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TMI Blog2023 (7) TMI 1534X X X X Extracts X X X X X X X X Extracts X X X X ..... ndia, 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, vests in the Union and are to be held for the purposes of the Union. The Government of India, Ministry of Petroleum & Natural Gas (GoI-MoP&G) took a policy decision to enter into public-private partnerships with private parties, with a view to optimize production of such natural resources in pursuance of New Exploration Licensing Policy (NELP). 2.2. Accordingly, the GoI-MoP&G had entered into a Production Sharing Contract (PSC) dated 12.04.2000 with the appellants along with other Participating Interest Holder (PIO) namely M/s Niko Resources Limited, for exploring and producing crude oil and natural gas in the KG - D6 Block located in the Exclusive Economic Zone & Continental Shelf of India. The purpose of such Contracts was to obtain capital investment and technical expertise from the private parties and to achieve the objective of optimum production. The contract determines the participating interest of each of the Holders, which is the respective ratio of sharing the parties to the contract. The participating inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce and the same would be taxable. Service tax is also applicable to any payment, in lieu of any permission or license granted by the Government or a local authority. This circular also clarified that where natural resources were assigned before 01.04.2016, and yearly installments which are due after 01.04.2016, then the periodic payments for use of such resources e.g. Spectrum User Charges, License Fees for Spectrum or Royalty payable on Coal extraction shall be taxable for payment of service tax. 2.4. As a result of the withdrawal of exemption in respect of services rendered by the Government of India, there was confusion as to whether royalty being paid by the appellants to the GoI-MoP&G under the PSC dated 12.04.2000 would be liable to levy of service tax. Though the appellants have represented to the Government and since there was no reply, amidst this confusion, the appellants have decided to pay service tax along with interest under protest. Accordingly, the appellants have paid the service tax along with interest for total amount of Rs. 38,62,31,491/- on 22.01.2018 for the period April 2016 to June, 2017. However, subsequently on realizing their mistake they had filed a ref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he appellant to the Government of India and the service tax payable thereon having been paid under protest for an amount of Rs. 33,09,51,270/- along with interest of Rs. 5,52,90,221/- during the disputed period April, 2016 to June, 2017. Later on realizing that the said total amount of Rs. 38,62,41,491/- is not payable, the appellants had filed a refund claim which was rejected by the Original authority and the such rejection was also upheld by the First Appellate Authority. Aggrieved by the impugned order, the appellant has preferred this appeal before the Tribunal. 3.1. Learned Advocate appearing on behalf of the appellants drew attention of the Bench to the PSC dated 12.04.2000 in respect of Block KG-D6 entered into between the Government of India and the appellant; Reliance Industries Ltd. and Niko Resources Ltd. The PSC, interalia, encapsulates the rights and obligation of all the parties to the PSC. In particular, attention was drawn to Article 6 of PSC which stipulates for constitution of a Management Committee of which all the participants/parties to the PSC i.e., GoI-MoP&G and the appellants, Riko as the PI holders are members. This Management Committee takes all the key ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion Sharing Contract given as Appendix C to the PSC dated 12.04.2000. Hence these costs incurred by the appellants for the conduct of the joint operations is nothing but the appellant's share of capital contribution to the Joint venture and consequently, there was no basis to hold that the appellant was rendering services to the Government or any of un-incorporated Joint Venture of the PI Holders. In other words, it was submitted that there was neither any service nor any consideration involved; and accordingly, there would be no liability to service tax. 3.3. The Ld. Counsel also placed reliance on the decisions of Co-ordinate Bench this Tribunal in the case of B.G. Exploration & Production India Ltd., Vs. Commissioner of CGST & CX., Navi Mumbai reported in 2022 (63) GSTL 351, wherein this Tribunal has categorically held that Government of India with the appellant 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 common objective to the joint ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd is not admissible as prima facie it appeared that the claim was filed beyond the prescribed date. However, this issue has been contended by the appellants before the Original adjudicating authority in their reply claiming that payment of service tax under RCM basis had been made vide Challan No.00085 dated 22.01.2018 and the refund application was filed on 21.01.2019, i.e., within one year from the date of payment of service tax. The Original Authority and the First Appellate Authority have taken note of the payment of service tax under protest by the appellants, and this issue is not under dispute in this case. 6. The expression 'service' has been defined in Section 65B (44) of the Finance Act, 1994 to mean that an activity for a consideration provided by one person to another. It is the appellants' submission that it had not rendered any service to another and that whatever it had done as per the contractual norms under PSC, was for its own benefit and in the course of furtherance of the joint venture, of which it is a co-venturer. It is also contended that there is no involvement of any 'consideration', in order to bring the transaction into the taxing net. 7. There is also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... defined percentage computed with reference to an investment-multiple on the cost incurred for undertaking the joint operation. 