TPO cannot determine ALP of Project at NIL if Assessee submit all relevant documents & bills

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 :

(i) Cost Allocation of Digital Business Expenses	Rs.2,923,472/-
(ii) Allocation of Technical Expenses	Rs. 647,110/-
(iii) Reimbursement of Leased Line Charges	Rs. 1,33,098/-
(iv) Allocation of Expenses relating to COE3 Project	Rs. 1,580,822/-
(v) Allocation of Digital Business Performance Management Charges	Rs. 214,443/-

For supporting these expenses, an invoice for Singapore Dollar 168,561 is filed. The charges for Digital Business COE Charge Out, Data Charge Out, Telephone/ISL Charge Out, HR Charge Out, HSSE Charge Out, Digital Business ROM Charge Out are mentioned in the invoice. However, the documents as mentioned in the Clause 5.3 and 5.4 of the agreement i.e. whether these are the expenses incurred by the BP Singapore Pte Ltd. or re ass throh (sic) expenses, are not submitted. In absence of these expenses, the Arm’s length Price on this allocation is also computed at Nil. This will result in disallowance of expense by the Assessing Officer of Rs. 6,498,957

5.3.7 Allocation by/Reimbursement to BP Australia Ltd.:

The expenses mentioned in the Exhibit-5 of the TP Report are discussed below:

(i) Allocation of Technical Services Fees – Rs. 1,459,681/-

The assessee neither submitted the invoice nor supporting documents, therefore, the Arm’s Length Price of this transaction is computed at NIL.

(ii) Allocation of Management Cost of Digital Business-Rs.374, 1751

A copy of debit note dated March, 2002 is filed which mentions that “Billing for the 2001 Row Regional Management Costs sitting in ANZ Books as per allocation provided by JOESPHINE TAN from SEA.” This is for Australian Dollar (AUD) for 14,880.72. This equals to US$ 7,668.07. The bifurcation of USD 7,668.07 is as below

Share of ROW Regional Management Costs	–	7,133.09
7.5% Transfer Pricing	–	534.98

It is not known, whether the services are provided by BP Australia Ltd. or are pass through costs. In case of pass through costs, no service charge is to be levied as per the group policy. Therefore, though, BP Australia is charging service charge, because of safe harbour provision, it is not allowable to the Indian Entity, if it is’ a pass through cost, for which, details are not filed. In absence of these details, the Arm’s Length Price of the transaction is also determined at NIL.

(iii) Reimbursement of Cost of Training and Travel — Rs. 358,132/:

For this, the assessee submitted two debit notes raised by BP Australia Ltd. dated March, 2002. The relevant portion reads as:

“Digital Business Projects Recover November, 2001

CVP Training Provided by 4 WAYEN GEARON

4 days @$2,000.00 per day	–	7,333.33
7.5% Transfer Pricing	–	399.19
CVP Training Travel	–	5,993.00
75% Transfer Pricing	–	469.19′

It appears that, WAYEN GEARON, visited Castrol India for training, for which, charges @ $2,000.00 per day and the travel expenses are recovered. For the training, AUD 2,000 per day, itself, will be the market price, therefore, there is no basis for charging surcharge on the same. The basis for AUD 2,000, per day is not submitted. Similarly, travel cost is a pass through cost, therefore, no service charge is allowable on these expenses. Considering this, the billing for transfer pricing of AUD 868.38 is not an allowable expense. This will result into dis allowance of Rs. 21,214/- out of the expenses on this account claimed by the assessee.

(iv) Allocation of Technical Services Fees – Rs.854,868/-

For this expense also, a debit note dated March, 2002 by BP Australia Ltd. is filed and the relevant portion reads as:

“Digital Business Project Recovery September, 2001

	Base Costs	–	US$15,076.65
	75% Transfer Pricing	–	US$1,130.75′

 For supporting the total Base Costs and basis of allocation, no documents are filed as required by Clauses 5.3 and 5.4 of the Service Agreement, therefore, the Arm’s Length Price of this transaction is computed at NIL.

