TaxTMI 
TaxTMI 
2018 (7) TMI 1954
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....he Appellant, for determination of the arm's length price ("ALP") by application of TNMM on an aggregated basis and further, erred in applying CUP method Ground No.2: Without prejudice that TNMM should be selected, learned AO / DRP / TPO applied CUP method in an erroneous manner 2.1 Without prejudice that TNMM should be selected as the most appropriate method for benchmarking the transactions pertaining to intra-group services, the learned AO / DRP / TPO have erroneously selected CUP method and have applied the same in an erroneous manner by considering the amount approved by the Joint Venture ("N") partner as CUP. Ground No.3: The learned DRP/AO/TPO erred in computing the TP adjustment of INR 2,619,486,354 for intra-group services even though the learned DRP had upheld the application of CUP method as per which the TP adjustment computed by the TPO was only INR 2,400,433,920. 3.1 Without prejudice to the assessee's contentions, the transfer pricing adjustment made by the Ld. AO/DRP/ TPO should be limited to the value of international transactions and cannot exceed INR 240 crores as per the ALP determined by the Ld. TPO ....
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....nt in the final assessment order. Ground No.8: Erroneous disallowance of payment made towards intra-group services by Appellant to its AE 8.1 The learned AO / DRP / TPO grossly erred in law and on facts by making an upward transfer pricing adjustment of INR 3,832,483,013 in total towards international transactions pertaining to payment of management service and unit charges, 1M charges, general and administration expenses and payroll expenses to its AE. Ground No.9: Erroneous disregarding multiple year data 9.1 The learned AO / DRP / TPO grossly erred in erroneously rejecting multiple year data used by the Appellant in computing the ALP. Ground No. 10: Proceedings barred by limitation 10.1 The order for the assessment year 2012-13 is bad in law and is liable to be quashed having regard to the statutory time limit prescribed under the section 153 of the Act read with Explanation 1 to section 153(4) of the Act. Ground No. 11: Disallowance of branch office expenditure 11.1 The learned AO /....
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....allowing the claim of non-taxability of provisions written back of Rs. 20,67,360. Ground No. 15: Disallowance of exchange loss on interest on BG Asia Pacific Pte. Limited ("BGAP") loan 15.1 The learned AO erred in law and in facts in disallowing exchange loss of Rs. 5,31,59,102, despite acknowledging the loss to be on revenue account being interest on BGAP loan. Ground No. 16: Disallowance of head office expenditure 16.1 The learned AO / DRP erred in law and in facts in applying the provisions of section 44C of the Act to payments made to BG International Limited. 16.2 Without prejudice, the AO has erred in computing allowance under section 44C with respect to the returned income and not income assessed. Ground No. 17: Disallowance of inventory written off 17.1 The learned AO erred in law and in facts in disallowing inventory written off of Rs. 1,54,16,938 on the basis that the Appellant submitted only internal documents which do not suffice for allowance of expenditure. 17.2 The learned AO / DRP er....
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.... 21: Addition on account of difference in revenue as per Form 26AS and profit and loss account 21.1 The learned AO / DRP erred in making an addition ofRs.63,65,958, being the difference of revenue received from 0 GC as reflected in Form 26AS and Appellant's books, without appreciating that the difference is due to accounting treatment as prescribed under the PSC. 21.2 Without prejudice, the learned AO / DRP erred in not reducing the income by Rs. 12,41,30,601 being the difference of revenue from IOCL as offered to tax by the Appellant visa-vis that appearing on Form 26AS. Ground No.22: Violation of principles of natural justice 22.1 The learned AO / DRP erred in law and in facts, in ignoring the submissions and the information furnished by the Appellant during the assessment proceedings Ground No. 23: Short credit for Tax deducted at source 23.1 The learned AO erred in not granting credit of tax deducted at source to the extent of Rs. 33,53,88,297. Ground No. 24: Levy of interest under sections 234B and 234C of the Act 24.1 The learned AO has erred in law and ....
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....9,606 TNMM Provision of support services 19,349,874 TNMM Interest paid on loan 1,849,141,197 Other Method Receipt of interest on outstanding receivables 67,288,875 - Recovery of expenses 462,158,369 - 4. The taxpayer in order to benchmark its international transaction qua intra-group services used Transactional Net Margin Method (TNMM) as the Most Appropriate Method (MAM) showing earning margin of 24.67%. The taxpayer has clubbed together all the international transactions relating to intra group services and benchmarked the same under TNMM. The taxpayer also used TNMM in relation to business support services showing margin of cost plus 12%. The taxpayer benchmarked the payment of interest by obtaining quotations corroborated with independent companies' comparable payment of interest on ECBs. However, Transfer Pricing Officer (TPO) rejected the method adopted by the taxpayer and used CUP as the MAM in the intra group services. Declining the contentions raised by the taxpayer, TPO proceeded to propose TP adjustment qua international transactions undertaken by the taxpayer as under :- "27. ....
