Dredging company wins on charter hire TDS and transfer pricing but loses on technical services adjustment

ITAT Chennai ruled on multiple tax issues for a dredging company. The tribunal held that bare-boat charter hire payments to Belgium companies are not subject to TDS under section 195, as such payments fall outside the scope of royalty under the India-Belgium DTAA, following precedent from Madras HC. For transfer pricing, the tribunal accepted the assessee's CUP method for benchmarking charter hire payments to associated enterprises, rejecting the TPO's entity-level TNMM approach and deleting the Rs. 23.46 crore adjustment, citing consistency with Mumbai ITAT decision. However, the tribunal upheld the TPO's adjustment regarding technical services payment calculation based on project turnover. The AO was directed to verify and allow TDS credits as per law.

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Issues Involved:
1. Taxability of hire charges received by non-resident lessors under the bare charter arrangement as 'Royalty' and disallowance under Section 40(a)(i) of the Income Tax Act, 1961.
2. Transfer Pricing (TP) adjustment related to the payment for hire of dredgers and vessels by applying the TNMM method instead of the CUP method adopted by the assessee.
3. TP adjustment concerning excess fees paid for technical services.

Detailed Analysis:

1. Disallowance of Bare-Boat Charter Hire Payments u/s 40(a)(i):
The assessee made payments to Belgium-based entities for hiring dredgers, excavators, and ships without deducting TDS, arguing that these payments were not taxable as royalty under the amended India-Belgium DTAA. The AO disagreed, treating the payments as royalty under Section 9(1)(vi) and Article 12 of the DTAA, leading to disallowance under Section 40(a)(i).

Upon appeal, it was clarified that the term "Royalty" in the amended DTAA (effective 01.04.1998) excluded payments for the use of industrial, commercial, or scientific equipment. The Tribunal referenced its own decision in the assessee's case for AY 2010-11 and the Madras High Court ruling in CIT vs. Van Oord ACZ Equipment BV, concluding that the payments were not taxable as royalty and the assessee was not liable for TDS. Consequently, the disallowance under Section 40(a)(i) was deleted.

2. Transfer Pricing Adjustment for Hire of Dredgers and Vessels:
The assessee benchmarked the hire charges using the CUP method based on independent valuation certificates from Bureau Veritas. The TPO rejected this method, stating that the certificates did not represent uncontrolled transactions, and instead applied entity-level TNMM, proposing an adjustment of Rs. 23.46 Crores.

The Tribunal noted that in subsequent years, the TPO accepted the CUP method based on similar valuation certificates. Citing the principle of consistency and the Mumbai Tribunal's decision in Van Oord Dredging and Marine Contractor BV, the Tribunal upheld the CUP method for the impugned year, rejecting the TNMM approach and deleting the TP adjustment.

3. TP Adjustment for Excess Fees Paid for Technical Services:
The assessee paid technical fees to its AE, Tideway BV, based on project turnover, which was higher than the 3% stipulated in the agreement. The TPO recalculated the fee based on the turnover in the Profit & Loss Account, proposing a downward adjustment for the excess payment.

The Tribunal referenced its previous decision for AY 2010-11, where it upheld the TPO's adjustment for similar facts, concluding that the assessee's payment exceeded the agreed terms. Therefore, the TP adjustment for excess fees paid was confirmed.

4. Short-Credit of TDS:
The assessee claimed that the AO granted TDS credit of Rs. 773.08 Lacs instead of Rs. 1121.01 Lacs. The Tribunal directed the AO to verify and allow the correct TDS credit in accordance with the law.

Conclusion:
The appeal was partly allowed, with the Tribunal deleting the disallowance under Section 40(a)(i) and the TP adjustment for hire charges, while confirming the TP adjustment for excess fees paid for technical services. The issue of short-credit of TDS was remanded for verification.

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