Premier Consolidated Oilfields Plc v The Board of Inland Revenue
| Jurisdiction | Trinidad & Tobago |
| Judge | Barnes, S.C. |
| Judgment Date | 31 January 1996 |
| Court | Tax Appeal Board (Trinidad and Tobago) |
| Docket Number | No. I 65 of 1992 |
| Date | 31 January 1996 |
Tax Appeal Board
Barnes, S.C.
Burke, Mem.
Dean-Maharaj, Mem.
No. I 65 of 1992
Mrs. M. Robinson-Walters for appellant.
Mrs. E. Bridgeman-Volney for respondent.
Revenue law - Income tax — Following an audit report certain items were queried including a claim for enhanced recovery allowance of $503,193.00 relating to expenditure on items which the respondent considered did not qualify as plant and machinery within the meaning of section 26A of the Petroleum Taxes Act, Chapter 75:04 — Appellant appealed — Whether the defendant had properly disallowed the appellant's claim for an allowance under section 26A of the Act — Decision of the respondent to disallow certain items was upheld — Amount of $136,301.00 disallowed by the respondent was allowed — Assessment returned to respondent for reassessment.
During the year of income 1986, the appellant, a Trinidad branch of a company incorporated in the United Kingdom, was engaged in the business of production of petroleum and filed a return of income dated 17th June, 1987 in which the particulars declared were as under:
| “Gross Income receipts/sales | $15,776,568.00 |
| Taxable profits | 995,147.00 |
| Supplemental petroleum tax liability | 1,452,701.00 |
| Petroleum profits tax liability | 447,816.00 |
| Loss relief | (223,908.00) |
| Total tax liability | 1,676,609.00” |
Originally that return was accepted, but following an audit examination and audit report of June 8, 1990 certain items were queried including a claim for Enhanced Recovery Allowance of $503,193.00 relating to expenditure on items which the respondent considered did not qualify as plant and machinery within the meaning of section 26A of the Petroleum Taxes Act, Chapter 75:04 (the Act) which reads–
“26. A. In computing supplemental petroleum tax an allowance of 140 per cent of all capital expenditure incurred in the acquisition of such machinery and plant as is specified in Schedule 3 for use in enhanced recovery on land, is deductible from gross income.”
Schedule 3 of the Act reads –
“SCHEDULE
(Section 26A)
MACHINERY AND PLANT FOR ENHANCED RECOVERY ALLOWANCE
Water injection pumps
Water treating equipment
Filtration equipment
Oxygen Scavenging Equipment
Gas Desorption Towers
Chemical Scavenging units
Biocide treating units
Accumulator vessels
Steam Generators
Compressors
Boilers
Equipment for use in injector wells
Other machinery and plant as may be specified by the member of the Cabinet responsible for petroleum.”
In its Notice of Appeal, in addition to the dispute as to the claim for Enhanced Recovery Allowance, the appellant had also challenged an adjustment as set out at para. 3(c) of the Statement of Case as under –
“3. The above return of income was accepted by the respondent but was subsequently the subject of an audit examination. During the course of the said audit examination the following items were noted:
(c) Additional Income — $268,118.00
The appellant had adjusted its total sales as per sales invoices of $16,044,685.00 by the decrease in inventory of $268,118.00 to arrive at the gross income for Supplemental Petroleum Taxes purposes of $15,776,567.00. This Adjustment was incorrect in law since the Petroleum Taxes (Amendment) Act, (No. 5 of 1981), defined gross income as that derived from the disposal of crude oil.”
At the start of the hearing, the appellant conceded on that issue.
The issue to be determined originated from a tax audit report of 8/6/90 — folio 166 – 172 of the record, at folio 171 which states inter alia –
“(b) Enhanced Recovery — $503,193
Enhanced Recovery $503,193 is disallowed because the expenditure previously identified by our letter dated 20/09/1989 do not qualify as plant and machinery as defined by section 26(a) Schedule III of Petroleum Taxes Act.”
We are to determine whether the respondent has properly disallowed the appellant's claim for an allowance under section 26(A) of the Act. The amount in dispute is 503,193.00 being 26(A) of the Act. The amount in dispute is $503.193.00 being 140% of the actual expenditure said to have been incurred.
