By TIOL News Service

MUMBAI, SEPT 08, 2016: THE Appellants MGL are engaged in the manufacture of Compressed Natural Gas from Natural gas and distribution thereof and have integrated infrastructure for the same. When the natural gas is compressed at 200 bar pressure, it is known as compressed natural gas (CNG), which is used as a fuel to motor vehicles.

Prior to 1.3.2001, compression of natural gas did not amount to manufacture. However, w.e.f. 1.3.2001, through a Note to Chapter 27, compression of natural gas amounts to manufacture.

MGL are classifying the CNG under Tariff Item 2711 21 00 and are paying duty thereon, after having obtained centralized registration for each of the outlets where compression of natural gas and supply thereof takes place. MGL installed their own equipment for compression and dispensation of CNG at each of the outlet and electricity charges to operate those equipments is borne by them. MGL purchase natural gas from GAIL and the sale/purchase of natural gas takes place at a location known as City Gate Station situated at Sion.

There are two streams of supply of natural gas by MGL, one, supply of piped natural gas (PNG) which is used for cooking purpose by domestic, commercial and small industrial consumers and the other being CNG, as a fuel to motor vehicles.

There are three types of outlets/filling stations for supplying CNG, which are known as Mother Stations (MS), Online Stations (OS) and Daughter Booster Stations (DBS). The MS are the locations where natural gas is received through underground pipelines and compressed & stored in stationary cascades of cylinders at around 210 bars and supplied as CNG to motor vehicles at 200 bars pressure, through dispensers. Further, CNG at 230 bar pressure is also filled into cascades of cylinders mounted on light commercial vehicles (LCV) at MS and taken to DBS for recompression and supply to motor vehicles at 200 bar pressure. Online Stations are the outlets somewhat similar to MS, wherein also natural gas is compressed and stored in stationary cascades of cylinders at around 210 bars and supplied as CNG to the vehicles at 200 bar pressure. Filing of CNG into cascades of cylinders mounted on LCV does not take place at OS. The DBS are outlets where direct supply of natural gas through pipeline does not take place, but CNG filled in cascades of cylinders mounted on LCV is received and CNG is dispensed from such cascades, through dispensers, after recompressing at 200 bar pressure.

The outlets are owned and/or operated by MGL and/or Oil Marketing Companies (OMCs) and/or Private Parties (PPs) on behalf of MGL and/or OMCs.

The assessable value on which MGL pay duty for sale of CNG through their own outlets and/or outlets of PPs, through which CNG is being sold for and on behalf of MGL, is same. Since PPs are selling CNG for and on behalf of MGL, certain service charges are given to those PPs. So far as sale of CNG to OMCs is concerned, since OMCs are purchasing and reselling CNG, the Appellants allow certain discount to them from the retail sales price, which is termed as commission/trade margin, etc. in the agreements.

For the purpose of payment of duty on the CNG supplied through PPs, MGL considered the service charges paid to PPs also while arriving at the transaction value. However, for the sale of CNG to OMCs, the Appellants raised sales invoices for the value mutually agreed upon in consequence thereof, the trade profit/commission/discount given to OMCs got excluded from retail sales price, if backward calculation is done. In a nutshell, duty was paid on the sales price to OMCs, which is the transaction value.

In the eleven SCNs, covering the period June, 2003 to December 2012, Revenue alleged that the assessable value considered by the Appellants for sale of CNG directly through their own outlets or through outlets of PPs should be the assessable value for payment of duty for the CNG supplied to OMCs, as against the Appellants' payment of duty on the net sale price charged to OMCs.

The basis of the SCNs is that all parameters like ownership of equipment, manner of production, product, RSP, etc. remaining the same, assessable value for the purpose of payment of duty should also be same for discharge of duty for sale of CNG to OMCs. The demands have been arrived at by backward calculation from RSP, excluding the element of VAT and central excise duty/cesses only, leading to demand of duty on commission/trade margin.

