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Income Tax Appellate Tribunal, MUMBAI K BENCH, MUMBAI
I.T.A. No.3812/Mum/2015 Assessment year: 2011-12 Page 1 of 7 IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI K BENCH, MUMBAI [Coram: Pramod Kumar AM and Pawan Singh JM] I.T.A. No.3812/Mum/2015 Assessment year: 2011-12 Gulf Energy Maritime Services Pvt. Ltd. ……….………………….Appellant Unit No. 406/407, A Wing, Atrium, Andheri Kurla Road, Andheri East Mumbai 400 093 [PAN: AADCG4829K] Vs. Income Tax Officer ……..…………….…Respondent Ward 8 (1)(4), Mumbai Appearances by: None for the appellant N Sathya Moorthy for the respondent Date of concluding the hearing : January 7, 2016 Date of pronouncing the order : February 29, 2016 ORDER Per Pramod Kumar, AM:
By way of this appeal, the assessee has challenged correctness of the order dated 26th March 2014, passed by the learned CIT(A) in the matter of assessment under section 143(3) of the Income Tax Act, 1961, for the assessment year 2011- 12. The short issue that we are required to adjudicate in this case is whether or not the learned CIT(A) was justified in upholding the arm’s length price adjustment of Rs.12,71,378 on the facts and in the circumstances of this case.
The appeal is time barred by 7 days. The assessee has moved a condonation petition, duly supported by an affidavit, praying that the delay be condoned. Having perused the petition, and having heard the learned Departmental Representative on the same, we are inclined to condone the delay and proceed to decide the matter on merits
I.T.A. No.3812/Mum/2015 Assessment year: 2011-12 Page 2 of 7 3. None appeared for the assessee but, having regard to the narrow compass of material facts within which the short issue requiring our adjudication is set out, we have considered it appropriate to proceed ex parte qua the assessee and decide the matter on the basis of material on record, pleadings of the learned Departmental Representative and in the light of the applicable legal position. Initially, this matter was heard on 5th January 2016 but as the need for a clarification was felt at the time of preparing the draft order, the matter was again fixed for hearing on 7th January 2016 to seek the clarification of the learned Departmental Representative. It is in this background that the matter is being disposed of ex-parte qua the assessee.
The relevant material facts of the case are like this. The assessee is engaged in the business of providing ship management services to its parent company, namely Gulf Energy Maritime PJSC, United Arab Emirates. The assessee has received US $ 40,000 per month, from its parent company, for the services so rendered. The services so rendered are benchmarked on the basis of CUP method, and the comparable uncontrolled price inputs are the quotations from Orient Express and Herald Maritime Services Pvt Ltd. The assessee has taken the stand that since the assessee has charged higher price for the services rendered to the AE, when compared with the rates offered in these quotations, the price of the services should be accepted as an arm’s length price. These quotations, and the working of arm’s length price, were duly produced by the assessee. The Assessing Officer required the assessee show cause that since the ‘comparables considered by the assessee are merely quotations, wherein no real transactions have taken place’, why ‘the ALP should not be rejected and recomputed as it has not properly benchmarked the transactions with its AEs’. It was also noted by the Assessing Officer that the fees for managing the crew has been charged on lump sum basis while the number of crew members have not remained the same. The assessee was also asked as to why the “revenue should not be recalculated on the basis of minimum rate per crew member”. The assessee did explain that, under clause 5.1 of the agreement with the AE, the fees of US $ 40,000 per month is irrespective of the number of crew members, and that the number of crew members varied from 152 to 180. It was also
I.T.A. No.3812/Mum/2015 Assessment year: 2011-12 Page 3 of 7 explained that there is no provision for minimum rate to be charged for each of the crew member. As for the computation of average charge of US $ 263.15 per crew member done by the Assessing Officer, the assessee submitted that there are three broad categories of crew members- namely officers, ratings and trainees who are paid, on an average, US$ 248.78, US $ 100.00 and nil remuneration respectively. The assessee computed that, even on this basis, the total amount works out to US $ 3,30,285 whereas the assessee has received US $ 4,80,000. None of these submissions, however, impressed the Assessing Officer. He rejected the same and proceeded to make an arm’s length price adjustment of Rs.12,71,378 on the following basis:
“7.5 The submission of the assessee has been carefully considered, however, the same is not acceptable. First of all the assessee has not furnished any proper working in respect of 'international transactions' carried out with its AE. More importantly, it has benchmarked the said transactions by simply comparing with the quotations of the third parties, which has no credibility. When this fact was brought to the notice, it has simply furnished the computation without any supporting documents. As per the provisions of the Act, when an entity carries out certain international transactions, it has to keep the relevant documents to justify its ALP reported in the 3CEB report, which the assessee failed to do so. By merely relying the quotations it has benchmarked the receipts, which is over and above the receipts from the AE in respect of such services is not acceptable. In the notice the revenue has been recomputed after considering all the manpower deployed by the assessee company to its AE. However, in the submission the assessee has not provided any evidences in respect of such variances, but simply argued that the variance is not substantial. It has simply argued that it has charged highest rate when compared to the market is of no use as the arguments of the assessee is not supported with any third party transaction which has reached finality. It is also not understandable as to how the assessee providing the man power at US$ 40,000 per month since inception of the company i.e, from 2009 without considering the inflation and hence it has reported substantial losses in the accounts. Thus, the assessee has not properly benchmarked the said receipt. Accordingly, the actual receivables by considering the minimal rate per crew work's out to $ 507880.70. However, the assessee has billed it AE at $ 480000. Thus, the assessee has billed its AE below the actual to the tune of $ 27,880.70 (507880.70 - 480000). Therefore, $27,880.70 is the amount which is receivable by the assessee company from its AE. After converting the said $27,880.70 into Indian rupees i.e., Rs.12,71,378/-(27880.70 X 45.60) the said sum is receivable by the assessee from the AE over and above the receipts reported in the Accounts. Accordingly, an addition of Rs. 12,71,378/- is made
I.T.A. No.3812/Mum/2015 Assessment year: 2011-12 Page 4 of 7 to the total income on account of 'ship management fees' receivable from the AE.”
Aggrieved, assessee carried the matter in appeal before the CIT(A) but without any success. Learned CIT(A), in a brief operative portion of the order, dismissed the grievances of the assessee rather summarily and noted that “the authorised representative of the assessee has failed to rebut the categorical findings of the Assessing Officer”. The assessee is not satisfied and is in further appeal before us.
We have noted that even as the Assessing Officer has rejected the determination of arm’s length price by the assessee and has proceeded to ascertain the arm’s length price on his own, he has not done so on the basis of any known method of determining the arm’s length price or on the legally sustainable basis. It is not open to the Assessing Officer to decide that for each variation in the number of crew members on the job, the charges must vary. The computation of fees on the basis of number of members, as done by the Assessing Officer, is devoid of any legally sustainable basis. While determining arm’s length price, the Assessing Officer can only decide as to what is the arm’s length price for services rendered but he has to do so on the basis of a legally recognized method. The arm’s length price so determined has not been decided on the basis of a recognized method. Even if one is to proceed on the basis that determination of ALP by the assessee is incorrect, the Assessing Officer cannot ascertain the ALP on an adhoc basis or make adhoc disallowances. The determination of the ALP, under the scheme of the Act, is to be done on the basis of a recognized method. That has not been done in the present case. Even the basis on which minimum wages per crew member is computed, though with certain assumptions which are not established to be correct, is assessee’s transactions with its AE but then intra AE transactions can never be legally acceptable inputs for application of CUP method. We have noted that the assessee had given certain quotations, the Assessing Officer duly examined these quotations and did not dispute the bonafides of these quotations. The rejection by the Assessing Officer is only on the basis of his observation that no actual transactions have taken place on the basis of these quotations, and, therefore, these
I.T.A. No.3812/Mum/2015 Assessment year: 2011-12 Page 5 of 7 quotations cannot be valid inputs for the CUP method. Undoubtedly, under rule 10B(1)(a), the valid inputs for CUP method can only be “the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions”. This rigidity about the price being for an actual transaction has, however, been considerably relaxed when we take into account the rule 10AB which allows hypothetical price of a transaction being taken into account as well. The scheme of law, as evident from reading of rule 10B(1)(a) read with rule 10 AB, now admits a price ‘which would have been charged or paid in comparable uncontrolled conditions’ to be taken into account. The rule 10AB, as stated in the Income Tax Rules, is effective from 1st April 2012. However, as held by a coordinate bench of this Tribunal in the case of Toll Global India Forwarding Pvt Ltd Vs DCIT [(2014) 37 ITR (Trib) 391 (Del)], rule 10AB, which provides that "………………any method which takes into account the price which has been charged or paid, or would have been charged or paid, for the same or similar uncontrolled transaction, with or between non-associated (i.e. independent) enterprises, under similar circumstances considering all the relevant facts" is retrospective in effect. The coordinate bench, inter alia, has further observed as follows:
