TMI Blog2019 (7) TMI 1577X X X X Extracts X X X X X X X X Extracts X X X X ..... incurred on Sudan pipeline - CIT (A) rejected the claim being the claim received from EPC contractor for additional expenditure incurred in respect of laying of Sudan pipeline on the ground that neither the liability has arisen in the hands of the assessee company nor revenue has accrued - HELD THAT:- We find merit in the findings given by the ld. CIT (A) that the additional expenses of ₹ 1026.08 million provided as expenditure by the assessee calls for disallowance as no liability has arisen in the hands of the assessee and since the revenue did not accrue or arise in the hands of the assessee, therefore, the addition of ₹ 1493.10 million made by the Assessing Officer cannot be justified. We accordingly dismiss the ground of appeal No.2 raised by the assessee and the ground Nos.6,7 and 8 by the Revenue. The various decisions relied on by the ld. counsel for the assessee are distinguishable and not applicable to the facts of the present case. In our opinion, the approach of the assessee should be consistent both for the revenue as well as expenditure. The assessee cannot take one stand for claiming the expenditure as an allowable deduction and, at the same time, do not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ground No.(i) by the assessee (i) Not allowing deduction under section 37 of the Act in respect of acquisition cost of participation interest in oil blocks That the Ld. CIT(A) erred in law and on facts of the case in not allowing deduction of 1NR 982.61 million being the acquisition cost paid during the year for acquiring participating interest in oil blocks under section 37 of the Act. Ld. CIT(A) has failed to appreciate that the cost of acquiring participating interest has been incurred in the normal course of its business and is wholly and exclusively for its business and hence allowable as deduction under section 37 of the Act. Ground Nos.1 2 by the Revenue 1. The Ld. CIT(A) has erred in law and on facts by not considering the fact that in the AY 2002-03 the ITAT has erred in granting relief to the assessee by wrongly invoking provisions of Section 32(1 )(ii) of the Act. 2. The Ld CIT(A) has erred in law and on facts by ignoring the fact that to acquire a stake in any kind of business would amount to acquiring an intangible asset as the nature of the business or commercial right which is being covered in the section under discussion, is of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Egypt Project 79,38,840/- 7. Qatar Project 8,19,37,500/- 8. A-3, Myanmar Project 4,42,72,569/- 9. 81-1 Libya Project 3,36,15,000/- 5. He, therefore, asked the assessee to justify the above claim in the return of income. Rejecting the various explanations given by the assessee, the Assessing Officer held that such an expenditure incurred could not be treated to be an expenditure incurred to acquire business or commercial rights as contemplated u/s 32(1)(ii) of the IT act. He also held that the nature of payment made by the assessee is that of capital expenditure on which the assessee is not eligible for any depreciation. The Assessing Officer analysed the production sharing contracts and noted that the analysis of the agreements shows that by making the payment the assessee has acquired a right of exploration and development of hydrocarbon, oil and gas. He observed that the rights acquired by the assessee are in the nature of business or commercial rights, but, not in the nature of rig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ., an Italian Corporation, Phillips Petroleum Company, a Delaware USA Corporation and Oil and Natural Gas Commission, read with the agreement made and entered on the 30th July, 1964 by and between the said Phillips Petroleum Company and the A.G.I.P., S.p.A.; and b) the agreement made and entered into on the 17the January, 1965 by and between National Iranian Oil Company of the One Part and the said A.G.I.P., S.p.A. Phillips Petroleum Company and the Oil and Natural Gas Commission of the Other Part. 11. In early 1970's, the assessee was also engaged in to carry out services and providing training in the international arena. In the year 1975, the assessee company also performed a service contract in Iraq, which due to lack of commercial viability, could not be pursued further after drilling a few wells in a field which still remains undeveloped. In the year 2000, this field was awarded by Iraq government, to the assessee through negotiations, for development and production of oil under new agreements. The assessee also had entered on May 19th, 1988 into a Petroleum Production Sharing Contract with Vietnam Oil and Gas Company. The Production Sharing Contract entered on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... siness or commercial rights of similar nature, being intangible assets acquired on or after 1-4-1988. 13. A reading of the above statutory expression brings home the point that the law has specified items of intangible assets eligible for depreciation in the following categories:- (i) Know-how (ii) Patents (iii) Copyrights (iv) Trademarks (v) Licences (vi) Franchises (vii) Any other business or commercial rights of similar nature. 