Syndicate Report reformed1

8/7/2019 Syndicate Report reformed1

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Syndicate ReportPetroleum and natural gas sector


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MEMBERS OF THE GROUP

Kalicharan

Mayank Mishra

Mohan Lal Joshi

Ravikant Chaudhary

Archana Gupta

Drop Singh

Meena

Jyoti Shah

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Approach

y Overview of the sector

y Major items and Sources of income

y

Provisions under Income tax acty Taxation issues

y Case laws involved

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Overview

STRATEGIC ROLE IN THE ECONOMIC GROWTHAND DEVELOPMENT

ENERGY BASKET OIL, GAS, COAL,HYDROELECTRIC, NUCLEAR, AND RENEWABLE(SOLAR,WIND AND BIOMASS).

SHARE IN TOTAL ENERGY BASKET- 38 %.

next slide, with heading)*

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CONSUMPTION OF PETROLEUM

PRODUCTS

5

YearConsumption (in MMT)

2008-09 133.599

2009-10 138.196


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6

Mumbai

Vishakhapatnam

Jamnagar

Koyali

Mangalore

KochiNarimanam

Chennai

Haldia

Digboi

Numaligarh

Bongaigaon

GuwahatiBarauni

Mathura

Panipat

Tatipaka

Vadinar

Location of Refineries in India


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INDUSTRY STRUCTURE

7

Exploration &

Production

y Natural Gas & Pipeline Refining &

Marketing

Public SectorONGCOIL

Private Sector(Reliance,HOEC,BG,

Shell,CAIRN etc)

Gas Distribution

LNG

Projects (Shell,Petronet, BG,IOC etc)

PipelineIOCLBPCLHPCL

Petronet IndiaGAIL

Public SectorONGCIOCLBPCLHPCLIBP $

MRPL***NRL**CPCL*BRPL $KRL#

Private SectorRelianceEssarShell @

* Majority stake acquired by IOCL

** Majority stake acquired by

BPCL

*** Majority stake acquired by

ONGC

@ Exclusive Marketing Company

$ Merged with IOCL

# Fully merged with BPCL


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ACTIVITY

8

CORE ACTIVITY

U TREA

(EX ORATIO A RO UCTIO OF CRU E

OI A A )

OW TREA (REFI I OF CRU E OII TO VARIOU RO UCT

A AR ETI OF T E ERO UCT )


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UPSTREAM

9

UPSTREAM

ACTIVITY

EXPLORATION ANDPRODUCTION

(E&P) OF CRUDEOIL AND GAS

E&P- BYUNDERTAKINGGEOLOGICAL /GEOPHYSICAL

SURVEYS ONWATER AND LAND

CRUDE OIL / GASPRODUCED ON

OFF / ON SHOREAREAS


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SUBSIDY

PRODUCTS TOTAL SUBSIDY (2008-09)

TOTAL SUBSIDY(2009-10)

LPG*( ) ( s./yli er)

257. 200.71

SK **(PDS) ( s./Ltr) 2 .88 15. 7

10

* Liquid Petroleum Gas

** Subsidized Kerosene Oil


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Distribution of Sources

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FINANCIALYEAR

INDIGENOUSCRUDE(MMT)

INDIGENEOUSNATURALGAS(MMT)

IMPORTEDCRUDE(MMT)

2 8-09 33.51 32.84 128.16

2009-10 33.69 47.57 159.26


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CONTRIBUTION

12

20%

80%

INDIGENO SPROD CTION

IMPORTS


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CONTRIBUTION TO TAXES

39.21%

60.79%

2009-10

State Tax

CentralTax

13

42.20%

57.80%

2008-09

StateTaxes

CentralTaxes


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CONTRIBUTION TO GOVT.

REVENUE

YEAR SALES (CRORE Rs.) CONTRIBUTION TOGOVERNMENTREVENUE(CRORES Rs)

2008-09 883209 161798

2009-10 885064 183861

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PRICING Mechanism

DMINI R D PRICM C NI M

( PM)

NON-APM

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APM (ADMINISTRATIVE PRICE

MECHANISM)

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CENTRAL GOVT. PLAYSKEY ROLE IN

DETERMINING PRICES BYOPERATING INDUSTRY

POOL ACCOUNTS

FOR UPSTREAM REIMBURSEMENT OF

OPERATING COST + 15%POST TAX RETURN ON

CAPITAL EMPLOYED FORINDIGENOUS CRUDE

PRODUCTION

FOR DOWNSTREAM-REIMBURSEMENT OF

OPERATING COST + 12%POST TAX RETURN ON NETWORTH AND WEIGHTED

COST OF BORROWINGS


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17

ACTIVITY

PSTREAM

(E PLORATION ANDPROD CTION O CR DE

OIL AND GAS )

