Kerala High Court
Prodair Air Products India ... vs The Deputy Commissioner Of State ... on 3 April, 2023
IN THE HIGH COURT OF KERALA AT ERNAKULAM
PRESENT
THE HONOURABLE MR.JUSTICE A.K.JAYASANKARAN NAMBIAR
&
THE HONOURABLE MR.JUSTICE MOHAMMED NIAS C.P.
MONDAY, THE 3RD DAY OF APRIL 2023/13TH CHAITHRA, 1945
W.A.NO.374 OF 2021
AGAINST THE JUDGMENT DATED 23.10.2020 IN WP(C).NO.18443/2020 OF
HIGH COURT OF KERALA
APPELLANT/PETITIONER:
PRODAIR AIR PRODUCTS INDIA PRIVATE LIMITED,
OFFICE NO.602, PENTAGON 5, MAGARPATTA CITY,
HADAPSAR, PUNE-411013, MAHARASHTRA, REPRESENTED
BY ITS AUTHORIZED SIGNATORY SRI.HEMEN KHOKHANI.
BY ADV.SRI.ASWIN GOPAKUMAR
BY ADV.SRI.K.AMAL NATH NAIK
BY ADV.SRI.KANDAMPULLY VIKRAM
BY ADV.SRI.NIRANJAN SUDHIR
BY ADV.SRI.RENOY VINCENT
RESPONDENTS/RESPONDENTS:
1 STATE OF KERALA,
REPRESENTED BY ITS SECRETARY (TAXES),
GOVERNMENT SECRETARIAT, THIRUVANANTHAPURAM-695001.
2 THE STATE TAX OFFICER (IB),
KERALA STATE GST DEPARTMENT, MATTANCHERRY,
MINI CIVIL STATION, ALUVA, ERNAKULAM-683101.
BY SRI.MOHAMMED RAFIQ, SPL. GOVT. PLEADER
THIS WRIT APPEAL HAVING COME UP FOR ADMISSION ON
15.03.2023, ALONG WITH W.A.NO.73/2022 & 91/2022, THE COURT
ON 03.04.2023 DELIVERED THE FOLLOWING:
W.A.Nos.374/2021,73/2022 & 91/2022 :: 2 ::
IN THE HIGH COURT OF KERALA AT ERNAKULAM
PRESENT
THE HONOURABLE MR.JUSTICE A.K.JAYASANKARAN NAMBIAR
&
THE HONOURABLE MR.JUSTICE MOHAMMED NIAS C.P.
MONDAY, THE 3RD DAY OF APRIL 2023/13TH CHAITHRA, 1945
W.A.NO.73 OF 2022
AGAINST THE JUDGMENT DATED 06.01.2022 IN WP(C).NO.18783/2021 OF
HIGH COURT OF KERALA
APPELLANT/PETITIONER:
PRODAIR AIR PRODUCTS INDIA PRIVATE LIMITED,
AMBALAMEDU, ERNAKULAM, REPRESENTED BY ITS
FINANCE EXECUTIVE MR.G.MALLIKARJUNA REDDY
BY ADV.SRI.P.S.SREEPRASAD
RESPONDENTS/RESPONDENTS:
THE DEPUTY COMMISSIONER OF STATE TAX,
SPECIAL CIRCLE II, KERALA SGST DEPARTMENT,
THEVARA, ERNAKULAM-682 015
BY SRI.MOHAMMED RAFIQ, SPL. GOVT. PLEADER
THIS WRIT APPEAL HAVING COME UP FOR ADMISSION ON
15.03.2023 ALONG WITH W.A.NO.374/2021 AND W.A.NO.91/2022,
THE COURT ON 03.04.2023 DELIVERED THE FOLLOWING:
W.A.Nos.374/2021,73/2022 & 91/2022 :: 3 ::
IN THE HIGH COURT OF KERALA AT ERNAKULAM
PRESENT
THE HONOURABLE MR.JUSTICE A.K.JAYASANKARAN NAMBIAR
&
THE HONOURABLE MR.JUSTICE MOHAMMED NIAS C.P.
MONDAY, THE 3RD DAY OF APRIL 2023/13TH CHAITHRA, 1945
W.A.NO.91 OF 2022
AGAINST THE JUDGMENT DATED 06.01.2022 IN WP(C).NO.17451/2021 OF
HIGH COURT OF KERALA
APPELLANT/PETITIONER:
PRODAIR AIR PRODUCTS INDIA PRIVATE LIMITED,
AMBALAMEDU, ERNAKULAM; REPRESENTED BY ITS
FINANCE EXECUTIVE MR. G.MALLIKARJUNA REDDY
BY ADV.SRI.P.S.SREEPRASAD
RESPONDENT/RESPONDENT:
THE DEPUTY COMMISSIONER OF STATE TAX,
SPECIAL CIRCLE II, KERALA SGST DEPARTMENT,
THEVARA, ERNAKULAM 682 015
BY SRI.MOHAMMED RAFIQ, SPL. GOVT. PLEADER
THIS WRIT APPEAL HAVING COME UP FOR ADMISSION ON
15.03.2023 ALONG WITH W.A.NO.374/2021 AND W.A.NO.73/2022,
THE COURT ON 03.04.2023 DELIVERED THE FOLLOWING:
W.A.Nos.374/2021,73/2022 & 91/2022 :: 4 ::
'C.R.'
JUDGMENT
A.K. Jayasankaran Nambiar, J.
These writ appeals separately impugn the judgment of a learned
Single Judge that dismissed the writ petitions preferred by the
appellant challenging (i) the orders of assessment under the KVAT Act
for the assessment years 2015-16 to 2017-18 and a show cause notice
for the year 2014-15 [W.P(C).No.17451/2021], (ii) the order of the
assessing authority rejecting the claim for input tax credit on the
purchase of capital goods [W.P(C).No.18783/2021] and (iii) the order
imposing penalty on the appellant under the KVAT Act for the
assessment years 2016-17 and 2017-18 [W.P(C).No.18443/2020]. While
W.A.No.374 of 2021 arises from the judgment of a learned Single Judge
in W.P(C).No.18443/2020, W.A.Nos.73 and 91 of 2022 arise from the
common judgment of another learned Single Judge in
W.P(C).Nos.17451/2021 and 18783/2021. Since the issue involved in all
these appeals is common, they are taken up together for hearing and
disposed by this common judgment.
THE FACTS IN BRIEF
2. The appellant is stated to be a private limited company
W.A.Nos.374/2021,73/2022 & 91/2022 :: 5 ::
involved, inter alia, in the activity of production and sale of industrial
gases such as Hydrogen, Nitrogen and HP Steam. It is a wholly owned
subsidiary company of Air Products and Chemicals Inc., USA. It is also a
registered dealer under the Kerala Value Added Tax Act [hereinafter
referred to as the 'KVAT Act'] and an assessee on the rolls of the Asst.
Commissioner (Assmt), Special Circle - II, Ernakulam. It is stated that
for the purposes of implementing its Integrated Refinery Expansion
Project, Bharath Petroleum Corporation Limited [BPCL] found it
necessary to ensure a continuous and reliable supply of Hydrogen,
Nitrogen and HP Steam of particular specifications so as to increase the
production of their petroleum products. They accordingly published a
notification inviting bids for supply of these gases. The appellant
responded to the said notification and was eventually awarded the
contract.