14. So far as claim of depreciation in case of intangible assets falling in the category of any other business or commercial rights of similar nature are concerned, as per our considered view, all the business or commercial rights are not by themselves assets eligible for depreciation, and that only those rights which are similar in nature with the know-how, patents, copyrights trademarks, licences etc. are eligible for claim of depreciation. In view of principle of ejusdem generis, the expression any other business or commercial rights has to be read in the company of the preceding words. This rule of interpretation makes an attempt to reconcile incompatibility between the specific and general wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... res, which is in the nature of intangible assets entitled to claim of depreciation u/s 32(1)(ii) of the IT Act. 14A. In view of the above discussion asssessee's claim for allowing deduction of entire expenditure of ₹ 1559.10 crores is declined. The stand of CIT(A) in treating the alleged expenditure as deferred revenue expenditure and directing the AO to allow 1/19 of the expenditure during the year is also declined, since there is no concept of deferred revenue expenditure under IT Act.. As we have treated the expenditure as capital in nature the same is eligible for claim of depreciation at the rates prescribed for the assets falling u/s 32(1)(ii) of the Act. We direct accordingly. 11. We find, following the above decision the Tribunal in assessee s own case for assessment year 2003-04, 2004-05 and 2005-06 has allowed depreciation. Since the ld. CIT(A) has followed the order of the Tribunal in assessee s own case for assessment year 2002-03 and the Tribunal has allowed the claim of depreciation in assessment year 2003-04 to assessment year 2005-06 and the appeal filed by the Revenue against order of the Tribunal for A.Y. 2002-03 has been dismissed by the Hon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpleted the execution of multi-product pipeline from Khartoum Refinery to Port Sudan for the Ministry of Energy and Mining of the Government of Sudan (MEM). The Project has been implemented in consortium with Oil India Limited, where the Company s share being 90%. The EPC contractor executing the project on behalf of the consortium claimed additional costs aggregating to ' 1,659 million from the assessee and consequently, an amount of ' 1,026.08 million, being the assessee s share out of' 1140.08 million has been provided in the books of accounts and claimed as an expense in the return of income. The assessee forwarded counter claim to its customer, MEM amounting to ' 1,524.20 million (OVL s share being 1,371.78 million) which has not been accepted by MEM till date. Accordingly, the assessee did not consider any revenue on this account in its books of account since according to the assessee it cannot be said to have acquired any right to receive such income till the time the claim is accepted by MEM. The AO held that since the project had been completed in the relevant assessment year, the assessee acquired a certain right to receive such amount from MEM and the sam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g ₹ 1493.10 Million) which have not been accepted by MEM. Accordingly, the company has not considered any revenue in its Profit Loss Account for the F.Y. 2005-06. AO held that as the project has been completed and the company made a provision for additional expense of ₹ 1026.8 Million being company's share in the consortium, therefore, revenues of the company to the extent of ₹ 1493.10 Million accrued and crystallized on completion of the project should have been recognized on matching principal and paid taxes on it on completion of the project during the year. The assessee company also forwarded its claim of ₹ 1493 Million to MEM. As such, for the year under consideration the income was ascertained and definite and hence should have been returned as taxable income under the principle of matching in accounts. Therefore, the sum of ₹ 1493.10 million is added by the AO to the taxable income of the assessee company. Alternatively, AO held that if in appeal the assessee s claim of treating revenues as non-taxable on account of it being uncertain, is accepted then the provision made by assessee for the additional expense to the extent of ₹ 1026. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the appellant company to the EPC contractor towards the additional costs claimed. The AR submitted that no payment has been made by the appellant company to the contractor. From the above it is evident that neither the additional cost claimed by the EPC contractor is accepted nor any part of it is paid. As such the liability towards the additional cost claimed by the EPC contractor has not arisen to the company during the relevant period. 7.4.6 Further, cl. 9.1.4 of agreement dt. 30.06.2004 between appellant company MEM says: OVL shall not make any variation, unless and until MEM approves a Variation in writing. In this context the reply of the legal department of MEM says: Referring to the above mentioned subject and after review and study of the contract signed between MEM and OVL and the related documents, I would like to convey to you that the contractor is not entitled to any amount under his claims for additional amounts, as the alleged variations were not approved by the owner before implementation of the works the subject of variations. In addition the required procedures under the contract for both variations approval and claims were not follow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dditional expense of ₹ 1026.08 million provided as expenditure by the appellant on this account calls for disallowance as no liability as arisen in the hands of the appellant. Further, since revenue did not accrue or arise in the hands of the appellant, therefore, the addition of ₹ 1493.10 million made by the AO cannot be justified. The cause laws relied on by the AR are not applicable in the instant case because the contractor is not legally entitled to the additional claims and liability claimed by the EPC contractors which is pending in arbitration tribunal is not accepted by the appellant. In view of the above, the addition made by the AO is reduced from ₹ 1493.10 million to ₹ 1026.08 million. The appeal is partly allowed in this ground. 