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PETITIONER: VASAVADATTA CEMENTS

       Vs.

RESPONDENT: STATE OF KARNATAKA & ANR.

DATE OF JUDGMENT:       18/01/1996

BENCH: AGRAWAL, S.C. (J) 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.                       J U D G M E N T S.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

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    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

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    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;

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    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

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    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

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    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 &

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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

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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

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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.