TaxTMI 
TaxTMI 
2024 (1) TMI 456
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....nce that the assessee has not been paying service tax on the services of 'Survey and exploration rendered by them as an "Operator" and on production cost recovered from the Petroleum produced, investigation was initiated against the assessee. 1.2.1. It was noted that the assessee has participating interest in four blocks. A block is a pre-defined area for exploration and production of petroleum as identified by the Government of India. Out of four blocks, in two blocks (CY-OS 90/1 (PY-3) and CY03/2) the assessee has been appointed as the operator. The Production Sharing Contract (PSC) is entered into between Government of India and the assessee for a block. Government of India is a stakeholder in the PSC. As stipulated in the Production Sharing Contract and Joint Operation Agreement, the Government of India is the owner of the block and owner of the petroleum underlying therein. The block is leased to the contractor (assessee) for Exploration, Development and Production for a specified period only. As a consideration, the contractor is entitled to recover Exploration Cost and Production cost as defined in the PSC. Government of India, being the owner of the fields/blocks, exerci....
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....mittee in Format 1 to 5 as prescribed in the PSC. 1.2.5. These services of Survey and Exploration and Mining are continuous service and the assessee is not raising any bills/ invoices. The aspect of service being rendered is known and quantified at the time of filing of Format-I to Format-5 to the Government of India. The services have to be considered as rendered as and when the assessee has submitted the audited details in Format-1 to Format-5 to the Government of India. 1.2.6. The assessee received various charges, viz., Production cost, Exploration and Development cost, etc., for which service tax is payable under 'Mining services' and 'Survey and Exploration services' up to 30.06.2012 and taxable as 'service' from 01.07.2012 onwards. 1.2.7. The assessee as an operator provided Survey & Exploration Services and Mining Services for two blocks. The services of Survey Exploration and Development rendered by the assessee as an operator are classifiable under Survey and Exploration of Minerals as defined in Section 65 (104a) and Section 65 (105) (zzv) of the Finance Act, 1994. The services of Production rendered by the assessee as an operator are cla....
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....ng out hydrocarbon Exploration & production activity in the country since inception. Post liberalisation in the early 1990s, participation of Indian and foreign companies in exploration and development activities was allowed to supplement the efforts of national oil companies to narrow the gap between supply and demand. New Exploration Licensing Policy (NELP) was formulated by the Government of India for a new contractual and fiscal model for award of contracts. The main objective of NELP was to attract significant risk capital from Indian and foreign companies and best management practices to explore oil and gas resources in the country to meet rising demands of oil and gas. 2.3 Oil and Gas blocks in India can be classified into 4 categories based on allocation. These are nomination blocks (prior to Pre-NELP), Pre NELP blocks (discovered), Pre-NELP blocks (exploration) and NELP blocks. Nomination Basis: Petroleum Exploration License (PEL) were granted to ONGC and OIL on nomination basis prior to implementation of NELP. Pre-NELP Discovered Field: Petroleum Mining Lease (PML) were granted under the small/ medium size discovered field PSC during 1991 to 1993 where operators ....
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....ies, including exploratory drilling. If the study of the seismic survey indicates that the structure will yield hydrocarbons, the company starts drilling an exploratory well in the chosen site. The results of the exploration activity could be a discovery. The reserve estimates at this stage may be proved or unproved. The estimates are further confirmed and the commercial quantities are determined by the appraisal activity. After an exploratory well (or more than one exploratory well) has been drilled into a reservoir and has resulted in the discovery of oil and/or gas reserves, additional wells, known as appraisal wells, may be drilled to gain information about the size and characteristics of the reservoir, to help in assessing its commercial potential and to better estimate the recoverable reserves. 2.9 Development: Development is the establishment of access to the mineral reserves and other preparations for commercial production. The development phase involves: • Gaining access to and preparing well locations for drilling, clearing ground, draining, building roads, and relocating public roads, gas lines and power lines to develop reserves • Constructi....
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....6 PSC defines the modality and formula to calculate profit. It has to be shared with Government of India based on the slabs as provided in the PSC. Hence, it is relevant to see few definitions of the terms used in PSC. Cost Petroleum: means portion of total volume of petroleum produced and saved from contract area which the contractor is entitled to take in a particular period for the recovery of contract costs. Profit Petroleum: means all petroleum produced and saved from the contract area in a particular period as reduced by the cost petroleum. Investment Multiple: means in relation to the contract area the ratio of accumulated net cash income from the contract area to accumulated investment in the contract area earned by the companies. 2.17 To put it in simple terms, profit is arrived after reducing costs from revenue that is shared with GOI as per the slabs provided in the PSC. The term 'cost recovery' is used in PSC for the costs that is incurred in the block at various stages. No cost is recovered from GOI, i.e. there is no consideration or reimbursement from GOI. 2.18 Further, it also needs mention that only profits are shared with Government. In cases o....