17. So far as the additional expenses is concerned, the ld. CIT (A) held that the additional expense of ₹ 1026.8 million provided as expenditure by the assessee calls for disallowance as no liability has arisen in the hands of the assessee. He accordingly deleted the addition of ₹ 1493.10 million made by the Assessing Officer and simultaneously directed the A.O. to sustain the addition of ₹ 1026.0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llion. Remaining amount was not provided as it had not yet been approved. No amount was claimed in subsequent years. No claim of any income was even made on MEM Sudan in AY 2006-07, claim was made on 17.04.2006. 17.04.2006 Assessee made a claim of USD 3,41,28,976 on MEM Sudan [equivalent to ₹ 1,524.20 million (Assessee s share being ₹ 1,371.78 million)]. It remain mere claim not yet admitted. 208-211 25.05.2006 ONGC informed the EPC contractor that its first claim has been scrutinized processed for payment of an amount of USD 2,42,57,643 out of total claim of USD 3,71,47,403 and the other two proposals are still under Process 201 06.07.2006 Assessee made additional claims of USD 1,18,78,586 and USD 1,69,147 on MEM Sudan [equivalent to ₹ 523.71 million (Assessee s share being ₹ 471.34 million)]. It remain mere claim not yet admitted. 212-228 09.12.2006 Letter written by Legal department of Ministry of Energy Mining of the Government of Sudan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e agreement dated 17.08.2004 for managing the entire project of pipeline execution and had directed Dodsal to directly deal/correspond with the Engineering Services, Division of ONGC on all matters relating to the project. The assessee had completed the project and the product pipeline system was handed over to MEM on 31.08.2005, i.e. before the year end. 21. Subsequently, the EPC contractor claimed additional costs amounting to USD 2,69,82,643, USD 12,70,435 and USD 88,94,325 (aggregating to ₹ 1,659 million) vide its letters and invoice dated 1 December 2005 and 09 January 2006. Such letters/invoice were submitted with ONGC (consultant) for review and approval. Vide its letter dated 25.05.2006, the consultant informed the EPC contractor that its first claim has been scrutinized processed for payment of an amount of USD 2,42,57,643 and the other two proposals are under process. Subsequently, vide letter dated 05.10.2007, the consultant approved the second claim for an amount of USD 12,29,652 and rejected the claim of USD 88,94,325. Thus the amount approved by the consultant aggregating to USD 2,54,87,295 (assessee s share USD 2,29,38,566 being 90% of USD 2,54,87,295). B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AO in the order that the aforesaid expenditure is merely a provision made is contrary to the notes of accounts. Referring to page 32 of the paper book, the ld. counsel for the assessee drew the attention of the Bench to the notes on accounts which read as under:- During the year, the Company completed the execution of the 12 X 741 Kms. multi-product pipeline system from Khartoum Refinery to Port Sudan for the Ministry of Energy Mining of the Government of Sudan (MEM) on Build, Own, Lease and Transfer (BOLT) basis and handed over the same to MEM. The project has been implemented in consortium with Oil India Limited, Company share s being 90%. 26. The EPC Contractor executing the project has claimed additional costs aggregating to ₹ 1,659.00 Million (Company s share being ₹ 1,493.10 Million), which have not been accepted by the Company as yet. However, part of the claims has been forwarded to MEM for their approval for an aggregate amount of receivables from MEM ₹ 1,524.20 Million (Company s share being ₹ 1371.78 Million), while the balance claims may be forwarded to MEM after further verification. Pending settlement with the EPC Contractor, an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tes to ₹ 2,444.79 Million. Referring to paper book page 28, he drew the attention of the Bench to the details which are as under: (i) Construction contract revenue ₹ 2173.53 million (appearing in Schedule 16) (ii) Lease income ₹ 271.26 million (appearing in Schedule 17) 29. He accordingly submitted that in view thereof there was no justification for the A.O. to have disallowed the claim of expenditure which has actually been incurred by it. The claim of expenditure could not have been disallowed merely on the ground that the assessee has not recognized the revenue despite the fact no such income had accrued. According to the ld. AR it is the settled law that expenditure is to be allowed in the year in which it incurred and whereas the income is to be recognized as and when the same accrues. In other words, expenditure is to be allowed as deduction in the year when the same is incurred and in respect of which income is recognized only when the same accrues. 30. Referring to the decision of the Hon'ble Delhi High Court in the case of Addl. CIT vs. Rattan Chand Kapoor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng, it is not necessary that the liability must have actually been incurred during the assessment year in question to enable the assessee to claim it as an expense or deduction as the case may be. The crux of the matter is the reasonable certainty with which the liability can be ascertained. The Hon'ble High Court accordingly reversed the decision of the Tribunal and allowed the entire licence fee and interest on arrears of licence fee as deductible. He also relied on various other decisions as placed in the paper book. 34. The ld. DR, on the other hand, heavily relied on the order of the CIT(A). 