Full Judgment Text
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PETITIONER:
GOVERNMENT OF ANDHRA PRADESH
Vs.
RESPONDENT:
GUNTUR TOBACCOS LTD.
DATE OF JUDGMENT:
18/11/1964
BENCH:
SUBBARAO, K.
BENCH:
SUBBARAO, K.
SHAH, J.C.
SIKRI, S.M.
CITATION:
1965 AIR 1396 1965 SCR (2) 167
CITATOR INFO :
RF 1969 SC1245 (10)
RF 1970 SC 732 (12)
RF 1972 SC1131 (11)
R 1976 SC2108 (52)
APL 1989 SC 285 (8)
F 1989 SC 962 (7,9,27)
ACT:
Madras General Sales Tax Act (9 of 1939), s. 2(h)-Redrying
of tobacco-Packing of tobacco, if an integral part of
process-Packing material-Passing of property in-if sale.
HEADNOTE:
The respondent-company was carrying on the business of
redrying tobacco entrusted to it by its customers. The
process involved the keeping of the moisture content of
tobacco leaf at a particular level, and in order to ensure
that level, the leaf was packed in bales, in water-proof
packing material, as it emerged from the reconditioning
plant. The tobacco was then returned, packed in the costly
packing material, to the constituent. In the company’s
charges for redrying each bale of tobacco, no separate
charge was made for the value of the packing material used.
The Deputy Commercial Tax Officer was of the view that the
packing material must be regarded as sold to the constituent
and that tax was exigible, under the Madras General Sales
Tax Act, 1939, on the value of the packing material used.
The order was confirmed by the Deputy Commissioner of
Commercial Taxes and by the Sales Tax Tribunal. The High
Court, in revision, set aside the order. It was held that
the packed tobacco was stored by the assessee for the
requisite period, before it was returned to the customer,
and that _packing formed an integral part of the redrying
process. ’Me State appealed to the Supreme Court and
contended that, packing of tobacco was not an integral part
of the process of redrying, and that, since there was
transfer of property in the packing material from the
respondent to its customers, there was sale of the packing
material for the purpose of the Act.
HELD (Per Shah and Sikri, JJ.) : The redrying process could
not be completed without the use of the packing material,
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and on the finding recorded by the High Court, that tobacco
was stored for the requisite period, the intention of the
assessee and its customers was that the material should from
an integral part of the process. Since there was no
independent contract for the sale of packing material, the
fact that tobacco delivered by the constituent was taken
away with the packing material would not justify an
inference that there was an intention to sell the material.
[184 H; 185 A-C]
In order that there should be a sale of goods which is
liable to sales tax as part of a contract for work, 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. From the mere passing of title to goods,
whether as an integral part of or independent of goods, it
cannot be inferred that the goods were agreed to he sold and
that the price was liable to sales tax. [181 G-H; 183 C]
Case law reviewed.
Per Subba Rao, J. (dissenting) : There was nothing on the
record to show that after packing the packed tobacco was
retained in the factory for the completion of the redrying
process. Packing, therefore, was not an integral part of
the redrying process. Once the idea of packing being a part
of the redrying process is eliminated, the transaction qua
the
168
packing material involved either a contract of agency, gift
or sale, and on the facts, a contract of sale was
necessarily implied. As all the ingredients of the charging
section read with the definition of "sale", were satisfied,
the, sales tax authorities rightly assessed the turnover in
regard to the packing material. [171 D; 174 F-H, 177 A, C]
Case law reviewed.
JUDGMENT:
CIVIL APPELLATE JURISDICTION : Civil Appeals Nos. 2-4 of
1964.
Appeals by special leave from the judgment dated the April
21, 1961, of the Andhra Pradesh High Court in Tax Revision
No. 20, 21 and 22 of 1957.
A. Ranganadham Chetty and B. R. G. K. Achar, for the
appellant (in all the appeals).
