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2015 (11) TMI 1391 - KARNATAKA HIGH COURT

2015 (11) TMI 1391 - KARNATAKA HIGH COURT - [2016] 87 VST 1 (Kar) - Levy of VAT on smart cards - Contract for sale or contract for service and labour - The assessee had purchased ID Smart cards for transport department - Assessee contended that the use of smart card for printing data and delivering the same to the transport department is incidental - They are the property of the transport department and were never considered as the property of the assessee. - Held that:- The smart card is only a .....

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transport department is incidental.

An article or commodity or a material must be something which can ordinarily come to the market to be bought and sold. It must have a distinctive name, character or use. Thereafter it should satisfy the test of abstraction transmission, transfer, delivery, storage and possession, etc.

The essential test to be satisfied before an article is said to be 'goods' is the test of marketability. In the market, the said goods is to be known as a c .....

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partment are not commercial commodities. The same cannot be sold to any other person. The smart cards, which are produced by the petitioner, have no utility or value to any other person than the department who paid for the service rendered by the petitioner. The material purchased and utilized in preparation of photo-identity cards is incidental. Another important aspect is that the smart cards also contained the official logo of the Government of Karnataka along with key management microchip. T .....

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ween the parties for supply of smart cards is for rendering service only and there is no element of sale. - Not liable to VAT - Decided in favour of assessee. - S.T.A. No. 17/2011 AND S.T.A. Nos. 20-23/2011 - Dated:- 18-9-2015 - MR. N. KUMAR AND MR. B. MANOHAR, JJ. For The Appellant : Smt. H. Vani, Adv. For The Respondent : Sri. K.M. Shivayogiswamy, Govt. Adv. JUDGMENT 1. These appeals are preferred by the assessee challenging the order passed by the Additional Commissioner of Commercial Taxes h .....

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Rosmerta Technologies Ltd, M/s ITI Limited, M/s Team Computers Pvt. Ltd. and M/s Mynd Solutions Pvt. Ltd. of which M/s Rosmerta Technologies Pvt. Ltd. being the leading member of the consortium. The proposal submitted by the assessee was accepted by the transport department. Thereafter, they entered into an agreement dated 25.02.2009 at Bangalore. After the award of the contract, by an agreement dated 29.10.2009 the assessee was inducted into the consortium as an implementing partner. Consequent .....

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ach of the member of the consortium. The nature of the work as agreed to in the agreement involves installation of computer systems, smart card facility, implementation of the computer systems installation, installation of project facilities at the respective transport offices through out the State of Karnataka, carrying out of performance tests, operation of smart card facility, data entry services, data entry process by deploying adequate data entry operators, data entry tests, ensuring availa .....

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loped for the transport department and shall not disclose confidential information to anyone else. The assessee shall maintain confidentiality apart from other obligation. In terms of the said agreement, it is the transport department which has the exclusive intellectual property rights of the project and nothing in the agreement shall be construed or deemed to grant the assessee any right, title, license etc. The entire projects including the smart cards obtained by the assessee as consumables .....

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ards the smart cards was negligible. The assessee is not indulging in any sale of ID smart cards as such. The assessee provides computerized service delivery system services and smart cards supplied while rendering those services as a part of the contract of service. 3. The Commercial Tax Officer (Enforcement) 12, South Zone, Bangalore visited the office premises of the assessee on 29.10.2009. He issued a show cause notice under Section 38(5) of the VAT Act proposing to levy tax, penalty and int .....

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1/- during June 2009 to October 2009 was contested. The assessee contended that the smart cards prepared by it are the property of the transport department and they have no value in the commercial market other than the transport department. Use of such ID cards without the authority of the transport department is an offence punishable under law. The transport department has paid the consideration in terms of the agreement for the services rendered by the assessee, the execution of which includes .....

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overnment of Karnataka along with the key management microchip. The loading of the data into the microchip embedded in the smart cards requires lot of skill and ability and the trained personnel. When these things were embedded in the smart card, the card gets laminated, scaled, made water proof and tamper proof. The edges are fussed so that the card cannot be opened for misuse and it is made in such a way that none of the materials affixed on the smart card can be removed or peeled off without .....

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he transport department for consideration and therefore, there is sale of goods. The smart cards until they were transferred to the transport department, were the property of the assessee. The department of transport has purchased the goods from the assessee by paying consideration and therefore, he proceeded to pass a protective assessment order dated 15.02.2010 under Section 38(5) of the Act imposing VAT at 12.5% on the entire consideration received by the assessee for the period June 2009 to .....

