TMI Blog1964 (11) TMI 65X X X X Extracts X X X X X X X X Extracts X X X X ..... ay 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". - Civil Appeal No. 2, 3, 4 of 1964 - - - Dated:- 18-11-1964 - SUBBA RAO K., SHAH J.C. AND SIKRI S.M. JJ. A. Ranganadham Chetty, Senior Advocate (B.R.G.K. Achar with him), for the appellant (in all the appeals). 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 separate judgment. 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 re-drying 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 re-drying. It re-dries it in its factory, packs it in gunny, water proof paper, bales etc. and delivers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in the factory for any length of time to undergo further re-drying process. The High Court in its judgment describes the re-drying process thus: "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 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 re-dried tobacco and its storage for the requisite period is an integral part of the re-drying 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 assessee'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 pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the re-drying process. The re-dried tobacco is immediately packed to preserve the chemical changes obtained by the re-drying 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 re-drying process. I, therefore, hold that the packing is not a part of the re-drying 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 this Act, every dealer shall pay for each year a tax on his total turnover for such year." "Dealer" is defined to mean any pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... goods' in Entry 48 is a nomen juris, its essential ingredients being an agreement to sell movables 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: ".....It must be stated that the above conclusion has reference to works contracts, which are entire 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, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esent case satisfy the definition of a sale. I have already held that the packing is not part of the re-drying process; and that the material used for packing is extraneous marketable material used to preserve the dry tobacco from contamination or loss. Tobacco after re-drying must be put in some container, such as hogsheads, boxes, gunny, waterproof 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 re- drying charges. The packing material is clearly movable property within the meaning of goods in the State 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 re-dries tobacco, packs it in a costly material and delivers it to the customer, including the price of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss is concerned. But it cannot be said that the costly packing material has become an integral part of the re-drying process like the parchment and ink of an artist; it is extraneous 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. State of Assam [1953] 4 S.T.C. 129. 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. State of Madras [1954] 5 S.T.C. 354. 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 Nirmal Cotton Press, Khandwa v. Sales Tax Officer, 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. L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the packing material by the sale of the property therein. The decision in State of Madras v. Voltas Ltd. [1963] 14 S.T.C. 446., 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 [1963] 14 S.T.C. 861. 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. 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dition 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 re-drying machine is packed in waterproof packing material and stored for the requisite period." The company purchases "packing material", such as jute cloth, waterproof paper, twine, from the market. For re-drying 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 entruste ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e decision in A.S. Krishna Company v. State of Andhra Pradesh, [1956] 7 S.T.C. 26. It seems to have been assumed by the taxing authorities that immediately after tobacco emerges from the reconditioning chambers it is packed in waterproof material and is handed over to the owners of the tobacco, and therefore packing of tobacco is not an integral part of the process of re-drying. 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 paragraph 4 that: "Re-drying 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 standardize the moisture content at the required level of 10 to 12 per cent. In order to keep the moisture content at the same standardized level which is an essential requisite for 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rty in the goods so used passes to the other party, the contactor 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 works 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 works contracts are frequently not recorded in writing setting out all the covenants and conditions thereof, and the terms and incident ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... preted in their legal sense, that sense can only be what it has in the law relating to sale of goods.....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 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." 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 shoul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... material may be implied and the turnover relating to the packing material would be liable to sales tax. In Mckenzies Limited v. State of Bombay [1962] 13 S.T.C. 602., 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 State of Madras v. Voltas Limited [1963] 14 S.T.C. 446., the contractor 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 m ..... X X X X Extracts X X X X X X X X Extracts X X X X
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