1
Reportable
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
Civil Appeal No. 2633 of 2020
Commissioner of Service Tax, Ahmedabad ...Appellant
Versus
M/s Adani Gas Ltd. ...Respondent
J U D G M E N T
Dr. Dhananjaya Y. Chandrachud, J
1 This appeal arises from a judgment and order of the Customs, Excise, &
Service Tax Appellate Tribunal,
1 West Zonal Bench at Ahmedabad in Service
dated 5 April 2019. The Tribunal has, in exercise of its appellate jurisdiction,
reversed the 30 March 2011 decision of the Commissioner of Service Tax,
Ahmedabad2 and set aside the demand for payment of service tax on the
charges collected by the respondent for supply of pipes and measuring
1 “Tribunal” 2 “Adjudicating Authority”
2
equipment to its customers under Section 65(105)(zzzzj) of the Finance Act,
1994. This appeal rests on the interpretation and applicability of the provisions of
Section 65(105)(zzzzj) of the Finance Act, 1994.
2 The respondent is in the business of distributing natural gas - Compressed
Natural Gas3 and Piped Natural Gas4 - to industrial, commercial, and domestic
consumers. Among other purposes, industrial consumers use PNG for
manufacturing operations. Domestic and commercial consumers use PNG for
cooking, power supply and air-conditioning. In order to facilitate the distribution of
PNG to industrial, commercial and domestic consumers through pipes, the
respondent installs an equipment described as ‘SKID’ at their customers’ sites.
The SKID equipment consists of isolation valves, filters, regulators and electronic
meters. The equipment regulates the supply of PNG being distributed and
records the quantity of PNG consumed by the customer, which is then used for
billing purposes. The respondent enters into an agreement – the Gas Sales
Agreement5 - with consumers to whom gas is supplied by it.
3 The manufacture of CNG falls under Chapter Sub-Heading 27112900 of
the Central Excise Tariff Act, 1985. The respondent is also engaged in providing
the taxable service falling under the category of “transport of goods through
pipeline”, as defined in Section 65(105)(zzz) of the Finance Act, 1994. During the
course of an audit by the officers of Central Excise, Ahmedabad-I during January
3 “CNG” 4 “PNG” 5 “GSA”
3
2009, it was noticed that the respondent had received income under the head of
“gas connection charges” from its industrial, commercial, and domestic
customers. From the GSA and the invoices, it was found that charges were
collected for the “supply of pipes, measuring equipment etc.” while providing new
gas connections to customers. The ownership of the equipment is not with the
customer but is retained by the respondent. The customer does not have control
or any legal rights over the equipment. Value Added Tax was also not paid on
these charges collected from the customers. A Notice to Show Cause6 was
issued to the respondent on 13 October 2009 stating that the transactions
undertaken by them are covered under the category of “supply of tangible goods
service”, under Section 65(105)(zzzzj) of Finance Act, 1994 which was
introduced by Notification No.18/2008- S.T. dated 10 May 2008, with effect from
16 May 2008. The Show Cause Notice required the respondent to pay service tax
with effect from 16 May 2008 on the gas connection charges recovered for the
period from 16 May 2008 to 31 March 2009. Three similar notices were issued to
the respondent for subsequent periods. The first notice indicated that the
respondent had received gas connection charges amounting to Rs.
23,37,51,903/- on which service tax and cess amounting to Rs. 2,83,46,411/-
had not been deposited. The respondent was called upon to show cause why
service tax should not be demanded together with interest and penalties under
Sections 76, 77 and 78 of the Finance Act, 1994.
6 “Show Cause Notice”
4
4 In their reply to the Show Cause Notice, the respondent stated that:
(i) PNG is distributed through pipes to industrial, commercial and domestic
customers. The SKID equipment is installed at the customers’ sites to
regulate the supply of PNG distributed and record the quantity of PNG
consumed for billing purposes;
(ii) The GSA is entered into with the customer. The ‘SKID’ consists of
isolation valves, filters, regulators and electronic meters;
(iii) The equipment is installed at the location of the customer without the
transfer of ownership and possession; and the respondent retains the
right to use the equipment;
(iv) The arrangement between the respondent and its customer provides
for the supply of gas, for which measurement equipment (the SKID
equipment), is installed at the cost of customers at their premises for
the purpose of billing;
(v) The equipment is used by the respondent for its own purposes and the
customer does not use the measurement equipment;
(vi) Under the GSA, the right to adjust, clean, handle, replace, maintain,
remove or modify the equipment is conferred upon the respondent. The
equipment is used by the respondent and the customer does not buy or
use the equipment;
(vii) Under the GSA, the respondent has a right of entry at all hours to the
measurement equipment to a pipeline upto all consumption points and
gas consuming facilities inside the buyer’s premises;
5
(viii) The equipment is used only for metering and billing so as to not invite
any dispute or objection from the customers; and
(ix) The amount which is collected from the customer is in the form of an
interest-free security deposit, for the purpose of ensuring safe-keeping
of the measurement equipment as is required by Attachment 3 to
Schedule A of the Petroleum and Natural Gas Regulatory Board
(Determination of Network Tariff for City or Local Gas Distribution
Networks and Compression Charge for CNG) Regulations 20087
. This
deposit is to be returned at the time of discontinuing or terminating the
connection and between 25 to 100 per cent of the charges were
refunded by the respondent in the year 2008-09.
The respondent thus contended that they were not liable to pay service tax and
consequently the demand for tax interest and penalty was not sustainable.
5 The Show Cause Notice was adjudicated by an order dated 30 March
2011 of the Adjudicating Authority. Confirming the demand, the Adjudicating
Authority noted that the demand in the Show Cause Notice was not under the
category of “transport of goods by pipeline or other conduit services” under
Section 65(105)(zzz) on the charges recovered from the supply of gas, but for
supplying measurement equipment at the time of providing a new gas connection
to a customer, under the category of “supply of tangible goods services” under
Section 65(105)(zzzzj). The Adjudicating Authority held that “…there is a definite
element of service involved in this transaction.” The Adjudicating Authority held
that the respondent is not only a seller engaged in the sale of gas to the customer
7 “PNGRB Network Tariff Regulations 2008”, published vide notification dated 19 March 2008.
6
but also a service provider who supplies, installs and maintains measurement
equipment at the customers’ premises. The customer, in this view, is a purchaser
of gas and a service recipient for the supply, installation and maintenance of
measurement equipment. The fact that (i) ownership of the measurement
equipment vests with the respondent; and (ii) there is no transfer of the right of
possession and effective control is undisputed, thereby satisfying two of the
required ingredients for Section 65(105)(zzzzj). Noting that the purpose of the
measurement equipment is to ensure effective and accurate billing, the
Adjudicating Authority held that the expression ‘use’ is attracted and it is the
customer who must be held to be in use of the equipment, regardless of the
customer lacking technical expertise in handling the measurement equipment.
