1. These two revision petitions have been preferred by the revenue against the orders of the Sales Tax Appellate Tribunal (Additional Bench), Coimbatore, dated 6th July, 1970, made in Coimbatore Tribunal Appeals Nos. 857/1965-66 and 958/1964-65 of 1968. Both the appeals were disposed of together by the Tribunal and the point arising is the same in two successive years.
2. The respondent-assessees are Messrs. Sri Ram Cotton Pressing Factory (Private) Ltd. engaged in the business of pressing cotton waste. In the course of their business they had purchased hessian cloth and hoop iron to the extent of Rs. 31,643.18 in 1964-65 and Rs. 7,701 in 1965-66 and utilised the same in the packing of cotton waste pressed by them, which were given to them for such pressing by their customers. The assessing authority considered that the respondents had sold hessian cloth and hoop iron used in packing the cotton waste to the respective customers. Since the respondents had not maintained separate accounts in respect of the alleged sale of hessian cloth and hoop iron, the assessing authority arrived at the sale price of these materials for the two years in question by adding 10 per cent profit to the cost price and assessed the same to sales tax. The objection of the respondents to the assessment of the said amounts on the ground that there was no sale of hessian cloth and hoop iron by the respondents to their customers was overruled by the assessing authority. The appeals preferred by the respondents to the appellate authority proved unsuccessful. However, when the respondents preferred second appeals to the Sales Tax Appellate Tribunal, the Tribunal by its impugned orders allowed the appeals holding that the contract entered into by the respondents with their customers was only a works contract or labour contract which did not include any implied agreement to sell hessian cloth or hoop iron and that, therefore, the amounts in question could not be assessed to sales tax. It is the correctness of this conclusion of the Tribunal that is challenged in these revision petitions before this court.
3. We shall refer to the following admitted facts :
(1) There were no accounts maintained by the respondents showing the sales of these hessian cloth and hoop iron. (2) The hessian cloth and hoop iron purchased by the respondents were admittedly used in packing the pressed cotton when delivering them to their customers. (3) The Appellate Assistant Commissioner in the course of his order pointed out that the respondents were found to have charged the value of hoop iron and hessian cloth, etc., supplied by them and that it was indicative of the fact that there was an implied contract for the supply of materials. However, the Sales Tax Appellate Tribunal in its impugned order pointed out that it had perused the bills produced by the respondents, but it did not find any indication that any charge as such was made for the supply of those materials and the correctness of this finding of the Tribunal was not challenged before us. (4) There were cases in which the customers themselves brought their hessian cloth and hoop iron which the respondents used in packing the pressed cotton, when delivering them to them after pressing. In other cases, the respondents utilised their own hessian cloth and hoop iron for packing cotton waste, after the same had been pressed. It is against the background of the above-admitted position that we have to consider the question as to whether the Tribunal was right in holding that there was no sale of hessian cloth and hoop iron by the respondents to their customers so as to attract liability to sales tax under the provisions of the Tamil Nadu General Sales Tax Act, 1959.
4. It is well-settled that in the case of a works contract or labour contract, if the person entering into such contract has to supply certain materials incidental to the execution of that contract, the said supply will not constitute a sale of those materials unless there is an agreement, express or implied, for the sale of the said materials as such. That was the view taken by this court in United Bleachers Ltd. v. State of Madras  11 S.T.C 278 following the judgment of the Supreme Court in State of Madras v. Gannon Dunkerley and Co. : 1SCR379 . The decision of this court referred to above dealt with the case of an assessee which owned a processing factory for textiles. Several of the spinning and weaving mills at Coimbatore forwarded to the assessee unbleached yarn and cloth manufactured by their mills for the purpose of being bleached or dyed, calendered, pressed and folded. The assessee after doing these works packed and delivered back the goods to the customer mills. The packing materials used, namely, brown kraft papers, hoop iron, hessian cloth, jute twine, palm mats, etc., were purchased by the assessee. In making the charges for services, the assessee included in the bill the charge for packing and the packing materials, though they were not separately shown. In that context a question arose, whether there had been a sale of the packing materials or not. This court pointed out:
The question whether there has been a sale of the material would depend on the contract between the parties, expressed or implied. A mere contract of service, although a transfer of a movable property is involved therein, cannot by itself imply a sale. For example, in the case of a bleaching and dyeing contract, the use of the materials utilised for the purpose of bleaching or dyeing though charged for even at a profit, would not amount to a sale, for the transfer of materials would be necessary or incidental to the contract of service But, if a person were to buy rice or salt in gunny bags, one could imply a contract to purchase the goods as packed, i.e., along with the packing materials. In such a case, even if the seller does not intend to make a profit on the gunnies as such, there would be a sale within the meaning of the Act, as there is a profit-motive in the business of selling rice or salt.
