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

Whether packing is an integral part of the re-drying process? Whether after the re-drying and packing, the tobacco bales are kept in the factory for any length of time to undergo further re-drying process? Whether there is a sale of the packing material by the respondent to its customers? Held that - Appeal dismissed. 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 .

Issues Involved
1. Whether the packing material used by the respondent-company for storing re-dried tobacco constitutes a sale under the Madras General Sales Tax Act, 1939.
2. Whether the packing material is an integral part of the re-drying process or a separate entity subject to sales tax.

Issue-Wise Detailed Analysis

1. Whether the packing material used by the respondent-company for storing re-dried tobacco constitutes a sale under the Madras General Sales Tax Act, 1939.

Majority Judgment (SHAH and SIKRI, JJ.):
- The primary question was whether the packing material used for storing tobacco after re-drying was subject to sales tax. The Deputy Commercial Tax Officer, Deputy Commissioner of Commercial Taxes, and the Sales Tax Tribunal had all concluded that the packing material was sold to the customers and thus subject to sales tax.
- The court noted that the respondent-company charged a consolidated rate for re-drying and packing material, with the packing material constituting about 25% of the re-drying charges.
- The court scrutinized the relevant provisions of the Madras General Sales Tax Act, specifically focusing on the definitions of "sale," "goods," and "turnover."
- The court held that the packing material was movable property and that the respondent-company had transferred property in the packing material to the customers for a price. The price for the material was included in the consolidated rates charged by the respondent.
- The court found that there was an implied agreement for the sale of the packing material, as the customers were aware that the factory supplied the packing material and included its price in the consolidated rate.
- The court concluded that the transaction involved a contract of sale of the packing material and upheld the assessments made by the Sales Tax Authorities. The appeals were allowed, and the order of the High Court was set aside.

Separate Judgment (SUBBA RAO, J.):
- Subba Rao, J., disagreed with the majority judgment, emphasizing that no acceptable material was placed before the High Court to show how packing becomes an integral part of the re-drying process.
- He pointed out that the High Court had accepted the description of the re-drying process given by Srinivasan but did not find that the tobacco, after it is packed, is kept in the factory for any length of time to undergo further drying process.
- Subba Rao, J., held that the packing is not a part of the re-drying process and is done only to conserve the dried tobacco.
- He further analyzed the provisions of the Madras General Sales Tax Act and concluded that the transaction did not constitute a sale within the meaning of the Act.
- Subba Rao, J., concluded that the packing material was not subject to sales tax, and the appeals should be dismissed.

2. Whether the packing material is an integral part of the re-drying process or a separate entity subject to sales tax.

Majority Judgment (SHAH and SIKRI, JJ.):
- The court analyzed the re-drying process and the role of packing material in it. The High Court had described the re-drying process as one, entire and indivisible, and stated that packing was essential to maintain the moisture content of the tobacco.
- The majority judgment, however, found that the packing material was not an integral part of the re-drying process. The court noted that the packing was done to preserve the chemical changes obtained by the re-drying process and to prevent decay.
- The court concluded that the packing material was extraneous marketable material used for a collateral purpose and was subject to sales tax.

Separate Judgment (SUBBA RAO, J.):
- Subba Rao, J., emphasized that the packing material was not an integral part of the re-drying process. He pointed out that there was no material on record to show that the packed tobacco was retained in the factory for the completion of the re-drying process.
- He concluded that the packing material was used only to conserve the dried tobacco and was not part of the re-drying process.
- Subba Rao, J., held that the transaction did not involve a sale of the packing material and that it was not subject to sales tax.

Conclusion
The majority judgment concluded that the packing material used by the respondent-company for storing re-dried tobacco constituted a sale under the Madras General Sales Tax Act, 1939, and was subject to sales tax. The order of the High Court was set aside, and the appeals were allowed. Subba Rao, J., delivered a dissenting judgment, holding that the packing material was not an integral part of the re-drying process and was not subject to sales tax. The appeals were dismissed with costs in accordance with the opinion of the majority.

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