Holding

The differential tax rates for cement based on the inclusion or exclusion of packing material are a valid legislative classification and do not violate Article 14.

Summary

The Associated Cement Companies Ltd. challenged the Andhra Pradesh General Sales Tax Act’s amendment that introduced two different tax rates for cement depending on whether the price included packing material (16%) or excluded it (20%). The appellants argued that this differential treatment violated Article 14 of the Constitution as arbitrary and discriminatory. The State contended that the classification was a legitimate regulatory measure to prevent tax avoidance by manufacturers who bifurcated the price of cement and its packing material. The Supreme Court held that the legislature validly distinguished between two categories of turnover – one including the value of packing material and the other excluding it – and that dealers can freely choose either option, so no invidious discrimination exists. Consequently, the amendment and the differential rates were upheld as constitutional.

Issues considered

The constitutionality of the differential sales tax rates on cement under Entry 18, Clause (a) and (b) vis‑à‑vis Article 14.
Whether the classification based on inclusion or exclusion of packing material in turnover is a permissible legislative distinction.
Whether the amendment to Section 6‑C and the revised Entry 18 constitute an unreasonable or arbitrary tax measure.

Legislation cited

Constitution of Indias. Article 14

Subjects

sales taxdifferential tax ratespacking materialArticle 14equalityclassificationcementtax avoidanceconstitutional validity

Judgment

__)'

THE ASSOCIATED CEMENT COMPANIES LTD. A
v.
GOVERNMENT OF ANDHRA PRADESH AND ANR.

JANUARY 4, 2006

[ASHOK BHAN AND S.H. KAPADIA, JJ.) B
Y'
Andhra Pradesh General Sales Tax Act with Amendments; Section 6-C
and Entries 18 & 19 of the first Schedule/Constitution of India, 1950; Article
14:
c
Levy of sales tax on cement and its packing material-Differential rate
of sales tax introduced by way of aniendment made in Entry 18 of the first
schedule to the Act-Constitutionality-Challenge 10--Upheld by High Court-
On appeal, held: Taxable turnover under clause (a) of Entry 18 includes the
" value of the cement and the packing material while it is only the value of D
cement included under clause (b)-Thus, turnove~ basis under these clauses
differ-It is the discretion of the dealer either to sell cement along with packing
material or to sell the packing material and the cement separately and to pay
tax accordingly-Manufacturer would be entitled to claim set off against the
tax paid by them on the packing material in terms of clause (a) of the Entry
while making the purchase of packing material within the State-Higher rate E
of the tax imposed under clause (b) of the Entry in order to check the lax
avoidance tendency by the manufacturer-Thus legislature laid down a formula
I
\ prescribing the rate of tax basing two categories envisaged in clause (a) and
clause (b) of Entry 18 which is regulatory in nature, thus permissible-Not
violative of Article 14 of the Conslillltion.
F
The State of Andhra Pradesh was charging sales tax on the cement
and packing material@ 16% in terms of the provisions of law in the
Andhra Pradesh Sales Tax Act. Later, the State Government made
amendment in Section 6-C of the Act levying sales tax on sale/purchase
of the packing material of the goods/cement as well. The validity of the G
provisions was challenged in the case of Raj Steel v. State of Andhra Pradesh
>- & Ors., 1198913 SCC 262 and this Court opined that the provisions only
clarify the existing legal position. However, the provisions introduced so
proved insignificant. Therefore, the State Legislature modified it further

149 H
f

150 SUPREME COURT REPOR rs [20061 I S.C.R.
.,
A by amending Entry 18 to the first schedule of the Ac.t relating to cement,
categorizing the Entry into two parts viz. part (a) where the sale price of
cement included the value of packing material and part (b) where the
packing material and cement are sold separately and also introduced
different rate of sale tax thereto. The amendment was challenged by the
B appellants-cement manufacturers before the High Court, which was
rejected by it. Hence the present appeals.

Appellants contended that Clause (b) of Entry 18 to the First
Schedule of Andhra Pradesh General Sales Tax Act is discriminatory and
irrational as different rates of taxation leviable on cement when sold in
C packing and without packing and such discriminatory treatment was not
justified.

Respondent submitted .that the provision of levying differential rate
of the sales tax was not discriminatory as the object was to see that the
tax revenue on packing material is not lost by reason of adoption of r
D artificial tax planning devices by the manufacturers.

Dismissing the appeal, the Court

HELD: I.I. The Legislature distinguished between two categories of
sale of cement recorded by the dealer as in these two categories there is
E considerable variation in the turnover base. In the category of transactions
falling in Clause (a) Entry 18 taxable turnover includes the value of the
cement and the value of the packing material. In the category of
transactions falling under clause (b) the taxable turnover includes the value '·
of the cement only. It does not include the value of the packing material.
So the turnover base under Clause (a) and Clause (b) differs. The turnover
F base under Clause (b) is inevitably higher than the turnover b~se under
Clause (a) and would be equivalent to the value of the packing material.
The discrimination does not arise for any dealer because the dealer can
avail any one of the option available in Clauses (a) and (b). If the dealer
sells cement along with the packing material and the sale price includes
G value of packing material he continues to pay tax at the previous rate, i.e.
16%. If the dealer opts to sell the packing material and cement separately
he has to pay tax at higher rate i.e., 20% on cement only. The dealer is
not left with any option. He can exercise one of the two options and pay
the tax accordingly. (166-F-G-H; 167-AI

H The T1ryford Tea Co. v. State of Kera/a, 119701 I SCC 189; Khandige
THE ASSOCIATED CEMENT COMPANIES LTD.•» GOVT. OF ANDHRA PRADESH J5J

Sham Bhyat v. Agricultural Income Tax Officer, AIR (1983) SC 591; Ganga A
Sugar Corporation v. State ofU.P. (1980( l SCC 223 and State of WB. v.
Kesoram Industries Ltd. & Ors., (20041 10 SCC 201, followed.

