Essar Oil and Gas Exploration and Production Limited Vs ommissioner of CGST & CX (CESTAT Kolkata)
CESTAT Kolkata disposed of cross-appeals filed by Essar Oil and Gas Exploration and Production Limited and the Revenue concerning CENVAT credit and demands arising from the supply and transportation of Coal Bed Methane (CBM) gas.
The Appellant provided CBM gas services to clients and was registered under Service Tax. The Revenue had raised two demands. The first, amounting to Rs.11,12,41,507/-, alleged that CBM was a manufactured exempted product and that the Appellant had availed CENVAT credit on services used for transportation of gas through pipelines, attracting Rule 6(3A) of the CENVAT Credit Rules, 2004. The second demand of Rs.5,27,86,789/- concerned CENVAT credit allegedly availed on services used for laying pipelines for supply of CBM gas.
The Adjudicating Authority dropped the first demand, holding that Rule 6 had been misinterpreted in the Show Cause Notice. The Revenue challenged this finding. The Adjudicating Authority, however, disallowed the second demand, leading the Appellant to file an appeal.
Regarding the first demand, the Appellant submitted that it merely extracted CBM from wells and compressed it to a limited extent for transportation through pipelines, which did not amount to manufacture of CNG. A departmental verification report dated 20.03.2018 recorded that the Appellant supplied CBM mainly through pipelines for industrial use, did not supply it to IOCL, BPCL or HPCL for use as automobile fuel, and applied pressure of up to 225 PSI. The Department treated the proceedings concerning manufacture as concluded.
The Tribunal found no reason to interfere with the Adjudicating Authority’s findings and rejected the Revenue’s appeal concerning the Rs.11,12,41,507/- demand.
On the second demand, the Appellant submitted that the services were used for laying pipelines employed for transportation of gas and relied upon decisions holding that pipeline construction was distinct from construction of a building or civil structure and that CENVAT credit could be available where the resulting infrastructure was used for providing taxable output services.
Relying particularly on Rastriya Ispat Nigam Ltd., Mundra Ports & Special Economic Zone Ltd. and Oberoi Mall Ltd., the Tribunal held that the Appellant was eligible for CENVAT credit. It therefore set aside the demand of Rs.5,27,86,789/- along with interest and penalty on merits.
The Tribunal also held that the extended-period demand was unsustainable on limitation. The Appellant was registered as a Service Tax provider, reflected CENVAT credit in ST-3 returns and held a bona fide belief regarding eligibility. The Tribunal further noted that the Department had not raised queries regarding manufacturing activity despite the ST-3 returns.
Accordingly, the Revenue’s appeal was rejected, while the Appellant’s appeal was allowed with consequential relief, if any, as per law.
Cases Discussed
- Rastriya Ispat Nigam Ltd. vs. CCE, Cus & S.T., Visakhapatnam (CESTAT Hyderabad), [2016 (44) S.T.R. 136 (Tri.-Hyd.)]
- Mundra Ports& Special Economic Zone Ltd. v. CCE & Cus. (Gujarat High Court), [2015 (39) STR 726 (Gujarat)]
- Oberoi Mall Ltd. Vs. Commissioner of Service Tax (CESTAT Mumbai), [2013-TIOL-604-CESTAT-MUM]
- Sterlite Telelink Ltd. vs. Commissioner of Central Excise, Vapi (CESTAT Ahmedabad), [2014 (312) E.L.T. 353 (Tri.-Ahmd.)]
- Vamona Developers Pvt. Ltd. (CESTAT)
- mPortal India Wireless Solutions Pvt. Ltd. (Karnataka High Court), 2012 (27) S.T.R. 134 (Kar.)
- Sai Sahmita Storages Pvt. Ltd. (Andhra Pradesh High Court), 2011 (270) E.L.T. 33 (A.P.)
