Custom, Excise & Service Tax Tribunal
Quippo Oil And Gas Infrastructure Ltd vs Commissioner, Service Tax-Delhi on 12 October, 2020
Author: Dilip Gupta
Bench: Dilip Gupta
CUSTOMS, EXCISE & SERVICE TAX APPELLATE TRIBUNAL
NEW DELHI
PRINCIPAL BENCH
Service Tax Appeal No. 54196 of 2014
(Arising out of Order-in-Original No. DEL-SVTAX-ADJ-COM-062-14-15 dated
29.04.2014 passed by Commissioner (Adj.), New Delhi)
M/s. Quippo Oil and Gas Infrastructure Ltd. .....Appellant
D-2, 5th Floor, Sourthern Park
Saket, Malviya Nagar,
New Delhi - 110 017.
Versus
Commissioner of Service Tax, .....Respondent
17-B, IAEA House, M.G. Marg,
New Delhi - 110 002.
APPEARANCE:
Shri B.L. Narasimhan and Shri Narendra Singhvi and Ms. Neha Chaudhary
Advocates for the Appellant
Shri Arun Thaplial, Authorised Representative for the Respondent
CORAM : HON'BLE MR.JUSTICE DILIP GUPTA, PRESIDENT
HON'BLE MR. C.L. MAHAR, MEMBER (TECHNICAL)
Date of Hearing and Decision : October 12, 2020
FINAL ORDER No.: _50879/2020__
JUSTICE DILIP GUPTA
The order dated April 29, 2014 passed by the Commissioner
(Adjudication), Service Tax Commissionerate, New Delhi1
confirming the demand proposed in the show cause notice dated
October 13, 2009 with interest and penalties under sections 76,
77 and 78 of the Finance Act, 19942 has been assailed in this
appeal filed by M/s Quippo Oil & Gas Infrastructure Ltd.3.
1. the Commissioner
2. the Finance Act
3. the Appellant
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ST/54196/2014
2. The appellant is engaged in the business of providing mobile
drilling services to various companies in the oil and gas industry.
It registered itself with the Service Tax Department, inter alia,
under the category of "mining of mineral, oil or gas4" that became
taxable w.e.f June 1, 2007.
3. An audit of the records of the appellant was conducted for
the period from 2005-06, 2007-08 between June 17, 2009 and
June 19, 2009. A view was formed by the Department that the
services provided by the appellant were covered under "site
formation and clearance, excavation and earthmoving and
demolition service"5 during the relevant period from April 1, 2006
upto May 31, 2007. Accordingly, a show cause notice dated
October 13, 2009 was issued to the appellant proposing a demand
of service tax under the category of site formation service on the
basis of an allegation which is reproduced below:
3. "the service contract of the Noticee is a composite contract
which covers the supply of equipments, supply of consumables
and supply of manpower. Further the Noticee is raising
bills/invoices to its clients for drilling operations/services of
oil/gas well. The sum total of this activity when seen in totality
results in rendering of services i.e. drilling service performed at
designated place meant for exploration of oil & minerals".
4. The period mentioned in the show cause notice was from
April 1, 2006 upto May 31, 2007 and it also proposed to invoke
the extended period of limitation contemplated under the proviso
to section 73(1) of the Finance Act.
4. Mining services
5. site formation service
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5. The appellant filed a reply to the show cause notice and
contested the demand both on merits as well as on limitation.
However, the Commissioner by order dated October 13, 2009
confirmed the demand proposed in the show cause notice with
interest and penalties. The relevant portion of the order passed
by the Commissioner is reproduced below :
"I find that the Noticee is engaged in the business of
providing Drilling Rig services to Oil & Gas Industry and
provides specialized and efficient drilling Rigs equipped
with latest technology and equipment along with the
highly qualified and experienced crew to its customers.
Drilling Oil & Gas wells in an efficient, fast and safe
manner is the companies core competency. The
contract/agreements are mostly uniform in nature.
Salient feature of an agreement include supply of rig
along with trained personnel. Drilling services/operations
charges are billed to the customers on monthly basis as
per terms of the contract. The drilling operations/services
are conducted as per the instructions given by the
customer in terms, of the agreement entered into.
