2025 (12) TMI 817 - HC - VAT / Sales Tax

APVAT assessments u/r 17(1)(g) set aside, matter remanded for fresh decision on accounts and tax situs

HC set aside the impugned APVAT assessment orders passed under Rule 17(1)(g) and remanded the matter to the assessing authority. It held that Rule ... Determination of turnover - Invocation of Rule-17(1)(g) of the APVAT Rules - Rejection of accounts produced by the petitioner, on the ground that these were not a complete set of accounts and that the books of account, required to be maintained, under the Income Tax Act, 1961 was not produced - interpretation of Rule 31 of the A.P. VAT Rules - HELD THAT:- Under Rule 17(1)(g) of the AP VAT Rules, the entire turnover of a dealer, is to be taxed at 12.5% subject to the deductions specified in the table annexed to Rule17(1)(g) of the AP VAT Rules, where the dealer had not maintained accounts to determine the correct value of the goods at the time of incorporation. This provision does not specify the manner in which such accounts are to be maintained. Rule 31 requires separate accounts, to be maintained, for each work contracts. Taken literally, it would mean that separate sets of accounts would have to be maintained for each contract - In the present case, the petitioner insists that it had maintained an account of the contract, in question, and had produced all its records. The 1st respondent contends that all the records were not produced before the 1st respondent. As far as the question of whether all the material, required by the 1st respondent, had been submitted by the petitioner is concerned, the same would be very difficult for this Court to ascertain, in view of the rival submissions made on both sides. In the circumstances, the only option available to this Court, would be to remand the matter back to the assessing authority to give an opportunity to the petitioner to submit the entire records relating to the works contract executed by the petitioner. Upon such production of the records, the 1st respondent shall then decide whether the said material is sufficient to account for all the material/goods which are being incorporated into the works contract by the petitioner for the relevant period - It is not proposed to go into the issue of the location of the execution of the work, as that would be a question of fact, which is best answered by the assessing authority. Similarly, the question of rate of tax that would be applicable is also a matter which can be raised before the 1st respondent and both issues are left open. The petitioner contends the transactions, in question, took place beyond the territorial waters of India as the said transaction took place beyond 12 nautical miles from the shore. These transactions would fall either within ambit of the contiguous zone or the exclusive economic zone. In such circumstances, it would only be Parliament which would have the jurisdiction and power to levy tax, in relation to any sale of goods. However, such power to levy tax on sale of goods has been confined to the State Legislature, under Entry-54 of the Second list, in the VII Schedule to the Constitution. Thus, neither the State Legislature nor the Central Legislature would have power, to levy tax on the sale of goods made beyond the territorial waters of India. These Writ Petition are disposed of setting aside the impugned assessment orders, dated 20.02.2010 and remanding the matters back to the 1st respondent or such appropriate assessing authority, as may be determined, to give an opportunity to the petitioner to produce all the records and accounts in relation to the aforesaid works contract for the relevant period and to take up assessment proceedings on the said basis and in accordance with the observations of this Court, in this Order. Petition disposed off by way of remand. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether the assessing authority was justified in invoking Rule 17(1)(g) of the Andhra Pradesh Value Added Tax Rules, 2005 on the ground that the petitioner had not maintained/produced 'books of account' and records as required, and consequently in rejecting the materials produced and taxing the entire turnover at 12.5%. 1.2 How Rule 31 of the Andhra Pradesh Value Added Tax Rules, 2005, governing records for works contracts, operates in a case where the assessee is a non-resident opting for presumptive taxation under Sections 44AA and 44BB of the Income Tax Act, 1961, and whether the VAT assessing authority can insist on production of income-tax books of account in such circumstances. 1.3 The manner in which the assessing authority should proceed, on remand, to ascertain whether the petitioner's accounts satisfy Rule 31 and when recourse to Rule 17(1)(g) becomes permissible. 1.4 The constitutional and statutory competence to levy tax on transactions relating to incorporation of goods in a works contract executed beyond the territorial waters (beyond 12 nautical miles), and whether such turnover is exigible to tax under the State VAT law, the factual questions and rate of tax having been left to the assessing authority. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 & 2 - Invocation of Rule 17(1)(g), scope of Rule 31 APVAT Rules, and interaction with Sections 44AA/44BB of the Income Tax Act Legal framework (as discussed in the judgment) 2.1 Section 44AA(2) of the Income Tax Act, 1961 mandates maintenance of prescribed books of account by specified categories of assessees. Section 44BB(1) and (3) provide a special presumptive scheme for non-residents engaged in business of providing services/facilities in connection with prospecting, extraction or production of mineral oils, permitting them either (a) to accept deemed profits at 10% of gross receipts without maintaining income-tax books, or (b) to claim lower profits by maintaining such books as required under Section 44AA(2), getting audit and being assessed normally. 