TMI Blog2015 (11) TMI 1391X X X X Extracts X X X X X X X X Extracts X X X X ..... me 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 commodity which is useful to a customer. In other words it should be known to the market as goods. That is, such goods must be bought and sold in the market. Therefore, 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 smart cards supplied to the department 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 incid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee is a service provider having expertise in providing information technology services. The assessee is the leading software solution and data service provider to large customer oriented offshore clients. The said agreement also stipulates the respective roles to be played by each 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 availability of data entry personnel at each of the transport offices, maintenance of project facilities, providing technical consultants, training of technical consultants, administrators, employees, officers etc. and ensure supply of consumables as per the annual consumable supply schedule i.e, smart cards after lamination. In terms of the said agreement, the assessee shall use the licenced software products and shall en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the incidental consumption of certain materials viz., ID smart cards. It was contended having regard to the nature of work carried out by the assessee in terms of the agreement, the use of smart card for printing data and delivering the same to the transport department is incidental. The smart cards issued by the department contains in it the data collected, entered and stored by the assessee by using the computers 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 that none of the materials affixed on the smart card can be removed or peeled off without destroying the ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee to the transport department. The smart card is only a media through which the particulars 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 assessee to the department. 8. Per contra, learned Government Advocate contended under the agreement the assessee has to sell the smart cards with the requisite information. The assessee has collected the consideration directly from the customers and therefore, there is an element of sale. The information embedded in the smart cards is in the nature of an intellectual property which is intangible but still, when the same is transferred, the State has the power to levy VAT on such sale of goods. In the alternative, she submitted, if the transaction is not considered as a sale of goods, then it falls w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a works contract, splitting of service and supply of goods has been constitutionally permitted by introducing the concept of deemed sale. Therefore, the works contract in truth, represents two distinct and separate contracts which are discernable as such. Then the State would have the power to separate the agreement to sell from the agreement to render service, and impose a tax on sale. Therefore, the works contract is necessarily a composite contract, consisting of both an agreement to sell goods and an agreement 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 Entry 54 should bear precise and definite meaning it has in law, and that the meaning should not be left to fluctuate with the definition of sale, in a law relating to sale of goods, whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ltered 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 there is no other service which has been permitted to be so split. If there is an instrument of contract which may be composite in form in any case other than the exceptions in Article 366(29A), unless the transaction in truth represents two distinct and separate contracts and is discernible as such, the State does not have the power to separate 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... materials like floppies, pouches, holograms and papers were used by the petitioner in preparation of photo-identity cards. Thus, there is no element of sale or transfer of property in the goods involved in the present case. The photo-identity cards of voters are not the commodities saleable in open 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, 620] at paragraph 24 held as under: 24. In our view, the term goods as used in article 366(12) of the Constitution of India and as defined under the said Act are very wide and include all types of movables properties, whether those properties be tangible or intangible. We are in complete agreement with the observations made by this Court in Associated Cement Companies Ltd. [2001] 4 SC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ultimately upon the intention of the parties. If the parties intended that the SIM card would be a separate object of sale, it would be open to the Sales Tax Authorities to levy sales tax thereon. 15. As there was no sufficient material on the basis of which they could reach a decision, the matter was remitted back to the respective High Court to record a finding of fact and then decide the case on merits. The dispute before the Supreme Court was whether sales tax is payable on the value of the 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 telephone number can be activated. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hem. The SIM card is in the nature of a key to the consumer to have access 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-card. When he pays for the Sim-card, he gets the mobile service activated. Service can only be rendered and cannot be sold. 18. In the instant case the contract between the parties is for supply, installation and maintenance of computer systems, supply and printing of smart cards, provision of data entry services and to carry out other activities incidental thereto. Under the terms of the agreement, the assessee ensures that the smart cards are specifically designed and developed for the transport department and shall not disclose confidential information to anyone else. In terms of the agreement, it is the transp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ht and sold in the market. Therefore, 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. 20. Unless the transaction in truth represents two distinct and separate contracts and is discernible as such, the State does not have the power to separate 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 the data can be utilized at a subsequent date for preparation of smart card. The smart cards so prepared were delivered to department but none else. The smart cards supplied to the department are not commercial commoditie ..... X X X X Extracts X X X X X X X X Extracts X X X X
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