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2015 (7) TMI 995 - UTTARAKHAND HIGH COURT

2015 (7) TMI 995 - UTTARAKHAND HIGH COURT - TMI - Expenditure incurred on Dry Docking - revenue v/s capital expenditure - Held that:- Substantial question of law already answered against the Revenue as decided in [2015 (6) TMI 104 - UTTARAKHAND HIGH COURT] wherein held according to the accepted principles, capital expenditure is something which is spent once for all, while revenue expenditure is that which has to be incurred from year to year. If the expenditure is to bring into existence or adv .....

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s revenue. Therefore, of the opinion that AO was not right in disallowing the expenditure as capital expenditure - 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 th .....

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e 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. - Decide against revenue. - Income Tax Appeal No. 18 of 2010, Income Tax .....

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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?" 2. As far as substantial question of law no.1 is concerned, we have already answered the same against the Revenue in I.T.A. Nos. 19 of 2010, 20 of 2010, 21 of 2010 & 22 of 2010 and we answer the same against the Revenue as we see no reason to take a different view. 3. Th .....

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on and Development) Act, 1948, the assessee could have paid 9% extra. The reply of the assessee is as follows: "Payment of Royalty "In response to this, the assessee submitted that the payment of royalty on crude oil is governed by Oilfield (Regulation and Development) Act 1948 and Petroleum and Natural Gas Rules 1959. The Royalty is payable to State Government in case of Onshore Production and to Central Government in case of Offshore payment. Section 6A of the (Regulation and Develop .....

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e 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 .....

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rely as per direction of Government of India (refer letter No. P-20012/2897-PP dated 30-10-2003 enclosed at Annexure-VIII). The entire amount of royalty paid by ONGC is, therefore, fully deductible in computing the taxable income of ONGC. Kind reference is also invited to reply at point No. 2.2 above and to our letter dated 14-09-2005 submitted in this regard. In response to query raised vide order sheet entry dated 20-03-2007, the assessee furnished the break up of the royalty for crude oil and .....

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tern Region Other Refineries 268.76 268.76 RJY-HPCL-Onshore 68.89 34.66 Cauvery-CPCL 118.99 118.99 Total 2181.96 1434.09 The assessee further contended that the amount of royalty was payable as per the govt. orders and paid by ONGC on the basis of pre-discount price and provisional amount of royalty computed on post discount price in case of on shore production. Royalty on crude oil for onshore production is being paid by the respective projects/assets of ONGC to the concerned State Govt. In ord .....

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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 Sta .....

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oil will not be affected by discount on ONGC s crude oil. ONGC has paid royalty on Onshore production to State governments as per these instructions of the Central Government. The AO has noted in the same para that royalty based on pre discounted price paid to State Governments during this year amounted to ₹ 2181.96 crores but if the same royalty is calculated based on post discount price (provisional), the royalty payable comes to only ₹ 1434.09 crores. It was held by the AO that ro .....

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le based on post discount price. One more reason is given by the AO. This reason given is that when reduced price is taken into account for sales, royalty paid on extra price is not allowable. Being aggrieved, the assessee carried the matter in appeal before ld. CIT(A), who has deleted this disallowance and now the revenue is in appeal before us. 18. It is submitted by learned counsel for the assessee that the royalty payment at pre discount price of oil paid to State Governments is as per the i .....

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ines and instructions of Central Government. In view of this factual 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 f .....

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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 this issue and we uphold the same. This ground of revenue is rejected." 5. Feeling aggrieved by the same, the Revenue is before us. 6. We heard learned counsel for the Revenue Shri H.M. Bhatia and Shri Rupesh Jain on behalf of the .....

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the payment of the excess royalty, which is involved in this case, amounts to an offence, but he would firmly contend that the excess royalty paid by the respondent assessee is prohibited by Section 6A of the Oilfield (Regulation and Development) Act, 1948. He would submit that the Appellate Authority and the Tribunal have laid store by certain Government of India notifications/communications and he would submit that it is trite that should there be a conflict between an order and a statutory pr .....

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MCs (Oil Marketing Companies), clearly, there is violation of Section 6A. Therefore, the explanation of the assessee should not be accepted. 8. Per contra, the learned counsel for the respondent assessee would contend that Section 6A of the Oilfield (Regulation and Development) Act, 1948 has not been breached. In this regard, reference is made to notification issued dated 16.12.2004. Therein, it is stated that from 01.04.2002, in respect of onland areas, the rate of royalty will be 20% of the We .....

