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TMI Blog2012 (12) TMI 425X X X X Extracts X X X X X X X X Extracts X X X X ..... this is what is covered by the definition of Survey and Exploration as far as oil/gas is concerned. - the wells drilled as per the GSPC's specification in the location identified after ensuring that the five elements of prospect are existing in the activity subsequent to survey and cannot be said to be a part of the service which is preliminary to mining or drilling activity. The fact that SOTG service was introduced in 2008 does not mean that the same service was not covered by any service earlier. - Decision in the case of Kopran Limited (2009 (4) TMI 121 - CESTAT, MUMBAI)followed. Regarding Extended period of limitation - held that:- It is also settled law that if two views are possible and if an assessee entertains a belief that he is not liable to pay duty or tax, intention to evade duty, suppression/mis-declaration cannot be attributed and therefore, extended period of limitation for demanding duty/tax cannot be invoked. Therefore, even if our finding on classification aspect turns out to be incorrect, extended period of limitation could not have been invoked. It is settled law that object and content of the contracts cannot be determined and decided by looking at one paragra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d shall drill, complete or abandon the wells identified by GSPC for drilling program in accordance with all the requirements specified in the contract. GSPC shall pay M/s Atwood for such performance of drilling, completion or abandonment in accordance with the financial provisions of the contract. (ii) M/s Atwood shall use their own equipment, personnel and obtain all the necessary permits/authorizations required for the operation of the equipments and for the performance of the job specified. GSPC has to give concurrence to the equipments and personnel. M/s Atwood shall also be responsible for the safety of the personnel and equipments. (iii) M/s Atwood shall prepare a 'Daily drilling report' for all the work in the well and shall furnish a copy of the report to GSPC. (iv) At GSPC's request M/s Atwood shall (a) complete the well as producer in the manner and by methods specified by GSPC, or (b) cease operations and plug or abandon the well, at any depth, in the manner GSPC directs. (v) All survey notes, drawings, invoices for materials, permits, permit applications, specifications, blueprints, reports, calculations and all other material prepared by M/s Atwood in connection wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /2007-TRU dated 28.02.2007 clearly states that with the notification of the service 'Mining of Mineral, Oil or Gas service', services provided in relation to both exploration and exploitation of mineral, oil or gas will be comprehensively brought under the service tax net. Prior to 01.06.2007 it would fall under 'Survey and Exploration of Mineral, Oil and Gas service'. (ii) services such as site formation and clearance and excavation and earth moving, drilling wells for production/exploitation of hydrocarbons (developmental drilling); well testing and analysis service; sub-contracted service such as deploying workers and machinery for extraction/breaking of rocks into stones, sieving, grading etc. ; outsourced services provided for mining which were individually classified under the appropriate taxable service were comprehensively brought under 'services provided in relation to Mining of Mineral, Oil or Gas'. Thus, exploration and exploitation of mineral, oil or gases were brought under service tax from 01.06.2007, which was the legislative intent. (iii) Activity carried out by M/s Atwood is for exploration, site preparation and not for exploitation. As the contract is basically ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the equipment. (v) Reliance is placed on the decision of the Bombay High Court in the case of Indian National Shipowners Association v. Union of India [2009] 19 STT 408 (Bom.) wherein the services provided by the petitioner i.e. providing vessels on time charter basis to various oil and gas producers was held to be falling under section 65(105) (zzzzj) i.e. 'supply of tangible goods for use' and not under section 65(105)(zzzy) which pertains to 'mining of mineral, oil and gas'. (vi) Reliance is also placed on various other decisions viz. Rashtriya Ispat Nigam Ltd. v. State of AP [1990] 77 STC 182 (AP) affirmed by the Hon'ble SC as well as Commissioner, Trade Tax v. Chabra Tourist Bus Service [MANU/UP/1355/2006] to contend that there is no transfer of possession and effective control where the supplier's employees are operating the equipment. 7. Both sides made very extensive oral Submissions and also submitted written submissions. We reproduce the written submissions. 8. Submissions by Revenue are as under. 