http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 8  

CASE NO.: Appeal (civil)  2124 of 2007

PETITIONER: M/s Co-operative Company Ltd

RESPONDENT: Commissioner of Trade Tax, U.P

DATE OF JUDGMENT: 24/04/2007

BENCH: S.B. Sinha & Markandey Katju

JUDGMENT: J U D G M E N T  [Arising out of S.L.P. (Civil) No. 13194 of 2006]

S.B. SINHA,  J :

       Leave granted.

       Appellant is a co-operative society registered under the U.P. Co- operative Societies Act.  It carries on business of manufacture and sale of  India Made Foreign Liquor (for short, ’IMFL’)  and country liquor.   

       In respect of the assessment year 1989-90, the books of accounts  maintained by it were rejected by the Assessing Authority, inter alia, on the  premise that tax would be payable in respect of bottles being containers of   the country liquor.  An appeal was preferred thereagainst by Appellant  before the Deputy Commissioner (Appeal) and by reason of an order dated  11.01.1994, the said appeal was allowed in part holding that no sales tax  could be imposed on the bottling charges for country made liquor.  A  Second Appeal thereagainst was preferred before the Trade Tax Tribunal by  the Revenue, which was dismissed.  A Revision was preferred before the  High Court against the said judgment of the Tribunal and by reason of the  impugned judgment, the High Court opined that bottling charges are part of  the turnover and are liable to tax.

       Mr. K. Radhakrishnan, the learned Senior Counsel appearing on  behalf of Appellant, would submit that the High Court committed a serious  error in passing  the  impugned judgment insofar as it failed to take into  consideration :

1)      The assessee is not a dealer in bottles as it does not carry on any           business  therein. 2)      There being no other alternative, bottles are used as a cheap and          convenient mode of transport and sale of country made liquor. 3)      Amounts of Rs. 2.60, Rs. 2.30 and Rs. 1.57 represent only the          charges for P.P. caps, sales and filling charges, which are collected          under the head of bottling charge and, thus, the same is a payment for          the job work undertaken for packing the country made liquor. 4)      Neither there is any sale of bottles nor any price is charged therefor. 5)      There is no express or implied agreement to sell bottles. 6)      The department has not discharged its burden to prove that there was          an implied agreement to sell the bottles. 7)      The purchasers were purchasing only country made liquor and the          appellant had only been selling the same. 8)      Cost of packing material is very less and insignificant  as compared to          the cost of country made liquor and price of the goods is the same          with    or without bottles.  9)      Tax on bottling charges is sought to be recovered only from tax free          country liquor, and in the course of sale of IMFL, the sale of bottle          has not been  held to be a separate sale and, thus, double standards

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 8  

       adopted by the  department is not justified.

10)     Section 3AB inserted in the U.P. Trade Tax Act, 1948 (for short, ’the          Act’) on 01.08.1990, being clarificatory/declaratory has  retrospective          effect.   

       The learned counsel has placed  strong reliance on a decision of the  Allahabad High Court in Chhatta Sugar Company Ltd. v. Commissioner,  Trade Tax, U.P., Lucknow  [124 STC 33], in support of the said  contention.  

       Mr. Dinesh Dwivedi, the learned Senior Counsel appearing on behalf  of the respondent, on the other hand, would submit that as sale of bottles  finds place in Entry  20 in the Scheduled appended to the Act, despite the  fact that no sales tax is payable on country liquor, the assessee would be  liable therefor having regard to the definition of ’turnover’ as contained in  Section 2(i) of the Act.    

       A notification was issued on or about 07.09.1981 by the State of Uttar  Pradesh in exercise of its power conferred upon it under the proviso  appended to clause (e) of sub-section (1) of Section 3-A of the U.P. Sales  Tax Act, 1948, in terms whereof glass bottles and phials, other than hand  made glass phials is exigible to tax @ 4% have been included in Entry 20  thereof.

       Appellant herein is a dealer of country liquor.  It also carries on  business in IMFL.  Curiously,  whereas in respect of IMFL, no sales tax has  been levied on  bottles, such a levy  is sought to be made on bottles for sale  of  country liquor.  Business in country liquor is res extra commercium.  It is  governed by the provisions of the U.P. Excise Act.  Each stage of  manufacture, bottling, distribution and sale of country liquor is governed not  only by the provisions of the U.P. Excise Act and the rules framed  thereunder, but also the terms and conditions of licence.   

