Gas regulating measuring equipment installed at customers site is taxable service

Gas regulating measuring equipment installed at customers site fulfills the description in Section 65(105)(zzzzj) of a taxable service – SC

ABACUS Case Law Citation
ABCAUS 3376 (2020) (08) SC

Important case law relied upon by the parties:
Indian National Shipowners’ Association and Anr.  v.  Union of India and others

The respondent company was in the business of distributing natural gas – Compressed Natural Gas (CNG) and Piped Natural Gas (PNG) to industrial, commercial, and domestic consumers.  

For the distribution of PNG to industrial, commercial and domestic consumers through pipes, the respondent installed an equipment called ‘SKID’ at customers’ sites.

The SKID equipment consisted of isolation valves, filters, regulators and electronic meters. The equipment regulated the supply of PNG and recorded quantity of PNG consumed by the customer, which was then used for billing purposes. 

The respondent entered into an agreement (the Gas Sales Agreement/GSA) with consumers to whom gas is supplied by it

During the course of an audit by the officers of Central Excise, it was noticed that while providing new gas connections to customers, the respondent had received gas connection charges from customers for the “supply of pipes, measuring equipment etc.

It was found that the ownership of the equipment was not with the customer but is retained by the respondent. The customer did not have control or any legal rights over the equipment. Value Added Tax was also not paid on these charges.

Thus the dispute arose on the charge of service tax said gas connection charges being “supply of tangible goods service”, under Section 65(105)(zzzzj) of the Finance Act, 1994.

The Tribunal held in favour of the respondent and held that the metering equipment was 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.

The Hon’ble Supreme Court observed that Section  65(105)(zzzzj)  of  the  Finance  Act  1994  provides  for  taxability  of  supply of tangible goods for use, without transferring right of  possession and effective control over such goods, as a ‘taxable service’.

The Hon’ble Supreme Court observed that the said provision creates an element of taxation over a service, as opposed to a ‘deemed sale’ under Article 366(29-A)(d) of the Constitution. Also, the Department of Revenue had issued a Circular clarifying the applicability of Section 65(105)(zzzzj) vis-à-vis Article 366(29-A)(d).

Further the Hon’ble Supreme Court from the perusal of the GSA and as admitted fact opined that the ingredient of not transferring the ownership, possession or effective control of the goods under Section 65(105)(zzzzj) was satisfied. And thus the crux of the dispute was whether the supply of tangible goods – the SKID equipment was for the use of the purchaser. 

The Hon’ble Supreme Court noted that the measurement equipment comprised 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 were 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 casted the exclusive responsibility to install and maintain it on the respondent as the seller.

The Hon’ble Supreme Court stated that the expression “use” under Section 65(105)(zzzzj) does  not  have  a  fixed  meaning.  The content of the expression must be based on the context in which the expression is adopted.

One of the contention of the respondent company was that the said gas connection charges were in the nature of refundable security deposits and are refunded at the time of discontinuation of the connection.

However, the Hon’ble Supreme Court noted that as per data provided, the percentage which has been refunded varied from customer to customer, while the remaining amount was retained by the respondent. In any case, as regards the domestic customers, no deposit receipts were provided.  

Accordingly, the argument of the respondent that these gas connection charges collected from industrial, commercial and domestic consumers constitute a refundable security deposit was rejected.

The Hon’ble Supreme Court upheld the view of the Adjudicating Authority in concluding that the buyer of gas was 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.

The Hon’ble Supreme Court added that 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 fulfilled 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.

The judgment of the Tribunal  was accordingly set aside and the order of the Adjudicating Authority was restored.

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