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TMI Blog2019 (10) TMI 960X X X X Extracts X X X X X X X X Extracts X X X X ..... mended 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 Larg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terms of Agreements which also contain a clause relating to allowed loss and consumption under which a certain percentage of LNG made available to the Appellant by the customers is understood to be lost/consumed in performing the regasification services. The Appellant discharged service tax liability on the amount received for regasification services, but the Revenue proposed to levy service tax on the value of such pre-fixed quantum of LNG identified towards allowed loss and consumption 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. This demand proposed in the show cause notice was confirmed by the Principal Commissioner. It is this issue that has come up for consideration in this Appeal. 4. The Appellant had set up the first LNG receiving and regasification terminal in India at Dahej in the State of Gujarat with a capacity of 10 million metric tons per annum. The Appellant also set up another LNG terminal at Kochi in the State of Kerala. At its regasification terminals, the Appellant imports L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of LNG into RLNG is a natural and inevitable process, which can be reduced only by maintaining the desired temperature and pressure levels. Such naturally converted RLNG is called Boil Off Gas . Technologies have been developed to trap and utilize the Boil Off Gas to contain the losses to the extent possible. 7. The LNG operation chain consists of several interconnected elements namely liquefaction, storage, loading, shipping, unloading, regasification and distribution network. It is stated that tolling activities of the Appellant extend from the custody transfer point i.e. receipt of shipped LNG of the customers from the vessel into the regasification plant to entry of RLNG into distribution pipeline system or other modes of conveyance. Typically, storage tanks are located at the receiving terminals to store the LNG prior to regasification. For this purpose, the Appellant claims to follow the internationally accepted best practices. Since the arrangement with the customers in the Agreements is for supplying the same energy value of RLNG as that of LNG received by the Appellant, it is incumbent upon the Appellant to convert the quantity of LNG received from the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 011-12 and a Demand Cum Show Cause Notice dated 10 December, 2014 was issued to the Appellant demanding service tax of ₹ 14,16,10,419/- by invoking the extended period of five years under the proviso to section 73(1) of the Finance Act, 1994 The Act. with interest u/s 75 and penalties u/s 77 and 78 of the Act. A penalty was also proposed on Pankaj Wadhwa as Vice President of the Appellant under section 78A of the Act. 11. The Appellant filed a reply to the show cause notice on 24 December, 2014. The Principal Commissioner confirmed the demand of service tax of ₹ 12,68,50,874/- for the period April 2009 to June 2014 with interest and imposed penalties of ₹ 6,93,61,308/- u/s 78 and ₹ 10,000 u/s 77 of the Act on the Appellant. A further penalty of ₹ 1,00,000/- was imposed on Pankaj Wadhwa u/s 78A of the Act. 12. The first and the most important issue examined by the Principal Commissioner was whether the Appellant was liable to pay service tax for the period commencing April, 2009 upto June, 2014 on the gross value of LNG supplied free of cost as a consideration towards providing regasification services re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ulation which is effectively leading to a remission of performance by the Appellant to the extent of the allowed loss and consumption is not in the nature of a consideration for the services of regasification as provided by the Appellant. In this connection reliance has been placed on the decision of the Supreme Court in Jagad Bandhu Chatterjee v/s Smt. Nilima Rani (1969) 3 SCC 445; iii. The charge of service tax under section 66B of the Act is on the value of all services provides or agreed to be provided in the taxable territory by one person to another. The definition of consideration under the India Contract Act read with the definition of consideration under the Act establishes that an amount will qualify as consideration if it has been agreed between the parties that such amount is payable for the services provided, thereby providing a direct link between the services provided and the amount payable; iv. The parties to a contract clearly agreed upon the price payable for the services of regasification. Thus, it is this amount alone which qualifies as consideration for the services of regasification and which is leviable to service tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In the present case, Pankaj Wadhwa had obtained a legal opinion from the legal advisor that specifically stated that the allowed loss and consumption would not be leviable to service tax. This was based on an interpretation of the legal provisions. 