Satyanarayana Raju, J.
1. These Tax Revision Cases have been referred for the decision of the Full Bench by Mohamed Ahmed Ansari, J. (as he then was), and Jaganmohan Reddy, J.
2. The question for decision in these cases is whether the price of the materials used for packing re-dried tobacco is liable to be included in the taxable turnover of the assessees.
3. The petitioners, who are hereinafter refer red to as 'the assessees', are a private limited company registered under the provisions of the Indian Companies Act, having their place of business in Guntur town. They have a plant for redrying raw tobacco, which is a process designed to create suitable conditions for the proper manuring of the leaf,
4. For a proper appreciation of the contentions raised before us, it is necessary to understand the nature and purpose of what is, in common parlance, known as the redrying process. After the grading and stripping operations are over, the leaf is reconditioned or redried. For the purpose all the leading exporters and cigarette manufacturers use the re-ordering or re-conditioning plant.
This plant consists of a series of three chambers in each of which the heat and humidity are regulated. The tobacco leaf is passed through each chamber under the action of steam and strong air current. The significance of the re-conditioning process lies in the fact that it re-dries the leaves to uniform moisture, besides helping to kill tie insects and germs that may be present m the leaf by the high temperature maintained in the first chamber of the machine.
The tobacco leaf as it comes out of the plant is in a soft and pliable condition and contains 10 to 12 per cent of moisture. Immediately afterwards the leaf is packed either in bales, cases ct hogsheads. In order to ensure that the moisture content is kept at the required level of 10 to 12 per cent, the tobacco leaf as it emerges from the redrying machine is packed in water-proof packing material and stored for the requisite period.
5. The assessees purchase the required materials employed in the packing process and deliver the bales to their customers. It is common ground that the assessees charge an inclusive rate for re-drying and packing the tobacco entrusted to them by their constituents.
6. On behalf of the assessees, it is contended that packing is an integral part of the re-drying process and, therefore, the contract between the parties is one of work and labour, and that no sale is involved in the transaction. It is, however, argued by the learned Government Pleader that the price of the packing materials is liable to be included in the taxable turnover of the assessees as the property in those materials is transferred to the customers for a price and the transaction, so far as the transfer of the packing materials is concerned, is clearly one of sale.
7. It will be convenient at this stage to refer to the relevant provisions of the statute. Under Section 53 of the Andhra State Act (XXX of 1953), the laws in force in the territories in the State of Andhra prior to its constitution, are to continue to be in force even thereafter, and one of those laws is the Madras General Sales Tax Act (Madras Act IX of 1939) (hereinafter referred to as 'the Madras Act'). The preamble to the Act states that it is expedient to provide for the levy of a general tax on the sale of goods.
Section 2(h) defines 'sale' as meaning 'every transfer of the property in goods by one person to another in the course of trade or business for cash or for deferred payment or other valuable consideration. Section 2(i) defines turnover as the aggregate amount for which goods are either bought by or sold by a dealer, whether for cash or for deferred payment or other valuable consideration. Section 3 is the charging section and provides that every dealer shall pay for each year a tax on his total turnover for such year.
8. In the definition of 'Turnover' in Section 2(i), the following Explanation is added;
'Subject to such conditions and restrictions, if any, as may be prescribed in this behalf- (i) the amount for which goods are sold shall, in relation to a works contract be deemed to he the amount payable to the dealer for carrying out such contract, less such portion as may be prescribed of such amount, representing the usual proportion of the cost of labour to the cost of the materials used in carrying out such contract.'
9. There has been much diversity and even conflict of opinion in relation to the proper principle by which to test whether transactions of the nature that we have in these cases, are contracts for the sale of goods or contracts for work and labour done. There are two Bench decisions of this Court which have taken the view that materials used in the process of packing redried tobacco are the subject of sale within the meaning of the Act.
In the first of them, namely, Krishna and Co., Ltd. Guntur v. State of Andhra 1956-7 S.T.C. 26 : (AIR 1957 Andh Pra 706) a Division Bench, consisting of Subba Rao C.J. and Bhimasankaram, J., had to consider the very question which falls for decision in these cases. It was argued before them as it is now argued before that the pocking material is an integral part of the redrying process and, therefore, there was no sale involved in the transaction. After considering the case law on the subject, the learned Judges observed as follows (at page 30) (of S. T. C.) : (at p. 708 of AIR)
'It cannot be said that the packing Material has become an integral part of the drying process like the parchment and ink of an artist. They are extraneous marketable material used to preserve dried tobacco from contamination or loss'.
