2012(1) ECS (101) (Tri-Ahd)

CUSTOMS EXCISE & SERVICE TAX APPELLATE TRIBUNAL,

West Zonal Bench, Ahmedabad
COURT
M/s. Atwood oceanics Pacific limited
Versus
Commissioner of Service Tax, Ahrnedabad

Appeal No.

ST/363 & 344 of 2009, ST/CO/73 of 2010

Arising out of

OIO No. 09/Commissioner/2009 dated 28.05.2009

Passed by

Commissioner of Central Excise, Ahmedabad

Appellant(s)

M/s. Atwood oceanics Pacific limited

Represented by

ShriSanjeevSachdeva Consultant &ShriNeeraj

Sharma,chartered Accountant

Respondent(s)

Commissioner of Service Tax, Ahrnedabad

Repeesented by

Shri S.K Mall,AR

CORAM:

HonbleMr.M.VRavindran, Member(Judicial)
HonbleMr.B.S.V.Murthy, Member (Technical)

Date of Hearing :01.08.2012

Date of Decision :30/08/2012

ORDER NO.A/1296-1298 WZB/AHD/2012

Per: Mr.B.S.V.Murthy;

i.

Atwood oceanics pacific limited (M/s Atwood for short) entered into an agreement on
03.09.2005 with M/s Gujarat State petroleum corporation ltd (GSPC for short). As
per the terms of the agreement the following salient covenants were agreed upon

(i)

M/s Atwood shall drill, complete or abandon the wells identified by

GSPC for drilling program in accordance with all the requirements
specified in the contract. GSPC shall pay M/s Atwood for such
performance of drilling, completion or abandonment in accordance with
the financial provisions of the contract.

(ii)

M/s Atwood shall use their own equipment, personal and obtain all the
necessary permits/ authorization required for the operation of the
equipments and for the performance of the job specified. GSPC has to
give concurrence to the equipments and personal. M/s Atwood shall
also be responsible for the safety of the personal and equipments.

(iii)

M/s Atwood shall prepare a Daily drilling report for all the work in the
well and shall furnish a copy of the report to GSPC.

(iv)

At GSPCs request M/s Atwood shall (a) complete the well as producer
in the manner and by methods specified by GSPC, or (b) cease

operations and plug or abandon the well, at any depth, in the manner
GSPC directs.
(v)

All survey notes, drawings, invoices for the material permits, permit
applications, specifications, blueprints, reports, circulation and all other
material prepared by M/s Atwood in connection with the work the shall
be transferred to GSPC upon completion of the each well and/or upon
completion of work/termination or the contract.

(vi)

GSPC shall pay M/s Atwood as par agreed rates. The invoicing shall
be at the end of each month accompanied by the drilling reports.

(vii)

M/s Atwood has indemnified GSPC from all damages pertaining to M/s
Atwood equipment and personal. Similarly GSPC indemnified M/s
Atwood from any claims arising out of its own personnel.

2.

M/s Atwood on 02.02.2009 had take registration in the category of Supply of

Tangible Goods service as defined under section 65 of the finance Act, 1994.
There were two appropriate taxable services prior to the registration taken by M/s
Atwood on 02.02.2009 namely Survey and Exploration of Mineral, oil and Gas
service with effect from 10.09.2004 and Mining of Mineral, oil or Gas service
with effect from 01.06.2007 which could cover the service rendered. However,
revenue entertained a view that the activities of M/s Atwood would fall under
Survey and Exploration of Mineral, oil and Gas service form November 2006 to
31.05.2007 and Mining of Mineral oil or Gas service for the period from
01.02.2007 onward. Hence, demand of service tax fir the two periods totally
amounting to Rs. 31,22,79,982/- was raised against M/s Atwood invoking the
larger period of limitation. Interests as well as penalties under Section 75A, 76,
77 and Section 78 were also proposed.

3.

The Show cause notice was decided by the Commissioner of Central Excise,
Ahmedabad-111 vides OIO No. 09/commr/2009 dated 28.05.2009. He held that
the services rendered by M/s Atwood would fall under Mining of Mineral, falling
under-Section 65(105)(zzzy) of the finance Act,1994 and accordingly, he
confirmed the demand of Rs. 19,86,31,386/- along with interest for the parried
from 01.06.2007 on words and dropped the demand of service tax amounting to
Rs. 11,36,48,596/- under the category Survey and Exploration of Mineral ,oil and
gas service for the period from November 2006 to may 2007. penalties under
section 75 and section 77 of the fianc Act, 1994 were imposed but penalties
under section 75A and section 78 of the Finance Act, 1994 were dropped.

4.

Both Revenue and the assessee are in appeal.

5.

Department has appealed against the impugned oia on the following grounds
:-

6.

(i)

The Boards latter D.O.F No. 334/1/2007-TRU dated 28.02.2007 clearly

states that with the notification of the service Mining of Mineral, oil or Gas
service, service provide in relation to both exploration and exploitation of
mineral, oil or gas will be comprehensively brought under the service tax
net. Prior to 01.06.2007 it would fall under Survey and exploration of
Mineral, oil and Gas service.

(ii)

Service such as site formation and clearance and excavation and earth
moving drilling wells for production/exploitation
of hydrocarbons
(developmental drilling); well testing anc analysis service; sub-contract a
service such as deploying workers and machinery for extraction/breaking
of rocks in to stones, sieving grading etc. ; outsourced services provided
for mining which were individually classified under the appropriate taxable
service were comprehensively brought under service provided in relation
to mining of mineral, oil or Gas. Thus exploration and exploitation of
mineral, oil or gasses were brought under service tax from 01.06.2007,
which was the legislative intent.

(iii)

Activity carried out by M/s Atwood is for exploration, site preparation and
not exploitation. As the contract is basically about exploratory drilling and
not actual exploitation the activity would be covered under the services in
relation to survey and exploration of minerals.

(iv)

The adjudicating authority is thus not justified in not considering the

classification of service rendered by M/s Atwood in the category of ;survey
and exploration of mineral, oil and Gas service for the period from
November 2006 to May 2007 and the subsequent dropping of the demand
amounting to Rs. 11,36,48,596/- demanded under the said service.

M/s Atwood has appealed against the impugned order on the following grounds :
i.

That the services provided by them falls under Supply of tangible goods
for use and not under Mining of, mineral, oil or gas services. The
adjudicating authority has misconstrued the scope of the taxable services
supply of tangible goods for use. The main reason for rejecting the
classification under the said service is that the appellant did not transfer

possession and effective control. It has been contended that tangible

goods used for exploration were always under their possession and
control.
ii.

It is clear from the definition of the taxable services in section

65(105)(zzzzj) of the FA, 1994 read with Ministry of Finance letter D.O.F.
No. 334/1/2008-TRU dated 29.02.2008 that the services provided by them
fall under the category of supply of tangible goods for use.

iii.

The persons operating the equipments were, at all times employees of the
appellant and since the equipments provided by the appellant were
operated by the employees/sub-contractors of the appellant, such
equipment remained under the possession and effective control of the
appellant at all times.

iv.

That the contract is for supply of tangible goods i.e. the drilling rig and
other equipments, is further established by the following facts :
(1)
(2)
(3)
(4)
(5)

Contractor is charging a specific amount from company in respect

of equipments supplied by it.
Amount is being charged on per day basis and not based on usage.
Separate rates are provided even for standby.
Equipment is given by the contractor for use during the term
specified in the contract and not for drilling pre defined number of
wells.
Contractors personnel are being provided since they are
experienced and qualified to use the equipment and this part of the
activity is incidental to the main activity, which is supply of the
equipment.

v.

Reliance is placed on the decision of the Bombay high court in the case of
Indian national ship owners association Us UOI [2009(14)STR 289 (Bom)]
wherein the services provided by the petitioner i.e. providing vessels on
time charter basis to various oil and gas producers was held to be falling
under section 65(105)(zzzzj) i.e. supply of tangible goods for and not
under section 65(105) (zzzy) which pertains to mineral,oil and gas.

vi.

Reliance is also placed on various other decisions viz. RashtriyaIspat

Nigam Ltd. Vs state of AP [(1990)77 STC 182 (AP)] affirmed by the
HonbleSc as well as commissioner. Trade tax vschabra tourist bus
service [MANU/UP/1355/2006] to contend that there is no transfer of

possession and effective control where the suppliers employees are

operating the equipment
7.

