9911796707
TMI Blog2015 (3) TMI 792X X X X Extracts X X X X X X X X Extracts X X X X ..... bted by revenue, the assessee failed to substantiate its claim regarding allocation of expenses incurred by it for the services rendered to BGEPIL. It has not been able to substantiate its claim as to what common expenses had been incurred; how those were allocated to assessee; and why those needed to be allowed as deduction from Indian operations. It is settled law that unless the assessee is able to substantiate its claim the deduction cannot be allowed. In this regard we may refer to the decision of Hon’ble Supreme court in the case of CIT Vs. Calcutta Agency Ltd. (1950 (12) TMI 4 - SUPREME Court) wherein it has been held that the burden of proving the necessary facts in order to entitle the assessee to claim exemption u/s 10(2)(xv) was on the assessee but the necessary facts had not been established by the assessee at any stage of the proceedings and the High Court was in error in applying the principles of Mitchell’s case on the assumption of facts which were not proved. Consequently the assessee was not entitled to the deduction claimed. In view of above discussion, keeping in view the entire conspectus of the cases, we are of the opinion that it would be fair to tax the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e in its return of income. He further observed that assessee had neither maintained any books of a/c., nor got its accounts audited as per provisions of section 44AB of the I.T. Act. The assessee was confronted with the fact that BGEPIL had claimed above expenses in their P L A/c, but the assessee had not shown the corresponding income. The assessee took the plea that they were reimbursements. The AO did not accept the assessee s contention, inter alia, observing that the claim was not supported by any evidence and in order to establish that the payments were reimbursed on actual expenses, assessee should have shown the date of receipt of payment in their account from BGEPIL and corresponding expenses made with details of parties to whom payment was made. The AO further observed that during the assessment of BGEPIL it came to the notice of the TPO that services were actually not rendered by the assessee to BGEPIL and, therefore, in the absence of any services rendered by the assesssee, the entire receipt was income in the hands of the assessee. AO further observed that during the survey operation on the premises of the assesssee and BGEPIL it was noticed that no requisitioning of s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ied in detail, is enclosed as Annexure -14. Evidence of services render: Copies of debit notes raised by BGIL on the assessee in respect of the MSU expenses on a sample basis {have already been enclosed as annexure to these written submissions. The said debit notes are supported by appropriate evidence of services rendered by BGIL. The balance debit notes may also be furnished before your goodself if so desired. Reimbursement of expenses Nature of expenses: The expenses pertain to reimbursement of travel cost incurred by the senior management of BGIL in respect of the assessee's operations in India apart from certain other miscellaneous expenses. Copies of debit notes raised by BGIL on the assessee in respect of reimbursement of expenses on a sample basis have already been submitted as annexure to submissions. The said debit notes are supported by appropriate evidence of services rendered by BGIL. The balance debit notes may also be furnished before your goodself if so desired. General and Administrative expenses Nature of expenses: The assessee has received certain charges (based on allocation of actual costs incurred) from its associated enterprises in the nature ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... L will be treated as income in your hand. 2. You have received payment from BGEIPL under the following heads: Payroll expenses Management service unit charges General and Administrative expenses Reimbursement of expenses Please explain when you are receiving payment under the head reimbursement of expenses separately over and above payroll expenses, management service unit charges, General and administrative expenses, you are asked to explain how the expenses other than reimbursement of expenses are also claimed by you as reimbursement of expenses. 3. Regarding payroll expenses, please give the name of employees seconded by you to BGEIPL, the date when BGEIPL requisitioned the services of those expats from you with documentary evidence, the date of appointment with you and subsequently, after the tenure was over in India and where was the employee transferred. The details of payment received by you employee wise from BGEIPL and subsequent payment by you to the employees with evidence of payment from your bank account to substantiate your claim of so called cost to cost reimbursement. Please note that in absence of evidence of corresponding payment by you to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o provide certain staff, support and personnel services. Please name the staff member who were provided to render the services, the nature of services rendered, the location of services rendered and the amount paid to such staff members by you. As per Exhibit A to the agreement, you were supposed to render various services to BGEIPL which you have not rendered as evidenced during the survey operation. Please explain why your claim of reimbursement be not rejected as you have received money without rendering any services. 