2025 (11) TMI 857 - AT - Service Tax

Single contracts partly offshore and partly in India: offshore services non-taxable; Section 66A makes Indian recipient liable; 12% rate affirmed

M/s Western Geco International Ltd. Versus The Commissioner, Service Tax Commissionerate, New Delhi

CESTAT held the contracts were single contracts partly performed outside India and partly onshore; services performed beyond territorial waters are not ... Levy of service tax - service provided beyond the territorial waters of India, in India‘s Exclusive Economic Zone - taxable event - treatment of service, when it was partly rendered on land in India and partly outside the territorial waters of India - rate of tax - measure of tax. HELD THAT:- The first essential element to levy and collect a tax is the occurrence of the 'taxable event‘. According to the Revenue, in this case, the taxable event had occurred and tax was payable. The appellant does not dispute that the nature of service rendered was covered by the charging section but contends that since it had taken place outside the taxable territory, i.e., in areas to which the Finance Act did not extend, the 'taxable event' had not taken place - It is agreed with the finding in the impugned order that the contract was for a single service which was partly done in the sea beyond the territorial waters of India and partly done onshore in Mumbai. Services performed outside the territorial waters of India are clearly not exigible to service tax because the Finance Act does not extend to places outside India. How the service should be treated when it was partly rendered on land in India and partly outside the territorial waters of India? - HELD THAT:- In the impugned order, the Commissioner, drawing analogy from the Service Tax (Determination of Value) Rules 2006, which at Rule 7(2) states that the value of taxable service specified in clause (ii) of Rule 3 of Taxation of Service (Provided from Outside India & Received in India) Rules, 2006, as are partly performed in India, shall be the total consideration paid by the recipient of such service including the value of service performed outside India, he confirmed the demand reckoning the total invoice value - It is agreed with the Commissioner that if services are provided from outside India &received in India, the total value of the service must be reckoned to calculate service tax. Who was responsible to pay service tax in these contracts? - HELD THAT:- In this case, it is undisputed that the service recipients (ONGC and RIL) were located in India and that service was provided. The question to be decided is who had to pay the service tax - the service provider or the service recipient. Usually as per section 68, the service provider has to pay the tax. However, section 66A makes the service recipient responsible to pay service tax as if he was the service provider if the service provider has his usual place of residence outside India. Usual place of business has been defined in the explanation to section 66A as the place where it is incorporated or otherwise legally constituted. Further, where a person is carrying on a business through a permanent establishment in India and through another permanent establishment in a country other than India, such permanent establishments shall be treated as separate persons for the purposes of section 66A. The irresistible conclusion is that data analysis by Western Geco Mumbai and the raising of invoices by Western Geco Gurugram were acts done on behalf of Western Geco BV Islands and were not based on some other contracts. There was no lis between ONGC and Western Geco Mumbai or Western Geco Gurugram. No contracts were entered into by ONGC with them and no payments were made to them. Rate of tax - HELD THAT:- The rate of tax is undisputedly, 12% of the twelve percent of the value of taxable services rendered as per section 66/66A. Measure of tax - on what value the tax should be charged - HELD THAT:- Indicating values of some parts of the total contract separately offers some practical advantages. It will help in financial adjustments if the contract gets frustrated by non-performance or by one of the parties reneging on the contract. It will also help in adjustments if additional costs have to be incurred due to changes such as, installation of double glazed windows instead of ordinary windows by the builder or an additional 1000 pages being copied and submitted as evidence by the advocate or additional procedures or tests being necessitated during the surgery. Merely because some costs are indicated separately, a single contract will not change it into multiple contracts. Thus, in this case, there were single contracts of Western Geco BV Islands with ONGC and RIL for geological surveys which were partly performed within India and partly outside the territorial waters of India. Whether tax has to be paid on the entire value when 96% of the work (by value) was performed outside India? - HELD THAT:- In case of import of services, if part of the service was rendered in India, it should be treated as having been rendered in India and conversely, in case of export of services, if part of the service was rendered outside India, it should be treated as having been rendered outside India. The Commissioner was correct in applying this Rule in deciding the case but he erred in ignoring Section 66A which states that if the service was rendered by a person outside India, the service recipient had to pay tax as if he had rendered the service. Rule 3 of the Taxation of services (Provided from outside India and received in India) Rules, 2006 specifically stated that it is subject to section 66A. If Section 66A is also considered, the irresistible conclusion is that the charge of service tax was on the service recipients ONGC and RIL. The demand of service tax on Western Geco Gurugram, the appellant in these appeals therefore cannot be sustained and needs to be set aside - Appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether service tax is exigible on offshore seismic survey (data acquisition) undertaken beyond 12 nautical miles from Indian land mass when part of the contract work (data processing) is performed in India. 