       It is not in dispute that Appellant charged from his customers a sum of  Rs.2.60, 2.30 and Rs.1.57 under the heading "P.P. Caps, Seal and Filling’.   The question which arose for consideration was as to whether imposition of  such charge would amount to the charge of price of the bottles as contra- distinguished from the bottling charges.

       The Assessing Officer found the same to be exigible to sales tax,  despite noticing that there existed a dispute as to whether sale of bottles was  admitted or the charges levied were bottling charges, it proceeded to hold :

"\005Thus, it is clear that for this purpose the bottles  purchased from outside the province has been used.  In  view of the aforesaid, as far as the question of tax  liability on the amount of aforesaid bottles is concerned,  as per the order of the Commissioner Excise the rates of  2.30, 2.20 and 2.10 which has been fixed for the bottles  of 750 M.L. 375 ML and 180 ML capacity is completely  for the empty bottles for the sale of country liquor.  As  far as the price of these empty bottles under these charges  is concerned, the alleged labour charges with regard to  the use of caps cork and labelling at different rates is  negligible in comparison to the price of the bottles of the  assessee and how much amount with regard to this work  is included in the said rate of 2-30, 2.20 and 2.10 has not  been mentioned in the aforesaid order of the Excise  Commissioner.  In this way, the recovery of the amount  by the assessee under the head of bottling charges is the  sale of cap and cork and labelled empty bottles in a  separate contract under the definition of Section 2-H of  the Provincial Sales Tax Act.  As far as the question of  two judgments referred by the assessee is concerned, the  facts of the aforesaid judgments were not relating to the

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 8  

bottling charges as the fact of this case.  In the case of  M/s Gannon Dunkerley & Co., the Hon’ble Supreme  Court has held that to constitute sale, the existence of two  parties, transfer of goods and passing of consideration  from purchaser to seller for this purpose is necessary.   These all facts are present in the case under consideration  and in view of the same the amount shown as the bottling  charges, is the sale of label, cap & cork used on the  bottle.  Under the case under consideration, the assessee  has shown the price of the bottles as bottling charges and  has not admitted the sale of the bottles, while amount  recovered in the form of bottling charges is the clear cut  sale of bottles\005"        

       The Appellate Authority,  on the other hand, held :

       "It is clear on the basis of the aforesaid principles  that the bottling charges have not been taken due to the  sale because in this case, the cost of the packing material  is very less than the price of the main material and the  appellant had no other business alternative that he could  sale and transport the liquor without packing materials  and there was no relaxation in price for the purchaser of  the liquor in case of absence of the packing materials.   Therefore, the sale of packing material could not be held  as a separate sale agreement and in case of sale no sales  tax could be imposed on the bottling charges.

       It is also pertinent to mention here that the sale of  foreign liquor and the sale of bottles have not been held  to be a separate sale and the same rate has been imposed  over the same.  The double standard adopted by the Tax  Assessment Officer in the same case shall not be held  justifiable."

       The  Trade Tax Tribunal opined :

       "As regards the  bottling charges, we are of the  opinion that the assessee is neither a dealer in bottles  nor does any business of bottles.  The bottles have been  used by the assessee only as a cheap and convenient  mode of transport, since there was no commercial  alternative available, the amount of 2.60, 2.30, 1.57  only represents the charge for P.P. Caps, seals, labels  and filling charges and not for bottles and this charge  has been collected under the head of bottling charges  and the same does not represent any cost of the bottles,  label etc.  It was merely a payment for the job work  undertaken for packing the liquor, since no price was  charged for bottles, there can be no sale of bottles as  was held by the Hon’ble Court in the case of State of  Madras v. Ganon Dunkerley & Co. Ltd. (1958) STC  383 S.C.

       The Hon’ble Supreme Court and the various  High Courts have repeatedly held that it is the onus of  the department to prove that an implied agreement to  sell existed and how the price has been charged for the  packing material.  The assessee was required to prove  negative.   This burden has not been discharged  successfully by the department.  Therefore, the  assessment to tax on this point was totally illegal.      The inference of alleged implied sale is baseless since  firstly no price for bottles is charged and whatever was

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 8  

the cost  of bottles, it goes into the overheads of and is  debited to the profit and loss account.  Moreover, the  packing material, which is used by the assessee is a  bare minimum necessary as the assessee has no other  commercial alternative."   

