TaxTMI 
TaxTMI 
2019 (10) TMI 960
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....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 terminal at Kochi in the State of Kerala. At its rega....
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....s. 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 Appellant to convert the quantity of LNG received from the cust....
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....0 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 Service". This was decided against the Appellant and the relev....
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....ovided 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 Appellant; v. Even if it is assumed that the customers made available the LNG as "free of cost material" for t....
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....upported 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 retained by the customer. In support of this contention, reliance has been placed on the decision of the Tribunal in BEE AM Industries Pvt. Ltd. v/s Commissioner of Central Excise & Service ....
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....n 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 with and subject to the terms and conditions of this Master Agreement and such Delivery Order. 3.2. PLL's Obligation Upon execution of relevant Delivery Order, PLL shall receive LNG at the Custody Transfer Point, undertake Regasification for PROCURER, tender for delivery, at the Delivery Point, RLNG to PROCURER, o....
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..... 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 Delivery Order, or if such Day is not a Business Day, the immediately following Business Day, during the Term, PLL will render or cause to be rendered to PROCURER, a signed invoice ("Invoice"), which shall show the following details (denominated in both MMSCM and MMBTU) for each Day during any Billing Period for such Delivery Order: (i) the quantity of LNG received at the Custody Transfer Point during such Billing Period (denominated in both CBM and MMBT....
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....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 execution of the relevant delivery order, the Appellant shall receive LNG at the Custody Transfer Point, undertake regasification for the procurer and deliver RLNG to the procurer at the Delivery Point. It also provides that the energy value of RLNG delivered to the procurer at the Delivery Point shall be equal to the energy value of LNG received by the Appellant at the Custody Transfer Point, reduced by the energy value of the "allowed loss and consumption". The Custody Transfer Point has been defined in the Agreement to mean the point at the unloading port, while the Delivery Point has been defined to mean the point where the RLN....
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....usiness 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 clause takes care of the LNG that may be lost during the regasification process, including during handling and/ or processing so as to absolve the Appellant from payment of liquidated damages, which otherwise the Appellant may have to pay on account of any deficiency in the supply of RLNG. The obligation of the Appellant under the Agreement is, therefore, to deliver the entire quantity of LNG which has been delivered by the customer to the Appellant, less the quantity agreed upon as "allowed loss and consumption". The price payable towards regasification charges with respect to each billing period is calculated at the regasification ra....
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....rvice 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 addition of service tax charged, is equivalent to the consideration; (iii) in a case where the provision of service is for a consideration which is not ascertainable, be the amount as may be determined in the prescribed manner. (2) Where the gross amount charged by a service provider, for the service provided or to be provided is inclusive of service tax payable, the value of such taxable service shall be such amount as, with the addition of tax payable, is equal to the gross amount charged. (3) The gross amount charged for the taxable service shall include any amount received towards the taxable service before, during or after provision of such servic....
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....ee 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 observed that it deals with waiver of contractual obligations. The observation are as follows:- "In India the general principle with regard to waiver of contractual obligations is to be found in s. 63 of the Indian Contract Act. Under that section it is open to a promise to dispense with or remit, wholly or in part, the performance of the promise made to him or he can accept instead of it any satisfaction which he thinks fit. Under the Indian law neither consideration nor an Agreement would be necessary to constitute waiver. This Court has already laid down in Waman Shriniwas Kini v. Ratilal Bhagwandas & Co.(1) that waiver is the abandonment of a right which normally everybody is at liberty to waive. "A waiver is no....
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....ction 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 amount charged and the service provided. Therefore, any amount charged which has no nexus with the taxable service and is not a consideration for the service provided does not become part of the value which is taxable under Section 67. The cost of free supply goods provided by the service recipient to the service provider is neither an amount "charged" by the service provider nor can it 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" 13. A plain meaning of the expression 'the gross amount charged by the service provider for such service provided or to be provided by him' would lead to the obvious conclu....