State of U.P. v. Sikhpal Singh Pal., (2005) 7 SCALE 106; R.K. Garg
etc. v. Union of India & Ors., ( 19811 4 SCC 675 and Premier Breweries v.
Siate of Kera/a, (199811sec641, relied on. B
Raj Steel v. State of Andhra Pradesh & Ors., (19891 3 SCC 262 and
Vasavadatta Cements v. State of Karnataka, 1199612SCC88, held
inapplicable.

Ayurveda Pharmacy v. State of Tamil Nadu, f 19891 2 BCC 285, C
distinguish~d.

1.2. lfthe appellants purchased the packing material from any dealer
within the State and paid tax at 16% on cement under Cfause (a) of the
Schedule he would be entitled to claim set off of the tax paid by him on
such packing material at the time of its purchase inside the State in terms D
of G.O. Ms. No. 374 Rev. dated 15.4.1987. f167-BI

1.3. The High Court rightly pointed out that the imposition of higher
rate of tax in the case falling under clause (b) of Entry 18 is to check the
tax avoidance measures which are said to be rampant. That contrary to E
the normal business practices and modalities ·or sale of cement, the
manufacturers had started bifurcating the price of cement and packing
material to make it to appear that there was separate sale of each of them,
so that they need not have to pay the higher tax on the component of
packing material. It is common knowledge that the cement, barring some
bulk supplies, is ordinarily sold in packed condition. Going by ordinary F
business practice and common sense, one does not think of purchasing the
cement and bag separately. The agreement and the bargain would be for
sale and purchase of cement in packed condition. (167-B-C-DI

1.4. The gunny bag or·the HOPE bag is used to facilitate the
transporting and marketing of cement. The value of bag would normally G
be a minor percentage of the value of cement. In such a situation, it would
. )-. be difficult to infer a separate agreement for the sale of bags used for
packing the cement. High Court was right in observing that the
manufacturers, in order to claim the tax benefit had resorted to the modus
operandi of the sale of containers (bags) by bifurcating the price. That H
152 SUPREME COURT REPORTS [2006] I S.C.R.

A when evidence is created prima facie supporting the plea of separate sale
of packing material, it would be difficult for the taxing authorities to
establish otherwise even though the design and purpose of creating such
evidence by the process of billing etc., is quite evident. That in every case, .
elaborate enquiry would have to be made to decide on which side the
B transaction falls. To obviate such uncertainties and long drawn enquiries,
the Legislature has laid down a straight formula prescribing the rate of
tax on cement dependent on the two categories envisaged in Clauses (a)
and (b) of Entry 18. It is rationalization of the entries and is regulatory
in nature. Hence, such classification of the same commodity is permissible
and would not amount to discrimination, not being violative of Article 14
C of the Constitution of India. 1167-B-C-D-EI

Hyderabad Deccan Cigarette Factory v. State of A.I'. (1966) 17 STC
624 (SC), relied on.

CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 6122 of2000.
,'
D
From the Judgment and Order dated 8.9.2000 of the Andhra Pradesh
High Court in Writ Petition No. 19304/ 1996.

Rajiv Shakdher, U.A. Rana, Sadeep Kharel and Ms. Srabonee Roy (For
M/s Gagrat & Co.) for the Appellant.
E
Anoop Choudhari, Mrs. J. Choudhari, Manoj Saxena. Amit Meharia
and M.P. Meharia for the Respondents.

The Judgment of the Court was delivered by
'I
F BHAN, J. This appeal by grant of special leave is directed against the
judgment and final order dated 8.9.2000 passed by the High Court of judicature
of Andhra Pradesh at Hyderabad dismissing the Writ Petition No.19304 of
1996 filed by the appellants. In the aforesaid writ petition the appellants had
challenged the constitutional validity of Entry 18 of the First Schedule to the
A.P. General Sales Tax Act (for short "the Acf') introduced by A.P.G.S.T.
G (Amendment) Act, 1996 (Act No.27 of 1996) on the ground that it is violative
of Article 14 of the Constitution of India.

