COMMISSIONER OF CENTRAL EXCISE, (APPEALS), CHENNAI BENCH
Hardy Exploration & Production (I) Inc., In re
ORDER-IN-APPEAL NO. 146 OF 2011 (MST)
Appeal No. 49 OF 2010 (MST)
AUGUST 25, 2011
ORDER
1. This is an appeal filed by M/s. Hardy Exploration & Production (India) Inc., Chennai (hereinafter referred to as appellant) against the Order-in-Original No. 86/2009(R), dated 8-12-2009 passed by the Deputy Commissioner of Service Tax, I Division, Service Tax Comm’te, Chennai.
2. Briefly stated facts of the case are that the appellant had entered into a Production Sharing Contract with ONGC, Tata Petrodyne Limited and Hindustan Oil Exploration Company Limited and Government of India which entitles them to carry out Petroleum Operations in the CY-OS-90/1 Block and to extract crude oil therefrom. They had entered into a Joint Operating agreement and the appellant had been appointed as the operator of the Block.
2.1 The appellant as an operator had entered into an agreement with M/s. Aban Offshore Ltd. for supply and operations of a ‘Floating Rig’ for use in its production activities. M/s. Aban Offshore Ltd. is a registered service tax assessee under the category “Mining Service” Storage and Warehousing Service, GTA Service, etc. M/s. Aban Offshore Ltd. had charged Service tax from the appellant for supply and operations of rig under “Mining Service” w.e.f. 1-6-2007. The appellant had filed a refund claim for Rs. 13,88,47,930/- on 5-5-2009 on the grounds that the Service tax on supply of rig is taxable w.e.f. 16-5-2008 only under the category “Supply of tangible goods” service and that they had been erroneously charged by M/s. Aban Offshore Ltd. under “Mining Service” and the same was paid by them erroneously for the period from 1-6-2007 to 15-5-2008 under the said category.
2.2 The appellant was issued with a show cause notice proposing to reject the refund claim on the following grounds :
(a) M/s. Aban Offshore Ltd. who had collected service tax from the appellant and paid to the Department under Mining service had not raised classification dispute.
(b) The appellant had relied on the judgment of Bombay High Court in the case of Indian National Shipowners’ Association v. Union of India [2009] 19 STT 408 in support of their contention, but the Department had filed a SLP in the Supreme Court against the order of Bombay High Court and as such the issue has not attained finality.
(c) Out of the claimed amount, an amount of Rs. 10,42,56,531/- paid during the period 5-9-2007 to 5-4-2008 is hit by time-bar and the remaining amount cannot be sanctioned on the above grounds.
(d) The appellant had not produced any documentary evidence to show that the incidence of duty had not been passed on by them to any other person.
(e) The appellant as a service receiver had not produced any disclaimer certificate from M/s. Aban Offshore Ltd.
3. After due process of law, the Lower Adjudicating Authority had rejected the refund claims on the above grounds vide impugned Order-in-Original. Aggrieved, the appellant had filed this appeal mainly on the following grounds :
(i) that the conclusion of the Lower Adjudicating Authority that the activity of supply of ‘floating rig’ is not classifiable under ‘supply of tangible goods’ services merely because the judgment of the Bombay High Court in the matter of Indian National Shipowners Association (supra) is appealed before the Supreme Court is erroneous.
(ii) that the appellant wishes to submit that when a new entry is introduced covering a particular activity, without amending the earlier entry, it cannot be said that the earlier entry covered the subsequently introduced entry. In other words, in case if a new entry is brought within the ambit of tax subsequently, it is to be presumed that the same was not taxable earlier.
(iii) that the appellant also wishes to submit that transaction of supply of rigs cannot be classified under the taxable service category of ‘mining services’ even on the strength of the words ‘in relation to’ appearing in the definition of ‘mining services’ as the words ‘in relation to’ are also to be read in the context only and cannot be interpreted to refer to the activity of ‘supply of tangible goods’.
