COMMISSIONER OF SERVICE TAX, versus M/S. ADANI GAS LTD.

COMMISSIONER OF SERVICE TAX, AHMEDABAD

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 supplyof pipes and measurement equipment (SKID equipment) chargedunder the head of ‘gas connection charges’ by the assessee to itsindustrial, commercial and domestic consumers treating the sameas supply of ‘tangible goods’ for their use – Held: SKID equipmentfulfils the description in s. 65(105)(zzzzj) of taxable service i.e.service in relation to ‘tangible goods’ where recipient of the servicehas 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, 1994provides for taxability of supply of tangible goods for use, withouttransferring right of possession and effective control over suchgoods, as ‘taxable service’. The introduction of Section65(105)(zzzzj) in the Finance Act, 1994, was with the intention oftaxing such activities that enable the customer’s use of the serviceprovider’s goods without transfer of the right of possession andeffective control. This provision creates an element of taxationover service, as opposed to ‘deemed sale’ under Article366(29-A)(d) of the Constitution of India. For the purpose ofclarification, the Department of Revenue issued Circular, D.O.F.No.334/1/2008-TRU, dated 29 February, 2008. The said circularclarified the applicability of Section 65(105)(zzzzj) vis-à-vis Article366(29-A)(d). [Paras 13 and 18][888-C; 891-F-G]

Bharat Sanchar Nigam Limited and Another v. Unionof India and Others (2006) 3 SCC 1 : [2006] 2 SCR823; Great Eastern Shipping Company Limited. v. Stateof Karnataka and Others (2020) 3 SCC 354; All India

876SUPREME COURT REPORTS

AFederation of Tax Practitioners v. Union of India, (2007)7 SCC 527 : [2007] 9 SCR 147; Indian NationalShipowners’ Association and Anr. v. Union of India andOthers (2009) 4 AIR Bom R 775; Union of India v.Indian National Shipowners’ Association and Anr(2010) 14 SCC 438 – referred to.B

1.2 The taxable service in the Finance Act, 1994, is definedas service which is provided or which is to be provided by anyperson to another “in relation to supply of tangible goods”. Theprovision indicates that the goods may include machinery,equipment or appliances. The crucial ingredient of the definitionCis 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 orderto attract the definition of taxable service under sub-clause(zzzzj), the ingredients that have to be fulfilled are: (i) TheDprovision of service; (ii) The service is provided by person toanother person; (iii) The service is provided in relation to thesupply of tangible goods, including machinery, equipment andappliances; (iv) There is no transfer of the right of possession;(v) Effective control over the goods continues to be with theservice provider; (vi) The goods are supplied for use by theErecipient of the service. There is an element of service which isthe foundation for the levy of the tax. [Para 20][893-G; 894-A-C]2. The GSA is an agreement between the respondent andits purchaser for regulating the terms on which gas is sold by therespondent. The agreement is of ‘take or pay’ genre. The buyerFmust lift the quantity contracted or pay for it. The agreementprovides for the supply of gas at the Delivery Point through gaspipelines constructed from the distribution main to themeasurement equipment. Further, both the seller and the buyerhave provided warranties for maintaining the ‘measurementGequipment’ in good working condition, in their respectivecapacities. The measurement equipment is installed for themeasurement and recording of the volume and pressure of thegas delivered at the Delivery Point and for the safe operation of

the buyer’s facilities. At the outset, it is clear from the provisionsof the agreement, and it has been admitted by both the parties,that there is no transfer of ownership or possession of the pipelinesor the measurement equipment (SKID equipment equipment)by the respondent to its customers. Clause 5.3 of the agreementspecifically provides that the ‘Measurement Equipment’ is to besupplied, installed and maintained by the seller at the cost of thebuyer and that the ownership of the equipment will rest with therespondent forever. Clause 5.6 further clarifies that the buyerhas no right to adjust, clean, handle, replace, maintain, removeor modify the measurement equipment. Clause 5.10 guaranteesthat the seller shall have the right of entry at all hours to theMeasurement Equipment and associated apparatus at the Buyer’spremises. The pipelines are also part of the “Seller’s Facilities”under the agreement and are constructed and maintained by therespondent at the cost of the customer. Thus, the ingredient ofnot transferring the ownership, possession or effective controlof the goods under Section 65(105)(zzzzj) is satisfied. [Paras 22and 23][900-G-H; 901-A-D]

3.1 The expression “use” does not have fixed meaning.The content of the expression must be based on the context inwhich the expression is adopted. The use of an article may ormay not result in visible change in its form or substance.Moreover, the nature of use is conditioned by the kind of articlewhich is put to use. Section 65(105) of the Finance Act, 1994envisages myriad interpretations of the expression “use”, in avariety of services such as telecommunication, renting ofimmovable property, and services related to art, entertainment,and marriage. In the case of some articles, use may be signifiedby physical operation of the article by the person who uses it.In such case, actual physical use is what is meant by the supplyof the goods for the use of another. In the case of others, thenature of the goods supplied impacts the character of the use towhich the goods can be put. As an illustration, Section65(105)(zzzze) of the Finance Act, 1994, seeks to tax servicesrelated to information technology and interprets the “right touse” to include the “right to reproduce, distribute, sell, etc”.This understanding of “use” differs from the supply of tangiblegoods under Section 65(105)(zzzzj, where effective control or

Apossession is not ceded. Thus, physical operation is not the onlyor invariable feature of use. As corollary to the same, technicalexpertise over the goods in question is not sine qua non fordetermining the ability of the consumer to use the good.Therefore, the expression “use” also signifies the application ofthe goods for the purpose for which they have been suppliedBunder the terms of 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 measurementequipment is exclusively entrusted to the respondent as theCseller. These provisions have been incorporated in the GSA toensure that buyer does not calibrate or tinker with the equipment.It is an incident of ownership and control being vested with therespondent. The purpose of the SKID equipment and its utility,lie in its ability to regulate the supply and achieve an accurateverification of that which is supplied; in the present case theDsupply of goods by the respondent to its buyers. This enures tothe benefit of the seller and the buyer. The seller is concernedwith the precise quantification of the gas which is supplied to thebuyer. The buyer has an interest in ensuring the safety of itsfacilities and that the billing is based on the correct quantity ofEgas supplied and delivered under the GSA. To postulate that themeasurement equipment is only for the benefit of the seller inmeasuring the quantity of the gas supplied would not be correct.The GSA is an agreement reflecting mutual rights and obligationsbetween the seller and the purchaser. Both have vital interestin ensuring the correct recording of the quantity of gas supplied.FAdditionally, delivery of gas in safe and regulated manner,enabled by the SKID equipment, is an essential component ofthe GSA. The SKID equipment subserves the contractual rightsof both the seller and the purchaser of gas. Indeed, without theSKID equipment there would be no gas supply agreement. InGfact, in the GSA, the buyer has also provided warranty to ensurethat the “Buyer’s Facilities” remain technically and operationallycompatible with the “Seller’s Facilities”, both of which includethe ‘measurement equipment’. This warranty would not have beenprovided if the measurement equipment was not of ‘use’ to thebuyer. The equipment is thus vital ingredient of the agreementH

towards protecting the mutual rights of the parties and in ensuringthe fulfilment of their reciprocal obligations as seller and buyerin regulating the supply of gas. As an incident of regulating supply,it determines the correct quantity of gas that is supplied. Theobligation to supply, install and maintain the equipment is castupon the seller as an incident of control and possession beingwith the seller. Section 65(105)(zzzzj) applies precisely in asituation where the use of the goods by person is notaccompanied by control and possession. ‘Use’ in the context ofSKID equipment postulates the utilization of the equipment forthe purpose of fulfilling the purpose of the contract. Section65(105)(zzzzj) does not require exclusivity of use. The SKIDequipment is an intrinsic element of the service which is providedby the respondent, acting pursuant to the GSA, as supplier ofnatural gas to its buyers. Thus, the supply of the pipelines andthe measurement equipment (SKID equipment) by therespondent, was of use to the customers and is taxable underSection 65(105)(zzzzj) of the Finance Act 1994. [Paras 28 and30][904-B-H; 905-A, D]

Meru Cab Company Pvt. Ltd. v. Commissioner of CentralExcise, 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 consumersby the respondent depends on their usage. From the internalnote dated 13 July 2007 and the tabulation of customers, it isevident that the percentage of funds refunded varies fromcustomer to customer, while the remaining amount is retainedby the respondent. In any case, as regards the domesticcustomers, no deposit receipts have been provided and instead,the respondent has relied on the tabulation of the refund of depositto industrial consumers to support their contention. Thus, it isnot correct to say that these gas connection charges collectedfrom industrial, commercial and domestic consumers constitutea refundable security deposit. [Para 37][910-F-G]

5. Therefore, the Adjudicating Authority was correct inconcluding that the buyer of gas is as interested as the seller in

Aensuring and verifying the correct quantity of the gas suppliedthrough the instrumentality of the measurement equipment andthe pipelines. Additionally, the role of regulating pressure andensuring the safety of supply of gas performed by themeasurement equipment is an essential aspect for the ‘use’ ofthe consumer. The SKID equipment fulfils the description inBSection 65(105)(zzzzj) of taxable service: service in relation“tangible goods” where the recipient of the service has use(without possession or effective control) of the goods. TheTribunal was in error in interfering with the findings and order ofthe Adjudicating Authority. [Paras 38 and 39][910-H; 911-A-C]

Case Law Reference

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 2633of 2020.E

From the Judgment and Order dated 05.04.2019 of the CustomExcise and Service Tax Appellate Tribunal, West Zonal Bench atAhmedabad in Service Tax Appeal No. 421 of 2011.

