18 November 1964
Supreme Court


Case number: Appeal (civil) 2 of 1964






DATE OF JUDGMENT: 18/11/1964


CITATION:  1965 AIR 1396            1965 SCR  (2) 167  CITATOR INFO :  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)

ACT: 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.

HEADNOTE: 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 law reviewed.

JUDGMENT: 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 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 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, 1939. The question raised in the appeals mainly depends upon  whe- ther  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  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 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 S.C.R. 379,425,427.               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". 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) trans- fer 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)  [1963] 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  con- solidated 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 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  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),  Lee  v. 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. 461. (2)  124 E.R. 555. (3)  [1935]1 K.B. 579. (4)  (1953] 4 S.T.C. 129. (5)  [1954] 5 S.T.C. 354. (6)  [1954]5 S.T.C. 428. (7)  [1956]7 S.T.C. 26. (8)  [1956] 7 S.T.C. 486. (9) [1951] 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 tobacco. 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 be. 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  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(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. C. 720. (3) [1960] It S.T.C. 278.    (4) [1963] 14 S.T.C. 446. (5)[1963] 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  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 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  "are- drying" 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.  51- per  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 Pradesh(1). 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  re-               drying  process  is  to  reduce  the  moisture               content  i.e.,  to  standardise  the  moisture               content               (1)   [1956]7 S.T.C. 26.               180               at  the required level of 10 to 12  per  cent.               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  emer-               ges  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 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 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 process. 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) [1959]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   con-               sideration, 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)   [1959] 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) [1956] 7 S.T.C. 26. (2)  [1956] 7 S.T.C 486. (3) [1960] 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 completed units. 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  bricks- to  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 other party. 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 redry- (1) [1960] 11 S.T.C. 321. (2)  [1962] 13 S.T.C. 602. (3)[1963] 14 S.T.C. 446. (4)  [1964] 2 S.C.R. 879.                             185 ing  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  with  costs. One hearing fee.                            ORDER In  accordance  with  the  opinion  of  the  majority  these appeals, are dismissed with costs.  One hearing fee. 3Sup./65-13 186