Appellants are inter alia engaged in the manufacture and sale of cement
and have various factories in different locations in India, including a unit in
the State of Andhra Pradesh for manufacturing cement. T~e appellants have
H
THE ASSOCIATED CEMENT COMPANIES LTD."· GOVT. OF AN OH RA PRADESH [BHAN. J ] J 53

their marketing division at Secunderabad from where sales of cement are A
carried on. It has its warehouses all over the State of Andhra Pradesh. Earlier
the State was charging sales tax on the sale of cement at the rate of 16% as
notified by the State Government, which included the value of the packing
material used for packing cement. The value of packing material is also
charged to sales lax on the total sales turnover. As far as second sale is
concerned Sales tax is not paid on the valm: of packing materials, as sales tax B
is leviable only on the first sale of packing materials. Section 6-C was
\·, introduced by Andhra Pradesh General Sales Tax Act (Amendment Act_No.11
of 1984) which reads as under:-

"6-C Levy of tax on packing material : - Notwithstanding anything C
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." D
The validity of this provision was challenged and this Court in Raj
Steel v. State of Andhra Pradesh and Ors., [1989] 3 SCC 262 interpreted this
Section to mean that "Section 6-C can at best be regarded as a provision by
way of clarification of existing legal situation". The Court pointed out
E
"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
I 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 F
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 G
contemplated."

With these observations the matter was remanded to the High Court for
fresh consideration and disposal in the light of the observations made in the
Judgment. In the earlier part of this judgment the Court after referring to the
various decisions summarized the legal position vis-a-vis sales tax on turnover H
154 SUPREME COURT REPORTS [2006] I S.C.R.

A relatable to packing material thus:
"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 fac~ that the packing
is of insignificant value in relation to the value of ilhe contents may
B 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 . I

independent commodity and the packing material as well as the
contents are sold independently, the packing material is liable to tax
C on its own footing."

The deeming provision as introduced by Act No. I I of 1984 by the
legislature by this interpretation was reduced to mere insignificance. This
interpretation put the Assessing and Appellate Authorities to the need of
making elaborate enquiries on the question whether there was an agreement
D express or implied for the sale of packing material and whether any artificial
or colourable devices were adopted by the assessee to split up the transaction
so as to take the plea that there was a separate contract for the sale of packing
material. The State Legislature then introduced Section 6-C in a modified
form. The following provision was substituted by Andhra Pradesh Amending
Act 22 of 1995 with effect from 1.4.1995. The amended section 6-C reads
E as follows:-

"6-C Levy of tax on packing material:- Notwithstanding anything
contained in Section 5, Section 5-F, Section 6 and Section 6-A, the

F
rate of tax on packing material sold with the goods shall be the same
as that of the goods packed or filled, whether or not there is separate
sale or agreement for sale for the packing material and the goods
-
packed or filled."

In order to follow up the amendment from the revenue's point of view,
the Entry in the First Schedule relating to cement was amended as follows by
G Act 27 of 1996 with effect from 1.8.1996:-
"'S. Description Point of Rate of Effective
No. of goods le\) tax from ,..._
18. Cement:-
(a) Where the sale price At the 16 paise
H
+·
THE ASSOCIATED CEMENT COMPANIES LTD. 1·. GOVT. OF ANDHRA PRADESH f BHAN. J.]
155
.fa
of cement includes point of in the 1.8.1996 A
the value of packing first sale rupee
material

(b) Where the packing
material and cement
arc sold separately -do- 20 paise B
and/or the sale price in the 1.8.1996
\- of cement docs not rupee
include the value of
packing material'"
c
This amendment was put to challenge by the appellants before the High
Court. By the impugned order the High Court has rejected the challenge a.nd
upheld the constitutional validity of the aforesaid provision.

Yet another step was taken by the Legislature in the year 1997 by
substituting the Entry relating to containers by the following entry dealing D
with the packing material of various types. This was done by Act 30 of 1997
with effect from 12.5.1997 in order to invigorate the charging provision read
with Section 6-C to the desired extent. The substituted Entry 19 reads as
follows:
··s. Description Point of Rate of Effective E
No. of goods levy tax from levy

i
19. Packing material that At the point
' is to say Bottles of of first sale
all types whether made in the State
of Glass. Plastic or any F
fibre or any other
material.
(a) when sold without -do- 4 paise in 12.5.1997
contents the rupee
(b) when sold containing -do- The rate at G
contents which the
,>-. content is
liable to tax"
Simultaneously, the State Government, in order to see that the value of
the packing materials is not taxed twice, exercised the power conferred under
H
156 SliPRl'ME COURT REPORTS [20061 I S.C.R.

A Section 9( I) of the Act and provided for set off of the tax paid on p~cking
materials. It was provided that the tax levied and collected on packing materials
in respect of sale or purchase of such materials inside the State shall be
reduced from the tax payable on the packed goods.

By virtue of the amendments introduced in the Act and the Schedule
B the sales tax on cement is now levied at the rate of 16% where the sale prjce
of cement includes the value of packing material and if the cement is sold
along with separate sale of packing material for a separate price, sales tax is • I

charged at the rate of 20%. According to the appellants, the same commodity
i.e. the cement cannot be treated and made liable to pay differential duty of
c tax depending upon how the sale of cement is effected, i.e., by effecting the
sale of cement and packing material separately.

The appellants have been showing the value of cement and the value
of the packing material separately while preparing their bills. The appellants'
case as set out in para 4 of the affidavit filed in support of the writ petition
D reads as under:-

"The petitioner Company has been showing the value of cement and
the value of packing material separately while preparing the bills.
Copy of the bills are filed herewith. The purpose of showing separately
the value of cement and the packing material which is used for packing
E cement is only for the purpose of claiming exemption for the packing
material as sales tax is not levied on second sales of packing material
as per the Act. By virtue of the Ordinance Cement for which tax is
levied is 16% and when Cement is sold with packed material it is
16% when billed along with cement, and if the very same cement is
billed separately i.e., cement and packing material it will be 20%.
F That means the same cement is liable for differential levy of tax
depending on how the bill is prepared."

