Where Assessee is continuously in the business of exploration and production of oil, expenditure incurred by it on abandoned project is in normal course of its business and such expenditure is allowable as revenue expenditure

 632 total views

Where Assessee is continuously in the business of exploration and production of oil, expenditure incurred by it on abandoned project is in normal course of its business and such expenditure is allowable as revenue expenditure

Ongc Videsh Ltd., New Delhi vs Department Of Income Tax

    IN THE INCOME TAX APPELLATE TRIBUNAL

     DELHI BENCHES : “E” NEW DELHI

    BEFORE SHRI J.SUDHAKAR REDDY, AM

              AND

  SHRI RAJPAL YADAV, JM

      ITA no. 5054/Del/2010

        Assessment Year : 2004-05

                                    &

         ITA no. 1140/Del/2011

        Assessment Year : 2005-06

DCIT, Circle 13(1)        vs.    M/s ONGC Videsh Ltd.,

New Delhi                        New Delhi

                                 AND

                     Cross Objection No.104/Del/2011

                        (In ITA No. 1140/Del/2011)

                                A.Y. 2005-06

ONGC Videsh Ltd.          vs.          DCIT, Circle 13(1)

New Delhi                              New Delhi

(Appellant)                             (Respondent)

 Department by:- Sh. Gunjan Prasad, CIT, D.R

 Assessee by:- Shri C.S.Aggarwal, Adv.&

 Shri Ravisharma, Adv. andMs. Anusha Singh,Adv.

   ORDER

PER J.SUDHAKAR REDDY, AM Both these appeals are filed by the Revenue and the Cross Objection is filed by the assessee for the Assessment Year 2005-06. As the issues arising in all these appeals are common, for the sake of convenience they are heard together and disposed of by way of this common order.

ITA No. 5054/Del/2010 – A.Y. 2004-05 ITA No. 1140/Del/2011 – A.Y. 2005-06 C.O. No. 104/Del/2011 (In ITA 1140/Del/11) A.Y. 2005-06 O.N.G.C. Videsh Ltd., New Delhi

  1. We shall first take up ITA 5054/Del/2010 which is an appeal filed by the Revenue against the order of the Ld.CIT(Appeals)-XVIII, New Delhi dt. 3.8.2010 for the Assessment Year 2004-05 on the following grounds.

“1. That on the facts and circumstances of the case the Ld. CIT(A) erred in allowing the assessee’s claim of depreciation on acquisition of participating interest u/s 32(1)(ii) of the Act, in respect of Sakhalin block and Myanmar Block.

