In a recent judgement, the Kerala High Court set aside the assessment order passed without giving the reason for denying the claim of ITC on capital goods under the Kerala Value Added Tax Act (KVAT Act).
Prodair Air Products India Private Limited, 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 thecontract.
The assessee’s obligations under the contractwere 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.’
It was evident 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.
A two-judge bench comprising Justice A K Jayasankaran Nambiar & Justice Mohammed Nias C P observed 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.
Further, the court viewed that the taxing authority assumed a jurisdiction that it did not have and the assessing authorities mechanically passed orders without showing how the taxable event is attracted in or without giving reasons for denying the claim of an assessee for exemption or deduction.
While allowing the appeal, the Court set aside the impugned judgment of the Single Judge and the assessment order.
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