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Supreme Court on Sales Tax on Packing*
by Sunil Gupta

Cite as : (2003) 4 SCC (Jour) 73

The question

The question whether there should be levy of sales tax on packing or containers in which the main goods are sold and, if yes, at what rate, has troubled the minds of judges, lawyers and assessing authorities for a long time. Despite several judgments of both the High Courts and the Supreme Court and legislative attempts to bring in clarity, the question remains unresolved.

Whenever there has been exemption of tax on the sale of the main goods, the assessee's endeavour has been to treat the entire turnover as one and indivisible and exempt in its totality from tax whereas the Government's effort has been to break the turnover into two, namely, the turnover in respect of the main goods enjoying exemption from tax, and a separate turnover in respect of packing exigible to tax at whatever rate is applicable to the sale of packing materials as such.

Also there have been occasions when the sale of the main goods has been subject to a higher rate of tax whereas the sale of packing has been subject to a lesser rate of tax. On such occasions, the assessee has been willing to break the turnover into two, namely, the turnover in respect of the main goods subject to a higher rate of tax and a separate turnover in respect of packing subject to a lower rate of tax whereas the Department has been keen to hold the entire turnover to be one and indivisible and liable to tax at only the higher rate of tax.

The problem addressed again and again in the courts ultimately has been as to what are the true tests to be applied to the transactions in respect of packing for determining whether or not there has been a sale—i.e. an implied sale—of packing and, if so, whether it has been a sale separate and distinct from the sale of the main goods so as to be exigible to a rate of tax separate and different from the rate applicable to that sale.

The leading judgment

As early as in 1966, the Supreme Court laid down the true test in Hyderabad Deccan Cigarette Factory v. State of A.P.1 In that case, the sale of the main goods, cigarettes, was exempt from sales tax. However, the Government sought to distinguish the transaction in respect of the packing materials viz. cardboard and wooden cases, from that sale and levied sales tax on a notional part of the total consideration or turnover taken to have been received by the assessee in respect of implied or deemed sales of such materials. For this the Government argued that the assessee had not produced any evidence from its accounts and records to show that it had not included the value and price of the packing in its total cost or price of the main goods i.e. the cigarettes. The Supreme Court, however, adopting the test of the three ingredients of an actual "sale of goods" propounded in State of Madras v. Gannon Dunkerley & Co.2, SCR at pp. 397-98 rejected the said argument and held: (STC pp. 628-29)

"In the instant case, it is not disputed that there were no express contracts of sale of the packing materials between the assessee and its customers. On the facts, could such contracts be inferred? The authority concerned should ask and answer the question whether the parties in the instant case, having regard to the circumstances of the case, intended to sell or buy the packing materials, or whether the subject-matter of the contracts of sale was only the cigarettes and that the packing materials did not form part of the bargain at all, but were used by the seller as a convenient and cheap vehicle of transport. He may also have to consider the question whether, when a trader in cigarettes sold cigarettes priced at a particular figure for a specified number and handed them over to a customer in a cheap cardboard container of insignificant value, he intended to sell the cardboard container and the customer intended to buy the same? It is not possible to state as a proposition of law that whenever particular goods were sold in a container the parties did not intend to sell and buy the container also. Many cases may be visualized where the container is comparatively of high value and sometimes even higher than that contained in it. Scent or whisky may be sold in costly containers. Even cigarettes may be sold in silver or gold caskets. It may be that in such cases the agreement to pay an extra price for the container may be more readily implied. In the present case, if we may say so with respect, all the authorities, including the High Court, dealt with the question as a question of law without considering the relevant factors which would sustain or negative any such agreement." (emphasis supplied)

Casting the burden for establishing the transaction in respect of packing as a separate sale on the Government but agreeing that the position in that regard evinced by the assessee in his accounts may well be one of the many factors for deciding the issue, the Court further said: (STC pp. 630-31)

"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 upon the doctrine of 'finished product', the Appellate Tribunal relied upon surmises; and the High Court, on the principle of implied agreement. But, none has tackled the real question. The burden lies upon the Commercial Tax Officer to prove that a turnover is liable to tax. No doubt he can ask the assessee to produce the relevant material; and if he does not produce the same, he may draw adverse inference against him. But, he must decide the crucial question whether the packing materials were subject of the agreement of sale, express or implied. To ascertain the said fact he can rely upon oral statements, accounts and other documents, personal enquiry and other relevant circumstances such as the nature and the purpose of the packing materials used.

