2019 (10) TMI 960 - AT - Service Tax

Valuation - Business Auxiliary services - inclusion of value of such pre-fixed quantum of LNG identified towards allowed loss and consumption - inclusion of such value in the assessable value 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. Whether the value of LNG received by the Appellant free of cost is required to be included in the taxable value for the payment of service tax under the head Business Auxiliary Service ? HELD THAT - The Supreme Court in COMMISSIONER OF SERVICE TAX ETC. VERSUS M/S. BHAYANA BUILDERS (P) LTD. ETC. 2018 (2) TMI 1325 - SUPREME COURT examined whether the value of goods/materials supplied or provided free of cost by a service recipient and used for providing taxable service is to be included in computation of the gross amount charged by the customer for valuation of taxable service and in this context, both the unamended and the amended provisions of section 67 of the Act, were examined and held that service tax is payable on the gross amount charged which would be the amount billed by the service provider to the service receiver. 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 - 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 M/S BHAYANA BUILDERS (P) LTD. OTHERS VERSUS CST, DELHI OTHERS. 2013 (9) TMI 294 - CESTAT NEW DELHI (LB) 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 Court in Bhayana Builders. It is not possible to accept the contention of the Department. In the first instance the Department had challenged the decision of the Larger Bench of the Tribunal before the Supreme Court and decision of the Supreme Court in Bhayana Builders does not make any reference to retention or non retention of the material supplied free of cost . It also needs to be noted that certain percentage of LNG is lost during regasification process, as is clear from the clause dealing with allowed loss and consumption . In any view of the matter, this was not the sole reason given by the Larger Bench as there are specific findings recorded by the Larger Bench in the other paragraphs of the order. Thus, the allowed loss and consumption will not form part of the consideration for the purpose of levy of service tax - the Commissioner was not justified in confirming the demand of service tax on the value of pre-determined quantum of LNG identified by the parties towards allowed loss and consumption since such free of cost supplies of LNG by the customers cannot form part of the consideration received by the Appellant. The value of such LNG cannot, therefore, be included in the taxable value for payment of service tax. Demand alongwith interest and penalty set aside - appeal allowed - decided in favor of appellant.

Summary

Issues Involved:

1. Liability of the appellant to pay service tax on the gross value of LNG supplied "free of cost" as a "consideration" for providing regasification services.
2. Imposition of penalty on the Vice President of the appellant company under section 78A of the Finance Act, 1994.

Detailed Analysis:

1. Liability of the appellant to pay service tax on the gross value of LNG supplied "free of cost" as a "consideration" for providing regasification services:

The appellant, Petronet LNG Ltd, provides regasification services under agreements that include a clause for "allowed loss and consumption," which accounts for a certain percentage of LNG lost or consumed during the regasification process. The Principal Commissioner confirmed a demand for service tax on the value of this "free of cost" LNG, considering it as part of the "consideration" for the services provided.

The appellant argued that the "allowed loss and consumption" clause is a remission of performance, not a consideration for the services. They cited the Supreme Court's decision in *Jagad Bandhu Chatterjee v/s Smt. Nilima Rani* and *Commissioner of Service Tax v. Bhayana Builders*, which established that the cost of free supplies provided by the service recipient does not qualify as "consideration" for the service provided.

The Tribunal examined the relevant clauses of the Master Regasification Agreement and concluded that the "allowed loss and consumption" is a term of the agreement to account for inherent losses during the regasification process. This clause absolves the appellant from paying liquidated damages for the agreed-upon loss percentage. The Tribunal found that the "allowed loss and consumption" does not represent a quid pro quo for the services rendered and cannot be considered as "consideration" for the purpose of service tax.

The Tribunal also referred to section 67 of the Finance Act, 1994, which deals with the valuation of taxable services. It emphasized that "consideration" includes any amount payable for the taxable services provided. Since the agreement specified the regasification charges payable, this amount alone qualifies as "consideration" for the services. The Tribunal further noted that the Supreme Court's decision in *Bhayana Builders* clarified that free supplies provided by the service recipient cannot be included in the taxable value for service tax purposes.

The Tribunal rejected the Principal Commissioner's reliance on the statement of Sanjay Kumar, which suggested no loss of LNG during regasification. The Tribunal found that the statement was contrary to the agreement's terms and other statements from officers of the appellant and its customers, which confirmed inherent losses during regasification.

2. Imposition of penalty on the Vice President of the appellant company under section 78A of the Finance Act, 1994:

The Principal Commissioner imposed a penalty of ?1,00,000 on Pankaj Wadhwa, Vice President of the appellant company, under section 78A of the Finance Act, 1994. The appellant argued that the penalty was unwarranted as there was no mens rea (intent to commit a wrongdoing). Pankaj Wadhwa had obtained a legal opinion stating that the "allowed loss and consumption" would not be subject to service tax.

The Tribunal set aside the penalty, noting that the demand itself had been set aside. The Tribunal found no basis for the penalty, given that the appellant had acted based on a legal interpretation of the provisions.

Conclusion:

The Tribunal concluded that the order dated 26 July 2016, passed by the Principal Commissioner, confirming the demand of service tax on the appellant and imposing penalties, could not be sustained. The Tribunal set aside the order and allowed the appeal, including the penalty imposed on Pankaj Wadhwa.