M/s. BG India Energy Solutions Pvt. Ltd., New Delhi V. ACIT, Gurgaon

ITA 1370/DEL/2016

• Counselvise Citation: [2020] 110 COUNSELVISE.COM (IT) 6782 (ITAT-DELHI)
• Duration Of Justice: 4 year(s) 6 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-09-2020
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I
• Assessment Year: 2011-2012
• Appeal Filed On: 11-03-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Transfer pricing; International transaction; Wholly owned subsidiary; TDS
• Section: 143(3); 201; 144C; 48; 13; 22

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL, DELHI I-1 B ENCH, NEW DELHI [THROUGH VIDEO CONFERENCE] BEFORE SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER, AND SHRI SUDHANSHU SRIVASTAVA, J UDICIAL MEMBER ITA NO. 1370/DEL/2016 [A.Y 2011-12] M/S B.G. INDIA ENERGY SOLUTIONS P LTD VS. THE DY. C.I.T 7H FLOOR, WPRLD TRADE TOWER CIRCLE 1(1) BARAKHAMBA LANE, CANNAUGHT PLACE GURGAON NEW DELHI PAN : AABCVB 9739 J [APPELLANT] [RESPONDENT] DATE OF HEARING : 08.09.2020 DATE OF PRONOUNCEMENT : 14.09 .2020 ASSESSEE BY : SHRI VISHAL KALRA, ADV REVENUE BY : SHRI SURENDRA PAL, C IT-DR ORDER PER N.K. BILLAIYA, ACCOUNTANT MEMBER, WITH THIS APPEAL, THE ASSESSEE HAS CHALLENGED THE C ORRECTNESS OF THE ORDER DATED 28.01.2016 FRAMED U/S 143(3) R.W.S 144C OF THE INCOME TAX ACT, 1961 [HEREINAFTER REFERRED TO AS 'T HE ACT' FOR SHORT]. 2 2. THE SUM AND SUBSTANCE OF THE GRIEVANCE OF THE AS SESSEE IS THAT THE AO/TPO/DRP ERRED IN MAKING AN UPWARD ADJUSTMENT OF RS. 1,79,11,717/- ON ACCOUNT OF PAYMENT FOR SUPPORT SER VICES. 3. REPRESENTATIVES OF BOTH THE SIDES WERE HEARD AT LENGTH, CASE RECORDS CAREFULLY PERUSED AND WITH THE ASSISTANCE O F THE LD. COUNSEL, WE HAVE CONSIDERED THE DOCUMENTARY EVIDENCES BROUGH T ON RECORD IN THE FORM OF PAPER BOOK IN LIGHT OF RULE 18(6) OF IT AT RULES AND HAVE ALSO PERUSED THE JUDICIAL DECISIONS RELIED UPON BY BOTH THE SIDES. 4. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT T HE APPELLANT- COMPANY IS A WHOLLY OWNED SUBSIDIARY OF BG ASIA PAC IFIC HOLDINGS PVT LIMITED. IT COMMENCED MIDSTREAM GAS MARKETING OPERA TIONS IN INDIA AFTER OBTAINING THE APPROVAL OF THE FOREIGN INVESTM ENT PROMOTION BOARD [FIPB] OF THE GOVERNMENT OF INDIA TO UNDERTAK E MARKETING AND DISTRIBUTION OF NATURAL GAS AS WELL AS LNG. 5. AS PER FORM 3CEB, THE APPELLANT HAS UNDERTAKEN T HE FOLLOWING INTERNATIONAL TRANSACTIONS: 3 NATURE OF TRANSACTION METHOD VALUE [RS.] PURCHASE OF LNG TNMM 3,29,29,42,698/ - RECEIPT OF SUPPORT SERVICES TNMM 1,79,11,717/ - REIMBURSEMENT