2018 (7) TMI 1954 - AT - Income Tax

TP Adjustment - Erroneous rejection of Transactional Net Margin Method ( TNMM ) - selection of Comparable Uncontrolled Price ( CUP ) Method - TPO has rejected the TNMM as MAM used by the taxpayer to benchmark its international transactions qua intra group services and business support services - HELD THAT - following the decision rendered by the coordinate Bench of the Tribunal in taxpayer s own case for AY 2010-11 2017 (4) TMI 1145 - ITAT DELHI we deem it necessary to remand this issue to ld. DRP to decide afresh to benchmark the international transactions undertaken by the taxpayer by applying the TNMM as MAM by providing an opportunity of being heard to the taxpayer in the light of the decision rendered by the coordinate Bench of the Tribunal in AY 2010-11. Disallowance of exploration and business development expenses incurred by the Branch Office by treating the same as pre-operative in nature - Allowable expenses u/s 37 - expenses incurred for sustenance of the business - HELD THAT - Neither the AO nor the DR 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 also not the argument of the revenue that such expenditure incurred by the Assessee is capital in nature. Furthermore 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 own case 2017 (4) TMI 1145 - ITAT DELHI 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 AO to allow the expenditure incurred by the Assessee on purchase of data and other relevant expenses AO is directed to allow the expenditure incurred by the taxpayer on cost of purchase of seismic data general and administrative expenses in connection with proposed NELP-VIII and staff cost and project management and consultancy charges Disallowance of expenditure incurred by the taxpayer on non-producing block - the expenditure incurred by the taxpayer in other PSCs prior to commercial production shall be aggregated and claimed only from the year of commercial production - expenses incurred by the taxpayer concerning oil blocks where commercial productions has not yet started has to be amortized and carried over and can be set off only when revenue is earned from such oil blocks after commencement of commercial production - AO invoked section 42 to disallow the expenses - HELD THAT - Taxpayer has brought on record the complete details of the expenditure incurred and there is no dispute between the parties to the appeal that all the expenses have been incurred for furtherance of its business though incurred in support to the PSC contracts executed by the taxpayer the same cannot be disallowed merely on the ground that it is not shared by others particularly when it is not disputed that these expenses have been incurred wholly and exclusively for the purpose of business of taxpayer. AO has not disputed the incurrence of expenses for the purpose of business. The expenses incurred by the taxpayer for furtherance of its business cannot be disallowed merely on the ground that the other party in the joint venture has not agreed to share the particular cost incurred by one party to the joint venture. So following the decision rendered by the coordinate Bench of the Tribunal in taxpayer s own case for AY 2010-11 (supra) the disallowance made by the AO/DRP is not sustainable in the eyes of law Addition of sum claimed by the taxpayer @ 6% as loss on transportation of gas - the provision for transportation loss can be equated to the provision of expenses paid at the year end - HELD THAT - As admitted case of the taxpayer that during the AY 2016-17 independent expert appointed by the joint venture partners had determined the loss on condensate at 1.7% and without prejudice the taxpayer also made a prayer for allowing the loss of transport of condensate @ 1.7% during the year under assessment we are of the considered view that when undisputedly as per settlement agreement entered into between the taxpayer ONGC and Reliance Industries Limited with ONGC (transporter) for transportation of gas and condensate the loss is to be determined by the expert appointed by the joint venture partners there is no question to resort to the estimation to claim such loss. In AY 2016-17 loss has been determined by the expert appointed as per settlement agreement @ 1.7%. So we are of the considered view that the matter is required to be remanded back to the AO to decide afresh after providing an opportunity of being heard to the taxpayer by following the rule of consistency. Write back of provisions of doubtful debts - AO taxed write back amount of Rs. 20, 67, 360/- on the ground that the taxpayer has not given any reason for writing back provisions for doubtful debts and claiming the same as expenditure in the computation of income - as contended by AR that the AO has failed to appreciate that provisions for doubtful debts credited in the preceding year has not been claimed as deduction in the year in which such provision was credited - HELD THAT - The contention raised by ld. AR for the taxpayer is sustainable because when the provisions of doubtful debts of Rs. 20, 67, 360/- credited in the preceding year has not been claimed in the year in which such provisions were credited the write back of the same in the subsequent year i.e. year under assessment is not taxable as it would amount to double taxation. So we are of the considered view that it is merely an arithmetic calculation and AO to verify the same and to decide accordingly Disallowance of exchange loss on interest on BG Asia Pacific Pte Ltd. loan - loan itself is being treated as a colourable device used by the taxpayer to increase its cost and reduce profits - AR contended that when the exchange loss is incurred by the taxpayer debited to the profit loss account as per PSC where foreign exchange loss is considered as an allowable deduction AO has erred in disallowing the same - HELD THAT - As relying on case of ENRON OIL AND GAS INDIA LTD. 2008 (1) TMI 319 - UTTARAKHAND HIGH COURT foreign