The Hindu Business Line : Xerox, rodents, fireworks and petrol

EVEN as the FEMA or Federal Emergency Management Agency is trying to cope with major natural calamities in the US, let us study about FSMA and SSMA in the judgment of the apex court in Xerox Modicorp Ltd vs State of Karnataka, reported in the latest issue of Supreme Court Revenue Cases. For starters, the abbreviations stand for full/spares service maintenance agreements that Xerox got into with its customers.

Full in FSMA meant that Xerox took up "the responsibility of fully maintaining the machine, servicing it and if necessary replacing parts", and also supplying material such as toners and developers, for Re 0.27 per copy produced by the machine. In SSMA, the company agreed to maintain the machine including replacement of parts, if necessary, for a lump sum of Rs 7,000 per annum; however, the customer had to bear the cost of toner, developer and so on.

Trouble started after the company filed its returns for sales tax, declaring `total' and `taxable' turnovers at Rs 4.2 crore and Rs 1.6 crore, respectively. The Assessing Authority almost tripled these numbers to Rs 10.3 crore and Rs 4.7 crore, saying that the amounts received for sale of parts, toners and developers, under the maintenance agreements, were includible for the purposes of sales tax.

Aggrieved, Xerox went on appeal at different levels, but in vain. The case ultimately came up before Justices S.N. Variava and Tarun Chatterjee of the Supreme Court. There, arguing for Xerox, S. Ganesh said that the essence of a sale of goods is that the parties must enter into a contract for the transfer of property in movables for a price. But, 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 said.

Unlike sale of goods, maintenance contract is not entered into for a transfer of the property in any specific part or component for any identifiable price, argued Ganesh. He contended that charges paid by customers are for the service and not as "price for the replacement of any particular part or component". Also, "when the contract is entered into, it is not even known whether any part or component will require replacement or not". There is 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 contract period," he pointed out.

On the taxman's side, it was Mr T.L.V. Iyer who argued that Xerox's agreements were not just service contracts but also maintenance contracts. Though price is not separately charged for parts replaced, there is supply for a price with all the elements of a sale, he reasoned. "The mere fact that it is not known in the beginning whether or not a part will have to be replaced is irrelevant," argued Iyer. "So far as toners and developers are concerned it is known from the beginning that they will require regular replenishment," he added.

What may be of consuming interest is the word `consumable' that got tossed between the two sides. Xerox said that toners and such were consumables used in the delivery of service, while the taxman argued that the same were materials sold. To press his point, Ganesh cited the Pest Control India Ltd case. It was about a contract for eradication of pests, rodents, and termites, using chemicals sprayed through machines. The question arose whether there was a sale of chemicals in the execution of the contract, and the verdict was that once the chemicals were sprayed they got consumed and nothing tangible remained in which property could be transferred.

Another case relied upon was that of M. K. Velu involving a contract for display of fireworks, and the question was whether there was a sale of fireworks. No, said the court, because "fireworks got consumed in the process of execution of the work".

No tangible property remained, and so there was no transfer of goods, it was held. To counter these, Iyer argued that the Xerox situation was more like sale of petrol or ink, and therefore deserving tax.

The apex court observed that toners and developers perform "the same function as ink in printers". The property in the toner and developer pass the moment they are put into the Xerox machine, said the court. "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," reasoned the court. "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."

A consuming worry for many, though, may not be ink or toner, fireworks or chemicals, but petrol and its price.

ExParte@TheHindu.co.in

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