Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, DELHI ‘I-1’ BENCH,
Before: SHRI N.K. BILLAIYA, & SHRI SUDHANSHU SRIVASTAVA
PER N.K. BILLAIYA, ACCOUNTANT MEMBER,
With this appeal, the assessee has challenged the correctness of the order dated 28.01.2016 framed u/s 143(3) r.w.s 144C of the Income tax Act, 1961 [hereinafter referred to as 'the Act' for short].
The sum and substance of the grievance of the assessee is that the AO/TPO/DRP erred in making an upward adjustment of Rs. 1,79,11,717/- on account of payment for support services.
Representatives of both the sides were heard at length, case records carefully perused and with the assistance of the ld. Counsel, we have considered the documentary evidences brought on record in the form of Paper Book in light of Rule 18(6) of ITAT Rules and have also perused the judicial decisions relied upon by both the sides.
Briefly stated, the facts of the case are that the appellant- company is a wholly owned subsidiary of BG Asia Pacific Holdings Pvt Limited. It commenced midstream gas marketing operations in India after obtaining the approval of the Foreign Investment Promotion Board [FIPB] of the Government of India to undertake marketing and distribution of natural gas as well as LNG.
As per Form 3CEB, the appellant has undertaken the following international transactions:
Nature of Transaction Method Value [Rs.] Purchase of LNG TNMM 3,29,29,42,698/- Receipt of support services TNMM 1,79,11,717/- Reimbursement of expenses NA 1,32,47,223/-
6. The quarrel before us relates to the receipt of support services valued at Rs. 1,79,11,717/- for which the appellant has taken TNM Method as the Most Appropriate Method. Facts on record show that the appellant, BG India Energy Solutions P. Ltd [BGEPIL], sought assistance of its group entity in India, for managing day-to-day business operations. The contention of the ld. counsel for the assessee is that BGEPIL is a company with expertise related to exploration and production activities in the oil and gas sector. BGEPIL possesses a pool of highly knowledgeable, technically trained and experienced individuals having extensive knowledge of the exploration and production sector. This pool of trained and experienced personnel has been made available by BGEPIL to the Appellant.
7. During the course of TP assessment proceedings, show cause notice was issued to the assessee which reads as under:
Please furnish all the agreements entered in to by the taxpayer company, related to the Intra Group Services obtained by the taxpayer company from the AEs during the year. Please identify each of the services actually received by the 2. taxpayer company. Please specify the amount of payment made for each of 3. such services. 4. Please submit the contemporaneous documentary evidence to show that these services have actually been received by the taxpayer company. Please justify the need for the receipt of such services for 5. which payment has been made.
Please state with documentary evidence as to when and how these services were requisitioned from the AEs.
Please state as to how the rate or payment for IGS has been determined at the time of entering in to the agreement? Please also furnish the basis thereof. 8. Please state as to whether any cost benefit analysis was done while entering into the agreement and while requisitioning the services for payment of IGS? If so the details of such cost benefit analysis should be furnished. a. The cost benefit analysis should include the expected benefit from the IGS vis a vis the payment made for the same. Please specifically state as to whether any benchmarking analysis b. was done at the time of entering into the agreement so as to compare the payment of IGS to the AE vis a vis an independent party under similar circumstances. If so, the details thereof.
9. Please show with evidence as to what tangible and direct benefit has been derived by the taxpayer company from the use of such IGS.
Whether the services availed from AEs, have also been performed by the taxpayer company itself or also availed from independent parties? If yes, The details of such expenditure for each of the services should be a. furnished. Please state as to why a separate payment has been made for such b. services to the AE. 11. Please furnish details and documentary evidence of cost incurred by the AE for rendering each type of services purportedly received by the taxpayer company and the mark up applied', if any by the AE. Please also state as to whether the cost incurred by the AE is audited. 12. Whether AE is rendering such services to any other AEs/independent parties also. If yes the details thereof including the rates/amount charged from such AEs along with mark up if any. 13. If the AE has rendered services to more than one entity including the taxpayer company, then the basis of allocation amongst various entities may be furnished. Please also furnish the basis of choosing a particular allocation key. 14. If the above information is not furnished, complete in all respects, along with contemporaneous documentary evidences, the arm's length payment for these intra group services would be treated as Nil by applying CUP method.
Vide reply dated 30.10.2014, the assessee explained the background of Intra-group services paid by it. In support, all the agreements entered into by the assessee company related to Intra Group Services obtained by it from the AEs during the year were filed.
