Service contract for smart cards, not sale of goods, where cards were only incidental to the predominant data service.

A contract for supply, installation and maintenance of computer systems, printing of smart cards and allied data services was held to be a service arrangement, not a sale of goods. The smart cards were specially designed for the department, the department retained exclusive intellectual property rights, and the cards had no independent commercial utility outside that arrangement. As the cards were only a medium for embedding and delivering data, their value was incidental to the predominant service element. Applying the settled distinction that a sale requires a distinct transfer of goods for a price, the transaction was not exigible to VAT.

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Issues: Whether the contract for supply, installation and maintenance of computer systems, printing of smart cards and allied data services was a contract for sale of smart cards or a contract for rendering service; and whether the smart cards supplied under the arrangement were exigible to VAT.

Analysis: The contract, read as a whole, showed that the assessee was engaged in providing a service solution to the Transport Department, with smart cards used only as a medium for embedding and delivering data. The cards were specifically designed for the department, the department retained exclusive intellectual property rights, and the cards had no commercial utility in the open market or to anyone other than the department. The value of the cards was merely incidental to the predominant service element. Applying the settled test that a sale requires a distinct agreement to transfer goods for a price and that materials used incidentally in a service contract do not by themselves create a sale, the transaction could not be treated as a sale of goods.

Conclusion: The contract was one for rendering service only, with no element of sale, and the levy of VAT on the smart cards was unsustainable.

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