Sanjay Jain, ASG, Sharad Kumar Singhania, D.L. Chidananda,FAshray Behura, Padmesh Mishra, B. Krishna Prasad, Advs. for theAppellant.

Vikram Nankani, Sr. Adv., Mahesh Agarwal, AnshumanSrivastava, Utkarsh Pratap, E. C. Agrawala, Advs. for the Respondents.

COMMISSIONER OF SERVICE TAX, AHMEDABAD v. M/S. ADANIGAS LTD.

The Judgment of the Court was delivered by

DR. DHANANJAYA Y. CHANDRACHUD, J.

1. This appeal arises from judgment and order of the Customs,Excise, & Service Tax Appellate Tribunal,[1] West Zonal Bench atAhmedabad in Service dated 5 April 2019. The Tribunal has, in exerciseof its appellate jurisdiction, reversed the 30 March 2011 decision of theCommissioner of Service Tax, Ahmedabad[2] and set aside the demandfor payment of service tax on the charges collected by the respondentfor supply of pipes and measuring equipment to its customers underSection 65(105)(zzzzj) of the Finance Act, 1994. This appeal rests onthe interpretation and applicability of the provisions of Section65(105)(zzzzj) of the Finance Act, 1994.

2. The respondent is in the business of distributing natural gas -Compressed Natural Gas[3] and Piped Natural Gas[4] - to industrial,commercial, and domestic consumers. Among other purposes, industrialconsumers use PNG for manufacturing operations. Domestic andcommercial consumers use PNG for cooking, power supply and air-conditioning. In order to facilitate the distribution of PNG to industrial,commercial and domestic consumers through pipes, the respondent installsan equipment described as ‘SKID’ at their customers’ sites. The SKIDequipment consists of isolation valves, filters, regulators and electronicmeters. The equipment regulates the supply of PNG being distributedand records the quantity of PNG consumed by the customer, which isthen used for billing purposes. The respondent enters into an agreement– the Gas Sales Agreement[5] - with consumers to whom gas is suppliedby it.3. The manufacture of CNG falls under Chapter Sub-Heading27112900 of the Central Excise Tariff Act, 1985. The respondent is alsoengaged 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 officersof Central Excise, Ahmedabad-I during January 2009, it was noticedthat the respondent had received income under the head of “gas

1 “Tribunal”

2 “Adjudicating Authority”

3 “CNG”

4 “PNG”

5 “GSA”

Aconnection charges” from its industrial, commercial, and domesticcustomers. From the GSA and the invoices, it was found that chargeswere collected for the “supply of pipes, measuring equipment etc.” whileproviding new gas connections to customers. The ownership of theequipment is not with the customer but is retained by the respondent.The customer does not have control or any legal rights over theBequipment. Value Added Tax was also not paid on these charges collectedfrom the customers. Notice to Show Cause[6] was issued to therespondent on 13 October 2009 stating that the transactions undertakenby them are covered under the category of “supply of tangible goodsservice”, under Section 65(105)(zzzzj) of Finance Act, 1994 which wasCintroduced by Notification No.18/2008- S.T. dated 10 May 2008, witheffect from 16 May 2008. The Show Cause Notice required therespondent to pay service tax with effect from 16 May 2008 on the gasconnection charges recovered for the period from 16 May 2008 to 31March 2009. Three similar notices were issued to the respondent forsubsequent periods. The first notice indicated that the respondent hadDreceived gas connection charges amounting to Rs. 23,37,51,903/- onwhich service tax and cess amounting to Rs. 2,83,46,411/- had not beendeposited. The respondent was called upon to show cause why servicetax should not be demanded together with interest and penalties underSections 76, 77 and 78 of the Finance Act, 1994.

E4. In their reply to the Show Cause Notice, the respondent statedthat:

(i)PNG is distributed through pipes to industrial, commercialand domestic customers. The SKID equipment is installedat the customers’ sites to regulate the supply of PNGFdistributed and record the quantity of PNG consumed forbilling purposes;

(ii)The GSA is entered into with the customer. The ‘SKID’consists of isolation valves, filters, regulators and electronicmeters;G

(iii)The equipment is installed at the location of the customerwithout the transfer of ownership and possession; and therespondent retains the right to use the equipment;

H6 “Show Cause Notice”

(iv)The arrangement between the respondent and its customerAprovides for the supply of gas, for which measurementequipment (the SKID equipment), is installed at the cost ofcustomers at their premises for the purpose of billing;

(v)The equipment is used by the respondent for its own purposesand the customer does not use the measurement equipment;B

(vi)Under the GSA, the right to adjust, clean, handle, replace,maintain, remove or modify the equipment is conferred uponthe respondent. The equipment is used by the respondentand the customer does not buy or use the equipment;

(vii)Under the GSA, the respondent has right of entry at allhours to the measurement equipment to pipeline upto allconsumption points and gas consuming facilities inside thebuyer’s premises;

(viii)The equipment is used only for metering and billing so as tonot invite any dispute or objection from the customers; andD

(ix)The amount which is collected from the customer is in theform of an interest-free security deposit, for the purpose ofensuring safe-keeping of the measurement equipment as isrequired by Attachment 3 to Schedule of the Petroleumand Natural Gas Regulatory Board (Determination ofNetwork Tariff for City or Local Gas Distribution Networksand Compression Charge for CNG) Regulations 2008[7]. Thisdeposit is to be returned at the time of discontinuing orterminating the connection and between 25 to 100 per centof the charges were refunded by the respondent in the year2008-09.

The respondent thus contended that they were not liable to payservice tax and consequently the demand for tax interest and penaltywas not sustainable.

5. The Show Cause Notice was adjudicated by an order dated 30March 2011 of the Adjudicating Authority. Confirming the demand, theAdjudicating Authority noted that the demand in the Show Cause Noticewas not under the category of “transport of goods by pipeline or other

7 “PNGRB Network Tariff Regulations 2008”, published vide notification dated 19March 2008.

Aconduit services” under Section 65(105)(zzz) on the charges recoveredfrom the supply of gas, but for supplying measurement equipment at thetime of providing new gas connection to customer, under the categoryof “supply of tangible goods services” under Section 65(105)(zzzzj). TheAdjudicating Authority held that “…there is definite element of serviceinvolved in this transaction.” The Adjudicating Authority held that theBrespondent is not only seller engaged in the sale of gas to the customerbut also service provider who supplies, installs and maintainsmeasurement equipment at the customers’ premises. The customer, inthis view, is purchaser of gas and service recipient for the supply,installation and maintenance of measurement equipment. The fact thatC(i) ownership of the measurement equipment vests with the respondent;and (ii) there is no transfer of the right of possession and effective controlis undisputed, thereby satisfying two of the required ingredients for Section65(105)(zzzzj). Noting that the purpose of the measurement equipmentis to ensure effective and accurate billing, the Adjudicating Authorityheld that the expression ‘use’ is attracted and it is the customer whoDmust be held to be in use of the equipment, regardless of the customerlacking technical expertise in handling the measurement equipment. Thisconclusion was based on the following reasoning:

“The expression “use” does not mean that the recipient has topersonally and physically use the equipment all the time. It broadlyErefers to the direct or indirect use whether personally or throughanybody else and meant to serve the intended purpose of thegoods. The contention of the said noticee that they use the“Measurement Equipment” which are installed for their ownbenefits and purposes is misplaced. Accuracy in billing is asFmuch concern of the buyer of gas as is of the seller andhence, he gets it installed at his own cost and thereforeworking of the “Measurement Equipment” is verifiedperiodically by the buyer as well as the seller as agreed byboth in the Agreement.” (emphasis supplied).

G6. The order also noted that the entirety of the gas connectioncharges collected at the time of installing the connection are not refundedat the time of discontinuation or termination. The Adjudicating Authorityallowed the respondent to claim the benefit of cum-tax value andreduced the demand for service tax from Rs. 2,83,46,411/- toRs. 2,52,73,526/-. Penalties were imposed under Sections 77 and 78 ofHthe Finance Act 1994.

