DCIT (INTERNATIONAL TAXATION), GURGAON vs. M/S CARIN ENERGY HYDROCARBON LTD.,, GURGAON

IN THE INCOME TAX APPELLATE TRIBUNAL, DELHI BENCH: ‘D’ NEW DELHI

BEFORE SHRI G.S. PANNU, HON’BLE PRESIDENT AND SHRI SAKTIJIT DEY, HON’BLE VICE PRESIDENT

ITA Nos.2229/Del/2017 Assessment Year: 2011-12 With ITA No.7028/Del/2019 Assessment Year: 2012-13

Cairn Energy Hydrocarbon Vs. DCIT, Ltd., International Taxation, DLF Atria Building, Circle - Gurgaon Jacaranda Marg, N-Block, DLF City, Phase-II, Gurgaon PAN :AACCC3279J (Appellant) (Respondent) With ITA Nos.2249/Del/2017 Assessment Year: 2011-12 With ITA No.7126/Del/2019 Assessment Year: 2012-13

DCIT, Vs. Cairn Energy Hydrocarbon International Taxation, Ltd., Circle - Gurgaon DLF Atria Building, Jacaranda Marg, N-Block, DLF City, Phase-II, Gurgaon PAN :AACCC3279J (Appellant) (Respondent)

Assessee by Sh. Ajay Vohra, Sr. Adv. Sh. Kshitij Bansal, CA Department by Sh. Vijay B. Vasanta, CIT(DR)

ITA Nos.2229 & 2249/Del/2017 & 7028 & 7126/Del/2019

Date of hearing 01.08.2023 Date of pronouncement 24.08.2023

ORDER These are two sets of cross appeals arising out of two

separate orders of learned Commissioner of Income Tax (Appeals)

pertaining to assessment years 2011-12 and 2012-13.

common issues, they have been clubbed together and disposed of

in a consolidated order for the sake of convenience.

ITA No. 2229/Del/2017 (Assessee’s Appeal) AY: 2011-12

royalty payment of Rs.48,58,52,650/- to Oil and Natural Gas

Corporation (ONGC).

incorporated in Scotland, United Kingdom (UK). As stated,

assessee is engaged in business of exploration, development and

production of hydrocarbons. For the purpose of such business

activity, the assessee acquired 50% participating interest in the

exploration, development and production of oil and natural gas at

a block located in Rajasthan, with the approval of Government of

India. Along with ONGC, another Indian entity, i.e. Cairn Energy 2 | P a g e

ITA Nos.2229 & 2249/Del/2017 & 7028 & 7126/Del/2019

India Pty Ltd. (CEIPL) were the other partners in the block and

the CEIPL was the operator of the contract area under the

Production Sharing Contract (PSC) entered between the parties.

As stated, subsequently, ONGC in terms of PAC exercised its

option to acquire 30% interest in the Rajasthan block.

Accordingly, revised participating interest in the block was carved

out. In terms of the contract, all activities, such as, seismic

acquisition & survey, geological and geophysical studies, drilling

of wells etc. for the exploration and development of the area are

undertaken by the operator. Whereas, the assessee as well as

ONGC contributed their shares in proportion of their respective

participating interests in the expenditure. The commercial

production from the block commenced w.e.f. 29th August, 2009

and the impugned assessment year is the second year of the

commercial production. For the assessment year under dispute,

the assessee filed its return on 30th November, 2011 declaring

income of Rs.77,32,535/- under normal provisions, whereas, it

declared book profits of Rs.3237,53,07,922/- under section

115JB of the Income-tax Act, 1961 (hereinafter referred to as ‘the

Act’).

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ITA Nos.2229 & 2249/Del/2017 & 7028 & 7126/Del/2019

noticed that as per Note No. 10 of the Notes to Accounts, an

amount of Rs.48,58,52,650/- was reduced from revenue and

profit earned after tax, towards cost recoverable on account of

royalty paid by ONGC with regard to the Rajasthan block. Since

the amount was not debited to the profit and loss account, the

Assessing Officer called upon the assessee to justify the claim. In

response, it was submitted by the assessee that as per the

decision of the Government of India under the provisions of PSC,

cost of royalty has to be shared by respective joint venture

partners in their participating ratio. Assessee’s participating

interest being 35%, its share of royalty cost worked out to

Rs.48,58,52,650/-, which was netted off with revenue earned.

submission of the assessee. From the details of royalty paid, the

Assessing Officer observed that the amount in dispute pertains to

financial year 2009-10 relevant to assessment year 2010-11 and

since the assessee is following mercantile system of accounting, it

cannot be allowed in the impugned assessment year. He further

observed that as per the letter of Ministry of Petroleum and

Natural Gas, the liability crystallized in financial year 2011-12 4 | P a g e

ITA Nos.2229 & 2249/Del/2017 & 7028 & 7126/Del/2019

relevant to assessment year 2012-13. Thus, he ultimately

concluded that the amount claimed by the assessee cannot be

allowed in the impugned assessment year. The assessee contested

the aforesaid disallowance before learned Commissioner

(Appeals). However, learned Commissioner (Appeals) endorsed the

decision of the Assessing Officer.

