Income Tax Appellate Tribunal - Delhi
Bg Exploration & Production India Ltd., ... vs Dcit, International Taxation, ... on 17 July, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL
(DELHI BENCH 'I-2' : NEW DELHI)
BEFORE SHRI R.K. PANDA, ACCOUNTANT MEMBER
and
SHRI KULDIP SINGH, JUDICIAL MEMBER
ITA No.6791/Del./2017
(ASSESSMENT YEAR : 2012-13)
M/s. BG Exploration & Production vs. DCIT,
India Limited, International Taxation,
Lake Boulevard Road, Dehradun.
Hiranandani Business Park, Powai,
Mumbai - 400 076.
(PAN : AAACE4569K)
(APPELLANT) (RESPONDENT)
ASSESSEE BY : Shri Ajay Vohra, Senior Advocate
Shri Sahil Sharma, CA
REVENUE BY : Shri H.K. Chaudhary, CIT DR
Date of Hearing : 19.04.2018
Date of Order : 17.07.2018
ORDER
PER KULDIP SINGH, JUDICIAL MEMBER :
Appellant, M/s. BG Exploration & Production India Pvt. Ltd. (for short 'the taxpayer'), by filing the present appeal sought to set aside the impugned order dated 30.10.2017, passed by the AO under section 144C read with section 143 (3) of the Income-tax Act, 1961 (for short 'the Act') qua the assessment year 2012-13 in 2 ITA No.6791/Del./2017 consonance with the orders passed by the ld. DRP/TPO on the grounds inter alia that :-
"Ground No.1: Erroneous rejection of Transactional Net Margin Method ("TNMM") and selection of Comparable Uncontrolled Price ("CUP") Method 1.1 The learned AO I DRP I Transfer Pricing Officer ("TPO") have erred in law and on facts by disregarding the economic analysis conducted by the 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 under the CUP method which was upheld by Hon'ble DRP Ground No.4: Erroneously disregarded the directions of the Hon'ble DRP for AY 2009-10 and AY 2010-11 4.1 The learned AO I DRP I TPO erred in disregarding the directions issued by the Hon'ble DRP in the case of the 3 ITA No.6791/Del./2017 Appellant for the prior years i.e. AY 2009-10 and AY 2010- 11 (which have also been affirmed by Hon'ble ITAT) even though the facts and circumstances of its case and the business model of the Appellant continued to remain the same.
Ground No.5: Erroneously questioning of commercial expediency of the Appellant 5.1 The learned AO I DRP I TPO erred in law and on facts by questioning the commercial expediency of the Appellant in availing the intra-group services from its associated enterprise ("AE") and in changing from floating interest rate to fixed interest rate on the External Commercial Borrowing taken from its AE.
Ground No.6: Erroneous application of CUP for determining arm's length interest rate 6.1 The learned AO I DRP I TPO erred in making an upward adjustment of INR 739,673,740 to the total income of the Appellant by erroneously applying CUP Method for determination of arm's length interest rate on the external commercial borrowing ("ECB") taken from its AE.
6.2 The learned DRP erred in upholding the erroneous approach of the Ld. AOI TPO to compute more than one arm's length price for the same international transaction by applying multiple approaches.
Ground No.7: Double addition vis-a-vis alleged arm's length rate for interest.
7.1 Without prejudice to the fact that learned TPO / DRP erroneously applied the CUP method for determining the arm's length rate for interest payment, the learned AO further erred in grossly misinterpreting the directions / order of the Hon'ble DRPI TPO and erroneously added the transfer pricing adjustment twice. The Ld. AO has erred by considering the amount of primary adjustment of INR 739,673,740 as well as the adjustment of INR 416,117,762 which was computed by TPO as an alternative approach on a without prejudice basis, while computing the total income of the Appellant in the final assessment order.4 ITA No.6791/Del./2017
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 / 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 appreciating that the said expenditure was incurred wholly and exclusively for the purpose of the Appellant's business in India.
11.3 The learned AO erred in law and in facts in observing that the payments made which are included in the branch office expenditure, were liable to be disallowed under section 40(a)(ia) of the Act.
11.4 The learned AO erred in not noting that the claim regarding double disallowance of Rs.52,39,273, being depreciation included in branch office expenditure, was already rectified by the learned AO in its order dated 21 February 2017.
Ground No. 12: Disallowance of expenditure incurred on non-producing Production Sharing Contracts ("PSCs") 5 ITA No.6791/Del./2017 12.1 The learned AO / DRP erred in law and in facts in disallowing the expenditure of Rs.1,96,49,04,712 incurred on non-producing PSCs.
