# GOVERNMENT OF ANDHRA PRADESH v. GUNTUR TOBACCOS LTD

- **Citation:** [1965] 2 S.C.R. 167
- **Court:** Supreme Court of India
- **Decided:** 1964-11-18
- **Bench:** K. Subba Rao, J. C. Shah Ands. M. Sikri
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/government-of-andhra-pradesh-v-guntur-tobaccos-ltd-3309
- **Pages:** 19

## Headnote

Madras General Sales Tax Act (9 of 1939), s. 2(h)-Redrying of
tobacc<>-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 0rder
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 vie'N that the packing material must
be regarded as sold to the constituent and that tax \Vas 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. The 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-CJ
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 .11ale of the ,-ery
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 be sold and that the price was liable !o sales tax. [181 G-H; 183 CJ
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 tronsaction qua the
168
SUPREME COURT REPORTS
[1965] 2 S.C.ll.
·packing material involved either a contract of agency, gift or sale, and
A
on the facts, a contract of s:!lt! was necessarily implied.
As all the
ingredients of the charging section read with the definition of "sale", v.ere
satisfied, the sales tax authorities rightly assessed the turnover in regard
to the packing material.
[171 D; 174 F-H; 177 A, CJ
Case law reviewed.
CrvrL APPELLATE JURISDICTION: Civil Appeals Nos. 2-4 of B
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 appel- c
!ant (in all the appeals).
R. Thyagarajan, for the respondent (in all the appeals).
The Judgment of Shah and Sikri JJ. was

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167
GOVERNMENT OF ANDHRA PRADESH
v.
GUNTUR TOBACCOS LTD.
November 18, 1964
[K. SUBBA RAO, J. C. SHAH ANDS. M. SIKRI, JJ.]
Madras General Sales Tax Act (9 of 1939), s. 2(h)-Redrying of
tobacc<>-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 0rder
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 vie'N that the packing material must
be regarded as sold to the constituent and that tax \Vas 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. The 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-CJ
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 .11ale of the ,-ery
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 be sold and that the price was liable !o sales tax. [181 G-H; 183 CJ
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 tronsaction qua the
168
SUPREME COURT REPORTS
[1965] 2 S.C.ll.
·packing material involved either a contract of agency, gift or sale, and
A
on the facts, a contract of s:!lt! was necessarily implied.
As all the
ingredients of the charging section read with the definition of "sale", v.ere
satisfied, the sales tax authorities rightly assessed the turnover in regard
to the packing material.
[171 D; 174 F-H; 177 A, CJ
Case law reviewed.
CrvrL APPELLATE JURISDICTION: Civil Appeals Nos. 2-4 of B
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 appel- c
!ant (in all the appeals).
R. 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 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 re-drying in its factory raw tobacco entrusted
to it by its customers. Its usual course of business may be describD
ed thus : A customer gives to the respondent raw tobacco for
re-drying. It re-dries it in its factory, packs it in gunny, wateri:
proof paper, bales etc. and delivers it to the customer. It charges
the c~stomer at a consolidated rate for re-drying and for the packing material supplied by it. The proportionate price of the packing material comes to about 25 per cent, of the re;dtying charges.
For the assessment years 1951-52, 1952-53 arid 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
Gunmr, and the said High Court allowed the revisions.
Hence C
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.
H
Mr. Thyagarajan, learned counsel for the respondent, argued
that packing was· part of the process of re-drying and, therefore,
ANDHRA GOVT. v. GANTUR TOBACCOS (Subba Rao, J.)
169
A . tltere 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
transac(ions between the respondent and its customers and, therefore, there was no sales within the meaning of the definition of
"sale
0 in the Madras General Sales-tax Act, 1939.
B
The question raised in the appeals mainly depends upon whether packing is an integral part of the re-drying process.
No
acceptable material was placed before the High Court to show
how packing becomes an integral part of the re-drying process.
