TaxTMI 
TaxTMI 
TaxTMI 
2018 (7) TMI 1954
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....h 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 under the CUP method which was upheld by Hon'ble DRP ....
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....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 / DRP erred in law and in facts in disallowing the branch office expenditure of Rs. 40,70,92,375 by treating it as pre-operative in nature. 11.2 The learned AO / DRP erred in not apprecia....
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....f 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 erred in not appreciating that amount of obsolete inventory written off was debited to the Profit and Loss Account which has been audited by an independent auditor. Ground No. 18: Disallowance of depreciation and depletion 18.1 The learned AO erred in law and in facts in disallowing depreciation of Rs. 48,70,14,075 ....
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....O / 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 in fact, in levying interest under sections 234B and 234C of the Act disregarding the fact that the appellant is a non-resident whose income is subject to tax deduction at source. Ground No. 25: General 25.1 The Appellant submits that the AO, TPO and DRP have erred in arriving various unwarranted and erroneous conclusions unsupported by any relevant material in deciding the case. 25.2 The AO erred in initiating penalty proceedings under section 271(1)(c)....
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....up 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. On the basis of discussion made above the total adjustments proposed in respect of international transactions under taken by the taxpayer are as given below: S.No. Nature of international transaction Adjustment u/s 92CA (INR) 1 Intra Group Services* 3,832,483,013 2 Interest Payment 739,673,740 Total 457,21,56,753 The above shortfall of Rs. 3,832,483,013 has been proposed as an adjustment on without prejudice basis to the price shown by the taxpayer in its books of account in relation to intra group services. Since t....
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.... 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 parties to the appeal, the grounds raised by the taxpayer impugning order passed by TPO/DRP/AO are discussed as under. TRANSFER PRICING GROUNDS GROUNDS NO.1, 2, 3, 4, 5, 6 7, 8 & 9 10. Perusal of Para Z at page 20 of impugned order passed by ld. DRP shows that the Ld. DRP has declined to deal with the objections with regard to benchmarking the international transactions under TNMM on the ground that the TPO has done benchmarking as per TNMM also (on without prejudice basis) and CUP has already been upheld by the ld. DRP, so the benchmarking under the TNMM becomes academic in nature. 11. Undisputedl....
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....ed 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 enterprise are closely linked to the main business activity of the assessee company placing reliance on the US regulations, OECD regulations and OECD draft notes on comparability. In view of this we do not find any infirmity and none was pointed out before us by the Ld. departmental representative in the order of the Ld. dispute resolution panel. Consequently, after verifying that assessee has demonstrated need for those services, benefit derived from those services, evidence of receipt of such services and submitting that those services are neither duplicative in nature and nor are share holder activities, the DRP directed the Ld. transfer pricing officer to delet....
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....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 taxpayer has not provided party-wise details of payment made and nor the details have been provided as to whether TDS compliance has been made or not. 17. The business expenditure u/s 37 of the Act are required to be allowed subject to fulfilling the conditions inter alia that the expenses should be incurred wholly and exclusively for the purpose of business and that the expenses should be revenue in nature. It is not in dispute that the taxpayer has incurred the expenses in question on cost for purchase of seismic data, general and administrative expenses under the NELP-VIII and staff costs and management consultancy charges, the break up/details thereof ha....
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....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 particular field/block. Since all these opportunities have to be evaluated and studied before taking decision to invest and enter into a contract, the process of evaluation of the block started with submitting tender fee/data fee, etc. and then the seismic data had to be evaluated in seismic processing centre. After evaluating the same, the Assessee was to take decision as to whether investments should be made in the project or not. There is no dispute to the fact that in all industries an activity for furtherance of its business or evaluation of better profit-earning process in one manner or other is undertaken. Effort to evaluate the prospects of better earning profit is not a separate activi....
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.... 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 of the considered view that since the AO/DRP have not disputed the incurrence of expenses and have also not disputed the fact that the taxpayer's business was already running and expenses are for the business of prospecting exploration and production of crude oil and natural gas in India, the same cannot be disallowed on the ground that these expenses are incurred for future prospects of the taxpayer for which PSC was not executed because when expenses are incurred for sustenance of the business, to evaluate the prospect of better profit as per aims and objects of the taxpayer, the same has to be treated as revenue expenses in nature. So, following the decision rendered by the coordinate ....
