TMI Blog2021 (10) TMI 367X X X X Extracts X X X X X X X X Extracts X X X X ..... he subject amount paid by M/s GSPC(J) to ANP, aCost Petroleum charge paid to ANP/ Exploration Costs paid to ANP/ Damages as a condition of Contract of PSC paid to ANP? - HELD THAT:- The subject payment to be paid by GSPC(J) to ANP is to be borne by GSPC(J) as the liability is several and each Respondent is obliged to pay only its respective proportionate share of the Settlement Sum per the ICC Order dated 16-9-20 and not jointly and severally, as submitted by the applicant - The subject payment is not for the breach of PS Contract. The PS Contract had been terminated on 157-15. The subject payment was in pursuance to the Deed of Settlement and Release, vide which there was an agreement between GSPA (J) and ANP and Release of Performance Guarantee of GSPA (J) by ANP - ANP not to pursue the Arbitration Proceedings against GSPC(J) on payment of subject payment by GSPC(J), as the subject payment, as per ICC Order 169-20 is to be paid by GSPC as the liability is several and each Respondent is obliged to pay only its respective proportionate share of the Settlement Sum. Supply taking place or not - HELD THAT:- The subject activities performed by ANP to GSPC (J) for consideration of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct as regulatory authority for the oil, gas and mineral related activities in accordance with the provisions of the Petroleum Activities Law, Interim Petroleum Mining Code, the Timor Sea Treaty and the Diploma Ministerial on mineral activities; that GSPC(JPDA) holds 20% participating interest(PI) in Block JPDA 06-103 and the list of other concessionaries and their participating interest(PI) are as follows: Oilex limited: 10% PI (Operator of the Block JPD 06-103). Videocon JPDA 06-103 limited: 20% PI. Bharat Petro Resources JPDA limited: 20% PI. Pan Pacific Petroleum (JPDA 06-103) Pty Limited: 15% PI. Japan energy E P JPDA Pty limited: 15% PI. 3. The applicant has further submitted that PSC provides right to carry on petroleum operations jointly to all the Concessionaries (hereinafter referred to as Contractor ) on Production Sharing basis which outlines all the rights, responsibilities and other contractual liabilities of all the Concessionaries and Designated Authority in respect of exploration activities in Block JPDA 06-103; that Timor-Leste Government initiated arbitration proceeding against the Government of Australia to have Certain Mari ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the Proceedings and without admission by any party as to liability in respect of the claims or counterclaims, that the Respondent shall pay to the Claimant the Settlement Sum in accordance with clauses 2.2 to 2.5 of this deed. 3. Releases Releases by Claimant 3.1 On receipt of Respondent s proportionate share of the Settlement Sum in accordance with clause 2.2, the Claimant releases: (a) that Respondent; and (b) that Respondent s directors, officers, employees and agents and each of them, past and present From all actions, proceedings, accounts, rights, claims, demands, liabilities, costs and expenses, wherever and however arising, whether known or unknown, whether at law or in equity at the Execution Date, arising out of or relating in any way to the Dispute, the Proceeding and/or the PSC. 3.2 Upon release of a Respondent under this clause 3, that Respondent s respective Parent Company Guarantee shall immediately lapse and shall be returned by the Claimant. Releases by Respondents 3.3 Subject to the Proceedings being settled on the terms set out in clause 2, the Respondents release: (a) the Claimant; and (b) the Claimant s d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provisions of sub-section (1) of section 7, they shall be treated either as supply of goods or supply of services as referred to in Schedule II. 4. Production Sharing Contract is not the contract for providing services. Following are the major differences between PSC and Service Contract: In Service Contract, contractor is responsible for providing required services only and not hold ownership in the resulting products whereas in PSC, contractors hold ownership in resulting products. In Service Contract, direction and control of the operation is with Designated Authority of Government whereas in PSC control of operation is jointly by both the parties i.e. Designated Authority of Government and contractor. In Service Contract, role of contractor is service provider whereas in PSC role of contractor is partner. In Service Contract, payment to contractor is fixed fees or buyback priority whereas in PSC, contractor has share in the resulting profit. In Service Contract, contractor is required to bear full operation risk and costs whereas in PSC, operation cost is recoverable on actual as Recoverable Cost from Designated Authority on commencement of co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the oil exploration and production contractors, in case of a commercial discovery of petroleum, the contractors are entitled to recover from the sale proceeds all expenses incurred in exploration, development, production and payment of royalty. Portion of the value of petroleum which the contractor is entitled to take in a year for recovery of these contract costs is called Cost Petroleum . It was clarified that the cost petroleum is not a consideration for service to Government and thus not taxable under GST regulations. 