12.2 Without prejudice, the AO / DRP erred in including an amount of Rs.50,30,71,918 in the disallowance which was disallowed by the DRP in AY 2009-10 with a direction to be allowed as a deduction in AY 2012-13.
Ground No. 13: Disallowance of loss on transportation 13.1 The learned AO erred in disallowing loss on transportation of condensate on the ground that the expenditure cannot be allowed on the basis of the provisions made by the assessee.
13.2 The learned DRP erred in concluding that the disallowance of loss on transportation was rectified by the learned AO vide order dated 21 February 2017.
13.3 Without prejudice, the learned AO / DRP erred in not allowing the loss on transportation of condensate at 1.7% determined by an expert in the year of creation of provision or in the year in which such loss was determined (i.e. AY 2016-17).
13.4 Without prejudice, the learned AO / DRP erred in not noting that the amount of provision reversed in FY 2015-16 ought not to be taxed in AY 2016-17.
Ground No. 14: Addition of provisions written back 14.1 The learned AO / DRP erred in law and in facts in not 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 6 ITA No.6791/Del./2017 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 being the difference of depreciation amount between the tax audit report and the computation.
18.2 The learned DRP erred in concluding that the disallowance of depreciation of Rs.48,70,14,075 was rectified by the learned AO vide order dated 21 February 2017.
18.3 The learned AO / DRP erred in not appreciating that this difference is on account of depreciation claimed on Global IT & T expenditure and that depreciation claim on Global IT & T expenditure was allowable as held by the Hon'ble IIAT in assessee's own case for AY 2010-11.
18.4 The learned AO erred in law and in facts in disallowing depletion of Rs.3,47,69,091 being the difference of depletion amount between the tax audit report and the computation 18.5 The learned DRP erred in not dealing with the objection on disallowance of depletion of Rs.3,47,69,091.7 ITA No.6791/Del./2017
18.6 The learned AO / DRP erred in not appreciating that this difference is on account of difference in opening WDV of assets on first day of the captioned assessment year which was accepted by the revenue authorities in earlier years.
Ground No. 19: Additional depreciation 19.1 The learned AO erred in disallowing additional depreciation ofRs.88,90,051 claimed by the Appellant during the course of assessment proceedings, not noting that the mistake apparent from record was already rectified by the learned AO in its order dated 21 February 2017.
19.2 The learned AO / DRP erred in not granting additional depreciation of Rs.88,90,051 under section 32(l)(iia) of the Act on the new plant and machinery of Rs.4,44,50,253 purchased and put to use by the Appellant during the year.
Ground No. 20: Disallowance of interest incurred on loan taken from BGAP 20.1 The learned AO / DRP erred in law and in facts in disallowing interest of Rs.2,31,62,145, not claimed as a deduction.
Ground No. 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 vis- a-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.8 ITA No.6791/Del./2017
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) of the Act.
25.3 The Appellant submits that each grounds of appeal are without prejudice to one another."
2. Briefly stated the facts necessary to adjudicate the issues in controversy are : M/s. BG Exploration and Production India Limited, the taxpayer is a company incorporated with limited liability in the Cayman Islands and is into the business of prospecting, exploration and production of crude oil and natural gas, being 100% subsidiary of BG Mumbai Holdings Limited (a company incorporated in Mauritius) having its project office in India for undertaking the Indian operations. BG International Limited (BGIL) is a company incorporated in the United Kingdom 9 ITA No.6791/Del./2017 with more than 40 years of experience and technical expertise relating to exploration and production activities in the oil and gas sector.
3. The taxpayer has entered into Production Sharing Contracts (PSCs) and Joint Operating Agreements qua six projects including Panna/Mukta and Mid & South Tapti Oil and gas fields as a partner of the respective unincorporated joint ventures for prospecting, exploring and producing oil and gas from the contracted areas. In order to execute such PSCs carried out its obligations under the PSCs as a joint operators, the taxpayer has set up a Project Office in India. During the year under assessment, the taxpayer has entered into international transactions with its Associated Enterprises (AE) as under :-
Type of International transaction Value (Rs.) Method Management Service Unit Charges 1,380,372,188 TNMM IM Recharge and Time writing 712,561,730 TNMM charges Reimbursement of Expenses 2,829,098 TNMM Payroll expenses 331,112,844 TNMM Reimbursement of expenses 171,954,384 TNMM Reimbursement of expenses 1,076,630 TNMM Reimbursement of expenses 229,606 TNMM Provision of support services 19,349,874 TNMM Interest paid on loan 1,849,141,197 Other Method Receipt of interest on outstanding 67,288,875 -
receivables
Recovery of expenses 462,158,369 -
10 ITA No.6791/Del./2017
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. 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 Adjustment
transaction 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 11 ITA No.6791/Del./2017 services. Since the adjustment as per TNMM analysis works out on the higher side compared to adjustment of Rs.2,100,433,920 proposed under CUP in the earlier part of the order, an adjustment of Rs.3,832,483,013 has been proposed u/s 92CA to protect the interest of revenue. It may further be mentioned that CUP analysis has been carried out for the sake of consistency wherein an adjustment of Rs.2,400,433,920 has been proposed.
