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TMI Blog2023 (4) TMI 163X X X X Extracts X X X X X X X X Extracts X X X X ..... ness 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. 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nreasonable 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. Appeal allowed. - Honourable Mr.Justice A.K.Jayasankaran Nambiar And Honourable Mr.Justice Mohammed Nias C.P. For the Appellant : 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 For the Respondents : By Sri.Mohammed Rafiq, Spl. Govt. Pleader 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). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 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 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs 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 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 whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 in a mode ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 [M/s Godrej Sara Lee v. Excise Taxation Officer-cum-Assessing Authority - JT (2023) 2 SC 32] . 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... refers to the requirement of the decision maker establishing the reasonableness of his decision by demonstrating therein 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. [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-inadministrative- law/] 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 assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yn 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 below: Period Particulars Taxable Value Excise Duty VAT Invoice Value Jan 17 Variable Cost invoice ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PERATOR'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 OPE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... greed 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 Chemi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ATOR 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. 7.2 BOO OPERATOR will deliver Requested Quantities of Hydrogen, HP Steam and Nitrogen to BPCL to meet the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ential purpose without the consent of BPCL. 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 BP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lows: (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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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