  1. That on the facts and circumstances of the case the Ld. CIT(A) erred in ignoring the fact that the Section 32(1 )(ii) comprises intangible assets, being know how patent, copy rights, trade marks, licenses, franchisee or any other business or commercial rights of similar nature.
  2. That on the facts and circumstances of the case the Ld. CIT(A) erred in ignoring the fact that the business or commercial right which is talked about in this section has a close link to intangible assets which are in the nature of knowhow, copy right trademarks, franchises, which if studied closely, indicate that it is a right given from licensor to a licensee in lieu of a payment which would be in the nature of either royalty, fees for technical services or any such sum which is of a similar nature.
  3. That on the facts and circumstances of the case the Ld. CIT(A) erred in allowing the assessee’s claim of expenditure of Rs.83,84,846/- incurred on Board Approved Project. It was submitted that the assessee is engaged in the business of Exploration and Production of Hydrocarbons in other countries and that it has to continually evaluate various business opportunities acquiring them.
  4. That on the facts and circumstances of the case the Ld. CIT(A) erred in relying upon the decision of Hon’ble lTAT in assessee’s own case A.Y.2002-03, has allowed the claim of the assessee and deleted the addition made by the AO.
  5. That on the facts and circumstances of the case the Ld. CIT(A) erred in allowing the assessee’s claim of expenditure of RS.22,59,81,215/- incurred by company for obtaining Political risk insurance for safeguarding investment of the Page 2 ITA No. 5054/Del/2010 – A.Y. 2004-05 ITA No. 1140/Del/2011 – A.Y. 2005-06 C.O. No. 104/Del/2011 (In ITA 1140/Del/11) A.Y. 2005-06 O.N.G.C. Videsh Ltd., New Delhi company in Sudan through its subsidiary, ONGC Nile Ganga BV. as the same represents business expenditure of company
  6. That on the facts and circumstances of the case the Ld. CIT(A) erred in holding that the assessee company has justified the expenses as allowable in view of (a) the fact that the investment led to earning of income which was subjected to tax and so is an allowable expense ; (b) the fact that any expense is incurred by the appellant to safeguard its business interest is an allowable expense as the destruction of its interest would have a direct impact on its goodwill; and (c) any expense incurred on the principle of commercial expediency relatable to the line business of the appellant is allowable.
  7. That on the facts and circumstances of the case the Ld. CIT(A) erred in ignoring the fact that since the investment in Sudan was not made by the assessee company but by its subsidiary company, which is a separate and independent identity. Since the business in Sudan was done only by the subsidiary company of the assessee and not by the assessee, the claim of expenses cannot be claimed by the assessee.
  8. That on the facts and circumstances of the case the Ld. CIT(A) erred in directing the AO to verify the GAS Sales & Purchase Agreement and the exact year-wise figures of advance received and sale of gas made nad deleted the addition in respect of the advance received during the year for which sale of gas has not taken place during the year.
  9. That on the facts and circumstances of the case the Ld. CIT(A) erred in holding that the amount received by the appellant is in the nature of advance received for sale of gas, and to the extent that the sale of gas has not taken place during the year under consideration the amount of advance cannot be treated as sale and added to the income of the appellant for the current year.
  10. That on the facts and circumstances of the case the Ld. CIT(A) erred in ignoring the fact that since the assessee had already received the amount of lifting the minimum quantity of gas income from which has been crystallized in the hands of the assessee and the assessee was following mercantile system of Page 3 ITA No. 5054/Del/2010 – A.Y. 2004-05 ITA No. 1140/Del/2011 – A.Y. 2005-06 C.O. No. 104/Del/2011 (In ITA 1140/Del/11) A.Y. 2005-06 O.N.G.C. Videsh Ltd., New Delhi accounting, therefore, the income that accrued to the assessee during the year is to be treated as income of the current year.
  11. That on the facts and circumstances of the case the Ld. CIT(A) has not appreciated the fact that the assessee was following the mercantile system of accounting, therefore, the income accrued/received by it on the basis of minimum quantity of Gas to be lifted by M/s Petro Vietnam is to be treated as its income in the Books of account being income accrued and crystallized to it.
  12. That the appellant craves to be allowed to add any fresh grounds of appeal and/or delete or amend any of the grounds of appeal.”
  13. We have heard Sh. C.S.Aggarwal, Ld.Counsel for the assessee and Shri Gunjan Prasad, Ld.CIT, D.R. on behalf of the Revenue.
  14. On a careful consideration of the facts and circumstances of the case, on a perusal of the papers on record and orders of the authorities below, case laws cited, we hold as follows.
  15. Ground no.1 to 3 pertain to allowance of depreciation u/s 32(1)(ii) of the Income Tax Act, 1961, on the acquisition , paid to acquire the participating interest in oil blocks. The assessee claims that it has incurred expenditure for acquiring participating interest in the rights and licenses granted by the Russian State which enables the assessee to carry on hydrocarbon operations. Thus it claimed that it acquired business rights and production licenses, which are in the nature of intangible property, eligible for depreciation u/s 32(1)(ii) of the Act. This issue is admittedly covered in favour of the assessee.