Presently, they provide onshore contract drilling services
utilizing its owned fleet of two land based Rigs as
notes/brief submitted by the Noticee.
I also find that the activities performed by the
assessee are covered under Site Formation and
Clearance, Excavation and Earthmoving Demolition
Services; the Noticee had not classified the activity
under Site Formation and Clearance, Excavation and
Earthmoving Demolition Services and not paid
Service Tax on Drilling services provided/rendered
prior to 1.6.2007 from 1.6.2007 assessee got
themselves registered under Mining of Minerals Oil
& Gas services and paying service tax appropriately.
The assessee is engaged in providing drilling services
which they have claimed as Mining of Minerals Oil & Gas
services w.e.f. 1.6.2007. The assessee‟s contention is not
correct. The service contract of Noticee is a composite
contract which covers supply of equipments, supply of
consumables and supply of manpower. Further, the
Noticee is raising bills/invoices to its clients for drilling
operations/services of Oil/Gas well. The sum total of this
activity when seen in totality results in rendering of
services i.e. drilling service performed at a designated
place meant for exploration of Oil & Minerals. In the
instant case, prior to 1.6.2007 the activities performed by
the assessee falls under the Site Formation and
Clearance.
Thus, I find that the activities i.e. drilling undertaken by
the assessee amounts to service, classifiable under,
taxable category of Service Tax. The services rendered
by the assessee were covered under Site Formation and
clearance, Excavation and Earthmoving Demolition
Services prior to 16.6.2007 which was taxable service
from 16.62005 as such they have failed to discharge
Service Tax liability along with Education Cess & Higher
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ST/54196/2014
Education Cess under the said service for the drilling
services provided by to its clients."
(emphasis supplied)
6. Shri B.L. Narasimhan assisted by Shri Narendra Singhvi,
learned Counsel appearing for the appellant made the following
submissions:
(i) The activities undertaken by the appellant do not fall
under site formation service and, therefore, the
demand is not sustainable. Site formation service
covers those activities which are taken prior to the
construction of building or factory or other civil
structures or laying of cables or pipelines or exploring
of minerals and mining, etc. and are in the nature of
preparatory work for making the location suitable for
construction, exploration or mining. In the instant
case, the preparatory work was undertaken by the
ONGC itself and the appellant carried out its activity
on the already prepared site and hence, this activity
cannot be classified under the category of site
formation service;
(ii) Creation of a new specific entry of mining services,
under which the appellant duly discharged service tax
w.e.f June 1, 2007 and accepted by the department,
without any change in the earlier entry of site
formation service shows that the activities of the
appellant are classifiable under the new entry of
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ST/54196/2014
mining services only. To support this contention,
reliance has been placed upon the following decisions
of the Tribunal :
(i) Indian National Shipowners' Associations Vs.
Union of India6; .
(ii) Malviya National Institute of Technology Vs.
Commr. of S.T., Jaipur7; .
(iii) Global Coal & Mining Pvt. Ltd. Vs. Commissioner
of Service Tax, Delhi8; and .
(ii) The extended period of limitation could not have been
invoked in the present case as the department failed
to point out any positive act of suppression on part of
the appellant. ..
7. Shri Arun Thapliyal, learned Authorized Representative of
the Department, however, supported the impugned order and
submitted that there is no error in the finding recorded by the
Commissioner that the service rendered by the appellant during
the period April 1, 2006 to May 31, 2007 would fall under the
category site formation service. Learned Authorized
Representative also submitted that the Commissioner was
justified in holding that the extended period of limitation was
correctly invoked in the show cause notice.
8. The submissions advanced by learned Counsel for the
appellant and the learned Authorized Representative of the
Department have been considered.
6. 2009(14) STR 289(Bom.)
7. 2019(28) GSTL 472(Tri. - Del.)
8. 2020(36) GSTL 77 (Tri. - Del.)
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9. The appellant is in the business of providing mobile drilling
services to companies in the oil and gas industry and had got
itself registered with the service tax department under the
category of mining services that became a taxable service under
section 65 (105)(zzzy) of the Finance Act w.e.f June 1, 2007.