(v) Cost Allocation of Digital Business Expenses — Rs.8,526,505/-

For this expense also, a debit note dated Feb. 2002 is filed. The relevant portion of this reads as:

“Digital Business Project Recovery September, 2001

	Base Costs	–	US$162,545.12
	7.5% Transfer Pricing	–	US$ 12,190.88
	Total	–	US$ 174,736.00

 For this debit note also, no documents are submitted as required by Clause 5.3 and 5.4 of the Service Agreement. It is also not known whether the Base Costs consists of the costs incurred by the providing party or the third party costs. In absence of these details, it is not known, whether, the service charge (mark-up to costs) are allowable as expenses in the hands of Castrol India or not. From the contents of debit notes, as discussed in this para and also preceding paras, it is seen that, the BP Australia Ltd. raised two debit notes for the same month i.e. September, 2001 in the months of February, 2002 and March, 2002. The reasons for the same are not known. Considering this, the Arm’s Length Price of this transaction is also computed at NIL.”

On the basis of ALPs of the international transactions computed by him as above, the TPO proposed addition of Rs. 3,89,63,865/- to the income of the assessee by way of TP adjustment on account of international transactions with AEs involving reimbursement/allocation of cost. Accordingly on the basis of TPO’s order passed u/s 92CA(3), the said addition was made by the AO to the total income of the assessee in the assessment completed u/s 143(3) vide an order dated 23-01-2005.

5. Against the order passed by the AO u/s 143(3), an appeal was preferred by the assessee before the learned CIT(Appeals) challenging therein, inter alia, the addition of Rs. 3.99 crores made by way of TP adjustment. During the course of appellate proceedings before the learned CIT(Appeals), the assessee furnished certain additional details relating to basis of allocation of COE3 expenses which were not submitted before the TPO/AO. The learned CIT(Appeals), therefore, sought remand report from the AO/TPO on these additional details furnished by the assessee. The TPO examined the matter afresh in the light of additional details furnished by the assessee and offered his comments in respect of each item in the remand report as under :

Sr. No.	Item of discussion in COE3	Amount	Details submitted	Action point in TPO’s order	Additional Evidence submitted	Remarks.
1.	Global Downstream charges & Licenses for Microsoft Professional 2000	Rs. 96,32,295/- GBP 131,197	Filed copy of invoice dt. 19/12/01	ALP determined as NIL. No supporting documents submitted for the invoice of GBP 131,197 filed.	Additional details filed -Basis allocation	Global and central downstream are allocated at USD 139 (Global team charges) + USD 140 (Downstream team charges). The basis of allocation for Microsoft license charges is USD 261 per seat. The basis for allocation is provided which is followed uniformly throughout the group.
2.	Cost Allocation Digital Business	Rs. 42,25,647/-USD 86,589	Filed copy of Invoice dt. 23/03/02	ALP determined as NIL. No details & basis of allocation submitted.	Additional details filed -Basis of allocation	The amount calculated for Castrol India Ltd. is based on the number of total seats [396] for the entire India region. The basis for allocation is provided which is followed uniformly throughout the group.
3.	Allocation of Federal charge on account of Digital business.	Rs. 9,91,456/-USD 20,316	Invoice dt. 10.4.02	ALP determined as NIL. No supporting documents of service agreement submitted	Additional details filed -Basis of allocation	These charges are allocated to India site based on the COE seat count. India’s share is 0.26% of the total charge. The amount charged by the AE pertains to India, which comprise of various legal entities. Thus, the amount calculated for Castrol India Ltd. is based on the number of total seats [800] for the entire India region. The basis for allocation is provided which is followed uniformly through the group.
4.	Allocation of Federal charge on account of Digital business	INI 113,03,889/- GBP 18,764.51	Same as above	Same as above	Same as above	Same as point no. 3 above.
5.	Downstream Group project cost	Rs. 50,75,190/- GBP 73,037.09	Invoice dt. 10.4.02 pertaining to share of group project cost	ALP determined as NIL. No supporting documents filed.	Additional details filed-Basis of allocation	Same as point no. 3 above.
6.	Cost allocation of Digital business exp. Allocation of tech exp. Reimbursement of leased trial charges.Allocation of expenses relating to COE3 project. Allocation of Digital Business performance	Rs.854,710/-Singapore $ 32,289.77		ALP determined as NIL. No supporting documents of the service agreement submitted.	Additional details filed.	Castrol India had been charged with an amount of USD 32,289.77 out of a total charge of USD 37,232.19. The basis for allocation is provided which is followed uniformly throughout the group.

