Oil well deduction u/s 80IB(9) upheld; depreciation u/s 32, MAT, TDS relief allowed; research deduction denied

ITAT Ahmedabad-AT allowed the assessee's appeals substantially. It upheld eligibility for deduction u/s 80IB(9) by treating each oil well as a separate undertaking, following earlier years and the jurisdictional HC ruling rejecting retrospective application of the Explanation. Depreciation on goodwill u/s 32 and higher depreciation at 60% on oil wells and oil field assets were directed to be allowed, as was additional depreciation u/s 32(1)(iia), maintaining consistency with prior years and SC confirmation. Weighted deduction u/s 35(1)(ii) for payment to a non-approved research trust was rightly disallowed. ALP adjustment on HO expense allocation under the Production Sharing Contract was deleted. AO was directed to verify and grant MAT credit and full TDS credit, and to re-examine and allow deduction u/s 42 in accordance with DRP directions.

---

---

1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether disallowance of deduction under section 80IB(9) in respect of individual oil wells, including application of the Explanation to section 80IB(9), was justified for assessment years 2017-18, 2018-19 and 2019-20.

1.2 Whether depreciation on "goodwill" representing commercial/business rights acquired on transfer of participating interest was allowable under section 32 for assessment years 2017-18, 2018-19 and 2019-20.

1.3 Whether plant and machinery comprising oil wells and oil field equipment were entitled to higher rate of depreciation (60%) as applicable to mineral oil concerns under Appendix I to the Income-tax Rules, and the effect of earlier years' decisions including affirmation by the Supreme Court.

1.4 Whether the assessee was entitled to additional depreciation under section 32(1)(iia) on assets used for extraction/production of mineral oil for assessment years 2017-18, 2018-19 and 2019-20.

1.5 Whether weighted deduction under section 35(1)(ii) on donations made to a specified research institution, and alternatively deduction as business loss under section 28, was allowable for assessment years 2017-18 and 2018-19.

1.6 Whether transfer pricing adjustment by determining the arm's length price of head office overhead charges (1% of total contract cost under the Production Sharing Contract) at Nil and treating such charges as double reimbursement was sustainable for assessment year 2017-18.

1.7 Whether credit of brought forward MAT under section 115JAA and full credit of tax deducted at source were correctly granted for assessment year 2017-18, and the nature of directions to the Assessing Officer.

1.8 Whether deduction under section 42 in respect of expenditure governed by the Production Sharing Contract was to be allowed for assessment year 2019-20 in light of specific directions issued by the Dispute Resolution Panel and the binding nature of section 144C directions.

1.9 Whether levy of interest under sections 234B and 234D was required to be adjudicated or treated as consequential.

2. ISSUE-WISE DETAILED ANALYSIS

2.1 Deduction under section 80IB(9) for oil wells as separate undertakings and applicability of the Explanation

Legal framework (as discussed)

2.1.1 The Court noted earlier binding decisions in the assessee's own case and of the jurisdictional High Court holding that: (i) each oil well constitutes a separate "undertaking" for purposes of section 80IB(9); and (ii) the Explanation to section 80IB(9) could not be applied retrospectively so as to treat all blocks licensed under a single contract as a single undertaking.

Interpretation and reasoning

2.1.2 For assessment years 2017-18, 2018-19 and 2019-20, the factual pattern and manner of claiming deduction under section 80IB(9) were held to be identical to earlier assessment years 2005-06 to 2011-12, in which the Tribunal had categorically held that each well is a separate undertaking entitled to deduction.

2.1.3 The jurisdictional High Court, in the assessee's own case following Niko Resources, had already held that the Explanation to section 80IB(9) has no retrospective application and that all blocks licensed under one contract cannot be treated as a single undertaking.

2.1.4 The Departmental Representative did not dispute that the facts for the relevant years were identical to those considered by the Tribunal and the High Court, nor point out any distinguishing feature.

2.1.5 The Court therefore followed its own earlier coordinate Bench orders and the binding judgment of the jurisdictional High Court.