R. Thyagarajan, for the respondent (in all the appeals).
The Judgment of Shah and Sikri JJ. was delivered by Shah J.
Subba Rao J. delivered a dissenting Opinion.
Subba Rao, J. I regret my inability to agree. The facts may
be briefly stated. The respondent-Company is a dealer
carrying on the business of redrying in its factory raw
tobacco entrusted to it by its customers. Its usual course
of business may be described thus : A customer gives to the
respondent raw tobacco for redrying. It redries it in its
factory, packs it in gunny, waterproof paper, bales etc. and
delivers it to the customer. It charges the customer at a
consolidated rate for redrying and for the packing material
supplied by it. The proportionate price of the packing
material comes to about 25 per cent, of the redrying
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
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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.
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.
Mr. Thyagarajan, learned counsel for the respondent, argued
that packing was part of the process of redrying and,
therefore,
169
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,
was absent in the transactions between the respondent and
its customers and, therefore, there was no sales within the
meaning of the definition of sale" in the Madras General
Sales-tax Act, 1939.
The question raised in the appeals mainly depends upon whe-
ther packing is an integral part of the redrying process.
No acceptable material was placed before the High Court to
show how packing becomes an integral part of the redrying
process. Mr. D. V. Srinivasan in his affidavit describes
the scientific process or redrying found in books, but he
does not describe how it is actually done in the factory.
He says that "in order to keep the moisture content at the
standardised level of 10 to 12 per cent, throughout the
process of aging or fermentation the tobacco as it emerges
from the redrying machine is packed in water-proof packing
material and stored for the requisite period." It only means
that packing is done to keep the moisture content at a
particular level. He is vague and does not commit himself
on the crucial question whether after the redrying and
packing, the tobacco bales are kept in the factory for any
length of time to undergo further redrying process. The
High Court in its judgment describes the redrying process
thus :
"The process of redrying tobacco brought to
the assessees by their constituents is one,
entire and indivisible. The object of the
redrying 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 be packed in waterproof packing material
and stored for the requisite period. Unless
the packing is done immediately, the tobacco
loses its standardized moisture content, and
without the packing, the process is not
complete. It is clear that the packing of
redried tobacco and its storage for the
requisite period is an integral part of the
redrying process."
The High Court accepted the description of redrying process
given by Srinivasan, but did not find that the tobacco,
after it is packed, is kept in the see’s factory for any
length of time to undergo further drying process. Indeed,
there is no material on the record to give such a finding.
Garner in his book on the Production of Tobacco describes
how dry tobacco is packed in a factory thus, at p. 422
3Sup./65-12
170
.lm15
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"As the tobacco emerges from the redrying machine the hands
are promptly packed in hogsheads under hydraulic pressure
while tobacco is still warm."
In Encyclopaedia Britannica, Vol. 22, p. 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 "redrying" 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."
Learned counsel for the respondent has supplied to us some
extracts from Garner’s book "The Production of Tobacco",
which describe the redrying process. At p. 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 observes at p. 418
"After the final packing in cases, bales or other packages,
the leaf commonly undergoes further aging."
At p. 421, it is stated :
"These cases or boxes are uniformly built 30 in. wide and 30
in. in high outside measurement, but range in length from 36
to 52 in. according to the length of leaf to be packed."
It is further stated :
"As the tobacco emerges from the redrying machine the hands
are promptly packed in hogsheads under hydraulic pressure
while the tobacco is still warm. The hogsheads are 48 in.
in diameter, 48 or 54 in. in high, and contain about 1000
pounds of tabacco......... ...... .... The hogsheads are
stacked on their sides in large open type or thoroughly
ventilated closed warehouses, and are
171
freely exposed to seasonal changes in temperature and air
humidity, no artificial heat being used."