5. After referring to certain decisions of this court which dealt with the question of liability to assessment to sales tax in respect of packing materials where the contract was for the purchase of certain other principal materials, this court observed :
The decisions referred to above were cases in which there had been a sale of the principal article and the question arose whether the packing materials used for the delivery of the principal articles could also be held to have been sold. In such cases the express agreement between the parties was to purchase the principal article, e. g., salt, tobacco or rice ; there was no specific and separate agreement to purchase the packing materials alone. But, it could not be that the purchaser was agreeable to take the principal article alone ; it is but reasonable to hold that the intention was to purchase the goods as packed, so that in the contract of sale of the principal item, the sale of the packing material was implicit. To put it in other words, the intention of the parties being to deliver the goods as packed, a contract to purchase the packing materials could readily be inferred in the circumstances of those cases.
6. This court thereafter considered the distinction between the purchase of certain principal materials as packed and the works contract or labour contract in which incidentally the use of packing materials was involved and pointed out :
What distinguishes then a mere contract of labour in which certain materials are used from a contract when such materials could be held to be sold, is the existence of an intention in the latter to sell the materials as such. Such an intention might be expressed or implied ; but in the absence of such an intention, there could be no sale....
Thus, in order that there could be a levy of sales tax, there should be a sale. Whether in regard to packing materials utilised in the performance of a contract between the parties, there was a sale, would depend on the agreement between the parties. Such an agreement could be express or implied. Where the main contract was one of sale of goods as packed, such an agreement to sell the packing materials could, having regard to the nature of the contract, be readily implied; but where the main contract was merely one of service, the fact that in the performance of such service packing materials are used and charged for, would not lead to a necessary inference that a sale of the materials was intended. In such a case, the onus would be on the taxing authority to prove that there was an agreement to sell the packing materials and a sale by the passing of property therein.
7. Thus, if the principle laid down by the above decision of this court is applied to the present case, it will clearly show that there was no sale of the packing materials and that therefore with reference to the notional sale value of those packing materials no tax could be levied.
8. To a similar effect is the decision of this court in State of Tamil Nadu v. Venkateswara Roller Flour Mills and Metal Industries  33 S.T.C. 369. In that case also the assessees were owners of flour mills and they were dealers and manufacturers of wheat products. The assessees entered into a contract with the Food Corporation of India under which the corporation was to supply wheat packed in gunny bags to the assessees for converting the same into maida, sooji, atta and bran and the assessees, after such conversion, should deliver to the corporation the wheat products marked and packed according to the existing standard packings for which the assessees should be paid a flat rate per ton. The assessees used old gunny bags in which wheat was supplied to them for packing the wheat products wherever it was possible and in cases where old gunny bags could not be used, they used new gunny bags purchased from out-of-State dealers by issuing C forms. The sales tax authorities assessed the assessees to sales tax on the value of such old and new gunny bags in which the wheat products had been packed and delivered to the corporation. With regard to the old gunny bags the contention of the authorities was that such old gunny bags were first sold by the Food Corporation of India to the assessees and thereafter the same were resold by the assessees to the Food Corporation of India when the wheat products were supplied. With regard to the new gunny bags used by the assessees, the contention was that the assessees purchased the same for resale and subsequently sold the same to the Food Corporation of India when they used those gunny bags for packing wheat products. This court negatived this contention of the assessing authorities. This court pointed out:
On a due consideration of the rival contentions and the relevant clauses in the contract between the Food Corporation and the assessees, we are convinced that in this case there cannot be a contract for sale of gunny bags as such by the assessees to the corporation and that it is not possible even to infer an implied contract of sale of gunny bags. It is not in dispute that the agreement does not at all refer to any obligation on the part of the assessees to supply old or new gunny bags and to pack the wheat products in those bags. As a matter of fact, it is seen that the assessees have in most cases used old gunny bags in which wheat was supplied to them and only in cases where such old gunny bags could not be used, they had used new gunny bags for packing the wheat products. The agreement nowhere refers to the value of the gunny bags either old or new as forming part of the charges and the fact that the charges are fixed at a flat rate per ton for the wheat products supplied without reference to the nature of the gunnies used also shows that the value of the gunny bags used by the assessees for packing the wheat products has not even been contemplated by the parties. In the face of the various provisions in the agreement, it is not possible for us to infer an implied contract for sale of gunny bags, either old or new, by the assessees to the Food Corporation of India.
