CUSTOMS, EXCISE & SERVICE TAX APPELLATE TRIBUNAL
NEW DELHI
PRINCIPAL BENCH - COURT NO. 1
SERVICE TAX APPEAL NO. 52946 OF 2016
(Arising out of Order-in-Original No. DLISVTAX001COM0141617 dated 26 July, 2016 passed by Principal Commissioner of Service Tax, New Delhi-110002)
Petronet LNG Limited .…… Appellant
(World Trade centre, First Floor, Babar Road,
Barakhamba Lane, New Delhi-110001)
VERSUS
Principal Commissioner of Service Tax, Delhi-I ....… Respondent
(17-B, I.A.E.A., House, I.P. Estate,M.G. Marg, New Delhi-110002)
AND
SERVICE TAX APPEAL NO. 52980 OF 2016
(Arising out of Order-in-Original No. DLISVTAX001COM141617 dated 26 July, 2016 passed by Principal Commissioner of Service Tax, New Delhi-110002)
Shri Pankaj Wadhwa .…… Appellant
(Vice President (Financial), M/s Petronet LNG Ltd., World Trade centre, First Floor, Babar Road,
Barakhamba Lane, New Delhi-110001)
VERSUS
Principal Commissioner of Service Tax, Delhi-I ....… Respondent
(17-B, I.A.E.A., House, I.P. Estate,M.G. Marg, New Delhi-110002)
APPEARANCE:
Shri Shri Sujit Ghosh & Ms. Mannat Bose, Advocates for the Appellant Shri R.K. Majhi, Authorized Representative for the Respondent
CORAM : HON’BLE MR.JUSTICE DILIP GUPTA, PRESIDENT HON’BLE MR. BIJAY KUMAR, MEMBER (TECHNICAL)
DATE OF HEARING : 24 April, 2019 DATE OF DECISION : 21 October, 2019
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Final Order No. 51372-51373/2019
JUSTICE DILIP GUPTA
Service Tax Appeal No. 52946 of 2016 has been filed by Petronet LNG Ltd1 to assail the order dated 26 July, 2016 passed by the Principal Commissioner of Service Tax Delhi-12 that confirms the demand of service tax of Rs. 12,68,50,874/- upon the Appellant and also orders for recovery of interest and payment of penalty.
2. Service Tax Appeal No. 52980 of 2016 has been filed by Pankaj Wadhwa to assail that part of the order dated 26 July, 2016 passed by the Principal Commissioner that seeks to impose a penalty of Rs. 1,00,000/- upon him as Vice President of the Appellant.
3. The Appellant regasifies Liquefied Natural Gas3 owned by customers in 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 ________________________
1. The Appellant
2. The Principal Commissioner 3. LNG
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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 LNG, stores it, regasifies it and sells the Regasified LNG4 to its customers. This is known as the “trading model”. The Appellant also provides regasification services to customers on the LNG owned by the customers, which activity is called “tolling model”. In tolling model, the Appellant receives LNG belonging to the customers at its plant, stores it, regasifies it and supplies RLNG to the customers. For providing such regasification services, the Appellant entered into Master Regasification Agreements5 with customers like Gujarat State Petroleum Ltd., Gas Authority of India Ltd. and Bharat Petroleum Corporation Ltd., wherein consideration for the regasification services was clearly stipulated and identified.
According to the Appellant, all the Agreements are similarly worded and so the Appellant has placed the Agreement dated 01 May, 2009 entered into with Gujarat State Corporation Ltd.6
5. Natural Gas is a type of fossil fuel which comprises of hydrocarbons. The main constituent is methane ( 90%) and minor
____________________
4. RLNG 5. Agreement
6. State Corporation
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constituents include ethane, propane, butane, higher hydrocarbons and traces of nitrogen and carbon dioxide. It is a non-toxic, colourless, odourless and non-corrosive fuel. It is said that Natural Gas has the lowest ratio of greenhouse gas emissions per unit, making it an environment friendly fuel. These factors led to an increasing demand of Natural Gas on a global level. With advancement in transportation, liquefaction and regasification technologies, the cost of consumption of Natural Gas also reduced substantially.
