TaxTMI 
TaxTMI 
2020 (8) TMI 789
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.... measuring equipment to its customers under Section 65(105)(zzzzj) of the Finance Act, 1994. This appeal rests on the interpretation and applicability of the provisions of Section 65(105)(zzzzj) of the Finance Act, 1994. 2. The respondent is in the business of distributing natural gas - Compressed Natural Gas (CNG) and Piped Natural Gas (PNG) - to industrial, commercial, and domestic consumers. Among other purposes, industrial consumers use PNG for manufacturing operations. Domestic and commercial consumers use PNG for cooking, power supply and air-conditioning. In order to facilitate the distribution of PNG to industrial, commercial and domestic consumers through pipes, the respondent installs an equipment described as 'SKID' at their customers' sites. The SKID equipment consists of isolation valves, filters, regulators and electronic meters. The equipment regulates the supply of PNG being distributed and records the quantity of PNG consumed by the customer, which is then used for billing purposes. The respondent enters into an agreement - the Gas Sales Agreement (GSA) - with consumers to whom gas is supplied by it. 3. The manufacture of CNG falls under Chapter Sub-Heading 2....
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....) The equipment is installed at the location of the customer without the transfer of ownership and possession; and the respondent retains the right to use the equipment; (iv) The arrangement between the respondent and its customer provides for the supply of gas, for which measurement equipment (the SKID equipment), is installed at the cost of customers at their premises for the purpose of billing; (v) The equipment is used by the respondent for its own purposes and the customer does not use the measurement equipment; (vi) Under the GSA, the right to adjust, clean, handle, replace, maintain, remove or modify the equipment is conferred upon the respondent. The equipment is used by the respondent and the customer does not buy or use the equipment; (vii) Under the GSA, the respondent has a right of entry at all hours to the measurement equipment to a pipeline upto all consumption points and gas consuming facilities inside the buyer's premises; (viii) The equipment is used only for metering and billing so as to not invite any dispute or objection from the customers; and (ix) The amount which is collected from the customer is in the f....
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.... "The expression "use" does not mean that the recipient has to personally and physically use the equipment all the time. It broadly refers to the direct or indirect use whether personally or through anybody else and meant to serve the intended purpose of the goods. The contention of the said noticee that they use the "Measurement Equipment" which are installed for their own benefits and purposes is misplaced. Accuracy in billing is as much a concern of the buyer of gas as is of the seller and hence, he gets it installed at his own cost and therefore working of the "Measurement Equipment" is verified periodically by the buyer as well as the seller as agreed by both in the Agreement." (emphasis supplied). 6. The order also noted that the entirety of the gas connection charges collected at the time of installing the connection are not refunded at the time of discontinuation or termination. The Adjudicating Authority allowed the respondent to claim the benefit of cum-tax value and reduced the demand for service tax from Rs. 2,83,46,411/- to Rs. 2,52,73,526/-. Penalties were imposed under Sections 77 and 78 of the Finance Act 1994. 7. The respondent assailed the order of adjudi....
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....uch concerned about the accuracy of the billing as the supplier of gas. The measurement equipment enures to the benefit of the buyer for the purpose of verifying the correctness of the charges levied based on the quantity of gas consumed; (vi) Though the gas connection charges which are initially recovered are claimed to be refundable, the quantum of refunds may vary from buyer to buyer and the data which was produced by the respondent indicates that in several cases full refunds have not been made; and (vii) The CBEC circular No. 334/1/2008-TRU dated 29 February 2008 has clarified that transactions that enable usage of goods without transferring the right to use, are in the nature of a service under Section 65(105)(zzzzj) and not sale under Article 366(29-A)(d) of the Constitution of India. Since the respondent has not paid VAT for the charges collected on supply of pipelines and the measurement equipment, this transaction must be treated as a service. 10. The ASG submitted that the use of the SKID equipment is not merely by the respondent as the seller of gas but by the buyer as well for the purpose of verifying the accuracy of billing. The decision of the Tr....
