TaxTMI 
TaxTMI 
2005 (8) TMI 359
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....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 lumpsum of Rs. 7,000 per annum. However, the costs of toners, developers, etc., are to be borne by the customer. 3.. It appears that in the returns filed by the appellants, for sales tax purposes, they declared total and taxable turnovers at Rs. 4,23,58,510 and Rs. 1,63,58,556. The assessing authority, on verification of the books of account, determined the total and taxable turnovers at Rs. 10,34,70,495 and Rs. 4,70,23,693. The assessing authority held that the amounts received for sale of parts, toners and developers, under the aforementioned two types of agreements, ....
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....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....
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.... 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. Under the SSMA the customer buys them. Under FSMA they are replenished by the appellants. 8.. Faced 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: "For the purpose 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 works contract, cost of establish- ment to the extent relatable to supply of labour and services and other similar expenses relatable to supply of labour and services." 9.. On the other hand Mr. Iyer subm....
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.... property left in which there can be transfer of property. 15.. On the 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 case. 16.. We 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....