Government of Andhra Pradesh Vs.
Guntur Tobaccos Ltd.  INSC 264 (18 November 1964)
18/11/1964 SUBBARAO, K.
CITATION: 1965 AIR 1396 1965 SCR (2) 167
RF 1969 SC1245 (10) RF 1970 SC 732 (12) RF 1972
SC1131 (11) R 1976 SC2108 (52) APL 1989 SC 285 (8) F 1989 SC 962 (7,9,27)
Madras General Sales Tax Act (9 of 1939), s.
2(h)-Redrying of tobacco-Packing of tobacco, if an integral part of
process-Packing material-Passing of property in-if sale.
The respondent-company was carrying on the
business of redrying tobacco entrusted to it by its customers. The process
involved the keeping of the moisture content of tobacco leaf at a particular
level, and in order to ensure that level, the leaf was packed in bales, in
water-proof packing material, as it emerged from the reconditioning plant. The
tobacco was then returned, packed in the costly packing material, to the
constituent. In the company's charges for redrying each bale of tobacco, no separate
charge was made for the value of the packing material used.
The Deputy Commercial Tax Officer was of the
view that the packing material must be regarded as sold to the constituent and
that tax was exigible, under the Madras General Sales Tax Act, 1939, on the
value of the packing material used.
The order was confirmed by the Deputy
Commissioner of Commercial Taxes and by the Sales Tax Tribunal. The High Court,
in revision, set aside the order. It was held that the packed tobacco was
stored by the assessee for the requisite period, before it was returned to the
customer, and that _packing formed an integral part of the redrying process.
'Me State appealed to the Supreme Court and contended that, packing of tobacco
was not an integral part of the process of redrying, and that, since there was
transfer of property in the packing material from the respondent to its
customers, there was sale of the packing material for the purpose of the Act.
HELD (Per Shah and Sikri, JJ.) : The redrying
process could not be completed without the use of the packing material, and on
the finding recorded by the High Court, that tobacco was stored for the
requisite period, the intention of the assessee and its customers was that the
material should from an integral part of the process. Since there was no
independent contract for the sale of packing material, the fact that tobacco
delivered by the constituent was taken away with the packing material would not
justify an inference that there was an intention to sell the material.
[184 H; 185 A-C] In order that there should
be a sale of goods which is liable to sales tax as part of a contract for work,
there must be a contract in which there is not merely transfer of title to
goods as an incident of the contract, but there must be a contract, express or
implied, for sale of the very goods which the parties intended should be sold
for a money consideration. From the mere passing of title to goods, whether as
an integral part of or independent of goods, it cannot be inferred that the
goods were agreed to he sold and that the price was liable to sales tax. [181
G-H; 183 C] Case law reviewed.
Per Subba Rao, J. (dissenting) : There was
nothing on the record to show that after packing the packed tobacco was
retained in the factory for the completion of the redrying process. Packing,
therefore, was not an integral part of the redrying process. Once the idea of
packing being a part of the redrying process is eliminated, the transaction qua
the 168 packing material involved either a contract of agency, gift or sale,
and on the facts, a contract of sale was necessarily implied. As all the
ingredients of the charging section read with the definition of
"sale", were satisfied, the, sales tax authorities rightly assessed
the turnover in regard to the packing material. [171 D; 174 F-H, 177 A, C] Case
CIVIL APPELLATE JURISDICTION : Civil Appeals
Nos. 2-4 of 1964.
Appeals by special leave from the judgment
dated the April 21, 1961, of the Andhra Pradesh High Court in Tax Revision No. 20,
21 and 22 of 1957.
A. Ranganadham Chetty and B. R. G. K. Achar,
for the appellant (in all the appeals).
R. Thyagarajan, for the respondent (in all
The Judgment of Shah and Sikri JJ. was
delivered by Shah J.
Subba Rao J. delivered a dissenting Opinion.