2.2 Rule 31 of the Andhra Pradesh Value Added Tax Rules, 2005 requires every dealer executing works contracts to maintain separate accounts for each contract and, where not under composition, to maintain specified records regarding procurement and use of goods, payments, labour charges, machinery hire, consumables, establishment costs, similar expenses, profit relatable to labour and services, exempt goods transferred, and inter-State/Outside State/import/export transfers. 2.3 Rule 17(1)(g) of the APVAT Rules provides that where a VAT dealer 'has not maintained the accounts to determine the correct value of the goods at the time of incorporation' in a works contract, the dealer shall pay tax at 12.5% on the total consideration received or receivable, subject to prescribed deductions, and shall not be eligible to claim input tax credit or issue tax invoices. Interpretation and reasoning 2.4 The Court recorded that the petitioner, a non-resident contractor engaged in offshore works for mineral oil exploration, had opted for the presumptive scheme under Section 44BB and was paying tax on 10% of its gross receipts, and that this factual position was not disputed by the respondents. 2.5 On that basis, the Court held that once the assessee validly opts for presumptive taxation under Section 44BB without claiming lower profits, there is no obligation under the Income Tax Act to maintain the books of account prescribed under Section 44AA(2) and to get them audited. Consequently, in such a case, the VAT assessing authority cannot insist on production of 'books of account required under the Income Tax Act' when the assessee specifically asserts that such books have not been maintained owing to the statutory dispensation. 2.6 At the same time, the Court clarified that the VAT assessing authority is fully entitled to insist on the accounts required under Rule 31 of the APVAT Rules and, in principle, may also call for books required under other laws only for the purpose of comparing and testing the accuracy of the Rule 31 accounts. In the present case, however, this comparative exercise was not possible since the petitioner had no obligation, and claimed not, to maintain income-tax books of account. 2.7 On the construction of Rule 31, the Court held that the requirement of 'separate accounts for each contract' does not mean multiple separate sets of full-fledged statutory books of account for every contract. It instead contemplates that, for each works contract, the dealer should maintain such separate accounts as are sufficient to set out: (a) the value of goods incorporated in the execution of that contract, and (b) the expenditure incurred to ascertain the cost of those goods incorporated in the property. 2.8 Rule 17(1)(g), being a special provision permitting a flat-rate levy when proper accounts are not maintained, can be invoked only where the dealer has not maintained accounts 'to determine the correct value of the goods at the time of incorporation'. Thus, Rule 17(1)(g) is attracted only if the dealer fails to maintain or produce the kind and quantum of records envisaged under Rule 31 sufficient to determine such value and cost. 2.9 On the factual dispute-whether the petitioner did in fact produce all accounts and records sufficient to meet Rule 31, or only summaries and incomplete documents-the Court found it impossible, in writ jurisdiction, to conclusively resolve the contradictory factual assertions of the parties. The Court therefore refrained from itself deciding whether Rule 17(1)(g) had been rightly invoked on the existing record. Conclusions 2.10 The assessing authority cannot insist on production of income-tax books of account in a case where, under Sections 44AA and 44BB of the Income Tax Act, the assessee is not obliged to maintain such books due to opting for presumptive taxation, and where it is undisputed that such statutory income-tax books do not exist. 2.11 The obligation under Rule 31 APVAT Rules is independent and continues to apply; the dealer must maintain for each works contract those separate accounts that adequately record procurement, use and incorporation of goods and associated costs, sufficient to determine the correct value of goods at the time of incorporation. 2.12 Rule 17(1)(g) APVAT Rules can legitimately be invoked only if the dealer has not maintained or produced accounts adequate under Rule 31 to determine the correct value of goods incorporated in the works contract; it is not a substitute for a proper examination of the records that are actually produced. 2.13 Since the existence and sufficiency of the petitioner's records under Rule 31 could not be adjudicated on the conflicting material in writ proceedings, the impugned assessment orders invoking Rule 17(1)(g) were set aside and the matter remanded for fresh consideration. Issue 3 - Directions to the assessing authority on remand and conditions for recourse to Rule 17(1)(g) Interpretation and reasoning 3.1 Noting the factual controversy over what records were produced and whether they satisfied Rule 31, the Court considered that the only appropriate course was to remand the matter to the assessing authority with structured directions. 3.2 The Court directed that the assessee be afforded an opportunity to submit the 'entire records' relating to the works contract for the relevant period, specifically to enable the assessing authority to verify whether such material is sufficient to account for all material/goods incorporated in the works contract. 