1964 (11) TMI 65 - SC - VAT / Sales Tax

Liability to pay sales tax - packing material used for storing re-dried tobacco - Whether packing is an integral part of the re-drying process - definition of sale - HELD THAT - 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 the material required for packing and that when a customer gives tobacco to it for re-drying a contract of sale in regard to the packing material is necessarily implied in the transaction. 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. 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 materials. 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.- 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 re-drying and without the use of the packing material re-drying process could not be completed and that there was no independent contract for sale of packing material . It is only as an incident of the re-drying process and as a part thereof that the respondent-company has to seal up the package of tobacco after it emerged 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 works contract and the fact that the tobacco delivered by the constituent is taken away with the packing material will not justify an 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.

ISSUES PRESENTED and CONSIDERED

The primary issue considered in this judgment was whether the respondent-company was liable to pay sales tax under the Madras General Sales Tax Act, 1939, on the value of "packing material" used for storing flue-cured tobacco under controlled conditions. This required determining whether the packing material was sold to the customers as part of the re-drying process or whether it was an integral part of the service provided.

ISSUE-WISE DETAILED ANALYSIS

Relevant legal framework and precedents:

The Madras General Sales Tax Act, 1939, defines "sale" as the transfer of property in goods by one person to another for cash or other valuable consideration. The court referenced several precedents, including the landmark case of State of Madras v. Gannon Dunkerley & Co., which established that a sale involves an agreement to sell movables for a price, with property passing pursuant to that agreement.

Court's interpretation and reasoning:

The Court had to determine whether the packing material was part of the re-drying process or if it constituted a separate sale. The majority opinion, delivered by SHAH, J., concluded that the packing was an integral part of the re-drying process, essential for maintaining the standardized moisture content necessary for proper aging or fermentation of the tobacco. The dissenting opinion by SUBBA RAO, J., argued that the packing material was extraneous and marketable, suggesting an implied sale.

Key evidence and findings:

The Court examined affidavits and expert descriptions of the re-drying process, which highlighted the necessity of immediate packing to preserve the moisture content. The High Court had accepted that packing was essential to complete the re-drying process, indicating it was not a separate transaction.

Application of law to facts:

The majority found that the packing material was used as part of the re-drying service and not sold independently. The dissenting opinion, however, viewed the packing material as a separate entity, subject to sales tax, due to its marketability and the fact that its cost was included in the overall charges.

Treatment of competing arguments:

The Court considered the argument that the packing material was not sold but used as part of the service. The opposing view, as presented by the dissent, was that the material was sold to the customers, as indicated by the inclusion of its cost in the re-drying charges.

Conclusions:

The majority concluded that there was no sale of the packing material as it was an integral part of the re-drying process. The dissent concluded that the material was sold to the customers, making it subject to sales tax.

SIGNIFICANT HOLDINGS

Preserve verbatim quotes of crucial legal reasoning:

The majority opinion stated: "The process of re-drying raw tobacco brought to the assessees by their constituents is one, entire and indivisible... packing of re-dried tobacco and its storage for the requisite period is an integral part of the re-drying process."

Core principles established:

The judgment reinforced the principle that for a transaction to be considered a sale under the Sales Tax Act, there must be an independent contract for the sale of goods, not merely the transfer of property as an incident of a service contract.

Final determinations on each issue:

The appeals were dismissed, with the majority holding that the packing material was part of the re-drying process and not subject to sales tax. The dissenting opinion argued for the opposite conclusion, suggesting the material was sold and taxable.

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