Commercial activity test governs sales tax on employee hire-purchase supply, while regularly sold manufacturing scrap remains taxable.

Supply of goods to employees on hire-purchase without profit motive was held not to attract sales tax because the activity was not carried on in a commercial sense and no profit element was shown. Sale of scrap iron and waste generated in the manufacturing process was held taxable because such scrap formed a subsidiary product of the business and was sold regularly in the ordinary course when sufficient quantities accumulated. The reference thus reflected divided success, with the first issue decided for the assessee and the second for the department.

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Issues: (i) Whether supply of goods to employees on hire-purchase basis without profit motive was liable to sales tax; (ii) Whether sale of scrap iron and waste material arising from the manufacturing activity of the assessee was liable to tax under the Punjab General Sales Tax Act, 1948.

Issue (i): Whether supply of goods to employees on hire-purchase basis without profit motive was liable to sales tax

Analysis: Liability to sales tax depended on whether the assessee carried on the activity in a commercial sense so as to amount to dealing in those goods. The supply was found to be on a no-profit-no-loss basis for providing amenities to employees, and no commercial motive or profit element was established.

Conclusion: The issue was answered in the negative, in favour of the assessee.

Issue (ii): Whether sale of scrap iron and waste material arising from the manufacturing activity of the assessee was liable to tax under the Punjab General Sales Tax Act, 1948

Analysis: Waste and scrap arising in the course of a manufacturing process may form part of the business when they are subsidiary products of the manufacture and are sold regularly. On the facts, the scrap iron was a resultant product of the cycle-manufacturing process and was sold in the ordinary course when sufficient quantities accumulated, bringing it within taxable turnover.

Conclusion: The issue was answered in the affirmative, in favour of the department.

Final Conclusion: The reference was disposed of with one question decided for the assessee and the other against it, resulting in divided success without an order as to costs.

Ratio Decidendi: Sales tax liability arises only where the disputed activity is carried on in a commercial sense or where a by-product or subsidiary product of the manufacturing process is regularly sold as part of the assessee's business.

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