REPORTABLE

IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.  5433   OF 2008 (Arising out of S.L.P. (C) No.16886 of 2008)

Commissioner of Income Tax, Dehradun &  Anr. … Appellants

v.

Enron Oil & Gas India Ltd.  .... Respondent  

J U D G M E N T

S.H. KAPADIA, J.

Leave granted.

2. Respondent-Enron  Oil  & Gas  India  Ltd.  (“EOGIL”)  is  a  company

incorporated in Cayman Islands engaged in the business of oil exploration.

In 1993, Government of India through Petroleum Ministry invited bids for

development  of  Concessional  Blocks.  EOGIL  offered  its  bid  for  the

development of concessional blocks. A consortium of EOGIL with RIL was

given the contract. Later on, ONGC joined. EOGIL with RIL and ONGC

executed  Production  Sharing  Contract  (PSC)  with  Government  of  India.

EOGIL was  entitled  to  a  participating  interest  of  30% in  the  rights  and

obligations  arising under  the PSC. RIL was also entitled  to  participating

interest  of  30%.  ONGC was  entitled  to  a  participating  interest  of  40%.

EOGIL was designated as the Operator under the said PSC.

3. Vide Notification No. 9997 dated 8.3.1996 under Section 293A of the

Income Tax  Act,  1961  (“1961  Act”),  each  co-venturer  was  liable  to  be

assessed for his own share of income. They were not to be treated as an

AOP.

4. EOGIL  filed  his  return  of  income  for  Assessment  Year  1999-00

declaring its taxable income of Rs. 71,19,50,013 under Section 115JA.

5. During the year, EOGIL debited its P&L account by exchange loss of

Rs. 38,63,38,980. The A.O. disallowed this loss on the ground that it was a

mere book entry and actually no loss stood incurred by the assessee.

6. The decision of the A.O. was challenged in appeal by EOGIL before

CIT(A), who after analyzing the PSC held that each co-venturer in this case

had made contribution at a certain rate whereas the expenditure incurred out

of  the  said  contribution  stood  converted  on  the  basis  of  the  previous

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month’s average daily means of the buying and selling rates of exchange

which  exercise  resulted  into  loss/profit  on  conversion.  Under  the

circumstances, according to CIT(A), it cannot be said that the assessee had

incurred  notional  loss.  In fact,  during  the course  of  proceedings,  CIT(A)

found  that  during  Assessment  Years  1995-96  and  1996-97  assessee  had

earned profits which stood taxed by the Department. He further found that

one co-venturer (ONGC) had gained Rs. 293.73 crores during Assessment

year  1997-98  because  the  Indian  rupee  had  appreciated  as  compared  to

foreign currency and the Department had taxed the same but when during

the  assessment  year  in  question  there  is  a  loss  on  account  of  such

conversion,  the  Department  has  refused  to  allow the  deduction  for  such

conversion losses. According to CIT(A), the Department cannot blow hot

and cold. Consequently, it was held that just as foreign exchange gain was

taxable, loss was allowable under Section 42(1) of Income Tax Act in terms

of  the  PSC.  Therefore,  CIT(A)  allowed  as  deduction  the  loss  of  Rs.

38,63,38,980.

7. Aggrieved by the order passed by CIT(A) the Department carried the

matter in appeal to ITAT objecting to the deletion made by CIT(A) on the

ground that the loss was only a book entry. It may be noted that before the

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Tribunal the matter pertained to Assessment Years 1999-00, 1998-99, 2000-

