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TMI BlogClarification regarding treatment of Farm-in expenditure incurred by the Oil Exploration and Production(E&P) CompaniesX X X X Extracts X X X X X X X X Extracts X X X X ..... rred by the Oil Exploration and Production (E&P) Companies - reg. Over the life cycle of an Oil & Gas block, E&P companies generally buy ('Farm in') and sell ['Farm out') their participating interests (PI) in the 'Production Sharing Agreement' (PSC). 'Farm-in' expenditure is incurred when an entity in this line of business acquires a PI from another entity(s) in oil/gas block(s) and becomes part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Gol. Typically, owing to the large investments required and the risks involved, multiple E&P companies execute the PSC with the Gol in which each member has its agreed and defined PI. 3. Section 42(2) of the Act provides that in the event of a farm out, the unamortized expenditure is allowed as a deduction and the surplus is taxed in the hands of the seller while in the hands of the buyer no sp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... UK etc. also require that such acquisition cost to be capitalized and depreciated. A perusal of the Model PSC's {as per the website of the Director General of Hydrocarbon (DGH)} indicates that participating interests are share in rights and obligation to explore, exploit and sell petroleum under the PSC along with related licences, permits etc. A few of the case-laws on this issue also support tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us in which the person enters into the agreement with the Central Government. 6. Thus, as persons participating in an E&P contract are assessed individually in respect of their share of income, the sum expended on acquisition of whole or part of such 'Participating Interest' in an E&P contract where such acquisition is approved by the Government of India, represents the amount paid to acquire the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o a licence), eligible for claim of depreciation for purposes of clause (ii) of sub-section (1) of section 32 of the Act. 9. This circular being clarificatory in nature shall be applicable from the date of applicability of clause (ii) of sub-section (1) of section 32 in the Income-tax Act, 1961. 10. Hindi version to follow. sd/- (Rajarajeswari R.) Under Secretary (ITA.II), CBDT (F. No. 225/3 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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