7. The respondent assailed the order of adjudication before theTribunal. By its judgment dated 05 April 2019, the Tribunal allowed theappeal filed by the respondent. The Tribunal observed that the SKIDequipment is installed by the respondent at the customers’ site and at thecost of the customer without the transfer of ownership and possession.However, the crucial issue which required analysis was whether theSKID equipment is for the use of the customer. Adverting to the GSAwhich is entered into between the respondent and its customers, theTribunal held:

“ … the appellant supplies natural gas through pipes to theIndustrial, Commercial or Domestic customers and for this purposeinstalls an equipment called “SKID” at the customer’s site toregulate the supply of natural gas supplied through pipes and torecord the quantity consumed by the customers for the purposeof billing. The gas pipeline from the nearest distribution point islaid and maintained by appellant at the cost of the customer andthe measuring equipment is also supplied, installed and maintainedby the appellant at the cost of the customer. The terms of theagreement leave no manner of doubt that the purpose ofthe equipment is to measure the amount of gas supplied tothe customer for the purpose of billing. They are, therefore,for the use of the appellant and are not for use by thecustomers. The finding to the contrary recorded by theAdjudicating Authority is, therefore, not correct.” (emphasissupplied)

8. The Tribunal held that the metering equipment is installed formeasuring the amount of gas supplied to the customer for the purpose ofbilling; hence the use of the equipment is by the respondent and not bythe customer.

9. The decision of the Tribunal has been assailed on behalf of therevenue/appellant in the appeals. Mr. Sanjay Jain, Additional SolicitorGeneral of India, submitted that the GSA which is ‘take or payagreement’ demonstrates that:

(i)The SKID equipment is installed by the respondent at thecost of the buyer;

(ii)Neither ownership nor possession of the equipment istransferred to the buyer;

A(iii)The measurement equipment is installed, maintained andrepaired by the respondent at the cost of the buyer;

(iv)Mere technical expertise on part of the respondent tooperate the equipment does not preclude the usage by thebuyer;

(v)The buyer is as much concerned about the accuracy of thebilling as the supplier of gas. The measurement equipmentenures to the benefit of the buyer for the purpose of verifyingthe correctness of the charges levied based on the quantityof gas consumed;

C(vi)Though the gas connection charges which are initiallyrecovered are claimed to be refundable, the quantum ofrefunds may vary from buyer to buyer and the data whichwas produced by the respondent indicates that in severalcases full refunds have not been made; and

D(vii)The CBEC circular No. 334/1/2008-TRU dated 29 February2008 has clarified that transactions that enable usage ofgoods without transferring the right to use, are in the natureof service under Section 65(105)(zzzzj) and not sale underArticle 366(29-A)(d) of the Constitution of India. Since theErespondent has not paid VAT for the charges collected onsupply of pipelines and the measurement equipment, thistransaction must be treated as service.

10. The ASG submitted that the use of the SKID equipment is notmerely by the respondent as the seller of gas but by the buyer as well forFthe purpose of verifying the accuracy of billing. The decision of theTribunal was faulted on the ground that its finding - that the use of theequipment is by the seller - is contrary to the terms of the GSA.

11. Opposing these submissions Mr Vikram Nankani, learnedSenior Counsel appearing on behalf of the respondent, submitted that:

G(i)The GSA is an agreement for the sale and purchase ofgoods, 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 thesupplier and to seek arbitration;

(iii)The rights of buyer of gas under the GSA must be keptdistinct from the use of the SKID equipment and the essentialissue in the present case is whether the equipment is installedfor the use of the buyer;

(iv)Under the terms of the GSA, ownership continues to vestswith the respondent at all times and the buyer of gas is notBentitled to adjust, modify or maintain the equipment. Thebuyer has no possessory right nor can they lease or sub-letthe equipment;

(v)The purpose of the measurement equipment in gas supplycontract is to measure the quantity of gas supplied to thebuyer of gas. However, the buyer gets no service out ofthe equipment;

(vi)In determining the issue in appeal, it is necessary to isolatethe rights conferred by the GSA on the buyer of gas fromthe issue as to whether the buyer has the use of the SKIDequipment. The SKID equipment is technical device andthe buyer has no right to use the equipment; and this inabilityto use the equipment by the customer would not be withinthe scope of the taxing provision, which must be construedstrictly;

(vii)Amounts collected under the head of “gas connectioncharges” are mainly in the nature of interest-free securitydeposits, which are required to be refunded in part, or infull, depending on the duration of the contract whichdetermines depreciation. They are not collected as aconsideration for providing service; and under Article366(29-A)(d), tax on the sale or purchase of goods includesa tax on the transfer of the right to use goods for anypurpose, without necessarily transferring the title. Section65(105)(zzzzj) was introduced with the intention of capturingservices which were technically not ‘sales’ and wereescaping the net of VAT. In the present case, there is notransfer of the right to use the equipment nor is there anyelement of service in the supply of the metering equipment.The equipment is installed by the respondent as seller ofgas and is not used by the buyer.

A12. The question that arises for our consideration is whether Section65(105)(zzzzj) of the Finance Act, 1994 is applicable in the present case,that is, whether the supply of pipes and measurement equipment (SKIDequipment), charged under the head of “gas connection charges” by therespondent to its industrial, commercial, and domestic consumers, amountsto supply of tangible goods for their use. While assessing the merits ofBthe rival submissions, it is necessary to interpret the provisions of Section65(105)(zzzzj).

13. Section 65(105)(zzzzj) of the Finance Act 1994 provides fortaxability of supply of tangible goods for use, without transferring rightof possession and effective control over such goods, as ‘taxableCservice’. Section 65(105)(zzzzj) of the Finance Act, 1994 reads asfollows:

“65(105) “taxable service” means any service provided or to beprovided-

Dxxxxxx

(zzzzj) to any person, by any other person in relation to supply oftangible goods including machinery, equipment and appliances foruse, without transferring right of possession and effective controlof such machinery, equipment and appliances.”

E14. Section 65(105)(zzzzj) of the Finance Act 1994 was introducedby Notification No.18/2008-S.T. with effect from 16 May 2008. Section65(105)(zzzzj) levies service tax on the use of tangible goods. On theother 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) ofFthe Constitution of India. It is necessary to distinguish the applicability ofthese two provisions. Article 366(29- A)(d), provides:

“(366)(29-A) tax on the sale or purchase of goods includes—

xx xx xx(d) tax on the transfer of the right to use any goods for anyGpurpose (whether or not for specified period) for cash, deferredpayment or other valuable consideration;

xx xx xx

and such transfer, delivery or supply of any goods shall be deemedHto be sale of those goods by the person making the transfer,

delivery or supply and purchase of those goods by the person towhom such transfer, delivery or supply is made.”

15. The applicability of Article 366(29-A)(d) was discussed in adecision of this Court in Bharat Sanchar Nigam Limited and anotherv. Union of India and others[8](“BSNL”). In BSNL, the Court heldthat the purpose of Article 366(29- A)(d) was to levy tax on thosetransactions where there was “transfer of the right to use any goods”to the purchaser, instead of passing the title or ownership of the goods.Thus, by fiction of law, these transactions were now treated as ‘sale’.Elucidating on the “transfer of the right to use any goods”, Dr RLakshmanan J. in concurring opinion held:

“97. To constitute transaction for the transfer of the right to usethe goods, the transaction must have the following attributes:

a. there must be goods available for delivery;

b. there must be consensus ad idem as to the identity of thegoods;

c. the transferee should have legal right to use the goods-consequently all legal consequences of such use including anypermissions or licenses required therefore should be availableto the transferee;

d. for the period during which the transferee has such legalright, it has to be the exclusion to the transferor; this isthe necessary concomitant of the plain language of thestatute viz. “transfer of the right to use” and not merelya licence to use the goods;

e. having transferred the right to use the goods during the periodfor which it is to be transferred, the owner cannot again transferthe same rights to others.”

(emphasis supplied)

16. The test laid down in BSNL has been applied by courts todetermine whether transaction involves the “transfer of the right touse any goods” under Article 366(29-A)(d). In doing so, the courts haveanalysed the terms of the agreement underlying the transaction toascertain whether effective control and possession has been transferred

8 2006 (3) SCC (1).