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on 64(1) of the KVAT Act suo-motu initiated proceedings proposing to revise the order of the appellate authority on the ground that it is erroneous as well as prejudicial to the interest of the revenue. 6. After service of notice, the assessee filed his objections reiterating the very same grounds urged before the assessing authority. The revisional authority without appreciating the contentions of appellant set-aside the order of the appellate authority and restored the protective assessment or .....

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lars of each driver is embedded by virtue of the software which the assessee has developed. There is no transfer of intellectual property when the smart card is handed over to the department. The intellectuality is used to render the services by way of supply of smart cards after the same is purchased as a blank smart card; the requisite information is embedded and supplied to the department and therefore, the authorities were in error in levying sales tax on the smart card supplied by the asses .....

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e alternative, she submitted, if the transaction is not considered as a sale of goods, then it falls within the definition of "works contract". Though the contract is a composite one, the State has the power to levy tax on the goods involved in the sale transaction and therefore, she submits the order passed by the authorities are legal and valid and do not call for any interference. 9. In the light of the aforesaid facts and rival contentions, the questions of law that arise for our c .....

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page 1 relying on the judgment of the Supreme Court in the case of Government of Andhra Pradesh v. Guntur Tobaccos Ltd. [(1965) 16 STC 240] has held as under: "Our attention was drawn by both Mr.Mohan, learned counsel for the appellant and Mr.Ramachandran, counsel for the respondent, to the decision of this Court in Government of Andhra Pradesh v. Guntur Tobaccos Ltd. [1965] 16 STC 240, where this Court laid down that a contract for work in the execution of which goods are used may take on .....

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r a price. Whether a contract is of the first or the second class must depend upon the circumstances; if it is of the first, it is a composite contract for work and sale of goods; where it is of the second category, it is a contract for execution of work not involving sale of goods". 11. This Court in the case of SASKEN COMMUNICATION TECHNOLOGIES LTD. Vs JOINT COMMISSIONER OF COMMERCIAL TAXES (APPEALS)-3 BANGALORE AND ANOTHER [(2012) 55 VST 89 (Karn.)] has held as under: 37. In a works cont .....

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reement to render service. No one can deny the legislative competence of the States to levy sales tax on sales provided that the necessary concomitants of a sale are present in the transaction and the sale is distinctly discernable in the transaction. This does not however allow the State to entrench upon the union list and tax services by including the cost of such service in the value of the goods. 38. Therefore the legislative intention is that the expression of 'sale of goods' In Ent .....

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legal sense is that those words have, in law, acquired a definite and precise sense, and that, accordingly, the Legislature must be taken to have intended that they should be understood in that sense. Therefore while interpreting an expression used in a legal sense, we have only to ascertain the precise connotation which it possess in law. In India, to constitute a transaction of sale there should be an agreement, express or implied, relating to goods to be conveyed by passing on title in those .....

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e of the very 'goods' in which eventually property passes. To sum up, the expression "sale of goods" in Entry 54 is a nomen juris, its essential ingredients being an agreement to sell movables for a price and property passing therein pursuant to that agreement. 39. The essential test to be satisfied before an article is said to be 'goods' is the test of marketability. In the market, the said goods is to be known as a commodity which is useful to a customer. In other wor .....

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s a sale and then to look around for what could be the goods. The word "goods" has not been altered by the Forty-sixth Amendment. That ingredient of a sale continues to have the same definition. By introducing separate categories of "deemed sales", the meaning of the word "goods" was not altered. Transactions which are mutant sales are limited to the clauses of Article 366(29A).Apart from cases falling under sub-clauses (b) and (f) of clause (29A) of Article 366 the .....

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intend separate rights arising out of the sale of goods. If there was no such intention there is no sale even if the contract could be disintegrated. The test for deciding whether a contract falls into one category or the other is as to what is the substance of the contract. The seller and such purchaser would have to be adidem as to the subject-matter of sale or purchase. In arriving at a conclusion the court would have to approach the matter from the point of view of a reasonable person of av .....

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ter of the CEO. The nature of the job involves highly skilled labour. 20. The job of preparation of photo-identity card involves skill like entering voter's data from the electoral rolls into computers and the data so entered is to be transferred and stored in magnetic media in a manner so that the data can be utilized at a subsequent date for preparation of photo-identity card. For this purpose the petitioner is to take video photograph of each voter as per electoral rolls at their respecti .....

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r. The material purchased and utilized in preparation of photo-identity cards is very negligible and incidental. 22. Another important aspect is that the very moment the floppies are used for storing the matter and the paper, pouches, holograms are used for preparation of identity cards, the same cannot be used or sold by the petitioner to any other person, save and except, the CEO. As such, it was a special kind of job and delicate in nature which is predominant in the transaction and not the v .....

