smart cards not assessable to VAT

By | November 26, 2015

Facts of the case

The Transport Department of Karnataka through a competitive bidding process invited proposals from interested parties 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.The proposal submitted by the assessee was accepted by the transport department.In terms of  agreement, the assessee shall use the licenced software products and shall ensure that the smart cards under the agreement are specifically designed and developed for the transport department and shall not disclose confidential information to anyone else.According to the assessee the entire project was a service contract and consumption of the smart cards was only incidental to the contract and a major portion of the value/consideration of the contract was towards providing the information technology services and the value towards the smart cards was negligible

Issue

The assessing authority passed an order holding that the assessee had supplied the goods to the 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. 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 October 2009, interest and penalty were also levied.

Held by JCCT (A)

The Joint Commissioner of Commercial Taxes (A) allowed the appeal by its order dated 13.05.2010 and held that assessee is not liable to pay any VAT on the contract receipts received by it from the transport department.

Revision of Order by ADCCT

The Additional Commissioner of Commercial Taxes exercising his power under Section 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.

Held by High Court

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 Forty-sixth Amendment does not give a licence, for example, to assume that a transaction is 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.

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 provides for the sale of goods by the assessee to the transport department. The assessee is not in the business of any sale of ID smart cards as such. The smart cards prepared by the assessee 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 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 card and the lamination. 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. The use of smart cards for printing data and delivering the same to the transport department is incidental.

The smart cards supplied to the department are not commercial commodities. The same cannot be sold to any other person.  Hence, supply of smart cards to RTO cannot be held as sale. It is a contract for labour and service.

HIGH COURT OF KARNATAKA

Zylog Systems (P.) Ltd.

v.

Additional Commisssioner of Commercial Taxes

N. KUMAR AND B. MANOHAR, JJ.

S.T. A. NOS. 17 AND 20-23 OF 2011

SEPTEMBER  18, 2015

Smt. H. Vani, Adv. for the Appellant. K.M. Shivayogiswamy, Govt. Adv. for the Respondent.

JUDGMENT

1. These appeals are preferred by the assessee challenging the order passed by the Additional Commissioner of Commercial Taxes holding that the smart cards are assessable to VAT.

2. The assessee is a company incorporated under the provisions of the Companies Act. The Transport Department of Karnataka through a competitive bidding process invited proposals from interested parties 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. A proposal was submitted by the consortium comprising of M/s 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. Consequently, M/s Mynd Solutions has given a no objection to exit out of the consortium and Zylog being inducted as a member of the consortium. Subsequently, a revised agreement was entered into between the above parties. The assessee 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 ensure that the smart cards under the agreement are specifically designed and developed 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 were the property of the transport department and were never considered as the property of the assessee. None of the clauses in the said agreement provides for the sale of goods by the assessee to the transport department. According to the assessee the entire project was a service contract and consumption of the smart cards was only incidental to the contract and a major portion of the value/consideration of the contract was towards providing the information technology services and the value towards 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 interest for the periods commencing from June 2009 to October 2009. The assessee is operating from a place given by the transport department in M S Building, Bangalore. The assessee objected to the show cause notice including the jurisdiction of the CTO to invoke Section 38(5) of the VAT Act. The assessee had purchased ID Smart cards to the extent of Rs.65,01,599/- for the month of June 2009 to September 2009. The allegation that the assessee has sold the said smart card for Rs.1,48,86,951/- 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 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 card and the lamination. Therefore, it was submitted that the money paid by the transport department to the assessee were towards the skilled and sophisticated system installed by the assessee and the highly skilled labour provided by the trained technical personnel of the assessee. They relied on several judgments in support of their case.

4. On consideration of the case of the assessee, the assessing authority passed an order holding that the assessee had supplied the goods to the 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 October 2009, interest and penalty were also levied.

5. Aggrieved by the said order, the assessee preferred an appeal before the Joint Commissioner of Commercial Taxes (A). After hearing the assessee, the Joint Commissioner of Commercial Taxes (A) allowed the appeal by its order dated 13.05.2010 and held that assessee is not liable to pay any VAT on the contract receipts received by it from the transport department. The Additional Commissioner of Commercial Taxes exercising his power under Section 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 order passed by the assessing authority. Aggrieved by the said order, the assessee is in appeal.

7. Learned counsel for the appellant assailing the impugned order contended that the terms of the contract entered into between the parties discloses it as a service contract, not a composite contract. The supply of smart card under the terms of the agreement is only incidental to the services rendered by the 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 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 consideration in these appeals are as under:

(1) Whether the contract entered into between the parties is a contract for sale of smart cards or for rendering the service?
(2) If it is to be treated as a works contract, what is the value of the goods which is involved in this works contract over which tax could be levied?
(3) If tax is to be levied, what is the rate of tax which is liable to be levied?

