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

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH : DB : NEW DELHI

BEFORE SHRI R.K. PANDA, ACCOUNTANT MEMBER AND SHRI N.K. CHOUDHRY, JUDICIAL MEMBER ITA No.05/DDN/2022 Assessment Year: 2017-18 BG Exploration & Production India Vs The DCIT, Limited, International Taxation, C/o Dloitte Haskins and Sells LLP Addl. National E-Assessment Lotus Corporate Park, Circle-1, 1st Floor, Wing A-G, CST No.185/A, Dehradun. Jay Koach of Western Express, Highway, Goregaon, East Mumbai, Maharashtra – 400 013. PAN: AAACE4569K (Appellant) (Respondent) Assessee by : Shri Ajay Vohra, Sr. Advocate & Shri Saksham Singhal, Advocate Revenue by : Shri T.S. Mapwal, Sr. DR Date of Hearing : 24.02.2022 Date of Pronouncement : 31.03.2022 ORDER PER R.K. PANDA, AM: This appeal filed by the assessee is directed against the order dated 19th January, 2022 passed u/s 143(3) r.w. section144C(13) by the AO for the assessment year 2017-18.

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“2.1 Grounds 1 to 7 relate to the transfer pricing adjustment proposed for the international transactions on intra group services and are taken up together. It is seen that identical legacy issue relating to adjustment on benchmarking of IGS was also present in AYs 2009-10 to 2014-15 and AY 2016-17. Although the DRP had directed the TPO to delete the adjustment on this issue in AYs 2009-10 and 2010-11, the DRP has consistently upheld the adjustment made by the TPO subsequently for AYs 2011-12 to 2014-15 and AY 2016-17. For instance, in AY 2016-17, the DRP held as under: "In AY 2014-15, the DRP held as under: “ix. The Panel has for AY 2012-13 discussed the issue in detail and, directed as under: a. The conditions mentioned above make it clear that the expenditure incurred for the purpose of the operations of the PSC are required to be approved by the joint operating board, which has independent entities as partners. The TPO conducted enquiry from ONGC and Reliance during A. Y.2011-12 about the mechanism of the joint operating board and the expenses approved by the board. Both of them mentioned that the budget for expenses was submitted to the JOB and after deliberations and clarifications, modified budget was approved by the JOB it was categorically mentioned that the expenses incurred for the operations were approved by the Board. b. Thus it can be held that the assessee has carried out operations in India under the production sharing contracts. The functions of the project office are approved by RBI and the assessee cannot discharge any other function as per this approval. Under these contracts, the assessee carries out the operations as a Contractor, along with other independent entities. The assessee shares the production of petroleum with the other entities in pre defined ratio. Similarly, the expenditure incurred is also shared in the same ratio. The quantum of expenditure required for carrying out the operations under PSC is approved by the joint operating board (JOB), which has all the entities including the assessee as members. Thus, any expenditure incurred for the purpose of PSC is approved by the independent entities and represents a comparable uncontrolled transaction. The expenditure incurred by the assessee, which is not approved by the joint operating board represents the expenditure in excess of the arm’s length price, c. RBI approval for opening branch office was restricted to carryout activities mentioned in the annexure to the approval. The branch office has not undertaken any of the activities mentioned in the annexure other than the JV. Hence the claim of the assessee that it has been undertaking activities other than the ones related to the JV does not appear to be correct, d Further the TPO asked that assessee to submit details of services rendered by the AE, the allocation key of allocation of the expenses by the AE and

