Case: Commissioner of Service Tax, Ahmedabad  Vs. M/s Adani Gas Ltd

2. The respondent is in the business of distributing natural gas - Compressed Natural Gas and Piped Natural Gas - 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- 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, 1985. The respondent is also engaged in providing the taxable service falling under the category of transport of goods through pipeline, as defined in Section 65(105)(zzz) of the Finance Act, 1994. During the course of an audit by the officers of Central Excise, Ahmedabad-I during January 2009, it was noticed that the respondent had received income under the head of gas connection charges from its industrial, commercial, and domestic customers. From the GSA and the invoices, it was found that charges were collected for the supply of pipes, measuring equipment etc. while providing new gas connections to customers. The ownership of the equipment is not with the customer but is retained by the respondent. The customer does not have control or any legal rights over the equipment. Value Added Tax was also not paid on these charges collected from the customers. A Notice to Show Cause was issued to the respondent on 13 October 2009 stating that the transactions undertaken by them are covered under the category of supply of tangible goods service, under Section 65(105)(zzzzj) of Finance Act, 1994 which was introduced by Notification No.18/2008- S.T. dated 10 May 2008, with effect from 16 May 2008. The Show Cause Notice required the respondent to pay service tax with effect from 16 May 2008 on the gas connection charges recovered for the period from 16 May 2008 to 31 March 2009. Three similar notices were issued to the respondent for subsequent periods. The first notice indicated that the respondent had received gas connection charges amounting to Rs. 23,37,51,903/- on which service tax and cess amounting to Rs. 2,83,46,411/- had not been deposited. The respondent was called upon to show cause why service tax should not be demanded together with interest and penalties under Sections 76, 77 and 78 of the Finance Act, 1994.4. In their reply to the Show Cause Notice, the respondent stated that:(i) PNG is distributed through pipes to industrial, commercial and domestic customers. The SKID equipment is installed at the customers sites to regulate the supply of PNG distributed and record the quantity of PNG consumed for billing purposes;(ii) The GSA is entered into with the customer. The SKID consists of isolation valves, filters, regulators and electronic meters;(iii) 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 buyers 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 equipment as is required by Attachment 3 to Schedule A of the Petroleum and Natural Gas Regulatory Board (Determination of Network Tariff for City or Local Gas Distribution Networks and Compression Charge for CNG) Regulations 2008 . This deposit is to be returned at the time of discontinuing or terminating the connection and between 25 to 100 per cent of the charges were refunded by the respondent in the year 2008-09.The respondent thus contended that they were not liable to pay service tax and consequently the demand for tax interest and penalty was not sustainable.5. The Show Cause Notice was adjudicated by an order dated 30 March 2011 of the Adjudicating Authority. Confirming the demand, the Adjudicating Authority noted that the demand in the Show Cause Notice was not under the category of transport of goods by pipeline or other conduit services under Section 65(105)(zzz) on the charges recovered from the supply of gas, but for supplying measurement equipment at the time of providing a new gas connection to a customer, under the category of supply of tangible goods services under Section 65(105)(zzzzj). The Adjudicating Authority held that …there is a definite element of service involved in this transaction.The Adjudicating Authority held that 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 measurement equipment at the customers premises. The customer, in this view, is a purchaser of gas and a service recipient for the supply, installation and maintenance of measurement equipment. The fact that (i) ownership of the measurement equipment vests with the respondent; and (ii) there is no transfer of the right of possession and effective control is undisputed, thereby satisfying two of the required ingredients for Section 65(105)(zzzzj). Noting that the purpose of the measurement equipment is to ensure effective and accurate billing, the Adjudicating Authority held that the expression use is attracted and it is the customer who must be held to be in use of the equipment, regardless of the customer lacking technical expertise in handling the measurement equipment. This conclusion was based on the following reasoning: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 adjudication before the Tribunal. By its judgment dated 05 April 2019, the Tribunal allowed the appeal filed by the respondent. The Tribunal observed that the SKID equipment is installed by the respondent at the customers site and at the cost of the customer without the transfer of ownership and possession. However, the crucial issue which required analysis was whether the SKID equipment is for the use of the customer. Adverting to the GSA which is entered into between the respondent and its customers, the Tribunal held:… the appellant supplies natural gas through pipes to the Industrial, Commercial or Domestic customers and for this purpose installs an equipment called SKID at the customers site to regulate the supply of natural gas supplied through pipes and to record the quantity consumed by the customers for the purpose of billing. The gas pipeline from the nearest distribution point is laid and maintained by appellant at the cost of the customer and the measuring equipment is also supplied, installed and maintained by the appellant at the cost of the customer. The terms of the agreement leave no manner of doubt that the purpose of the equipment is to measure the amount of gas supplied to the customer for the purpose of billing. They are, therefore, for the use of the appellant and are not for use by the customers. The finding to the contrary recorded by the Adjudicating Authority is, therefore, not correct.(emphasis supplied)8. The Tribunal held that the metering equipment is installed for measuring the amount of gas supplied to the customer for the purpose of billing; hence the use of the equipment is by the respondent and not by the customer.