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.... e) That even if assumed that there is rendition of service, mere reimbursements/cost recovery do not constitute receipt of consideration received by the assessee; f) That the allegation of cost petroleum being consideration to be paid by GOI to the assessee is incorrect and based on complete mis-reading of the PSC. g) That the classification as mining service or survey and exploration service prior to July 1, 2012 is erroneous, as Section 65(105) (zzzy) of the Act only covers those activities in relation to mining services and not the mining services per se; h) That the classification as service under Section 65B (44) of the Act post July 1, 2012 is incorrect as mere transfer of title in goods (property in crude oil gets transferred from assessee to GOI in this case) is excluded from the definition of service under Section 65B (44); That the SCN contains the following factual errors: a) There is a double count of production expense under the category 'mining service as production cost and under the category 'survey and exploration of minerals as exploration cost. b) Even if it is assumed that, extended period is invokable,....
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....ided to government of India. 4.5.5. In view of the above, I find that the activities of surfacing of mineral oil undertaken by the assessee as an operator on behalf of the government of India falls within the ambit of survey and exploration of minerals as services provided to a customer, government of India in this case. 4.6.1. At Para 1 of PSC it is clearly mentioned that Petroleum in its natural state is vested in the Union of India and that Government of India is the absolute owner of the Petroleum...." 2.24 The Ld. Consultant argued that the above observations of the adjudicating authority are rendered by misinterpreting the provisions of the PSC, and thus has erroneously assumed that the relationship between the GOI and the operator (assessee) is that of an owner - contractor. Further, as per Article 7 of PSC, the contractor shall have the exclusive right to carry out petroleum operations in the contracted area and to recover costs and expenses as provided in the contract. It is also relevant to mention that under Article 1 "Petroleum Operations" includes sale or disposition of petroleum to the delivery point. 2.25 Additionally, Article 28 of the PSC pr....
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....s and benefits of exploration and pays the oil and gas company only for its services...". 2.28 It is argued by the Ld. Consultant that from the above agenda of the meeting, it is clear that there is no service provider-service recipient relationship between the assessee and the Government. The contractor i.e. the assessee in the present case, is the owner of the crude oil as he has acquired the rights to explore, exploit and sell petroleum in lieu of royalty payment and in lieu of profit petroleum. 2.29 The Ld. Consultant relied on the order of CESTAT Mumbai bench in the case of M/s. B.G Exploration and Production India Ltd vs Commissioner of CGST & Cx 2022 (1) TMI 207CESTAT MUMBAI] dated 4 January 2022 ("BG- 3"), wherein it was held that there is no service rendered by the operator to the Government of India under the Production sharing Contract and the 'Cost Petroleum and Profit Petroleum' are not consideration for services and therefore not leviable to Service Tax. 2.30 The decision of CESTAT Mumbai in the case the of M/S Reliance Industries Limited Versus Commissioner Of CGST & Central Excise, Belapur [2023 (4) TMI 921 CESTAT MUMBAI] (hereinafter referred to as....
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....riate VAT and does not result in rendition of any service. However, the adjudicating authority has not considered or examined any of these submissions. Even for the period post July 01, 2012, the activity of the assessee does not fall within the ambit of definition of service under Section 65 (44) of the Act. Additionally, in this regard, it is submitted that as per definition of "service", any activity by one person to another for a consideration constitutes service and it excludes negative list of services. The activity of the assessee results in manufacture and production of oil and gas, which is covered in negative list of services. 2.35 Without prejudice to the above submission, it is submitted that the adjudicating authority in para 4.7.1 to 4.7.10 has erred in holding that the cash calls received by the assesse are in the nature of advance payments towards taxable services to be received from the joint venture. 2.36 The Ld. Consultant adverted to Para P and Q of the facts explained in appeal that at each stage i.e. E&P lifecycle, the budget estimates are presented to Operating Committee (which comprises of members from participating companies) and once approved by Oper....
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....tment which would show that the assessee has indulged in evasion of service tax. The entire figures have been obtained from the records maintained by the assessee, and there is no suppression of facts with intent to evade payment of tax. The demand raised invoking the extended period cannot sustain and prayed that it may be set aside. It is prayed that the appeal may be allowed. 3. The Ld. AR Shri. Rudra Pratap Singh appeared and argued for the appellant. The Ld. AR adverted to the definition of 'Survey and Exploration Service' under Section 65 (104a) which reads as under: "Survey and exploration of mineral" means geological, geophysical or other prospecting surface or subsurface surveying or map making service, in relation to location or exploration of deposits of mineral, oil or gas." 3.1. It is submitted by learned AR, the activity of survey or exploration of deposits of gases and oil done by the appellant would fall within the definition. The taxable service is given in Section 65 (105) (zzv) reads as "to any person, by any person, in relation to survey and exploration of mineral". The Board Circular No.80/10 /2004-Service Tax dated 17.09.2004 has clarified that ....
