United Breweries Ltd. vs State of A.P.

Suhas C. Sen, J.—This case along with a number of other cases was heard by S. P. Bharucha and Faizan Uddin, JJ., who passed the following order:

During the course of the arguments, the judgment of a Bench of two learned Judges in State of Maharashtra, Bombay & Ors. vs. Brittannia Biscuits Company Ltd. & Ors., 1995 Supp, (2) SCC 72 has been cited. Our attention has also been drawn to the judgment of a bench of three learned Judges in Punjab Distilling Industries Limited v. Commissioner of income tax, Simla 1959 Supp. (1) SCR 683. Having regard to these judgments, we think that these appeals require the consideration of a larger Bench. The larger Bench may also take note of the judgment dated 11th September, 1996 in C.A. Nos. 11864-67 of 1996 Commissioner of Income Tax, Madurai v. T.V. Simdaram Iyengar and Sons Ltd.

The United Breweries (hereinafter referred to as ''U.B.") supplies at Hyderabad two brands of beer -- (1) U. B. Export Lager and (2) Sun Lager. The dispute between U.B. and Andhra Pradesh Sales Tax Authority was as regards the crates and bottles in which the beer was supplied. The case of U.B. was that when beer was sold, bottles and crates were not sold to the customers. The sale price of U.B. Export Lager was Rs. 43.18 and Sun Lager Rs. 43.75 per dozen. The supplies were made to selling agents who deposited security of Rs. 4.80 for the bottles and Rs. 5.00 for the crates. These deposits were returned to the selling agents when the bottles and the crates were returned. This was the method of carrying on of the trade by the Assessee and two circulars were issued by the Assessee to explain the scheme to their customers. It was stated in the two circulars as to how payments for two brands of the beer were to be made. Additionally, it was stated that the "vendees to return bottles and crates and customers are assured of better supply, if the scheme is adhered by the customers; otherwise the company expressed difficulty in supplying the liquor".

The scheme was explained to the taxing authorities. The Commercial Tax Officer verified the scheme and held that the customers did not always return the bottles and crates. The sale of beer included sale of the crates and the bottles.

The Commercial Tax Officer was also of the view that the bottles and crates were higher in value than the amounts deposited as security. For these two reasons, it was held that the scheme was not genuine. Therefore, the taxable turnover had to be computed not only by taking into account the sale price but also the value of the bottles.

The case ultimately went up to the Tribunal. The Tribunal was of the view that there was no bailment of the bottles and the crates and there was no contractual obligation on the part of the customers to return the bottles and the crates. The scheme, therefore, was not acceptable as genuine.

Thereafter, the case was taken up by U.B. to the High Court. Before the High Court, the contention of the Revenue was that the mere fact that bottles and crates in which beer was sold could be returned did not mean that the customers had not purchased the bottles and the crates and had not become owners thereof. The bottles and crates were also vended to the customers along with the beer. The High Court held that the ownership in the bottles and crates did not remain with the U.B. when beer was sold. The customers purchased the bottles and the crates with the contents of receptacles. When bottles and crates were returned to the extent shown by the Assessee, in law, there was a resale of bottles and crates to the Assessee. The High Court referred to the decision of this Court in the case of Punjab Distilling Industries Ltd. v. Commissioner of Income Tax (A) (1959) 35 STC 519, and pointed out that U.B. did not have any right to the return of the bottles and crates nor was there any time-limit set for return of the bottles and crates. Therefore, it was a clear case where bottles and crates were sold along with beer and had to be included in the sale price.

The Assessee has come up in appeal against this decision.

The case of the Appellant is that the Company carries on business of manufacture and sale of beer. It sells beer to retailers and wholesale dealers throughout India. When the beer is sold, the bottles and crates are not sold to the customers. The Assessee follows the trade practice to sell the beer in bottles which are ultimately to be returned to the Assessee after the beer is consumed. To ensure such return, a deposit is collected from the customers. This deposit cannot be treated as sale proceeds in any way. It has been emphasised that the Assessee had issued circulars to its customers making it clear that empty bottles and crates were not being sold. The bottles were to be returned so that the process of bottling beer could continue smoothly and steady supply could be maintained. The system followed by the Assessee was that upon the return of the empty bottles, fresh supplies would be made to the dealer. The Assessee had submitted figures to show that a substantial part of the bottles was returned by the consumers. The attention of the Sales Tax Authority was also drawn to the circulars issued by the Assessee to its customers to the following effect:

United Breweries Limited, Hyderabad, 24, Grant Road. P.B. 5104 Bangalore-1.

Dear Sir,

We are glad to inform you that our brewery at Hyderabad commenced operating on October 18, 1971 and we are not in a position to render the same service to you as we render to our valued customers in Bangalore viz., delivery of our beer at your door fresh from the Brewery every day.

