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State Of Tamil Nadu Etc. v. (In All Appeals)
Factual and Procedural Background
Multiple appeals by certificate were heard together because they raised common questions of law under the Madras General Sales Tax Act, 1959 and the Cement Control Order, 1958. The producers of cement were required by the Central Government to supply cement to the State Trading Corporation of India (STC) in gunny bags. The State of Tamil Nadu sought to levy sales tax on the turnover representing the price of those gunny bags. In separate but related assessments, the State also attempted to tax the selling agents of STC on the value of the bags used when cement was sold to ultimate consumers. The High Court ruled in favour of the assessees on both points, prompting the present appeals by the State.
Legal Issues Presented
- Whether producers who supplied cement to the State Trading Corporation in gunny bags are liable to pay sales tax on the turnover representing the price of the gunny bags.
- Whether the selling agents of the State Trading Corporation are similarly liable when they sell cement in gunny bags to consumers.
- Whether, under Rule 6(f) of the Madras General Sales Tax Rules, “charges for packing” exclude only labour/service components or also exclude the cost of the packing materials themselves.
Arguments of the Parties
State of Tamil Nadu’s Arguments
- Under clause 6(4) of the Cement Control Order the Central Government could at best fix only a maximum price for gunny bags; therefore the actual price was not “controlled” and the transaction constituted a taxable sale.
- Prior to 27 September 1963, Rule 6(f) exempted only service charges for packing, not the cost of the packing material. Reliance was placed on the Madras High Court decision in State of Madras v. K. Damodaran Chettiar & Co.
- (Raised at the hearing but disallowed) Amendments to the Central Sales Tax Act, 1956 made in 1969 with retrospective effect eliminate any exemption for packing material in inter-State transactions.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| New India Sugar Mills Ltd. v. Commissioner of Sales Tax, Bihar (AIR 1963 SC 1207; 1963 Supp 2 SCR 459) | Where both commodity price and container price are fully controlled, the transaction is not a “sale” for sales-tax purposes. | Relied upon to hold that if the price of gunny bags was wholly controlled, no taxable sale occurred when cement was supplied in such bags. |
| Chiattar Mal Narain Das v. Commissioner of Sales Tax, U.P. (1970 3 SCC 809) | Same principle as above concerning controlled prices negating the existence of a taxable sale. | Re-affirmed that controlled transactions are outside the scope of “sale” under the Sales Tax Act. |
| State of Madras v. K. Damodaran Chettiar & Co. (Madras High Court) | Held that “charges for packing” under Rule 6(f) covered only service elements, not cost of materials. | Expressly overruled; the Supreme Court found the decision erroneous and inconsistent with earlier authority. |
| State of Madras In re (AIR 1957 Mad 663; ILR 1957 Mad 61) | Interpreted language identical to Rule 6(f) as exempting both labour and material components of packing. | Approved as correctly stating the law; used to interpret Rule 6(f) in favour of the assessees. |
Court’s Reasoning and Analysis
1. Controlled price of gunny bags. Documentary evidence showed that, for all relevant assessment years (1959-60 to 1961-62), the Central Government issued specific orders fixing the exact packing charge per tonne of cement supplied in new or second-hand gunny bags. Applying the principles in New India Sugar Mills and Chiattar Mal Narain Das, the Court held that where both the commodity and the container prices are fully controlled, the necessary element of volition required for a “sale” is absent; hence no sales tax can be levied on the value of the gunny bags.
2. Rejection of a belated challenge to the Central Government’s power. The State’s new argument—that clause 6(4) authorised only the fixing of a maximum price—was raised for the first time in the Supreme Court, had not been pleaded below, and the Union of India was not before the Court. On these procedural grounds the Court declined to entertain the contention.
3. Interpretation of Rule 6(f) (packing charges). The Court analysed the wording of the rule as it existed before and after its 1963 and 1964 amendments. It concluded that even in its original form the phrase “charges for packing” naturally encompassed both (a) the cost of packing materials and (b) the cost of labour. The words “and other such like services” were read as qualifying “delivery,” not “packing.” The 1963 and 1964 amendments were viewed as merely clarificatory. Consequently, the earlier Madras High Court decision in Damodaran Chettiar was overruled and the 1957 decision in State of Madras In re was followed.