In effect, thus, it would appear that as long as one can come to the conclusion, under any method of determining the arm’s length price, that price paid for the controlled transactions is the same as it would have been, under similar circumstances and considering all the relevant factors, for an uncontrolled transaction, the price so paid can be said to be arm’s length price. As we have noted earlier in this order, the price need not be in terms of an amount but can also be in terms of a formulae, including interest rate, for computing the amount. In any case, when the expression ‘price which….would have been charged on paid” is used in rule 10BA, dealing with this method, in this method the place of “price charged or paid”, as is used in rule 10B(1)(a), dealing with CUP method, such an expression not only covers the actual price but also the price as would have been, hypothetically speaking, paid if the same transaction was entered into with an independent enterprise. This hypothetical price may not only cover bonafide quotations, but it also takes it beyond any doubt or controversy that where pricing mechanism for associated enterprise and independent enterprise is the same, the price charged to the associated enterprises will be treated as an arm’s
I.T.A. No.3812/Mum/2015 Assessment year: 2011-12 Page 6 of 7 length price. In this view of the matter, the business model said to have been adopted by the assessee, in principle, meets the test of arm’s length price determination under rule 10AB as well.
(Emphasis, by underlining, supplied by us now)
The views so expressed by the coordinate bench have been upheld by Hon’ble Delhi High Court, in the case of PCIT Vs Toll Global Forwarding India Pvt Ltd [(2016) 66 taxman.com 53 (Del)], by observing as follows:
……… the Court finds the impugned order of the ITAT to be well reasoned and researched. The legal principles governing the determination of ALP in a TP adjustment exercise have been expounded lucidly by the ITAT in the impugned orders.
In this view of the matter, it would indeed seem that a bonafide quotation, as referred to and relied upon by the assessee in this case- and particularly bearing in mind limited scale of operations of the assessee and the smallness of amount involved, could indeed be a valid input under the residuary method set out in rule 10AB read with rule 10B(1)(a). In our considered view, in the light of insertion rule 10AB, the rigour of rule 10B(1)(a) stands relaxed to the extent that not only the actual price of transactions under comparable uncontrolled conditions but also hypothetical price which would have been charged under comparable uncontrolled conditions can be taken into account for computing the arm’s length price. The Assessing Officer was thus in error not only in resorting to an unscientific and unrecognized method ascertaining the arm’s length price of the services rendered by the assessee but also in rejecting bonafide quotations as a valid input for ascertaining the arm’s length price by the assessee.
In view of the above discussions, as also bearing in mind entirety of the case, we uphold the grievance of the assessee and direct the Assessing Officer to delete the impugned arm’s length price addition of Rs.12,71,378. The assessee gets the relief accordingly.
I.T.A. No.3812/Mum/2015 Assessment year: 2011-12 Page 7 of 7 10. As we part with the matter, we make it clear that since this case has been decided on the peculiar facts of this case, and particularly bearing in mind smallness of the amount involved and the nature of business of the assessee, this decision should not be considered as an authority for the proposition that bonafide quotations can be accepted as valid inputs, for determining arm’s length price, in all situations and without any further verifications. The grace shown by the learned Departmental Representative, in extending cooperation in disposal of this appeal even in the absence of the representatives of the taxpayer, should not be work against the legitimate interests of the revenue authorities. The acceptance of bonafide quotation under rule 10BA is an open issue and this decision should not be construed as coming in the way of an independent judicial call to be taken on this aspect of the matter by the coordinate benches, as and when the occasion comes, after hearing the parties in detail on that aspect of the matter.
In the result, the appeal is allowed. Pronounced in the open court today on 29th day of February, 2016.
Sd/- Sd/- Pawan Singh Pramod Kumar (Judicial Member) (Accountant Member) Dated: 29th day of February, 2016.
Copies to: (1) The appellant (2) The respondent (3) Commissioner (4) CIT(A) (5) Departmental Representative (6) Guard File By order etc
Assistant Registrar Income Tax Appellate Tribunal Mumbai benches, Mumbai