(iv) that the conclusion of the Lower Adjudicating Authority that the appellant has not proved with documentary evidence that it has not passed on the burden of tax to any other person. The appellant submitted that the concept of unjust enrichment is not applicable to their case for the following reasons :
(a) It is clear from the relevant clauses of contract regarding price determination of oil, that the price in respect of crude oil produced is fixed based on the price quoted in the market and has no bearing whatsoever on cost of production of crude oil. Crude oil is a commodity item and the price of the commodity items are determined based on various market forces viz. demand and supply, competitors’ activities. Govt. policies, etc. and these prices bear no co-relation to the costs incurred by the appellant.
(b) Unjust enrichment inapplicable if price fixation is beyond control of appellant.
(c) Unjust enrichment not applicable if collection of tax is illegitimate.
(v) that they relied upon the following case laws in their defence :
(i) Girish Foods & Beverages (P.) Ltd. v. CCE 2007 (211) ELT 388 (Tri.-Mumbai)
(ii) Oswal Chemicals & Fertilizers v. CCE 2004 (172) ELT 216 (Tri-Delhi)
(iii) Mcnally Bharat Engg. Co. Ltd. v. CCE 2004 (168) ELT 249 (Tri – Kol.)
(iv) Steel Authority of India Ltd. v. CC 2007 (210) ELT 353 (Tri – Kol.).
4. Personal hearing was held on 12-7-2011. S/Shri B. Shankar, Senior Advisor, Rajaram Ramanan, Senior Consultant, Pawan Kochar and R. Jeevanandam, CFO of the appellant appeared before me. Despite intimation no one has appeared from the Department side. During the hearing in addition to reiterating the submissions made in the grounds of appeal memorandum, they have emphasized the following aspects :-
(i) their activity of processing of crude oil after the extraction from the oil well will not fall under mining operations. In other words it is post-mining operation and they relied on Bombay High Court judgment in the case of Indian National Shipowners’ Association (supra), which has been affirmed by the Hon’ble Apex Court Union of India v. Indian National Shipowners’ Association [2011] 30 STT 254
(ii) that the refund claim is not hit by limitation inasmuch as the time prescribed under Section 11B is applicable only to those tax which is collected as permitted by the statute and in the instant case the tax was collected without authority of law and hence time limit is not applicable.
(iii) that the conclusion of the Lower Authority that they have not produced documentary evidence is not correct inasmuch as they have produced all the documentary evidences such as copies of invoices, challans evidencing tax payment, disclaimer certificate from Aban and copy of crude sale agreement of CPCL.
During the hearing they have submitted those documents that have been submitted before the Lower Authority. In addition they have undertaken to produce a certificate from CPCL to the effect that their client has not collected Service Tax from them. As regards non-application of unjust enrichment they relied on the Hon’ble Supreme Court’s judgment in the case of State of Rajasthan v. Hindustan Copper Ltd. [1998] 9 SCC 708.
5. I have carefully gone through the records of the case, case laws and the submissions filed oral as well as written. The issue to be decided in the instant case is whether the appellant as a service receiver is entitled for the refund claimed by him. In other words it has to be decided whether the activity of supply of floating rigs by M/s. Aban Offshore Ltd. is covered under the category “Supply of tangible goods” service as contended by the appellant or under the category “Mining service” as alleged by the Department.
5.1 I find from the records that the refund claim was rejected by the Lower Adjudicating Authority on the following grounds : (i) part of the claim hit by time-bar; (ii) the service provider had not raised the classification dispute; (iii) no documentary evidence had been produced by the appellant to show that the incidence of tax has not been passed on to any other person; (iv) Indian National Shipowners’ Association case (supra) had not attained finality; (v) disclaimer certificate from M/s. Aban had not been produced by the appellant.
5.2 The appellant’s main contention is that the Service tax on supply of rig is taxable only w.e.f. 16-5-2008 under the category “Supply of tangible goods” service and that they had been erroneously charged by M/s. Aban Offshore Ltd. under “Mining Service” and the same was paid by them erroneously for the period 1-6-2007 to 15-5-2008 under the said category; and hence they are eligible for the refund.