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evidence that the services were requisitioned by the assessee from the AE. Necessary details were not furnished by the assessee. The assessee claimed that the services were received as per the service agreement signed with the AE. The TPO found that the Service agreements were vague, had no scope of work, there was no quality assurance mentioned in the agreements. e……… f. Further analysis of expenses not approved by the JV Board reveals that most of the expenses are of the nature of pre-acquisition cost, as mentioned in Guidance note on Accounting for Oil and Gas producing activities. The assessee claimed that the Branch office made expenses in connection with identifying new opportunities in its business of prospecting for, exploration and production of crude oil and natural gas. To ascertain the assessee's claim, when the Production Sharing Contract with ONGC & Reliance was examined it was noticed that the entity which entered into contract was BGEPIL, which is the foreign company. Thus the function of bidding and entering into the contract pertains to the foreign entities and not BGEPIL- branch office. Further as per the RBI approval, the Branch office is not allowed to undertake Retail Trading Activities in India of any nature. Accordingly, it can be seen that the branch office is not allowed to make bids for entering into the production sharing contracts. At the most, it can represent the foreign company and carry out bidding function on its behalf. It is clear that the function of identifying new opportunities and making bids pertain to the foreign company and accordingly any expenditure pertaining to such an activity should be borne by the foreign parent. As per the Govt of India Policy and accounting standards followed for accounting PSC, incase the expenditure incurred under branch operations lead to successful entering into the PSC, the expenditure becomes deductible against the revenue of the PSC, however in case the expenditure incurred does not lead to entering into a PSC, there will be no revenue stream for such expenses and it would be a capital loss. g. In view of the above discussion, it is held that the TPO was right in taking only those portion of the expenses which were approved by the JOB as the ALP of the intra group services. It was mentioned by the A/R during the DRP proceedings that total value of the international transactions undertaken by the assessee during the year was Rs 261.94 Crores where as the TPO has done adjustments worth Rs 384.29 Crores. The TPO is directed to restrict the adjustments w.r.t. international transactions only. h. The TPO has done benchmarking as per TNMM also on “without prejudice” basis. Since the CUP has been upheld by the Panel, objection w.r.t. benchmarking under TNMM becomes academic in nature. The Panel is not inclined to deal with objections w.r.t. benchmarking under TNMM. These objections are accordingly disposed off.

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x. The factual matrix remaining same and in view of the remand report, the Panel finds no reason to differ with the above directions of the Panel for AY 2012-13. The objections of the assessee are rejected. However, the TPO is directed to restrict the adjustments to international transactions only.” 2.2 The same grounds were also taken by the assessee during DRP proceedings in subsequent AY 2016-17 in which, the assessee informed that Revenue is in appeal against the orders of the Hon’ble ITAT for AYs 2009-10 and 2010-11. As the legal and factual matrix remains unchanged, there is no reason for DRP to differ from the stand taken by it in preceding AYs 2011-12 to 2014-15. In view of the above, objections in Ground nos. 1 to 7 are dismissed.”

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to payment of management service and unit charges, IM charges and payroll expenses to its AE. Ground No. 2: Erroneous rejection of Transactional Net Margin Method ("TNMM”) and selection of Comparable Uncontrolled Price ("CUP”) Method 2.1 The learned TPO / AO / DRP / have erred in law and on facts by disregarding the economic analysis conducted by the Appellant, for determination of the arm's length price ("ALP") pertaining to intra-group services, by application of TNMM on an aggregated basis and further, erred in applying CUP method. Ground No. 3: Without prejudice that TNMM should be selected, learned TPO / AO / DRP applied CUP method in an erroneous manner 3.1 Without prejudice that TNMM should be selected as the most appropriate method for benchmarking the transactions pertaining to intra- group services, the learned TPO / AO / DRP have erroneously selected CUP method and have applied the same in an erroneous manner by considering the amount approved by the Joint Venture ("JV") partner as CUP. Ground No. 4: Erroneously disregarded the decision of Hon'ble ITAT in AY 2011-12 to AY 2014-15 and AY 2016-17 and directions of the Hon'ble DRP for AY 2009-10 and AY 2010-11 4.1 The learned TPO / AO / DRP erred in disregarding the decision of Hon'ble ITAT in AY 2011-12 to AY 2014-15 and AY 2016-17 and directions issued by the Hon'ble DRP in the case of the Appellant for the prior years i.e. AY 2009-10 and AY 2010-11 (which have also been affirmed by Hon'ble ITAT) even though the facts and circumstances of its case and the business model of the Appellant continued to remain the same. Ground No. 5: Erroneously questioning of commercial expediency of the Appellant 5.1 The learned TPO / AO / DRP erred in law and on facts by questioning the commercial expediency of the Appellant in availing the intra-group services from its AE. 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.8,68,11,169 by treating it as pre-operative in nature.

