The Hindu Business Line : ONGC to reimburse service tax dues to shipping cos

Mumbai Aug. 20 Shipping companies are set to get some financial relief, with ONGC committing to reimburse them the service tax dues pending from last fiscal.

Shipping and other offshore services companies have been asked by the Central Board of Excise and Customs (CBEC) to pay service tax on all marine logistics services provided by them to offshore oil exploration and production companies such as ONGC and Reliance from fiscal 2007-08.

With ONGC maintaining that such services do not come under the ambit of service tax, the companies have not been factoring the tax in their contracts with the oil major.

Although ONGC still clings on to its stand on the issue, it has, however, committed before the Mumbai High Court that it was willing to reimburse the tax to the shipping companies if the Government does find such services liable for taxation.

ONGC’s commitment came when a writ petition filed by the Indian National Shipowners Association (INSA), seeking a clarification on the issue of tax on offshore services, came up for hearing in the High Court on July 31.

“It is now clear that shipping companies will get the reimbursement once the service tax issue is straightened out by the Government,” a top offshore services company official told Business Line.

Clearly, if ONGC were to bear the burden of service tax for all services it hires, including different supply and support vessels, for its offshore operations, its finances will take a hit. This is especially so as even the day-hire rates of various marine assets such as supply vessels and rigs have been soaring in the last two years.

ONGC has been maintaining that the tax was not applicable to such marine services as offshore oil exploration and production did not come under the definition of mining of minerals, oil and gas, which is subject to service tax.

However, in December last year, the CBEC clarified to INSA that such services were liable for service tax of 12.5 per cent, under Section 65 (105) (3ZY) of the Act. CBEC had even asked INSA to inform its member companies such as SCI, Great Offshore, Great Eastern, Garware Offshore and Mercator Lines to pay the service tax, failing which they will be liable to face the consequences, sources said.

ONGC, which has in operation (both hired and owned) over 100 offshore vessels, pays hire charges of between $1,800 and $20,000 a day or even more depending on the type of the marine asset. The hire charges are significantly more in the case of new generation vessels, which are fitted with DP (Dynamically Positioning) systems.

The daily rental for a 3,300 DDWT platform supply vessel (PSV), for example, has increased from an average of about $11,500 in 2003 to $14,500 in early 2006.

“By mid-2006, the rate spurted to $15,500 and now is almost touching $20,000,” an official of another offshore services company said.

In case of drilling rigs, the daily rentals range from $1,50,000 to $2,00,000.

Industry sources said ONGC would have to finally bear the service tax burden, as the Government is in no mood to change its stand on applicability of service tax on marine logistics services.

“The Government is of the view that offshore services cannot be viewed in isolation as far as service tax applicability is concerned and hence the services cannot be exemption from tax,” a source said.

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ONGC may reimburse part of service tax to shipping cos
Service tax: ONGC may have to pay more hire rates

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