TMI Blog2022 (1) TMI 207X X X X Extracts X X X X X X X X Extracts X X X X ..... -VERSA) [ 2016 (11) TMI 520 - CESTAT MUMBAI] and the decision of the Supreme Court in FAQIR CHAND GULATI VERSUS UPPAL AGENCIES PVT. LTD. [ 2008 (7) TMI 159 - SUPREME COURT] 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, 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. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Period of Dispute Show Cause Notice date Issue Order-in-Original Demand Barred under the longer period of limitation Proceedings initiated under 86004/2019 2011-12 to 2013-14 15 December 2016 Whether the entitlement towards Cost Petroleum under the Production Sharing Contract be treated as the consideration for rendering Mining services to the Government of India? 31 December 2018 ₹ 929.53 crores ₹ 929.53 crores Proviso to section 73(1) of Finance Act. 86007/2019 2014-15 to 2015-16 17 April 2017 31 December 2018 ₹ 676.56 crores - Section 73(1A) of Finance Act 86312/2020 April 2016 to June 2017 05 July 2019 Whether the entitlement towards ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7. 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 two separate contracts [the Contracts] with Enron Oil and Gas India Ltd. (now the appellant), Reliance Industries Ltd. [RIL] and Oil and Natural Gas Corporation Ltd. [ONGC] for the discovery and exploitation of petroleum resources in Panna and Mukta and Mid and South Tapti fields [the Contract Areas]. The terms of the two Contracts are identical. The appellant, RIL and ONGC shall be called Holders . Under the Contracts, the Holders were required to enter into an Operating Agreement. Accordingly, Enron Oil and Gas India Ltd., RIL and ONGC entered into a Joint Operating Agreement [Agreement] on 22.12.1994 to define their respective rights, duties and obligations with respect to their operations under the Contracts. In terms of the Agreement, liabilities incurred by any Holder were required to be borne by all the Holders in accordance with the ratio for performing their obligations. These expenses were required to debited in the joint account and cash calls raised and reimbursement taken from the Joint Account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... curred 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. 12. The issue arising in all the three appeals relates to the Production Sharing Contract dated 22.12.1994 and the cause of action, as can be culled out from the show cause notice, is as follows: (i) The transaction between the appellant (on behalf of all the three Holders i.e., the appellant RIL and ONGC) and the Government of India are on principal-to-principal basis. The appellant (on behalf of the Holders) and the Government of India are two separate and distinct juridical persons, with the former acting as the service provider and the latter acting as the service recipient; (ii) The appellant (on behalf of the Holders) is providing mining services (i.e., development of exploration and production of crude oil, gas and condensate) to the Government of India; (iii) The recovery of cost of service i.e. Cost Petroleum from the Government of India represents the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibutions 16. From our discussion supra, we find 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. 14. It needs to be noted that both the aforesaid decisions of the Tribunal refer to and relay upon an earlier decision of the Tribunal in Mormugoa Port Trust vs. Commissioner of Customs, Excise Service Tax [2017 (48) STR 69 (Tri-Mum)]. The relevant observations of the Tribunal in Mormugao Port Trust are reproduced below: 12 .. In our view this arrangement in the nature of the joint venture where tw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... partner. All the resources and contribution of a partner enter into a common pool of resource required for running the joint enterprise and if such an enterprise is successful the partners become entitled to profits as a reward for the risks taken by them for investing their resources in the venture. A contractor-contractee or the principal-client relationship which is an essential element of any taxable service is absent in the relationship amongst the partners/co-venturers or between the co-venturers and joint venture. In such an arrangement of joint venture/partnership, the element of consideration i.e. the quid pro quo for services, which is a necessary ingredient of any taxable service is absent. 15. The Civil Appeal filed by the Department (Commissioner vs. Mormugao Port Trust) against the aforesaid decision of the Tribunal was dismissed by the Supreme Court, both on the ground of delay as well as on merits and the judgment is reported in 2018 (19) GSTL J 118 (SC). 16. Shri Rohan Shah, learned senior counsel assisted by Shri Vipin Kumar Jain, appearing for the appellant made the following submissions: (i) The commercial nature of the transaction under the Productio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Joint Venture, which is not an Incorporated Association of persons, from the common pool lies within the ambit of service tax applicability. (ii) The Joint Venture Committee is a body of companies and the appellant is one of the constituent member providing mining services for consideration received from the common pool of fund of the Joint Venture and ultimately reimbursed by the beneficiary Government of India as Cost Petroleum to the Joint Venture Companies and, therefore, satisfies the criteria of applicability of service tax; (iii) The activities of the Joint Venture Companies is in the interest of the Government as the three Companies have no field of their own but the fields belong to the Government of India, for which the work has been carried out; (iv) In connection with the Final Order dated 11.06.2020 passed by the Tribunal in Service Tax Appeal No. 87085 of 2017, the department has preferred an appeal before the Bombay High Court; and (v) The Supreme Court in State of West Bengal vs. Calcutta Club Limited [ 2019 (29) G.S.T.L. 545 (S.C.) ] has clearly held that the doctrine of mutuality continues to be applicable to incorporated and unincorporated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the appellant recovers the cost of service from the Government of India by way of deduction from account / book adjustment at the time of profit sharing. It, therefore, proposes that the appellant should have paid service tax on such mining services on the aforesaid consideration received by the appellant. 