Income Tax Appellate Tribunal - Delhi
M/S. Bg Exploration & Production India ... vs Jcit (International Taxation), ... on 18 July, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH "I-2", NEW DELHI
BEFORE SHRI R. K. PANDA, ACCOUNTANT MEMBER
AND
MS. SUCHITRA KAMBLE, JUDICIAL MEMBER
ITA No.1478/Del/2017
Assessment Year : 2011-12
BG Exploration & Production India JCIT (International Taxation),
Ltd., Dehradun.
Lake Boulevard Road,
Vs.
Hiranandani Business Park,
Powai, Mumbai.
PAN : AAACE4569K
(Appellant) (Respondent)
Assessee by : Shri Ajay Vohra, Sr.Adv.
Shri Sahil Sharma, CA
Department by : Shri H. K. Choudhary, CIT-DR
Date of hearing : 19-04-2018
Date of pronouncement : 18-07-2018
ORDER
PER R. K. PANDA, AM :
This appeal filed by the assessee is directed against the order dated 23.02.2017 passed u/s 143(3)/144C(13) of the I.T. Act, 1961 by the JCIT (International Taxation), Dehradun for the assessment year 2011-12.
2. Facts of the case, in brief, are that the assessee (BGEPIL) is a non- resident company incorporated in the Cayman Islands with limited liability and is engaged in the business of prospecting for exploration and production of crude oil and natural gas. It filed its return of income on 30.11.2011 declaring 2 ITA No.1478/Del/2017 total income of Rs.890,50,35,760/-. Since the assessee had entered into several international transactions with its AE, the Assessing Officer referred the matter to the TPO for determination of the arm's length price of the international transactions entered into by the assessee with its AE. The TPO vide order dated 29.01.2016 proposed an upward adjustment of Rs.291,72,84,667/- in respect of the international transactions undertaken by the assessee, the details of which are as under :-
S. No. Nature of international transaction TP adjustment u/s 92CA (INR)
1. Intra Group Services 183,94,39,318
2. Interest Payment 107,78,45,349 Total 291,72,84,667
3. The Assessing Officer accordingly in the draft assessment order passed on 28.03.2016 made the above adjustment on account of payment of interest and on account of intra group services. In the said draft assessment order, the Assessing Officer also made the following additions/disallowances :-
1. Disallowance of branch office expenses 51,42,39,383/-
2. Disallowance of non-producing PSCs 39,18,72,912/-
3. Disallowance of exploration expenses written off 68,39,51,972/-
5. Disallowance of excess depreciation/depletion claimed 26,57,46,314/-
6. Disallowance of interest expenses of capital nature 14,99,98,785/-
7. Disallowances of Club expenses 56,12,044/-
4. The Assessing Officer accordingly determined the total income of the assessee at Rs.1383,37,41,840/-.3 ITA No.1478/Del/2017
5. The assessee approached the DRP who vide order dated 23.12.2016 deleted the addition on account of disallowance of club expenses amounting to Rs.56,12,044/- and sustained the remaining additions made by the Assessing Officer in the draft assessment order. The Assessing Officer, thereafter, passed the final assessment order on 23.02.2017 u/s 143(3)/144C(13) of the I.T. Act determining the total income at Rs.1382,81,29,790/-.
6. Aggrieved with such order of the Assessing Officer/TPO/DRP, the assessee is in appeal before the Tribunal by raising the following grounds :-
"The Appellant objects to the order dated 23 February 2017 passed by the Joint Commissioner of Income Tax (International Taxation), Dehradun ("AO") for the Assessment Year ("AY") 2011-12, pursuant to the directions dated 23 December 2016 issued by the Dispute Resolution Panel ("DRP") under section 144C(5) of the Income- tax Act, 1961 ("the Act") on the following among other grounds. Ground No.1: Proceedings barred by limitation 1.1 The order for the assessment year 2011-12 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.2: Erroneous rejection of Transactional Net Margin Method ("TNMM") and selection of Comparable Uncontrolled Price ("CUP") Method 2.1 The learned AO / DRP / 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 and further, erred in applying CUP method Ground No.3: Without prejudice that TNMM should be selected, learned AO / DRP / TPO applied CUP method in an erroneous manner 3.1 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 ("JV") partner as CUP.
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 / DRP / TPO erred in completely disregarding the directions issued by the Hon'ble DRP in the case of the Appellant for the prior year's i.e. AY 4 ITA No.1478/Del/2017 2009-10 and AY 2010-11 even though the facts and circumstances of its case and the business model of the Appellant has continued to remain the same. Ground No.5: Erroneously questioning of commercial expediency of the Appellant 5.1 The learned AO / DRP / 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 / DRP / TPO erred in making an upward adjustment of Rs.1,07,78,45,349 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.
Ground No.7: Erroneous disallowance of payment made towards intra-group services by Appellant to its AE 7.1 The learned AO / DRP / TPO grossly erred in law and on facts by making an upward transfer / pricing adjustment of Rs. 1,83,94,39,318 in total towards international transactions pertaining to payment of management service and unit charges, IM charges, general and administration expenses, payroll expenses and joint acquisition and development of IT infrastructure and software to its AE. Ground No.8: Erroneous disregarding multiple year data 8.1 The learned AO / DRP / TPO grossly erred in erroneously rejecting multiple year data used by the Appellant in computing the ALP.
Ground No.9: Disallowance of branch office expenditure 9.1 The learned AO / DRP erred in law and in facts in disallowing the branch office expenditure of Rs. 51,42,39,383 by treating it as pre-operative in nature. 9.2 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. 9.3 The learned AO erred in law and in facts in observing that the payments made for purchase of seismic data, included in the branch office expenditure, were liable to be disallowed under section 40(a)(ia) of the Act.
Ground No. 10: Disallowance of expenditure incurred on non-producing Production Sharing Contracts ("PSCs") 10.1 The learned AO / DRP erred in law and in facts in disallowing under section 42 of the Act read with the PSCs, the expenditure of Rs. 39,18,72,912 incurred on non-producing PSCs.
Ground No. 11: Disallowance of exploration expenditure written off 11.1 The learned AO / DRP erred in disallowing exploration expenditure written off of Rs.68,39,51,972, under section 42 of the Act read with the PSCs. Ground No. 12: Disallowance of head office expenditure 12.1 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. 12.2 Without prejudice, the AO has erred in computing allowance under section 44C with respect to the returned income and not income assessed. Ground No. 13: Disallowance of depreciation on Panna-Mukta Well Cost 5 ITA No.1478/Del/2017 13.1 The learned AO / DRP erred in law and in facts in disallowing a sum of Rs.26,57,46,314 by considering depreciation rate of 15% on the Panna-Mukta Well Cost as per section 32, instead of allowing 100% of the cost under section 42. Ground No. 14: Disallowance of depreciation on global IT & T expenditure 14.1 The learned AO / DRP erred in law and in facts in disallowing depreciation of Rs.26,79,33,582 on global IT & T expenditure.
14.2 Without prejudice, the learned DRP erred in not treating the global IT & T expenditure as revenue expenditure allowable under section 37(1) of the Act. Ground No. 15: Disallowance of interest 15.1 The learned AO / DRP erred in law and in facts in disallowing interest of Rs.14,99,98,785 claimed by the Appellant.
Ground No. 16: Non-grant of additional depreciation 16.1 The learned AO / DRP erred in not granting additional depreciation of Rs.4,32,25,478 under section 32(1)(iia) of the Act on the new plant and machinery of Rs. 21,05,13,315 purchased and put to use by the Appellant during the year. Ground No.17: Violation of principles of natural justice 17.1 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. 18: Short credit for Tax deducted at source 18.1 The learned AO erred in not granting credit of tax deducted at source to the extent of Rs.87,48,486.
Ground No. 19: Levy of interest under sections 234B and 234C of the Act 19.1 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. 20: General 20.1 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.
20.2 The AO erred in initiating penalty proceedings under section 271(1)(c) of the Act.
20.3 The Appellant submits that each grounds of appeal are without prejudice to one another 20.4 The Appellant craves leave to add, alter, amend, substitute and / or modify in any manner whatsoever all or any of the foregoing grounds of objections at or before the hearing of the appeal."
