TII BRIEF

CBDT signs 2 APAs relating to IT & Banking

CASE LAW

2017-TII-154-ITAT-DEL-TP

BG EXPLORATION AND PRODUCTION INDIA LTD Vs JCIT: DELHI ITAT (Dated: April 24, 2017)

Income Tax - Sections 32, 37(1), 42(1), 92CA(3), 143(3) & 144C.

Keywords - Exploration - Most Appropriate Method - Reimbursement of expenses - PSC - PLI - Project Office - PO - TNMM - support services - payment of interest

The Assessee company, incorporated in the Cayman Island with limited liability, is engaged in the business of exploration and extraction of Mineral Oils in terms of production sharing contracts (PSC) signed with the Government of India. To execute such PSCs and carry out its obligations under the PSCs as a joint operator, Assessee had set up a Project Office ("PO") in India. It had a participating interest in five production sharing contracts. AO referred to TPO for determination of ALP of the international transactions. The Assessee had aggregated all the transactions except a few transactions, and applied TNMM, and submitted that they were at arm's length. The Assessee did not benchmark the amount of reimbursement of expenses. The aggregation approach was adopted by the Assessee for the reason that these transactions were closely linked to the only business activity of the company of the extraction of oil and gas. The TPO rejected the contention of the Assessee with respect to aggregation and stated that all these transactions were in itself a class of transaction hence was required to be benchmarked separately and TNMM was not the most appropriate method. Therefore TPO held that it needed to be verified that i. whether the Assessee had actually received the intragroup services, ii. what were the economic and commercial benefits derived by the recipient of the intragroup services, iii. the mechanism adopted with respect to the cost recharge and the basis of allocation of cost to various associated enterprises, iv. whether the comparable independent enterprise would have paid for the services in comparable circumstances and after that benchmarking the same services either using CUP or cost plus method.

Assessee raised objections before the DRP. With respect to Intra-Group services it was stated that the Assessee had established the fact that it had received the services and it was a useful services which it had received. With respect to the separate benchmarking of the international transaction and the most appropriate method, the DRP held that TNMM was the most appropriate method in this case and the Assessee was justified in obtaining the services. The DRP also held that the determination of ALP by the TPO in the intragroup services is erroneous and was also be deleted. With respect to provision of support services and its benchmarking, DRP upheld the selection of comparables by the TPO. On account of the comparability analysis it upheld the adjustment made by the TPO. With respect to the payment of interest, DRP held that that there is no justification for conversion of floating rate of interest into a fixed rate of interest and further the increasing the rate of interest was 165% higher than the rate at which the Assessee was paying interest at the time of conversion. With respect to the disallowance of the production cost u/s 37 (1) DRP held that as the Assessee had failed to show the commercial expediency test in the instant case, the disallowance was correctly made. With respect to the disallowance on account of legal and professional charges it directed the AO to consider the additional evidence filed by the Assessee before the DRP and to modify the disallowance accordingly. With respect to the disallowance of expenditure on wellhead platform the DRP directed the AO to allow depreciation u/s 42 (1), subject to the fulfillment of the necessary condition. With respect to the disallowance of depreciation on the global infrastructure on information technology projects DRP upheld the depreciation disallowance holding that amendment to section 32, which now provided for the word 'used' and Assessee could not substantiate the user of these assets. On the ownership it rejected finding of TPO that Assessee fails ownership test. With respect to the disallowance of exploration cost, DRP upheld the same. With respect to the disallowance of club expenditure, AO was directed to allow the club expenditure as deductible expenditure as in the preceding AY. Therefore, for this year also the AO was directed to allow the club expenditure u/s 37 (1). Based on above directions, AO passed final order u/s 143(3) of the act. In the begining of the appeal, assessee also raised an additional groun with respect to the exploration cost not claimed by the assessee. This additional ground was also allowed.

Having heard the parties, the Tribunal held that,

+ there is no dispute about the functions performed, risk assumed and assets employed to generate the revenue of support services. With reference to the error in the computation of margin of the comparable companies, in view of the argument of the both the parties and no objection from the side of the Revenue, we direct the Ld. Transfer Pricing Officer to verify the computation of the margins of the comparable and also give an opportunity to the Assessee to point out, if there is any error, and recompute the PLI of the comparables;

+ the Assessee entered originally into a loan agreement dated 31st of May 2005 between BG. Asia Pacific Plc Ltd and Assessee for unsecured loan facility of US dollar 500 million. According to the terms and conditions of that agreement interest rate was fixed as one month, US $ LIBOR +2% for an and apportioned on an actual 360 basis. The termination date of the agreement was 31st of May 2020. Subsequently on 21/10/2009 there is an amendment made to the existing loan facility under agreement dated 31/05/2005, according to which, the parties have agreed to amend the interest rate terms applicable to the existing loan facility at the fixed rate of 6.18% for 5 years from the date of execution of this agreement (i.e. from 21/10/2009), it would be once again at available rate of 6 months USD LIBOR +350 unless the parties agree otherwise. On conjoint readings of this 2 agreements it is apparent that during the year there is a change in the interest rate of the above loan, which was earlier at US dollar LIBOR +2% to 6.18%. For part of the year i.e. from 01/04/2009 2 21/10/2009, the rate of interest on the above loan was 2.33% and from 22/10/2009 to 31/03/2010 the rate of interest of the same loan without any change in the terms and condition of agreement except interest was @ 6.18%. Further, Vide letter dated 21/10/2009 the AE has agreed to offer an additional unsecured loan of US dollars 300 million until 2020 to the assessee;

+ we set aside the whole matter of determination of ALP of interest paid by the Assessee to its associated enterprise back to the file of the Transfer Pricing Officer with a direction to examine the computation of ALP by the Assessee of above transaction strictly in accordance with the provisions of section 92C of the Income Tax Act considering the evidences placed by the Assessee before him and then decide the issue of adjustment, if any, on merits. Needless to say that Assessee may be given proper opportunity of hearing to demonstrate that payment of interest made by the Assessee to its associated enterprise is at arm's length according to one of the methods supporting it with necessary and credible evidences;

Whether the AO has partly allowed the expenditure at the time of determining the ALP, any disallowance is called for when the nature of other expenditure has not been pointed out - NO: ITAT

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

Whether DRP has inherent powers to admit additional evidence - YES: ITAT

+ with respect to the objection of the assessing officer that DRP does not have right to admit the additional evidence mean would like to refer the provisions of section 144C of the income tax act, whether the reference dispute resolution panel is dealt with. According to the provisions of section 144C (6) of the dispute resolution panel shall issue the direction after considering evidences collected by or cause to be collected by it and result of any enquiry made or cause to be made by it. Therefore it is apparent that the dispute resolution panel can take into consideration any further evidences which has been collected by it or furnished before it.

Assessee's appeal partly allowed