01  and  1996-97.  However,  for  the  sake  of  convenience,  the  Tribunal

focused its  attention  on  the  facts  and figures  given for  Assessment  Year

1999-00. Before the Tribunal, the Department contended that the assessee

borrows in USD and repays in the same currency for the preparation of the

Balance  Sheet.  The  loans,  according  to  the  Department,  were  stated  at

prevalent exchange rates and the loss so arrived at was charged to the P&L

account. Therefore, according to the Department, the said loss was a book

entry and it was not an actual loss in the foreign exchange caused to the

assessee. This argument of the Department was rejected by the Tribunal. It

was held that the assessee was a foreign company. It carried out business

activity in India. It had to maintain its accounts in rupees for the purpose of

income tax, that the PSC had to be read with Section 42(1) of the Income

Tax Act, which entitled the assessee to claim conversion loss as deduction,

particularly  when  the  said  PSC  provided  for  realized  and  unrealised

gains/losses from the exchange of currency. According to the Tribunal, the

assessee was maintaining its accounts in rupees and such accounts had to

reflect the loan liability under consideration as the loan had been taken for

the Indian activity. Therefore, according to the Tribunal, the liability arising

as a consequence of depreciation of the rupee had to be considered both for

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accounting and tax purposes. Accordingly, the Tribunal refused to interfere

with the findings returned by CIT(A).

8. The  above  concurrent  finding  stood  confirmed  by  the  impugned

judgment delivered by the Uttrakhand High Court in ITA No. 74/07 along

with ITA No. 76/07 and ITA No. 77/07 decided on 17.1.2008. Hence, this

civil appeal.

9. The only question which needs to be considered in this civil appeal is

whether the assessee was entitled to claim deduction for foreign exchange

losses on account of foreign currency translation? In other words, whether

loss  arising  on  account  of  foreign  currency  translation  is  allowable  as

deduction or not and conversely whether  the gains on account of foreign

currency translation is to be treated as a receipt liable to tax.

10. At the outset, we quote hereinbelow Section 42(1) of the Income Tax

Act, 1961, which reads as follows:

“Special  provision  for  deductions  in  the  case  of business for prospecting, etc., for mineral oil.

42. (1)  For the purpose of computing the profits or gains of  any  business  consisting  of  the  prospecting  for  or extraction  or  production  of  mineral  oils  in  relation  to which  the  Central  Government  has  entered  into  an agreement  with  any  person  for  the  association  or

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participation  of  the Central  Government  or  any person authorised by it in such business (which agreement has been  laid  on  the  Table  of  each  House  of  Parliament), there  shall  be  made  in  lieu  of,  or  in  addition  to,  the allowances  admissible  under  this  Act,  such allowances as are specified in the agreement in relation –  

(a)   to  expenditure  by  way  of  infructuous  or abortive exploration expenses in respect of any area surrendered prior to the beginning of commercial production by the assessee;  

(b)   after the beginning of commercial production, to  expenditure  incurred  by  the  assessee, whether  before  or  after  such  commercial production,  in  respect  of  drilling  or exploration  activities  or  services  or  in respect  of  physical  assets  used  in  that connection,  except  assets  on  which allowance  for  depreciation  is  admissible under section 32 :  

Provided  that in relation to any agreement entered into after 31st day of March, 1981, this  clause  shall  have  effect  subject  to  the modification  that  the  words  and  figures "except  assets  on  which  allowance  for depreciation is admissible under section 32" had been omitted; and   

(c) to the depletion of mineral oil in the mining area  in  respect  of  the  assessment  year relevant  to  the  previous  year  in  which commercial  production  is  begun  and  for such  succeeding  year  or  years  as  may  be specified in the agreement;

and such allowances shall be computed and made in the manner specified in the agreement, the other provisions  of  this  Act  being  deemed  for  this

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purpose  to  have  been  modified  to  the  extent necessary  to  give  effect  to  the  terms  of  the agreement.  

(2) …

Explanation.- For  the  purposes  of  this  section, "mineral oil" includes petroleum and natural gas.”  

11. Section 42 is a special provision applicable to oil contracts. It has to

be construed in the background of the PSC. There is a difference between

Production Sharing Contracts and Revenue Sharing Contracts. PSCs were

put in place in order to enable Sovereign Governments to maximize their

gains from oil exploration by private corporations. PSC is a regime.

