Syndicate Report

Petroleum and natural gas sector

 MEMBERS OF THE GROUP

Archana Gupta • Kalicharan

Drop Singh • Mayank Mishra
Meena • Mohan Lal Joshi
• Ravikant Chaudhary
Jyoti Shah

2
Approach
Overview of the sector
Major items and Sources of income
Provisions under Income tax act
Taxation issues
Case laws involved

3
 Overview

 STRATEGIC ROLE IN THE ECONOMIC GROWTH

AND DEVELOPMENT
 ENERGY BASKET – OIL, GAS, COAL,
HYDROELECTRIC, NUCLEAR, AND RENEWABLE
(SOLAR,WIND AND BIOMASS).
 SHARE IN TOTAL ENERGY BASKET- 38 %.
 next slide, with heading)*

4
CONSUMPTION OF PETROLEUM
PRODUCTS

Year Consumption (in MMT)

2008-09 133.599

2009-10 138.196

5
Location of Refineries in India

Panipat
Digboi
Mathura Bongaigaon
Barauni GuwahatiNumaligarh

Jamnagar
Koyali
Vadinar
Haldia

Mumbai
Vishakhapatnam
Tatipaka
Mangalore
Chennai

Kochi
Narimanam
6
INDUSTRY STRUCTURE
Exploration & Natural Gas & Pipeline Refining &
Production Marketing

Gas Distribution
Public Sector
• ONGC
Public Sector
• OIL
LNG • ONGC
Projects (Shell, • IOCL
Private Sector Petronet, BG,IOC etc) • BPCL
(Reliance,HOEC,BG, • HPCL
Shell,CAIRN etc) • IBP $
Pipeline • MRPL***
IOCL • NRL**
* Majority stake acquired by IOCL BPCL • CPCL*
** Majority stake acquired by HPCL • BRPL $
BPCL Petronet India • KRL#
*** Majority stake acquired by GAIL Private Sector
ONGC • Reliance
@ Exclusive Marketing Company • Essar
$ Merged with IOCL • Shell @
# Fully merged with BPCL 7
ACTIVITY

CORE ACTIVITY

DOWNSTREAM
UPSTREAM
(REFINING OF CRUDE OIL
(EXPLORATION AND INTO VARIOUS PRODUCTS
PRODUCTION OF CRUDE AND MARKETING OF THESE
OIL AND GAS ) PRODUCTS)

8
UPSTREAM
E&P- BY
UNDERTAKING
GEOLOGICAL /
GEOPHYSICAL
SURVEYS ON
WATER AND LAND
EXPLORATION AND
PRODUCTION CRUDE OIL / GAS
(E&P) OF CRUDE PRODUCED ON
OIL AND GAS OFF / ON SHORE
AREAS

UPSTREAM
ACTIVITY

9
 SUBSIDY
PRODUCTS TOTAL SUBSIDY TOTAL SUBSIDY
(2008-09) (2009-10)

LPG*(DOM) (Rs./ 257.46 200.71

Cylinder)
SKO **(PDS) (Rs./Ltr) 24.88 15.67

* Liquid Petroleum Gas

** Subsidized Kerosene Oil

10
Distribution of Sources

FINANCIAL INDIGENOUS INDIGENEOUS IMPORTED

YEAR CRUDE(MMT) NATURAL CRUDE
GAS(MMT) (MMT)

2008-09 33.51 32.84 128.16

2009-10 33.69 47.57 159.26

11
CONTRIBUTION

20%

INDIGENOUS
PRODUCTION
IMPORTS

80%

12
CONTRIBUTION TO TAXES
2008-09 2009-10

State Taxes State Tax

42% Central 39% Central Tax
58% Taxes
61%

13
CONTRIBUTION TO GOVT. REVENUE

YEAR SALES (CRORE Rs.) CONTRIBUTION TO

GOVERNMENT
REVENUE
(CRORES Rs)
2008-09 883209 161798
2009-10 885064 183861

14
 PRICING Mechanism

ADMINISTERED PRICE
MECHANISM NON-APM
(APM)

15
APM – (ADMINISTRATIVE PRICE
MECHANISM)
CENTRAL GOVT. PLAYS
KEY ROLE IN
DETERMINING PRICES BY
OPERATING INDUSTRY
POOL ACCOUNTS