8.1 The whole issue revolves around three contending entries, namely (i) Survey and Exploration of Mineral, Oil and Gas service' (ii) Mining of mineral, oil and gas ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... test and complete the exploratory wells. The activity which is to be done by the contractor is to drill the exploratory wells for exploration of oil. The definition of 'Survey and Exploration of Mineral, Oil and Gas service' also makes it clear that activities involved in the exploration of minerals, oil and gases fall under this service. The adjudicating authority has also contended that the SCN proceeds on the basis of legislative intent. However, Ministry's letter F.No. B2/8/2004-TRU dated 10.09.2004 issued at the time of introduction of the service and which, as contemporanea exposito, explains that the service tax under this service would be limited to the services rendered in relation to survey and exploration only and not on the activity of actual extraction after the survey and exploration is complete. Activities such as seismic survey, collection/processing/interpretation of data and drilling and testing in relation to survey and exploration would, however, fall within the ambit of taxable service. M/s Atwood have contended in their cross objections that services rendered to GSPC is not in relation to exploration as perusal of the terms of the contract would show that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ervice 'Survey and Exploration of Mineral, Oil and Gas service' after 01.06.2007. There are a catena of case laws wherein it has been held that when an activity comes under the service tax net with effect from a certain date the same activity cannot be subjected to tax under a pre-existing category unless the scope of the pre-existing categories of service is simultaneously modified. Thus, in view of the above, the activities would not fall under 'Survey and Exploration of Mineral, Oil and Gas service'. However, in this regard it may be mentioned that Finance Ministry in Para 3.4 of its letter DO F. No. 334/1/2008-TRU, dated 29-2-2008 has categorically stated that 'Specifying a service separately as a taxable service does not necessarily mean or suggest that services falling within the scope of newly specified service were not earlier classifiable under any one of the existing taxable services. Grouping of services under a specific taxable service may change. The scope and coverage of a taxable service are to be determined strictly in accordance with the language of the relevant statutory provision existing during the material period.' This view has been further substantiated in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een supported by the Tribunal in the case of Kopran Ltd. v. CCE [2009] 20 STT 414 (Mum. - CESTAT) wherein it was held that - 'As per Rule 65A of the Service Tax Rules, 1994, it is possible for a service to be classifiable under two different categories. As per the classification rule, the classification would be done under the head, which is more specific failing which under the category which comes first. Thus, introduction of a new service by carving out from an earlier service will not mean that the new service was not taxable under any other category earlier. Thus, even though the service regarding transfer of intellectual property was introduced with effect from 10-9-2004, it does not mean that the service would not be covered under any other category earlier even if it was covered under the definition of a new service.' 8.6 Further, while clarifying the scope of 'Mining of Mineral, Oil or Gas service' introduced during the 2007 Budget, Ministry's Letter D.O.F. No. 334/1/2007-TRU, dated 28-2-2007 has explained as under: 'Para 6.2. Mining Service [section 65(105)(zzzy)] : Presently, geological, geophysical or other prospecting, surface or sub-surface surveying or map-making ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs cited above it is clear that drilling wells for production/exploitation of hydrocarbons (development drilling) was earlier classifiable under 'Survey and Exploration of mineral service'. 9. Submissions by Atwood are as under. 9.1 Issue: Classification of services provided by Atwood to GSPC in terms of Contract No. GSPC-JEL-GGR/KG-OSN-2001/13 dated September 2005 9.2 Key Dates/Milestones 3rd September 2005 : Signing of Contract December 2006 : Commencement of services in terms of the contract 9th Feb 2009 : Registration obtained & Service Tax paid under Category 'SOTG' from 16.5.2008 till Jan 2009 along with interest. Total amount paid was approximately Rs. 11 Crore 16th February 2009 :Meeting with Commissioner and other Senior Officials of Ahmedabad' III Commissionerate. Letter received from DC (Prev) stating that tax was payable under category 'Mining Services' with effect from 16.05.2008. 19th February 2009 : Reply to letter of DC (Preo) stating that appropriate classification is 'SOTG'. However in order to avoid litigation Service Tax agreed to be paid under 'Mining Services' 28th February 2009 : Paid Rs. 17 crore (approx) pursuant to letter dated 16.2.2009 towards t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fication issued by CBEC. • In order to determine the nature of the services it is pertinent to examine the contract in its entirely so as to understand its pith and substance. Examination of the contract establishes that the duties, obligations and rights of the assessee were related to ensuring availability of the Oil rig for use by GSPC. The performance was not measured in terms of drilling activity but by availability of the rig. The remuneration was not related to drilling activity but to the period for which the rig remained in use by GSPC. • The relevant provisions of the contract between Atwood and GSPC in this regard are as follows' • Atwood was engaged to provide an offshore oil rig, along with its compliment of crew and support staff. • Atwood was paid a specific amount by GSPC in respect of the equipment supplied for the drilling operations. • Atwood was paid on a per day basis, and not on the basis of the extent of drilling done. (Schedule F of the Contract, at page 245 of the paper book refers in this regard) • The contract specifies that the total duration for which the oil rig and associated equipment and personnel were to b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent, in its appeal, has not challenged the invocation of Section 80 by the Commissioner in his order. 