materials on record. The facts on record reveal that under the

terms of PSC, initially ONGC was paying royalty and the other

participants of the joint venture did not consider any part of the

royalty paid by ONGC as their cost. However, subsequently, the

Government of India in letter dated 26th July, 2011 clarified that

the royalty so paid by ONGC will be part of cost of petroleum and

will be the cost recoverable from all the joint venture participants

in proportion to their interests. In terms of the letter of the

Government of India, the assessee treated the amount in dispute

as the cost recoverable and netted off against the revenue. The

Assessing officer held that since the payment of royalty has

accrued in assessment year 2010-11 as per mercantile system of

account, it has to be allowed in assessment year 2010-11.

Further, he held that the liability got crystallized by virtue of 5 | P a g e

ITA Nos.2229 & 2249/Del/2017 & 7028 & 7126/Del/2019

Government of India letter dated 26th July, 2011, falling in

financial year 2011-12 relevant to assessment year 2012-13.

Therefore, it cannot be allowed in the impugned assessment year.

From the observations of learned first appellate authority in para

17.1 and 17.2, it is very much clear that he has endorsed the view

of the Assessing Officer by holding that the claim could have been

allowed either in assessment year 2010-11 on accrual basis or in

assessment year 2012-13, wherein, the liability got crystallized.

Thus, from the aforesaid observations of the departmental

authorities, it is very much clear that they have not disputed

assessee’s claim that the cost of royalty has to be allowed.

However, the dispute is only with regard to the timing.

allow assessee’s claim in assessment year 2012-13, wherein, the

liability got crystallized. This ground is partly allowed.

of Rs.27,26,07,627/- claimed towards amortization of facility

management fee.

the Assessing Officer called upon the assessee to furnish the

details of interest payment on loan. From the financial 6 | P a g e

ITA Nos.2229 & 2249/Del/2017 & 7028 & 7126/Del/2019

statements, he noticed that there was huge increase under the

head ‘financial expenses’. He further called upon the assessee to

justify such increase in financial expenses. In response, it was

submitted by the assessee that he had taken loan from Standard

Chartered Bank, which has been exclusively utilized for

operations in India. It was submitted, in financial year 2010-11, it

had accrued financial charges of Rs.1371,669,690/-, which

includes interest charges on term loan of Rs.82,32,17,505/- and

loan facility and management fees of Rs.54,84,52,185/-, which

has been capitalized in its books of account in respect of the loan

arrangement. After considering the submissions of the assessee,

the Assessing Officer observed that the assessee has not provided

full details in respect of loan transaction. Further, he observed

that the loan transaction was arranged in financial year 2009-10

and the total facility management fees for loan was also paid in

financial year 2009-10. He observed that the total facility

management fee amounted to Rs.133,66,68,750/-, which is

claimed to have been amortized during the tenure of loan based

on effective interest based method. Thus, he called upon the

assessee to explain, how and why the facility management fees

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ITA Nos.2229 & 2249/Del/2017 & 7028 & 7126/Del/2019

have been amortized over four years, even though, it was paid

entirely in assessment year 2010-11.

however, the Assessing Officer was not convinced. Ultimately, he

disallowed assessee’s claim. The assessee contested the aforesaid

disallowance before learned first appellate authority. After

considering the submission of the assessee in the context of facts

and materials on record, learned Commissioner (Appeals) upheld

the decision of Assessing Officer.

materials on record. Before us, learned counsel appearing for the

assessee submitted that the Assessing Officer, in fact, has

accepted assessee’s claim of deferment/amortization in

assessment year 2010-11 in respect of part of the expenditure.

Thus, he submitted, there is no reason to disallow assessee’s

claim in the impugned assessment year. Without prejudice, he

submitted, if the departmental authorities are of the view that the

entire expenditure having been incurred in financial year 2009-10

relevant to assessment year 2010-11 has to be allowed in that

assessment year, the Assessing Officer may be directed to allow

the expenditure in assessment year 2010-11. 8 | P a g e

ITA Nos.2229 & 2249/Del/2017 & 7028 & 7126/Del/2019

observations of the Assessing Officer and learned Commissioner

(Appeals).

materials on record. From the observations of the Assessing

Officer and learned first appellate authority, it is crystal clear that

they have not disputed the incurring of the expenditure by the

assessee. They are of the view that since the entire facility

management fee was paid in assessment year 2010-11 for due

diligence process for admissibility of the loan facility and it is not

connected to the utilization of the loan, therefore, it cannot be

amortized over the tenure of the loan. Even assuming that the

aforesaid reasoning of the departmental authorities to be correct,

then also the expenditure has to be allowed, even though, not in

the impugned assessment year but in assessment year 2010-11,

as, according to the departmental authorities, the expenditure

was incurred in the said assessment year. Further, as submitted

before us, the Assessing Officer has allowed a part of the

expenditure in assessment year 2010-11 while considering

assessee’s claim of deferment/amortization.

