HLS India Ltd. (2011) 11 taxmann.com 83 (Delhi)
Facts –
- The taxpayer, HLS India Ltd. (now known as HLS Asia Ltd.) is an Indian company engaged in the business of providing oilfield services to upstream companies. The taxpayer entered into a contract with Oil India Ltd. (OIL) and ONGC to provide wire line logging and perforation services.
- The wireline logging services are used at the time of exploration and development of wells and perforating services are used at the development stage. The wire line logging and perforation equipments/ tools (“logging tools”) are used for providing these services. The logging tools are used below the earth surface for underground oilfield operations.
- The services of the taxpayer assist the mineral oil concern primarily to ascertain whether there is any gas or oil in the well. If there is such presence, then logging tools enable the taxpayer to figure out whether gas or oil can be extracted, at what depth such reserves are available and quantity of the reserves.
- The process involves collection of data by logging tools and processing thereof by an online computer and generating of output termed as „logs‟. The logs enabled determination of detailed description of an oil reservoir.
- The taxpayer made the following claims which are subject matter of the dispute in the present case:
– Investment allowance under section 32A on new plant and machinery installed by taxpayer pursuant to above contracts with OIL and ONGC.
– Tax holiday under section 80-IA! 80-IB.
– Depreciation at the rate of 100% in respect of logging tools.
Issue before the Delhi High Court- Whether the taxpayer can be said to be an „industrial undertaking‟ engaged in the business of manufacturing or production of an article or thing for the purposes of section 32A! 80-IA! 80-IB? Whether the taxpayer is entitled to 100% depreciation in respect of logging tools which is available only to mineral oil concerns?
Contentions of the Revenue
• On the first issue of whether taxpayer is an „industrial undertaking‟, the revenue authorities position was as under:
– Mere conversion of something which is already in existence (viz. geo-physical properties of earth crust) with the help of sophisticated equipment into useful data does not amount to production.
– The services provided by the taxpayer are same as that of typewriter machine and that these do not amount manufacture or production.
• On the second issue of eligibility for 100% depreciation, the revenue denied the claim because: – Taxpayer is not a „mineral oil concern‟ since it is neither producing any oil nor is engaged in the activity of oil drilling.
– Equipment used by the taxpayer is mobile as against the one used by a mineral oil concern which is permanently affixed down the hole.
– Depreciation is allowable only to “concerns” and not on the plant and machinery used in the business.
Contentions of the Taxpayer
• The taxpayer ‟s contention for the first issue was as under:
– In view of several judicial precedents, the process of collecting and transmitting of data amounted to manufacture and producing of an article or thing.
– The services provided are identical to those provided by use of X-ray or ultrasound machine and there are judicial precedents to support that the report generated with the help of X-ray or ultrasound machine amounts to manufacture or production.
• For the second issue, the taxpayer’s submission was that even if taxpayer is not a mineral oil concern, it is eligible for 100% depreciation on equipment since the equipment was employed for underground oilfield operations.
Ruling of the Delhi High Court
• The taxpayer is an industrial undertaking, thereby eligible for investment allowance under section 32A/ tax holiday under section 80-IA and 80-IB on the following grounds:
– After measurement of geo-physical and petro-chemical properties by logging tools, further scientific processing is done by dedicated software on the computers. Only after the processing, data in the form of logs is provided to technical experts.
– The High Court reiterated the legal position as per which if an operation or process renders a commodity or article fit for use which was otherwise not fit, such process will fall within the meaning of “manufacture”.
– The analogy of X-ray or ultrasound machine drawn by the taxpayer was considered appropriate.
• 100% depreciation was also allowed on the basis, as under:
– Reliance on the letter of OIL, wherein it has been confirmed by OIL that the equipment used by the taxpayer is similar to the one owned by OIL and that such equipment is meant only for use in underground oilfield operation.
– Artificial distinction regarding the mobile nature of taxpayer‟s equipment as compared to the one used by a mineral oil concern was held as not relevant.
– It is in the interest of the Government to grant 100% depreciation since otherwise service provided by the taxpayer could be a costlier affair. In such a case, oil companies will be forced not to outsource which may not be a viable option considering the growing energy needs of the economy.
Conclusion – The wire line logging and perforation services provided to oil companies amount to manufacturing and production of article or thing and therefore provider of such services will be regarded as industrial undertaking for the purposes of section 32A, 80-IA and 80-IB. The wire line logging and perforation equipment employed by taxpayer is eligible for 100% depreciation even though the service provider is not itself producing any oil nor is engaged in the activity of oil drilling.
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FULL TEXT OF THE ABOVE JUDGMENT IS AS FOLLOWS:-
