OVL slapped with 7,666-cr service tax demand

New Delhi: The tax department has slapped ONGC Videsh Ltd a service tax demand of Rs 7,666.10 crore on remittance the firm makes to its overseas subsidiaries for past one decade, sources in know of the development said.

OVL, the overseas arm of State-owned Oil and Natural Gas Corp (ONGC), has stakes in 41 projects in 20 countries spanning from 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 2006 to 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 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.

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 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 per cent and if it has to pay 14-15 per cent 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.

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 2017-18 fiscal 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.

Gas output increased to 4.811 billion cubic meters in 2017-18 from 4.369 BCM in the previous year.