Holding

The Supreme Court held that liability for sales tax on packing material under Section 5(3‑D) must be determined based on the factual ingredients of the contract and the parties' intention, not by a per se rule treating the sale as an integrated transaction.

Summary

Vasavadatta Cements, a cement manufacturer, challenged the constitutional validity of Section 5(3‑D) of the Karnataka Sales Tax Act, 1957, which made packing material (gunny/plastic bags) taxable. The Karnataka High Court dismissed the challenge, relying on Ranganatha Associates and the Supreme Court’s decision in Rajshee. The Supreme Court held that the High Court erred in construing the provision as treating the sale of goods in a container as a single integrated transaction without examining the contract’s ingredients. The Court reiterated the Rajshee principle that liability for sales tax on packing material must be determined on the facts of each case, considering the actual terms and intention of the parties. Consequently, the appeal was allowed and the writ petitions were disposed of, directing a factual investigation to ascertain tax liability under Section 5(3‑D).

Issues considered

The constitutional validity of Section 5(3‑D) of the Karnataka Sales Tax Act, 1957, which brings packing material within the tax net.
Whether the provision should be interpreted to treat the sale of goods in a container as an integrated single transaction, thereby making packing material automatically taxable.
Whether the High Court's interpretation of Section 5(3‑D) was consistent with the Supreme Court’s ruling in Rajshee & Ors. v. State of Andhra Pradesh.

Legislation cited

Andhra Pradesh General Sales Tax Act, 1957s. 6-C
Industries (Development and Regulation) Act, 1951s. 18-G, s. 25
Karnataka Sales Tax Act, 1957s. 5(3-D)

Subjects

Sales taxPacking materialConstitutional validitySection 5(3‑D)Karnataka Sales Tax ActContract interpretationTax liabilityRajshee caseRanganatha AssociatesCement industry

Judgment

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VASAVADATTA CEMENTS ETC. A
v.
• STATE OF KARNATAKA AND ANOTHER

JANUARY 18, 1996

[S.C. AGRAWAL AND G.B. PATIANAIK, JJ.] B

Sales Tax-Section 5(3-D) of Kamataka Sales Tax Act 1957-Cement
sold in Containers-Packing material exigible to tOJ.-Provisions similar to Sec-
tion 6-C of the Andhra Pradesh General Sales Tax Act 1957-!nterpreta-
tion-Sales Tax liability in such cases depends upon the facts of each case C
and intention of the pmties.

The appellants are the manufacturers of cement and they supply
cement either packed in plastic bags/gunny bags or loose to bulk con-
sumers. They enjoyed the deduction in respect of packing charges from the
taxable turnover. After the introduction of Sub-section (3-D) in Section 5 D
of the Karnataka.Sales Tax Act 1957, packing material was made exigible
to tax.

Appellants challenged the constitutional validity of the said Sub-Sec-
tion by filling Writ petitions in the Karnataka High Court. The High Court E
dismissed the Writ petitions on the ground that the question raised is
covered by the decision in Ranganath Associates v. State of Kamataka, JLR
(1990) KAR 82 after taking note of the decision of the Supreme Court in
Rajshee/ and Ors. v. State of Andhra Pradesh, (1989) 74 STC 379. Hence this
appeal.
F
Appellants contended that Section 5 (3-D) of the Karnataka Sales
Tax Act 1957 is similar to Section 6-C of the Andhra Pradesh General Sales
Tax Act 1957. Constitntional validity of Section 6-C was upheld by the
Supreme Court in Rajsheel case, and that Karnataka High Court while
deciding Ranganath Associates case, completely departed from the law laid G
down by the Supreme Court in Rajsheel case. They also contended that in
Rajsheel case, this court held that the question as to the liability for sales
tax would depend on the actual ingredients of the contract and intention
of the parties which has to be determined in each case.

Allowing the appeal, this Court H
749
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750 SUPREME COURT REPORTS [1996] 1 S.C.R.