6. Most Natural Gas reserves are offshore and away from the demand sites. Thus, the storage and transportation of Natural Gas is of critical importance. Liquefaction has emerged as the most cost effective technology for transportation and storage of Natural Gas.
Liquefaction involves cooling of Natural Gas to minus 1630 C temperature resulting in formation of LNG. When liquefied, the volume of Natural Gas reduces by a factor of about 600 at room temperature and normal atmospheric pressure. This greatly facilitates its transportation to long distances as space requirement is substantially reduced. LNG is transported in cryogenic ships/vessels/tankers. With increase in temperature or decrease in pressure, LNG converts into RLNG and evaporates, which results in loss. Conversion 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.
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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 customers into corresponding energy terms i.e.
in British Thermal Units7. The BTU level of the LNG and RLNG is dependent upon the composition of the constituent components making up the LNG received and RLNG supplied by the Appellant.
The Appellant, therefore, withdraws samples of LNG received by it and RLNG supplied by it and carries out tests called Gas Chromatography to ascertain the composition of constituent components of LNG and RLNG and then computes the energy level.
8. According to the Appellant, some inherent losses takes place during the regasification process as there are measurement related errors at every stage and part of the LNG and RLNG are consumed in testing. The Appellant claims that these losses are recognized internationally and as per established practice, there is a specific
___________
7. BTU
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clause “allowed loss and consumption” in all the Agreements ranging from 0.66% to 1% of the LNG received by the Appellant. It is necessary to determine the deficiency as the Appellant would have to pay liquidated damages for such deficiency. The obligation, according to the Appellant, is, therefore, to deliver the entire quantity of LNG which has been delivered by the customers minus the quantity agreed upon as “allowed loss and consumption” for avoiding any liquidated damages.
9. For the regasification activity undertaken by the Appellant, it is specifically mentioned in the Agreements that a regasification charge shall be payable by the customer to the Appellant. The Agreement further provide that the regasification charge with respect to each billing period shall be calculated at the regasification rate multiplied by the total MMBTU8 of RLNG received by the customer at the Delivery Point during such billing period.
The Appellant collected service tax on the regasification charges from the customers and discharged its service tax liability thereon under the category of “Business Auxiliary Services”. Thus, except for the quantity of LNG consumed, utilized or lost during the regasification process in terms of the “allowed loss and consumption” clauses in the Agreements, the Appellant discharged service tax liability on the service charges pertaining to 99%- 99.34% of the LNG received from the customers.
10. The Department conducted an audit of the Appellant for the Financial Years 2008-2009 to 2011-12 and a Demand Cum Show Cause Notice dated 10 December, 2014 was issued to the Appellant demanding service tax of Rs. 14,16,10,419/- by invoking ___________________
8. One million BTU‟s
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the extended period of five years under the proviso to section 73(1) of the Finance Act, 19949 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 Rs. 12,68,50,874/- for the period April 2009 to June 2014 with interest and imposed penalties of Rs. 6,93,61,308/- u/s 78 and Rs. 10,000 u/s 77 of the Act on the Appellant. A further penalty of Rs. 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 rendered under the category of “Business Auxiliary Service”. This was decided against the Appellant and the relevant portions of the order of the Principal Commissioner are as follows:-
“ From the abovementioned statement, it is seen that the noticee company was retaining certain percentage of the LNG supplied to them by their clients for regasification and this retained quantity of LNG was over and above the regasification charges collected by the noticee company from their clients in terms of the Master Agreement. I also find that the retained quantity of LNG, received by the noticee company free of cost was being consumed to run GTG (Gas Turbine Generator) as well as in extreme winter to run SCV (Submerged Combustion Vaporizer) on burner mode and slightly for flare and canteen. The notice company was also generating power through GTG and the power so generated was used to run the electrical equipments, viz. HP LNG Pumps, BOG Compressor, LP Pumps, SCV blower etc. used for re-gasification. It was also disclosed by Shri Sanjay Kumar, Chief Operating Officer at Dahej Plant, that the plant was designed in such a way that there was no loss of LNG during re-gasification process. I also find from the ________________
