OVL slapped with service tax demand of Rs 6,100 crore

ONGC Videsh Ltd has stakes in 37 oil and gas projects in 17 countries around the world

The tax department has slapped a service tax demand of over Rs 6,100 crore on ONGC Videsh Ltd (OVL), the overseas arm of state-owned Oil and Natural Gas Corp (ONGC), highlighting the accounting discrepancies arising out of its overseas investments in oil and gas fields.

The service tax department has contended that as the overseas units were rendering a service to OVL, the company was liable to pay service tax in full.

OVL has stakes in 37 oil and gas projects in 17 countries. These stakes are held through subsidiaries, branches and joint ventures. For operations of these projects, those units and joint ventures would raise a demand for money on the parent, OVL, which would transmit the investments.

“What is a bigger matter of concern is why an amount paid to joint ventures or subsidiaries was charged to the profit & loss account instead of carrying it in the balance sheet,” said Rakesh Nangia, managing partner, Nangia & Co. "The service tax department has very clearly stated that the demand was drawn from foreign currency expenditure reported in the company's financial statements. Prima facie, the case is clear that foreign currency expenditure would have also resulted in import of service on which service tax has to be paid.”

The tax amount was calculated based on foreign currency expenditure reported in the company's financial statements from April 1, 2006 to March 31, 2010.

The department first issued a demand-cum-show-cause notice on October 11, 2011, requiring OVL to show-cause why service tax amounting to Rs 2,816.31 crore plus interest on such amount and penalty should not be demanded and recovered. Subsequently, five more demand-cum-show-cause notices were issued covering up to March 31, 2015, to show-cause why service tax amounting to Rs 3,286.36 crore, the interest on such amount and penalty should not be demanded and recovered from the company.

The Service Tax Department, sources said, had contended that the expenses represented business auxiliary services rendered by the company's foreign branches and operator of joint venture/consortium to the company.

According to OVL, investments made overseas through subsidiaries or branches or joint ventures do not constitute availing of any service.

It also contended that a high service tax rate of 14-15 per cent on such investments, which have an internal rate of return of 12-13 per cent, would lead to negative returns, making the project “infructuous”. Also, it argued that service tax by law can be levied on services rendered within the country. And even if one were to assume that its branches or subsidiaries were rendering any service, they were all overseas and not within India and so cannot be subject to any service tax.

OVL had reported a net loss of Rs 2,093.5 crore in 2015-16 on a turnover of Rs 12,772 crore. It had a net profit of Rs 1,904.2 crore on a turnover of Rs 19,148.9 crore in the previous financial year.