A HELD: 1.1 The High Court was in error in construing the provisions
or Section 5 (3-D) of Karnataka Sales Tax Act to hold that the legislature
has thought it fit and convenient to treat the sale of goods contained in a
container as an integrated, single transaction or sale of the goods and that
it makes it unnecessary to analyse the components or a particular sale and
B enter upon investigation to find out the real price at which the packing
material is purported to have been sold, and separate it from the computa-
tion of the turnover regarding the particular goods which was packed in
the packing materials or housed in the container. [757-E-F)

Jamana Flour & Oil Mill (Pvt.) Ltd. v. State of Bilzar, [1987) 2 SCR
C 1048, referred to.
1.2 The observations majle by this court in Rajsheel case are equally
applicable to the present case involving construction of Section 5 (3-D) or
the Karnataka sales tax Act, 1957. The liability for sale tax on the gunny-
bags used for packing the cement sold by the appellants has to be con-
D sidered having regard to the facts of each case after determining what are
the ingredients of the contract and the intention of the parties in accord-
ance with the decision of this court in Rajsheel case. [759-D]

Union of India v. Bombay Tyre lntemational Ltd., [1984) 1 SCR 347,
E referred to.
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 2084 of
1996 Etc.

From the Judgment and Order dated 7.12.90 of the Karnataka High
F Court in W.P. No. 20736 of 1986.

Harish N. Salve, C.K. Shashi and Kailash Vasdev for the Appellants.

T. Vishwanath Iyer, M. Veerappa and K.H. Nobin Singh for the
Respondents.
G
The Judgment of the Court was delivered by

S.C. AGRAWAL, J. Special leave granted in both the special leave
petitions.

H Both these appeals are directed against the judgment of the Kar-
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VASAVADATIACEMENTSv. STATE(S.C.AGRAWAL,J.) 751

nataka High Court dated December 7, 1990 in Writ Petitions (Writ Peli- A
tions Nos. 20736 and 21195 of 1986) filed by the appellants wherein they
had assailed the constitutional validity of Section 5(3-D) of the Karnataka
Sales Tax Act, 1957 (hereinafter referred to as 'the Act'). By the impugned
orders the said Writ Petitions of the appellants have been dismissed by the
High Court on the ground that the question raised is covered by the
B
decision in Ranganatha Associates v. State of Kamataka, !LR 1990 Kar. 82.

The appellants are manufactures of cement the price of which is
controlled by the Cement Control Order, 1967 issued by the Central
Government in exercise of the powers conferred by Section 18-G and
Section 25 of the Industries (Development and Regulation) Act, 1951. The C
appellants supply the cement packed either in gunny bags or in plastic bags.
They also sell the same loose to bulk consumers. Till April 1, 1986 the
appellants were enjoying deduction in respect of packing charges from the
taxable turn-over. After the introduction of sub-section (3-D) in Section 5
of the Act the packing material was brought within the purview of the Act D
and made exigible to tax. Section 5(3-D) of the Act provides as under :

"Section 5. Levy of Tax on Sale or Purchase of Goods.

(3-D). Notwithstanding anything contained in the Act where goods
sold or purchased are contained in containers or are packed in E
any packing materials liable to tax under this Act, the rate of tax
and the point of levy applicable to turn-over or 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 p
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 purchase of goods contained in such containers or

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packed in such packing materials is exempt from tax under this
Act."

The said proVIs10n m Section 5(3-D) is comparable to similar
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provision contained in Section 6-C of the Andhra Pradesh General Sales
Tax Act, 1957, which provides as follows : H
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1.
752 SUPREME COURT REPORTS [1996] 1 S.C.R.

A "Section 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 beensold 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
B of goods themselves."

In Rajshee/ & Ors. v. State of Andhra Pradesh & 01'., (1989) 74 STC
379, this Court has upheld the constitutional validity of the said provisions
contained in Section 6-C of the Andhra Pradesh General Sales Tax Act,
c 1957, and, in that context, this Court has laid down :

"It is commonly accepted that a transaction of sale may consist of
a sale of the product and a separate sale of the container housing
the product with respective sale considerations for the product and
the container separately; or it may consist of a sale of the product
D
and a sale of the container but both sales being conceived of as
integrated components of a single sale transaction: or, what may
yet be a third case, it may consist of a sale of the product with the
transfer of the container without any sale consideration therefor.
The question in every case will be a question of fact as to what are
E 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 cir-
cumstance th'!_t 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
F conclusive of the true character of the transaction. It is not un-
known that traders may, for the advantage of their trade, show
what is essentially a single sale transaction of product and con-
tainer, or a transaction of a sale of the product only with no
consideration for transfer of the container, as divisible into two
separate transactions, one of sale of the product, and the other a
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sale of the container, with a distinct price shown against each.
Similarly where pJrsuant 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. Alter-
natively, it may be a case where the container is sold and the
H deposit represents the consideration for the sale, and in the event
VASAVADATIACEMENTSv. STATE[S.C.AGRAWAL,J.] 753

of the container being retu med to the dealer the deposit is A
returned by way of consideration for the resale. In every case, the
assessing authority is obliged to astertain 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 emphasised by B
this Court." [pp.384-85]