* * *

We have, therefore, no option but to remand the case to the High Court to consider the question whether, having regard to the facts of the case and the observations made by us, there was an agreement, express or implied, between the assessee and its customers to sell the packing materials or whether the packing materials, which were comparatively of insignificant value, were used only as a convenient vehicle to put the purchasers in possession of the cigarettes sold." (emphasis supplied)

Thus, the question was held by the Court to be not one of law but one of fact and the true test was expressed as being one of determining the intention of the assessee. If the packing is, keeping in mind its nature and purpose, merely a necessary and convenient means of delivery or transportation of the main goods without being itself of unduly high or extravagant value, then it would not be right for the court to conclude that the assessee intended to sell the packing as such or that the sale of the packing formed part of the bargain alongside the sale of the main goods and that there was an implied sale of packing on that ground. Conversely, if the packing is unnecessary from the point of view of the main goods or of an unduly lavish nature or significant value, the agreement to pay an extra price for the packing and its implied sale would be more readily concluded.

This dictum was followed, applied and reiterated by the Supreme Court in quite a few cases, for instance, M.A. Razack & Co. v. State of Madras3, Commr. of Taxes v. Prabhat Marketing Co. Ltd.4 and Jamana Flour & Oil Mill (P) Ltd. v. State of Bihar5

The application of the intention test presented the controversy in some other cases in a slightly different context. For instance, in United Breweries Ltd. v. State of A.P.6 the assessee was able to controvert the sale theory propounded by the Government and prove from its own positive evidence and materials that its intention as regards the packing viz. bottles containing beer, was, far from being one of sale, one of bailment. But in another similar case Kalyani Breweries Ltd. v. State of W.B.7 the assessee failed to do so and the Government's case was upheld.

A path-breaking judgment

In some States, the State Legislatures effected amendments in the sales tax statutes, perhaps, to overcome the Hyderabad Deccan1 dictum laid down by the Supreme Court. These amendments were not always of the same kind. However, they succeeded in giving rise to further controversies before the Supreme Court.

In Raj Sheel v. State of A.P.8 the Supreme Court reiterated the Hyderabad Deccan1 test as against an apparently hostile legislative amendment in the sales tax statute concerned. The assessees who sold beer in bottles and cement in gunny bags were keen to establish that they were making sales of their packing materials and containers separately from the sale of the main goods and that the former sales should be subject to a lesser rate of tax as opposed to the higher rate of tax which was meant only for sales of the main goods. For this the assessees resorted to a display of their accounts and invoicing practices wherein the main goods and the packing items were shown to have been subject-matters of two different sales. The Government, however, contended that the packing items in question were so necessary for the main goods contained therein that the two, namely, the packing items and the main goods, could not but be treated as a single, composite and integrated sale for one compact consideration subject in its totality to the higher rate of tax. For this, the Government placed reliance on a legislative amendment in the statute viz. Section 6-C of the A.P. General Sales Tax Act, which read as follows:

"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."

The Supreme Court, however, rejected both the approach of the Government as well as that of the assessee. Reminding the parties of the Hyderabad Deccan1 rule, the Court held: (SCC pp. 266-67, para 7)

"The question in every case will be a question of fact as to what are the nature and ingredients of the sale. It is not right in law to pick on one ingredient only to the exclusion of the others and deduce from it the character of the transaction. For example, the circumstance that the price of the product and the price of the container are shown separately may be evidence that two separate transactions are envisaged, but that circumstance alone cannot be conclusive of the true character of the transaction. It is not unknown that traders may, for the advantage of their trade, show what is essentially a single sale transaction of product and container, or a transaction of a sale of the product only with no consideration for the 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 a deposit is made by the purchaser with the dealer, the deposit may be 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 emphasized by this Court." (emphasis supplied)

