Supreme Court of India

E.I.D. PARRY (I) LTD.versusASST. COMMR. OF COMMERCIAL TAXES AND ANR.

Citation: 1999 INSC 570
Decided: 17 December 1999
Disposal: Appeal(s) allowed
Bench: G T NANAVATI

Holding

Planting subsidy and transport subsidy are components of the consideration for sugarcane and must be included in taxable turnover, but penalty provisions are not applicable where the assessee acted in good faith.

Summary

The appellants, sugar manufacturers Arooran Sugars Ltd. and E.I.D. Parry (I) Ltd., challenged assessments that included planting subsidies and transport charges in their taxable turnover under the Tamil Nadu General Sales Tax Act, 1959. They argued that the subsidy agreements were independent of the sale contracts and that the transport charges were post‑sale expenses, thus not part of the turnover. The State argued that both subsidies were integral to the consideration for sugarcane and therefore must be included in turnover, and that penalties under Section 12(2) and (5) were proper. The Supreme Court held that the planting subsidy and the transport subsidy formed a single transaction with the sale of sugarcane and had to be included in the turnover, but the penalties were unwarranted because the appellants acted on a bona‑fide belief of non‑inclusion. Consequently, the Court set aside the penalty orders while upholding the inclusion of the subsidies in turnover. The appeals were partly allowed.

Issues considered

Whether planting subsidy paid to sugarcane growers is part of the taxable turnover under Section 2(r) and Explanation 2(ii) of the Tamil Nadu General Sales Tax Act, 1959.
Whether transport charges paid to third‑party lorry owners for sugarcane delivery constitute part of the taxable turnover.
Whether penalties under Section 12(2) and (5) of the Tamil Nadu General Sales Tax Act can be levied when the assessee acted on a bona‑fide belief that the amounts were not includable.

Legislation cited

Sugarcane (Control) Order, 1966
Tamil Nadu General Sales Tax Act, 1959s. 12(2), s. 12(5), s. 2(r), s. Explanation 2(ii)

Subjects

sales taxturnoverplanting subsidytransport subsidypenaltyTamil Nadu Sales Tax Actsugar industrystatutory interpretation

Judgment

A E.I.D. PARRY (I) LTD.
v.
ASST. COMMR. OF COMMERCIAL TAXES AND ANR.

DECEMBER 17, 1999

B [G.T. NANAVATI AND V.N. KHARE, JJ.]

SALES TAX: Tamil Nadu General Sales Tax Act, 1959- Section 2(r),
Explanation (2)(ii)-Turnover-planting subsidy paid to sugarcane growers
as an incentive by sugar company for growing good quality sugarcane-Part
C of transport charges for bringing produce to factory gate borne by the
company as per administrative instructions of State Government--whether
part of taxable turnover-Held, Planting subsidy and transport charges
constitute '"turnover"- Madras Sugar Factories Control Act, 1949-Sugarcane
(Contro/) Order, I 966.

D Section 12(2), (5)-Penalty-Failure to include planting subsidy and
transport charges as taxable turnover in returns filed by sugar company--
whether penalty under the Act can be levied--Held, penalty is not /eviable
due to assessees · bona fide belief and the doubtful position in law.

Appellant-sugar companies are governed by Madras Sugar Factories
E Control Act, 1949 and Sugarcane (Control) Order, 1966. Under the Act, an
area was reserved for a sugar company for a specified crushing season and
sugarcane grower in the reserved area had to offer the company a specified
quantity of sugarcane grown "at inspection and weighment at the factory".
On such offer, the company had to enter into an agreement with the grower
F for purchase of sugarcane. The Sugarcane (Control) Order fixes minimum
price to be paid by the company to the grower for the produce delivered at
factory gate. Besides the price, the company announces payment of planting
subsidy on acre basis to the grower as an incentive to ensure sufficient
supply of good quality sugarcane. The growers had to bear the transport
charges for bringing the produce to the factory gate upto 30 kilometers and
G the company to bear the excess charges for the distance beyond 30 kilometers
under the administrative instructions of the State Government. In sales tax
returns, the companies did not include the planting subsidy and transport
charges in its taxable turnover which are held to be includible by sales tax
authorities under Explanation 2(ii) to section 2 (r) of Tamil Nadu General
H Sales Tax Act, 1959. Penalties in some cases were also levied under section
466
E.l.D.PARRY (!)LTD. 1•.ASSTI". COMMISSIONER OF COMMERCIAL TAXES 467
12(2) or (5) of the Act for failure to include the items in question. The A
companies challenged in the High Court by filling Writ Petitions, section
2(r) and the Explanation (2)(ii) thereto of the Tamil Nadu General Sales Tax
Act as ultra vires Entry 54 of List II of the Seventh Schedule of the
Constitution. High Court upheld the validity of the provisions and held that
the amounts in question were to be included in the taxable turnover.
B
In appeal to this Court, the companies contended that agreement for
giving planting subsidy to the growers are entered much prior to agreements
of sale of the produce. Since the two agreements are independent though
collateral, the inclusion of planting subsidy in the turnover is not tenable.
The companies further contended that the transport charges were paid to C
third party lorry owners and not to the growers and that the amounts are
in the nature of post-sale expenses, which are not included in the taxable
turnover. With regard to penalty, the companies contended that the law on
inclusion of planing subsidy and transport charges in the taxable turnover
was not clear as there were conflicting decisions of the court and therefore
there was no justification for levying any penalty as the companies had bona D
fide not included in the returns.
:i
The authorities, on the other hand, contended that the act of giving
planting subsidy for growing sugarcane is followed by the agreement for
sale of the produce and therefore constituted one single transaction and the
planting subsidy being an amount paid in relation to the goods purchased had E
been included in the taxable turnover. In regard to the transport charges, the
authorities contended that as per the agreement, the growers should deliver
the produce at factory gate and arrangements made by the growers by
engaging lorries were for the purpose of enabling to deliver the produce on
time.
F
Partly allowing the appeals, this Court
HELD : 1.1. The two agreements-one agreement in respect of planting
subsidy and the other agreement for the sale of sugarcane-appear to be
,.. independent but on a close scrutiny it can be noticed that they constitute one
single transaction. It is given to motivate the cane grower to grow sugarcane G
and subsequently sell the same to the sugar factory. The object of the planting
subsidy was to obtain the desired variety and quality of sugarcane at the time
required by the appellants. The Planting subsidy was given to the cane
growers at the time of delivery of sugarcane. Though the appellants had
described the payments by way of planting subsidy as deferred payments, that
cannot conceal the real nature of the transaction between the appellants and H
468 SUPREME COURT REPORTS [1999] SUPP. 5 S.C.R .