Conclusions

2.1.6 Each oil well is to be treated as a separate "undertaking" for the purpose of section 80IB(9), and profits of each such undertaking are eligible for deduction.

2.1.7 The Explanation to section 80IB(9) cannot be applied retrospectively in these years to deny such deduction by aggregating wells/blocks into a single undertaking.

2.1.8 Disallowance of deduction under section 80IB(9) for assessment years 2017-18, 2018-19 and 2019-20 was unsustainable; the grounds challenging such disallowance were allowed.

2.2 Depreciation on goodwill under section 32

Legal framework (as discussed)

2.2.1 Depreciation is allowable on "intangible assets" being business or commercial rights of similar nature under section 32. Earlier decisions, including in the assessee's own case and Supreme Court precedent, had recognized goodwill arising on acquisition of business/commercial rights as an eligible intangible asset.

Interpretation and reasoning

2.2.2 The assessee had acquired participating interest from another party pursuant to an agreement; consideration paid in excess of net identifiable fixed assets had consistently been recognized as "goodwill" and depreciation thereon allowed in prior years.

2.2.3 For assessment years 2017-18, 2018-19 and 2019-20, the assessee only claimed depreciation on the opening written down value of goodwill; no new payment or right was acquired in these years.

2.2.4 The Tribunal found the facts to be identical to earlier years 2005-06 to 2011-12, in which depreciation on the said goodwill had been allowed, following Supreme Court and coordinate Bench decisions.

2.2.5 No distinguishing facts were brought on record by the Revenue.

Conclusions

2.2.6 "Goodwill" arising from acquisition of participating interest constituted a business/commercial right of similar nature and is an eligible intangible asset for depreciation under section 32.

2.2.7 Depreciation on goodwill on the opening written down value was to be allowed for assessment years 2017-18, 2018-19 and 2019-20; the grounds on this issue were allowed.

2.3 Higher depreciation rate on oil wells and oil field equipment (mineral oil concerns)

Legal framework (as discussed)

2.3.1 Appendix I to the Income-tax Rules prescribes higher depreciation for plant and machinery used in the business of extraction or production of mineral oil (Entry III(8)(xii)). Earlier decisions of the Tribunal and jurisdictional High Court, and affirmation by the Supreme Court, had already applied this entry to similar assets in the assessee's own case.

Interpretation and reasoning

2.3.2 The assessee is engaged in extraction/production of mineral oil; plant and machinery comprising oil wells and oil field equipment are used in that business.

2.3.3 In earlier assessment years, including A.Y. 2006-07, the Tribunal held, and the High Court and Supreme Court affirmed, that such assets qualify for higher depreciation @ 60% under the prescribed entry.

2.3.4 For assessment years 2017-18, 2018-19 and 2019-20, the assets and nature of business remained the same; the Revenue did not point to any factual distinction.

Conclusions

2.3.5 Plant and machinery comprising oil wells and oil field equipment used in extraction of mineral oil are entitled to depreciation at 60% under Appendix I.

2.3.6 Disallowance of higher depreciation for assessment years 2017-18, 2018-19 and 2019-20 was not sustainable; the grounds seeking such higher rate were allowed.

2.3.7 The alternative/arithmetic ground on quantum of depreciation (Ground 4.2) became academic consequent to acceptance of the higher rate and was dismissed as such.

2.4 Additional depreciation under section 32(1)(iia)

Legal framework (as discussed)

2.4.1 Section 32(1)(iia) allows additional depreciation where new plant and machinery is acquired and installed for manufacture or production of any article or thing. Earlier orders in the assessee's own case had considered whether extraction/production of mineral oil is akin to manufacture or production of an article or thing.

Interpretation and reasoning

2.4.2 The Tribunal, in prior years 2006-07 to 2011-12, had already held that extraction of mineral oil is similar to manufacture or production of an article or thing and that the assessee is entitled to additional depreciation on eligible assets.

2.4.3 For assessment years 2017-18, 2018-19 and 2019-20, the nature of operations and assets remained the same; no contrary factual position was shown by the Revenue.

Conclusions

2.4.4 Extraction of mineral oil is to be treated as manufacture or production of an article or thing for purposes of section 32(1)(iia).