Elaborating further that no one circumstance or consideration is finally determinative of the question of fact, the Court held as follows: (SCC p. 269, para 9)

"9. It is, therefore, perfectly plain that the issue as to whether the packing material has been sold or merely transferred without consideration depends on the contract between the parties. The fact that the packing is of insignificant value in relation to the value of the contents may imply that there was no intention to sell the packing, but where any packing material is of significant value it may imply an intention to sell the packing material. In a case where the packing material is an independent commodity and the packing material as well as the contents are sold independently, the packing material is liable to tax on its own footing. Whether a transaction for sale of packing material is an independent transaction will depend upon several factors, some of them being:

1. The packing material is a commodity having its own identity and is separately classified in the Schedule;

2. There is no change, chemical or physical, in the packing either at the time of packing or at the time of using the content;

3. The packing is capable of being reused after the contents have been consumed;

4. The packing is used for convenience of 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."

(emphasis supplied)

The challenge by the assessee to the constitutional validity of Section 6-C was negatived by the Court as follows: (SCC pp. 270-71, para 10)

"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. ... What Section 6-C intends to lay down is that even upon such analysis the rate of tax to be applied to the component will be the rate applied to the goods themselves. And that is for the simple reason that it is the price of the goods alone which constitutes the transaction between the dealer and the purchaser. No matter what may be the component which enters into such price, the parties understand between them that the purchaser is paying the price of the goods. Section 6-C merely clarifies and explains that the components which have entered into determining the price of the goods cannot be treated separately from the goods themselves, and that no account was in fact taken of the packing material when the transaction took place, and that if such account must be taken then the same rate must be applied to the packing material as is applicable to the goods themselves. We find it difficult to accept the contention of the appellants that a rate applicable to the packing material in the Schedule should be applied to the sale of such packing material in a case under Section 6-C, when in fact there was no such sale of packing material and it is only by legal fiction, and for a limited purpose, that such sale can be contemplated. In the circumstances, no question arises of Section 6-C being constitutionally discriminatory, and therefore invalid."

(emphasis supplied)

The sum and substance of the ruling in Raj Sheel8 is that only if a positive finding of fact of, at least, an implied sale of packing is recorded, can it further be suggested that such a sale would be subject to a higher or, for that matter, a separate and different rate of tax other than that applicable to sale of the main goods. But if such a finding is non-existent or missing, then the packing items would be an integral and inseparable part of the transaction of sale of the main goods, totally identified with the main goods, and they would undergo the same treatment in every respect as the transaction pertaining to the main goods themselves. If the main goods are subject to tax, so would the packing be; if the main goods are exempt from tax, so too would be the packing. In short, in such cases, the packing and the main goods would sink or sail together.

Two apparently contradictory judgments

In two other cases Vasavadatta Cements v. State of Karnataka9 and Premier Breweries v. State of Kerala10 the legislative amendment was not so innocuous or meaningless as to be explained away as merely clarificatory like Section 6-C in Raj Sheel case8. It was designed and inserted in the sales tax statute in question with the specific purpose of subjecting the turnover in respect of the packing transaction also to the higher rate of tax, that is to say, the rate of tax applicable to the sale of the main goods. As an illustration, the legislative amendment in the first-mentioned case Vasavadatta9 is being reproduced below:

"5. (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 turnover of 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 purchases of goods contained in such containers or packed in such packing materials is exempt from tax under this Act."

