TaxTMI 
TaxTMI 
2013 (1) TMI 830
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....1/- on account of adjustment in respect of payment of lease rental or Dredger Hector. 2. On the facts and in the circumstances of the case and in law, the learned CIT (A) erred in stating that these are not A.E, whereas in Gr. No.3, Para 4.2 he has agreed with AO that AO can examine the international transaction for correct assessment of income. 3. On the facts and in the circumstances of the case and in law, the learned CIT (A) erred in holding that the adjustment made by the Transfer Pricing Officer is wholly arbitrary in rejecting the VG BouW Certificate when the learned CIT (A) is of the view that too much uncertainty is associated with the VG Bouw Certificate. 4. On the facts and in the circumstances of the case and in law, the learned CIT (A) erred in fact and in law in deleting the addition of Rs. 80,51,038/- in respect of dredger Saga by holding that no adjustment is required to be made as the payments made is less than 5%". C.O. No.81/Mum/2007 2. Even though assessee raised four grounds in cross objection, the grounds from 1 to 3 were withdrawn as not pressed and Ground No.4 only was pressed, without prejudice, which is as under: "....
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.... Therefore, the price paid to WLPZ was the same as entered when it was independent entity and therefore, the same has to be considered as uncontrolled transaction. 5. Assessee had obtained quotations from Great Lakes Dredge & Dock Company (GLDD) dated 22.12.1999 and another quotation from Dredging International N.V. (DI) dated 15.12.1999 before entering into the contacts for hire. Both these quotations were obtained for dredger Saga in relation to their use in calendar year 2000 and calendar year 2001. For the dredger Hector, GLDD gave quotation dated 13.12.2000 for calendar year 2001 & 2002. Similarly DI gave quotation dated 11.12.2000 for dredger Hector for calendar year 2001 & 2002. Assessee also obtained technical certificate from 'VG Bouw' for both the dredgers. VG Bouw certificate for vessel Saga is dated 01.10.2002. Similarly VG Bouw certificate for vessel Hector is dated 01.10.2002. For Saga, certificate is in respect of calendar year of 2001 whereas for Hector for calendar year 2002. VG Bouw certificate dated 01.10.2002 clarified that the lease rental for operation does not include excessive wear and tear, overhead, mobilization/demobilization. Certificate also mentione....
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.... 160 13,506 33,838 1,82,564 8. The position of rates quoted by DI & GLDD for both the vessels are as under: Particulars Dredging International Great Lake Dredge & Dock Co. (1) Amount NLG per week (2) Amount Euro per week (3)=(2)/2.20371 Amount NLG per week (4) Amount Euro per week (5)=(4)/ 2.20371 Vessel:SAGA Mob/Demob year 2000 3,69,314 1,67,587 3,68,712 1,67,314 Mob/Demob year 2001 3,87,443 1,75,814 3,88,732 1,76,399 Operations: year 2000 4,14,733 1,88,198 4,15,053 1,88,343 Operations: Year 2001 4,38,411 1,98,942 4,37,968 1,98,741 Vessel HECTOR Mob/Demob year 2001 3,76,469 1,70,834 3,74,155 1,69,784 Mob/Demob year 2002 3,95,451 1,79,448 3,93,713 1,78,659 Operations: Year 2001 5,49,541 2,49,371 5,48,131 2,48,731 Operations: Year 2002 5,79,953 2,63,171 5,81,334 2,63,798 Actual Payment charter hire rates to BNBE and WLPZ are as under: Particulars As per charter Agreement (1) Amount NLG per week Amount Euro per week ....
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....n it would be required to give the consent for use of vessel by some other entity. Both the owners belong to the BND group, therefore, the information regarding the use of dredgers for the period prior to contract and after the contract should be available with the BND. In absence of the actual hire charges received for the Dredgers from the affiliated/ unrelated entities during the period prior and after of the use by BND-PO and BND and also the huge time gap between the date of quotations and actual use of the Dredgers in India, no cognizance to the quotes obtained can be given, therefore, these quotes used by assessee as internal comparables are rejected". 10. The TPO accordingly rejected the independent quotations as well as the independence of the agreement between WLPZ and assessee. 11. Having rejected these certificates, TPO examined the VG Bouw certificates. TPO accepted that the VG Bouw valuation certificate or the VG Bouw Valuation norms for the dredger can qualify as comparable uncontrolled transaction since these were obtained in October, 2002. He accordingly proceeded to use VG Bouw Certificate for determining the arms length price. He found that claim of excessi....