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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 AYs. 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 AY. 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. 1,24,84,806 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.51,06,498 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 and AY 2016-17. 8.3 The learned AO / DRP erred in not appreciating that the balance difference of Rs.73,78,308 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.25,28,05,028 on the basis that the Appellant submitted only internal documents which do not suffice for allowance of expenditure.

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9.2 The learned AO / DRP erred in not appreciating that amount of obsolete inventoiy written off was debited to the Profit and Loss Account which has been audited by an independent auditor. Ground No. 10: Claim for deduction of cess 10.1 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. 11: Short grant of credit of taxes deducted at source (“TPS”) 11.1 The learned AO erred in law and in facts, in granting short credit of TDS of Rs.16,58,73,558, which includes TDS of Rs.II,95,58,717 deducted by the income-tax authorities on interest on income-tax refund. Ground No. 12: Erroneous levy of interest under section 234A of the Act 12.1 The learned AO erred in law and in facts, in levying interest under section 234A of the Act whereas the Appellant filed the return of income within the due date applicable to it under the provision of section 139(1) of the Act. Ground No. 13: Erroneous levy of interest under section 234B of the Act 13.1 The learned AO erred in law and in facts, in levying consequential interest under section 234B of the Act. Ground No. 14: Violation of principles of natural justice 14.1 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.15 : General 15.1 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. 15.2. The AO erred in initiating penalty proceedings under section 270A of the Act. 15.3 The Appellant submits that each grounds of appeal are without prejudice to one another

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15.4 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.”

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adjustment amounting to Rs 181,73,48,726 on account of international transaction of receipt of intra group services to the extent of amount not shared by JV partners.

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15 . Further , it is observed that for assessment year 2011-12 (ITA No. 1478/Del/2017) and assessment year 2012-13 (ITA No. 6791/Del/2017) following the above ruling. 16 . From the above, it is clear that Revenue intends to keep issues alive, however , could not controvert view taken in respect of these issues as there has been no contrary observation/material evidences brought out on record by ld. CIT DR . It has been admitted by him that facts and circumstances of the services received by assessee for the year under consideration are same visà-vis assessment year 2010-11 , and other preceding assessment years . We are therefore inclined to follow the same view. Respect fully, following view taken by this Tribunal in assessment year 2010-11 reproduced hereinabove and other preceding assessment years, orders of which are placed at pages 530-915 of paper book, addition made by Assessing Officer stands deleted. “ 6. To maintain the rule of consistency, we follow the earlier order of Tribunal and decide the issue in favour of the assessee and the addition made being TP adjustment on account of intra group services provided by the assessee to its AE is deleted.”

Respectfully following the order of the Tribunal for the preceding year and in absence of any contrary material brought to our notice by the ld. DR, we direct the AO/TPO to delete the TP adjustment on account of intra-group services provided by the assessee to its AE.

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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 (such as HR, legal, accounts and finance, IT, etc.). During the subject year, the assessee had incurred exploration and business development cost of Rs. 8,68,11,169. However, the disallowances totaling to Rs. 2,12,426 have been suo-moto made by the assessee. Therefore, to prevent double addition, the difference of Rs. 8,65,98,743 was added by the AO to the total income. The AO proposed to disallow the expenses by alleging that since the said expenses had been incurred for prospecting new business opportunities, therefore, the same were to be treated as pre-operative in nature and not allowable under section 37(1) of the Act. The AO further alleged that since the branch office would not earn any income in future, therefore, no expenditure would be allowed under the matching principle. The DRP upheld the addition proposed by the AO by stating that similar disallowance has also been made for AY 2013-14

