Case Law Details
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 ‘
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(zzzy) to any person, by any other person in relation to mining of mineral, oil or gas;
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(zzzzj) to any person, by any other person in relation to supply of tangible goods including machinery, equipment and appliances for use, without transferring right of possession and effective control of such machinery, equipment and appliances;
8.2 The adjudicating authority has sought to deny classification of the service under the category of ‘Survey and Exploration of Mineral, Oil and Gas service’ on the ground that there is nothing in the SCN to show that the services provided by M/s Atwood fall under geological, geophysical or other prospecting, surface or sub- surface surveying or map making.
8.3 The essential ingredients of this service are geological, geophysical or other prospecting surface or sub-surface surveying or mapmaking services. Such services must be in relation to location or exploration of deposits of mineral, oil or gas. The show cause notice in Para 4 has in detail discussed the meaning of various terms contained in the definition of the service. The SCN has also discussed threadbare the contract entered into by M/s Atwood with GSPC. The preamble portion of the contract states that’
‘WHEREAS, Company desires to drill, test, complete, exploratory wells as specified by Company in the East Coast Off Andhra Pradesh, India as set for hereinafter; and WHEREAS, contractor is engaged in the business of drilling, testing and completing, and abandoning of offshore wells; and contractor represents that it has adequate resources and equipment in good working condition and fully trained personnel capable of efficiently operating such equipment and is ready, willing and able to drill the said wells and carry out auxiliary operations and services necessary to carry out the work for company’.’
A perusal of the above part of the contract makes it clear that the contract entered into between M/s Atwood, the contractor, and GSPC, the company is to drill, test and complete the exploratory wells. The activity which is to be done by the contractor is to drill the exploratory wells for exploration of oil. The definition of ‘Survey and Exploration of Mineral, Oil and Gas service’ also makes it clear that activities involved in the exploration of minerals, oil and gases fall under this service. The adjudicating authority has also contended that the SCN proceeds on the basis of legislative intent. However, Ministry’s letter F.No. B2/8/2004-TRU dated 10.09.2004 issued at the time of introduction of the service and which, as contemporanea exposito, explains that the service tax under this service would be limited to the services rendered in relation to survey and exploration only and not on the activity of actual extraction after the survey and exploration is complete. Activities such as seismic survey, collection/processing/interpretation of data and drilling and testing in relation to survey and exploration would, however, fall within the ambit of taxable service. M/s Atwood have contended in their cross objections that services rendered to GSPC is not in relation to exploration as perusal of the terms of the contract would show that they were not engaged in locating the areas where deposits of mineral, oil or gas are available, rather the said act of locating such places has been done by GSPC. It is pertinent to mention here that as stated above the preamble of the contract states that GSPC desires to drill, test and complete exploratory wells, and that the contractor is ready, willing and able to drill the said wells and carry auxiliary operations and services necessary to carry out the work. The question here is not who is identifying the place where the drilling is to be done. What is to be seen is the activity that is being conducted. There is no doubt that M/s Atwood has been entrusted to drill, test and complete an exploratory well. The activity conducted by M/s Atwood is in relation to exploration. The web definition of Exploratory well is as under :
(a) As per Businessdictionary.com- ‘Test hole drilled on land or in sea to ascertain the extent of recoverable gas and/or oil in a probable but yet-unproved location.’
(b) As per offshoretechnology.com- ‘An Exploratory Well is a well drilled for the purpose of discovering new reserves in unproven areas. They are used to extract geological or geophysical information about an area with a view to exploiting untapped reserves. Exploratory Wells are sometimes known as Wildcat Wells.’
(c) As per termwiki.com – ‘A well drilled either in search of a new and as yet undiscovered accumulation of oil or gas, or in an attempt to significantly extend the limits of a known reservoir.’
Thus, from the above it can be seen that an exploratory well is drilled for the purpose of discovering new reserves in unproven areas. The activity of exploration includes the drilling of exploratory well as such a well is drilled to ascertain whether there is sufficient oil/gas for commercial exploitation. This shows that the activity conducted by M/s Atwood is exploration of minerals. This is also supported by the statement dated 13.02.2009 of the Drilling Engineer of GSPC, Shri Vishal D. Rathod, wherein he stated that to the best of his knowledge GSPC has not yet started commercial production of hydrocarbon from the aforementioned block.
8.4 M/s Atwood has contended that from 01.06.2007 the Department has sought to classify the activities undertaken by them under ‘Mining of Mineral, Oil or Gas service’. However, there has been no change in the definition of the service ‘Survey and Exploration of Mineral, Oil and Gas service’ after 01.06.2007. There are a catena of case laws wherein it has been held that when an activity comes under the service tax net with effect from a certain date the same activity cannot be subjected to tax under a pre-existing category unless the scope of the pre-existing categories of service is simultaneously modified. Thus, in view of the above, the activities would not fall under ‘Survey and Exploration of Mineral, Oil and Gas service’. However, in this regard it may be mentioned that Finance Ministry in Para 3.4 of its letter DO F. No. 334/1/2008-TRU, dated 29-2-2008 has categorically stated that ‘Specifying a service separately as a taxable service does not necessarily mean or suggest that services falling within the scope of newly specified service were not earlier classifiable under any one of the existing taxable services. Grouping of services under a specific taxable service may change. The scope and coverage of a taxable service are to be determined strictly in accordance with the language of the relevant statutory provision existing during the material period.’ This view has been further substantiated in the following two letters issued during the budgets of 2004 and 2007-
(i) Letter F. No. B2/8/2004-TRU, dated 10-9-2004
Para 27. Many of the services covered under fresh levies may include activities that were taxable earlier under different category of taxable services. While the classification of a taxable service would be in terms of Section 65A of the Finance Act, 1994, it should be ensured that there is no double taxation and a service is taxed only once under the appropriate category.
(ii) Letter D.O.F. No. 334/1/2007-TRU, dated 28-2-2007
Pars 5. Services of same category are grouped together and defined as a separate taxable service. Newly specified services may contain part or whole of existing individually specified taxable services. The scope and coverage of taxable services should, therefore, be interpreted for classification purposes strictly in accordance with the statutory provisions existing during the material point of time.
8.5 Thus, classification of any service has to be determined by taking recourse to the provisions of Section 65A of the Finance Act, 1994, which is as under:-
‘Section 65A. Classification of taxable services.’ (1) For the purposes of this Chapter, classification of taxable services shall be determined according to the terms of the sub-clauses of clause (105) of section 65;
(2) When for any reason, a taxable service is, prima facie, classifiable under two or more sub-clauses of clause (105) of section 65, classification shall be effected as follows :-
(a) the sub-clause which provides the most specific description shall be preferred to sub-clauses providing a more general description;
(b) composite services consisting of a combination of different services which cannot be classified in the manner specified in clause (a), shall be classified as if they consisted of a service which gives them their essential character, in so far as this criterion is applicable;
(c) when a service cannot be classified in the manner specified in clause (a) or clause (b), it shall be classified under the sub-clause which occurs first among the sub-clauses which equally merit consideration.]
