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TMI Blog2022 (6) TMI 839X X X X Extracts X X X X X X X X Extracts X X X X ..... mineral oil and hence restricted deduction u/s.80IB(9) of the Act to the proportionate profit relating to sale of only crude oil - CIT-A allowed the deduction - HELD THAT:- In view of the aforesaid decisions of this Tribunal in the case of Reliance Industries Ltd. which is a 90% joint venture partner of assessee and the decision of the Hon ble Gujarat High Court in the case of Niko Resources Ltd., [ 2015 (3) TMI 986 - GUJARAT HIGH COURT ] which is a sister concern of the assessee, we hold that the ld. CIT(A) had rightly granted relief to the assessee by allowing deduction u/s.80IB(9) of the Act on profit earned by the assessee for exploration of natural gas. Accordingly, the ground No.2 raised by the Revenue is dismissed. TP Adjustment made on account of interest chargeable on outstanding receivables - applying LIBOR rates - HELD THAT:- It is not in dispute that the receivables from AE were outstanding for more than two years. Accordingly, the ld. TPO observed that the same constitutes indirect funding by the assessee to its AE and therefore, the imputation of interest need to be made on the same. Whether the transaction of imputation of interest on outstanding receivable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the provisions of Section 80IB(9) which restricts the deduction to exploration of mineral oil. 3. The Appellant prays that the order of the Ld. CIT(A) on the above grounds be set aside and that of the Assessing Officer be restored. 4. The Appellant craves leave to amend or alter any ground or add a new ground which may be necessary. 2.1. The effective issue to be decided is whether assessee is eligible for deduction u/s.80IB(9) of the Act in the facts and circumstances of the instant case. 3. We have heard rival submissions and perused the materials available on record. The brief facts of this appeal are that the assessee with 10% participating interest and its joint venture partner Reliance Industries Limited ('RIL') has entered into a Production Sharing Contract ('PSC') with the Government of India for the exploration and development of oil and gas field with respect to contract area identified as KG-DWN-98/3 popularly known as the D6 block. The assessee makes the payment to the co-venturer i.e. RIL to conduct day to day business activities and the expenditure related to Joint Venture. These payments made by the assessee are deposited by RIL i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Act which restricts the deduction to exploration of mineral oil. 4.1. We find that the assessee company with 10% participating interest and its joint venture partner Reliance Industries Ltd., (RIL) with 90% participating interest, entered into Production Sharing Contract (PSC) with Government of India as per amendment No.1 to the PSC with Block KG-DWN-98/3 on 26/12/2007 for the exploration and development of oil and gas field with respect to contract area identified as Block KG-DWN-98/3 popularly known as D-6 field or D-6 PSC. The ld. AO had observed that company had set up project office in India from April 2006 under intimation to RBI and had obtained necessary approval from the Registrar of Companies in this regard. The assessee claimed that commercial production of mineral oil commenced from 01/05/2009 from KG D-6 Block as informed by the operator i.e. Reliance Industries Ltd., and the trial production of crude oil and natural gas was started from September 2008 and 02/04/2009 respectively. 4.2. We find that the ld. AO in his assessment order took a view that natural gas does not fall into the category of mineral oil and hence restricted deduction u/s.80IB(9) of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er in the Act or in the sister legislations governing the E P sector. In the absence of any contrary meaning, there is no basis whatsoever, to hold that the term 'mineral oil' does not include natural gas for the purposes of Section 80-IB(9) of the Act as well. The ld. AR also placed reliance on the speech of the Hon ble Finance Minister introducing the tax holiday for promotion of the oil and gas industry in the country. Accordingly, he submitted that the term mineral oil as referred to Section 80IB(9) of the Act includes natural gas and the intention of the legislature as spelt out in the budget speech of the Hon ble Finance Minister and provisions of Section 44BB, 293A and Section 42 of the Act are to be read harmoniously. 4.5. Per contra, the ld. DR vehemently argued that the explanation to the provisions of Section 44BB defines mineral oil to include petroleum and natural gas. He argued that this explanation is relevant only for the provisions of Section 44BB of the Act. He submitted that no such explanation is given in Section 80IB(9) of the Act. Hence, the assessee would not be eligible for deduction u/s.80IB(9) of the Act in respect of natural gas. 4.6. We ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n challenged. 