TaxTMI 
TaxTMI 
2023 (7) TMI 1534
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....ms of Article 297 of the Constitution of India, lands, minerals and other things of value underlying the ocean within the territorial waters, or the continental shelf, or the Exclusive Economic Zone of India, vests in the Union and are to be held for the purposes of the Union. The Government of India, Ministry of Petroleum & Natural Gas (GoI-MoP&G) took a policy decision to enter into public-private partnerships with private parties, with a view to optimize production of such natural resources in pursuance of New Exploration Licensing Policy (NELP). 2.2. Accordingly, the GoI-MoP&G had entered into a Production Sharing Contract (PSC) dated 12.04.2000 with the appellants along with other Participating Interest Holder (PIO) namely M/s Niko Resources Limited, for exploring and producing crude oil and natural gas in the KG - D6 Block located in the Exclusive Economic Zone & Continental Shelf of India. The purpose of such Contracts was to obtain capital investment and technical expertise from the private parties and to achieve the objective of optimum production. The contract determines the participating interest of each of the Holders, which is the respective ratio of sharing the par....
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....to be regarded as a consideration for that service and the same would be taxable. Service tax is also applicable to any payment, in lieu of any permission or license granted by the Government or a local authority. This circular also clarified that where natural resources were assigned before 01.04.2016, and yearly installments which are due after 01.04.2016, then the periodic payments for use of such resources e.g. Spectrum User Charges, License Fees for Spectrum or Royalty payable on Coal extraction shall be taxable for payment of service tax. 2.4. As a result of the withdrawal of exemption in respect of services rendered by the Government of India, there was confusion as to whether royalty being paid by the appellants to the GoI-MoP&G under the PSC dated 12.04.2000 would be liable to levy of service tax. Though the appellants have represented to the Government and since there was no reply, amidst this confusion, the appellants have decided to pay service tax along with interest under protest. Accordingly, the appellants have paid the service tax along with interest for total amount of Rs. 38,62,31,491/- on 22.01.2018 for the period April 2016 to June, 2017. However, subsequent....
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....n the present case is arising from the royalty paid by the appellant to the Government of India and the service tax payable thereon having been paid under protest for an amount of Rs. 33,09,51,270/- along with interest of Rs. 5,52,90,221/- during the disputed period April, 2016 to June, 2017. Later on realizing that the said total amount of Rs. 38,62,41,491/- is not payable, the appellants had filed a refund claim which was rejected by the Original authority and the such rejection was also upheld by the First Appellate Authority. Aggrieved by the impugned order, the appellant has preferred this appeal before the Tribunal. 3.1. Learned Advocate appearing on behalf of the appellants drew attention of the Bench to the PSC dated 12.04.2000 in respect of Block KG-D6 entered into between the Government of India and the appellant; Reliance Industries Ltd. and Niko Resources Ltd. The PSC, interalia, encapsulates the rights and obligation of all the parties to the PSC. In particular, attention was drawn to Article 6 of PSC which stipulates for constitution of a Management Committee of which all the participants/parties to the PSC i.e., GoI-MoP&G and the appellants, Riko as the PI holders....
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.... in terms of Section 3 of the Accounting Procedure to Production Sharing Contract given as Appendix C to the PSC dated 12.04.2000. Hence these costs incurred by the appellants for the conduct of the joint operations is nothing but the appellant's share of capital contribution to the Joint venture and consequently, there was no basis to hold that the appellant was rendering services to the Government or any of un-incorporated Joint Venture of the PI Holders. In other words, it was submitted that there was neither any service nor any consideration involved; and accordingly, there would be no liability to service tax. 3.3. The Ld. Counsel also placed reliance on the decisions of Co-ordinate Bench this Tribunal in the case of B.G. Exploration & Production India Ltd., Vs. Commissioner of CGST & CX., Navi Mumbai reported in 2022 (63) GSTL 351, wherein this Tribunal has categorically held that Government of India with the appellant 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....