5.3 Now the question to be answered is whether the activity of supply of floating rigs is covered under “Mining Service” or “Supply of tangible goods” service. Taxable service under the category “Mining Service” has been defined under the Finance Act as follows :
“Taxable service” means any service provided or to be provided to any person, by any other person in relation to mining of mineral, oil or gas [Section 65(105)(zzzy) of the Act].
The essential ingredients of the service are :
♦ The service must be provided to any person
♦ The service must be provided by any other person
♦ The service must be in relation to mining or mineral oil or gas.
The word ‘mine’ has been very widely defined to include infrastructure created for mining of minerals, oil or gas. Thus, the meaning of mining has to be restricted to process of extracting metallic or non-metallic mineral deposits. In short, the word ‘mining’ must be understood as the process of taking minerals, gas or oil from underneath the surface of the earth. I find that from the above definition that the process of actual extraction of mineral, oil or gas from beneath the earth is taxable under this category. I also find that in the instant case the floating rigs supplied by M/s. Aban is used by the appellant for purifying the extracted oil which is an activity subsequent to the extraction of oil. As the activity to be taxed under “Mining Service” is restricted to actual extraction of oil, the process carried out by the appellant after extraction of oil by using the floating rigs supplied by M/s. Aban is definitely not covered under this category. Hence, I hold that the activity of supply of floating rigs to the appellant by M/s. Aban is not covered under “Mining Service”.
5.4 Taxable service under the category “Supply of tangible goods” has been defined under the Finance Act as follows :
“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 appliance.
According to the above definition, a service becomes taxable as supply of tangible goods service, when :
• The service is provided in relation to supply of tangible goods
• The supply is without transferring right of possession and effective control of goods
• The service may be provided by any person to any other person.
The taxability of ‘supply of tangible goods services’ would get attracted when a supply of tangible goods including machinery, equipment and appliances is made for the use of service recipient. From the above definition, I find that the taxable service covers where tangible goods are supplied without transferring possession and effective control thereof though the goods are made available to the service recipient for use. In the instant case, M/s. Aban had supplied floating rigs to the appellant for post extraction activity without transferring possession and effective control.
5.5 In the grounds of appeal as well as during the hearing, the appellant had relied on the judgment in the case of Indian National Shipowners’ Association (supra) by the Hon’ble High Court of Bombay, which was later affirmed by the Hon’ble Supreme Court in the case of Indian National Shipowners’ Association (supra), the relevant portion of the case is quoted below for reference :-
“Mining service – Supply of Tangible Goods service – Marine logistics services – Offshore support vessels, marine construction barges and harbour tugs provided to exploration and production companies – Service tax paid under Supply of Tangible Goods service from 16-5-2008 – Demand of Service tax under Mining service for prior period – Vessels given on time charter basis without parting with right of possession and effective control – Impugned services covered only upon insertion of new entry (zzzzj) in Section 65(105) of Finance Act, 1994 – Impugned services are either pre-mining or post-mining activities not having direct relation to mining – Letters issued by Department quashed – Sections 65(105)(zzzy) and 65(105)(zzzzj) ibid. – There was no entry covering transport by sea. Legislature could have easily provided for such an entry. Absence of such entry leads us to conclude that the chartering of vessels was not covered by any entry prior to insertion of entry (zzzzj)…it must be held that the said services were not specified under any entry and hence were not liable to Service tax till entry (zzzzj) was introduced covering them. [paras 11, 19, 37, 40, 48].
Mining service – Supply of Tangible Goods service – Scope of – Entry (zzzy) in Section 65(105) of Finance Act, 1994 covers services provided to any person in relation to mining of mineral, oil or gas – Services covered by entry (zzzzj) ibid identifiable by supply of tangible goods including machinery, equipment and appliances for use and absence of transfer of right of possession and effective control over such goods – Entry (zzzzj) not a specie of entry (zzzy) – C.B.E. & C. circulars clarifying that activities having direct relation to mining covered under Mining service – Services having remote connection cannot be included under Mining service merely on the strength of words “in relation to” – Sections 65(105)(zzzy) and 65(105)(zzzzj) ibid, [paras 37, 38, 42, 48].