3. The relevant portion of the amendment in the present proceedings read as under:- '37. In Section 80-IB of the Income-tax Act, - (a) for sub-Section (9), the following sub-Section shall be substituted and shall be deemed to have been substituted with effect from the 1st day of April, 2000, namely :- '(9) The amount of deduction to an undertaking shall be hundred per cent, of the profits, for a period of seven consecutive assessment years, including the initial assessment year, if such undertaking fulfils any of the following, namely :- (i) is located in North-Eastern Region and has begun or begins commercial production of mineral oil before the 1st day of April, 1997; (ii) is located in any part of India and has begun or begins commercial production of mineral oil on or after the 1st day of April, 1997; (iii) is engaged in refining of mineral oil and begins such refining on or after the 1st day of October, 1998. Explanation. - For the purposes of claiming deduction under this sub-Section, all blocks licensed under a single contract, which has been awarded under the New Exploration Licensing Policy announced by the Governmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t be looked at in construing the provisions of Section 80-IB. 34. This contention would merit consideration if mineral oil has either been defined under the Act or has acquired a natural, commercial or interpretative meaning so as to exclude natural gas. Section 80-IB(9)(ii) of the Act provides for the same exemption to undertakings located in any part of India which began commercial production of mineral oil on or after 1st April 1997. Apart from use of the term undertaking , this provision also uses the term mineral oil . It is necessary to consider the scope and amplitude of these terms in the context of the provisions of Sections 80-IB particularly in view of the fact that while amending the provisions of this Section in the manner aforesaid, Section 80IB(9)(ii) has remained unamended. 35. The question whether natural gas is encompassed in the term mineral oil came up for consideration before a Constitutional Bench of the Apex Court in the case of Association of Natural Gas v. Union of India [2004] 4 SCC 489. The question arose as to the legislative competence of the State to enact laws on natural gas in terms of Entry 25 of List II of the Seventh Schedule of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rd until contained under impervious rock barriers. 23. On page 634 of the above Encyclopedia, Natural gas is classified in several broad categories based on the chemical composition, which are; (1) wet gas contains condensable hydrocarbons such as propane, butane, and pentane; (2) lean gas denotes an absence of condensable hydrocarbons; (3) dry gas is a gas whose water content has been reduced by dehydration process; (4) sour gas contains hydrogen sulfide and other sulfur compounds; and (5) sweet gas denotes an absence of hydrogen sulfide and other sulfur compounds. Natural gas sold to the public is described as lean, dry and sweet. 27. In Volume 17 on page 119, it is stated that the term 'petroleum', literally, rock oil, is applied to the deposits of oily material found in the upper strata of the earth's crust. Petroleum was formed by a complex and incompletely understood series of chemical reactions from organic material laid down in previous geological eras. Large deposits have Lean found in widely different parts of the world and their chemical composition varies greatly. Consequently, no single composition of petroleum can be defined. It is not surprising ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her the word 'petroleum' or 'petroleum products' has been defined in an inclusive way, so as to include natural gas. In Encyclopaedia Britannica, 15th Edn. Vol. 19, page 589 (1990), it is stated that liquid and gaseous hydrocarbons are so intimately associated in nature that it has become customary to shorten the expression 'petroleum and natural gas' to 'petroleum' when referring to both. The word petroleum literally means 'rock oil'. It originated from the Latin term petra-oleum. (petra-means rock or stone and oleum-means oil). Thus, Natural Gas could very well be comprehended within the expression 'petroleum' or petroleum product. 37. A survey of the various legislations on the topic would show that the term 'petroleum' or 'petroleum products' has been given a wide meaning to include natural gas and other similar products. 