This conclusion was based on the following reasoning:
“The expression “use” does not mean that the recipient has to
personally and physically use the equipment all the time. It
broadly refers to the direct or indirect use whether personally
or through anybody else and meant to serve the intended
purpose of the goods. The contention of the said noticee that
they use the “Measurement Equipment” which are installed
for their own benefits and purposes is misplaced. Accuracy
in billing is as much a concern of the buyer of gas as is
of the seller and hence, he gets it installed at his own
cost and therefore working of the “Measurement
Equipment” is verified periodically by the buyer as well
as the seller as agreed by both in the Agreement.”
(emphasis supplied).
6 The order also noted that the entirety of the gas connection charges
collected at the time of installing the connection are not refunded at the time of
discontinuation or termination. The Adjudicating Authority allowed the
respondent to claim the benefit of cum-tax value and reduced the demand for
7
service tax from Rs. 2,83,46,411/- to Rs. 2,52,73,526/-. Penalties were imposed
under Sections 77 and 78 of the Finance Act 1994.
7 The respondent assailed the order of adjudication before the Tribunal. By
its judgment dated 05 April 2019, the Tribunal allowed the appeal filed by the
respondent. The Tribunal observed that the SKID equipment is installed by the
respondent at the customers’ site and at the cost of the customer without the
transfer of ownership and possession. However, the crucial issue which required
analysis was whether the SKID equipment is for the use of the customer.
Adverting to the GSA which is entered into between the respondent and its
customers, the Tribunal held:
“ … the appellant supplies natural gas through pipes to the
Industrial, Commercial or Domestic customers and for this
purpose installs an equipment called “SKID” at the customer’s
site to regulate the supply of natural gas supplied through
pipes and to record the quantity consumed by the customers
for the purpose of billing. The gas pipeline from the nearest
distribution point is laid and maintained by appellant at the
cost of the customer and the measuring equipment is also
supplied, installed and maintained by the appellant at the cost
of the customer. The terms of the agreement leave no
manner of doubt that the purpose of the equipment is to
measure the amount of gas supplied to the customer for
the purpose of billing. They are, therefore, for the use of
the appellant and are not for use by the customers. The
finding to the contrary recorded by the Adjudicating Authority
is, therefore, not correct.” (emphasis supplied)
8 The Tribunal held that the metering equipment is installed for measuring
the amount of gas supplied to the customer for the purpose of billing; hence the
use of the equipment is by the respondent and not by the customer.
8
9 The decision of the Tribunal has been assailed on behalf of the
revenue/appellant in the appeals. Mr. Sanjay Jain, Additional Solicitor General of
India, submitted that the GSA which is a ‘take or pay agreement’ demonstrates
that:
(i) The SKID equipment is installed by the respondent at the cost of the
buyer;
(ii) Neither ownership nor possession of the equipment is transferred to
the buyer;
(iii) The measurement equipment is installed, maintained and repaired
by the respondent at the cost of the buyer;
(iv) Mere technical expertise on part of the respondent to operate the
equipment does not preclude the usage by the buyer;
(v) The buyer is as much concerned about the accuracy of the billing as
the supplier of gas. The measurement equipment enures to the
benefit of the buyer for the purpose of verifying the correctness of
the charges levied based on the quantity of gas consumed;
(vi) Though the gas connection charges which are initially recovered are
claimed to be refundable, the quantum of refunds may vary from
buyer to buyer and the data which was produced by the respondent
indicates that in several cases full refunds have not been made; and
(vii) The CBEC circular No. 334/1/2008-TRU dated 29 February 2008
has clarified that transactions that enable usage of goods without
transferring the right to use, are in the nature of a service under
Section 65(105)(zzzzj) and not sale under Article 366(29-A)(d) of the
9
Constitution of India. Since the respondent has not paid VAT for the
charges collected on supply of pipelines and the measurement
equipment, this transaction must be treated as a service.
10 The ASG submitted that the use of the SKID equipment is not merely by
the respondent as the seller of gas but by the buyer as well for the purpose of
verifying the accuracy of billing. The decision of the Tribunal was faulted on the
ground that its finding - that the use of the equipment is by the seller - is contrary
to the terms of the GSA.
11 Opposing these submissions Mr Vikram Nankani, learned Senior Counsel
appearing on behalf of the respondent, submitted that:
(i) The GSA is an agreement for the sale and purchase of goods,
namely, PNG;
(ii) The terms of the GSA provide contractual rights to the buyer,
including the right to verify and dispute the bill raised by the supplier
and to seek arbitration;
(iii) The rights of a buyer of gas under the GSA must be kept distinct
from the use of the SKID equipment and the essential issue in the
present case is whether the equipment is installed for the use of the
buyer;
(iv) Under the terms of the GSA, ownership continues to vests with the
respondent at all times and the buyer of gas is not entitled to adjust,
10
modify or maintain the equipment. The buyer has no possessory
right nor can they lease or sub-let the equipment;
(v) The purpose of the measurement equipment in a gas supply
contract is to measure the quantity of gas supplied to the buyer of
gas. However, the buyer gets no service out of the equipment;
(vi) In determining the issue in appeal, it is necessary to isolate the
rights conferred by the GSA on the buyer of gas from the issue as to
whether the buyer has the use of the SKID equipment. The SKID
equipment is a technical device and the buyer has no right to use
the equipment; and this inability to use the equipment by the
customer would not be within the scope of the taxing provision,
which must be construed strictly;
(vii) Amounts collected under the head of “gas connection charges” are
mainly in the nature of interest-free security deposits, which are
required to be refunded in part, or in full, depending on the duration
of the contract which determines depreciation. They are not
collected as a consideration for providing a service; and under
Article 366(29-A)(d), a tax on the sale or purchase of goods includes
a tax on the transfer of the right to use goods for any purpose,
without necessarily transferring the title. Section 65(105)(zzzzj) was
introduced with the intention of capturing services which were
technically not ‘sales’ and were escaping the net of VAT. In the
present case, there is no transfer of the right to use the equipment
nor is there any element of service in the supply of the metering
11
equipment. The equipment is installed by the respondent as a seller
of gas and is not used by the buyer.
12 The question that arises for our consideration is whether Section
65(105)(zzzzj) of the Finance Act, 1994 is applicable in the present case, that is,
whether the supply of pipes and measurement equipment (SKID equipment),
charged under the head of “gas connection charges” by the respondent to its
industrial, commercial, and domestic consumers, amounts to supply of tangible
goods for their use. While assessing the merits of the rival submissions, it is
necessary to interpret the provisions of Section 65(105)(zzzzj).
