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

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH ‘DB’, NEW DELHI Before Sh. Kul Bharat, Judicial Member Dr. B. R. R. Kumar, Accountant Member ITA No. 13/DDN/2022: Asstt. Year: 2015-16 ITA No. 47/DDN/2022: Asstt. Year: 2018-19 BG Exploraton & Production India Ltd., Vs DCIT, BG House, Lake Boulevard, DDIT/ADIT (International Hiranandani Business Park, Powai, Taxation), Circle-1, Mumbai-400076 Dehradun-248001 (APPELLANT) (RESPONDENT) PAN No. AAACE4569K

Assessee by : Sh. Ajay Vohra, Sr. Adv. Revenue by : Sh. Mayak Kumar, JCIT, DR

Date of Hearing: 11.10.2022 Date of Pronouncement: 27.12.2022

ORDER Per Dr. B. R. R. Kumar, Accountant Member: These are the appeals filed by the assessee against the order dated 21.06.2022 passed by the AO u/s 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961. The issues for both the appeals are similar in nature.

“The Appellant objects to the order dated 18 February 2022 passed by the Deputy Commissioner of Income Tax (International Taxation), Dehradun (“AO”) for the Assessment Year (“AY”) 2015-16, pursuant to the directions dated 29 October 2021 [bearing DIN no. ITBA/DRP/M/144C(5)/2021-22/1036840292(1)] issued by the Dispute Resolution Panel (“DRP”) under section 144C(5) of the Income-tax Act, 1961 (“the Act”) on the following among other grounds.

Ground No. 1 : Reassessment proceedings are without Jurisdiction and bad in law 1.1 The learned AO erred in law and on facts as reasons recorded for reopening the case of the assessee for AY 2015-16 are invalid and cannot form the basis for reassessment. Ground No. 2: Erroneous disallowance of payment made towards intra-group services by Appellant to its Associated Enterprise (“AE”) 2.1 The learned Transfer Pricing Officer ("TPO") / AO / DRP grossly erred in law and on facts by making an upward transfer pricing adjustment of Rs.219,44,33,564 in total towards international transactions pertaining to payment of management service and unit charges, IM charges and payroll expenses to its AE. Ground No. 3: Erroneous rejection of Transactional Net Margin Method ("TNMM") and selection of Comparable Uncontrolled Price ("CUP") Method 3.1 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 aim'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. 4: Without prejudice that TNMM should be selected, learned TPO / AO / DRP applied CUP method in an erroneous manner 4.1 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. 5: Erroneously disregarded the decision of Hon'ble ITAT in AY 2011-12 to Assessment Year 2014- 15 and AY 2016-17 and directions of the Hon'ble DRP for AY 2009-10 and AY 2010-11 5.1 The learned TPO / AO / DRP erred in disregarding the decision of Hon'ble ITAT in AY 2011-12 to AY 2014-15 and AY 2016-17 and Page | 2

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. 6: Erroneously questioning of commercial expediency of the Appellant 6.1 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. 7: Erroneous application of CUP for determining arm's length interest rate 7.1 The learned TPO / AO / DRP erred in making an upward adjustment of Rs.3,97,64,880 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. 7.2 Without prejudice to the above, the learned TPO / AO / DRP erred in not appreciating the fact that a substantial amount of loan was already repaid during previous assessment year i.e. AY 2014- 15. Accordingly, even if the benchmarking undertaken by learned TPO / AO is to be adopted, the arm’s length interest rate ought to be considered is 6.06% pertaining to USD 300 million loan facility. Accordingly, the rate of interest of 6.18% is considered to be at arm’s length after availing the benefit of +/-3%.

Ground No. 8: Disallowance of branch office expenditure 8.1 The learned AO / DRP erred in law and in facts in disallowing the branch office expenditure of Rs.3,63,06,772 by treating it as pre-operative in nature. 8.2 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. 8.3 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. 9: Disallowance of expenditure incurred on non-producing Production Sharing Contracts (“PSCs”) 9.1 The learned AO / DRP erred in law and in facts in disallowing the expenditure of Rs.49,37,84,218 incurred on non-producing PSCs. 9.2 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. 9.3 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 AYs. Ground No. 10: Disallowance of head office expenditure 10.1 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. 10.2 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. 10.3 Without prejudice, the learned AO has erred in computing allowance under section 44C with respect to returned income and not income assessed. Ground No. 11: Disallowance of depreciation 11.1 The learned AO erred in law and in facts in disallowing depreciation of Rs.3,19,15,609 being the difference of depreciation amount between the tax audit report and the computation. 11.2 The learned AO / DRP erred in not appreciating that this difference is on account of depreciation

claimed on Global IT & T expenditure and that depreciation claim on Global IT & T expenditure was allowable as held by the Hon’ble ITAT in Appellant’s own case for AYs 2010-11 to 2014- 15. 11.3 The learned AO / DRP erred in not appreciating that this difference is on account of difference in opening written down value of assets on first day of the captioned assessment year which was accepted by the revenue authorities in earlier years. Ground No. 12: Disallowance of inventory written off

