TaxTMI 
TaxTMI 
2022 (1) TMI 207
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....or rendering "mining services" to the Government of India. The Commissioner, by the impugned order, has confirmed the demand of service tax with interest and penalty. 2. Service Tax Appeal No. 86312 of 2020 has been filed to assail the order dated 31.08.2020 that adjudicates the show cause notice dated 05.07.2019 issued for the period April 2016 to June 2017. The issue involved in this appeal is whether entitlement towards to "Cost Petroleum" and Profit Petroleum under the "Production Sharing Contract" can be treated as the consideration for rendering "mining services" to the Government of India. The impugned order confirms the demand of service tax with interest and penalty. 3. The details of the proceedings and the issues under consideration are enumerated in the following Tabular Chart:- Appeal No. Period of Dispute Show Cause Notice date Issue Order-in-Original Demand Barred under the longer period of limitation Proceedings initiated under 86004/2019 2011-12 to 2013-14 15 December 2016 Whether the entitlement towards "Cost Petroleum" under the "Production Sharing Contract" be treated as the "consideration" for rendering "Mining servi....
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.... II. Development Phase This phase inter alia involves sending vessels to determine the extent of marketable mineral present in that block. III. Production Phase This is the final Phase which involves installation of fresh equipment for drilling and commercial production of petroleum. 7. Pursuant to a Notice Inviting Offers issued in 1992 for a joint venture to develop medium sized oil and gas fields, the Government of India on 22.12.1994, entered into two separate contracts [the Contracts] with Enron Oil and Gas India Ltd. (now the appellant), Reliance Industries Ltd. [RIL] and Oil and Natural Gas Corporation Ltd. [ONGC] for the discovery and exploitation of petroleum resources in 'Panna and Mukta' and 'Mid and South Tapti' fields [the Contract Areas]. The terms of the two Contracts are identical. The appellant, RIL and ONGC shall be called 'Holders'. Under the Contracts, the Holders were required to enter into an Operating Agreement. Accordingly, Enron Oil and Gas India Ltd., RIL and ONGC entered into a Joint Operating Agreement [Agreement] on 22.12.1994 to define their respective rights, duties and obligations with respect to their operation....
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....he Holders in the prescribed proportion as per the investment multiple in the terms agreed in the Contract. 11. The ability of the Contractor to recover any costs so incurred for the Petroleum Operations is dependent on the existence of "Cost Petroleum". Thus, in the event the exploration is unsuccessful, the costs incurred would have to be borne by the Holders and would not in any manner be reimbursed by the Government. Further, the ability of the Government of India and the Holders to share surplus profits is dependent upon there being a distributable surplus after deduction of the costs incurred by the Holders. 12. The issue arising in all the three appeals relates to the Production Sharing Contract dated 22.12.1994 and the cause of action, as can be culled out from the show cause notice, is as follows: (i) The transaction between the appellant (on behalf of all the three Holders i.e., the appellant RIL and ONGC) and the Government of India are on principal-to-principal basis. The appellant (on behalf of the Holders) and the Government of India are two separate and distinct juridical persons, with the former acting as the service provider and the latter acting as ....
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....d in the books is nothing but capital contribution. The adjudicating authority has erred in concluding that the mechanism of 'cash call' prescribed in the 'joint operations agreement' is consideration for services; it is intended as the vehicle for contribution by the participating interests to the capital requirements of the venture. As such capital contributions...... 16. From our discussion supra, we find that it is parties to the 'production sharing contract' who constitute a joint venture and that the Explanation below section 65B (44), intended to cover supply of services to a constituent of 'unincorporated associations' or 'body of persons' by the latter is not relevant to the present dispute. Further, the fulfilment of obligation to contribute to the capital of the joint venture is beyond the scope of taxation under Finance Act, 1994 as it does not amount to consideration. The performance of such obligations is intended to serve itself and, thereby, the joint-venture. As the demand confirmed in impugned order is not on the consideration for rendering of a service, we are not required to decide on the other issues." 14. It needs to be noted that both the aforesai....
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....p). In our view, the answer to this question has to be in the negative inasmuch as whatever the partner does for the furtherance of the business of the partnership, he does so only for advancing his own interest as he has a stake in the success of the venture. There is neither an intention to render a service to the other partners nor is there any consideration fixed as a quid pro quo for any particular service of a partner. All the resources and contribution of a partner enter into a common pool of resource required for running the joint enterprise and if such an enterprise is successful the partners become entitled to profits as a reward for the risks taken by them for investing their resources in the venture. A contractor-contractee or the principal-client relationship which is an essential element of any taxable service is absent in the relationship amongst the partners/co-venturers or between the co-venturers and joint venture. In such an arrangement of joint venture/partnership, the element of consideration i.e. the quid pro quo for services, which is a necessary ingredient of any taxable service is absent. 15. The Civil Appeal filed by the Department (Commissioner vs. Mor....
