Xerox Modicorp Limited Vs. State of Karnataka  Insc 440 (24
N. Variava & Tarun Chatterjee S. N. Variava, J.
Appeal is against the Judgment dated 18th February 1999 passed by the Karnataka High Court.
stated the facts are as follows:
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.
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.
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
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 movables for a price. He
submitted that the statutory definitions of "Sale" (Sec. 2(k),
"Taxable 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
not a contract which is entered into for a transfer of the property in any
specific part or component for any identifiable price. He submitted that a
maintenance contract, when entered into, is not an agreement for the sale of
goods. He submitted that a maintenance contract does not get transformed into
an agreement for the sale of goods merely by reason of the subsequent
development of some parts or components being replaced by the service provider,
as an integral part of the contractual obligation of keeping the equipment in
good operating condition. He submitted that in a maintenance contract, the
charge is paid for the service and not as a price for the replacement of any
particular part or component. He submitted that when the contract is entered into,
it is not even known whether any part or component will require replacement or
not. He submitted that there is thus no nexus or correlation between the price
paid for the contract and the value of any part or component which subsequently
gets replaced, if at all, during the contract period. He further submitted that
the basic and essential requisites of a contract of sale of goods are thus
entirely missing in a maintenance contract, and the same are not created or
brought into existence by the 46th Amendment. He submitted that the predominant
and basic object of a maintenance contract is the rendering of a service and
not the sale of any goods.
support of his submissions Mr. Ganesh relied on the case of State of U. P. vs.
Union of India [(2003) 3 SCC 239] where it is held that if a contract is
basically a service contract, the incidental supply of goods under the contract
as an essential part of the service does not attract the levy of sale of tax
even after the insertion of Article 366(29A)(b). It has been held that this
provision does not obliterate the distinction between a service and a sale of
though at first blush the submissions of Mr. Ganesh may appear attractive, on a
proper consideration, we think that Mr. Iyer was right when he submitted that
the Agreements are not just service contracts but also maintenance contracts.
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.
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.
SSMA the customer buys them. Under FSMA they are replenished by the Appellants.
with this situation Mr. Ganesh next submitted that in any event, from the point
of view of the Appellants, the part or component replaced can be considered to
be material which is consumed in the execution of the maintenance contract and,
therefore, not exigible to tax by virtue of Explanation I to Rule 6(4) of the
Karnataka Sales tax Rules. The said Explanation reads as under :
the purposes of clauses (m) and (n) of sub-rule (4), 'labour and other like
charges' include charges for obtaining on hire or otherwise machinery and tools
used for execution of Works Contract, charges for planning, designing and
architects' fees, cost of consumables used in the execution of the works
contract, cost of establishment to the extent relatable to supply of labour and
services and other similar expenses relatable to supply of labour and
services." On the other hand Mr. Iyer submitted, and in our view rightly,
that the term 'consumables' used in this explanation has to be read in the
context of the words preceding and following. He submitted that read as such it
is clear that the term 'consumables' refers to such items as are used up in
execution of the works contract, so that nothing tangible is left, in which
property in the goods can pass to the buyer. A part placed in the machine does
not get consumed. It remains in the machine. May be over a course of time there
may be wear and tear and/or deterioration but it does not get consumed.
however strenuously submitted that in the toner or developer, supplied in the
FSMA there is no transfer of property or sale. He submitted that the toner and
developer are consumed in the process of the execution of the Agreement itself.
He submitted that no sales tax is, therefore, leviable.
support of this submission Mr. Ganesh relied upon the case of Pest Control
India Ltd. vs. Union of India & Ors. reported in [(1989) 75 STC 188]. In
this case there was a contract for eradication of pests, rodents, termites etc.
In carrying out this work chemicals were sprayed through machines. The question
was whether there was a sale of chemicals in execution of the works contract.
It was held once the chemicals were sprayed they got consumed and nothing
tangible remained in which property could be transferred.
also relied on the case of The Deputy Commissioner of Sales Tax (Law), Board of
Revenue (Taxes), Ernakulam vs. M. K. Velu reported in [(1993) 89 STC 40]. In
this case there was a contract for display of fireworks. The question was
whether there was a sale of fireworks. It was held that the fireworks got
consumed in the process of execution of the work. It was held that thereafter
no tangible property remained. It was held that there was no transfer of goods.
next relied on the case of Dynamic Industrial & Cleaning Services (P) Ltd.
vs. State of Kerala & Anr. reported in [(1995) 97 STC 564]. In this case
there was a contract to clean boilers in factories. Chemicals were used to
clean the boilers. It was held that the chemicals were used up and thus there
was no transfer of property and thus no sale.
on these cases Mr. Ganesh submitted that toners and developers get consumed in
the process of printing and thus there is tangible property left in which there
can be transfer of property.
other hand, Mr. Iyer submitted that there is transfer of property in tangible
goods i.e. toners and developers, before they get consumed. He submitted that
this case is akin to sale of petrol or sale of ink. He submitted that the
authorities relied upon by Mr. Ganesh are all cases where the goods get
consumed in execution of the work and where there is no transfer of property in
the goods before the goods are consumed. He submitted that the principles laid
down in those cases have no relevance and cannot apply to the facts of this
have considered the rival submissions. 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:
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.
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.
Before us no contention is raised that sales tax is not being levied on a
correct basis. On the contrary Mr. Iyer pointed out to us the Order dt. 30th August 1994 of the Joint Commissioner of
Commercial Taxes wherein, whilst remitting back for recalculation of tax, the
principles on which it is to be done are laid down. To us they appear to be
this view we see no reason to interfere with the impugned Judgment. The Appeal
stands dismissed. There will be no order as to costs.