The brands can offer and their prices are as follows:

Rebate for orders at a time of 40 dozen and more of Sun Lager only is Rs. 1.24 per dozen making the net price Rs. 47.50 per dozen.

Orders should be booked at the office of Phipson and Co. Ltd., at 3.6.14/7, Himayathnagar, Hyderabad-29.

Full payment should be made at the above rates at the time of booking of orders. Cheques for U.B. Export Lager should be made in favour of United Breweries Limited and cheques for Sun Lager should be made in favour of Phipson and Co. Ltd.

Delivery will be made on the following working day after booking of the order. Empty bottles and crates with customers will be taken back by our truck, the driver of which will issue a receipt, against which our Brewery will issue a Credit Note on production of which credit will be allowed for the deposit at the time of booking of the next order. Please take back empty bottles from your customers and pay them 40 paise per bottle. This will reduce the cost of the beer and encourage them to buy larger quantities from you.

As open delivery will be given, there will be no question of leakages. Further, as already stated above, the beer will be delivered to you fresh every day. Not only will this simplify your business but you will build up a very good turnover In beer just like every one of our customers in Bangalore. This arrangement will be particularly of great advantage to you during the hot weather when there is a large demand for beer. We hope you will easily visualize the tremendous benefit to you of our having started our Brewery in Hyderabad and extend your kind patronage to your mutual benefit.

Four things emerge from this circular set out herein:

(1) The refundable deposits were being collected on the bottles and the crates.

(2) The Appellant advised its customers to collect forty paise per bottle from the consumers as deposit.

(3) The customers were advised to collect the empty bottles from the consumers and return them to the Appellant.

(4) The empty bottles and crates were to be taken back by the trucks of the Appellant, the drivers of which were authorised to issue a receipt for the empties against which the Appellant would issue credit notes. At the time of the booking of the next consignment, the customers would get advantage of the credit notes.

This arrangement suggests a continuous process by which the Appellant will sell beer to its customers in bottles and crates and collect the sale price of beer and also deposits for the crates and the bottles. The customers, in their turn, will sell beer to the consumers and apart from the price of beer, will recover forty paise per bottle as deposit to ensure return of the bottles. The bottles will ultimately be taken back by the Appellant for which the trucks will be sent and the credit notes will be given to the customers for return of the empties. This scheme of recycling the bottles and crates will keep down the costs and ultimately will have the effect of reducing the price of beer and encouraging the customers to buy beer in larger quantities.

The contention of Mr. Ganguli appearing for the Respondent is that when beer was sold in bottles and despatched in crates to the customers by U.B, an out and out sale to the bottles and the crates took place. The property in the bottles and the crates passed to the customers. The customers had an option to retain the bottles and use them as they liked. There was no contractual obligation to return the bottles to U.B. within any specified period of time. When the bottles were ultimately returned by the customers to U.B., a resale of the bottles took place.

We are unable to uphold this contention having regard to the nature of the transaction. The basic questions are : What was the intention of the parties? When the bottles and crates were supplied by U.B., did U.B. intend to make an out and out sale of the bottles and the crates along with beer and did the customers purchase not only beer but also the bottles and the crates from U.B.? The intention has to be found out from the conduct of the parties to the agreement and the manner in which the business was being carried out.

Section 19 of the Sale of Goods Act lays down that where there is a contract for sale of specific or ascertained goods, the property in them is transferred to the buyer at such time as the parties to the contract intend it to be transferred. For the purpose of ascertaining the intention of the parties, regard shall be had to the terms of the contract, conduct of the parties and the circumstances of the case. Sections 20 to 24 contain rules for ascertaining the intention of the parties as to the time at which the property in the goods is passed to the buyer. But these rules will apply only if a different intention does not appear from the contract itself.

From the memorandum issued by U.B., it appears that U.B. was very anxious not to lose the bottles and crates in which the beer was supplied. Forty paise was charged as deposit and the customers were also advised to do likewise when they sold the beer to the consumers. The whole intention was to get back the bottles from the consumers through the customers. The scheme was that U.B. would regularly send trucks with beer to the customers to supply beer and get back the empties. These empties will be filled up again for further supplies. This recycling of bottles will keep down the costs and this process will have the effect of keeping down the price of the beer which in turn will increase the sales. This does not appear to be a case where U.B. was selling beer in bottles and washing off its hands thereafter. It wanted to use the empty bottles. it was anxious to get back the bottles and that is why It not only charged 40 paise per bottle from customers but even advised them to do likewise, and collect 40 paise as deposit per bottle of beer from consumers to ensure that the bottles ultimately are returned to U.B.

