Transfer pricing cost plus method requires normal gross profit mark-up on costs, not dividend-based reduction of the cost base.

Section 14A disallowance was remitted for fresh examination in light of the Special Bench view and the Tribunal's earlier order in the assessee's case. On transfer pricing for bare boat charter hire, the CUP comparables were found insufficient for a 22-year-old vessel, but the cost plus approach was accepted to the extent that arm's length price must be based on direct and indirect costs plus a normal gross profit mark-up, not by reducing the cost base as dividend. The revenue's objections to depreciation, hire charges, foreign exchange fluctuation depreciation, lease rental, section 33AC deduction, and non-convertible debenture expenditure were rejected, and the first appellate relief was sustained.

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Issues: (i) Whether the disallowance under section 14A was to be finally sustained or the matter required fresh determination in accordance with the Special Bench view; (ii) Whether the transfer pricing adjustment in respect of bare boat charter hire charges was justified; (iii) Whether the revenue's objections to allowance of depreciation and hire charges on the ship, depreciation on foreign exchange fluctuation, lease rental, deduction under section 33AC, and expenditure on non-convertible debentures were sustainable.

Issue (i): Whether the disallowance under section 14A was to be finally sustained or the matter required fresh determination in accordance with the Special Bench view.

Analysis: The issue was already considered by the Special Bench in another matter, and the Tribunal directed that the Assessing Officer re-examine the claim in the light of that binding view and its own earlier order in the assessee's case. The earlier order of the Tribunal was to operate consistently, and if any conflict arose, the Special Bench view was to prevail.

Conclusion: The disallowance was set aside and the issue was restored to the Assessing Officer for fresh decision.

Issue (ii): Whether the transfer pricing adjustment in respect of bare boat charter hire charges was justified.

Analysis: The assessee had supported the charter hire rate by relying on comparable uncontrolled transaction data and an alternative cost plus working. The Tribunal held that the relied-upon comparables were not sufficiently comparable for a 22-year-old vessel and declined to accept the assessee's CUP-based valuation. However, on the cost plus working, the authorities had accepted the direct and indirect costs and had only reduced the amount treated as dividend. The Tribunal held that the proper approach under the cost plus method was to add a normal gross profit mark-up, not to reduce the cost base by treating that amount as dividend.

Conclusion: The transfer pricing adjustment was not justified to the extent of reducing USD 274 per day, and the assessee's claim was accepted on this ground.

Issue (iii): Whether the revenue's objections to allowance of depreciation and hire charges on the ship, depreciation on foreign exchange fluctuation, lease rental, deduction under section 33AC, and expenditure on non-convertible debentures were sustainable.

Analysis: The Tribunal followed its earlier orders in the assessee's own case on the ship depreciation and hire charges issue, the foreign exchange fluctuation depreciation issue, and the section 33AC issue. It also upheld the allowance of lease rental in view of the consistent earlier appellate position and sustained the deduction of expenditure on non-convertible debentures as revenue expenditure following the principle that expenditure relatable to the non-convertible portion is allowable as deduction.

Conclusion: The revenue's grounds on these issues were rejected and the relief granted by the first appellate authority was sustained.

Final Conclusion: The cross appeals were disposed of with the assessee obtaining relief on the transfer pricing ground, the section 14A matter being sent back for reconsideration, and the revenue's challenges to the remaining allowances failing.

Ratio Decidendi: Under the cost plus method, the arm's length price is to be determined by adding a normal gross profit mark-up to the direct and indirect costs, and an authority cannot reduce the cost base by treating an element as dividend where no such dividend receipt exists.

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