1959 (12) TMI 22 - HC - VAT and Sales Tax

Summary

Issues Involved:
1. Liability of the assessee to sales tax on the turnover representing the price of packing materials.
2. Determination of whether the transfer of packing materials constitutes a sale under the Madras General Sales Tax Act.

Detailed Analysis:

1. Liability of the Assessee to Sales Tax on the Turnover Representing the Price of Packing Materials:
The assessee, United Bleachers Ltd., operates a textile processing factory and charges for services including bleaching, dyeing, and packing. The packing materials used, such as brown kraft papers, hoop iron, hessian cloth, jute twine, and palm mats, are purchased by the assessee. The charges for these materials are included in the service bills but not itemized separately. For the years 1953-54 and 1954-55, the assessee was assessed to sales tax on the turnover representing the price of these packing materials. The turnover for the respective years was Rs. 20,117-4-2 and Rs. 65,373-1-5.

Both the Deputy Commercial Tax Officer and the Commercial Tax Officer upheld the assessment. On further appeal, the Sales Tax Appellate Tribunal also held that a portion of the profits from the business could be attributed to the packing materials, thereby attracting sales tax liability.

2. Determination of Whether the Transfer of Packing Materials Constitutes a Sale:
The primary contention of the assessee was that no sale was involved in the transfer of packing materials, as it was incidental to the service provided. The court examined whether the transaction involved a sale of packing materials under the Madras General Sales Tax Act, which defines a sale as a transfer of property in goods for cash or other valuable consideration.

The court noted that the profit motive necessary to render a business taxable under the Act applies to the entire business, not just individual components. The intention behind the entire business operation, which included the use of packing materials, was to earn a profit. Therefore, the transfer of packing materials could attract sales tax liability if it constituted a sale.

The court differentiated between a mere contract of service and a contract involving the sale of materials. In cases where the principal contract is for the sale of goods (e.g., rice or salt in gunny bags), the sale of packing materials is implicit. However, in a service contract (e.g., bleaching or dyeing), the use of materials necessary for the service does not automatically imply a sale.

The court referred to various precedents, including Varasukhi and Co. v. Province of Madras and Indian Leaf Tobacco Development Co. Ltd. v. State of Madras, where the sale of packing materials was considered separate from the sale of the principal goods. Conversely, in Krishna and Co., Ltd. v. State of Andhra, the court held that packing materials used in a service contract could be subject to sales tax if there was a transfer of property for consideration.

The court emphasized that the existence of a sale depends on the intention of the parties and the presence of an agreement, express or implied, to sell the materials. The Supreme Court's decision in State of Madras v. Gannon Dunkerley and Co. clarified that a sale requires an agreement to transfer title to goods for consideration.

In the present case, the court found no express contract for the sale of packing materials between the assessee and its customers. The principal contract was for service, and the use of packing materials was incidental. Therefore, there was no implied agreement to sell the packing materials, and no sale occurred. Consequently, the assessee was not liable to sales tax on the turnover representing the price of the packing materials.

Conclusion:
The court allowed the revision cases, concluding that the transfer of packing materials in the context of the service contract did not constitute a sale. The petitions were allowed with costs in T.R.C. No. 79 of 1957, and the assessee was not liable to sales tax on the turnover for packing materials.