DO NSTREAM

(RE INING O CR DE OILINTO VARIO S PROD CTSAND MARKETING O

THESE PROD CTS)


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OFF SHORE DRILLINGREFERS TO E&P UNDER WA

ON SHORE DRILLING

REFERS TO E&P ON LAND


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PROJECTED PRODUCTION OF CRUDE OIL & NATURAL GAS-DURING THE ELEVENTH PLAN -2007-12

PRODUCTION OF CRUDE OIL (MMT)

COMPANY 07-08 08-09 09-10 10-11 11-12 TOTAL

ONGC 27.16 28.00 29.00 28.53 27.37 140.06

OIL 3.50 3.55 3.73 3.91 4.30 18.99

JOINTVENT./

PRIVATE Cos

10.57 10.78 9.76 8.75 7.85 47.71

TOTAL 41.23 42.33 42.49 41.19 39.52 206.76


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REFINING

i. PRODUCTION OF FINISHED PRODUCTS FROMCRUDE OIL HAVING DIFFERENT BOILING

POINTS BY A PROCESS OFFRACTIONATING/DISTILLATION

20

PROD CTS

LIGHTDISTILLATE

MEDI MDISTILLATE

HEAVYDISTILLATE


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USES OF PRODUCTSPRODUCTS USES

LIGHT DISTILLATES LPG,NAPTHA,PETROL ETC

MIDDLEDISTILLATES

HSD,SKO,ATF,LDO ETC

HEAVY DISTILLATES LUBES,LSHS/FO, LUBE BASE OIL, BITUMEN,COKEETC.


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MAIN PETROLEUM PRODUCTS AND THEIR

USAGE

PRODUCTS USES

LPG Domestic fuel, Industrial application where technically essential and permitted as Auto fuel.

Naphtha/NGL Feedstock/Fuel in Fertilizer units, feedstock forpetrochemical sector and fuel for Power plants.

Gasoline/Petrol

fuel in motor cars, scooters, motor cycles, and other lightvehicles.

Kerosene oil household oil (cooking/lighting). A special grade ofkerosene oil known as Aviation Turbine fuel used as fuelin aero planes.

Diesel oil(HSD)

fuel for transport sector(Railways/Road),agriculture(tractors,pumpsets,threshersetc.) and Captive power generation.

LDO (LightDiesel oil)

fuel for agricultural pump sets, small industrial units,start up fuel for Power generation.

Paraffin Wax used for making candles,vaseline,Ointments and waxpaper.


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PETROLEUM PRODUCTS AND THEIR USAGE (Contd..)PRODUCTS USESFurnace oil/LSHS Secondary fuel for Thermal Power Plants,

Fuel/feedstock for fertilizer plants. Industrialunits.

Lubricating Oi lubrication for Automotive/Industrialapplication.

Mineral Turpentine Oil solvent for textile printing, dry cleaning, polishand insecticides

Grease liquid lubricant.

Asphalt/Bitumen making road surfaces and the final residue ofpetroleum

Bezene/Toluene/LABFS/C

BFS

Feedstock for value added products.


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Down-stream supply chainRefineryterminals

Inland / TapOff Terminals

Customers

Depots

Retail Outlets

PortTerminals

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MARKET SHARE

89.10%

10.90%

2009-10

PS

PRIVATE

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PROVISIONS UNDER INCOME TAX

ACTy Section 32y Section 33 ABAy Section 35y Section 35ADy Section 37y Section 40 (a)(i) (ENRON OIL AND GAS)y Section 42 ( GSPC, CAIRN ENERGY)y

Section 44 BBy Section 115 JAy Section 44 C ( BRITISH GAS P&E)y Section 80 IB ( NIKO RESOURCES)

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New Exploration Licensing Policy and

Tax Provision

NELP1999

LEVEL PLAYING FIELDTO THE DOMESTIC

PUBLIC SECTOR

COMPANIES, PRIVATECOMPANIES ANDFOREIGN COMPANIES

A SEVEN YEAR TAXHOLIDAY FROM THE

DATE OFCOMMENCEMENT O

COMMERCIALPRODUCTION

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SECTION 80 IB (9)

100% TAXHOLIDAY ON

PROFIT EARNEDFROM

PRODUCTIONOF MINERAL

OIL

TAX HOLIDAYFOR 7

CONSECUTIVEYEAR

STILL BELIABLE TO PAYMAT ON BOOK

PROFIT

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MAT(115 JB)

MAT IS APPLICABLE IF

TAX PAYABLE < 10 % OF BOOK PROFIT

CERTAIN POSITIVE AND NEGATIVEADJUSTMENT ARE MADE TO THE NET PROFITAS SHOWN IN THE BOOKS OF ACCOUNT

CARRY FORWARD AND SET OFF OF MAT ISAVAILABLE FOR SEVEN SUBSEQUENT YEARS.

