TaxTMI 
TaxTMI 
2019 (10) TMI 960
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....esident of the Appellant. 3. The Appellant regasifies Liquefied Natural Gas ^LNG owned by customers in terms of Agreements which also contain a clause relating to "allowed loss and consumption" under which a certain percentage of LNG made available to the Appellant by the customers is understood to be lost/consumed in performing the regasification services. The Appellant discharged service tax liability on the amount received for regasification services, but the Revenue proposed to levy service tax on the value of such pre-fixed quantum of LNG identified towards "allowed loss and consumption" on the ground that such "free of cost" supplies of LNG by the customers should have formed part of the "consideration" received by the Appellant and should be included in the taxable value for payment of service tax. This demand proposed in the show cause notice was confirmed by the Principal Commissioner. It is this issue that has come up for consideration in this Appeal. 4. The Appellant had set up the first LNG receiving and regasification terminal in India at Dahej in the State of Gujarat with a capacity of 10 million metric tons per annum. The Appellant also set up another LNG termi....
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....nverts into RLNG and evaporates, which results in loss. Conversion of LNG into RLNG is a natural and inevitable process, which can be reduced only by maintaining the desired temperature and pressure levels. Such naturally converted RLNG is called "Boil Off Gas". Technologies have been developed to trap and utilize the Boil Off Gas to contain the losses to the extent possible. 7. The LNG operation chain consists of several interconnected elements namely liquefaction, storage, loading, shipping, unloading, regasification and distribution network. It is stated that tolling activities of the Appellant extend from the custody transfer point i.e. receipt of shipped LNG of the customers from the vessel into the regasification plant to entry of RLNG into distribution pipeline system or other modes of conveyance. Typically, storage tanks are located at the receiving terminals to store the LNG prior to regasification. For this purpose, the Appellant claims to follow the internationally accepted best practices. Since the arrangement with the customers in the Agreements is for supplying the same energy value of RLNG as that of LNG received by the Appellant, it is incumbent upon the Appellan....
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....8-2009 to 2011-12 and a Demand Cum Show Cause Notice dated 10 December, 2014 was issued to the Appellant demanding service tax of Rs. 14,16,10,419/- by invoking the extended period of five years under the proviso to section 73(1) of the Finance Act, 1994 ^The Act. with interest u/s 75 and penalties u/s 77 and 78 of the Act. A penalty was also proposed on Pankaj Wadhwa as Vice President of the Appellant under section 78A of the Act. 11. The Appellant filed a reply to the show cause notice on 24 December, 2014. The Principal Commissioner confirmed the demand of service tax of Rs. 12,68,50,874/- for the period April 2009 to June 2014 with interest and imposed penalties of Rs. 6,93,61,308/- u/s 78 and Rs. 10,000 u/s 77 of the Act on the Appellant. A further penalty of Rs. 1,00,000/- was imposed on Pankaj Wadhwa u/s 78A of the Act. 12. The first and the most important issue examined by the Principal Commissioner was whether the Appellant was liable to pay service tax for the period commencing April, 2009 upto June, 2014 on the gross value of LNG supplied "free of cost" as a "consideration" towards providing regasification services rendered under the category of "Business Auxiliary....
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.... and consumption" is not in the nature of a consideration for the services of regasification as provided by the Appellant. In this connection reliance has been placed on the decision of the Supreme Court in Jagad Bandhu Chatterjee v/s Smt. Nilima Rani (1969) 3 SCC 445; iii. The charge of service tax under section 66B of the Act is on the value of all services provides or agreed to be provided in the taxable territory by one person to another. The definition of "consideration" under the India Contract Act read with the definition of "consideration" under the Act establishes that an amount will qualify as "consideration" if it has been agreed between the parties that such amount is payable for the services provided, thereby providing a direct link between the services provided and the amount payable; iv. The parties to a contract clearly agreed upon the price payable for the services of regasification. Thus, it is this amount alone which qualifies as "consideration" for the services of regasification and which is leviable to service tax. The concept of "allowed loss and consumption" does not represent any quid pro quo for the regasification services rendered by the ....