Both sides made very extensive oral submissions and also submitted written
submissions we reproduce the written submissions.

8.

Submissions by revenue are as under.

8.1.

The whole issue revolves around three contending entries, namely

(i)
(ii)
(iii)

Survey and exploration of mineral. Oil and gas service

Mining of mineral , oil and gas
Supply of tangible good for use

The definitions of these three entries are as under:

Survey and exploration of mineral means geological, geophysical or other
prospecting surface or sub-surface surveying or map making service , in relation
to location or exploration of deposits of mineral , oil or gas;
Section 65(105)taxable service means any service provided or to be provided
*

(zzzy) to any person, any other person in relation to mining of mineral, oil or gas;
*

(zzzzj) to anyperson, by any other person in relation to supply of tangible goods

including machinery, equipment and appliances for use, without transferring right
of possession and effective control of such machinery, equipment and
appliances;

8.2

The adjudicating authority has sought to deny classification of the service under
the category of survey and exploration of mineral, oil and gas service on the
ground that there is nothing in the SCN to show that the services provided by
M/S atwood fall under geological, geophysical or other prospecting, surface or
sub- surface surveying or nap making.

8.3

The essential ingredients of this service are geological, geophysical or other

prospecting surface or sub- surface surveying or mapmaking services. Such
services must be in relation to location or exploration of deposits of mineral, oil or
gas. The show cause notice in para 4 has in detail discussed the meaning of

various terms contained in the definition of the service the SCN has also
discussed threadbare the contract entered into by M/s atwood with GSPC the
preamble portion of the contract states that
Whereas, company desires tov drill, test , complete, exploratory wells as
specified by company in the east coast off Andhra Pradesh, India as set
for hereinafter; and whereas, contractor is engaged in the business of
drilling, testing and completing, and abandoning of offshore wells; and
contractor represent that it has adequate resources and equipment in
good working condition and fully trained personal compliment of efficiently
operating such equipment and is ready, willing and able to drill the said
well and carry out auxiliary operation and services necessary to carry out
the work for company.

A perusal of the above part of the contract makes it that the contract entered into
between M/s Atwood the contractor, and GSPC, the company is to drill, test and
complete the exploratory wells. The activity which is to be done by the contractor
is to drill the exploratory wells for exploration of oil. The definition of survey and
exploration of mineral, oil and gas service also makes it clear that activities
involved in the exploration of minerals. Oil and gases fall under this service. The
adjudication authority has also contended that the SCN proceeds on the basis of
legislative intent. However, ministrys letter F.No b2/8/2004-TRU dated
10.09.2004 issued at the time of introduction of the service and which, as
contemporaneous expositor, explains that the service tax under this service
would be limited to services rendered in relation to survey and exploration only
and not on the activity of actual extraction after the survey and exploration is
complete . Activities such as seismic survey, collection/ processing/ interpretation
of date and drilling and testing in relation to surveys and exploration would,
however, fall within the ambit of taxable service. M/s Atwood have contended in
their cross objection that servicesb rendered to GSPC is not in relation to
exploration as perusal of the terms of the contract would show that they were not
engaged in locating the areas where deposits of mineral , oil or gas are available,
rather the said act of locating such places has been done by GSPC it is pertinent
to mention here that as stated above the preamble of the contract states that
GSPC desires to drill test and complete exploratory wells and that the contractor
is ready willing and able to drill the said wells and carry auxiliary operations and
services necessary to carry out the work b the question here is not who is
identifying the place where the drilling is to be done what is to be seen is the
activity that is being conducted there is no doubt that m/s Atwood has been
entrusted to drill , test and complete an exploratory well the activity conducted by
m/s Atwood is in relation to exploration the web definition of exploratory well is as
under

(a)

As per businessdicitionary.com test hole drilled on land or in sea to

ascertain the extent of recoverable gas and/or oil in a probable but yetunproved location.

(b)

As per offshoretechnology.com- An Exploratory well a well drilled for

the purpose of discovering new reserves in unproven areas. They are
used to extract geological or geophysical information about an area with a
view to exploiting untapped reveres Exploratory wells are sometimes
knows as Wildcat Wells.

(c)

As per termwiki.com- A well drilled either in search of a new and as yet

undiscovered accumulation of all or gas, or in an attempt to significantly
extend the limits of a known reservoir.

Thus, from the above it can be seen that an exploratory well is drilled for the
purpose of discovering new reserves in unproven areas. The activity of
exploration includes the drilling of exploratory well as such a well is drilled to
ascertain whether there is sufficient oil/gas for commercial exploration. This
shows that the activity conducted by M/s Atwood is exploitation of minerals. This
is also supported by the statement dated 13.02.2009 of the drilling engineer of
GSPC shri visual D.Rathod, wherein he stated that to the best of his knowledge
GSPC has not yet started commercial production of hydrocarbon from the
aforementioned block .
8.4

M/s Atwood has contended that from 01.06.2007 the department has sought to
classify the activities undertaken by them under mining of mineral oil or gas
service however there has been no change in the definition of the service survey
and exploration of mineral oil and gas service after 01.06.2007. There is a catena
of case laws where in it has been held that when an activity comes under the
service tax net with effect from certain date the same activity cannot be subjected
to tax under a per-existing category unless the scope of the per-existing
categories of services is simultaneously modified. Thus, in view of the above, the
activities would not fall under Survey and Exploration of Mineral, oil and Gas
service. However, in this regard it, may be mentioned that Finance ministry in
Para 3.4 of its letter Do f. No. 334/1/2008-TRU, dated 29-2-2008 has category
stated that Specifying a service separately as a taxable service does not
necessarily mean or suggest that services falling within the scope of newly
specified service were not earlier classifiable under any one of the existing
taxable services. Grouping of the services under a specific taxable service
may change. The scope and coverage of a taxable service are to be
determined strictly in accordance with the language of the relevant
statutory provision existing during the material period.This view has been

further substantiated in the following two letters issued during the budgets of
2004 and 2007.

8.5.

1.

Letter F. No. B2/8/2004-TRU, dated 10-9-2004 Para 27. May of the

services covered under fresh levies may include activities that were
taxable earlier under different category of taxable services. While the
classification of a taxable service would be in terms of Section 65A of the
Finance Act, 1994, it should be ensured that is no double taxable and a
service is taxed only once under the appropriate category.

2.

Letter D.O.F. No.334/1/2007-TRU, dated 28/2/2007 Pars 5. Services of

same category are group together and defined, as a separate taxable
service. Newly specified services may contain part or whole of exiting
individually specified taxable services. The scope and coverage of
taxable service should, therefore, be interpreted for classification
purposes strictly in accordance with the statutory provisions exiting
during the material point of time.

Thus classification of any service has to be determined by taking recourse to the

provision of Section 65A of the Finance Act, 1994, which is as under:Section 65A, Classification of taxable services.(1)
For
the purpose of this chapter, classification of taxable services shall be
determined according of the terms of the sub-clauses of clause (105) of
section 65;
(2)
When for any reason a taxable service is, prima focie, classifiable
under two or more sub-coleuses of closure (105) of section 65,
classification shall be effected as follows:(a)

The sub-clause which provides the most specific description

shall be preferred to sub-clauses providing a move general
description;

(b)

composite service consisting of combination of different

services which cannot be classified in the manner specified
in clause (a), shall be classified as if they consisted of a
service which gives them their essential character, in so for
this criterion is applicable.;

(c)

when a service cannot be classified in the manner specified

in clause (a) or clause (b), it shall be classified under the
sub-clause which occurs first among the sub-clauses which
equally merit consideration.]