SET OFF ALLOWABLE =

TAX ON TOTAL INCOME - MAT PAYABLE 29


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DEDUCTIBILITY OF SITE RESTORATION EXPENSES

SECTION 33ABAAMOUNT OFDEDUCTION

BEING LOWEROF:-

Sumdepositedeither inspecial

account or insite

restorationA/C

2 OF T EROFIT

CALCULATEDIN

RESCRIBED

MANNER

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DIVIDEND DISTRIBUTION TAX(DDT)

115 O

DDT

Levied @ 16.995% on thedivided

declared/distributed/paidby INDIAN COMPANY

Dividend fromDOMESTIC

COMPANIES isexempt from tax in

the hands ofRECIPIENT Is Payable InAddition To

Regular CorporateIncome Tax

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FRINGEBENEFIT TAX (FBT) CHAPTER

XII- H

PAYABLE BY EMPLOYER ONTHE BENEFITS PROVIDEDTO THE EMPLOYEES

TAX PAYABLE =5% / 20%/100 %

of the costs incurredon such benefits

FBT

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PRODUCTION SHARING CONTRACT

(PSC)

PSC

PROSPECTING

Production ofMineral Oil

EXPLORATION

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TAXABLE PROFIT of PSC

Allowances to PSC

SPECIFIC ALLOWANCES

EXPENDITURE BY WAY OFABORTIVE EXPLORATION

EXPENDITURE OCCURREDON

EXPLORATION/DRILLING/SERVICES/ASSETS USED FOR

THESE ACTIVITIES

ALLOWANCESACCORDANCE WITH THE

SPECIAL PROVISIONSCONTAINED IN PSC

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TAXABLE PROFIT of PSC contd..y profits and gains of business of a PSC =

V = the value, determined andrevenue realised on sale of Petroleum according to contract

G = any other gains or receipts fromPetroleum Operations

D = Deductions of the following expenditures in lieu of(and not in addition to) corresponding allowances provided for under the

heading Profits and Gains of Business or Profession in the Income-Tax Act,1961

a)all expenditure incurred in respect of ExplorationOperations

b) all expenditure incurred in respect of drillingoperations

(V + G) D

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DTC

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Deduction of Head office Expenditure Sec 44 C

y in the case of a PSC Participant, being a non-resident, the deduction of head office

y

expenditure shall be limited toi. 5 % of the adjusted total income, orii. so much of the expenditure in the nature of

head office expenditure incurred by him as isattributable to the business carried on in India

whichever is lower.

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Depreciation Sec 32

yAny capital expenditure, other than those qualifyingfor 100% allowance in the nature ofbuildings, machinery, plant or furniture owned by thePSC Participant and used for the PetroleumOperations, shall be eligible for depreciation allowanceon the written down value of the block of assets inaccordance with section 32 of the Income-Tax Act, 1961

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Investment-linked tax incentives Sec 35 AD

Incentivisebusinesses by

providinginvestment-linked

taxexemption, whichwill be offered to

businesses involvedin

Laying and operatingcross country natural

gas or crude orpetroleum oil

pipeline network fordistribution,

including storagefacilities being an

integral part of such

network

Where a deductionunder this section isallowed in respect of

the specifiedbusiness for any

assessment year nodeduction underchapter VI will be

allowed for the sameor any other

assessment year

If a choice is givenbetween deductionunder

ection 35

and the one under

hapter VI

, manycorporate houses

will prefer the latter.

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NO RING FENCING OF EXPENDITURE

yAll unsuccessful exploration costs in other contractarea can be set off against income in the contract areain which commercial production has commenced.

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TAXATION OF SERVICE PROVIDERS Sec

44 BB NON RESIDENT SERVICE PROVIDERS

ENGAGED IN THE B SINESS O PROVIDINGSERVICES OR ACILITIES OR S PPLYINGPLANT AND MACHINERY ON HIRE INCONNECTION ITH PROSPECTING OR, OR E PLORATION, OR PROD CTIONO , MINERAL OILS.

