Custom, Excise & Service Tax Tribunal
Nikoresources Nelpv Ltd vs Service Tax - Chennai on 10 January, 2025
IN THE CUSTOMS, EXCISE & SERVICE TAX
APPELLATE TRIBUNAL, CHENNAI
Service Tax Appeal No.40015 of 2015
(Arising out of Order in Original No. CHN-SVTAX-000-COM-08/2014-15 dated
25.9.2014 passed by the Commissioner of Service Tax, Chennai)
M/s. Nikoresources (NELPV) Ltd. Appellant
407-411/311, Oberoi Chambers II
645, 646, New Link Road
Andheri West, Mumbai - 400 053.
Vs.
Commissioner of Customs Respondent
Chennai Outer Commissionerate Newry Towers, 12th Main Road Anna Nagar, Chennai - 600 040.
APPEARANCE:
Shri Vishal Agrawal, Advocate for the Appellant Shri M. Selvakumar, Authorized Representative for the Respondent CORAM Hon'ble Shri P. Dinesha, Member (Judicial) Hon'ble Shri M. Ajit Kumar, Member (Technical) FINAL ORDER NO. 40078/2025 Date of Hearing : 21.11.2024 Date of Decision: 10.01.2025 Per M. Ajit Kumar, This appeal arises out of Order in Original No. CHN-SVTAX-000- COM-08/2014-15 dated 25.9.2014 passed by the Commissioner of Service Tax, Chennai.
2. Brief facts of the case are that the appellants M/s. Nikoresources (NELPV) Ltd. (Herein after referred to as 'Niko'), are registered with the Service Tax Department and are in the business of exploration, development and production of mineral oil and natural gas. Niko has signed a 'Production Sharing Contract' with Government of India for exploration and development of Cauvery Block, with 100% 2 ST/40015/2015 participating interest. In furtherance of this activity, they sourced various services from foreign companies who are not having fixed establishment in India in connection with survey, geological studies, seismic analysis, reservoir estimation, drilling etc. In the case of M/s. High Arctic Energy Services (HAES), Canada, they had received service relating to drilling rigs during the period from May 2007 to January 2008 and reportedly paid service tax on the value of the gross amount paid to HAES. In order to verify their claim of appropriate payment of service tax, the Vendor Open Transaction Report of HAES was obtained from Niko and reconciled with the value of service tax paid as declared in ST-3 returns. It appeared that Niko had failed to pay service tax on the value of mobilization charges, diesel reimbursement charges, cost of rig move etc. amounting to Rs.5,46,29,417/- and value of service tax not paid worked out to Rs.67,52,196/- including cess. Accordingly, Show Cause Notice cum demand notice dated 18.04.2012 was issued to Niko, invoking the extended period. After due process of law, the Ld. Adjudicating Authority confirmed the demand of service tax as per sec. 65(105)(g) of FA1944, as 'Consulting Engineer Service' along with interest and imposed penalty under section 78 and 77(2) of the Finance Act, 1994 inasmuch as the appellant did not file the ST-3 returns with all the relevant details for the said period. Against this order, the appellant has preferred this present appeal.
3. Shri Vishal Agrawal, Ld. Advocate appeared for the appellant and Shri M. Selvakumar, Ld. Authorized Representative appeared for the respondent.
3.1 The Ld. Advocate submitted as under;
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ST/40015/2015 i. The Appellant, Niko's, Project Office, is engaged in the business of exploration and exploitation of petroleum oils and natural gas. The Appellant entered into a "Production Sharing Contract" with the Government of India for the exploration and exploitation of oils and natural gas in the Cauvery Basin in India.
ii. The Appellant entered into a contract dated 02.02.2007 with HAES for the supply of a drilling rig (with manpower as per the Appellant's requirement), for exploration operations at the Cauvery Block in India. During the course of this supply, certain incidental costs such as mobilization, camp (i.e. arrangements for stay and meals of personnel), diesel reimbursements, medical expenses, etc. are also incurred and which are charged over and above the consideration for the supply of rig.
iii. They had initially self-assessed and paid service tax under 'Consulting Engineer' service, but on receipt of advice from their tax consultant they realized that the services were correctly classifiable as 'supply of tangible goods'.