Tax liability (Service tax) – New services – Introduction of new entry and inclusion of certain services in that entry presupposes that there was no earlier entry covering such services – Section 66 of Finance Act, 1994. [para 38]
Supply of Tangible Goods service – Mining service – Creation of new entry for Supply of Tangible Goods service not by amending earlier entry on Mining service and not by carving out of Mining service – Providing vessels on time charter basis without giving effective control not covered under Mining service – Sections 65(105)(zzzy) and 65(105)(zzzzj) of Finance Act, 1994. [paras 38, 48].”
“Mining service – Supply of Tangible Goods service – Service tax liability during period from 1-6-2007 to 15-5-2008 – Appellant contending that members of respondent-association liable to Service tax for impugned period under Mining service though liable under Supply of Tangible Goods service after amendment from 16-5-2008 – Scope of work relating to providing vessel – Nature of work in terms of contract with ONGC indicating that none of the work can be strictly said to be service in relation to mining of mineral, oil or gas – Nature of work as per records not even remotely connected and included within expression found in Section 65(105)(zzzy) of Finance Act, 1994 – Impugned order of High Court affirmed on facts leaving question of law open to be considered by High Court at length in appropriate case – Sections 65(105)(zzzy) and 65(105)(zzzzj) ibid. [paras 3, 4, 6, 7]”
From the above decision of the Hon’ble High Court of Bombay, which was later affirmed by the Supreme Court, it can be safely concluded that supply of floating rigs will not attract service tax under the category of ‘mining service’ but only under ‘supply of tangible goods service’.
5.6 During the earlier hearing held on 21-1-2011, it was suggested to the appellants to get expert opinion from independent sources regarding the activity conducted by them as to whether it is a part of mining operation or post mining operation. The appellant had obtained and submitted Technical opinion from three professors namely (i) Prof. Sukumar Laik (C.I), (ii) Prof. V.P. Sharma (Co. C.I) and (iii) Dr. Ajay Mandal (Co. C.I) on Flotation Production System by the Indian School of Mines, Department of Petroleum Engineering, Dhanbad – 826 004. They had primarily answered three issues, which are as follows :-
“1. of carrying out any drilling operation for mining? Whether the contractor’s Floating Production System is capable
Opinion :
The said Floating Production system is not capable of carrying out any drilling or work-over operations because the crucial technological requirements such as motion and weathervane compensation systems and many other drilling equipments, which are required for drilling are not available in the vessel. Hence is exclusively used for post production operations only.
2. the Field? Whether the contract is involved in the mining operation of
Opinion :
Based on the scope of the work and considering the capability of the vessels such as FPU, FSO and other equipments, the contractor is not involved with the mining operations.
3. Field? Whether the contractor is involved post mining operations of the
Opinion :
The Contractors role, responsibility, obligations and the compensation thereof are related to post production and therefore the activities of the Contractor is post mining”
I am inclined to accept the expert opinion by the three professors of the Indian School of Mines, Department of Petroleum Engineering, Dhanbad.
5.7 As per Section 65A of the Finance Act, if a service is classifiable under two or more sub-clauses of clause (105) of Section 65, Classification shall be effected to the sub-clause which provides the most specific description to sub-clauses providing a more general description. From the above definitions, I find that the activity of supply of floating rigs by M/s. Aban Offshore Ltd. to the appellant is more specifically covered under the category “Supply of tangible goods service”. Thus, I hold that the appellant is not liable to pay service tax on the supply of floating rigs to M/s. Aban for the disputed period. Hence, the appellant has erroneously paid the service tax for the disputed period and the appellant is right in claiming the refund.
