MARCH 13, 2012

FM needs to offer Investment Linked incentive for Natural Gas & Crude Oil Pipelines 

By S S Mittal, Dy GM (Finance), IOCL

WITH a view to encourage creating environment friendly alternate means of  transportation for bulk goods, a new section 35AD has been inserted in the Income Tax Act, 1961 w.e.f. 1.4.2010 i.e. assessment year 2010-11. As per this amendment, a deduction will be allowed of 100% of any expenditure of Capital Nature incurred, wholly and exclusively, for the purpose of laying and operating a cross country natural gas or crude or Petroleum oil pipeline network for distribution, including storage facilities being any integral part of such network. 

The salient features of the new regime of investment linked tax incentive are following:-

1.  100% deduction would be allowed in respect of the whole of any expenditure of capital nature incurred wholly and exclusively, for the purpose of the specified business during the previous year in which such expenditure is incurred. Provided that the expenditure incurred shall be allowed as deduction during the previous year in which the assessee commences operations of his specified business, if-

 (a) the expenditure is incurred prior to the commencement of its operations; and

 (b) the amount is capitalized in the books of account of the assessee on the date of commencement of its operations.

2. The expenditure of capital nature shall not include any expenditure incurred on acquisition of any land or goodwill or financial instrument.

3. The business of laying and operating a cross country natural gas or crude or petroleum oil pipeline network for distribution should have been approved by the Petroleum and Natural Gas Regulatory Board (PNGRB) and notified by Central Government in the Official Gazette in this behalf

4. A portion of total pipeline capacity, as specified under PNGRB regulations, should have been made available for use on common carrier basis by any person other than the assessee or an associated person.

5.  The benefit will be available:-

a) In a case where the business relates to laying and operating of a cross country natural gas pipeline network for distribution, if such business commences its operation on or after 1.4.2007 and

b) In any other case, if such business commences its operation on or after 1.4.2009.

B.  Issue

The benefit under section 35 AD is available only to the Oil and Gas Pipelines approved by the PNGRB and which have common carrier capacity as per PNGRB regulations.

Since the Oil & Gas Pipelines are capital intensive projects and the Oil & Gas sector is a regulated sector, no oil & Gas pipeline is economically viable unless sufficient volumes are available for transportation by oil companies to the Pipeline owners. The present regime where domestic prices of Oil & Gas is controlled by the Government of India has created a scenario where a large majority of the Oil & Gas pipeline transportation volumes are owned by the national oil & Gas companies only. In such scenario, it is economically beneficial for an oil company to lay its own pipeline rather than committing volumes to an independent common carrier pipeline company. Therefore, a large majority of oil & Gas Pipelines are dedicated Pipelines.

Since the crude oil Pipelines and the dedicated pipelines which are dedicated for supply of petroleum products to a specific consumer, are outside the ambit of PNGRB Act, the benefit under section 35 AD is not available to such pipelines. Thus, unintentionally, the benefit to Oil & Gas Pipelines made available under section 35 AD of Income Tax Act, 1961, is not actually available to Crude Oil Pipelines and the dedicated pipelines which are dedicated for supply of petroleum products to a specific consumer.

C.  Recommendation

Based on the above, it is requested that the conditions under sub-clause (b) and (c) of clause (iii) of sub-section (2) of Section 35 AD of the Income Tax Act, 1961, regarding approval of PNGRB for specified business and availability of common carrier capacity as per PNGRB regulations, may be waived for Crude Oil Pipelines and the dedicated pipelines which are dedicated for supply of petroleum products to a specific consumer.