TMI Blog2013 (1) TMI 830X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee preferred the cross objection against the order for AY 2002-03. As common issues are involved these are heard together and disposed off by this common order.For the sake of convenience the appeal by Revenue in AY 2002-03 and CO by assessee were taken up first. ITA No 6531/Mum/2006: The Revenue grounds are as under: 1. On the facts and in the circumstances of the case and in law, the learned CIT (A) erred in deleting the addition made by AO of ₹ 2,43,77,621/- on account of adjustment in respect of payment 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 circu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... BNBE and the WLPZ were entered into prior to 01.04.2001 and the transactions being a continuous transaction where transfer pricing provisions were not applicable, the same cannot be considered under the TP provisions in this year. Further, it is also argued that the agreement with WLPZ was entered on 21.12.2000 when assessee and the WLPZ were independent entities and not associated enterprises. It was submitted that the WLPZ became associated enterprises during November 2001. Therefore, the price paid to WLPZ was the same as entered when it was independent 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gures in Euro per week Activity/Dredger Charter hire Rates per VG Bouw Additional wear tear per VG Bouw Overhead costs @ 10% Adjustment for market conditions Arm s length price Operations SAGA 1,70,564 11,789 17,056 2,201 2,01,610 HECTOR 2,07,361 8,331 20,736 31,007 2,67,435 Mobilization/Demobilization SAGA 1,44,937 6,663 14,494 13,704 1,79,798 HECTOR 1,35,060 160 13,506 33,838 1,82,564 8. The position of rates quoted by DI GLDD for both the vessels are as under: Particulars Dredging International ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mob/Demob year 2001 3,83,160 1,73,870 Mob/Demob year 2002 4,02,318 1,82,564 Operations: Year 2001 5,61,285 2,54,700 Operations: Year 2002 5,89,349 2,67,435 9. Regarding the correctness of the quotations obtained from GLDD and DI, the TPO did not accept them on the ground as observed in his order on page 11 as under: After going through the contents of the quotes from Great Lakes Dredge Dock Company and Dredging International, it is seen that for the vessel Saga quotes were obtained in December, 1999 and for the vessel Hector quotes were obtained in December, 2000. Chartering of Vessel Saga: The charter agreement for vessel Saga was entered into on 05.01.2000. The period of charter was 10.01.2000 upto and including 31.12.2001. The date of arrival of vessel in India is not known. However, BND-PO used the Dredger upto 05.05.2001. Due to this, it is not known that for what purpose the vessel was used during the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 2,201 per week on rental per week of Euro 1,70,564. The TPO accordingly computed the arms length price as under: Activity/ Dredger Charter Hire Rates as per VG Bouw (Euro) Adjustment for market condition (Euro) Arms length rate (Euro) Difference per week (Euro) Period (Weeks) Difference between charges paid and charges at Arms length (Euro Operations: SAGA 2,201 1,72,765 28,845 1.57 45,286 HECTOR 2,07,361 2,675 2,10,036 57,399 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relevant time of hiring 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 sin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his, addition of ₹ 80,51,038/- made in respect of dredger Saga is deleted. 6.24 Consequently the total addition of ₹ 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 discusse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quotations pertain to the earlier years and cannot 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 ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oses at the time the trademark option was exercised. This transactional 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 agre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ta ignoring the fact that the agreements were entered in an earlier year 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 transact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... parties agreed before us that the CUP method should be followed. As there is no 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he provisions no adjustment need be made. 26. Similarly in the case of dredger Hector even though 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- vis quotes received from M/s Dredging International (DI) Amounts in NLG Particulars SAGA HECTOR Operational (per week) Mob/Demob (per week) Operational (per week) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 396,222 589,349 402,318 Difference between the actual payment and Arm s length price after applying Proviso to section 92C(2) E=D-C (15,576) (11,947) (21,052) (11,081) The Actual payment made by the appellant are within the 5% range as per the proviso to section 92C(2) of the Act. 27. Since the price paid in both the cases is within the +/-5% range of the quotations available at the time of entering into the agreement, we are of the view that there is no need for making any addition on the basis of the data available on record and accordingly the CIT (A) order is to be confirmed. 28. Even with reference to the VG Bouw certificate, there is no dispute with reference to the authenticity of the VG Bouw certificate and its use in the analysis of arms length price determination under CUP method by the TPO. What the TPO has done is only reliance on the first certificate stating that it is contemporaneous, whereas the 2nd certificate issued on the basis of the first certificate clarifying certain reservations made in the first cert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the result, the C.O filed by assessee is dismissed. ITA No.1591/Mum/2008 32. This is a Revenue appeal against the order of the CIT (A) dated 3.12.2007 for assessment year 2003-04. The Revenue has raised the following grounds: 1. On the facts and in the circumstances of the case and in law, the learned CIT (A) erred in holding that there is no adjustment required to be made with regard to the hire charges paid for the vessel Hector and accordingly in directing AO to delete the addition of ₹ 1,72,02,723/-. 2. On the facts and in the circumstances of the case and in law, the learned CIT (A) erred in deleting the disallowance of ₹ 4,14,62,866/- on account of release of retention money against issue of Bank Guarantee. 3. On the facts and in the circumstances of the case and in law, the learned CIT (A) erred in deleting the disallowance of ₹ 22,46,641/- being expenses on repair work for dredger. 4. On the facts and in the circumstances of the case and in law, the learned CIT (A) erred in deleting the disallowance of contribution of ₹ 3,15,000/- to annual celebration of the Naval Staff . 