2025 (1) TMI 546 - AT - Service Tax

Classification of service received by the appellant from an overseas supplier - Consulting Engineer Services or Supply of Tangible Goods Services? - invocation of extended period of limitation - HELD THAT - The impugned order notes that the services received by NIKO includes operating the rig with the personnel of HAES, providing project management, providing campsite, man-power planning etc., The Production Sharing Contract' entered with the Government by NIKO is to explore the presence of Hydrocarbons and exploration of oil and natural gas. The impugned order does not find that the service is one of hiring of rigs, ruling out the possibility of classification of the service as supply of tangible goods . Instead, it was held to be more akin to technical assistance in the pursuit of finding Hydrocarbon. The activity was felt to be in the nature of advice, consultancy or technical assistance and found to satisfy the definition of consulting engineer service as per section 65(31) which was a taxable for providing service as defined under section 65(105) (g) of the Finance Act 1994. In CIT Vs Bharti Cellular Ltd. 2008 (10) TMI 321 - DELHI HIGH COURT , the Hon ble High Court of Delhi has observed that the word consultant is a derivative of the word consult which entails deliberations, consideration, conferring with someone, conferring about or upon a matter. Hence it is seen that what is envisaged from a consultant is merely the provision of advisory services and not the actual performance of the operation function. The 28 personnel provided by HAES for the Project include Rig/ Project Manager, Rig Superintendent, Night Tour Pusher, Driller, Assistant Driller, Chief Mechanic, Chief Electrician, Safety Officer, Medic, welder, Electrician helper, Mechanic helper, Roustabout, Crew bus Driver, Fork lift operator and Crane operator. They are hardly the type of persons who can be expected to advice or provide consultancy or technical assistance. In Basti Sugar Mills Co. Ltd. vs. CCE Allahabad 2007 (4) TMI 25 - CESTAT,NEW DELHI the Tribunal held that the role of a consultant is to render advice, consultancy and technical assistance in the matters in which he possesses expertise. However, the decision of acceptance or otherwise of the advice is left to the management and the consultant is not authorized to impose the advice rendered. This is not the case as gleaned from the agreement. Hence while the agreement involves a host of services, the dominant intention of the contract is for providing operational services i.e. providing Drilling Rig along with personnel and related services to NIKO for its exploration activities of Cauvery Block in India and not for the services of consulting engineers . This being so revenue has failed to prove its allegation that the classification of the service is that of consulting engineer service as per section 65(31) of the Finance Act, 1994. Conclusion - i) The services were incorrectly classified as 'Consulting Engineer Services' and should be under 'Supply of Tangible Goods Services'. ii) Reimbursements for expenses are not subject to service tax. The burden of proof lies with the revenue to justify tax claims and penalties. Appeal disposed off.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment were:

• Whether the services received by the appellant, Niko, from High Arctic Energy Services (HAES) should be classified under 'Consulting Engineer Service' or 'Supply of Tangible Goods Service' for the purpose of service tax under the Finance Act, 1994.
• Whether the incidental costs such as mobilization and diesel reimbursement charges should be included in the taxable value for service tax purposes.
• Whether the invocation of the extended period of limitation and imposition of penalties under Section 78 of the Finance Act, 1994, was justified.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Classification of Service

• Relevant legal framework and precedents: The classification of services under the Finance Act, 1994, particularly Section 65(31) defining 'consulting engineer' and Section 65(105)(g) defining taxable service as consulting engineer services. The distinction between consulting services and supply of tangible goods services was also considered.
• Court's interpretation and reasoning: The Tribunal analyzed the nature of the services provided by HAES, which included the provision of drilling rigs along with personnel and related services. The Tribunal found that these services were operational rather than advisory, thus not fitting the definition of consulting engineer services.
• Key evidence and findings: The agreement between Niko and HAES, which detailed the provision of drilling rigs and personnel, was central to the Tribunal's findings. The personnel provided were operational staff, not consultants.
• Application of law to facts: The Tribunal concluded that the dominant intention of the contract was the provision of operational services, not consulting services, thereby classifying it under 'Supply of Tangible Goods Service'.
• Treatment of competing arguments: The Tribunal considered the appellant's argument that the services were operational and not advisory. The revenue's argument that the services constituted consulting engineer services was rejected due to a lack of supporting evidence.
• Conclusions: The Tribunal concluded that the services should be classified as 'Supply of Tangible Goods Service', not 'Consulting Engineer Service'.

Issue 2: Inclusion of Incidental Costs in Taxable Value

• Relevant legal framework and precedents: Section 67 of the Finance Act, 1994, which deals with the valuation of taxable services for charging service tax.
• Court's interpretation and reasoning: The Tribunal referenced the Supreme Court's decision in Intercontinental Consultants & Technocrats Pvt. Ltd., which held that reimbursements cannot be included in the taxable value.
• Key evidence and findings: The incidental costs such as mobilization and diesel reimbursement were found to be reimbursements and not part of the service value.
• Application of law to facts: The Tribunal held that these costs should not be included in the taxable value for service tax purposes.
• Treatment of competing arguments: The appellant's argument that these costs were reimbursements was accepted, while the revenue's contrary position was rejected.
• Conclusions: The Tribunal concluded that incidental costs should not be included in the taxable value.

Issue 3: Invocation of Extended Limitation Period and Penalties

• Relevant legal framework and precedents: Section 78 of the Finance Act, 1994, concerning penalties and the extended period of limitation.
• Court's interpretation and reasoning: The Tribunal noted the lack of cogent reasons for invoking the extended period and imposing penalties.
• Key evidence and findings: The Tribunal found no evidence of willful misstatement or suppression of facts by Niko.
• Application of law to facts: The Tribunal determined that the conditions for invoking the extended period and penalties were not met.
• Treatment of competing arguments: The appellant's argument against the invocation of the extended period and penalties was accepted.
• Conclusions: The Tribunal concluded that the invocation of the extended period and penalties was unjustified.

3. SIGNIFICANT HOLDINGS

• Preserve verbatim quotes of crucial legal reasoning: "The dominant intention of the contract is for providing operational services i.e. providing Drilling Rig along with personnel and related services to NIKO for its exploration activities of Cauvery Block in India and not for the services of 'consulting engineers'."
• Core principles established: The classification of services should be based on the dominant intention of the contract and the nature of the services provided. Reimbursements should not be included in the taxable value for service tax purposes.
• Final determinations on each issue: The Tribunal set aside the demand for service tax, interest, and penalties, concluding that the services were not consulting engineer services and that incidental costs should not be included in the taxable value.