MDC for under-consumption of Gas Deemed a Penalty, Not Consideration for Service: CESTAT quashes Service Tax Demand [Read Order]

The Kolkata Bench of Customs, Excise, And Service Tax Appellate Tribunal ( CESTAT ) quashed the service tax demand order ruling that Minimum Demand Charges ( MDC ) for under-consumption of gas are not taxable as it was a penalty.

Assam Gas Company Limited, the appellant was receiving "Minimum Demand Charges" (MDC) from their clients and also realized a "Marketing Margin" for gas transportation. The appellant received a show cause notice demanding service tax on these services.

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Subsequently, the demand was confirmed by the Adjudicating Authority. The appellant challenged the demand order before the Kolkata bench of CESTAT.

The appellant’s counsel submitted that MDC was a charge collected when a customer’s consumption of gas fell below 90% of the contracted amount. Since this amount was not for an actual provision of service, it should not be subject to Service Tax.

The appellant further argued that MDC was a form of penalty for not consuming a minimum quantity of gas, rather than a payment for services rendered.

On the contrary, the revenue counsel argued that the MDC was a consideration for gas transportation services and should be subject to Service Tax under the category of "Transportation of Gas through Pipeline and Conduit Service."

The two-member bench comprising R. Muralidhar (Judicial Member) and K. Anpazhakan (Technical Member) observed that the MDC was collected when the customer failed to consume more than 90% of the booked quantity of gas. Since this was a penalty for under-utilization rather than a charge for services rendered, it did not fall under the taxable service category. The tribunal held that the amount collected as MDC could not be termed as consideration for any service.

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Therefore, the tribunal set aside the demands for Service Tax on the Minimum Demand Charges and ruled that the appellant was not liable to pay Service Tax.

To Read the full text of the Order CLICK HERE

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