INTERNATIONAL SEAPORT DREDGING PRIVATE LIMITED,CHENNAI vs. DCIT CORPORATE CIRCLE 2(2), CHENNAI

आयकर अपीलीय अिधकरण ‘डी’ �ायपीठ चे�ई म�। IN THE INCOME TAX APPELLATE TRIBUNAL ‘D’ BENCH, CHENNAI

माननीय ,ी महावीर िसंह, उपा23 एवं माननीय ,ी मनोज कुमार अ8वाल ,लेखा सद; के सम3। BEFORE HON’BLE SHRI MAHAVIR SINGH, VICE PRESIDENT AND HON’BLE SHRI MANOJ KUMAR AGGARWAL, AM

आयकरअपीलसं./IT(TP)A No.30/Chny/2018 (िनधाCरणवषC / Assessment Year: 2009-10) International Seaport Dredging Pvt. Ltd., DCIT (Formerly known as International Seaport Corporate Circle-2(2), बनाम/ Dredging Ltd.) Chennai. 5th Floor, Challan Tower, Old No.62, Vs. New No.133, Dr. Radhakrishnan Salai, Chennai – 600 004. �थायीलेखासं./जीआइआरसं./PAN/GIR No. AABCI-2286-E (अपीलाथ�/Appellant) : (��थ� / Respondent) अपीलाथ�कीओरसे/ Appellant by : Shri Ashik Shah(CA) – Ld. AR ��थ�कीओरसे/Respondent by : Shri A Sasikumar(CIT) –Ld. DR सुनवाईकीतारीख/Date of Hearing : 25-03-2024 घोषणाकीतारीख /Date of Pronouncement : 06-05-2024 आदेश / O R D E R Manoj Kumar Aggarwal (Accountant Member) 1. This appeal by assessee for Assessment Year (AY) 2009-10 is directed against the order passed by learned Commissioner of Income Tax (Appeals)-13, Chennai [CIT(A)] on 02-05-2018 in the matter of an assessment framed by Ld. Assessing Officer [AO] u/s.143(3) r.w.s.144C(3) of the Income Tax Act, 1961 (hereinafter “the Act”) on 22-05-2013.

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IT(TP)A No.30/Chny/2018 - 3 - 4.2 Pursuant to the same, Ld. AO passed an order on 22-05-2013 incorporating the proposed adjustment. The Ld. AO made another disallowance u/s 40(a)(i). It was noted by Ld. AO that the assessee made payment of bareboat charter hire rental charges to Belgium based entities. The payment of Rs.1136.78 Lacs was made to M/s Baggerwerken Decloedten Zoon, Belgium and another payment of Rs.2009.83 Lacs was made to Dredging Environmental and Marine Engineering, NV – Offshore Service, Belgium. The above payments were made as bareboat charter hire for hiring dredgers, excavators and ships and no TDS was deducted against the same by the assessee. The Ld. AO proceeded to make disallowance u/s 40(a)(i). The assessee submitted that the payments would not be taxable as royalty as per Double Taxation Avoidance Agreement (DTAA / Treaty) between India and Belgium. Since the payment was not liable for tax in India, there was no requirement to deduct tax at source. However, Ld. AO held that the aforesaid payment would constitute royalty u/s 9(1)(vi). Further, as per Article-12 of India-Belgium DTAA, royalty include payments for use of or right to use industrial, commercial or scientific equipment or for information concerning industrial, commercial or scientific experience. Finally, Ld. AO disallowed the payment of Rs.3146.61 Lacs u/s 40(a)(i). The assessee had made similar payments to France based and Netherlands based entities. However, those payments were concerned with tonnage business income which was offered by the assessee as per the provisions of Sec.115VG. Therefore, no disallowance was made for payment made to those entities.

