2003 PLP (Trib (PTD)

ZAFAR IQBAL, MEMBER (TECHNICAL). ‑‑‑This order will dispose of Central Excise Appeals Nos. H‑168 and H‑08 of 2000, as both these appeals arise from identical facts and involves common question of law.

2. As per show‑cause notice, dated 12‑6‑1998, issued in Case No.H‑168 of 2000, the charge against the appellant is that they were providing excisable services in the form of supply of natural gas to their staff canteens and that too without payment of excise duty. In the opinion of the respondent the said act was a violation of excise law. Accordingly, the respondent raised a demand for the recovery of Rs. 9.7 million against the appellant. The appellant vide show‑cause notice, dated 12‑6‑1998, was called upon to explain that as to why penalty and fine, for not conforming to legal rules, be not imposed against them.

3. The appellant in their reply to the show‑cause notice denied the charges and stated that; (i) their act of supply of gas to its field staff falls within the ambit of exemption as agreed in. accordance with the terms of contract and as envisaged vide Notifications Nos. 555(I)/79 and 797(I)/90; (ii) that the appellant is an exploration and production company, not engaged in the sale of gas; (iii) the charge of duty is on distribution and supply of natural gas to consumers of all sorts and not on its production and use necessary for carrying on the process of production; (iv) that the amount calculated by the department is not correct; (v) that the demand is time‑barred.

4. The Adjudicating Officer, however, did not agree with the appellant's point of view and held that that demand raised by the department was perfectly in order. He accordingly passed the impugned order. The said order has now been challenged by the appellant through this appeal.

5. We have heard the rival parties. The first issue which requires consideration is the review of the substantive and procedural law through which excise duty has been levied on the services of distribution and supply of natural gas. Section 3 of the Central Excises Act, 1944, which is the charging section and provides as follows: "

3. Duties specified in the First Schedule to be levied.‑‑‑[(1) There shall be levied and collected in such manner as may be prescribed duties of excise on all excisable services, provided or rendered, in Pakistan, as and at the rates, set forth in the First Schedule..."

6. The word prescribed in section 3 of the Central Excises Act, 1944 is to be taken to apply to the rules. In this regard the relevant rule is rule 96ZZO. This rule did prescribe the manner of collection of duty. It reads: "[96ZZO. Special procedure for collection of central excise duty on the service of gas supply and gas distribution. ‑‑‑(1) Every person, firm or company engaged in the supply or distribution of natural gas, hereinafter referred to as the said person, shall pay the central excise duty leviable on services provided on rendered by it..."

7. Another relevant legal provision in this regard is the tariff heading, 9817.0000; it reads: ‑ ...9817.000 Services of distribution and supply to all consumers, including domestic consumers, commercial consumers, industrial consumes and consumers like WAPDA and other producers in the energy sector, but not including fertilizer factories. Ten per cent of the charges".

8. It will thus be seen that section 3 maintains the distinction that the duty of excise is to be levied on all excisable goods and services in a prescribed manner. The manner has been prescribed vide rule 96ZZO, whereby central excise duty on the service of gas supply from a person, firm or company engaged in the supply or distribution of natural gas is to be collected. The fact is further supported from the description of the form of service as given in the First Schedule to the Act. Under heading 9817,0000 services of distribution and supply to consumer is an excisable service chargeable to central excise duty, at the rate of ten percent.

9. In the present case the appellant as already pointed out clearly stated that he was neither a service provided nor engaged in the distribution of natural gas to consumers. The authorities did not controvert the submission of the appellant but merely stated that, supply of natural gas to staff canteen at camp site located at the production fields accounts to an excisable service and hence recoverable from the appellant: It is, however, not sufficient merely that a person who is engaged in the use of gas becomes a person liable to duty. In order to be made liable to the duty, a person must, under section 3 read with rule 96ZZO be a person, firm or company engaged in the supply or distribution of natural gas to consumes. Neither in the show‑cause notice nor in the records, there is any material to show clearly that the act of the appellant is in anyway chargeable to duty. The contention of the Taxing Authorities, therefore, does not appear to be correct.

10. From the perusal of substantive law and the procedure, it is evident that in order to attract duty of excise, the concerned person, business or institution should be engaged in the supply and distribution of natural gas. However, in the instant case, the fact is not disputed that the appellant is not engaged in the distribution or supply of natural gas. In fact the appellant is engaged in drilling out gas from gas fields and for carrying on these operations of gas drilling, the field staff uses gas for the preparation of food and other necessities. Such an act obviously does not fall within the framework of excise law.