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the total expenditure The Ld. Assessing Officer has partly allowed the expenditure and partly disallowed the expenditure by using the single yardstick that if expenditure are shared by the JV same are allowable and if same is not shared by JV partners , then it is not allowable. We failed to see any such provision in the act that if the other party in the joint-venture do not agree to share the particular cost , the cost incurred by one of the partners of that joint-venture becomes the expenditure not for the purpose of the business of that partner . No such provision has also been brought to our notice by the revenue. It is also not the case of the revenue that details of those expenditure are not available before them or Assessee has furnished incomplete information for its allowability. Further , no judicial precedent was cited before us by revenue, which says that such expenditure are not allowable to the Assessee. Therefore according to us the expenses incurred by the Assessee with respect to i) KG-OS- 02004/1 of Rs .71638553/- ii) MN – DWN – 2002/2 of Rs .10524 1649/- iii) KG-DWN-98/4 of Rs .6245 0283/– cannot be disallowed. In view of this we direct the Ld . Assessing Officer to delete the disallowance made with respect to about 3 items . 56 . Now coming to the claim of the deduction of expenditure of Rs . 220983295/– on account of purchase of seismic data and general and administrative expenses in connection with the proposed NELP VIII, It is submitted by the Assessee that these were the expenses incurred by the Assessee with respect to the offers which were invited for the 8th offer of blocks for national exploration licensing policy for which the Assessee has to purchase the data for the bidding purposes . The other expenses which are the necessary general and administrative expenses were incurred for project management , consultancy services , etc and also staff cost and project management expenses were incurred . These expenses were disallowed by Ld. Assessing Officer holding that these are expenses for the future projects o f the Assessee for which even the PSC is not executed. The Ld . Authorised Representative has submitted that this issue of allowability of this expenditure is covered in its favour by the decision of ONGC Videsh Ltd versus DCIT [37 SOT 97] wherein it has been held as under:- “15 . With regard to disallowing claim of expenses of Rs . 43.85 lakhs incurred for purchase and evaluation of the seismic data of foreign blocks , on the plea of same being capital in nature, we found that Assessee being engaged in the business of exploration and production of hydrocarbons in other countries to augment the oil resources of India , it was continuously evaluating various business opportunities before acquiring a particular field/block . Since all these opportunities have to be evaluated and studied

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before taking decision to invest and enter into a contract, the process of evaluation of the block started with submitting tender fee/data fee, etc . and then the seismic data had to be evaluated in seismic processing centre. After evaluating the same, the Assessee was to take decision as to whether investments should be made in the project or not . There is no dispute to the fact that in all industries an activity for furtherance of its business or evaluation of better profit-earning process in one manner or other is undertaken. Effort to evaluate the prospects of better earning profit is not a separate activity but is in the course of conduct of normal day-to-day business . These expenditures cannot be said to bring an enduring benefit to the business nor the same can be said as initial outlay for expansion of business . In the instant case, the expenditure so incurred by the Assessee is for furtherance of activities undertaken by it in the normal course of its business . The same are incurred on continuous basis for evaluation of business activities . In view of the decision of Bombay High Court in the case of CIT v . Essar Oil Ltd. [IT Appeal No. 921 of 2008 , dated 16-10- 2008], such expenditure is to be allowed as revenue expenditure. Hon’ble Calcutta High Court in the case of Kesoram Industries & Cotton Mills Ltd . v. CIT [1992] 196 ITR 845 held that where the setting up does not amount to starting of new business but expansion or extension of the business already being carried on by the Assessee, expenses in connection with such expansion or extension of the business must be held to be deductible as revenue expenses . One has to consider purpose of the expenditure and its object and effect . Accordingly, it was held that expenses pertaining to exploring feasibility of expansion or extension of business are revenue expenditure and not capital expenditure . The expenditure so incurred by the Assessee in the normal course of business of exploration and production of oil, being revenue in nature, is liable to be allowed as a deduction. Similar claim was also made by the Asses see in the earlier year . We, therefore, direct the Assessing Officer to allow the same as revenue expenditure . As we have allowed ground Nos . 3 to 3 .2 , the alternate ground No. 3 .3 as taken by the Assessee become infructuous .” Neither the Ld . Assessing Officer nor the Ld. Departmental Representative could press any other judicial precedent which shows that amount spent by the assessing is not allowable as revenue expenditure under section 37 (1) of the act . It is al so not the argument of the revenue that such expenditure incurred by the Assessee is capital in nature. Furthermore, the Ld. AR has also pressed into several decisions which say that that expenses incurred towards extension of business which was subsequently abandon or did not fructify , are allowable. Therefore in view of the above decisions wherein it is been held that the expenses for purchase of this kind of data is unnecessary revenue expenditure required to be incurred by the Assessee for the purpose of its business and hence is allowable as revenue expenditure, we also direct the Ld. Assessing Officer