OF EXPENSES NA 1,32,47,223/ - 6. THE QUARREL BEFORE US RELATES TO THE RECEIPT OF SUPPORT SERVICES VALUED AT RS. 1,79,11,717/- FOR WHICH THE APPELLANT HAS TAKEN TNM METHOD AS THE MOST APPROPRIATE METHOD. FACTS ON RE CORD SHOW THAT THE APPELLANT, BG INDIA ENERGY SOLUTIONS P. LTD [BG EPIL], SOUGHT ASSISTANCE OF ITS GROUP ENTITY IN INDIA, FOR MANAGI NG DAY-TO-DAY BUSINESS OPERATIONS. THE CONTENTION OF THE LD. COUNSEL FOR THE ASSESSEE IS THAT BGEPIL IS A COMPANY WITH EXPERTISE RELATED TO EXPLO RATION AND PRODUCTION ACTIVITIES IN THE OIL AND GAS SECTOR. BG EPIL POSSESSES A POOL OF HIGHLY KNOWLEDGEABLE, TECHNICALLY TRAINED AND EX PERIENCED INDIVIDUALS HAVING EXTENSIVE KNOWLEDGE OF THE EXPLO RATION AND PRODUCTION SECTOR. THIS POOL OF TRAINED AND EXPERIE NCED PERSONNEL HAS BEEN MADE AVAILABLE BY BGEPIL TO THE APPELLANT. 7. DURING THE COURSE OF TP ASSESSMENT PROCEEDINGS, SHOW CAUSE NOTICE WAS ISSUED TO THE ASSESSEE WHICH READS AS UN DER: 4 1. PLEASE FURNISH ALL THE AGREEMENTS ENTERED IN TO BY THE TAXPAYER COMPANY, RELATED TO THE INTRA GROUP SERVICES OBTAIN ED BY THE TAXPAYER COMPANY FROM THE AES DURING THE YEAR. 2. PLEASE IDENTIFY EACH OF THE SERVICES ACTUALLY RECE IVED BY THE TAXPAYER COMPANY. 3. PLEASE SPECIFY THE AMOUNT OF PAYMENT MADE FOR EACH OF SUCH SERVICES. 4. PLEASE SUBMIT THE CONTEMPORANEOUS DOCUMENTARY EVID ENCE TO SHOW THAT THESE SERVICES HAVE ACTUALLY BEEN RECEIVED BY THE TAXPAYER COMPANY. 5. PLEASE JUSTIFY THE NEED FOR THE RECEIPT OF SUCH SE RVICES FOR WHICH PAYMENT HAS BEEN MADE. 6. PLEASE STATE WITH DOCUMENTARY EVIDENCE AS TO WHEN AND HOW THESE SERVICES WERE REQUISITIONED FROM THE AES. 7. PLEASE STATE AS TO HOW THE RATE OR PAYMENT FOR IGS HAS BEEN DETERMINED AT THE TIME OF ENTERING IN TO THE AGREEM ENT? PLEASE ALSO FURNISH THE BASIS THEREOF. 8. PLEASE STATE AS TO WHETHER ANY COST BENEFIT ANALYS IS WAS DONE WHILE ENTERING INTO THE AGREEMENT AND WHILE REQUISI TIONING THE SERVICES FOR PAYMENT OF IGS? A. IF SO THE DETAILS OF SUCH COST BENEFIT ANALYSIS SH OULD BE FURNISHED. THE COST BENEFIT ANALYSIS SHOULD INCLUDE THE EXPECT ED BENEFIT FROM THE IGS VIS A VIS THE PAYMENT MADE FOR THE SAME. B. PLEASE SPECIFICALLY STATE AS TO WHETHER ANY BENCHM ARKING ANALYSIS WAS DONE AT THE TIME OF ENTERING INTO THE AGREEMENT SO AS TO COMPARE THE PAYMENT OF IGS TO THE AE VIS A VIS AN I NDEPENDENT PARTY UNDER SIMILAR CIRCUMSTANCES. IF SO, THE DETAI LS THEREOF. 