BG India Energy Private Limited, New Delhi V. Addll. CIT, Gurgaon

ITA 2041/DEL/2009

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 4278 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 10 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-04-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 26-10-2010
• Assessment Year: 2003-2004
• Appeal Filed On: 14-05-2009
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: ASHISH KUMAR CAS
• Keywords: Gift; Transfer pricing; Opportunity of being heard
• Section: 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL DELHI DELHI DELHI DELHI BENCH BENCH BENCH BENCH A AA A : NEW DELHI : NEW DELHI : NEW DELHI : NEW DELHI BEFORE BEFORE BEFORE BEFORE SHRI G.E.VEERABHADRAPPA, VICE PRESIDENT AND SHRI G.E.VEERABHADRAPPA, VICE PRESIDENT AND SHRI G.E.VEERABHADRAPPA, VICE PRESIDENT AND SHRI G.E.VEERABHADRAPPA, VICE PRESIDENT AND SHRI C.L.SETHI, SHRI C.L.SETHI, SHRI C.L.SETHI, SHRI C.L.SETHI, JUDICIAL MEMBER JUDICIAL MEMBER JUDICIAL MEMBER JUDICIAL MEMBER ITA NO. ITA NO. ITA NO. ITA NO.2240/DEL/2006 2240/DEL/2006 2240/DEL/2006 2240/DEL/2006 ASSESSMENT YEAR : ASSESSMENT YEAR : ASSESSMENT YEAR : ASSESSMENT YEAR : 2002 2002 2002 2002- -- -0 00 03 33 3 M/S BRITISH GAS INDIA PVT.LTD., M/S BRITISH GAS INDIA PVT.LTD., M/S BRITISH GAS INDIA PVT.LTD., M/S BRITISH GAS INDIA PVT.LTD., (NOW KNOWN AS BG INDIA (NOW KNOWN AS BG INDIA (NOW KNOWN AS BG INDIA (NOW KNOWN AS BG INDIA ENERGY PVT.LTD.), ENERGY PVT.LTD.), ENERGY PVT.LTD.), ENERGY PVT.LTD.), 7 77 7 TH THTH TH FLOOR, WORLD TRADE TOWER, FLOOR, WORLD TRADE TOWER, FLOOR, WORLD TRADE TOWER, FLOOR, WORLD TRADE TOWER, BARAKHAMBA LANE, BARAKHAMBA LANE, BARAKHAMBA LANE, BARAKHAMBA LANE, NEW DELHI NEW DELHI NEW DELHI NEW DELHI 110 001. 110 001. 110 001. 110 001. PAN NO. PAN NO. PAN NO. PAN NO.AAACB7268C. AAACB7268C. AAACB7268C. AAACB7268C. VS. VS. VS. VS. DEPUTY COMMISSIONER OF DEPUTY COMMISSIONER OF DEPUTY COMMISSIONER OF DEPUTY COMMISSIONER OF INCOME TAX, INCOME TAX, INCOME TAX, INCOME TAX, GURGAON CIRCLE, GURGAON CIRCLE, GURGAON CIRCLE, GURGAON CIRCLE, GURGAON. GURGAON. GURGAON. GURGAON. (APPELLANT) (RESPONDENT) ITA NO. ITA NO. ITA NO. ITA NO.2041 2041 2041 2041/DEL/200 /DEL/200 /DEL/200 /DEL/2009 99 9 ASSESSMENT YEAR : ASSESSMENT YEAR : ASSESSMENT YEAR : ASSESSMENT YEAR : 20 2020 2003 0303 03- -- -04 0404 04 M/S BG INDIA ENERGY PVT.LTD., M/S BG INDIA ENERGY PVT.LTD., M/S BG INDIA ENERGY PVT.LTD., M/S BG INDIA ENERGY PVT.LTD., (FORMERLY KNOWN AS BRITISH (FORMERLY KNOWN AS BRITISH (FORMERLY KNOWN AS BRITISH (FORMERLY KNOWN AS BRITISH GAS INDIA PVT.LTD.), GAS INDIA PVT.LTD.), GAS INDIA PVT.LTD.), GAS INDIA PVT.LTD.), 7 77 7 TH THTH TH FLOOR, WORLD TRADE TOWER, FLOOR, WORLD TRADE TOWER, FLOOR, WORLD TRADE TOWER, FLOOR, WORLD TRADE TOWER, BARAKHAMBA LANE, BARAKHAMBA LANE, BARAKHAMBA LANE, BARAKHAMBA LANE, CONNAUGHT PLACE, CONNAUGHT PLACE, CONNAUGHT PLACE, CONNAUGHT PLACE, NEW DELHI NEW DELHI NEW DELHI NEW DELHI 110 001. 110 001. 110 001. 