. A the cane growers. The planting subsidy was given not by way of agrarian
reform or a social welfare measure. The appellants had given planting subsidy
as purchasers of sugarcane and as a part of the consideration for which the
sugarcane was ultimately purchased by them. The planting subsidy was
relatable to the supply of sugarcane. If the whole deal between the appellants
B and the cane growers is examined they really constitute one contract of sale.
Therefore, the s~ms paid by the appellant as planting subsidy to the cane
grower were rightly treated as a part of the sale price and included in the
taxable turnover of the appellants for the purpose of assessing the purchase
tax liability. (483-A-F) ..
C 1.2. Though the agreements between the parties provided for delivery
by the sugarcane growers at the factory gate and though the transport charges
paid by the appellants were not to the sugarcane growers but to the third
party lorry owners, they were made for securing regular supply of sugarcane
as per the requirements. Though payments were made at the instance of the
State Government, they also become a part of the implied agreement between
D the appellants and the sugarcane growers. They were not post-sale expenses.
Those amounts were paid to ensure scheduled delivery of sugarcane. The
sale of sugarcane became complete only thereafter. Those payments can be
regarded either as payments made on behalf of the sugar cane growers or
payments made in modification or nriation of the earlier agreements entered
into by the sugarcane growers for selling sugarcane. In either case they
E could legitimately be regarded as the components of the sale price as the
sellers would have otherwise included those amounts in the sale price.
(483-G-H; 484-A-B)
Hindustan Sugar Mills v. State of Rajasthan, (1979) 1 SCR 276;
Mis. George Oakes (Pvt.) Ltd v.. The State of Madras & Ors., XII STC 476;
F Sarju Pd Pritam Lalv. Judge, Revisions, Sales Tax, U.P. XIV STC 884; SC.
Johar & Sons (P) Ltd., v. Sales Tax Officer, Ernakulum, 27 STC 120;
Hiranyakeshi S.S.K. Niyamit v. State of Karnataka, 42 STC 184; Black
Diamond Beverages v. C. T.O, (1997) 107 STC 219; State ofA.P. v. Hyderabad
Allwyn Ltd (1970) 78 STC 56; Remco Cement Distribution Co. Pvt Ltd v. •
G State of Tamil Nadu, 88 STC 151 and State of Tamil Nadu v. National Co-
operative Sugar Mills Ltd, (1992) 86 STC 22, relied on.

State of Orissa v Utkal Distributors (P) Ltd. 17 STC 320; Cauvery
Sugers and Chemicals Ltd. v The Joint Commercial Tax Officer, 29 STC t;
Thiru Arooran Sugars Ltd v. Deputy Commercial Tax Officer, Mannargudi
H and Ors., (71STC4441; State of Tamil Nadu v. Kothari Sugars & Chemicals
E.l.D. PARRY{l)LTD. 1•.ASSTI".COMMISSIONEROFCOMMERCIAL TAXES 469

Ltd., 101 STC 197; State of Madras v. Srinivasa Timber Depot, 180 STC A
393; Hyderabad Asbestos Cement Products Ltd. v. State ofAndhra Pradesh,
24 STC 487 and Andhra Sugar Ltd. v. A.P. State, (1968) 1 SCR 705,
distinguished.

Srinivasa Timber Depot v. Dy. Commercial Tax Officer, (1969) 23 STC
158; State of Madras v. Srinivasa Timber Depot, (1974) 33 STC 423; Sakthi B
Sugars Limited and Ors. v. Deputy Commercial Tax Officer, Bhavani and
Ors., 23 STC 232; Esso Petroleum Co. Ltd. v. Cus"toms and Excise
Commissioners, {1975) 1 W.L.R. 406; Pandavapura Sahakara Sakkare
Kharkhane (P) Ltd. v. State of Mysore, 32 STC 104; Tungabhadra Sugar
Works Ltd. v State of Karnataka 93 STC 561 and Kallakurichi Co- operative C
Mills Ltd. v. State of Tamil Nadu, 60 STC 113, referred to.

2. But so far as the penalty is concerned, it appears that on bona fide
>
belief that planting and transport subsidies were not includible in the taxable
turnover, the appellants had not included those amounts in their turnover and
for that reason non-inclusion of these two items in the turnover do not seem D
to be intentional. Though the appellants are not right in not including the
amounts in the taxable turnover, considering the facts and circumstances of
the case, it would not be correct to say that they had acted deliberately in
defiance of law or that their conduct was dishonest or they had acted in
conscious disregard of their obligation under the Sales Tax Act. (484-C-E)
E
Parambalur Sugar Mills Ltd. v. State of Tamil Nadu, (1992) 86 STC
17, approved.

CIVIL APPELLATE JURISDICTION : Civil appeal Nos. 7517-18 of
1998.
WITH
F

C.A. No. 7523-7524 of 1998 and 7519-7522 of 1998.

From the Judgment and Order dated 9.12.1986 of the High Court
of Madras in Writ Petition Nos. 15705 and 15706 of 1995.
G
K. Parasaran, F.S. Nariman, R. Venkataramani, V. Balaji, P.N. Ramalingam,
Sanjay Parekh, P.H. Parekh, V.Ramasubramanian and V. Krishnamurthy for the
appearing parties.

The Judgment of the Court was delivered by
H
470 SUPREME COURT REPORTS [1999] SUPP. 5 S.C.R.

A NANAVATI, J. Leave granted.

These eight appeals arise out of three different judgments of the Madras
High Court in Writ Petition Nos. 15530-31of1995, 15532-35of1995 and 15705-
15706 of 1995. S.L.P. (C) Nos. 4973-4974of1997 are against the decision in
Writ Petition Nos. 15530-31 of 1995, S.L.P. (C) Nos. 5589-92of1997 are against
B the decision in Writ Petition Nos. 15532-35of1995 and S.L.P. (C) Nos. 5441-
52of1997 are against the decision in Writ Petition Nos. 15705-15706of1995.

