SPIRIT WAREHOUSE Vs. STATE OF MADRAS

JUDGEMENT

(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, 1939 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 are referred to the various invoices raised by the company and the course of conduct of the 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 supplied 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.

(2.) 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 the 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.Mr. C. S. Chandrasekhara 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 deduction of the concerned turnover in its 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 transaction 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 firs 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.) 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 4th 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 inclined to trace the further history of the petitioners' assessment proceedings. We have particularly traced the above details only to note with displeasure that there has not been any co-operation and must less any co-ordination between the assessing authorities and even between one 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 24th February, 1969, seems to have ignored the findings of the Tribunal, and it is doubtful whether it could do but it has happened. Coming to the facts in the instant 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 an 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, 1939, 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 that 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 definition in section 2(h) of the Act. The petitioners entrust certain raw materials which form part of the finished product to the company. The company supplies the 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