Transfer pricing adjustment of ?10.47 crore deleted; back-to-back bareboat charter deemed arm's-length, directs Section 234C interest on returned income

ITAT MUMBAI held that the transfer pricing adjustment of INR 10,47,30,105 made by the TPO/AO lacked merit and directed its deletion, allowing grounds 4-10 of the appeal. The tribunal found the assessee's back-to-back bareboat charter arrangement with the associated enterprise produced an arm's length outcome; even after imputing a 2.5% commission the assessee's remuneration remained below comparables. The tribunal applied the benchmarking accepted in the earlier year and saw no change in facts. The AO was directed to compute interest under s.234C based on returned income.

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ISSUES PRESENTED AND CONSIDERED

1. Whether the transfer pricing adjustment of INR 10,47,30,105 in relation to bareboat charter hire paid to an associated enterprise (AE) is sustainable, including (a) appropriateness of characterising the assessee as a mere pass-through/sub-lessor, (b) applicability of a 2.5% commission imputation, (c) choice and application of the "Other Method" under Rule 10AB/section 92C, and (d) whether the ALP falls within the +/-3% tolerance under the second proviso to section 92C(2).

2. Whether the findings/directions in the assessee's own earlier assessment year (AY 2016-17) bearing on benchmarking/revenue split are distinguishable and can be departed from in the impugned year.

3. Whether credit for tax deducted at source (TDS) claimed by the assessee requires adjudication and verification (section 2/credit provisions).

4. Whether interest under section 234C should be computed on returned income or assessed income.

5. Whether initiation of penalty proceedings under section 270A is premature.

ISSUE-WISE DETAILED ANALYSIS - Transfer Pricing Adjustment (Grounds 4-10)

Legal framework: Transfer pricing provisions under Chapter X (sections 92 to 92F) and section 92C(1)/(2)/(3), Rule 10AB (Other Method), and the role of the Transfer Pricing Officer (TPO) and Dispute Resolution Panel (DRP) under sections 92CA and 144C were applied to determine Arm's Length Price (ALP) of international transactions.

Precedent treatment: The Tribunal relied on earlier DRP directions in the assessee's own AY 2016-17 and cited principles of consistency/res judicata and Radhasoami Satsang v. CIT (supra) to the effect that absent change of facts/arrangement a different stand cannot be taken in subsequent year.

Interpretation and reasoning: The Tribunal analysed the contractual matrix between the contracting Indian entity and ONGC (composite contract for supply of FPSO and O&M services) and the bareboat charter agreement between the assessee and the AE. It found: (a) the JV structure reflected distinct and complementary functions - AE supplying/constructing/converting/mobilising and owning the FPSO; the assessee performing O&M and other operational obligations and bearing operational responsibilities; (b) the composite contract does not render the assessee an agent of the AE; clause recognising the assessee as an independent contractor supports principal-to-principal characterisation; (c) both parties jointly benefited from the contract and each bore distinct roles and risks, undermining the TPO's view that the assessee was a mere pass-through; (d) the TPO's rejection of the assessee's benchmarking primarily on account of accounting presentation (change arising from adoption of Ind AS 116) was misplaced because mere book entries are not determinative of TP liability; and (e) the assessee's adoption of Other Method (revenue split/proportionate benchmarking) had prior DRP acceptance in AY 2016-17 and the Revenue produced no material showing a substantive change in facts or arrangements to justify a departure.

Treatment of 2.5% commission imputation: The TPO/DRP imputed a 2.5% brokerage/facilitation commission and computed a downward ALP adjustment. The Tribunal examined the assessee's "after-imputation" computation comparing the percentage split of bareboat hire and O&M with comparables and found that even after imputing 2.5% commission, the revenue split remained within/comparable to external benchmarks (i.e., assessee still paid less for bareboat hire than comparables). The Tribunal therefore concluded the international transaction produced an arm's length outcome even after imputing commission.

Rule-methodology scrutiny: The Tribunal emphasised that the Other Method under Rule 10AB (revenue split/comparative proportion approach) was reasonably applied; the DRP had accepted similar approach previously. The TPO's reliance on differences in FPSO specifications as a basis to reject comparables was considered insufficient in light of DRP's earlier on-record consideration of such differences.

Ratio vs. Obiter: The holdings that (a) the assessee was not an agent but a principal for the composite contract, (b) the Other Method was appropriately applied, and (c) the 2.5% imputation did not vitiate ALP are ratio decidendi for the transfer pricing issue. Observations about the commercial importance of commitment letters and joint-venture rationale are explanatory but support the ratio.