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.... 14. The learned CIT (A) rejected the reliance on the VG Bouw certificate by stating as under: "6.18 I am therefore, of the view that too much of uncertainty is associated with the VG Bouw certificate namely; a) Valuation on the basis of notional cost of construction and notional cost of operational lease. b) Specific condition regarding additional repairs, excessive wear & tear, overhead cost etc., not being taken into account. c) Market conditions, being the demand and supply situation at the relevant time of hiring not being taken into account. These uncertainties about the correctness of valuation make such a VG Bouw certificate unsuitable for acting as arm's length price for comparison purposes". 15. After rejecting the VG Bouw Certificate relied upon by the TPO, the learned CIT (A) considered the third party quotations with reference to the two dredging vessels acquired by assessee and accordingly, he deleted the addition so made by stating as under: "6.19 On the other hand the appellant has produced two third party quotations offering their rates for hiring of dredger during the calendar year 2001 & 2002. These quot....
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....ean of more than one price computed by the most appropriate method. It can be seen that in the case of appellant two independent quotations for taking the dredger on hire have been filed. In the absence of evidence that the quotations are not independent, there veracity has to be accepted. In view of this, proviso to section 92C(2) would be applicable. As explained above, the difference between the quoted rates of the DI and GLDD with the actual rates at which payments have been made is individually less than 5%. Accordingly, no adjustment is required to be made. In view of this, addition of Rs. 80,51,038/- made in respect of dredger Saga is deleted. 6.24 Consequently the total addition of Rs. 3,24,32,184/- made by the TPO is deleted. Appeal on ground of appeal Nos. 6, 7 & 8 is allowed". 16. The learned CIT (DR) after referring to the facts stated above and various documents placed on record and contentions taken up by the TPO submitted two fundamental questions (1) whether the two quotations can be considered as uncontrolled transactions so as to consider them under the CUP method and (2) whether the rates of the preceding year can be considered as CUP in the absence o....
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....s available from third party which was submitted as international CUP earlier, smaller amount of addition was sustained by the CIT (A) which was confirmed by the ITAT. It was the submission that on the basis of the same quotations available at the time of entering into the agreement, since there is no change in facts in the later years, the quotations can be accepted vide Rule 10D(4) as the international transactions continue to have effect over more than one year. He supported the order of the CIT (A). 18. With reference to the argument of the learned CIT (DR) that the quotations pertain to the earlier years and cannot be accepted for this financial year, the learned Counsel referred to the provisions of Rule 10B(4) which specifically empowered the data relating to a period not being more than two years prior to such financial year may also be considered. It was his submission that the quotations obtained at the time of entering into the agreement can also be considered. 19. With reference to dredger Hector it was submitted that assessee paid hire charges of Rs. 11,07,55,779 to WLPZ for charging the dredger Hector at the rate fixed vide agreement dated 21.12.2000 and the tra....
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....LI, and the Consortium. That is, the endpoint for the period over which there needed to be common control within the meaning of Section 482 was the completion of the binding option agreement. The economic reality of the transaction was that the price of the trademark was established at the time the Consortium obtained the option to buy it at the specified price. The ultimate purchase of the trademark at that price merely ratified the price that had been established at the earlier time Thus, we need not determine whether there was sufficient common control for Section 482 purposes at the time the trademark option was exercised. This transactional approach for determining common control under Section 482 comports with common sense, and the regulations, which state that "It is the reality of the control which is decisive, not its form or the mode of its existence." ("Tax consequences must turn upon the economic substance of a transaction and not upon the time sequences or form of the transaction.") Accordingly, the US Court Law ruled that, as the terms of the transaction were decided between related/entities the said transaction would still require arm's length compliance ev....
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....s placed before the CIT (A). With reference to the adjustment not considered by AO and the mistakes committed by him as accepted by the CIT (A), it was his submission that whether the quotations were taken as a basis or as a VG Bouw certificate as a basis, assessee's price paid is to be considered as ALP as per the provisions of the Act and therefore, the order of the CIT (A) required confirmation. 21. We have considered the issue and examined the rival contentions. As seen from the order of the TPO, it is noticed that the TPO rejected two quotations as not of contemporaneous data ignoring the fact that the agreements were entered in an earlier year and assessee has paid the prices according to the originally agreed amounts. There is no dispute with reference to the fact that the contract was spread over three years and assessee having entered into agreement way back in January/ December 2000 continued to pay the amount as per the originally agreed amounts. The quotations obtained were contemporaneous to the date of the agreement and therefore, in our opinion the TPO rejected the quotations without any basis. 22. As seen from Rule 10B(4), it is specified as under: "Rule 10B(4....
