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TMI Blog2019 (7) TMI 1577X X X X Extracts X X X X X X X X Extracts X X X X ..... ition cost paid during the year for acquiring participating interest in oil blocks under section 37 of the Act. Ld. CIT(A) has failed to appreciate that the cost of acquiring participating interest has been incurred in the normal course of its business and is wholly and exclusively for its business and hence allowable as deduction under section 37 of the Act." Ground Nos.1 & 2 by the Revenue "1. The Ld. CIT(A) has erred in law and on facts by not considering the fact that in the AY 2002-03 the ITAT has erred in granting relief to the assessee by wrongly invoking provisions of Section 32(1 )(ii) of the Act. 2. The Ld CIT(A) has erred in law and on facts by ignoring the fact that to acquire a stake in any kind of business would amount to acquiring an intangible asset as the nature of the business or commercial right which is being covered in the section under discussion, is of a narrower scope than what has been envisaged and allowed by the ITAT." 3. Facts of the case, in brief, are that the assessee is a company and is a wholly owned subsidiary of M/s ONGC and is engaged in the business of overseas exploration and production of hydrocarbon and oil and gas through acquirin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee is not eligible for any depreciation. The Assessing Officer analysed the production sharing contracts and noted that the analysis of the agreements shows that by making the payment the assessee has acquired a right of exploration and development of hydrocarbon, oil and gas. He observed that the rights acquired by the assessee are in the nature of business or commercial rights, but, not in the nature of rights as envisaged in section 32(1)(ii). He accordingly disallowed the claim of depreciation. The Assessing Officer further held that the expenditure incurred also does not fall within the ambit of section 42 of the Act although no such claim was made before him. 6. In appeal, the ld. CIT (A), following the order of the Tribunal in assessee's own case for assessment year 2002-03 held that the participating interest in the products are intangible assets entitled to claim depreciation u/s 32(1)(ii) of the Act. He accordingly allowed the claim of depreciation which was disallowed by the Assessing Officer. 7. Aggrieved with such order of the CIT(A), the assessee as well as the Revenue are in appeal by taking the above grounds. 8. The ld. counsel for the assessee fairly con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er drilling a few wells in a field which still remains undeveloped. In the year 2000, this field was awarded by Iraq government, to the assessee through negotiations, for development and production of oil under new agreements. The assessee also had entered on May 19th, 1988 into a Petroleum Production Sharing Contract with Vietnam Oil and Gas Company. The Production Sharing Contract entered on May 19th, 1988 envisages making available necessary manpower, technical skills and other inputs required for the execution of the Production Sharing Contract in accordance with sound petroleum industry practices. The Production Sharing Contract provided for exploration and exploitation of Petroleum resources in the specified area in the Continental Shelf of Vietnam. The assessee carried out petroleum exploration in the area since 1988 and has the distinction of discovering the largest free gas field of Vietnam. The assessee partnered with British Petroleum and Vietnam Oil and Gas Company in the block and finalized development plans for the development of Natural Gas discovery. The development plan for the discovery was finalized and necessary commercial arrangements entered into in December 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the know-how, patents, copyrights trademarks, licences etc. are eligible for claim of depreciation. In view of principle of ejusdem generis, the expression "any other business or commercial rights" has to be read in the company of the preceding words. This rule of interpretation makes an attempt to reconcile incompatibility between the specific and general words. The first category of words like know-how, patents, copyright, etc., form a distinct genesis or category inasmuch as all those items are specific and elucidated rights of business or commercial nature. In such circumstances, the expression 'any other business or commercial rights of similar nature' also must be in the same genesis or category with specific and elucidated identity of commercial or business nature. Therefore, in the light of the statutory provisions contained in section 32(1)(ii), the commercial rights of exploration of mineral oils, as acquired by the assessee falls under the expression of any other business or commercial rights of the nature similar to one of the category i.e. licenses as stipulated in Section 32(1)(ii). The commercial rights of exploration and licenses acquired by the assessee b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... epreciation. Since the ld. CIT(A) has followed the order of the Tribunal in assessee's own case for assessment year 2002-03 and the Tribunal has allowed the claim of depreciation in assessment year 2003-04 to assessment year 2005-06 and the appeal filed by the Revenue against order of the Tribunal for A.Y. 2002-03 has been dismissed by the Hon'ble Delhi High Court, therefore, in absence of any contrary material or distinguishing features, the order of the CIT(A) is upheld and the grounds raised by the Revenue are dismissed. 