Custom, Excise & Service Tax Tribunal
M/S. Hardy Exploration & Production (I) ... vs Cst,Chennai on 5 February, 2018
IN THE CUSTOMS, EXCISE & SERVICE TAX
APPELLATE TRIBUNAL
SOUTH ZONAL BENCH AT CHENNAI
ST/156/2010
(Arising out of Order-in-Original No. 52/2009 dated 19.10.2009, passed by the Commissioner of Service Tax, Chennai).
M/s. Hardy Exploration & Production (I) Inc. Appellant
Vs.
CST,Chennai Respondent
Appearance Shri S. Muthu Venkataraman, for the Appellant Shri K. Veerabhadra Reddy, JC (AR) for the Respondent.
CORAM :
Honble Ms. Sulekha Beevi, Member (Judicial) Honble Shri Madhu Mohan Damodhar, Member (Technical) Date of Hearing/Decision: 05.02.2018 FINAL ORDER No. 40364/2018 Per Bench The brief facts are that the appellants are engaged in the business of prospecting, exploring and production of petroleum products registered for Survey and Exploration of Mineral, Oil or Gas service. During the course of audit of accounts, it was noticed that the appellants while discharging service tax liability under the above category of service did not include freight charges and equipment rental charges etc., in their total taxable value. The department was of the view that as per Rule 5(1) of Service Tax (Determination of Value) Rules 2006, any expenditure or cost which are incurred by the service provider in the course of providing taxable services are to be treated as consideration and has to be included in the value of taxable services for levy of service tax. Show Cause Notice was issued raising the above allegations and proposing to demand service tax along with interest and for imposition of penalties. After due process of law, the original authority confirmed an amount of Rs. 1,88,83,236/- along with interest and imposed penalty of Rs. 1,90,00,000/- under Section 78 of the Act with an option to pay reduced penalty as per law. Aggrieved, the appellants are now before the Tribunal.
2. On behalf of Ld. Counsel, Shri S. Muthuvenkataraman submitted that the period involved is from June 2006 to July 2007. The appellant had discharged service tax under Survey and Exploration of Mineral, Oil or Gas service without including freight charges and equipment rental charges. The appellant was under bonafide belief that these are expenditures incurred for providing the taxable service and is not required to be included. The definition of taxable service under Survey and Exploration of Mineral, Oil or Gas service covered only activities in the nature of prospecting, surveying and map making activities. They have entered into a contract withr M/s. Odfjell Well Services Ltd., UAE, from whom they had taken the equipments on rent and the appellant is alleged to be liable to pay service tax on the freight charges and rent paid under reverse charge mechanism as provided under Section 66 A of the Finance Act, 1994. The equipment rentals paid by the appellant is in the nature of deemed sale and hence not subjected to service tax. The renting of equipments involved transfer of right to use the equipments wherein possession and the effective control of equipments is also transferred to the appellants. Therefore, the transaction would be exigible to the sales tax/VAT and not service tax. Alternatively, it is argued by him that even if it is assumed that renting of equipment is liable to service tax, the same would become taxable under the category of supply of tangible goods service. The said section has been introduced only w.e.f. 16.05.2008 and therefore the demand cannot sustain. The Ld. Counsel pointed out that the only provision invoked in the SCN is Rule 5 (1) of Service Tax (Determination of Value) Rules 2006, alleging that the appellant has not included the freight charges and equipment rental charges in the taxable value. These are expenses incurred by the appellant for providing the taxable services of Survey and Exploration of Mineral, Oil or Gas service. That therefore the appellant has rightly excluded such charges for discharging liability of service tax. The Honble High Court in the case of Intercontinental Consultants and Technocrats Pvt. Ltd. Vs. UOI 2013 (29) STR 9 (Delhi) has struck down the said provision [Rule 5 (1)] holding that it is ultra vires, and also held that such costs and expenses need not be included.
3. Ld. AR, Shri K. Veerabhadra Reddy, JC, reiterated the findings in the impugned order. He submitted that all the components of invoices which has been raised on the appellant as form part of gross taxable value of service while discharging service tax. For rendering the main service Survey and Exploration of Mineral, Oil or Gas service, equipments were rented out. These equipments are integral to the service activities and the rental charges paid have to be included in the gross value. The services could not have been provided without the use of the equipments, which makes it clear that the use of these equipments is the essential part of the service. For the same reason, freight charges and other charges also form essential part of the taxable value and have to be included as reimbursable expenses. Further, appellants have not disclosed to the department the exclusion of various components while discharging the service tax liability. The appellant is guilty of suppression of facts. The demand confirmed is legal and proper.
4. Heard both sides and have perused the facts on record.
5. The relevant part of the agreement entered by appellant (company) with M/s. Odfjell Well Services Ltd., is noticed as under:-
HARDY EXPLORATION & PRODUCTION (INDIA) INC., a company incorporated under the laws of State of Delaware, USA having its project office in India at 5th Floor, DBS Westminster Building 108, Dr. Radhakrishnan Salai, Chennai- 600004 (hereinafter called Company) ODFJELL WELL SERVICES LIMITED, a company incorporated under the laws of Norway, having its Operating office at P.O. Box 17354, Jebel Ali Free Zone, United Arab Emirates (hereinafter called Contractor).
WHEREAS the Company and Participants wishes that the Contractor provides drilling & fishing tools, equipment, appurtenances and personnel in accordance with the Contract in connection with the Company and Participants activities in PY-3 Field, Block CY-OS/2 Offshore East Cost of India; and WHEREAS Contractor is engaged in the business of performing such services, has adequate resources capable of efficiently performing the Services and capable of providing such Services as detailed in the Contract and is ready, willing and able to perform the Services and provide such Services.
