In a recent case, the Chennai bench of the Customs, Excise & Service Tax Appellate Tribunal(CESTAT) gas held that service of drilling rig for exploration activities of Cauvery Block in India does not fall under ‘consulting engineers and the bench set aside the demand of service tax.
The appellants M/s. Nikoresources (NELPV) Ltd. (‘Niko’), are registered with the Service Tax Department and are in the business of exploration, development and production of mineral oil and natural gas. Niko has signed a ‘Production Sharing Contract’ with Government of India for exploration and development of Cauvery Block, with 100% participating interest. In furtherance of this activity, they sourced various services from foreign companies who are not having fixed establishment in India in connection with survey, geological studies, seismic analysis, reservoir estimation, drilling etc.
In the case of M/s. High Arctic Energy Services (HAES), Canada, they had received service relating to drilling rigs during the period from May 2007 to January 2008 and reportedly paid service tax on the value of the gross amount paid to HAES. In order to verify their claim of appropriate payment of service tax, the Vendor Open Transaction Report of HAES was obtained from Niko and reconciled with the value of service tax paid as declared in ST-3 returns. It appeared that Niko had failed to pay service tax on the value of mobilization charges, diesel reimbursement charges, cost of rig move etc. amounting to Rs.5,46,29,417/- and value of service tax not paid worked out to Rs.67,52,196/- including cess.
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The Appellant, Niko’s, Project Office, is engaged in the business of exploration and exploitation of petroleum oils and natural gas. The
Appellant entered into a “Production Sharing Contract” with the Government of India for the exploration and exploitation of oils and natural gas in the Cauvery Basin in India. The Appellant entered into a contract dated 02.02.2007 with HAES for the supply of a drilling rig (with manpower as per the Appellant’s requirement), for exploration operations at the Cauvery Block in India.
During the course of this supply, certain incidental costs such as mobilization, camp (i.e. arrangements for stay and meals of personnel), diesel reimbursements, medical expenses, etc. are also incurred and which are charged over and above the consideration for the supply of rig. They had initially self-assessed and paid service tax under ‘Consulting Engineer’ service, but on receipt of advice from their tax consultant they realized that the services were correctly classifiable as ‘supply of tangible goods’.
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A Show Cause Notice cum demand notice dated 18.04.2012 was issued to Niko, invoking the extended period. After due process of law, the Adjudicating Authority confirmed the demand of service tax as per sec. 65(105)(g) of FA1944, as ‘Consulting Engineer Service’ along with interest and imposed penalty under section 78 and 77(2) of the Finance Act, 1994 inasmuch as the appellant did not file the ST-3 returns with all the relevant details for the said period. Against this order, the appellant has preferred this present appeal.
The bench found that the dispute pertains to the classification of service received by the appellant from an oversea supplier, based on an agreement. Section 2(h) of the Indian Contract Act, 1872, states that an agreement enforceable by law is a contract. A contract comprises the joint intent of the parties. It has to be understood that the contract between the parties is in the realm of private law. It is not a statutory contract. It has hence to be understood by the intent of the parties to the contract.
From the agreement conditions entered into by the appellant with HAES, which is summarised in the extract of the OIO above, it is seen that the contract is executed for providing drilling rig along with personnel and related services to NIKO for its exploration activities of Cauvery Block in India. The impugned order notes that the services received by NIKO includes operating the rig with the personnel of HAES, providing project management, providing campsite, man-power planning etc., The ‘Production Sharing Contract’ entered with the Government by NIKO is to explore the presence of Hydrocarbons and exploration of oil and natural gas.
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The impugned order does not find that the service is one of hiring of rigs, ruling out the possibility of classification of the service as ‘supply of tangible goods’. Instead, it was held to be more akin to technical assistance in the pursuit of finding Hydrocarbon. The activity was felt to be in the nature of advice, consultancy or technical assistance and found to satisfy the definition of ‘consulting engineer’ service as per section 65(31) which was a taxable for providing service as defined under section 65(105) [(g) of the Finance Act 1994.
While the agreement involves a host of services, a two member bench of Shri P. Dinesha, Member (Judicial) and Shri M. Ajit Kumar, Member (Technical) observed thatthe dominant intention of the contract is for providing operational services i.e. providing Drilling Rig along with personnel and related services to NIKO for its exploration activities of Cauvery Block in India and not for the services of ‘consulting engineers’. This being so revenue has failed to prove its allegation that the classification of the service is that of ‘consulting engineer’ service as per section 65(31) of the Finance Act, 1994.
Since the revenue has not been able to discharge their burden of proof, the impugned order confirming the demand for service tax, merits to be set aside.
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