The tax department is reported to have slapped service tax demand of over Rs 6,100 crore [Rs 2,816.31 crore for April 1, 2006 to March 31, 2010 and Rs 3,286.36 crore for April 2010 to March 2015] on ONGC Videsh Ltd [OVL] – an overseas arm of central government undertaking viz., Oil and Natural Gas Corporation [ONGC]. Including interest and penalty, the liability will be much higher. This has caused much consternation at a time when OVL is already financially stressed.
OVL had reported a net loss of Rs 2,093.5 crore in 2015-16 fiscal against a net profit of Rs 1,904.2 crore in 2014-15 despite increase in production of oil and gas. Such humongous demand will seriously impair return from OVL’s investment abroad [it owns assets in 37 oil and gas projects in 17 countries around the world]. It would be a disgrace to see a fundamentally sound state-run undertaking bleeding profusely!
Given the huge implications, a natural question that needs to be addressed on top priority is whether the demand for service tax is justified? What is the stance taken by tax authorities? Does it pass the test of reasoning? Is it tenable in the eyes of the law?
OVL holds stakes in mentioned projects abroad through its subsidiaries, branches and joint ventures [JVs]. The way E&P [exploration and production] industry works, the fields are operated by one firm and all partners in the consortium reimburse cost on the basis of their equity share. In sync with this arrangement, the operator raises a demand for money on OVL, which transmit the funds.
The service tax department has taken a view that the operator/overseas units are rendering a service [so called business auxiliary services] to OVL and as such all reimbursements made by the latter to the former are liable to levy of service tax at the full rate [for computing the tax liability, it has picked up foreign currency expenditure as reported in company’s financial statements for the mentioned period]. The department’s logic is completely flawed.
Basically, the money spent by OVL on exploration and development of the fields is in the nature of capital spending or investment. Only the manner of spending is a bit circuitous because of the nature of its participation in fields activities [via a partner in JV having exclusive responsibility of ‘operations’]. Had it also been the operator, the money would have been directly spent.
It is abundantly clear that investments made overseas through its subsidiaries or branches or JVs do not constitute availing of any service. None of mentioned expenditures has been charged to profit and loss [P&L] account in the books of OVL in consonance with accounting standards in India. Accordingly, the company did not pay service tax and continues to defend itself against the notices served on it.
Without prejudice to what is stated above, even if one were to assume that its branches or subsidiaries were rendering any service [not true], then also, the department is not justified in raising a demand as service tax – under the law – can be levied only on services rendered within the country. And, since all these activities happened overseas and not within India, no service tax can be levied. Yet, what prompted the tax authorities to raise the demand.
On a closer look, it turns out that they may have grossly misinterpreted ‘expenditure in foreign currency’ reported by way of notes to the financial statement, representing the total outflow of foreign currency [that includes capital expenditure and investment] as being charged to the statement of P&L thus reaching a conclusion that these could be payments towards alleged services rendered to OVL.
Indeed, that may well be the case as under a system of tax administration as it has evolved over the years [what finance minister, Arun Jaitely termed as ‘tax terrorism’], officials look for slightest available opportunity to come up with demands – irrespective of merits of the case. Such tendencies proliferated during erstwhile UPA – regime which was ridden with lack of transparency and corruption.
That these demands were raised ‘retrospectively’ [first of such notices was issued in October, 2011 for period beginning April, 2006] lends credence to such a possibility. If, service tax has to be levied which tax authorities believe was not paid, does it take so long for them to detect it? Are they not aware of serious implications of making such demand after accounts have been finalized, profit/loss declared and all other consequential actions implemented as per the law?
The action looks even more anomalous when one considers that the company [read OVL] on which demand is being raised is majority owned by Government of India [GOI] – vide its majority ownership and control over ONGC [of which OVL is a subsidiary] which also has the service tax department under its jurisdiction. What prevents a member of CBEC [central board of excise & customs] from checking with bureaucrat sitting on the board of OVL and sorting out things before rushing to raise the demand.
An argument that such matters are dwelt at the level of field formations and therefore, CBEC could not have been aware is untenable as (i) the demand runs in to thousands of crores; (ii) it is retrospective and (iii) is being raised on a government undertaking. A field level officer is expected to be aware of these basics and should have brought to the attention of higher ups more so, when the demand hinged on ‘interpretation’ of expenses mentioned in accounts.
Also, look at the time and resources of company, tax department and judiciary right up to Supreme Court [where matter ultimately reaches if it does not get settled at level of Commissioner, Appeals] that gets wasted in contesting the demand. These could have been utilized elsewhere for bringing more people within ambit of tax net and better tax administration leading to more revenue collection.
This issue cannot be allowed to linger on as it will not only cripple OVL which has on its shoulders a major responsibility for getting hydrocarbon resources from abroad to meet India’s burgeoning energy needs but will have much wider implications for all other companies operating on the same model for capital spending abroad. Hence, the urgent need for nipping the problem in the bud.
Modi – government which is moving fast on reforms road and is committed to stemming out ‘tax terrorism’ should take note and order service tax department to withdraw the demand forthwith. For the future, field officials should be given clear instructions to bring the matter to attention of higher-ups where ever issues of ‘interpretation’ are involved for proper guidance.