Conclusion: The Tribunal deleted the transfer pricing adjustment of INR 10,47,30,105 and allowed grounds 4-10. It held that absent a change in factual matrix from AY 2016-17, the assessee was entitled to maintain the benchmarking previously accepted by the DRP and that, in any event, the transaction was at arm's length even after imputing a 2.5% commission.

ISSUE-WISE DETAILED ANALYSIS - Reliance on Earlier DRP Findings and Consistency (Grounds 6-7 & cross-ref to TP issue)

Legal framework: Principles of consistency and relevance of findings in the assessee's own earlier proceedings; evidentiary relevance of earlier DRP directions; Radhasoami principle on re-opening/change of view where facts unchanged.

Precedent treatment: Tribunal invoked authoritative principle that a different stand cannot be taken by Revenue in a later year in absence of change in facts/arrangement (citing Radhasoami Satsang v. CIT).

Interpretation and reasoning: The Tribunal found no material to show change in the contract or arrangement between the parties vis-à-vis the earlier AY. The adoption of Ind AS 116 changed presentation but not substance. The DRP's prior consideration of differences in FPSO specifications was held to undercut the TPO's post facto attempt to distinguish the years based on vessel differences. The JV nature and commitment letters evidenced long-term interdependence between the parties justifying consistent treatment.

Ratio vs. Obiter: The conclusion that prior DRP findings are binding in substance unless facts change is ratio and was pivotal to the TP outcome; discussion of accounting standard impact is ancillary but material.

Conclusion: Reliance on the DRP's prior acceptance of the benchmarking approach for AY 2016-17 was upheld; Revenue's attempt to distinguish AY 2016-17 was rejected for lack of new material/facts.

ISSUE-WISE DETAILED ANALYSIS - TDS Credit (Ground 11)

Legal framework: Entitlement to credit for tax deducted at source under the Act requires factual verification of TDS certificates, deductor details and compliance with statutory conditions.

Interpretation and reasoning: The Tribunal observed that adjudication of TDS credit requires examination of primary evidence and verification of facts. No conclusive finding was possible on the record before the Tribunal.

Ratio vs. Obiter: Direction to remit for de novo consideration is dispositive for this issue but procedural; the requirement for factual verification is ratio for remand.

Conclusion: Ground 11 allowed for statistical purposes and restored to the file of the jurisdictional AO for de novo consideration after necessary verification/examination.

ISSUE-WISE DETAILED ANALYSIS - Interest under section 234C (Ground 13)

Legal framework: Section 234C levies interest for failure/shortfall in advance tax payments and refers to "returned income" for computation, whereas section 234B (and others) refer to "assessed tax".

Interpretation and reasoning: The Tribunal clarified that section 234C requires comparison with returned income and directed the AO to compute interest under section 234C as per law taking into account the returned income, not the assessed income.

Ratio vs. Obiter: The directive on correct base for computation under section 234C is ratio and binds the AO's recomputation.

Conclusion: Ground 13 allowed for statistical purposes; AO directed to recompute interest under section 234C on returned income.

ISSUE-WISE DETAILED ANALYSIS - Interest under sections 234A/234B and Penalty under section 270A (Grounds 12 & 14)

Legal framework: Interest under sections 234A/234B is consequential on assessment; penalty under section 270A has its own preconditions and may be premature prior to completion of assessment consequences and fact-finding.

Interpretation and reasoning: The Tribunal treated interest under sections 234A/234B as consequential and not warranting separate adjudication in the appeal. The challenge to initiation of penalty proceedings under section 270A was dismissed as premature.

Ratio vs. Obiter: The treatment of interest as consequential is procedural/ratio for case management; dismissal of challenge to penalty initiation as premature is dispositive on that ground.

Conclusion: Ground 12 requires no separate adjudication (consequential). Ground 14 dismissed as premature.

FINAL CONCLUSION

The appeal was partly allowed: the transfer pricing addition of INR 10,47,30,105 was deleted; TDS credit issue remitted to AO for de novo verification; interest under section 234C to be recomputed on returned income; interest under sections 234A/234B treated as consequential; initiation of penalty proceedings under section 270A held premature and challenge dismissed. The Tribunal implemented consistency principle with prior DRP directions in absence of change in facts and found the tested transaction to be at arm's length even after hypothetical imputation of a 2.5% commission.

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