The appellant in the appeals arising out of S.L.P. (C) Nos. 4973-74 of
1997 and S.L.P. (C) Nos. 5589 to 5592 of 1997 is Thiru Arooran Sugars Ltd.
(hereinafter referred to as 'Arooran Sugars'). Arooran Sugars is engaged in
C manufacturing sugar in its units at Vadapathimangalam and Tirumandankudi.
The Madras Sugar Factories Control Act, 1949, (hereinafter referred to as 'the
Act') the Rules framed thereunder and the Sugar Control Order, 1966 apply
to its sugar manufacturing activity. In order to provide incentives to sugarcane
growers and to ensure sufficient supply of sugarcane of good quality it has
been announcing every year planting subsidy payable to those sugarcane
D growers who are able to grow, for the immediately following crushing season,
that variety of sugarcane which it requires. For the year 1990-91 it had
announced on 5.11.1989, planting subsidy payable to those sugarcane growers
who were willing to plant Co.C.661. For those growers who were to plant that
variety in December, 1989 and January, 1990 the subsidy was to be paid at
E the rate of Rs. 800 per acre and for those who were to plant in February, June
and July, 1990 it was to be paid at the rate of Rs. 600 per acre. On the basis
of that announcement willing cane growers had entered into agreements with
it. Pursuant to those agreements the sugarcane growers were supplied seeds
by it and the cane growers after sowing and raising the crops had offered the
same for sale to it in the prescribed manner. One of the terms of the agreement
F was that sugarcane was to be delivered at the factory gate by the sugarcane
growers. Price as fixed by. the Central Government was to be paid against
delivery of sugar cane. Though the sale contemplated by the Act was 'factory
gate sale' and under the agreements also the obligation of the sugarcane
growers was to deliver sugarcane at the factory gate, in view of the general
G advice of the Tamil Nadu State Government, which was in the nature of
administrative instruction, it did subsidise freight/transport charges. For the
year 1990-91 the advice was that the sugarcane growers should bear
transportation charges up to the distance of 30 kms. and for the distance
beyond 30 kms. the charges should be borne by the sugar manufacturers. In
its sales tax return for that year it did not include the amounts paid as plc10ting
H subsidy and transport subsidy in its taxable turnover as according to it the
E.l.D. PARRY (I) LTD.''- ASS TT. COMMISSIONER OF COMMERCIAL TAXES (NANA VATI, J.] 471

same were not includible therein. The Assistant Commissioner of Sales Tax A
did not agree with it and assessed tax after including these amounts. Against
that order and the demand raised on its basis the appellant preferred an
appeal to the Deputy Commissioner but it was dismissed. The appellant then
preferred an appeal to the higher appellate authority. For the years 1991-96
also it had followed the same pattern. Same view was taken by the Sale Tax
· authorities and against the order passed it had filed appeals and they were B
pending when on 6.11.1996 to avoid recurring of such situation every year
it filed six writ petitions in the Madras High Court, seeking a declaration that
words 'aggregate', 'or delivered or supplied or otherwise disposed,' 'either
directly or through another', and 'account of others' in the definition of the
term 'turnover' as contained in Section 2 (r) of the Tamil Nadu General Sales C
Tax Act, 1959 (hereinafter referred to as the 'Tamil Nadu Sales Tax Act' and
the Explanation (2)(ii) thereto are ultra vires Entry 54 of List II of the 7th
Schedule of the Constitution and, therefore, subsidies and expenses incurred
by the sugar manufacturers or paid to the sugarcane- growers both prior to
or collateral to the sugarcane agreements or after the sale and transfer of
property in sugarcane from the growers to the manufacturers are outside the D
charging provisions of Section 3(2) of the Sales Tax Act and also for a
mandamus restraining the sales-tax authorities from re-covering purchase tax
by including the amounts paid as planting and transport subsidies in its
taxable turn over. It had also filed some Appeals and Tax Cases but it is not
necessary to refer to them. E
The appellant in the other two appeals is E.l.D. Parry {I) Ltd. (hereinafter
referred to as 'Parry'). Parry is also engaged in manufacturing sugar. The facts
relating to Parry are also similar to the facts of Arooran Sugars except that
the assessment years involved are different .. Challenging the assessment
orders it filed Writ Petition Nos. 15705-15706of1995 in the High Court as F
by that time others had filed writ petitions raising the same questions in the
High Court. Like Arooran Sugars it also questioned the validity of the above
referred expressions in Section 2 (r) and sought a similar mandamus.

The two writ petitions filed by Arooran Sugars were heard along with
some other Tax Ceases by a Full Bench of the Madras High Court, as there G
were conflicting decisions of that Court on some of the points involved in
those cases. They were dismissed by a common judgment. Other petitions
filed by Arooran Sugars were dismissed later on following the judgment
delivered by the Full Bench. The writ petition filed by Parry were also dismissed
following the Full bench judgment in Arooran's case. H
472 SUPREME COURT REPORTS [1999] SUPP. 5 S.C.R.

A In these appeals the appellants are pressing only three points. They are
(i) whether planting subsidy paid by the appellants the cane growers can be -
said to be a part of the price of sugar cane purchased by it from them and
can legitimately be included in the turnover of the appellants; (ii) whether the
transport subsidy charges in excess of 30 kms. paid by the appellants to third
party lorry owners for transporting sugarcane pursuant to the State
B Govemments's direction can be aggregated with the price of sugarcane and
included in the turnover of the appellants; and (iii) whether levy of penalty
was justified in view of the facts and circumstances of these cases.

