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2017 (4) TMI 1190 - AT - Income TaxTPA - rejecting the economic analysis conducted by the assessee for the determination of the Arm s Length Price ( ALP ) in connection with the transactions pertaining to Management Service and Unit charges ( MSU Charges ) and General & Administrative Expenses ( G& A ) - Held that - For the year before us the assessee has submitted 11 papaerbooks. According to paper book no 5 assessee has demonstrated the nature of the services in relation to general and administrative expenses . In paper book no 6 assessee has submitted the details of recovery of expenses details of payment made of management unit charges by the assessee. Paper book no 7 8 10 11 and 12 contains the details of the benefit received by the assessee on receipt of services with respect to general and administrative expenses showing the time sheets of individual fro time writing cost etc. and details of third party costs. Paper book no 9 contains the details of list of application to which the assessee s employees have access to show that the assets are used by the assessee. The Ld DR could not point out on any infirmity in the above submission of the assessee with respect to satisfaction of need benefit duplicity or shareholder s activity test. We do not find any reason to deviate from our finding as the facts and circumstances leading to the dispute are identical. In view of this we dismiss ground No. 1 2 and 3 of the appeal of the revenue. Adjustment on account of loan transaction - Held that - In the present case the Ld. assessing officer has assumed the rate of interest @ 12.5 % without any basis but merely on assumptions and presumptions. Furthermore the Ld. Dispute Resolution Panel has also held that the refund amount of the assessee was wrongly adjusted and only actual amount of interest received from the Department by the associated enterprise shall be retained as an addition. We also do not approve the finding of the Ld. Dispute Resolution Panel and we failed to understand what relationship the amount of interest on refund received by the associated enterprise have with the amount of arms length price of the interest on loans given by the assessee to the associated enterprise. In fact the interest on refund given by the revenue to the AE is statutory interest rates which cannot be used for benchmarking of loan between two business concerns. Thus we set aside this ground of appeal of the revenue back to the file of the Ld. Transfer Pricing Officer to determine arm s length price of interest in one of the prescribed method and in accordance with the provisions of section 92C of the income tax act. Further we have perused the decisions relied upon by the Ld. authorized representative stating that there is no international transaction in absence of existence of some tangible material. As we have already held that in the present case the parties are acting in concert with its associated enterprise and there is a liquidation of the assets of the assessee for paying the tax liability of the associated enterprise we do not find those decisions can be applied to the facts of this case. In view of this ground No. 4 of the appeal of the revenue is allowed with above direction. Addition on account of expenses claimed for club entrance and subscription fees for the employees of the company - Held that - We are of the view that issue is identical to ground No. 5 of the appeal of the revenue for assessment year 2010 2011 wherein we have held that the Ld. Dispute Resolution Panel has correctly directed the Ld. assessing officer to delete the disallowance was respect to the club expenditure. For the same reasons and on the same logic we also hold that Ld. Dispute Resolution Panel has correctly directed the Ld. Transfer Pricing Officer/Ld. assessing officer to delete the disallowance with respect to the club expenditure - Decided against revenue Claim of the expenditure as deduction in the year in which the expenditure become infructuous - Held that - In the case of Joshi Technologies International Inc. v. UOI 2015 (5) TMI 521 - SUPREME COURT it was held that Where the production sharing contract entered into between the assessee with Ministry of Petroleum and Natural Gas did not incorporate clause for granting benefits under section 42 of the Act it cannot be said the failure to incorporate the same in the contract was not inadvertently omitted and therefore assessee was not entitle for deduction under section 42 of the Act . So first of all it is mandatory that these expenditure are mention in the PSC then only the question of its allowability arises in any assessment year u/s 42 of the act. It is also mentioned in the orders of lower authorities that the assessee has not made claim in respect of said expenditure when the expenditure become infructuous i.e. in FY 2011-12 being the year in which the area was surrendered prior to commercial production. From the above observation it is apparent that that the claim of the assessee falls in section 42(1)(a) when the expenditure becomes infructuous. Apparently such expenditure became infructuous in Assessment Year 2011-12. In view of this the ld Assessing Officer as well as the ld Dispute Resolution Panel has correctly held that the assessee is not entitled for deduction therefore in this year i.e. AY 2009-10 the claim of the assessee cannot be accepted. Adjusting the appellant s refund with the demand of AE which is not an international transaction - Held that - While deciding ground No. 4 of the appeal of the revenue we have already held that above transaction is an international transaction under section 92B of the income tax act and therefore arm s length price of such transaction is required to be determined in accordance with the provisions of section 92C of the income tax act and set aside the issue to the file of the Ld. Transfer Pricing Officer. Therefore accordingly we dismiss this ground of appeal of the assessee.