Mr. D. V. Srinivasan in his affidavit describes the scientific process
C or re-drying found in books, but he does not describe how it is
actually done in the factory. 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 re-drying machine is packed in water-proof packing material and stored for the requisite period." It only means
D , 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 re-drying and packing, the tobacco
bales are k~pt 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 :
E
"The process of re-drying tobacco brought to the
assessees by their constituents i~ 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
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the re-conditioning 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 storG
age for the requisite period is an integral part of the
re-drying process."
The High Court accepted the description of re-drying 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
H -on the record to give such a finding. Gamer in his book on the
Production of Tobacco describes how dry tobacco is packed in a
factoiy thus, at p. 422 :
1.3Sup./6S-t2
170
SUPllEMB COURT llBPOllTS
(1965] 2 S.C.R.
"As the tobacco emerges from the re-drying machine
A
the hands are promptly packed in hogsheads under
hydraulic pressure while toabcco 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 "re-drying" 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 re-drying process. At p. 414, it is stated :
'"In preparation for fermentation or aging, tobacco
usually is pressed into standard containers or formsnamely, 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."
B
c
D
At p. 421, it is stated:
F
"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 re-drying 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
G
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ANDHRA GOVT. v. GANTUJ. TOBACCOS (Subba Rao, /.)
171
A
freely exposed to seasonal changes in temperature and
air humidity, no artificial heat being used."
These passages and similar others show that after re-drying process is over tobacco is stacked in costly containers like boxes,
hogsheads etc. and the aging takes place for a considerable time
B
even after the packing. The process of re-drying is quite different
from aging. But none of the passages extracted above established
that packing is an integral part of the re-drying process. The redried tabacco 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
C
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 aft"r
packing the packed tobacco is retained in the factory for the completion of the re-drying process. I, therefore, hold that the packing
D
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, fer,
E
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''. "Deit!er'' 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
F
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:
G
H
" '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
SUPllBMB COURT llIIPORTS
[ 1965]2 S.C.R..
Section 2(i) 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
B
A combined reading of the provisions relevant to the question raised
may be stated thus ; Every person, who carries on the business ol
transferring property in any kind of movable property including
C
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.(') has introduced another element in the definition
of "sale", namely, a contract of sale, and that element is not present
D
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 saJe."
To avoid misconception, the learned Judge proceeded to observe:
" .......... it must be stated that the above concluE
F
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sion 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
II
assume are set out in Hudson on Building Contractr,
-·---------· - - -------
(!) {19S9 S.C.R. 379, 42S, 427.
A
B
('
ANDHllA GOVT. v. GANTUR. TOBACCOS (Subba Rao,/.) ,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 accretion".
D 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
E
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(') 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 desF
patches of sugar by the assessce 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
G 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
II
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) [19631 Supp. 2 S.C.R. 4S9.
17'
stJPllBNll OOUllT lll!PO!l.TS
[196SJ 2 s.c.a.
· not say that the contract of sale must be express : it may also be
A
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 re-drying process; and that the material used for packing
is extrilneous marketable material used to preserve the dry tobacco
B
from contamination or loss .. Tobacco after re-drying 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 re-drying charges. The packing material is clearly
C
movable property within the meaning of goods in the Sale of
GoodS Act. The assessee had property in the said goods, for, it is
<:onceded that it purchased the material and became its owner. Jt
<:annot also be disputed that it transferred the property in tl1e packing material to the customers for price. The price for the material
was also included in the consolidated rates charged by the assessee.
0
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 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 ~ing, 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 re-drying process, we arrive at the
position that the transaction qua the packing material involve~ F
either a contract of agency, gift or sale. 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 tllat tile course of business of tile assessee indicates
that it is part of its business to sell tile material required for packing and that when a customer gives tabacco to it for re-drying, a
contract' of sale in regard to tile packing material is necessarily
implied in tile transaction.
Now, coming to the decisions cited at tile Bar, it is not necessary to consider tile English decisions in detail. It would be enough
G
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..
ANDHllA GOVT. v. GANTUR TOBACCOS (Subba Rao, /.)
