ACIT circle 13 (1), V. ONGC Nidesh Ltd,

ITA 546/DEL/2008

• Counselvise Citation: [2009] 115 COUNSELVISE.COM (IT) 1135 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 8 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-10-2009
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: F
• Next Hearing Date: 07-09-2009
• Assessment Year: 2002-2003
• Appeal Filed On: 14-02-2008
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: NAVNEET SON I
• Assessee Lawyers: RAVI SHARMA CAS; C S AGGARWAL K M GUPT A S
• Keywords: Depreciation; Revenue expenditure
• Section: 37(1); 32

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES : F : NEW DELHI BEFORE SHRI D.R. SINGH AND SHRI R.C. SHARMA ITA NO.472/D/08 ASSESSMENT YEAR : 2002-03 M/S ONGC VIDESH LTD., VS. D.C.I.T., 601, KAILASH BUILDING, 26, CIRCLE 13(1), K.G. MARG, NEW DELHI NEW DELHI PAN NO.AAACO1230F AND ITA NO.546/D/08 ASSESSMENT YEAR : 2002-03 A.C.I.T., VS. M/S ONGC VIDESH LTD., CIRCLE-13(1), 601, KAILASH BUILDING, 26, NEW DELHI KG MARG, NEW DELHI ( APPELLANT ) ( RESPONDENT ) ASSESSEE BY : S/SHRI C.S. AGGARWAL, K.M. GUPT A, ADVOCATES & KANCHAN KAUSHAL & RAVI SHARMA, CAS. DEPARTMENT BY : SHRI NAVNEET SONI, CIT- DR O R D E R PER R.C. SHARMA, AM: THESE ARE THE CROSS APPEALS FILED BY THE ASSESSEE A ND THE REVENUE AGAINST THE ORDER OF CIT(A) DATED 10.12.2007 FOR TH E ASSESSMENT YEAR 2002- 03. 2. FACTS IN BRIEF ARE THAT THE ASSESSEE IS ENGAGED IN EXPLORATION, DEVELOPMENT AND PRODUCTION OF HYDROCARBONS IN OVERS EAS JURISDICTIONS TO AUGMENT THE OIL SECURITY OF INDIA MAINLY BY WAY OF ACQUIRING PARTICIPATING ITA NOS.472-546-2008 2 INTEREST IN PRODUCTION SHARING CONTRACTS. DURING T HE YEAR UNDER CONSIDERATION, THE ASSESSEE THROUGH AN ASSIGNMENT A GREEMENT DATED FEBRUARY 10, 2001 WITH CONSORTIUM MEMBERS AND /THE RUSSIAN G OVERNMENT ACQUIRED A 20% PARTICIPATING INTEREST IN SAKHALIN PRODUCTION S HARING AGREEMENT (SAKHALIN PSA). THE PROJECT WAS IMPLEMENTED BETW EEN THE FOLLOWING PARTIES:- RUSSIAN FEDERATION REPRESENTED BY THE GOVERNMENT OF THE RUSSIAN FEDERATION AND /THE ADMINISTRATION OF THE SAKHALIN OBLAST; EXXON NEFTEGAS LIMITED (EXXON), SSAKHALIN OIL DEVELOPMENT COOPERATION LIMITED (SOD ECO), ROSNEFT-SAKHALIN (ROSNEFT-S) AND SAKHALINMORNEFTEGAS-SHELF (SMNG-S). THE PROJECT RELATES TO THE CHAYVO, ODOPTU AND ARKUT UN-DAGI OIL, GAS AND CONDENSATE FIELDS, WHICH IS OFFSHORE SAKHALIN ISLAN D (SAKHALIN BLOCK). THE PSA WAS ENTERED INTO ON JUNE 30, 1995 AND WAS F OR A PERIOD OF 25 YEARS. THEN THE CONSORTIUM MEMBERS COMMENCED HYDRO CARBONS OPERATIONS IN THE SAKHALIN BLOCK. ROSNEFT-S AND SMNG-S HELD 4 0% INTEREST IN THE SAID SAKHALIN PSA AND IN A JOINT OPERATING AGREEMENT. V IDE THE ASSIGNMENT AGREEMENT DATED FEBRUARY 10, 2001. ROSNEFT-S AND S MNG-S (ASSIGNORS) ASSIGNED 50% OF THEIR SHARE IN THE SAKHLIN PSA AND IN A JOINT OPERATING AGREEMENT TO OVI FOR A CONSIDERATION OF RS.15,590.9 6 MILLION. CONSEQUENT ITA NOS.472-546-2008 3 TO THE ACQUISITION OF SUCH RIGHTS AND LICENSES, THE ASSESSEE BECAME A CONSORTIUM MEMBER AND THE ASSIGNORS WERE RELIEVED F ROM OBLIGATION UNDER THE SAKHALIN PSA TO THAT EXTENT. THUS, BY ACQUIRIN G 20% PARTICIPATING INTEREST, ASSESSEE HAS BECOME THE MEMBER OF THE CON SORTIUM AND ACQUIRED PROPORTIONATE SHARE IN RIGHTS AND LICENSES GRANTED BY THE RUSSIAN STATE FOR SAKHALIN BLOCK. BY ACQUIRING THESE BUSINESS RIGHTS AND EXPLORATION AND PRODUCTION LICENSES, THE ASSESSEE BECAME ENTITLED T O CARRY ON HYDROCARBON OPERATIONS IN THE SAKHALIN