By TIOL News Service

MUMBAI, OCT 29, 2014: THE appellant had entered into two contracts with M/s. Oil and Natural Gas Corporation Ltd. (ONGC) for supply of Cantilever type jack-up rigs named Greatdrill Chetna and Greatdrill Chitra. These were required to provide offshore drilling services to ONGC in terms of the contracts dated 27/02/2009 and 08/05/2009. These drilling rigs were hired by the appellant from M/s. Greatship Global Energy Services Pte. Ltd., Singapore, on bareboat charter basis.

The adjudicating authority confirmed a service tax demand of Rs.27,24,52,804/- against the appellant M/s. Greatship (India) Ltd., Mumbai. While passing the impugned order, the Commissioner has classified the services rendered by the appellant as falling under ‘Supply of Tangible Goods for Use service' (SOTG in short) and the period of demand is from 07/07/2009 to 31/03/2010.

Aggrieved by the said order, the appellant is before the CESTAT.

The Bench after hearing the lengthy submissions made by both sides observed –

++ To fall within the definition of taxable service, two conditions are required to be satisfied – (1) there should be a supply of tangible goods for use; (2) there should not be any transfer of right of possession and effective control of such goods. Once these two conditions are satisfied, the provisions of the said entry will be attracted.

++ From the terms of the agreement entered into between the appellant and M/s. ONGC, it is clear that the service provided by the appellant is essentially supply of drilling rig along with its personnel to operate the same on charter hire basis and the payment for the services rendered is made on per-day basis. Thus, from the terms of the contract, it is clear that the activity comes within the scope of ‘supply of tangible goods for use'. In the present case, the appellant has supplied drilling rigs along with the crew. Thus it is the appellant who has possession and effective control over the drilling rig. The crew so supplied are the employees of the appellant and not of ONGC. Consideration is paid on per-day basis. All these elements in the contract clearly show that there is no transfer of right of possession and effective control by the appellant to M/s. ONGC.

++ The appellant's contention that the appellant should have transferred the possession of the goods to come within the statutory definition of SOTG service which they have not done is completely untenable. The definition of SOTG service envisages only two conditions to be satisfied, namely, (1) there should be a supply of tangible goods for use and (2) there should not be any transfer of right of possession and effective control of such goods. These two conditions are clearly satisfied as evident from the terms of the contract. The use of the rig is by ONGC who directs the appellant to make available the rig with the crew where drilling operations have to be undertaken.

++ The Boards Circular/letter D.O.F. No.334/1/2008-TRU dated 29/02/2008 issued at the time of inception of levy on SOTG service clearly explains the scope of the said service in para 4.4 thereof.

++ The activity of supply with no legal right of possession and effective control is sought to be taxed under the entry (zzzzj). It is an accepted principle of interpretation that the contemporaneous construction placed by administrative or executive officers charged with executing a statute has to be given due diligence as held by the hon'ble apex Court.

++ Hon'ble High Court of Bombay in Indian National Shipowners' case - 2009-TIOL-150-HC-MUM-ST considered an identical issue…Question before the hon'ble High Court was whether the said activity would come under entry (zzzy) of Section 65(105) under the category of ‘Mining Services' or would it fall under entry (zzzzj) inserted under the said Section vide Finance Act, 2008 w.e.f. 16/05/2008 as ‘Supply of Tangible Goods for Use Service'. The conclusions reached by the hon'ble High Court is given in para 37 of the said order – "…The right of possession 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."

++ The above decision was also affirmed by the hon'ble apex Court in the same case - 2011-TIOL-05-SC-ST …, therefore, we have no hesitation to conclude that the service rendered by the appellant merits classification under entry (zzzzj) of Section 65(105) of the Finance Act, 1994.

The case laws cited by the appellant were held to be not relevant to the facts of the case.

In the matter of the reliance placed on the Export of Service Rules, 2005, the Bench observed that the said Rule deals with export of services and the conditions required to be satisfied so as to fall within the scope of ‘export of service'; the expression used in a rule cannot be used to interpret the wordings in an Act of Parliament; It has to be interpreted in the light of the expressions employed therein; Nowhere in entry (zzzzj) is there any mention of the fact that throughout the period of use, the goods should be physically located in India; In the absence of such a specific condition in the definition of ‘taxable service', we are unable to accept the contention of the appellant that the condition stipulated in Export of Service Rules has to be applied to interpret entry (zzzzj) of Section 65 (105); In the facts of the case before us, both the service provider as well as the service receiver are located in the taxable territory, namely, India. Therefore, the place of provision of service is India. Thus from whichever angle one looks at the issue, there cannot be any dispute on the fact that the service has been provided in India and not anywhere else.

Adverting inter alia to the decisions in AbanLoyd Chiles Offshore Ltd. vs. Union of India - 2008-TIOL-78-SC-CUS holding that the oil rigs carrying on operations in the designated area would be deemed to be a part of the Indian territory & The Shipping Corporation of India - 2013-TIOL-1652-CESTAT-MUMthe Bench held that the said service merits classification under SOTG service.

The CESTAT further observed –

++ Even if for argument sake it is considered that the service provided is a composite service consisting of SOTG service and mining service, as per the principles of classification enshrined in section 65A (2) (b) of the Finance Act, 1994, composite services, consisting of a combination of different services, shall be classified as if they considered of a service which gives them their essential character. In the facts of the present case, the essential character is SOTG service since 95% of the consideration is for supply of tangible goods for use and mining operations account only for about 5% of the consideration received.

Holding that the service provided by the appellant merits classification under “supply of tangible goods for use service”, the demand of service tax under the said category was held as clearly sustainable. The demand of interest on the service tax was also upheld. Penalty imposed u/s 78 of FA, 1994 was set aside by holding that the issue relates to interpretation of law and classification.

(See 2014-TIOL-2122-CESTAT-MUM)