NEW DELHI: After Vodafone, British oil major Cairn has now avoided India’s tax jurisdiction, invoking the India-UK bilateral investment protection treaty.
This indicates MNCs find it tough to contest in a local court the I-T department’s ‘retrospective taxation’ powers over long-concluded transactions involving Indian assets.
Cairn Energy late on Tuesday announced its decision file a ‘notice of dispute’ under the treaty, necessitating a period of negotiations, the failure of which could result in international arbitration. The company said the draft income reassessment order issued to subsidiary Cairn UK Holdings for 2006-07 amounts to $1.6 billion (R10,039 crore) plus any applicable interest and penalties.
“The 2012 amendments to the Income Tax Act, 1961, clearly makes indirect transfer of Indian assets including those executed in previous years taxable in India. Since the government has the power to make retrospective changes to the Income Tax Act especially when they are clarificatory in nature, successfully contesting its legal validity in courts may be difficult,” said Amit Maheshwari, partner, Ashok Maheshwary and Associates.
“Arbitration, on the other hand, offers a better dispute resolution mechanism for a tax dispute rather than getting the law itself struck down,” Maheshwari added.
Bilateral investment protection treaties, including the India-UK one, usually do not fix a time frame for concluding the arbitration.
The department’s dispute with Vodafone over its alleged liability to pay close to Rs 20,000 crore of taxes, interest and penalty on account of its purchase of Hutch Essar in 2007, which triggered the retroactive change in law, is dragging on with the arbitrators appointed by both the parties unable to make up their mind about a third arbitrator.
The tax department wants to levy 20% tax on the alleged short-term capital gain of Rs 24,503 crore that Cairn UK Holdings made in 2006-07 while transferring its Indian assets to Cairn India from Cairn India Holdings incorporated in Jersey. Cairn India acquired the Indian assets of the British energy giant for Rs 26,681 crore. Since the tax liability actually falls on a non-resident company which the department cannot reach out to, it wants to hold Cairn India in default of not having deducted the tax at source while making payment to the UK firm. Since Vedanta has acquired Cairn India from Cairn Energy, the department attached the 10.3% residual stake Cairn Energy holds in the Indian unit towards recovery of alleged dues.
The India-UK treaty prevents each country from expropriating assets of investors from the other except for a public purpose, in which case, the investor is entitled to fair and prompt compensation.
“Cairn continues to be restricted by the Indian income tax department from selling its 10% shareholding in CIL, currently valued at approximately $700million. Supported by detailed legal advice, on the strength of the legal protections available to it under international law, Cairn does not intend to make any accounting provision in respect of the draft tax assessment,” the company stated. It also said it would seek restitution of losses resulting from the attachment.
While there is no easy solution for the nearly three dozen past disputes arising from the department’s ‘retrospective taxation’ power on indirect sale of Indian assets, the income tax department has not raised any fresh tax claims in the last one year invoking it.
Sources told FE that not a single reference has been made by any field officer yet to a high-level task force set up almost a year ago to examine and vet fresh tax demands under indirect transfer provisions. Sources also said that the leadership has sensitised field officers to be judicious while invoking the retrospective application of the provisions meant to tax global asset transfers involving Indian companies.
Cairn, which approached the Delhi High Court against a show-cause notice served over the 2006-07 reorganisation of Indian assets, subsequently withdrew it in the hope that the notices might be reviewed by a committee set up by finance minister Arun Jaitley aimed at reducing avoidable litigation.
“Cairn went to court and then withdrew the petition. They gave a representation to the high-level committee, which informed the company it would not get the benefit of a review because at the time Budget was presented (announcing the decision to set up the committee for review of such cases), the matter was already under litigation. The finance minister announced the benefit of examination by the committee only for all fresh cases,” explained a person privy to the development.
(Source: The Financial Express, March 12, 2015)
GOVT TO SCRAP ALLOCATION OF CBM BLOCK GIVEN TO GEECL
NEW DELHI: The government will cancel award of a coal-bed methane (CBM) block in Tamil Nadu to Great Eastern Energy Corp Ltd (GEECL) for not fulfilling contractual requirements, Oil Minister Dharmendra Pradhan said Wednesday.
GEECL was awarded block MG-CBM-2008/IV for extraction of gas lying below coal seams, called CBM, under the fourth round of CBM block auction in 2010. The production sharing contract (PSC) for the block was signed on July 29, 2010.