Aby the supplier to the recipient of the goods. Recently, this Court inGreat Eastern Shipping Company Limited. v. State of Karnatakaand others[9]considered whether the transfer of vessel under charterparty agreement was ‘deemed sale’, subject to sales tax. The Court,after analysing the terms of the charter party agreement, held:

B“43. We are not turning our decision upon the terms used like‘let’, ‘hire’, ‘delivery’ and ‘redelivery’ but on the other essentialterms of the Charter Party Agreement entered in the instant casewhich clearly makes out that there is transfer of exclusive rightto use the vessel which is deemed sale and is liable to tax underthe KST Act. In the instant case, full control of the vesselChad been given to the charterer to use exclusively for sixmonths, and delivery had also been made. The use bycharterer exclusively for six months makes it out that it isdefinitely contract of transfer of right to use the vesselwith which we are concerned in the instant matter, and thatDis deemed sale as specified in Article 366(29A)(d). On thebasis of the abovementioned decision, it was urged that all CharterParty Agreements are service agreements. The submission cannotbe accepted, as there is no general/invariable rule/law in thisregard. It depends upon the terms and conditions of the charterpartywhen it is to be treated as only for service and when it is theEtransfer of right to use.

xx xx xx

54. When we consider the charterparty in question in the contextof applicable law, particularly in view of the constitutional provisionsFof Article 366(29A)(d), we find that there is transfer of right touse tangible goods, which is determinative of deemed sale as perthe Constitution of India and provisions of section 5C reflectingthe said intendment. We are of the considered opinion thatthere is transfer of right to use exclusively given tocharterer for six months, and the vessel has been keptGunder the exclusive control. The charterer qualifies the testlaid down by this court in BSNL (supra).”

(emphasis supplied)

17. Therefore, sales tax is levied in pursuance of Article 366(29-A)(d) on transactions which resemble sale in substance as they resultin transfer of the right to use in goods, instead of the transfer of title ingoods. The Finance Act, 1994, deriving authority from the residuaryEntry 97 of the Union List, enabled the Central Government to levy taxon services. ‘Service tax’ was introduced as response to theadvancement of the contemporary world where an indirect tax wasnecessary to capture consumption of services, which are economicallysimilar to consumption of goods, in as much as they both satisfy humanneeds.[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 very thinline which divides “sale” from “service”. That, applying theprinciple of equivalence, there is no difference between productionor manufacture of saleable goods and production of marketable/saleable services in the form of an activity undertaken by theservice provider for consideration, which correspondingly standsconsumed by the service receiver. It is this principle of equivalencewhich is inbuilt into the concept of service tax under the FinanceAct, 1994. That service tax is, therefore, tax on an activity.That, service tax is value added tax. The value addition is onaccount of the activity which provides value addition…Thus,service tax is imposed every time service is rendered tothe customer/client…Thus, the taxable event is each exercise/activity undertaken by the service provider and each time servicetax 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 thecustomer’s use of the service provider’s goods without transfer of theright of possession and effective control. This provision creates an elementof taxation over service, as opposed to ‘deemed sale’ under Article366(29-A)(d). For the purpose of clarification, the Department ofRevenue issued Circular, D.O.F. No.334/1/2008-TRU, dated 29February, 2008. The said circular clarified the applicability of Section65(105)(zzzzj) vis-à-vis Article 366(29-A)(d). The relevant portions ofthe 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.

A“4.4 SUPPLY OF TANGIBLE GOODS FOR USE:

4.4.1 Transfer of the right to use any goods is leviable to salestax/VAT as deemed sale of goods [Article 366(29A)(d) of theConstitution of India]. Transfer of right to use involves transferof both possession and control of the goods to the user ofBthe goods.

4.4.2 Excavators, wheel loaders, dump trucks, crawler carriers,compaction equipment, cranes, etc., offshore construction vessels& barges, geo-technical vessels, tug and barge flotillas, rigs andhigh value machineries are supplied for use, with no legal right ofCpossession and effective control. Transaction of allowinganother person to use the goods, without giving legal rightof possession and effective control, not being treated assale of goods, is treated as service.

Proposal is to levy service tax on such services provided in relationDto supply of tangible goods, including machinery, equipment andappliances, for use, with no legal right of possession or effectivecontrol. Supply of tangible goods for use and leviable to VAT/ sales tax as deemed sale of goods, is not covered underthe scope of the proposed service. Whether transactioninvolves transfer of possession and control is question ofEfacts and is to be decided based on the terms of the contractand other material facts. This could be ascertainable fromthe fact whether or not VAT is payable or paid.”

(emphasis supplied)

F19. The above circular clarified that Section 65(105)(zzzzj) isapplicable only to those transactions where there is supply of tangiblegoods for use, without the transfer of possession or effective control tothe recipient. This aspect has been interpreted by various courts andtribunals. In the Bombay High Court decision in Indian NationalShipowners’ Association and Anr. v. Union of India and othersG(“Shipowners”),[12] the petitioners were engaged in providing servicesto major exploration and production operators by supplying their variousvessels including offshore drilling rigs, offshore support vessels, harbourtugs, and construction barges. The question before the Bombay HighCourt was whether, prior to the introduction of Section 65(105)(zzzzj) inH12 (2009) 4 AIR Bom R 775.

2008, the petitioner could be taxed on its services in relation to mining ofmineral, oil, or gas under Section 65(105)(zzzy). In the present matter,we are not concerned with the merits of Shipowners’, which wasaffirmed on appeal by this Court in Union of India v. Indian NationalShipowners’ Association and Anr.[13]This Court explicitly restricteditself to the interpretation of Section 65(105)(zzz) while leaving the otherobservations on interpretation of the law, “open to be considered at lengthat an appropriate stage”.[14 ]We note however, the analysis of Section65(105)(zzzzj) of the Bombay High Court, where the High Court observed:

“38. Entry (zzzzj) is entirely new entry. Whereas Entry (zzzy)covers services provided to any person in relation to mining ofmineral, oil or gas, services covered by Entry (zzzzj) can beidentified by the presence of two characteristics namely (a)supply of tangible goods including machinery, equipmentand appliances for use, (b) there is no transfer of right ofpossession and effective control of such machinery,equipment and appliances. According to the members of the1st petitioner, they supply offshore support vessels to carry outjobs like anchor handling, towing of vessels, supply to rig orplatform, diving support, fire fighting etc. Their marine constructionbarges support offshore construction, provide accommodation,crane support and stoppage area on main deck or equipment.Their harbour tugs are deployed for piloting big vessels in and outof the harbour and for husbanding main fleet. They give vesselson time charter basis to oil and gas producers to carry out offshoreexploration and production activities. The right of possessionand effective control of such machinery, equipment andappliances is not parted with. [...]”

(emphasis supplied)

20. The taxable service is defined as service which is providedor which is to be provided by any person to another “in relation to supplyof tangible goods”. The provision indicates that the goods may includemachinery, equipment or appliances. The crucial ingredient of thedefinition is that the supply of tangible goods is for the use of another,without transferring the right of possession and effective control “ofsuch machinery, equipment and appliances”. Hence, in order to attract

13 2010 (14) SCC 438.

14 2010 (14) SCC 438, para 7.

Athe definition of taxable service under sub-clause (zzzzj), the ingredientsthat have to be fulfilled are:

(i)The provision of service;

(ii)The service is provided by person to another person;

B(iii) The service is provided in relation to the supply of tangiblegoods, 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 theservice provider; and

(vi) The goods are supplied for use by the recipient of the service.

There is an element of service which is the foundation for thelevy of the tax.

21. GSA entered into by the respondent on 17 November 2008Dwith one of its buyers (Polymer Industries) has been adverted to by thecontesting parties as representative sample. Under the terms of theGSA, the respondent as the seller agrees to sell and tender for deliveryat the ‘Delivery Point’, gas in the quantities, times and at the pricesdetermined in accordance with it. Clause 2.1 stipulates that:

E“2.1. The Seller agrees to sell and tender for delivery at theDelivery Point, and the Buyer agrees to purchase and receive atthe Delivery Point and pay for Gas in quantities at the times andat the prices determined in accordance with, and subject to theterms and conditions of this Agreement.”

FThe expression ‘Delivery Point’ is defined thus:“ “Delivery Point” means the flange or weld or agreed mark atthe downstream of the isolation valve located immediately outsidethe Buyer’s premise as identified in Schedule 2.”

Clause 5.1 requires the seller to deliver gas to the buyer at theGDelivery Point. The seller is required to set up gas pipeline to themetering station of the buyer from the nearest distribution mains at thecost of the buyer:

“5.1. The seller shall deliver the Gas to the Buyer at the DeliveryPoint in accordance with the terms of this Agreement. GasHpipeline to the Buyer’s metering station from nearest

distribution mains would be constructed and maintainedby the Seller at the Buyer’s cost.”

(emphasis supplied)

Clause 5.3 states that the ‘Measurement Equipment’ is to besupplied, installed and maintained by the seller at the cost of the buyer:

“5.3. The Measurement Equipment shall be supplied,installed and maintained by the Seller at the Buyer’s cost.Ownership of equipment will rest with AEL [respondentherein] forever. Buyer shall provide free of cost adequateland and power connection in its premise for the installation ofMeasurement Equipment. Buyer shall pay for providing gaspipeline connection including pipeline from distribution mainsupto the measurement equipment; and measurement equipmentto its unit as per the proposal submitted by the Seller.”

