Bg International Ltd., Dehradun vs Assessee

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.

ORDER

PER S.V. MEHROTRA, A.M:-

This appeal, preferred by the assessee, is directed against the

assessment order dated 30-11-2011, framed by the AO 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 draft assessment order, the 2 ITA no. 171/Del/2012 B.G. International Ltd.

AO noticed that assessee had received payments from 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 been reflected by

assessee in its return of income. He further observed that assessee had

neither maintained any books of a/c., nor got its accounts audited as per

provisions of section 44AB of the I.T. Act. The assessee was confronted

with the fact that BGEPIL had claimed above expenses in their P&L A/c,

but the assessee had not shown the corresponding income. The assessee took

the plea that they were reimbursements. The AO did not accept the

assessee's contention, inter alia, observing that the claim was not supported

by any evidence and in order to establish that the payments were reimbursed

on actual expenses, assessee should have shown the date of receipt of

payment in their account from BGEPIL and corresponding expenses made

with details of parties to whom payment was made. The AO further

observed that during the assessment of BGEPIL it came to the notice of the

TPO that services were actually not rendered by the assessee to BGEPIL

and, therefore, in the absence of any services rendered by the assesssee, the 3 ITA no. 171/Del/2012 B.G. International Ltd.

entire receipt was income in the hands of the assessee. AO further observed

that during the survey operation on the premises of the assesssee and

BGEPIL it was noticed that no requisitioning of services was made by

BGEPIL to the assessee and no evidence was furnished 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 element of profit. The AO

pointed out that assessee in its reply gave the following 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 assessee's reply has been reproduced on page 3, which was as under:

Management service and unit charges The assessee has submitted the nature of services rendered MSU charges consist of the following costs recharged by BGIL.

4 ITA no. 171/Del/2012 B.G. International Ltd.

Time writing charges - BGIL has recharged the cost of time spent by its personnel based overseas for the assessee's operations in India.

Allocation of administrative costs incurred by BGIL: BGIL has recharged certain administrative costs incurred outside 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 allocation of the aforesaid costs has been verified by M/s. Price Water House Coopers and they have, vide their report dated 20 November 2007 certified that the allocations made by BGIL confirm to the aforesaid policy. The said report along with the cost allocation and time writing policy of BGIL are enclosed as Annexure 12. The said cost allocations have also been verified by M/s. Lancaster 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 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 render: Copies of debit notes raised by BGIL on the assessee in respect of the MSU expenses on a sample basis {have already been enclosed as annexure to these written submissions. The said debit notes are supported by appropriate evidence of services rendered by BGIL. The balance debit notes may also be furnished before your goodself if so desired.

Reimbursement of expenses Nature of expenses: The expenses pertain to reimbursement of travel cost incurred by the senior management of BGIL in respect of the assessee's operations in India apart from certain other miscellaneous expenses. Copies of debit notes raised by BGIL on the assessee in respect of reimbursement of expenses on a sample basis have already been submitted as annexure to submissions. The said debit notes are supported by appropriate 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 desired. General and Administrative expenses Nature of expenses: The assessee has received certain charges (based on allocation of actual costs incurred) from its associated enterprises in the nature of general administration and geological and geophysical expenses that are paid by the assessee. Apart from the above, these expenses also include expenses incurred by third parties in respect of various services. Further, the basis of allocation of the aforesaid costs 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 policy. The said report along with the cost allocation and time writing policy of BGIL are enclosed as Annexure 12 above. The said cost allocations have a/so been verified by M/s. Lancaster 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 notes raised b BGIL have already been enclosed as annexure to these written submissions. The said debit notes are supported by appropriate evidence of services rendered by BGIL. The balance debit notes may also be furnished beta your goodself if so desired. The assessee has received reimbursement on account of management service unit charges, general & administrative expenses on the basis of actual expenditure incurred by it. We are enclosing herewith for two months of the previous year 2007-08, the copies of debit notes raised by the assessee on BGEPIL. These debit notes, along with their supporting 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 that the services were actually provided by the assessee to BG Exploration & Production India Ltd."

2.4. The AO, being not satisfied with the above reply, again issued following

questionnaire:

"Please refer to the assessment proceeding for assessment 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 documentary 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 how the expenses other than reimbursement of expenses are also claimed by you as reimbursement of expenses.

3. Regarding payroll expenses, please give the name of employees seconded by you to BGEIPL, the date when BGEIPL requisitioned the services of those expats from you with documentary evidence, the date of appointment with you and subsequently, after the tenure was over in India and where 7 ITA no. 171/Del/2012 B.G. International Ltd.

was the employee transferred. The details of payment received by you employee wise from BGEIPL and subsequent payment by you to the employees with evidence of payment from your bank account to substantiate your claim of so called cost to cost reimbursement. Please note that in absence of evidence of corresponding payment by you to the employee your claim of reimbursement will not be accepted.

4. Please explain why you are not required to maintain 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 income and expenditure account and get it audited as per the provisions of Income-tax Act, 1961. You have not done the same. Therefore, your claim of reimbursement is not substantiated with any evidence. The debit notes are only your claim to BGEIPL and not an evidence of reimbursement. In order to establish reimbursement, you have to furnish the following information in the following proforma:

Please note that you have to substantiate the above from your bank account.

