BG EXPLORATION & PRODUCTION INDIA LIMITED,MUMBAI vs. THE DEPUTY COMMISSIONER OF INCOME TAX DDIT/ADIT (INTERNATIONAL TAXATION ) CIRCLE-1, DEHRADUN

PER V.P. RAO, J.M.:

This appeal by the assessee is directed against the assessment order dated 19.03.2021passed u/s. 143(3) read with section 144C(13)of the Income-tax Act (“the Act” for short) in pursuance to the directions of the DRP dated 28.02.2020 passed u/s. 144C(5)of the

Act for the assessment year 2016-17. The assessee has raised the following grounds : Ground No. 1: Erroneous disallowance of payment made towards intra-group services by Appellant to its Associated Enterprise (“AE”) 1.1. The learned Transfer Pricing Officer ("TPO") / AO / DRP grossly erred in law and on facts by making an upward transfer pricing adjustment of Rs.2,28,48,22,523 in total towards international transactions pertaining to payment of management service and unit charges, IM charges and payroll expenses to its AE. Ground No. 2: Erroneous rejection of Transactional Net Margin Method ("TNMM”) and selection of Comparable Uncontrolled Price ("CUP”) Method 2.1. The learned TPO / AO / DRP / 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") pertaining to intra-group services, by application of TNMM on an aggregated basis and further, erred in applying CUP method. Ground No. 3: Without prejudice that TNMM should be selected, learned TPO / AO / DRP 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 TPO / AO / DRP 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 decision of Hon'ble ITAT in AY 2011-12 and2012-13 and directions of the Hon'ble DRP for AY 2009-10 and AY 2010-11 4.1. The learned TPO / AO / DRP erred in disregarding the decision of Hon'ble ITAT in AY 2011-12 and AY 2012-13 and

directions issued by the Hon'ble DRP in the case of the Appellant for the prior years i.e. AY 2009-10 and AY 2010-11 (which have also been affirmed by Hon'ble ITAT) even though the facts and circumstances of its case and the business model of the Appellant continued to remain the same. Ground No. 5: Erroneously questioning of commercial expediency of the Appellant 5.1. The learned TPO / AO / DRP erred in law and on facts by questioning the commercial expediency of the Appellant in availing the intra-group services from its AE and in changing from floating interest rate to fixed interest rate on the External Commercial Borrowing ("ECB") taken from its AE. Ground No. 6: Erroneous application of CUP for determining arm's length interest rate 6.1. The learned TPO / AO / DRP erred in making an upward adjustment of Rs. 14,71,656 to the total income of the Appellant by erroneously applying CUP Method for determination of arm's length interest rate on the ECB taken from its AE. Ground No. 7: Disallowance of branch office expenditure 7.1. The learned AO / DRP erred in law and in facts in disallowing the branch office expenditure of Rs.4,46,55,777 by treating it as pre-operative in nature. 7.2. 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. 7.3. The learned AO / DRP erred in not appreciating that this expenditure was held as allowable by the Hon’ble ITAT in Appellant’s own case for earlier AYs. Ground No. 8: Disallowance of expenditure incurred on non- producing Production Sharing Contracts (“PSCs”) 8.1. The learned AO / DRP erred in law and in facts in disallowing the expenditure of Rs. 18,84,57,216 incurred on non- producing PSCs.

8.2. The learned AO / DRP erred in not appreciating the fact that set off of expenditure of non-producing PSC against the income of PSC in which commercial production has been commenced is in accordance with the provisions of the Act and provisions of PSC. 8.3. The learned AO / DRP erred in not appreciating that this expenditure was held allowable by the Hon’ble ITAT in Appellant’s own case for earlier AY s. Ground No. 9: Disallowance of head office expenditure 9.1. 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. 9.2. The learned AO / DRP erred in not appreciating that the head office expenditure was allowed by the Hon'ble ITAT in Appellant’s own case for earlier AY. 9.3. Without prejudice, the learned AO has erred in computing allowance under section 44C with respect to returned income and not income assessed. Ground No. 10: Disallowance of depreciation 10.1 The learned AO erred in law and in facts in disallowing depreciation of Rs.2,14,46,607 being the difference of depreciation amount between the tax audit report and the computation. 10.2 The learned AO / DRP erred in not appreciating that this difference is on account ofdepreciation claimed on Global IT & T expenditure and that depreciation claim on GlobalIT & T expenditure was allowable as held by the Hon’ble ITAT in Appellant’s own case for AYs 2010-11 to 2014-15. 10.3 The learned AO / DRP erred in not appreciating that this difference is on account ofdifference in opening WDV of assets on first day of thecaptioned assessment year whichwas accepted by the revenue authorities in earlier years. Ground No. 11: Disallowance of inventory written off