23. According to the appellant, the commercial nature of the transaction under the Production Sharing Contract dated 22.12.1994 between the Government of India, ONGC, RIL 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. 24. To appreciate the contentions raised on behalf of the appellant and the Department, it would be useful to reproduce the relevant clauses of the Production Sharing Contract between the Government of India, ONGC, RIL and the appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the Effective Date in connection with Development Operations under the Development Plan for Panna and Mukta Fields (as those Fields are determined in the Development Plan first approved by the Management Committee) which exceed Contractor s Cost Recovery Limit (as hereinafter defined). 13.1.2 For the purposes of this Article 13.1, Contractor s Cost Recovery Limit means costs incurred after the Effective Date relating to the construction and/or establishment of such facilities as are necessary to produce, process, store and transport Petroleum from within the Existing Discoveries, in order to enable Oil production of thirty-eight thousand three hundred barrels per day (38,300 BOPD) in accordance with the Development Plan for the Panna and Mukta Fields. Such costs shall include costs incurred in relation to those items illustrated in Appendix G and matters in connection therewith. Appeandix G, Annex G-1, further describes Companies development concept based on an assumed project start date of 1st July, 1993, and Parties understand and agree that the schedules and activities contained in such assessment shall be revised, subject to Management Committee approval, by the Contrac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Article 13.1. a) recovery shall first be made of the Production Costs; and b) recovery shall next be made of the Exploration Costs; and c) recovery shall then be made of the Development Costs. The unrecovered portions of Contract Costs shall be carried forward to the following Financial Year and the Contractor shall be entitled to recover such Costs in such Financial Year or the subsequent Financial Years as if such costs were due for recovery in that Financial Year, or the succeeding Financial Years, until the unrecovered costs have been fully recovered out of Cost Petroleum from the Contract Area. ARTICLE 14 Production Sharing of Petroleum Between Contractor and Government 14.1 The Contractor and the Government shall share in the Profit Petroleum from the Contract Area in accordance with the provisions of this Article. The share of Profit Petroleum, in any Financial Year, Shall be calculated for the Contract Area on the basis of the Investment Multiple actually achieved by the Companies at the end of the preceding Financial Year for the Contract Area as provided in Appendix D. 14.2 Profit Petroleum 14.2.1 When the Investment Multiple of the Com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this Contract except that part of Crude Oil or Gas the title whereof has passed to each constituent of the Contractor or any other person in accordance with the provisions of this Contract. 25. It would also be useful to refer to the Accounting Procedure contained in Appendix C to the Production Sharing Contract. The relevant sections are as follows: SECTION 2 Classification, Definition and Allocation of Costs and Expenditures 2.2 Exploration Costs Exploration Costs are all direct and allocated indirect expenditures incurred in the search for Petroleum in an area which is, or was at the time when such costs were incurred, part of the Contract Area, including expenditures incurred in respect of: xxxxxxxxx 2.2.2 Core hole drilling and water well drilling. 2.2.3 Labor, materials, supplies and services used in drilling Wells with the object of finding Petroleum or in drilling Appraisal Wells provided that if such Wells are completed as producing Wells, the costs of completion thereof shall be classified as Development Costs. xxxxxxxxx 2.2.5 Any Service Costs and General and Administrative Costs directly incurred on exploration activities and identifiable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation Costs, Development Costs, Production Costs, and all other costs related to Petroleum Operations as set out in section 3 of the Accounting Procedure. Development Costs means those costs and expenditures incurred in carrying out Development Operations, as classified and defined in section 2 of the Accounting Procedure and allowed to be recovered in terms of section 3 thereof. Exploration Costs means those costs and expenditures incurred in carrying out Exploration Operations, as classified and defined in section 2 of the Accounting Procedure and allowed to be recovered in terms of section 3 thereof. Production Costs means those costs and expenditures incurred in carrying out Production Operations as classified and defined in section 2 of the Accounting Procedure and allowed to be recovered in terms of section 3 thereof. Cost Petroleum means the portion of the total volume of Petroleum produced and saved from the Contract Area which the Contractor is entitled to take from the Contract Area in a particular period for the recovery of Contract Costs as provided in Article 13. 