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.... nor is there any element of service in the supply of the metering equipment. The equipment is installed by the respondent as a seller of gas and is not used by the buyer. 12. The question that arises for our consideration is 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. While assessing the merits of the rival submissions, it is necessary to interpret the provisions of Section 65(105)(zzzzj). 13. Section 65(105)(zzzzj) of the Finance Act 1994 provides for taxability of supply of tangible goods for use, without transferring right of possession and effective control over such goods, as a 'taxable service'. Section 65(105)(zzzzj) of the Finance Act, 1994 reads as follows: "65(105) "taxable service" means any service provided or to be provided- xx xx xx (zzzzj) to any person, by any other person in relati....
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....d be available to the transferee; d. for the period during which the transferee has such legal right, it has to be the exclusion to the transferor; this is the necessary concomitant of the plain language of the statute viz. a "transfer of the right to use" and not merely a licence to use the goods; e. having transferred the right to use the goods during the period for which it is to be transferred, the owner cannot again transfer the same rights to others." (emphasis supplied) 16. 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 Great Eastern Shipping Company Limited. v. State of Karnataka and others 2020 (3) SCC 354., considered whether the transfer of a vessel under a charter party agreement was a 'deemed sale', subject to sales tax. The Court, after analysing the terms of the charter party agreement, h....
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....umption of goods, in as much as they both satisfy human needs. All India Federation of Tax Practitioners v. Union of India, (2007) 7 SCC 527, para 4. This Court, in Association of Leasing and Financial Service Companies v. Union of India (2011) 2 SCC 352., had noted: "38...Today with technological advancement there is a very thin line which divides a "sale" from "service". That, applying the principle of equivalence, there is no difference between production or manufacture of saleable goods and production of marketable/saleable services in the form of an activity undertaken by the service provider for consideration, which correspondingly stands consumed by the service receiver. It is this principle of equivalence which is inbuilt into the concept of service tax under the Finance Act, 1994. That service tax is, therefore, a tax on an activity. That, service tax is a value added tax. The value addition is on account of the activity which provides value addition...Thus, service tax is imposed every time service is rendered to the customer/client...Thus, the taxable event is each exercise/activity undertaken by the service provider and each time service tax gets attracted." (e....
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....reted by various courts and tribunals. In the Bombay High Court decision in Indian National Shipowners' Association and Anr. v. Union of India and others (2009) 4 AIR Bom R 775. ("Shipowners"), the petitioners were engaged in providing services to major exploration and production operators by supplying their various vessels including offshore drilling rigs, offshore support vessels, harbour tugs, and construction barges. The question before the Bombay High Court was whether, prior to the introduction of Section 65(105)(zzzzj) in 2008, the petitioner could be taxed on its services in relation to mining of mineral, oil, or gas under Section 65(105)(zzzy). In the present matter, we are not concerned with the merits of Shipowners', which was affirmed on appeal by this Court in Union of India v. Indian National Shipowners' Association and Anr. 2010 (14) SCC 438. This Court explicitly restricted itself to the interpretation of Section 65(105)(zzz) while leaving the other observations on interpretation of the law, "open to be considered at length at an appropriate stage". 2010 (14) SCC 438, para 7. We note however, the analysis of Section 65(105)(zzzzj) of the Bombay High Court, where the....
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....by the respondent on 17 November 2008 with one of its buyers (Polymer Industries) has been adverted to by the contesting parties as a representative sample. Under the terms of the GSA, the respondent as the seller agrees to sell and tender for delivery at the 'Delivery Point', gas in the quantities, times and at the prices determined in accordance with it. Clause 2.1 stipulates that: "2.1. The Seller agrees to sell and tender for delivery at the Delivery Point, and the Buyer agrees to purchase and receive at the Delivery Point and pay for Gas in quantities at the times and at the prices determined in accordance with, and subject to the terms and conditions of this Agreement." The expression 'Delivery Point' is defined thus: " "Delivery Point" means the flange or weld or agreed mark at the downstream of the isolation valve located immediately outside the Buyer's premise as identified in Schedule 2." Clause 5.1 requires the seller to deliver gas to the buyer at the Delivery Point. The seller is required to set up a gas pipeline to the metering station of the buyer from the nearest distribution mains at the cost of the buyer: "5.1. The sell....