3. According to the appellant, its obligations under the contract
were to Build, Own, Operate (BOO) and maintain a Hydrogen and
Nitrogen manufacturing plant at its own cost and expenditure on the
land to be allocated by BPCL on lease basis, with the objective of
ensuring exclusive and uninterrupted supply of Hydrogen, Nitrogen and
HP Steam to BPCL at competitive prices. In the agreement between the
parties, the price of the gases is fixed in terms of a formula specified in
Article 15 thereof, which comprises of Fixed Monthly Charges as well as
W.A.Nos.374/2021,73/2022 & 91/2022 :: 6 ::
Variable Charges. The Fixed Monthly Charges consist of an fixed
amount towards return on the investment of the appellant, a component
towards maintenance costs and other overheads, as well as manpower
costs. The variable charges, on the other hand, comprises of the
variable costs of producing the industrial gases. Although separate
invoices are raised for the Fixed Charges and Variable Charges, they
together go to make up the price for the supply of the industrial gases
under the agreement. As regards the production plant itself, the
agreement envisaged that the plant to be installed by the appellant,
together with all the pipelines, metering and other systems would be
the property of the appellant during the term of the agreement, and
even after its termination, unless transferred or removed in accordance
with the agreement. It is significant that the agreement gives BPCL an
option to takeover the production plant if the agreement is not renewed
upon completion of its initial term of fifteen years from the date of
commencement of the supply of gases to BPCL. In the event BPCL
exercises its option, it has to compensate the appellant at a fair value as
determined in accordance with the procedure set out in Appendix 8 of
the agreement.
4. For the assessment years 2015-16 to 2017-18, the assessment
of the appellant under the KVAT Act was completed, based on the
penalty orders passed for the assessment years 2016-17 and 2017-18,
W.A.Nos.374/2021,73/2022 & 91/2022 :: 7 ::
by construing the agreement entered into between the appellant and
BPCL as one that effected a transfer of property in the plant and
specified gases in the course of execution of a works contract. The
assessing authority, like the intelligence officer who imposed the
penalty, referred to the proviso to Rule 10 (2) of the KVAT Rules, 2005
which, in the context of determination of taxable turnover in relation to
works contracts in which transfer of property takes place not in the
form of goods but in some other form, mandates that 'when the
turnover arrived at after deducting the amounts mentioned in clause (a)
falls below the cost of goods transferred in the execution of the works
contract, an amount equal to the cost of the goods transferred in the
execution of the works contract together with profit, if any, shall be the
taxable turnover in respect of such works contract.' He then proceeded
to find that the contract price shown as received by the appellant,
which was the sum of the fixed and variable charges, was less than the
cost of the plant that was brought to the site and hence the cost of the
plant, together with a component of gross profit, would be taken as the
taxable turnover for the purpose of levying tax @ 14% applicable to
works contracts (as against 5% applicable to supply of gases) under the
KVAT Act. The show cause notice issued for the assessment year 2014-
15 also proceeded on the same lines. It was the said show cause notice,
assessment orders and penalty orders that were impugned by the
appellant in the writ petitions aforementioned which, as noticed earlier,
W.A.Nos.374/2021,73/2022 & 91/2022 :: 8 ::
were dismissed by the learned single judges who relegated the
appellant to its alternate remedy of approaching the appellate
authorities under the KVAT Act for an adjudication on merits.
THE ARGUMENTS OF COUNSEL
5. The submissions of the learned senior counsel Sri. Arvind P
Datar, assisted by Adv. Sri.N. Prasad, appearing on behalf of the
appellants in these cases, briefly stated are as follows:
• The impugned assessment orders do not contain a finding
that there is transfer of property involved in the execution of a
works contract and hence, the very sine qua non for invoking
Section 6 (1)(f) of the KVAT Act does not exist in the instant cases.
• A fact which is a condition precedent for applicability of a
taxing provision is a jurisdictional fact and insofar as the
authorities in the impugned orders have wrongly assumed that
there is a transfer of property in goods in the course of execution of
a works contract, this court can exercise its powers under Article
226 of the Constitution of India to correct an error in the
determination of a jurisdictional fact. Reliance is placed on the
decisions in Raza Textiles Ltd. v. Income Tax Officer, Rampur -
[(1973) 1 SCC 633] and Arun Kumar and Others v. Union of
India and Others - [(2007) 1 SCC 732].
• A writ court can examine whether a taxable event exists in
W.A.Nos.374/2021,73/2022 & 91/2022 :: 9 ::
the case before it while considering the legality of the order
impugned in the writ petition, since the existence of a taxable event
is fundamental to the levy of tax. Reliance is placed on the
decisions in Paradip Port Trust v. Sales Tax Officer and Others
- [(1998) 4 SCC 90], Union of India and Another v. State of
Haryana and Another - [(2001) 123 STC 539] and Govind
Saran Ganga Saran v. Commissioner of Sales Tax and Others -
[1985 (Supp) SCC 205].
• A writ petition will lie to quash the impugned proceedings
when the findings therein are not sustainable based on the
admitted facts. (See: M/s. East India Commercial Co. Ltd.
Calcutta & Another v. The Collector of Customs, Calcutta -
[AIR 1962 SC 1893]). That apart, when the issue in the writ
petition relates to the interpretation of a contract which is a pyre
question of law, the petitioner need not be relegated to an alternate
remedy (See: ABL International Ltd. and Another v. Export
Credit Guarantee Corporation of India Ltd. and Others -
[(2004) 3 SCC 553]; Deputy Commissioner, Central Excise
and Another v. Sushil and Company - [(2016) 13 SCC 223]. As
for the challenge to a show cause notice, it is contended that where
the issue has been decided by the authority for earlier years, it
would be futile for an assessee to prefer a reply and the remedy of
a writ petition is always available. Reliance is placed on the
decision in Siemens Ltd. v. State of Maharashtra and Others -
[(2006) 12 SCC 33].
• A reference to the various clauses in the agreement between
the appellant and BPCL would clearly reveal that the agreement
was to build, own and operate a Hydrogen and Nitrogen Plant and
W.A.Nos.374/2021,73/2022 & 91/2022 :: 10 ::
to effect sales of Hydrogen, Nitrogen and HP Steam to BPCL. The
agreement was only for the sale of gases and the ownership of the
plant continues to be with the appellant. There was no justification,
therefore, to infer a transfer of goods in the course of execution of a
works contract and levy tax thereon on the appellant.
• The authorities under the KVAT Act misread the provisions of
the agreement to infer that the fixed monthly charge component of
the price of the gases constituted the consideration for a works
contract. It is standard industry practice to recover fixed and
variable costs in the price of the goods being supplied. That apart,
the method of computation of the price cannot be determinative of
the character of the payment. It is also significant that the fixed
monthly charge component of the price of the gas supplied has
already been subjected to tax @5% while simultaneously subjecting
it to tax again @ 14% as a works contract.
• In respect of assessment year 2017-18, the assessment order
impugned has a portion involving input credit of Rs.23,85,79,747/-
that is not vitiated by a jurisdictional error and this part can be
severed from the rest of the assessment order for the purposes of
relegating the appellant to its alternate remedy of challenging that
portion before the appellate authority under the KVAT Act. Reliance
is placed on the decisions in The State of Jammu & Kashmir and
Others v. Caltex (India) Ltd. - [(1966) 17 STC 612]; Union of
India v. Hindalco Industries - [(2003) 5 SCC 194].