IT(TP)A No.30/Chny/2018 - 4 - 4.3 The Transfer pricing (TP) adjustment as proposed by Ld. TPO was on account of payment of hire charges of dredgers and vessels by the assessee to its AEs. The assessee made payment of Rs.1145.71 Lacs as Hire charges for dredgers and another payment of Rs.7083.20 Lacs for hire of vessels. These transactions along with various other transactions viz. receivables from renting of vessels, sale of fixed assets, payment for technical services were benchmarked using Comparable Uncontrolled Price (CUP) method. The assessee adopted external CUP and relied on valuation given by independent Bureau Veritas. The Ld. TPO held that the same was not a valid CUP as per Rule 10B(1)(a), The assessee has to benchmark the transactions with comparable uncontrolled transactions. The certificate issued by independent valuer could not be considered as uncontrolled transactions. Therefore, the aforesaid method was rejected. 4.4 The assessee received payment of Rs.77.76 Lacs on account of deputation of personnel and made payment of Rs.126.68 Lacs on account of support services. These transactions were aggregated and benchmarked using Transactional Net Margin Method (TNMM) method. The assessee is stated to have charged mark-up of 8% on cost on deputation services. The assessee selected 3 comparable entities having mean margin of 7.83% and accordingly, justified its margins. However, the assessee did not submit working of its Profit Level Indicator (PLI) for benchmarking the transactions. Therefore, the said methodology was also rejected by Ld. TPO. 4.5 The Ld. TPO proceeded to benchmark all the stated transactions using entity level TNMM and selected two comparable entities having mean margin of 18.26%. As against this, Ld. TPO worked out

IT(TP)A No.30/Chny/2018 - 5 - assessee’s margin of -15.22%. Accordingly, Ld. TPO proposed TP adjustments on these transactions. 4.6 Without prejudice, Ld. TPO observed that the assessee paid fees for technical services to its AEs for Rs.1258.58 Lacs. As per relevant agreement, the assessee had to pay technical fee of 3% on project turnover. The same would work out to be Rs.968.39 Lacs as against payment of Rs.1258.58Lacs and therefore, the assessee paid excess fees of Rs.290.19 Lacs which would require another adjustment. 4.7 The assessee justified its own methodologyof benchmarking on the ground that transaction-wise approach was more scientific and reliable. Reliance was placed on several judicial decisions to support the submissions. However, Ld. TPO rejected the same on the ground that certificate issued by independent valuer could not be considered as a valid CUP. Finally, Ld. TPO applied entity level TNMM and proposed adjustment of Rs.23.46 Crores in respect of hire of dredgers and vessels from the AEs. Another adjustment of Rs.2.90 Crores was proposed as above on account of excess fees paid to AE. 4.8 Aggrieved, the assessee assailed the assessment framed by Ld. AO before first appellate authority by way of elaborate written submissions which have been extracted in the impugned order. Appellate Proceedings 5.1 On the issue of disallowance u/s 40(a)(i), the assessee relied on amended Article-12 of India-Belgium Treaty (as amended w.e.f. 01.04.1998) to submit that royalty would not include payment for use or right to use industrial, commercial or scientific equipment. In the absence of permanent establishment for non-resident lessors, hire charges would not be taxable in India and therefore, there would be no