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.... in the SCN dated 04.06.2019, the department had claimed that the refund is not admissible as prima facie it appeared that the claim was filed beyond the prescribed date. However, this issue has been contended by the appellants before the Original adjudicating authority in their reply claiming that payment of service tax under RCM basis had been made vide Challan No.00085 dated 22.01.2018 and the refund application was filed on 21.01.2019, i.e., within one year from the date of payment of service tax. The Original Authority and the First Appellate Authority have taken note of the payment of service tax under protest by the appellants, and this issue is not under dispute in this case. 6. The expression 'service' has been defined in Section 65B (44) of the Finance Act, 1994 to mean that an activity for a consideration provided by one person to another. It is the appellants' submission that it had not rendered any service to another and that whatever it had done as per the contractual norms under PSC, was for its own benefit and in the course of furtherance of the joint venture, of which it is a co-venturer. It is also contended that there is no involvement of any 'consideration', ....
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.... 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. 9. We find that the entire issue in this case lies in the narrow compass of whether payment of royalty on mining of minerals i.e., petroleum or natural gas to the GoI-MoP&G can be considered as service or not, and whether it attracts payment of service tax. 10. We note that 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 th....
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..... Appropriate clarification may be issued regarding taxability of Cost Petroleum. As per the Production Sharing Contract (PSC)between the Government and the oil exploration & 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". The relationship of the oil exploration and production contractors with the Government is not that of partners but that of licensor/lessor and licensee/lessee in terms of the Petroleum 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 ....
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....e identical. The relevant portion of the decision of Tribunal is reproduced below: "13. Under the 'negative list' regime, in which demarcation between services was superfluous, the obliteration of boundaries permitted the definition of 'service', as '(44) ...any activity carried out by a person for another for consideration, and includes a declared service, but shall not include - ..' in section 65B of Finance Act, 1994, to encompass all 'activities' save those exogenic to, and excepted in, it and aligned it with the essence of service by the expression 'for another', replacing 'to any person', to eliminate the recipient as a necessity. In the new scheme of tax, 'consideration', being the obligated recompense to the provider devolving on the person who opted for hiving off the undertaking of an activity, was no longer mere measure of value but translatable as the span of service rendered. Thus, 'service' was the extent of activity entrusted to a provider for such consideration as rendered it economically gainful to be outsourced. We now subject the expenditure booked by the appellant to test of conformity with this definition. 14. In Cri....
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....pose. It is the nature of the undertaking, in terms of permanence and of purpose, that determines the mode of contribution. 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 e....
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....pital, 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. 24. The Tribunal in Mormugao Port Trust, explained that public private partnerships between the Government/Public Enterprises and Private parties are in the nature of joint venture, where two or more parties come together to carry out a specific economic venture, and share the profits arising from such venture. Such public private partnerships are at times described as collaboration, joint venture, consortium or joint undertaking. Regardless of the name or the legal form in which the same are conducted, they are essentially in the nature of partnership with each co-venturer contributing some of the resources for the furtherance of the joint business activity. The Tribunal held that such public private partnerships meet the test laid down by the Supreme Court in Faqir Chand Gulati vs. Uppal Agencies Pvt ....
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.... 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. 25. The Civil Appeal filed by the Department (Commissioner vs. Mormugao Port Trust) against the aforesaid decision of the Tribunal was dismissed by the Supreme Court both on t....
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....irely misplaced inasmuch as the order dated 11.6.2020 of the Tribunal is not premised on the principle of mutuality. Further, the Department has assumed that merely because the unincorporated association and its members are deemed to be distinct persons, this by itself is enough to establish that a service has been provided by the Appellant to the unincorporated joint venture. This presumption is not tenable as the burden to prove that there was a rendition of service for a consideration is a sine qua non for any liability to service tax being attracted. No evidence has been led by the Department to establish this fact. On the contrary, the Tribunal in the decision rendered on 16. 2018 (10) GSTL 435 20 ST/85028/2021 11.06.2020, arrived at a finding of fact to the effect that the Government of India along 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 a service being rendered to the joint venture, but in their own interest, in the course or furtherance of the common objective of the joint venture.....