According to the Department, the appellant had rendered site
formation service from April 1, 2006 upto May 31, 2007.
10. Site formation service has been defined under section 65
(97a) of the Finance Act as follows:
"65 (97a) site formation and clearance, excavation and earth
moving and demolition" includes -
(i) Drilling, boring and core extraction services for
construction, geophysical, geological or similar
purposes; or
(ii) Soil stabilization; or
(iii) Horizontal drilling for the passage of cables or
drain pipes; or
(iv) Land reclamation work; or
(v) Contamin ated top soil stripping work; or
(vi) Demolition and wrecking of building, structure or
road,
but does not include such services provided in relation to
agriculture, irrigation, watershed development and drilling,
digging, repairing, renovating or restoring of water sources or
water bodies;"
11. This site formation service is taxable under section 65
(105)(zzza) of the Finance Act, which is reproduced below:
"Section 65(105)(zzza) "taxable service" means any service
provided or to be provided to any person, by any other person, in
relation to site formation and clearance, excavation and
earthmoving and demolition and such other similar activities."
12. Mining services became taxable under section 65
(105)(zzzy) of the Finance Act w.e.f June 1,2007 and this section
is reproduced below:
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ST/54196/2014
"Section 65(105)(zzzy) - "taxable service" means any service
provided or to be provided to any person, by any other person in
relation to mining of mineral, oil or gas."
13. To appreciate the nature of the service that was provided by
the appellant, it will be appropriate to refer to the agreement
entered between under the appellant (referred to as the
Contractor in the agreement) and Oil and Natural Gas Corporation
Limited (referred to as the Operator in the agreement) . The
relevant portion of the agreement is reproduced below:
"WHEREAS, Operator desires to have drilling operations
conducted in the western sector of India particularly in the state
of Gujarat/Raj, as may be designated by Operator, AND
WHEREAS, Contractor is owner of "Mobile Rig KREMCO Series K-
750" (hereinafter referred to as "Drilling Unit") and is capable &
willing to perform such drilling operations on charter hire basis
with Drilling Unit and its personnel as per Exhibit-A."
**********
2.3 WELL DEPTH The depth of each well to be drilled, hereunder will be specified in Operator‟s Drilling and Completion Programme, which Operator may amend from time to time. The depth so specified is hereunder referred to as the „well depth‟.
********** 10.0 COMPLETION OR ABANDONMENT Contractor agrees to perform all work necessary to drill, complete or abandon each Well in the manner specified by Operator.
********** 11.2 CORING AND CORES Contractor shall core at such depths as Operator shall specify and shall deliver all cores as recovered in Operator‟s containers, property labeled, to Operatory and shall not allow any third party access to said cores or samples without Operator‟s prior written consent."
14. The scope of work has been specified in Exhibit-A of the agreement and the relevant portion is reproduced below:
"The scope of work involves drilling of 6(six) core holes upto an average depth range of 1200 to 1500 mtr each with at least one core hole to penetrate the technical basement and 2(two) test wells to a depth range of 1500-1700 mtr in Tertiary coal/lignite Formations of Barmer-Sanchor Block. Besides Drilling and Coring, the job will include Casing, Cementation, Cement Plugging, logging of Wells etc."8
ST/54196/2014
15. The roles and responsibilities of Operator and Contractor have been specified in Appendix-II. Point A refers to the preparatory work and point B(iii) refers to the activity of identifying drilling locations, constructing, access road, cellar pits, foundations, oil waste pit and sanitary pits, water pit and internal site hard surfacing fencing at drill site, etc., which are, inter alia, the responsibilities of operatory i.e. ONGC.
16. It is, therefore, clear from the aforesaid agreement that the appellant (Contractor) had been engaged by ONGC (Operator) for conducting the drilling operations in the area specified therein. The depth of each well to be drilled was to be specified in the drilling and completion programme of ONGC. The scope of work involved drilling of 6 core holes upto an average depth range of 1200 to 1500 mtrs., each with at least 1 core role to penetrate the technical basement and 2 test wells to a depth range of 1500 to 1700 mtrs. in the specified blocks. A perusal of the roles and responsibilities of Operator and Contractor also indicates that ONGC had to prepare the site and provide it to the appellant for the drilling activities. It is thereafter that the appellant provides rig drilling services for extraction of oil or gas, on an already prepared surface and the said drilling rig service has to be provided by specialized and efficient drilling rigs equipped with latest technology and equipment along with highly qualified and experienced crew.
