TaxTMI 
TaxTMI 
2013 (5) TMI 270
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.... had, earlier, retained the exclusive privilege for mining of hydrocarbons, which was carried out on nomination basis through the statutory corporations like ONGC. The need for maximising domestic exploration of production of oil led to the Government of India encouraging private sector participation in the exploration of oil and natural gas from the year 1980. Rajasthan Block (RJ-ON-90/1) was one of the Pre-New Energy Licensing Policy (Pre-NELP) exploration block offered by a Competitive Building Mechanism. The said block was offered in the 4th round of Pre-NELP regime to M/s. Shell India in execution of a Production Sharing Contract (PSC) on 15.5.1995. Since the exploration licence for Rajasthan Block was held by ONGC, the PSC had three parties, (a) Government of India, (b) the bidder, M/s. Shell India Production Development BV (Shell) and (c) the licensee ONGC. PSC was entered into for the exploration and exploitation of crude oil and natural gas. As per the PSC, ONGC is holding 30% of the participating interest (PI) in the development or within the contract area since 13.1.2005. 3. Shell failed to make any commercial discovery even after investing US$ 9 million and was contemp....
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....ull details of the proposed transaction along with copies of the agreements and other arrangements entered into between CAIRN and/or its affiliates and the proposed buyer and/or its affiliates. CAIRN on 10.9.2010 provided the details of the proposed transaction to ONGC, the operative portion of which reads as follows: ".. the Transaction is a sale of shares in Cairn India Limited, rather than an assignment of any Participating Interest under the various Production Sharing Contracts (PSCs) and Joint Operating Agreements (JOAs). We believe that the various pre-emption rights under each of the JOAs only apply when there is an assignment, by a party to that PSC, of part or all of that party's Participating Interest. However, in this case, as the contract with Vedanta Resources Plc is at shareholder level of Cairn India involving sale of shares - there is no change to the Participating Interest in any of the PSCs to which the Cairn India Group is party. Consequently, under the terms of the relevant PSCs and JOAs, no pre-emptive right or requirement for ONGC consent, as claimed in the Letter, is triggered by the Transaction". Consequently, CAIRN took up the stand that various pre-empt....
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....le Cost' in the calculations of entitlement interest submitted by the Operator to the Operating Committee vide letter dated 1.7.2010. CEIL, however, took up the stand that the same was not cost recoverable. 11. ONGC Board in its 215th meeting held on 29.1.2011 considered the issue regarding treating royalty as cost recoverable and the option of ONGC going for acquisition of the stake in CIL. Board, after taking into account the offered rate of Rs.405/- per share (including non-compete fee of Rs.50/- per share), vis-à-vis internal assessed value of Rs.290/- per share, decided that the following recommendation be forwarded to the Ministry of Petroleum and Natural Gas (MoPNG) for their consideration: i. Acquisition cost offered by Vedanta to CAIRN for the proposed transaction of sale of the shares of CIL is much above the ONGC evaluated value of the proposed transaction. Therefore, ONGC does not find merit in the acquisition on commercial considerations. ii. To request MoPNG for allowing the recovery of royalty being paid by ONGC for entire crude oil produced from RJ-ON-90/1 block as "Cost Oil" from the total revenue accrued from the block. ONGC may further request MOPNG to ....
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....d transaction under the respective PSCs. e) Necessary approval from other regulatory bodies such as SEBI, on the proposed transaction to be obtained and submitted by Vedanta Resources Plc. f) Necessary Security Clearance from Ministry of Home Affairs in favour of the assignee i.e. Vedanta Resources Plc. to acquire the shareholding shall be obtained and submitted by the said assignee. g) In respect to RJ-ON-90/1 block, the parties, CAIRN India Ltd., CAIRN Energy Pty Limited (CEIL), CAIRN Energy Hydrocarbon Ltd. (CEHL) and any other affiliate company of CIL and Vedanta Resources Plc. and any other affiliate company of Vedanta Resources Plc. shall agree and give an undertaking that Royalty paid by ONGC is cost recoverable by ONGC as contract costs, as per the provisions of PSC. h) In respect to RJ-ON-90/1 block, CAIRN Energy Pty Limited and CAIRN Energy Hydrocarbon Ltd. shall withdraw the arbitration case relating to dispute raised by them on payment of Cess under the PSC." 14. CIL, later, by its letter 15.9.2011 informed ONGC that based on the result of postal ballot by their shareholders, the Board of Directors of CIL has passed a Resolution for acceptance of the conditions (g)....