The assessee also identified services actually received by it.
Reliance was placed on several judicial decisions. The reply of the assessee was duly considered by the TPO but it did not find any favour with him who was of the opinion that the TPO is empowered to apply appropriate method for each class of transactions. As these services are a separate class of transaction, the same is to be analysed separately.
10. As far as the issue of services that the appellant has received from respective AEs is concerned, the TPO analysed the nature of services as under:
Nature of Services Comments Financial & other The taxpayer has incurred the following expenses: administration Legal and professional charges Rs. 19581901 which inter alia support services includes Auditors remuneration of Rs. 910550 The taxpayer has submitted following documents vide its submission dated 28.07.2014 as proof of receipt of the aforesaid services. S.N Particulars Reference t Financial Statements Appendix 1
2 Tax Audit report Appendix 2 3 Income Tax Return Appendix 3 4 Annexure 1 Agreements entered into during the year-for the aforesaid services 5 Time Sheets prepared in relation to the execution of the aforesaid Appendix 4 services 6 Confirmation memorandums in relation to purchase of LNG Appendix 5 7 Minutes of board meetings held during the year Appendix 6 8 Minutes of general meetings held during the year Appendix? 9 VAT returns pertaining FY 2010-11 Appendix 8 1 Service tax returns pertaining FY 2010-11 1 TDS returns pertaining FY 2010-11 To be provided at a later stage 1 Evidence of any other statutory compliances filed pertaining FY 2010- 11 The taxpayer has not been able to establish as to how the AE’s are in a better position to advice it on tax, legal and financial matters in India. The taxpayer is operating in India. It is not at all likely that they have developed some knowledge on these issues which the taxpayer lacks. Hence, there is no plausible reason for the taxpayer to make this payment. The taxpayer has not been able to substantiate as to how this service were useful to it. Moreover These services seem to be of a very generic nature with there being nothing so unique in these services that the taxpayer itself may not be able to achieve. Every organization has its own performance measurement, quality control and troubleshooting mechanisms in place. Hence, it is not understandable as to why the taxpayer relying on its AEs for accomplishment of such routine tasks. Again, no evidence was put forth to show that the AE had indeed helped the taxpayer in implementation of performance appraisals, performance evaluation, HR policies. The taxpayer has not been able to show as to what were that actual services that the corporate management group provided it and how it has helped the in strategic planning and development. The taxpayer has entered into an agreement without carrying out any cost benefit analysis and has simply made a payment because it was asked to do so. This does not constitute arm's length behaviour. This is an international stand as obvious from the landmark judgment of Hon'ble US Supreme Court in the case of Commissioner vs TOWER 327 US 280, 291 (1946], it was observed that the "Simple expedient of drawing up papers” is not controlling for tax purposes when the objective realities are to the contrary and which have no economic significance beyond tax benefits." (also Falsetti Vs. Commissioner 85 T.C. 332,347 [1985]}. Moreover as per the description given of the aforesaid services, these were more in the nature of complying with the overall group method and procedures. These expenses were basically incurred by the taxpayer to comply with the format or rules formulated for the group IT charge members. They were in the nature of share holder services. The taxpayer has not been able to substantiate as to how this service were useful to it. Moreover, the services seem to be of a very generic nature with there being nothing so unique in these services that the taxpayer itself may not have been able to perform. Every organization has its own performance measurement, quality control and troubleshooting mechanisms in place. Moreover as per the description given of the aforesaid services, these were more in the nature of complying with the overall group method and procedures. These expenses were basically incurred by the taxpayer to comply with the format or rules formulated for the group members. They were in the nature of share holder services. The taxpayer has entered into an agreement without carrying out any cost benefit analysis and has simply made a payment because it was asked to do so. This does not constitute arm’s length behaviour. Moreover the taxpayer has been unable to substantiate actual receipt of these services. Commercial and The taxpayer has claimed to have received following services operational services ■ Marketing services * Negotiation of contracts ■ Determination of prices * Coordination of logistics of the products Credit and collection management
After analysing these services, the TPO further observed that there is no evidence that the services have actually been provided.
The assessee failed miserably to demonstrate the need for these services and also receipt of the same. After referring to OECD guidelines and several judicial decisions, the TPO finally concluded that the assessee had made payment of Rs. 179,11,717/- to its AE for intra group services pertaining to management support services which are not found to exist fully and accordingly, made an upward adjustment of Rs. 1,79,11,717/-.