- Vandana Global Ltd. v. CCE, Raipur (CESTAT Larger Bench), [2010 (253) ELT 440 (Tri.-LB)]
FULL TEXT OF THE CESTAT KOLKATA ORDER
The Appellant is providing the service of CBM (Coal Bed Methane Gas) to their clients. They are registered under Service Tax and paying Service Tax for the services charges received from their clients. The Appellants were issued Show Cause Notice on the following grounds:-
(1) The Appellants were selling the CBM which is a manufactured product and which is exempted from payment of duty. The Appellants were taking Cenvat Credit for the services utilized for provision of transportation of gas through pipelines. This amounts to taking credit commonly for both exempted goods and the taxable service. Accordingly, the demand of Rs.11,12,41,507/- was raised based on the total turnover of exempted goods and calculating the Excise Duty @ 6% under Rule 6(3A) of the Cenvat Credit Rules, 2004.
(2) The second demand was on account of Cenvat Credit of Rs.5,27,86,789/- taken by the Appellant for various services used for laying the pipeline which ultimately was used for supply of the CBM gas.
2. After due process, the Adjudicating Authority dropped the demand amount of Rs.11,12,41,507/- holding that the provisions of Rule 6 of the Cenvat Credit Rules, 2004 has been mis-interpreted in the Show Cause Notice. Being aggrieved, the Revenue has filed their Appeal before the Tribunal.
3. The Adjudicating Authority after due process disallowed the Cenvat Credit of Rs.5,27,86,789/-. Being aggrieved, the assessee is in Appeal before us.
4. The Ld.Chartered Accountant appearing on behalf of the Appellant submits that the activities undertaken by them is only to extract the CBM from the well and to compress it to a very small extent so that the same is transported to the receiving client through pipelines. He submits that this does not amount to manufacture. He draws our attention to the Chapter Note No.5 of Chapter 27, which deals with Compressed Natural Gas (CNG). He submits that admittedly there is no allegation in the Show Cause Notice that the Appellant has been extracting or manufacturing CNG. He also takes us through to some of the invoices raised by them on their client showing that they have been selling CBM and also paying the VAT treating the same as goods. He relies on the detailed finding of the Adjudicating Authority dropping the demand of Rs. 11,12,41,507/-.
5. Countering the same, the Ld.AR for the Department submits that Adjudicating Authority has mis-interpreted and held that the provisions of Rule 6(3) of Cenvat Credit Rules would be applicable only when dutiable and exempted goods are manufactured or taxable and exempted services are provided together. He submits that he failed to take into account that even when exempted goods are manufactured and supplied along with taxable service, still the provisions of Rule 6(3) would be applicable. Therefore, he submits that the dropping of the demand of Rs. 11,12,41,507/- on this count is erroneous.
6. On going through the appeal papers and several documentary evidences filed by the Revenue, we find from the Page No.27 of the submissions made by Revenue that after filing the Appeal, the Department has directed the Assistant Commissioner, Anti-Evasion to visit the unit of the Appellant and give a verification report on the activity undertaken by them. The Assistant Commissioner vide his Report dated 20.03.2018 has given the following report:-
“Acting on intelligence, a team of Head Quarter Anti-Evasion unit of the erstwhile Durgapur, Central Excise & Service Tax, Commissionerate had visited the factory premises of M/s. Essar Oil Limited, CBM Raniganj Project on 14.03.2017. During the visit statement of Sri Debaraj Jena, Son of Shri Prafulla Kumar Jena, Designation – Senior Manager-F&A of M/s. Essar Oil Limited was recorded under Section 14 of Central Excise Act, 1944. In his statement Sri Jena inter-alia stated that their only product is Coal Bed Methane (CBM) gas and they do not supply CBM to any gas station for use as automobile fuel. From the Sales register submitted by M/s. Essar Oil Limited, it is noticed that they did not supply CBM to IOCL, BPCL & HPCL during the last five years They are supplying CBM mainly through pipeline to various parties for industrial use. They are paying Service Tax against transportation of gas through pipeline.