12. Prior to the PSC regime, Governments recovered royalty and imposed

tax  on  revenues  from oil  exploration.  However,  in  countries  like  India,

where  there  is  a  great  demand  for  oil,  PSC  was  devised  to  give  the

Governments a stake in oil exploration and  development- virtually making

it  a  partner  in  the  process.  Under  the  PSC,  Government  or  its  nominee

becomes a party. The private parties either single company or a consortium

are the other parties to the contract. The consortium consists of an Indian

partner and a foreign company. The private parties are generally called as

Contractors.  These  contractors  have  a  defined  share  which  is  called  as

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“Participating Interest”. One of the Contractors would be designated as an

“Operator”, who would have a control over day to day operations. Upfront

investments  are made generally by the Contractors.  For this  purpose,  the

Operator  “in this  case being M/s EOGIL” would make “cash calls”.  The

operating expenses are also similarly funded. In these Contracts, generally

there are three types of costs, namely, exploration costs, which is a capital

expenditure,  development  cost  which  is  also  capital  expenditure  and

production cost which is operational expenditure. Under the PSC, costs are

recovered from the oil produced until such time as they are fully absorbed.

Oil so recovered is called “Cost Oil”. Oil in excess of “Cost Oil” is called

“Profit Oil”. In Profit Oil there is the sharing percentage. The share of each

constituent  is  equal  to  their  participating  interest.  Similarly,  between the

Contractors and the Government, the oil produce is shared on the basis of

pre-determined shares.  In the  initial  years,  generally the Contractors  who

have  made  upfront  investment  in  the  Project  have  a  lion’s  share  of

production  as  they have  to  recover  their  investments  made upfront.  The

contractors in the initial years recover their investments as cost oil, and in

the later years most of the oil produced is profit oil and, therefore, the more

profit oil is recovered the higher is the Return on Investment (ROI) earned

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by the Contractor. With the increased ROI recovered by the Contractor, the

percentage share of the Government goes on increasing.

13. The above analysis of the PSC indicates  that  both the Government

and the Contractor are entitled to their “take” in oil and not in money. That

is  why the contract  is called as  Production Sharing Contract  and for that

purpose it becomes necessary to translate costs into oil barrels. This is done

by dividing the monetary value of costs by the agreed price of oil. The price

of oil generally is bench-marked – x% above Brent Crude quotation, or it

may depend on oil market price.

14. In  India,  oil  had  to  be  sold  during  the  years  in  question  by  the

Contractors to IOC so that it was convenient to have a bench-marked price.

15. If  the  price  of  oil  increased,  the  extent  of  profit  oil  would  also

increase  and  thereby  the  share  of  the  Government  would  automatically

increase.  It  is  for  this  reason  that  PSCs  were  considered  to  be  a  better

arrangement  for  ensuring   the  Sovereign  Governments  (owners  of  the

natural  resources)  the  maximum possible  “take”.  At the same time, such

contracts  ensure  that  the  projects  remained  attractive  enough  for  foreign

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investors.  However,  due  to  this  kind  of  structure  of  the  PSC,  inherently

there has to be frequent conversion from one currency to the other. Cash

calls  were  made  in  USD;  some  of  the  cash  calls  were  required  to  be

converted to INR for local expenses; some of the expenses stood incurred in

USD whereas some to be incurred in INR; the sale price of oil was in USD

whereas the accounts were drawn up in USD. When some of the expenses

were incurred in USD and some incurred in INR, conversion had to be made

at the prevalent rates of exchange to bring them all to the contract currency,

i.e., USD. Similarly, as stated above, the sale price of oil was in USD. At the

time of sale, the INR – USD rate would change from that on the date of the

cash  calls.  Similarly,  as  stated  above,  the  accounts  were  required  to  be

drawn up in USD. For that purpose also one had to reconvert the costs from

barrels to monetary terms. For the said reasons, clauses 1.6.1 and 1.6.2 of

appendix ‘C’ to the PSC envisaged booking of all currency gains and losses

irrespective  of  whether  such  gains/losses  stood  realized  or  remained

unrealized.  In  case  of  gains,  a  part  of  the  credit  would  go  to  the

Government,  and taxes would be payable on the income to the extent of

such  gains  credited.  Therefore,  in  our  view,  currency  gains  and  losses

constituted an inextricable part of the accounting mechanism for expenses

incurred on the development and production of oil.  

