By TIOL News Service

MUMBAI, MAR 15, 2016: THIS is a Revenue appeal against the order passed by the CCE, LTU, Mumbai.

The respondent is engaged in exploration and extraction of oil and gas in the offshore Blocks allotted to them by the Government of India under Production Sharing Contracts (PSC). It uses services of different persons/companies for exploration and extraction activities. It is alleged that RIL has been receiving services from service providers who have a fixed establishment or have their permanent address or usual place of residence from where service is provided, in a country other than India, and, therefore, they are required to pay service tax on such services as if the recipient had himself provided the service in India.

The respondent was not paying service tax under the belief that the imported services are used outside the territorial waters of India viz., beyond 12 nautical miles (NM) to which provisions of the FA, 1994 are not extended. Revenue viewed that provisions of Chapter V of the Finance Act, 1994 are extended to installations, structures and vessels in the continental shelf of India (CS) and the exclusive economic zone of India (EEZ) vide Notification No. 1/2002- Service Tax dated 01-03-2002, as amended by Notification No. 21/2009-Service Tax dated 07-07-2009, and hence service tax is payable.

Vide their letter dtd. 06-10-2009, addressed to the Commissioner of Central Excise LTU Mumbai, RIL informed that where installations or structures are under construction, services rendered towards their construction would not attract any service tax. Further, in case of "vessels", the services provided from the vessel to the seabed or to other outer areas which are not part of India will not attract service tax. So, on such taxable services rendered by foreign service providers, they, as recipient of service, were not liable to pay Service Tax, prior to 27.02.2010.

The adjudicating authority set aside the demand of Rs.75,43,93,392/- but confirmed the service tax amount of Rs.33,94,064/- (already paid by the respondent) towards "Management, maintenance or repair services". The proceedings initiated under various other Show cause notices were also dropped.

The Commissioner came to the conclusion that Notification 14/2010-ST dated 27.02.2010 by which the provisions of the Finance Act, 1994 were extended to the whole of the CS and EEZ for specified purposes could not be given retrospective effect. He relied on various decisions including CC Vs. Spice Telecom - 2005-TIOL-925-CESTAT-BANG and Bombay Industries Pvt Ltd. Vs. UOI [1995 (77) 32 (SC)] in support. Therefore, he dropped the entire demand of service tax except an amount of Rs.33,94,064 being the admitted liability under the head "management, maintenance or repair" service.

As mentioned, Revenue is in appeal.

After hearing the exhaustive submissions made by both sides, the CESTAT observed -

Whether the services received by RIL are taxable services provided in the taxable territory under the provisions of Notification No. 21/2009-ST dated 7/7/2009 .

+ We find that it was only on supersession of Notification 1/2002-ST by Not 14/2010 that the concept of service tax on services for pre-construction activity was introduced. In the Notfn. 14/2010, the scope of service tax was bifurcated into two parts: services for pre-construction and during-construction activities and services for existing installations, structures and vessels. The period of dispute is prior to issue of this notification. Revenue's contention that the Not 21/2009 covered under-construction installations as well because services can be delivered through a vessel, has to rejected as this was never a ground in the SCN. [Reliance Industries - 2014-TIOL-940-CESTAT-MUM refers]

+ We find that even in Not 14/2010, the phrase used is 'activities pertaining to construction of installations, structures and vessels… in the CS and EEZ.' It would be incongruous to think of construction of vessels in the CS and EEZ for the obvious reason that vessels are not constructed in the ocean as such. Therefore, the contention of Revenue that the Notification extends the ambit of taxable territory to vessels traversing across the seas in the CS and EEZ is fallacious.

+ The construction of the notification is such that it aims to extend the taxable territory of India to installations, structures and vessels in the CS and EEZ. That is, the vessel itself becomes taxable territory. A vessel could even be traversing, during the oil exploration work beyond the 200 miles limit of the EEZ (taxable territory) and within this territory, back and forth. Would the same vessel become taxable territory at one moment and non-taxable territory inanother moment? Therefore, it would be absurd to say that the taxable territory keeps shifting when a vessel is rendering service to the installations.

+ We are further strengthened in our view by the wording used in SO 643 (E) issued under the Maritime Zones Act from which the Notification under the Finance Act 1994, 1/2002 derives its authority. The SO extends the validity of enactment i.e. the Finance Act to the CS and EEZ only in respect of installations, structures and platforms. The validity was not extended to vessels. Therefore the meaning of the word 'vessels' used in the Not 21/2009 does not appear to be intended to include vessels traversing across the CS and EEZ. Even in Not 14/2010 the taxable territory stands extended to installations, structures and vessels within the continental shelf and the exclusive economic zone of India, constructed for the purpose of prospecting or extraction or production. The key words are 'constructed for the purpose.' These words imply that only vessels specially constructed for this purpose would be covered and not any supply vessels which are merely used to transport men and material from onshore to offshore locations.

+ It is clear that incomplete structures cannot fall within the meaning of the word 'structure' as used in the notification in the context of its association with the word 'installation'. Otherwise there would have been no need to introduce two distinctly separate categories of 'pertaining to construction of' and 'constructed' in the Not 14/2010.