110 001. PAN NO. PAN NO. PAN NO. PAN NO.AAACB7268C. AAACB7268C. AAACB7268C. AAACB7268C. VS. VS. VS. VS. DEPUTY COMMISSIONER OF DEPUTY COMMISSIONER OF DEPUTY COMMISSIONER OF DEPUTY COMMISSIONER OF INCOME TAX, INCOME TAX, INCOME TAX, INCOME TAX, GURGAON CIRCLE, GURGAON CIRCLE, GURGAON CIRCLE, GURGAON CIRCLE, GURGAON. GURGAON. GURGAON. GURGAON. (APPELLANT) (RESPONDENT) APPELLANTS BY : SHRI RAJAN VOHRA, CA, MS.PREETI GOEL, ADVOCATE, SHRI NITIN NARANG AND SHRI ASHISH KUMAR, CAS. RESPONDENT BY : SHRI ASHOK PANDEY, CIT-DR. ORDER ORDER ORDER ORDER PER C.L.SETHI PER C.L.SETHI PER C.L.SETHI PER C.L.SETHI, J , J, J , JM : M : M : M : THESE TWO APPEALS, FILED BY THE ASSESSEE, ARE DIRE CTED AGAINST TWO SEPARATE ORDERS DATED 31.3.2006 AND 17.12.2009 PASSED BY LEARNED CIT(A) PERTAINING TO THE AY 2002-03 & 2003- 04 RESPECTIVELY. 2. THESE APPEALS WERE CONSOLIDATED AND WERE HEARD T OGETHER. THEREFORE, A COMMON ORDER IS BEING PASSED, FOR THE SAKE OF ITA-2240/D/2006 & 2041/D/2009 2 CONVENIENCE. BE IT STATED HERE THAT APPEAL PERTAIN ING TO THE AY 2004- 05 WAS ALSO HEARD ALONGWITH THESE APPEALS IN RESPEC T OF WHICH SEPARATE ORDER HAS BEEN PASSED VIDE ORDER DATED 8.4 .2011 IN ITA NO.3688/DEL/2009 FOR AY 2004-05. 3. NOW, WE SHALL FIRST TAKE UP THE APPEAL PERTAININ G TO THE AY 2002- 03. 4. GROUND NO.1 & 2 ARE DIRECTED AGAINST CIT(A)S OR DER IN UPHOLDING THE ACTION OF THE AO IN ADDING A MARK-UP OF `25,82, 578/- TO THE RETURNED INCOME OF THE ASSESSEE BEING 8% OF THE COS T OF `3,22,82,224/- INCURRED BY THE ASSESSEE ON BEHALF OF BG PIPAVAV LN G PVT.LTD. 5. IN THE COURSE OF ASSESSMENT PROCEEDINGS, IT WAS FOUND BY THE AO THAT THE ASSESSEE HAD INCURRED A COST OF `3,22,82,2 24/- ON BEHALF OF ITS ASSOCIATE ENTERPRISE FOR WHICH IT WAS REIMBURSED BY ITS ASSOCIATE ENTERPRISE WITHOUT ANY MARK UP. THE AO, THEREFORE, ISSUED A SHOW CAUSE NOTICE TO THE ASSESSEE TO EXPLAIN AS TO WHY 8 % MARK UP ON COST OF `3,22,82,224/- INCURRED BY THE ASSESSEE ON BEHAL F OF ITS AE SHOULD NOT BE ADDED BACK TO ASSESSEES INCOME IN THE SAME WAY AS 8% MARK UP WAS APPLIED TO THE AMOUNT OF SERVICES RENDERED B Y THE ASSESSEE TO ITS ASSOCIATE ENTERPRISE. IN REPLY, THE ASSESSEE S TATED THAT ITS ASSOCIATE ENTERPRISE NAMELY BGLNG PIPAVAV (IN SHORT BGLNG) HA D UNDERTAKEN PROJECT DEVELOPMENT ACTIVITIES IN INDIA, NAMELY, ID ENTIFYING, ANALYZING SPECIFIC PROJECTS IN INDIA ETC. IN A COST SHARING ARRANGEMENT, THE ASSESSEE AND BGLNG SHARED VARIOUS RESOURCES AND FAC ILITIES. THE ASSESSEE FACILITATED DISBURSEMENTS OF VARIOUS AMOUN TS ON BEHALF OF BGLNG OUT OF ADVANCES RECEIVED FROM ITS HOLDING COM PANY BG PLC (UK) THROUGH BG ASIA PACIFIC HOLDINGS PTE LTD. (SINGAPOR E). ACCORDINGLY, THE ASSESSEE COMPANY CHARGED/INCURRED EXPENSES AMOUNTIN G TO `3,22,82,224/- FOR BGLNG, AND THESE EXPENSES WERE I NCURRED BY THE ITA-2240/D/2006 & 2041/D/2009 3 ASSESSEE FROM THE ADVANCE REMITTANCES RECEIVED FROM THE HOLDING COMPANY I.E. BG. THE ASSESSEE FURTHER STATED THAT IT WAS AGREED WITH BG THAT THE EXPENSES SO INCURRED WOULD BE CHARGED T O THE PROJECT COMPANY, AND IN CASE, THE SAME WAS NOT RECOVERED FR OM THE PROJECT COMPANY, NAMELY BGLNG, THE SAME WOULD BE REIMBURSED BY BG BY WAY OF AN ADJUSTMENT AGAINST THE ADVANCE REMITTANCE S. IT WAS SUBMITTED BY THE ASSESSEE BEFORE THE AO THAT THE SU BJECT TRANSACTION IS A COST SHARING ARRANGEMENT BETWEEN THE ASSESSEE AND BGLNG RATHER THAN RENDERING OF SERVICES BY THE ASSESSEE. IT WAS FURTHER SUBMITTED THAT A MARK UP OF 8% ON COSTS WOULD HAVE BEEN APPRO PRIATE ONLY IF ASSESSEE COMPANY HAD RENDERED ANY SERVICES TO ITS A SSOCIATE ENTERPRISE. THE ASSESSEE FURTHER CLARIFIED THAT 8% MARK UP ON COST HAS ALREADY BEEN CHARGED WHERE ASSESSEE HAD RENDERED SE RVICES TO ITS ASSOCIATE ENTERPRISE. BUT, SINCE IT WAS MERELY A C OST SHARING ARRANGEMENT, NO CONTRACTUAL AGREEMENT WAS MADE TO P ROVIDE FOR MARK UP ON DISBURSEMENT OF VARIOUS AMOUNTS ON BEHALF OF BGLNG OUT OF ADVANCES MADE BY BG. THE ASSESSEE FURTHER STATED B EFORE THE AO THAT NO ADJUSTMENT IN THIS REGARD HAS BEEN MADE BY THE T PO WHILE DETERMINING THE ARMS LENGTH PRICE OF THE TRANSACTI ONS ENTERED INTO WITH THE ASSOCIATE ENTERPRISE. 