One wonders whether a transfer of interests under an SPA can be called an exploration operation, a development operation or a production operation under a petroleum agreement. The Tribunal does not think so. What is defined as exploration, development or production can be discerned from the activities whose expenditures are given in the Eight Schedule of the Act. A Contractor is defined under S.89A to mean a person with whom the Government enters into a petroleum agreement and includes a licensee. S. 89G deals specifically with “Transferee Contractor” and “Transferor Contractor” which it defines to mean one who disposes and the person who will become a contractor as a result of the disposal respectively. A transfer of interest does not involve exploration, development or production. A transfer of interests under a PSA by an SPA cannot be considered as a petroleum operation under S. 89C. S. 89 B (3) provides that income earned by a contractor from activities other than petroleum operations shall be taxed in accordance with the Act.

Hence, while Part IXA deals with petroleum operations and includes a transfer of interest under a petroleum agreement, the law in the ITA Part VI, in respect of capital gains applies as modified by S. 89G of the ITA. That is transferee contractors and transferor contractors are taxed in accordance with Part VI, as modified by Part IXA. The Tribunal does not see any inconsistency in applying Part VI of the ITA in respect of the initial disposal as it was provided by Part IXA. The inconsistency should be in respect to computation of the gains and not application of the parts.   Part IXA of the ITA, S. 89G deals with computation of the cost base and allowable deductions. S. 89G (a) provides for the deduction of any costs at the date of disposal. It provides for the computation of the cost base where there is a transfer of original interests under S.89G(c) and for subsequent disposal under S. 89G (d) of the ITA.   It is not in dispute that there were two disposals of interests in the transaction which before the Tribunal. The first disposal was the transfer of interest acquired by Tullow directly from the GOU which was an initial disposal of original interests.

The second disposal was Tullow’s transfer of the interests acquired from Heritage to CNOOC and Total which is a subsequent disposal. S.89G deals with different computations for the calculation of the cost bases for initial disposals and for subsequent ones.    (a) Initial disposal/ disposal of original interests   In respect of the initial disposal or a disposal of original interests, S. 89G (c) provides that the cost base for purposes of calculating any capital gain or loss shall be determined in accordance with Part VI of the ITA.   Part VI of the ITA deals with gains and losses on disposal of assets. S. 49 of the ITA reads: “This Part applies for the purposes of determining the amount of any gain or loss arising on the disposal of an asset where the gain is included in gross income or the loss is allowed as a deduction under this Act.” S. 50 of the ITA specifically deals with gains and losses on a transfer of an asset.

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