IN THE ITAT MUMBAI BENCH ‘C’
Castrol India Ltd.
Versus
Assistant Commissioner of Income-tax
IT Appeal Nos. 3938 & 4413 (Mum.) of 2010
[Assessment year 2002-03]
SEPTEMBER 14, 2012
ORDER
P.M. Jagtap, Accountant Member
These two appeals being ITA No. 3938/Mum/2010 and ITA No. 4413/Mum/2010 are cross appeals which are directed against the order of learned CIT(Appeals)-15, Mumbai dated 7-03-2010.
2. Ground No. 1 raised by the assessee in its appeal disputing the addition of Rs. 5,40,294/- made by the AO and confirmed by the learned CIT(Appeals) on account of transfer pricing adjustment in respect of transactions with AE involving export of lubricants is not pressed by the learned counsel for the assessee at the time of hearing before us. The same is accordingly dismissed as not pressed.
3. Ground No. 2 of the assessee’s appeal and the solitary ground raised in the Revenue’s appeal involve a common issue relating to addition of Rs. 3,99,63,865/-made by the AO on account of TP adjustments in respect of reimbursement/allocation of COE3 related expenses which has been sustained by the learned CIT(Appeals) to the extent of Rs. 1,68,80,675/-.
4. The assessee in the present case is a company which is engaged in the business of manufacturing and distribution of lubricant oils, greases, brake fluids and other speciality products. The return of income for the year under consideration was filed by it on 31-10-2002 declaring total income of Rs. 138,63,51,510/-. The assessee belongs to multi-national BP group of companies and during the year under consideration, it had entered into international transactions, inter alia, involving cost sharing and cost reimbursement with associated enterprises. As submitted in the TP report furnished by the assessee company, BP group undertakes worldwide information technology initiatives and the assessee company being a member of the said group, receives information technology support from its associated enterprises. It also shares the related cost incurred by the said enterprises in providing such support. During the year under consideration, significant IT costs were incurred relating to a Common Operating Environment System (COE3) deployed by the BP group worldwide. As claimed in the TP return, COE3 offered significant benefits to the participating entities including the assessee company resulting into efficient functioning of the business and reduction in operation cost. To implement the said project, various group entities incurred cost which were allocated to group companies participating in the system on the basis of number of COE3 enabled computers installed at each entity. It was claimed that the assessee company has also reimbursed certain cost to its associated enterprises at actual which constituted international transactions of the assessee company with its associated enterprises within the meaning of section 92B read with section 92A. During the course of assessment proceedings, a reference u/s 92CA(1) was made by the AO to the TPO for the computation of arm’s length price, inter alia, in relation to these international transactions. The TPO asked the assessee company to furnish certain information and on the basis of the information furnished by the assessee as well as other submissions made from time to time, he proceeded to determine the ALP of international transactions of the assessee company with its AE involving cost sharing and cost reimbursement as under :
“5.3.1 Global Down Stream & Licenses for Microsoft Professional 2000 — Rs. 9,632,295/ :
The assessee has paid/payable an amount of Rs. 9,632,295/- to BP International Ltd., United Kingdom. The amount in foreign currency is GBP 131,197.
In the support, a copy A invoice dated 9.12.2001 is filed. The relevant portion of the invoice reads as: —
‘Global & Downstream Central Charges for COE3 Deployment in Castrol India
345 Units @ $279 = $96255 REX Microsoft Pro 2000 licenses.
Bought Centrally 345 Units @$261 .= $90045 C4PEX’
This invoice does not convey the proper meaning regarding the capital expense pertaining to licenses bought and also the Central Charges for COE3 Deployment. The invoice is dated 19.12.2001, indicating that, this cost pertains to period ending November/December, 2001. From the details filed by the assessee on 05.10.2004, regarding Project Request (ROW OB Castrol Integration Project — India Castrol Integration Project). This document is dated 30.04.2001 and the name of the project Phase 2 -India COE. As per the Conceptual Project Plan, the India Phase 2 was to start on 10.03.2001 and was to get over by 27.08.2001. The plan and Documentation for Phase 3 was to start on 02.07.2001 and the business approval was to be obtained for this Phase 3 on 16.07.2001. Considering these facts, it can be stated that, during the year 2001, COE3 was not implemented, and the assessee did not submit any document, as required vide this office letter dated 16.08.2004. No supporting documents for this invoice are filed. Considering these facts, the Arm’s Length Price of this transaction is computed at NIL.
5.3.2 Cost Allocation of Digital Business – Rs.4,225,647/- Paid/Payable to BP International Ltd., U.K.
The amount in foreign currency is US$ 86,589. This is invoice dated 23.03.2002 and the details read as : “1Q02 D80 Infrastructure Charges”. As discussed earlier, the assessee was asked to submit the details and basis of allocation, which is not submitted. These documents, it was required to obtain and maintain as per Clauses 5.3 and 5.4 of the Agreement. In absence of these documents, the Arm’s Length Price of the transaction is computed at NIL.
5.3.3 Cost Allocation of Global Licenses Charges – Rs. 1,269,885/-Paid/Payable to BP International Ltd., U.K. :,
The corresponding amount in US$ is 26,022. A copy of E-mail dated 25.03.2002 is submitted and the relevant portion of the same reads as:
“Further to my Email below and our last discussion, we will also be raising a corresponding invoice for the DBO Global Software Licence charges, the breakdown of which is as follows:
2001:
3rd Quarter 2001:201 PC’s at $128/Annum ($32/Quarter)/PC. = $6,432. .
4th Quarter 2001 : 369 PC’s at $128/Annum ($32/Quarter)/PC = $11,808
2002
1 Quarter 2002 : 389 PC’s at $118/Annum ($30 in 1 Q)/PC $11,670 Total = $29,910″
These are Global Software Licenses Charges and as per the agreement, should be Pass Through. Costs. – As the invoice is for Global Software License Charges, therefore, no adjustment is made to the transaction value recorded in the accounts by the assessee.
5.3.4 Allocation of Federal Charges on account of Digital Business of Rs. 2,295,345/- to BP International Ltd., United Kingdom
The assessee submitted a copy of invoice dated 10.04.2002 issued by BP International Ltd., United Kingdom, for the share of Federal Costs 2001, for GBP 18,754.51. The supporting documents, as required by Clause 5.3 and 5.4 of the Service Agreement are not submitted, otherwise also, the transaction value in equivalent INR will be Rs. 1,302,875/- only. In absence of the nature of expenses, basis of allocation and the benefit to Castrol India, the Arm’s Length Price of the transaction is computed at NIL.
5.3.5 Allocation of Downstream Group Project Cost of Rs. 5075,190/-paid/payable to BP International Ltd., United Kingdom:
On the issue, a copy of invoice dated 10.04.2002 issued by BP International Ltd., United Kingdom pertaining to share of group project costs is submitted. The amount is GBP 73,037.09. It is not known what are the Total Group Project Costs, how the same are allocated, and what is the basis of allocation. No document to demonstrate the nature of expense is submitted. It is also not known, whether the allocation is for full year or for part of the year, because, as per details filed on 05.10.2004 by the company, the COE Phase 2 of the Project, was scheduled (planned) to start on 27.08.2001. Considering this fact, not only this expense but all the expenses relating to the software licensing, maintenance and other digital business expenses were required to be allocated for part of the year only. In absence of these details, the Arm’s Length Price of this transaction is also computed at NIL.
5. 3.6 The amounts paid payable to BP Singapore Pte Ltd., account of the following :
