Transfer-pricing provisions were introduced to ensure that an international transaction between two associated enterprises is made at an arm's length price (ALP) so that both the countries involved get a proper share of profits in their respective jurisdiction. In order to determine the ALP, various methods have been prescribed which are based on Organisation for Economic Co-operation and Development guidelines and international transfer-pricing practices.
However, sometimes the nature of transaction is such that none of the methods prescribed in law are appropriate to determine ALP. Then, in such a situation, how will the ALP be calculated? Problems arise in determination of ALP on transfer of capital assets. In most of such cases, none of the methods may be appropriately applied because it may be difficult to locate similar transactions.
Irrespective of the difficulties, taxpayers have to comply with the transfer-pricing regulations and determine the arm's length price.
In the absence of the other comparable uncontrolled transactions for the purpose of benchmarking, taxpayers resort to prices available across the board like prices on bourses, magazine rates or the valuation reports etc. In this context, the recent case of Tolani Shipping Co. Ltd. (2013-III-102-ITAT-MUM-TP) may be referred to as a guide in some special circumstances.
The assessee was an Indian company in the business of shipping. The assessee owned ships and during the year a ship was sold by the assessee to its AE in Singapore at $9.5 million, at an exchange rate of 47.71, which was stated to be its market price. Consideration for sale of ship was paid by way of allotment of shares of Singapore Company.
The assessee backed up the sale with a valuation report of M/s. Simpson Spence & Young Shipbrokers of London, which certified the ship value at $9.5 million. The assessee also furnished the prices quoted in a monthly magazine called 'The Platou Monthly'.
AO, however, noted that in its valuation report, M/s Simpson Spence & Young had stated that neither the vessel had been inspected by them, nor had they perused the classification record of the vessel. The report cautioned that the valuation figure had to be utilised only after full inspection of the vessel and classification record, hence, rejected by the AO.
AO took the relevant average sale prices of ships from 1994 to 1996, out of which most of them were higher tonnage capacity to the assessee's ship (1992 make) and also took the price month to month from the Platou magazine. The AO calculated higher ALP at higher exchange rate of 47.85.
In appeal before the CIT(A), the assessee furnished another valuation certificate from M/s JB Boda Offshore Surveyors & adjustments, which made the valuation at $13 million. The CIT(A) held that the transaction was an international transaction between two AEs and the comparable uncontrolled price (CUP) method was the most appropriate to compute the arm's length price of the vessel, because the prices charged for various ships sold worldwide during this period were available as per the 'Platou' magazine, which represented comparable uncontrolled transactions.
The matter was taken to ITAT. ITAT held that, "As seen from the paper book, we have noticed that the JB Boda certificate which was relied upon by assessee before the CIT (A) was issued in connection with the insurance of the Ship by M/s United India Insurance Co. Ltd as on July 1, 2002. The ship was insured for a sum of Rs 50.00 crore, as its value as can be seen from the page Nos. 149 of the paper book. In that, the United India Insurance Company Ltd has stated that the Hull and Machinery insured value at Rs 50.00 crores.
This Insurance was valid w.e.f. July 1, 2002 to June 3, 2003. In view of the above document available, we are of the view that this value accepted by the Insurance Company for the ship can be taken as reasonable value to arrive at ALP rather than going by the estimation on the basis of the quoted figures in a monthly magazine as was done by the learned CIT(A)."
It may be true that difficulties might arise in ascertaining the fair market value but such difficulties should not be a reason for not adapting the rules and methods prescribed in this regard.
This might require some subtle adjustments in the methodology prescribed for evaluation of an international transaction. In an earlier decision of Ascendas India Pvt Ltd. also the Hon'ble Tribunal had stressed the need for a harmonious interpretation of TP Rules.The Hon'ble Tribunal observed "A water-tight attitude of interpretation of the prescribed methods will defeat the very purpose of enactment of transfer pricing rules and regulations and also detrimentally affect the effective and fair administration of an international tax regime."
The article has been co-authored bu Alok Gupta
Email: hp.agrawal@sskmin.com
