BG International Ltd., Dehradun V. ADIT (International Taxation), Dehradun

ITA 171/DEL/2012

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 87121 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 2 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-03-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Assessment Year: 2007-2008
• Appeal Filed On: 11-01-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SANJEEV SHARMA
• Keywords: Business income; Depreciation; Transfer pricing; Business expenditure; Double taxation relief; Opportunity of being heard; Principle of natural justice; International transaction; Rule of consistency; Permanent establishment; Wholly owned subsidiary
• Section: 92A; 133A; 234B; 37(1); 32; 27

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH A NEW DELHI BEFORE SHRI S.V. MEHROTRA : ACCOUNTANT MEMBER AND SHRI C.M. GARG : JUDICIAL MEMBER ITA NO. 171/DEL/2012 A.Y. 2007-08 BG INTERNATIONAL LTD., VS. ADIT (INTERNATIONAL TAX ATION), C/O NANGIA & CO. DEHRADUN 75/7, RAJPUR ROAD, DEHRADUN. PAN: AACCB 6571 E ( APPELLANT ) ( RESPONDENT ) APPELLANT BY : SHRI AJAY VOHRA SR. ADV. SHRI ANSHUL SACHAN SHRI RAHUL YADAV CA RESPONDENT BY : SHRI SANJEEV SHARMA CIT(DR) DATE OF HEARING : 19-02-2015 DATE OF ORDER : 18-03-2015. O R D E R PER S.V. MEHROTRA, A.M:- THIS APPEAL, PREFERRED BY THE ASSESSEE, IS DIRECTE D AGAINST THE ASSESSMENT ORDER DATED 30-11-2011, FRAMED BY THE A O PURSUANT TO DRP DIRECTIONS U/S 144C, PERTAINING TO ASSESSMENT YEAR 2007-08. 2. THE ASSESSEE IS A NON-RESIDENT COMPANY AND IS AE OF M/S BGEPIL. IT HAD FILED ITS RETURN OF INCOME DECLARING INCOME OF RS. 1,59,520/-, CLAIMING REFUND OF RS. 6,12,08,565/-. WHILE PASSING THE DRAF T ASSESSMENT ORDER, THE 2 ITA NO. 171/DEL/2012 B.G. INTERNATIONAL LTD. AO NOTICED THAT ASSESSEE HAD RECEIVED PAYMENTS FRO M BGEPIL UNDER THE FOLLOWING HEADS: - PAYROLL EXPENSES - MANAGEMENT SERVICE UNIT CHARGES - GENERAL AND ADMINISTRATIVE EXPENSES - REIMBURSEMENT OF EXPENSES 2.1. THE AO OBSERVED THAT THESE PAYMENTS HAD NOT BE EN REFLECTED BY ASSESSEE IN ITS RETURN OF INCOME. HE FURTHER OBSERV ED THAT ASSESSEE HAD NEITHER MAINTAINED ANY BOOKS OF A/C., NOR GOT ITS A CCOUNTS AUDITED AS PER PROVISIONS OF SECTION 44AB OF THE I.T. ACT. THE ASS ESSEE WAS CONFRONTED WITH THE FACT THAT BGEPIL HAD CLAIMED ABOVE EXPENSE S IN THEIR P&L A/C, BUT THE ASSESSEE HAD NOT SHOWN THE CORRESPONDING IN COME. THE ASSESSEE TOOK THE PLEA THAT THEY WERE REIMBURSEMENTS. THE AO DID NOT ACCEPT THE ASSESSEES CONTENTION, INTER ALIA, OBSERVING THAT T HE 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 CORRESPOND ING EXPENSES MADE WITH DETAILS OF PARTIES TO WHOM PAYMENT WAS MADE. THE AO FURTHER OBSERVED THAT DURING THE ASSESSMENT OF BGEPIL IT CA ME 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 REN DERED BY THE ASSESSSEE, THE 3 ITA NO. 171/DEL/2012 B.G. INTERNATIONAL LTD. ENTIRE RECEIPT WAS INCOME IN THE HANDS OF THE ASSES SEE. AO FURTHER OBSERVED THAT DURING THE SURVEY OPERATION ON THE PREMISES OF THE ASSESSSEE AND BGEPIL IT WAS NOTICED THAT NO REQUISITIONING OF SER VICES WAS MADE BY BGEPIL TO THE ASSESSEE AND NO EVIDENCE WAS FURNISHE D TO ESTABLISH WHETHER ANY SERVICE WAS ACTUALLY RENDERED OR NOT. 2.2. WHEN SHOW CAUSED, THE ASSESSEE REITERATED ITS SUBMISSIONS THAT THE TRANSACTION BETWEEN THE ASSESSEE AND BGEPIL WAS IN THE NATURE OF REIMBURSEMENT OF ACTUAL COST AND DEVOID OF ANY ELEM ENT OF PROFIT. THE AO POINTED OUT THAT ASSESSEE IN ITS REPLY GAVE THE FOL LOWING COMPUTATION OF INCOME: INCOME FROM BUSINESS : RS. 972898465/- LESS: BUSINESS EXPENDITURE, REIMBURSEMENT EXPENDITURE ON COST OF COST BASIS : RS. 972898465 /- NET BUSINESS INCOME CHARGEABLE TO TAX: NIL 2.3. HE, THEREFORE, POINTED OUT THAT ASSESSEE ALSO ACCEPTED THAT THE RECEIPTS OF RS. 97,28,98,465/- WERE IN THE NATURE OF INCOME. HOWEVER, THE ENTIRE AMOUNT WAS CLAIMED AS EXPENDITURE WITHOUT PRODUCING NECESSARY EVIDENCE. THE ASSESSEES REPLY HAS BEEN REPRODUCED ON PAGE 3, WHICH WAS AS UNDER: MANAGEMENT SERVICE AND UNIT CHARGES THE ASSESSEE HAS SUBMITTED THE NATURE OF SERVICES R ENDERED MSU CHARGES CONSIST OF THE FOLLOWING COSTS RECHARGE D BY BGIL. 4 ITA NO. 171/DEL/2012 B.G. INTERNATIONAL LTD. TIME WRITING CHARGES - BGIL HAS RECHARGED THE COS T OF TIME SPENT BY ITS PERSONNEL BASED OVERSEAS FOR T HE ASSESSEE'S OPERATIONS IN INDIA. ALLOCATION OF ADMINISTRATIVE COSTS INCURRED BY BGIL : BGIL HAS RECHARGED CERTAIN ADMINISTRATIVE COSTS INCURRED OUT SIDE INDIA AND ALLOCATED TO THE ASSESSEE'S OPERATIONS IN INDIA . THESE COSTS HAVE BEEN ALLOCATED ON THE BASIS OF COST ALLOCATION AND TIME WRITING POLICY 2006. FURTHER, THE BASIS OF ALLOCATI ON OF THE AFORESAID COSTS HAS BEEN VERIFIED BY M/S. PRICE WAT ER HOUSE COOPERS AND THEY HAVE, VIDE THEIR REPORT DATED 20 N OVEMBER 2007 CERTIFIED THAT THE ALLOCATIONS MADE BY BGIL CO NFIRM TO THE AFORESAID POLICY. THE SAID REPORT ALONG WITH THE CO ST ALLOCATION AND TIME WRITING POLICY OF BGIL ARE ENCLOSED AS ANN EXURE 12. THE SAID COST ALLOCATIONS HAVE ALSO BEEN VERIFIED B Y M/S. LANCASTER MACLEAN, AN INDEPENDENT CONSULTANT APPOIN TED BY THE ASSESSEE. THE SAID CONSULTANTS HAVE ALSO ARRIVED AT THE SAME CONCLUSION VIDE THEIR REPORT DATED 30 OCTOBER 2007 ENCLOSED AS ANNEXRUE 13. FURTHER, THE ACCOUNTING MANUAL OF THE ASSESSEE WHEREIN THE ALLOCATION METHODS HAVE BEEN SPECIFIED IN DETAIL, IS ENCLOSED AS ANNEXURE -14. EVIDENCE OF SERVICES REND ER: COPIES OF DEBIT NOTES RAISED BY BGIL ON THE ASSESSEE IN RE SPECT OF THE MSU EXPENSES ON A SAMPLE BASIS {HAVE ALREADY BEEN E NCLOSED AS ANNEXURE TO THESE WRITTEN SUBMISSIONS. THE SAID DEBIT NOTES ARE SUPPORTED BY APPROPRIATE EVIDENCE OF SERVICES R ENDERED 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 REIMBUR SEMENT OF TRAVEL COST INCURRED BY THE SENIOR MANAGEMENT OF BG IL 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 AN NEXURE TO SUBMISSIONS. THE SAID DEBIT NOTES ARE SUPPORTED BY APPROPRIATE 5 ITA NO. 171/DEL/2012 B.G. INTERNATIONAL LTD. EVIDENCE OF SERVICES RENDERED BY BGIL. THE BALANCE DEBIT NOTES MAY ALSO BE FURNISHED BEFORE YOUR GOODSELF IF SO DE SIRED. GENERAL AND ADMINISTRATIVE EXPENSES NATURE OF EXPENSES: THE ASSESSEE HAS RECEIVED CERTA IN CHARGES (BASED ON ALLOCATION OF ACTUAL COSTS INCURRED) FROM ITS ASSOCIATED ENTERPRISES IN THE NATURE OF GENERAL ADMINISTRATION AND GEOLOGICAL AND GEOPHYSICAL EXPENSES THAT ARE PAID B Y THE ASSESSEE. APART FROM THE ABOVE, THESE EXPENSES ALSO INCLUDE EXPENSES INCURRED BY THIRD PARTIES IN RESPECT OF VA RIOUS SERVICES. FURTHER, THE BASIS OF ALLOCATION OF THE AFORESAID C OSTS HAS BEEN VERIFIED BY M/S. PRICE WATERHOUSE COOPERS AND THEY HAVE, VIDE THEIR REPORT DATED 20 NOVEMBER 2007 CERTIFIED THAT THE ALLOCATIONS MADE BY BGIL CONFIRM TO THE AFORESAID P OLICY. THE SAID REPORT ALONG WITH THE COST ALLOCATION AND TIME WRITING POLICY OF BGIL ARE ENCLOSED AS ANNEXURE 12 ABOVE. T HE SAID COST ALLOCATIONS HAVE A/SO BEEN VERIFIED BY M/S. LA NCASTER MACLEAN, AN INDEPENDENT CONSULTANT APPOINTED BY THE ASSESSEE. THE SAID CONSULTANTS HAVE ALSO ARRIVED AT THE SAME CONCLUSION VIDE THEIR REPORT DATED 30 OCTOBER 2007 ENCLOSED AS ANNEXURE 13. FURTHER, THE ACCOUNTING MANUAL OF THE ASSESSEE WHEREIN THE ALLOCATION METHODS HAVE BEEN SPECIFIED IN DETAIL IS ENCLOSED AS ANNEXURE 14. EVIDENCE OF SERVICES RENDERED: COPIES OF DEBIT NOTE S RAISED B BGIL HAVE ALREADY BEEN ENCLOSED AS ANNEXURE TO THES E WRITTEN SUBMISSIONS. THE SAID DEBIT NOTES ARE SUPPORTED BY APPROPRIATE EVIDENCE OF SERVICES RENDERED BY BGIL. THE BALANCE DEBIT NOTES MAY ALSO BE FURNISHED BETA YOUR GOODSELF IF SO DESI RED. THE ASSESSEE HAS RECEIVED REIMBURSEMENT ON ACCOUNT OF MANAGEMENT SERVICE UNIT CHARGES, GENERAL & ADMINIST RATIVE EXPENSES ON THE BASIS OF ACTUAL EXPENDITURE INCURRE D BY IT. WE ARE ENCLOSING HEREWITH FOR TWO MONTHS OF THE PRE VIOUS YEAR 2007-08, THE COPIES OF DEBIT NOTES RAISED BY THE AS SESSEE ON BGEPIL. THESE DEBIT NOTES, ALONG WITH THEIR SUPPORT ING DOCUMENTATION CLEARLY PROVE THE FACT THAT THE DEBIT NOTES WERE RAISED ON COST-TO-COST BASIS WITHOUT ANY ELEMENT OF PROFIT. 