IT(TP)A No.30/Chny/2018 - 6 - requirement of TDS u/s 195. The assessee’s submissions were subjected to remand proceedings. After considering the same, Ld. CIT(A) held that hire charges were to be considered as royalty payments for the use of or the right to use of industrial, commercial and scientific equipment. Such payments would be covered u/s 9(1)(vi) which would require TDS u/s 195. Accordingly, the grounds urged by the assessee were rejected. 5.2 The Ld. CIT(A) also upheld the conclusion of Ld. TPO that independent valuer certificate could not be accepted as valid CUP for the purpose of benchmarking. Therefore, the TP adjustments were also confirmed. Aggrieved, the assessee is in further appeal before us. Our findings and Adjudication 6. Disallowance of bare-boat charter hire payments u/s. 40(a)(i) 6.1 We find that the assessee has made impugned payments to Belgium based entities. The AO held the payment to be royalty under Article 12 and Sec. 9(1)(vi) of the Act and relied on the decision of Hon’ble Tribunal in the case of West Asia Maritime Ltd. Vs. ITO [2008] 111 ITD 155 (Chny).However, it is admitted position that India- Belgium Treaty applies to the impugned payments. As per the submissions of Ld. AR, the AO has applied the old provisions of DTAA between India and Belgium wherein payment for use of equipment was characterized as royalty. However, the aforesaid treaty has been revised by Notification No.54(E)/2001 dated 19.01.2001. By said amendment, the term “Royalty” was redefined and the expression ‘use of industrial, commercial or scientific equipments’ was excluded from the same. Therefore, Ld. AO has erred in appreciating the correct amended position of royalty.

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6.2 In fact, Tribunal in assessee’s own case for AY 2010-11 (ITA No.418/Mds/2015), held that the assessee is not liable to deduct TDS on payment made towards hiring equipmentfrom a Sweden company on identical transaction. During hearing, Ld. AR also relied on the decision of Hon’ble High Court of Madras in the case of CIT vs. Van Oord ACZ Equipment BV [2015] 373 ITR 133 (Mad.) on exactly identical facts. We find substance in all these submissions of Ld. AR. The Ld. AO has made disallowance u/s. 40(a)(i) of the Act holding that the provisions of Section 9(1)(vi) of the Act would be applicable with the relevant articles of DTAA. It has been held by Hon’ble Supreme Court in the case of Union of India &Another vs. Azadi BachaoAndolan [2003] 263 ITR 706 (SC) that in case of difference between the provisions of the Act and agreement, the provisions of agreement would prevail over the provisions of the Act and can be enforced by the appellate authority and the Court. Therefore, the terms of Treaty, being more beneficial to the assessee, would apply in the present case. The Tribunal in assessee’s own case for AY 2010- 11, on identical transaction concerning payment made to Sweeden based entity for bareboat charter payment held as under: “4.5 From the above, it is clear that payments for use of equipments under Article 13 of the treaty between India and France, if any convention or agreement or protocol are signed after 01.09.1989 between India and a third State which is a member of OECD, then for the purpose of taxation in India, the scope of taxation shall be restricted to such treaty signed after 01.09.1989 if its terms are beneficial to the assessee and as rightly pointed out by the assessee India has signed a treaty with Sweden subsequently wherein payments made for hiring equipments are excluded from taxing in the contracting State. Therefore, as claimed by the assessee income arising out of the payment made by the assessee towards hiring equipments will not be taxable in India, accordingly assessee will not be liable for deducting tax at source. Needless to mention that protocol will form an integral part of the convention and it has to be duly respected as the same is signed between two countries under agreement for avoidance of double taxation. Therefore, the assessee succeeds in its appeal on this issue.”

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6.3 The DTAA between India and Belgium has been revised vide Notification No.54(E)/2001 dated 19.01.2001 in the line of DTAA between India and Sweden in which definition of term “Royalty” in Article 12 Paragraph-3 sub-paragraph (a) has been revised as under: “And whereas in the Convention between India and Sweden which became effective on the 1st April, 1998, in the case of India, and on the 1st January, 1998, in the case of Sweden, which state is a member of the Organisation for Economic Co-operation and Development, the Government of India has limited the taxation at source on royalties and fees for technical services to a rate lower and a scope more restricted than that provided in the Agreement between India and Belgium on the said items of income ; Now, therefore, in exercise of the powers conferred by section 90 of the Income-tax Act, 1961 (43 of 1961), the Central Government hereby directs that the following modifications shall be made in the Agreement notified by the said notification which are necessary for implementing the aforesaid Agreement between India and Belgium, namely ;-- 1.. With effect from the 1st April, 1998, in India and, with effect from the 1st January, 1998, in Belgium for the existing paragraph (2) of article 12 relating to "royalties and fees for technical services", the following paragraph shall be substituted, namely: "2. However, such royalties and fees for technical services may also be taxed in the Contracting State in which they arise and according to the laws of that State, but if the beneficial owner of the royalties or fees for technical services is a resident of the other Contracting State, the tax so charged shall not exceed 10per cent of the gross amount of the royalties or fees for technical services." II. With effect from the 1st April, 1998, in India and with effect from the 1st January, 1998, in Belgium for the existing sub-paragraph {a) of paragraph 3 of article 12 relating to "royalties and fees for technical services", the following sub-paragraph shall be substituted, namely : “(a) The term “royalties” as used in this article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literacy, artistic or scientific work including cinematograph films, any patent, trade mark, design or model, plant, secret formula or process, or for information concerning industrial, commercial or scientific experience”.

