In a recently reported Tribunal decision in the case of Great Ship (India) Ltd. vs. CST, Mumbai 2015 (37) STR 533 (Tri.-Mum), the issue posed before the Hon. Tribunal was to examine primarily whether a contract entered into for charter hire of drilling unit (including carrying out drilling activity), by the appellant therein, an Indian company with ONGC, involved dispute relating to taxability under mining of mineral, oil or gas service as defined in section 65(105)(zzzy) of the Finance Act, 1994 (the Act) or liable as Supply Of Tangible Goods service (SOTG) as defined under sub-clause (zzzzj) of the said section 65(105) of the Act. Considering that along with the drilling rigs brought in by the appellant, their significant number of personnel carried out actual drilling operations, the appellant contended that the contract is one of drilling service liable as mining service as defined under service tax law whereas according to the revenue, the core object of the agreement was to provide equipment (tangible goods) on hire to attract service tax u/s. 65(105)(zzzzj) of the Finance Act, 1994. According to the appellant, they provided drilling service with the use of the drilling equipment obtained by them on hire from a Singapore company on bareboat charter basis and under the contract with ONGC, they were required to carry out drilling operations after securing permit and licenses for operation of drilling by its own crew of various skills like engineers, technicians etc., totalling to about 45 persons and hence the activity was carried out to produce the output service required by their customer. They also contended that they were fully responsible for the job as a whole and therefore they controlled, directed and supervised drilling operations and did not transfer possession of the equipment so as to merit classification as SOTG. The issue pertained to the period 07-07-2009 to 27-02-2010. Therefore, alternatively and incidentally, it was also contended on behalf of the appellant that prior to the date of 27-02-2010, service tax did not extend to the area in which the drilling services were carried out as India did not include installations, structures and vessels in the Continental Shelf and Exclusive Economy Zones of India. However, for the analysis and discussion herein below, the aspect of territorial jurisdiction is kept aside as the same is not relevant. The appellant also put forth the fact of their paying service tax under mining service for the subsequent period viz. 01-04-2010 onwards and filed ST-3 Returns to such effect and thus contended that their classification was accepted by the department.
As against this claim, the revenue’s submission was that the issue involved was covered by the Hon. Bombay High Court’s decision in Indian National Shipowners Association (INSA) 2009 (14) STR 289 (Bom). The High Court examined the scope of SOTG service in the context of supply of offshore vessels to carry out various jobs like anchor handling, towing of vessels, supply of rigs or platform, diving or safety support, crane support etc., in designated or non-designated areas. The question before the High Court in the case of INSA (supra) was whether various independent services provided by the members of the association were in the nature of mining services defined under entry (zzzy) or the later entry (zzzzj) defining SOTG in section 65(105) of the Act. Since these activities were independently carried out by various and separate vendors, it was held that the services are liable to be classified as SOTG, when the right of possession and effective control of goods was not transferred as they did not carry out mining activity.
Statutory provisions:
For facilitating easy reference, both the relevant definitions of section 65(105) of the Act are reproduced below:
[zzzy]:
“Taxable service means any service provided or to be provided to any person, by any other person in relation to mining of mineral, oil or gas”.
{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.”
Scope of the contract:
The Tribunal on detailed examination of the contract between the parties inter alia found that the contract:
Was for a firm period of three years from the commencement date.
The compensation was based on per day of operation and only slightly lower compensation was payable (about 95%) even for a non-operation day. Similarly, even for the day when rigs were moved from one location to another, the lower rate of about 95% of the daily rate was still applicable to non-operation day.
The scope included provision of complete drilling rig and equipment as per technical specification.
Provision of capable and experienced rig crew.
The appellant was fully responsible for mobilisation of personnel, equipment and material and their safety.
Loss or damage to the drilling unit was on account of the appellant.
For undertaking any drilling, the appellant was entitled to additional charges.
Training the crew also was appellant’s responsibility.
The Tribunal on examining the definition of SOTG found that only two conditions were required to be covered by SOTG service viz. there should be supply of tangible goods and there should not be any transfer of right of possession and effective control. Whereas, the appellant’s contention that they did not transfer possession and control to ONGC was not relevant to determine liability under the category of SOTG.
Perusal of the ingredients of the contract in the light of the legal provisions, the Tribunal observed that the equipment and crew were of the appellant and therefore possession and effective control was of the appellant and the consideration was also expressed on per day basis. Thus, all the elements put together showed that there was no transfer of right or possession by the appellant to ONGC and therefore appellant’s contention that they should have transferred possession of goods to come within the scope of the taxing entry of SOTG was not tenable. On examining Bombay High Court’s decision in Indian National Shipowners Association (supra), the Tribunal concluded that the appellant’s service merited classification as SOTG. In support of its decision, the Tribunal also relied on the decisions of:
Atwood Oceanic Pacific Ltd. vs. Commissioner 2013 (32)STR 756 (Tribunal Ahmd)
Shipping Corporation of India 2014 (33 STR 552 (Tri.- Mum)
Srinivasa Transports 2014 (34) STR 765 (Tri.-Bang)
The Tribunal on concluding also noted that even on assuming that service was a composite service consisting of mining service and SOTG, the essential character of the service was SOTG service since 95% of the consideration was attributed for supply of tangible goods.
