service tax on the charges collected by the respondent for supply of pipes and measuring equipment to its customers under Section 65(105)(zzzzj) of the Finance Act, 1994. –

In the Show Cause Notice, the appellant stated that based on an assessment of gas sale agreements and invoices, it found that the “gas connection charges” were collected for “supply of pipes and measurement equipment etc.”. The appellant also noted that the respondent had not issued any deposit receipt for these charges nor had it mentioned that these charges are a refundable amount in the invoices issued.- we are of the view that the supply of the pipelines and the measurement equipment (SKID equipment) by the respondent, was of use to the customers and is taxable under Section 65(105)(zzzzj) of the Finance Act 1994. 

1
Reportable
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
Civil Appeal No. 2633 of 2020
Commissioner of Service Tax, Ahmedabad …Appellant
Versus
M/s Adani Gas Ltd. …Respondent
J U D G M E N T
Dr. Dhananjaya Y. Chandrachud, J
1 This appeal arises from a judgment and order of the Customs, Excise, &
Service Tax Appellate Tribunal,
1 West Zonal Bench at Ahmedabad in Service
dated 5 April 2019. The Tribunal has, in exercise of its appellate jurisdiction,
reversed the 30 March 2011 decision of the Commissioner of Service Tax,
Ahmedabad2 and set aside the demand for payment of service tax on the
charges collected by the respondent for supply of pipes and measuring
1 “Tribunal” 2 “Adjudicating Authority”
2
equipment to its customers under Section 65(105)(zzzzj) of the Finance Act,

  1. This appeal rests on the interpretation and applicability of the provisions of
    Section 65(105)(zzzzj) of the Finance Act, 1994.
    2 The respondent is in the business of distributing natural gas – Compressed
    Natural Gas3 and Piped Natural Gas4 – to industrial, commercial, and domestic
    consumers. Among other purposes, industrial consumers use PNG for
    manufacturing operations. Domestic and commercial consumers use PNG for
    cooking, power supply and air-conditioning. In order to facilitate the distribution of
    PNG to industrial, commercial and domestic consumers through pipes, the
    respondent installs an equipment described as ‘SKID’ at their customers’ sites.
    The SKID equipment consists of isolation valves, filters, regulators and electronic
    meters. The equipment regulates the supply of PNG being distributed and
    records the quantity of PNG consumed by the customer, which is then used for
    billing purposes. The respondent enters into an agreement – the Gas Sales
    Agreement5 – with consumers to whom gas is supplied by it.
    3 The manufacture of CNG falls under Chapter Sub-Heading 27112900 of
    the Central Excise Tariff Act, 1985. The respondent is also engaged in providing
    the taxable service falling under the category of “transport of goods through
    pipeline”, as defined in Section 65(105)(zzz) of the Finance Act, 1994. During the
    course of an audit by the officers of Central Excise, Ahmedabad-I during January
    3 “CNG” 4 “PNG” 5 “GSA”
    3
    2009, it was noticed that the respondent had received income under the head of
    “gas connection charges” from its industrial, commercial, and domestic
    customers. From the GSA and the invoices, it was found that charges were
    collected for the “supply of pipes, measuring equipment etc.” while providing new
    gas connections to customers. The ownership of the equipment is not with the
    customer but is retained by the respondent. The customer does not have control
    or any legal rights over the equipment. Value Added Tax was also not paid on
    these charges collected from the customers. A Notice to Show Cause6 was
    issued to the respondent on 13 October 2009 stating that the transactions
    undertaken by them are covered under the category of “supply of tangible goods
    service”, under Section 65(105)(zzzzj) of Finance Act, 1994 which was
    introduced by Notification No.18/2008- S.T. dated 10 May 2008, with effect from
    16 May 2008. The Show Cause Notice required the respondent to pay service tax
    with effect from 16 May 2008 on the gas connection charges recovered for the
    period from 16 May 2008 to 31 March 2009. Three similar notices were issued to
    the respondent for subsequent periods. The first notice indicated that the
    respondent had received gas connection charges amounting to Rs.
    23,37,51,903/- on which service tax and cess amounting to Rs. 2,83,46,411/-
    had not been deposited. The respondent was called upon to show cause why
    service tax should not be demanded together with interest and penalties under
    Sections 76, 77 and 78 of the Finance Act, 1994.
    6 “Show Cause Notice”
    4
    4 In their reply to the Show Cause Notice, the respondent stated that:
    (i) PNG is distributed through pipes to industrial, commercial and domestic
    customers. The SKID equipment is installed at the customers’ sites to
    regulate the supply of PNG distributed and record the quantity of PNG
    consumed for billing purposes;
    (ii) The GSA is entered into with the customer. The ‘SKID’ consists of
    isolation valves, filters, regulators and electronic meters;
    (iii) The equipment is installed at the location of the customer without the
    transfer of ownership and possession; and the respondent retains the
    right to use the equipment;
    (iv) The arrangement between the respondent and its customer provides
    for the supply of gas, for which measurement equipment (the SKID
    equipment), is installed at the cost of customers at their premises for
    the purpose of billing;
    (v) The equipment is used by the respondent for its own purposes and the
    customer does not use the measurement equipment;
    (vi) Under the GSA, the right to adjust, clean, handle, replace, maintain,
    remove or modify the equipment is conferred upon the respondent. The
    equipment is used by the respondent and the customer does not buy or
    use the equipment;
    (vii) Under the GSA, the respondent has a right of entry at all hours to the
    measurement equipment to a pipeline upto all consumption points and
    gas consuming facilities inside the buyer’s premises;
    5
    (viii) The equipment is used only for metering and billing so as to not invite
    any dispute or objection from the customers; and
    (ix) The amount which is collected from the customer is in the form of an
    interest-free security deposit, for the purpose of ensuring safe-keeping
    of the measurement equipment as is required by Attachment 3 to
    Schedule A of the Petroleum and Natural Gas Regulatory Board
    (Determination of Network Tariff for City or Local Gas Distribution
    Networks and Compression Charge for CNG) Regulations 20087
    . This
    deposit is to be returned at the time of discontinuing or terminating the
    connection and between 25 to 100 per cent of the charges were
    refunded by the respondent in the year 2008-09.
    The respondent thus contended that they were not liable to pay service tax and
    consequently the demand for tax interest and penalty was not sustainable.
    5 The Show Cause Notice was adjudicated by an order dated 30 March
    2011 of the Adjudicating Authority. Confirming the demand, the Adjudicating
    Authority noted that the demand in the Show Cause Notice was not under the
    category of “transport of goods by pipeline or other conduit services” under
    Section 65(105)(zzz) on the charges recovered from the supply of gas, but for
    supplying measurement equipment at the time of providing a new gas connection
    to a customer, under the category of “supply of tangible goods services” under
    Section 65(105)(zzzzj). The Adjudicating Authority held that “…there is a definite
    element of service involved in this transaction.” The Adjudicating Authority held
    that the respondent is not only a seller engaged in the sale of gas to the customer
    7 “PNGRB Network Tariff Regulations 2008”, published vide notification dated 19 March 2008.
