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

New Delhi: The Tax Department has slapped a service tax demand of over Rs 6,100 crore on the overseas arm of state-owned Oil and Natural Gas Corp (ONGC), a move that may potentially render its investments in oil and gas fields abroad infructuous.

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

The Service Tax Department now contends that the overseas units are rendering a service to OVL and as such the company is liable to pay service tax at the full rate, sources said.

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.

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

Subsequently, five more demand-cum-show cause notices were issued covering period 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, has contended that the expenses represent business auxiliary services rendered by the company's foreign branches and operator of joint venture/consortium to the company.

OVL however has contended that service tax is not payable and is contesting the same legally.

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

The company operates the projects at an internal rate of return on investments of 12-13 percent and if it has to pay 14-15 percent service tax on such investments, the projects will give negative returns and would become infructuous.

Also, it contends 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, sources said.

OVL had reported a net loss of Rs 2,093.5 crore in 2015- 16 fiscal 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 fiscal.

It produced 8.916 million tonnes of oil and oil equivalent gas in 2015-16 as compared to 8.874 million tonnes in the previous year. The overall gas production slightly increased from 3.341 billion cubic meters during 2014-15 to 3.406 bcm in 2015-16 and oil production was almost flat at 5.51 million tonnes.