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TMI Blog2013 (1) TMI 830X X X X Extracts X X X X X X X X Extracts X X X X ..... nt 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 Even though assessee raised four grounds in cross objection, the grounds from 1 to 3 were withdrawn as not pressed and Ground No.4 only was pressed, without prejudice, which is as under: "4. On the facts and in the circumstances of the case and in law, the learned CI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 mentioned that market conditions prevailing at the time when transactions were finalized were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reat 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 (2) (3)=(2)/2.20371 Vessel:SAGA Mob/Demob year 2000 3,76,579 1,70,884 Mob/Demob year 2001 3,96,222 1,79,798 Operations: year 2000 4,22,470 1,91,709 Operations: Year 2001 4,44,290 2,01,610 Vessel HECTOR Mob/Demob year 2001 3,83,160 1,73,870 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 excessive wear and tear was unjustified and held the price mentioned in the original certificate as the value at arms length price. The claim of overhead cost of assessee was also rejected by him. The claim of assessee of adjustment for market conditions was accepted in part by the TPO. However, the adjustment was restricted to 1.29% being the adjustment shown in the case of Saga Vessel of Euro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng 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 quotations are on the same terms and conditions as applicable to actual hiring by the appellant from WLPZ. These parties are independent parties and are unrelated to the appellant. It is accordingly held that the rates offered by these two parties, namely, DI & GLDD can be taken as independent transactions for comparison purposes for purposes of section 92C, both in respect of dredgers Hector and Saga. 6.20. Additionally in respect of dredger Hector, the transaction entered into by the appellant with WLPZ is itself an independent transaction since at the time of contract, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 of any contemporaneous data. Extending the arguments, he referred to the Rule 10B(1)(a) with reference to the CUP method specifically to the words used with reference to price charged or paid which cannot be accepted in a case of a quotation and further to Rule 10D(3) with reference to documents to submit that the quotations cannot be considered as authentic documents as per Rule 10D(3). It was further his argument that the learned CIT (A) rejected the VG Bouw certificate stating that it has too much uncertainties when the certificates issued were contemporaneous as discussed by the TPO and the same can also be taken as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 transactions entered into by assessee with WLPZ was itself an independent transaction since at the time of entering into contract assessee and the WLPZ were both independent parties and not associated enterprises, even though at the time of payment the said WLPZ became an associated enterprise. The submission was that the price paid was determined when the parties were independent. Therefore, there is no need for re-determining the ALP when the transactions itself was entered at ALP level. He submitted a detailed note with reference to "entered into" used in the provisions. The note is as under: As per the Rule 10B(4) of the Rul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransactional 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 even though at the time of entering into the transaction, two entities were not related. Applying the ratio of the decision in the case of DHL to the facts of BND's case, it is submitted for determining whether the transaction of charter hire of Hector, the conditions prevailing at the time of the agreement is relevant. Further it is respectfully submitted that the charter hire charges as determined between two non AEs were unchanged even after the two entities became AEs. Therefore, as the terms of the transaction for charter hire were decided between BND and WLPZ vide agreement dated December 21, 2000 when WLPZ was not an AE of BND, such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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): The data to be used in analysing the comparability of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into : Provided that data relating to a period not being more than two years prior to such financial year may also be considered if such data reveals facts which could have an influence on the determination of transfer prices in relation to the transactions being compared" The rule permits data relating to the financial year in which international transaction has been entered into. In this case the international transaction continu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o 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, etc., and then arrive at the arm's length price. The assessee has furnished its calculation. The Assessing Officer shall examine this calculation of arm's length price given by the assessee