M/s. Quippo Oil and Gas Infrastructure Ltd. @Hash Commissioner Of Service Tax

The order dated April 29, 2014 passed by the Commissioner (Adjudication), Service Tax Commissionerate, New Delhi, the Commissioner

confirming the demand proposed in the show cause notice dated October 13, 2009 with interest and penalties under sections 76, 77 and 78 of the

Finance Act, 1994, the Finance Act has been assailed in this appeal filed by M/s Quippo Oil & Gas Infrastructure Ltd. the Appellant.

The appellant is engaged in the business of providing mobile drilling services to various companies in the oil and gas industry. It registered itself with

the Service Tax Department, inter alia, under the category of “mining of mineral, oil or gas, Mining services†that became taxable w.e.f June 1,

2007.

An audit of the records of the appellant was conducted for the period from 2005-06, 2007-08 between June 17, 2009 and June 19, 2009. A view

was formed by the Department that the services provided by the appellant were covered under “site formation and clearance, excavation and

earthmoving and demolition serviceâ€, site formation service during the relevant period from April 1, 2006 upto May 31, 2007. Accordingly, a show

cause notice dated October 13, 2009 was issued to the appellant proposing a demand of service tax under the category of site formation service on the

basis of an allegation which is reproduced below:

“the service contract of the Noticee is a composite contract which covers the supply of equipments, supply of consumables and supply

of manpower. Further the Noticee is raising bills/invoices to its clients for drilling operations/services of oil/gas well. The sum total of this

activity when seen in totality results in rendering of services i.e. drilling service performed at designated place meant for exploration of oil

& mineralsâ€​.

The period mentioned in the show cause notice was from April 1, 2006 upto May 31, 2007 and it also proposed to invoke the extended period of

limitation contemplated under the proviso to section 73(1) of the Finance Act.

The appellant filed a reply to the show cause notice and contested the demand both on merits as well as on limitation. However, the Commissioner

by order dated October 13, 2009 confirmed the demand proposed in the show cause notice with interest and penalties. The relevant portion of the

order passed by the Commissioner is reproduced below :

“I find that the Noticee is engaged in the business of providing Drilling Rig services to Oil & Gas Industry and provides specialized and

efficient drilling Rigs equipped with latest technology and equipment along with the highly qualified and experienced crew to its customers.

Drilling Oil & Gas wells in an efficient, fast and safe manner is the companies core competency. The contract/agreements are mostly

uniform in nature. Salient feature of an agreement include supply of rig along with trained personnel. Drilling services/operations charges

are billed to the customers on monthly basis as per terms of the contract. The drilling operations/services are conducted as per the

instructions given by the customer in terms, of the agreement entered into. Presently, they provide onshore contract drilling services utilizing

its owned fleet of two land based Rigs as notes/brief submitted by the Noticee.

I also find that the activities performed by the assessee are covered under Site Formation and Clearance, Excavation and Earthmoving

Demolition Services; the Noticee had not classified the activity under Site Formation and Clearance, Excavation and Earthmoving

Demolition Services and not paid Service Tax on Drilling services provided/rendered prior to 1.6.2007 from 1.6.2007 assessee got

themselves registered under Mining of Minerals Oil & Gas services and paying service tax appropriately. The assessee is engaged in

providing drilling services which they have claimed as Mining of Minerals Oil & Gas services w.e.f. 1.6.2007. The assessee’s contention

is not correct. The service contract of Noticee is a composite contract which covers supply of equipments, supply of consumables and supply

of manpower. Further, the Noticee is raising bills/invoices to its clients for drilling operations/services of Oil/Gas well. The sum total of this

activity when seen in totality results in rendering of services i.e. drilling service performed at a designated place meant for exploration of

Oil & Minerals. In the instant case, prior to 1.6.2007 the activities performed by the assessee falls under the Site Formation and Clearance.

Thus, I find that the activities i.e. drilling undertaken by the assessee amounts to service, classifiable under, taxable category of Service

Tax. The services rendered by the assessee were covered under Site Formation and clearance, Excavation and Earthmoving Demolition

Services prior to 16.6.2007 which was taxable service from 16.62005 as such they have failed to discharge Service Tax liability along with

Education Cess & Higher Education Cess under the said service for the drilling services provided by to its clients.â€​

(emphasis supplied)

Shri B.L. Narasimhan assisted by Shri Narendra Singhvi, learned Counsel appearing for the appellant made the following submissions:

(i) The activities undertaken by the appellant do not fall under site formation service and, therefore, the demand is not sustainable. Site formation

service covers those activities which are taken prior to the construction of building or factory or other civil structures or laying of cables or pipelines or

exploring of minerals and mining, etc. and are in the nature of preparatory work for making the location suitable for construction, exploration or mining.