“The contractor (GEECL) has not submitted the requisite documents viz bank guarantee, financial performance guarantee etc as required under the contract till date despite notice issued by the Ministry of Petroleum and Natural Gas,” he said in a written reply to a question in Rajya Sabha here.
GEECL has not initiated any exploration activity on the block and the first phase of exploration expired on November 3, 2013. “Action for cancellation of the contract has been initiated as per the provisions of CBM contract,” Pradhan said.
GEECL was awarded CBM block MG-CBM-2008/IV, measuring 667 square kilometers in Tamil Nadu for exploration and exploitation of CBM gas in Mannargudi area, he said. The Government has so far awarded 33 CBM blocks in four rounds of auction. Of these, 13 blocks have either been relinquished or offered to be relinquished due to poor CBM prospectivity.
GEECL has begun production from Raniganj (South) block in West Bengal and is currently producing 0.38 million standard cubic metres per day while state-owned Oil and Natural Gas Corp (ONGC) has entered development phase in four blocks including Raniganj (North). Reliance Industries (RIL) has entered development phase in its Sohagpur East and West CBM blocks in Madhya Pradesh while Essar Oil has done the same in case of RG(E)-CBM-2001/1 block in West Bengal.
To a separate question, Pradhan said exploration activities has not been able to start in 6 oil and gas exploration blocks “due to delay in grant of Petroleum Exploration License (PEL) by the respective state governments in the last two years.” Of these blocks, two are in Madhya Pradesh, one in Rajasthan and the rest three in Gujarat.
The Madhya Pradesh blocks were awarded to Deep Energy while Focus Energy had bagged rights for the Rajasthan block. The Gujarat blocks pertain to Deep Energy, Pratibha Oil and Natural Gas Pvt Ltd and Sankalp Oil and Gas Resources, he said.
(Source: The Financial Express, March 12, 2015)
GOVERNMENT COMMITTEE SUGGESTS KEY STEPS FOR OIL & GAS SECTOR
NEW DELHI: A government panel has recommended key measures such as amending public sector procurement rules, setting up manufacturing zones and targeting 50% local input in the upstream oil and gas sector in three years, in a bid to boost local manufacturing.
A steering committee with members from the ministries of oil and commerce department of industrial policy and promotion, state-run oil firms and industry bodies Ficci and CII has identified some “actionable areas” in short (one year) to medium (three year) term, oil minister Dharmendra Pradhan told Parliament on Wednesday.
ET had first reported on February 18 that the government planned to offer a sizeable chunk of business in the oil and gas sector to local firms through a slew of measures. The government is targeting an investment of Rs 6-7 lakh crore in oil and gas sector in the next five years to contribute to its ‘Make in India’ plan.
“Suitable amendments in the public procurement norms to mandate aggregation of requirement and local content as procurement criteria as a short-term initiative,” is one of the key recommendations of the panel. This could mean some sort of quota for local produce or price preference.
The government had stopped giving a 10% price preference to local companies as public sector firms complained the policy had led to high costs for them. Industry bodies have been demanding review of the withdrawal of the price preference policy for oil and gas equipment makers.
“A target of indigenisation of 50% in the upstream sector in the medium term” is another important suggestion, which could require immense effort on the part of both government and the private sector.
(Source: The Economic Times, March 12, 2015)
GOLD-PLATING IN THE OIL AND GAS SECTOR
It is hard to believe that a single contractual dispute can lead a country to change a fiscal regime that has been in existence for 35 years. And yet, that is exactly what has happened to the production-sharing contract (PSC) regime that was introduced in the oil and gas exploration sector as far back as 1980. I am a great believer in change and innovation, but a regressive step that is against the economic interests of the country can never be justified. After the controversy over Reliance Industries Ltd’s D6 gas field in the Krishna-Godavari basin, the government has meekly bowed down before the bar of public opinion (however misinformed) and the criticism of the Comptroller and Auditor General (CAG) of India. The blame for massive regulatory failure is sought to be laid at the door of the unfortunate PSC.
It needs to be first understood that PSCs (and the fiscal terms flowing from them) are in vogue in over 50% of petroleum-producing countries worldwide. The Indian PSC is, in fact, not a production-sharing but a profit-sharing fiscal regime. Profit-sharing arrangements exist in petroleum extraction in over 90% of countries. In the Indian PSC, after the producing company has recovered its costs, profits are shared between the company and the government, based on a sliding scale profit-sharing formula related to the rate of return of the producing company. This formula is the chief item in a bidding round and the successful bidder is the one that offers the highest take to the government.
