2023 (7) TMI 1534 - AT - Service Tax

Levy of service tax - royalty paid by the appellant to the Government of India - whether payment of royalty on mining of minerals i.e. petroleum or natural gas to the GoI-MoP G can be considered as service or not and whether it attracts payment of service tax? - HELD THAT - This issue has arisen initially on the understanding of the Revenue on the basis of Circular No.179/5/2014-ST dated 24.09.2014 issued clarifying about the levy of service tax inter alia on taxable services received by a Joint Venture from its members or third party. It was stated therein that In the context of a JV project cash calls are capital contributions made by the members of JV to the JV. If cash calls are merely a transaction in money they are excluded from the definition of service provided in section 65B(44) of the Finance Act, 1994. Whether a cash call is merely... a transaction in money in terms of section 65B(44) of the Finance Act 1994 and hence not in the nature of consideration for taxable service would depend on the terms of the Joint Venture Agreement which may vary from case to case. Payments made out of cash calls pooled by a JV towards taxable services received from a member or a third party is in the nature of consideration and hence attracts service tax. From the above clarification issued by the Ministry of Finance CBIC which equally apply to the service tax in pre-GST regime it is found that on the basis of this clarification alone the impugned order is not sustainable. This Tribunal in the case of B.G. EXPLORATION PRODUCTION INDIA LTD. VERSUS COMMISSIONER OF CGST CEX. NAVI MUMBAI 2021 (10) TMI 306 - CESTAT MUMBAI has considered a similar arrangement under another PSC between the Government of India and B.G. Exploration and Production India Ltd. ONGC and the appellant. We find that the this Tribunal had after taking note of the policy underlying the execution of the PSCs as also the terms and conditions of the same concluded that the Government of India with the Appellant RIL and ONGC had entered into a joint venture agreement where under each co-venturer had its own set of obligations and the responsibility discharged by each of the co-venturers towards the venture which was not by way of any service rendered to the joint venture but in their own interest in furtherance of the common objective of the joint venture. Thus it was held by the Tribunal that service tax liability could not have been fastened upon the Appellant. It is also found that in the appellant s own case in M/S RELIANCE INDUSTRIES LIMITED VERSUS COMMISSIONER OF CGST CENTRAL EXCISE BELAPUR 2023 (4) TMI 921 - CESTAT MUMBAI in respect of demand of service tax towards certain expenditure incurred by the appellants as operator under the Joint Operating Agreement under the PSC the issue had been decided in favour of the appellants. Conclusion - The demand of service tax on royalty paid by the appellant to the Government of India do not sustain. There are no merits in the impugned order passed by the learned Commissioner (Appeals) - appeal allowed.

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in the judgment are:

Whether the payment of royalty by the appellants to the Government of India for mining rights constitutes a service liable to service tax under the Finance Act, 1994.
Whether the appellants are entitled to a refund of the service tax paid under protest on the royalty amount.
Whether the arrangement between the Government of India and the appellants under the Production Sharing Contract (PSC) constitutes a joint venture or a service agreement.
Whether the payment of service tax under protest was filed within the prescribed time limit for a refund claim.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Liability of Royalty Payment to Service Tax

Relevant Legal Framework and Precedents: The Finance Act, 1994, particularly Section 65B(44), defines 'service' and the applicability of service tax. Circular No. 192/02/2016-ST and Notification No. 30/2012-ST are relevant to the interpretation of services provided by the government.
Court's Interpretation and Reasoning: The court examined whether the royalty payment for mining rights is a consideration for a service rendered. It referred to Circular No. 32/06/2018-GST, which clarified that such payments are not taxable as they do not constitute a service.
Key Evidence and Findings: The PSC and related agreements were scrutinized to determine the nature of the relationship between the appellants and the government. The court found that the PSC is a joint venture rather than a service agreement.
Application of Law to Facts: The court applied the definition of 'service' and concluded that the royalty payment is not a consideration for a service, thus not liable to service tax.
Treatment of Competing Arguments: The respondent argued that the royalty payment is taxable based on earlier circulars, but the court favored the clarification in the GST regime, which aligns with the non-taxability of such payments.
Conclusions: The court concluded that the royalty payment does not attract service tax as it is not a consideration for a service.

Issue 2: Entitlement to Refund of Service Tax Paid

Relevant Legal Framework and Precedents: Section 11B of the Central Excise Act, 1944, as applicable to service tax, governs refund claims.
Court's Interpretation and Reasoning: The court considered the appellants' argument that the payment was made under protest and within the time limit for claiming a refund.
Key Evidence and Findings: The court noted that the appellants filed the refund claim within one year from the date of payment.
Application of Law to Facts: The court applied the provisions of Section 11B and found that the refund claim was timely and justified.
Treatment of Competing Arguments: The respondent's argument regarding the time limit was dismissed as the court found the claim to be within the prescribed period.
Conclusions: The appellants are entitled to a refund of the service tax paid under protest.

Issue 3: Nature of the Arrangement under the PSC

Relevant Legal Framework and Precedents: The court referred to previous judgments, including B.G. Exploration & Production India Ltd., to determine the nature of the PSC.
Court's Interpretation and Reasoning: The court found that the PSC is a joint venture, not a service agreement, based on the roles and contributions of the parties involved.
Key Evidence and Findings: The court examined the PSC's terms, highlighting the joint venture's common objective and shared profits.
Application of Law to Facts: The court applied the principles of joint venture arrangements and concluded that the PSC fits this model.
Treatment of Competing Arguments: The respondent's argument that the PSC constituted a service agreement was rejected based on the joint venture's characteristics.
Conclusions: The PSC is a joint venture, not a service agreement, and does not attract service tax.

3. SIGNIFICANT HOLDINGS

Preserve Verbatim Quotes of Crucial Legal Reasoning: "Having acquired the right to explore, exploit and sell petroleum in lieu of royalty and a share in profit petroleum, contractors carry out the exploration and production of petroleum for themselves and not as a service to the Government."
Core Principles Established: The payment of royalty for mining rights under a joint venture does not constitute a service liable to service tax. The PSC arrangement is a joint venture, not a service agreement.
Final Determinations on Each Issue: The appellants are not liable to pay service tax on the royalty payment, and they are entitled to a refund of the service tax paid under protest.

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