By TIOL News Service

MUMBAI, MAY13, 2013: THE appellant provided their rigs "Kedarnath" & "Badrinath" on charter hire basis to Oil and Natural Gas Corporation Ltd. (ONGC) and M/s. Deep Water Service India Ltd., subsidiary of M/s. ONGC for drilling operation/drilling wells in the offshore waters of India during the period July 2009 to March 2010.

The department was of the view that the services undertaken by the appellant is classifiable under the category of "Supply of Tangible goods for use Services" and is taxable under Section 65(105)(zzzzj) of the Finance Act, 1994 with effect from 16/05/2008.

Accordingly, a SCN was issued to the appellant demanding service tax of Rs. 10,53,46,914/- along with interest thereon and also proposing to impose penalties under the provisions of the Finance Act, 1994.

The Commissioner (TAR) of Service Tax, Mumbai passed an order-in-original confirming the demand and imposing penalties and interest.

Before the CESTAT, the appellant submitted thus -

+ As per the contract entered, the services required to be rendered by the appellant is drilling of wells in the areas specified by the ONGC and hence the activity undertaken is not "supply of tangible goods' but ‘drilling of oil wells' and which merits classification under "mining services" falling under Section 65(105)(zzzy) of the Finance Act, 1994.

+ during the impugned period, the drilling was undertaken in the non-designated areas under the Territorial Waters, Continental Shelf, Exclusive Economic Zone and other Maritime Zones, Act, 1976 and the activity of drilling was undertaken on the sea bed where no structures or other vessels existed and accordingly, the activity undertaken was not in India but outside India and hence service tax is not leviable.

+ that Petroleum Federation of India had submitted a representation to the Central Board of Excise & Customs vide letter dated 25/09/2009 seeking clarification as to whether they would be liable to pay service tax on the activity undertaken by them. A copy of the said representation was endorsed to Central Excise, Division-I, Mumbai vide letter dated 16/12/2009.

+ Since the department was aware of the activity undertaken by the appellant, the show-cause notice is time barred.

+ Interim stay be granted and as the appellant is facing financial difficulties.

The Revenue representative submitted that the appellant should be put to terms on account of the following -

+ that as per the agreement entered into between the appellant and the ONGC, it is for charter hire of the drilling rigs and the drilling operation was conducted at the areas designated by the ONGC.

+ that as per the terms of the contract, the compensation paid to the appellant is based on the number of days during which the vessel was on charter hire and even when the vessel was not used for drilling, the compensation was paid to the appellant by the ONGC. Similarly, even when drilling rigs were moved from one place to another, for the period in transit also hire charges were paid. All these facts clearly indicated that the services rendered by the appellant is hiring of vessels for ONGC and since the vessel was under the operational control of the appellant, the activity undertaken by the appellant falls squarely within the scope of "supply of tangible goods for use" service and therefore, the demand for service tax under the said classification is sustainable in law.

+ the appellant informed the department only on 16/12/2009 whereas the show-cause notice in this case has been issued on 15/12/2010, i.e. within a period of one year. Since the date of knowledge is relevant in computing time limit, the SCN is not time barred.

+ Notification No.1/2002-ST dated 01/03/2002 was amended vide notification No.21/2009-ST dated 07/07/2009 wherein the expression designated areas in the continental shelf and Exclusive Economic Zone of India as declared by the Notifications of the Government of India in the Ministry of External Affairs Nos. S.O.429 (E) dated 18/07/1986 and S.O. 643 (E), dated 19/09/1996 with immediate effect was replaced by the words "installations, structures and vessels in the Continental Shelf of India and the Exclusive Economic Zone of India".

+ that with this amendment, the entire Continental Shelf and Exclusive Economic zone of India where the installations, structures and vessels are situated becomes India for the purpose of levy of service tax and, therefore, the demand is sustainable.

The Bench observed -

"5.1 We have also perused the agreement entered into by the appellant with ONGC. The agreement is for charter hiring of drilling units by the appellants to ONGC or its subsidiaries. The Hon'ble High Court of Bombay in the case of Indian National Shipowners' Association Vs. UOI, reported in - (2009-TIOL-150-HC-MUM-ST) has held that charter hiring of vessels merits classification under "supply of tangible goods for use" service and not under "mining service". The decision of the Hon'ble High Court was also affirmed by the apex Court in the same case. The judgement of the Andhra High Court in the case of Rashtriya Ispat Nigam Ltd., reported in 1990 (77) STC 182 AP reveals that supply of machinery for execution of the work does not amount to transfer of the right to use the machinery and therefore, sales tax is not imposable on the hire charges on the machinery. In other words, the transaction involved is one of service.

5.2 From the agreement entered into between the appellant and ONGC, it is seen that compensation is fixed per day basis. Thus even when no drilling takes place, the service provider is compensated. Thus prima facie the service undertaken by the appellant falls under the category of "supply of tangible goods for use". As regards the issue of time bar raised by the appellant it is both a question of fact as well as law which can be considered at the time of final hearing of the appeal. Thus we are prima facie of the view that the appellant has not made out any case for complete waiver of pre-deposit of the dues adjudged against them."

Upon being informed by the appellant that the demand of Service Tax for the normal period is Rs.5.00 crores (approx), the Bench directed the appellant to make a pre-deposit of the said amount and report compliance.

In passing: Also refer Notification 14/2010-ST dated 27/02/2010.

(See 2013-TIOL-722-CESTAT-MUM)