The Gujarat High Court held - the Explanation added to section 80-IB(9) by Finance Act (No.2) of 2009 defining the term ‘undertaking’ to treat all blocks licensed under single contract under New Exploration Licensing Policy (NELP) as a single undertaking with retrospective effect, held to be unconstitutional, violative of Article 14 of the Constitution and liable to be struck down - the expression ‘mineral oil’ includes and always included natural gas
NIKO RESOURCES LIMITED........Petitioner vs. UNION OF INDIA & 1.......Respondents
[Special Civil Application No. 13134 of 2009]
Facts of the case
- The Petitioner is a foreign company based in Canada and has set up a project office in India with the permission of Reserve Bank of India. The Petitioner is engaged in exploration, development and production of mineral oil and natural gas for which it has entered into ‘Production Sharing Contract’ (PSC) with the Government of India. The PSC, which defines the Contract Area as a Block, specifies the area over which the Petitioner has been given such rights i.e. in the instant case Hazira and Surat block respectively.
- The Petitioner has been claiming benefit of deduction of 100% of the profits and gains from the production of mineral oil and natural gas under section 80-IB(9). This section provides for deduction for a period of seven consecutive assessment years, provided the undertaking has commenced commercial production of mineral oil on or after 1st April 1997
- For the purpose of claiming the deduction, the Petitioner has been treating each well / cluster of wells, depending upon the anatomy of exploration, as a separate undertaking. This contention of the Petitioner was accepted by the Income-tax Appellate Tribunal (ITAT) vide order reported in (123 TTJ 310) (AHD)
- The revenue department, however, did not accept this proposition and filed appeals before the Hon’ble Gujarat High Court against the order of the ITAT and the same are pending
- The Finance (No.2) Act, 2009, introduced an explanation to section 80-IB(9) with retrospective effect from 01-04-2000. The said explanation defined the term ‘undertaking’ to mean that ‘all blocks licensed under a single contract......... shall be treated as a single undertaking.’
- Further, the Finance (No.2) Act, 2009 also introduced clause (iv) to section 80-IB(9) which states that commercial production of natural gas in blocks licensed under the NELP VIII beginning on or after 1st day of April, 2009 shall be eligible to claim the said deduction
- Aggrieved by the said amendment, the petitioner filed writ petitions challenging the constitutional validity of such amendment
Issues under consideration before the Hon’ble Gujarat High Court
- Whether the insertion of sub clause (iv) in section 80-IB(9) of the Act by Finance (No.2) Act, 2009 conferring the benefit of the deduction under 80-IB(9) to undertakings commencing commercial production of natural gas on or after 1.4.2009, results in denial of the benefit of deduction under 80-IB(9) to undertakings commencing commercial production of natural gas prior to 1.4.2009, on an interpretation thereof that the term ‘mineral oil’ would not include natural gas, since such benefit was available only by the newly added sub clause (iv); renders the amendment unconstitutional and ultra vires to Article 14 of the Constitution of India?
- Whether the insertion of the Explanation to section 80-IB(9) of the Act by Finance (No.2) Act, 2009 with retrospective effect from 1.4.2000 explaining the meaning of the term ‘undertaking’ is unconstitutional and ultra vires to Article 14 of the Constitution of India?
- Whether the Petitioner has any accrued or vested right?
Key observations and decision of the Hon’ble Gujarat High Court (the Court)
Whether the term ‘mineral oil’ would include natural gas?