11.1 The learned AO erred in law and in facts in disallowing inventory written off of Rs. 15,71,20,459 on the basis that the Appellant submitted only internal documents which do not suffice for allowance of expenditure. 11.2 The learned AO / DRP erred in not appreciating that amount of obsolete inventory written off was debited to the Profit and Loss Account which has been audited by an independent auditor. Ground No. 12: Claim for deduction of cess 12.1 On the facts and circumstances of the case and in law, the Appellant prays that the learnedAO be directed to allow deduction in respect of education cess on income-tax paid by the Appellant. Ground No. 13: Violation of principles of natural justice 13.1. 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. 14: Short credit for Tax deducted at source 14.1. The learned AO erred in not granting credit of tax deducted at source to the extent of Rs.2,37,656. Ground No. 15: Short grant of interest under section 244A 15.1 The learned AO erred in fact and in law, in granting short interest under section 244A of the Act. Ground No. 16: General 16.1 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 16.2 The AO erred in initiating penalty proceedings under section 271(1)(c) of the Act. 16.3 The Appellant submits that each grounds of appeal are without prejudice to one another

16.4 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 ofthe appeal.” 2. Ground Nos. 1 to 5 are regarding addition made on account of transfer pricing adjustment in respect of international transactions of Intra Group Services provided by the assessee to its Associated Enterprises (AE). 3. At the time of hearing, ld. Sr. Counsel of the assessee has submitted that an identical issue has been considered by this Tribunal in assessee’s own case for the assessment years 2013-14 and 2014-15. He has also pointed out that the DRP while passing the directions has also followed the earlier directions of the DRP for the assessment year 2013-14 and 2014-15. Ld. Counsel has submitted that this issue is covered by the decision of this Tribunal in assessee’s own case for the assessment years 2010-11 to 2014-15. 4. On the other hand, ld. DRhas relied upon the order of the Assessing Officer and fairly admitted that for the preceding assessment years, the Tribunal had decided identical issue in favour of the assessee. 5. Having considered the rival submissions and on careful perusal of the relevant record, we note that an identical issue has been considered by this Tribunal in assessee’s own case for the assessment years 2010-11 to 2014-15. Thus, it is clear that this Tribunal has taken a consistent view on this recurring issue. In the

latest decision for the assessment year 2013-14 and 2014-15 vide order dated 03.04.2019,the Tribunal has considered and decided this issue in para 14 to 16 asunder :

book, addition made by Assessing Officer stands deleted. 6. To maintain the rule of consistency, we follow the earlier order of Tribunal and decide the issue in favour of the assessee and the addition made being T P adjustment on account of intra group services provided by the assessee to its AE is deleted.

“25. We have heard the rival submissions and perused the orders of the lower authorities and materials available on record. We also refer to the specific observation by DRP reproduced hereinabove. As both the parties admit that the issues under consideration are similar and identical with that of facts in assessment year 2010-11. The directions issued by this Tribunal for assessment year 2010-11 more

particularly the underlined portion hereinabove are followed by us. Ld. CIT DR did not object for the issue to be set aside. We direct the Ld. TPO/Assessing Officer to compute the rate of interest on the basis of aforesaid direction and accordingly is set aside to AO/TPO.” 9. Accordingly, in view of the earlier decision of this Tribunal in assessee’s own case, we set aside this issue to the record of TPO/Assessing Officer with the same directions.

“30. The ld. Counsel at the outset submitted that fact and circumstances of the case are similar to assessment year 2010-11 and this issue stands covered by this Tribunal for assessment year 2010-11 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 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.10524 1649/- iii) KG-DWN-98/4 of Rs.6245 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.

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 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.”

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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.”

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. Accordingly, these grounds raised by the assessee stands allowed.” 12. Following the earlier order of this Tribunal, this issue is decided in favour of the assessee and against the Revenue.

need not be accepted by the joint venture partner. Ld. AR for the taxpayer contended that identical issue has already been decided in favour of the taxpayer in its own case for AY 2010-11 (supra).

