TMI Blog2015 (7) TMI 995X X X X Extracts X X X X X X X X Extracts X X X X ..... Decided against revenue. Payment made on account of royalty to State Govt. - payment of royalty in excess of 20% - restriction under Section 6A(4) of the Oilfield (Exploration and Development Act), 1948 - to be calculated on international price instead of discounted sale price in the nature of allowable business expenditure? - 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 ot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yalty on crude oil effective from Apr 98, vide MoP NG s resolution dated 17 Mar 03, which was notified vide Gazette Notification dated 16 Dec 04 (copy enclosed as Annexure-VII). MoP NG, vide letter no. P-20012/2897-PP dated 30 Oct 03 conveyed the decision of the Government that the revenue of State Governments in terms of royalty on crude oil will not be affected by discount on ONGC s crude oil (copy enclosed at Annexure-VIII). As replied in point 2(i) of our letter dated 30-08-2005 (referred in your query dated 13-03-2007), the royalty is paid on onshore production to State Governments as per the instructions of Central Government. Accordingly, the same treatment has been made in Accounts and in determination of taxable income. Further it is submitted that payment of Royalty is to Central Government State Government and is a matter between ONGC and respective Government. No provision of Income Tax Act, 1961 stipulates that only 20% of royalty payable is allowable. In our view payment of the entire amount of royalty is, an expenditure incurred by ONGC wholly and exclusively for the purposes of its business, the same having been made to secure a valuable business right viz., t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... GC to the concerned State Govt. In order to work out the impact of royalty on crude oil between pre discount post discount prices, essentially the information from these projects/assets is necessary. 4. The Assessing Officer was not inclined to accept the explanation offered by the assessee and the Assessing Officer disallowed the royalty paid in excess of 20%. The Assessing Officer actually taxed the difference in royalty paid between the pre-discount and post-discount price. The Appellate Authority in appeal, however, accepted the contention of the assessee and found that all the ingredients for allowing royalty as revenue expenditure were present and it could not be said to be hit by the explanation given in Section 37 and allowed the appeal in this regard. Revenue carried the matter in further appeal before the Tribunal. The Tribunal proceeded to hold as follows: 17. The facts are noted by the AO in para 12 of the assessment order. As per these facts, the assessee is to pay royalty to the relevant State Governments with regard to onshore production of oil and for the offshore production, the royalty is paid to the Central Government. The Government had determined lowe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tual position, we are of the considered opinion that the AO is not justified in holding that such payment of royalty to State Governments is not allowable, being the payment by infraction of law. The payment of royalty is as per the guidelines and instructions of Government. Such payment cannot be said to be infraction of law. Second reason given by AO is that as per the Government policy, ONGC is not allowed to increase the price fixed by the Government and the resultant net recovery leads to decrease in sale revenue of the assessee. The excess payment of royalty to State Governments is on this decreased amount of sale revenue and since such extra sale revenue has not been taken to the credit of profit and loss account of the assessee, payment of royalty thereupon cannot be allowed as expenditure. We find that this objection of the AO is also without any basis because it is a Government policy to make the sales at reduced price but royalty payable to State Government is on pre discount price. We are of the considered opinion that for this reason also, the payment of royalty cannot be disallowed. Considering all these facts, we find no reason to interfere in the order of CIT (A) on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as resolution dated 17.03.2003. Therein, it is stated as follows: MINISTRY OF PETROLEUM AND NATURAL GAS RESOLUTION NEW DELHI, the 17th March, 2003 No. O-22013/1/2001-ONG-III- The Government vide its Resolution No. 224 dated 21-11-1997 decided the phased dismantling of Administered pricing Mechanism (APM). In the aforesaid resolution, it was envisaged that the prices payable to the indigenous crude oil producers will be linked to the increasing percentage of international prices Free on Board (FOB) in place of cost plus based prices prevalent till 31-03-1998. 