T. Ramaprasada Rao, J.
1. Messrs. Spirit Warehouse, the petitioners, are dealers in varnish, etc. at 49, Sydenhams Road, Madras. Before the assessing authority they claimed a concession over a turnover of Rs. 1,52,999.95, which represented their second sales of varnish, (according to them) and which were already subject to tax under the Madras General Sales Tax Act in the hands of Messrs. E.I.D. Parry Limited. The assessing authority was of the view that under Section 10 of the Act the burden of proof was on the assessee to establish that the sales of varnish covered by the turnover referred to above were in fact second sales. According to the assessing authority, the petitioners ought to have produced the purchase invoices noting the full value of varnish as such and also establish that such sales by Messrs. E.I.D. Parry Limited suffered the full tax of 6 per cent as provided in item 46 of the First Schedule of the Act as it then stood. In this view he negatived the concession asked for. The appeal by the petitioners to the Appellate Assistant Commissioner was unsuccessful. Before the Tribunal in second appeal the appellant brought out in full the, nature of the dealings between them and Messrs. E.I.D. Parry Limited, hereinafter referred to as the company, and urged that there was a contract between, themselves and the company, whereunder certain raw materials such as rosin, shellac, etc., were supplied by the petitioners to the company and the company in turn manufactured varnish with the methylated spirit supplied and sold by them to the petitioners, and ultimately what was transferred by the company to the petitioners was a finished product of varnish. They also referred to the various invoices raised by the company and the course of the conduct of business indulged in by the company, to establish that in the ultimate analysis what was done by the company was to sell varnish as a finished product, raised invoices as such and supply such finished varnish to the constituents nominated by the petitioners. One factor, however, has to be noticed that in the invoices raised by the company the value of shellac and rosin supplied by the petitioners (which appears to be as a matter of course) was not included in them. The fact, however, remains that the company themselves owned such transactions as sales of varnish to the petitioners and paid sales tax on such sales at the prescribed rate of 6 per cent. The Tribunal, however, would not countenance the contentions raised before them by the petitioners. They were of the view that notwithstanding the fact that the contract was captioned as 'varnish contract' it was only a bare contract and would not conclude matters. They were of the view that the word 'purchase' appearing in one of the clauses in the contract was deployed in a loose manner. According to the Tribunal, the language used in the contract and the amounts in the Bills referred to the denatured spirit, which the company agreed to supply to the petitioners, and other services rendered by the company and they do not make the transaction between the company and the dealers a sale of varnish within the meaning of the taxing enactment. According to them, rosin and shellac, which were admittedly supplied by the petitioners to the company were kept by the company as a bailee until the product of varnish was manufactured and delivered to them after the purpose was over. They came to the conclusion that the company did not sell varnish to the petitioners and the sale, if at all, in question was referable to sale of denatured spirit for a specified price and ultimately dismissed the appeal of the petitioners. As against this the present tax case has been filed.
2. Mr. C.S. Chandrasekara Sastry, learned Counsel for the petitioners, once again took us through the relevant documents in the instant case to impress his standpoint that the transaction between the petitioners and the company was indeed a sale and the first sale of varnish having thus suffered a tax, the petitioners are entitled to the statutory reduction of the concerned turnover in his assessable turnover. Learned Counsel for the Revenue, however, urges that the petitioners have not discharged their burden, which is on their shoulders under Section 10 of the Act, to bring home either before the taxing authorities or even at this stage before us that there was a valid first sale of varnish. According to him, the invalidity in the first sale lies in the fact that the-entire turnover or price of varnish, which was the subject-matter of the transactions-between the company and the petitioners, did not suffer a tax. He would expand his argument by stating that in the invoices raised by the company the price of shellac and rosin was not included and therefore the tax paid by the company at the time when the varnish was subject to a first sale was not the total tax payable in law. In this sense he would say that the sale is not a first sale. His other contention is that the petitioners are not entitled to the benefit, because the contract in question would disclose that the intention of the parties was that there should be no sale but merely a supply of a finished product with the assistance of materials supplied by the petitioners and also methylated-spirit used by the company in the manufacture of varnish. We shall now consider the respective contentions.
