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2016 (1) TMI 1066 - AUTHORITY FOR ADVANCE RULINGS

2016 (1) TMI 1066 - AUTHORITY FOR ADVANCE RULINGS - 2016 (42) S.T.R. 592 (A. A. R.) , [2016] 89 VST 410 (AAR) - Taxability of services - Nature of activity - transfer of right to use goods - effective control and possession of the subject System stands transferred to the Customer - services for the provision of automated, online ID and 2D bar code printing system, labeling application system, aggregation system and dispatch system in accordance with ESCIMS standard operating procedures for disti .....

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ion and operational maintenance of the System is the responsibility of the customer. - Revenue has not explained as to how the cost of consumables etc. paid by the customer to the applicant as fees, would not transfer the right to use the System to the Customer and effective control will remain with SICPA/applicant. It is observed from perusal of scope of the Agreement that it also involves supply of consumables, which constitute a part of value/consideration. Further, transfer of right to u .....

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licant is not liable to Service Tax under the provisions of the Finance Act, 1994. - Decided in favor of assessee. - Ruling No. AAR/ST/02/2016, Application No. AAR/44/ST/15/2013 - Dated:- 22-1-2016 - V S Sirpurkar (Chairman), S S Rana (Member) And R S Shukla (Member) For the Applicant : Shri B. L. Narasimhan, Adv For the Respondent : Shri Amresh Jain, DR, Shri M.L. Garg, Advocate For NCT Delhi RULING M/s SICPA India Pvt. Limited (hereinafter also referred to as 'applicant') is a Joint Ve .....

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plication 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 (hereina .....

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arlsberg 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 maintenance is the responsibility is of the Customer. With regard to consideration for the agreed scope of work, applicant is required to get a consolidated sum based on per thousand labels printed using the System. Applicant is responsible for the granting to the breweries a revocable, non-exclusive and non-t .....

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ir own for the agreed purposes. In addition to the above, applicant shall also be responsible for preventive maintenance of the System, which shall include planned operations dedicated to minimize System breakdown by providing System maintenance at pre-defined intervals and also replacement of worn-out parts, cleaning up of System, etc. In addition to above, applicant shall also be responsible for its corrective maintenance which shall comprise of measures to maximize uptime by reducing faults i .....

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2013 entered into with United Breweries Ltd and Carlsberg India Pvt. Ltd.? Applicant submits that the entire activity of applicant will not be taxable in terms of Section 66B of the Act as the activity undertaken by the applicant is a transfer of right to use goods wherein the effective control and possession of the subject System stands transferred to the Customer; that the applicant is also responsible for supply of consumables such as printing labels and ink ribbons required for the printing .....

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e 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 wh .....

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nsible for the granting to the breweries a revocable, non exclusive and non-transferable right to use the System set up and installed by the applicant at the location of the breweries; that the System is to be used in relation to labeling of beer bottles, cans etc. with the desired bar codes under ESCIMS for the term which has been agreed with the customers; that the applicant shall provide the customer, the services of maintenance and repair and consumables as per agreement; that for transactio .....

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Vs. State of Haryana - [1993] 088 STC 0357 [Punjab and Haryana High Court], a view was taken that if pandal, is given to the customers for use only after having been erected, then it is not transfer of right to use goods. It is further, submitted by the Revenue that applying the ratio of the apex Court judgment in case of BSNL Vs UOI [2006] 3 STT 245, the activity of providing machinery and apparatus for provision of automated, online 1D and 2D bar code printing system, label application system .....

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ed to treat a transaction as transfer of right to use. But as per terms of agreement of SICPA with the customer, effective possession and control over the machinery and apparatus remains with SICPA. SICPA has 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 attr .....

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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 does not have effective control of the goods / System. In view of the above, as the SICPA has not .....

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of the same has been transferred to the recipient; that various clauses in the Agreement are illustrative of the fact that the operation and the routine maintenance arising from the operation of System is the responsibility of the recipient/customer. 6. Applicant submits that the clauses 2, 4.5.2 and 5 as also Schedule 11 to the Agreement are clear indicators that the effective control coupled with possession of the said System has been transferred to customer/recipient, who in turn will operat .....

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at such personnel of applicant are not entrusted with the responsibility for the operation and maintenance of the System at any point of time; that the above is also supported by the fact there is no clause in the Agreement which indicates that the responsibility for operation and maintenance is that of applicant. It is also submitted by the applicant that the phrase grant of license to use the System on a "non-exclusive" in the agreement indicates that the applicant is reserving his r .....

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tivity 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 t .....

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ere in the operation on the System; that the applicant is undertaking installation of the machines/apparatus at customer's premises and training of the staff of the customer(s) so as to enable them to carry out the operation on their own, which is an evidence that effective control and possession of machines / apparatus shall be with customer(s) and not with the applicant; that the Agreement nowhere provides that operation of machines/apparatus shall be the responsibility of the applicant, t .....

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re installed; that this is just similar to any user guide which comes along-with any electronic equipment along-with the sale package; that this again reflects that effective control and possession of the machines/apparatus is being transferred to the customer(s). Applicants re-iterate that the same machine/apparatus, however cannot be provided by the applicant to any other customer(or used by themselves) while it is in effective control and possession of a specific customer; that the reliance o .....

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only on the termination such measures would be resorted to seek back the possession of the system. 8. Relevant provisions of law with respect to the present issue are as under:- 9. Section 65B (44) of the Finance Act, 1994 defines the term 'service' to mean any activity carried out by a person for another for consideration, including a declared service but shall not include- (a) An activity which constitutes merely,- A transfer of title in goods or immovable property, by way of sale, gif .....