After referring to the decision this Court in Jamana Flour & Oil Mill
(P) Ltd. v. State of Biha1; [1987] 2 SCR 1046, this Court has observed :

"It is, therefore, perfectly plain that the issue as to whether the
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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 D
may imply an intention to sell the packing material. In a case where
the packing material is an independent commodity and the pack-
ing material as well as the contents are sold independently, the
packing material is liable to tax on its footing. Whether a transac-
tion for sale of packing material is an independent transaction will
depend upon several factors, some of them being : E

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; F

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

4. The packing is used for convenience or transport and the G
'. 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."
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754 SUPREME COURT REPORTS (1996]1 S.C.R.

A "Turning to section 6-C of the Act, it seems to envisage a· case
where it is the goods which are sold and there is actual sale of the
packing material. 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,
B the section declares, the tax will be leviable o~ such deemed sale
of the packing material at the rate of tax applicable to the sale of > ..
the goods themselves. It is difficult to comprehend the need for
such a provision. It can at best be regarded a provision by way of
clarification of an existing legal situation. If the transaction is one
c of sale of the goods only, clearly all that can be taxed in fact is the
sale of the goods, and the rate to be applied must be the rate as
in the case of such goods. It may be that the price of the goods is
determined upon a consideration of several components, including
the value of the packing material, but none the less the price is the
price of the goods. It is not open to anyone to say that the value
D of the different components which have entered into a detennina-
tion of the price of the goods should be analysed and separated,
in order that different rates of tax should be applied according to
the character of the component (for example, packing material).
What section 6-C intends to lay down is that even npon such
E 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
F 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
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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
H fiction, and for a limited purpose; that such sale can be con-
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VASAVADATIACEMENTSv. STATE[S.C.AGRAWAL,J.] 755

> templated. In the circumstances, no question arises of section 6-C A
•• being constitutionally discriminatory, and therefore invalid." (p.
388]

In Ranganatha Associates v. State of Kamataka (supra) a Division
Bench of the Karnataka High Court; after taking note of the decision of
this Court in Raj Shee/ & Ors. v. State of Andhra Pradesh & Ors. (supra), B
I' has observed :
•
"The principle behind Section 5 (3-D) seems to us, to be, that, a
buyer bargains for the goods and pays the price in its entirety
inclusive of the value of the packing material, whenever the goods
are sold in a packed condition (or housed in a container); the
c
consideration for the sale essentially, is the consideration for the
goods, though, the price (i.e., the consideration) may have as a
component of it, the price of the packing material (or of the
container). This is not an irrelevant principle at all, if one considers
the practical aspect of a trading transaction. Here under Section D
5(3-D) the Legislature has thought it fit and convenient to treat
the sale of goods contained in a container as an integrated, single
transaction of sale of the goods; this levy makes it simpler the
assessee to maintain his accounts, and convenient for the revenue
to levy and collect the tax; it makes it unnecessary to analyse the E
components of a particular sale and enter upon investigation to
find out the real price (i.e., genuine price) at which the packing
f
material (or the container) is purported to have been sold, and
separate it from the computation of the turnover regarding the
particular goods (which was packed in the packing materials or
housed in the container). F

Simplicity of procedure and convenience of the tax collection are
not irrelevant while considering the validity of a particular levy.
§ection 5(3-D) on the fact of it elevates the status of the container
(or the packing material) to that of the goods dressed in it. Such G
a container/packing material is distinct from, another con-
tainer/packing material which has not housed any goods." (pp.
852-53]

The Karnataka High Court has also referred to the decision of this
Court in Union of Indian v. Bombay Tyre Jntemational Ltd., (1984] 1 SCR H
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756 SUPREME COURT REPORTS [1996] 1 S.C.R.

