Holding

The making of xerox copies for a fee is a contract of work or service, not a sale of goods, and is not subject to sales tax under the Tamil Nadu General Sales Tax Act.

Summary

Everest Copiers, a photocopying business, was assessed sales tax for two assessment years on the ground that it sold xerox copies to customers. The issue before the Supreme Court was whether the making and delivery of photocopies constituted a sale of goods under Section 2(1) of the Tamil Nadu General Sales Tax Act, 1959, or a contract of work/service. The Court examined prior decisions, notably B. Girija v. State of Karnataka, Hindustan Aeronautics Ltd. v. State of Karnataka, and Assistant Sales Tax Officer v. B.C. Kame, and held that the primary object of the transaction was to duplicate documents, not to transfer paper as a chattel. Consequently, the transaction was characterized as a contract of work or service, not a sale of goods, and therefore not liable to sales tax. The appeals were allowed, setting aside the lower court judgments and the tax assessments.

Issues considered

Whether the making of xerox copies and delivery to a customer amounts to a sale of goods under the Tamil Nadu General Sales Tax Act, 1959.
Whether the transaction should be treated as a contract of work/service for tax purposes.

Legislation cited

Tamil Nadu General Sales Tax Act, 1959s. 2(1)

Subjects

sales taxcontract of servicecontract of salephotocopyingTamil Nadu General Sales Tax ActSection 2taxabilitywork contract

Judgment

MIS. EVEREST COPIERS THROUGH R.A. PARTNER ETC. A
v.
STATE OF TAMIL NADU

JULY 25, 1996

[S.P. BHARUCHA AND K.T. THOMAS, JJ.] B

Tamil Nadu Ge11eral Sales Tax Act, 1959: Sectio11 2(11).

Sales Ta:i.-Sa/e !11gredie11ts of-Work or Seivice co11tract and co11tract
of sa/.,-Disti11ctio11 betwee11-Maki11g Photostat copies with use of a xerox or C
other machi11e--Deli1•e1y of copies to customers 011 payme11t-Levy of sales
tax-Chal/e11ge--Held the object of the w01k u11dC11ake11 by the operator of
xerox machi11e is 11ot the tra11sfer of pape1~17ie purpose is to make a xerox
copy for which the customer pays p1ice--171e paper upon which duplication
takes place is only incidental to the transactio1t-Object of payment is to get
the docunzent duplicated and not to receive the pape~Held it is a contract D
of work or service and not a contract of sale-Held not exigible to sales tax.

B. Gi1ija and Anr. v. State of Kamataka, (1984) 56 STC 297, approved.

Hi11dusta11 Aeronautics Ltd. v. State of Kamataka, (1984) 55 STC 314 E
= [1984) 2 SCR 248, referred to.
Assistant Sales Tax Officer & Ors. v. B.C. Kame, (1977) 39 STC 237
= (1977) 2 SCR 435, relied on.

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 2672 of F
1992 Etc.

From the Judgment and Order dated 12.11.91 of the Madras High
Court in T.C. No. 1416 of 1982.

T.L. Viswantha Iyer and R. Mohan, Ms. Indu Malhotra, V. Balaji, G
P.N. Ramalingam, V. Balachandran, A. Subba Rao, V. Krishnamurthy, T.
Harish Kumar and A. Mariarputham for the appearing parties.

The following Order of the Court was delivered :

The appellant runs a photocopying business. It has been assessed to H
51
52 SUPREME COURT REPORTS (1996] SUPP. 4 S.C.R.

A sales tax for the Assessment Year 1978"79 (in Civil Appeal No. 5339/92)
and the Assessment Year 1979-80 (in Civil Appeal No. 2672/92) on the
basis that there was a sale by it of the photocopied or xeroxed document
to the customer. The question that we are concerned with, therefore, is
whether the making of photoslat copies with the use of a xerox or other
machine and delivering the copies so taken to the customer on receipt of
B
payment amounts to a sale of goods exigible to lax under the Tamil Nadu
General Sales Tax Act, 1959.

Section 2(n) of the Tamil Nadu General Sales Tax Act, 1959 read as
under at the relevant time :
c
111
~ale' \Vith all its grammatical variations and cognate expressions
means every transfer of the property in goods by person to another
in the. course of business for cash or for deferred payment or other
valuable consideration, but does not include a mortgage,
hypothecation, charge or pledge."
D
It is the case of the appellant that no sales tax is involved in that the •
contract that he enters into with the customer is only a works contract. It
is the case of the respondents that the contract is of sale of the photocopies.

E The Karnataka High Court, in B. Girija and Anr. v. State of Kar-
nataka, {1984) 56 STC 297, considered the question that arises in these
appeals and observed that the turnover of the assessee WdS made up of
amounts collected from customers as labour charges towards developing
and printing of photostat copies and the cost of the material used for
F taking such copies. It was a matter of common experience that persons
went to a xerox establishment not with a view to buy duplicates of their
documents but to get copies made of their documents. It was no less true
in the case of the assessee. The assessee utilised her own papers and ink
and, by the use of the xerox machine, turned out copies of documents
brought to her. The assessee charged for the service rendered in addition
G to the cost of the material used. On these facts, it had to be found what
the primary, object of the transaction was and the intention of the parties,
namely, whether it was a contract purely of work or service or a contract
of sale. The High Court noticed the decision of this Court in Hindustan
Aeronautics Ltd. v. State of Kamataka, (1984) 55 STC 314 = (1984) 2 SCR
H 248, wherein it was held :
EVEREST COPIERS v. STATE 53

"........ Mere passing of property in an article or commodity during A
. the course of performance of the transaction in question does not
render the transaction to be transaction of sale. Even in a contract
purely of work or service, it is possible that articles may have to
be used by the person executing the work, and property in such
articles or materials may pass to the other party. That would not
B
necessarily convert the contract into one of sale of those materials.
In every case, the court would have to find out what was the
primary object of the transaction and the intention of the parties
while entering into it .........."

