2013 (7) TMI 223 - AT - Income Tax

Addition on Arm s Length Price u/s.92C - sale of ship to wholly owned Subsidiary - CIT(A) considered the sale price of SHIP at US 11.32 million as against US 9.50 million dollar - CIT(A) rejected the Valuation report of M/s. J.B. BODA SURVEYORS & ADJUSTERS PVT. LTD. certifying the value of ship at US 9.60 million only on the ground that valuation report was submitted at the fag end of the assessment proceedings - CIT (A) also not considered the 5% of the difference allowable - Held that - Sale of ship is an international transaction between associate enterprises and therefore, transfer pricing provisions are applicable. The findings of the CIT (A) on this issue are therefore, upheld. The sale has taken place in November, 2002, therefore, the CIT (A) findings that the adoption of value of February, 2003 by AO is not correct has to be upheld. Adjustment of prices based on the capacity in DWT - Held that - As verifying the records relating to the vessel and it is confirmed that both the figures are correct, i.e. 43,595 and 42,430, respectively, as they relate to summer and winter dwts of mv Prabhu Puni. Typically, when a vessel is described for sale/purchase purposes, the same is described in terms of its summer dwt enclosing extracts of information from independent sources, viz. Wikipedia, MarineTraffic.com, Clarkson Research Services Ltd. and Shippingdatabase.com. The extracts would show that the vessel, mv Prabhu Punis dwt is 43,595. We are not in a position to approve the value of the CIT (A) on the basis of average prices of different category of ships adopted, as he has relied on prices quoted in a magazine and adopted an average method which is not prescribed. As noticed that the JB Boda certificate which was relied upon by assessee before the CIT (A) was issued in connection with the insurance of the Ship by M/s United India Insurance Co. Ltd as on 1.7.2002. The ship was insured for a sum of Rs.50.00 crores. In that the United India Insurance Company Ltd has stated that the Hull and Machinery insured value at Rs.50.00 crores. This Insurance was valid w.e.f. 1.7.02 to 30.06.03. In view of the above document available, this value accepted by the Insurance Company for the ship can be taken as reasonable value to arrive at ALP rather than going by the estimation on the basis of the quoted figures in a monthly magazine as was done by the CIT (A). M/s Simpson Spence and Young London certificate will not be acceptable as it is not based on inspection of the vessel, condition of the vessel and further they have furnished a revised certificate as stated in the note with reference to the dead weight of the ship. Even though the JB Boda certificate dated 11.06.2002 was for internal purposes, may be for the purpose of insurance, the insurance value as accepted by the insurer can be considered as reasonable valuation for the purpose of arriving at the ALP. Therefore, AO directed to adopt the value of Rs.50.00 crores for the purpose of arriving at the ALP. 5% standard deduction can not be allowed in view of change in law as well as there is only one price determined - appeal filed by assessee is partly allowed.

Summary

Issues Involved:
1. Addition under section 92C of the Income Tax Act on sale of ship to a wholly owned subsidiary.
2. Consideration of the sale price of the ship.
3. Acceptance of valuation certificates.
4. Methodology for determining the market price of the ship.
5. Jurisdiction to make additions under section 92C.
6. Application of Transfer Pricing provisions.
7. Determination of Arm's Length Price (ALP).
8. Consideration of 5% standard deduction.

Detailed Analysis:

Issue 1: Addition under section 92C of the Income Tax Act on sale of ship to a wholly owned subsidiary
The assessee appealed against the CIT(A) order, which confirmed an addition under section 92C of the Income Tax Act due to the sale of the ship MV Prabhu Puni to its wholly owned subsidiary at a price lower than the Arm's Length Price (ALP).

Issue 2: Consideration of the sale price of the ship
The CIT(A) considered the sale price of the ship at US$11.32 million instead of US$9.50 million, leading to an addition of Rs.8,68,32,200. The assessee argued that the sale price was based on a valuation certificate from M/s. Simpson Spence & Young Shipbrokers Ltd., London, which was not accepted by the CIT(A) due to lack of inspection and a disclaimer in the certificate.

Issue 3: Acceptance of valuation certificates
The CIT(A) rejected the valuation certificate from M/s. Simpson Spence & Young Shipbrokers Ltd. because the vessel was not inspected, and the valuer provided a disclaimer. The assessee furnished another valuation certificate from M/s. JB Boda Offshore Surveyors and Adjustments Pvt. Ltd., which valued the ship at USD 9.60 million. However, the CIT(A) did not accept this valuation either.

Issue 4: Methodology for determining the market price of the ship
The CIT(A) adopted the Comparable Uncontrolled Price (CUP) method using data from 'The Platou Monthly' magazine to determine the ALP. The CIT(A) adjusted the prices based on the ship's capacity and year of manufacture, concluding that the ALP for November 2002 was US$11.32 million. The exchange rate adopted was Rs.47.71 per US dollar, resulting in an ALP of Rs.54,00,77,200.

Issue 5: Jurisdiction to make additions under section 92C
The CIT(A) confirmed the jurisdiction to make additions under section 92C, as the transaction was an international transaction between associated enterprises. The assessee's argument that the sale was not a trading transaction but a transfer of a capital asset was rejected.

Issue 6: Application of Transfer Pricing provisions
The CIT(A) upheld the application of Transfer Pricing provisions, determining that the sale price must be computed having regard to the ALP. The CIT(A) found the assessee's valuation methods insufficient and adopted the CUP method as the most appropriate.

Issue 7: Determination of Arm's Length Price (ALP)
The CIT(A) determined the ALP based on average prices from 'The Platou Monthly' magazine, adjusted for inflation and the ship's specifications. However, the Tribunal found the CIT(A)'s method of averaging prices from different categories inappropriate. Instead, the Tribunal considered the insurance value of Rs.50.00 crores as a reasonable valuation for the ship's ALP.

Issue 8: Consideration of 5% standard deduction
The Tribunal did not allow the 5% standard deduction due to changes in law and the determination of a single price.

Conclusion:
The Tribunal upheld the CIT(A)'s findings on the applicability of Transfer Pricing provisions and the determination of the sale date as November 2002. However, it directed the AO to adopt the insurance value of Rs.50.00 crores as the ALP, modifying the order accordingly. The assessee's appeal was partly allowed, and the additional grounds were deemed academic and not considered. The Tribunal pronounced the order on 30th April 2013.