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 redrying 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 redrying. It redries it in its factory,
packs it in gunny, waterproof paper, bales etc. and delivers it to the
customer. It charges the customer at a consolidated rate for redrying and for
the packing material supplied by it. The proportionate price of the packing
material comes to about 25 per cent, of the redrying charges. For the
assessment years 1951-52, 1952-53 and 1953-54, the Deputy Commercial Tax
Officer assessed the respondent under the Madras General Sales-tax Act, 1939,
by different orders, on the sale price of the said packing material. The
assessee took the question of his liability through a hierarchy of tribunals,
but they all confirmed the assessments made by the Deputy Commercial Tax
Officer. It preferred revisions to the High Court of Andhra at Guntur, and the
said High Court allowed the revisions. Hence the present appeals.
Mr. A. Ranganadham Chetty, learned counsel
for the Revenue, contended that there was a sale of the packing material for
price by the respondent to its customers and, therefore, it was liable to pay
sales-tax on the said sales.
Mr. Thyagarajan, learned counsel for the
respondent, argued that packing was part of the process of redrying and, therefore,
169 there was no question of any sale of the packing material by the respondent
to its customers. He further argued that the necessary ingredient of a sale,
namely, a contract to sell, was absent in the transactions between the
respondent and its customers and, therefore, there was no sales within the
meaning of the definition of sale" in the Madras General Sales-tax Act,
The question raised in the appeals mainly
depends upon whether packing is an integral part of the redrying process.
No acceptable material was placed before the
High Court to show how packing becomes an integral part of the redrying
process. Mr. D. V. Srinivasan in his affidavit describes the scientific process
or redrying found in books, but he does not describe how it is actually done in
He says that "in order to keep the
moisture content at the standardised level of 10 to 12 per cent, throughout the
process of aging or fermentation the tobacco as it emerges from the redrying
machine is packed in water-proof packing material and stored for the requisite
period." It only means that packing is done to keep the moisture content
at a particular level. He is vague and does not commit himself on the crucial
question whether after the redrying and packing, the tobacco bales are kept in
the factory for any length of time to undergo further redrying process. The
High Court in its judgment describes the redrying process thus :
"The process of redrying tobacco brought
to the assessees by their constituents is one, entire and indivisible. The
object of the redrying 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 redried tobacco and
its storage for the requisite period is an integral part of the redrying
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 see'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 packed in a factory thus, at p. 422
3Sup./65-12 170 .lm15 "As the tobacco emerges from the redrying machine
the hands are promptly packed in hogsheads under hydraulic pressure while
tobacco is still warm." In Encyclopaedia Britannica, Vol. 22, p. 263,
under the heading "Grading, Marketing, Fermentation and Aging" it is
stated "It is common procedure to recondition the tobacco, that is, to dry
the product and then return the proper amount of moisture by
"redrying" after it has been marketed and before it is packed. The
purpose is to avoid damage which occurs when the leaf is packed with an
excessive moisture content, and to ensure proper amount of moisture for aging.
The aging period is from one to three years." Learned counsel for the
respondent has supplied to us some extracts from Garner's book "The
Production of Tobacco", which describe the redrying process. At p. 414, it
is stated :
"In preparation for fermentation or
aging, tobacco usually is pressed into standard containers or forms--namely,
boxes or "cases", hogsheads, and bales--or it is placed in large
piles or bulks in a warehouse having facilities for at least partial control of
temperature and humidity." The learned author observes at p. 418
"After the final packing in cases, bales or other packages, the leaf
commonly undergoes further aging." At p. 421, it is stated :
"These cases or boxes are uniformly
built 30 in. wide and 30 in. in high outside measurement, but range in length
from 36 to 52 in. according to the length of leaf to be packed." It is
further stated :
"As the tobacco emerges from the
redrying machine the hands are promptly packed in hogsheads under hydraulic
pressure while the tobacco is still warm. The hogsheads are 48 in.
in diameter, 48 or 54 in. in high, and
contain about 1000 pounds of tabacco......... ...... .... The hogsheads are
stacked on their sides in large open type or thoroughly ventilated closed
warehouses, and are 171 freely exposed to seasonal changes in temperature and
air humidity, no artificial heat being used." These passages and similar
others show that after redrying process is over tobacco is stacked in costly
containers like boxes, hogsheads etc. and the aging takes place for a
considerable time even after the packing. The process of redrying is quite
different from aging. But none of the passages extracted above established that
packing is an integral part of the redrying process. The redried tabacco is
immediately packed to preserve the chemical changes obtained by the redrying
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 redrying process.