5.1. The assessee had made an identical claim in respect of Myanmar block in the earlier A.Ys. The ITAT Delhi Benches for the Assessment Year 2003-04 in Page 4 ITA No. 5054/Del/2010 – A.Y. 2004-05 ITA No. 1140/Del/2011 – A.Y. 2005-06 C.O. No. 104/Del/2011 (In ITA 1140/Del/11) A.Y. 2005-06 O.N.G.C. Videsh Ltd., New Delhi ITA no.3610 and 3692/Del/2013 vide order dt. 14th March, 2014 has allowed the claim of the assessee by holding as follows.

“7. With the assistance of learned representatives, we have gone through the records carefully. We find that there is no disparity on facts. This very PSA was considered by the ITAT and treated as a intangible rights which qualify for depreciation. The discussion made by the ITAT reads as under:

  1. We have considered the rival contentions of both the parties and perused the material placed on record. From the record, we found that on 5th May, 1965 assessee company was registered as “Hydrocarbons India Private Limited” to take over the rights and interest of its parent company i.e., the ITA Nos.472-546-2008 erstwhile Oil and Natural Gas Commission to formalize the following agreements so as to explore and develop oil fields in Iran:
  2. a) the agreement made and entered into on 26thAugust, 1964, by and between A.G.I.P., S.p.A., 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
  3. 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.
  4. 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 Page 5 ITA No. 5054/Del/2010 – A.Y. 2004-05 ITA No. 1140/Del/2011 – A.Y. 2005-06 C.O. No. 104/Del/2011 (In ITA 1140/Del/11) A.Y. 2005-06 O.N.G.C. Videsh Ltd., New Delhi 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 May 19th , 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 and Gas Company 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.
  5. From the record, we found that hydrocarbons in their natural habitat embedded in a particular territory are the property of the state government, jurisdiction over such hydrocarbons does not lie with any private person other than state government and a person cannot carry out hydrocarbons operations unless the person had entered into a production sharing agreement with the government. 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 Page 6 ITA No. 5054/Del/2010 – A.Y. 2004-05 ITA No. 1140/Del/2011 – A.Y. 2005-06 C.O. No. 104/Del/2011 (In ITA 1140/Del/11) A.Y. 2005-06 O.N.G.C. Videsh Ltd., New Delhi 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% 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 carry on hydrocarbon operations in the Sakhalin project. The statutory expression of the provision granting depreciation on intangible asset is that-

“know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after 1-4-1988.”

  1. A reading of the above statutory expression brings home the point that the law has specified items of intangible assets eligible for epreciation 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.

  1. 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 Page 7 ITA No. 5054/Del/2010 – A.Y. 2004-05 ITA No. 1140/Del/2011 – A.Y. 2005-06 C.O. No. 104/Del/2011 (In ITA 1140/Del/11) A.Y. 2005-06 O.N.G.C. Videsh Ltd., New Delhi preceding order. 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., form a distinct genesis or category inasmuch 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 section 32(1)(ii), the commercial rights of exploration of mineral oils, as acquired by the assessee falls under the expression of any other business or commercial rights of the nature similar to one of the category i.e. licenses as stipulated in Section 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 u/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 has been granted licenses by Russian government to explore and produce hydrocarbons in the agreement area. There is no dispute to the fact that assessee has incurred expenditure of Rs.1559.09 crores for obtaining the right and license for exploration of oil. It is not possible to say that such expenditure was neither capital nor revenue in nature. If it is held to be capital, then it is obvious that what the assessee has acquired was a participating right which is in the nature of commercial right of carrying on of business of exploration and production of mineral oil. It also cannot be said that the right so acquired was not an asset. If it is an asset being the right then it is obvious that same is commercial right, therefore in the nature of asset in the form of license. This right had been granted to the assessee by way of license and the assessee became owner of such right i.e. license to have an access and to carry on of business of exploration Page 8 ITA No. 5054/Del/2010 – A.Y. 2004-05 ITA No. 1140/Del/2011 – A.Y. 2005-06 C.O. No. 104/Del/2011 (In ITA 1140/Del/11) A.Y. 2005-06 O.N.G.C. Videsh Ltd., New Delhi and development of mineral oil. Accordingly, as per our considered view such an asset fall within the category of asset falling u/s 32(1)(ii) of the Act. Accordingly, we are inclined to agree with the learned senior counsel that the assessee had 15 acquired business and commercial right and license by making payment of Rs.1559.10 crores, 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 assessee’s claim for allowing deduction of entire expenditure of Rs. 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”.

