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TMI Blog2020 (8) TMI 789X X X X Extracts X X X X X X X X Extracts X X X X ..... t to sales tax under Article 366(29-A)(d) of the Constitution of India - The applicability of Article 366(29-A)(d) was discussed in a decision of this Court in BHARAT SANCHAR NIGAM LTD. (BSNL) VERSUS UNION OF INDIA [ 2006 (3) TMI 1 - SUPREME COURT] . In BSNL, the Court held that the purpose of Article 366(29A)(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 - 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 THE GREAT EASTERN SHIPPING CO. LTD. VERSUS STATE OF KARNATAKA OTHERS [ 2019 (12) TMI 225 - SUPREME COURT] considered whether the transfer of a vessel under a charter party agreement was a deemed sale , subject to sales tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rest distribution main to the buyers metering station is constructed and maintained by the seller at the cost of the buyer. 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 . 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. Thus, 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. The Adjudicating Authority was correct in concluding that the buyer of gas is as interested as the seller in ensuring and ve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spondent 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 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 1 . 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 Adjudic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onnection 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 ₹ 2,83,46,411/- to ₹ 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 customer s site to regulate the supply of natural gas supplied through pipes and to record the quantity consumed by the customers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T 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 Counsel appearing on behalf of the respondent, submitted that: (i) The GSA is an agreement for the sale and purchase of goods, namely, PNG; (ii) The terms of the GSA provide contractual rights to the buyer, including the right to verify and dispute the bill raised by the supplier and to seek arbitration; (iii) The rights of a buyer of gas under the GSA must be kept distinct from the use of the SKID equipment and the essential issue in the present case is whether the equipment is installed for the use of the buyer; (iv) Under the terms of the GSA, ownership continues to vests with the respondent at all times and the buyer of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch 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 Notification No.18/2008-S.T. with effect from 16 May 2008. 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. It is necessary to distinguish the applicability of these two provisions. Article 366(29A)(d), provides: (366)(29-A) tax on the sale or purchase of goods includes- xx xx xx (d) a tax on the transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssel 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 Act. In the instant case, full control of the vessel had been given to the charterer to use exclusively for six months, and delivery had also been made. The use by charterer exclusively for six months makes it out that it is definitely a contract of transfer of right to use the vessel with which we are concerned in the instant matter, and that is a deemed sale as specified in Article 366(29A)(d). On the basis of the abovementioned decision, it was urged that all Charter Party Agreements are service agreements. The submission cannot be accepted, as there is no general/invariable rule/law in this regard. It depends upon the terms and conditions of the charterparty when it is to be treated as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch 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 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 Sectio 65(105)(zzzzj) vis- -vis Article 366(29-A)(d). The relevant portions of the circular are as follows: 4.4 SUPPLY OF TANGIBLE GOODS FOR USE: 4.4.1 Transfer of the right to use any goods is leviable to sales tax/VAT as deemed sale of goods [Article 366(29A)(d) of the Constitution of India]. Transfer of right to use involves transfer of both possession and control of the goods to the user of the goods. 4.4.2 Excavators, wheel loaders, dump trucks, crawler carriers, compaction equipment, cranes, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 010 (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 effective control of such machinery, equipment and appliances . According to the members of the 1st petitioner, they supply offshore support vessels to carry out jobs like anchor handling, towing of vessels, supply to rig or platform, diving support, fire fighting etc. Their marine construction barges support offshore construction, provide accommodation, crane support and stoppage area on main deck or equipment. Their harbour tugs are deployed for piloting big vessels in and out of the harbour and for husbanding main fleet. They give vessels on time charter basis to oil and gas producers to carry out offshore exploration and production activities. The right of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om 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 Seller at the Buyer s cost. Ownership of equipment will rest with AEL [respondent herein] forever. Buyer shall provide free of cost adequate land and power connection in its premise for the installation of Measurement Equipment. Buyer shall pay for providing gas pipeline connection including pipeline from distribution mains upto the measurement equipment; and measurement equipment to its unit as per the proposal submitted by the Seller. (emphasis supplied) Clause 5.4 provides that: 5.4. Gas pipeline from nearest Distribution Mains to the Measurement equipment shall be constru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... odify 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 clause 7.1, title and risk in the gas passes from the seller to the buyer at the Delivery Point. Clause 8.1 defines the expression Daily Contract Quantity 2 . Clause 9.2 of the agreement deals with measurement and calibration: 9.2 Measurement and Calibration 9.2.1 Quantity of Gas supplied under this Agreement shall be measured at the Delivery Point in SCM. The measurement shall include all corrections in installation practices recommended for accurate metering of Gas by the American Gas Association (AGA) G ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourteen (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 of the previous Fortnight, along with the details of calculations: (i) the DCQ for each Day of that Fortnight in SCM; (ii) the aggregate quantity of Gas delivered by the Seller in such Fortnight, in SCM and Gross Calorific Value for the same; (iii) the Weighted Average Gross Calorific Value (GCV) of such Gas taken by the Buyer in such fortnight; (iv) the amount payable by the Buyer to the Seller for the quantifies of the Gas delivered during the Fortnight equal to quant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... minate 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 and pressure of the gas delivered at the Delivery Point and for the safe operation of the buyer s 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccess 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 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 wor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pment 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 ( Meru Cab ). 2016 (41) STR (444) (Tri-Mum). 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omer). 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: Period from Commencement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 47,000.00 47,000.00 100% 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. 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 no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 320.76 534.04 Gas Connection Charges 1395.96 1454.80 Oil Lubricant sales - 0.62 Other Income 351.23 687.51 Total Income 32506.09 25318.72 Total Expenditure 30928.10 22998.22 Prior Period Adjustment 2.51 7.70 Profit / (Loss) Before Tax 1575.48 2312.81 Provision for Tax 975.57 561.91 Profit/ (Loss) After Tax 599.91 1750.90 Notes: 1) The Company had received hedging income of ₹ 560 Iacs in 2007-08 in 2008-09 no such extraordinary income has been received in the current year. 2) Until now the Company was treating the entire amount received from domestic gas connections as inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 judgment of the Tribunal shall accordingly stand set aside. The order of the Adjudicating Authority is restored. The appeal is allowed in the above terms. 40. Pending application(s), if any, stands disposed of. ------------------ Notes: 1. PNGRB Network Tariff Regulations 2008 , published vide notification dated 19March 2008. 2. 8.1. Daily Contract Quantity (a) Daily Contract Quantity or DCQ shall be equal to 100 SCM per day having approximately Gross Calorific Value (GCV) of 9000 Kcal/scm. (b) Provided further, if on any Day, the Buyer requires Gas in excess of Daily Contract Quantity, the seller may supply the same subject to availability of gas with Seller and Seller s Operational Flexibility. (c) Supplier s ..... X X X X Extracts X X X X X X X X Extracts X X X X
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