iv. What is covered under the head of "consulting engineer's services" is advice, consultancy or technical assistance and not executory services. There is no dispute in the present case that the services procured are executory services and hence, the same would not fall under the head of "consulting engineer's services". He placed reliance in this regard on the following judgments: Jyoti Ltd. [2008 (9) STR 3731, upheld by the Supreme Court in (2022 (64) GSTL 129 (SC)); Suzlon Windfarms Services Ltd. [2014 (33) STR 65 (Tri.- Mumbai)); Rolls Royce Indus. Power (I) Ltd. (2006 (3) STR 292 (Tri.-Delhi)). 4
ST/40015/2015 v. In any event, he submitted that even if it were assumed that the services fall within the ambit of "consulting engineer's services", the charges on which tax is demanded, viz., mobilization, diesel reimbursement, etc. are clearly in respect of expenses or costs incurred by the service provider and are not against the so-called "consulting engineer's services". Hence, he submitted that in terms of Section 67 of the Finance Act, 1994, no service tax is payable on these reimbursements/costs. This position has been upheld by the Hon'ble Supreme Court in the case of Intercontinental Consultants & Technocrats Pvt. Ltd. (2018 (3) TMI 357-SC] vi. Without prejudice to the above, he submitted that no cogent reasons have been laid down for the invocation of the extended period of limitation and imposition of equivalent penalty under Section 78 of the Finance Act, 1994.
In light of the above, the Ld. Counsel prayed that the appeal be allowed and the demands raised along with interest and penalty be quashed in toto.
3.2 The learned AR took us through the OIO. He mainly relied on the paragraphs reproduced below, to high light the issue involved and to state revenue's view on the matter;
"6.1 On perusal of the documents furnished by NIKO along with the written reply, it is seen that ➢ HAES has confirmed its agreement to provide the Drilling Unit 250K CDWS for NIKO for its exploration activities of Cauvery Block in India ➢ The compensation schedule lists the rates and charges such as Mobilization charges, Rig operating rate day rate, Rig standby day rate with crew, Rig standby without crew, Camp charges, demobilisation charges, etc. ➢ All other terms and conditions of the Master Day Work Contract HA- 0607-001 dated 29th August 2006 executed between HAES and TIC Energy (Thailand) Corporation Co Ltd and 5 ST/40015/2015 subsequent amendments/addendums/variation orders be applicable for Cauvery Block operations.
From the Master Day Work Contract HA-0607-001 and the Appendix/addendum, it is seen that the contract is executed for providing Drilling Rig Services and the various contents provides that:
➢ The 250K CDWS Rig is the second generation to the Stand Alone Snubbing System technology introduced by High Arctic.
➢ It is primarily a mobile land-based rig that rigs up faster, trips faster and moves more efficiently than any other rig in the market ➢ The 250k CDWS Rig is a self-contained unit capable of all underbalanced drilling, workover and snubbing operations ➢ It has automated controls that reduces the opportunity for human error, eliminates third party charges and allow for open hole drilling, side tracking or fishing operations.
➢ The unit has an automated tripping procedure, thus safely increasing the speed at which the drill string is inserted or removed ➢ HAES will be responsible to process all licences, permits, duties, customs and the NIKO/TLC will be responsible to reimburse HAES for all applicable fees ➢ HAES proposed 28 personnel for the Project who are Rig/Project Manager, Rig Superintendent, Night Tour Pusher, Driller, Assistant Driller, Chief Mechanic, Chief Electrician, Safety Officer, Medic, welder, Electrician helper, Mechanic helper, Roustabout, Crew bus Driver, Fork lift operator, Crane operator who are all certified as experienced personnel ➢ Apart from the HAES personnel, Mud Engineer, Well site supervisor, well site geologist and 5 other personnel of NIKO shall be in the camp set up by HAES during the project.
➢ NIKO will be responsible for the supply of Equipment and services to perform continuous automatic detection and recording of Hydrogen sulphide gases and flammable Hydrocarbon from start of the operation to until end of the operations.
➢ NIKO shall be responsible for the provision and cost of any and all material, water/mud chemicals, etc used for drilling the wells, consumables used for drilling and replacements of equipments damaged beyond repair.
6.2 Having seen the facts of the case, the relevant statutory provisions are to be seen. Section 65(31) defined, consulting engineer as:
*consulting engineer means any professionally qualified engineer or any body corporate or any other firm who, either directly or indirectly, renders any advice, consultancy or technical assistance in any manner to any person in one or more disciplines of engineering."
Section 65(105) [(g) defines taxable service as 6 ST/40015/2015 "any service provided or to be provided to any person, by a consulting engineer in relation to advice, consultancy or technical assistance in any manner in one or more disciplines of engineering including the discipline of computer hardware engineering."
