Jindal Drilling & Industries Ltd vs Commissioner Of Service Tax, Mumbai

(Arising out of Order-in-Original No. 08/STC-I/BR/10-11 dt. 20.05.2010 passed by the Commissioner of Service Tax, Mumbai)

For approval and signature:

Honble Mr. M.V. Ravindran, Member (Judicial) Honble Mr. P.S.Pruthi, Member (Technical)

============================================================ 1. Whether Press Reporters may be allowed to see : No the Order for publication as per Rule 27 of the CESTAT (Procedure) Rules, 1982?

2. Whether it should be released under Rule 27 of the : No CESTAT (Procedure) Rules, 1982 for publication in any authoritative report or not?

3. Whether Their Lordships wish to see the fair copy : Seen of the Order?

4. Whether Order is to be circulated to the Departmental : Yes authorities?

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Jindal Drilling & Industries Ltd. : Appellant

VS

Commissioner of Service Tax, Mumbai : Respondent

Appearance

Shri S.S. Gupta, C.A. for Appellant

Shri Devendra Nagvenkar, Addl. Commissioner (A.R) for respondent

CORAM:

Mr. M.V. Ravindran, Member (Judicial) Mr. P.S.Pruthi, Member (Technical)

Date of hearing : 15/05/2015 Date of decision : 15/05/2015

ORDER NO.

Per : M.V. Ravindran

This appeal is directed against Order-in-Original No. 08/STC-I/BR/10-11 dt. 20.05.2010. 2. The relevant facts that arise for consideration are appellant are registered under the category of Mining of Mineral Oil or Gas service on which discharging the service tax liability. During an investigation conducted, it was noticed that in order to provide the services under the category of mining of mineral oil or gas service, the appellants were engaging the services of foreign parties not having permanent establishment in India. On conclusion of the investigation, Revenue entertained a view that the appellant is liable to pay service tax under reverse charge mechanism as provided under Section 66A of the Finance Act, 1994. Coming to such conclusion, a show cause notice dt. 23.9.2008 was issued for demanding service tax liability for the payment made by the appellant during period July 2007 to September 2007 to the foreign parties. The appellant contested the show cause notice on merits inter alia contesting the duty liability as also the imposition of penalty on the ground that they are not service providers. The adjudicating authority after following the principles of natural justice held against the appellant and passed the following order: ORDER

5. 5.1. I confirm the amount of Rs.6,03,94,143/- (Rupees Six Crores three Lakhs Ninety-four Thousand one Hundred and forty-three Only) as demanded in the Show cause notice dated 19th September 2008 issued by the Service Tax Mumbai Commissionerate under Section 73 of the Finance Act, 1994 read with Rule 14 of Cenvat Credit Rules 2004.

5.2. I order for payment of interest on delayed payment of service tax, at the appropriate rates prevalent during the material period, on service tax amount confirmed in (5.1) above, under Section 75 of the Act.

5.3. I hereby impose the penalty on the Noticees under Section 76 of the Act, which shall be Rs. 200/- (Rs. Two hundred only) for every day during which such failure continues or at the rate of two percent (2%), of such tax, per month, whichever is higher, starting with the first day after the due date till the date of actual payment of the outstanding amount of service tax. The penalty shall, however, not exceed the service tax payable by them as mentioned at 5.1 above.

5.4 I impose penalty on the Noticees of Rs.6,04,00,000/- (Rs. Six crores and four lakhs only) under Section 78 of the Act read with Rule 15 of Cenvat Credit Rules 2004.

5.5. I hereby impose the penalty on the Noticees under Section 77 of the Act, which shall be Rs.2000/- (Rupees Two Thousand only) for submission of incomplete ST-3 return.