BLOCK. THE CONTENTION O F ASSESSEE WAS THAT THE RIGHTS AND LICENSWES, BEING INTANGIBLE ASSETS, WERE ENTITLED TO DEPRECIATION @25% IN VIEW OF THE AMENDED PROVISIONS OF SECTION 3 2 OF THE ACT. 3. THE ASSESSING OFFICER DISALLOWED THE CLAIM OF DE PRECIATION AND OTHER EXPENSES MADE BY THE ASSESSEE. THE ASSESSING OFFIC ER HELD THAT CLAIM OF DEPRECIATION U/S 32 OF THE ACT AND CLAIM FOR OTHER EXPENSES ARE NOT ALLOWABLE DUE TO THE FOLLOWING REASONS:- 1. THE BUSINESS OR COMMERCIAL RIGHTS, ENVISAGED U/ S 32 HAS CLOSE LINK TO INTANGIBLE ASSETS WHICH ARE IN THE NA TURE OF KNOW HOW, COPYRIGHT TRADEMARKS, FRANCHISES, WHICH INDICATES THAT IT IS A RIGHT GIVEN FROM A LICENSOR TO A LICENSEE IN LIEU OF A PAYMENT WHICH IS IN THE NATUR E OF ROYALTY, FEES FOR TECHNICAL SERVICES, OR ANY SUCH S UM WHICH IS OF A SIMILAR NATURE. THE ASSESSING OFFICE R HELD THAT WHEN ONE TALKS ABOUT ACQUIRING AN INTANGIBLE A SSET, THE PAYMENT MADE SHOULD BE A CONSIDERATION FOR THE USE OF COPYRIGHTS, INDUSTRIAL PROPERTY RIGHTS, EQUIPMEN T AND EXPERIENCE OR IN SHORT INTELLECTUAL PROPERTY RIGHTS . 2. IF THE CLAIM OF THE APPELLANT IS ACCEPTED THAT P ARTICIPATION RIGHT ARE IN THE NATURE OF BUSINESS OR COMMERCIAL R IGHT, ITA NOS.472-546-2008 4 AS DEFINED IN SECTION 32(1)(II), IT WOULD AMOUNT TO BROADENING THE AMBIT OF THE SECTION TO A GREAT EXTE NT. IN SUCH A SITUATION, ANY PARTNERSHIP AGREEMENT BETWEEN TWO ENTITIES OR VARIOUS ENTITIES WOULD THEN FALL WITHIN THE PURVIEW OF BUSINESS RIGHTS AND HENCE DEPRECIATION B E CLAIMED ON ANY AMOUNT OF A CAPITAL NATURE, WHICH IS IN THE NATURE OF ANY INVESTMENT MADE FOR THE PURPOSE O F ANY PARTNERSHIP, JOINT VENTURE AGREEMENT OR ANY OTHER AGREEMENT. 3. THE COMMERCIAL PRODUCTION DID NOT START IN YEAR OF ACQUISITION OF INTEREST AND, THEREFORE, THE EXPENDI TURE IS PRE-COMMENCEMENT. 4. AS PER AO, WHAT HAS BEEN ACQUIRED IS A PARTICIPA TION RIGHT IN THE LICENSE TO CARRY OUT HYDROCARBON OPERATIONS IN SAKH ALIN BLOCK. BY THE IMPUGNED ORDER, THE CIT(A) HELD THAT THE SAID EXPEN DITURE EVEN THOUGH REPRESENTS REVENUE EXPENDITURE, YET ONLY 1/19 TH THEREOF HAD TO BE ALLOWED, SINCE THE SAME REPRESENTS DEFERRED REVENUE EXPENDIT URE. ACCORDINGLY, 1/19 TH OF THE EXPENDITURE SO INCURRED BY THE ASSESSEE WAS DIRECTED TO BE ALLOWED BY THE CIT(A) IN HIS APPELLATE ORDER. AGGRIEVED BY TH IS ORDER OF CIT(A), BOTH REVENUE AND ASSESSEE ARE IN APPEAL BEFORE US. REVE NUE IS AGGRIEVED FOR CIT(A)S DIRECTION TO THE AO FOR ALLOWING 1/19 TH OF THE EXPENDITURE, WHEREAS ASSESSEE IS AGGRIEVED FOR NOT ALLOWING THE ENTIRE E XPENDITURE OR AS AN ALTERNATE FOR NOT ALLOWING CLAIM OF DEPRECIATION U/ S 32(1)(II) OF THE IT ACT. 5. FOLLOWING GROUNDS HAVE BEEN TAKEN BY THE ASSESSE E:- 1) THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE AND IN LAW, THE LEARNED CIT(A) ERRED IN NOT ALLOWING IN FU LL AN AMOUNT OF RS.1559/10 CRORES AS CLAIMED BY THE APPEL LANT. 1.1)THAT THE LEARNED CIT(A) ERRED ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE IN NOT APPRECIATING THE B USINESS ITA NOS.472-546-2008 5 INTRICACIES OF THE OIL & GAS SECTOR AND ACCORDINGLY ERRED IN NOT APPRECIATING THAT THE AMOUNT OF RS.1559.10 CROR ES FOR GETTING THE RIGHTS IN EXPLORATION AND PROSPECTING O F HYDROCARBONS WAS INCURRED IN THE REGULAR COURSE OF THE BUSINESS AND IS A NORMAL BUSINESS ACTIVITY. 1.2THAT THE LEARNED CIT(A) ERRED IN NOT ALLOWING TH E CLAIM OF RS.1559.10 CRORES UNDER SECTION 42 OF THE I.T. ACT, 1961 (ACT) WITH PRODUCTION SHARING CONTRACT AND THE AGREEMENT ENTERED INTO BY THE APPELLANT WITH THE CENTRAL GOVERNMENT. 