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....ntelligence Weekly and Drewry Monthly, which is the rates in the public domain and without making any adjustment for variation in capacity, cost, finance, risk, etc., computed the arm's length price. The Commissioner (Appeals) took the mean of the arm's length price determined by the TPO and price actually paid by the assessee and determined the arm's length price. Thus, the assessee as well as the authorities have not computed the arm's length price in accordance with law. Hence, we have to quash the arm's length price determined by all the parties. 12.10 Both the parties agreed before us that the "CUP" method should be followed. As there is no comparable transactions, in view of the fact that "Reichem Isha", is a Unique Vessel, with no comparable ship available, as suggested by both the parties, we set aside the issue to the file of the Assessing Officer for the limited purpose of re--computing the arm's length price by taking the date available in the public domain in the form of publication of Shipping Intelligence Weekly and Drewry Monthly as a "comparable price", and thereafter to make various adjustments towards weight, capital cost, risk, et....
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....ompared to the 'Pacifique'. Moreover, the another unrelated company namely 'GLDC' has offered the hire charges to M/s. BNBE, which company is owning the 'Saga'. As per the facts on record, the only difference between the rates offered was to the tune of Rs. 32,17,492/- and to that extent, the learned CIT (A) has rightly sustained the addition. In our opinion, there is no reason to interfere with the order of the CIT (A) on this issue. We therefore, confirm the same". 25. In this year the variation from the price quoted and the price paid is less than +/- 5% as permitted. Therefore under the provisions no adjustment need be made. 26. Similarly in the case of dredger Hector even though there is no dispute with reference to the examination of the international transactions in this year under the provisions of transfer pricing, while determining the ALP what is required to be considered is whether the price paid has any significant impact on the income. As submitted by assessee, the agreement was entered when the entities are independent and therefore, the price paid can be considered at arms length. Moreover, assessee also justified the price paid is within the permitted range o....
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....ering into the agreement, we are of the view that there is no need for making any addition on the basis of the data available on record and accordingly the CIT (A) order is to be confirmed. 28. Even with reference to the VG Bouw certificate, there is no dispute with reference to the authenticity of the VG Bouw certificate and its use in the analysis of arms length price determination under CUP method by the TPO. What the TPO has done is only reliance on the first certificate stating that it is contemporaneous, whereas the 2nd certificate issued on the basis of the first certificate clarifying certain reservations made in the first certificate was not accepted. Since the certificates itself were authenticated, the only exercise TPO could have been done is to examine whether the contentions made therein are correct or not. Even Rule 10B(2) permits various adjustments with reference to specific characteristics, functions performed, contractual terms & conditions prevailing in the market including geographical location, size of the market, cost of labour, overall economic development, level of competition etc. These aspects could have been considered by the TPO before rejecting the ....
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.... and in the circumstances of the case and in law, the learned CIT (A) erred in deleting the disallowance of Rs. 4,14,62,866/- on account of release of retention money against issue of Bank Guarantee. 3. On the facts and in the circumstances of the case and in law, the learned CIT (A) erred in deleting the disallowance of Rs. 22,46,641/- being expenses on repair work for dredger. 4. On the facts and in the circumstances of the case and in law, the learned CIT (A) erred in deleting the disallowance of contribution of Rs. 3,15,000/- to annual celebration of the Naval Staff". 33. We have heard the learned DR and the learned Counsel. 34. Ground No.1: This ground pertains to TP adjustment made against the dredger "Hector" by the TPO/AO of Rs. 1,72,02,723. As in earlier appeal the TPO rejected the quotations obtained at the time of entering agreements, tweaked the VG Bouw certificate without considering the revised certificate, determined the ALP and arrived at disallowance of above amount under TP provisions. The CIT (A) after rejecting the contentions of assessee on jurisdiction etc, however, deleted the addition by stating as under: "10.3 I have gone th....
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....llant with WLPZ is itself an independent transaction since at the time of contract, appellant and WLPZ were both independent parties. In the absence of material brought on record by AO, it cannot be said the WLPZ and appellant were AEs, it has further been discussed in the earlier paragraphs that the difference between the rate at which payment is made to WLPZ compared to the quotations of GLDD and DI is very minimal sand is less than 5% of the actual payment. It is accordingly held that the TPO has wrongly made adjustment in respect of payment of lease rental regarding dredger Hector and thus addition made of Rs. 2,43,77,621/- is deleted. 6.21 In respect of Saga, the issue was examined in A.Y 2001-02 also by my predecessor in his order dated 17/12/2004 in Appeal No.CIT (A) XXXI/DDIT (IT)-1(1)IT-107/04-05. The position of the rates at which the payment has made for the use of Saga and the quotations of DI and GLDD has already been quoted in para 6.11. The percentage difference taking the actual payment as basis in difference quotations of DI and GLDD is quoted in Para 6.12. 6.22 It can be seen that the percentage variation between the quotes of GLDD and DI with th....
