TMI Blog2009 (10) TMI 76X X X X Extracts X X X X X X X X Extracts X X X X ..... Sakhalin Block. CIT(A) held that the said expenditure even though represents revenue expenditure, yet only 1/19th thereof had to be allowed, since the same represents deferred revenue expenditure. Accordingly, 1/19th of the expenditure so incurred by the assessee was directed to be allowed by the CIT(A) HELD THAT:- In the instant case, by entering into an agreement called PCA, the Government owning the hydrocarbons, granted rights to the assessee company along with license for carrying on hydrocarbons operations. The business rights in the license are owned by the assessee entering into PCA and such right and license can be assigned and transferred to other parties subject to the terms and conditions of the PCA and approval of the Government. The assessee by virtue of acquisition of 20 per cent. participating interest became the member of the consortium and acquired proportionate share in rights and licenses granted by the Russian State for Sakhalin Block. By acquiring these business rights and production licenses, the assessee became entitled to carryon hydrocarbon operations in the Sakhalin project In view of principle of ejusdem generis, the expression any other business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of the seismic data of foreign blocks - HELD THAT:- In the instant case, the expenditure so incurred by the assessee is for furtherance of activities undertaken by it in the normal course of its business. The same are incurred on continuous basis for evaluation of business activities. In view of the decision of Bombay High Court in the case of CIT vs. Essar Oil Ltd.[ 2008 (10) TMI 387 - BOMBAY HIGH COURT] , such expenditure is to be allowed as revenue expenditure. Hon'ble Calcutta High Court in the case of Kesoram Industries Cotton Mills Ltd. vs. CIT [ 1991 (3) TMI 28 - CALCUTTA HIGH COURT] held that where the setting up does not amount to starting of new business but expansion or extension of the business already being carried on by the assessee, expenses in connection with such expansion or extension of the business must be held to be deductible as revenue expenses. One has to consider purpose of the expenditure and its object and effect. Accordingly, it was held that expenses pertaining to exploring feasibility of expansion or extension of business are revenue expenditure and not capital expenditure. The expenditure so incurred by the assessee was in the normal cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agreement dt. 10th Feb., 2001 with consortium members and the Russian Government acquired a 20 per cent participating interest in Sakhalin Production Sharing Agreement ("Sakhalin PSA"). The project was implemented between the following parties: - Russian Federation represented by the Government of the Russian Federation and the administration of the Sakhalin Oblast; - Exxon Neftegas Ltd. ("Exxon"), - Sakhalin Oil Development Co-operation Ltd. ("Sodeco"), - Rosneft-Sakhalin ("Rosneft-S") and - Sakhalinmomeftegas-Shelf ("SMNG-S"). The project relates to the Chayvo, Odoptu and Arkutun-Dagi oil, gas and condensate fields, which is offshore Sakhalin Island ("Sakhalin Block"). The PSA was entered into on 30th June, 1995 and was for a period of 25 years. Then the consortium members commenced hydrocarbons operations in the Sakhalin Block. Rosneft-S and SMNG-S held 40 per cent interest in the said Sakhalin PSA and in a joint operating agreement. Vide the assignment agreement dt. 10th Feb., 2001, Rosneft-S and SMNG-S (assignors) assigned 50 per cent of their share in the Sakhalin PSA and in a joint operating agreement to OVI for a consideration of Rs. 15,590.96 million. Consequen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions in Sakhalin Block. By the impugned order, the CIT(A) held that the said expenditure even though represents revenue expenditure, yet only 1/19th thereof had to be allowed, since the same represents deferred revenue expenditure. Accordingly, 1/19th of the expenditure so incurred by the assessee was directed to be allowed by the CIT(A) in his appellate order. Aggrieved by this order of CIT(A), both Revenue and assessee are in appeal before us. Revenue is aggrieved for CIT(A)'s direction to the AO for allowing 1/19th of the expenditure, whereas assessee is aggrieved for not allowing the entire expenditure or as an alternative for not allowing claim of depreciation under s. 32(1)(ii) of the IT Act. 5. Following grounds have been taken by the assessee: 1 That on the facts and in the circumstances of the case and in law, the learned CIT(A) erred in not allowing in full an amount of Rs. 1,559.10 crores as claimed by the appellant. 1.1 That the learned CIT(A) erred on the facts and in the circumstances of the case in not appreciating the business intricacies of the oil and gas sector and accordingly erred in not appreciating that the amount of Rs. 1,559.10 crores for getting the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case and in law, the CIT(A) grossly erred in holding that expenditure incurred by the appellant would bring enduring benefit to the business of the appellant. 3.3 That without prejudice to the above and in the alternative, the CIT(A) erred on the facts and circumstances of the case and in law in not allowing deduction of expenditure in accordance with the agreement entered into by the appellant with the Central Government under s. 42 of the Act. 4. That on the facts and circumstances of the case and in law, the learned CIT(A) grossly erred in disallowing revenue expenses relating to project pending final evaluation of Rs. 5,64,15,776 treating the same as capital in nature. 