FOR UPSTREAM –
REIMBURSEMENT OF
OPERATING COST + 15%
POST TAX RETURN ON
CAPITAL EMPLOYED FOR
INDIGENOUS CRUDE
PRODUCTION

FOR DOWNSTREAM-
REIMBURSEMENT OF
OPERATING COST + 12%
POST TAX RETURN ON NET
WORTH AND WEIGHTED
COST OF BORROWINGS

16
 ACTIVITY

DOWNSTREAM
UPSTREAM
(REFINING OF CRUDE OIL
(EXPLORATION AND
INTO VARIOUS PRODUCTS
PRODUCTION OF CRUDE
AND MARKETING OF
OIL AND GAS )
THESE PRODUCTS)

17
 ON SHORE DRILLING OFF SHORE DRILLING
REFERS TO E&P ON LAND REFERS TO E&P UNDER WAT

18
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

JOINT 10.57 10.78 9.76 8.75 7.85 47.71

VENT./
PRIVATE Cos

TOTAL 41.23 42.33 42.49 41.19 39.52 206.76

 REFINING
i. PRODUCTION OF FINISHED PRODUCTS FROM
CRUDE OIL HAVING DIFFERENT BOILING
POINTS BY A PROCESS OF
FRACTIONATING/DISTILLATION

PRODUCTS

LIGHT MEDIUM HEAVY

DISTILLATE DISTILLATE DISTILLATE
20
USES OF PRODUCTS
PRODUCTS USES

LIGHT DISTILLATES LPG,NAPTHA,PETROL ETC

MIDDLE HSD,SKO,ATF,LDO ETC

DISTILLATES

HEAVY DISTILLATES LUBES,LSHS/FO, LUBE BASE OIL, BITUMEN,COKE

ETC.
 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 for
petrochemical sector and fuel for Power plants.
Gasoline fuel in motor cars, scooters, motor cycles, and other light
/Petrol vehicles.
Kerosene oil household oil (cooking/lighting). A special grade of
kerosene oil known as Aviation Turbine fuel used as fuel
in aero planes.
Diesel oil fuel for transport sector
(HSD) (Railways/Road),agriculture(tractors,pumpsets,threshers
etc.) and Captive power generation.
LDO (Light fuel for agricultural pump sets, small industrial units,
Diesel oil) start up fuel for Power generation.
Paraffin Wax used for making candles,vaseline,Ointments and wax
paper.
PETROLEUM PRODUCTS AND THEIR USAGE (Contd..)
PRODUCTS USES
Furnace oil/LSHS Secondary fuel for Thermal Power Plants,
Fuel/feedstock for fertilizer plants. Industrial
units.

Lubricating Oi lubrication for Automotive/Industrial

application.

Mineral Turpentine Oil solvent for textile printing, dry cleaning, polish
and insecticides

Grease liquid lubricant.

Asphalt/Bitumen making road surfaces and the final residue of

petroleum
Bezene/Toluene/LABFS/C Feedstock for value added products.
BFS
 Down-stream supply chain
Refinery Inland / Tap
terminals Off Terminals Depots

Port
Terminals

Customers Retail Outlets

PIPELINES
24
MARKET SHARE
2009-10

11%

PSU
PRIVATE

89%

25
PROVISIONS UNDER INCOME TAX ACT
Section 32
Section 33 ABA
Section 35
Section 35AD
Section 37
Section 40 (a)(i) (ENRON OIL AND GAS)
Section 42 ( GSPC, CAIRN ENERGY)
Section 44 BB
Section 115 JA
Section 44 C ( BRITISH GAS P&E)
Section 80 IB ( NIKO RESOURCES)

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New Exploration Licensing Policy and
Tax Provision
A SEVEN YEAR TAX
LEVEL PLAYING FIELD
HOLIDAY FROM THE
TO THE DOMESTIC
DATE OF
PUBLIC SECTOR
COMMENCEMENT OF
COMPANIES, PRIVATE
COMMERCIAL
COMPANIES AND
PRODUCTION
FOREIGN COMPANIES

NELP
1999
27
 100%
100% TAX
TAX
TAX
TAX HOLIDAY
HOLIDAY
HOLIDAY
HOLIDAY ON
ON
FOR
FOR 77 PROFIT
PROFIT EARNED
EARNED
CONSECUTIVE
CONSECUTIVE FROM
FROM
YEAR
YEAR PRODUCTION
PRODUCTION
OF
OF MINERAL
MINERAL
OIL
OIL

