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TMI Blog2024 (1) TMI 456X X X X Extracts X X X X X X X X Extracts X X X X ..... es 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 Tribunal held that there is no service provider and service recipient relationship in the joint venture and the amounts in the nature of profit petroleum/cost petroleum/ cash calls are not consideration for services. The issues that arise in the present case as to whether cost petroleum/profit petroleum are to be treated as consideration for rendering mining services by assesse to government was examined in the case of B.G. EXPLORATION PRODUCTION INDIA LTD. VERSUS COMMISSIONER OF CGST CX., NAVI MUMBAI [ 2022 (1) TMI 207 - CESTAT MUMBAI] . Besides the earlier decisions, the Tribunal also referred to the Board Circular dt.12.02.2018 to hold that the demand of service tax is not sustainable. Thus, the issue on merits has to be answered in favour of assessee and against the department. The appellant succeeds on merits. Time Limitation - sup ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ied period only. As a consideration, the contractor is entitled to recover Exploration Cost and Production cost as defined in the PSC. Government of India, being the owner of the fields/blocks, exercises absolute control on the operation being undertaken by the contractor by way of a Management Committee which is headed by the representative of the Government of India. The contractor is also required to adhere to the Minimum Work Programme as agreed before the award of the contract and also have to submit periodical reports to the Government detailing the various developments. 1.2.2. Even though the lease is granted for a specified period, the contractor is not free to do any activity on his own unless it is approved by the Government. The petroleum produced in the contract area has to be sold as per the Government regulation to the Government or to the nominee of the Government only. The assessee as Operator has to undertake all the activities of Exploration and Production in terms of Minimum Work Programme as mentioned in the Production Sharing Contract. The assessee is entitled to recover first the production cost incurred by them during the year from which the Petroleum is p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Survey and Exploration of Minerals as defined in Section 65 (104a) and Section 65 (105) (zzv) of the Finance Act, 1994. The services of Production rendered by the assessee as an operator are classifiable under Mining Services as defined in Section 65 (105) (zzzy) of the Finance Act, 1994. The services rendered by the assessee from 01.07.2012 are classifiable as Service under Section 65B (44) of the Finance Act, 1994 as taxable services as these do not fall under the Negative List as per Section 66D of the Finance Act, 1994 or are otherwise exempt. Therefore are taxable services. 2. Accordingly, Show Cause Notice No.44/2016 dated 21.4.2016 was issued to the assessee proposing to demand the Service Tax under mining services as defined under Section 65 (105) (ZZZY) of the Finance Act 1994 up to 30.6.2012 and after such date under taxable service defined under 65 B (44) of the Finance Act 1994. Show Cause Notices also proposed to demand service tax under survey and exploration services defined under Section 65 (104) (a) read with 65 (105) (zzv) of Finance Act 1994 up to 30.6.2012 and as under section 65 B 44 from 1.7.2012 onwards. The Show Cause Notice proposed to demand intere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... basis prior to implementation of NELP. Pre-NELP Discovered Field : Petroleum Mining Lease (PML) were granted under the small/ medium size discovered field PSC during 1991 to 1993 where operators of blocks were private companies and ONGC/OIL, had a participating interest. Block PY-3 is a Pre- NELP discovered field and the PSC was signed on 30 December 1994. Pre-NELP Exploration Blocks: 28 exploration blocks were awarded to private companies between 1990 and prior to implementation of NELP (1999) where ONGC and OIL have the rights for participation in the block after hydrocarbon discoveries. Block CY- OS/2 is a pre-NELP exploration block and the PSC was signed on 19 November 1996. New Exploration Licensing Policy (1999 onwards): Under NELP, exploration blocks were awarded to Indian private and foreign companies through international competitive bidding process where ONGC and OIL were also competing. 2.4 On award of the block, Production Sharing Contract ( PSC ) is signed by all participating companies and the Government. One of the participant company is identified as Operator of the block on behalf of the other participating companies. In few cases two operators ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ling, clearing ground, draining, building roads, and relocating public roads, gas lines and power lines to develop reserves Constructing platforms or preparing drill sites; Drilling wells to gain access to and produce the oil and gas reserves; and Installing equipment and facilities necessary for getting the oil and gas to the surface and for handling, storing and processing or treating the oil and gas to make them transportable. 