The Patna High Court has held that where, under the governing contractual arrangement, crude oil is stored at an intermediate point in tankage/discharge facilities before onward transportation, and such facility is separately charged, the activity does not remain merely incidental to pipeline transportation but constitutes an independent service in the nature of “storage and warehousing” within Section 65(102) read with Section 65(105)(zza) of the Finance Act, 1994, and is therefore separately liable to service tax.
The Court further held that the existence of a substantial question of law permits maintainability of the appeal notwithstanding the monetary limits prescribed under the CBIC instructions. On that basis, the High Court allowed the Department’s appeal, set aside the CESTAT order, and restored the Commissioner’s order confirming service tax, interest and penalties.
The Division Bench comprising Justice Bibek Chaudhuri and Justice Chandra Shekhar Jha first considered the objection to maintainability on the ground that the disputed tax amount was below the monetary threshold prescribed in the CBIC instructions dated Aug 22, 2019 and Aug 06, 2024. It held that although the aggregate disputed tax was below the monetary limit applicable to High Court appeals, the appeal was still maintainable because it involved a substantial question of law, namely whether storing/warehousing of crude oil at Barauni was incidental to pipeline service or an independent terminal facility.
On merits, the Bench examined Section 65(102) and Section 65(105)(zza) of the Finance Act, 1994 and observed that levy of service tax on “storage and warehousing” requires that the activity fall within the statutory definition and that there be an element of service rendered by one person to another for consideration.
The Bench noted that the MOU itself contemplated tankage at Barauni as a discharge facility, that a separate charge was provided for such facility, and that without such storage the crude oil could not be transhipped to the onward mode of transport. It further observed that the separate terminal/discharge charges were not shown to have been included in the taxable value on which pipeline service tax had been paid, and rejected the contentions of self-service and double taxation.
The Bench found that CESTAT had overlooked material factual aspects considered by the Commissioner, especially the separate charging mechanism and the nature of the facility at Barauni.
Briefly, the Indian Oil Corporation Limited, Barauni Refinery, entered into an MOU with Bongaigaon Refinery and Petrochemicals Limited for movement of crude oil from Haldia to Bongaigaon through a three-step arrangement: transportation by pipeline from Haldia to Barauni, storage at Barauni, and onward dispatch from Barauni to Bongaigaon. Service tax had been paid on the first leg, namely transportation through pipeline, and the third leg was not in dispute.
The controversy related to the second leg, namely storage of crude oil at Barauni, where IOCL provided tankage/discharge facility at Barauni under paragraph 1.5 of the MOU and charged separately for such facility under Article 4 of the MOU. The Department treated this activity as “storage and warehousing” service and raised service tax demands of Rs. 58 lakhs for July 2003 to March 2007 and Rs. 23.47 lakhs for April 2007 to March 2008, aggregating Rs.81,47,845/-, along with interest and penalties. The Commissioner confirmed the demand, but CESTAT set aside that order holding the activity to be part of a single transportation arrangement.