It was contended by the learned counsel for the appellants that planting
C subsidy given by the appellants to the cane growers was by way of an
incentive to the cane growers for planting a particular variety in the stipulated
months preceding the planting season. The agreements made in that behalf
were anterior in point of time to the agreements of sale and being unrelated
to the sale and suppI,- of sugarcane were independent though collateral
agreements. The planting subsidy were paid per acre of land and there was
D no obligation on the grower to grow sugarcane on particular plot of land even
after accepting the subsidy. There was not contractual certainty that the
grower would grow the agreed variety of sugarcane or that he would sell all
the produce -0f that land to the appellants. The planting subsidy being
unrelated to the sale of sugarcane could not have been treated as a part of
E the price for which the goods were bought and, therefore, could not have
been rightly included in the tum over of the appellants for determining ~heir
purchase tax liability. On the other hand the contention raised on behalf of
the Sales tax Authorities/respondents was that the act of giving planting
subsidy for growing sugarcane fol.lowed by an agreement for sale of the
sugarcane by the grower constituted one single transaction and the planting
F subsidy being an amount paid in relation to the goods purchased had been
rightly regarded as a part of the price of sugar cane and included in the
turnover of the appellants. As regards the transport subsidy, the contention
of the appellants was that the transport charges were in fact paid by the
appellants to third party lorry owners for transporting sugarcane beyond the
G distance of30 kms (20 after 1992-93) in view of the Government's directions.
The transport charges being not the amounts charged by the growers nor
being the amounts paid to them were really in the nature of post sale
expenses and, therefore, could not have been lawfully treated as part of the
price and included in the turnover of the appellants. The contention of the
respondents, on the other hand, was that under the agreements of sale the
H cane growers ha<l to deliver sugarcane at fact~ry premises and the arrangements
E.l.D.PARRY(l)LTD.v.ASSTT.COMMISSIONEROFCOMMERCIALTAXES (NANAVATl,J.J 473

made by the appellants for transporting sugarcane by engaging private lorries A
were for the purpose of enabling the cane growers to deliver sugarcane
speedily and at specified times. As transportation charges were paid by the
appellants with a view to help or assist the sugarcane growers they were
really a part of the price for which sugarcane was bought by the appellants
and were, therefore, rightly included in the taxable turnover of the appellants. B
On the question of penalty it was contended that the law on these two points
was not clear as there were conflicting decisions and, therefore, there was no
justification for levying any penalty as the appellants had bona fide not
included in their returns the amounts of planting subsidy and transport
charges in the turnovers shown in. their returns. The contention of the
respondents was that after the decision of the Madras High Court in C
Ka/lakurichi Co-operative Mills Ltd. v. State of Tamil Nadu, [60 STC 113]
the appellants should have included the amounts of planting subsidy and
transport subsidy in turnover and as they had failed to do so full amount of
penalty was legally imposed upon them.

In order to consider the rival contentions, legal provisions, in the D
context of which they arise shall have to be seen.

The manufacturers of sugarcane in the State of Tamil Nadu are governed
by the Madras Sugar Factories Control Act, 1949 and the rules framed
thereunder and also by the Sugar (Control) Order, 1966. No sugarcane can be E
crushed in any factory without a licence. Section 8 of the Act requires the
occupier of every factory to submit to the Sugarcane Commissioner on or
before the specified date, an estimate, in the prescribed form and manner of
the quantity of sugarcane required by that factory during the crushing season
immediately following. The Sugarcane Commissioner, after taking into
consideration the estimate and several material circumstances, has thereafter F
to declare an area to be a reserved area for such factory for a specified
season. Under Section 10, a grower in a reserved area is expected, before the
close of each planting season, to make an offer to sell to the occupier of the
factory for which the area has been reserved, such quantity of sugarcane
grown by him as may be specified, but not exceeding the quantity specified G
for such grower by the Sugarcane Commissioner or the authorised Inspector.
The offer is required to be made in the form prescribed by Rule 11 (6-A). On
an offer being made the occupier of the factory is required to enter into an
agreement with the grower for purchase of all the sugarcane offered by him
and that agreement is also required to be entered into in the form prescribed
by Rule 11(7). The occupier is entitled to refuse to enter into such an H
474 SUPREME COURT REPORTS [1999) SUPP. 5 S.C.R.

A agreement where sugarcane is offered for delivery during the period in respect
of which he has already entered into agreements with other growers in the
reserved area, for the purchase of required quantity of sugarcane for that
period. Section 11 prohibits sale of sugarcane grown by the grower in the
reserved area to any person other than the occupier of the factory unless
such an occupier has refused to buy sugarcane exercising his rights under
B the proviso to sub-section (2) of Section 10. Section 11 also prohibits the
occupier of the factory from refusing to purchase any sugarcane offered to
him under Section 10(1), except in terms of the proviso to Section 10(2). It als~
prohibits. export of any sugarcane out of the reserved area except where sale
of sugarcane to a person other than the occupier of the factory permitted.
C Section 11-A provides that it shall be open to any grower, other than a co-
operative society, who owns within the reserved area not more than five acres
of land growing sugarcane, either himself to crush sugarcane grown by him
for the purpose of making 'Gur' within the same reserved area or to sell it for
that purpose. Section 12 empowers the Government to fix price that the
D occupier of the factory shall be bound to pay for any sugarcane purchased
by him.

Sugarcane (Control) Order, 1966 define 'price' to mean the price or the

E
minimum price fixed by the Central Government from time to time for sugarcane
delivered to a sugar factory at the gate of the factory or at the sugarcane
purchasing centre. ·Clause 3 of the Order empowers the Government to fix
minimum price of sugarcane which the producer of sugar has to pay to the
-
growers of sugarcane. Clause 5(a) of the Order provides for payment of
additional price for sugarcane, as may be determined by the Central Government
or the State Government, as the case may be.

