2020 (8) TMI 789 - SC - Service Tax

SKID Equipment Supply Taxable Service: Gas Connection Charges Considered as Payment

The court held that the supply of SKID equipment by the respondent constitutes a taxable service under Section 65(105)(zzzzj) of the Finance Act, 1994. ... Valuation - Supply of tangible goods service - Supply of piped natural gas - Interpretation of statute - charges collected by the respondent for supply of pipes and measuring equipment to its customers - period from 16 May 2008 to 31 March 2009 - applicability of the provisions of Section 65(105)(zzzzj) of the Finance Act, 1994 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? HELD THAT:- 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 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 - The applicability of Article 366(29-A)(d) was discussed in a decision of this Court in BHARAT SANCHAR NIGAM LTD. (BSNL) VERSUS UNION OF INDIA [2006 (3) TMI 1 - SUPREME COURT]. In BSNL, the Court held that the purpose of Article 366(29A)(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’ - 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 THE GREAT EASTERN SHIPPING CO. LTD. VERSUS STATE OF KARNATAKA & OTHERS [2019 (12) TMI 225 - SUPREME COURT] considered whether the transfer of a vessel under a charter party agreement was a ‘deemed sale’, subject to sales tax - the conclusion reaced was 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. 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 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. 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 - 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. 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”. 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. Thus, 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. 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. Tribunal was in error in interfering with the findings and order of the Adjudicating Authority - Appeal allowed. Issues Involved:1. Interpretation and applicability of Section 65(105)(zzzzj) of the Finance Act, 1994.2. Whether the supply of pipes and measurement equipment (SKID equipment) constitutes a taxable service under Section 65(105)(zzzzj).3. Whether the gas connection charges collected are refundable security deposits or consideration for a service.Detailed Analysis:1. Interpretation and Applicability of Section 65(105)(zzzzj) of the Finance Act, 1994:Section 65(105)(zzzzj) defines taxable service as the supply of tangible goods for use without transferring the right of possession and effective control. The court noted that this provision was introduced to tax services where the right to use goods is provided without transferring possession or control, distinguishing it from a deemed sale under Article 366(29-A)(d) of the Constitution, which involves a transfer of the right to use goods.2. Supply of Pipes and Measurement Equipment (SKID Equipment) as a Taxable Service:The respondent installs SKID equipment at customers' sites to regulate and measure the supply of PNG. The equipment remains under the respondent's ownership and control. The court examined whether this arrangement constitutes a service under Section 65(105)(zzzzj).The court noted that:- The SKID equipment is installed and maintained by the respondent at the customer's cost.- The customer has no right to adjust, clean, handle, replace, maintain, remove, or modify the equipment.- The equipment's purpose is to ensure accurate billing and safe operation of the customer's facilities.The court concluded that the supply of SKID equipment is for the customer's use, as it is essential for regulating and measuring the gas supply, which benefits both the seller and the buyer. Thus, the supply of SKID equipment falls under the taxable service defined in Section 65(105)(zzzzj).3. Gas Connection Charges as Refundable Security Deposits or Consideration for a Service:The respondent argued that gas connection charges are mainly refundable security deposits. However, the court found that:- The percentage of refunds varied, and in many cases, the charges were not fully refunded.- No deposit receipts were issued, and the charges were not consistently treated as refundable in the respondent's financial records.The court rejected the respondent's contention, concluding that the gas connection charges are consideration for the service of supplying and installing the SKID equipment, not merely refundable deposits.Conclusion:The court held that the supply of SKID equipment by the respondent is a taxable service under Section 65(105)(zzzzj) of the Finance Act, 1994. The gas connection charges collected by the respondent are not refundable security deposits but consideration for the service provided. The Tribunal's decision was set aside, and the order of the Adjudicating Authority was restored.