12.1 The learned AO erred in law and in facts in disallowing inventory written off of Rs.5,63,15,398 on the basis that the Appellant submitted only internal documents which do not suffice for allowance of expenditure. 12.2 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. 13: Disallowance of amount under section 40(a) 13.1 The learned AO / DRP erred in law and in facts in disallowing amount of Rs. 10,28,82,922 being the difference between the amount reflected in the tax audit report and considered by the Appellant in its computation of income. Ground No. 14: Disallowance of interest incurred on loan taken from BG Asia Pacific Pte. Limited (“BGAP”) 14.1 The learned AO / DRP erred in law and in facts in disallowing interest of Rs.2,25,32,059 claimed by the Appellant. Ground No. 15: Disallowance of exchange loss on interest on BGAP loan 15.1 The learned AO / DRP erred in law and in facts in disallowing exchange loss of Rs.58,45,008 on account of foreign exchange fluctuation for loan taken during the year. Ground No. 16: Claim for deduction of cess

16.1 On the facts and circumstances of the case and in law, the Appellant prays that the learned AO be directed to allow deduction in respect of education cess on income-tax paid by the Appellant. Ground No. 17: Violation of principles of natural justice 17.1 The learned AO / DRP erred in law and in facts, in ignoring the submissions and the information furnished by the Appellant during the assessment proceedings. Ground No. 18: Non grant of credit for Advance Tax and Self-Assessment Tax 18.1 The learned AO erred in not granting credit of Advance Tax and Self-Assessment Tax of Rs. 69,89,00,000 and Rs.20,88,43,758 respectively.

Ground No. 19: Interest under section 234A of the Act 19.1 The learned AO erred in computing interest under section 234A of Rs.63,42,30,450 without appreciating the fact that the return was filed within the due date. Ground No. 20: General 20.1 The Appellant submits that the AO, TPO and DRP have erred in arriving various unwarranted and erroneous conclusions unsupported by any relevant material in deciding the case. 20.2 The AO erred in initiating penalty proceedings under section 271(1 )(c) of the Act. 20.3 The Appellant submits that each grounds of appeal are without prejudice to one another. 20.4 The Appellant craves leave to add, alter, amend, substitute and /or modify in any manner whatsoever all or any of the foregoing grounds of objections at or before the hearing of the appeal.” 3. The assessee has raised the following ground of appeal in ITA No. 47/DD/2022 for A.Y. 2018-19:

“The Appellant objects to the order dated 21 June 2022 passed by the Deputy Commissioner of Income Tax (International Taxation), Dehradun (“AO”) for the Page | 6

Assessment Year (“AY”) 2018-19, pursuant to the directions dated 29 April 2022 [bearing DIN no. ITBA/DRP/M/144C(5)/2022-23/1042951632(1)] issued by the Dispute Resolution Panel (“DRP”) under section 144C(5) of the Income-tax Act, 1961 (“the Act”) on the following among other grounds. Ground No. 1: 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. 1,73,99,42,587 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 C'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 2007-08. Assessment Year 2008- 09, AY 2011-12 to AY 2014-15. AY 2016-17 and AY 2017-18 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 2007-08, AY

2008-09, AY 2011-12 to AY 2014-15, AY 2016-17 and AY 2017-18 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. S: 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. Ground No. 6: Disallowance of branch office expenditure 6.1 The learned AO / DRP erred in law and in facts in disallowing the branch office expenditure of Rs.8,97,41,305 by treating it as pre-operative in nature. 6.2 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. 6.3 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 AY s. Ground No. 7: Disallowance of head office expenditure 7.1 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. 7.2 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 AYs. 7.3 Without prejudice, the learned AO has erred in computing allowance under section 44C with respect to returned income and not income assessed. Ground No. 8: Disallowance of depreciation