• In the case of W.A.No.73 of 2022, the proceedings impugned
is one that denies input credit on capital goods. As no personal
hearing was provided to the appellant, the impugned order is one
W.A.Nos.374/2021,73/2022 & 91/2022 :: 11 ::
that was passed in violation of the principles of natural justice. That
apart, if it is found that no works contract existed, then the
appellant would be entitled to the input credit since the credit was
denied solely on the finding that there was a transfer of the plant to
BPCL.
• As regards the penalty orders involved in W.A.No.374 of
2021, it is submitted that for the reasons already stated in relation
to the impugned assessment orders, they cannot be legally
sustained as they have proceeded on an erroneous assumption of a
jurisdictional fact/taxable event as also on an estimation of the
taxable turnover.
6. Per Contra, the submissions of the learned Senior Government
Pleader (Taxes) Sri. Mohammed Rafiq, briefly stated, are as follows:
• Under the scheme of the KVAT Act, it is for the respondent
assessing authority to decide during the course of the assessment
as to whether or not the assessee has executed a works contract.
The decision so taken by the assessing authority cannot be termed
as without jurisdiction as jurisdiction only refers to the authority of
a person to decide the matter and that authority to decide the
matter in the instant case is admittedly conferred on the assessing
officer by Section 25 (1) of the KVAT Act. Reliance is placed on the
decision in Smt. Ujjam Bai v. State of U.P. and another - [AIR
1962 SC 1621] and Embassy Property Development Private
Limited v. State of Karnataka & Others - [(2020) 13 SCC 308]
to point out that lack of jurisdiction has to be differentiated from
errors committed within the available jurisdiction and that in the
W.A.Nos.374/2021,73/2022 & 91/2022 :: 12 ::
latter case, interference under Article 226 of the Constitution of
India is not warranted.
• There are ample provisions under the KVAT Act to correct
erroneous orders of the assessing authorities and in the absence of
any pleading to that effect or material to demonstrate that the
statutory remedies are not adequate, efficacious or meaningful, this
court ought not to interfere with the orders of the assessing
authority, or the penalty orders, through the exercise of the writ
jurisdiction. Reliance is placed on the judgments in Thansingh
Nathmal v. Superintendent of Taxes - [AIR 1964 SC 1419],
Titaghur Paper Mills Co. Ltd. v. State of Orissa - [(1983) 2
SCC 433] and CIT v. Chhabil Dass Agarwal - [(2014) 1 SCC
603] in support of the said contention.
• At any rate, inasmuch as a single judge of this court had
exercised his discretion to not entertain the writ petitions and
relegated the appellant herein to its alternate remedy under the
statute, a writ appeal under Section 5 of the Kerala High Court Act
could not be entertained since the impugned judgment cannot be
seen as illegal, irregular or improper warranting interference in an
intra-court appeal. Reliance is placed on the decision in Red Bee
Enterprises v. Assistant Commissioner of State Tax - Neutral
Citation Number 2019/KER/64699 in support of the said
contention.
OUR ANALYSIS AND FINDINGS
7. We have gone through the pleadings on record and considered
W.A.Nos.374/2021,73/2022 & 91/2022 :: 13 ::
the submissions of the learned counsel on either side. We have also
perused the judgments cited by counsel before us. We find that the issue
before us lies in a narrow compass and requires us to determine
whether the learned Single Judges were justified in relegating the
appellant to its alternate remedies under the KVAT Act against the
orders impugned in the writ petitions ? We deem it apposite, therefore,
to examine the law in that regard.
JUDICIAL REVIEW AND THE ALTERNATE REMEDY ARGUMENT
8. The true basis of judicial review has been the subject matter of
discussion among legal scholars for many years. While under American
jurisprudence, even prior to the formal enunciation of a principle in
Marbury v. Madison, the court's power of judicial review was seen as
emanating from the larger concept of a fundamental law to which all
state action, including legislation, had to conform, in England, where
there was no written constitution, the basis for judicial review was often
seen located in the concept of Parliamentary sovereignty, and the allied
concept of 'ultra vires', that frowned upon any exercise of power by a
statutory authority that went beyond the mandate of the statute. In
more recent times, however, there has been a shift in judicial thinking in
England, and it is now fairly well established that judicial review is
nothing more than a means adopted by courts to uphold the rule of law
W.A.Nos.374/2021,73/2022 & 91/2022 :: 14 ::
in a modern day democratic republic. The many instances where courts
have thought it fit to interfere with decisions of non-statutory bodies
that have an impact on the rights of citizens, and where the doctrine of
ultra vires has no role to play, clearly reveal that the said doctrine is not
the sole basis for the exercise, by courts, of the power of judicial review.
Judicial review is no longer seen based solely on principles of statutory
interpretation, but on the application of some general principles of good
administration to the exercise of power, irrespective of the source of
that power.1
9. Tom Bingham2 observes that Ministers and public officers at all
levels must exercise the powers conferred on them in good faith, fairly,
for the purpose for which the powers were conferred, without exceeding
the limits of such powers and not unreasonably. Judicial review is the
tool that the courts use to ensure this standard. Review is an
appropriate judicial function since the law is the judges' stock-in-trade,
the field in which they are professionally expert. In the exercise of the
power of judicial review, judges do not substitute their view for that of
the statutory authority for they often do not have the expertise
necessary for taking such a view. They are expected to act only as
auditors of legality and nothing more.
1 Dawn Oliver, 'Is the Ultra Vires Rule the Basis of Judicial Review? - 1987 Public Law, 543
2 Tom Bingham, 'The Rule of Law', Penguin Books, London, 2011
W.A.Nos.374/2021,73/2022 & 91/2022 :: 15 ::
10. Under our Constitution, the power of judicial review is
traceable to Articles 32 and 226 that confer on the Supreme Court and
the High Courts the power to issue prerogative and like writs to protect
the citizens from state action that infringes upon their rights. The
Constitution being the supreme law of our land, and the rule of law
being one of its basic features, the exercise of statutory power has to
conform, inter alia, to the requirements of fairness,
non-arbitrariness and reasonableness, all of which are integral aspects
of the rule of law. Thus, when a litigant approaches a writ court, alleging
a breach of his rights - be it a constitutional right, a statutory right or a
common law right - by an authority empowered by the State, the court
examines the manner in which the decision was arrived at, and in
exceptional cases, the decision itself, to see whether it conforms to the
requirements mandated by the rule of law.
11. The writ jurisdiction being a discretionary jurisdiction, it is
for the constitutional courts to decide whether or not they should
exercise their discretion to entertain a writ petition. In that context, it
would be apposite to point out that there is a subtle distinction that
exists between instances when a court dismisses a writ petition as 'not
maintainable' and when it exercises its discretion against 'entertaining'
it. The former is a case where the court finds that the circumstances are
W.A.Nos.374/2021,73/2022 & 91/2022 :: 16 ::
such that it is rendered incapable of even receiving the lis for
adjudication whereas the latter is a case where the court finds that,
while it is competent to adjudicate the lis, the adjudication is better left
to other forums that are more suited for the same 3. An argument as
regards existence of an alternate remedy is one that is aimed at
persuading a court against 'entertaining' a writ petition that is
otherwise 'maintainable' before it. While accepting such an argument,
the court essentially finds that notwithstanding the petitioner having
made out a sound legal point it would be against public interest for it to
entertain and adjudicate the matter.