7. The ld. counsel for the assessee at the time of hearing did not press ground no.1, 17 and 20 being general in nature for which ld. DR has no objection. Accordingly, the above grounds are dismissed as not pressed. 6 ITA No.1478/Del/2017
8. Ground no.2 to 8 by the assessee relates to the transfer pricing adjustment made by the Assessing Officer/TPO/DRP.
9. Facts of the case, in brief, are that during the relevant previous year, the assessee availed the following services from the associated enterprises for the purposes of carrying on its business of prospecting, exploration and production of crude oil and natural gas :-
S.No. Type of intra group service Amount
I Joint acquisition development of IT 804,936,227
infrastructure and software
II Management Service Unit Charges 1,014,795,742
III IM Recharge and Time writing charges 74,397,367
IV Payroll expenses 255,563,180
V Reimbursement of expenses 472,645,602
Total Amount 2,622,338,118
10. The aforesaid international transactions pertaining to intra-group services received by the assessee (i.e. MSU charges, G&A charges, payroll expenses and joint acquisition and development of IT infrastructure and software) were benchmarked by the assessee applying Transactional Net Margin Method ('TNMM') as the transaction of receipt of intra group services were closely linked to the main business activity of the assessee of exploration and production of oil and gas. Since the operating margin of the assessee at 32.12% was higher than those of the comparable companies at 25.94%, international transaction of receipt of intra-group services was considered to be at arm's 7 ITA No.1478/Del/2017 length. The TPO, however, determined the arm's length price of international transaction of receipt of services at 782,898,800 applying the CUP method holding that the expenditure incurred by the assessee and allowed by the JV partners/Operator board shall be considered as Comparable Uncontrolled Price. The TPO accordingly made an adjustment on account of international transaction of receipt of intra group services to the extent of amount not shared by JV partners Accordingly, the TPO made an adjustment amounting to Rs.183,94,39,318/- as under :-
S.No. Description of intra Value of Amount shared Total Adjustment group service International by Join Venture Transaction (JV) I Payroll expenses 255,563,180 107,381,829 148,181,351 II Management Service Unit 1,014,795,742 0 1,015,132,296 Charges III IM Recharge and Time 74,397,367 7,086,287 67,310,540 writing charges IV Joint acquisition 804,936,227 0 267,933,582 development of IT (amount claimed Infrastructure and as depreciation software corresponding to 804,936,227) V Reimbursement of 472,645,602 131,764,052 340,881,550 expenses Total 2,622,338,118 246,232,708 1,839,439,318
11. The DRP upheld the action of the Assessing Officer/TPO. Accordingly, the Assessing Officer made adjustment of Rs.1,83,94,39,318/- on account of intra group services.
12. Aggrieved with such order of the Assessing Officer/TPO/DRP, the assessee is in appeal before the Tribunal.
8ITA No.1478/Del/2017
13. After hearing both the sides, we find identical issue had come up before the Tribunal in assessee's own case. The Tribunal vide ITA No.1581/Del/2015 has deleted the similar adjustment by observing as under :-
"7.2 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 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."9 ITA No.1478/Del/2017
14. We find, following the above decision the Tribunal vide ITA No.6791/Del/2017 order dated 17.07.2018 has restored the issue to the file of the DRP with a direction to decide the issue afresh by observing as under :-
"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."
15. Respectfully following the order of the Co-ordinate Bench of the Tribunal to which one of us is a party (AM), we restore the issue to the file of the DRP for adjudication of the issue afresh in the light of the direction of the Tribunal. The grounds relating to intra-group services are accordingly allowed for statistical purposes.
16. So far as transfer pricing adjustment on account of interest on payment of loan amounting to Rs.107,78,45,349/- is concerned, the ld. counsel for the assessee submitted that in terms of the PSC, the assessee is required to contribute its share of the funds for the planned activities under the work program. The activities of the assessee involves huge investments and have a long gestation period. The assessee had taken an unsecured foreign currency loan amounting to USD 500 million from its associated enterprise, BG Asia Pacific Pte. Ltd., Singapore CBGAP') on May 3 L 2005 for a period of 15 years. 10 ITA No.1478/Del/2017 The loan was taken at an interest rate of London Inter-Bank Offer Rate ("LIBOR") plus 2 percent per annum payable annually. As a result of subprime crisis in the year 2008, there was lack of availability of funds in the global financial markets which indicated towards a possible increase in the interest rates in the near future. As a result of the prevailing uncertainty, the proportion of borrowers borrowing funds at fixed rate of interest also increase.
17. In order to fund the operations the assessee on October 22. 2009, availed additional loan amounting to USD 300 million and the interest rate was changed to a fixed rate of 6.18% (being Libor USD Swap rate +350 bps) for succeeding five years. The said loan from the AE was an unsecured loan, since the financial position of the assessee did not permit obtaining secured loan on favourable rate of interest from unrelated party, financial institutions or banker.
18. The interest rate was amended in October 2009, when the assessee availed of an additional tranche (under the same loan agreement) from its AE to meet its working capital requirement. As there were significant variations in the global interest rates sine 2005 (i.e. when the loan was initially extended and the original agreement was signed) through 2009, the AE and the assessee agreed for an interest rate revision in 2009 from LIBOR +200 bps to LIBOR + 350 bps based on Barclay banks quotation after assessing appellant's risks and market conditions prevailing at that time. Further, as the appellant expected volatile 11 ITA No.1478/Del/2017 interest rates in future and hence believed that there should be stability in the interest rate to be paid at least for the next five year period.
19. Accordingly, the assessee decided to migrate from a floating interest rate to fixed rate of interest for the next five years. Therefore the LIBOR + 350 bps was converted to a fixed rate of interest @ 6.18% (being USD Libor swap rate + 350 bps). Therefore, for the relevant year under consideration i.e. FY 2010-11, the Appellant paid an effective interest of 6.18 percent for the year. It was further submitted that the interest rate paid by the appellant was in line with the rates quoted, by independent enterprises (Citi Bank, HSBC Bank and Bank of America).
20. The TPO, however, considered USD London Inter-Bank Offer Rate (,Libor') + 200 bps (effective 2.28%) as the arm's length rate and made an adjustment for the additional amount of interest paid during the period April 1, 2010 to March 2011 being difference between 6.18% and 2.28%. Accordingly, the TPO made an adjustment of Rs.107,78,45,349/- to the international transaction of payment of interest undertaken by the assessee.
21. The TPO additionally performed a without prejudice analysis wherein the TPO arrived at a fixed interest rate of 4.88% for the old loan facility of USD 500mn after converting the LIBOR + 200 bps through the SWAP manager function in Bloomberg database. The TPO applied this rate on the old loon 12 ITA No.1478/Del/2017 facility which was continuing from the year 2005, without appreciating that the pricing terms were re-negotiated during the financial year 2009.
22. The TPO further performed a fresh loan search and identified three loan comparable from financial and government industry having an average spread of LIBOR + 213 .33bps. The TPO converted this rate into fixed rate of 5.02% for the new loan facility of USD 300mn. Based on the above analysis the TPO made an adjustment of Rs.35,86,76,789/- on a without prejudice basis. The action of the TPO was upheld by the DRP. The Assessing Officer accordingly made the addition.