9. The Act.
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aforementioned statements that the noticee company was neither making any payments for such retained quantity of LNG to their clients nor paying any service tax on the value of such quantity of LNG received free of cost from their clients.
---
From the discussions supra, I come to the conclusion that the notice company was retaining part of LNG supplied to them for regasification by their clients in terms of the mutually agreed Agreement and such quantity of LNG received free of cost is therefore a consideration for Re- gasification Services in other than money for providing the said services. “
(emphasis supplied)
13. Shri Sujeet Ghosh, learned Counsel for the Appellant made the following submissions:-
i. The concept of “allowed loss and consumption”
contemplated under the Agreements cannot be considered as a non-monetary consideration for the services of regasification and thereby leviable to service tax;
ii. The “allowed loss and consumption” is effectively a remission of the performance as agreed upon between the parties. Such a stipulation 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 Rani10;
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 _______________________
10. (1969) 3 SCC 445
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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. The concept of “allowed loss and consumption” does not represent any quid pro quo for the regasification services rendered by the Appellant;
v. Even if it is assumed that the customers made available the LNG as ”free of cost material” for the services of regasification provided by the Appellant, then too such free of cost supplies do not qualify as “consideration”;
vi. The value of free LNG cannot be added to the amount charged by the Appellant for valuation of the services of regasification in view of the judgment of the Supreme Court in Commissioner of Service Tax v. Bhayana Builders11, wherein it has been specifically held that the cost of free supply of goods provided by a service recipient to a service provider is neither an amount
“charged” by the service provider nor can it be regarded as “consideration” for the service provided by the service provider;
________________________
11. 2018 (10) GSTL 118 (SC)
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vii. The stipulation in relation to “allowed loss and consumption” is a condition of the contract as agreed upon between the parties and cannot be treated as a
“consideration” separately agreed upon between the parties. In this connection reliance has been placed on a Goods and Service Tax ruling rendered by the Australian Taxation Office, wherein it has been held that the recipient of a supply may provide or make a thing available for the supplier for use in making the supply, which would not necessarily form “consideration”;
viii. Reliance placed by the Department on the statement of Sanjay Kumar is in complete derogation of the principles of law and facts of the present case;
ix. The requirement to rely upon the statement of Sanjay Kumar will arise only if “free of cost material” has always to be added to the valuation. The “free of cost material”
was not used/consumed in the regasification process but was in fact lost during the regasification process;
x. In any case, the statement of Sanjay Kumar cannot be looked at in isolation, in as much there are other statements, wherein it was specifically stated that
“allowed losses” do take place in the regasification process ; and
xi. The penalty of Rs. 1,00,000/- on Pankaj Wadhwa under section 78A of the Act is also without any basis in as much as the pre-requisite under section 78A of the Act is the presence of mens rea. In the present case, Pankaj
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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 Builders (P) Ltd. V/s Commissioner of Service Tax, Delhi12 is based on the principle that the title of the goods remains with the service recipient, whereas in the present case the title is not retained by the customer.
In support of this contention, reliance has been placed on the ________________________
12. 2013 (32) STR 49 (Tri.-LB)
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decision of the Tribunal in BEE AM Industries Pvt. Ltd.
v/s Commissioner of Central Excise & Service Tax, Meerut-I.13
15. In order to appreciate the rival contentions it will be appropriate at this stage to reproduce the relevant clauses of the Master Regasification Agreement dated 1 May, 2009 between the Appellant- Petronet LNG Limited and Gujarat State Petroleum Corporation Limited and they are :-
“WHEREAS:
A. PLL has been jointly promoted by Indian Oil Corporation Limited, Oil and Natural Gas Corporation Limited, Bharat Petroleum Corporation Limited and GAIL (India) Limited to undertake, inter alia, import of LNG into India, development of facilities.