5. Regarding management service unit charges and general and administrative charges, you have to substantiate the nature of services rendered, the location of services rendered, 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 various employees. The above information is also to be furnished in the proforma mentioned above. Please note that the debit 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 rendering of any services by you to BGEIPL and also no requisition was made by BGEIPL for availing those services from you. In the light of these facts, you are asked to show cause why your total receipt be not taxed as income without allowing any expenses 8 ITA no. 171/Del/2012 B.G. International Ltd.

as you have not incurred any expense to earn the above-said income.

7. Please explain the term parent over head.

8. Please explain the General and Administrative Expenses received by you from BGEIPL and the basis of such charges. Please prove the nature of the above as reimbursement with supporting document and the evidence of rendering of 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 evidence from your bank account.

9. What is the difference between al/ the three agreement signed in India on 15.02.2002. As per the service agreement for direct charges or operating charges, you have agreed to provide certain staff, support and personnel services. Please name the staff member who were provided to render the services, the nature of services rendered, the location of services rendered and the amount paid to such staff members by you. As per Exhibit A to the agreement, you were supposed to render various services to BGEIPL which you have not rendered as evidenced during the survey operation. Please explain why your claim of reimbursement be not rejected as you have received money without rendering any services.

10. Similarly, for allocated charges, you are being paid based on the provisions of production sharing contract. Please explain the basis of computation of general and administrative expense received by you from BGEIPL and corresponding payment to various parties to substantiate your claim of reimbursement. Please further explain what are the services rendered by you under General and Administrative head to BGEIPL. It is once again clarified that mere submission of .invoices is not an evidence to substantiate your claim of reimbursement. " 9

ITA no. 171/Del/2012 B.G. International Ltd.

2.5. The AO observed that assesseer's claim could not be allowed for the

following reasons:

(a) The assessee failed to furnish any worthwhile evidence to substantiate its of expenses.

(b) The accounts were not audited.

(c) There was no evidence of actual rendering of service.

(d) The allocation of expenses had not been substantiated to be directly linked to the business operations of an AE.

(e) No evidence of payment from the bank a/c of the assessee was submitted by the assessee.

(f) The only evidence was in the form of debit notes raised on BGEIPL by assessee. The AO observed that these debit notes were related to revenue earned by the assessee. However, neither t here was any evidence of actual services rendered nor any evidence that actual payment was made by the assessee to third parties.

(g) During the survey operation, the principal office of the assessee could not give individual name and could not provide document from BGEIPL to show its requisitioning of specialized 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 the assessee as BGEIPL was supposed to charge this to its parent and not the assessee. He accordingly computed the assessee's income at Rs.

97,28,98,465/-.

2.6. Without prejudice to above computation he further pointed out that

the income of the assessee was also taxable under the head "fees for

technical services", if it was accepted that the services were actually

rendered. He pointed out that the provisions of personnel 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

Hon'ble Uttrakhand High Court in the case of CIT & Another Vs. Enron Oil

and Gas India Ltd. 305 ITR 68. The other services were also covered under

the head "fees for technical services and taxable under 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 Article 7 of DTAA. As per

which the assessee's 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 computed the income of Rs.

97,28,98,465/-.

2.7. Against the draft assessment order the assessee filed objections before ld. DRP.

2.8. Ld. DRP, after considering the assessee's submissions, inter alia, held as under:

(a) The assessee has not been able to produce, either before the AO or before the DRP any convincing evidence (except for the payroll services to a limited extent), about actual rendering of these services.

(b) The evidence that the assessee referred in its submissions qua service agreement between the assessee and BGEPIL, list of employees of the assessee deputed to India, copies of 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 did not give any other evidence about the nature of services rendered, persons or parties who rendered the services, how and from which source and when the settlements were made for the consideration for these services.

(d) Considering the detailed consideration of the services involved, which was about Rs. 80 crores, the evidence that the assessee was able to produce, was absolutely insufficient.

(e) The assessee failed to keep books of a/c and got them audited as per the requirement of section 44AB.

2.9. Further, the assessee's contention before ld. DRP was that the

manner of account followed by it was based on a condition in the

production sharing contract signed by BGEPIL, ONGC and Reliance

Corporation with the Govt. of India, under which the 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 as under:

(a) If any Ministry or Department of Government of India introduces any scheme for promotion of industry, business, trade or for any other development activity in any field and any incentive is provided in respect of income generated 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 such income.

(b) Any condition laid down in the Production Sharing Contract (PSC), which is an administrative agreement, for the development of oil fields, cannot override the provisions of a Central Act enacted by the Central Government such as Income tax Act.

2.11. Since the assessee had not given complete text of the PSC, ld. DRP considered the model production sharing contract, as the terms were almost identical.

