TaxTMI 
TaxTMI 
1964 (11) TMI 65
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.... material supplied by it. The proportionate price of the packing material comes to about 25 per cent. of the re-drying charges. For the assessment years 1951-52, 1952-53 and 1953-54, the Deputy Commercial Tax Officer assessed the respondent under the Madras General Sales Tax Act, 1939, by different orders, on the sale price of the said packing material. The assessee took the question of his liability through a hierarchy of tribunals, but they all confirmed the assessments made by the Deputy Commercial Tax Officer. It preferred revisions to the High Court of Andhra at Guntur, and the said High Court allowed the revisions. Hence the present appeals. 2. Mr. A. Ranganadham Chetty, learned counsel for the Revenue, contended that there was a sale of the packing material for price by the respondent to its customers and, therefore, it was liable to pay sales tax on the said sales. 3. Mr. Thyagarajan, learned counsel for the respondent, argued that packing was part of the process of re-drying and, therefore, there was no question of any sale of the packing material by the respondent to its customers. He further argued that the necessary ingredient of a sale, namely, a contract to sell....
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....o emerges from the re-drying machine the hands are promptly packed in hogsheads under hydraulic pressure while tobacco is still warm." 6. In Encyclopaedia Britannica, Volume 22, page 263, under the heading "Grading, Marketing, Fermentation and Aging" it is stated: "It is common procedure to recondition the tobacco, that is, to dry the product and then return the proper amount of moisture by 're-drying' after it has been marketed and before it is packed. The purpose is to avoid damage which occurs when the leaf is packed with an excessive moisture content, and to ensure proper amount of moisture for aging. The aging period is from one to three years." 7. Learned counsel for the respondent has supplied to us some extracts from Garner's book "The Production of Tobacco", which describes the re-drying process. At page 414, it is stated: "In preparation for fermentation or aging, tobacco usually is pressed into standard containers or forms ..... namely, boxes or cases, hogsheads, and bales ..... or it is placed in large piles or bulks in a warehouse having facilities for at least partial control of temperature and humidity." The learned author obser....
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...." is defined to mean any person who carried on the business of buying or selling goods [vide section 2(b)]. Under section 2(c), "goods" means all kinds of movable property other than actionable claims, stocks and shares and securities and includes all materials, commodities and articles including those to be used in the construction, fitting out, improvement or repair of immovable property or in the fitting out, improvement or repair of movable property. Section 2(h) defines "sale" thus: "'Sale' with all its grammatical variations and cognate expressions means every transfer of the property in goods by one person to another in the course of trade or business for cash or for deferred payment or other valuable consideration, and includes also a transfer of property in goods involved in the execution of a works contract, but does not include a mortgage, hypothecation, charge or pledge." Section 2(i) defines "turnover" thus: "'Turnover' means the aggregate amount for which goods are either bought by or sold by a dealer, whether for cash or for deferred payment or other valuable consideration provided that the proceeds of the sale by a person of agri....
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....se, there are really two agreements, though there is a single instrument embodying them, and the power of the State to separate the agreement to sell from the agreement to do work and render service and to impose a tax thereon cannot be questioned, and will stand untouched by the present judgment." 11. One of the main reasons given by the learned Judge why there is no sale involved in a building contract is found at page 385: "But if there was no such agreement and the contract was only to construct a building, then the materials used therein would become the property of the other party to the contract only on the theory of accretion." 12. This Court was dealing in that case with a contract to construct a building and it held that the contract did not involve an agreement to sell materials but was only to construct a building and that the building so constructed became the property of the owner of the land on the theory of accretion. I do not see any relevancy of this judgment to the question raised in the present case except the observation that every sale involves a contract of sale, either express or implied. This Court again in New India Sugar Mills Ltd. v. Commi....
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....ual course of business, the factory re-dries tobacco, packs it in a costly material and delivers it to the customer, including the price of the material in the consolidated rate charged by it. The customer who goes to the factory knows that the factory supplies the packing material, transfers the property in the said material to him and he has to pay for it. With that knowledge when a customer delivers his tobacco to the factory for re-drying, there is clearly an implied agreement to purchase the said packing material for price. Once we eliminate the idea of the packing being a part of the re-drying process, we arrive at the position that the transaction qua the packing material involves either a contract of agency, gift or sale. The concept of agency can be eliminated, as it is nobody's case that the factory is purchasing the material on behalf of a particular constituent and passing it on to him without any profit; the concept of gift may also be excluded, as it is unthinkable that a businessman will make a gift of material costing about 25 per cent. of his charges. If so, it follows that the course of business of the assessee indicates that it is part of its business to sell....
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.... Khandwa [1954] 5 S.T.C. 428., Sales tax on the turnover of packing materials used for packing re-dried tobacco was held to be leviable by two decision of the Andhra High Court in Krishna & Co. Ltd. v. State of Andhra [1956] 7 S.T.C. 26., and Hanumantha Rao v. State of Andhra [1956] 7 S.T.C. 486. The Madras High Court in Varasuki and Co. v. Province of Madras [1951] 2 S.T.C. 1., held that the exemption from sales tax given to salt could not be extended to the gunny bags wherein the salt was preserved. The sale price of packing material employed for effecting sale of cotton was held to be liable to sales tax by the Madras High Court in Chidambara Nadar Sons & Co. v. State of Madras [1960] 11 S.T.C. 321. The learned Judges in the aforesaid cases rightly held that whether the commodity conserved in the container is sold or not, the transaction involved a contract of sale of the packing material. It was argued that as the sale of the exempted goods along with the packing material was admitted in some cases the courts have held that there was a sale of the packing materials. I cannot see any distinction on principle between the two classes of cases, namely, (i) where the goods ....