B. PLL has initially developed LNG receiving and regasification facilities at Dahej, State of Gujarat capable of receiving and regasifying approximately 5 MMTPA of LNG which has recently been expanded to receive and regasify approximately 10 MMPTA of LNG.
C. PROCURER is a dominant player in E&P sector and also engaged in sale and purchase of natural gas, playing a leading role as the demand aggregator in the State of Gujarat. PROCURER has interests in various exploratory blocks in India and has also acquired acreage in E&P blocks outside India.
D. PROCURER, plans to purchase and import LNG into India and has approached PLL with a request to receive and regasify such LNG at its terminal at Dahej, for PROCURER and PLL has agreed to such request.
E. In pursuance thereto, PLL and PROCURER desire to enter into this Master Agreement to set out the mutually agreed terms and conditions upon which PLL shall receive and regasify LNG purchased and imported by PROCURER into India and deliver Regasified LNG at the Delivery Point to the R-LNG Transporter nominated by the PROCURER.
Now, therefore, in consideration of the mutual covenants herein set forth, the parties agree as follows:-
1. DEFINITIONS AND INTERPRETATION 1.1 Definitions
In this Master Agreement, except where the context otherwise requires:
---
“Allowed Loss and Consumption” means 0.66% (zero decimal ________________________
13. 2017 (4) GSTL 185 (Tri.-Del.)
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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.
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“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 construed accordingly.
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3 OBLIIGATIONS
3.1. PROCURER’s Obligation
Upon execution of relevant Delivery Order, PROCURER shall deliver LNG to PLL at the Custody Transfer Point, receive RLNG at the Delivery Point and pay for Regasification or for its Pay For If Not Used obligation, in accordance with and subject to the terms and conditions of this Master Agreement and such Delivery Order.
3.2. PLL’s Obligation
Upon execution of relevant Delivery Order, PLL shall receive LNG at the Custody Transfer Point, undertake Regasification for PROCURER, tender for delivery, at the Delivery Point, RLNG to PROCURER, or failing which pay Liquidated Damages in accordance with and subject to the terms and conditions of this Master Agreement and relevant Delivery Order. The energy value of RLNG delivered to PROCURER at the Delivery Point shall be equal to the energy value of LNG received by PLL at the Custody Transfer Point, reduced by the energy value of the Allowed Loss and Consumption.
--- 3.4. Co-mingling
PROCURER acknowledges that PLL is also an importer of LNG and a supplier of RLNG. PROCURER further acknowledges that PLL provides/ may provide receiving and regasification of LNG to other entities as well. PROCURER agrees that PLL shall have the right to Agreement and relevant Delivery Order with any other quantities and qualities of LNG received by PLL from any other source under any other contractual arrangements (including as an importer or while regasifying LNG) provided however that the energy value of RLNG delivered to PROCURER at the Delivery Point shall be equal to the energy value of LNG received by PLL at the Custody Transfer Point, reduced by the energy value of the Allowed Loss and Consumption and that the RLNG delivered at the Delivery Point shall conform to The Specifications of Gas at the Delivery Point. Parties acknowledge and agree that on account of co- mingling, the Specifications of RLNG delivered at the Delivery Point may not necessarily be the same as that of LNG received at the Custody Transfer Point.
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4.1. Title
PLL shall not have, or otherwise acquire, in any manner whatsoever, any title to LNG received by 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. The Regasification Charges with respect to each Billing Period shall be calculated at the Regasification Rate multiplied by the total MMBTU of RLNG taken by PROCURER at the Delivery Point during such Billing Period.