2.10 Production: This phase involves extraction of natural resources from the earth and the related processes necessary to make the produced resource marketable or transportable. These activities include lifting the oil or gas to the surface, gathering production from individual wells to a common point in the field, field treating, field processing and storage of the production in field storage tanks. 2.11 Abandonment and surrender of properties : Abandonment is the term most widely used to describe the process of plugging and abandoning wells, of dismantlement of wellheads, of production and transport facilities and of restoration of producing areas in accordance with licence requirements and the relevant legislation. Thus, abandonmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sement from GOI. 2.18 Further, it also needs mention that only profits are shared with Government. In cases of losses, the same is being borne by the contractor/companies and not by the Government. 2.19 In India, the assessee has participating interest in one producing asset and two exploration blocks as below: Block CY-OS-90/1 ( PY-3 ): assessee has an 18% interest in this field and is the operator of the Block. The PY-3 field is located off the east coast of India 80 km south of Pondicherry in water depths between 40 m and 450 m. The licence, which covers 81 km, produces high quality light crude oil (49 API). The other partners in this block are ONGC (40%), Tata Petrodyne (21%) and Hindustan Oil Exploration Company (21%). Block CY-OS/2: assessee has 75% participating interest in this exploration block and GAIL holds the balance 25%. ONGC is the licensee of this block with an option to acquire up to 30% interest at development stage. Block CY-OS/2 is located in the northern part of the Cauvery Basin immediately offshore from Pondicherry and covers approximately 859 km . Hardy is the Operator of the block. Block GS-01: Hardy has a 10 per cent participating interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ember 2010 as it exceeds 5 years from the relevant date of issuance of SCN. c) That even if it is assumed that transaction is liable to service tax, the Appellant would be eligible to avail and set off CENVAT credit on inputs and input services for provision of output service; d) That interest under Section 75 of the Act is not payable as no service tax is payable; That penalty under Section 78 of the Act is not leviable as: a) PSC arrangements and other relevant documents were well within the knowledge of CBEC authorities; b) PSC arrangements of various blocks are subject to innumerable enquiries in audit from time to time; c) There has been no suppression of facts by the assessee. 2.22 The Ld. Consultant asserted that there is no service provider/service relationship between the assessee and the GOI. It is submitted that the activities undertaken by the assessee are not services provided to any third party, as they are all aimed at advancing the assessee's own interest, since assessee has made substantial investments in the venture. There is no intention on the assessee's part to render any service. 2.23 In the Paras 4.5.1 to 4.6.1 of impugned or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he terms of the contract. The PSC also provides that the title to petroleum sold to Government, or its nominee shall get transferred at the delivery point. 2.26 Circular No.32/06/2018-GST dated February 12, 2018 clarifies that the relationship between the Oil Exploration operator and the production contractors with the Government is that of Licensor/ Lessor and Licensee/ Lessee. It is specifically also clarified that the Oil exploration and production contractor has obtained the right to explore, exploit and sell petroleum in lieu of royalty and in lieu of profit petroleum and therefore the exploration and production is for themselves and not a service to the Government. The contractor has the exclusive right to recover the cost and expenses and all the activities are conducted at their own risk. 2.27 Prior to issuance of the aforesaid clarification, the said issue was discussed in the 20th, 23rd and 25th GST Council Meetings in detail. Post the detailed discussion, the above referred circular was issued. In this regard, some key points from the agenda of 25th GST Council Meeting based on which the said circular was issued: (Agenda 54 of the GST Council Meeting, Page No.67 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vs. Commissioner of CGST Cx bearing (2022 (1) TMI 207- CESTAT MUMBAI] dated 4 January 2022 was relied where it was held that there is neither any service rendered by the operator under the Joint venture to other member which is constituted under PSC and nor any consideration. 2.31 The decision of CESTAT Mumbai bench in the case of M/s Reliance Industries Limited Versus Commissioner Of CGST Central Excise, Belapur [2023-VIL-945-CESTAT- MUM-ST] (hereinafter referred to as Reliance -2) was relied in which CESTAT by following the decision in case of BG- 3 and Circular No.32 dt.12.02.2018, held that the costs incurred by the assessee for the conduct of the joint operations is nothing but the assessee's share of capital contribution to the Joint venture and consequently, there is no basis to hold that the assessee was rendering services to the Government or any of un-incorporated Joint Venture of the PI Holders. 