3. Before it is undertaken, it is necessary to state what according to us is the history of assessment in the instant case. When the petitioners supplied rosin and shellac to the company during the assessment years 1959-60, 1960-61 and 1961-62 the assessing authority did not subject them to tax but later on by an order dated 21st January, 1965 the Deputy Commissioner of Commercial Taxes, in exercise of his revisional powers, brought to tax the amounts representing the price of such rosin and shellac supplied by the petitioners to the company. The question of hailment of these goods by the assessee to the company does not arise. Thereafter, for the year of assessment in question, namely 1962-63 the Tribunal passed an order which we now notice. Mainly the Tribunal was of the view that the company should be treated as a bailee in respect of such rosin and shellac, which the Department treated as an out and out sale by them to the company. Apparently, the proceedings before the Deputy Commissioner was not brought to the notice of the Tribunal. On 20th May, 1966, for the assessment year 1963-64 once again the matter was scrutinised by the Sales Tax Appellate Tribunal. There the question did not arise as to whether the sales therein but similar to those arising in the tax ease, were second sales or not. The primary question, amongst those noticed by the Tribunal, was that the petitioners were liable to pay a penalty for non-disclosing the turnover relating to sales of rosin and shellac during the assessment year in question. In this view the Appellate Tribunal sustained the penalty but observed as follows:
It is to be remembered that Messrs. E.I.D. Parry Limited, when supplying varnish to the appellants treated them as first sales and collected sales tax.
Therefore, the Tribunal when it assessed the dealings of the petitioners agreed that the sales in question were second sales. Since it made certain deletions from the assessable turnover, it remitted the matter to the assessing authority for the purpose of implementing its order. It appears that the final orders of assessment have been made for 1963-64 on 5th August, 1966. But the assessing authority (the Joint Commercial Tax Officer) in the purported exercise of his powers as a revisional authority has given a notice dated 24th February, 1969, treating the sales in question as first sales of the company and has called upon the petitioners to explain. We are not inclined to trace the further history of the petitioners' assessment proceedings.
4. We have particularly traced the above details only to note with displeasure that there has not been any co-operation and much less any co-ordination between the assessing authorities and even before Tribunal and another constituted under the enactment. Whilst one Tribunal would say on 20th May, 1966, that the sales are to be deemed as second sales, another Tribunal on 9th July, 1965, while dealing with the assessment year 1962-63, would come to the conclusion that they are first sales. Even the assessing authority, when it issued the notice on 25th February, 1969, seems to have ignored the findings of the Tribunal, and it is doubtful whether it could do; but it has happened.
5. Coming to the facts in the instance case the petitioners entered into a contract with the company, known as a varnish contract. It provides for the price to be paid by the petitioners to the company at 0.87 nP. f.o.r. Nellikuppam inclusive of gallonage fee and Central excise duty. Clause (3) of the said contract uses the word 'purchase'. The payment is against documents at Madras. A rebate also is provided for in Clause (6), provided the petitioners satisfactorily discharge their obligations under the contract. The argument is that the word 'purchase', the terms of payment and the details-as to price are all a camouflage to cover up what according to the Revenue is merely a contract to manufacture varnish and supply the finished product and to-make it appear that it is a sale for all purposes. We do not agree. The entire course of conduct adopted by both the petitioners and the company has to be looked into and the words in the contract ought not to be taken out from its context and weighed, dealt with and interpreted de hors the other facts and circumstances attendant upon the dealings in the case. We have before us the invoices raised by the company. Categorically the company would say that they have sold various quantities of varnish to the constituents of the petitioners and would add in a. statement given by them to the Special Deputy Commercial Tax Officer (Detection), North Madras that they indeed sold varnish as a finished product to the petitioners during the years 1959 to 1963, which covers the assessment year in question as well. When the goods are sold and sent out of the factory the company issues a gate pass, as varnish is an excisable commodity. While describing the goods, they would call it varnish. The assessee when it effects second sales on its own, observed one of the conditions prescribed under Rule 26, Sub-rule (13) of the Rules framed under the Madras General Sales Tax Act, which enjoins a dealer dealing in such goods liable to single point tax at the first stage of sale or purchase, to furnish a certificate in the bill or memo in the form prescribed that the goods already suffered a tax at its first sale. In the bills issued by the petitioners they have given the certificate. Thus we see the contract in question entered into between the petitioners and the company provided for a transfer of property in the goods for valuable consideration and such a transfer was in the course of the business between the parties concerned. The above elements do satisfy the essential requirements of a sale as also the in Section 2(n) of the Act. The petitioners entrust certain raw materials which form part of the finished product to the company. The company supplies rest of the materials required to make the finished product and supplies such finished product, namely varnish to the petitioners. This is in terms of the varnish contract entered into between the parties. Learned Counsel for the Revenue, however, invites our attention to one sentence in the varnish contract, which runs as follows:
The necessary materials for making the varnish should be taken by you to Nellikuppam and mixed there at your cost.