Relevance of Not 14/2010-ST

+ We find that on 27/2/2010, notification 16/2010-ST was issued which defined India in the Taxation of Services (Provided from outside India and Received in India) Rules, 2006 as below:- "India" includes the installations, structures and vessels located in the continental shelf of India and the exclusive economic zone of India, for the purpose of prospecting or extraction or production of mineral oil and natural gas and supply thereof.

+ Revenue's contention that Not 14/2010-ST was referred to in the SCN only to emphasize that the extent of taxability was limited merely for the oil exploration activities is quite evidently not borne from a simple reading of the notification, and therefore, needs no elucidation from us. The intention to include all activities including those for construction under scope of service tax actually got fructified only in 2012 in the statutory definition of India in Section 65B, which includes well defined territories in -

(i) clause (b) as Territorial waters, CS and EEZ (which would cover all activities) and

(ii) in clause (e) as 'installation in the CS and EEZ'.

These two categories of taxable territory are distinct. The statute included the activities pertaining to construction only from 2012. It is established law that the primacy of the statute cannot be bypassed by reading some intention in a notification. [Ispat Industries ltd. - 2006-TIOL-127-SC-CUS refers.]

+ From the above it is clear that the definition of India in notification 21/2009-ST cannot be given a presumed meaning and, therefore, the services provided for pre-construction and during-construction activities will not fall within the ambit of the notification. What is introduced in the Not 14/2010 and in the Statute in 2012 cannot be given retrospective effect.

+ We note that the territorial jurisdiction of service tax law is laid down in Section 64 which states that chapter V of the Finance Act 1994 extends to the whole of India except the State of Jammu and Kashmir. By virtue of notification 21/2009, the provisions of chapter V were extended to the installations, structures and vessels in the CS and EEZ of India.

+ Service tax is not a charge on business but on the consumer on the provision of a taxable service in the taxable territory. Service provided outside the taxable territory cannot be subject to levy of Service Tax. In the present case the notification applicable during the dispute period extends the taxable territory to the installations, structures and vessels in the CS and EEZ of India. It does not extend to the entire areas of the CS and the EEZ.

+ It also clearly does not extend to exploration activities pertaining to the construction of installations, structures and vessels for the purpose of extraction of oil. Had this been the intention or the definite implication, there would have been no need to introduce this phraseology specifically in the notification 14/2010 dated 27.02.2010. [All India Federation of Tax Practitioners - 2007-TIOL-149-SC-ST & Cox and Kings India Ltd - 2013-TIOL-1907-CESTAT-DEL refers]

+ Some of the services as being services that are received in the installations under construction in the CS and EEZ; the question of taxing such services does not arise being outside the scope of the notification which defines only existing installations as falling in the territory of India.

+ Essentially, the jurisdiction of service tax law under Section 64 is such that only service provided in the taxable territory is the service that can be taxed. Only the installations and structures as notified under the Notification fall in the ambit of the definition of India which is the taxable territory. If the services are provided anywhere in the seabed of the CS and EEZ which is not a taxable territory, the same cannot be treated as a service provided in the taxable territory. The location of the recipient is important but at the same time what has to be considered, qua the statutory provisions of Section 64 and 66, before deciding the location of the recipient, is whether the service is provided in the taxable territory. The jurisdiction of the Finance Act cannot be decided by the Taxation of Services (Provided from Outside India and Received in India) Rules, 2006 Rules. The jurisdiction is laid in the Finance Act, 1994. The Rules will come into play only when the jurisdiction is there. Therefore, in the present case, the confirmation of demand beyond taxable territory is clearly ultra-vires [Kiran Singh and Ors vs Chaman Paswan and Ors [1955] 1 SCR 117 refers].

+ Service tax is not payable in the present case as the services provided in the CS and EEZ are services provided outside the taxable territory.

Penalty:

++ RIL had declared in the ST returns that the services are performed or received at locations to which the provisions of the Finance Act, 1994 do not apply. Therefore penalties are not warranted in terms of Section 80, being an interpretational issue.

Conclusion:

(a) Not 21/2009 extends the taxable territory only to constructed installations and structures and not to under-construction installations. Therefore services provided to latter are not taxable.

(b) The 'structures' referred to in Not 21/2009 are complete structures.

(c) Services provided by vessels traversing to and fro from shore to off shore and in the EEZ are not taxable under the provisions of Not 21/2009.

(d) Not 21/2009 extends taxable territory to installations etc. in the CS and EEZ in contradistinction to Not 14/2010 which also extends the taxable territory to the whole of the sea-bed and thus the services provided to the sea-bed are not taxable as held by the High Court of Bombay in Greatship India Ltd - 2014-TIOL-2122-CESTAT-MUM.

(e) Services provided in taxable territory alone are taxable as laid down in the judgements in the case of All India Federation of Tax Practitioners vs Union of India - 2007-TIOL-149-SC-ST and Cox and Kings India Ltd - 2013-TIOL-1907-CESTAT-DEL. Resort to Taxation of Services (Provided from Outside India and Received in India) Rules, 2006 is not warranted in the circumstances except in case of services in para (f) below.

(f) Service tax is payable on the services namely 'Commercial Training and Coaching service' and 'Management Consultant Service'. Appropriate interest on demand confirmed in respect of these two services is payable. However no penalty is imposable.

The Revenue Appeal was disposed of.

(See 2016-TIOL-618-CESTAT-MUM)