  1. Respectfully following the order of the Co-ordinate Bench of the ITAT, we allow ground No.1 in the assessee’s appeal. Consequently, both the grounds raised in the revenue ‘s appeal are rejected.”

Respectfully following the same, we uphold the finding of the First Appellate Authority and dismiss these grounds of the Revenue.

5.2. Ground no.4 and 5 pertain to allowability of expenditure incurred on evaluating existing business opportunities relating to products pending for final evaluation.

Page 9 ITA No. 5054/Del/2010 – A.Y. 2004-05 ITA No. 1140/Del/2011 – A.Y. 2005-06 C.O. No. 104/Del/2011 (In ITA 1140/Del/11) A.Y. 2005-06 O.N.G.C. Videsh Ltd., New Delhi 5.2.1. Similar issue has come up before the ITAT for the Assessment Year 2003-04 and the Tribunal at para 9 and 10 has held as follows.

“9. In ground No.2, assessee has challenged disallowance of Rs.6,68,57,064 which were incurred on evaluating business opportunities relating to project pending final evaluation. These expenditure were claimed under sec. 37(1) of the Income-tax Act, 1961. Learned counsel for the assessee pointed out that similar expenditure were claimed in assessment year 2002-03 and these have been allowed by the ITAT. Learned DR was unable to controvert the contentions of the learned counsel for the assessee. The ITAT has recorded following findings:

“16. The expenditure of Rs.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 evaluation. The assessee had made distinction between contract projects for which agreement is entered into and the board approved projects i.e. projects for which no agreement/contract has been entered. The assessee used to capitalize expenditure incurred on projects for which no agreement/contract has been entered, however, the cost of such projects which are abundant was written off over a period of five years in the books of account of the assessee. The assessee had claimed the expenses pertaining to abandoned project as revenue expenses. The expenditure incurred for this purpose was in the nature of travel cost, meeting and conference expenses, delegation, salaries and professional fees etc. These expenditure were claimed by the assessee in its return of income in the year of its incurrence. The issue under consideration is covered in favour of the assessee by the order of Bombay High Court in the case of CIT Vs. Page ITA No. 5054/Del/2010 – A.Y. 2004-05 ITA No. 1140/Del/2011 – A.Y. 2005-06 C.O. No. 104/Del/2011 (In ITA 1140/Del/11) A.Y. 2005-06 O.N.G.C. Videsh Ltd., New Delhi Essar Oil Ltd. 2008 TIOL 530 wherein the High Court has observed that submitting tenders and bids in the field of oil exploration is a highly sophisticated technical task for which the assessee company had to incur substantial amount of expenditure before submitting its bid. If the assessee is not successful in obtaining bid, such expenditure is allowable as revenue expenditure. As the assessee was continuously in the business of exploration and production of oil, the expenditure so incurred was in the normal course of its business, such expenditure being revenue in nature incurred for the purpose of existing exploration and production business was required to be allowed u/s 37(1) of the IT Act. Similar claim was also made by the assessee in earlier years. Accordingly, we direct the AO to allow the same”.

  1. We do not find any disparity on the facts except quantum of amount. Therefore, respectfully following the order of the ITAT, we delete the disallowance . Accordingly, the appeal of the assessee is allowed and that of the revenue is dismissed.”

5.2.2. Respectfully following the same, we uphold the finding of the First Appellate Authority and dismiss these grounds of the Revenue.