28. The Assessing Officer will accordingly enhance the income of the taxpayer by Rs.457,21,56,753/- This shall be treated as the cumulative adjustment u/s 92CA. No adverse inference is drawn in respect of the other international transactions undertaken by the taxpayer during the F.Y.2011-12. The taxpayer was afforded reasonable opportunity of being heard, as mentioned on page 1 of this Order. The Assessing Officer may examine issue of initiation of penalty u/s 271(1)(c) of the Act in accordance with Explanation 7 of the same."
5. Assessee carried the matter before the ld. DRP by way of filing objections who has extended part relief. Feeling aggrieved, the taxpayer has come up before the Tribunal by way of filing the present appeal.
6. We have heard the ld. Authorized Representatives of the parties to the appeal, gone through the documents relied upon and orders passed by the revenue authorities below in the light of the facts and circumstances of the case.
7. Undisputedly, the TPO has rejected the TNMM as MAM used by the taxpayer to benchmark its international transactions qua intra group services and business support services. It is also not in dispute that the operations of the taxpayer in India are being carried out under PSC which generate revenue for the taxpayer. It 12 ITA No.6791/Del./2017 is also not in dispute that the taxpayer has entered into 6 PSC 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 Adjustment Adjustment transactions u/s 92CA after the (INR) 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 13 ITA No.6791/Del./2017 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. Undisputedly, the taxpayer has entered into PSC with Oil and Natural Gas Corporation Limited (ONGC) and Reliance Industries Limited (RIL), being joint venture partners as mandated by Government of India for exploration and production of oil and gas hydrocarbons in the designated contracted fields of Panna Mukta and Mid and South Tapti fields for which taxpayer being a joint operator has set up a project office in India. It is the case of the taxpayer that as per approval given by Reserve Bank of India activities of the branch office were restricted as per annexure annexed with the approval and no other activities have been carried 14 ITA No.6791/Del./2017 out by the taxpayer. It is also the case of the taxpayer that it has received services as per service agreement signed with its AE having 40 years of experience relating to exploration and production activities in the oil and gas sector and BGIL is having a wide pool of highly knowledgeable, technically trained and experienced staff. It is also the case of the taxpayer that during the year under assessment, the taxpayer availed of the services from its AE for the purpose of carrying out its business of prospecting its exploration and production of crude oil and natural gas, as has been discussed by the ld. DRP at pages 8 to 18, as under :-
S.No. Type of intra group service Amount
1. Management Service Unit Charges 1,380,372,188
2 IM Recharge and Time writing charges 712,561,730
3 Payroll expenses 331,112,844
4 Reimbursement of expenses 171,954,384
Total Amount 2,596,001,146
12, The ld. AR for the taxpayer contended that the international transactions qua intra group services received by the taxpayer was required to be benchmarked by applying 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 15 ITA No.6791/Del./2017 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 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 delete the adjustment proposed with respect to the intragroup services of Rs. 3329766244/-, deserves to be upheld. The judicial precedents cited before us also supports the view that the needed test, the benefit test are also required to be viewed from the perspective of a businessperson and not from the perspective of the revenue. Further, no evidences have been led before us by revenue stating that these services are duplicative in nature and also serves only the interest of the shareholder. According to the information supplied by the assessee and examined by the Ld. dispute resolution panel does not give any such indication. Further regarding non-sharing of the cost by the joint-venture partners we have given our findings while deciding the appeal of the assessee that such an action of the joint-venture partners cannot be the reason to determine the arm's length price of the services which is been received by the assessee at nil. In view of this we uphold the finding of the Ld. dispute resolution panel holding that transactions of intragroup services are interlinked, therefore, they should be benchmarked together by adopting 16 ITA No.6791/Del./2017 TNMM as the most appropriate method , hence, directing the Ld. transfer pricing officer to delete the adjustment proposed of Rs. 3 329766244/-. In the result ground No. 1 to 3 of the appeal of the revenue are dismissed."