13. BILLING AND PAYMENT
13.1. Billing
(a) Invoices
Not later than the 18th Day of each calendar month and 3rd day of the immediately following month in which PLL undertakes Regasification for PROCURER pursuant to this Master Agreement and relevant Delivery Order, or if such Day is not a Business Day, the immediately following Business Day, during the Term, PLL will render or cause to be rendered to PROCURER, a signed invoice (“Invoice”), which shall show the following details (denominated in both MMSCM and MMBTU) for each Day during any Billing Period for such Delivery Order:
(i) the quantity of LNG received at the Custody Transfer Point during such Billing Period (denominated in both CBM and MMBTU);
(ii) DCQ
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(iii) the quantity of RLNG actually taken by PROCURER during such Billing Period (denominated in both MMSCM and MMBTU) at the Delivery Point;
(iv) the Gross Heating Value of such RLNG taken by PROCURER at the Delivery Point during such Billing Period;
(v) the Regasification Rate;
(vi) the Taxes and Duties;
(vii) the invoice Amount;
(viii) the Due Date;
(ix) opening balance and closing balance of stock of LNG/RLNG with PLL
(x) quantity of Allowed Losses and Consumption deducted by PLL.
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15. USE OR PAY OBLIGATION; LNG AND RLNG OBLIGATION; LIQUIDATED DAMAGES
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15.3. PLL’s Liquidated Damages
(a) PLL‟s Supply Deficiency;
If, having received the LNG Cargo at the Custody Transfer Point, PLL is unable or fails to deliver RLNG quantities at the Delivery Point at the end of the Delivery Period for any relevant Delivery Order, for any reason other than
(i) an event of Force Majeure; or
(ii) non performance by PROCURER of its Obligations under this Master Agreement; and / or the relevant Delivery Order.
PLL shall pay liquidated damages to PROCURER as calculated 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 (such product being referred to as “Liquidated Damages”), as set out in the relevant Delivery Order. “
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16. A perusal of clause 3 of the aforesaid Agreement indicates that it deals with obligations of both the customer and the Appellant.
Whereas clause 3.1 deals with the procurer‟s (customer‟s) obligation and provides that upon execution of the delivery order the procurer shall deliver LNG to the Appellant at the Custody Transfer Point and receive RLNG at the Delivery Point and make payment for regasification in accordance with and subject to the terms and conditions of the master Agreement, Clause 3.2 deals with the obligations of the Appellant and provides that upon execution of the relevant delivery order, the Appellant shall receive LNG at the Custody Transfer Point, undertake regasification for the procurer and deliver RLNG to the procurer at the Delivery Point. It also provides that the energy value of RLNG delivered to the procurer at the Delivery Point shall be equal to the energy value of LNG received by the Appellant at the Custody Transfer Point, reduced by the energy value of the “allowed loss and consumption”. The Custody Transfer Point has been defined in the Agreement to mean the point at the unloading port, while the Delivery Point has been defined to mean the point where the RLNG transporter‟s facilities connect to the Appellant‟s facilities immediately after the RLNG measurement facilities. The “allowed loss and consumption” has also been defined in clause 1.1 of the Agreement to mean 0.66% of each LNG cargo/
quantities (collected in energy terms) delivered by procurer to the Appellant at the Custody Transfer Point that is consumed, utilized or that may be lost during the regasification of such LNG and which shall not be taken in connection while determining the supply deficiency of the Appellant. Thus “allowed loss and consumption” is
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a term of the Agreement and assumes importance in view of clause 15 of the Agreement which relates to liquidated damages that is determined in accordance with clause 15.3 of the Agreement. It provides that in the event of occurrence of any supplied deficiency by the Appellant, the Appellant shall pay liquidated damages which shall be the product of the supplied deficiency and 100% of the regasification rate, as set out in the relevant delivery order.
17. What 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, therefore, to be determined whether the value of LNG received by the Appellant free of cost is required to be included in the
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taxable value for the payment of service tax under the head “Business Auxiliary Service”.
