2018 (4) TMI 1811 - AT - Income Tax

TP Adjustment in relation to manning fees - 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 which is in excess of the arm s length rate adopted by the TPO - As canvassed even if one has to go by the manner in which benchmarking has been carried out by the TPO, even then the transactions of the assessee are at an arm‟s length price taking into consideration the amount of expenses reimbursed by the associated enterprise over and above the fixed rate of payment - HELD THAT 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. Plea of the Revenue before us, 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. We delete the addition made on account of transfer pricing adjustment of manning services as made by the Assessing Officer and sustained by the learned Commissioner (Appeals). The grounds raised are allowed to the extent indicated above. Disallowance of unabsorbed depreciation and loss - As submitted that the related issue arising in assessment year 2004 05 is yet to be decided as the appeal for the said assessment year is still pending - HELD THAT - We are inclined to restore this issue to the Assessing Officer for granting consequential relief depending upon the ultimate outcome of assessee s appeal on the issue in assessment year 2004 05. This ground is allowed for statistical purposes.

Summary

Issues Involved:
1. Addition of ?5,14,71,625 on account of transfer pricing adjustment in relation to manning fees.
2. Disallowance of unabsorbed depreciation and loss.

Detailed Analysis:

Issue 1: Addition of ?5,14,71,625 on account of transfer pricing adjustment in relation to manning fees

The assessee, an Indian company engaged in sourcing, screening, and selecting seafarers, had undertaken an international transaction related to manning services with its Associate Enterprise (A.E) M/s. Barber Ship Management Ltd., Hong Kong. For the assessment year 2005–06, the assessee reported ?3,43,50,125 as fees received from its AE for manning services. The Transfer Pricing Officer (TPO) compared this with the fees charged by M/s. Confidence Shipping Co. Pvt. Ltd. in the assessment year 2002–03, which was $120 per person per month. The TPO adopted this rate, determining the arm's length price for the assessee's services to be ?8,58,21,750, leading to an upward adjustment of ?5,14,71,625.

The assessee contended that the Tribunal had previously ruled in its favor for the assessment year 2002–03, where the Tribunal had deleted a similar addition, holding that the price charged by the assessee was at arm's length. The Departmental Representative agreed that the issue had been decided in favor of the assessee in the preceding assessment year.

The Tribunal reviewed the facts and noted that the TPO had used the same comparability analysis from the assessment year 2002–03, where the Tribunal had found that the assessee's charges were at arm's length when considering the reimbursement of expenses. The Tribunal reiterated that the expenses incurred by the assessee for providing manning services, which were reimbursed by the AE, should be considered in determining the arm's length price. The Tribunal concluded that the adjustment made by the TPO was untenable as the actual charges, including reimbursements, were at arm's length. Therefore, the addition of ?5,14,71,625 was deleted.

Issue 2: Disallowance of unabsorbed depreciation and loss

The assessee challenged the disallowance of unabsorbed depreciation and loss. The learned Authorised Representative pointed out that the observations of the first appellate authority were factually incorrect and that the related issue for the assessment year 2004–05 was still pending. The Departmental Representative had no objection to remitting the matter to the Assessing Officer for consequential relief.

The Tribunal decided to restore the issue to the Assessing Officer for granting consequential relief based on the outcome of the assessee's appeal for the assessment year 2004–05, allowing this ground for statistical purposes.

Conclusion:

The appeal was partly allowed. The addition of ?5,14,71,625 on account of transfer pricing adjustment was deleted, and the issue regarding the disallowance of unabsorbed depreciation and loss was remitted to the Assessing Officer for consequential relief. The order was pronounced in the open Court on 27.04.2018.