35. We have considered the rival arguments made by both the sides, perused orders of the Assessing Officer and CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find the EPC Contractor executing the project on behalf of the consortium claimed additional costs aggregating to ₹ 1659 million from the assessee and, consequently, an amount of ₹ 1026.08 million being the assessee s share out of ₹ 1140.08 million as approved by ONGC (consultant) was provided in the books of account and was cla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the assessee cannot take contradictory stands i.e., claim an expenditure on the basis that he has provided for the same in the books after admitting the same, but, will not show the revenue in its books of account on the ground the revenue did not accrue or arise to the assessee especially when the assessee is following mercantile system of accounting. 36. We find the assessee, during the year under consideration has completed the execution of the pipeline from Khartoum Refinery to Port Sudan. The EPC contractor executing the project on behalf of the consortium has claimed additional costs aggregating to ₹ 1026.08 million being the share of the company out of ₹ 1140.08 million as approved by ONGC (consultant) which has been provided as expenditure during the year. The claim forwarded by the company has not been accepted by the MEM for which the company has not considered any revenue in the P L Account. However, it has made a provision for additional expenses of ₹ 1026.08 million being the company s share in the consortium. From the findings given by the CIT(A), we find the additional cost of ₹ 1659.00 million company s share being ₹ 1493.10 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under litigation and, therefore, following matching principle the claim of additional expenditure made by the assessee in its books of account has to be disallowed. We accordingly uphold the order of the CIT(A) on this issue and the grounds raised by the assessee as well as the Revenue are accordingly dismissed. 37. Ground of appeal No.5 by the Revenue reads as under:- 5. The Ld. CIT(A) has erred in law and on facts by ignoring the thorough discussion made by the assessing officer, in his order regarding the provisions of section 37 and section 42 and reason to why the expenses shall be claimed u/s 42 of the Act. 38. Facts of the case, in brief, are that during the relevant assessment year, the assessee incurred expense of ₹ 1,125,125,851 on purchase of seismic data / submission of tenders or bids etc. for evaluation of oil blocks proposed to be acquired by the assessee and claimed the same as revenue expenditure allowable under section 37(1) of the Act on the ground that the said expenditure was incurred for expansion / extension of the existing business of the assessee. The AO disallowed the claim of the assessee and held that aforesaid expenditure may be cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rofits. A perusal of the nature of the expenses incurred reveal that the same are in the nature of revenue expenses incurred in the normal course of business. It is only that the expenses are incurred on evaluation of projects for acquisition and in pre-bid phase. These expenditure have to be incurred by the Appellant irrespective of whether any participating interest is acquired by the Appellant or not. By incurring these expenses, the Appellant evaluates the viability of the various projects and decides whether to invest in such venture or not, without which the Appellant may incur severe losses. AO erred in disallowing the pre-acquisition expenses of ₹ 112,51,25,851/- claimed under section 37 of the Act by holding that the same were allowable as deduction under section 42 of the Act in the subsequent assessment years only after the commencement of commercial production /abandonment of the relevant projects. Section 42 agreement makes it clear that only expenditure on exploration are governed by the agreement. However, in the present case, the expenditure has not been incurred on exploration, rather the expenditure has been incurred on evaluating whether a project is viable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of the business already being carried on by the assessee, expenses in connection with such expansion or I extension of the business must be held to be deductible as revenue expenses. I 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 course of business of exploration and production of oil, being revenue in nature is liable to be allowed as a deduction. Similar claim was also made by the assessee in the earlier year. We therefore direct the AO to allow the same as revenue expenditure. As we have allowed ground no. 3 to 3.2, the alternate ground no. 3.3 as taken by assessee become anfractuous. 16. The expenditure of ₹ 5.64 crores incurred on projects pending final approval, even though the said expenditure was written off in the accounts over a period of five years the AO disallowed the same. We have considered rival contentions. The assessee in the instant case has incurred expenses relating to project pending final ev ..... X X X X Extracts X X X X X X X X Extracts X X X X
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