2. WITHOUT PREJUDICE TO THE GROUND NO.1 TO 1.2, AND IN THE ALTERNATE THE LEARNED CIT(A) ERRED ON FACTS AND IN LAW IN NOT ALLOWING THE DEPRECIATION CLAIM OF RS.3,897,742,300 BEING 25% OF RS.1559.10 CRORES CLAIMED BY THE APPELLANT U/S 3 2(1)(II) OF THE ACT. 2.1 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE , THE LEARNED CIT(A) GROSSLY ERRED IN UPHOLDING THE ACTION OF THE LEARNED ASSESSING OFFICER THAT THE ACQUISITION OF PARTICIPA TING INTEREST IN THE PSA ONLY GIVES THE APPELLANT AN ACCESS TO THE A REA IN WHICH EXPLORATION IS DONE AND IS ONLY A PARTICIPATING RIG HT AND NOT A RIGHT ELIGIBLE FOR DEPRECIATION OF THE ACT. 2.2 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT(A) GRAVELY ERRED IN LAW IN UPHOLDIN G THE CONTENTION OF THE ASSESSING OFFICER THAT THE PAYMEN T MADE FOR ACQUIRING AN INTANGIBLE ASSET SHOULD BE A CONSIDERA TION FOR THE USE OF COPYRIGHTS, INDUSTRIAL PROPERTY RIGHTS, EQUI PMENT AND EXPERIENCE AND HENCE MUST BE IN THE NATURE OF AN IP R FOR BEING ELIGIBLE FOR DEPRECIATION U/S 32(1)(II) OF THE ACT. 2.3 THAT WITHOUT PREJUDICE TO THE ABOVE AND IN THE ALTERNATIVE, THE ASSESSING OFFICER AND CIT(A) ERRED ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW IN NOT ALLOWIN G DEPRECIATION ON TANGIBLE AND INTANGIBLE ASSETS ACQU IRED BY THE APPELLANT PURSUANT TO ACQUISITION OF 20% PARTICIPAT ING INTEREST IN SAKHALIN BLOCK. 3. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE CIT(A) GROSSLY ERRED IN CONFIRMING THE ACTION O F ASSESSING OFFICER IN DISALLOWING REVENUE EXPENSES OF RS.4,385 ,722 INCURRED ON PURCHASE AND EVALUATION OF SEISMIC DATA TREATING THE SAME AS CAPITAL IN NATURE. 3.1 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE ASSESSING OFFICER AND THE CIT(A) GROSSLY ERRED IN NOT APPRECIATING THAT THIS EXPENDITURE HAS BEEN INCURRE D IN EVALUATING BUSINESS OPPORTUNITIES FOR EXPANSION OF THE EXISTING ITA NOS.472-546-2008 6 BUSINESS OF EXPLORATION AND PRODUCTION OF HYDROCARB ONS OUTSIDE INDIA FOR AUGMENTING OIL SECURITY OF INDIA. 3.2 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE CIT(A) GROSSLY ERRED IN HOLDING THAT EXPENDITUR E INCURRED BY THE APPELLANT WOULD BRING ENDURING BENEFIT TO TH E BUSINESS OF THE APPELLANT. 3.3 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 WI TH THE CENTRAL GOVERNMENT U/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 REV ENUE EXPENSES RELATING TO PROJECT PENDING FINAL EVALUATI ON OF RS.56,415,776 TREATING THE SAME AS CAPITAL IN NATUR E. 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 WI TH THE CENTRAL GOVERNMENT U/S 42 OF THE ACT. 6. THE GROUNDS TAKEN BY THE REVENUE READS AS UNDER: - THE LEARNED CIT(A) HAS ERRED IN LAW AND IN FACTS A ND CIRCUMSTANCES OF THE CASE IN HOLDING THAT DEDUCTION FOR THE EXPENDITURE SHOULD BE ALLOWED OVER THE PERIOD OF PR ODUCTION SHARING AGREEMENT DURING WHICH THE BENEFIT WOULD AC CRUE TO THE ASSESSEE AND DIRECTED THE ASSESSING OFFICER TO ALLO W 1/19 TH OF THE 1550.10 CRORES. 