TMI Blog2019 (12) TMI 815X X X X Extracts X X X X X X X X Extracts X X X X ..... actions have no relevance, weight and length of user of qualifying ships, rather than the nature of party for which the user is, or ALP, or income, or expenses, being the formula prescribed for computation of income under Chapter XII-G. (c) Consideration of the TP provisions, enclosing within them, the arm s length principle, under Chapter X (sections 92 to 92F) of the Act are, a fortiori, not applicable to the TTS and ALP does not affect the computation and taxability of the tonnage income of the assessee. (d) Computation of income under the TTS is, thus, not impinged upon by the adjustment made by the TPO. (e) Income computed under the TTS is, by virtue of section 115VF, deemed to be the profits taxable as profits gains of business or profession. (f) The amount which represents reimbursement of Head Office Expenses by the assessee to its holding company and AE, has wrongly been added, by altering the expenditure, under Chapter X, despite the inapplicability of the Chapter and inspite of the fact that Chapter X contains only machinery provisions and no charging provisions, sans which, it is trite, no tax can be levied. (g) Non-applicability of Chapter X does not g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee by: S/Shri Nishant Thakkar, Rishi Kapadia, Hiten Chande, Jairajesh Nadar and Bhakti Maru, A.Rs Revenue by: Shri Rajeev Harit, D.R. ORDER A. D. Jain, This is assessee s appeal against the assessment order, dated 29/12/2014, passed under section 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961, for assessment year 2010-11, in pursuance to the directions by the DRP vide its order dated 5/12/2014. The following grounds have been raised: On being aggrieved by the final order dated 29 December 2014 passed by the learned Deputy Commissioner of Income-tax Range-5(3)(2), Mumbai ('AO') passed under section 143(3) read with section 144C(13) of the Income-tax Act, 1961 ('the Act') in pursuance of the directions issued by the DRP, the present appeal is being preferred on the following grounds amongst others which, it is prayed, may be considered 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 ₹ 17,24,50,468 in the Appellant's case. Applicabilit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10. The learned AO/ TPO/DRP has failed to appreciate the fact that the TTS and Non TTS income of the Appellant can be segregated and the same was submitted before the learned Assessing Officer/DRP. 11. The learned AO/ TPO/DRP failed to appreciate the fact that the adjustment proposed by the learned TPO of ₹ 17,24,50,468 (Head office expenses allocation pertaining to income covered under TTS) has no relevance in computing the income from operating qualifying ships, which is determined on a presumptive basis as provided under the TTS of the Act, hence, the alleged excess payment cannot have any impact on the taxable income of the Appellant and ought to be deleted. Addition on account of allocation of head office expenses 12. The learned AO/TPO/DRP erred in law in making an adjustment of ₹ 17,24,50,468 in respect of allocation of head office expenses pertaining to income covered under TTS, for which no deduction was claimed by the Appellant, since its TTS income is taxable on deemed 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case and in law, the learned AO erred in levying interest under section 234C amounting to ₹ 1,27,057/-. 21. On the facts and in the circumstances of the case and in law, the ld. AO/TPO erred in law by initiating penalty proceedings under section 271(1)c) when the Appellant had made full and true disclosures both, in the return of income and during assessment proceedings. 2. The assessee has also raised the following additional ground: The Appellant prays that the Dividend Distribution Tax (DDT) paid under section 115-0 of the Income-tax Act, 1961 ('the Act) on dividends declared and paid by the Appellant to its parent foreign shareholder Van Oord Dredging Marine Contractors bv, who is a tax resident of Netherlands, is in excess of the rate provided under Article 10 read with the Most Favoured Nation clause under Article IV of the Protocol to the Double Taxation Avoidance Agreement between India and Netherlands. 3. The matter concerning the additional ground shall be taken up post dealing with the original grounds. 4. The effective challenge, by way of all the 21 grounds originally taken, is to the action of the Asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ₹ 6,43,439/- and, as a consequence, ₹ 17,30,93,907/- was brought to tax as business income. 6. On perusal of the records, it was seen by the Assessing Officer that the assessee Company has entered into International Transactions with its Associated Enterprise(s) (AE), amounting to more than ₹ 15 crores. Hence, the matter was referred to the Transfer Ppricing Officer (TPO) for determination of Arm's Length Price (ALP) in relation to the international transactions. The TPO-II(6), Mumbai, by his order dated 13/01/14, made adjustment of ₹ 17,24,50,468/- towards ALP of Head Office Expenses. The assessee Company was to show cause as to why an adjustment should not be made to the arm's length of head office expenses, amounting to ₹ 17,24,50,468/- as per the order of TPO-II(6), Mumbai, by his order dated 13/01/14. The main contention of the assessee Company was that the provisions of transfer pricing regulations do not apply to the companies, whose income is taxable under the Tonnage Tax Scheme, and hence, the adjustment/enhancement of income made in the transfer pricing order would not have any effect on the taxable income of the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. The assessee has raised the contention that it is covered under the Tonnage Tax Scheme vide chapter Xll-G and that the section II5VA specifically provides that notwithstanding anything to the contrary contained in the section 28 to 43C and accordingly the adjustment of ₹ 17,24,50,468/- to its taxable income should not be made under the provisions of transfer pricing. In this regard, it