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16. Section  42  of  the  1961  Act  was  enacted  to  ensure  that  where  the

structure  of  the  PSC  was  at  variance  with  the  accounting  principles

generally used for ascertaining taxable income, the provisions of the PSC

would prevail.  Section 42 provides for deduction on expenditure incurred

on  prospecting  for  or  extraction  or  production  of  mineral  oil  whereas

Section 44 BB contains special provision for computing profits and gains in

connection with the business of exploration or extraction or production of

mineral  oils.  The  Head Note  itself  indicates  that  Section  42 is  a  special

provision for deduction on expenditure incurred on prospecting, extraction

or production of mineral oils.  

17. PSC is  a  contract  in  which  the  Central  Government  is  not  only a

party, it is a partner in the process. Such contracts are required to be placed

before each House of Parliament under Section 42.

18. Analysing Section 42(1),  it  becomes clear that the said section is a

special  provision  for  deductions  in  the  case  of  business  of  prospecting,

extraction or production of mineral oils. As stated above, Section 42(1) inter

alia provides for deduction of certain expenses.  

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19. Broadly speaking, Section 42(1) provides for admissibility in respect

of three types of allowances provided they are specified in the PSC. They

relate  to  expenditure  incurred  on  account  of  abortive  exploration,

expenditure  incurred,  before  or  after  the  commencement  of  commercial

production,  in  respect  of  drilling  or  exploration  activities  and  expenses

incurred in relation to depletion of mineral oil  in the mining area. If one

reads  Section  42(1)  carefully  it  becomes  clear  that  the  above  three

allowances  are  admissible  only  if  they are  so  specified  in  the  PSC.  For

example, in the PSC in question expenses incurred on account of depletion

of  mineral  oil  is  not  provided  for.  Therefore,  to  that  extent,  respondent

would  not  be  entitled  to  claim deduction  under  Section  42(1)(c).  Under

section 42(1) it is made clear that for the purpose of computing the profits

or gains of any business consisting of prospecting, extraction or production

of mineral oil, an assessee would be entitled to claim deduction in respect of

abovementioned three items of expenditure in lieu of  or in addition to the

allowances admissible under the 1961 Act. Further, such allowances shall

be computed and made in the manner specified in the agreement. In short,

an  assessee  is  entitled  to  allowances  which  are  mentioned  in  the  PSC.

According to the Department, translation losses claimed by EOGIL are not

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specified  in  the  PSC,  hence  they  cannot  be  claimed  as  deduction  under

Section 42(1).  

20. The question which this Court needs to answer is – are the translation

losses within the scope of Section 42?

21. In order  to  answer  the above question,  we are required to  analyse

certain provisions of the PSC in question. Article 1 deals with definitions.

Under Article 1.21 “Contract Costs” means exploration costs, development

costs, production costs and all other costs related to petroleum operations.

Similarly,  “Cost  Petroleum”  is  defined  to  mean  the  portion  of  the  total

volume of petroleum produced which the contractor is entitled to take for

the recovery of Contract Costs as specified in Article 13. Under Article 13

the Contractor is entitled to recover Contract Costs out of the total volume

of  petroleum produced.  That  costs  include  development  and  exploration

costs.  Similarly,  Article  1.69  defines  “Profit  Petroleum”  to  mean  all

petroleum produced and saved from the Contract Area in a particular period

as  reduced  by  Cost  Petroleum  and  calculated  in  terms  of  Article  14.

