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TMI Blog2019 (12) TMI 815X X X X Extracts X X X X X X X X Extracts X X X X ..... red without prejudice to one another: General 1. On the facts and in the circumstances of the case and in law, the learned AO, based on directions of DRP erred in making addition of Rs. 17,24,50,468 in the Appellant's case. Applicability of transfer pricing provisions to companies covered under the Tonnage Tax Scheme 2. On the facts and in the circumstances of the case and in law, the learned AO/ DRP failed to appreciate that the transfer pricing regulations do not apply to the Appellant to the extent of operations carried out through operating qualifying ships, since the Appellant is a company registered under the Tonnage Tax Scheme ('TTS') provided under the Act. 3. The learned AO/DRP failed to appreciate that since the transfer pricing regulations do not apply to the Appellant, no reference should have been made to the Transfer Pricing Officer ('TPO') under section 92CA of the Act with regards to the income derived from operating qualifying ships by the Appellant. 4. The learned AO/ DRP erred in not appreciating the fact that section 92 of the Act is not a charging section but merely a computation mechanism for determination of arm's len ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d basis and hence ought to be deleted. 13. On the facts and in the circumstances of the case and in law, the Hon'ble DRP erred in observing that the Appellant is having income under the normal provisions as well as under TTS provisions and stating that segregation of allocation of head office expenses into TTS and Non-TTS activity would lead to absurd results, as the Appellant has only TTS income in the relevant year. 14. Without prejudice to above, on the facts and in the circumstances of the case and in law, the learned AO/ TPO/ DRP erred in not accepting economic analysis undertaken by the Appellant and carrying out a transfer pricing adjustment of Rs. 17,24,50,468/- to the total income of the Appellant on account of allocation of head office expenses from its Associated Enterprises. 15. Without prejudice to above, the learned AO/ TPO/ DRP erred in making an adhoc adjustment of Rs. 17,24,50,468/- on account of allocation of head office expenses without appreciating the fact that the Appellant had submitted documentary evidence for the same and demonstrated that the Associated Enterprise had rendered such services and that the. Appellant had benefitted from suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... riginally taken, is to the action of the Assessing Officer in applying the Transfer Pricing Provisions, as contained in Chapter X of the Income Tax Act, to the case of the assessee company, Van Oord India Private Limited, which is a company covered as a Tonnage Company under the Tonnage Tax Scheme ('TTS', for short), as contained in Chapter XII-G of the Income Tax Act, i.e., sections 115V to 115VZC of the Income Tax Act. It has been submitted on behalf of the assessee, that ground No.2 pinpoints this grievance. 5. Facts first. The assessee is an Indian company incorporated under the provisions of the Companies Act, 1956. It is, during the year, as in the earlier years, inter-alia, engaged in the business of executing dredging contracts in India, involving capital & maintenance dredging & other survey and dredging related activities. It is a wholly owned subsidiary of Van Oord Dredging and Marine Contractors BV, which is incorporated in the Netherlands. For its dredging and dredging-related activities in India, the assessee has set up a project office in India. For carrying out the dredging work, the assessee charter hires dredgers from its overseas associa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have any effect on the taxable income of the assessee. 7. The Assessing Officer held the Transfer Pricing Provisions of the Act to be applicable to the case of the assessee, on the following observations: "i. The Transfer Pricing Officer is a specialized person for determining Arm's Length Price with regard to international transactions with associated enterprises. His order is almost binding on the Assessing Officer, in view of the word 'shall' used in section 92CA(4), which is reproduced below: "On receipt of the order under sub-section (3), the Assessing Officer shall proceed to compute the total income of the assessee under subsection (4) of section 92C in conformity with the arm's length price as so determined by the Transfer Pricing Officer." "The Transfer Pricing Officer vide order u/s. 92CA(3) of the income-tax Act, 1961, dated 13/01/14 has held that adjustments aggregating to Rs. 17,24,50,468/- is made after considering all the submissions of the assessee. "The claim of the assessee is that since it is covered by provisions of Tonnage Tax Scheme under Chapter XlI-G of the Income-tax Act, 1961, no adjustment can be made to its income. It is claimed tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ect to interpret that the scheme of Tonnage Tax will override the provisions of section 92 to 90 2F The fact that they are special provisions (Transfer Pricing) puts them on an elevated position than other general provisions." 8. The Assessing Officer, thus, proposed to add back the amount of Rs. 17,24,50,468/- to the total income of the assessee, as ALP of the international transactions. 