Texaco Ireland Ltd v Murphy, Inspector of Taxes

• Jurisdiction: Ireland
• Judge: Miss Justice Carroll
• Judgment Date: 01 January 1989
• Neutral Citation: 1988 WJSC-HC 3046
• Docket Number: No. 1269R/1987,[1987 No. 1269R]
• Court: High Court
• Date: 01 January 1989

1988 WJSC-HC 3046

THE HIGH COURT

No. 1269R/1987

TEXACO IRELAND LTD v. MURPHY

REVENUE

BETWEEN/

TEXACO IRELAND LIMITED

APPELLANT

AND

SEAN MURPHY INSPECTOR OF TAXES

RESPONDENT

Citations:

INCOME TAX ACT 1967 S244

CORPORATION TAX ACT 1976 SCHED 1 PARA 9

MINING DEVELOPMENT ACT 1940 S8(3)

FINANCE (PROFIT OF CRETAIN MINES)(TEMPORARY RELIEF FROM TAXATION) ACT 1956

FINANCE (MISCELLANEOUS PROVISIONS) ACT 1956

PETROLEUM & OTHER MINERALS DEVELOPMENT ACT 1960 S8

PETROLEUM & OTHER MINERALS DEVELOPMENT ACT 1960 S9

PETROLEUM & OTHER MINERALS DEVELOPMENT ACT 1960 S19

PETROLEUM & OTHER MINERALS DEVELOPMENT ACT 1960 S6(1)

PETROLEUM & OTHER MINERALS DEVELOPMENT ACT 1960 S8(7)

CONTINENTAL SHELF ACT 1968 S2

CONTINENTAL SHELF ACT 1968 S4

FINANCE ACT 1973 S33

INCOME TAX ACT 1967 S245

CORPORATION TAX ACT 1976 SCHED 1 PARA 10

INCOME TAX ACT 1967 S245(5)(C)

FINANCE (TAXATION OF PROFITS OF CERTAIN MINES) ACT 1974

INCOME TAX ACT 1967 S245(3)

INCOME TAX ACT 1967 S244

CORPORATION TAX ACT 1976 S21(1)

CORPORATION TAX ACT 1976 S21(3)

Synopsis:

REVENUE

Corporation tax

Scientific research - Allowance - Capital expenditure - Oil company - Exploration drill - Preparatory scientific research - Dry hole capped - The appellant oil company was the holder of an exclusive petroleum exploration licence which entitled the appellants to explore for oil in the sea area designated Block 13/3 off North Donegal - The appellants conducted extensive preparatory work to discover the relevant geological strata in the area by means of seismic programmes and other scientific studies - Having evaluated the substantial amount of data thus obtained, the appellants drilled one well which failed to reveal the existence of commercial quantitles of gas or oil - The appellants then capped the well and relinquished their licence - The appellants claimed, in relation to their liability to corporation tax, to be entitled to an allowance in respect of the capital expenditure incurred by them in drilling for oil in Block 13/3 - Section 244, sub-s. 3, of the Act of 1967 provides (inter alia) that where a person "incurs capital expenditure on scientific research" while carrying on a trade to which the expenditure relates then, in certain circumstances, there shall be made an allowance in respect of the expenditure in taxing the trade for the chargeable period - Where a person carrying on a trade incurs capital expenditure on scientific research in respect of which an allowance cannot be made under the sub- section because the scientific research is not related to any trade being carried on by that person, a proviso to the sub- section states that there shall be made in taxing that person's trade an allowance equal to the amount of the expenditure - The appellants" claim to an allowance under the proviso was rejected by the special commissioners, but they stated a Case for the opinion of the High Court on that issue - Held that the appellants" expenditure had not been incurred on "scientific research" within the meaning of s. 244, sub-s. 3, of the Act of 1967 - Held that that conclusion was supported by the juxtaposition of the contents of s. 245 of the Act of 1967 dealing with allowances in respect of capital expenditure incurred in searching for and testing mineral deposits by persons working mines - Held, accordingly, that the ruling of the special commissioners was correct - Income Tax Act, 1967, ss. 244, 245 - Corporation Tax Act, 1976, 1976, s. 21, 1st schedule (para. 9) - (1987/1269 R - Carroll J. - 19/5/88)

|Texaco Ireland Ltd. v. Murphy|

WORDS AND PHRASES

"Scientific research"