13 Section 65(105)(zzzzj) of the Finance Act 1994 provides for taxability of
supply of tangible goods for use, without transferring right of possession and
effective control over such goods, as a ‘taxable service’. Section 65(105)(zzzzj) of
the Finance Act, 1994 reads as follows:
“65(105) “taxable service” means any service provided or to
be providedxx xx xx
(zzzzj) to any person, by any other person in relation to
supply of tangible goods including machinery, equipment
and appliances for use, without transferring right of
possession and effective control of such machinery,
equipment and appliances.”
14 Section 65(105)(zzzzj) of the Finance Act 1994 was introduced by
Notification No.18/2008-S.T. with effect from 16 May 2008. Section
65(105)(zzzzj) levies a service tax on the use of tangible goods. On the other
12
hand, the transfer of the right to use any goods is treated as a ‘deemed sale’ and
is subject to sales tax under Article 366(29-A)(d) of the Constitution of India. It is
necessary to distinguish the applicability of these two provisions. Article 366(29-
A)(d), provides:
“(366)(29-A) tax on the sale or purchase of goods includes—
xx xx xx
(d) a tax on the transfer of the right to use any goods for any
purpose (whether or not for a specified period) for cash, deferred
payment or other valuable consideration;
xx xx xx
and such transfer, delivery or supply of any goods shall be deemed
to be a sale of those goods by the person making the transfer,
delivery or supply and a purchase of those goods by the person to
whom such transfer, delivery or supply is made.”
15 The applicability of Article 366(29-A)(d) was discussed in a decision of this
Court in Bharat Sanchar Nigam Limited and another v. Union of India and
others8 (“BSNL”). In BSNL, the Court held that the purpose of Article 366(29-
A)(d) was to levy tax on those transactions where there was a “transfer of the
right to use any goods” to the purchaser, instead of passing the title or ownership
of the goods. Thus, by a fiction of law, these transactions were now treated as
‘sale’. Elucidating on the “transfer of the right to use any goods”, Dr A R
Lakshmanan J. in a concurring opinion held:
“97. To constitute a transaction for the transfer of the right to
use the goods, the transaction must have the following
attributes:
a. there must be goods available for delivery;
b. there must be a consensus ad idem as to the identity of
the goods;
8 2006 (3) SCC (1).
13
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 licence to use the
goods;
e. having transferred the right to use the goods during the
period for which it is to be transferred, the owner cannot
again transfer the same rights to others.”
(emphasis supplied)
16 The test laid down in BSNL has been applied by courts to determine
whether a transaction involves the “transfer of the right to use any goods” under
Article 366(29-A)(d). In doing so, the courts have analysed the terms of the
agreement underlying the transaction to ascertain whether effective control and
possession has been transferred by the supplier to the recipient of the goods.
Recently, this Court in Great Eastern Shipping Company Limited. v. State of
Karnataka and others9 considered whether the transfer of a vessel under a
charter party agreement was a ‘deemed sale’, subject to sales tax. The Court,
after analysing the terms of the charter party agreement, held:
“43. We are not turning our decision upon the terms used
like ‘let’, ‘hire’, ‘delivery’ and ‘redelivery’ but on the other
essential terms of the Charter Party Agreement entered in
the instant case which clearly makes out that there is a
transfer of exclusive right to use the vessel which is a
deemed sale and is liable to tax under the KST Act. In the
instant case, full control of the vessel had been given to
the charterer to use exclusively for six months, and
delivery had also been made. The use by charterer
exclusively for six months makes it out that it is
definitely a contract of transfer of right to use the vessel
with which we are concerned in the instant matter, and
that is a deemed sale as specified in Article 366(29A)(d).
On the basis of the abovementioned decision, it was urged
9 2020 (3) SCC 354.
14
that all Charter Party Agreements are service agreements.
The submission cannot be accepted, as there is no
general/invariable rule/law in this regard. It depends upon
the terms and conditions of the charterparty when it is to be
treated as only for service and when it is the transfer of right
to use.
xx xx xx
54. When we consider the charterparty in question in the
context of applicable law, particularly in view of the
constitutional provisions of Article 366(29A)(d), we find that
there is transfer of right to use tangible goods, which is
determinative of deemed sale as per the Constitution of India
and provisions of section 5C reflecting the said intendment.
We are of the considered opinion that there is transfer of
right to use exclusively given to charterer for six
months, and the vessel has been kept under the
exclusive control. The charterer qualifies the test laid
down by this court in BSNL (supra).”
(emphasis supplied)
17 Therefore, sales tax is levied in pursuance of Article 366(29-A)(d) on
transactions which resemble a sale in substance as they result in a transfer of the
right to use in goods, instead of the transfer of title in goods. The Finance Act,
1994, deriving authority from the residuary Entry 97 of the Union List, enabled the
Central Government to levy tax on services. ‘Service tax’ was introduced as a
response to the advancement of the contemporary world where an indirect tax
was necessary to capture consumption of services, which are economically
similar to consumption of goods, in as much as they both satisfy human needs.10
This Court, in Association of Leasing and Financial Service Companies v.
Union of India,
11 had noted:
“38…Today with technological advancement there is a very
thin line which divides a “sale” from “service”. That, applying
the principle of equivalence, there is no difference between
production or manufacture of saleable goods and production
of marketable/saleable services in the form of an activity
10 All India Federation of Tax Practitioners v. Union of India, (2007) 7 SCC 527, para 4. 11 (2011) 2 SCC 352.
15
undertaken by the service provider for consideration, which
correspondingly stands consumed by the service receiver. It
is this principle of equivalence which is inbuilt into the
concept of service tax under the Finance Act, 1994. That
service tax is, therefore, a tax on an activity. That, service
tax is a value added tax. The value addition is on account of
the activity which provides value addition…Thus, service
tax is imposed every time service is rendered to the
customer/client…Thus, the taxable event is each
exercise/activity undertaken by the service provider and
each time service tax gets attracted.” (emphasis supplied)
18 The introduction of Section 65(105)(zzzzj) in the Finance Act, 1994, was
with the intention of taxing such activities that enable the customer’s use of the
service provider’s goods without transfer of the right of possession and effective
control. This provision creates an element of taxation over a service, as opposed
to a ‘deemed sale’ under Article 366(29-A)(d). For the purpose of clarification, the
Department of Revenue issued a Circular, D.O.F. No.334/1/2008-TRU, dated 29
February, 2008. The said circular clarified the applicability of Section
65(105)(zzzzj) vis-à-vis Article 366(29-A)(d). The relevant portions of the circular
are as follows:
“4.4 SUPPLY OF TANGIBLE GOODS FOR USE:
4.4.1 Transfer of the right to use any goods is leviable to
sales tax/VAT as deemed sale of goods [Article 366(29A)(d)
of the Constitution of India]. Transfer of right to use
involves transfer of both possession and control of the
goods to the user of the goods.