6 ITA NO. 171/DEL/2012 B.G. INTERNATIONAL LTD. FURTHERMORE, THE DEBIT NOTES ALSO GO ON TO PROVE TH AT THE SERVICES WERE ACTUALLY PROVIDED BY THE ASSESSEE TO BG EXPLORATION & PRODUCTION INDIA LTD. 2.4. THE AO, BEING NOT SATISFIED WITH THE ABOVE REP LY, AGAIN ISSUED FOLLOWING QUESTIONNAIRE: PLEASE REFER TO THE ASSESSMENT PROCEEDING FOR ASSE SSMENT YEAR 2007-08. YOU ARE REQUESTED TO FURNISH THE FOLLOWING INFORMATION: 1. KINDLY REFER TO THE NOTICE DATED 03-12-2010 AND YOUR SUBSEQUENT REPLY. YOU HAVE STILL NOT FURNISHED THE COMPLETE REPLY TO THE NOTICE. PLEASE NOTE THAT IN CASE NO DO CUMENTARY EVIDENCE IS SUBMITTED TO SUBSTANTIATE YOUR CLAIM OF REIMBURSEMENT, YOUR TOTAL RECEIPT FROM BGEIPL 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 H OW THE EXPENSES OTHER THAN REIMBURSEMENT OF EXPENSES ARE A LSO 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 F ROM YOU WITH DOCUMENTARY EVIDENCE, THE DATE OF APPOINTMENT WITH YOU AND SUBSEQUENTLY, AFTER THE TENURE WAS OVER IN INDI A AND WHERE 7 ITA NO. 171/DEL/2012 B.G. INTERNATIONAL LTD. WAS THE EMPLOYEE TRANSFERRED. THE DETAILS OF PAYMEN T RECEIVED BY YOU EMPLOYEE WISE FROM BGEIPL AND SUBSEQUENT PAY MENT BY YOU TO THE EMPLOYEES WITH EVIDENCE OF PAYMENT FR OM YOUR BANK ACCOUNT TO SUBSTANTIATE YOUR CLAIM OF SO CALLE D COST TO COST REIMBURSEMENT. PLEASE NOTE THAT IN ABSENCE OF EVIDE NCE OF CORRESPONDING PAYMENT BY YOU TO THE EMPLOYEE YOUR C LAIM OF REIMBURSEMENT WILL NOT BE ACCEPTED. 4. PLEASE EXPLAIN WHY YOU ARE NOT REQUIRED TO MAINT AIN BOOKS OF ACCOUNT AND UNDER WHICH PROVISIONS OF JAW YOU ARE EXEMPT FROM THE SAME. PLEASE NOTE THAT EVEN IF YOU ARE NOT MAKING ANY PROFIT, YOU ARE REQUIRED TO MAINTAIN INC OME AND EXPENDITURE ACCOUNT AND GET IT AUDITED AS PER THE P ROVISIONS OF INCOME-TAX ACT, 1961. YOU HAVE NOT DONE THE SAME. T HEREFORE, YOUR CLAIM OF REIMBURSEMENT IS NOT SUBSTANTIATED WI TH ANY EVIDENCE. THE DEBIT NOTES ARE ONLY YOUR CLAIM TO BG EIPL AND NOT AN EVIDENCE OF REIMBURSEMENT. IN ORDER TO ESTAB LISH REIMBURSEMENT, YOU HAVE TO FURNISH THE FOLLOWING IN FORMATION IN THE FOLLOWING PROFORMA: PLEASE NOTE THAT YOU HAVE TO SUBSTANTIATE THE ABOVE FROM YOUR BANK ACCOUNT. 5. REGARDING MANAGEMENT SERVICE UNIT CHARGES AND GE NERAL AND ADMINISTRATIVE CHARGES, YOU HAVE TO SUBSTANTIAT E THE NATURE OF SERVICES RENDERED, THE LOCATION OF SERVICES REND ERED, THE DATE OF ACQUISITION OF SUCH SERVICES BY BGEIPL, DETAILS WHERE THE SERVICES WERE UTILIZED BY BGEIPL IN INDIA, DATE OF PAYMENT BY BGEIPL TO YOU AND CORRESPONDING PAYMENT BY YOU TO V ARIOUS EMPLOYEES. THE ABOVE INFORMATION IS ALSO TO BE FURN ISHED IN THE PROFORMA MENTIONED ABOVE. PLEASE NOTE THAT THE DEBI T NOTE SUBMITTED BY YOU ARE NO EVIDENCE. 6. PLEASE NOTE THAT DURING THE SURVEY OPERATION IN THE CASE OF BGEIPL, NO DOCUMENT WAS PRODUCED TO SUBSTANTIATE RE NDERING OF ANY SERVICES BY YOU TO BGEIPL AND ALSO NO REQUIS ITION WAS MADE BY BGEIPL FOR AVAILING THOSE SERVICES FROM YOU . IN THE LIGHT OF THESE FACTS, YOU ARE ASKED TO SHOW CAUSE W HY YOUR TOTAL RECEIPT BE NOT TAXED AS INCOME WITHOUT ALLOWING A NY EXPENSES 8 ITA NO. 171/DEL/2012 B.G. INTERNATIONAL LTD. AS YOU HAVE NOT INCURRED ANY EXPENSE TO EARN THE AB OVE-SAID INCOME. 7. PLEASE EXPLAIN THE TERM PARENT OVER HEAD. 8. PLEASE EXPLAIN THE GENERAL AND ADMINISTRATIVE EX PENSES RECEIVED BY YOU FROM BGEIPL AND THE BASIS OF SUCH C HARGES. PLEASE PROVE THE NATURE OF THE ABOVE AS REIMBURSEME NT WITH SUPPORTING DOCUMENT AND THE EVIDENCE OF RENDERING O F SERVICES BY YOU WITH THE LOCATION OF SERVICES RENDERED, THE NATURE OF SERVICES RENDERED, THE UTILITY OF SUCH SERVICES FOR BGEIPL AND SUBSEQUENT EXPENSE TO RENDER THE SERVICES WITH EVID ENCE FROM YOUR BANK ACCOUNT. 9. WHAT IS THE DIFFERENCE BETWEEN AL/ THE THREE AGR EEMENT SIGNED IN INDIA ON 15.02.2002. AS PER THE SERVICE A GREEMENT FOR DIRECT CHARGES OR OPERATING CHARGES, YOU HAVE AGREE D TO PROVIDE CERTAIN STAFF, SUPPORT AND PERSONNEL SERVICES. PLEA SE NAME THE STAFF MEMBER WHO WERE PROVIDED TO RENDER THE SERVIC ES, THE NATURE OF SERVICES RENDERED, THE LOCATION OF SERVIC ES RENDERED AND THE AMOUNT PAID TO SUCH STAFF MEMBERS BY YOU. A S PER EXHIBIT A TO THE AGREEMENT, YOU WERE SUPPOSED TO RE NDER VARIOUS SERVICES TO BGEIPL WHICH YOU HAVE NOT REND ERED AS EVIDENCED DURING THE SURVEY OPERATION. PLEASE EXPLA IN 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. P LEASE EXPLAIN THE BASIS OF COMPUTATION OF GENERAL AND ADMINISTRAT IVE EXPENSE RECEIVED BY YOU FROM BGEIPL AND CORRESPONDING PAYME NT TO VARIOUS PARTIES TO SUBSTANTIATE YOUR CLAIM OF REIMB URSEMENT. PLEASE FURTHER EXPLAIN WHAT ARE THE SERVICES RENDER ED BY YOU UNDER GENERAL AND ADMINISTRATIVE HEAD TO BGEIPL. IT IS ONCE AGAIN CLARIFIED THAT MERE SUBMISSION OF .INVOICES I S NOT AN EVIDENCE TO SUBSTANTIATE YOUR CLAIM OF REIMBURSEMEN T. ' 9 ITA NO. 171/DEL/2012 B.G. INTERNATIONAL LTD. 2.5. THE AO OBSERVED THAT ASSESSEERS CLAIM COULD N OT BE ALLOWED FOR THE FOLLOWING REASONS: (A) THE ASSESSEE FAILED TO FURNISH ANY WORTHWHILE EVIDE NCE TO SUBSTANTIATE ITS OF EXPENSES. (B) THE ACCOUNTS WERE NOT AUDITED. (C) THERE WAS NO EVIDENCE OF ACTUAL RENDERING OF SERVI CE. (D) THE ALLOCATION OF EXPENSES HAD NOT BEEN SUBSTANTIAT ED TO BE DIRECTLY LINKED TO THE BUSINESS OPERATIONS OF AN A E. (E) NO EVIDENCE OF PAYMENT FROM THE BANK A/C OF THE ASS ESSEE WAS SUBMITTED BY THE ASSESSEE. (F) THE ONLY EVIDENCE WAS IN THE FORM OF DEBIT NOTES RA ISED ON BGEIPL BY ASSESSEE. THE AO OBSERVED THAT THESE DEBI T NOTES WERE RELATED TO REVENUE EARNED BY THE ASSESSEE. HOW EVER, NEITHER T HERE WAS ANY EVIDENCE OF ACTUAL SERVICES RENDERED NOR ANY EVIDENCE THAT ACTUAL PAYMENT WAS MADE BY THE AS SESSEE TO THIRD PARTIES. (G) DURING THE SURVEY OPERATION, THE PRINCIPAL OFFICE O F THE ASSESSEE COULD NOT GIVE INDIVIDUAL NAME AND COULD NOT PROVID E DOCUMENT FROM BGEIPL TO SHOW ITS REQUISITIONING OF SPECIALIZ ED SERVICE FROM THE ASSESSEE. (H) THE ASSESSEE DID NOT GIVE ANY EXPLANATION AS TO HOW BGEIPL WAS CHARGING THE AMOUNT OF ACCRUAL OVER HEAD TO T HE ASSESSEE AS BGEIPL WAS SUPPOSED TO CHARGE THIS TO ITS PARENT AND NOT THE ASSESSEE. HE ACCORDINGLY COMPUTED THE ASSESSEES IN COME AT RS. 97,28,98,465/-. 2.6. WITHOUT PREJUDICE TO ABOVE COMPUTATION HE FURT HER POINTED OUT THAT THE INCOME OF THE ASSESSEE WAS ALSO TAXABLE UNDER T HE HEAD FEES FOR TECHNICAL SERVICES, IF IT WAS ACCEPTED THAT THE SE RVICES WERE ACTUALLY RENDERED. HE POINTED OUT THAT THE PROVISIONS OF PER SONNEL BY AN ENTITY IS 10 ITA NO. 171/DEL/2012 B.G. INTERNATIONAL LTD. COVERED UNDER FEES FOR TECHNICAL SERVICES IN VIEW OF THE DECISION OF HONBLE UTTRAKHAND HIGH COURT IN THE CASE OF CIT & ANOTHER VS. ENRON OIL AND GAS INDIA LTD. 305 ITR 68. THE OTHER SERVICES W ERE ALSO COVERED UNDER THE HEAD FEES FOR TECHNICAL SERVICES AND TAXABLE U NDER ARTICLE 9(1)(VII) OF THE I.T. ACT. THE AO, AFTER CONSIDERING ARTICLE 13 OF INDO UK DTAA, POINTED OUT THAT SINCE ASSESSEE WAS HAVING A FIXED PE IN INDIA THE FEE FOR TECHNICAL SERVICES WAS TO BE COMPUTED AS PER ARTICL E 7 OF DTAA. AS PER WHICH THE ASSESSEES INCOME WAS TAXABLE AS PER THE PROVISIONS OF INDIAN INCOME TAX ACT AND SINCE ASSESSEE HAD NOT PRODUCED ANY EVIDENCE OF RENDERING OF ANY SERVICES OR ANY EVIDENCE OF ACTUAL EXPENDITURE INCURRED NO DEDUCTION COULD BE ALLOWED. ACCORDINGLY, HE COMPUTE D THE INCOME OF RS. 97,28,98,465/-. 2.7. AGAINST THE DRAFT ASSESSMENT ORDER THE ASSESSE E FILED OBJECTIONS BEFORE LD. DRP. 2.8. LD. DRP, AFTER CONSIDERING THE ASSESSEES SUBM ISSIONS, INTER ALIA, HELD AS UNDER: (A) THE ASSESSEE HAS NOT BEEN ABLE TO PRODUCE, EITHER B EFORE THE AO OR BEFORE THE DRP ANY CONVINCING EVIDENCE (EXCEP T FOR THE PAYROLL SERVICES TO A LIMITED EXTENT), ABOUT AC TUAL RENDERING OF THESE SERVICES. (B) THE EVIDENCE THAT THE ASSESSEE REFERRED IN ITS SUBM ISSIONS QUA SERVICE AGREEMENT BETWEEN THE ASSESSEE AND BGEP IL, LIST OF EMPLOYEES OF THE ASSESSEE DEPUTED TO INDIA, COPIES OF 11 ITA NO. 171/DEL/2012 B.G. INTERNATIONAL LTD. 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 D ID NOT GIVE ANY OTHER EVIDENCE ABOUT THE NATURE OF SERVICE S RENDERED, PERSONS OR PARTIES WHO RENDERED THE SERVI CES, HOW AND FROM WHICH SOURCE AND WHEN THE SETTLEMENTS WERE MADE FOR THE CONSIDERATION FOR THESE SERVICES. (D) CONSIDERING THE DETAILED CONSIDERATION OF THE SERV ICES INVOLVED, WHICH WAS ABOUT RS. 80 CRORES, THE EVIDEN CE THAT THE ASSESSEE WAS ABLE TO PRODUCE, WAS ABSOLUTELY INSUFFICIENT. (E) THE ASSESSEE FAILED TO KEEP BOOKS OF A/C AND GOT TH EM AUDITED AS PER THE REQUIREMENT OF SECTION 44AB. 2.9. FURTHER, THE ASSESSEES CONTENTION BEFORE LD. DRP WAS THAT THE MANNER OF ACCOUNT FOLLOWED BY IT WAS BASED ON A CON DITION IN THE PRODUCTION SHARING CONTRACT SIGNED BY BGEPIL, ONGC AND RELIANCE CORPORATION WITH THE GOVT. OF INDIA, UNDER WHICH TH E PARTNERS OF THE CONTRACT CANNOT FARM OUT SERVICES TO AN AFFILIATE ON A PROFIT MAKING BASIS. 