By TIOL News Service

NEW DELHI, JUNE 04, 2014: THE appellants are carrying on various businesses including Exploration & Production of Oil & Natural Gas. Appellant entered into agreements with the owners of Offshore Supply Vessels (OSVs) known as Charter Party Agreement under which owners supply OSVs which were deployed by the appellant in the Eastern and Western Coast of India in their Offshore Oil and Exploration sites.

SCNs were issued demanding service tax for the period 16.5.2008 to 1.9.2009 on reverse charge mechanism under the category of 'supply of tangible goods'. After 1.9.2009, appellant started paying service tax under the heading of transportation of coastal goods.

As the CST, LTU, Mumbai confirmed the tax demands, presumably of high amounts, the appellant is before the CESTAT.

It is submitted that in the present case there is no supply of vessel by the ship owner to the appellant. Inasmuch as the vessels remain under the control of the owner and, therefore, the activity does not come under the scope of 'Supply of tangible goods for use' service. In the present case the vessels are used by the owner and not by the appellant,hence the provisions of Section 65 (105) (zzzz) do not apply. The appellants further submit that in the context of amending notification 21/2009-ST dated 07.07.2009 extending the provisions of Chapter V of the FA, 1994 to include installations, structures and vessels in the continental shelf of India and the exclusive economic zone of India by applying the principle of noscitur a sociis , the off-shore supply vessels in question are not akin to installation and structures and, therefore, they stand excluded from the imposition of service tax. It is also contended that the contracts entered with the owner prior to 16.5.2008 are not liable to service tax under the service 'Supply of tangible goods for use' even though the use of vessels and the payments made forthe same maybe after 16.5.2008. For this submission, they 'heavily' rely upon the decision of the Tribunal in Petronet LNG Ltd vs CST 2013-TIOL-1700-CESTAT-DEL, particularly,para 36 of the judgment.

Yet another argument made is that as per the proviso to Rule 3 (iii) of the Import of Service Rules, 2006, for Section 66A to apply, the vessels were to be located in India for the entire duration of the period for use and which is not so and moreover prior to the amendment of Notf. No. 1/2002-ST by 21/2009-ST, dated 07.07.2009, the notification did not cover the area in question in the present case. Further, the voyage undertaken by the vessels from Kakinada Port to installation/structures is through the sea which is not India and there is no evidence on record to show that each journey/voyage the entire passage is within India as per the provisions of Notification dated 7.7.2009.

The Revenue representative relied on various clauses of the Charter Party Agreement and submitted that the plea of the appellant that there is no supply of vessel is not sustainable. Reliance is placed on the decision in Indian National Ship Owners Association 2009-TIOL-150-HC-MUM-ST [Revenue appeal dismissed as reported 2011-TIOL-05-SC-ST] and whereit is held that the activity is a case of supply of tangible goods for use service.

On the next submission that Off-shore Supply Vessels are not located in Indian waters during the use, it is contended that from the scope or work mentioned, the operation of the OSVs commence from the Indian Ports of Kakinada, Paradip, Vizag etc. and materials are procured from the Indian territory and OSVs move through the Indian territory for the lions' share of time;the vessels also lie always afloat within Indian waters; that the concept of taxability commences when the vessels are transferred to the appellants at India ports; that the taxable event is a continuous one and each supply of tangible goods would amount to taxable event. The case law of Petronet LNG was sought to be distinguished by emphasizing that in that case for the lions' share of time the vessel was plying in international waters whereas in the present case it was not so.

After considering the submissions, the Bench held that in view of the Bombay High Court decision in the case of Indian National Ship Owners Association (supra) there is no merit in the contention of the appellant that the activity does not come under the scope of Supply of Tangible Goods for Use service.

However, on the second issue as to whether the appellant was not liable to discharge service tax in respect of the said activity as the said vessels were not located in India during the entire period of use of such tangible goods by the recipient of service, the Bench adverted to the provisions of the proviso inserted with effect from 16.05.2008 under rule 3(iii) of the Taxation of Service (Provided from Outside India and received in India) Rules, 2006 and observed that the Tribunal in the case of Petronet LNG had held that the expression 'during the period of use' would mean that the tangible goods must be located in India during the entire period of use and if it is not so located in India for any part of the period it cannot be said to be located in India and the Service Tax in respect of the same cannot be levied under the reverse charge mechanism.

As to whether the vessels in question were located in India during the period in dispute, the Bench analysed the issue thus -

++ During the relevant period the vessels were plying to Kakinada and various other places in the Continental Shelf and the Exclusive Economic Zone of India which are beyond the territorial waters of India and which are non-designated places.

++ Expression "India" is defined in the Import of Service Rules differently at different points of time and the definition as applicable from 16.5.2008 till 6.7.2009 reads -

"India" includes the designated areas in the Continental Shelf and the Exclusive Economic Zone of India as declared by the Notifications of the Government of India in the Ministry of External Affairs S.O. 429E dated 18.7.1986 and S.O. 643 (E) dated 19.9.1996".

++ The period in dispute in the present case is 16.5.2008 to 1.9.2009, as after 1.9.2009 service tax is being paid under the heading transportation of coastal goods.

++ It is clear from the definition of "India" as extracted above that for the purpose of Import of Service Rules, non-designated area in the Continental Shelf and the Executive Economic Zone of India during the relevant period, even after the amendment, definition "India" included only the installations, structures and vessels in the Continental Shelf of India and the Exclusive Economic Zone itself.

++ Further the expression 'vessels' is preceded by the words "installation and structures". Applying the principle of Noscitur A Socis the vessels covered therein would be such vessels which are akin to installation and structures and which are to be stationed at a fixed location in the Continental Shelf and Exclusive Economic Zone of India while rendering services. In our opinion such vessels may be of the type such as floating or submersible drilling of production platforms, generally designed for the discovery or the exploitation of offshore deposits of oil and natural gas. The vessels in question are offshore supply vessels which are different from function in a fixed or stationary position.

The CESTAT concluded that the appellant cannot be held to be under the reverse charge mechanism in respect of vessels not located in India during the entire period of their use and, therefore, the orders were set aside and the appeals were allowed.

In passing : More…in the days to come…

(See 2014-TIOL-940-CESTAT-MUM)