Offshore Works Contracts and VAT: Constitutional Limits on Taxing Sales Beyond Territorial Waters

Background of the Dispute

Helix Energy Solutions Group Inc. Vs Commercial Tax Officer Kakainada Another came before the Andhra Pradesh High Court as a challenge to VAT assessments on an offshore works contract executed in the Krishna Godavari Basin.

The assessee, a company incorporated in the United States of America, entered into a sub-sea construction and diving contract dated 21.12.2006 with M/s. Allseas Marine Contractors S.A. The project related to an offshore gas field developed by M/s. Reliance Industries Limited in the Bay of Bengal, within the Krishna Godavari Basin. The scope of work included laying undersea pipelines and installing equipment such as suction pipes, manifolds, Christmas trees, rigid jumpers, tying spools, and infield umbilical lines.

Under the contract:

All principal materials and equipment were to be supplied by M/s. Allseas Marine Contractors S.A.
The assessee was responsible for engineering, planning, fabrication, and offshore installation activities.

The assessee asserted that roughly 80% of the contractual work was carried out beyond 12 nautical miles from the Andhra Pradesh coastline, i.e., outside the territorial waters of India.

Registrations and Initial Tax Position

To comply with Indian tax requirements, the assessee took the following steps:

Obtained registration under the Service Tax Act.
Registered as a dealer under the Andhra Pradesh Value Added Tax Act, 2005 (APVAT Act) and the Central Sales Tax Act, 1956 (CST Act).

The assessee’s stand was that:

The contract was predominantly a service/works contract.
Less than 1% of the total contract value represented transfer of property in goods.
Hence, only a very small portion of the contract value could be treated as taxable turnover for sales tax/VAT.

On this basis, the assessee approached the 1st respondent (Commercial Tax Officer) seeking determination of taxable turnover for purposes of tax deduction at source. The assessing authority issued a certificate in Form 501D, dated 10.04.2008, fixing the taxable turnover at 3.5% of the gross contract value, liable to tax deduction at 4%.

Assessment Proceedings and Demands Raised

Subsequently, the 1st respondent initiated detailed assessment proceedings:

Notice dated 28.08.2008
- Called for information and records regarding the works contract.
- The assessee responded by filing various records and explanations.
Assessment orders dated 15.06.2009 (AYs 2007-08 and 2008-09)
- A tax demand of Rs.2,51,61,401/- was raised.
- The accounts produced by the assessee were rejected on the ground that:
  - They were not a “complete set of accounts”.
  - Books of account “required to be maintained” under the Income Tax Act 1961 were allegedly not produced.
First appeal and remand
- The assessee challenged these orders before the 2nd respondent (Appellate Deputy Commissioner).
- Vide order dated 11.08.2009, the appellate authority:
  - Set aside the assessments.
  - Remanded the matter to the 1st respondent with directions to reframe assessments after:
    - Considering the assessee’s objections, and
    - Examining the books of account and other supporting material.
Proceedings after remand
- The assessee claims to have furnished:
  - Month-wise details of expenditure under Rule 31 of the APVAT Rules.
  - Copies of contracts and documentation obtained from its vendors.
Fresh show cause notice dated 29.10.2009
- The 1st respondent proposed to levy:
  - Rs.19,01,11,662/- for AY 2007-08, and
  - Rs.60,74,59,981/- for AY 2008-09.
- Basis of proposal:
  - Alleged failure of the assessee to produce books of account as per Rule 31.
  - Therefore, the entire turnover was proposed to be taxed at 12.5%, granting only 30% deduction under Rule 17(1)(g) of the APVAT Rules.
Final assessment orders dated 20.02.2010
- The 1st respondent confirmed the proposed demands for both assessment years.
- Recovery action was initiated by issuing a garnishee notice.

These actions led to filing of W.P. No. 5089 of 2010 (against the garnishee order) and W.P. Nos. 6319 & 6321 of 2010 (against the assessment orders) before the High Court.

Assessee’s Key Contentions

1. Improper invocation of Rule 17(1)(g) of APVAT Rules

The assessee argued that:

It had produced all its available project accounts, details of expenses, and supporting documents.
Despite this, the 1st respondent rejected the material on a blanket basis and straightaway invoked Rule 17(1)(g) of the APVAT Rules, which applies where the dealer has not maintained accounts to determine the correct value of goods incorporated in the works.
According to the assessee:
- Rule 31 of the APVAT Rules does not mandate maintenance of a full-fledged profit and loss account; it only requires specified records related to works contracts.
- The insistence on “books” as per Income Tax Act 1961 was misplaced because income-tax and VAT have distinct record-keeping requirements.

2. Offshore work beyond territorial waters not taxable under APVAT

The assessee further contended that:

Around 80% of the work under the contract was executed beyond 12 nautical miles from the shore of Andhra Pradesh.
This area lies beyond India’s territorial waters.
Any transfer of property in goods occurring in that zone falls:
- Either in the contiguous zone, or
- In the exclusive economic zone under the Territorial Waters, Continental Shelf, Exclusive Economic Zone and other Maritime Zones Act, 1976.

On this basis, it was argued:

Offshore works contracts & VAT: No sales tax on supplies beyond India’s territorial waters