TAT upholds contention that payments made in respect of gas flaring activities may be included in tax deductions - Shell Petroleum Development Company v. Federal Inland Revenue Service (Consolidated appeal: appeal no: TAT/LZ/040/2013; appeal no: TAT/LZ/041/2013; appeal no: TAT/LZ/042/2013).


On the 27th of October, 2015, the Tax Appeal Tribunal, Lagos Zone (Tribunal) delivered a judgment in favour of the Shell Petroleum Development Company of Nigeria Limited in the above stated case. The issues submitted for determination before the Tribunal were:

  1. Whether the payments made by the Appellant to the DPR to flare gas (in the absence of certificate of gas flaring) in 2006, 2007 and 2008 (YOA's) constitute a penalty.
  2. Whether the Appellant is entitled to make tax deductions on the sums paid for gas flaring activities for the YOA's.
  3. Whether or not the Respondent was right to have issued the Additional Assessments for the YOA's.


The Appellant, Shell Petroleum Development Company, made payments to the DPR to flare gas (as gas flaring fee) in respect of the YOA's and sought to treat same as deductible expenses in its returns for the YOA's. The Respondent, FIRS, disallowed the deductions and issued additional assessments on the amounts deducted by the Appellant on the ground that the gas flaring fee is a penalty because the Appellant was not issued the Certificate to flare gas by the Minister of Petroleum in accordance with the provisions of the Associated Gas Reinjection Act (AGRA).


  • The Appellant contended that the gas flaring fee does not qualify as a penalty within the context of the provisions of AGRA. The Appellant argued that the penalty prescribed under AGRA is not in the form of monetary payments but as clearly contained in Section 4 of AGRA as follows;

    1. Where any person commits an offence under section 3 of this Act, the person concerned shall forfeit the concessions granted to him in the particular field or fields in relation to which the offence was committed.
    2. In addition to the penalty specified in subsection (1) of this section, the Minister may order the withholding of all or part of any entitlements of any offending person towards the cost of completion or implementation of a desirable re-injection scheme or the repair or restoration of any reservoir in the field in accordance with good oil-field practice.
  • The Appellant submitted that it is entitled to make tax deductions on the sums incurred as gas flaring fee because the expenses were incurred wholly, exclusively and necessarily for the purpose of petroleum operations in accordance with Section 10(1)(i) of the PPTA. The Appellant also placed reliance inter alia on Section 13 of the PPTA which sets out expenses that are, by statute, not deductible to argue that gas flaring fees are affected by the provision.
  • The Respondent's position is that payments made by the Appellant to the DPR in respect of the gas flared by the Appellant in the YOA's were incurred as a penalty because no certificate was issued by the Minister authorizing the Appellant to flare gas in the YOA's. The Respondent then submitted that even though no statute prescribes a monetary penalty for gas flaring, the Appellant purportedly paid to flare gas and this is an illegal transaction that the Tribunal should not recognize as being legal.


The summary of the decision of the Tribunal is as follows:

  • The payments made by the Appellant to DPR in respect of the gas flared by the Appellant in the YOA's do not constitute a penalty;
  • The Appellant is entitled to make tax deductions of the sums incurred as royalties paid for gas flaring activities for the YOA's; and
  • The Respondent was wrong to have issued the additional assessments for the YOA's.


The decision of Tribunal is a welcome one because it reaffirms the position that tax deductibility of expenses under the PPTA is based on the satisfaction of the 'wholly, exclusively and necessarily' test set out under Section 10 of the PPTA. This is particularly so where such expenses are not disallowed from being so treated under Section 13 of the PPTA. The decision of the Tribunal that gas flaring fee does not constitute a penalty is in accordance with the provision of AGRA. A penalty can only be said exist if clearly prescribed by law.

Originally published November 2015

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