Cash Calls in Oil & Gas from Unincorporated Joint Ventures Not Taxable as Service: CESTAT Quashes Service Tax Demand [Read Order]

The Customs, Excise & Service Tax Appellate Tribunal ( CESTAT ),New Delhi (Principal Bench) held that the cash calls in oil and gas from Unincorporated joint ventures are not taxable as service as it is a cost sharing activity.

Oil India Limited, engaged in exploration and production of oil and natural gas, was registered under service tax for certain taxable services such as business support and technical testing.

The issue was in relation to blocks awarded under the New Exploration Licensing Policy (NELP), 1999, which was introduced to attract private and foreign participation, technology and risk capital in India’s oil and gas exploration sector.

In the concerned blocks, Oil India entered into joint venture arrangements with entities such as Hindustan Oil Exploration Co. Ltd. (HOEC) and HPCL Mittal Energy Ltd. (HMEL). Upon award, a Production Sharing Contract (PSC) was executed with the Government, and Oil India was appointed as the “Operator” under the PSC.

As the Operator, Oil India undertook operational activities including seismic analysis, drilling, exploration, mud logging and other related tasks either through third-party contractors or using its own resources.

Under the Joint Operating Agreement (JOA), all costs and expenses incurred for joint operations were required to be borne by the parties in proportion to their participating interest.

To recover the proportionate share of such expenditure, the Operator would raise a claim on other consortium members. These claims raised by the Operator on non-operators were referred to as “cash calls”, which were paid by the non-operators by transferring funds to the designated joint account.

The Department alleged that Oil India, acting as Operator, was providing taxable services to the UJV and that cash calls were consideration for such services. Further it issued a SCN invoking Explanation 3(a) to Section 65B(44). It also raised the demand for the extended period demanding Rs. 1,63,92,534/- along with interest and penalties, while appropriating Rs. 53,89,710/- already deposited by Oil India for the relevant blocks.

The Commissioner (Appeals) upheld the demand, which led to the appeal before CESTAT.

According to Oil India, the levy of service tax on cash calls in unincorporated joint ventures is no longer res integra, and has repeatedly been decided in favour of assessees by various Tribunal decisions.

The Tribunal noted that in a joint venture arrangement, contributions by members are made for furtherance of the common enterprise, not as a contractor-client relationship.

On the Supreme Court’s understanding of “joint venture” as explained in Faqir Chand Gulati vs Uppal Agencies Pvt. Ltd., recognising that joint ventures involve combining skill, capital and resources for a common profit objective, with each participant acting as both principal and agent within the scope of the venture, observed the tribunal.

It further noted that whatever a partner/co-venturer does for the venture is done to advance its own interest, since the partner has a stake in the venture’s success.

There is no intention to provide a service to other partners, and there is no direct quid pro quo consideration for any particular activity. Hence, the basic requirement of a taxable service relationship is missing, said the bench of Binu Tamta (Judicial member) and Hemambika R. Priya (Technical member).

Unless the Department identifies a specific activity rendered by one party to another for a clearly agreed consideration, service tax cannot be levied. The contributions made for common expenses or discharge of shared liabilities do not become taxable merely due to payment transactions, ruled the tribunal.

The demand was quashed accordingly.

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