5.3. Ground nos. 6 to 8 pertain to the claim for allowance of risk insurance premium amounting to Rs.22,59,81,215/-, incurred for obtaining a political risk insurance policy for safeguarding its interest, in its wholly owned subsidiary (hereinafter referred to as ‘WOS’) against unstable political environment in Sudan.

Page ITA No. 5054/Del/2010 – A.Y. 2004-05 ITA No. 1140/Del/2011 – A.Y. 2005-06 C.O. No. 104/Del/2011 (In ITA 1140/Del/11) A.Y. 2005-06 O.N.G.C. Videsh Ltd., New Delhi 5.3.1. The Ld.Counsel for the assessee submits that payment of insurance premium is in the nature of revenue expenditure. He submitted that the insurance policy was taken at the specific directions issued by the Ministry of Petroleum and Natural Gas, Govt. of India, vide letter dt. 28th October,2002. He argued that the mere fact that the investment in Sudan has been made through a Subsidiary, does not make the expenditure, as expenditure of the Subsidiary.

The Ld.D.R. supported the order of the Ld.A.O.

5.3.2. We have considered rival submissions. The First Appellate Authority has at para 8.2 to 8.2.4. pages 42 to 44 held as follows.

“8.2. I have carefully considered the assessment order and the submissions made by the Ld. AR on the above issue. As per the facts of this case, M/s ONGC Nile Ganga BV (ONGBV) is a wholly owned subsidiary company of the appellant. ONGBV entered into a joint venture in Sudan which is a politically unstable country, involved in civil war and where there were disputes relating to the control over country’s oil resources. To safeguard its investment in the subsidiary the appellant entered into a tripartite agreement with the Oriental Insurance Company Ltd under Expropriation Insurance which is an insurance to cover losses arising from nationalization or confiscation of property which might occur due to political instability. During the year under consideration the appellant incurred an expenditure of Rs. 22,59,81,2151- toward insurance premium for the said insurance.

8.2.1 It is argued by the Id. AR that in terms of the Policy of Insurance undertaken, the appellant had insures its equity investment by which it had acquired the share in the joint venture in the Greater Nile Oil Project for exploration, development, production and marketing of petroleum resources. The basic purpose of the insurance was to safeguard the appellant’s business Page ITA No. 5054/Del/2010 – A.Y. 2004-05 ITA No. 1140/Del/2011 – A.Y. 2005-06 C.O. No. 104/Del/2011 (In ITA 1140/Del/11) A.Y. 2005-06 O.N.G.C. Videsh Ltd., New Delhi decision to invest in Sudan, the appellant incurred the expenditure towards insurance premium by taking an insurance policy to safeguard its equity investment. In light of these facts once an expense has been incurred by the assessee in the course of its business to safeguard its business asset, it is a business expenditure.

8.2.2 It is also pointed out by the Id. AR that the appellant had earned an income of Rs.3,279,680,000/- from its investment in its subsidiary M/s ONGBV on which tax of Rs.327,968,000/- was withheld. The AO in his order while making the disallowance had held that such an expenditure is not a business expenditure of the appellant. It is argued that this reasoning of the AO is incorrect because the appellant has earned substantial income from its investment so made which has been subjected to tax as business income for the current year and credit for the tax withheld was allowed. In view of this, I find force in the argument of the appellant that any recurring expenditure incurred by the appellant towards an asset which is a source of business income is allowable business expenditure.

8.2.3. In view of the above factual matrix and judicial precedents, it cannot be denied that investment in the Sudan and expenditure incurred to take the insurance cover is a business decision. Considering the same, I am in agreement with the submission of the appellant that the expenditure needs to be allowed u/s 37(1) of the Act for the reason that the same is incurred in order to safeguard its business interest as it is the real beneficiary of insurance as well as investment made in the subsidiary. Secondly, the said expenditure also falls within the meaning “for the purpose of business” as the appellant has earned substantial dividend from the above investment which has been offered to tax in India and therefore such expense has a direct link with the investment and also in protecting the legitimate business interest of the appellant. This view is also Page ITA No. 5054/Del/2010 – A.Y. 2004-05 ITA No. 1140/Del/2011 – A.Y. 2005-06 C.O. No. 104/Del/2011 (In ITA 1140/Del/11) A.Y. 2005-06 O.N.G.C. Videsh Ltd., New Delhi squarely supported by the, Hon’ble Apex court in the case of S.A. Builder Ltd VS CIT 288 ITR 1 and ITC Limited vs. Jt.CIT (2005) 95 TTJ 1017.

