TaxTMI 
TaxTMI 
2015 (3) TMI 792
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.... further observed that assessee had neither maintained any books of a/c., nor got its accounts audited as per provisions of section 44AB of the I.T. Act. The assessee was confronted with the fact that BGEPIL had claimed above expenses in their P&L A/c, but the assessee had not shown the corresponding income. The assessee took the plea that they were reimbursements. The AO did not accept the assessee's contention, inter alia, observing that the claim was not supported by any evidence and in order to establish that the payments were reimbursed on actual expenses, assessee should have shown the date of receipt of payment in their account from BGEPIL and corresponding expenses made with details of parties to whom payment was made. The AO further observed that during the assessment of BGEPIL it came to the notice of the TPO that services were actually not rendered by the assessee to BGEPIL and, therefore, in the absence of any services rendered by the assesssee, the entire receipt was income in the hands of the assessee. AO further observed that during the survey operation on the premises of the assesssee and BGEPIL it was noticed that no requisitioning of services was made by BGEPIL to....
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....ure -14. Evidence of services render: Copies of debit notes raised by BGIL on the assessee in respect of the MSU expenses on a sample basis {have already been enclosed as annexure to these written submissions. The said debit notes are supported by appropriate evidence of services rendered by BGIL. The balance debit notes may also be furnished before your goodself if so desired. Reimbursement of expenses Nature of expenses: The expenses pertain to reimbursement of travel cost incurred by the senior management of BGIL in respect of the assessee's operations in India apart from certain other miscellaneous expenses. Copies of debit notes raised by BGIL on the assessee in respect of reimbursement of expenses on a sample basis have already been submitted as annexure to submissions. The said debit notes are supported by appropriate evidence of services rendered by BGIL. The balance debit notes may also be furnished before your goodself if so desired. General and Administrative expenses Nature of expenses: The assessee has received certain charges (based on allocation of actual costs incurred) from its associated enterprises in the nature of general administration and geolo....
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.... hand. 2. You have received payment from BGEIPL under the following heads: Payroll expenses Management service unit charges General and Administrative expenses Reimbursement of expenses Please explain when you are receiving payment under the head reimbursement of expenses separately over and above payroll expenses, management service unit charges, General and administrative expenses, you are asked to explain how the expenses other than reimbursement of expenses are also claimed by you as reimbursement of expenses. 3. Regarding payroll expenses, please give the name of employees seconded by you to BGEIPL, the date when BGEIPL requisitioned the services of those expats from you with documentary evidence, the date of appointment with you and subsequently, after the tenure was over in India and where was the employee transferred. The details of payment received by you employee wise from BGEIPL and subsequent payment by you to the employees with evidence of payment from your bank account to substantiate your claim of so called cost to cost reimbursement. Please note that in absence of evidence of corresponding payment by you to the employee your claim of reimburseme....
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....d personnel services. Please name the staff member who were provided to render the services, the nature of services rendered, the location of services rendered and the amount paid to such staff members by you. As per Exhibit A to the agreement, you were supposed to render various services to BGEIPL which you have not rendered as evidenced during the survey operation. Please explain why your claim of reimbursement be not rejected as you have received money without rendering any services. 10. Similarly, for allocated charges, you are being paid based on the provisions of production sharing contract. Please explain the basis of computation of general and administrative expense received by you from BGEIPL and corresponding payment to various parties to substantiate your claim of reimbursement. Please further explain what are the services rendered by you under General and Administrative head to BGEIPL. It is once again clarified that mere submission of .invoices is not an evidence to substantiate your claim of reimbursement. " 2.5. The AO observed that assesseer's claim could not be allowed for the following reasons: (a) The assessee failed to furnish any worthwhile evidence to....
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....ions, inter alia, held as under: (a) The assessee has not been able to produce, either before the AO or before the DRP any convincing evidence (except for the payroll services to a limited extent), about actual rendering of these services. (b) The evidence that the assessee referred in its submissions qua service agreement between the assessee and BGEPIL, list of employees of the assessee deputed to India, copies of debit notes raised by BGIL on BGEPIL and copies of some reports of some 'independent' consultants. (c) Apart from the evidence noted above the assessee did not give any other evidence about the nature of services rendered, persons or parties who rendered the services, how and from which source and when the settlements were made for the consideration for these services. (d) Considering the detailed consideration of the services involved, which was about Rs. 80 crores, the evidence that the assessee was able to produce, was absolutely insufficient. (e) The assessee failed to keep books of a/c and got them audited as per the requirement of section 44AB. 2.9. Further, the assessee's contention before ld. DRP was that the manner of account followed by it wa....