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17. The appellant, in reply to the show cause notice, stated that the activities carried out by the appellant would not fall under site formation service. The activities carried out in relation to exploration and mining of oil and gas from the stage of allotment of blocks to production of oil and gas from the blocks was highlighted in the reply to the show cause notice. The sequence of events in mining of oil and gas were also summarized in the following manner:
"1. Allotment of blocks to operators by the Central Government through Directorate General of Hydrocarbons, who allots various blocks to various operators in terms of National Exploration licensing policy.
2. At the time of bidding for the blocks, the operators make a commitment regarding minimum number of oil wells, Gas wells or wells, the case may be, to be drilled.
3. After obtaining license for exploration, various required documents/reports are prepared and submitted with the Ministry of Environment and Forest for obtaining requisite clearance.
4. After obtaining the license and clearance as stated in point 2 above, 2D and 3D Seismic Survey (Geo Physical Testing) of the allotted blocks is conducted by the operatory, which inter alia includes the following :
(a) Geological and theme mapping
(b) Aerial photography/survey
(c) Satellite imagery
(d) Topographic and underground survey
(e) Sample drilling (test drilling)
(f) Geophysical exploration
5. Thereafter, operator floats tenders which are referred to as, "Tender for provision of drilling Rig and associated services".
The said tender involves two aspects viz., technical and commercial. The tenders are awarded to Drilling Service Providers like QOGIL based on their technical capability and competitive commercial quotation. .
6. Once the contract is awarded, Operator issues mobilization notice for Rig, equipment and personnel for carrying out the drilling activities. Operators prescribe the drilling plan and accordingly the contractor carries out the drilling activity. Contractor provides required experienced and qualified manpower and equipment for proper execution of drilling plan. Drilling of well is carried out under the supervision of operator‟s site representative. .
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7. Prior to mobilizing Rig to the drilling site, Contractor provides the layout of the proposed Rig to the Operator. On the basis of this layout, the Operator carries out civil work for Site Formation including setting up of storage areas and other premises to make the site suitable and ready for installation of Rig and carry out the drilling activity. In case, the site is at remote area then an approach road is also prepared by the operator for transportation of drillings rigs and other movable properties to the site. .
8. In case oil or gas is struck while drilling Oil or Gas well, Contractor‟s responsibility is to immediately inform the operator or such encounter of Hydrocarbon. Contractor‟s responsibility is to drill hole as per the drilling plan and the operator decides whether to test the well with the same rig or different rig. The Scope of work for the contractor completes once the well is drilled to required depth as per drilling plan. Well is secured and the Rig is released for next location."
18. Thereafter, the relevant Clauses of the agreement were referred to in the reply and the scope of work was also described as below:
"4.2.5 Thus, from the aforesaid scope of work to be undertaken under the agreement, it may be seen that QOGIL is engaged in carrying out drilling of wells/core holes and the same is an integral part of mining of oil and gas. Further, the site preparatory work for making the site conducive for carrying out the drilling activities is the sole responsibility of the operator i.e. the Customer. The site preparatory work would be undertaken by the operator is specifically demarcated in the agreement entered by QOGIL. Thus, activity carried on by QOGIL was only in or in relation to mining activity, where as all other pre and post drilling activity, including the work of site preparation and mineral extraction are performed by ONGC itself or the contractor appointed by ONGC in this behalf. Hence, services provided by QOGIL to its customer do not fall under the category of "Site formation and Clerance, Excavation and Earthmoving Demolition Services" but under the head „mining service‟. In this respect, it would be pertinent to highlight the meaning and scope of both the aforesaid heads of taxable service herein under:"
19. The issue, therefore, that arises for consideration is as to whether the appellant had rendered site formation service for the period April 1, 2006 to May 31, 2007, which is the period prior to June 1, 2007 when mining services became taxable.