On plain reading of the above section, it is clear that the legislature recognized and envisaged the possibility of an overlap between two services and thus provided a remedy in the form of Section 65A to resolve such an overlap. This view has also been supported by the Tribunal in the case of Kopran Ltd. v. CCE [2009] 20 STT 414 (Mum. – CESTAT) wherein it was held that –
‘As per Rule 65A of the Service Tax Rules, 1994, it is possible for a service to be classifiable under two different categories. As per the classification rule, the classification would be done under the head, which is more specific failing which under the category which comes first. Thus, introduction of a new service by carving out from an earlier service will not mean that the new service was not taxable under any other category earlier. Thus, even though the service regarding transfer of intellectual property was introduced with effect from 10-9-2004, it does not mean that the service would not be covered under any other category earlier even if it was covered under the definition of a new service.’
8.6 Further, while clarifying the scope of ‘Mining of Mineral, Oil or Gas service’ introduced during the 2007 Budget, Ministry’s Letter D.O.F. No. 334/1/2007-TRU, dated 28-2-2007 has explained as under:
‘Para 6.2. Mining Service [section 65(105)(zzzy)] : Presently, geological, geophysical or other prospecting, surface or sub-surface surveying or map-making services relating to location or exploration of deposits of mineral, oil or gas are leviable to service tax under ‘survey and exploration of mineral service’ [section 65(105)(zzv)]. 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 services
• sub-contracted services such as deploying workers and machinery for extraction/breaking of rocks into stones, sieving, grading, etc.
• outsourced services,
provided for mining are individually classified under the appropriate taxable service. Services provided in relation to mining of mineral, oil and gas are comprehensively covered under this proposed service. With this, services provided in relation to both exploration and exploitation of mineral, oil or gas will be comprehensively brought under the service tax net.
6.2.1. The trend is to outsource part or whole of the mining activities. Since exploration and mining of mineral, oil or gas are comprehensively brought under the service tax, field formations may undertake necessary action.
The above clarification shows that the intention of the legislature was to bring all the activities related to mining, which was hitherto individually classified under the appropriate taxable service, under one head comprehensively i.e. ‘Mining of Mineral, Oil or Gas service’. It is well settled that the meaning ascribed by the authority issuing the Notification, is a good guide of contemporaneous exposition of the position of law.
8.7 In the following cases, Hon’ble Supreme Court has held that official statements of the meaning of statutes are of particular importance since every statute is originally promoted by Government which is assumed to know the legislative intent behind a legislation. Hence, Departmental circulars are entitled to respect. In this case, there are letters clarifying that the services which are now covered under ‘Mining of Mineral, Oil or Gas service’ could have been earlier covered under ‘Survey and exploration of mineral service’. For this proposition, the following case laws are relied upon-
(a) Ajay Gandhi v. B. Singh 2004 (167) ELT 257 (SC) – Paras 16 and 17.
(b) Commissioner of Trade Tax, UP v. Kajaria Ceramics Ltd. 2005 (191) ELT 20 (SC) – Para 28.
Thus, in view of Board’s letters cited above it is clear that drilling wells for production/exploitation of hydrocarbons (development drilling) was earlier classifiable under ‘Survey and Exploration of mineral service’.
9. Submissions by Atwood are as under.
9.1 Issue: Classification of services provided by Atwood to GSPC in terms of Contract No. GSPC-JEL-GGR/KG-OSN-2001/13 dated September 2005
9.2 Key Dates/Milestones
3rd September 2005 : Signing of Contract
December 2006 : Commencement of services in terms of the contract
9th Feb 2009 : Registration obtained & Service Tax paid under Category ‘SOTG’ from 16.5.2008 till Jan 2009 along with interest. Total amount paid was approximately Rs. 11 Crore
16th February 2009 :Meeting with Commissioner and other Senior Officials of Ahmedabad’ III Commissionerate. Letter received from DC (Prev) stating that tax was payable under category ‘Mining Services’ with effect from 16.05.2008.
19th February 2009 : Reply to letter of DC (Preo) stating that appropriate classification is ‘SOTG’. However in order to avoid litigation Service Tax agreed to be paid under ‘Mining Services’
28th February 2009 : Paid Rs. 17 crore (approx) pursuant to letter dated 16.2.2009 towards tax and interest under ‘Mining Services’ with effect from 16.5.2008. Total amount paid, therefore approximately Rs. 29 crore.
29th April 2009 : SCN Issued-
(i) Demand of Service Tax from Dec. 2006 to 31.5.2007 under the category of ‘Survey and Exploration Services’
(ii) Demand of Service Tax from 1.6.2007 onwards under ‘Mining Services’
28th May 2009 : (i) Commissioner rejected submissions made by Atwood for classification under SOTG with effect from 16.05.2008.
(ii) Commissioner dropped demand under ‘Survey & Exploration’ for the period from Dec. 2006 to 31.05.2007.
(iii) Commissioner held services to be classified under ‘Mining’ and confirmed demand from 01.6.2007 onwards.
(iv) Commissioner held that the assessee had shown that there was reasonable cause for nonpayment of Service Tax, that there was no malafide and further that the non-payment was on account of technical/legal reasons. He dropped penalty under Section 78. However, he imposed penalty under Section 76 and Section 77.
(v) Commissioner confirmed payment of interest.
(vi) Commissioner rejected submission of assessee to consider the payments received from GSPC as being cum- tax and to determine Service Tax payable accordingly.
9.3 Service Provided By Atwood to GSPC Appropriately Classifiable as ‘Supply of Tangible Goods for Use’ in terms of the provisions of sub-clause (zzzzj) of clause (105) of section 65 of the Finance Act, 1994
• CBEC has clarified vide JS (TRU)’s DO letter dated 29.2.2008 (excerpt at P 372 of paper book) that supply of tangible goods for use may involve transfer of possession and effective control of the goods. In such a case the transaction attracts VAT. CBEC has further clarified that where tangible goods are supplied for use without transfer of possession and effective control, Service Tax would be applicable under Section 65(105)(zzzzj). In the instant case there is no dispute that Atwood did not transfer possession or effective control in the equipment that was supplied to GSPC. This is clear from Para 35 of the SCN (page 306 & 312 of paper book) and from order of Commissioner (page 173 of paper book). The use, however, of the tangible goods was transferred to GSPC, who alone could decide how to use the equipment for the duration of the contract. It is abundantly clear that the activity is squarely covered by section 65(105)(zzzzj) as read with the clarification issued by CBEC.
• In order to determine the nature of the services it is pertinent to examine the contract in its entirely so as to understand its pith and substance. Examination of the contract establishes that the duties, obligations and rights of the assessee were related to ensuring availability of the Oil rig for use by GSPC. The performance was not measured in terms of drilling activity but by availability of the rig. The remuneration was not related to drilling activity but to the period for which the rig remained in use by GSPC.
• The relevant provisions of the contract between Atwood and GSPC in this regard are as follows’
• Atwood was engaged to provide an offshore oil rig, along with its compliment of crew and support staff.
• Atwood was paid a specific amount by GSPC in respect of the equipment supplied for the drilling operations.
• Atwood was paid on a per day basis, and not on the basis of the extent of drilling done.
(Schedule F of the Contract, at page 245 of the paper book refers in this regard)
• The contract specifies that the total duration for which the oil rig and associated equipment and personnel were to be made available to GSPC. The contract did not specify the number of wells to be dug or the extent of drilling.