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ld 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 t .....

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of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration; (e) a tax on the supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration; (f) a tax on the supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (whether or no .....

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transfer of the right to use the goods, as envisaged in Article 366 (29A) (d) of the Constitution of India, necessarily involves delivery of possession and effective control by the transferor to the transferee. Relevant paragraph of the judgment is reproduced as under; In our view, whether the transaction amounts to transfer of right or not cannot be determined with reference to a particular word or clause in the agreement. The agreement has to be read as a whole, to determine the nature of the .....

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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 c .....

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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 legal right to use the goods - consequently all legal consequences of such use including any permissions or licenses required therefore should be available to the transferee; (d) For the period during which the transferee has such legal right, it has to be the exclusion to the transferor - this is the necessary concomitant of the plain language of t .....

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case of Indus Towers Ltd. Vs Deputy Commissioner of Commercial Taxes, Bangalore 2012 (285) ELT 3 (Kar) observed as under; 64. It is well settled that, whether the transaction amounts to transfer of right or not cannot be determined with reference to a particular word or clause in the agreement. The agreement has to be read as a whole to determine the nature of transfer……… 16. In view of above, it may be appropriate to examine the Agreement between the applicant and customer .....

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roduct, during the Term, as further specified in Schedule 11 - License to Use and Intellectual Property hereto; and 2.1.3 SICPA shall also provide to the Customer the Services and Consumables as described in this Agreement. 2.2 Title of the System 2.2.1 As further stated in Schedule 11 hereof, the System and any part thereof shall, at all times during the Term of this Agreement, remain the property of SICPA. 2.2.2 The Customer shall not pledge or exercise any lien over the System and shall ensur .....

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te(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 .....

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;grant of license to use the System on a non-exclusive basis" in 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. We agree with this submission of the applicant because the automated online ID and 2D bar code printing machinery; label application system, aggregation system and dispatch system is for exclusive use of the customer. It is obvious that whe .....

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uot; used in the System is tenable. Further exclusivity required to qualify as transfer of right to use the goods is with respect to goods, for which the transfer is taking place, which is being satisfied in this case. 18. Further, relevant extracts of the Agreement are as under; 4.5.2 SICPA shall: XXXXX II. Upon the completion of the Alpha Phase and from the Effective Date of the Agreement: (a) Develop, supply and install the System as per the requirements agreed or to be agreed between the Par .....

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ities required for the installation and implementation of the System and provision of Services including complying fully with the specifications for the 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 Sy .....

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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 any issues related to the System. System, as per definitions in clause 1.1 of the Agreement shall mean 4 machines / Systems i.e., online 1D and 2D bar code p .....

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by clause 5.1.1 to the Agreement that the customer shall operate the System. This fact is also contracted in Schedule 11 wherein it is inter-alia mentioned that the customer may only use the System at site(s) and solely for its internal business use. 20. Revenue submits that effective control of the System shall remain with the applicant, in view of Schedule 8 to the Agreement. Relevant extract of Schedule 8, as pointed out by the Revenue, is reproduced as under: Schedule 8- Overall roles and Re .....

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. It is observed from contents (a) to (c) of Schedule 8 above that the applicant is required to install the System, train people to operate the System and provide documents for operation of the System. These factors do not indicate that the operation and control of the System is with the applicant. In-fact, training personnel of customer with regard to operation of the System and also providing them with its manual (documents), only shows that customer is made ready to take control of the System .....

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uld 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 (C .....

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ed out by the customer, whereas Preventive maintenance (PRM) and Corrective maintenance have not to be done on day to day basis. Further, level, purpose and responsibility of maintenance, as envisaged in para 2.1 of Schedule 6 to the Agreement, is reproduced below: LEVEL AT FACTORY PURPOSE 0 Customer -Operation (printing-Labelling-Aggregation-Dispatching-Rework -Daily maintenance (CRM) -Basic troubleshooting, with on-call assistance if necessary -issue escalation to level 1 (SICPA service techni .....

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r than daily maintenance. In nut-shell, Schedule 6 to the Agreement makes it clear that operation and operational maintenance of the System is the responsibility of the customer. 25. Revenue has also relied upon Schedule 10 to the Agreement to state that the applicant has not transferred to the right to use their System to their customer and the effective control of the System remains with SICPA. Relevant extract, as mentioned by Revenue, is as under: Schedule 10-Fees, ordering and payment (page .....

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ined as to how the cost of consumables etc. paid by the customer to the applicant as fees, would not transfer the right to use the System to the Customer and effective control will remain with SICPA/applicant. It is observed from perusal of scope of the Agreement that it also involves 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 .....

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nse 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 termination of Agreement leads to revo .....

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e customers for use only after having been erected, then it is not transfer of right to use goods. It is noticed that the Hon'ble High Court in this case observed that whether there is a transfer of the right of use the goods or not is essentially a question of fact which has to be determined in each case having regard to the terms of the contract under which there is said to be transfer of the right to use goods. In view of this observation of the Hon'ble High Court, the ratio of this j .....

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said Agreement that the phrase "right to use" and "license to use" have been interchangeable used by the applicant, which is made clear from perusal of clause 2.1 and 2.1.2. Article 2.1 uses the phrase "Grants of right to use the System & provisions of Services". Clause 2.1.2 uses both types of phrases i.e. "right to use" and "license to use". In order to determine whether the subject transaction is "right to use" or "license t .....

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