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en market. It fetches no commercial value in the open market. Had it been photographs of gods, goddesses, national leaders, popular film stars or cricketers, which are tradable in open market, it would have been exigible to tax, if not otherwise exempted from payment of tax. Hence, supply of photo- identity cards to CEO cannot be held as sale. It is a contract for labour and service'. 13. The Apex Court in the case of TATA CONSULTANCY SERVICES vs STATE OF ANDHRA PRADESH [2004 STC Vol.137, 62 .....

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gnated task. The copyright in that programme may remain with the originator of the programme. But the moment copies are made and marketed, it becomes goods, which are susceptible to sales tax. Even intellectual property, once it is put on to a media, whether it be in the form of books or canvas (in case of painting) or computer discs or cassettes, and marketed would become "goods". We see no difference between a sale of a software programme on a CD/floppy disc from a sale of music on a .....

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or CD. Thus a transaction sale of computer software is clearly a sale of "goods" within the meaning of the term as defined in the said Act. The term "all materials, articles and commodities" includes both tangible and intangible/incorporeal property which is capable of abstraction, consumption and use and which can be transmitted, transferred, delivered, stored, possessed etc. The software programmes have all these attributes'. 14. The Apex Court in the case of Bharat Sa .....

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tion whether a Sim card was "goods" within the definition of the word in the Sales Tax Act it was held that what a Simcard represents is ultimately a question of fact. In determining the issue, the Assessing Authorities will have to keep in mind the following principles: "If the SIM card is not sold by the assessee to the subscribers, but is merely part of the services rendered by the service providers, then a SIM card cannot be charged separately to sales tax. It would depend ult .....

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he SIM cards to the State Government or service tax is payable to the Central Government. After remand, before the Kerala High Court, the State Government gave up its claim for sales tax. Therefore, the only question, which arose for consideration before the Kerala High Court was whether the value of the SIM cards form part of taxable service. After examining the functioning of the SIM card, the Kerala High Court held that the SIM card is a computer chip having its own SIM number on which the te .....

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d and it is an essential part of the service. The SIM card has no intrinsic value or purpose other than use in a mobile phone for receiving mobile telephone service from the service provider. Therefore, they accepted the stand of the BSNL that it is not goods sold or intended to be sold to the customer but supplied as a part of service. Consequently, they held the value of SIM card supplied by the BSNL forms part of taxable service on which service tax is payable. 16. The said order was challeng .....

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ed as part and parcel of the services provided and the dominant purpose of the transaction is to provide services and not to sell the materials, i.e., SIM card which on its own but without the service would hardly have any value at all. Thus, it was established from the records and facts of the case that the value of the SIM cards formed part of activation charges as no activation was possible without a proper functioning of a SIM card and the value of the taxable service was calculated on the g .....

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to the telephone network established and operated by the assessee-company on its own behalf. Since the SIM Card is only a device to have access to the mobile phone network, there is no question of passing of any ownership or title of the goods from the assessee-company to the distributor or from the distributor to the ultimate consumer. Therefore, the SIM card, on its own but without service would hardly have any value. A customer, who wants to have its service initially, has to purchase a Sim- .....

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ransport department and shall not disclose confidential information to anyone else. In terms of the agreement, it is the transport department which has the exclusive intellectual property rights of the project and nothing in the agreement confers any right, title, license to the assessee. The smart cards obtained by the assessee are consumables. They are the property of the transport department and were never considered as the property of the assessee. None of the clauses in the said agreement p .....

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mputers installed in the transport offices. They also contain the official logo of the Government of Karnataka along with the key management microchip. The loading of the data into the microchip embedded in the smart cards requires lot of skill and ability and the trained personnel. When these things were embedded in the smart card, the card gets laminated, scaled, made water proof and tamper proof. The edges are fussed so that the card cannot be opened for misuse and it is made in such a way th .....

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art card. The requisite information is embedded and supplied to the department. The use of smart cards for printing data and delivering the same to the transport department is incidental. 19. The law on the point is well settled. The essential test to be satisfied before an article is said to be 'goods' is the test of marketability. In the market, the said goods is to be known as a commodity which is useful to a customer. In other words it should be known to the market as goods. That is, .....

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rate the 'agreement to sell' from the 'agreement to render service', and impose tax on the sale. The question is did the parties have in mind or intend separate rights arising out of the sale of goods. If there was no such intention there is no sale even if the contract could be disintegrated. The job of preparation of smart card involves skill like entering requisite data in the computers. The data so entered is to be transferred and stored in magnetic media in a manner so that .....

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