In any profit-based fiscal arrangement, costs will determine the size of the cake left for sharing between the company and the government. This appears to have weighed on the mind of the CAG when it criticized the cost recovery component in the Indian PSC. In particular, the CAG referred to the gold-plating of costs, which refers to attempts by companies to inflate costs through overspending on projects. Companies go in for gold-plating when the fiscal regime gives them an incentive to spend more on capital investment to claim a greater share of project revenues. Gold-plating, therefore, needs to be distinguished from over-invoicing, transfer pricing and other forms of cheating on actual costs to claim larger deductions for avoiding tax. These latter issues are often confronted by tax officials when assessing corporate tax.
The solution to the gold-plating problem does not, however, lie in damning the company or in losing faith in a profit-share based PSC. Companies have a greater incentive to gold-plate if they are procuring goods and services from affiliates or subsidiary companies. This can be checked through a number of mechanisms. The Indian PSC requires government approval of annual work programmes and budgets. Joint venture partners of the operating company also need to approve capital and operating expenditures; they are unlikely to sanction excessive expenses, since the burden falls on them as well. Additionally, audit provisions enable government to assess the reasonableness of expenditures.
The problem in the Indian context arose from the decline in estimated gas production from the D6 field. The government and the Director General of Hydrocarbons (DGH) were of the view that the production levels did not justify the costs sought to be recovered by the company. There was also the feeling that the company was producing less gas because its demand for a higher gas price had not been met. Such issues are, according to the PSC provisions, to be resolved through conciliation and arbitration procedures. The apprehensions in government about the dispute resolution mechanisms provided in the PSC, the public (and political) hysteria built up over the issue and the apparent unwillingness of the government to seek expert international oil industry opinion on technical and geological issues have all contributed to the continuing confusion on an issue that should have been addressed in a scientific and rational manner.
The seeming inability of DGH to effectively address this issue, coupled with indecision in the petroleum ministry and a public washing of dirty linen, has led to a scenario where the government apparently wants to dilute the role of DGH in PSC management through virtually removing cost management aspects from the fiscal structure. This is an extremely short-sighted approach for two reasons: (a) a fiscally regressive revenue-sharing model is sought to be promoted in place of a profit-share model that private investors have become comfortable with over two decades (b) even in a revenue-sharing model, the issue of costs will have to be dealt with, with the headache only being transferred from DGH to the tax authorities.
The Indian government, unfortunately, continues to view private companies in the oil and gas sector as adversaries rather than as partners in the growth of domestic hydrocarbon reserves and production. The growing disenchantment among private sector companies with government policy and practice in the oil and gas sector, coupled with the sharp southward turn in oil prices to half their previous levels will have its adverse impact on private investment in this sector. The last straw that breaks the camel’s back will be the introduction of a commercially unappetizing fiscal structure. In the interest of long-term energy security, it is time the government (and its petroleum ministry) see the writing on the wall.
(Source: Mint, March 12, 2015)
PETROLEUM MINISTRY ASKS BHARAT PETROLEUM CORPORATION TO CANCEL DEALERSHIP FOR POSH DELHI PUMP
The petroleum ministry has asked state-run Bharat Petroleum Corporation to cancel allotment of a petrol pump to a dealer in a posh Delhi locality after it found irregularities in the allotment process, people aware of the development told ET. The pump in South Delhi’s Moti Bagh area was converted from company-owned company-operated (Co-Co) to dealer-owned dealer-operated (DoDo) about four years ago and handed over to private dealer Masaurhi Service Station, which ran another pump in Azadpur
The pump, which had an all-women staff, was known for high footfalls. BPCL’s decision to change ownership of the pump was even opposed by the local petrol pump dealers’ association. “The ministry has directed us to cancel the dealership in this particular case, as they found some issues with the allocation,” a senior BPCLBSE -1.85 % executive told ET on condition of anonymity.” We notified the dealer and he has challenged it in the court and the case is sub-judice.”
Ajay Bansal, president, All India Petroleum Dealers’ Association, said there is a need to compensate some of the older dealers, who have lost sales due to change in traffic pattern, new pumps in their areas, or other reasons impacting footfalls. He said new lucrative pumps can be offered to old dealers following a transparent process. “This could also improve the efficiency of some low-performing pumps in good areas.