While analysing the above decision of the hon. tribunal, the fact of the matter to be noted is that the limited issue before the Bench was to examine and classify the activity under one or the other classification as the dispute raised in the show cause notice was in relation to classification. Similarly, when the hon. Bombay high Court examined the case of INSA (supra), the trigger point for filing writ petition on behalf of members of the Shipowners’ association was that various offshore support vessels, construction barges, tugs etc., were provided by members for exploration operations on time charter basis. This summarily may be described as marine logistics services. The revenue initiated action to recover service tax on the said activity under the entry of mining service under the above sub-clause (zzzy). Vide this entry actually all the activities relating to mining were consolidated by the finance act, 2007. The category of SotG was introduced later from 16th may 2008. Therefore, in the case of INSA (supra) to put an end to dispute relating to taxability under the entry of mining service, the argument was advanced that the later entry of SOTG was the relevant classification. However, the scope of this taxing entry in (zzzzy) or taxability under the entry was per se not examined vis-à-vis a contract for hiring of equipment in detail as there did not arise such question before the high Court. As a matter of fact, the decisions relied upon above by the tribunal in Great Ship (india) Ltd. (supra) viz. Shipping Corporation (supra), atwood oceanic (supra) etc., also, the dispute involved was limited to different classifications vis- à-vis SOTG and/or fact prior to the date of introduction of SOTG the service was not taxable.
Are Most Hiring Contracts Not of “Deemed sale”?:
On closely perusing the scope of the entry of SOTG one may find that only those hiring or leasing contracts would be covered by the scope of this entry whereunder, there is no transfer of right of possession and effective control over the equipment provided on hire. hiring contracts where such right is transferred are liable as “deemed sale” under the Vat laws of the States. To examine whether a contract contains transfer of such right to use the goods or not, a test is laid down in the benchmark decision of Bharat Sanchar Nigam Ltd. vs. UOI 2006 (2) STR 161 (SC) which provides direction in the matter and which is also followed by various high Courts as listed below:
? There must be goods available for delivery.
? There must be consensus ad idem as to the identity of the goods.
? The transferee should have legal right to use the goods
– consequently all legal consequences of such use including any permission or licenses required therefore should be available to the transferee.
? For the period during which the transferee has such legal right, it has to be the exclusion of the transferor. This is the necessary concomitant of the plain language of the statute viz. a “transfer of the right to use” and not merely a license to use the goods.
? Having transferred the right to use the goods during the period for which it is to be transferred, the owner cannot again transfer the same rights to others.
If all the above ingredients are present, the contract is one of “deemed sale” in terms of article 366(29A) of the Constitution and exigible to Vat and therefore cannot be held as SOTG service. It may be noted at this point that under the negative list based taxation applicable from 01-07-2012, the said service of SOTG is included in the list of “declared Services” in section 66e of the act in clause (F) as “transfer of goods by way of hiring, leasing, licensing or in any such manner without transfer of right to use such goods”. While explaining the negative list based provisions, the Government in the education Guide dated 20-06-2012 has referred to the above test and has cited a few illustrations with reference to some judgments to advance its own interpretation. (readers may refer para 6.6.1 and 6.6.2 of the said education Guide). The said test referred above was followed interalia in another important decision of the andhra high Court in G. S. Lamba & Sons vs. State of Andhra Pradesh 2012-TIOL-49-HC-AP-CT involving contract of hiring of commercial vehicles and the aspect of transfer of right to use has been exhaustively analysed (refer BCAJ november 2012 issue under hiring of goods: declared Service or deemed Sale). An extract of a few important observations made in the said decision of G. S. Lamba (supra) is provided below:
“The right to use goods arises only on the transfer of such right to use goods and that the transfer of right is the sine quo non for the right to use any goods”.
“Effective control does not mean physical control and even if the manner, method, modalities and time are decided by the lessee, it would be general control over goods”.
“Article 366(29A) would show that the tax (i.e. VAT in the instant case) is not on the delivery of goods used but on the transfer of the right to use goods regardless of when and whether goods are delivered for use. This is subject to the condition that goods are in existence for use.”
“The entire use in the property in goods is to be exclusively utilized for a period under contract by lessee.”
Similar decision has also been pronounced by the Gauhati high Court in Deepaknath vs. ONGC (2010) 31 VST 337 (GAU) and Orissa High Court in K. C. Behra vs. State of Orissa (1991) 83 STC 325 (Orissa). On going through the terms of contract in the instant case of Great Ship (india) Ltd. (supra), one may find that the contract satisfies the test laid down by the Apex Court in BSNL’s case (supra) and conforms with all the observations made by andhra high Court in G. S. Lamba’s case (supra). Yet, paradoxically, the contract is subjected to service tax.
Conclusion:
There may exist several conflicting decisions for a common situation. Similarly, view of professionals also may differ. yet the test laid down by BSNL seems a decisive factor for the situation discussed above. Following principles laid down thereunder, the above contract does not appear to be a contract for service at all. However, since this aspect was not presented before the tribunal for the reasons best known to the appellant, the contract seemingly of “deemed sale” is held as service of supply of tangible goods liable for service tax. Entire service sector and professionals eagerly await the arrival of GST legislation in the hope of bringing an end to the battle between the aspect of ‘sale’ and ‘service’ in a transaction.