    6
    but also a service provider who supplies, installs and maintains measurement
    equipment at the customers’ premises. The customer, in this view, is a purchaser
    of gas and a service recipient for the supply, installation and maintenance of
    measurement equipment. The fact that (i) ownership of the measurement
    equipment vests with the respondent; and (ii) there is no transfer of the right of
    possession and effective control is undisputed, thereby satisfying two of the
    required ingredients for Section 65(105)(zzzzj). Noting that the purpose of the
    measurement equipment is to ensure effective and accurate billing, the
    Adjudicating Authority held that the expression ‘use’ is attracted and it is the
    customer who must be held to be in use of the equipment, regardless of the
    customer lacking technical expertise in handling the measurement equipment.
    This conclusion was based on the following reasoning:
    “The expression “use” does not mean that the recipient has to
    personally and physically use the equipment all the time. It
    broadly refers to the direct or indirect use whether personally
    or through anybody else and meant to serve the intended
    purpose of the goods. The contention of the said noticee that
    they use the “Measurement Equipment” which are installed
    for their own benefits and purposes is misplaced. Accuracy
    in billing is as much a concern of the buyer of gas as is
    of the seller and hence, he gets it installed at his own
    cost and therefore working of the “Measurement
    Equipment” is verified periodically by the buyer as well
    as the seller as agreed by both in the Agreement.”
    (emphasis supplied).
    6 The order also noted that the entirety of the gas connection charges
    collected at the time of installing the connection are not refunded at the time of
    discontinuation or termination. The Adjudicating Authority allowed the
    respondent to claim the benefit of cum-tax value and reduced the demand for
    7
    service tax from Rs. 2,83,46,411/- to Rs. 2,52,73,526/-. Penalties were imposed
    under Sections 77 and 78 of the Finance Act 1994.
    7 The respondent assailed the order of adjudication before the Tribunal. By
    its judgment dated 05 April 2019, the Tribunal allowed the appeal filed by the
    respondent. The Tribunal observed that the SKID equipment is installed by the
    respondent at the customers’ site and at the cost of the customer without the
    transfer of ownership and possession. However, the crucial issue which required
    analysis was whether the SKID equipment is for the use of the customer.
    Adverting to the GSA which is entered into between the respondent and its
    customers, the Tribunal held:
    “ … the appellant supplies natural gas through pipes to the
    Industrial, Commercial or Domestic customers and for this
    purpose installs an equipment called “SKID” at the customer’s
    site to regulate the supply of natural gas supplied through
    pipes and to record the quantity consumed by the customers
    for the purpose of billing. The gas pipeline from the nearest
    distribution point is laid and maintained by appellant at the
    cost of the customer and the measuring equipment is also
    supplied, installed and maintained by the appellant at the cost
    of the customer. The terms of the agreement leave no
    manner of doubt that the purpose of the equipment is to
    measure the amount of gas supplied to the customer for
    the purpose of billing. They are, therefore, for the use of
    the appellant and are not for use by the customers. The
    finding to the contrary recorded by the Adjudicating Authority
    is, therefore, not correct.” (emphasis supplied)
    8 The Tribunal held that the metering equipment is installed for measuring
    the amount of gas supplied to the customer for the purpose of billing; hence the
    use of the equipment is by the respondent and not by the customer.
    8
    9 The decision of the Tribunal has been assailed on behalf of the
    revenue/appellant in the appeals. Mr. Sanjay Jain, Additional Solicitor General of
    India, submitted that the GSA which is a ‘take or pay agreement’ demonstrates
    that:
    (i) The SKID equipment is installed by the respondent at the cost of the
    buyer;
    (ii) Neither ownership nor possession of the equipment is transferred to
    the buyer;
    (iii) The measurement equipment is installed, maintained and repaired
    by the respondent at the cost of the buyer;
    (iv) Mere technical expertise on part of the respondent to operate the
    equipment does not preclude the usage by the buyer;
    (v) The buyer is as much concerned about the accuracy of the billing as
    the supplier of gas. The measurement equipment enures to the
    benefit of the buyer for the purpose of verifying the correctness of
    the charges levied based on the quantity of gas consumed;
    (vi) Though the gas connection charges which are initially recovered are
    claimed to be refundable, the quantum of refunds may vary from
    buyer to buyer and the data which was produced by the respondent
    indicates that in several cases full refunds have not been made; and
    (vii) The CBEC circular No. 334/1/2008-TRU dated 29 February 2008
    has clarified that transactions that enable usage of goods without
    transferring the right to use, are in the nature of a service under
    Section 65(105)(zzzzj) and not sale under Article 366(29-A)(d) of the
    9
    Constitution of India. Since the respondent has not paid VAT for the
    charges collected on supply of pipelines and the measurement
    equipment, this transaction must be treated as a service.
    10 The ASG submitted that the use of the SKID equipment is not merely by
    the respondent as the seller of gas but by the buyer as well for the purpose of
    verifying the accuracy of billing. The decision of the Tribunal was faulted on the
    ground that its finding – that the use of the equipment is by the seller – is contrary
    to the terms of the GSA.
    11 Opposing these submissions Mr Vikram Nankani, learned Senior Counsel
    appearing on behalf of the respondent, submitted that:
    (i) The GSA is an agreement for the sale and purchase of goods,
    namely, PNG;
    (ii) The terms of the GSA provide contractual rights to the buyer,
    including the right to verify and dispute the bill raised by the supplier
    and to seek arbitration;
    (iii) The rights of a buyer of gas under the GSA must be kept distinct
    from the use of the SKID equipment and the essential issue in the
    present case is whether the equipment is installed for the use of the
    buyer;
    (iv) Under the terms of the GSA, ownership continues to vests with the
    respondent at all times and the buyer of gas is not entitled to adjust,
    10
    modify or maintain the equipment. The buyer has no possessory
    right nor can they lease or sub-let the equipment;
    (v) The purpose of the measurement equipment in a gas supply
    contract is to measure the quantity of gas supplied to the buyer of
    gas. However, the buyer gets no service out of the equipment;
    (vi) In determining the issue in appeal, it is necessary to isolate the
    rights conferred by the GSA on the buyer of gas from the issue as to
    whether the buyer has the use of the SKID equipment. The SKID
    equipment is a technical device and the buyer has no right to use
    the equipment; and this inability to use the equipment by the
    customer would not be within the scope of the taxing provision,
    which must be construed strictly;
    (vii) Amounts collected under the head of “gas connection charges” are
    mainly in the nature of interest-free security deposits, which are
    required to be refunded in part, or in full, depending on the duration
    of the contract which determines depreciation. They are not
    collected as a consideration for providing a service; and under
    Article 366(29-A)(d), a tax on the sale or purchase of goods includes
    a tax on the transfer of the right to use goods for any purpose,
    without necessarily transferring the title. Section 65(105)(zzzzj) was
    introduced with the intention of capturing services which were
    technically not ‘sales’ and were escaping the net of VAT. In the
    present case, there is no transfer of the right to use the equipment
    nor is there any element of service in the supply of the metering
    11
    equipment. The equipment is installed by the respondent as a seller
    of gas and is not used by the buyer.