1, therefore, hold that the packing is not a part of the redrying 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 person who
carried on the business of buying or selling goods [vide S. 2(b)]. Under S.
2(c), "goods" means all kinds of movable property other than
actionable claims, stocks and shares and securities and includes all materials,
commodities and articles including those to be used in the construction,
fitting out, improvement or repair of immovable property or in the fitting out,
improvement or repair of movable property. Section 2(h) defines
"sale" thus :
"'Sale' with all its grammatical
variations and cognate expressions means every transfer of the property in
goods by one person to another in the course of trade or business for cash or
for deferred payment or other valuable consideration, and includes also a
transfer of property in goods involved in the execution of a works contract,
but does not include a mortgage, hypothecation, charge or pledge." 172
Section 2(1) defines "turnover" thus :
"'Turnover' means the aggregate amount
for which goods are either bought by or sold by a dealer, whether for cash or
for deferred payment or other valuable consideration provided that the proceeds
of the sale by a person of agricultural or horticultural produce grown by
himself or grown on any land in which he has an interest whether as owner,
usufructuary mortgagee, tenant or otherwise, shall be excluded from his
turnover." A combined reading of the provisions relevant to the question
raised may be stated thus : Every person, who carries on the business of
transferring property in any kind of movable property including materials,
commodities and articles in the fitting out, improvement or repair of movable
property to another for valuable consideration would be liable to tax on the
turnover. It is said that the decision in The State of Madras v. Gannon
Dunkerley & Co.
(Madras) Ltd. (1) has introduced another
element in the definition of "sale", namely, a contract of sale, and
that element is not present in the instant case. In that case this Court held
that the provisions ,of the Madras General Sales-tax Act were ultra vires the
Legislature in so far as they sought to impose tax on the supply of material in
the execution of works-contract treating it as a sale of goods by a contractor.
In the course of the judgment, Venkatarama Ayyar, J., speaking for the Court,
summed up the legal position thus "To sum up, the expression 'sale of goods'
in Entry 48 is a nomen juris, its essential ingredients being an agreement to
sell movable 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:
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, (1) 1959
173 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 the power
of the State to separate the agreement to sell from the agreement to do work
and render service and to impose a tax thereon cannot be questioned, and will
stand untouched by the present judgment." One of the main reasons given by
the learned Judge why there is no sale involved in a building contract is found
at p. 423-424 "But if there was no such agreement and the contract was
only to construct a building, then the materials used therein would become the
property of the other party to the contract only on the theory of
This Court was dealing in that case with a
contract to construct a building and it held that the contract did not involve
an agreement to sell materials but was only to construct a building and that
the building so constructed became the property of the owner of the land on the
theory of accretion. I do not see any relevancy of this judgment to the
question raised in the present case except the observation that every sale
involves a contract of sale, either expressed or implied. This Court again in
M/s. New India Sugar Mills Ltd., v. Commissioner of Sales-tax, Bihar(1)
reiterated that under the Sale of Goods Act a transaction is called sale only
where for money consideration property in goods is transferred under a contract
of sale. As in that case the transaction of dispatches of sugar by the assessee
pursuant to the directions of the Controller were not the result of any
contract of sale, this Court, by a majority, held that it was not a sale liable
to sales-tax. Under s. 4 of the Sale of Goods Act a contract of sale of goods
is a contract whereby the seller transfers or agrees to transfer the property
in the goods to the buyer for a price; and under sub-s.(3) thereof, where under
a contract of sale the property in the goods is transferred from the seller to
the buyer, the contract is called a sale. It is clear that in order to constitute
a sale under this section there must be three ingredients, namely, (i) contract
of sale, (ii) transfer of property in the goods to the buyer, and (iii) payment
of price by the buyer to the seller. Therefore, under this section there cannot
be a sale unless there is a contract of sale. The section does (1)  Supp.
2 S.C.R. 459.
174 not say that the contract of sale must be
express : it may also be implied.