2.10. LD. DRP, INTER ALIA, OBSERVED ON THIS COUNT A S UNDER: (A) IF ANY MINISTRY OR DEPARTMENT OF GOVERNMENT OF INDI A INTRODUCES ANY SCHEME FOR PROMOTION OF INDUSTRY, BU SINESS, TRADE OR FOR ANY OTHER DEVELOPMENT ACTIVITY IN ANY FIELD AND ANY INCENTIVE IS PROVIDED IN RESPECT OF INCOME GENERATE D UNDER SUCH SCHEME, THE PROVISIONS OF THE INCOME TAX ACT APPLY UNLESS A 12 ITA NO. 171/DEL/2012 B.G. INTERNATIONAL LTD. SPECIFIC PROVISION IS MADE IN THE ACT BY WAY OF AN AMENDMENT TO PROVIDE A SPECIFIC EXEMPTION UNDER THE ACT FOR S UCH INCOME. (B) ANY CONDITION LAID DOWN IN THE PRODUCTION SHARING C ONTRACT (PSC), WHICH IS AN ADMINISTRATIVE AGREEMENT, FOR TH E DEVELOPMENT OF OIL FIELDS, CANNOT OVERRIDE THE PROV ISIONS OF A CENTRAL ACT ENACTED BY THE CENTRAL GOVERNMENT SUCH AS INCOME TAX ACT. 2.11. SINCE THE ASSESSEE HAD NOT GIVEN COMPLETE TEX T OF THE PSC, LD. DRP CONSIDERED THE MODEL PRODUCTION SHARING CONTRACT, A S THE TERMS WERE ALMOST IDENTICAL. 2.12. AFTER EXAMINING THE CONTENTS OF MODEL AGREEM ENT, WHICH ARE REPRODUCED FROM PAGE 6 TO 8 OF ITS ORDER, LD. DRP O BSERVED AS UNDER: A PERUSAL OF THE ABOVE PROVISIONS SHOWS THAT THIS IS A CODE OF CONDUCT THAT GOVERNS THE MEMBERS OF THE PSC. THE BA SIC INTENTION OF THE ABOVE PROVISION IS THAT THE MEMBER S OF THE PSC WILL CHARGE FAIR AND REASONABLE PRICE FOR THEIR SHA RE OF ACTIVITY CARRIED OUT FOR THE EXPLORATION/EXTRACTION/PRODUCTI ON OF OIL AND GAS. IT IS IN THAT SPIRIT THAT FURTHER CONDITIONS H AVE BEEN LAID DOWN FOR SERVICES AVAILED BY THE MEMBER OF PSC FROM AN AFFILIATE. WHAT IS LAID DOWN IS THAT THE SERVICES F ROM AN AFFILIATE WILL BE AT AN ARM'S LENGTH BASIS. IT DOES NOT MEAN THAT THE CHARGE MADE BY THE AFFILIATE TO THE PARTNER OF A PSC IS ON A COST TO COST BASIS: WHAT IS INTENDED IS THAT THE AFFILIATE WILL NOT CHARGE A PRICE WHICH IS HIGHER THAN CHARGES TO A THIRD PARTY IN THE SIMILAR CIRCUMSTANCES. THERE IS NOTHING IN THE ABOVE PROVIS ION WHICH LAYS DOWN ANY RESTRICTION ON AN AFFILIATE OTHER TH AN THAT OF CHARGING AN ARM'S LENGTH PRICE. THE ABOVE PROVISION S THEREFORE HAVE NO BEARING ON HE WAY THE AFFILIATE IS TO COND UCT ITS BUSINESS. IT CERTAINLY DOES NOT ABSOLVE THE ASSESSE E FROM THE REQUIREMENTS OF MAINTAINING ITS BOOKS OF ACCOUNTS A ND GETTING THEM AUDITED AS REQUIRED U/S 44AS OF THE I.T ACT. A S MENTIONED 13 ITA NO. 171/DEL/2012 B.G. INTERNATIONAL LTD. EARLIER SUCH A CONDITION CANNOT BE MADE BY ANY DEPA RTMENT OF GOVERNMENT OF INDIA EXCEPT WITH AN EXPRESS AMENDMEN T IN THE INCOME TAX ACT. THIS IS SUPPORTED BY ARTICLE 17 OF THE MODEL CONTRACT DEALING WITH 'TAXES, ROYALTIES, RENTALS, D UTIES 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 RENDERED TO BGEP IL IN ITS PROFIT AND LOSS ACCOUNTS IS NOT TENABLE. 2.13. LD. DRP FURTHER POINTED OUT THAT ALL THE FOUR HEADS OF EXPENSES THAT WERE PROPOSED TO BE DISALLOWED BY THE AO WERE ALSO SUBJECTED TO THE TRANSFER PRICING AUDIT BY THE TPO IN THE CASE OF BG EPIL. THE TPO GAVE A FINDING THAT THE ASSESSEE WAS NOT ABLE TO PROVIDE A NY EVIDENCE OF THE SERVICES RENDERED TO BGEPIL AND HENCE HE COMPUTED THE ALP OF THESE TRANSACTIONS AT NIL IN THE CASE OF BGEPIL. THE ORDER OF THE TPO IN THE CASE OF BGEPIL BY AND LARGE HAD BEEN CONFIRMED BY THE PANEL AS BGE PIL, INSPITE OF SUFFICIENT OPPORTUNITIES GIVEN TO, WAS UNABLE TO FU RNISH ANY CONVINCING 14 ITA NO. 171/DEL/2012 B.G. INTERNATIONAL LTD. EVIDENCE TO PROVE THAT THE SERVICES FOR WHICH THE A SSESSEE (BGEPIL) HAD BEEN REMUNERATED, WERE ACTUALLY RENDERED. 2.14. LD. DRP CONCLUDED ITS FINDINGS AS UNDER: TAKING INTO CONSIDERATION THE ABOVE FACTS AND CIR CUMSTANCES, THIS PANEL IS OF THE VIEW THAT THE ASSESSEE HAS N OT BEEN ABLE TO SUBSTANTIATE ITS CLAIM THAT SERVICES AS CLAIMED BY IT WERE RENDERED 40 BGEPIL EXCEPT TO THE EXTENT THIS CLAIM HAS BEEN UPHELD BY THIS PANEL IN THE CASE OF BGEPIL IN RESPE CT OF THE FOLLOWING (TO THE EXTENT THIRD PARTY EVIDENCE IS SU BMITTED BY THE ASSESSEE BEFORE THE A.O/TPO): I. OUT OF MANAGEMENT AND SERVICE UNIT CHARGES OF RS 34,77,35,896: INFORMATION MANAGEMENT CHARGES TO THE EXTENT OF THE EXPENSES IN RESPECT OF WHICH THE EVID ENCE REGARDING THIRD PARTY COST IS FURNISHED BY THE ASSE SSEE. II. OUT OF GENERAL AND ADMINISTRATIVE EXPENSES OF RS.19,16,1 0,571: EXPENSES IN RESPECT OF WHICH THE EVIDENCE REGARDING THIRD PARTY COST IS FURNISHED BY THE ASSESSEE. III. OUT OF MISCELLANEOUS EXPENSES RS 3,05,85,488: DIRECT RECHARGE OF THIRD PARTY COST INCURRED ON BEHALF OF THE TAXPAYER OF THE EXPENSES IN RESPECT OF WHICH THE EVIDENCE REGARDING THIRD PARTY COST IS FURNISHED BY THE ASSESSEE. THEREFORE AS THE ASSESSEE HAS DECLARED THE REVENUE ON ACCOUNT OF THE FOUR HEAD OF SERVICES IT WILL BE TAXED IN IT S HANDS AS PROPOSED BY THE A. O. HOWEVER THE A.O. WILL PROVIDE DEDUCTION ON ACCOUNT OF EXPENDITURE TO THE EXTENT O F RELIEF GIVEN ON ACCOUNT OF SAME EXPENDITURE IN THE CASE OF BGEIL . THE OBJECTION MADE BY THE ASSESSEE IS REJECTED SUBJECT TO THE ABOVE REMARKS. 15 ITA NO. 171/DEL/2012 B.G. INTERNATIONAL LTD. 2.16. THE AO PASSED THE ORDER AS PER THE DIRECTIONS ISSUED BY LD. DRP DATED 30-11-2011 AND DETERMINED THE TOTAL INCOME AT RS. 8 8,45,32,930/- AS UNDER: ACCORDINGLY ASSESSMENT IS FINALIZED AS PER THE DIR ECTIONS OF DRP AND INCOME OF THE ASSESSEE IS COMPUTED AS UNDER: INCOME AS DETERMINED IN DRAFT ASSESSMENT ORDER: RS. 97,28,98,465/- LESS: 1) RELIEF GRANTED BY DRP OUT OF MANAGEMENT AND SERVICE UNIT CHARGES OF RS. 34,77,35,896/- RS. 60,00,000/- 2) RELIEF GRANTED BY DRP OUT OF GENERAL & ADMN. EXPENSES OF RS. 19,16,1,571/- RS. 8,10,31,154/- 3) OUT OF MISCELLANEOUS EXPENSES OF RS. 3,05,85,488/- RS. 13,34,377/- TOTAL INCOME RS. 88,45,32,934/- TOTAL INCOME ROUNDED OFF RS. 88,45,32,930/- 3. BEING AGGRIEVED WITH THE ASSESSMENT ORDER PASSED U/S 143(3)/144C(13), THE ASSESSEE IS IN APPEAL BEFORE U S AND HAS TAKEN FOLLOWING GROUNDS OF APPEAL: BASED ON THE FACTS AND CIRCUMSTANCES OF THE CASE, BG INTERNATIONAL LIMITED (HEREINAFTER REFERRED TO AS T HE 'APPELLANT') CRAVES LEAVE TO PREFER AN APPEAL AGAINST THE ORDER PASSED BY THE ASSISTANT DIRECTOR OF INCOME TAX (INTERNATIONAL TAX ATION), DEHRADUN [HEREINAFTER REFERRED TO AS THE 'LEARNED A O' OR 'AO'] UNDER SECTION 143(3)/ 144C(13) OF THE INCOME-TAX AC T, 1961 (HEREINAFTER REFERRED TO AS THE 'ACT'), IN PURSUANC E OF THE DIRECTIONS ISSUED BY THE HON'BLE DISPUTE RESOLUTION PANEL - II, DELHI (HEREINAFTER REFERRED TO AS THE 'HON'BLE DRP' ) ON THE FOLLOWING GROUNDS, EACH OF WHICH ARE WITHOUT PREJUD ICE TO ONE ANOTHER: 16 ITA NO. 171/DEL/2012 B.G. INTERNATIONAL LTD. I. VIOLATION OF PRINCIPLES OF NATURAL JUSTICE 1. THE LEARNED AO/ DRP HAS ERRED IN LAW AND IN FACTS, IN DENYING THE APPELLANT AN OPPORTUNITY OF BEING HEARD AND THEREBY, VIOLATING THE PRINCIPAL OF NATURAL JUSTICE IN ASSESSING THE INCOME OF THE APPELLANT. 2. THE LEARNED AO/ DRP HAS ERRED IN LAW AND IN FACTS, IN IGNORING THE SUBMISSIONS AND INFORMATION FURNISHED BY THE APPELLANT DURING THE ASSESSMENT PROCEEDINGS. 3. THE LEARNED AO/ DRP HAS ERRED IN LAW AND IN FACTS, IN DENYING THE APPELLANT SUFFICIENT TIME TO JUSTIFY AN D FURNISH THE ADDITIONAL DETAILS TO SUBSTANTIATE ITS CLAIM. TAXABILITY UNDER THE ACT II . TAXING THE RECEIPTS AND DISALLOWING THE EXPENSES ACTUALLY INCURRED 4. THE LEARNED AO/ DRP HAS ERRED IN DISREGARDING THE SUBMISSIONS AND DOCUMENTS FILED BY THE APPELLANT SUBSTANTIATING THE RECEIPTS TO BE IN THE NATURE OF REIMBURSEMENTS. THE LEARNED AO/ DRP OUGHT TO HAVE H ELD THAT THE RECEIPTS ARE PURE REIMBURSEMENTS AND HENCE , NOT TAXABLE UNDER THE ACT. 5. THE LEARNED AO HAS ERRED IN LAW AND IN FACTS, IN NO T GRANTING RELIEF TO THE APPELLANT FOR THE PAYROLL COST OF RS 219,736,534 AND NOT CONSIDERING THE DIRECTIONS OF THE DRP. 6. WITHOUT PREJUDICE THE LEARNED AO/ DRP HAS ERRED IN LAW AND IN FACTS, IN NOT HOLDING THAT THE RECEIP TS OF THE APPELLANT ARE TAXABLE UNDER SECTION 44BB OF THE ACT . THE LEARNED AO/ DRP OUGHT TO HAVE HELD THAT THE INCOME OF THE APPELLANT SHOULD BE GOVERNED UNDER SECTION 44BB OF THE ACT. 7. WITHOUT PREJUDICE TO GROUND 6, ASSUMING PROVISION OF SECTION 44BB OF THE ACT ARE NOT APPLIC ABLE TO THE APPELLANT, THE LEARNED AO/ DRP OUGHT TO HAVE HELD T HAT THE INCOME OF THE APPELLANT WOULD HAVE TO BE COMPUTED B Y REDUCING EXPENSES INCURRED. 