Important point
Entry 18 of the First Schedule of the A.P. General Sales Tax Act, introduced by A.P.G.S.T. (Amendment) Act, 1996, prescribing the rate of tax on cement dependent on the two categories envisaged in Clauses (a) and (b), cannot be held to be violative of Article 14 of the Constitution of India.

Headnote:Sales Tax—A.P. General Sales Tax Act—Section 6C as Introduced by Andhra Pradesh General Sales Tax Act (Amendment Act No. 11 of 1984); Entry 18 of First Schedule as Introduced by A.P.G.S.T. (Amendment) Act, 1996 (Act No. 27 of 1996)—Levy of tax on packing material—Entry in the First Schedule relating to cement was amended by Act 27 of 1996 w.e.f. 1.8.1996—Writ petition filed challenging constitutional validity of Entry 18 of the First Schedule—Appellants are 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—Earlier the State was charging sales tax on sale of cement at the rate of 16 as notified by the State Government, which included the value of packing material used for packing cement—Value of packing material is also charged to sales tax on the total sales turnover—As far as second sale is concerned sales tax is not paid on the value of packing materials—By virtue of amendments introduced in the Act and the schedule the sales tax on cement is now levied at the rate of 16 where the sale price of cement includes the value of packing material—If the cement is sold along with separate sale of packing material for a separate price, sales tax is charged at the rate of 20 —Appellants have been showing the value of cement and value of packing material separately while preparing their bills—According to appellants, they sell cement in bulk which is not packed at all—Whether such classification of same commodity is impermissible—(No)—Whether it would amount to discrimination being violative of Article 14 of the Constitution—High Court was justified in upholding validity of Entry 18 of the First Schedule.
Held : 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) 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 than the turnover base 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 cement separately he has to pay tax at higher rate i.e., 20 on cement only. The dealer is not left without any option. He can exercise one of the two 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. 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 18 is to check the tax avoidance measures which are said to be rampant. That 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, is ordinarily sold in packed condition, i.e., either gunny bags or HDPE 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. (Paras 28 and 29)
The gunny bag or the HDPE 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 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 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 classification of the same commodity is impermissible and would amount to discrimination being violative of Article 14 of the Constitution of India. (Paras 31 and 32)

Judgment

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 Act") introduced by A.P.G.S.T. (Amendment) Act, 1996 (Act No. 27 of 1996) on the ground that it is violative of Article 14 of the Constitution of India.

2. 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. The appellants have their marketing division at Secunderabad from where sales of cement are 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 tax on the total sales turnover. As far as second sale is concerned Sales tax is not paid on the value of packing materials, as sales tax 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 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."

3. The validity of this provision was challenged and this Court in Raj Steel Vs. State of Andhra Pradesh & Others, 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

"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 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 fiction, and for a limited purpose, that such sale can be contemplated."

4. 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 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 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 may imply an intention to sell the packing material. In a case where the packing material is an independent commodity and the packing material as well as the contents are sold independently, the packing material is liab

Click Here to Read the rest of this document

2006 Supreme(SC) 11

Cases Referred (11)