6. THE AFORESAID EXPLANATION HAS BEEN CONSIDERED BY THE AO BUT HE DID NOT ACCEPT THE SAME. THE AO STATED THAT THE TP O IN HIS ORDER HAS STATED THAT THE PLEA OF THE ASSESSEE TO THE EFFECT THAT ASSESSEE HAS INCURRED A COST OF `3,22,82,224/- ON BEHALF OF ITS AE FOR WHICH IT WAS REIMBURSED BY AE WITHOUT ANY MARK UP AND IT WAS A P ART OF COST SHARING ARRANGEMENT WITH THE AE AND THE NATURE OF T HE TRANSACTION DOES NOT FALL WITHIN THE AMBIT OF SECTION 92, WAS R EJECTED. THE AO FURTHER POINTED OUT THAT DUE TO REJECTION OF THE AS SESSEES PLEA, THE OPERATING PROFIT/TOTAL COST RATIO OF THE ASSESSEE W ENT DOWN TO 6.69% BUT SINCE THE OP/TC OF THE ASSESSEE AT 6.69 DID FAL L WITHIN THE RANGE OF ITA-2240/D/2006 & 2041/D/2009 4 +/- 5% OF THE ARMS LENGTH PRICE MARGIN OF 10.55%, NO ADJUSTMENT IN ARMS LENGTH PRICE WAS MADE BY THE TPO. THE AO, TH EREFORE, TOOK A VIEW THAT THE ASSESSEES PLEA THAT THE REIMBURSEMEN T OF THE COST OF `3,22,92,224/- WAS A PART OF COST SHARING ARRANGEME NT WAS NOT ACCEPTED BY THE TPO. THE AO, THEREFORE, WORKED OUT THE MARK UP OF 8% ON COST OF `3,22,82,224/- AND MADE AN ADDITION O F `25,82,578/- TO THE TOTAL INCOME OF THE ASSESSEE. 7. BEING AGGRIEVED, THE ASSESSEE PREFERRED AN APPEA L BEFORE THE LEARNED CIT(A). 8. AFTER CONSIDERING THE ASSESSEES SUBMISSION AND AOS ORDER AND TPOS FINDINGS, THE CIT(A) CONFIRMED THE AOS ACTIO N. WHILE CONFIRMING THE AOS ACTION, THE LEARNED CIT(A) HAS OBSERVED TH AT THE ASSESSEE HAS NOT SHOWN THE 8% MARK UP THOUGH SERVICES WERE RENDE RED BY THE ASSESSEE AND THE DEPARTMENT HAS CLEARLY DISCHARGED ITS BURDEN TO SHOW THAT THIS WAS NOT A COST SHARING ARRANGEMENT B UT THIS WAS ACTUALLY THE SERVICES RENDERED BY THE ASSESSEE COMP ANY. IN THIS VIEW OF THE MATTER, THE LEARNED CIT(A), THEREFORE, HAD T AKEN A VIEW THAT 8% MARK UP OUGHT TO HAVE BEEN SHOWN BY THE ASSESSEE AN D ASSESSEE COULD NOT ESCAPE THE INCIDENCE OF TAX BY NOT SHOWIN G IT AS ITS INCOME. THE CIT(A) FURTHER OBSERVED THAT THE AO HAS CONSIDE RED THE TRUE NATURE OF THE TRANSACTION WHILE MAKING THE ADDITION AND, T HEREFORE, THERE WAS NO MERIT IN THE ASSESSEES CASE. THE LEARNED CIT(A ), THEREFORE, REJECTED THE ASSESSEES PLEA. 9. HENCE, THE ASSESSEE IS IN FURTHER APPEAL BEFORE US. 10. THE LEARNED COUNSEL FOR THE ASSESSEE HAS SUBMIT TED THAT THE ASSESSEE COMPANY WAS ENGAGED IN RENDERING SERVICES TO ITS AFFILIATES AND HAD SOME RESOURCES AND FACILITIES IN EXCESS OF ITS REQUIREMENTS. ITA-2240/D/2006 & 2041/D/2009 5 HE POINTED OUT THAT MARK UP OF 8% WITH REGARD TO TR ANSACTIONS OF RENDERING SERVICES TO ITS AFFILIATES HAS BEEN SHOWN BY THE ASSESSEE. HOWEVER, NO MARK UP HAS BEEN EARNED BY THE ASSESSEE IN RESPECT OF THE FACILITATION OF DISBURSEMENT OF VARIOUS EXPENSE S INCURRED ON BEHALF OF BGLNG OUT OF THE ADVANCES MADE BY THE BG GROUP A S NO SERVICES WERE ACTUALLY RENDERED BY THE ASSESSEE IN THAT RESP ECT BUT ONLY IT WAS A CASE OF COST SHARING ARRANGEMENT. HE FURTHER