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TMI Blog1999 (1) TMI 505X X X X Extracts X X X X X X X X Extracts X X X X ..... under, inter alia, the RST Act. It manufactures photocopying machines and sells xerographic machines, their components and parts on which it claims it charged and collected and deposited due tax with the assessing authority. In the case of the machines sold, installation kits comprising a drum, a developer and two bottles of toner accompanied them, which were charged for separately. The developer and toner were also sold separately, independently of the machines. It also rented out photocopying machines, which were also liable to be taxed. In addition, it also entered into two optional after-sales schemes-one was the Full Service Maintenance Agreement (FSMA) and the other was the Spare Service Maintenance Agreement (SSMA). 4.. In order to better appreciate the points involved the relevant provisions of the law and the various notifications are taken note of at this stage itself. 5.. Section 2, RST Act, pertains to definitions and sub-section (o) with effect from April 1, 1987 provides in clauses (ii) and (iv) for "sale" to include in the period in question: "(ii) a transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 12 per cent under item No. 95 of Notification No. F.4 (4) FD/Gr. IV/89-12 dated March 23, 1989 (S.O. 264) also issued under section 5, RST Act. 10.. The State Government by another Notification No. F.4 (24) FD/Gr. IV/ 90-44 also dated June 27, 1990 (hereinafter referred to as S.O. 123) specified the rate of tax on the use of goods which read: "S.O. 123.-In exercise of the powers conferred by sub-section (4) of section 5E of the Rajasthan Sales Tax Act, 1954 (Rajasthan Act No. XXIX of 1954), the State Government being of the opinion that it is expedient in the public interest so to do, hereby specifies the rate of tax in column (3) of the Schedule, hereto leviable on the turnover of sales in respect of the transfer of the right to use goods mentioned in column (2) of the said Schedule: SCHEDULE Sl. No. Description Rate of tax (1) (2) (3) 1 The transfer of the right to use video cassettes, pre-recorded video cassette. 10% 2 The transfer of the right to use television sets, video cassette recorders, video cassette players or projectors, video games equipment, internal communication equipment, and closed circuit TV equipments. 10% 3 The transfer of the right to use plant, machiner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e goods covered by S.O. 123 would continue to be taxable under S.O. 94 in the periods in question. The sale by way of transfer of right to use of goods other than the goods specified in S.O. 123 would be taxable in the periods in question under S.O. 264 or S.O. 94 as the case may be. 14.. The Commercial Taxes Officer, Anti-Evasion ["CTO(AE)", for short) surveyed the premises of MX on September 17, 1991 and it was found that: (i) MX in the periods in question had sold installation kits along with the photocopying machines for which Rs. 9,070 had been separately charged in the bills. The break-up of this was given out at the time of the survey to be Rs. 4,640, Rs. 2,420 and Rs. 1,010 respectively for the drum, developer and toner. On the sale of these installation kits MX charged sales tax at 4 per cent. MX sold Rs. 1,71,500 worth of developer and toner as part of the installation kits in 1990-91 and of Rs. 4,28,750 in 1991-92. However, MX also sold developer and toner independently of the photocopying machines on which sales tax was charged at 10 per cent. The CTO(AE) was of the view that the rate of tax applicable even in the case of the developer and toner sold as part of the in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated June 30, 1994 of the Board impugned in these applications. The Board dismissed the appeals filed by the CTO(AE). As for the appeals filed by MX they were partially accepted in that penalty was further reduced to the level of the additional tax liability which itself stood reduced by the deletion of the tax levied on the supply of spares under the maintenance agreements. Interest was accordingly to be reduced proportionately. The position in summary form was: 1990-91: Rs. Rs. Tax on 1,71,500 @ 6% 10,290 Tax on 1,06,364 @ 7% 7,445 Tax on 27,17,150 @ 10% 2,71,715 Total tax 2,89,450 Penalty 2,89,000 1991-92: Rs. Rs. Tax on 4,28,750 @ 6% 25,725 (sic) Tax on 1,26,039 @ 7% 8,823 Tax on 24,21,710 @ 10% 2,42,171 Total tax 2,76,744 Penalty 2,76,000 The Board held that the toner and developer supplied along with the installation kits were not spare parts or accessories; that the photocopying equipment was covered by the provision for "office equipment" in entry at serial No. 3 in the Schedule to S.O. 123; and that the FSMA and SSMA were particularly service contracts; that the supply of spares was predominantly for carrying out the contractual obligation with regard to the repair and m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... constituted a sale. In our opinion, the dealer cannot legitimately plead that he had a different interpretation of the contract. We have opined that supply of these two items was not even remotely related to any part of service contract. The dealer unsuccessfully tried to confuse the supply of these two items claiming that the same was part of service contract." 