Contractor agrees to perform and complete the Services in conformity in all respects with the provisions of the Contract in consideration of the payments to be made by Company to Contractor as provided in the Contract. Except to any extent expressly stated elsewhere in the Contract, the Services are to be furnished on a non-exclusive basis and Company may at any time obtain similar or associated services to the Services from other contractors or suppliers.
Company agrees to pay Contractor in consideration of the performance and completion of the Services in conformity in all respects with the provisions of the Contract the Rates (or such other sums as may become payable under the provisions of the Contract) at the times and in the manner prescribed by the Contract.
6. The allegation raised against the appellant is that they failed to include freight charges, equipment rental charges, clearing expenses, mobilization and demobilization expenses, travel and personnel expenses etc., while discharging the liability of service tax under the category of Survey and Exploration of Mineral, Oil or Gas service. As per the agreement entered by the appellant with the contractor M/s. Odfjell Well Services Ltd., UAE, the work involves drill vertical wells and evaluate the reservoir, test the well conventionally to evaluate reservoir potential for which the contractors (Odfjell Well Services) provide various equipments on rental basis to the appellants and also provide service engineers who have experience with the equipments. The contractors raised invoices on the appellant towards freight and clearing charges for the import of equipments, fishing service engineering charges and equipment rentals etc. The appellants discharged service tax under reverse charge basis, on clearing charges and service engineering charges paid by them but did not pay service tax on freight charges and equipment rental charges. According to the department as per sub-rule 1 to Rule 5 Service Tax (Determination of Value) Rules 2006, any expenditure or costs incurred in the course of providing service has to be included in the value of the taxable services. The Ld. Counsel for the appellants has taken a contention that the equipment rental charges if at all would come only under the Supply of Tangible Goods service and that such services were not taxable during the relevant period. We do not think that such arguments are material for consideration in this appeal, for the reason that the SCN as well as the OIO basis the allegation only under sub-rule 1 of Rule 5 of Service Tax (Determination of Value) Rules 2006. The Rule 5 (1) reads as under:-
As per sub-rule (1) to Rule 4 of the Service Tax (Determination of Value) Rules 2006, where any expenditure or costs are incurred by the service provider in the course of providing taxable service, all such expenditure or costs shall be treated as consideration for the taxable service provided or to be provided and shall be included in the value for the purpose of charging service tax on the said service.
7. The applicability of Rule 5 (1) was considered by the Honble High Court of Delhi in the case of Intercontinental Consultants and Technocrats Pvt. Ltd. (supra). The Honble High Court held that the inclusion of costs and expenditures in the gross taxable value by making provision in the Rules is repugnant to Section 66 and 77 of the Finance Act and to that extent is ultra vires. The relevant part of judgment is quoted as under:-
18.?Section 66 levies service tax at a particular rate on the value of taxable services. Section 67(1) makes the provisions of the section subject to the provisions of Chapter V, which includes Section 66. This is a clear mandate that the value of taxable services for charging service tax has to be in consonance with Section 66 which levies a tax only on the taxable service and nothing else. There is thus inbuilt mechanism to ensure that only the taxable service shall be evaluated under the provisions of 67. Clause (i) of sub-section (1) of Section 67 provides that the value of the taxable service shall be the gross amount charged by the service provider for such service. Reading Section 66 and Section 67(1)(i) together and harmoniously, it seems clear to us that in the valuation of the taxable service, nothing more and nothing less than the consideration paid as quid pro quo for the service can be brought to charge. Sub-section (4) of Section 67 which enables the determination of the value of the taxable service in such manner as may be prescribed is expressly made subject to the provisions of sub-section (1). The thread which runs through Sections 66, 67 and Section 94, which empowers the Central Government to make rules for carrying out the provisions of Chapter V of the Act is manifest, in the sense that only the service actually provided by the service provider can be valued and assessed to service tax. We are, therefore, undoubtedly of the opinion that Rule 5(1) of the Rules runs counter and is repugnant to Sections 66 and 67 of the Act and to that extent it is ultra vires. It purports to tax not what is due from the service provider under the charging Section, but it seeks to extract something more from him by including in the valuation of the taxable service the other expenditure and costs which are incurred by the service provider in the course of providing taxable service. What is brought to charge under the relevant Sections is only the consideration for the taxable service. By including the expenditure and costs, Rule 5(1) goes far beyond the charging provisions and cannot be upheld. It is no answer to say that under sub-section (4) of Section 94 of the Act, every rule framed by the Central Government shall be laid before each House of Parliament and that the House has the power to modify the rule. As pointed out by the Supreme Court in Hukam Chand v. Union of India, AIR 1972 SC 2427 :-
The fact that the rules framed under the Act have to be laid before each House of Parliament would not confer validity on a rule if it is made not in conformity with Section 40 of the Act. Thus Section 94(4) does not add any greater force to the Rules than what they ordinarily have as species of subordinate legislation.
8. The said decision was followed by the Tribunal in the case of Dream Loanz Vs. CCE, Coimbatore 2017 (6) GSTL 443 (Tri.-Chen.). Following the ratio laid in the case of Intercontinental Consultants and Technocrats Pvt. Ltd. (supra), we are of the view that the demand cannot sustain.
9. In the result, the impugned order is set aside and the appeal is allowed with consequential relief.
(Order dictated and pronounced in the open Court)
(MADHU MOHAN DAMODHAR) (SULEKHA BEEVI C.S.)
MEMBER (TECHNICAL) MEMBER (JUDICIAL)
BB
9