2. Learned Chartered Accountant appearing on behalf of the appellant would take us through the show cause notice and Order-in-Original. He would submit that the classification of the services as made by the adjudicating authority is under the supply of tangible goods for use. It is his submission that the said services were tangible only from 16.5.2008 and they have discharged the service tax from that date. It is his submission that the service tax liability under the reverse charge mechanism is also applicable to the provisions of the service tax liability on the supply of tangible goods but it is from 16.5.2008. He would submit that the entire issue is now settled by the judgment of the Honble High Court of Bombay in the case of Indian National Shipowners Association Vs. Union of India 2009 (14) STR 289(Bom.) which has been upheld by the Apex Court. He would draw our attention to Paragraphs 10,11,34,37, & 38 of the said judgement in the case of Indian National Ship Owners Association. It is his further submission that the appellant has already paid the entire amount of the service tax liability as the service provided by the appellants were to ONGC and ONGC has paid the tax to him; it is the submission that the dispute today before the Tribunal is regarding the payment of interest on the said amount of tax as also penalties imposed. It is his submission that service tax liability itself does not arise, which is enough to set aside the interest and the penalties imposed. It is his submission that appellants had discharged entire amount of the service tax liability except for an amount of Rs.4.92 lakhs approximately. It is his submission that the said amount is also paid by the appellant during hearing of the stay petition wherein the appellant was directed to deposit this amount.

3. Ld. DR on the other hand reads the contract entered by the appellant with ONGC and submits that the appellant is liable to discharge the service tax liability under the category of mining of mineral oil or gas service. It is his submission that the appellant had collected the amount of service tax from the ONGC and did not deposit with the Government which is evident from the fact that they have not paid Rs. 4.92.lakhs approximately. He would submit that the collection of service tax from ONGC under the category of mining and minerals service itself is enough for the Revenue to demand interest and penalty, as there is no dispute as to service tax liability on the appellants under the provisions of Section 66A of the Finance Act, 1994. He would submit that the judgment in the case of Indian National Shipowners Association is on different facts. He would submit that the claim of the appellant that the issue is of revenue neutral is also incorrect as they cannot avail the Cenvat Credit of the duty which is not paid. He would also submit that another issue of Cenvat Credit availed on the capital goods and inputs during the period 1.6.2007 to 31.7.2007 is incorrect and is not disputed the appeal.

4. We have considered the submissions made at length by both sides and perused the records.

5. The undisputed facts are that the appellants have paid an amount to foreign parties for hiring the drilling rigs and enlisted the same to ONGC by way of charter hire. Revenue authorities are of the view that the amounts paid by the appellant to such foreign parties is taxable under the provisions of Section 66A of the Finance Act, 1994 under the category of mining and minerals services.

6. At the outset, we will record that the issue on merits as to the service tax liability during the period in question in this appeal i.e. July 2007 to September 2007 is now squarely covered in favour of the appellant herein in the case of Indian National Shipowners Association (supra). The judgment of their lordships clearly records that Para 11 as to the petitioners case which we reproduced 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.

Their lordships have recorded entry of supply of tangible goods in para 18 which reads as under:-

18.?In the meantime by the Finance Act, 2008 Entry (zzzzj) which we have quoted hereinabove was inserted into sub-section (105) of Section 65 of the Finance Act, 1994 to be effective from 16-5-08 to tax service in relation to supply of tangible goods including machinery, equipment and appliances for use, without transferring right of possession and effective control of such machinery, equipment and appliance. The 2nd respondent by Circular bearing No. M.F. (DR) Letter D.O.F. No. 334/1/2008 TRU dated 28-2-08 clarified the scope of this entry as covering inter alia, the supply of vessels without giving legal right of possession and effective control, such as offered by the members of the 1st petitioner. We may quote the relevant paragraph of the said circular :

4.4.2.?Excavators, wheel loaders, dump trucks, crawler carriers, compaction equipment, cranes etc., offshore construction vessels and barge flotillas, rigs & 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.

