2014 (11) TMI 128 - AT - Service Tax

Classification of service - Contract to supply drilling rigs to ONGC - Drilling rigs hired by assessee - Supply of Tangible Goods for Use service - Imposition of interest and equivalent penalty - Held that - From the terms of the agreement entered into between the appellant and M/s. ONGC, it is clear that the service provided by the appellant is essentially supply of drilling rig along with its personnel to operate the same on charter hire basis and the payment for the services rendered is made on per-day basis. Thus, from the terms of the contract, it is clear that the activity comes within the scope of supply of tangible goods for use . In the present case, the appellant has supplied drilling rigs along with the crew. Thus it is the appellant who has possession and effective control over the drilling rig. The crew so supplied are the employees of the appellant and not of ONGC. Consideration is paid on per-day basis. All these elements in the contract clearly show that there is no transfer of right of possession and effective control by the appellant to M/s. ONGC. The activity of supply with no legal right of possession and effective control is sought to be taxed under the entry (zzzzj). It is an accepted principle of interpretation that the contemporaneous construction placed by administrative or executive officers charged with executing a statute has to be given due diligence. In a case where the place of service recipient is not known or cannot be determined, then as per the said rule, the place of provision of service is that of the service provider. the service provider is situated in India and, therefore, the service has been provided in India and not elsewhere. Further, Rule 8 of the said Rules provides that, if any one of the service provider or receiver is located in the taxable territory, the place of provision of service will be the location of the service receiver. In the facts of the case before us, both the service provider as well as the service receiver are located in the taxable territory, namely, India. Therefore, the place of provision of service is India. Thus from whichever angle one looks at the issue, there cannot be any dispute on the fact that the service has been provided in India and not anywhere else. - Following decision of The Shipping Corporation of India 2013 (12) TMI 1124 - CESTAT MUMBAI and Srinivasa Transports 2014 (6) TMI 205 - CESTAT BANGALORE - classification of service under the taxable service category of supply of tangible goods for use service as defined in Section 65(105)(zzzzj) of the Finance Act, 1994 is upheld. Consequently, the demand of service tax under the said category along with interest thereon is upheld - However, penalty is set aside - Decided partly in favour of assessee.

Summary

Issues Involved:
1. Classification of services rendered by the appellant.
2. Applicability of service tax on drilling operations conducted in the Continental Shelf and Exclusive Economic Zone of India.
3. Transfer of possession and effective control under Section 65(105)(zzzzj) of the Finance Act, 1994.
4. Applicability of Export of Service Rules, 2005.
5. Imposition of penalties under Section 78 of the Finance Act, 1994.

Detailed Analysis:

1. Classification of Services:
The primary issue was whether the services provided by the appellant, which involved the supply of drilling rigs and personnel to ONGC, should be classified under 'Supply of Tangible Goods for Use service' (SOTG) under Section 65(105)(zzzzj) of the Finance Act, 1994. The Tribunal concluded that the service provided by the appellant is essentially the supply of drilling rigs along with its personnel on a charter hire basis, and the payment for the services rendered is made on a per-day basis. Therefore, the activity falls within the scope of 'Supply of Tangible Goods for Use service' as the appellant retained possession and effective control over the drilling rig.

2. Applicability of Service Tax on Drilling Operations:
The appellant argued that no service tax was payable for the period 07/07/2009 to 27/02/2010 as the drilling activities were undertaken in open locations beyond the territorial waters of India. However, the Tribunal noted that the service provider and recipient were both located in India, and the drilling rigs were used in the exclusive economic zone of India. Thus, the service was provided in India, and the demand for service tax was upheld.

3. Transfer of Possession and Effective Control:
The Tribunal emphasized that for a service to be classified under SOTG, there should be no transfer of the right of possession and effective control of the goods. The terms of the contract between the appellant and ONGC indicated that the appellant retained possession and control over the drilling rigs and personnel. Therefore, the conditions for classification under SOTG were met.

4. Applicability of Export of Service Rules, 2005:
The appellant contended that the drilling rigs were not located in India during the period of use by ONGC, invoking the Export of Service Rules, 2005. The Tribunal rejected this argument, stating that the rules for export of services cannot be used to interpret the statutory definition of SOTG service. The Tribunal also highlighted that both the service provider and recipient were in India, and the services were provided within the exclusive economic zone of India.

5. Imposition of Penalties:
The appellant argued against the imposition of penalties, citing a bona fide belief in the non-applicability of service tax based on ONGC's communication. The Tribunal agreed, noting that the issue involved interpretation of law and classification. Consequently, the penalty imposed under Section 78 of the Finance Act, 1994, was set aside.

Conclusion:
The Tribunal upheld the classification of the service under 'Supply of Tangible Goods for Use service' as defined in Section 65(105)(zzzzj) of the Finance Act, 1994, and confirmed the demand for service tax along with interest. However, the penalty imposed on the appellant was set aside due to the interpretative nature of the issue.