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

IN THE INCOME TAX APPELLATE TRIBUNAL DEHRADUN BENCH, DEHRADUN Before Sh. Satbeer Singh Godara, Judicial Member & Sh. M. Balaganesh, Accountant Member ITA No. 2134/Del./2016 : Asstt. Year : 2006-07 DCIT, Vs BG Exploration & Production (India) International Taxation, Ltd., C/o Nangia & Co., 3rd Floor, NCR Plaza, New Cantt. Circle-1, Dehradun Road, Dehradun (APPELLANT) (RESPONDENT) PAN No. AAACE4569K Assessee by: Sh. Amit Arora, Adv. & Sh. Vishal Mishra, Adv. Revenue by: Sh. Mithun Shete, Sr. DR Date of Hearing: 18.03.2025 Date of Pronouncement: 28.04.2025 ORDER Per Satbeer Singh Godara, Judicial Member:

This Revenue’s appeal for Assessment Year 2006-07, arises against the CIT(A)-2, Noida’s in case No. 01/CIT(A)- 2/2007-08 dated 11.02.2016, in proceedings u/s 143(3) of the Income Tax Act, 1961 (in short “the Act”).

“(i) Whether on the facts of the case and in law, the CIT(A) has erred in allowing the entire expenses of the assessee deductible u/s 42(1)(b) of the Act ignoring the clear observations of the Hon'ble High Court that…………….". If the assessee seeks exemption of any expenditure u/s 42(1) of the Act, he has to show that he

2 ITA No. 2134/DDN/2016 BG Exploration & Production (India) Ltd. has entered into an agreement with the Central govt. of the nature mentioned in section 42(1) of the Act and that, under the agreement, he has been authorized to incur certain expenditure and those expenditures fall within wither clause (a) or clause (b) or clause (c) of section 42(1) of the Act." (ii) Whether on the facts of the case and in law, the CIT(A) has erred in not appreciating the fact that only the expenses as approved by the "Joint Operating Board" of concerned PSC could be eligible for deduction u/s 42(1) (b) of the Act. (iii) Whether on the facts of the case and in law, the CIT(A) has erred in not ascertaining the expenses not approved by the Joint Operating Board and hence not a part of PSC related expenses, and in not holding those expenses to be covered by the provisions of section 44C as "Head Office Expenses", especially when the Hon'ble ITAT had already held that such expenses are of the nature of "Head Office Expenses" within the meaning of section 44C of the Act. (iv) Whether on the facts of the case and in law, the CIT(A) has erred in holding that the expenditure of the assessee was allowable u/s 42(1)(b) of the Act, and in ignoring the fact that the Hon'ble ITAT, While adjudicating the same issue in the case of assessee's holding company, namely, BGIL, has already observed that expenses claimed to have been incurred by BGIL for the services rendered to the assessee were not fully supported by evidences and hence BGIL had failed to substantiate its claim regarding allocation of expenses incurred by it for the services rendered to BGEPIL (the assessee).” 4. Suffice to say, this is the second round of proceedings between the parties in furtherance of hon’ble jurisdictional high court’s remand directions extracted in para 3.3 page 2 of the CIT(A)’s order to verify the alleged agreement between the assessee and the Central Government, so as to claim deduction u/s 42(1) of the Act.

3 ITA No. 2134/DDN/2016 BG Exploration & Production (India) Ltd. 5. It is in this factual backdrop that both the parties reiterate their respective stands against and in support of the CIT(A)’s action reversing the impugned assessment findings, as under:

“4.1 It is noted that CIT (A)-I, Dehradun bad earlier held that the expenditure was allowable under section 42(1) of the Act. Hon'ble ITAT, based on facts and also relying upon the judgement of the Apex Court in the case of Enron Oil and Gas Ltd. (2008) 305 ITR 77, has held that the expenditure was covered u/s 42(1) of the Act. Hon'ble jurisdictional High Court in ITA No. 25 of 2009 have remitted the matter back to this office with a direction to ascertain, whether the expenditure, being the subject matter of dispute, falls under Clause (a) or Clause (b) or Clause (c) of section 42(1) of the Act, if so, to proceed in accordance with the mandate contained in section 42(1) of the Act and, if not, to give an opportunity to the assessee to claim such expenses to be covered by section 44C of the Act. 4.2 The Appellant has relied upon the accounting procedure of PSC and judgment of Apex Court in the case of Commissioner of Income Tax and Another vs. Enron Oil and Gas Ltd. 305 ITR 75, which forms part of Submissions made before this office and also extracted above, in the order to Contend that the expenses were allowable u/s 42(1) of the Act. I find merit in the contention of the Appellant. 4.3 As far as determination of the specific clause of section 42(1) of the Act under which the expenses are allowable, it is noted that the Appellant has been in commercial production of Oil and Gas under PSC contract. The Judgment of Apex Court in the case of Enron Oil and Gas (Supra) has held that the PSC is a code in itself and covers gamut of expenditure, It is noted that the accounting procedure of PSC defines the costs including the general and administrative cost, professional and administrative services and expenses, expenses on account of scientific and technical personnel among other costs. 4.4 The expenditure incurred by the Appellant is held to be allowable under clause (b) of section 42(1) of the Act, which covers expenditure incurred by any assessee, whether before or after commercial production in respect of drilling or exploration activities or services or in

4 ITA No. 2134/DDN/2016 BG Exploration & Production (India) Ltd. respect of physical assets used in that connection after the beginning of commercial production.” 6. We have given our thoughtful consideration to the Revenue’s and assessee’s respective stands. We are informed during the course of hearing that the very issue of the assessee’s entitlement to claim expenditure u/s 42(1) of the Act is indeed a recurring one which came for adjudication before the tribunal in it’s appeal ITA No. 05/DDN/2022 decided on 31.03.2022, against the department as under:

“13. Ground of appeal No.7 relates to disallowance of head office expense. 14. After hearing both the sides, we find during the course of the assessment proceedings, the AO alleged 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 aforesaid expenditure which was not approved by the Operator Board of the PSC, was outside the purview of section 42(1) of the Act. Accordingly, such expenses incurred by the assessee were held to be in the nature of head office expenditure allowable only to the extent of 5% of the adjusted total income of the appellant. The AO did not, however, make any addition since the said expenses had already been disallowed by the TPO. 15. The DRP upheld the additions proposed by the AO by merely relying on its directions issued in appellant’s own case for AY 2014-15-2016-17. 16. We find, identical issue had come up before the Tribunal in assessee’s own case for the immediately preceding assessment year i.e., 2016-17. We find, the Tribunal, in ITA No.07/DDN/2021, order dated 14th December, 2021, has decided the issue in favour of the assessee and against the Revenue by observing as under:- “13. Ground No.9 is regarding disallowance of head office expenses.

5 ITA No. 2134/DDN/2016 BG Exploration & Production (India) Ltd. 14. We have heard ld. Sr. Counsel as well as ld. DR and carefully perused the orders of the authorities below on this issue as well as the decision of this Tribunal in assessee’s own case for the preceding assessment years. At the outset we note that this Tribunal in its earlier order in assessee’s own cases for the assessment years 2013-14 and 2014-15 vide order dated 03.04.2019 in ITA Nos. 7476 & 7477/Del/2018 has considered and decided this issue in para 39 to 43 as under: “39. At the outset, Ld. Counsel submitted that this issue has been dealt with by the Co-ordinate Bench of this Tribunal for assessment years 201011 and 2012- 13 . He submitted that the assessee has incurred expenses to undertake activities required by the PSC with regard to its standard of operation, including the quality of execution of work, access to latest industry information and global updates, safety of its employees and environment etc. and all these expenses are incurred on the basis of commercial expediency determined by the taxpayer and the same need not be accepted by the joint venture partner. Ld. AR for the taxpayer contended that identical issue has already been decided in favour of the taxpayer in its own case for AY 2010-11 (supra). 40. He submitted that this issue had been adjudicated by coordinate Bench of the Tribunal in assessee’s own case for AY 2010-11 and decided as under: “31 .……Coming to the facts of the impugned ground , the Ld. Assessing Officer has disallowed the same expenditure for the only reason that had the same were incurred for the production it should have been passed through the joint venture and shared by all the partners and these expenses are not incurred wholly and actually for the purpose of the business of the Assessee. Nature of the expenses which have been disallowed by the Ld. Assessing Officer are as under:- Particulars Amount Tanker & Related Costs 115,534,442 Tug Boat Costs 70,464,943 Safety Environment & Materials 11,355 Technical & Engineering Services 316,786095 Less: Reversal o f Water (8,344,443) Transportation & other charges Total BG Exclusive Production 494,452392 Cost