According to the appellants. the appellants sell cement in bulk which
is not packed at all. They are loaded into special type of wagons, and it is
the loose cement which is sent without being packed to various companies
G
such as Hyderabad Industries Limited who purchase large quantity of cement
in bulk in unpacked condition for the manufacture of Asbestos Sheets and
·"""'
pipes. There is no packing material as the cement is not packed. According
to the appellants the same cement cannot be made liable for differential levy
of tax depending on how the bill is prepared. The same product cannot be
H classified differently and charged with different rates of sales tax. It was
THE ASSOCIATED CEMENT COMPANIES LTD o·. GOVT. OF AN DH RA PRADESH [BHAN. 1 ] J 57

further averred that there was no distinction between the cement sold in A
packed condition or cement which is sold in loose condition without being
packed. That a distinction in the rate for charging sales tax could not be made
dependent on the method and manner of preparation of bills as to whether the
cement is sold along with packing material or the customer is billed separately
for the value of cement and the packing material. The method of billing B
would not alter the character of cement which remains one and the same
\~ commodity. It was also submitted that there was no justification for making
a distinction between the commodities in th\! same category. This was violative
of Article 14 of the Constitution and thus liable to be struck down. In support
of its submissions the appellants relied upon two decisions of this Court in
Ayurveda Pharmacy v. State of Tamil Nadu, [I 989] 2 SCC i85 and C
Vasavadatta Cement v. State of Karnataka, [ 1996] 2 SCC 88.

The High Court negatived the contentions raised by the appellants and
concluded that there was nothing anomalous or incongruous in prescribing
the same rate of tax for the packing materials as well as the goods packed
irrespective of the fact whether they are charged for and sold separately. D
There was no invidious discrimination and that the present case was not a
case in which species of the genus was picked up for higher taxation without
apparent justification. It was reld that:

"The present case is not a case in which a species of the genus is
picked up for higher taxation without apparent justification. The charge E
of discrimination was upheld in Ayurveda Pharmacy "s case (sunra)
having regard to the inherent nature of the commodity and its similarity
with others falling within the same category. In the present case, the
rate of tax on cement is made dependant on whether the sale price of
cement includes the cost of packing materials. If the packing material F
cost is shown as an integral part of the price at which the cement was
sold, it would attract lesser rate of tax. However, if t~e packing material
cost is excluded from the value of the cement, the turnover wi II be
less and in such an event, the Legislature thought it fit to prescribe
a higher rate of tax. It is left to the dealer to choose one of the
courses. Different rates of tax for the same commodity is prescribed G
depending on whether the price includes packing material cost,
obviously with a view to check tax avoidance. Such was not the
situation in Ayurveda Pharmacy case (supra)."

Relying heavily on the decision in Ayurveda Pharmacy case (supra)
H
t

158 SUPREME COURT REPORTS 12006] I S.C.R.

A Mr. Rajiv Shakdher, learned counsel for the appellants contended that the
same commodity i.e. cement could not be subjected to different rates of
taxation depending on whether the cement and packing material are sold
separately. It was not permissible to the respondents to levy tax at the rate
of 16% when the same is bi lied along with packing material and to tax the
B same commodity (cement) at the rate of20% when the cement and its packing
material are billed separately. It was submitted that Clause B of Entry 18 of
the First Schedule of Andhra Pradesh Act is discriminatory and irrational. It - .,
levies differential tax rate higher than 16% on the same commodity i.e.
cement depending on the fact that the appellants have been claiming a separate
sale of packing material and thereby showing the value of cement and the
C value of packing material separately while preparing the bills. It was submitted
that the discrimination is writ large on the face of the impugned Entry in the
taxation schedule and such discriminatory treatment was not justified. As
against this, Mr. Anoop Choudhary, learned senior advocate appearing for
the respondent contended that the provision was not discriminatory. The
object was to see that the tax revenue on packing material is not lost to the
D State by reason of adoption of artificial tax planning devices. According to
him Ayurveda Pharmacy ·s case (supra) was distinguishable and the
prescription of different rates of tax in the peculiar circumstances obtained in
cement and liquor trade was not impermissible. He strongly relied upon the
decision of this Court in Premier Breweries v. State of Kera/a, [ 1998] I SCC
E 641 in which this Court considered the provisions of sub-Sections (5) and (6)
of Section 5 of the Kerala General Sales Tax Act which according to him are
pari materia with Section 6-C of the Andhra Pradesh General Sales Tax Act
introduced by Act No.22 of 1995.

