TaxTMI 
TaxTMI 
2025 (4) TMI 245
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..../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 Services Contract in the following manner: ....
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....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 verification of the LIH equipments/tools. After confirmation of such LIH equipments/too....
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.... 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] would not be applicable. The relevant portions of the order are reproduced below: "31.3 The above mentioned Valuation Rule specifically excludes, in so....
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....nvocation 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, 1994 as discussed above. Hence, I find that the demand is well within the limitation period as prescribed under the provisions. Hence, I reject the contentions of the Noticee in this regard." (....
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....ithout 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 Central Excise Revenue Audit (CERA) party and there is no further evidence that these documents were examined by CERA from the view of liability to Service Tax. Under the circumstances, I hold that mere visit by CERA to the Unit or mere exami....
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....itted 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 providing drilling service has to be included in the value of taxable service. 16. To appreciate this issue, it would be pertinent to refer to the two contracts between the appellant and the two customers dealing with compensation to be provided to the appellant for such LIH equipments/tools on account of unforese....
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.... 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 execution of a specified contract. As per the terms and conditions of the Agreement, the equipments/tools have to be re-exported for which a Certificate has again to be obtained by the customers from the Directorate General of Hydrocarbons. The appellant has also to inform the customers immediately about the LIH equipments/tools so that it can be verified by the customers....
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....quipments/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 compensation, which is an amount in terms of the contract and not towards any service. Thus, the compensation amount is not towards any "consideration" for a taxable service. 26. This is what was observed by the Tribunal in Balaji Enterprises and the relevant portions of the decision of the Tribunal are reproduced below: "34. The submission made by learned Counsel for the....
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.... 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 also be pertinent to refer to rule 6 of the 2006 Rules. Subclause (1) of rule 6 deals with the value of taxable services which have to be included, and sub-rule (2) deals with the value of taxable services which would not be included. Rule 6(2)(vi) of the 2006 Rules is as follows: "6(2)(vi) accidental damages due to unforeseen actions not relatable to the provision of service; and" 29. Thus, the amoun....
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....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 circumstances is not to be included in the value of taxable service, as it is not relatable to the provision of service but is only in the nature of consequence of provisions of insurance service. 32. Likewise, compensation that is paid by the customers to the appellant for the LIH items will not be included in the value of taxable service as it is not relatable to the provision of service but is only in the nature of consequence of provisions of drilling service. 33. Another issue that woul....
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....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 that the compensation received for the LIH items was not to be included in the value of taxable services; sufficient disclosure was made by the appellant in the Returns filed before the department and in any case there was no wilful mis-statement of facts with intent to evade payment of service tax. The appellant also pointed out that the unit was audited by the Central Excise Revenue Audit [CERA] for the period April 2010 to March 2014 and, therefore, also the extended period could not have been invoked as facts were in the knowledge of the department. 36. The Additional Director General did not accept the contention of the appellant that it had bona fide believed that the compensation received for the LIH items was not be included in the assessabl....
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....pter 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 not been levied or paid by reason of fraud or collusion or wilful mis-statement or suppression of facts or contravention of any of the provisions of the Chapter or the Rules made there under with intent to evade payment of service tax, by the person chargeable with the service tax, the provisions of the said section shall have effect as if, for the word "eighteen months", the word "five years" has been substituted. 40. It is correct that section 73 (1) of the Finance Act does not mention that suppression of facts has to be "wilful‟ since "wilful‟ precedes only misstatement. It has, therefore, to be seen whether even in the absence of the expression "wilful" before "suppression of facts" under section 73(1) of the Finance Act, suppression of facts has still to be willful and with an intent to evade....
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.... 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 otherwise is well known. In normal understanding it is not different that what is explained in various dictionaries unless of court the context in which it has been used indicates otherwise. A perusal of the proviso indicates that it has been used in company of such strong words as fraud, collusion or wilful default. In fact it is the mildest expression used in the proviso. Yet the surroundings in which it has been used it has to be construed strictly. It does not mean any omission. The act must be deliberate. In taxation, it can have only one meaning that the correct information was not disclosed deliberately to escape from payment of duty. Where facts are known to both the parties the omission by one to do what he might have done and not that he must have done, does not render it suppression." (emphasis supplied) 43. This decision was relied upon by the Supreme Court in Ana....
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....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, learned senior counsel, appearing on behalf of the appellant, and Mr. Mukul Gupta, learned senior counsel appearing on behalf of the Revenue. We are not convinced by the reasoning of the Tribunal. The conclusion that mere non-payment of duties is equivalent to collusion or willful misstatement or suppression of facts is, in our opinion, untenable. If that were to be true, we fail to understand which form of nonpayment would amount to ordinary default? Construing mere nonpayment as any of the three categories contemplated by the proviso would leave no situation for which, a limitation period of six months may apply. In our opinion, the main body of the Section, in fact, contemplates ordinary default in payment of duties and leaves cases of collusion or wilful misstatement or suppression of facts, a smaller, specific and more serious niche, to the proviso. Therefore, something more must be shown to construe the acts....