10. Similarly, for allocated charges, you are being paid based on the provisions of production sharing contract. Please explain the basis of computation of general and administrative expense received by you from BGEIPL and corresponding payment to various parties to substantiate your claim of reimbursement. Please further explain what are the services rendered by you under General and Administrative head to BGEIPL. It is once again clarified that mere submission of .invoices is not an evidence to substantiate your claim of reimbursement. 2.5. The AO observed that assesseer s claim could not be allowed for the following reasons: (a) The assessee failed to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... P, after considering the assessee s submissions, inter alia, held as under: (a) The assessee has not been able to produce, either before the AO or before the DRP any convincing evidence (except for the payroll services to a limited extent), about actual rendering of these services. (b) The evidence that the assessee referred in its submissions qua service agreement between the assessee and BGEPIL, list of employees of the assessee deputed to India, copies of debit notes raised by BGIL on BGEPIL and copies of some reports of some independent consultants. (c) Apart from the evidence noted above the assessee did not give any other evidence about the nature of services rendered, persons or parties who rendered the services, how and from which source and when the settlements were made for the consideration for these services. (d) Considering the detailed consideration of the services involved, which was about ₹ 80 crores, the evidence that the assessee was able to produce, was absolutely insufficient. (e) The assessee failed to keep books of a/c and got them audited as per the requirement of section 44AB. 2.9. Further, the assessee s contention before ld. DRP w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from the requirements of maintaining its books of accounts and getting them audited as required u/s 44AS of the I.T Act. As mentioned earlier such a condition cannot be made by any Department of Government of India except with an express amendment in the Income tax Act. This is supported by Article 17 of the Model Contract dealing with 'Taxes, Royalties, Rentals, Duties etc', para 17.1 of which reads as under: 17.1 Companies, their employees, persons providing any materials, supplies, services or facilities or supplying any ship, aircraft, machinery, equipment or plant [whether by way of sale or hire) to the Companies for Petroleum Operations or for an r other purpose and the employees of such persons shall be subject to all fiscal legislation in India except where, pursuant to any authority granted under an 7 applicable law, they are exempted wholly or partly from the application of the revisions of a particular law or as otherwise provided herein. In view of the above the plea taken by the assessee that it is not required to maintain any books of accounts and not to reflect the amounts received from BGEPIL in its Profit and expenditure in respect of services rend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessment is finalized as per the directions of DRP and income of the assessee is computed as under: Income as determined in draft assessment order: ₹ 97,28,98,465/- Less: 1) Relief granted by DRP out of Management and service unit Charges of ₹ 34,77,35,896/- Rs.60,00,000/- 2) Relief granted by DRP out of General Admn. Expenses Of ₹ 19,16,1,571/- ₹ 8,10,31,154/- 3) Out of miscellaneous expenses Of ₹ 3,05,85,488/- ₹ 13,34,377/- Total income ₹ 88,45,32,934/- Total income rounded off ₹ 88,45,32,930/- 3. Being aggrieved with the assessment order passed u/s 143(3)/144C(13), the assessee is in appeal before us and has taken following grounds of appeal: Based on the facts and circumstances of the case, BG International Limited (hereinafter referred to as the 'Appellant') craves leave to prefer an appeal against the order passed by the Assistant Director of Income Tax (Internatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... residency certificate of the Appellant) that the Appellant is a tax resident of UK and therefore, is entitled to the beneficial provisions under the DT AA. 9. The learned AO/ DRP has erred in law and in facts, in ignoring the fact that the reimbursements received by the Appellant are not taxable in India under Article 13 of the DT AA as FTS since the service does not make available any technical knowledge, experience, skill know-how or processes, or consist of the development and transfer of a technical plan or technical design to the Appellant. IV. Permanent establishment ('PE') in India 10. The learned AO/ DRP has erred in facts in holding that the Appellant has a PE in India without seeking/ analysing any information to prove that a PE exists in India. 