In The fo:vford Tea Co. v. State of Kera/a, [1970] I SCC 189.
F Hidayatullah, J. speaking for Constitution Bench spelt out the principles
governing the application of Article 14 to the taxing statutes. It was held that
the State does not have to tax everything in order to tax something. The state
enjoys a wide discretion in the matters of taxation and enjoys more freedom
for classifying the objects to be taxed and the rates of taxation. The burden
G for proving discrimination is always heavy on the person who alleges
discrimination and heavier still when a taxing statute is under attack. That the
State can validly pick and choose one commodity for taxation and the same
is not open to attack under Article 14 on the ground that the same result must
follow when the State picks out one category of goods and subjects it to the
taxation. Relevant portions at para 15 of this judgment read as under:-
H
THE ASSOCIATED CEMENT COMPANIES LTD.•·. GOVT. OF AN DH RA PRADESH [BHAN. J.] • J 59

"15. We may now state the principles on which the present case must A
be decided. These principles have been stated earlier but are often
ignored when the question of the application of Article 14 arises. One
principle on which our Courts (as indeed the Supreme Court in the
United States) have always acted, is no where better stated than by
Willis in his "Constitutional Law" page 587. This is how he put it : B

"A State does not have to tax everything in order to tax something.
+· It is allowed to pick and choose districts, objects, persons, methods
and even rates for taxation if it does so reasonably ...... The
Supreme Court has been practical and has permitted a very wide
latitude in classification for taxation."
c
This principle was approved by this Court in East Indian Tobacco
Co. v. State of Andhra Pradesh. (1963] 1 SCR 404 at page 409.
Applying it, the Court observed:

"If a State can validly pick and choose one commodity for taxation
and that is not open to attack under Article 14, the same result D
must follow when the State picks out one category of goods and
subjects it to taxation."
This indicates a wide range of selection and freedom in appraisal not
only in the objects of taxation and the manner of taxation but also in
the determination of the rate or rates applicable. If production must E
always be taken into account there will have to be a settlement for
every year and the tax would become a kind of income-tax.
)
•\
16. The next principle is that the burden of proving discrimination is
always heavy and· heavier still when a taxing statute is under attack.
This was also observed in the same case of this Court at page 411 F
approving the dictum of the Supreme Court of the United States in
Madden v. Kentucky (1940) 309 US 83; 84 L Ed. 590)

"In taxation even more than in other fields, Legislatures possess
the greatest freedom in classification The burden is on the one
attacking the legislative arrangement to negative every conceivable G
basis which might support it."

In Khandige Sham Bhat v. Agricultural Income Tax Officer, AIR (1963)
SC 591, a Constitution Bench of this Court while pointing out the taxation
law is not an exception to the doctrine of equality, clarified:
H
t

160 SUPREME COURT REPORTS 12006] I S.C.R.

A "But in the application of the principles, the Courts, in view of the
inherent complexity of fiscal adjustment of diverse elements, permit
a larger discretion to the Legislature in the matter of classification, so
long it adheres to the fundamental principles underlying the said
doctrine. The power of the Legislature to classify is of 'wide range
and flexibility' so that it can adjust its system of taxation in all proper
B and reasonable ways".

In Ganga Sugar Corporation v. Stute of U.P .. (1980] I SCC 223, - '
another decision the Constitution Bench of this Court observed:-

"Even so, taxing statutes have enjoyed more judicial indulgence. This
c Court has uniformly held that classification for taxation and the
application of Article 14, in that context, must be viewed liberally,
not meticulously"

Recently, in State of W.B. v. Kesoram Industries Ltd and Ors.. [2004)
I0 SCC 20 I. a Constitution Bench by a majority of 4: I held that the measure/
D mode/machinery employed for assessing a tax mu.;, not be confused with the
nature of the tax. A tax has two elements: first, the person, thing or activity
on which the tax is imposed (the subject of tax), and second, the amount of
tax. The subject of tax is different from the measure of levy. The amount of
tax may be measurecd in many ways but the distinction between the subject-
E matter of a tax and the standard by which the amount of tax is measured must
not be lost sight of. While the subject of tax is clear and well defined. the
amount of tax is capable of being measured in many ways for the purpose
of quantification. Devising the measure of taxation is a far more complex
exercise than defining the subject of tax and therefore the legislature has to
be given much more flexibility for devising the measure of taxation. It was
F observed in para 33 as under:-
"We now proceed to enter a deeper dimension in the field of tax
legislation by considering the problem of devising the measure of
taxation. This aspect has been dealt with in detail in Union of India
V. Bombay Tyre International Ltd. [1983) 4 sec 210. Tracing the
G principles from the leading authority of A reference under the
Government of Ireland Act, 1920 and Section 3 of the Finance Act
(Northern Ireland) 1934, Re. ( 1936) AC 352, passing through Rullu
Ram v. Province of East Punjab, ( 1948) FCR 207, and treading through
the law as it has developed through judicial pronouncements one
H
+-
THE ASSOCIATEDCEME,TCOMPANIES LTD."· G_OVT OF ANDHRA PRADESH (BHAN. J] 161
_f

after the other, this Court has made subtle observatioris therein. It has A
been long recognized that the measure employed for assessing a tax
must not be confused with the nature of the tax. A tax has two
elements: first, the person, thing or activity on which the tax is
imposed, and second, the amount of tax. The amount may be measured,
in many ways; but a distinction between the s 1 1hje~t matter of a tax B
and the standard by which the amount of tax is r1easured must not
be lost sight of. These are described respectively a:; the subject of a
tax and the measure of a tax. It is true that the standard adopted as
a measure of the levy may be indicative of the nature of the tax, but
it does not necessarily determine it. The nature of the mechanism by
which the tax is to be assessed is not decisive of the essential C
characteristic of the particular tax charged, though it may throw light
on the general character of the tax.

