By TIOL News Service

MUMBAI, APRIL 17, 2018: THE issue at hand before the High Court was whether where an appeal to the Tribunal involved a legal issue, as to whether or not the supply of material to an off-shore base loacted outside Indian territorial waters would constitute an export, can the Tribunal treat the issue as being factual in nature and direct the assessee to pre-deposit part of the duty demand raised against it. No is the verdict.

Facts of the case

The assessee is a leading company engaged as a contractor and developer of projects. It is engaged in off-shore oil & gas exploration, commercial & industrial construction and related activities. During the relevant AY, the assessee was awarded a works contract by the ONGC for replacement of pipelines. This contract includes laying and completing 39 pipeline segments, which includes conducting project management surveys, design engineering, procurement, fabrication, anti-corrosion and weight coating. Considering the terms & conditions of the contract, the activities were to be carried out at offshore platforms located beyond territorial waters. To execute the contract, the assessee imported most of the goods & material used, and sent the same directly to the offshore platform from the port of landing. The assessee claimed that the goods & material used never crossed the Customs frontiers of India, and were never brought into Maharashtra.

When the assessee filed returns, assessment was initiated u/s 23 of the Maharashtra Value Added Tax Act, 2002 (MVAT). Thereupon, an assesment order was passed, raising duty demand for VAT of Rs 4,26,94,89,037/-, including tax, interest and penalty. The Department also passed a separate order rejecting the assessee's claim for deduction. This order also sought to tax the entire turnover declared by the assessee. The Department rejected the assessee's claim that the sale in the works contract was of the nature of export u/s 5(1) of the Central Sales Tax Act, 1956. It went on to treat the entire activity as a local sale and thus, taxable. Further, in a separate assessment order passed for a different period, identical findings were recorded and duty demand of Rs 2,28,50,15,227/- was raised. Later, the Appellate Commissioner rejected the assessee's appeals. Subsequently, the assessee filed four separate appeals before the Tribunal, accompanied with applications seeking stay on recovery of the duty demand during the pendency of the appeals. However, the Tribunal directed the assessee to pre-deposit a sums of Rs 8 crores & Rs 4 crores for both the periods, conditional upon which the recovery of dues would be stayed. Hence the present writ.

On hearing the matter, the High Court held that,

++ here, the contract is for pipelines replacement & laying project between the ONGC and consortium of companies. The agreement is that a tender was floated and the assessee and others represented that they have expertise and technical knowhow in respect of the said work and which is of laying and completion of 39 pipeline segments, including all the steps as per the agreement and for a lump sum price. The scope of the work is laying and completion of 39 pipeline project, which includes project management, survey, design, engineering, procurement & fabrication. The dates of commencement and completion of the work are stipulated. Then, there is an access provided to installation site. Then, there are conditions for procurement & selection of makes and vendors. The contractor has to select the equipment and material from the vendor list and thereafter, there is an approval, which has to be given also for subcontracting arrangement and procurement of plant, equipment & materials. That is only when the compliance by the contractor of the conditions stipulated in paras 5.2.2 and 5.2.3 of the contract is made. The miscellaneous and the certification following the same would result in the performance of contract & discharge certificate being issued.

++ the assessee in this case raised specific grounds to challenge the assessment order and the order of the first appellate authority. The assessee pointed out that it is responsible for the goods imported and procured until their use for executing the contract and during the course of which, an approval has to be granted by the ONGC. It is submitted that the goods supplied under the contract with ONGC for carrying out turnkey project on offshore sites is beyond 12 nautical miles. The entire finding in the order of assessment and the order of the first appellate authority is termed as vague because the matter has been approached in general terms. It is specifically alleged that the materials and equipments supplied are in the course of export and hence, not liable to VAT in Maharashtra. The assessee specifically urged that the goods supplied to ONGC offshore site need to be transported to such sites by a sea vessel. The ultimate risk of the goods supplied to ONGC offshore site lies with the assessee until the ONGC representative provides with final acceptance certificate to the assessee for the work done. These facts were ignored and the goods were held to be supplied to the ONGC because they are assigned for ONGC supply base at Nhava Sheva and handed over to ONGC. The argument is that the property in such goods has not been transferred within the State of Maharashtra. That is how the judgment and having a nexus theory is inapplicable. It is only because the goods are despatched to the supply base, but subject to acceptance by the ONGC that this matter is distinct from the other cases and dealt with by the Tribunal.

++ therefore, this was a highly debatable issue. If the Tribunal was required to refer to not only the legal principles, but whether they are applicable will have to be eventually determined on the basis of the terms and conditions of the contract, then, in the given facts and circumstances of the case, there was no reason to impose any condition of part payment. The legal issues and raised either way ought to be answered on the basis of the nexus theory involved in the judgment of the Supreme Court and this court, whether that can be applied to the given facts and circumstances and to a works contract, unmindful of its peculiarity, demands an unconditional stay of recovery. This was not a case where the Tribunal was confronted with purely factual matters and it was not required to consider anything further, but apply a settled principles to the facts and an attempt is made by the dealer to get out of this settled legal position. The legal position, as is emerging from the judgments rendered in two distinct cases, namely a sale and by applying a nexus theory to it or a sale in the course of execution of a works contract would, therefore, need a deeper consideration. That justifies an unconditional stay of recovery pending disposal of the appeal. This is a case where the Tribunal could have decided the legal issues and finally instead of insisting on part payment. This is an exception, which enables the High Court to interfere in the Tribunal's order.

(See 2018-TIOL-720-HC-MUM-CT)