PETITIONER:
VASAVADATTA CEMENTS
Vs.
RESPONDENT:
STATE OF KARNATAKA & ANR.
DATE OF JUDGMENT: 18/01/1996
BENCH:
AGRAWAL, S.C. (J)
G.B. PATTANAIK (J)
CITATION:
1996 AIR 1035 1996 SCC (2) 88
JT 1996 (1) 508 1996 SCALE (1)483
ACT
HEADNOTE
JUDGMENT
WITH
CIVIL APPEAL NO. 2085 OF 1996
[Arising out of SLP(C) No. 17062 of 1993] Rajashree Cement V. State of Karnataka & Anr.
JUDGMENTS.C. AGRAWAL, J. :
Special leave granted in both the special leave petitions.
Both these appeals are directed against the judgment of the Karnataka High Court dated December 7, 1990 in Writ Petitions (Writ Petitions Nos. 20736 and 21195 of 1986) filed by the appellants wherein they had assailed the constitutional validity of Section 5(3-D) of the Karnataka Sales Tax Act, 1957 (hereinafter referred to as ’the Act’). By the impugned orders the said Writ Petitions of the appellants have been dismissed by the High Court on the ground that the question raised is covered by the decision in Ranganatha Associates v. State of Karnataka, ILR 1990 Kar. 82.
The appellants are manufactures of cement the price of which is controlled by the Cement Control Order, 1967 issued by the Central Government in exercise of the powers conferred by Section 18-G and Section 25 of the Industries (Development and Regulation) Act, 1951. The appellants supply the cement packed either in gunny bags or in plastic bags. They also sell the same loose to bulk consumers. Till April 1, 1986 the appellants were enjoying deduction in respect of packing charges from the taxable turn-over. After the introduction of sub-section (3-D) in Section 5 of the Act the packing material was brought within the purview of the Act and made exigible to tax. Section 5(3-D) of the Act provides as under :
"Section 5. Levy of Tax on Sale or
Purchase of Goods.
(3-D). Notwithstanding anything
contained in the Act where goods sold or
purchased are contained in containers or
are packed in any packing materials
liable to tax under this Act, the rate
of tax and the point of levy applicable
to turn-over or such containers or
packing materials, as the case may be,
shall whether the containers or the
packing materials have already been
subjected to tax under this Act or not
or whether the price of the containers
or of the packing materials is charged
separately or not, be the same as those
applicable to goods contained or packed
:
Provided that no tax under this
sub-section shall be leviable if the
sale or purchase of goods contained in
such containers or packed in such
packing materials is exempt from tax
under this Act." The said provision in Section 5(3-D) is comparable to similar provision contained in Section 6-C of the Andhra Pradesh General Sales Tax Act, 1957, which provides as follows :
"Section 6-C. Notwithstanding anything
in sections 5 and 6-A, where goods
packed in any materials are sold or
purchased, the materials in which the
goods are so packed shall be deemed to
have been sold or purchased along with
the goods and the tax shall be leviable
on such sale or purchase of the
materials at the rate of tax, if any, as
applicable to the sale, or, as the case
may be, purchase of goods themselves." In Raj Sheel & Ors. v. State of Andhra Pradesh & Ors., (1989) 74 STC 379, this Court has upheld the constitutional validity of the said provisions contained in Section 6-C of the Andhra Pradesh General Sales Tax Act, 1957, and, in that context, this Court has laid down :
"It is commonly accepted that a
transaction of sale may consist of a
sale of the product and a separate sale
of the container housing the product
with respective sale considerations for
the product and the container
separately; or it may consist of a sale
of the product and a sale of the
container but both sales being conceived
of as integrated components of a single
sale transaction; or, what may yet be a
third case, it may consist of a sale of
the product with the transfer of the
container without any sale consideration
therefor. The question in every case
will be a question of fact as to what
are the nature and ingredients of the
sale. It is not right in law to pick on
one ingredient only to the exclusion of
the others and deduce from it the
character of the transaction. For
example, the circumstance that the price
of the product and the price of the
container are shown separately may be
evidence that two separate transactions
are envisaged, but that circumstance
alone cannot be conclusive of the true
character of the transaction. It is not
unknown that traders may, for the
advantage of their trade, show what is
essentially a single sale transaction of
product and container, or a transaction
of a sale of the product only with no
consideration for transfer of the
container, as divisible into two
separate transactions, one of sale of
the product, and the other a sale of the
container, with a distinct price shown
against each. Similarly where pursuant
to a transaction where there is no sale
of the container and its return is
contemplated, and in the event of its
not being returned the security is
liable to forfeiture. Alternatively, it
may be a case where the container is
sold and the deposit represents the
consideration for the sale, and in the
event of the container being returned to
the dealer the deposit is returned by
way of consideration for the resale. In
every case, the assessing authority is
obliged to ascertain the true nature and
character of the transaction upon a
consideration of all the facts and
circumstances pertaining to the
transaction. That the problem almost
always requires factual investigation
into the nature and ingredients of the
transaction has been repeatedly
emphasised by this Court." [pp. 384-85] After referring to the decision of this Court in Jamana Flour & Oil mill (P) Ltd v. State of Bihar, 1987 (2) SCR 1046, this Court has observed :-
"It is, therefore, perfectly plain that
the issue as to whether the packing
material has been sold or merely
transferred without consideration
depends on the contract between the
parties. The fact that the packing is of
insignificant value in relation to the
value of the contents may imply that
there was no intention to sell the
packing, but where any packing material
is of significant value it may imply an
intention to sell the packing material.