9. GST Ruling GSTR 2001/4(GSTR), issued by the Australian Tax office explains the GST treatment of court order and out of court settlement. As per the said ruling, if a payment is made under an out of court settlement and there is no earlier or current supply, the payment will not be treated as consideration for a supply at all. 10. Hon ble Bombay High Court, in the case of Bai Mamubai Trust, Vithaldas Laxmidas Bhatia, Smt. Indu Vithaldas Bhatia vs. Suchitra (109 taxmann.com200), has held that GST is not payable on damages/compensation paid for a legal injury. The principle laid down by the Court is that such payment does not have the necessary qualit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egulations. In view thereof, settlement amount i.e. committed exploration cost payable to ANP by unincorporated Joint Venture which in turn is payable by applicant to the extent of its share in unincorporated Joint venture is not taxable under GST regulations. ANP vide letter dated 15-7-2015 terminated PSC dated 15-112006 and raised demand for cost of exploration and therefore demand raised by ANP pertains to period prior to GST regime and accordingly is not taxable under GST regulations. 9. The applicant submits that in view of the above submission, share of settlement amount payable by the applicant as a partner of UJV should not be chargeable to GST under RCM due to the following reasons: (i) Amount payable to ANP pertains to period prior to GST regime. (ii) Production Sharing Contract is for the block in JPDA which is in non-taxable territory. Unincorporated Joint venture formed under Joint operating Agreement and Operator of the UJV are in non-taxable territory. (iii) PSC is not the contract for services to Designated Authority. (iv) Share of settlement payment by applicant could not be said to be in relation to any supply or independent supply ei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cost of the Exploration not carried out for the Contract Year 2013 (pursuant to Article 4.5(a)(iii) of the PSC) in the amount of US$16,585,789.72; and 3.1.2 damages for breach of its local content obligation in the amount of US$ 433,000.00; thereby making the Contractor s total liability upon termination to be US$17,018,789.72 12. The applicant submitted the sequence of events post issuance of Notice dated 13th May 2015 by ANP as follows: 1. ANP vide notice dated 15 th July 2015 terminated the PSC with a demand of payment estimated cost of exploration not carried out and damages for breach of its local content obligations. They have submitted a copy of the notice. 2. In terms of the said demand notice dated 15 th July 2015, the demand for payment of US$ 17,018,789.51 became due and payable on 14 th August 2015. 3. ANP had on 8 th October 2018 filed request for Arbitration with the Secretariat of the International Court of Arbitration of the International Chamber of Commerce. 4. Settlement amount was agreed between parties vide Deed of the Settlement and Release dated 15 th July 2020 wherein a settlement sum is payable by Concessionaries to ANP. Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure which in turn is payable by Applicant to the extent of its share in unincorporated Joint venture is not taxable under GST regulations in India. (ii) Amount payable to ANP pertains to period prior to GST regime a. ANP vide letter dated 15.07.2015 terminated PSC dated 15.11.2006 and raised demand for cost of exploration. Applicant submits that demand raised by ANP pertains to period prior to GST regime and accordingly is not taxable under GST regulations. b. In the present case settlement of original demand is made between the Concessionaries and after that the case in the international chamber of commerce is withdrawn. In view thereof, in terms of GST regulation, the time of supply would be the date immediately following sixty days from the date of Issuance of invoice or any other document, by whatever name called, in lieu thereof by the supplier. In the instant case ANP has issued a letter dated 15.07.2015 for demanding cost of exploration not performed. Said date and sixty days from the said date are covered under the period prior to implementation of GST. Accordingly, since time of supply is prior to GST regime, GST cannot be applicable on the said payment. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion when the capacity of the assessee was not fully utilized by M/s. Parley, ex gratia charges were claimed so as to compensate the assessee from financial damage or injury. The Department invoked the provisions of [Section] 66E(e) to levy tax on the amount so received. The Tribunal held that the ex gratia charges were for making good the damages due to the breach of the terms of the contract and did not emanate from any obligation on the part of any of the parties to tolerate an act or a situation and cannot be considered to be towards payment for any services. Relevant extract of the decision is reproduced herein: In the present case apart from manufacturing and receiving the cost of the same, the appellants were also receiving the compensation charges under the head ex-gratia job charges. The same are not covered by any of the Acts as described under Section 66E(e) of the Finance Act, 1994. The said sub-clause proceeds to state various active and passive actions or reactions which are declared to be a service namely; to refrain from an act, or to tolerate an act or a situation, or to do an act. As such for invocation of the said clause, there has to be first a concurrence ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TS-301-CESTAT-2021ST]. (copy submitted). In this decision, the Hon ble Tribunal Delhi has examined the taxability (service tax) of the amount received by the service recipient as payment (compensation) for a service provider s failure to provide quality services, as specified in the agreement. In this case Ruchi Soya Industries Limited, which is engaged in the business of generation of wind energy, purchased and used wind turbine generators to generate wind energy. Operation and maintenance of these wind turbine generators was outsourced to Suzlon Global Services Ltd. Suzlon is the service provider and the Ruchi Soya the service recipient in this case. According to the agreement between the Ruchi Soya and Suzlon, Suzlon would maintain the wind turbine generators in working condition so that they would be available for use by the Ruchi Soya. It is further provided in the Machine availability clause of the agreement that if the availability of the wind turbine generators dropped between 92.5% and 95.5%, then Suzlon would have to compensate Ruchi Soya an amount equal to 3% of the annual operation and maintenance charges for every 1% of shortfall below 95.5% of average machine availa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that it is available for use by Ruchi Soya for more than 95.5% of the time. The said clause sets out that Ruchi Soya will not bare losses for Suzlon s failure to provide quality services and in the event that Suzlon does fail to provide a quality service, it should make good the losses borne by Ruchi Soya. It was observed by the CESTAT that the payment of compensation should not be construed as the taxable service of tolerating an act by the service recipient. Incorporation of penalty clauses is a condition in the contract and the payment pursuant to such a clause is condition to the contract . Thus, reading the agreement as a whole and considering the intent and purpose of the contract is necessary in ascertaining taxability. It is opined that when the agreement is read in its entirety it is evident that the machine availability clause is incorporated to ensure that the terms of agreement are not violated and Suzlon does not compromise on the quality of service. Should the quality of service be inadequate, the commercial interests of Ruchi Soya are safeguarded in the form of compensation payable by Suzlon. Reference was made to the decision of South Eastern Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance Ruling sought: 15. Whether payment of settlement fees pursuant to deed of settlement and Release signed for Timor-Leste Oil Block Production Sharing Contract qualifies as a supply under Goods and Service Tax(GST) regulations and thereby attract levy of GST? 16. Vide submission dated 29-6-2021, the applicant rephrased the question as follows: Whether payment of settlement fees against demand made by Autoridade Nacional do Petroleo E Minerais (ANP) vide letter dated 15.07.2015 attract levy of GST under GST regulations. Personal hearing: 17. Shri Anil Chauhan, C.A. appeared for the hearing on 30-6-21 and reiterated the contents of the application and the contents of submission dated 29-6-21. Further as per the request of the applicant, another personal hearing (through video conferencing) was accorded on 12-8-2021 for which Shri Anil Chauhan, C.A. appeared. During the course of personal hearing, Shri Chauhan was enquired if the performance guarantee was encashed before the settlement to which he replied that till the completion of settlement, performance guarantee was not encashed. FINDINGS 18. At the outset we would like to make it clear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (J) is entitled to take/ receive as per PS Contract. In subject matter, we find a situation where GSPC(J) is paying subject payment to ANP and not receiving any amount from ANP. CBIC vide Circular No.32/06/2018-GST dated 12-2-18 clarified that as per the Production Sharing Contract (PSC) between the Government and the oil exploration and production contractors, in case of a commercial discovery of petroleum, the contractors are entitled to recover from the sale proceeds all expenses incurred in exploration, development, production and payment of royalty. Portion of the value of petroleum which the contractor is entitled to