A 347, and has said :

"A seller who sells the bottles only and the purchaser who pur-
chases them as such, are not concerned with anything else, except
the marketability of the bottles. But the person who sells liquor
contained in a bottle, and a person who purchases such a liquor,
B
is concerned with the liquor and its marketability; the payment of
a price for the bottle in such a situation is part of the bargain for
the sale and purchase of the liquor. In other words, the sale and >
purchase of the bottles, here, is incidental to and integrated with
the sale and purchase of the liquor. This makes all the difference
c and for the purpose of the levy of sales tax, this distinction between
the two types of sales which classify the dealers differently i.e., a
trader who sells or purchases only bottles and another dealer who
sells or purchases the bottles, because it contains the liquor, cannot
be held as an arbitrary classification, bearing no nexus to the object
of the Act. Such a classification, also, makes the levy and collection
D
simpler reducing the area of disputes to the minimum; it also,
prevents the dealers from resorting to tax evading mechanisation,
while dealing in goods which are sold in containers or in packed
condition by showing unrealistic prices for the container (or the
packing materials) and the goods, so as to reduce the sales tax
E payable in a given case, i.e., if the sale of the goods attracts a higher
rate of taxation, then, the dealers are likely to sell the goods for a
lesser price and offset the reduction by increasing the sale price
of the container. Section 5(3-D), thus, prevents the dealers from
being tempted to resort to such a scheme of tax evasion. Taxation
operates in the sphere of realities and a law levying a tax normally
F
takes note of such realities. A hypothetical equality, is not the basis
of Article 14 of the Constitution. Whenever, a distinction exists in
reality, and such a distinction has· a reasonable nexus with the
object of the law, the distinction made by the law cannot be
nullified as violative of Article 14 of the Constitution; every dis-
G tinction·made, is not an act of discrimination; a reasonable distinc-
tion is the product of a sound discretion."

Shri Harish M. Salve, the learned senior counsel appearing for the
appellants, has not assailed the constitutional validity of the provisions of
H Section 5(3-D) of the Act. He has confined his submissions to the inter-
VASAVADATIACEMENTSv. STATE[S.C.AGRAWAL,J I 757

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pretation of the said provisions. The learned counsel has submit! ed that in A
Ranganatha Associates v. State of Kamataka (supra) the High Court was in
error in departing from the law laid down by this Court in Raj Sheel & 01i
, .. State of Andhra Pradesh & Ors. (supra). Shri Salve has urged that in view
nf the decision in Raj Sheel & Ors. v. State ofAndhra Pradesh & OJS. (supra)
in respect of provisions of Section 6-C of the Andhra Pradesh General
B
Sales Tax Act, 1957, which are similar to the provisions contained in
Section 5(3-D) of the Act, the question as to the liability for sales tax would
depend on the actual ingredients of the contract and intention of the
parties which has to be determined in each case.

Shri T.L. Vishwanath Iyer, the learned senior counsel appearing for c
the State, has, however, supported the decision of the Karnataka High
Court and has placed reliance on the decisions of this Court in Commis·
sioner of Sales Tax, UP. v. Raj Bharat Das & Bros., 1988 Vol. 71 STC 277
and Ramco Cement Distribution Co. Pvt. Ltd. v. State of Tamil Nadu & Ors.,
1993 Vol. 88 STC 151.
D
Having carefully considered the decision of the Karnataka High
Court in Ranganatha Associates v. State of Kamataka (supra), we are of the
view that the High Court was in error in construing the provisions of
Section 5(3-D) to hold that the legislature has thought it fit and convenient
to treat the sale of goods contained in a container as an integrated, single E
transaction of sale of the goods and that it makes it unnecessary to analyse
the components of a particular sale enter upon investigation to find out the
read price at which the packing material is purported to have been sold,
and separate it from the computation of the turnover regarding the par-
ticular goods which was packed in the packing materials or housed in the
container. The reasoning of the Karnataka High Court is similar to that of F
the Andhra Pradesh High Court in Raj Sheel v. The State Andhra Pradesh,
(1987) 64 STC 398. In that case the Andhra Pradesh High Court was
dealing with cases with of manufacturers of or dealers in beer as well as
manufacturers of or dealers in cement who had challenged the constitu-
tional validity of Section 6-C of the Andhra Pradesh General Sales Tax G
Act, 1957 on the ground that it was violative of Article 14 of the Constitu·
tion. While considering the constitutional validity of Section 6-C, the
Andhra Pradesh High Court had examined the nature and characteristics
of the transaction involving the sale of cement packed in the materials
which are generally used for packing purposes for the sale of these goods
in the market and had observed that in the sale of those goods the H
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758 Sll PREME COURT REPORTS (1996] 1 S.C.R.