If so, the question is whether the facts of
the present case satisfy the definition of a sale. I have already held that the
packing is not part of the redrying process; and that the material used for
packing is extraneous marketable material used to preserve the dry tobacco from
contamination or loss. Tobacco after redrying must be put in some container,
such as hogsheads, boxes, gunny, water-proof 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 redrying charges. The packing
material is clearly movable property within the meaning of goods in the Sale 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 redries tobacco, packs it in a costly material and delivers it to the
customer, including the price of the material in the consolidated rate charged
by it. The customer who goes to the factory knows that the factory supplies the
packing material, transfers the property in the said material to him and he has
to pay for it. With that knowledge when a customer delivers his tobacco to the
factory for redrying, there is clearly an implied agreement to purchase the
said packing material for price. Once we eliminate the idea of the packing
being a part of the redrying process, we arrive at the position that the
transaction qua the packing material involves either a contract of agency, gift
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 tabacco to it for redrying, a contract of sale in regard to the packing
material is necessarily implied in the transaction.
Now, coming to the decisions cited at the
Bar, it is not necessary to consider the English decisions in detail. It would
be enough 175 if a summary of the decisions is given. The said decisions
recognize four categories of contracts, namely, (1) contracts for labour and
work such as one for the production of a work of art, picture, statue, etc.;
(2) contract primarily for labour and the materials supplied are only ancillary
i.e., paper and ink used by a painter or an artist; (3) contract of sale of the
finished product denture or a ship of which the parts supplied become an
integral part of the denture or the ship, as the case may be; and (4) contract
of sale of the finished product but some of the materials supplied do not form
part of the finished product but are sold separately : see Clay v. Yates(1),
Griffin(2), and Robinson v. Graves(3). Here
there is no sale of any finished product, for the assessee has no property in
the tobacco and has undertaken only to perform the redrying process for
consideration. It is simply a contract of work and labour so far as the
redrying process is concerned. But it cannot be said that the costly packing
material has become an integral part of the redrying 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.
The State of Assam(4). 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.
The State of Madras(5). 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 Nimar
Cotton Press, Khandwa v. The Sales-tax Officer, Khandwa(6). Sales-tax on the
turnover of packing, materials used for packing redried tobacco was held to be
leviable by two decisions of the Andhra High Court in Krishna & Co., Ltd.
v. State of Andhra (7 ) and Hanumantha Rao v. The State of Andhra(8). The
Madras High Court in Varsukhi and Co. v. Province of Madras(9) held that the
exemption from sales-tax given to salt could not be extended to the gunny bags
wherein the salt was preserved. The sale price of packing material employed for
effecting sale of cotton was held to be liable to sales-tax by the (1) 108 E.R.
(2) 124 E.R. 555.
(3) 1 K.B. 579.
(4) (1953] 4 S.T.C. 129.
(5)  5 S.T.C. 354.
(6) 5 S.T.C. 428.
(7) 7 S.T.C. 26.
(8)  7 S.T.C. 486.
(9)  2 S.T.C. 1.
176 Madras High Court in Chidambara Nadar
Sons & Co., v. State of Madras(1). The learned Judges in the aforesaid cases
rightly held that whether the commodity conserved in the container is sold or
not, the transaction involved a contract of sale of the packing material. It
was argued that as the sale of the exempted goods along with the packing
material was admitted in some cases the courts have held that there was a sale
of the packing materials. I cannot see any distinction on principle between the
two classes of cases, namely, (i) where the goods were not sold, and (ii) where
they were also sold. 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
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
I shall now consider the decisions cited by
the learned counsel for the respondents. In Sri Dasarathi Mohapatra v. The
State of Orissa(2) the High Court of Orissa held that purchase of gunny bags
for storage and transport of paddy by the assessee was part of the contract of
agency and was, therefore, not the subject-matter of sale. The decision in
United Bleachers Ltd. v. State of Madras(3) relates to turnover of packing
materials supplied by the assessee for packing yam and cloth given to it for
bleaching. The learned Judges of the Madras High Court held that there was no
agreement to sell the packing materials as the contract was merely one of
service, but they did not exclude such an agreement to sell in every case, for
they pointed out that the onus would be on the taxing authority to prove that
there was an agreement to sell the packing material by the sale of the property
therein. The decision in The State of Madras v. Voltas Ltd. (4 ) relates to a
contract for airconditioning 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(5). 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.