2.12. After examining the contents of Model agreement, which are reproduced from page 6 to 8 of its order, ld. DRP observed as under:

"A perusal of the above provisions shows that this is a code of conduct that governs the members of the PSC. The basic intention of the above provision is that the members of the PSC will charge fair and reasonable price for their share of activity carried out for the exploration/extraction/production of oil and gas. It is in that spirit that further conditions have been laid down for services availed by the member of PSC from an affiliate. What is laid down is that the services from 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 provision which lays down any restriction on an affiliate other than that of charging an arm's length price. The above provisions therefore have no bearing on •he way the affiliate is to conduct its business. It certainly does not absolve the assessee from the requirements of maintaining its books of accounts and getting them audited as required u/s 44AS of the I.T Act. As mentioned 13 ITA no. 171/Del/2012 B.G. International Ltd.

earlier such a condition cannot be made by any Department of Government of India except with an express amendment in the Income tax Act. This is supported by Article 17 of the Model Contract dealing with 'Taxes, Royalties, Rentals, Duties etc', para 17.1 of which reads as under:

"17.1 Companies, their employees, persons providing any materials, supplies, services or facilities or supplying any ship, aircraft, machinery, equipment or plant [whether by way of sale or hire) to the Companies for Petroleum Operations or for an r other purpose and the employees of such persons shall be subject to all fiscal legislation in India except where, pursuant to any authority granted under an 7 applicable law, they are exempted wholly or partly from the application of the revisions of a particular law or as otherwise provided herein."

In view of the above the plea taken by the assessee that it is not required to maintain any books of accounts and not to reflect the amounts received from BGEPIL in its Profit and expenditure in respect of services rendered to BGEPIL 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 BGEPIL. The TPO gave a

finding that the assessee was not able to provide any 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 BGEPIL, inspite of

sufficient opportunities given to, was unable to furnish any convincing 14 ITA no. 171/Del/2012 B.G. International Ltd.

evidence to prove that the services for which the assessee (BGEPIL) had

been remunerated, were actually rendered.

2.14. Ld. DRP concluded its findings as under:

"Taking into consideration the above facts and circumstances, this Panel is of the view that the assessee has not 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 respect of the following (to the extent third party evidence is submitted 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 evidence regarding third party cost is furnished by the assessee. 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 its hands as proposed by the A. O. However the A.O. will provide deduction on account of expenditure to the extent of 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. 88,45,32,930/- as under:

"Accordingly assessment is finalized as per the directions 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 us and has taken following

grounds of appeal:

"Based on the facts and circumstances of the case, BG International Limited (hereinafter referred to as the 'Appellant') craves leave to prefer an appeal against the order passed by the Assistant Director of Income Tax (International Taxation), Dehradun [hereinafter referred to as the 'learned AO' or 'AO'] under section 143(3)/ 144C(13) of the Income-tax Act, 1961 (hereinafter referred to as the 'Act'), in pursuance 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 prejudice 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 and 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 held 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 not 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 receipts 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 applicable to the Appellant, the learned AO/ DRP ought to have held that the income of the Appellant would have to be computed by reducing expenses incurred.

17

ITA no. 171/Del/2012 B.G. International Ltd.

Taxability under India - UK Double Taxation Avoidance Agreement ('DTAA') III. Taxing the receipts as fees for technical services ('FTS') under DTAA

8. The learned AO/ DRP has erred in law and in facts in not appreciating (without verifying the tax residency certificate of the Appellant) that the Appellant is a tax resident of UK and therefore, is entitled to the beneficial provisions under the DT AA.

9. The learned AO/ DRP has erred in law and in facts, in ignoring the fact that the reimbursements received by the Appellant are not taxable in India under Article 13 of the DT AA as FTS since the service does not make available any technical knowledge, experience, skill know-how or processes, or consist of the development and transfer of a technical plan or technical design to the Appellant.

IV. Permanent establishment ('PE') in India

10. The learned AO/ DRP has erred in facts in holding that the Appellant has a PE in India without seeking/ analysing any information to prove that a PE exists in India.

11. WITHOUT PREJUDUCE to Ground 10, assuming but not accepting that a PE exists, the AO/ DRP erred in treating all amounts received by the Appellant as income attributable to the PE. The learned AO/ DRP ought to have held that only income directly attributable to the PE should be taxable in India under the DTAA.

12. WITHOUT PREJUDUCE to Ground 10, assuming but not accepting that a PE exists, the Appellant being a non- resident engaged in the business of providing services and facilities in connection with extraction or production of mineral oils, the income shall be taxable under section 44BB 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 get 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 section 234B and 234C of the Act disregarding the fact that the Appellant is a non-resident Appellant, whose income is subject to tax deduction at source. Accordingly, interest under section 234B and 234C of the Act is not leviable to the Appellant.

VII. Initiating penalty proceedings under section 271 B of the Act

15. The learned AO/ DRP has erred in law and in fact, in initiating penalty proceedings under section 271 B of the Act for not getting the accounts audited as required under section 44AB of the Act.

VIII. Initiating penalty proceedings under section 271(1)(c) of the Act

16. The learned 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 well as furnishing of inaccurate particulars of income.