175
A if a summary of the decisions is ~· The said decisions recognize four categories of contracts, namely, (I) 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 arc only ancillary i.e., paper and ink used by
a painter or an artist; (3) contract of sale of the finished productB
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 arc sold
separately: see Clay v. Yates('), Lee v. Grif/in( 2 ), and Robinson
C
v. Graver("). 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 re-drying process for consideration. It is simply a
contract of work and labour so far as the re-drying process 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
D 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 Mohan/al
iE /ogani Rice and Atta Mi/Lr v. The State of Assam('). 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 Stale of Madras("). Sales-tax imposed
on the turnover in respect of hessian and iron hoops used for
F packing the bales of pressed gin cotton was sanctioned by the
Madhya Pradesh High Court in Nimar Cotton Prers, Khandwa v.
The Sales-tax Officer, Khandwa( 4). Sales-tax on the turnover of
packing materials used for packing re-dried tobacco was held to
be lcviable by two decisions of the Andhra High Court in Krishna
&: Co., Ltd. v. State of Andhra(') and Hanumantha Rao v. The
,c State of Andhra(8 ). The Madras High Court in Varsukhi and Co.
v: Province of Madras(") held that the exemption from sales-tax
given to salt could not be extended to the gunny bags wherein the
salt was prcacrvcd. The sale price of packing material employed
for effecting sale of cotton was held to be liable to sales-tax by the
{1) 108 B.R. 461.
(2) 124 B.R. SSS.
H
(3) (193$) I JC.B. S79.
(4) [195') 4 s.r.c. 129.
(S) 11"4) S S. T.C. 3.ff.
(6) (1954) SS. T.C. 428.
(1) (1956) 7 S. T.C. 26.
(8) [t9S6] 7 S.T.C. 486.
(9) (19SI) 2 S. T.C. I.
176
SUPRBMB COURT REPORTS
(1965) 2 S.C.R.
Madras High Court in Chidambara Nadar Sons & Co., v. State A
of Madras('). 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 goodl
along with the packing material was admitted in some cases the
courts have held that there was a sale of the packing materials. I
8
cannot see any distinction OQ 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 tobacco. So too, if the gunny bag was C
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 be.
J shall now consider the decisions cited by the learned counsel
for the respondents. In Sri Dasarathi Mahapatra v. The State of
Ori.rsa ( 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
D'
of sale. The decision in United Bleachers Ltd. v. State of Madra.T( 1 )
I!!
relates to turnover of packing materials supplied by the assessee for
packing yarn and cloth given to it for bleaching. The learned
Judges of the Madras High Court held that there was no agreement
to tell 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 r
taxing authorjty 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. Vo/tas Ltd.(') 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("). These two G
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 contra'cts for sale of air-conditioning units.
(I) [1900) II S.T.C. 321.
, !3) (1960) 11 & T.C 278.
(S) [1963114 S.T.C. 861.
(2) (19S7) 8 S.T.C. 11D.
(4) (1963114 S.T.C. 446.
H
AN DH RA GOVT. y. GAN TUR TOBACCOS (Shah, /.)
177
A
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. ProB perty 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 Sales-tax authorities
have rightly assessed the turnover in regard to the packing material. The order of the High Court is wrong and is, therefore, set
c
D
E
G
H
aside.
In the result, the appeals are allowed. The appellant will have
costs here and in the Court below.
SUia, 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 ftue-cured
tobacco under controlled conditions of uniform moisture, is the·
question which falls to be determined in these appeals. The Company cond11c1s the business of "re-drying" tobacco and for that
purpose maintains a factory at Guntur in the State of Andhra
Pradc.sh. Fr~hly 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 cigarette'
tobacco leaves must undergo a process of fermentation or aging~
which gives the leaf a distinctive aroma. Tobacco is highly hygroscopie and when exposed to atmospher;c conditions it decays as a
result of ~ction by microorganisms. The leaf has to undergo fer"
menlation. 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 year;, The process of re-drying is described by the High Court
in it< judgment under appeal as follows :
'"After the grad;ng the stripping operations arc over.
the leaf is re-conditioned or re-dried. For this purpose all
the leading exporters and cigarette manufacturers use the
re-ordering or re-conditioning 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
SUPllBME COURT REPORTS
(1965] 2 S.C.R.
strong air current The significance of the re-conditioning process lies in the·fact that it re-dries 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
re-drying machine is packed in water-proof packing
material and stored for the requisite period."