SUB MITTED THAT A MARK UP ON COSTS INCURRED IN CONNECTION WITH COST SHARIN G ARRANGEMENT WOULD HAVE BEEN APPROPRIATE ONLY IF THE ASSESSEE HA D RENDERED SERVICES TO ITS AFFILIATES. HE FURTHER SUBMITTED T HAT ASSESSEE AND HIS GROUP COMPANY HAVE CONTRACTUALLY AGREED NOT TO PROV IDE FOR MARK UP ON DISBURSEMENT OF VARIOUS EXPENSES ON BEHALF OF BG LNG OUT OF ADVANCES MADE BY THE BRITISH GAS GROUP. UNDER THE COST SHARING ARRANGEMENT, THE ONLY FUNCTION PERFORMED BY THE ASS ESSEE WITH REGARD TO PROJECT DEVELOPMENT WAS DISBURSAL AND FACILITATI ON OF PAYMENTS AND COORDINATION OF THE SERVICES FOR WHICH THE ASSESSEE HAS BEEN REIMBURSED ADEQUATELY UNDER THE SERVICE AGREEMENT A ND AS SUCH, THERE WAS NO INCREMENTAL EFFORT INCURRED BY THE ASS ESSEE FOR INCURRING THESE COSTS AND MAKING THE ABOVE PAYMENTS. HE FURT HER POINTED OUT THAT ASSESSEE WAS ONLY INCURRING COSTS ON BEHALF OF BGLNG, WHICH WILL EITHER BE CHARGED TO BGLNG OR WILL BE ADJUSTED AGAI NST THE ADVANCES REMITTED BY BG GROUP. HE FURTHER SUBMITTED THAT TH ERE WAS NO SEPARATE AGREEMENT BETWEEN THE ASSESSEE AND BGLNG I N THIS REGARD, AND IT WAS ONLY AS PER THE ARRANGEMENT BETWEEN THE ASSESSEE AND BGLNG THAT THE ASSESSEE WAS ENTITLED TO ONLY A REIM BURSEMENT OF COST AND NO MARK UP IS PAYABLE ON THE SAME. HE, THEREFO RE, SUBMITTED THAT NO REAL INCOME HAD ACCRUED NOR RECEIVED BY THE ASSE SSEE, AND THE AO HAS MADE THE ADDITION ONLY ON NOTIONAL BASIS. HE F URTHER SUBMITTED THAT REIMBURSEMENT OF EXPENSES ARE NOT LIABLE TO TA X AS NO PROFIT ELEMENT IS INVOLVED THEREIN. ITA-2240/D/2006 & 2041/D/2009 6 11. THE LEARNED DR, ON THE OTHER HAND, SUPPORTED TH E REASONING AND THE BASIS GIVEN BY THE AUTHORITIES BELOW IN MAKING THE ADDITION OF MARK UP OF 8% ON COST OF `3,22,82,224/- INCURRED BY THE ASSESSEE ON BEHALF OF BGLNG. HE, THEREFORE, SUPPORTED THE ORDERS OF A UTHORITIES BELOW. 12. WE HAVE CONSIDERED THE RIVAL CONTENTIONS OF BOT H THE PARTIES AND PERUSED RELEVANT MATERIAL ON RECORD. 13. IT IS NOT IN DISPUTE THAT THE ASSESSEE COMPANY MADE PAYMENTS OF VARIOUS EXPENSES ON BEHALF OF BGLNG. THE ASSESSEE HAS CLAIMED THAT ASSESSEE FACILITATED DISBURSEMENT OF VARIOUS AMOUNT S ON BEHALF OF BGLNG OUT OF ADVANCES MADE BY THE BG GROUP. IT IS THE ASSESSEES CASE THAT IT IS MERELY A COST SHARING ARRANGEMENT B ETWEEN ASSESSEE AND ITS AFFILIATES. THE ASSESSEE HAS NOT FILED ANY SEPARATE AGREEMENT WITH BGLNG TO SUPPORT ITS CASE. HOWEVER, ON THE OT HER HAND, THE AO HAS TAKEN A VIEW THAT THE PAYMENTS WERE MADE IN CON NECTION WITH THE SERVICES RENDERED BY THE ASSESSEE TO ITS AFFILIATES AND THEREFORE, 8% MARK UP OF THE EXPENSES INCURRED WAS LIABLE TO BE I NCLUDED IN THE ASSESSEES INCOME. ON PERUSAL OF THE PAPER BOOK FI LED BY THE ASSESSEE, WE FIND THAT THE ASSESSEE SUBMITTED A LET TER DATED 27.12.2004 BEFORE THE TPO WHERE ASSESSEE FURNISHED THE NATURE OF THE EXPENSES BROADLY CATEGORIZED THEM INTO CERTAIN CATE GORIES MENTIONED IN THE SAID LETTER. THESE EXPENSES WERE CATEGORIZE D INTO (I) EXPATRIATE EMPLOYEES RELATED DIRECT COSTS, (II) LOCAL EMPLOYEE S RELATED AND OTHER DIRECT COSTS AND (III) ALLOCATED COSTS. WE FIND TH AT BEFORE CONCLUDING THAT THESE EXPENSES WERE DISBURSED BY THE ASSESSEE COMPANY ON BEHALF OF THE GROUP COMPANY IN CONNECTION WITH SERV ICES RENDERED BY THE ASSESSEE, THE AO HAS FAILED TO EXAMINE AND VERI FY THE NATURE AND PURPOSE OF THESE