APPLICABILITY

10% O THE GROSS RECEIPTS DEEMEDTO BE B SINESS INCOME .

ABOVE ILL RES LT IN TA RATE O4.23% O GROSS REVEN ES ( IN YEAR2009-10)

MECHANICS

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INVESTIGATIVE TECHNIQUES

A. Return of Income based InvestigationI. Income-based InvestigationII. Expenditure-based Investigation (Scale of operation

involves huge investment- High expense claimed)

III. Net worth- based Investigation

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Internal SourcesTEPs and FIU ReferenceCIB

TDS

ITDMS and ITDData Bank

REIC

Board references

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External Sources of InformationNewspapers

Market information

Commercial Tax Department ebsiteSEBI ebsite

Ministry of Corporate Affairs ebsite

Informants

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Investigation of Listed Companies

y Issues:

y Bogus Bills to inflate expensesy Bogus claim of investment in P & M

y Claim of Depreciation on non-existent fixedassets

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PHYSICAL VERIFACATION OF FIXED ASSETS ADDITION

y By way of survey

y By looking at Auditors Note.

y By intelligence gathered from market

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DATA ANALYSISy Comparison with previous years data

y Income

y Expenditure

y Depreciation Claimed Trend Analysisy Subsidies

y Compare with similar partiesTaking help of PROVOS and CAPITALINE

Ratio AnalysisOCEAN LOSS (Transportation Loss):-

Loss during transportation of crude, petroleumproducts, natural gas etc

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y Trend Analysis: Operating data for prior years iscompared to evaluate current income or expense.

Analysis of trends across years, or across departments,divisions, etc. can be very useful in detecting possibleconcealment. Another useful calculation is the ratio ofthe current year to the previous year. A high ratioindicates a significant change in the totals.

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y Other agencies:y Custom Excise( Bogus purchase , RBI Transparency in

transaction, )

y Other sources-

y Market intelligence, internet, newspaper, mergers andacquisition,

y

TDS Issue contrast, sub contract

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Taxation Issuesy Huge investment--- Investigative Techniques

y Interpretation of terminologies

yTax Holiday---- specific issues under 80IB +circular sunset clause

y Deduction claimed--- sec 42Niko resources case

y Conflict Resolution Mechanism Shiv Shahi case

committee of disputey DRP optional DTC

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ACIT vs Niko Resources Ltd (123 TTJ 310) (Ahd)-Facts

y Niko Resources Ltd, Co. incorporated in Canada, business ofexploration and production of mineral oil in India.

y Niko-PSC with the GOI to develop oilfields in Hazira (Guj.),developed clusters of wells in phases 1st cluster of wells (5 wells)started commercial production- prior to April 1, 1997; 2nd & 3rd cluster-after April 1, 1997.

Issues

Eligibility for claiming tax holiday u/s 80IB(9) Absence of explicit inclusion of natural gas in definition of

mineral oil under section 80IB(9) hether cluster of wells which commenced commercial production

after April 1, 1997 considered as separate undertaking

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Term mineral oil not defined under section 80IB

defined to include natural gas in other sections of

the Act (sections 42, 44BB and 293A) Principle of harmonious construction for

interpretation of statutes.

Hence eligible for deduction under section 80IB(9) of

the Act. Each well /cluster of wells is a physically separate unit

& separate books maintained by A for each cluster.Hence 3 independent undertakings

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ACIT vs Niko Resources Ltd (123 TTJ 310 (Ahd)- Decision


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DDIT V. BG Exploration and Prod (29 SOT 79) (Del)- Facts

A entered into a PSC with GOI for undertakingexploration and exploitation of mineral oil.

Claimed deduction on account of reimbursement ofexpenditure incurred by 3rd party.

AO disallowed claim- invoked s. 44C- restrictsdeduction of head office expenditure in the case of nonresidents.

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DDIT V. BG Exploration and Prod (29 SOT 79) (Del)-

Decision

y s. 44C- expenditure in the nature of head officeexpenditure, not expenditure incurred by head officein relation to the operations of the taxpayer in India.

Hence reimbursement of expenses to 3rd party alsocaught within the mischief of head office expensesinadmissible u/s 44C.

y ollowing SC decision in case ofCIT vs Enron Oil and

Gas India Ltd (305 ITR 75) (SC), ITAT held-as taxpayeris one of the parties to PSC which represents anindependent regime, such expenses are deductible u/s42 r.w. PSC and s.44C not applicable.

