TaxTMI 
TaxTMI 
2021 (10) TMI 367
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....roleum Mining Code, the Timor Sea Treaty and the Diploma Ministerial on mineral activities; that GSPC(JPDA) holds 20% participating interest(PI) in Block JPDA 06-103 and the list of other concessionaries and their participating interest(PI) are as follows: * Oilex limited: 10% PI (Operator of the Block JPD 06-103). * Videocon JPDA 06-103 limited: 20% PI. * Bharat Petro Resources JPDA limited: 20% PI. * Pan Pacific Petroleum (JPDA 06-103) Pty Limited: 15% PI. * Japan energy E&P JPDA Pty limited: 15% PI. 3. The applicant has further submitted that PSC provides right to carry on petroleum operations jointly to all the Concessionaries (hereinafter referred to as 'Contractor') on Production Sharing basis which outlines all the rights, responsibilities and other contractual liabilities of all the Concessionaries and Designated Authority in respect of exploration activities in Block JPDA 06-103; that Timor-Leste Government initiated arbitration proceeding against the Government of Australia to have Certain Maritime Agreements in Timor Sea(CMATS) Treaty declared as void ab initio and accordingly, the termination of CMATS would result in autom....
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....s, that the Respondent shall pay to the Claimant the Settlement Sum in accordance with clauses 2.2 to 2.5 of this deed. 3. Releases Releases by Claimant 3.1 On receipt of Respondent's proportionate share of the Settlement Sum in accordance with clause 2.2, the Claimant releases: (a) that Respondent; and (b) that Respondent's directors, officers, employees and agents and each of them, past and present From all actions, proceedings, accounts, rights, claims, demands, liabilities, costs and expenses, wherever and however arising, whether known or unknown, whether at law or in equity at the Execution Date, arising out of or relating in any way to the Dispute, the Proceeding and/or the PSC. 3.2 Upon release of a Respondent under this clause 3, that Respondent's respective Parent Company Guarantee shall immediately lapse and shall be returned by the Claimant. Releases by Respondents 3.3 Subject to the Proceedings being settled on the terms set out in clause 2, the Respondents release: (a) the Claimant; and (b) the Claimant's directors, officers, employees and agents, and each of them, past ....
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.... sub-section (1) of section 7, they shall be treated either as supply of goods or supply of services as referred to in Schedule II. 4. Production Sharing Contract is not the contract for providing services. Following are the major differences between PSC and Service Contract: • In Service Contract, contractor is responsible for providing required services only and not hold ownership in the resulting products whereas in PSC, contractors hold ownership in resulting products. • In Service Contract, direction and control of the operation is with Designated Authority of Government whereas in PSC control of operation is jointly by both the parties i.e. Designated Authority of Government and contractor. • In Service Contract, role of contractor is service provider whereas in PSC role of contractor is partner. • In Service Contract, payment to contractor is fixed fees or buyback priority whereas in PSC, contractor has share in the resulting profit. • In Service Contract, contractor is required to bear full operation risk and costs whereas in PSC, operation cost is recoverable on actual as 'Recoverable Cost' from Desi....
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....dated 12.02.2018 clarified that as per the Production Sharing Contract(PSC) between the Government and the oil exploration and production contractors, in case of a commercial discovery of petroleum, the contractors are entitled to recover from the sale proceeds all expenses incurred in exploration, development, production and payment of royalty. Portion of the value of petroleum which the contractor is entitled to take in a year for recovery of these contract costs is called 'Cost Petroleum'. It was clarified that the cost petroleum is not a consideration for service to Government and thus not taxable under GST regulations. 9. GST Ruling GSTR 2001/4(GSTR), issued by the Australian Tax office explains the GST treatment of court order and out of court settlement. As per the said ruling, if a payment is made under an out of court settlement and there is no earlier or current supply, the payment will not be treated as consideration for a supply at all. 10. Hon'ble Bombay High Court, in the case of Bai Mamubai Trust, Vithaldas Laxmidas Bhatia, Smt. Indu Vithaldas Bhatia vs. Suchitra (109 taxmann.com200), has held that GST is not payable on damages/compensation paid for....
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....axable territory, payment by applicant towards its share of expenses (exploration cost), which is in the nature of cash call cannot be considered as taxable under GST regulations. In view thereof, settlement amount i.e. committed exploration cost payable to ANP by unincorporated Joint Venture which in turn is payable by applicant to the extent of its share in unincorporated Joint venture is not taxable under GST regulations. • ANP vide letter dated 15-7-2015 terminated PSC dated 15-112006 and raised demand for cost of exploration and therefore demand raised by ANP pertains to period prior to GST regime and accordingly is not taxable under GST regulations. 9. The applicant submits that in view of the above submission, share of settlement amount payable by the applicant as a partner of UJV should not be chargeable to GST under RCM due to the following reasons: (i) Amount payable to ANP pertains to period prior to GST regime. (ii) Production Sharing Contract is for the block in JPDA which is in non-taxable territory. Unincorporated Joint venture formed under Joint operating Agreement and Operator of the UJV are in non-taxable territory. (iii)....