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.... of accounts and getting them audited as required u/s 44AS of the I.T Act. As mentioned earlier such a condition cannot be made by any Department of Government of India except with an express amendment in the Income tax Act. This is supported by Article 17 of the Model Contract dealing with 'Taxes, Royalties, Rentals, Duties etc', para 17.1 of which reads as under: "17.1 Companies, their employees, persons providing any materials, supplies, services or facilities or supplying any ship, aircraft, machinery, equipment or plant [whether by way of sale or hire) to the Companies for Petroleum Operations or for an r other purpose and the employees of such persons shall be subject to all fiscal legislation in India except where, pursuant to any authority granted under an 7 applicable law, they are exempted wholly or partly from the application of the revisions of a particular law or as otherwise provided herein." In view of the above the plea taken by the assessee that it is not required to maintain any books of accounts and not to reflect the amounts received from BGEPIL in its Profit and expenditure in respect of services rendered to BGEPIL in its Profit and Loss accounts ....
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....of the assessee is computed as under: Income as determined in draft assessment order: Rs. 97,28,98,465/- Less: 1) Relief granted by DRP out of Management and service unit Charges of Rs. 34,77,35,896/- Rs.60,00,000/- 2) Relief granted by DRP out of General & Admn. Expenses Of Rs. 19,16,1,571/- Rs. 8,10,31,154/- 3) Out of miscellaneous expenses Of Rs. 3,05,85,488/- Rs. 13,34,377/- Total income Rs. 88,45,32,934/- Total income rounded off Rs. 88,45,32,930/-" 3. Being aggrieved with the assessment order passed u/s 143(3)/144C(13), the assessee is in appeal before us and has taken following grounds of appeal: "Based on the facts and circumstances of the case, BG International Limited (hereinafter referred to as the 'Appellant') craves leave to prefer an appeal against the order passed by the Assistant Director of Income Tax (International Taxation), Dehradun [hereinafter referred to as the 'learned AO' or 'AO'] under section 143(3)/ 144C(13) of the Income-tax Act, 1961 (hereinafter referred to as the 'Act'), in pursuance of the directions issued by the Hon'ble Dispute Resolution Panel - II, Delh....
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....in India under Article 13 of the DT AA as FTS since the service does not make available any technical knowledge, experience, skill know-how or processes, or consist of the development and transfer of a technical plan or technical design to the Appellant. IV. Permanent establishment ('PE') in India 10. The learned AO/ DRP has erred in facts in holding that the Appellant has a PE in India without seeking/ analysing any information to prove that a PE exists in India. 11. WITHOUT PREJUDUCE to Ground 10, assuming but not accepting that a PE exists, the AO/ DRP erred in treating all amounts received by the Appellant as income attributable to the PE. The learned AO/ DRP ought to have held that only income directly attributable to the PE should be taxable in India under the DTAA. 12. WITHOUT PREJUDUCE to Ground 10, assuming but not accepting that a PE exists, the Appellant being a nonresident engaged in the business of providing services and facilities in connection with extraction or production of mineral oils, the income shall be taxable under section 44BB of the Act. Other Grounds of Appeal V. Requirement to maintain books of accounts and get the same audited unde....
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....ny mark up. 6.1. Ld. counsel submitted that BG Exploration and Production India Ltd. ("BGEPIL") is a limited liability company incorporated in Cayman Islands and an Associated Enterprise of the assessee within the meaning of Sec. 92A of the Act. BGEPIL had entered into a production sharing contract ("PSC") dated 15-2-2002 (which was subsequently amended on 10-1-2005) along with Oil and Natural gas Commission ("ONGC") and Reliance Industries Ltd. ("RIL"), with the Government of India, for exploration and production of oil and gas hydrocarbons in India in the designated contracted fields of Panna Mukta and Mid and South Tapti fields. To execute such PSC and carry out its obligations under the PSC as a joint operator, BGEPIL has set up a project office in India. 6.2. The ld. counsel in the written submissions has also submitted that: (i) Oil and Gas Industry is huge capital intensive industry. Exploration challenges and low success rate (of finding oil deposits), makes use of high end and sophisticated technology, and, technically expert and highly trained and experienced human resource, imperative for this industry. The challenges are further marked by a dearth of experience....