20. According to the Appellant, there are certain unavoidable factors during the entire period of regasification that result in loss of LNG, which loss is recognized internationally and is a part of established industry practice. It is in order to deal with such a loss that the Appellant and the customers namely Gujarat State Petroleum Ltd, Gas Authority of India Ltd. and Bharat Petroleum Corporation Ltd.
specifically dealt with the concept of “allowed loss and consumption”
ranging from 0.66% to 1% in the Agreements. This clause takes care of the LNG that may be lost during the regasification process, including during handling and/ or processing so as to absolve the Appellant from payment of liquidated damages, which otherwise the Appellant may have to pay on account of any deficiency in the supply of RLNG. The obligation of the Appellant under the Agreement is, therefore, to deliver the entire quantity of LNG which has been delivered by the customer to the Appellant, less the quantity agreed upon as “allowed loss and consumption”. The price payable towards regasification charges with respect to each billing period is calculated at the regasification rate multiplied by the total MMBTU of RLNG taken by the procurer at the Delivery Point and the invoices have to specifically mention the quantity of “allowed loss and consumption” deducted by the Appellant. The obligation of the Appellant under clause 3.2 of the Agreement specifically mentions that the energy value of RLNG delivered to the customer at the Delivery Point shall be equal to the energy value of LNG received by the Appellant at the Custody Transfer Point reduced by the energy value of the “allowed loss and consumption”. Clause 3.4 of the Agreement that deals with Co-
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mingling acknowledges that the Appellant provides regasification of LNG to other entities as well and so it would have the right to Co- mingle all quantities of LNG received under the Agreement with other quantities and qualities of LNG, but the energy value of RLNG delivered to the customer at the Delivery Point shall be equal to the energy value of LNG received by the Appellant at the Custody Transfer Point reduced 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 provides that there shall be levied a tax called service tax at the rate of 12% of the value of taxable services referred to in various sub-clauses of section 65(105). Section
__________________
14. 2006 Rules
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67 of the Act deals with valuation of taxable service for charging service tax and is as follows:-
“67(1) (1) Subject to the provisions of this Chapter, where service tax is chargeable on any taxable service with reference to its value, then such value shall,—
(i) in a case where the provision of service is for a consideration in money, be the gross amount charged by the service provider for such service provided or to be provided by him;
(ii) in a case where the provision of service is for a consideration not wholly or partly consisting of money, be such amount in money as, with the addition of service tax charged, is equivalent to the consideration;
(iii) in a case where the provision of service is for a consideration which is not ascertainable, be the amount as may be determined in the prescribed manner.
(2) Where the gross amount charged by a service provider, for the service provided or to be provided is inclusive of service tax payable, the value of such taxable service shall be such amount as, with the addition of tax payable, is equal to the gross amount charged.
(3) The gross amount charged for the taxable service shall include any amount received towards the taxable service before, during or after provision of such service.
(4) Subject to the provisions of sub-sections (1), (2) and (3), the value shall be determined in such manner as may be prescribed.
Explanation.—For the purposes of this section,—
(a) “consideration” includes any amount that is payable for the taxable services provided or to be provided;
(b) “money” includes any currency, cheque, promissory note, letter of credit, draft, pay order, travellers cheque, money order, postal remittance and other similar instruments but does not include currency that is held for its numismatic value;
(c) “gross amount charged” includes payment by cheque, credit card, deduction from account and any form of payment by issue of credit notes or debit notes and book adjustment, and any amount credited or debited, as the case may be, to any account, whether called “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
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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 services rendered by the Appellant. In fact, “allowed loss and consumption” is a stipulation contained in the Agreement between the parties to remit performance of the obligation of regasification in relation to the percentage of the LNG agreed upon as “allowed loss and consumption”.
