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TMI Blog2014 (11) TMI 128X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in Section 65 (105) (zzzzj) of the Finance Act, 1994 and the period of demand is from 07/07/2009 to 31/03/2010. Aggrieved of the same the appellant is before us. 3.The learned counsel for the appellant made the following submissions: 3.1In the present case, the appellant had entered into two contracts with M/s. Oil and Natural Gas Corporation Ltd. (ONGC) for supply of Cantilever type jack-up rigs named Greatdrill Chetna and Greatdrill Chitra. These were required to provide offshore drilling services to ONGC in terms of the contracts dated 27/02/2009 and 08/05/2009. These drilling rigs were hired by the appellant from M/s. Greatship Global Energy Services Pte. Ltd., Singapore, on bareboat charter basis. The appellant was required to provide the drilling rig, equipment and crew for drilling operations as specified by ONGC in the Continental Shelf and Exclusive Economic zone of India, well beyond the territorial waters of India. These drilling activities were undertaken in open locations and not in areas specified in the Notification issued under the Maritime Zones Act, 1976 and, therefore, there was no liability to pay service tax on such drilling operations undertaken by the ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Parties and Bills of Lading (20th edition) wherein it has been clarified as follows: "Charter Parties may be categorized according to whether or not they amount to a demise or lease of the ship. A charter by demise operates as a lease of the ship itself, to which the services of the master and crew may or may not be superadded. The charterer becomes for the time the owner of the vessel. However, under a Charter not by demise, ship owner agrees with the charterer to render services by his master and crew to carry the goods which are put on board of the ship by or on behalf of the charterer, notwithstanding the temporary right of the charterer to have his goods loaded and conveyed in the vessel, the ownership and also the possession of the ship remain in the original owner through the master and crew who continue to be his servants." 3.4 Reliance is also placed on the decision in Sea & Land Securities Ltd. vs. William Dickinson and Co. Ltd. (1942) 72 Lloyd's Reported 159, wherein it was held that: "The rights and obligations of the parties to a time charter would depend on its written terms. The modern form of time charter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case, there is no transfer of possession at all by the appellant to ONGC. The appellant has not fulfilled the conditions stipulated so as to merit classification under SOTG. 3.7 It is further argued that in the case of Lakshmi Audio Visual Inc vs. Asstt. Commissioner of Commercial Taxes (2001) 124 STC 246, the hon'ble Karnataka High Court observed that, to constitute a transfer of right to use the goods, there should be a delivery of possession of the goods by the transferor to the transferee, as distinct from the mere custody of the goods. In the present case, the appellants are using the drilling rig along with its personnel to provide drilling operation in terms of the contract. At no point of time, the possession and control of the drilling rig is transferred from the appellant to ONGC. Therefore, the use of the expression "without transfer of right of possession" must necessarily involve transfer of custody/possession without involving a transfer of right or possession. Since in the present case, at all time, custody/possession remained with the appellant and not with ONGC, the provisions of SOTG are not satisfied. 3.8 The contract entered into by the appellant with ONGC pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tification 14/2010 dated 27/02/2010 and the said Notification is only prospective and therefore prior to 27/02/2010, the services undertaken by the appellant are not leviable to service tax. 3.10 Without prejudice to the above submissions, even if it is assumed that the appellant provided supply of tangible goods for use, liability to service tax is not attracted since as per the principles set out in proviso to Rule 3(1)(iii) of the Export of Service Rules, 2005, as the goods are not in India during the entire period of use. Reliance is placed on the decision of this Tribunal in the case of Petronet LNG Ltd. vs. Commissioner of Service Tax - 2013-TIOL-1700-CESTAT-DEL wherein the phrase "during the period of use" was interpreted and it was held that to come within the scope of SOTG, the tangible goods must be located in India during the entire period of use. The same ratio was followed in the case of M/s. Reliance Industries Ltd. vs. Commissioner of Service Tax vide final order No. A/720-722/14/CSTB/C-I dated 13/05/2014 wherein also it was held that if the tangible goods are used at different points of time at different places and outside the designated place in India, liabi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sification by entry (zzzzj) since they inter alia relates to supply of vessels without transferring right of possession and effective control, in contrast to entry under (zzzy) which relates to activities having direct nexus to mining activities. Since these activities are independent, it was held that the service is liable to be classified under entry (zzzzj). It is argued that the ratio of the said decision would apply to the facts of the present case as well. 4.1 Reliance is also placed on the clarification issued by CBEC vide Circular dated 29/02/2008 wherein the scope of the service is explained. In para 4.4.1 and 4.4.2 of the said circular, it was clarified that offshore construction vessels and barges, geo-technical vessels, rigs and high value machineries are supplied for use, with no legal right of possession and effective control and the said activity would be covered by the newly introduced entry of 'supply of tangible goods for use'. 4.2 Reliance is also placed on the stay order No. S/429/13/CSTB/C-I dated 25/03/2013 in the case of Gol Offshore Ltd, wherein also the question for consideration was charter hire of drilling rigs by ONGC in various designated and no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovide complete drilling rig and equipment, as per the technical specifications mentioned in the agreement. (ii) to provide capable and experienced rig crew personnel; (iii) the drilling unit ready in all aspects have to be made available by the contractor to ONGC at the drilling locations enumerated and made ready for use by ONGC. The Contractor is required to deploy the drilling unit at the designated locations during the period of contract; (iv) the compensation is on a per-day basis; (v) the contractor is also required to mobilize personnel, equipment and materials and he shall be solely responsible for providing of requirement of his personnel including housing and transportation; (vi) the crew employed in the drilling rig unit by the contractor shall be under the control of the contractor and even the safety of the crew is the responsibility of the contractor; (vii) the contractor is also required to register themselves with the service tax department for payment of tax; (viii) if any loss or damage occurs to the drilling rig unit, regard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ken. 5.5The Boards Circular dated 29/02/2008 issued at the time of inception of levy on SOTG service clearly explains the scope of the said service in para 4.4 thereof which reads as under: "4.4.1 Transfer of the right to use any goods is leviable to sales tax / VAT as deemed sale of goods [Article 366(29A)(d) of the Constitution of India]. Transfer of right to use involves transfer of both possession and control of the goods to the user of the goods. 