20. As noticed above, it is clear from the definition contained in section 65 (97)(a) of the Finance Act that site formation includes 11 ST/54196/2014 drilling, boring and core extraction services for construction, geophysical, geological or similar purposes. It will also be pertinent to refer to the Circular dated July 27, 2005 that was issued by the Government of India in connection with the issues pertaining to service tax in the budget 2005-06. The relevant portion relating to site formation service is reproduced below:
6. Site formation and clearance, excavation, earth moving and demolition services. .
6.1 Any service provided or to be provided to any person, by any other person, in relation to site formation and clearance, excavation and earthmoving and demolition and such other similar activities is leviable to service tax under sub-clause (zzza) of section 65(105) of the Finance Act, 1994. "Site formation and clearance, excavation and earthmoving and demolition" has been defined in clause (97a) of section 65 of the Finance Act, 1994.
6.2 The definition of site formation and clearance, excavation and earthmoving and demolition is an inclusive definition and the activities specifically mentioned are indicative and not exhaustive. Prior to construction of buildings, factory or any civil structure, activity of mining or laying of cables or pipes, preparation services of site formation and clearance, excavation and earthmoving or leveling are normally undertaken for a consideration to make the land suitable for such activities. Such services include blasting and rock removal work, clearance of undergrowth, drilling and boring, overburden removal and other development and preparation services of mineral properties and sites, and other similar excavating and earthmoving services.
Demolition of structures, buildings, streets or highways is also undertaken for a consideration as a preparatory activity for subsequent construction activity or for clearing the site for any other purpose. All such activities fall within the scope of this service.
6.3 However, site formation and clearance, excavation and earthmoving and demolition services when provided in relation to agriculture, irrigation, watershed development and drilling, digging, repairing, renovating or restoring of water sources or water bodies are specifically excluded and not within the scope of this service. .
6.4 Notification 17/2005-S.T., dated 7-6-2005 exempts this service provided in the course of construction of roads, airports, railways, transport terminals, bridges, tunnels, dams, major and minor ports.
21. A plain reading of the definition of site formation service and the aforesaid Circular clearly shows that site formation service covers those activities which are taken prior to construction of buildings or factory or other civil structures or laying of cables or 12 ST/54196/2014 pipelines or exploring of minerals and mining and are in the nature of preparatory work for making the location suitable for construction or exploration or mining. These facts were specifically stated by the appellant in reply to the show cause notice, but the Commissioner has not considered the submissions in the impugned order. The work required to be performed under the agreement was definitely not the work relating to preparation of site. The preparatory work was carried out by ONGC itself and the appellant carried out the activity on the prepared site. The activity undertaken by the appellant cannot, therefore, be classified under the category of site formation service.
22. This issue was also examined by the Tribunal in Atwood Oceanics Pacific Ltd. Vs. Commr. Of Service Tax, Ahmedabad9. It was held that drilling of exploratory work is integral to mining and thus would be classifiable under mining services.
23. The Commissioner was, therefore, not justified in holding that the appellant had rendered site formation service from April 1, 2006 to May 31, 2007.
24. This issue can be examined from another aspect. Mining service was introduced w.e.f June 1, 2007 without any change in the site formation taxable service. Thus, when the intention of the legislature was to levy service tax on the activities in relation to mining under mining services only under section 65
9. 2013(32) STR 758 (Tri. - Ahmd.) 13 ST/54196/2014 (105)(zzzy) of the Finance Act w.e.f June 1, 2007, the said activity cannot be classified under any other category, including site formation service prior to June 1, 2007. The decisions of the Tribunal in Malviya National Institute of Technology and Global Coal & Mining Pvt. Ltd. have taken this view.
25. When the appellant had not rendered any site formation service w.e.f April 1, 2006 to May 31, 2007, it would not be necessary to examine whether, in the facts and circumstances in the case, the extended period of limitation could have been invoked by the Commissioner.
26. Thus, for all those reasons stated above, the order dated April 29, 2014 passed by the Commissioner cannot be sustained and is set aside. The appeal is, accordingly allowed.
(JUSTICE DILIP GUPTA) PRESIDENT (C.L. MAHAR) MEMBER (TECHNICAL) Babita