• Atwood was responsible for ensuring the availability of rig, but usage for actual drilling was entirely as per the requirements of GSPC. It was GSPC who determined where to drill, how much to drill, whether to cap the well or to abandon it. Atwood was not concerned with the purpose or object of the drilling beyond assuring availability of rig/associated equipment/ personnel.
• Articles 6, 7.4, 8.1, 9, 10.1, 10.2, 11.1, 29, 33, 40, 41.11, 41.15.
• Article 16 to 27, together comprising Part III of the Contract, further make it clear that all aspects related to the drilling per se are controlled entirely by GSPC
• If it is argued, as the department has sought to in the SCN, that Service Tax would be attracted only if the tangible goods are supplied for use along with transfer of possession and effective control, then this category of service tax would become in-operational as such transactions where transfer of use is accompanied by transfer of possession and effective control would attract VAT.
9.4 Limitation
• Extended period of limitation is not applicable. Commissioner has concluded in his order that the reasons for non-payment of service tax by Atwood were technical/legal, and that this is a case of technical interpretation (Para 162 of o-in-o at page 182-183 refers). Commissioner held that this was a fit case for invoking the provisions of Section 80 of the Finance Act 1994. Further, there is no allegation in SCN to show any action on part of the assessee to willfully suppress any facts with intent to evade tax. It is evident that at best, the classification of service provided by Atwood to GSPC is arguable. Commissioner has also concluded that the assessee had cooperated at all time with the department. In such circumstance the extended period of limitation could not have been invoked.
9.5 Penalty
• Commissioner held that this was a fit case for invoking the provisions of Section 80. Accordingly, he dropped the proposal for levy of penalty under section 78. However, as Section 80 begins with a non obstante clause that gives Section 80 overriding precedence over section 76, 77 and 78, Commissioner should not have levied penalty under section 76 and 77 also. It is pertinent to mention that the Department, in its appeal, has not challenged the invocation of Section 80 by the Commissioner in his order.
9.6 Cum-Tax
• If at all any tax is payable by Atwood then the amount recovered by Atwood from GSPC has to be regarded as cum-tax and the service tax liability ought to be worked out accordingly. This is because till date GSPC has not reimbursed a single rupee towards Service Tax to Atwood.
9.7 Service not within meaning of ‘Survey and Exploration of Mineral, Oil and Gas Services’ in terms of the provisions of sub clause (zzv) of section 65(105) of the Finance Act, 1994
• The department has erred in resorting to dictionary/common meanings of ‘Exploration’ when ‘Survey and Exploration’ has been assigned a specific meaning in 65(104a).
• Section 65(104a) defines ‘Survey and Exploration of Minerals’ to mean geological, geophysical or other prospecting, surface or sub-surface surveying or map making. Prospecting means to explore an area or inspect a region or search a district for minerals. Prospecting, therefore, refers to a general assessment regarding a possibility of locating mineral deposits, and not to specific locations.
9.8 Insertion of new category without change in existing one
• It is submitted that the taxable service category of ‘Mining of Mineral, Oil or Gas’ was introduced by the Finance Act, 2007 with effect from 1st June 2007 by way of insertion of clause (zzzy) to section 65(105). It may be pointed out that at the time of insertion of this clause, no change was made to the then existing taxable service category of ‘Survey and Exploration of Mineral, Oil and Gas Services’ i.e. clause (zzv) of section 65(105).
• The SCN is based on an erroneous contention of the department that taxable service category of ‘Mining of Mineral, Oil or Gas’ was carved out of existing taxable service category of ‘Survey and Exploration of Mineral, Oil and Gas Services’.
• This is clear from the fact that there was no amendment made in the meaning of ‘Survey and Exploration of Mineral Services’, and is further clear from the speech of the FM while presenting the Budget for FY 2007-08 to Parliament and the DO letter issued by JS(TRU) at that time to senior departmental functionaries.
9.9 Prayer
• The relief sought in the appeal may be allowed.
10. The submissions made by the appellants were opposed by the Ld. A.R. as under.
10.1 M/s Atwood, in their appeal, has contended that the service provided by them does not fall under ‘Mining of Mineral, Oil or Gas service’ but falls under ‘Supply of Tangible Goods service’. The main reason being canvassed for such a view is that there is no transfer of possession and effective control of the equipment and the same remained under their possession and control at all times. The appellant has relied upon the definition of ‘Supply of Tangible Goods service’ as contained in Section 65(105)(zzzzj) of the Finance Act, 1994, which reads as under :-
‘Section 65 (105)(zzzzj) :- taxable service’ means any service provided or to be provided : –
to any person, by any other person in relation to supply of tangible goods including machinery, equipment and appliances for use, without transferring right of possession and effective control of such machinery, equipment and appliances;
10.2 The service tax on ‘supply of tangible goods service’ is leviable if the service provider supplies only Tangible Goods to its client but does not do any activity beyond supply of tangible goods. The appellant did not simply supply the drilling rigs to M/s GSPC but also engaged its own drilling crew to drill and complete the wells.
10.3 As per Clause 1.14 of the contract, ‘work’ shall mean all drilling operations, services and activities to be performed by contractor. Thus, the said contract is not for supply of Drilling Rigs but for drilling of wells. The object of the contract is given in clause 3 which says that the contractor shall drill, complete or abandon the well(s) and company shall pay for such performance of drilling, completion or abandonment services. Clause 7.4 provides that company is interested only in the results of contractor’s performance. These clauses of the contract make it abundantly clear that the contract was not for supply of Drilling Rigs but was actually for drilling of the wells. Clause 9 and Schedule C of the contract clearly provide that the appellant shall engage its own personnel for drilling of wells. Shri Nigel Richardson, Operations Manager of the appellant in his statement dated 09.02.2009 stated that the object of the contract was to drill, complete or abandon the wells; that they provided required equipment and personnel ; that on an average 52 persons were required at board the vessel as per Schedule C. As per Schedule H to the contract, the appellant was required to provide inventory details of critical material (including mud material) and consumption of such critical material should be part of contractor’s Daily Drilling Report. The said Schedule H further provides that the contractor shall ensure that a document is posted in a doghouse showing ‘maximum back pressure to be held on casing’ vs. ‘various mud densities’. Article 20 of the contract stipulates that the appellant shall drill the well and land casing of the size and at depths, specified by M/s GSPC. The casing shall be set and cemented at the depths and tested. The clauses 21 to 23 of the contract provides that the appellant shall perform the work of coring, testing and formation cutting. The clause 26 stipulates that the appellant shall complete the well as a producer or cease the operation and plug or abandon the well.
10.4 The appellant did not simply supply Drilling Rigs to M/s GSPC. Had they simply supplied the Drilling Rigs for use there was no need of supplying personnel, undertake services of casing, coring, testing, formation cutting and maintaining data because a person supplying the tangible goods for use is not required to do such activities. It is evident from the above definition that Service Tax under ‘Supply of Tangible Goods’ service is leviable if the service provider supplies tangible goods to its clients without transfer of possession and control of such goods. The condition ‘without transferring possession and effective control’ is prescribed only because if goods are transferred, same will amount to sale and hence no service tax can be levied because tax on sale is subject matter of State Government. Therefore, the contention that service tax is leviable under said service only because appellant did not transfer the possession and control of drilling rigs to M/s GSPC does not appear to be correct. The appellant actually provides service of drilling the wells by their own equipments and personnel and hence the service is classifiable under ‘Mining of mineral, oil or gas’.