14. So, following the decision rendered by the coordinate Bench of the Tribunal in taxpayer's own case for AY 2010-11 (supra), we deem it necessary to remand this issue to ld. DRP to decide afresh to benchmark the international transactions undertaken by the taxpayer by applying the TNMM as MAM by providing an opportunity of being heard to the taxpayer, in the 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 17 ITA No.6791/Del./2017 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 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 has been submitted to the AO during assessment proceedings. It is also not in dispute that at the time of incurring the expenses 18 ITA No.6791/Del./2017 business of the taxpayer was already running and exploratory expenses are necessary to carry out its business in India which were to be based upon the evaluation of particulars and technical analysis.
18. Coordinate Bench of the Tribunal in the case of ONGC Videsh Ltd. vs. DCIT - 37 SOT 97 allowed expenses incurred by the taxpayer on exploration, acquiring seismic data and undertaking feasibility status for production of crude oil and natural gas u/s 37 (1) of the Act by returning following findings :-
"Section 37 (1) of the Income-tax Act, 1961 - Business expenditure - Allowability of - Assessment Year 2002-03 - Whether where assessee engaged in business of exploration and production of hydrocarbons, incurred expenditure on purchase and evaluation of seismic data of foreign blocks, it was to be held that expenditure so incurred was for furtherance of activities undertaken by it in normal course of business and, therefore, same was to be allowed as business expenditure - Held, yes."
19. Undisputedly, this issue has come up for consideration before the coordinate Bench of the Tribunal in taxpayer's own case in AY 2010-11 (supra) and has been decided in favour of the taxpayer by returning following findings :-
"56. Now coming to the claim of the deduction of expenditure of Rs.22098 3295/- on account of purchase of seismic data and general and administrative expenses in connection with the proposed NELP VIII, It is submitted by the Assessee that these were the expenses incurred by the Assessee with respect to the offers which were invited 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 19 ITA No.6791/Del./2017 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 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 activity but is in the course of conduct of normal day-to-day business. These expenditures cannot be said to bring an enduring benefit to the business nor the same can be said as initial outlay for expansion of business. In the instant case, the expenditure so incurred by the Assessee is for furtherance of activities undertaken by it in the normal course of its business. The same are incurred on continuous basis for evaluation of business activities. In view of the decision of Bombay High Court in the case of CIT v. Essar Oil Ltd. [IT Appeal No. 921 of 2008, dated 16-10-2008], such expenditure is to be allowed as revenue expenditure. Hon'ble Calcutta High Court in the case of Kesoram Industries & Cotton Mills Ltd. v. CIT [1992] 196 ITR 845 held that where the setting up does not amount to starting of new business but expansion or extension of the business already being carried on by the Assessee, expenses in connection with such expansion or extension of the business must be held to be deductible as revenue expenses. One has to consider purpose of the expenditure 20 ITA No.6791/Del./2017 and its object and effect. Accordingly, it was held that expenses pertaining to exploring feasibility of expansion or extension of business are revenue expenditure and not capital expenditure. The expenditure so incurred by the Assessee in the normal course of business of exploration and production of oil, being revenue in nature, is liable to be allowed as a deduction. Similar claim was also made by the Assessee in the earlier year. We, therefore, direct the Assessing Officer to allow the same as revenue expenditure. As we have allowed ground Nos. 3 to 3.2, the alternate ground No. 3.3 as taken by the Assessee become infructuous."
[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 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 21 ITA No.6791/Del./2017 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 Bench of the Tribunal in taxpayer's own case for AY 2010-11 (supra), AO is directed to allow the expenditure incurred by the taxpayer on cost of purchase of seismic data, general and administrative expenses in connection with proposed NELP-VIII and staff cost and project management and consultancy charges of Rs.40,70,92,375/-. So, ground no.11 is determined in favour of the taxpayer.
GROUND NO.12
21. AO/DRP have disallowed the expenditure of Rs.1,96,49,04,712/- incurred by the taxpayer on non-producing block on the ground that the expenditure incurred by the taxpayer in other PSCs prior to commercial production shall be aggregated and claimed only from the year of commercial production. So, the expenses incurred by the taxpayer concerning oil blocks where commercial productions has not yet started has to be amortized and carried over and can be set off only when revenue is earned from such oil blocks after commencement of commercial production. 22 ITA No.6791/Del./2017 The AO also invoked section 42 of the Act to disallow the expenses.
22. The taxpayer has come up with detail of expenditure incurred on non-producing blocks which is as under :-
Block Amount (Rs.)