(emphasis supplied)

Clause 5.4 provides that:

“5.4. Gas pipeline from nearest Distribution Mains tothe Measurement equipment shall be constructed andmaintained by the Seller at Buyer’s cost. The Buyer agreesto let the Seller or his authorised representative to supply,construct, install commission and maintain the supply pipelinefrom main distribution line upto the Measurement Equipmentand Measurement Equipment in its premises.

(emphasis supplied)

The Buyer’s Facilities and Seller’s Facilities are defined to includethe measurement equipment and pipelines and have been defined asfollows:

“ “Buyers Facilities” means plant, machinery, measurementequipment and other equipment from the Delivery Point onwardsnecessary to receive Gas under this Agreement.”

“ “Seller’s Facilities” means the Seller’s pipelines, gas plants,machinery, Measurement Equipment, other metering facilities andother equipment necessary for flow control and the processing,compression, measuring and testing of Gas to enable delivery ofGas to the Buyer at the Delivery Point.”

AFurther, the expression ‘Measurement Equipment’ is defined asfollows:

“ “Measurement equipment” means such main and subsidiarymeter, including apparatus, mains and pipes, as the Sellerconsiders necessary for the measurement and recording ofthe volume in SCM and pressure in Kg/cm[2] of Gas deliveredat the Delivery Point and for the safe operation of the Buyer’sFacilities.”

Ownership of the measurement equipment continues to vest withthe respondent as per clause 5.3. The buyer is required to provide landCand power connection, free of cost at its premises. The buyer has topay for providing gas pipeline connection from the distribution mainsup to the measurement equipment.

Gas is transported from the ‘Measurement Equipment’ by meansof pipeline provided by the buyer as stipulated in Clause 5.5:

“5.5. Gas will be transported from the Measurement equipmentby means of pipeline provided by the Buyer as per thespecifications and applicable standards provided by the Sellerand the same shall be maintained by the Buyer. The Sellerreserves the right to supply other Buyer’s before the upstreamErange of measurement equipment installed at its premises.”

Clause 5.6 clarifies that the buyer has no right to adjust, clean,handle, replace, maintain, remove or modify the measurement equipment:

“5.6. The Buyer shall not have the right to adjust, clean, handler,replace, maintain, remove or modify in any mannerFmeasurement equipment at any time during the currency ofthe Contract.”

Under clause 5.7 the buyer cannot lease, sublet or sell themeasurement equipment:

“5.7. The Buyer under no circumstances shall sublet/lease/sell/create charge over part or whole of measurementequipment at any given time.”

Clause 5.10 provides that the seller has the right of entry to themeasurement equipment:

“5.10. The Seller or his authorized representative shall haveright of entry at all hours to the Measurement Equipment, routeof pipeline upto all consumption points and gas consumingfacilities inside the Buyer’s premises.”

Under clause 7.1, ‘title and risk’ in the gas passes from the sellerto the buyer at the Delivery Point. Clause 8.1 defines the expression‘Daily Contract Quantity’[15]. Clause 9.2 of the agreement deals withmeasurement and calibration:

“9.2Measurement and Calibration

9.2.1 Quantity of Gas supplied under this Agreement shall beCmeasured at the Delivery Point in SCM. Themeasurement shall include all corrections in installationpractices recommended for accurate metering of Gasby the American Gas Association (AGA) GasMeasurement Committee report No. 3,7 and 8.

9.2.2 The Measurement Equipment shall be supplied,installed, owned and maintained by the Seller atthe Buyer’s cost.

9.2.3 Working of the Measurement Equipment shall be verifiedperiodically by the Parties.

9.2.4 If the Buyer has any doubt as to the accuracy ofthe Measurement Equipment, it shall communicatethe same to the Seller in writing and request theSeller to either check or re-calibrate theMeasurement Equipment. The Seller shall undertakesuch check/re-calibration of the MeasurementFEquipment within fourteen (14) days of receipt of suchrequest. The cost of conducting the checks/re-calibrationshall be borne by the Buyer.

15 “8.1. Daily Contract Quantity

(a)“Daily Contract Quantity” or “DCQ” shall be equal to 100 SCM per day havingapproximately Gross Calorific Value (GCV) of 9000 Kcal/scm.

(b)Provided further, if on any Day, the Buyer requires Gas in excess of Daily ContractQuantity, the seller may supply the same subject to availability of gas with Sellerand Seller’s Operational Flexibility.

(c)Supplier subject to the operational flexibility and availability of the gas supplythe Daily Contract Quantity however the Seller shall have the freedom to curtail,stop or interrupt the gas supply with prior notice to the Buyer.

9.2.5 If the seller has any doubt about the proper working ofthe Measurement Equipment, it may immediately checkthe meter in presence of the Buyer’s representative. Incase it is established that the existing MeasurementEquipment is not working satisfactorily, the same shallbe replaced at the Buyer’s cost.

9.2.6 If on carrying out the check/re-calibration of theMeasurement Equipment as aforesaid it is discoveredthat either the percentage of inaccuracy exceed – 2%(Two per cent) or that the Measurement Equipment isout of service, the following procedure in order of priority,whichever is feasible for arriving at the computation ofquantity of Gas during the period between the lastcalibration and the present, shall be followed:

(a)by correcting the error if the percentage oferror is ascertainable by calibration, tests ormathematical calculation; or

(b)by estimating the volume of Gas delivered bycomparison with deliveries during the periodunder similar conditions when theMeasurement Equipment was registeringaccurately.

9.2.7 If at the time of carrying out the check of theMeasurement Equipment as above, it is discovered thatthe error in the readings of the Measurement Equipmentexceeds- 2.0% the Measurement Equipment shall bere-calibrated at Buyer’s cost.

9.2.8 Notwithstanding anything contained in this Agreement,pending the result of any check/re- calibration, the Buyershall not withhold payments to the Seller under thisAgreement on this account. However, the Buyer shallbe entitled to lodge his claim for refunds/adjustments, ifany, depending upon the final results of such check/re-calibration within period of fourteen (14) days of suchcheck/re-calibration. Such claim, if found correct by theSeller, shall be adjusted against the subsequent invoice(s)of supply of Gas.

9.2.9 Pending the resolution of any dispute, the Seller shallproduce the invoices on the basis of self-verification.”(emphasis supplied)

The provisions for billing and payment are contained in clause 12.The relevant portion is extracted below:

“12. Billing and Payment

12.1 Following the end of the Fortnight, the Seller shall render tothe Buyer statement including the following details for eachDay of the previous Fortnight (hereinafter referred to as the“Fortnightly Invoice”), which shall show in respect of the previousFortnight, along with the details of calculations:

(i)the DCQ for each Day of that Fortnight in SCM;

(ii)the aggregate quantity of Gas delivered by the Seller insuch Fortnight, in SCM and Gross Calorific Value for thesame;

(iii)the Weighted Average Gross Calorific Value (GCV) of suchGas taken by the Buyer in such fortnight;

(iv)the amount payable by the Buyer to the Seller for thequantifies of the Gas delivered during the Fortnight equal toquantities of Gas delivered by the Seller in SCM/Kcal asdetermined in (ii) above multiplied by Contract Priceprevailing for the Fortnight.

12.2The Buyer shall within seven (7) days of the receipt of thefortnightly invoice from the seller, pay to the seller the amountmentioned in such invoice in the manner to be specified bythe Seller.

12.3. The Buyer agrees that, notwithstanding any dispute in relationto any amount invoiced, it shall not be withhold payment inaccordance with the provisions of this Section 12 of anyamounts. After making full payment of such invoice, theBuyer shall lodge the claims with the Seller giving fullparticulars within period of fourteen (14) Days from thedate of making payment, and if such claims are foundcorrect, the Seller shall adjust the same against the nextinvoice. It is further agreed that no interest will be payable

Aby the Seller on any such amount adjusted in the subsequentinvoices.”

Under clause 13, security for payment in the form of cash depositis required to be maintained by the buyer equivalent to the DCQ[16]multiplied by thirty and by the contract price. If the seller draws uponBthe payment security, the buyer has to make good the amount withdrawn.

Clause 14 of the Agreement further provides for therepresentations and warranties of the buyer and seller. Clause 14.3 readsas follows:

“14.3 Buyer’s Warranties and UndertakingsC

The Buyer warrants and undertakes to the Seller that throughoutthe term of this Agreement:

a) the Buyer’s Facilities will be technically and operationallycompatible with the Seller’s Facilities at the Delivery PointDand fit for purpose for off take of gas from the Delivery Point;

b) the Buyer’s Facilities will be maintained in good working orderand condition and so operated as to be compatible with thefulfilment of the obligations of the Buyer under thisAgreement;…”

EUnder the above clause 14.3, the buyer warrants to maintain the“Buyer’s Facilities”, which includes the ‘measurement equipment’, ingood working order and condition and technically and operationallycompatible with the Seller’s Facilities.

Under clause 16.4, if the buyer fails (otherwise than as aFconsequence of force majeure or the seller’s default) to take fifty percent or more of the cumulative DCQ over 45 consecutive days, theseller is entitled to terminate the agreement.

22. The GSA is an agreement between the respondent and itspurchaser for regulating the terms on which gas is sold by the respondent.GThe agreement is of ‘take or pay’ genre. The buyer must lift the quantitycontracted or pay for it. The agreement provides for the supply of gas atthe Delivery Point through gas pipelines constructed from the distributionmain to the measurement equipment. Further, both the seller and thebuyer have provided warranties for maintaining the ‘measurement

equipment’ in good working condition, in their respective capacities. Themeasurement equipment, as has been re-iterated by the respondent inthe course of their arguments, is installed for the measurement andrecording of the volume and pressure of the gas delivered at the DeliveryPoint and for the safe operation of the buyer’s facilities.

23. 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 ofownership or possession of the pipelines or the measurement equipment(SKID equipment equipment) by the respondent to its customers. Clause5.3 of the agreement specifically provides that the ‘MeasurementEquipment’ is to be supplied, installed and maintained by the seller at thecost of the buyer and that the ownership of the equipment will rest withthe respondent forever. Clause 5.6 further clarifies that the buyer has noright to adjust, clean, handle, replace, maintain, remove or modify themeasurement equipment. Clause 5.10 guarantees that the seller shallhave the right of entry at all hours to the Measurement Equipment andassociated apparatus at the Buyer’s premises. The pipelines are alsopart of the “Seller’s Facilities” under the agreement and are constructedand maintained by the respondent at the cost of the customer. Thus, theingredient of not transferring the ownership, possession or effectivecontrol of the goods under Section 65(105)(zzzzj) is satisfied.

24. The crux of the dispute is whether the supply of tangible goods– the SKID equipment - is for the use of the purchaser. In determiningas to whether the provisions of Section 65(105)(zzzzj) are attracted, it isnecessary to distinguish between the rights and obligations of therespondent (as the seller of gas) and of their purchasers, from the issueof whether the measurement equipment (SKID equipment) is suppliedfor the use of the purchaser of gas, without transferring the right ofpossession and effective control.

25. The purchaser of gas has an interest in ensuring the accuracyof billing and regulation of supply. The respondent is interested in ensuringthat it receives payment for the quantity of gas which is contracted to besupplied to the purchaser. The ‘SKID’ consists of regulators, valves,filters and the metering equipment. The SKID equipment regulates andrecords supply. Under the terms of the GSA, the obligation of the selleris to deliver gas to the buyer at the Delivery Point. The gas pipeline fromthe nearest distribution main to the buyers’ metering station is constructedand maintained by the seller at the cost of the buyer. The measurement

Aequipment is supplied, installed and maintained by the seller at the costof the buyer, inspite of ownership of the equipment resting with therespondent as the seller. The Measurement Equipment is installed andmaintained exclusively by the seller. Clause 5.6 indicates that the buyerhas no right to adjust, clean, handle, replace, maintain, remove or modifyit in any manner. Clause 5.10 guarantees the seller’s access to theBMeasurement Equipment at the buyer’s premises at all hours. Ownership,control and possession of the measurement equipment is with therespondent. The measurement equipment comprises not only ofelectronic meters that are useful for determining the quantity of gassupplied to the purchaser at the Delivery Point, but also of isolationCvalves, filters and regulators that are crucial for regulating the pressureof gas and ensuring safe operation of the buyer’s facilities. In order tomaintain the sanctity of the equipment, the agreement casts the exclusiveresponsibility to install and maintain it on the respondent as the seller.The terms of the GSA would indicate that the quantity of gas supplied isto be measured at the Delivery Point. For this purpose, the measurementDequipment is supplied, installed, owned and maintained by the seller atthe cost of the buyer. The working of the measurement equipment isverified periodically by the parties to the agreement. If the buyer doubtsits accuracy, this has to be communicated in writing to the seller, whoalone is entitled to test, re-calibrate, remove or modify it. Similarly, if theEseller has any doubt about the proper working of the measurementequipment it is entitled to check the meter in the presence of therepresentatives of the buyer. If according to the seller, the existingmeasurement equipment is not working satisfactorily it would be replacedat the cost of the buyer. These provisions indicate that the supply,installation and maintenance of the measurement equipment is exclusivelyFcarried out by the seller. The buyer has contractual remedies against theseller in terms of the GSA. These remedies to the buyer as purchaserof gas are distinct from the issue as to whether the equipment for whichgas connection charges are recovered is used by the buyer.

26. Under Section 65(105)(zzzzj), the taxable service is providedGor to be provided in relation to the supply of tangible goods for the use ofanother, without transferring the right of possession and effective control.The expression “use” has been defined in Black’s Law Dictionary:

“Use, n. Act of employing everything, or state of being employed;application, as the use of pen, or his machines are in use. AlsoH

the fact of being used or employed habitually; usage, as, the wearand tear resulting from ordinary use. Berry-Kofron DentalLaboratory Co. v. Smith, 345 Mo. 922, 137 S.W. 2d 452, 454, 455,456. The purpose served; purpose, object or end for useful oradvantageous nature. Brown v. Kennedy, Ohio Appellant. 49N.E.2d 417, 418. To put or bring into action or service; to employfor or apply to given purpose. Beggs v. Texas Dept. of MentalHealth and Mental Retardation, Tex. Civ. App., 496 S.W.2d 252,254. To avail oneself of; to employ; to utilize; to carry out purposeor action by means of; to put into action or service, especially toattain an end. State v Howard, 221 Kan. 51, 557 P.2d 1280, 1281.

Non-technical sense. The “use” of thing means that one is toenjoy, hold, occupy or have some manner of benefit thereof. Usealso means usefulness, utility, advantage, productive of benefit.”

27. The expression “use” does not have fixed meaning. Thecontent of the expression must be based on the context in which theexpression is adopted. The use of an article may or may not result in avisible change in its form or substance. Moreover, the nature of use isconditioned by the kind of article which is put to use. Section 65(105) ofthe Finance Act, 1994 envisages myriad interpretations of the expression“use”, in variety of services such as telecommunication,[17] renting ofimmovable property,[18] and services related to art, entertainment, andmarriage.[19] In the case of some articles, use may be signified by physicaloperation of the article by the person who uses it. In such case, actualphysical use is what is meant by the supply of the goods for the use ofanother. In the case of others, the nature of the goods supplied impactsthe 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 servicesrelated to information technology and interprets the “right to use” toinclude the “right to reproduce, distribute, sell, etc”.[20] This understandingof “use” differs from the supply of tangible goods under Section65(105)(zzzzj) at hand, where effective control or possession is not ceded.Thus, physical operation is not the only or invariable feature of use. As acorollary to the same, technical expertise over the goods in question isnot sine qua non for determining the ability of the consumer to use

17 Section 65(105)(zzzzb), Finance Act, 1994.

18 Section 65(105)(zzz-z), Finance Act, 1994.

19 Section 65(105)(zzzzr), Finance Act, 1994.

20 Circular D.O.F. No.334/1/2008-TRU, dated 29 February, 2008.

Athe good. Therefore, the expression “use” also signifies the applicationof the goods for the purpose for which they have been supplied underthe terms of contract.

28. The terms of the GSA indicate that the supply, installation,maintenance and repair of the measurement equipment is exclusivelyBentrusted to the respondent as the seller. These provisions have beenincorporated in the GSA to ensure that buyer does not calibrate ortinker with the equipment. It is an incident of ownership and controlbeing vested with the respondent. The purpose of the SKID equipmentand its utility, lie in its ability to regulate the supply and achieve anaccurate verification of that which is supplied; in the present case theCsupply of goods by the respondent to its buyers. This enures to the benefitof the seller and the buyer. The seller is concerned with the precisequantification of the gas which is supplied to the buyer. The buyer hasan interest in ensuring the safety of its facilities and that the billing isbased on the correct quantity of gas supplied and delivered under theDGSA. To postulate, as did the Tribunal, that the measurement equipmentis only for the benefit of the seller in measuring the quantity of the gassupplied would not be correct. The GSA is an agreement reflecting mutualrights and obligations between the seller and the purchaser. Both have avital interest in ensuring the correct recording of the quantity of gassupplied. Additionally, delivery of gas in safe and regulated manner,Eenabled by the SKID equipment, is an essential component of the GSA.The SKID equipment subserves the contractual rights of both the sellerand the purchaser of gas. Indeed, without the SKID equipment therewould be no gas supply agreement. In fact, in the GSA, the buyer hasalso provided warranty to ensure that the “Buyer’s Facilities” remainFtechnically and operationally compatible with the “Seller’s Facilities”,both of which include the ‘measurement equipment’. This warranty wouldnot have been provided if the measurement equipment was not of ‘use’to the buyer. The equipment is thus vital ingredient of the agreementtowards protecting the mutual rights of the parties and in ensuring the

fulfilment of their reciprocal obligations as seller and buyer in regulatingGthe supply of gas. As an incident of regulating supply, it determines thecorrect quantity of gas that is supplied. The obligation to supply, installand maintain the equipment is cast upon the seller as an incident ofcontrol and possession being with the seller.