F The provisions disclose that the Act makes provisions for ensuring
adequate supply of sugarcane to the sugar factories by reserving an area for
such factory and by regulating/prohibiting transactions of sale, purchase,
export and import of sugarcane into or from the reserved area. These provisions
and the i'rovisions regarding fixing of price by the Government also safeguard
G the interest of the cane growers within the reserved area. The Act, however,
does not make it compulsory for a land holder within the reserved area to
grow sugarcane only. The obligations under the Act arise only if the land
holder grows sugarcane within the reserved area. Thus, there is no statutory
.. obligation to grow sugarcane in the reserved area. Again this Act does not
cast any obligation on the sugar factories to pay to the cane grower any
H amount other than thf' price fixed for it either by the Government or under the
E.l.D. PARRY(l)LTD.1•.ASSTT. COMMISSIONER OF COMMERCIAL TAXES [NANAVATI,J.] 475

agreement between the sugar factory and the cane grower. As a matter of fact A
even though the State Government has the power under the Act to fix price
of sugarcane it has not done so, probably because minimum price is being
fixed by the Central Government from time to time under the Sugarcane
(Control) Order, 1966. ~e prescribed form in which sugarcane grower has to
make an offer to sell sugarcane grown by him to the factory discloses that
the offer is to sell sugarcane "at inspection and weighment at the factory". B
The prescribed form of agreement also discloses that sugarcane has to be
delivered by the grower at the factory premises and the factory has to pay
to the grower statutory or controlled price for the accepted quality of
sugarcane. It is not in dispute that offers were made by the sugarcane
growers and required agreements between the sugar cane growers and the C
appellants were made in the prescribed forms. It is also not indispute that
under the agreements of sale and purchase the amounts paid as planting and
transport subsidies were not to be deducted from the purchase price. In fact,
neither the Act nor the rules nor the agreements refer to planting subsidy or
transport subsidy. Though the obligation of the cane growers under the
agreements was to deliver sugarcane at factory premises and thus bear the D
expense of bringing sugarcane to the factory premises, part of it was borne
by the appellants, like other sugar factories, because of the administrative
directions given by the Government. Neither under any provision of law or
under the agreements the appellants were required to pay to the cane growers
and part of the freight for the distance beyond 30 kms. from the place of the E
cane growers. According to the appellants they were merely waiving their
right under the agreements to receive delivery of sugarcane free of
transportation cost at the factory premises. The private lorry owners were
paid freight upto the distance of 30 kms. (later on 20 Kms.) by the cane
growers and for the remaining distance the freight was paid by the appellants.
No new agreements were entered into between the appellants and the cane F
growers in that behalf. In the context of this legal and factual position what
we have to consider is whether for the purposes of the Sales Tax Act the
amounts paid as planting subsidy and transport subsidy can be included in
the 'turnover' or the aggregate amount for which sugarcane was bought by
the appellants from the cane growers.

The Sales Tax Act provides for levy of tax on sale or purchase of goods.
The a'llount of tax is to be determined on the basis of 'taxable turnover' i.e.
the turnover on which a dealer is liable to pay tax as determined after making
such deductions from his total turnover and in such manner as may be
prescribed. The relevant part of the definition of the term 'turnover' as
476 SUPREME COURT REPORTS [1999] SUPP. 5 S.C.R.

A contained in Section 2(r), is as under: -.
"turnover" means the aggregate amount for which goods are bought
or sold, or delivered or supplied or otherwise disposed of in any of
the ways referred to in clause (n), by a dealer either directly or
through another, on his own account or on account of others whether
B for cash or · for deferred payment or other valuable
consideration, ......................"
xxx xxx xxx

Explanation (2) Subject to such conditions and restrictions, if any, as
C may be prescribed in this behalf-
(i) (Omitted)
(ii) the amount for which goods are sold shall include any sums
charged for anything done by the dealer in respect of the goods
sold at the time of, or before the delivery thereof;
D
xxx xxx xxx

xxx xxx xxx

The Act does not define 'price' but defines 'sale' as under:-

E 'Sale" with all its grammatical variations and cognate expressions
means every transfer of the property in goods (other than by way of
a mortgage, hypothecation, charge or pledge by one person to another
in the course of business for cash, deferred payment or other valuable
consideration and includes-

F xxx xxx xxx xxx

Number of decisions were cited at the bar to indicate what can be and
what cannot be the component of sale price for the purpose of sales tax
legislation. This Court in Hindustan Sugar Mills v. State' of Rajasthan, [ 1979]
I SCR 276, has held that sale price would include all the amounts which are
G payable by the purchaser for the sale of goods. Sale price will be inclusive
of excise duty and while so holding it observed as under :

"Take for example, excise duty payable by a dealer who is a
manufacturer. When he sells goods manufactured by him, he always
passes on the excise duty to the purchaser. Ordinarily it is not shown
H as a separate item in the bill, but it is included in the price charged
E.I.D. PARRY(l)LTD. v.ASSTI. COMMISSIONER OF COMMERCIAL TAXES [NANAVATI,J.] 477

... by him. The 'sale price' in such a case could be the entire price
inclusive of excise duty because that would be the consideration
A ·

payable by the purchaser for the sale of the goods. True, the excise
duty component of the price would not be an addition to the coffers
of the dealer, as it would go to re-imburse him in respect of the excise
duty already paid by him on the manufacture of the goods. But even
so, it would be paid of the 'sale price' because it forms a component B
of the consideration payable by the purchaser to the dealer. It is only
as part of the consideration for the sale of the goods that the amount
representing excise duty would be payable by the purchaser. There is
no other manner of liability, statutory or otherwise, under which the
purchases would be liable to pay the amount of excise duty to the C
dealer. And, on this reasoning, it would make no difference whether
the amount of excise duty is included in the price charged by the
dealer or is shown as a separate item in the bill. In either case, it would
be part of the 'sale price'."

So also, the amount of sales tax payable by a dealer, whether included in the D
price or added to it as a separate item as is usually the case, forms part of
the 'sale price'. It is payable by the purchaser to the dealer as part of the
consideration for the sale of the goods and hence falls within the first part
of the definition. [See Mis George Oakes (Pvt.) Ltd v. The State of Madras
& Ors., (XII STC 476) and Hindustan Sugar Mills v. State ofRajasthan, [1979) E
l SCR 276. Weighing charges have also been held to be a part of the sale
price of the goods where the goods were required to be weighed before they
were sold and delivered for completing their sale. Sarju Pd. Pritam Lal v.
Judge, Revisions, Sales Tax, UP. (XIV STC 884). So also, the transport
charges have been held to be a part of the sale price by this Court in the case
of S.C. Johar & Sons (P) ltd v. Sales Tax Officer, Ernakulam, (27 S.T.C. 120). F
The amount paid by the sugar mills to the sugarcane suppliers as 'khodki
charges' for the purpose of keeping the land on which sugarcane had been
grown in good condition have also been held to be a part of the consideration
for the sugarcane sold by the cane growers to the sugar mills for the reason
that they were paid in lieu of sugarcane supplied by the seller to the sugar G
mills. Hiranyakeshi S.S.K. Niyamit v. State of Karnataka, (42 S.T.C. 184). So
also, the freight and handling charges payable by the purchaser not under
the statutory liability but as a part of the consideration for the sale of goods
have been held to be a part of the sale price Hindustan Sugar Mills v. State
ofRajasthan, [ 1979] 1 SCR 276. In Black Diamond Beverages v. C. T. 0., [ 1997]

- 107 S.T.C. 219, this Court has held that when the venue of the sale was the H
478 SUPREME COURT REPORTS [1999] SUPP. 5 S.C.R.