12. While it is fairly well settled that when confronted with
disputed questions of fact, the writ court will not ordinarily entertain a
writ petition, but leave it to the civil courts or statutory forums to
adjudicate the matter, it is equally well settled that the existence of an
alternate remedy is not a bar to the entertainment of a writ petition
where (i) the writ petition seeks the enforcement of any of the
fundamental rights, (ii) where there is a violation of the principles of
natural justice, (iii) where the order or the proceedings are wholly
without jurisdiction or (iv) where the vires of an Act is challenged. 4 That
apart, as observed in State of UP & Ors. v. Indian Hume Pipe Co. Ltd. 5
3 M/s Godrej Sara Lee v. Excise & Taxation Officer-cum-Assessing Authority - JT (2023) 2 SC 32
4 Whirlpool Corporation v. Registrar of Trade Marks, Mumbai & Ors - (1998) 8 SCC 1
5 (1977) 2 SCC 724
W.A.Nos.374/2021,73/2022 & 91/2022 :: 17 ::
and UOI v. State of Haryana6, and re-iterated most recently in M/s
Godrej Sara Lee Ltd v. Excise & Taxation Officer-cum-Assessing
Authority7 where the controversy is a purely legal one and it does not
involve disputed questions of fact but only questions of law, then it
should ideally be decided by the high court instead of dismissing the
writ petition on the ground of an alternate remedy being available. The
need for upholding the rule of law would also mandate that the high
court decide the matter in situations where the exercise of statutory
power does not conform, inter alia, to the requirements of fairness, non-
arbitrariness and reasonableness and therefore falls foul of the culture
of justification that is seen as a necessary and essential feature of
administrative decision making8. The said feature requires the decision
of the administrative authority to demonstrate responsiveness,
justification and demonstrated expertise. Responsiveness refers to the
requirement that the reasons given by the decision maker must respond
to the central issues and concerns raised by the parties by 'listening'
rather than merely 'hearing' the parties. Justification refers to the
principle that the exercise of public power must be justified, intelligible
and transparent, not in the abstract, but to the individuals subject to it.
Demonstrated expertise refers to the requirement of the decision maker
establishing the reasonableness of his decision by demonstrating therein
6 (2000) 10 SCC 482
7 JT (2023) 2 SC 32
8 Akshay N. Patel v. RBI - (2022) 3 SCC 694
W.A.Nos.374/2021,73/2022 & 91/2022 :: 18 ::
his experience and expertise. Added to the above is the requirement of
a reviewing court to understand the contextual constraints, if any, under
which the decision under review was rendered by the administrative
authority while assessing its reasonableness. 9
IS THE EXERCISE OF JUDICIAL REVIEW WARRANTED IN THESE CASES ?
13. A reading of the assessment orders and penalty orders that
are impugned in these cases would reveal that the assessing officer has
interpreted the terms of the contract entered into between the appellant
assessee and BPCL as requiring the appellant to transfer the property in
the plant put up by them on land leased from BPCL and also to sell to
BPCL the gases manufactured in that plant. The reasoning of the
assessing officer is to be found at pages 41 to 46 of the assessment
order and read as follows:
"The dealer is assessed to tax under section 6 of of the KVAT Act
as in the case of transfer of goods involved in execution of works
contract, where the transfer is not in the form of goods, but in some
other form, at the rate of 14.5%. Section 2(Iv) of the KVAT Act 2003 "works
contract includes any agreement for carrying out for cash or deferred
payment or other valuable consideration the construction, fitting out,
improvement, repair, manufacture, processing, fabrication, erection,
installation, modification, or commissioning of any movable or immovable
property.
The dealer signed an agreement with Bharat Petroleum Corporation Ltd on
9 Paul Daly, 'Vavilov and the Culture of Justification in Administrative Law' -
https://www.administrativelawmatters.com/blog/2020/04/20/vavilov-and-the-culture-of-justification-in-
administrative-law/
W.A.Nos.374/2021,73/2022 & 91/2022 :: 19 ::
August 21 2013 to build a Hydrogen, Nitrogen and HP steam plant to supply
BPCL's requirements for industrial gas products as BPCL owns and operates a
refinery at Kochi, Kerala, India and has a requirement for Hydrogen, Nitrogen
and HP Steam. BPCL also intends to form a joint venture to build and operate
a petrochemical plant to be located near BPCL's Plant (as defined herein). In
response to BPCL's invitation for bid (bid document BPCL/IREP/BOO/01 dated
14 September 2012 and its Amendments), Air Products and Chemicals, Inc.
(APCI), BOO OPERATOR's parent company, submitted an offer dated 26
January 2013, as revised on 22 March 2013, to (i) build a Hydrogen and
Nitrogen plant to supply BPCL's requirements for Hydrogen, Nitrogen and
Steam and (ii) to build Hydrogen, Nitrogen, Oxygen and Syn Gas plants to
supply the joint venture's requirements for Industrial gas products.
Sri. Mallikarjuna Reddy, Representative of M/s. Prodair Air Products India Pvt
Ltd. filed a reply along with copy of agreement executed with Contractors such
as M/s. Ray Engineering, Simplex Infrastructure, M.P. Paulose etc. and copy of
Profit and Loss Account and Balance Sheet for the years 2014-15 and 2015-16
before the State Tax Officer(lB), Mattancherry at Aluva while hearing their
case as evident from the penalty order Order No.IBM-III/IR-85/2016-
17/OR-1/2020-21(2016-17) dt. 06.07.2020. Later the company filed a letter
on 29.05.2017, vide paper read as 14" cited. On 03.06.2017, Sri. Mallikarjuna
Reddy, Representative of M/s. Prodair Air Products lndia Pvt. Ltd. appeared
and gave statement before the State Tax officer that they have incurred above
Rs.2000 crores for setting up the Plant and Machinery generating Hydrogen,
Nitrogen, Oxygen and Syn Gas exclusively for BPCL in the land allocated by
BPCL on lease. It is also stated that the Basic Facility Charges of Rs.30
Crores per month is given by BPCL to M/s. Prodair Air Products India
Pvt. Ltd. for 15 years of leased period and Mls. Prodair Air Products
Ltd. raising invoices towards this as Fixed Monthly Charge for
Hydrogen and Nitrogen and it is Return of Investment (ROI) i.e.,
repayment of the expenses incurred by M/s. Prodair Air Products lndia Pvt. Ltd
for setting up the Plant and Machinery in the land allocated by BPCL on lease
i.e., the way of recouping the expenses incurred for setting up the Plant and
Machinery is through raising invoices for Fixed Monthly Charges for Hydrogen
and Nitrogen. They are raising separate invoices for supply of industrial gases
such as Hydrogen, Nitrogen, Oxygen and Syn Gas. It is also stated that they
are not making any sale of industrial gases to dealers other than BPCL and
they are not permitted to do so without the consent of BPCL.
Hence from the statement above extracted from the penalty order Order
No.IBM-III/IR-85/2016-17/OR-1/2020-21(2016-17) dt. 06.07.2020 itself
makes it evident that the assessee is engaged in works contract with BPCL
limited for deferred payment of cash in monthly installment for 15 years as
Fixed charges on BPCL vide Article 15 of the agreement entered into between
the parties. Further the assessee himself awards contracts to various dealers
in its own name and purchases made from both local and interstate using its
own TIN, and no goods were stock transferred in from their parent company, in
whose name the agreement was entered into from interstate which proves the
same as a local works contract.