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....at the Delivery Point and for the safe operation of the Buyer's Facilities." Ownership of the measurement equipment continues to vest with the respondent as per clause 5.3. The buyer is required to provide land and a power connection, free of cost at its premises. The buyer has to pay for providing a gas pipeline connection from the distribution mains up to the measurement equipment. Gas is transported from the 'Measurement Equipment' by means of a pipeline provided by the buyer as stipulated in Clause 5.5: "5.5. Gas will be transported from the Measurement equipment by means of a pipeline provided by the Buyer as per the specifications and applicable standards provided by the Seller and the same shall be maintained by the Buyer. The Seller reserves the right to supply other Buyer's before the upstream range of measurement equipment installed at its premises." Clause 5.6 clarifies that the buyer has no right to adjust, clean, handle, replace, maintain, remove or modify the measurement equipment: "5.6. The Buyer shall not have the right to adjust, clean, handler, replace, maintain, remove or modify in any manner measurement equipment at a....
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....r cent) or that the Measurement Equipment is out of service, the following procedure in order of priority, whichever is feasible for arriving at the computation of quantity of Gas during the period between the last calibration and the present, shall be followed: (a) by correcting the error if the percentage of error is ascertainable by calibration, tests or mathematical calculation; or (b) by estimating the volume of Gas delivered by comparison with deliveries during the period under similar conditions when the Measurement Equipment was registering accurately. 9.2.7 If at the time of carrying out the check of the Measurement Equipment as above, it is discovered that the error in the readings of the Measurement Equipment exceeds- 2.0% the Measurement Equipment shall be re-calibrated at Buyer's cost. 9.2.8 Notwithstanding anything contained in this Agreement, pending the result of any check/recalibration, the Buyer shall not withhold payments to the Seller under this Agreement on this account. However, the Buyer shall be entitled to lodge his claim for refunds/adjustments, if any, depending upon the final results of such che....
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....contract price. If the seller draws upon the payment security, the buyer has to make good the amount withdrawn. Clause 14 of the Agreement further provides for the representations and warranties of the buyer and seller. Clause 14.3 reads as follows: "14.3 Buyer's Warranties and Undertakings The Buyer warrants and undertakes to the Seller that throughout the term of this Agreement: a) the Buyer's Facilities will be technically and operationally compatible with the Seller's Facilities at the Delivery Point and fit for purpose for off take of gas from the Delivery Point; b) the Buyer's Facilities will be maintained in good working order and condition and so operated as to be compatible with the fulfilment of the obligations of the Buyer under this Agreement;..." Under the above clause 14.3, the buyer warrants to maintain the "Buyer's Facilities", which includes the 'measurement equipment', in good working order and condition and technically and operationally compatible with the Seller's Facilities. Under clause 16.4, if the buyer fails (otherwise than as a consequence of force majeure or the seller's default) to take fifty....
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....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. 25. 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. The measurement equipment is supplied, installed and maintained by the seller at the cost of the buyer, inspite of ownership of the equipment resting with the respondent as the seller. The measurement equipment is installed and maintained exclusively by the seller. Clause 5.6 indicates that the buyer has no right to adjust, clean,....
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....g used or employed habitually; usage, as, the wear and tear resulting from ordinary use. Berry-Kofron Dental Laboratory Co. v. Smith, 345 Mo. 922, 137 S.W. 2d 452, 454, 455, 456. The purpose served; a purpose, object or end for useful or advantageous nature. Brown v. Kennedy, Ohio Appellant. 49 N.E.2d 417, 418. To put or bring into action or service; to employ for or apply to a given purpose. Beggs v. Texas Dept. of Mental Health and Mental Retardation, Tex. Civ. App., 496 S.W.2d 252, 254. To avail oneself of; to employ; to utilize; to carry out a purpose or action by means of; to put into action or service, especially to attain an end. State v Howard, 221 Kan. 51, 557 P.2d 1280, 1281. Non-technical sense. The "use" of a thing means that one is to enjoy, hold, occupy or have some manner of benefit thereof. Use also means usefulness, utility, advantage, productive of benefit." 27. The expression "use" does not have a fixed meaning. The content of the expression must be based on the context in which the expression is adopted. The use of an article may or may not result in a visible change in its form or substance. Moreover, the nature of use is conditioned by the kind of ....
