Prodair Air Products India Private Limited Vs State of Kerala (Kerala High Court)
Kerala High Court held that order passed rejecting claim of input tax credit (ITC) on purchase of capital goods without giving reasons for rejecting the same is unjustified and unsustainable.
Facts- The appellant is a private limited company involved 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 was also a registered dealer under the Kerala Value Added Tax Act (KVAT Act).
It was stated that to implement 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 to increase the production of their petroleum products. They accordingly published a notification inviting bids for the supply of these gases. The appellant responded to the said notification and was eventually awarded the contract.
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 a lease basis, to ensure 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 Fixed Monthly Charges as well as Variable Charges. The Fixed Monthly Charges consist of a 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, comprise the variable costs of producing 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.
The assessing authority 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 about 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.
Conclusion- Held 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 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.
FULL TEXT OF THE JUDGMENT/ORDER OF KERALA HIGH COURT
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 BRIE F
2. The appellant is stated to be a private limited company 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 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, 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 201415 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, 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 COUNSE L
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:
