2016 (1) TMI 1066 - AAR - Service Tax

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/ equipments which are installed and commissioned by the applicant as per ESCIMS. Customer is responsible for the operational maintenance of all 4 sub-systems of main Systems i.e. printing, labelling, aggregation and dispatching, as also daily maintenance, whereas SICPA is to look after other 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. 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 use goods, shall not include service(s). In view of above, contention of Revenue is not tenable. 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. The activity proposed to be undertaken by applicant is not liable to Service Tax under the provisions of the Finance Act, 1994. - Decided in favor of assessee.

Summary

Issues Involved:

1. Service Tax liability with respect to the activity proposed under the Agreement dated 25th June 2013.
2. Classification of the service as taxable under Chapter V of the Finance Act, 1994, if there is a Service Tax liability.
3. Valuation of the service under Section 66B of the Finance Act, 1994, if the service is taxable.

Issue-wise Detailed Analysis:

Issue 1: Service Tax Liability

The applicant, M/s SICPA India Pvt. Limited, entered into System Delivery Agreements with United Breweries Ltd. and Carlsberg India Pvt. Ltd. to provide an automated, online ID and 2D bar code printing system, labeling application system, aggregation system, and dispatch system as per ESCIMS standards. The applicant contends that this activity constitutes a transfer of right to use goods, wherein effective control and possession of the system are transferred to the customer, thus excluding it from the definition of service under Section 65B(44) of the Finance Act, 1994.

The Revenue argues that the transaction does not amount to a transfer of right to use goods because the effective control and possession remain with the applicant, citing precedents like Rashtriya Ispat Nigam Ltd. Vs. CTO and BSNL Vs. UOI. The agreement grants a revocable, non-exclusive, and non-transferable right to use the system, and the applicant retains responsibilities for maintenance and supply of consumables, indicating that effective control is not transferred to the customer.

Issue 2: Classification of Service

Assuming the activity is taxable, the applicant argues that the service should be classified under the "Other" category, as the primary contract is for the supply of the system along with ancillary services. The Revenue's position is that the service involves providing machinery and apparatus for bar code printing and related activities, which do not qualify as a transfer of right to use goods.

Issue 3: Valuation of Service

If the service is taxable, the applicant proposes that the service element in the composite consideration should be computed based on its records and certified by a Chartered Accountant/Cost Accountant, and only this service value should be liable to Service Tax.

Judgment:

After examining the agreement and relevant legal provisions, the Authority observed that:

1. Exclusive Use: The system is installed at the customer's site and used exclusively by the customer for its internal business purposes, indicating a transfer of right to use the system.
2. Operation and Maintenance: The customer is responsible for operating the system and daily maintenance, while the applicant provides preventive and corrective maintenance, which does not imply control over the system.
3. Effective Control: The agreement's clauses, including those related to training, documentation, and maintenance responsibilities, indicate that effective control and possession of the system are with the customer.

The Authority concluded that the activity proposed by the applicant does not attract Service Tax under the Finance Act, 1994, as it qualifies as a transfer of right to use goods. Consequently, issues related to classification and valuation of the service become irrelevant.