CESTAT Delhi Remands ₹5.82 Crore CE: STAT, Delhi, has remanded the service tax dispute between Schlumberger Asia Services Ltd. and the department on the question of verifying the nature of training services supplied to Oil and Natural Gas Corporation (ONGC), the applicability of reverse charge and the taxability of some services rendered offshore in drilling oil and natural gas. This is regarding the period of April 2008 to March 2009, where the service tax demand raised is ₹5,82,28,796, along with interest and penalties. The case was initiated by the department after examining the returns in respect of ST-3 filed by the assessee.
In the impugned order, the adjudicating authority has upheld some demands and rejected others. The revenue approached CESTAT against the said order on the grounds that several key facts relating to the place of service and proof of tax payment were not considered by the adjudicating authority. In the order, the Tribunal observed that the disputed issues needed factual investigation. The Tribunal has thus set aside the impugned order and remanded the case to the adjudicating authority.
Background of the Schlumberger Service Tax Case
The present case revolves around Schlumberger Asia Services Ltd., which rendered services related to exploration of oil and gas, technical training and drilling. The department looked into the ST-3 returns of the company for the period from April 2008 to March 2009. After the investigation, the tax department issued a show cause notice regarding service tax demand of ₹5,82,28,796 along with the interest and penalty provisions under Sections 76 and 77 of the Finance Act, 1994. Furthermore, the notice also concerned the appropriation of ₹1,67,77,259 which had been previously paid as arrears.
The company was of the opinion regarding several aspects of the service tax demand. The company said that the notice was an outcome of reconciliation of differences in the service tax returns and further said that the department’s subsequent appeal involved certain allegations about the nature, place and taxability of certain services that were not sufficiently considered during the initial procedure. The adjudicating authority upheld the demand to the extent of ₹19.53 lakh regarding Technical Testing and Analysis Services; however, it rejected other disputed demands.
CESTAT Examines the Validity of the Show-Cause Notice
Another preliminary matter that came up in this case was whether the show-cause notice was valid and whether the Revenue could plead the contested grounds in the appeal. According to Schlumberger, the notice was mostly based on the differences that had arisen during the reconciliation process of its ST-3 forms. According to the company, the notice did not clearly state the nature, place, and taxability of the service under question by the department.
The company based its arguments on the law on the ambit of show-cause notices such that the department should not be allowed to create a new case in the appellate process. However, the Tribunal did not find any force in this submission.
It noted that the company had been requested by the department for information and documents in a letter and a reminder but that it did not supply those documents during the initial proceedings. Under these circumstances, the Tribunal ruled that the company could not mount a successful challenge to the notice on the ground of lack of particulars.
ONGC Training Programme and Reverse Charge Mechanism
One of the issues related to the training programme arranged for the Acreage Managers of ONGC. This training programme, which was called “Orientation Programme for Acreage Managers,” lasted for seven weeks. Out of these seven weeks, six weeks were spent on classroom training in India and one week on visiting abroad, in order to acquaint the participants with data acquisition and processing methods.
The Revenue contended that the whole programme had been treated as one transaction without giving due consideration to services rendered in India and the consideration for such services. The revenue claimed that the assessing officer had accepted the reasons of the company relating to training abroad without considering the taxable nature of the first six weeks of classroom training done in India.
It was stated that ₹24,65,870 mentioned as payable in the statement had been paid by ONGC through the reverse charge mechanism. Reverse charge mechanism means that, in the situation prescribed by the law, the recipient of services will be the person liable to pay service tax on those services. But mere existence of reverse charge provision does not necessarily mean payment of tax.
Why ONGC’s Tax Payment Evidence Requires Verification
The Tribunal took special care in examining whether ONGC had in reality deposited the service tax charged in respect of the reverse charge mechanism. Schlumberger made use of the communications, including emails, to prove that ONGC had paid the service tax.
On the other hand, the Revenue contended that the adjudicating authority did not examine the documents in question independently in conjunction with the respective tax payment challans.
The Tribunal found that the documentary evidence needed to be examined further. While emails or correspondence can give an explanation of the transaction, it does not mean that the tax liability has been discharged. It is necessary to examine the amount of the payment, the period for which the tax was charged and the respective challan.
In this way, the Tribunal ordered the adjudicating authority to reconsider the tax liability concerning the training services provided in India after examining the nature of the services, payment for them and the evidence of such payment by ONGC. This remand gives the company a chance to provide all the required documentation to the adjudicating authority.
Offshore Oil and Gas Services Provided to SEDCO, Triton and Transocean
Yet another controversy arose regarding the supply of services by the company to SEDCO, Triton, and Transocean in connection with offshore exploration of oil and natural gas.
In its defence, the company claimed that the services were rendered for wells that were located outside the designated areas of the continental shelf and the EEZ of India. Accordingly, it claimed that the services did not fall within the service tax purview in the relevant period of time.
The Revenue denied the contention of the company. It stated that the services were in relation to the installations of ONGC, which were located within the designated areas of the continental shelf and EEZ of India. Hence, the relevant service tax purview included such territories within it.
Furthermore, the department placed emphasis on the relevant contractual arrangements as well, and contended that the adjudicating authority had failed to consider the contracts of the offshore operations properly.
The Tribunal held that the company had failed to submit adequate evidence to show that the services had been supplied outside the designated areas. It further held that the adjudicating authority had failed to discuss the service agreements adequately.
RIL Contract and Integrated Drilling Optimisation Centre
The Revenue also contested the way in which the services provided in relation to the contract between the company and Reliance Industries Limited (RIL) were considered.
The department contended that the company was engaged in the operations of the Integrated Drilling Optimisation Centre at Navi Mumbai and was a real-time operation centre. The said activity involved the monitoring, tracking, planning, designing, documentation, management, training and development relating to exploration activities.
The Revenue claimed that these activities were conducted in a centre located in India and could not be considered to be exempt from the tax since they were related to offshore wells. The department also placed reliance on an invoice dated April 13, 2008, where the company had charged and collected service tax.
This brought up an important issue. In case the service tax was charged on the invoice, it had to be considered in light of the facts of the present case, where the company was claiming that those services were not taxable. The Tribunal found out that the adjudicating authority did not properly consider the contract, place of activities and the invoice referred to by the department.
CESTAT Delhi Remands ₹5.82 Crore: Key Lessons for Businesses and Service Providers
Several important lessons can be learned from the case in terms of practical advice for businesses facing difficult disputes under the service tax law.
Keep records of tax payments by customers: If customers claim to have made tax payment using the reverse charge method, the company should keep proper records, including challans that identify the sum and the period of such tax payment.
Prove the nature of services. The contracts, invoices, work report and the allocation of the consideration can assist in proving that the services were done outside or inside India.
Prove the fact of the offshore location. If companies base their argument on the location of the oilfield, installation, or offshore well, they should be able to back this fact up with proper evidence.
Answer the questions raised by the department. Failing to produce the documents requested by the department in the initial process will limit the procedural objections.
Check invoices and contracts. All taxes charged or collected from the customers must correspond to the company’s position regarding taxes on particular services.