10.5 It has been contended that they are charging fixed amounts in respect of equipments on per day basis and not based on usage of drills. Schedule F to the contract reveals that there are 6 different rates viz. operating rate, standby with crew rate, standby without crew rate, equipment breakdown rate, move rate and stack rate. The operating rates are highest while standby without crew rate and equipment breakdown rate are the lowest. It is thus evident that the appellant is charging fixed amount of US $ 1,05,000/- per day for supply of drilling rigs and US $ 8,000/- (1,13,000 – 1,05,000) per day for the crew and other related services as discussed in Para 6 supra. Therefore, said contract is not simply for supply of drilling rigs but also for service of ‘Mining of mineral, oil or gas’. Thus, the contract is for composite services.
10.6 Section 65A of Finance Act, 1994 provides for classification of services as under :-
‘(a) the sub-clause which provides the most specific description shall be preferred to sub-clauses providing a more general description.
(b) composite services consisting of a combination of different services which cannot be classified in the manner specified in clause (a), shall be classified as if they consisted of a service which gives them their essential character, in so far as this criterion is applicable.
(c) when a service cannot be classified in the manner specified in clause (a) or clause (b), it shall be classified under the sub-clause which occurs first among the sub-clauses which equally merit consideration.’
10.7 The object of the contract entered into between M/s Atwood and GSPC is :
‘Contractor shall drill, complete or abandon the well(s) identified by the Company’s drilling program (hereinafter referred to as the ‘well’) in accordance with all the requirements specified in this contract and Company shall pay Contractor for such performance of drilling, completion or abandonment services in accordance with the financial provisions of this Contract.’
As per clauses 20 to 23 of the contract, the appellant is required to undertake the service of casing, coring, testing and formation cuttings. Clause 26 further provides that the appellant shall complete the well as producer, As per Clause 19, the appellant is required to repair, deepen, maintain, rework and perform remedial or other operations to the wells. Moreover, the appellant was to provide services as mentioned in schedule H. Thus, the essential character of the services provided by the appellant is ‘Mining of minerals, oil or gas’ and not ‘Supply of tangible goods’. Therefore, as per clause (b) of Section 65A of Finance Act, 1994, the service provided by the appellant is classifiable as ‘Mining of mineral, oil or gas’ on the basis of essentiality test.
10.8 The Rules of interpretation of Central Excise Tariff Act, 1985 for classification of excisable goods are almost the same as in Section 65A of the Finance Act, 1994 for classification of taxable services. There are several case laws for classification of composite articles made of two or more constituents and it has been held that the composite articles shall be classified on the basis of essentiality test as per rule 3(b). Hon’ble Supreme Court in the case of Kemrock Industries & Exports Ltd. v. CCE [2007 (210) ELT 497 (SC)] held that fiber glass reinforced plastic (FRP) sheets are classifiable under Chapter 39 and not Chapter 70 because stiffness of such sheets gives them essential character. Similarly, Hon’ble Supreme Court in the case of CCE v. Naga Ltd. [2007 (212) ELT 452 (SC)] has held that Vim Dish wash Bar, a mixture of OSAA and abrasive powder is classifiable under heading 3405.40 as abrasive powder because essential character of the product is scouring. The aforesaid judgments of Hon’ble Supreme Court are applicable in the present case for classification of the service provided by the appellant. The essential character of the service provided by the appellant is ‘Mining of mineral, oil or gas’ and not ‘Supply of tangible goods’. Therefore, service provided by them has been correctly classified as ‘Mining of mineral, oil or gas’ by applying essentiality test as per clause (b) of Section 65 A of the Finance Act, 1994.
10.9 In the case of N. Rajashekar & Co. v. CCE [2008] 16 STT 130 (Bang. – CESTAT), wherein the appellant was involved in transporting limestone boulders from outside the mine site to yard, breaking/crushing of limestone boulders into jelly of size 10 mm to 50 mm and then loading, transporting of limestone jelly from crushing yard and unloading at BF yard, the Department took a view that such transportation would fall under the category of ‘Cargo Handling Service’. The Tribunal took a view that Loading and unloading of boulders and jelly are only incidental to mining activity and the main purpose of the contract was that of breaking and crushing of limestone boulders into jelly. In the present case, main purpose of contract is ‘Mining of mineral, oil or gas’ and not ‘Supply of tangible goods’. Therefore, applying the ratio of aforesaid judgment, the service provided by the appellant is classifiable under ‘Mining of mineral, oil or gas’ and supply of Drilling Rig is only incidental to activity of ‘Mining of mineral, oil or gas’.
10.10 In the case of Gajanand Agarwal v. CCE&C [2009] 18 STT 353 (Kol. – CESTAT, the Hon’ble Tribunal was examining whether activity of providing pay loader for loading of coal to wagons would fall under ‘cargo handling service’. The appellant pleaded that since they were letting out the pay loader for loading the coal, they would not be liable to Service tax under the cargo handling service. In this case also, there was an agreement between the appellants and Mahanadi Coalfields Ltd. wherein the obligation of the appellants did not end with letting out of the pay loader. The appellants were required to carry out the loading of the quantity required by the work orders within the time frame and the rates were fixed for loading of the goods i.e. coal into Railway wagons. The appellants were to operate the pay loader and payment of Rs. 2.47 per ton was to be made by Mahanadi Coal Fields Ltd. for loading of coal through the pay loader into the Railway wagons at the respective side. The Hon’ble Tribunal held that – ‘letting out of the pay loader was not the primary object of the contract but the pay loader was an aid to perform the service of loading of cargo with certain contractual obligation defined by the contract executed by them. Accordingly, we are of the view that the plea of the appellant that the contract was for hiring of tangible goods is baseless. Once the activity carried out is found to be loading of cargo, such an activity is clearly covered by the category ‘cargo handling service’. The appellants reliance on the format of agreement and work order giving a different nomenclature shall not help the appellant denying its liability stating that the activity carried out by the Appellant was not ‘cargo handling service’ when a combined reading of Section 65(23), 65(105)(zr) of the Act is made.’ The aforesaid judgment is applicable in the instant case because the equipments used by M/s Atwood was an aid to perform the service of ‘mining of minerals, oil or gas’. Thus, the service provided by M/s Atwood would not fall under ‘Supply of tangible goods for use’ service, but will fall under ‘Mining of Mineral, oil or gas’.