W.A.Nos.374/2021,73/2022 & 91/2022 :: 20 ::
Further Article 3.5 of the agreement entered into between the parent company
of the dealer with BPCL provides that the construction and commissioning of
the Production Plant shall be under periodical inspection of representatives of
BPCL undertaken with reasonable notice and in accordance with the safety
rules of BOO OPERATOR. Article 5.4 of the agreement "the authorised
representatives of BPCL shall have free access to BOO Operators Production
Plant during erection and commissioning and during operation phase
throughout the term of this agreement subject to reasonable notice and
compliance with safety rules" makes it clear that BPCL is not only interested in
ensuring regular and timely supply of industrial gases as the same was
ensured through Article 3.7 "For any delay in commissioning of the Production
Plant and meeting the First Delivery Date of Products for reasons attributable
to BOO OPERATOR and not due to any event of Force Majeure, BOO
OPERATOR shall compensate BPCL for the loss suffered by BPCL in the form
of genuine liquidated damages in accordance with Article 26."
When the Article 5.4 read with Article 3.7 of the agreement it evidents that for
ensuring the commissioning and delivery of the product in the agreed time is
ensured by the Article 3.7, and the provision made in Article 5.4 clearly
indicated BPCL's interest as an awarder in the design, layout, construction and
commissioning of the work undertook by Prodair.
Under Article l5.1 Upon the commencement of the Term, the payment of the
respective Fixed Monthly Charges and the Product Variable Charges will begin
in accordance with this Article 15. The Fixed Monthly Charges for Hydrogen
and Nitrogen are defined below in Article 15.1.1.
A) Fixed Monthly Charge for BPCL
This will have three components
1. Constant amount (towards return on investment (ROI) of BOO
OPERATOR).
2. Component related to wholesale price indexed (WPI) for manufactured
products (towards maintenance cost and other overheads).
3. Component related to consumer price index (CPI) for industrial workers
(towards manpower cost)
From the above article it is evident that the the dealer charges from BPCL, its
Return on Investment in monthly installments for 15 years, and cost of
maintaining the plant and an amount towards manpower cost apart from the
Variable Charges for the actual supply of industrial gases based on the actual
reading. Since the monthly fixed charges to be collected from BPCL to
Rs.30,62,45,992.00 including the VAT charged @ 5% by the dealer
Rs.1,72,26,337.00, even if there is no escalation made on the above, total fixed
charge receivable by the company, for 15 years comes to Rs.5512,42,78,560.00
roughly 3 times of the investment made by the dealer.
A summary of monthly invoices raised by the Company to BPCL is provided
W.A.Nos.374/2021,73/2022 & 91/2022 :: 21 ::
below:
Period Particulars Taxable Value Excise Duty VAT Invoice Value
Jan - 17 Variable Cost invoice 40972.00 5121.50 2304.68 48398.18
values
Feb - 17 Fixed Cost invoice 24826899.52 3,103,362.44 1,39,6513.1 29,326,775.06
values
Variable Cost invoice 8,905,220.24 1,113,152.53 500,918.64 10,519,291.41
values
Mar- 17 Fixed Cost invoice 306,245,992.56 38,280,749.07 17,226,337.08 361,753,078.71
values
Variable Cost invoice 262,714,798.49 31,290,250.12 15,877,568.19 309,882,616.81
values
Apr - 17 Fixed Cost invoice 17,221,83
values 306,165,870.32 38,270,733.79 0.21 361,658,434.32
Variable Cost invoice 552,145,985.82 64,119,303.34 34,536,462.67 650,801,751.82
values
May - 17 Fixed Cost invoice 306,230,345.84 38,278,793.23 17,225,456.95 361,734,596.02
values
Variable Cost invoice 633,664,622.68 71,598,885.15 41,046,161.84 746,309,669.66
values
Jun - 17 Fixed Cost invoice 306,390,298.56 38,298,787.32 17,234,454.29 361,923,540.17
values
Variable Cost invoice 525,189,209.88 55,889,103.18 36,471,172.17 617,549,485.23
values
Total 3,232,520,215.91 380,248,241.66 198,739,179.82 3,811,507,637.39
As evident above, the invoices for fixed monthly charge was raised from
February 2017.i..e. when the company, started to produce and supply the
gases to BPCL.
As per Article 30.4 On completion of 15 (fifteen) years from the date of
First Delivery of last delivered Product, this Agreement shall automatically
W.A.Nos.374/2021,73/2022 & 91/2022 :: 22 ::
terminate without any compensation to either Party, unless extension of the
term of the Agreement is agreed in writing between BPCL and BOO
OPERATOR. Discussions on renewal of this Agreement and the terms thereof
shall begin on completion of the 10" year of the Term.30.5 In case of
termination of this Agreement in accordance with Article 30.4, BPCL will have
the first right of refusal to acquire the Production Plant by compensating the
BOO OPERATOR at Fair Value.
From the above articles, quoted from the agreement entered into
between parties, on termination of this Agreement in accordance with Article
30.4, BPCL will have the first right of refusal to acquire the Production Plant
by compensating the BOO OPERATOR at Fair Value. Since the dealer has given
roughly 3 times of their investment during the above period by BPCL who have
the right of refusal to acquire the Production Plant by compensating the BOO
OPERATOR at Fair Value, and the written down value of the plant after
adjusting the depreciation over the years will be less than 10% of the current
value, the fair price for the transfer can be a nominal amount since the leader
has already recouped 3 times of their investment and also gained from the
sales of industrial gases as variable cost received from BPCL based on actual
reading.
Further the agreement between the parent company of the dealer and
BPCL had entered on the wake of the requirement of Bharat Petroleum
Corporation Ltd, to implement the Integrated Refinery Expansion Project
(IREP) and it is necessary for BPCL's Kochi Refinery to ensure a continuous
and reliable supply of Hydrogen, Nitrogen and HP steam of specific
parameters so as to increase the production of their petroleum products. BPCL
also intends to form a joint venture to build and operate a petrochemical plant
to be located near BPCL's Plant. From the same it was evident that BPCL
needed continued supply of such industrial gases and intends to acquire the
plant after the agreed period. For that purpose the lease period was limited for
15 years, and with a nominal lease value of Rs.1/acre.
All the above facts proves that the agreement entered into between the
parent company of Prodair and BPCL was for a works contract, for setting up a
production plant for BPCL's exclusive purpose and the consideration was given
as deferred payment through the Fixed monthly charges of around Rs.30
crores per month, which help the dealer to recoup their investment in 15 years
and also collected the value of industrial gases supplied to them as variable
charges based on actual reading.
Since the goods which was suppressed from the books of accounts
became the part of the goods used for works contract and its transfer was
made not in the form of goods the suppressions established by this order is
taxed @ 14.5%."
14. As against that, the relevant clauses in the agreement that
deal with the scope of the work and the payment terms read as follows:
W.A.Nos.374/2021,73/2022 & 91/2022 :: 23 ::
"A. BPCL owns and operates a refinery at Kochi, Kerala, India and
has a requirement for Hydrogen, Nitrogen and HP Steam.
