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TMI Blog2009 (10) TMI 76X X X X Extracts X X X X X X X X Extracts X X X X ..... d the administration of the Sakhalin Oblast; - Exxon Neftegas Ltd. ("Exxon"), - Sakhalin Oil Development Co-operation Ltd. ("Sodeco"), - Rosneft-Sakhalin ("Rosneft-S") and - Sakhalinmomeftegas-Shelf ("SMNG-S"). The project relates to the Chayvo, Odoptu and Arkutun-Dagi oil, gas and condensate fields, which is offshore Sakhalin Island ("Sakhalin Block"). The PSA was entered into on 30th June, 1995 and was for a period of 25 years. Then the consortium members commenced hydrocarbons operations in the Sakhalin Block. Rosneft-S and SMNG-S held 40 per cent interest in the said Sakhalin PSA and in a joint operating agreement. Vide the assignment agreement dt. 10th Feb., 2001, Rosneft-S and SMNG-S (assignors) assigned 50 per cent of their share in the Sakhalin PSA and in a joint operating agreement to OVI for a consideration of Rs. 15,590.96 million. Consequent to the acquisition of such rights and licenses, the assessee became a consortium member and the assignors were relieved from obligation under the Sakhalin PSA to that extent. Thus, by acquiring 20 per cent participating interest, assessee has become the member of the consortium and acquired proportionate share in. rights and li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T(A) in his appellate order. Aggrieved by this order of CIT(A), both Revenue and assessee are in appeal before us. Revenue is aggrieved for CIT(A)'s direction to the AO for allowing 1/19th of the expenditure, whereas assessee is aggrieved for not allowing the entire expenditure or as an alternative for not allowing claim of depreciation under s. 32(1)(ii) of the IT Act. 5. Following grounds have been taken by the assessee: 1 That on the facts and in the circumstances of the case and in law, the learned CIT(A) erred in not allowing in full an amount of Rs. 1,559.10 crores as claimed by the appellant. 1.1 That the learned CIT(A) erred on the facts and in the circumstances of the case in not appreciating the business intricacies of the oil and gas sector and accordingly erred in not appreciating that the amount of Rs. 1,559.10 crores for getting the rights in exploration and prospecting of hydrocarbons was incurred in the regular course of the business and is a normal business activity. 1.2 That the learned CIT(A) erred in not allowing the claim of Rs. 1,559.10 crores under s. 42 of the IT Act, 1961 (Act) with production sharing contract and the agreement entered into by the appel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce with the agreement entered into by the appellant with the Central Government under s. 42 of the Act. 4. That on the facts and circumstances of the case and in law, the learned CIT(A) grossly erred in disallowing revenue expenses relating to project pending final evaluation of Rs. 5,64,15,776 treating the same as capital in nature. 4.1 That without prejudice to the above and in the alternative, the CIT(A) erred on the facts and circumstances of the case and in law in not allowing deduction of expenditure in accordance with the agreement entered into by the appellant with the Central Government under s. 42 of the Act. 6. The ground taken by the Revenue reads as under: "The learned CIT(A) has erred in law and in facts and circumstances of the case in holding that deduction for the expenditure should be allowed over the period of production sharing agreement during which the benefit would accrue to the assessee and directed the AO to allow 1/19th of Rs. 1,550.10 crores." 7. It was contended by senior counsel that the assessee had acquired a business right in a form of a license equally qualified to be an intangible asset under s. 32(1)(ii) and eligible for depreciation allowanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p; collectively as 'parties of consortium' or as 'consortium'." ------------------------------------------------------------------ Article XXXV- 35.1 Consortium (including each of party of Assignment consortium) shall have the right to assign provides all or any parts of its rights, obligations, and interests under this agreement to an affiliate. In addition, the consortium (including each of party of consortium) & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns promptly after the effective date of this agreement." ------------------------------------------------------------------ Article 3.1 "The State grants exclusive rights to dealing with consortium to conduct 'hydrocarbon grant of rights operations' in the agreement marine body provided area (Sakhalin Block) as well as the ownership right to the portion of hydrocarbons to which the consortium is entitled under this agreement." ------------------------------------------------------------------ Article 8.2 "Combined exploration and production provide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not modify the rights or obligations of the parties under this agreement in any respect; (3) the registration of such license; consents, and approvals and the taking of any other actions by the Government of the Russian Federation and the administration of the Sakhalin Oblast as are necessary, under the applicable law ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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. Hence, the intangible asset i.e. to be considered for the purpose of claiming depreciation should be related to a product, skill or a technical know-how which is already in existence and on which payment is received for passing on its know-how or its patent or its copyright or its trademark or license to use or sublet it. 10. 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 (P) Ltd." to take over the rights and interests of its parent company i.e., the erstwhile Oil & Natural Gas Commission to formalize the following agreements so as to explore and develop oil fields in Iran: (a) the agreement made and entered into on 26th Aug., 1964, by and between A.G.I.P., S.p.A., an Italian Corporation, Phillips Petroleum Company, a Delaware USA Corporation and Oil & Natural Gas Commission, read with the agreement made and entered on the 30th July, 1964 by and between the said Phillips Petroleum Company a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lled 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 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 per cent. 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 carryon 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 1st April, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uired 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 and development of mineral oil. Accordingly, as per our considered view such an asset falls within the category of asset falling under s. 32(1)(ii) of the Act. Accordingly, we are inclined to agree with the learned senior counsel that the assessee had acquired business and commercial right and license by making payment of Rs. 1,559.10 crores, which is in the nature of intangible assets entitled to claim of depreciation under 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. 1,559.10 crores is declined. The stand of CIT(A) in treating the alleged expenditure as deferred r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, expenses in connection with such expansion or extension of the business must be held to be deductible as revenue expenses. 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 Nos. 3 to 3.2, the alternate ground No. 3.3 as taken by assessee becomes infructuous. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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