Tribunal annuls service tax orders, ruling Cost & Profit Petroleum not consideration.

The Tribunal set aside the orders demanding service tax, interest, and penalties, concluding that "Cost Petroleum" and "Profit Petroleum" under the Production Sharing Contract cannot be considered as consideration for providing mining services to the Government of India. The appeals were allowed, and the demands were annulled.

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Issues Involved:
1. Whether entitlement towards "Cost Petroleum" under the "Production Sharing Contract" can be treated as "consideration" for rendering "mining services" to the Government of India.
2. Whether entitlement towards "Cost Petroleum" and "Profit Petroleum" under the "Production Sharing Contract" can be treated as the consideration for rendering "mining services" to the Government of India.

Detailed Analysis:

Issue 1: "Cost Petroleum" as Consideration for Mining Services
The primary issue revolves around whether the entitlement to "Cost Petroleum" under the Production Sharing Contract (PSC) can be considered as "consideration" for providing "mining services" to the Government of India. The Commissioner confirmed the demand for service tax, interest, and penalty, asserting that the appellant provided mining services to the Government of India and recovered the cost of these services through "Cost Petroleum."

Appellant's Arguments:
- The appellant argued that the PSC represents a joint venture between the Government of India, ONGC, RIL, and the appellant, involving no rendition of service.
- The contractors (appellant, RIL, ONGC) undertook to make available financial and technical resources for the proper discharge of obligations under the contract.
- The activities within the joint venture framework cannot be considered as services liable to service tax.
- "Cost Petroleum" and "Profit Petroleum" are inherent and embedded parts of the PSC and cannot be treated as consideration for services rendered.

Department's Arguments:
- The Department contended that the appellant provided "mining services" to the Government of India and recovered the cost through "Cost Petroleum."
- The Joint Venture Committee is a body of companies, with the appellant providing "mining services" for consideration from the common pool of the Joint Venture, ultimately reimbursed by the Government of India.

Tribunal's Findings:
- The Tribunal referred to its earlier decisions, which concluded that the Government of India, with the appellant, RIL, and ONGC, entered into a joint venture where each co-venturer had its own obligations. The responsibilities discharged by each co-venturer were not services rendered to the joint venture but were in furtherance of the common objective.
- The Tribunal emphasized that the PSC's terms clearly show that "Cost Petroleum" and "Profit Petroleum" are not consideration flowing from the Government of India to the appellant.
- The Tribunal relied on the Circular dated 12.02.2018, which clarified that contractors carry out exploration and production of petroleum for themselves and not as a service to the Government of India. Hence, "Cost Petroleum" is not taxable per se.

Issue 2: "Cost Petroleum" and "Profit Petroleum" as Consideration for Mining Services
The second issue pertains to whether both "Cost Petroleum" and "Profit Petroleum" under the PSC can be treated as consideration for rendering mining services to the Government of India. The adjudicating order confirmed the demand for service tax, interest, and penalty.

Appellant's Arguments:
- The appellant reiterated that the PSC is a joint venture involving no rendition of service.
- The appellant argued that "Cost Petroleum" and "Profit Petroleum" are inherent parts of the PSC and cannot be treated as consideration for services rendered.
- The appellant cited previous Tribunal decisions and the Circular dated 12.02.2018 to support their position.

Department's Arguments:
- The Department maintained that the appellant provided mining services to the Government of India and recovered costs through "Cost Petroleum" and "Profit Petroleum."
- The Department referenced the Circular dated 24.09.2014, which discusses the taxability of services provided by members of a joint venture.

Tribunal's Findings:
- The Tribunal found that the PSC's terms indicate that "Cost Petroleum" and "Profit Petroleum" are not consideration for services rendered by the appellant.
- The Tribunal referred to its previous decisions and the Circular dated 12.02.2018, which clarified that "Cost Petroleum" is not taxable as it does not represent consideration for services to the Government of India.
- The Tribunal concluded that the components of "Cost Petroleum" and "Profit Petroleum" are inherent parts of the PSC and cannot be treated as consideration for services rendered.

Conclusion:
The Tribunal set aside the impugned orders dated 31.12.2018 and 31.08.2020, concluding that "Cost Petroleum" and "Profit Petroleum" under the PSC cannot be treated as consideration for rendering mining services to the Government of India. The appeals were allowed, and the orders demanding service tax, interest, and penalties were annulled.

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