The sales taxation of supplies from the land mass of India to offshore installations and structures located in the Exclusive Economic Zone (EEZ), i.e. within 200 nautical miles of the appropriate baseline, has been the subject matter of much litigation, particularly after various offshore oil exploration blocks have become active. The facts are typically that sales are made from the Indian land mass and the goods are delivered to a site beyond 12 nautical miles off the coast of India but within the EEZ, which is where the oil rigs and other installations are located, in Bombay High and elsewhere.
In view of the contradictory positions taken by the Maharashtra Sales Tax Tribunal (‘Tribunal’) in different cases, the matter was recently referred to the larger bench of the Tribunal in the case of M/s Industrial Oxygen Company Limited (the appellants) vs State of Maharashtra [(2010) 44 M.T.J. 89]. The facts were that the appellants had supplied helium gas from Mumbai port to ONGC, to be used by them for their diving operations at the Bombay High offshore oilfields. The appellants all along contended that the sales were in the course of export and hence no sales tax (or State VAT) or the Central Sales Tax (CST) was payable on such sales. Consequently, these supplies would not be chargeable to Indian sales tax at all. However, the Commissioner of Sales Tax issued an order holding that the sales in question were sales in the course of inter-State trade, attracting the CST. The appellants filed an appeal before the Tribunal against the said order. This was referred to a larger bench of the Tribunal. The three issues referred to the Tribunal were a) whether Bombay High, situated beyond the territorial waters of India and within the EEZ, was part of Indian territory; b) whether the sale of helium gas from Maharashtra to Bombay High would constitute an inter-State sale under Section 3(a) of the CST Act or c) whether such a transaction would constitute an export sale under Section 5(1) of the CST Act on the basis that the sale occasioned the movement of the goods from Maharashtra to a place situated outside the Indian Territory.
In relation to the first question, as to whether Bombay High should be considered a part of the Indian Territory, a key argument revolved around the distinction between ‘sovereignty’ and ‘sovereign rights’. The argument was that India could certainly exercise sovereign rights over the Continental Shelf and the EEZ ,as per the provisions of the Territorial Waters, Continental Shelf, Exclusive Economic Zone and Maritime Zones Act, 1976 (Maritime Act). However, this did not lead to the conclusion that India had sovereignty over these areas. It was therefore contended that the provisions of the CST Act could apply to sales made to Bombay High only if it were so made applicable by issue of an appropriate notification under the Maritime Act, as was done under the Customs Act, the Income tax Act, etc. This point did not however find favour with the Tribunal. The Tribunal relied 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.)]. In this case, the Supreme Court had held that the designated areas in the EEZ were deemed to be a part of India, for customs purposes. The Tribunal quoted extensively from the Aban Loyd case and concluded that the apex Court had clearly held in this case that Bombay High was part of the territory of India. Hence, the Tribunal rejected the argument in this regard.
It appears however that the Aban Loyd judgement had held that Bombay High was a part of India for certain limited purposes. Thus, the Tribunal appears to have read more into the Aban Loyd judgement than perhaps what the Supreme Court had intended. Consequent to this finding, the question that then arose was whether the supply in question should be treated as an inter-State sale. For deciding this question, the Tribunal examined in detail the definition of ‘Union Territory’ as per the provisions of Clause 62A of Section 3 of the General Clauses Act. As per these provisions, ‘Union territory’ meant any Union territory specified in the first schedule to the Constitution and included any other territory comprised within the territory of India but not specified in that schedule. Accordingly, on a combined reading of the provisions of the Maritime Act & the General Clauses Act, and relying on the Aban Loyd case, it held that since Bombay High was part of the territory of India, the sale of gas should be treated as a sale occasioning the movement of gas from Mumbai port to Bombay High, a territory of India. Accordingly, this would be an inter-State sale under the CST Act.
For answering the last question, the Tribunal relied on the landmark decision of the Supreme Court in Burmah-Shell [(1960) 11 S.T.C. 764 (S.C.)], in which it had held that “export” did not mean merely taking out of good the country but that the goods must be sent to a destination at which such goods were said to be imported. Following this ratio, the Tribunal held that the sale of gas to Bombay High could not be treated as an export of goods out of the territory of India, as there was no destination for the goods in a foreign country, notwithstanding that the goods had physically left the Indian land mass. Accordingly, it held that the benefit of exemption under Section 5(1) of the CST Act will not be available.
In sum, the Tribunal has upheld that the sale of ascertained goods from Mumbai port to Bombay High should be subject to CST and cannot be treated as exports. This decision has significant impact on the oil and gas industry as most of the supplies are made from the nearest port to locations in the EEZ and the CST charged on such supplies cannot be offset and hence become sticking tax costs. It remains to be seen as to whether a similar situation or outcome will obtain under the forthcoming GST.