4.4.2 Excavators, wheel loaders, dump trucks, crawler
carriers, compaction equipment, cranes, etc., offshore
construction vessels & barges, geo-technical vessels, tug
and barge flotillas, rigs and high value machineries are
supplied for use, with no legal right of possession and
effective control. Transaction of allowing another person
to use the goods, without giving legal right of
possession and effective control, not being treated as
sale of goods, is treated as service.
16
4.4.3 Proposal is to levy service tax on such services
provided in relation to supply of tangible goods, including
machinery, equipment and appliances, for use, with no legal
right of possession or effective control. Supply of tangible
goods for use and leviable to VAT / sales tax as deemed
sale of goods, is not covered under the scope of the
proposed service. Whether a transaction involves
transfer of possession and control is a question of facts
and is to be decided based on the terms of the contract
and other material facts. This could be ascertainable
from the fact whether or not VAT is payable or paid.”
(emphasis supplied)
19 The above circular clarified that Section 65(105)(zzzzj) is applicable only to
those transactions where there is a supply of tangible goods for use, without the
transfer of possession or effective control to the recipient. This aspect has been
interpreted by various courts and tribunals. In the Bombay High Court decision in
Indian National Shipowners’ Association and Anr. v. Union of India and
others (“Shipowners”),12 the petitioners were engaged in providing services to
major exploration and production operators by supplying their various vessels
including offshore drilling rigs, offshore support vessels, harbour tugs, and
construction barges. The question before the Bombay High Court was whether,
prior to the introduction of Section 65(105)(zzzzj) in 2008, the petitioner could be
taxed on its services in relation to mining of mineral, oil, or gas under Section
65(105)(zzzy). In the present matter, we are not concerned with the merits of
Shipowners’, which was affirmed on appeal by this Court in Union of India v.
Indian National Shipowners’ Association and Anr.13 This Court explicitly
restricted itself to the interpretation of Section 65(105)(zzz) while leaving the
other observations on interpretation of the law, “open to be considered at length
12 (2009) 4 AIR Bom R 775. 13 2010 (14) SCC 438.
17
at an appropriate stage”.14 We note however, the analysis of Section
65(105)(zzzzj) of the Bombay High Court, where the High Court observed:
“38. Entry (zzzzj) is entirely a new entry. Whereas Entry
(zzzy) covers services provided to any person in relation to
mining of mineral, oil or gas, services covered by Entry
(zzzzj) can be identified by the presence of two
characteristics namely (a) supply of tangible goods
including machinery, equipment and appliances for use,
(b) there is no transfer of right of possession and
effective control of such machinery, equipment and
appliances. According to the members of the 1st petitioner,
they supply offshore support vessels to carry out jobs like
anchor handling, towing of vessels, supply to rig or platform,
diving support, fire fighting etc. Their marine construction
barges support offshore construction, provide
accommodation, crane support and stoppage area on main
deck or equipment. Their harbour tugs are deployed for
piloting big vessels in and out of the harbour and for
husbanding main fleet. They give vessels on time charter
basis to oil and gas producers to carry out offshore
exploration and production activities. The right of
possession and effective control of such machinery,
equipment and appliances is not parted with. [...]”
(emphasis supplied)
20 The taxable service is defined as a service which is provided or which is to
be provided by any person to another “in relation to supply of tangible goods”.
The provision indicates that the goods may include machinery, equipment or
appliances. The crucial ingredient of the definition is that the supply of tangible
goods is for the use of another, without transferring the right of possession and
effective control “of such machinery, equipment and appliances”. Hence, in order
to attract the definition of a taxable service under sub-clause (zzzzj), the
ingredients that have to be fulfilled are:
(i) The provision of a service;
14 2010 (14) SCC 438, para 7.
18
(ii) The service is provided by a person to another person;
(iii) The service is provided in relation to the supply of tangible goods,
including machinery, equipment and appliances;
(iv) There is no transfer of the right of possession;
(v) Effective control over the goods continues to be with the service
provider; and
(vi) The goods are supplied for use by the recipient of the service.
There is an element of service which is the foundation for the levy of the tax.
21 A GSA entered into by the respondent on 17 November 2008 with one of
its buyers (Polymer Industries) has been adverted to by the contesting parties as
a representative sample. Under the terms of the GSA, the respondent as the
seller agrees to sell and tender for delivery at the ‘Delivery Point’, gas in the
quantities, times and at the prices determined in accordance with it. Clause 2.1
stipulates that:
“2.1. The Seller agrees to sell and tender for delivery at the
Delivery Point, and the Buyer agrees to purchase and receive
at the Delivery Point and pay for Gas in quantities at the times
and at the prices determined in accordance with, and subject
to the terms and conditions of this Agreement.”
The expression ‘Delivery Point’ is defined thus:
“ “Delivery Point” means the flange or weld or agreed mark at
the downstream of the isolation valve located immediately
outside the Buyer’s premise as identified in Schedule 2.”
19
Clause 5.1 requires the seller to deliver gas to the buyer at the Delivery Point.
The seller is required to set up a gas pipeline to the metering station of the buyer
from the nearest distribution mains at the cost of the buyer:
“5.1. The seller shall deliver the Gas to the Buyer at the
Delivery Point in accordance with the terms of this
Agreement. Gas pipeline to the Buyer’s metering station
from nearest distribution mains would be constructed
and maintained by the Seller at the Buyer’s cost.”
(emphasis supplied)
Clause 5.3 states that the ‘Measurement Equipment’ is to be supplied, installed
and maintained by the seller at the cost of the buyer:
“5.3. The Measurement Equipment shall be supplied,
installed and maintained by the Seller at the Buyer’s cost.
Ownership of equipment will rest with AEL [respondent
herein] forever. Buyer shall provide free of cost adequate
land and power connection in its premise for the installation of
Measurement Equipment. Buyer shall pay for providing gas
pipeline connection including pipeline from distribution mains
upto the measurement equipment; and measurement
equipment to its unit as per the proposal submitted by the
Seller.”
(emphasis supplied)
Clause 5.4 provides that:
“5.4. Gas pipeline from nearest Distribution Mains to the
Measurement equipment shall be constructed and
maintained by the Seller at Buyer's cost. The Buyer agrees
to let the Seller or his authorised representative to supply,
construct, install commission and maintain the supply pipeline
from main distribution line upto the Measurement Equipment
and Measurement Equipment in its premises.
(emphasis supplied)
The Buyer’s Facilities and Seller’s Facilities are defined to include the
measurement equipment and pipelines and have been defined as follows:
20
“ “Buyers Facilities" means plant, machinery, measurement
equipment and other equipment from the Delivery Point
onwards necessary to receive Gas under this Agreement.”