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.... 15, 2016 is barred by limitation; 11. 2008 (12) STR 401 (x) Interest is not leviable under section 75 of the Finance Act; and (xi) No penalty under sections 76, 77 and 78 of the Finance Act, could have been imposed on the appellant. 17. Shri S.K. Mathur, learned Authorised Representative appearing for the Department made the following submissions: (i) The activity of the appellant of doing "mining services" for consideration to the Joint Venture, which is not an Incorporated Association of persons, from the common pool lies within the ambit of service tax applicability. (ii) The Joint Venture Committee is a body of companies and the appellant is one of the constituent member providing "mining services" for consideration received from the common pool of fund of the Joint Venture and ultimately reimbursed by the beneficiary Government of India as Cost Petroleum to the Joint Venture Companies and, therefore, satisfies the criteria of applicability of service tax; (iii) The activities of the Joint Venture Companies is in the interest of the Government as the three Companies have no field of their own but the fields belong to the Governme....
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....y be, and a member thereof shall be treated as distinct persons; xxxxxxxxx 22. The show cause notice, after referring to the Production Sharing Contract dated 22.12.1994, mentions that the transaction between the Government of India and the appellant are on principal-to-principal basis in view of the Article 7 of the said contract and, therefore, the appellant and the Government of India are two separate and distinct juridical persons; the appellant provides "mining services" which are received by the Government of India; and the appellant recovers the cost of service from the Government of India by way of deduction from account / book adjustment at the time of profit sharing. It, therefore, proposes that the appellant should have paid service tax on such "mining services" on the aforesaid consideration received by the appellant. 23. According to the appellant, the commercial nature of the transaction under the Production Sharing Contract dated 22.12.1994 between the Government of India, ONGC, RIL and the appellant is a joint venture and the activities undertaken by the co-venturers within the framework of a "joint venture" cannot be considered as rendition of "servi....
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....icle VII of the Operating Agreement. 13.1.1 Development Costs incurred by the Contractor in the Contract Area shall be aggregated, and the Contractor shall be entitled to recover out of Cost Petroleum the aggregate of such Development Costs at the rate of one hundred percent (100%) per annum, provided, however, that, subject to the remaining provisions of this Article 13.1,the Contractor shall not, for the purposes only of determining the volume of Petroleum to which Contractor shall be entitled under Article 13.1 as Cost Petroleum, claim as Contract Costs Contractor's Development Costs incurred after the Effective Date in connection with Development Operations under the Development Plan for Panna and Mukta Fields (as those Fields are determined in the Development Plan first approved by the Management Committee) which exceed Contractor's Cost Recovery Limit (as hereinafter defined). 13.1.2 For the purposes of this Article 13.1, Contractor's "Cost Recovery Limit" means costs incurred after the Effective Date relating to the construction and/or establishment of such facilities as are necessary to produce, process, store and transport Petroleum from within the Existi....
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....ed on such Contract Area after the date of Commercial Production from the Contract Area at the rate of one hundred percent (100%) per annum of such Development Costs beginning from the date such Development Costs are incurred. 13.7 The Contractor shall be entitled to recover in full during any Financial Year the Production Costs incurred in the Contract Area out of the Cost Petroleum. 13.8 If during any Financial Year the Cost Petroleum is not sufficient to enable the Contractor to recover in full the Contract Costs due for recovery in that Financial Year in accordance with the provisions of Articles 13.1 through 13.7, then, subject to the provisions of Article 13.1. a) recovery shall first be made of the Production Costs; and b) recovery shall next be made of the Exploration Costs; and c) recovery shall then be made of the Development Costs. The unrecovered portions of Contract Costs shall be carried forward to the following Financial Year and the Contractor shall be entitled to recover such Costs in such Financial Year or the subsequent Financial Years as if such costs were due for recovery in that Financial Year, or the succe....
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.... Contract Area with effect from the start of the succeeding Financial Year. 14.2.4 When the Investment Multiple of the Companies at the end of any Financial Year in respect of the Contract Area is equal to or more than three and one-half (3.5), the Government shall be entitled to take and receive fifty percent (50%) and the Contractor shall be entitled to take and receive fifty percent (50%) of the total Profit Petroleum from the Contract Area with effect from the start of the succeeding Financial Year. ARTICLE 27 Title to Petroleum, Data and Assets 27.1 The Government is the sole owner of Petroleum underlying the Contract Area and shall remain the sole owner of Petroleum produced pursuant to the provisions of this Contract except that part of Crude Oil or Gas the title whereof has passed to each constituent of the Contractor or any other person in accordance with the provisions of this Contract. 25. It would also be useful to refer to the Accounting Procedure contained in Appendix C to the Production Sharing Contract. The relevant sections are as follows: SECTION 2 Classification, Definition and Allocation of Costs and Expenditures 2.2 Exp....
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....troleum Operations pursuant to the Contract as classified under the headings referred to in Section 2 shall be allowable for the purposes of the Contract except to the extent provided in Section 3.2 or elsewhere in this Accounting Procedure, and subject to audit as provided for herein. 3.1.1 Surface Rights 3.1.2 Labor and Associated Costs 3.1.3 Transportation Costs 3.1.4 Charges for Services 3.1.5 Communications 3.1.6 Office; Shore Bases and Miscellaneous Facilities 3.1.7 Environmental Studies and Protection 3.1.8 Materials and Equipment 3.1.9 Duties, Fees and Other Charges 3.1.10 Insurance and Losses 26. It would be seen from the aforesaid terms of the Production Sharing Contract that it deals with both "Cost Petroleum" and "Profit Petroleum". 27. In so far as "Cost Petroleum" is concerned, Contract Costs means Exploration Costs, Development Costs, Production Costs, and all other costs related to Petroleum Operations as set out in section 3 of the Accounting Procedure. Development Costs means those costs and expenditures incurred in carrying out Development Operations, as classified and....