The Appellant craves leave to add, alter, omit 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 assessee 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 submitted that they are

academic in nature as they do not arise out of AO's order and stand 19 ITA no. 171/Del/2012 B.G. International Ltd.

dismissed accordingly. Ground nos. 15 & 16 are premature 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 enriched technical

expertise related to exploration and production activities in the oil and gas

sector. It possesses a wide pool of highly knowledgeable, technically trained

and experienced staff to engage in exploration and production related

activities. As part of its continued program of running efficient and cost

effective ventures across the world, the assessee provides requisite services/

support to its group entities and incurs certain expenditure/ cost on behalf of

such group entities ("assets") across the world, and the same is cross charged

to such group entities without any mark up.

6.1. Ld. counsel submitted that BG Exploration and Production India Ltd. ("BGEPIL") is a limited liability company incorporated in Cayman Islands and an Associated Enterprise of the assessee within the meaning of Sec. 92A of the Act. BGEPIL had entered into a production sharing contract ("PSC") dated 15-2-2002 (which was subsequently amended on 10-1-2005) along with Oil and Natural gas Commission ("ONGC") and Reliance Industries Ltd. ("RIL"), with the Government of India, for exploration and production of oil and gas hydrocarbons in India in the designated contracted fields of Panna Mukta and Mid and South Tapti fields. To execute such PSC and 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 industry.

Exploration challenges and low success rate (of finding oil deposits), makes use of high end and sophisticated technology, and, technically expert and highly trained and experienced human resource, imperative for this industry. The challenges are further marked by a dearth of experienced personnel with required level of technical expertise.

(ii) BGEPIL's Project Office in India does not possess all requisite expertise to discharge its critical business functions and requires extensive support of resources for carrying out its business efficiently. In order to perform its obligations under the PSC efficiently and optimally, BGEPIL is required to procure various services from the Appellant. Appellant incurs certain cost for providing various services to BGEPIL, which are then cross- charged to BGEPIL, without any mark-up, interalia, based on, appropriate allocation keys. The receipts pertain to such payments by BGEPIL to the Appellant, which represent cost incurred by the Appellant and are in the nature of reimbursements.

6.3. Ld. counsel further submitted that the assessee 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 form 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/ appeals 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 consideration. The

assessee had incurred expenditure on payroll expenses, management service

unit charges, general and administrative expenses etc. and had received

reimbursement of Rs. 972,898,465/- from BGEPIL towards such cross

charges/ cost allocation.

6.5. Ld. counsel submitted that in AY 2003-04, 2004-05 & 2005-06,

Tribunal vide its order dated 28-8-2009, restored the matter to the file of

AO, following the Tribunal's decision in the case of EGEPIL for A.Y. 2000-

01 as per ITA no. 861/Del/2005 dated 24-10-2008, observing in para 9 as

under:

"9. Since, we have noted that the facts in the present case are identical we decide this issue in the present case in principle in favour of the assessee respectively following this Tribunal decision but since factual aspect of this claim of the assessee that the receipt of the assessee in these three years is only reimbursement of the expenses from an affiliate company was not examined by the Assessing Officer or by the Ld. CIT(A), we feel that for the factual verification of this contention of the assessee, the issue should go back to the file of the Assessing Officer and if the assessee can satisfy the Assessing Officer on this aspect no addition can be made in all the three years. With these objections we confirm the order of the Ld. CIT(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 dismissed the revenue's

appeal observing in para 5 as under:

"The ITAT in these assessment years had agreed in principle with the assessee but set aside the issue for verification of factual aspects. However, in the present year, learned CIT(Appeals) has considered the factual aspects also in the finding extracted supra. In paragraph no. 9.3, learned CIT(Appeals) has observed that assessee has produced invoices and no material brought by the Assessing Officer to doubt the debit note and invoices. Hon'ble High Court has also considered this issue in the case of M/s Enron Expats, hence the dispute is squarely covered in favour of the assessee. As far as the apprehension of learned DR is concerned that possibility of profit embedded in the cost of professional services cannot be ruled out. We are of the opinion that other members of PSC would not allow the affiliated concern of any member 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 services rendered by the assessee to the PSC members could be rendered at a lower cost and should have established on record that in the garb of reimbursement of expenses, in fact, it is earning profit. Merely on apprehension, we cannot deviate from the view taken in earlier years which is more particularly in the lines of decision of Hon'ble Jurisdictional High Court's decision.

6.7. Ld. counsel submitted in assessee's case a reference was made to TPO

and the TPO proposed no adjustment, observing as under:

24 ITA no. 171/Del/2012 B.G. International Ltd.

"The assessee is a wholly owned subsidiary of BG Energy Holdings Ltd. which in turn is a wholly owned subsidiary of BG Group PLC.

The assessee has entered into following transactions

Total amount Description of such mutual receivable received/

Name of AE agreement or arrangement

As computed by As per the books of the account(INR} assessee having regard the arm's length price (INR) BG Payroll Expenses 219,736,534 219,736,534 & Production India Ltd Management services unit 530,806,352 530,806,352 charges General & administrative 191,610,571 191,610,571 -

expenses Reimbursement 30,585,488 30,585,488

Total 972,738,945 972,738,945

BG Reimbursement of expenses 50,98,140 50,98,1401 & Production India Ltd 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 the PB wherein the Cost

Allocation and time writing policy 2006 is contained 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 out.

