Service Tax on Gas Connection Charges: Supreme Court’s Verdict on Adani Gas Ltd.

The Supreme Court of India, in its judgment dated August 28, 2020, ruled on the applicability of service tax on gas connection charges levied by M/s Adani Gas Ltd. The case involved a dispute between the Commissioner of Service Tax, Ahmedabad, and Adani Gas Ltd. regarding whether the charges collected for the supply of pipes and measurement equipment to customers were taxable under Section 65(105)(zzzzj) of the Finance Act, 1994.

The judgment addressed the legal interpretation of ‘supply of tangible goods for use’ under the Finance Act and whether the charges collected constituted consideration for a service. The Supreme Court overturned the ruling of the Customs, Excise, and Service Tax Appellate Tribunal (CESTAT), reinstating the service tax demand imposed by the Adjudicating Authority.

Background of the Case

M/s Adani Gas Ltd. is engaged in the distribution of Compressed Natural Gas (CNG) and Piped Natural Gas (PNG) to industrial, commercial, and domestic consumers. The company supplies PNG through a pipeline network and installs SKID equipment at customer premises. The SKID equipment consists of isolation valves, filters, regulators, and electronic meters, which regulate the supply of PNG and record consumption for billing purposes.

The issue arose when an audit by Central Excise officers in January 2009 revealed that Adani Gas Ltd. had collected ‘gas connection charges’ from customers for the supply of pipes and measurement equipment but had not paid service tax on these amounts. The department issued a Show Cause Notice demanding service tax under Section 65(105)(zzzzj) of the Finance Act, 1994, which covers the supply of tangible goods for use without transferring possession and effective control.

Petitioner’s Arguments (Commissioner of Service Tax)

The Commissioner of Service Tax argued that:

• The gas connection charges collected by Adani Gas Ltd. were for providing measurement equipment, which qualifies as ‘supply of tangible goods for use’ under Section 65(105)(zzzzj) of the Finance Act, 1994.
• There was no transfer of ownership or possession of the equipment to the customer; rather, the equipment remained with Adani Gas Ltd.
• The customers benefited from the measurement equipment as it facilitated accurate billing and regulated gas supply.
• The fact that Value Added Tax (VAT) was not paid on the gas connection charges indicated that the transaction was not a sale but a service.
• The company had collected significant amounts under this head but had not remitted the corresponding service tax.

Respondent’s Arguments (Adani Gas Ltd.)

Adani Gas Ltd. defended its position by contending that:

• The charges were collected as refundable security deposits, not as consideration for a service.
• The measurement equipment was used by Adani Gas Ltd. itself for billing purposes, not by the customer.
• The supply of PNG was a sale of goods, and any ancillary charges should not be treated as a separate taxable service.
• Some portion of the connection charges was refunded upon termination of service.
• The company acted in compliance with the Petroleum and Natural Gas Regulatory Board (PNGRB) guidelines.

Supreme Court’s Observations

The Supreme Court examined the agreement between Adani Gas Ltd. and its customers and analyzed the legal framework governing service tax. Key observations made by the Court included:

• The measurement equipment was essential for regulating gas supply and ensuring accurate billing.
• The equipment was used by both the seller (Adani Gas Ltd.) and the buyer (customers), meaning the customers derived a direct benefit from it.
• The agreement explicitly stated that Adani Gas Ltd. retained ownership and control of the equipment.
• The connection charges were not fully refundable, contradicting the company’s claim that they were security deposits.
• Section 65(105)(zzzzj) applies when tangible goods are supplied for use without transferring possession, which was precisely the nature of this transaction.
• Service tax liability arises irrespective of whether the recipient physically operates the equipment, as long as they derive a benefit from its use.

Final Verdict

The Supreme Court set aside the CESTAT ruling and reinstated the order of the Adjudicating Authority, holding that:

• The gas connection charges collected by Adani Gas Ltd. were subject to service tax under Section 65(105)(zzzzj) of the Finance Act, 1994.
• The claim that the charges were refundable security deposits was not substantiated by evidence.
• The measurement equipment was supplied for the use of customers, fulfilling the conditions for service tax applicability.
• The argument that customers did not physically operate the equipment was irrelevant, as the equipment facilitated their access to PNG.

Impact of the Judgment

This ruling has far-reaching implications for businesses that supply equipment as part of their services:

• It clarifies that service tax applies when tangible goods are provided for use without transferring possession.
• It reinforces that service tax cannot be avoided by categorizing charges as security deposits if they are not fully refundable.
• It provides guidance on how contractual agreements impact tax liability.
• It ensures tax compliance in industries where ancillary charges are collected from customers.

The Supreme Court’s ruling in this case strengthens the enforcement of service tax laws and sets a precedent for similar disputes involving the supply of equipment as part of a service.

Petitioner Name: Commissioner of Service Tax, Ahmedabad.
Respondent Name: M/s Adani Gas Ltd..
Judgment By: Justice Dhananjaya Y. Chandrachud, Justice Indu Malhotra, Justice K. M. Joseph.
Place Of Incident: Ahmedabad, Gujarat.
Judgment Date: 28-08-2020.

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Download Judgment: Commissioner of Serv vs Ms Adani Gas Ltd. Supreme Court of India Judgment Dated 28-08-2020.pdf

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