exchange loss incurred by the taxpayer has been debited to the profit and loss account as per specific provisions of PSC wherein foreign exchange loss is treated as an allowable deduction but AO/DRP have erred in disallowing the same. So we order to delete the disallowance Addition of head office expenses - restricting allowability of these expenditure to 5% of the adjusted total income of the taxpayer by invoking the provisions contained u/s 44C - HELD THAT - 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. So we hereby order to allow the claim of the taxpayer for deduction of the expenses incurred by the taxpayer. Disallowance of inventory written off - certain internal documents furnished by the taxpayer are not enough for allowing of theses expenditure - AR contended that the expenditure has been claimed as per method of write off obsolete inventory in accordance with the system of accounting regularly followed and relied upon Note-II of Financial Statements - HELD 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. See ALFA LAVAL (INDIA) LIMITED. 2007 (11) TMI 281 - SUPREME COURT - when complete details about the inventory written off has been given sufficient to identify items of inventory to be written off in the books of account the same is required to be allowed. AO is directed to allow the amount on account of inventory written off after due verification Disallowance of depreciation and depletion - addition being the difference of depreciation/ depletion amount between the tax audit report and the computation - HELD THAT - When the taxpayer has duly explained that the difference of depreciation of Rs. 48, 70, 14, 075/- is due to the fact that in previous year the amount of Global IT T cost paid to BGIL was considered as capital in nature by the taxpayer and the same was capitalized on which taxpayer had claimed depreciation but tax auditor report has considered this as revenue in nature no disallowance can be made on account however subject to the verification by the AO. As following the decision rendered in Melm ould Corporation vs. CIT 1993 (2) TMI 82 - BOMBAY HIGH COURT AO is directed to accept the opening WDV of assets furnished by the taxpayer in the schedule for computation of income arrived from the closing WDV of fixed assets of previous year and after due verification to delete the disallowance in accordance with the computation and income and tax audit report. Additional depreciation on new plant and machinery purchased by the taxpayer put to use during the year under assessment claimed by the taxpayer during the course of assessment proceedings - HELD THAT - in order to explain the additional deduction claimed comprehensive submission dated 29.01.2016 were filed before the AO who has merely declined the claim on the ground that the additional claim can only be made by way of revised return of income. We are of the considered view that AO is required to decide the claim in view of the provisions contained u/s 32(1)(iia) of the Act in the light of the decision rendered in CIT vs. Hindustan Petroleum Corp. Ltd. 2017 (8) TMI 197 - SUPREME COURT OF INDIA M/S. HLS INDIA LTD. 2011 (5) TMI 322 - DELHI HIGH COURT SESA GOA LTD. 2004 (11) TMI 14 - SUPREME COURT MERCANTILE CONSTRUCTION CO. 1993 (7) TMI 335 - CALCUTTA HIGH COURT and ALUMINIUM CORPORATION OF INDIA VERSUS COAL BOARD 1958 (9) TMI 81 - CALCUTTA HIGH COURT on merits after providing an opportunity of being heard to the taxpayer - remanded for statistical purposes. Disallowing interest on the ground that the same has not been claimed as deduction - HELD THAT - Since the amount has not been claimed by the taxpayer while computing its profit in the year under assessment the issue is required to be sent back to the AO for verification and to decide accordingly after providing an opportunity of being heard to the taxpayer Difference in revenue as per Form 26AS and profit loss account - as contended by ld. AR that the difference was on account of difference in foreign exchange rate which is to be governed by the terms of PSC and relied on Article 15 Taxes royalties rentals etc. of the PSC for Mid and South Tapti Field and the Revenue from petroleum operations shall be determined in accordance with Article 19 of the PSC. - HELD THAT - In view of the law laid down by the Hon ble Apex Court in case of CIT vs. Enron Oil Gas Limited 2008 (9) TMI 3 - SUPREME COURT we are of the considered view that the income earned by the taxpayer in foreign currency pursuant to the PSC entered into with Government of India is governed by the agreement of PSC and the foreign exchange losses on account of foreign currency translation is an allowable deduction while computing the total income of the taxpayer. In such circumstances provisions of PSC are to be applied and the disallowance made by AO/DRP on account of difference in revenue is not sustainable hence allowable subject to verification by the AO. Credit of tax deducted at sourceDenied - HELD THAT - TDS stated to have been deposited by the taxpayer. AO is directed to grant the credit of the TDS claimed by the taxpayer subject to verification. Interest to the taxpayer u/s 234B - AR contended that the interest u/s 234B is not chargeable to taxpayer it being a non-resident whose income is subject to tax deduction at source and further contended that this issue has already been determined in favour of the taxpayer in its own case for AY 2010-11 - HELD THAT - Following the order passed by the coordinate Bench of the Tribunal in taxpayer s own case for AY 2010-11 which is on the basis of decision rendered in CIT vs. Maersk Company Limited 2011 (4) TMI 886 - UTTARKHAND HIGH COURT and GE PACKAGED POWER INC. AND OTHERS 2015 (1) TMI 1168 - DELHI HIGH COURT we are of the considered view that the taxpayer cannot be charged to tax u/s 234B on the income earned which is otherwise subject to tax deducted at source. So we hereby direct the AO to recompute the interest u/s 234B accordingly.

