The judgment of the court was delivered by

MADON, J. - This is a reference under section 61(1) of the Bombay Sales Tax Act, 1959, made at the instance of the Commissioner of Sales Tax.

The respondents carry on the business of processing and refining crude oil for the purpose of manufacturing kerosene from it. The crude oil so processed and refined belongs to Burmah Shell Oil Storage and Distributing Company of India Limited (hereinafter for the sake of brevity referred to as "the marketing company"). The respondents after refining the crude oil into kerosene hand over the kerosene to the marketing company. For the purpose of refining crude oil the respondents require sulphuric acid. Accordingly, they entered into an agreement dated 9th June, 1955, with the Dharamsi Morarji Chemical Company Limited (hereinafter for the sake of brevity referred to as "the chemical company") under which the respondents agreed to purchase all their requirements of sulphuric acid from the chemical company upon certain terms and conditions set out in the said agreement. For the purpose of manufacturing and supplying the respondent's requirement of sulphuric acid the chemical company had erected a plant. The said agreement was to come into operation as soon as the chemical company was able to put on commission the required additional plant and was to remain in force for a period of ten years from the date of its coming into operation, unless terminated by notice as provided in the said agreement. By clause 5 of the said agreement, the respondents agreed that during the terms of the said agreement they would not manufacture sulphuric acid either for their own consumption or for sale and would not resell or barter in any manner directly or indirectly any sulphuric acid supplied by the chemical company but would use the same for their own exclusive consumption. By clause 6 of the said agreement the respondents further agreed not to purchase sulphuric acid required for their use except from the chemical company unless the chemical company failed or was unable to supply the respondents' requirements. When crude oil is refined and made into kerosene, a by-product which inevitably results is acid sludge or spent acid. Under the said agreement it was, therefore, further agreed that the respondents would sell the chemical company spent acid, if available, at the rate of 9,000 tons per annum, and should the chemical company's requirement of acid sludge in any year exceed 9,000 tons the respondents would supply the same, if available, up to a maximum of 12,000 tons per annum. It was further provided by the said agreement that acid sludge to be supplied to the chemical company should be fresh and not deteriorated and, in any case, before the disintegration products formed in acid sludge had rendered it unsuitable for separation of the acid and oil and further refining thereof. Clause 13 of the said agreement provided that the chemical company would not manufacture acid sludge either for its own consumption of for sale, and clause 14 provided that the chemical company would not purchase acid sludge except from the respondents, unless the respondents failed or were unable to supply the chemical company's requirement of acid sludge. The other terms and conditions of the said agreement are not material for the purposes of this reference. By a subsequent agreement recorded in a letter dated 2nd November, 1955, from the chemical company to the respondents the said agreement dated 9th June, 1955, was varied and it was provided that the said agreement would come into operation from 1st January, 1956, and would remain in force for a period of ten years from that date, unless terminated earlier by notice as provided in the said agreement. There was also a further subsequent variation of the said agreement which is not material for our purpose.

In their assessments for the periods 1st April, 1954, to 10th July, 1956, 11th July, 1956, to 31st March, 1957, 1st April