A place of the buyer and the time of sale was the point of delivery, the delivery
charges would contribute an addition to the cost of the goods and would
clearly be component of the price charged from the purchaser and would be
part of the sale price as defined in Section 2 (d) of the West Bengal Sales Tax
Act, 1954. When the manufacturer ofrefrigerators sold refrigerators with one
year service warranty on which the customers had no option, the charges for
B the one year warranty were held includible in the sale price since there was
no sale without it. State ofA.P. v. Hyderabad Allwyn Ltd., (1970) 78 STC 56.
In Remco Cement Distribution Co. Pvt. Ltd. v. State of Tamil Nadu and other
connected matters 88 STC 151, this Court has held that freight charges could
not be deducted by the producing dealer in computing taxable ~mover of
C cement for the purposes of the Sales Tax Act as under the Cement Control
Order the freight charges were to be met by him and he was entitled to a
consolidated price irrespective of the freight he might have incurred. In that
case this Court has also held that packing charges also could not be deducted
from the taxable turnover for the purposes of the Sales Tax Act unless it was
shown that they were not included in the sale price of the goods sold.
D
The learned counsel for the appellants, however, relied upon the
decisions in I. State of Orissa v. Utica/ Distributors (P) Ltd., [17 S.T.C. 320],
Ii. Cauvary Sugars and Chemicals Ltd. v. The Joint Commercial Tax Officer,
[29 S.T.C. I], III. Thiru Arooran Sugars Ltd. v. Deputy Commercial Tax
E Officer, Mannargudi and Ors., [71 S.T.C. 444] and IV. State of Tamil Nadu v.
Kothari Sugars & Chemicals Ltd., [IOI S.T.C. 197), wherein it has been held
that- where the sale price is statutorily fixed no other amount paid by the
purchaser could be added in his turnover for the purpose of assessing the
purchase tax. In the case of Utica/ Distributors P. Ltd., this Court has held
that the Central Sales Tax paid by the assessee at the time of purchase and
F realised from the customers under the statutory provisions did not form part
of the price paid by !he customers to the assessee, as the valuable consideration
for the sale was only the price fixed by the Government. This Court took that
view because the controlled stock-holder was not entitled to charge a price
higher than that fixed by the Government of India and thus the valuable
G consideration for the sale was the price fixed by the Government of India and
did not include the central sales tax. In Cauvery Sugars and Chemicals Ltd.,
the question· that arose before the Madras High Court was whether on
sugarcane levied on a sugar manuf~cturer under the Madras Sugar Factories
Control Act could form part of a sugar manufacturer's purchase turnover of
sugarcane under the Madras General Sales Tax Act, 1959. It was held that as
H the cess was paid by the sugar manufacturer in discharge of its own statutory ....
E.l.D.PARRY(I)LTD. v.ASSTLCOMMISSIONEROFCOMMERCIAL TAXES [NANAVATI,J.J 479
,.
liability it could not form part of its purchase turnover. In Thiru Arooran A
Sugars Ltd., the madras High Court held that the amounts paid by L.'le sugar
mill pursuant to the directive of the Director of Sugar could not be called the
agreed price, as the agreement was only to pay the controlled or statutory
price and the sugar mill had paid the price fixed under clauses 3 and 5-A of
the Sugarcane (Control) Order. The Madras High Court took that view because B
there was no agreement between the cane grower and the manufacturer to pay
a price higher than the minimum statutory price. In Kothari Sugars &
Chemicals ltd., this court has held that an amount paid in excess of the
minimum cane price fixed under clauses 3 and 5-A of the Sugar (Control)
Order paid by the purchaser to the grower of sugarcane could not be added
to the price of sugarcane. This Court held so because there was no agreement C
between the parties to pay a higher price and the only agreement was to pay
a price· fixed under clauses 3 and 5-A of the Sugar (Control) Order.

The learned counsel for the appellants also relied upon some decisions
wherein it has been laid down that if any amount is paid by the purchaser
to the seller of goods de hors the agreement of sale, then such amount could D
not be included in his turnover for the purpose of assessing purchase tax.
In Srinivasa Timber Depot v. Dy. Commercial Tax Officer, (1969) 23 S.T.C. 158,
a case arising under the Madras General Sales Tax Act, the Madras High
Court held that the object of the Act is to levy a general tax on the sale or
purchase of goods in the State and it is, therefore, clear that what could E
legitimately be brought to tax under the Act is the aggregation of the
consideration for the transfer of property in the goods and service charges
can not be equated to the consideration for transfer of property in the goods.
Taking this view it held that the charges paid on a percentage basis by
customers for picking out or selecting timber from the timber depots described
as lot cooly charges and shown separately in the bills cannot form part of F
the turnover of the dealer. This view was reaffirmed by the Madras High Court
in State of Madras y. Srinivasa Timber Depot, (1974) 33 S.T.C. 423. In an
appeal against the said judgment this Court in State of Madras v. Srinivasa
Timber Depot, 80 S.T.C. 393 (Supreme Court) while dismissing the appeal
observed that "After hearing learned counsel for the parties we are of the G

- opinion that the High Court placed reliance on its earlier judgment in Srinivasa
Timber Depot v. Deputy Commercial Tax Officer, 23 STC 158, in holding that
"the lot cooley charges are collected de hors the sale and such charges do
not form part of the turnover. This view has held the field in the State of Tamil
Nadu for the last 21 years, which is consistent with the provisions of the
Tamil Nadu General Sales Tax Act, 1959. We find no good reason to take a H
480 SUPREME COURT REPORTS [1999) SUPP. 5 S.C.R.