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.... with permission from the Government of India which are as under :- S.No. Name 1 Panna Mukta Oil Field 2 South Tapti Oil Field area 3 KG-OSN - 2004/1 Contract area 4 KG-DWN-2002/2 Contract area 5 MN-DWN-2002/2 Contract area 6 KG-DWN-2009/1 8. It is also not in dispute that the commercial production has only started in first 2 PSC i.e. Panna Mukta Oil Field and South Tapti Oil Field area. It is also not in dispute that the taxpayer has aggregated all transactions and used TNMM at entity level and found its international transactions at arm's length. It is also not in dispute that after directions issued by the DRP, proposed adjustment of Rs. 457,21,56,753/- by the TPO has been revised to Rs. 3,359,160,094/- which is as under :- Nature of international transactions Adjustment u/s 92CA (INR) Adjustment after the direction of DRP Intra Group Services 3,832,483,013 2,619,486,354 Interest Payment 739,673,740 739,673,740 Total 4,572,156,753 3,359,160,094 9. In the backdrop of the aforesaid facts and circumstances, arguments addressed by the ld. Authorized Representatives of the par....
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....plying TNMM on the ground that the transaction of intra group services were closely linked with the business activities of taxpayer qua exploration and production of oil and gas. 13. The ld. AR for the taxpayer contended that the issue in controversy has already been decided in favour of the taxpayer in its own case for AY 2010-11 in ITA No.1170/Del/2015 order dated 24.04.2017. We have gone through the order (supra) referred to by the ld. AR for the taxpayer in which identical issues were raised and has been decided in favour of the taxpayer by returning following findings :- "72. On the examination of the volume and us details submitted by the assessee. The Ld. dispute resolution panel has come to the conclusion that assessee has received the services and those services are useful services.. With respect to the clubbing of the transaction it was held that when the transactions are closely interrelated it is but natural to club such transaction and benchmarked it together. The Ld. dispute resolution panel at page No. 30 - 31, has considered the suspect and agreed with the contention of the assessee that intragroup services received from its associated enterp....
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....e light of the decision rendered by the coordinate Bench of the Tribunal in AY 2010-11. So, grounds no.1 to 9 are determined in favour of the taxpayer for statistical purposes. GROUND NO.10 15. Ground No.10 is dismissed having not been pressed during the course of arguments. GROUND NO.11 16. AO/DRP have disallowed the exploration and business development expenses of Rs. 40,70,92,375/- incurred by the Branch Office by treating the same as pre-operative in nature. It is the case of the taxpayer that it is established on record that the Branch Office has been established in India to carry out necessary functions for sustenance of its business of prospecting, exploration and production of crude oil and natural gas by identifying the opportunities. The taxpayer has also brought on record the detail of cost for purchase of seismic data, general and administrative expenses in connection with proposed National Exploration Licensing Policies-VIII (NELP-VIII), staff costs and project management consultancy charges etc. AO disallowed the expenditure on the ground that it is a pre-operative expenditure and cannot be allowed as business expenditure and the ta....
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....vited for the 8th offer of blocks for national exploration licensing policy for which the Assessee has to purchase the data for the bidding purposes. The other expenses which are the necessary general and administrative expenses were incurred for project management, consultancy services, etc and also staff cost and project management expenses were incurred. These expenses were disallowed by Ld. Assessing Officer holding that these are expenses for the future projects of the Assessee for which even the PSC is not executed. The Ld. Authorised Representative has submitted that this issue of allowability of this expenditure is covered in its favour by the decision of ONGC Videsh Ltd versus DCIT [37 SOT 97] wherein it has been held as under:- "15. With regard to disallowing claim of expenses of Rs. 43.85 lakhs incurred for purchase and evaluation of the seismic data of foreign blocks, on the plea of same being capital in nature, we found that Assessee being engaged in the business of exploration and production of hydrocarbons in other countries to augment the oil resources of India, it was continuously evaluating various business opportunities before acquiring a particula....