                                Differing with the findings of fact arrived at by the Appellate  Authority as also the Tribunal, the High Court, in exercise of its revisional  jurisdiction, however, in its judgment which is being impugned before us  proceeded on the basis that in view of the definition of ’turnover’ as  contained in Section 2(i) of the Act, and also the fact that the liquor could  not be sold without packing, a contract of sale of bottles  would be  presumed, holding  :

       "The  aforesaid two decisions of the Apex Court  clearly hold that in case where the goods are sold in  packed form, there is implied contract for sale of material  even if the price are separately charged for.  It has been  further held that the packing charges charged for the  packing material and for labour charges etc. falls within  the purview of "any sums charged for anything done by  the dealer in respect of the goods at the time of or before  the delivery thereof" and thus,  it is the part of turnover.   Bottling of liquor is an integral part of the process of  manufacturing.  Liquor becomes marketable only after  bottling.  Liquor can not be sold without packing.  Thus,  the packing charges are liable to be included in the  turnover and liable to tax.  I do not agree that bottling  charges is a delivery charges."     

       There is no finding by the High Court that there was an implied  condition of sale in regard to sale of  bottles.  The High Court while arriving  at the said finding did not deal with the question as to whether the charges  levied by Appellant from its customers, which admittedly stand approved by  the Excise Authority, represent bottling charges  or sale of bottles.

       A contract of sale of goods must be construed having regard to the  terms and conditions thereof.  A person purchasing a property must know as  to what he had bargained for.  The parties might not have bargained for the  containers but might have bargained only for the contents.

       In absence of any stipulation made in the contract of sale for the  purpose of levy of sales tax or otherwise, the Revenue Authorities must  arrive at a finding as to whether there had been any implied condition of  transfer, burden of proof wherefor would be on the Revenue.  Consideration  of a part of goods may be held to be a condition precedent for constituting a  sale, but therefor each case  must be judged on its own facts.

       The High Court, in our opinion, failed to take into consideration the  fact that the question as to whether there had been an implied contract for  sale of bottles and any amount has separately been charged therefor was  required to be determined.  Each case  is required to be determined on  consideration of the relevant materials placed on record by the parties.

       The Assessing Officer proceeded on the basis that the assessee  admitted to have levied charged for the bottles.  It, however, failed to make a  distinction between ’bottling charges’ and the ’price of bottles’.  When the  excise articles are sold in a bottle, it must have a label containing the  requisite informations  as envisaged under the Excise Act and the Rules  framed thereunder or the terms and conditions of licence authorising the  dealer to deal with in the commodity in question.  The Assessing Officer did  not proceed on the basis that the price of bottles form a part of the turnover  as contended by Mr. Dwivedi.  

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 8  

       The question came up for consideration before different High Courts.   We may notice only a few of them.   

       In Commissioner of Sales Tax, Madhya Pradesh, Indore v. The  Bhopal Sugar Industries Ltd. [48 STC 45], Division Bench comprising of  G.P. Singh and U.N. Bhachawat, J., (as the learned Judges then were)   opined :         "7. Sales tax on gunny bags can be imposed only  on the basis that the assessee sold the bags to the  purchasers of sugar. There was no express agreement for  sale of gunny bags. The Tribunal has stated that there  was no evidence to show even an implied agreement for  sale of gunny bags. The learned Government Advocate,  who appeared for the department, however, submitted  that the other facts stated by the Tribunal lead to the  inference that there was an implied sale of gunny bags. It  is this argument which we have to examine. The property  in the gunny bags no doubt passed to the purchasers of  sugar and the gunny bags did not become useless in the  hands of the purchasers. But from this alone it is not  possible to hold that there was an implied sale of gunny  bags. When goods packed in containers are sold, the  property in the containers no doubt is transferred to the  purchaser. But before holding that there was an implied  sale of containers, one has to exclude the possibility that  the containers were used by the dealer as a convenient  and cheap mode of transporting the goods to the  purchaser without charging any price for them. It has also  to be kept in mind that the burden of proof that there was  an implied sale of packing material or container is on the  department and the assessee is not required to prove the  negative. Viewed on these principles, in our opinion, the  facts do not warrant the conclusion of implied sale of  gunny bags. It is not practicable for a manufacturer of  sugar like the assessee to sell sugar in loose and the  assessee has to use some form of packing material for  transporting the sugar sold by it to the purchaser. Indeed,  the mode of packing sugar in gunny bags was prescribed  under the Control Order which was binding on the  assessee. The assessee did not charge any separate price  for gunny bags. The price of 100 kgs. of sugar packed in  gunny bag was fixed under the Control Order and it is  this price which the assessee charged from the  purchasers. May be, that in fixing the price of 100 kgs.  sugar packed in gunny bag, the Government took into  account the price of the packing material just as it must  have taken into account manufacturing cost and other  incidental charges and expenses of the producer. But  from this alone, it cannot be said that the assessee  charged the price of gunny bags from the purchasers or  that there was an implied sale of gunny bags to the  purchasers. The Sugar Control Order authorises the  Government to fix the ex factory price of sugar and not  the price of gunny bags. The price fixed by the Control  Order and charged by the assessee was the price of sugar.  The cost of gunny bag is insignificant as compared to the  cost of sugar packed in it. Having regard to all these  circumstances, in our opinion, it is not possible to infer  that there was any implied sale of gunny bags."