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ITA Nos.2229 & 2249/Del/2017 & 7028 & 7126/Del/2019

verify the facts relating to assessment year 2010-11 and in case

such deferment has been allowed in assessment year 2010-11,

then he has to allow it in the impugned assessment year. Or else,

he is directed to allow the entire expenditure in assessment year

2010-11. Ground is partly allowed.

of claim of additional depreciation amounting to Rs.

23,42,39,488/-.

the assessee fairly submitted that this issue has been decided

against the assessee in assessment years 2010-11, 2013-14 and

2014-15.

aforesaid submission of the assessee.

materials on record, we find identical issue came up for

consideration before the Tribunal in assessee’s own case in

assessment years 2010-11, 2013-14 and 2014-15. While deciding

the issue in ITA Nos. 6346/Del/2013; 6277/Del/2018 and

6278/Del/2018, the Tribunal in order dated 31.01.2023 has held 10 | P a g e

ITA Nos.2229 & 2249/Del/2017 & 7028 & 7126/Del/2019

that in view of explanation 5 to section 32(1) of the Act, the

Assessing Officer has to compute additional depreciation

irrespective of the fact whether the assessee has claimed it or not.

Accordingly, the Tribunal has upheld the decision of the

Assessing Officer with regard to allowance of claim of additional

depreciation. The aforesaid decision of the Coordinate Bench

squarely applies to the facts of the present appeal. Accordingly,

we uphold the decision of the departmental authorities on the

issue. Ground raised is dismissed.

ITA No. 2249/Del/2017 (Revenue’s Appeal) AY: 2011-12

addition expenses on exploration and development amounting to

Rs.416,08,19,616/- for alleged non-deduction of tax under

sections 40(a)(i)/40(a)(ia) of the Act.

Assessing Officer noticed that the assessee has claimed an

amount of Rs.416,08,19,616/- as allowable exploration and

development expenditure for incurring expenses for geological

studies, drilling, processing of data, general administrative 11 | P a g e

ITA Nos.2229 & 2249/Del/2017 & 7028 & 7126/Del/2019

overheads etc. After calling for necessary details for expenses and

examining them, the Assessing Officer observed that the assessee

has failed to deduct tax at source under sections 40(a)(i)/40(a)(ia)

of the Act. Thus, alleging non-deduction of tax at source, the

Assessing Officer disallowed the expenses. While doing so, he

relied upon the assessment orders passed for assessment years

2009-10 and 2010-11. While deciding the issue in appeal, learned

Commissioner (Appeals), having found that similar disallowance

made in assessment year 2010-11, was deleted by his

predecessor, followed the same and deleted the disallowance.

covered in favour of the assessee by the decision of the Tribunal

in assessment years 2010-11, 2013-14, 2014-15, 2015-16 and

2016-17. Having considered rival submissions, we find, while

deciding identical issue in assessee’s own case in assessment

years 2010-11, 2013-14 and 2014-15, referred to above, the

Tribunal has upheld the deletion of similar disallowance made by

the Assessing Officer. The same view was reiterated by the

Tribunal while deciding the issue in assessment years 2015-16

and 2016-17 in ITA Nos. 9491/Del/2019 and 9492/Del/2019,

dated 07.06.2023. Thus, respectfully following the consistent view 12 | P a g e

ITA Nos.2229 & 2249/Del/2017 & 7028 & 7126/Del/2019

of the Coordinate Benches, we uphold the decision of learned

Commissioner (Appeals) on the issue. Ground raised is dismissed.

disallowance of Rs. 172,29,15,802/-

materials on record. The aforesaid amount, being assessee’s share

in the exploration and development expenditure was disallowed

by the Assessing Officer on the reasoning that it was claimed

purely on estimate basis without any actual evidence. However,

learned Commissioner (Appeals) deleted the disallowance

following his predecessor’s order in assessment year 2010-11. We

find, while considering identical issue in Revenue’s appeal arising

in assessment years 2010-11, 2013-14 and 2014-15 (supra), the

Tribunal has upheld the deletion of disallowance. Identical view

was reiterated by the Tribunal while deciding Revenue’s Appeal in

assessment years 2015-16 and 2016-17 as well in the order

referred to above. Thus, respectfully following the consistent view

of the Coordinate Benches, we uphold the decision of learned

Commissioner (Appeals). Ground raised is dismissed.

addition of Rs.13,75,92,378/-, being part of exploration and 13 | P a g e

ITA Nos.2229 & 2249/Del/2017 & 7028 & 7126/Del/2019

development cost in head ‘office expenditure’ covered under

section 44C for the Rajasthan block.

assessee, the Assessing Officer held that the expenditure claimed

is purely on estimate basis without any supporting evidence.