M/s. Essar Oil & Gas has cited exemption Notification No.12/2012-CE dated 17.03.2012 claiming that their product did not meet the criteria to be classified as CNG. They depressurized their CBM before delivery to their clients. They only undertook compression for the purpose of transportation. They cited general Circular No.14/2001 dated 04.06.2001 for this purpose.
It is seen that M/s.Essar Oil & Gas apply pressure of maximum 225 PSI which is equivalent to 15.819075 Kg/Cm2, a prerequisite for the natural gas to become dutiable as mentioned in the Board’s letter F.No.B.1/3/2001-TRU dated 21.05.2001. Natural Gas is not chargeable to Duty of Excise as per Chapter 27 Sl.No.84 of General Exemption under Notfn. No.12/2012-CE, dated 17.03.2012 as amended.
In view of the above, instant case proceedings initiated against M/s. Essar Oil Limited, Village/PO Gopalpur, PS Kanksha, Durgapur-713212 are treated to be concluded.
This issues with the approval of the Commissioner of CGST Bolpur Commissionerate.”
[Emphasis supplied]
7. The Adjudicating Authority has given the following detailed findings in the Order-in-Original:-
”6.11 I find that in the impugned show cause notice it has been stated that the noticee has availed Cenvat credit of service tax in the ST-3 returns for the said period and alleged that the same has been used for the manufacture and sale of CBM Gas. In this regard I observe that the ST-3 return is for the service provider and hence, a manufacturer cannot avail Cenvat credit therein. Therefore, I hold that the provision of rule 6 of the CENVAT Credit Rules, 2004 has been mis-interpreted in the impugned show cause notice.
6.12 I further observe that nowhere in the notice, has it been pointed out that the noticee is a manufacturer of both dutiable and exempted goods or the noticee is a provider of output services which are chargeable to tax as well as exempted services. In the impugned show cause notice this aspect has been mis-interpreted. What has been stated in the impugned show cause notice is that the noticee manufactures exempted goods and provides service which is chargeable to service tax. I hold that it is contrary to rule 6(1) & (2) of the CENVAT Credit Rules, 2004. I find that on this basis the demand of an amount under Rule 6(3) of the CENVAT Credit Rules, 2004 has been raised. The noticee as a manufacturer (though under dispute) admittedly manufactures only exempted goods and there is no evidence in the show cause notice that they have availed Cenvat credit on inputs or input services used in the manufacture of such exempted goods or manufactures dutiable final products. Moreover, for the sake argument if it is assumed that the noticee is required to pay an amount @6% for they have manufactured & cleared goods as well as provided output service which is chargeable to service tax, then they should be allowed to avail the entire input service credit but the same has been denied in the second part of the demand. Therefore, I hold that Rule 6(3) of the CENVAT Credit Rules, 2004 is not applicable here and the demand made in first part of the notice stands dropped in its merit.
6.13 I find that there is another allegation in the first part that the said noticee was also liable for registration under Rule 9 of the Central Excise Rules, 2002, for being engaged in the manufacture of such goods. In this regard the notice has contended that they extract CBM Gas from the gas wells and for transporting the gas over long distances, the gas is compressed by them by applying maximum 200-225 psi of pressure for enabling seamless transportation of the same. The compression that they undertake on the gas is by applying very low pressure that is upto 200-225 psi. This compression does not result in the CBM gas being marketable as Compressed Natural Gas (CNG for short) since for marketing a gas as CNG, the same is required to be compressed at 2900-3600 psi of pressure. They have further contended that the undisputed and admitted position is that the compression that is undertaken by them on the CBM gas is only for the limited purpose of facilitating the transportation of the same through pipeline. The compression is not for the purpose of marketing the CBM gas as CNG.”
8. Therefore, considering the Conclusion Report C.No. II(8) 89/AE/Essar Oil/CE/BOL/2017/1540 dated 20.03.2018 with the
decision of the Department to treat the issue as closed and the detailed findings given by the Adjudicating Authority, we do not see any reason to interfere in with the Order-in-Original. Accordingly, the Appeal filed by the Revenue is rejected.