5 9. PLEASE SHOW WITH EVIDENCE AS TO WHAT TANGIBLE AND DIRECT BENEFIT HAS BEEN DERIVED BY THE TAXPAYER COMPANY FROM THE U SE OF SUCH IGS. 10. WHETHER THE SERVICES AVAILED FROM AES, HAVE ALSO B EEN PERFORMED BY THE TAXPAYER COMPANY ITSELF OR ALSO AVAILED FROM INDEPENDENT PARTIES? IF YES, A. THE DETAILS OF SUCH EXPENDITURE FOR EACH OF THE SER VICES SHOULD BE FURNISHED. B. PLEASE STATE AS TO WHY A SEPARATE PAYMENT HAS BEEN MADE FOR SUCH SERVICES TO THE AE. 11. PLEASE FURNISH DETAILS AND DOCUMENTARY EVIDENCE OF COST INCURRED BY THE AE FOR RENDERING EACH TYPE OF SERVICES PURPO RTEDLY RECEIVED BY THE TAXPAYER COMPANY AND THE MARK UP AP PLIED', IF ANY BY THE AE. PLEASE ALSO STATE AS TO WHETHER THE COST INCURRED BY THE AE IS AUDITED. 12. WHETHER AE IS RENDERING SUCH SERVICES TO ANY OTHER AES/INDEPENDENT PARTIES ALSO. IF YES THE DETAILS TH EREOF INCLUDING THE RATES/AMOUNT CHARGED FROM SUCH AES ALONG WITH M ARK UP IF ANY. 13. IF THE AE HAS RENDERED SERVICES TO MORE THAN ONE E NTITY INCLUDING THE TAXPAYER COMPANY, THEN THE BASIS OF ALLOCATION AMONGST VARIOUS ENTITIES MAY BE FURNISHED. PLEASE ALSO FURNISH THE BASIS OF CHOOSING A PARTICULAR ALLOCATION KEY. 14. IF THE ABOVE INFORMATION IS NOT FURNISHED, COMPLET E IN ALL RESPECTS, ALONG WITH CONTEMPORANEOUS DOCUMENTARY EVIDENCES, T HE ARM'S LENGTH PAYMENT FOR THESE INTRA GROUP SERVICES WOULD BE TREATED AS NIL BY APPLYING CUP METHOD. 6 8. VIDE REPLY DATED 30.10.2014, THE ASSESSEE EXPLAI NED THE BACKGROUND OF INTRA-GROUP SERVICES PAID BY IT. IN SUPPORT, ALL THE AGREEMENTS ENTERED INTO BY THE ASSESSEE COMPANY REL ATED TO INTRA GROUP SERVICES OBTAINED BY IT FROM THE AES DURING T HE YEAR WERE FILED. THE ASSESSEE ALSO IDENTIFIED SERVICES ACTUALLY RECE IVED BY IT. 9. RELIANCE WAS PLACED ON SEVERAL JUDICIAL DECISION S. THE REPLY OF THE ASSESSEE WAS DULY CONSIDERED BY THE TPO BUT IT DID NOT FIND ANY FAVOUR WITH HIM WHO WAS OF THE OPINION THAT THE TPO IS EMP OWERED TO APPLY APPROPRIATE METHOD FOR EACH CLASS OF TRANSACTIONS. AS THESE SERVICES ARE A SEPARATE CLASS OF TRANSACTION, THE SAME IS TO BE ANALYSED SEPARATELY. 10. AS FAR AS THE ISSUE OF SERVICES THAT THE APPELL ANT HAS RECEIVED FROM RESPECTIVE AES IS CONCERNED, THE TPO ANALYSED THE NATURE OF SERVICES AS UNDER: NATURE OF SERVICES COMMENTS FINANCIAL & OTHER ADMINISTRATION SUPPORT SERVICES THE TAXPAYER HAS INCURRED THE FOLLOWING EXPENSES: LEGAL AND PROFESSIONAL CHARGES RS. 19581901 WHICH I NTER ALIA INCLUDES AUDITORS REMUNERATION OF RS. 910550 THE TAXPAYER HAS SUBMITTED FOLLOWING DOCUMENTS VIDE ITS SUBMISSION DATED 28.07.2014 AS PROOF OF RECEIPT OF THE AFORESA ID SERVICES. S.N PARTICULARS REFERENCE T FINANCIAL STATEMENTS