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.... Mob/Demob: Year 2002 182,564 3.116 1.71 3.905 2.14 Operations: Year 2001 254,700 5.329 2.09 5.969 2.34 Operations: Year 2002 267,435 4.264 1.59 3.637 1.36 10.5 From this, it can be noticed that the percentage of difference is less in calendar year 2002 compared to calendar year 2001. Further, it is also noticed that with respect to vessel 'Hector' the agreement was entered when the WLPZ was not an associated enterprise. This fact also helps the appellant to argue that the transaction was entered at Arm's Length Price. 10.6 In view of all the above discussions, I am of the view that there is no adjustment required to be made with regard to the hire charges paid for the vessel 'Hector'. AO is directed to delete the addition of Rs. 1,72,02,723/-." 35. We have heard the learned DR and the learned Counsel whose arguments are similar to the contentions raised in above appeal in ITA No.6531/Mum/2006. Since the issues are similar and facts being same, for the reasons stated above in Para 21 to 28, we affirm the order of the CIT (A) and reject the ground of Revenue. 36. Ground No.2: This ground arises on....
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....ppellant. The Hon'ble Mumbai High Court has categorically held so (286 ITR 596) (Bom.). The money received by the appellant on furnishing bank guarantee is not the income at that point of time. As pointed out by the appellant, it is a facility given to the appellant (to the contractor) under the agreement to have cash liquidity to carry out the work. The absolute right to get the retention money arises only after satisfaction of the conditions listed out in clause 60.6 of the agreement and it is extracted below: Sub clause 60.6: Payment of Retention money: "Upon the issue of taking over certificate with respect to the Breakwater construction, 2 per cent of the Retention Money shall be certified by the Engineer for payment to the Contractor (or return of the bank guarantee, as the case may be). Upon the issue of the taking over certificate with respect to the Dredging Works in the approach Channel and Harbour Basin and the Reclamation works, a further 2 per cent of the Retention money shall be certified by the Engineer for payment to the Contractor for return of the bank guarantee, as may be the case). Upon the expiration of the Defects Liability Perio....
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....y assessee to customers. As per the agreement entered into with the customers, amount retained was released against furnishing bank guarantee by a scheduled bank." The third member held of the tribunal had held as follows: "... As the performance guarantee remains and is enforceable without notice to the assessee, the income from the retention money cannot be recognized. Consequently, I have to agree with the learned Accountant Member that the retention money of 10% has to be excluded in computing the total income until the period of guarantee is over." We observe that the Hon'ble Jurisdictional High Court in the subsequent assessment year of same assessee considered the above decision of ITAT and affirmed the said decision. It was held that retention money withheld by the contractee pending completion of contract work does not accrue to the assessee/contractor in the year in which the amount is retained. We also observe that similar issue was also considered by ITAT in the case of Spirax Marshall Ltd (supra) wherein it was held that receipt of retention money against furnishing bank guarantee cannot partake character of income since it cannot be apportioned until....
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....thereon had accrued at the moment when such services were rendered by assessee. However, in this case the project was ongoing and so the accrual of income to the extent of retention money was concerned has not happened. The principle in the Hon'ble Supreme Court in the case of Rotork Controls India (P) Ltd (supra) was with reference to "warranty liability" provided as expense, not income. With reference to the third member case of ITAT in Associated Cables (P) Ltd was concerned, the order was approved by the Hon'ble High Court in286 ITR 596 (Bom.) which the CIT (A) has followed. Therefore, the argument of dissenting Member does not come into consideration. In view of the above, the contentions raised by the learned DR were rejected. Respectfully following the Coordinate Bench decision in other years, we affirm the order of the CIT (A) and reject the ground No.2 of the Revenue. 41. Ground No.3 pertains to the issue of repairs to the dredger. AO disallowed the repair expense holding that provision of expense is not allowable under section 37(1) of the Act. It was the contention that the repair work was completed during the year under consideration. Pending the receipt of i....
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....Seabird Hrs for equipt & Manpower to disch. Hector Spud parts. 1,467.00 Total amount payable in SGD $8 4,625.00 14.1 From the above, it is clear that the works were carried out in the previous year relevant to assessment year 2003- 04 and the appellant has claimed this expenditure in assessment year 2003-04 after making provision for payment. AO has simply stated that it is not allowable because it is only provision. I am fully convinced it is an allowable expenditure because the expenditure was incurred in this accounting year and AO is directed to delete the addition". 44. We have considered the rival submissions and facts on record. We see no reason to differ from the findings of the CIT (A). First of all the expenditure has accrued and so the payment later cannot be a reason to disallow on the reason that assessee provided as a provision. As rightly pointed out by the CIT (A), the genuineness of expenditure was not doubted. In these circumstances, there is no merit in Revenue ground, hence, rejected. 45. Ground No.4 pertains to the issue of contribution of assessee Rs. 3,15,000 towards celebration of the annual event by the ....