These passages and similar others show that after redrying
process is over tobacco is stacked in costly containers like
boxes, hogsheads etc. and the aging takes place for a
considerable time even after the packing. The process of
redrying is quite different from aging. But none of the
passages extracted above established that packing is an
integral part of the redrying process. The redried tabacco
is immediately packed to preserve the chemical changes
obtained by the redrying process and to prevent decay. So
too, scents, medicines, salt, alcohol and similar
commodities are bottled or packed to preserve the high
quality obtained by scientific processing. It cannot be
said that bottles are part of the medicine, scent, alcohol
etc., as the case may be. Further as I have indicated
earlier, there is nothing on the record to show that after
packing the packed tobacco is retained in the factory for
the completion of the redrying process. 1, therefore, hold
that the packing is not a part of the redrying process, and
that it is done only to conserve the dried tobacco.
The next question is whether there is a sale of the packing
material by the respondent to its customers. Now let us
scrutinize the relevant provisions of the Madras General
Sales-tax Act, for, in the ultimate analysis, the point has
to be decided on the terms of those provisions. Section
3(1) of that Act says that, "subject to the provisions of
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this Act, every dealer shall pay for each year a tax on his
total turnover for such year". "Dealer" is defined to mean
any person who carried on the business of buying or selling
goods [vide S. 2(b)]. Under S. 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."
172
Section 2(1) 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 agricultural or horticultural
produce grown by himself or grown on any land
in which he has an interest whether as owner,
usufructuary mortgagee, tenant or otherwise,
shall be excluded from his turnover."
A combined reading of the provisions relevant to the
question raised may be stated thus : Every person, who
carries on the business of transferring property in any kind
of movable property including materials, commodities and
articles in the fitting out, improvement or repair of
movable property to another for valuable consideration would
be liable to tax on the turnover. It is said that the
decision in The State of Madras v. Gannon Dunkerley & Co.
(Madras) Ltd. (1) has introduced another element in the
definition of "sale", namely, a contract of sale, and that
element is not present in the instant case. In that case
this Court held that the provisions ,of the Madras General
Sales-tax Act were ultra vires the Legislature in so far as
they sought to impose tax on the supply of material in the
execution of works-contract treating it as a sale of goods
by a contractor. In the course of the judgment, Venkatarama
Ayyar, J., speaking for the Court, summed up the legal
position thus
"To sum up, the expression ’sale of goods’ in
Entry 48 is a nomen juris, its essential
ingredients being an agreement to sell movable
for a price and property passing therein
pursuant to that agreement. In a building
contract which is, as in the present case,
one, entire and indivisible-and that is its
norm, there is no sale of goods, and it is not
within the competence of the Provincial
Legislature under Entry 48 to impose a tax on
the supply of the materials used in such a
contract treating it as a sale."
To avoid misconception, the learned Judge
proceeded to observe:
reference to works contracts, which are entire
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and indivisible, as the contracts of the
respondents have been held by the learned
Judges of the Court below to be. The several
forms which such kinds of contracts can assume
are set out in Hudson on Building Contracts,
(1) 1959 S.C.R. 379,425,427.
173
at page 165. It is possible that the parties
might enter into distinct and separate
contracts, one for the transfer of materials
for money consideration, and the other for
payment of remuneration for services and for
work done. In such a case, 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."
One of the main reasons given by the learned
Judge why there is no sale involved in a
building contract is found at p. 423-424
"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".
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 expressed or implied. This Court again in M/s. New
India Sugar Mills Ltd., v. Commissioner of Sales-tax,
Bihar(1) reiterated that under the Sale of Goods Act a
transaction is called sale only where for money
consideration property in goods is transferred under a
contract of sale. As in that case the transaction of
dispatches of sugar by the assessee pursuant to the
directions of the Controller were not the result of any
contract of sale, this Court, by a majority, held that it
was not a sale liable to sales-tax. Under s. 4 of the Sale
of Goods Act a contract of sale of goods is a contract
whereby the seller transfers or agrees to transfer the
property in the goods to the buyer for a price; and under
sub-s.(3) thereof, where under a contract of sale the
property in the goods is transferred from the seller to the
buyer, the contract is called a sale. It is clear that in
order to constitute a sale under this section there must be
three ingredients, namely, (i) contract of sale, (ii) trans-
fer of property in the goods to the buyer, and (iii) payment
of price by the buyer to the seller. Therefore, under this
section there cannot be a sale unless there is a contract of
sale. The section does
(1) [1963] Supp. 2 S.C.R. 459.