In a case where the packing material is
an independent commodity and the packing
material as well as the contents are
sold independently, the packing material
is liable to tax on its own footing.
Whether a transaction for sale of
packing material is an independent
transaction will depend upon several
factors, some of them being :
1. The packing material is a commodity
having its own identity and is
separately classified in the Schedule;
2. There is no change, chemical or
physical, in the packing either at the
time of packing or at the time of using
the content;
3. The packing is capable of being
reused after the contents have been
consumed;
4. The packing is used for
convenience or transport and the
quantity of the goods as such is not
dependent on packing;
5. The mere fact that the
consideration for the packing is merged
with the consideration for the product
would not make the sale of packing an
integrated part of the sale of the
product." [p. 387]
"Turning to section 6-C of the Act,
it seems to envisage a case where it
is the goods which are sold and there is
actual sale of the packing material. The
section provides by legal fiction that
the packing material shall be deemed to
have been sold along with the goods. In
other words, although there is no sale
of the packing material, it will be
deemed that there is such a sale. In
that event, the section declares, the
tax will be leviable on such deemed sale
of the packing material at the rate of
tax applicable to the sale of the goods
themselves. It is difficult to
comprehend the need for such a
provision. It can at best be regarded a
provision by way of clarification of an
existing legal situation. If the
transaction is one of sale of the goods
only, clearly all that can be taxed in
fact is the sale of the goods, and the
rate to be applied must be the rate as
in the case of such goods. It may be
that the price of the goods is
determined upon a consideration of
several components, including the value
of the packing material, but none the
less the price is the price of the
goods. It is not open to anyone to say
that the value of the different
components which have entered into a
determination of the price of the goods
should be analysed and separated, in
order that different rates of tax should
be applied according to the character of
the component (for example, packing
material). What section 6-C intends to
lay down is that even upon such analysis
the rate of tax to be applied to the
component will be the rate applied to
the goods themselves. And that is for
the simple reason that it is the price
of the goods alone which constitutes the
transaction between the dealer and the
purchaser. No matter what may be the
component which enters into such price,
the parties understand between them that
the purchaser is paying the price of the
goods. Section 6-C merely clarifies and
explains that the components which have
entered into determining the price of
the goods cannot be treated separately
from the goods themselves, and that no
account was in fact taken of the packing
material when the transaction took
place, and that if such account must be
taken then the same rate must be applied
to the packing material as is applicable
to the goods themselves. We find it
difficult to accept the contention of
the appellants that a rate applicable to
the packing material in the Schedule
should be applied to the sale of such
packing material in a case under section
6-C, when in fact there was no such sale
of packing material and it is only by
legal fiction, and for a limited
purpose, that such sale can be
contemplated. In the circumstances, no
question arises of section 6-C being
constitutionally discriminatory, and
therefore invalid." [p. 388] In Ranganatha Associates v. State of Karnataka (supra) a Division Bench of the Karnataka High Court, after taking note of the decision of this Court in Raj Sheel & Ors.
Material (or of the container). This is
not an irrelevant principle at all, if
one considers the practical aspect of a
trading transaction. Here, under Section
5(3-D) the Legislature has thought it
fit and convenient to treat the sale of
goods contained in a container as an
integrated, single transaction of sale
of the goods; this levy makes it simpler
for the assessee to maintain his
accounts, and convenient for the revenue
to levy and collect the tax; it makes it
unnecessary to analyse the components of
a particular sale and enter upon
investigation to find out the real price
(i.e., genuine price) at which the
packing material (or the container) is
purported to have been sold, and
separate it from the computation of the
turnover regarding the particular goods
(which was packed in the packing
materials or housed in the container).