17 ITA NO. 171/DEL/2012 B.G. INTERNATIONAL LTD. TAXABILITY UNDER INDIA UK DOUBLE TAXATION AVOIDAN CE AGREEMENT (DTAA) III. TAXING THE RECEIPTS AS FEES FOR TECHNICAL SERV ICES (FTS) UNDER DTAA 8. THE LEARNED AO/ DRP HAS ERRED IN LAW AND IN FACT S IN NOT APPRECIATING (WITHOUT VERIFYING THE TAX RESIDENCY C ERTIFICATE 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 FACT S, 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 TEC HNICAL PLAN OR TECHNICAL DESIGN TO THE APPELLANT. IV. PERMANENT ESTABLISHMENT ('PE') IN INDIA 10. THE LEARNED AO/ DRP HAS ERRED IN FACTS IN HOLDI NG THAT THE APPELLANT HAS A PE IN INDIA WITHOUT SEEKING/ AN ALYSING 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 I N TREATING ALL AMOUNTS RECEIVED BY THE APPELLANT AS INCOME ATTRIBU TABLE TO THE PE. THE LEARNED AO/ DRP OUGHT TO HAVE HELD THAT ONL Y INCOME DIRECTLY ATTRIBUTABLE TO THE PE SHOULD BE TAXABLE I N INDIA UNDER THE DTAA. 12. WITHOUT PREJUDUCE TO GROUND 10, ASSUMING BUT NOT ACCEPTING THAT A PE EXISTS, THE APPELLANT BEING A NON- RESIDENT ENGAGED IN THE BUSINESS OF PROVIDING SERVI CES AND FACILITIES IN CONNECTION WITH EXTRACTION OR PRODUCT ION OF MINERAL OILS, THE INCOME SHALL BE TAXABLE UNDER SECTION 44B B OF THE ACT. OTHER GROUNDS OF APPEAL 18 ITA NO. 171/DEL/2012 B.G. INTERNATIONAL LTD. V. REQUIREMENT TO MAINTAIN BOOKS OF ACCOUNTS AND GE T THE SAME AUDITED UNDER SECTION 44AB OF THE ACT 13. THE LEARNED AO/ DRP HAS ERRED IN LAW IN HOLDING THAT THE APPELLANT IS REQUIRED TO MAINTAIN BOOKS OF ACCOUNTS AND GET THE SAME AUDITED UNDER SECTION 44AB OF THE ACT. VI . LEVY OF INTEREST UNDER SECTION 234B AND 234C OF THE ACT 14.THE LEARNED AO / DRP HAS ERRED IN LEVYING INTEREST UNDER SEC T ION 234B AND 234C OF THE ACT D I SREGARDING THE FACT THAT THE APPELLAN T I S A NON-RESIDENT APPELLANT , WHOSE INCOME IS SUBJECT TO TAX DEDUCTION AT SOURCE. ACCORD I NGLY , INTEREST UNDE R SECTION 234B AND 234C OF THE ACT IS NOT LEVIABLE TO THE APPELLAN T . VII . INITIATING PENALTY PROCEEDINGS UNDER SECTION 271 B OF THE ACT 15. THE LEARNED AO/ DRP HAS ERRED I N LAW AND IN FACT , IN I NITIATING PENALTY PROCEEDINGS UNDER SECTION 27 1 B OF THE ACT FOR NOT GETTING THE ACCOUNTS AUDITED AS REQUIRED UNDER SECT ION 44AB OF THE AC T . VIII . INITIATING PENALTY PROCEEDINGS UNDER SECTION 271(1)(C) OF THE ACT 16. THE L EARNED AO/ DRP HAS ERRED IN LAW AND IN FACT , IN INITIATING PENALTY PROCEEDINGS UNDER SECTION 271 (1 )( C) OF THE ACT FOR CONCEALMENT OF PARTICULARS OF INCOME AS WEL L AS FURN I SHING OF INACCURATE PARTICULARS OF INCOME. THE APPELLANT CRAVES LEAVE T O ADD , ALTER , OMI T OR SUBSTITUTE ANY OR ALL OF THE ABOVE GROUNDS OF APPEAL , AT ANY TIME BEFORE OR AT THE TIME OF THE APPEAL . 4. AT THE TIME OF HEARING LD. COUNSEL FOR THE ASSES SEE DID NOT PRESS GROUND NOS. 1,2,3,5,10 & 11, ACCORDINGLY, THE SAME STAND DISMISSED BEING NOT PRESSED. 5. AS REGARDS GROUND NOS. 8 & 9, LD. COUNSEL SUBMIT TED THAT THEY ARE ACADEMIC IN NATURE AS THEY DO NOT ARISE OUT OF AOS ORDER AND STAND 19 ITA NO. 171/DEL/2012 B.G. INTERNATIONAL LTD. DISMISSED ACCORDINGLY. GROUND NOS. 15 & 16 ARE PREM ATURE AND ACCORDINGLY DISMISSED. 6. LD. COUNSEL SUBMITTED THAT ASSESSEE IS A COMPANY INCORPORATED IN THE U.K. WITH MORE THAN 4 DECADES OF EXPERIENCE AND ENR ICHED TECHNICAL EXPERTISE RELATED TO EXPLORATION AND PRODUCTION ACT IVITIES IN THE OIL AND GAS SECTOR. IT POSSESSES A WIDE POOL OF HIGHLY KNOWLEDG EABLE, TECHNICALLY TRAINED AND EXPERIENCED STAFF TO ENGAGE IN EXPLORATION AND PRODUCTION RELATED ACTIVITIES. AS PART OF ITS CONTINUED PROGRAM OF RU NNING EFFICIENT AND COST EFFECTIVE VENTURES ACROSS THE WORLD, THE ASSESSEE P ROVIDES REQUISITE SERVICES/ SUPPORT TO ITS GROUP ENTITIES AND INCURS CERTAIN EX PENDITURE/ COST ON BEHALF OF SUCH GROUP ENTITIES (ASSETS) ACROSS THE WORLD, AN D 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 INCORPORA TED 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 SH ARING CONTRACT (PSC) DATED 15-2-2002 (WHICH WAS SUBSEQUENTLY AMENDED ON 10-1-2005) ALONG WITH OIL AND NATURAL GAS COMMISSION (ONGC) AND RE LIANCE INDUSTRIES LTD. (RIL), WITH THE GOVERNMENT OF INDIA, FOR EXP LORATION AND PRODUCTION OF OIL AND GAS HYDROCARBONS IN INDIA IN THE DESIGNA TED CONTRACTED FIELDS OF PANNA MUKTA AND MID AND SOUTH TAPTI FIELDS. TO EXEC UTE SUCH PSC AND 20 ITA NO. 171/DEL/2012 B.G. INTERNATIONAL LTD. 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 INTENSIVE IND USTRY. EXPLORATION CHALLENGES AND LOW SUCCESS RATE (OF FIN DING OIL DEPOSITS), MAKES USE OF HIGH END AND SOPHISTICATED TECHNOLOGY, AND, TECHNICALLY EXPERT AND HIGHLY TRAINED AND EXPE RIENCED HUMAN RESOURCE, IMPERATIVE FOR THIS INDUSTRY. THE C HALLENGES ARE FURTHER MARKED BY A DEARTH OF EXPERIENCED PERSO NNEL WITH REQUIRED LEVEL OF TECHNICAL EXPERTISE. (II) BGEPIL'S PROJECT OFFICE IN INDIA DOES NOT POSS ESS ALL REQUISITE EXPERTISE TO DISCHARGE ITS CRITICAL BUSINESS FUNCTI ONS AND REQUIRES EXTENSIVE SUPPORT OF RESOURCES FOR CARRYING OUT ITS BUSINESS EFFICIENTLY. IN ORDER TO PERFORM ITS OBLIGATIONS UN DER THE PSC EFFICIENTLY AND OPTIMALLY, BGEPIL IS REQUIRED TO PR OCURE VARIOUS SERVICES FROM THE APPELLANT. APPELLANT INCURS CERTA IN COST FOR PROVIDING VARIOUS SERVICES TO BGEPIL, WHICH ARE THE N CROSS- CHARGED TO BGEPIL, WITHOUT ANY MARK-UP, INTERALIA, BASED ON, APPROPRIATE ALLOCATION KEYS. THE RECEIPTS PERTAIN T O SUCH PAYMENTS BY BGEPIL TO THE APPELLANT, WHICH REPRESENT COST IN CURRED BY THE APPELLANT AND ARE IN THE NATURE OF REIMBURSEMENTS. 6.3. LD. COUNSEL FURTHER SUBMITTED THAT THE ASSESSE E HAD RENDERED SERVICES TO BGEPIL UNDER FOLLOWING HEADS: - MANAGEMENT SERVICE UNIT CHARGES - FEDERAL GREEN RECHARGES 21 ITA NO. 171/DEL/2012 B.G. INTERNATIONAL LTD. OTHER MANAGEMENT AND UNIT CHARGES (A) IM RELATED SERVICES - ONLINE AND TELEPHONIC IT SUPPORT SERVICES IN THE FO RM OF SERVICE DESK AND REMOTE SUPPORT TO ALL BGEPIL EMPLOYEES. - EMAIL SERVICES - BG INTRANET PORTAL - INTERNET SERVICES - ENABLING MOBILE/OFFSITE WORKING. (B) HR INTERNATIONAL (C) INTERNATIONAL ACCOUNTING SUPPORT. - FINANCIAL SYSTEM AND ANALYSIS - FINANCIAL TECHNICAL ACCOUNTING AND ASSURANCE. - FINANCIAL REPORTING - MANAGEMENT REPORTING. (D) INSURANCE DEPARTMENT SUPPORT. (E) TAXATION - GUIDANCE ON HOW THE PARTICULAR TAX POSITION WILL BE LOOKED AT IN INTERNATIONAL PARLANCE IN VIEW OF HEAD OFFICE BEING LOCATED IN OVERSEAS COUNTRY. - ASSISTANCE ON LOAN AND GROUP TAX ACCOUNTING MATTERS . - ASSISTANCE ON MANAGING TAX AUDITS/ ASSESSMENTS/ APP EALS AND OTHER ISSUES AS AND WHEN REQUIRED. F. MARKETING G. EVP OFFICE SUPPORT. H. ICDN, COST CONTROL AND FINANCE SERVICE FUNCTION. - TECHNOLOGY RECHARGES - STRUCTURAL GEOLOGY - WELL ENGINEERING - PRODUCTION OPERATIONS TECHNOLOGY - BOREHOLE GEOPHYSICS - GEOLOGY TECHNOLOGY MANAGEMENT - GEOPHYSICS TECHNOLOGY WATCH I MANAGEMENT - PETRO PHYSICS TECHNOLOGY PROGRAM - TRANSMISSION AND DISTRIBUTION - COMMERCIAL. GENERAL AND ADMINISTRATIVE EXPENSES: - OTHER CONSULTANCY SERVICES 22 ITA NO. 171/DEL/2012 B.G. INTERNATIONAL LTD. - 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 CO NSIDERATION. THE ASSESSEE HAD INCURRED EXPENDITURE ON PAYROLL EXPENS ES, MANAGEMENT SERVICE UNIT CHARGES, GENERAL AND ADMINISTRATIVE EXPENSES E TC. AND HAD RECEIVED REIMBURSEMENT OF RS. 972,898,465/- FROM BGEPIL TOWA RDS 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 T HE MATTER TO THE FILE OF AO, FOLLOWING THE TRIBUNALS DECISION IN THE CASE O F EGEPIL FOR A.Y. 2000- 01 AS PER ITA NO. 861/DEL/2005 DATED 24-10-2008, OB SERVING IN PARA 9 AS UNDER: 9. SINCE, WE HAVE NOTED THAT THE FACTS IN THE PRES ENT 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 THREE YEA RS IS ONLY REIMBURSEMENT OF THE EXPENSES FROM AN AFFILIATE COM PANY WAS NOT EXAMINED BY THE ASSESSING OFFICER OR BY THE LD. CIT(A), WE FEEL THAT FOR THE FACTUAL VERIFICATION OF THIS CON TENTION OF THE ASSESSEE, THE ISSUE SHOULD GO BACK TO THE FILE OF T HE ASSESSING OFFICER AND IF THE ASSESSEE CAN SATISFY THE ASSESSI NG OFFICER ON THIS ASPECT NO ADDITION CAN BE MADE IN ALL THE THRE E YEARS. WITH THESE OBJECTIONS WE CONFIRM THE ORDER OF THE LD. CI T(A). 