“ “Seller’s Facilities” means the Seller’s pipelines, gas plants,
machinery, Measurement Equipment, other metering facilities
and other equipment necessary for flow control and the
processing, compression, measuring and testing of Gas to
enable delivery of Gas to the Buyer at the Delivery Point.”
Further, the expression ‘Measurement Equipment’ is defined as follows:
“ “Measurement equipment” means such main and subsidiary
meter, including apparatus, mains and pipes, as the Seller
considers necessary for the measurement and recording of
the volume in SCM and pressure in Kg/cm2 of Gas delivered
at the Delivery Point and for the safe operation of the Buyer’s
Facilities.”
Ownership of the measurement equipment continues to vest with the respondent
as per clause 5.3. The buyer is required to provide land and a power connection,
free of cost at its premises. The buyer has to pay for providing a gas pipeline
connection from the distribution mains up to the measurement equipment.
Gas is transported from the ‘Measurement Equipment’ by means of a pipeline
provided by the buyer as stipulated in Clause 5.5:
“5.5. Gas will be transported from the Measurement
equipment by means of a pipeline provided by the Buyer as
per the specifications and applicable standards provided by
the Seller and the same shall be maintained by the Buyer.
The Seller reserves the right to supply other Buyer’s before
the upstream range of measurement equipment installed at
its premises.”
Clause 5.6 clarifies that the buyer has no right to adjust, clean, handle, replace,
maintain, remove or modify the measurement equipment:
“5.6. The Buyer shall not have the right to adjust, clean,
handler, replace, maintain, remove or modify in any manner
measurement equipment at any time during the currency of
the Contract.”
21
Under clause 5.7 the buyer cannot lease, sublet or sell the measurement
equipment:
“5.7. The Buyer under no circumstances shall
sublet/lease/sell/create a charge over part or whole of
measurement equipment at any given time.”
Clause 5.10 provides that the seller has the right of entry to the measurement
equipment:
“5.10. The Seller or his authorized representative shall have
right of entry at all hours to the Measurement Equipment,
route of pipeline upto all consumption points and gas
consuming facilities inside the Buyer’s premises.”
Under clause 7.1, ‘title and risk’ in the gas passes from the seller to the buyer at
the Delivery Point. Clause 8.1 defines the expression ‘Daily Contract Quantity’
15.
Clause 9.2 of the agreement deals with measurement and calibration:
“9.2 Measurement and Calibration
9.2.1 Quantity of Gas supplied under this Agreement shall
be measured at the Delivery Point in SCM. The
measurement shall include all corrections in
installation practices recommended for accurate
metering of Gas by the American Gas Association
(AGA) Gas Measurement Committee report No. 3,7
and 8.
9.2.2 The Measurement Equipment shall be supplied,
installed, owned and maintained by the Seller at
the Buyer’s cost.
9.2.3 Working of the Measurement Equipment shall be
verified periodically by the Parties.
15 “8.1. Daily Contract Quantity
(a) “Daily Contract Quantity” or “DCQ” shall be equal to 100 SCM per day having approximately Gross
Calorific Value (GCV) of 9000 Kcal/scm.
(b) Provided further, if on any Day, the Buyer requires Gas in excess of Daily Contract Quantity, the seller
may supply the same subject to availability of gas with Seller and Seller’s Operational Flexibility.
(c) Supplier subject to the operational flexibility and availability of the gas supply the Daily Contract
Quantity however the Seller shall have the freedom to curtail, stop or interrupt the gas supply with prior
notice to the Buyer.
22
9.2.4 If the Buyer has any doubt as to the accuracy of
the Measurement Equipment, it shall
communicate the same to the Seller in writing and
request the Seller to either check or re-calibrate
the Measurement Equipment. The Seller shall
undertake such check/re-calibration of the
Measurement Equipment within fourteen (14) days of
receipt of such request. The cost of conducting the
checks/re-calibration shall be borne by the Buyer.
9.2.5 If the seller has any doubt about the proper working
of the Measurement Equipment, it may immediately
check the meter in presence of the Buyer’s
representative. In case it is established that the
existing Measurement Equipment is not working
satisfactorily, the same shall be replaced at the
Buyer’s cost.
9.2.6 If on carrying out the check/re-calibration of the
Measurement Equipment as aforesaid it is discovered
that either the percentage of inaccuracy exceed – 2%
(Two per cent) or that the Measurement Equipment is
out of service, the following procedure in order of
priority, whichever is feasible for arriving at the
computation of quantity of Gas during the period
between the last calibration and the present, shall be
followed:
(a) by correcting the error if the percentage of
error is ascertainable by calibration, tests or
mathematical calculation; or
(b) by estimating the volume of Gas delivered by
comparison with deliveries during the period
under similar conditions when the
Measurement Equipment was registering
accurately.
9.2.7 If at the time of carrying out the check of the
Measurement Equipment as above, it is discovered
that the error in the readings of the Measurement
Equipment exceeds- 2.0% the Measurement
Equipment shall be re-calibrated at Buyer’s cost.
9.2.8 Notwithstanding anything contained in this
Agreement, pending the result of any check/recalibration, the Buyer shall not withhold payments to
the Seller under this Agreement on this account.
However, the Buyer shall be entitled to lodge his
claim for refunds/adjustments, if any, depending upon
the final results of such check/re-calibration within a
period of fourteen (14) days of such check/re-
23
calibration. Such claim, if found correct by the Seller,
shall be adjusted against the subsequent invoice(s) of
supply of Gas.
9.2.9 Pending the resolution of any dispute, the Seller shall
produce the invoices on the basis of self-verification.”
(emphasis supplied)
The provisions for billing and payment are contained in clause 12. The relevant
portion is extracted below:
“12. Billing and Payment
12.1 Following the end of the Fortnight, the Seller shall
render to the Buyer a statement including the following details
for each Day of the previous Fortnight (hereinafter referred to
as the “Fortnightly Invoice”), which shall show in respect of
the previous Fortnight, along with the details of calculations:
(i) the DCQ for each Day of that Fortnight in SCM;
(ii) the aggregate quantity of Gas delivered by the Seller
in such Fortnight, in SCM and Gross Calorific Value
for the same;
(iii) the Weighted Average Gross Calorific Value (GCV) of
such Gas taken by the Buyer in such fortnight;
(iv) the amount payable by the Buyer to the Seller for the
quantifies of the Gas delivered during the Fortnight
equal to quantities of Gas delivered by the Seller in
SCM/Kcal as determined in (ii) above multiplied by
Contract Price prevailing for the Fortnight.
