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TMI Blog2016 (1) TMI 1066X X X X Extracts X X X X X X X X Extracts X X X X ..... ing application system, aggregation system and dispatch system in accordance with ESCIMS standard operating procedures for distilleries, breweries and wineries. The applicant has in this regard entered into System Delivery Agreements with said customers to provide for a System comprising of a complete set of various machines/ equipments which are installed and commissioned by the applicant as per ESCIMS. Pursuant to the above understanding, the System Delivery Agreement, dated 25th June, 2013 (hereinafter referred to as Agreements entered into between the customers and the applicant), applicant would supply and install the System for the printing of labels required to fulfill the statutory requirements. The said Agreement also includes the providing of services for the provision of automated, online ID and 2D bar code printing system, labeling application system, aggregation and dispatch system. Applicant is also required to impart training to the personnel of the Customer/United Breweries/Carlsberg India for the purposes of successful handling and operation of the System. Applicant is also responsible for the Preventive Maintenance of the System wherein the operative/routine maint ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncy of Agreement, would be under the control and possession of the Customer, who shall operate the same as per the agreed parameters; that the proposed transaction shall qualify as transfer of right to use the good and the same is excluded from the definition of a service under Section 65B(44) of the Finance Act, 1994. Issue 2 : Assuming that there is a Service Tax liability then how to classify the service as taxable service under Chapter V of the Finance Act, 1994? Applicant submits that he is of the view that the contract includes supply element and services (if any) are only ancillary which are for the purpose of main contract, i.e., for the supply of System along with consumables, such as labels and ink ribbons; that if at all such are considered as taxable, then the classification shall be under the "Other" category. Issue 3 : Assuming that the service is a taxable service then what is the valuation under Section 66B of the Finance Act, 1994? Applicant submits that in the above case, they may be allowed to compute the service element in the composite consideration based on its records/books (and substantiated by Chartered Accountant/Cost Accountant) and such service value ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as granted a license to use the machinery and apparatus to their customers. 4. Revenue submits that from perusal of clause 2.1.2 to the Agreement, it is clear that there is no exclusion of the transferor i.e. SICPA during the tenure of Agreement for providing System to their customers (an attribute to treat a transaction as transfer of right to use). As per Schedule 10 of the Agreement, SICPA shall provide to the customer raw material for printing labels, conduct routine maintenance of equipment, servicing of equipment and provide technicians. As per Schedule 8 to the Agreement, SICPA shall provide overall spare parts for the performance of the services, implement overall maintenance processes, ensure CRM, PRM, spare parts dispatch and KPI's as per SLA, ensure 2 nd level support to local organization and ensure change requests are properly handled. As per Schedule 11 to the Agreement, it is specifically written that the customer has been given license to use the System. Further, Revenue states that as per Schedule 12 to the Agreement i.e., in the event of termination of the Agreement, license of the customer to use the System shall expire, meaning thereby that the customer doe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... supplied to the customer; that the consideration for the entire activity is a single composite sum which includes supply of equipments for use along-with the supply of goods; that such activity of supply of goods cannot be regarded as transaction for service in as much as the definition of service as provided under Section 65B(44) of the Finance Act, 1994 excludes an activity of mere transfer of title in goods; that even though the consideration for the entire activity is composite even then the value attributable to the goods cannot be made a subject matter of Service Tax as levy itself does not covers transaction involving mere sale of goods. 7. Applicant re-iterates that in the subject Agreement(s), the scope of applicant is to set-up a System and supply of consumables along with ancillary support activities wherein the operation of the System will be done by the customer(s); that the customer shall have the uninterrupted right to use the System; that the agreement at various places clearly states that the operation and maintenance of the System shall be the responsibility of the customers and it is not provided anywhere that applicant shall have the right to interfere in the o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... constitutes merely,- - A transfer of title in goods or immovable property, by way of sale, gift or in any other manner; or - Such transfer, delivery or supply of any goods which is deemed to be a sale within the meaning of clause (29A) of Article 366 of the Constitution; - a transaction in money or actionable claim; (b) a provision of service by an employee to the employer in the course of or in relation to his employment; (c) fees taken in any Court or tribunal established under any law for the time being in force. 10. Section 66D of the Finance Act, 1994, enlists the services which would fall under the negative list. It may be noted that the services specified in the negative list would go out of the ambit of chargeability of service tax. 11. As per Section 66E of the Finance Act, 1994, certain specified activities would constitute declared service which inter-alia includes transfer of goods by way of hiring, leasing, licensing or in any such manner without transfer of right to use goods. Such declared services shall be taxable under the new regime. 