10. The Apex Court in the case of State of Tamil Nadu v. Anandam Viswanathan [1989] 73 STC 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 one of three forms. The contract may be for work to be done for remuneration and for supply of materials used in the execution of the works for a price; it may be a contract for work in which the use of materials is accessory or incidental to the execution of the work; or it may be a contract for work and use or supply of materials, though not accessory to the execution of the contract, is voluntary or gratuitous. In the last class there is no sale because though property passed it did not pass for 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. v. Jt. CCT (Appeals)-3 [2011] 33 STT 507 has held as under:

’37. In 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, which might be in force for the time being. If the words “sale of goods ” have to be interpreted in their legal sense, that sense can only be what it has in the law relating to sale of goods. The ratio of the rule of interpretation that words of legal import occurring in a statute should be construed in their 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 goods. It is the essence of this concept that both the agreement and the sale should relate to the same subject-matter. Where the goods delivered under the contract are not the goods contracted for, the purchaser has a right to reject them, or to accept them and claim damages for breach of condition. Therefore, in law, there cannot be an agreement relating to one kind of property and sale of different property. On the other hand there must be a definite agreement between the parties for the sale 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 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.

40. The Forty-sixth Amendment does not give a licence, for example, to assume that a transaction is 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 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 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 average intelligence.’

12. The Orissa High Court in the case of Orissa Small Industries Corporation Ltd. v. State of Orissa [2009] 23 VST 55 held as under:

’19. The very wording “render for this Department the job of preparation of photo identity card for voters” appearing in first paragraph of the order reveals the intention of parties which envisages that it is a job-work. The job is to be done by doing certain specified nature of work as specified in paragraph 2 of the letter 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 respective polling booth or at a suitable place nearby and prepare photo-identity cards using the data stored in the magnetic media.

21. The photo identity cards so prepared were delivered to be CEO but none else. The photo-identity cards supplied to the CEO are not commercial commodities. The same cannot be sold to any other person. The photo identity cards, which are produced by the petitioner, have no utility or value to any other person than the CEO who paid for the service rendered by the petitioner. 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 value of the materials which are used in executing the job.

23. Photo-identity cards prepared for voters had no existence as the sole property of the petitioner before its delivery to the CEO even though 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 v. State of Andhra Pradesh 2004 taxmann.com 101 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 SCC 593. A software programme may consist of various commands which enable the computer to perform a designated 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 cassette/CD or a sale of a film on a video cassette/CD. IN all such cases, the intellectual property has been incorporated on a media for purposes of transfer. Sale is not just of the media which by itself has very little value. The software and the media cannot be split up. What the buyer purchases and pays-for is not the disc or the CD. As in the case of paintings or books or music or films the buyer is purchasing the intellectual property and not the media i.e., the paper or cassette or disc 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 Sanchar Nigam Ltd. v. Union of India [2006] 3 STT 245 was called upon to decide the question as to what is the nature of the transaction by which mobile phone connections are enjoyed. Whether it is a sale or is it a service or is it both? Answering the said question at para 82 of the said judgment, it was held that telephone service is nothing but a service. There is no sales element apart from the obvious one related to the hand set, if any. Dealing with the question 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 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. The SIM card is a device through which the customer gets a connection from the mobile tower. Unless it is activated, the service provider cannot give service connection to the customer. Signals are transmitted and conveyed through towers and through SIM card communication signals reach the customer’s mobile instrument. In other words, it is an integral part required to provide mobile service to the customer. The customer cannot get service without the SIM card 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 challenged before the Apex Court by the assessee. The Apex Court in the case of Idea Mobile Communication Ltd. v. CCE & C [2011] 32 STT 262 held that the position in law is therefore clear that the amount received by the cellular telephone company from its subscribers towards the SIM cards will form part of the taxable value for levy of service tax, for the SIM cards are never sold as goods independent of the services provided. They are considered 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 gross total amount received by the operator from the subscribers. Therefore, the judgment of the Kerala High Court was upheld.

17. This Court in the case of Bharti Airtel Ltd. v. Dy. CIT [ITA Nos. 637-644/2013 and connected cases decided on 14.8.2014] has held as under : —

“The telephone service is nothing but service. SIM cards, have no intrinsic sale value. It is supplied to the customers for providing mobile services to them. 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 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 provides for the sale of goods by the assessee to the transport department. The assessee is not in the business of any sale of ID smart cards as such. The smart cards prepared by the assessee 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 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 card and the lamination. 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. 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, 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.

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 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. The same cannot be used or sold by the petitioner to any other person. As such, it was a special kind of job and delicate in nature which is predominant in the transaction and not the value of the materials which are used in executing the job. The smart cards are not the commodities saleable in open market. It fetches no commercial value in the open market. Hence, supply of smart cards to RTO cannot be held as sale. It is a contract for labour and service.

21. Therefore, the first question of law is answered in favour of the assessee and against the revenue by holding that the contract entered into between the parties for supply of smart cards is for rendering service only and there is no element of sale.

22. In view of the finding on question of law No.1, the other issues do not arise for consideration. Accordingly, they are not answered.

23. Hence, we pass the following order : —

(i) The Appeal is allowed.
(ii) The impugned order passed by the Additional Commissioner of Commercial Taxes is hereby set aside.
(iii) The order passed by the Appellate Authority is restored.

Ordered accordingly.

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