While negative list-based taxation system is aimed at simplifying overall framework and resolving issues relating to taxability of a particular transaction, ambiguities continue to surround in some critical areas both in terms of interpretation of law as well as operational difficulties.
One of the key issues is the applicability of service tax on certain transactions of unincorporated joint ventures (UJV) like cash calls made in terms of production sharing contracts (PSC) from members who are part of such PSC, and reimbursement of overhead costs incurred by operator for carrying out exploration and production (E&P) activities while acting on behalf of all members in terms of obligations cast upon such operators under PSC.
In terms of PSC, liability of all members is joint and one of the members is required to be appointed as ‘operator’ who performs all activities in relation to E&P on behalf of all members. The operator incurs various costs in relation to exploration, development, production, general administration, etc. In this regard, periodic cash calls are raised on all members by UJV through operator.
With the introduction of the negative list regime, an ambiguity has arisen whether such cash calls and overhead cost reimbursements would be subject to levy of service tax in light of specific definition of service to mean any activity carried out by a person for another for consideration with a specific explanation that an unincorporated association or a body of persons, and a member thereof shall be treated as distinct persons.
Industry maintains the view that in terms of overall framework of PSC, operator and its members continue to be outside service tax ambit in absence of any element of ‘service’ and ‘service provider-service recipient relationship’. Cash calls, in essence, are pure funding arrangements/capital contributions made by members in ratio of their participating interest to UJV. Further, such infusion should be construed as a mere transaction in money for which there is a specific exclusion in definition of ‘service’. Similar treatment ought to be accorded to reimbursement of overhead costs by operators acting on behalf of UJV.
The industry anticipates alternative interpretation by tax authorities in relation to the