8.2.4. Further the facts of the case of the appellant are identical to the case of ITC Ltd. (supra) wherein the Hon’ble ITAT has allowed the payments made by the holding company to discharge the liability of its subsidiary as a revenue expense. The appellant in its submissions relyi8ng on the judgement of M/s ITC Ltd. has argued that an expenditure incurred by the assessee with a view to protect the goodwill of its business is a revenue expenditure laid out wholly and exclusively for the purpose of business and thus an eligible deduction. The Ld.A.R. submitted that in the present case the appellant has made investment in a 100% subsidiary which is in the same line of business as the appellant. The purpose of the investment is to earn revenue directly or indirectly. Thus, expenditure incurred in order to safeguard its goodwill as well business interest is nothing but wholly and exclusively for the purpose of business. The Ld. AR further submitted that it was also commercially expedient for it to safeguard its interest. In other words, the Ld. AR justified the expenses as allowable in view of

(a) the fact that the investment led to earning of income which was subjected to tax and so is an allowable expense; (b)the fact that any expense is incurred by the appellant to safeguard its business interest is an allowable expense as the destruction of its interest would have a direct impact on its goodwill; and (c) any expense incurred on the principle of commercial expediency relatable to the line business of the appellant is allowable. Under the facts and circumstances as discussed above, the Ld. AR’s contention is found to be correct. Under the facts and circumstances of the case and the judicial pronouncements as discussed above, the impugned disallowance made by the AO cannot be legally sustained. The same is, therefore, deleted.”

5.3.3. We find no infirmity in these findings of the First Appellate Authority. The policy itself has been take at the specific directions given by the Page ITA No. 5054/Del/2010 – A.Y. 2004-05 ITA No. 1140/Del/2011 – A.Y. 2005-06 C.O. No. 104/Del/2011 (In ITA 1140/Del/11) A.Y. 2005-06 O.N.G.C. Videsh Ltd., New Delhi Govt. of India. The expenditure in question has been laid down wholly and exclusively for the purpose of the assessee’s business. In the result these grounds of the Revenue are dismissed.

5.4. Ground nos. 9 to 12 are on the issue of taxability of amounts received in advance on the quantity of gas sold by the assessee. The submissions of the assessee were that the agreement for sale and purchase of natural gas provide that the buyer has to pay for certain minimum quality of gas (take or pay), even if the actual quantity of gas taken by the buyer is less than the minimum contracted quantity of gas. It is further submitted that in case the actual quantity of gas taken by the buyer is less than the minimum quantity of gas contracted, then the buyer is entitled to get the same, free of charge in future years.

5.4.1. In this case the assessee had received an amount of Rs.98,16,00,000/- for gas which was not supplied during the year. The gas was supplied in the subsequent year and the same was offered to tax during the A.Y.

2005-06 and 2006-07. The Ld.Commissioner of Income Tax (Appeals) at pages 53 to 55 para 9.3.1 of his order has held as follows.