The demands were confirmed and, therefore, eleven appeals were filed before the CESTAT during the years 2010 to 2014.

Lengthy submissions were made by both sides justifying their stands.

The Bench, inter alia , observed -

++ The Appellants have paid VAT/sales tax on their sale of CNG to OMCs, as evidenced from the invoices. Further, sales invoices of OMCs for resale of CNG to ultimate buyers, VAT/sales tax is paid by them on their sales price. In nutshell, the Appellants are paying VAT on its sales price to OMCs and OMCs are also paying VAT on their sales price to their customers. This clearly evidences that the AR's arguments that sale is not taking place between Appellants and OMCs and also it is a paper transaction is incorrect and not supported by any evidence on record.

++ It is noteworthy that this Tribunal in the case of BPCL/HPCL - 2014-TIOL-1114-CESTAT-MUM, wherein the service tax demanded on the very same amount received by OMCs from MGL, claiming such amount as commission paid for rendering of services under Business Auxiliary Service for marketing of CNG manufactured by the Appellants, has been set aside holding that the OMCs themselves are buying the goods from MGL and MGL is charging VAT/sales tax while selling the CNG to BPCL/HPCL and BPCL/HPCL are also paying VAT/sales tax on the entire value, including the so called commission and, hence, the transaction between them is sale/purchase transaction and VAT/sales tax has been paid at both ends the same cannot be considered as service contracts.

++ We find that the Appellants' contention that OMCs, being bulk buyers, have been given higher discount also needs to be accepted in the absence of any allegation/substantiation of mutuality of interest between Appellants and OMCs, as both are independent entities.

++ In a true sense, the customers/vehicle users at the outlets of PPs are buying CNG from MGL, through the PPs. The privity of contract is between MGL and those buyers and those sales are directly recorded in the Books of Account of MGL and not in the Books of PPs, as there is no sale and purchase of CNG by PPs and PPs act only as an agent of MGL on commission basis. The entire sales proceeds are remitted by PPs to MGL on daily basis. The contracts between MGL and PPs are that of "principal" and "agent" as the PPsare merely service providers and not buyers of CNG from MGL. Their obligation under the contracts is merely to provide assistance for supply /sale of CNG to the vehicles by MGL. For acting as an agent of MGL, PPs get specified service charges on "per kg" basis of the CNG sold by them on behalf of MGL. Since the PPs are acting as agents of MGL for supply of CNG, PPs consider their activity as Business Auxiliary Service and pay service tax on the commission received from MGL.

++ From the above discussions, we are of the view that the Appellants' case is squarely covered under new Section 4(1)(a) of CEA which essentially permit different transaction value, unlike normal sales price existed prior to 1.7.2000, which has also been explained by CBEC, vide its Circular No. 354/81/2000-TRU dated 30.06.2000 in Para 5.

++ We also find that the agreements between the Appellants and OMCs were entered into in 1998 or 1999, when there was no levy on CNG, which came into effect only from 1.3.2001 and, hence, the Appellants could not have thought that using certain expressions like commission/trade margin, etc. would create hassle at a future date from central excise point of view and also there would not have been any inducement to use any expression in the agreement with an intent to evade payment duty.

++ The AR's arguments that manufacture and sale is taking place simultaneously would not be correct, as CNG is drawn from stationary cascades and dispensed through dispenser. Further, even if the transaction of purchase and sale between the buyer and seller takes place simultaneously on account of peculiar nature of the product, such transaction has to be treated as sale on principal to principal basis based on the Hon'ble Supreme Court judgment in the case of Bayyana Bhimayya - 1951 SCR (3) 267, Alwaye Agencies - 1974 (34) STC 457 (Ker) etc. cited by the Appellants.

The impugned orders were set aside and the appeals were allowed with consequential relief.

(See 2016-TIOL-2339-CESTAT-MUM)