# COMMISSIONER OF SERVICE TAX, AHMEDABAD v. M/S. ADANI GAS LTD

- **Citation:** [2020] 8 S.C.R. 875
- **Court:** Supreme Court of India
- **Decided:** 2020-08-28
- **Case number:** Civil Appeal No. 2633 of 2020
- **Bench:** Dr. Dhananjaya Y. Chandrachud, Indu Malhotra, K. M. Joseph
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/commissioner-of-service-tax-ahmedabad-v-m-s-adani-gas-ltd-34857
- **Pages:** 42

## Headnote

Finance Act, 1994:
s. 65(105)(zzzzj) - Levy under - Applicability of - To supply
of pipes and measurement equipment (SKID equipment) charged
under the head of 'gas connection charges' by the assessee to its
industrial, commercial and domestic consumers treating the same
as supply of 'tangible goods' for their use - Held: SKID equipment
fulfils the description in s. 65(105)(zzzzj) of a taxable service i.e.
service in relation to 'tangible goods' where recipient of the service
has use (without possession or effective control) of the goods.
Allowing the appeals, the Court
HELD: 1.1. 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 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) of the Constitution of India. 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 Section 65(105)(zzzzj) vis-à-vis Article
366(29-A)(d). [Paras 13 and 18][888-C; 891-F-G]
Bharat Sanchar Nigam Limited and Another v. Union
of India and Others (2006) 3 SCC 1 : [2006] 2 SCR
823; Great Eastern Shipping Company Limited. v. State
of Karnataka and Others (2020) 3 SCC 354; All India
875
[2020] 8 S.C.R. 875
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Federation of Tax Practitioners v. Union of India, (2007)
7 SCC 527 : [2007] 9 SCR 147; Indian National
Shipowners' Association and Anr. v. Union of India and
Others (2009) 4 AIR Bom R 775; Union of India v.
Indian National Shipowners' Association and Anr
(2010) 14 SCC 438 - referred to.
1.2 The taxable service in the Finance Act, 1994, is defined
as a service which is provided or which is to be provided by any
person to another "in relation to supply of tangible goods". The
provision indicates that the goods may include machinery,
equipment or appliances. 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. There is an element of service which is
the foundation for the levy of the tax. [Para 20][893-G; 894-A-C]
2. 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 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
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the buyer's facilities. At the outset, it is clear

## Text

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COMMISSIONER OF SERVICE TAX, AHMEDABAD
v.
M/S. ADANI GAS LTD.
(Civil Appeal No. 2633 of 2020)
AUGUST 28, 2020
[DR. DHANANJAYA Y. CHANDRACHUD,
INDU MALHOTRA AND K. M. JOSEPH, JJ.]
Finance Act, 1994:
s. 65(105)(zzzzj) - Levy under - Applicability of - To supply
of pipes and measurement equipment (SKID equipment) charged
under the head of 'gas connection charges' by the assessee to its
industrial, commercial and domestic consumers treating the same
as supply of 'tangible goods' for their use - Held: SKID equipment
fulfils the description in s. 65(105)(zzzzj) of a taxable service i.e.
service in relation to 'tangible goods' where recipient of the service
has use (without possession or effective control) of the goods.
Allowing the appeals, the Court
HELD: 1.1. 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 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) of the Constitution of India. 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 Section 65(105)(zzzzj) vis-à-vis Article
366(29-A)(d). [Paras 13 and 18][888-C; 891-F-G]
Bharat Sanchar Nigam Limited and Another v. Union
of India and Others (2006) 3 SCC 1 : [2006] 2 SCR
823; Great Eastern Shipping Company Limited. v. State
of Karnataka and Others (2020) 3 SCC 354; All India
875
[2020] 8 S.C.R. 875
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Federation of Tax Practitioners v. Union of India, (2007)
7 SCC 527 : [2007] 9 SCR 147; Indian National
Shipowners' Association and Anr. v. Union of India and
Others (2009) 4 AIR Bom R 775; Union of India v.
Indian National Shipowners' Association and Anr
(2010) 14 SCC 438 - referred to.