CBEC vide Circular No.B43/5/97-TRU dated 2.7.97 has clarified the scope of "Consulting engineer' service", wherein the scope of the service is defined as under:
4.3...... The scope of the services of a consultant may include any one or more of the following categories:
(i) Feasibility study.
(ii) Pre-design services/project.
(iii) Basic design engineering.
(iv) Detailed design engineering.
(v) Procurement.
(vi) Construction supervision & project management.
(vii) Supervision of commissioning and initial operation.
(viii) Manpower planning and training.
(ix) Post-operation and management.
(x) Trouble shooting and technical services, including establishing systems and procedures for an existing plant.
Though the above list is not exhaustive, it illustrates the wide scope and nature of the services rendered by a consulting engineer." From the above statutory provisions, it is evident that services rendered by a body corporate by means of technical assistance in any manner in one or more disciplines of engineering constitutes Consulting Engineering services' and as illustrated in the CBEC's letter the advice, consultancy or technical assistance in the categories of Feasibility study, Project management, Manpower Planning. supervision of commissioning and initial operation, etc. all comes within the ambit of Consulting Engineer.
6.3 Section 65(105)(a) of the Finance Act, 1994 defines "supply of tangible goods services as follows:
"any services provided or to be provided to any person by any other person in relation to supply of tangible goods including machinery, equipment and appliances for use, without transferring right of possession and effective control of such machinery, equipment and appliances"
TRU vide letter D.O.F. No.334/1/2008-TRU dated February 29, 2008 clarified the scope of the Supply of tangible services as follows:
*4.4 SUPPLY OF TANGIBLE GOODS FOR USE:7
ST/40015/2015 4.4.1 Transfer of the right to use any goods is leviable to sales tax/ VAT as deemed sale of goods (Article 366(294)(d) of the Constitution of Indial. Transfer of right to use involves transfer of both possession and control of the goods to the user of the goods.
4.4.2 Excavators, wheel loaders, dump trucks, crawler carriers, compaction equipment, cranes, etc., offshore construction vessels & barges, geo-technical vessels, tug and barge flotillas, rigs and high value machineries are supplied for use, with no legal right of possession and effective control. Transaction of allowing another person to use the goods, without giving legal right of possession and effective control, not being treated as sale of goods, is treated as service 4.4.3 Proposal is to levy service tax on such services provided in relation to supply of tangible goods, including machinery, equipment and appliances, for use, with no legal right of possession or effective control. Supply of tangible goods for use and leviable to VAT/sales tax as deemed sale of goods, is not covered under the scope of the proposed service. Whether a transaction involves transfer of possession and control is a question of facts and is to be decided based on the terms of the contract and other material facts. This could be ascertainable from the fact whether or not VAT is payable or paid."
From a joint reading of the above, it is clear that Mere transfer of goods for use for a specific period for lease/hire charges without transfer of possession and effective control of the goods to the transferee/lessee amounts to service covered under 'Supply of Tangible service' 6.4 In the case at hand, HAES has executed a contract for providing Drilling Rig Services' and not for simple hiring of the Rig. The services received by NIKO includes operating the rig with the personnel of HAES, providing project management, providing campsite, man- power planning etc., The 'Production Sharing Contract' entered with the Government by NIKO is in the pursuit to explore the presence of Hydrocarbons capable of mining and exploration of oil and natural gas and the services received from HAES is more akin to technical assistance in the pursuit of finding Hydrocarbon and not a case of mere hiring of rigs.
*****. *****. ***** 6.8 Once, it is evident that apart from the fact that NIKO has self- assessed the services received from HAES under 'Consulting Engineer Service' initially, the services provided by HAES are appropriately classifiable under 'Consulting Engineer Service', it becomes clear that NIKO has short paid service tax inasmuch as they have failed to pay on the gross amount paid to HAES. NIKO has not disputed the quantification raised in the notice and therefore, I hold that NIKO has short-paid service tax of Rs.67,52,196/-." The Ld. AR concluded by praying that the appeal may be rejected. 8
ST/40015/2015
4. We have heard the rival parties and gone through the records. We find that the dispute pertains to the classification of service received by the appellant from an oversea supplier, based on an agreement. Section 2(h) of the Indian Contract Act, 1872, states that an agreement enforceable by law is a contract. A contract comprises the joint intent of the parties. It has to be understood that the contract between the parties is in the realm of private law. It is not a statutory contract. [See: Kerala SEB and another Vs Kurien E. Kalathil and others [(2000) 6 SCC 293]. It has hence to be understood by the intent of the parties to the contract. Further the Supreme Court, in Commr. of Customs, Central Excise and Service Tax v. Northern Operating Systems (P) Ltd. [2022 SCC Online SC 658] stated that "the nomenclature of any contract, of document, is not decisive of its nature". Hence in a contract involving many activities what is pertinent to ascertain from the language used is as to what was the dominant intention of the contract, in the light of the surrounding circumstances and object of the contract.