In the instant case, the preparatory work was undertaken by the ONGC itself and the appellant carried out its activity on the already prepared site and

hence, this activity cannot be classified under the category of site formation service;

(ii) Creation of a new specific entry of mining services, under which the appellant duly discharged service tax w.e.f June 1, 2007 and accepted by the

department, without any change in the earlier entry of site formation service shows that the activities of the appellant are classifiable under the new

entry of mining services only. To support this contention, reliance has been placed upon the following decisions of the Tribunal :

(i) Indian National Shipowners’ Associations Vs. Union of India, 2009(14) STR 289(Bom.); .

(ii) Malviya National Institute of Technology Vs. Commr. of S.T., Jaipur, 2019(28) GSTL 472(Tri. - Del.); .

(iii) Global Coal & Mining Pvt. Ltd. Vs. Commissioner of Service Tax, Delhi, 2020(36) GSTL 77 (Tri. - Del.) ; and .

(ii) The extended period of limitation could not have been invoked in the present case as the department failed to point out any positive act of

suppression on part of the appellant.

Shri Arun Thapliyal, learned Authorized Representative of the Department, however, supported the impugned order and submitted that there is no

error in the finding recorded by the Commissioner that the service rendered by the appellant during the period April 1, 2006 to May 31, 2007 would fall

under the category site formation service. Learned Authorized Representative also submitted that the Commissioner was justified in holding that the

extended period of limitation was correctly invoked in the show cause notice.

The submissions advanced by learned Counsel for the appellant and the learned Authorized Representative of the Department have been

considered.

The appellant is in the business of providing mobile drilling services to companies in the oil and gas industry and had got itself registered with the

service tax department under the category of mining services that became a taxable service under section 65 (105)(zzzy) of the Finance Act w.e.f

June 1, 2007. According to the Department, the appellant had rendered site formation service from April 1, 2006 upto May 31, 2007.

Site formation service has been defined under section 65 (97a) of the Finance Act as follows:

“65 (97a) site formation and clearance, excavation and earth moving and demolitionâ€​ includes â€

(i) Drilling, boring and core extraction services for construction, geophysical, geological or similar purposes; or

(ii) Soil stabilization; or

(iii) Horizontal drilling for the passage of cables or drain pipes; or

(iv) Land reclamation work; or

(v) Contamin ated top soil stripping work; or

(vi) Demolition and wrecking of building, structure or road, but does not include such services provided in relation to agriculture,

irrigation, watershed development and drilling, digging, repairing, renovating or restoring of water sources or water bodies;â€​

This site formation service is taxable under section 65 (105)(zzza) of the Finance Act, which is reproduced below:

“Section 65(105)(zzza) ""taxable service"" means any service provided or to be provided to any person, by any other person, in relation to

site formation and clearance, excavation and earthmoving and demolition and such other similar activities.â€​

Mining services became taxable under section 65 (105)(zzzy) of the Finance Act w.e.f June 1,2007 and this section is reproduced below:

“Section 65(105)(zzzy) â€" “taxable service†means any service provided or to be provided to any person, by any other person in

relation to mining of mineral, oil or gas.â€​

To appreciate the nature of the service that was provided by the appellant, it will be appropriate to refer to the agreement entered between under

the appellant (referred to as the Contractor in the agreement) and Oil and Natural Gas Corporation Limited (referred to as the Operator in the

agreement) . The relevant portion of the agreement is reproduced below:

“WHEREAS, Operator desires to have drilling operations conducted in the western sector of India particularly in the state of

Gujarat/Raj, as may be designated by Operator, AND WHEREAS, Contractor is owner of “Mobile Rig KREMCO Series K750â€

(hereinafter referred to as “Drilling Unitâ€) and is capable & willing to perform such drilling operations on charter hire basis with

Drilling Unit and its personnel as per Exhibit-A.â€​

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2.3 WELL DEPTH

The depth of each well to be drilled, hereunder will be specified in Operator’s Drilling and Completion Programme, which Operator

may amend from time to time. The depth so specified is hereunder referred to as the „well depth’.

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10.0 COMPLETION OR ABANDONMENT

Contractor agrees to perform all work necessary to drill, complete or abandon each Well in the manner specified by Operator.