This, according to the Counsel, militates against the transaction being a sale. In our opinion, it is not. The Revenue has treated such supplies by the assessee to the company as sales and the company had to suffer a penalty, for not including such sales in their assessable turnover. It is one of the innocuous terms mentioned in the contract to fix the petitioners with notice of their obligation to supply certain raw materials for the manufacture of varnish. This appears in Clause (2) of the contract which deals with the price of varnish. Apparently this was introduced to work out the correct price. Taking all the circumstances into consideration we have no hesitation to hold that the transactions in question between the petitioners and the company were indeed sales, as is popularly and statutorily understood, and, therefore the goods in question were subject to a first sale in the hands of the company. It is not in dispute that the company paid the tax payable in respect of such first sales effected by them.
6. The contention, however, is that the tax paid by the company was not full and complete. This argument is based on the fact that the turnover disclosed by the company does not include the value of rosin and shellac supplied by the petitioners to the company. It may be true. But the question is whether the non-inclusion of an assessable turnover in the returned turnover of an assessee would in any way detract the character of the transaction or have any bearing or impact on its nature. The fact that the company did not suffer a full tax and excluded advertently or inadvertently the price attributable to the supply of rosin and shellac cannot make a sale, not a sale. The Supreme Court had occasion to consider under similar circumstances as to what the effect of a transaction of the nature under discussion would be if the parties do not agree to characterise it as a sale. Said the Supreme Court in Chandra Bhan Gosain v. State of Orissa (1963) 14 S.T.C. 766, that, although the contract did not use the word 'sale' there was a transfer of property in the bricks from the appellant to the company for consideration and therefore there was a sale liable to sales tax. There also the contract was that the assessee was to be provided with the land free from which bricks had to be manufactured. The question that arose was whether what was supplied to the company by the assessee therein was not the earth which he got from it or bricks. The Supreme Court came to the conclusion that what was ultimately supplied was entirely different from what was originally entrusted by the company to the assessee and observed:
It could not have been intended that the property in the earth would continue in the company in spite of its conversion into such a different thing as bricks.
Here also it cannot be predicated with any amount of reasonableness that when the petitioners supplied rosin and shellac to the company they intended that the property in such material supplied by them would continue in them inspite off its conversion into varnish by the company. Again in Visweshwaradass Gokuldas v. The Government of Madras (1962) 13 S.T.C. 113, this Court held that even a barter or exchange of goods might become a sale under the Sales Tax Act provided there is transfer of property in the goods and such transfer is in the course of trade or business. The mere fact that instead of receiving cash the assessee received raw materials of that value towards part price of the finished product would not therefore make the transaction anything but a sale of the finished product.
7. In the light of our conclusions on facts and as we are unable to agree with the interpretation put by the Tribunal on the contract in question, we set aside the order of the Tribunal and hold that the sales in question are second sales and the petitioners are entitled to the concession to which they are statutorily entitled on the basis that they are second sales. The tax case is allowed with costs. Counsel's fee Rs. 100.