7. IT WAS CONTENDED BY SENIOR COUNSEL THAT THE ASSE SSEE HAD ACQUIRED A BUSINESS RIGHT IN A FORM OF A LICENSE EQUALLY QUALI FIED TO BE AN INTANGIBLE ASSET U/S 32(1)(II) AND ELIGIBLE FOR DEPRECIATION A LLOWANCE. OUR ATTENTION WAS INVITED TO THE FOLLOWING TERMS OF THE PSA WHICH REA D AS UNDER:- TERMS OF PSA WHAT PSA PROVIDES ARTICLE II- OBJECT AND PURPOSE UNDER THIS AGREEMENT AND IN ACCORDANCE WITH THE LAW S OF THE RUSSIAN FEDERATION IN EFFECT ON THE EFFECTIV E DATE, THE CONSORTIUM SHALL BE GRANTED AN EXCLUSIVE RIGH T ITA NOS.472-546-2008 7 TO CONDUCT HYDROCARBON OPERATIONS IN THE AGREEMENT MARINE BODY AREA (I.E. SAKHALIN BLOCK) ARTICLE 1DEFINES HYDROCARBON OPERATIONS TO MEAN EXPLORATION AND DEVELOPMENT AND ALL OTHER ACTIVITIES AUTHORIZED OR CONTEMPLATED BY CONSORTIUM PURSUANT T O THIS AGREEMENT. ARTICLE 1-DEFINES CONSORTIUM TO MEAN THE PARTIES WHO ARE COLLECTIVELY NAMED AS CONSORTI UM IN THE PREAMBLE TO THIS AGREEMENT AND WHO SIGNED TH IS AGREEMENT IN THAT CAPACITY AND ANY OF THEIR RESPECT IVE ASSIGNEES OR TRANSFEREES PURSUANT TO ART ICLE XXXV. SUCH PARTIES ARE INDIVIDUALLY REFERRED TO AS A PAR TY OF CONSORTIUM AND COLLECTIVELY AS PARTIES OF CONSORTIUM OR AS CONSORTIUM. ARTICLE XXXV- ASSIGNMENT PROVIDES 35.1 CONSORTIUM (INCLUDING EACH OF PARTY OF CONSORTIUM) SHALL HAVE THE RIGHT TO ASSIGN ALL OR A NY PARTS OF ITS RIGHTS, OBLIGATIONS, AND INTERESTS UND ER THIS AGREEMENT TO AN AFFILIATE. IN ADDITION, THE CONSOR TIUM (INCLUDING EACH OF PARTY OF CONSORTIUM) SHALL HAVE THE ASSIGNMENT RIGHTS TO A THIRD PARTY OR PARTIES THAT ARE NOT AFFILIATES PROVIDED SUCH PROPOSED ASSIGNEE(S) ESTAB LISH TO THE SATISFACTION OF THE AUTHORIZED STATE BODY TH AT IT HAS THE NECESSARY TECHNICAL AND ECONOMIC CAPABILITY TO PERFORM ITS OBLIGATIONS UNDER THIS AGREEMENT. ASSIGNMENTS TO THIRD PARTIES THAT ARE NOT AFFILIATE S REQUIRE PRIOR WRITTEN CONSENT OF THE STATE .. 35.2 . 35.3 SUBJECT TO LIMITATIONS CONTAINED IN THUS ARTIC LE XXXV, THIS AGREEMENT SHALL INURE TO THE BENEFIT OF AND BE BINDING UPON THE SUCCESSORS AND ASSIGNEES OF THE PARTIES. ARTICLE 2.5 PROVIDES SUBJECT TO THE PROVISIONS OF THIS AGREEMENT, CONSORTIUM SHALL COMMENCE HYDROCARBON OPERATIONS PROMPTLY AFTER THE EFFECTIVE DATE OF THIS AGREEMENT . ARTICLE 3.1 DEAL- ING WITH GRANT OF RIGHTS PROVIDED. THE STATE GRANTS EXCLUSIVE RIGHTS TO CONSORTIUM TO CONDUCT HYDROCARBON OPERATIONS IN THE AGREEMENT MARINE BODY AREA (SAKHALIN BLOCK) AS WELL AS THE OWNERSHIP RIGHT TO THE PORTION OF HYDROCARBONS TO WHICH THE CONSORTIUM IS ENTITLED UNDER THIS AGREEME NT. ARTICLE 8.2 PROVIDES COMBINED EXPLORATION AND PRODUCTION LICENSES, GRANTING RIGHTS TO EXPLORE FOR, DEVELOP AND PRODUCE HYDROCARBONS IN THE AGREEMENT MARINE BODY AREA, AND TO CONDUCT ALL RELATED HYDROCARBON OPERATIONS SHALL BE ITA NOS.472-546-2008 8 GIVEN TO THE CONSORTIUM ON OR BEFORE THE EFFECTIVE DATE OF THIS AGREEMENT. ARTICLE 37.2 OF THE PSA PROVIDES AFTER EXECUTION OF THIS AGREEMENT, THE GOVERNMENT OF THE RUSSIAN FEDERATION AND THE ADMINISTRATION OF TH E SAKHALIN OBLAST SHALL UNDERTAKE THE FOLLOWING . (1) . (2) THE GRANT TO PARTIES OF THE CONSORTIUM OF THE NECESSARY AND EXCLUSIVE LICENSE FOR HYDROCARBON EXPLORATION AND DEVELOPMENT WHICH LICENSE SHALL TAKE EFFECT SUBJECT TO AND IN ACCORDANCE WITH THE TERMS OF THIS AGREEMENT AND SHALL 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 LAWS, DECREES OR REGULATIONS WITHIN THE RUSSIAN FEDERATION IN EFFECT ON THE EFFECTIVE DATE, TO PERMIT THE CONSORTIUM FREELY TO EXERCISE ALL THE RIGHTS GRANTED TO THE CONSORTIUM UNDER THIS AGREEMENT FROM AND AFTER THE EFFECTIVE DATE. 8. AS PER LEARNED AR, SECTION 32(1)(II) OF THE ACT SPECIFICALLY AND SEPARATELY RECOGNIZES LICENSES AS AN INTANGIBLE A SSETS, WHICH IS BEING COMPLETELY IGNORED BY ASSESSING OFFICER. SINCE THE TERM LICENSE WAS NOT DEFINED, REFERENCE WAS MADE BY LD.AR TO OTHER LAWS AND JUDICIAL PRECEDENTS WHERE THE TERM LICENSE HAS BEEN DEFINED AND TO TH E DICTIONARIES MEANING. 