174
not say that the contract of sale must be express : it may
also be implied.
If so, the question is whether the facts of the present case
satisfy the definition of a sale. I have already held that
the packing is not part of the redrying process; and that
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the material used for packing is extraneous marketable
material used to preserve the dry tobacco from contamination
or loss. Tobacco after redrying must be put in some
container, such as hogsheads, boxes, gunny, water-proof
paper, bales etc. They are costly materials. In the
present case, it is not disputed that the price of the
packing material is about 25 per cent of the redrying
charges. The packing material is clearly movable property
within the meaning of goods in the Sale of Goods Act. The
assessee had property in the said goods, for, it is conceded
that it purchased the material and became its owner. It
cannot also be disputed that it transferred the property in
the packing material to the customers for price. The price
for the material was also included in the consolidated rates
charged by the assessee. The only question is whether there
was an implied agreement for the sale of the said goods. In
the usual course of business, the factory redries tobacco,
packs it in a costly material and delivers it to the
customer, including the price of the material in the con-
solidated 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 redrying,
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 redrying 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 the
material required for packing and that when a customer gives
tabacco to it for redrying, a contract of sale in regard to
the packing material is necessarily implied in the
transaction.
Now, coming to the decisions cited at the Bar, it is not
necessary to consider the English decisions in detail. It
would be enough
175
if a summary of the decisions is given. The said decisions
recognize four categories of contracts, namely, (1)
contracts for labour and work such as one for the production
of a work of art, picture, statue, etc.; (2) contract
primarily for labour and the materials supplied are only
ancillary i.e., paper and ink used by a painter or an
artist; (3) contract of sale of the finished product denture
or a ship of which the parts supplied become an integral
part of the denture or the ship, as the case may be; and (4)
contract of sale of the finished product but some of the
materials supplied do not form part of the finished product
but are sold separately : see Clay v. Yates(1), Lee v.
Griffin(2), and Robinson v. Graves(3). Here there is no
sale of any finished product, for the assessee has no
property in the tobacco and has undertaken only to perform
the redrying process for consideration. It is simply a
contract of work and labour so far as the redrying process
is concerned. But it cannot be said that the costly packing
material has become an integral part of the redrying process
like the parchment and ink of an artist : it is extraneous
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marketable material used for a collateral purpose and,
therefore, is subject of sale.
The Indian decisions throw considerable light on the
question now raised before us. Turnover from the sale of
gunny bags in which rice, which was an exempted commodity,
was packed, was held to be liable to sales-tax by the Assam
High Court in Mohanlal Jogani Rice and Atta Mills v. The
State of Assam(4). Imposition of sales-tax on the packing
material used for packing tobacco was approved by the Madras
High Court in Indian Leaf Tobacco Development Co., Ltd. v.
The State of Madras(5). Sales-tax imposed on the turnover
in respect of hessian and iron hoops used for packing the
bales of pressed gin cotton was sanctioned by the Madhya
Pradesh High Court in Nimar Cotton Press, Khandwa v. The
Sales-tax Officer, Khandwa(6). Sales-tax on the turnover of
packing, materials used for packing redried tobacco was held
to be leviable by two decisions of the Andhra High Court in
Krishna & Co., Ltd. v. State of Andhra (7 ) and Hanumantha
Rao v. The State of Andhra(8). The Madras High Court in
Varsukhi and Co. v. Province of Madras(9) 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
(1) 108 E.R. 461.