14. Shri R.K. Majhi, learned Authorized Representative of the Department has, however, supported the impugned order and has made the following submissions:- (i) The order of the Commissioner that has been assailed in this Appeal is a well reasoned order and does not call for any interference; (ii) The LNG that is retained and used for regasification purpose free of cost is a kind of consideration for providing re-gasification service; (iii) LNG is utilized in the plant to run the Turbine Generator as well as for other purpose in extreme winter considerations as is clear from the various statements made by officers of the Appellant. The Principal Commissioner, therefore, committed no illegality in holding that LNG gas supplied free of cost to the Appellant is a non-mandatory consideration; (iv) The decision of the Larger Bench of the Tribunal in Bhayana B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In this Master Agreement, except where the context otherwise requires: ------------- Allowed Loss and Consumption means 0.66% (zero decimal sixty per cent ) of each LNG Cargo/quantities in each LNG Cargo (calculated in energy terms) delivered by PROCURER to PLL at the Custody Transfer Point that is consumed, utilized, or that may be lost during the Regasification of such LNG; including during handling and/or processing, of such LNG Cargo/LNG quantities with PLL acting as a Reasonable and Prudent Operator and which shall not be taken into account while determining PLL‟s Supply Deficiency. ----------------- Regasification means : (a) reception by PLL of LNG Ships at the Unloading Port; (b) receipt by PLL of LNG delivered by LNG Ship for and on behalf of the PROCURER at the Custody Transfer Point; (c) storage and regasification of such LNG at PLL‟s Facilities; and (d) transportation and delivery of RLNG by PLL to PROCURER at Delivery Point, in accordance with the terms of this Master Agreement and relevant Delivery Order and derivations of Regasification shall be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it at the Custody Transfer Point or RLNG delivered at the Delivery Point, Pursuant to this Master Agreement and relevant Delivery Order. ------------------ 12. PRICE 12.1. Charges PROCURER shall, in respect of a Billing Period, for Regasification undertaken by PLL for PROCURER in relation to the RLNG Quantities taken by PROCURER, pursuant to this Master Agreement and relevant Delivery Order pay an amount equal to the sum of: (a) the Regasification Charge in relation to such quantity of RLNG taken by PROCURER (as described in Article 12.2); and (b) Taxes and Duties. For the avoidance of doubt, it is clarified that the charge in respect of any Use or Pay Deficiency shall be determined in accordance with Article 15.1 and shall be in addition to the charges described in Article 12.1. 12.2. Regasification Charges Regasification Charges shall mean the charges payable by PROCURER for Regasification undertaken by PLL for PROCURER in relation to the RLNG Quantities taken by PROCURERE pursuant to this Master Agreement and relevant Delivery Order. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in accordance with this Article 15.3. PLL s supply Deficiency for a Delivery Order shall be equivalent to the RQ specified at the Delivery Point for such Delivery Order less. (i) the aggregate of actual quantities of RLNG offtaken by PROCURER at the Delivery Point for such Delivery Order; (ii) the aggregate of all quantities of RLNG that could not be delivered by PLL at the Delivery Point for the reason attributable to the non performance by the PROCURER of its obligations under this Master Agreement; and /or the relevant Delivery Order; and (iii) the aggregate of all quantities of RLNG that could not be offtaken by PROCURER or that could not be delivered by PLL due to Force Majeure; PLL will make best endeavour to deliver the quantities equivalent to the PLL‟s Supply Deficiency to the PROCURER at the earliest. (b) Liquidated Damages In the event of occurrence of any PLL‟s Supply Deficiency calculated under this Article 15.3, PLL shall pay the liquidated damages which shall be the product of: (a) PLL‟s Supply Deficiency; and (b) 100% of the Regasification Rate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat is also important to note is that under the clause 13 of the Agreement which deals with Billing, the Appellant has to provide signed invoices to the procurer that shall show the details provided for in clause 13.1(a) of the Agreement which, amongst others, includes the details relating to quantity of allowed loss and consumption deducted by the Appellant. Regasification charges are provided in clause 12.2 of the Agreement and are the charges payable by the procurer for regasification undertaken by the Appellant for the procurer and with respect to each Billing period shall be calculated at the regasification rate multiplied by the total MMBTU of RLNG taken by the procurer at the Delivery Point during such Billing period. 18. The case of the Department, as set out in the demand cum show cause notice, is that the LNG received free of cost by the Appellant from the customers for regasification of LNG is a non-monetary consideration for providing a taxable service and so its value has to form part of the taxable value, but the Appellant did not include this value and did not pay service tax resulting in short payment of service tax. 19. It has, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the energy value of allowed loss and consumption . 