Facts of the case

In the case of Prodair Air Products India Pvt. Ltd. v State of Kerala Prodair Air Product India Private Limited filed appeals contesting the assessment authority’s ruling imposing a penalty on it under the Kerala Value Added Tax Act (KVAT Act) for two assessment years. A private limited corporation called Prodair Limited produces and sells industrial gases like hydrogen, nitrogen, and high-pressure steam. Prodair Limited and BPCL had a contract in place for the supply of the aforementioned gases. In the event that the agreement is not extended after its initial period of fifteen years from the date on which the delivery of gases to BPCL began, the contract granted BPCL the option to take over the production facility.

In order to boost the output of their petroleum products, Bharath Petroleum Corporation Limited (BPCL) determined that it was essential to guarantee a consistent and reliable supply of hydrogen, nitrogen, and HP steam of precise specifications. However, after completing the assessment for two assessment years, the assessment authority penalised the appellant for violating the KVAT Act by interpreting the contract they had signed as one that transferred ownership of the plant and certain gases as part of the performance of a works contract. The appellant approached the High Court as a result of this.

Arguments advanced from parties

In order to guarantee BPCL’s exclusive and continuous supply of Hydrogen, Nitrogen, and HP Steam at market-competitive prices, the appellant claims that its obligations under the contract were to build, own, operate (BOO), and maintain a Hydrogen and Nitrogen manufacturing plant at its own cost and expense on land that BPCL would lease and hence the contention made by the assessee authority that they violate the provision of KVAT act is false and fabricated that he had transferred ownership of the plant and certain gasses as part of the contract.

Conclusion of the court 

The order of the assessment authority under tax law was overturned by a division bench of Justices AK Jayasankaran Nambiar and Mohammed Nias, who noted that the assessment authority should use its judgement when determining whether a taxable event exists for demanding from an assessee more tax than what has been admitted as payable.

According to the court, an assessing authority may anymore be a strict, arbitrary machine that exists simply to extort money from assessees that the revenue department believes is owed in taxes. After carefully reviewing the parties’ agreement, the court ruled that there is no transfer of the property in the plant, or any part of it, to BPCL as claimed by the assessment authority. Instead, the appellant will construct, own, and operate a plant on land it has leased from BPCL in order to supply BPCL with certain gases.