8.1 The learned AO erred in law and in facts in disallowing depreciation of Rs.76,33,296 being the difference of depreciation amount between the tax audit report and the computation. 8.2 The learned AO/DRP erred in not appreciating that out of the above the difference of Rs.13,61,733 is on account of depreciation claimed on Global IT & T expenditure and that depreciation claim on Global IT & T expenditure was allowable as held by the Hon’ble ITAT in Appellant’s own case for AYs 2010-11 to 2014- 15, AY 2016-17 and AY 2017-18. 8.3 The learned AO / DRP erred in not appreciating that the balance difference of Rs.62,71,563 is on account of difference in opening written down value of other block of assets, allowed by the Hon’ble ITAT in Appellant’s own case for AY 2012-13 and AY 2013-14. Ground No. 9: Disallowance of inventory written off 9.1 The learned AO erred in law and in facts in disallowing inventory written off of Rs.6,54,60,721 on the basis that the Appellant submitted only internal documents which do not suffice for allowance of expenditure. 9.2 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. 10: Erroneous levy of interest under section 234B of the Act 10.1 The learned AO erred in law and in facts, in levying interest under section 234B of the Act. Ground No. 11: Violation of principles of natural justice 11.1 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. 12: General 12.1 The Appellant submits that the AO, TPO and DRP have erred in arriving various unwarranted and erroneous conclusions unsupported by any relevant material in deciding the case.

12.2 The AO erred in initiating penalty proceedings under section 270A of the Act. 12.3 The Appellant submits that each grounds of appeal are without prejudice to one another 12.4 The Appellant craves leave to add, alter, amend, substitute and/or modify in any manner whatsoever all or any of the foregoing grounds of objections at or before the hearing of the appeal.”

Intra group services:

the expenditure incurred by the appellant and allowed by the JV partners/Operator board shall be considered as Comparable Uncontrolled Price. The Dispute Resolution Panel (‘DRP’) relying upon the orders for the earlier years approved the adjustment made by the TPO (para 3.2 of the directions @ page 65). The TPO accordingly made an adjustment amounting to Rs. 219,44,33,564/- on account of international transaction of receipt of intra group services to the extent of amount not shared by JV partners.

Interest on loan:

capital requirement. As there were significant variations in the global interest rates sine 2005 (i.e. when the loan was initially extended and the original agreement was signed) through 2009, the AE and the assessee agreed for an interest rate revision in 2009 from LIBOR +200 bps to LIBOR + 350 bps based on Barclay bank’s quotation after assessing appellant’s risks and market conditions prevailing at that time.

“Re: Commercial rationale for shifting from floating to fixed rate of interest

The appellant had entered into a loan agreement with its AE, BGAP dated 31st May 2005, whereby the appellant availed of a loan of a sum of USD 500 million at a floating rate of interest of Libor plus 200 bps per annum payable annually. The loan was taken on an unsecured basis for a period of 15 years. To meet its working capital requirements, the appellant required additional funds for which it entered into another agreement with BGAP for the additional funds and revising the rate of interest from floating basis to fixed rate of 6.18 percent for the total outstanding loan effective from 22nd October 2009.

It is respectfully submitted that during financial year 2009-10 the global financial markets were suffering from sub-prime crisis which led to significant volatility and uncertainty in the global liquidity and interest rate scenario. Due to the crisis, there was scarcity of funds in the global financial system and it was expected that the interest rate would rise in the near future.

The fact that there was scarcity of funds in the global system and independent borrowers preferred to avail funds at fixed rate of interest is evident from the fact that as per Bloomberg, a globally renowned financial database, during the post crisis period there was significant increase in the proportion of loan transactions at fixed rate of interest as compared to pre crisis period.

As per the said database, during the pre-crisis period (i.e. September 1, 2007 till August 31, 2008) there were approximately 12,000 reported loan deals. Out of these, approximately 6,000 deals were having a fixed interest rate structure, i.e. approximately 50% of total deals were having fixed interest rate structure during the pre-crisis period.

As opposed to the pre-crisis period, total number of reported deals which were active during the crisis period (i.e. September 1, 2008 till August 31, 2009) was approximately 10,000. Therefore, the total

volume of loan issue transactions decreased considerably indicating towards scarcity of funds in the global financial markets.

Further, out of the total loan transactions, 6,534 transactions were having fixed interest rate structure i.e. during the post crisis period more than 65% of the total transactions were executed with fixed rate of interest as compared to 50% during the pre-crisis period.

In view of the aforesaid, it is respectfully submitted that in the post crisis period, in order to avoid uncertainty associated with floating interest rates, even independent borrowers preferred to borrow funds at fixed rate of interest.