1.2 The taxable service in the Finance Act, 1994, is defined
as a service which is provided or which is to be provided by any
person to another "in relation to supply of tangible goods". The
provision indicates that the goods may include machinery,
equipment or appliances. 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. There is an element of service which is
the foundation for the levy of the tax. [Para 20][893-G; 894-A-C]
2. 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 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
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the buyer's facilities. 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 'Measurement Equipment' is to be
supplied, installed and maintained by the seller at the cost of the
buyer and that the ownership of the equipment will rest with the
respondent forever. Clause 5.6 further clarifies that the buyer
has no right to adjust, clean, handle, replace, maintain, remove
or modify the measurement equipment. Clause 5.10 guarantees
that the seller shall have the right of entry at all hours to the
Measurement Equipment and associated apparatus at the Buyer's
premises. The pipelines are also part of the "Seller's Facilities"
under the agreement and are constructed and maintained by the
respondent at the cost of the customer. Thus, the ingredient of
not transferring the ownership, possession or effective control
of the goods under Section 65(105)(zzzzj) is satisfied. [Paras 22
and 23][900-G-H; 901-A-D]
3.1 The expression "use" does not have a fixed meaning.
The content of the expression must be based on the context in
which the expression is adopted. The use of an article may or
may not result in a visible change in its form or substance.
Moreover, the nature of use is conditioned by the kind of article
which is put to use. Section 65(105) of the Finance Act, 1994
envisages myriad interpretations of the expression "use", in a
variety of services such as telecommunication, renting of
immovable property, and services related to art, entertainment,
and marriage. 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".
This understanding of "use" differs from the supply of tangible
goods under Section 65(105)(zzzzj, where effective control or
COMMISSIONER OF SERVICE TAX, AHMEDABAD v. M/S. ADANI
GAS LTD.
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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. [Para 27][903-D-G; 904-A]
3.2 The terms of the GSA indicate that the supply,
installation, maintenance and repair of the measurement
equipment is exclusively entrusted to the respondent as the
seller. These provisions have been incorporated in the GSA to
ensure that a buyer does not calibrate or tinker with the equipment.
It is an incident of ownership and control being vested with the
respondent. The purpose of the SKID equipment and its utility,
lie in its ability to regulate the supply and achieve an accurate
verification of that which is supplied; in the present case the
supply of goods by the respondent to its buyers. This enures to
the benefit of the seller and the buyer. The seller is concerned
with the precise quantification of the gas which is supplied to the
buyer. The buyer has an interest in ensuring the safety of its
facilities and that the billing is based on the correct quantity of
gas supplied and delivered under the GSA. To postulate that the
measurement equipment is only for the benefit of the seller in
measuring the quantity of the gas supplied would not be correct.
The GSA is an agreement reflecting mutual rights and obligations
between the seller and the purchaser. Both have a vital interest
in ensuring the correct recording of the quantity of gas supplied.
Additionally, delivery of gas in a safe and regulated manner,
enabled by the SKID equipment, is an essential component of
the GSA. The SKID equipment subserves the contractual rights
of both the seller and the purchaser of gas. Indeed, without the
SKID equipment there would be no gas supply agreement. In
fact, in the GSA, the buyer has also provided a warranty to ensure
that the "Buyer's Facilities" remain technically and operationally
compatible with the "Seller's Facilities", both of which include
the 'measurement equipment'. This warranty would not have been
provided if the measurement equipment was not of 'use' to the
buyer. The equipment is thus a vital ingredient of the agreement
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towards protecting the mutual rights of the parties and in ensuring
the fulfilment of their reciprocal obligations as seller and buyer
in regulating the supply of gas. As an incident of regulating supply,
it determines the correct quantity of gas that is supplied. The
obligation to supply, install and maintain the equipment 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. 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. [Paras 28 and
30][904-B-H; 905-A, D]
Meru Cab Company Pvt. Ltd. v. Commissioner of Central
Excise, Mumbai 2016 (41) STR (444) (Tri-Mum) -
referred to.
4. The extent of the refund of gas connection charges,
collected from industrial, commercial and domestic consumers
by the respondent depends on their usage. From the internal
note dated 13 July 2007 and the tabulation of customers, it is
evident that the percentage of funds refunded varies from
customer to customer, while the remaining amount is retained
by the respondent. In any case, as regards the domestic
customers, no deposit receipts have been provided and instead,
the respondent has relied on the tabulation of the refund of deposit
to industrial consumers to support their contention. Thus, it is
not correct to say that these gas connection charges collected
from industrial, commercial and domestic consumers constitute
a refundable security deposit. [Para 37][910-F-G]
5. Therefore, the Adjudicating Authority was correct in
concluding that the buyer of gas is as interested as the seller in
COMMISSIONER OF SERVICE TAX, AHMEDABAD v. M/S. ADANI
GAS LTD.