Particulars Amount Tanker & Related Costs 115,534,442 Tug Boat Costs 70,464,943 Safety Environment & 11,355 Materials Technical & Engineering 316,786,095 Services Less: Reversal of Water (8,344,443) Transportation & other charges Total BG Exclusive 494,452,392 Production Cost.

The above expenditure are in the nature of tanker expenditure, tug and boat expenditure, safety environment and material expenditure as well as technical and engineering services. During the course of assessment proceedings, the

Assesseehas furnished the details of those expenditure. Merely because the joint-venture partners are not sharing the cost/expenses which is been incurred by the Assessee, It does not become disallowable in the hands of the Assessee. We find no such condition existing either under section 42, or under section 37 (1) of the Income Tax Act. Therefore, we reject the contention of the revenue that unless the expenditure is not borne by all the JV partners the expenses cannot be allowed to the Assessee. In fact, if the JV partners share the expenditure, there cannot be any question of claim of such expenditure in the hands of the Assessee, once again. Further, if the expenses are not specified in the agreement u/s 42 (1), even if the JV partners agree to share those expenditure, it is not allowable u/s 42 (1) or section 37 (1) of the act. Now it needs to be examined, whether the Assessee has incurred expenditure for the purposes of its business or not. The Assessee has stated that it has incurred such expenditure having regard to its standard of operation and the quality of execution work, safety of its employees in the environment. These expenses are required to be incurred by the Assessee based on the commercial expediency. The Assessee has stated that in relation to the support functions, which are innovatively inevitable for carrying on its business and incurred based on the commercial expediency are expenses belonging to the Assessee which cannot be accepted by the operating board. Further, there may be certain expenditure which are required to be incurred to enable the Assessee to perform its operation under the production sharing contract sustaining its activities and maintaining its standard of operations. It is irrelevant whether the joint operator board has approved such expenditure or not because there may be several other reasons for joint-venture partners to not to share the expenditure. The Ld. Assessing Officer as well as the Ld. Dispute Resolution Panel, despite having the necessary details of the expenditure did not point out the single instance that these expenditure are not incurred by the Assessee for the purposes of its business. Merely making references to the various

judicial precedents without putting to the facts on record about incurring of the expenditure by the Assessee or non-business purposes disallowance made by the Ld. and Assessing Officer cannot be upheld. Instead, despite full details available with them they have denied the claim to the Assessee. Neither the assessing officer and nor the Dispute resolution Panel point out nature of details which was not submitted by the Assessee when part of the expenditure has already been considered in detail at the time of determining Arms; Length of the transaction. In view of no adverse inference from the lower authorities on the details submitted, we are constrained to allow the claim of the Assessee of deductibility of the above expenditure of Rs. 316786095/-. In the result ground No. 3 of the appeal of the Assessee is allowed.

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. Accordingly, this ground raised by the assessee stands allowed.”

“49. The ld. Counsel at the outset submitted that this issue has been considered by this Tribunal in assessment year 2010-11 as under: “41. We have carefully considered the rival contention and also noted the facts that BGIL has acquired and developed certain IT infrastructure

and software for the benefit of BG Group of companies. Such assets include production data base management system, SAP up gradation, efficient budgeting and forecasting systems, field development training programs, geosciences/geophysics simulations, integrated asset modeling systems, sophisticated e-mail facility etc. BGIL has allocated the cost of these assets to its Group companies including Assessee at cost based in allocation methodology decided at the group level. Assessee has capitalized these costs in the book of accounts. During the year, BGIL had allocated an expense of Rs. 80,13,26,640/- to the appellant out of which Rs. 66,61,30,450/- had been capitalized and balance was accounted as work in progress. The appellant had claimed depreciation of Rs. 3,30,05,676/- on the IT infrastructure and software. The Ld. Dispute Resolution Panel has stated that even the beneficial ownership of the assent also entitles the Assessee to claim the depreciation if the test of user is proved. In the present case, we do not think that there is any doubt about the ownership of the IT infrastructure in question as per paragraph No. 11.1 of the direction of the Ld. Dispute Resolution Panel. Therefore only issue now remains is to be seen whether the Assessee has properly demonstrated before the Ld. Assessing Officer that the Assessee has used the assets for the purposes of the business. It is better to look at what kind of assets the Assessee are owned by and used by it. Assets are production database management system, SAP up gradation, budgeting and forecasting system, training programs, simulations software, asset modeling systems and email facilities. When the Assessee is participating in such a huge production sharing contract, It is too naïve to think that production database management system and SAP, training programs, simulations programme and email facilities have not been used by the Assessee. Issues have also been examined at the time of determining Arm’s length price of these expense. The actual cost of these

