THE COMMISSIONER OF SERVICE TAX, AHMEDABAD v. M/S ADANI GAS LTD.

THE COMMISSIONER OF SERVICE TAX, AHMEDABAD v. M/S ADANI GAS LTD.

Civil appeal no. 2633 of 2020

Court: Supreme Court of India

Bench: Dr. D. Y. Chandrachud, Indu Malhotra, K M Joseph, J

Date of Judgement: 28th August, 2020

Parties:

Appellant: Commissioner of Service Tax, Ahmedabad

Respondent: M/s Adani Gas Ltd.

Introduction

This appeal arises from a judgement and order of the customs, excise, & service tax Appellate Tribunal, west zonal bench at Ahmedabad in service dated 5th April, 2019. The Tribunal has, in exercise of its appellate jurisdiction, reversed the 30th march, 2011 decision of the commissioner of service tax, Ahmedabad “Adjudicating Authority” and set aside the demand for payment of service tax on the charges collected by the respondent for the supply of pipes and measuring equipment to its customers under Section 65(105)(zzzzj) of the Finance Act, 1994.

The Adjudicating Authority held that there is definite element of service involved in the transaction as the respondent is not only a seller engaged in the sale of gas to the customer but also a service provider who supplies, installs and maintains measuring equipment at the customers premises. So the respondent is held liable to pay service tax with penalties. Also, it was noted by the Adjudicating Authority that the purpose of measuring equipment is to ensure effective and accurate billing. So it is the customer who must held to be in use of the equipment regardless the customer lacking in technical expertise in handling the equipment.

But the Tribunal reverse the order of the Adjudicating Authority by stating that the terms of the agreement leaves no manner of doubt that the purpose of the equipment is to measure the amount of gas supplied to the customers for the billing purpose. They are, therefore, for the use of the Appellant and not for the use by the customers.

The decision of the Tribunal has been assailed in the Supreme Court and the appeal rests on the interpretation and applicability of the provisions of section 65(105)(zzzzj) of the Finance Act, 1994.

Facts

• The respondent is in the business of distributing natural gas – Compressed Natural Gas and Piped Natural Gas – to industrial, commercial, and domestic consumers. Mostly PNG is used by industrial consumer for manufacturing operations and by domestic and commercial consumer for cooking, power supply and air-conditioning.
• An equipment called ‘SKID’ is installed by the respondent at customer’s sites for regulating the supply of PNG and recording the quantity consumed by the customers for measuring and billing purposes. This equipment consists of isolation valves, filters, regulators and electronic meters.
• The respondent use to enter into an agreement named ‘Gas sales agreement’ with every customer to whom the gas is supplied.
• As per the GSA, the customer will not have any control or legal right over the equipment. The ownership of the equipment will belong to the respondent only.
• During the course of audit, it was found that the income received by the respondent from its customers comes under the head of “gas connection charges” and charges were collected for the supply of pipes, measuring equipment, etc while providing gas connections but no value added tax was paid on these charges collected from the customers.
• Also, the customers are provided with no control and any legal rights over the equipment despite the fact that the equipment is installed at the customer’s expenses.
• Notice was issued on 13th October, 2009 requiring the respondent to pay service tax on the gas connection charges recovered from the customers.
• In the reply to the notice the respondent contended that use of the measuring equipment does not belongs to the customer as all the technical part is being handled by the respondent and is used only for metering and billing purpose.
• The amount which is collected from the customers is the interest free deposits which is refundable wholly or partly at the time of termination or discontinuing the connection depending upon the duration of contract.

Issues

1. Whether the SKID equipment installed for measuring and billing purposes is for the use of customer or not?
2. Whether the supply of pipes and measurement equipment is taxable under Section 65 (105) (zzzzj) of the Finance Act, 1994?

Judgment

The Apex Court in its Judgement concluded that the Adjudicating Authority was right in making their decision and the Tribunal makes an error in interpreting the judgement of Adjudicating Authority. The Apex Court has found itself in agreement with the findings of the Adjudicating Authority and restored its order.

It was held that

• The buyer is as much concerned about the accuracy of the billing as the supplier of gas. The measurement equipment ensures to the benefit of the buyer for the purpose of verifying the correctness of the charges levied based on the quantity of gas consumed. 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. 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.”
• Dealing with the issue number 2, the order also noted that the entirety of the gas connection charges collected at the time of installing the connection are not refunded or it is not refunded wholly at the time of discontinuation or termination. It is necessary to interpret the provision of section 65 (105) (zzzj):

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:

(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.”

Section 65(105)(zzzzj) levies a service tax on the use of tangible goods. On the other hand, the transfer of the right to use any goods is treated as a ‘deemed sale’ and is subject to sales tax under Article 366(29-A) (d) of the Constitution of India.

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. Hence, respondent is liable to pay the service tax with penalties given under section 77 and 78 of finance act, 1994.

Conclusion

Every service which is provided under the head of “Supply of Tangible Goods” is taxable and service tax is to be given on it while providing the services and the measuring equipment which is installed for the purpose of billing and measuring is a matter of concern for a buyer also as it is of the seller.