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2018 (2) TMI 1986 - AT - Income TaxTP Adjustment - international transactions entered by the assessee with its overseas associated enterprise - validity of the reference made u/s 92CA(1) to the Transfer Pricing Officer - as per the assessee, if the reimbursement of expenses is considered while determining the arm s length price of the international transaction, then the rate charged by the assessee for the manning services comes to US 152, which is in excess of the arm s length rate of US 150 adopted by the TPO - HELD THAT - TPO has reproduced the details of expenses reimbursed by the associate enterprise which are on various heads, viz., fish vessel expenses, travelling expenses, port expenses, licence and certification expenses, uniform expenses, training expenses, repair team expenses etc. - finding of the Assessing Officer clearly supports the assertion of the assessee to the effect that the said expenses have been incurred by it in the course of providing the manning service to the associate enterprise, and the same have been recovered from the associate enterprise as reimbursements. We are only trying to highlight the fact that the said expenses are in relation to the tested transaction and therefore there is no justification in not considering them while computing the arm s length price. The plea of the Revenue based on the observation of the CIT(A) that the expenses have not been shown in the Profit Loss Account, and therefore, it cannot be taken into consideration, is to say the least, avoiding the obvious. Ostensibly, if such expenses were to be debited to the Profit Loss Account, it would require simultaneous equivalent credit to the Profit Loss Account on account of reimbursements. Ostensibly, if one is to determine the rate charged by the assessee from its associate enterprise per crew per month, it would entail taking into consideration the recoveries by way of reimbursements also; and, as the Tabulation reproduced by us earlier shows that once such recoveries are also factored into the rate charged from the associated enterprise, the rate comes to US 150.28 per crew per month and upon comparison with the rate of US 150 adopted by the TPO, the amount recovered by the assessee from the associate enterprise compares favourably, and, thus it would obviate the need for any further adjustment to the stated values in order to arrive at the arm s length price. Therefore, on this short point, the adjustment sustained by the CIT(A) is found to untenable - Decided in favour of assessee.
Issues Involved:
1. Legality and validity of the reference made under section 92CA(1) of the ITA to the Transfer Pricing Officer. 2. Confirmation of the addition of ?68,262,138. 3. Validity of M/s. Confidence Shipping Co. as a comparable. 4. Rejection of the appellant's plea to consider expenses incurred and collected back from their AE in determining the manning fee. Issue-wise Detailed Analysis: 1. Legality and Validity of the Reference under Section 92CA(1): The appellant challenged the legality of the reference made to the Transfer Pricing Officer (TPO) under section 92CA(1) of the Income Tax Act, 1961. However, the judgment does not provide a detailed discussion on this issue, implying that the primary focus was on the substantive addition made by the TPO and upheld by the CIT(A). 2. Confirmation of the Addition of ?68,262,138: The core issue revolves around an addition of ?6,82,61,138 made to the returned income on account of transfer pricing adjustment related to international transactions between the assessee and its overseas associated enterprise. The assessee, a subsidiary of Barber International Ltd., Hongkong, engaged in providing manning services, declared a loss of ?2,08,90,645, which was revised to a total income of ?4,89,55,180 after scrutiny. The TPO determined the arm’s length price of the international transaction of providing manning services above the stated values by ?6,82,62,138. The TPO applied the Comparable Uncontrolled Price (CUP) method, using data from Confidence Shipping Pvt. Ltd., to benchmark the transactions, which the assessee contested. 3. Validity of M/s. Confidence Shipping Co. as a Comparable: The assessee argued against the appropriateness of using Confidence Shipping Co. as a comparable, citing irrelevance and unsubstantiated data. The TPO used the rate quoted by Confidence Shipping Ltd. (US$ 150) as the arm’s length rate for the manning services provided by the assessee, leading to the adjustment. The assessee contended that even if this rate was considered valid, the actual charges recovered, including reimbursed expenses, would demonstrate that the transactions were at an arm’s length price. 4. Rejection of the Appellant's Plea to Consider Expenses: The appellant argued that the expenses incurred (?6,38,78,901) and reimbursed by the associated enterprise should be considered in determining the arm’s length price. The TPO and CIT(A) did not factor in these expenses, leading to the disputed addition. The Tribunal found merit in the appellant's argument, noting that the expenses were related to the 'tested transaction' and should be included in the arm’s length price calculation. The Tribunal highlighted that if these expenses were considered, the rate charged per crew per month would be US$ 150.28, which is in line with the rate adopted by the TPO (US$ 150), thereby obviating the need for any further adjustment. Conclusion: The Tribunal set aside the order of the CIT(A) and directed the Assessing Officer to delete the addition of ?6,82,62,138. The decision was based on the alternate plea that even under the TPO's approach, no addition was maintainable once the reimbursements were correctly factored in. The Tribunal did not delve into the validity of the CUP method or the quality of the CUP data, leaving these issues open for future consideration. The appeal of the assessee was allowed, and the order was pronounced on 7th February 2018.
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