11. WITHOUT PREJUDUCE to Ground 10, assuming but not accepting that a PE exists, the AO/ DRP erred in treating all amounts received by the Appellant as income attributable to the PE. The learned AO/ DRP ought to have held that only income directly attributable to the PE should be taxable in India under the DTAA. 12. WITHOUT PREJUDUCE to Ground 10, assuming but not accepting that a PE exists, the Appellant be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of running efficient and cost effective ventures across the world, the assessee provides requisite services/ support to its group entities and incurs certain expenditure/ cost on behalf of such group entities ( assets ) across the world, and the same is cross charged to such group entities without any mark up. 6.1. Ld. counsel submitted that BG Exploration and Production India Ltd. ( BGEPIL ) is a limited liability company incorporated in Cayman Islands and an Associated Enterprise of the assessee within the meaning of Sec. 92A of the Act. BGEPIL had entered into a production sharing contract ( PSC ) dated 15-2-2002 (which was subsequently amended on 10-1-2005) along with Oil and Natural gas Commission ( ONGC ) and Reliance Industries Ltd. ( RIL ), with the Government of India, for exploration and production of oil and gas hydrocarbons in India in the designated contracted fields of Panna Mukta and Mid and South Tapti fields. To execute such PSC and carry out its obligations under the PSC as a joint operator, BGEPIL has set up a project office in India. 6.2. The ld. counsel in the written submissions has also submitted that: (i) Oil and Gas Industry is huge capital intensi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - Petro Physics technology program - Transmission and Distribution - Commercial. General and administrative expenses: - Other consultancy services - Professional subscriptions - Travel subsistence. 6.4. Third party costs incurred by BGIL on behalf of various BG group entities, including BGEPIL during the year under consideration. The assessee had incurred expenditure on payroll expenses, management service unit charges, general and administrative expenses etc. and had received reimbursement of ₹ 972,898,465/- from BGEPIL towards such cross charges/ cost allocation. 6.5. Ld. counsel submitted that in AY 2003-04, 2004-05 2005-06, Tribunal vide its order dated 28-8-2009, restored the matter to the file of AO, following the Tribunal s decision in the case of EGEPIL for A.Y. 2000- 01 as per ITA no. 861/Del/2005 dated 24-10-2008, observing in para 9 as under: 9. Since, we have noted that the facts in the present case are identical we decide this issue in the present case in principle in favour of the assessee respectively following this Tribunal decision but since factual aspect of this claim of the assessee that the receipt of the assessee in these ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AE Description of such mutual agreement or arrangement Total amount received receivable As per the books of account(INR} As computed by the assessee having the arm's lengrtehg ard price (INR) BG Production India Ltd Payroll Expenses 219,736,534 219,736,534 Management services unit 530,806,352 530,806,352 General administrative expenses 191,610,571 191,610,571 - Reimbursement 30,585,488 30,585,488 Total 972,738,945 972,738,945 BG Production India Ltd Reimbursement of expenses 50,98,140 50,98,1401 No TP adjustment is proposed in this case 6.8. Ld. counsel referred to pages 106 to 147 of the PB wherein the Cost Allocation and time writing policy 2006 is contained and pointed out that allo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nses 232,867,196 Not applicable Reimbursement of expenses 32,060,972 6.15. Ld. counsel submitted that ld. DRP has allowed pay roll expenses vide his order dated 10-12-2012 contained at page 14 to 19 of the PB and, therefore, ground no. 5 has not been pressed. Out of general and administrative expenses and management expenses, ld. DRP has allowed only third party cost but not the allocation as has been done by assessee as per global allocation policy. 6.16. Ld. counsel further submitted that profit sharing contract has been approved by government and, therefore, it over-rides the income-tax provisions. In this regard he referred to section 42 of the I.T. Act and pointed out that as per this section for the purpose of computing profits or gains of any business consisting of the prospecting for or extraction or production of mineral oils in relation to which the Central Government has entered into an agreement with any person for the association or participation of the Central Government or any person authorized by it in such business which ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s contentions have been noted as under: In this connection the assessee would apprise you that the documents pertaining to the assessment year in question are now over 7 years old, located in the United Kingdom and are extremely difficult to retrieve. In these circumstances, BGIL does not wish to litigate/ agitate this issue any further before the tax authorities. 