STILL BE
LIABLE TO PAY
MAT ON ‘BOOK
PROFIT’

SECTION 80 IB (9)
28
 MAT(115 JB)
MAT IS APPLICABLE IF
TAX PAYABLE < 10 % OF BOOK PROFIT

CERTAIN POSITIVE AND NEGATIVE ADJUSTMENT ARE

MADE TO THE NET PROFIT AS SHOWN IN THE BOOKS OF
ACCOUNT

CARRY FORWARD AND SET OFF OF MAT IS AVAILABLE

FOR SEVEN SUBSEQUENT YEARS.

SET OFF ALLOWABLE =

TAX ON TOTAL INCOME - MAT PAYABLE
29
DEDUCTIBILITY OF SITE RESTORATION EXPENSES
SECTION 33ABA
AMOUNT OF
DEDUCTION
BEING LOWER
OF:-

Sum
deposited 20% OF THE
either in PROFIT
special CALCULATED
account or in IN
‘site PRESCRIBED
restoration MANNER
A/C’

30
DIVIDEND DISTRIBUTION TAX(DDT)
115 O
Dividend from
DOMESTIC
COMPANIES is
exempt from tax in
the hands of
RECIPIENT Is Payable In
Levied @ 16.995% on the
divided Addition To
declared/distributed/paid Regular Corporate
by INDIAN COMPANY Income Tax

DDT
31
32
• PAYABLE BY EMPLOYER ON
THE BENEFITS PROVIDED
TO THE EMPLOYEES FBT
• TAX PAYABLE = 5% /
20%/100 % of the costs
incurred on such benefits
XII- H
FRINGE BENEFIT TAX (FBT) CHAPTER
PRODUCTION SHARING CONTRACT
(PSC)

PROSPECTING

PSC
Production of
EXPLORATION
Mineral Oil

33
TAXABLE PROFIT of PSC

Allowances to PSC

ALLOWANCES
ACCORDANCE WITH THE
SPECIFIC ALLOWANCES
SPECIAL PROVISIONS
CONTAINED IN PSC

EXPENDITURE OCCURRED
ON
EXPENDITURE BY WAY OF
EXPLORATION/DRILLING/S
ABORTIVE EXPLORATION
ERVICES/ASSETS USED FOR
THESE ACTIVITIES

34
TAXABLE PROFIT of PSC contd…..
 profits and gains of business of a PSC =

(V + G) – D
V = the value, determined and revenue realised on sale of
Petroleum according to contract
G = any other gains or receipts from Petroleum
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 Exploration Operations
b) all expenditure incurred in respect of drilling operations

35
DTC

36
Deduction of Head office Expenditure Sec 44 C
in the case of a PSC Participant, being a non-resident,
the deduction of head office
expenditure shall be limited to
i. 5 % of the adjusted total income, or
ii. so much of the expenditure in the nature of
head office expenditure incurred by him as is
attributable to the business carried on in India
whichever is lower.

37
 Depreciation Sec 32
Any capital expenditure, other than those qualifying
for 100 % allowance in the nature of buildings,
machinery, plant or furniture owned by the PSC
Participant and used for the Petroleum Operations,
shall be eligible for depreciation allowance on the
written down value of the block of assets in accordance
with section 32 of the Income-Tax Act, 1961

38
Investment-linked tax incentives Sec 35 AD

Where a
Laying and deduction under
Incentivise operating cross this section is If a choice is given
businesses by country natural allowed in respect between
providing gas or crude or of the specified deduction under
investment- petroleum oil business for any Section 35AD and
linked tax pipeline network assessment year the one under
exemption, which for distribution, no deduction Chapter VIA,
will be offered to including storage under chapter VI many corporate
businesses facilities being an will be allowed houses will prefer
involved in integral part of for the same or the latter.
such network any other
assessment year

39
NO RING FENCING OF EXPENDITURE
All unsuccessful exploration costs in other contract
area can be set off against income in the contract area
in which commercial production has commenced.