9.6 Cum-Tax • If at all any tax is payable by Atwood then the amount recovered by Atwood from GSPC has to be regarded as cum-tax and the service tax liability ought to be worked out accordingly. This is because till date GSPC has not reimbursed a single rupee towards Service Tax to Atwood. 9.7 Service not within meaning of 'Survey and Exploration of Mineral, Oil and Gas Services' in terms of the provisions of sub clause (zzv) of section 65(105) of the Finance Act, 1994 • The department has erred in resorting to dictionary/common meanings of 'Exploration' when 'Survey and Exploration' has been assigned a specific meaning in 65(104a). • Section 65(104a) defines 'Survey and Exploration of Minerals' to mean geological, geophysical or other prospecting, surface or sub-surface surveying or map making. Prospecting means to explore an area or inspect a region or search a district for minerals. Prospecting, therefore, refers to a general assessment regarding a possibility of locating mineral deposits, and not to specific locations. 9.8 Insertion of new category witho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... drilling crew to drill and complete the wells. 10.3 As per Clause 1.14 of the contract, 'work' shall mean all drilling operations, services and activities to be performed by contractor. Thus, the said contract is not for supply of Drilling Rigs but for drilling of wells. The object of the contract is given in clause 3 which says that the contractor shall drill, complete or abandon the well(s) and company shall pay for such performance of drilling, completion or abandonment services. Clause 7.4 provides that company is interested only in the results of contractor's performance. These clauses of the contract make it abundantly clear that the contract was not for supply of Drilling Rigs but was actually for drilling of the wells. Clause 9 and Schedule C of the contract clearly provide that the appellant shall engage its own personnel for drilling of wells. Shri Nigel Richardson, Operations Manager of the appellant in his statement dated 09.02.2009 stated that the object of the contract was to drill, complete or abandon the wells; that they provided required equipment and personnel ; that on an average 52 persons were required at board the vessel as per Schedule C. As per Schedule H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k rate. The operating rates are highest while standby without crew rate and equipment breakdown rate are the lowest. It is thus evident that the appellant is charging fixed amount of US $ 1,05,000/- per day for supply of drilling rigs and US $ 8,000/- (1,13,000 - 1,05,000) per day for the crew and other related services as discussed in Para 6 supra. Therefore, said contract is not simply for supply of drilling rigs but also for service of 'Mining of mineral, oil or gas'. Thus, the contract is for composite services. 10.6 Section 65A of Finance Act, 1994 provides for classification of services as under :- '(a) the sub-clause which provides the most specific description shall be preferred to sub-clauses providing a more general description. (b) composite services consisting of a combination of different services which cannot be classified in the manner specified in clause (a), shall be classified as if they consisted of a service which gives them their essential character, in so far as this criterion is applicable. (c) when a service cannot be classified in the manner specified in clause (a) or clause (b), it shall be classified under the sub-clause which occurs first among the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The essential character of the service provided by the appellant is 'Mining of mineral, oil or gas' and not 'Supply of tangible goods'. Therefore, service provided by them has been correctly classified as 'Mining of mineral, oil or gas' by applying essentiality test as per clause (b) of Section 65 A of the Finance Act, 1994. 10.9 In the case of N. Rajashekar & Co. v. CCE [2008] 16 STT 130 (Bang. - CESTAT), wherein the appellant was involved in transporting limestone boulders from outside the mine site to yard, breaking/crushing of limestone boulders into jelly of size 10 mm to 50 mm and then loading, transporting of limestone jelly from crushing yard and unloading at BF yard, the Department took a view that such transportation would fall under the category of 'Cargo Handling Service'. The Tribunal took a view that Loading and unloading of boulders and jelly are only incidental to mining activity and the main purpose of the contract was that of breaking and crushing of limestone boulders into jelly. In the present case, main purpose of contract is 'Mining of mineral, oil or gas' and not 'Supply of tangible goods'. Therefore, applying the ratio of aforesaid judgment, the service p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bombay High Court in the case of Indian National Shipowners Association (supra) wherein the services provided by the petitioner i.e. providing vessels on time charter basis to various oil and gas producers was held to be falling under section 65(105) (zzzzj) i.e supply of tangible goods for use' and not under section 65(105)(zzzy) which pertains to 'mining of mineral, oil and gas'. Para 37 of the order is reproduced below:- 'Entry (zzzzj) is entirely a new entry. Whereas entry (zzzy) covers services provided to any person in relation to mining of mineral, oil or gas, services covered by entry (zzzzj) can be identified by the presence of two characteristics namely (a) supply of tangible goods including machinery, equipment and appliances for use, (b) there is no transfer of right of possession and effective control of such machinery, equipment and appliances. According to the members of the 1st petitioner, they supply offshore support vessels to carry out jobs like anchor handling, towing