assets are not doubted by the Ld. Assessing Officer. In view of this we are of the opinion that these assets are beneficially owned by the Assessee and are used for the purposes of the business of the Assessee, therefore entitles Assessee to claim the depreciation on these assets. In view of this ground No. 5 of the appeal of the Assessee is allowed.”

year. If instead, a procedure is adopted for changing the value of the opening stock, it will lead to a chain reaction of changes in the sense that the closing value of stock of the year preceding will also have to change and correspondingly the value of the opening stock of that year and so on.”

assesseeto substantiate its case. 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. The ld. Counsel at the outset submitted that this issue stands squarely covered by the order of this Tribunal for assessment year 2012-13 as under: “38. AO/DRP have disallowed an amount of Rs.1,54,16,938/- claimed by the taxpayer on

account of inventory written off on the ground that certain internal documents furnished by the taxpayer are not enough for allowing of theses expenditure. The ld. AR for the taxpayer contended that the expenditure has been claimed as per method of write off obsolete inventory in accordance with the system of accounting regularly followed and relied upon Note-II of Financial Statements for the year under assessment wherein it is stated that the financial statements have been prepared to comply with all material aspects with accounting standard notified u/s 211(3C) of the Companies (Accounting Standards) Rules, 2006 as amended and other relevant provisions of the Companies Act, 1956. The taxpayer also relied upon the supporting documents prepared by Senior Drilling Engineer of the company certifying that such inventory was not usable in future and was produced before AO and consequently claimed deduction for the obsolete inventory written off u/s 37(1) of the Act and relied upon the decision rendered by Hon’ble Bombay High Court in case of Alfa Laval India Ltd. vs. DCIT – 266 ITR 418 (Bom.), affirmed by the Hon’ble Supreme Court by judgment reported in 295 ITR 451. The ld. AR for the taxpayer also contended that the taxpayer has submitted audit report of an independent auditor prepared on the basis of physical verification and maintenance of inventory during assessment proceedings and further relied upon the decision rendered by coordinate Bench of the Tribunal in Gillette India Ltd. vs. ACIT – 66 taxmann.com 221. Ld. DR for the Revenue to repel the arguments addressed by the ld. AR for the taxpayer relied upon the orders of AO/DRP.

“Held, (i) that the duly certified auditor's report placed before the Assessing Officer clearly justified valuation of obsolete items at 10 per cent. of cost. There is no dispute that the assessee is entitled to value the closing stock at market value or at cost whichever is lower. It is also not in dispute that the value of the closing stock has been taken as the value of the opening stock in the subsequent year. Moreover, it is also not disputed that the obsolete items were in fact sold in the subsequent year at a price less than 10 per cent. of the cost. In the absence of any basis for valuing the obsolete items at 50 per cent. of the cost, the Tribunal could not have upheld the findings of the Assessing Officer.”

by the AO/DRP is not sustainable in the eyes of law.”

Chambal Fertilizersand Chemicals Ltd. vs. JCIT reported in107 Tamann.com 484 has held that Education Cess is an allowable deduction while computing the income under the head “profit and gains from business or profession”, as it does not fall within section 40(a)(ii) of the Act. He has also relied upon the decision of Hon’ble Bombay High Court in the case of Sesa Goa Ltd. v. JCIT (2020) 117 taxmann.com 96 (Bom) on this issue. Placing reliance on the precedents, as laid down by Hon’ble Rajasthan High court and Hon’ble Bombay High Court, he has submitted that education cess paid by the assessee is an allowable deduction for computing the income from business and profession.

has been held that the assessee is eligible to claim the deduction of the ‘cess’ as per the provisions of Section 37 of the Income Tax Act. In the absence ofany contrary decision of jurisdictional High Court or any other high Court, the decisions relied upon by the ld. Sr. counsel are binding on this Tribunal. Respectfully following the above decisions, this issue is decided in favour of the assessee and the claim of deduction on account of education cess is allowed.