EXPENSES VIS-A-VIS NATURE OF SERVI CES RENDERED BY THE ASSESSEE WITH A VIEW TO DETERMINE AS TO WHETHER THE SE EXPENSES ARE DIRECTLY RELATABLE TO THE SERVICES RENDERED BY THE ASSESSEE COMPANY TO ITA-2240/D/2006 & 2041/D/2009 7 ITS GROUP COMPANY, IN RESPECT OF WHICH 8% MARK UP W AS RECEIVABLE. THE TERMS OF EMPLOYMENT OF EXPATRIATE EMPLOYEES AND LOCAL EMPLOYEES HAVE NOT BEEN BROUGHT ON RECORD TO DETERM INE WHETHER WORKS EXECUTED BY EMPLOYEES WERE RELATED TO THE SER VICES RENDERED BY THE ASSESSEE TO ITS ASSOCIATES AND/OR WHETHER TH EY WERE WORKING UNDER THE CONTROL AND MANAGEMENT OF THE ASSESSEE. THE NATURE OF WORK OR ACTIVITIES, IN THE COURSE OF WHICH THE EXPE NSES IN QUESTION WERE ALLEGEDLY DISBURSED BY THE ASSESSEE FOR AND ON BEHA LF OF ITS ASSOCIATES, NEED TO BE EXAMINED AND VERIFIED TO ASCERTAIN WHETH ER EXPENSES WERE RELATED OR CONNECTED TO THE SERVICES RENDERED BY TH E ASSESSEE COMPANY. THE QUESTION AS TO WHETHER IT WAS MERELY A COST SHARING ARRANGEMENT OR WHETHER THE PAYMENT WAS MADE BY THE ASSESSEE IN THE COURSE OF ANY SERVICES RENDERED BY THE ASSESSEE COMPANY TO ITS AFFILIATES CAN ONLY BE DECIDED AFTER EXAMINING AND VERIFYING THE NATURE AND PURPOSE OF THE EXPENSES INCURRED BY THE ASSESSE E VIS-A-VIS NATURE OF SERVICES RENDERED BY THE ASSESSEE IN RESPECT OF WHICH 8% MARK UP HAS BEEN SHOWN. IF ONE EXAMINES THE NATURE AND PUR POSE OF THE EXPENSES INCURRED BY THE ASSESSEE FOR AND ON BEHALF OF ITS AFFILIATES VIS- A-VIS NATURE OF SERVICES RENDERED, THAT MAY MAKE IT CLEAR AS TO WHETHER IT WAS MERELY A COST SHARING ARRANGEMENT OR WHETHER IT WAS IN CONNECTION WITH SOME SERVICES RENDERED BY THE ASSES SEE COMPANY TO ITS AFFILIATES. THE CONCLUSION ARRIVED AT BY THE A O THAT ALL THE SERVICES RENDERED BY THE ASSESSEE COMPANY COME UNDER THE PUR VIEW OF SERVICES RENDERED IS MADE WITHOUT EXAMINING AND VER IFYING THE NATURE AND PURPOSE OF THE EXPENSES DISBURSED BY THE ASSESS EE COMPANY. IN ORDER TO DECIDE AS TO WHETHER IT WAS MERELY A COST SHARING ARRANGEMENT OR THE PAYMENTS WERE MADE IN THE COURSE OF RENDERING SERVICES BY THE ASSESSEE TO AFFILIATES NEED TO BE D ECIDED AFTER EXAMINING THE VARIOUS ASPECTS OF THE MATTER AND VAR IOUS SERVICES UNDERTAKEN BY THE ASSESSEE VIS-A-VIS THE NATURE AND PURPOSE OF THE ALLEGED PAYMENT MADE FOR AND ON BEHALF OF BGLNG BY THE ASSESSEE. ITA-2240/D/2006 & 2041/D/2009 8 THE TERMS AND CONDITIONS OF THE SERVICE AGREEMENT D ATED 23 RD AUGUST, 2002 BETWEEN THE ASSESSEE AND BG ASIA PACIFIC HOLDI NGS PTE.LTD. (SINGAPORE) NEED TO BE EXAMINED IN THE LIGHT OF NAT URE OF EXPENSES DISBURSED BY THE ASSESSEE. THEREFORE, WE FIND IT F IT AND PROPER TO RESTORE THE MATTER BACK TO THE FILE OF THE AO FOR F URTHER EXAMINATION AND VERIFICATION SO THAT THE REAL NATURE OF THE TRA NSACTION MAY BE ASCERTAINED AND DETERMINED HAVING REGARD TO THE FAC TS AND CIRCUMSTANCES OF THE PRESENT CASE. WE, THEREFORE, RESTORE THIS MATTER BACK TO THE FILE OF THE AO FOR HIS FRESH ADJUDICATI ON AFTER PROVIDING REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESS EE. THE AO SHALL MAKE SUCH ENQUIRY OR INVESTIGATION AS HE THINKS FIT AND PROPER AS PER LAW, TO DECIDE THE ISSUE IN ITS RIGHT AND CORRECT P ERSPECTIVE. WE ALSO OBSERVE THAT THE ASSESSEE SHALL BE AT LIBERTY TO PR ODUCE AND FURNISH ANY SUCH OTHER EVIDENCE OR MATERIAL OR INFORMATION BEFORE THE AO AND MAY ADVANCE SUCH CONTENTIONS OR SUBMISSIONS AS ASSE SSEE THINKS FIT AND PROPER TO SUPPORT ITS CASE. THE MATTER SHALL R EMAIN OPEN FOR FRESH ADJUDICATION BY THE AO AS PER LAW. WE ORDER ACCORD INGLY. 