System Use Gas charges by LNG terminal operator included in taxable value of re-gasification services under Section 15 CGST Act

AAR Gujarat ruled that System Use Gas (SUG) charges levied by an LNG terminal operator on customers are includible in the taxable value of re-gasification services under Section 15 CGST Act. The Authority held that SUG charges, covering gas used for fuel, retained as gain, and flaring during re-gasification operations, constitute an indispensable component of the service cost. Since re-gasification encompasses the entire process from LNG unloading to delivery including storage and safety measures, SUG value cannot be excluded from taxable value and remains liable to GST.

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Issues Involved:
1. Whether the value attributable to System Use Gas (SUG) stipulated in the Agreement between the Applicant and Customers is subject to the levy of GST and therefore, liable to be included in the consideration for re-gasification services determined as per Section 15 of the CGST Act.

Detailed Analysis:

Scope of Re-gasification Services:
The scope of re-gasification services provided by M/s Shell includes:
- Receipt of LNG cargo/carriers at the Hazira port.
- Unloading of LNG from the carriers and its receipt at the terminal's receipt point.
- Storing the imported LNG in cryogenic tanks.
- Re-gasification of the LNG imported by the customers into RLNG.
- Delivery of RLNG to the customers at the delivery point.

Nature of System Use Gas (SUG):
M/s Shell argued that SUG represents process losses during re-gasification and should not be considered as consideration for the re-gasification services under the CGST Act. They cited industry practices and various reports to support that SUG is an internationally recognized concept for limiting risk associated with process loss.

Valuation Provisions Under GST:
Section 15 of the CGST Act indicates that the value of a supply shall be the transaction value, which is the price actually paid or payable for the supply where the supplier and the recipient are not related and the price is the sole consideration. Rule 27 of the CGST Rules provides methods to determine the value of supply when the consideration is not wholly in money.

Arguments and Evidence Presented:
1. Industry Practice and Reports: M/s Shell cited reports from M/s Ravi Energie Private Limited and Poten and Partners (Australia) Pty Limited to highlight that estimating losses (SUG) is a recognized industry practice.
2. Previous Legal Precedents: M/s Shell referenced the Tribunal's decision in the case of Petronet LNG Ltd., where it was held that SUG does not constitute consideration for re-gasification services.
3. Contract Law: M/s Shell argued that consideration must act as an inducement for the promisor to enter into the contract. In this case, SUG was not intended as consideration but as a pre-estimate of process losses.

Personal Hearing and Revenue’s Submission:
During the personal hearing, M/s Shell reiterated their submissions. It was revealed that in the pre-GST era, a Show Cause Notice was issued proposing to demand Service Tax on SUG, and M/s Shell settled the matter under the SVLDRS scheme by paying the service tax computed amount.

Authority’s Findings:
1. Usage of SUG: The Authority noted that SUG is used by M/s Shell for various purposes such as controlling terminal tank pressure, operating submerged combustion vaporizers, and during planned maintenance. This indicates that SUG is not merely a process loss but is used in the re-gasification process.
2. Measurement Uncertainties: M/s Shell admitted that there are always uncertainties and inaccuracies in the measurement of LNG, which can lead to both losses and gains.
3. Nexus with Re-gasification Service: The Authority found that SUG has a direct nexus with the re-gasification service supply, making it an indispensable component of the taxable value of re-gasification services.

Ruling:
1. Scope of Re-gasification Services: The scope includes allied, incidental, and ancillary services such as receipt of LNG carriers, unloading, temporary storage, and delivery of RLNG.
2. Inclusion of SUG in Taxable Value: SUG, which is used as fuel, for safety procedures, and maintenance, is a cost for the supplier (M/s Shell) and must be included in the cost of provision of re-gasification services. Therefore, the value of SUG is an indispensable part of the taxable value for re-gasification service supply and is liable to GST.

Conclusion:
The value attributable to System Use Gas (SUG) stipulated in the Agreement between M/s Shell and its customers is subject to the levy of GST and must be included in the consideration for re-gasification services as determined under Section 15 of the CGST Act.

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