AI Drafter 
TaxTMI 
TaxTMI 
2025 (4) TMI 245
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....n received by the appellant for equipments/tools lost in LIH while providing drilling service to the customers is required to be included in the value of taxable service for the purpose of payment of service tax and whether the extended period of limitation could have been invoked in the facts and circumstances of the case as portion of the demand confirmed falls in the extended period. 3. The appellant is engaged in providing various oil field services, including Directional Drilling, Measuring while Drilling and Logging to various companies by using its own equipments. Since the activities are carried out beneath the surface of the earth, the equipments used may get stuck or lost in the oil wells due to uncontrolled situation and it may not be possible for the appellant to retrieve them. Such equipments, which get stuck or lost and are not retrievable, are termed as LIH items. The appellant claims that it pays service tax on the value of service for the use of equipments/tools and personnel, but not on the LIH items as no service is provided by the appellant in such a case. 4. The appellant has elaborately described the sequence of events that typically happen in Drilling S....
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.... charges are charged to the customers by the appellant, on which applicable service tax is paid. g. There is a possibility that the equipments/tools used for drilling services may get stuck or lost due to uncontrollable or unforeseen downhole environmental situations in the Oil and Gas Well and may not be retrievable. Such equipments/tools which are stuck and cannot be retrieved or lost are termed as Lost-in-Hole ("LIH") equipments/tools. Similarly equipments/tools used for drilling services may get stuck but can be retrieved. However, the damage to the equipments/tools is beyond repair and they cannot be re-used. Such equipments/tools are called Damage Beyond Repair ('DBR') equipments/tools. h. When such equipments/tools are lost in hole or damaged beyond repair, drilling services cannot be performed until new equipments/tools are made available by the appellant. The appellant discharges service tax on the rental value for the use of such new/replaced equipments/tools arranged and used for the contract. i. Further, when the accident of the equipments/tools occurs, appellant has to immediately inform the customer for &n....
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.... (iv) The equipments/tools used by the appellant was its property and there was no transfer of title in respect of LIH equipments/tools which had been consumed in the course of provision of service. 7. Another show cause notice dated 26.04.2016 was issued to the appellant requiring the appellant to show cause as to why Swachh Bharat Cess on the taxable services for the period commencing from 15.11.2015 to 31.03.2016 may not be recovered from the appellant. 8. The appellant filed detailed replies to the show cause notices dated 19.04.2016 and 26.04.2016 and denied the allegations made therein. 9. The Additional Director General, by order dated 20.06.2017, did not accept the contentions advanced by the appellant and confirmed the demand with interest and penalty. The Additional Director General observed that since the appellant claimed that LIH items have to be treated as "consumed", then the value would have to be included in the value of taxable services. The Additional Director General also noticed that it is only during the drilling process that the items are lost and, therefore, rule 6(2) of the Service Tax (Determination of Value) Rules, 2006 [the 2006 Rules] ....
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....ion, namely "the damages are not related to provisions of service" stipulated in the said para 8.6.2, is not satisfied in the instant case." (emphasis supplied) 10. Regarding the invocation of the extended period of limitation, the Additional Director General observed: "39.3. Thus, based on the above provision the relevant date for the purpose of demanding Service Tax short paid, not paid etc. involving longer period under the proviso clause is 5 years from the date a periodical return for the period involved in the show cause notice is filed. I find that in the instant case the show cause notice demand service tax for the period starting with Invoice raised by the Noticee for LIH item in the month of December 2010 (details as aforesaid). I observe that the periodical return for the period October 2010 to March 2011 was the earliest period involved for demanding service tax short paid by the Noticee and the ST-3 return for the said period was filed by M/s HOSI on 22.04.2011, while the show cause notice was issued and served on M/s HOSI on 19.04.2016, which is well within 5 years of the relevant date as provided under the provisions of Section 73 of the Finance Act, 1....
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....ms in themselves are not rendering of any Taxable Service. When there is no separate service, the consideration received during the rendering of Service (Drilling Services) should naturally have been included by the Noticee without waiting for the department to detect the case. Even if the Noticee had reversed the credit in terms of Rule 6 of CCR, 2004 in this regard, unless they communicate the same in clear terms, there was no possibility for the department to know the actual nature and circumstance under which the Noticee had reversed credit in relation to consideration received by them from their clients, in respect of the "Lost in Hole Items". Therefore, I reject their contention in this regard. ***** 42.1. The Noticee have further contended that Larger Period Limitation cannot be applied to the present case as their records for the period 2010 to 2014 were audited by CERA. In this regard I find that in many cases, the Hon'ble CESTAT and Courts have held that the visit of Audit parties cannot be cited as a ground for resisting the applicability of Larger period of Limitation. There is no documentary evidence that these documents were placed before the Cen....
