2018 (10) TMI 677 - AT - Income Tax

Transfer pricing - selection of comparable - none of the companies selected by the TPO are engaged in the activity of lease and sub-lease of the vessels - Held that - the issue needs verification by the Ld.TPO/AO to select the correct comparables functionally, asset wise to arrive at the PLI to bench mark and arrive at the ALP. Therefore, in the interest of justice, we restore the matter back to the file of the Ld.TPO/AO to determine ALP after making proper transfer pricing study. - Matter remanded back.

Issues Involved:
1. Determination of Arm's Length Price (ALP) for Bareboat Charter Rentals and Ship Management Services.
2. Selection of Comparables for Transfer Pricing Study.
3. Adjustment of Interest on Receivables.
4. Consideration of Government Regulations Impact on ALP.
5. Service Tax Payment Issue.

Detailed Analysis:

1. Determination of Arm's Length Price (ALP) for Bareboat Charter Rentals and Ship Management Services:
The assessee declared a loss for the assessment years 2012-13 and 2013-14, with significant international transactions involving payments to its Associate Enterprises (AEs) for Bareboat Charter Rentals and Ship Management Services. The Transfer Pricing Officer (TPO) determined the ALP using the Transactional Net Margin Method (TNMM) and found discrepancies in the projected margins used by the assessee. The TPO proposed adjustments, which were contested by the assessee but ultimately upheld by the Dispute Resolution Panel (DRP).

2. Selection of Comparables for Transfer Pricing Study:
The TPO selected six comparables, which the assessee argued were functionally divergent and incomparable. The assessee highlighted differences in the operations, assets, and risks of the selected companies, such as Chowgule Steamships Ltd., Global Offshore Services Ltd., Great Eastern Shipping Co. Ltd., Seamec Ltd., Shahi Shipping Ltd., and Shipping Corporation of India Ltd. The DRP rejected the assessee's objections, stating that any functional differences were accounted for in the arithmetic mean of the comparables. However, the Tribunal found that none of the selected comparables were engaged in identical or similar functions to the assessee and remitted the matter back to the TPO/AO for fresh determination of ALP with correct comparables.

3. Adjustment of Interest on Receivables:
The TPO suggested an adjustment for interest on receivables at 14.75%, amounting to ?3,41,85,930/-. The assessee filed objections before the DRP, which were rejected. The Tribunal did not specifically address this issue in the final order, implying acceptance of the TPO's adjustment.

4. Consideration of Government Regulations Impact on ALP:
The assessee argued that government regulations, particularly delays in obtaining permission for External Commercial Borrowing (ECB) loans, impacted its financial performance. The DRP dismissed this argument, stating that the assessee should not have entered into international transactions resulting in losses. The Tribunal upheld this view, emphasizing that government policies cannot justify adjustments for determining ALP.

5. Service Tax Payment Issue:
The assessee raised an issue regarding the service tax paid to the government treasury for the assessment year 2012-13. However, this issue was not raised before the DRP, and the Tribunal dismissed the appeal on this ground.

Conclusion:
The Tribunal set aside the orders of the lower authorities concerning the determination of ALP for Bareboat Charter Rentals and Ship Management Services and remitted the matter back to the TPO/AO for fresh determination with appropriate comparables. The appeals were partly allowed for statistical purposes, and other grounds raised by the assessee were dismissed as not pressed. The order was pronounced on 10th October 2018.

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