It was observed in para 126 as under :-

"(ii) the subject of tax is different from the measure of the levy; D
(iii) merely because a tax o-n land or building is imposed by reference
to its income or yield, it does not cease to be a tax on land or
building. The income or yield of the land/building is taken merely as
a measure of the tax; it does not alter the nature or character of the
levy. It still remains a tax on land or building. No one can say that E
a tax under a particular entry must be levied only in a particular
manner. The legislature is free to adopt such method of levy as it
chooses. So long as the essential character of levy is not departed
"\
from within the four corners of the particular entry, the manner of
levying the tax would not have any vitiating effect;
F
xxx xxx xxx

(vi) it is permissible to classify land by reference to its user as a
· separate unit for the purpose of levy of cess. :rea estate, as a separate
category of land, is a valid classification;"
G
It was further observed in para 129, sub para 3 as under:-

"(3) The nature of tax levied is different from the measure of tax.
While the subject of tax is clear and well defined, the amount of tax
is capable of being measured in many ways for the purpose of
quantification. Defining the subject of tax is a simple task; devising H
+
162 SUPREME COURT REPORTS 120061 I S.C.R.
\

A the measure of taxation is a far more complex exercise and therefore
the legislature has to be given much more flexibility in the latter
field. The mechanism and method chosen by Legislature for
quantification of tax is not decisive of the nature of tax though it may
constitute one relevant factor out of many for throwing light on
determining the general character of the tax."
B
In State of U.P. v. Sukhpal Singh Pal, (2005) 7 SCALE 106, this Court
has laid down that the Courts must show judicial restraint while considering
..
-
the scope of economic legislation as well as tax legislation and unless the
provision is manifestly unjust or glaringly unconstitutional the same should
C not be interfered with. There is always a presumption in favour of the
constitutional validity of any legislation unless the same is set aside for
breach of the provisions of the Constitution. Citing with the approval the
decision of this Court in R.K. Garg etc. v. Union of India & Ors., (1981] 4
sec 675, it was held that every legislation particularly in economic matters,
is essentially empiric and based on experimentation. It cannot be struck down
D merely because there is a possibility of abuse. The same can be set right by
the legislature by passing amendments. The Courts therefore, should adjudge
the constitutionality of such legislation by the generality of its provisions.
Laws relating to economic activities should be viewed with greater latitude
than laws touching civil rights such as freedom of speech. religion etc.

E In Premier Breweries 's case (supra), a three-Judge Bench of this Court
repelled the contention of the assessee that it was not open to the assessing
authority to include the value of the containers in the price of the liquor for
the purpose of calculating the rate of tax as the containers were separately
billed and charged for. Interpreting sub-sections (5) and (6) of Section 5 of
F the Kerala General Sales Tax Act it was held that underlying idea behind
these rules is that packed goods are to be taxed as composite units and
therefore in calculating the turnover of the goods, the turnover of the containers
will have to be included. The appropriate rate of tax will be the rate payable
on the goods and it will not make any difference, if the containers are shown
to have been sold and charged separately.
G
In the Premier Breweries 's case (supra), the assessee sold Indian-made
foreign liquor in bottles packed in cardboard cartons. As the assessee charged
its cugtomers separately for the liquor and the cartons the Assistant Collector
held the cartons to be taxable @ 8% under Entry 7 to Schedule I of the
H Kerala General Sales Tax Act, 1963. The Deputy Collector under the Act
THE ASSOCIATED CEMENT COMPANIES LTD.''· GOVT. OF ANDHRA PRADESH [BHAN. J.] J63

exercising his revisional jurisdiction under Section 35 set aside the Assistant A
Collector's order and invoking Section 5 (5) of the Kerala General Sales Tax
Act held the cartons to be taxable at the rate the liquor was taxable. The view
of the Deputy Commissioner was upheld by the Appellate Court and the
High Court. Before this Court it was contended by the assessee that since the
appellants had charged, and the customers paid, for the liquor and cartons B
r.!'~parately, in the presence of Entry 97 in Schedule I to the Act prescribing
1.-- a specific rate of tax for carton·s, the value of the containers could not be
included in the value of the liquor for the purpose of calculating the assessee's
turnover. It was further contended that the sales tax under the Kerala General
Sales Tax Act being a single-point tax and tax having already paid on the
cartons by the manufacturers thereof, the cartons could not be taxed again at C
the time of the sale of beer. Dismissing the appeal this Court pointed out in
para 6 that:

"The language of sub-sections (5) and (6) of Section 5 is clear and
unambiguous. These two sub-sections deal with the method of
valuation of packed goods and the rate of tax payable thereon. The D
rules laid down are: (I) Where goods sold are contained in a container
or packed in any packing material, the rate of tax payable on the
containers shall be the same as that applicable to the goods contained
or packed. (2) This will be the position even if price of the containers
or packing materials is charged separately. (3) The turnover of the E
goods will include the turnover in respect of containers or packing
materials in which the goods are contained or packed. (4) The point
of levy of the tax on the containers or the packing materials will be
the same as applicable to the goods contained or packed. (5) If the
sale or purchase of goods contained in a container or packed in a
packing material is exempted from tax, then, no tax shall be payable F
on the sale or purchase of the containers or packing materials in
which the goods are sold."

