CESTAT sets aside service tax assessment on unearned consideration for incomplete crude oil supply milestone

The CESTAT Hyderabad set aside the Commissioner's order determining taxable turnover for service tax liability. The appellant had not reached the stipulated milestone for crude oil/gas supply to ONGC and neither received nor was entitled to consideration during the disputed period. The tribunal held that the turnover determination violated proviso to Rule 3 of Point of Taxation Rules since the stipulated event for service completion was not achieved. The addition of notional profit at 10% was deemed improper. The best judgment assessment was found erroneous given proper record maintenance and regular return filing. The extended limitation period was unavailable to Revenue without meeting statutory conditions. Appeal allowed.

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Issues Involved:

1. Determination of Taxable Turnover
2. Point of Taxation for Continuous Supply of Service
3. Applicability of Service Tax (Determination of Value) Rules
4. Invocation of Extended Period of Limitation

Summary:

1. Determination of Taxable Turnover:
The appellant, M/s B.G. Shirke Construction Technology Pvt Ltd, engaged in a service contract with ONGC for the development of the Manepalli Field, argued that the taxable turnover determined by the Commissioner was erroneous. The Commissioner calculated the service tax liability based on the expenditure incurred plus a notional profit of 10%, which the appellant contended was against the provisions of the service tax law.

2. Point of Taxation for Continuous Supply of Service:
The appellant argued that the services provided were in the nature of continuous supply of service, and the point of taxation had not been triggered as the milestone for production and supply of oil/gas to ONGC had not been reached. The contract stipulated that payment would only be made upon the successful delivery of oil/gas, and no such delivery occurred during the disputed period. The Tribunal agreed, stating that the point of taxation rules, particularly Rule 2 and Rule 3, were misconceived by the Commissioner.

3. Applicability of Service Tax (Determination of Value) Rules:
The Tribunal found that the determination of taxable turnover under section 67(1)(iii) read with Rule 3(b) of the Service Tax (Determination of Value) Rules was incorrect. The appellant had neither issued invoices nor received any consideration from ONGC during the disputed period, and thus, the taxable turnover could not be determined based on the cost incurred plus notional profit.

4. Invocation of Extended Period of Limitation:
The Tribunal held that the extended period of limitation was not applicable as the appellant maintained proper records, was registered with the department, and regularly filed returns. The demand raised by the Commissioner was based on a best judgment assessment, which was found to be cryptic and non-speaking.

Conclusion:
The Tribunal allowed the appeals, set aside the impugned orders, and held that the appellant was not liable to pay service tax for the disputed period. The appellant was entitled to consequential benefits in accordance with the law.

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