Summary

Issues Involved:
1. Rejection of Transactional Net Margin Method (TNMM) and selection of Comparable Uncontrolled Price (CUP) Method.
2. Erroneous application of CUP method.
3. Computation of Transfer Pricing (TP) adjustment.
4. Disregarding directions of the DRP for previous years.
5. Questioning of commercial expediency.
6. Application of CUP for determining arm's length interest rate.
7. Double addition vis-a-vis alleged arm's length rate for interest.
8. Disallowance of payment made towards intra-group services.
9. Disregarding multiple year data.
10. Proceedings barred by limitation.
11. Disallowance of branch office expenditure.
12. Disallowance of expenditure on non-producing Production Sharing Contracts (PSCs).
13. Disallowance of loss on transportation.
14. Addition of provisions written back.
15. Disallowance of exchange loss on interest on BG Asia Pacific Pte. Limited loan.
16. Disallowance of head office expenditure.
17. Disallowance of inventory written off.
18. Disallowance of depreciation and depletion.
19. Additional depreciation.
20. Disallowance of interest incurred on loan taken from BGAP.
21. Addition on account of difference in revenue as per Form 26AS and profit and loss account.
22. Violation of principles of natural justice.
23. Short credit for Tax deducted at source.
24. Levy of interest under sections 234B and 234C of the Act.
25. General grounds.