On plain reading of the above section, it is clear that the legislature recognized
and envisaged the possibility of an overlap between two service and thus
provided a remedy in the from of section 65a to resolve such a overlap. This view

has also been supported by the Tribunal case of Kopran Ltd Vs CCE, Raigad[2(09(16) STR 279 (Tri-Mum)]wherein it was held that
As per Rule 65 A of the service tax Rules, 1994, it is possible for a
service to be classifiable under two different categories. As per the
classification rule, the classification would be done under the head, which
is more specific falling which under the category which comes first thus,
introduction of a new services by carving out from on earlier service will
not mean that the new service was not taxable under any other category
earlier. Thus even thought the service regarding transfer of intellectual
property was introduced with effect from 10-9-2004, it dose not mean that
service would not be covered under any other category earlier even if it
was covered under the definition of new service.
8.6

Further while clarifying the scope of mining of mineral, oil or gas service induced
during the 2007 Budget, Ministrys Letter D.O.F. No.334/1/2007-TRU, dated
28/2/2007 has explained as under :
Para 6.2 Mining service [65(105)(zzzy)] : Presently, geological,
geophysical or other prospecting surface or sub-surface surveying or mopmaking service relating to lactation or exploration of deposits of mineral oil
or gas are leviable to service tax under surey and exploitation of mineral
service' [section 65(105)(zzzy)].Services such as.
Site formation and clearance, and excavation and earth moving, drilling wells
for production/ exploitation of hydrocarbons (developmental drilling)
Well testing and analysis services
Sub-contracted services such as deploying workers and machinery for
extraction/breaking of rocks into stones, sieving, grading, etc.
Outsourced service

Providing for mining are individually classified under the appropriate

taxable service. Service provide in relation to mining of mineral, oil and
gas comprehensively covered under this proposed. With this, services
provided in relation to both exploration and exploitation of mineral, oil or
gas will be comprehensively brought under the service tax net.

6.2.1 The trend is to outsource part or whole of the mining activities, since
exploration and mining of mineral, oil or gas are comprehensively brought
under the service tax, field formations may undertake necessary action.

The above clarification shows that the intention of the legislature was to
bring all the activities related to mining, which was hitherto individually
classified under the appropriate taxable service, under one head
comprehensively i.e. mining of mineral, oil or gas service. It is well
settled that the meaning ascribe by the authority issuing the notification, is
a good guide of contemporaneous exposition of the position of law.
8.7

In the following cases, honble supreme court has held that official statements of
the meaning of statutes are of particular importance since every statute is
originally promoted by government which is assumed ton know the legislative
intent behind a legislation. Hence, departmental circulars are entitled to respect. I
this case, there are letters clarifying that the services which are now covered
under mining of minerals, oil or gas service could have been earlier covered
under survey and exploration of mineral services. For this proposition, the
following case are relied upon(a)

Ajay Gandhi vs B.Singh-2004(167)ELT257(sc)-paras 16 and 17.

(b)

Commissioner of Trade tax, UP VsKajaria Ceramic Ltd 2005(191) ELT

20(sc) para 28,

Thus in view of Boards letters cited above it is clear that drilling wells for
production/ exploitation of hydrocarbons (development drilling) was earlier
classifiable under survey and exploration of mineral service
9.

Submissions by Atwood are as under.

9.1

Issue : classification of services provide by Atwood to GSPC in terms of contract

NO.GSPC-JET-GGR/KG=OS2001/13 date September 2005

9.2

KeyDates/Milestones
3rd September 2005

: singing of contract

December 2006

: Commencement of services in terms of the contract

9th Feb 2009

: registration obtained & service tax paid under

category SOTG from 16.5.2008 till Jan 2009 along
with interest. Total amount paid was approximately
Rs. 11 Crore .

16th February 2009

: meeting with Commissioner and other senior officials

of. Ahmedabad III commissionerate. Latter received
from DC (prev) stating that tax was payable under
category mining service with effect from 16.5.2008.

19th February 2009

: reply to latter of DC (preo) starting that appropriate

classification is SOTG. However in order to avoid
litigation service Tax agreed to be paid under mining
services.

28th February 2009

: paid Rs. 17 crore (approx) pursuant to letter dated

16.2.2009 towards tax and interest under mining
service with effect from 16.5.2008 Total amount paid,
therefore approximately Rs. 29 corer.

29th April 2009

: SCN Issued(i)
(ii)

28th May2009

Demand of services tax from Dec. 2006 to

31.5.2007 under the category of survey and
Exploration Services
Demand of service tax from 1.6.2007 onwards
under mining services

: (i)
Commissioner rejected submissions made by
Atwood for classification under SOTG with effect from
under from 16.5.2008
(ii)

Commissioner dropped demand under survey &

exploration for the period from dec. 2006 to
31.5.2007 .

(iii) Commissioner held services to be classified

under mining and confirmed demand from
01.6.2007 onward.
(iv)

(v)

Commissioner held that the assessee had

shown that there was reasonable cause for
nonpayment of service tax, that there was no
mollified and further that the non-payment was
on account of technical/ legal reasons. He
dropped penalty under section 78. However he
imposed penalty under section 76 and section
77.
Commissioner confirmed payment of interest.

(vi) Commissioner rejected submission of assessee

to consider the payment received from GSPC as
being cus- tax and to determine service tax
payable accordingly.
9.3.

Service provide by Atwood to GSPC Appropriately Classifiable as supply

of Tangible Goods for Use in terms of the provisions of sub-clause (zzzj)
of clause (105) of section 65 of the Finance Act, 1994

CBCE has clarified vied JS (TRU)s DO letter dated 29.2.2008 (excerpt at

p 372 of paper book) that supply of tangible goods for use may involve
transfer of possession and effective control of the goods. In such a case
transaction attracts VAT.CBSE has further clarified that where tangible
goods are supplied for use without transfer of possession and effective
control, services tax would be applicable under section 65(105) (zzzj). In
the instant case there is no dispute that Atwood did not transfer
possession or effective control in the equipment that was supplied to
GSPC. This is clear from Para 35 of the SCN (page 306 & 312 of paper
book) and from order of Commissioner (page 173 of paper book) The use,
However, of the tangible goods was transferred to GSPC, who alone could
decide now to use the equipment for the duration of the contract. It is
abundantly clear that the activity is squarely covered by section
65(105)(zzzzj) as read with the clarification issued by CBEC.
In order to determine the nature of the services it is pertinent to examine
the contract in tis entirely so as to understand its pith and substance.
Examination of the contract establishes that the duties, obligations and
rights of the assessee were related to ensuring availability of the Oil rig for
use by GSPC. The performance was not measured in terms of drilling
activity but by availability of the rig. The remuneration was not related to
drilling activity but to the period for which the rig remained is use by GSPC
The relevant provisions of thecontract between Atwood and GSPC in this
regard are as follows
Atwood was engaged to provide an offshore oil rig, along with its
compliment of crew and support staff.
Atwood was paid a specific amount by GSPC in respect of the equipment
supplied for the drilling operations.
Atwood was paid on a per day basis, and not on the basis of the extent of
drilling done.
(Schedule F of the Contract, at page 245 of the paper book refers in this
regard)
The contract specifies that the total duration for which oil rig and
associated equipment and personnel were to be made available to GSPC.
The contract did not specify the number of wells to be dug or the extent of
drilling.
Atwood was responsible for ensuring the availability of rig, but usage for
actual drilling was entirely as per the requirements of GSPC. It was GSPC
who determined where to drill, how much to drill, whether to cap the well

or to abandon it. Atwood was not concerned with the purpose or object of
the drilling beyond assuring availability of rig/ associated equipment/
personnel.
Articles 6, 7.4, 8.1, 9, 10.1, 10.2, 11.1, 29, 33, 40, 41.11, 41.15.
Article 16 to 27, together comprising Part III of Contract, further make it
clear that all aspects related to the drilling perse are controlled entirely by
GSPC.
If it is argued, as the department has sought to in the SCN, that Service
Tax would be attracted only if the tangible goods are supplied for use
along with transfer of possession and effective control, then this category
of service tax would become in-operational as such transactions where
transfer of use is accompanied by transfer of possession and effective
control would attract VAT.
9.4

Limitation
Extended period of limitation is not applicable. Commissioner has
concluded in his order that the reasons for non-payment of service tax by
Atwood were technical/ legal, and that this is a case of technical
interpretation (Para 162 of o-in o at page 182-183 refers). Commissioner
held that this was a fit case for invoking the provisions of Section 80 of the
Finance Act 1994/ Further, there is no allegation in SCN to show any
action on part of the assesses tc willfully suppress any fact with intent to
evade tax. It is evident that at best, the classification of service provided
by Atwood to GSPC is arguable. Commissioner has also concluded that
the assessee had cooperated at all time with the department. In such
circumstance the extended period of limitation could not have been
invoked.

9.5

Penalty
Commissioner held that this was a fit case for invoking the provisions of
Section 80. Accordingly, he dropped the proposal for levy of penalty under
section 78. However, as Section 80 begins with a non obstante clause that
gives Section 80 overriding precedence over section 76, 77 and 78,
Commissioner should not have levied penalty under section 76 and 77
also. It is pertinent to mention that the Department, in its appeal, has not
challenged the invocation of Section 80 by the Commissioner in his order.