BPCL also intends to form a joint venture to build and operate
a petrochemical plant to be located near BPCL's Plant (as
defined herein).
B. In response to BPCL's invitation for bid (bid document
BPCL/IREP/BOO/01 dated 14 September 2012 and its
Amendments), Air Products and Chemicals, Inc. (APCI), BOO
OPERATOR's parent company, submitted an offer dated 26
January 2013, as revised on 22 March 2013, to (i) build a
Hydrogen and Nitrogen plant to supply BPCL's requirements
for Hydrogen, Nitrogen and Steam and (ii) to build Hydrogen,
Nitrogen, Oxygen and Syn Gas plants to supply the joint
venture's requirements for industrial gas products.
C. BPCL issued a letter of acceptance to APCI dated 15 May 2013
stating its desire to purchase Hydrogen, Nitrogen and HP
Steam from APCI and APCI, as agreed, formally authorised the
wholly owned subsidiary of APCI in India i.e, Prodair Air
Products India Pvt. Limited as BOO OPERATOR to build own
and operate a Hydrogen and Nitrogen manufacturing plant."
ARTICLE 3 - BUILD
3.1 BOO OPERATOR shall design, procure and construct the Production
Plant for the supply of Hydrogen, HP Steam and Nitrogen to BPCL.
3.2 BOO OPERATOR shall submit specifications of flow meters for
Product, Feed and Utilities, to be installed at the Delivery Point of
the Production Plant ,to BPCL for their review prior to their
procurement as in Article 9. Any disagreement on these
specifications will be settled mutually between BPCL and BOO
OPERATOR. BOO OPERATOR shall also submit to BPCL the
documents listed in Appendix 15.
3.3 BOO OPERATOR shall obtain necessary clearances, permissions and
licenses, if any, applicable for the construction, installation and
commissioning of the Production Plant as required before start of
construction as well as from time to time from the appropriate
authorities at local, state and national levels for operations of the
Production Plant. The requisite regulatory permission to work under
the existing PRU are will be obtained by BPCL.
3.4 BOO OPERATOR shall ensure implementation of efficient project
management and Quality Assurance Systems during the installation
period.
3.5 The construction and commissioning of the Production Plant shall be
W.A.Nos.374/2021,73/2022 & 91/2022 :: 24 ::
under periodical inspection of representatives of BPCL undertaken
with reasonable notice and in accordance with the safety rules of
BOO OPERATOR.
3.6 BOO OPERATOR shall adhere to the schedule of commissioning of
the Production Plant and in no case shall BOO OPERATOR delay
commissioning of the Production Plant due to any reason
whatsoever other than BPCL delaying commencement of the First
Delivery Date, Force Majeure and subject to BPCL fulfilling its
obligations under this Agreement.
3.7 For any delay in commissioning of the Production Plant and meeting
the First Delivery Date of Products for reasons attributable to BOO
OPERATOR and not due to any event of Force Majeure, BOO
OPERATOR shall compensate BPCL for the loss suffered by BPCL in
the form of genuine liquidated damages in accordance with Article
26.
3.8 BPCL assumes responsibility for MoEF clearance to enable BOO
OPERATOR to undertake construction of the Production Plant and
supply Products to BPCL. Any delay on account of MoEF clearance
will not affect the compensation to BOO OPERATOR from the agreed
or rescheduled First Delivery Date. BOO OPERATOR shall follow all
the norms and regulations of the Central Pollution Control Board /
State Pollution Control Board and guidelines stipulated under MoEF
clearance of BPCL's Integrated Refinery Expansion Project at Kochi.
BOO OPERATOR shall obtain all necessary permissions/certificates
in this regard as applicable from the appropriate authority.
3.9 BOO OPERATOR shall follow all applicable statutory provisions
including labour laws and industrial laws for installation of the
Production Plant and in no case the employees or workers engaged
by BOO OPERATOR, directly or indirectly, shall be the employees of
BPCL and claim for the same. For any breach of this Article 3.9 by
BOO OPERATOR and/or its representatives, BPCL shall be
indemnified against any claim or demand made by any authority
against BPCL.
3.10 BOO OPERATOR shall ensure that all the personnel and employees
engaged by them in operating the Production Plant for the
continuous supply of Hydrogen, HP Steam and Nitrogen to BPCL
shall follow all the applicable safety rules.
3.11 Hydrogen, HP Steam and Nitrogen shall be supplied by BOO
OPERATOR at the Delivery Point. Pipelines from BOO OPERATOR's
Production Plant to the Delivery Point shall be installed, owned,
operated and maintained by BOO OPERATOR at its own expense.
3.12 BOO OPERATOR, at its premises and expense, will construct the
Production Plant including supply pipelines to the Delivery Point and
W.A.Nos.374/2021,73/2022 & 91/2022 :: 25 ::
connect these pipelines with BPCL's pipelines / systems at BOO
OPERATOR's battery limit, subject to Article 3.11.
3.13 BOO OPERATOR, at its own Products expense, shall install Metering
Equipment for measuring to BPCL for meeting excise requirements.
BOO OPERATOR shall also, at its own expense, install Metering
Equipment in the BPCL premises for Feed and Utilities and
maintain, repair and replace the Metering Equipment as stipulated
in Article 9. The Metering Equipment shall at all times remain the
property of BOO OPERATOR. The total quantity of Hydrogen, HP
Steam and Nitrogen supplied to BPCL shall be measured by the
Metering Equipment. The Metering Equipment shall be integrating
type flow meter and measurement of Natural Gas and Nitrogen will
be in volume, the unit of which shall be the Normal Cubic Meter
(NM3). Hydrogen, HP Steam, DM Water, Hydrogen rich off gas,
Naphtha, flare gas, start up Hydrogen, start up HP Steam shall be
measured in Tonnes. The Metering Equipment of Natural Gas and
Hydrogen Rich Off Gas will have provision for measuring caloric
content and the pricing of Natural Gas and Hydrogen Rich Off Gas
will be based on this caloric content. Raw water, potable water, fire
water will be measured in cubic meters. Back-up power to and from
BOO OPERATOR will be measured through TOD Energy Meters.
3.14 BOO OPERATOR shall also ensure that materials of construction of
all pipelines and various systems at BOO OPERATOR's Delivery
Point are compatible with BPCL's pipelines and systems.
ARTICLE 4 - OWN
4.1 The Production Plant along with all other systems, pipelines,
metering system, etc. installed by BOO OPERATOR to meet its
obligations under this Agreement shall be the property of BOO
OPERATOR at all times during the Term of this Agreement and
alter the termination of this Agreement unless transferred or
removed in accordance with the terms herein, and BPCL will not
create liens, mortgages or charges over any property of BOO
OPERATOR.
4.2 BOO OPERATOR shall take all necessary steps for the registration
of the Production Plant and obtaining the necessary licenses and
permissions from all the appropriate authorities for owning the
Production Plant.
