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2020 (10) TMI 579 - AT - Service TaxFastening of tax liability by combination of the legal fiction in Finance Act, 1994 for deeming ‘provider’ and ‘recipient’ - inclusion of a particular business model within the compasses of that very fiction by way of a clarificatory circular of the Central Board of Excise & Customs that was deployed by the adjudicating authority - attribution of certain expenditure of the appellant to one of their business ventures sufficed for it to be ‘consideration’ for service rendered - HELD THAT:- There are no doubt that agreement among entities for rendering of service to another entity is the essence of ‘joint venture’; however, it is doubtful if ‘joint operation agreement’, mandated by the terms of the ‘production sharing contract’, can be deemed to be one such in the absence of an external beneficiary. In the impugned contract, the several participating interests are, collegially, designated as ‘contractor’ in the singular and in furtherance of the policy of the Government of India to involve corporate participation for efficient harnessing of natural resources as codified in the ‘production sharing contract’ agreed upon. This, then, would be the primary association as joint venture comprising of four entities, including Government of India, for viability in extraction of natural resource as the common goal. The manner in which the contract provides for distribution of ‘profit petroleum’ and ‘cost petroleum’ is a business model for ensconcing within itself the alienation of risk by the Government of India which necessarily mandates a working arrangement for the disaggregation of ‘cost petroleum’ as compensation for the mutually exclusive risks undertaken by the contractor. The participating interests in the ‘joint operations’ have not come together of their own accord for the common purpose of bearing the risk but from one stipulation in the contract setting forth the common purpose including the participation in the proceeds of ‘profit petroleum’ that is extracted. Service is the satisfaction of one’s need by another person with the existence of a ‘provider’ as sine qua non in any service transaction and with accumulated capital affording the luxury of such satisfaction. Owing to increasing pressure on manufacturers to scale up size and to specialize in competencies for achieving cost optimality, that is no longer a luxury borne on affordability. With the maturing of this sector, the State inserted itself as a stakeholder and, as always, tax was, so to speak, the foot in the door. Taxpayer fatigue, engendered by prohibitively high rates, frenetic enforcement overreach and incessant adversarial litigation, was not conducive to direct implementation of the ‘negative list’; more so, as definitional certitude was necessary to guide assesses and assessors through unfamiliar territory of intangibles. The addition of services to the enumeration, though slow in the early years, underwent a five-fold increase between 2000-01 and 2006-07 signposting the imminence of transition to ‘negative list’ regime. No business venture can function without capital and the by-passing of transubstantiation of accumulated capital, in the form of cash and bank balances, into these rights and competencies does not derogate from that. Hence, the activity undertaken by the appellant with its cost equivalence recorded in the books is nothing but capital contribution. The adjudicating authority has erred in concluding that the mechanism of ‘cash call’ prescribed in the ‘joint operations agreement’ is consideration for services; it is intended as the vehicle for contribution by the participating interests to the capital requirements of the venture. As such capital contributions are obligated for the establishment and operation of a business venture, it is not ‘consideration’ for rendering of any taxable service. It is found that it is parties to the ‘production sharing contract’ who constitute a joint venture and that the Explanation below section 65B (44), intended to cover supply of services to a constituent of ‘unincorporated associations’ or ‘body of persons’ by the latter is not relevant to the present dispute. Further, the fulfilment of obligation to contribute to the capital of the joint venture is beyond the scope of taxation under Finance Act, 1994 as it does not amount to consideration. The performance of such obligations is intended to serve itself and, thereby, the joint-venture. As the demand confirmed in impugned order is not on the consideration for rendering of a service, we are not required to decide on the other issues. Appeal allowed - decided in favor of appellant.
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