10.11 M/s Atwood has also placed reliance on the decision of the Bombay High Court in the case of Indian National Shipowners Association (supra) 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’. Para 37 of the order is reproduced below:-
‘Entry (zzzzj) is entirely a new entry. Whereas entry (zzzy) covers services provided to any person in relation to mining of mineral, oil or gas, services covered by entry (zzzzj) can be identified by the presence of two characteristics namely (a) supply of tangible goods including machinery, equipment and appliances for use, (b) there is no transfer of right of possession and effective control of such machinery, equipment and appliances. According to the members of the 1st petitioner, they supply offshore support vessels to carry out jobs like anchor handling, towing of vessels, supply to rig or platform, diving support, fire fighting etc. Their marine construction barges support offshore construction, provide accommodation, crane support and stoppage area on main deck or equipment. Their harbour tugs are deployed for piloting big vessels in and out of the harbour and for husbanding main fleet. They give vessels on time charter basis to oil and gas producers to carry out offshore exploration and production activities. The right of possession in and effective control of such machinery, equipment and appliances is not parted with. Therefore, those activities clearly fall in entry (zzzzj) and the services rendered by the members of the 1st petitioner have been specifically brought to the levy of Service Tax only upon the insertion of this new entry.’
This judgment was also affirmed by the Supreme Court Union of India v. Indian National Shipowners Association [2011] 30 STT 254 (SC) and the Hon’ble SC held that the nature of the work in terms of contract with ONGC indicates that none of the work can be strictly said to be service in relation to mining of mineral, oil or gas and as per records not even remotely connected and included within expression found in Section 65(105) (zzzy) of Finance Act, 1994. However, in the case of M/s Atwood, the activities undertaken by them have direct nexus with mining as the activity which they are undertaking is drilling of wells for exploration of minerals. Thus, the facts in the case of Indian National Shipowners Association (supra) are entirely different as the activities in that case were pre-mining or post-mining operations unlike in the instant case where the activity is primarily mining.
10.12 It can be seen from the above judgment that the appellants were carrying out jobs like anchor handling, towing of vessels, supply of rig or platform, diving support, fire fighting etc. Their marine construction barges support offshore construction, provide accommodation, crane support and stoppage area on main deck or equipment. Their harbor tugs are deployed for piloting big vessels in and out of the harbor and for husbanding main fleet. All these activities are not related to mining. This has also been accepted by the Hon’ble High Court in Para 48 of the order, which is reproduced below-
‘Applying the above conclusions to the instant case, we hold that the services rendered by the members of the 1st petitioner are either pre-mining or post-mining activities. They have no direct relation to mining. They were, therefore, rightly not brought to tax till entry (zzzzj) was introduced to cover transport of tangible goods by sea without transferring right of possession and effective control thereof. The services rendered by the members of the 1st petitioner are covered by entry (zzzzj) because they inter alia supply vessels, offshore support vessels, barges, tugs etc. without transferring right of possession and effective control over them. In contrast entry (zzzy) was introduced to comprehensively bring under the service tax net activities having a direct nexus to mining activities. Entry (zzzzj) is not a carve out of entry (zzzy). Both entries are independent. Entry (zzzzj) was not inserted into the Finance Act by amending entry (zzzy). It is not possible to invent a remote connection of the services rendered by the members of the 1st petitioner to mining activities and hold that they fall in entry (zzzy)’.’
10.12.1 M/s Atwood has challenged the OIO on the ground of limitation as they had not committed fraud, collusion, willful mis-statement, suppression for invoking the extended period. They have further contended that the Commissioner has also held that they have showed their bonafide. They have also showed their bonafide by approaching the Department to assess their duty liability. None of the contentions are correct due to following reasons:-
(i) M/s Atwood have started their activities way back in 2006 but had obtained registration under ‘Supply of Tangible Goods Service’ only in 2009. Further, M/s Atwood had not approached the Department on their own will. It was only when the Department initiated an enquiry and called for the records that the appellant to avoid penal provisions sought to co-operate with the Department.
(ii) M/s Atwood have contended that they were under the bona fide belief that their activities were taxable w.e.f. 16.05.2008 under the category of ‘Supply of tangible goods service’, but they had approached the Department only in February, 2009. It is thus evident that in spite of bonafide belief that their service is classifiable under ‘Supply of tangible goods’, they did not pay service tax on said service with effect from 16.05.2008 and obtained registration on 09.02.2009 after initiation of inquiry by the Department. This fact clearly shows that M/s Atwood had no intention of payment of service tax even with effect from 16.05.2008 under ‘Supply of tangible goods service’ and obtained registration under said service only after initiation of inquiry by the department. Thus, they did not pay service tax by way of suppression of facts and wilful mis-declaration with intent to evade service tax. Therefore, the extended period of limitation is invokable for demand of service tax.
(iii) M/s Atwood in their invoices charged service tax with effect from 01.06.2007 i.e. the date on which service of ‘Mining of minerals, oil or gas’ was brought under service tax net. The charging of service tax with effect from 01.06.2007 on their invoices clearly shows that the appellant was fully aware that he was required to pay service tax with effect from 01.06.2007, the date on which ‘Mining of minerals, oil or gas’ service was brought under the service tax net. In view of this factual position, the contention of the appellant that they had bonafide belief that their service is chargeable to service tax under ‘Supply of tangible goods service’ is totally wrong. This fact clearly shows that they had bonafide belief that their service is chargeable to service tax under ‘Mining of mineral, oil or gas service’ with effect from 01.06.2007. In spite of such bonafide belief, they did not pay service tax by way of suppression of facts, willful mis-statement and contravention of provisions of Finance Act, 1994 with intent to evade service tax. Therefore, extended period of limitation has been correctly invoked for demand of service tax.
(iv) Further, M/s GSPC had engaged another contractor viz M/s Deep Drilling India Pvt. Ltd for drilling the exploratory wells in the same exploration block. M/s Deep Drilling had obtained the necessary Service Tax registration and were discharging their Service Tax liability. Thus, there was no doubt that the activity of drilling exploratory wells was liable for service tax during the relevant time.
(v) Another point canvassed by M/s Atwood for establishing their bonafide is that they have paid the service tax and interest voluntarily before issue of SCN. This contention is devoid of any merit. The Himachal Pradesh High Court in the case of CCE v. Him Chemical and Fertilizers Ltd. [2010 (256) ELT 363 (HP)] and CCE v. Ruchira Papers Ltd. [2010 (251) ELT 502 (H.P.) has held that ‘applicability of Section 11AC of Central Excise Act, 1944 not excluded merely on deposit of amount after having been caught but before the issuance of show cause notice – Once a case is covered by situation mentioned in Section 11AC ibid, mere deposit prior to issuance of show cause notice under Section 11A ibid will not necessarily negate the situation mentioned in the said section’. Thus, when the bonafide of M/s Atwood is in doubt, extended period is invokable as held by the Gujarat High Court in the case of CCE v. Neminath Fabrics [2010 (256) ELT 369 (Guj.)]. Further, the Supreme Court in the case of CCE v. Mehta & Co. [Civil Appeal No. 1090 of 2009, dated 10-2-2011] has held that ‘though the respondent has pleaded that it was done out of ignorance, but there appears to be an intention to evade excise duty and contravention of the provisions of the Act. Therefore, proviso of Section 11A(1) of the Act would get attracted to the facts and circumstances of the present case- Show Cause Notice issued within five years from the date of knowledge of the Department is valid’.
