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TMI Blog2015 (7) TMI 995X X X X Extracts X X X X X X X X Extracts X X X X ..... on to take a different view. 3. Then, we proceed to consider the second substantial question of law, which relates to the payment of royalty. The respondent assessee is engaged in oil exploration. For the assessment year in question, namely, 2006-2007, noticing the reports in the Economic Times that royalty is being paid at the rate of 29% to the State Governments by the assessee, the Assessing Officer issued notice calling upon the appellant to explain how despite the injunction contained in Section 6A of the Oilfield (Regulation and Development) Act, 1948, the assessee could have paid 9% extra. The reply of the assessee is as follows: "Payment of Royalty "In response to this, the assessee submitted that the payment of royalty on crude oil is governed by Oilfield (Regulation and Development) Act 1948 and Petroleum and Natural Gas Rules 1959. The Royalty is payable to State Government in case of Onshore Production and to Central Government in case of Offshore payment. Section 6A of the (Regulation and Development) Act 1948 provides that Central Government shall not fix the rate of royalty so as to exceed 20% of sale price at wellhead. The Methodology of determination of wellhead ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion Other Refineries 268.76 268.76 RJY-HPCL-Onshore 68.89 34.66 Cauvery-CPCL 118.99 118.99 Total 2181.96 1434.09 The assessee further contended that the amount of royalty was payable as per the govt. orders and paid by ONGC on the basis of pre-discount price and provisional amount of royalty computed on post discount price in case of on shore production. Royalty on crude oil for onshore production is being paid by the respective projects/assets of ONGC to the concerned State Govt. In order to work out the impact of royalty on crude oil between pre discount & post discount prices, essentially the information from these projects/assets is necessary." 4. The Assessing Officer was not inclined to accept the explanation offered by the assessee and the Assessing Officer disallowed the royalty paid in excess of 20%. The Assessing Officer actually taxed the difference in royalty paid between the pre-discount and post-discount price. The Appellate Authority in appeal, however, accepted the contention of the assessee and found that all the ingredients for allowing royalty as revenue expenditure were present and it could not be said to be hit by the explanation given in Section 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... supported the order of learned CIT (A) whereas learned DR supported the assessment order. 19. We have considered the rival submissions. We find that the reasons for making payment of royalty to State Governments for onshore productions based on pre discount price has been explained by the assessee before the AO and it has been submitted that the said payment is as per the guidelines and instructions of Central Government. In view of this factual position, we are of the considered opinion that the AO is not justified in holding that such payment of royalty to State Governments is not allowable, being the payment by infraction of law. The payment of royalty is as per the guidelines and instructions of Government. Such payment cannot be said to be infraction of law. Second reason given by AO is that as per the Government policy, ONGC is not allowed to increase the price fixed by the Government and the resultant net recovery leads to decrease in sale revenue of the assessee. The excess payment of royalty to State Governments is on this decreased amount of sale revenue and since such extra sale revenue has not been taken to the credit of profit and loss account of the assessee, payment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that Section 6A of the Oilfield (Regulation and Development) Act, 1948 has not been breached. In this regard, reference is made to notification issued dated 16.12.2004. Therein, it is stated that from 01.04.2002, in respect of onland areas, the rate of royalty will be 20% of the Well Head Price. He still further draws our attention to the resolution which was issued by the Government of India in the Ministry of Petroleum and Natural Gas resolution dated 17.03.2003. Therein, it is stated as follows: "MINISTRY OF PETROLEUM AND NATURAL GAS RESOLUTION NEW DELHI, the 17th March, 2003 No. O-22013/1/2001-ONG-III- The Government vide its Resolution No. 224 dated 21-11-1997 decided the phased dismantling of Administered pricing Mechanism (APM). In the aforesaid resolution, it was envisaged that the prices payable to the indigenous crude oil producers will be linked to the increasing percentage of international prices Free on Board (FOB) in place of cost plus based prices prevalent till 31-03-1998. 