wherein various adjustments are claimed on account of variation and arrive at the arm's length price. Needless to say, opportunity of being heard should be given to the assessee. Here also in the above case, the quotations from the Shipping Intelligence Weekly and Drewry Monthly were considered. Therefore, the VG Bouw certificate which is an internationally accepted body can also be considered on similar line under the CUP method, even though there is no 'price paid or charge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 of +/- 5% in both the cases, the fact of which was accepted by the CIT (A). The relevant computations on the basis of the two quotations are as under: Computation of arm's length range of price - Actual payment vis-àvis quotes received from M/s Dredging International (DI) Amounts in NLG Particulars SAGA HECTOR Operational (per week) Mob/Demob (per week) Operational (per week) Mob/Demob (per week) Quotes from unrelated party A 438,411 387,443 579,953 395,451 Price range of 5% (as per proviso to section 92C(2) of the Act B=A *95% C=A* 105% 416,490 460,332 368,071 406,815 550,955 608,951 375,678 415,224 Arm's Length Price ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce 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 2nd certificate. In our opinion the CIT (A) has recorded the objections raised by assessee as valid but rejected the certificate on the reason that of too much uncertainties. Assessee is able to justify various adjustments so made to arrive at the ALP on the basis of the VG Bouw certificate also. If we examine the certificates as such before the authorities by assessee, we do not see any reason to reject the same. As already stated, there is no independent data available before the TPO to determine the ALP and the TPO has only to tweak the two certificates so as to arrive at the so called difference on the ALP. If a proper analysis was made, there would not be any difference from the price paid to the price determined, as assessee demonstrated before the TPO both on the basis of the third party quotations which are considered as internal CUP and the VG Bouw Certificates as externa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 through the facts of the case very carefully. I have also gone through the appellate order passed by CIT (A)-XXXI Mumbai for A.Y. 2002-03. The CIT (A)-XXXI Mumbai has dealt the issue very elaborately and his findings are available in Para 6.17 to 6.24 of that order and it is reproduced below: 6.17 I find that the adjustment made by the TPO is wholly arbitrary. There is absolutely no way of knowing as to what is the market condition. Market condition primarily means the demand and supply situation. VG Bouw Certificate working is done on the basis of notional cost of construction of an equivalent dredger and thereafter providing for its market lease at certain rates taking into account the cost of standard repairs needed etc. A demand and supply situation is a fluctuating position. Thus, a lease rent of particular dredger may be much higher or lower than the rate provided by the VG Bouw certificate depending upon the demand and s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce 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 the actual payment is less than 5%. Section 92C(2) reads as under: "92C computation of arm's length price (2) the most appropriate method referred to in sub section (1) shall be applied, for determination of arm's length price, in the manner as may be prescribed: Provided that where more than one price is determined by the most appropriate method, the arm's length price shall be taken to be the arithmetical mean of such prices, or, at the option of assessee, a price which may vary from the arithmetical mean by an amount not exceeding five per cent of such arithmetical mean". 6.23 Proviso provides that an assessee shall be allowed margin of 5% from the arithmetical mean of more than one price computed by the most appropriated 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 sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ound arises on the following facts. During the year under consideration, the assessee received against the Bank Guarantee, an amount of Rs. 4,14,62,866 towards the release of retention money. As per the contract entered by the assessee with Govt. of India, retention money of 5% had been withheld. The said amount was not offered to tax during the year and was offered to tax only upon completion of the project. The agreement also provided that whenever retention money reaches 2% of the contract price, contractor can ask for release of 1% of the contract price by furnishing bank guarantee. Accordingly assessee received the retention money by furnishing the bank guarantee. 37. AO has held that the release of retention money against the bank guarantee has accrued during the year and therefore is taxable in the year of release since assessee has reduced the amounts so released from the balance of retention money in its books of accounts. 