This article summarizes a recent ruling of the Delhi Income Tax Appellate Tribunal (ITAT) in the case of M/s ONGC Videsh Ltd. (Taxpayer) [2009-TIOL-758-ITAT-DEL] on the issue of allow ability of depreciation on participatory right to carry out the hydrocarbon operations, acquired by the Taxpayer, pursuant to a Production Sharing Arrangement (PSA).
The ITAT held that the participatory right acquired by the Taxpayer was in the nature of asset, in the form of ‘license’ i.e. license to have an access and to carry out exploration, development and production of hydrocarbon operations. Considering this, it was held that the participatory right is eligible for depreciation under the provisions of the Indian Tax Law (ITL).
Facts of the case
- The Taxpayer is engaged in the business of exploration, development and production of hydrocarbons in overseas jurisdictions. This is meant to augment India’s oil security, mainly by way of acquiring a participating interest in a PSA.
- During the relevant tax year, the Taxpayer acquired a 20% participating interest (participating interest) in Sakhalin Block, located in Russia, from the existing consortium members. The existing consortium members had entered into a PSA with the Russian Government (Government). Consequent to the acquisition of the participating interest, the Taxpayer became a member of the consortium. It acquired a proportionate share in the business rights and exploration and production licenses (participatory right) granted by the Government for the Sakhalin Block.
- The expenditure incurred by the Taxpayer on the acquisition of the participatory right was treated as an intangible asset, eligible for depreciation under the ITL. The Tax Authority disallowed the Taxpayer’s claim for depreciation.
- The first appellate authority held that the expenditure incurred on the acquisition of the participatory right was in the nature of deferred revenue expenditure and allowed 1/19th of the expenditure as a deduction under the ITL.
- Aggrieved by the order of the first appellate authority, both the Taxpayer and the Tax Authority preferred an appeal before the ITAT. The Taxpayer appealed for a claim of depreciation under the ITL on the expenditure incurred on the acquisition of the participatory right. The Tax Authority appealed against the allowance of 1/19th of the expenditure under the ITL.
Contentions of the Taxpayer:-The Taxpayer had acquired a business right in the form of a license which qualifies as an intangible asset under the ITL and is eligible for depreciation.
Contentions of the Tax Authority