7.1. Thus, the assessee was not able to substantiate its claim regarding the payments being in the nature of reimbursement in AY 2004-05. 7.2. As regards the decision of Tribunal in AY 2006-07, ld. CIT(DR) referred to CIT(A) s and pointed out that in para 5 of Tribunal s order dated 29-1-2010 reproduced earlier, the Tribunal has noted that CIT(A) para 9.3 of his order observed that assessee had produced invoices. Therefore, the revenue s appeal was dismissed. 7.3. However, in the present year, the AO as well as ld. DRP has brought on record that there is no evidence of expenses being incurred by BGI for which the alleged reimbursement was taken. Since there was no expenditure incurred by BGI, therefore, there was no question of any reimbursement. 7.4. As far as the ld. counsel s reliance on the TPO s ord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the present case, income is to be computed as per section 37(1) and only those expenses can be allowed which are wholly and exclusively for business purposes. 8. Ld. counsel in the rejoinder referred to the appeal filed by the department (ITA no. 62/2010) against the Tribunal s order for AY 2003-04 in which department itself has taken a ground that the assessee s receipts were taxable u/s 44BB. 8.1. Ld. counsel further pointed out that in AY 2009-10 ld. DRP has allowed the assessee s claim contained at pages 27 to 75 of the PB in which ld. DRP has observed as under: i) Assessee has produced large amount of documents in support of its claim. The same is summarized in Para 4.4. It cannot be brushed aside. They are relevant to the. Claims made by the assessee. ii) Technical services received are intangible in nature. Therefore, TPO should be clear when he/she says concrete evidence for such technical services received to be produced by the taxpayer. The proof of the pudding is in the eating, If the assessee has not maintained any documentation at all or has not allocated the cost based on the time spent by the expert/ employee, then, it would have been possible to do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... int operators to the contract. Vide agreement dated 10-1-2005 BGEPIL is the operator and is also responsible for maintaining of books of account of the contract. 9.3. BGEPIL and the assessee are associated enterprises under the Incometax Act. BGEPIL has operations in India only and has opened a project office in India. On all these aspects there is no dispute. 9.4. The assessee had filed return of income at an income of ₹ 1,59,520/-, being interest received from Income-tax department. In the return of income contained at page 267 and 268, the assessee had given following notes:- NOTE: 1. BG International Limited (BGI) is a company incorporated in the England, UK, having registered office at 100 Thames Valley Park Drive, Reading, Berkshire, R61 PT.BGI provides certain staff support and personnel services in connection with Oil and Gas Exploration and drilling activities. BGI is rendering services on cost to cost basis any payment to BGI through Debit Note is purely accordance with provisions of PSC. 2. For the purpose of the Double Taxation Avoidance Agreement between India and the United Kingdom, BGI is a tax resident of the United Kingdom. 3. In India, BGI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng invoices and no material brought by the AO to doubt the debit note and invoices and, therefore, in this year also the same decision should be applied. We are not inclined to accept this plea of ld. counsel because in assessment year AY 2006-07, ld. CIT(A) had allowed the claim of the assessee because he held that services had been provided on cost to cost basis. The tribunal s findings were based on the ld. CIT(A) s observation that assessee had produced invoices and no material was brought by the AO to doubt the debit note and invoices. However, in the present year the assessee has not produced any documents before the AO or ld. DRP to justify that it had incurred any expenses (other than pay roll expenses or third party expenses). The decision of the Tribunal for AY 2006-07, therefore, cannot be applied, particularly because the principles of res judicata do not apply to income-tax proceedings and each year has to be considered on the basis of facts obtaining in each year. 9.7. Ld. counsel for the assessee also referred to tribunal s order for AY 2003-04, 2004-05 and 2005-06 dated 28-8-2009, wherein Tribunal had restored the matter back to the file of AO for factual verific ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oxymoron. Therefore, to demand that assessee to produce evidence to show that independent entity in comparable situation would have paid' for such services is nothing but asking to perform the impossible. iv) . DRP is convinced that without such services assessee would not have succeeded in earning the income it did during the year. If the assessee and its group companies were not having this kind of expertise, then, Government of India and ONGC would not have entered into a joint production agreement in the first place. v) It is impossible for any auditor or TPO or DRP to see each and every invoice. It is a time honoured practice of audit to .test check.' Assessee has a system of documentation retention of backup invoices. Therefore, based on the test checking, DRP comes to the conclusion that TNMM is the most appropriate method in this case and CUP cannot be applied in the absence of any data availability in case of comparable cases. As the assessee has earned 41.42% on cost, which is much above the comparable companies, the underlying international transaction is held to be at arm's length. TPO/AO is directed to delete the addition made under this head. 9 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Lancaster Maclean . The department has disputed this on the ground that assessee did not submit the details of expenses incurred i.e. to whom paid, when paid and where paid along with supporting invoices received. The assessee did not produce any document to substantiate the expenses incurred by it against receipts for which debit notes were raised on BGEPIL. The debit notes did not show as to on what account and where the expenses were incurred by assessee on behalf of BGEPIL. The assessee has to prove that the services rendered by it is regarding federal green recharges. The assessee gave a general note as to what is the nature of these recharges are but no where it has given any specific detail as to how much were the federal green charges incurred by BGEPIL as a whole and how the expenses relating to BGEPIL were allocated to it for which debit notes were raised. 9.14. Ld. counsel has pointed out that it is not possible to give one to one nexus for each debit note vis a vis services rendered. However, basic details as pointed out by lower revenue authorities have to be brought on record. Further, the submissions of assessee did not justify the nature of activities specific t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... considered having regard to the terms of reference for appointing it. He pointed out that at page 125 of the report, it has been observed that, the purpose of the Agreed upon procedure is to ensure that BG International Limited s overhead cost allocation and time writing policy, has been adhered throughout the year. The agreed upon procedure will examine application of the policy on a sample basis, to ensure that .. . He pointed out that these terms of references nowhere require the PWC to examine as to how the cost had been allocated to various assets (business in different locations/ countries) and do not refer to certification of benefits tests. He pointed out that PWC has come out with a time writing rates which were primarily hourly rates which needed to be applied for various types of activities. 9.21. As regards the reliance placed on M/s Lancaster Mac Lean, UK report, ld. CIT(DR) has pointed out that this independent consultant was appointed to represent the interest of joint venture partners. They also gave hourly rates for a charge. 9.22. He pointed out that these reports nowhere show what the total general and administrative overhead cost was, what were the keys ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deciding that the receipt are not taxable u/s 44BB. 9.25. We are conscious of the fact that earlier we have observed that merely because in AY 2004-05 assessee agreed for its receipts being taxed u/s 44BB, cannot operate as estoppels against it for pleading that the entire receipts were in the nature of reimbursement. However, considering the fact that assessee is not able to substantiate its claim, as has been extensively demonstrated by ld. Cit(DR) in his submissions and the assessee has only given a general writ e up for the benefits derived by BGEPIL, we are of the considered opinion that no fruitful purpose would be served by restoring the matter to the file of AO for examining the assessee s claim again as that would be a futile exercise particularly because assessee has clearly stated that it is not possible to have one to tone nexus of the expenses with the services rendered. 9.26. Under such circumstances, in our opinion, the only possible course is to invoke section 44BB because B.G.I. provide services to BGEPIL, which was engaged in prospecting the mineral oils. We direct accordingly. 10. In the result, assessee s appeal is partly allowed. Order pronounced in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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