2. The Government, constituted a Committee for evolution of a new scheme of royalty on crude oil w.e.f.1-4-1998, because, inter-alia, the State Governments had been requesting for revision in the methodology for fixation of the rates of royalty paid by National Oil Companies (NOCs) since 01-04-1998. The Committee consulted all stakeholders, especially the major oil and gas producing State Governments and the National oil companies. It also obtained expert opinion of National Institute of Public Finance Policy (NIPFP), an eminent autonomous body supported by the Ministry of Finance. After considering the recommendati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... each year so as to facilitate convergence with NELP rates of 12.5% within a period of 5 years i.e. by 2011-12 to be calculated accordingly. The matter may be reviewed for fine-tuning after 3 years, i.e. during 2005-06. 9. He would also refer to Section 92 F (2) of the Act. He would, therefore, submit that there is nothing illegal in the respondent assessee being called upon to pay royalty on the basis of the transaction based on the international price. He would submit further that matters have been made very clear by the communication dated 30th October, 2003 issued by the Government of India to the Chairman M.D. of the respondent assessee among others and, therein, it is stated in clause (vi) as follows: The revenue of State Governments in terms of royalty on crude oil will not be affected by the discount on ONGC s crude oil. 10. He would further submit that the expression prohibited by law must be understood in the context of the object which is sought to be achieved. In this regard, he drew our attention to the provisions relating to the explanation in question and it reads as follows: Disallowance of illegal expenses It is proposed to insert an explanati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been for the previous year that the assessee had not challenged the order, there might have been some merit. On the other hand, the assessment year, where the assessment had became final at the hands of the appellate authority or at the higher level, relates to 2007-08 and therefore, we would not think that in the facts of this case, we should throw out the Revenue s case on the basis of res judicata. 13. The respondent assessee is an Oil Exploration Company. There is no dispute that in respect of oil exploration done on-shore, royalty is to be paid to the State Government and in respect of off- shore exploration royalty is to be paid to the Central Government. Section 6A of the Oilfield (Regulation and Development) Act, 1948 Act reads as follows: 6A. Royalties in respect of mineral oils.- (1) The holder of a mining lease granted before the commencement of the Oilfields (Regulation and Development) Amendment Act, 1969, shall, notwithstanding anything contained in the instrument of lease or in any law in force at such commencement, pay royalty in respect of any mineral oil mined, quarried, excavated, or collected by him from the leased area after such commencement, at the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Oil Marketing Companies. Thereafter, the oil is marketed by the Oil Marketing Companies and finally it reaches the consumers. The international crude oil price apparently has been on the rise for quite some time. Unless the OMCs get oil at a discount, necessarily the price at which oil and its products are finally sold in the market would be affected; that is to say, there will be rise in the price. Apparently, the Government of India had a policy, under which the price was to be controlled. The result was that the oil companies like the respondent assessee were asked to sell the oil, which they drilled at a discount to OMC s. This is what is the post-discount price. If the amount of royalty, which the appellant paid to the State Government, is calculated with reference to the post-discount price, then there would be a violation of Section 6A, inasmuch as, the price, at which the respondent assessee was forced to sell, in a manner of speaking, under the Government of India s directions, to the OMCs was at a price, which was lesser than the international price. However, when it came to the payment of royalty to the State Governments, the Government of India also wished to persevere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would appear to mean the description of an agreement made by two parties freely and independently of each other. In other words, Well Head Price for the purpose of calculating the royalty has been understood to mean by the Government of India, which is the Authority to administer the central legislation namely The Oilfields (Regulation and Development) Act, 1948 that it should be the price at which it is sold or capable of being sold at arm s length. We do not find any acceptable response to contradict this understanding of the transaction at arm s length. We can safely proceed on the basis that the Well Head Price would be the price as provided for in the resolution and valid for the year in question. If that be so, the Well Head Price cannot be the price, at which the respondent assessee has sold the crude oil to the OMCs, which is the discounted price. If we were to look at the situation in the context of the notification read with the resolution read with the communication, which we have adverted to, the Government of India intended as we have already found, on the one hand, that the oil should be sold by the oil producers to the oil marketing companies at a discount, which is ..... X X X X Extracts X X X X X X X X Extracts X X X X
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