2.4.5 The assessee is entitled to additional depreciation on eligible additions to plant and machinery used in mineral oil extraction for all three assessment years in appeal; the ground claiming additional depreciation was allowed.

2.5 Weighted deduction under section 35(1)(ii) and alternate claim as business loss under section 28 (A.Ys. 2017-18 and 2018-19)

Legal framework (as discussed)

2.5.1 Section 35(1)(ii) provides weighted deduction for contributions to approved scientific research institutions. The Court also considered the possibility of allowing actual expenditure as a business loss under section 28 if not allowable under section 35(1)(ii).

Interpretation and reasoning - section 35(1)(ii)

2.5.2 The assessee had made donations to a specified institution and claimed weighted deduction relying on earlier notification and documentation from the trust.

2.5.3 It was an admitted position that, in light of CBDT advisory dated 14.12.2018, the said trust did not have valid approval to accept such donations in the relevant period, and this was known to the assessee.

2.5.4 The Court held that in absence of valid approval for the relevant period, the statutory condition of section 35(1)(ii) was not satisfied.

2.5.5 Case law relied on by the assessee was held inapplicable on the specific facts where the institution lacked approval and the CBDT advisory clearly disentitled it.

Interpretation and reasoning - alternate claim under section 28

2.5.6 The assessee, without prejudice, claimed that the amount actually paid should be allowed as a business loss, asserting bona fide belief and a business purpose.

2.5.7 The Court noted that the payment was made to a non-approved/non-recognized trust and was not shown to be expenditure incurred wholly and exclusively for the assessee's business activities.

2.5.8 On the facts, the expenditure could not be related to the carrying on of business in a manner that would qualify as business loss under section 28. The precedents cited, dealing with different kinds of business losses, were found not applicable to the present factual matrix.

Conclusions

2.5.9 Weighted deduction under section 35(1)(ii) on the contributions to the said trust was not allowable for assessment years 2017-18 and 2018-19 due to absence of valid approval; grounds seeking such deduction were dismissed.

2.5.10 The alternative claim to treat the donations as business loss under section 28 was also rejected as the expenditure was not incurred for the purposes of business; that ground was dismissed.

2.6 Transfer pricing adjustment on head office overhead charges (1% PSC-based charge) - A.Y. 2017-18

Legal framework (as discussed)

2.6.1 Section 92C governs determination of arm's length price; CBDT Instruction No. 3/2016 limits the TPO's role to determination of ALP and not to questioning commercial expediency. The Court also considered the nature of obligations and cost classifications under the Production Sharing Contract (PSC), noting Supreme Court authority that a PSC can operate as a self-contained code for certain fiscal matters.

Interpretation and reasoning

2.6.2 The assessee had two distinct components of administrative expenditure:

(a) Head office ("HO") expenses falling within the definition in section 44C, allocated and restricted to 5% of adjusted total income (Rs. 2.26 crore); and

(b) Overhead charges computed at 1% of total contract cost as per para 2.6 of Section 2 of Appendix C to the PSC, debited as general and administrative expenditure (Rs. 35.19 lakh). These overheads related to financial, legal, manuals, journals, periodicals and employee relations, and were not treated as HO expenses under section 44C.

2.6.3 It was an undisputed factual position that, in all other years (A.Ys. 2007-08 to 2016-17 and 2018-19 to 2019-20), the Revenue had accepted the claim of 1% overhead charges as per PSC without TP adjustments.

2.6.4 For A.Y. 2017-18 alone, the TPO held that the 1% charge did not represent actual expenditure and amounted to double reimbursement, and determined the ALP of this international transaction at Nil.

2.6.5 The Tribunal found that the PSC-based overhead charges were not included in the HO expenses under section 44C and therefore did not amount to double charging; they were a distinct category mandated by the PSC.

2.6.6 The Court also noted that the TPO/AO had not applied any recognized transfer pricing method nor identified comparable uncontrolled prices while fixing the ALP at Nil, and had thereby exceeded the limited role contemplated under section 92C and CBDT Instruction No. 3/2016.