12.2 The Buyer shall within seven (7) days of the receipt of
the fortnightly invoice from the seller, pay to the seller
the amount mentioned in such invoice in the manner
to be specified by the Seller.
12.3. The Buyer agrees that, notwithstanding any dispute in
relation to any amount invoiced, it shall not be
withhold payment in accordance with the provisions of
this Section 12 of any amounts. After making full
payment of such invoice, the Buyer shall lodge the
claims with the Seller giving full particulars within a
period of fourteen (14) Days from the date of making
payment, and if such claims are found correct, the
Seller shall adjust the same against the next invoice.
It is further agreed that no interest will be payable by
24
the Seller on any such amount adjusted in the
subsequent invoices.”
Under clause 13, security for payment in the form of a cash deposit is required to
be maintained by the buyer equivalent to the DCQ16 multiplied by thirty and by
the contract price. If the seller draws upon the payment security, the buyer has to
make good the amount withdrawn.
Clause 14 of the Agreement further provides for the representations and
warranties of the buyer and seller. Clause 14.3 reads as follows:
“14.3 Buyer's Warranties and Undertakings
The Buyer warrants and undertakes to the Seller that
throughout the term of this Agreement:
a) the Buyer’s Facilities will be technically and operationally
compatible with the Seller's Facilities at the Delivery Point
and fit for purpose for off take of gas from the Delivery
Point;
b) the Buyer's Facilities will be maintained in good working
order and condition and so operated as to be compatible
with the fulfilment of the obligations of the Buyer under this
Agreement;…”
Under the above clause 14.3, the buyer warrants to maintain the “Buyer’s
Facilities”, which includes the ‘measurement equipment’, in good working order
and condition and technically and operationally compatible with the Seller’s
Facilities.
Under clause 16.4, if the buyer fails (otherwise than as a consequence of force
majeure or the seller’s default) to take fifty per cent or more of the cumulative
DCQ over 45 consecutive days, the seller is entitled to terminate the agreement.
16 “Daily Contract Quality”
25
22 The GSA is an agreement between the respondent and its purchaser for
regulating the terms on which gas is sold by the respondent. The agreement is of
a ‘take or pay’ genre. The buyer must lift the quantity contracted or pay for it. The
agreement provides for the supply of gas at the Delivery Point through gas
pipelines constructed from the distribution main to the measurement equipment.
Further, both the seller and the buyer have provided warranties for maintaining
the ‘measurement equipment’ in good working condition, in their respective
capacities. The measurement equipment, as has been re-iterated by the
respondent in the course of their arguments, is installed for the measurement and
recording of the volume and pressure of the gas delivered at the Delivery Point
and for the safe operation of the buyer’s facilities.
23 At the outset, it is clear from the provisions of the agreement, and it has
been admitted by both the parties, that there is no transfer of ownership or
possession of the pipelines or the measurement equipment (SKID equipment
equipment) by the respondent to its customers. Clause 5.3 of the agreement
specifically provides that the ‘Measurement Equipment’ is to be supplied,
installed and maintained by the seller at the cost of the buyer and that the
ownership of the equipment will rest with the respondent forever. Clause 5.6
further clarifies that the buyer has no right to adjust, clean, handle, replace,
maintain, remove or modify the measurement equipment. Clause 5.10
guarantees that the seller shall have the right of entry at all hours to the
Measurement Equipment and associated apparatus at the Buyer’s premises. The
pipelines are also part of the “Seller’s Facilities” under the agreement and are
26
constructed and maintained by the respondent at the cost of the customer. Thus,
the ingredient of not transferring the ownership, possession or effective control of
the goods under Section 65(105)(zzzzj) is satisfied.
24 The crux of the dispute is whether the supply of tangible goods – the SKID
equipment - is for the use of the purchaser. In determining as to whether the
provisions of Section 65(105)(zzzzj) are attracted, it is necessary to distinguish
between the rights and obligations of the respondent (as the seller of gas) and of
their purchasers, from the issue of whether the measurement equipment (SKID
equipment) is supplied for the use of the purchaser of gas, without transferring
the right of possession and effective control.
25 The purchaser of gas has an interest in ensuring the accuracy of billing
and regulation of supply. The respondent is interested in ensuring that it receives
payment for the quantity of gas which is contracted to be supplied to the
purchaser. The ‘SKID’ consists of regulators, valves, filters and the metering
equipment. The SKID equipment regulates and records supply. Under the terms
of the GSA, the obligation of the seller is to deliver gas to the buyer at the
Delivery Point. The gas pipeline from the nearest distribution main to the buyers’
metering station is constructed and maintained by the seller at the cost of the
buyer. The measurement equipment is supplied, installed and maintained by the
seller at the cost of the buyer, inspite of ownership of the equipment resting with
the respondent as the seller. The measurement equipment is installed and
maintained exclusively by the seller. Clause 5.6 indicates that the buyer has no
27
right to adjust, clean, handle, replace, maintain, remove or modify it in any
manner. Clause 5.10 guarantees the seller’s access to the Measurement
Equipment at the buyer’s premises at all hours. Ownership, control and
possession of the measurement equipment is with the respondent. The
measurement equipment comprises not only of electronic meters that are useful
for determining the quantity of gas supplied to the purchaser at the Delivery
Point, but also of isolation valves, filters and regulators that are crucial for
regulating the pressure of gas and ensuring safe operation of the buyer’s
facilities. In order to maintain the sanctity of the equipment, the agreement casts
the exclusive responsibility to install and maintain it on the respondent as the
seller. The terms of the GSA would indicate that the quantity of gas supplied is to
be measured at the Delivery Point. For this purpose, the measurement
equipment is supplied, installed, owned and maintained by the seller at the cost
of the buyer. The working of the measurement equipment is verified periodically
by the parties to the agreement. If the buyer doubts its accuracy, this has to be
communicated in writing to the seller, who alone is entitled to test, re-calibrate,
remove or modify it. Similarly, if the seller has any doubt about the proper
working of the measurement equipment it is entitled to check the meter in the
presence of the representatives of the buyer. If according to the seller, the
existing measurement equipment is not working satisfactorily it would be replaced
at the cost of the buyer. These provisions indicate that the supply, installation and
maintenance of the measurement equipment is exclusively carried out by the
seller. The buyer has contractual remedies against the seller in terms of the GSA.
These remedies to the buyer as a purchaser of gas are distinct from the issue as
28
to whether the equipment for which gas connection charges are recovered is
used by the buyer.
26 Under Section 65(105)(zzzzj), the taxable service is provided or to be
provided in relation to the supply of tangible goods for the use of another, without
transferring the right of possession and effective control. The expression “use”
has been defined in Black’s Law Dictionary:
“Use, n. Act of employing everything, or state of being
employed; application, as the use of a pen, or his machines
are in use. Also the fact of being used or employed habitually;
usage, as, the wear and tear resulting from ordinary use.