“9.3.1. As argued by the Id. AR, the consideration received under the take or pay agreement can e held taxable only when the transaction of sale is completed, which would happen when the buyers take delivery of the product sold. It is submitted by the ILd.AR that the purchaser had to guarantee and pay for lifting of a certain minimum quantity of gas from the appellant. In case the Page ITA No. 5054/Del/2010 – A.Y. 2004-05 ITA No. 1140/Del/2011 – A.Y. 2005-06 C.O. No. 104/Del/2011 (In ITA 1140/Del/11) A.Y. 2005-06 O.N.G.C. Videsh Ltd., New Delhi said gas was not lifted in the 151 year it could be supplied by the appellant within the subsequent four years. The payments received during the year was thus in the nature of advance which could be adjusted against the sale only when the gas was delivered to the buyer. It is argued that in oil & gas industries, such contracts are normal as the seller or producer of gas always looks for a prospective buyer who is willing to enter into a long term agreement for supply of gas to reduce the risk of any variation in supply due to production as well as fluctuation in price of gas. Similarly, the buyer also desires to enter into such forward or long term contract with the seller in accordance with its needs as the storage of gas needs to be proper and therefore it becomes difficult to take the entire quantity of gas in one go. The result of this is, that supply to be made by the seller to the buyer is on need basis which is often termed as take & pay. The payments in such cases are normally received in advance on predetermined rates to avoid any variation of prices in future which could result into adverse situation to either the seller or the buyer. Accordingly, the accrual on account of sale of gas is based on the actual take off, of quantity of gas by the buyer and not on the basis of advance payment received by the seller.

I also find force in the argument of the Id. AR that under the concept of Sale of Goods, an agreement to sell becomes a sale only when in terms of the understanding between the parties i.e. the buyer and the seller, the property in the goods is transferred to the buyer, which in the present case is at the time of delivery by the seller to the buyer at the sales point. If the actual quantity of gas delivered or taken by the buyer is less than for which the advance has been received, then the seller is obliged to deliver, free of any payment, Make-Up gas to the buyer in subsequent years. Therefore, in such case till the time delivery of the gas is not taken by the buyer, the sale is not complete, despite the payment made in advance. It was further submitted that even under mercantile system of accounting, a sale would crystallise when the buyer takes the delivery Page ITA No. 5054/Del/2010 – A.Y. 2004-05 ITA No. 1140/Del/2011 – A.Y. 2005-06 C.O. No. 104/Del/2011 (In ITA 1140/Del/11) A.Y. 2005-06 O.N.G.C. Videsh Ltd., New Delhi of goods and title/risk to such goods gets transferred from the seller to the buyer.

It is settled law that even under the mercantile system of accounting, a transaction of sale or purchase is complete only on the passing of title/risk attached to such sale or purchase from one party to another. Hence, in the present case, the transaction of sale of gas was not complete in the current year as the title/risk of the gas did not pass from the appellant to the buyer in the absence of delivery. In such circumstances, there could not be any reason for treating the advance received as a part of sale for the year. The above reasoning is also fortified by clause 4 of the Gas Sales and Purchase Agreement according to which the title to and risk in Sales Gas sold and delivered passes from the seller to the buyer at the sale point. Sale point is the point connecting the transportation facilities with the buyer’s facilities for receiving gas. In other words, the title and risk in the gas sold passes from the seller to the buyer only when the gas sold is delivered by the seller to the buyer and not earlier. Since in the present case gas worth Rs. 1032.44 million was not delivered to the buyer in the present year, the amount so received stood reflected as advance in the Balance Sheet. The appellant has submitted that the gas as against this advance to the extent of Rs. 62,35,50,000/- was supplied in AY 2005-06 and to the extent of Rs. 35,81,50,000/- was supplied in AY 2006-07 and stands accounted for as sale in the respective years. The AO has not been able to bring on record any material or evidence to show as to how the sale of gas to the extent of Rs. 1032.44 millions crystallised in the current year as the same had not been delivered by the seller to the buyer and hence the title risk did not stand transferred. It is also not a case of loss to the revenue for the reason that such practice is customary in the oil and gas industry wherein the advance is received in a year and same is recognised as income in subsequent years at the time of supply/delivery of gas, by the seller to the buyer. Hence in all the advance stands accounted for as income.

