IOCL's Terminal Facilities For Crude Oil Storage At Barauni Attract Service Tax: Patna High Court

The Patna High Court has held that terminal facilities used by IOCL's Barauni Refinery for storing crude oil before onward transportation constituted an independent taxable service liable to service tax, and were not merely incidental to pipeline transportation.

The court ruled, “If MOU creates a provision of a separate charge for 'discharge facility' or 'terminal facilities' or 'storing of crude oil' before entering into next phase of transportation for Bongaigaon Refinery then, it cannot be said the integral part or incidental part of pipeline transportation.”

A Division Bench of Justice Bibek Chaudhuri and Justice Chandra Shekhar Jha passed the ruling while allowing an appeal filed by the Commissioner of Central Excise and Service Tax, Patna, against a CESTAT East Zone Bench, Kolkata order that had ruled in favour of Indian Oil Corporation Ltd (IOCL).

At the outset, the Court rejected IOCL's objection to the maintainability of the appeal based on CBIC monetary-limit notifications. It held that the case involved a substantial question of law. The disputed service tax demand was Rs 81.47 lakh.

The dispute arose from an April 18, 2003 MOU between IOCL and Bongaigaon Refinery and Petrochemicals Ltd (BRPL) for transportation of crude oil from Haldia to Bongaigaon. The arrangement involved pipeline transportation from Haldia to Barauni, storage at Barauni Refinery, and onward transportation to Assam.

Service tax had been paid on the first stage of pipeline transportation. The third stage was not in dispute. The controversy concerned the second stage, where crude oil was stored at Barauni before onward movement.

The Revenue argued that IOCL separately charged “terminal charges” or “discharge facility” charges for this activity. It said the activity therefore amounted to taxable “storage and warehousing” service.

The court noted that the Commissioner had earlier held the activity taxable and confirmed the demand. However, CESTAT reversed that finding after holding that the entire arrangement formed one composite transportation contract.

Disagreeing with the tribunal, the High Court held that CESTAT overlooked material facts, particularly the existence of separate charges under the MOU for terminal and discharge facilities.

The Bench observed, “Summarizing all aforesaid factual aspects, we are convinced enough that without having any storage or warehousing facilities, crude oil not be transhipped from pipeline to other mode of transport as arranged by BRPL.”

“Therefore, the terminal facilities or discharge facilities is nothing but store and warehousing of the crude oil before entering into third step of transportation which to be arranged by BRPL for final destination of supply of crude oil.”, it added.

The bench also rejected IOCL's argument that the activity amounted to self-service within the same corporate structure. It noted that the crude oil belonged to BRPL and the service was separately charged.

The court observed, “There was no transfer of right of possession at any point and effective control over the goods continues to be with service provider and the goods i.e. crude oil are supplied for use by the recipient of the service.”

The court also rejected the double-taxation argument. It noted that no evidence was produced to show that terminal charges were included in the taxable value on which service tax had already been paid by the pipeline division.

Holding that the terminal facilities constituted an independent taxable “storage and warehousing” service, the Court set aside the CESTAT order. It restored the Commissioner's order and permitted recovery of service tax along with penalties.

For Appellant: ASG Dr. K.N. Singh; Senior Standing Counsel Anshuman Singh; Advocate Shivaditya Dhari Sinha; Advocate Abhinav.

For Respondent: Senior Advocate D.V. Pathy; Advocate Mohit Agarwal.