38. The learned CIT (A) on considering the facts and law on the issue deleted the same on the following reasons: "12. I have gone through the facts of the case. There is no dispute over the fact that the monies retained by the contractee does not acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of the Retention Money shall be certified by the Engineer for payment to the contractor for return of the bank guarantee, as the case may be)..... 12.4 Till the issue of Taking-over Certificate with respect to the dredging works in the Approach Channel and Harbour basin and the Reclamation Works, 2% of the retention money never accrues to the appellant. The bank guarantee furnished also lives upto the date of issue of certificate. The 'sword' of recovering the amount always hangs on till the issue of Engineer's certificate. Hence the appellant has not got any absolute right over the amount paid and the amount paid only partakes the character like an "interest free advance money" paid on the basis of a security (Bank Guarantee) provided. 12.5 In view of these discussions, I hold that Rs. 4,14,62,866/- cannot be taxed as income in this assessment year and I direct AO to delete the addition. However, before deleting the addition, AO should verify whether this amount consists of any amount released on issue of Taking Over Certificate (without any Bank Guarantee), if it is so such amount is taxable". 39. We have considered the rival contentions. There is no dispute over the fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be apportioned until expiry of warranty period. We observe that the Hon'ble Allahabad High Court in the case of CIT vs. Yatindra and Co. (supra) held that an amount received by assessee against bank guarantee was not accrued to the assessee during the year as no absolute right to receive the amount at that stage vested. 9. Further we observed that the assessee received a part of retention money against bank guarantee in the preceding assessment years, the details of which are given by Assessing Officer at Page 2 and also mentioned herein above in Para 3 at Page 3 of this order. During the course of hearing the learned Authorized Representative submitted that the assessee is following consistently to offer for taxation the part released of retention money against bank guarantee in the assessment year in which right to receive the said release of retention money accrued to the assessee unconditionally. The learned Departmental Representative also did not dispute the above contention of learned Authorized Representative at the time of hearing. 10. In view of above facts and decisions, and particularly that similar issue has been considered by the Hon'ble Mumbai High Court in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had already arisen since the repair work was completed during the year under consideration and the invoice was also received by April 30, 2003. Copies of the invoices were filed before AO and CIT(A). Accordingly the assessee submitted that the expenditure as an allowable deduction in the year under consideration. 42. In this regard the assessee relied on the ratio laid down in the following decisions: (i) Calcutta Co. Ltd v. CIT (1959) 37 ITR 1 (SC) (ii) Poona Electric Supply Co. v. CIT 57 ITR 521 (SC) (iii) CIT vs S.K.G. Sugar Ltd, 96 ITR 194 (Pat) (iv) Bharat Earth Movers vs. CIT 245 ITR 428 (SC) (v) Udaipur Mineral Development Syndicate (P) Ltd vs. DCIT and Anr. 261 ITR 706 (Raj.) (vi) Kundan Sugar Mills vs. CIT 106 ITR 704 (vii) Metal Box Co. of India Ltd vs. Their Workmen 73 ITR 53. (viii) CIT vs. S.K.G. Sugar Ltd 96 ITR 194 (ix) CIT vs. Lakshmi Ratan Cotton Mills Co. 104 ITR 319 (x) CIT vs. Delhi Cloth & General Mills Co. Ltd 127 ITR 11 (xi) CIT vs. Nirmal Kumar Bose & Bros. 119 ITR 537". 43. The learned CIT (A) considered the submissions and deleted the addition by stating as under: "14. I have carefully considered the assessment order and the submi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted that the expenditure was incurred on account of commercial expediency and was incurred wholly and exclusively in the course of carrying on its business. It was submitted that it resulted in benefits to assessee's business by means of developing more cordial relations with the naval authorities. Thus, the expenditure although incurred voluntarily was wholly and exclusively for the purpose of assessee's business and therefore, claimed as business expenditure. 46. The Learned CIT (A) considered the submissions and deleted the addition by stating as under: "18. I have gone through the issue. The appellant is carrying out a contract with regard to a Naval Project. The appellant has donated an amount of Rs. 3,15,000/- towards the celebration of "Navy Ball" which is an annual event celebrated by the naval staff. The appellant has claimed it as a business expenditure. AO has not accepted this contention stating that it is not allowable under section 37 of the I.T. Act, 1961. AO has also stated that the appellant could not prove that the expenditure is met out for business purposes. 18.1 When a person is carrying out a contract work, it is necessary to have a goodwill of all those ..... X X X X Extracts X X X X X X X X Extracts X X X X
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