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Income Tax Appellate Tribunal, MUMBAI BENCH “K” MUMBAI
Before: SHRI MAHAVIR SINGH & SHRI N.K. PRADHAN
ORDER PER N.K. PRADHAN, A.M. This is an appeal filed by the assessee. The relevant assessment year is 2011-12. The appeal is directed against the order u/s 143(3) r.w.s. 144C (13) of the Income Tax Act 1961, (the ‘Act’) dated 24.02.2016 passed by the Assessing Officer(AO), Mumbai. 2. The grounds of appeal filed by the assessee read as under:
1. On the facts and circumstances of the case and in law, the learned TPO erred in treating BHN Shipping Company Pvt. Ltd. as not comparable to M/s British Marine PLC India Branch 2 the Appellant Company and thereby excluding the same while determining arm's Length price.
2. On the facts and circumstances of the case and in law, the learned TPO erred in treating Five Star Shipping Pvt. Ltd. as not comparable to the Appellant Company and thereby excluding the same while determining arm's length price.
3. On the facts and circumstances of the case and in law, the learned TPO erred in treating SVS Marine Services Pvt. Ltd. as not comparable to the Appellant Company and thereby excluding the same while determining arm's length price.
4. On the facts and circumstances of the case and in law, the learned TPO erred in treating Bippy Ship Management (India) Pvt. Ltd. as not comparable to the Appellant Company and thereby excluding the same while determining arm's length price.
5. On the facts and circumstances of the case and in law, the learned TPO erred in treating Ashapura Logistics Pvt. Ltd. as not comparable to the Appellant Company and thereby excluding the same while determining arm's length price.
6. On the facts and circumstances of the case and in law, the learned TPO legally erred in selectively picking Sealion Sparkle Port & Terminal Services (Dahej) Ltd. as comparable for the purpose of determining arm's length price, without following a scientific search process and sharing the said search process with the Appellant Company.
7. On the facts and circumstances of the case and in law, the learned TPO legally erred in selecting Sealion Sparkle Port & Terminal Services (Dahej) Ltd. despite the fact that it is functionally non comparable to the Appellant Company.
8. On the facts and circumstances of the case and in law, the learned TPO legally and factually erred in considering Sealion Sparkle Port & Terminal M/s British Marine PLC India Branch 3 Services (Dahej) Ltd. as comparable despite the fact that Sealion Sparkle Port & Terminal Services (Dahej) Ltd. had significant related party transactions during the year in question.
9. On the facts and circumstances of the case and in law, the learned TPO/Honorable Dispute Resolution Panel have legally and factually erred in making transfer pricing adjustment under TNMM based only on one company without appreciating the fact that availability and coverage of data are relevant factors for selecting and applying a specific transfer pricing method.
10. On the facts and circumstances of the case and in law, the learned TPO have legally and factually erred by not considering multiple year data for calculation of Profit Level Indicator ('PLI') of comparable companies, failing to appreciate the provisions of Proviso to Rule 10B(4) of the Income Tax Rules, 1962.
Briefly stated, the facts of the case are that the assessee-company filed its return of income for the AY 2011-12 on 29.11.2011 declaring total taxable income of Rs.6,89,459/-. During the year it had entered into three international transactions: a. Receipt of capital contribution from the HO. b. Fees received for rendering ship management services. c. Reimbursement of expenses received. Out of the above three transactions, the provision of transfer pricing was examined by the AO to apply only to transaction (b) as it was the only transaction which contained some income element.
M/s British Marine PLC India Branch 4 The AO made a reference u/s 92CA(1) to the Transfer Pricing Officer (TPO) for computation of the arm’s length price of the assessee. The TPO vide order u/s 92CA(3) dated 29.01.2015 made an adjustment of Rs.83,90,834/-. The AO, accordingly, in his draft assessment order u/s 144C (1) r.w.s. 143(3) dated 23.03.2015 made a TP adjustment by adding the above sum of Rs.83,90,834/- to the income shown by the assessee. After receipt of the draft assessment order, the assessee- company filed its objection before the Dispute Resolution Panel (DRP)-1 Mumbai. The DRP vide its order dated 29.12.2015 directed the AO to consider only Sealion Sparkle Port and Terminal Services (Dahej) Ltd. as suitable comparable to benchmark the international transaction of the assessee for the purpose of computing arm’s length price. The AO following the direction of the DRP passed the assessment order u/s 143(3) r.w.s 144C(13) dated 24.02.2016 making an addition of Rs.1,18,34,132/- as TP adjustment.