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....y 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 that the Appellant did not have any such intention and was acting under a bonafide belief." (emphasis supplied) 48. It would also be appropriate to refer the decision of the Delhi High Court in Mahanagar Telephone Nigam Ltd. vs. Union of India and others-W.P. (C) 7542 of 2018 decided on 06.04.2023 . The Delhi High Court observed that merely because MTNL had not declared the receipt of compensation as payment for taxable service, does not establish that it had wilfully suppressed any material fact. The Delhi High Court further observed that the contention of MTNL that receipt was not taxable under the Act is a substantial one and no intent to evade tax can be inferred by non-disclosure of the receipt in the service tax return. The relevant portion of the observations are: "28. In terms of the proviso to Section 73(1) of the Act, the extended period of limitation is applicable only in cases where service tax has not been levied or paid or has been short-le....
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.... 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 the value of taxable service because of rule 6(2)(vi) of the 2006 Rules and it cannot be said that the belief of the appellant is mala fide merely because it may ultimately be held that the appellant is not entitled to the compensation amount. This contention deserves to be accepted. 52. In this connection, it may be pertinent to refer to the decision of the Supreme Court in Commissioner of C. Ex. & Customs vs. Reliance Industries Ltd.- 2023 (385) E.L.T. 481 (S.C.) . The Supreme Court held that if an assessee bona fide believes that it was correctly discharging duty, then merely because the belief is ultimately found to be wrong by a judgment would not render such a belief of the assessee to be mala fide. If a dispute relates to interpretation of legal provisions, the department would be totally unjustified in invoking the extended period of limitation. The Supreme Court further held that in any scheme of self-assessment, it is the responsibility of the assessee to determine the liability....
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....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 information and it is not the duty of the officers to scrutinize the returns. 55. In this connection, reference can be made to the decision of the Tribunal in M/s. Raydean Industries vs. Commissioner CGST, Jaipur -Excise Appeal No. 52480 of 2019 decided on 19.12.2022. The Tribunal, in connection with the extended period of limitation, observed that even in a case of self-assessment, the department can always call upon an assessee and seek information and it is the duty of the proper officer to scrutinize the correctness of the duty assessed by the assessee. The Division Bench also noted that departmental instructions issued to officers also emphasise that it is the duty of the officers to scrutinize the returns. The relevant portion of the decision of the Tribunal in Raydean Industries is reproduced below: "24. It would be seen that the ER-III/ER-I returns filed by the applicant clearly show that the applicant had categorically declared that it had cleared the final products by availing the exemption under t....
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.... extended period of limitation given in the impugned order is that the appellant was operating under self-assessment and hence had an obligation to assess service tax correctly and take only eligible CENVAT credit and if it does not do so, it amounts to suppression of facts with an intent to evade and violation of Act or Rules with an intent to evade. We do not find any force in this argument because every assessee operates under self-assessment and is required to self-assess and pay service tax and file returns. If some tax escapes assessment, section 73 provides for a SCN to be issued within the normal period of limitation. This provision will be rendered otiose if alleged incorrect self-assessment itself is held to establish wilful suppression with an intent to evade. To invoke extended period of limitation, one of the five necessary elements must be established and their existence cannot be presumed simply because the assessee is operating under self-assessment." (emphasis supplied) 57. In this connection, it may be pertinent to refer to the decision of the Tribunal in M/s. India Glycols Limited vs. Commissioner of CGST & Central Excise .- Excise Appeal No. 52129 of 2019 deci....
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....cords for verification as and when required by such officer. Hence, it was the duty of the proper officer to have scrutinized the correctness of the duty assessed by the assessee and if necessary call for such records and documents from the assessee, but that was not done. It is, therefore, not possible to accept the contention of the learned authorized representative appearing for the Department that the appellant should have filed a proper assessment return under rule 6 of the Rules." (emphasis supplied) 59. Civil Appeal No. 4246 of 2023 (Commissioner of CGST, Customs and Central Excise vs. Sunshine Steel Industries) filed by the department before the Supreme Court to assail the aforesaid decision of the Tribunal in Sunshine Steel Industries was dismissed by the Supreme Court on 06.07.2023 and the judgment is reproduced below: "Delay condoned. 2. Heard learned counsel for the appellant. 3. This Court is not inclined to interfere with the impugned order of the High Court (Sic). 4. The appeal is dismissed. 5. Pending applications, if any, are disposed of." 60. In the present case, the records of the appellant for the period 2010 to 2014 were also audited by CERA. A fin....