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to allow the expenditure incurred by the Assessee on purchase of data and other relevant expenses amounting to Rs.220983295/– . In the result ground No. 6 of the appeal of the Assessee is allowed .” 31 . The ld. Counsel for the assessee submitted that facts are similar and identical to that for year under consideration. On a question being raised by the Bench regarding bifurcation of expenses for year under consideration, the ld . Counsel pointed out at page no. 9 paragraph 7 .2 of final assessment order wherein the details of various expenses incurred by Branch Office and various project office has been tabulated . 32 . The ld . CIT DR opposed for the same. However, could not controvert the above reproduced observation by this Tribunal in assessee’s own case for earlier years . 33 . 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 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 be them or Assessee has furnished incomplete information for its allowability. Further , no judicial precedent was cited before us by revenue , which says that such expenditure are not allowable to the Assessee . Accordingly , these grounds raised by the assessee s tands allowed .” 12. Following the earlier order of this Tribunal, this issue is decided in favour of the assessee and against the Revenue. “

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“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 2010- 11 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 ,786 ,095 Less: Reversal o f Water Transportation & other (8 ,344 ,443) charges Total BG Exclusive Production Cos t. 494 ,452 ,392

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 o f 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

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section 42 , or under section 37 (1) of the Income Tax Act . Therefore, we reject the contention of the revenue that unless the expenditure is not borne by all the JV partners the expenses cannot be allowed to the Assessee. In fact , if the JV partners share the expenditure, there cannot be any question of claim of such expenditure in the hands of the Assessee, once again. Further , if the expenses are not specified in the agreement u/s 42 (1), even if the JV partners agree to share those expenditure , it is not allowable u/s 42 (1) or section 37 (1) of the act . Now it needs to be examined, whether the Assessee has incurred expenditure for the purposes of its business or not . The Assessee has stated that it has incurred such expenditure having regard to its standard of operation and the quality of execution work , safety of its employees in the environment. These expenses are required to be incurred by the Assessee based on the commercial expediency . The Assessee has stated that in relation to the support functions which are innovatively inevitable for carrying on its business and incurred based on the commercial expediency are expenses belonging to the Assessee which cannot be accepted by the operating board . Further , there may be certain expenditure which are required to be incurred to enable the Assessee to perform its operation under the production sharing contract sustaining its activities and maintaining its standard of operations . It is irrelevant whether the joint operator board has approved such expenditure or not because there may be several other reasons for joint-venture partners to not to share the expenditure. The Ld . Assessing Officer as well as the Ld . Dispute Resolution Panel , despite having the necessary details of the expenditure did not point out the single instance that these expenditure are not incurred by the Assessee for the purposes of its business . Merely making references to the various judicial precedents without putting to the facts on record about incurring of the expenditure by the Assessee or non- business purposes disallowance made by the Ld. and Assessing Officer cannot be upheld . Instead , despite full details available with them they have denied the claim to the Assessee. Neither the assessing officer and nor the Dispute resolution Panel point out nature of details which was not submitted by the Assessee when part of the expenditure has already been considered in detail at the time of determining Arms; Length of the transaction. In view of no adverse inference from the lower authorities on the details submitted , we are constrained to allow the claim of the Assessee of deductibility of the above expenditure of Rs.316786095/-. In the result ground No. 3 of the appeal of the Assessee is allowed. 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

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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 .” 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.”