Objections were raised before the DRP but were of no avail.
Before us, the ld. counsel for the assessee reiterated what has been stated before the lower authorities. It is the say of the ld. counsel for the assessee that the assessee availed certain support services from BGEPIL which included assistance in procuring and selling LNG, obtaining information concerning industrial and commercial matters, services related to promotion, marketing and sale of LNG, and incidental support services like financial reporting, assistance on international and local taxation issues, insurance related assistance, budgeting services, legal services, etc where allocation of actual cost incurred by BGEPIL charged with a mark-up of 12 percent.
14. The ld. counsel for the assessee vehemently stated that the assessee has a very small set-up and has no employees on its payroll and was fully dependent on the employees of BGEPIL for support services and because of such support, the assessee could record sales of Rs. 917 crores.
Further, the ld. counsel for the assessee pointed out that the recovery of payments from the assessee have been considered by BGEPIL as income in its books of accounts and the same was duly offered to tax in India at the tax rate applicable to foreign companies, i.e, 40% plus surcharge and the same has been accepted by the TPO in the case of BGEPIL.
16. The ld. counsel for the assessee concluded by saying that the entire upward adjustment deserves to be deleted.
17. Per contra, the ld. DR strongly supported the findings of the TPO and read the relevant portion of the TPO’s order.
18. We have given thoughtful consideration to the orders of the authorities below. A perusal of the profit and loss account of the appellant company, which is placed at page 105 of the paper book shows that the assessee has not incurred a single rupee on employee cost. Even in the notes of accounts, at clause 10, it is mentioned that no provision for retirement benefits has been made in these financial statements as there were no employees on the payroll of the company during the year. These facts clearly show that the assessee was totally dependent on the AE for running its business. But for the support and services provided by the AE, the assessee could not have booked turnover of Rs. 917 crores.
We have also carefully perused the time sheets of the employees of BGEPIL which are placed at pages 139 to 141 of the paper book and which are also exhibited hereinbelow:
Sum of Adi Sum SKf iross Hours of C.C/IO for j2XBillini2$ ,CC Gross fAHpcll tt Prec BGTO lOGraduateTralne 215 utba e 48 2702282 2702323 2702322 BREG 212 BO Regulations 27 21924 O 21925 BO SO S700039 . - F-0160-BD- 50 80 DP-PD01- BHSSE 212 80 HSSE 25 21924 0001 480 25 O 2192S 240 13 63 21628 1,200 1505742 2702282 - S709041 6DAG BO £<ecutfve-£G 212 23 1504SE4 MO India 21924 103 S 2192S 24 1 21683 1,924 53 150S742 2702262 12 1 2702323 2702322 5700039 - 1506422 12 1 Branch orf- 219 BflNPl 17A 1504864 nnance (National pay) 21924 21925 - 21588 2702282 92 58 2702323 52 33 2702322 S7C0039 P-C337-EX- OP-GA01- P-04S0-EX- C001 16 10 OP-GA01- BFINP Branch off- 215 17E 1504864 1C01 2 Finance (Cther G&A) 21924 21925 216S8 2702282 92 SB 2702323 52 33 2702322 S70C039 P-0337-EX- OP-GA01- P-04SD-EX- 16 10 0001 OP-GA01- KG DV/N1 Branch off-JCG-0WN-2009/l 5G5 S3 1501864 1001 (E»pat) 2192S 21688 1504852 1505742 2702262 1,920 100 2702323 2702322 p-oiso-rx-op-GAOi-ion Branch 6fr-KG- 506 KGDVVN2 83 1504E64 10 2 0WN-200S/l (NationaU) 21688 1S01862 2702282 77 to 16 2702322 17 S700039 - P-0337-EX- CP-GA01- P-0490-EX- C001 OP-GA01- P-04SO-EX- 85 1012 18 OP-GA01- IS 05422 22 47 1011 7 G0V/N4 Branch off-KG- SC6 83 1504864 10 0 D'.VN-2009/l (Othe' G&A costs)
Department; No. of employees Admin 5 Business Development - Tech 9 KG-DWN-2009-1 4 C&P 22 Commercial - Economics 2 Commercial - Upstream 9 Commercial - Midstream 3 Commercial - Mkt. Planning & Fundamentals 1 Commercial - Regulations 1 Commercial - Business Develooment 1 Commercial - VP 2 Drilling 11 Well Services 7 Executive-BG India 2 Executive-PO 2 Finance-PO 22 Finance-BO 2 Graduate Trainees 7 HR 8 HSSE-PO 8 HSSE -BO 1 IT 6 Legal PO 2 Legal BO 3 Logistics 7 PCA 6 Projects 21 Production 12 Subsurface 26 Production Optimisation 7 Shorebase 11 Production Panna 60 Production Tapti 41 Total ! 331
On the basis of these time sheets of the employees of BGEPIL, it raised debit notes on the assessee. This further supports the fact that the appellant was fully dependent on the employees of BGEPIL for support services including assistance in procuring and selling LNG, obtaining information concerning industrial and commercial matters, etc. The receipt of services further find support from the evidences in the form of documents showing compliance to various acts like filing of Income tax return, VAT return, preparation of financial statements, tax audit report, time sheets filled in by BGEPIL employees,
The TPO has grossly erred in appreciating the facts in true perspective when he held that the employees of BGEIPL sitting in UK cannot comply with tax provisions in India. The fact of the matter is that BGEPIL was rendering these services from its office situated in India and the employees were very much based in India.
