2019 (4) TMI 1573 - AT - Income Tax

TP adjustment - TPO rejecting TNMM and applied CUP method - The TPO held that the expenditure incurred by the appellant and allowed by the JV partners/Operator board shall be considered as Comparable Uncontrolled Price - international transactions pertaining to intra-group services received by the appellant (i.e. MSU charges, reimbursement of expenses, payroll expenses, Information Technology and other charges) - HELD THAT - It has been admitted that facts and circumstances of the services received by assessee for the year under consideration are same vis- -vis assessment year 2010- 11, and other preceding assessment years. We are therefore inclined to follow the same view. Respectfully, following view taken by this Tribunal in assessment year 2010-11 2017 (4) TMI 1190 - ITAT DELHI , addition made by Assessing Officer stands deleted. Erroneous application of CUP for determining arm s length interest rate - assessee taken fixed rate of interest @ 6.18% (being USD Libor swap rate 350 bps) - TPO proceeded on the basis of an independent fresh search and considered LIBOR 2.785 BPS as the arm s length rate - HELD THAT - Lower authorities and materials available on record. We also refer to the specific observation by DRP reproduced hereinabove. As both the parties admit that the issues under consideration are similar and identical with that of facts in assessment year 2010-11 2017 (4) TMI 1190 - ITAT DELHI . The directions issued by this Tribunal for assessment year 2010-11 more particularly the underlined portion are followed by us. Ld. CIT DR did not object for the issue to be set aside. We direct the TPO/AO to compute the rate of interest on the basis of aforesaid direction and accordingly is set aside to AO/TPO. Disallowance of branch office expenditure - treating it as pre-operative in nature - whether said expenditure was incurred wholly and exclusively for the purpose of the Appellant s business in India? - AO limited the disallowance to avoid double addition/ disallowance - HELD THAT - 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 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. Disallowance of head office expenditure - Allowable revenue expenditure - 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., disallowed merely on the ground that the said expenses have not been borne by the joint venture partner - DRP applying the provisions of section 44C of the Act to payments made to BG International Limited - HELD THAT - 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 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. Disallowance of depreciation and depletion - disallowing depreciation being the difference of depreciation amount between the tax audit report and the computation - 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 - the tax auditor in the Tax Audit Report considered this as revenue in nature - HELD THAT - 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) in the relevant assessment year. CIT DR has no objection for the above issue to be set aside to ld. AO/TPO - 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 ground raised by the assessee on this issue is allowed for statistical purposes. Disallowance of loss on transportation - AO disallowing loss on transportation of condensate on the ground that the expenditure cannot be allowed on the basis of the provisions made by the assessee - HELD THAT - In view of the 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. More so 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 - restore the issue to the file of the Assessing Officer with a direction to give an opportunity to the assessee to substantiate his case as per the direction of the DRP. Disallowance of inventory written off - As per AO Appellant submitted only internal documents which do not suffice for allowance of expenditure - 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 - 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 Foreign exchange loss disallowance - whether foreign exchange gain has been taxed in the previous years, foreign exchange loss in the subsequent years needs to be allowed? - HELD THAT - As decided in own case 2018 (7) TMI 1954 - ITAT DELHI 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 - restore the issue to the file of the AO with a direction to give an opportunity to the assessee to substantiate his case as per the direction of the DRP. Interest u/s 234B, 234C 234D - HELD THAT - As relying on assessee's own case 2018 (7) TMI 1954 - ITAT DELHI we direct the Assessing Officer to compute the interest u/s 234C of the Act qua returned income as per law followed by interest u/s 234B 234D of the Act by giving due opportunity to the assessee.

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. Disregard of prior ITAT decisions and DRP directions.
4. Questioning of commercial expediency.
5. Disallowance of intra-group service payments.
6. Application of CUP for determining arm’s length interest rate.
7. Disallowance of branch office expenditure.
8. Disallowance of non-producing Production Sharing Contracts (PSCs) expenditure.
9. Disallowance of head office expenditure.
10. Disallowance of depreciation and depletion.
11. Disallowance of loss on transportation.
12. Disallowance of inventory written off.
13. Addition due to difference in revenue as per Form 26AS and profit and loss account.
14. Disallowance of foreign exchange loss.
15. Interest levied under sections 234B, 234C, and 234D.