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....tuous." [Extracted Taxmann.com][underline supplied by us] Neither the Ld. Assessing Officer nor the Ld. Departmental Representative could press any other judicial precedent which shows that amount spent by the assessing is not allowable as revenue expenditure under section 37 (1) of the act. It is also not the argument of the revenue that such expenditure incurred by the Assessee is capital in nature. Furthermore, the Ld. AR has also pressed into several decisions which say that that expenses incurred towards extension of business which was subsequently abandon or did not fructify, are allowable. Therefore in view of the above decisions wherein it is been held that the expenses for purchase of this kind of data is unnecessary revenue expenditure required to be incurred by the Assessee for the purpose of its business and hence is allowable as revenue expenditure, we also direct the Ld. Assessing Officer to allow the expenditure incurred by the Assessee on purchase of data and other relevant expenses amounting to Rs. 220983295/-. In the result ground No. 6 of the appeal of the Assessee is allowed. 20. In view of what has been discussed above, we are....
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....T - 37 SOT 97. 24. The ld. AR for the taxpayer has also contended that this issue has also been decided in favour of the taxpayer in its own case for AY 2010-11. For ready perusal, operative part of the order is extracted as under :- "54. Section 42(1) makes it clear that for the purpose of computing the profits and gains of any business consisting of prospecting, extraction or production of mineral oil, the Assessee would be entitled to claim deduction in respect of three items of expenditure in lieu of or in addition to the allowances admissible under the Act, viz., (i) exploration cost, which is capital expenditure, (ii) development cost, which is also capital expenditure, and (iii) production costs which are operational expenditure. Therefore it is erroneous belief that in case of PSC the Assessee is only entitled to deduction, which are covered there and not any other deduction which are covered under the any other provisions of the act. We have already discussed the provision of section 42 of the act in deciding some of the grounds of appeal of the assessee. Therefore, we reject the contention of the revenue that if the expenditure do not find allowabi....
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.... each of the PSC contract were explained by the Assessee by giving breakup of their cost as well as nature of those expenditure. Assessee explained that as it needs to safeguard its interest in the blocks it has employed technical experts for which time writing charges are incurred. Further, for the support functions. It also hires several other persons and necessarily has to incur other expenditure with respect to its finance and accounting activities, its human resource activities and legal compliance and litigation activities. These expenditure are though incurred in support to the PSC contracts executed by the Assessee at may not be necessarily shared by the other jointventure partners. Merely because it is not shared by others, which may be for many reasons, it cannot be said that the Assessee has not incurred these expenditure wholly and exclusively for the purposes of business of the Assessee. With respect to the details available with the Assessing Officer, It was not pointed out a single instance that any of the expenditure are not incurred by the Assessee for the purposes of its business. In fact, out of the total expenditure The Ld. Assessing Officer has partly allowed t....
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....O/DRP is not sustainable in the eyes of law, hence disallowance is ordered to be deleted and ground no.12 is determined in favour of the taxpayer. GROUND NO.13 27. AO/DRP have disallowed an amount of Rs. 8,33,97,904/- claimed by the taxpayer @ 6% as loss on transportation of gas on the ground that the provision for transportation loss can be equated to the provision of expenses paid at the year end. It is the case of the taxpayer that ONGC, Reliance Industries Limited and the taxpayer have entered into a settlement agreement dated 31.12.2005 with ONGC (transporter) for transportation of gas and condensate from the Mid and South Tapti Contract Areas from the Tapti Delivery point to PMT redelivery point. It is also the case of the taxpayer that as per clause 4.4 of the Agreement, the losses on transportation of gas shall be determined by condensate expert jointly appointed by joint venture partners and transporters, however pending appointment of expert BGEPIL, the taxpayer has provided for transportation losses @ 6% of the condensate revenue on estimate basis. 28. The ld. AR for the taxpayer contended that the AO has disallowed the transportation loss by relying....
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....for transportation of gas and condensate, the loss is to be determined by the expert appointed by the joint venture partners, there is no question to resort to the estimation to claim such loss. More so in AY 201617, loss has been determined by the expert appointed as per settlement agreement @ 1.7%. So, we are of the considered view that the matter is required to be remanded back to the AO to decide afresh after providing an opportunity of being heard to the taxpayer by following the rule of consistency. So, ground no.13 is determined in favour of the taxpayer for statistical purposes. GROUND NO.14 31. The taxpayer claimed an amount of Rs. 1,50,21,66,730/- on account of write back of provisions of doubtful debts out of which AO taxed write back amount of Rs. 20,67,360/- on the ground that the taxpayer has not given any reason for writing back provisions for doubtful debts and claiming the same as expenditure in the computation of income. It is contended by ld. AR for the taxpayer that the AO has failed to appreciate that provisions for doubtful debts of Rs. 20,67,360/- credited in the preceding year has not been claimed as deduction in the year in whi....