       Yet again in  Commissioner of Sales Tax, M.P. v. Swadeshi Cotton  and Flour Mills Ltd. [ 46 STC 138], Sohani, J.,  (as His Lordship then was)  stated the law thus :

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 6 of 8  

       "4. Having heard the learned counsel for the  parties, we have come to the conclusion that this  reference must be answered in favour of the assessee and  against the department. As regards the grievance that the  Board had not given any clear findings, all that we can  say is that no such grievance can be made in view of the  question referred to us. That question is based on the  assumption that there was material before the Board for  giving a finding and that finding was accordingly given  by the Board that there was no implied sale of the  packing materials. In point of fact, the question referred  to this Court is a question of fact. The burden was on the  department to prove that there was an implied sale of the  packing materials. In the instant case, it was not disputed  that there was no express agreement for the sale of the  packing materials. The assessing authorities had not  found that price was separately charged for the packing  material. The contention advanced on behalf of the  assessee before the Board that the price charged by the  assessee for the cloth was either on the basis of meterage  or on the basis of weightage was impliedly upheld by the  learned Member as he relied upon the decision reported  in Binod Mills Co. Ltd. v. Commissioner of Sales Tax  1971 M.P.L.J. 1009, where a similar finding had been  given. It must, therefore, be held that the Board had  found that the burden to prove that there was sale of the  packing material was not discharged by the department.  In our opinion, therefore, the Board rightly relied upon  the decision reported in Binod Mills Co. Ltd. v.  Commissioner of Sales Tax 1971 M.P.L.J. 1009 for  coming to the conclusion that there was no implied sale  by the assessee of the packing materials."

       This Court in Hyderabad Deccan Cigarette Factory v. The State of  Andhra Pradesh [17 STC 624],  observed :

       "This passage indicates that the Tribunal  rejected  the contention on the ground that the value of the packing  materials must have been taken into consideration in  fixing the price of the cigarettes.  But that reasoning does  not answer the contention that howsoever the price was  fixed, the cigarettes  were sold, whether packed in  cardboards or wooden boxes, in or outside the State of  Andhra Pradesh, at the same rate.  The High Court also  held that though there was no express contract to sell the  packing materials and the packets separately, such a  contract was implicit in the contract for the sale of the  goods.  This implied agreement was based on the fact   that the packet cigarettes were sold at a price and on the  surmise that in fixing the price the assessee  might have  taken into consideration the cost of all the materials used  in the packing.  The High Court also ignored the  aforesaid contention of the assessee.  It also did not  consider the relevant material to come to the conclusion  that the assessee agreed to sell the packing materials to  the customers.

       A perusal of the orders of the various authorities  and the High Court shows that a simple question of fact  has been sidetracked by copious citations.  Whether there  was an agreement to sell the packing materials is a pure  question of fact and that question cannot be decided on  fictions or surmises. That is what has happened in this  case.  The Commercial Tax Officer invoked a fiction; the  Assistant Commissioner of Commercial Taxes relied

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 7 of 8  

upon the doctrine of "finished product", the Appellate  Tribunal relied upon surmises; and the High Court on the  principle of implied agreement\005"  

       Definition of ’turnover’, in our opinion, for the purpose of  determining the question,  is not very relevant.  Interpretation clause must be  construed having regard to the purport and object of the Act it seeks to  achieve.  The term ’turnover’ may contain several ingredients.  One of the  ingredients of the said term, however, cannot be taken in isolation for the  purpose of imposition of levy.  Imposition of tax would be on the total  turnover, assuming that the prices of the bottles were to be included in the  price of the country liquor, provided one is leviable.  If an exemption has  been granted, it  would be on sale of the articles in a deliverable  form.   There exists a serious dispute as to whether for the purpose of levying sales  tax, a part of the commodity which is sold as a composite whole would come  within the purview of the Act when sale of two different commodities can be  bifurcated for levy of tax.