5. Further as per the Hon'ble Supreme Court in Union of India Vs Garware Nylons Ltd. reported in 1996 (87) E.L.T. 12 (S.C.), the burden of proof is on the taxing authorities to show that the particular case or item or service in question, is taxable in the manner claimed by them. [Also see: Commissioner of Central Excise, Nagpur Vs Vicco Laboratories - 2005 (179) E.L.T. 17 (S.C.)]. The fact that the appellant had self-assessed and paid tax on the activity as 'consulting engineering service' will not bar them from challenging the same, more so, which revenue seeks to reopen the assessment and demand duty. As stated by the Apex Court in its judgment in Dunlop 9 ST/40015/2015 India Ltd. & Madras Rubbery Factory Ltd. Vs. UOI [1983 (13) ELT 1566 (SC)], there is no estoppel in law against a party in taxation matters and hence they were free to raise the question of law before the Original Authority.
6. From the agreement conditions entered into by the appellant with HAES, which is summarised in the extract of the OIO above, it is seen that the contract is executed for providing drilling rig along with personnel and related services to NIKO for its exploration activities of Cauvery Block in India. The impugned order notes that the services received by NIKO includes operating the rig with the personnel of HAES, providing project management, providing campsite, man-power planning etc., The 'Production Sharing Contract' entered with the Government by NIKO is to explore the presence of Hydrocarbons and exploration of oil and natural gas. The impugned order does not find that the service is one of hiring of rigs, ruling out the possibility of classification of the service as 'supply of tangible goods'. Instead, it was held to be more akin to technical assistance in the pursuit of finding Hydrocarbon. The activity was felt to be in the nature of advice, consultancy or technical assistance and found to satisfy the definition of 'consulting engineer' service as per section 65(31) which was a taxable for providing service as defined under section 65(105) [(g) of the Finance Act 1994.
7. We find that in Black's Law Dictionary, Eighth Edition, the word 'consultation' has been defined as an act of asking the advice or opinion of someone (such as a lawyer). It means a meeting in which a party consults or confers and eventually it results in human interaction that leads to rendering of advice. In CIT Vs Bharti Cellular Ltd. 10
ST/40015/2015 [(2009) 319 ITR 139 / (2008) 175 Taxman 573 (Delhi)], the Hon'ble High Court of Delhi has observed that the word "consultant" is a derivative of the word "consult" which entails deliberations, consideration, conferring with someone, conferring about or upon a matter. Hence it is seen that what is envisaged from a consultant is merely the provision of advisory services and not the actual performance of the operation function. The 28 personnel provided by HAES for the Project include Rig/ Project Manager, Rig Superintendent, Night Tour Pusher, Driller, Assistant Driller, Chief Mechanic, Chief Electrician, Safety Officer, Medic, welder, Electrician helper, Mechanic helper, Roustabout, Crew bus Driver, Fork lift operator and Crane operator. They are hardly the type of persons who can be expected to advice or provide consultancy or technical assistance. In Basti Sugar Mills Co. Ltd. vs. CCE Allahabad [2007 (7) STR 431 (Tri-Del)] the Tribunal held that the role of a consultant is to render advice, consultancy and technical assistance in the matters in which he possesses expertise. However, the decision of acceptance or otherwise of the advice is left to the management and the consultant is not authorized to impose the advice rendered. This is not the case as gleaned from the agreement. Hence while the agreement involves a host of services, the dominant intention of the contract is for providing operational services i.e. providing Drilling Rig along with personnel and related services to NIKO for its exploration activities of Cauvery Block in India and not for the services of 'consulting engineers'. This being so revenue has failed to prove its allegation that the classification of the service is that of 'consulting engineer' service as per section 65(31) of the Finance Act, 1994.
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8. Since the revenue has not been able to discharge their burden of proof, the impugned order confirming the demand for service tax, merits to be set aside. So also does the demand for interest and imposition of penalties. It is hence ordered accordingly. The appellant is eligible for consequential relief, if any, as per law. The appeal succeeds and is disposed of accordingly.
(Order pronounced in open court on 10.01.2025) (M. AJIT KUMAR) (P. DINESHA) Member (Technical) Member (Judicial) Rex