of vessels, supply to rig or platform, diving support, fire fighting etc. Their marine construction barges support offshore construction, provide accommodation, crane support and stoppage area on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cover transport of tangible goods by sea without transferring right of possession and effective control thereof. The services rendered by the members of the 1st petitioner are covered by entry (zzzzj) because they inter alia supply vessels, offshore support vessels, barges, tugs etc. without transferring right of possession and effective control over them. In contrast entry (zzzy) was introduced to comprehensively bring under the service tax net activities having a direct nexus to mining activities. Entry (zzzzj) is not a carve out of entry (zzzy). Both entries are independent. Entry (zzzzj) was not inserted into the Finance Act by amending entry (zzzy). It is not possible to invent a remote connection of the services rendered by the members of the 1st petitioner to mining activities and hold that they fall in entry (zzzy)'.' 10.12.1 M/s Atwood has challenged the OIO on the ground of limitation as they had not committed fraud, collusion, willful mis-statement, suppression for invoking the extended period. They have further contended that the Commissioner has also held that they have showed their bonafide. They have also showed their bonafide by approaching the Department to asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uppression of facts, willful mis-statement and contravention of provisions of Finance Act, 1994 with intent to evade service tax. Therefore, extended period of limitation has been correctly invoked for demand of service tax. (iv) Further, M/s GSPC had engaged another contractor viz M/s Deep Drilling India Pvt. Ltd for drilling the exploratory wells in the same exploration block. M/s Deep Drilling had obtained the necessary Service Tax registration and were discharging their Service Tax liability. Thus, there was no doubt that the activity of drilling exploratory wells was liable for service tax during the relevant time. (v) Another point canvassed by M/s Atwood for establishing their bonafide is that they have paid the service tax and interest voluntarily before issue of SCN. This contention is devoid of any merit. The Himachal Pradesh High Court in the case of CCE v. Him Chemical and Fertilizers Ltd. [2010 (256) ELT 363 (HP)] and CCE v. Ruchira Papers Ltd. [2010 (251) ELT 502 (H.P.) has held that 'applicability of Section 11AC of Central Excise Act, 1944 not excluded merely on deposit of amount after having been caught but before the issuance of show cause notice - Once a case i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . CCE 2009 (239) ELT 346 (Tri) (viii) Similarly, it has been consistently held by various judicial for a that 'ignorance of law' is no excuse. In this regard, the following decisions are cited:- (a) R.G. Nagori & Sons v. CCE 1989 (39) ELT 303 (Tri) (b) Sindhu Resettlement Corpn. Ltd. v. CCE 2000 (118) ELT 182 (Tri - Delhi) (c) CCE v. Bindal Cotex (P.) Ltd. 2004 (165) ELT 298 (Tri - Del) 11. The issues to be decided are as under:- (i) Whether as claimed by the Revenue in their appeal, the services provided by M/s. Atwood can be classified under the category of 'Survey and Exploration of Mineral, Oil and Gas Service' for the period from November 2006 to May 2007. (ii) Whether the services provided by M/s. Atwood can be classified as 'Mining of Oil or Gas Service' from 01 June 2007 onwards and levied to service tax. (iii) Whether the claim of M/s. Atwood that the services provided by them is to be classified as 'Supply of Tangible Goods' [SOTG for short] and is liable to service tax only from 16 May 2008 or not. (iv) We also require to decide whether extended period is invokable and whether penalty is leviable on M/s. Atwood. 11.1 Issue (i) 'Revenue's appeal claiming classif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on not yet started. Several decisions as well as references of the Ministry were cited to submit that subsequent to introduction of mining service and SOTG service would not take the service provided by the M/s. Atwood out of purview of the service of 'Survey and Exploration of Mineral, Oil and Gas Service' prior to 01.6.2007. 12. We are unable to accept the submissions made on behalf of Revenue. Subsequent clarification issued by the Ministry and reproduced in Para 8.6 above, in our opinion goes against the Revenue's contention. Ministry has issued a letter on 28.2.2007 clarifying the scope of Mining of Mineral, Oil or Gas Service. While doing so, it was observed that, presently geological, geophysical or other prospecting, surface or sub-surface surveying or map making service, in relation to location or exploration of deposits of mineral, oil or gas are leviable to service tax under ''Survey and Exploration of Mineral Service'. The letter goes on to observe that site formation, clearance and excavation and earth moving, drilling wells for production/exploration of Hydrocarbon (developmental drilling) provided for mining are individually classified under appropriate taxable serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich are required to be complied with to identify source of potential petroleum Hydrocarbon drill location. In our opinion, this is what is covered by the definition of Survey and Exploration as far as oil/gas is concerned. 12.2 Further, it is settled law that object and content of the contracts cannot be determined and decided by looking at one paragraph or one clause but the whole contract has to be seen as a whole and considered. 