18.. Applications for revision Nos. 57 and 58 of 1994 filed by MX set out the following substantial questions of law said to arise in the cases: (i) Whether, under the facts and circumstances of the present case, the Board was justified in opining that the toner and developer which were supplied along with the installation kits were not spare parts or accessories of the machines and were thus liable to be taxed at the rate of 10 per cent and not at the rate of 4 per cent? (ii) Whether, under the facts and circumstances of the present case, the Board was justified in holding that the photocopying machines were included in entry No. 3 of S.O. 123 and, therefore, the rentals received in respect of transfer of right to use the photocopying machines were taxable at the rate of 10 per cent? (iii) Whether, under the facts and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d parcel of the installation kits and were therefore accessories; as accessories their sales were taxable at 4 per cent; that the photocopying machines fell into the category of "machinery" and the transfer of the right to use them in the cases in which the photocopying machines were let out on hire were taxable at 4 per cent under S.O. 123; that even if the maintenance agreements were taken to be works contracts there was no transfer of property in the toner and developer as they were consumed in the process of execution of the contracts and nothing was left of them for there to be a transfer of right to property in them; that in the case of FSMA the toner and developer were supplied free of charge and that, therefore, in the absence of consideration there could not be said to have been a sale; that the regular assessing authority had prior to the survey accepted the position disclosed in the returns as correct and that everything had been disclosed in the returns and in the books of accounts; that therefore no penalty could have been imposed. 22.. On behalf of the CTO(AE), i.e., the department it was argued that the CTO(AE) had the necessary jurisdiction; that this was a clear c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n that while interpreting the terms of the agreement the substance rather than the form has to be looked at and that the true relationship of the contracting parties has to be gathered from the nature of the contract, its terms and conditions, and the terminology used by the parties was not decisive of the relationship. 27.. In Pest Control India Ltd. v. Union of India [1989] 75 STC 188 (Pat), cited by the learned counsel of MX the facts were that the petitioner was a company engaged in the business of rendering services such as anti-termite treatment, rodent control, general pest control, house-hold disinfection, etc., in the course of which certain chemicals were used. It has for this purpose been engaged by one other. The question arose whether there was a sale of such chemical. The petitioner's contention was that it was engaged in the business of rendering services of pest control and charged their clients only for services rendered and as no goods were supplied in any form and its activities were confined to rendering services only, there was no question of payment of sales tax for rendering such services as no sale of goods was involved. The petitioner's contention was uphe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oods which are involved in the execution of works contract for purpose of imposition of sales tax. 30.. The principle laid down in Gannon Dunkerley's case [1993] 88 STC 204 (SC), was applied by the Madras High Court in State of Tamil Nadu v. Vijayakumar Mills Limited [1996] 100 STC 213, also cited by the learned counsel for MX. The Madras High Court followed its own decision in Tamil Nadu Mosaic Manufacturers Association v. State of Tamil Nadu [1995] 97 STC 503, in which in one matter the appellant did job-work in printing and used ink in the course of the printing work which was consumed in the execution of the works contract for printing. In another matter the job-work in question was dyeing and dyes used were consumed in the course of the execution of the works contract of dyeing. The question arose whether the ink used in printing and the dyes used in the dyeing in the execution of the works contracts respectively for printing and dyeing were taxable under the provisions of the sales tax law. It was held that the cost of the consumables used in the execution of the works contract, the property in which is not transferred in the course of the execution of the works contract wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed counsel for MX, this Tribunal had a matter before it in which the assessee was engaged in the business of developing exposed photo films and preparing positive films from the negatives given by the customers. The transactions relating to the purchase of photo papers and chemicals were not shown in the returns and tax was also not paid on them. The assessing authority imposed tax, interest and penalty-the last under section 16(1)(e), RST Act, for failure to disclose the taxable sales of the goods involved in the execution of the job work on account of which the returns filed were not accurate. This Tribunal held that the main object of the work undertaken by the assessee was not to transfer the photo papers upon which the positive prints were taken-such transfer being simply incidental-and that payment was made to get the positive prints and not to get the photo papers; that the contracts in between the assessee and its customers were neither contracts of sale nor direct or indirect works contract involving supply of photo papers. Therefore it was held that no sale of photo papers was involved which could be taxed under the RST Act. As all amounts received in connection with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... undertakes to take a photograph, develop the negative, or do other photographic work and thereafter supplies the prints to his customer he cannot be said to enter into a contract for sale of goods. The contract on the contrary is for use of skill and labour by the photographer. Therefore, Camera House's case [1970] 25 STC 354 (Bom) is no more good law. 36.. In Eastern Typewriter Service v. State of Andhra Pradesh [1978] 42 STC 18 (AP), cited by the learned counsel for the department, the facts were that the assessee entered into an agreement with the Government of Andhra Pradesh to carry out repairs to typewriters, duplicators, etc., belonging to the Government agreeing to take up their repairs and servicing at the rates approved by the Government of India and to supply spares at the rates approved by the Government of India. The question arose whether the supply of spares for a price amounted to sales liable to tax. It was held that they were. 37.. In Indian Hume Pipe Co. Ltd. v. State of Rajasthan (Original Application Nos. 248, 249, 250, 251 and 252 of 1997) decided by this Tribunal on August 27, 1998 and relied upon by the learned counsel for the department the facts were th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also show that toner and developer