6 ITA No. 2134/DDN/2016 BG Exploration & Production (India) Ltd. The above expenditure are in the nature of tanker expenditure, tug and boat expenditure, safety environment and material expenditure as well as technical and engineering services. During the course of assessment proceedings, the Assessee has furnished the details of those expenditure. Merely because the joint-venture partners are not sharing the cost/expenses which is been incurred by the Assessee, It does not become disallowable in the hands of the Assessee. We find no such condition existing either under section 42, or under section 37 (1) of the Income Tax Act. Therefore, we reject the contention of the revenue that unless the expenditure is not borne by all the JV partners the expenses cannot be allowed to the Assessee. In fact, if the JV partners share the expenditure, there cannot be any question of claim of such expenditure in the hands of the Assessee, once again. Further, if the expenses are not specified in the agreement u/s 42 (1), even if the JV partners agree to share those expenditure, it is not allowable u/s 42 (1) or section 37 (1) of the act . Now it needs to be examined, whether the Assessee has incurred expenditure for the purposes of its business or not. The Assessee has stated that it has incurred such expenditure having regard to its standard of operation and the quality of execution work, safety of its employees in the environment. These expenses are required to be incurred by the Assessee based on the commercial expediency. The Assessee has stated that in relation to the support functions which are innovatively inevitable for carrying on its business and incurred based on the commercial expediency are expenses belonging to the Assessee which cannot be accepted by the operating board. Further, there may be certain expenditure which are required to be incurred to enable the Assessee to perform its operation under the production sharing contract sustaining its activities and maintaining its standard of operations. It is irrelevant whether the joint operator board has 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

7 ITA No. 2134/DDN/2016 BG Exploration & Production (India) Ltd. 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. 41. Keeping in view the facts and circumstances of the case and the fact that business model has not undergone any change since the AY 2010-11 and by following the decision rendered by the coordinate Bench of the Tribunal in taxpayer’s own case for AY 2010-11 , we are of the considered view that the cost of services availed of by the taxpayer required by PSC with regard to its standard of operation including the quality of execution of work, access to latest industry information and global updates, safety of its employees and the environment etc., cannot be disallowed merely on the ground that the said expenses have not been borne by the joint venture partner , particularly when it is not disputed by the Revenue that the expenditure were made for commercial expediency. 42. The ld. CIT DR opposed to the same and submitted that the issue has been contested before the Hon’ble High Court. 43. We have heard the rival submissions and perused the orders of the lower authorities and materials available on record. We fail 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 o f 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 .”

8 ITA No. 2134/DDN/2016 BG Exploration & Production (India) Ltd. 15. To maintain the rule of consistency, we follow the earlier order of Tribunal and decide the issue in favour of the assessee and allow this ground of assessee’s appeal.” 17. Respectfully following the order of the Tribunal in assessee’s own case for the immediately preceding assessment year, which in turn has followed the order of the Tribunal for AYs 2013-14 and 2014-15 and in absence of any contrary material brought to our notice, we decide the issue in favour of the assessee and allow the grounds raised by the assessee on this issue.” 7. That being the case and once the assessee has already been eligible for the very kind of expenditure in the said assessment year, we adopt judicial consistency to reject the Revenue’s instant sole substantive ground in very terms.