Simplicity of procedure and
convenience of the tax collection are
not irrelevant while considering the
validity of a particular levy. Section
5(3-D) on the fact of it elevates the
status of the container (or the packing
material) to that of the goods dressed
in it. Such a container/packing material
is distinct from, another
container/packing material which has not
housed any goods." [pp. 852-53] The Karnataka High Court has also referred to the decision of this Court in Union of India v. Bombay Tyre International Ltd., 1984 (1) SCR 347, and has said :
"A seller who sells the bottles only and
the purchaser who purchases them as
such, are not concerned with anything
else, except the marketability of the
bottles. But the person who sells liquor
contained in a bottle, and a person who
purchases such a liquor, is concerned
with the liquor and its marketability;
the payment of a price for the bottle in
such a situation is part of the bargain
for the sale and purchase of the liquor.
In other words, the sale and purchase of
the bottles, here, is incidental to and
integrated with the sale and purchase of
the liquor. This makes all the
difference and for the purpose of the
levy of sales tax, this distinction
between the two types of sales which
classify the dealers differently i.e., a
trader who sells or purchases only
bottles and another dealer who sells or
purchases the bottles, because it
contains the liquor, cannot be held as
an arbitrary classification, bearing no
nexus to the object of the Act. Such a
classification, also, makes the levy and
collection simpler reducing the area of
disputes to the minimum; it also,
prevents the dealers from resorting to
tax evading mechanisation, while dealing
in goods which are sold in containers or
in packed condition by showing
unrealistic prices for the container (or
the packing materials) and the goods, so
as to reduce the sales tax payable in a
given case, i.e., if the sale of the
goods attracts a higher rate of
taxation, then, the dealers are likely
to sell the goods for a lesser price and
offset the reduction by increasing the
sale price of the container. Section
5(3-D), thus, prevents the dealers from
being tempted to resort to such a scheme
of tax evasion. Taxation operates in the
sphere of realities and a law levying a
tax normally takes note of such
realities. A hypothetical equality, is
not the basis of Article 14 of the
Constitution. Whenever, a distinction
exists in reality, and such a
distinction has a reasonable nexus with
the object of the law, the distinction
made by the law cannot be nullified as
violative of Article 14 of the
Constitution; every distinction made, is
not an act of discrimination; a
reasonable distinction is the product of
a sound discretion." Shri Harish N. Salve, the learned senior counsel appearing for the appellants, has not assailed the constitutional validity of the provisions of Section 5(3-D) of the Act. He has confined his submissions to the interpretation of the said provisions. The learned counsel has submitted that in Ranganatha Associates v. State of Karnataka (supra) the High Court was in error in departing from the law laid down by this Court in Raj Sheel & Ors. v. State of Andhra Pradesh & Ors. (supra). Shri Salve has urged that in view of the decision in Raj Sheel & Ors. v. State of Andhra Pradesh & Ors. (supra) in respect of provisions of Section 6-C of the Andhra Pradesh General Sales Tax Act, 1957, which are similar to the provisions contained in Section 5(3-D) of the Act, the question as to the liability for sales tax would depend on the actual ingredients of the contract and intention of the parties which has to be determined in each case.
Shri T.L. Vishwanath Iyer, the learned senior counsel appearing for the State, has however, supported the decision of the Karnataka High Court and has placed reliance on the decisions of this Court in Commissioner of Sales Tax, U.P. v. Raj Bharat Das & Bros., 1988 Vol. 71 STC 277, and Ramco Cement Distribution Co. Pvt. Ltd. v. State of Tamil Nadu & Ors., 1993 Vol. 88 STC 151.