12. As mentioned earlier, the ground of appeal No.1 by the assessee has been decided against the assessee by the order of the Tribunal, hence, the same is also dismissed. 13. Ground of appeal No.(ii) of the assessee and ground of appeal Nos.6, 7 and 8 by the Revenue read as under:- Ground No.(ii) of the assessee "(ii) Disallowance in respect expenditure incurred on Sudan pipeline That the Ld. C1T(A) erred in law and on facts of the case in not allowing deduction amounting to INR 1,026.08 million being the claim received from EPC Contractor for additional expenditure incurred in respect of laying of Sudan pipeline. Ld. C1T(A) has failed to app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e according to the assessee it cannot be said to have acquired any right to receive such income till the time the claim is accepted by MEM. The AO held that since the project had been completed in the relevant assessment year, the assessee acquired a certain right to receive such amount from MEM and the same was taxable in its hands on accrual basis and, accordingly, made an addition of ' 149,31,00,000 to the income of the assessee on this account (as against the correct amount of ' 1371.78 million). 15. The Assessing Officer held that since the assessee has failed to offer the accrued revenue as non-taxable on account of it being uncertain is accepted in appeal then the provision made by the assessee for the additional expenses to the extent of Rs. 1026.8 million should be disallowed on matching principles on the same logic as per exclusion of revenue. 16. In appeal, the ld. CIT (A) rejected the claim of INR 1,659 million being the claim received from EPC contractor for additional expenditure incurred in respect of laying of Sudan pipeline on the ground that neither the liability has arisen in the hands of the assessee company nor revenue has accrued. The relevant obse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee company. Alternatively, AO held that if in appeal the assessee's claim of treating revenues as non-taxable on account of it being uncertain, is accepted then the provision made by assessee for the additional expense to the extent of Rs. 1026.8 Million should be disallowed on matching principals and on the same logic as for exclusion of revenues. 7.4.3 In this context in schedule 27 of annual report of FY 2005-06 in Point no. 5 of the notes to the Accounts, the auditors certifies : "Khartoum-Port Sudan Pipeline Project: During the year, the company completed the execution of the 12"X741 Kms multi-product pipeline from Khartoum Refinery to Port Sudan for the Ministry of Energy and Mining of the Government of Sudan (MEM) on Build, Own, Lease and Transfer (BOLT) basis and handed over the same to MEM. The project has been implemented in consortium with Oil India Limited, Company's share being 90%. The EPC Contractor executing the project has claimed additional costs aggregating to Rs. 1,659.00 million (company's share being Rs. 1,493.10 million), which have not been accepted by the company as yet. However, part of the claims has been forwarded to MEM for their a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the owner before implementation of the works the subject of variations. In addition the required procedures under the contract for both variations approval and claims were not followed. However, the high standard of performance and early completion of the project by the contractor (OVL) is appreciated and high valued and could be a matter of consideration at your company's own discretion and consideration, without any legal obligation to do the same." 7.4.7 In view of the above, it is evident that neither the EPC contractor nor the appellant is legally entitled to claim the additional costs as the alleged variations were not approved by the MEM before implementation of the works. As such the appellant is not legally entitled to the claim of additional cost of Rs. 1,371.78 million which was forwarded by the appellant to MEM for approval. It is an established principal of law that a sum accrues as "income" only when the person acquires a legally vested right in it. Hon'ble Calcutta High Court in CIT Vs. Bharat Petroleum Corporation Limited (68 Taxman 429) held that the amount can accrue or arise to the assessee, if the assessee acquires a legal right to receive the amount. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e addition of Rs. 1493.10 million made by the Assessing Officer and simultaneously directed the A.O. to sustain the addition of Rs. 1026.08 million being the expenditure claimed by the assessee in respect of Sudan pipeline. 18. Aggrieved with such order of the CIT(A), the assessee as well as the Revenue are in appeal before the Tribunal by raising the above grounds 19. The ld. counsel for the assessee strongly challenged the order of the CIT(A) in sustaining an amount of Rs. 1026.08 million. He drew the attention of the Bench to the date-wise sequence of events in respect of the Multiproduct Pipeline from Khartoum Refinery Sudan to Port Sudan on Build, Own, Lease and Transfer (BOLT) basis:- Date Events Page No. of Paper Book 30.06.2004 Relevant extract of Pipeline Contract Agreement (PCA) entered with the Ministry of Energy & Mining of the Government of Sudan (MEM, Sudan) 184-190 17.08.2004 Technical and Administrative Support Agreement (TASA) entered with ONGC Limited (ONGC) for managing the entire project of pipeline execution on its behalf 1388-1401 [Compilation of agreements paper book] 31.08.2004 Relevant extract of agreement entered with M/S Dodsal Pte Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion proceedings against the assessee Not in paper book 07.01.2014 (corrected on 27.03.2014) USD 30,00,000 on account of Adjustment claim and USD 3,13,100.35 on account of change order alongwith with interest awarded to EPC Contractor Not in paper book 30.06.2014 Petition filed by the EPC Contractor before the Delhi High Court against the Arbitral Award - Not yet decided Not in paper book 03.07.2014 Petition filed by the assessee before the Delhi High Court in respect of Arbitral Award of USD 30,00,000 on account of Adjustment claim - Not yet decided Not in paper book 31.10.2014 Assessee paid a sum of USD 452,195 to EPC Contractor which comprises USD 313,100.35 along with interest Not in paper book 20. He submitted that the assessee had entered into a Pipeline Contract Agreement (PCA) with the Ministry of Energy & Mining of the Government of Sudan (MEM) on 30.06.2004 for construction of 12" X 741 Kms. multi-product pipeline system from Khartoum Refinery to Port Sudan on Build, Own, Lease and Transfer (BOLT) basis. The assessee had entered a participation agreement with Oil India Limited on 10.11.2004 wherein 10% rights and obligations in relation to this proje ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t claim) and USD 3,13,100 (for change order) alongwith with interest. EPC contractor did not accept the Award. Assessee had accepted Award in respect of change order and on 31.10.2014 voluntarily paid a sum of USD 4,52,195 to EPC Contractor which comprises USD 3,13,100.35 along with interest. However, the assessee had not accepted Award in respect of Adjustment claims. Accordingly, both the EPC Contractor and the assessee have challenged the Award in Delhi High Court and the matter is pending with the High Court. 24. Referring to the above sequence of events he submitted that the assessee has not merely incurred expenditure but such expenditure has duly been admitted by it and debited in the books of accounts. Further, said expenditure had duly been approved by the consultant M/s ONGC who were appointed to supervise and manage the project. However, in view of the fact that the assessee had not been paid in respect of additional claim made by the Government of Sudan, the assessee had not recognized additional income in the books of account. 25. The ld. counsel for the assessee submitted that the AO has included the amount claimed by it from Sudan Government aggregating to Rs. 1, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arrange its affairs and follow the method of accounting, which the department has earlier accepted. It is only in those cases where the department records a finding that the method adopted by the assessee results in distortion of profits that the department can insist on substitution of the existing method." He submitted that in the instant case the expenditure incurred is to be allowed as and when such expenditure is incurred which admittedly has been incurred by the assessee. However, in so far as the income is concerned, no such accrual as yet has taken place since the Government of Sudan has not admitted its liability and no income as such has accrued. Thus in view of the judgment of the Supreme Court in the case of E D Sassoon & Co. Ltd. Vs CIT reported in 26 ITR 27 unless the income accrues, said amount of addition made aggregating to Rs. 1,49,31,02,715/- as included by the A.O. cannot be made the basis to disallow the claim of expenditure. 28. In so far as the amount of Rs. 1,49,31,02,715/- (correct amount Rs. 1,371.78 million) is concerned, he submitted that the assessee has not yet raised any invoice on the Government of Sudan in respect of its additional income. Howeve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t payment has been made or not made is not relevant and the assessee himself has admitted the liability for claiming the same as an expenditure. In the present case, the assessee, in fact, has admitted such liability. Referring to the decision of the Hon'ble Supreme Court in the case of Calcutta Company Ltd. vs. CIT, 37 ITR 1, he submitted that the Hon'ble Supreme Court in the said decision has held that the expression 'profits or gains' in section 10(1) of the IT Act has to be understood in its commercial sense and there can be no computation of such profits and gains until the expenditure which is necessary for the purpose of earning the receipts is deducted therefrom - whether the expenditure is actually incurred or liability in respect thereof has accrued even though it may have to be discharged at some future date. 33. Referring to the decision of the Hon'ble Delhi High Court in the case of Aggarwal and Modi Enterprises (Cinema Project) Co. Pvt. Ltd. [2016] 381 ITR 469 (Delhi), he submitted that the Hon'ble High court in the said decision has held that the question whether a liability is ascertained or contingent is dependent on facts of each case. Merely bec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... should be disallowed on matching principles and on the same logic as per exclusion of revenues. We find in appeal, the ld. CIT (A) deleted the addition of Rs. 1,49,31,000/- on the ground that the revenue did not accrue or arise in the hands of the assessee. He, however, accepted the alternate plea of the Assessing Officer on the ground that the additional expenses of Rs. 1026.08 million provided as expenditure by the assessee has to be disallowed as no liability has arisen in the hands of the assessee. It is the submission of the ld. counsel for the assessee that it is following mercantile system of accounting. It has admitted the liability in its books