Issues Involved:
1. Rejection of economic analysis for determining Arm's Length Price (ALP) for Management Service and Unit (MSU) charges and General & Administrative (G&A) expenses. 2. Adjustment on account of disallowance of G&A expenses paid to BG International Ltd (BGIL). 3. Adjustment on account of disallowance of Management Service and Unit Charges paid to BGIL. 4. Adjustment on account of loan transaction between the assessee and BG Asia Pacific Holding Ltd (BGAPHL). 5. Adjustment on account of expenses claimed for club entrance and subscription fees for employees. 6. Disallowance of exploration cost reimbursed to ONGC. 7. Erroneous initiation of penalty proceedings. 8. Erroneous levy of interest under sections 234A, 234B, and 234C. Detailed Analysis: 1. Rejection of Economic Analysis for Determining ALP for MSU Charges and G&A Expenses: The Hon'ble Dispute Resolution Panel (DRP) erred in rejecting the economic analysis conducted by the assessee for determining the ALP for MSU charges and G&A expenses. The DRP held that the Transactional Net Margin Method (TNMM) and Operating Profit Margin based on Sales as the Profit Level Indicator (PLI) used by the assessee was the most appropriate method. The DRP found that the difficulty in availability of reliable data of comparables justified the use of TNMM over the Comparable Uncontrolled Price (CUP) method. The DRP rejected the AO/TPO's contention that each transaction should be benchmarked separately and upheld the combined approach adopted by the assessee, finding it consistent with OECD guidelines. 2. Adjustment on Account of Disallowance of G&A Expenses Paid to BGIL: The DRP directed the AO/TPO to drop the proposed adjustment of Rs. 9,88,84,046 on account of disallowance of G&A expenses paid to BGIL. The DRP found that the assessee had received the services and derived benefits from them. The DRP held that the cost allocation key applied by the assessee was appropriate and that the services were not shareholders' activities. The DRP also found that the TNMM was the most appropriate method and that the CUP method could not be applied due to the absence of comparable data. 3. Adjustment on Account of Disallowance of Management Service and Unit Charges Paid to BGIL: The DRP directed the AO/TPO to drop the proposed adjustment of Rs. 1,52,09,65,985 on account of disallowance of Management Service and Unit Charges paid to BGIL. The DRP found that the assessee had received the services and derived benefits from them. The DRP held that the cost allocation key applied by the assessee was appropriate and that the services were not shareholders' activities. The DRP also found that the TNMM was the most appropriate method and that the CUP method could not be applied due to the absence of comparable data. 4. Adjustment on Account of Loan Transaction between the Assessee and BGAPHL: The DRP directed the AO/TPO to restrict the proposed adjustment of Rs. 22,58,422 on account of the loan transaction between the assessee and BGAPHL to Rs. 14,61,247 only. The DRP held that the AO/TPO was wrong in working out the adjustment on the basis of an interest rate of 12.5%, as the loan transaction was in the nature of a forced transaction. The DRP found that the interest rate should be based on the actual interest received by BGAPHL from the revenue, which was Rs. 14,61,247. 5. Adjustment on Account of Expenses Claimed for Club Entrance and Subscription Fees for Employees: The DRP directed the AO/TPO to drop the proposed addition of Rs. 39,59,606 on account of expenses claimed for club entrance and subscription fees for employees. The DRP found that the expenses were incurred wholly and exclusively for the purposes of the business of the assessee. 6. Disallowance of Exploration Cost Reimbursed to ONGC: The assessee's cross-objection regarding the disallowance of Rs. 50,30,71,917 in respect of exploration cost reimbursed to ONGC was dismissed. The DRP upheld the AO's contention that the expenditure could not be allowed as a deduction in the year in which it was incurred, as the production had not commenced. The DRP also held that it did not have jurisdiction to issue directions for future assessments. 7. Erroneous Initiation of Penalty Proceedings: The cross-objection regarding the initiation of penalty proceedings under section 271(1)(c) was dismissed as premature. 8. Erroneous Levy of Interest under Sections 234A, 234B, and 234C: The cross-objection regarding the levy of interest under sections 234A, 234B, and 234C was set aside to the AO for recomputation, considering that the assessee is a non-resident whose income is subject to tax deduction at source. Conclusion: The appeal filed by the revenue was partly allowed, and the cross-objection filed by the assessee was also partly allowed. The DRP's directions regarding the adjustments for G&A expenses, Management Service and Unit Charges, and club entrance and subscription fees were upheld. The issue of the loan transaction was remanded to the TPO for fresh determination of the arm's length price. The disallowance of exploration cost reimbursed to ONGC was upheld, and the cross-objection regarding the initiation of penalty proceedings was dismissed as premature. The issue of the levy of interest was remanded to the AO for recomputation.
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