is pertinent to mention here that this section 115VA begin with a non-obstante clause which says notwithstanding anything to the contrary contained in section 28 to 43C..... . This means that provisions beginning from 28 and ending at 43C are not applicable so far it applies to shipping industry which is to be governed, by Tonnage Tax Scheme. Whereas, the transfer pricing provisions begin from section 92 and end with 92F. They are contained in chapter X in the special provisions relating to avoidance of tax. As such, it is not correct to interpr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee and its AEs on its income. To mitigate this provisions of computing income from International Transactions have been provided in the Act. In fact, the heading of Section 92(1) reads as- Computation of income from international transaction having regard to arm's length price This brings to the fore that these provisions are distinct, separate and over and above the provisions of computation of income under section 28 to 43C or even TTS. 6.2.3 Now with regard to assessee s argument that since the income arising to the assessee is not as a result of international transaction but as a result of computation provided under TTS, the provisions of section 92(1) would not apply to the applicant, it is to be stated that it is not only when there arises income from international transaction that transfer pricing provisions get applied, even in cases of expenses, benefit, service, facility or even borrowing and lending, etc., the transfer pricing provisions get attracted, whether there arises income from it which, requires to be adjusted depends on facts of each case. Thus even in cases where apparently there arises no income, the applicabi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d his order is almost binding on the Assessing Officer; that the TPO, in his order dated 13/1/2014, has held that in its TP study report, it was stated that since the assessee is a resident, and it would be entering into international transactions with its AEs, each of which is a non-resident for Indian tax purposes, the Indian transfer pricing regulations would be applicable to the transactions to be undertaken between the assessee and its AEs; that admittedly, the assessee has entered into international transactions as defined in section 92B of the Income Tax Act and hence the transfer pricing provisions would be applicable and the ALP of the international transactions has to be determined; that the Indian Transfer Pricing Regulations have been brought into the statute to prevent the erosion of the tax base of the country, but in implementing the provisions, it is not the encumbrance of the TPO/AO to prove the same; that further, it is not the case of the assessee that it has not undertaken any international transactions, which fall within the meaning of section 92B of the Act or it is not the case that the TP regulations of India are not applicable in the case of the assessee, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g Officer, as it has been mandated in section 92C(4) of the Act that the Assessing Officer shall compute the total income of the assessee in conformity with the ALP determined by the TPO. The assessee, per contra, has maintained all through, that VOIPL, the assessee, is a company registered under the TTS of the Act; that it is a presumptive basis of taxation and the income of the company arising from the operations of qualifying ships (which, inter alia, includes dredgers) is to be computed on a deemed tonnage basis; that the entire computation of the tonnage income depends on the tonnage capacity of qualifying ships and number of days they have been operated; that accordingly, the income of a tonnage tax company depends on the tonnage capacity of the qualifying ships and the number of days for which they have been operated, rather than the income generated by the qualifying ships; that as per the provisions of the TTS, once the tonnage income of the company is computed, the same would be presumed to be the profits and gains of business; that actual receipt/ revenue earned and expenses incurred are not taken into consideration for the purpose of determining the income of the compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business or profession ; and that hence, it can be said that allowance/disallowance of any expenditure does not have any bearing on the taxable income of the assessee, a Tonnage Company under TTS. 15. The Assessing Officer has observed that section 115VA of the Act begins with a non-obstante clause, which says notwithstanding anything to the contrary contained in section 28 to 43C .. ; that this means that the provisions beginning from section 28 and ending at section 43C are not applicable so far it applies to the shipping industry, which is to be governed by the Tonnage Tax Scheme, whereas, the transfer pricing provisions begin from section 92 and end at section 92F; that they are contained in Chapter X of the Income Tax Act, in the special provisions relating to avoidance of tax; and that as such, it is not correct to interpret that the scheme of Tonnage Tax will override the provisions of sections 92 to 92F of the Act. 16. This seeming imbroglio stands already resolved by the Tribunal in its order dated 22/5/2019 passed in the assessee s own case for assessment year 2007-08. In paragraphs 7 8 thereof, it has been observed as follows: 7. Sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns to such transactions, because the statutorily prescribed formula to compute income under chapter XII-G is based on the weight of the qualifying ship and number of days it has been held, irrespective of whether the ship has been used for a related party or an unrelated party. Once again, therefore, the computation provisions of Chapter X of the Act fail and in such circumstances, the application of Chapter X of the Act fails. 