In order to obtain certainty with respect to future interest obligations, the appellant decided to convert the floating rate loan into fixed rate loan. It would be appreciated that by shifting to fixed interest rate structure, the risk associated with uncertainty/fluctuations in the interest rate movements was shifted to the associated enterprise and the appellant became immune from any adverse movement in the interest rates. It would be appreciated that the decision of the appellant to shift from floating to fixed rate of interest was based on commercial considerations and to protect the business operations of the appellant from any adverse movements in floating interest rates.”

“We disagree with this finding of the Ld. Transfer Pricing Officer that there was no reason for the Assessee to increase the interest rate for 2.33% to 6.18%. The Assessee has given detailed rational behind its own decision for shifting from floating rate of interest regime to fixed rate of interest. In a way, it reduces the risk of changes in the interest rates. It is a well settled proposition of law that The Ld. Transfer Pricing Officer is not supposed to question the business decision of the Assessee. The Assessee has given ample reasons for its business decision even stating that most of the reported loans in that particular period were having a clause of fixed rate of interest. Page | 15

Therefore, the decision of the appellant to shift from floating rate to fixed rate of interest was based on commercial consideration and to protect the business operation of the appellant from any adverse movement in floating interest rates and that only businessmen can decide. It may sound illogical to the Ld. Transfer Pricing Officer, but it is beyond his authority to question the wisdom of Assessee. It is not the prerogative of revenue to direct Assessee to conduct its business in a particular manner. It is also not proper to ask and Assessee to conduct its business in a manner which is understood by the revenue, despite heavy business risk, and further in a manner that will lead to higher revenue to the coffers of the tax gatherers.”

Branch Office Expenditure:-

and production of crude oil and natural gas) in India, such as identifying opportunities for exploration, acquiring seismic data and undertaking feasibility studies, based thereon determining the contracts / opportunities for which bids should be made, participating in bids, etc. and other corporate functions.

• Costs for purchase of seismic data • General and administrative expenses in connection with proposed NELP- VIII • Staff costs and project management consultancy charges

“55 Therefore, primary the disallowances of Rs.46,03,13,788/- includes a sum of Rs.22,09,83,295/- 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 above three items.” Contd. Para 56.

Disallowance of expenditure – Non producing PSCs:

AY 2010-11-ITA No. 1170/Del/2015 AY 2011-12- ITA No.1478/Del/2017 AY 2012-13- ITA No.6791/Del/2017 AY 2013-14- ITA No.7476/Del/2018 AY 2014-15- ITA No.7477/Del/2018 AY 2016-17- ITA No.7/DDN/2019 AY 2017-18- ITA No.5/DDN/2022

Head Office Expenses:

“It is submitted that the appellant incurs expenditure to undertake activities required by the PSC, having 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 die environment, etc. The expenses on such services are required to be incurred based on commercial expediency determined by BGEPIL. The same are not necessarily accepted by the JV partners as the incurrence and need is not dependent on the point of view of the other contractors in the JV (who likewise may incur expenditure based on their commercial expediency having regard to their overall business and circumstances, which may vary from that of the BGEPIL in different aspects). However, the cost would have to be incurred by BGEPIL based on commercial expediency, notwithstanding that some cost may not be shared by the JV partners.

As an Operator in the PMT JV, BGEPIL incurs expenses as it deems are appropriate and necessary for conducting the operations. Out of the said expenditure, only the expenditure which is approved by the Joint Operator Board would be debited to the JV account and shared by the JV partners. The balance expenditure would have to be borne by BGEPIL.

Typically, costs are not shared with the JV in the following cases:

- The expense is incurred in order to safeguard BGEPIL’s interest in any oil block in which it operates (such as analysis on risks, analysis of insurance, information management related services, HR international support, accounting support, insurance support, taxation support, marketing of oil and gas support, and cost control and finance service function)’, or

- It is in relation to support functions (such as HR, legal, accounts and finance, etc.) which are inevitable for carrying on its business and incurred based on die commercial expediency determined by BGEPIL (but not accepted by the Operator Board based on commercial expediency determined by them)\

- It is incurred to enable BGEPIL to perform operations under the PSC, sustain its activities and maintain its standard of operations, based on the commercial expediency determined by BGEPIL (but not accepted by the Operator Board based on commercial expediency determined by them).