38. In the Pipelines Act, 1962 of the United Kingdom, 'petroleum' has been defined as follows :- Petroleum includes any mineral oil or relative hydrocarbon and natural gas existing in its natural condition in strata, whether or not it has undergone any processing; but ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... duct means any commodity made from petroleum or natural gas and shall include refined crude oil, processed crude petroleum, residuum from crude petroleum, cracking stock, uncracked fuel oil, fuel oil, treated crude oil residuum, casing head gasoline, natural gas gasoline, naphtha, distillate, gasoline, kerosene, waste oil, blended gasoline, lubricating oil, blends or mixture of oil with one or more liquid products or by-products derived from oil condensate, gas or petroleum hydrocarbons, whether herein enumerated or not. 5. The Petroleum and Minerals Pipelines (Acquisition of Right of User in Land) Act, 1962, 2. (c) petroleum has the same meaning as in the Petroleum Act, 1934, and includes natural gas and refinery gas. 6. The Oil Industry (Development) Act, 1974 2. (h). mineral oil includes petroleum and natural gas. 2. (m). petroleum product means any commodity made from petroleum or natural gas and includes refined crude oil, processed crude petroleum, residuum from crude petroleum, cracking stock, uncracked fuel oil, fuel oil, treated crude oil residuum, casing head gasoline, natural gas, gasoline, naphtha, distillate gasoline, kerosene, bitume ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or petroleum products has been given a wide meaning to include natural gas and other similar products. (iii) In para 41, it held production of natural gas is not independent of the production of other petroleum products; though from some wells natural gas alone would emanate, other products may emanate from sub terrain chambers of the earth, But all oil fields explored for their potential hydrocarbon. (iv) In para 42 it held that the legislative history and the definition of 'petroleum', 'petroleum products' and 'mineral oil resources' contained in various legislations and books and the national interest involved in the equitable distribution of natural gas amongst the States - all these factors lead to the inescapable conclusion that natural gas in raw and liquefied form is petroleum product and part of mineral oil resource, which needs to be regulated by the Union of India.' 35.7 The Apex Court in unequivocal terms has held that, natural gas in raw and liquefied form is a petroleum product and part of mineral oil resources. In light of the above judgment, and in absence of any specific definition of mineral oil under Section 80- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rewriting the decision of the Apex court that mineral oil in its natural sense would not include natural gas. On the contrary, para 48 of the judgment uses the expression all these factors lead to the inescapable conclusion that natural gas in raw and liquefied form is petroleum product and part of mineral oil resources. 35.10 In fact, there is no dispute or contest on facts between the Union and the States as to what would constitute natural gas and its broad categories and chemical compositions. The Apex Court referred to technical literature and the advancement in science in the use of liquefied natural gas. The contention of the State that natural gas do not fall within the genre of petroleum products and mineral oil stood rejected by holding that natural gas in raw and liquefied form is petroleum product and part of mineral oil resources. 35.11 Section 80-IB of the Act has not defined mineral oil nor has it excluded petroleum products and natural gas. It is not alien to tax laws to have scripted definition to suit a particular enactment or introduce deeming provisions. The amendments to Section 80-IB do not define or restrict the meaning of mineral oil or even in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y issues relating to Natural Gas which position has been made explicit. 35.14 Sub-clause (iv) to Section 80-IB(9) was introduced by the Finance (No.2) Act 2009 with effect from 1.4.2010. Notes on Clauses to the Finance Bill 2008 and 2009, the actual amendments to Section 80-IB(9) made through Finance Bill 2008 and Finance Bill 2009 along with the statements laid on the floor of the Parliament by the Hon'ble Finance Minister while moving the motion for consideration of Finance Bill 2008 on this subject matter are reproduced below :- 'Notes on clauses to Finance Bill 2008 :- Clause 15 seeks to amend section 80-IB of the Income-tax Act, which relates to deduction in respect of profits and gains from certain industrial undertakings other than infrastructure development undertakings. Sub-section (9) of the said section provides for deduction in respect of profits and gains derived from commercial production or refining of mineral oil. The term mineral oil does not include petroleum and natural gas, unlike other sections of the Act. The deduction under this sub-section is available to an undertaking for a period of seven consecutive assessment years including th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the courts which are adjudicating the matter. Nothing new has been stated, it is simply a restatement of Department's position which has already placed before the tribunals and the courts. Besides, it is a well settled proposition of law that notes on clauses have no legal effect and are not binding on the courts. I may assure potential bidders for oil exploration blocks that the benefit of Section 80IB(9), as finally interpreted by the courts, will be applicable to all exploration and production contracts, whether obtained through nomination or bidding... 