23 ITA NO. 171/DEL/2012 B.G. INTERNATIONAL LTD. 6.6. LD. COUNSEL FURTHER SUBMITTED THAT IN AY 2006- 07, TRIBUNAL VIDE ITS ORDER DATED 29-1-2010 IN ITA NO. 4773/DEL/2007 DISM ISSED THE REVENUES APPEAL OBSERVING IN PARA 5 AS UNDER: THE ITAT IN THESE ASSESSMENT YEARS HAD AGREED IN P RINCIPLE WITH THE ASSESSEE BUT SET ASIDE THE ISSUE FOR VERIF ICATION OF FACTUAL ASPECTS. HOWEVER, IN THE PRESENT YEAR, LEAR NED CIT(APPEALS) HAS CONSIDERED THE FACTUAL ASPECTS ALS O IN THE FINDING EXTRACTED SUPRA. IN PARAGRAPH NO. 9.3, LEAR NED CIT(APPEALS) HAS OBSERVED THAT ASSESSEE HAS PRODUCE D INVOICES AND NO MATERIAL BROUGHT BY THE ASSESSING OFFICER TO DOUBT THE DEBIT NOTE AND INVOICES. HONBLE HIGH COURT HAS ALS O CONSIDERED THIS ISSUE IN THE CASE OF M/S ENRON EXP ATS, HENCE THE DISPUTE IS SQUARELY COVERED IN FAVOUR OF THE AS SESSEE. AS FAR AS THE APPREHENSION OF LEARNED DR IS CONCERNED THAT POSSIBILITY OF PROFIT EMBEDDED IN THE COST OF PROFESSIONAL SERV ICES CANNOT BE RULED OUT. WE ARE OF THE OPINION THAT OTHER MEMB ERS OF PSC WOULD NOT ALLOW THE AFFILIATED CONCERN OF ANY MEMBE R TO INFLATE ITS EXPENSES FOR THE SERVICES AND ENABLE IT TO EARN PROFIT IN THE GARB OF PROVIDING SUCH SERVICES. ASSESSING OFFICER OUGHT TO HAVE BROUGHT MATERIAL INDICATING THE FACT THAT SERV ICES RENDERED BY THE ASSESSEE TO THE PSC MEMBERS COULD BE RENDERE D AT A LOWER COST AND SHOULD HAVE ESTABLISHED ON RECORD TH AT IN THE GARB OF REIMBURSEMENT OF EXPENSES, IN FACT, IT IS E ARNING PROFIT. MERELY ON APPREHENSION, WE CANNOT DEVIATE FROM THE VIEW TAKEN IN EARLIER YEARS WHICH IS MORE PARTICULARLY IN THE LINES OF DECISION OF HONBLE JURISDICTIONAL HIGH COURTS DEC ISION. 6.7. LD. COUNSEL SUBMITTED IN ASSESSEES CASE A REF ERENCE WAS MADE TO TPO AND THE TPO PROPOSED NO ADJUSTMENT, OBSERVING AS UN DER: 24 ITA NO. 171/DEL/2012 B.G. INTERNATIONAL LTD. THE ASSESSEE IS A WHOLLY OWNED SUBSIDIARY OF BG EN ERGY HOLDINGS LTD. WHICH IN TURN IS A WHOLLY OWNED SUBSI DIARY OF BG GROUP PLC. THE ASSESSEE HAS ENTERED INTO FOLLOWING TRANSACTION S NA ME OF A E DE SCRI P TION O F S UC H MU T U A L TOTAL AMO UN T RECE I VED / RECEIVAB L E AGREEMENT OR ARR AN GEMENT AS PER THE BOOKS OF AS COMPUTED BY THE ACC O UNT(I N R} AS SES SEE H A VING REGARD THE ARM ' S LENGT H P R I C E ( INR ) BG PAY R OLL EX PE N SES 21 9 , 736 ,5 34 219,7 3 6 , 534 & PRODUCT I ON INDIA LTD MANA G EMENT S ERVICES UNIT CHARGES 530 , 80 6,3 52 5 3 0 , 806 , 352 GENERAL & ADM I N I STRAT I VE EXPENSES 191 , 6 1 0 , 571 1 9 1, 6 1 0 , 571 - RE I MBURS E MENT 30 , 585 , 488 3 0 , 585 , 488 T O TAL 972 , 738 , 945 97 2 , 73 8, 9 4 5 BG REIMBURSE M ENT OF E X PENSE S 5 0,98,140 50 , 98 , 1401 & PRODUCTION IN D I A L TD 25 ITA NO. 171/DEL/2012 B.G. INTERNATIONAL LTD. NO TP ADJUSTMENT IS PROPOSED IN THIS CASE 6.8. LD. COUNSEL REFERRED TO PAGES 106 TO 147 OF TH E PB WHEREIN THE COST ALLOCATION AND TIME WRITING POLICY 2006 IS CONTAIN ED AND POINTED OUT THAT ALLOCATION OF OVERHEAD COST WAS MADE STRICTLY ON A NO GAIN NO LOSS BASIS. ONLY THOSE COSTS, WHICH WERE DEEMED TO BENEFIT THE ASSESSEE, WERE INCLUDED IN THE OVER HEAD COST ALLOCATION POOL AND CHARGED O UT. 6.9. LD. COUNSEL REFERRED TO THE GLOBAL ALLOCATION POLICY AND POINTED OUT THAT THE DIRECT COST INCURRED BY ASSESSEE AND DIREC TLY ATTRIBUTABLE TO COST CENTRES INCLUDED MAINLY PAYROLL AND ASSOCIATED EMPL OYEE COSTS OF BG INTERNATIONAL EMPLOYEES; AND OTHER EXPENSES OF BGI COST CENTRES. THE SUPPORT COSTS INCURRED BY BGI WERE MAINLY INSURANCE AND UNDER MANAGEMENT SUPPORT UNIT, THE ALLOCATION WAS MADE ON THE BASIS OF SHARED SERVICE PERFORMED FOR THE BENEFIT OF TIME WRITING C OST CENTRES AND ASSETS OR OF A CORPORATE NATURE. 6.10. LD. COUNSEL TOOK US TO VARIOUS CLAUSES OF POL ICY TO BUTTRESS THE SUBMISSION THAT THE COST ALLOCATION POLICY WAS QUIT E REASONABLE AND DEBIT NOTES CONTAINED AT PAGE 347 WERE RAISED ON THE BASI S OF ITS GLOBAL COST ALLOCATION POLICY. HE SUBMITTED THAT THE POLICY HAD BEEN VALIDATED BY TWO INDEPENDENT CONSULTANTS. 26 ITA NO. 171/DEL/2012 B.G. INTERNATIONAL LTD. 6.11. LD. COUNSEL SUBMITTED THAT IN EARLIER YEARS A LSO THIS POLICY WAS THE BASIS SUBJECT TO SLIGHT MODIFICATION IN EARLIER YEA RS ALSO AND THE PROFIT SHARING CONTRACT IS ALSO THE SAME. THEREFORE, THE DECISION FOR AY2006-07 SHOULD BE FOLLOWED. 6.12. LD. COUNSEL FURTHER POINTED OUT THAT IN VIEW OF THE NATURE OF ASSESSEES BUSINESS ONE TO ONE NEXUS BETWEEN SERVICES RENDERED AND THE EXPENDITURE ALLOCATED FOR SUCH SERVICES IS NOT POSSIBLE. 6.13. LD. COUNSEL FURTHER REFERRED TO PAGE 269 OF T HE PB, WHEREIN THE REFERENCE WAS MADE U/S 92CA TO TPO FOR DETERMINATIO N OF ALP OF THE INTERNATIONAL TRANSACTIONS ENTERED BY THE ASSESSEE DURING AY 2009-10 AND THE TPO HAS OBSERVED AS UNDER: 6.14. THE ASSESSEE HAS ENTERED INTO FOLLOWING TRANS ACTIONS: S. NO. NAME OF ASSOCIATED ENTERPRISES DESCRIPTION OF TRANSACTION VALUE OF TRANSACTION (INR) METHOD OF COMPUTATION OF ALP 1. BG EXPLORATION AND PRODUCTION INDIA LTD. PAYROLL EXPENSES 224,033,845 NOT APPLICABLE MANAGEMENT SERVICE & UNIT CHARGES 608,755,894 NOT APPLICABLE GENERAL ADMINISTRATIVE EXPENSES 232,867,196 NOT APPLICABLE REIMBURSEMENT OF EXPENSES 32,060,972 6.15. LD. COUNSEL SUBMITTED THAT LD. DRP HAS ALLOWE D PAY ROLL EXPENSES VIDE HIS ORDER DATED 10-12-2012 CONTAINED AT PAGE 1 4 TO 19 OF THE PB AND, 27 ITA NO. 171/DEL/2012 B.G. INTERNATIONAL LTD. THEREFORE, GROUND NO. 5 HAS NOT BEEN PRESSED. OUT O F 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 SHA RING CONTRACT HAS BEEN APPROVED BY GOVERNMENT AND, THEREFORE, IT OVER-RIDE S THE INCOME-TAX PROVISIONS. IN THIS REGARD HE REFERRED TO SECTION 4 2 OF THE I.T. ACT AND POINTED OUT THAT AS PER THIS SECTION FOR THE PURPOSE OF COM PUTING PROFITS OR GAINS OF ANY BUSINESS CONSISTING OF THE PROSPECTING FOR OR EXTRACTION OR PRODUCTION OF MINERAL OILS IN RELATION TO WHICH THE CENTRAL GOVER NMENT HAS ENTERED INTO AN AGREEMENT WITH ANY PERSON FOR THE ASSOCIATION OR PA RTICIPATION OF THE CENTRAL GOVERNMENT OR ANY PERSON AUTHORIZED BY IT IN SUCH B USINESS WHICH AGREEMENT HAS BEEN LAID ON THE TABLE OF EACH HOUSE OF PARLIAMENT), THERE SHALL BE MADE IN LIEU OF, OR IN ADDITION TO, THE AL LOWANCES ADMISSIBLE UNDER THIS ACT, SUCH ALLOWANCES AS ARE SPECIFIED IN THE A GREEMENT IN RELATION - (A) TO EXPENDITURE BY WAY OF INFRUCTUOUS OR ABORTIV E EXPLORATION EXPENSES IN RESPECT OF ANY AREA SURRENDERED PRIOR T O THE BEGINNING OF COMMERCIAL PRODUCTION BY THE ASSESSEE; (B) AFTER THE BEGINNING OF COMMERCIAL PRODUCTION, T O EXPENDITURE INCURRED BY THE ASSESSEE, WHETHER BEFOR E OR AFTER SUCH COMMERCIAL PRODUCTION, IN RESPECT OF DRILLING OR EXPLORATION ACTIVITIES OR SERVICES OR IN RESPECT OF PHYSICAL ASSETS 28 ITA NO. 171/DEL/2012 B.G. INTERNATIONAL LTD. USED IN THAT CONNECTION, EXCEPT ASSETS ON WHICH ALL OWANCE FOR DEPRECIATION IS ADMISSIBLE UNDER SECTION 32. [PROVIDED THAT IN RELATION TO ANY AGREEMENT ENTERED INTO AFTER THE 31 ST DAY OF MARCH, 1981, THIS CLAUSE SHALL HAVE EFFECT SUBJECT TO THE MODIFICATION THAT THE WORDS AND FIGURES 'EXCEPT ASSETS ON WHICH ALLOWANCE FOR DEPRECIATION IS ADMISSIBLE UNDE R SECTION 32 HAD HAD BEEN OMITTED; AND] (C) TO THE DEPLETION OF MINERAL OIL IN THE MINING A REA IN RESPECT OF THE ASSESSMENT YEAR RELEVANT TO THE PREVIOUS YE AR IN WHICH COMMERCIAL PRODUCTION IS BEGUN AND FOR SUCH SUCCEED ING YEAR OR YEARS AS MAY BE SPECIFIED IN THE AGREEMENT; 6.17. LD. COUNSEL RELIED ON THE DECISION OF HONBLE UTTRAKHAND HIGH COURT IN THE CASE OF ENRON OIL AND GAS INDIA LTD., WH ICH HAS BEEN TAKEN OVER BY BG INTERNATIONAL, WHEREIN IT HAS BEEN HELD THAT TA XABILITY OF INCOME OF EACH MEMBER OF THE PSC HAS TO BE DETERMINED IN TERMS OF PROVISIONS OF SECTION 42, WHICH OVER-RIDES OTHER PROVISIONS OF THE ACT. T HE HONBLE UTTRAKHAND HIGH COURT HAS RELIED ON THE DECISION OF ANOTHER DI VISION BENCH IN THE CASE OF CIT & ANOTHER VS. ENRON OIL AND GAS INDIA LTD. 3 05 ITR 68. LD. COUNSEL FURTHER SUBMITTED THAT HONBLE JURISDICTIONAL HIGH COURT IN THAT CASE HAS, INTER ALIA, OBSERVED THAT MERELY BECAUSE IN EARLIE R YEARS THE ASSESSEE HAD OFFERED THE RECEIPTS U/S 44BB, DOES NOT OPERATE AS RES-JUDICATA AGAINST THE ASSESSEE. 29 ITA NO. 171/DEL/2012 B.G. INTERNATIONAL LTD. 6.18. LD. COUNSEL SUBMITTED THAT SINCE IN AY 2006-0 7, SAME PSC HAS BEEN CONSIDERED, WHICH IS UNDER CONSIDERATION IN THE PRE SENT ASSESSMENT YEAR, THEREFORE, THE DECISION OF 2006-07 SHOULD BE FOLLOW ED ON THE PRINCIPLE OF CONSISTENCY. 