ESSENTIAL POINTS TO REMEMBER IN A SALE

In the case of Escotel Mobile Communications v Union of India (2002), 123 Taxman
134, the Kerala High Court held the sale of subscriber identity module (SIM) card is
simultaneously liable to sales tax as well service tax. Once the aspect theory is kept in
focus, the same transaction could be liable to different taxes in its different aspects.
Service tax is different from sales tax. But the same transaction may simultaneously
involve ‘service’ and ‘sales’ as its two aspects and it is open to different legislatures to
tax different aspects of the same subject within their individual legislative competence.
Merely because a tax is measured by relating it to the value of taxable service does not
mean that it has ceased to be a service tax. The taxable event is rendering of service and
not the sale.

However, the Supreme Court, in its recent decision in the case of BSNL (2006) 3 STT
245, held both service tax and sales tax cannot be levied. The ultimate intention of the
party is to be seen. If the SIM card is not sold but is part of the service rendered by
service providers, then it cannot be charged separately to sales tax. If the parties intended
the SIM card to be a separate object of sale, it would be open to sales tax authorities to
levy sales tax on it.

As for a painting contract, the main intention is to render service and not to sell paints.

ESSENTIALS OF CONTRACT OF SALE

The following essentials of a contract of sale may by noted:

1. There must be at least two parties

2. Transfer or Agreement to transfer the ownership of goods.
3. The subject matter of the contract must necessarily be 'goods'.
4. The consideration is Price. In other words barter does not constitute a sale.
3. A Contract of sale may be absolute or conditional
6. All other essentials of a valid contract must be present.

GOODS

19
 every kind of moveable
property
Good
s
includes stock and shares growing crops,
grass, and things attached to or forming
part of the land,

Example - goodwill, copyright,

trademark, patents, water, gas, and
electricity are all goods

Note: Sale of immoveable property like land /houses comes under the
Transfer of Property Act.

Electricity is a good which is sold but the electricity dues receivable from a
customer if sold does not come under the definition of goods. (i.e a claim
of dues which if not received legal action can be taken). In other words
Actionable claims are not goods.

CONCEPT QUESTION
Is there difference in the nature of the goods in each of the following cases:

a) Suresh entered into a contract for sale of the entire crop of apples that
would yield on his orchard.
b) An automobile company entered into a contract for sale of scrap that
would accumulate during the year.
c) Ganesh entered into a contract of sale for some goods which are to be
imported from other country and is to arrive on a ship.
d) Ajay entered into a contract of sale of a painting only if he is able to
successfully bid foe the same in an auction.
e) Rehman purchases eggs and bread from a grocery
f) Rehana purchases eggs and bread from a supermarket
g) Rajesh selects a particular brand of mobile phone in a shop.
h) Rajesh selects a particular painting from a shop.

Specific points from the Sale of Goods Act 1930.

20
S 2(6) "future goods" means goods to be manufactured or produced or acquired by the
seller after making of the contract of sale;

S 2(14)"specific goods" means goods identified and agreed upon at the time a contract of
sale is made

SUBJECT MATTER OF CONTRACT

S 6. Existing or future goods

(1) The goods which form the subject of a contract of sale may be either existing goods,
owned or possessed by the seller, or future goods.

(2) There may be a contract for the sale of goods the acquisition of which by the seller
depends upon a contingency which may or may not happen.

(3) Where by a contract of sale the seller purports to effect a present sale of future goods,
the contract operates as an agreement to sell the goods.

S 18. Goods must be ascertained

Where there is a contract for the sale of unascertained goods, no property in the goods is
transferred to the buyer unless and until the goods are ascertained.

S 23. Sale of unascertained goods and appropriation

(1) Where there is a contract for the sale of unascertained or future goods by description
and goods of that description and in a deliverable state are unconditionally appropriated
to the contract, either by the seller with the assent of the buyer or by the buyer with the
assent of the seller, the property in the goods thereupon passes to the buyer. Such assent
may be expressed or implied, and may be given either before or after the appropriation is
made.

From the above points one can identify the following type of goods:

a) Specific b) future as against existing c) ascertained d) unascertained e) goods

dependent upon a contingency happening ..contingent goods Section 6 (2)

Therefore let us revisit the Concept Question and decide in each case which type of
goods it is?

a and b are examples of future goods

c and d are examples of contingent goods

e and f are examples of specific goods

g is existing but unascertained ( i.e specific mobile not identified)

21
h is existing but ascertained also can be called specific ( i.e specific painting identified)

The Legislature has thus kept the law simple but the following issues came up to the
courts making it difficult for them to decide for example the SIM card case mentioned in
the beginning of the chapter explains how the sale of SIM card is viewed differently by
different courts.