14. GROUND NO.3 IS DIRECTED AGAINST CIT(A)S ORDER IN UPHOLDING THE ACTION OF THE AO IN DISALLOWING ENTERTAINMENT EXPEN SES AND STAFF FUNCTION EXPENSES AMOUNTING TO `2,98,431/-. 15. THE AO HAS DISCUSSED THIS ISSUE IN PARA 6 OF HI S ORDER WHERE THE DETAILS OF THE EXPENSES ITEM-WISE AND AMOUNT-WISE H AVE BEEN NARRATED. THE AO HAS DISALLOWED THESE EXPENSES MER ELY BY OBSERVING THAT THESE EXPENSES ARE PERSONAL IN NATURE AND NOT WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. HE, ACCOR DINGLY, DISALLOWED THE EXPENSES OF `2,98,431/-. 16. ON AN APPEAL, THE LEARNED CIT(A) CONFIRMED THE AOS ACTION. THE CIT(A) HAS OBSERVED THAT THESE EXPENSES WERE CLAIME D BY THE ITA-2240/D/2006 & 2041/D/2009 9 ASSESSEE AS STAFF WELFARE EXPENSES BUT IT IS VERY U NLIKELY THAT FOR THE PARTIES GIVEN BY THE CEOS, DIRECTORS ETC., STAFF OF ALL THE LEVELS WILL BE INCLUDED. THE CIT(A) FURTHER OBSERVED THAT TOKEN E XPENSES INCURRED ON ACCOUNT OF FAREWELL ARRANGED IN THE OFFICE CAN BE A LLOWED BUT FROM THE DETAILS, IT WAS SEEN THAT THE FAREWELL EXPENSES WER E INCURRED AT A LEVEL OF `1,39,826/-, `65,673/-, `22,850/- AND `2,912/- E TC. THE CIT(A) FURTHER OBSERVED THAT THE ASSESSEE HAS NOT FURNISHE D THE DETAILS OF STAFF MEMBERS, WHO PARTICIPATED IN THE CRICKET MATC H FOR WHICH MORE THAN `16,000/- WAS EXPENDED. THE CIT(A), THEREFORE , UPHELD THE ADDITION. 17. HENCE, THE ASSESSEE IS IN APPEAL BEFORE US. 18. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE ORDERS OF THE AUTHORITIES BELOW. 19. FROM THE DETAILS OF THE EXPENSES, WE FIND THAT THE EXPENSES WERE INCURRED ON ACCOUNT OF FAREWELL GIVEN TO CERTAIN DI RECTORS AND EMPLOYEES AND EXPENSES INCURRED ON CRICKET MATCH. THE FACT THAT AMOUNT HAS ACTUALLY BEEN INCURRED BY THE ASSESSEE I S NOT IN DISPUTE. NOWADAYS IN THE BUSINESS WORLD, ARRANGING FAREWELL PARTIES AND DINNERS AND ARRANGING CRICKET MATCH IS COMMON TO ADVANCE TH E WELFARE ACTIVITIES AMONGST THE STAFF. IT IS NOT IN DISPUTE THAT THE ASSESSEE COMPANY IS A BIG COMPANY WITH HUGE STAFF AND INCURR ING AN AMOUNT OF `2,98,431/- AGAINST THE TOTAL SERVICES REVENUE OF ` 17,83,17,199/- IS NOT AT ALL ON HIGHER SIDE. IT IS WELL SETTLED THAT EXP ENDITURE INCURRED BY THE COMPANY ON MAKING GIFTS TO EMPLOYEES AND HOSTING DI NNER AT A FAREWELL PARTY IS PURELY ON COMMERCIAL CONSIDERATIO N AND OF BUSINESS EXPEDIENCY TO MAINTAIN HEALTHY RELATIONSHIP BETWEEN THE COMPANY AND ITS STAFF. WE, THEREFORE, HOLD THAT THE DISALLOWAN CE OF `2,98,431/- INCURRED BY THE ASSESSEE ON FAREWELL PARTIES AND CR ICKET MATCH CANNOT ITA-2240/D/2006 & 2041/D/2009 10 BE SAID TO BE NON-BUSINESS IN NATURE. WE, THEREFOR E, ALLOW THE ASSESSEES CLAIM OF EXPENSES AND DELETE THE ADDITIO N. 20. LAST GROUND NO.4 IS AGAINST CIT(A)S ORDER IN U PHOLDING THE ACTION OF THE AO IN DISALLOWING THE EXPENSES OF `68,378/- BEING PAYMENTS MADE TO PERSONS SPECIFIED U/S 40A(2)(B) OF THE ACT. 21. ON PERUSAL OF THE AUDIT REPORT, IT WAS NOTICED BY THE AO THAT SUM OF `68,378/- WAS PAID TO SPOUSES OF THE DIRECTORS O N ACCOUNT OF CELL PHONE EXPENSES INCURRED DURING THE YEAR. THE AO ST ATED THAT SPOUSES OF THE DIRECTORS ARE NOT ASSOCIATED WITH THE WORKIN G OF THE COMPANY AND HENCE, THE PAYMENT MADE TO THEM HAS NO CONNECTI ON WITH BUSINESS OF THE ASSESSEE COMPANY. THE AO, THEREFOR E, DISALLOWED THE AFORESAID EXPENSES AND ADDED THE SAME TO THE ASSESS EES TOTAL INCOME. 