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....ring Contract, basis the reports filed for the quarter and year ending 31 March 2014 with the Director General of Hydrocarbon. This illustrative calculation which exemplifies the method of calculation of "Cost Petroleum" and "Profit Petroleum" is reproduced below: Description Amount in USD Revenue from sale of Crude Oil and Natural Gas from Panna Mukta Contract Area from FY 2013-14 1,181,042,280 Total Revenue 1,181,042,280 Costs including Development, Exploratory Drilling, Production facilities, EPOD, Operating Costs, Administrative Costs, Royalty and Cess. Contract Costs from April 1, 2013 to June 30, 2013 123,448,753 Contract Costs from July 1, 2013 to September 30, 2013 123,846,146 Contract Costs from October 1, 2013 to December 31, 2013 86,398,685 Contract Costs from January 1, 2014 to March 31, 2014 109,322,029 Total Costs (Cost Oil) 443,015,613 Profit Oil 744,306,729 Government of India's share of Profit Petroleum 186,076,682 25% Government Profit's share as a percentage of Actual Revenue ....
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....vident from the contentions urged by the Department that there is no dispute on the proposition that the Contract is an example of public private partnership in which the Government and private enterprises are in a joint venture for the purpose of achieving a common objective and sharing the profits arising from such operations. Under the Contract in question, the Central Government was to bring in its rights over the resources, while ONGC was to handle contracts and documentation, RIL was to manage financial and commercial requirements and the Appellant was vested with the responsibility of undertaking the technical operations. The man power deployed by the Appellant was in furtherance of its own interest as also that of the joint venture and not by way of any service to unincorporated joint venture. Also, the cost incurred by the Appellant for this purpose was its capital contribution to the joint venture and it cannot be said that consideration was received by the Appellant for arranging man power. 23. It is natural that in such public private partnerships, the public enterprise generally brings in the resource over which it has exclusive rights, such as the waterfront or the....
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....r) in the course or furtherance of the joint-venture is a service rendered to the joint venture for a consideration. It is not in dispute that in a partnership or a joint venture, whatever a partner does for the furtherance of the business, he does so also for advancing his own interest, as he has a stake in the venture. All the resources contributed by the partners enter into a common pool required for running of the enterprise. There is no contractor-contractee or principal-agent relationship between the co-venturer and the joint-venture, which is a pre-requisite for a service to be liable to tax under the Finance Act. 27. As is evident from the submissions made by the Department, the decision of the Tribunal rendered on 11.06.2020 in the Appellants case has been assailed on the grounds that: (a) The same had relied upon another decision of the Tribunal in the case of Cricket Club of India, which has since been affirmed by the Supreme Court in Calcutta Club. However, while doing so the Supreme Court has held that the principle of mutuality would not apply to a unincorporated club or association. The PMT-JV being an unincorporated association of persons, the principle of mut....
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....onsideration that forms the basis for computation of service tax. However, existence of consideration cannot be presumed in every money flow. Without an identified recipient who compensates the identified provider with appropriate consideration, a service cannot be held to have been provided. In a taxation scheme that specifies the particular targets of taxation, tax liability will arise when a provider conforming to the relevant description in the charging section performs an activity that conforms to the relevant description in the charging section on the request, and for the benefit, of a recipient conforming to the relevant description in the charging section. Service, its taxability and the provision of the taxable service to a recipient, in that order, are necessary pre-requisites to ascertaining the quantum of consideration on which ad valorem tax will be levied. This fundamental will not after in the scheme of the negative list too; a service that is clearly identifiable has to be provided or agreed to be provided before it can be taxed. The factual matrix of the existence of a monetary flow combined with convergence of two entities for such flow cannot be moulded by tax au....
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....t outside the scope of the joint venture that had been entered into between the Appellant and the PMT-JV. The making available of man-power was the Appellant's obligation as a co-venturer to the venture, by way of capital contribution and was not an independent service for a consideration being rendered by the Appellant to the PMT-JV. 33. It can safely be concluded that the Government of India with the Appellant, RIL and ONGC had entered into a joint venture agreement, whereunder each co-venturer had its own set of obligations and the responsibility discharged by each of the co-venturers towards the venture was not by way of any service rendered to the joint venture, but in their own interest in furtherance of the common objective of the joint venture. Service tax liability, therefore, could not have been fastened upon the Appellant." (emphasis supplied) 34. The issues raised in this appeal are covered by the aforesaid earlier decision of the Tribunal rendered on 06.10.2021. 35. The submissions advanced by the learned special counsel appearing for the Department in connection with the filing of the appeal before the Bombay High Court in the matter decided by the Tribuna....