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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 Compani .....

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de oil w.e.f. 01-04-1998. The salient features of the new Scheme are as follows:- (i) The revised royalty dispensation will be applicable to the areas granted to National Oil Companies on nomination basis, the exploration blocks awarded to Private/Joint Venture (Pvt/JV) contractors prior to New Exploration Licensing Policy (NELP) and the onland discovered fields awarded to Pvt./JV contractors. (ii) Royalty will be fixed on Ad valorem basis. (iii) Royalty will be calculated in accordance with the .....

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ual import of crude oil stipulated in the Government Resolution on dismantling of the APM. (b) Royalty on crude oil production from onland and shallow water offshore areas (upto 400 mts water depth) will be paid @ 20% of the wellhead price as derived from the price determine as at sub para (a) above. (c) Additional amount accrued during this period in the States as a result of these decisions may not be borne by NOCs and will be paid to the States under liabilities of the Oil Pool Account after .....

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nd areas, royalty will be paid @ 20% of the Wellhead price as derived from the price determined as at sub sub para (a) above till the year 2006-07.The convergence process may commence w.e.f. 2007-08 with tapering rates of royalty @ 1.5% 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 .....

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nts 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 explanation after sub-section (i) of section 37 to cl .....

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1. Therefore, he would submit that it is inconceivable that the payment made by the respondent assessee, a Government of India undertaking, of the royalty to the State Government in terms of the Government of India s policy and directions could amount to protection money, extortion, hafta, bribes etc. He would submit that the object of the respondent assessee in making the payment was to comply with the directions of the Government of India and it could not, therefore, incur the wrath of the exp .....

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peals, but he reminds us that in regard to the other assessment years, where similar question arose and the Appellate Authority took the similar view as was taken in this case, it has not been subjected to appeals and therefore, on principles analogous to res-judicata, the present appeals are barred. In this connection, he sought support from the decision of the Hon ble Apex Court reported in Berger Paints India Limited Vs. Commissioner of Income Tax reported in 266 ITR Page 99 as also of that o .....

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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 th .....

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the leased area after such commencement, at the rate for the time being specified in the Schedule in respect of the mineral oil. (2) The holder of a mining lease granted on or after the commencement of the Oilfields (Regulation and Development) Amendment Act, 1969, shall pay royalty in respect of any mineral oil mined, quarried, excavated or collected by him from the leased area at the rate for the time being specified in the Schedule in respect of that minerals oil. (3) Notwithstanding anything .....

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il with effect from such date as may be specified in the notification and different rates may be notified in respect of same mineral oil mined, quarried, excavated or collected from the areas covered by different classes of mining leases; Provided that the Central Government shall not fix the rate of royalty in respect of any mineral oil so as to exceed twenty per cent of the sale price of the mineral oil at the oilfields or the oil well-head, as the case may be. (5) If the Central Government, w .....

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a notification fixing the rate of royalty. The proviso is a limitation on the maximum rate of royalty that can be fixed. It expressly provides that royalty cannot be in excess of 20% of the Well Head Price. It is necessary at this juncture to notice the facts. The respondent assessee produces oil and is an internal producer of oil. Under the law, it is bound to pay royalty to the State Governments. Respondent sells crude oil to the Oil Marketing Companies. Thereafter, the oil is marketed by the .....

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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 internat .....

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resolve, is that arising from Section 37 of the Income Tax Act, inasmuch as, under the explanation that which is prohibited cannot be allowed as a revenue expenditure. At this juncture, we must notice the case of the respondent assessee with reference to Notification dated 16.12.2004, which we have already adverted to. It is the case of the respondent assessee that Well Head Price under Section 6A of the Act has not even been defined. It was on the basis of the discussion that it was decided th .....

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ty, the Well Head Price will be the market driven price on the basis of the arm s length transactions. Therefore, the contention is that the price, which is a controlled price or rather the post-discount price or in other words, the price at which the respondent assessee had to sell to the OMCs, which was a discounted price, could not be taken as the Well Head Price. Instead, the concept of transaction at arm s length was imported. He would explain it with reference to Section 92(F)(ii), which r .....

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but generally, as a concept, price at arm s length 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 le .....

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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 intended to pass on to the consumers and, at the same time, preserve the revenue of the State Governments by way of royalty. If this interpretation is accepted, we would come to inevitable conclusion that the argument of the learned counsel for the .....

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