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....ntracts on behalf of the unincorporated joint venture as the latter was incapable of entering into contracts in its own name. All activities of the unincorporated joint venture are conducted in the name of its constituent members. Unless such an activity is undertaken by a constituent member as an independent service provider for the joint venture for a consideration, there is neither a rendition of service nor can there be any liability to service tax. This position also evolves from paragraph 4.2 of the Circular dated 24.09.2014, wherein it has been clarified that a member of a joint venture may provide support services to the joint venture for a consideration either in cash or in kind, which alone would be leviable to service tax. 31. Insofar as the decision of the Tribunal in Badve Helmets is concerned, the same is based on entirely different facts. In that case M/s Vemmar SRL Italy, who was a equity holder had transferred know how for a consideration of US$ 1,00,000/-. The said transfer of knowhow was not in the course or furtherance of the venture nor was it by way of a capital contribution. Undisputedly, M/s. Vemmar SRL was acting as a independent service provider t....
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....e. The relevant paragraphs of the order referred above is extracted below: "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 Exploration Costs Exploration Costs are all direct and allocated indirect expenditures incurred in the search for Petroleum in an area which is, or was at the time when such costs were incurred, part of the Contract Area, including expenditures incurred in respect of: xxxxxxxxx 2.2.2 Core hole drilling and water well drilling. 2.2.3 Labor, materials, supplies and services used in drilling Wells with the object of finding Petroleum or in drilling Appraisal Wells provided that if such Wells are completed as producing Wells, the costs of completion thereof shall be classified as Development Costs. xxxxxxxxx 2.2.5 Any Service Costs and General and Administrative Costs directly incurred on exploration activities and identifiable as such and a portion of the remaining Service Costs and General and A....
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....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 defined in section 2 of the Accounting Procedure and allowed to be recovered in terms of section 3 thereof. Exploration Costs means those costs and expenditures incurred in carrying out Exploration Operations, as classified and defined in section 2 of the Accounting Procedure and allowed to be recovered in terms of section 3 thereof. Production Costs means those costs and expenditures incurred in carrying out Production Operations as classified and defined in section 2 of the Accounting Procedure and allowed to be recovered in terms of section 3 thereof. "Cost Petroleum" means the portion of the total volume of Petroleum produced and saved from the Contract Area which the Contractor is entitled to take from the Contract Area in a particular period for the recovery of Contract Costs as provided in Article 13. 28. Article 7.1(a) provides that the Contrac....
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....02.2018. The relevant extract of the said Circular is reproduced below: Sl. No. Issue Clarification 6. Appropriate clarification may be issued regarding taxability of Cost Petroleum As per the Production Sharing Contract (PSC) between the Government and the oil exploration & 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". The relationship of the oil exploration and production contractors with the Government is not that of partners but that of licensor/lessor and licensee/lessee in terms of the Petroleum 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....
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....ppellants as 'operator' under the Joint Operating Agreement under the PSC, the issue had been decided in favour of the appellants vide Final Order No. A/85552/2023 dated 13.04.2023. The relevant paragraphs of the above decision is extracted below: "11. We also agree with the observations of the findings of this Tribunal in the other decision of B.G., reported in 2021 (49) GSTL 143 wherein, it has been held that the joint operations undertaken under the PSC does not result in rendition of any service as there is no beneficiary entity outside the PSC to which the joint operation are subordinated. It has been held that the cost incurred towards the employees which has been deployed towards the joint operation is a capital contribution to the venture and not a consideration to the rendition of any service. xx xx xx xx xx 12. In view of the above, we are of the considered opinion that there is neither any service rendered by the Appellant nor is there any consideration involved in the appellant's deploying its man power and assets for furtherance of the operation of the joint venture. The ratio laid down in the aforesaid decision of the Tribunal in the case of....