4.1 That without prejudice to the above and in the alternative, the CIT(A) erred on the facts and circumstances of the case and in law in not allowing deduction of expenditure in accordance with the agreement entered into by the appellant with the Central Government under s. 42 of the Act. 6. The ground taken by the Revenue reads as under: "The learned CIT(A) has erred in law and in facts and circumstances of the case in holding that deduction for the expenditure should be allowed over the period of pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... party or parties that are not affiliates provided such proposed assignee(s) establish to the satisfaction of the authorized State body that it has the necessary technical and economic capability to perform its obligations under this agreement. Assignments to third parties that are not affiliates require prior written consent of the State..... 35.2.......... 35.3 Subject to limitations contained in the art. XXXV, this agreement shall inure to the benefit of and be binding upon the successors and assignees of the parties. ------------------------------------------------------------------ Article 2.5 "Subject to the provisions of this agreement, provides consortium shall commence hydrocarbon operations promptly after the effective date of this agreement." ------------------------------------------------------------------ Article 3.1 "The State grants exclu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ------------------------------------------------------------ 8. As per learned Authorised Representative, s. 32(1)(ii) of the Act specifically and separately recognizes "licenses" as an intangible asset, which is being completely ignored by AO. Since the term "license" was not defined, reference was made by learned Authorised Representative to other laws and judicial precedents where the term "license" has been defined and to the dictionaries meaning. 9. On the other hand, learned Departmental Representative relied on the order of AO and submitted that expenditure so incurred were capital in nature, the same were not allowable and CIT(A) was wrong in allowing 1/19th of these expenses. As per learned Departmental Representative, the assessee has not acquired any business rights, as the agreement so entered by assessee only gives it access to the area in which exploration and development of hydrocarbon is to be done and therefore it was only a participating right and not a business or a commercial right, as has been claimed to be by the assessee. As per learned Departmental Representative, the concept of business or commercial rights as has been envisaged in s. 32 (1)(ii) is clea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lso had entered on 19th May, 1988 into a petroleum production sharing contract with Vietnam Oil Gas Co. The production sharing contract entered on 19th May, 1988 envisages making available necessary manpower, technical skills and other inputs required for the execution of the production sharing contract in accordance with sound petroleum industry practices. The production sharing contract provided for exploration and exploitation of petroleum resources in the specified area in the Continental Shelf of Vietnam. The assessee carried out petroleum exploration in the area since 1988 and has the distinction of discovering the largest free gas field of Vietnam. The assessee partnered with British Petroleum and Vietnam Oil Gas Co. in the block and finalized development plans for the development of natural gas discovery. The development plan for the discovery was finalized and necessary commercial arrangements entered into in December, 2000. The first phase of the development of Vietnam Project (Block 06.1) was completed in January, 2003. From the above, it is evident that the business of the assessee had already commenced which was set up in the year 1965. 12. From the record, we fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds. This rule of interpretation makes an attempt to reconcile incompatibility between the specific and general words. The first category of words like know-how, patents, copyright, etc., forms a distinct genesis or category in as much as all those items are specific and elucidated rights of business or commercial nature. In such circumstances, the expression 'any other business or commercial rights of similar nature' also must be in the same genesis or category with specific and elucidated identity of commercial or business nature. Therefore, in the light of the statutory provisions contained in s. 32(1)(ii), the commercial rights of exploration of mineral oils, as acquired by the assessee fall under the expression of any other business or commercial rights of the nature similar to one of the categories i.e., licenses as stipulated in s. 32(1)(ii). The commercial rights of exploration and licenses acquired by the assessee being in the nature of intangible assets are eligible for the claim of depreciation at the rate prescribed under s. 32(1)(ii) of the Act. The AO himself in his order had observed that as a result of entering into such an agreement i.e., PCA, the assessee company h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s business opportunities before acquiring a particular field/block. Since all these opportunities have to be evaluated and studied before taking decision to invest and enter into a contract, the process of evaluation of the block started with submitting tender fee/data fee etc. and then the seismic data had to be evaluated in seismic processing centre. After evaluating the same, the assessee was to take decision as to whether investments are to be made in the project or not. There is no dispute to the fact that in all industries an activity of furtherance of its business or evaluation of better profit-earning process in one manner or other are undertaken. Efforts to evaluate the prospects of better earning profit is not a separate activity but is in the course of conduct of normal day to day business. These expenditure cannot be said to bring an enduring benefit to the business nor the same can be said as initial outlay for expansion of business. In the instant case, the expenditure so incurred by the assessee is for furtherance of activities undertaken by it in the normal course of its business. The same are incurred on continuous basis for evaluation of business activities. In vi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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