Aggrieved by the order of the AO, the assessee has filed the present appeal before the Tribunal. The assessee – company is a branch of the British Marine PLC United Kingdom (BMPLCUK). As per the corporate background, BMPLCUK is an international ocean freight transportation group, which operates and manages a portfolio of owned and chartered vessels of Supermax, Handymax and Paramax types. The group is headquartered in London and has offices in Mumbai, New Delhi and Singapore.
M/s British Marine PLC India Branch 5 The assessee is a Ship Management Company which provide management services to all its associated enterprises. It provides operational, personnel, technical services. 4.1 The assessee – company as per its benchmarking report has filed the following five comparable companies: S. No. Name of the Company 1. BHN Shipping Company Private Ltd.
Five Star Shipping Agency Private Ltd.
3. SVS Marine Services Pvt. Ltd.
4. Bibby Ship Management (India) Pvt. Ltd.
5. Ashapura Logistics Pvt. Ltd. The AO rejected the above comparables selected by the assessee. Instead, he selected HSCC (India) Ltd. and Sealion Sparkle Port and Terminal Services (Dahej) Ltd. as comparables. As mentioned earlier, the DRP has directed the AO to consider only Sealion Sparkle Port and Terminal Services (Dehej) Ltd. as suitable comparable to the assessee to benchmark the international transaction for computing the arm’s length price of the assessee 4.2 The Ld. counsels of the assessee submit in defence of their five comparables that (i) the TPO has erred in functionally comparing the business descriptions of another group company i.e. BHN Shipping Offshore Company Pvt. Ltd. with that of the assessee, (ii) the TPO has erred in functionally comparing the business description of another group company i.e. Five Star Shipping Company Pvt. Ltd. with that of the assessee, (iii) the TPO has erred in functionally comparing the business description of the SVS Group Company as a whole and not specifically M/s British Marine PLC India Branch 6 SVS Marine Services Pvt. Ltd. with that of the assessee (iv) Bibby Ship Management (India) Pvt. Ltd. is not persistently loss making since the Director’s Report shows that there was a profit in the FY 2010-11, and (v) the TPO has erred in functionally comparing the business description of another company i.e. Ashapura Group with that of the assessee.
4.3 We extract below the submission of the assessee-company in defence of its five comparables: 1. BHN Shipping Company Private Limited Reasons for rejection by TPO Functionally dissimilar and diversified business operations as can be seen from page 29 of the paper book. Financials and segmental details were not provided by the Applicant. Weighted average PLI used to arrive at final PLI.
Applicant's Contention The TPO has erred in functionally comparing the business description of another group company I. e. BHN Shipping Offshore Company Private Limited, with that of the Applicant. This is evident from the website of the group as attached in pages 292 to 293 of the paper book. The Applicant had submitted the financials of the company vide submission dated 28th July 2014, as seen in pages 61 to 67 of the paper M/s British Marine PLC India Branch 7 book. The TPO has erred in not considering the Director's Report of the Company submitted vide submission dated 28th July 2014, Where in it is stated that the Company is engaged in shipping services as seen in page 66 of the paper book. Further, it is submitted that the average used is the simple average and not the weighted average, as it appears in the benchmarking report.
Reasons for Rejection by TPO Functionally dissimilar as can be seen from page 30 of the paper book Applicant failed to clarify whether segmental results are available or not, Weighted average PLI used to arrive at final PLI. Applicant’s Contention The TPO has erred in functionally comparing the business description of another group company i.e. Five Star Shipping Company Private Limited, with that of the Applicant. This is evident from the website extract as attached in pages 293 to 294 of the paper book. Further, it is submitted that the M/s British Marine PLC India Branch 8 average used is the simple average and not the weighted average, as it appears in the benchmarking report.
3. SVS Marine Services Pvt. Ltd. Reasons for rejection by TPO Functionally dissimilar as can be from page 30 of the paper book Applicant had not submitted financials so as to verify the comparable segment of the company, Applicant failed to provide single year updated margins thus the company could not be accepted on the basis of the average of previous two years margin Applicant’s Contention The TPO has erred in functionally comparing the business description of the SVS Group company as a whole and not specifically of SVS Marine Services Private Limited, with that of the Applicant, which is evident from the website extract as attached in page 295 of the paper book. As per the website, the company is engaged in providing ship management services as seen in pages 295 of the paper book. The Applicant had submitted the financials of the company vide submission dated 28thJuly 2014 as seen on pages 68 to 90 of the paper book M/s British Marine PLC India Branch 9 4. Bibby Ship Management (India) Pvt. Ltd. Reasons for rejection by TPO TPO has stated in his transfer pricing order that the company is engaged in technical management, crew management, supply, training, marine business and travel and training services. This is the description of the Bibby ship management group as evidenced from the website extract on page 297 of the paper book. In the absence of financials, the TPO has not been able to verify the functional business of the company. The company has been making losses persistently for FY 2008-09 and FY 2009- 10 and that the Applicant hasn't provided updated margins for FY2010-11 Applicant’s Contention The Applicant had submitted the financials of the company vide submission dated 28thJuly 2014 as pages 52 to 60 of the paper book. The company is not persistently loss making since the director's report shows that there was a profit in the FY 2010-11, as seen in page 47 of the paper book.