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ensuring and verifying the correct quantity of the gas supplied
through the instrumentality of the measurement equipment and
the pipelines. Additionally, 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 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. The
Tribunal was in error in interfering with the findings and order of
the Adjudicating Authority. [Paras 38 and 39][910-H; 911-A-C]
Case Law Reference
[2006] 2 SCR 823
referred to
Para 15
(2020) 3 SCC 354
referred to
Para 16
[2007] 9 SCR 147
referred to
Para 17
(2010) 14 SCC 438
referred to
Para 19
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 2633
of 2020.
From the Judgment and Order dated 05.04.2019 of the Custom
Excise and Service Tax Appellate Tribunal, West Zonal Bench at
Ahmedabad in Service Tax Appeal No. 421 of 2011.
Sanjay Jain, ASG, Sharad Kumar Singhania, D.L. Chidananda,
Ashray Behura, Padmesh Mishra, B. Krishna Prasad, Advs. for the
Appellant.
Vikram Nankani, Sr. Adv., Mahesh Agarwal, Anshuman
Srivastava, Utkarsh Pratap, E. C. Agrawala, Advs. for the Respondents.
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The Judgment of the Court was delivered by
DR. DHANANJAYA Y. CHANDRACHUD, J.
1. This appeal arises from a judgment and order of the Customs,
Excise, & Service Tax Appellate Tribunal,1 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, Ahmedabad2 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 and Piped Natural Gas4 - 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 airconditioning. 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 - 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
COMMISSIONER OF SERVICE TAX, AHMEDABAD v. M/S. ADANI
GAS LTD.
1 "Tribunal"
2 "Adjudicating Authority"
3 "CNG"
4 "PNG"
5 "GSA"
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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 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- S.T. 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'
consists of isolation valves, filters, regulators and electronic
meters;
(iii)
The equipment is installed at the location of the customer
without the transfer of ownership and possession; and the
respondent retains the right to use the equipment;
6 "Show Cause Notice"
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(iv)
The arrangement between the respondent and its customer
provides for the supply of gas, for which measurement
equipment (the SKID equipment), is installed at the cost of
customers at their premises for the purpose of billing;
(v)
The equipment is used by the respondent for its own purposes
and the customer does not use the measurement equipment;
(vi)
Under the GSA, the right to adjust, clean, handle, replace,
maintain, remove or modify the equipment is conferred upon
the respondent. The equipment is used by the respondent
and the customer does not buy or use the equipment;
(vii)
Under the GSA, the respondent 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 20087. 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
Adjudicating Authority noted that the demand in the Show Cause Notice
was not under the category of "transport of goods by pipeline or other
COMMISSIONER OF SERVICE TAX, AHMEDABAD v. M/S. ADANI
GAS LTD. [DR. DHANANJAYA Y. CHANDRACHUD, J.]
7 "PNGRB Network Tariff Regulations 2008", published vide notification dated 19
March 2008.
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conduit services" under Section 65(105)(zzz) on the charges recovered
from the supply of gas, but for supplying measurement equipment at the
time of providing a new gas connection to a customer, under the category
of "supply of tangible goods services" under Section 65(105)(zzzzj). The
Adjudicating Authority held that "...there is a definite element of service
involved in this transaction." The Adjudicating Authority held that the
respondent is not only a seller engaged in the sale of gas to the customer
but also a service provider who supplies, installs and maintains
measurement equipment at the customers' premises. The customer, in
this view, is a purchaser of gas and a service recipient for the supply,
installation and maintenance of measurement equipment. The fact that
(i) ownership of the measurement equipment vests with the respondent;
and (ii) there is no transfer of the right of possession and effective control
is undisputed, thereby satisfying two of the required ingredients for Section
65(105)(zzzzj). Noting that the purpose of the measurement equipment
is to ensure effective and accurate billing, the Adjudicating Authority
held that the expression 'use' is attracted and it is the customer who
must be held to be in use of the equipment, regardless of the customer
lacking technical expertise in handling the measurement equipment. This
conclusion was based on the following reasoning:
"The expression "use" does not mean that the recipient has to
personally and physically use the equipment all the time. It broadly
refers to the direct or indirect use whether personally or through
anybody else and meant to serve the intended purpose of the
goods. The contention of the said noticee that they use the
"Measurement Equipment" which are installed for their own
benefits and purposes is misplaced. Accuracy in billing is as
much a concern of the buyer of gas as is of the seller and
hence, he gets it installed at his own cost and therefore
working of the "Measurement Equipment" is verified
periodically by the buyer as well as the seller as agreed by
both in the Agreement." (emphasis supplied).
6. The order also noted that the entirety of the gas connection
charges collected at the time of installing the connection 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 Rs. 2,83,46,411/- to
Rs. 2,52,73,526/-. Penalties were imposed under Sections 77 and 78 of
the Finance Act 1994.
