The matter of the applicability of direct and indirect taxes to supplies of goods and services from India to offshore installations, typically situated in the Exclusive Economic Zone (EEZ) i.e. within 200 nautical miles of the appropriate baseline, as per the Territorial Waters, Continental Shelf, Exclusive Economic Zone and other Maritime Zones Act 1976 (MZA for short), has been the subject of much litigation. This has been the case particularly with the State sales tax, especially the central sales tax. There have been many judgements on the point and several of them have been contradictory to each other.
In a previous article on this subject, the decision pronounced by the Larger Bench of the Maharashtra Tribunal in the case of M/s Industrial Oxygen Company Limited (the appellants) Vs. State of Maharashtra [(2010) 44 M.T.J. 89] was discussed wherein the supply of helium gas from Mumbai port to ONGC at the Bombay High offshore oilfields, situated within the EEZ, was held to be an inter-State sale by relying heavily on the decision of the Supreme Court in the case of Aban Loyd Chiles Offshore Ltd Vs. Union of India (2008) 227 E.L.T. 24 (S.C.), wherein it had been held that the designated areas in the EEZ were deemed to be a part of the territory of India, for the purposes of the Customs Act. The Tribunal quoted extensively from the above case and concluded that the apex Court had clearly held that Bombay High was part of the territory of India and hence any supplies made to Bombay High would be exigible to tax under the Central Sales Tax Act, 1956 (‘CST’).
Interestingly, in a very recent case of M/s Larsen and Toubro Ltd. Vs. Union of India (Special Civil Application No. 5575 / 2011), the Gujarat High Court, while deciding a writ petition, has held that goods supplied from Gujarat to ONGC’s oilfield in Bombay High does not constitute an inter-State sale under the CST, thereby directly contradicting the decision in Industrial Oxygen. Also, the High Court has relied on the decision in Aban Loyd to come to its conclusion! In this case, the petitioners had entered into four indivisible turnkey projects consisting of both supply of goods and rendition of services. To execute such turnkey contracts, the petitioners had arranged for supplies of certain parts, equipment and machinery from their Hazira plant to ONGC at their Bombay High oilwells, which were situated around 180 kms off the baseline of the coast of India and which hence formed part of the EEZ. These goods were therefore used in the execution of the turnkey projects and by virtue of the contractual terms, the title to these goods passed at Bombay High, at the time of such usage, and not at the time of shipment from plant at Hazira. These facts were not in dispute.
The sales tax authorities in Gujarat held these supplies to be taxable under the CST Act. While the petitioners filed a writ on several grounds, the Court confined itself to deciding only the first and substantial ground as to whether the supplies of goods from Hazira to Bombay High were at all taxable under the said Act. The Court examined in detail the provisions of the MZA and observed that while the Union of India had certain sovereign rights over the EEZ, it did not have sovereignty over the zone. Further, these sovereign rights were only for limited purposes. More importantly, the MZA empowered the Central Government to issue specific notifications to extend the ambit of certain laws to any part of the EEZ and to make such provisions as were necessary for the enforcement of such laws in the EEZ. Accordingly, the EEZ was deemed to be a part of the territory of India only for the limited purpose of the extension and application of notified law. Since, as per Section 3(a) of the CST Act, a sale of goods is inter alia deemed to take place in the course of inter State trade or commerce if it occasions the movement of goods from one State to another, the Court concluded that the movement of goods from Hazira to Bombay High was not covered within the expression “movement of goods from one State to another”, as above since Bombay High did not form part of the territory of India in any general sense, under the MZA or any other law.
Further, the Court noted that while the Government had issued notifications under various fiscal statutes such as the Income Tax Act, the Customs Act, the Central Excise Act and the Finance Act, 1994 to extend the income tax, customs, excise and service tax provisions to the EEZ, no such notification had been issued to extend the provisions of the CST Act to the EEZ. In the absence of such a notification, the Court held that the Gujarat VAT authorities could not demand tax under the CST Act on the transactions in question, particularly as the transfer of property of goods took place in Bombay High. While the Court took note of various decisions in coming to its conclusions, it particularly noted that the decision in Aban Loyd was on the point that since the customs law was expressly extended to the EEZ, it was applicable to supplies to the zone. Since no such extension of the CST law had been made, the decision in Aban Loyd meant that this Act could not apply to the EEZ.
The High Court also discussed the ratio in the case of Murli Manohar and Co. and another Vs. State of Haryana (1991 (1) SCC 3777), wherein the Apex Court had held that any sale effected by an assessee must fall in one of three categories, namely local sales, inter State sales or sales in the course of export outside the territory of India and that there could not be a fourth category of sale, in addition to the above.
The Court however concluded that the observations of the Apex Court in the aforesaid case were obiter and could not be seen in isolation as the facts in the instant case were materially different in as much as the transaction had occasioned the movement of goods from an Indian State to a territory which was not a part of India and over which India only had sovereign rights for the limited purpose of exploiting the natural resources etc. as laid out in the MZA.
Thus, the question of whether the transaction, if not an inter State sale, should necessarily qualify as an export of goods outside the country, in order not to be exigible to the tax, was not addressed and answered by the Court. It will be interesting to see if the decision is accepted by the tax authorities.
The above decision will come as a respite for the upstream oil and gas industry in relation to their offshore oilfield activities. It remains to be seen as to how this issue will be addressed under the forthcoming GST, especially for a bundled supply of goods and services provided in the EEZ.
The author is Executive Director, PricewaterhouseCoopers Pvt. Ltd. firstname.lastname@example.org
Supported by Rahul Renavikar and Abhishek Shah