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Rs 6,100 cr service tax demand on ONGC Videsh threatens to nullify returns; here’s how

ONGC Videsh is disputing service tax demands to the tune of over Rs 6,100 crore slapped on it through multiple notices since 2011 — if met, these demands could outstrip OVL’s returns from these investments during the period.

By: | New Delhi | Updated: September 21, 2016 6:45 AM
The service tax department, after it audited OVL’s accounts in 2011, observed that the funds given to the lead operator in each case by OVL have been towards sourcing “business auxiliary services” and, therefore, the foreign remittances received by it are subject to service tax. (Reuters) The service tax department, after it audited OVL’s accounts in 2011, observed that the funds given to the lead operator in each case by OVL have been towards sourcing “business auxiliary services” and, therefore, the foreign remittances received by it are subject to service tax. (Reuters)

ONGC Videsh (OVL) is disputing service tax demands to the tune of over Rs 6,100 crore slapped on it through multiple notices since 2011 — if met, these demands could outstrip OVL’s returns from these investments during the period. The dispute is currently being heard by the commissioner (appeals) at Faridabad.

OVL, the overseas arm of state-run ONGC with a key mandate to buttress India’s energy security, has invested $24.5 billion until FY16 across 37 hydrocarbon projects in 17 countries; all these projects are run under the joint venture (consortium) model, where one investor carries out the day-to-day operations as the lead operator while all partners share investments and returns proportionately.

ONGC

The service tax department, after it audited OVL’s accounts in 2011, observed that the funds given to the lead operator in each case by OVL have been towards sourcing “business auxiliary services” and, therefore, the foreign remittances received by it are subject to service tax. The department has since been serving tax-plus-interest notices to OVL every year for the past six years.

Tax experts, however, said the department’s stance is untenable; if the service tax is payable in such cases, it should only be on the fee charged by the lead operators for additional work (day-to-day operations), not on the entire remittances received from the project, said Anita Rastogi of PwC India.

According to OVL, investments in these projects are not meant for receiving any services from the operator but towards running the project. “The operator doesn’t offer any services to the joint venture partners (and hence no fee is paid),” said an official privy to the development.

“The non-operator partners make the cash call payments and the operator carries out the activities and, therefore, whatever foreign remittances OVL is getting are return on investments (which cannot be subjected to service tax),” the official added. The service tax department, however, contends that the operators are rendering a service to OVL and so the company is liable to pay service tax on the remittances. Service tax is currently levied at 15%, including the Krishi Kalyan cess.

While OVL is awaiting the verdict from the commissioner (appeals) at Faridabad, it has also approached the government to sort out the dispute. Another official told FE that discussions have take place at the level of secretaries to resolve the dispute.

Curiously, some analysts point out that an accounting goof by OVL might have resulted in the hefty tax demands. Instead of showing its overseas investments as assets, the company has charged them to the profit and loss account as expenditure. “Going by the basic logic of accounting, investments should not be charged to the profit and loss account, but should be carried in financial statements as an asset,” said Rajat Mohan, director (indirect taxation) at Nangia & Co.

“ONGC Videsh probably has erroneously charged an amount as an expense which was to be recovered from subsidiaries, branches and joint ventures in 37 oil and gas projects in 17 countries around the world. Sometimes, a mistake like us cost you billions. This being the case, then ONGC could also be looking at a demand from the income tax department due to charge of capital expense as a revenue expenditure under Section 37 of the Income Tax Act, 1961,” Mohan added.

The company operates the projects at an internal rate of return on investments of 12-13%, and if it has to pay service tax on remittances received from the project, the projects will give negative returns and become infructuous.

For the first time in a decade, OVL reported a net loss of Rs 2,094 crore in FY16. In FY16, gross revenues were reported at Rs 12,772 crore, a 33.3% drop from the previous year. This is primarily due to Rs 3,042 crore of impairment losses booked by the firm. In FY15, OVL had reported a net profit of Rs 1,904 crore.

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