It was th en observed at Para 7 th us:

"(a) "The underlying idea behind these rules is that packed goods are G
to be taxed as composite units. In calculating the turnover of the
goods, the turnover of the containers will have to be included. The
appropriate rate of tax will be the rate payable on the goods. It will
not make any difference, if the containers are shown to have been
sold and charged separately. The logical corollary to this principle is
that when the goods are exempted from tax, no tax is leviable on the H
+

164 SllPRLME COURT REPORTS [20061 I S.CR.

A containers. This will be the position even when th~ goods and the
containers are sold and charged separately".

Further in para 8 it was observed:

"Various rates of tax have been fixed by the Act for sale or purchase
B of various types of goods. If the goods are sold in packages or
containers then for the purpose of imposition of tax, the turnover of
goods will have to be calculated by the including therein the turnover
..
of the packages or the containers. The rate of tax applicable to the
turnover so calculated will be the rate payable on the goods contained
in the containers. It follows that if bottled beer is sold in containers,
c the tax payable on beer will be the appropriate rate of tax payable on
the turnover calculated in the manner stated hereinabove. It has not
been found by any of the authorities who heard the case that the
carton were specially provided for protection of the bottles and bottled
beer usually was not delivered in cartons even in cases of bulk sales.
D The argument based on secondary packing is misconceived."

After referring to Raj Steel case (supra), it was observed that the difficulty
arising out of the restricted meaning given to a deeming clause in Section 6-
C of the A.P. Act had been obviated by specific provisions of Section 5(5)
of the Kerala Act by providing that the turnover of the goods shall include
E the turnover in respect of packing materials or containers. It was observed in
para 16:

"This difficulty arising out of the restricted meaning given to the
deeming clause in Section 6-C of the Andhra Act has been obviated
by specific provisions of Section 5(5) of the Kerala Act by providing
F that the turnover of the goods wi II include the turnover in respect of
the packing materials or the containers. The containers or the packing
materials will be taxed at the same point and at the same rate at
which the goods are to be taxed. This rule will apply ''whether the
price of the containers or the packing materials is charged separately
or not." Therefore, even in a case where the containers are separately
G sold, the turnover of the goods will include the turnover of the
containers and the appropriate rate of tax on such turnover will be the
rate _of tax payable on the goods."

Referring to the decision in Vasavadaua Cements v. State of Karnataka,
H [1996] 2 sec 88, wherein this Court had followed the principle laid down
THE ASSOCIATED CEMENT COMPANIES LTD.•·. GOVT. OF AN DH RA PRADESH [BHAN. J.] \ 65
J in Raj Steel case (supra) it was pointed out that: A
" .. .in Vasavadalta case (supra) this Court overlooked the marked
dissimilarity between Section 6-C of the Andhra Act and Section 5(3-
D) of the Kamataka General Sales Tax Act. We are also of the view
that sub-sections (5) and (6) of the Kerala General Sales Tax Act will
have to be construed uninfluenced by the decision of the Court in Raj B
Steel's case where Pathak, C.J. construed the deeming provisions in
Section 6-C of the Andhra Act in a narrow sense. Section 6-C did not
contain any specific provisions for including the turnover of the
containers of the packing materials in the turnover of the goods."

Section 6-C as amended by Act 22 of 1995 is almost in pari materia C
to sub-sections (5) and (6) of Section 5 of the Kerala General Sales Tax Act.
Sub-sections (5) and (6) of Section 5 of the Kerala Act reads as under:

"5. (5) Notwithstanding anything contained in sub-section (I) or sub-
section (2), but subject to sub-section (6), where goods sold are D
contained in containers or are packed in any packing materials, the
rate of tax and the point of levy applicable to the containers or packing
materials, as the case may be, shall, whether the price of the containers
or packing materials is charged separately or not, be the same as
those applicable to goods contained or packed, and in determining
turnover of the goods, the turnover in respect of the containers or E
packing materials shall be included therein.

(6) Where the sale or purchase of goods contained in any containers
or packed in any packing materials is exempt from tax, then, the sale
or_ purchase of such containers or packing materials shall also be
exempt from tax". F
In Premier Breweries' case (supra), which is a three-Judge Bench case,
the distinction in Raj Sleet's case (supra) as well as in Vasavadatta 's case
(supra), which are two-Judge Bench cases, has been pointed out. We are in
respectful agreement with the view taken by three-Judge Bench in Premier
Breweries case (supra), which has interpreted sub-sections (5) and (6) of G
Section 5 of the Kera la General Sales. Tax Act, 1963 which is in pari materia
>-. with the Section 6-C as introduced by amendment Act 22 of 1995.