The Government sought to rely on the afore-produced legislative provision in a bid to overcome the rule and requirements of the Hyderabad Deccan1 test as reiterated in Raj Sheel case8. The Supreme Court, however, repelled the argument, reasserted the importance of the "intention" test, and directed the Government to determine the intention of the assessee to make the sale of the packing as a question of fact notwithstanding the apparent change in the statutory position. It held: (SCC p. 96, para 13)

"The liability for sales 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 case8." (emphasis supplied)

In Vasavadatta9 the assessee contended that it had, indeed, never effected any sale of the packing (gunny bags and plastic bags for cement) so as to be subjected to a particular kind of treatment in matters relating to the rate of levy, point of levy etc. which is applicable only to a transaction of sale. According to the assessee, therefore, in keeping with the dictum of Hyderabad Deccan case1 the Government, in the first place, remained under an obligation to discharge its legal burden of establishing that there had been a sale of the packing—albeit impliedly—by the assessee. That being the case of the assessee, the Court upheld the same and held the Government to be bound by the Hyderabad Deccan1 dictum of burden being on the Government itself and the intention test pertaining to the assessee.

As distinct from Vasavadatta9 the assessee in Premier Breweries10 itself came with the case that it had made sales of the packing items (cardboard cartons containing beer bottles) but contended that, regardless of the legislative provision viz. Section 5(5) (similar to the afore-produced Karnataka provision), it was a separate sale and, therefore, it should be exigible only to a lower rate of tax viz. the tax applicable to sales of packing materials as such, and not to the higher rate of tax applicable to sales of the main goods (i.e. beer). It sought to avoid the legislative mandate as regards application of the higher rate of tax (as per the sale of the main goods) even to such a self-confessed sale of packing on the ground that it was, after all, a separate sale on the assessee's own showing for which the assessee had charged a separate consideration in his accounts, invoices etc. The Court, however, refused to extend the benefit of the ratio of Vasavadatta9 to such an assessee. It observed: (SCC p. 648, para 19)

"The mere fact that the containers and the goods were sold separately and charged separately will not make any difference in the matter of computation of the turnover of the goods and determination of tax or the rate of tax and the point at which the tax will be levied under Section 5(5) of the Kerala Act."

Giving effect to the legislative amendment in the light of the admitted case of sale of packing before it and distinguishing both the cases Vasavadatta9 and Raj Sheel8 the Court held as follows: (SCC p. 649, para 20)

"The law is quite clear that when the goods contained in containers or packed in packing materials are sold the containers and the packing materials will have to be taxed at the same rate at which the goods are liable to be taxed. It will not make any difference if the price payable for the containers or packing materials are shown separately in the bills raised by the seller."

The view taken by the Supreme Court in Premier Breweries10 including a few peripheral remarks about Vasavadatta9 treatment of a similar statutory provision in the Karnataka case, has given rise to a feeling that Vasavadatta9 and Raj Sheel8 and, for that matter, even the long-standing dictum of Hyderabad Deccan1 have been diluted and overthrown by the ruling in Premier Breweries10. In this regard, one may consider, for instance, the view of the Editor in the SCC report of the judgment in Premier Breweries10 which treats Vasavadatta9 (two Judges) to have been "criticised" by the judgment in Premier Breweries10 (three Judges). However, although the said view may not be wholly without any basis, the fact remains that there is no overruling or supersession of the "intention" test and the "burden" rule of Hyderabad Deccan1 and Raj Sheel8 cases in the latter case. In Premier Breweries10, only because the assessee itself had admitted the factum of sale of the packing items, the question of applying the "intention" test or requiring the Government to discharge its burden did not arise. Had the assessee not admitted but disputed the factum of sale of packing, the said test and rule of burden would have both resurfaced and possibly led to a different result just as in Vasavadatta case9.

In short, the time-honoured principles of Hyderabad Deccan1 and Raj Sheel8 cases seem to remain relevant to the law on the question of taxability of transactions of packing and containers even today.


*    Senior Advocate, Supreme Court of India. Return to Text

  1. (1966) 17 STC 624 (SC) Return to Text
  2. 1959 SCR 379 Return to Text
  3. (1967) 19 STC 135 (SC) Return to Text
  4. (1967) 1 SCR 961 Return to Text
  5. (1987) 3 SCC 404 Return to Text
  6. (1997) 3 SCC 530 Return to Text
  7. (1997) 7 SCC 738 Return to Text
  8. (1989) 3 SCC 262 Return to Text
  9. (1996) 2 SCC 88 Return to Text
  10. (1998) 1 SCC 641 Return to Text
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