Continuing  the  analysis  of  PSC,  Article  7  inter  alia  provides  that  the

contractor shall provide for all funds necessary for the conduct of petroleum

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operations. Article 13 deals with recovery of costs, as stated above. Article

15 deals with taxes, royalties, rentals etc. It indicates that Government of

India is entitled to get taxes apart from profit petroleum. Article 15.2.1 inter

alia provides that in order to compute profits of the business consisting of

prospecting,  extraction  or  petroleum  production  there  shall  be  made

allowances in lieu of the allowances admissible under the 1961 Act, such

allowances as are specified in the PSC pursuant to Section 42 in relation to

three  items of  expenditure  specified  under  Section  42(1)(a),  (b)  and  (c).

Under Article 15.2.1, two allowances are provided for. They are for abortive

exploration  expenses  and  expenses  incurred  after  the  commencement  of

commercial  production  in  respect  of  drilling  or  exploration  activities.  In

other  words, two out  of three allowances mentioned in Section 42(1) are

provided for in Article 15.2.1.  

22. The above analysis shows that Section 42 provides for deduction for

expenses provided such expenses/allowances are provided for in the PSC.

The PSC in question provides for both capital and revenue expenditures. It

also provides for a method in which the said expenses had to be accounted

for. The said PSC is an independent accounting regime which includes tax

treatment of costs, expenses, incomes, profits etc. It  prescribes a separate

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rule  of  accounting.  In  normal  accounting,  in  the  case  of  fixed  assets,

generally when the currency fluctuation results in an exchange loss, addition

is made to the value of the asset for depreciation. However, under the PSC,

instead  of  increasing  the  value  of  expenditure  incurred  on  account  of

currency  variation  in  the  expenses  itself,  EOGIL  was  required  to  book

losses separately. Therefore, PSC represented an independent regime. The

shares of the Government and the contractors were also determined on that

basis. Section 42 is inoperative by itself. It becomes operative only when it

is  read  with  the  PSC.  Expenses  deductible  under  Section  42  had  to  be

determined as per the PSC. This implied that expenses had to be accounted

for only as contemplated by the PSC. If so read, it is clear that the primary

object of the PSC is to ensure a fair “take” to the Government. The said

“take”  comprised  of  profit  oil,  royalty,  cesses  and  taxes.  The  said  PSC

prescribed a special manner of accounting which was at variance with the

normal  accounting  standards.  The  said  “PSC accounting”  obliterated  the

difference between capital  and revenue expenditure.  It  made all  kinds of

expenditure chargeable to P&L account without reference to their capital or

revenue nature. But for the PSC Accounting there would have been disputes

as to whether the expenses were of revenue or capital nature. In view of the

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special accounting procedure prescribed by the PSC, Accounting Standard

11 had to be ruled out.  

23. The question before us still  remains as to whether the PSC talks of

translation,  and  if  so,  whether  translation  losses  could  be  claimed  by

EOGIL. In this connection, we need to consider Article 20.2 which inter alia

states that the rates of exchange for the purchase and sale of currency by the

Contractor shall be the prevailing rates as determined by the State Bank of

India and for accounting purposes under the PSC such rates shall apply as

provided for in clause 1.6 of Appendix ‘C’ to the PSC.  Appendix is a part

of  PSC.  The  purpose  of  Appendix  ‘C’  inter  alia  is  to  prescribe  the

Accounting  Procedure.  Clause  1.1  of  appendix  ‘C’  provides  for

classification of costs and expenditures. That classification is warranted as

PSC contemplates costs recovery by the contractor(s), who has made initial

contribution/investment of funds in foreign currency. The said classification

of costs and expenditures is also indicated in appendix ‘C’ for profit sharing

purposes  and  for  participation  purposes.  Appendix  ‘C’  prescribes  the

manner  in  which  a  contractor  is  required  to  maintain  his  accounts.  It

stipulates  that  each  of  the  co-venturer  has  to  follow the  computation  of

income tax  under  the  1961  Act.  Clause  1.6.1  of  appendix  ‘C’  refers  to

currency exchange rates. It states that for translation purposes between USD

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and INR, the previous month’s average of the daily means of buying and

selling rates of exchange as quoted by SBI shall be used for the month in

which  revenues,  costs,  expenditures,  receipts  or  incomes  are  recorded.