KG-OSN - 2004/1 1,08,03,21,692
MN-DWN-2002/2 58,53,00,833
Total 1,66,56,22,525
23. The ld. AR for the taxpayer contended that section 42 is not applicable as it allows benefit/deduction to the eligible taxpayer in addition to the allowance permissible under the Act and as such, these deductions are allowable u/s 37(1) of the Act and relied upon decision rendered by the coordinate Bench of the Tribunal in a case cited as ONGC Videsh Ltd. vs. DCIT - 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 23 ITA No.6791/Del./2017 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 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 Disallowed Total
AO by AO
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 - 220,983,295 220,983,295
primarily for
purchase of seismic
data (for new
opportunities in
exploration)
Total 471,505,233 460,313,788 931,819,021
Remarks Cost Non-JV cost
pertaining (primarily
to those time-writing
shared with costs and
JV partners development
expenses)
55. From the above chart it is apparent that out of the total expenditure incurred of Rs. 931819021/- the Ld. Assessing Officer has allowed the expenditure of Rs. 471505233/- which is the cost of respective PSC and shared with JV partners. The balance cost which is not shared by the JV partners amounting to Rs. 460313788/- was disallowed for the reason that these cost have not been shared by the JV partners and therefore it is not incurred for the purposes of the business of the Assessee and 24 ITA No.6791/Del./2017 hence disallowable. Further sum of Rs.220983295/- included in the disallowance of Rs. 460313788/- was pertaining to the purchase of seismic data for exploring new opportunities in the business of the company under the pretext that these are with respect to the future businesses which has not yet commenced. Therefore, primary the disallowances of Rs. 460313788/- includes a sum of Rs 22098 3295/- for purchase of seismic data and balance amount primarily with respect to time writing cost and development expenses. The time writing charges as it is explained by the Assessee are for the purpose of drilling and subsurface inputs, analysis and administrative expenses with respect to executive, finance, human resources, legal, commercial, etc the detailed breakup of these time writing charges for 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 joint- venture 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 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 was cited before us by revenue, which says that such expenditure are not allowable to the Assessee. Therefore according to us the expenses incurred by the Assessee with respect to
i) KG-OS- 02004/1 of Rs.71638553 25 ITA No.6791/Del./2017
ii) MN - DWN - 2002/2 of Rs.105241649
iii) KG-DWN-98/4 of Rs.62450283 cannot be disallowed. In view of this we direct the Ld. Assessing Officer to delete the disallowance made with respect to about 3 items."
25. Keeping in view the facts and circumstances of the case wherein the taxpayer has brought on record the complete details of the expenditure incurred and there is no dispute between the parties to the appeal that all the expenses have been incurred for furtherance of its business, though incurred in support to the PSC contracts executed by the taxpayer, the same cannot be disallowed merely on the ground that it is not shared by others, particularly, when it is not disputed that these expenses have been incurred wholly and exclusively for the purpose of business of taxpayer.
26. Moreover, the AO has not disputed the incurrence of expenses for the purpose of business. Even otherwise, the expenses incurred by the taxpayer for furtherance of its business cannot be disallowed merely on the ground that the other party in the joint venture has not agreed to share the particular cost incurred by one party to the joint venture. So, following the decision rendered by the coordinate Bench of the Tribunal in taxpayer's own case for AY 2010-11 (supra), the disallowance made by the AO/DRP is not sustainable in the eyes of law, hence disallowance 26 ITA No.6791/Del./2017 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 upon the decision rendered by the Hon'ble Supreme Court in case of Seagram 27 ITA No.6791/Del./2017 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 condensate due to peculiar nature of appellant's business. Thus, there exists a present obligation on account of past event. Accordingly, the same represent provisions which is allowable as deduction in terms of principles laid down by the Hon'ble Supreme Court in the case of Bharat Earth Movers v. Commissioner of Income-tax (supra).
In the case before Supreme Court, the provision was made on ad- hoc basis. Whereas in the current case, the provision is made on the basis of Memorandum of Understanding which is an estimate agreed by both the part to the agreement. Thus, it is submitted that the estimate in the current scenario is made on a sound basis and ought to be allowed to the appellant."
29. The ld. DR for the Revenue to repel the arguments addressed by the ld. AR for the taxpayer contended that the settlement agreement relied upon by the taxpayer was not produced before AO which otherwise says that the transportation loss is to be determined by the expert to be appointed by joint venture partner.