9. We find that the entire issue in this case lies in the narrow compass of whether payment of royalty on mining of minerals i.e., petroleum or natural gas to the GoI-MoP&G can be considered as service or not, and whether it attracts payment of service tax. 10. We note that this issue has arisen initially on the understanding of the Revenue on the basis of Circular No.179/5/2014-ST dated 24.09.2014, issued clarifying about the levy of service tax, inter alia, on taxable services received by a Joint Venture from its members or third party. It was stated therein that,- "In the context of a JV project, cash calls are capital contributions made by the members of JV to the JV. If cash calls are merely a transaction in money, they are excluded from the definition of service provided in section 65B(44) of the Finance Act,1994. Whether a 'cash call' is 'merely... a transaction in money' [in terms of section 65B(44) of the Finance Act, 1994] and hence not in the nature of consideration for taxable service, would depend on the terms of the Joint V ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion & 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". The relationship of the oil exploration and production contractors with the Government is not that of partners but that of licensor/lessor and licensee/lessee in terms of the Petroleum and Natural Gas Rules, 1959. Having acquired the right to explore, exploit and sell petroleum in lieu of royalty and a share in profit petroleum, contractors carry out the exploration and production of petroleum for themselves and not as a service to the Government. Para 8.1 of the Model Production Sharing Contract (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, cos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f boundaries permitted the definition of 'service', as '(44) ...any activity carried out by a person for another for consideration, and includes a declared service, but shall not include - ..' in section 65B of Finance Act, 1994, to encompass all 'activities' save those exogenic to, and excepted in, it and aligned it with the essence of service by the expression 'for another', replacing 'to any person', to eliminate the recipient as a necessity. In the new scheme of tax, 'consideration', being the obligated recompense to the provider devolving on the person who opted for hiving off the undertaking of an activity, was no longer mere measure of value but translatable as the span of service rendered. Thus, 'service' was the extent of activity entrusted to a provider for such consideration as rendered it economically gainful to be outsourced. We now subject the expenditure booked by the appellant to test of conformity with this definition. 14. In Cricket Club of India Ltd. on examination of the several types of payments made to clubs by members, the Tribunal dealt with entrance fees, held to be akin to capital contribution, thus '11....Consideration is, undoubtedly, an essent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... M/s Reliance Industries Ltd manages financial and commercial requirements and the appellant vested with responsibility for technical operations. The deployment of personnel is in pursuance of that obligation. 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. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the hotchpotch of the unincorporated joint venture. 24. The Tribunal in Mormugao Port Trust, explained that public private partnerships between the Government/Public Enterprises and Private parties are in the nature of joint venture, where two or more parties come together to carry out a specific economic venture, and share the profits arising from such venture. Such public private partnerships are at times described as collaboration, joint venture, consortium or joint undertaking. Regardless of the name or the legal form in which the same are conducted, they are essentially in the nature of partnership with each co-venturer contributing some of the resources for the furtherance of the joint business activity. The Tribunal held that such public private partnerships meet the test laid down by the Supreme Court in Faqir Chand Gulati vs. Uppal Agencies Pvt Ltd. 15, for ascertaining whether or not the arrangement is one of joint venture. 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 two parties have got together to carry out a specific econ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er 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. 25. 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). 