take in a year for recovery of these contract costs is called Cost Petroleum . It was clarified that the cost petroleum is not a consideration for service to Government and thus not taxable under GST regulations. The subject payment under consideration is not Cost Petroleum. ii. The subject payment is not Exploration Cost/ Reimbursements cost as contended by GSPC (J) in subject application. ANP vide its letter dated 15-7-2015 terminated PS Contract and raised demand for cost of exploration. We do not find a situation of payment of amount of exploration cost ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purposes of this Act, the expression supply includes (a) all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business; (b) import of services for a consideration whether or not in the course or furtherance of business; (c) the activities specified in Schedule I, made or agreed to be made without a consideration; and (d) the activities to be treated as supply of goods or supply of services as referred to in Schedule II. iii. We also note that there is a specific entry at clause 5(e) to Schedule II, CGST Act, as follows: (e) agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act; As per said Schedule II (5) (e), the said activity shall be treated as Supply of Service. iv. We hold that subject activities performed by ANP to GSPC (J) for consideration of subject payment is Supply of Service in the GST era. 21.3 Is subject Supply in GST era or not? i. We note that the subject payment is made in pursuance to the Deed of Settleme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in column (2) of the Table below, supplied by a person as specified in column (3) of the said Table, the whole of integrated tax leviable under section 5 of the said Integrated Goods and Services Tax Act, shall be paid on reverse charge basis by the recipient of the such services as specified in column (4) of the said Table:- Sl.No. Category of Supply of Services Supplier of service Recipient of Service (1) (2) (3) (4) 1. Any service supplied by any person who is located in a non-taxable territory to any person other than non-taxable online recipient. Any person located in a non-taxable territory Any person located in the taxable territory other than non-taxable online recipient. 22.1 Thus we find that this situation, calls into action, the provisions of Entry No. 1 of Notification No. 10/2017- IGST (Rate). What we find here is the supply of service by ANP which is in non taxable territory to GSPC(J) which is in taxable terri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7 CGST Act and Schedule II(5)(e) CGST Act where the subject activity by ANP to GSPC(J) is supply of service, there is supply of service in subject matter and the cited Australian office comments is not applicable in subject matter. Also, GST liability is as per GST Scheme of law enacted by the competent legislature in India and we confine ourselves to the Central Goods and Services Act, 2017 enancted by the Parliament for arriving at our conclusion for pronouncement of the Ruling. Further, we find that GSPC(J) has placed reliance on certain case laws pertaining to the Service Tax era, such as, in KN Food Industries case CESTAT held that the appellants are entitled ex-gratia job charges to cover up the loss or deficiencies in normal job charges and that this was due to breach of terms of contract and is not considered to be towards payment for any services; in the case of M.P. Poorva Kshetra Vidyut Vitran Co. Ltd. CESTAT held that demand of Service Tax on the amount collected towards liquidated damages and theft of electricity collected by the appellant is not liable; CESTAT s decision in the case of Ruchi Soya Industries Limited wherein the demand of service tax by the Dep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .com 200 the issue pertained to (i) liability of GST on services or assistance rendered by the Court Receiver appointed by the Court and (ii) GST liability on royalty or payments under a different head paid by a defendant to the Court Receiver in respect of properties over which a Court Receiver has been appointed. Hon ble Bombay High Court, in the case of Bai Mamubai Trust, Vithaldas Laxmid as Bhatia, Smt. Indu Vithaldas Bhatia vs. Suchitra (109 taxmann.com 200) , has held that GST is not payable on damages/compensation paid for a legal injury. The principle laid down by the Court is that such payment does not have the necessary quality of reciprocity to make it a supply and, therefore, GST is not payable on such amount. The subject matter of GSPC(J), has reciprocity and supply of service from ANP to GSPC(J). We note that the subject supply of service in not envisaged or arising from the Production sharing agreement, but arising as an agreement between ANP and GSPC(J) and is dependent on the Deed of Settlement and Release and therefore we hold that subject settlement amount is not due to a breach of contract of PSC but due to the ANP s obligation to supply said services to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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