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....uction 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 allowability under section 42, it cannot be allowed to the Assessee. Now coming to the various expenditure which has been incurred by the Assessee are in the form of various expenditure pertaining to oil exploration blocks for which the PSC has been entered into. Out of the same, the Ld. Assessing Officer has allowed some of the expenditure and disallowed rest of the expenditure. The below chart depicts this picture. Classification Allowed by AO Disallowed by AO Total KG-OSN-2004/1 102,937,064 71,638,553 174,575,617 MN-DWN-2002/2 330,681,668 105,241,658 435,923,326 KG-DWN-98/4 37,886,501 62,450,282 100,336,783 Other expenditure - primarily for purch....
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....ny 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 the expenditure and partly disallowed the expenditure by using the single yardstick that if expenditure are shared by the JV same are allowable and if same is not shared by JV partners, then it is not allowable. We failed to see any such provision in the act that if the other party in the joint-venture do not agree to share the particular cost, the cost incurred by one of the partners of that joint-venture becomes the expenditure not for the purpose of the business of that partner. No such provision has also been brought to our notice by the revenue. It is also not the case of the revenue that details of those expenditure are not available before them or Assessee has furnished incomplete information for its allowability. Further, no judicial precedent w....
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....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 upon the decision rendered by the Hon'ble Supreme Court in case of Seagram Distilleries (P) Ltd. vs. CIT-III - Appeal (C) No.12102 of 2016 which is not applicable to the case of the taxpayer for the following reasons :- "In the said case, the provision for transportation loss was made on dispatch goods when the breaking of bottle mayor may not happen. Thus, there was no present obligation with respect to liability in the date on which the provision was created. Thus, this liability was contingent in nature as per Accounting Standard 29 'Provisions, Contingent Liabilities, Contingent Assets' in that case. In the appellant's case, the provision is made on completion of the sale of condensate where the loss is bound to happen on transportation of condens....
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.... 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 which such provision was credited. The contention raised by ld. AR for the taxpayer is sustainable because when the provisions of doubtful debts of Rs. 20,67,360/- credited in the preceding year has not been claimed in the year in which such provisions were credited, the write back of the same in the subsequent year i.e. year under assessment is not taxable as it would amount to double taxation. So, we are of the considered view that it is merely an arithmetic calculation and AO to verify the same and to decide accordingly. So, ground no.14 is determined in favour of the taxpayer. GROUND NO.15 32. AO disallowed exchange loss on interest on BG Asia Pacific Pte Ltd. loan on the ground that the loan itself is being treated as a colourable device used by the taxpayer to increase its....
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....curred 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 accepted by the joint venture partner. Ld. AR for the taxpayer contended that identical issue has already been decided in favour of the taxpayer in its own case for AY 2010-11 (supra). 36. Undisputedly, this issue was directly and substantially come up for adjudication for the coordinate Bench of the Tribunal in taxpayer's own case for AY 2010-11 and decided in favour of the taxpayer by returning following findings :- " ......Coming to the facts of the impugned ground, The Ld. Assessing Officer has disallowed the same expenditure for the only reason that had the same were incurred for the production it should have been passed through the joint venture and shared by all the partners and these expenses are not incurred wholly and actually for the purpose of the business of the Assessee. Nature of the expe....
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....rd 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 out the single instance that these expenditure are not incurred by the Assessee for the purposes of its business. Merely making references to the various judicial precedents without putting to the facts on record about incurring of the expenditure by the Assessee or non-business purposes disallowance made by the Ld. and Assessing Officer cannot be upheld. Instead, despite full details available with them they have denied the claim to the Assessee. Neither the assessing officer and nor the Dispute resolution Panel point out nature of details which was not submitted by the Assessee when part of the expenditure has already been considered in detail at the time of determining Arms; Length of the transaction. In view of no adverse inference from the lower authorities on the details submitted, we are constrained to allow the claim of the Assesse....
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....sp; 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 taxmann.com 221. Ld. DR for the Revenue to repel the arguments addressed by the ld. AR for the taxpayer relied upon the orders of AO/DRP. 39. While deciding the identical issue, the Hon'ble Bombay High Court in case cited as Alfa Laval India Ltd. vs. DCIT (supra) held as under :- "Held, (i) that the duly certified auditor's report placed before the Assessing Officer clearly justified valuation of obsolete items at 10 per cent. of cost. There is no dispute that the assessee is entitled to value the closing stock at market value or at cost whichever is lower. It is also not in dispute that the value of the closing stock has been taken as the value of the opening stock in the subsequent year. Moreover, it is also not disputed that the obsolete items were in fact sold in the subsequent year at a price less than 10 per cent. of the cos....