25. In this connection reference can be made to section 63 of the Indian Contract Act, 1872 that provides that a promisee may dispense with or remit performance of promise and it is as follows :-
“63. Promisee may dispense with or remit performance of promise.- Every promisee may dispense with or remit, wholly or in part, the performance of the promise made to him, or may extend the time for such performance, or may accept instead of it any satisfaction which he thinks fit. “
26. Section 63 of the Contract Act was examined by the Supreme Court in Jagad Bandhu Chatterjee and it was observed that it deals with waiver of contractual obligations. The observation are as follows:-
“In India the general principle with regard to waiver of contractual obligations is to be found in s. 63 of the Indian Contract Act. Under that section it is open to a promise to
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dispense with or remit, wholly or in part, the performance of the promise made to him or he can accept instead of it any satisfaction which he thinks fit. Under the Indian law neither consideration nor an Agreement would be necessary to constitute waiver. This Court has already laid down in Waman Shriniwas Kini v. Ratilal Bhagwandas & Co.(1) that waiver is the abandonment of a right which normally everybody is at liberty to waive. "A waiver is nothing unless it amounts to a release. It signifies nothing more than an intention not to insist upon the right.”
27. It can, therefore, safely be said that concept of “allowed loss and consumption” in the Agreement between the parties was to remit performance of the obligation and would not qualify as “consideration”
for the services of regasification.
28. Learned Counsel for the Appellant, in the alternative, submitted that even if it is assumed that the customers provided LNG to the Appellant as “free of cost material” for the services of regasification, then too the “free of cost material‟” supply would not constitute
“consideration” for the purpose of levy of service tax because 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
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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" the Department does not get any jurisdiction to go beyond the contract value to arrive at the value of taxable services. Further, by the use of the word "charged", it is clear that the same refers to the amount billed by the service provider to the service receiver. Therefore, in terms of Section 67, unless an amount is charged by the service provider to the service recipient, it does not enter into the equation for determining the value on which service tax is payable.
b. The amount charged should be for "for such service provided": Section 67 clearly indicates that the gross amount charged by the service provider has to be for the service provided. Therefore, it is not any amount charged which can become the basis of value on which service tax becomes payable but the amount charged has to be necessarily a consideration for the service provided which is taxable under the Act. By using the words "for such service provided" the Act has provided for a nexus between the amount charged and the service provided. Therefore, any amount charged which has no nexus with the taxable service and is not a consideration for the service provided does not become part of the value which is taxable under Section 67. The cost of free supply goods provided by the service recipient to the service provider is neither an amount "charged" by the service provider nor can it be regarded as a consideration for the service provided by the service provider. In fact, it has no nexus whatsoever with the taxable services for which value is sought to be determined"
13. A plain meaning of the expression 'the gross amount charged by the service provider for such service provided or to be provided by him' would lead to the obvious conclusion that the value of goods/material that is provided by the service recipient free of charge is not to be included while arriving at the 'gross amount' simply, because of the reason that no price is charged by the assessee/service provider from the service recipient in respect of such goods/materials. This further gets strengthened from the words 'for such service provided or to be provided' by the service provider/assessee. Again, obviously, in respect of the goods/materials supplied by the service recipient, no service is provided by the assessee/service provider. Explanation 3 to subsection (1) of 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)
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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 credited or debited, as the case may be...' is to be Civil Appeal Nos. 1335-1358 of 2015 with Ors. Page 18 of 26 included for the purposes of arriving at gross amount charges and is leviable to pay service tax. On that basis, it was sought to argue that the value of goods/materials supplied free is a form of payment and, therefore, should be added. We fail to understand the logic behind the aforesaid argument. A plain reading of Explanation (c) which makes the 'gross amount charges' inclusive of certain other payments would make it clear that the purpose is to include other modes of payments, in whatever form received; be it through cheque, credit card, deduction from account etc. It is in that hue, the provisions mentions that any form of payment by issue of credit notes or debit notes and book adjustment is also to be included.