2.32 BG Exploration Production India Ltd Versus Commissioner of Service Tax (Audit-1) [2020 (10) TMI 579- CESTAT MUMBAI], (hereinafter referred to as BG-1 ) held that there is no service rendered by the operator to the other members of joint venture which is con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... MoPNG). Based on the budget approvals, every month an estimate of expenditure is submitted to all the non-operators for funding the block as per the respective participating interest. The statement of estimation is known as Cash Call Statement. Upon furnishing the cash call statement, all participating members contribute as per participating interest. These cash calls are in nature of capital contribution made for operations of Joint Operations i.e. similar to a Joint Venture. 2.37 In this regard, the Circular No.179/5/2014-ST dated 24th September 2014 was adverted to by the Ld. Consultant, and argued that it has been clarified that the cash calls are capital contributions made by the members of JV to the JV. The relevant extract is as below. 3. In the context of a JV project, cash calls are capital contributions made by the members of JV to the JV. If cash calls are merely a transaction in money, they are excluded from the definition of service provided in section 65B (44) of the Finance Act, 1994. Whether a 'cash call' is 'merely... a transaction in money [in terms of section 65B (44) of the Finance Act, 1994] and hence not in the nature of consideration for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... crude is located, the activity falls under survey and exploration services . The said services has been introduced with effect from 10.09.2004. The gross amount received by appellant in relation to such activity is chargeable to service tax prior to and after 1.7.2012. 3.2. The Ld. AR submitted that in regard to the mining services, there is no definition of mining in the Finance Act, 1994. However, in terms of Section 2 (1) (j) of Mines Act, 1952, Mine means any excavation where any operation for the purpose of searching for or obtaining minerals has been or carried out and includes all bore holes, oil wells and accessary crude conditioning plants including the pipe conveying mineral oil within the oil fields. The taxable service has been defined in Section 65 (105) (zzzy) to mean any service provided or to be provided to any person, by any other person in relation to mining of mineral, oil or gas. 3.3. Petroleum in its natural state is vested in the Union of India and Government of India is the absolute owner of the Petroleum. The production sharing contract shows that Production Costs are expenses incurred on production operations after the start of the production. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oubtful 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 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. 17. Accordingly, the impugned order is set aside and appeal allowed . 5.2. The Tribunal in the case of B.G.Exploration and Production Vs CCGST Central Excise, Navi Mumbai, decided on 06.10.2021 (BG-II) 2021 (10) TMI 306 CESTAT Mumbai, also dealt with similar issue. Following the earlier decision, it was held that there is no service rendered by the assessee to the joint venture and the salary expenses are not consideration for services within the meaning of Section 67 of Finance Act, 1994. The relevant paras read as under: 22. It is an admitted fact that though an appeal has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... examine the contention of the Appellant regarding the invocation of the extended period of limitation. 35. Thus, for all the reasons stated above, the impugned order dated 31.08.2020 passed by the Commissioner cannot be sustained and is set aside. The appeal is, accordingly, allowed . 5.3 The issues that arise in the case before us as to whether cost petroleum/profit petroleum are to be treated as consideration for rendering mining services by assesse to government was examined in the case of B.G. Exploration Production India Ltd Vs CCGST Central Excise, Navi Mumbai 2022(1) TMI 207- CESTAT Mumbai, decided on 04.01.2022 (BGIII). Besides the earlier decisions, the Tribunal also referred to the Board Circular dt.12.02.2018 to hold that the demand of service tax is not sustainable. The relevant paras read as under: 2. Service Tax Appeal No.86312 of 2020 has been filed to assail the order dated 31.08.2020 that adjudicates the show cause notice dated 05.07.2019 issued for the period April 2016 to June 2017. The issue involved in this appeal is whether entitlement towards to Cost Petroleum and Profit Petroleum under the Production Sharing Contract can be treated a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... development of exploration and production of crude oil, gas and condensate) to the Government of India; (iii) The recovery of cost of service i.e. Cost Petroleum from the Government of India represents the consideration for providing mining services ; and (iv) In the show cause notice dated 05.07.2019, it is also alleged that the recovery of Cost Petroleum and Profit Petroleum represents consideration received by the appellant for providing mining service to the Government of India. 19. The issue that arises for consideration in these appeals is whether the entitlement towards Cost Petroleum and Profit Petroleum under the Production Sharing Contract can be treated as the consideration for rendering mining services to the Government of India. 