Having carefully considered the decision of the Karnataka High Court in Ranganatha Associates v. State of Karnataka (supra), we are of the view that the High Court was in error in construing the provisions of Section 5(3-D) to hold that the legislature has thought it fit and convenient to treat the sale of goods contained in a container as an integrated, single transaction of sale of the goods and that it makes it unnecessary to analyse the components of a particular sale and enter upon investigation to find out the real price at which the packing material is purported to have been sold, and separate it from the computation of the turnover regarding the particular goods which was packed in the packing materials or housed in the container. The reasoning of the Karnataka High Court is similar to that of the Andhra Pradesh High Court in Raj Sheel v. The State of Andhra Pradesh, (1987) 64 STC 398. In that case the Andhra Pradesh High Court was dealing with cases of manufacturers of or dealers in beer as well as manufacturers of or dealers in cement who had challenged the constitutional validity of Section 6-C of the Andhra Pradesh General Sales Tax Act, 1957 on the ground that it was violative of Article 14 of the Constitution. While considering the constitutional validity of Section 6-C, the Andhra Pradesh High Court had examined the nature and characteristics of the transaction involving the sale of cement packed in the materials which are generally used for packing purposes for the sale of these goods in the market and had observed that in the sale of those goods the container are necessary concomitants and the transfer of property in the containers in favour of the purchaser of the contents is incidental or unavoidable and that such a sale transaction would be a composite and integrated sale of the containers and the contents and one is not divisible from the other and the transaction is understood by the seller and the purchaser as the sale of the contents in those containers. Having regard to the nature of the such transactions and the goods sold, the Andhra Pradesh High Court held that Section 6-C did not bring about any change in the legal position and that it was incorporated in the Andhra Pradesh General Sales Tax Act to obviate the possibility of different assessing authorities taking different views on the rate of tax exigible on the turn over and relating to packing material. The Andhra Pradesh High Court rejected the contention that by virtue of section 6-C the rate of tax applicable to the containers will vary according to the rate applicable to the contents and this would lead to arbitrariness and discrimination inasmuch as the same kind of containers would be subject to different rates of tax. The High Court held that when the content was sold with the container, both the dealer as well as the purchaser treated the transaction as the one involving the sale of the merchandise (the contents) only and the sale of the container, if any, would get merged in the sale of the content itself and thus it is always treated as a single transaction of sale of both the container and the content and the container whose identity pales into insignificance is identified with the content itself and the value of the container forms part of the consideration paid by the purchaser and it is one of the components of the sale price like the other components such as freight charges, excise duty, sales tax, etc.
This Court in Raj Sheel & Ors. v. State of Andhra Pradesh & Ors. (supra), however, did not approve the said view of the Andhra Pradesh High Court and, while allowing the appeals, observed :
"In the appeals before us, we find that
the High Court has proceeded on the
assumption that the transactions are
covered by trade practice and having
regard to the nature of the goods it has
inferred that what is charged is the
price of the bottled beer or of cement
packed in gunny bags, and reference has
also been made to the excise law and the
Cement Control Order requiring that the
liquor or the cement, as the case may
be, must be sold in bottles or in gunny
bags respectively. We are constrained to
observe that no attempt has been made by
the tax authorities to ascertain the
facts of each case and to determine what
were the actual ingredients of the
contract and the intention of the
parties. Assumptions have been made when
what was required was a detailed
investigation into the facts. We have
indicated earlier the several
possibilities which are open in cases of
this kind, and how the ultimate
conclusion can be vitally affected by
the tests to be applied. Because of the
lack of adequate and clear factual
material, the High Court also was
compelled to proceed on the basis of
generalised statements and broad
assumptions. We are unable, in the
circumstances, to hold that the cases
can be regarded as disposed of finally.
It is regrettable but the cases must go
back for proper findings on facts to be
ascertained on fuller investigation."
[pp. 388-89] The said observations are equally applicable to the present case involving construction of Section 5(3-D) of the Act. The liability for sale tax on the gunny bags used for packing the cement sold by the appellants has to be considered having regard to the facts of each case after determining what are the ingredients of the contract and the intention of the parties in accordance with the decision of this Court in Raj Sheel case (supra).
In Commissioner of Sales tax, U.P. v. Raj Bharat Das & Bros. (supra) and Ramco Cement Distribution Co.Pvt.Ltd. v. State of Tamil Nadu & Ors. (supra) there were findings of fact recorded by the authorities under the sale tax enactments and the decision was given in the light of the facts found. The said decisions have, therefore, no bearing on the matter in issue.
The appeals are, therefore, allowed and the Writ Petitions filed by the appellants are disposed of with the direction that the liability of the appellants for sales tax under Section 5(3-D) on the gunny bags/plastic bags in which the cement manufactured by the appellants is packed for sale would have to be determined after investigation into the facts and determining what were the ingredients of the contract and the intention of the parties. The impugned order of the High Court dated December 7, 1990 would stand modified accordingly. But, in the circumstance, there is no order as to costs.