1. Supply of pipes and measurement equipment for gas connections — recovery of connection charges — taxability under Section 65(105)(zzzzj) of the Finance Act, 1994. (Para 1 , 2 , 3 )
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2020 Supreme(SC) 513
SUPREME COURT OF INDIA
DHANANJAYA Y. CHANDRACHUD, INDU MALHOTRA, K.M. JOSEPH, JJ.
Commissioner of Service Tax, Ahmedabad – Appellant
Versus
M/s Adani Gas Ltd. – Respondent
Civil Appeal No. 2633 of 2020
Decided on : 28-08-2020
Important Points
Supply of tangible goods for use, without transferring possession and effective control, is a taxable service under Section 65(105)(zzzzj) of the Finance Act, 1994. 'Use' signifies the application of goods to fulfill contractual purposes, such as ensuring accurate billing and safety, regardless of who maintains technical control.
Subject
Tax Law - Service Tax
Act Referred
FINANCE ACT: S.65(105)(zzzzj), S.77, S.78, S.366(29)(a)(d)
Headnote
SERVICE TAX - SUPPLY OF TANGIBLE GOODS FOR USE - SECTION 65(105)(ZZZZJ) OF THE FINANCE ACT, 1994 - INTERPRETATION - WHETHER THE SUPPLY OF PIPES AND MEASUREMENT EQUIPMENT (SKID EQUIPMENT), CHARGED UNDER THE HEAD OF "GAS CONNECTION CHARGES" BY THE RESPONDENT TO ITS INDUSTRIAL, COMMERCIAL, AND DOMESTIC CONSUMERS, AMOUNTS TO SUPPLY OF TANGIBLE GOODS FOR THEIR USE.
Fact of the Case:
The respondent is in the business of distributing natural gas - Compressed Natural Gas (CNG) and Piped Natural Gas (PNG) - 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 (GSA) - with consumers to whom gas is supplied by it.
Finding of the Court:
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.
Issues: Whether the supply of pipes and measurement equipment (SKID equipment), charged under the head of "gas connection charges" by the respondent to its industrial, commercial, and domestic consumers, amounts to supply of tangible goods for their use.
Ratio Decidendi: 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; (vi) The goods are supplied for use by the recipient of the service.
Final Decision: The appeal is allowed in the above terms.
Legal Category Hierarchy
Advocates Appeared:
For the Appellant :Sharad Kumar Singhania, B. Krishna Prasad, Advocates
For the Respondent:Vikram Nankani, Mahesh Agarwal, Anshuman Srivastava, Utkarsh Pratap, E. C. Agrawala, Advocates
For the Appellant :Sharad Kumar Singhania, B. Krishna Prasad, Advocates
For the Respondent:Vikram Nankani, Mahesh Agarwal, Anshuman Srivastava, Utkarsh Pratap, E. C. Agrawala, Advocates
Table of Contents
2. Whether measurement equipment is for the use of the customer or the supplier — nature of connection charges as refundable security deposits versus taxable service. (Para 4 , 9 , 10 , 11 )
3. Analysis of the expression use in the context of contractual utility — evaluation of the Gas Sales Agreement — rejection of the security deposit claim. (Para 12 , 13 , 14 , 15 , 16 , 17 , 18 , 19 , 20 , 21 , 22 , 23 , 24 , 25 , 26 , 27 , 28 , 31 , 32 , 33 , 34 , 35 , 36 , 37 , 38 )
4. Supply of tangible goods for use without transfer of possession and effective control is taxable if the goods serve the contractual purpose for the recipient. (Para 28 , 30 )
5. Appeal allowed — Tribunal judgment set aside — order of the Adjudicating Authority restored. (Para 39 )
6. What constitutes a taxable service under Section 65(105)(zzzzj) of the Finance Act, 1994?
A taxable service occurs when tangible goods, including machinery or equipment, are supplied for use by another person without transferring the right of possession and effective control over those goods. (Para 13 , 20 )
7. How is the term use interpreted regarding the supply of tangible goods for service tax?
Use is not limited to physical operation or technical expertise; it signifies the application of goods for the purpose for which they were supplied under a contract, including when the goods serve the recipient's contractual interests. (Para 26 , 27 , 28 )
8. How does the supply of tangible goods for use differ from a deemed sale under Article 366(29-A)(d) of the Constitution?
A deemed sale involves the transfer of the right to use goods, which includes transferring both possession and control. Conversely, Section 65(105)(zzzzj) applies when goods are supplied for use without transferring possession or effective control. (Para 14 , 15 , 18 )
9. Whether gas connection charges treated as refundable security deposits are exempt from service tax?
If the charges are not fully refundable and the amount retained by the provider varies or becomes income over time, they cannot be classified as mere security deposits and may be treated as consideration for a taxable service. (Para 31 , 33 , 34 , 37 )
JUDGMENT :
Dhananjaya Y. Chandrachud, J.
This appeal arises from a judgment and order of the Customs, Excise, & Service Tax Appellate Tribunal,1["Tribunal"] West Zonal Bench at Ahmedabad in Service dated 5 April 2019. The Tribunal has, in exercise of its appellate jurisdiction, reversed the 30 March 2011 decision of the Commissioner of Service Tax, Ahmedabad 2["Adjudicating Authority"] and set aside the demand for payment of service tax on the charges collected by the respondent for supply of pipes and measuring equipment to its customers under Section 65(105)(zzzzj) of the Finance Act, 1994. This appeal rests on the interpretation and applicability of the provisions of Section 65(105)(zzzzj) of the Finance Act, 1994.
2. The respondent is in the business of distributing natural gas - Compressed Natural Gas3 ["CNG"] and Piped Natural Gas4 ["PNG"] - 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 Agreement5["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 any legal rights over the equipment. Value Added Tax was also not paid on these charges collected from the customers. A Notice to Show Cause6["Show Cause Notice"] 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- ST. 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' consis