4. Attempt to invoke retrospective Central Sales Tax amendments. The State attempted to raise, for the first time at the hearing, an argument based on 1969 amendments to the Central Sales Tax Act. The Court refused to permit a wholly new ground not pleaded in the appeal or the interlocutory applications and for which no notice had been given to the respondents.
Holding and Implications
Appeals dismissed. The Supreme Court affirmed the High Court’s decision that neither the cement producers nor the selling agents of the State Trading Corporation are liable for sales tax on the value of gunny bags, and that Rule 6(f) exempts both labour and material components of packing when separately charged.
Implications: The judgment confirms that where the Central Government fully controls the price of both goods and their containers, the transaction is outside the ambit of taxable “sales” under the State Sales Tax law. It also settles the interpretation of Rule 6(f), providing clarity for dealers regarding exclusions from taxable turnover. No broader constitutional issue was decided, and no new doctrine was created, but existing principles were reaffirmed and clarified.
K.S Hegde, J.— These appeals by certificate can be disposed of by one judgment. They raise common questions of law. The material facts are not in dispute. In Civil Appeals Nos. 498, 499 to 502 of 1970, the principal question of law that arises for decision is whether the producers who supplied the cement to the State Trading Corporation or its agents in gunny bags in pursuance of the directions given by the Government are liable to pay sales tax on the turnover relating to the price of the gunny bags. The only other question that arises for decision in these appeals relates to the interpretation of Rule 6(f) of the rules framed under the Madras General Sales Tax Act, 1959. This question will be considered while dealing with the other appeals. In the other appeals the question for decision is whether the selling agents of the State Trading Corporation are liable to pay sales tax in respect of the price of the gunny bags in which they sold the cement to the consumers. The High Court has decided both these questions in favour of the assessees. Aggrieved by that decision, the State of Tamil Nadu has come up in appeal.
2. Taking first the case of the transactions between the producers and the State Trading Corporation, there is no dispute that so far as the supply of cement is concerned, the same cannot be considered as “sales” within the meaning of the Madras General Sales Tax Act, 1959 in view of the Cement Control Order, 1958. The only question is whether the gunny bags in which the cement in question was supplied can be considered to have been sold. There is no dispute that if the price of the gunny bags is also held to have been wholly controlled then the supply of the gunny bags cannot be considered as “sales”. This position must be held to be concluded by the decisions of this Court: see New India Sugar Mills Ltd. v. Commissioner of Sales Tax, Bihar AIR 1963 SC 1207, 1963 Supp 2 SCR 459 and Chiattar Mal Narain Das v. Commissioner of Sales Tax, U.P (1970) 3 SCC 809 Therefore all that we have to see is whether the price of the gunny bags in which the cement was supplied to the State Trading Corporation was controlled under clause 6(4) of the Cement Control Order, 1958. The relevant assessment years with which we are concerned in these appeals are Assessment Years 1959-60, 1960-1961 and 1961-1962. It is admitted that the Central Government by its order, dated March 26, 1959 informed all concerned thus:
“Packing charges for cement for period commencing First April to Thirtieth June, Nineteen Fiftynine will be Rupees Eleven Decimal five four per ton in New Gunny Bags.”
3. Again by its order, dated June 24, 1959, it stipulated that the packing charges for cement for the period commencing July 1 to September 30, 1959, will be Rs 11.04 per ton, in new gunny bags. The Central Government by its letter, dated December 26, 1959, informed the State Trading Corporation that it has accepted the Tariff Commission's recommendations in respect of the fixation of the packing charges and the principle that would be adopted was on the basis of the average of the maximum and minimum market price of the packing material during each week of the nine months immediately preceding the quarter for which the charges were to be in force plus Rs 1.25 per ton to cover incidental charges. By its telegram, dated February 17, 1961, the Central Government informed all the State Governments that having regard to the prevailing jute bag price, the Government was pleased to fix under clause 6(4) of the Cement Control Order, 1958 the charges for packing cement in DW as well as serviceable second hand DW Heavy Cases Jute Bags at Rs 17 per ton for the period effective from February 20 to March 31, 1961. From these orders, it is clear that the Government of India was purporting to fix the price of the gunny bags in which the producers were required to supply cement to the State Trading Corporation. The learned Advocate-General of Tamil Nadu contended that the Central Government under clause 6(4) of the Cement Control Order, 1958 could have fixed only the maximum price of gunny bags and not the actual price; that being so, there was scope for bargaining between the producers of the cement and the State Trading Corporation. This contention has not been taken in the High Court; nor in the appeal memo. The Central Government has not put in its appearance in this Court. Hence we cannot go into the question whether the Central Government had power to fix the actual price of the gunny bags. The fact remains, that the Central Government had fixed the actual price of the gunny bags. Its right to fix the price had not been disputed in the pleadings before the High Court nor does it appear from the judgment of the High Court that that question was urged before it. It is raised for the first time at the hearing.