23. After hearing both the sides, we find identical issue had come up before the Tribunal in assessee's own case in the immediately preceding assessment year. We find the Tribunal vide ITA No.1581/Del/2015 (supra) has restored the issue to the file of the Assessing Officer/TPO with certain directions. The relevant observations of the Tribunal read as under :-
"26. We have carefully considered the rival contentions and perused the orders of the Assessing Officer and directions of Dispute Resolution Panel. The Assessee entered originally into a loan agreement dated 31st of May 2005 between BG. Asia Pacific Plc Ltd and Assessee for unsecured loan facility of US dollar 500 million. According to the terms and conditions of that agreement interest rate was fixed as one month, US $ LIBOR +2% for an and apportioned on an actual 360 basis. The termination date of the agreement was 31st of May 2020. Subsequently on 21/10/2009 There is an amendment made it to the existing loan facility under agreement dated 31/05/2005, according to which, the parties have agreed to amend the interest rate terms applicable to the existing loan facility at the fixed rate of 6.18% for 5 years from the date of execution of this agreement (i.e. from 21/10/2009), it would be once again at available rate of 6 months USD LIBOR +350 unless the parties agree otherwise. On conjoint readings of this 2 agreements it is apparent that during the 13 ITA No.1478/Del/2017 year there is a change in the interest rate of the above loan, which was earlier at US dollar LIBOR +2% to 6.18%. For part of the year i.e. from 01/04/2009 2 21/10/2009, the rate of interest on the above loan was 2.33% and from 22/10/2009 to 31/03/2010 the rate of interest of the same loan without any change in the terms and condition of agreement except interest was @ 6.18%. Further, Vide letter dated 21/10/2009 the AE has agreed to offer an additional unsecured loan of US dollars 300 million until 2020 to the appellant wherein terms of clause 1 and 3 of the terms and conditions are as under:-
"1 Definition :-
" interest" means the interest or advance at the fixed rate of 6.18% (being the 5 years, US Libor swept rate +350 ) for a period of 1st 5 years from the date of execution of this agreement and thereafter at variable rate of 6 months USD LIBOR +350 unless parties mutually agree otherwise in writing"
"3 . Interest 3.1 interest shall accrue on the amount of the advance on a day-to-day basis in respect of amounts outstanding under the facility on each day of the drawdown period and such interest due shall be created and interest accrued between 1st temporary in each year of the facility and 31st March in the following year, shall be paid by the borrower to the lender on 31st may each year of the facility on a modified following date on versions basis or as may be otherwise agreed between the parties.
3.2 Parties may mutually agree in writing to fix the interest rate for a period of 5 years."
The Ld. Transfer Pricing Officer has questioned the business decision of the Assessee to say that there was no reason for the Assessee to increase the interest rate from 2.33% to 6.18%, which was 165% higher than the rate at which the Assessee was paying interest till the time of revision in the interest rate. The Ld. Transfer Pricing Officer has further held that Assessee has failed to submit any documentary detail of negotiation and convincing agreement for increasing interest rate and what benefit has accrued to the Assessee when all the terms and aggrieved terms and conditions of the agreements remained unchanged. According to the Ld. Transfer Pricing Officer no independent party would have agreed for such a unilaterally increase which defies any logic except that the amount was being paid to the associated enterprise in this regard to TP provisions. According to him the LIBOR rates have been continuously reducing from 2009 onwards and the Assessee was well aware of the trend at the time of taking decision. Accordingly, the increases in rates are considered a classic example of transfer pricing to reduce the profitability of the Assessee company. For this reasons he proposed an adjustment of Rs. 42,72,64,082/- on account of interest payments. We disagree with this finding of the Ld. Transfer Pricing Officer that there was no reason for the Assessee to increase the interest rate for 2.33% to 6.18%. The Assessee has given detailed rational behind its own decision for shifting from floating rate of interest regime to fixed rate of interest. In a way, it reduces the risk of changes in the interest rates. It is a well settled proposition 14 ITA No.1478/Del/2017 of law that The Ld. Transfer Pricing Officer is not supposed to question the business decision of the Assessee. The Assessee has given ample reasons for its business decision even stating that most of the reported loans in that particular period were having a clause of fixed rate of interest. Therefore, the decision of the appellant to shift from floating rate to fixed rate of interest was based on commercial consideration and to protect the business operation of the appellant from any adverse movement in floating interest rates and that only businessmen can decide. It may sound illogical to the Ld. Transfer Pricing Officer, but it is beyond his authority to question the wisdom of Assessee. It is not the prerogative of revenue to direct Assessee to conduct its business in a particular manner. It is also not proper to ask and Assessee to conduct its business in a manner which is understood by the revenue , despite heavy business risk, and further in a manner that will lead to higher revenue to the coffers of the tax gatherers. Various decisions relied upon by the Ld. Authorised Representative also support the above view expressed by us. According to the provisions of section 92 CA of the Income Tax Act, authority envisaged with the Ld. Transfer Pricing Officer is to serve a notice on the Assessee requiring him to produce or cause to be produced on a date to be specified therein, any evidence on which the Assessee may rely in support of the computation made by him of the arm's length price in relation to the international transactions and then after hearing such evidences as produced before him and after taking into account all relevant materials gathered, he shall order determining the arm's length price in relation to an international transaction by passing an order. In the present case Ld. Transfer Pricing Officer has not performed his duty of determining arm's length price of interest payment made by the Assessee of Rs. 1059412322/- but has analyzed and questioned the international transactions entered in to by the Assessee , of which he should have determined ALP only. The provisions of section 92C of the act provides that arm's length price in relation to an international transaction shall be determined according to one of the prescribed methods, which should be the most appropriate method, having regard to the nature of transaction and the functions performed. Therefore according to this, the Ld. Transfer Pricing Officer is duty bound to apply one of the methods specified in that section to determine the arm's length price, having regard to the nature of the transactions and functions performed by the Assessee after considering into account the materials/ documents and evidences placed before him by the Assessee. In the present case Ld. Transfer Pricing Officer has stated that Assessee has failed to submit any documentary details of negotiation and convincing agreement for increasing interest rate. The nature of transaction involved in this case is payment of interest where the terms and conditions with respect to rate of interest have changed during the year, whereas the loan was granted in 2005. For benchmarking the interest transaction it is necessary to consider the factors such as :-
i) Prevailing economic situation
ii) Time Schedule of drawing down the debt
iii) repayment schedule,
iv) options of prepayment of the loan,
v) term / tenure of loan, 15 ITA No.1478/Del/2017
vi) tenure and periodicity of interest payments,
vii) withholding taxes burden on interest
viii) Security offered
ix) Credit rating of the group , AE and Payer entity
x) risk of currency
xi) Possibility and terms and condition of convertibility of Debt to equity.
The Ld. Transfer Pricing Officer must have looked the agreement dated 31st of May 2005. According to clause No. 7, the interest is required to be paid on the interest payment date, which is 31st May each year, , the taxes on interest, shall be on the account of the borrower according to clause 9 of the agreement. Further, according to clause 5 of the agreement the cancellation of the facility is at the sole discretion of the lender, therefore there was no right of prepayment with the Assessee. With respect to the 2nd transaction of loan of US dollar 300 million there are also the clauses of repayment and prepayment in clause No. 4, there is also an agreement vide clause No. 3 of rewriting the interest rate for a period of 5 years, the amount of repayment on prepayment shall be of at least 100000 US$ , there is no reference of the currency in which the amount is required to be repaid. On the reading of agreement dated 21st of October 2009 and 31st of May 2005, it is apparent that there are certain different terms and conditions in both the agreements. Therefore it is not proper to benchmark both the transactions of payment of interest with respect to two different loans which are governed by two different agreements which has different terms and conditions as 'one transaction'. Regarding the claim of the Assessee with respect to the quotations of the bank, the 1st quotation is dated 10/10/2011 wherein vide letter dated 22/02/2012, a quote was provided from Citibank which says that quote for the currency is LIBOR +285 - 300 basis points and does not include withholding taxes. Assessee with respect to other banks also took similar quotations. However, from the reading of the quotation it is not known that these quotes are with respect to both the transactions of loan of US dollar 500 million and US dollar 300 million where there are different terms and conditions of repayment prepayment. Most importantly, the Ld. Transfer Pricing Officer has not looked at these evidences produced by the Assessee in the form of quotations of various banks, comparable search by the Assessee on LPC/ dealscan database. The Ld. Dispute Resolution Panel has also brushed aside the provision of section 92C of the Income Tax Act, which prescribes methodology for computation of arms length price of an 'international transactions'. It has merely reiterated whatever has been stated by the Ld. Transfer Pricing Officer without applying the provisions of law to the facts of the case before them. In view of this we set aside the whole matter of determination of ALP of interest paid by the Assessee to its associated enterprise back to the file of the Ld. Transfer Pricing Officer with a direction to examine the computation of ALP by the Assessee of above transaction strictly in accordance with the provisions of section 92C of the Income Tax Act considering the evidences placed by the Assessee before him and then decide the issue of adjustment, if any, on merits. Needless to say that Assessee may be given proper opportunity of hearing to demonstrate that payment of interest made by the Assessee to its associated enterprise is at arm's length 16 ITA No.1478/Del/2017 according to one of the methods supporting it with necessary and credible evidences . In the result ground No. 2 of the appeal of the Assessee is allowed with above direction."