7. LD. CIT(DR) REFERRED TO PAGES 277 AND 278 OF THE PB, WHEREIN GIVING EFFECT TO TRIBUNALS ORDER IS CONTAINED, IN WHICH A SSESSEES CONTENTIONS HAVE BEEN NOTED AS UNDER: IN THIS CONNECTION THE ASSESSEE WOULD APPRISE YOU THAT THE DOCUMENTS PERTAINING TO THE ASSESSMENT YEAR IN QUES TION ARE NOW OVER 7 YEARS OLD, LOCATED IN THE UNITED KINGDOM AND ARE EXTREMELY DIFFICULT TO RETRIEVE. IN THESE CIRCUMSTA NCES, BGIL DOES NOT WISH TO LITIGATE/ AGITATE THIS ISSUE ANY F URTHER BEFORE THE TAX AUTHORITIES. 7.1. THUS, THE ASSESSEE WAS NOT ABLE TO SUBSTANTIAT E 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 200 6-07, LD. CIT(DR) REFERRED TO CIT(A)S AND POINTED OUT THAT IN PARA 5 OF TRIBUNALS ORDER DATED 29-1-2010 REPRODUCED EARLIER, THE TRIBUNAL HAS NOTE D THAT CIT(A) PARA 9.3 OF HIS ORDER OBSERVED THAT ASSESSEE HAD PRODUCED INVOI CES. THEREFORE, THE REVENUES APPEAL WAS DISMISSED. 7.3. HOWEVER, IN THE PRESENT YEAR, THE AO AS WELL A S LD. DRP HAS BROUGHT ON RECORD THAT THERE IS NO EVIDENCE OF EXPENSES BEI NG INCURRED BY BGI FOR 30 ITA NO. 171/DEL/2012 B.G. INTERNATIONAL LTD. WHICH THE ALLEGED REIMBURSEMENT WAS TAKEN. SINCE T HERE WAS NO EXPENDITURE INCURRED BY BGI, THEREFORE, THERE WAS NO QUESTION O F ANY REIMBURSEMENT. 7.4. AS FAR AS THE LD. COUNSELS RELIANCE ON THE TP OS ORDER FOR AY 2007- 08 IS CONCERNED, LD. CIT(DR) SUBMITTED THAT BGIPL H AD MADE THE PAYMENT TO ASSESSEE UNDER SPECIFIC HEAD, THEREFORE, TPO ACC EPTED THE SAME. IN THIS REGARD LD. DR REFERRED TO SECTION 92(3), WHICH READ S AS UNDER: COMPUTATION OF INCOME FROM INTERNATIONAL TRANSACTI ON HAVING REGARD TO ARMS LENGTH PRICE 92(3) THE PROVISIONS OF THIS SECTION SHALL NOT APPL Y IN A CASE WHERE THE COMPUTATION OF INCOME UNDER SUB-SECTION ( 1) OR SUB- SECTION (2A) OR THE DETERMINATION OF THE ALLOWANCE FOR ANY EXPENSE OR INTEREST UNDER THAT SUB-SECTION OR THE D ETERMINATION OF ANY COST OR EXPENSE ALLOCATED OR APPORTIONED, OR , AS THE CASE MAY BE CONTRIBUTED UNDER SUB-SECTION (2) OR SUB-SEC TION (2A),HAS THE EFFECT OF REDUCING THE INCOME CHARGEAB LE TO TAX OR INCREASING THE LOSS, AS THE CASE MAY BE, COMPUTED O N THE BASIS OF ENTRIES MADE IN THE BOOKS OF ACCOUNT IN RESPECT OF THE PREVIOUS YEAR IN WHICH THE INTERNATIONAL TRANSACTIO N OR SPECIFIED DOMESTIC TRANSACTION WAS ENTERED INTO. 7.5. LD. CIT(DR) REFERRED TO PAGE 6 OF LD. DRP ORDE R AND POINTED OUT THAT LD. DRP HAS SPECIFICALLY OBSERVED THAT CONSIDERING THE CONSIDERATION OF THE SERVICES INVOLVED THE EVIDENCE THAT THE ASSESSEE WA S ABLE TO PRODUCE WAS ABSOLUTELY INSUFFICIENT. 7.6. LD. CIT(DR) FURTHER REFERRED TO SECTION 44AA(2 ) AND POINTED OUT THAT IN VIEW OF THE PROVISIONS CONTAINED THEREIN, SINCE THE ASSESSEES RECEIPTS 31 ITA NO. 171/DEL/2012 B.G. INTERNATIONAL LTD. EXCEEDED RS. 10 LACS, IT WAS REQUIRED TO MAINTAIN BOOKS OF ACCOUNT. IN SUPPORT OF ITS CONTENTION LD. DR REFERRED TO SECTIO N 2(31), WHEREIN THE DEFINITION OF PERSON IS CONTAINED AND POINTED OUT THAT THE SAME INCLUDES A COMPANY. HE FURTHER REFERRED TO SECTION 2(17) WHERE IN THE DEFINITION OF A COMPANY IS CONTAINED TO POINT OUT THAT THE SAID D EFINITION INCLUDES ANYBODY CORPORATE INCORPORATED BY OR UNDER THE LAW S OF A COUNTRY OUTSIDE INDIA (FRANCHISEE COMPANY). THEREFORE, ASSESSEE WA S REQUIRED TO MAINTAIN BOOKS OF A/C TO SUBSTANTIATE ITS CLAIM. AS REGARD THE ASSESSEES SUBMISSION THAT THE ASSESSMENT BE MADE U/S 44BB, LD. DR SUBMIT TED THAT IT IS NOT AN AMNESTY SCHEME AND THE ASSESSEES PROFITS ARE TAXAB LE UNDER ARTICLE 7 OF DTAA BETWEEN INDIA AND UK ON NET BASIS. 7.7. LD. CIT(DR) FURTHER SUBMITTED THAT THE PROVISI ONS OF SECTION 44C REGARDING DEDUCTION OF HEAD OFFICE EXPENDITURE IN T HE CASE OF NON-RESIDENTS, HEAD OFFICE EXPENDITURE CANNOT BE MORE THAN 5% OF A DJUSTED TOTAL INCOME. HE SUBMITTED THAT IN THE PRESENT CASE, INCOME IS TO BE COMPUTED AS PER SECTION 37(1) AND ONLY THOSE EXPENSES CAN BE ALLOWE D WHICH ARE WHOLLY AND EXCLUSIVELY FOR BUSINESS PURPOSES. 8. LD. COUNSEL IN THE REJOINDER REFERRED TO THE APP EAL FILED BY THE DEPARTMENT (ITA NO. 62/2010) AGAINST THE TRIBUNALS ORDER FOR AY 2003-04 32 ITA NO. 171/DEL/2012 B.G. INTERNATIONAL LTD. IN WHICH DEPARTMENT ITSELF HAS TAKEN A GROUND THAT THE ASSESSEES RECEIPTS WERE TAXABLE U/S 44BB. 8.1. LD. COUNSEL FURTHER POINTED OUT THAT IN AY 200 9-10 LD. DRP HAS ALLOWED THE ASSESSEES 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. I T CANNOT BE BRUSHED ASIDE. THEY ARE RELEVANT TO THE. CLAIMS MAD E BY THE ASSESSEE. II) TECHNICAL SERVICES RECEIVED ARE INTANGIBLE IN N ATURE. THEREFORE, TPO SHOULD BE CLEAR WHEN HE/SHE SAYS 'CO NCRETE EVIDENCE' FOR SUCH TECHNICAL SERVICES RECEIVED TO B E PRODUCED BY THE TAXPAYER. THE PROOF OF THE PUDDING IS IN THE EATING, IF THE ASSESSEE HAS NOT MAINTAINED ANY DOCUMENTATION AT AL L OR HAS NOT ALLOCATED THE COST BASED ON THE TIME SPENT BY T HE EXPERT/ EMPLOYEE, THEN, IT WOULD HAVE BEEN POSSIBLE TO DOUB T THE TRANSACTIONS. THIS IS NOT THE CASE. III) INTRA GROUP SERVICES, BY DEFINITION ARE WITHIN THE GROUP. IT IS A TAUTOLOGY TO SAY THAT INTRA GROUP SERVICES DO NOT HAVE OUTSIDE COMPARABLES. SEARCH FOR COMPARABLES OF INTRA GROUP SERVICES IN AN UNCONTROLLED - INDEPENDENT ENVIRONMENT IS AN OXYMORON. THEREFORE, TO DEMAND THAT ASSESSEE TO PRODUCE EVIDE NCE TO SHOW THAT 'INDEPENDENT ENTITY IN COMPARABLE SITUATI ON WOULD HAVE PAID' FOR SUCH SERVICES' IS NOTHING BUT ASKING TO PERFORM THE IMPOSSIBLE. IV) . DRP IS CONVINCED THAT WITHOUT SUCH SERVICES A SSESSEE WOULD NOT HAVE SUCCEEDED IN EARNING THE INCOME IT D ID DURING THE YEAR. IF THE ASSESSEE AND ITS GROUP COMPANIES W ERE 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. 33 ITA NO. 171/DEL/2012 B.G. INTERNATIONAL LTD. V) IT IS IMPOSSIBLE FOR ANY AUDITOR OR TPO OR DRP T O SEE EACH AND EVERY INVOICE. IT IS A TIME HONOURED PRACTICE O F AUDIT TO .TEST CHECK.' ASSESSEE HAS A SYSTEM OF DOCUMENTATION RETE NTION OF BACKUP INVOICES. THEREFORE, BASED ON THE TEST CHECK ING, DRP COMES TO THE CONCLUSION THAT TNMM IS THE MOST APPRO PRIATE METHOD IN THIS CASE AND CUP CANNOT BE APPLIED IN TH E ABSENCE OF ANY DATA AVAILABILITY IN CASE OF COMPARABLE CASE S. AS THE ASSESSEE HAS EARNED 41.42% ON COST, WHICH IS MUCH A BOVE THE COMPARABLE COMPANIES, THE UNDERLYING INTERNATIONAL TRANSACTION IS HELD TO BE AT ARM'S LENGTH. TPO/AO I S DIRECTED TO DELETE THE ADDITION MADE UNDER THIS HEAD. 9. WE HAVE CONSIDERED RIVAL SUBMISSIONS AND PERUSED THE RECORD OF THE CASE. THE ASSESSEE IS A TAX RESIDENT OF THE UK. IT HAS RECEIVED PAYMENTS FROM BGEPIL, WHICH IS INCORPORATED IN CAYMAN ISLAND S, ALLEGEDLY FOR THE SERVICES RENDERED TO THIS COMPANY. THE CAYMAN ISLAN DS ARE BRITISH OWNERSHIP TERRITORY AND DO NOT LEVY ANY INCOME TAX. THEREFORE, THE PROFITS EARNED, IF ANY, BY BGEPIL ARE NOT SUBJECT TO ANY IN COME-TAX IN THE CAYMAN ISLANDS. 9.1. BGEPIL IS A PART OF PRODUCTION SHARING CONTRAC T ALONG WITH ONGC AND RELIANCE INDUSTRIES LIMITED, FOR EXPLORATION AN D PRODUCTION OF OIL AND GAS IN THE OIL FIELDS OF PANNA- MUKTA AND TAPTI FIE LDS. 9.2. BGEIPL HAS OPERATIONS IN INDIA ONLY AND HAS OP ENED A PROJECT OFFICE IN INDIA. THERE IS NO TAX TREATY BETWEEN INDIA AND THE CAYMAN ISLANDS; THEREFORE, PROFITS OF BGEIPL ARE TAXABLE IN INDIA A S PER THE PROVISIONS OF THE INCOME TAX ACT. THESE THREE PARTIES ARE JOINT OPERA TORS TO THE CONTRACT. VIDE 34 ITA NO. 171/DEL/2012 B.G. INTERNATIONAL LTD. AGREEMENT DATED 10-1-2005 BGEPIL IS THE OPERATOR AN D IS ALSO RESPONSIBLE FOR MAINTAINING OF BOOKS OF ACCOUNT OF THE CONTRACT . 9.3. BGEPIL AND THE ASSESSEE ARE ASSOCIATED ENTERPR ISES UNDER THE INCOME- TAX ACT. BGEPIL HAS OPERATIONS IN INDIA ONLY AND HA S OPENED A PROJECT OFFICE IN INDIA. ON ALL THESE ASPECTS THERE IS NO D ISPUTE. 