Issue-wise Analysis:

1. Rejection of TNMM and Selection of CUP Method:
The Tribunal noted that the TPO rejected the TNMM and applied the CUP method, considering the expenditure approved by JV partners as the CUP. The Tribunal found that the issues were covered by prior decisions of the ITAT in the assessee’s own case for earlier years, where TNMM was upheld as the most appropriate method.

2. Erroneous Application of CUP Method:
The Tribunal observed that the TPO applied the CUP method erroneously by considering the amount approved by the JV partner as the CUP. The Tribunal reiterated the findings from previous years, emphasizing that the intra-group services were closely linked to the main business activity and should be benchmarked together using TNMM.

3. Disregard of Prior ITAT Decisions and DRP Directions:
The Tribunal noted that the AO/DRP/TPO disregarded the decisions of the ITAT for earlier years and the directions of the DRP. The Tribunal emphasized that the facts and circumstances remained the same, and the prior decisions should be followed.

4. Questioning of Commercial Expediency:
The Tribunal found that the AO/DRP/TPO erred in questioning the commercial expediency of the appellant in availing intra-group services and changing the interest rate on the ECB. The Tribunal reiterated that business decisions should not be questioned by the tax authorities if they are commercially justified.

5. Disallowance of Intra-group Service Payments:
The Tribunal noted that the TPO made an upward adjustment by disallowing payments towards intra-group services. The Tribunal followed the decisions from earlier years, where such disallowances were deleted, emphasizing the necessity and benefit of the services received.

6. Application of CUP for Determining Arm’s Length Interest Rate:
The Tribunal observed that the TPO applied the CUP method for determining the arm’s length interest rate on the ECB. The Tribunal referred to its earlier decision, where it was held that the TPO should not question the business decision of shifting from floating to fixed interest rates. The issue was set aside to the AO/TPO for re-examination.

7. Disallowance of Branch Office Expenditure:
The Tribunal noted that the AO/DRP disallowed branch office expenditure by treating it as pre-operative. The Tribunal reiterated its earlier decision, where such disallowances were deleted, emphasizing that the expenditure was incurred wholly and exclusively for business purposes.

8. Disallowance of Non-producing PSCs Expenditure:
The Tribunal observed that the AO/DRP disallowed expenditure on non-producing PSCs. The Tribunal followed its earlier decision, where it was held that such expenditures are allowable under section 37(1) of the Act.

9. Disallowance of Head Office Expenditure:
The Tribunal noted that the AO/DRP applied section 44C to disallow head office expenditure. The Tribunal reiterated its earlier decision, where it was held that such expenditures are allowable if incurred wholly and exclusively for business purposes.

10. Disallowance of Depreciation and Depletion:
The Tribunal observed that the AO disallowed depreciation due to differences in WDV of assets. The Tribunal followed its earlier decision, where it was held that depreciation on capitalized Global IT & T expenditure is allowable. The issue was set aside to the AO for re-examination.

11. Disallowance of Loss on Transportation:
The Tribunal noted that the AO disallowed loss on transportation of condensate based on provisions made by the assessee. The Tribunal followed its earlier decision, where it was held that such losses are allowable based on reasonable estimates. The issue was set aside to the AO for re-examination.

12. Disallowance of Inventory Written Off:
The Tribunal observed that the AO disallowed inventory written off due to lack of independent auditor’s report. The Tribunal followed its earlier decision, where it was held that write-offs based on internal procedures and audited financial statements are allowable. The issue was set aside to the AO for re-examination.

13. Addition Due to Difference in Revenue as per Form 26AS and Profit and Loss Account:
The Tribunal noted that the AO made an addition due to differences in revenue as per Form 26AS and the profit and loss account. The assessee did not press this ground, and it was dismissed as not pressed.

14. Disallowance of Foreign Exchange Loss:
The Tribunal observed that the AO disallowed foreign exchange loss. The Tribunal followed its earlier decision, where it was held that such losses are allowable under the provisions of the PSC. The issue was set aside to the AO for re-examination.

15. Interest Levied under Sections 234B, 234C, and 234D:
The Tribunal noted that the interest under sections 234B, 234C, and 234D was consequential and should be computed as per law. The issue was set aside to the AO for re-computation.

Conclusion:
The Tribunal allowed the appeals for the assessment years 2013-14 and 2014-15, following its earlier decisions on similar issues and setting aside certain issues to the AO/TPO for re-examination and re-computation as per law.