    12 The question that arises for our consideration is whether Section
    65(105)(zzzzj) of the Finance Act, 1994 is applicable in the present case, that is,
    whether the supply of pipes and measurement equipment (SKID equipment),
    charged under the head of “gas connection charges” by the respondent to its
    industrial, commercial, and domestic consumers, amounts to supply of tangible
    goods for their use. While assessing the merits of the rival submissions, it is
    necessary to interpret the provisions of Section 65(105)(zzzzj).
    13 Section 65(105)(zzzzj) of the Finance Act 1994 provides for taxability of
    supply of tangible goods for use, without transferring right of possession and
    effective control over such goods, as a ‘taxable service’. Section 65(105)(zzzzj) of
    the Finance Act, 1994 reads as follows:
    “65(105) “taxable service” means any service provided or to
    be providedxx xx xx
    (zzzzj) to any person, by any other person in relation to
    supply of tangible goods including machinery, equipment
    and appliances for use, without transferring right of
    possession and effective control of such machinery,
    equipment and appliances.”
    14 Section 65(105)(zzzzj) of the Finance Act 1994 was introduced by
    Notification No.18/2008-S.T. with effect from 16 May 2008. Section
    65(105)(zzzzj) levies a service tax on the use of tangible goods. On the other
    12
    hand, the transfer of the right to use any goods is treated as a ‘deemed sale’ and
    is subject to sales tax under Article 366(29-A)(d) of the Constitution of India. It is
    necessary to distinguish the applicability of these two provisions. Article 366(29-
    A)(d), provides:
    “(366)(29-A) tax on the sale or purchase of goods includes—
    xx xx xx
    (d) a tax on the transfer of the right to use any goods for any
    purpose (whether or not for a specified period) for cash, deferred
    payment or other valuable consideration;
    xx xx xx
    and such transfer, delivery or supply of any goods shall be deemed
    to be a sale of those goods by the person making the transfer,
    delivery or supply and a purchase of those goods by the person to
    whom such transfer, delivery or supply is made.”
    15 The applicability of Article 366(29-A)(d) was discussed in a decision of this
    Court in Bharat Sanchar Nigam Limited and another v. Union of India and
    others8 (“BSNL”). In BSNL, the Court held that the purpose of Article 366(29-
    A)(d) was to levy tax on those transactions where there was a “transfer of the
    right to use any goods” to the purchaser, instead of passing the title or ownership
    of the goods. Thus, by a fiction of law, these transactions were now treated as
    ‘sale’. Elucidating on the “transfer of the right to use any goods”, Dr A R
    Lakshmanan J. in a concurring opinion held:
    “97. To constitute a transaction for the transfer of the right to
    use the goods, the transaction must have the following
    attributes:
    a. there must be goods available for delivery;
    b. there must be a consensus ad idem as to the identity of
    the goods;
    8 2006 (3) SCC (1).
    13
    c. the transferee should have a legal right to use the
    goods- consequently all legal consequences of such
    use including any permissions or licenses required
    therefore should be available to the transferee;
    d. for the period during which the transferee has such
    legal right, it has to be the exclusion to the
    transferor; this is the necessary concomitant of the
    plain language of the statute viz. a “transfer of the
    right to use” and not merely a licence to use the
    goods;
    e. having transferred the right to use the goods during the
    period for which it is to be transferred, the owner cannot
    again transfer the same rights to others.”
    (emphasis supplied)
    16 The test laid down in BSNL has been applied by courts to determine
    whether a transaction involves the “transfer of the right to use any goods” under
    Article 366(29-A)(d). In doing so, the courts have analysed the terms of the
    agreement underlying the transaction to ascertain whether effective control and
    possession has been transferred by the supplier to the recipient of the goods.
    Recently, this Court in Great Eastern Shipping Company Limited. v. State of
    Karnataka and others9 considered whether the transfer of a vessel under a
    charter party agreement was a ‘deemed sale’, subject to sales tax. The Court,
    after analysing the terms of the charter party agreement, held:
    “43. We are not turning our decision upon the terms used
    like ‘let’, ‘hire’, ‘delivery’ and ‘redelivery’ but on the other
    essential terms of the Charter Party Agreement entered in
    the instant case which clearly makes out that there is a
    transfer of exclusive right to use the vessel which is a
    deemed sale and is liable to tax under the KST Act. In the
    instant case, full control of the vessel had been given to
    the charterer to use exclusively for six months, and
    delivery had also been made. The use by charterer
    exclusively for six months makes it out that it is
    definitely a contract of transfer of right to use the vessel
    with which we are concerned in the instant matter, and
    that is a deemed sale as specified in Article 366(29A)(d).
    On the basis of the abovementioned decision, it was urged
    9 2020 (3) SCC 354.
    14
    that all Charter Party Agreements are service agreements.
    The submission cannot be accepted, as there is no
    general/invariable rule/law in this regard. It depends upon
    the terms and conditions of the charterparty when it is to be
    treated as only for service and when it is the transfer of right
    to use.
    xx xx xx
  2. When we consider the charterparty in question in the
    context of applicable law, particularly in view of the
    constitutional provisions of Article 366(29A)(d), we find that
    there is transfer of right to use tangible goods, which is
    determinative of deemed sale as per the Constitution of India
    and provisions of section 5C reflecting the said intendment.
    We are of the considered opinion that there is transfer of
    right to use exclusively given to charterer for six
    months, and the vessel has been kept under the
    exclusive control. The charterer qualifies the test laid
    down by this court in BSNL (supra).”
    (emphasis supplied)
    17 Therefore, sales tax is levied in pursuance of Article 366(29-A)(d) on
    transactions which resemble a sale in substance as they result in a transfer of the
    right to use in goods, instead of the transfer of title in goods. The Finance Act,
    1994, deriving authority from the residuary Entry 97 of the Union List, enabled the
    Central Government to levy tax on services. ‘Service tax’ was introduced as a
    response to the advancement of the contemporary world where an indirect tax
    was necessary to capture consumption of services, which are economically
    similar to consumption of goods, in as much as they both satisfy human needs.10
    This Court, in Association of Leasing and Financial Service Companies v.