After considering the detailed submissions made by both sides; Honble High Court has held that the service tax liability under the category of supply of tangible goods would be effective from 16.5.2008 and prior to that the same was not taxable. The ratio is in para No. 34, 37, 38 & 48 which with respect we reproduce:

34.?We are concerned here with the scope of entry (zzzy) inserted into Section 65(105) of the Finance Act, 1994 by the Finance Act, 2007. The moot question is what kind of services are covered by this entry. As noticed by us hereinabove entry (zzzzj) was inserted into Section 65(105) of the Finance Act, 1994 by the Finance Act, 2008 with effect from 16-5-08. Services rendered by the 1st petitioners members have been specifically brought to levy of Service Tax only upon insertion of the new entry and they have been paying Service Tax accordingly. Thus they have accepted that services rendered by them are covered by this new entry but their contention is that those services i.e. Marine Logistic Services are not covered by entry (zzzy).

37.?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 main deck or equipment. Their harbour tugs are deployed for piloting big vessels in and out of the harbour and for husbanding main fleet. They give vessels on time charter basis to oil and gas producers to carry out offshore exploration and production activities. The right of possession in and effective control of such machinery, equipment and appliances is not parted with. Therefore, those activities clearly fall in entry (zzzzj) and the services rendered by the members of the 1st petitioner have been specifically brought to the levy of Service Tax only upon the insertion of this new entry.

38.?If the Departments contention is accepted that would mean that the activities of the members of the 1st petitioner are covered by entry (zzzy) and entry (zzzzj). Such a result is difficult to comprehend because entry (zzzzj) is not a specie of what is covered by entry (zzzy). Introduction of new entry and inclusion of certain services in that entry would presuppose that there was no earlier entry covering the said services. Therefore, prior to introduction of entry (zzzzj), the services rendered by the members of the 1st petitioner were not taxable. Creation of new entry is not by way of amending the earlier entry. It is not a carve out of the earlier entry. Therefore, the services rendered by the members of the 1st petitioner cannot be brought to tax under that entry.

48.?Applying the above conclusions to the instant case, we hold that the services rendered by the members of the 1st petitioner are either pre-mining or post-mining activities. They have no direct relation to mining. They were, therefore, rightly not brought to tax till entry (zzzzj) was introduced to 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 nexxis 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). Entry (zzzzj) is not a specie of what is covered by entry (zzzy). Nature of the services rendered by the members of the 1st petitioner, legislative history of the two entries, various circulars to which, we have made reference and the relevant judgments which we have noted hereinabove lead us to hold that the entry contained in Section 65(105)(zzzy) of the Finance Act, 1994 does not apply to services provided by the members of the 1st petitioner. Needless to say that respondents 1 to 4 and respondent 6 cannot demand service tax from the members of the 1st petitioner on the services rendered by them to the 5th respondent. As a consequence of this view of ours proceedings leading to issuance of letters dated 17-12-07, 19-2-08 and 5-3-08 annexed as Exhibits H, N and R respectively to the petition stand quashed and set aside.

7. On the plain reading of the judgement, we find that law is settled the Honble High Court, accordingly we have to hold that the service tax liability on the appellant for hiring of rigs to ONGC by making payment to foreign entities is liable to be tax from 16.5.2008, to that extent we hold in favour of the appellant.

8. Be that as it may, from the records we find that the appellant has discharged entire service tax liability which was charged by them to ONGC. When the appellant has already paid the amount collected by them from ONGC to the Government, the question of any recovery of amount does not arise.

9. This takes to the question of interest and penalty imposed on the appellant. As we have already recorded hereinabove, the activities of the appellant in hiring the rigs from the foreign parties and enlisting the same to ONGC would not fall under the category of mining of mineral oil and gas service, is in itself enough to set aside the liability of interest and penalties imposed, in as much as that when there can be no service tax liability, the question of interest and penalty does not arise. We are of the view that the interest confirmed and penalty imposed on the appellant are unwarranted and needs to be set aside and we do so.

10. The appeal is disposed of as indicated hereinabove.

(Pronounced in court)

(P.S.Pruthi) Member (Technical)

(M.V. Ravindran) Member (Judicial)

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