26. There is no dispute that the joint venture in the present case has been constituted in terms of the Contract, which is a contractual arrangement between the Government of India, the Appellant, ONGC and RIL. The said joint venture was entered into for maximizin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not tenable as the burden to prove that there was a rendition of service for a consideration is a sine qua non for any liability to service tax being attracted. No evidence has been led by the Department to establish this fact. On the contrary, the Tribunal in the decision rendered on 16. 2018 (10) GSTL 435 20 ST/85028/2021 11.06.2020, arrived at a finding of fact to the effect that the Government of India along 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 a service being rendered to the joint venture, but in their own interest, in the course or furtherance of the common objective of the joint venture. 29. It is also pertinent to note that the decision of the Tribunal in Cricket Club of India had been relied upon by the Tribunal not in support of the proposition that there cannot be a levy to service tax by applying the principle of mutuality, but on the point that a mere flow of money by itself is not enough to fasten a service tax liability. It is obligatory on the part of the Department to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere be any liability to service tax. This position also evolves from paragraph 4.2 of the Circular dated 24.09.2014, wherein it has been clarified that a member of a joint venture may provide support services to the joint venture for a consideration either in cash or in kind, which alone would be leviable to service tax. 31. Insofar as the decision of the Tribunal in Badve Helmets is concerned, the same is based on entirely different facts. In that case M/s Vemmar SRL Italy, who was a equity holder had transferred know how for a consideration of US$ 1,00,000/-. The said transfer of knowhow was not in the course or furtherance of the venture nor was it by way of a capital contribution. Undisputedly, M/s. Vemmar SRL was acting as a independent service provider to the joint venture and was rendering services for a consideration. The facts in the case of Badve Helmets, being completely different with that of Mormagao Port Trust, as also those in the present case, the said decision cannot be relied upon nor does the same in any manner dilute the ratio laid down in Mormagao. Infact the Tribunal had in Mormagao specifically recorded that there can be situations were a co-venturer or a p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 as such and a portion of the remaining Service Costs and General and Administrative Costs allocated to Exploration Operations determined by the proportionate share of total Contract Costs (excluding General and Administrative Costs and Service Costs) represented by all other Exploration Costs. xxxxxxxxx 2.2.7 Any other expenditure incurred in the search for Petroleum not covered under Section 2.3 or 2.4. 2.3 Development Costs Development Costs are all direct and allocated indirect expenditures incurred with respect to the development of the Contract Area including expe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 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 provided in this Contract. Article 7.3(a) stipulates that the Contractor shall conduct all Petroleum Operations at its sole risk, cost and expense and provide all funds necessary for the conduct of Petroleum Operations. Articles 13.1 to 13.5 states that the Contractor shall be entitled to recover Contract Costs namely Development Costs, Exploration Costs and Development Costs. Article 13.8 provides the manner of recovery of Contract Costs where the "Cost Petroleum" is insufficient to enable the Contractor to recover the Contract Costs. 29. In so far as Profit Petroleum is concerned, "Profit Petroleum" means al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t that of licensor/lessor and licensee/lessee in terms of the Petroleum and Natural Gas Rules, 1959. Having acquired the right to explore, exploit and sell petroleum in lieu of royalty and a share in profit petroleum, contractors carry out the exploration and production of petroleum for themselves and not as a service to the Government. Para 8.1 of the Model Production Sharing Contract (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 petro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xx xx xx xx xx 12. In view of the above, we are of the considered opinion that there is neither any service rendered by the Appellant nor is there any consideration involved in the appellant's deploying its man power and assets for furtherance of the operation of the joint venture. The ratio laid down in the aforesaid decision of the Tribunal in the case of B.G. Exploration & Production India Ltd., reported in 2021 (49) GSTL 143 is squarely applicable and the reason assigned by the Respondent to disregard the same i.e., there is nothing to show that the terms of the JV executed by B.G. Exploration & Production India Ltd. and those executed by the appellant were the same, appears nothing but a ruse to disregard a binding precedent. In our view, besides the fact that the broad contours of the PSC cannot be any different as the same is entered into, basis a model document devised by the Government of India. In any case, what was relevant was to observe whether the broad fact-situation in the two cases is the same. We have examined the same and do not find any real difference in the arrangement with which the Tribunal was concerned in the case of B.G. Exploration & Production Indi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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