(2) 124 E.R. 555.
(3) [1935]1 K.B. 579.
(4) (1953] 4 S.T.C. 129.
(5) [1954] 5 S.T.C. 354.
(6) [1954]5 S.T.C. 428.
(7) [1956]7 S.T.C. 26.
(8) [1956] 7 S.T.C. 486.
(9) [1951] 2 S.T.C. 1.
176
Madras High Court in Chidambara Nadar Sons & Co., v. State
of Madras(1). 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 were not sold,
and (ii) where they were also sold. If the packing material
became an integral part of the dried tobacco, there could
not have been a sale of the material apart from the tobacco.
So too, if the gunny bag was treated as an integral part of
salt, the bag should have been sold as part of the salt.
They were taxed because they were held to be extraneous and
separate marketable material, though necessary and
convenient for the preservation and delivery of tobacco or
salt or cotton, as the case may be.
I shall now consider the decisions cited by the learned
counsel for the respondents. In Sri Dasarathi Mohapatra v.
The State of Orissa(2) the High Court of Orissa held that
purchase of gunny bags for storage and transport of paddy by
the assessee was part of the contract of agency and was,
therefore, not the subject-matter of sale. The decision in
United Bleachers Ltd. v. State of Madras(3) relates to
turnover of packing materials supplied by the assessee for
packing yam and cloth given to it for bleaching. The
learned Judges of the Madras High Court held that there was
no agreement to sell the packing materials as the contract
was merely one of service, but they did not exclude such an
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agreement to sell in every case, for they pointed out that
the onus would be on the taxing authority to prove that
there was an agreement to sell the packing material by the
sale of the property therein. The decision in The State of
Madras v. Voltas Ltd. (4 ) relates to a contract for air-
conditioning of a building. The Court held that there was
no agreement between the contracting parties for the sale of
any part of the machinery, but it was one for building an
air-conditioning unit. A similar view was also expressed by
the same High Court in State of Madras v. Voltas Ltd. : No.
2(5). These two decisions of the Madras High Court have no
bearing on the present question, as in the view of the
learned Judges the decisions related to contracts for sale
of air-conditioning units.
(1) [1960)] 11 S.T.C. 321. (2) [19571 8 S.T. C. 720.
(3) [1960] It S.T.C. 278. (4) [1963] 14 S.T.C. 446.
(5)[1963] 14 S.T.C. 861.
177
To conclude, in the instant case all the ingredients of the
charging section read with the definition of "sale" are
satisfied. Unless it can be held that the material used for
packing is transformed into some other commodity not covered
by the definition of "goods", it is not possible to hold
that there 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 material. The order of the High Court is
wrong and is, therefore, set aside.
In the result, the appeals are allowed. The appellant will
have costs here and in the Court below.
Shah, J. 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 "are-
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 leaves must undergo a process of
fermentation or aging, which gives the leaf a distinctive
aroma. Tobacco is highly hydroscopic and when exposed to
atmospheric conditions it decays as a result of action by
microorganisms. The leaf has to undergo fermentation, with
the moisture content of the leaf maintained at a uniform low
level. Flue-cured tobacco contains 15 to 17 per cent
moisture which is considered excessive. A moisture content
of 10 to 12 per cent is ideal for the process of
fermentation, and the time required for proper fermentation
varies from eighteen months to, two years. The process of
redrying is described by the High Court in its judgment
under appeal as follows :
"After the grading the stripping operations
are over, the leaf is reconditioned or
redried. For this purpose all the leading
exporters and cigarette manufacturers use the
reordering or reconditioning plant. This
plant consists of a series of three chambers
in each of which the heat and humidity are
regulated. The tobacco leaf is passed through
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each chamber under the action of steam and
178
strong air current. The significance of the
reconditioning process lies in the fact that
it redries the leaves to uniform moisture,
besides helping to kill the insects and ’germs
that may be present in the leaf by the high
-temperature maintained in the first chamber
of the machine. The "tobacco leaf as it comes
out of the plant is in a -soft and pliable
condition and contains 10 to 12 per cent of
moisture. Immediately afterwards the leaf is
packed either in bales, cases or hogsheads.