30. When we examine the facts and circumstances of the case in view of the admitted case of the taxpayer that during the AY 2016- 17, independent expert appointed by the joint venture partners had 28 ITA No.6791/Del./2017 determined the loss on condensate at 1.7% and without prejudice, the taxpayer also made a prayer for allowing the loss of transport of condensate @ 1.7% during the year under assessment, we are of the considered view that when undisputedly as per settlement agreement entered into between the taxpayer, ONGC and Reliance Industries Limited with ONGC (transporter) 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 2016- 17, 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 29 ITA No.6791/Del./2017 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 cost and reduce profits. The ld. AR for the taxpayer contended that when the exchange loss is incurred by the taxpayer debited to the profit & loss account as per PSC where foreign exchange loss is considered as an allowable deduction, AO has erred in disallowing 30 ITA No.6791/Del./2017 the same and relied upon the decision rendered by Hon'ble Uttarakhand High Court in case cited as CIT vs. Enron Oil and Gas India Limited - 305 ITR 68, which was affirmed by Hon'ble Supreme Court reported in 305 ITR 75.
33. Hon'ble Uttarakhand High Court in case cited as CIT vs. Enron Oil and Gas India Limited (supra) has decided the identical issue in favour of the taxpayer by returning following findings :-
"Held, dismissing the appeal, that under article 1.6.1 of the accounting procedure set out in Appendix C to the production sharing contract, the expenditure incurred in foreign exchange by the co-venturer during any particular calendar month had to be converted into Indian rupee at the rate which had to be determined at the end of the calendar month. When the Revenue was accepting the tax on the profits/gains accrued to the assessee out of the change in the foreign exchange rates in other assessment years, it could not deny deduction on account of loss incurred for that reason. The Commissioner (Appeals) as well as the Tribunal were right in holding that the deduction claimed by the assessee on account of foreign exchange loss was admissible to it under section 42 of the Act read with the clauses of the production sharing contract."
34. Following the decision rendered by Hon'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 31 ITA No.6791/Del./2017 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 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 :-
32 ITA No.6791/Del./2017
" ......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 expenses which have been disallowed by the Ld. Assessing Officer are as under:-
Particulars Amount Tanker & Related Costs 115,534,442 Tug Boat Costs 70,464,943 Safety Environment & Materials 11,355 Technical & Engineering Services 316,786,095 Less: Reversal of Water Transportation & (8,344,443) other charges Total BG Exclusive Production Cost. 494,452,392
The above expenditure are in the nature of tanker expenditure, tug and boat expenditure, safety environment and material expenditure as well as technical and engineering services. During the course of assessment proceedings, the Assessee has furnished the details of those expenditure. Merely because the joint-venture partners are not sharing the cost/expenses which is been incurred by the Assessee, It does not become disallowable in the hands of the Assessee. We find no such condition existing either under section 42, or under section 37 (1) of the Income Tax Act. Therefore, we reject the contention of the revenue that unless the expenditure is not borne by all the JV partners the expenses cannot be allowed to the Assessee. In fact, if the JV partners share the expenditure, there cannot be any question of claim of such expenditure in the hands of the Assessee, once again. Further, if the expenses are not specified in the agreement u/s 42 (1), even if the JV partners agree to share those expenditure, it is not allowable u/s 42 (1) or section 37 (1) of the act. Now it needs to be examined, 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 33 ITA No.6791/Del./2017 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 Assessee of deductibility of the above expenditure of Rs. 316786095/- . In the result ground No. 3 of the appeal of the Assessee is allowed.
37. Keeping in view the fact that facts and circumstances of the case and the fact that business model has not undergone any change since AY 2010-11 and by following the decision rendered by the coordinate Bench of the Tribunal in taxpayer's own case for AY 2010-11, we are of the considered view that the cost of services availed of by the taxpayer required by 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 the environment etc., cannot be disallowed merely on the ground that the said expenses have not been borne by the joint venture partner, particularly when it is not disputed by the Revenue that the expenditure were made for commercial 34 ITA No.6791/Del./2017 expediency. So, we hereby order to allow the claim of the taxpayer for deduction of the expenses incurred by the taxpayer. So, ground no.16 is determined in favour of the taxpayer.
GROUND NO.17
38. AO/DRP have disallowed an amount of Rs.1,54,16,938/- claimed by the taxpayer on account of inventory written off on the ground that certain internal documents furnished by the taxpayer are not enough for allowing of theses expenditure. The ld. AR for the taxpayer contended that the expenditure has been claimed as per method of write off obsolete inventory in accordance with the system of accounting regularly followed 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 35 ITA No.6791/Del./2017 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 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 cost. In the absence of any basis for valuing the obsolete items at 50 per cent. of the cost, the Tribunal could not have upheld the findings of the Assessing Officer."
40. Hon'ble Delhi High Court in case cited as CIT vs. Bharat Commerce and Industries Ltd. - 240 ITR 256 (Del.) held that, 36 ITA No.6791/Del./2017 "An assessee is free to adopt a particular method of valuation of its closing stock which it has to follow regularly from year to year. At the same time it is well settled that irrespective of the basis adopted for valuation for earlier years, the assessee has an option to change the method of valuation of closing stock, provided the change is bona fide and followed regularly thereafter."