6.9. Ld. counsel referred to the Global Allocation Policy and pointed out

that the direct cost incurred by assessee and directly attributable to cost

centres included mainly payroll and associated employee 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 cost centres and assets or of

a corporate nature.

6.10. Ld. counsel took us to various clauses of policy to buttress the

submission that the cost allocation policy was quite reasonable and debit

notes contained at page 347 were raised on the basis 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 also this policy was the

basis subject to slight modification in earlier years 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 assessee's

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 the PB, wherein the

reference was made u/s 92CA to TPO for determination 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 transactions:

S. No. Name of Description of Value of Method of Associated Transaction Transaction (INR) Computation of Enterprises ALP

1. BG Exploration and Payroll expenses 224,033,845 Not applicable Production India Ltd.

Management service & 608,755,894 Not applicable Unit charges General Administrative 232,867,196 Not applicable expenses Reimbursement of 32,060,972 expenses

6.15. Ld. counsel submitted that ld. DRP has allowed pay roll expenses

vide his order dated 10-12-2012 contained at page 14 to 19 of the PB and, 27 ITA no. 171/Del/2012 B.G. International Ltd.

therefore, ground no. 5 has not been pressed. Out of general and

administrative expenses and management expenses, ld. DRP has allowed

only third party cost but not the allocation as has been done by assessee as

per global allocation policy.

6.16. Ld. counsel further submitted that profit sharing contract has been

approved by government and, therefore, it over-rides the income-tax

provisions. In this regard he referred to section 42 of the I.T. Act and pointed

out that as per this section for the purpose of computing profits or gains of

any business consisting of the prospecting for or extraction or production of

mineral oils in relation to which the Central Government has entered into an

agreement with any person for the association or participation of the Central

Government or any person authorized by it in such business which

agreement has been laid on the table of each house of Parliament), there

shall be made in lieu of, or in addition to, the allowances admissible under

this Act, such allowances as are specified in the agreement in relation -

(a) to expenditure by way of infructuous or abortive exploration expenses in respect of any area surrendered prior to the beginning of commercial production by the assessee;

(b) after the beginning of commercial production, to expenditure incurred by the assessee, whether before 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 allowance for depreciation is admissible under section 32.

[Provided that in relation to any agreement entered into after the 31st 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 under section 32 had had been omitted; and]

(c) to the depletion of mineral oil in the mining area in respect of the assessment year relevant to the previous year in which commercial production is begun and for such succeeding year or years as may be specified in the agreement;

6.17. Ld. counsel relied on the decision of Hon'ble Uttrakhand High Court

in the case of Enron Oil and Gas India Ltd., which has been taken over by

BG International, wherein it has been held that taxability 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. The Hon'ble Uttrakhand

High Court has relied on the decision of another Division Bench in the case

of CIT & Another Vs. Enron Oil and Gas India Ltd. 305 ITR 68. Ld. counsel

further submitted that Hon'ble Jurisdictional High Court in that case has,

inter alia, observed that merely because in earlier 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 2006-07, same PSC has been

considered, which is under consideration in the present assessment year,

therefore, the decision of 2006-07 should be followed on the principle of

consistency.

7. Ld. CIT(DR) referred to pages 277 and 278 of the PB, wherein giving

effect to Tribunal's order is contained, in which assessee's contentions have

been noted as under:

"In this connection the assessee would apprise you that the documents pertaining to the assessment year in question are now over 7 years old, located in the United Kingdom and are extremely difficult to retrieve. In these circumstances, BGIL does not wish to litigate/ agitate this issue any further before the tax authorities."

7.1. Thus, the assessee was not able to substantiate its claim regarding the

payments being in the nature of reimbursement in AY 2004-05.

7.2. As regards the decision of Tribunal in AY 2006-07, ld. CIT(DR)

referred to CIT(A)'s and pointed out that in para 5 of Tribunal's order dated

29-1-2010 reproduced earlier, the Tribunal has noted that CIT(A) para 9.3 of

his order observed that assessee had produced invoices. Therefore, the

revenue's appeal was dismissed.

7.3. However, in the present year, the AO as well as ld. DRP has brought

on record that there is no evidence of expenses being incurred by BGI for 30 ITA no. 171/Del/2012 B.G. International Ltd.

which the alleged reimbursement was taken. Since there was no expenditure

incurred by BGI, therefore, there was no question of any reimbursement.

7.4. As far as the ld. counsel's reliance on the TPO's order for AY 2007-

08 is concerned, ld. CIT(DR) submitted that BGIPL had made the payment

to assessee under specific head, therefore, TPO accepted the same. In this

regard ld. DR referred to section 92(3), which reads as under:

"Computation of income from international transaction having regard to arm's length price -

92(3) The provisions of this section shall not apply 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 determination of any cost or expense allocated or apportioned, or, as the case may be contributed under sub-section (2) or sub-section (2A),has the effect of reducing the income chargeable to tax or increasing the loss, as the case may be, computed on the basis of entries made in the books of account in respect of the previous year in which the international transaction or specified domestic transaction was entered into."

