S. 92C, the Act; Rule 10A(d), the Rules – when the transactions are influenced by each other, particularly in determining price/ profit in the transactions, they are ‘closely linked transactions’; however, where taxpayer undertook transactions with different AEs, only transactions with each separate AE could not be clubbed.
Facts:
The taxpayer was a limited partnership established in Netherland to undertake international dredging contracts. It entered into a contract with Indian Oil Corporation for dredging and reclamation for a refinery project in India. For this purpose, it hired dredgers/vessels/equipment on lease from certain Associated Enterprises (“AEs”).
The taxpayer followed CUP method for benchmarking the international transactions of leasing of dredger/equipment using valuation certificates of an international firm that are normally used in the dredging industry for negotiating lease rentals. The said valuation certificates were accepted by TPO as suitable benchmark for computing the ALP. The taxpayer then clubbed all lease transactions with all AEs together and benchmarked the same on an aggregate basis by adopting average of all.
Referring to section 92C of the Act read with Rule 10A(d) of the rules, the taxpayer contended that all the transactions of lease of dredger and equipment being similar, were the same class of transactions. Further, dredgers and equipment were used for carrying out single project and they could not be used independently since their working was dependent on each other. The taxpayer also contended that the TPO should consider the average of all the payments (whether above the benchmark valuation certificates or below the benchmark valuation certificates) and since such average was lower than the benchmark, question of any adjustment will not arise.
The tax authority contended that the benchmark valuation certificates of the international firm constituted a scientific benchmark. Once a scientific benchmark is used as a basis, and as each vessel is a class by itself, no clubbing of transactions should be done.
The issue before Tribunal was whether for determining ALP, lease rentals paid to AEs should be considered by adopting ‘vessel-by-vessel’ approach or ‘class of transactions’ approach (i.e. clubbing) in respect of ‘closely linked transactions’.
Held:
The Tribunal held as follows.
If transactions are closely linked or continuous in nature, they can be considered as ‘closely linked transactions’ in terms of Rule 10A(d). When number of transactions are entered into between two parties, then portfolio approach (and not individual transaction approach) should be followed.
To examine whether the number of transactions are closely linked or continuous, it should be considered whether a transaction is, follow on of, and wholly or substantially dependent on, the earlier transaction. If the transactions are influenced by each other, particularly in determining the price/profit, they can be regarded ‘closely linked transactions’.
The taxpayer had taken dredger/equipment on hire from several AEs. The objective of transfer pricing provisions is to avoid base erosion and profit shifting from one tax jurisdiction to another tax jurisdiction. Therefore, for determining ALP, the clubbing of transactions can be only to the extent of the transactions with each AE. Transactions with different AEs cannot be clubbed as ‘closely linked transactions’ so as to influence the aggregate price or profit arising from the transactions because they cannot be termed as closely linked or continuous so as to influence the price in aggregate or the profit of the parties arising from these transactions.