Accordingly, he disallowed assessee’s claim. However, while

examining the issue in appeal, learned Commissioner (Appeals)

allowed assessee’s claim by following the decision taken by his

predecessor in assessment year 2010-11.

covered by the decisions of the Tribunal in assessment years

2010-11, 2013-14, 2014-15, 2015-16 and 2016-17. We find,

while deciding identical issue in assessee’s own case in

assessment years, noted above, the Tribunal has upheld the

decision of learned Commissioner (Appeals) in deleting the

disallowance. Facts being identical, respectfully following the

decision of the Coordinate Benches, we uphold the deletion of

disallowance. Ground is dismissed.

ITA No. 7028/Del/2019 (Assessee’s Appeal) AY: 2012-13

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ITA Nos.2229 & 2249/Del/2017 & 7028 & 7126/Del/2019

disallowance of exploration and development expenditure

amounting to Rs.358,31,72,379/- for alleged non-deduction of tax

at source under section 40(a)(i)/40(a)(ia) of the Act. The issue

raised in this ground is identical to the issue raised in ground no.

1 of Revenue’s appeal in ITA No. 2249/Del/2017 decided by us in

the earlier part of the order.

covered by the decision of the Tribunal in assessment years 2010-

11, 2013-14, 2014-15, 2015-16 and 2016-17. It is observed,

while deciding the appeal in assessment years, noted above, the

first appellate authority has deleted identical disallowance made

by the Assessing Officer. However, in the impugned assessment

year, he has taken a divergent view. We find, the facts relating to

the issue in dispute are no way different from assessment years,

relating to which appeals have been decided by the Tribunal.

Therefore, respectfully following the consistent view of the

Coordinate Benches, as discussed in the earlier part of the order,

we delete the disallowance. Thus, grounds are allowed.

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ITA Nos.2229 & 2249/Del/2017 & 7028 & 7126/Del/2019

disallowance of claim of amortization in relation to facility

management fee.

assessee’s appeal in ITA No. 2229/Del/2017 in the earlier part of

the order. Our decision therein will apply mutatis mutandis to

these grounds as well. Accordingly, grounds are partly allowed.

The issue raised in this ground is identical to the issue raised in

ground no. 3 of ITA No. 2229/Del/2017 decided by us in the

earlier part of the order. Facts being identical, following our

decision therein, we uphold the disallowance. Accordingly, this

ground is dismissed.

deduction claimed on account of royalty payment.

before the first appellate authority by way of additional ground.

However, learned first appellate authority refused to admit the

additional ground.

materials on record. It is observed, identical issue was raised by 16 | P a g e

ITA Nos.2229 & 2249/Del/2017 & 7028 & 7126/Del/2019

the assessee in ground no. 1 of its appeal in ITA

No.2229/Del/2017 decided by us in the earlier part of the order.

While deciding the issue, we have directed the Assessing Officer to

allow the claim in assessment year 2012-13, as, according to him

the expenditure was crystallized in that assessment year.

However, since, in the impugned assessment year, learned first

appellate authority has declined to admit the additional ground

raised by the assessee, we restore the issue to the Assessing

Office for examining assessee’s claim in the light of our direction

in ground no. 1 of assessee’s appeal in ITA No. 2229/Del/2017.

Ground is allowed for statistical purposes.

ITA No.7126/Del/2019 (Revenue’s Appeal) AY: 2012-13

of disallowance of exploration and development expenses

amounting to Rs.182,71,55,310/-. The issue raised is identical to

the issue raised in ground no. 2 of ITA No. 2249/Del/2017

decided by us in the earlier part of the order. Following our

decision therein, we uphold the order of learned Commissioner

(Appeals) on the issue. Ground raised is dismissed. 17 | P a g e

ITA Nos.2229 & 2249/Del/2017 & 7028 & 7126/Del/2019

disallowance of head office expenses claimed under section 44C of

the Act. This issue is identical to the issue raised in ground no. 3

of ITA No. 2249/Del/2017 decided by us in the earlier part of the

order. Following our decision therein, we uphold the order of

learned Commissioner (Appeals) on this issue by dismissing the

ground raised.

Revenue’s appeals are dismissed.

Order pronounced in the open court on 24th August, 2023

Sd/- Sd/- (G.S. PANNU) (SAKTIJIT DEY) PRESIDENT VICE PRESIDENT Dated: 24th August, 2023. RK/- Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR Asst. Registrar, ITAT, New Delhi

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