4.4.2 Excavators, wheel loaders, dump trucks, crawler carriers, compaction equipment, cranes, etc., offshore construction vessels & barges, geo-technical vessels, tug and barge flotillas, rigs and high value machineries are supplied for use, with no legal right of possession and effective control. Transaction of allowing another person to use the goods, without giving legal right of possession and effective control, not being treated as sale of goods, is treated as service. 4.4.3 Proposal is to levy service tax on such services provided in relation to supply of tangible goods, including machinery, equipment and appliances, for use, with no legal right of possession or effect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the said order and are reproduced verbatim below: "11. It is now necessary to state the petitioners' case. Members of the 1st petitioner provide services to major exploration and production operators (in India as well as in the international waters) with their various vessels that include offshore drilling rigs, offshore support vessels, harbour tugs and construction barges. The vessels provided by the members of the 1st petitioner carry out various jobs, inter alia, as enumerated hereunder: a). The Offshore Support Vessels carry out various types of jobs like, anchor handling, towing of vessel, supply to rig or platform, diving support, fire fighting and safety support in designated and non-designated areas. b). The marine construction barge supports offshore construction, provides accommodation, crane support and stoppage area on main deck for equipment. c). The harbour tugs are deployed for piloting big vessels in and out of the harbour and for husbanding main fleet. 12. Members of the 1st petitioner give the above-mentioned vessels on time charter basis to various oil and gas pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tation to conclude that the service rendered by the appellant merits classification under entry (zzzzj) of Section 65(105) of the Finance Act, 1994. 5.10. As regards the reliance placed by the appellant on the Petronet LNG decision and the Reliance Industries case (cited supra), and the applicability of provisions of Rule 3 of the Export of Service Rules, 2005, we find that these decisions are not at all relevant to the facts of the case before us. In the Petronet case, the service provider was situated outside India. Secondly, the vessel which was charter hired was used for transportation of liquefied natural gas from Qatar to India. The contract for supply was entered into much prior to 16-5-2008 when the service tax levy on SOTG service came into force. The levy was sought to be made under section 66A of the Finance Act, 1994, under reverse charge mechanism. In the facts of the case before us, this is not the situation obtaining. Both the service provider and the service recipient are situated in India. The oil drilling rig is used in India in the exclusive economic zone. The agreement for charter hire of the vessel has been entered into after the SOTG service came into force. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e and, therefore, the activity is squarely covered by the taxable entry (zzzzj). The appellant has sought to make a distinction that the drilling units have been put to use in open locations in the Continental Shelf/Exclusive Economic Zone of India, which have not been designated and, therefore, use has taken place outside India. We are not able to persuade ourselves with this strange logic. The service provider is in India and service recipient is also in India. Though, at the relevant time, there was no specific rule relating to place of provision of service, one can usefully and gainfully adopt the provisions of Place of Provision of Service Rules, 2012 which is an internationally accepted concept in the matter of service taxation. As per the said rules, Rule 3 specifically provides that the place of provision of service is where the recipient is located. In the present case, there is no dispute that the service recipient, M/s. ONGC is located in India. In a case where the place of service recipient is not known or cannot be determined, then as per the said rule, the place of provision of service is that of the service provider. In the present case, the service provider is also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the area in the exclusive economic zone/continental shelf where the oil wells are stationed is deemed to be part of the territory of India under the Central Government Notification issued pursuant to the provisions of Maritime Zones Act, 1976 and, therefore, the oil rigs carrying on operations in the designated area would be deemed to be part of the Indian territory. In the said case the apex court held as follows:- "77. ....... The limits of territorial waters as defined in Section 3 of the Maritime Zones Act, 1976 has not been extended but under Sections 6 and 7 thereof, sovereign rights can be exercised by the coastal States on a area which is recognized as the maritime limit of the coastal State which is being exercised. Section 2(21) of the Customs Act cannot be read in isolation. The entire scheme of the Customs Act and other Acts such as Maritime Zones Act, 1976 which are in pari-materia have to be read together. Reading of Sections 6 and 7 of the Maritime Zones Act, 1976 makes it clear India's jurisdiction over the Maritime Zones Act, 1976 extends to the continental shelf and exclusive economic zone. Consequently, if mineral oil is extracted or pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bove discussion, we are of the considered view that the service provided by the appellant merits classification under "supply of tangible goods for use service". Therefore, the demand of service tax under the said service is clearly sustainable. Consequently, the demand for interest on the service tax would also be sustainable. 5.17 As regards the imposition of penalty, since the issue relates to interpretation of law and classification, as has been held in a number of decisions, the same is not warranted. Accordingly, we set aside the penalty imposed on the appellant under Section 78 of the Finance Act, 1994. 5.18 There are a few decisions cited by the appellant which we have not specifically adverted to. The reason is that, in our view, these decisions are not relevant for consideration of the issues involved. 6.In sum, we uphold the classification of service under the taxable service category of "supply of tangible goods for use service" as defined in Section 65(105)(zzzzj) of the Finance Act, 1994. Consequently, the demand of service tax under the said category along with interest thereon is upheld. However, the penalty imposed on the appellant is set aside. (Pronounced in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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