Exploration Services - Taxability of Drilling of Shot Hole

[CA Akash Phophalia]

Survey and exploration activity is chargeable to service tax. However, one of the activities which is related to it is shot hole drilling activity. Department proposed to collect service tax on the impugned activity by covering it under the survey and exploration activity which is in contravention to the argument of assessee. The taxability is discussed here in regard to one recent case of Shiv-vani Oil and Gas Exploration Service Ltd  2016 (10) TMI 878 - CESTAT NEW DELHI

Nature of Work

The nature of work undertaken by the assessee as per its written submission is that the was to undertake shot hole drilling activity for another company. Holes of not less than 7.5 cm in diameter and with depth varying from 15 to 50 meters, are termed as shot holes wherein shot is fired by other company after placing the explosives to the desired depth. As per the scope of work under the above said contract, the assessee has to provide clear shot holes of specified depth and quantities (with its personnel, instruments, equipments, all kinds of materials, stores and services) as per the programme supplied in advance by other company. As per the scope of work the assessee had to drill shot holes of predetermined depth at specified regular intervals along the pre-surveyed lines for loading the explosives by the other company for the purposes of the seismic surveys conducted by other company. The locations, at which the shot holes are required to be drilled, are marked on the ground by the other company. The assessee has to carry out the shot hole drilling exactly at the drilling points pre-determined and marked on the ground by the survey team of the Geophysical field party of the other company. Further, it has been specifically stated in the contract that the drilling conditions in areas of work are likely to vary from place to place consisting of hard rocks, boulders and pebble formation and that the assessee must ensure drilling of shot holes of the desired depths in such areas by putting its best efforts. Further, the assessee has to execute the work as per the programme intimated by the other company through its geophysical party-chief. In the said contract, it has been specifically stated that the other company is conducting the seismic survey for hydrocarbon exploration and desires to get the seismic job services and shot hole drilling services as per the specification and scope of work provided therein. Before taking of the actual drilling of shot holes at the surveyed shot points along a particular profile, the assessee has to clear jungle/undergrowth, etc. to make a passage of about 1.5 meters width and 2.5 meters height. The assessee has to maintain liaison with the local people and agencies in the survey areas in order to ensure safe and uninterrupted seismic operations.

Assessee’s submissions

Assessee argues that shot hole drilling activity is not taxable under “survey and exploration service” under Section 65(105)(zzv) read with Section 65(104a) of the Finance Act, 1994. The “taxable service” means services provided or to be provided in relation to survey and exploration of minerals. Since the assessee had never engaged in survey and exploration of minerals it was not liable to any Service Tax.  Before discussing further, let’s have a look at the relevant definitions of the Finance Act 1994.

Deparmtent’s Submissions

The Department contended that the services as explained above rendered by the assessee are very much ‘in relation to’ survey and exploration of minerals. The assessee was emphasizing on the legal definition of scope of service in terms of Section 65(104a) and argued that when the assessee was not engaged in such activity, the definition of taxable service in terms of Section 65(105)(zzv) cannot expand the scope to bring in all types of activities even remotely connected only on the pretext that these are in “in relation to” survey and exploration of minerals. In other words, the assessee submitted that the term ‘in relation to’ cannot be given a scope to indefinitely expand the main tax entry of survey and exploration of minerals. The arguments of the assessee in this context is mis-placed. From the very nature of the work undertaken by them it is very clear that these activities are very much in relation to survey and exploration of minerals. It is also clear that any person providing service to any other person in relation to survey and exploration of minerals is liable to Service Tax. In other words, the taxable service does not restrict only to the list of activities under Section 65(104a) but service provided in relation to such activities. It is nobody case that shot hole drilling service provided by the assessee has no relationship to the survey and exploration activity of the other company. Admittedly such drilling is very much an integral part of such survey and exploration.

Discussion and Decision

It is observed that the activity of shot hole drilling involves a composite process of clearances of nearby areas, undertaking the drilling work as specified by the other company, tamping the same with requisite materials prior to shot, after loading of explosives and after the shot (emphasis provided). It is observed that the purpose of such drilling a hole is linked with technicalities involved and related to seismic survey for locating or exploration of minerals. In other words shot hole drilling is activity found to be essential for the purposes of locating suitable place of availability of minerals in the given area. This is also fortified by the fact that if the holes are not made as required by the clients the assessee would be liable for damages per hole which is skipped for shot hole for such lapses. Hence, the assessee is not required to merely drill a hole and forget it. After drilling of a hole they have to work in consonance with the clients even after drilling a hole. The combined activities of both the assessee and clients, therefore can be considered as an act of survey related to location or exploration of minerals. Undoubtedly, the entire activity, partly done by the assessee and remaining done by the other company, is otherwise activity related to location or exploration of minerals. This fact is already admitted by the assessee in their written submissions, wherein they have opined that it is the other company who are conducting survey operations. However, the activities conducted by the assessee even in isolation depict that are being carried out in the direction related to location or exploration of minerals. It is also matter of fact and evidence that shot hole drilling is an activity per se without which the activity of further surveying “in relation to” a location or exploration of minerals would not be possible. The further activity of using explosives for the said purpose would not be achievable without the drilling of specified and technically drilled holes. Thus, it is materially evident that such holes are basically meant for withstanding the shots and involve several processes for the entire activity of blasting shot to be made possible. Such entire process is undertaken by the assessee by drilling the shot holes, which are technically highly important, based on sound technology and expertise. Thus, in the entirety of the issue, it is also observed that the purposes conducted by the assessee and by their clients the processes are inter-linked, inter-depended and inter-related which are “in relation to” to the location or exploration of minerals. Hence, it is not the issue of mere drilling of a hole, rather involves several process for the said purpose and are not ordinary holes”.

The dictionary meaning and case laws relied upon by the assessee has also been examined no reason was found to differ with the findings. The assessee reliance on the decision of the Tribunal in Saipem (Portugal) Comercio Maritimo v. CCE, ST & CUS., Visakhapatnam-II reported in 2014 (10) TMI 94 - CESTAT BANGALORE . was not relevant to the facts of the present case. The terms of agreement in the present case are much more elaborate and specific. Thus, the shot hole drilling activity undertaken in the present case is sought to be taxed as an activity in relation to survey and exploration of minerals.

 

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Discussions to this article

[Ganeshan Kalyani]

Nice article. Enriched my knowledge.

[CA Akash Phophalia]

Thanks!!!!