41. In view of the settlement proposition of law discussed in the preceding paras, we are of the considered view that when the taxpayer has prepared obsolete inventory in accordance with the system of accounting regularly followed by it in compliance to section 211 (3C) of the Companies (Accounting Standards) Rules, 2006 as amended and other relevant provisions of the Companies Act, 1956 and has duly got prepared audited report of an independent auditor on the basis of physical verification and in view of the maintenance of inventory, the disallowance made by the AO/DRP is not sustainable in the eyes of law.
42. Coordinate Bench of the Tribunal in Gillette India Ltd. vs. ACIT (supra) also while deciding the identical issue held in favour of the assessee that when complete details about the inventory written off has 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 37 ITA No.6791/Del./2017 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.48,70,14,075/-, 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 38 ITA No.6791/Del./2017 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 decided in favour of the taxpayer in its own case for AY 2010-11 (supra). Ld. DR for the Revenue to repel the arguments addressed by the ld. AR for the taxpayer relied upon the orders of AO/DRP.
44. Coordinate Bench of the Tribunal in AY 2010-11 (supra decided the identical issue in favour of the taxpayer by returning following findings :-
"41. We have carefully considered the rival contention and also noted the facts that BGIL has acquired and developed certain IT infrastructure and software for the benefit of BG Group of companies. Such assets include production data base management system, SAP up gradation, efficient budgeting and forecasting systems, field development training programs, geosciences/geophysics simulations, integrated asset modeling systems, sophisticated e-mail facility etc. BGIL has allocated the cost of these assets to its Group companies including Assessee at cost based in allocation methodology decided at the group level. Assessee has capitalized these costs in the book of accounts. During the year, BGIL had allocated an expense of Rs. 80,13,26,640/- to the appellant out of which Rs. 66,61,30,450/- had been capitalized and balance was accounted as work in progress. The appellant had claimed depreciation of Rs.39 ITA No.6791/Del./2017
3,30,05,676/- on the IT infrastructure and software. The Ld. Dispute Resolution Panel has stated that even the beneficial ownership of the assent also entitles the Assessee to claim the depreciation if the test of user is proved. In the present case, we do not think 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 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 40 ITA No.6791/Del./2017 disallowance can be made on account however subject to the verification by the AO.
46. So far as question of amount of difference of depletion of Rs.3,47,69,091/- is concerned, the Hon'ble Bombay High Court in case of Melmould Corporation vs. CIT - 202 ITR 789 decided the identical issue by returning following findings :-
"Thus, the value of the closing stock of the preceding year must be the value of the opening stock of the next year. The change therefore, has to be effected by adopting the new method for valuing the .closing stock which will, in its turn, become the value of the opening stock of the next year. If instead, a procedure is adopted for changing the value of the opening stock, it will lead to a chain reaction of changes in the sense that the closing value of stock of the year preceding will also have to change and correspondingly the value of the opening stock of that year and so on. "
47. So, following the decision rendered by Hon'ble Bombay High Court in Melmould Corporation vs. CIT (supra), AO is directed to accept the opening WDV of assets furnished by the taxpayer in the schedule for computation of income arrived from the closing WDV of fixed assets of previous year and after due verification to delete the disallowance in accordance with the computation and income and tax audit report. Consequently, ground no.18 is decided in favour of the taxpayer. 41 ITA No.6791/Del./2017 GROUND NO.19
48. AO/DRP have further disallowed additional depreciation of Rs.88,90,051/- on new plant and machinery of Rs.4,44,50,253/- purchased by the taxpayer put to use during the year under assessment claimed 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 42 ITA No.6791/Del./2017 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 has already made a disallowance of Rs.2,31,62,145/- in its computation of income, the addition thereof made by the AO is not sustainable. However, we are of the considered view that since the amount has not been claimed by the taxpayer while computing its 43 ITA No.6791/Del./2017 profit in the year under assessment, the issue is required to be sent back to the AO for verification and to decide accordingly after providing an opportunity of being heard to the taxpayer. Consequently ground no.21 is determined in favour of the taxpayer for statistical purposes.
GROUND NO.21
53. AO/DRP have made addition of Rs.63,65,958/- on account of difference in revenue as per Form 26AS and profit & loss account. It is contended by ld. AR for the taxpayer that the difference of Rs.63,65,958/- was on account of difference in foreign exchange rate which is to be governed by the terms of PSC and relied on para 15.3.2 of Article 15 - Taxes, royalties, rentals, etc. of the PSC for Mid and South Tapti Field and the Revenue from petroleum operations shall be determined in accordance with Article 19 of the PSC. For ready perusal, relevant article of PSC is extracted as under :-
""The revenue from the business consisting of Petroleum Operations shall be determined in accordance with Article 19 for its Participating Interest share of Crude oil saved and sold, or otherwise disposed of, from each Field."