12.3 The next question arises what is the drilling and testing covered by the letter issued by the Ministry issued in 2004. It is well known that in a Geological survey, drilling is done to confirm the other theoretical calculations. In the case of Oil, as mentioned in Wikipedia, offshore drilling refers to a mechanical process and it is typically carried out in order to explore for and subsequently produce hydrocarbons which lie in rock formations beneath the seabed. Therefore, the wells drilled as per the GSPC's specification in the location identified after ensuring that the five elements of prospect are existing in the activity subsequent to survey and cannot be said to be a part of the service which is preliminary to mining or drilling activity. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y and Exploration, drilling activity starts and if the well is found to be successful and if there is sufficient quantity of Hydrocarbon, Gas or Oil, the well is not abandoned but the same well is used for exploitation successfully. This is why the contract between two parties namely M/s. Atwood and GSPC speaks of completion of a well or abandoning a well. This shows that the wells which are drilled are not only exploratory but can be used for Mining if successful. Otherwise there is no question of abandoning some wells and drilling other wells and complete. The explanation provided for Offshore well in Wikipedia as reproduced above would also support this view. 13.5 Further, while considering the scope of Survey and Exploration of Mineral, Oil and Gas Service, we limited the scope to the five elements of exploration and did not consider the drilling of exploratory wells as part of that service, it has to be treated as part of Mining Service since any service in relation to Mining would come in this category. The question of mining Oil or Gas does not arise while drilling the wells by using rigs. Here we agree that the letter issued by the Finance Ministry F. No. 334/1/2008-TRU da ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cent to a mine; (viii) all workshop and store situated within the precincts of a mine and the same management and used primarily for the purposes connected with that mine or a number of mines under the same management; (ix) all power stations, transformer sub-stations, converter stations, rectifier stations and accumulator storage stations for supplying electricity solely or mainly for the purpose of working the mine or a number of mines under the same management; (x) any premises for the time being used for depositing sand or other material for use in a mine or for depositing refuse from a mine or in which any operations in connection with such and refuse or other material is being carried on, being premises exclusively occupied by the owner of the mine; (xi) any premises in or adjacent to and belonging of a mine or which any process ancillary to the getting, dressing or operation for a sale of minerals or of coke is being carried on; Thus, it will be seen that the word 'mine' has been very extensively defined to include infrastructure created for mining of minerals, oil or gas. In short, the word 'mining' must be understood as the process of taking minerals, gas or oil from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of tangible goods for use may involve transfer of possession and effective control of the goods. In such a case the transaction attracts VAT and in such case, service tax would not be applicable. It was further clarified that where tangible goods are supplied for use without transfer of possession and effective control, service tax would be applicable. (viii) From Para 35 of the show cause notice itself this fact emerges that it is necessary to examine the contract in its entirety so as to understand the peculiar facts and circumstances. According to contract, M/s. Atwood's role was limited to providing offshore annual rate along with completion of report and support supply for payment on specific amount based on the contract which was in turn based on use of rig, stand by time etc. (ix) The contract also provide all aspects regarding location of the wells, extent of drilling, depth of drilling etc were required to be decided by GSPC and the role of M/s. Atwood was to provide rigs only. 15. We find substantial force in all these submissions. The main contention of SOTG i.e. allowing another person to use the rigs without giving legal right of possession are fulfilled in this cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e law in this regard was not very clear which is evident from the fact that the legislature had to issue new categories of services in the same circumferences. At this juncture, it is pertinent to mention here that M/s. Gujarat State Petroleum Corporation Limited had engaged yet another contractor viz. M/s. Deep Drilling (I) Pvt. Limited for drilling of exploratory wells in the same Exploration Block and had obtained necessary Service Tax Registration Certificate and has been discharging their tax liabilities accordingly. M/s. GSPC, being State Government owned organization should have been little more cautious to ensure that their contractors particularly from foreign based companies are discharging required Service Tax and following other statutory procedures. In Paras 97 and 130 of this order, wherein reply of the notice has been reproduced, relevant case law has been referred where it has been held that no penalty is imposable where duty is not paid due to the bonafide belief of the assessee. One such case is the decision of the Larger Bench of the Tribunal in the case of ETA Engg. Ltd. v. CCE [2007] 8 STT 61 (New Delhi - CESTAT) (LB), in which it was held that where the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X
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