TMI Blog2023 (7) TMI 685X X X X Extracts X X X X X X X X Extracts X X X X ..... total income by the assessee. We therefore direct the TPO / AO to delete the additions made on account of Transfer Pricing adjustment. Appeal of assessee allowed. - I.T. (TP)A. No. 41/Viz/2022 - - - Dated:- 14-7-2023 - Shri Duvvuru Rl Reddy, Hon ble Judicial Member And Shri S Balakrishnan, Hon ble Accountant Member For the Appellant : Sri Jitendra Singh, AR For the Respondent : Sri ON Hari Prasada Rao, Sr. AR ORDER PER S. BALAKRISHNAN, ACCOUNTANT MEMBER : This appeal filed by the assessee is directed against the order passed U/s. 143(3) r.w.s 144C(13) r.w.s 144B of the Income Tax Act, 1961 [the Act], for the AY 2017-18. 2. Brief facts of the case are that the assessee is engaged in the business of chartering of shipping vessels. The assessee has opted for presumptive taxation under the Chapter XII-G of the Act ie., Special Provisions relating to income from Shipping Companies. The assessee filed its return of income on 2/11/2017 declaring total income of Rs. 3,53,810/- which was subsequently revised U/s. 139(5) on 20/08/2018 admitting the same income. The case was selected for Limited Scrutiny under CASS. Notice U/s. 143(2) and 142(1) were issued an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on ble DRP failed to appreciate the fact that the Transfer Pricing regulations do not apply to the assessee and hence no reference should have been made to the Ld. TPO U/s. 92C of the Income Tax Act, 1961. Accordingly, the reference made by the Ld. AO is bad in law. 1.3. On the facts and circumstances of the case and in law, the Ld. TPO / Ld. AO and further Hon ble DRP failed to appreciate the fact that the appellant has filed the accountants report in Form 3CEB under section 92E of the act out of abundant caution. 1.4. On the facts and circumstances of the case and in law, the Hon ble DRP erred in holding that the Chapter X of the Act is applicable to the appellant s international transactions based on the similar view as taken by the Hon ble DRP in AY 2013-14 without appreciating that the Tonnage Tax was not applicable to the appellant in AY 2013-14. 2. Erred in not considering that the ship management charges recovered from appellant are substantially various third party costs with a nominal mark-up. On the facts and circumstances of the case and in law, Ld. AO / Ld. TPO and further Hon ble DRP erred in not considering the fact that the ship management char ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax, Kakinada Range vide F. No. Tonnage Tax/2013-14, dated 27/06/2013, the Ld. AR argued that the assessee is entitled to exercise such option effective from the AY 2014-15 for a period of 10 years from the date of exercising such option. The Ld. AR therefore pleaded that since the assessee has exercised its option for the first time during the impugned assessment year, the TP provisions cannot be applied to the assessee. In this regard, the Ld. AR placed heavy reliance on the following case laws: (i) Essar Ports Ltd vs. DCIT [2020] 118 taxmann.com 433 (Mumbai); (ii) Van Oord India Private Limited vs. DCIT in IT(TP)A No. 720/Mum/2015 (AY: 2010-11), dated 11/11/2019; and (iii) Van Oord India Private Limite vs. ACIT in ITA No.7228/Mum/2012 (AY 2007-08), dated 22/05/2019. 5. The Ld. AR referred to section 115VA of the Act stating that in the Computation of profits and gains from the business of operating qualifying ships, notwithstanding anything to the contrary contained in sections 28 to 43C, in the case of a company, the income from the business of operating qualifying ships, shall be computed in accordance with the provisions of this Chapter. The Ld. AR therefore pleade ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... U/s. 115VP(3) of the Act allowing the company to exercise option under the Tonnage Tax Scheme. Accordingly, the Ld. JCIT, Kakinada Range vide F.No. Tonnage Tax/2013-14, dated 27/06/2013 granted approval for a period of ten years effective from the AY 2014-15 from the date on which such option has been exercised by the assessee. As per the submissions of the Ld. AR, the assessee has exercised its option for the first time for the AY 2017-18. Further, we also find that the proviso to section 115VB of the Act does not cover the charter of ships to others. For reference sake, we hereby extract the section 115VB with proviso as follows: 115VB. Operating ships. For the purposes of this Chapter, a company shall be regarded as operating a ship if it operates any ship whether owned or chartered by it and includes a case where even a part of the ship has been chartered in by it in an arrangement such as slot charter, space charter or joint charter : Provided that a company shall not be regarded as the operator of a ship which has been chartered out by it on bareboat charter-cum-demise terms or on bareboat charter terms for a period exceeding three years. Further, we also e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... one of the methods prescribed can have any application to computation of the tonnage income. In these circumstances, the computation provisions of Chapter X of the Act would fail and therefore, application of Chapter X of the Act in such circumstances has to fail. Tonnage tax provisions determine the entire chargeable income earned by the tonnage tax vessel including income from an international transaction with associated enterprise. In contrast, transfer pricing provisions apply only to international transactions entered with associated enterprises. It is not possible to segregate what portion of the final taxable tonnage income is relatable to international transactions with associated enterprises and then apply transfer pricing provisions 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. 9 10 . ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the Act. 9. Similar view was also held by Coordinate Bench at Mumbai in the case of Essar Ports Ltd vs. DCIT [2020] 118 taxmann.com 433 (Mumbai Trib.) and the relevant para is extracted herein below: 22. We have given a thoughtful consideration to the issue before us and find substantial force in the aforesaid claim of the assessee. In our considered view, the determination of income/expense having regard to arm's length price as envisaged in Chapter-X would have no bearing on the computation of income liable for taxation in Chapter-XII G of the Act. On a perusal of the tonnage tax scheme, it can safely be gathered that the same contemplates a presumptive basis for computing the taxable income of the qualifying ships. It lays down the mechanism for computation of income of the qualifying ships which is dependent on the tonnage capacity of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of taxation, whereby the taxability of income from qualifying ships is restricted to the framework provided in the TTS. Further, the tonnage tax company is liable to pay taxes even in a case where the financial statements reveal a loss on actual operations. Further, all expenses, deduction, allowances or tax incentives are deemed to be allowed while computing the total income of a company as per TTS. The income thus computed shall be deemed to be the income chargeable to tax under the head 'Profit and gains of business or profession'. Hence, it is clear from the above that actual receipts/revenues earned and expenses incurred are not taken into consideration for the purpose of determining the tonnage income of the company. The entire computation of the tonnage income depends on the tonnage capacity of qualifying ships and number of days it has been held. At this stage, we may contrast the sphere in which the transfer pricing provisions of Chapter-X operate. The transfer pricing provisions envisage computation of income from specified international transactions of receipt or expenditure, of-course with reference to the stated price of such transactions. This is completely in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ire chargeable income earned by the tonnage tax vessel including income from an international transaction with associated enterprise. In contrast, transfer pricing provisions apply only to international transactions entered with associated enterprises. It is not possible to segregate what portion of the final taxable tonnage income is relatable to international transactions with associated enterprises and then apply transfer pricing provisions 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. 10. On perusal of the facts and circumstances of the instant case, as well as the judicial pronouncements extracted above, we are of the considered view that since the assessee has exercised its option under Tonnage Tax Scheme as per the provisions of Chapter XII-G of the Act, the provisions of Chapter-X cannot be ap ..... X X X X Extracts X X X X X X X X Extracts X X X X
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