21. The Principal Commissioner concluded that the Appellant retained part of LNG supplied to it by the customers for regasification in terms of the Agreement and, therefore, such quantity of LNG received free of cost would be a non monetary consideration for service of regasification, in addition to the amount charged for the actual quantity of RLNG delivered at the Delivery Point. The Principal Commissioner, therefore, determined the value of such LNG under section 67 of the Act and Rule 3 of the Service Tax (Determination of Value) Rules 200614. 22. The contention of the Appellant is that the concept of allowed loss and consumption contemplated under the Agreement cannot be considered as a non-monetary consideration for the regasification service. According to the Appellant, the allowed loss and consumption is effectively a remittance of the performance as agreed upon between the parties and is not in the nature of a consideration for the service of regasification. 23. The submission of learned Counsel for the Appellant deserves to be accepted. Section 66 of the Act prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alled Suspense account or by any other name, in the books of account of a person liable to pay service tax, where the transaction of taxable service is with any associated enterprise. 24. Explanation (a) to sub-section (4) of section 67 of the Act defines consideration to include any amount that is payable for the taxable services provided or to be provided. Section 2(d) of the Contract Act also defines consideration . It provides that when at the desire of the promisor, the promisee or any other person has done or abstained from doing anything or does or abstains from doing, or promises to do or abstain from doing something, such act or abstinence is called a consideration for the promise. An amount will, therefore qualify as consideration if it has been agreed upon between the parties that such amount would be payable for the services provided. Thus, once it was agreed in the Agreement that the Appellant would receive a certain price for the services of regasification, it is this amount alone which would qualify as consideration for the services of regasification. The allowed loss and consumption would not represent a quid pro quo for the regasification ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the value of such LNG cannot be added to the amount charged by the Appellant for determining the taxable value of services in view of the decision of the Supreme Court in Bhayana Builders. 29. The Supreme Court in Bhayana Builders 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. The observation of the Supreme Court are as follows:-. 12. On a reading of the above definition, it is clear that both prior and after amendment, the value on which service tax is payable has to satisfy the following ingredients: a. Service tax is payable on the gross amount charged:- the words gross amount only refers to the entire contract value between the service provider and the service recipient. The word gross is only meant to indicate that it is the total amount charged without deduction of any expenses. Merely by use of the word gross ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Section 67 removes any doubt by clarifying that the gross amount charged for the taxable service shall include the amount received towards the taxable service before, during or after provision of such service, implying thereby that where no amount is charged that has not to be included in respect of such materials/goods which are supplied by the service recipient, naturally, no amount is received by the service provider/assessee. Though, sub-section (4) of Section 67 states that the value shall be determined in such manner as may be prescribed, however, it is subject to the provisions of sub-sections (1), (2) and (3). Moreover, no such manner is prescribed which includes the value of free goods/material supplied by the service recipient for determination of the gross value. (emphasis supplied) 30. The Supreme Court also examined Explanation (c) to sub-section (4) of the section 67 of the Act, on which reliance was placed by the Principal Commissioner, and which defines gross amount charged . The observations of the Supreme Court are as follows:- 15. It was argued that payment received in 'any form' and 'any amount cre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds can be added over and above the contract value to arrive at the value of taxable services. The value of taxable services cannot be dependent on the value of goods supplied free of cost by the service recipient. The service recipient can use any quality of goods and the value of such goods can vary significantly. Such a value, has no bearing on the value of services provided by the service recipient. Thus, on first principle itself, a value which is not part of the contract between Civil Appeal Nos. 1335-1358 of 2015 with Ors. Page 20 of 26 the service provider and the service recipient has no relevance in the determination of the value of taxable services provided by the service provider. (emphasis supplied) 31. The aforesaid decision of the Supreme Court emphasises that service tax is payable on the gross amount charged which would be the amount billed by the service provider to the service receiver. Thus, unless an amount is charged by the service provider to the service recipient, it would not enter into the equation for determining the value on which service tax is payable. It also emphasises that the cost of free supply of goods provided ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it in this legislative architecture is the concept that any consideration whether monetary or otherwise should have flown or should flow from the service recipient to the service provider and should accrue to the benefit of the later. Free supplies , incorporated into construction (cement or steel for instance), even on an extravagant inference, would not constitute a non-monetary consideration remitted by the service recipient to the service provider for providing a service, particularly since no part of the goods and materials so supplied accrues to or is retained by the service provider. Wherever a monetary consideration is charged for providing the taxable service and no non-monetary consideration forms part of the Agreement between the parties, it is clause (i) that applies and the value of the taxable service would in such case be the gross amount charged by the service provider and paid by the service recipient. (emphasis supplied) 35. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ddie Engineer ('Eddie') agrees to supply services to Mountain Miners ('Mountain') at a rate of $100 per hour. Under the Agreement, Eddie must perform the services on Mountain's premises in Melbourne. Mountain agrees to allow Eddie to use its computer facilities, stationery and safety equipment on Mountain's premises to perform the services. Mountain also agrees to fly Eddie to Melbourne and provide accommodation and meals during the period Eddie performs the services. 92. There is monetary consideration for Eddie's services ($100 per hour). The provision of the use of computer facilities, stationery and safety equipment and the transport, accommodation and meals is not part of the price paid for the as it is not a payment or of value to Eddie in return for his services. They are rather conditions of the contract that go to defining the supply made by Eddie, and are used in providing the services, rather than being supplied to Eddie in return for the services. They do not provide economic value to Eddie in return for his supply. The provision of these things in these circumstances is not consideration in connection with the supply by Eddie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Appellant under the Agreement. 42. Jenil Joshi, Financial Officer of the Appellant Company clearly stated that as per the terms and conditions of the Agreement, the Appellant had deducted a quantity of LNG at a fixed percentage as LNG consumed, utilized or lost during regasification of such LNG. 43. The Appellant had also submitted in writing before the Principal Commissioner that the concept of allowed loss or consumption in the Agreement is to take care of the inherent loss and uncertainties of the regasification process and that the concept of losses/ uncertainties in measurement inherent in an industrial process is well recognized under the indirect tax laws and accordingly, the losses and uncertainties cannot be subjected to service tax. 44. Senior Officers of M/s GAIL (India) Pvt. Ltd. and Gujarat State Petroleum Corporation providing LNG to the Appellant for regasification, also gave their statements. 45. Subhandhu Sinha Manager, (Marketing Gas), International Gas Sourcing of M/s GAIL (India) Ltd. in his statement made under section 14 of the Excise Act stated: Ques.1: How many consignment of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /s PETRONET LNG have included the cost of the LNG free of cost by your company while issuing invoices for re-gasification services and charged Service Tax on the cost of the LNG supplied free of cost? Ans.5: No, M/s PETRONET have not included the cost of the quantity of LNG supplied retained by them while charging Service Tax in the invoices. 46. Keyur Shah, Senior Manager (Finance and Accounts) in M/s Gujarat State Petroleum Corporation Ltd. also gave a statement under section 14 of the Excise Act and the relevant portion is reproduced below:- Ques.3: On perusal; of the aforesaid details of LNG consignments, it is noticed that Regasified LNG taken from PETRONET LNG Ltd. is less than the Quantity of LNG Unloaded as per Agreement with PETRONET LNG Ltd. Please offer your comments. And.3: We have entered in to a Master Re-gasification Agreement with M/s PETRONET LNG Ltd. on 01.015.2009. As per the said Agreement, after deduction of Allowed Loss and Consumption M/s PETRONET LNG Ltd. have delivered the remaining quantity of RLNG to our company. The Allowed Loss and Consumption is 0.66% of the total quan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me importance because it is the customers who would suffer if they were to ultimately receive lesser energy of LNG at the Delivery Point. It was, therefore, obligatory on the part of the Principal Commissioner to have considered all the aforesaid statements instead of merely relying upon an isolated statement of Sanjay Kumar that there are no losses during the process of regasification, more particularly when this statement was contrary to a specific clause in the Agreement. On a consideration of the aforesaid statements, it is clear that there are inherent losses when regasification of LNG takes place and it for this reason that the parties have included a clause in the Agreement relating to allowed loss and consumption . 49. In this view of the matter, 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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