Concept ‘Allowed Loss and Consumption’ would not Qualify as ‘Consideration’ for Levy of Service Tax: CESTAT [Read Order]

In a recent case,  the Customs, Excise & Service Tax Appellate Tribunal ( CESTAT ) New Delhi held that the concept of “allowed loss and consumption” in the Agreement between the parties was to remit performance of the obligation and would not qualify as “consideration” for the services of regasification.

In the instant case Service Tax Appeal has been filed by Petronet LNG Ltd to set aside the order passed by the Principal Commissioner of Service Tax Delhi that confirms the demand of service tax upon the Appellant and also orders for recovery of interest and payment of penalty.

The appellant regasifies Liquefied Natural Gas owned by customers in terms of agreements. The agreement contains a clause relating to “allowed loss and consumption” under which the value of certain percentage of LNG is giving to the appellant by the customers to overcome the loss occurred in performing the regasification services can be allocated. The revenue authority levied service tax on the value of such percentage of LNG on the ground that such “free of cost” supplies of LNG by the customers should have formed part of the “consideration” received by the appellant.

Appellant submitted In the light of decision of the Supreme Court in Bhayana Builders, that “free of cost” LNG supplied by the customers to the appellant cannot be included in the value of taxable service because it supplied to overcome some inherent losses takes place during the regasification process these losses are recognized internationally and as per established practice.  And there is a specific clause “allowed loss and consumption” in all the Agreements and which should not be considered as a non-monetary consideration for the regasification service.

Learned Authorized Representative of the Department placed reliance upon a decision of the Tribunal in BEE AM Industries and held that the LNG received “free of cost” by the appellant from the customers for regasification of LNG is a non-monetary consideration for providing a taxable service and so its value has to form part of the taxable value, but the appellant did not include this value and did not pay service tax resulting in short payment of service tax. So the appellant was liable to pay service tax on the gross value of LNG supplied “free of cost” as a “consideration” towards providing regasification services rendered under the category of “Business Auxiliary Service”.

The bench comprising of  President Justice Dilip Gupta and Technical Member Bijay Kumar has allowed the appeal and held that concept of “allowed loss and consumption” in the Agreement between the parties was to remit performance of the obligation and would not qualify as “consideration” for the services of regasification. So it is not possible to sustain the order passed by the Principal Commissioner confirming the demand of service tax upon the appellant with interest and penalty. so the order is, accordingly, set aside.

In this case, the authority made reference to section 63 of the Indian Contract Act, 1872 that provides that a promisee may dispense with or remit performance of the promise. The Supreme Court in Jagad Bandhu Chatterjee and it was observed that it deals with the waiver of contractual obligations. It can, therefore, safely be said that concept of “allowed loss and consumption” in the Agreement between the parties was to remit performance of the obligation and would not qualify as “consideration” for the services of regasification.