A different view. This appeal fails and is accordingly dismissed, but there will
be no order as to costs." In Hyderabad Asbestos Cement Products ltd v.
State ofAndhra Pradesh, 24 S.T.C. 487, a case on which heavy reliance was
placed by the appellants, the facts were that the appellant company had sold
cement at catalogue rate and thereafter deducted railway freight. It had sent
B goods to out-station customers by rail under railway receipts with freight to
pay. It made out invoices at the catalogue rate and the customers paid the
amount of invoices less freight for releasing the railway receipts and took
delivery of the goods on payment of the railway freight. The result was that
the net price received by the company was the catalogue rate less railway

C
freight charged in respect of the goods transported to the destination. As
under the Contract of Sale there was no obligation on the part of the company
to pay the freight and the price received by the company for the sale of goods
-
was the invoice amount less freight charges, this Court held that the freight
was not part of sale price and could not be included in the turnover of the
company.

D The learned counsel for the appellants had also drawn our attention to
the decision in Sakthi Sugars Limited and Ors. v. Deputy Commercial Tax
Officer, Bhavani and Ors., 23 S.T.C. 232, but the question raised therein was
quite different. In that case the sugar mills advanced monies to the ryots, who
-,
supplied sugarcane to them, to enable the ryots to purchase the sugarcane
E setts from the owners of the seed plots and this advance was adjusted in the
price to be paid by the mills to the ryots of the sugarcane supplied and the
ryots gave promissory notes for the amounts advanced. It was held by the
Madras High Court that the mills were only financiers and could not be
deemed as dealers in sugarcane setts under the provisions of the Madras
General Sales Tax Act, 1959. This decision is, therefore, of no help to the
F appellants. So also the case of Esso Petroleum Co. Ltd v. Customs and
Excise Commissioners, (1975) 1 W.L.R. 406 is not helpful to the appellants.
Esso Petroleum, suppliers of and dealers in petrol, got manufactured special
coins and advertised that they would distribute those coins free to any
motorist buying petrol from Esso Filling station and dealers on the basis of
G one coin for every four gallons of petrol and gave the coins as advertised.
The question that arose for consideration in that case was whether the coins
were goods chargeable to purchase tax under the Purchase Tax Act, 1963. It
was held that the coins were produced for general distribution as free gifts
to motorists who bought petrol and not for sale and, therefore, they were not
liable to purchase tax. Thus, the giving of coins was held to be in pursuance
H of a collateral agreement but it was not regarded as a part of transaction of
E.l.D. PARRY(l)LTD.1•.ASSTT.COMMISSIONEROFCOMMERCIAL TAXES [NANAVATl,J.J 48}

sale of petrol. A
Our attention was also invited to the decision of this Court in State of
Tamil Nadu v. Kothari Sugars & Chemicals Ltd, IOI S.T.C. 197, wherein it
has been held that "Where, without any contractual or statutory basis the
sale price of sugarcane is fixed at an amount higher than the minimum cane
price fixed under clause 3 and the additional cane price fixed under clause 5- B
A, any sum paid by the purchaser to the grower as advance prior to fixation
of the additional cane price under Clause 5-A, to the extent that it is in excess
of the additional cane price fixed later, cannot form part of the price of cane
sugar". While so holding this Court further observed that for treating the
entire amount paid by the purchaser as the price of sugarcane, it must be C
found proved as a fact that the higher price including the excess amount was
paid as price of the sugarcane under the agreement between the grower and
the purchaser irrespective of the lower amount being fixed as the aggregate
of the price fixation under clauses III and 5(a) of the Control Order. This Court
also, after referring to the two decisions of the Karnataka High Court in
Pandavapura Sahakara Kakkare Kharkhane (P) Ltd v. State of Myssore, D
32 S.T.C. 104, and Tungabhadra Sugar Works Ltd v. State of Karnatatka, 93
S. T.C. 56 l observed that where the substance of the transacdon between the
purchaser and the cane growers was for payment of the enhanced price for
the sugarcane supplied and the amount paid in excess of the statutory price
was paid under the contract and not either as an ex gratia payment or towards E
advance then that amount has to be treated as price of the sugarcane supplied.

What transpires from the above case law is that the amounts paid by
way of consideration by the purchaser to the seller of goods in pursuance of
the contract of sale can legitimately be regarded as purchase price while
calculating the turnover for the purposes of sales tax legislation. What can F
legitimately be brought to sales tax or purchase tax is the aggregation of the
consideration for the transfer of property. All the payments should have been
made pursuant to the contract of sale and not de hors it. Any amount paid as
ex gratia payment or as an advance cannot be the component of the purchase
price and therefore can not legitimately be included in the turnover of the
purchasing dealer. Whether one of the components of the purchase price goes G
to the coffers of the seller or not will not cease to be so if it is necessary for
completing the same. Thus the total amount of consideration for the purchase
of goods would include the price strictly so called and also other amounts
which are payable by the purchaser or which represent the expenses required
for completing the sale as, the seller wouid ordinarily include all of them in the H
482 SUPREME COURT REPORTS [1999] SUPP. 5 S.C.R.

A price at which he would sell his goods. But ifthe sale price is fixed statutorily
then the only obligation of the purchaser under the agreement would to pay
that price only and no other amount can be included in °the purchase price
even if the same is paid by the purchaser to the seller.