9.4. THE ASSESSEE HAD FILED RETURN OF INCOME AT AN INCOME OF RS. 1,59,520/-, BEING INTEREST RECEIVED FROM INCOME-TAX DEPARTMENT. IN THE RETURN OF INCOME CONTAINED AT PAGE 267 AND 268, THE ASSESSEE HAD GIV EN FOLLOWING NOTES:- NOTE: 1. BG INTERNATIONAL LIMITED (BGI) IS A COMPANY INCORPO RATED IN THE ENGLAND, UK, HAVING REGISTERED OFFICE AT 100 THAMES VALLEY PARK DRIVE, READING, BERKSHIRE, R61 PT.BGI PROVIDES CERTAIN STAFF SUPPORT AND PERSONNEL SERVIC ES IN CONNECTION WITH OIL AND GAS EXPLORATION AND DRILLIN G ACTIVITIES. BGI IS RENDERING SERVICES ON COST TO CO ST BASIS ANY PAYMENT TO BGI THROUGH DEBIT NOTE IS PURELY ACCORDA NCE 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 IS PROVIDING SERVICES ONLY TO BG EXPL ORATION & PRODUCTION INDIA LIMITED (BGEPIL). THE SERVICES A RE BEING PROVIDED ON COST-TO-COST IN THE NATURE OF 35 ITA NO. 171/DEL/2012 B.G. INTERNATIONAL LTD. REIMBURSEMENTS) IN TERMS OF ARTICLE 3.1.4B OF THE P RODUCTION SHARING CONTRACTS (PANNA MUKTA & MID AND SOUTH TAPT I) ENTERED INTO BETWEEN BGEPIL. RELIANCE INDUSTRIES LI MITED, THE ONGC AND THE GOVERNMENT OF INDIA (WHICH HAS BEE N APPROVED BY BOTH HOUSES OF THE PARLIAMENT) 4. IN ACCORDANCE WITH EFFECTIVE WITHHOLDING TAX ORDER. TAX WAS DEDUCTED AND PAID TO THE TREASURY UNDER PROTEST. TH E PAYMENT TO BGI SHOULD NOT BE COVERED UNDER SEC. 44B B AS THE REVENUES TO BGI SOCIETY CONSIST OF REIMBURSEMEN T REVENUES NOT CHARGEABLE TO TAX UNDER SECTION 44BB O F THE INCOME-TAX ACT. 9.5. IN COURSE OF HEARING, THE ASSESSEE FILED AN AF FIDAVIT TO CONFIRM THAT THE PROFITS OF THE ASSESSEE AND BGEPIL WERE INCORPORATE D IN THE U.K. WITH THE ULTIMATE HOLDING COMPANY VIZ. ASSESSEE. THERE WAS N O DISPUTE ON THIS ASPECT BUT THE MAIN OBJECT WAS THAT WHILE CONSIDERING THE PROFITS BEING INCORPORATED WITH BGEPIL HOW THE TOTAL EXPENSES CLAIMED WERE SET OFF AGAINST THE ALLOCATION BASED AND THE REIMBURSEMENT ALLEGEDLY RE CEIVED BY ASSESSEE. THIS ASPECT HAS NOT BEEN DEMONSTRATED IN THE AFFIDAVIT F ILED BY ASSESSEE, AS IT MERELY STATES THAT THE PROFITS OF BGIL AND THE PRO FITS OF BGEPIL BOTH OF THEM BEING BG ARE CONSOLIDATED AND MERGED WITH THE PROFITS OF BGIL, BEING THE ULTIMATE HOLDING COMPANY. THIS AFFIDAVIT DOES N OT IN ANY MANNER EXPLAIN THE CONTROVERSY, WHICH IS BEFORE US. 36 ITA NO. 171/DEL/2012 B.G. INTERNATIONAL LTD. 9.6. THE MAIN DISPUTE IN THE PRESENT APPEAL IS WHET HER ASSESSEE HAS BEEN ABLE TO PROVIDE PRIMARY EVIDENCE IN RESPECT OF VARI OUS TYPES OF SERVICES ALLEGEDLY RENDERED TO BGEPIL FOR WHICH IT CLAIMED T O HAVE RECEIVED REIMBURSEMENT FROM BGEPIL. THE DEBIT NOTES WERE RAI SED BY ASSESSEE TO BGEPIL, BG HOUSE, LAKE BOULEVARD ROAD, HIRANANDANI BUSINESS PARK, MUMBAI (INDIA). THERE IS NO DISPUTE ON THE RAISING OF THESE DEBIT NOTES AND THE RECEIPT OF RS. 97,28,98,465/-. BEFORE WE PROCEE D FURTHER TO DEAL WITH THE MERITS OF THE CASE, WE MAY FIRST DEAL WITH THE ASSE SSEES ARGUMENTS WITH REGARD TO ITS CLAIM ON THE RELIANCE PLACED ON THE D ECISION OF TRIBUNAL FOR AY 2006-07. THE ASSESSEES CONTENTION IS THAT SINCE IN AY 2006-07 TRIBUNAL HAS CONSIDERED THE SAME PROFIT SHARING CONTRACT AND UN DER IDENTICAL CIRCUMSTANCES HAS HELD THAT ASSESSEE WAS ABLE TO SU BSTANTIATE THE ENTIRE ASPECTS BY PRODUCING INVOICES AND NO MATERIAL BROU GHT 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 TH IS PLEA OF LD. COUNSEL BECAUSE IN ASSESSMENT YEAR AY 2006-07, LD. CIT(A) H AD ALLOWED THE CLAIM OF THE ASSESSEE BECAUSE HE HELD THAT SERVICES HAD B EEN PROVIDED ON COST TO COST BASIS. THE TRIBUNALS FINDINGS WERE BASED ON T HE LD. CIT(A)S OBSERVATION THAT ASSESSEE HAD PRODUCED INVOICES AN D NO MATERIAL WAS BROUGHT BY THE AO TO DOUBT THE DEBIT NOTE AND INVOI CES. HOWEVER, IN THE 37 ITA NO. 171/DEL/2012 B.G. INTERNATIONAL LTD. PRESENT YEAR THE ASSESSEE HAS NOT PRODUCED ANY DOCU MENTS BEFORE THE AO OR LD. DRP TO JUSTIFY THAT IT HAD INCURRED ANY EXPENSE S (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 TRIBUNALS ORDER FOR AY 2003-04, 2004-05 AND 2005-06 DATED 28-8-2009, WHERE IN TRIBUNAL HAD RESTORED THE MATTER BACK TO THE FILE OF AO FOR FACT UAL VERIFICATION OF THE ASSESSEES CLAIM. MATTER WAS TAKEN UP BY AO TO GIV E EFFECT OF THE TRIBUNALS ORDER FOR AY 2004-05. THE ASSESSEE CLEARLY STATED T HAT SINCE THE DOCUMENTS WERE FOR MORE THAN 7 YEARS, THEREFORE, IT WAS EXTRE MELY DIFFICULT TO RETRIEVE THEM FROM UK. THEREFORE, ON THIS BASIS, AO BASED O N HIS EARLIER ORDER RENDERED DETERMINED THE INCOME U/S 44BB. 9.8. LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT TH E FINDINGS FOR AY 2004- 05 CANNOT BE A GUIDING FACTOR FOR DECIDING THE ISSU E IN THE PRESENT ASSESSMENT YEAR. HE REFERRED TO THE DECISION IN THE CASE OF M/ S ENORON EXPATS SERVICES INC. (SUPRA), WHEREIN IT HAS BEEN HELD THAT PRINCIP LES OF RES-JUDICATA DO NOT OPERATE IN INCOME-TAX PROCEEDINGS AND THE FACT THAT IN SOME OF THE EARLIER YEARS THE ASSESSEE HAD OFFERED TO PAY TAX U/S 44BB CANNOT OPERATE AS 38 ITA NO. 171/DEL/2012 B.G. INTERNATIONAL LTD. ESTOPPELS AGAINST IT. WE ARE IN AGREEMENT WITH LD. COUNSEL FOR THE ASSESSEE ON THIS PROPOSITION THAT MERELY BECAUSE IN AY 2004-05 THE ASSESSEE WAS UNABLE TO SUBSTANTIATE ITS CLAIM ON ACCOUNT OF ELAPSE OF T IME AND OFFERED THE INCOME U/S 44BB, THE SAME CANNOT BE THE BASIS FOR ARRIVING AT ANY CONCLUSION THAT THE INCOME SHOULD BE ASSESSED U/S 44BB. IN VIEW OF ABOVE DISCUSSIONS, THE DECISIONS GIVEN IN EARLIER YEARS HAVE LITTLE BEARIN G ON THE FACTS AS OBTAINING IN THE CURRENT ASSESSMENT YEAR. 9.9. LD. COUNSEL FOR THE ASSESSEE HAS RELIED ON THE LD. DRPS ORDER FOR AY 2009-10 WHEREIN LD. DRP HAS ACCEPTED THAT THE SERVI CES WERE RENDERED BY BGEPIL, INTER ALIA, OBSERVING AS UNDER: I) ASSESSEE HAS PRODUCED LARGE AMOUNT OF DOCUMENTS IN SUPPORT OF ITS CLAIM. THE SAME IS SUMMARIZED IN PAR A 4.4. IT CANNOT BE BRUSHED ASIDE. THEY ARE RELEVANT TO THE. CLAIMS MADE BY THE ASSESSEE. II) TECHNICAL SERVICES RECEIVED ARE INTANGIBLE IN N ATURE. THEREFORE, TPO SHOULD BE CLEAR WHEN HE/SHE SAYS 'CO NCRETE EVIDENCE' FOR SUCH TECHNICAL SERVICES RECEIVED TO B E PRODUCED BY THE TAXPAYER. THE PROOF OF THE PUDDING IS IN THE EATING, IF THE ASSESSEE HAS NOT MAINTAINED ANY DOCUMENTATION AT AL L OR HAS NOT ALLOCATED THE COST BASED ON THE TIME SPENT BY T HE EXPERT/ EMPLOYEE, THEN, IT WOULD HAVE BEEN POSSIBLE TO DOUB T THE TRANSACTIONS. THIS IS NOT THE CASE. III) INTRA GROUP SERVICES, BY DEFINITION ARE WITHIN THE GROUP. IT IS A TAUTOLOGY TO SAY THAT INTRA GROUP SERVICES DO NOT HAVE OUTSIDE COMPARABLES. SEARCH FOR COMPARABLES OF INTRA GROUP SERVICES IN AN UNCONTROLLED - INDEPENDENT ENVIRONMENT IS AN OXYMORON. THEREFORE, TO DEMAND THAT ASSESSEE TO PRODUCE EVIDE NCE TO 39 ITA NO. 171/DEL/2012 B.G. INTERNATIONAL LTD. SHOW THAT 'INDEPENDENT ENTITY IN COMPARABLE SITUATI ON WOULD HAVE PAID' FOR SUCH SERVICES' IS NOTHING BUT ASKING TO PERFORM THE IMPOSSIBLE. IV) . DRP IS CONVINCED THAT WITHOUT SUCH SERVICES A SSESSEE WOULD NOT HAVE SUCCEEDED IN EARNING THE INCOME IT D ID DURING THE YEAR. IF THE ASSESSEE AND ITS GROUP COMPANIES W ERE 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 T O SEE EACH AND EVERY INVOICE. IT IS A TIME HONOURED PRACTICE O F AUDIT TO .TEST CHECK.' ASSESSEE HAS A SYSTEM OF DOCUMENTATION RETE NTION OF BACKUP INVOICES. THEREFORE, BASED ON THE TEST CHECK ING, DRP COMES TO THE CONCLUSION THAT TNMM IS THE MOST APPRO PRIATE METHOD IN THIS CASE AND CUP CANNOT BE APPLIED IN TH E ABSENCE OF ANY DATA AVAILABILITY IN CASE OF COMPARABLE CASE S. AS THE ASSESSEE HAS EARNED 41.42% ON COST, WHICH IS MUCH A BOVE THE COMPARABLE COMPANIES, THE UNDERLYING INTERNATIONAL TRANSACTION IS HELD TO BE AT ARM'S LENGTH. TPO/AO I S DIRECTED TO DELETE THE ADDITION MADE UNDER THIS HEAD. 9.10. IN THIS REGARD LD. DR HAS SUBMITTED THAT DECI SION OF LD. DRP HAS NOT BEEN ACCEPTED BY THE DEPARTMENT AND AN APPEAL HAS B EEN PREFERRED BEFORE TRIBUNAL WHICH IS PENDING ADJUDICATION. THEREFORE, IN VIEW OF THESE CIRCUMSTANCES, IT WOULD NOT BE PROPER TO COMMENT EI THER WAY ON THE FINDINGS OF LD. DRP AND WE, THEREFORE, REFRAIN FROM CONSIDER ING THE SAID FINDINGS. 9.11. NOW COMING TO THE FACTS AS OBTAINING IN THE P RESENT ASSESSMENT YEAR, THE FIRST ASPECT TO BE CONSIDERED IS THE EFFECT OF TPOS ORDER RELIED UPON BY LD. COUNSEL FOR THE ASSESSEE. WE ARE IN AGREEMENT W ITH LD. CIT(DR) THAT THE 40 ITA NO. 171/DEL/2012 B.G. INTERNATIONAL LTD. TRANSACTIONS OF THE ASSESSEE, REFERRED IN TPOS ORD ER ARE WITH BGEPIL AND TOTAL TRANSACTIONS ARE OF RS. 97,27,38,495/- AND TH ESE TRANSACTIONS ARE ALL RECEIPTS BY THE ASSESSEE FROM BGEPIL. THE TPO WAS P RIMARILY CONCERNED WITH THE ALP OF THE RECEIPTS OF THE ASSESSEE WHICH ARE NOT AT ALL DISPUTED. THE TPO ACCEPTED THE RECEIPTS AS TAXABLE U/S 92CA(3 )LD. CIT(DR) HAS RIGHTLY SUBMITTED THAT THE ISSUE BEFORE THE TPO WAS NOT TO VERIFY THE EXPENSES INCURRED BY THE ASSESSEE. 