Transfer pricing lease rentals for dredging equipment: ALP aggregation limited to each associate enterprise; post-project rentals remitted for review.

The note addresses transfer pricing treatment of lease rentals for dredging equipment. It holds that transactions with different associated enterprises cannot be clubbed as closely linked or continuous for ALP determination; aggregation is permissible only for transactions between the assessee and each associate enterprise separately, and AO/TPO must determine ALP by aggregating per associate enterprise accordingly. On lease rentals paid beyond the project period for demobilization and redelivery, no conclusive standard or comparable evidence was produced by either party, and neither met the onus to establish ALP; the question whether such post-project rentals are acceptable must be resolved by comparing independent comparable transactions, and the matter is remitted to AO/TPO for reconsideration.

---

---

Issues Involved:
1. Disallowance of lease rentals for pontoons.
2. Transfer Pricing (TP) adjustment of lease rentals for vessels.
3. Disallowance of lease rentals paid beyond the project period.

Issue-wise Detailed Analysis:

1. Disallowance of Lease Rentals for Pontoons:
The assessee initially raised grounds regarding the disallowance of Rs. 18,93,130, which was 10.61% of the lease rentals paid for small vessels (pontoons). The CIT(A) had compared the lease rentals paid for these pontoons with other vessels to determine the arm's length price (ALP). However, during the hearing, the assessee did not press these grounds, and they were dismissed as not pressed.

2. TP Adjustment of Lease Rentals for Vessels:
The core issue was the TP adjustment by rejecting the assessee's contention for clubbing transactions to compare with the ALP. The assessee, a Limited Partnership firm incorporated in the Netherlands, undertook international dredging contracts and had entered into a contract with Indian Oil Corporation (IOC) for dredging work in Paradeep Refinery Project, Orissa. The assessee hired dredgers and vessels from associated enterprises (AEs) and paid Rs. 128,79,89,255/- for these transactions. The TPO used the Comparable Uncontrolled Price (CUP) method, relying on VG Bouw Valuation Certificates, accepted as a suitable benchmark for computing the ALP. However, the TPO rejected the assessee's claim to aggregate lease rentals based on the class of transactions, instead analyzing each transaction separately. This led to an adjustment of Rs. 90,71,754/-.

The assessee argued that the lease transactions were closely linked and should be aggregated for ALP determination, citing Section 92C and Rule 10A(d). The assessee relied on multiple judicial precedents supporting the aggregation of closely linked transactions. The Tribunal accepted the principle that closely linked transactions could be aggregated but limited this to transactions with each AE separately. The AO/TPO was directed to determine the ALP by aggregating transactions between the assessee and each AE separately, not by clubbing transactions with all AEs.

3. Disallowance of Lease Rentals Paid Beyond the Project Period:
The TPO disallowed lease rentals paid beyond the project period, limiting allowable rentals to 252 days. The assessee argued that lease rentals were paid as per the agreement terms, including the period for demobilization and transportation of vessels. The Tribunal noted that neither the assessee nor the TPO provided adequate evidence to support their respective positions. The Tribunal set aside this issue to the AO/TPO for reconsideration, directing them to compare the payments with independent and uncontrolled transactions to determine the ALP for lease rentals paid beyond the project period.

Conclusion:
The appeal was partly allowed. The Tribunal directed the AO/TPO to reconsider the aggregation of transactions for ALP determination and to re-examine the lease rentals paid beyond the project period.

---