9.6

Cum-Tax
If at all any tax is payable by Atwood then the amount recovered by
Atwood from GSPC has to be regarded as cum-tax and the service tax

liability ought to be worked out accordingly. This is because till data GSPC
has not reimbursed a single rupee towards Service Tax to Atwood.
9.7

Service no within meaning of Survey and Exploration of Mineral, Oil and

Gas Services in terms of the provisions of sub clause (zzv) of section
65(105) of the Finance Act, 1994
The department has erred in resorting to dictionary/ common meanings of
Exploration when Survey and Exploration has been assigned a specific
meaning in 65(1C4a).
Section 65(1042) defines Survey and Exploration of Minerals to mean
geological, geophysical or other prospecting, surface or sub-surface
surveying or map making. Prospecting means to explore an area or
inspect region or search a district for minerals. Prospecting, therefore,
refers to a general assessment regarding a possibility of locating mineral
deposits, and not to specific locations.

9.8

Insertion of new category without change in existing one

It is submitted that the taxable service category of Mining of Mineral, Oil
or Gas was introduced by the Finance Act, 2007 with effect from 1st June
2007 by way of insertion of clauses (zzzy) to section 65 (105). It may be
pointed out that at the time of insertion of this clause, no change was
made to the then existing taxable service category of Survey and
Exploration of Mineral, Oil and Gas Services i.e. clause (zzy) of section
65 (105).
The SCN is based on an erroneous contention of the department that
taxable service category of Mining of Mineral, Oil or Gas was carved out
of existing taxable service category of Survey and Exploration of Mineral,
Oil and Gas Services.
This is clear from the fact that there was no amendment made in the
meaning of Survey and Exploration of Mineral service, and is further
clear from the speech of the FM while presenting the Budget for FY 200708 to Parliament and the DO letter issued by JS (TRU) at that time to
senior departmental functionaries.

9.9

Prayer
The relief sought in the appeal may be allowed.

10.

The submissions made by the appellants were opposed by Ld. A. R. as under.

10.1

M/s Atwood, in their appeal, has contended that the service provided by them
does not fall under Mining of Mineral, Oil or Gas service but falls under Supply
of Tangible Goods service. The main reason being canvassed for such a view is

that there is no transfer of possession and effective control of the equipment and
the same remained under their possession and control at all times. The appellant
has relied upon the definition of Supply of Tangible Goods service as contained
in Section 65(105) (zzzzj) of the Finance Act, 1994, which reads as under:Section 65 (105) (zzzzj) :- taxable service means any service provided
or to be provided : to any person, by any other person in relation to supply of tangible goods
including machinery, equipment and appliances for use, without
transferring right of possession and effective control of such machinery,
equipment and appliances;
10.2

The service tax on supply of tangible goods service is livable if the service
provider supplies only Tangible Goods to its client but does not do any activity
beyond supply of tangible goods. The appellant did not simply supply the drilling
rigs to M/s GSPC but also engaged its own drilling crew to drill and complete the
wells.

10.3

As per Clause 1.14 of the contract, work shall mean all drilling operations,
services and activities to be performed by contractor. Thus, the said contract is
not for supply of Drilling Rigs but for drilling of wells. The object of the contract is
given in clause 3 which says that the contractor shall drill, complete or abandon
the well(s) and company shall pay for such performance of drilling, completion or
abandonment services. Clause 7.4 provides that company is interested only in
the results of contractors performance. These clauses of the contract make it
abundantly clear that the contract was not for supply of Drilling Rigs but was
actually for drilling of the wells. Clause 9 and Schedule C of the contract clearly
provide that the appellant shall engage its own personnel for drilling of wells.
ShriNigeRichardsom, Operations Manager of the appellant in his statement
dated 09.02.2009 stated that the object of the contract was to drill, complete or
abandon the wells; that they provided required equipment and personnel ; that on
an average 52 persons were required at board the vessel as per Schedule C. As
per Schedule H to the contract, the appellant was required to provide inventory
details of critical material (including mud material) and consumption of such
critical material should be part of contractors Daily Drilling Report. The said
Schedule H further provides that the contractor shall ensure that a document is
posted in a doghouse showing maximum back pressure to be held on casing vs
various mud densities. Article 20 of the contract stipulates that the appellant
shall drill the well and land casing of the size and at depths, specified by M/s
GSPC. The casing shall be set and cemented at the depths and tested. The
clauses 21 to 23 of the contract provide that the appellant shall perform the work
of coring, testing and formation cutting. The clause 26 stipulates that the
appellant shall complete the well as a producer or cease the operation and plug
or abandon the well.

10.4

The appellant did not simply supply drilling Rigs to M/s GSPC. Had they simply
supplied the Drilling Rigs for use there was no need of supplying personnel,

undertake services of casing, coring, testing, formation cutting and maintain data
because a person supplying the tangible goods for use is not required to do such
activities. It is evident from the above definition that Service Tax under Supply of
Tangible Goods service is livable if the service provider supplies tangible goods
to its clients without transfer of possession and control of such goods. The
condition without transferring possession and effective control is prescribed
only because if goods are transferred, same will amount to sale and hence no
service tax can be levied because tax on sale is subject matter of State
Government. Therefore, the contention that service tax is livable under said
service only because appellant did not transfer the possession and control of
drilling rigs to M/s GSPC does not appear to be correct. The appellant actually
provided service of drilling the wells by their own equipments and personnel and
hence the service is classifiable under Mining of mineral, oil or gas.
10.5

It has been contended that they are charging fixed amounts in respect of
equipments on per day basils and not based on usage of drills. Schedule F to the
contract reveals that there are 6 different rates viz, operating rate, standby
without crew rate, equipment breakdown rate, move rate and stack rate. The
operating rates are highest while standby without crew rate and equipment
breakdown rate are the lowest. It is thus evident that the appellant is charging
fixed amount of US $ 1, 05, 000/- per day for supply of drilling rigs and US $
8,000/- (1,13000 1,05,000) per day for the crew and other related services as
discussed ire Para 6 supra. Therefore, said contract is not simply for supply of
drilling rigs but also for service of Mining of mineral, oil or gas. Thus the contract
is for composite services.

10.6

Section 65A of finance Act, 1994 provides for classification of services as under:-

10.7

(a)

the sub-clause which provides the most specific description shall be

preferred to sub-clauses providing a more general description.

(b)

Composite services consisting of a combination of different services which

cannot be classified in the manner specified in clause (a), shall be
classified as if they consisted of a service which gives them their essential
character, in so far as this criterion is applicable.

(c)

When a service cannot be classified in the manner specified in clause (a)

or clause (b), it shall be classified under the sub-clause which occurs first
among the sub-clauses which equality merit consideration.

The object of the contract entered into between M/s Atwood and GSPC is:
Contractor shall drill, complete or abandon the well(s) identified by the
Companys drilling program (hereinafter referred to as the well) in
accordance with all the requirements specified in this contract and
Company shall pay Contractor for such performance of drilling, completion
or abandon.ent services in accordance with the financial provisions of this
Contract.

As per clauses 20 to 23 of the contract, the appellant is required to undertake the

service of casing, coring, testing and formation cuttings. Clause 26 further
provides that the appellant shall complete the well as producer, As per Clause
19, the appellant is required to repair, deepen, maintain, rework and perform
remedial or other operations to the wells. Moreover, the appellant was to provide
services as mentioned in schedule H. Thus, the essential character of the
services provided by the appellant is Mining of minerals, oil or gas and not
Supply of tangible goods. Therefore, as per clause (b) of Section 65A of
Finance Act, 1994, the service provided by the appellant is classifiable as Mining
of mineral, oil or gas on the basis of essentiality test.
10.8

The Rules of interpretation of Central Excise Tariff Act, 1985 for classification of
excisable goods are almost the same as in Section 65A of the Finance Act, 1994
for classification of taxable services. There are several case laws for
classification of composite articles made of two or more constituents and it has
been held that the composite articles shall be classified on the basis of
essentiality test as per rule 3(b) Honble Supreme Court in the case of Kemrock
Industries & Exports Ltd. Vs CCE [2007(210) ELT 497 (SC)] held that fiber glass
reinforced plastic (FRP) sheets are classifiable under Chapter 39 and not
Chapter 70 because stiffness of such sheets gives them essential character.
Similarly, Honble Supreme Court in the case of CCE vs. Naga Ltd. [2007 (212)
ELT 452 (SC)] has held that Vim Dish wash 3ar, a mixture of OSAA and abrasive
powder is classifiable under heading 3405.40 as abrasive powder because
essential character of the product is scouring. The aforesaid judgments of
Honble Supreme Court are applicable in the present case for classification of the
service provided by the appellant. The essential character of the service provided
by the appellant is Mining of mineral, oil or gas and not Supply of tangible
goods. Therefore, service provided by them has been correctly classified as
Mining of mineral, oil or gases by applying essentiality test as per clause (b) of
Section 65A of the Finance Act, 1994.

