2014 (10) TMI 94 - AT - Service Tax

Survey and exploration of mineral, oil and gases - Off-shore jack up drilling rig services - Held that - it would appear that the activity is not limited to exploration alone but if the well is successful it will be used for mining the oil also. - appellants relied upon the decision in the case of M/s. Atwood Oceanics Pacific Ltd. reported in 2012 (12) TMI 425 (CESTAT) - it may not be correct to take a view that drilling a well in this case is basically a part of pre-mining activity. Therefore from the definition itself, it is possible to take a view that appellant may not be liable to pay tax. In addition to that as submitted by the appellants, they had brought it to the notice of GSPC on 5.10.2004 and had sought GSPC confirmation and further GSPC had issued a letter to them that no service tax would be liable in view of the fact that its distance in terms of nautical miles from Kakinada shore base is more than 12 nautical miles and therefore the activity is not liable to service tax. However, the Commissioner in this case has relied on a subsequent letter issued by Directorate General of Hydrocarbons (DGHC) that wells are within 12 nautical miles of Indian landmass Hope Island, which is part of India is less than 12 nautical miles from all the wells. In our opinion, two opinions given by expert body like DGHC about the distance itself would show that demand cannot be extended beyond normal period. Moreover, it was also submitted that the appellant has explicitly communicated to GSPC that in the event any service tax is demanded, the burden would be on GSPC. In the absence of evidence to show that GSPC has not rejected this contention and in the absence of any such finding by the Commissioner, which compels us to accept this submission, what emerges is the fact that appellant had no reason not to pay service tax since in any case GSPC was liable to pay. - demand and penalty set aside - Decided in favor of assessee.

Summary

Issues Involved:
1. Classification of services under "Survey and Exploration of Minerals, Oil, and Gas."
2. Applicability of service tax on the activities undertaken by the appellant.
3. Invocation of the extended period for demand.
4. Bona fide belief and liability for penalty.

Detailed Analysis:

1. Classification of Services under "Survey and Exploration of Minerals, Oil, and Gas":

The core issue revolved around whether the services rendered by the appellant, involving offshore jack-up drilling rig services, fell under the taxable category of "Survey and Exploration of Minerals, Oil, and Gas" as per Section 65(104a) of the Finance Act, 1994. The appellant argued that their activities did not fall under this category, emphasizing that the exploration and prospecting activities were already completed by GSPC, and their role was limited to drilling wells based on GSPC's specifications.

2. Applicability of Service Tax:

The Commissioner had confirmed a service tax demand of Rs. 16.13 crores, along with interest and an equal penalty under Section 78 of the Finance Act, 1994. The appellant contested that the drilling activities were not part of the taxable service of "survey and exploration of minerals, oil, and gases." They relied on the Tribunal's decision in the case of M/s. Atwood Oceanics Pacific Ltd., which differentiated between prospecting and drilling activities, suggesting that drilling for production or exploration did not fall under the "Survey and Exploration of Minerals" category.

3. Invocation of Extended Period for Demand:

The Tribunal noted that the Commissioner relied on conflicting certificates from the Director General of Hydrocarbons regarding the distance of the wells from the nearest landmass. Initially, it was confirmed that the wells were within 12 nautical miles from Hope Islands, but a subsequent letter indicated a greater distance from the Kakinada shore base. This discrepancy suggested that the demand could not be extended beyond the normal period, as the appellant had a reasonable basis for their belief that the services were not taxable.

4. Bona Fide Belief and Liability for Penalty:

The Tribunal found that the appellant had communicated with GSPC regarding the service tax liability and had received confirmation that no service tax would be applicable due to the distance from the shore base. The Tribunal concluded that the appellant had a bona fide belief that their activities were not taxable, and thus, they were not liable for penalties. The Tribunal emphasized that if two views are possible, and the assessee holds a belief that they are not liable to pay tax, the intention to evade duty cannot be attributed.

Conclusion:

The Tribunal allowed the appeal, concluding that the appellant's activities did not fall under the taxable service of "Survey and Exploration of Minerals, Oil, and Gas." The Tribunal also ruled that the extended period for demand could not be invoked due to conflicting expert opinions on the distance of the wells from the nearest landmass. Consequently, the appellant was not liable for penalties, and the appeal was allowed with consequential relief.