'Article 19 - Valuation of Oil' prescribes for valuation of sale of crude 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, 44 ITA No.6791/Del./2017 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 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 booked excess revenue in accordance with the Rule 115 of the Income-tax Rules, 1962 (for short 'the Rules'), accounting as per PSC would oblige the taxpayer to reverse the excess revenue and consider it as foreign exchange loss. The taxpayer relied upon the decision rendered by Hon'ble Supreme Court in CIT vs. Enron Oil & Gas Limited - 305 ITR 75. 45 ITA No.6791/Del./2017
55. Hon'ble Apex Court in CIT vs. Enron Oil & Gas Limited (supra) while deciding the identical issue held that, "Section 42 is a complete code by itself for deduction in case of business of prospecting the extraction or production of mineral oils. The section is inoperative by itself and becomes operative only when it is read with the production sharing contract. The section was enacted to ensure that where the structure of the production sharing contract is at variance with accounting principles generally used for ascertaining taxable income, the provisions of the production sharing contract would prevail."
56. Hon'ble Court further held that in case of production sharing contract, an independent accounting regime is applicable and foreign exchange losses on account of foreign currency translation is an allowable deduction. So, in view of the law laid down by the Hon'ble Apex Court in case of CIT vs. Enron Oil & Gas Limited (supra), we are of the considered view that the income earned by the taxpayer in foreign currency pursuant to the PSC entered into with Government of India is governed 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 46 ITA No.6791/Del./2017 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 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 47 ITA No.6791/Del./2017 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 USA Inc (supra), in any event, can be distinguished on the ground that the Court was persuaded to confirm the levy of interest under Section 234B, only on account of the equities that needed to be balanced in those peculiar facts, in favour of taxability. This is evident from the following words of the Court:
"26. It further seems to us inequitable that the Assessee, who accepted the tax liability after initially denying it, should be permitted to shift the responsibility to the Indian payers for not deducting the tax at source from the remittances, after leading them to believe that no tax was deductible. The Assessee must take responsibility for its volte face. Once liability to tax is accepted, all consequences follow; they cannot be avoided. After having accepted the liability to tax at the first appellate stage, it is unfair on the part of the Assessee to invoke section 201 and point fingers at the Indian payers. The argument advanced by the learned counsel for the Assessee that the Indian payers failed to deduct tax at their own risk seems to us to be only an argument of convenience or despair. As we have pointed out earlier, it is difficult to imagine that the Indian telecom equipment dealers of the Assessee would have failed to deduct tax at source except on being prompted by the Assessee. It may be true that the general rule is that equity has no place in the interpretation of tax laws. But we are of the view that when the facts of a particular case justify it, it is open to 48 ITA No.6791/Del./2017 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 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 non- resident 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 hon supreme court, therefore respectfully following the decision of the Hon'ble high court we direct the Ld. Assessing Officer to not to charge interest under section 234B of the act on the income of the Assessee which is subject to or liable to tax deduction at source. In view of this we set aside ground No. 9 of the appeal of the Assessee back to the file of the Ld. Assessing Officer to recompute the interest under section 234B of the act accordingly."49 ITA No.6791/Del./2017
60. Following the order passed by the coordinate Bench of the Tribunal in taxpayer's own case for AY 2010-11 which is on the basis of decision rendered by Hon'ble Uttarakhand High Court in case of CIT vs. Maersk Company Limited (supra) and Hon'ble Delhi High Court in case of DIT vs. GE Packaged Power Incorporation (supra), we are of the considered view that the taxpayer cannot be charged to tax u/s 234B on the income earned which is otherwise subject to tax deducted at source. So, we hereby direct the AO to recompute the interest u/s 234B accordingly. So, ground no.24 is determined in favour of the taxpayer.
GROUND NO.25
61. Ground No.25 is general in nature, hence does not require any adjudication.
62. Resultantly, the appeal filed by the taxpayer is partly allowed for statistical purposes.
Order pronounced in open court on this 17th day of July, 2018.
Sd/- sd/-
(R.K. PANDA) (KULDIP SINGH)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated the 17th day of July, 2018
TS
50 ITA No.6791/Del./2017
Copy forwarded to:
1.Appellant
2.Respondent
3.CIT
4.CIT (A)
5.CIT(ITAT), New Delhi. AR, ITAT
NEW DELHI.