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.... "3. CONTRACTOR'S LIABILITY UPON TERMINATION In light of the matters raised in Section 2 above, it is the ANP's position that upon termination, the Contractor is liable to the ANP for: 3.1.1 the estimated cost of the Exploration not carried out for the Contract Year 2013 (pursuant to Article 4.5(a)(iii) of the PSC) in the amount of US$16,585,789.72; and 3.1.2 damages for breach of its local content obligation in the amount of US$ 433,000.00; thereby making the Contractor's total liability upon termination to be US$17,018,789.72" 12. The applicant submitted the sequence of events post issuance of Notice dated 13th May 2015 by ANP as follows: 1. ANP vide notice dated 15^th July 2015 terminated the PSC with a demand of payment estimated cost of exploration not carried out and damages for breach of its local content obligations. They have submitted a copy of the notice. 2. In terms of the said demand notice dated 15^th July 2015, the demand for payment of US$ 17,018,789.51 became due and payable on 14^th August 2015. 3. ANP had on 8^th October 2018 filed request for Arbitration with the Secretariat of the International Co....
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....V are in nontaxable territory, payment by Applicant towards its share of expenses (exploration cost), which is in the nature of cash call, cannot be considered as taxable under GST regulations. c. In view thereof, settlement amount (committed exploration cost) payable to ANP by unincorporated Joint venture which in turn is payable by Applicant to the extent of its share in unincorporated Joint venture is not taxable under GST regulations in India. (ii) Amount payable to ANP pertains to period prior to GST regime a. ANP vide letter dated 15.07.2015 terminated PSC dated 15.11.2006 and raised demand for cost of exploration. Applicant submits that demand raised by ANP pertains to period prior to GST regime and accordingly is not taxable under GST regulations. b. In the present case settlement of original demand is made between the Concessionaries and after that the case in the international chamber of commerce is withdrawn. In view thereof, in terms of GST regulation, the time of supply would be the date immediately following sixty days from the date of Issuance of invoice or any other document, by whatever name called, in lieu thereof by the supplier. In ....
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....Section 7 of the CGST Act, 2017. (iv) The applicant has relied upon the following case laws to support their contention: (a) Hon'ble Tribunal in the case of K.N. Food Industries Pvt. Ltd. vs. Commissioner of CGST and C.Ex. Kanpur [2020 (38) G.S.T.L. 60 (Tri. - All.)] [Copy enclosed herewith as Annexure10] has examined a situation when the capacity of the assessee was not fully utilized by M/s. Parley, ex gratia charges were claimed so as to compensate the assessee from financial damage or injury. The Department invoked the provisions of [Section] 66E(e) to levy tax on the amount so received. The Tribunal held that the ex gratia charges were for making good the damages due to the breach of the terms of the contract and did not emanate from any obligation on the part of any of the parties to tolerate an act or a situation and cannot be considered to be towards payment for any services. Relevant extract of the decision is reproduced herein: "In the present case apart from manufacturing and receiving the cost of the same, the appellants were also receiving the compensation charges under the head ex-gratia job charges. The same are not covered by any of the Acts as ....
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.... principle laid down by the Court is that such payment does not have the necessary quality of reciprocity to make it a 'supply' and, therefore, GST is not payable on such amount. (e) Applicant refer herewith Hon'ble CESTAT decision in the case of Ruchi Soya Industries Limited v. Commissioner of Customs, Central GST and Excise, Indore [TS-301-CESTAT-2021ST].(copy submitted). In this decision, the Hon'ble Tribunal Delhi has examined the taxability (service tax) of the amount received by the service recipient as payment (compensation) for a service provider's failure to provide quality services, as specified in the agreement. In this case Ruchi Soya Industries Limited, which is engaged in the business of generation of wind energy, purchased and used wind turbine generators to generate wind energy. Operation and maintenance of these wind turbine generators was outsourced to Suzlon Global Services Ltd. Suzlon is the service provider and the Ruchi Soya the service recipient in this case. According to the agreement between the Ruchi Soya and Suzlon, Suzlon would maintain the wind turbine generators in working condition so that they would be available for use by the Ruchi ....
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....tween 'conditions to a contract' and 'considerations for the contract' and that payment made as a condition to contract would not necessarily form a part of taxable value. Basis the judgment of the Supreme Court, it was held that the payment made by Suzlon to the Ruchi Soya was a condition of the contract to provide services and maintain the wind turbine generator in way that it is available for use by Ruchi Soya for more than 95.5% of the time. The said clause sets out that Ruchi Soya will not bare losses for Suzlon's failure to provide quality services and in the event that Suzlon does fail to provide a quality service, it should make good the losses borne by Ruchi Soya. • It was observed by the CESTAT that the payment of compensation should not be construed as the taxable service of "tolerating an act" by the service recipient. Incorporation of penalty clauses is a condition in the contract and the payment pursuant to such a clause is 'condition to the contract'. Thus, reading the agreement as a whole and considering the intent and purpose of the contract is necessary in ascertaining taxability. • It is opined that when the agreement is read in its enti....
