Cash Calls By Oil India Are Capital Contributions, Not Taxable Services: CESTAT Delhi

The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), New Delhi, has held that 'cash calls' collected by Oil India Limited from non-operator members of an unincorporated joint venture for petroleum exploration do not constitute taxable services. As such, contributions are capital contributions and not consideration for any service.

A Bench of CESTAT, comprising Ms. Binu Tamta (Judicial Member) and Ms. Hemambika R. Priya (Technical Member), allowed the appeal filed by Oil India Limited, quashing the service tax demand along with interest and penalties. The Tribunal held that activities performed by a co-venturer or operator for the common objective of a joint venture cannot be treated as services rendered to another person for consideration under the Finance Act, 1994. The Bench observed:

“Such cash calls received as share of expenses cannot be subjected to service tax… The appellant incurs various expenses on exploration or development of the petroleum asset (i.e., the oil fields or gas fields) or for production of oil and/or gas. If the exploration and development operations fructify into a discovery of commercial fields, production of oil happens. Otherwise, the Block is to be relinquished and the contribution towards exploration and development operations becomes a sunk cost which is a loss incurred by the participants in proportion to their PI. Thus, the exploration and development costs are nothing but investments in anticipation of future production from the oil field (which is contingent upon the successful discovery of oil and/or gas deposits).”

Oil India Limited, appointed as the 'Operator' under a Production Sharing Contract (PSC) pursuant to the New Exploration Licensing Policy (NELP), undertook exploration and drilling operations through an unincorporated joint venture with other entities, with costs shared proportionately under the Joint Operating Agreement (JOA).

The Department had alleged that the 'cash calls' raised on non-operators constituted taxable services under Section 66B read with Explanation 3(a) of the Finance Act, 1994, confirming the service tax demand along with interest and penalties and invoking the extended period of limitation.

The Tribunal observed that the issue was no longer res integra, relying on earlier decisions consistently holding that joint venture arrangements do not create a service-provider/service-recipient relationship. The Bench drew on its ruling in Marmugao Port Trust v. CCE 2017 (48) STR 69 (Tri-Mum), where it was held that partners or co-venturers act for their own mutual business interest, and not for rendering services to each other for consideration.

The Bench further clarified that mere movement of money does not automatically create a taxable service, unless a direct quid pro quo for a specific service is established. Applying this principle, it noted that cash calls are proportionate contributions towards exploration costs, which may become sunk costs if no commercial discovery occurs.

Following binding precedents and CBEC Circular No. 179/5/2014-ST dated 24 September 2014, the Tribunal set aside the impugned order and allowed the appeal filed by Oil India Limited. It quashed the service tax demand along with interest and penalties.

Appearance for the Appellant: Shri B.L. Narasimhan and Ms. Sukriti Das

Appearance for the Respondent: Shri Vivek Kumar Jain, Authorised Representative