Mr. Ganguli invited our attention to Sections 23 and 24 of Sale of Goods Act. According to him, this Court in the case of State of Maharashtra, Bombay and others V. Britannia Biscuits Co, Ltd. and Others, 1995 Supp. (2) SCC 72 in a similar transaction had held that supply of biscuits by the manufacturer to its customers in returnable tins amounted to sale of goods. To come to this conclusion, a Bench of two Judges of this Court took the view that the principle underlying Section 24 was that where the goods were delivered to the buyer on terms similar to the delivery of goods on approval or "on sale or return" basis, the property in the goods therein passed to the buyer, if he did not signify his approval or acceptance and also did not return the goods within the time prescribed therefor. The position of the purchaser, until he returned the goods within the prescribed period, was that of a bailee and on the expiry of the said period, he becomes a purchaser. Where, however, the person to whom the goods were delivered was under an obligation to return the goods, there was no question of sale ever coming into being and the person to whom the goods were delivered remained a bailee. It was held in the facts of that case that the transaction therein was of the nature nearer to the situation contemplated by Section 24 inasmuch as the tins were delivered to the buyer with the stipulation that if he returned the tins in good condition within three months, he would get back the deposit made by him in that behalf. It meant that after the expiry of the said period, he had no right to claim the refund on return of goods. The transaction then became a sale. The Court highlighted two features of the transaction. One was that the customer was under no obligation to return the tins in which the biscuits had been supplied. He had a right to return the tins in good condition within three months. The supplier was under an obligation to refund the deposit amount only if the tins were returned within three months in good condition.

It is not clear how the Court came to the conclusion in the facts of that case that the tins were sent to the buyers on sale or ''on sale or return'' basis or any analogous condition. We are of the view that the principle of Section 24 or any analogous principle cannot be applied to a case like this. Neither the beer nor the battles nor the crates were sent to the customers by U.B. for approval or ''on sale or return'' basis or any other similar term. Section 24 of the Sale of Goods Act is subject to the provisions of Section 19 which provides that the property in specific or ascertained goods is passed to the buyer only at such time as the parties to the contract intend it to be passed. The facts of this case reveal that U.B. did not intend to sell the bottles or the crates to the customers. There was no intention of an out and out sale to the customers. On the contrary, the customers were advised to sell the beer in bottles to the consumers and collect a deposit of 40 paise per bottle so that the bottles can be brought back from the consumers and returned to U.B. The entire idea was to use the bottles over and over again so that the business costs of U.B. could be kept at the minimum and the price of the beer could be kept at a low level so that consumption of beer would increase. It does not appear that any time limit was fixed for return of bottles in this case. But, even if such limit was fixed, it is well-settled that time is not of the essence of the contract unless the parties specifically make it so. Section 11 of the Sale of Goods Act gives statutory recognition to this principle. This aspect of the matter was also overlooked in Britannia Biscuits Co.''s case.

Having regard to the facts of this case, we are of the view that an out and out sale of the bottles did not take place when beer was supplied In bottles by U.B. to its customers against the deposits which had to be refunded when the bottles were returned. Having regard to the scheme and the nature of the transactions, we are of the view that the High Court was in error in holding that when beer was sold in bottles, not only beer but also the bottles were sold and the price of beer along with the deposits became exigible to sales-tax.

Mr. Ganguli argued that the very fact that U.B. had a right to forfeit the deposits on the failure of the customer to return the bottles indicates that the bottles were sold. The deposits were nothing but price of the goods which was returnable when the bottles were resold.

We are unable to uphold this contention. Whether the bottles and the crates were sold along with the beer or not will depend upon the intention of the parties. We have set out the terms and conditions under which the beer was sold and it does not appear from these terms and conditions that U.B. intended to sell crates and bottles to the customers. On the contrary, it was very anxious to get back these crates and bottles in order to use them again for further supplies. The fact that U.B. advised their customers to charge similar deposits from their consumers and get back the bottles from them goes to show that an out and out sale of the bottles had not taken place. By taking the deposits, U.B. merely ensured the return of the bottles and the crates. A deposit of forty paise per bottle was taken to ensure return of the bottles. In our view, the deposit amount which was liable to be forfeited on failure of the return of bottle was in the nature of liquidated damages recoverable by the supplier u/s 74 of the Contract Act. An overall view has to be taken of the dealings and transactions between the manufacturer of the beer, its customers and the consumers. The intention of U.B. does not appear to have been to sell the beer bottles. Nor was there any intention of the retailers to sell the bottles to the consumers. On the contrary, by the terms and conditions of the agreement U.B. was trying to ensure that the bottles in which the beer was supplied to the consumers through their customers were brought back to it so that they could be used again for fresh supply of beer at a cheap rate.

Strong reliance was placed by Mr. Ganguli on the decision of this Court in the case of Punjab Distilling Industries Ltd. v. Commissioner of Income Tax, Simla 1959 Supp. (1) SCR 683. That case was decided under the Income Tax Act, 1922. There the Appellant-distiller of