9. ON THE OTHER HAND, LEARNED DR RELIED ON THE ORDE R OF AO AND SUBMITTED THAT EXPENDITURE SO INCURRED WERE CAPITAL IN NATURE, THE SAME WERE NOT ALLOWABLE AND CIT(A) WAS WRONG IN ALLOWING 1/19 TH OF THESE EXPENSES. AS PER LEARNED DR, THE ASSESSEE HAS NOT ACQUIRED AN Y BUSINESS RIGHTS, AS THE ITA NOS.472-546-2008 9 AGREEMENT SO ENTERED BY ASSESSEE ONLY GIVES IT ACCE SS TO THE AREA IN WHICH EXPLORATION AND DEVELOPMENT OF HYDROCARBON IS TO BE DONE AND THEREFORE IT WAS ONLY A PARTICIPATING RIGHT AND NOT A BUSINESS O R A COMMERCIAL RIGHT, AS HAS BEEN CLAIMED TO BE BY THE ASSESSEE. AS PER LEA RNED DR, THE CONCEPT OF BUSINESS OR COMMERCIAL RIGHTS AS HAS BEEN ENVISAGED IN SECTION 32(1)(II) IS CLEARLY DISTINGUISHABLE FROM THE KIND OF AGREEMENT THAT THE ASSESSEE HAS ENTERED INTO FOR THE EXPLORATION AND DEVELOPMENT OF HYDROCARBON. THE BUSINESS OR COMMERCIAL RIGHT WHICH IS TALKED ABOUT IN SECTION 32(1)(II) HAS A CLOSE LINK TO INTANGIBLE ASSETS WHICH ARE IN THE NA TURE OF KNOWHOW, COPY RIGHT TRADEMARKS, FRANCHISES, WHICH IF STUDIED CLOS ELY, INDICATE THAT IT IS A RIGHT GIVEN FROM A LICENSOR TO A LICENSEE IN LIEU O 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 INTANGIBL E 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 EXISTEN CE AND ON WHICH PAYMENT IS RECEIVED FOR PASSING ON ITS KNOW HOW OR ITS PATENT OR ITS COPY RIGHT OR ITS TRADE MARK OR LICENSE TO USE OR SUB LE T IT. 10. WE HAVE CONSIDERED THE RIVAL CONTENTIONS OF BOT H THE PARTIES AND PERUSED THE MATERIAL PLACED ON RECORD. FROM THE RE CORD, WE FOUND THAT ON 5 TH MAY, 1965 ASSESSEE COMPANY WAS REGISTERED AS HYDRO CARBONS INDIA PRIVATE LIMITED TO TAKE OVER THE RIGHTS AND INTEREST OF IT S PARENT COMPANY I.E., THE ITA NOS.472-546-2008 10 ERSTWHILE OIL AND NATURAL GAS COMMISSION TO FORMALI ZE THE FOLLOWING AGREEMENTS SO AS TO EXPLORE AND DEVELOP OIL FIELDS IN IRAN: A) THE AGREEMENT MADE AND ENTERED INTO ON 26 TH AUGUST, 1964, BY AND BETWEEN A.G.I.P., S.P.A., AN ITALIAN CORPORATION, P HILLIPS PETROLEUM COMPANY, A DELAWARE USA CORPORATION AND OIL AND NAT URAL GAS COMMISSION, READ WITH THE AGREEMENT MADE AND ENTERE D ON THE 30 TH JULY, 1964 BY AND BETWEEN THE SAID PHILLIPS PETROLE UM COMPANY AND THE A.G.I.P., S.P.A.; AND B) THE AGREEMENT MADE AND ENTERED INTO ON THE 17THE JANUARY, 1965 BY AND BETWEEN NATIONAL IRANIAN OIL COMPANY OF THE ONE PART AND THE SAID A.G.I.P., S.P.A. PHILLIPS PETROLEUM COMPANY AN D THE OIL AND NATURAL GAS COMMISSION OF THE OTHER PART. 11. IN EARLY 1970S, THE ASSESSEE WAS ALSO ENGAGED IN TO CARRY OUT SERVICES AND PROVIDING TRAINING IN THE INTERNATIONAL ARENA. IN THE YEAR 1975, THE ASSESSEE COMPANY ALSO PERFORMED A SERVICE CONTRACT IN IRAQ, WHICH DUE TO LACK OF COMMERCIAL VIABILITY, COULD NOT BE PURSUED FURTHER AFTER DRILLING A FEW WELLS IN A FIELD WHICH STILL REMAINS UNDEVELOPED. I N THE YEAR 2000, THIS FIELD WAS AWARDED BY IRAQ GOVERNMENT, TO THE ASSESSEE THR OUGH NEGOTIATIONS, FOR DEVELOPMENT AND PRODUCTION OF OIL UNDER NEW AGREEME NTS. THE ASSESSEE ALSO HAD ENTERED ON MAY 19 TH , 1988 INTO A PETROLEUM PRODUCTION SHARING CONTRACT WITH VIETNAM OIL AND GAS COMPANY. THE PRODUCTION S HARING CONTRACT ITA NOS.472-546-2008 11 ENTERED ON MAY 19 TH , 1988 ENVISAGES MAKING AVAILABLE NECESSARY MANPOWE R, 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 EXPLOR ATION AND EXPLOITATION OF PETROLEUM RESOURCES IN THE SPECIFIED AREA IN THE CONTINENTAL SHELF OF VIETNAM. THE ASSESSEE CARRIED OUT PETROLEUM EXPLOR ATION IN THE