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.... rather a termination of arrangement which itself the original authority held as a service. We note that by terminating the arrangement, the appellants are adversely put to certain business loss. The consideration has been paid for such loss. No identifiable service could be attributed for such payment during the material time." 14. The Applicant submits that the subject matter is not chargeable to GST. Question on which Advance Ruling sought: 15. 'Whether payment of settlement fees pursuant to deed of settlement and Release signed for Timor-Leste Oil Block Production Sharing Contract qualifies as a 'supply' under Goods and Service Tax(GST) regulations and thereby attract levy of GST?' 16. Vide submission dated 29-6-2021, the applicant rephrased the question as follows: 'Whether payment of settlement fees against demand made by Autoridade Nacional do Petroleo E Minerais (ANP) vide letter dated 15.07.2015 attract levy of GST under GST regulations.' Personal hearing: 17. Shri Anil Chauhan, C.A. appeared for the hearing on 30-6-21 and reiterated the contents of the application and the contents of submission dated 29-6-21. Further as per the request of the ap....
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....P/ Damages as a condition of Contract of PSC paid to ANP? We find the following facts forthcoming in subject matter, as follows: i. The subject 20% of Settlement Payment (hereinafter referred to as the subject payment for the sake of brevity) to be paid by GSPC(J) is not 'Cost Petroleum' as referred to in CBEC Circular dated 12-2-18. Infact, Cost Petroleum is that Portion of the value of petroleum which the GSPC(J) is entitled to take/ receive as per PS Contract. In subject matter, we find a situation where GSPC(J) is paying subject payment to ANP and not receiving any amount from ANP. CBIC vide Circular No.32/06/2018-GST dated 12-2-18 clarified that as per the Production Sharing Contract (PSC) between the Government and the oil exploration and production contractors, in case of a commercial discovery of petroleum, the contractors are entitled to recover from the sale proceeds all expenses incurred in exploration, development, production and payment of royalty. Portion of the value of petroleum which the contractor is entitled to take in a year for recovery of these contract costs is called 'Cost Petroleum'. It was clarified that the cost petroleum is not a consideratio....
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.... acts for GSPC(J); ANP is service provider by agreeing to tolerate certain acts of GSPC(J); ANP is service provider by agreeing to refrain from certain acts to benefit GSPC(J). b. GSPC(J) is service recipient. c. Consideration is the subject payment which is 20% of USD 80,00,000 to be paid by GSPC(J). ii. Further we refer to the definition of Supply as defined at Section 7 of CGST Act, reproduced as follows: 7. (1) For the purposes of this Act, the expression "supply" includes-- (a) all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business; (b) import of services for a consideration whether or not in the course or furtherance of business; (c) the activities specified in Schedule I, made or agreed to be made without a consideration; and (d) the activities to be treated as supply of goods or supply of services as referred to in Schedule II. iii. We also note that there is a specific entry at clause 5(e) to Schedule II, CGST Act, as fo....
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....d that the applicant, being the recipient of service, is liable to pay IGST on the supply of service by ANP, which is located in non-taxable territory) on reverse charge basis. Entry No.1 to Notification No.10/2017-Integrated Tax(Rate) dated 28.06.2017, reads as follows: In exercise of the powers conferred by sub-section (3) of section 5 of the Integrated Goods and Services Tax Act, 2017 (13 of 2017), the Central Government on the recommendations of the Council hereby notifies that on categories of supply of services mentioned in column (2) of the Table below, supplied by a person as specified in column (3) of the said Table, the whole of integrated tax leviable under section 5 of the said Integrated Goods and Services Tax Act, shall be paid on reverse charge basis by the recipient of the such services as specified in column (4) of the said Table:- Sl.No. Category of Supply of Services Supplier of service Recipient of Service (1) (2) (3) (4) 1. Any service supplied by any person who is located in a non-taxable territory to any person other than non-taxable online recipient. Any person located in a non-taxable territory Any person located....
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.... its Performance Guarantee. 25. We note that the applicant has referred a Australian Tax office comments that with no earlier or current supply, the payment will not be treated as consideration for a supply at all. We note that as per the GST law in India, in particular with reference to the definition of Supply under Section 7 CGST Act and Schedule II(5)(e) CGST Act where the subject activity by ANP to GSPC(J) is supply of service, there is supply of service in subject matter and the cited Australian office comments is not applicable in subject matter. Also, GST liability is as per GST Scheme of law enacted by the competent legislature in India and we confine ourselves to the Central Goods and Services Act, 2017 enancted by the Parliament for arriving at our conclusion for pronouncement of the Ruling. Further, we find that GSPC(J) has placed reliance on certain case laws pertaining to the Service Tax era, such as, in KN Food Industries case CESTAT held that the appellants are entitled ex-gratia job charges to cover up the loss or deficiencies in normal job charges and that this was due to breach of terms of contract and is not considered to be towards payment for any services; ....