No Service Tax on Offshore Seismic Surveys Conducted Beyond 12 Nautical Miles of Indian Waters: CESTAT [Read Order]
The seismic surveys were conducted to find fertile reserves to drill for oil and gas.
The Principal Bench of the Customs, Excise & Service Tax Appellate Tribunal (CESTAT) at New Delhi recently affirmed that no service tax may be demanded on seismic survey services performed beyond 12 nautical miles from the Indian landmass, as they fall outside the taxable territory and therefore cannot attract levy under the Finance Act, 1994.
The assessee, M/s Western Geco International Ltd. (Geco), is a company incorporated in the British Virgin Islands with project offices in Gurugram and Mumbai, having centralised registration with the Service Tax Department in Gurugram.
Geco was issued show cause notices covering the period April 2005 to March 2012, alleging non-payment of service tax on offshore data acquisition undertaken under long-term contracts with Oil and Natural Gas Commission (ONGC) and Reliance Industries Ltd. The work involved acquisition of data on specialised vessels using Q-Marine technology, for which the foreign entity was paid an all-inclusive basic charge of USD 7.5 million per month, subject to specified adjustments.
The data was acquired offshore and thereafter processed at the Mumbai project office. Invoices were issued to ONGC and RIL from the Gurugram office, which paid service tax only on the 4% attributable to data processing undertaken in India. No service tax was paid on the remaining 96%, which formed the subject matter of the dispute.
A common Order-in-Original dated 15.03.2013 confirmed a service tax demand of ₹346,15,17,778 along with interest and penalties, treating the entire composite service as taxable. Aggrieved by the confirmation of demand, the assessee filed the present appeal before CESTAT.
V. Lakshmikumaran, Kunal Aggarwal and Shagun Arora appeared for Geco and submitted that the survey activity was conducted entirely beyond twelve nautical miles, outside the territorial scope of the Finance Act, 1994. It was further argued that the contract constituted a single composite engagement executed solely by Western Geco BV Islands, and that the project offices in India, though centrally registered, were to be treated as separate establishments under Section 66A.
Since all consideration was received abroad in US dollars, it was contended on behalf of Geco that any tax, if applicable, would be payable by only by ONGC and RIL under the reverse charge mechanism, and that the Commissioner wrongly applied principles treating the supply of import of services as taxable in India.
Rajpal Sharma appeared as Special Counsel for the Revenue and submitted that offshore acquisition and onshore processing formed inseparable components of a single supply and could not be split into taxable and non-taxable elements. The Department also argued that that Geco’s approach effectively avoided tax on 96% of the contract value since data acquisition itself fell within “survey and exploration of mineral”, which was a taxable service under Section 65(104a),
A Bench comprising Dr. Rachna Gupta, Member (Judicial) and P.V. Subba Rao, Member (Technical), examined the contractual arrangements, which reflected a single consolidated engagement covering both offshore data acquisition and subsequent processing in the Mumbai project office.
Although invoices indicated 4% of the value towards data processing, the Tribunal held that this did not create separate contracts or separate taxable services and that the primary part of the work, being data acquisition, took place entirely beyond twelve nautical miles, which was outside the territorial scope of the Finance Act, 1994.
The Tribunal also noted that the contracts were entered into exclusively with the foreign entity and all consideration was paid to its overseas bank account. The Indian project offices, though registered, neither rendered the contracted service nor received any consideration. Under Section 66A of the Finance Act, where the service provider is located outside India, service tax liability would rest on the service recipient under the reverse charge mechanism.
Accordingly, CESTAT concluded that no service tax could be imposed on a person other than the service recipient when the service provider was located outside India and set aside the confirmation of tax, interest and penalties.
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