Transfer pricing by TNMM and business expense allowability were largely restored to the assessee, with key claims remanded for verification.

In intra-group service transfer pricing, TNMM was preferred over CUP because the services were closely linked to the assessee's core exploration and production business, and the matter was remanded for fresh benchmarking after giving the assessee an opportunity. On expenses, branch office costs, non-producing PSC expenditure, foreign exchange loss, head office expenditure, inventory write-off, depreciation and depletion, additional depreciation, TDS credit, and section 234B interest were generally accepted as allowable or subject to recomputation, with verification directed where supporting material was needed. Transportation loss and certain related claims were also sent back for fresh verification. The appeal was partly allowed with substantial relief to the assessee.

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Issues: (i) whether the international transactions relating to intra-group services were to be benchmarked under Transactional Net Margin Method or Comparable Uncontrolled Price Method; (ii) whether the branch office expenditure, expenditure incurred on non-producing production sharing contracts, exchange loss, head office expenditure, inventory written off, depreciation and depletion, additional depreciation, TDS credit, and interest under section 234B were allowable or liable to be deleted or recomputed; and (iii) whether the transportation loss and certain other claims required fresh verification.

Issue (i): whether the international transactions relating to intra-group services were to be benchmarked under Transactional Net Margin Method or Comparable Uncontrolled Price Method.

Analysis: The transactions relating to intra-group services were held to be closely linked with the assessee's core business of exploration and production under production sharing contracts. The earlier year decision in the assessee's own case had accepted aggregation of such services and benchmarking under TNMM. In view of the same business model and the earlier coordinate bench ruling, the transfer pricing issue was required to be reconsidered by applying TNMM as the most appropriate method after giving opportunity to the assessee.

Conclusion: The issue was decided in favour of the assessee for statistical purposes and was remanded for fresh decision.

Issue (ii): whether the branch office expenditure, expenditure incurred on non-producing production sharing contracts, exchange loss, head office expenditure, inventory written off, depreciation and depletion, additional depreciation, TDS credit, and interest under section 234B were allowable or liable to be deleted or recomputed.

Analysis: The expenditure on branch office operations and non-producing blocks was treated as revenue in nature because it was incurred wholly and exclusively for the assessee's ongoing business and could not be disallowed merely because the joint venture partners did not share the cost. Foreign exchange loss on loan interest was held allowable in view of the accounting regime under the production sharing contract. Head office expenditure was held not to be restricted under section 44C where the expenses were incurred for business purposes and commercial expediency. Inventory written off was allowed subject to verification on the basis of regular accounting treatment and supporting material. Differences in depreciation and depletion were accepted as arising from accounting and opening written down value issues, subject to verification. The claim for additional depreciation required adjudication on merits, and TDS credit and interest under section 234B were directed to be recomputed or granted in accordance with law.

Conclusion: These issues were decided in favour of the assessee, while the claims requiring verification were restored to the Assessing Officer.

Issue (iii): whether the transportation loss and certain other claims required fresh verification.

Analysis: The transportation loss claim was not accepted on an outright basis and was sent back for fresh consideration in light of the contractual mechanism for determining loss and the principle of consistency. The challenge to limitation and the natural justice ground were not pressed, and therefore did not survive for adjudication.

Conclusion: The transportation loss issue was decided in favour of the assessee for statistical purposes and remanded.

Final Conclusion: The appeal was partly allowed, with substantial relief granted to the assessee and some issues remanded or directed to be verified by the Assessing Officer.

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