Whether the supply of pipes and measurement equipment (SKID equipment), charged under the head of ?gas connection charges? being charged by the assessee from consumers, amounts to supply of tangible goods for their use and thus liable to Service Tax?

PJ/Case Law/2020-2021/3647

M/s Adani Gas Ltd. v/s Commissioner of Service Tax, Ahmedabad Civil Appeal No. 2633 of 2020 (Supreme Court) dated 28^th August 2020
Brief Facts: - The taxpayer is in the business of distributing natural gas - Compressed Natural Gas (CNG) and Piped Natural Gas (PNG) to industrial, commercial, and domestic consumers. In order to facilitate the distribution of PNG to industrial, commercial and domestic consumers through pipes, the assessee installs equipment known as ‘SKID’ at customers’ sites. In this regard, assessee enters into a Gas Sales Agreement with consumers to whom gas is supplied by it. The SKID equipment comprises of electronic meters that are useful for determining the quantity of gas supplied to the purchaser at the Delivery Point and isolation valves, filters and regulators that are crucial for regulating the pressure of gas and ensuring safe operation of the buyer's facilities.
Issue: Whether the supply of pipes and measurement equipment (SKID equipment), charged under the head of ‘gas connection charges’ being charged by the assessee from consumers, amounts to supply of tangible goods for their use and thus liable to Service Tax?
Reasoning of the judgement: -The Hon’ble Supreme Court observed that ownership of the measurement equipment continues to vest with the supplier as per the agreement entered with the customer. The buyer is required to provide land and a power connection, free of cost at its premises. The buyer has to pay for a gas pipeline connection from the distribution mains up to the measurement equipment.
As per the provisions of the Finance Act 1994, taxability of supply of tangible goods for use, without transferring right of possession and effective control over such goods, is a ‘taxable service’. 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.
It was argued by the assessee that the equipment is of no use for the consumer. The equipment is used by the supplier for measuring the quantity consumed by the consumer and based on that billing is done to the customer. The Supreme Court observed that the measurement equipment is not only for the benefit of the seller in measuring the quantity of the gas supplied. As per the agreement, both the seller and buyer 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 agreement. The obligation to supply, install and maintain the equipment is cast upon the seller as an incident of control and possession lies with the seller.
It was also argued that Gas connection charges are mainly in the nature of interest free refundable security deposit which is returned to the customers in the event of connection being discontinued or terminated.
Held: -Hon’ble Apex Court held that the supply of the SKID equipment by the assessee, was of ‘use’ to the customers and is liable to service tax.The Apex Court held that since the supplier has not able to substantiate that it has returned the amount to the customers, therefore the amount received by it would be taxable. The provisions of the Finance Act 1994 discussed above 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 signifies the utilization of the equipment for the purpose measuring the quantity consumed, safely regulating the supply of gas etc.
Prepared By : CA Kartik Singhvi

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PJ/Case Law/2020-2021/3647

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