5. Ashapura Logistics Private Limited Reasons for rejection by TPO Functionally dissimilar, diversified business as seen from pages 30 to 31 M/s British Marine PLC India Branch 10 of the paper book Weighted average PLI used to arrive at final PLI. Applicant’s Contention The TPO has erred in functionally comparing the business description of another company i.e. Ashapura Group, with that of the Applicant, which is evident from the website extract, attached as page 295 of the paper book. The company is presently called ‘Ambica Logistics Private Limited’ and is earning revenue from ship and technical management fees, as seen in page 166 of the paper book. Further, it is submitted that the average used is the simple average and not the weighted average, as it appears in the benchmarking report.
4.4 Thereafter, the Ld. counsels have submitted that the comparable selected by the AO is a functionally different company.
Sealion Sparkle Port & Services (Dahej) Ltd. Reason for selection given by TPO Considered functionally similar on the grounds that it is a joint venture between Ocean Sparkle and PSA Marine (PTE) Limited i.e. executing a 12 year contract for provision- of comprehensive port operation, M/s British Marine PLC India Branch 11 management services. Applicant’s Contention Functional Differences The learned TPO failed to take into consideration the Applicants submission that the company, is an SPV engaged in providing port management services to Petronet LNG as its LNG jetty at Dahej in Gujarat. The contract has a 12 year tenure expiring in December 2015 and includes provision of comprehensive port O&M services, as evidenced from the website extract on page 297 of the paper book and financial extract on page 300 of the paperbook. Detailed description of the business of the company was elucidated by the Applicant in its letter to the TPO filed on January 27, 2015 attached as page 35 of the paper book. Further, the financial statements of the company for the year ended March 31, 2011, discloses 'ships and vessels' amounting to 95.9 crores as 'Fixed Assets'. Hence, the Company is a ship owner and not engaged in ship management services, evidenced in the fixed asset schedule, attached as page 301 of the paper book. Thus, it is submitted that the company is engaged in port related services M/s British Marine PLC India Branch 12 rather than ship management services. The Applicant has placed reliance on a few case laws of the jurisdictional Mumbai Tribunal, wherein it was held that companies having dissimilar functional profile could not be taken as comparables for determining the arm's length price. These case laws have been enlisted in page 21 of the paper book. Significant Related Party Transaction The learned TPO failed to take into consideration the fact that the company has significant related party transactions i.e. 44.39% (RPT Expenses as a percentage of total operating expenses) and hence such company could not be selected as comparable. The working has been attached as page 303 of the paper book. The Applicant has relied on a few case laws, including that of the jurisdictional Mumbai Tribunal, wherein it was held that companies having significant related party transactions could not be taken as comparables for determining the arm's length price. These case laws have been enlisted in page 21 of the M/s British Marine PLC India Branch 13 paper book.
Per contra the Ld. DR relies on the order passed by the AO. He submits that (i) in the case of BHN Shipping Company Pvt. Ltd. the financials and segmental details were not filed by the assessee and weighted average PLI was used to arrive at final PLI, (ii) in the case of Five Star Shipping Agency Pvt. Ltd., the assessee failed to clarify whether segmental results were available or not and weighted average PLI was used to arrive at final PLI, (iii) in the case of SVS Marine Services Pvt. Ltd. the assessee failed to file financials so as to verify the comparable segment of the company and also failed to file single year updated margin, (iv) in the case of Bibby Ship Management (India) Pvt. Ltd., the company has been making losses persistently for the FY 2008-09 and FY 2009-10 and the assessee failed to file updated margins for FY 2010-11 and (v) in the case of Ashapura Logistics Pvt. Ltd., it was having functionally dissimilar, diversified business. Thus the Ld. DR submits that the AO has rightly rejected the above five comparables mentioned by the assessee. Further, the Ld. DR submits that though Sealion Sparkle Port and Terminal Services (Dahej) Ltd. is not engaged in ship management, the function is same as it is engaged in port management. In Transactional Net Margin Method (TNMM), the broad functional comparability is required to be seen and not product comparability.
M/s British Marine PLC India Branch 14 The Ld. DR thus supports the order passed by the DRP and the AO.