9.12. THE TPO DID NOT PROPOSE ANY ADJUSTMENT BECAUS E THE TPO WAS PROHIBITED BY SECTION 92C(3) TO REDUCE THE TRANSACT ION PRICE OF THE RECEIPTS WHICH WOULD HAVE RESULTED IN DEDUCTION OF INCOME. T HEREFORE, THE FINDING OF TPO IN CASE OF ASSESSEE HAS NO BEARING TO THE ISSUE BEFORE US WHICH IS WITH REGARD TO CLAIM OF ASSESSEE THAT THE RECEIPTS ARE R EIMBURSEMENT OF EXPENSES. LD. CIT(DR) HAS REFERRED TO THE LD. DRPS OBSERVATI ONS WITH REGARD TO TP ORDER IN THE CASE OF BGEPIL WHEREIN THE TPO HAS GIV EN A FINDING THAT BGEPIL WAS NOT ABLE TO PROVIDE ANY EVIDENCE OF THE SERVICES RENDERED BY THE BGEPIL AND, THEREFORE, THE ALP OF THE TRANSACTI ONS WERE COMPUTED AT NIL. FURTHER, IT IS NOTICED THAT AO HAD CARRIED OUT A SURVEY U/S 133A OF THE ACT AT THE PREMISES OF BGEPIL ON 12-11-2010 AND QUE STION NO. 12 OF THE AOS LETTER TO THE ASSESSEE STATED THAT DURING THE SURVEY OPERATIONS IN CASE 41 ITA NO. 171/DEL/2012 B.G. INTERNATIONAL LTD. OF BGEPIL NO DOCUMENTS WERE PRODUCED TO SUBSTANTIAT E RENDERING OF SERVICES BY YOUR EMPLOYEES AND REGULARIZATION OF SU CH SERVICES BY BGEPIL. 9.13. LD. COUNSEL FOR THE ASSESSEE HAS RELIED ON CO ST ALLOCATION POLICY AND HAS GIVEN A DETAILED NOTE ON THE SERVICES RENDERED BY BGEPIL, BROUGHT NATURE OF SERVICES RENDERED, BENEFIT DERIVED BY BGE PIL. LD. COUNSEL HAS FURTHER SUBMITTED THAT THE GLOBAL ALLOCATION POLICY HAS BEEN EXAMINED BY PWC AND M/S 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 SUPP ORTING 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 BGE PIL. THE ASSESSEE HAS TO PROVE THAT THE SERVICES RENDERED BY IT IS REGARD ING 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 A S 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 D EBIT NOTES WERE RAISED. 9.14. LD. COUNSEL HAS POINTED OUT THAT IT IS NOT PO SSIBLE TO GIVE ONE TO ONE NEXUS FOR EACH DEBIT NOTE VIS A VIS SERVICES RENDER ED. HOWEVER, BASIC DETAILS 42 ITA NO. 171/DEL/2012 B.G. INTERNATIONAL LTD. AS POINTED OUT BY LOWER REVENUE AUTHORITIES HAVE TO BE BROUGHT ON RECORD. FURTHER, THE SUBMISSIONS OF ASSESSEE DID NOT JUSTIF Y THE NATURE OF ACTIVITIES SPECIFIC TO INDIA. 9.15. LD. CIT(DR) HAS POINTED OUT THAT THE TERMINOL OGY FRANCHISEE SUGGESTS THAT THESE EXPENSES APPARENTLY PERTAINED TO US TERR ITORY. THE ASSESSEE HAS BUSINESS IN THE USA. THE TERM GREEN ALSO DESCRIBE D SOMETHING RELATED TO PRESERVING CLIMATE. THE US IS HAVING FEDERAL ENERG Y REGULATORY COMMISSION AND ANY EXPENSES INCURRED IN COMPLYING W ITH THEIR REQUIREMENTS HAVE NOTHING TO DO WITH INDIA. 9.16. THE NEXT SERVICES ALLEGEDLY GIVEN BY ASSESSEE TO BGEPIL ARE IN REGARD TO MANAGEMENT AND UNIT CHARGES. DEBIT NOTES WERE RAISED. THE ASSESSEE HAS RECEIVED FOLLOWING PAYMENT FROM BGEPIL ON THIS COUNT: - INFORMATION MANAGEMENT RELATED SERVICES: INR 20,49, 03,976 - HR INTERNATIONAL: INR 1,66,83,335 - INTERNATIONAL ACCOUNTING SUPPORT: INR 1,13,59,654 - INSURANCE DEPARTMENT SUPPORT: INR 26,72,502 - TAXATION: 31,56,243 - MARKETING: 43,65,895 - EXECUTIVE VICE PRESIDENT OFFICE SUPPORT: 6,73,72,22 9 - ICDN, COST CONTROL AND FINANCE SERVICE FUNCTION. 9.17. THE ASSESSEE HAS RELIED ON THE GLOBAL ALLOCAT ION POLICY WHICH ONLY PROVIDES THAT THOSE COSTS WHICH ARE DEEMED TO BENE FIT THE ASSET ARE INCLUDED IN THE GENERAL AND ADMINISTRATIVE OVER HEAD COST. 43 ITA NO. 171/DEL/2012 B.G. INTERNATIONAL LTD. 9.18. LD. CIT(DR) HAS POINTED OUT THAT REVENUE DOES NOT DOUBT THAT A MNC LIKE BRITISH GAS GROUP DOES NOT HAVE A COST ALLOCA TION POLICY, BUT THE ASSESSEE HAS FAILED TO JUSTIFY HOW THIS POLICY HAD BEEN USED TO ALLOCATE THE EXPENSES TO INDIAN ASSETS. LD. CIT(DR) HAS POINTED OUT THAT FOR TAXATION SERVICES AN AMOUNT OF RS. 31,56,243/- WAS ALLOCATED . LD. CIT(DR) HAS RIGHTLY OBSERVED THAT ASSESSEE HAS TO ESTABLISH THA T WHERE AND TO WHOM THESE AMOUNTS WERE PAID AND HOW THE SAME ARE CONNECTED TO INDIAN BUSINESS. BGEPIL WAS OPERATING THE PSC AND WAS MAINTAINING TH E ACCOUNTS IN INDIA, THEREFORE, IT COULD REASONABLY BE INFERRED THAT IT MUST HAVE SEPARATELY MADE PAYMENTS TO ITS TAX ADVISOR. WHY THIS AMOUNT HAS BE EN FURTHER CHARGED BY BGEPIL, THE ASSESSEE WAS REQUIRED TO DEMONSTRATE TH IS ASPECT. 9.19. FURTHER, THE LD. CIT(DR) HAS QUESTIONED AS TO WHY THE INDIAN PERMANENT ESTABLISHMENT WAS ALLOCATED MARKETING EX PENSES WHICH WERE NOT INCURRED IN INDIA. HE HAS RIGHTLY POINTED OUT THAT EXECUTIVE VP SUPPORT IS NO DOUBT THE HEAD OFFICE EXPENSES AND ATTRACT THE APPL ICATION OF SECTION 44C BUT THE DEDUCTION COULD NOT BE ALLOWED IN FULL. 9.20. LD. CIT(DR) HAS ALSO POINTED OUT THAT THE REP ORT OF PWC HAS TO BE 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 T HAT BG INTERNATIONAL 44 ITA NO. 171/DEL/2012 B.G. INTERNATIONAL LTD. LIMITEDS OVERHEAD COST ALLOCATION AND TIME WRITING POLICY, HAS BEEN ADHERED THROUGHOUT THE YEAR. THE AGREED UPON PROCEDURE WIL L 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 EXAM INE AS TO HOW THE COST HAD BEEN ALLOCATED TO VARIOUS ASSETS (BUSINESS IN DIFFERENT LOCATIONS/ COUNTRIES) AND DO NOT REFER TO CERTIFICATION OF BE NEFITS TESTS. HE POINTED OUT THAT PWC HAS COME OUT WITH A TIME WRITING RATES WHI CH WERE PRIMARILY HOURLY RATES WHICH NEEDED TO BE APPLIED FOR VARIOUS TYPES OF ACTIVITIES. 9.21. AS REGARDS THE RELIANCE PLACED ON M/S LANCAST ER MAC LEAN, UK REPORT, LD. CIT(DR) HAS POINTED OUT THAT THIS INDEP ENDENT CONSULTANT WAS APPOINTED TO REPRESENT THE INTEREST OF JOINT VENTUR E PARTNERS. THEY ALSO GAVE HOURLY RATES FOR A CHARGE. 9.22. HE POINTED OUT THAT THESE REPORTS NOWHERE SHO W WHAT THE TOTAL GENERAL AND ADMINISTRATIVE OVERHEAD COST WAS, WHAT WERE THE KEYS OF ALLOCATION OF THESE EXPENSES AND HOW THE SAME HAD BEEN ALLOCATED TO VARIOUS ASSETS/ COUNTRIES. WHAT EXPENSES HAD BEEN ALLOCATED TO INDI A, ON WHAT BASIS AND WHAT WERE THE BENEFITS. 9.23. ONCE IT IS ACCEPTED THAT GLOBAL COST ALLOCATI ON POLICY EXIST IN A CASE OF GROUP OF SIZE LIKE B.G. GROUP, THEN IT CANNOT BE DE NIED THAT THE DEBIT NOTES RAISED ARE TOWARDS SERVICES RENDERED. NOW THE CORE ISSUE THAT REMAINS FOR 45 ITA NO. 171/DEL/2012 B.G. INTERNATIONAL LTD. CONSIDERATION IS WHETHER THE WHOLE AMOUNT CLAIMED T O BE REIMBURSEMENT SHOULD BE ACCEPTED OR NOT. ON THIS COUNT, ADMITTEDL Y THE ASSESSEE HAS NOT BEEN ABLE TO ESTABLISH ONE TO ONE NEXUS BETWEEN THE SERVICES RENDERED AND ALLEGED REIMBURSEMENT. THERE ARE ALSO NO COMPARABLE CASES WHICH OBVIOUSLY COULD NOT BE THERE. 9.24. THUS, IN SUM AND SUBSTANCE THE POSITION AS IT EMERGES IS THAT INSPITE OF THERE BEING A GLOBAL COST ALLOCATION POLICY, THE EX ISTENCE OF WHICH IS NOT DOUBTED BY REVENUE, THE ASSESSEE FAILED TO SUBSTANT IATE ITS CLAIM REGARDING ALLOCATION OF EXPENSES INCURRED BY IT FOR THE SERVI CES RENDERED TO BGEPIL. IT HAS NOT BEEN ABLE TO SUBSTANTIATE ITS CLAIM AS TO W HAT 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 CLA IM THE DEDUCTION CANNOT BE ALLOWED. IN THIS REGARD WE MAY REFER TO THE DECISIO N OF HONBLE SUPREME COURT IN THE CASE OF CIT VS. CALCUTTA AGENCY LTD. ( 1951) 19 ITR 191, 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 ESTAB LISHED BY THE ASSESSEE AT ANY STAGE OF THE PROCEEDINGS AND THE HIGH COURT WAS IN ERROR IN APPLYING THE PRINCIPLES OF MITCHELLS CASE ON THE ASSUMPTION OF FACTS WHICH WERE NOT 46 ITA NO. 171/DEL/2012 B.G. INTERNATIONAL LTD. PROVED. CONSEQUENTLY THE ASSESSEE WAS NOT ENTITLED TO THE DEDUCTION CLAIMED. IN VIEW OF ABOVE DISCUSSION, KEEPING IN VIEW THE EN TIRE CONSPECTUS OF THE CASES, WE ARE OF THE OPINION THAT IT WOULD BE FAIR TO TAX THE ASSESSEES RECEIPTS U/S 44BB, AS HAS BEEN DONE IN PAST ALSO. I N THIS REGARD WE FIND OURSELVES IN AGREEMENT WITH THE LD. COUNSEL FOR THE ASSESSEE THAT IN AY 2003- 04, THE DEPARTMENT WHILE PREFERRING APPEAL BEFORE H ONBLE HIGH COURT HAS ITSELF TAKEN A GROUND THAT THE ASSESSEES RECEIPTS ARE TAXABLE U/S 44BB AND THE ITAT ERRED IN DECIDING THAT THE RECEIPT ARE NOT TA XABLE 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 RECEI PTS BEING TAXED U/S 44BB, CANNOT OPERATE AS ESTOPPELS AGAINST IT FOR PL EADING THAT THE ENTIRE RECEIPTS WERE IN THE NATURE OF REIMBURSEMENT. HOWEV ER, CONSIDERING THE FACT THAT ASSESSEE IS NOT ABLE TO SUBSTANTIATE ITS CLA IM, 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 B E 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 ASS ESSEE HAS CLEARLY STATED THAT IT IS NOT POSSIBLE TO HAVE ONE TO TONE NEXUS O F THE EXPENSES WITH THE SERVICES RENDERED. 47 ITA NO. 171/DEL/2012 B.G. INTERNATIONAL LTD. 9.26. UNDER SUCH CIRCUMSTANCES, IN OUR OPINION, THE ONLY POSSIBLE COURSE IS TO INVOKE SECTION 44BB BECAUSE B.G.I. PROVIDE SERVI CES TO BGEPIL, WHICH WAS ENGAGED IN PROSPECTING THE MINERAL OILS. WE DIR ECT ACCORDINGLY. 10. IN THE RESULT, ASSESSEES APPEAL IS PARTLY ALLO WED. ORDER PRONOUNCED IN OPEN COURT ON 18-03-2015. SD/- SD/- (C.M. GARG ) ( S.V. MEHROTRA ) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 18-03-2015. MP: C OPY TO : 1. ASSESSEE 2. AO 3. CIT 4. CIT(A) 5. DR