40
41
• 10% OF THE GROSS RECEIPTS DEEMED
TO BE BUSINESS INCOME . MECHANICS
• ABOVE WILL RESULT IN TAX RATE OF
4.23% OF GROSS REVENUES (FIN YEAR
2009-10)
• NON RESIDENT SERVICE PROVIDERS
ENGAGED IN THE BUSINESS OF PROVIDING
SERVICES OR FACILITIES OR SUPPLYING
PLANT AND MACHINERY ON HIRE IN
APPLICABILITY
CONNECTION WITH PROSPECTING FOR , OR
EXPLORATION, OR PRODUCTION OF,
MINERAL OILS.
44 BB
TAXATION OF SERVICE PROVIDERS Sec
 INVESTIGATIVE TECHNIQUES
A. Return of Income based Investigation
I. Income-based Investigation
II. Expenditure-based Investigation (Scale of operation
involves huge investment- High expense claimed)
III. Net worth- based Investigation

42
Internal Sources
 TEPs and FIU Reference
 CIB
 TDS
 ITDMS and ITD
 Data Bank
 REIC
 Board references

43
External Sources of Information
 Newspapers
 Market information
 Commercial Tax Department Website
 SEBI Website
 Ministry of Corporate Affairs Website
 Informants

44
 Investigation of Listed Companies

Issues:
Bogus Bills to inflate expenses
Bogus claim of investment in P & M
Claim of Depreciation on non-existent fixed
assets

45
PHYSICAL VERIFACATION OF FIXED ASSETS ADDITION

By way of survey

By looking at Auditor’s Note.
By intelligence gathered from market

46
DATA ANALYSIS
Comparison with previous years data
 Income
 Expenditure
 Depreciation Claimed Trend Analysis
 Subsidies

 Compare with similar parties

•Taking help of ‘PROVOS’ and ‘CAPITALINE’
•Ratio Analysis
•OCEAN LOSS (Transportation Loss):-
•Loss during transportation of crude, petroleum
products, natural gas etc

47
  Trend Analysis: Operating data for prior years is
compared to evaluate current income or expense.
Analysis of trends across years, or across departments,
divisions, etc. can be very useful in detecting possible
concealment.  Another useful calculation is the ratio
of the current year to the previous year.  A high ratio
indicates a significant change in the totals.

48
Other agencies:
 Custom Excise( Bogus purchase , RBI –Transparency in
transaction, )
Other sources-
Market intelligence, internet, newspaper, mergers and
acquisition,
TDS Issue contrast, sub contract

49
Taxation Issues
Huge investment--- Investigative Techniques
Interpretation of terminologies
Tax Holiday---- specific issues under 80IB +
circular sunset clause
Deduction claimed--- sec 42—Niko resources case
Conflict Resolution Mechanism– Shiv Shahi case
– committee of dispute
DRP– optional DTC

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

Niko Resources Ltd, Co. incorporated in Canada, business of exploration

and production of mineral oil in India.
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)
• Whether cluster of wells which commenced commercial production after
April 1, 1997 considered as separate ‘undertaking’

52
 ACIT vs Niko Resources Ltd (123 TTJ 310 (Ahd)- Decision
 
ACIT vs Niko Resources Ltd (123 TTJ 310) (Ahd)(Contd) - Decision

• 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
53
DDIT V. BG Exploration and Prod (29 SOT 79) (Del)- Facts

• A entered into a PSC with GOI for undertaking

exploration and exploitation of mineral oil.
• Claimed deduction on account of reimbursement of
expenditure incurred by 3rd party.
• AO disallowed claim- invoked s. 44C- restricts
deduction of head office expenditure in the case of non
residents.

54
DDIT V. BG Exploration and Prod (29 SOT 79) (Del)-
Decision
 s. 44C- expenditure in the nature of head office
expenditure, not expenditure incurred by head office in
relation to the operations of the taxpayer in India. Hence
reimbursement of expenses to 3rd party also caught
within the mischief of head office expenses inadmissible
u/s 44C.
Following SC decision in case of CIT vs Enron Oil and
Gas India Ltd (305 ITR 75) (SC), ITAT held-as taxpayer is
one of the parties to PSC which represents an
independent regime, such expenses are deductible u/s
42 r.w. PSC and s.44C not applicable.
55
Gujarat State Petroleum Corporation Ltd (308 ITR 248)
(Ahm) - Facts