(Source: Economic Times March 12, 2015)
GOVERNMENT ASKS GAIL TO REMIT INCREMENTAL KG-D6 GAS PRICE EVERY MONTH
Government has asked GAILBSE 1.58 % to remit to the exchequer on a monthly basis the incremental gas price from RIL’s KG-D6 field towards recovery of profit share it claims is due from the private firm. The government directed GAIL on March 2 to deposit the amount which is presently credited to the gas pool account… to the Government’s exchequer towards the additional profit petroleum of $ 195.34 million due and payable by the contractor up to 2013-14,” Oil Minister Dharmendra Pradhan said in a written reply to a question in the Rajya Sabha.
The government had in November last year hiked domestic natural gas prices by 33 per cent to $ 5.61 per million British thermal unit. In case of RIL’s main gas field in KG-D6 block, it, however, ordered buyers to pay the firm old rate of $ 4.2 and deposit the balance $ 1.41 in the gas pool account maintained by GAIL. The revenue collected in the gas pool account was to recover $ 195.34 million in profit petroleum due from RILBSE -0.38 % after $ 2.376 billion in cost was disallowed for KG-D6 output lagging projections.
“The government directed GAIL on March 2 to deposit the amount which is presently credited to the gas pool account… to the Government’s exchequer towards the additional profit petroleum of $ 195.34 million due and payable by the contractor up to 2013-14,” Oil Minister Dharmendra Pradhan said.
(Source: PTI March 12, 2015)
SUPREME COURT DEFERS RE-HEARING OF PILs IN RIL GAS PRICING CASE
The Supreme Court on Wednesday deferred until March 30 re-hearing of a bunch of petitions challenging the government’s gas pricing policy. The petitions also allege that the gas pricing formula devised by the government sought to benefit Reliance Industries Ltd (RIL) by favouring doubling of the prices of gas extracted from its KG-DG basin fields.
A bench of justices T S Thakur, Jasti Chelameswar and Kurian Joseph postponed the hearing from March 20 on a request by RIL’s counsel and senior advocate Harish N Salve. The bench had earlier refused to reject the public interest litigations ( PILs) filed by non-government organisation Common Cause, CPI leader Gurudas Dasgupta and Manohar Lal Sharma.
The Narendra Modi-led government had soon after taking over in May 2014 urged the apex court to dismiss these petitions on the ground that they had lost relevance as the government had notified a new gas pricing formula, junking the older Rangarajan formula that was under challenge. A Supreme Court bench had earlier heard the issue for more than three weeks, but will have to re-hear it all over again as one of the judges on the bench, B S Chauhan, has retired.
(Source: Economic Times March 12, 2015)
ONGC VIDESH IN TALKS TO ACQUIRE STAKE IN 2 SIBERIAN OILFIELDS
ONGC Videsh Ltd, the overseas arm of state-owned Oil and Natural Gas Corp (ONGC), is in talks to acquire stake in two Siberian oilfields, Oil Minister Dharmendra Pradhan said. OVL “is in discussions with a Russian oil company for acquiring participating interest in two Siberian oil fields,” he said in a written reply to a question in Rajya Sabha here. While the Minister did not name the fields, sources said OVL was in talks for a stake in Vankor and Yurubcheno-Tokhomskoye fields. “Discussions are at a preliminary stage,” Pradhan said. Sources said an agreement for the stake was to be signed during the visit of Russian President Vladmir Putin in December last year but differences between the two sides prevented formal signing of the pact.
Russia’s biggest oil company Rosneft had offered to sell 10 per cent stake in the strategic Vankor oilfield in Siberia to OVL. In September, 2014, Rosneft had sold 10 per cent stake in the Vankor cluster fields in northern Siberia to China’s CNPC for about US$1 billion. Vankor is the largest field to have been discovered and brought into production in Russia in the last 25 years. As of January 1, 2014, the initial recoverable reserves in the Vankor field are estimated at 500 million tonnes of oil and condensate, and 182 billion cubic meters of gas.
Vankor will reach peak output of 500,000 barrels per day (bpd) or 25 million tonnes a year in 2019. The field, which has driven recent Russian output growth, pumped 435,000 bpd in September, 2014.
Russia is the world’s top oil producer with current output of 10.5 million bpd but its key producing region – West Siberia – is maturing. Besides Vankor, Rosneft has also made a proposal to OVL for joint development of Yurubcheno-Tokhomskoye oilfield in eastern Siberia. The field is estimated to hold 991 million barrels of oil equivalent reserves and is planned to start production in 2017. Yurubcheno-Tokhomskoye will reach a production plateau of up to 5 million tons a year (100,000 bpd) in 2019.