24. Following the decision of the Tribunal in assessee's own case, we deem it proper to restore the issue to the file of the Assessing Officer/TPO to decide the issue afresh in the light of the direction of the Tribunal in assessee's own case in the immediately preceding assessment year. The grounds no.2 to 8 raised by the assessee on this issue are accordingly allowed for statistical purposes.
25. So far as ground no.9 is concerned, the same relates to disallowance of branch office expenditure of Rs.51,42,39,383/- by treating the same as pre- operative expenditure.
26. Facts of the case, in brief, are that the assessee has established a branch office in India to undertake other functions necessary for sustenance of its business of prospecting for exploration and production of crude oil and natural gas in India such as identifying opportunities for exploration, acquiring seismic data and undertaking feasibility studies, based thereon determining the contracts/opportunities for which bids should be made, participating in bids, etc. and other corporate functions such as HR, legal, accounts and finance, IT, etc. During the year under consideration, the assessee had incurred exploration and business development cost of Rs.514,239,383/-. The Assessing Officer 17 ITA No.1478/Del/2017 proposed to disallow the said expenses by alleging that since the said expenses had been incurred for prospecting new business opportunities, therefore, the same were to be treated as pre-operative in nature and not allowable under section 37(1) of the Act. The Assessing Officer further alleged that since the branch office would not earn any income in future, therefore, no expenditure would be allowed under the matching principle.
27. Ld. counsel for the assessee submitted that for sustenance of its business in India of prospecting for exploration and production of crude oil and natural gas, BGEPIL is constantly on the lookout for new opportunities, for instance, the evaluating whether to bid for new block through NELP, etc. He submitted that while assessing the assessee's taxable income, all the expenditure incurred for its business would have to be considered and evaluated to determine the deductibility as per the normal provisions of the Act. The said expenditure disallowed by the Assessing Officer/DRP has been incurred for development of the assessee's existing business of prospecting for, extraction and production of mineral oils by exploring and evaluating new business opportunities i.e. oilfields. The exploratory expenses are important for appellant to carry on its business in India. Based on the evaluation of opportunities and technical analysis, appellant makes a decision to invest in an opportunity or not. This is an integral part of the business of the assessee and any expenditure incurred for 18 ITA No.1478/Del/2017 the same is wholly and exclusively for the purpose of its business. The Assessing Officer has failed to consider that exploration and business development expenditure incurred by the assessee is to explore and evaluate new business opportunities in India. Since the business of the assessee is already in existence, the aforesaid expenses cannot be regarded as pre-operative. Referring to provisions of section 37, he submitted that the said section provides for deduction of expenditure not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee laid out or expended wholly and exclusively for the purposes of the business. Thus, for expenditure to be allowable u/s 37, the following conditions need to be satisfied :-
(i) Expense should be incurred wholly and exclusively for the purposes of the business.
(ii) The expense should be revenue in nature.
28. Referring to the decision in the case of ONGC Videsh Ltd. vs. DCIT reported in 37 SOT 97, he submitted that the assessee in that case was engaged in business of exploration and production of hydrocarbons incurred expenditure on purchase and evaluation of seismic data of foreign blocks. It was held that expenditure so incurred was for furtherance of activities undertaken by it in 19 ITA No.1478/Del/2017 normal course of business and, therefore, same was to be allowed as business expenditure.
29. He also relied on the following decisions :-
(i) CIT vs. Vardhman Spinning and General Mills, 176 Taxm 157 (P&H).
(ii) Indo Rama Synthetics Ltd., 333 ITR 18 (Del.).
(iii) Jay Engineering Works Ltd., [2008] 166 taxman 115 (Del.).
(iv) CIT vs. Priya Village Roadshows Ltd., 332 ITR 594 (Del.).
(v) CIT vs. Euro India Ltd., [2014] 223 Taxman 97 (Del.).
(vi) Hindustan Aluminium Corporation Ltd. vs. CIT, 159 ITR 673 (Cal.).
(vii) Asiatic Oxygen Ltd. vs. CIT (Cal.).
(viii) CIT vs. Graphite India Ltd., 221 ITR 420 (Cal.).
(ix) Binani Cement Ltd. vs. CIT, 227 CTR 49 (Cal.).
(x) DCIT vs. Gujarat Narmada Valley Fertilizers Co. Ltd., 57 taxmann.com
(Guj.).
30. He submitted that identical issue had come up before the Tribunal in assessee's own case for the assessment year 2010-11 and the Tribunal vide ITA No.1170/Del/2015 decided the issue in favour of the assessee. He accordingly submitted that the disallowance of exploration and business development cost of Rs.51,42,39,383/- made by the Assessing Officer should be deleted.
31. So far as the allegations of the Assessing Officer that no expenditure would be allowed under the matching principle since BO would not earn any income in future is concerned, he submitted that the Assessing Officer erred in alleging that since BO would not earn any income in future, therefore, no expenditure would be allowed under the matching principle. If the business development efforts lead to investments in Oil and Gas blocks by the assessee in 20 ITA No.1478/Del/2017 future, then the assessee will earn income in India after establishment of a Project Office to carry out exploration and development activities. The Assessing Officer has erred in disregarding the business structure of the assessee to contend that there will not be any future income of the assessee after the business development cost is incurred. As regards the allegation of the Assessing Officer that no tax is required to be deducted at source on payments made to Fugro Data Services Ltd., Switzerland (Furgo) and Geo Spectrum Limited, UK (Geo) for purchase of seismic data is concerned, he submitted that the disallowance in terms of section 40(a)(ia) is applicable only when the payer fails to deduct tax u/s 195, which casts an obligation on a person making payment to a non-resident of any sum, which is chargeable under the provisions of the Act to deduct tax at the rates in force at the time of payment of such sum or at the time of credit thereof to the account of the payee, whichever is earlier.
As per the said section 195, tax is required to be withheld in respect of payments made to a non-resident only if such payment is chargeable to tax in India. In terms of section 90(2) of the Act, provisions of the Act are overridden by the provisions of the DTAA to the extent more beneficial to the non-resident assessee. In the present case, Furgo and Geo are non-residents and entitled to claim benefit under the India-Swiss and India-UK Tax Treaties respectively. In terms of paragraph 1 of Article 7 of the aforesaid treaties, business profits 21 ITA No.1478/Del/2017 arising to a non-resident enterprise shall be taxable in India, only if such enterprise has a PE in India. In other words, in absence of PE in India, no part of the business profits arising to such enterprise would be taxable in India. In the instant case, since Fugro and Geo do not have any PE in India, therefore business profits earned by the said companies from sale of seismic data to the assessee would not be liable to tax in India in terms of Article 7 read with Article 5 of the respective DTAA and hence the assessee was not required to deduct tax at source on the payments to be made to the said parties. He accordingly submitted that the addition made by the Assessing Officer should be deleted.
32. Ld. DR on the other hand heavily relied on the order of the Assessing Officer/TPO/DRP. He submitted that the assessee was given permission to open branch office for exploration of crude oil and gas as per RBI Guidelines and as per PSC. The assessee cannot conduct any business beyond permission granted by the RBI since the assessee is not a normal resident assessee. Therefore, the decision of the ITAT in assessee's own case is not applicable to the facts of the present case. So far as the activities of seismic data is concerned, the ld. DR submitted that such activities are not permitted by the RBI for opening branch office. Therefore, the assessee cannot claim the same as business activities. So far as the decision in the case of ONGC Videsh Ltd. 22 ITA No.1478/Del/2017 (supra) considered by the Tribunal is concerned, he submitted that the facts in that case are entirely different since ONGC Videsh Ltd. was a resident assessee. It was the mandate and not under any provision to conduct business in India for new ventures of crude oil exploration, therefore, the deduction of expenditure u/s 37 was allowed. However, in the present case, the assessee is a non-resident company having been allowed to open branch office only to conduct business in respect of particular PSC, therefore, such expenditure and its allowability u/s 37 will not apply.