33. We have heard the learned DR and the learned Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 02. 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 dredger 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, appellant and WLPZ were both independent parties. In the absence of material brought on record by AO, it cannot be said the WLPZ and appellant were AEs, it has further been discussed in the earlier paragraphs that the difference between the rate at which payment is made to WLPZ compared to the quotations of GLDD and DI is very minimal sand is less than 5% of the actual payment. It is accordingly held that the TPO has wrongly made adjustment in respect of payment of lease rental regarding dredger Hector and thus addition made of ₹ 2,43,77,621/- is deleted. 6.21 In respect of Saga, the issue was e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ence Variation GLDD rate Percentage difference Vessel:SAGA Mob/Demob: Yearr 2000 170,884 3.297 1.93 3.570 2.09 Mob/Demob: year 2001 179,798 3.984 2.21 3.399 1.89 Operations: Year 2000 191,709 3.511 1.83 3.366 1.75 Operations: Year 2001 201,610 2.668 1.32 2.869 1.42 Vessel: HECTOR Mob/Demob: Year 2001 173,870 3.036 1.75 4.086 2.35 Mob/Demob: Year 2002 182,564 3.116 1.71 3.905 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the case. There is no dispute over the fact that the monies retained by the contractee does not accrue to the contractor till the contract work is completed to the satisfaction of the contractee. This is the view taken by the Hon'ble Mumbai High Court in the case of CIT vs. Associated Cables Pvt. Ltd, 286 ITR 596 (Bom.). The Hon'ble Mumbai High Court has observed as follows: The payment of retention money in the case of contract is contingent on satisfactory completion of contract work. The right to receive the retention money accrues only after the obligation under the contract are fulfilled and, therefore, it would not amount to income of assessee in the year in which the amount is retained . 12.1 AO has also accepted this view and he has not treated the retention money as income. 12.2 However, AO is of the view that when the appellant was allowed to get certain amount of retention money (after furnishing bank guarantee), that amount has accrued to the appellant and hence it should be taxed in the year of receipt. 12.3 I could not agree with AO. It is admitted by AO that the retention money accrues to the appellant as and when the contract is completed t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it is so such amount is taxable . 39. We have considered the rival contentions. There is no dispute over the fact that assessee is consistently following the same method and the retention money received is against a bank guarantee, but the retention money as such was not released as the project was not complete. On these facts, we agree with the learned CIT (A). This issue was also considered in assessee s own case by ITAT in the years i.e. assessment year 2002-03, 2004-05 and 2005- 06. The ITAT elaborately discussed the facts and held in favour of assessee in assessment year 2004-05 which is as under in Para 8 to 10 in ITA No.999/Mum/2008 dated 30.12.2011. 8. We have carefully considered the orders of the authorities below and submissions of the learned representatives of both the parties. We have gone through the cases (supra) cited by learned representatives of both parties.. We observe that the similar issue has been considered by ITAT (TM) in the case of Associated Cables Pvt. Ltd (supra) as under: 90 percent of value of assessee s goods were billed on dispatch, and 10 percent was payable upon completion of warranty period. This amount retained was conditional on fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ove facts and decisions, and particularly that similar issue has been considered by the Hon ble Mumbai High Court in the case of Associated Cables Pvt. Ltd. (supra) which has been followed by the learned CIT (A), we do not find any reason to interfere with the order of Ld.CIT (A). Hence, we uphold his order and reject the ground of appeal taken by the department . 40. Learned DR tried to distinguish the above and relied on the decision of Emerson Network Power India (P.) Ltd. Vs. Assistant Commissioner of Income-tax, 27 SOT 593 (Mum) and the principles laid down by Hon'ble Supreme Court in the case of Rotork Controls India (P.) Ltd. Vs. Commissioner of Income-tax 180 Taxman 422(SC). He also referred to the Associated Cables P. Ltd. Vs. Deputy Commissioner of Income-tax in 48 ITD 141 in defending the action of AO. In our considered opinion, the case law relied on by learned DR does not apply to the facts of this case. In the case of Emerson Network Power India (P) Ltd (supra), the facts are that the whole income has accrued to assessee on the delivery of the products to the customers as far as sale value of products was concerned and as regards installation and commissioning ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsidered the submissions and deleted the addition by stating as under: 14. I have carefully considered the assessment order and the submissions and explanations provided by the appellant. I have also gone through the invoice dated 30.04.2003 and it is extracted below: Ballast Nedam Far East Pte. Ltd. Dredging Division. Tax Invoice No.M0359 GST No.M2-00292 12-O Banker-ABN Amro Bank Account No.4032292 Office Address: 20 Harbour Drive PSA Vista # 07-02 Singapore 117612 Ballast RAM Dredging B V Waltermanweg 64 3067 GG Rotterdam PO Box 8574 3009 AN Rotterdam The Netherlands Invoice nr: 31/03189 Date: 30 April,2003 Dear Sir, We herewith charge you for the following: Rechargeale Project/JV s (Ledger No.290800) Date Reference Description Amount Project Seabird-India. 17-Mar 03 20320560 Semco GIANT-V Cribbing Works on main deck 32,680.00 17-Mar-03 20320561 Works carried out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gone through the issue. The appellant is carrying out a contract with regard to a Naval Project. The appellant has donated an amount of ₹ 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 present in the locality. It need not be emphasized that when a contract is done for Navy, it is necessary to have the good will of the Navy Staff. This kind of contribution to a public cause will create a lot of goodwill and it will certainly help the person carrying out the contract. It is settled law that any expenditure has to be looked from the businessman s point of view while analyzing any deduction claimed by the appellant. The genuinity of the expenditure is not doubted and the expenditure is not expressly prohibited by the provisions of the law. In view of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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