9. Coming to the rejection of the Cenvat Credit of Rs.5,27,86,789/-the Ld.Consultant submits that admittedly without any dispute, the credit has been taken only on account of services utilized in the provision of the output services namely transportation of gas through pipelines. He also produced a copy of the Certificate issued by the C.A. certifying that during the period under consideration they have forgone the Cenvat Credit to the extent of 17,02,89,399/- wherein the services were provided in respect of extraction of CBM gas. Thus, he submits that the Appellant was very clear that they were not eligible for the credit pertaining to the extraction of CBM and they were taking the Cenvat Credit only on the services pertaining to the pipeline which was used for transporting the gas. He submits that the Adjudicating Authority has erroneously taken the stand that Civil Work and Works Contract Service were utilized. He has distinguished the construction services from the pipeline laying services to come to a conclusion that the Appellant is not eligible for the Cenvat Credit. The Appellant relies on the case law of Rastriya Ispat Nigam Ltd. vs. CCE, Cus & S.T., Visakhapatnam [2016 (44) S.T.R. 136 (Tri.-Hyd.)], wherein on similar issue in respect of erection and construction of pipeline for supply of water, the Hyderabad Tribunal has held that Cenvat Credit would be eligible. He further submits that in the case Mundra Ports& Special Economic Zone Ltd. v. CCE & Cus. [2015 (39) STR 726 (Gujarat)], the Hon’ble High Court of Gujarat had held that even if an immovable property structure has come into existence so long as the same is utilized for provision of taxable service, the Cenvat Credit cannot be denied. He submits that similar decisions have been rendered in the case of Oberoi Mall Ltd. vs. Commissioner of Service Tax, [2013-TIOL-604-CESTAT-MUM] and in several other cases where the demand were raised based on the earlier Larger Bench Decision of in the case of Vandana Global Ltd. v. CCE, Raipur [2010 (253) ELT 440 (Tri.-LB)]. In view of all these, he submits that the confirmed demand is required to be set aside on merits.
10. He submits that the confirmed demand for the extended period is not sustainable for the following reasons:-
(1) The Appellants are duly registered with the Service Tax Department.
(2) They have been taking Cenvat Credit and reflecting the same in the ST-3 Returns.
(3) They were also under the bona fide belief that they are eligible for the Cenvat Credit which is being used for the provision of the output servies.
(4) They were under the bona fide belief that the compression of CBM gas would not amount to manufacture and no manufacturing activity has taken place.
(5) He relies on the case law of Sterlite Telelink Ltd. vs. Commissioner of Central Excise, Vapi [2014 (312) E.L.T. 353 (Tri.-Ahmd.)], wherein it has been held that when the monthly ST-3 Returns are filed, still the same are required to be scrutinized as per the Instruction given under the CBEC Manual.
11. In view of the above submissions, the Ld.Consultant takes the stand that the confirmed demand of Rs.5,27,86,789/- is not sustainable for the demand pertaining to the extended period.
12. He extends the same arguments in respect of the amount of Revenue’s demand of Rs.11,12,41,507/- and submits that they have been holding bona fide belief that no manufacturing activity takes place. Therefore, the question of same being treated as exempted goods calling for payment of 6% of the amount as Cenvat Credit would not arise. He further submits that the very fact that the verification was taken up by the Revenue officials on 20.03.2018, as noted above would fortify the fact that no manufacture of goods has taken place at their end. Therefore, he submits that even in respect of Revenue’s Appeal of Rs.11,12,41,507/-, the Show Cause Notice demanding the amount for the extended period would not be legally sustainable.