In the Notice of Appeal, the statement of reasons to be advanced in support of the appeal as it pertains to the disputed item is as under –
“B Statement of Reasons to be Advanced in Support of Appeal
(1) Claim for Enhanced Recovery Allowance $503,193.00
The respondent is entitled to the said claim by virtue of the Petroleum Taxes Act, Chap. 75:04 Section 26A in that the said sum represented capital expenditure in the acquisition of a steam generator machine and/or plant for use in enhanced recovery of crude oil from land operations.
Particulars
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(a) The steam generator/plant comprises three large components installed on separate foundations but interconnected with piping, the total weight of which exceeds 100 tons. An area of approximately 10,000 square feet is required for the proper installation of same.
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(b) The placement of the said heavy components and the foundation for the said generator/plant requires that the portion of land upon which same is located is properly paved.
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(c) The steam generator is fitted with sophisticated instrumentation for automatic/unattended operation and uses natural gas as fuel and electrical power at 460 volts. Any form of tampering by unauthorised persons or straying animals could lead to an explosion. In addition, certain parts of the machinery/plant are very hot (up to 600 degrees Fahrenheit) and create high pressure super heated steam (up to 1,500 PSI) during operation and could cause serious burns, even death. Several families including children reside within the vicinity of the said generator plant.
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(d) In the premises the safe and efficient operation of the machinery as a steam generator requires that the portion of land upon which same is located is properly paved and securely fenced, the expenditure for which forms an integral part of a steam generator machine and/or plant, and constitutes the allowance claimed herein.”
At para. 13(c) of the Statement of Case, it is stated that the respondent contends –
“13.(c) That the enhanced recovery allowance claim of $503,193.00 was properly disallowed since the expenditures related to items which did not qualify as plant and machinery within the meaning of the Petroleum Taxes Act.”
Khamkeran Ablack, whose position at the time of the hearing was General Manager of the appellant testified.
The witness explained that the appellant operated wells at various locations in the Southern Basin with Head Office at Fyzbad. The company was a producer of heavy oils in some areas and medium gravity oil at others.
The production of heavy oil necessitated the use of enhanced recovery measures to obtain a satisfactory level of output as normal methods would not create the mobility for moving the oil from the reservoir.
The method employed in 1986 was that of thermal recovery involving expenditure on items including –
Steam Generator
Water Wells
Water Treatment Plant
Chemicals to purify water
Water Storage tank
The steam generator purchased had a capacity of 50 million B.T.U. per hour with an overall length of 73 feet, 10 feet width and 10 feet height and had had to be transported in components to be accommodated on local roadways. To install equipment of this size the weight of which was 100 tons, together with a water tank when filled of another 100 tons, a filtration plant of 9 tons and another plant of 6 tons necessitated a very thick concrete foundation and for security reasons, the compound had to be fenced.
The witness explained that in order to make use of the steam generator to produce steam, a source of water had to be located by drilling wells, impurities had to be removed involving water treatment equipment and the use of electrical power and natural gas.
The function of the water tank in the overall process of converting water into steam was demonstrated in a diagram marked “A” which showed that water from an original source was piped into a water tank (referred to as water storage — feed stock). From that stage, it passed through water treatment equipment from which purified water was pumped into a steam generator producing steam.
In cross-examination, Ablack was referred to a definition from the Oil and Gas Dictionary — Paul Stephen — indicating that an accumulator vessel was one for the temporary storage of oil and gas in a system which uses continuous flow operations and provides for the event of capacity imbalances.
The witness expressed the view that the definition was consistent with his evidence regarding the function of the water tank which formed part of an automatic steam generation operation. So that in the event of a power outage, there would be a supply of water up to 25% of the throughput of the generator and thus continuity of supply would be ensured in the operations of the plant and to correct imbalances of the system.
Ablack's testimony too was that he was fortified in his view that expenditure on a water tank would properly be allowed, as from his knowledge and experience other companies had received the benefit of the allowance for such expenditure.
In general, it appears from the evidence of Ablack, that he perceived all of the expenditure on the thermal recovery protect as being capital expenditure within the ambit of section 26A.
One new water tank has been acquired and several used tanks specifically altered and repaired, the expenditure on which had been treated as capital expenditure incurred on the thermal recovery project.
The witness drew attention to Schedule 3 of the Act and categorised various items as falling within the Schedule in addition to the steam generator itself, such as water pumps,...
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