2.6.7 Given consistent acceptance of the claim in all other years and absence of methodical ALP determination, the adjustment on this count was held unwarranted.

Conclusions

2.6.8 Overhead charges computed at 1% of total contract cost in accordance with the PSC constitute deductible expenditure and do not represent double reimbursement of HO expenses.

2.6.9 Determining the ALP of such charges at Nil, without application of prescribed methods or identification of comparables, was contrary to section 92C and CBDT Instruction No. 3/2016.

2.6.10 The transfer pricing adjustment of Rs. 35,19,439/- for A.Y. 2017-18 was deleted; grounds challenging this adjustment (including sub-grounds 7.1 to 7.6) were allowed.

2.6.11 The without prejudice ground (7.7) on unused HO expenditure under section 44C became academic and was dismissed.

2.7 MAT credit and TDS credit - A.Y. 2017-18

MAT credit under section 115JAA

2.7.1 The assessee had paid MAT in A.Y. 2016-17 but, due to additions in that year, normal tax became payable and MAT credit was not reflected in records. Appeal for A.Y. 2016-17 was pending.

2.7.2 The Court held that any MAT credit that may arise as a consequence of relief in A.Y. 2016-17 must be given effect to in A.Y. 2017-18 after due verification.

Conclusion: The Assessing Officer was directed to grant MAT credit in A.Y. 2017-18, if and to the extent it arises on finalization of A.Y. 2016-17; the ground was partly allowed.

TDS credit

2.7.3 The assessee claimed that full TDS as reflected in Form 26AS had not been allowed as credit.

2.7.4 The Court held that credit for tax deducted at source must correspond to figures appearing in Form 26AS.

Conclusion: The Assessing Officer was directed to verify Form 26AS and grant full TDS credit accordingly; the ground was partly allowed.

2.8 Deduction under section 42 and binding nature of DRP directions - A.Y. 2019-20

Legal framework (as discussed)

2.8.1 Section 42 allows deductions in accordance with terms specified in agreements (such as PSCs) with the Central Government. Section 144C(10) mandates that the Assessing Officer must complete assessment in conformity with directions issued by the DRP.

Interpretation and reasoning

2.8.2 For A.Y. 2019-20, the assessee claimed deduction under section 42 pursuant to the PSC (including Articles 15.5 and 15.6). The DRP had directed the Assessing Officer to determine the eligibility of the assessee for deduction under section 42 and thereafter quantify and allow the eligible amount.

2.8.3 The Assessing Officer, however, concluded that the assessee was not eligible for deduction under section 42, relying on a Supreme Court decision in an earlier year, and effectively did not implement the DRP's directive to quantify and allow the deduction upon accepting eligibility.

2.8.4 The Tribunal held that section 144C(10) obliges the Assessing Officer to strictly follow the DRP's directions. The DRP had already taken a view on eligibility and had required quantification of the deduction.

2.8.5 In these circumstances, the Court found it appropriate to remand the matter to the Assessing Officer solely for the limited purpose of properly complying with the DRP's directions: to decide eligibility in line with DRP observations and thereafter quantify the deduction under section 42.

Conclusions

2.8.6 The Assessing Officer is bound by DRP directions under section 144C and cannot disregard them by independently re-deciding eligibility contrary to such directions.

2.8.7 The issue of deduction under section 42 for A.Y. 2019-20 was remanded to the Assessing Officer to (i) decide eligibility in accordance with DRP directions, and (ii) quantify and allow deduction as per section 42 and the PSC; the grounds on this issue were partly allowed.

2.9 Interest under sections 234B and 234D

2.9.1 Grounds regarding levy of interest under section 234B (A.Ys. 2017-18 and 2019-20) and section 234D (A.Y. 2018-19) were treated as consequential to the outcome of quantum issues.

2.9.2 The Court, therefore, did not independently adjudicate on the merits of such interest, leaving it to be recomputed as per law while giving effect to the order.

Conclusions

2.9.3 Interest under sections 234B and 234D is to follow consequentially from the final assessed income; specific grounds on these were not adjudicated on merits.

---