Thus the expression ‘use of industrial, commercial or scientific equipments’ has been excluded from the purview of royalty under the amended treaty. 6.4 The Hon’ble High Court of Madras in the case of CIT vs. Van Oord ACZ Equipment BV (supra) has also considered the revised

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definition of Royalty in Article 12 between India and Netherland and has held as under: “36. We are not inclined to accept such a plea, as in the case on hand the dredging equipment was leased out on bareboat basis viz., without Master and Crew. Therefore, it will not come under the permanent establishment and the entire control over the equipment was not with the Foreign company, but with the Indian Company. Therefore, the above said plea is not accepted. 37. For the foregoing reasons, the appellate authority below has rightly considered Article 12(4) of the DTAA agreement between Netherlands and India and is right in holding that the amount received by the assessee forhiring out Dredgers to an Indian Company of the same name for use in Indian Ports is not taxable in India and the substantial question of law is answered against the Revenue / appellant. 38. In the result, the appeal is dismissed and order of the Income Tax Appellate Tribunal Chennai 'A' Bench, dated 29.3.2007 made in ITA No. 1894/Mds/2005 for the assessment year 2003-2004 is confirmed. No costs.”

6.5 Therefore, considering the facts of the case, we would hold that the assessee is not liable to deduct tax on the hire charter payments made to Belgium based companies.The impugned disallowance stand deleted. The corresponding grounds raised by the assessee stands allowed. 7. Transfer Pricing (TP) Adjustment in relation to payment for hire of dredgers and vessels 7.1 We find that the assessee had entered into hire agreements with its Associated Enterprises for leasing out their vessels and dredgers and benchmarked the said transaction under the CUP method based on valuation certificates issued by an independent valuer. The TPO rejected the benchmarking under CUP and aggregated the transaction for benchmarking under entity level TNMM observing that the valuation certificate issued by Bureau Veritas is not an uncontrolled transaction. 7.2 The Ld. AR has argued that the hire charges are benchmarked based on the valuation certificates issued by Bureau Veritas following the CIRIA norms, which is a representative of the price that would have

IT(TP)A No.30/Chny/2018 - 10 - been charged in the market for similar transactions. Hence, the same should be allowed as a comparable uncontrolled transaction. The Ld. AR further argued that during the subsequent years, valuation certificates issued by Bureau Veritas have been considered to be a valid CUP by the TPO and based on the Principle of consistency, the valuation certificates should be considered as a valid CUP for the impugned year also. The Ld. AR further argued that alternatively, the benchmarking based on valuation certificates is valid under the sixth method retrospectively applicable for impugned AY under Section 92C(1)(f) of the Act read with Rule 10AB of the Income Tax Rules, 1962. 7.3 We have heard the rival submissions and gone through facts of the case.The assessee has benchmarked the payment made for hire of dredgers and vessels to its AEs by adopting CUP method. However, the TPO has rejected the CUP method and adopted entity level TNMM method, proposing adjustment of Rs.23.46 Crores. The Mumbai Tribunal in the case of Van Oord Dredging and Marine Contractor BV in ITA No.2029/Mum/2016, on identical facts, has accepted assessee’s benchmarking of international transaction of charter hire paid to AE using CUP method, based on independent valuer certificate for bench marking. The bench, on the principle of consistency, allowed the appeal. 7.4 We find that similar facts exist before us. The TPO in assessee’s own case for AY 2010-11 to 2012-13 has accepted the CUP method adopted by the assessee based on the valuation certificate issued by Bureau Veritas and has not made any adjustment.In view of the above, as the assessee’s case is squarely covered by the decision of Hon’ble