35.16 Budget speech of the Finance Minister while introducing Finance (No.2) Bill, 2009 :- 102. Madam Speaker, in the context of the geo-political environment, it is necessary for us to create our own faculties for energy security. Accordingly, I propose to extend the tax holiday under Section 80IB(9) of the Income Tax Act, which was hitherto available in respect of profits arising from the commercial production or refining of mineral oil, also to natural gas. This tax benefit will be available to undertakings in respect of profits derived from the commercial production of mineral oil and natural gas from oil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g is engaged in refining of mineral oil and begins such refining on or after the 1st day of October, 1998 but not later than the 31st day of March, 2012. This amendment will take effect retrospectively from the 1st April, 2009. It is also proposed to further amend the said sub-section (9) as so substituted and further amended by inserting a new clause (iv) to provide that the benefit of deduction under the said sub-section shall be available if the undertaking is engaged in commercial production of natural gas in blocks licensed under the VIII Round of bidding for award of exploration contracts under the New Exploration Licensing Policy announced by the Government of India vide Resolution No.O-19018/22/95-ONG.DO.VL dated 10th February, 1999 (hereinafter referred to as NELP-VIII ) and begins commercial production of natural gas on or after the 1st day of April, 2009. This amendment will take effect from 1st April, 2010 and will, accordingly, apply in relation to the assessment year 2010 - 2011 and subsequent years.' 35.18 Amendment to Section 80-IB(9) by Finance (No.2) Act, 2009 :- '37. In Section 80-IB of the Income-tax Act, - (a) for sub-section (9), t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting Act and they have not been given retrospective effect. In fact, the Notes on Clauses merely set out the stand of the revenue authorities. This exercise is insufficient to construe that the term mineral oil does not include natural gas or that the benefits of Section 80-IB have been extended to natural gas for the first time with effect from 1.4.2009 by virtue of insertion of sub-clause (iv) to Section 80-IB(9). At the best, sub-clause (iv) has to be construed to mean that the benefit would also be available for NELP VIII bidders who satisfy the conditions set out in the said sub-clause. 35.20 In the absence of specific wordings in the Statute, to draw a conclusion that only undertakings engaged in the commercial production of 'mineral oil other than natural gas will be entitled to deductions of profits and gains under the above mentioned sub-section, is wholly incorrect. 35.21 For the aforesaid reasons, we hold that the insertion of sub-clause (iv) to Section 80-IB(9) of the Act by the Finance (No.2) Act, 2009 cannot be interpreted to mean that the term mineral oil as used in Section 80-IB does not include natural gas and cannot result in denial of the benef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee (AE). Assessee had not charged any interest on the said outstanding receivables from its AE. The assessee is a non-resident company incorporated in Cayman Island and is a tax resident of Cyprus India. It is not in dispute that the receivables from AE were outstanding for more than two years. Accordingly, the ld. TPO observed that the same constitutes indirect funding by the assessee to its AE and therefore, the imputation of interest need to be made on the same. Whether the transaction of imputation of interest on outstanding receivables from AE would constitute an international transaction or not, is not in dispute before us. For the purpose of imputation of interest, the ld. TPO proposed the interest rate at 14.45% being the SBI prime lending rate. We hold that adoption of SBI prime lending rate @14.45% is definitely excessive and is not in order. In our considered opinion, applying LIBOR rates plus two basis points would be a reasonable rate of interest which should be adopted for benchmarking the international transaction of interest on outstanding receivables. We direct the ld. TPO / ld. AO to make transfer pricing adjustment in this regard accordingly. Accordingly, the g ..... X X X X Extracts X X X X X X X X Extracts X X X X
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