2026 (1) TMI 1160 - AT - Service Tax

Levy of service tax on cash calls in joint ventures characterised as non-taxable contributions; appeal allowed quashing levy

Levy of service tax on cash calls by co-venturers was examined through joint venture and PPP principles, focusing on characterisation of cash calls as ... Levy of service tax on cash calls / capital contributions in joint ventures - Characterisation of contributions by co-venturers as consideration for taxable service - Joint venture / partnership law principles - Public-Private Partnership - Operator and non-operator under Production Sharing Contract - Explanation 3(a) to Section 66B(44) of the Finance Act, 1994 - Proviso to Section 73(1) of the Finance Act, 1994 - Circular No.179/5/2014ST - HELD THAT:- Since both the sides agree that the issue is covered, we would like to refer to the decision of this Tribunal in the case of Marmugao Port Trust Vs. CC & ST, Goa [2016 (11) TMI 520 - CESTAT MUMBAI], where the Bench considered the concept of Public-Private Partnership, which was held to be in the nature of Joint Venture where two parties got together to carry out a specific economic venture on a revenue sharing model. The Bench noticed that such arrangements are common nowadays, not only in the port sector but also in various other sectors such as road construction, airport construction, oil and gas exploration where the Government has exclusive privilege of conducting businesses. In all such models, the public entity brings in the resource over which it has the exclusive right, whether land, water front or the right to exploit the said land and water front, and the private entities brings in the required resources either capital or technical expertise necessary for commercial exploitation of the resource belonging to the Government. It is apparent that the appellant had placed bids through joint venture arrangements with different parties. On acceptance of joint-bid by the Government, the parties to Joint Bidding Agreement [JBA] enter into PSC. On perusal of the Joint Operating Agreement and Production Sharing Contract, it is apparent that one of the Member of UJB is appointed as ‘Operator’, who is responsible for all kinds of activities related to the allotted block. In this case, the appellant has been appointed as the ‘Operator’ and is incurring expenses in relation to manpower drilling work arranging for facilities for exploration activities etc. and in lieu thereof, the appellant raises cash calls on non-operators. Such cash calls received as share of expenses cannot be subjected to service tax, in view of the decisions referred above. The appellant incurs various expenses on exploration or development of the petroleum asset (i.e. the oil fields or gas fields) or for production of oil and/or gas. If the exploration and development operations fructify into a discovery of commercial fields, production of oil happens. Otherwise, the Block is to be relinquished and the contribution towards exploration and development operations become a sunk cost which is a loss incurred by the participants in proportion to their PI. Thus, the exploration and development costs are nothing but investments in anticipation of future production from the oil field (which is contingent upon the successful discovery of oil and/or gas deposits). Thus, the impugned order is liable to be quashed. The appeal is accordingly allowed, with consequential benefits, if any. Issues: Whether the amounts received as 'cash calls' by an operator from other members of an unincorporated joint venture (formed for exploration and production under PSC/JVA/JOA) constitute consideration for a taxable service and are liable to service tax.Analysis: The issue was examined by reference to the legal character of joint ventures between public and private entities in exploration contracts, earlier Tribunal rulings and CBEC guidance. The analysis applies the principle that contributions and activities undertaken by co-venturers in furtherance of a common enterprise enter a common pool and are undertaken to advance each member's stake in the venture rather than as services rendered for a specified quid pro quo. Precedents considered include decisions treating public-private arrangements for resource exploitation as joint ventures and authorities holding that absent a direct, specific consideration for a distinct service (contractor-contractee or principal-client relationship), monetary contributions for common expenses do not meet the statutory test of consideration for a taxable service. The Circular cited clarifies that cash calls in joint venture projects are capital contributions and not chargeable to service tax; prior Tribunal decisions applying these principles to exploration joint ventures and operator/non-operator arrangements were followed.Conclusion: The cash calls received by the operator from other members of the unincorporated joint venture are capital contributions related to the joint venture and do not constitute consideration for a taxable service; therefore service tax is not leviable on such cash calls. The appeal is allowed and the impugned order is quashed, with consequential reliefs, if any.