Page ITA No. 5054/Del/2010 – A.Y. 2004-05 ITA No. 1140/Del/2011 – A.Y. 2005-06 C.O. No. 104/Del/2011 (In ITA 1140/Del/11) A.Y. 2005-06 O.N.G.C. Videsh Ltd., New Delhi Under the facts and circumstances as mentioned above, I am convinced that the amount received by the appellant is in the nature of advance received for sale of gas, and to the extent that the sale of gas has not taken place during the year under consideration the amount of advance cannot be treated as sale and added to the income of the appellant for the current year. In the light of the above, the Assessing Officer is directed to verify the gas sales and purchase agreement and the exact year wise figures of advance received and sale of gas made and delete the addition in respect of the advance received during the year for which sale of gas has not taken place during the year.”

5.4.2. The Ld.D.R. could not controvert these factual findings of the First Appellate Authority. In the result the findings of the First Appellate Authority on this issue are upheld, and these grounds of the Revenue are dismissed.

  1. Now we take up ITA No.1140/Del/2011 for the Assessment Year 2005-06.

6.1. Ground nos. 1 and 2 are similar to ground nos. 1 to 3 for the Assessment Year 2004-05. These grounds pertain to the claim of depreciation u/s 32(1)(ii) of the Act. This issue was dealt by us for the Assessment Year 2004-05 at para 5 to 5.1 above, and consistent with the view taken therein, we dismiss these grounds of the Revenue.

6.2. Ground no.3 is on the issue of allowability of expenditure incurred on evaluation of existing business. This ground is similar to ground nos. 4 and 5 of the appeal for the Assessment Year 2004-05. Consistent with the finding given Page ITA No. 5054/Del/2010 – A.Y. 2004-05 ITA No. 1140/Del/2011 – A.Y. 2005-06 C.O. No. 104/Del/2011 (In ITA 1140/Del/11) A.Y. 2005-06 O.N.G.C. Videsh Ltd., New Delhi therein at paras 5.2 to 5.2.2, we uphold the order of the First Appellate Authority and dismiss these grounds of the Revenue.

6.3. Ground no.4 is on the issue of allow ability of risk insurance premium paid for obtaining political risk insurance policy, for safeguarding the interest of its WOS against unstable political environment in Sudan. Similar issue was dealt by us while disposing of ground nos. 6 to 8 of our order above for the Assessment Year 2004-05 at paras 5.3 to 5.3.2. Consistent with the view taken therein, we dismiss this ground of the Revenue.

6.4. Ground no.5 is on the issue of allow ability of depreciation on UPS @ 60%.

This issue is covered in favour of the assessee by the decision of the Hon’ble Jurisdictional High Court in the case of CIT vs. Oriental Ceramics and Industries Ltd. (2011) reported in 11 taxman.com, 417 (Delhi). Respectfully following the same, we uphold the order of the First Appellate authority and dismiss this ground of the Revenue.

  1. The Cross Objection no. 104/Del/2011 for the Assessment Year 2005-06 has been filed on the following ground.

“1. That on the facts and circumstances of the case and in law, the CIT(A) has erred in dismissing the appellant’s claim that the expenditure incurred to acquire participating interest in Sudan 5A, Sudan 5B and Ivoy Coast Block for undertaking the hydrocarbon operations amounting to Rs.344,96,00,023 (Rs.233,37,67,685 + 109,43,91,255 + 2,14,41,083) is a revenue expenditure allowable u/s 37(1) of the Act.”

7.1. The Ld.Counsel for the assessee submits that this is an alternative claim.

He submitted that the claim is to be rejected in view of the decision of the ITAT Page ITA No. 5054/Del/2010 – A.Y. 2004-05 ITA No. 1140/Del/2011 – A.Y. 2005-06 C.O. No. 104/Del/2011 (In ITA 1140/Del/11) A.Y. 2005-06 O.N.G.C. Videsh Ltd., New Delhi on this issue in the preceding Assessment Years. In view of the above submission, the C.O. is hereby rejected.

  1. In the result both the appeals filed by the Revenue as well as the Cross Objection filed by the assessee are dismissed.

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