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....se-IV As per 2P CIL Production cases for Brent Crude Price ofUS$100/bbl and WACC o 12%, Cess Rs.2626.50/MT CIL Profile - Peak Production PSC Term Recoverable Reserves (MMBBLS) 228 kbopdWF+EOR+Bh+20 Small Fields Capex US$ Million Opex US$ Million NPV US$ Million CAIRN INDIA Share Price - Rs/Share 2020 811 7618 6664 11272 268 2025 998 7698 8818 11985 285 2040 1167 7698 12922 122239 291 18. The Royalty paid on behalf of CEIL & CEHL which has been recovered for the period since inception till September, 2011 and from 1.10.2011 to 30.6.2012 is as under:- RJ-ON-OP-1 100% 70% Royalty since inception till Sep'11 784,833,924 549,383,747 Royalty from Oct' 11 to June'12 602,140,130 421,498,091 Total 1,386,974,054 970,881,838 19. SBI Caps, therefore, on the basis of the above given statistics, opined that under the highest profile case with base assumptions, the value of these shares works out to Rs.291/- and even considering higher CAPEX (130% incremental) and lower OPEX (-30% total) and increase in crude price from US$ 100/bbl to US$ 110/bbl, the value of share increases to Rs.328. Amongst the various scenario....
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.... owner agreeing to share royalty and pay oil cess on mainstay Rajasthan oilfields. Union Cabinet also, on 24.1.2012, gave its final approval to London-based mining group Vedanta Resources Plc's acquisition of a majority stake in Cairn India for $8.48 billion. It was noticed that Cairn and Vedanta had complied with all the pre-conditions stipulated by the Government of India and ONGC and the transaction between them stood concluded. ARGUMENTS 23. Shri Prashant Bhushan, learned counsel appearing for the petitioner, questioned the decision of the Government of India in giving clearance to CAIRN-Vedanta deal, without ONGC exercising the RoFR, but for which it was submitted that the State Exchequer would have benefited to the tune of Rs.1,00,000/- crore rupees. Learned counsel submitted that petrol and natural gas is held by the State in public interest and cannot be given away without due exercise of power and discretion guided by clear and cogent policy, because the natural resources should not be subject to private ownership or private commercial exploitation. Reliance was placed on the judgments of this Court in M. C. Mehta v. Kamal Nath & Others (1997) 1 SCC 388, Meerut Developme....
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....s Court in Balco Employers' Union (Regd.) v. Union of India and Others (2002) 2 SCC 333, Bajaj Hindustan Limited v. Sir Shadi Lal Enterprises Ltd. and Another (2011) 1 SCC 640 and Life Insurance Corporation of India v. Escorts Limited and Others (1986) 1 SCC 264. 27. Shri Siddharth Luthra, learned Additional Solicitor General appearing for the Union of India, submitted that the ONGC Board forwarded its request to MoPNG to ensure that royalty for Rajasthan Block be treated as cost recoverable. MoPNG on 26.3.2011 submitted the recommendations before the Cabinet Committee for Economic Affairs (CCEA) for decision of the Cabinet Committee on the issue of proposed transaction between Cairn-Vedanta. CCEA referred the matter to the Group of Ministers (GOM) and GOM on 25.11.2011 recommended grant of approval based on certain conditions. Union of India took the stand that there was no commercial viability for ONGC to purchase CIL share at the value being offered by Vedanta. Shri Luthra submitted that this decision was taken by ONGC in public interest and after taking into consideration all commercial and technical aspects of the matter and that this Court, in exercise of its powers under Ar....