Therefore, the words 'in any form of payment' are by means of issue of credit notes or debit notes and book adjustment. With the supply of free goods/materials by the service recipient, no case is made out that any credit notes or debit notes were issued or any book adjustments were made. Likewise, the words, 'any amount credited or debited, as the case may be', to any account whether called 'suspense account or by any other name, in the books of accounts of a person liable to pay service tax' would not include the value of the goods supplied free as no amount was credited or debited in any account. In fact, this last portion is related to the debit or credit of the account of an associate enterprise and, therefore, takes care of those amounts which are received by the associated enterprise for the services rendered by the service provider.
16. In fact, the definition of "gross amount charged"
given in Explanation (c) to Section 67 only provides for the modes of the payment or book adjustments by which the consideration can be discharged by the service recipient to the service provider. It does not expand the meaning of the term "gross amount charged" to enable the Department to ignore the contract value or the amount actually charged by the service provider to the service recipient for the service rendered. The fact that it is an inclusive definition and may not be exhaustive also does not lead to the conclusion that the contract value can be ignored and the value of free supply goods 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
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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 by the service recipient to the service provider is neither an amount charged by the service provider nor it can be regarded as a consideration for the service provided by the service provider. In fact it has no nexus whatsoever with the taxable services for which value is sought to be determined. The Supreme Court also made it clear that sub-section (3) section 67 (1) of the Act removes any doubt by clarifying that the gross amount charged for the taxable service shall include the amount received towards the taxable service, during or after provision of such services, implying thereby that where no amount is charged, it cannot be included in material/goods which are supplied by the service recipient.
The Supreme Court also examined the scope of Explanation (c) to sub- section (4) of section 67(1) of the Act and observed that it only provides for the modes of the payment of book adjustments and it does not expand the meaning of the term “gross amount charged” to enable the Department to ignore the contract value or the amount actually charged by the service provided to the service recipient for the service rendered.
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32. 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.
33. 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 Bhayana Builders 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.
34. It will, therefore, be appropriate to reproduce that observation of the Larger Bench of the Tribunal in Bhayana Builders on which reliance has been placed by the Department and the same is as follows:-
“(v) Clearly, section 67 of the Act deals with valuation of taxable services and intends to define what constitutes the value received by the service provider as “consideration”
from the service recipient for the service provided. Implicit 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)
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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 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. In this context it would also be appropriate to refer to clause 4 of the Agreement which specifically provides that the Appellant shall not have, or otherwise acquire, in any manner whatsoever, any title to LNG received by it at the Custody Transfer Point or RLNG delivered at the Delivery Point.
36. Learned Authorized Representative of the Department placed reliance upon a decision of the Tribunal in BEE AM Industries. In the first instance, the decision of the Larger Bench of the Tribunal in Bhayana Builders that was rendered in 2013, before the decision in BEE AM Industries, but it was not considered. Secondly, in view of the decision of the Supreme Court in Bhayana Builders it would also not possible to take a view that if working premises have been provided rent-free, then would be a non-monetary consideration for the purpose of levy of the Service Tax.
37. What is also important to note is that the stipulation “allowed loss and consumption” is a condition of the contract and cannot be treated as a consideration for the contract entered into between the Appellant and the customer. Such a distinction has been noticed in a Goods and
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Service Tax ruling rendered by the Australian TaxationOffice15 relating to non-monetary consideration. It was observed that the recipient of a supply may provide or make things available for the supplier to use in making the supply. This thing may not necessarily form
“consideration” and in this context an example was cited. The relevant paragraph 90 of the ruling is reproduced below:-
“Things used to make a supply
90. The recipient of a supply may provide or make a thing available for the supplier to use in making the supply.
However, the thing does not necessarily form consideration.
Example 9 - things used in making the supply
91. Eddie 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. There is no non-monetary consideration for Eddie's supply.”
38. In this view of the matter also, the “allowed loss and consumption” will not form part of the “consideration” for the purpose of levy of service tax.
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15. GSTR 2001/06