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....t of the seller in measuring the quantity of the gas supplied would not be correct. The GSA is an agreement reflecting mutual rights and obligations between the seller and the purchaser. Both have a vital interest in ensuring the correct recording of the quantity of gas supplied. Additionally, delivery of gas in a safe and regulated manner, enabled by the SKID equipment, is an essential component of the GSA. The SKID equipment subserves the contractual rights of both the seller and the purchaser of gas. Indeed, without the SKID equipment there would be no gas supply agreement. In fact, in the GSA, the buyer has also provided a warranty to ensure that the "Buyer's Facilities" remain technically and operationally compatible with the "Seller's Facilities", both of which include the 'measurement equipment'. This warranty would not have been provided if the measurement equipment was not of 'use' to the buyer. The equipment is thus a vital ingredient of the agreement towards protecting the mutual rights of the parties and in ensuring the fulfilment of their reciprocal obligations as seller and buyer in regulating the supply of gas. As an incident of regulating supply, it determines the c....
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....harges nor had it mentioned that these charges are a refundable amount in the invoices issued. 33. The respondent, in their reply dated 29 December 2009, stated that the purpose of the collection of these charges was for safe-keeping of the meter by the customers and the expense towards charges incurred on disconnection, if the customer disconnects immediately after installation. The respondent stated that according to the company policy, with respect to commercial and industrial consumers, an amount for installation of equipment was collected depending on the pressure of the gas and the size of the SKID equipment. Although these are reflected as gas connection income, they are (according to the respondent) mainly in the nature of refundable security deposits. In support of their argument for industrial and commercial consumers, the respondent provided a copy of an "internal note dated 13 July 2007" and a list of industrial customers to whom the gas connection charges have been refunded. The internal note is extracted below: "Today we are supplying gas to more than 200 Industrial customers at Ahmedabad & Vadodara. We are collecting Gas Connection Charge upfront from the custo....
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.... as gas connection charges is refunded at the time of discontinuation of the connection, the percentage which has been refunded to the industrial customers has varied from case to case ranging from 25 per cent to 100 per cent. The Adjudicating Authority observed: "...the gas connection charges are refunded, based on the number of years of gas supply, when the gas connection contract is discontinued. This clearly evidences that gas connection charges in most of the cases are not refunded completely. The said noticee not only earns interest on the gas connection charges but also earns income by retaining some portion of the gas connection charges at the time of discontinuance of the contract. This is a very strange kind of security deposit which is not only devoid of interest but also on maturity the principal amount gets reduced. Moreover, in reality it may never be refunded if the gas connection is not discontinued. I have also seen the "Internal Note dated 13.7.2007" submitted by the said noticee along with his written submission as "Annexure-A" and I find that the amount to be deducted is 100% when there is "upgradation of load" or "termination of agreement" between 3rd ....
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....After Tax 599.91 1750.90 Notes: 1) The Company had received hedging income of Rs. 560 Iacs in 2007-08 in 2008-09 no such extraordinary income has been received in the current year. 2) Until now the Company was treating the entire amount received from domestic gas connections as income. However, in line with the PNGRB guidelines, the Company has treated an amount of Rs. 5,000/- per domestic customer as Refundable interest free Security Deposit this amount to Rs. 833.34 Lacs. 36. The above report provides that the respondent has treated an amount of Rs. 5000/- per domestic consumer as refundable interest-free security deposit amounting to Rs. 883.34 lacs. In assessing these rival contentions, the Adjudicating Authority held that: "...I find that the attempt of the said notice to align the Finance Act, 1994, with the Petroleum and Natural Gas Regulatory Board Regulations 2008, to determine the taxability of a taxable event is not acceptable and goes in vain. Taxability of a service is governed under Section 65(105) of the Finance Act, 1994 and is not determined under any other Act or Regulations, unless and until the same is specifically pr....