(vi) M/s Atwood’s other contention that extending the benefit of Section 80 of the Finance Act, 1994 would mean that extended period under Section 78 cannot be invoked. Benefit of Section 80 is extended for waiving off penalties under Sections 76, 77 and 78 if there are sufficient reasons for the same. Commissioner’s observations regarding bonafide of the appellant have to be interpreted in the light of provisions of section 80 which allows waiver of penalty under section 78, even in case where demand is confirmed by invoking extended period in the cases of suppression etc. If the interpretation as canvassed by the appellants is taken, it will mean that section 80 can only be invoked in cases where there is no suppression etc. But, if this is the case, there will not be any confirmation of demand invoking extended period and consequently no penalty under Section 78. This will clearly render the provisions of Section 80 of the Finance Act otiose. Such an interpretation which makes certain provisions of statute redundant, is not permitted to be taken. That is why Commissioner, though having extended the benefit of Section 80, confirmed the demand under extended period.
(vii) Further, the following decisions hold that ‘blind belief’ cannot be cited as excuse for bonafide belief:-
(a) Winner System v. CCE&C – 2005 (191) ELT 1051 (Tri. – Mum.)
(b) Tanzeem Screen Arts v. CCE 2006 (196) ELT 209 (Tri. – Mum.)
(c) Interscape v. CCE 2006 (198) ELT 275 (Tri)
(d) Camlin Ltd. v. CCE 2009 (239) ELT 346 (Tri)
(viii) Similarly, it has been consistently held by various judicial fora that ‘ignorance of law’ is no excuse. In this regard, the following decisions are cited:-
(a) R.G. Nagori & Sons v. CCE 1989 (39) ELT 303 (Tri)
(b) Sindhu Resettlement Corpn. Ltd. v. CCE 2000 (118) ELT 182 (Tri – Delhi)
(c) CCE v. Bindal Cotex (P.) Ltd. 2004 (165) ELT 298 (Tri – Del)
11. The issues to be decided are as under:-
(i) Whether as claimed by the Revenue in their appeal, the services provided by M/s. Atwood can be classified under the category of ‘Survey and Exploration of Mineral, Oil and Gas Service’ for the period from November 2006 to May 2007.
(ii) Whether the services provided by M/s. Atwood can be classified as ‘Mining of Oil or Gas Service’ from 01 June 2007 onwards and levied to service tax.
(iii) Whether the claim of M/s. Atwood that the services provided by them is to be classified as ‘Supply of Tangible Goods’ [SOTG for short] and is liable to service tax only from 16 May 2008 or not.
(iv) We also require to decide whether extended period is invokable and whether penalty is leviable on M/s. Atwood.
11.1 Issue (i) ‘Revenue’s appeal claiming classification of the services under ‘Survey and Exploration of Mineral, Oil and Gas Service’. According to definition, Survey and exploration of Mineral, Oil and Gas means – Geological, Geophysical other prospecting, surface or sub-surface surveying or map making service in relation to location or exploration of deposits of Mineral, Oil or Gas.
11.2 M/s. Atwood has claimed that they have not undertaken any Geological, Geophysical or other prospecting, surface or sub-surface surveying or map making service and therefore, the services provided by them which is limited to drilling, testing, completion of exploratory wells as specified by the Company i.e. GSPC, cannot be classified under this service.
11.3 Revenue has relied upon the preamble portion of the contract between GSPC and M/s. Atwood which starts with the words ”Company desires to drill, test, complete exploratory wells, as specified by the Company in the east coast off shore of Andhra Pradesh, India as set for hereinafter.’ This would show that the contract was for drilling, testing and completion of exploratory wells. Further it was also submitted that the clarification issued by the Board in letter F. No. B-II/8/2004-TRU dated 10.09.2004, explained the service at the time of introduction in 2004 as ‘Service rendered in relation to survey and exploration only and not on the activity of actual extraction.’ Further, the letter also observed that activities such as seismic survey, collection/process/interpretation of data and drilling and testing in relation to survey and exploration would, however, fall within the ambit of taxable service. It was submitted that this was the intention of the Government and therefore this clarification has to be treated as contemporanea exposito and therefore, keeping in view the preamble of the contract and the observation of the Ministry in the letter, it becomes quite clear that the action of the M/s. Atwood in providing the service of drilling, testing of exploratory wells is classifiable under this service. Since M/s. Atwood has been entrusted to drill, test and complete exploratory well, the service provided is covered by the definition. Further, Revenue has also relied upon the definition of exploratory wells given in certain websites. Revenue has also relied upon the statement of Shri Vishal D. Rathore, Drilling Engineer of GSPC, who agreed that commercial production not yet started. Several decisions as well as references of the Ministry were cited to submit that subsequent to introduction of mining service and SOTG service would not take the service provided by the M/s. Atwood out of purview of the service of ‘Survey and Exploration of Mineral, Oil and Gas Service’ prior to 01.6.2007.
12. We are unable to accept the submissions made on behalf of Revenue. Subsequent clarification issued by the Ministry and reproduced in Para 8.6 above, in our opinion goes against the Revenue’s contention. Ministry has issued a letter on 28.2.2007 clarifying the scope of Mining of Mineral, Oil or Gas Service. While doing so, it was observed that, presently 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 are leviable to service tax under ”Survey and Exploration of Mineral Service’. The letter goes on to observe that site formation, clearance and excavation and earth moving, drilling wells for production/exploration of Hydrocarbon (developmental drilling) provided for mining are individually classified under appropriate taxable service. The letter goes on to say that services provided in relation to mining of mineral, oil and gas are comprehensively covered under this proposed service. With this, services provided in relation to both, exploration and exploitation of mineral, oil or gas will be comprehensively brought under the service tax net. The fact that drilling of wells for production/exploitation Hydrocarbons (developmental drilling) is put along with site formation and clearance and excavation and earth moving, which are not part of Survey and exploration of mineral service, would show that the contemporanea exposito and intention of the Government that can be derived from the letter in 2004, does not appear to be correct in our view.
12.1 According to Wikipedia, there are five elements of a petroleum prospects:
‘A prospect is a potential trap which geologists believe may contain hydrocarbons. A significant amount of geological, structural and seismic investigation must first be completed to redefine the potential hydrocarbon drill location from a lead to a prospect. Five geological factors have to be present for a prospect to work and if any of them fail neither oil nor gas will be present.
• A source rock – When organic-rich rock such as oil shale or coal is subjected to high pressure and temperature over an extended period of time, hydrocarbons form.
• Migration – The hydrocarbons are expelled from source rock by three density-related mechanisms: the newly-matured hydrocarbons are less dense than their precursors, which causes overpressure; the hydrocarbons are lighter medium, and so migrate upwards due to buoyancy, and the fluids expand as further burial causes increased heating. Most hydrocarbons migrate to the surface as oil seeps, but some will get trapped.
• Trap – The hydrocarbons are buoyant and have to be trapped within a structural (e.g. Anticline, fault block) or stratigraphic trap.
• Seal or cap rock – The hydrocarbon trap has to be covered by an impermeable rock known as a seal or cap-rock in order to prevent hydrocarbons escaping to the surface
• Reservoir – The hydrocarbons are contained in a reservoir rock. This is a porous sandstone or limestone. The oil collects in the pores within the rock. The reservoir must also be permeable so that the hydrocarbons will flow to surface during production.’
These are the five elements which are required to be complied with to identify source of potential petroleum Hydrocarbon drill location. In our opinion, this is what is covered by the definition of Survey and Exploration as far as oil/gas is concerned.