3.3 If, upon examination, the assessing authority is satisfied that the records produced meet the requirements of Rule 31 and are sufficient to determine the correct value of the goods at the time of incorporation, the assessments must be completed on that basis, without resorting to Rule 17(1)(g). 3.4 If the assessing authority forms the opinion that the accounts produced do not meet the requirements of Rule 31, it must (a) specifically set out the missing details and material that are required, and (b) call upon the assessee to make good such deficiencies. 3.5 Only if, after this exercise and opportunity, the dealer fails to supply the requisite details or the accounts still do not satisfy Rule 31, would it be open to the assessing authority to invoke Rule 17(1)(g) of the APVAT Rules. Conclusions 3.6 The impugned assessments were quashed and the matter remanded to the assessing authority to: (i) allow production of complete records; (ii) assess whether they satisfy Rule 31; (iii) communicate any specific deficiencies; and (iv) only thereafter, in case of continued non-compliance, consider resort to Rule 17(1)(g). 3.7 Consequentially, the garnishee proceedings based on the set-aside assessments were rendered infructuous and the related writ petition was closed. Issue 4 - Competence to tax works contracts executed beyond 12 nautical miles (territorial waters and maritime zones), and treatment of this issue in the present case Legal framework (as discussed in the judgment) 4.1 The Court referred to the Territorial Waters, Continental Shelf, Exclusive Economic Zone and other Maritime Zones Act, 1976, which defines and delimits: (a) territorial waters (up to 12 nautical miles from the appropriate baseline), (b) contiguous zone (up to 24 nautical miles), (c) exclusive economic zone (up to 200 nautical miles), and (d) continental shelf (submarine areas extending to the natural prolongation of the land or up to 200 nautical miles). 4.2 Under the Act, 1976, sovereignty of India extends to the territorial waters (Section 3), while specific powers in respect of the contiguous zone (Section 5), exclusive economic zone (Section 7) and continental shelf (Section 6) are vested in the Central Government. 4.3 Entry 54 of List II (State List), Seventh Schedule to the Constitution vests in the State Legislatures the power to levy tax on the sale or purchase of goods (subject to constitutional limitations). The Court noted that the power to tax sales of goods in those maritime areas beyond territorial waters is not expressly conferred upon either the Union or the States under the then applicable constitutional scheme. Interpretation and reasoning 4.4 The petitioner's contention was that approximately 80% of the works contract, including incorporation of goods into the subsea pipeline, was executed beyond 12 nautical miles, and therefore outside the territorial waters and territorial limits of the State, rendering that portion of turnover non-exigible under the State VAT Act. Numerous authorities and commentaries on the nature of territorial waters, maritime zones and allocation of legislative competence were cited. 4.5 The Court observed that, for the present case, it was not necessary to decide whether the State's territory extends into territorial waters or the extent to which State legislation applies therein, since the petitioner's case was that the relevant transactions occurred beyond territorial waters, i.e., beyond 12 nautical miles. 4.6 The Court held that transactions beyond the territorial waters would fall within the contiguous zone or the exclusive economic zone as defined in the Act, 1976, in respect of which it is the Parliament, acting through the Central Government, that exercises the enumerated powers. However, the constitutional power specifically to levy tax on the sale of goods has been allocated to the State Legislatures under Entry 54 of List II. 4.7 On that reasoning, the Court stated that, for sales of goods taking place beyond territorial waters, neither the State Legislature (by virtue of territorial limits) nor the Parliament (in view of the confinement of sales tax power to the States under the then constitutional arrangement) would have power to levy tax on such sales. The Court explicitly noted that it was not examining the subsequent constitutional changes introduced by Article 246A and the Goods and Services Tax Act, 2017, leaving that question open. 4.8 However, the Court declined to adjudicate, in the writ proceedings, on the factual question whether, in this case, the incorporation of goods in execution of the works contract did in fact occur beyond 12 nautical miles. It considered this a pure question of fact best left to be determined by the assessing authority upon proper evidence. 4.9 Likewise, the Court declined to decide the applicable rate of tax (4% versus 14.5%), holding that this issue should also be raised and decided before the assessing authority on remand. Conclusions 4.10 As a matter of principle, the Court held that, under the then-prevailing constitutional allocation of taxing powers, transactions involving sale of goods occurring beyond territorial waters (beyond 12 nautical miles) lie outside the taxing competence of both the State Legislature and Parliament, since the specific power to tax sales is constitutionally vested in the States in respect of their territories. 4.11 In the present matter, the questions (a) whether, factually, the incorporation of goods in the works contract occurred beyond 12 nautical miles, and (b) what tax rate is applicable to the petitioner's transactions, were expressly left open to be raised, established and adjudicated by the assessing authority during the remand proceedings.