1970 (12) TMI 75 - HC - VAT and Sales Tax

Summary

Issues:
Assessment of sales tax and penalty on the petitioner for the period 1st April, 1964, to 31st March, 1965, and 1st April, 1965, to 31st March, 1966. The controversy revolves around the taxation of packing materials used in the bottling process of liquor.

Analysis:
The petitioner, holding a warehouse license for country liquor, is obligated to bottle liquor according to specific rules under the license. The petitioner is not compensated for the bottling process but can charge a fee from retail sellers. The Sales Tax Officer assessed the petitioner on items like corks, sealing wax, and labels used in bottling, considering them as packing material. The petitioner disputed this assessment, arguing that the bottling process is mandatory under government rules, akin to a works contract, and not a voluntary sale activity to attract sales tax.

The court deliberated on whether the items used in bottling constitute packing material subject to sales tax. The petitioner contended that since the bottles, which are not taxed, are returnable after consumption, the items becoming part of the bottle should also be exempt. Additionally, the petitioner argued that the items are destroyed upon consumption, indicating no intention of sale to the retail seller.

The department argued that the petitioner sells liquor in containers to prevent damage or theft, implying a sale contract for the packing materials. Citing a precedent, the department emphasized that providing items along with the main product constitutes a sale contract.

The court differentiated the present case from the precedent, highlighting that the petitioner is compelled by law to bottle liquor and does not have the choice to opt-out. Referring to legal precedents, the court determined that the bottling process is a works contract and not primarily a sale contract. Even if viewed as a sale, the court noted that the main packing material, the bottle, is not taxable, and the additional items are insignificantly valued and destroyed upon use, negating any intention of sale between the petitioner and the retail seller.

Consequently, the court ruled in favor of the petitioner, concluding that no sales tax is applicable to the packing materials used in bottling. The assessment and penalty imposed were set aside, and the petitioner was awarded costs.