As ~as been noticed, the High Court stated that no person went to the C
assessee for buying duplicates of his documents. He went to ask whether
he could get xerox copies of his documents. The assessee undertook to get
the documents duplicated and collected a certain charge. This was essen-
tially a contract of work or labour or service and not a contract of sale.
The distinction had been explained in the Hindustan Aeronautics's case D
(supra) thus :

".... A contract of sale is a contract whose main object is the transfer
of the property in, and the delivery of the possession of a chattel
as a chattel lo the buyer. Where however the main object of work
undertaken by the payee of the price was not the transfer of chattel E
qua chattel, the contract is one of work and labour. The test is,
whether or not the work and labour bestowed and in anything that
can properly become the subject of sale; neither the ownership of
the materials, nor the value of the skill and labour as compared
with the value of the materials, is conclusive, although such matters
may be taken into consideration in determining, in the circumstan- F
ces of a particular case whether the contract was in substance one
for work and labour and one for the sale of a chattel".

The High Cour~ therefore, held that what was involved was not a contract
of sale, but a contract of work or service.
G
The principles enunciated in Hindustan Aeronautics' case (supra),
quoted by the High Court, also find expression in the earlier decision of
this Court in Assistant Sales Tax Officer & 01>. v. B.C. Kame, (1977) 39
STC 237 = [1977] 2 SCR 435. In Kame's case the respondent carried on
the business of supplying photographs to those who got themselves H
54 SUPREME COURT REPORTS (1996] SUPP. 4 S.C.R.

A photographed at his studios. It was held that he did not enter into a
contract of sale.

The judgment of the Karnataka High Court was cited before the
Division Bench that wrote the judgment and order under appeal (reported
in 83 STC 420). It was distinguished on the ground that it "proceeded upon
B an erroneous understanding of the nature of the transaction and was
apparently carried away by the corporeal rights over the contents or
subject-matter of the copies with the material turned out, namely, the
duplicate copies made. If an author or a publisher of a text orders for the
printing and supply of a. specified number of copies of the literature ....
c concerned, it could not be said that the work merely is a contract for work
and labour or service and not a contract for sale. Duplication or making
out copies does not get its character altered merely on account of the
proprietary ownership of the material which was sought to be duplicated
or multiplied". The Division Bench held that the supply of a xerox copy
manufactured by the use of a xerox machine for a price consisted of an
D indivisible contract of sale and, consequently, the turnover relating to the
same had rightly been subjected to tax by the assessing authority.

As we see it, the view taken by the Karnataka High Court is right
and is based upon the decisions of this Court. Where the main object of
E the work undertaken by the person to whom the price is paid is not the
transfer of a chattel as a chattel, the contract is one of work and labour.
The main object of the work undertaken by the operator of the photocopier
or xerox machine is not the transfer of the paper upon which the copy is
produced; it is to duplicate or make a xerox copy of the document which
the payer of the price wants duplicated. The paper upon which the duplica-
F tion takes place is only incidental to this transaction. The object of the
payment of the price is to get the document duplicated, not to receive the
paper. The payer of the price has no interest in the bare paper upon which
his document is duplicated. He is interested in it only if it bears such
duplication.
G The case is very similar to Kame's case. The tests laid down by this
Court as aforestated are satisfied; the contract between the appellant and
the payer of the price to him is a contract of work or service, not a contract
of sale upon which sales tax is exigible.

H In the result, the appeals are allowed and the judgments and orders
EVEREST COPIERS v. STATE 55

under appeal are set aside. A

There shall be no order as to costs.

ORDER

Learned counsel for the appellants seeks leave to withdraw these B
appeals. He states that in an appropriate case where the judgment under
appeal is relied upon in assessment proceedings or proceedings subsequent
thereto, a challenge to the judgment shall be made.

The appeals arc dismissed as withdrawn. c
CIVIL APPEAL NO. 11903 OF 1995
•
Learned counsel for the appellant seeks leave to withdraw this
appeal. He states that in an appropriate case where the judgment under
appeal is relied upon in assessment proceedings or proceedings subsequent D
thereto, a challenge to the judgment shall be made. Learned counsel adds
that in this matter the agreement of inapplicability of the statute to the
commodities used by the appellants was urged before the High Court, but
was not considered in the judgment.

E
The appeal is dismissed as withdrawn.

CIVIL APPEAL NO. 11294 OF 1995 :

Learned counsel for the appellant seeks leave to withdraw this
appeal. He states that in an appropriate case where the judgment under F
appeal is relied upon in assessment proceedings or proceedings subsequent
thereto, a challenge to the judgment shall be made. The appeal is dis-
missed as withdrawn.

T.N.A. Appeals allowed.