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M/s SICPA India Pvt. Ltd. New Delhi Versus Commissioner of Service Tax, Commissioner of Trade And Taxess, Govt. of NCT of Delhi

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 distilleries, breweries and wineries. - to provide for a System comprising of a complete set of various machines/ equ .....

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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. - The phrase .....

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e. - 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 Venture Company. United Breweries Ltd. and Carlsberg India Private Limited (hereinafter also referred to as 'C .....

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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 .....

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e 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-transferable right to use the System set up and installed by the applicant at the location of the breweries withi .....

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ntenance 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 in the System as well as provision of required spare parts to make the System good. Applicant shall also supply v .....

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tivity 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; that the entire contract indicates that the System shall at all the times during the tenancy of Agreement, wou .....

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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 m .....

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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 transaction to be regarded as "transfer of right to use goods", the transfer has to be coupled with possession; .....

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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, aggregation system and dispatch system for breweries in accordance with Excises Supply Chain Information Manag .....

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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 attribute to treat a transaction as transfer of right to use). As per Schedule 10 of the Agreement, SICPA shall prov .....

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s 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 transferred the right to use their system to their customer but merely a license to use the System, the effectiv .....

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e 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 operate and maintain the machines for his own purposes; that the clauses in the agreement unambiguously provide that t .....

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e 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 right to allow the use of similar kind of license to other vendor (which exactly is happening as similar system i .....

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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 ancil .....

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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, that the installation of System at customer(s) premises pursuant to which as a process and in terms of the Agreem .....

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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 on Schedule 12 is totally misplaced in the rejoinder for the reason that the said schedule indicate that as a con .....

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rovisions 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, gift or in any other manner; or - Such transfer, delivery or supply of any goods which is deemed to be a sale withi .....

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f 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 includes (a) a tax on the tr .....

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t 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 not intoxicating), where such supply or service, is for cash, deferred payment or other valuable consideration, an .....

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essarily 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 transaction. From a close reading of all the clauses in the agreement, it appears to us that the contractor is .....

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e 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 Co .....

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ds; (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 the statute - viz., a "transfer of the right to use" and not merely a license to use the goods; (e) Hav .....

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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 to ascertain whether the transaction in question qualifies as a transfer of right to use goods and consequently .....

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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 ensure that the Sites are secure and that only Trained Personnel are allowed to operate the System. Schedule 11 Licen .....

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d 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 .....

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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 when said machineries / Systems are installed at the site of the customer, they cannot be utilized by any other cus .....

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s 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 Parties. (b) Provide related documentation to the System and training to the personnel of the Customer on how to op .....

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ng 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 System & Dispatching System in line with the ESCIMS guidelines and specifications; and (e) Inform SICPA prompt .....

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nd 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 printing system, label application system, aggregation system and dispatch system. All these 4 machines / Systems .....

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edule 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 Responsibilities 2. SICPA SICPA shall at the operational level:- (a) Install System as per requirements; (b) Train .....

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em, 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. Similarly, the Clause that SICPA shall provide overall spare parts for the performance of the service to the c .....

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-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. .....

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ay 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 technician) 1 SICPA service technician, with support of local HQ -incident resolution (CRM) -preventive maintenance (P .....

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l 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 57 of the Agreement) 1. Fee: The customer will pay to SICPA the amount of INR 495.00 per1000 labels ordered for .....

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e 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 raised another issue that in the event of expiration or termination of the Agreement for any reason, the license .....

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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 revoking transfer of right to use goods/System. However, such termination does not indicate that there was no transf .....

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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 judgment cannot be applied to the present case. Similarly, judgment of Hon'ble Delhi High Court in case of Ha .....

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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 to use", Agreement has to be examined in totality. It is reiterated that Hon'ble High Court of Karnataka .....

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