**********

11.2 CORING AND CORES

Contractor shall core at such depths as Operator shall specify and shall deliver all cores as recovered in Operator’s containers,

property labeled, to Operatory and shall not allow any third party access to said cores or samples without Operator’s prior written

consent.â€​

The scope of work has been specified in Exhibit-A of the agreement and the relevant portion is reproduced below: “The scope of work

involves drilling of 6(six) core holes upto an average depth range of 1200 to 1500 mtr each with at least one core hole to penetrate the technical

basement and 2(two) test wells to a depth range of 1500-1700 mtr in Tertiary coal/lignite Formations of Barmer-Sanchor Block. Besides Drilling and

Coring, the job will include Casing, Cementation, Cement Plugging, logging of Wells etc.â€​

The roles and responsibilities of Operator and Contractor have been specified in Appendix-II. Point A refers to the preparatory work and point

B(iii) refers to the activity of identifying drilling locations, constructing, access road, cellar pits, foundations, oil waste pit and sanitary pits, water pit and

internal site hard surfacing fencing at drill site, etc., which are, inter alia, the responsibilities of operatory i.e. ONGC.

It is, therefore, clear from the aforesaid agreement that the appellant (Contractor) had been engaged by ONGC (Operator) for conducting the

drilling operations in the area specified therein. The depth of each well to be drilled was to be specified in the drilling and completion programme of

ONGC. The scope of work involved drilling of 6 core holes upto an average depth range of 1200 to 1500 mtrs., each with at least 1 core role to

penetrate the technical basement and 2 test wells to a depth range of 1500 to 1700 mtrs. in the specified blocks. A perusal of the roles and

responsibilities of Operator and Contractor also indicates that ONGC had to prepare the site and provide it to the appellant for the drilling activities. It

is thereafter that the appellant provides rig drilling services for extraction of oil or gas, on an already prepared surface and the said drilling rig service

has to be provided by specialized and efficient drilling rigs equipped with latest technology and equipment along with highly qualified and experienced

crew.

The appellant, in reply to the show cause notice, stated that the activities carried out by the appellant would not fall under site formation service.

The activities carried out in relation to exploration and mining of oil and gas from the stage of allotment of blocks to production of oil and gas from the

blocks was highlighted in the reply to the show cause notice. The sequence of events in mining of oil and gas were also summarized in the following

manner:

Allotment of blocks to operators by the Central Government through Directorate General of Hydrocarbons, who allots various blocks to

various operators in terms of National Exploration licensing policy.

At the time of bidding for the blocks, the operators make a commitment regarding minimum number of oil wells, Gas wells or wells, the

case may be, to be drilled.

After obtaining license for exploration, various required documents/reports are prepared and submitted with the Ministry of Environment

and Forest for obtaining requisite clearance.

After obtaining the license and clearance as stated in point 2 above, 2D and 3D Seismic Survey (Geo Physical Testing) of the allotted

blocks is conducted by the operatory, which inter alia includes the following :

(a) Geological and theme mapping

(b) Aerial photography/survey

(c) Satellite imagery

(d) Topographic and underground survey

(e) Sample drilling (test drilling)

(f) Geophysical exploration

Thereafter, operator floats tenders which are referred to as, “Tender for provision of drilling Rig and associated servicesâ€. The said

tender involves two aspects viz., technical and commercial. The tenders are awarded to Drilling Service Providers like QOGIL based on

their technical capability and competitive commercial quotation.

Once the contract is awarded, Operator issues mobilization notice for Rig, equipment and personnel for carrying out the drilling

activities. Operators prescribe the drilling plan and accordingly the contractor carries out the drilling activity. Contractor provides

required experienced and qualified manpower and equipment for proper execution of drilling plan. Drilling of well is carried out under the

supervision of operator’s site representative.

Prior to mobilizing Rig to the drilling site, Contractor provides the layout of the proposed Rig to the Operator. On the basis of this layout,

the Operator carries out civil work for Site Formation including setting up of storage areas and other premises to make the site suitable and

ready for installation of Rig and carry out the drilling activity. In case, the site is at remote area then an approach road is also prepared by

the operator for transportation of drillings rigs and other movable properties to the site.

In case oil or gas is struck while drilling Oil or Gas well, Contractor’s responsibility is to immediately inform the operator or such

encounter of Hydrocarbon. Contractor’s responsibility is to drill hole as per the drilling plan and the operator decides whether to test

the well with the same rig or different rig. The Scope of work for the contractor completes once the well is drilled to required depth as per

drilling plan. Well is secured and the Rig is released for next location.â€​

Thereafter, the relevant Clauses of the agreement were referred to in the reply and the scope of work was also described as below:

“4.2.5 Thus, from the aforesaid scope of work to be undertaken under the agreement, it may be seen that QOGIL is engaged in carrying

out drilling of wells/core holes and the same is an integral part of mining of oil and gas. Further, the site preparatory work for making the

site conducive for carrying out the drilling activities is the sole responsibility of the operator i.e. the Customer. The site preparatory work

would be undertaken by the operator is specifically demarcated in the agreement entered by QOGIL. Thus, activity carried on by QOGIL

was only in or in relation to mining activity, where as all other pre and post drilling activity, including the work of site preparation and

mineral extraction are performed by ONGC itself or the contractor appointed by ONGC in this behalf. Hence, services provided by QOGIL

to its customer do not fall under the category of “Site formation and Clerance, Excavation and Earthmoving Demolition Services†but

under the head „mining service’. In this respect, it would be pertinent to highlight the meaning and scope of both the aforesaid heads

of taxable service herein under:â€​

The issue, therefore, that arises for consideration is as to whether the appellant had rendered site formation service for the period April 1, 2006 to

May 31, 2007, which is the period prior to June 1, 2007 when mining services became taxable.

As noticed above, it is clear from the definition contained in section 65 (97)(a) of the Finance Act that site formation includes drilling, boring and

core extraction services for construction, geophysical, geological or similar purposes. It will also be pertinent to refer to the Circular dated July 27,

2005 that was issued by the Government of India in connection with the issues pertaining to service tax in the budget 2005-06. The relevant portion

relating to site formation service is reproduced below:

Site formation and clearance, excavation, earth moving and demolition services.

6.1 Any service provided or to be provided to any person, by any other person, in relation to site formation and clearance, excavation and

earthmoving and demolition and such other similar activities is leviable to service tax under sub-clause (zzza) of section 65(105) of the

Finance Act, 1994. “Site formation and clearance, excavation and earthmoving and demolition†has been defined in clause (97a) of

section 65 of the Finance Act, 1994.

6.2 The definition of site formation and clearance, excavation and earthmoving and demolition is an inclusive definition and the activities

specifically mentioned are indicative and not exhaustive. Prior to construction of buildings, factory or any civil structure, activity of mining

or laying of cables or pipes, preparation services of site formation and clearance, excavation and earthmoving or leveling are normally

undertaken for a consideration to make the land suitable for such activities. Such services include blasting and rock removal work,

clearance of undergrowth, drilling and boring, overburden removal and other development and preparation services of mineral properties

and sites, and other similar excavating and earthmoving services. Demolition of structures, buildings, streets or highways is also undertaken

for a consideration as a preparatory activity for subsequent construction activity or for clearing the site for any other purpose. All such

activities fall within the scope of this service.

6.3 However, site formation and clearance, excavation and earthmoving and demolition services when provided in relation to agriculture,

irrigation, watershed development and drilling, digging, repairing, renovating or restoring of water sources or water bodies are specifically

excluded and not within the scope of this service.

6.4 Notification 17/2005-S.T., dated 7-6-2005 exempts this service provided in the course of construction of roads, airports, railways,

transport terminals, bridges, tunnels, dams, major and minor ports.

A plain reading of the definition of site formation service and the aforesaid Circular clearly shows that site formation service covers those

activities which are taken prior to construction of buildings or factory or other civil structures or laying of cables or pipelines or exploring of minerals

and mining and are in the nature of preparatory work for making the location suitable for construction or exploration or mining. These facts were

specifically stated by the appellant in reply to the show cause notice, but the Commissioner has not considered the submissions in the impugned order.

The work required to be performed under the agreement was definitely not the work relating to preparation of site. The preparatory work was carried

out by ONGC itself and the appellant carried out the activity on the prepared site. The activity undertaken by the appellant cannot, therefore, be

classified under the category of site formation service.

This issue was also examined by the Tribunal in Atwood Oceanics Pacific Ltd. Vs. Commr. Of Service Tax, Ahmedabad, 2013(32) STR 758 (Tri.

â€" Ahmd.). It was held that drilling of exploratory work is integral to mining and thus would be classifiable under mining services.

The Commissioner was, therefore, not justified in holding that the appellant had rendered site formation service from April 1, 2006 to May 31,

2007.

This issue can be examined from another aspect. Mining service was introduced w.e.f June 1, 2007 without any change in the site formation

taxable service. Thus, when the intention of the legislature was to levy service tax on the activities in relation to mining under mining services only

under section 65(105)(zzzy) of the Finance Act w.e.f June 1, 2007, the said activity cannot be classified under any other category, including site

formation service prior to June 1, 2007. The decisions of the Tribunal in Malviya National Institute of Technology and Global Coal & Mining Pvt. Ltd.

have taken this view.

When the appellant had not rendered any site formation service w.e.f April 1, 2006 to May 31, 2007, it would not be necessary to examine

whether, in the facts and circumstances in the case, the extended period of limitation could have been invoked by the Commissioner.

Thus, for all those reasons stated above, the order dated April 29, 2014 passed by the Commissioner cannot be sustained and is set aside. The

appeal is, accordingly allowed.