TMI Blog2005 (8) TMI 359X X X X Extracts X X X X X X X X Extracts X X X X ..... ---- The judgment of the Court was delivered by S.N. VARIAVA, J. This appeal is against the judgment dated 18th February, 1999 Reported in [1999] 114 STC 424 (Modi Xerox Ltd. v. State of Karnataka). passed by the Karnataka High Court. 2.. Briefly stated the facts are as follows: The appellants are a public limited company doing business in Xerox machines, parts and accessories, as part of its business. After the 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 retu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the statutory definitions of "sale" [section 2(t)], "taxable turnover " [section 2(u-1)] and "turnover" [section 2(v)], read with the charging section 5B, in the Karnataka Sales Tax Act, 1957, also indicate that there must be an agreement for transfer of property in certain goods for an identifiable price. He submitted that in a maintenance contract, the only obligation cast on the service provider is to keep the equipment in 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 char ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... own whether or not a part would be required to be replaced. It could not be denied that, even in the absence of any such agreements, if a part was required to be replaced and was replaced there would be a sale of that part. The same position remains even under the agreements. As and when a part is required to be and is replaced a sale takes place at that instance. To leave no room for doubt it must be mentioned that the tax 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) Ltd. v. State of Kerala reported in [1995] 97 STC 564 (Ker). In this case there was a contract to clean boilers in factories. Chemicals were used to clean the boilers. It was held that the chemicals were used up and thus there was no transfer of property and thus no sale. 14.. Relying on these cases Mr. Ganesh submitted that toners and developers get consumed in the process of printing and thus there is tangible 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 consume ..... X X X X Extracts X X X X X X X X Extracts X X X X
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