Whether expenditure incurred on premium paid for political risk insurance policy for safeguarding interest in its wholly owned subsidiary against unstable political environment in foreign country is allowable as business expenditure - YES: ITAT

THE issue before the Bench is - Whether expenditure incurred on premium paid for political risk insurance policy for safeguarding interest in its wholly owned subsidiary against unstable political environment in a foreign country is allowable as business expenditure. And the answer is YES.

Facts of the case

A) Assessee was allowed depreciation u/s 32(1)(ii) on the acquisition amount paid to acquire the participating interest in oil block. Assessee contended that it had incurred expenditure for acquiring participating interest in the rights and licenses granted by the Russian State which

enables the assessee to carry on hydrocarbon operations. Thus it acquired business rights and production licenses, which are in the nature of intangible property, eligible for depreciation u/s 32(1)(ii) of the Act.

B) Assessee claimed expenditure incurred on evaluating existing business opportunities relating to products pending for final evaluation. ITAT in the preceding year observed in this regard that the assessee in the instant case has incurred expenses relating to project pending final evaluation. The assessee had made distinction between contract projects for which agreement is entered into and the board approved projects i.e. projects for which no agreement/contract have been entered. The assessee used to capitalize expenditure incurred on projects for which no agreement/contract has been entered, however, the cost of such projects which are abundant was written off over a period of five years in the books of account of the assessee. The assessee had claimed the expenses pertaining to abandoned project as revenue expenses. The expenditure incurred for this purpose was in the nature of travel cost, meeting and conference expenses, delegation, salaries and professional fees etc.

C) Assessee incurred expenses towards the risk insurance premium for obtaining a political risk insurance policy for safeguarding its interest, in its wholly owned subsidiary against unstable political environment in Sudan. Assessee contended that premium is in the nature of revenue expenditure. The insurance policy was taken at the specific directions issued by the Ministry of Petroleum and Natural Gas, Govt. of India. Assessee contended that mere fact that the investment in Sudan has been made through a Subsidiary, does not make the expenditure, as expenditure of the Subsidiary.

D) Assessee received amount in advance on quantity of gas sold by it. Assessee contended that agreement for sale and purchase of natural gas provide that the buyer has to pay for certain minimum quality of gas (take or pay), even if the actual quantity of gas taken by the buyer is less than the minimum contracted quantity of gas. In case the actual quantity of gas taken by the buyer is less than the minimum quantity of gas contracted, then the buyer is entitled to get the same, free of charge in future years. Assessee received an amount for which gas was supplied in the subsequent year. CIT (A) allowed the claim of assessee observing that under the concept of Sale of Goods, an agreement to sell becomes a sale only when in terms of the understanding between the parties i.e. the buyer and the seller, the property in the goods is transferred to the buyer, which in the present case is at the time of delivery by the seller to the buyer at the sales point. If the actual quantity of gas delivered or taken by the buyer is less than for which the advance has been received, then the seller is obliged to deliver, free of any payment, Make-Up gas to the buyer in subsequent years. Therefore, in such case till the time delivery of the gas is not taken by the buyer, the sale is not complete, despite the payment made in advance. AO has not been able to bring on record any material or evidence to show as to how the sale of gas crystallised in the current year as the same had not been delivered by the seller to the buyer and hence the title risk did not stand transferred. It is also not a case of loss to the revenue for the reason that such practice is customary in the oil and gas industry wherein the advance is received in a year and same is recognised as income in subsequent years at the time of supply/delivery of gas, by the seller to the buyer.

After hearing both the parties, the ITAT held that,

A) ++ in the preceding years, the similar claim of assessee was allowed observing that by entering into an agreement called PCA, the government owning the hydrocarbons, granted rights to the assessee company along with license for carrying on hydrocarbons operations. The business rights in the license are owned by the assessee entering into PCA and such right and license can be assigned and transferred to other parties subject to the terms and conditions of the PCA and approval of the government. The assessee by virtue of acquisition of 20% participating interest became the member of the consortium and acquired proportionate share in rights and licenses granted by the Russian state for Sakhalin Block. By acquiring these business rights and production licenses, the assessee became entitled to carry on hydrocarbon operations in the Sakhalin project. So far as claim of depreciation in case of intangible assets falling in the category of "any other business or commercial rights of similar nature" are concerned, all the business or commercial rights are not by themselves assets eligible for depreciation, and that only those rights which are similar in nature with the know-how, patents, copyrights trademarks, licences etc. are eligible for claim of depreciation. The first category of words like know-how, patents, copyright, etc., form a distinct genesis or category in as much as all those items are specific and elucidated rights of business or commercial nature. In such circumstances, the expression 'any other business or commercial rights of similar nature' also must be in the same genesis or category with specific and elucidated identity of commercial or business nature. Therefore, in the light of the statutory provisions contained in section 32(1)(ii), the commercial rights of exploration of mineral oils, as acquired by the assessee falls under the expression of any other business or commercial rights of the nature similar to one of the category i.e. licenses as stipulated in Section 32(1)(ii). The commercial rights of exploration and licenses acquired by the assessee being in the nature of intangible assets are eligible for the claim of depreciation at the rate prescribed u/s 32(1)(ii) of the Act. This right had been granted to the assessee by way of license and the assessee became owner of such right i.e. license to have an access and to carry on of business of exploration and development of mineral oil. Accordingly, such an asset fall within the category of asset falling u/s 32(1)(ii) of the Act. Accordingly, the claim of depreciation of assessee is accepted;

B) ++ the ITAT held following the order of Hon’ble Bombay High Court in the case of CIT Vs. Essar Oil that submitting tenders and bids in the field of oil exploration is a highly sophisticated technical task for which the assessee company had to incur substantial amount of expenditure before submitting its bid. If the assessee is not successful in obtaining bid, such expenditure is allowable as revenue expenditure. As the assessee was continuously in the business of exploration and production of oil, the expenditure so incurred was in the normal course of its business, such expenditure being revenue in nature incurred for the purpose of existing exploration and production business was required to be allowed u/s 37(1). Following the said order, the claim of assessee is allowed;

C) ++ to safeguard its investment in the subsidiary the appellant entered into a tripartite agreement with the Oriental Insurance Company Ltd under Expropriation Insurance which is an insurance to cover losses arising from nationalization or confiscation of property which might occur due to political instability. The basic purpose of the insurance was to safeguard the appellant's business decision to invest in Sudan, the appellant incurred the expenditure towards insurance premium by taking an insurance policy to safeguard its equity investment. In light of these facts once an expense has been incurred by the assessee in the course of its business to safeguard its business asset, it is a business expenditure. Thus, the assessee’s claim is allowed;

D) ++ the revenue could not controvert the factual findings of the first appellate authority. In the result the findings of the First Appellate Authority on this issue are upheld, and these grounds of the Revenue are dismissed.