In Ayurveda Pharmacy v. State of Tamil Nadu, [1989) 2 SCC 285,
which is the sheet anchor of the appellants' submission the facts were: that
H
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166 SUPREME COURT REPORTS [20061 I S.C.R.
\.
A the appellants were manufacturers of Ayurvedic drugs and medicines, including
Arishtams and Asavas. Arishtams and Asavas contain alcohol, which according
to the assessee was essential for the effective and easy absorption of the
medicine by the human system and also because it acted as a preservative.
While all other patent or proprietary medicinal preparations belonging to the
B different systems of medicines were taxed at the rate of 7% only, Arishtams
prepared under the Ayurvedic system were made subject to a levy of 30%.
The appellants filed the writ petitions in the High Court of Madras challenging
the levy at 30% on Arishtams and Asavas, being violative of Article 14 as
well as Article 19 (I )(g) of the Constitution of India. High Court dismissed
the writ petition by observing that the imposition of the rate of 30% on the
C sale of Arishtams and Asavas must be regarded principally as a measure for
. raising revenue, and repelled the argument that the rate of tax was
discriminatory or that Article 19( 1)(g) was infringed. Reversing the decision
it was held by this Court that the two preparations, Arishtams and Asavas,
were medicinal preparations, and even though they contained a high alcohol
content, so long as they continue to be identified as medicinal preparations
D they must be treated, for the purposes of the Sales Tax Law, in like manner
as medicinal preparations generally, including those containing a lower
percentage of alcohol. In the said case the charge of discrimination was
upheld having regard to the inherent nature of the commodity and its similarity
with others falling within the same category. But in the present case. the rate
E of tax on cement is made dependant on whether the sale price of cement
includes the cost of packing materials.

The Legislature distinguished between two categories of sale of cement
recorded by the dealer as in these two categories there is considerable variation
in the turnover base. In the category of transactions falling in Clause (a)
F Entry 18 taxable turnover includes the value of the cement and the value of
the packing material. The category of transactions falling under clause (b) the
taxable turnover includes the value of the cement only. It does not include
the value of the packing material. So the turnover base under Clause (a) and
Clause (b) differs. The turnover base under Clause (b) is inevitably higher
G than the turnover base under clause (a) and would be equivalent to the value
of the packing material. The discrimination does not arise for any dealer
because the dealer can avail any one of the option available in Clauses (a)
and (b). If the dealer sells cement along with the packing material and the
sale price includes value of packing material he continues to pay tax at the
previous rate, i.e. 16%. If the dealer opts to sell the packing material and
H cement separately he has to pay tax at higher rate i.e., 20% on cement only.
TliE ASSOCIATED CEMENT COMPANIES LTD 1·. GOVT. OF ANDHRA PRADESH (BHAN. J_] 167
)
The dealer is not left without any option. He can exercise one of the two A
options and pay the tax accordingly.

Moreover, as per G.O. Ms. No. 374 Rev dated 25.04.1987, tax levied
in the State on the packing material used for packing the goods shall be
reduced from the tax payable by a dealer at the rate applicable to cements
under Section 6C on the turnover of sale of such goods and packing material. B
· If the appellants purchased the packing material from any dealer within the
State and paid tax at 16% on cement under Clause (a) he would be entitled
to claim set off of the tax paid by him on such packing material at the time
of its purchase inside the State. High Court rightly pointed out that the
imposition of higher rate of tax in the case falling under clause (b) of Entry C
18 is to check the tax avoidance measures which are said to be rampant. Thai
contrary to the normal business practices and modalities of sale of cement,
the manufacturers had started bifurcating the price of cement and packing
material to make it to appear that there was separate sale of each of them, so
that they need not have to pay the higher tax on the component of packing
material. It is common knowledge that the cement, barring some bulk supplies, D
is ordinarily sold in packed condition, i.e, either gunny bags or HOPE bags.
Going by ordinary business practice and common sense, one does not think
of purchasing the cement and bag separately. The agreement and the bargain
would be for sale and purchase of cement in packed condition, that is to say,
together with the container.
E
In Hyderabad Deccan Cigarel/e Factory v. Stale of A.P., (1966) 17
STC 624 (SC), it was observed:

"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 F
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 G
used by the seller as a convenient and cheap vehicle of transport."

It was further held:

" ... Many cases may be visualized where the container is comparatively
of high value and sometimes even higher than that contained in it. H
t

168 SUPREME COURT REPORTS [2006] I S.C.R.

A 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 ... "

Going by what has been held in the aforesaid case the gunny bag or the
B HOPE bag is used to facilitate the transporting and marketing. The value of
bag would normally be a minor percentage of the value of cement. In such
a situation, it would be difficult to infer a separate agreement for the sale of • .,.
bags used for packing the cement. High Court was right in observing that the
manufacturers, in order to claim the tax benefit had resorted to the modus
C operandi of the sale of containers (bags) by bifurcating the price. That when
evidence is created prima facie supporting the plea of separate sale of packing
material, it would be difficult for the taxing authorities to establish otherwise
even though the design and purpose of creating such evidence by the process
of billing etc., is quite evident. That in every case, elaborate enquiry will
have to be made to decide on which side the transaction falls. To obviate
D such uncertainties and long drawn enquiries, the Legislature has laid down a
straight formula prescribing the rate of tax on cement dependent on the two
categories envisaged in Clauses (a) and (b) of Entry 18. It is rationalization
of the entries and is regulatory in nature.

If that be the situation. we do not find any basis to hold that such
E classification of the same commodity is impermissible and would amount to
discrimination being violative of Article 14 of the Constitution of India.

For the reasons stated above. we do not find any merit in the appeal
and dismiss the same leaving the parties to bear their own costs. ,
F S.K.S. Appeal dismissed.