In order to ensure that the moisture content
is kept at the required level of 10 to 12 per
cent, the tobacco leaf as it emerges from the
redrying machine is packed in water-proof
packing material and stored for the requisite
period."
The Company purchases "packing material" such as jute cloth,
water-proof paper, twine from the market. For redrying each
bale of tobacco the Company charges Rs. 22/- and it is
common ground that it makes no separate charge for the value
of the "packing material" used. From the books of account
of the Company, it appears-and there is no dispute about it
that the Company spent for the value of "packing material"
used by it at an average per package Rs. 6-1-1 in 1950-51,
Rs. 5-9-5 in 1951-52, Rs. 3-13-10 in 1952-53 and Rs. 4-1-6
in 1953-54. The Deputy Commercial Tax Officer was of 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. 51-
per each bale redried 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.
It is unfortunate that the taxing authorities did not
analyse the ’facts to ascertain the primary purpose for
which the packing matetrial was used by the Company. The
Deputy Commercial Tax
179
Officer stated in his, order that tobacco entrusted to the
Company was returned after redrying properly packed. He
observed
"The dealers regularly undertake to redry
tobacco entrusted to them and return the same
after packing. This regular practice of
redrying and using packing material is to be
construed as ’in the course of business’ and
the sale of packing material involved is
clearly assessable. The bills issued for
redrying charges cannot be said to exclude the
value of packing material used."
In appeal the Deputy Commissioner of
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Commercial Taxes observed that "costly packing
material" was purchased and property in them
was transferred for consideration which was
embedded in the price charged for redrying.
He observed :
"Packing is different from redrying. If
redrying is their main business, packing is
their subsidiary business. It is admitted
that they are specialists in packing and it is
for that reason that the owners of tobacco
look to them as much for redrying as for
packing. It cannot be said that packing is
not their business and that they have utilised
for packing without any profit, the costly
materials which they have purchased. There
is, therefore, a transfer of property in the
packing materials from the appellant to the
customers which constitutes a sale for
purposes of the Madras General Sales Tax Act."
The Sales Tax Tribunal was of the view that the question
arising before it was covered by the decision in A. S.
Krishna & Company v. State of Andhra Pradesh(1).
It seems to have been assumed by the taxing authorities that
immediately after tobacco emerges from the reconditioning
chambers it is packed in water-proof material and is handed
over to the owners of the tobacco, and therefore packing of
tobacco is not in integral part of the process of redrying.
The assumption appears on the evidence not to be true. In
the affidavit of D. V. Srinivasan which was not challenged,
it was stated in paragraphs 4 that :
"Redrying is a process designed to create
suitable conditions for the proper maturing of
the leaf in storage. The object of the re-
drying process is to reduce the moisture
content i.e., to standardise the moisture
content
(1) [1956]7 S.T.C. 26.
180
at the required level of 10 to 12 per cent.
In order to keep themoisture content at the
same standardised level which x x x is
an essential requisite for proper aging or
fermentation, it is essential that the tobacco
as it emergesfrom the redrying machine and
while it is still warm should be promptly
packed with water-proof packing material. x x
x
"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 IO to 12
per cent moisture. It is essential in such
cases that the leaf should be packed
immediately. x x x Thus in order to keep the
moisture content at the standardised level of
10 to 12 per cent throughout the process of
aging or fermentation the tobacco as it emer-
ges from the redrying machine is packed in
water-proof packing material and stored for
the requite period."
