Revenue deduction for royalty and dry docking upheld where payment followed government policy and was not prohibited by law
Dry docking expenditure was treated as revenue in nature, following the view taken in earlier connected appeals. Royalty paid to the State Government on the international price, rather than the discounted sale price, was held allowable as business expenditure under section 37 because it was made pursuant to Government policy and directions, not as an unlawful or prohibited payment. Section 6A of the Oilfield (Regulation and Development) Act, 1948, read with the relevant Government resolution, notification and communication, did not require royalty to be confined to the discounted sale price, and the expenditure satisfied the requirements of section 37. The appellate challenges therefore failed.
Issues: (i) Whether dry docking expenditure was revenue in nature; (ii) Whether royalty paid to the State Government on the international price instead of the discounted sale price was allowable as business expenditure under section 37.
Issue (i): Whether dry docking expenditure was revenue in nature.
Analysis: The issue had already been answered in earlier connected appeals against the Revenue, and the Court saw no reason to depart from that view.
Conclusion: The issue was decided against the Revenue and in favour of the assessee.
Issue (ii): Whether royalty paid to the State Government on the international price instead of the discounted sale price was allowable as business expenditure under section 37.
Analysis: The Court held that royalty on onshore production was paid pursuant to Government policy and instructions, and not by way of an unlawful or prohibited payment. Section 6A of the Oilfield (Regulation and Development) Act, 1948, when read with the Government resolution, notification and communication, did not require royalty to be confined to the discounted sale price. The wellhead price for royalty computation was understood on the basis of market-driven or arm's length price, and the payment did not amount to an infraction of law. The expenditure also satisfied the other requirements of section 37.
Conclusion: The issue was decided against the Revenue and in favour of the assessee.
Final Conclusion: The appeals failed on both substantial questions of law and were dismissed, leaving the assessee's claim for deduction undisturbed.
Ratio Decidendi: Expenditure is not disallowable under the explanation to section 37 merely because it is made pursuant to governmental policy or instructions, unless it is itself an offence or a payment prohibited by law; royalty computed on the basis directed by the Government cannot be treated as an unlawful expenditure.
TaxTMI 
AI Drafter ✕
TaxTMI 