17. While passing that order, the Tribunal considered, in favour of the assessee, the following decisions: i. Shreyas Shipping Logistics Ltd. (Mumbai ITAT-ITA 7406/Mum/2014). ii. TAG Offshore Ltd. (Mumbai ITAT-ITA No. 710/Mum/2014). iii. CGU Logistics Ltd. (Mumbai ITAT-ITA No. 1053/Mum/2014). iv. Trans Asian Shipping Services Pvt. Ltd. (Supreme Court - (Civil Appeal No. 5869 and 5870 of 2016). v. DRP order dated 8/12/2014, passed under section 144C (5) of the Act. 18. The Tribunal concluded by observing, thus: 14. To sum up, Tonnage Tax Scheme, as per Chapter XIT-G of the Act, is a separate code by itself in as much as it provides a selfcontained changing provision as well as method of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of operations carried out through operating qualifying ships where the income is taxed under TTS. 19. In its order dated 21/6/2019, passed in the assessee s case for assessment year 2011-12, the Tribunal has observed as follows: 4. .. Undisputedly, the assessee has opted for computation of its profit derived from the shipping business under TTS as provided under chapter XII-G of the Act. As per section 115VE of the Act TTS will apply only if an option to that effect is made in terms of section 115VP of the Act. In the facts of the present appeal, there is no dispute that assessee has exercised its option for computation of income under TTS in terms of section 115VP of the Act and the department has also approved it. Section 115VF of the Act provides that tonnage income shall be computed in the manner provided under section 115VG of the Act. Section 115VG lays down the mode and manner of computing tonnage income. A careful reading of section 115VG of the Act would make it clear that the mode and manner of computing tonnage income does not depend upon the income and expenditure stated in the profit and loss account but is on the basis of net tonnage of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t was the contention of the assessee that the provisions of 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 the T.P. study to benchmark its international transactions; and 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. 23. Now, once Chapter X of the Act is, as held hereinabove, of no relevance to the assessee s case and the TP provisions do not apply, it does not make any difference, if the assessee itself has filed the audit report in Form 3CEB and further, has also undertaken the 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. The assessee cannot, in the absence of anything to the contrary brought on record by the Revenue, be said to be incor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is, by virtue of section 115VF, deemed to be the profits taxable as profits gains of business or profession. (f) The amount of ₹ 17,24,50,468/-, which represents reimbursement of Head Office Expenses by the assessee to its holding company and AE, has wrongly been added, by altering the expenditure, under Chapter X, despite the inapplicability of the Chapter and inspite of the fact that Chapter X contains only machinery provisions and no charging provisions, sans which, it is trite, no tax can be levied. (g) Non-applicability of Chapter X does not get altered by the factum of the assessee having either filed audit report in Form 3CEB, or undertaken the benchmarking process and concluding its international transactions to be at arm s length. (h) The issue stands decided by the Tribunal in favour of the assessee vide its orders in the assessee s case for assessment years 2007-08 and 2011-12. (i) The DRP has itself acceded to this legal claim of the assessee. 26. The assessee s grievance by way of ground No.2 is, thus, accepted and the TP addition of ₹ 17,24,50,468/- is deleted. As a consequence, ground Nos.3 to 21 stand ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... berally, as held by the Hon'ble Bombay High Court in the case of CIT vs. Pruthvi Brokers Shareholders , 23 taxmann.com 23 (Bom.); and that therefore, the additional ground may be admitted. 28. Opposing the admission of the additional ground, the ld. D.R. has contended that since the additional ground raised does not arise from the orders of the lower authorities, the same should not be admitted; that Article 10(6) of the DTAA provides that if the non-resident has a Permanent Establishment in India and if the dividend income is effectively connected with the PE in India, then the benefit of Article 10(2) is not available and since in the present case, the fact regarding the existence or nonexistence of the PE is not on record, the additional ground is not maintainable; and that the procedure for making a claim, as provided in Article 10(3) of Indo-Netherland Treaty, is also not on record herein. 29. Insofar as regards the argument of the ld. DR that since the additional ground raised does not arise from the orders of the lower authorities, the same cannot be admitted, this argument deserves to be rejected in view of the decisions of the Hon'ble Suprem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on behalf of the assessee, that the assessee s holding company has a PE in the form of a project office in India is on the records of the lower authorities, remains undisputed before us. Therefore, the argument of the DR, that the fact regarding existence of the PE of VODMC BV is not on record, is factually incorrect. Further, it also remains unchallenged that the fact that the shares are not effectively connected to the PE, i.e., the project office of VODMC BV, is also on record. Be that as it may, whether the PE exists in India or not, rightly, is not relevant to decide the admissibility of the additional ground, as these facts are required for the adjudication of the merits of the claim made by the assessee, and are not necessary to decide the admissibility of the same. Further, proving the compliance of the provisions of Article 10(6) of the Treaty, by which Article, the claim of the assessee under Article 10(2) can be denied by the Revenue, is not necessary to decide the admissibility of the additional ground raised by the assessee. 31. With respect to the submission of the ld. DR that the procedure for making a claim, as prescribed in Article 10(3) of the DTAA, ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
