Case: M/S.Xerox Modicorp Limited Vs. State Of Karnataka

2. Briefly stated the facts are as follows:3. 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 lump sum of Rs. 7,000/- per annum. However, the costs of toners, developers etc are to be borne by the customer.4. It appears that in the Returns filed by the Appellants, for Sales Tax purposes, they declared total taxable turnovers at Rs. 4,23,58,510/- and Rs. 1,63,58,556/-. The Assessing Authority, on verification of the books of accounts, determined the total and taxable turnovers at Rs. 10,34,70,495/- and Rs. 4,70,23,693/-. The Assessing Authority held that amounts received for sale of parts, toners and developers, under the aforementioned two types of Agreements, were includible for the purposes of sales tax. T5. The Appellants filed an Appeal before the Joint Commissioner of Commercial Taxes (Appeals), Bangalore. In that Appeal, the matter was remanded back for purposes of considering certain reductions. An Appeal was filed before the Karnataka Appellate Tribunal which was dismissed. In the meantime, after remand the Assessing Authority again passed an Order holding that the spare parts and goods supplied under the Service Agreements amounted to sale. The Appellants then filed a Revision Petition which was dismissed by the impugned Judgment.

Reasoning:
8. Even though at first blush the submissions of Mr. Ganesh may appear attractive, on a proper consideration, we think that Mr. Iyer was right when he submitted that the Agreements are not just service contracts but also maintenance contracts. Mr. Iyer is right that the machines belong to the customer after they are sold to them. If after the sale some part was to be replaced or some component supplied there would be sale as understood in law. Under the Agreements, apart from the service element, for which no tax is sought to be levied, there is the element of supplying parts and components like toners/developers etc. Mr. Iyer is right in submitting that merely because price is not being separately charged for this, does not detract from the position that the supply is for a price. Such supply has all the elements of sale as understood in law. There is transfer of title in movables for a price. The mere fact that it is not known in the beginning whether or not a part will have to be replaced is irrelevant. If there were no such Agreements, it would not be known 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 SSMA the customer buys them. Under FSMA they are replenished by the Appellants.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. In the FSMA supplies are left with the customer.Thus for the extra stock there is a provision which provides that it is left in trust. However once the toner and developer are put into the machine they are no longer in trust. This is because the property in the toner and developer passed the moment they are put into the Xerox machine. Now they belonged to the customer. At this stage they are tangible movables in which property can pass. This is clear from the provision that Appellants will charge for unaccounted stock at prevailing prices. That they are goods in which property can pass is also clear from the fact that in the SSMA the customer has to buy the toner and developer. If as now claimed they are consumables in which property cannot be transferred how are the Appellants charging for toners and developers. In our view, Mr. Iyer is right. The sale i.e. transfer of property takes place before the goods are consumed. The transfer takes place in respect of tangible goods. Just like petrol is consumed after sale or ink is consumed after sale in this case also the toners and developers get consumed after sale. The property passes the moment they are put in the machine. At that stage they are not consumed but are tangible goods in which property can pass.19. In view of the above it is held that there is sale of parts, both in FSMA and SSMA. There is also sale of toners and developers even in the case of FSMA. Before us no contention is raised that sales tax is not being levied on a correct basis. On the contrary Mr.Iyer pointed out to us the Order dt. 30th August 1994 of the Joint Commissioner of Commercial Taxes wherein, whilst remitting back for recalculation of tax, the principles on which it is to be done are laid down.To us they appear to be correct.20. In this view we see no reason to interfere with the impugned Judgment.