10.9

In the case of N. Rajashekar& Co. Vs CCE, Mysore-[2008(12) STR760 (TriBang)], wherein the appellant was involve in transporting limestone boulders
from outside the mine site to yard, breaking/crushing of limestone boulders into
jelly of size 10mm to 50 mm and then loading, transporting of limestone jelly from
crushing yard and unloading at BF yard, the Department: took a view that such
transportation would fall under the category of Cargo Handling Service. The
Tribunal took a view that Loading and unloading of boulders and jelly are only
incidental to mining activity and the main purpose of the contract was that of
breaking and crushing of limestone boulders into jelly. In the present case, main
purpose of contract is Mining of mineral, oil or gases and not Supply of tangible
goods. Therefore, applying the ratio of aforesaid judgment, the service provided
by the appellant is classifiable under Mining of mineral, oil or gas and supply of
Drilling Rig is only incidental to activity of Mining of mineral, oil or gas.

10.10 In the case of GajanandAgarwalVs CCE, BBSR-[2009(13) STR 138 (Tri-Kol)],

the Honble Tribunal was examining whether activity of providing pay loader for

loading of coal to wagons would fall under cargo handing service. The appellant
pleaded that since they were letting out the pay loader for loading the coal, they
would not be liable to Service tax under the cargo handing service. In this case
also, there was an agreement between the appellants and Mahanadi Coalfields
Ltd. wherein the obligation of the appellants and Mahanadi Coalfields Ltd did not
end with letting out of the pay loader. The appellants were required to carry out
the loading of the quantity required by the work order within the time frame and
the rates were fixed for loading of the goods i.e. coal into Railway wagons. The
appellants were to the pay loader and payment of Rs. 2.47 person was to be
made by Mahanadi Coal Fields Ltd. For loading of coal through the pay loader
into the Railway wagons at the respective side. The Honble Tribunal held that
letting out of the pay loader was not the primary object of the contract but the
pay loader was an aid to perform the service of loading of cargo with certain
contractual obligation defined by the contract executed by them. Accordingly, we
are of the view that the plea of the appellant that the contract was for hiring of
tangible goods is baseless. Once the activity carried out is found to be loading of
cargo, such an activity is clearly covered by the category cargo handling
service. The appellants reliance on the format of agreement and work order
giving a different nomenclature shall not help the appellant denying its liability
stating that the activity carried out by Appellant was not cargo handing service
when a combined reading of Section 65(23), 65(105)(zr) of the Act is made. The
aforesaid judgment is applicable in the instant case because the equipments
used by M/s Atwood were an aid to perform the service of Mining of minerals, oil
or gas. Thus, the service provided by M/s Atwood would not fall under Supply of
tangible goods for use service, but will fall under Mining of Mineral, oil or gas.
10.11 M/s Atwood has also placed reliance on the decision of the Bombay High Court
in the case of Indian National Ship Owners Association Vs UOI [2009(14)STR
289 (Bom.)] wherein the services provided by the petitioner i.e. providing vessels
on time charter basis to various oil and gas producers was held to be falling
under section 65(105) (zzzzj) i.e supply of tangible goods for use and nit under
section 65(105) (zzzzy) which pertains to mining of mineral, oil and gas.
Para 37 of the order is reproduced below:Entry (zzzzj) is entirely a new entry ( zzzzy) covers services
provided to any person in relation to mineral, oil or gas , services
covered by entry (zzzzj) can be identified by the presence of two
characteristics namely (a) supply of tangible goods including machinery,
equipment and appliances for use,(b) there is no transfer of right of
possession and effective control of such machinery, equipment and
appliances. According to the members of the 1st petitioner, they supply
offshore support vessels t o carry out jobs like anchor handing, towing of
vessels, supply to rig or platform, diving support , fire fightingetc.their
marine construction barges support offshore
constraction, provide
accommodation crane support and stoppage area on main deck or
equipment. Their harbor tugs are deployed for piloting big vessels in and
out of the harbor and for husbanding main fleet. They give vessels on time

charter basic to oil and gas producers to carry out offshore exploration and
production activities. The right ofpossession in and effective control of
such machinery, equipmentand appliances is not parted with.Therefore,
those activities clerly 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.
This judgment was also affirmed by the Supreme Court [2011(21)STR3(SC)] and
the honble SC held that thr nature of the work in terms of contract with ONGC
indicates that none of the work can be strictly said to be service in the relaction to
mineral, oil or gas and as per records not even remotely connected and included
within expression found in Section 65(105) (zzzy) of finance Act,1994. However,
in the case of M\s Atwood, the activities undertaken by then have direct nexus
with mining as the activity which they are undertaking is drilling of wells for
explorating of minerals. Thus, the facts in the case of Indian National Ship
Owners Association are entirely different as the activities in that case were premining or post-mining operations unlike in the instant case where the activity is
primarily mining.
10.12. It can be seen from the above judgment that the appellants were carrying out
jobs like anchor handing, towing of vessels supply of rig or platform, diving
support, fire lighting etc. their marine construction barges support offshore
constructior, provide accommodation, crane support and stoppage area on main
deck or equipment. Thair harbor tugs are deployed for piloting big vessels in and
out of the harbor and for husbanding main fleet. All these activities are not
related to mining. This has also been accepted by the Honble High Court in
Para 48 of the order,which is reproduced belowApplying the above conclusions to the instant case, we hold that the
services rendered by the members of the 1st petioner are either premining or post-mining activities. They have no direct
relation to
mining.Theywere,therefore,rightly not brought to tax till entry(zzzzj) was
introduced to
cover transport of tangible goods by sea without
transferring right of possession and effective control therof. The services
rendered by the members of the 1st petitioner are covered by entery
(zzzzj) because they inter alia supply vessels, offshore support vessels,
barges , tugs etc. without transferring right of possession and effective
control over them
in contrast entry (zzzy) was introduced to
comprehensively bring under the service tax net activities having a direct
nexus to mining activities. Entry (zzzzj) is not a carve out of entry (zzzy).
Both entries are independed. Entry (zzzy) was not inserted into the
Finance Act by amending entery (zzzy), It is not possible to invent a
remote connection of the service renderd by the members of the 1st
petitioner to mining activities and hold that they fall in the entry (zzzy)
10.13. M/s Atwood has challenged the oio on the ground of limitation as they had not
committed fraud, collusion, willfullmis-statement, suppression for invoking the
extended period. They have further contended that the Commissioner has also

held they have showed their bonafide. They have also showed their bonafide by
approaching the Department to assess their duty liability. None of the contentions
are correct due to following reasons:(i)

M/s Atwood have started theiractivies way back in 2006 but had obtained
registration under Supply of Tangible Goods Service only in 2009.
Further, M/s Atwood had not approached the Department on their own
will. It was only when the Department intiated an enquiry and called for
the records that the appellant to avoid penal provisions sought to cooperate with the Department.

(ii)

M/s Atwood have contended that they were under the bona fide belief that
their activities were taxable w.e.f. 16.05.2008 under the category of
Supply of tangible goods service, but they had approached the
Department only in February,2009. It is thus evident that in spite of
bonafide belief that their service is classifiable under Supply of tangible
goods, they did not pay service tax on said service with effect from
16.05.2008 and obtained registration on 09.02.2009 after initiation of
inquiry by the Department. This fact clearly shows that M/s Atwood had
no intention of payment of service tax even with effect from 16.05.2008
under supply of tangible goods service and obtained registration under
said service only sfterintiaction of inquiry by the department. Thus, they
did not pay service tax by way of suppression of facts and willfullmisdeclaration with intent to evade service tax. Therfore,the extended period
of limitation is invokable for demand of service tax.