We have heard the rival submissions and perused the relevant materials on record. The obtaining factual matrix has to be tested on the anvil of the following enunciation of law which would resolve the contentious issues in the instant case. (i) Comparability In Rampgreen Solutions Pvt. Ltd. vs. CIT (2015) 377 ITR 0533 (Del.), the Hon’ble Delhi High Court has held that ‘Comparability analysis by TNMM method may be less sensitive to certain dissimilarities between the tested party and the comparables. However, that cannot be the consideration for diluting the standards of selecting comparable transactions/entities. A higher product and functional similarity would strengthen the efficacy of the method in ascertaining a reliable ALP. Therefore, as far as possible, the comparables must be selected keeping in view the comparability factors as specified. Wide deviations in PLI must trigger further investigations/analysis.’ (ii) Operating Profit The Operating Profit, for the purposes of TNMM, is the net profit of the Tested Party from the controlled transaction; and the net profit of Uncontrolled Comparable Enterprises from comparable uncontrolled transactions. The income and expenses of only operating nature are taken into account for working out the Operating Profit of the Tested Party from the controlled transaction. And the Operating Profit of the M/s British Marine PLC India Branch 15 Uncontrolled Comparable Enterprises from comparable uncontrolled transactions is also worked out on similar basis. (iii) Loss making Comparables In CIT v. Welspun Zucchi Textiles Ltd. (2017) 391 ITR 211 at page 215-216 (Bom.), the Hon’ble Bombay High Court has held that ‘Rule 10B(2) does not require exclusion of a company from comparability analysis only because it had suffered a loss in a particular year. However it must be clarified that in the facts of a particular case, a loss could be a symptom to enquire/examine whether it is on account of any of the reference point referred to in rule 10B(2) of the Rules would get attracted.’ In Chryscapital Investment Advisors (India) Pvt. Ltd. vs. DCIT (2015) 376 ITR 0183 (Delhi), the Hon’ble Delhi High Court has held that ‘the mere fact that an entity makes high/extremely high profits/losses does not, ipso facto , lead to its exclusion from the list of comparables for the purposes of determination of ALP. In such circumstances, an enquiry under Rule 10B(3) ought to be carried out, to determine as to whether the material differences between the assessee and the said entity can be eliminated. Unless such differences cannot be eliminated, the entity should be included as a comparable.’ (iv) Current year vs. Multiple year data Data of only the relevant year should be considered for comparison. This is what Rule 10B(4) prescribes. In order to analyze M/s British Marine PLC India Branch 16 comparability of an uncontrolled transaction with an international transaction, data relating to the financial year in which the international transaction or specified domestic transaction has been entered into should be used. Proviso to Rule 10B(4) carves out the exception i.e. data relating to two years prior to such financial year may be considered if such data reveals facts which could have an influence on determination of transfer prices. In Chryscapital Investment Advisors (India) Pvt. Ltd. vs. DCIT (2015) 376 ITR 0183 (Delhi), the Hon’ble Delhi High Court has held that while determining the comparability of transactions, multiple year data can only be included in the manner provided in Rule 10B(4) and thus, it is not open to assessee to rely upon previous year’s data as a general rule. (v) Related Party Transactions In CIT v.Thyssen Krupp Industries India (P) Ltd. (2016) 385 ITR 0612 (Bom), the Hon’ble Bombay High Court has held ‘applying consistent filter of 25% or less of related party transaction alone shall be considered comparable.’ (vi) Segmentation vs. Aggregation In Aztec Software & Technology v. ACIT (294 ITR 32-Bang ITAT), it is held that ‘ALP to be determined on transaction by transaction basis and not on aggregate basis.’ M/s British Marine PLC India Branch 17 It has been held in LG Soft India (P.) Ltd. DCIT (2014) 48 taxmann.com 237 (Bangalore-Trib.) that in absence of segmental details, a company cannot be taken into account for comparability analysis. In M/s Panasonic India Pvt. Ltd. v. ITO (2010) TII-47-ITAT-DEL-TP, aggregation of transactions are upheld where functions, assets and risks underlying those transactions are similar. (vii) Economic adjustments In Mentor Graphics (P) Ltd. v. DCIT 109 ITD 101 (Del ITAT), adjustment is permitted in (a) working capital, (b) risk and growth, (c) R & D expenses. However, it has been held that, if differences are so material that adjustment cannot be made then the company should be rejected. TNMM is more tolerant to minor functional and risk level differences. Certain significant risks like market risks, contract risks, credit and collection risks, infringement of intellectual property right etc. are material and can lead to major difference in the value of transaction.
(viii) Mean It is the ‘Mean PLI of Comparable’ which is arrived at.
In view of the above, we set aside the order of the TPO/AO and direct the TPO/AO to make an assessment de novo after examining the said comparables in the light of our observations hereinbefore at para 6 and after giving reasonable opportunity of being heard to the assessee.