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....rvice tax. This was based on an interpretation of the legal provisions. 14. Shri R.K. Majhi, learned Authorized Representative of the Department has, however, supported the impugned order and has made the following submissions:- (i) The order of the Commissioner that has been assailed in this Appeal is a well reasoned order and does not call for any interference; (ii) The LNG that is retained and used for regasification purpose free of cost is a kind of "consideration" for providing re-gasification service; (iii) LNG is utilized in the plant to run the Turbine Generator as well as for other purpose in extreme winter considerations as is clear from the various statements made by officers of the Appellant. The Principal Commissioner, therefore, committed no illegality in holding that LNG gas supplied free of cost to the Appellant is a non-mandatory consideration; (iv) The decision of the Larger Bench of the Tribunal in Bhayana Builders (P) Ltd. V/s Commissioner of Service Tax, Delhi 2013 (32) STR 49 (Tri.-LB) is based on the principle that the title of the goods remains with the service recipient, whereas in the present case the title is not ret....
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....ustody Transfer Point that is consumed, utilized, or that may be lost during the Regasification of such LNG; including during handling and/or processing, of such LNG Cargo/LNG quantities with PLL acting as a Reasonable and Prudent Operator and which shall not be taken into account while determining PLL‟s Supply Deficiency. ----------------- "Regasification" means : (a) reception by PLL of LNG Ships at the Unloading Port; (b) receipt by PLL of LNG delivered by LNG Ship for and on behalf of the PROCURER at the Custody Transfer Point; (c) storage and regasification of such LNG at PLL‟s Facilities; and (d) transportation and delivery of RLNG by PLL to PROCURER at Delivery Point, in accordance with the terms of this Master Agreement and relevant Delivery Order and derivations of "Regasification" shall be construed accordingly. -------------------- 3 OBLIIGATIONS 3.1. PROCURER's Obligation Upon execution of relevant Delivery Order, PROCURER shall deliver LNG to PLL at the Custody Transfer Point, receive RLNG at the Delivery Point and pay for Regasification or for its Pay For If Not Used obligation, in accordance w....
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....mount equal to the sum of: (a) the Regasification Charge in relation to such quantity of RLNG taken by PROCURER (as described in Article 12.2); and (b) Taxes and Duties. For the avoidance of doubt, it is clarified that the charge in respect of any Use or Pay Deficiency shall be determined in accordance with Article 15.1 and shall be in addition to the charges described in Article 12.1. 12.2. Regasification Charges Regasification Charges shall mean the charges payable by PROCURER for Regasification undertaken by PLL for PROCURER in relation to the RLNG Quantities taken by PROCURERE pursuant to this Master Agreement and relevant Delivery Order. The Regasification Charges with respect to each Billing Period shall be calculated at the Regasification Rate multiplied by the total MMBTU of RLNG taken by PROCURER at the Delivery Point during such Billing Period. 13. BILLING AND PAYMENT 13.1. Billing (a) Invoices Not later than the 18th Day of each calendar month and 3rd day of the immediately following month in which PLL undertakes Regasification for PROCURER pursuant to this Master Agreement and relevant Deli....
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....aken by PROCURER or that could not be delivered by PLL due to Force Majeure; PLL will make best endeavour to deliver the quantities equivalent to the PLL‟s Supply Deficiency to the PROCURER at the earliest. (b) Liquidated Damages In the event of occurrence of any PLL‟s Supply Deficiency calculated under this Article 15.3, PLL shall pay the liquidated damages which shall be the product of: (a) PLL‟s Supply Deficiency; and (b) 100% of the Regasification Rate (such product being referred to as "Liquidated Damages"), as set out in the relevant Delivery Order. " 16. A perusal of clause 3 of the aforesaid Agreement indicates that it deals with obligations of both the customer and the Appellant. Whereas clause 3.1 deals with the procurer‟s (customer‟s) obligation and provides that upon execution of the delivery order the procurer shall deliver LNG to the Appellant at the Custody Transfer Point and receive RLNG at the Delivery Point and make payment for regasification in accordance with and subject to the terms and conditions of the master Agreement, Clause 3.2 deals with the obligations of the Appellant and provides that upon exe....
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....h Billing period. 18. The case of the Department, as set out in the demand cum show cause notice, is that the LNG received "free of cost" by the Appellant from the customers for regasification of LNG is a non-monetary consideration for providing a taxable service and so its value has to form part of the taxable value, but the Appellant did not include this value and did not pay service tax resulting in short payment of service tax. 19. It has, therefore, to be determined whether the value of LNG received by the Appellant free of cost is required to be included in the taxable value for the payment of service tax under the head "Business Auxiliary Service". 20. According to the Appellant, there are certain unavoidable factors during the entire period of regasification that result in loss of LNG, which loss is recognized internationally and is a part of established industry practice. It is in order to deal with such a loss that the Appellant and the customers namely Gujarat State Petroleum Ltd, Gas Authority of India Ltd. and Bharat Petroleum Corporation Ltd. specifically dealt with the concept of "allowed loss and consumption" ranging from 0.66% to 1% in the Agreements. This....