A
B
c
The Company purchases "packing material" such as jute cloth,
water-proof 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 "packD
ing 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
F
the Company for maintaining uniformity of moisture by sealing
off contact with the external atmospheric conditions after tobacco
passed through re-conditioning 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 wa~
exigible. The order of the Deputy, Commercial Tax Officer was
F
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. 5/- per each bale re-dried by the Company. The High Court
G
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
fact~ to ascertain the primary purpose for which the packing material was used by the Company.
The Deputy Commercial Tax
H
ANDHRA GOVT, V. GANTUR TOBACCOS (Shah, /.)
179
A Officer stated in his order that tobacco entrusted to the Company
was returned after re-drying properly packed. He observed:
B
"The dealers regularly undertake to re-dry tobacco
entrusted to them and return the same after packing.
This regular practice of re-drying 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 re-drying charges cannot be said to exclude the value of packing material
used."
In appeal the Deputy Commissioner of Commercial Taxes observe ed that "costly packing material" was purchased and property in
them was transferred for consideration which was embedded in
the price charged for re-drying. He observed :
"Packing is different from re-drying. If re-drying is
their main business, packing is their subsidiary business.
D
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 re-drying 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,
E
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
F
v. State of Andhra Pradesh(').
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 an integral part of the process of redrying. The assumption
G 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:
"Re-drying is a process designed to create suitable
conditions for the proper maturing o( the leaf in storaH
age. The object of the re-drying process is to reduce the
moisture content i.e., to standardise the moisture content
(t} (1956] 7 S.T.C. 26.
180
. SUPREME COURT REPORTS
[1965) 2 S,C.R •
at the required level of 10 to 12 per cent. In order to
keep the moisture 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
emerges from the re-drying 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
10 to 12 per cent moisture. It is essential in such cases
that the leaf should lie 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 re-drying machine is packed in water-proof
packing material and stored for the requisite period."
The High Court accepted this description of the "re-drying" process, aad observed :
-
"The process of redrying raw tobacco brought to the
assessee 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
re-conditioning 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 redrying process."
Counsel for the State faintly submitted that t!Je Company
maintains no storage facilities and it must be inferred that tobacco
i;caled in water-proof material would be stored by t!Je owner of
the tobacco after it was returned IP him duly packed. But this
plea was never advanced at any stage of the proceedings for a!!Se.ssA
B
c
D
E
F
G
ment, and cannct be entertained at this late stage.
H
If the process of redrying or reconditioning does not end witlJ
•he emergence of tobacco out of the last reconditioning chamber
..
A
B
ANDHRA GOVT. v. GANTUR TOBACCOS (Shah, J.)
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 co:iditions, and of storage to enable fennentalion 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 re-drying and m1t
Independent of that process.
The fact that in the execution of a contract for work some
mat;:rials are used and property in the goods so used passes to the
c 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
D 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
E 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 e11:ecution of work not involving sale of goods.
It is true that in business transactions the work contracts are
F 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 oire 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
G 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
sold. and the price was liable to sales-tax. In The State of Madras
v. Gannon Dunkerley & Company (Madras) Ltd('), this Court
held that the expression "sale of goods" was, at the time when the
H Government of India Act, 1935, was enacted. a term of wellrecognised legal import in the general law relating to s~le of
__,,_.
(I) (1959] S.C.R. 379.
182
SUPREME COURT llEPORTS
(196SJ 2 S.C.R.
goods and in the legislative practice relating to that topic, and A
must be interpreted in Entry 48 in List II 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 II, Sch. VII of the Government of
India Act, 1935; a taxable sale is one which amounts to sale of B
Goods under the Sale of Goods Act, 1930. Venkatarama Aiyar, J.,
delivering the judgment of this Court in Gannon Dunker[ey's
case(') observed at p.