7.5. Ld. CIT(DR) referred to page 6 of ld. DRP order and pointed out that

ld. DRP has specifically observed that considering the consideration of the

services involved the evidence that the assessee was 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 assessee's 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 section 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) wherein the definition of a

'company' is contained to point out that the said definition includes

"anybody corporate incorporated by or under the laws of a country outside

India" (Franchisee company). Therefore, assessee was required to maintain

books of a/c to substantiate its claim. AS regard' the assessee's submission

that the assessment be made u/s 44BB, ld. DR submitted that it is not an

amnesty scheme and the assessee's profits are taxable under Article 7 of

DTAA between India and UK on net basis.

7.7. Ld. CIT(DR) further submitted that the provisions of section 44C

regarding deduction of head office expenditure in the case of non-residents,

head office expenditure cannot be more than 5% of adjusted 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 allowed which are wholly and

exclusively for business purposes.

8. Ld. counsel in the rejoinder referred to the appeal filed by the

department (ITA no. 62/2010) against the Tribunal's order for AY 2003-04 32 ITA no. 171/Del/2012 B.G. International Ltd.

in which department itself has taken a ground that the assessee's receipts

were taxable u/s 44BB.

8.1. Ld. counsel further pointed out that in AY 2009-10 ld. DRP has

allowed the assessee's claim contained at pages 27 to 75 of the PB in which

ld. DRP has observed as under:

i) Assessee has produced large amount of documents in support of its claim. The same is summarized in Para 4.4. It cannot be brushed aside. They are relevant to the. Claims made by the assessee.

ii) Technical services received are intangible in nature.

Therefore, TPO should be clear when he/she says "concrete evidence" for such technical services received to be produced by the taxpayer. The proof of the pudding is in the eating, If the assessee has not maintained any documentation at all or has not allocated the cost based on the time spent by the expert/ employee, then, it would have been possible to doubt 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 evidence to show that "independent entity in comparable situation would have paid' for such services" is nothing but asking to perform the impossible.

iv) . DRP is convinced that without such services assessee would not have succeeded in earning the income it did during the year. If the assessee and its group companies were not having this kind of expertise, then, Government of India and ONGC would not have entered into a joint production agreement in the first place.

33

ITA no. 171/Del/2012 B.G. International Ltd.

v) It is impossible for any auditor or TPO or DRP to see each and every invoice. It is a time honoured practice of audit to .test check.' Assessee has a system of documentation retention of backup invoices. Therefore, based on the test checking, DRP comes to the conclusion that TNMM is the most appropriate method in this case and CUP cannot be applied in the absence of any data availability in case of comparable cases. As the assessee has earned 41.42% on cost, which is much above the comparable companies, the underlying international transaction is held to be at arm's length. TPO/AO is directed to delete the addition made under this head.

9. 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 Islands, allegedly for the

services rendered to this company. The Cayman Islands are British

ownership territory and do not levy any income tax. Therefore, the profits

earned, if any, by BGEPIL are not subject to any income-tax in the Cayman

Islands.

9.1. BGEPIL is a part of Production Sharing Contract along with ONGC

and Reliance Industries Limited, for exploration and production of oil and

gas in the oil fields of Panna- Mukta and Tapti Fields.

9.2. BGEIPL has operations in India only and has opened a project office

in India. There is no tax treaty between India and the Cayman Islands;

therefore, profits of BGEIPL are taxable in India as per the provisions of the

Income Tax Act. These three parties are joint operators to the contract. Vide 34 ITA no. 171/Del/2012 B.G. International Ltd.

agreement dated 10-1-2005 BGEPIL is the operator and is also responsible

for maintaining of books of account of the contract.

9.3. BGEPIL and the assessee are associated enterprises under the Income-

tax Act. BGEPIL has operations in India only and has opened a project

office in India. On all these aspects there is no dispute.

9.4. The assessee had filed return of income at an income of 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 given following notes:-

"NOTE:

1. BG International Limited (BGI) is a company incorporated in the England, UK, having registered office at 100 Thames Valley Park Drive, Reading, Berkshire, R61 PT.BGI provides certain staff support and personnel services in connection with Oil and Gas Exploration and drilling activities. BGI is rendering services on cost to cost basis any payment to BGI through Debit Note is purely accordance with provisions of PSC.

2. For the purpose of the Double Taxation Avoidance Agreement between India and the United Kingdom, BGI is a tax resident of the United Kingdom.

3. In India, BGI is providing services only to BG Exploration & Production India Limited (BGEPIL). The services are 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 Production Sharing Contracts (Panna Mukta & Mid and South Tapti) entered into between BGEPIL. Reliance Industries Limited, the ONGC and the Government of India (which has been 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. The payment to BGI should not be covered under Sec. 44BB as the revenues to BGI society consist of reimbursement revenues not chargeable to tax under section 44BB of the Income-tax Act."

