A) ABSTRACT / HEADNOTE

The judgment examines the scope and interpretation of Section 65(105)(zzzzj) of the Finance Act, 1994, which levies service tax on the supply of tangible goods for use without transfer of possession and effective control. The controversy arose from service tax demands on gas connection charges collected by M/s Adani Gas Ltd. from industrial, commercial, and domestic consumers for installation of pipelines and SKID measurement equipment. The Tribunal had set aside the demand by holding that such equipment was not used by the consumer. The Supreme Court reversed this finding and upheld the levy.

The Court undertook a detailed contractual and statutory analysis to determine whether the ingredients of the taxable service were fulfilled. It held that although ownership, possession, and control of the equipment remained with the supplier, the consumer derived functional and contractual use of the equipment. The concept of “use” was interpreted contextually and purposively rather than mechanically. The Court clarified the distinction between deemed sale under Article 366(29-A)(d) and service tax under Section 65(105)(zzzzj), holding that absence of transfer of possession and control brings the transaction within service tax.

The judgment reaffirms the principle that service tax is a tax on activity, not ownership, and expands jurisprudence on composite commercial arrangements involving infrastructure-based services. It decisively overruled the Tribunal’s narrow interpretation and restored the adjudicating authority’s findings.

Keywords:
Service Tax; Supply of Tangible Goods; Use Without Possession; Gas Distribution; SKID Equipment; Finance Act 1994

B) CASE DETAILS

C) INTRODUCTION AND BACKGROUND OF JUDGEMENT

The judgment arises from long-standing disputes surrounding the taxation of infrastructure-linked service arrangements under the pre-GST service tax regime. The respondent was engaged in distribution of PNG and CNG through an integrated pipeline network. To operationalise gas supply, measurement and pressure-regulating SKID equipment was installed at customer premises at their cost, while ownership and control remained with the supplier.

The Department viewed this arrangement as a taxable service involving supply of tangible goods for use, whereas the respondent treated the charges as refundable security deposits. The adjudicating authority confirmed the demand, but the Tribunal reversed it by adopting a narrow interpretation of “use”.

The Supreme Court was thus required to settle the legal meaning of “use” under Section 65(105)(zzzzj), reconcile it with Article 366(29-A)(d), and determine whether economic benefit without physical operation qualifies as taxable use.

D) FACTS OF THE CASE

The respondent collected gas connection charges for pipelines and SKID equipment installed at customer premises. Ownership, possession, calibration, maintenance, and operational control remained exclusively with the respondent. The buyer had no right to modify, handle, lease, or alienate the equipment.

The Department issued multiple Show Cause Notices alleging non-payment of service tax for supply of tangible goods. The respondent contended that the equipment was used solely by it for billing purposes and that amounts collected were refundable deposits under PNGRB Regulations, 2008.

The adjudicating authority rejected this contention, noting that refunds were partial and usage was customer-specific. The Tribunal overturned this finding. The Supreme Court examined the Gas Supply Agreement (GSA) clauses in detail to determine the nature of use and service.

E) LEGAL ISSUES RAISED

i. Whether installation of SKID equipment constitutes supply of tangible goods for use under Section 65(105)(zzzzj)?
ii. Whether absence of possession and control excludes tax liability?
iii. Whether functional benefit amounts to “use” under service tax law?
iv. Whether the transaction amounts to deemed sale under Article 366(29-A)(d)?

F) PETITIONER / APPELLANT’S ARGUMENTS

The counsels for the appellant submitted that the customer derived clear economic and functional use of the equipment. The equipment ensured accurate billing, pressure regulation, and safety, which were integral to gas consumption. Mere lack of physical operation did not negate use. Reliance was placed on BSNL v Union of India and CBEC Circular dated 29.02.2008.

G) RESPONDENT’S ARGUMENTS

The counsels for the respondent argued that the equipment was installed solely for the seller’s benefit. No right to use was transferred. The transaction was incidental to sale of gas and did not involve service consideration. It was contended that taxing provisions must be construed strictly.

H) RELATED LEGAL PROVISIONS

i. Section 65(105)(zzzzj), Finance Act, 1994
ii. Article 366(29-A)(d), Constitution of India
iii. Entry 97, Union List
iv. PNGRB Network Tariff Regulations, 2008

I) JUDGEMENT 

The Court held that all six statutory ingredients of Section 65(105)(zzzzj) were satisfied. It ruled that “use” is not limited to physical handling. The SKID equipment enabled regulated gas supply, safety, and accurate billing, all of which benefitted the consumer. The absence of possession and control actually triggered service tax liability rather than negating it.

The Tribunal erred by equating use with operational control. The Court emphasised that service tax is activity-based and the transaction was not a deemed sale. Refund claims were inconsistent and incomplete, defeating the security deposit argument. The appeals were allowed and the adjudicating authority’s order restored.

a) RATIO DECIDENDI

Where tangible goods are supplied for functional and contractual use without transfer of possession or effective control, the transaction constitutes a taxable service under Section 65(105)(zzzzj), irrespective of physical operation by the recipient.

b) OBITER DICTA

The Court observed that modern commercial contracts involve layered service elements. Taxation must align with economic reality rather than formal labels.

c) GUIDELINES

i. “Use” must be interpreted contextually
ii. Absence of possession supports service tax
iii. Functional benefit is sufficient
iv. VAT non-payment indicates service character

J) REFERENCES

a) Important Cases Referred

1. Bharat Sanchar Nigam Ltd. v Union of India, [2006] 2 SCR 823
2. Great Eastern Shipping Co. v State of Karnataka, (2020) 3 SCC 354
3. All India Federation of Tax Practitioners v Union of India, [2007] 9 SCR 147
4. Union of India v Indian National Shipowners Association, (2010) 14 SCC 438

b) Important Statutes Referred

1. Finance Act, 1994
2. Constitution of India