12.2 Further, it is settled law that object and content of the contracts cannot be determined and decided by looking at one paragraph or one clause but the whole contract has to be seen as a whole and considered.
12.3 The next question arises what is the drilling and testing covered by the letter issued by the Ministry issued in 2004. It is well known that in a Geological survey, drilling is done to confirm the other theoretical calculations. In the case of Oil, as mentioned in Wikipedia, offshore drilling refers to a mechanical process and it is typically carried out in order to explore for and subsequently produce hydrocarbons which lie in rock formations beneath the seabed. Therefore, the wells drilled as per the GSPC’s specification in the location identified after ensuring that the five elements of prospect are existing in the activity subsequent to survey and cannot be said to be a part of the service which is preliminary to mining or drilling activity.
12.4 No doubt, the analysis made by us can be questioned and we are aware of limitations since we are not experts in the field of oil exploration, drilling or survey etc. but the analysis made above with the help of Wikipedia, letters issued by the Ministry and definitions of service would show that it is possible to entertain an opinion that the activity of the M/s. Atwood cannot be considered as a service covered by the definition of service ‘Exploration of Mineral, Oil and Gas Service’. It is also settled law that if two views are possible and if an assessee entertains a belief that he is not liable to pay duty or tax, intention to evade duty, suppression/mis-declaration cannot be attributed and therefore, extended period of limitation for demanding duty/tax cannot be invoked. Therefore, even if our finding on classification aspect turns out to be incorrect, extended period of limitation could not have been invoked. In this case, the period is prior to 01.6.2007 and the show cause notice was issued in April 2009. Therefore, the demand for service tax treating the services provided as service of Survey/Exploration of Minerals cannot be sustained.
13.1 Issue (ii) : Whether service provided is covered by the definition of Mining of Oil or Gas Service – According to definition, the taxable service means any service provided or to be provided to any person, by any other person in relation to Mining, Oil or Gas.
13.2 According to M/s. Atwood, their service is specifically covered by supply of tangible goods including machinery, equipments and appliances for use and therefore , a specific service has to be preferred to a general service and therefore, the service provided by them cannot be classified under ‘Mining of Mineral, Oil or Gas Service’.
13.3 First of all, when we see the definition, to be classified under this service, it is not necessary that the activity has to be ‘Mining of Mineral, Oil or Gas’. As per the definition, any service provided by any person to any person in relation to Mining of Mineral, Oil or Gas would be covered under this service.
13.4 The question that arises therefore is whether supply of drilling rigs prior to 16.5.2008, when there was no service of ‘Supply of Tangible goods’ in the statute books can be covered by the Mining Service. We have already seen the preamble to the contract. In the case of Oil or Gas, after the Survey and Exploration, drilling activity starts and if the well is found to be successful and if there is sufficient quantity of Hydrocarbon, Gas or Oil, the well is not abandoned but the same well is used for exploitation successfully. This is why the contract between two parties namely M/s. Atwood and GSPC speaks of completion of a well or abandoning a well. This shows that the wells which are drilled are not only exploratory but can be used for Mining if successful. Otherwise there is no question of abandoning some wells and drilling other wells and complete. The explanation provided for Offshore well in Wikipedia as reproduced above would also support this view.
13.5 Further, while considering the scope of Survey and Exploration of Mineral, Oil and Gas Service, we limited the scope to the five elements of exploration and did not consider the drilling of exploratory wells as part of that service, it has to be treated as part of Mining Service since any service in relation to Mining would come in this category. The question of mining Oil or Gas does not arise while drilling the wells by using rigs. Here we agree that the letter issued by the Finance Ministry F. No. 334/1/2008-TRU dated 29.2.2008 (Para 3.4) supports the stand taken by the Revenue. The fact that service tax was introduced on Supply of Tangible Goods in 2008, does not mean that this service was not covered by any other service earlier. Further, the letter dated 10.9.2004, in Para 27, it was observed that meaning of the services covered under tax net may include the activities that were taxable earlier under different category of taxable services. This also supports the view canvassed before us.
13.6 Further, we also find that the contention of the Revenue that classification of any service has to be determined by taking recourse to the provisions of Section 65 (A) of the Finance Act, 1994, reproduced Para 8.5 of this order has considerable force. Prior to 16.5.2008, the service provided by M/s. Atwood was clearly covered by the Mining Services since the service provided by them was in relation to Mining. However, with the introduction of SOTG service, it can be said that the service provided by M/s. Atwood can be covered under the Mining Service as well as SOTG service and as per the section 65A of Finance Act, 1994, since the SOTG service provides most specific description that will have to be adopted. Therefore, in our view, the fact that SOTG service was introduced in 2008 does not mean that the same service was not covered by any service earlier. In this regard we find reliance of the Revenue on the decision of the Tribunal in the case of Kopran Limited (supra), is appropriate.
13.7 As per the Mines Act, 1952, the word ‘mines’ is defined as ‘Mine’ means, any excavation where any operation for the purpose of searching for or obtaining minerals has been or is being carried on and includes —
(i) all borings, bore holes, oil wells and accessory crude conditioning plants, including the pipe conveying mineral oil within the oil fields;
(ii) all shafts, in or adjacent to and belonging to a mine, where in the course of being sunk or not;
(iii) all levels and inclines planes in the course of being driven;
(iv) all opencast workings;
(v) all conveyors or aerial ropeways provided for the bringing into or removal from a mine or minerals or other articles or for the removal of refuse there from;
(vi) all adits, levels, planes, machinery works, railways, tramways and sidings in or adjacent to and belonging to a mine;
(vii) all protective works being carried out in or adjacent to a mine;
(viii) all workshop and store situated within the precincts of a mine and the same management and used primarily for the purposes connected with that mine or a number of mines under the same management;
(ix) all power stations, transformer sub-stations, converter stations, rectifier stations and accumulator storage stations for supplying electricity solely or mainly for the purpose of working the mine or a number of mines under the same management;
(x) any premises for the time being used for depositing sand or other material for use in a mine or for depositing refuse from a mine or in which any operations in connection with such and refuse or other material is being carried on, being premises exclusively occupied by the owner of the mine;
(xi) any premises in or adjacent to and belonging of a mine or which any process ancillary to the getting, dressing or operation for a sale of minerals or of coke is being carried on;
Thus, it will be seen that the word ‘mine’ has been very extensively defined to include infrastructure created for mining of minerals, oil or gas. In short, the word ‘mining’ must be understood as the process of taking minerals, gas or oil from the underneath the surface of the earth.’
13.8 M/s. Atwood relied upon the decision of the Hon’ble High Court of Bombay in the case of Indian National Shipowners Association (supra) which is affirmed by the Hon’ble Supreme Court to submit that if the service provided is classifiable as SOTG Service, prior to 16.5.2008, service tax cannot be levied under Mining Service. However, Hon’ble Supreme Court in that case held the work in terms of contract with ONGC indicates that none of the work strictly said to be service in relation to mining oil or gas and as per records not even remotely connected within explanation found in Section 65, 105 (zzzy) of Finance Act, 1994. However, as observed by us in the case of Atwood, activities undertaken has direct nexus with Mining as the activity undertaken is drilling of wells for exploration of minerals. Therefore, as contended by the Revenue, the decision in the case of Indian National Shipowners Association (supra) does not help the M/s. Atwood.