9. It should be noticed that in the case of United Bleachers Ltd. v. State of Madras  11 S.T.C. 278, the assessee had actually included in the bill the charges for packing and packing materials, though they were not separately shown. But in the case of State of Tamil Nadu v. Venkateswara Roller Flour Mills and Metal Industries  33 S.T.C. 369, there was nothing in the bills to show that the packing materials were charged by the assessees. Notwithstanding this difference in the two cases, this court came to the conclusion that there was no sale of packing materials because there was no contract, express or implied, for the sale of those packing materials. This court also pointed out that the mere fact that the property in the goods passed from one to the other was not sufficient to constitute a sale, because such passing of property must be the result of an agreement between the parties either express or implied.
10. Notwithstanding these decisions of this court, the learned Additional Government Pleader very strongly relied on a decision of the High Court of Madhya Pradesh in Nimar Cotton Press Factory v. Commissioner of Sales Tax, Madhya Pradesh, Indore  21 S.T.C. 505. The Madhya Pradesh High Court in that judgment purported to follow an earlier judgment of a Full Bench of that Court in respect of the same assessee in Nimar Cotton Press v. Sales Tax Officer, Nimar Circle, Khandwa  12 S.T.C. 313 . In the Full Bench case the question came to be considered, in view of the judgment of the Supreme Court in State of Madras v. Gannon Dunkerley and Co. : 1SCR379 , since it was argued that that decision had impliedly overruled the earlier decision of the High Court of Madhya Pradesh in Jaikishan Gopikishan v. Commissioner of Sales Tax, Madhya Bharat  8 S.T.C. 286. The Full Bench also was dealing with the case of a factory engaged in the business of pressing and baling ginned cotton. With regard to the actual contract between the assessee and his customers in that case, the Full Bench pointed out :
When cotton is ginned, that is, separated from its seeds, it is in a very loose condition. In that state it cannot be easily dealt with for the purpose of trade, manufacture or transport. It has, therefore, to be pressed into bales. The compressing is not done by the hessian cloth or the iron hoops, but by a machine worked by mechanical or hydraulic power which exerts great and steady pressure on the ginned cotton in a cast and thus compresses it into bales. The packing material is for convenience of transport and to prevent the bales from being 'unloosened' during the course of handling. The necessity of packing compressed cotton varies with the factor of transport and the time within which the pressed cotton is to be spun and used for manufacture in the textile mills. If the pressed cotton is to be taken immediately to an adjoining textile mill and used for manufacture, it may be wholly unnecessary to use any packing material. The necessity would be great if the pressed bales are to be transported over long distances or to overseas. Therefore a contract for pressing cotton and delivery of the compressed cotton in a certain kind of packing is really divisible into two distinct contracts : (i) one of labour and work, namely, the pressing of the cotton and (ii) the other of packing the compressed cotton which is partly of material and of labour. In the packing part' of the contract, the substance of the agreement is not the skill and labour but it is the material.