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.... that falls for consideration in this case is whether this Court sitting in this jurisdiction is justified in interfering with a complex economic decision taken by a State or its instrumentalities in the absence of violation of any statutory provision or proof of mala fide or on extraneous and irrelevant considerations. 31. The Government had initially the exclusive privilege of exploration of mineral ore resources in India. The Parliament felt the need to provide for the regulation of oil fields and for the development of mineral resources and enacted The Oil Fields (Regulation and Development) Act, 1948 (Act 53 of 1948) and later The Petroleum and Natural Gas Rules, 1958 were framed for the regulation of petroleum operations and the grant of licenses and leases for exploration and development of petroleum in India. The Rules provide for the grant of exploration licenses and mining leases in respect of lands vested in State Government by that State Government with the previous approval of the Central Government, and ONGC had been duly granted an exploration license to carry out exploration operations in association with other companies in the concerned area. 32. The Government o....
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.... SBI Caps of its financial implications has already been noticed in the earlier part of this Judgment. 35. The question whether the CEIL, the operator of the block has to include Royalty "as recoverable cost" and whether it is commercially viable for the ONGC to exercise its RoFR were elaborately considered by the ONGC Board in its various meetings held on 29.1.2011, 27.9.2011. The Board after due deliberations and considering the offered right at Rs.405/- per share vis-à-vis the internal assessed value of Rs.290/- per share, noticed that acquisition stake offered by Vedanta Cairn for the proposed transaction of sale of shares of CEIL was much above the ONGC evaluated value of the proposed transaction, and hence was not advisable for the ONGC to acquire shares. Further there was an ongoing issue/dispute relating to cost recovery of Royalty being paid by ONGC for the entire crude oil producing field - RJ-0A-90/1 block pursuant to provisions of accounting procedure of PSC. Further there was a dispute between CEIL and CEHL and ONGC as to the liability of cess under the PSC for the Rajasthan Block. CEIL and CEHL had initiated arbitration proceedings in respect of the same. It w....
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.... business decision taken by parties to the agreement, after evaluating and assessing its monetary and financial implications, unless the decision is in clear violation of any statutory provisions or perverse or for extraneous considerations or improper motives. States and its instrumentalities can enter into various contracts which may involve complex economical factors. State or the State undertaking being a party to a contract, have to make various decisions which they deem just and proper. There is always an element of risk in such decisions, ultimately it may turn out to be a correct decision or a wrong one. But if the decision is taken bona fide and in public interest, the mere fact that decision has ultimately proved to be a wrong, that itself is not a ground to hold that the decision was mala fide or done with ulterior motives. 39. Matters relating to economic issues, have always an element of trial and error, so long as a trial and error are bona fide and with best intentions, such decisions cannot be questioned as arbitrary, capricious or illegal. This Court in State of M.P. and others v. Nandlal Jaiswal and others (1986) 4 SCC 566 referring to the Judgment of Frankfurter....
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.... petitioner merely because it has been urged that a different policy would have been fairer or wiser or more scientific or more logical. Wisdom and advisability of economic policy are ordinarily not amenable to judicial review. In matters relating to economic issues the Government has, while taking a decision, right to "trial and error" as long as both trial and error are bona fide and within the limits of the authority. For testing the correctness of a policy, the appropriate forum is Parliament and not the courts." In Bajaj Hindustan Limited v. Sir Shadi Lal Enterprises Limited And Another (2011) 1 SCC 640, this Court held "that economic and fiscal regulatory measures are a field where Judges should encroach upon very wearily as Judges are not expert in those matters". This Court in Bhavesh D. Parish and Others v. Union of India and Another (2005) 5 SCC 471, took the view that, in the context of the changed economic scenario, the expertise of people dealing with the subject should not be lightly interfered with. The consequences of such interdiction can have large-scale ramifications and can put the clock back for a number of years. The process of rationalisation of the infirmi....