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Gujarat State Petroleum Corporation Ltd (308 ITR 248)

(Ahm) - Facts

y A claimed deduction u/s 42 while computing the book profitsunder section 115JA.

y s.42 applicable in computing profit of the business of

prospecting for or extraction or production of mineral oil andallows expenses by way of abortive exploration etc.

y AO disallowed claim u/s 42. Ground- s.115JA did not provide forsuch a deduction. s.115JA creates legal fiction by deeming 30%book profits to be its total income on which tax is levied.

y

As contention-

since s. 42 was special provision for deduction inthe case of business for prospecting or for extraction of mineraloil, fiction created had to be given effect to and the fictionenacted under section 115JA of the Act would not operate on thebasic principle- there could be no fiction on fiction.

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Gujarat State Petroleum Corporation Ltd (308 ITR 248)

(Ahm) - Decision

y No doubt that legal fiction created in s. 42, but it wasrelevant only for the purpose of computation of

income under the head profits and gains from B andP.

y If such fiction was extended into section 115JA, thenpurpose of introducing MAT u/s 115JA would bedefeated.

y The two fictions had to exist harmoniously and oneshould not destroy the other.

y Section 42 cannot override section 115JA.

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Cairn Energy India Pty Limited (2009 TIOL 220)

(Chennai) - Facts

y A, a non-resident Co. incorporated in Australia, engaged inprospecting and exploration of mineral oils in India,carried out business activities under PSC.

y

A reimbursed certain expenses incurred by parent Co. asper PSC and claims it as deduction u/s 42 of Act, which isspecial provision for computing income from business ofprospecting, extraction or production of mineral oil .

y AO disallowed expense as tax was not deducted from thepayment.

y As argument- pment was reimbursement without anyelement of profit for which withholding provisions notapplicable. Disallowance cannot be made u/s 40(a)(i) ofthe Act, which stands overridden by s. 42 of Act.

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Cairn Energy India Pty Limited (2009 TIOL 220)

(Chennai) - Decision

y Pments were in nature of reimbursement of expensesby taking on record Auditors certificate provided bytaxpayer from its parent and held that TDS provisions

wont apply to reimbursements.

y Decision of SC in case ofCIT v Enron Oil and Gas IndiaLtd 305 ITR 75 (SC), was relied upon and it was held infavor of A that s. 40(a)(i) of Act would not apply.

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Saipem SPA vs CIT (27 SOT 531) (Delhi) Facts


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Saipem SPA vs CIT (27 SOT 531) (Delhi) - Facts

yA- engaged in drilling operations for extraction ofmineral oils in India, offered to tax its income applyingthe presumptive rate of tax of10% u/s 44BB on grossreceipts less subcontractor payments and employee

salary.yAO did not object to this but CIT revised order of AO

u/s 263, directed him to reassess income withoutexcluding deductions claimed.

y

A defended position by relying on Art. 7 of India - ItalyDTAA which permits deduction of expenses incomputing profits attributable to P.E.

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Saipem SPA vs CIT (27 SOT 531) (Delhi) - Decision

yA has to apply in full, either provisions of Act or DTAAprovisions, but it cant apply a combination.

y

If provisions of domestic law have been chosen, thendeductions as per DTAA are not permissible.

y Revision by CIT was upheld.

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ON CVi es Lt vs CI ( IOL ) ( el i)- F cts

y A, an oil and gas exploration company, acquiredparticipating interest in a Russian oilfield. A wasgranted license by Russian State to carry out

hydrocarbon operations in block for period of 20 yrs.yA claimed that amount paid for participating PI and

license to carry out operations were in nature of anintangible asset, falling under the term any other

business or commercial rights as referred to u/s 32.yAccordingly, depreciation was claimed in respect of

pment. Alternatively, entire expenditure claimed asdeductible in first year.

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ONGC idesh Ltd vs DCIT (2009 TIOL 748) (Delhi)- Facts

yAO rejected claims and held that depreciation onintangible assets available only to IPRs as nature ofintangible assets referred to u/s 32 indicated aconnection to IPRs.

y Claim for deduction of such expenditure in full in 1st

year was also rejected holding it to be a capitalexpenditure.

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ONGC idesh Ltd vs DCIT (2009 TIOL 748) (Delhi)-

Decision

y CIT (A)- expenditure deductible over 20 yr pd oflicense as deferred revenue expenditure.

y

ITAT- share in participating rights and license was acommercial right similar to license, specified as anintangible asset u/s 32.

y Hence held that payment was entitled to depreciation

u/s 32. Also, payment could not be treated as adeferred expenditure as concept was alien to Act.

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