33. Ld. counsel for the assessee in his rejoinder submitted that there is no bar as per FEMA for branch office not to take any other activities. All the expenses are PSC specific and where there is no PSC, the expenditure is allowable u/s 37(1) and it is not right to distinguish the decision of the ITAT.
34. We have considered the rival arguments made by both the sides and perused the material available on record. We find the Assessing Officer disallowed an amount of Rs.51,42,39,383/- on the ground that the said expenses had been incurred for prospecting new business activities and, therefore, the same are basically pre-operative in nature and not allowable u/s 37(1) of the I.T. Act. We find the action of the Assessing Officer has been upheld by the DRP. It is the submission of the ld. counsel for the assessee that the issue has been decided by the Tribunal in assessee's own case in the immediately preceding 23 ITA No.1478/Del/2017 assessment year. It is the submission of the ld. DR that when the assessee was given permission to open branch office for exploration of crude oil/gas as per RBI Guidelines and as per PSC, the assessee cannot conduct any business beyond permission by the RBI especially when the assessee is not a normally resident assessee.
35. We find identical issue had come up before the Tribunal in assessee's own case and the Tribunal at para 55 and 56 has decided the issue in favour of the assessee by observing as under :-
"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 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 24 ITA No.1478/Del/2017 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. 7 163 8553
ii) MN - DWN - 2002/2 of Rs. 1 0524 1649
iii) KG-DWN-98/4 of Rs. 6 245 0283/-
cannot be disallowed. In view of this we direct the Ld. Assessing Officer to delete the disallowance made with respect to about 3 items.
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 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 25 ITA No.1478/Del/2017 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 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."
26ITA No.1478/Del/2017
36. We find following the above decision, the Tribunal in assessee's own case for assessment year 2012-13 in ITA No.6791/Del/2017 order dated 17.07.2018 has allowed such claim by observing as under :-
"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 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."
37. Respectfully following the decision of the Tribunal, the above grounds are decided in favour of the assessee.
38. So far as ground no.10 is concerned, the same relates to disallowance of expenditure of Rs.39,18,72,912/- incurred on non-producing PSC.
39. Facts of the case, in brief, are that the assessee being a non-resident entity has interest in Panna/Mukta oil and gas fields, Mid and South Tapti oil and gas fields, KG-OSN-2004/1, MN-DWN-2002/2, KG-DWN-1998/4 and KG-DWN- 2009/1 fields. During the year under consideration, Panna/Mukta and Mid and South Tapti oil and gas fields were producing gas fields. The production in KG- OSN-204/1, MN-DWN-2002/2, KG-DWN-1998/4 and KG-DWN-2009/1 oil 27 ITA No.1478/Del/2017 and gas fields had not commenced during the year under consideration. The assessee claimed exploration expenditure incurred on non-producing block of Rs.39,18,72,912/- in terms of section 42(1) read with Production Sharing Contract of Panna/ Mukta and Mid and South Tapti gas fields. The break-up of the expenditure incurred on non-producing blocks are as under :-
Block Amount (Rs.)
KG-DWN-2009/1 4,157,641
KG-DWN-98/4 18,499,277
KG-OSN-2004/1 322,917,779
MN-DWN-2002/2 46,298,214
Total 391,872,912
40. During the course of the assessment proceedings, the Assessing Officer proposed to disallow the aforesaid expense of Rs.39,18,72,912/- by alleging that as per clause 17.2.3 and 17.2.4 of PSC in respect of Block KG-DWN-2009/1, the expenditure incurred by BGEPIL in other PSCs prior to commercial production shall be aggregated and claimed only from the year of commercial production. Therefore, expenses incurred by the assessee in respect of those oil blocks where commercial production has not yet commenced 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.
41. The Assessing Officer further held that section 42 is a complete code in itself which allows the assessee to claim even the capital expenditure incurred 28 ITA No.1478/Del/2017 for the purpose of exploration and extraction activities as provided in PSCs entered into for the purpose. Taxability of profits of the assessee are strictly as per provision of this section. Therefore, setting-off of expense of one field cannot be allowed from revenue of other oil block.
42. The DRP upheld the addition proposed by the Assessing Officer.
43. The ld. counsel for the assessee referred to section 42(1) and submitted that the said section seeks to provide additional allowance/benefit/deduction to an eligible assessee, which are otherwise not available under the regular provisions of the Act. In other words, the section does not override or seek to take away benefits/deductions available to the eligible assessee under any other provision of the Act in the absence of a non-obstante clause. Accordingly, where an assessee already carrying on business of exploration and production of mineral oil, incurs any expenditure in pursuance of such existing business, the same would be allowable business deduction u/s 37(1) de hors section 42 of the I.T. Act. He submitted that identical issue had come before the Tribunal in assessee's own case in the immediately preceding assessment year and the Tribunal had deleted the disallowance. He accordingly submitted that the disallowance of expenditure of Rs.39,18,72,912/- incurred on non-producing PSC made by the Assessing Officer is bad in law and liable to be deleted. 29 ITA No.1478/Del/2017
44. The ld. DR on the other hand heavily relied on the order of the Assessing Officer/TPO/DRP. He reiterated the arguments as made while arguing the ground of appeal no.9.
45. We have considered the rival arguments made by both the sides and perused the material available on record. We find, following the decision of the Tribunal in assessee's own case in assessment year 2009-10, the Tribunal vide ITA No.6791/Del/2017 order dated 17.07.2018 [to which of us (AM) is a party] has decided the issue in favour of the assessee by observing as under :-
"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. 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 30 ITA No.1478/Del/2017 mineral oil, the Assessee would be entitled to claim deduction in respect of three items of expenditure in lieu of or in addition to the allowances admissible under the Act, viz., (i) exploration cost, which is capital expenditure, (ii) development cost, which is also capital expenditure, and (iii) production costs which are operational expenditure. Therefore it is erroneous belief that in case of PSC the Assessee is only entitled to deduction, which are covered there and not any other deduction which are covered under the any other provisions of the act. We have already discussed the provision of section 42 of the act in deciding some of the grounds of appeal of the assessee. Therefore, we reject the contention of the revenue that if the expenditure do not find 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 31 ITA No.1478/Del/2017 purposes of the business of the Assessee and 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
ii) MN - DWN - 2002/2 of Rs.105241649
iii) KG-DWN-98/4 of Rs.62450283 32 ITA No.1478/Del/2017 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 is ordered to be deleted and ground no.12 is determined in favour of the taxpayer." 45.1 Respectfully following the same, the grounds raised by the assessee on this issue are allowed.
46. In ground no.11, the assessee has challenged the order of the ld. CIT(A) in sustaining the disallowance of exploration expenses written off amounting to Rs.68,39,51,972/-.
47. Facts of the case, in brief, are that the assessee in its audited Profit & Loss Account had claimed an amount of Rs.71,72,23,583/- as exploration expenses written off. On being asked the Assessing Officer to furnish the details regarding such expenditure the assessee submitted that the above amount consists of two elements i.e. Rs.68,39,51,972/- which represents amount payable by the assessee to ONGC in relation to cost incurred by them in KG- DWN-98/4 block in the past. It was further submitted that since the assessee, before commencement of commercial production, had decided to exit from the 33 ITA No.1478/Del/2017 block considering it to be not beneficial, hence it stood of abortive nature in the books of the assessee. Balance of Rs.3,32,71,620/- was stated to be related to PMT field considered to be of infructuous and abortive nature. It was further submitted that as per Article 17.2.1 of PSC related to KG-DWN-98/4 block, the same was an allowable expenditure. However, the Assessing Officer was not satisfied with the arguments advanced by the assessee and disallowed the deduction on the ground that the expenditure relating to unsuccessful or abortive areas of one block cannot be adjusted against the revenue of some other block. However, the same can be claimed only when commercial production begins in those contract areas the PSC of which permits adjustments of cost incurred in respect of any other unsuccessful or abortive areas from the revenue of the former mentioned block. The action of the Assessing Officer was upheld by the DRP.