Oil company - Exploration - Geological strata - Scientific analysis - Exploratory well drilled - Dry well abandoned - Corporation tax - Claim by company for allowance in respect of capital expenditure incurred - ~See~ Revenue, corporation tax - (1987/1269 R - Carroll J. - 19/5/88)

|Texaco Ireland Ltd. v. Murphy|

1 Judgment of Miss Justice Carrolldelivered the 19th day of May 1988.

2 Section 244 of the Income Tax Act, 1967as amended by Section 21(1) of the Corporation Tax Act, 1976and set out in full at Clause 9 of the First Schedule thereto, allows in certain circumstances expenditure on scientific research to be deducted as an expense in computing the profits or gains of a person's trade. Subsection (1) defines scientific research as "any activities in the fields of natural or applied science for the extension of knowledge". Subsection (3) relates to capital expenditure. It provides for taxation relief for traders who at the time or within a given period carry on a trade related to the expenditure but it is the proviso to that subsection giving full relief to a trader who is not carrying on a trade related to the expenditure, which is relevant. It provides as follows:-

"Provided that, where, on or after the 6th day of April 1968, a person carrying on a trade incurs capital expenditure on scientific research in respect of which an allowance cannot be made under the foregoing provisions of this subsection because the scientific research is not related to any trade being carried on by that person, there shall be made in taxing that persons trade for the chargeable period in which the expenditure was incurred an allowance equal to the amount of theexpenditure."

3 The question at issue in this Case Stated is whether expenditure incurred by the Appellant, Texaco, in exploring and drilling for oil was expenditure on scientific research as defined by Section 244 and whether accordingly it is entitled to deduct the expenditure as expenses.

4 The statement of facts submitted by Texaco to the Appeal Commissioners (which was not contested as inaccurate) discloses the following -

5 An exclusive petroleum exploration licence, number 3/76, was granted by the Minister of Industry and Commerce to Texaco and Deutsche Texaco Aktiengesellschaft with effect from the 6th of April 1976. Under the terms of this licence Texaco was the designated operator. The two areas assigned by the licence were Block 13/3 (North of Donegal) and Block 56/22 (South of Bantry, County Cork). Texaco's work programme carried out under the terms of the exploration licence, concentrated on the identification and selection of potentially drillable prospects in the two blocks. The geological activity was supplemented by the shooting of seismic programmes (i.e. detection and measurement of reflected signals as a result of passing acoustic shock waves into strata). Subsequentlyadditional geological and other scientific studies were conducted in an attempt to obtain confirmation that the identified structures contained potential reservoir rocks, and final drilling location montages (i.e. visual displays of collated data) were prepared to illustrate the optimum drilling sites. During 1978 one well was drilled on each of the blocks and both were classified as dry holes. After comprehensive study in line with generally recognized evaluation procedures the decision was taken that no further exploration under the licence be undertaken and that the licensed area be relinquished. It was on these prospecting and exploration activities that the expenditure which is the subject of the appeal was incurred.

6 To illustrate the Appellant's activities and the flow of information obtained, a comprehensive statement was given in respect of Block 13/3. During the initial prospecting period an area off Northern Donegal was subjected to close scrutiny. Geophysical projects were undertaken and at all stages detailed plans and maps were prepared to record data obtained on the geography and geology of the area. At an early stage the possibility of a hydrocarbon structure in the block was noted. At this stage appraisal of seismic and other studies provided the base for further geophysical and geological activities. Mapping at different horizons from seismic data was necessary to define the subsurface topographic structures and the critical faults. In particular, studies were aimed at demonstrating whether potential reservoir rocks could be identified at critical horizons.

7 Throughout the whole period of activity, continuous reportsof plans and operations, with results, were made to the Minister for Industry and Commerce who required quarterly and annual reports with detailed plans, maps and related data. During the exploration period interpretation of data increased Texaco's knowledge continuously. The area was mapped on a much finer scale. Compared with earlier maps, the shape of the potential hydrocarbon structure had changed substantially, further faulting was identified which could affect the potential structure, delineation of the structure was much more accurate and the highest point in the structure had been identified (i.e. the optimum drilling position).

8 The map 13/3 drilling montage - dated the 20th of February 1978, recorded knowledge gained on the potential structure and surrounding area and was the basis on which it was decided to drill Well Number 13/3-1. The well location was confirmed and the expected stratigraphic...