THERE CAN NOT BE TWO LEVIES OF TAX ON THE SAME TRANSACTION

Madras High Court Ruling: No Double Taxation on Storage & Warehousing Services

The Madras High Court, in the case of SHV Energy Pvt Ltd v. The State of Tamil Nadu & Ors (W.P. No. 17728 of 2017), set aside an assessment order passed by the Deputy Commissioner of Commercial Tax on July 13, 2017. The court held that an assessee cannot be subjected to both service tax and sales tax on the same transaction, reinforcing the principle that double taxation is unjust.

Facts of the Case:

• Petitioner: SHV Energy Pvt Ltd
• Respondent: State of Tamil Nadu & Ors
• Nature of Business: The petitioner operated a storage and distribution facility for LPG at Tuticorin, providing terminalling services to BPCL.
• Taxation Issue: The Deputy Commissioner (Commercial Tax) – IV demanded VAT under the Tamil Nadu VAT Act (TNVAT) on these services for the assessment year 2015-16, despite the petitioner having already paid service tax under the Finance Act.
• Legal Remedy Sought: The petitioner challenged the assessment order and sought a Writ of Certiorarified Mandamus to quash the VAT demand.

Issue Before the Court:

Can a taxpayer be subjected to both service tax and sales tax (VAT) on the same transaction?

Contentions of the Parties:

Petitioner’s Arguments (SHV Energy Pvt Ltd):

1. Already Paid Service Tax:

   • The transaction was classified as a taxable service under Section 65(102) of the Finance Act and was subject to service tax under the category of “storage and warehousing”.
   • Since service tax was paid, the same transaction should not attract VAT liability.

2. Storage Facilities Are Not “Goods”:

   • The storage tanks were permanent structures and not goods, so their usage did not amount to the transfer of property.
   • Since there was no transfer of ownership, VAT should not apply.

3. Non-Exclusive Services:

   • The agreement between SHV Energy and BPCL was not exclusive, meaning BPCL did not acquire ownership or exclusive rights over the storage facility.
   • Without exclusive rights, there was no transfer of the right to use goods, which is a precondition for VAT liability.

4. Applicability of Article 366(29A) of the Constitution:

   • The transaction did not fall under composite contracts as defined under Article 366(29A) of the Constitution, which allows taxing the sales element of certain contracts.
   • Relying on Commissioner, VAT, Trade and Taxes Department v. International Travel House Ltd. (2009) VST 653 (Del), the petitioner argued that artificial severance of the contract for VAT was unjustified.

Respondent’s Arguments (State of Tamil Nadu):

1. Transfer of Right to Use Goods:

   • The company’s storage facilities allowed BPCL to store and handle LPG, which the state government argued amounted to the transfer of the right to use goods, making it liable for VAT.

2. Storage Facilities as Movable Goods:

   • The storage system was not a permanent fixed asset like land or a building but a mechanism for LPG intake, storage, and distribution.
   • Periodic maintenance and replacement of parts attracted Input Tax Credit (ITC) under the TNVAT Act, further strengthening the state’s claim that VAT was applicable.

3. Exhaustion of Appeal Process:

   • The respondents challenged the petitioner’s right to approach the High Court, arguing that the petitioner had not exhausted its appellate remedies under the VAT Act before seeking judicial intervention.

Judgment of the Madras High Court:

The court ruled in favor of the petitioner (SHV Energy Pvt Ltd) and made the following key observations:

1. No Double Taxation:

   • The fundamental principle that an assessee should not be taxed twice for the same transaction was upheld.
   • Since the petitioner had already discharged service tax liability, it could not be further burdened with VAT.

2. Storage Facility Not “Goods”:

   • The court rejected the argument that the storage facility was movable property and clarified that permanently fixed installations do not constitute “goods”.
   • Hence, the transaction did not involve a “sale” or transfer of property in goods, eliminating VAT applicability.

3. No Justification for Artificial Severance of Contract:

   • Unless a transaction falls within Article 366(29A) of the Constitution, the contract cannot be artificially split to separately tax the sale element.
   • The absence of exclusive rights granted to BPCL reinforced this point.

4. Failure of the Assessing Officer to Consider Key Legal Aspects:

   • The court noted that the Deputy Commissioner had overlooked significant legal considerations, including the definition of “storage and warehousing” under Section 65(102) of the Finance Act.
   • The failure to recognize the non-exclusivity of the BPCL contract further weakened the tax authority’s case.

5. Reassessment Required:

   • The assessment order was set aside, and the case was remanded for re-evaluation considering the legal principles discussed in the judgment.

Significance of the Judgment:

• Reinforcement of Anti-Double Taxation Norms:

  • The ruling upholds the principle that a taxpayer should not be subject to multiple levies (service tax + sales tax) on the same transaction.

• Clarity on Taxability of Storage & Warehousing Services:

  • The judgment clarifies that storage and warehousing facilities, when provided as services, do not constitute a transfer of goods and are liable only to service tax.

• Judicial Review of Tax Authorities’ Decisions:

  • The ruling underscores that courts can intervene in tax assessments where revenue authorities fail to consider essential legal principles.

• Criticism & Executive Encroachment Concerns:

  • While the ruling was widely appreciated for protecting businesses from double taxation, some critics argued that it interfered with the functioning of tax authorities, potentially limiting their ability to classify transactions for taxation.

The Madras High Court’s ruling in SHV Energy Pvt Ltd v. State of Tamil Nadu is a landmark decision reinforcing the principle that taxpayers should not suffer dual taxation. By clarifying that storage and warehousing services do not involve the transfer of goods, the judgment provides much-needed relief to businesses engaged in similar activities. However, while the ruling is a win for taxpayers, it also raises questions about the scope of judicial interference in tax matters, a debate that may continue in the future.