4. In the result, for the reasons mentioned above the contention that supplies of gunny bags by the producers amounted to “sales” must be rejected.
5. Now coming to the contention raised in the other appeals which also arises in some of the appeals earlier considered, it relates to the interpretation of Rule 6(f) of the rules framed under the Madras General Sales Tax Act, 1959. That rule as it stood up to September, 1963 read thus:
“All amounts falling under the following two heads, when specified and charged for by the dealer separately, without including them in the price of the goods sold:
(i) freight;
(ii) charges for packing and delivery and other such like services.”
6. On September 27, 1963, this rule was recast thus:
“All amounts falling under the following three heads, when specified and charged for by the dealer separately, without including them in the price of goods sold:
(i) freight;
(ii) charges for packing, that is to say, cost of packing materials and cost of labour;
(iii) charges for delivery and other such like services.”
7. This rule was again recast, on March 9, 1964. The rule as reframed reads thus:
“All amounts falling under the following three heads when specified and charged for by the dealer separately, without including them in the price of the goods sold:
(i) freight;
(ii) charges for packing, that is to say, cost of packing materials and cost of labour and other such like services;
(iii) charges for delivery.”
8. In the above group of appeals, some relate to Assessment Years 1962-63 and 1963-64.
9. Mr S.T Desai, learned counsel appearing for the State of Tamil Nadu in this group of appeals contended that the rule as it stood till September, 1963, merely provided for exemption of service charges for packing and not the cost of packing material. It is not disputed that the price of the packing materials was separately charged in the bills issued. In support of his contention that price of packing material is not covered by the rule in question, Mr Desai relied on the decision of the Madras High Court in State of Madras v. K. Damodaran Chettiar & Co. This decision undoubtedly supports Mr Desai's contention; but the learned judges who decided that case overlooked an earlier decision of that High Court in State of Madras In re. AIR 1957 Mad 663, ILR 1957 Mad 61 In that case Rajagopalan and Rajagopala Aryangar, JJ. had taken the view that a rule identical in terms with Rule 6(f) as it stood till September, 1963 exempted the price of the packing material as well. We are entirely in agreement with the view taken by the learned judges in that case. The charges for packing include both the price of the packing material as well as the labour charges relating to packing. The words in sub-clause (ii) of Rule 6(f) “and other such like services” in our opinion refer to the word “delivery” immediately preceding those words. The subsequent changes effected in the rule merely clarified the intention of the rule-making authority. We hold that Damodaran Chettiar case was not correctly decided.
10. At the hearing a new contention was sought to be raised by Mr S.T Desai. He sought so urge that the exemption given for packing material must be held to be not available in respect of the cases arising under the Central Sales Tax Act (some of the appeals relate to assessment under the Central Sales Tax Act) in view of certain amendments made in the Central Sales Tax Act in 1969, with retrospective effect after the disposal of the petitions by the High Court. We did not permit him to raise that totally new contention as the same was not raised either in the petitions of appeal or by any special application. Further the appellant did not serve any notice on the respondents informing them of its intention to raise that question at the hearing.
11. In the result these appeals fail and they are dismissed with costs; but there will be only three sets of hearing fee: one set for the counsel appearing for the State Trading Corporation and his agents; one for the counsel appearing for Dalmia Cement Bharat Ltd.; and one for the counsel appearing for Thiruvelargal India Cement Ltd.
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