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....relevant considerations; and (vi) The extended period of limitation could not have been invoked in the facts and circumstances of the case. 13. Shri Rohit Issar and Shri S.K. Meena, learned authorized representatives appearing for the department, however, supported the impugned order and submitted that it does not call for any interference in this appeal. Learned authorized representatives submitted that: (i) When the Directorate General of Hydrocarbons issued Certificate mentioning that the LIH items shall be treated as "consumed", it is not open to the appellant to contend that the consideration received in terms of the contract would not be includable in the taxable value of the services; and (ii) The extended period of limitation was correctly invoked in the facts and circumstances of the case. 14. The submissions advanced by the learned senior counsel for the appellant and the learned authorized representatives appearing for the department have been considered. 15. As noticed above, the issue that arises for consideration in this appeal is as to whether the compensation received by the appellant for the LIH equipments/tools while....
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....ctor Group while lost or damaged in the hole, or as a result of uncontrolled well conditions. Provided such loss or damage is not due to normal wear and tear, in which cases, Company shall (i) exert its best efforts to recover such property of material, equipment for Contractor at Company's sole risk and expense, or (ii) reimburse Contractor LIH replacement cost less depreciation ..............." 19. The contention of the learned senior counsel for the appellant is that since the customers have to compensate the appellant for LIH equipments/tools which are not consumed as they are lost/damaged because of conditions beyond the control of the appellant, the value of the compensation should not form part of the taxable value for the purpose of levy of service tax. 20. The appellant had imported equipments/tools claiming waiver of customs duty in terms of the exemption notification dated 17.03.2012. In order to avail this exemption, the appellant had to produce an Essentiality Certificate issued by the Directorate General of Hydrocarbons to the customs authorities certifying that the equipments/tools imported were required for petroleum operations and had been imported for execut....
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....d in service tax law. The Additional Director General, therefore, committed an error in placing reliance upon the word "consumed" for the purpose of including the value of compensation to the taxable value service. 24. The contention advanced by the learned senior counsel appearing for the appellant is that the compensation received by the appellant from the customers for LIH equipments/tools is on account of an indemnity contract and not on account of any service and, therefore, this amount cannot be included in the value of taxable service. In this connection, learned senior counsel placed reliance on the decision of the Tribunal in Balaji Enterprises. 25. The contention advanced by the learned senior counsel for the appellant deserves to be accepted. Once the equipments/tools are declared as LIH equipments/tools, the appellant would not receive any charges for the same from the customer since such equipments/tools would not be assisting in the drilling. In fact, these equipments/tools are replaced and then the replaced equipments/tools are used for drilling purposes. The appellant did not receive any amount towards the services as what the appellant received was comp....
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....hence liable to service tax. The Supreme Court in Bhayana Builders Pvt. Ltd. held that for valuation of taxable service, a provision has been made in the section 67 of the Act that provides that it would be the gross amount charged by the service provider for such service provided or to be provided by him‟. Thus, the amount should be charged for such service provided. Therefore, it is not any amount charged which can become a basis value on which service tax becomes payable. The amount charged has to be necessarily a consideration for the service provided which is taxable under the Act. The Supreme Court further held that by using the word for such service provided, the Act has provided for a nexus between the amount charged and the service provided and, therefore, any amount charged which has no nexus with taxable service is not a consideration for the service provided nor does it become a part of the value taxable under section 67 of the Act." (emphasis supplied) 27. In view of the aforesaid decision of the Tribunal in Balaji Enterprises, the compensation amount cannot be included in the assessable value for the purpose of payment of service tax. 28. It would....
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....re of consequence of provisions of insurance service. • In case a landlord who has rented out his office building to a tenant receives compensation from the tenant for the damage caused to the building by an unforeseen action then such compensation would not form part of the value of taxable service related to tenant of his building as an unforeseen damage caused by the tenant is not relatable to provision of service of renting of the office building." (emphasis supplied) 31. The aforesaid provisions of the CBEC Education Guide explain the scope of the exclusion entry relating to accidental damages due to unforeseen actions not relatable to the provisions of service in the context of the 2006 Rules. It has been clarified that accidental damages are not to be included in the value of service provided the damages are due to unforeseen actions and are not related to the provisions of service. The example of an insurance company that has been referred to in the CBEC Education Guide is in connection with compensation paid to a client due to unforeseen action like an accident. It clarifies that the compensation paid by the insurance company to the client in such circum....
