2016 (1) TMI 1066 - AAR - Service Tax

Tax Authority Rules Transfer of Automated Systems as Right to Use Goods, Not Taxable Service

The Authority determined that the activity proposed by the applicant, involving the provision of automated systems to customers, constitutes a transfer of ... Transfer of right to use goods - effective possession and control - revocable, non exclusive and non transferable license to use the System - service tax liability under the Finance Act, 1994 - declared service by licensing/transfer of goods without transfer of right to use (Section 66E) - exclusion of transfer of title or mere transfer of right to use from definition of serviceTransfer of right to use goods - effective possession and control - revocable, non exclusive and non transferable license to use the System - service tax liability under the Finance Act, 1994 - Whether the transaction under the System Delivery Agreement amounts to a transfer of the right to use goods and therefore falls outside the definition of 'service' for levy of service tax. - HELD THAT: - The Agreement must be read as a whole to determine whether a transfer of the right to use has occurred. Although the Agreement describes the grant as a 'revocable, non exclusive and non transferable' right or a 'license to use', the Authority found that 'non exclusive' refers to the proprietary/intellectual property and not to the physical System installed at the customer's site. The System installed at each customer site is available for the exclusive use of that customer and cannot concurrently be used by others. Clauses requiring SICPA to install the System, provide documentation and training, and to supply consumables and spare parts do not, by themselves, retain operation or effective control with SICPA. Operational clauses (clause 4.5.2(II)(d),(e), clause 5.1.1 and Schedule 6) make the customer responsible for operating the label printing, label application, aggregation and dispatch systems and for daily/operational maintenance, with SICPA responsible only for preventive and corrective maintenance levels above daily operation. The decommissioning clause upon termination, which permits SICPA to render the System unusable, does not negate that prior to termination the customer had effective possession and control during the Term. Applying the established tests (including the attributes identified in BSNL and decisions that agreements must be read in totality), the Authority concluded that the necessary concomitant of transfer of right to use - delivery of possession and effective control to the transferee for the period - is satisfied here. Consequently the transaction is not a taxable service under the Finance Act, 1994. [Paras 19, 21, 24, 31, 32]The activity under the Agreement is a transfer of the right to use the System (with effective possession and control vested in the customer) and is not liable to service tax under the Finance Act, 1994.Classification of taxable service - valuation of composite consideration - Whether, assuming liability, the activity should be classified under an 'other' taxable service category and how valuation should be determined. - HELD THAT: - Having held that the transaction is not a taxable service because it amounts to a transfer of the right to use goods, the Authority did not find it necessary to examine or decide the alternate contentions on classification under Chapter V or on valuation of any hypothetical service element. Those questions consequently do not arise for adjudication. [Paras 32]Classification and valuation issues are rendered infructuous in view of the primary finding that the transaction is not liable to service tax.Final Conclusion: The Authority held that the arrangements for supply, installation, training, operation and maintenance of the label printing and related Systems constitute a transfer of the right to use goods (with effective possession and control vested in the customers) and therefore do not attract service tax under the Finance Act, 1994; consequential questions on classification and valuation were left infructuous. 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 LiabilityThe 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 ServiceAssuming 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 ServiceIf 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.