Detailed Analysis:

Transfer Pricing Grounds (Grounds No. 1, 2, 3, 4, 5, 6, 7, 8 & 9):
- Rejection of TNMM and selection of CUP Method: The Tribunal found that the taxpayer's use of TNMM was appropriate for benchmarking international transactions related to intra-group services. The matter was remanded to the DRP to apply TNMM as the Most Appropriate Method (MAM) following the Tribunal's decision in the taxpayer’s own case for AY 2010-11.
- Erroneous application of CUP method: The Tribunal noted that the DRP had upheld CUP on a without-prejudice basis, making the discussion on TNMM academic. The Tribunal directed the DRP to reconsider using TNMM.
- Computation of TP adjustment: The Tribunal acknowledged the discrepancy in TP adjustments and directed a fresh examination using TNMM.
- Disregarding directions of the DRP for previous years: The Tribunal emphasized consistency with previous years' decisions and directed the DRP to follow the established method.
- Questioning of commercial expediency: The Tribunal noted that the taxpayer had demonstrated the need and benefit of the services, and the DRP should reconsider the commercial expediency.
- Application of CUP for determining arm's length interest rate: The Tribunal remanded the issue for fresh consideration using TNMM.
- Double addition vis-a-vis alleged arm's length rate for interest: The Tribunal found merit in the taxpayer's claim of double addition and directed a fresh computation.
- Disallowance of payment made towards intra-group services: The Tribunal directed the DRP to reconsider the disallowance using TNMM.
- Disregarding multiple year data: The Tribunal directed the DRP to re-evaluate the use of multiple year data.

Ground No. 10:
- Proceedings barred by limitation: Dismissed as not pressed during arguments.

Ground No. 11:
- Disallowance of branch office expenditure: The Tribunal found that the expenses were incurred for the taxpayer's business and directed the AO to allow the expenditure.

Ground No. 12:
- Disallowance of expenditure on non-producing PSCs: The Tribunal held that the expenses were for the taxpayer's business and directed the AO to allow the expenditure.

Ground No. 13:
- Disallowance of loss on transportation: The Tribunal remanded the issue to the AO for fresh consideration, noting that the loss should be determined by an expert as per the agreement.

Ground No. 14:
- Addition of provisions written back: The Tribunal directed the AO to verify and allow the write-back of provisions that were not claimed in the preceding year.

Ground No. 15:
- Disallowance of exchange loss on interest on BG Asia Pacific Pte. Limited loan: The Tribunal directed the AO to allow the foreign exchange loss as per the PSC provisions.

Ground No. 16:
- Disallowance of head office expenditure: The Tribunal directed the AO to allow the head office expenses, noting that they were incurred for the taxpayer's business.

Ground No. 17:
- Disallowance of inventory written off: The Tribunal directed the AO to allow the inventory write-off after verification, noting that the taxpayer followed a consistent accounting method.

Ground No. 18:
- Disallowance of depreciation and depletion: The Tribunal directed the AO to verify and allow the depreciation and depletion claims, noting the differences were due to accounting treatments in previous years.

Ground No. 19:
- Additional depreciation: The Tribunal remanded the issue to the AO to decide on merits as per section 32(1)(iia) after providing an opportunity to the taxpayer.

Ground No. 20:
- Disallowance of interest incurred on loan taken from BGAP: The Tribunal remanded the issue to the AO for verification and decision.

Ground No. 21:
- Addition on account of difference in revenue as per Form 26AS and profit and loss account: The Tribunal directed the AO to verify and allow the adjustment as per PSC provisions.

Ground No. 22:
- Violation of principles of natural justice: Dismissed as not pressed during arguments.

Ground No. 23:
- Short credit for Tax deducted at source: The Tribunal directed the AO to grant the credit of TDS after verification.

Ground No. 24:
- Levy of interest under sections 234B and 234C of the Act: The Tribunal directed the AO not to charge interest under section 234B, following the decision in the taxpayer’s own case for AY 2010-11.

Ground No. 25:
- General grounds: Dismissed as general in nature.

Conclusion:
The appeal filed by the taxpayer was partly allowed for statistical purposes, with several issues remanded to the AO/DRP for fresh consideration and verification. The Tribunal emphasized consistency with previous decisions and adherence to the principles of natural justice.