to as “CST Act”). However, the Tribunal dismissed the appeal and upheld the levy of tax on entire value of chemicals.

The Respondent further challenged the order of the Tribunal before the Hon’ble Punjab and Haryana High Court (hereinafter referred to as “Hon’ble P& H High Court”) on the imposition of VAT on the wastage from the dyeing process being taxable under Haryana VAT Act and CST Act. The Hon’ble P & H High Court ruled in favor of the Respondent, stating that the wastage generated during the dyeing process cannot be considered a taxable event under Haryana VAT Act.

The Hon’ble P & H High Court held in their judgment dated 17.05.2018 (hereinafter referred to as “impugned order”) that since the wastage does not result in any sale or transfer of goods and, therefore, cannot be subjected to Haryana VAT Act, and only the goods embedded in the final cloth would attract tax due to it being a taxable event and essentially a transfer of property. Thus, being aggrieved by the same the Appellants appealed the impugned order before the Hon’ble Supreme Court.

ISSUE BEFORE THE SUPREME COURT

1. Whether the wastage generated during the dyeing process is subject to VAT and is a taxable event?

CONTENTIONS OF THE PARTIES

The Appellants submitted that the decision of the P & H, the High Court decision was erroneous and needed rectification.

The Appellant contended that the wastage should be considered a taxable event under VAT, as the Haryana VAT Act,  provides for the levy and collection of tax on the sale or purchase of goods in the state of Haryana. According to the Appellant wastage is a by-product of the dyeing process and should be treated as a saleable commodity and subjected to VAT.

The Appellant further argued that the interpretation of the P&H High Court of the VAT laws was flawed and did not align with the intention of the legislation. The Appellants emphasized that the purpose of VAT is to tax the value added at each stage of production and distribution, and the wastage generated during the dyeing process should be considered as part of the value added.

Another contention raised by the Appellants was regarding their authority to impose VAT on the wastage. The Appellants argued that the government and the revenue collection agency have the power and jurisdiction to levy taxes, including VAT, on all taxable events within the state and  the imposition of VAT on the wastage was within their legal authority and was a legitimate means of revenue generation for the state.

The Appellants further submitted that exempting the wastage from taxation would result in a loss of potential revenue for the state and the revenue generated from taxing the wastage could contribute to the development and welfare programs of the state.

On the contrary, the Respondent that the items generated during the dyeing process should not be considered as a taxable event under Haryana VAT Act, as the items are industrial wastes generated from the textile and dyeing industry and do not contain any saleable worth. The Respondent stated that the purpose of VAT is to tax the value added at each stage of production and distribution, and the wastage generated during the dyeing process does not add any value to the final product.

It was further argued by the Respondent that the wastage generated during the dyeing process does not involve any sale or transfer of goods and wastage is a non-saleable by-product generated during dyeing and cannot be sold or transferred.

The Respondent submitted that wastage is not a by-product that can be sold or transferred but a non-saleable by-product generated during dyeing.

Thus, the respondent-  contended that the decision of the P&H High Court was correct, which held that the wastage is a non-saleable by-product and should not be taxed under VAT.  The Respondent also emphasized that the purpose of VAT is to tax the sale or purchase of goods, and the wastage generated during the dyeing process does not fall within the purview of VAT.

DECISION AND FINDINGS

The Hon’ble Supreme Court observed the contentions of both Parties and examined the situation. It then affirmed the ruling of the Hon’ble P & H High Court, which held that the wastage generated during the dyeing process is not subject to VAT.

The impugned order has relied upon various technical reports, for analyzing the process of dyeing and held that   tax is only leviable on the value of goods that gets transferred from the contractor in the execution of works contract, and thus wastage of the chemicals in the dyeing process will not be considered to be transferred on the product in the works contract.

The Hon’ble Supreme Court agreed with the Hon’ble P & H High Court’s reasoning in the impugned order that the wastage does not involve any sale or transfer of goods and, therefore, cannot be taxed under Haryana VAT Act. The Hon’ble Supreme Court further concurred with the Hon’ble P & H High Court’s finding that the wastage generated during the dyeing process does not result in any sale or transfer of goods.

The Hon’ble Supreme Court had affirmed the examination of the provisions of the Haryana VAT Act in the impugned order which concluded that the Haryana VAT Act  does not provide for the taxation of wastage generated during the dyeing process. The Hon’ble Supreme Court further held that the Haryana VAT Act specifically focuses on selling or purchasing goods and hence does not encompass the taxation of non-saleable by-products like the wastage in question.

Thus, the Hon’ble Supreme Court affirming the Hon’ble P & H High Court’s decision in the impugned order which held that the interpretation of tax laws should be based on the specific provisions and intent of the legislation. In this case, the Court impugned order found that the wastage generated during the dyeing process does not fall within the scope of Haryana VAT Act.

AMLEGALS REMARKS

In this case, the Hon’ble Supreme Court’s decision has significant implications for the dyeing industry. It clarifies that the wastage generated during the dyeing process is not subject to VAT, providing relief to dyeing units from the burden of taxation on non-saleable by-products. This decision sets a legal precedent regarding the taxation of wastage in the dyeing industry, establishing that such wastage does not fall within the purview of VAT, as it does not involve the sale or transfer of goods.

This case becomes important as it clarifies the scope of the VAT levy on dyeing units and provides guidance on the taxation of wastage generated during the dyeing process. The Supreme Court’s affirmation of the Hon’ble P & H High Court’s decision in the impugned order ensures consistency in the interpretation and application of tax laws in relation to dyeing units.

– Team AMLEGALS, assisted by Mr. Arvind Raghav (Intern)