Therefore,  in  our  view,  clause  1.6.1  of  Appendix  ‘C’  provides  for

translation.

24. On  reading  the  said  PSC,  one  finds  that  it  not  only  deals  with

ascertainment of profits of individual stakeholders including Government of

India but it also refers to  taxes on individual shares, calculation of costs

against  revenues  from  sale  of  petroleum,  allowances  admissible  for

deduction, taxability, valuation, recovery, conversion etc. In other words, it

is a complete Code by itself.

25. The question to be asked is why does the PSC warrant translation?

26. To understand this aspect, we need to reiterate some important facts

of  this  case.  In  1993,  Government  of  India,  through  Petroleum Ministry

invited bids for the development of concessional blocks. The respondent-

assessee offered its  bid  for the concession.  Accordingly, a consortium of

M/s EOGIL and RIL was awarded the contract for development of Panna,

Mukta  and Mid & South  Tapti  fields.  Respondent  was  designated  as  an

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Operator.  Subsequent  to the award of  the concession, EOGIL along with

RIL and ONGC executed PSC with Government of India. Under the said

PSC,  each  co-venturer  remitted  money,  known  as  cash  call  to  the  bank

account of the Operator in USA. The expenditure for the joint venture is

made  out  of  the  said  Account.  The  Trial  Balance  was  required  to  be

prepared at the end of the month in USD which was then required to be

translated on the basis of accounting procedure mentioned in Appendix ‘C’

to the PSC. Cash call in other words was not a loan. A wrong illustration

has been given in the impugned judgment. Cash call was a contribution. It

was  made by each  co-venturer  at  a  certain  rate  whereas  the  expenditure

against it had to be converted on the basis of the exchange rates as provided

for  in  the  PSC,  which,  as  stated  above,  stated  that  the  same had  to  be

converted on the basis of the previous month’s average of the daily means

of buying and selling rates of exchange (see clause 1.6.1 of Appendix ‘C’ to

PSC).

27. The  above  analysis  shows  that  the  capital  contribution  had  to  be

converted  under  the  PSC at  one  rate  whereas  the  expenditure  had  to  be

converted  at  a  different  rate.  This  exercise  resulted  into  loss/profit  on

conversion. Under the PSC, the respondent had to convert revenues, costs,

receipts and incomes. If  EOGIL had a choice to prepare its accounts only in

USD,  there  would  have  been  no  loss/profit  on  account  of  currency

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translation. It is because of the specific provision in the PSC for currency

translation that loss/profit accrued to EOGIL. Moreover, under clause 1.6.2

of  Appendix  ‘C’  to  PSC it  was  inter  alia  provided  that  any  realized  or

unrealized gains  or  losses  from the  exchange  of  currency  in  respect  of

Petroleum  Operations  shall  be  credited  or  charged  to  the  Accounts.

Therefore, it would be wrong to say, as stated by the A.O., that the currency

translation losses incurred by EOGIL, during the years in question, was only

a notional loss/ book entry.

28. To sum up, the simple question which arises for determination in this

civil  appeal  is  whether  translation  losses  are  illusory  or  real  losses?

According to the Department, they are illusory losses.

29. To answer this question we were required to understand the subject of

a Production Sharing Contract (PSC). The State hires the investor(s) as a

contractor(s)  for  the  conduct  of  work  connected  with  the  extraction  of

minerals. The subsoil belongs to the State. It has a monopoly over the use of

the subsoil and the removal from it all natural resources. Under the PSC the

State grants to the contractor (investor) exclusive rights to conduct activity

of exploration envisaged by the contract. A PSC is a civil-law contract. The

contractor  (investor)  carries  out  the  activities  envisaged  in  the  contract

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(prospecting,  search,  exploration, extraction etc.)  at  his own expense and

risk. The State does not bear any expenses or risks. If the investor invests in

the prospecting and exploration but does not discover any oil, the expended

funds is  not  refundable unless the contract  provides otherwise.  The State

hires the investor as a contractor to perform work for it, but at the expense

and risk of  the investor.  The said work is  carried  out  on a compensated

basis,  with the State paying the investor  not  in money, but  in terms of a

portion of the produced product (oil). This is called as Production Sharing.