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....re is no sale of the material. The packing material remained distinct from the dried tobacco. Property in it passed to the customer, who had paid for it. On the basis of the practice obtaining in the factory of the assessee, contracts of sale arose easily by implication. The Sales Tax Authorities have rightly assessed the turnover in regard to the packing materials. The order of the High Court is wrong and is, therefore, set aside. 18. In the result, the appeals are allowed. The appellant will have costs here and in the Court below. SHAH, J. 18. Whether the respondent-company is liable to pay sales tax under the Madras General Sales Tax Act, 1939, on the value of "packing material" used by it for storage of flue-cured tobacco under controlled conditions of uniform moisture, is the question which falls to be determined in these appeals. The company conducts the business of "re-drying" tobacco and for that purpose maintains a factory at Guntur in the State of Andhra Pradesh. Freshly cured tobacco leaf is unfit to be used as smoking material, for it has a rank unpleasant odour and produces irritating and pungent smoke. To make it fit for use in cigars and cigarettes tobacco l....
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....the view that the "packing material" used by the company for maintaining uniformity of moisture by sealing off contact with the external atmospheric conditions after tobacco passed through reconditioning chambers, and in which the tobacco entrusted was returned by the company, must be regarded as sold to the constituent, and on the value of the materials tax was exigible. The order of the Deputy Commercial Tax Officer was confirmed in appeal by the Deputy Commissioner of Commercial Taxes. That officer adopted a uniform rate of Rs. 6 as price of the material used in each bale. Liability to pay sales tax on the value of the "packing material" used by the company was confirmed by the Sales Tax Tribunal, but the turnover was reduced to Rs. 5 per each bale re-dried by the company. The High Court of Andhra Pradesh set aside the order of the taxing authorities holding that the assessment of tax on the "packing material" could not be sustained. With special leave, the State has appealed to this Court. 20. It is unfortunate that the taxing authorities did not analyses the fact to ascertain the primary purpose for which the packing material was used by the company. The Deputy Commercial T....
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....r proper aging or fermentation, it is essential that the tobacco as it emerges from the re-drying machine and while it is still warm should be promptly packed with waterproof packing material..... In the process of reconditioning the tobacco is passed through a series of three chambers in each of which the heat and humidity are regulated so that the leaf emerges in a soft pliable condition and contains only 10 to 12 per cent. moisture. It is essential in such cases that the leaf should be packed immediately..... Thus in order to keep the moisture content at the standardized level of 10 to 12 per cent. throughout the process of aging or fermentation the tobacco as it emerges from the re-drying machine is packed in waterproof packing material and stored for the requisite period." 24. The High Court accepted this description of the "re-drying" process, and observed: "The process of re-drying raw tobacco brought to the assessees by their constituents is one, entire and indivisible. The object of the re- drying process is to standardize the moisture content at the required level of 10 to 12 per cent., and when the tobacco leaf emerges from the reconditioning chamber, it must....
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.... for work and sale of goods; where it is of the second category, it is a contract for execution of work not involving sale of goods. 28. It is true that in business transactions the works contracts are frequently not recorded in writing setting out all the covenants and conditions thereof, and the terms and incidents of the contracts have to be gathered from the evidence and attendant circumstances. The question in each case is one about the true agreement between the parties and the terms of the agreement must be deduced from a review of all the attendant circumstances. But one fundamental fact has to be borne in mind that from the mere passing of title to goods either as integral part of or independent of goods it cannot be inferred that the goods were agreed to be sold, and the price was liable to sales tax. In State of Madras v. Gannon Dunkerley & Company (Madras) Ltd. [1959] S.C.R. 379; 9 S.T.C. 353., this Court held that the expression "sale of goods" was, at the time when the Government of India Act, 1935, was enacted, a term of well-recognised legal import in the general law relating to sale of goods and in the legislative practice relating to that topic, and must be int....
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....xpression 'sale of goods' there must be an agreement between the parties for the sale of the very goods in which eventually property passes." 29. The authority of State Legislatures, under the Constitution to enact legislation in respect of taxes on sale of goods, remains the same as it was under the Government of India Act. 30. In order that there should be a sale of goods which is liable to sales tax as part of a contract for work under a statute enacted by the Provincial or State Legislature, there must be a contract in which there is not merely transfer of title to goods as an incident of the contract, but there must be a contract, express or implied, for sale of the very goods which the parties intended should be sold for a money consideration, i.e., there must be in the contract for work an independent term for sale of goods by one party to the other for a money consideration. 31. No useful purpose will be served by entering upon a detailed analysis of the large number of cases cited at the Bar. The cases relied upon lay down no general principle and the ultimate decision in all the cases turned upon what the Courts found were the true agreements between the ....
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....or had under-taken to instal in a building under construction a "system of air- conditioning", and for that purpose to supervise the construction of the building itself in order that the air-conditioning of the building may be efficiently designed and erected. It was held on the facts and circumstances of the case that there was no agreement between the contracting parties for the sale of any part of the machinery and the contract was a contract for execution of work. 37. In Chandra Bhan Gosain v. State of Orissa and Others [1963] 14 S.T.C. 766., this Court held that the assessee-a manufacturer of bricks-to whom land was given free for the manufacture and supply of bricks was liable to pay sales tax on bricks delivered by him. 38. Whether a contract for service or for execution of work, involves a taxable sale of goods must be decided on the facts and circumstances of the case. The burden in such a case lies upon the taxing authorities to show that there was a taxable sale, and that burden is not discharged by merely showing that property in goods which belonged to the party performing service or executing the contract stands transferred to the other party. 39. In the pres....