APPENDIX 1 7 2 TAX AUDIT REPORT APPENDIX 2 3 INCOME TAX RETURN APPENDIX 3 4 AGREEMENTS ENTERED INTO DURING THE YEAR - FOR THE AFORESAID ANNEXURE 1 SERVICES 5 TIME SHEETS PREPARED IN RELATION TO THE EXECUTION O F THE AFORESAID SERVICES APPENDIX 4 6 CONFIRMATION MEMORANDUMS IN RELATION TO PURCHASE OF LNG APPENDIX 5 7 MINUTES OF BOARD MEETINGS HELD DURING THE YEAR APPENDIX 6 8 MINUTES OF GENERAL MEETINGS HELD DURING THE YEAR APPENDIX? 9 VAT RETURNS PERTAINING FY 2010 - 11 APPENDIX 8 1 SERVICE TAX RETURNS PERTAINING FY 2010 - 11 1 TDS RETURNS PERTAINING FY 2010 - 11 TO BE PROVIDED 1 EVIDENCE OF ANY OTHER STATUTORY COMPLIANCES FILED P ERTAINING FY 2010- 11 AT A LATER STAGE THE TAXPAYER HAS NOT BEEN ABLE TO ESTABLISH AS TO H OW THE AES ARE IN A BETTER POSITION TO ADVICE IT ON TAX, LEGAL AND FINANCIAL MATTERS IN INDIA. THE TAXPAYER IS OPERATING IN INDIA. IT IS NOT AT AL L LIKELY THAT THEY HAVE DEVELOPED SOME KNOWLEDGE ON THESE ISSUES WHICH THE TAXPAYER LACKS. HENCE, THERE IS NO PLAUSIBLE REASON FOR THE TAXPAYE R TO MAKE THIS PAYMENT. T HE TAXPAYER HAS NOT BEEN ABLE TO SUBSTANTIATE AS TO HOW THIS SERVICE WERE USEFUL TO IT. MOREOVER THESE SERV ICES SEEM TO BE OF A VERY GENERIC NATURE WITH THERE BEING NOTHING SO UNI QUE IN THESE SERVICES THAT THE TAXPAYER ITSELF MAY NOT BE ABLE T O ACHIEVE. EV ERY ORGANIZATION HAS ITS OWN PERFORMANCE MEASUREMENT, Q UALITY CONTROL AND TROUBLESHOOTING MECHANISMS IN PLACE. HENCE, IT IS NOT UNDERSTANDABLE AS TO WHY THE TAXPAYER RELYING ON IT S AES FOR ACCOMPLISHMENT OF SUCH ROUTINE TASKS. AGAIN, NO EVI DENCE WAS PUT FO RTH TO SHOW THAT THE AE HAD INDEED HELPED THE TAXPA YER IN IMPLEMENTATION OF PERFORMANCE APPRAISALS, PERFORMAN CE EVALUATION, HR POLICIES. THE TAXPAYER HAS NOT BEEN ABLE TO SHOW AS TO WHAT WERE THAT ACTUAL SERVICES THAT THE CORPORATE MANAGEMENT GROUP PROVIDE D IT AND HOW IT HAS HELPED THE IN STRATEGIC PLANNING AND DEVELOPMENT. THE TAXPAYER HAS ENTERED INTO AN AGREEMENT WITHOUT CARR YING OUT ANY COST BENEFIT ANALYSIS AND HAS SIMPLY MADE A PAYMENT BECA USE IT WAS ASKED TO DO SO. THIS DOES NOT CONSTITUTE ARM'S LENG TH BEHAVIOUR. THIS IS AN INTERNATIONAL STAND AS OBVIOUS FROM THE LANDMARK JU DGMENT OF HON'BLE US SUPREME COURT IN THE CASE OF COMMISSIONER VS TOW ER 327 US 280, 291 (1946], IT WAS OBSERVED THAT THE 'SIMPLE E XPEDIENT OF DRAWING UP PAPERS IS NOT CONTROLLING FOR TAX PURPOSES WHEN THE OBJECTIVE REALITIES ARE TO THE CONTRARY AND WHICH HAVE NO ECO NOMIC SIGNIFICANCE BEYOND TAX BENEFITS.' (ALSO FALSETTI VS. COMMISSION ER 85 T.C. 332,347 [1985]}. MOREOVER AS PER THE DESCRIPTION GIVEN OF THE AFORES AID SERVICES, THESE WERE MORE IN THE NATURE OF COMPLYING WITH THE OVERA LL GROUP METHOD AND PROCEDURES. THESE EXPENSES WERE BASICALLY INCUR RED BY THE TAXPAYER TO COMPLY WITH THE FORMAT OR RULES FORMULA TED FOR THE GROUP MEMBERS. THEY WERE IN THE NATURE OF SHARE HOLDER SE RVICES. IT CHARGE THE TAXPAYER HAS NOT BEEN ABLE TO SUBSTANTIATE AS T O HOW THIS SERVICE WERE USEFUL TO IT. MOREOVER, THE SERVICES SEEM TO B E OF A VERY GENERIC NATURE WITH THERE BEING NOTHING SO UNIQUE IN THESE SERVICES THAT THE TAXPAYER ITSELF MAY NOT HAVE BEEN ABLE TO PERFORM. EVERY ORGANIZATION HAS ITS OWN PERFORMANCE MEASUREMENT, QUALITY CONTRO L AND TROUBLESHOOTING MECHANISMS IN PLACE. MOREOVER AS PE R THE DESCRIPTION GIVEN OF THE AFORESAID SERVICES, THESE WERE MORE IN THE NATURE OF COMPLYING WITH THE OVERALL G ROUP METHOD AND PROCEDURES. THESE EXPENSES WERE BASICALLY 8 INCURRED BY THE TAXPAYER TO COMPLY WITH THE FORMAT OR RULES FORMULATED FOR THE GROUP MEMBERS. THEY WERE IN THE NATURE OF S HARE HOLDER SERVICES. THE TAXPAYER HAS ENTERED INTO AN AGREEMEN T WITHOUT CARRYING OUT ANY COST BENEFIT ANALYSIS AND HAS SIMPLY MADE A PAYMENT BECAUSE IT WAS ASKED TO DO SO. THIS DOES NOT CONSTITUTE ARM S LENGTH BEHAVIOUR. MOREOVER THE TAXPAYER HAS BEEN UNABLE TO SUBSTANTIA TE ACTUAL RECEIPT OF THESE SERVICES. COMMERCIAL AND OPERATIONAL SERVICES THE TAXPAYER HAS CLAIMED TO HAVE RECEIVED FOLLOWING SERVICES MARKETING SERVICES * NEGOTIATION OF CONTRACTS DETERMINATION OF PRICES * COORDINATION OF LOGISTICS OF THE PRODUCTS CREDIT AND COLLECTION MANAGEMENT 11. AFTER ANALYSING THESE SERVICES, THE TPO FURTHER OBSERVED THAT THERE IS NO EVIDENCE THAT THE SERVICES HAVE ACTUALL Y BEEN PROVIDED. THE ASSESSEE FAILED MISERABLY TO DEMONSTRATE THE NE ED FOR THESE SERVICES AND ALSO RECEIPT OF THE SAME. AFTER REFER RING TO OECD GUIDELINES AND SEVERAL JUDICIAL DECISIONS, THE TPO FINALLY CONCLUDED THAT THE ASSESSEE HAD MADE PAYMENT OF RS. 179,11,7 17/- TO ITS AE FOR INTRA GROUP SERVICES PERTAINING TO MANAGEMENT SUPPO RT SERVICES WHICH ARE NOT FOUND TO EXIST FULLY AND ACCORDINGLY, MADE AN UPWARD ADJUSTMENT OF RS. 1,79,11,717/-. 12. OBJECTIONS WERE RAISED BEFORE THE DRP BUT WERE OF NO AVAIL. 