    Union of India,
    11 had noted:
    “38…Today with technological advancement there is a very
    thin line which divides a “sale” from “service”. That, applying
    the principle of equivalence, there is no difference between
    production or manufacture of saleable goods and production
    of marketable/saleable services in the form of an activity
    10 All India Federation of Tax Practitioners v. Union of India, (2007) 7 SCC 527, para 4. 11 (2011) 2 SCC 352.
    15
    undertaken by the service provider for consideration, which
    correspondingly stands consumed by the service receiver. It
    is this principle of equivalence which is inbuilt into the
    concept of service tax under the Finance Act, 1994. That
    service tax is, therefore, a tax on an activity. That, service
    tax is a value added tax. The value addition is on account of
    the activity which provides value addition…Thus, service
    tax is imposed every time service is rendered to the
    customer/client…Thus, the taxable event is each
    exercise/activity undertaken by the service provider and
    each time service tax gets attracted.” (emphasis supplied)
    18 The introduction of Section 65(105)(zzzzj) in the Finance Act, 1994, was
    with the intention of taxing such activities that enable the customer’s use of the
    service provider’s goods without transfer of the right of possession and effective
    control. This provision creates an element of taxation over a service, as opposed
    to a ‘deemed sale’ under Article 366(29-A)(d). For the purpose of clarification, the
    Department of Revenue issued a Circular, D.O.F. No.334/1/2008-TRU, dated 29
    February, 2008. The said circular clarified the applicability of Section
    65(105)(zzzzj) vis-à-vis Article 366(29-A)(d). The relevant portions of the circular
    are as follows:
    “4.4 SUPPLY OF TANGIBLE GOODS FOR USE:
    4.4.1 Transfer of the right to use any goods is leviable to
    sales tax/VAT as deemed sale of goods [Article 366(29A)(d)
    of the Constitution of India]. Transfer of right to use
    involves transfer of both possession and control of the
    goods to the user of the 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 and high value machineries are
    supplied for use, with no legal right of possession and
    effective control. Transaction of allowing another person
    to use the goods, without giving legal right of
    possession and effective control, not being treated as
    sale of goods, is treated as service.
    16
    4.4.3 Proposal is to levy service tax on such services
    provided in relation to supply of tangible goods, including
    machinery, equipment and appliances, for use, with no legal
    right of possession or effective control. Supply of tangible
    goods for use and leviable to VAT / sales tax as deemed
    sale of goods, is not covered under the scope of the
    proposed service. Whether a transaction involves
    transfer of possession and control is a question of facts
    and is to be decided based on the terms of the contract
    and other material facts. This could be ascertainable
    from the fact whether or not VAT is payable or paid.”
    (emphasis supplied)
    19 The above circular clarified that Section 65(105)(zzzzj) is applicable only to
    those transactions where there is a supply of tangible goods for use, without the
    transfer of possession or effective control to the recipient. This aspect has been
    interpreted by various courts and tribunals. In the Bombay High Court decision in
    Indian National Shipowners’ Association and Anr. v. Union of India and
    others (“Shipowners”),12 the petitioners were engaged in providing services to
    major exploration and production operators by supplying their various vessels
    including offshore drilling rigs, offshore support vessels, harbour tugs, and
    construction barges. The question before the Bombay High Court was whether,
    prior to the introduction of Section 65(105)(zzzzj) in 2008, the petitioner could be
    taxed on its services in relation to mining of mineral, oil, or gas under Section
    65(105)(zzzy). In the present matter, we are not concerned with the merits of
    Shipowners’, which was affirmed on appeal by this Court in Union of India v.
    Indian National Shipowners’ Association and Anr.13 This Court explicitly
    restricted itself to the interpretation of Section 65(105)(zzz) while leaving the
    other observations on interpretation of the law, “open to be considered at length
    12 (2009) 4 AIR Bom R 775. 13 2010 (14) SCC 438.
    17
    at an appropriate stage”.14 We note however, the analysis of Section
    65(105)(zzzzj) of the Bombay High Court, where the High Court observed:
    “38. Entry (zzzzj) is entirely a new entry. Whereas Entry
    (zzzy) covers services provided to any person in relation to
    mining of mineral, oil or gas, services covered by Entry
    (zzzzj) can be identified by the presence of two
    characteristics namely (a) supply of tangible goods
    including machinery, equipment and appliances for use,
    (b) there is no transfer of right of possession and
    effective control of such machinery, equipment and
    appliances. According to the members of the 1st petitioner,
    they supply offshore support vessels to carry out jobs like
    anchor handling, towing of vessels, supply to rig or platform,
    diving support, fire fighting etc. Their marine construction
    barges 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 out of the harbour and for
    husbanding main fleet. They give vessels on time charter
    basis to oil and gas producers to carry out offshore
    exploration and production activities. The right of
    possession and effective control of such machinery,
    equipment and appliances is not parted with. […]”
    (emphasis supplied)
    20 The taxable service is defined as a service which is provided or which is to
    be provided by any person to another “in relation to supply of tangible goods”.
    The provision indicates that the goods may include machinery, equipment or
    appliances. The crucial ingredient of the definition is that the supply of tangible
    goods is for the use of another, without transferring the right of possession and
    effective control “of such machinery, equipment and appliances”. Hence, in order
    to attract the definition of a taxable service under sub-clause (zzzzj), the
    ingredients that have to be fulfilled are:
    (i) The provision of a service;
    14 2010 (14) SCC 438, para 7.
    18
    (ii) The service is provided by a person to another person;
    (iii) The service is provided in relation to the supply of tangible goods,
    including machinery, equipment and appliances;
    (iv) There is no transfer of the right of possession;
    (v) Effective control over the goods continues to be with the service
    provider; 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 the levy of the tax.
    21 A GSA entered into by the respondent on 17 November 2008 with one of
    its buyers (Polymer Industries) has been adverted to by the contesting parties as
    a representative sample. Under the terms of the GSA, the respondent as the
    seller agrees to sell and tender for delivery at the ‘Delivery Point’, gas in the
    quantities, times and at the prices determined in accordance with it. Clause 2.1
    stipulates that:
    “2.1. The Seller agrees to sell and tender for delivery at the
    Delivery Point, and the Buyer agrees to purchase and receive
    at the Delivery Point and pay for Gas in quantities at the times
    and at the prices determined in accordance with, and subject
    to the terms and conditions of this Agreement.”
    The expression ‘Delivery Point’ is defined thus:
    “ “Delivery Point” means the flange or weld or agreed mark at
    the downstream of the isolation valve located immediately
    outside the Buyer’s premise as identified in Schedule 2.”
    19
    Clause 5.1 requires the seller to deliver gas to the buyer at the Delivery Point.
    The seller is required to set up a gas pipeline to the metering station of the buyer
    from the nearest distribution mains at the cost of the buyer:
    “5.1. The seller shall deliver the Gas to the Buyer at the
    Delivery Point in accordance with the terms of this
    Agreement. Gas pipeline to the Buyer’s metering station
    from nearest distribution mains would be constructed
    and maintained by the Seller at the Buyer’s cost.”