(iii)

M/s Atwood in their invoices charged service tax with effect from
01.06.2007 i.e. the date on which service of mining of minerals, oil or gas
was brought under service tax net. The charging of service tax with effect
from 01.06.2007 on their invoces clearly shows that the appellant was fully
aware that he was required to pay service tax with effect from 01.06.2007,
the date on the which Mining of minerals, oil or gas service was brought
under the service tax net. In view of this factual position, the contention of
the appellant that they had bonafide belief that their service is chargeable
to service tax under supply of tangible goods service is totally wrong.
This fact clearly shows that they had bonafide belief that their service is
chargeable to service tax under Mining of mineral ,oil or gas service with
effect from 01,06.2007. In spite of such bonafide belief, they did not pay
service tax by way of suppression of facts, willfullmis-statement and
contravention of provisions of Finance Act, 1994 with intent to evade
service tax. Therefore, extended period of limitation has been correctly
invoked for demand of service tax .

(iv)

Further, M/s GSPC had engaged another contractor viz M/s Deep Drilling
India Pvt.Ltd for drilling the exploratory wells in the same exploration
block. M/s Deep Drilling had obtained the necessary Service Tax
registration and were discharging their Service Tax Liability. Thus, there

was no doubt that the activity of drilling exploratory wells was liable for
service tax during the relevant time.
(v)

Another point canvassed by M/s. Atwood for establishing their bonafide is

that they have paid the service tax and interest voluntarily before issue of
SCN. This contention is devoid of any merit. The Himachal Pradesh High
Court in the case of CCE, Chandigarh Vs Him Chemical and Fertilizers
Ltd.{2010{256}ELT 363 (H.P)] and CCE, Chandigarh Vs. Ruchira Papers
Ltd. [2010 (251) ELT 502 (H.P) has held that applicability of Section 11
AC of Central Excise Act, 1944 not excluded merely on deposit of amount
after having been caught but before the issuance of show cause notice.
Once a case is covered by situation mention in section 11AC ibid, mere
deposit prior to issuance of show cause notice under section 11 A ibid will
not necessarily negate the situation mentioned in the said section. Thus
when the bonafide of M/s. Atwood is in doubt, extended period is
invokable as held by the Gujarat High Court in the case of Neminath
Fabrics {2010{256} ELT 369 (GUJ)}.Further ,the Supreme Court in the
case of M/s.Mehta and co.(2011-TIOL-17-SC-CX)held that though the
respondent has pleaded that it was done out of ignorance but there
appears to be an intention to evade excise duty and contravention of the
provisions of the Act. Therefore proviso of Section 11A(1)of the Act would
get attracted to the fact and circumstance of the present case-show cause
notice issued within five years from the data of knowledge of the
Department is valid .

(vi)

M/s Atwoods other contention that extending he benefit of section 80 of

the act,1994 would mean that extended period under section78 cannot be
invoked. Benefit of section 80 is extended for waiving off penalties under
sections 76,77and 78 if there are sufficient reasons for the same.
Commissioners observations regarding bonafide of the appellant have to
be interpreted in the light of provision of section 80 which allows waiver of
penalty under section 78,even in case where demand is confirmed by
invoking extended period in the cases of suppression etc. If the
interpretation as canvassed by the appellants is taken ,it will mean that
section 80 can only be invoked in cases where there is no suppress on
etc. but,if this is the case, there will not be any confirmation of demand
invoking extended period and consequently on penalty under section 78.
This will clearly render the provisions of Section 80of the finance act
otiose. Such an interpretation which makes certain provisions of statute
redundant, is not permitted to be taken. That is way commissioner, though
having extended the benefit of section 80, confirmed the demand under
extended period.

(vii)

Further, the following decisions hold that blind bellef cannct be cited as
excuse for bonafide belief:-

(a) Winner System Vs CCE, Pune 2005(191) ELT 1051(Tri.)

(b) Tanzeem Screen Arts VS CCE, Mumbai- 2006(196)ELT209(Tri.)
(c) InterscapeVs CCE, Mumbai-I-2006(198)ELT 275(Tri.)
(d) Camlin Ltd. Vs CCE, Mumbai-IV-2009(239)ELT 346(Tri.)
(viii)

Similarly,it has been consistently held by various judicial for a that

ignorance of law is no excuse in this regard, the following decisions are
cited:(a) R.G.Nagori&Sons Vs CCE-1989(39)ELT303(Tri)
(b) Sindhu Resettlement Corpn. Ltd Vs CCE, Rajkot 2000(118)ELT
182(Tri)
(c) CCE,RohtakVsBindalCotex (P) Limited 2004 (165)ELT 298 (TriDel)

11.

The issuesto be decided are as under:(i)

Whether as claimed by the revenue in their appeal, the services provided

by M/s. Atwood can be classified under the category of Survey and
Exploration of Mineral ,oil and Gas Service for the period from November
2006 to May 2007.

(ii)

Whether the services provided by M/s. Atwood can be classified as

Mining of oil or Gas Service from 01 june 2007 onwards and levied to
service tax.

(iii)

Whether the claim of M/s.Atwood that the services provided by them is to

be classified as Supply of Tangible Goods[SOTG for short ]and is liable
to service tax only from 16 May 2008 or not.

(iv)

We also require to decide whether extended period is invokable and

whether penalty is leviable on M/s. Atwood.

11.1 Issue (i) Revenues appeal claiming classification of the services under Survey
and Exploration of Mineral , oil and Gas Service
According to definition, Survey and exploration of Mineral, oil and Gas
means- Geological, Geophysical other prospecting , surface or sub-surface
surveying or map making service in relation to location or exploration of deposits
of Mineral, oil or Gas .
11.2

M/s. Atwood has claimed that they have not undertaken any Geological,
Geophysical or other prospecting , surface or sub surface surveying or map
Making service and therefor, the services provided by them which is limted to
drilling , testing , completion of exploratory wells as specified by the Company
i.e. GSPC, cannot be classified under this service.

11.3

Revenue has relied upon the preamble portion of contract between GSPC and
M/s. Atwood which start with the words-Company desires to drill , test, complete
exploratory wells, as specified by the Company in the east coast off shore of
Andhra Pradesh , India as set for hereinfter . This would show that the contract
was for drilling , testing and completion of exploratory wells . Further it was also
submitted that the clarification issud by the Board in letter F.NO.B-II/8/2004-TRU
dated10.09.2004 , explained the service at the time of introduction in 2004 as
Service rendered in relation to survey and exploration only and not on the
activity of actual extraction. Further the letter also observed that activties such
as seismic survey , collection / process/ Interpretation of date and drilling and
testing in relation ton survey and exploration would, however , fall within the
ambit of taxable service . It was submitted that this was the intention of the
Government and therefore this clarification has to be treated as contemporanea
exposito and therefor , keeping in view the preamble of the contract and the
observation of the Ministry in the letter , it becomes quite clear that the action of
the M/s. Atwood in providing the service of drilling, testing of exploratory wells is
classifiable under this service . Since m/s. Atwood has been entrusted to drill,
test and complete exploratory well, the service provided is covered by the
definition. Further, Revenue has also relied upon the deflnition of exploratory
wells given in certain websites . Revenue has also relied upon the statement of
Shri Vishai D.Rathore ,drilling Engineer of GSPC, who agreed that commercial
production not yet started . Several decisions as well as references of the
ministry were cited to submit that subsequent to introduction of mining service
and SOTG service would not take the service provided by the M/s. Atwood out of
purview of the sevice of Survey and Exploration of Mineral, Oil and Gas
Seviceprior to 01.6.2007.

12.

We are unable to accept the submissions made on behalf of Revenenue.

