1996 (1) TMI 357 - SC - VAT and Sales Tax

Supreme Court modifies Karnataka High Court order on tax liability for packing materials

Vasavadatta Cements & Others Versus State of Karnataka and Another

The Supreme Court allowed the appeals, modifying the Karnataka High Court's order regarding the constitutional validity and interpretation of Section ... Whether the price of the containers or of the packing materials is charged for separately or not, be the same as those applicable to goods contained or packed? Held that:- The appeals are allowed and the writ petitions filed by the appellants are disposed of with the direction that the liability of the appellants for sales tax under section 5(3-D) on the gunny bags/plastic bags in which the cement manufactured by the appellants is packed for sale would have to be determined after investigation into the facts and determining what were the ingredients of the contract and the intention of the parties. The impugned order of the High Court dated December 7, 1990, would stand modified accordingly. Issues Involved:1. Constitutional validity of Section 5(3-D) of the Karnataka Sales Tax Act, 1957.2. Interpretation of Section 5(3-D) concerning tax liability on packing materials.3. Comparison with Section 6-C of the Andhra Pradesh General Sales Tax Act, 1957.4. Analysis of the Karnataka High Court's decision in light of the Supreme Court's ruling in Raj Sheel v. State of Andhra Pradesh.5. Determination of tax liability based on the facts and intention of the parties.Issue-wise Detailed Analysis:1. Constitutional Validity of Section 5(3-D) of the Karnataka Sales Tax Act, 1957:The appellants challenged the constitutional validity of Section 5(3-D) of the Karnataka Sales Tax Act, 1957. The Karnataka High Court dismissed the writ petitions, referencing the decision in Ranganatha Associates v. State of Karnataka, which upheld the provision. The Supreme Court noted that the appellants did not contest the constitutional validity in the current appeal but focused on the interpretation of the provision.2. Interpretation of Section 5(3-D) Concerning Tax Liability on Packing Materials:Section 5(3-D) states that when goods are sold or purchased in containers or packing materials liable to tax, the tax rate and point of levy applicable to such containers or packing materials shall be the same as those applicable to the goods contained or packed. The appellants argued that the Karnataka High Court erred in its interpretation, suggesting that the tax liability should depend on the actual ingredients of the contract and the intention of the parties, as established in Raj Sheel v. State of Andhra Pradesh.3. Comparison with Section 6-C of the Andhra Pradesh General Sales Tax Act, 1957:Section 6-C of the Andhra Pradesh General Sales Tax Act, 1957, is similar to Section 5(3-D) of the Karnataka Sales Tax Act. In Raj Sheel v. State of Andhra Pradesh, the Supreme Court upheld the constitutional validity of Section 6-C but emphasized that the tax liability depends on the nature and ingredients of the sale transaction, which must be determined based on the facts of each case.4. Analysis of the Karnataka High Court's Decision in Light of the Supreme Court's Ruling in Raj Sheel v. State of Andhra Pradesh:The Karnataka High Court, in Ranganatha Associates, treated the sale of goods in containers as an integrated, single transaction, simplifying tax collection and preventing tax evasion. However, the Supreme Court in Raj Sheel emphasized the need for a factual investigation to determine the true nature of the transaction, whether the packing material was sold or merely transferred without consideration.5. Determination of Tax Liability Based on the Facts and Intention of the Parties:The Supreme Court held that the tax liability on the gunny bags/plastic bags used for packing cement must be determined based on the facts of each case and the intention of the parties, following the principles laid down in Raj Sheel. The Court directed that the liability for sales tax under Section 5(3-D) should be assessed after a detailed investigation into the contract's ingredients and the parties' intention.Conclusion:The Supreme Court allowed the appeals, modifying the Karnataka High Court's order. The liability for sales tax on packing materials must be determined based on the facts and the intention of the parties, requiring a detailed investigation. The Court emphasized the need to follow the principles established in Raj Sheel v. State of Andhra Pradesh for interpreting Section 5(3-D) of the Karnataka Sales Tax Act. No order as to costs was made. Appeals allowed.