CESTAT, AHMEDABAD BENCH
Atwood Oceanics Pacific Ltd.
Versus
Commissioner of Service tax, Ahmedabad
APPEAL NOS. ST/344 & 363 OF 2009
and ST/CO/73 OF 2010
AUGUST 30, 2012
ORDER
B.S.V. Murthy, Technical Member
Atwood Oceanics Pacific Limited (M/s. Atwood for short) entered into an agreement on 03.09.2005 with M/s Gujarat State Petroleum Corporation Ltd. (GSPC for short). As per the terms of the agreement, the following salient covenants were agreed upon:
(i) M/s Atwood shall drill, complete or abandon the wells identified by GSPC for drilling program in accordance with all the requirements specified in the contract. GSPC shall pay M/s Atwood for such performance of drilling, completion or abandonment in accordance with the financial provisions of the contract.
(ii) M/s Atwood shall use their own equipment, personnel and obtain all the necessary permits/authorizations required for the operation of the equipments and for the performance of the job specified. GSPC has to give concurrence to the equipments and personnel. M/s Atwood shall also be responsible for the safety of the personnel and equipments.
(iii) M/s Atwood shall prepare a ‘Daily drilling report’ for all the work in the well and shall furnish a copy of the report to GSPC.
(iv) At GSPC’s request M/s Atwood shall (a) complete the well as producer in the manner and by methods specified by GSPC, or (b) cease operations and plug or abandon the well, at any depth, in the manner GSPC directs.
(v) All survey notes, drawings, invoices for materials, permits, permit applications, specifications, blueprints, reports, calculations and all other material prepared by M/s Atwood in connection with the work shall be transferred to GSPC upon completion of each well and/or upon completion of work/termination of the contract.
(vi) GSPC shall pay M/s Atwood as per agreed rates. The invoicing shall be at the end of each month accompanied by the drilling reports.
(vii) M/s Atwood has indemnified GSPC from all damages pertaining to M/s Atwood’s equipments and personnel. Similarly GSPC indemnified M/s Atwood from any claims arising out of its own personnel.
2. M/s Atwood on 02.02.2009 had taken registration in the category of ‘Supply of Tangible Goods service’ as defined under Section 65 of the Finance Act, 1994. There were two appropriate taxable services prior to the registration taken by M/s Atwood on 02.02.2009 namely ‘Survey and Exploration of Mineral, Oil and Gas service’, with effect from 10.09.2004 and ‘Mining of Mineral, Oil or Gas service’ with effect from 01.06.2007 which could cover the service rendered. However, revenue entertained a view that the activities of M/s Atwood would fall under ‘Survey and Exploration of Mineral, Oil and Gas service’ from November 2006 to 31.05.2007 and ‘Mining of Mineral, Oil or Gas service’ for the period from 01.06.2007 onwards. Hence, demand of service tax for the two periods totally amounting to Rs. 31,22,79,982/- was raised against M/s Atwood invoking the larger period of limitation. Interest as well as penalties under Sections 75A, 76, 77 and Section 78 were also proposed.
3. The show cause notice was decided by the Commissioner of Central Excise, Ahmedabad-III vide OIO No. 09/Commr/2009 dated 28.05.2009. He held that the services rendered by M/s Atwood would fall under ‘Mining of Mineral, Oil or Gas service’ falling under Section 65(105)(zzzy) of the Finance Act, 1994 and accordingly, he confirmed the demand of Rs. 19,86,31,386/- along with interest for the period from 01.06.2007 onwards and dropped the demand of service tax amounting to Rs. 11,36,48,596/- under the category ‘Survey and Exploration of Mineral, Oil and Gas service’ for the period from November 2006 to May 2007. Penalties under Section 76 and Section 77 of the Finance Act, 1994 were imposed but penalties under section 75A and Section 78 of the Finance Act, 1994 were dropped.
4. Both Revenue and the assessee are in appeal.
5. Department has appealed against the impugned OIO on the following grounds :
(i) The Board’s letter D.O.F No. 334/1/2007-TRU dated 28.02.2007 clearly states that with the notification of the service ‘Mining of Mineral, Oil or Gas service’, services provided in relation to both exploration and exploitation of mineral, oil or gas will be comprehensively brought under the service tax net. Prior to 01.06.2007 it would fall under ‘Survey and Exploration of Mineral, Oil and Gas service’.