20. Section 65B of the Finance Act that was inserted w.e.f. 01.07.2012 deals with Interpretations and sub-section (44) of section 65B that defines service is as follows: Section 65B (44) (44) service means any activity carried out by a person for another for consideration, and includes a declared service, but shall not include (a) an activity which constitutes merely, (i) a transfer of title in go ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , RIL and ONGC is a Joint Venture and involves no rendition of service. 34. The issues raised in this appeal are covered by the aforesaid earlier decision of the Tribunal rendered on 06.10.2021. 35. The submissions advanced by the learned special counsel appearing for the Department in connection with the filing of the appeal before the Bombay High Court in the matter decided by the Tribunal on 11.06.2020 have been considered and repelled by the Tribunal in the subsequent decision rendered on 06.10.2021. It would, therefore, not be necessary to deal with the submissions again in this order. 36. From the provisions of the Production Sharing Contract it is clear that Cost Petroleum and Profit Petroleum cannot be said to be consideration flowing from the Government of India to the appellant and that the components of Cost Petroleum and Profit Petroleum are inherent and embedded part of the Production Sharing Contract. Consequently, such components cannot be treated as consideration for the services rendered by the appellant. 37. Learned senior counsel appearing for the appellant placed reliance upon the Circular dated 12.02.2018. The relevant extract of the said Ci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Circular dated 24.09.2014, on which reliance has been placed by the learned special counsel appearing for the Department, is not applicable to the facts of the present case. It needs to be noted that the said Circular is generically in relation to Joint Ventures. The subsequent Circular dated 12.02.2018 is specifically on the issue involved in the present case, namely taxability of Cost Petroleum in relation to a Production Sharing Contract. 40. It is, therefore, not possible to sustain the order dated 31.12.2018, which has been assailed in Service Tax Appeal No. 86004 of 2019 and Service Tax Appeal No. 86007 of 2019, as also the order dated 31.08.2020 that has been assailed in Service Tax Appeal No. 86312 of 2020. 41. It would, therefore, not be necessary to examine the issue relating to the applicability of the extended period of limitation. 42. Thus, for all the reasons stated above, the impugned orders dated 31.12.2018 and 31.08.2020 passed by the Commissioner are set aside and the appeals are allowed . 5.4 Similar issue was analysed in the case of M/s.Reliance Industries Ltd Vs CCGST Central Excise, Belapur 2023(4) TMI 921 CESTAT Mumbai (Reliance -I) decid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecision of the Tribunal in the case of B.G. Exploration Production India Ltd., reported in 2021 (49) GSTL 143 is squarely applicable and the reason assigned by the Respondent to disregard the same i.e., there is nothing to show that the terms of the JV executed by B.G. Exploration Production India Ltd. and those executed by the appellant were the same, appears nothing but a ruse to disregard a binding precedent. In our view, besides the fact that the broad contours of the PSC cannot be any different as the same is entered into, basis a model document devised by the Government of India. In any case, what was relevant was to observe whether the broad fact-situation in the two cases is the same. We have examined the same and do not find any real difference in the arrangement with which the Tribunal was concerned in the case of B.G. Exploration Production India Ltd. vis- -vis, that in the present case. We therefore, do not find any justification in the Respondent s refusal in applying the ratio laid down by this Tribunal in the case of B.G. Exploration Production India Ltd. (supra) . 5.5 In the case of M/s.Reliance Industries Ltd Vs CCGST Central Excise, Belapur 2023-VIL 9 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he findings of this Tribunal in the other decision of B.G., reported in 2021 (49) GSTL 143 wherein, it has been held that the joint operations undertaken under the PSC does not result in rendition of any service as there is no beneficiary entity outside the PSC to which the joint operation are subordinated. It has been held that the cost incurred towards the employees which has been deployed towards the joint operation is a capital contribution to the venture and not a consideration to the rendition of any service. 12. In view of the above, we are of the considered opinion that there is neither any service rendered by the Appellant nor is there any consideration involved in the appellant s deploying its man power and assets for furtherance of the operation of the joint venture. The ratio laid down in the aforesaid decision of the Tribunal in the case of B.G. Exploration Production India Ltd., reported in 2021 (49) GSTL 143 is squarely applicable and the reason assigned by the Respondent to disregard the same i.e., there is nothing to show that the terms of the JV executed by B.G. Exploration Production India Ltd. and those executed by the appellant were the same, appears not ..... X X X X Extracts X X X X X X X X Extracts X X X X
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