By TIOL News Service

NEW DELHI, JAN 29, 2016: EXCISE Supply Chain Information Management System (ESCIMS) is an IT initiative of the Excise Department, Government of NCT of Delhi to automate and regulate liquor sales in Delhi.

It is in this regard that applicant offers 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.

The applicant has entered into System Delivery Agreements with 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.

Applicant is also required to impart training to the personnel of the Customers/United Breweries/Carlsberg India for the purposes of successful handling and operation of the System. In addition to the above, applicant is also 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 is also responsible for its corrective maintenance which comprises 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 is also required to supply various Consumables in the form of blank labels and ink ribbons based on orders placed by the breweries.

With regard to consideration for the agreed scope of work, applicant is 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 within the territory of India. Such 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 customers.

The applicant has sought Advance Ruling(s)on the following:-

Issue 'a' : What is the Service Tax liability with respect to the activity proposed to be undertaken by applicant under the Agreement dated 25 th June 2013 entered into with United Breweries Ltd and Carlsberg India Pvt. Ltd.?

Applicant contention is that the proposed transaction shall qualify as transfer of right to use the goods and the same is excluded from the definition of a service under Section 65B(44) of the Finance Act, 1994.

Issue 'b' : 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 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 'c' : Assuming that the service is a taxable service then what is the valuation under Section 66B of the Finance Act, 1994?

Applicant submits that service element in the composite consideration is alone liable to Service Tax.

The Revenue countered the submissions made by applicant and opined that the service is taxable under the FA, 1994.

The Authority for Advance Rulings observed -

++ 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 be outside the definition of service. [Rashtriya Ispat Nigam Ltd. Vs Commercial Tax officer 1990 77 STC 182 AP, Bharat
Sanchar Nigam Ltd. Vs Union of India [2006] 145 STC 91 & Indus Towers Ltd. Vs Deputy Commissioner of Commercial Taxes, Bangalore 2012 (285) ELT 3 (Kar) refers.]

++ It is observed from contents (a) to (c) of Schedule 8 of the Agreement 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.

++ 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 applicant. It is observed that normal day to day maintenance of the System has to be carried out by the customer, whereas Preventive maintenance (PRM) and Corrective maintenance have not to be done on day to day basis.

++ 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. Further, transfer of right to use goods, shall not include service(s). In view of above, contention of Revenue is not tenable.

++ 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. 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 transfer of right to use goods and the effective control was not with the customer. On the contrary, it may indicate that before termination of Agreement, customer was in control of the System.

++ As per Schedule 10 of agreement, the Customer has been given license to use the System. Implication of this statement is that applicant has given the license to use the System and not right to use the System.

++ It is observed from reading of said Agreement that the phrase "right to use" and "license to use" have been interchangeably used by the applicant, which is made clear from perusal of clause 2.1 and 2.1.2. 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.

++ 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.

++ 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 possession and effecting control of the goods (System) will be with the customer.

Conclusion:

The activity proposed to be undertaken by applicant is not liable to Service Tax under the provisions of the Finance Act, 1994. Issues (b) and (c) i.e., classification and valuation of said service are, therefore, infructuous.

(See 2016-TIOL-03-ARA-ST)