13. In respect of the demand of Rs.5,27,86,789/- towards denial of Cenvat Credit, we find that admittedly the services have been used towards laying of pipelines. The Hyderabad Bench of the Tribunal in the case of Rastriya Ispat Nigam Ltd. vs. CCE, Cus & S.T., Visakhapatnam, cited supra, has held as under:-
“7. The main argument of the appellant is that the works contract service relating to laying/erection of underground/over ground pipeline is not included in the exclusion portion of the definition of ‘input service’. According to him, the services of ‘construction of a building or a civil structure or a part thereof’ is entirely different and distinct service from ‘construction of pipeline or conduit’. For this learned counsel draws reference from the definition of construction service provided in under Section 65(25b) of the Finance Act, 1994, which is as under :-
“Commercial or Industrial Construction” means –
(a) construction of a new building or a civil structure or a part thereof; or
(b) construction of pipeline or conduit; or
(c) completion and finishing services such as glazing, plastering, painting, floor and wall tiling, wall covering and wall papering, wood and metal joinery and carpentry, fencing and railing, construction of swimming pools, acoustic applications or fittings and other similar services, in relation to building or civil structure; or
(d) repair, alteration, renovation or restoration of, or similar services in relation to, building or civil structure, pipeline or conduit.
8. In the above definition, the two services are given under two different sub-clauses which means that construction of pipeline or conduit cannot be considered to be part of construction of building or civil structure. Similarly, sub-clause (b) of definition of works contract service contained in sub-clause (zzzza) of Section 65(105) of the Finance Act, 1994 is also noteworthy in this regard which is reproduced as under :-
“(b) construction of a new building or a civil structure or a part thereof, or of a pipeline or conduit, primarily for the purpose of commerce or industry.”
9. If one goes through the above provisions, the contention of the appellant that ‘construction of a pipeline or conduit’ is distinct from the service of ’construction of a building or a civil structure or part thereof’ is not without merits. Wherever the Legislature wanted to include the construction of a pipeline or conduit, it has been specifically mentioned separately in the definition. This itself would indicate that erection/construction of pipeline or conduit cannot be considered as part of ‘construction of building of civil structure or part thereof’.
……………..
11. In the said judgment, the credit availed of service tax paid on construction services for laying pipeline was held to be admissible. A plain reading of the definitions noticed above makes it sufficiently clear that laying of pipeline is different from construction of building or civil structure. Undisputedly, in the present case, the service tax was paid on works contract for laying pipe over the ground and under to supply water to the raw material plant. From the above discussions, I am able to hold that appellant is eligible for credit on service tax paid on works contract services relating to erection/construction of underground pipe and over ground pipelines for supply of water to raw material plant as the work of construction of pipeline or conduit do not fall in the exclusion portion of the definition of input services.”
14. The law laid down in the above case is squarely applicable. Further, in the case of Mundra Ports& Special Economic Zone Ltd. v. CCE & Cus., cited supra, the Hon’ble Gujarat High Court has held as under:-
”9. Mr. Ravani has also vehemently urged that since jetty was constructed by the appellant through the contractor and construction of jetty is exempted and, therefore, input credit would not be available to the appellant as construction of jetty is exempted service. The argument though attractive cannot be accepted. The jetty is constructed by the appellant by purchasing iron, cement, grid, etc., which are used in construction of jetty. The contractor has constructed jetty. There are two methods, one is that the appellant would have given entire contract to the contractor for making jetty by giving material on his end and then make the payment, the other method was that the appellant would have provided material to the contractor and labour contract would have been given. The appellant claims that he has provided cement, steel, etc., for which he was entitled for input credit and, therefore, in our opinion, the appellant was entitled for input credit and it cannot be treated that since construction of jetty was exempted, the appellant would not be entitled for input credit. The view taken contrary by the Tribunal deserves to be set aside.
10. For the reasons given above, this Tax Appeal succeeds and is allowed. The denial of input credit to the appellant by the respondent is set aside. The appellant would be entitled for input credit. The question is answered in favour of the assessee-appellant and against the department. No order as to costs.”
