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Income Tax Appellate Tribunal, DELHI BENCH: ‘D’ NEW DELHI
Before: SHRI G.S. PANNU, HON’BLE & SHRI SAKTIJIT DEY, HON’BLE
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.
Since the appeals relate to the same assessee and involve common issues, they have been clubbed together and disposed of in a consolidated order for the sake of convenience. (Assessee’s Appeal) AY: 2011-12
In ground no. 1, the assessee has challenged disallowance of royalty payment of Rs.48,58,52,650/- to Oil and Natural Gas Corporation (ONGC).
Briefly the facts are, the assessee is a non-resident entity 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 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’).
In course of assessment proceeding, the Assessing Officer 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.
The Assessing Officer, however, was not convinced with the 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 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.
We have considered rival submissions and perused the 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 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.
In view of the aforesaid, we direct the Assessing Officer to allow assessee’s claim in assessment year 2012-13, wherein, the liability got crystallized. This ground is partly allowed.
In ground no. 2, the assessee has contested the disallowance of Rs.27,26,07,627/- claimed towards amortization of facility management fee.
Briefly the facts are, in course of assessment proceedings, the Assessing Officer called upon the assessee to furnish the details of interest payment on loan. From the financial 6 | P a g e 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 have been amortized over four years, even though, it was paid entirely in assessment year 2010-11.
Though, the assessee furnished its reply justifying the claim, 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.
We have considered rival submissions and perused the 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
Learned Departmental Representative relied upon the observations of the Assessing Officer and learned Commissioner (Appeals).
We have considered rival submissions and perused the 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.
In view of the aforesaid, we direct the Assessing Officer to 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.
In ground no. 3, the assessee has challenged disallowance of claim of additional depreciation amounting to Rs. 23,42,39,488/-.
At the time of hearing, learned Senior Counsel appearing for the assessee fairly submitted that this issue has been decided against the assessee in assessment years 2010-11, 2013-14 and 2014-15.
Learned Departmental Representative agreed with the aforesaid submission of the assessee.
Having considered rival submissions and perused the 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 6277/Del/2018 and 6278/Del/2018, the Tribunal in order dated 31.01.2023 has held 10 | P a g e 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.
In the result, appeal is partly allowed. (Revenue’s Appeal) AY: 2011-12
18. In ground no. 1, the Revenue has challenged the deletion of 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.
Briefly the facts are, in course of assessment proceeding, the 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 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.
Before us, parties have agreed that the issue is squarely 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 and 9492/Del/2019, dated 07.06.2023. Thus, respectfully following the consistent view 12 | P a g e of the Coordinate Benches, we uphold the decision of learned Commissioner (Appeals) on the issue. Ground raised is dismissed.
In ground no. 2, the Revenue has challenged the deletion of disallowance of Rs. 172,29,15,802/-
We have considered rival submissions and perused the 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.
In ground no. 3, the Revenue has challenged deletion of addition of Rs.13,75,92,378/-, being part of exploration and 13 | P a g e development cost in head ‘office expenditure’ covered under section 44C for the Rajasthan block.
Briefly the facts are, while examining the claim of the 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.
Before us, the parties have agreed that the issue is squarely 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.
In the result, appeal is dismissed.
(Assessee’s Appeal) AY: 2012-13
In ground nos. 1 and 2, the assessee has challenged the 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 decided by us in the earlier part of the order.
Before us, the parties have agreed that the issue is squarely 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.
In ground nos. 3 and 4, the assessee has challenged the disallowance of claim of amortization in relation to facility management fee.
Identical issue has been decided by us in ground no. 2 of assessee’s appeal in in the earlier part of the order. Our decision therein will apply mutatis mutandis to these grounds as well. Accordingly, grounds are partly allowed.
Ground no. 5 relates to claim of addition for depreciation.
The issue raised in this ground is identical to the issue raised in ground no. 3 of 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.
In ground no. 6, the assessee has raised the issue of deduction claimed on account of royalty payment.
As could be seen, this ground was raised by the assessee before the first appellate authority by way of additional ground.
However, learned first appellate authority refused to admit the additional ground.
We have considered rival submissions and perused the materials on record. It is observed, identical issue was raised by 16 | P a g e the assessee in ground no. 1 of its appeal in 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.
In the result, the appeal is partly allowed. (Revenue’s Appeal) AY: 2012-13
In ground no. 1, the Revenue has raised the issue of deletion 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 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
The issue raised in ground no. 2 relates to deletion of 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 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.
In the result, the appeal is dismissed.
To sum up, assessee’s appeals are partly allowed and Revenue’s appeals are dismissed.
Order pronounced in the open court on 24th August, 2023