2. The Government, constituted a Committee for evolution of a new scheme of royalty on crude oil w.e.f.1-4-1998, because, inter-alia, the State Governments had been requesting for revision in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ven price obtained/obtainable by the producers based on "arm's length transactions" will be considered for royalty calculations. (b) For crude oil productions from onland areas, royalty will be paid @ 20% of the Wellhead price as derived from the price determined as at sub sub para (a) above till the year 2006-07.The convergence process may commence w.e.f. 2007-08 with tapering rates of royalty @ 1.5% each year so as to facilitate convergence with NELP rates of 12.5% within a period of 5 years i.e. by 2011-12 to be calculated accordingly. The matter may be reviewed for fine-tuning after 3 years, i.e. during 2005-06." 9. He would also refer to Section 92 F (2) of the Act. He would, therefore, submit that there is nothing illegal in the respondent assessee being called upon to pay royalty on the basis of the transaction based on the international price. He would submit further that matters have been made very clear by the communication dated 30th October, 2003 issued by the Government of India to the Chairman & M.D. of the respondent assessee among others and, therein, it is stated in clause (vi) as follows: "The revenue of State Governments in terms of royalty on crude oil will n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in 266 ITR Page 99 as also of that of the Delhi High Court in Commissioner of Income Tax v. Mahalakshmi Sugar Mills Co. Ltd. reported in 200 ITR page 275. 12. In fact, in regard to res judicata, there is a case for the Revenue that it is not a case, where the assessment year is 2007-08. He would, in fact, refer to Section 11 of the C.P.C. and his attempt would appear to be that had it been for the previous year that the assessee had not challenged the order, there might have been some merit. On the other hand, the assessment year, where the assessment had became final at the hands of the appellate authority or at the higher level, relates to 2007-08 and therefore, we would not think that in the facts of this case, we should throw out the Revenue's case on the basis of res judicata. 13. The respondent assessee is an Oil Exploration Company. There is no dispute that in respect of oil exploration done on-shore, royalty is to be paid to the State Government and in respect of off- shore exploration royalty is to be paid to the Central Government. Section 6A of the Oilfield (Regulation and Development) Act, 1948 Act reads as follows: "6A. Royalties in respect of mineral oils.- (1) T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itation on the maximum rate of royalty that can be fixed. It expressly provides that royalty cannot be in excess of 20% of the Well Head Price. It is necessary at this juncture to notice the facts. The respondent assessee produces oil and is an internal producer of oil. Under the law, it is bound to pay royalty to the State Governments. Respondent sells crude oil to the Oil Marketing Companies. Thereafter, the oil is marketed by the Oil Marketing Companies and finally it reaches the consumers. The international crude oil price apparently has been on the rise for quite some time. Unless the OMCs get oil at a discount, necessarily the price at which oil and its products are finally sold in the market would be affected; that is to say, there will be rise in the price. Apparently, the Government of India had a policy, under which the price was to be controlled. The result was that the oil companies like the respondent assessee were asked to sell the oil, which they drilled at a discount to OMC's. This is what is the post-discount price. If the amount of royalty, which the appellant paid to the State Government, is calculated with reference to the post-discount price, then there would b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... text otherwise requires - (i) ... (ii) "arm's length price" means a price which is applied or proposed to be applied in a transaction between persons other than associated enterprises, in uncontrolled conditions;" 15. No doubt, the said definition is actually meant for the sections, which are mentioned therein; but generally, as a concept, price at arm's length would appear to mean the description of an agreement made by two parties freely and independently of each other. In other words, Well Head Price for the purpose of calculating the royalty has been understood to mean by the Government of India, which is the Authority to administer the central legislation namely The Oilfields (Regulation and Development) Act, 1948 that it should be the price at which it is sold or capable of being sold at arm's length. We do not find any acceptable response to contradict this understanding of the transaction at arm's length. We can safely proceed on the basis that the Well Head Price would be the price as provided for in the resolution and valid for the year in question. If that be so, the Well Head Price cannot be the price, at which the respondent assessee has sold the crude oil to the OM ..... X X X X Extracts X X X X X X X X Extracts X X X X
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