2020 (10) TMI 579 - AT - Service Tax

Fastening of tax liability by combination of the legal fiction in Finance Act, 1994 for deeming provider and recipient - inclusion of a particular business model within the compasses of that very fiction by way of a clarificatory circular of the Central Board of Excise Customs that was deployed by the adjudicating authority - attribution of certain expenditure of the appellant to one of their business ventures sufficed for it to be consideration for service rendered - HELD THAT - There are no doubt that agreement among entities for rendering of service to another entity is the essence of joint venture ; however, it is doubtful if joint operation agreement , mandated by the terms of the production sharing contract , can be deemed to be one such in the absence of an external beneficiary. In the impugned contract, the several participating interests are, collegially, designated as contractor in the singular and in furtherance of the policy of the Government of India to involve corporate participation for efficient harnessing of natural resources as codified in the production sharing contract agreed upon. This, then, would be the primary association as joint venture comprising of four entities, including Government of India, for viability in extraction of natural resource as the common goal. The manner in which the contract provides for distribution of profit petroleum and cost petroleum is a business model for ensconcing within itself the alienation of risk by the Government of India which necessarily mandates a working arrangement for the disaggregation of cost petroleum as compensation for the mutually exclusive risks undertaken by the contractor. The participating interests in the joint operations have not come together of their own accord for the common purpose of bearing the risk but from one stipulation in the contract setting forth the common purpose including the participation in the proceeds of profit petroleum that is extracted. Service is the satisfaction of one s need by another person with the existence of a provider as sine qua non in any service transaction and with accumulated capital affording the luxury of such satisfaction. Owing to increasing pressure on manufacturers to scale up size and to specialize in competencies for achieving cost optimality, that is no longer a luxury borne on affordability. With the maturing of this sector, the State inserted itself as a stakeholder and, as always, tax was, so to speak, the foot in the door. Taxpayer fatigue, engendered by prohibitively high rates, frenetic enforcement overreach and incessant adversarial litigation, was not conducive to direct implementation of the negative list ; more so, as definitional certitude was necessary to guide assesses and assessors through unfamiliar territory of intangibles. The addition of services to the enumeration, though slow in the early years, underwent a five-fold increase between 2000-01 and 2006-07 signposting the imminence of transition to negative list regime. No business venture can function without capital and the by-passing of transubstantiation of accumulated capital, in the form of cash and bank balances, into these rights and competencies does not derogate from that. Hence, the activity undertaken by the appellant with its cost equivalence recorded in the books is nothing but capital contribution. The adjudicating authority has erred in concluding that the mechanism of cash call prescribed in the joint operations agreement is consideration for services; it is intended as the vehicle for contribution by the participating interests to the capital requirements of the venture. As such capital contributions are obligated for the establishment and operation of a business venture, it is not consideration for rendering of any taxable service. It is found that it is parties to the production sharing contract who constitute a joint venture and that the Explanation below section 65B (44), intended to cover supply of services to a constituent of unincorporated associations or body of persons by the latter is not relevant to the present dispute. Further, the fulfilment of obligation to contribute to the capital of the joint venture is beyond the scope of taxation under Finance Act, 1994 as it does not amount to consideration. The performance of such obligations is intended to serve itself and, thereby, the joint-venture. As the demand confirmed in impugned order is not on the consideration for rendering of a service, we are not required to decide on the other issues. Appeal allowed - decided in favor of appellant.

Issues Involved:
1. Legality of the tax liability imposed on the appellant under the Finance Act, 1994.
2. Applicability of the clarificatory circular issued by the Central Board of Excise & Customs.
3. Whether the appellant's expenditure was consideration for taxable service.
4. Legitimacy of invoking the extended period of demand under section 73 of the Finance Act, 1994.
5. Relevance of the Explanation below section 65B (44) of the Finance Act, 1994 to the present dispute.
6. Nature of the contributions made by the appellant under the joint venture agreement.

Detailed Analysis:

1. Legality of the Tax Liability:
The dispute centers around the tax liability imposed on M/s BG Exploration & Production India Ltd. The adjudicating authority used a clarificatory circular to deem certain expenditures as "consideration" for services rendered, leading to a demand of ?10,98,62,116 under section 73 of the Finance Act, 1994, along with interest and penalties under sections 75, 77, and 78.

2. Applicability of the Clarificatory Circular:
The circular no. 179/5/2014-ST dated 24th September 2014 clarified that transactions between a joint venture and its constituents should be deemed as services provided for consideration. The Tribunal noted that the adjudicating authority overreached by using this circular, which was not intended to be an autonomous provision but an adjunct to the principal provision.

3. Expenditure as Consideration for Taxable Service:
The Tribunal examined whether the appellant's expenditure on "employee benefit expenses" was consideration for a taxable service. It concluded that the expenditure booked by the appellant was not consideration for rendering taxable service but a capital contribution to the joint venture for operational purposes.

4. Legitimacy of Invoking the Extended Period of Demand:
The impugned order invoked the extended period of demand under section 73 of the Finance Act, 1994, but did not align the liability within the enumerated activities in section 65(105) of the Finance Act, 1994, before 1st July 2012. The Tribunal restricted itself to the legality of the levy for the normal period under the revised tax scheme, noting that the ingredients justifying the extended period and penalties might be absent.

5. Relevance of Explanation Below Section 65B (44):
The Tribunal found that the artificial delineation of "unincorporated associations" and "body of persons" from their members, as provided in the Explanation below section 65B (44), was not relevant to the present dispute. The circular relied upon by the adjudicating authority was misplaced in alleging tax liability on services rendered by the appellant to the joint venture.

6. Nature of Contributions Under the Joint Venture Agreement:
The Tribunal emphasized that the contributions made by the appellant were capital contributions necessary for the joint venture's operations. These contributions were not consideration for services rendered but were obligations under the "production sharing contract" to ensure the venture's viability. The mechanism of "cash call" was identified as a vehicle for capital contributions, not as consideration for taxable services.

Conclusion:
The Tribunal set aside the impugned order, concluding that the demand confirmed was not on consideration for rendering a service. The appeal was allowed, and the order pronounced in the open court on 11/06/2020.

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