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.... including BGEPIL during the year under consideration. The assessee had incurred expenditure on payroll expenses, management service unit charges, general and administrative expenses etc. and had received reimbursement of Rs. 972,898,465/- from BGEPIL towards such cross charges/ cost allocation. 6.5. Ld. counsel submitted that in AY 2003-04, 2004-05 & 2005-06, Tribunal vide its order dated 28-8-2009, restored the matter to the file of AO, following the Tribunal's decision in the case of EGEPIL for A.Y. 2000- 01 as per ITA no. 861/Del/2005 dated 24-10-2008, observing in para 9 as under: "9. Since, we have noted that the facts in the present case are identical we decide this issue in the present case in principle in favour of the assessee respectively following this Tribunal decision but since factual aspect of this claim of the assessee that the receipt of the assessee in these three years is only reimbursement of the expenses from an affiliate company was not examined by the Assessing Officer or by the Ld. CIT(A), we feel that for the factual verification of this contention of the assessee, the issue should go back to the file of the Assessing Officer and if the assessee can ....
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....rvices unit 530,806,352 530,806,352 General & administrative expenses 191,610,571 191,610,571 - Reimbursement 30,585,488 30,585,488 Total 972,738,945 972,738,945 BG & Production India Ltd Reimbursement of expenses 50,98,140 50,98,1401 No TP adjustment is proposed in this case" 6.8. Ld. counsel referred to pages 106 to 147 of the PB wherein the Cost Allocation and time writing policy 2006 is contained and pointed out that allocation of overhead cost was made strictly on a "no gain no loss" basis. Only those costs, which were deemed to benefit the assessee, were included in the over head cost allocation pool and charged out. 6.9. Ld. counsel referred to the Global Allocation Policy and pointed out that the direct cost incurred by assessee and directly attributable to cost centres included mainly payroll and associated employee costs of BG International employees; and other expenses of BGI cost centres. The support costs incurred by BGI were mainly insurance and under management support unit, the allocation was made on the basis of shared service performed for the benefit of time writing cost centres a....
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....n to which the Central Government has entered into an agreement with any person for the association or participation of the Central Government or any person authorized by it in such business which agreement has been laid on the table of each house of Parliament), there shall be made in lieu of, or in addition to, the allowances admissible under this Act, such allowances as are specified in the agreement in relation - (a) to expenditure by way of infructuous or abortive exploration expenses in respect of any area surrendered prior to the beginning of commercial production by the assessee; (b) after the beginning of commercial production, to expenditure incurred by the assessee, whether before or after such commercial production, in respect of drilling or exploration activities or services or in respect of physical assets used in that connection, except assets on which allowance for depreciation is admissible under section 32. [Provided that in relation to any agreement entered into after the 31st day of March, 1981, this clause shall have effect subject to the modification that the words and figures "except assets on which allowance for depreciation is admissible under sect....
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....e alleged reimbursement was taken. Since there was no expenditure incurred by BGI, therefore, there was no question of any reimbursement. 7.4. As far as the ld. counsel's reliance on the TPO's order for AY 2007- 08 is concerned, ld. CIT(DR) submitted that BGIPL had made the payment to assessee under specific head, therefore, TPO accepted the same. In this regard ld. DR referred to section 92(3), which reads as under: "Computation of income from international transaction having regard to arm's length price - 92(3) The provisions of this section shall not apply in a case where the computation of income under sub-section (1) or subsection (2A) or the determination of the allowance for any expense or interest under that sub-section or the determination of any cost or expense allocated or apportioned, or, as the case may be contributed under sub-section (2) or sub-section (2A),has the effect of reducing the income chargeable to tax or increasing the loss, as the case may be, computed on the basis of entries made in the books of account in respect of the previous year in which the international transaction or specified domestic transaction was entered into." 7.5. Ld. CIT(DR) ref....
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....s in the eating, If the assessee has not maintained any documentation at all or has not allocated the cost based on the time spent by the expert/ employee, then, it would have been possible to doubt the transactions. This is not the case. iii) Intra group services, by definition are within the group. It is a tautology to say that intra group services do not have outside comparables. Search for comparables of intra group services in an uncontrolled - independent environment is an oxymoron. Therefore, to demand that assessee to produce evidence to show that "independent entity in comparable situation would have paid' for such services" is nothing but asking to perform the impossible. iv) . DRP is convinced that without such services assessee would not have succeeded in earning the income it did during the year. If the assessee and its group companies were not having this kind of expertise, then, Government of India and ONGC would not have entered into a joint production agreement in the first place. v) It is impossible for any auditor or TPO or DRP to see each and every invoice. It is a time honoured practice of audit to .test check.' Assessee has a system of documen....