(1) [1960)] 11 S.T.C. 321. (2) [19571 8 S.T.
(3)  It S.T.C. 278. (4)  14
(5) 14 S.T.C. 861.
177 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 Salestax authorities have rightly
assessed the turnover in regard to the packing material. 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. Whether the respondent Company is
liable to pay sales-tax under the Madras General Sales Tax Act, 1939, on the
value of "packing material" used by it for storage of flue-cured
tobacco under controlled conditions of uniform moisture, is the question which
falls to be determined in these appeals. The Company conducts the business of
"a redrying" tobacco and for that purpose maintains a factory at
Guntur in the State of Andhra Pradesh. Freshly cured tobacco leaf is unfit to
be used as smoking material, for it has a rank unpleasant odour and produces
irritating and pungent smoke. To make it fit for use in cigars and cigarettes
tobacco leaves must undergo a process of fermentation or aging, which gives the
leaf a distinctive aroma. Tobacco is highly hydroscopic and when exposed to
atmospheric conditions it decays as a result of action by microorganisms. The
leaf has to undergo fermentation, with the moisture content of the leaf
maintained at a uniform low level. Flue-cured tobacco contains 15 to 17 per
cent moisture which is considered excessive. A moisture content of 10 to 12 per
cent is ideal for the process of fermentation, and the time required for proper
fermentation varies from eighteen months to, two years. The process of redrying
is described by the High Court in its judgment under appeal as follows :
"After the grading the stripping
operations are over, the leaf is reconditioned or redried. For this purpose all
the leading exporters and cigarette manufacturers use the reordering or
reconditioning plant. This plant consists of a series of three chambers in each
of which the heat and humidity are regulated. The tobacco leaf is passed
through each chamber under the action of steam and 178 strong air current. The
significance of the reconditioning process lies in the fact that it redries the
leaves to uniform moisture, besides helping to kill the insects and 'germs that
may be present in the leaf by the high -temperature maintained in the first
chamber of the machine. The "tobacco leaf as it comes out of the plant is
in a -soft and pliable condition 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 redrying machine is packed in water-proof packing material and
stored for the requisite period." The Company purchases "packing
material" such as jute cloth, water-proof paper, twine from the market.
For redrying 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 entrusted was
returned by the Company, must be regarded as sold to the constituent, and on
the value of the materials tax was exigible. The order of the Deputy Commercial
Tax Officer was confirmed in appeal by the Deputy Commissioner of Commercial
Taxes. That Officer adopted a uniform rate of Rs. 6/as price of the material
used in each bale. Liability to pay sales-tax on the value of the "packing
material" used by the Company was confirmed by the Sales Tax Tribunal, but
the turnover was reduced to Rs. 51per each bale redried by the Company. The
High Court ,of Andhra Pradesh set aside the order of the taxing authorities
holding that the assessment of tax on the "packing material" could
not be sustained. With special leave, the State has appealed to this Court.
It is unfortunate that the taxing authorities
did not analyse the 'facts to ascertain the primary purpose for which the
packing matetrial was used by the Company. The Deputy Commercial Tax 179
Officer stated in his, order that tobacco entrusted to the Company was returned
after redrying properly packed. He observed "The dealers regularly
undertake to redry tobacco entrusted to them and return the same after packing.
This regular practice of redrying and using packing material is to be construed
as 'in the course of business' and the sale of packing material involved is
clearly assessable. The bills issued for redrying charges cannot be said to
exclude the value of packing material used." In appeal the Deputy
Commissioner of Commercial Taxes observed that "costly packing
material" was purchased and property in them was transferred for
consideration which was embedded in the price charged for redrying.
He observed :
"Packing is different from redrying. If redrying
is their main business, packing is their subsidiary business. It is admitted
that they are specialists in packing and it is for that reason that the owners
of tobacco look to them as much for redrying as for packing. It cannot be said
that packing is not their business and that they have utilised for packing
without any profit, the costly materials which they have purchased. There is,
therefore, a transfer of property in the packing materials from the appellant
to the customers which constitutes a sale for purposes of the Madras General
Sales Tax Act." The Sales Tax Tribunal was of the view that the question
arising before it was covered by the decision in A. S.
