TMI Blog2020 (1) TMI 1647X X X X Extracts X X X X X X X X Extracts X X X X ..... gly, we are of the considered view that the lower authorities had erred in concluding that the disallowance computed under Sec.14A r.w. Rule 8D was to be added for the purpose of working out the book profit‟ under Sec.115JB - we restore the issue to the file of the A.O who is directed to rework out the book profit‟ of the assessee u/s 115JB in terms of our aforesaid observations. The additional Ground of appeal‟ is allowed in terms of our aforesaid observations. TP adjustment in respect of corporate guarantee as provided by the assessee as a co-guarantor alongwith its holding company - HELD THAT:- ALP of the corporate guarantee commission in the case of the assessee before us can safely be taken at 0.5%. As the assessee is a co-guarantor, therefore, the TP adjustment as regards its share of guarantee commission would work out at 0.25% [ of 0.5%]. TP adjustment on account of Ship management income - HELD THAT:- As regards the ship management services provided by the assessee to ESLL, we find, that the same falls within the realm of the definition of the Incidental activities as envisaged in sub-section (5) of Sec. 115V-I r.w Rule 11R, which encompa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) r.w.s. 144C(13) of the Income-tax Act at Rs.22,61,57,130/- as against Rs.5,88,38,525/- declared in the revised return of income. 3. The Assessing Officer has erred in law and on facts in refusing to admit and act upon the revised return of income filed by the appellant on 30.03.2012 disclosing total income at Rs.5,88,38,525/- as against Rs.10,21,73,631/- declared in the original return filed on 10.10.2010. 4. The Assessing Officer, under the directions of the Dispute Resolution Panel ('DRP'), has erred in law and on facts in considering the corporate guarantee provided by the appellant along with its co-guarantor to Essar Oilfield Services Limited as an international transaction and in applying the transfer pricing provisions therefor. 5. The Assessing Officer, under the directions of the DRP, has erred in law and on facts in making transfer pricing adjustment of Z 12,39,83,501/- which comprise of the following: (a) Rs.10,39,44,092/- for providing corporate guarantee of Rs1,320 crores along with Essar Shipping Logistics Ltd., Cyprus to Essar Oilfield Services, Mauritius; (b) Rs.1,34,21,990/- on account of ship management income; and ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8223; return of income that was filed by the assessee on 10.10.2010. After receiving the order passed by the TPO under Sec. 92CA(3), dated 27.01.2014, the A.O vide his draft assessment order passed under Sec.144C(1) r.w.s 143(3), dated 18.03.2014 inter alia proposed to make the following additions/disallowances: Sr. No. Particulars Amount 1. Transfer Pricing addition under Sec. 92CA(3) Rs.34,50,37,936/- 2. Disallowance under Sec.40A Rs.121,35,34,487/- 4. Aggrieved, the assessee filed objections with the Dispute Resolution Panel-1, Mumbai (for short, DRP‟). Observing, that the A.O had rightly concluded that the revised‟ return of income filed by the assessee was not to be accepted, the DRP upheld his order. However, the DRP finding favour with the claim of the assessee that for computing the disallowance under Sec. 14A only those investments which had yielded exempt income during the year were to be considered, accordingly directed the A.O to recompute the disallowance. Insofar the claim of the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ec. 144C(1) r.w.s 143(3), dated 18.03.2014, the A.O worked out the disallowance under Sec. 14A r.w Rule 8D at Rs.130,98,64,725/-. Accordingly, after considering the suo motto disallowance of Rs. 9,63,30,238/- that was offered by the assessee in its Original‟ return of income, the A.O made a consequential addition/disallowance under Sec.14A r.w.r 8D of Rs. 121,35,34,487/- [Rs. 130,98,64,725/- (-) Rs. 9,63,30,238/-]. Objections were filed by the assessee with the DRP against the disallowance u/s 14A of Rs. 130,98,64,725/- that was proposed by the A.O, vide his draft assessment order passed under Sec. 144C(1) r.w.s 143(3), dated 18.03.2014. We find that the DRP finding favour with the claim of the assessee that for working out the disallowance under Sec. 14A r.w. Rule 8D only those investments were to be considered which had yielded exempt income during the year, thus directed the A.O to recompute the disallowance accordingly. The A.O giving effect to the directions of the DRP, vide his final assessment order passed under Sec.143(3) r.w.s. 144C(13), dated 30.01.2015, restricted the disallowance under Sec.14A to the extent it was offered by the assessee in its Original‟ r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 015]. (v) DCIT Vs. DCM Ltd. [ITA No. 4467/Del/2012 for A.Y. 2009-10, dated 01.09.015]. Accordingly, in terms of our aforesaid observations, we are of the considered view that the disallowance under Sec. 14A in the case of the present assessee was liable to be restricted to the extent of the amount of the exempt dividend income of Rs.53,04,157/- that was earned by the assessee during the year under consideration. 