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Judgment
Briefly stated, the facts of the case are that during the disputed period, the appellant herein was engaged in providing mining services to M/s. Oil &
Natural Gas Corporation Limited (ONGC) for performing drilling operations on Oil Wells in the East and West Costs of India. For providing such
service, the appellant chartered its vessel, namely Ultra Deepwater Drilling Unit “Platinum Explorer (Hull No. 3601)â€, owned by it on time â€
charter basis to ONGC. Such service provided by the appellant is confirming to the definition of taxable service under the category of “Mining of
Mineral, Oil or Gas Serviceâ€, defined under Section 65 (105) (zzzy) of the Finance Act, 1994. For providing such taxable service and other category
of services, the appellant got itself registered with the Service Tax Department. In this case, the appellant had entered into an agreement dated
29.04.2009 with M/s. ONGC for carrying out the drilling operations. The agreement inter alia, provided that there will be an average consumption of
diesel @ 50 KL/per day, which will be provided by M/s. ONGC at their cost. During the course of audit conducted under EA-2000, the department
observed that ONGC had provided diesel to the appellant during the disputed period and opined that the cost of such fuel should form part of gross
amount under Section 67 ibid for payment of service tax on such value. Since, the appellant did not discharge service tax liability on the value of diesel
supplied by ONGC, the department initiated show cause proceedings against the appellant, which culminated into the adjudication order dated
31.03.2018 (for short, referred to as ‘the impugned order’), wherein the learned Commissioner of Service Tax has confirmed service tax
demand amounting to Rs.53,12,37,269/- along with interest and also imposed penalties under Section 76, 77 and 78 ibid. Feeling aggrieved with the
impugned order, the appellant has preferred this appeal before the Tribunal.
Shri Prasad Paranjape, the learned Advocate appearing for the appellant submitted that for the period prior to 14.05.2015, the term
‘consideration’ finding place in the valuation provisions under Section 67 ibid meant only the amount, which was payable for the provision of the
taxable service. Thus, he submitted that since M/s. ONGC was not required to made payment towards the cost of fuel to the appellant, its value
cannot be added to the taxable value for the purpose of computation of service tax liability thereon. He further submitted that even the amended
provisions to Section 67 ibid w.e.f.14.05.2015 would not be applicable to the case of appellant inasmuch as it had never charged the cost of fuel to the
service receiver M/s ONGC for providing the taxable service. The learned Advocate has relied upon the judgment of Hon’ble Supreme Court in
the case of Commissioner of Service Tax vs. Bhayana Builders (P) Ltd. â€" 2018 (10) G.S.T.L. 118 (S.C.) and Union of India vs. Intercontinental
Consultants & Technocrats Pvt. Ltd. â€" 2018 (10) G.S.T.L. 401 (S.C.), to state that value of free supplies made under the contractual arrangement
by the service receiver to the service provider cannot be added to the value of taxable service provided by the service provider.
On the other hand, Shri Suresh Merugu, the learned AR for Revenue reiterated the findings recorded in the impugned order and supported
confirmation of the adjudged demands in the impugned order.
Heard both sides and examined the case records.
The issue involved in this case for consideration by the Tribunal is, whether the appellant has taken the correct legal stand in not including the cost
of free supply diesel made by M/s ONGC in the value of taxable service for running the drilling vessel.
On perusal of the agreement dated 29.04.2009, we find that the recipient of service M/s ONGC was required to supply the fuel (diesel) for running
of the drilling equipments; that it was not required to make payment of fuel to the appellant and that the same was in fact, supplied free of cost to
accomplish the assigned task. This factual aspect has also been accepted by the department in the show cause notice as well in the impugned order.
The period of dispute involved in this case is from December 2010 to December 2015. The provisions of valuation of taxable services for charging
service tax are contained in Section 67 ibid. The said statutory provision has defined the term ‘consideration’, to include any amount that is
payable for the taxable services provided or to be provided for provision of taxable service. Section 67 ibid was amended by the Finance Act, 2015 (20
of 2015), w.e.f. 14.05.2015. The effect of amendment was that subclauses (ii) and (iii) were inserted in clause (a) in the definition of consideration
contained in the explanation part appended to Section 67 ibid. The amended provisions include inter alia, any reimbursable expenditure or cost incurred
by the service provider and charged, in the course of providing or agreeing to provide a taxable service, subject to the fulfilment of the prescribed
conditions. In the present case, it is an admitted fact on record that the appellant had never charged any cost of fuel to M/s. ONGC over and above
the amount claimed by it for providing the taxable service. Since, M/s. ONGC was not required to make payment of fuel to the appellant, its value
cannot be added to the taxable value both under the un-amended and amended provisions of Section 67 ibid. Further, the appellant herein had received
the entire consideration for provision of service in monetary terms. Hence, it cannot be said that it was not properly able to determine the value of
taxable service, in order to attract the provisions of Rule 3 (b) of the Service Tax (Determination of Value) Rules, 2006. Similarly, the provisions of
Rule 5 ibid also would not attract in this case inasmuch as no cost of fuel was charged or billed by the appellant to the recipient of service.