9.5. In course of hearing, the assessee filed an affidavit to confirm that the

profits of the assessee and BGEPIL were incorporated in the U.K. with the

ultimate holding company viz. assessee. There was no 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 received by assessee. This

aspect has not been demonstrated in the affidavit filed by assessee, as it

merely states that the profits of BGIL and the profits of BGEPIL both of

them being BG are consolidated and merged with the profits of BGIL, being

the ultimate holding company. This affidavit does not 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 whether assessee has been

able to provide primary evidence in respect of various types of services

allegedly rendered to BGEPIL for which it claimed to have received

reimbursement from BGEPIL. The debit notes were raised 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 proceed further to deal with the

merits of the case, we may first deal with the assessee's arguments with

regard to its claim on the reliance placed on the decision of Tribunal for AY

2006-07. The assessee's contention is that since in AY 2006-07 Tribunal has

considered the same profit sharing contract and under identical

circumstances has held that assessee was able to substantiate the entire

aspects by producing invoices and no material brought by the AO to doubt

the debit note and invoices and, therefore, in this year also the same decision

should be applied. We are not inclined to accept this plea of ld. counsel

because in assessment year AY 2006-07, ld. CIT(A) had allowed the claim

of the assessee because he held that services had been provided on cost to

cost basis. The tribunal's findings were based on the ld. CIT(A)'s

observation that assessee had produced invoices and no material was

brought by the AO to doubt the debit note and invoices. However, in the 37 ITA no. 171/Del/2012 B.G. International Ltd.

present year the assessee has not produced any documents before the AO or

ld. DRP to justify that it had incurred any expenses (other than pay roll

expenses or third party expenses). The decision of the Tribunal for AY

2006-07, therefore, cannot be applied, particularly because the principles of

res judicata do not apply to income-tax proceedings and each year has to be

considered on the basis of facts obtaining in each year.

9.7. Ld. counsel for the assessee also referred to tribunal's order for AY

2003-04, 2004-05 and 2005-06 dated 28-8-2009, wherein Tribunal had

restored the matter back to the file of AO for factual verification of the

assessee's claim. Matter was taken up by AO to give effect of the Tribunal's

order for AY 2004-05. The assessee clearly stated that since the documents

were for more than 7 years, therefore, it was extremely difficult to retrieve

them from UK. Therefore, on this basis, AO based on his earlier order

rendered determined the income u/s 44BB.

9.8. Ld. counsel for the assessee submitted that the findings for AY 2004-

05 cannot be a guiding factor for deciding the issue 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 principles 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 time 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 bearing on the facts as obtaining in

the current assessment year.

9.9. Ld. counsel for the assessee has relied on the ld. DRP's order for AY

2009-10 wherein ld. DRP has accepted that the services 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 Para 4.4. It cannot be brushed aside. They are relevant to the. Claims made by the assessee.

ii) Technical services received are intangible in nature.

Therefore, TPO should be clear when he/she says "concrete evidence" for such technical services received to be produced by the taxpayer. The proof of the pudding is in the eating, If the assessee has not maintained any documentation at all or has not allocated the cost based on the time spent by the expert/ employee, then, it would have been possible to doubt 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 evidence to 39 ITA no. 171/Del/2012 B.G. International Ltd.

show that "independent entity in comparable situation would have paid' for such services" is nothing but asking to perform the impossible.

iv) . DRP is convinced that without such services assessee would not have succeeded in earning the income it did during the year. If the assessee and its group companies were not having this kind of expertise, then, Government of India and ONGC would not have entered into a joint production agreement in the first place.

v) It is impossible for any auditor or TPO or DRP to see each and every invoice. It is a time honoured practice of audit to .test check.' Assessee has a system of documentation retention of backup invoices. Therefore, based on the test checking, DRP comes to the conclusion that TNMM is the most appropriate method in this case and CUP cannot be applied in the absence of any data availability in case of comparable cases. As the assessee has earned 41.42% on cost, which is much above the comparable companies, the underlying international transaction is held to be at arm's length. TPO/AO is directed to delete the addition made under this head.

9.10. In this regard ld. DR has submitted that decision of ld. DRP has not

been accepted by the department and an appeal has been preferred before

Tribunal which is pending adjudication. Therefore, in view of these

circumstances, it would not be proper to comment either way on the findings

of ld. DRP and we, therefore, refrain from considering the said findings.

9.11. Now coming to the facts as obtaining in the present assessment year,

the first aspect to be considered is the effect of TPO's order relied upon by

ld. counsel for the assessee. We are in agreement with ld. CIT(DR) that the 40 ITA no. 171/Del/2012 B.G. International Ltd.

transactions of the assessee, referred in TPO's order are with BGEPIL and

total transactions are of Rs. 97,27,38,495/- and these transactions are all

receipts by the assessee from BGEPIL. The TPO was primarily 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 because the TPO was

prohibited by section 92C(3) to reduce the transaction price of the receipts

which would have resulted in deduction of income. Therefore, 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 reimbursement of expenses.

Ld. CIT(DR) has referred to the ld. DRP's observations with regard to TP

order in the case of BGEPIL wherein the TPO has given a finding that

BGEPIL was not able to provide any evidence of the services rendered by

the BGEPIL and, therefore, the ALP of the transactions 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 question no. 12 of the

AO's 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 substantiate rendering of

services by your employees and regularization of such services by BGEPIL.