14. The next issue to be decided is whether the service provided by M/s. Atwood can be classified as SOTG service with effect from 16.5.2008. In this case, we find that in terms of Contract;
(i) Persons operating the equipments at all time were the employees of M/s. Atwood and all equipments operated by M/s. Atwood;
(ii) The equipments always remained in possession of M/s. Atwood at all times.
(iii) The contract is for supply of drilling rigs and other equipments as is seen from the fact that contractor charges specific amount on per day basis and not based on usage and separate rates are provided even for standby.
(iv) Equipments were given by the contractor for use during the term specified in contract and not for drilling predefined number of wells.
(v) M/s. Atwood also relied upon the decision of Hon’ble High Court of Bombay in the case of Indian National Shipowners Association (supra), wherein it was held that providing vessels on time charter basis to various Oil and Gas producers were held to be supply of Tangible Goods and not under ‘Mining of Mineral, Oil and Gas’.
(vi) They also relied upon the decision in the case of Rashtriya Ispat Nigam Ltd. (supra) to contend that there is no transfer of possession and effective control where the supplier’s employees are operating the equipment.
(vii) CBEC has clarified vide JS (TRU)’s DO letter dated 29.2.2008 that supply of tangible goods for use may involve transfer of possession and effective control of the goods. In such a case the transaction attracts VAT and in such case, service tax would not be applicable. It was further clarified that where tangible goods are supplied for use without transfer of possession and effective control, service tax would be applicable.
(viii) From Para 35 of the show cause notice itself this fact emerges that it is necessary to examine the contract in its entirety so as to understand the peculiar facts and circumstances. According to contract, M/s. Atwood’s role was limited to providing offshore annual rate along with completion of report and support supply for payment on specific amount based on the contract which was in turn based on use of rig, stand by time etc.
(ix) The contract also provide all aspects regarding location of the wells, extent of drilling, depth of drilling etc were required to be decided by GSPC and the role of M/s. Atwood was to provide rigs only.
15. We find substantial force in all these submissions. The main contention of SOTG i.e. allowing another person to use the rigs without giving legal right of possession are fulfilled in this case. Further, we also find that the clarification issued by the Ministry at the time of introduction of this service are also applicable to the facts of this case. Under these circumstances, we have to hold that after 16.5.2008, the service provided by M/s. Atwood has to be classified under SOTG services only.
16. As regards limitation for the period subsequent to 01.6.2007, it was submitted by the learned departmental representative that according to records for same period after 1.6.2007, Atwood had charged service tax but for reasons best known to them the same was not paid to the Government. However, learned counsel for M/s. Atwood stated that no service tax was collected. Apparently the fact that they had charged would show that even Atwood had felt that they were liable to pay service tax on the ground that the service provided by them was in relation to mining. Probably GSPC did not agree and hence they have not paid. In any case, when the department started verification of the records, the appellant on their own came forward, sought a meeting with Commissioner which was held on 16.2.2009 and on the advice of Commissioner, given orally, they discharged the liability treating the services provided by hem as Mining Services from 01.6.2007. Taking note of the fact that M/s. Atwood started their operation from November 2006, the approach adopted by them would show that they were not interested in entering into litigation and believed in paying the taxes. It was submitted by the learned counsel for M/s. Atwood that even though they believed that they had a case for non-payment of tax prior to 16.5.2008, to avoid litigation they had paid the entire amount of service tax due with interest. The observation of Commissioner in Para 162 are relevant and are reproduced below:-
‘162. However, I find that the said assessee has shown its bonafide by rendering full cooperation to the department in the investigation and also making goods the liability immediately on being pointed out. The fact that they have already paid the service tax along with interest much before the issuance of show cause notice and they have borne the incidence of tax on their shoulders, is sufficient evidence to show that the reasons for not paying the service tax by the assessee were the technical/ legal reasons rather than wilful suppression with an intent to evade payment of service tax. The law in this regard was not very clear which is evident from the fact that the legislature had to issue new categories of services in the same circumferences. At this juncture, it is pertinent to mention here that M/s. Gujarat State Petroleum Corporation Limited had engaged yet another contractor viz. M/s. Deep Drilling (I) Pvt. Limited for drilling of exploratory wells in the same Exploration Block and had obtained necessary Service Tax Registration Certificate and has been discharging their tax liabilities accordingly. M/s. GSPC, being State Government owned organization should have been little more cautious to ensure that their contractors particularly from foreign based companies are discharging required Service Tax and following other statutory procedures. In Paras 97 and 130 of this order, wherein reply of the notice has been reproduced, relevant case law has been referred where it has been held that no penalty is imposable where duty is not paid due to the bonafide belief of the assessee. One such case is the decision of the Larger Bench of the Tribunal in the case of ETA Engg. Ltd. v. CCE [2007] 8 STT 61 (New Delhi – CESTAT) (LB), in which it was held that where the assessee is under a bonafide doubt regarding their activity being covered by service tax, no penalty is imposable in terms of Section 80 of the Finance Act, 1994. The recent decision of CESTAT, Ahmedabad delivered on 27.03.2009 in the case of Krunal Catering Services v. CCE [2009] 21 STT 160 (Ahd. – CESTAT), is also relevant. In this case, the assessee contested penalty imposed under Section 78 on the ground that they were under a genuine belief that they were not covered under the taxable service. The Tribunal held that where all the factors point to the bonafide belief of the assessee, it is a fit case to invoke the provisions of Section 80, in which case no penalty would be imposable under Section 78. Thus, I find that this is a fit case to invoke the provisions of Section 80. It is also clear from the provisions of Section 78, as also the case law on technical interpretation of the statute, hence, penalty under Section 78 cannot be imposed.’
From the above, we find that besides our own observations finding of the Commissioner with which we agree, support the view that provisions of Section 80 are required to be invoked for waiving penalty imposed under Section 78 of the Finance Act, 1994 on M/s. Atwood. Once the penalty is waived under Section 78 of Finance Act, 1994, the question that will remain is penalty under Section 76 or 77. As regards penalty under Section 76, M/s. Atwood get protection from section 73 (3) of Finance Act, 1994, which is reproduced as under :-
‘Sec. 73(3) provides that – where any service tax has not been levied or paid or has been short levied or short paid or erroneously refunded, the person chargeable with the service tax, or the person to whom such tax refund has erroneously been made, may pay the amount of such service tax, chargeable or erroneously refunded, on the basis of his own ascertainment thereof, or on the basis of tax ascertained by a Central Excise Officer before service of notice on him under sub section (1) in respect of such service tax, and inform the Central Excise Officer of such payment in writing, who, on receipt of such information shall not serve any notice under sub-section (1) in respect of the amount so paid:’
We find that provisions of this section are applicable to the present case.
17. In view of the above discussions, we confirm demand for service tax with interest for the period 01.6.2007 onwards under Mining Service up to 16.5.2008 and thereafter, under SOTG service as applicable with interest. Penalties imposed on M/s. Atwood are set-aside.
Appeals filed by the department are rejected. Cross objection also get disposed of.
