ST - Whether services provided could be vivisected and services provided within taxable territory alone brought to tax on proportionate value received therefor - Pre-deposit ordered: CESTAT
By TIOL News Service
NEW DELHI, DEC 13, 2013 : AGAINST a Rs.346.15 crores demand confirmed along with loads of penalties and interest by the Commissioner, Service Tax, New Delhi the appellant is before the CESTAT seeking a stay. The period involved is 2005-06 to February 2010.
The appellant is an American company registered in British Virgin Islands(tax haven!) operating in the specialized area of mineral exploration and prospecting and has developed advanced technology for the purpose. The recipients of the alleged taxable service ONGC and RIL entered into agreements with the appellant for exploration and prospecting, for identification of oil and gas reserves in the sea bed within the territory authorised for exploration by India. The agreements were for long term leasing of "Q-Marine technology" in Indian offshore areas, during the periods in issue. Under the terms of the contract between the parties, the appellant employs its advanced three dimensional (3D) seismic data and acquisition and processing technology and provides data to the recipients. The data acquisition and a part of the processing of the acquired data occurs offshore. Certain preparatory processes and a part of the processing of the offshore acquired data is within the Indian landmass, in Mumbai. The agreements are composite agreements for data acquisition and processing of data, offshore and inland as well.
Insofar as the transaction with ONGC is concerned, the appellant has remitted service tax on 4% of the gross value received from ONGC, computing that percentage of the value received, as attributable to the taxable activity falling within the reach of provisions of the Act. The petitioner did so based on the assumption that its data acquisition and part processing of such data, being activity carried out offshore and beyond the 12 nautical miles limit from the Indian landmass, is outside the purview of provisions of the Act. Insofar as the transactions with RIL, the petitioner did not remit tax on any portion of the gross value received, from RIL.
In the SCNs, Revenue has alleged that since the eventual delivery of services to the service recipients is of the processed data and a part of the processing occurs within the Indian landmass; the deliverable obligations of the petitioner in respect of the taxable service are pursuant to composite agreements comprising both the offshore data acquisition process and part processing of data; and the final processing of data and delivery of the data so processed is in Indian territory, the service provided by the appellant falls within the taxable service of "Survey and Exploration of mineral".
As mentioned, the demand notices were confirmed along with penalty and interest and, therefore, the appellant is before the CESTAT.
It is submitted:
(i) That it is not liable to the levy of tax since the dominant activity is of acquisition of data by using its Q-Marine technology, a process that occurs offshore and beyond the purview of the Act.
(ii) That the gross value received on the transactions must be apportioned between a value attributable to operations beyond the purview of the Act and the value attributable to operations (of final processing of data the petitioner was associated with) occurring within India, the latter being 4% of the total transaction value, and, therefore, this quantum of the value received would alone be exigible to service tax.
(iii) That invocation of the extended period of limitation is unwarranted. In the case of RIL transactions, the entire period falls within the extended period; and in the case of ONGC, the total tax liability even by Revenue interpretation of the transaction, falling within the normal period of limitation is Rs.54 crores since all the relevant information was furnished by April 2006 itself i.e. information which enabled Revenue to take an informed view on whether the transaction is liable to tax, and if so, the quantum of tax due thereby.
The Revenue representative referred to provisions of Articles 1 and 290 of the Constitution of India; The Territorial Waters, Continental Shelf, Exclusive Economic Zone and Other Maritime Zones Act, 1976 and certain Notifications issued by the Government of India (extending the operation of provisions of the Act beyond the territorial waters of India), to conclude that even offshore activities of data acquisition and substantial processing on board petitioner's vessels, at offshore locations, was within the purview of the Act.
The Bench observed that the adjudicating authority while confirming the demand has held that as the transactions are covered under composite contracts, the transactions are integrated and since the eventual deliverables occurred within the Indian territory the entire transaction and the gross value received therefor is exigible to tax.
The Bench further observed that it is not inclined to embark on a sui-generis enquiry and fact determination, of whether the petitioner's offshore activities and the services provided thereby (admittedly beyond 12 nautical miles) nevertheless fall within the Indian territory and provisions of the Act.
It was recorded thus -
" 17. We therefore avoid an idle parade of familiar authority on the aspect whether services provided outside the Indian taxable territory are immune to tax under provisions of the Act, at this stage of proceedings. We proceed in the premise that there is no such liability."
Noting that there is no warrant to exclude the generic principle that even composite, integrated transactions or transactions covered by a composite contractual instrument are subject to vivisection to identify the taxable element and on such identification to apportion the taxable value for levy of tax after excluding the non-taxable component of the income or receipt, the CESTAT observed that it is of the prima facie view that services provided by the petitioner to ONGC/RIL beyond the Indian taxable territory are protantoexcisable (sic) from the taxable services provided within the taxable territory and the values received and attributable to the taxable component of the total activities are alone susceptible to the levy and collection of service tax.
The Bench also held that at the stay application stage it is not inclined to proceed on an elaborate analysis of whether the circumstances justify invocation of the extended period of limitation.
It was further noted that in respect of services provided to ONGC, the appellant had remitted the tax due on that component of its services and the proportionate value received therefor as were provided within the Indian territory, on its landmass at Mumbai by way of processing data and other associated activities, falling within the scope of Section 65(104a) of the Act. However, no tax was remitted in respect of services provided within the Indian territory to the other corporate entity RIL.
The appellant informed the Bench that the tax component for the Indian land based services provided to RIL would be Rs.60 lakhs.
To this submission, the Bench observed –
"There is no contest to this assertion by the ld. DR, at present. Whether only 4% of the gross value received (from ONGC/ RIL) is attributable to services provided within the taxable Indian territory under the provisions of the Act requires further scrutiny and analyses, and at hearing of the appeal. Since this assertion of the petitioner in the adjudication proceedings was not contested by Revenue, which proceeded on the assumption that entire transaction is taxable, we assume in the circumstances, that only 4% of the gross value received by the petitioner is attributable to the taxable component of services provided, for the nonce. The resultant tax liability, in respect of services provided to RIL is thus assumed to be Rs.60 lakhs."
In fine, the appellant was directed to make a pre-deposit of Rs.60 lakhs with proportionate interest thereon for grant of stay in the matter.
(See 2013-TIOL-1859-CESTAT-DEL)