The learned Judges summarised their conclusions as follows:
'They are clearly movable property within the wide meaning of the words 'goods' in the Act. The assessee had property in these goods, for, it is conceded that he purchased the material. It cannot also be disputed that he transferred the property in the goods to his customer for consideration. The amounts clearly show that he charged for the material in addition to his remuneration for drying the tobacco, though the price shown in the accounts is the inclusive one. All the ingredients of the charging section, read with the definition, are satisfied. Unless we can hold that the materials, after being packed, have been transformed into some-Other commodity not covered by the definition of goods, it is not possible to hold that there was-no sale of that material.'
10. Again in Hanumantha Rao v. State of Andhra, 1956-7 S. T. C. 486 (Andhra) a Division Bench of the Andhra High Court, consisting of Subbarao, C. J, and Viswanatha Sastry J., reached the same conclusion. There the assessee carried on the business of baling and pressing palmyra fibre. He purchased gunny cloth and from hoops for the purpose of using them in the baling process. The assessee contended that the transaction did not involve any sale of goods, that the contracts entered into by him with his constituents were works contracts and that the gunny cloth, and iron hoops became an integral part of the product entrusted to him for baling and pressing, and that therefore he was not liable to be assessed to sales tax on the value of the gunny bags and iron hoops used by him. The learned Judges held that the packing materials were 'goods' and that in the course of carrying on the business of baling and pressing fibre, the assessee transferred the property in those goods and therefore he was rightly assessed to sales tax.
11. These two decisions wholly support the contention advanced on behalf of the State. In both these cases, the learned Judges referred to the decision of the Madras High Court in Gannon Dunkerley and Co., (Madras) Ltd v. State of Madras, 1954-5 S.T.C. 216 : (AIR 1954 Mad 1130). They distinguished the said decision on the ground that the building contract in that case was one of work and labour and the material supplied formed an integal part of the building.
Subsequently the Supreme Court affirmed the decision of the Madras High Court in State of Madras v. Gannon Dunkerley and Co. (Madras) Ltd., : 1SCR379 . The Madras High Court, has, in the following cases, viz. Sundaram Motors (Private) Ltd. v. State Of Madras, : AIR1959Mad33 and United Bleachers Ltd. v. State of Madras 1960-11 S.T.C, 278 (Mad) dissented from the view taken by the learned Judges of this Court.
12. Before us, it is argued by the assesses that the transfer of property in the packing materials is ancillary to the contract for the use of skill and labour and that in view of the judgment of the Supreme Court in : 1SCR379 the decisions of this Court would require reconsideration.
13. Now, there can be three types of contract : for work and labour simply, a mixed contract of labour and materials, and another for goods sold and delivered. The first and last categories of contract present no difficulty. With regard to the first of them, there is no sale, for the supply of labour and work is not a contract of sale of goods, as labour and work cannot be deemed to be 'goods' in any sense of the term.
With regard to the third of them, the transaction is indisputably one of sale but where, as here, there is a mixed contract of work and labour and materials, the question is whether the work and labour is of the essence of the contract or whether it is the materials that are supplied. It is possible that even in this class of cases, the parties might enter into distinct and separate contracts, one for the transfer of materials for money consideration, and the other for payment of remuneration for services and for work done. In such a case there arc really two agreements, though in form there is only one contract.
14. Now, both under the comon law and the statute hiw relating to sale of goods, to constitute a transaction of sale, there should be an agreement, express or implied, relating to transfer of the goods to be completed by the passing of title in those goods. As pointed out by their Lordships of the Supreme Court, in : 1SCR379 , it is of the essence of this concept that both the agreement and the sale should relate to the same subject matter.
14a. Benjamin on Sale, 8th edition, contains an elaborate discussion of the English cases on the subject. At page 355 occurs the following passage :
'It follows from this decision Reid v. Macbeth 1904 A.C. 223 that the various rules in the Act as to the passing of the property in goods do not apply, in the absence of a contrary intention, unless the materials are contracted for separatim and not merely as part of the larger corpus which is the subject-matter of the contract. The property in them will prima facie pass when the property passes in the larger corpus itself.'
After a discussion of the principles, the learned author has deduced the following proposition :
'The principles already discussed have shown that a contract of sale is not constituted merely by reason that the property in materials is to ha transferred to the employer. If they are simply accessory to work and labour, the contract is for work, labour and materials.''
15. Now, we may refer to the Madras decision in 1954-5 S.T.C. 216 : (AIR 1954 Mad 1130), which was later affirmed by their Lordships of the Supreme Court. The Madras High Court there held that the expression 'sale of goods' had the same meaning in Entry No. 48, List II of Schedule VII of the Government of India Act, 1935, which it had in the Sale of Goods Act (III of 1930) and that construction contracts were agreements to execute works to be paid for according to measurements at the rates specified in the schedule thereto and were not contracts for sale of the materials used therein, and that further, they were entire and indivisible and could not be broken up into a contract for sale of materials and a contract for payment for work done.