Section 65(105)(zzzzj) applies precisely in situation where theHuse of the goods by person is not accompanied by control and possession.

‘Use’ in the context of SKID equipment postulates the utilization of theequipment for the purpose of fulfilling the purpose of the contract. Section65(105)(zzzzj) does not require exclusivity of use. The SKID equipmentis an intrinsic element of the service which is provided by the respondent,acting pursuant to the GSA, as supplier of natural gas to its buyers.

29. While interpreting the term ‘use’, the Tribunal in the impugnedjudgment has relied on its decision in the case of Meru Cab CompanyPvt. Ltd. v. Commissioner of Central Excise, Mumbai[21](“MeruCab”). Meru Cab involved the transfer of vehicle from radio taxioperator to the driver, in turn to provide service to the passengers. Wefind that the reliance placed on Meru Cab is misplaced as the factualcontext of the ‘use’ in the two cases is substantially different. In presentmatter, the agreement to supply gas, and the measurement equipmentand pipelines only involves two parties - the respondent and the ultimatecustomer. Having said that, we are not expressing any opinion on thecorrectness of the decision in Meru Cab.

30. Thus, we are of the view that the supply of the pipelines andthe measurement equipment (SKID equipment) by the respondent, wasof use to the customers and is taxable under Section 65(105)(zzzzj) ofthe Finance Act 1994.

31. Another aspect of the matter which requires to be set out isthe contention of the respondent that the gas connection charges aremainly in the nature of refundable security deposit which is returnedto the customers in the event of the connection being discontinued orterminated, depending on their usage, and are not payment for serviceprovided by the respondent.

32. In the Show Cause Notice, the appellant stated that based onan assessment of gas sale agreements and invoices, it found that the“gas connection charges” were collected for “supply of pipes andmeasurement equipment etc.”. The appellant also noted that therespondent had not issued any deposit receipt for these charges nor hadit mentioned that these charges are refundable amount in the invoicesissued.

33. The respondent, in their reply dated 29 December 2009, statedthat the purpose of the collection of these charges was for safe-keepingof the meter by the customers and the expense towards charges incurred

21 2016 (41) STR (444) (Tri-Mum).

Aon disconnection, if the customer disconnects immediately afterinstallation. The respondent stated that according to the company policy,with respect to commercial and industrial consumers, an amount forinstallation of equipment was collected depending on the pressure of thegas and the size of the SKID equipment. Although these are reflectedas gas connection income, they are (according to the respondent) mainlyBin the nature of refundable security deposits. In support of their argumentfor industrial and commercial consumers, the respondent provided copyof an “internal note dated 13 July 2007” and list of industrial customersto whom the gas connection charges have been refunded. The internalnote is extracted below:C“Today we are supplying gas to more than 200 Industrial customersat Ahmedabad & Vadodara. We are collecting Gas ConnectionCharge upfront from the customers before commencing gassupplies based on the customer load profile (provided by customer).Many of our customers have future expansion after commissioningDof the unit which is not covered in existing meter connection.Further, few of the customers have also requested for terminationof the GSAs due to various issues. In such cases, followingamount shall be deducted from the Gas Connection Chargesand balance shall be refundable.

(1) Upgradation of Load:EIn this case the percentage of amount to be deducted shall be asfollows: -

(2) Terminating of Agreement:

In this case the percentage of amount to be deducted shall be asfollows:

(emphasis supplied)

The tabulation of the refund given to the industrial customers ofthe respondent for 2008-09 is as follows:

34. The above data indicates that, contrary to the assertion of therespondent that the amount collected as gas connection charges is

Arefunded at the time of discontinuation of the connection, the percentagewhich has been refunded to the industrial customers has varied fromcase to case ranging from 25 per cent to 100 per cent. The AdjudicatingAuthority observed:

“…the gas connection charges are refunded, based on the numberBof years of gas supply, when the gas connection contract isdiscontinued. This clearly evidences that gas connection chargesin most of the cases are not refunded completely. The said noticeenot only earns interest on the gas connection charges but alsoearns income by retaining some portion of the gas connectioncharges at the time of discontinuance of the contract. This is aCvery strange kind of security deposit which is not only devoid ofinterest but also on maturity the principal amount gets reduced.Moreover, in reality it may never be refunded if the gas connectionis not discontinued. I have also seen the “Internal Note dated13.7.2007” submitted by the said noticee along with his writtenDsubmission as “Annexure-A” and I find that the amount to bededucted is 100% when there is “upgradation of load” or“termination of agreement” between 3[rd] year to 4[th] year. Thisclearly establishes that the liability of the said noticee to refundthe said “Gas Connection Charges” is only upto period of threeyears, after that no amount is to be refunded and it eventuallyEbecomes income of the said noticee. Moreover, till the time thesaid amount is partially refunded it remains with the said noticeewho is at liberty of using the same in whatever manner he wantsto. I have seen the Annexure-B annexed with the writtensubmission dated 4.1.2010 and find that the gas connection chargesFare refunded to only 13 customers during the year 2008-09. Thisindicates that effectively, the gas connection charges oncerecovered from the customers remain with the said noticee and incases where it is refunded then also some amount is retained bythe said notice.”

G35. With respect to the domestic consumers, the respondent, intheir reply to the Show Cause Notice, argued that under the PNGRBNetwork Tariff Regulations 2008, entities such as the respondent arerequired to collect refundable interest-free security deposits towardssafe-keeping of the meter and are to be refunded in full to the domesticPNG customer in case of disconnection. The respondent argued thatH

the PNGRB Network Tariff Regulations 2008 further provide that theamount collected as interest-free refundable security deposit is to existas liability in their books of account. In support of their contention, therespondent provided their Annual Report for the financial year 2008-09which depicts the performance in terms of income and profitability. Anextract of the report is provided below:

Performance Highlights:

During the year under review, your Company has shown resiliencein the times of global economic show down and has shownimpressive performance in terms of Income and Profitability, whichis summarized as under:

36. The above report provides that the respondent has treated anamount of Rs. 5000/- per domestic consumer as refundable interest-free security deposit amounting to Rs. 883.34 lacs. In assessing theseCrival contentions, the Adjudicating Authority held that:

“…I find that the attempt of the said notice to align the FinanceAct, 1994, with the Petroleum and Natural Gas Regulatory BoardRegulations 2008, to determine the taxability of taxable event isnot acceptable and goes in vain. Taxability of service is governedDunder Section 65(105) of the Finance Act, 1994 and is notdetermined under any other Act or Regulations, unless and untilthe same is specifically provided in the definition given under Section65(105) of the Finance Act, 1994. The taxability of service isalso not determined by the manner in which the Books of Accountsare maintained….”E

37. We find ourselves in agreement with the findings of theAdjudicating Authority. The extent of the refund of gas connectioncharges collected from industrial, commercial and domestic consumersby the respondent depends on their usage. From the internal note datedF13 July 2007 and the tabulation of customers provided above, it is evidentthat 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 beenprovided and instead, the respondent has relied on the tabulation of therefund of deposit to industrial consumers to support their contention.GThus, the argument of the respondent that these gas connection chargescollected from industrial, commercial and domestic consumers constitutea refundable security deposit is rejected.

38. Thus construed, we are of the view that the AdjudicatingAuthority was correct in concluding that the buyer of gas is as interestedH

as the seller in ensuring and verifying the correct quantity of the gassupplied through the instrumentality of the measurement equipment andthe pipelines. Additionally, the role of regulating pressure and ensuringthe safety of supply of gas performed by the measurement equipment isan essential aspect for the ‘use’ of the consumer. The SKID equipmentfulfils the description in Section 65(105)(zzzzj) of taxable service:service in relation “tangible goods” where the recipient of the servicehas use (without possession or effective control) of the goods.

39. For the above reasons, we are of the view that the Tribunalwas in error in interfering with the findings and order of the AdjudicatingAuthority. The judgment of the Tribunal shall accordingly stand set aside.The order of the Adjudicating Authority is restored. The appeal is allowedin the above terms.

40. Pending application(s), if any, stands disposed of.

Kalpana K. Tripathy

Appeals allowed.

[2020] 8 S.C.R.

ATHE STATE OF MADHYA PRADESH & ORS.