AREA SINCE 1988 AND HAS THE DISTINCTION OF DISCOVERING THE LAR GEST FREE GAS FIELD OF VIETNAM. THE ASSESSEE PARTNERED WITH BRITISH PETRO LEUM AND VIETNAM OIL AND GAS COMPANY IN THE BLOCK AND FINALIZED DEVELOPM ENT PLANS FOR THE DEVELOPMENT OF NATURAL GAS DISCOVERY. THE DEVELOPM ENT PLAN FOR THE DISCOVERY WAS FINALIZED AND NECESSARY COMMERCIAL AR RANGEMENTS ENTERED INTO IN DECEMBER 2000. THE FIRST PHASE OF THE DEVE LOPMENT OF VIETNAM PROJECT (BLOCK 06.1) WAS COMPLETED IN JANUARY, 2003 . FROM THE ABOVE, IT IS EVIDENT THAT THE BUSINESS OF THE ASSESSEE HAD ALREA DY COMMENCED WHICH WAS SET UP IN THE YEAR 1965. 12. FROM THE RECORD, WE FOUND THAT HYDROCARBONS IN THEIR NATURAL HABITAT EMBEDDED IN A PARTICULAR TERRITORY ARE THE PROPERTY OF THE STATE GOVERNMENT, JURISDICTION OVER SUCH HYDROCARBONS DOES NOT LIE WI TH ANY PRIVATE PERSON OTHER THAN STATE GOVERNMENT AND A PERSON CANNOT CAR RY OUT HYDROCARBONS OPERATIONS UNLESS THE PERSON HAD ENTERED INTO A PRO DUCTION SHARING AGREEMENT WITH THE GOVERNMENT. IN THE INSTANT CASE , BY ENTERING INTO AN ITA NOS.472-546-2008 12 AGREEMENT CALLED PCA, THE GOVERNMENT OWNING THE HYD ROCARBONS, GRANTED RIGHTS TO THE ASSESSEE COMPANY ALONGWITH LICENSE FO R CARRYING ON HYDROCARBONS OPERATIONS. THE BUSINESS RIGHTS IN TH E 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 TER MS AND CONDITIONS OF THE PCA AND APPROVAL OF THE GOVERNMENT. THE ASSESSEE B Y VIRTUE OF ACQUISITION OF 20% 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 BUSIN ESS RIGHTS AND PRODUCTION LICENSES, THE ASSESSEE BECAME ENTITLED TO CARRY ON HYDROCARBON OPERATIONS IN THE SAKHALIN PROJECT. THE STATUTORY EXPRESSION OF T HE PROVISION GRANTING DEPRECIATION ON INTANGIBLE ASSET IS THAT KNOW-HOW, PATENTS, COPYRIGHTS, TRADEMARKS, LICENCE S, FRANCHISES OR ANY OTHER BUSINESS OR COMMERCIAL RIGHTS OF SIMILAR NATURE , BEING INTANGIBLE ASSETS ACQUIRED ON OR AFTER 1-4- 1988. 13. A READING OF THE ABOVE STATUTORY EXPRESSION BRI NGS HOME THE POINT THAT THE LAW HAS SPECIFIED ITEMS OF INTANGIBLE ASSETS EL IGIBLE FOR DEPRECIATION IN THE FOLLOWING CATEGORIES:- (I) KNOW-HOW (II) PATENTS (III) COPYRIGHTS (IV) TRADEMARKS (V) LICENCES (VI) FRANCHISES ITA NOS.472-546-2008 13 (VII) ANY OTHER BUSINESS OR COMMERCIAL RIGHTS OF SI MILAR NATURE. 14. SO FAR AS CLAIM OF DEPRECIATION IN CASE OF INTA NGIBLE ASSETS FALLING IN THE CATEGORY OF ANY OTHER BUSINESS OR COMMERCIAL R IGHTS OF SIMILAR NATURE ARE CONCERNED, AS PER OUR CONSIDERED VIEW, ALL THE BUSINESS OR COMMERCIAL RIGHTS ARE NOT BY THEMSELVES ASSETS ELIGIBLE FOR DE PRECIATION, AND THAT ONLY THOSE RIGHTS WHICH ARE SIMILAR IN NATURE WITH THE K NOW-HOW, PATENTS, COPYRIGHTS TRADEMARKS, LICENCES ETC. ARE ELIGIBLE F OR CLAIM OF DEPRECIATION. IN VIEW OF PRINCIPLE OF EJUSDEM GENERIS, THE EXPRESSIO N 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 REC ONCILE 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 ELUCID ATED RIGHTS OF BUSINESS OR COMMERCIAL NATURE. IN SUCH CIRCUMSTANCES, THE EXPR ESSION ANY OTHER BUSINESS OR COMMERCIAL RIGHTS OF SIMILAR NATURE AL SO MUST BE IN THE SAME GENESIS OR CATEGORY WITH SPECIFIC AND ELUCIDATED ID ENTITY OF COMMERCIAL OR BUSINESS NATURE. THEREFORE, IN THE LIGHT OF THE ST ATUTORY PROVISIONS CONTAINED IN SECTION 32(1)(II), THE COMMERCIAL RIGHTS OF EXPL ORATION 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 T HE CATEGORY I.E. LICENSES AS ITA NOS.472-546-2008 14 STIPULATED IN SECTION 32(1)(II). THE COMMERCIAL RI GHTS OF EXPLORATION