Custom, Excise & Service Tax Tribunal
Petronet Lng Limited vs Commissioner, Cgst-Delhi I on 22 March, 2021
Author: Dilip Gupta
Bench: Dilip Gupta
CUSTOMS, EXCISE & SERVICE TAX APPELATE TRIBUNAL
NEW DELHI
PRINCIPAL BENCH
SERVICE TAX APPEAL NO. 50532 OF 2017
(Arising out of Order-in-Original No. DLISVTAX001COMO141617 dated 27.12.2016 passed by the
Commissioner of Service Tax, Delhi-110002)
Petronet LNG Limited .........Appellant
(World Trade Centre, First Floor, Barbar Road,
Barakhamba Lane, New Delhi-110001)
VERSUS
Principal Commissioner of Service Tax, ........Respondent
Delhi-I (17-B, I.A.E.A., House, I.P. Estate, M.G. Marg, New Delhi-110002) APPEARANCE:
Shri Sujeet Ghosh and Ms. Mannat, Advocates for the Appellant Shri Radhe Tallo, Authorised Representative for the Department CORAM: HON'BLE MR. JUSTICE DILIP GUPTA, PRESIDENT HON'BLE MR. P.V. SUBBA RAO, MEMBER (TECHNICAL) Date of Hearing/Decision: 22.03.2021 FINAL ORDER NO. 51163/2021 JUSTICE DILIP GUPTA:
This appeal has been filed by Petronet LNG Ltd1 to assail the order dated December 27, 2016 passed by the Commissioner of Service Tax Delhi-12 that confirms the demand of service tax of Rs. 4,55,89,647/- 1 . The Appellant 2 . The Commissioner 2 ST/50532/2017 upon the Appellant for the period July 2014 to March 2015 and also orders for recovery of interest and payment of penalty.
2. 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 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 Commissioner. It is this issue that has come up for consideration in this Appeal.
3. 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 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 3 . LNG 3 ST/50532/2017 the quantity agreed upon as "allowed loss and consumption" for avoiding any liquidated damages.
4. 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 MMBTU4 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.
5. 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/- for the period 2009 to June 2014 by invoking the extended period of five years under the proviso to section 73(1) of the Finance Act, 19945 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.
6. The Appellant filed a reply to the show cause notice on 24 December, 2014. The Principal Commissioner confirmed the demand of 4 . One million BTU's 5 . The Act 4 ST/50532/2017 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.
7. This order dated December 27, 2016 passed by the Principal Commissioner was assailed by the appellant before this Tribunal in Service Tax Appeal No. 52946 of 2016. The Tribunal, by order dated October 21, 2019, set aside the order passed by the Principal Commissioner and allowed the appeal. The portion of the order relevant for the purpose of this appeal is reproduced below:
"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.
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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.
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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 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".
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27. It can, therefore, safely be said that concept of "allowed loss and consumption" in the Agreement between the parties was to remit 5 ST/50532/2017 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 Commissioner of Service Tax vs. Bhayana Builders6.
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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 subsection (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.
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. xxxxxxxxx
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 Service Tax ruling rendered by the Australian Taxation Office7 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 6 . 2018 (10) GSTL 118 (SC) 7 . GSTR 2001/06 6 ST/50532/2017 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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49. In this view of the matter, the Commissioner was not justified in confirming the demand of service tax on the value of pre-determined quantum of LNG identified by the parties towards "allowed loss and consumption" since such "free of cost" supplies of LNG by the customers cannot form part of the "consideration" received by the Appellant. The value of such LNG cannot, therefore, be included in the taxable value for payment of service tax.
50. Thus, for all the reasons stated above it is not possible to sustain the order dated 26 July, 2016 passed by the Principal Commissioner confirming the demand of service tax upon the Appellant with interest and penalty (emphasis supplied)
8. The show cause notice in the present appeal is dated April 8, 2016 and has been issued for the period July 2014 to March 2015 in continuation of the show cause notice dated October 10, 2014 that was issued for the period June 2009 to June 2014. The order arising out of this show cause notice dated October 10, 2014 had been assailed by the appellant in Service Tax Appeal No. 50532 of 2017. The Agreements referred to in this show cause notice are the same Agreements which were referred to in the earlier show cause notice and the same allegations have been made against the appellant.
9. Shri Sujeet Ghosh learned Counsel for the appellant assisted by Ms. Mannat Bose have raised the same submissions as were raised in the earlier Service Tax Appeal No. 52946 of 2016. Shri Radhe Tallo Learned Authorised Representative of the Department has also made the same submissions.
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ST/50532/2017
10. The impugned order dated December 27, 2016 passed by the Commissioner, for all the reasons stated in the decision rendered in Service Tax Appeal No. 52946 of 2016, deserves to be set aside and is set aside. The appeal is, accordingly, allowed.
(Pronounced in open court on March 22, 2021) (JUSTIC DILIP GUPTA) PRESIDENT (P.V. SUBBA RAO) MEMBER (TECHNICAL) Shreya