2005 (8) TMI 359 - SC - VAT and Sales Tax

Whether there was a sale? - Held that - Appeal dismissed. As 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 dated 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 correct.

Summary

Issues Involved:
1. Whether the amounts received for the sale of parts, toners, and developers under Full Service Maintenance Agreement (FSMA) and Spares and Service Maintenance Agreement (SSMA) are includible for sales tax purposes.
2. Whether the parts and components supplied under maintenance contracts amount to a sale.
3. Whether toners and developers supplied under FSMA are considered consumables and thus not subject to sales tax.

Detailed Analysis:

1. Inclusion of Amounts for Sales Tax Purposes:
The appellants, a public limited company dealing in Xerox machines, entered into FSMA and SSMA with customers post-sale. Under FSMA, they charged 0.27 paise per copy for full maintenance, including parts replacement and supply of materials like toners and developers. Under SSMA, they charged Rs. 7,000 per annum for maintenance, excluding the cost of toners and developers. The assessing authority determined higher taxable turnovers than declared by the appellants, including amounts received for parts, toners, and developers under these agreements for sales tax purposes.

2. Sale of Parts and Components:
The appellants argued that a maintenance contract is essentially for service, not for the sale of goods. They contended that the replacement of parts under such contracts does not constitute a sale, as the contract's primary objective is service, not the transfer of property in goods. However, the court held that the agreements involved the supply of parts and components, which constitutes a sale as understood in law. The court emphasized that the supply of parts and components like toners and developers, even if not separately priced, involves a transfer of title in movables for a price, thus meeting the criteria for a sale.

3. Toners and Developers as Consumables:
The appellants claimed that toners and developers used in FSMA are consumed in the execution of the maintenance contract and thus should not be subject to sales tax. They relied on precedents where consumables used in service contracts did not attract sales tax. However, the court distinguished these cases, stating that toners and developers are tangible goods in which property can pass before they get consumed. The court noted that the property in toners and developers passes when they are put into the Xerox machine, similar to how petrol or ink is sold and then consumed. Therefore, the sale occurs before consumption, making them subject to sales tax.

Conclusion:
The court concluded that there is a sale of parts, toners, and developers under both FSMA and SSMA. The court found no reason to interfere with the impugned judgment of the Karnataka High Court, which upheld the inclusion of amounts received for these items in the taxable turnover. The appeal was dismissed, and the principles laid down by the Joint Commissioner of Commercial Taxes for recalculating the tax were deemed correct.