Value Added Tax on supplies to offshore blocks

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: With some Indian offshore exploration blocks recently going live, the applicability of Value Added Tax (‘VAT’)/ Central Sales Tax (‘CST’) on material supplied from the mainland to such ‘economic islands’ (located beyond 12 nautical miles from shore) can become contentious as the Revenue may not always accept a no-VAT approach.

Illustrations of modes of material supply are (1) direct supplies from outside (and possibly transiting through) India; (2) imported and stocked in India, for onward supply; (3) direct domestic supplies; and (4) domestic supplies for stocking at offshore location and onward supply.

While the first mode of supply is typically uncontested, the other three modes have been subjected to rigorous scrutiny.

One (key) reason provided for scrutiny is the debate on whether such supplies constitute an ‘export’ for the purposes of VAT/ CST; because, though VAT regulations define an ‘export’ to mean movement of goods out of India pursuant to a sale, and certain decisions have questioned this approach on the basis that materials supplied either do not cross the national boundary (pursuant to a sale) or are not supplied to another country.

On the first contention, there are certain precedents, say, in the context of fuel and food supplied to vessels operating on international routes, where ‘export’ status has been denied.

There is however a level of merit in questioning the applicability of such decisions as supplies to production blocks cross Indian borders under a (single) transaction of sale, regardless of the point of delivery or transfer of risk.

The second contention is linked to the court evolved jurisprudence that an export under VAT regulations should have the feature of an import into another country.

Again, such jurisprudence has evolved in an era when supplies to offshore production blocks were not prevalent or insignificant.

The revenue has also argued that supplies to such production blocks (which may fall within India’s Exclusive Economic Zone (EEZ) or Continental Shelf (CS)) do not cross the boundaries of India at all, on the reasoning that India’s EEZ/ CS are subject to the jurisdiction of Central levies like the income tax, customs and excise, and service tax.