It is pertinent to point out that in case of points 42’ and ‘3’ above, there could be occasions where BGEPIL deems it necessary and expedient to incur certain expenditure for its business, whereas, the other JV partners have a different point of view in the matter. In such case, some cost may not be shared by the JV.

The principal reason for the Joint Operator Board not approving expenditure is its impact on cost recovery (as Cost Petroleum) and consequent profit (as Profit Petroleum). As it is not in the Government interest (impact on Profit Petroleum) to consider the high cost of the full engagement, ONGC, looking into the Government’s benefit, attempts to push back costs outside the JV.

However, it does not alter the nature of cost in the hands of BGEPIL; the costs are expenses incurred wholly and exclusively for the purpose of its business of prospecting for, exploration and production of crude oil and natural gas.

During the subject assessment year, the appellant had paid Rs. 181,73,45,726 to BGIL in respect of services rendered by BGIL to the appellant. However, out of the aforesaid expense, the operator Board of the PSC did not approve expenses amounting to Rs. 158,18,33,864.

During the course of the assessment proceedings, the AO alleged that the expenditure incurred by BGIL for the activities of the appellant 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 appellant 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.

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.”

Depreciation and Depletion:

"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. I LI 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 naive 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 Asses see, 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’'

Inventory Written off:

internal procedures and due diligence of the company, the aforesaid inventory of Rs. 5,63,15,398 was written off in the books and claimed as a deduction in the computation of total income.

Para ii (a). The production and drilling inventory of the Indian operations has been physically verified by the Management during the year.

Para ii (b) slates that the procedures of physical verification of drilling inventory and production inventory followed by the Management are reasonable and adequate in relation to the size of the Indian operations and nature of its business.

Para ii(c) states that the Indian operations is maintaining proper records of inventory.”

assessment order does not survive (i.e. audit report of independent auditor is available), no disallowance can be made with respect to the loss on account of inventory written-off

“where there is no dispute that the duly certified auditor's report placed before the Assessing Officer clearly justified valuation of obsolete items at 10 per cent, of cost and also the fact that there is no dispute that the appellant is entitled to value the closing stock at market value or at cost whichever is lower and the value of the closing stock has been taken as the value of the opening stock in the subsequent year. It could not be said that the valuation of the obsolete items done by the assessee and certified by the auditors was not proper or arbitrary.”

"Mr. Inamdar, learned senior advocate appearing on behalf of the appellant, submitted that the valuation of the obsolete items were backed by the auditor's report. In the auditor's report, it was clearly stated that the stock of the finished goods, stores, spare parts and raw materials' of the company have been physically verified by the management and that the procedure for verification of the stock and valuation of stocks adopted by the management are reasonable and adequate and the same are in accordance with the normally accepted accounting principles. Counsel submitted that all the books and

records maintained by the company were made available at the time of assessment.

Apart from the books, the summary of the obsolete items whose value has been written off were placed before the Assessing Officer.”

• IAC v/s. Consolidated Pneumatic Tool Co. (India) Ltd. (15 ITD 564) (ITAT Bom) • CIT v/s. Wolkem India Ltd. (221CTR 767) (Raj. HC) • Emersons Process Management India (P.) Ltd v/s. ACIT (13 taxmann.com 149)/ (47 SOT 157) (ITAT Mum.)

deduction for write off of obsolete inventory should be allowed to the assessee.

“41. In view of the settlement proposition of law discussed in the preceding paras, we are of the considered view that when the taxpayer has prepared obsolete inventory in accordance with the system of accounting regularly followed by it in compliance to section 211 (3C) of the Companies (Accounting Standards) Rules, 2006 as amended and other relevant provisions of the Companies Act, 1956

and has duly got prepared audited report of an independent auditor on the basis of physical verification and in view of the maintenance of inventory, the disallowance made by the AO/DRP is not sustainable in the eyes of law.

Disallowances u/s 40(a)(ia):

reconciliation of the difference between the disallowance computed under section 40(a) as per the tax audit report and the amount reported in the return of income. With the consent of the ld. DR the matter is being remanded back to the file of AO for verification of reconciliation.

Excess Interest:

Foreign Exchange Loss:

Education Cess:

A.Y. 2018-19

Levy of Interest u/s 234B:

Order Pronounced in the Open Court on 27/12/2022.

Sd/- Sd/-

(Kul Bharat) (Dr. B. R. R. Kumar) Judicial Member Accountant Member Dated: 27/12/2022 *Subodh Kumar/AK, Sr. PS* Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5. DR: ITAT ASSISTANT REGISTRAR