Value added tax-supply of goods or services-place of supply-transfer of software recorded on a carrier -subsequent customisation of software to purchaser's specific requirements-Whether two distinct supplies or one single supply-Whether single supply classified as supply of services- Council Directive 77/388, art. 2(1), 6(1), 9(2).

The European Court of Justice (First Chamber) ruled that under art. 2(1) of Council Directive 77/388 (the sixth directive), where two or more elements or acts supplied by a taxable person to a customer, being a typical consumer, were so closely linked that they formed objectively, from an economic point of view, a whole transaction, which it would be artificial to split, all those elements or acts constituted a single supply for purposes of the application of VAT. That applied to a transaction by which a taxable person supplied to a consumer standard software previously developed, put on the market and recorded on a carrier and subsequently customised that software to that purchaser's specific requirements, even where separate prices were paid.

Facts

The taxpayer was established in the Netherlands and operated an insurance business. On 2 October 1997 it entered into a contract with a US company'FDP', under which FDP undertook to provide the taxpayer with a computer program which it marketed to insurance companies in the US ('the basic software'). A non-transferable licence of unlimited duration was granted to the taxpayer for that software for a fee of US$713,000, payable by way of an initial sum and monthly instalments. The amount of the fee was to be invoiced separately from the other amounts. The contract also specified that the licence would start in the US, the taxpayer acting as importer of the product into the Netherlands.

The contract further stipulated that FDP would customise the basic software in order to enable the taxpayer to use it in the management of the insurance contracts which it sold. It was essentially a question of transposing the programme into Dutch and modifying it as required by the fact that, in the Netherlands, agents were involved in such insurance contracts. The price of that customisation, on the basis of the definitive specifications to be determined by the parties during performance of the contract, was to be between $793,000 and $970,000.

In addition, FDP undertook to install the basic software and customise it on the taxpayer's computer system and to give five days' training to its staff. The customisation of the basic software, its installation and the agreed training took place between 1997 and 1999. The taxpayer did not state the amounts paid for the basic software in its VAT declarations. On 25 January 2000, it asked the tax authorities to issue notices of assessment a posteriori with regard to the amounts paid in respect of the customisation of that software, its installation and the training given by FDP.

Taking the view that the service supplied by FDP consisted in a single supply relating to the customised software, the authorities issued notices of assessment in respect of all the payments made by the taxpayer under the contract. The taxpayer argued that the supply of the basic software constituted a supply of goods. The national court referred that issue to the ECJ for a preliminary ruling.

Issue

Whether, for the purposes of collecting VAT, the provision of standard software developed, put on the market and recorded on a carrier by the supplier and the subsequent customisation thereof, were to be regarded as two distinct supplies or as one single supply and, in the latter case, whether that single supply was to be classified as a supply of services; and in what place would a single supply of services be deemed to take place.

Decision

The European Court of Justice (First Chamber) (ruling accordingly) said that, where a transaction comprised a bundle of features and acts, regard had to be had to all the circumstances in which the transaction in question took place in order to determine, first, if there were two or more distinct supplies or one single supply and, secondly, whether, in the latter case, that single supply was to be regarded as a supply of services.

Single supply

The essential features of the transaction had to be ascertained in order to determine whether the taxable person was making to the customer, being a typical consumer, several distinct principal supplies or a single supply. There was a single supply in particular in cases where one or more elements were to be regarded as constituting the principal supply, whilst one or more elements were to be regarded, by contrast, as ancillary supplies which shared the tax treatment of the principal supply. The same was true where two or more elements or acts supplied by the taxable person to the customer, being a typical consumer, were so closely linked that they formed, objectively, a single, indivisible economic supply, which it would be artificial to split. In the present case, it was apparent that the economic purpose of the transaction was the supply, by a taxable person to a consumer, of functional software specifically customised to that consumer's requirements. It was not possible, without entering the realms of the artificial, to take the view that such a consumer had purchased, from the same supplier, first, pre-existing software which, as it stood, was nevertheless of no use for the purposes of its economic activity, and only subsequently the customisation, which alone made that software useful to it.

The fact that separate prices were contractually stipulated for the supply of the basic software, on the one hand, and for its customisation, on the other, was not of itself decisive. Such a fact could not affect the objective close link with regard to that supply and that customisation nor the fact that they formed part of a single economic transaction. It followed that under art. 2 of the sixth directive such supply and such subsequent customisation of software were, in principle, to be regarded as forming a single supply for VAT purposes.

Supply of services

With regard to the question whether such a single complex supply was to be classified as a supply of services, it was vital to identify the predominant elements of that supply. Apart from the importance of the customisation of the basic software to make it useful for the professional activities of the purchaser, the extent, duration and cost of that customisation were also relevant elements. On the basis of those different criteria, the national court correctly concluded that there was a single supply of services within the meaning of art. 6(1) of the sixth directive, since those criteria in fact led to the conclusion that, far from being minor or ancillary, such customisation predominated because of its decisive importance in enabling the purchaser to use the software customised to its specific requirements.

Place of supply

Article 9 of the sixth directive contained rules for determining the place where services were deemed to be supplied for tax purposes. Whereas art. 9(1) laid down a general rule on the matter, art. 9(2) set out a number of specific instances of places where certain services were deemed to be supplied. The object of those provisions was to avoid, first, conflicts of jurisdiction which might result in double taxation, and, secondly, non-taxation. In every situation, the question was whether it was covered by one of the instances mentioned in art. 9(2); if not, it fell within the scope of art. 9(1).

Article 9(2)(e), third indent, of the sixth directive did not refer to professions, such as those of lawyers, consultants, accountants or engineers, but to the services supplied by those professionals and similar services. The Community legislature had used the professions mentioned in that provision as a means of defining the categories of services to which it referred. A service such as the customisation of computer software to the specific requirements of a consumer was therefore likely to be carried out either by engineers or by other persons trained to carry out such tasks. It followed that such a service was covered either by the services carried out by engineers or by those which were similar to the activity of an engineer.

European Court of Justice (First Chamber). Judgment delivered 27
October 2005.