TaxTMI 
TaxTMI 
2020 (8) TMI 789
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....der 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 27112900 of the Central Excise Tariff Act, 19....
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....t 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 form of an interest-free security deposit, for the purpose of ensuring safe-keeping of the measurement equipme....
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....fers 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 adjudication before the Tribunal. By its judgment dated 05 April 2019, the Tribunal allowed the appeal filed by the respondent. The Tribunal observ....
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....arges 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 Tribunal was faulted on the ground that its finding - that the use of the equipment is by the seller - is contrary to the terms of the GSA. 11. Opposing these submissions Mr Vikram Nankani, learned Senior....
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....zj) 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 relation to supply of tangible goods including machinery, equipment and appliances for use, without transferring right of possession and effective control of such machinery, equipment and appliances." 14. Section 65(105)(zzzzj) of the Finance Act 1994 was introduced by Notificat....
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....ight 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, held: "43. We are not turning our decision upon the terms used like 'let', 'hire', 'delivery' and 'redelivery' but on the other essential terms of the Charter Party Agreement entered in the instant case which clearly makes out that there is a transfer of exclusive right to use the vessel which is a deemed sale and is liable to tax under the KST A....
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....ervice". 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." (emphasis supplied) 18. 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....
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....uction 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 High Court observed: "38. Entry (zzzzj) is entirely a new entry. Whereas Entry (zzzy) covers services provided to any person in relation to mining of mineral, oil or gas, services covered by Entry (zzzzj) can be identified by the presence of two characteristics namely (a) supply of tangible goods including machinery, equipment and appliances for use, (b) there is no transfer of right of possession and ef....
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.... 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 seller shall deliver the Gas to the Buyer at the Delivery Point in accordance with the terms of this Agreement. Gas pipeline to the Buyer's metering station from nearest distribution mains would be constructed and maintained by the Seller at the Buyer's cost." (emphasis supplied) Clause 5.3 states that the 'Measurement Equipment' is to be supplied, installed and maintained by the seller at the cost of the buyer: "5.3. The Measurement Equipment shall be supplied, installed and maintained by the S....
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.... 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 any time during the currency of the Contract." Under clause 5.7 the buyer cannot lease, sublet or sell the measurement equipment: "5.7. The Buyer under no circumstances shall sublet/lease/sell/create a charge over part or whole of measurement equipment at any given time." Clause 5.10 provides that the seller has the right of entry to the measurement equipment: "5.10. The Seller or his authorized representative shall have right of entry at all hours to the Measurement Equipment, route of pipeline upto all consumption points and gas consuming facilities inside the Buyer's premises." Under c....
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....e 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 check/re-calibration within a period of fourteen (14) days of such check/recalibration. Such claim, if found correct by the Seller, shall be adjusted against the subsequent invoice(s) of supply of Gas. 9.2.9 Pending the resolution of any dispute, the Seller shall produce the invoices on the basis of self-verification." (emphasis supplied) The provisions for billing and payment are contained in clause 12. The relevant portion is extracted below: "12. Billing and Payment 12.1 Following the end of the Fortnight, the Seller shall render to the Buyer a statement including the following details for each Day of the previous Fortnight (hereinafter referred to as the "Fortnightly Invoice"), which shall show in respect....
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....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 per cent or more of the cumulative DCQ over 45 consecutive days, the seller is entitled to terminate the agreement. 22. The GSA is an agreement between the respondent and its purchaser for regulating the terms on which gas is sold by the respondent. The agreement is of a 'take or pay' genre. The buyer must lift the quantity contracted or pay for it. The agreement provides for the supply of gas at the Delivery Point through gas pipelines constructed from the distribution main to the measurement equipment. Further, both the seller and the buyer have provided warranties for maintaining the 'measurement equipment' in good working condition, in their respective capacities. The measurement equipment, as has been re-iterated by the respondent in the course of their arguments, is installed for the measurement and recording of the volume....