11. It will be seem, that the words used in the procedural rules are "supplier, distributor and consumer". The term consumer has been defined under section 2C of the Natural Gas Rules, 1960, which states that; "Consumer means any person who is supplied with gas by a licensee, or whose premises are for the time being connected with the works of a licensee for the purpose of supply of gas;"

12. The expression "consumer" has been explained in Black's Law Dictionary, 5th Edition, as under; "One who consumes, individuals, who purchase, use, maintain, and dispose of products and services. A member of that broad class of people who are affected by pricing policies, financing practices, quality of goods and services, credit reporting, debts collection and other trade practices..."

13. Accordingly, the respondent should have determined in the first instance, whether or not the field camps and messes of Union Texas Pakistan do fall within the definition of the term consumer.

14. It is worthwhile to note that the duty is chargeable on 10% of the service charges, whereas, it is not disputed that the appellant neither charged its staff nor received any charges whatsoever. The appellant is engaged in the production of gas and has never engaged itself in the supply and distribution of gas to licensed consumers. In these circumstances, it is difficult to assume that the appellant do fall within the parameters prescribed in the law for charging of excise duty.

15. Attention is also invited to the Natural Gas Rules, 1960 wherein the term "licensee" has been defined. The term "Licensee" means a person who holds a licence under Part II of the Rules. As per rules not person can supply gas without laying pipeline of the transmission or distribution or supply of natural gas. The appellant does not hold any such licence.

16. Under the said Rules, there is another condition to regulate laying of a pipeline transmission or distribution or supply of natural gas; that is that a distributor of gas has to obtain a licence or permission from 1 the appropriate authority. Absence of any such permission or grant of licence to the appellant indicates that he never intended to get himself involved in distribution or supply of gas.

17. The Natural Gas Rules, 1960 also provide an exception to a flow line used for the transportation or conduct of gas within a leased area or from the wellhead to purification plant or connection with the main transmission line within such area. The fields and messes of course fall within that exception.

18. It is not capable of being disputed that the appellant is merely a producer of oil and gas and is not engaged in the supply or distribution of gas in any manner. The appellant, therefore, does not fall within any of the definitions given in Natural Gas Rules, 1960.

19. Having said this much, however, it must be pointed out that even if it is conceded that a duty of excise may be levied at any stage between production, supply and consumption of the service, it appears to us that the statute with which we are in the present case concerned contains within it some indication that such a wide latitude with regard to the stage at which collection is to be made has not been given to the authorities concerned under the Central Excises Act, 1944. Section 2 subsection (20) defines "excisable services." as services, facilities and utilities specified in the First Schedule read with Chapter 98 thereof, including the services, facilities and utilities or originating from Pakistan or its tariff area or terminating in Pakistan or its tariff area. Having a Took at the provisions of heading 9817.0000 of the First Schedule to the Act reveals that consumers on whom, the liability to pay duty of excise did exist is only restricted to domestic consumers, commercial consumers, industrial consumers and consumers like WAPDA and other producers in the energy sector. This definition makes the things more clear. The gas supplied from a gas field to the on site workers does not fall within the four corners of the definition of "excisable service". In other words the appellants were not engaged, in anyway, in the supply of an excisable service and, therefore, not liable to excise duty under the Central Excises Act, 1944. The fact is further strengthened from the study of contractual provisions whereby the appellant was granted the right to engage itself in the drilling and production of natural gas. The contract in this regard specifically provided that gas used at the site and in the gas fields will be exempt from domestic taxation. The contractual provisions were given effect to vide S.R.O. No. 455(I)/96, dated 13‑6‑1996, whereby natural gas used in joint operations was exempted. The word "joint operation" 'was explained as: "Explanation.‑‑‑Joint operations means all marines and land activities including gas exploration, prospection, development and production activities conducted by working interest owners under a Petroleum Concession Agreement with the Government. The perusal of the explanation reveals that production activities' conducted by working interest owners under petroleum agreement with the Government stood exempt. The facts of the case reveal that the supply made by the appellant did fall within the ambit of exemption provide vide S.R.O. No. 455(I)/96, as the goods were never supplied in furtherance of a business and were consumed for development and production work.

20. Be that as it may, we are convinced that the demand raised by the authorities was not legal as the appellant is neither engaged in the supply of excisable services nor the kind of activity alleged to contravene excise law was chargeable to excise duty within the existing framework of law.

21. Furthermore, the demand raised by the department is also time‑barred and the show‑cause notice had not been issued by an officer competent to re‑open past an closed transactions. The departmental representative when confronted with these aspects of the case had no answer and concerned the existence of this lacuna in the proceedings.

22. Be that as it may, in the light of what has been stated above, we, allow these appeals and set aside the impugned orders. S.A.K./526/Tax(Trib.) Appeal allowed.