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.... months 25.04.2016 25.10.2018 Normal period Demand for normal period 24,005,755 Total 476,751,932 59,412,270.94 34. In connection with the invocation of the extended period of limitation, the show cause notice mentions that under the self-assessment regime, it was the responsibility of the appellant to determine the service tax liability correctly and submit the ST-3 Returns properly, but the appellant deliberately suppressed the fact that it was receiving consideration for the LIH items and this amount was not included in the taxable value. The show cause notice also mentions that non-payment of service tax on the compensation received for LIH items would have not come to the notice of the department, had investigation not been carried out by the Directorate General of Central Excise Intelligence .[ DGCEI] 35. The appellant filed a detailed reply to the show cause notice and in the context of the invocation of the extended period of limitation, pointed out th....
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....ice tax has not been levied or paid or has been short-levied or short-paid or erroneously refunded, the Central Excise Officer may, within eighteen months from the relevant date, serve notice on the person chargeable with the service tax which has not been levied or paid or which has been short-levied or short-paid or the person to whom such tax refund has erroneously been made, requiring him to show cause why he should not pay the amount specified in the notice: PROVIDED that where any service tax has not been levied or paid or has been short-levied or short-paid or erroneously refunded by reason of- (a) fraud; or (b) collusion; or (c) wilful mis-statement; or (d) suppression of facts; or (e) contravention of any of the provisions of this Chapter or of the rules made thereunder with intent to evade payment of service tax, by the person chargeable with the service tax or his agent, the provisions of this sub-section shall have effect, as if, for the words "eighteen months", the words "five years" had been substituted." 39. The proviso to section 73(1) of the Finance Act stipulates that where any service tax has....
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....od of six months by invoking the proviso to section 11A of the Central Excise Act. The proviso to section 11A of the Excise Act carved out an exception to the provisions that permitted the department to reopen proceedings if the levy was short within six months of the relevant date and permitted the Authority to exercise this power within five years from the relevant date under the circumstances mentioned in the proviso, one of which was suppression of facts. It is in this context that the Supreme Court observed that since "suppression of facts‟ has been used in the company of strong words such as fraud, collusion, or wilful default, suppression of facts must be deliberate and with an intent to escape payment of duty. The observations are as follows; "4. Section 11A empowers the Department to reopen proceedings if the levy has been short-levied or not levied within six months from the relevant date. But the proviso carves out an exception and permits the authority to exercise this power within five years from the relevant date in the circumstances mentioned in the proviso, one of it being suppression of facts. The meaning of the word both in law and even otherw....
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....n view of our findings made herein above that there was no deliberate intention on the part of the appellant not to disclose the correct information or to evade payment of duty, it was not open to the Central Excise Officer to proceed to recover duties in the manner indicated in proviso to Section 11A of the Act." (emphasis supplied) 44. In Easland Combines, Coimbatore vs. Collector of Central Excise, Coimbatore-(2003) 3 SCC 410 the Supreme Court observed that for invoking the extended period of limitation, duty should not have been paid because of fraud, collusion, wilful statement, suppression of fact or contravention of any provision. These ingredients postulate a positive act and, therefore, mere failure to pay duty which is not due to fraud, collusion or wilful misstatement or suppression of facts is not sufficient to attract the extended period of limitation. 45. The aforesaid decisions of the Supreme Court were relied upon by the Supreme Court in Uniworth Textiles Ltd. vs. Commissioner of Central Excise, Raipur-2013 (288) E.L.T. 161 (S.C.) and the relevant portion of the judgment is reproduced below: "12. We have heard both sides, Mr. R.P. Batt, learn....
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....mined the issue relating to the extended period of limitation under the proviso to section 73 (1) of the Finance Act, 1994 [the Finance Act] and held as follows: "27. Therefore, it is evident that failure to pay tax is not a justification for imposition of penalty. Also, the word "suppression" in the proviso to Section 11A(1) of the Excise Act has to be read in the context of other words in the proviso, i.e. "fraud, collusion, wilful misstatement". As explained in Uniworth (supra), "misstatement or suppression of facts" does not mean any omission. It must be deliberate. In other words, there must be deliberate suppression of information for the purpose of evading of payment of duty. It connotes a positive act of the assessee to avoid excise duty. ***** Thus, invocation of the extended limitation period under the proviso to Section 73(1) does not refer to a scenario where there is a mere omission or mere failure to pay duty or take out a license without the presence of such intention." ***** The Revenue has not been able to prove an intention on the part of the Appellant to avoid tax by suppression of mention facts. In fact it is clear th....