OVL is interested in expanding its presence in Russia as it looks to source one million barrels per day of oil and oil-equivalent gas from Russia. It already has 20 per cent stake in Sakhalin-1 oil and gas field in Far East Russia and in 2009 acquired Imperial Energy, which has fields in Siberia, for US$2.1 billion.
(Source: PTI March 12, 2015)
RIL GAS PRICING CASE: SUPREME COURT DEFERS RE-HEARING OF PILs
NEW DELHI: The Supreme Court on Wednesday deferred until March 30 re-hearing of a bunch of petitions challenging the government’s gas pricing policy. The petitions also allege that the gas pricing formula devised by the government sought to benefit Reliance Industries Ltd (RIL) by favouring doubling of the prices of gas extracted from its KG-DG basin fields.
A bench of justices T S Thakur, Jasti Chelameswar and Kurian Joseph postponed the hearing from March 20 on a request by RIL’s counsel and senior advocate Harish N Salve.
The bench had earlier refused to reject the public interest litigations ( PILs) filed by non-government organisation Common Cause, CPI leader Gurudas Dasgupta and Manohar Lal Sharma..
The Narendra Modi-led government had soon after taking over in May 2014 urged the apex court to dismiss these petitions on the ground that they had lost relevance as the government had notified a new gas pricing formula, junking the older Rangarajan formula that was under challenge.
A Supreme Court bench had earlier heard the issue for more than three weeks, but will have to re-hear it all over again as one of the judges on the bench, B S Chauhan, has retired.
(Source: The Economic Times, March 12, 2015)
HISTORY SUGGESTS OPEC’S DAYS COULD BE NUMBERED
As OPEC ‘s refusal to curb oil production contributes to a nine-month plunge in prices, a new paper suggests the group’s days may be numbered.
OPEC, the Organization of the Petroleum Exporting Countries, has vowed to defend its market share against higher-cost producers such as U.S. shale drillers and companies developing Canada’s oil sands. Its strategy hinges on the odds that an extended period of low prices will lead other producers to scale back output, enabling the group to reassert its influence. OPEC supplies about 40 percent of the world’s crude.
Yet a brief history detailed by the World Bank Group shows how difficult it can be to maintain a commodities cartel in the face of market forces and technological advances.
Following World War II a number of agreements were struck to govern trade in commodities including wheat, sugar, tin, coffee and olive oil, according to the Washington-based development bank. Producing and consuming nations often negotiated the deals to stabilize price levels. All of the agreements eventually collapsed–with the notable exception of OPEC, which was founded in 1960 and is led by Saudi Arabia.
Take tin. Once upon a time, people wrapped their leftovers in it. Most beverage cans were made of it. Now that job falls primarily to aluminium, a lighter metal that’s less susceptible to corrosion. According to the World Bank, the rise of aluminium as a substitute was a driving factor behind the collapse in 1985 of the tin cartel, which was formed in 1954.
Or look at natural rubber. Its three key producers — Indonesia, Malaysia and Thailand — formed a producer group in 1979. Rubber prices, which are denominated in U.S. dollars, declined in the late 1990s due to weak demand amid the fallout from the Asian financial crisis. The World Bank notes this should have prompted production cuts, however the sharp devaluation in the members’ currencies caused local prices of rubber to increase, leading producers to expand output. The cartel collapsed in 1999.
And OPEC? The oil producers’ group was on full display during the twin oil shocks of the 1970s, when oil prices spiked. But the entry of new suppliers and squabbling between OPEC members eroded its influence over the next two decades, according to the World Bank. “There’s very little evidence that OPEC has been effective as a cartel for some time,” said Michael Levi, senior fellow for energy and the environment at the Council on Foreign Relations. “Saudi Arabia, once in a while, has stepped in to stabilize the market.”
The World Bank reckons unconventional and higher-cost players such as U.S. shale drillers and even biofuel producers may be the new swing producers in the oil market.
Still, OPEC’s fate isn’t completely sealed. It may benefit from the fact that, unlike other commodity producing groups, OPEC isn’t governed by a legal clause on how it can intervene in the market, giving it more flexibility to respond, according to the bank.
“The last time they were in a parallel situation, with oil prices plummeting in the 1980s, you had all these proclamations that OPEC was dead,” said Benn Steil, also at the Council on Foreign Relations, where he’s director of international economics. “Yet they weren’t, because when the fundamental forces of the business settled at a higher level of oil prices, they started to regain some relevance.” — Bloomberg
(Source: The Financial Express, March 12, 2015)