1995 (12) TMI 362 - HC - VAT and Sales Tax

Canteen sales for welfare not taxable; not business, but service.

The court held that canteen sales, operated as a welfare measure under legal obligation, are not subject to tax as the dominant purpose is service, not ... Dominant object test - welfare canteen maintained under statutory obligation - business and dealer status - taxability of supply of food in canteens - construction of business after insertion of definition - overruling of conflicting precedentDominant object test - welfare canteen maintained under statutory obligation - taxability of supply of food in canteens - business and dealer status - Canteen sales effected by an occupier in discharge of statutory obligation under the Factories Act are not exigible to sales tax where the dominant object is to render a welfare service and not to sell food as a business. - HELD THAT: - The court applied the dominant object test to distinguish between a bona fide welfare activity and a business. Where the occupier maintains a canteen pursuant to section 46 of the Factories Act and the canteen is run on the insignia of welfare (including price fixation and management by a canteen committee under the Factories Rules), the tribunal's finding that the dominant object was service and not sale is decisive. If sale is not intended and the primary object is to serve employees in compliance with statutory mandate, the occupier does not become a dealer in respect of such canteen activity and the receipts do not constitute dealer's taxable turnover. Consequently the question of taxability depends on factual appreciation of intention and object in each case; the mere presence of definitions in the sales tax statute does not automatically convert every canteen supply into a taxable business transaction where the dominant object is welfare. [Paras 11, 12, 13, 16, 17]Tribunal was right to hold canteen sales not exigible to tax on the facts; non-taxability depends on factual finding that dominant object is welfare service.Construction of business after insertion of definition - taxability of supply of food in canteens - overruling of conflicting precedent - The later Division Bench decision holding that insertion of section 2(bb) (widened definition of 'business') automatically rendered canteen sales taxable is incorrect and is overruled; section 2(bb) does not obviate the need to apply the dominant object test. - HELD THAT: - The court analysed the impact of the broadened statutory definitions introduced by insertion of section 2(bb) and the later substitution of section 2(n), but concluded that those provisions do not supplant the factual inquiry into dominant object. Section 2(bb) concerns activities of the nature of trade, commerce or manufacture; where the intention is not to sell food but to render a statutory welfare service, the activity will not be characterised as such a trade or business. Hence the decision in (1989) 3 TLD 106 (MP) (Gwalior Rayon) that treated canteen supplies as automatically exigible by virtue of the widened definition was found to be wrongly decided and is overruled; each case must turn on factual appreciation whether sale was intended. [Paras 6, 7, 8, 12, 19]The Gwalior Rayon view is overruled; widened statutory definitions do not negate the requirement to apply the dominant object test and to examine facts in each case.Final Conclusion: References answered in favour of the assessee: canteen sales maintained under statutory obligation and run as a welfare measure are not exigible to sales tax where the dominant object is to render service; the contrary view in the later decision is overruled and factual appreciation remains decisive. Issues Involved:1. Taxability of canteen sales under the Madhya Pradesh General Sales Tax Act, 1958.2. Interpretation and application of section 2(bb) defining 'business'.3. Impact of section 46 of the Factories Act, 1948 on canteen sales.4. Definition of 'dealer' and 'taxable turnover' under the Act.5. Dominant object of running the canteen.6. Relevance of previous conflicting judgments.Detailed Analysis:1. Taxability of Canteen Sales:The central issue was whether canteen sales within a factory, mandated under section 46 of the Factories Act, 1948, are subject to sales tax. The Tribunal had previously ruled that these sales were not exigible to tax, which was contested by the Commissioner of Sales Tax.2. Interpretation and Application of Section 2(bb) Defining 'Business':Section 2(bb) of the Madhya Pradesh General Sales Tax Act, 1958, defines 'business' to include activities with or without a profit motive. This section was introduced with effect from April 15, 1965. The court noted that this provision was not considered in earlier decisions ([1988] 68 STC 378 and [1989] 3 TLD 106). The court emphasized that the motive for profit is irrelevant under this section, thus canteen sales could be considered 'business' and subject to tax.3. Impact of Section 46 of the Factories Act, 1948 on Canteen Sales:The court examined whether the canteen sales, conducted under a legal obligation for employee welfare, constituted 'business.' It was noted that the dominant object of these sales was to provide a welfare service, not to conduct business. The price of food was fixed on a non-profit basis under rule 80 of the M.P. Factories Rules, 1962.4. Definition of 'Dealer' and 'Taxable Turnover' under the Act:Section 2(d) defines 'dealer' as any person engaged in the business of selling goods. Section 2(r) speaks of 'taxable turnover' as the dealer's turnover. The court questioned whether a company running a canteen under legal obligation could be considered a 'dealer' and whether such sales could be deemed 'taxable turnover.' The court concluded that if the dominant object is service, the company cannot be considered a dealer for these sales.5. Dominant Object of Running the Canteen:The court reiterated that the dominant object of running the canteen was to serve food as a welfare measure, not to sell it as a business. This was consistent with the Supreme Court's guidelines in Northern India Caterers (India) Ltd. v. Lt. Governor of Delhi, where the dominant object of the transaction determined its taxability.6. Relevance of Previous Conflicting Judgments:The court noted the conflict between previous decisions ([1988] 68 STC 378 and [1989] 3 TLD 106) regarding the taxability of canteen sales. The earlier decision did not consider section 2(bb), while the later decision did. The court concluded that the later decision did not lay down the correct law and overruled it, holding that the dominant object of service exempted canteen sales from tax.Conclusion:The court held that canteen sales, conducted as a welfare measure under legal obligation, are not exigible to tax. The dominant object of these sales is service, not business. Therefore, the assessee cannot be considered a dealer for these transactions, and such sales do not constitute taxable turnover. The reference was answered in the affirmative, favoring the assessee and against the Revenue. The court also suggested that the State Government consider invoking sections 10 and 12 of the Act to avoid such litigation in similar cases.