get consumed in the process of utilisation of the equipment, i.e., in photocopying. They further show that, therefore, they are not consumables for this contract the cost of which has to be deducted from the contract value for purposes of sales tax. The transaction in toner and developer is independent of this contract and is in terms a sale, simpliciter. It is not a case of the transfer of property in goods in the execution of a works contract, viz., the SSMA. It is a straightforward case of transfer of property in the toner and developer for valuable consideration directly from MX to the customer without the intervention of a works contract and hence is a pure and simple sale and therefore exigible to tax at the rates specified from time to time in the periods in question under section 5, RST Act. The position of the supply of spares under the SSMA is slightly different as there is no transfer of property in the spares but there is undoubtedly a transfer of the right to use them as the machines of which they are parts are put to use by the customers and the consideration for the transfer of the right to use has necessarily to be taken to be incl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... free to put it to use. There is therefore a transfer of the right to use even if there be no transfer of property in the toner and developer. The transfer of the right to use is conditional on the toner and developer being used only in the equipment to which the FSMA applies and on the customer being able to account for the supplies of the toner and developer. On the conditions being violated the customer is liable to be saddled with the full "charge", i.e., the prevailing MX prices for sale by way of a transfer of property in the toner and developer. The FSMA, therefore, in normal circumstances when the conditions are met, evidences a sale by way of transfer of the right to use with the valuable consideration being included in the contract price. The position of spares under the FSMA would be the same as under the SSMA, i.e., there is a sale by way of transfer of the right to use the spares. 43.. Therefore, strictly speaking, the question whether there is a works contract other than for labour and service or not; or, whether it is a single indivisible contract or not; or, whether the toner and developer are consumables the value of which must necessarily be deducted from the con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t be taxed under S.O. 123, as xerographic materials are not covered by it. 46.. It is a matter of record that when the toner and developer were sold as part of the installation kits at the time when the photocopying machines were sold MX charged tax separately on them, though, at the rate applicable to the sales of photocopying machines with effect from June 27, 1990 but when they were sold independently MX charged tax at the general rate. That would show that MX itself did not consider them to be spare parts or accessories when sold independently. If so, they cannot become spare parts or accessories when sold at the time of selling the photocopying machines. 47.. For a thing to be a spare part it must be a replacement for something which is a component part. That is to say the toner and developer must initially be a component part for them to be subsequently spare parts. MX obviously regards toner and developer to be included in xerographic supplies and such supplies cannot be regarded as spare parts just as much as ink used in a fountain pen is not a part or a spare part of the pen or a roll of film is a part or spare part of a camera even though neither the pen nor the camera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e or effectiveness of something else or is supplementary or secondary to something of greater or primary importance which assists in operating or controlling or may serve as aid or accessories. It also referred with approval to the definition given in Black's Law Dictionary as "anything which is joined to another thing as an ornament, or to render it more perfect, or which accompanies it, or is connected with it as an incident, or as subordinate to it, or which belongs to or with it, adjunct or accompaniment. A thing of subordinate importance. Aiding or contributing in secondary way of assisting in or contributing to as a subordinate" (emphasis added). Xerographic supplies like toner and developer do not fit this definition and are therefore not accessories. 49.. It is for these reasons that toner and developer cannot be taken to be spare parts or accessories and not because they are consumables. No such general rule can be laid down that consumables cannot be spare parts or accessories. 50.. Therefore, in the periods in question the toner and developer supplied as part of the installation kits as well as under the SSMA and FSMA would attract tax at the general rate, i.e., 12 per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat MX was of the bona fide, belief that the transfer of the right to use the photocopying machine was not taxable or was taxable at 3 per cent. The figure of 3 per cent has no basis. There was no ambiguity about the rate applicable, which was public knowledge and was clearly 10 per cent. Similarly, after having excluded the toner and developer from the scope of SSMA and having specifically provided in it for the customer purchasing the toner and developer MX could not then claim to have been in the bona fide belief that no sale of toner and developer took place. This was a clear case of evasion punishable under section 16(1)(e), RST Act. In these circumstances the ruling of this Tribunal in D.K. Woollen's case XXI Tax World (Full Reports) 14 does not apply. Having held that it was a case of evasion it must be held that the CTO(AE) did have the necessary jurisdiction. 53.. However, considering the facts and circumstances of the case it is felt that it would suffice if the penalty in these cases were confined to the amount equal to the tax liability evaded. The interest liability on the tax amount would remain. 54.. In view of the foregoing questions of law raised in the applicat ..... X X X X Extracts X X X X X X X X Extracts X X X X
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