B.G. Exploration & Production India Ltd. Vs Commissioner of CGST (CESTAT Mumbai)
Conclusion: In present facts of the case, the Hon’ble Tribunal observed that allowed appeals on the ground that consideration cannot be deciphered out from any clauses of the Contract and without consideration Service Tax cannot be demanded.
Facts: The issue involved in these appeals is whether entitlement towards “Cost Petroleum” under the “Production Sharing Contract” can be treated as “consideration” for rendering “mining services” to the Government of India. The Commissioner, by the impugned order, has confirmed the demand of service tax with interest and penalty.
In terms of Article 297 of the Constitution of India, lands, minerals and other things of value underlying the ocean within the territorial waters, or the continental shelf, or the exclusive economic zone of India, vest in the Union and are to be held for the purposes of the Union. The Government of India took a policy decision to enter into public-private partnerships with private parties, with a view to optimise production of such natural resources. Accordingly, the Government of India issued a Notice Inviting Offers for joint ventures to develop medium sized oil fields in India. Pursuant to the said Notice Inviting Offers, the Government of India entered into contracts with private parties for production of petroleum and the costs and profits were shared between the Government and the private parties as per the formula prescribed and agreed in the Contracts. The purpose of the said Contracts was to obtain capital investment and technical expertise from the private parties to achieve the objective of optimum production. The common objective was to explore, develop and produce the maximum amount of mineral resource for commercial sale.
Pursuant to a Notice Inviting Offers issued in 1992 for a joint venture to develop medium sized oil and gas fields, the Government of India on 22.12.1994, entered into contracts for the discovery and exploitation of petroleum resources. Under the Contracts, the Holders were required to enter into an Operating Agreement.
The first two phases of the Contract, namely exploration and development require an investment cycle in which the Government did not invest. This investment was made by the Holders. In this phase, since there is a recurring need of finance/ capital investment, a joint account is created, and capital contributions are made from time to time depending upon the project requirements through ‘Cash Calls’. In case the exploration is successful, the mineral is extracted. The said mineral is first used by the Holders to recover the expenses incurred i.e. Cost Petroleum and then the excess share is the profit, known as “Profit Petroleum” which is shared amongst the parties to the Contract i.e. the Government of India and the Holders in the prescribed proportion as per the investment multiple in the terms agreed in the Contract. The ability of the Contractor to recover any costs so incurred for the Petroleum Operations is dependent on the existence of “Cost Petroleum”. Thus, in the event the exploration is unsuccessful, the costs incurred would have to be borne by the Holders and would not in any manner be reimbursed by the Government. Further, the ability of the Government of India and the Holders to share surplus profits is dependent upon there being a distributable surplus after deduction of the costs incurred by the Holders.
According to the appellant, the commercial nature of the transaction under the Production Sharing Contract dated 22.12.1994 between the Government of India, and the appellant is a joint venture and the activities undertaken by the co-venturers within the framework of a “joint venture” cannot be considered as rendition of “service”, liable to service tax. The appellant also contends that the components of “Cost Petroleum” and “Profit Petroleum” are inherent and embedded part of the Production Sharing Contract and consequently, such components cannot be treated as “consideration” for the “services rendered” by the appellant.
The Hon’ble Tribunal observed that this issue was examined at length by the Division Bench of the Tribunal in the decision rendered by the Tribunal on 06.10.2021, in the case of the appellant itself, which decision is reported in 2021 (10) TMI 306- CESTAT (Mum). The Tribunal, after referring to the earlier decision of the Tribunal rendered on 11.06.2020 in the case of the appellant, which decision is reported in 2020 (10) TMI 579-CESTAT (Mum), the decision of the Tribunal in Mormugao Port Trust and the decision of the Supreme Court in Faqir Chand Gulati and after noticing that an appeal had been filed by the Department in the Bombay High Court against the decision of the Tribunal rendered on 11.06.2020, observed that the Government of India with the appellant, RIL and ONGC had entered into a joint venture agreement, where under each co-venturer had its own set of obligations and the responsibility discharged by each of the co-venturers towards the venture was not by way of any service rendered to the joint venture, but in their own interest in furtherance of the common objective of the joint venture. Service tax liability, therefore, could not have been fastened upon the Appellant. The paragraphs of the decision relevant for the purpose this order are as follows:
“33. It can safely be concluded that the Government of India with the Appellant, RIL and ONGC had entered into a joint venture agreement, whereunder each co-venturer had its own set of obligations and the responsibility discharged by each of the co-venturers towards the venture was not by way of any service rendered to the joint venture, but in their own interest in furtherance of the common objective of the joint venture. Service tax liability, therefore, could not have been fastened upon the Appellant.”
(emphasis supplied)
Further it was observed that from the provisions of the Production Sharing Contract it is clear that Cost Petroleum and Profit Petroleum cannot be said to be consideration flowing from the Government of India to the appellant and that the components of “Cost Petroleum” and “Profit Petroleum” are inherent and embedded part of the Production Sharing Contract. Consequently, such components cannot be treated as “consideration” for the “services rendered” by the appellant. The Hon’ble Tribunal relied upon the Circular dated 12.02.2018. wherein it was mention that Contractors carry out the exploration and production of petroleum for themselves and not as a service to the Government of India and “Cost Petroleum” is not a consideration for service to Government of India and thus not taxable per se.
Accordingly, the appeals were allowed.
FULL TEXT OF THE CESTAT MUMBAI ORDER
Service Tax Appeal No. 86004 of 2019 and Service Tax Appeal No. 86007 of 2019 have been filed by B.G. Exploration and Production India Ltd.1 (formerly known as Enron Oil and Gas India Ltd.) to assail the common order dated 31.12.2018 passed by the Commissioner, CGST and CX, Navi Mumbai2 adjudicating the two show cause notices dated 15.12.2016 and 17.07.2017 issued for the period 2011-12 to 2013-14 and 2014-15 to 2015-16 respectively. The issue involved in these appeals is whether entitlement towards “Cost Petroleum” under the “Production Sharing Contract” can be treated as “consideration” for rendering “mining services” to the Government of India. The Commissioner, by the impugned order, has confirmed the demand of service tax with interest and penalty.
2. Service Tax Appeal No. 86312 of 2020 has been filed to assail the order dated 31.08.2020 that adjudicates the show cause notice dated 05.07.2019 issued for the period April 2016 to June 2017. The issue involved in this appeal is whether entitlement towards to “Cost Petroleum” and Profit Petroleum under the “Production Sharing Contract” can be treated as the consideration for rendering “mining services” to the Government of India. The impugned order confirms the demand of service tax with interest and penalty.
3. The details of the proceedings and the issues under consideration are enumerated in the following Tabular Chart:-