9. On answering the aforesaid issue in affirmative, we shall now traverse to the second aspect i.e. whether is it permissible for the assessee to seek restriction of the disallowance under Sec. 14A at an amount lower than that which was offered on a suo motto basis in its return of income for the year under consideration. As observed by us hereinabove, the assessee had in its Original‟ return of income voluntarily offered a disallowance under Sec.14A of Rs.9,63,30,238/-. On the basis of a revised‟ return of income the assessee had reworked out the disallowance under Sec. 14A at Rs.5,29,95,132/-. However, the A.O being of the view that the revised‟ return of income filed by the assessee was neither voluntary nor on account of discovery of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct to the order of the CIT(A) without restricting the income to the returned income. On a perusal of the facts as were involved in the aforesaid case before the Hon‟ble High Court, we find, that the A.O was of the view that by virtue of the decision of the Hon‟ble Supreme Court in the case of CIT Vs. Shelly Products (2003) 261 ITR 367 (SC) and CBDT Circular No. 549, dated 31.10.1989, while giving effect to the order of the CIT(A) the assessed income of the assessee could not be brought below the returned income. On appeal, the CIT(A) upheld the aforesaid view of the A.O. However, the Tribunal by relying on the judgement of the Hon‟ble High Court Gujarat in the case of Gujarat Gas Company Ltd. Vs. JCIT (2000) 245 ITR 84 (Guj) allowed the appeal of the assessee. On further appeal by the revenue, it was observed by the High Court that while giving the effect to the CIT(A) order in favour of the assessee, the resultant assessed income can go below the returned income. It was observed by the Hon‟ble High Court that the CBDT Circular No. 549, dated 31.10.1989 which contemplated that the assessed income of an assessee cannot go below the returned income was invalid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rule 8D for the purpose of working out the book profit‟ under Sec. 115JB of the Act. Objection raised by the assessee in context of the aforesaid issue was rejected by the DRP. 12. Aggrieved, the assessee has assailed before us the addition of the disallowance worked out by the A.O under Sec. 14A r.w.s Rule 8D for the purpose of computing the book profit‟ under Sec. 115JB. We have given a thoughtful consideration to the contentions advanced by the authorized representatives for both the parties in respect of the aforesaid issue and find that the same is clearly covered by the order of the Special Bench‟ of the ITAT, Delhi Bench H in the case of ACIT, Circle 17(1) New Delhi, Vs. Vireet Investments Pvt. Ltd. (2017) 165 ITD 27 (Del) (SB). In the aforesaid case, we find, that the Tribunal had held that the computation under clause (f) of Explanation 1 to Sec.115JB(2) is to be made without resorting to the computation contemplated under Sec.14A r.w. Rule 8D. Accordingly, we are of the considered view that the lower authorities had erred in concluding that the disallowance computed under Sec.14A r.w. Rule 8D was to be added for the purpose of working out the bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AT, Mumbai in the case of Everest Kento Cylinder Ltd. Vs . ACIT (2015) 167 TTJ 204 (Mum), had held, that corporate guarantee commission charged by the assessee from its AE @ 0.5% was adequate. It was submitted by the ld. A.R that the aforesaid order of the Tribunal had thereafter been approved by the Hon‟ble High Court of Bombay. Also, in order to drive home his aforesaid claim that the determination of ALP of corporate guarantee commission at 3% by the AO/TPO was substantially on the higher side, the ld. A.R had relied on the judgment of the Hon‟ble High Court of Bombay in the case of CIT Vs. Glenmark Pharmaceuticals Ltd. (2017) 398 ITR 439 (Bom), wherein the corporate guarantee commission determined by the Tribunal @ 0.5% was upheld. 15. Per contra, the ld. Departmental Representative (for short D.R‟) relied on the orders of the lower authorities. 16. We have given a thoughtful consideration to the issue pertaining to the TP adjustment as regards the corporate guarantee commission, which had been sustained by the DRP at 3%. As the assessee was a co-guarantor, therefore, the TP adjustment in respect of the corporate guarantee commission was worked out in i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see company had with effect from 30.11.2009 ceased to render crew management services to ESLL ,therefore, the fees for ship management services was scaled down to an amount of USD 2,900 per day. Assessee had applied TNMM method in order to benchmark its aforesaid international transaction. On a reference made to the TPO, an adjustment of Rs.1,34,21,990/- was proposed to be made to the arms length price of the aforesaid international transaction. It was the claim of the assessee, before the TPO, that since it had offered its shipping income based on tonnage tax scheme, therefore, the transfer pricing provisions would not be applicable to the underlying transactions. However, the TPO declined to accept the aforesaid claim of the assessee. Objection filed with the DRP, wherein the assessee had claimed that as it was offering its shipping income under the deeming provisions of the tonnage tax scheme‟ as envisaged in Chapter XII-G of the Act, therefore, the transfer pricing provisions would not be applicable, was rejected by the DRP. Accordingly, the A.O framed the final assessment order in conformity with the directions of the DRP. 18. Aggrieved, the assessee has assailed the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ities. It was submitted by the ld. D.R that as the transfer pricing provisions were separately provided in Chapter X of the Act, therefore, it was incorrect on the part of the counsel for the assessee to claim that the provisions therein envisaged for determining the arm‟s length price of the international transactions in respect of shipping companies whose income was determined under the tonnage taxation scheme‟, would not be applicable. 