6. I find from the records that the refund claim was rejected partially on the grounds that it is hit by time limitation. The remaining part of the claim is rejected on the grounds as mentioned in the brief facts of the case. The appellant had submitted the following documents with their submissions filed during personal hearing :
1. Disclaimer certificate dated 1-3-2011 from M/s. Aban Offshore Ltd.
2. Expert opinion dated 21-2-2011 on floating production system obtained from the professors of Indian School of Mines, Dhanbad.
I find that the above documents were not the subject-matter of the adjudication proceedings. I also find that the appeal filed by the Department with Hon’ble Supreme Court against the judgment of the Hon’ble High Court, Bombay in the matter of Indian National Shipowners Association (supra) had attained finality which is reported vide Indian National Shipowners’ Association (supra) wherein impugned order of the High Court affirmed on facts leaving question of law open to be considered by High Court at length in appropriate case.
6.1 As directed during the personal hearing, the appellant had produced a certificate from M/s. CPCL dated 15-7-2011, confirming that no service tax is either invoiced by the appellant or paid by CPCL on the sale of crude oil. Taking the above into consideration, I accept the contention of the appellant that unjust enrichment is not applicable in the instant case as the price of the Crude oil produced is fixed based on the price quoted in the market and the price fixation is beyond the control of the appellant.
6.2 The lower authority had also held that the refund claim is partially time-barred. The appellant had argued that the refund claim is not hit by limitation inasmuch as the time prescribed under Section 11B is applicable only to those tax which is collected as permitted by the statute and in the instant case the tax was collected without authority of law and hence time limit is not applicable. In this connection it is pertinent to note here that various higher judicial forums had time and again held that the time prescribed under Section 11B is applicable only to those tax which is collected as permitted by the statute and where the tax was collected without authority of law, the time limit under Section 11B of the Act, is not applicable.
The Hon’ble High Court of Madras in the case of Natraj & Venkat Associates v. Asstt. CST 2010 (249) ELT 337 (Mad.), had held as follows :
Refund – Limitation – Service tax paid on construction activity undertaken in Sri Lanka and refund thereof claimed as erroneously paid – Service tax paid on 4-7-2005 – Refund claim filed on 20-9-2006 and claim beyond period of limitation – Rejection of refund claim on time-bar appears to be as per provisions – Supreme Court in Union of India v. ITC Ltd. 1993 (67) ELT 3 (SC) upheld Delhi High Court ruling that money realized in excess of what is permissible in law is outside the provisions and such money not covered under “duty of excise” – Limitation under Section 11B of Central Excise Act, 1944 not applicable to amount paid which cannot be taken as duty of excise – High Court empowered to entertain refund claim as what was paid was not Service tax – Refund directed – Section 11B ibid as applicable to Service tax vide Section 83 of Finance Act, 1994. [paras 3, 6, 7, 13, 14, 15, 16].
Way back in 2009 as Commissioner (Appeals) Pune-II, I have taken a very similar decision in the case of Amit Spinning Industries Ltd., In re 2009 (246) ELT 782 (Commr. Appl.) wherein it was held as follows :
“Refund – When any amount is not legally payable to Government, it becomes ‘pre-deposit’ and thus there need not be any elaborate procedure for claiming refund – Appellant has gone out of Central Excise net and not paying any excise duty on his final product and under such circumstances, whatever amount is lying in his PLA account, has to be paid back summarily without any hesitation. [paras 4.3, 5]”
From the above judicial pronouncements, it is clear that where the tax was collected without authority of law, the time limit under Section 11B of the Act, is not applicable. Hence I hold that the appellant are eligible for the refund claimed.
7. As per the above discussions and the conclusions arrived at after going through the evidences produced before me, I hold that the activity of supply of floating rigs by M/s. Aban Offshore Ltd. to the appellant for post extraction work is squarely covered under “Supply of tangible goods” service and the appellant is liable to pay service tax on the same only from 16-5-2008 under that head. Thus, the appellant is eligible for the refund claimed by them.
8. Thus I set aside the impugned order and direct the Lower Adjudicating Authority to sanction the refund which is eligible otherwise as per law.
9. Appeal is allowed.
