An OVL ship. (Source: ONGC Videsh Ltd Twitter Page)

ONGC Videsh Served Rs 7,666 Crore Service Tax Demand

The tax department has served a service tax demand of Rs 7,666.1 crore on ONGC Videsh Ltd. for remittances the firm has made to its overseas subsidiaries over the past decade, sources in know of the development said.

OVL, the overseas arm of state-owned Oil & Natural Gas Corporation Ltd., has stakes in 41 projects in 20 countries spanning Venezuela to New Zealand. For the operations of these projects, the local units and joint ventures would raise a demand for money on the parent, OVL, which would transmit the funds.

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 tax demand pertains to the period between 2006 and 2017.

The service tax department had 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 the foreign currency expenditure reported in the company’s financial statements covering the period from April 1, 2006 to March 31, 2010.

Sources said the tax department contends that these expenses represent business auxiliary services rendered by the foreign branches and operator of the joint venture/ consortium to OVL.

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Subsequently, five more demand-cum-show cause notices have been issued based on similar contentions covering the period up to March 31, 2015, to show cause why service tax amounting to Rs 3,286.36 crore (including education cess and SHE cess), the interest on such amount and penalty should not be demanded and recovered from the company.

A demand-cum-show cause notice has been issued based on similar contentions covering the period April 1, 2015, to March 31, 2017, to show cause why service tax amounting to Rs 1,563.32 crore plus interest on such amount and penalty should not be demanded and recovered from OVL.

Sources said OVL believes that no service tax is due or payable and is contesting the demand.

According to OVL, investments made overseas through subsidiaries, branches or joint ventures do not tantamount 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, rendering them ineffective.

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.

Sources said OVL management is of the view that the disputed service-tax demands are not tenable in law.

OVL had reported a net profit of Rs 981.5 crore in the fiscal year 2017-18 on a turnover of Rs 12,945.6 crore. It produced 9,353 million tonnes of oil in the fiscal, up from 8,434 million tonnes in the previous year. The company’s gas output increased to 4.811 billion cubic meters in 2017-18 from 4.369 billion cubic meters in the previous year.

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