Krishna & Company v. State of Andhra
It seems to have been assumed by the taxing
authorities that immediately after tobacco emerges from the reconditioning
chambers it is packed in water-proof material and is handed over to the owners
of the tobacco, and therefore packing of tobacco is not in integral part of the
process of redrying.
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 paragraphs 4 that :
"Redrying is a process designed to
create suitable conditions for the proper maturing of the leaf in storage. The
object of the redrying process is to reduce the moisture content i.e., to
standardise the moisture content (1) 7 S.T.C. 26.
180 at the required level of 10 to 12 per
In order to keep themoisture content at the
same standardised level which x x x is an essential requisite for proper aging
or fermentation, it is essential that the tobacco as it emergesfrom the
redrying machine and while it is still warm should be promptly packed with
water-proof packing material. x x x "In the process of reconditioning the
tobacco is passed through a series of three chambers in each of which the heat
and humidity are regulated so that the leaf emerges in a soft pliable condition
and contains only IO to 12 per cent moisture. It is essential in such cases
that the leaf should be packed immediately. x x x Thus in order to keep the
moisture content at the standardised level of 10 to 12 per cent throughout the
process of aging or fermentation the tobacco as it emerges from the redrying
machine is packed in water-proof packing material and stored for the requite
period." The High Court accepted this description of the
"redrying" process, and observed :
"The process of redrying raw tobacco
brought to the assessee by their constituents is one, entire and indivisible.
The object of the redrying 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 redried tobacco
and its storage for the requisite period is an integral part of the redrying
process." Counsel for the State faintly submitted that the Company
maintains no storage facilities and it must be inferred that tobacco sealed in
water-proof material would be stored by the owner of the tobacco after it was
returned to him duly packed. But this pea was never advanced at any stage of
the proceedings for assessment, and cannot be entertained at this late stage.
If the process of redrying or reconditioning
does not end with the emergence of tobacco out of the last reconditioning
chamber 181 as suggested by counsel for the State, but consists, as held by the
High Court, of cleansing it, processing it in the reconditioning chambers under
controlled conditions of heat and humidity, of packing it in water-proof
material to seal it off from external atmospheric conditions, and of storage to
enable fermentation for the requisite period to make the tobacco mature for use
in cigarettes, cigars etc., packing tobacco in water-proof material must be regarded
as an integral part of the process of redrying and not independent of that
The fact that in the execution of a contract
for work some materials are used and property in the goods so used passes to
the other party, the contractor 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 work 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
work contracts are frequently not recorded in writing setting out all the
covenants and conditions thereof, and the terms and incidents of the contract
have to be gathered from the evidence and attendant circumstances. The question
in each case is one about the true agreement between the parties and the terms
of the agreement must be deduced from a review of all the attendant
circumstances. But one fundamental fact has to be borne in mind that from the
mere passing of title to goods either as integral part of or independent of
goods it cannot be inferred that the goods were agreed to be ,,;old, and the
price was liable to sales-tax. In The State of Madras v. Gannon Dunkerley &
Company (Madras) Ltd(1), this Court held that the expression "sale of
goods" was, at the time when the Government of India Act, 1935, was
enacted, a term of well recognised legal import in the general law relating to
sale of (1) S.C.R 379.
182 goods and in the legislative practice
relating to that topic, and must be interpreted in Entry 48 in List 11 of Sch.
VII of the Act as having the same meaning as in the Sale of Goods Act, 1930.
Therefore under a statute enacted in exercise of power under the Government of
India Act, 1935, and in pursuance of the power reserved in Entry 48, in List
11, Sch. VII of the Government of India Act, 1935, a taxable sale is one which
amounts to sale of Goods under the Sale of Goods Act, 1930. Venkatarama Aiyar,
J., delivering the judgment of this Court in Gannon Dunkerley's cave(1)
observed at p. 397 :
"Thus, according to the law both of
England and of India, in order to constitute a sale it is necessary that there
should be an agreement between the parties for the purpose of transferring
title to goods which of course presupposes capacity to contract, that it must
be supported by money consideration, and that as a result of the transaction
property must actually pass in the goods. Unless all these elements are
present, there can be no sale.