9.13. Ld. counsel for the assessee has relied on cost allocation policy and

has given a detailed note on the services rendered by BGEPIL, brought

nature of services rendered, benefit derived by BGEPIL. 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 supporting invoices

received. The assessee did not produce any document to substantiate the

expenses incurred by it against receipts for which debit notes were raised on

BGEPIL. The debit notes did not show as to on what account and where the

expenses were incurred by assessee on behalf of BGEPIL. The assessee has

to prove that the services rendered by it is regarding federal green recharges.

The assessee gave a general note as to what is the nature of these recharges

are but no where it has given any specific detail as to how much were the

federal green charges incurred by BGEPIL as a whole and how the expenses

relating to BGEPIL were allocated to it for which debit notes were raised.

9.14. Ld. counsel has pointed out that it is not possible to give one to one

nexus for each debit note vis a vis services rendered. However, basic details 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 justify the nature of activities

specific to India.

9.15. Ld. CIT(DR) has pointed out that the terminology franchisee suggests

that these expenses apparently pertained to US territory. The assessee has

business in the USA. The term "Green" also described something related to

preserving climate. The US is having Federal Energy Regulatory

Commission and any expenses incurred in complying with 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: 6,73,72,229

- ICDN, Cost control and finance service function.

9.17. The assessee has relied on the global allocation policy which only

provides that those costs which are deemed to benefit 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 allocation 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 that 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 the accounts in India,

therefore, it could reasonably be inferred that it must have separately made

payments to its tax advisor. Why this amount has been further charged by

BGEPIL, the assessee was required to demonstrate this aspect.

9.19. Further, the ld. CIT(DR) has questioned as to why the Indian

Permanent establishment was allocated marketing expenses 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 application of section 44C but

the deduction could not be allowed in full.

9.20. Ld. CIT(DR) has also pointed out that the report 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 that BG International 44 ITA no. 171/Del/2012 B.G. International Ltd.

Limited's overhead cost allocation and time writing policy, has been adhered

throughout the year. The agreed upon procedure will examine application of

the policy on a sample basis, to ensure that ....." . He pointed out that these

terms of references nowhere require the PWC to examine as to how the cost

had been allocated to various assets (business in different locations/

countries) and do not refer to certification of benefits tests. He pointed out

that PWC has come out with a time writing rates which were primarily

hourly rates which needed to be applied for various types of activities.

9.21. As regards the reliance placed on M/s Lancaster Mac Lean, UK

report, ld. CIT(DR) has pointed out that this independent consultant was

appointed to represent the interest of joint venture partners. They also gave

hourly rates for a charge.

9.22. He pointed out that these reports nowhere show what the total general

and administrative overhead cost was, what were the keys of allocation of

these expenses and how the same had been allocated to various assets/

countries. What expenses had been allocated to India, on what basis and

what were the benefits.

9.23. Once it is accepted that global cost allocation policy exist in a case of

group of size like B.G. Group, then it cannot be denied 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 to be reimbursement

should be accepted or not. On this count, admittedly 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 existence of which is not

doubted by revenue, the assessee failed to substantiate its claim regarding

allocation of expenses incurred by it for the services rendered to BGEPIL. It

has not been able to substantiate its claim as to what common expenses had

been incurred; how those were allocated to assessee; and why those needed

to be allowed as deduction from Indian operations. It is settled law that

unless the assessee is able to substantiate its claim the deduction cannot be

allowed. In this regard we may refer to the decision of Hon'ble Supreme

court in the case of CIT Vs. Calcutta Agency Ltd. (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 established by the assessee at

any stage of the proceedings and the High Court was in error in applying the

principles of Mitchell's case on the assumption of facts which were not 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 entire conspectus of the

cases, we are of the opinion that it would be fair to tax the assessee's

receipts u/s 44BB, as has been done in past also. In 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 Hon'ble High Court has

itself taken a ground that the assessee's receipts are taxable u/s 44BB and the

ITAT erred in deciding that the receipt are not taxable u/s 44BB.

9.25. We are conscious of the fact that earlier we have observed that merely

because in AY 2004-05 assessee agreed for its receipts being taxed u/s

44BB, cannot operate as estoppels against it for pleading that the entire

receipts were in the nature of reimbursement. However, considering the fact

that assessee is not able to substantiate its claim, as has been extensively

demonstrated by ld. Cit(DR) in his submissions and the assessee has only

given a general writ e up for the benefits derived by BGEPIL, we are of the

considered opinion that no fruitful purpose would be served by restoring the

matter to the file of AO for examining the assessee's claim again as that

would be a futile exercise particularly because assessee has clearly stated

that it is not possible to have one to tone nexus of the expenses with the

services rendered.

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 services to BGEPIL, which

was engaged in prospecting the mineral oils. We direct accordingly.

10. In the result, assessee's appeal is partly allowed.

Order pronounced in open court on 18-03-2015.

Sd/- Sd/- (C.M. GARG ) ( S.V. MEHROTRA ) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 18-03-2015. MP: Copy to : 1. Assessee 2. AO 3. CIT 4. CIT(A) 5. DR