9 13. BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE REI TERATED WHAT HAS BEEN STATED BEFORE THE LOWER AUTHORITIES. IT IS TH E SAY OF THE LD. COUNSEL FOR THE ASSESSEE THAT THE ASSESSEE AVAILED CERTAIN SUPPORT SERVICES FROM BGEPIL WHICH INCLUDED ASSISTANCE IN P ROCURING AND SELLING LNG, OBTAINING INFORMATION CONCERNING INDUSTRIAL AN D COMMERCIAL MATTERS, SERVICES RELATED TO PROMOTION, MARKETING A ND SALE OF LNG, AND INCIDENTAL SUPPORT SERVICES LIKE FINANCIAL REPO RTING, ASSISTANCE ON INTERNATIONAL AND LOCAL TAXATION ISSUES, INSURANCE RELATED ASSISTANCE, BUDGETING SERVICES, LEGAL SERVICES, ETC WHERE ALLOC ATION OF ACTUAL COST INCURRED BY BGEPIL CHARGED WITH A MARK-UP OF 12 PER CENT. 14. THE LD. COUNSEL FOR THE ASSESSEE VEHEMENTLY STA TED THAT THE ASSESSEE HAS A VERY SMALL SET-UP AND HAS NO EMPLOYE ES ON ITS PAYROLL AND WAS FULLY DEPENDENT ON THE EMPLOYEES OF BGEPIL FOR SUPPORT SERVICES AND BECAUSE OF SUCH SUPPORT, THE ASSESSEE COULD RECORD SALES OF RS. 917 CRORES. 15. FURTHER, THE LD. COUNSEL FOR THE ASSESSEE POINT ED OUT THAT THE RECOVERY OF PAYMENTS FROM THE ASSESSEE HAVE BEEN CO NSIDERED BY BGEPIL AS INCOME IN ITS BOOKS OF ACCOUNTS AND THE S AME WAS DULY OFFERED TO TAX IN INDIA AT THE TAX RATE APPLICABLE TO FOREIGN COMPANIES, 10 I.E, 40% PLUS SURCHARGE AND THE SAME HAS BEEN ACCEP TED BY THE TPO IN THE CASE OF BGEPIL. 16. THE LD. COUNSEL FOR THE ASSESSEE CONCLUDED BY S AYING THAT THE ENTIRE UPWARD ADJUSTMENT DESERVES TO BE DELETED. 17. PER CONTRA, THE LD. DR STRONGLY SUPPORTED THE F INDINGS OF THE TPO AND READ THE RELEVANT PORTION OF THE TPOS ORDER. 18. WE HAVE GIVEN THOUGHTFUL CONSIDERATION TO THE O RDERS OF THE AUTHORITIES BELOW. A PERUSAL OF THE PROFIT AND LOS S ACCOUNT OF THE APPELLANT COMPANY, WHICH IS PLACED AT PAGE 105 OF T HE PAPER BOOK SHOWS THAT THE ASSESSEE HAS NOT INCURRED A SINGLE R UPEE ON EMPLOYEE COST. EVEN IN THE NOTES OF ACCOUNTS, AT CLAUSE 10, IT IS MENTIONED THAT NO PROVISION FOR RETIREMENT BENEFITS HAS BEEN MADE IN THESE FINANCIAL STATEMENTS AS THERE WERE NO EMPLOYEES ON THE PAYROL L OF THE COMPANY DURING THE YEAR. THESE FACTS CLEARLY SHOW THAT THE ASSESSEE WAS TOTALLY DEPENDENT ON THE AE FOR RUNNING ITS BUSINESS. BUT F OR THE SUPPORT AND SERVICES PROVIDED BY THE AE, THE ASSESSEE COULD NOT HAVE BOOKED TURNOVER OF RS. 917 CRORES. 11 19. WE HAVE ALSO CAREFULLY PERUSED THE TIME SHEETS OF THE EMPLOYEES OF BGEPIL WHICH ARE PLACED AT PAGES 139 TO 141 OF T HE PAPER BOOK AND WHICH ARE ALSO EXHIBITED HEREINBELOW: SKF FOR PREC UTBA J2XBILLINI2$ ,CC C.C/IO FAHPCLL SUM OF ADI IROSS HOURS SUM OF GROSS TT BGTO LOGRADUATETRALNE E 215 48 2702282 2702323 2702322 BREG O BO REGULATIONS 212 27 21924 21925 BO SO S700039 . - F - 0160 - BD - DP - PD01 - 0001 80 50 BHSSE O 80 HSSE 212 25 21924 480 25 2192S 240 13 21628 1,200 63 1505742 2702282 S709041 - 6DAG MO BO