On the basis of his comments/remarks given in the remand report as above, the TPO agreed that the allocation of COE3 expenses to the extent of Rs. 2,20,83,188/-was in order. As regards the allocation of balance amount of Rs.1,68,80,675/-, he stated that the required back-up/evidence was not submitted by the assessee and addition made to that extent, therefore, was required to be sustained. Keeping in view these comments/remarks offered by the TPO in the remand report, the learned CIT(Appeals) restricted the addition of Rs. 3,99,63,865/- made by the AO on this issue to Rs. 1,68,80,675/- thereby allowing a relief of Rs. 2,20,83,188/- to the assessee. Aggrieved by the order of the learned CIT(Appeals) on this issue, the assessee and Revenue both have raised their grievance in the present appeals filed before the Tribunal.

6. We have heard the arguments of both the sides on this issue and also perused the relevant material on record. In so far as the allocation/reimbursement of COE3 expenses to the extent of Rs .2,20,83,188/- is concerned, it is observed that fresh details were furnished by the assessee for the first time before the learned CIT(Appeals) giving complete details of the said expenses as well as the basis of allocation thereof. The said details were forwarded by the learned CIT(Appeals) to the AO/TPO and on verification of the same, the TPO accepted in his remand report that allocation/reimbursement of COE3 expenses to the extent of Rs. 2,20,83,188/- was in order. Keeping in view this finding recorded by the TPO in the remand report, the addition made on this issue to the extent of Rs. 2,20,83,188/- has been deleted by the learned CIT(Appeals) and, in our opinion, quite rightly so. We, therefore, find no merit in the solitary ground raised by the Revenue in its appeal on this issue and dismiss the same.

7. In so far as the allocation/reimbursement of COE3 expenses to the extent of Rs. 1,68,80,675/- is concerned, the learned counsel for the assessee has submitted before us that there is no dispute about the fact that significant costs were incurred related to COE3 project deployed by the BP group worldwide and the assessee company as a part of the said group had derived benefit thereof. As submitted by him, the dispute is about the basis of allocation and want of details in this regard. He has submitted that the copies of invoices raised in this regard by the AEs were furnished by the assessee along with respective allocation keys. Keeping in view this submission made by the learned counsel for the assessee as well as on perusal of the relevant details available on record, we agree with the contention of the learned counsel for the assessee that there is no justification in the action of the TPO in ignoring all these details and taking the ALP of the relevant transactions at Nil. In our opinion, it is incumbent upon the TPO to work out the ALP of the relevant transactions by following some authorized method and the entire cost borne by the assessee cannot be disallowed by taking the ALP at Nil keeping in view the facts and circumstances of the case and the relevant details furnished by the assessee. The learned counsel for the assessee in this regard has submitted that in the subsequent years i.e. assessment years 2005-06 and 2006-07, a similar issue was involved in the assessee’s case and the learned CIT(Appeals) has allowed the expenses allocated to the extent of 50%. We have perused the orders of the learned CIT(Appeals) passed in the assessee’s case for assessment years 2005-06 and 2006-07. It is noted that no convincing or sound basis has been given by the learned CIT(Appeals) therein in support of the 50% cost allocation accepted by him and such estimate has been made purely on ad hoc basis. In our opinion, the exercise of ascertaining ALPs has to be done by the TPO keeping in view the well laid down scheme in the relevant provisions of the Act and addition, if any, on account of TP adjustment, has to be made only after doing such exercise. We, therefore, restore this issue to the file of the AO/TPO with a direction to do such exercise and make addition, if any, on this issue after completing such exercise in accordance with law. Ground No.2 of the assessee’s appeal is accordingly treated as allowed for statistical purposes.

8. The issue raised in ground No.3 of the assessee’s appeal relates to the dis allowance made by the AO and confirmed by the learned CIT(Appeals) on account of depreciation of Rs. 9,70,65,909/- in respect of unit located at Silvassa.