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....ost 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, handle, replace, maintain, remove or modify it in any manner. Clause 5.10 guarantees the seller's access to the Measurement Equipment at the buyer's premises at all hours. Ownership, control and possession of the measurement equipment is with the respondent. The measurement equipment comprises not only of electronic meters that are useful for determining the quantity of gas supplied to the purchaser at the Delivery Point, but also of isolation valves, filters and regulators that are crucial for regulating the pressure of gas and ensuring safe operation of the buyer's facilities. In order to maintain the sanctity of the equipment, the agreement casts the exclusive responsibility to install and maintain it on the respondent as the seller. The terms of the GSA would indicate that the quantity of gas supplied is to be measured at the Deliver....
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....antage, 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 article which is put to use. Section 65(105) of the Finance Act, 1994 envisages myriad interpretations of the expression "use", in a variety of services such as telecommunication,4 renting of immovable property,5 and services related to art, entertainment, and marriage.6 In the case of some articles, use may be signified by a physical operation of the article by the person who uses it. In such a case, actual physical use is what is meant by the supply of the goods for the use of another. In the case of others, the nature of the goods supplied impacts the character of the use to which the goods can be put. As an illustration, 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".7 This understanding of "use" differs....
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....nt 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 correct quantity of gas that is supplied. The obligation to supply, install and maintain the equipment is cast upon the seller as an incident of control and possession being with the seller. Section 65(105)(zzzzj) applies precisely in a situation where the use of the goods by a person is not accompanied by control and possession. 'Use' in the context of SKID equipment postulates the utilization of the equipment for the purpose of fulfilling the purpose of the contract. Section 65(105)(zzzzj) does not require exclusivity of use. The SKID equipment is an intrinsic element of the service which is provided by the respondent, acting pursuant to the GSA, as a supplier of natural gas to its buyers. 29. While interpreting the term 'use', the Tribunal in the impugned judgment has relied on its decision in the case of Meru Cab Company Pvt. Ltd. v. Commissioner of Central ....
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....ternal 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 customers before commencing gas supplies based on the customer load profile (provided by customer). Many of our customers have future expansion after commissioning of the unit which is not covered in existing meter connection. Further, few of the customers have also requested for termination of the GSAs due to various issues. In such cases, following amount shall be deducted from the Gas Connection Charges and balance shall be refundable. (1) Upgradation of Load: In this case the percentage of amount to be deducted shall be as follows: - Period from Commencement % of Amount to be deducted Earlier New Revised Upto 1 Year 10% 20% Between 1st Year to 2nd Year 25% 50% Between 2nd Year to 3rd Year 50% 75% Between 3rd Year to 4th Year 75% 100% (2) Terminating of Agreement: In this case the percentage of amount to be deducted shall be as follows: ....
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.... to be deducted is 100% when there is "upgradation of load" or "termination of agreement" between 3rd year to 4th year. This clearly establishes that the liability of the said noticee to refund the said "Gas Connection Charges" is only upto a period of three years, after that no amount is to be refunded and it eventually becomes income of the said noticee. Moreover, till the time the said amount is partially refunded it remains with the said noticee who is at liberty of using the same in whatever manner he wants to. I have seen the Annexure-B annexed with the written submission dated 4.1.2010 and find that the gas connection charges are refunded to only 13 customers during the year 2008-09. This indicates that effectively, the gas connection charges once recovered from the customers remain with the said noticee and in cases where it is refunded then also some amount is retained by the said notice." 35. With respect to the domestic consumers, the respondent, in their reply to the Show Cause Notice, argued that under the PNGRB Network Tariff Regulations 2008, entities such as the respondent are required to collect refundable interest-free security deposits towards safe-keeping of th....
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.... same is specifically provided in the definition given under Section 65(105) of the Finance Act, 1994. The taxability of a service is also not determined by the manner in which the Books of Accounts are maintained...." 37. We find ourselves in agreement with the findings of the Adjudicating Authority. The extent of the refund of gas connection charges collected from industrial, commercial and domestic consumers by the respondent depends on their usage. From the internal note dated 13 July 2007 and the tabulation of customers provided above, it is evident that the percentage of funds refunded varies from customer to customer, while the remaining amount is retained by the respondent. In any case, as regards the domestic customers, no deposit receipts have been provided and instead, the respondent has relied on the tabulation of the refund of deposit to industrial consumers to support their contention. Thus, the argument of the respondent that these gas connection charges collected from industrial, commercial and domestic consumers constitute a refundable security deposit is rejected. 38. Thus construed, we are of the view that the Adjudicating Authority was correct in concluding th....