IT(TP)A No.30/Chny/2018 - 11 - ITAT, Mumbai (supra), the ALP adjustment made by AO is deleted. The aggregation approach adopted by Ld. TPO is rejected.The corresponding grounds raised by the assessee stands allowed. 8. TP adjustment in relation to the payment of availing technical services: 8.1 The assessee has entered into agreement with Tideway BV (TBV) for payment of technical services. The agreement requires payment of fee amounting to 3% of project turnover of assessee. The assessee has paid Rs.12.58 Crores to TBV which represents 3.9% of accounted turnover. The assessee has benchmarked the above transaction using CUP method. However, the TPO has re-computed their fee based on the turnover as per Profit & Loss Account at Rs.9.68 Crores (3% of the turnover of Rs.322.79 Crores) and proposed downward adjustment towards the payment made in excess of 3% of the accounted turnover (Rs.12.58 Cr. – Rs. 9.68 Cr.). The assessee has submitted that has made payment for technical services as the percentage of the project turnover. The project as per agreement has been defined to mean dredging project/charter hire/sub contracting works outside India. The project turnover is thus, represented by the invoices raised by the assessee on third party. 8.2 The Ld. AR has submitted that the TPO has failed to appreciate that the assessee has agreed for consideration amounting to 3% of the project turnover and not the amended turnover. However, it is admitted position that, on identical facts, this issue has been decided by Tribunal against the assessee in AY 2010-11 as under: - “5.3 From the above, we find that the learned DRP has only computed the correct fee payable by the assessee to its AE in accordance with the rate prescribed towards the eligible turnover while as the assessee had computed the fee according

IT(TP)A No.30/Chny/2018 - 12 - to their convenience and advantage disregarding the agreement with its AE. For the irrational payment made by the assessee over and above the terms of the agreement between the assessee and its AE the DRP/TPO has revised the profit of the assessee by downward adjustment. Therefore, we do not find it necessary to interfere with the orders of the learned DRP and the learned Assessing Officer. Accordingly, this issue is decided against the assessee.”

As the issue is covered against the assessee, the impugned adjustment as proposed by Ld. TPO is confirmed. The corresponding grounds stand dismissed. 9. In ground Nos.21 & 22,the assessee is aggrieved by short-credit of TDS. The assessee has taken a ground before Ld. CIT(A) that the Ld. A.O has granted TDS credit ofRs.773.08 Lacs instead of Rs.1121.01 Lacs. However, Ld. CIT(A) has not given any direction and hence, the grievance of the assessee. In this regard, we direct Ld. AO to verify the claim of TDS and allow the credit in accordance with law. The corresponding grounds of appeal stand allowed for statistical purposes. 10. In the result, the appeal of the assessee is partly allowed. Order pronounced on 6th May, 2024

Sd/- Sd/- (MAHAVIR SINGH) (MANOJ KUMAR AGGARWAL) उपा,- / VICE PRESIDENT लेखासद/ / ACCOUNTANT MEMBER चे1ईChennai; िदनांकDated :06-05-2024 DS आदेशकीWितिलिपअ8ेिषत/Copy of the Order forwarded to : 1. अपीलाथ�/Appellant 2. ��थ�/Respondent 3. आयकरआयु9/CIT 4. िवभागीय�ितिनिध/DR 5. गाड>फाईल/GF