AND LICENSES ACQUIRED BY THE ASSESSEE BEING IN THE NATU RE OF INTANGIBLE ASSETS ARE ELIGIBLE FOR THE CLAIM OF DEPRECIATION AT THE RATE PRESCRIBED U/S 32(1)(II) OF THE ACT. THE AO HIMSELF IN HIS ORDER HAD OBSERVED THAT AS A RESULT OF ENTERING INTO SUCH AN AGREEMENT I.E. PCA, THE ASSESSEE COMPA NY HAS BEEN GRANTED LICENSES BY RUSSIAN GOVERNMENT TO EXPLORE AND PRODU CE HYDROCARBONS IN THE AGREEMENT AREA. THERE IS NO DISPUTE TO THE FACT TH AT ASSESSEE HAS INCURRED EXPENDITURE OF RS.1559.09 CRORES FOR OBTAINING THE RIGHT AND LICENSE FOR EXPLORATION OF OIL. IT IS NOT POSSIBLE TO SAY THAT SUCH EXPENDITURE WAS NEITHER CAPITAL NOR REVENUE IN NATURE. IF IT IS HELD TO BE CAPITAL, THEN IT IS OBVIOUS THAT WHAT THE ASSESSEE HAS ACQUIRED WAS A PARTICIPATING RIGHT WHICH IS IN THE NATURE OF COMMERCIAL RIGHT OF CARRYING ON OF BUSINE SS 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 RIGH T THEN IT IS OBVIOUS THAT SAME IS COMMERCIAL RIGHT, THEREFORE IN THE NATURE OF ASS ET 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 ASS ET FALL WITHIN THE CATEGORY OF ASSET FALLING U/S 32(1)(II) OF THE ACT. ACCORDINGLY, WE ARE INCLINED TO AGREE WITH THE LEARNED SENIOR COUNSEL T HAT THE ASSESSEE HAD ITA NOS.472-546-2008 15 ACQUIRED BUSINESS AND COMMERCIAL RIGHT AND LICENSE BY MAKING PAYMENT OF RS.1559.10 CRORES, WHICH IS IN THE NATURE OF INTANG IBLE ASSETS ENTITLED TO CLAIM OF DEPRECIATION U/S 32(1)(II) OF THE IT ACT. 14A. IN VIEW OF THE ABOVE DISCUSSION ASSSESSEES CL AIM FOR ALLOWING DEDUCTION OF ENTIRE EXPENDITURE OF RS. 1559.10 CROR ES IS DECLINED. THE STAND OF CIT(A) IN TREATING THE ALLEGED EXPENDITURE AS DE FERRED REVENUE EXPENDITURE AND DIRECTING THE AO TO ALLOW 1/19 OF T HE EXPENDITURE DURING THE YEAR IS ALSO DECLINED, SINCE THERE IS NO CONCEPT OF DEFERRED REVENUE EXPENDITURE UNDER IT ACT.. AS WE HAVE TREATED THE E XPENDITURE AS CAPITAL IN NATURE THE SAME IS ELIGIBLE FOR CLAIM OF DEPRECIATI ON AT THE RATES PRESCRIBED FOR THE ASSETS FALLING U/S 32(1)(II) OF THE ACT. WE DIRECT ACCORDINGLY. 15. WITH REGARD TO DISALLOWING CLAIM OF EXPENSES OF RS.43.85 LAKHS INCURRED FOR PURCHASE AND EVALUATION OF THE SEISMIC DATA OF FOREIGN BLOCKS, ON THE PLEA OF SAME BEING CAPITAL IN NATURE, WE FOU ND THAT ASSESSEE BEING ENGAGED IN THE BUSINESS OF EXPLORATION AND PRODUCTI ON OF HYDROCARBONS IN OTHER COUNTRIES TO AUGMENT THE OIL RESOURCES OF IND IA, IT WAS CONTINUOUSLY EVALUATING VARIOUS BUSINESS OPPORTUNITIES BEFORE AC QUIRING A PARTICULAR FIELD/BLOCK. SINCE ALL THESE OPPORTUNITIES HAVE TO BE EVALUATED AND STUDIED BEFORE TAKING DECISION TO INVEST AND ENTER INTO A C ONTRACT, THE PROCESS OF EVALUATION OF THE BLOCK STARTED WITH SUBMITTING TEN DER FEE/DATA FEE ETC. AND THEN THE SEISMIC DATA HAD TO BE EVALUATED IN SEISMI C PROCESSING CENTER. AFTER ITA NOS.472-546-2008 16 EVALUATING THE SAME, THE ASSESSEE WAS TO TAKE DECIS ION 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 O F ITS BUSINESS OR EVALUATION OF BETTER PROFIT EARNING PROCESS IN ONE MANNER OR OTHE R 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 BU SINESS. 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 FURT HERANCE OF ACTIVITIES UNDERTAKEN BY IT IN THE NORMAL COURSE OF ITS BUSINE SS. THE SAME ARE INCURRED ON CONTINUOUS BASIS FOR EVALUATION OF BUSINESS ACTI VITIES. 