In the result, the Madras High Court held that the impugned provisions introduced by the Amendment Act No. XXV of 1947 were ultra vires the powers of the Provincial Legislature. Against this decision the State of Madras preferred an appeal to the Supreme Court. The decision of the Supreme Court is reported in : 1SCR379 . Their Lordships summarised their conclusions as follows :
'The expression 'sale of goods' in Entry 48 is is a nomen juris, its essential ingredients being an agreement to sell movables for a price and property passing therein pursuant to that agreement. In a building contract, which is, as in the present case, one, entire and indivisible and that is its norm, there is no sale of goods, and it is not within the competence of the Provincial Legislature under Entry 48 to impose a tax on the supply of the materials used in such a contract treating it as a sale.'
16. The principle emerging from the decision of their Lordships, therefore, is that where the contract is one, entire and indivisible, it is not within the competence of the State Legislature to impose a tax on the supply of the materials used in such a contract treating it as a sale.
17. The process of redrying raw tobacco brought to the assessees by their constituents is one, entire and indivisible. The object of the re-drying process is to standaidize the moisture content at the required level of 10 to 12 per cent and when the tobacco leaf emerges from the reconditioning chamber, it roust be packed in waterproof packing material and stored for the requisite period. Unless the packing is done immediately, the tobacco loses its standardized moisture content, and without the packing, the process is not complete. It is clear that the packing of re-dried tobacco and its storage for the requisite period is an intergal part of the re-drying process.
18. It is argued on behalf of the State that even it the supply of materials under the contract cannot be regarded as a sale under the Sale of Goods Act, the contract is nevertheless a composite agreement under which the assessee undertakes to supply material and contribute labour, and that it is open to the State in execution of its tax laws, to split up that agreement into its constituent parts, single out that which relates to supply of materials and to impose tax thereon treating it as a sale.
This was indeed the argument advanced before the Supreme Court in : 1SCR379 . Their Lordships held that if the agreement between the parties could be split up in the manner suggested by the State, the resultant would not he a sale in the sense of the Sale of Goods Act as there was in the contract neither an agreement to sell materials as such nor does property in them pass as movables. It was further pointed out by their Lordships that another difficulty in the way of accepting the contention advanced on behalf of the State as to the splitting up the contract was that the property with the materials used therein did not pass to the other party in the contract as movable property.
The contention that a taxable sale would result from the disintegration of the sale could be rested only on the ground that there was an agreement to sell the materials as such. In the instant transaction, the theory that they can be broken up into their constituent parts and that as regards the supply of materials it could be said that there was a sale, must fail both on the ground that there was no agreement to sell materials as such and that property in them did not pass as movables.
19. The question then is : whether the contract between the assessees and their constituents is one, entire and indivisible, or whether there are really two agreements, one for the transfer of materials for money consideration, and the other for payment of remuneration for services and work done. Undoubtedly, the charge made by the assessees is one and indivisible. It is common ground that the assessees recover from their constituents an inclusive charge of Rs. 22/- per bale.
There is no splitting up of the charge into its various components. One of the tests which may be usefully applied in judging whether there are really two agreements, one for the transfer of materials for money consideration, and the other for payment of remuneration for services, is to find whether the assessees could make a higher charge if the price of the materials goes up and the constituent is entitled to insist upon a reduction of the total charge if the price of the materials goes down.
There is no agreement between the parties either for a variation of the price depending upon the variation in the prices of materials supplied. The assessees charge a fixed amount in either case, not depending upon the fluctuation in the prices of materials. Having regard to the fact that the contract between the assessees and their constituents is one and indivisible, there is no sale or the materials as such involved in the transaction.
20. From the above discussion it follows that the decisions of this Court in 1956-7 S.T.C. 26 : (AIR 1957 Andh Pra 706), and 1956-7 S.T.C. 486 (Andhra), do not accord with the principle laid down by their Lordships of the Supreme Court in : 1SCR379 . It must be held that having regard to the nature of the transactions in the pressent case, it is not within the competence of the Assessing Authorities to impose the tax on the supply of the materials used in the contracts treating them as sales.
21. On this conclusion, it follows that the assessment made on the impugned transactions cannot he sustained. These Revision cases are allowed, and the taxes, it collected, shall be refunded to the petitioners. The petitioners will have their costs from the respondents. Advocate's fee Rs. 100/- in each of the cases.