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.... the conduct of an assessee, the extended period of limitation under the proviso to Section 73(1) of the Act is not applicable. The facts of the present case indicate that MTNL had made the receipt of compensation public by reflecting it in its final accounts as income. As stated above, merely because MTNL had not declared the receipt of compensation as payment for taxable service does not establish that it had willfully suppressed any material fact. MTNL‟s contention that the receipt is not taxable under the Act is a substantial one. No intent to evade tax can be inferred by non-disclosure of the receipt in the service tax return." (emphasis supplied) 49. It is, therefore, clear from the aforesaid discussion that the extended period of limitation could have been invoked only if there was suppression of facts with intent to evade payment of service tax. 50. In the present case, as noticed above, the Additional Director General observed that since there was suppression of facts, the larger period of limitation could be invoked. 51. The contention of the appellant is also that it bona fide believed that compensation for LIH equipments/tools was not to be added to th....
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....have already noticed above the assessee had disclosed to the department its pricing policy by giving separate letters. It is also not disputed that the returns which were required to be filed were indeed filed. In these returns, as we noticed earlier there was no separate column for disclosing details of the deemed export clearances. Separate disclosures were required to be made only for exports under bond and not for deemed exports, which are a class of domestic clearances, entitled to certain benefits available otherwise on exports. There was therefore nothing wrong with the assessee's action of including the value of deemed exports within the value of domestic clearances." (emphasis supplied) 53. The show cause notice also alleged that in an era of self-assessment an assessee in required to correctly discharge the duty liability, but the appellant still did not include the compensation amount. 54. The approach of the Commissioner cannot be countenanced. It is the duty of the officers scrutinizing the returns to examine the information disclosed by an assessee and the department cannot be permitted to take a plea that it is the duty of the assessee to disclose correct in....
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....eturns. The instructions issued by the Central Board of Excise & Customs on December 24, 2008 deal with "duties, functions and responsibilities of Range Officers and Sector Officers". It has a table enumerating the duties, functions and responsibilities and the relevant portion of the table is reproduced below: ***** 26. The Central Excise Manual published by CBEC on May 17, 2005, which is available on the website of CBEC, devotes Part VI to SCRUTINY OF ASSESSMENT. ***** 27. It is thus evident that not only do the 2002 Rules mandate officers to scrutinise the Returns to verify the correctness of self assessment and empower the officers to call for documents and records for the purpose, Instructions issued by the department also specifically require officers at various levels to do so." (emphasis supplied) 56. The view that has been taken by the Commissioner was also not accepted by the Tribunal in G.D. Goenka and the observations are as follows: "16. Another ground for invoking extended period of limitation given in the impugned order is that the appellant was operating under self-assessment and ....
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....n Sunshine Steel Industries vs. Commissioner of CGST, Customs & Central Excise, Jodhpur -(2023) 8 Centax 209 (Tri.-Del.) observed that the department cannot be permitted to invoke the extended period of limitation by merely stating that it is a case of self-assessment. The relevant observations are: "20. The Department cannot be permitted to invoke the period of limitation by merely stating that it is a case of self-assessment as even in a case of self-assessment, the Department can always call upon an assessee and seek information. It is under sub-rule (1) of rule 6 of the Central Excise Rules, 2002 that the assessee is expected to self-assess the duty and sub-rule (3) of rule 12 of the Rules provides that the proper officer may, on the basis of information contained in the return filed by the assessee under sub-rule (1), and after such further enquiry as he may consider necessary, scrutinize the correctness of the duty assessed by the assessee. Sub-rule (4) of rule 12 also provides that every assessee shall make available to the proper officer all the documents and records for verification as and when required by such officer. Hence, it was the duty of the proper o....
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....023 , wherein it was observed: "11. Both the SCNs further state that had the audit not conducted scrutiny of the records, the short paying the service tax would not have come to notice. It is a matter of fact that all the details were available in the records of the appellant. The appellant was required to furnish returns under section 70 with the Superintendent of Central Excise which it did. It is for the Superintendent to scrutinize the returns and ascertain if the service tax had been paid correctly or not. If the assessee either does not make the returns under section 70 or having made a return, fails to assess the tax in accordance with the provisions of Chapter or Rules made thereunder, the Superintendent of Central Excise can make the best judgment assessment under section 72. For this purpose, he may require the assessee to produce such accounts, documents or other evidence, as he may deem necessary. Such being the legal position, if some tax has escaped assessment which came to light later during audit, all it shows is that the Superintendent of Central Excise with whom the returns were filed had either not scrutinized the returns or having scru....