Court's reasoning:
15. The applicability of Article 366(29-A)(d) was discussed in a decision of this Court in Bharat Sanchar Nigam Limited and another v. Union of India and others 2006 (3) SCC (1 ). ( BSNL). In BSNL, the Court held that the purpose of Article 366(29- A)(d) was to levy tax on those transactions where there was a transfer of the right to use any goods to the purchaser, instead of passing the title or ownership of the goods. Thus, by a fiction of law, these transactions were now treated as sale. Elucidating on the transfer of the right to use any goods, Dr A R Lakshmanan J. in a concurring opinion held:97. To constitute a transaction for the transfer of the right to use the goods, the transaction must have the following attributes:a. there must be goods available for delivery;b. there must be a consensus ad idem as to the identity of the goods;c. the transferee should have a legal right to use the goods- consequently all legal consequences of such use including any permissions or licenses required therefore should 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.17. Therefore, sales tax is levied in pursuance of Article 366(29-A)(d) on transactions which resemble a sale in substance as they result in a transfer of the right to use in goods, instead of the transfer of title in goods. The Finance Act, 1994, deriving authority from the residuary Entry 97 of the Union List, enabled the Central Government to levy tax on services. Service tax was introduced as a response to the advancement of the contemporary world where an indirect tax was necessary to capture consumption of services, which are economically similar to consumption of goods, in as much as they both satisfy human needs.18. The introduction of Section 65(105)(zzzzj) in the Finance Act, 1994, was with the intention of taxing such activities that enable the customers use of the service providers 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 366(29-A)(d). For the purpose of clarification, the Department of Revenue issued a Circular, D.O.F. No.334/1/2008-TRU, dated 29 February, 2008. The said circular clarified the applicability of Section 65(105)(zzzzj) vis-à-vis Article 366(29-A)(d).19. The above circular clarified that Section 65(105)(zzzzj) is applicable only to those transactions where there is a supply of tangible goods for use, without the transfer of possession or effective control to the recipient.20. The taxable service is defined as a service which is provided or which is to be provided by any person to another in relation to supply of tangible goods. The provision indicates that the goods may include machinery, equipment or appliances. The crucial ingredient of the definition is that the supply of tangible goods is for the use of another, without transferring the right of possession and effective control of such machinery, equipment and appliances. Hence, in order to attract the definition of a taxable service under sub-clause (zzzzj), the ingredients that have to be fulfilled are:(i) The provision of a service;(ii) The service is provided by a person to another person;(iii) The service is provided in relation to the supply of tangible goods, including machinery, equipment and appliances;(iv) There is no transfer of the right of possession;(v) Effective control over the goods continues to be with the service provider; and(vi) The goods are supplied for use by the recipient of the service.There is an element of service which is the foundation for the levy of the tax.21. A GSA entered into 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.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 and pressure of the gas delivered at the Delivery Point and for the safe operation of the buyers facilities.23. At the outset, it is clear from the provisions of the agreement, and it has been admitted by both the parties, that there is no transfer of ownership or possession of the pipelines or the measurement equipment (SKID equipment equipment) by the respondent to its customers. Clause 5.3 of the agreement specifically provides that the Measurement Equipment is to be supplied, installed and maintained by the seller at the cost of the buyer and that the ownership of the equipment will rest with the respondent forever. Clause 5.6 further clarifies that the buyer has no right to adjust, clean, handle, replace, maintain, remove or modify the measurement equipment. Clause 5.10 guarantees that the seller shall have the right of entry at all hours to the Measurement Equipment and associated apparatus at the Buyers premises. The pipelines are also part of the Sellers Facilities under the agreement and are constructed and maintained by the respondent at the cost of the customer. Thus, the ingredient of not transferring the ownership, possession or effective control of the goods under Section 65(105)(zzzzj) is satisfied.In determining as to whether the provisions of Section 65(105)(zzzzj) are attracted, it is necessary to distinguish between the rights and obligations of the respondent (as the 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, handle, replace, maintain, remove or modify it in any manner. Clause 5.10 guarantees the sellers access to the Measurement Equipment at the buyers 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 buyers 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 Delivery Point. For this purpose, the measurement equipment is supplied, installed, owned