Berry-Kofron Dental Laboratory Co. v. Smith, 345 Mo. 922,
137 S.W. 2d 452, 454, 455, 456. The purpose served; a
purpose, object or end for useful or advantageous nature.
Brown v. Kennedy, Ohio Appellant. 49 N.E.2d 417, 418. To
put or bring into action or service; to employ for or apply to a
given purpose. Beggs v. Texas Dept. of Mental Health and
Mental Retardation, Tex. Civ. App., 496 S.W.2d 252, 254. To
avail oneself of; to employ; to utilize; to carry out a purpose or
action by means of; to put into action or service, especially to
attain an end. State v Howard, 221 Kan. 51, 557 P.2d 1280,
1281.
Non-technical sense. The “use” of a thing means that one is
to enjoy, hold, occupy or have some manner of benefit
thereof. Use also means usefulness, utility, advantage,
productive of benefit.”
27 The expression “use” does not have a fixed meaning. The content of the
expression must be based on the context in which the expression is adopted. The
use of an article may or may not result in a visible change in its form or
substance. Moreover, the nature of use is conditioned by the kind of article which
is put to use. Section 65(105) of the Finance Act, 1994 envisages myriad
interpretations of the expression “use”, in a variety of services such as
29
telecommunication,17 renting of immovable property,
18 and services related to art,
entertainment, and marriage.19 In the case of some articles, use may be signified
by a physical operation of the article by the person who uses it. In such a case,
actual physical use is what is meant by the supply of the goods for the use of
another. In the case of others, the nature of the goods supplied impacts the
character of the use to which the goods can be put. As an illustration, Section
65(105)(zzzze) of the Finance Act, 1994, seeks to tax services related to
information technology and interprets the “right to use” to include the “right to
reproduce, distribute, sell, etc”.20 This understanding of “use” differs from the
supply of tangible goods under Section 65(105)(zzzzj) at hand, where effective
control or possession is not ceded. Thus, physical operation is not the only or
invariable feature of use. As a corollary to the same, technical expertise over the
goods in question is not a sine qua non for determining the ability of the
consumer to use the good. Therefore, the expression “use” also signifies the
application of the goods for the purpose for which they have been supplied under
the terms of a contract.
28 The terms of the GSA indicate that the supply, installation, maintenance
and repair of the measurement equipment is exclusively entrusted to the
respondent as the seller. These provisions have been incorporated in the GSA to
ensure that a buyer does not calibrate or tinker with the equipment. It is an
incident of ownership and control being vested with the respondent. The purpose
of the SKID equipment and its utility, lie in its ability to regulate the supply and
17 Section 65(105)(zzzzb), Finance Act, 1994. 18 Section 65(105)(zzz-z), Finance Act, 1994. 19 Section 65(105)(zzzzr), Finance Act, 1994. 20 Circular D.O.F. No.334/1/2008-TRU, dated 29 February, 2008.
30
achieve an accurate verification of that which is supplied; in the present case the
supply of goods by the respondent to its buyers. This enures to the benefit of the
seller and the buyer. The seller is concerned with the precise quantification of the
gas which is supplied to the buyer. The buyer has an interest in ensuring the
safety of its facilities and that the billing is based on the correct quantity of gas
supplied and delivered under the GSA. To postulate, as did the Tribunal, that the
measurement equipment is only for the benefit of the seller in measuring the
quantity of the gas supplied would not be correct. The GSA is an agreement
reflecting mutual rights and obligations between the seller and the purchaser.
Both have a vital interest in ensuring the correct recording of the quantity of gas
supplied. Additionally, delivery of gas in a safe and regulated manner, enabled by
the SKID equipment, is an essential component of the GSA. The SKID equipment
subserves the contractual rights of both the seller and the purchaser of gas.
Indeed, without the SKID equipment there would be no gas supply agreement. In
fact, in the GSA, the buyer has also provided a warranty to ensure that the
“Buyer’s Facilities” remain technically and operationally compatible with the
“Seller’s Facilities”, both of which include the ‘measurement equipment’. This
warranty would not have been provided if the measurement equipment was not of
‘use’ to the buyer. The equipment is thus a vital ingredient of the agreement
towards protecting the mutual rights of the parties and in ensuring the fulfilment of
their reciprocal obligations as seller and buyer in regulating the supply of gas. As
an incident of regulating supply, it determines the correct quantity of gas that is
supplied. The obligation to supply, install and maintain the equipment is cast
upon the seller as an incident of control and possession being with the seller.
31
Section 65(105)(zzzzj) applies precisely in a situation where the use of the goods
by a person is not accompanied by control and possession. ‘Use’ in the context of
SKID equipment postulates the utilization of the equipment for the purpose of
fulfilling the purpose of the contract. Section 65(105)(zzzzj) does not require
exclusivity of use. The SKID equipment is an intrinsic element of the service
which is provided by the respondent, acting pursuant to the GSA, as a supplier of
natural gas to its buyers.
29 While interpreting the term ‘use’, the Tribunal in the impugned judgment
has relied on its decision in the case of Meru Cab Company Pvt. Ltd. v.
Commissioner of Central Excise, Mumbai21 (“Meru Cab”). Meru Cab involved
the transfer of a vehicle from a radio taxi operator to the driver, in turn to provide
a service to the passengers. We find that the reliance placed on Meru Cab is
misplaced as the factual context of the ‘use’ in the two cases is substantially
different. In present matter, the agreement to supply gas, and the measurement
equipment and pipelines only involves two parties - the respondent and the
ultimate customer. Having said that, we are not expressing any opinion on the
correctness of the decision in Meru Cab.
30 Thus, we are of the view that the supply of the pipelines and the
measurement equipment (SKID equipment) by the respondent, was of use to the
customers and is taxable under Section 65(105)(zzzzj) of the Finance Act 1994.
21 2016 (41) STR (444) (Tri-Mum).
32
31 Another aspect of the matter which requires to be set out is the contention
of the respondent that the gas connection charges are mainly in the nature of a
refundable security deposit which is returned to the customers in the event of the
connection being discontinued or terminated, depending on their usage, and are
not payment for a service provided by the respondent.
32 In the Show Cause Notice, the appellant stated that based on an
assessment of gas sale agreements and invoices, it found that the “gas
connection charges” were collected for “supply of pipes and measurement
equipment etc.”. The appellant also noted that the respondent had not issued any
deposit receipt for these charges nor had it mentioned that these charges are a
refundable amount in the invoices issued.