(ii) services such as site formation and clearance and excavation and earth moving, drilling wells for production/exploitation of hydrocarbons (developmental drilling); well testing and analysis service; sub-contracted service such as deploying workers and machinery for extraction/breaking of rocks into stones, sieving, grading etc. ; outsourced services provided for mining which were individually classified under the appropriate taxable service were comprehensively brought under ‘services provided in relation to Mining of Mineral, Oil or Gas’. Thus, exploration and exploitation of mineral, oil or gases were brought under service tax from 01.06.2007, which was the legislative intent.
(iii) Activity carried out by M/s Atwood is for exploration, site preparation and not for exploitation. As the contract is basically about exploratory drilling and not actual exploitation the activity would be covered under the services in relation to survey and exploration of minerals.
(iv) the adjudicating authority is thus not justified in not considering the classification of service rendered by M/s Atwood in the category of ‘Survey and Exploration of Mineral, Oil and Gas service’ for the period from November 2006 to May 2007 and the subsequent dropping of the demand amounting to Rs. 11,36,48,596/- demanded under the said service.
6. M/s Atwood has appealed against the impugned order on the following grounds :
(i) That the service provided by them falls under ‘Supply of tangible goods for use’ and not under ‘Mining of mineral, oil or gas service’. The adjudicating authority has misconstrued the scope of the taxable service ‘supply of tangible goods for use’. The main reason for rejecting the classification under the said service is that the appellant did not transfer possession and effective control. It has been contended that the tangible goods used for exploration were always under their possession and control.
(ii) It is clear from the definition of the taxable service in Section 65(105)(zzzzj) of the FA, 1994 read with Ministry of Finance letter D.O.F. No. 334/1/2008-TRU dated 29.02.2008 that the services provided by them fall under the category of ‘supply of tangible goods for use’.
(iii) The persons operating the equipments were, at all times, employees of the appellant and since the equipments provided by the appellant were operated by the employees/sub-contractors of the appellant, such equipments remained under the possession and effective control of the appellant at all times.
(iv) that the contract is for supply of tangible goods i.e. the drilling rig and other equipments, is further established by the following facts:
(1) Contractor is charging a specific amount from the company in respect of equipments supplied by it.
(2) Amount is being charged on per day basis and not based on usage.
(3) Separate rates are provided even for standby.
(4) Equipment is given by the contractor for use during the term specified in the contract and not for drilling pre-defined number of wells.
(5) Contractor’s personnel are being provided since they are experienced and qualified to use the equipment and this part of the activity is incidental to the main activity, which is supply of the equipment.
(v) Reliance is placed on the decision of the Bombay High Court in the case of Indian National Shipowners Association v. Union of India [2009] 19 STT 408 (Bom.) wherein the services provided by the petitioner i.e. providing vessels on time charter basis to various oil and gas producers was held to be falling under section 65(105) (zzzzj) i.e. ‘supply of tangible goods for use’ and not under section 65(105)(zzzy) which pertains to ‘mining of mineral, oil and gas’.
(vi) Reliance is also placed on various other decisions viz. Rashtriya Ispat Nigam Ltd. v. State of AP [1990] 77 STC 182 (AP) affirmed by the Hon’ble SC as well as Commissioner, Trade Tax v. Chabra Tourist Bus Service [MANU/UP/1355/2006] to contend that there is no transfer of possession and effective control where the supplier’s employees are operating the equipment.
7. Both sides made very extensive oral Submissions and also submitted written submissions. We reproduce the written submissions.
8. Submissions by Revenue are as under.
8.1 The whole issue revolves around three contending entries, namely
(i) Survey and Exploration of Mineral, Oil and Gas service’
(ii) Mining of mineral, oil and gas
(iii) Supply of tangible goods for use
The definitions of these three entries are as under:
‘Survey and exploration of mineral’ means geological, geophysical or other prospecting, surface or sub-surface surveying or map making service, in relation to location or exploration of deposits of mineral, oil or gas;
Section 65(105) “taxable service” means any service provided or to be provided ‘