The Tribunal in assessee’s own case for A.Y 2010-11 in on identical set of facts has deleted the adjustment made on account of disallowance of payment of management services and unit charges by the assessee to its AE. The relevant findings of the Tribunal read as under:
“13. We have carefully considered the orders of the authorities below and with the assistance of the ld. AR, we have considered the relevant documentary evidences brought on record in the form of Paper Book in light of Rule 18(6) of ITAT Rules.
It is true that the international transactions reported by the assessee have been accepted excepted for MSU charges amounting to Rs. 1,45,06,572/-. The same has not been accepted because the TPO/DRP were of the opinion that the payments for these services are duplicative and when the assessee has already paid for support services and the payments for which have been accepted by the TPO.
15. The agreement mentioned elsewhere explains the scope of work and in Article 2, it has been mentioned as under:
“2.1 BGEPIL shall endeavour to provide the following services to BGIES (the “Services"):
(a) assist BGIES to procure LNG and natural gas from International and domestic sellers.
(b) assist BGIES to sell LNG and natural gas to various customers of BGIES.
(c) obtain information concerning industrial and commercial matters, which are of interest to BGIES especially in connection with upcoming projects in the oil, gas and energy sector.
(d) provide services towards the promotion, marketing or sale of LNG and natural gas. (e) provide incidental support services such as, without limitation, the billing, issue or collection or recovery of cheques, payments, maintenance of accounts and remittance, inventory management, evaluation or development of prospective customers or vendors, and public relations services. This Includes services such as that of commission agent, as well as information technology services Including but not limited to any service in relation to designing, development or maintaining of computer software, or computerized data processing or systems networking, or any other service in relation to the operation of computer systems.”
Article 3 provides for consideration and the same reads as under:
“3.1In consideration of the Services provided by BGEPIL under Article 2, BGEPIL agrees to pay BGEPIL for ail costs and expenses incurred by BGEPIL related to the provision of the Services plus a mark-up of 12% on all such costs and expenses. Ail payments under this agreement shall be made in Indian Rupees and shall be subject to deduction of tax at source as applicable,
3.2 BGEPIL shall pay service tax as may be correctly and reasonably Invoiced and paid to the authorities by BGIES. BGIES shall provide BGEPIL with evidence of payment of such service tax upon request by BGEPIL”
It appears that this agreement has not been properly appreciated by the lower authorities. In the light of this agreement, we are of the considered opinion that there is no payment for duplicative services and the payment of Rs. 1,45,06,572/- is distinct as MSU charges and adjustment made by the TPO is uncalled for and deserves to be deleted
Before closing, it would be pertinent to mention here that in the financial statement of the assessee, there is no expenditure relating to the employees cost and in the notes annexed and forming part of the financial statement at clause 10A it has been specifically mentioned that no provision for retirement benefits has been made in these accounts as there were no employees about the payroll of the company during the year. The sales of LNG amounting to Rs. 2,27,37,88,338/- could not have been achieved without the aid of support staff and the same was provided by BGEPIL. Considering the facts in totality, Ground Nos. 2 to 4 taken together are allowed.”
Considering the facts in totality, in light of the aforesaid decision of the coordinate bench, we do not find any merit in the upward adjustment of Rs. 1,79,11,717/- and the same is directed to be deleted.
In the result the appeal filed by the assessee in is allowed.
The order is pronounced in the open court on 14.09.2020.