48. Aggrieved with such order of the Assessing Officer/DRP, the assessee is in appeal before the Tribunal.
49. Ld. counsel for the assessee referring to the provisions of section 37(1) submitted that for allowing an expenditure u/s 37, the following conditions need to be satisfied i.e. (i) Expense should be incurred wholly and exclusively for the purpose of the business and (ii) the expense should be revenue in nature. 34 ITA No.1478/Del/2017
50. Referring to the decision of the Delhi Bench of the Tribunal in the case of ONGC Videsh Ltd. (supra), he submitted that the assessee was engaged in business of exploration and production of hydrocarbons incurred expenditure on purchase and evaluation of seismic data of foreign blocks. It was 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.
51. Referring to the decision of the Ahmedabad Bench of the Tribunal in the case of ACIT vs. Niko Resources Ltd. reported in 123 TTJ 310, he submitted that the Tribunal in the said case after disallowing deduction claimed by the assessee for certain expenses u/s 42 allowed the same under the regular provisions of the I.T. Act. He further submitted that identical issue had come up before the Tribunal in assessee's own case in the immediately preceding assessment year which is similar to ground of appeal no.9 and 10. He accordingly submitted that the disallowance of exploration expenses written off amounting to Rs.68,39,51,972/- made by the Assessing Officer being bad in law is liable to be deleted.
52. The ld. DR on the other hand heavily relied on the order of the Assessing Officer/DRP. Reiterating his arguments as made while arguing ground appeal 35 ITA No.1478/Del/2017 no.9 he submitted that since the expenditure has been incurred beyond the RBI permission, therefore, it is not an allowable expenditure u/s 37 of the I.T. Act.
53. After hearing both the sides, we find the issue involved in the above grounds are identical to the issue as per ground of appeal no.9. We have already decided the issue and the ground has been allowed in the preceding paragraph. Following similar reasoning, this ground by the assessee is allowed.
54. In ground no.12, the assessee has challenged the order of the Assessing Officer/DRP in disallowing the amount of Rs.237,61,05,409/- holding the same being expenses paid by the assessee to BGIL which is not borne by the operator board of the PSC and, therefore, cannot be allowable as deduction to the extent of 5% of adjusted total income in terms of section 44C of the I.T. Act.
55. Facts of the case, in brief, are that during the course of assessment proceedings the Assessing Officer observed that a number of expenses have been incurred by its group entity M/s BG International Limited, a UK based company. These expenses are primarily in the nature of salary and wages, management charges, time writing charges, which are necessarily of the nature of executive and general administration of the activities of the assessee. On being confronted by the Assessing Officer, it was submitted by the assessee that these services were procured for the operation of the assessee in India. The main activities of the assessee in India are exploration and production of oil and 36 ITA No.1478/Del/2017 natural gas in India. The Assessing Officer noted that some of these expenses, which is claimed to be pertaining to MPT contract area have not been approved by the operating board of the JV of that contract area. A bifurcation of these expenses were furnished to the TPO in the course of transfer pricing proceedings. The Assessing Officer in the light of the provisions of section 44C r.w.s. 42 analyzed as to whether these expenses can be construed as head office expenses or not. The Assessing Officer, however, held that the expenditure incurred by BGIL for the activities of the assessee in India were in nature of head office expenditure within the meaning of section 44C and that part of the expenditure which was not approved by the Operator Board of the PSC was outside the purview of section 42(1) of the I.T. Act. Therefore, such expenses incurred by the assessee are held to be in the nature of head office expenditure allowable only to the extent of 5% of the adjusted total income of the assessee. The Assessing Officer, however, did not make any addition since the said expenses had already been disallowed by the TPO. The DRP did not interfere with the action of the Assessing Officer.
56. Aggrieved with such order of the Assessing Officer/TPO/DRP, the assessee is in appeal before the Tribunal.
57. Ld. counsel for the assessee at the outside submitted that identical issue had come before the Tribunal in assessee's own case in the immediately 37 ITA No.1478/Del/2017 preceding assessment year wherein the Tribunal held that the cost of services availed by the assessee from its group company cannot be disallowed in the hands of the assessee merely because the said expenses has not been borne by the JV partners. He accordingly submitted that since the expenditure have been incurred by the assessee wholly and exclusively for the purpose of its business of prospecting for, exploration and production of crude oil and natural gas, therefore, the disallowance made by the Assessing Officer being bad in law is liable to be deleted.
58. Without prejudice to the above, the ld. counsel for the assessee drew the attention of the Bench to the provisions of section 44C and Circular No.202 dated 05th July, 1976 issued by the CBDT and various other decisions, he submitted that the assessee in the instant case is incorporated in Cayman Islands and is operating in India through Project office established with the prior approval of RBI for the purpose of conducting its business activities. In other words, the head office of the assessee is situated in Cayman Islands. Further, BGIL is an affiliate company incorporated in the United Kingdom with more than 40 years of experience and expertise in oil and gas exploration and production. BGIL possesses a pool of highly knowledgeable, technically trained and experienced individuals having extensive knowledge of exploration and production activities. This pool of trained and experienced personnel is used by 38 ITA No.1478/Del/2017 BGIL to provide requisite support to other BG Group companies, across the globe. BGIL being the spearhead of the BG group, like every other multinational group, devises policies and practices in various areas for the use and benefit of all BG Group entities worldwide. Such centralization of knowledge and expertise, ensures overall efficiency and smooth functioning. All new projects/ initiatives are first conceived, developed and launched at BGIL, and are thereafter implemented in other BG Group entities. In the instant case, BGIL had provided various direct support services to BGEPIL for its exploration projects in India like cost in relation to IT related services, HR related services and other services like insurance support, taxation support, support in financial accounting, management reporting and other service functions and payment for the same was claimed as deduction. The debit notes in this regard were submitted to the Assessing Officer / TPO during the course of the assessment proceedings. A summary of services rendered by BGIL to the appellant have been filed before the Assessing Officer / DRP. In terms of Explanation (iv) to section 44C of the Act, HO expenditure is defined as an expenditure incurred by the appellant outside India. The provisions of section 44C of the Act are applicable only in respect of head office expenditure and not expenditure incurred by the affiliate company. Since in the instant case, the aforesaid payment is made to an affiliate company, i.e., BGIL and not to the 39 ITA No.1478/Del/2017 head office of the appellant situated in Cayman Islands, the provisions of section 44C of the Act would not be applicable. Even otherwise provisions of section 44C of the Act are not applicable since (i) BGIL provides services to various entities of BG Group since the past many years; BGIL's income is assessed to tax in India by the same Assessing Officer who is assessing income of BGEPIL; All information pertaining to the transactions of BGIL in India is available with the Revenue authorities and hence there is no difficulty in scrutinizing and verifying the claims of the appellant; (ii) The payment to BGIL is on cost to cost basis and no profit element is involved therein. In other words, the same is mere reimbursement of expenses incurred by BGIL and (iii) the expenditure has been incurred by the appellant for availing specialized services for carrying out its technical business operations in relation to prospecting, exploring and production of oil-and gas and the expenses, (iv) payment made for specific services for- which necessary manpower/experience is not available with the appellant; and are not in nature of executive and general administration expenses.
59. The ld. DR on the other hand strongly supported the order of the Assessing Officer/DRP. He submitted that the provisions of section 44C does not spell out what construed head office expenses, therefore, specific services will include head office expenses. Reiterating his arguments as made while 40 ITA No.1478/Del/2017 arguing in ground no.9, he submitted that the order of the Assessing Officer/DRP should be upheld.