    (emphasis supplied)
    Clause 5.3 states that the ‘Measurement Equipment’ is to be supplied, 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 [respondent
    herein] forever. Buyer shall provide free of cost adequate
    land and power connection in its premise for the installation of
    Measurement Equipment. Buyer shall pay for providing gas
    pipeline connection including pipeline from distribution mains
    upto the measurement equipment; and measurement
    equipment to 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 to the
    Measurement equipment shall be constructed and
    maintained by the Seller at Buyer’s cost. The Buyer agrees
    to let the Seller or his authorised representative to supply,
    construct, install commission and maintain the supply pipeline
    from main distribution line upto the Measurement Equipment
    and Measurement Equipment in its premises.
    (emphasis supplied)
    The Buyer’s Facilities and Seller’s Facilities are defined to include the
    measurement equipment and pipelines and have been defined as follows:
    20
    “ “Buyers Facilities” means plant, machinery, measurement
    equipment and other equipment from the Delivery Point
    onwards necessary to receive Gas under this Agreement.”
    “ “Seller’s Facilities” means the Seller’s pipelines, gas plants,
    machinery, Measurement Equipment, other metering facilities
    and other equipment necessary for flow control and the
    processing, compression, measuring and testing of Gas to
    enable delivery of Gas to the Buyer at the Delivery Point.”
    Further, the expression ‘Measurement Equipment’ is defined as follows:
    “ “Measurement equipment” means such main and subsidiary
    meter, including apparatus, mains and pipes, as the Seller
    considers necessary for the measurement and recording of
    the volume in SCM and pressure in Kg/cm2 of Gas delivered
    at the Delivery Point and for the safe operation of the Buyer’s
    Facilities.”
    Ownership of the measurement equipment continues to vest with the respondent
    as per clause 5.3. The buyer is required to provide land and a power connection,
    free of cost at its premises. The buyer has to pay for providing a gas pipeline
    connection from the distribution mains up to the measurement equipment.
    Gas is transported from the ‘Measurement Equipment’ by means of a pipeline
    provided by the buyer as stipulated in Clause 5.5:
    “5.5. Gas will be transported from the Measurement
    equipment by means of a pipeline provided by the Buyer as
    per the specifications and applicable standards provided by
    the Seller and the same shall be maintained by the Buyer.
    The Seller reserves the right to supply other Buyer’s before
    the upstream range 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 manner
    measurement equipment at any time during the currency of
    the Contract.”
    21
    Under clause 5.7 the buyer cannot lease, sublet or sell the measurement
    equipment:
    “5.7. The Buyer under no circumstances shall
    sublet/lease/sell/create a charge over part or whole of
    measurement equipment at any given time.”
    Clause 5.10 provides that the seller has the right of entry to the measurement
    equipment:
    “5.10. The Seller or his authorized representative shall have
    right of entry at all hours to the Measurement Equipment,
    route of pipeline upto all consumption points and gas
    consuming facilities inside the Buyer’s premises.”
    Under clause 7.1, ‘title and risk’ in the gas passes from the seller to the buyer at
    the Delivery Point. Clause 8.1 defines the expression ‘Daily Contract Quantity’
    15.
    Clause 9.2 of the agreement deals with measurement and calibration:
    “9.2 Measurement and Calibration
    9.2.1 Quantity of Gas supplied under this Agreement shall
    be measured at the Delivery Point in SCM. The
    measurement shall include all corrections in
    installation practices recommended for accurate
    metering of Gas by the American Gas Association
    (AGA) Gas Measurement Committee report No. 3,7
    and 8.
    9.2.2 The Measurement Equipment shall be supplied,
    installed, owned and maintained by the Seller at
    the Buyer’s cost.
    9.2.3 Working of the Measurement Equipment shall be
    verified periodically by the Parties.
    15 “8.1. Daily Contract Quantity
    (a) “Daily Contract Quantity” or “DCQ” shall be equal to 100 SCM per day having approximately Gross
    Calorific Value (GCV) of 9000 Kcal/scm.
    (b) Provided further, if on any Day, the Buyer requires Gas in excess of Daily Contract Quantity, the seller
    may supply the same subject to availability of gas with Seller and Seller’s Operational Flexibility.
    (c) Supplier subject to the operational flexibility and availability of the gas supply the Daily Contract
    Quantity however the Seller shall have the freedom to curtail, stop or interrupt the gas supply with prior
    notice to the Buyer.
    22
    9.2.4 If the Buyer has any doubt as to the accuracy of
    the Measurement Equipment, it shall
    communicate the same to the Seller in writing and
    request the Seller to either check or re-calibrate
    the Measurement Equipment. The Seller shall
    undertake such check/re-calibration of the
    Measurement Equipment within fourteen (14) days of
    receipt of such request. The cost of conducting the
    checks/re-calibration shall be borne by the Buyer.
    9.2.5 If the seller has any doubt about the proper working
    of the Measurement Equipment, it may immediately
    check the meter in presence of the Buyer’s
    representative. In case it is established that the
    existing Measurement Equipment is not working
    satisfactorily, the same shall be replaced at the
    Buyer’s cost.
    9.2.6 If on carrying out the check/re-calibration of the
    Measurement Equipment as aforesaid it is discovered
    that either the percentage of inaccuracy exceed – 2%
    (Two per cent) or that the Measurement Equipment is
    out of service, the following procedure in order of
    priority, whichever is feasible for arriving at the
    computation of quantity of Gas during the period
    between the last calibration and the present, shall be
    followed:
    (a) by correcting the error if the percentage of
    error is ascertainable by calibration, tests or
    mathematical calculation; or
    (b) by estimating the volume of Gas delivered by
    comparison with deliveries during the period
    under similar conditions when the
    Measurement Equipment was registering
    accurately.
    9.2.7 If at the time of carrying out the check of the
    Measurement Equipment as above, it is discovered
    that the error in the readings of the Measurement
    Equipment exceeds- 2.0% the Measurement
    Equipment shall be re-calibrated at Buyer’s cost.
    9.2.8 Notwithstanding anything contained in this
    Agreement, pending the result of any check/recalibration, the Buyer shall not withhold payments to
    the Seller under this Agreement on this account.
    However, the Buyer shall be entitled to lodge his
    claim for refunds/adjustments, if any, depending upon
    the final results of such check/re-calibration within a
    period of fourteen (14) days of such check/re-
    23
    calibration. Such claim, if found correct by the Seller,
    shall be adjusted against the subsequent invoice(s) of
    supply of Gas.
    9.2.9 Pending the resolution of any dispute, the Seller shall
    produce 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 to the Buyer a statement including the following details
    for each Day of the previous Fortnight (hereinafter referred to
    as the “Fortnightly Invoice”), which shall show in respect of
    the previous Fortnight, 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
    in such Fortnight, in SCM and Gross Calorific Value
    for the same;
    (iii) the Weighted Average Gross Calorific Value (GCV) of
    such Gas taken by the Buyer in such fortnight;
    (iv) the amount payable by the Buyer to the Seller for the
    quantifies of the Gas delivered during the Fortnight
    equal to quantities of Gas delivered by the Seller in
    SCM/Kcal as determined in (ii) above multiplied by
    Contract Price prevailing for the Fortnight.