20. We have heard the authorized representatives for both the parties in context of the aforesaid issue under consideration and have also perused the orders of the lower authorities and the material available on record, as well as the judicial pronouncements relied upon by them. As observed by us hereinabove, the assessee company which is engaged in the business of shipping operations had entered into a ship management agreement‟ with ESLL, Cyprus. As per the agreement‟ the assessee was to provide ship and crew management services to ESLL, Cyprus. As mutually agreed, ESLL was to pay to the assessee annualized management fees of USD 7,000 per day on a fixed fees basis. However, as the assessee company had with effect f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, the taxability of the income from qualifying ships is circumscribed by the framework provided in the tonnage tax scheme. In fact, the income determined as per the provisions of tonnage tax scheme contemplated in Chapter XII-G is to be deemed to be the income chargeable to tax under the head Profits and gains of business or profession‟. As under the tonnage tax scheme, the actual receipts/revenues earned and expenses incurred are not taken into consideration for the purpose of determining the tonnage income of the company, therefore, in our considered view the applicability of the transfer pricing provisions as envisaged in Chapter X of the Act would stand excluded. Our aforesaid view is fortified by the order of the coordinate bench of the Tribunal viz. ITAT, Mumbai Benches J , Mumbai in the case of Van Oord India Pvt. ltd. Vs. ACIT-5(3), Mumbai, [ITA No.7228/Mum/2012, dated 22.05.2019]. In the said case, the Tribunal had observed that the determination of income/expense having regard to arm's length price as envisaged in Chapter-X would have no relevance for the purpose of computing the income liable for tax under Chapter-XII G. It was observed by the Tribunal, as u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e number of days it has been held. In other words, the determination of income/ expense having regard to arm's length price as envisaged in Chapter-X has no relevance, as it would not affect the computation of income liable for taxation in Chapter-XII G. 7. Section 115VA of the Act starts with 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sub-section (1) of Sec. 115V-1, the relevant shipping income of tonnage tax company for the purpose of Chapter XII-G shall inter alia include the profits from the Incidental activities as referred to in sub-section (5) of Sec. 115V-1. On the basis of our aforesaid observations, we are of the considered view that as the ship management services provided by the assessee to its AE, viz. ESLL forms part of its presumptive income determined as per the provisions of tonnage tax scheme contemplated in Chapter XII-G, therefore, no addition by way of any adjustment to the value of the said transaction could have been carried out by the A.O/TPO by resorting to the transfer pricing provisions contemplated in Chapter X of the Act. Accordingly, in terms of our aforesaid observations, we vacate the addition of Rs. 1,34,21,990/- made by the A.O/TPO. The Ground of appeal No. 5(b) is allowed. 24. We shall now advert to the TP adjustment of Rs. 66,17,419/- made by the A.O/TPO on account of interest on ship acquisition on BBCD basis (hire purchase basis). In the period relevant to A.Y. 2009-10 the assessee had acquired two ships viz. (i). MV Malathi ; and (ii). MV Malvika , from its AE i.e M/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ika in the immediately preceding year viz. A.Y 2009-10, and had not assailed the same any further in appeal, therefore, it could not be permitted to take an inconsistent stand during the year under consideration. 27. We have given a thoughtful consideration to the issue before us, and as observed by us at length hereinabove, are of the considered view that 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. In sum and substance, we are of a strong conviction that now when under the tonnage tax scheme, the actual receipts/revenues earned and expenses incurred are not taken into consideration for the purpose of determining the tonnage income of the eligible company, therefore, the applicability of the transfer pricing provisions as envisaged in Chapter X of the Act would clearly stand excluded. Our aforesaid view is fortified by the order of the coordinate bench of the Tribunal viz. ITAT, Mumbai Benches J , Mumbai in the case of Van Oord India Pvt. ltd. Vs. ACIT-5(3), Mumbai, [ITA No.7228/Mum/2012, dated 22.05.2019]. On the basis ..... X X X X Extracts X X X X X X X X Extracts X X X X
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