22. ON AN APPEAL, THE LEARNED CIT(A) DECIDED THE IS SUE AGAINST THE ASSESSEE IN THE LIGHT OF THE APPELLATE ORDER OF CIT (A) DATED 25.4.2005 PERTAINING TO THE AY 2001-02. 23. HENCE, THE ASSESSEE IS IN APPEAL BEFORE US. 24. WE HAVE HEARD BOTH THE PARTIES AND CONSIDERED T HE MATERIAL ON RECORD. 25. THE LEARNED COUNSEL FOR THE ASSESSEE HAS SUBMIT TED THAT EVEN EXPENDITURE INCURRED VOLUNTARILY ON THE GROUND OF C OMMERCIAL EXPEDIENCY AND IN ORDER TO INDIRECTLY FACILITATE TH E CARRYING ON OF THE BUSINESS WOULD BE DEDUCTIBLE U/S 37 OF THE ACT. HO WEVER, THE ASSESSEE HAS NOT BEEN ABLE TO ESTABLISH AS TO HOW THE PAYMEN T MADE TOWARDS TELEPHONE EXPENSES OF DIRECTORS WIVES INCURRED VOL UNTARILY BY THE ITA-2240/D/2006 & 2041/D/2009 11 COMPANY CAN BE SAID TO BE ON THE GROUND OF COMMERCI AL EXPEDIENCY AND FACILITATING THE CARRYING ON OF THE BUSINESS OF THE ASSESSEE. THE DIRECTORS WIVES ARE NOT IN ANY WAY CONNECTED OR RE LATED TO ANY BUSINESS ACTIVITY OF THE ASSESSEE. WE, THEREFORE, DO NOT FIND ANY MERIT IN THIS GROUND AND REJECT THE SAME. THE ORDER OF C IT(A) ON THIS GROUND IS THUS UPHELD. 26. NOW, WE SHALL COME TO THE APPEAL PERTAINING TO THE AY 2003-04. 27. GROUND NOS.1 TO 7 RAISED BY THE ASSESSEE HAVE B EEN SUMMARIZED IN THE WRITTEN SYNOPSIS FILED BY THE ASSESSEE AS UN DER:- THE LEARNED CIT(A) HAS ERRED ON FACTS AND IN LAW I N UPHOLDING THE ACTION OF THE AO IN ADDING A MARK-UP OF RS.20,87,572/- TO THE RETURNED INCOME OF THE APPELL ANT BEING 8% OF THE COST OF RS.26,094,655 INCURRED BY T HE APPELLANT ON BEHALF OF BG PIPAVAV LNG(PVT) LTD., AN D TAXING NOTIONAL INCOME WHICH NEVER ACCRUED TO/RECEIVED BY THE APPELLANT. 28. IN THE COURSE OF ASSESSMENT PROCEEDINGS, IT WAS FOUND BY THE AO THAT ASSESSEE HAD INCURRED EXPENSES AMOUNTING TO `2 ,60,94,655/- ON BEHALF OF BG LNG PIPAVAV PVT.LTD. (IN SHORT BGLNG) AND THE SAME WERE SPENT OUT OF THE ADVANCES MADE BY BG ASIA PACIFIC H OLDINGS PTE.LTD. (SINGAPORE) (IN SHORT BGAPH). THE ASSESSEE COMPANY DID NOT PROVIDE ANY MARK UP OF 8% ON THE AFORESAID AMOUNT OF `2,60, 94,655/- ON THE GROUND THAT ASSESSEE HAD MERELY FACILITATED THE PAY MENTS WITHOUT THERE BEING ANY SERVICES RENDERED BY THE ASSESSEE C OMPANY. HOWEVER, AO HAS TAKEN A VIEW THAT THESE EXPENSES WE RE INCURRED IN CONNECTION WITH SERVICES RENDERED BY THE ASSESSEE A ND, THEREFORE, ASSESSEE SHOULD HAVE BOOKED MARK UP OF 8% AS INCOME IN ITS BOOKS OF ACCOUNT AS SO BOOKED IN THE CASE OF AMOUNT RECEIVED AGAINST THE SERVICES RENDERED. THE AO, THEREFORE, MADE AN ADDI TION OF `20,87,572/- BEING 8% OF `2,60,94,655/-. ITA-2240/D/2006 & 2041/D/2009 12 29. ON AN APPEAL, CIT(A) CONFIRMED THE AOS ACTION AFTER FOLLOWING THE CIT(A)S ORDER PASSED IN AY 2002-03. 30. HENCE, THE ASSESSEE IS IN APPEAL BEFORE US. 31. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. 32. AN IDENTICAL ISSUE HAD COME UP BEFORE US FOR CO NSIDERATION IN THE AY 2002-03 WHERE BY THIS COMMON ORDER, WE HAVE REST ORED THE MATTER BACK TO THE FILE OF THE AO FOR HIS FRESH EXAMINATIO N/ADJUDICATION AFTER PROVIDING REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. IN THE LIGHT OF OUR ORDER FOR THE AY 2002-03, THIS ISS UE IS RESTORED BACK IN THIS ASSESSMENT YEAR ALSO WITH THE SAME DIRECTIONS AS GIVEN IN AY 2002-03 VIDE THIS COMMON ORDER. 