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....nsidered as a non-monetary consideration for the regasification service. According to the Appellant, the "allowed loss and consumption" is effectively a remittance of the performance as agreed upon between the parties and is not in the nature of a "consideration" for the service of regasification. 23. The submission of learned Counsel for the Appellant deserves to be accepted. Section 66 of the Act provides that there shall be levied a tax called service tax at the rate of 12% of the value of taxable services referred to in various sub-clauses of section 65(105). Section 67 of the Act deals with valuation of taxable service for charging service tax and is as follows:- "67(1) (1) Subject to the provisions of this Chapter, where service tax is chargeable on any taxable service with reference to its value, then such value shall,- (i) in a case where the provision of service is for a consideration in money, be the gross amount charged by the service provider for such service provided or to be provided by him; (ii) in a case where the provision of service is for a consideration not wholly or partly consisting of money, be such amount in money as, with the a....
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....once it was agreed in the Agreement that the Appellant would receive a certain price for the services of regasification, it is this amount alone which would qualify as "consideration" for the services of regasification. The "allowed loss and consumption" would not represent a quid pro quo for the regasification services rendered by the Appellant. In fact, "allowed loss and consumption" is a stipulation contained in the Agreement between the parties to remit performance of the obligation of regasification in relation to the percentage of the LNG agreed upon as "allowed loss and consumption". 25. In this connection reference can be made to section 63 of the Indian Contract Act, 1872 that provides that a promisee may dispense with or remit performance of promise and it is as follows :- "63. Promisee may dispense with or remit performance of promise.- Every promisee may dispense with or remit, wholly or in part, the performance of the promise made to him, or may extend the time for such performance, or may accept instead of it any satisfaction which he thinks fit. " 26. Section 63 of the Contract Act was examined by the Supreme Court in Jagad Bandhu Chatterjee and it was....
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....value between the service provider and the service recipient. The word "gross" is only meant to indicate that it is the total amount charged without deduction of any expenses. Merely by use of the word "gross" the Department does not get any jurisdiction to go beyond the contract value to arrive at the value of taxable services. Further, by the use of the word "charged", it is clear that the same refers to the amount billed by the service provider to the service receiver. Therefore, in terms of Section 67, unless an amount is charged by the service provider to the service recipient, it does not enter into the equation for determining the value on which service tax is payable. b. The amount charged should be for "for such service provided": Section 67 clearly indicates that the gross amount charged by the service provider has to be for the service provided. Therefore, it is not any amount charged which can become the basis of value on which service tax becomes payable but the amount charged has to be necessarily a consideration for the service provided which is taxable under the Act. By using the words "for such service provided" the Act has provided for a nexus between the....
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....arged". The observations of the Supreme Court are as follows:- "15. It was argued that payment received in 'any form' and 'any amount credited or debited, as the case may be...' is to be Civil Appeal Nos. 1335-1358 of 2015 with Ors. Page 18 of 26 included for the purposes of arriving at gross amount charges and is leviable to pay service tax. On that basis, it was sought to argue that the value of goods/materials supplied free is a form of payment and, therefore, should be added. We fail to understand the logic behind the aforesaid argument. A plain reading of Explanation (c) which makes the 'gross amount charges' inclusive of certain other payments would make it clear that the purpose is to include other modes of payments, in whatever form received; be it through cheque, credit card, deduction from account etc. It is in that hue, the provisions mentions that any form of payment by issue of credit notes or debit notes and book adjustment is also to be included. Therefore, the words 'in any form of payment' are by means of issue of credit notes or debit notes and book adjustment. With the supply of free goods/materials by the service recipien....
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....determining the value on which service tax is payable. It also emphasises that the cost of "free supply of goods" provided by the service recipient to the service provider is neither an amount charged by the service provider nor it can be regarded as a consideration for the service provided by the service provider. In fact it has no nexus whatsoever with the taxable services for which value is sought to be determined. The Supreme Court also made it clear that sub-section (3) section 67 (1) of the Act removes any doubt by clarifying that the gross amount charged for the taxable service shall include the amount received towards the taxable service, during or after provision of such services, implying thereby that where no amount is charged, it cannot be included in material/goods which are supplied by the service recipient. The Supreme Court also examined the scope of Explanation (c) to sub-section (4) of section 67(1) of the Act and observed that it only provides for the modes of the payment of book adjustments and it does not expand the meaning of the term "gross amount charged" to enable the Department to ignore the contract value or the amount actually charged by the service prov....