- The Court noted that the term ‘mineral oil’ has not been defined under the Act. The Court has placed reliance on the Constitutional Bench of the Apex Court in the case of Association of Natural Gas and others v. Union of India and others, (2004) 4 SCC 489
- The Court also considered various enactments such as the Oil Fields (Regulation and Development) 1948, Mines Act 1952, The Mines and Minerals (Development and Regulation) Act 1957, Petroleum and Natural Gases Rules 1959, The Petroleum and Minerals Pipelines (Acquisition of Right of User in Land) Act 1962 and The Oil Industry Development Act 1974
- In light of the aforesaid Apex Court decision and various other enactments, the Court concluded that the term ‘mineral oil’ in the section 80-IB of the Act, takes within its purview both petroleum products and natural gas
- It also held that the insertion of sub clause (iv) to section 80-IB(9) of the Act by the Finance (No.2) Act, 2009 cannot be interpreted to mean that the term ‘mineral oil’ as used in section 80-IB does not include natural gas and cannot result in denial of the benefit of deduction under section 80-IB(9) to undertakings engaged in commercial production of natural gas under contracts entered into prior to NELP VIII
Meaning of the term ‘undertaking’
- The Court noted that neither ‘undertaking’ or ‘commercial production’ have been defined under section 80-IB of the Act
- The Court noted the methodology for development of oil and gas fields as explained by the Petitioner in the affidavit and also considered various provisions of the PSC and remarked that the process of commercial production takes place in a phased manner
- The Court noted that commercial production involves a step by step process identified to every development area comprising a well or cluster of wells. The PSC further obligates that the investment, costs, work programme, budget and expenditure is separately identified for each such development area. Revenue streams are identifiable from mineral oil produced from each of the development area/field.
- The activities of commercial production of every development area/field qualifies as an undertaking being standalone and economically independent unit in terms of the principles laid out by the Apex Court in Textile Machinery Corporation Ltd. (1977) 2 SCC 368
- The Court accordingly, concluded that a block or a contract area can have more than one undertaking since it involves more than one commercial discovery, development area, development plan and execution of the commercial production on an independent standalone basis
- Thus, the Court opined that before the insertion of the Explanation, the section 80-IB(9) had created a substantive vested right in the Petitioner in deriving profits and seeking deductions for every undertaking comprised in each development area within the contract area or block
- Any amendment to the law deviating from settled interpretation of the term ‘undertaking’, has to be through the process of validation which has to be notwithstanding any law or decision. The Explanation is not a non-obstante clause, notwithstanding any law or decision, it proceeds under the presumption that an existing ambiguity is sought to be clarified when, in reality, there is none. Under the garb of clarification or defining the term “undertaking”, the Finance Minister by amendment almost withdrew the benefit of tax deduction substantially
- The Court was of the considered opinion that the amendment made in section 80-IB(9) by adding an Explanation was not clarificatory, declaratory, curative or made ‘small repair’ in the Act, but on the contrary takes away the accrued and vested right of the Petitioner which had matured after the judgments of ITAT, therefore, the Explanation added by Finance (No.2) 2009 was a substantive law
- The legislature had by inserting the Explanation widened the main section 80-IB(9) and imposed an altogether new tax by widening the tax net which would be applicable for different periods depending upon the date of starting commercial production would be substantive change in the law with different tax liability. Such substantive provision could only be construed prospective in operation. Thus, the Court held that the Explanation added to section 80-IB(9) by Finance Act (No.2) of 2009 is substantive law and could not apply retrospectively
The Hon’ble Gujarat High Court concluded that the Explanation added to section 80-IB(9) breaches the rule of law and is arbitrary being violative of Article 14 of the Constitution of India and thus struck down.
The Hon’ble Gujarat High Court has affirmed the meaning of the term ‘undertaking’ and ‘mineral oil’ based on the principles laid down by the Apex Court in various decisions. Reaffirmation that the term ‘mineral oil’ as understood in various legislations and by the Apex Court, includes and always included natural gas, sets to rest an unnecessary controversy, especially when the prospector or the legislature has no control over what lies in the earth’s crust by way of petroleum or natural gas, except mother nature.
This decision reiterates the first principles of interpretation of statutes that substantive amendments in law, which diametrically change the very basis of law, cannot apply retrospectively, in a manner that deprives any person, any corporation or company of his property, without following the rule of law, such that it violates Article 300A of the Constitution of India. Such amendment would also need to pass the test of constitutional validity.
Judicial thought seems to be laying emphasis that in the commercial world also, all investors including foreign investors should have faith, that the rule of law prevails in this country.