Territorial nexus and right-to-use test defeated VAT levy on offshore drilling rig hire contracts.

Territorial nexus for VAT depended on where the taxable transaction was entered into or executed, and the High Court found the offshore drilling rig contracts were centred outside Andhra Pradesh, so jurisdiction under the Andhra Pradesh VAT Act was unavailable. The court also held that a charter-hire arrangement does not amount to a transfer of the right to use unless possession and effective control pass to the hirer; because the owner retained operational control over the rigs, the levy under Section 4(8) could not be sustained. The assessment order was quashed.

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Issues: (i) Whether the contracts relating to offshore drilling rigs were entered into or executed/performed within Andhra Pradesh so as to confer jurisdiction under the Andhra Pradesh Value Added Tax Act, 2005. (ii) Whether the arrangement amounted to a transfer of the right to use the rigs within the meaning of Section 4(8) of the Andhra Pradesh Value Added Tax Act, 2005.

Issue (i): Whether the contracts relating to offshore drilling rigs were entered into or executed/performed within Andhra Pradesh so as to confer jurisdiction under the Andhra Pradesh Value Added Tax Act, 2005.

Analysis: The contract documents showed the contractor and the sub-contractor to be based at Mumbai and the Cayman Islands, with correspondence addresses at Mumbai. The stamp paper was purchased in Mumbai, the arbitration venue was Mumbai, and the agreement conferred exclusive jurisdiction on the courts at Mumbai. The drilling rigs were admittedly operating beyond the territorial waters relevant to Andhra Pradesh. Mere registration as a dealer in Andhra Pradesh did not extend the State's jurisdiction to transactions occurring outside its territory.

Conclusion: Jurisdiction was not available to the Andhra Pradesh authorities, and the finding of taxable execution within the State was unsustainable.

Issue (ii): Whether the arrangement amounted to a transfer of the right to use the rigs within the meaning of Section 4(8) of the Andhra Pradesh Value Added Tax Act, 2005.

Analysis: The agreement was a charter-hire arrangement under which the petitioner supplied the rigs, operating personnel, and supervisory control, while retaining actual performance, superintendence, and effective control over the equipment and operations. The contractor's role was only liaison, and the operator did not obtain possession and control comparable to a demise or bare-boat charter. On the settled test, a transfer of the right to use arises only when possession and effective control pass to the transferee.

Conclusion: There was no transfer of the right to use the rigs, and the levy under Section 4(8) could not be sustained.

Final Conclusion: The assessment order was quashed because the State lacked jurisdiction and the contractual arrangement did not constitute a taxable transfer of the right to use.

Ratio Decidendi: Territorial nexus for VAT depends on the place where the taxable transaction is entered into or executed, and a hire arrangement does not amount to a transfer of the right to use unless possession and effective control pass to the hirer.

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