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costs in the book of accounts . During the year , BGIL had allocated an expense o f Rs.80,13,26 ,640/- to the appellant out of which Rs. 66 ,61 ,30 ,450/- had been capitalized and balance was accounted as work in progress . The appellant had claimed depreciation of Rs .3 ,30 ,05 ,676/- on the IT infrastructure and software. The Ld . Dispute Resolution Panel has stated that even the beneficial ownership of the assent also entitles the Assessee to claim the depreciation if the test of user is proved . In the present case , we do not think that there is any doubt about the ownership of the IT infrastructure in question as per paragraph No. 11 .1 of the direction of the Ld . Dispute Resolution Panel . There fore only issue now remains is to be seen whether the Assessee has properly demonstrated before the Ld. Assessing Officer that the Assessee has used the assets for the purposes of the business . It is better to look at what kind of assets the Assessee are owned by and used by it . Assets are production database management system , SAP up gradation, budgeting and forecasting system, training programs, simulations software, asset modeling systems and email facilities . When the Assessee is participating in such a huge production sharing contract, It is too naïve to think that production database management system and SAP , training programs , simulations programme and email facilities have not been used by the Assessee. Issues have also been examined at the time of determining Arm’s length price of these expense. The actual cost of these assets are not doubted by the Ld. Assessing Officer. In view of this we are of the opinion that these assets are beneficially owned by the Assessee and are used for the purposes of the business of the Assessee, therefore entitles Assessee to claim the depreciation on these assets . In view of this ground No. 5 of the appeal of the Assessee is allowed .” 50 . As regards di fference in depreciation of other assets o f Rs.2 ,65 ,85 ,446 , the appellant submits that the aforesaid difference is on account of the fact that the appellant had capitalised certain costs as part of the cost of the fixed assets and appellant had claimed depreciation thereon . However , the tax auditor in the Tax Audit Report considered this as revenue in nature. In this regard, the appellant submits that even though the aforesaid amounts have been treated as revenue expenditure by the tax auditor in the respective previous years , their view was not binding on the appellant and hence, the same have been capitalised by the appellant and depreciation has been claimed thereon. Reference is made to Sr. No. 70 .10 of Guidance Note on Tax Audit under section 44AB of the Act issued by the Institute of Chartered Accountants of India wherein it has been mentioned that view taken by tax auditor is not binding on the appellant . The relevant paragraph has been reproduced as under: It will be appreciated that even Guidance Note on Tax Audit recognizes that an appellant can take a different stand in the return of income if he has a bona fide reason. In this regard , reliance is placed on the decision of the

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Hon’ble Bombay High Court in the case of Melmould Corporation v. CIT (202 ITR 789) where the Court held that closing value of an asset of previous year ought to be taken as opening value of the asset for the immediately succeeding year . Relevant extracts of the decision are as under: “Thus , the value of the closing stock of the preceding year must be the value of the opening stock of the next year . The change therefore, has to be effected by adopting the new method for valuing the closing stock which will, in its turn, become the value of the opening stock of the next year . If instead, a procedure is adopted for changing the value of the opening stock, it will lead to a chain reaction of changes in the sense that the closing value of stock of the year preceding will also have to change and correspondingly the value of the opening stock of that year and so on.” 51 . Reliance was also placed on the decisions of the Hon’ble Supreme Court in the case of VKJ Builders & Contractors PLimited v . CIT (318 ITR 204) wherein it has been held that it is the fundamental principle of accountancy that the figure of the closing stock of the earlier year has to form the opening stock of the next accounting year .To the same effect is the decision of the Hon'ble Bombay High Court in the case of CIT v . Corporation Bank Limited (174 ITR 616). 52 . In view of the above binding precedents, the AO ought to be directed to accept the opening WDV of assets as submitted by the appellant in the schedule to computation of income which is arrived from the closing WDV of fixed assets of previous year. Accordingly , the AO be directed to delete disallowance on account of difference in depletion as per the computation of income and tax audit report .Without prejudice, it is submitted that if the expenditure capitalised by the appellant in previous years is not held to be capital in nature and depreciation and depletion on capitalised portion is subsequently disallowed, the amount capitalised by the appellant should be allowed as deduction under section 37(1) of the Act in the relevant assessment year . 53 . The ld . CIT DR has no objection for the above issue to be set aside to ld . AO/TPO. 54 . 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 its case. The Assessing Officer shall decide the issue as per fact and law after giving due opportunity of being heard to the assessee. We hold and direct accordingly . The ground raised by the assessee on this issue is allowed for statistical purposes.”

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(Accounting Standards) Rules, 2006 as amended and other relevant provisions of the Companies Act, 1956.