11. The Full Bench decision of the High Court of Madhya Pradesh split up the contract into two, one as a contract of labour and work and the other as a contract for packing. With great respect to the learned Judges, we are unable to accept their reasoning. As a matter of fact, the learned Judges themselves have pointed out that the packing material is for convenience of transport and to prevent the bales from being 'unloosened' during the course of handling. The ginned cotton has to be handled even for the purpose of its being removed from the factory to the adjoining mills and it is not as if the removal of the cotton to adjoining mills does not require handling and that handling does not require packing. Therefore the very contract for ginning cotton clearly involves, as an incident thereof packing ginned cotton for being handled after the ginning is over. Under such circumstances, it is very difficult for us to agree with the reasoning and conclusion of the High Court of Madhya Pradesh, that such a contract should be artificially split up into two, one, a contract of labour and the other, a contract for packing. As a matter of fact, in the Full Bench decision, the decision of this court in United Bleachers Ltd. v. State of Madras  11 S.T.C. 278 was noticed in paragraph 14 of the judgment. After referring to the said judgment of this court and after referring to the fact that this court in that judgment had dissented from the decision in A.S. Krishna & Co. Ltd. v. State of Andhra  7 S.T.C. 26 and B.V. Hanumantha Rao v. State of Andhra  7 S.T.C. 486, the Full Bench proceeded to state :
The dissent is on the ground that where the main contract is merely one of service, the fact that in the performance of such service, packing materials are used and charged for will not lead to a necessary inference that the sale of the materials was intended and in the cases dissented from, it was not considered whether the principal contract was one of service or of sale of any goods and it was wrongly held that there was a sale of the packing material merely by reason that the property in the material was transferred for consideration. Here, as has been pointed out earlier, the substance of the packing part of the contract is the material used and not the labour that has to be exercised in packing.
12. Thus it will be seen that the High Court of Madhya Pradesh did not dissent from the view of this court, but merely pointed out that in the case with which they were concerned, the contract could be split up into two-one, a contract of labour and work and the other, a contract for sale of the packing materials. As a matter of fact, the very High Court of Madhya Pradesh in Binod Mills Co. Ltd., Ujjain v. Commissioner of Sales Tax, M.P.  29 S.T.C. 413, recognised the distinction between the contract of work and labour in which transfer of property in the packing materials is involved as incident to the execution of the works and a contract for purchase of articles in a packed condition and for that purpose it has relied on the decision of the Supreme Court itself in Hyderabad Deccan Cigarette Factory v. State of A.P.  17 S.T.C. 624 (S.C.).
13. Under these circumstances, we have to consider the present case from the point of view of the nature of the contract, namely, whether it is principally a works contract or a contract for purchase of any article. There can be no doubt whatever that in this case the contract was principally a works contract and as incidental to the execution of the works contract, the assessee-respondents had used hoop iron and hessian cloth as packing materials. As we have pointed out already and it is not disputed before us that it is for the department to show that in such a case there is an implied contract for the sale of the packing materials, it being admitted that there was no express contract.
14. The only question then for consideration is, whether there is any such implied contract in the present case. As we have pointed out already, the Appellate Assistant Commissioner of Commercial Taxes inferred the existence of an implied contract on his finding that the value of hessian cloth and hoop iron has been charged for by the respondents herein. As against this, the Tribunal after having perused the bills came to the conclusion that the respondents had not charged for such hoop iron and hessian cloth. If so, the very basis for inferring the existence of an implied contract, as has been done by the Appellate Assistant Commissioner, disappears and there being no other material for proving the existence of an implied contract, it must be held that the department has failed to establish the existence of an implied contract for the sale of the packing materials. We may also point out in this context that admittedly there had been cases in which the customers themselves brought their hessian cloth and hoop iron to be used in packing the cotton waste after pressing and only in other cases the assessee-respondents supplied the hessian cloth and hoop iron while packing the pressed cotton. There is no evidence to show that the charges collected by the respondents from their customers in respect of these two types of cases differed so that from that difference an inference could be drawn that the difference should be accounted for in terms of value of the hessian cloth and hoop iron supplied by the respondent-assessees.
15. Under these circumstances, we are clearly of the opinion that there is no sale of hessian cloth and hoop iron in the present case and therefore the Tribunal was right in holding that the two amounts referred to above could not be subject to tax under the provisions of the Tamil Nadu General Sales Tax Act, 1959. Accordingly, these revision cases fail and they are dismissed with costs of the respondent-assessees-one set. Counsel's fee Rs. 250 (Rupees two hundred and fifty only).