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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 for the purpose
of billing. The gas pipeline from the nearest distribution point is
laid and maintained by appellant at the cost of the customer and
the measuring equipment is also supplied, installed and maintained
by the appellant at the cost of the customer. The terms of the
agreement leave no manner of doubt that the purpose of
the equipment is to measure the amount of gas supplied to
the customer for the purpose of billing. They are, therefore,
for the use of the appellant and are not for use by the
customers. The finding to the contrary recorded by the
Adjudicating Authority is, therefore, not correct." (emphasis
supplied)
8. The Tribunal held that the metering equipment is 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.
9. The decision of the Tribunal has been assailed on behalf of the
revenue/appellant in the appeals. Mr. Sanjay Jain, Additional Solicitor
General of India, submitted that the GSA which is a 'take or pay
agreement' demonstrates that:
(i)
The SKID equipment is installed by the respondent at the
cost of the buyer;
(ii)
Neither ownership nor possession of the equipment is
transferred to the buyer;
COMMISSIONER OF SERVICE TAX, AHMEDABAD v. M/S. ADANI
GAS LTD. [DR. DHANANJAYA Y. CHANDRACHUD, J.]
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(iii)
The measurement equipment is installed, maintained and
repaired by the respondent at the cost of the buyer;
(iv)
Mere technical expertise on part of the respondent to
operate the equipment does not preclude the usage by the
buyer;
(v)
The buyer is as much concerned about the accuracy of the
billing as the supplier of gas. The measurement equipment
enures to the benefit of the buyer for the purpose of verifying
the correctness of the charges levied based on the quantity
of gas consumed;
(vi)
Though the gas connection charges which are initially
recovered are claimed to be refundable, the quantum of
refunds may vary from buyer to buyer and the data which
was produced by the respondent indicates that in several
cases full refunds have not been made; and
(vii)
The CBEC circular No. 334/1/2008-TRU dated 29 February
2008 has clarified that transactions that enable usage of
goods without transferring the right to use, are in the nature
of a service under Section 65(105)(zzzzj) and not sale under
Article 366(29-A)(d) of the Constitution of India. Since the
respondent has not paid VAT 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;
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(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 gas is not
entitled to adjust, modify or maintain the equipment. The
buyer has no possessory right nor can they lease or sub-let
the equipment;
(v)
The purpose of the measurement equipment in a gas supply
contract is to measure the quantity of gas supplied to the
buyer of gas. However, the buyer gets no service out of
the equipment;
(vi)
In determining the issue in appeal, it is necessary to isolate
the rights conferred by the GSA on the buyer of gas from
the issue as to whether the buyer has the use of the SKID
equipment. The SKID equipment is a technical device and
the buyer has no right to use the equipment; and this inability
to use the equipment by the customer would not be within
the scope of the taxing provision, which must be construed
strictly;
(vii)
Amounts collected under the head of "gas connection
charges" are mainly in the nature of interest-free security
deposits, which are required to be refunded in part, or in
full, depending on the duration of the contract which
determines depreciation. They are not collected as a
consideration for providing a service; and under Article
366(29-A)(d), a tax on the sale or purchase of goods includes
a tax on the transfer of the right to use goods for any
purpose, without necessarily transferring the title. Section
65(105)(zzzzj) was introduced with the intention of capturing
services which were technically not 'sales' and were
escaping the net of VAT. In the present case, there is no
transfer of the right to use the equipment nor is there any
element of service in the supply of the metering equipment.
The equipment is installed by the respondent as a seller of
gas and is not used by the buyer.
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12. The question that arises for our consideration is whether Section
65(105)(zzzzj) of the Finance Act, 1994 is applicable in the present case,
that is, 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. While assessing the merits of
the rival submissions, it is necessary to interpret the provisions of Section
65(105)(zzzzj).
13. 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'. Section 65(105)(zzzzj) of the Finance Act, 1994 reads as
follows:
"65(105) "taxable service" means any service provided or to be
providedxx
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(29- A)(d), provides:
"(366)(29-A) tax on the sale or purchase of goods includesxx 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 consideration;
xx xx xx
and such transfer, delivery or supply of any goods shall be deemed
to be a sale of those goods by the person making the transfer,
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delivery or supply and a purchase of those goods by the person to
whom such transfer, delivery or supply is made."
15. The applicability of Article 366(29-A)(d) was discussed in a
decision of this Court in Bharat Sanchar Nigam Limited and another
v. Union of India and others8 ("BSNL"). In BSNL, the Court held
that the purpose of Article 366(29- A)(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'.