9. The assessee filed an objection against the transfer pricing adjustment of Rs. 17,24,50,468/- before the Dispute Resolution Panel (DRP)-II, Mumbai. The Dispute Resolution Panel-II, vide its order dated 8/12/2014, dismissed the objection of the assessee against the transfer pricing adjustment of Rs. 17,24,50,468/-. The DRP-II observed as follows: "6.2 Discussion and directions of DRP:- "6.2.1 The contentions raised by the assessee have been considered. At the outset, we would like to point out there is no exclusion provided in Transfer Pricing Provisions to the effect that the Transfer Pricing Provisions would not apply to companies whose income is computed under Tonnage Tax Scheme. Having said that, we now deal, with the contentions raised by the assessee that Transf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g provisions may be called for TTS provisions are narrow and limited to few factors whereas Transfer Pricing Provisions takes into consideration wider and broader aspects. Verification of international transactions between assessee and its Associated Enterprise may lead to finding of income from factors which were not taken into consideration while arriving at income under TTS." 10. The Assessing Officer passed a final assessment order, dated 29/12/2014, i.e., the order under appeal. In para 3.3.5, at page 5 thereof, observing that the directions of the DRP are binding on the Assessing Officer, the TP adjustment of Rs. 17,24,50,468/-, as proposed in the draft assessment order (supra) dated 5/3/2014, was made to the returned income of the assessee. 11. Challenging the impugned order, the ld. A.R. of the assessee has, at the outset, submitted that if the transfer pricing provisions do not apply to the income computed under the Tonnage Tax Scheme (Chapter XIIG), the adjustment made by the TPO and DRP is rendered unlawful; that this issue came up for consideration the first time before the ITAT in Assessment Year 2007-08 and the Mumbai 'J' Bench of the ITAT, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the audit report in form 3CEB and further has also undertaken benchmarking process and having regard to the details mentioned in its TP report, has arrived at the conclusion that its international transactions are at arm's length; that if it was the contention of the assessee that the provisions of the T.P. do not apply in the case of the assessee, then it should not have itself filed the audit report in form 3CEB or should not have undertaken T.P. study to benchmark its international transactions; that when the facts of the case are such that the provisions of the T.P. Regulations of India are applicable to the case of the assessee, and the normal literal interpretation of the regulation are unambiguous and clear, then there is no need to go into the intention of the Regulations or proving the intent of the assessee, behind its transfer prices of services; that the assessee has raised the contention that it is covered under the Tonnage Tax Scheme vide chapter XII-G, and that section 115VA specifically provides that notwithstanding anything to the contrary contained in the section 28 to 43C, and accordingly the adjustment of Rs. 17,24,50,468/- to its taxable income should not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n case the qualifying company is generating losses by operating qualifying ships, then such losses have to be ignored for the purpose of computation of tonnage income; that all the expenses, deduction, allowances or tax incentives are deemed to be allowed while computing the tonnage income of a qualifying company by operating qualifying ships; that since the tax is charged on deemed income on a presumptive basis, the income generated by operating qualifying ships should not be chargeable to tax; that section 115VA of the Act, starts with 'Notwithstanding anything to the contrary contained in section 28 to section 43C...."; that TTS, thus, provides for computation of income to the exclusion of sections 28 to 43C of the Act; that in case of companies which are into international transactions, the amount of allowable expenses is required to be determined under the arm's length principle under the machinery provisions of Chapter X (Sections 92 to 92F); that the amount of allowable expenses determined under the arm's length principle under section 92 of the Act would, thus, be relevant to compute business profits as provided for in sections 28 to 43C; that as the assessee ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h "Notwithstanding any to the contrary contained in section 28 to section 43....". TTS thus, provides for computation of income to the exclusion of section 28 of the Act. In case of an assessee entering into international transactions with associated enterprise, the amount of allowable expenses is required to be determined as per the arm's length principle as per the machinery provisions of Chapter X (Section 92 to section 92F). The amount of allowable expenses determined as per the arm's length principle under section 92(1) of the Act would thus be relevant to compute business profits as provided for in sections 28 to 43C of the Act. The Assessee has opted to be governed by TTS, thus the provisions of section 115VA would override section 28 to section 43C and hence income has to be calculated with reference to the registered tonnage of the ships and not on basis of net profits depicted in the financial statements or as per the profits adjusted in terms of Chapter-X. In fact, the related party transactions are not relevant for computing income chargeable to tax as per Chapter-XII G of the Act and therefore, the arm's length price determined under transfer pricing provis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come under TTS is not dependent on receipt or expenditure of the assessee. Under Tonnage Tax Scheme, the income has to be computed as per the method prescribed in section 115VG. The income as per Tonnage Tax Scheme is computed on the basis of the weight of the vessel and number of days it is held, irrespective of its revenue realizations and the expenditure incurred for the purpose of the business. Hence, neither the business receipts nor the business expenditure of the assessee has any bearing on the method prescribed for computation of income under TTS as per section 115VG. The tonnage tax scheme, in that sense, is a presumptive method of computation of taxable income which is not dependent on actual receipts and expenditure of the assessee. "15. In fact, the fallacy in the approach of the Assessing Officer can be gauged from a perusal of the computation of taxable income made in para 11 of the assessment order. The Assessing Officer has sought to add Rs. 5,40,887/- as a separate line item captioned as "Proposed adjustment/addition in view of the above discussion. Thus, as per the perception of Assessing Officer, chapter X of the Act creates an independent or