60. We have considered the rival arguments made by both the sides and perused the material available on record. We find identical issue had come up before the Tribunal in assessee's own case in the immediately preceding assessment year and the Tribunal has allowed the claim of the assessee at para 31 of the order holding that cost of services availed by the assessee from its group company cannot be disallowed in the hands of the assessee merely because the said expenditure has not been borne by the J.V. Partners. It is an admitted fact that the Assessing Officer/TPO/DRP had not the benefit the order of the Tribunal which was passed subsequent to the orders passed by them. Considering the totality of the facts of the case and in the interest of justice, we deem it proper to restore this issue to the file of the Assessing Officer/TPO for adjudication of the issue afresh in the light of the decision of the Tribunal in assessee's own case in the immediately preceding assessment year. The ground raised by the assessee on this issue is allowed for statistical purposes.
61. In ground no.13, the assessee has challenged the disallowance of depreciation amounting to Rs.26,57,56,314/- of Panna Well Cost.
62. Facts of the case, in brief, are that the Assessing Officer during the course of assessment proceedings observed that the assessee claimed 100% 41 ITA No.1478/Del/2017 depreciation/depletion on Panna Well Cost. In support of its claim, it has annexed schedule2B alongwith its computation of income. From the depreciation chart which is forming part of 3CD report of the Auditor of the assessee. The Assessing Officer noted that it is a bit different from the chart annexed by the assessee with its computation of income. He, therefore, asked the assessee to reconcile the above charts. Since the assessee refurnished the same chart that was annexed with the computation of income, the Assessing Officer asked the assessee to reconcile the above two charts and explain the difference. From the reconciliation chart furnished by the assessee, the Assessing Officer noted that there was difference of Rs.31,26,42,722/-. He observed that in the depreciation chart furnished by the Auditor in 3CD report, the above addition to fixed assets were shown in the head "Panna Mukta PD & PE Gas Lift surface facility" which was eligible for depreciation @ 15%. Where as in the chart annexed by the assessee with its computation of income, the same has been shown as addition to fixed assets in the head "Panna Well Cost" which is eligible for 100% depreciation. Thus, the assessee has claimed 85% more depreciation/depletion on the above amount in the computation of income. Since no documentary evidence was produced by the assessee in shape of bills, vouchers, invoices etc., the Assessing Officer made disallowance of Rs.26,57,46,314/-. While doing so, he further alleged that the assessee could 42 ITA No.1478/Del/2017 not find fault with the finding of the Auditors and make its own claim regarding the proper head of expenditure.
63. The DRP remitted the issue to the Assessing Officer directing him to verify the claim of the assessee after scrutinizing the bills, vouchers, invoices, etc. However, the Assessing Officer in the order passed on 23.02.2017 upheld the disallowance of Rs.26,57,46,314/- proposed in the draft assessment order.
64. Ld. counsel for the assessee at the outset submitted that pursuant to the directions issued by the DRP, the Assessing Officer while passing the final assessment order dated 23.02.2017 did not grant an opportunity to the assessee to furnish the invoices, bills, etc. and passed the impugned order in gross violation of principles of natural justice upholding the disallowance proposed in the draft assessment order. Relying on various decisions, he submitted that in absence of affording adequate opportunity the addition cannot be made. He accordingly submitted that he has no objection if the matter is restored to the file Assessing Officer for fresh adjudication.
65. Ld. DR has no objection for the above contention of the ld. counsel for the assessee.
66. After hearing both the sides and considering the totality of the facts of the case, we deem it proper to restore the issue to the file of the Assessing Officer with a direction to give an opportunity to the assessee to substantiate his case as 43 ITA No.1478/Del/2017 per the direction of the DRP. The Assessing Officer shall decide the issue as per fact and law after giving due opportunity of being heard to the assessee. We hold and direct accordingly. The ground raised by the assessee on this issue is allowed for statistical purposes.
67. In ground no.14, the assessee has challenged the disallowance of depreciation amounting to Rs.26,79,33,582/- on the IT infrastructure and software.
68. Facts of the case, in brief, are that the assessee during the year under consideration has claimed addition of assets under the head global IT and I Projects amounting to Rs.80,49,36,227/- and claimed depreciation of Rs.26,79,33,582/-. The Assessing Officer proposed the disallowance on the ground that the deduction is not allowable since the assessee was not able to prove that the assets are owned by it or that the assets are put to use for the business purposes. He, however, did not make any addition since the said expenses had already been disallowed by the TPO and the DRP did not interfere with the findings of the Assessing Officer.
69. Ld. counsel for the assessee submitted that identical issue had come before the Tribunal in assessee's own case in the immediately preceding assessment year and the Tribunal has allowed the depreciation. Further, although the assets may not be registered in the name of the assessee, the 44 ITA No.1478/Del/2017 assessee is entitled to and has been using the same in the capacity of an owner having made due payment to its group company and thus akin to a part owner to the extent payment made by it. The global IT & T projects are being used by the assessee in its day to day business operations and the same are essential for conducting the business operations. The same results in operations being undertaken in an efficient manner. Considering the large scale at which the assessee operates, the global IT & T projects play a vital role in updating the operations and saving both time and energy of the employees. Hence, there could be no doubt as to whether these have been put to use by the assessee. Further, ownership need not only be denoted by physical control but also includes intangible rights in the asset. Further, it is not possible to document every record of benefits derived from the use of IT assets. The qualitative aspects and benefits of the IT infrastructure procured are very high and carry a significant element of being non-figurative. However, the global IT & T cost had been incurred centrally and infrastructure implemented after due deliberations and discussions with the appellant. Further, the cost has been allocated to the appellant based on a detailed cost allocation methodology. Hence, the disallowance in respect of deduction should be deleted.
70. Without prejudice to the above, if it is considered that the appellant is not eligible to deduction on account of not being the registered owner of the assets, 45 ITA No.1478/Del/2017 the appellant submits that the entire expenditure should be allowed as revenue expenditure under section 37(1) of the Act, the same having been incurred wholly and exclusively for the purpose of the business. Reliance may be placed on the decision of the Hon'ble Supreme Court in the case of CIT vs. Madras Auto Service (P.) Ltd. reported in 233 ITR 468 wherein it was held that in order to decide whether this expenditure is revenue expenditure or capital expenditure, one has to look at the expenditure from a commercial point of view. To the same effect is the decision of Supreme Court in Empire Jute Go. Ltd. vs. CIT reported in 124 ITR 1.
71. The ld. DR on the other hand strongly supported the order of the Assessing Officer/DRP.
72. We have considered the rival arguments made by both the sides and perused he orders of the authorities below. It is an admitted fact that the assessee during the year has claimed addition of assets under the head global IT and I Projects amounting to Rs.80,49,36,227/- and claimed depreciation of Rs.26,79,33,582/-. We find the Assessing Officer disallowed depreciation on the ground that since the assessee was not able to prove that the assets are owned by the assessee or that the assets are put to use for the business purposes. Since the said expenses was already disallowed by the TPO, Assessing Officer 46 ITA No.1478/Del/2017 did not make any addition. We find the Assessing Officer at page 24 of the order while disallowing the depreciation has observed as under :-
"From the details submitted by the assessee it is clear that the asset is not owned by the assessee either wholly or partly neither any document was submitted to prove that these assets were put to use for the business of the assessee company. Therefore, the depreciation claimed by the assessee on IT infrastructure and software amounting to Rs.26,79,33,582/- is not allowable. However, since the above amount has already been adjusted by the TPO on the determination of ALP of the above transactions, no separate addition is made on this account to avoid double taxation of the same amount. However, if any alteration or modification takes place in the determination of arm's length price of the above transactions, the above addition on account of excess depreciation would hold good to that extent."
73. It is also an admitted fact that the order of the Tribunal was not available before the Assessing Officer/DRP. Since the assessee in the instant case has not filed the documentary evidences before the Assessing Officer substantiating that the assets were put to use for the business of the assessee, therefore, we in the interest of justice deem it proper to restore the issue to the file of the Assessing Officer/TPO to adjudicate the issue afresh after giving due opportunity of being heard to the assessee. While doing so, the Assessing Officer/TPO shall keep in mind the order of the Tribunal in assessee's own case in the immediately preceding assessment year. The ground raised by the assessee on this issue is allowed for statistical purposes.