Elucidating on the "transfer of the right to use any goods", Dr A R
Lakshmanan J. in a concurring opinion held:
"97. To constitute a transaction for the transfer of the right to use
the goods, the transaction must have the following attributes:
a. there must be goods available for delivery;
b. there must be a consensus ad idem as to the identity of the
goods;
c. the transferee should have a legal right to use the goodsconsequently all legal consequences of such use including any
permissions or licenses required therefore should be available
to the transferee;
d. for the period during which the transferee has such legal
right, it has to be the exclusion to the transferor; this is
the necessary concomitant of the plain language of the
statute viz. a "transfer of the right to use" and not merely
a licence to use the goods;
e. having transferred the right to use the goods during the period
for which it is to be transferred, the owner cannot again transfer
the same rights to others."
(emphasis supplied)
16. 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
COMMISSIONER OF SERVICE TAX, AHMEDABAD v. M/S. ADANI
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by the supplier to the recipient of the goods. Recently, this Court in
Great Eastern Shipping Company Limited. v. State of Karnataka
and others9 considered whether the transfer of a vessel 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 only for service and when it is the
transfer of right to use.
xx xx
 xx
54. When we consider the charterparty in question in the context
of applicable law, particularly in view of the constitutional provisions
of Article 366(29A)(d), we find that there is transfer of right to
use tangible goods, which is determinative of deemed sale as per
the Constitution of India and provisions of section 5C reflecting
the said intendment. We are of the considered opinion that
there is transfer of right to use exclusively given to
charterer for six months, and the vessel has been kept
under the exclusive control. The charterer qualifies the test
laid down by this court in BSNL (supra)."
(emphasis supplied)
9 2020 (3) SCC 354.
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17. Therefore, sales tax is levied in pursuance of Article 366(29A)(d) on transactions which resemble a sale in substance as they result
in a transfer of the right to use in goods, instead of the transfer of title in
goods. The Finance Act, 1994, deriving authority from the residuary
Entry 97 of the Union List, enabled the Central Government to levy tax
on services. 'Service tax' was introduced as a response to the
advancement of the contemporary world where an indirect tax was
necessary to capture consumption of services, which are economically
similar to consumption of goods, in as much as they both satisfy human
needs.10 This Court, in Association of Leasing and Financial Service
Companies v. Union of India,11 had noted:
"38...Today with technological advancement there is a very thin
line which divides a "sale" from "service". That, applying the
principle of equivalence, there is no difference between production
or manufacture of saleable goods and production of marketable/
saleable services in the form of an activity undertaken by the
service provider for consideration, which correspondingly stands
consumed by the service receiver. It is this principle of equivalence
which is inbuilt into the concept of service tax under the Finance
Act, 1994. That service tax is, therefore, a tax on an activity.
That, service tax is a value added tax. The value addition is on
account of the activity which provides value addition...Thus,
service tax is imposed every time service is rendered to
the customer/client...Thus, the taxable event is each 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 Section
65(105)(zzzzj) vis-à-vis Article 366(29-A)(d). The relevant portions of
the circular are as follows:
17. Therefore, sales tax is levied in pursuance of Article 366(29A)(d) on transactions which resemble a sale in substance as they result
in a transfer of the right to use in goods, instead of the transfer of title in
goods. The Finance Act, 1994, deriving authority from the residuary
Entry 97 of the Union List, enabled the Central Government to levy tax
on services. 'Service tax' was introduced as a response to the
advancement of the contemporary world where an indirect tax was
necessary to capture consumption of services, which are economically
similar to consumption of goods, in as much as they both satisfy human
needs.10 This Court, in Association of Leasing and Financial Service
Companies v. Union of India,11 had noted:
"38...Today with technological advancement there is a very thin
line which divides a "sale" from "service". That, applying the
principle of equivalence, there is no difference between production
or manufacture of saleable goods and production of marketable/
saleable services in the form of an activity undertaken by the
service provider for consideration, which correspondingly stands
consumed by the service receiver. It is this principle of equivalence
which is inbuilt into the concept of service tax under the Finance
Act, 1994. That service tax is, therefore, a tax on an activity.
That, service tax is a value added tax. The value addition is on
account of the activity which provides value addition...Thus,
service tax is imposed every time service is rendered to
the customer/client...Thus, the taxable event is each 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 Section
65(105)(zzzzj) vis-à-vis Article 366(29-A)(d). The relevant portions of
the circular are as follows:
10 All India Federation of Tax Practitioners v. Union of India, (2007) 7 SCC 527,
para 4.
11 (2011) 2 SCC 352.
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"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].