2. Whether the contracts for seismic data acquisition and subsequent data processing constitute a single composite 'taxable service' or distinct services susceptible to separate tax treatment and valuation. 3. Whether statutory extensions/notifications (extending the Finance Act to Continental Shelf/EEZ or to installations/vessels therein) and decisions on characterization of vessels affect exigibility of service tax in the facts at hand. 4. Who is the person liable to pay service tax where the service provider is an overseas entity with project offices in India - whether the overseas entity, its project office, or the Indian service recipient is chargeable (interaction of section 66, 66A and 68). 5. Whether the value for computation of service tax should be the entire contract price (100%) or only the portion expressly indicated for data processing (4%), and the applicability of Rules governing import/export of services (including Rule 3 of the Taxation of Services Rules and Export Rules). 6. Consequent issues relating to interest, penalties and jurisdiction where demand was made on an Indian project office which did not contract with or receive consideration from the service recipients. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Exigibility of service tax where part of the service is performed beyond 12 nautical miles Legal framework: Service tax is charged under Chapter V of the Finance Act; the territorial extent of the Finance Act is the whole of India and does not automatically extend beyond territorial waters except by notification. Taxable event is rendering of a 'taxable service' as defined in section 65(105) and charge arises under section 66/66A. Precedent treatment: The Rules and prior decisions distinguish between services performed wholly outside India (treated as not exigible) and those partly performed in India (treated as performed in India for specified categories), subject to section 66A. Interpretation and reasoning: The contracts evidencing the scope (acquisition + processing) show the work is a single contractual supply which is partly executed outside territorial waters (data acquisition) and partly within India (data processing). Rule 3 of the Taxation of Services (Provided from outside India and received in India) Rules, 2006 treats an imported taxable service partly performed in India as treated as performed in India. Thus, where part of a composite taxable service is performed in India, the service can be treated as performed in India for exigibility. Ratio vs. Obiter: Ratio - where a single contractual service is partly rendered in India and partly outside, the service may be treated as rendered in India under Rule 3, subject to the reverse-charge provisions of section 66A when provider is located outside India. Conclusion: Part performance outside India does not automatically avoid exigibility where the contractual service is composite and partly performed in India; the service must be treated as rendered in India if Rule 3 and section 66A apply. Issue 2 - Composite contract vs separate services; valuation basis Legal framework: The charge requires a clear taxable event, person liable, rate and measure/value (sections 65, 66 and section 67/rules for valuation). Taxing statutes are strictly construed; ambiguity in core components defeats the charge. Precedent treatment: The Court referenced principles distinguishing an absence of charge from disputes about computation; composite contracts may be taxed as single services where the contract terms show a consolidated obligation and consideration. Interpretation and reasoning: The examined contracts set out an all-inclusive basic price with specified activities (12 items) forming the scope and only allocating 4% for data processing. That allocation was held to be an internal apportionment/line item for practical purposes and did not create a separate contract or independent taxable service. Analogies (e.g., BOQs, itemised billing) support treating the contract as single composite service. Accordingly, valuation for a taxable composite service requires consideration of the contract as a whole when tax is exigible. Ratio vs. Obiter: Ratio - an itemised cost in a composite/all-inclusive contract does not convert contract elements into separate contracts/services for taxability or valuation unless separate legal supply relationships or statutory mechanism exists to treat them separately. Conclusion: The contract constitutes a single service; the attempt to limit tax to the 4% line item fails if the total service is treated as rendered in India under the Rules and section 66A. Issue 3 - Effect of notifications extending the Finance Act to EEZ/Continental Shelf and characterization of vessels Legal framework: The Finance Act may be extended to certain maritime zones or objects by notification; characterization of a platform/vessel under a notification affects territorial application. Precedent treatment: The decision noted earlier authorities addressing whether seismic survey vessels qualify as 'vessels' under specific notifications and recorded those authorities, but treated that inquiry as not determinative in the present result. Interpretation and reasoning: Even if certain notifications extend the Act to specified maritime areas or vessels, here the decisive finding was that the provider was an overseas entity and that section 66A makes the recipient chargeable where the provider is established outside India; therefore, characterization under those notifications was not decisive to outcome. Ratio