Composite service contracts and tax: spare parts and consumables were taxable as sale, but wholly consumed fuser oil was not.

In a composite service and maintenance arrangement, supply and replacement of spare parts, toner and developer was treated as a taxable sale because the contracts showed transfer of property in goods for valuable consideration, and the value of the goods formed part of the consideration. By contrast, fuser oil, being wholly consumed in the operation of the machines and not surviving in tangible form, was not treated as a transfer of property in goods and was not liable to tax. The assessment was therefore sustained for the goods supplied under the contracts, with relief confined to the fuser oil component.

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Issues: (i) Whether the supply and replacement of spare parts, toner and developer under the service and maintenance agreements amounted to a sale liable to tax under the Karnataka Sales Tax Act, 1957. (ii) Whether the supply of fuser oil used in the functioning of the machines amounted to a sale liable to tax.

Issue (i): Whether the supply and replacement of spare parts, toner and developer under the service and maintenance agreements amounted to a sale liable to tax under the Karnataka Sales Tax Act, 1957.

Analysis: The agreements provided for replacement of worn-out parts, supply of toner and developer, and payment of fixed consideration for the combined service. The transfer of property in goods for valuable consideration was treated as the governing test, and the Court held that the contractual clauses and the nature of the consideration showed that the consumer received the spare parts and the toner and developer as part of the transaction. The amount charged under the contracts included the value of the goods supplied, and the exchange of worn-out parts did not exclude a transfer of property in goods.

Conclusion: The supply and replacement of spare parts, toner and developer amounted to a sale and was liable to tax.

Issue (ii): Whether the supply of fuser oil used in the functioning of the machines amounted to a sale liable to tax.

Analysis: Fuser oil was consumed in the course of operation and did not remain in any tangible form after use. Applying the distinction between goods that continue to exist in another form and goods wholly consumed in service, the Court held that the oil did not involve a transfer of property in goods in the sense required for sale.

Conclusion: The supply of fuser oil did not amount to a sale and was not liable to tax.

Final Conclusion: The revision succeeded only in part, with relief confined to the value of the fuser oil, while the assessment was sustained for the remaining goods and transactions.

Ratio Decidendi: In a composite service-and-supply arrangement, tax is attracted where goods supplied in performance of the contract involve a transfer of property for valuable consideration, but not where the item supplied is wholly consumed and does not survive in any tangible form.

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