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....nt' whether cash calls are to be included in the taxable value. 5.1. The very same issue was considered by the Tribunal in the case of B.G.Exploration and Production India Ltd. Vs Commissioner of CST (Audit- I) 2020 (10) TMI 579 [CESTAT, Mumbai dt.11.06.2020 (BG-I). The Tribunal thoroughly examined the nature of the 'Product Sharing Contract' and whether the distribution of profit, petroleum and cost petroleum, as well as cash calls are consideration for service provided by assesse to Government. The Tribunal held that the manner in which the contract provides for distribution of 'profit petroleum' and 'cost petroleum' is a business model for ensconcing within itself the alienation of risk by the Government of India, which necessarily mandates a working arrangement for the disaggregation of cost petroleum as compensation for the mutually exclusive risks undertaken by the contractor. The Tribunal held that there is no service provider and service recipient relationship in the joint venture and the amounts in the nature of profit petroleum/cost petroleum/ cash calls are not consideration for services. The relevant paras of the decision of Tribunal read as under: "11....
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....n. In the impugned 'production sharing contract', Government of India brings in its rights over the resources, M/s Oil & Natural Gas Corporation handles contracts and documentation, M/s Reliance Industries Ltd manages financial and commercial requirements and the appellant vested with responsibility for technical operations. The deployment of personnel is in pursuance of that obligation. No business venture can function without capital and the by-passing of transubstantiation of accumulated capital, in the form of cash and bank balances, into these rights and competencies does not derogate from that. Hence, the activity undertaken by the appellant with its cost equivalence recorded 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 are obligated for the establishment and operation of a business venture, it is not 'consideration' for rendering of any taxable service. ....
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....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 right to exploit the minerals, while the private party brings in the required capital, either in monetary terms or in kind or by way of equity. The equity brought in by the co-venturer, in this case by making available man power, cannot be considered as a service rendered to the unincorporated joint venture. It is this capital contribution along with the capital contribution made by others which forms the hotchpotch of the unincorporated joint venture. ... .... ... 33. It can safely be concluded that the Government of India with the Appellant, RIL and ONGC had entered into a joint venture agreement, where under each co-venturer had its own set of obligations and the responsibility discharged by each of the co-ventures' towards the venture was not by way of any service rendered to the joint venture, but in their own interest in....
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.... then the excess share is the profit, known as "Profit Petroleum" which is shared amongst the parties to the Contract i.e. the Government of India and the 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 o....
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....tions 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 "service", liable to service tax. The appellant also contends that the components of "Cost Petroleum" and "Profit Petroleum" are inherent and embedded part of the Production Sharing Cont....
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....m and Natural Gas Rules, 1959. Having acquired the right to explore, exploit and sell petroleum in lieu of royalty and a share in profit petroleum, contractors carry out the exploration and production of petroleum for themselves and not as a service to the Government. Para 8.1 of the Model Production Sharing Contract (MPSC) states that subject to the provisions of the PSC, the Contractor shall have exclusive right to carry out Petroleum Operations to recover costs and expenses as provided in this Contract. The oil exploration and production contractors conduct all petroleum operations at their sole risk, cost and expense. Hence, cost petroleum is not a consideration for service to GOI and thus not taxable per se. However, cost petroleum may be an indication of the value of mining or exploration services provided by operating member to the joint venture, in a situation where the operating member is found to be supplying service to the oil exploration and production joint venture. (emphasis supplied) 38. A perusal of the aforesaid Circular reveals that Contractors carry out the exploration and production of petroleum for themselves and not as a service to the Government o....
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....flowing therefrom. Under the PSC, the Government of India brings on the table the block which could potentially hold crude and/or natural gas, while the technical and financial contribution is made by the PI Holders. There is also a management committee which is constituted comprising of members from the Government of India as also the PI Holders which has to interalia approve the annual work programs as also the budgets for undertaking the same. Further, the profits arising from the venture are to be shared between the Government and the PI Holder in accordance with the pre-defined percentage computed with reference to an investment-multiple on the cost incurred for undertaking the joint operation. We note that this Tribunal has in the case of B.G. Exploration and Production India Ltd., reported in 2022 (63) GSTL 351 (T) has considered a similar arrangement under another PSC between the Government of India and B.G. Exploration and Production India Ltd., ONGC and the appellant and after taking note of the policy underlying the execution of the PSCs as also the terms and conditions of the same, concluded that there was a joint venture between the GOI and the PI holders. .......
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....hat this issue has arisen initially on the understanding of the Revenue on the basis of Circular No.179/5/2014-ST dated 24.09.2014, issued clarifying about the levy of service tax, inter alia, on taxable services received by a Joint Venture from its members or third party. It was stated therein that, - "In the context of a JV project, cash calls are capital contributions made by the members of JV to the JV. If cash calls are merely a transaction in money, they are excluded from the definition of service provided in section 65B (44) of the Finance Act, 1994. Whether a 'cash call' is 'merely... a transaction in money' [in terms of section 65B(44) of the Finance Act, 1994] and hence not in the nature of consideration for taxable service, would depend on the terms of the Joint Venture Agreement, which may vary from case to case. Payments made out of cash calls pooled by a JV, towards taxable services received from a member or a third party is in the nature of consideration and hence attracts service tax. ... .... 12. We also find that in the appellant's own case in M/s Reliance Industries Limited Vs. Commissioner of CGST & Central Excise, Belapur in re....