Thus, if merely title to the goods passes but
not as a result of any contract between the parties, express or implied, there
is no sale.
So also if the consideration for the transfer
was not money but other valuable consideration, it may then be exchange or
barter but not a sale. And if under the contract of sale, title to the goods
has not passed, then there is an agreement to sell and not a completed
sale." It was again observed at p. 413 "If the words "sale of
goods" have to be interpreted in their legal sense, that sense can only be
what it has in the law relating to sale of goods. x x x 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 (1)  S.C.R. 379.
183 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 should be a sale of goods
which is liable to sales-tax as part of a contract for work under a statute
enacted by the Provincial or State Legislature, there must be a contract in
which there is not merely transfer of title to goods as an incident of the
contract, but there must be a contract, express or implied, for sale of the
very goods which the parties intended should be sold for a money consideration
i.e. there must be in the contract for work an independent term for sale of
goods by one party to the other for a money consideration.
No useful purpose will be served by entering
upon a detailed analysis of the large number of cases cited at the Bar. The
cases relied upon lay down no general principle and the ultimate decision in
all the cases turned upon what the Courts found were the true agreements
between the parties.
In A. S. Krishna & Company's case(1) the
High Court of Andhra in dealing with a contract for redrying tobacco held on
the evidence in that case that packing material used by the assessee did not
become an integral part of the drying process and an intention to sell the
packing could be properly attributed to the assessee.
In B. V. Hanumantha Rao v. The State of
Andhra (2) it was held that gunny cloth and iron hoops used by the assessee who
had undertaken a works contract for baling and pressing palymyra fibre were
intended to be transferred and that the materials had not become an integral
part of the product entrusted to him for baling and pressing, the price was
liable to pay sales-tax.
In United Bleachers Ltd., v. The State of
Madras(") the assessee who had entered into contracts to bleach, dye,
calender, press, and fold unbleached yarn was held not liable to sales-tax in
respect of craft paper, hoop iron, hessian cloth, jute twine, palm mats etc.
which were used for packing the goods at the time of delivery, because in the
view of the Court the primary contract was one for service, viz. bleaching,
dyeing etc. and as an incident of the service, the goods bleached or dyed were
to be packed and delivered.
(1)  7 S.T.C. 26.
(2)  7 S.T.C 486.
(3)  II S.T.C. 278.
184 In M. S. Chidambara Nadar Sons and Co.,
v. State of Madras(1) it was held that where under an agreement to purchase
cotton to be delivered by the seller to the buyer, it was implicit that the
goods should be delivered packed, the contract to pay for and purchase the
packing material may be implied and the turnover relating to the packing
material would be liable to sales-tax.
In Mckenzies Limited v. The State of Bombay
(2 ) 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
It was held that in such a case there was a
contract to sell motor bodies.
In The State of Madras v. Voltas Limited(3)
the contractor had undertaken to install in a building under construction a
"system of airconditioning", 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 machinery and the contract was a
contract for execution of work.
In Chandra Bhan Gosain v. The State of Orissa
and other(4) this Court held that the assessee-a manufacturer of bricksto whom
land was given free for the manufacture and supply of bricks was liable to pay
sales-tax on bricks delivered by him.
Whether a contract for service or for
execution of work, involves a taxable sale of goods must be decided on the
facts and circumstances of the case. The burden in such a case lies upon the
taxing authorities to show that there was a taxable sale, and that burden is
not discharged by merely showing that property in goods which belonged to the
party performing service or executing the contact stands transferred to the
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
redrying (1)  11 S.T.C. 321.
(2)  13 S.T.C. 602.
(3) 14 S.T.C. 446.
(4)  2 S.C.R. 879.
185 and without the use of the "packing
material" redrying process could not be completed, and that there was no
independent contract for sale of "packing materials". It is only as
an incident of the redrying process and as a part thereof that the respondent
Company has to seal up the package of tobacco, after it emerges 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 work contract, and the fact that the tobacco delivered by the constituent
is taken away with the "packing material" will not justify and
inference that there was an intention to sell the "packing material".
The appeals therefore fail and are dismissed
One hearing fee.
ORDER In accordance with the opinion of the
majority these appeals, are dismissed with costs. One hearing fee.