30. There are two main systems around the world: royalty/tax systems or

production sharing systems. PSCs have become the fiscal system of choice

for most countries. Taxes are embedded in the Government share of profit

oil. PSC is a complex system. In it, the foreign company provides the capital

investment in exploration,  drilling and construction of infrastructure. The

first proportion of oil extracted is allocated to the company, which uses oil

sales  to  recoup  its  costs  and  capital  investment.  The  oil  used  for  this

purpose, namely, to recoup capital investment and cost is termed as “cost

oil”. Once costs have been recovered, the remaining “profit oil” is divided

between the State and the company in agreed proportions. The company is

taxed  on  its  profit  oil.  Sometimes,  the  State  participates  either  itself  or

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through its nominee as a commercial partner in the contract,  operating in

joint venture with foreign oil companies. In such cases, the State provides

its  percentage  share  of  capital  investment,  and  directly  receives  the

percentage share of cost oil and profit oil.

31. As stated above, in PSC, the foreign company provides the capital

investment and cost  and the  first  proportion of  oil  extracted  is  generally

allocated to the company which uses oil sales to recoup its costs and capital

investment. The oil used for that purpose is termed as “cost oil”.  Often a

company obtains profit not just  from the “profit  oil”,  but also from “cost

oil”.  Such  profits  cannot  be  ascertained  without  taking  into  account

translation  losses.  Moreover,  as  stated  above,  taxes  are  embedded in  the

profit  oil.  If  these  concepts  are kept  in  mind then  it  cannot  be  said that

“translation losses” under the PSC are illusory losses.

32. Before  concluding,  we  may  point  out  that  on  behalf  of  the

Department,  great  emphasis  was  placed  on  clause  3.2  of  Appendix  ‘C’

annexed to the PSC which inter alia referred to costs not recoverable and

not allowable under the Contract (PSC). In the said clause it was stated that

exchange losses on loans or other financing would not  be admissible for

deduction.  We find no merit  in this  argument advanced on behalf  of the

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Department. As stated above, “Cash Call” is not a loan. It is a contribution

made into the Account of the Operator by each co-venturer in USD. Clause

3.2 of Appendix ‘C’ refers to loans borrowed by an assessee or loans which

are  financed  on  which  the  assessee  has  to  pay  interest.  Interest  costs

incurred by the assessee on such loans is not allowable under clause 3.2 of

Appendix  ‘C’  to  the  PSC.  That  clause  is  not  applicable  for  cash

call/contribution. It may be noted that PSC is a special regime. It does not

come under Accounting Standard 11. Note 12 annexed to the Accounts for

the year ending 31.3.1999 refers to carrying costs of fixed assets financed

through  loans.  This  Note  refers  to  the  P&L account  of  EOGIL.  It  is  a

comment regarding the 2nd tier whereas clause 1.6.1 of Appendix ‘C’ to the

PSC refers  to  tier  1.  If  one  keeps  in  mind  the  concept  of  PSC being  a

separate regime and if one keeps in mind the concept of cash call being an

investment and not a loan then the entire controversy stands resolved. In

this case, we are concerned with foreign currency transaction under which

all monetary balances were required to be translated at the exchange rates

prevailing as on the last date of the accounting year (balance sheet date) and

accordingly  the  resultant  translation  gains/losses  were  required  to  be

recognized which is referred to in Note 1(d) to Schedule R, annexed to the

Accounts for the year ending 31.3.1999.  

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33. For the aforestated reasons, we find no merit in this civil appeal and

the same is dismissed with no order as to costs.

……………………………J.                                      (S.H. Kapadia)

……………………………J.                                                 (B. Sudershan Reddy)

New Delhi; September 2, 2008.

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