We find that the issue arising out of the present dispute is no more res integara, in view of the judgement of Hon’ble Supreme Court in the case
of M/s. Bhayana Builders (P) Ltd.(supra), relied upon by the learned Advocate for the appellant. The relevant paragraphs in the said judgement are
extracted herein below:
As already pointed out in the beginning, all these assessees are covered by Section 65(25b) of the Act as they are rendering
‘construction or industrial construction service’, which is a taxable service as per the provisions of Section 65(105)(zzq) of the Act.
The entire dispute relates to the valuation that has to be arrived at in respect of taxable services rendered by the assessees. More precisely,
the issue is as to whether the value of goods/materials supplied or provided free of cost by a service recipient and used for providing the
taxable service of construction or industrial complex, is to be included in computation of gross amount charged by the service provider, for
valuation of taxable service. For valuation of taxable service, provision is made in Section 67 of the Act which enumerates that it would be
‘the gross amount charged by the service provider for such service provided or to be provided by him’. Whether the value of
materials/goods supplied free of cost by the service recipient to the service provider/assessee is to be included to arrive at the ‘gross
amount’, or not is the poser. On this aspect, there is no difference in amended Section 67 from unamended Section 67 of the Act and the
parties were at ad idem to this extent.
On a reading of the above definition, it is clear that both prior and after amendment, the value on which service tax is payable has to
satisfy the following ingredients :
a. Service tax is payable on the gross amount charged :- the words “gross amount†only refers to the entire contract value between the
service provider and the service recipient. The word “gross†is only meant to indicate that it is the total amount charged without
deduction of any expenses. Merely by use of the word “gross†the Department does not get any jurisdiction to go beyond the contract
value to arrive at the value of taxable services. Further, by the use of the word “chargedâ€, it is clear that the same refers to the amount
billed by the service provider to the service receiver. Therefore, in terms of Section 67, unless an amount is charged by the service provider
to the service recipient, it does not enter into the equation for determining the value on which service tax is payable.
b. The amount charged should be for “for such service providedâ€: Section 67 clearly indicates that the gross amount charged by the
service provider has to be for the service provided. Therefore, it is not any amount charged which can become the basis of value on which
service tax becomes payable but the amount charged has to be necessarily a consideration for the service provided which is taxable under
the Act. By using the words “for such service provided†the Act has provided for a nexus between the amount charged and the service
provided. Therefore, any amount charged which has no nexus with the taxable service and is not a consideration for the service provided
does not become part of the value which is taxable under Section 67. The cost of free supply goods provided by the service recipient to the
service provider is neither an amount “charged†by the service provider nor can it be regarded as a consideration for the service
provided by the service provider. In fact, it has no nexus whatsoever with the taxable services for which value is sought to be determinedâ€
A plain meaning of the expression ‘the gross amount charged by the service provider for such service provided or to be provided by
him’ would lead to the obvious conclusion that the value of goods/material that is provided by the service recipient free of charge is not
to be included while arriving at the ‘gross amount’ simply, because of the reason that no price is charged by the assessee/service
provider from the service recipient in respect of such goods/materials. This further gets strengthened from the words ‘for such service
provided or to be provided’ by the service provider/assessee. Again, obviously, in respect of the goods/materials supplied by the service
recipient, no service is provided by the assessee/service provider. Explanation 3 to sub-section (1) of Section 67 removes any doubt by
clarifying that the gross amount charged for the taxable service shall include the amount received towards the taxable service before,
during or after provision of such service, implying thereby that where no amount is charged that has not to be included in respect of such
materials/goods which are supplied by the service recipient, naturally, no amount is received by the service provider/assessee. Though, sub-
section (4) of Section 67 states that the value shall be determined in such manner as may be prescribed, however, it is subject to the
provisions of sub-sections (1), (2) and (3). Moreover, no such manner is prescribed which includes the value of free goods/material supplied
by the service recipient for determination of the gross value.
In view of the foregoing discussions, we do not find any merits in the impugned order passed by the learned Commissioner of Service Tax.
Therefore, by setting aside the same, the appeal is allowed in favour of the appellant.
(Order pronounced in the open court on 12.02.2021)