ITAT MUMBAI BENCH ‘K’
Additional Director of Income-tax (IT) 3(2)
versus
Ballast Nedam Dredging
B. RAMAKOTAIAH, ACCOUNTANT MEMBER
AND VIVEK VARMA, JUDICIAL MEMBER
IT APPEAL NOS. 6531 (MUM.) OF 2006 AND 1591 (MUM.) OF 2008
C.O. No. 81 (Mum.) of 2007
[ASSESSMENT YEARS 2002-03 & 2003-04]
JANUARY 31, 2013
ORDER
Per Bench
The appeals are preferred by the Revenue against the orders of the CIT(A)-31 Mumbai dated 18.08.2006 and 31.12.07 for the AYs 2002-03 and 2003-04. Assessee 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 Rs. 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 circumstances of the case and in law, the learned CIT(A) erred in fact and in law in deleting the addition of Rs. 80,51,038/- in respect of dredger Saga by holding that no adjustment is required to be made as the payments made is less than 5%”.
C.O. No.81/Mum/2007
2. Even though assessee raised four grounds in cross objection, the grounds from 1 to 3 were withdrawn as not pressed and Ground No.4 only was pressed, without prejudice, which is as under:
“4. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in fact and in law in deleting the addition of Rs. 80,51,038/- in respect of dredger Saga by holding that no adjustment is required to be made as the payments made is less than 5%”.
3. Briefly stated, Ballast Nedam Dredging (BND/assessee) is a company incorporated in the Netherlands. During the year assessee was involved in execution of a contract for construction of breakwaters and the associated dredging and land reclamation works at Karwar awarded by the Govt. of India. BND is a tax resident in Netherland and the provisions of DTAA between India and Netherlands apply. Since the presence of assessee in India exceeded the limit of six months as prescribed in Article 5(3) of the tax treaty assessee had a permanent establishment in India taxable on net income basis. Assessee offered an income of Rs. 1,76,40,410. A revised return of income was filed on 26.02.2004 declaring taxable income at Rs. 44,93,503. During the year under consideration assessee reported international transaction with its Associated Enterprises (AEs) in the Form 3CEB under Rule 92E of the Act. AO referred the case to the TPO vide the letter dated 04.09.2003 for determining the arms length price (ALP) in respect of the international transactions entered into by assessee.
4. The assessee company had hired two dredgers ‘Saga’ from M/s Ballast Nedam Baggeren Exploitatiemaatschappij B.V., Netherlands (BNBE) and ‘Hector’ from B.V. Werktuigmaatschappij L. Paans en Zonen, Netherlands (WLPZ). Saga dredger was utilized during the period 1.4.2001 to 5.5.2001 and payments were made as per the agreement with BNBE entered on 05.01.2000. The dredger Hector was utilized during the period from 17.01.2002 to 31.03.2002 whereas payments were made as per the agreement dated 21.12.2000. Before the TPO, it was argued that the agreement with the 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 technical certificate from ‘VG Bouw’ for both the dredgers. VG Bouw certificate for vessel Saga is dated 01.10.2002. Similarly VG Bouw certificate for vessel Hector is dated 01.10.2002. For Saga, certificate is in respect of calendar year of 2001 whereas for Hector for calendar year 2002. VG Bouw certificate dated 01.10.2002 clarified that the lease rental for operation does not include excessive wear and tear, overhead, mobilization/demobilization. Certificate also mentioned that market conditions prevailing at the time when transactions were finalized were also to be adjusted. VG Bouw certificate regarding mobilization and demobilization stated that no overheads were included and that market conditions prevailing at the time when the transaction was finalized should be taken into account.
6. As the TPO found that the rates quoted by the VG Bouw certificate were less compared to the rates at which payments were made by assessee, he asked assessee to justify. Assessee argued that the excessive wear and tear, overheads and market conditions have not been taken into account. If these were taken into account, VG Bouw rate would be comparable with the rate at which assessees had made payments. Upon the requirement of TPO, assessee approached the VG Bouw again and obtained the certificates dated 24.12.2004 (two separate certificates for Saga & Hector). The VG Bouw provided for additional 15% repairs for dredger Hector and 20% repairs for dredger Saga in respect of lease/operational rental. Assessee on its own submitted to the TPO that the mobilization/demobilization rentals were also required to be adjusted by same percentage of additional repairs. Regarding the overheads, assessee submitted before the TPO a certificate from KPMG dated 05.09.2001 certifying that in the calendar year 2001 the indirect cost of Ballast Nedam Dredging (Assessee) as described in the companies accounting policies are 13% of the turnover in that year, which percentage was used in involving these costs to Ballast Nedam Dredging (Singapore Branch). Assessee accordingly submitted that overhead cost @10% is required to be added.
7. After making these adjustments, assessee provided the total working of valuation starting from VG Bouw certificate to the actual payment by assessee. Chart read as under:
Description of VG Bouw Technical Certificate working
All figures in Euro per week