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....l before the Supreme Court and decision of the Supreme Court in Bhayana Builders does not make any reference to retention or non retention of the material supplied "free of cost". It also needs to be noted that certain percentage of LNG is lost during regasification process, as is clear from the clause dealing with "allowed loss and consumption". In any view of the matter, this was not the sole reason given by the Larger Bench as there are specific findings recorded by the Larger Bench in the other paragraphs of the order. In this context it would also be appropriate to refer to clause 4 of the Agreement which specifically provides that the Appellant shall not have, or otherwise acquire, in any manner whatsoever, any title to LNG received by it at the Custody Transfer Point or RLNG delivered at the Delivery Point. 36. Learned Authorized Representative of the Department placed reliance upon a decision of the Tribunal in BEE AM Industries. In the first instance, the decision of the Larger Bench of the Tribunal in Bhayana Builders that was rendered in 2013, before the decision in BEE AM Industries, but it was not considered. Secondly, in view of the decision of the Supreme Court in....
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....consideration for Eddie's supply." 38. In this view of the matter also, the "allowed loss and consumption" will not form part of the "consideration" for the purpose of levy of service tax. 39. The Principal Commissioner has, however, relied heavily on the statement made by Sanjay Kumar, Chief Manager Operation of the Appellant to conclude that no loss of LNG takes place during regasification. Sanjay Kumar stated that the plant is designed in such a way that there is no loss of LNG during regasification process and that natural gas processed out of LNG is consumed to run the Gas Turbine Generator as well as in extreme winter to run the Submerged Combustion Vaporizer. It is for this reason that the Principal Commissioner concluded that the Appellant retained a part of LNG supplied free of cost for regasification services for non-monetary consideration. 40. The Principal Commissioner, failed to take into consideration the statement made by the other officers of the Appellant and the relevant clauses of the Agreement that clearly contemplate "allowed loss and consumption". The statement of Sanjay Kumar cannot be read de hors the terms of the Agreement which clearly contemp....
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....he period 2009-10 to 2014-15 (up to June 2014). Ans.1: Our Company M/s Gail India Ltd. have imported total 49 LNG Cargoes at and regasified the same from M/s PETRONET LNG Terminal, Dahej during the period 2009-10 to 2014-15 (up to June 2014), I submit herewith list of the LNG Cargoes as detailed in Annexure-I along with the copies of the Bills of Entry for import of LNG at M/s PETRONET LNG Terminal, Dahej. Ques.2: After re-gasified of the above consignment of LNG how much quantity of the RLNG have been delivered to your company? Ans.2.: Our company have entered in to a Master Re-gasified Agreement with M/s PETRONET LNG Ltd. dated 26.08.2009 alongwith subsequent Amendment Side Letters 'A", "B" and "C". As per the Agreement, after deduction of 'Allowed Loss and Consumption" M/s PETRONET LNG Ltd. have delivered the remaining quantity of RLNG to our company. Ques.3: Please define the "Allowed Loss and Consumption"? Ans.3: As per the Agreement "Allowed Loss and Consumption" means certain percentage of each LNG Cargo/ quantities in each LNG Cargo (calculated in energy terms) delivered by our company to M/s PETRONET at the Custody Transfer Poin....
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....) delivered by our company to M/s PETRONET at the Custody Transfer Point that is consumed, utilized or that may be lost during the Re-gasification of such LNG; including during handling and/or processing of such LNG cargo/LNG quantifies with M/s PETRONET. Ques.5: Whether your company have charged any cost for the aforesaid quantity of LNG retained by M/s PETRONET LNG Ltd. during providing re-gasification services? Ans.5: No, our company have not charged any amount to M/s PETRONET LNG Ltd. towards aforesaid quantity of LNG retained by them. Ques.6: Whether M/s PETRONET LNG Ltd. have included the cost of the LNG supplied free of cost by your company while issuing invoices for re-gasification services and charged Service Tax on the cost of the LNG supplied free of cost? Ans.6: No, M/s PETRONET LNG Ltd. have not included the cost of the quantity of LNG retained by them while charging Service Tax in the invoices for Regasification Services." 47. It would, therefore, be seen that Subhandhu Sinha of M/s GAIL (India) Ltd. clearly stated that there was a Master Agreement in which there as a clause relating to "allowed loss and consumption" and the Appe....