2017 (4) TMI 1145 - AT - Income Tax

Unsecured foreign currency loan amounting to USD 500 million from its associated enterprise - tpa - Held that - It is not proper to benchmark both the transactions of payment of interest with respect to two different loans which are governed by two different agreements which has different terms and conditions as one transaction . Regarding the claim of the Assessee with respect to the quotations of the bank, the 1st quotation is dated 10/10/2011 wherein vide letter dated 22/02/2012, a quote was provided from Citibank which says that quote for the currency is LIBOR 285 300 basis points and does not include withholding taxes. Assessee with respect to other banks also took similar quotations. However, from the reading of the quotation it is not known that these quotes are with respect to both the transactions of loan of US dollar 500 million and US dollar 300 million where there are different terms and conditions of repayment prepayment. Most importantly, the Ld. Transfer Pricing Officer has not looked at these evidences produced by the Assessee in the form of quotations of various banks, comparable search by the Assessee on LPC/ dealscan database. The Ld. Dispute Resolution Panel has also brushed aside the provision of section 92C of the Income Tax Act, which prescribes methodology for computation of arms length price of an international transactions . It has merely reiterated whatever has been stated by the Ld. Transfer Pricing Officer without applying the provisions of law to the facts of the case before them. In view of this 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 Ld. 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 Disallowance of the production cost - Held that - 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 ₹ 316786095/- Disallowance of exploration cost - Held that - 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. Therefore according to us the expenses incurred by the Assessee cannot be disallowed Disallowance of purchase of seismic data and general and administrative expenses in connection with the proposed NELP VIII - Held that - 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 also 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 to allow the expenditure incurred by the Assessee on purchase of data and other relevant expenses amounting to ₹ 220983295/ . In the result ground of the appeal of the Assessee is allowed. Not allowing credit of tax deduction at source - Held that - Assessee has submitted that the Ld. Assessing Officer may kindly be directed to grant credit for the aforesaid tax deduction to the appellant. Ld. Departmental Representative submitted that if the Assessee has proper tax credit certificates available with it then only the credit for tax deducted at source can be granted, and if those are available then there is no objection against this. In view of these arguments, we set aside ground No. 7 of the appeal of the Assessee to the file of the Ld. Assessing Officer with a direction to verify the tax credit certificates submitted by the Assessee of ₹ 52358137/ and then to grant credit for such taxes if they are found in order and in accordance with the law. Credit for self-assessment tax paid - Held that - The Assessee has submitted that the Ld. Assessing Officer may kindly be directed to grant credit for the aforesaid tax to the appellant. Ld. Departmental Representative submitted that if the Assessee has proper tax challan available with it then only the credit for it can be granted, and if those are available then there is no objection against this. In view of these arguments, we set aside ground No. 8 of the appeal of the Assessee to the file of the Ld. Assessing Officer with a direction to verify the self-assessment tax paid as submitted by the Assessee of ₹ 63128093/ and then to grant credit for such taxes if they are found in order and in accordance with the law. Charge interest under section 234B - Held that - We direct the Ld. Assessing Officer to not to charge interest under section 234B of the act on the income of the Assessee which is subject to or liable to tax deduction at source. In view of this we set aside ground No. 9 of the appeal of the Assessee back to the file of the Ld. Assessing Officer to recompute the interest under section 234B of the act accordingly. Disallowance of legal and professional expenses - Held that - Assessing Officer has stated that Assessee has been delaying the submission of the details during assessment proceedings as it was asked to submit the breakup of expenses on 27th of March 2014 whereas the query was raised on 12/03/2014 and then again on 25/03/2014, this itself shows that Ld. Assessing Officer started questioning the allowability of these expenses in the last fortnight of the month of March 2014 only, whereas the notice under section 143 (2) was issued on 30th of August 2011. It is always for Assessing Officer to observe time limit for completion of the assessment proceedings and manage it for completing it properly in time. The provisions of Income Tax Act, 1961, has empowered him to tackle situations where Assessee is delaying submitting the requisite detail on time. However, if the Assessing Officer himself start acting late when the time has raced against him, the fault cannot be put on the head of the Assessee. In view of this, without going into the merits of the case about the allowability or otherwise of the above expenditure, We set aside this ground of appeal to the file of the Ld. Assessing Officer with a direction to examine the details furnished by the Assessee and call for such further evidence as it is required for him for such examination and then to decide the issue on merit. Disallowance of depreciation on global IT & T expenditure - whether the Assessee has properly demonstrated before the Ld. Assessing Officer that the Assessee has used the assets for the purposes of the business? - Held that - Only issue now remains is to be seen . 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 na ve 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 Intra Group Services - TPA - Held that - With respect to the clubbing of the transaction it was held that when the transactions are closely interrelated it is but natural to club such transaction and benchmarked it together. The Ld. dispute resolution panel at page No. 30 31, has considered the suspect and agreed with the contention of the assessee that intragroup services received from its associated enterprise are closely linked to the main business activity of the assessee company placing reliance on the US regulations, OECD regulations and OECD draft notes on comparability. In view of this we do not find any infirmity and none was pointed out before us by the Ld. departmental representative in the order of the Ld. dispute resolution panel. Consequently, after verifying that assessee has demonstrated need for those services, benefit derived from those services, evidence of receipt of such services and submitting that those services are neither duplicative in nature and nor are share holder activities, the DRP directed the Ld. transfer pricing officer to delete the adjustment proposed with respect to the intragroup services of ₹ 3329766244/ , deserves to be upheld. Further, no evidences have been led before us by revenue stating that these services are duplicative in nature and also serves only the interest of the shareholder. According to the information supplied by the assessee and examined by the Ld. dispute resolution panel does not give any such indication. Further regarding non-sharing of the cost by the joint-venture partners we have given our findings while deciding the appeal of the assessee that such an action of the joint-venture partners cannot be the reason to determine the arm s length price of the services which is been received by the assessee at nil. In view of this we uphold the finding of the Ld. dispute resolution panel holding that transactions of intragroup services are interlinked, therefore, they should be benchmarked together by adopting TNMM as the most appropriate method , hence, directing the Ld. transfer pricing officer to delete the adjustment proposed of ₹ 3329766244/ . In the result ground of the appeal of the revenue are dismissed. Depreciation to the assessee on wellhead platforms at the rate of hundred percent allowed. Club entrance and subscription fee for its employees - Allowable business expenditure - Held that - In view of the submission of the assessee that assessee has considered these expenses for purpose of FBT which AO has also accepted. In such a case, this expenditure has to be treated as business expenditure of the assessee. The binding nature of Jurisdictional High Court and numerous decisions from various Tribunal, holding that club expenditure for its employees incurred by the assessee as expenditure incurred wholly and exclusively for the purposes of the business of the assessee. In view of this we find no infirmity in the order of the Ld. dispute resolution panel in allowing the claim of the assessee of the stability of expenditure on account of the club expenses. In the result ground No. 5 of the appeal of the revenue is dismissed.