Therefore, what is now required to b~ considered is whether the planting
B subsidy and the freight subsidy given by the appellants to the sugarcane
growers were given by way of consideration for sale of the sugarcane. The
answer to this question also calls for the examination of the true nature of
the transaction between the appellants and the sugarcane growers and the
object of the payments made as planting subsidy and freight subsidy. We
C have earlier pointed out that in the State of Tamil Nadu, because of Madras
Sugar Factories (Control) Act there are certain restrictions on the transactions
of sugarcane in reserved areas. A grower of sugarcane in the reserved area
cannot sell any sugarcane grown in that area exce~t to the specified sugar
manufacturer. He is required to enter into an agreement by making an offer
to the specified sugar mill for sale of the sugarcane grown by him. Pursuant
D to this offer the sugar mill has to enter into an agreement with him for
purchasing of the sugarcane offered by him. The Sugarcane (Control) Order,
1966 controls distribution and movement and also the purchase price of
sugarcane. As neither the Madras Sugar Factories (Control) Act nor the
Sugarcane (Control) Order provide for any agreement between the sugarcane ·
E grower and the purchaser i.e. the sugar mill for giving planting subsidy or
freight subsidy it was contended by the learned counsel for the appellants
that the agreements which the appellants have entered into with the cane
growers in respect of planting subsidy are independent though collateral "
contracts and, therefore, they have nothing to do with the sale or purchase
of sugarcane. It was submitted that the invitation to cane grower to plant a
F particular variety and claim the amount of subsidy per acre if planted in the
stipulated month precedes the planting and growing of sugarcane. Acceptance
of that offer by the grower also precedes growing of sugarcane and the
statutory offer which the grower is required to make under Section IO (1) of
the Madras Sugar Factories (Control) Act. It was also submitted that even
G after taking planting subsidy the cane grower may or may not plant that
specified variety and even if he plants and grows sugarcane as per the said
agreement he may not sell the whole or part of the sugarcane grown by him
to the sugar factory as he is entitled to consume the sugarcane or process
it into jaggery if its holding is small in area.

H In support of this last submission not only the relevant provisions
E.I.D.PARRY(l)LTD. v.ASSTT. COMMISSIONER OF COMMERCIAL TAXES [NANAVATI,J.J 483

.. under the Act but the decision of this Court in Andhra Sugars Ltd v. A.P.
State, [1968) I SCR 705, was also relied upon. Apparently, the two agreements-
one agreement in respect of planting subsidy and the other agreement for the
sale of sugarcane appear to be independent but on a close scrutiny it can be
A

noticed that they constitute one single transaction. In their petitions filed

- before the High Court the appellants have stated that the planting or varietal
subsidy is by way of incentive to the cane grower. It is given to motivate the
cane grower to grow sugarcane and subsequently sell the same to the sugar
B

factory. Thus the reason why the appellants had given planting subsidy was
to see that the cane grower plant the desired and improved variety of sugarcane
and that too in the months suggested by the appellants so as to ensure
stagger supply of sugarcane as per the crushing schedule. The object of the C
planting subsidy was to obtain the desired variety and quality of sugarcane
at the time required by the appellants. It is also significant to note that as a
matter of fact the planting subsidy was given by the appellants to the cane
growers at the time of delivery of sugarcane by them. Though the appellants
had described the payments by way of planting subsidy as deferred payments
that cannot conceal the real nature of the transaction between the appellants D
and the cane growers. The planting subsidy was given by the appellants to
the cane growers not by way of agrarian reform or a social welfare measure.
The appellants had given planting subsidy as purchasers of sugarcane and
as a part of the consideration for which the sugarcane was ultimately purchased
by them. As rightly pointed out by the Madras High Court in State of Tamil E
Nadu v. National Co-operative Sugar Mills Ltd, (1992) 86 STC 22 giving of
planting subsidy earlier a.nd supply of sugarcane later were closely linked.
The planting subsidy was relatable to the supply of sugarcane. If the whole
deal between the appellants and the cane growers is examined they really
constitute one contract of sale. Therefore, the sums paid by the appellant as
planting subsidy to the cane grower were rightly treated as a part of the sale F
price and included in the taxable turnover of the appellants for the purpose
of assessing the purchase tax liability~

For the same reasons we hold that the transport subsidy was a part of
the consideration for which sugarcane was sold by the sugarcane growers to G
the appellants. Though the agreements between the parties provided for ..
delivery by the sugarcane growers at the factory gate and though the transport
charges paid by the appellants were not to the sugarcane growers but to
third party lorry owners, they were made for securing regular supply of
sugarcane as per the requirements. Though payments were made at the

- instance of Government of Tamil Nadu they also became a part of the implied H
484 SUPREME COURT REPORTS [1999] SUPP. 5 S.C.R.

A agreement between the appellants and the sugarcane growers. They were not
post-sale expenses. Those amounts were paid to ensure scheduled delivery
of sugarcane. The sale of sugarcane became complete only thereafter. Those
payments can be regarded either as payments made on behalf of the sugarcane
growers or payments made in modification or variation of the earlier agreements
B entered into by the sugarcane growers for selling sugarcane. In either case
they could legitimately be regarded as the components of the sale price as
the sellers would have otherwise included those amounts in the sale price.

But so far as levy of penalty is concerned, we do not think that the
Sales Tax Authorities were justified in levying it. Till the judgment of the
C Madras High Court, on 15.7.1991, in Perambalur Sugar Mills Ltd v. State of
Tamil Nadu, (1992) 86 S.T.C. 17, the correct position of law within the State
of Tamil Nadu was not free from doubt. Even thereafter, the Sales Tax Tribunal
had in subsequent orders held that transport subsidy was not includible in
the taxable turnover. Such a view held by the Tribunal till 19.3.1993. It appears
that on bona fide belief that planting and transport subsidies were not
D includible in the taxable turnover, the appellants had not included those
amounts in their turnover and for that reason non-inclusion of these two
items in the turnover do not seem to be intentional. Though we have now
held that the appellants were ·not right in not including the amounts of
planting subsidy and transport subsidy in the taxable turnover, considering
E the facts and circumstances of the case, it would not be correct to say that
they had acted deliberately in defiance of law or that their conduct was
dishonest or they had acted in ·conscious disregard of their obligation under
the Sales Tax Act. The Sales Tax Authorities were, therefore, wrong in passing
the orders of penalty and upholding the same. The High Court also, in our
opinion, committed an error in upholding the orders of penalty. In the result,
F these appeals are partly allowed. The order of the High Court and the orders
of the Sales Tax Authorities imposing and_ upholding levy of penalty are set
aside. Only to that extent the appellants succeed and their appeals are allowed.
The judgment of the High Court in respect to the planting subsidy and
transport subsidy is upheld. In the facts and circumstances of the case, there
G shall be no order as to costs.

B.S. Appeals allowed.

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