BHERULAL

(Special Leave Petition (Civil) Diary No. 9217 of 2020)

OCTOBER 15, 2020

Limitation:

Delay – In filing SLP – By Government-litigant – Held:CSupreme Court cannot be place for the Governments to walk-in,ignoring the period of limitation – Despite strong deprecation bythe Court for such practice, there is no improvement – In matterswhere there are inordinate delay, the State Authorities must pay forwastage of judicial time – In the present case in view of the periodof delays and the manner in which the application seekingDcondonation of delay has been worded, cost of Rs. 25,000/- isimposed, which would be recoverable from the officers responsible– On failure to deposit the cost in time, contempt proceedings to beinitiated against the Chief Secretary.Dismissing the petition as time barred, the CourtE

HELD: 1. The Supreme Court of India cannot be placefor the Governments to walk in when they choose, ignoring theperiod of limitation prescribed. If the Government machinery isso inefficient and incapable of filing appeals/petitions in time, thesolution may lie in requesting the Legislature to expand the timeFperiod for filing limitation for Government authorities because oftheir gross incompetence. That is not so. Till the Statute subsists,the appeals/petitions have to be filed as per the Statutesprescribed. [Para 2][914-C-D]

2. preposterous proposition is sought to be propoundedGthat if there is some merit in the case, the period of delay is to begiven go-by. This does not, take away the jurisdiction of theCourt in an appropriate case to condone the delay. The objectappears to be to obtain certificate of dismissal from the SupremeCourt to put quietus to the issue and thus, say that nothingHcould be done because the highest Court has dismissed the appeal.

It is to complete this formality and save the skin of officers whomay be at default that such process is followed. The purpose ofcoming to this Court is not to obtain such certificates and if theGovernment suffers losses, it is time when the concerned officerresponsible for the same bears the consequences. The irony isthat in none of the cases any action is taken against the officers,who sit on the files and do nothing.[Paras 5 and 6][915-G-H; 916-A-C]

3. The reason for inordinate delay in the present case isstated to be only “due to unavailability of the documents and theprocess of arranging the documents”. In all matters, where thereare such inordinate delays that the Government or Stateauthorities coming before this Court, must pay for wastage ofjudicial time which has its own value. Such costs can be recoveredfrom the officers responsible. Looking to the period of delay andthe casual manner in which the application has been worded, itwould be appropriate to impose costs on the petitioner-State ofRs.25,000/- (Rupees twenty five thousand) to be deposited withthe Mediation and Conciliation Project Committee. The amountbe deposited in four weeks. [Paras 4 and 7, 8][915-F; 916-D-F]

4. If the aforesaid order is not complied within time, theCourt will be constrained to initiate contempt proceedings againstthe Chief Secretary. [Para 10][916-G]

Collector, Land Acquisition, Anantnag & Anr vs. Mst.Katiji & Ors. (1987) 2 SCC 107 : [1987] 2 SCR 387;Office of the Chief Post Master General & Ors. v. LivingMedia India Ltd. & Anr. (2012) 3 SCC 563 : [2012] 1SCR 1045 – referred to.

Case Law Reference

CIVIL APPELLATE JURISDICTION: Special Leave Petition(C) Diary No. 9217 of 2020.

From the Judgment and Order dated 12.02.2018 of the High Courtof Madhya Pradesh, Indore in Second Appeal No. 65 of 2001.

AV.V.V.M.B.N.S. Pattabhiram, Dy. AG, Arjun Garg, Ms. ShrutikaGarg, Advs. for the appearing parties.

The Judgment of the Court was delivered by

SANJAY KISHAN KAUL, J.

BIA No.62372/2020-CONDONATION OF DELAY IN FILING

1. The Special Leave Petition has been filed with delay of 663days! The explanation given in the application for condonation of delayis set out in paragraphs 3 and 4.

2. We are constrained to pen down detailed order as it appearsCthat all our counseling to Government and Government authorities havefallen on deaf ears i.e., the Supreme Court of India cannot be place forthe Governments to walk in when they choose ignoring the period oflimitation prescribed. We have raised the issue that if the Governmentmachinery is so inefficient and incapable of filing appeals/petitions inDtime, the solution may lie in requesting the Legislature to expand thetime period for filing limitation for Government authorities because oftheir gross incompetence. That is not so. Till the Statute subsists, theappeals/petitions have to be filed as per the Statues prescribed.3. No doubt, some leeway is given for the Governmentinefficiencies but the sad part is that the authorities keep on relying onEjudicial pronouncements for period of time when technology had notadvanced and greater leeway was given to the Government (Collector,Land Acquisition, Anantnag & Anr vs. Mst. Katiji & Ors. (1987) 2SCC 107). This position is more than elucidated by the judgment of thisCourt in Office of the Chief Post Master General & Ors. v. LivingFMedia India Ltd. & Anr. (2012) 3 SCC 563 where the Court observedas under:

“12) It is not in dispute that the person(s) concerned were wellaware or conversant with the issues involved including theprescribed period of limitation for taking up the matter by way ofGfiling special leave petition in this Court. They cannot claim thatthey have separate period of limitation when the Departmentwas possessed with competent persons familiar with courtproceedings. In the absence of plausible and acceptableexplanation, we are posing question why the delay is to becondoned mechanically merely because the Government or wingHof the Government is party before us.

Though we are conscious of the fact that in matter of condonationof delay when there was no gross negligence or deliberate inactionor lack of bonafide, liberal concession has to be adopted toadvance substantial justice, we are of the view that in the factsand circumstances, the Department cannot take advantage ofvarious earlier decisions. The claim on account of impersonalmachinery and inherited bureaucratic methodology of makingseveral notes cannot be accepted in view of the moderntechnologies being used and available. The law of limitationundoubtedly binds everybody including the Government.

13) In our view, it is the right time to inform all the governmentbodies, their agencies and instrumentalities that unless they havereasonable and acceptable explanation for the delay and therewas bonafide effort, there is no need to accept the usualexplanation that the file was kept pending for several months/years due to considerable degree of procedural red-tape in theprocess. The government departments are under specialobligation to ensure that they perform their duties with diligenceand commitment. Condonation of delay is an exception and shouldnot be used as an anticipated benefit for government departments.The law shelters everyone under the same light and should not beswirled for the benefit of few. Considering the fact that therewas no proper explanation offered by the Department for thedelay except mentioning of various dates, according to us, theDepartment has miserably failed to give any acceptable and cogentreasons sufficient to condone such huge delay.”

Eight years hence the judgment is still unheeded!

4. reading of the aforesaid application shows that the reasonfor such an inordinate delay is stated to be only “due to unavailabilityof the documents and the process of arranging the documents”. Inparagraph 4 reference has been made to “bureaucratic processworks, it is inadvertent that delay occurs”.

5. preposterous proposition is sought to be propounded that ifthere is some merit in the case, the period of delay is to be given go-by.If case is good on merits, it will succeed in any case. It is really barof limitation which can even shut out good cases. This does not, of course,take away the jurisdiction of the Court in an appropriate case to condonethe delay.

A6. We are also of the view that the aforesaid approach is beingadopted in what we have categorized earlier as “certificate cases”.The object appears to be to obtain certificate of dismissal from theSupreme Court to put quietus to the issue and thus, say that nothingcould be done because the highest Court has dismissed the appeal. It isto complete this formality and save the skin of officers who may be atBdefault that such process is followed. We have on earlier occasionsalso strongly deprecated such practice and process. There seems tobe no improvement. The purpose of coming to this Court is not to obtainsuch certificates and if the Government suffers losses, it is time whenthe concerned officer responsible for the same bears the consequences.CThe irony is that in none of the cases any action is taken against theofficers, who sit on the files and do nothing. It is presumed that thisCourt will condone the delay and even in making submissions, straightaway counsels appear to address on merits without referring even to theaspect of limitation as happened in this case till we pointed out to thecounsel that he must first address us on the question of limitation.D

7. We are thus, constrained to send signal and we propose to doin all matters today, where there are such inordinate delays that theGovernment or State authorities coming before us must pay for wastageof judicial time which has its own value. Such costs can be recoveredfrom the officers responsible.E

8. Looking to the period of delay and the casual manner in whichthe application has been worded, we consider appropriate to imposecosts on the petitioner-State of Rs. 25,000/- (Rupees twenty fivethousand) to be deposited with the Mediation and Conciliation ProjectCommittee. The amount be deposited in four weeks. The amount beFrecovered from the officers responsible for the delay in filing the specialleave petition and certificate of recovery of the said amount be alsofiled in this Court within the said period of time.

9. The special leave petition is dismissed as time barred in termsaforesaid.

G10. We make it clear that if the aforesaid order is not compliedwithin time, we will be constrained to initiate contempt proceedings againstthe Chief Secretary.

11. copy of the order be placed before the Chief Secretary,State of Madhya Pradesh.

HKalpana K. Tripathy

Petition dismissed.