M/S. BG EXPLORATION & PRODUCTION INDIA LTD.,MUMBAI vs. JCIT (INTERNATIONAL TAXATION), DEHRADUN

The DRP upheld the addition proposed by the Assessing Officer.

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.

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.

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 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.

The taxpayer has come up with detail of expenditure incurred on non- producing blocks which is as under :-

The ld. AR for the taxpayer has also contended that this issue has also been decided in favour of the taxpayer in its own case for AY 2010-11. For ready perusal, operative part of the order is extracted as under :- “54. Section 42(1) makes it clear that for the purpose of computing the profits and gains of any business consisting of prospecting, extraction or production of mineral oil, the Assessee would be entitled to claim deduction in respect of three items of expenditure in lieu of or in addition to the allowances admissible 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.

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.

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

Aggrieved with such order of the Assessing Officer/DRP, the assessee is in appeal before the Tribunal.

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.

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.

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

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 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.

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.

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.

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 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.

Aggrieved with such order of the Assessing Officer/TPO/DRP, the assessee is in appeal before the Tribunal.

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 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.

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 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 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.

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 arguing in ground no.9, he submitted that the order of the Assessing Officer/DRP should be upheld.

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.

In ground no.13, the assessee has challenged the disallowance of depreciation amounting to Rs.26,57,56,314/- of Panna Well Cost.

Facts of the case, in brief, are that the Assessing Officer during the course of assessment proceedings observed that the assessee claimed 100% 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%.

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.

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.

Ld. DR has no objection for the above contention of the ld. counsel for the assessee.

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

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.

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.

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 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.

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, 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.

The ld. DR on the other hand strongly supported the order of the Assessing Officer/DRP.

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.

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.

In ground no.15, the assessee has challenged the disallowance of interest expenses of Rs.14,99,98,785/- as capital in nature.

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 :-

The DRP restored the issue to the file of the Assessing Officer with the following directions :-

Aggrieved with such order of the Assessing Officer/DRP, the assessee is in appeal before the Tribunal.

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.

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.

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.

Ground no.18 relates to short credit of TDS amounting to Rs.87,48,486/-.

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.

In ground no.19, the assessee has challenged the interest charged u/s 234B of the I.T. Act.

Ld. counsel for the assessee submitted that the revenues receivable by the assessee non-resident company are subject to deduction of tax at source.

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.

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 :-

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:

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 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.

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.

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.