Subsequent clarification issued by the Ministry and reproduced in Para 8.6
above, in our opinion goes against the Revenues contention . Ministry has
issued a letter on 28.2.2007 clarifying the scope of Mining of Mineral oil or Gas
Service. While doing so, it was observed that , presently geological , geopysical
or other prospecting, surfaceor sub-surface surveying or map making service, in
relation to location or exploration of deposits of mineral, oil or gas are leviable to
service tax under Survery and Exploration of Mineral Service. Theletter goes
on to observe that site format on , clearance and excavation and earth moving ,
drilling wells for production /exploration of Hydrocarbon(developmental drilling
)provided for mining are individually classified under approvided in relation to
mining of mineral , oil and gas are comprehensively covered under appropriate
taxable service. The letter goes on to say that service provided in relation to
mining of mineral, oil and gas are comprehensively covered under this proposed
service. With this, service provided to relation to both , exploration and expiotion
of mineral , oil or gas will he comprehensively brought under the service tax net.
The fact that drilling of wells for production/ exploitation Hydrocarbon
(developmental drilling) is put along with site formation and clearance and
excavation and earth moving , which are not part of Survey and excavation of
mineral service, would show that the contemporanceexposito and intention of

the Government that can be derived from the letter in 2004, does not appear to
be correct in our view.
12.1

According to Wikipedia, there are five elements or a petroleum prospects:

A prospect is a potential trap which geologists believe may contain
hydrocarbons. A significant amount of geological, structural and seismic
investigation must first be completed to redefine the potential hydrocarbon
drill location from a lead to a prospect. Five geological factors have to be
present for a prospect to work and if any of them fail neither oil nor gas will
be present.
A source rock- When organic-rich rock such as cill shale or coal is
subjected to high pressure and temperature over an extended period of
time, hydrocarbons form.
Migration- The hydrocarbons are expelled from source rock by
three density-related mechanisms: the newly-matured hydrocarbons are
less dense than their precursors, which causes overpressure; the
hydrocarbons are lighter medium, and so migrate upwards due to
buoyancy, and the fluids expand as further burial causes increased
heating. Most hydrocarbons migrate to the surface as oil seeps, but some
will get trapped.
Trap- The hydrocarbons are buoyant and have to be trapped
within a structural (e.g. Anticline, fault block) or stratigraphic trap.
Seal or cap rock- The hydrocarbon trap has to be covered by an
impermeable rock known as a seal or cap-rock in order to prevent
hydrocarbons escaping to the surface
Reservoir- The hydrocarbon; are contained in a reservoir rock.
This is a porous sandstone or limestone. The oil collects in the pores
within the rock. The reservoir must also be
Permeable so that the hydrocarbons will flow to surface during
production.
These are the five elements which are required to be complied with to identify
source of potential petroleum hydrocarbon drill location. In our opinion, this is
what is covered by the definition of survey and exploration as far as oil/gas is
concerned.

12.2

Further, it is settled law that object and content of the contracts cannot be
determined and decided by looking at one paragraph or one clause but the whole
contract has been to be seen as a whole and considered.

12.3

The next arises what is the drilling and testing by the letter issued by the ministry
issued in 2004. It is well known that in a geological survey, drilling is done to

confirm the other theoretical calculations. In the case of oil, as mentioned in

Wikipedia, offshore drilling refers to a mechanical process and it is typically
carried out in order to explore for and subsequently produce hydrocarbons which
lie in rock formation beneath the seabed. Therefore, the wells drilled as per the
GSPCs specification in the location identified after ensuring that the five element
of prospect are existing in the activity subsequent to survey and cannot be said
to be a part of the service which is preliminary to mining or drilling activity.

12.4 No doubt, the analysis made by is can be questioned and we are aware of
limitations since we are not experts in the field not oil exploration, drilling pr
survey etc. but the analysis made above with the help of Wikipedia, letters issued
by the ministry and definitions of service would show that it is possible to
entertain an opinion that the activity of the M/s. Atwood cannot be considered as
a service covered by definition of service Exploration of mineral, oil and gas
service. It is also settled law that if two views are possible and if an assesses
entertains a belief that he is not liable to pay duty or tax, intention to evade duty ,
suppression/ miss-declaration cannot be attributed and therefore, extended
period of limitation for demanding duty/ tax cannot be invoked. Therefore, even if
our finding on classification aspect turns out to be incorrect extended period of
limitation could not have been invoked. In this case, the period is prior to
01.6.2007 and the show cause notice was issued in April 2009. Therefore , the
demanded for service tax treating the services provided as service of survey/
exploration of minerals cannot be sustained.

13.1

Issue (ii): whether service provided is covered by the definition of mining of oil or
gas service According to definition, the taxable service means any service
provided or to be provided to any person, by any other in relation to mining, oil or
gas.

13.2

According to M/s. Atwood, their service is specially covered by of tangible goods

including machinery, equipments and appliances for use and therefore a specific
service has to be preferred to a general srivce and the tehrefore, the service
provided by them cannot be classified under mining of mineral, oil or gas
service.

13.3

First of all, when we see the definition, to be classified under this service, it is not
necessary that the activity has to be mining of mineral, oil or gases. As per the
definition, any service provided by any person to any person in relation to mining
of mineral, oil or gas would be covered under this service.

13.4

The question that arises therefore is whether supply of drilling rigs prior to
16.5.2008, when there was no service of supply of tangible goods in the statute
books can be covered by the mining service. We have already seen the

preamble to the contract. In the case of oil or gas, after the survey and
exploration, drilling activity starts and if the well is found to be successful and if
there is sufficient quantity of hydrocarbon, gas or oil, the well is not abandoned
but the same well is used for exploitation successfully. This is why the contract
between two parties namely M/s. Atwood and GSPC speaks of completion of a
well or abandoning a well. This shows that the wells which are drilled are not only
exploratory but can be used for mining if successful. Otherwise there is no
question of a abandoning some wells and during other wells and complete. The
explanation provided for offshore well in Wikipedia as reproduce above would
also support this view.

13.5

Further, while considering the scope of survey and exploration of mineral, oil and
gas service, we limited the scope to the five elements of exploration and did not
consider the drilling of exploratory wells as part of that service, it has to be
treated as part of mining service since any service in relation to mining would
come in this category. The question of mining oil or gas does not arise while
drilling the wells by using rigs. Here we agree that the letter issued by the finance
ministry F. No. 334/1/2008-TRU dated 29.2.2008 (Para 3.4) supports the stand
taken by the revenue. The fact that service tax was introduce on supply of
Tangible Goods in 2008,does not means that this service was not covered by
any other service earlier . Further, the letter dated 10.9.2004,in Para27, it was
observed that meaning of the service covered under tax net may include the
activities that were taxable earlier under different category of taxable service s.
This also supports the view canvassed before us.

13.6

Further we also find that the contention of the Revenue that classification of any
service has to be determined by taking recourse to the provisions of section
65(A) of the finance Act, 1994 reproduced para 8.5 of this order has considerable
force. Prior to 16.5.2008, the service provided by M/s. Atwood was clearly
covered by the Mining Service since the service provided them was in relation to
Mining. However with the introduction of SOTG service, it can be said that the
service provided by M/s. Atwood can be covered under the Mining Service as
well as SOTG service and as per the section 65A of Finance Act, 1994 since the
SOTG service most provides specific description that will have to be adopted.
Therefore, in our view the fact that SOTG service was introduced in 2008 does
not mean that the same service was not covered by any service earlier. In this
regard we find reliance of the Revenue on the decision of the Tribunal in the case
of Kopran Limited Vs. CCE, Raigad (supra) is appropriate .

13.7

As per the mines Act 1952, the word mines is defined as mine means ,any
excavation where any operation for the purpose of searching for or obtaining
minerals has been or is being carried on includes(i)
(ii)

All boring , bore holes, oil wells and accessory crude conditioning plants,
including the pipe conveying mineral oil within the oil fields;
All shafts, in or adjacent to and belonging to a mine of being sunk or not;

(iii)
(iv)
(v)
(vi)
(vii)
(viii)
(ix)

(x)

(xi)

All level and incline planes in the course of being driven;

All opencast workings;
All conveyors or aerial ropeways provided for the bringing into or removal
from a mine or minerals or the other articles or for the removal of refuse
there form;
All adits, levels, planes , machinery works, railways, tramways and siding
in or adjacent to and belonging to a mine;
All protective works being carried out in or adjacent to a mine;
All workshop and store situated within the precincts of a mine and the
same management and used primarily for the purpose connected with the
mine or a number of mines under the same management;
All power stations, transformer sub-station, converter stations, rectifier
stations and accumulator storage stations for supplying electricity solely or
mainly for the purpose of working the mine or a number of mines under
the same management;
Any premises for the time being used for depositing sand or other material
for use in mine or for depositing refuse from a mine or in which any
operations in connection with such and refuse or other material is being
carried on, being premises exclusively occupied by the owner of the mine;
Any premises in or adjacent to and belonging of a mine or which any
process ancillary to the getting, dressing or operation for a sale of
minerals or of coke is being carried on;

Thus, it will be seen that the word mine has been very extensively defined to
include infrastructure created for mining of minerals, oil or gas.
In short, the word mining must be understood as the process of talking minerals,
gas or oil from the underneath the surface of the earth.
13.8

M/s Atwood relied upon the decision of the honble high court of Bombay in the
case of Indian national ship owners association vs. UOI [2009 (14) STR 289
(BOM.)] which is affirmed by the honble supreme court to submit That if the
service provided is classifiable as SOTG service, prior to 16.5.2008, service tax
cannot be levied under mining service.However, honble supreme court in that
case held the work in term of contract with ONGC indicates that none of the
works strictly said to be service in relation to mining oil or gas and per records
not even remotely connected within explanation found in section 65, 105 (zzzy)
of finance Act, 1994. However, as observed by us in the case of M/s. Atwood, an
activities undertaken has direct nexus with mining as the activity undertaken is
drilling of wells for exploration of minerals. Therefore, as contended by the
Revenue, the decision in the case of Indian national ship owners association
does not help the M/s. Atwood.