A claimed deduction u/s 42 while computing the book profits under

section 115JA.
s.42 applicable in computing profit of the business of prospecting for
or extraction or production of mineral oil and allows expenses by
way of abortive exploration etc.
AO disallowed claim u/s 42. Ground- s.115JA did not provide for such
a deduction. s.115JA creates legal fiction by deeming 30% book
profits to be its total income on which tax is levied.
A’s contention- since s. 42 was special provision for deduction in the
case of business for prospecting or for extraction of mineral oil,
fiction created had to be given effect to and the fiction enacted under
section 115JA of the Act would not operate on the basic principle-
there could be no fiction on fiction.
56
Gujarat State Petroleum Corporation Ltd (308 ITR 248)
(Ahm) - Decision

No doubt that legal fiction created in s. 42, but it was

relevant only for the purpose of computation of income
under the head “profits and gains from B and P”.
If such fiction was extended into section 115JA, then
purpose of introducing MAT u/s 115JA would be
defeated.
The two fictions had to exist harmoniously and one
should not destroy the other.
Section 42 cannot override section 115JA.

57
 Cairn Energy India Pty Limited (2009 TIOL 220)
(Chennai) - Facts

A, a non-resident Co. incorporated in Australia, engaged in

prospecting and exploration of mineral oils in India, carried out
business activities under PSC.
A reimbursed certain expenses incurred by parent Co. as per PSC
and claims it as deduction u/s 42 of Act, which is special provision
for computing income from business of prospecting, extraction or
production of mineral oil .
AO disallowed expense as tax was not deducted from the payment.
A’s argument- p’ment was reimbursement without any element of
profit for which withholding provisions not applicable.
Disallowance cannot be made u/s 40(a)(i) of the Act, which stands
overridden by s. 42 of Act.

58
Cairn Energy India Pty Limited (2009 TIOL 220)
(Chennai) - Decision

P’ments were in nature of reimbursement of expenses

by taking on record Auditor’s certificate provided by
taxpayer from its parent and held that TDS provisions
won’t apply to reimbursements.
Decision of SC in case of CIT v Enron Oil and Gas
India Ltd 305 ITR 75 (SC), was relied upon and it was
held in favor of A that s. 40(a)(i) of Act would not
apply.

59
Saipem SPA vs CIT (27 SOT 531) (Delhi) - Facts

A- engaged in drilling operations for extraction of

mineral oils in India, offered to tax its income applying
the presumptive rate of tax of 10% u/s 44BB on gross
receipts less subcontractor payments and employee
salary.
AO did not object to this but CIT revised order of AO
u/s 263, directed him to reassess income without
excluding deductions claimed.
A defended position by relying on Art. 7 of India -
Italy DTAA which permits deduction of expenses in
computing profits attributable to P.E.

60
Saipem SPA vs CIT (27 SOT 531) (Delhi) - Decision

A has to apply in full, either provisions of Act or DTAA

provisions, but it can’t apply a combination.
If provisions of domestic law have been chosen, then
deductions as per DTAA are not permissible.
Revision by CIT was upheld.

61
ONGC Videsh Ltd vs DCIT (2009 TIOL 748) (Delhi)- Facts
 
 A, an oil and gas exploration company, acquired
participating interest in a Russian oilfield. A was granted
license by Russian State to carry out hydrocarbon
operations in block for period of 20 yrs.
A claimed that amount paid for participating PI and
license to carry out operations were in nature of an
intangible asset, falling under the term ‘any other
business or commercial rights’ as referred to u/s 32.
Accordingly, depreciation was claimed in respect of
p’ment. Alternatively, entire expenditure claimed as
deductible in first year.
62
ONGC Videsh Ltd vs DCIT (2009 TIOL 748) (Delhi)- Facts
 

AO rejected claims and held that depreciation on

intangible assets available only to “IPRs” as nature of
intangible assets referred to u/s 32 indicated a
connection to IPRs.
Claim for deduction of such expenditure in full in 1st
year was also rejected holding it to be a capital
expenditure.

63
ONGC Videsh Ltd vs DCIT (2009 TIOL 748) (Delhi)- Decision

CIT (A)- expenditure deductible over 20 yr pd of

license as deferred revenue expenditure.
ITAT- share in participating rights and license was a
commercial right similar to ‘license’, specified as an
intangible asset u/s 32.
Hence held that payment was entitled to depreciation
u/s 32. Also, payment could not be treated as a
deferred expenditure as concept was alien to Act.

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THANK YOU

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