vs. Obiter: Obiter - prior authorities on vessel characterization were noted but were not relied upon as necessary to decide liability of the Indian recipient under section 66A. Conclusion: Notifications and vessel-characterization issues were considered but not outcome-determinative; tax liability was resolved under section 66A and the contractual allocation rather than by treating the vessel activity as bringing performance within India under notifications. Issue 4 - Person liable: application of section 66A, section 68 and treatment of project offices Legal framework: Section 68 requires the person providing taxable service to pay service tax; section 66A makes services provided from outside India and received in India taxable as if rendered by the recipient (reverse charge). Explanations treat permanent establishments/project offices as separate persons for section 66A. Precedent treatment: The Rules and statutory text treat permanent establishments as separate persons for reverse-charge liability; contractual stipulations cannot override statutory charge. Interpretation and reasoning: The contracts were entered into by the overseas incorporated entity which received payment into its foreign bank account. Project offices in India carried out acts (invoicing, data processing) on behalf of the overseas provider but did not contract with or receive consideration from the recipients. Under section 66A, project offices/permanent establishments are to be treated as separate persons, and where the provider is located outside India the recipient is chargeable as if it had provided the service. Therefore, the tax demand on the Indian project office that neither contracted with nor received payment from the recipients is unsustainable. Ratio vs. Obiter: Ratio - where the contractual provider is established outside India and consideration is paid to it, reverse-charge under section 66A makes the Indian recipient liable; a domestic project office acting on behalf of the foreign provider cannot be charged where it is not the contracting provider and does not receive consideration. Conclusion: The charge of service tax lay on the Indian service recipients under section 66A; demands against the Indian project office that neither provided the contractual services nor received payment are invalid. Issue 5 - Interaction of Rules (import/export) and determination of value Legal framework: Export rules treat partly performed export services as performed outside India; Taxation of Services (Provided from outside India and received in India) Rules (Rule 3) treat partly performed imported services as performed in India and require valuation under section 67 and rules; Rule 3 is subject to section 66A. Precedent treatment: The Rules form the statutory valuation and territorial treatment framework; section 66A prevails in establishing person liable where provider is non-resident. Interpretation and reasoning: Rule 3 properly treats an imported taxable service partly performed in India as rendered in India and requires total consideration to be reckoned for valuation. However, that Rule operates subject to section 66A; accordingly, where the provider is outside India, the recipient is liable to tax on the total consideration. The contractual internal apportionment (4%) cannot alter statutory valuation where a composite service is treated as provided in India under the Rules and section 66A. Ratio vs. Obiter: Ratio - when Rule 3 applies and section 66A makes the recipient liable, valuation must take total contract consideration into account; itemised apportionment in the contract is not determinative of taxable value for a composite service treated as received in India. Conclusion: If the statutory conditions for treating the service as provided in India are satisfied and section 66A makes the recipient liable, the total invoice value is relevant for computation of tax (subject to section 67/rules), and the 4% internal allocation is not controlling to escape taxation on the balance. Issue 6 - Interest, penalties and jurisdiction of issuing officers Legal framework: Interest and penalties attach only if a valid tax demand is sustainable; jurisdiction for issuance of notices follows statutory empowerment of officers. Precedent treatment: Recovery of tax, interest and penalties must conform to statutory charge and correct person liable; demands against a person not legally liable are unsustainable. Interpretation and reasoning: Because the charge of service tax on the appellant (the Indian project office) could not be sustained - the contractual provider was the overseas entity and reverse-charge lay on the Indian recipients - demands for service tax, interest and penalties against the Indian project office cannot be maintained. Jurisdictional objections to the issuing officers were considered but the dispositive ground was absence of liability on the appellant. Ratio vs. Obiter: Ratio - if the foundational tax demand is unsustainable for lack of legal charge on the respondent, consequential interest and penalties founded on that demand must be set aside. Conclusion: Interest and penalties imposed on the Indian project office are set aside because the service tax demand itself against that office cannot be sustained. Overall Conclusions 1. Contracts constituted a single composite taxable service partly performed outside and partly inside India. 2. The contractual provider was an overseas entity; project offices in India acted on its behalf and did not contract with or receive consideration from the recipients. 3. Under section 66A the charge of service tax was on the Indian service recipients; therefore demands against the Indian project office were unsustainable. 4. Consequently, demands for service tax, interest and penalties made on the Indian project office were set aside and the appeal was allowed with consequential relief.