    12.2 The Buyer shall within seven (7) days of the receipt of
    the fortnightly invoice from the seller, pay to the seller
    the amount mentioned in such invoice in the manner
    to be specified by the Seller.
    12.3. The Buyer agrees that, notwithstanding any dispute in
    relation to any amount invoiced, it shall not be
    withhold payment in accordance with the provisions of
    this Section 12 of any amounts. After making full
    payment of such invoice, the Buyer shall lodge the
    claims with the Seller giving full particulars within a
    period of fourteen (14) Days from the date of making
    payment, and if such claims are found correct, the
    Seller shall adjust the same against the next invoice.
    It is further agreed that no interest will be payable by
    24
    the Seller on any such amount adjusted in the
    subsequent invoices.”
    Under clause 13, security for payment in the form of a cash deposit is required to
    be maintained by the buyer equivalent to the DCQ16 multiplied by thirty and by
    the contract price. If the seller draws upon the payment security, the buyer has to
    make good the amount withdrawn.
    Clause 14 of the Agreement further provides for the representations and
    warranties of the buyer and seller. Clause 14.3 reads as follows:
    “14.3 Buyer’s Warranties and Undertakings
    The Buyer warrants and undertakes to the Seller that
    throughout the term of this Agreement:
    a) the Buyer’s Facilities will be technically and operationally
    compatible with the Seller’s Facilities at the Delivery Point
    and fit for purpose for off take of gas from the Delivery
    Point;
    b) the Buyer’s Facilities will be maintained in good working
    order and condition and so operated as to be compatible
    with the fulfilment of the obligations of the Buyer under this
    Agreement;…”
    Under the above clause 14.3, the buyer warrants to maintain the “Buyer’s
    Facilities”, which includes the ‘measurement equipment’, in good working order
    and condition and technically and operationally compatible with the Seller’s
    Facilities.
    Under clause 16.4, if the buyer fails (otherwise than as a consequence of force
    majeure or the seller’s default) to take fifty per cent or more of the cumulative
    DCQ over 45 consecutive days, the seller is entitled to terminate the agreement.
    16 “Daily Contract Quality”
    25
    22 The GSA is an agreement between the respondent and its purchaser for
    regulating the terms on which gas is sold by the respondent. The agreement is of
    a ‘take or pay’ genre. The buyer must lift the quantity contracted or pay for it. The
    agreement provides for the supply of gas at the Delivery Point through gas
    pipelines constructed from the distribution main to the measurement equipment.
    Further, both the seller and the buyer have provided warranties for maintaining
    the ‘measurement equipment’ in good working condition, in their respective
    capacities. The measurement equipment, as has been re-iterated by the
    respondent in the course of their arguments, is installed for the measurement and
    recording of the volume and pressure of the gas delivered at the Delivery Point
    and for the safe operation of 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 of ownership or
    possession of the pipelines or the measurement equipment (SKID equipment
    equipment) by the respondent to its customers. Clause 5.3 of the agreement
    specifically provides that the ‘Measurement Equipment’ is to be supplied,
    installed and maintained by the seller at the cost of the buyer and that the
    ownership of the equipment will rest with the respondent forever. Clause 5.6
    further clarifies that the buyer has no right to adjust, clean, handle, replace,
    maintain, remove or modify the measurement equipment. Clause 5.10
    guarantees that the seller shall have the right of entry at all hours to the
    Measurement Equipment and associated apparatus at the Buyer’s premises. The
    pipelines are also part of the “Seller’s Facilities” under the agreement and are
    26
    constructed and maintained by the respondent at the cost of the customer. Thus,
    the ingredient of not transferring the ownership, possession or effective control of
    the goods under Section 65(105)(zzzzj) is satisfied.
    24 The crux of the dispute is whether the supply of tangible goods – the SKID
    equipment – is for the use of the purchaser. In determining as to whether the
    provisions of Section 65(105)(zzzzj) are attracted, it is necessary to distinguish
    between the rights and obligations of the respondent (as the seller of gas) and of
    their purchasers, from the issue of whether the measurement equipment (SKID
    equipment) is supplied for the use of the purchaser of gas, without transferring
    the right of possession and effective control.
    25 The purchaser of gas has an interest in ensuring the accuracy of billing
    and regulation of supply. The respondent is interested in ensuring that it receives
    payment for the quantity of gas which is contracted to be supplied to the
    purchaser. The ‘SKID’ consists of regulators, valves, filters and the metering
    equipment. The SKID equipment regulates and records supply. Under the terms
    of the GSA, the obligation of the seller is to deliver gas to the buyer at the
    Delivery Point. The gas pipeline from the nearest distribution main to the buyers’
    metering station is constructed and maintained by the seller at the cost of the
    buyer. The measurement equipment is supplied, installed and maintained by the
    seller at the cost of the buyer, inspite of ownership of the equipment resting with
    the respondent as the seller. The measurement equipment is installed and
    maintained exclusively by the seller. Clause 5.6 indicates that the buyer has no
    27
    right to adjust, clean, handle, replace, maintain, remove or modify it in any
    manner. Clause 5.10 guarantees the seller’s access to the Measurement
    Equipment at the buyer’s premises at all hours. Ownership, control and
    possession of the measurement equipment is with the respondent. The
    measurement equipment comprises not only of electronic meters that are useful
    for determining the quantity of gas supplied to the purchaser at the Delivery
    Point, but also of isolation valves, filters and regulators that are crucial for
    regulating the pressure of gas and ensuring safe operation of the buyer’s
    facilities. In order to maintain the sanctity of the equipment, the agreement casts
    the exclusive responsibility to install and maintain it on the respondent as the
    seller. The terms of the GSA would indicate that the quantity of gas supplied is to
    be measured at the Delivery Point. For this purpose, the measurement
    equipment is supplied, installed, owned and maintained by the seller at the cost
    of the buyer. The working of the measurement equipment is verified periodically
    by the parties to the agreement. If the buyer doubts its accuracy, this has to be
    communicated in writing to the seller, who alone is entitled to test, re-calibrate,
    remove or modify it. Similarly, if the seller has any doubt about the proper
    working of the measurement equipment it is entitled to check the meter in the
    presence of the representatives of the buyer. If according to the seller, the
    existing measurement equipment is not working satisfactorily it would be replaced
    at the cost of the buyer. These provisions indicate that the supply, installation and
    maintenance of the measurement equipment is exclusively carried out by the
    seller. The buyer has contractual remedies against the seller in terms of the GSA.
    These remedies to the buyer as a purchaser of gas are distinct from the issue as
    28
    to whether the equipment for which gas connection charges are recovered is
    used by the buyer.
