2016 (1) TMI 870 - HC - VAT and Sales Tax

Jurisdiction Issue: Gujarat Sales Tax Act Inapplicable to Gas Sales

The court held that the sale of natural gas did not take place within the State of Gujarat or during the course of import into India. The reassessment ... Levy of VAT / Sales Tax - protected transactions by Article 286 of the Constitution - supply of Natural Gas from Panna-Mukta oil/gas fields to GAIL - Production Sharing Contracts for development and exploration of Panna- Mukta and Mid-South Tapti Oil and Gas fields, in the west-coast off shore, India. Under the terms of the Production Sharing Contract (hereinafter referred to as “the PSC”) - Held that:- On a conjoint reading of the Production Sharing Contract and the Interim Sales and Purchase Agreement, it is apparent that what was agreed to be sold and purchased was Natural Gas. The goods, viz., Natural Gas were ascertained goods at the time when they came to be separated and measured at the Offshore Processing Facility. The ascertained goods upon being separated and measured came to be appropriated to the contract and delivered at the Delivery Point. In terms of Article 27.2 of the PSC, the title to the goods also passed to the Buyer at the Delivery Point. The situs of the sale is the Offshore Processing Facility where the goods were appropriated to the contract. Therefore, it cannot be said that the goods in question were within the State of Gujarat at the time of their appropriation to the contract of sale so as to fall within the ambit of clause (b) of section 4(2) of the Central Sales Tax Act, 1956. The transactions in question are, therefore, not amenable to tax under the provisions of the Gujarat Sales Tax Act, 1969. Merely because the Natural Gas upon being delivered at the Delivery Point was commingled with other gases, does not mean that it was not in a deliverable state because having regard to its unique physical properties, large volumes of Natural Gas can be transported only in a continuous stream and once delivered in the pipeline for transportation, it becomes commingled with other natural gas. Individual molecules are not separately indentified and cannot be accurately tracked or traced. As a result, natural gas is sold and purchased on a “quality and quantity” basis. The act of sweetening of natural gas, having taken place post appropriation, after the goods were delivered and the title had passed to the Buyer outside the State of Gujarat, merely because post appropriation the goods were subjected to the process of sweetening within the State of Gujarat it cannot be said that the sale of goods has taken place within the State of Gujarat. Since the provisions of the Customs Act, 1962 have been extended beyond the designated area, the Panna Mukta oil fields from where the movement of goods is occasioned fall within the customs frontiers of India Consequently, the sale of goods cannot be said to have taken place in the course of import of goods into the territory of India as contemplated under sub-section (2) of section 5 of the Central Sales Tax Act, 1956. Since the the sale of goods has taken place outside the State of Gujarat, the question as to whether or not subjecting the Natural Gas to the process of sweetening amounts to manufacture becomes redundant, and hence, it not necessary to enter into the merits of the question as to whether or not the processing of the Natural Gas at ONGC’s sweetening and separation facility at Hazira, whereby the sour gas is converted into sweetened gas, amounts to manufacture. The show cause notices which form the basis of the impugned assessment orders are without jurisdiction as the same have been issued without formation of the requisite opinion as required under the provisions of section 41 and 44 of the Gujarat Sales Tax Act, 1969 and are based on a mere change of opinion. The petitions succeed and are accordingly allowed - the sales in question have not taken place within the State of Gujarat, the State of Gujarat has no authority to levy the sales tax under the provisions of the GST Act on the transactions in question - Decided in favor of assessee. Issues Involved:1. Whether the sale of natural gas has taken place within the State of Gujarat.2. Whether the sale has taken place during the course of import of goods into the territory of India.3. The validity of the reassessment orders and the jurisdiction of the Sales Tax Officer.4. The applicability of the Gujarat Sales Tax Act to the transactions in question.Detailed Analysis:1. Whether the sale of natural gas has taken place within the State of Gujarat:The court examined the Production Sharing Contract (PSC) and the Interim Sales and Purchase Agreement (ISPA) to determine the delivery point and the nature of the goods sold. The PSC defined the 'Delivery Point' as the upstream weld at the underwater connection between the Seller's pipeline and ONGC's underwater Gas transmission line, which is outside the State of Gujarat. The court concluded that the goods, viz., Natural Gas, were ascertained at the offshore Processing Facility, appropriated to the contract, and delivered at the Delivery Point. The title to the goods also passed at the Delivery Point. Therefore, the sale did not take place within the State of Gujarat, and the transactions are not amenable to tax under the Gujarat Sales Tax Act.2. Whether the sale has taken place during the course of import of goods into the territory of India:The court referred to various notifications issued under the Maritime Zones Act, 1976, which extended the provisions of the Customs Act to the designated areas in the continental shelf and the exclusive economic zone. Since the Panna-Mukta oil fields fall within these designated areas, they are within the customs frontiers of India. Consequently, the movement of goods from these oil fields to Hazira cannot be considered as import into the territory of India. Therefore, the sale of goods is not in the course of import into the territory of India.3. The validity of the reassessment orders and the jurisdiction of the Sales Tax Officer:The court found that the reassessment notices were issued based on a mere change of opinion without any new material. The show-cause notices did not disclose the formation of any opinion based on new material, which is a precondition for reassessment under section 44 of the Gujarat Sales Tax Act. The reassessment orders were, therefore, held to be without jurisdiction and ab initio void.4. The applicability of the Gujarat Sales Tax Act to the transactions in question:The court held that since the sale of natural gas did not take place within the State of Gujarat and was not in the course of import into the territory of India, the Gujarat Sales Tax Act does not apply to the transactions. The court also noted that the sweetening of natural gas at ONGC's facility at Hazira does not change the situs of the sale, which was outside the State of Gujarat.Conclusion:The petitions were allowed, and the assessment orders were quashed. The court directed the refund of the amount deposited by the petitioners with interest. The operation of the judgment was stayed for ten weeks to allow the respondents to approach a higher forum.