12. Article 366 (29A) of the Constitution of India, 1949 reads as under; Tax on the sale or purchase of goods i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ractor is not free to make use of the same for other works or move it out during the period the machinery is in his use. The condition that he will be responsible for the custody of the machinery while the machinery is on the site does not militate against the petitioners' possession and control of the machinery. For these reasons, we are of the opinion that the transaction does not involve transfer of the right to use the machinery in favour of the contractor. As the fundamental requirement of section 5-E is absent, the hire charges collected by the petitioner from the contractor are not eligible to sales tax. 14. Hon'ble Supreme Court in the case of Bharat Sanchar Nigam Ltd. Vs Union of India [2006] 145 STC 91 held that the goods in telecommunication are limited to the handsets supplied by the service provider. Hon'ble Justice A.R. Lakshmanan in his concurring judgment held that to constitute a transaction for the transfer of the right to use the goods, the transaction must have the following attributes: (a) There must by goods available for delivery; (b) There must be a consensus ad idem as to the identity of the goods; (c) The transferee should have a lega ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Personnel are allowed to operate the System. Schedule 11 License to Use and Intellectual Property X x x x Customer may only use the System at the Site(s) and solely for its own internal business use, which shall not include: (i) any renting, leasing or sublicensing of the System or any part thereof to any third party or (ii)of the System by any third party, except that Customer's agents and Affiliates may access the System installed at the Site(s) solely in furtherance of Customer's business and provided that Customer remains liable for the acts and omissions of any such agent(s) and/or Affiliate(s) and for ensuring their compliance with the License and confidentiality terms set forth herein. 17. It was argued on behalf of the Revenue that as per clause 2.1.2 of the Agreement, SICPA grants to the customer a revocable, non-exclusive and non-transferable right to use the System and one of the attributes of transfer of the right to use the goods, as per Hon'ble Supreme Court judgment in BSNL case supra is that for the period during which the transferee has such legal rights, it has to be the exclusion to the transferor. In short, the plea of Revenue is that a tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Sites as prescribed by SICPA. (b) Provide appropriate dedicated network cabling, electricity and compressed air within proximity of the System; (c) Download and upload the necessary files and data from / to the ESCIMS system and in line with its specifications; (d) Operate the label Printing System, the Label Applications Systems, Aggregation System & Dispatching System in line with the ESCIMS guidelines and specifications; and (e) Inform SICPA promptly of any issues related to the System. 5.1.1 Upon conclusion of the implementation of the System on each site and starting from the GO Live Date, Customer shall operate the System and SICPA shall provide preventive and corrective maintenance for the System in accordance with the standards and time scales provided in schedule 6 - Service Level Agreement". 19. Clause 4.5.2(II) (d) and (e) of the Agreement, as mentioned above, states that the Customer, upon the completion of the Alpha phase and from the effective date of the Agreement, operate the label Printing System, label application system, aggregation system and Dispatching system in line with the ESCIMS guidelines and specifications and inform SICPA promptly of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... operation and control on the applicant. 22. Revenue has stressed that as applicant would implement overall maintenance process, ensure CRM, PRM, spare parts dispatch and KPI's as per SLA, ensure 2 nd level support to local organization and ensure change request are properly handled, it would show that operation and control of the System is with the applicant. Schedule 6 (2.2) to the Agreement inter-alia makes it clear that "Customer is in charge of the operation". Daily maintenance, as described in the said Schedule, is the maintenance required for normal day to day functioning of the System; Preventive maintenance (PRM) includes planned operations dedicated to minimize System breakdown by providing System maintenance at pre-defined intervals; Corrective maintenance (CRM) is to maximize uptime by reducing indicates impact on production due to malfunctions or fault in the System. 23. As far as maintenance of the System is concerned, Schedule 6 to the Agreement in unambiguous terms have mentioned that daily maintenance (CPM) shall be the responsibility of the customer, whereas preventive maintenance (PRM) and Corrective maintenance (CRM) shall be the responsibility of the appli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ves supply of consumables, which constitute a part of value/consideration. Further, transfer of right to use goods, shall not include service(s). In view of above, contention of Revenue is not tenable. 27. Revenue has raised another issue that in the event of expiration or termination of the Agreement for any reason, the license of the customer to use the System, as well as the sub-license to the customer, shall expire with immediate effect. Relevant extract of the Agreement is as under. Schedule 12- Decommissioning 1. Consequences of termination 1.1 In the event of expiration or termination of this agreement for any reason whatsoever: (a) the license of the customer to use the system, as well as the sub-license to the customer, shall expire with immediate effect and SICPA may render the system automatically unusable, unless a separate arrangement is made directly with the customer. 28. It is observed that on termination of Agreement, the goods are returned to the owner, consumables' supply stopped as also other assistance to the customer. Similarly, in the present case also, there is such a provision in the Agreement (Schedule 12). Therefore, the effect of termin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re of transfer. Therefore, in order to understand the meaning of the Agreement, one has to read the Agreement in totality and it is not appropriate to determine the meaning of the Agreement on the basis of a phrase used in the Agreement. 31. After examination of the Agreement, we have observed that the phrase "grant of license to use the System on a non-exclusive basis" (clause 2.1.2 to the Agreement) is used for the reason that the proprietary / intellectual property used in the System is utilized by the applicant in other similarly placed transaction with other customers. However, the use of System by the customer is on exclusive basis. Further, applicant is required to supply and install the System at the site of the customer, as also provide training and documentation with respect to the System. Customer is also required to operate the System and inform the applicant regarding issues related to the System (clause 4.5.2 and 5.1.1 to the Agreement). It is also mentioned in the Agreement that overall operation (Schedule 6 to the Agreement) and maintenance processes (clause 2 to the Agreement) shall be the responsibility of the customer. All these clauses amply make it clear that ..... X X X X Extracts X X X X X X X X Extracts X X X X
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