The High Court accepted this description of
the "redrying" process, and observed :
"The process of redrying raw tobacco brought
to the assessee by their constituents is one,
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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 be packed
in waterproof packing material and stored for
the requisite period. Unless the packing is
done immediately, the tobacco loses its
standardized moisture content, and without the
packing, the process is not complete. It is
clear that the packing of redried tobacco and
its storage for the requisite period is an
integral part of the redrying process."
Counsel for the State faintly submitted that the Company
maintains no storage facilities and it must be inferred that
tobacco sealed in water-proof material would be stored by
the owner of the tobacco after it was returned to him duly
packed. But this pea was never advanced at any stage of the
proceedings for assessment, and cannot be entertained at
this late stage.
If the process of redrying or reconditioning does not end
with the emergence of tobacco out of the last reconditioning
chamber
181
as suggested by counsel for the State, but consists, as held
by the High Court, of cleansing it, processing it in the
reconditioning chambers under controlled conditions of heat
and humidity, of packing it in water-proof material to seal
it off from external atmospheric conditions, and of storage
to enable fermentation for the requisite period to make the
tobacco mature for use in cigarettes, cigars etc., packing
tobacco in water-proof material must be regarded as an
integral part of the process of redrying and not independent
of that process.
The fact that in the execution of a contract for work some
materials are used and property in the goods so used passes
to the other party, the contractor undertaking to do the
work will not necessarily be deemed on that account to sell
the materials. A contract for work in the execution of
which goods are used may take one of three forms. The
contract may be for work to be done for remuneration and for
supply of materials used in the execution of the work for
a price; it may be a contract for work in which the use of
materials is accessory or incidental to the execution of the
work or it may be a contract for work and use or supply of
materials though not accessory to the execution of the
contract is voluntary or gratuitous. In the last class
there is no sale because though property passes it does not
pass for a price. Whether a contract is of the first or the
second class must depend upon the circumstances : if it is
of the first, it is a composite contract 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.
It is true that in business transactions the work contracts
are frequently not recorded in writing setting out all the
covenants and conditions thereof, and the terms and
incidents of the contract 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
,,;old, and the price was liable to sales-tax. In The State
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of Madras v. Gannon Dunkerley & Company (Madras) Ltd(1),
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
(1) [1959]S.C.R 379.
182
goods and in the legislative practice relating to that
topic, and must be interpreted in Entry 48 in List 11 of
Sch. VII of the Act as having the same meaning as in the
Sale of Goods Act, 1930. Therefore under a statute enacted
in exercise of power under the Government of India Act,
1935, and in pursuance of the power reserved in Entry 48, in
List 11, Sch. VII of the Government of India Act, 1935, a
taxable sale is one which amounts to sale of Goods under the
Sale of Goods Act, 1930. Venkatarama Aiyar, J., delivering
the judgment of this Court in Gannon Dunkerley’s cave(1)
observed at p. 397 :
"Thus, according to the law both of England
and of India, in order to constitute a sale it
is necessary that there should be an agreement
between the parties for the purpose of
transferring title to goods which of course
presupposes capacity to contract, that it must
be supported by money consideration, and that
as a result of the transaction property must
actually pass in the goods. Unless all these
elements are present, there can be no sale.
Thus, if merely title to the goods passes but
not as a result of any contract between the
parties, express or implied, there is no sale.
So also if the consideration for the transfer
was not money but other valuable con-
sideration, it may then be exchange or barter
but not a sale. And if under the contract of
sale, title to the goods has not passed, then
there is an agreement to sell and not a
completed sale."
It was again observed at p. 413
"If the words "sale of goods" have to be
interpreted in their legal sense, that sense
can only be what it has in the law relating to
sale of goods. x x x both under the common law
and the statute law relating to sale of goods
in England and in India, to constitute a
transaction of sale there should be an
agreement, express or implied, relating to
goods to be completed by passing of title in
those goods. It is of the essence of this
concept that both the agreement and the sale
should relate to the same subject-matter.
