By TIOL News Service

NEW DELHI, NOV 30, 2016: THESE appeals are filed by two Public Sector Undertakings of the State of Gujarat. They were served with show cause notice dated 04.05.2011 alleging therein that the appellant no. 1 ('GSFC') was collecting 'incineration charges' from M/s. Gujarat Alkalies & Chemical Ltd. ('GACL') and the said amount charged by GSFC from GACL amounted to providing 'Storage and Warehousing Services' falling under clause (zza) of Sub-Section (105) of Section 65 of the Finance Act, 1994.

The GSFC submitted its reply questioning the very basis of the said show cause notice and submitted that the process which was undertaken did not amount to 'Storage Facilities' and, in any case, GSFC was not providing any service to GACL for which the aforesaid 'incineration charges' were collected.

It was explained that though the GSFC and GACL were receiving Hydro Cynic Acid (HCN) from M/s. Reliance Industries Limited through common pipeline, which was partially utilized in their factory for manufacturing of their final product and was shared between them in the ratio of 60:40, since incineration process was also required to be undertaken, the charges, which were incurred on the said process, were also shared in the ratio of 50:50. It was also mentioned that an agreement was arrived at between GSFC and GACL on the aforesaid basis and, therefore, there was no question of providing any services by one party to the other. This contention of the appellants was not accepted by the Adjudicating Authority which confirmed the demand of 'service tax' along with interest and also imposed penalties under various sections including Section 78 of the Finance Act, 1994. The appellants preferred appeal there-against before the Commissioner (Appeals) which was dismissed by the Appellate Authority upholding the order of the Adjudicating Authority. Further appeal to the Customs Excise & Service Tax Appellate Tribunal (CESTAT) has met the same fate inasmuch as vide impugned judgment dated 04.02.2015, the CESTAT has affirmed the order passed by the Adjudicating Authority as well as the Appellate Authority.

The present appeals challenge the order of the CESTAT.

The Supreme Court noted that in order to levy service tax pertaining to 'Storage and Warehousing' of goods, following two conditions are required to be satisfied:

1. The goods in question have to come within four corners of the definition of 'Storage and Warehousing' contained in Sub-Section 102 of Section 65 of the Finance Act, 1994;

2. In order to attract service tax, there has to be an element of service provided by one person to the other for which charges for providing such services are collected.

The Supreme Court first considered the second aspect namely, as to whether the arrangement between GSFC and GACL amounts to providing any services by GSFC to GACL and 50% incineration expenses incurred would constitute charges for providing such services.

The Court observed,

"There is no dispute about the manner in which HCN is received through pipeline from M/s. Reliance Industries Ltd. by GSFC and GACL and then shared in the ratio of 60:40 respectively. GSFC and GACL are public sector undertakings. Since HCN is to be received through pipeline, it is abundantly clear that in order to save the expenditure, both the parties agreed that there should be a common pipeline. Once HCN is received through the said common pipeline, it comes first to GSFC's premises and from there it is diverted in the ratio of 60:40, meaning thereby that GSFC receives 60% of the HCN whereas GACL receives 40% of the supply in accordance with their respective requirement. To enable GACL to receive this HCN through common pipeline, arrangement/agreement was entered into between these two parties. For this purpose, handling facilities were installed in the premises of GSFC. However, fact remains, for which there is no dispute, that for installation of these facilities both the parties had contributed towards the investment. Since the said handling facilities are in the premises of GSFC, incineration also takes place at the said premises. Handling facilities expenditure thereof is shared equally by both the parties. That is clearly provided in the agreement/arrangement that was agreed to between the parties and is reflected in the Minutes dated 06.07.1980. Once these facts are accepted, we find that handling portion and maintenance including incineration facilities is in the nature of joint venture between two of them and the parties have simply agreed to share the expenditure. The payment which is made by GACL to GSFC is the share of GACL which is payable to GSFC. By no stretch of imagination, it can be treated as common 'service' provided by GSFC to GACL for which it is charging GACL."

The Court was thus, of the opinion that the second ingredient has not been established in the present case and the question of service tax does not arise. In view thereof, the Court found it was not necessary to go into the question as to whether receiving of HCN through the said common pipeline in the tank which is setup by the GFSC and GACL amounts to 'storage' or not and the Court left the said question open.

Held: The demand of 'service tax' made by the Revenue is unwarranted and is set aside.

(See 2016-TIOL-198-SC-ST)