33 The respondent, in their reply dated 29 December 2009, stated that the
purpose of the collection of these charges was for safe-keeping of the meter by
the customers and the expense towards charges incurred on disconnection, if the
customer disconnects immediately after installation. The respondent stated that
according to the company policy, with respect to commercial and industrial
consumers, an amount for installation of equipment was collected depending on
the pressure of the gas and the size of the SKID equipment. Although these are
reflected as gas connection income, they are (according to the respondent)
mainly in the nature of refundable security deposits. In support of their argument
for industrial and commercial consumers, the respondent provided a copy of an
“internal note dated 13 July 2007” and a list of industrial customers to whom the
33
gas connection charges have been refunded. The internal note is extracted
below:
“Today we are supplying gas to more than 200 Industrial
customers at Ahmedabad & Vadodara. We are collecting Gas
Connection Charge upfront from the customers before
commencing gas supplies based on the customer load profile
(provided by customer).
Many of our customers have future expansion after
commissioning of the unit which is not covered in existing
meter connection. Further, few of the customers have also
requested for termination of the GSAs due to various issues.
In such cases, following amount shall be deducted from
the Gas Connection Charges and balance shall be
refundable.
(1) Upgradation of Load:
In this case the percentage of amount to be deducted
shall be as follows: -
Period from Commencement % of Amount to be
deducted
Earlier New
Revised
Upto 1 Year 10% 20%
Between 1st Year to 2nd Year 25% 50%
Between 2nd Year to 3rd Year 50% 75%
Between 3rd Year to 4th Year 75% 100%
(2) Terminating of Agreement:
In this case the percentage of amount to be deducted shall be
as follows:
Period from Commencement % of Amount to be
deducted
Earlier New
Revised
Upto 1 Year 10% 25%
Between 1st Year to 2nd Year 85% 50%
Between 2nd Year to 3rd Year 95% 75%
34
Between 3rd Year to 4th Year 95% 100%
(emphasis supplied)
The tabulation of the refund given to the industrial customers of the respondent
for 2008-09 is as follows:
34 The above data indicates that, contrary to the assertion of the respondent
that the amount collected as gas connection charges is refunded at the time of
discontinuation of the connection, the percentage which has been refunded to the
35
industrial customers has varied from case to case ranging from 25 per cent to
100 per cent. The Adjudicating Authority observed:
“…the gas connection charges are refunded, based on the
number of years of gas supply, when the gas connection
contract is discontinued. This clearly evidences that gas
connection charges in most of the cases are not refunded
completely. The said noticee not only earns interest on the
gas connection charges but also earns income by retaining
some portion of the gas connection charges at the time of
discontinuance of the contract. This is a very strange kind of
security deposit which is not only devoid of interest but also
on maturity the principal amount gets reduced. Moreover, in
reality it may never be refunded if the gas connection is not
discontinued. I have also seen the “Internal Note dated
13.7.2007” submitted by the said noticee along with his
written submission as “Annexure-A” and I find that the amount
to be deducted is 100% when there is “upgradation of load” or
“termination of agreement” between 3rd year to 4th year. This
clearly establishes that the liability of the said noticee to
refund the said “Gas Connection Charges” is only upto a
period of three years, after that no amount is to be refunded
and it eventually becomes income of the said noticee.
Moreover, till the time the said amount is partially refunded it
remains with the said noticee who is at liberty of using the
same in whatever manner he wants to. I have seen the
Annexure-B annexed with the written submission dated
4.1.2010 and find that the gas connection charges are
refunded to only 13 customers during the year 2008-09. This
indicates that effectively, the gas connection charges once
recovered from the customers remain with the said noticee
and in cases where it is refunded then also some amount is
retained by the said notice.”
35 With respect to the domestic consumers, the respondent, in their reply to
the Show Cause Notice, argued that under the PNGRB Network Tariff
Regulations 2008, entities such as the respondent are required to collect
refundable interest-free security deposits towards safe-keeping of the meter and
are to be refunded in full to the domestic PNG customer in case of a
disconnection. The respondent argued that the PNGRB Network Tariff
36
Regulations 2008 further provide that the amount collected as interest-free
refundable security deposit is to exist as a liability in their books of account. In
support of their contention, the respondent provided their Annual Report for the
financial year 2008-09 which depicts the performance in terms of income and
profitability. An extract of the report is provided below:
37
36 The above report provides that the respondent has treated an amount of
Rs. 5000/- per domestic consumer as refundable interest-free security deposit
amounting to Rs. 883.34 lacs. In assessing these rival contentions, the
Adjudicating Authority held that:
“…I find that the attempt of the said notice to align the
Finance Act, 1994, with the Petroleum and Natural Gas
Regulatory Board Regulations 2008, to determine the
taxability of a taxable event is not acceptable and goes in
vain. Taxability of a service is governed under Section
65(105) of the Finance Act, 1994 and is not determined under
any other Act or Regulations, unless and until the same is
specifically provided in the definition given under Section
65(105) of the Finance Act, 1994. The taxability of a service is
also not determined by the manner in which the Books of
Accounts are maintained….”
37 We find ourselves in agreement with the findings of the Adjudicating
Authority. The extent of the refund of gas connection charges collected from
industrial, commercial and domestic consumers by the respondent depends on
their usage. From the internal note dated 13 July 2007 and the tabulation of
customers provided above, it is evident that the percentage of funds refunded
varies from customer to customer, while the remaining amount is retained by the
respondent. In any case, as regards the domestic customers, no deposit receipts
have been provided and instead, the respondent has relied on the tabulation of
the refund of deposit to industrial consumers to support their contention. Thus,
the argument of the respondent that these gas connection charges collected from
industrial, commercial and domestic consumers constitute a refundable security
deposit is rejected.
38
38 Thus construed, we are of the view that the Adjudicating Authority was
correct in concluding that the buyer of gas is as interested as the seller in
ensuring and verifying the correct quantity of the gas supplied through the
instrumentality of the measurement equipment and the pipelines. Additionally, the
role of regulating pressure and ensuring the safety of supply of gas performed by
the measurement equipment is an essential aspect for the ‘use’ of the consumer.
The SKID equipment fulfils the description in Section 65(105)(zzzzj) of a taxable
service: service in relation “tangible goods” where the recipient of the service has
use (without possession or effective control) of the goods.
39 For the above reasons, we are of the view that the Tribunal was in error in
interfering with the findings and order of the Adjudicating Authority. The judgment
of the Tribunal shall accordingly stand set aside. The order of the Adjudicating
Authority is restored. The appeal is allowed in the above terms.
40 Pending application(s), if any, stands disposed of.
…….………….…………………...........................J.
[Dr. Dhananjaya Y Chandrachud]
…….…………………………...............................J.
[Indu Malhotra]
…….…………………………...............................J.
[K M Joseph]
New Delhi;
August 28, 2020.