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....on'ble Uttarakhand High Court in CIT vs. Enron Oil and Gas India Limited (supra), we are of the considered view that foreign exchange loss incurred by the taxpayer has been debited to the profit and loss account as per specific provisions of PSC, wherein foreign exchange loss is treated as an allowable deduction but AO/DRP have erred in disallowing the same. So, we order to delete the disallowance of Rs. 5,31,59,102/- made by the AO. So, ground no.15 is determined in favour of the taxpayer. GROUND NO.16 35. AO/DRP have disallowed the head office expenses amounting to Rs. 240,04,33,920/- by restricting allowability of these expenditure to 5% of the adjusted total income of the taxpayer by invoking the provisions contained u/s 44C of the Act. It is the case of the taxpayer that it has incurred expenses to undertake activities required by the PSC with regard to its standard of operation, including the quality of execution of work, access to latest industry information and global updates, safety of its employees and environment etc. and all these expenses are incurred on the basis of commercial expediency determined by the taxpayer and the same need not be accep....
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....d, whether the Assessee has incurred expenditure for the purposes of its business or not. The Assessee has stated that it has incurred such expenditure having regard to its standard of operation and the quality of execution work, safety of its employees in the environment. These expenses are required to be incurred by the Assessee based on the commercial expediency. The Assessee has stated that in relation to the support functions, which are innovatively inevitable for carrying on its business and incurred based on the commercial expediency are expenses belonging to the Assessee which cannot be accepted by the operating board. Further, there may be certain expenditure which are required to be incurred to enable the Assessee to perform its operation under the production sharing contract sustaining its activities and maintaining its standard of operations. It is irrelevant whether the joint operator board has approved such expenditure or not because there may be several other reasons for joint-venture partners to not to share the expenditure. The Ld. Assessing Officer as well as the Ld. Dispute Resolution Panel, despite having the necessary details of the expenditure did not point ou....
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....d and relied upon Note-II of Financial Statements for the year under assessment wherein it is stated that the financial statements have been prepared to comply with all material aspects with accounting standard notified u/s 211(3C) of the Companies (Accounting Standards) Rules, 2006 as amended and other relevant provisions of the Companies Act, 1956. The taxpayer also relied upon the supporting documents prepared by Senior Drilling Engineer of the company certifying that such inventory was not usable in future and was produced before AO and consequently claimed deduction for the obsolete inventory written off u/s 37(1) of the Act and relied upon the decision rendered by Hon'ble Bombay High Court in case of Alfa Laval India Ltd. vs. DCIT - 266 ITR 418 (Bom.), affirmed by the Hon'ble Supreme Court by judgment reported in 295 ITR 451. The ld. AR for the taxpayer also contended that the taxpayer has submitted audit report of an independent auditor prepared on the basis of physical verification and maintenance of inventory during assessment proceedings and further relied upon the decision rendered by coordinate Bench of the Tribunal in Gillette India Ltd. vs. ACIT - 66 taxma....
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....been given sufficient to identify items of inventory to be written off in the books of account, the same is required to be allowed. So, in these circumstances, we are of the considered view that the AO is directed to allow the amount of Rs. 1,54,16,938/- on account of inventory written off after due verification in the light of what has been discussed in the preceding paras. Consequently, ground no.17 is determined in favour of the taxpayer. GROUND NO.18 43. AO/DRP have disallowed an amount of Rs. 48,70,14,075/- and amount of Rs. 3,47,69,091/- on account of depreciation and depletion respectively being the difference of depreciation/ depletion amount between the tax audit report and the computation. The ld. AR for the taxpayer contended that the difference in the actual cost of addition in the fixed assets as per tax audit report and as per computation of total income is on account of allocation of interest cost of Rs. 23,52,463/- which was highlighted in the depreciation schedule of the revised computation of the total income submitted to the AO. The ld. AR for the taxpayer further contended that as regards the difference of depreciation of Rs. 48,70,....