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 E XPENDITURE. HON'BLE CALCUTTA HIGH COURT IN THE CASE OF KESHORAM INDUSTR IES AND COTTON MILLS 196 ITR 845 HELD THAT WHERE THE SETTING UP DOES NOT AMOUNT TO STARTING OF NEW BUSINESS BUT EXPANSION OR EXTENSION OF THE BUSI NESS ALREADY BEING CARRIED ON BY THE ASSESSEE, EXPENSES IN CONNECTION WITH SUCH EXPANSION OR EXTENSION OF THE BUSINESS MUST BE HELD TO BE DEDUCT IBLE AS REVENUE EXPENSES. ONE HAS TO CONSIDER PURPOSE OF THE EXPENDITURE AND ITS OBJECT AND EFFECT. ACCORDINGLY, IT WAS HELD THAT EXPENSES PERTAINING T O EXPLORING FEASIBILITY OF EXPANSION OR EXTENSION OF BUSINESS ARE REVENUE EXPE NDITURE AND NOT CAPITAL ITA NOS.472-546-2008 17 EXPENDITURE. THE EXPENDITURE SO INCURRED BY THE AS SESSEE 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. SIM ILAR 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 GR OUND NO. 3 TO 3.2, THE ALTERNATE GROUND NO. 3.3 AS TAKEN BY ASSESSEE BECOM E ANFRACTUOUS. 16. THE EXPENDITURE OF RS.5.64 CRORES INCURRED ON P ROJECTS PENDING FINAL APPROVAL, EVEN THOUGH THE SAID EXPENDITURE WAS WRIT TEN OFF IN THE ACCOUNTS OVER A PERIOD OF FIVE YEARS THE AO DISALLOWED THE S AME. WE HAVE CONSIDERED RIVAL CONTENTIONS. THE ASSESSEE IN THE INSTANT CASE HAS INCURRED EXPENSES RELATING TO PROJECT PENDING FINAL EVALUATI ON. THE ASSESSEE HAD MADE DISTINCTION BETWEEN CONTRACT PROJECTS FOR WHIC H AGREEMENT IS ENTERED INTO AND THE BOARD APPROVED PROJECTS I.E. PROJECTS FOR WHICH NO AGREEMENT/CONTRACT HAS BEEN ENTERED. THE ASSESSEE USED TO CAPITALIZE EXPENDITURE INCURRED ON PROJECTS FOR WHICH NO AGREE MENT/CONTRACT HAS BEEN ENTERED, HOWEVER, THE COST OF SUCH PROJECTS WHICH A RE ABUNDANT WAS WRITTEN OFF OVER A PERIOD OF FIVE YEARS IN THE BOOKS OF ACC OUNT OF THE ASSESSEE. THE ASSESSEE HAD CLAIMED THE EXPENSES PERTAINING TO ABA NDONED PROJECT AS REVENUE EXPENSES. THE EXPENDITURE INCURRED FOR THI S PURPOSE WAS IN THE NATURE OF TRAVEL COST, MEETING AND CONFERENCE EXPEN SES, DELEGATION, SALARIES AND PROFESSIONAL FEES ETC. THESE EXPENDITURE WERE CLAIMED BY THE ASSESSEE ITA NOS.472-546-2008 18 IN ITS RETURN OF INCOME IN THE YEAR OF ITS INCURREN CE. THE ISSUE UNDER CONSIDERATION IS COVERED IN FAVOUR OF THE ASSESSEE BY THE ORDER OF BOMBAY HIGH COURT IN THE CASE OF CIT VS. ESSAR OIL LTD. 20 08 TIOL 530 WHEREIN THE HIGH COURT HAS OBSERVED THAT SUBMITTING TENDERS AND BIDS IN THE FIELD OF OIL EXPLORATION IS A HIGHLY SOPHISTICATED TECHNICAL TAS K FOR WHICH THE ASSESSEE COMPANY HAD TO INCUR SUBSTANTIAL AMOUNT OF EXPENDIT URE BEFORE SUBMITTING ITS BID. IF THE ASSESSEE IS NOT SUCCESSFUL IN OBTA INING BID, SUCH EXPENDITURE IS ALLOWABLE AS REVENUE EXPENDITURE. AS THE ASSESSEE W AS CONTINUOUSLY IN THE BUSINESS OF EXPLORATION AND PRODUCTION OF OIL, THE EXPENDITURE SO INCURRED WAS IN THE NORMAL COURSE OF ITS BUSINESS, SUCH EXPE NDITURE BEING REVENUE IN NATURE INCURRED FOR THE PURPOSE OF EXISTING EXPLORA TION AND PRODUCTION BUSINESS WAS REQUIRED TO BE ALLOWED U/S 37(1) OF TH E IT ACT. SIMILAR CLAIM WAS ALSO MADE BY THE ASSESSEE IN EARLIER YEARS. AC CORDINGLY, WE DIRECT THE AO TO ALLOW THE SAME. 17. IN THE RESULT, THE APPEAL OF THE ASSESSEE AND R EVENUE ARE ALLOWED IN PART IN TERMS INDICATED HERE-IN-ABOVE. ORDER PRONOUNCED IN THE OPEN COURT ON 30-10-2009. SD/- SD/- ( D.R. SINGH ) ( R.C. SHARMA ) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : 30.10.2009 VK ITA NOS.472-546-2008 19 COPY FORWARDED TO : - 1. M/S ONGC VIDESH LIMITED, 601, KAILASH BUILDING, 26, K.G. MARG, NEW DELHI. 2. DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE 13(1), NEW DELHI. 3. CIT 4. CIT(A) 5. DR, ITAT TRUE COPY DY. REGISTRAR, ITA NOS.472-546-2008 20