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.... all it was equated at a very high premium, secondly it guaranteed no return either in the way of dividend or any other profits. Further, it might lead to huge liability of investment and with a minimum work programme and the remaining PSC's help by CEIL which involved exploitation operations with no guarantee of any commercial discovery. The result of CEIL and its affiliates agreeing to treat royalty paid by ONGC as cost recoverable by ONGC as contract cost, and ONGC has derived benefits to the tune of US $ 970,881,838 towards royalty paid by till June 2012 and would continue to derive similar benefits till the currency of the contract i.e. till June 2020. 41. Consequent to the agreement dated 30.11.2011, ONGC received Rs.5000 crores approximately towards CEIL and CEHL's share of royalty for the period from 29.8.2009 to 30.7.2012 besides CAIRN and Vedanta agreeing to pay their share of royalty and cess in future involving huge financial implications. 42. ONGC in its wisdom decided not to acquire any shares of CEIL at a high premium of Rs.335 per share plus Rs.50 per share as not to compete fee, which would have come to ONGC at a hefty cost of 4.44 billion US $ about Rs.6,20,600 ....
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.... may be prescribed by or under any law made by the Parliament and, until provision in that behalf is so made, shall perform such duties and exercise such powers in relation to the accounts of the Union and of the States as were conferred on or excisable by the Auditor General of India immediately before the commencement of this Constitution in relation to the accounts of the Dominion of India and of the Provinces respectively." 49. The CAG earlier functioned under the Government of India (Audit and Accounts) Order, 1936 as adopted by the India (Provisional Constitution) Order, 1947, which was repealed by Section 26 of the Act of 1971. The Comptroller and Auditor General's (Duties, Powers and Conditions of Service) Act, 1971 was enacted by the Parliament in the year 1971. Section 10 of the Act states that in relation to the Government, the CAG shall compile the accounts of the Union and the States. The CAG on the basis of these accounts, prepares the annual accounts which are submitted to the President of India or the Governor of the State or the Administrator of the Union Territory. The audit of the Union and the States is under Section 13 of the Act. The scope of the audit extend....
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.... scope of the demands'. This means that no expenditure should exceed the amount granted without fresh parliamentary approval, nor should the grant be appropriated for a new service not contemplated in the demand. Even if there is a surplus of a grant under one vote, it cannot be appropriated to another vote without sanction of Parliament. The exercise of this function gives the Committee a comprehensive power of survey over the entire scheme of expenditure of the government as well as the administration. Though the Committee has nothing to question the policies of the government, it has to scrutinise the implementation of the policies through its review of the expenditure. Both in England ............... as well as in India, it has been acknowledged that the present function includes a criticism of extravagant or wasteful expenditure of public money, in general, and in this connection, it is entitled to point out the weak points in the administration of the departments concerned, and also to ensure that proper action has been taken against delinquents guilty of irregularity or breach of the rules, though it has no power to enforce its comments by any direct administrative action. ....
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.... CAG, the report of the PAC in the first instance drawn up after hearing the view of the ministries, the Action Taken Report including the replies of the Government and the further comments of the PAC on the replies of the Government. 54. We have referred to the report of the CAG, the role of the PAC and the procedure followed in the House, only to indicate that the CAG report is always subject to scrutiny by the Parliament and the Government can always offer its views on the report of the CAG. 55. The question that is germane for consideration in this case is whether this Court can grant reliefs merely placing reliance on the CAG's report. The CAG's report is always subject to parliamentary debates and it is possible that PAC can accept the ministry's objection to the CAG report or reject the report of the CAG. The CAG, indisputably is an independent constitutional functionary, however, it is for the Parliament to decide whether after receiving the report i.e. PAC to make its comments on the CAG's report. 56. We may, however, point out that since the report is from a constitutional functionary, it commands respect and cannot be brushed aside as such, but it is equally important....