9. The assessee in the earlier years had not claimed depreciation on the assets of Silvassa Unit. In the year under consideration, depreciation on the said assets was claimed by the assessee at Rs. 15,84,40,030/-. The said amount of depreciation was worked out by the assessee on the written down value of assets of Silvassa Unit without taking into consideration depreciation for the earlier years as no such depreciation in the earlier years was claimed by the assessee. Since the depreciation on the assets of Silvassa Unit was allowed by the AO in the earlier years, he worked out the written down value of the assets of Silvassa Unit after deducting the depreciation so allowed in the earlier years and recomputed the depreciation allowable to the assessee at Rs. 6,13,74,121/- on the written down value so worked out. This resulted in the disallowance of depreciation to the extent of Rs.9,70,65,909/-. On appeal, the learned CIT(Appeals) confirmed the said disallowance made by the AO relying on the decision of Hon’ble Bombay High Court in the case of Plastiblends Ltd. v. Addl. CIT [2009] 318 ITR 352/185 Taxman 187.

10. We have heard the arguments of both the sides and perused the relevant material on record. As agreed even by the learned counsel for the assessee, the issue raised in ground No. 3 of the assessee’s appeal is squarely covered against the assessee and in favour of the Revenue by the decision of Hon’ble Bombay High Court in the case of Plastiblends Ltd. (supra). Respectfully following the said decision of Hon’ble jurisdictional High Court, we uphold the impugned order of the learned CIT(Appeals) confirming the dis allowance made by the AO on this issue and dismiss ground No. 3 of the assessee’s appeal.

11. Ground No. 4 raised by the assessee in this appeal has not been pressed by the learned counsel for the assessee at the time of hearing before us. The same is accordingly dismissed as not pressed.

12. The issue raised in ground No. 5 of the assessee’s appeal relates to the disallowance made by the AO and confirmed by the learned CIT(Appeals) on account of assessee’s claim for deduction u/s 80-IB in respect of the following items of other income :

1.	Other Income directly linked to Silvassa Unit	Rs. 41,67,815
2.	Interest received (in ratio of sales volumes)	Rs. 34,69,135
3.	Miscellaneous Income (in ratio of sales volume)	Rs. 23,61,499
4.	Reversal of excess provision of Doubtful debts (ratio of sales volume)	Rs.32,75,948
5.	Insurance Claim (ratio of sales volume)	Rs.54,02,609

13. We have heard the arguments of both the sides and also perused the relevant material on record. As agreed by learned representatives of both the sides, this issue to the extent of assessee’s claim for deduction u/s 80-IB in respect of first four items is concerned, the same is covered against the assessee and in favour of the Revenue by the decision of Hon’ble Supreme Court in the case of Liberty India v. CIT [2009] 317 ITR 218 /183 Taxman 349 wherein it was held that the provisions of section 80-IB are code by themselves as they contain both substantive as well as procedural provisions. The word ‘derived from’ is narrower in connotation as compared to the words ‘attributable to’. By using the expression ‘derived from’ Parliament intended to cover sources not beyond the first degree. The assessee has claimed deduction u/s 80IB in respect of receipts which are incidental to the business and so beyond the first degree. Respectfully following the said decision of Hon’ble Supreme Court, we uphold the order of the learned CIT(Appeals) on this issue confirming the dis allowance made by the AO u/s 80-IB in respect of first four items of other income.

14. In so far as the claim of the assessee for deduction u/s 80-IB in respect of insurance claim of Rs. 54,02,609/- is concerned, it is observed that the same is covered in favour of the assessee by the decision of coordinate bench of this Tribunal at Delhi in the case of J.K. Aluminium Co. v. ITO rendered vide its order dated 29-04-2011 passed in ITA No. 3303/Del/2010. In the said decision, the coordinate bench of this Tribunal has held that refund of excise duty being refund of assessee’s own money cannot be regarded as separate income at all and the AO, therefore, was not justified in denying the relief u/s 80-IB on that amount. While rendering this decision, the Tribunal has taken into consideration the decision of Hon’ble Supreme Court in the case of Liberty India (supra). In our opinion, the decision of the Tribunal in the case of J.K. Aluminium Co. (supra) is applicable in respect of insurance claim received by the assessee inasmuch as the same being reimbursement/recovery of expenses actually incurred by the assessee, it has no effect on the final income of the assessee so as to warrant exclusion thereof while computing deduction u/s 80-IB. Accordingly, we allow ground No. 5 of the assessee’s appeal partly.

15. In the result, the appeal of the Revenue is dismissed whereas the appeal of the assessee is partly allowed.