A container are necessary concomitants and the transfer of property in the
containers in favour of the purchaser of the contents is incidental or ). •
unavoidable and that such a sale transaction would be a composite and
integrated sale of the containers a~d the contents and one is not divisible
from the other and the transaction is understood by the seller and the
purchaser as the sale of the contents in those containers. Having regard to
B the nature of the such transactions and the goods sold, the Andhra Pradesh
High Court held that Section 6-C did not bring about any change in the
legal position and that it was incorporated in the Andhra Pradesh General r
Sales Tax Act to obviate the possibility of different assessing authorities
taking different views on the rate of tax exigible on the turn over and
relating to packing material. The Andhra Pradesh High Court rejected the
c contention that by virtue of section 6-C the rate of tax applicable to the
containers will vary according to the rate applicable to the contents and
this would lead to arbitrariness and discrimination inasmuch as the same
kind of containers would be subject to different rates of tax. The High
Court held that when the content was sold with the container, both the
D dealer as well as the purchaser treated the transaction as the one involving
the sale of the merchandise (the contents) only and the sale of the con-
tainer, if any, would get merged in the sale of the content itself and thus it
'
is always treated as a single transaction of sale of both the container and
the content and the container whose identity pales into ins;gnificance is
identified with the content itself and the value of the container forms part
E of the consideration paid by the purchaser and it is one of the co~ts
of the sale price like the other components such as freight charge;('excise
1
duty, sales tax, etc.

This Court in Raj Slzeel & Or>. v. State of Andhra Pradesh & Ors.
'
(supra), however, did not approve the said view of the Andhra Pradesh
F
High Court and, while allowing the appeals, nbserved :

"In the appeals before us, we find that the High Court has
proceeded on the assumption that the transactions are covered by
!rode practice and having regard to the nature of the goods it has
G inferred that what is charged is the price of the bottled beer or of
cement packed in gunny bags, and reference has also been made
to the excise law and the Cement Control Order requiring that the
liquor or the cement, as the case may be, must be sold in bottles
or in gunny bags respectively. We are constrained to observe that
H no attempt has been made by the tax authorities to ascertain the
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VASAVADATTACEMENTSv. STATE IS.C.AGRAWAL,J.] 759

facts of each case and to determine what were the actual in- A
gredients of the contract and the intention of the parties. Assump-
tions have been made when what was required was a detailed
investigation into the facts. We- have indicated earlier the several
possibilities which are open in cases of this kind, and how the
ultimate conclusion can be vitally affected by the tests to be
B
·applied. Because of the lack of adequate and clear factual material,
the High Court also was compelled to proceed on the basis of
generaiised statements and br~ad assumptions. We are unable, in
the circumstances, to hold that the cases can be regarded as
disposed of finally. It is regrettable but the cases must gu back for
proper findings on facts to be ascertained on fuller investigation." c
[pp. 388-89]

The said observations are equally applicable to the present case
involving construction of Section 5(3-D) of the Act. The liability for sale
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 deter- D
mining what are the ingredients of the contract and the intention of the
parties in accvrdance with_ the decision of this Court in Raj Sheet case
(supra).

In Commissioner of Sales Tax, U.P. v. Rai Bharat Das & Bros. (supra) E
. and Ramco Cement Distlibution Co. Pvt. Ltd. v. State of Tamil Nadu & Ors.
(supra) there were findings of fact recorded by the authorities under the
sale tax enactments and the decisi"n was given in the light of the facts
found. The said decisions have, therefore, no bearing on the matter in issue.

The appeals are therefore, allowed and the Writ Petitions filed by F
the appellants are disposed of with the direction that the liability of the
appellants for sales tax under Section 5(3-D) on the gunny bags/plastic bags
in which the cement manufactured by the appellants is packed for sale
would have to be determined after investigation into the facts and deter-
mining what were the ingredients of the contract and the intention of the G
,. - parties. The impugned order of the High Court dated December 7, 1990
would stand modified accordingly. But, in the circumstance, there is no
order as to costs.

M.K. Appeal allowed.