1 Food served to inhouse guests in a hotel If goods then sale tax becomes due

2 Food served to non residential guests in - do-

a hotel

3 Food bought from a hotel and consumed -do-

outside

4 Dentist making artificial teeth A good or work of labour or both

5 Painter making a personal portrait Is the painting a good or work of labour

6 A ready made painting -do-

7 A sculptor with his work on marble -do-

8 A breast implant Sale or service

9 An attorney prepares an affidavit on Is the deed a good or service of the

your behalf attorney

10 Software

11 Lottery ticket

There are different strains and different debates in the above situations. Let us take them
one by one :

Sale of Goods vs Contract for work and labour ( which may involve delivery of
goods)

Justice Blackburn in his judgment in Lee vs Griffin case ( Point 4 in table above )
Blackburn, J: if the contract be such that, when carried out, it would result in the
sale of a chattel(good), the party cannot sue for work and labour, but if the result

22
 of the contract is that he party has done work and labour which ends in nothing
that become the subject of a sale, the party cannot sue for goods sold and
delivered. The case of an attorney employed to prepare a deed is an illustration
of this latter proposition. It cannot be said that the paper and ink he uses in the
preparing of the deed are goods sold and delivered….I do not think that the test
to apply to these cases is whether the value of the work exceeds that of the
material used in its execution; for, if a sculptor were employed to execute a work
of art, greatly as his skill and labour, supposing it to be of the highest description,
might exceed the value of the marble in which he worked, the contract would in
my opinion nevertheless be a contract for the sale of a chattel (good).

The above judgment settles 4(goods), 6 (goods), 7(goods), 8(goods) and

9(service).

And also 5(service), 1 and 2 (service) while 3 is a good.

The Supreme Court of India has echoed the above views in its judgments in
Northern India Caterers (India) Ltd vs LG of Delhi. Thus restaurants and hotels
could not charge sales tax on food served as the SC believed that it was a service
and not the supply of goods.
Thus Parliament was compelled to bring in the 46 th amendment to the
constitution in 1982 allowing states to levy taxes on works contracts as well as on
supply of food in restaurants.

Of course now we have the VAT and in due course the road map to a common
Goods and Services tax. (GST).

Is software a good ?

The issue of whether branded software can be termed `goods' first came up before the
Andhra Pradesh High Court in Tata Consultancy Services vs State of Andhra Pradesh
(1997 105 STC 421) in 1996. The court examined various aspects and ruled that that
branded software is `goods' and liable to sales tax. The court left unbranded software out
of its ambit.

However, TCS took the matter on appeal to the Supreme Court in Tata Consultancy
Services vs State of Andhra Pradesh. The apex court rendered a landmark decision on
November 5, 2004, upholding the AP High Court ruling that branded software is `goods'.
More significantly, the Supreme Court also observed that unbranded software may be
goods subject to certain other conditions being fulfilled.

During the course of delivering the judgment, the apex court observed that there was no
distinction between branded and unbranded software and that their characteristics were
similar. However, after recording all of these points, the court specifically and

23
categorically observed that the issue of whether unbranded software could be called
`goods' was not before the court and that the issue has been left open. The relevant
portion of the apex court's observation is as follows:

"However, we find no error in the High Court holding that branded software is goods. In
both cases, the software is capable of being abstracted, consumed and used. In both cases
the software can be transmitted, transferred, delivered, stored, possessed, etc. Thus even
unbranded software, when it is marketed/sold, may be goods. We, however, are not
dealing with this aspect and express no opinion thereon because in case of unbranded
software other questions like situation of contract of sale and/or whether the contract is a
service contract may arise." ( like asking a painter to make a portrait).

The court held that goods have the attributes of (a) its utility; (b) capable of being bought
and sold; and (c) capable of being transmitted, transferred, delivered, stored & possessed.
If a software whether customized or non-customised satisfies these attributes, the same
would be goods”.

Now, the issue is whether this Supreme Court pronouncement can be taken to mean that
unbranded software is goods. It may be noted from the apex court's observations that
unbranded software can be called goods only if certain conditions are fulfilled.

Are Lottery tickets goods ?

Sale of a ticket does not necessarily involve sale of goods and it can be equated with sale
of tickets by Railways. Tickets are themselves normally evidence of and in some cases
the contract between buyer & seller. The person who buys a ticket would have to claim to
the prize money on future event of winning a draw. This right is nothing but an
“actionable claim”. There is no value in the mere right to participate in the draw and the
purchaser does not pay for this right to participate. Consideration is paid for chance to
win. The right to participate, being an inseparable part of the chance to win, is therefore,
an actionable claim.

Hire Purchase Agreements

In a hire purchase agreement the hirer has an option to purchase and the property in the
goods passes on the payment of the last installment. The true test of a hire purchase
agreement is when the hirer has the option to terminate the agreement and not accept the
transfer of property.

24
25