Service tax demands set aside for offshore rig operations and overseas vendor payments but upheld for consulting services

CESTAT Mumbai ruled on service tax demands for financial years 2008-2015 involving offshore rig operations. The tribunal set aside service tax demands under Supply of Tangible Goods for Use (STGU) for rig charter services, finding appellants had effective possession and control of rigs. Demands under Business Support Services (BSS) for overseas vendor payments were also set aside as services were performed entirely abroad and didn't qualify as import of services. However, service tax liability was upheld for consulting engineer payments under reverse charge mechanism, as these services were consumed in India despite being performed abroad. Appeal was allowed in part.

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Issues Involved:

1. Whether the activity of hiring rigs on charter basis amounts to service of Supply of Tangible Goods for Use (STGU) and if appellants are liable to pay service tax under Reverse Charge Mechanism (RCM).
2. Whether appellants are liable to pay service tax on RCM basis for services availed from overseas vendors under 'Business Support Services' (BSS) and 'Consultancy Engineering Service'.
3. Whether confirmation of demand for short payment of service tax along with interest by invoking extended period of limitation, and subsequent periodical demands along with imposition of penalties, is sustainable.

Summary:

Issue 1: Hiring of Rigs on Charter Basis and STGU Service Tax Liability

The Tribunal examined whether the activity of hiring rigs on a charter basis by the appellants from GGES constitutes the service of Supply of Tangible Goods for Use (STGU). The legal provisions u/s 65(105)(zzzzj) of the Finance Act, 1994, and the post-2012 definition of 'service' u/s 65B(44) were analyzed. The Tribunal found that the appellants had effective control and possession of the rigs during the charter period, supported by clauses in the BARECON 2001 agreement. The Tribunal concluded that the appellants' activities did not fall under STGU services as there was a transfer of right to use the rigs, thus not liable for service tax under RCM.

Issue 2: Service Tax Liability on Business Support Services (BSS) and Consultancy Engineering Service

The Tribunal considered the service tax demands on payments made to foreign vendors for various services under BSS. The definition of 'Business Support Services' u/s 65(104c) and its taxable service definition u/s 65(105)(zzzq) were examined. The Tribunal found that the services provided by foreign vendors did not fall under BSS as they were not related to marketing or sales promotion. Additionally, services performed entirely outside India did not qualify as import of services u/s Rule 3(ii) of the Taxation of Services (Provided from Outside India and Received in India) Rules, 2006. Thus, the service tax demands under BSS were not sustainable.

For the payments made to Mr. Balbir Singh Negi, the Tribunal upheld the service tax demand u/s 65(105)(g) for 'Consulting Engineer Services' as his services were consumed in India, despite being performed abroad.

Issue 3: Confirmation of Demand and Penalties

The Tribunal found that the confirmation of service tax demands on STGU and BSS services, along with interest and penalties, was not sustainable due to the reasons discussed in Issues 1 and 2. However, the demand for Consulting Engineer Services was upheld.

Conclusion:

The impugned order was sustained only to the extent of the service tax demand for Consulting Engineer Services. The appeal was disposed of accordingly.

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