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TMI Blog2018 (10) TMI 677X X X X Extracts X X X X X X X X Extracts X X X X ..... Ship Management Services to its AEs Lewek Shipping Pte.Ltd., and Emas Offshore services Ltd., for an amounts of Rs. 43.33 crores and 23.18 crores respectively apart from issue of shares of Rs. 82.75 lacs byTunis Oil Pte.Ltd., therefore, the AO referred the international transaction to Transfer Pricing Officer (TPO) u/s 92CA of the Income Tax Act, 1961 (hereinafter called as „Act') to determine the Arms Length Price( ALP in short). The assessee paid the Bareboat Charter Rentals to its Associate Enterprise (AE) for an amount of Rs. 43,35,50,310/- and ship management services of Rs. 23,18,30,814 and worked out the PLI of the tax payer (OP/OC) at 28.36% against the margin of comparables at 19.22% and held the transaction are at arms length. The details of payments made to AEs, PLI indicator, Most Appropriate Method (MAM) adopted by the assessee as per the transfer pricing document are furnished as under : Nature of International Transaction Amount (Rs.) MAM PLI Margin of Taxpayer Margin of comparables Bareboat Charter Rentals 43,35,50,310 TNMM OP/OC 28.36 19.22 Ship Management Services 23,18,30,814 TNMM OP/OC 28.36 19.22 Issue of shares 82,75,970 O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es after analyzing the databases, the annual reports. After considering the objections raised by the taxpayer, the AO arrived at the average margin of 12.35% as under : Sl. No. Name of the Company OR OC OP OP/OR 1. Chowgule Steamships Ltd. 245266000 261541000 -1,62,75,000 -6.63 2. Global Offshore Ltd. 1542596000 983986000 558610000 36.21 3. Great Eastern Shipping Co.Ltd. 17107000000 10294400000 6812600000 39.82 4. Seamec Ltd. 1877570000 2038910000 -161340000 -8.59 5. Shahi Shipping Ltd. 228315634 174760088 53555546 23.46 6. Shipping Corporation Ltd. 43019900000 47397500000 4377600000 -10.18 Total 74.09 Average 12.35 2.5. Accordingly, the TPO applied the margin of 12.35% over the operating cost and arrived at the arm's length price at Rs. 42,58,08,049/- against the operating cost of Rs. 68,63,58,779/- and suggested for adjustment u/s 92CA of the Act at Rs. 26,05,50,730/- towards Bareboat charges and ship management charges as under : Description Amount Arm's Length Margin 12.5% Operating Revenue 48,58,04,962 Operating Cost 68,63,58,779 Arm's Length Pri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the region's leading provider of diving support vessel based diving services utilizing in-house owned and operated specialist DSVs, SEAMEC has unrivalled experience in the ongoing subsea inspection, repair, maintenance and light construction required for the efficient and productive support. The assessee further submitted that the company's performance as per Directors' Report in page No.6 of its Annual Report is as under : "The company owns and operates four multi support vessels. The company operates an additional vessel under bareboat charter from Seamec International FZE. Your company's wholly owned subsidiary effective from January 2012. The company succeeded in overcoming the volatility of decline in business of last year. Overall deployment has increased significantly to 65% against 49 of last year. The company's vessels during the Year in general operated in India and South East Asia. One of the vessels had undergone modification / upgradation for deployment on a long term contract of 3 years with ONGC. The charger commenced from end of January 2012 after release of vessel by customs. With this two of your company's vessels are placed on Long Term Charter. Out of the ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions, the same is taken care of in arithmetic mean of the comparables. The DRP further observed that the onus is on the assessee to establish the ALP and if the assessee contends that the comparables selected by the TPO are not appropriate, the onus is on the assessee to establish the transaction are at arm's length. Since the assessee failed to do so and analysis of the Profit & Loss of the assessee company shows that the company had incurred losses to the extent of 34.42 crores during the year only due to the transactions with the AE and no independent enterprise would have entered into such transaction, the DRP rejected the objections raised by the assessee. With regard to the assessee's objection on external commercial borrowings, the DRP observed that instead of seeking transfer price adjustment, the DRP opined that the assessee should not have entered into such international transaction which would result into loss. Accordingly, the objections raised by the assessee were rejected. The alternate plea raised by the assessee to adopt any other method and cost plus method was also rejected by the DRP and confirmed the adjustment proposed by the TPO. The AO passed order u/s 143(3) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpletely uncomparable deployment of asset wise, turnover wise, functionally and also on risk factors. The Ld.AR submitted that in case of Chowgule Steamships Ltd., the company is engaged in the dry bulk market, and the freight earnings and charter hire receipts amounted to Rs.,2,270.83 lakhs. The company is owning fleet profile having DWT of 47574 MT and it is completely divergent to the functions of the assessee. 4.1. With regard to the Global Offshore Services Ltd., the Ld.AR submitted that the company's vessels support oil and gas exploration, involving transport of personnel to rigs / platforms from onshore bases and vice versa, delivery of cargo / material to rigs / platforms, anchor handling operations, towing of rigs from one location to another. It also supports off shore under water construction projects. The platform supply vessels owned and operated by the company and its subsidiaries in India. Therefore, the activities of the Global Offshore Services Ltd. are completely divergent to the functions of the assessee. 4.2. With regard to Great Eastern Shipping Company Ltd., as stated earlier in this order, the company owns 34 vessels and engaged in providing sea-logistics ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ld.DR supported the order of the lower authorities. 6. We have heard both the parties and perused the material placed on record. The assessee is engaged in the activity of chartering of vessels and made the payment of bareboat charges and the ship management services to it's AE. In a nut shell, the company has taken two vessels on lease and sub leased them and receiving the charter rentals. For the assessment year 2012-13, the company paid the Bareboat charter rentals of Rs. 43,35,50,310/- apart from ship management services paid to Emas Offshore Services Pte Ltd., amounting to Rs. 23,18,30,814/- aggregating to operating cost of Rs. 68,63,58,779/- against operating revenue of Rs. 48,58,04,962/- and incurred loss of Rs. 20,05,53,817/- merely on leasing and sub-leasing activity before the administrative, marketing and finance expenses. The operating profit to OP/OR was (-)29.22%. The OP/OC was (-)41.28%. Similarly, for the assessment year 2013-14, the loss incurred was Rs. 53.96 crores which resulted in margin of Rs. (-)189.41%. Plain reading of the financial results of both the years clearly indicate that the payment made by the assessee company to it's AE is not at arm's length. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by both the TPO as well as of the assessee are functionally divergent since none of the comparables are engaged in identical or similar functions. In this connection, the Ld.AR also could not explain whether the companies from which the assessee had received the bareboat rental are having related party transactions. The Ld.DR did not controvert the arguments advanced by the Ld.AR in respect of divergent comparables selected by both the TPO as well as the assessee in transfer pricing study. 6.2. We have gone through the submissions made by the assessee and observed that none of the companies selected by the TPO are engaged in the activity of lease and sub-lease of the vessels. The revenue did not place any evidence to controvert the argument of the Ld.AR. Therefore, we are of the opinion that the issue needs verification by the Ld.TPO/AO to select the correct comparables functionally, asset wise to arrive at the PLI to bench mark and arrive at the ALP. Therefore, in the interest of justice, we restore the matter back to the file of the Ld.TPO/AO to determine ALP after making proper transfer pricing study. Accordingly, the orders of the lower authorities for both the assessment y ..... X X X X Extracts X X X X X X X X Extracts X X X X
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