UN-NECESSART LITIGATION BY TAX AUTHORITIES BY INVOKING EXPLANATION TO SECTION 37 IN RELATION TO ROYALTY PAID TO GOVERNMENT AND THAT TOO IN CASE OF HIGH TAX PAYING NAVRATNA PSU - ONGC.

[CA DEV KUMAR KOTHARI]

Relevant PROVISIONS AND LINKS:

Sections 37  and of the Income-tax Act, 1961

Section 92(F)(ii)  was also considered by honourable High Court, as an aid to find out reasonableness based on árms length pricing.

Section 6A(4) of the Oilfield (Exploration and Development Act), 1948,

Commissioner of Income Tax, Dehradun Versus Oil And Natural Gas Corporation Ltd. 2015 (7) TMI 995 - UTTARAKHAND HIGH COURT

The assessee- Oil & Natural Gas Corporation Ltd (ONGC):

The assessee ONGC, in the cited cases is a well-known Central Government Public Sector Enterprise - in fact it is one of nav-ratna PSU. The promoters, at present hold 68.93% of equity shares, as per information obtained from the website of BSE. Besides, Government Insurance Companies also hold substantial stake. During the years to which litigation relates to Government held much higher stake.

 ONGC had also been one of largest tax payer / largest tax paying PSU for many number of years.

Royalty – higher limit:

Section 6A(4) of the Oilfield (Exploration and Development Act), 1948 provides that the Central Government is authorised to prescribe manner and rate of royalty payable to Central Government and state Government. The provision also provide maximum rate of royalty.

Assessee paid Royalty to State Government, The AO , in view of certain news reports examined the issue and found that p Payment made on account of royalty to State Govt was in in excess of 20% . The AO took view that the payment was in excess of limits and was therefore hit by Explanation to S.37 as violation of law was involved. Therefore, the AO disallowed excess payment, as per his computation.

As per related notification of government and communication, the payment was made on the basis of international price instead of discounted sale price. This was with a view to avoid loss of revenue to the State Government.

The learned CIT(A) after detailed discussion of facts and relevant documents,  allowed the claim and deleted disallowance made by the AO. The revenue preferred appeal before the ITAT which was dismissed on this issue and claim was allowed.

The finding of Tribunal, in this case are pure finding of the facts, therefore, revenue should not have filed an appeal against order of ITAT. However, revenue preferred appeal before High Court. The appeal was dismissed after consideration of related provisions, notification and communication of Central Government.  The relevant substantial question of law in appeal before the High court was as follows:

          2. Whether the ITAT has erred in law by holding that payment made on account of royalty to State Govt  calculated on international price instead of discounted sale price in the nature of allowable business expenditure?"

From the question, it is clear that the payment is on account of Royalty and was paid to State Government. The method of computation of royalty has also been indicated in the question itself.

There is no case of finding being wrong or perverse. Therefore, this appeal should not have been filed.

Anyway the appeal was admitted by the High Court.  The High Court observed and held that

         “the case set up by the Revenue that it is a case, which involves violation of the mandate of Section 37 in its explanation may not hold good. In this context, we would think that Section 6A may not be read in isolation; instead, we must also view it in the context of the notification read with resolution read with communication. Certainly, we cannot liken it to hafta or extortion money, which appears to have been the intention. It is very fairly conceded by the learned counsel for the Revenue, there is no question of any offence being committed. In fact, the respondents were only faithfully abiding by the decision of the Government of India. In the circumstances of this case, we are therefore of the view that the amounts, which were paid, would not incur the opprobrium of being in violation of Section 37. There is no dispute that all the other ingredients required to sanction the expenditure as expenditure under Section 37 are present.

Therefore the appeal of revenue was dismissed and case stood decided against revenue and in favour of assessee (ONGC). The conclusive paragraph of the judgment is reproduced below:

                9. We are of the view that the view taken by the appellate authority, as affirmed by the Tribunal, cannot be faulted. In such circumstances, we are of the view that the question of law raised has to be answered against the Revenue. We do so and, consequently, the appeals fail and are dismissed. No order as to costs.

A fit case for awarding costs:

As discussed above, in the facts and circumstances of the case, first of all AO should not have made a disallowance? And when the disallowance was deleted by CIT(A) the revenue should not have  indulged in litigation by preferring an appeal on this issue. However, appeal was preferred first against order of CIT(A) and then against order of ITAT.

Recently we have come across observations of CBDT itself showing displeasure on filing of frivolous or un-necessary appeals. However, unfortunately despite policy decision to avoid un-necessary appeals, the revenue authorities are preferring appeal, even when tax effect is low and even when over a period of time there is no tax effect at all.

In case of matters related with PSU like ONGC filing of appeal also involves scrutiny and approvals by various authorities and counsels. Therefore, in such a situation, filing of appeal, on an issue which is devoid of merit must have been avoided.

However, ground reality is that no one want to take a decision, rather most of concerned want to linger the process and let litigation continue.

Let us hope that revenue will not prefer appeal before the Supreme Court on this issue.

Tax authorities must have some regard to the taxpayer:

Business is carried by businessman. Assessee, like ONGC is a government company, managed by its Board of Directors which includes government appointed/ nominated directors, directors from minority shareholders and independent directors.  ONGC is a business organisation. As an organisation carrying business, it must have due regard even at level of tax authorities. A businessman will not pay a sum unless he is required to pay under a law, contract or as per commercial expediency. The tax authorities must have some respect and regard to the wisdom of businessman. An expenditure which is incurred for the purpose of business in normal course of business, must be allowed taking into account point of view of businessman.

In this case it is not clear, whether there was any dispute on amount of royalty fixed. Even if there was a dispute, and suppose some refund is allowed to assessee subsequently, the same will be taxable in year of receiving refund. Therefore, when a revenue expenditure has accrued, it should have been allowed by the AO, as claimed by the assessee.