How an oil company milked super-profits

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Purchase price Rs 3,245, and selling price Rs 10,887. What is the profit? Rs 7,642, or a 235 per cent mark-up. This are the numbers relating to a kilolitre of ATF or aviation turbine fuel, bought and sold by Indian Oil Corporation Ltd (IOC) from Bongaigaon Refinery & Petrochemicals Ltd (BRP). The mark-ups are nearly 150 per cent for diesel and furnace oil, 70 per cent for LPG or liquefied petroleum gas, and more than 260 per cent for petrol.

These statistics, though dated, are what most consumers rarely get to see, about a company `engaged in the business of sale and supply of petroleum products in the country including the State of Assam'. Interestingly, these data are in a recent judgment of the Supreme Court:

IOC vs State of Assam

. The dispute was about sales tax. The State Government demanded IOC to pay sales tax on the selling price, whereas IOC said that it would pay the tax only after subtracting the purchase price from the selling price.

IOC explained to the court how it had to sell the petroleum products at prices fixed by the Central Government, and how these prices included surcharge to be collected from the buyers and deposited to the `Oil Pool Account'. You may remember that when APM (administered price mechanism) was dismantled with effect from April 1, 2002, the oil pool account too was wound up. The balance in the account estimated at over Rs 14,000 crore, lying to the credit of oil companies, was to be liquidated by the issue of `oil bonds' to the companies. More important than the `pool' story is the side story on the chasm between purchase and sale prices.

Taxman's demand

One learns from the text of the verdict dated November 27 that IOC `was entitled to retain only the basic price, the sales tax paid at the time of purchase of the products in Assam from BRP and the profit margin specified by the Central Government.' IOC argued that surcharge, which was remitted to the `Oil Pool Account' immediately after collection, did not form part of the turnover of the company, and therefore, the State's demand for sales tax on an increased base was not correct. The Revenue had passed

ex parte

assessment orders on IOC, raising a tax demand of Rs 304 crore, retrospectively for the years 1994-95 to 1997-98, taking into account `the entire amount collected by the appellant from its customers'. Subsequently, an interest of Rs 158 crore too was slapped on IOC.

At the High Court of Assam, Nagaland, Meghalaya, Manipur, Tripura, Mizoram and Arunachal Pradesh, the decision of the Single Judge, in November 1998, went against IOC. He held that the amount of `surcharge' collected by IOC, even though passed on to the `Oil Pool Account', had to be included in the `sale price' as defined under Sub-section (34) of Section 2 of the Assam General Sales Tax Act, 1993.

According to `explanation' in the Section, "Any tax, cess or duty which is liable to be paid in respect of any goods before the buyer can obtain delivery and possession of such goods and all costs, expenses and charges incurred before the goods are put in a deliverable state shall, notwithstanding any agreement, covenant or understanding that such tax, cess, duty, costs, expenses or other charges be borne or paid by the buyer or any other person, be included in the sale price."

High margins

Aggrieved by the single judge's verdict, IOC filed a writ appeal before the Division Bench of the High Court. In May 2001, the Division Bench dismissed the writ appeal.

Inter alia

, it held that the `surcharge' collected by IOC on behalf of the Central Government and contributed to the `Oil Pool Account' was not a statutory collection; it had been collected under the executive instructions and, therefore, could not be excluded while calculating `sale price'. The Bench also held that the sale by IOC was to be treated as first sale within the meaning of Section 8(1)(a) of the Assam General Sales Tax Act read with Rule 12 of the Rules since the resale price exceeded 40 per cent of the purchase price.

Section 8, titled `Charge of tax and rates', specifies that the tax shall be charged on the taxable turnover at the first point of sale within the State, at the rate or rates specified in the Schedule. An `explanation' to the Section speaks of `deemed' first sale when `price charged on resale exceeds the sale price by more than such percentage as may be prescribed'. And Rule 12 specifies the threshold thus: "... price charged on such re-sale exceeds forty percentum of the original sale or purchase price." The percentages in IOC's case were running to three digits!

Yet, unhappy with the High Court's order, IOC took the case to the apex court. The first question before Justices Ashok Bhan, Altamas Kabir and Dalveer Bhandari of the Supreme Court was about what the `sale price' should be in this case. IOC also argued that if the `first point of sale' were deemed to be the ultimate sale by the company, there could not be tax when the products were purchased from BRP. Because the `explanation' in Section 8 did not contemplate `first point sale' in the hands of two dealers, but only contemplated shifting of `first point of sale', said G.E. Vahanvati, arguing for IOC. Again, non-adjustment of taxes paid by IOC while purchasing the goods from BRP, at the point of first sale in Assam, amounted to double taxation, he contended.


The counter-affidavit filed before the apex court, on behalf of the State, by the Extra Assistant Commissioner, Government of Assam, was categorical. It alleged that IOC had sold the petroleum products through its various dealers to the consumers and had also collected sales tax from the consumers on the entire sales. "The entire collection of sales tax was done as per the provisions of the Act. However, instead of depositing the entire collected sales tax with the State government, the appellant had misappropriated it and contrary to the statutory provisions had not deposited the sales tax with the State Government," read the counter-affidavit.

Arguing for the State of Assam, at the apex court, was C.A. Sundram. He submitted that the definition of `sale price' included every amount received by IOC from the buyers as consideration for the sale of the goods. "It was unfair to suggest that contribution to the `Oil Pool Account' should not be taken into account for determining the sale price, when the appellant itself had collected sales tax from the purchasers on sale price which was inclusive of the purported surcharge towards the Central `Oil Pool Account'," said Sundram. And that "there was no justification in not depositing the sales tax amount collected by the appellant from the consumers and misappropriating the same."

Unjust enrichment

After listening to rival arguments, the court opined that according to the clear construction of the provisions of the Act, IOC was under an obligation to pay `sales tax only on the difference amount between purchase price and the entire sale price'. Directing IOC to pay sales tax on the entire amount resold would amount to double taxation, said the court. On the `unjust enrichment' angle, however, the court had to remit the matter back to the Senior Superintendent of Taxes, Gauhati for ascertaining the fact whether IOC had in fact collected sales tax on the entire sale price. He has to decide the controversy `as expeditiously as possible', `and in any event within three months from the date of the receipt of this order,' noted the court.

What if the Senior Superintendent of Taxes were to arrive at `a definite conclusion that the appellant company had in fact collected sales tax on the entire sales'? Then IOC would have to deposit the entire sales tax amount collected from the consumers with the State of Assam `within four weeks of the order passed by the Senior Superintendent of Taxes along with 9 per cent interest from the date of collecting the amount towards sales tax till payment'. And there was more: "If the amount, as directed, is not paid by the appellant company within the stipulated period, the same would be recovered as the arrears of land revenue by the respondent State."

Ironically, a news report dated December 6 cites IOC Chairman and Managing Director Sarthak Behuria about how his company is losing an additional Rs 8 crore a day on sale of petroleum products after the recent price cut.


"How do you spell scrutiny?"

"S-C-R-E-... "

D. Murali

(This article was published in the Business Line print edition dated December 9, 2006)
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