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it is stated that the financial statements have been prepared to comply with all material aspects with accounting standard notified u/s 211(3C) of the Companies (Accounting Standards) Rules , 2006 as amended and other relevant provisions of the Companies Act , 1956 . The taxpayer also relied upon the supporting documents prepared by Senior Drilling Engineer of the company certifying that such inventory was not usable in future and was produced before AO and consequently claimed deduction for the obsolete inventory written off u/s 37(1) of the Act and relied upon the decision rendered by Hon’ble Bombay High Court in case of Alfa Laval India Ltd . vs . DCIT – 266 ITR 418 (Bom.), affirmed by the Hon’ble Supreme Court by judgment reported in 295 ITR 451. The ld. AR for the taxpayer also contended that the taxpayer has submitted audit report of an independent auditor prepared on the basis of physical verification and maintenance of inventory during assessment proceedings and further relied upon the decision rendered by coordinate Bench of the Tribunal in Gillette India Ltd. vs . ACIT – 66 taxmann.com 221. Ld . DR for the Revenue to repel the arguments addressed by the ld. AR for the taxpayer relied upon the orders of AO/DRP. 39 . While deciding the identical issue, the Hon’ble Bombay High Court in case cited as Alfa Laval India Ltd. vs . DCIT (supra) held as under:- “Held, (i) that the duly certified auditor's report placed before the Assessing Officer clearly justified valuation of obsolete items at 10 per cent of cost . There is no dispute that the assessee is entitled to value the closing stock at market value or at cost whichever is lower . It is also not in dispute that the value of the closing stock has been taken as the value of the opening stock in the subsequent year . Moreover , it is also not disputed that the obsolete items were in fact sold in the subsequent year at a price less than 10 per cent of the cost. In the absence of any basis for valuing the obsolete items at 50 per cent of the cost, the Tribunal could not have upheld the findings of the Assessing Officer .” 40 . Hon’ble Delhi High Court in case cited as CIT vs. Bharat Commerce and Industries Ltd. – 240 ITR 256 (De l.) held that, “An assessee is free to adopt a particular method of valuation of its closing stock which it has to follow regularly from year to year . At the same time it is well settled that irrespective of the basis adopted for valuation for earlier years , the assessee has an option to change the method of valuation of closing stock , provided the change is bona fide and followed regularly thereafter .” 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

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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.” 68 . The ld . CIT DR has no objection for the above issue to be set aside to ld . AO/TPO. 69 . 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. The Assessing Officer shall decide the issue as per fact and law after giving due opportunity of being heard to the assessee. We hold and direct accordingly. The ground raised by the assessee on this issue is allowed for statistical purposes.” 21. By following the earlier order of Tribunal we restore this issue to the record of Assessing Officer with the same directions for deciding the issue afresh after giving reasonable opportunity of being heard to the assessee. Accordingly, this ground of appeal is also allowed for statistical purposes.”

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to the assessee as per law after giving due opportunity of being heard to the assessee. Ground of appeal No.11 is accordingly allowed for statistical purposes.

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deleted. He also referred to the decision of the Tribunal in assessee’s own case for the AY 2009-10 vide ITA No.2227/Del/2014 and for AY 2010-11 vide ITA No.1170/Del/2015. He submitted that following the order of the Tribunal for AY 2009-10 and 2010-11, the Tribunal, again, in AYs 2011-12, 2012-13 and 2014-15 has decided the issue in favour of the assessee. He further submitted that the Finance Act, 2012 w.e.f. 01.04 added proviso below section 209(l)(d) of the Act to the following effect: “Provided that for computing liability for advance tax, income-tax calculated under clause (a) or clause (b) or clause (c) shall not, in each case, be reduced by the aforesaid amount of income-tax which would be deductible or collectible at source during the said financial year under any provision of this Act from any income, if the person responsible for deducting tax has paid or credited such income without deduction of tax or it has been received or debited by the person responsible for collecting tax without collection of such tax.”

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Sd/- Sd/- (N.K. CHOUDHRY) (R.K. PANDA) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 31st March, 2022. dk Copy forwarded to : 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR Asstt. Registrar, ITAT, New Delhi

Date 1. Draft dictated on 16.03.2022 2. Draft placed before the author 17.03.2022 3. Draft placed before the other Member 4. Approved Draft comes to the Sr.PS/PS 5. Order uploaded on 6. File sent to the Bench Clerk 7. Date on which file goes to the Head Clerk. 8. Date on which file goes to the AR 9. Date of dispatch of Order.