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....hink that there is any doubt about the ownership of the IT infrastructure in question as per paragraph No. 11.1 of the direction of the Ld. Dispute Resolution Panel. Therefore only issue now remains is to be seen whether the Assessee has properly demonstrated before the Ld. Assessing Officer that the Assessee has used the assets for the purposes of the business. It is better to look at what kind of assets the Assessee are owned by and used by it. Assets are production database management system, SAP up gradation, budgeting and forecasting system, training programs, simulations software, asset modeling systems and email facilities. When the Assessee is participating in such a huge production sharing contract, It is too naïve to think that production database management system and SAP, training programs, simulations programme and email facilities have not been used by the Assessee. Issues have also been examined at the time of determining Arm's length price of these expense. The actual cost of these assets are not doubted by the Ld. Assessing Officer. In view of this we are of the opinion that these assets are beneficially owned by the Assessee and are used for the purposes of t....
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.... by the taxpayer during the course of assessment proceedings. 49. Ld. AR for the taxpayer contended that as per section 32 (1)(iia) of the Act in case of new plant and machinery acquired and installed by the taxpayer engaged in the business of manufacture or production of any article or thing, a sum equal to 20% of the actual cost of such machinery or plant is allowable as deduction in addition to the normal depreciation and further contended that the process of exploration and production of oil and gas comprises of extraction and separation and separation brings into existence new and distinct article and it amounts of manufacturing. 50. It is also the case of the taxpayer that in order to explain the additional deduction claimed comprehensive submission dated 29.01.2016 were filed before the AO who has merely declined the claim on the ground that the additional claim can only be made by way of revised return of income. We are of the considered view that AO is required to decide the claim in view of the provisions contained u/s 32(1)(iia) of the Act in the light of the decision rendered by Hon'ble Supreme Court and Hon'ble High Courts in CIT vs. Hindustan P....
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....oil for which the accounting treatment of currency fluctuation is provided under 'Article 20 - Currency and Exchange Control Provisions' of the aforesaid PSC. Para 20.2 in Article 20 of the aforesaid the PSC provides that for accounting of purchase and sale of currency by the contractor, the rates as specified in Section 1.6 of Appendix C - Accounting Procedure' shall apply. The relevant extract of the aforesaid article of PSC has been reproduced for your ready reference: "The rates of exchange for the purchase and sale of currency by the Contractor shall be the prevailing rates of general application determined by the State Bank of India or such other financial body as may be mutually agreed by the Parties and in accordance with prevailing currency and exchange regulations and, for accounting purposes under this Contract, these rates shall apply as provided in Section 1.6 of Appendix C." As per the Para 1.6.1 in 'Accounting Procedure - Section l' of the aforesaid mentioned PSC, the appellant is required to consider previous month's average of the daily means of the buy and selling rates of exchange as quoted by t....
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.... by the agreement of PSC and the foreign exchange losses on account of foreign currency translation is an allowable deduction while computing the total income of the taxpayer. In such circumstances, provisions of PSC are to be applied and the disallowance made by AO/DRP on account of difference in revenue is not sustainable, hence allowable subject to verification by the AO. So, ground no.21 is determined in favour of the taxpayer for statistical purposes. GROUND NO.22 57. Ground No.22 is dismissed having not been pressed during the course of arguments. GROUND NO.23 58. AO has not granted credit of tax deducted at source to the tune of Rs. 33,53,88,297/- stated to have been deposited by the taxpayer. AO is directed to grant the credit of the TDS claimed by the taxpayer subject to verification. Accordingly, ground no.23 is determined in favour of the taxpayer. GROUND NO.24 59. AO charged the interest to the taxpayer u/s 234B. The ld. AR for the taxpayer contended that the interest u/s 234B is not chargeable to taxpayer it being a non-resident whose income is subject to tax deduction at source and further contended that this issue has a....
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....e view that when the facts of a particular case justify it, it is open to the court to invoke the principles of equity even in the interpretation of tax laws. Tax laws and equity need not be sworn enemies at all times. The rule of strict interpretation may be relaxed where mischief can result because of the inconsistent or contradictory stands taken by the Assessee or even the revenue. Moreover, interest is, inter alia, compensation for the use of the money. The Assessee has had the use of the money, which would otherwise have been paid as advance tax, until it accepted the assessments at the first appellate stage. Where the revenue has been deprived of the use of the monies and thereby put to loss for no fault on its part and where the loss arose as a result of vacillating stands taken by the Assessee, it is not expected of the Assessee to shift the responsibility to the Indian payers. We are not to be understood as passing a value-judgment on the Assessee's conduct. We are only saying that the Assessee should take responsibility for its actions." [Emphasis added] This Court finds that no need is made out in these facts to balance any equities in these facts, as the Assessee h....