Important point
Where under a contract for maintenance, apart from service element there is supply of parts and components merely because price is not being separately charged for that would not detract from position that supply is for a price and there is transfer of title in movables for price which is to be included for sales tax purposes.

Headnote:Sales Tax—Karnataka Sales Tax Act—Sections 2(k), 2(u-1), 2(k) r/w 5B and 6(4) Explanation-I—‘Sale’, “Taxable Turnover” and “Turnover” and “consumable”—Appellants were in business in xerox machines, parts and accessories, as part of its business—After sale of xerox machine, parties used to enter either Full Service Maintenance Agreement or a Spares and Service Maintenance Agreement—Assessing Authority held that amounts received for sale of parts, toners and developers under the Agreements were includible for purposes of sales tax—Appeal before Appellate Tribunal was dismissed—Appeal—Contention that there was no agreement for transfer of property in certain goods for identifiable price—If after sale of machine some part was to be replaced or some component supplied that would be sale—Merely because price was not being separately charged, did not detract from the position that supply was for a price—Word consumable referred to such items which got consumed before property in goods could pass—Toner and developer, supplied under maintenance contract, passed moment they were put into the machine—No reason to interfere with impugned order.
       Held : Mr. Iyer is right that the machines belong to the customer after they are sold to them. If after the sale some part was to be replaced or some component supplied there would be sale as understood in law. Under the Agreements, apart from the service element, for which no tax is sought to be levied, there is the element of supplying parts and components like toners/developers etc. Mr. Iyer is right in submitting that merely because price is not being separately charged for this, does not detract from the position that the supply is for a price. Such supply has all the elements of sale as understood in law. There is transfer of title in movables for a price. The mere fact that it is not known in the beginning whether or not a part will have to be replaced is irrelevant. If there were no such Agreements, it would not be known whether or not a part would be required to be replaced. It could not be denied that, even in the absence of any such Agreements, if a part was required to be replaced and was replaced there would be a sale of that part. The same position remains even under the Agreements. As and when a part is required to be and is replaced a sale takes place at that instance. To leave no room for doubt it must be mentioned that the tax is on sale. So if there is no replacement of a part then there is no sale of a part. So far as toners and developers are concerned it is known from the beginning that they will require regular replenishment. Under SSMA the customer buys them. Under FSMA they are replenished by the Appellants. (Para 7)
       As set out hereinabove the word consumable in Explanation I to Section 6(4) refers to such items which get consumed before the property in the goods can pass. We are informed that toners and developers are liquids which are put in the Xerox machine. They perform, to put it simply, the same function as ink in printers. Under the Sale of Goods Act if specified goods in a deliverable state are delivered the property in the goods passes. It could not be disputed that the toner and developer will be delivered in bottles/containers. In the FSMA supplies are left with the customer. Thus clause 9 of the Section dealing with the customers obligation provides as follows:
       “THE CUSTOMER
       ...............................................
       9. shall be accountable to MX for xerographic supplies stock left in trust with the customer who shall ensure that such stock is used only in the Equipment under this Agreement. MX reserves the right to charge the Customer for any stocks which are unaccounted for, to MX’s satisfaction, at the then prevailing MX prices.”
       Thus for the extra stock there is a provision which provides that it is left in trust. However once the toner and developer are put into the machine they are no longer in trust. This is because the property in the toner and developer passed the moment they are put into the Xerox machine. Now they belonged to the customer. At this stage they are tangible movables in which property can pass. This is clear from the provision that Appellants will charge for unaccounted stock at prevailing prices. That they are goods in which property can pass is also clear from the fact that in the SSMA the customer has to buy the toner and developer. If as now claimed they are consumables in which property cannot be transferred how are the Appellants charging for toners and developers. In our view, Mr. Iyer is right. The sale i.e. transfer of property takes place before the goods are consumed. The transfer takes place in respect of tangible goods. Just like petrol is consumed after sale or ink is consumed after sale in this case also the toners and developers get consumed after sale. The property passes the moment they are put in the machine. At that stage they are not consumed but are tangible goods in which property can pass. In view of the above it is held that there is sale of parts, both in FSMA and SSMA. There is also sale of toners and developers even in the case of FSMA. (Paras 15 and 16)

Judgment

S.N. Variava, J.—This Appeal is against the Judgment dated 18th February 1999 passed by the Karnataka High Court.

2. Briefly stated the facts are as follows:

The Appellants are a Public Limited Company doing business in Xerox machines, parts and accessories, as part of its business. After the Xerox machine is sold to a customer, if the customer so desires, the Appellants enter into one of the two types of Agreements, namely, either a Full Service Maintenance Agreement (FSMA) or a Spares and Service Maintenance Agreement (SSMA). In FSMA the Appellants take on the responsibility of fully maintaining the machine, servicing it and if necessary replacing parts. The Appellants also supply material, like toners and developers. They charge at the rate of 0.27 paise per copy produced by the machine. Under the SSMA, the Appellants agree to maintain the machine including replacement of parts, if necessary, for a lump sum of Rs. 7,000/- per annum. However, the costs of toners, developers etc. are to be borne by the customer.

3. It appears that in the Returns filed by the Appellants, for Sales Tax purposes, they declared total taxable turnovers at Rs. 4,23,58,510/- and Rs. 1,63,58,556/-. The Assessing Authority, on verification of the books of accounts, determined the total and taxable turnovers at Rs. 10,34,70,495/- and Rs. 4,70,23,693/-. The Assessing Authority held that amounts received for sale of parts, toners and developers, under the aforementioned two types of Agreements, were includible for the purposes of sales tax.

4. The Appellants filed an Appeal before the Joint Commissioner of Commercial Taxes (Appeals), Bangalore. In that Appeal, the matter was remanded back for purposes of considering certain reductions. An Appeal was filed before the Karnataka Appellate Tribunal which was dismissed. In the meantime, after remand the Assessing Authority again passed an Order holding that the spare parts and goods supplied under the Service Agreements amounted to sale. The Appellants then filed a Revision Petition which was dismissed by the impugned Judgment.

5. Mr. Ganesh, learned senior counsel for the Appellants, submitted that the essence of a sale of goods is that the parties must enter into a contract for the transfer of property in movables for a price. He submitted that such a contract may be a separate and distinct contract or it may be an inseparable part of a larger contract, such as a contract for the construction of a house with materials to be supplied by the contractor. He further submitted that prior to the 46th Amendment to the Constitution of India, it had been held by this Court in the Gannon Dunkerly’s case [1959 SCR 379] that no sales tax could be levied on the transfer of property in goods in the case of such an inseverable contract. He further submitted that Article 366(29A)(b), inserted by the 46th Amendment, only enables an inseverable contract to be split up, so as to enable sales tax to be levied on that part of it which consists of a contract to transfer property in movables for a price. He submitted that Article 366(29A)(b) does not have the effect or consequence of converting what in law is not a sale of goods into a taxable sale of goods. He submitted that Article 366(29A)(b) does not make any departure from the basic concept of the parties having to enter into a contract for the transfer of property in moveables for a price. He submitted that the statutory definitions of “Sale” (Sec. 2(k), “Taxation Turnover” (Sec. 2(u-1) and “Turnover” (Sec. 2(k), read with the charging Section 5B, in the Karnataka Sales Tax Act, also indicate that there must be an agreement for transfer of property in certain goods for an identifiable price. He submitted that in a maintenance contract, the only obligation cast on the service provider is to keep the equipment in question in operating condition and to repair it if necessary and to replace a part only if found necessary. He submitted that a maintenance contract is thus

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2005 Supreme(SC) 1082

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