14

the next issue to be decided is whether the service provided by M/s. Atwood can
be classified as SOTG service with effect from 16.5.2008. In the case, we find
that in terms of contract;
(i)

Persons operating the equipments at all time were the employees of M/s.
Atwood and all equipments operated by M/s. Atwood;

(ii)

The equipments always remained in possession of m/s. Atwood at all

times.

(iii)

The contract is for supply of driling rigs and other equipments as is seen
from the fact that contractor charges specific amount on per day basis and
not based on usage and separate rates are provided even for standby.

(iv)

Equipments were given by the contractor for use during the term specified
in contract and not drilling predefined number of wells.

(v)

M/s Atwood also relied upon the decision of Honble High Court of
Bombay in the case of Indian National Ship Owners Association, wherein
it was held that providing vessels on time charter basis to various Oil and
Gas producers were held to be supply of Tangible Goods and not under
Mining of Mineral, Oil and Gas.

(vi)

They also relied upon the decision in the case of RashtriyaIspat Nigam
Limited (Supra) to contend that there is no transfer of possession and
effective control where the suppliers employees are operating the
equipment.

(vii)

CBEC has clarified vide JS (TRU)s Do letter dated 29.2.2008 that supply
of tangible goods for use may involve transfer of possessions and
effective control of the goods. In such a case the transaction attracts VAT
and in such case, service tax would not be applicable. It was further
clarified that where tangible goods are supplied for use without transfer of
possession and effective control, service tax would be applicable.

(viii)

From Para 35 of the show case notice itself fact emerges that it is
necessary to examine the contract in its entirety so as to understand the
peculiar fact and circumstances. According to contract, M/s Atwoods role
was limited to providing offshore annual rate along with completion of
report and support supply for payment on specific amount based on the
contract which was in turn based on use of rig, Stand by time etc.

(ix)

The contract also provides that all aspects regarding location of the wells,
extent of drilling, depth of drilling etc were required to be decided by
GSPC and the role of M/s. Atwood was to provide rigs only.

15.

We find substantial force in all these submission. The main contention of SOTG
i.e. allowing another person to use the rigs without giving legai right of
possession are fulfilled in the case. Further, we also find that the clarification
issued by the ministry at the time of introduction of this service are also
applicable to the facts of this case. Under these circumstances, we have, to hold
that after 16.5.2008, the service provided by M/s. Atwood has to be classified
under SOTG service only.

16.

As regard limitation for the period subsequent to 01.6.2007, it was submitted by

the learned departmental representative that according to records for same
period after -01.06.20007, Atwood had charged service tax but for reasons best
known to them the same was not paid to the Government. However, learned
counsel for M/s Atwood Stated that no Service tax was collected. Apparently the
fact that they had changed would show that even Atwood had felt that they were
liable to pay service tax on the ground that service provided by them was in
relation to mining. Probably GSPC did not agree and hence they have not paid.
In any case, when the department started verification of the records, the
appellant on their own came forward, sought a meeting with Commissioner which
was held on 16.02.2009 and on the advice of Commissioner, given orally, they
discharged the liability treating the services provided by hem mining Services
from 01.06.2007. Taking note of the fact that M/s Atwood started their operation
from November 2006, the approach adopted by them would show that they wee
not interested in entering into litigation and believed in paying the taxes. It was
submitted by the learned counsel for M/s. Atwood that even though they believed
that they had a case for non- payment of tax prior to 16.05.2008, to avoid
litigation they had paid the entire amount of service tax due with interest. The
observation of Commissioner in Para 162 are relevant and are reproduced
below:162. However, I find that the said assesses has show its bonafide by
rendering full cooperation to the department in the investigation and also
making goods the liability immediately on being pointed out. The fact that
they have already paid the service tax along with interest much before the
issuance of show cause notice and they have borne the incidence of tax
on their shoulders, sufficient evidence to show that the reasons for not
paying the service tax by the assesses were the technique legal reasons
rather than willful suppression with an intent to evade payment of service
tax. The law in this regard was not very clear which is evident from the fact
that the legislature had to issue new categories of services in the same
circumferences. At this juncture, it is pertinent to mention here that M/s.
Gujarat State Petroleum Corporation Limited had engaged yet another
contractor viz M/s. Deep Drilling (l)Pvt. Limited for drilling of expreratory
wells in the same Exploration Block and had obtained necessary service
tax Registration Certificate and has been discharge their tax liabilities
accordingly. M/s. GSPC, being state Government owned organization

should have been little more contious to ensure that their contractor
particularly from foreign based companies are discharging required
Service Tax and following other statutory procedure . In Paras 97 and 130
of this order, wherein reply of the notice has been reproduced, relevant
case law has been referred where it has been held that no penalty is
impassable where duty is not paid due to the banafide belief of the
assessee. One such case is the decision of the Larger Bench of the
Tribunal in the case of ETA Engineering Limited vs, CCE, Chennai2006(3) STR 429 (LB), in which it was held that where the assessee is
under a bonfire doubt regarding their activity being covered by service
tax, no penalty is imposable in term of Section 80 of the Finance Act,1994.
The recent decision of CESTAT, Ahmadabad delivered on 27.03.2009 in
the case of M/s. Krunal catering Service vs. CCE, Vadodara-2009-TIOL672-CESTAT-AHM, is also relevant. In this case, the assessee contested
penalty imosed under Section 78 on the ground that they were under a
genuine belief that they were not covered under the taxable service. The
Tribune held that where all the factors point to the banafide belief of the
assessee, it is a fit case to invoke the provision of Section 80,in which
case no penalty would be impasble under Section 78. Thus, I find that this
is a fit case to invoke the provisions of Section 80. It is also clear from the
provision of Section 78, as also the case law on technical interpretation of
the statute hence, penalty under Section78 can not imposed.
From the above, we find that besides our own observations finding of the
commissioner with which we agree, support the view that provisions of Sections
80 are required to be invoked for waiving penalty imposed under Section 78 of
the Finance Act, 1994 or M/s. Atwood. Once the penalty is waived under Section
78 of Finance Act, 1994 ,the question that will remain is penalty under Section76
or 77.As a regards penalty under Section 76,M/s. Atwood get protection from
section 73(3) of Finance Act, 1994, which is reproduced as under;sec.73(3 ) provides that- where any service tax has not been levied or
paid has been short levied or short paid erroneously refund, the person
chargeable with the service tax, or the person to whom such tax refund
has erroneously been made, may pay the amount of such service tax,
chargeable or erroneously refunded
on the basis of his own
ascertainment there of or on the basis of the tax ascertained by a Central
Excise officer before service of notice on him under sub section (1)in
respect of such service tax, and inform the central Excise, officer of such
payment in writing, who, on receipt of such information shall not serve any
notice under sub-section (1) in respect of the amount so paid.
We find that provisions of this section are applicable to the present case.
1.

In view of the above discussions, we confirm demand for service tax with interest
for the period 01.6.2007onward under Mining Service up to 16.5.2008 and
thereafter, under SOTG service as applicable with interest. Penalties imposed
on M/s. Atwood are set aside.

Appeals filed by the department are rejected. Cross objection also get and
disposed of.
(Pronounced in the court on 30.8.2012 )