of account totaling to Rs. 1026.08 million and provided for in the books of account after the same was received from the EPC contractor. Therefore, such expenditure which is an ascertained liability and which has been provided in the books of account has to be allowed as expenditure. So far as the counter claim made by the assessee against EPC contractor is concerned, they have not accepted the same. Therefore, the assessee has not considered any revenue on this account in its books of account since the assessee cannot be said to ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld. CIT (A) that the additional expenses of Rs. 1026.08 million provided as expenditure by the assessee calls for disallowance as no liability has arisen in the hands of the assessee and since the revenue did not accrue or arise in the hands of the assessee, therefore, the addition of Rs. 1493.10 million made by the Assessing Officer cannot be justified. We accordingly dismiss the ground of appeal No.2 raised by the assessee and the ground Nos.6,7 and 8 by the Revenue. The various decisions relied on by the ld. counsel for the assessee are distinguishable and not applicable to the facts of the present case. In our opinion, the approach of the assessee should be consistent both for the revenue as well as expenditure. The assessee cannot take one stand for claiming the expenditure as an allowable deduction and, at the same time, do not recognize the revenue. In the instant case, since the claim has not been accepted by the EPC contractor, therefore, the addition made by the Assessing Officer is not justified. At the same time, although the assessee has provided in its Profit & Loss Account regarding the additional claim made by the EPC contractor, however, the assessee has challenged ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were incurred for expansion / extension of the existing business of the Appellant. These expenses include expenses incurred for foreign block evaluation, for making bid, legal and professional fees paid to lawyers and consultants, travelling, communication, boarding and lodging expenses etc. AO held that the above claim of pre-acquisition expenses u/s 37(1) to the extent of Rs. 112,51,25,851/- is not proper as the same is eligible u/s 42 as per the terms of the agreement. Therefore, AO disallowed the claim being premature and erroneous. 7.5.2 The Appellant is engaged in the business of Exploration and Production of oil and natural gas. The expenses are incurred on submission of bids/ tenders, consultancy fee paid to consultants, purchase and evaluation of seismic data etc. The Appellant has incurred the expenses to evaluate the prospects of proposed acquisition to determine the profitability of the oil block over a period of time. Expenses are incurred on submission of bids/ tenders, consultancy fee paid to consultants, purchase and evaluation of seismic data etc. There is no dispute that the aforesaid expenditure has been incurred by the Appellant for the furtherance of its bus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ata had to be evaluated in seismic processing center. After evaluating the same, the assessee was to take decision as to whether investments to be made in the project or not. There is no dispute to the fact that in all industries an activity of furtherance of its business or evaluation of better profit earning process in one manner or other are undertaken. Efforts to evaluate the prospects of better earning profit is not a separate activity but is in the course of conduct of normal day to day business. These expenditure cannot be said to bring an enduring benefit to the business nor the same can be said as initial outlay for expansion of business. In the instant case, the expenditure so incurred by the assessee is for furtherance of activities undertaken by it in the normal course of its business. The same are incurred on continuous basis for evaluation of business activities. In view of the decision of Bombay High Court in the case of Essar Oil Ltd. - (2008) TIOL 530, such expenditure is to be allowed as revenue expenditure. Hon'ble I Calcutta High Court in the case of Keshoram Industries and Cotton Mills - 196 ITR 845 held that where the setting up does not amount to starting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenditure before submitting its bid. If the assessee is not successful in obtaining bid, such expenditure is allowable as revenue expenditure. As the assessee was continuously in the business of exploration and production of oil, the expenditure so incurred was in the normal course of its business, such expenditure being revenue in nature incurred for the purpose of existing exploration and production business was required to be allowed u/s 37(1) of the IT Act. Similar claim was also made by the assessee in earlier years. Accordingly, we direct the AO to allow the same." In view of the above, legal and factual position, the expenses incurred on submission of bids/ tenders, consultancy fee paid to consultants, purchase and evaluation of seismic data etc are normal business expenditure of the Appellant and allowable under section 37 of the Act and provisions of Section 42 of the Act are not applicable. Therefore, the addition made by the AO is legally not sustainable. The appeal is allowed in this ground." 40. Aggrieved with such order of the ld. CIT(A), the Revenue is in appeal before the Tribunal. 41. We have considered the rival arguments made by both the sides and perus ..... X X X X Extracts X X X X X X X X Extracts X X X X
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