    26 Under Section 65(105)(zzzzj), the taxable service is provided or to be
    provided in relation to the supply of tangible goods for the use of another, 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 a pen, or his machines
    are in use. Also the fact of being used or employed habitually;
    usage, as, the wear and tear resulting from ordinary use.
    Berry-Kofron Dental Laboratory Co. v. Smith, 345 Mo. 922,
    137 S.W. 2d 452, 454, 455, 456. The purpose served; a
    purpose, object or end for useful or advantageous nature.
    Brown v. Kennedy, Ohio Appellant. 49 N.E.2d 417, 418. To
    put or bring into action or service; to employ for or apply to a
    given purpose. Beggs v. Texas Dept. of Mental Health and
    Mental Retardation, Tex. Civ. App., 496 S.W.2d 252, 254. To
    avail oneself of; to employ; to utilize; to carry out a purpose or
    action by means of; to put into action or service, especially to
    attain an end. State v Howard, 221 Kan. 51, 557 P.2d 1280,
    1281.
    Non-technical sense. The “use” of a thing means that one is
    to enjoy, hold, occupy or have some manner of benefit
    thereof. Use also means usefulness, utility, advantage,
    productive of benefit.”
    27 The expression “use” does not have a fixed meaning. The content of the
    expression must be based on the context in which the expression is adopted. The
    use of an article may or may not result in a visible change in its form or
    substance. Moreover, the nature of use is conditioned by the kind of article which
    is put to use. Section 65(105) of the Finance Act, 1994 envisages myriad
    interpretations of the expression “use”, in a variety of services such as
    29
    telecommunication,17 renting of immovable property,
    18 and services related to art,
    entertainment, and marriage.19 In the case of some articles, use may be signified
    by a physical operation of the article by the person who uses it. In such a case,
    actual physical use is what is meant by the supply of the goods for the use of
    another. In the case of others, the nature of the goods supplied impacts the
    character of the use to which the goods can be put. As an illustration, Section
    65(105)(zzzze) of the Finance Act, 1994, seeks to tax services related to
    information technology and interprets the “right to use” to include the “right to
    reproduce, distribute, sell, etc”.20 This understanding of “use” differs from the
    supply of tangible goods under Section 65(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 a corollary to the same, technical expertise over the
    goods in question is not a sine qua non for determining the ability of the
    consumer to use the good. Therefore, the expression “use” also signifies the
    application of the goods for the purpose for which they have been supplied under
    the terms of a contract.
    28 The terms of the GSA indicate that the supply, installation, maintenance
    and repair of the measurement equipment is exclusively entrusted to the
    respondent as the seller. These provisions have been incorporated in the GSA to
    ensure that a buyer does not calibrate or tinker with the equipment. It is an
    incident of ownership and control being vested with the respondent. The purpose
    of the SKID equipment and its utility, lie in its ability to regulate the supply and
    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.
    30
    achieve an accurate verification of that which is supplied; in the present case the
    supply of goods by the respondent to its buyers. This enures to the benefit of the
    seller and the buyer. The seller is concerned with the precise quantification of the
    gas which is supplied to the buyer. The buyer has an interest in ensuring the
    safety of its facilities and that the billing is based on the correct quantity of gas
    supplied and delivered under the GSA. To postulate, as did the Tribunal, that the
    measurement equipment is only for the benefit of the seller in measuring the
    quantity of the gas supplied would not be correct. The GSA is an agreement
    reflecting mutual rights and obligations between the seller and the purchaser.
    Both have a vital interest in ensuring the correct recording of the quantity of gas
    supplied. Additionally, delivery of gas in a safe and regulated manner, enabled by
    the SKID equipment, is an essential component of the GSA. The SKID equipment
    subserves the contractual rights of both the seller and the purchaser of gas.
    Indeed, without the SKID equipment there would be no gas supply agreement. In
    fact, in the GSA, the buyer has also provided a warranty to ensure that the
    “Buyer’s Facilities” remain technically and operationally compatible with the
    “Seller’s Facilities”, both of which include the ‘measurement equipment’. This
    warranty would not have been provided if the measurement equipment was not of
    ‘use’ to the buyer. The equipment is thus a vital ingredient of the agreement
    towards protecting the mutual rights of the parties and in ensuring the fulfilment of
    their reciprocal obligations as seller and buyer in regulating the supply of gas. As
    an incident of regulating supply, it determines the correct quantity of gas that is
    supplied. The obligation to supply, install and maintain the equipment is cast
    upon the seller as an incident of control and possession being with the seller.
    31
    Section 65(105)(zzzzj) applies precisely in a situation where the use of the goods
    by a person is not accompanied by control and possession. ‘Use’ in the context of
    SKID equipment postulates the utilization of the equipment for the purpose of
    fulfilling the purpose of the contract. Section 65(105)(zzzzj) does not require
    exclusivity of use. The SKID equipment is an intrinsic element of the service
    which is provided by the respondent, acting pursuant to the GSA, as a supplier of
    natural gas to its buyers.
    29 While interpreting the term ‘use’, the Tribunal in the impugned judgment
    has relied on its decision in the case of Meru Cab Company Pvt. Ltd. v.
    Commissioner of Central Excise, Mumbai21 (“Meru Cab”). Meru Cab involved
    the transfer of a vehicle from a radio taxi operator to the driver, in turn to provide
    a service to the passengers. We find that the reliance placed on Meru Cab is
    misplaced as the factual context of the ‘use’ in the two cases is substantially
    different. In present matter, the agreement to supply gas, and the measurement
    equipment and pipelines only involves two parties – the respondent and the
    ultimate customer. Having said that, we are not expressing any opinion on the
    correctness of the decision in Meru Cab.
    30 Thus, we are of the view that the supply of the pipelines and the
    measurement equipment (SKID equipment) by the respondent, was of use to the
    customers and is taxable under Section 65(105)(zzzzj) of the Finance Act 1994.
    21 2016 (41) STR (444) (Tri-Mum).
    32
    31 Another aspect of the matter which requires to be set out is the contention
    of the respondent that the gas connection charges are mainly in the nature of a
    refundable security deposit which is returned to the customers in the event of the
    connection being discontinued or terminated, depending on their usage, and are
    not payment for a service provided by the respondent.
    32 In the Show Cause Notice, the appellant stated that based on an
    assessment of gas sale agreements and invoices, it found that the “gas
    connection charges” were collected for “supply of pipes and measurement
    equipment etc.”. The appellant also noted that the respondent had not issued any
    deposit receipt for these charges nor had it mentioned that these charges are a
    refundable amount in the invoices issued.