4.3 BOO OPERATOR shall notify BPCL regarding the readiness of the
Production Plant separately for Hydrogen and Nitrogen. BPCL
will, thereafter, decide upon a date for carrying out a test run for
capacity and product quality demonstration as defined in
Appendices 9 and 10 and notify the same to BOO OPERATOR. The
duration of this test run will be maximum of 24 hours for each
train / Product. The modalities and format for the test run shall be
W.A.Nos.374/2021,73/2022 & 91/2022 :: 26 ::
mutually agreed upon in writing between BOO OPERATOR and
BPCL. If BOO OPERATOR fails to demonstrate the performance
with respect to capacity and Products quality(es), BOO OPERATOR
will be given an opportunity for corrective engineering to
demonstrate performance through a subsequent test run. BPCL
will provide all the Feed and Utilities under BPCL's scope of supply
at cost including taxes and duties to BOO OPERATOR for the
commissioning and first test run of the units and for all subsequent
test runs.
The test run will be separately carried out for Hydrogen (train wise)
and Nitrogen, within 6 (six) months from the First Delivery Date of
the respective Product. BPCL will accept and pay for Products
produced during this first performance test run.
ARTICLE 5 - OPERATE
5.1 BOO OPERATOR shall ensure that the Production Plant is
completed and fully operational within the time schedule specified
in Article 12 and capable of delivering Hydrogen HP Steam and
Nitrogen to BPCL at required parameters.
5.2 BOO OPERATOR shall engage its personnel and employees and
workers directly for operating and maintaining the Production
Plant. Shift supervisors should have at least a Degree in Chemical
Engineering with minimum 5 years of experience in operation of a
steam methane reformer and at least a Diploma in Engineering
with minimum 3 years experience in operation of an air separation
unit.
5.3 BOO OPERATOR shall arrange to procure all necessary clearances,
permissions and licenses required for the operation of the
Production Plant and BPCL render shall all necessary assistance to
BOO OPERATOR, including providing relevant documents, and
certificates, to enable BOO OPERATOR to obtain such clearances,
permissions and licenses.
5.4 The authorised representatives of BPCL shall have free access to
BOO OPERATOR's Production Plant during erection and
commissioning and during the operation phase throughout the
term of this Agreement, subject to reasonable notice and
compliance with safety rules of BOO OPERATOR.
5.5 Representatives of B00 OPERATOR and BPCL shall meet to
co-ordinate, as far as reasonably possible for planning Scheduled
Maintenance of the Hydrogen and Nitrogen Plants.
5.6 At least 6 (six) Months prior to the expected First Delivery Date,
the Parties shall develop and agree upon an Operating Protocol
which shall include emergency response procedures to be
W.A.Nos.374/2021,73/2022 & 91/2022 :: 27 ::
applicable during the Production Plant operating period.
ARTICLE 6 - SUPPLY
6.1 From the First Delivery Date and thereafter continuously during
the Term and in accordance with the stipulations of this
Agreement, BOO OPERATOR shall operate the Production Plant to
supply BPCL requirements of Hydrogen, Nitrogen and HP Steam.
Supply of the products to other consumers is not envisaged in this
Agreement. However BOO Operator and BPCL / PETCHEM-JV may
consider such option on mutually agreed terms later.
6.2 Representatives of BOO OPERATOR and BPCL shall meet to
coordinate, as agreed, for planning scheduled requirements of the
Hydrogen, HP Steam and Nitrogen.
6.3 On receiving communication from BPCL, BOO OPERATOR shall
adjust the production level to match with change in demand within
the turn down capability of the relevant Production Plant. Such
adjustments will be @ 1% minimum per 3 (three) minutes for the
Hydrogen Plant and @ 0.25 minimum per minute for the Nitrogen
Plant of actual capacity of the plant running at that point of time,
as ramp-up or ramp-down rate.
6.4 If BPCL requires Nitrogen at ow rates higher than 100% of the
Contracted Quantity, then BOO OPERATOR will use all reasonable
endeavours to supply the required additional Nitrogen at the prices
set forth in Article 7.3.
6.5 If BPCL requires. Hydrogen at flow rates higher than the
Contracted Quantity or in excess of those permitted by the
operating limitations, then BOO OPERATOR shall endeavour, but
have no obligation to supply the required additional Hydrogen. The
additional Hydrogen shall be at the same price as set forth in
Articles 15.1.1 and 15.1.3.
6.6 BPCL shall notify BOO OPERATOR to rectify the quality of
Hydrogen, HP Steam and Nitrogen ,as the case may be, in case it
falls below the Specifications.
6.7 BOO OPERATOR and BPCL shall adopt and comply with
operational and communication guidelines as mutually agreed in
writing from time to time.
7.1 BOO OPERATOR will sell and deliver Hydrogen H P Steam and
Nitrogen at the Delivery Point and BPCL will purchase and receive
from BOO OPERATOR, Hydrogen, HP Steam and Nitrogen
requirements set forth in this Article 7. BPCL shall have the right
to use these Products without restriction in any of the BPCL Plants.
W.A.Nos.374/2021,73/2022 & 91/2022 :: 28 ::
7.2 BOO OPERATOR will deliver Requested Quantities of Hydrogen,
HP Steam and Nitrogen to BPCL to meet the requirements of BPCL
at the Delivery Points as set forth below:
7.2.1 Hydrogen
Maximum instantaneous requirement for BPCL 15.3 Tonne/h
Minimum Instantaneous requirement for BPCL 5.74 Tonne/h
until PET CHEM-JV is accepting Hydrogen and 5.35
Tonne/uh thereafter. BPCL may request BOO OPERATOR to
shut down one train of the Hydrogen Plant and the Parties
shall develop together a single train operating mode in the
Operating Protocol.
7.2.2 HP Steam
Minimum instantaneous HP Steam supply will be guaranteed
at 60-T/h when both Hydrogen trains are operating and at
30 T/h when single Hydrogen train is operating. Maximum
instantaneous HP Steam supply shall not exceed 250 MT/h
for all windows of operation as set out in Appendix 9.
10.1 BOO OPERATOR, at its own expense, will construct, operate and
maintain the Production Plant on the land allocated by BPCL under
lease for use for the purpose of setting up the Production Plant for
the period required for the construction of the Production Plant
plus 15 years from the date of First Delivery of last delivered Product
unless terminated earlier in accordance with this Agreement and any
extension of this Agreement as may be agreed between BOO
OPERATOR and BPCL. The Production Plant will remain the property
of BOO OPERATOR at all times and may be removed by BOO
OPERATOR within 12 twelve months of the expiry or termination
of the Agreement. Should BOO OPERATOR fail to remove the
Production Plant or any part thereof from the leased site or to vacate
the site within the said 12 (twelve) month period, BOO OPERATOR's
Production Plant or such part thereof as remains unremoved and BOO
OPERATOR's property whatsoever remaining on the Production Plant
Site shall vest in BPCL free from any mortgage, charge, pledge,
hypothecation or other encumbrance or third party rights
whatsoever and/or liabilities whatsoever and shall be entitled to
take such measures as it considers necessary including but not
limited to measures under the Public Premises Eviction
of Unauthorised Occupants Act, 1971 for the eviction of all BOO
OPERATORs or third party personnel or their agents or
representatives from the site.
10.1.1 BOO OPERATOR shall use the leased land for setting up operating
and maintaining the Production Plant only pursuant to this
Agreement and not for any other purpose, including any other
commercial activity or residential purpose without the consent of
BPCL.
W.A.Nos.374/2021,73/2022 & 91/2022 :: 29 ::
10.1.2 BPCL and BOO OPERATOR shall execute a Lease Agreement for
the use of the leased land in the form set out in Appendix 4.