       Containers of the principal commodity which is the subject matter of  the contract of sale may have to be taken into consideration for the purpose  of arriving at the total turnover, but even for that purpose there has to be an  element of ad idem of mind between the purchaser and seller.  If by reason  of express contract or implied contract, the containers are also sold,  indisputably the same would be exigible to tax, as has been held in  Commissioner of Taxes Assam v. Prabhat Marketing Co. Ltd., Gauhati   [AIR 1967 SC 602],  but it is difficult to accept the contention of Mr.  Dwivedi that even in absence of such a contract, sales tax would be leviable.   Reliance  has been placed by Mr. Dwivedi on Jamana Four and Oil Mills (P)  Ltd. v. State of Bihar [(1987) 3 SCC 404], wherein this Court was not  dealing with a situation of the present nature.  It was held :         "3. The dealer filed a revision before the Tribunal  and contended that the demand of Sales Tax payable at  different rates on the calculated turnover of gunny bags  was not at all warranted as no price had been charged for  the containers. The Tribunal found:  (1) The dealer transferred the property in the gunny bags,  the packing material, to the purchasers for price. (2) The price of the gunny bags was included in the  consolidated rates of price charged by the dealer. (3) There was an implied agreement for the sale of gunny  bags between the dealer and the different purchasers to  whom the wheat products were supplied. (4) The transfer of gunny bags was impliedly covered by  the contract of sale with regard to the wheat products. On these findings the Tribunal held:  We hold that the learned lower courts were justified in  levying tax at a different rate on the turnover on account  of sale of gunny bags in which the wheat products were  sold. It further found:  The learned Deputy Commissioner has given a direction  for determination of the turnover on account of sale of  gunny bags. On being asked the applicant accepted that  the accounts maintained by him would reveal the exact  number of gunny bags used in the transaction of sale  under consideration as also the price of the same. Hence  we direct in modification of the orders passed by the  learned Deputy Commissioner in this behalf that the  learned Assessing Officer should ascertain from the  accounts, the turnover on account of sale of gunny bags  as container of wheat products during the period under  consideration and assess tax thereon at the prescribed rate  of 4=per cent The balance turnover shall be assessed at 2  per cent."  

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 8 of 8  

       Reliance has also been placed by Mr. Dwivedi on M/s Chhatta Sugar  Company Ltd., Mathura v. Commissioner of Sales Tax [1991 UPTC 341],  wherein a learned Single Judge of the Allahabad High Court, without any  discussion, opined that the containers would also be taxed.   

       Inclusion of bottles as a separate item in the notification dated  07.09.1981, in our opinion, is not relevant.  Appellant is not a dealer of  bottles.  Had it been a dealer of the bottles, he might have been exigible to  sales tax in terms of the said provision.

       Thus, without adverting to the question as to whether there had been  an implied sale, Entry 20 will have no role to play.

       We may also consider the matter from another angle.  A tax may be  leviable at different rates.  Definition of ’turnover’ having undergone an  amendment and being expansive in nature, would it be permissible to  segregate it to make different commodities for the purpose of imposition of  tax at a higher rate, would, in our opinion, merit consideration.  We are not  oblivious of the fact that if the sale is in relation to two different  commodities, it may be permissible to levy tax at different rates, but not  when the definition of ’turnover’ includes a wide range of subjects including  the package.  Only for the purpose, the concept of implied contract of sale  would assume significance.  

       We, however, are not impressed with the arguments of Mr.  Radhakrishnan that Section 3AB of the Act introduced in the statute by  reason of the U.P. Trade Tax Tax (Amendment) Act, 1991 is clarificatory in  nature.  The said amendment came into force with effect from 25.04.1990.   The assessment year, as noticed hereinbefore, is 01.04.1989 to 31.03.1990.   The Act having been brought into force from a particular date, no  retrospective operation thereof can be contemplated prior thereto.   The said  provision furthermore contains a substantive provision which is itself a  pointer to the fact that for the earlier period packing materials would not be  exempted merely because main commodity is exempted from tax, but albeit  subject to the condition that there was an agreement to sell in respect  thereof.  The amendment sought to deal with a matter which created some  problem in implementation of the Act.   

       We, therefore, are of the opinion that the matter requires  reconsideration by the High Court.  The High Court must on the basis of the  materials available on records arrive at a finding as to whether there existed  any implied contract for sale and/or whether in effect and substance keeping  in view the fixation of price of different materials by the excise authorities in  terms of the U.P. Excise Act and/or rules framed thereunder any separate  charges have been levied for prices of the bottles separately or not.

       For the reasons aforementioned, the impugned judgment cannot be  sustained, which is set aside accordingly.  The  appeal is allowed.  The  matter is remitted to the High Court for its consideration afresh.  No costs.