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....with provisions of PSC. 2. For the purpose of the Double Taxation Avoidance Agreement between India and the United Kingdom, BGI is a tax resident of the United Kingdom. 3. In India, BGI is providing services only to BG Exploration & Production India Limited (BGEPIL). The services are being provided on cost-to-cost in the nature of reimbursements) in terms of Article 3.1.4b of the Production Sharing Contracts (Panna Mukta & Mid and South Tapti) entered into between BGEPIL. Reliance Industries Limited, the ONGC and the Government of India (which has been approved by both Houses of the Parliament) 4. In accordance with effective withholding tax order. Tax was deducted and paid to the treasury under protest. The payment to BGI should not be covered under Sec. 44BB as the revenues to BGI society consist of reimbursement revenues not chargeable to tax under section 44BB of the Income-tax Act." 9.5. In course of hearing, the assessee filed an affidavit to confirm that the profits of the assessee and BGEPIL were incorporated in the U.K. with the ultimate holding company viz. assessee. There was no dispute on this aspect but the main object was that while considering the profits....
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....for the assessee also referred to tribunal's order for AY 2003-04, 2004-05 and 2005-06 dated 28-8-2009, wherein Tribunal had restored the matter back to the file of AO for factual verification of the assessee's claim. Matter was taken up by AO to give effect of the Tribunal's order for AY 2004-05. The assessee clearly stated that since the documents were for more than 7 years, therefore, it was extremely difficult to retrieve them from UK. Therefore, on this basis, AO based on his earlier order rendered determined the income u/s 44BB. 9.8. Ld. counsel for the assessee submitted that the findings for AY 2004- 05 cannot be a guiding factor for deciding the issue in the present assessment year. He referred to the decision in the case of M/s Enoron Expats Services Inc. (supra), wherein it has been held that principles of res-judicata do not operate in Income-tax proceedings and the fact that in some of the earlier years the assessee had offered to pay tax u/s 44BB cannot operate as estoppels against it. We are in agreement with ld. counsel for the assessee on this proposition that merely because in AY 2004-05 the assessee was unable to substantiate its claim on account of elapse of ....
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....ch is much above the comparable companies, the underlying international transaction is held to be at arm's length. TPO/AO is directed to delete the addition made under this head. 9.10. In this regard ld. DR has submitted that decision of ld. DRP has not been accepted by the department and an appeal has been preferred before Tribunal which is pending adjudication. Therefore, in view of these circumstances, it would not be proper to comment either way on the findings of ld. DRP and we, therefore, refrain from considering the said findings. 9.11. Now coming to the facts as obtaining in the present assessment year, the first aspect to be considered is the effect of TPO's order relied upon by ld. counsel for the assessee. We are in agreement with ld. CIT(DR) that the transactions of the assessee, referred in TPO's order are with BGEPIL and total transactions are of Rs. 97,27,38,495/- and these transactions are all receipts by the assessee from BGEPIL. The TPO was primarily concerned with the ALP of the receipts of the assessee which are not at all disputed. The TPO accepted the receipts as taxable u/s 92CA(3)Ld. CIT(DR) has rightly submitted that the issue before the TPO was n....
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....wever, basic details as pointed out by lower revenue authorities have to be brought on record. Further, the submissions of assessee did not justify the nature of activities specific to India. 9.15. Ld. CIT(DR) has pointed out that the terminology franchisee suggests that these expenses apparently pertained to US territory. The assessee has business in the USA. The term "Green" also described something related to preserving climate. The US is having Federal Energy Regulatory Commission and any expenses incurred in complying with their requirements have nothing to do with India. 9.16. The next services allegedly given by assessee to BGEPIL are in regard to Management and Unit Charges. Debit notes were raised. The assessee has received following payment from BGEPIL on this count: - Information Management related Services: INR 20,49,03,976 - HR International: INR 1,66,83,335 - International accounting support: INR 1,13,59,654 - Insurance department support: INR 26,72,502 - Taxation: 31,56,243 - Marketing: 43,65,895 - Executive Vice President Office Support: 6,73,72,229 - ICDN, Cost control and finance service function. 9.17. The assessee has relied on t....
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....rs. They also gave hourly rates for a charge. 9.22. He pointed out that these reports nowhere show what the total general and administrative overhead cost was, what were the keys of allocation of these expenses and how the same had been allocated to various assets/ countries. What expenses had been allocated to India, on what basis and what were the benefits. 9.23. Once it is accepted that global cost allocation policy exist in a case of group of size like B.G. Group, then it cannot be denied that the debit notes raised are towards services rendered. Now the core issue that remains for consideration is whether the whole amount claimed to be reimbursement should be accepted or not. On this count, admittedly the assessee has not been able to establish one to one nexus between the services rendered and alleged reimbursement. There are also no comparable cases which obviously could not be there. 9.24. Thus, in sum and substance the position as it emerges is that inspite of there being a global cost allocation policy, the existence of which is not doubted by revenue, the assessee failed to substantiate its claim regarding allocation of expenses incurred by it for the services r....