Where the goods delivered under the contract
are not the goods contracted for, the
purchaser has got a right to reject them, or
to accept them and claim damages for breach of
warranty. Under the law, therefore, there
cannot be an agreement relating to one kind of
property and a sale as regards
(1) [1959] S.C.R. 379.
183
another. We are accordingly of opinion that
on the true interpretation of the expression
"sale of goods" there must be an agreement
between the parties for the sale of the very
goods in which eventually property passes."
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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.
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.
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 parties.
In A. S. Krishna & Company’s case(1) the High Court of
Andhra in dealing with a contract for redrying tobacco held
on the evidence in that case that packing material used by
the assessee did not become an integral part of the drying
process and an intention to sell the packing could be
properly attributed to the assessee.
In B. V. Hanumantha Rao v. The State of Andhra (2) it was
held that gunny cloth and iron hoops used by the assessee
who had undertaken a works contract for baling and pressing
palymyra fibre were intended to be transferred and that the
materials had not become an integral part of the product
entrusted to him for baling and pressing, the price was
liable to pay sales-tax.
In United Bleachers Ltd., v. The State of Madras(") the
assessee who had entered into contracts to bleach, dye,
calender, press, and fold unbleached yarn was held not
liable to sales-tax in respect of craft paper, hoop iron,
hessian cloth, jute twine, palm mats etc. which were used
for packing the goods at the time of delivery, because in
the view of the Court the primary contract was one for
service, viz. bleaching, dyeing etc. and as an incident of
the service, the goods bleached or dyed were to be packed
and delivered.
(1) [1956] 7 S.T.C. 26.
(2) [1956] 7 S.T.C 486.
(3) [1960] II S.T.C. 278.
184
In M. S. Chidambara Nadar Sons and Co., v. State of
Madras(1) it was held that where under an agreement to
purchase cotton to be delivered by the seller to the buyer,
it was implicit that the goods should be delivered packed,
the contract to pay for and purchase the packing material
may be implied and the turnover relating to the packing
material would be liable to sales-tax.
In Mckenzies Limited v. The State of Bombay (2 ) the price
of motor-bus bodies supplied under a contract to construct
and deliver to the Government of India several motor-bus
bodies fitted on to the chassis supplied by the Government
was held liable to be included in the turnover. The price
was a fixed sum per motor body, and the material for the
body and the fitting were to be provided and the work of
construction was to be done by the contractors who had
undertaken to deliver to the Government the completed units.
It was held that in such a case there was a contract to sell
motor bodies.
In The State of Madras v. Voltas Limited(3) the contractor
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had undertaken to install in a building under construction a
"system of airconditioning", 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.
In Chandra Bhan Gosain v. The State of Orissa and other(4)
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.
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 contact stands
transferred to the other party.
In the present case, it must be held on the finding recorded
by the High Court, that it was intended by the parties that
the "packing material" should form an integral part of the
process of redry-
(1) [1960] 11 S.T.C. 321.
(2) [1962] 13 S.T.C. 602.
(3)[1963] 14 S.T.C. 446.
(4) [1964] 2 S.C.R. 879.
185
ing and without the use of the "packing material" redrying
process could not be completed, and that there was no
independent contract for sale of "packing materials". It is
only as an incident of the redrying process and as a part
thereof that the respondent Company has to seal up the
package of tobacco, after it emerges from the reconditioning
chamber, with a view to protect it against atmospheric
action. In the absence of any evidence from which contract
to sell "packing material" for a price may be inferred, the
use of "packing material" by the respondent Company must be
regarded as in execution of the work contract, and the fact
that the tobacco delivered by the constituent is taken away
with the "packing material" will not justify and inference
that there was an intention to sell the "packing material".
The appeals therefore fail and are dismissed with costs.
One hearing fee.
ORDER
In accordance with the opinion of the majority these
appeals, are dismissed with costs. One hearing fee.
3Sup./65-13
186