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.... 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. 48,70,14,075/-, it is submitted that in the previous years, the amount of Global IT & T cost paid to BGIL was considered as capital in nature by the taxpayer and the same was capitalized and the taxpayer had claimed depreciation thereof but the tax auditor report has considered this as revenue in nature, hence difference occurred. It is further contended by the ld. AR that difference in amount of depletion of Rs. 3,47,69,091/- is due to the fact that opening WDV of assets as on the 1st day of year of assessment arises out of additions to fixed assets and consequently, depreciation accepted in the earlier years by the AO which was considered by the auditor as revenue in nature but the taxpayer has suo motu disallowed the said expenses and claimed the depreciation in the previous years. It is further contended by ld. AR that identical issue has been....
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....een 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 the business of the Assessee, therefore entitles Assessee to claim the depreciation on these assets. In view of this ground No. 5 of the appeal of the Assessee is allowed." 45. In view of what has been discussed above and following the decision rendered by the coordinate Bench of the Tribunal in taxpayer's own case for AY 2010-11 (supra), we are of the considered view that when the taxpayer has duly explained that the difference of depreciation of Rs. 48,70,14,075/- is due to the fact that in previous year, the amount of Global IT&T cost paid to BGIL was considered as capital in nature by the taxpayer and the same was capitalized on which taxpayer had claimed depreciation, but tax auditor report has considered this as revenue in nature, no disallowance can be made on account however subject to the verification by the AO. 46. So far as question of amou....
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....ditional 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 Petroleum Corp. Ltd. - 396 ITR 696 (SC), HLS India Ltd. - 355 ITR 292 (Del.), CIT vs. Sesa Goa Ltd. - 271 ITR 331 (SC), Aluminum Corporation of India Ltd. vs. Coal Board - AIR 1959 Cal. 222 and CIT vs. Mercantile Construction Co. (1994) 74 taxman 41 (Cal. HC) on merits after providing an opportunity of being heard to the taxpayer. Consequently, ground no.19 is determined in favour of the taxpayer for statistical purposes. GROUND NO.20 51. AO/DRP have disallowed interest of Rs. 2,31,62,145/- on the ground that the same has not been claimed as deduction. Undisputedly, the taxpayer has not claimed the interest amount of Rs. 2,31,62,145/- while computing its profit for the year under assessment and consequently, disallowed by the AO/DRP being excess interest claim of capital nature. 52. The ld. AR for the taxpayer contended that since the taxpayer ....
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....n 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 the State Bank of India or any other financial body as may be mutually agreed. The relevant extract of the aforesaid article is reproduced for your ready reference: "For translation purposes between United States Dollars and Indian Rupees or any other currency, the previous month's average of the daily means of the buying and selling rates of exchange as quoted by the State Bank of India (or any other financial body as may be mutually agreed between the Parties) shall be used for the month in which the revenues, costs, expenditures, receipts or income are recorded. However, in the case of any single non-US Dollar transaction in excess of the equivalent of one hundred thousand us Dollars (US$ 100,000), the conversion into US Dollars shall be performed on the basis of the average of the applicable exchange rates for the day on which the transaction occurred." 54. When the taxpayer has book....
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....arged 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 already been determined in favour of the taxpayer in its own case for AY 2010-11 (supra). Coordinate Bench of the Tribunal by relying upon the decisions rendered by Hon'ble Uttarakhand High Court in case of CIT vs. Maersk Company Limited - 334 ITR 79 and Hon'ble Delhi High Court in case of DIT vs. GE Packaged Power Incorporation - 373 ITR 65 directed the AO not to charge the interest u/s 234B of the Act on the income of the taxpayer which is liable to tax deduction at source by returning following findings :- "61. We have carefully considered the rival contentions and also perused the relevant judicial precedents cited before us. In the decision cited by the Ld. Authorised Representative in case of CIT versus GE packaged power incorporation (373 ITR 65) in Para No. 19, the Hon'ble high court has considered the decision cited by the Ld. Departmental Representative as under:- "19. Alcatel Lucent ....
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....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 has not vacillated in its stand as to the existence of a PE in India or otherwise. In any event, as observed earlier, the position of law itself requires that the tax be deducted at source, whatever may be the Assessee's stance, failing which the payer is treated as an Assessee-in-default under Section 201, and the payee is required to discharge its liability to pay the tax that was not deducted under Section 191." [Extracted from Taxmann.com] 62. We are aware that Hon'ble Supreme Court has granted SLP against High Court's ruling that where Assessee was nonresident company, entire tax was to be deducted at source on payments made by payer to it and there was no question of payment of advance tax by Assessee; therefore, revenue could not charge any interest under section 234B from Assessee, which is pending for adjudication. However the decision of the Hon high court is to be followed by us , if the same is not stayed by the ho....