    33 The respondent, in their reply dated 29 December 2009, stated that the
    purpose of the collection of these charges was for safe-keeping of the meter by
    the customers and the expense towards charges incurred on disconnection, if the
    customer disconnects immediately after installation. The respondent stated that
    according to the company policy, with respect to commercial and industrial
    consumers, an amount for installation of equipment was collected depending on
    the pressure of the gas and the size of the SKID equipment. Although these are
    reflected as gas connection income, they are (according to the respondent)
    mainly in the nature of refundable security deposits. In support of their argument
    for industrial and commercial consumers, the respondent provided a copy of an
    “internal note dated 13 July 2007” and a list of industrial customers to whom the
    33
    gas connection charges have been refunded. The internal note is extracted
    below:
    “Today we are supplying gas to more than 200 Industrial
    customers at Ahmedabad & Vadodara. We are collecting Gas
    Connection Charge upfront from the customers before
    commencing gas supplies based on the customer load profile
    (provided by customer).
    Many of our customers have future expansion after
    commissioning of the unit which is not covered in existing
    meter connection. Further, few of the customers have also
    requested for termination of the GSAs due to various issues.
    In such cases, following amount shall be deducted from
    the Gas Connection Charges and balance shall be
    refundable.
    (1) Upgradation of Load:
    In this case the percentage of amount to be deducted
    shall be as follows: –
    Period from Commencement % of Amount to be
    deducted
    Earlier New
    Revised
    Upto 1 Year 10% 20%
    Between 1st Year to 2nd Year 25% 50%
    Between 2nd Year to 3rd Year 50% 75%
    Between 3rd Year to 4th Year 75% 100%
    (2) Terminating of Agreement:
    In this case the percentage of amount to be deducted shall be
    as follows:
    Period from Commencement % of Amount to be
    deducted
    Earlier New
    Revised
    Upto 1 Year 10% 25%
    Between 1st Year to 2nd Year 85% 50%
    Between 2nd Year to 3rd Year 95% 75%
    34
    Between 3rd Year to 4th Year 95% 100%
    (emphasis supplied)
    The tabulation of the refund given to the industrial customers of the respondent
    for 2008-09 is as follows:
    34 The above data indicates that, contrary to the assertion of the respondent
    that the amount collected as gas connection charges is refunded at the time of
    discontinuation of the connection, the percentage which has been refunded to the
    35
    industrial customers has varied from case to case ranging from 25 per cent to
    100 per cent. The Adjudicating Authority observed:
    “…the gas connection charges are refunded, based on the
    number of years of gas supply, when the gas connection
    contract is discontinued. This clearly evidences that gas
    connection charges in most of the cases are not refunded
    completely. The said noticee not only earns interest on the
    gas connection charges but also earns income by retaining
    some portion of the gas connection charges at the time of
    discontinuance of the contract. This is a very strange kind of
    security deposit which is not only devoid of interest but also
    on maturity the principal amount gets reduced. Moreover, in
    reality it may never be refunded if the gas connection is not
    discontinued. I have also seen the “Internal Note dated
    13.7.2007” submitted by the said noticee along with his
    written submission as “Annexure-A” and I find that the amount
    to be deducted is 100% when there is “upgradation of load” or
    “termination of agreement” between 3rd year to 4th year. This
    clearly establishes that the liability of the said noticee to
    refund the said “Gas Connection Charges” is only upto a
    period of three years, after that no amount is to be refunded
    and it eventually becomes income of the said noticee.
    Moreover, till the time the said amount is partially refunded it
    remains with the said noticee who is at liberty of using the
    same in whatever manner he wants to. I have seen the
    Annexure-B annexed with the written submission dated
    4.1.2010 and find that the gas connection charges are
    refunded to only 13 customers during the year 2008-09. This
    indicates that effectively, the gas connection charges once
    recovered from the customers remain with the said noticee
    and in cases where it is refunded then also some amount is
    retained by the said notice.”
    35 With respect to the domestic consumers, the respondent, in their reply to
    the Show Cause Notice, argued that under the PNGRB Network Tariff
    Regulations 2008, entities such as the respondent are required to collect
    refundable interest-free security deposits towards safe-keeping of the meter and
    are to be refunded in full to the domestic PNG customer in case of a
    disconnection. The respondent argued that the PNGRB Network Tariff
    36
    Regulations 2008 further provide that the amount collected as interest-free
    refundable security deposit is to exist as a liability in their books of account. In
    support of their contention, the respondent provided their Annual Report for the
    financial year 2008-09 which depicts the performance in terms of income and
    profitability. An extract of the report is provided below:
    37
    36 The above report provides that the respondent has treated an amount of
    Rs. 5000/- per domestic consumer as refundable interest-free security deposit
    amounting to Rs. 883.34 lacs. In assessing these rival contentions, the
    Adjudicating Authority held that:
    “…I find that the attempt of the said notice to align the
    Finance Act, 1994, with the Petroleum and Natural Gas
    Regulatory Board Regulations 2008, to determine the
    taxability of a taxable event is not acceptable and goes in
    vain. Taxability of a service is governed under Section
    65(105) of the Finance Act, 1994 and is not determined under
    any other Act or Regulations, unless and until the same is
    specifically provided in the definition given under Section
    65(105) of the Finance Act, 1994. The taxability of a service is
    also not determined by the manner in which the Books of
    Accounts are maintained….”
    37 We find ourselves in agreement with the findings of the Adjudicating
    Authority. The extent of the refund of gas connection charges collected from
    industrial, commercial and domestic consumers by the respondent depends on
    their usage. From the internal note dated 13 July 2007 and the tabulation of
    customers provided above, it is evident that the percentage of funds refunded
    varies from customer to customer, while the remaining amount is retained by the
    respondent. In any case, as regards the domestic customers, no deposit receipts
    have been provided and instead, the respondent has relied on the tabulation of
    the refund of deposit to industrial consumers to support their contention. Thus,
    the argument of the respondent that these gas connection charges collected from
    industrial, commercial and domestic consumers constitute a refundable security
    deposit is rejected.
    38
    38 Thus construed, we are of the view that the Adjudicating Authority was
    correct in concluding that the buyer of gas is as interested as the seller in
    ensuring and verifying the correct quantity of the gas supplied through the
    instrumentality of the measurement equipment and the pipelines. Additionally, the
    role of regulating pressure and ensuring the safety of supply of gas performed by
    the measurement equipment is an essential aspect for the ‘use’ of the consumer.
    The SKID equipment fulfils the description in Section 65(105)(zzzzj) of a taxable
    service: service in relation “tangible goods” where the recipient of the service has
    use (without possession or effective control) of the goods.
    39 For the above reasons, we are of the view that the Tribunal was in error in
    interfering with the findings and order of the Adjudicating Authority. The judgment
    of the Tribunal shall accordingly stand set aside. The order of the Adjudicating
    Authority is restored. The appeal is allowed in the above terms.
    40 Pending application(s), if any, stands disposed of.
    …….………….…………………………………………J.
    [Dr. Dhananjaya Y Chandrachud]
    …….…………………………………………………….J.
    [Indu Malhotra]
    …….…………………………………………………….J.
    [K M Joseph]
    New Delhi;
    August 28, 2020.