and maintained by the seller at the cost of the buyer. The working of the measurement equipment is verified periodically by the parties to the agreement. If the buyer doubts its accuracy, this has to be communicated in writing to the seller, who alone is entitled to test, re-calibrate, remove or modify it. Similarly, if the seller has any doubt about the proper working of the measurement equipment it is entitled to check the meter in the presence of the representatives of the buyer. If according to the seller, the existing measurement equipment is not working satisfactorily it would be replaced at the cost of the buyer. These provisions indicate that the supply, installation and maintenance of the measurement equipment is exclusively carried out by the seller. The buyer has contractual remedies against the seller in terms of the GSA. These remedies to the buyer as a purchaser of gas are distinct from the issue as to whether the equipment for which gas connection charges are recovered is used by the buyer.26. Under Section 65(105)(zzzzj), the taxable service is provided or to be provided in relation to the supply of tangible goods for the use of another, without transferring the right of possession and effective control.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, (Section 65(105)(zzzzb), Finance Act, 1994.) renting of immovable property,(Section 65(105)(zzz-z), Finance Act, 1994.) and services related to art, entertainment, and marriage. (Section 65(105)(zzzzr), Finance Act, 1994.) 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. (0 Circular D.O.F. No.334/1/2008-TRU, dated 29 February, 2008) This understanding of use differs from the supply of tangible goods under Section 65(105)(zzzzj) at hand, where effective control or possession is not ceded. Thus, physical operation is not the only or invariable feature of use. As a corollary to the same, technical expertise over the goods in question is not a sine qua non for determining the ability of the consumer to use the good. Therefore, the expression use also signifies the application of the goods for the purpose for which they have been supplied under the terms of a contract.28. The terms of the GSA indicate that the supply, installation, maintenance and repair of the measurement equipment is exclusively entrusted to the respondent as the seller. These provisions have been incorporated in the GSA to ensure that a buyer does not calibrate or tinker with the equipment. It is an incident of ownership and control being vested with the respondent. The purpose of the SKID equipment and its utility, lie in its ability to regulate the supply and achieve an accurate verification of that which is supplied; in the present case the supply of goods by the respondent to its buyers. This enures to the benefit of the seller and the buyer. The seller is concerned with the precise quantification of the gas which is supplied to the buyer. The buyer has an interest in ensuring the safety of its facilities and that the billing is based on the correct quantity of gas supplied and delivered under the GSA. To postulate, as did the Tribunal, that the measurement equipment is only for the benefit 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 Buyers Facilities remain technically and operationally compatible with the Sellers 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 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 Excise, Mumbai 2016 (41) STR (444) (Tri-Mum) ( Meru Cab). Meru Cab involved the transfer of a vehicle from a radio taxi operator to the driver, in turn to provide a service to the passengers. We find that the reliance placed on Meru Cab is misplaced as the factual context of the use in the two cases is substantially different. In present matter, the agreement to supply gas, and the measurement equipment and pipelines only involves two parties - the respondent and the ultimate customer. Having said that, we are not expressing any opinion on the correctness of the decision in Meru Cab.30. Thus, we are of the view that the supply of the pipelines and the measurement equipment (SKID equipment) by the respondent, was of use to the customers and is taxable under Section 65(105)(zzzzj) of the Finance Act 1994.34. The above data indicates that, contrary to the assertion of the respondent that the amount collected 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.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 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….. 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 that the buyer of gas is as interested as the seller in ensuring and verifying the correct quantity of the gas supplied through the instrumentality of the measurement equipment and the pipelines. Additionally, the role of regulating pressure and ensuring the safety of supply of gas performed by the measurement equipment is an essential aspect for the use of the consumer. The SKID equipment fulfils the description in Section 65(105)(zzzzj) of a taxable service: service in relation tangible goods where the recipient of the service has use (without possession or effective control) of the goods.39. For the above reasons, we are of the view that the Tribunal was in error in interfering with the findings and order of the Adjudicating Authority.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 3 rd year to 4 th 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.