Tribunal Rules Free LNG Supply Not Taxable Consideration, Lifts Penalties

The Tribunal ruled in favor of the appellant, Petronet LNG Ltd, regarding the liability to pay service tax on the gross value of LNG supplied "free of cost" as a "consideration" for providing regasification services. The Tribunal held that the "allowed loss and consumption" clause in the agreement did not constitute consideration for services rendered and thus was not subject to service tax. Additionally, the penalty imposed on the Vice President of the appellant company under section 78A of the Finance Act, 1994, was set aside as there was no mens rea and the appellant had acted based on a legal interpretation. The Tribunal allowed the appeal and lifted the penalties imposed.

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Issues Involved:

1. Liability of the appellant to pay service tax on the gross value of LNG supplied "free of cost" as a "consideration" for providing regasification services.
2. Imposition of penalty on the Vice President of the appellant company under section 78A of the Finance Act, 1994.

Detailed Analysis:

1. Liability of the appellant to pay service tax on the gross value of LNG supplied "free of cost" as a "consideration" for providing regasification services:

The appellant, Petronet LNG Ltd, provides regasification services under agreements that include a clause for "allowed loss and consumption," which accounts for a certain percentage of LNG lost or consumed during the regasification process. The Principal Commissioner confirmed a demand for service tax on the value of this "free of cost" LNG, considering it as part of the "consideration" for the services provided.

The appellant argued that the "allowed loss and consumption" clause is a remission of performance, not a consideration for the services. They cited the Supreme Court's decision in *Jagad Bandhu Chatterjee v/s Smt. Nilima Rani* and *Commissioner of Service Tax v. Bhayana Builders*, which established that the cost of free supplies provided by the service recipient does not qualify as "consideration" for the service provided.

The Tribunal examined the relevant clauses of the Master Regasification Agreement and concluded that the "allowed loss and consumption" is a term of the agreement to account for inherent losses during the regasification process. This clause absolves the appellant from paying liquidated damages for the agreed-upon loss percentage. The Tribunal found that the "allowed loss and consumption" does not represent a quid pro quo for the services rendered and cannot be considered as "consideration" for the purpose of service tax.

The Tribunal also referred to section 67 of the Finance Act, 1994, which deals with the valuation of taxable services. It emphasized that "consideration" includes any amount payable for the taxable services provided. Since the agreement specified the regasification charges payable, this amount alone qualifies as "consideration" for the services. The Tribunal further noted that the Supreme Court's decision in *Bhayana Builders* clarified that free supplies provided by the service recipient cannot be included in the taxable value for service tax purposes.

The Tribunal rejected the Principal Commissioner's reliance on the statement of Sanjay Kumar, which suggested no loss of LNG during regasification. The Tribunal found that the statement was contrary to the agreement's terms and other statements from officers of the appellant and its customers, which confirmed inherent losses during regasification.

2. Imposition of penalty on the Vice President of the appellant company under section 78A of the Finance Act, 1994:

The Principal Commissioner imposed a penalty of Rs. 1,00,000 on Pankaj Wadhwa, Vice President of the appellant company, under section 78A of the Finance Act, 1994. The appellant argued that the penalty was unwarranted as there was no mens rea (intent to commit a wrongdoing). Pankaj Wadhwa had obtained a legal opinion stating that the "allowed loss and consumption" would not be subject to service tax.

The Tribunal set aside the penalty, noting that the demand itself had been set aside. The Tribunal found no basis for the penalty, given that the appellant had acted based on a legal interpretation of the provisions.

Conclusion:

The Tribunal concluded that the order dated 26 July 2016, passed by the Principal Commissioner, confirming the demand of service tax on the appellant and imposing penalties, could not be sustained. The Tribunal set aside the order and allowed the appeal, including the penalty imposed on Pankaj Wadhwa.

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