Summary

Issues Involved:
1. Provision of support services
2. Payment of interest
3. Disallowance of production cost
4. Disallowance of legal and professional expenses
5. Disallowance of depreciation on global IT & T expenditure
6. Disallowance of exploration cost
7. Short credit for Tax deducted at source
8. Short credit for self-assessment tax paid
9. Levy of interest under sections 234B of the Act
10. Levy of interest under section 234D of the Act

Issue-wise Detailed Analysis:

1. Provision of support services:
The Tribunal addressed the upward adjustment of ?8,018,048 made by the Assessing Officer (AO) regarding the provision of business support services. The AO had used the Transactional Net Margin Method (TNMM) and rejected 16 out of 19 comparables selected by the assessee, adding 19 new comparables. The Tribunal directed the AO to verify the computation of margins of the comparables and correct any errors.

2. Payment of interest:
The Tribunal examined the upward adjustment of ?427,264,082 made by the AO concerning the payment of interest on external commercial borrowings (ECB). The AO had deemed the interest rate of 6.18% excessive compared to the earlier rate of 2.33%. The Tribunal set aside the matter to the AO for re-examination, emphasizing the need to consider the prevailing economic situation, terms of the loan, and other relevant factors.

3. Disallowance of production cost:
The Tribunal addressed the disallowance of ?316,786,095 related to technical and engineering services. The AO had disallowed these expenses, arguing they were not shared by joint venture partners. The Tribunal found that the expenses were incurred wholly and exclusively for business purposes and directed the AO to allow the deduction.

4. Disallowance of legal and professional expenses:
The Tribunal considered the disallowance of ?24,936,767 in legal and professional expenses. The AO had disallowed these expenses due to a lack of detailed evidence. The Tribunal set aside the matter to the AO, directing a re-examination of the evidence provided by the assessee.

5. Disallowance of depreciation on global IT & T expenditure:
The Tribunal examined the disallowance of ?33,005,676 in depreciation on global IT & T expenditure. The AO had disallowed the depreciation, arguing the assets were not owned or used by the assessee. The Tribunal found that the assets were beneficially owned and used for business purposes, directing the AO to allow the depreciation.

6. Disallowance of exploration cost:
The Tribunal addressed the disallowance of ?460,313,788 in exploration costs. The AO had disallowed these expenses, arguing they were related to future business ventures without signed production sharing contracts. The Tribunal found the expenses were incurred for the business and directed the AO to allow the deduction.

7. Short credit for Tax deducted at source:
The Tribunal addressed the issue of short credit for tax deducted at source (TDS) amounting to ?52,358,137. The AO was directed to verify the TDS certificates and grant credit accordingly.

8. Short credit for self-assessment tax paid:
The Tribunal addressed the issue of short credit for self-assessment tax paid amounting to ?63,128,093. The AO was directed to verify the self-assessment tax paid and grant credit accordingly.

9. Levy of interest under sections 234B of the Act:
The Tribunal examined the levy of interest under section 234B, noting that the assessee, being a non-resident, had income subject to tax deduction at source. The Tribunal directed the AO to recompute the interest under section 234B accordingly.

10. Levy of interest under section 234D of the Act:
The Tribunal noted that the levy of interest under section 234D was consequential and did not require adjudication.

Additional Ground:
The Tribunal admitted an additional ground regarding the deduction of ?692,213,884 not claimed by the assessee. The matter was set aside to the AO for examination and decision on merits.

Revenue's Appeal:
The Tribunal dismissed the revenue's appeal, upholding the directions of the Dispute Resolution Panel (DRP) on various issues, including the deletion of adjustments related to intra-group services, wellhead platform depreciation, and club expenses.

Conclusion:
The Tribunal partly allowed the assessee's appeal and dismissed the revenue's appeal, providing detailed directions for re-examination and verification by the AO on various issues.