Sales Tax Appeal No.K-81 of 2001, decided on 1st October, 2005. Versus Sales Tax Appeal No.K-81 of 2001, decided on 1st October, 2005.

ZAFAR IQBAL (MEMBER TECHNICAL).--- This appeal challenges the vires of the order, dated 28-3-2001, passed by the Additional Collector of Customs, Sales Tax and Central Excise Adjudication, Hyderabad/Hub.

2. According to the records, the facts of the case. are that' appellant's factory situated at Hub Industrial Area, and was engaged in providing services by laminating plastic coating on textile fabric supplied by their principals and goods before and after conversion continue to A belong to their principal. The appellant was only a vendor duly registered under the Sales Tax Act, 1990 and charging sales tax on the conversion charges only.

3. As a consequence of an audit of the appellant's records by the sales tax department, it was alleged that the appellants who were offering its services by only coating the surface of the poly coated cloth classifiable under PCT Heading 59.03, failed to pay due amount of sales tax on the entire value of the subject goods instead they were paying sales tax on lamination charges only, and they had not included the value of cotton fabric which is one of the predominant raw materials supplied by different parties.

4. It was also alleged that sales tax should be calculated and paid on the entire value of the finished product including the price of fabrics, resulted into, short recovery of tax which was found against section 2(31) of the Sales Tax Act, 1990. Based on this a show-cause notice was issued.

5. The learned respondent enforced the demand raised in the said show-cause notice vide its order, dated 28-3-2001. This appeal challenges the vires of the said order.

6. The learned counsel for the appellant contends that:

(a) section 2(31) of the Sales Tax Act, 1990 clearly defines the taxable supply which says the consideration in money which he receives;

(b) the learned respondent had passed an order based on Sales Tax General Order No.5 of 1994, and had not interpreted it even correctly;

(c) the Sales Tax General Order No.5 of 1994 had been rescinded by STGO No.1 of 1995, which was thereafter rescinded by STGO No.2 of 1996;

(d) the learned respondent had not considered the leaflet issued by he Central Board of Revenue vide No.607/1/96 which clearly defines "manufacturing on labour charges and vendors, etc.",

(e) the learned respondent had not considered the Sales Tax General Order No.1 of 1998, which clarifies the position on sales on goods produced by vendors from the raw materials supplied by the principals.

7. The learned departmental representative defended the impugned order for the reasons given therein.

8. Parties have been heard, case record examined. The learned counsel contends that the issue relates to demand of sales tax on service charges, whereas the department is demanding duty on the total value of goods. The question for determination is whether or not a supply of taxable goods made by the appellant was a service or consisted of manufacturing product. The moot point was considered by the Central Board of Revenue and a Sales Tax General Order No.1 of 1998 was issued. It stated:--

"...Various queries have been raised by taxpayers regarding the chargeability of sales tax and value of taxable supply in cases where, raw materials and/or semi-manufactured goods arc supplied by the principals to their vendors for further processing."

Following clarifications are issued for information and guidance in this regard:

(i) The first question is whether a vendor providing a "service" e.g. printing, textile processing, corrugation, etc. is a manufacturer or not. The definition of "manufactures" as given in section 2(16)(c) of the Sales Tax Act, 1990, covers the processes and operations of assembling, mixing, cutting, diluting, bottling packaging, repackaging or preparations of goods in any other manner. A `manufacturer' is a person who is involved in any of the said processes. Therefore, vendors, by very nature of their job, are manufacturers and liable for registration or enrolment, as the case may be.

(ii) The definition of "supply" in section 2(33) of the Act states that "supply" includes sales, lease or other disposition of goods in the course or furtherance of business carried out for considera?tion. The supply by such vendor is covered by words "other disposition or goods" and hence is chargeable to sales tax.

(iii) The most important question now is the value on which such vendor shall charge and pay the tax. According to the definition laid down in section 2(46) of the Act, "value" is the consideration in money against which the registered person supplies the goods. Therefore, a vendor is required to charge sales tax on the consideration/charges of conversion. If during this "disposition of goods", he has used tax paid raw materials procured by the vendor himself, tax credit of the same shall be available to the vendor.

(iv) The aforesaid principle will inter alia apply even the cases where goods are chargeable to sales tax on the basis of retail price. The principal will pay tax on the basis of retail price whereas the vendor will be liable to pay tax only on his gross conversion charges.

(v) There is, however, one exception to the foregoing. Under section 2(46)(f), in case of processing of non-taxable raw materials, the value of processed goods will be the open market price of finished goods and not the processing charges alone..."

9. These instructions were binding on the respondent in terms of section 72 of the Sales Tax Act, 1990. However, the respondent failed to abide by them and considered instructions and orders which had already been withdrawn or cancelled. The Board has clearly stated that the value of supply will be the consideration of money so received by the vendor. C The findings given by the respondent are, therefore, against the spirit of law. This appeal is accordingly allowed, the impugned order is set aside and the department is directed to finalize the assessment in accordance with law and keeping in view the latest instruction issued by the Government on the subject.

H.B.T./194/Tax (Trib.) ???????????????????????????????????????????????????????????? Appeal allowed.