74. In ground no.15, the assessee has challenged the disallowance of interest expenses of Rs.14,99,98,785/- as capital in nature.
47ITA No.1478/Del/2017
75. Facts of the case, in brief, are that the Assessing Officer during the course of assessment proceedings observed that the assessee has claimed an amount of Rs.151,11,93,163/- as payment of interest to BG Asia pacific Pte Ltd., a group entity of the assessee. This amount has been added back in the computation of income and an amount of Rs.166,04,21,607/- has been claimed as interest paid on BGAP loan. The Assessing Officer, therefore, asked the assessee to explain the same. Rejecting the various explanations given by the assessee, the Assessing Officer made disallowance of Rs.14,99,98,785/- by observing as under :-
"12.4 From the above reply, it is clear that actual amount of interest that was capitalized was Rs.19,74,59,895/-. Assessee even furnished details of utilization of the said loan. It has categorically been stated that these pertains to Panna-Mukta project. Assets of this project is also eligible for depreciation. The Auditors of the assessee's accounts have also audited the said head of expenses and then certified the amount of Rs.151,04,22,823/- pertaining to revenue accounts of the assessee. However, in computation of income, assessee has reduced this capitalization amount to Rs.4,74,61,411/- without any note from Auditor or without any basis or without submitting any evidence regarding the same. Accordingly, it is held that the amount of interest allowable is Rs.151,04,22,283/- only, which has duly been verified and certified by Auditors. Accordingly, difference of Rs.14,99,98,785/- is disallowed as excess interest claim, which is of capital in nature and added t the total income of the assessee."
76. The DRP restored the issue to the file of the Assessing Officer with the following directions :-
"In the notes to the accounts, the assessee had mentioned that interest of Rs.170,78,82,718/- was accrued to BG Asia Pacific Pte Ltd. out of which only an amount of Rs.151,04,22,822/- was claimed in the profit & loss account and balance was capitalized. Later the assessee furnished detail showing interest accrued during the year - Rs.170,78,82,718/-. Interest capitalized - Rs.197,459,895/- balance 48 ITA No.1478/Del/2017 Rs.151,04,22,822/- was claimed as deduction. The A.O. has observed that "However, in computation of income, assessee has reduced this capitalization amount to Rs.4,74,61,411/- without any note from Auditor or without any basis or without submitting any evidence regarding the same". During the DRP proceedings the assessee submitted that out of Rs.197,459,895/- Rs.43,529,545/- pertain to loan utilized towards capital work in progress not yet capitalized as on 31.03.2012 and Rs.93,931,566/- pertain to the assets capitalized during the year. The assessee claimed that the assessee follows an assumption for tax purposes which are different from accounting. The assessee has been following this method of accenting regularly. The A.O. did not give it an opportunity to explain the accounting method. In view of this the A.O. is directed to go through the submissions of the assessee and to allow the interest as per the law."
77. Aggrieved with such order of the Assessing Officer/DRP, the assessee is in appeal before the Tribunal.
78. After hearing both the sides and in view of the agreement made by both the sides, we are of the opinion that this issue should be restored to the file of the Assessing Officer for proper verification. We therefore restore the issue to the file of the Assessing Officer/TPO with a direction to verify the details and adjudicate the issue afresh after giving due opportunity of being heard to the assessee. We hold and direct accordingly. The ground raised by the assessee is accordingly allowed for statistical purposes.
79. In ground no.16, the assessee has challenged the order of the Assessing Officer in not granting additional depreciation of Rs.4,32,25,478/- u/s 32(1)(iia) on the new plant and machinery of Rs.21,05,13,315/- purchased and put to use during the relevant assessment year.
49ITA No.1478/Del/2017
80. Facts of the case, in brief, are that the assessee has made addition to plant and machinery amounting to Rs.21,05,13,315/-. According to the assesse the same were put to use during the year under consideration. However, the assessee did not claim additional depreciation on the same inadvertently amounting to Rs.4,32,25,478/- u/s 32(1)(iia). The Assessing Officer and the DRP did not admit the claim of the assessee on the ground that such claim can be made only by way of filing a revised return of income. It is the submission of the ld. counsel for the assessee that in view of the various decisions such additional claim can be made during the appellate proceedings. It has been held in various decisions that (a) the ld. CIT(A) having coextensive power over the assessment could deal with the claim made for the first time during the course of assessment proceedings and (b) it is open to the assessee to enlarge the claim before the Assessing Officer through a letter filed during the course of assessment proceedings without filing a revised return of income. In view of the same, we deem it proper to restore the issue to the file of the Assessing Officer with a direction to verify the allowability of the claim and if the assessee is otherwise eligible for such additional depreciation then allow the same. Needless to say, the Assessing Officer shall decide the issue as per the fact and law after giving due opportunity of being heard to the assessee. The ground no.16 is accordingly allowed for the statistical purposes. 50 ITA No.1478/Del/2017
81. Ground no.18 relates to short credit of TDS amounting to Rs.87,48,486/-.
82. After hearing both the sides, we restore the issue to the file of the Assessing Officer with a direction to verify the same and allow the TDS credit as per law.
83. In ground no.19, the assessee has challenged the interest charged u/s 234B of the I.T. Act.
84. Ld. counsel for the assessee submitted that the revenues receivable by the assessee non-resident company are subject to deduction of tax at source. Therefore, the question of payment of advance tax and consequent levy of interest u/s 234B for shortfall in payment of advance tax does not arise. Referring to the decision of the Tribunal in assessee's own case for assessment year 2009-10 in ITA No.2227/Del/2014 and for assessment year 2010-11 in ITA No.1170/Del/2015, he submitted that the Tribunal in the said decision has directed the Assessing Officer not to charge interest u/s 234B on the income of the assessee which is liable to tax deduction at source. He accordingly submitted that the ground raised by the assessee should be allowed.
85. Ld. DR on the other hand supported the order of the ld. CIT(A) and submitted that section 234B is mandatory and consequential in nature. 51 ITA No.1478/Del/2017
86. After hearing both the sides, we find identical issue had come up before the Tribunal in the immediately preceding assessment year. We find the Tribunal at para 61 and 62 of the order has observed as under :-
"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:-
xxxxx
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."
87. Further, it may be pointed out that the Finance Act, 2012 w.e.f. 1.4.2012 added proviso below section 209(1)(d) of the Act to the following effect:
"Provided that for computing liability for advance tax, income-tax calculated under clause (a) or clause (b) or clause (c) shall not, in each case, be reduced by the aforesaid amount of income-tax which would be deductible or collectible at source during the said financial year under any provision of this Act from any income, if the person responsible for deducting tax has paid or credited such income without deduction of tax or it has been received or debited by the person responsible for collecting tax without collection of such tax."
88. The said proviso in our opinion is applicable from assessment year 2013- 14 and is, therefore, prospective in operation. The insertion of the proviso cannot be construed to have retrospective effect so to expose a non-resident 52 ITA No.1478/Del/2017 company to levy of interest u/s 234B of the Act for assessment years prior to assessment year 2013-14, where tax was deductible at source on the income payable to the non-resident, if such income is held to be chargeable to tax in India. Accordingly, this ground raised by the assessee is allowed.
89. So far as interest u/s 234C is concerned, the same is leviable only on the retuned income and not on the assessed income as held in various decisions. We therefore direct the Assessing Officer to compute the interest u/s 234C on the basis of the returned income.
90. In the result, the appeal filed by the assessee is partly allowed for statistical purposes.
Order pronounced in the open Court on this 18th July, 2018.
Sd/- Sd/-
(SUCHITRA KAMBLE) (R. K. PANDA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated: 18-07-2018.
Sujeet
Copy of order to: -
1) The Appellant
2) The Respondent
3) The CIT
4) The DRP- 2, New Delhi.
5) The DR, I.T.A.T., New Delhi
By Order
//True Copy//
Assistant Registrar
ITAT, New Delhi