[emphasis supplied]
15. In the case of Oberoi Mall Ltd. Vs. Commissioner of Service Tax, cited supra, the Mumbai Bench of the Tribunal has held as under:-
”7. The submission made by the ld. C.A. has strong force inasmuch, there is no dispute, that the appellant has constructed various malls and rented the same to various parties and discharge of service tax on rent received is also not disputed. The availment of Cenvat credit on various input services for the construction of the malls and subsequent utilization, we find that in the case of Navaratna S.G. Highway Properties (P) Ltd. (supra), (wherein one of the member of this Bench Shri M.V. Ravindran was presiding) this Tribunal held in favour of the assessee by recording as under :
“3.2 The definition of ‘inputs’ is limited to the definition of ’input services’ as can be seen from the definition given above. Credit of duty paid on inputs is available when the inputs are used for providing an ‘output service’. Therefore, there is a need to say that the inputs have been used for providing an ‘output service’. In the case of ‘input service’ the definition includes input services used by a provider of taxable service for providing an output service. Therefore the definitions of input and input service are pari materia as far as the service providers are concerned. That being the position, the decision of the Hon’ble High Court of Andhra Pradesh would be applicable to the present case. In that case also, the Hon’ble High Court took the view that without use of cement and TMT bars for construction of warehouse assessee could not have provided ‘storage and warehousing service’. In this case also, without utilizing the service, mall could not have been constructed and therefore the renting of immovable property would not have been possible. The issue involved is squarely covered by the decision of the Hon’ble High Court of Andhra Pradesh. Since the service tax demand itself is not sustainable, the question of imposition of penalty does not arise. The appeal is allowed with consequential relief to the appellants.”
The above reproduced view was followed by this Bench of the Tribunal in the case of Vamona Developers Pvt. Ltd. by referring to the judgment of Hon’ble High Court of Karnataka in the case of mPortal India Wireless Solutions Pvt. Ltd. – 2012 (27) S.T.R. 134 (Kar.) and the judgment of Hon’ble High Court of Andhra Pradesh in the case of Sai Sahmita Storages Pvt. Ltd. – 2011 (270) E.L.T. 33 (A.P.) and held in the favour of the appellant. We do not find any reason to deviate from such a view already taken on this issue.”
16. In the above cases, it has been held that even if any immovable property comes into being, but if the same is used for provision of output service resulting in payment of Service Tax, the Cenvat Credit cannot be denied. Considering the above cited case law, we hold that the Appellant is eligible to take the Cenvat Credit. On merits, we set aside the confirmed demand of Rs.5,27,86,789/- along with interest and penalty on merits.
17. We also find force in the arguments of the Appellant that they are duly registered with the Service Tax authorities and have been taking the Cenvat Credit used in the laying down of the pipelines and reflecting the same in the ST-3 Returns. In the case of Sterlite Telelink Ltd. vs. Commissioner of Central Excise, Vapi, cited supra, it has been held as under :-
”30. ………………………… I am in agreement with the view taken by ld. Member (Judicial), holding that the entire demand falls as being time barred. Since the entire demand becomes time barred, there is no question of imposition of penalties on other company as well as other appellants.”
18. Therefore, the confirmed demand in respect of denial of Rs.5,27,86,789/- pertaining to the extended period, stands set aside on account of limitation also.
19. In respect of the Department’s Appeal wherein demand was raised for Rs.11,12,41,507/- on the Appellant, it has been held by the Adjudicating Authority that the Appellant was registered as service provider and was filing of their Returns towards the Cenvat taken by them. Appellants were carrying bona fide belief that no excisable goods were being manufactured by them. Therefore they neither took the Registration nor did they file any Returns. In spite of the ST-3 Returns being filed as service provider, the Department did not issue any query as to whether they were also into manufacturing of the gas. Therefore, we hold that the demand of Rs.11,12,41,500/- raised based on the alleged exempted turnover of the goods, is legally not sustainable on account of time bar in respect of the demand pertaining to extended period. The Adjudicating Authority has set aside this demand on merits in the Order-in-Original and we have already upheld the same.
20. Thus, on the above lines, the Appeal filed by the Revenue stands rejected and the Appeal filed by the Assessee stands allowed with consequential relief, if any, as per law.
(Operative part of the order was pronounced in the open Court.)