28. Article 7.1(a) provides that the Contractor shall have the right to recover costs and expenses as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Total Revenue 1,181,042,280 Costs including Development, Exploratory Drilling, Production facilities, EPOD, Operating Costs, Administrative Costs, Royalty and Cess. Contract Costs from April 1, 2013 to June 30, 2013 123,448,753 Contract Costs from July 1, 2013 to September 30, 2013 123,846,146 Contract Costs from October 1, 2013 to December 31, 2013 86,398,685 Contract Costs from January 1, 2014 to March 31, 2014 109,322,029 Total Costs (Cost Oil) 443,015,613 Profit Oil 744,306,729 Government of India s share of Profit Petroleum 186,076,682 25% Government Profit s share as a percentage of Actual Revenue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 06.2020 in the case of the Appellant. xxxxxxxx 22. It is an admitted fact that though an appeal has been filed before the Bombay High Court against the order dated 11.06.2020 of the Tribunal, but the said order has neither been stayed or set aside. It is also evident from the contentions urged by the Department that there is no dispute on the proposition that the Contract is an example of public private partnership in which the Government and private enterprises are in a joint venture for the purpose of achieving a common objective and sharing the profits arising from such operations. Under the Contract in question, the Central Government was to bring in its rights over the resources, while ONGC was to handle contracts and documentation, RIL was to manage financial and commercial requirements and the Appellant was vested with the responsibility of undertaking the technical operations. The man power deployed by the Appellant was in furtherance of its own interest as also that of the joint venture and not by way of any service to unincorporated joint venture. Also, the cost incurred by the Appellant for this purpose was its capital contribution to the joint venture and it cann ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llant, ONGC and RIL undertook all the strategic, financial and other operative decisions with respect to the venture. Thus, all the pre-requisites of being a joint venture are clearly met. In this backdrop, it is clearly impermissible to hold that the contribution made by a co-venturer (partner) in the course or furtherance of the joint-venture is a service rendered to the joint venture for a consideration. It is not in dispute that in a partnership or a joint venture, whatever a partner does for the furtherance of the business, he does so also for advancing his own interest, as he has a stake in the venture. All the resources contributed by the partners enter into a common pool required for running of the enterprise. There is no contractor-contractee or principal-agent relationship between the co-venturer and the joint-venture, which is a pre-requisite for a service to be liable to tax under the Finance Act. 27. As is evident from the submissions made by the Department, the decision of the Tribunal rendered on 11.06.2020 in the Appellants case has been assailed on the grounds that: (a) The same had relied upon another decision of the Tribunal in the case of Cricke ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the present case. The relevant findings of the Tribunal in Cricket Club of India, which were relied upon by the Tribunal in the case of the Appellant, are reproduced herein below: 11 .. Consideration is, undoubtedly, and essential ingredient of all economic transactions and it is certainly consideration that forms the basis for computation of service tax. However, existence of consideration cannot be presumed in every money flow. Without an identified recipient who compensates the identified provider with appropriate consideration, a service cannot be held to have been provided. In a taxation scheme that specifies the particular targets of taxation, tax liability will arise when a provider conforming to the relevant description in the charging section performs an activity that conforms to the relevant description in the charging section on the request, and for the benefit, of a recipient conforming to the relevant description in the charging section. Service, its taxability and the provision of the taxable service to a recipient, in that order, are necessary pre-requisites to ascertaining the quantum of consideration on which ad valorem tax will be levied. Thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed into in individual capacity, independent as a co-venturer, for a specific consideration. 32. Unlike in the case of Badve Helmets, where one of the co-ventures had entered into a separate and independent agreement with the joint venture for a specific consideration, in the facts of the present case there is no such agreement outside the scope of the joint venture that had been entered into between the Appellant and the PMT-JV. The making available of man-power was the Appellant s obligation as a co-venturer to the venture, by way of capital contribution and was not an independent service for a consideration being rendered by the Appellant to the PMT-JV. 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. (em ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ract (MPSC) states that subject to the provisions of the PSC, the Contractor shall have exclusive right to carry out Petroleum Operations to recover costs and expenses as provided in this Contract. The oil exploration and production contractors conduct all petroleum operations at their sole risk, cost and expense. Hence, cost petroleum is not a consideration for service to GOI and thus not taxable per se. However, cost petroleum may be an indication of the value of mining or exploration services provided by operating member to the joint venture, in a situation where the operating member is found to be supplying service to the oil exploration and production joint venture. (emphasis supplied) 38. A perusal of the aforesaid Circular reveals 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. It is, therefore, more than apparent that the aforesaid Circular only confirms the view taken by the Tribunal in the decision rendered on 06.10.2021. 39. The Circular date ..... X X X X Extracts X X X X X X X X Extracts X X X X
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