10.1.3 Upon formation of the PETCHEM-JV, it is the intent that BOO
OPERATOR and PETCHEM-JV enters into an agreement for the
supply of Hydrogen, Syn Gas, Nitrogen and Oxygen on terms that
are similar to the extent applicable to this Agreement.
13.1 The scope of work of B00 OPERATOR shall be to build, own, operate
and maintain the Production Plant and "supply Hydrogen, Nitrogen
and HP Steam to BPCL in accordance with the provisions of this
Agreement.
15.1 Upon the commencement of the Term, the payment of
the respective Fixed Monthly Charges and the Product Variable
Charges will begin in accordance with this Article 15. The Fixed
Monthly Charges for Hydrogen and Nitrogen are defined below in
Article 15.1.1. The Variable Charges for Hydrogen, Nitrogen and
HP Steam are defined below in Article 15.1.3."
15. What is apparent from the above is that while the agreement
envisages that the appellant will build, own and operate a plant on land
leased from BPCL for the purposes of supplying specified gases to BPCL,
there is no transfer of the property in the plant, or any part of it, to
BPCL. In fact, the assessing authority also admits this when he states
that it is only on termination of the agreement entered into between the
parties that BPCL gets the first right of refusal to acquire the production
plant by compensating the appellant BOO Operator. His finding,
however, is that insofar as the plant has been set up on land belonging to
BPCL, albeit leased to the appellant, there is an accretion of the plant on
land belonging to BPCL and hence the activity attracts the definition of
W.A.Nos.374/2021,73/2022 & 91/2022 :: 30 ::
works contract under the KVAT Act, which reads as follows:
"(lv) "Works contract" includes any agreement for carrying out for
cash or for deferred payment or other valuable consideration the
construction, fitting out, improvement, repair, manufacture,
processing, fabrication, erection, installation, modification or
commissioning of any movable or immovable property;
16. What the assessing officer completely overlooks, however, is
the fact that there has been no transfer of the property in the goods
involved in the execution of the works contract. The taxable event under
the KVAT Act is not the execution of a works contract but the transfer of
the property in the goods involved in the execution of the works
contract. The latter aspect being absent in the transaction between the
appellant and BPCL, as evident from the findings of the Intelligence
Officer in the penalty orders, based on which the assessing officer
rendered similar findings in the assessment orders, the assessing officer
virtually usurped to himself the jurisdiction to tax a 'works contract' by
erroneously assuming the existence of the jurisdictional fact/taxable
event that would have conferred him with such a jurisdiction. The
Intelligence Officer who confirmed the penalty on the appellant, as also
the assessing officer who followed the said order while completing the
assessments against the appellant by treating the transaction between
the appellant and BPCL as a works contract, clearly find that the
ownership of the plant continued with the appellant BOO operator for 15
years or till BPCL exercised its option to take over the plant in terms of
W.A.Nos.374/2021,73/2022 & 91/2022 :: 31 ::
the agreement. They, however, treated the recovery of a portion of the
investment in plant and machinery, as a part of the fixed component of
the price of the gas supplied, as a disguised payment of consideration for
the sale of the plant and applied the rate of tax applicable to works
contract to the turnover of the gas supplied. This was patently illegal for
the manner of pricing of the gas could not be used to determine the
nature of the transaction or the character of the payment, as rightly
pointed out by the learned senior counsel for the appellant. To illustrate
the matter using an analogy, if A were to contract with B to provide
electricity to B's premises using a generator belonging to A, then even if
A charged B a price higher than the usual per unit electricity charges
that would have been charged by a licensee under the Electricity Act,
the agreement could not be construed as one where A had undertaken a
works contract for B wherein the property in the generator had also
passed from A to B, along with the electricity that was supplied using
that generator. This would be the case, even if the generator was
fixed/embedded firmly in B's property for the purposes of supplying the
electricity contracted for. So long as the contract between the parties did
not envisage the transfer of property in the generator, the contract
would remain as one for the mere supply of electricity, notwithstanding
that a part of the cost of the generator might have been recouped by A
through incorporating the said cost in the price of the electricity
W.A.Nos.374/2021,73/2022 & 91/2022 :: 32 ::
supplied. As observed by the Supreme Court in Raza Textiles10;
"No authority, much less a quasi-judicial authority, can confer
jurisdiction on itself by deciding a jurisdictional fact wrongly. The
question whether the jurisdictional fact has been rightly decided or not
is a question that is open for examination by the High Court in an
application for a writ of certiorari."
17. We are of the view that this is a clear case where the taxing
authority assumed a jurisdiction that it did not have and hence it would
be a case of palpable injustice to the appellant herein to force it to adopt
the remedies provided by the statute.11
18. While on this subject, and going by the number of instances
that we have come across of assessing authorities passing orders in a
mechanical manner without showing how the taxable event is attracted
in a given case or without giving reasons for denying the claim of an
assessee for exemption or deduction, we deem it appropriate to observe
that in matters of assessment under a taxing statute, the requirement of
fairness, that is an integral aspect of the rule of law in our country,
mandates that an assessing authority should apply its mind to the
various factors that influence an assessment and give sufficient
indication in the assessment order of having done so. This would
necessitate his/her giving reasons for the finding regarding the existence
of the taxable event that attracts the charge of tax as also other factors
10 Raza Textiles Ltd. Rampur v. Income Tax Officer - (1973) 2 SCC 154
11 State of HP v. Gujarat Ambuja Cement Ltd - (2005) 6 SCC 499
W.A.Nos.374/2021,73/2022 & 91/2022 :: 33 ::
that result in a demand from an assessee of more tax than what has been
admitted by him/her as payable. The profile of an assessing authority can
no longer be that of a stern and unreasonable automaton that is
programmed solely to collect the tax that the revenue department feels
is due from an assessee. The right of an assessee to seek justification of
state action would mandate that this court step in to correct
unreasonable orders of assessing authorities so as to uphold the culture
of justification that legitimizes state action.
In the result, we allow these writ appeals as follows:
(i) W.A.No.374 of 2021 is allowed by setting aside the impugned
judgment of the learned Single Judge as also setting aside the
penalty orders for assessment years 2016-17 and 2017-18,
impugned in the writ petition.
(ii) W.A.No.73 of 2022 is allowed by setting aside the impugned
judgment of the learned Single Judge as also the order for the
assessment year 2017-18 that was impugned in the writ petition,
to the extent it did not grant credit of the input tax paid on capital
goods on the ground that the property in question did not belong
to the appellant. The adjudicating authority shall consider the
issue afresh in the light of the observations and directions in this
judgment.
(iii) W.A.No.91/2022 is allowed by setting aside the impugned
judgment of the learned Single Judge and quashing the
W.A.Nos.374/2021,73/2022 & 91/2022 :: 34 ::
assessment orders for the assessment years 2015-16, 2016-17 and
2017-18, save to the extent the said assessment orders deal with
the disallowance of the input tax credit to the appellant. The
appellant is given liberty to agitate the latter issue before the
appellate authority concerned for the said assessment years. The
appellant is also permitted to file a reply to the show cause notice
issued for the assessment year 2014-15 so as to enable the
assessing authority to complete the assessment for the said
assessment year in the light of the findings and directions in this
judgment.
Sd/-
A.K.JAYASANKARAN NAMBIAR
JUDGE
Sd/-
MOHAMMED NIAS C.P.
JUDGE
prp/