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....r 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 recipient, no case is made out that any credit notes or debit notes were issued or any book adjustments were made. Likewise, the words, 'any amount credited or debited, as the case may be', to any account whether called 'suspense account or by any other name, in the books of accounts of a person liable to pay service tax' would not include the value of the goods supplied free as no amount was credited or debited in any account. In fact, this last portion is related to the debit or credit of the account of an associate enterprise and, therefore, takes care of those amounts which are received by the associated enterprise for the services rendered by the service provider. 16. In fact, the definition of "gross amount charged" given in Explanation (c) to Section....
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....s 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 provided to the service recipient for the service rendered. 32. In view of the aforesaid decision of the Supreme Court in Bhayana Builders, "free of cost" LNG supplied by the customers to the Appellant cannot be included in the value of taxable service. 33. The Principal Commissioner, however, distinguished the aforesaid decision of the Supreme Court by making reference to the observation made by the Larger Bench of Tribunal in Bhayana Builders that the material supplied "free of cost" was not retained by builder but in the present case the quantity of LNG was retained by Appellant. The learned Authorized Representative of the Department has also emphasized that in this view of the matter, the Appellant would not be justified in placing reliance upon the decision of the Supreme ....
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....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 Bhayana Builders it would also not possible to take a view that if working premises have been provided rent-free, then would be a non-monetary consideration for the purpose of levy of the Service Tax. 37. What is also important to note is that the stipulation "allowed loss and consumption" is a condition of the contract and cannot be treated as a consideration for the contract entered into between the Appellant and the customer. Such a distinction has been noticed in a Goods and Service Tax ruling rendered by the Australian Taxation Office GSTR 2001/06 relating to non-monetary consideration. It was observed that the recipient of a supply may provide or make things available for the supplier to use in making the supply. This thing may not necessarily form "consideration" and in this context an....
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....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 contemplate loss of LNG during regasification process. 41. Pankaj Wadhwa, Vice President (Finance) of the Appellant Company gave a statement under section 14 of the Central Excise Act, 1944. He clearly stated that as per the terms and conditions of the Agreement, a certain percentage of LNG is lost during regasification and this "allowed loss and consumption" is initiated with the clients as per the industry practice. He also specifically stated that the quantity of LNG received free of cost is consumed, utilized and lost in the regasification. In response to a specific query having been put to him regarding the statement made by Sanjay Kumar, he stated that the percentage of "allowed loss and consumption" as provided in the Agreement is negotiated with the clients as per the industry practice. He also specifically stated that a certain quan....
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....r 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 Point that is consumed, utilized or that may be lost during the Re-gasification of such LNG Cargo; including during handling and/or processing of such LNG cargo/LNG quantities with M/s PETRONET acting as a Reasonable and Prudent Operator and which shall not be taken into account while determining PETRONET LNG‟s Supply Deficiency. As per Agreement dated 26.08.2009 the aforesaid certain percentage was 0.85% till 31.12.2011, which was change to 0.66% as per Amendment Side Letter "A" dated 07.03.2012 (effective from 01.01.2012). I submit herewith copies of the above Agreements. Ques.4: Whether your company have charged any cost for the aforesaid quantity of LNG retained by M/s PETRONET LNG during providing re-gasification services as mentioned in answer to the question no.3? Ans.4: No, our company have not charge any amount to M/s PETRONET towards aforesaid quantity of LNG retai....
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....tion 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 Appellant delivered that quantity of RLNG to M/s GAIL (India) Ltd. after deducting the percentage contemplated under the Agreement. He also stated that M/s Gail (India) Ltd. had not charged any amount to the Appellant for such quantity of LNG quantified under the "allowed loss and consumption". Similarly, Keyur Shah of M/s Gujarat State Petroleum Corporation Ltd. also stated that there was a Master Agreement with the Appellant and the Appellant delivered RLNG after deducting the "allowed loss and consumption", which in the Agreement was stipulated as 0.66%. He also stated that M/s Gujarat State Petroleum Corporation Ltd. had not charged any amount to the Appellant in regard to the LNG that was lost during regasification services. 48. The statements made by the Officers assume importance because it is the customers who would suffer if they were to ultimately receive lesser energy of LNG at the Delivery Point. It was, therefore, obligatory on the part of the Princ....