33. GROUND NO.8 IS DIRECTED AGAINST THE CIT(A)S OR DER IN CONFIRMING THE ADDITION OF `1,04,317/- MADE BY THE AO ON ACCOU NT OF DISALLOWANCE OF ALLEGED BUSINESS DEVELOPMENT EXPENSES. 34. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, IT WAS FOUND BY THE AO THAT ASSESSEE HAD INCURRED `1,04,317/- TOWAR DS EXPENSES INCURRED ON ACCOUNT OF HOLDING PARTIES AT NIGELS R ESIDENCE ON SEVERAL OCCASIONS. THE AO DISALLOWED THE SAME BY OBSERVING THAT THESE EXPENSES WERE PERSONAL IN NATURE AND NOT WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. 35. ON AN APPEAL, CIT(A) CONFIRMED THE AOS ACTION AFTER FOLLOWING THE ORDER OF LEARNED CIT(A) PASSED IN IMMEDIATELY P RECEDING ASSESSMENT YEAR. ITA-2240/D/2006 & 2041/D/2009 13 36. THE LEARNED COUNSEL FOR THE ASSESSEE HAS SUBMIT TED THAT THE ISSUE INVOLVED IN AY 2002-03 WAS REGARDING THE DISA LLOWANCE OF VARIOUS EXPENSES INCURRED ON DINNERS, PARTIES OF FAREWELL A ND ARRANGING CRICKET MATCHES. HOWEVER, IN THE YEAR UNDER CONSIDERATION, THE EXPENSES WERE INCURRED IN CONNECTION WITH ARRANGING DINNER M EETING AT NIGELS AND PHILS RESIDENCE, THE TWO DIRECTORS OF THE ASSE SSEE COMPANY. HE FURTHER SUBMITTED THAT PARTIES AT DIRECTORS HOUSE WERE ARRANGED FOR THE PURPOSE OF ESTABLISHING AND MAINTAINING BUSINES S RELATIONSHIP WITH VARIOUS CUSTOMERS AND PROSPECTIVE CUSTOMERS. HE, A CCORDINGLY, SUBMITTED THAT EXPENSES SUCH AS LUNCH, DINNER OR SM ALL PARTIES AND GET TOGETHER OR EXPENSES INCURRED ON MEALS CAN, BY NO S TRETCH OF IMAGINATION, BE CONSIDERED AS PERSONAL EXPENSES. I N THIS CONNECTION, HE HAS GIVEN A WRITTEN SYNOPSIS CITING CERTAIN DECI SIONS. 37. THE LEARNED DR, ON THE OTHER HAND, SUBMITTED TH AT ARRANGING PARTIES AT DIRECTORS HOUSE ARE PURELY FOR NON-BUSI NESS PURPOSE AND, THEREFORE, THE AUTHORITIES BELOW HAVE RIGHTLY REJEC TED THE ASSESSEES CLAIM. 38. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. 39. THE AMOUNT INCURRED ON LUNCHES AND DINNERS IS V ERY NOMINAL AMOUNTING TO `1,04,317/- WITH REFERENCE TO THE TOTA L SERVICE REVENUE REALIZED BY THE ASSESSEE OF `15,64,24,289/-. NOWAD AYS, IT IS NOT UNCOMMON THAT LUNCHES AND DINNERS ARE BEING ARRANGE D AT DIRECTORS HOUSE WHERE THE CUSTOMERS OF THE COMPANY ARE INVITE D TO DEVELOP CORDIAL RELATIONS WITH THEM. IN THIS CASE, THE AMO UNT IS VERY NOMINAL AND IT HAS NOT BEEN PROVED THAT THE PARTIES WERE NO T ARRANGED BY THE COMPANY BUT IT WAS A PERSONAL PARTY OF A DIRECTOR. WE ARE, THEREFORE, ITA-2240/D/2006 & 2041/D/2009 14 OF THE CONSIDERED VIEW THAT ASSESSEES CLAIM OF EXP ENSES OF `1,04,317/- INCURRED ON LUNCHES AND DINNERS IS ALLO WABLE. WE, THEREFORE, DIRECT THE AO TO ALLOW THE SAME. 40. IN THE RESULT, BOTH THE APPEALS PERTAINING TO T HE AY 2002-03 & 2003-04 ARE PARTLY ALLOWED IN THE MANNER AS INDICAT ED ABOVE. DECISION PRONOUNCED IN THE OPEN COURT ON 8 TH APRIL, 2011. SD/- SD/- (G.E.VEERABHADRAPPA (G.E.VEERABHADRAPPA (G.E.VEERABHADRAPPA (G.E.VEERABHADRAPPA) )) ) (C.L.SETHI (C.L.SETHI (C.L.SETHI (C.L.SETHI) )) ) VICE PRESIDENT VICE PRESIDENT VICE PRESIDENT VICE PRESIDENT JUDICIAL MEMBER JUDICIAL MEMBER JUDICIAL MEMBER JUDICIAL MEMBER DATED : 08.04.2011. VK. COPY FORWARDED TO: - 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT ASSISTANT REGISTRAR ITA-2240/D/2006 & 2041/D/2009 15