a separate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evious year." 20. It thus emerges, as rightly contended on behalf of the assessee, that since the assessee has opted to be governed by TTS, the provisions of section 115VA shall override sections 28 to 43C and hence, the income has to be calculated with reference to the registered tonnage of the ships and not on the basis of net profits; that consequently, the related party transactions are not considered for computing the income chargeable to tax, and, therefore, the arm's length price determined under the transfer pricing provisions would be of no relevance; that therefore, the determination of income/expense having regard to arm's length price would be of no relevance, as it would not affect the computation of income and the taxability of tonnage income of the assessee; and that even if the transfer pricing provisions were to apply, the provisions of TTS do not allow the adjustment made by the TPO to affect the computation of income under TTS. That being so, the adjustment made by the TPO would not affect the income of the assessee. This, more so, because the first proviso to section 92C(4) does not cover the provisions of Chapter XII-G of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee has filed the accountant's report in Form 3CEB under section 92E of the Act out of abundant caution in respect of the tonnage tax income. Therefore, the Assessing Officer has erred in making these observations also and the assessment order fails on this count too. In fact, no reference to the TPO ought to have, at all, been made, in the first instance itself. 24. In view of the above discussion, the assessee is correct in contending that the AO/DRP failed to appreciate that the transfer pricing regulations do not apply to the assessee, to the extent of operations carried out through operating qualifying ships, since the assessee is a company registered under the Tonnage Tax Scheme ('TTS') provided under the Act. The facts in the year under consideration are not different from those in assessment years 2007-08 and 2011-12, where the very same issue has been decided by the Tribunal in favour of the assessee. So, we see no reason as to why the decision this year be not consistent therewith. Too, even the DRP, vide its order dated 8/12/2014, has held in favour of the assessee qua this issue, which fact was also taken cognizance of by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ereof, it has been contended by the ld. Counsel for the assessee that the additional ground could not be raised either at the time of filing of the return of income on 15th October, 2010, or during proceedings before the lower authorities (which culminated in passing of the Final Assessment order on 29th December, 2014), because during that period, the law that tax under section 115-O was a tax on the distributed profits of the company and not on dividend, as laid down by the Hon'ble Bombay High Court in the case of 'Godrej & Boyce Mfg. Co. Ltd. vs DCIT', 328 ITR 281 (Bom.), vide Judgment dated 12th August, 2010; that it was only when the Supreme Court, on 20th September, 2017 in the case of 'Union of India vs. Tata Tea Co. Ltd.', 85 taxmann.com 346 (SC), decided that the tax under section 115-O is a tax on dividend, that the occasion to raise the additional ground arose; that the Hon'ble Supreme Court, in the aforesaid case, was hearing appeals challenging the constitutional validity of section 115-O; that the challenge was that by taxing, under section 115-O, the distributed profits of a company engaged in agricultural activities, the Central Government sought to levy tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Full Bench decision of the Hon'ble Bombay High Court in the case of 'Ahmedabad Electricity Co. Ltd. Vs. CIT', 199 ITR 351 (Bom.). In fact, as rightly submitted on behalf of the assessee, this is the settled position of law, as has been held by the Hon'ble Bombay High Court in the case of 'Ultratech Cement Ltd. Vs. ACIT', 81 taxmann.com 74. It remains undisputed that this issue could not be raised either at the time of filing of the return of income on 15th October, 2010, or during proceedings before the lower authorities (which culminated in passing of the Final Assessment order on 29th December, 2014), because during that period, the law as laid down by the Hon'ble Bombay High Court in the case of 'Godrej & Boyce Mfg. Co. Ltd. vs DCIT' (supra), held the filed. It is only by virtue of the Supreme Court order dated 20th September, 2017 passed in the case of 'Union of India vs. Tata Tea Co. Ltd.' (supra), that the law now is that the tax under section 115-O is a tax on dividend. The impugned order was passed by the Assessing Officer on 29/12/2014, when 'Godrej & Boyce Mfg. Co. Ltd. vs DCIT' (supra) was the governing law. It cannot be gainsa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me does not, in any manner, relate to the assessee, or VODMC BV, or the project office, and hence, it cannot be regarded as a fact that needs to be examined for the purposes of admission and/or adjudication of the assessee's claim. In any case, as dwelt upon hereinabove, the assessee was prevented from raising the additional ground before the lower authorities, due to a reason beyond the control of the assessee, as considered above. This fact, by itself, is, in our opinion, sufficient to allow it to be raised at this stage. So, even if, arguendo, the objections of the Department were to be acceded to, the assessee's request for admission of the additional ground merits acceptance. 32. In view of the above, the additional ground is admitted. 33. On the merits of the additional ground raised by the assessee, the ld. Counsel for the assessee submitted that the Dividend Distribution Tax (DDT) under section 115-O of the Income Tax Act, on the dividends declared and paid by the assessee, to its foreign shareholder, Van Oord Dredging & Marine Contractors bv., who is a tax resident of the Netherlands, is in excess of the rate provided under Article 10 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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