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TMI Blog2025 (5) TMI 1405X X X X Extracts X X X X X X X X Extracts X X X X ..... under the Tonnage Tax scheme. Accordingly, TP additions for Rs. 51,46,215/- being interest on lease loan from qualifying assets being a Ship i.e. MV Maithili and MV Maanika to the AE M/s Essar Shipping DMCC was bad in Law. 2. The Ld. FAO and DRP both grossly erred in not following the binding order of the Hon'ble Supreme Court and High Court quoted before them. 3. The Ld. FAO and DRP both grossly erred in not following the ITAT Mumbai order in the Appellant Company's own case and also failed to appreciate that unless there is an order from the High Court to suspend the operation of the order of the ITAT, the order of ITAT in Appellant Company's case is binding on them. 4. The Ld. FAO under the direction of DRP had erred in law and in fact in proposing a TP adjustment of Rs. 3,95,78,000/- as Corporate Guarantee Commission taking calculated @1.75%. Without Prejudice the Learned FAO/TPO ought to have restricted the Guarantee Commission @ 0.25% following the ITAT order in the Assessee's own case. 5. The Ld. FAO under the direction of DRP erred in assessing the Interest income from income tax refund for Rs. 1,00,00,000/- (arises due to excess of TDS over-assessed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , challenging the impugned additions made by the ld. AO. 6. First ground raised by the assessee pertains to the addition of Rs. 51,46,215/- towards interest of lease loan from qualifying assets to its AE viz. M/s. Essar Shipping DMCC. During the assessment proceeding, the ld. TPO/AO observed that the assessee had taken ships on lease basis from its AE viz. Essar DMCC for which it has paid interest. It is observed that during assessment year 2009-10, the assessee has declared purchase price of Rs. 75 million USD for the ship (MV Maithili) which the ld. TPO had benched marked the purchase price at USD 73.75 million during that year under consideration. It was further observed that the AE has borrowed funds from banks at a interest rate of LIBOR plus 400 basis point for purchase of the ships which was leased out to the assessee and the AE has charged the lease rent on the basis of the principal loan amount and interest payable on EMI basis (based on amortization schedule) at the rate of interest rate paid by the AE to third party bank with a total interest of finance lease paid by the assessee to its AE amounted to Rs. 25,68,82,295/-. The ld. TPO proposed an adjustment on the interes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pugned addition. 9. The learned Authorised Representative ('ld. AR' for short) for the assessee contended that the said transaction pertains to tonnage business of the assessee, where the income was offered under the tonnage tax scheme where the income has to be computed only on the basis of the weight of vessel and number of days it was held per ton rate prescribed u/s. 115VG of the Act, and not on receipts or expenses. The ld. AR further stated that transfer pricing provisions cannot be invoked for disallowing expenditure incurred towards interest on the qualifying ship which does not pertain to the tonnage tax scheme. The ld. AR further contended that in assessee's own case for A.Y. 2013-14, 2016-17 and 2018-19, this issue was decided in favour of the assessee. The ld. AR relied on a catena of decisions in favour of the assessee's contentions. 10. The learned Departmental Representative ('ld. DR' for short) for the revenue on the other hand controverted the said fact and stated that the revenue is in appeal against the order of the Tribunal before the Hon'ble Jurisdictional High Court and that this issue has not attend its finality. The ld. DR relied on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not apply to in assessee's case for the operations carried out through qualifying ships when income arising out of the said activities are liable to be taxed under the tonnage tax scheme. Further, in A.Y. 2011-12, the adjustments were made on the similar grounds in the case of Essar Ports Ltd. in which the assessee got demerged w.e.f. 01.10.2010, where the coordinate bench has categorically held that no adjustments could be made under the TP provisions for transactions carried through qualifying ships which has been covered by the tonnage tax scheme. The relevant extract of the said decision is cited herein under for ease of reference: "10. We have considered the submission of ld. Authorized Representative (AR) of the assessee and ld. Departmental Representative (DR) for the revenue and perused the material available on record. The ld. AR of the assessee submits that the assessee has exercised the option of offering its income to tax on a presumptive basis under the Tonnage Tax Scheme covered under chapter XII-G of the Act. The option was exercised since AY 2005-06 till Ay 2014- 15. This fact is not disputed by ld. DR for the revenue as well as by the lower authorities. We have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the transaction has no relevance to the computation of income of qualifying ships, which is based on the weight of the ship and the 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 secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ness of operating qualifying ships which opt for Tonnage Tax Scheme(TTS).The method of computation of income under the scheme, as provided by the section, stipulates that income has to be assessed in a particular manner. In other words, no expenditure can be allowed or disallowance can be made, while computing the income under TTS. The income of the assessee is computed at affixed rate and all other provisions of the Act are not to be applied, once an assessee opts for the scheme. In short, if the assessee cannot claim any expenditure after opting out of the scheme, then the AO is also barred by making any disallowance for incurring of expenditure. Legislature, in its wisdom, has allowed the assessee for opting for the said scheme and with a specific purpose. Therefore, while computing the income of the assessee u/s. 115VP, the AO has to put on blinkers and assess the income as suggested by the Parliament. There is no scope for tinkering with the provisions of section 115 VP of the Act. He has to follow the simple rule that no deduction is to be allowed or no disallowance is to be made under any of the normal provisions of the Act, once it is found that an assessee is to be assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns of section 115VW of the Act, whereas section115VX determines tonnage. Amalgation is subject matter of section 115VY.Next section i.e. Section 15VZBtakes care of the tonnage tax companies which are found to be a party to any transaction or arrangement that amounts to an abuse of the scheme. Last section, section115VZC,deals with exclusion from TTS. From the above it is clear that chapter XII-G is a complete code in itself and it provides for non applicability of section 28 to 43C of the Act i.e. chapter IV of the Act, when income is to be computed as per the provisions of the said section. Chapter-XII-G, was introduced by the Finance (No.2)Act,2004,with effect from April 1,2005,and it provides for TTS, which is optional. The Notes on Clauses appended to the Finance (No.2) Bill,2004, referring to clause 28 as regards the introduction of section 115VA specifically states that the provision relates to the computation of profits and gains of the shipping business. Tonnage tax was intended to make the industry internationally competitive and also to induce more ships to fly the Indian flag. As the whole of FEFG is covered by the provisions of chapter XII-G of the Act, there is no ju ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 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 charge of income, an aspect which is contrary to the judgment of the Hon'ble Bombay High court in the case of Vodafone Services Pvt.ltd. vs. UOI ( 2015) 53 Taxman.com 286 (Bom), wherein after referring to an earlier judgment dated 10th October, 2014 in the case of same assessee reported in 50 taxmann.com 300 (Bom) interalia, held that chapter X does not contain any charging provision but ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (Supreme Court - (Civil Appeal No. 5869 and 5870 of 2016), where the purpose of the tonnage tax scheme which is a preferential regime of taxation as per CBDT circular dated 05/2005 was to ensure that the Indian Shipping companies sustained the competition based on the vis-à-vis foreign shipping lines by providing easy accessibility, fixed rate and low tax regime on the basis of the recommendation of the Rakesh Mohan committee. The Tribunal following the said decision had given relief to the assessee for the earlier years and the same has been accepted by the Hon'ble DRP. On identical facts, we do not find any justification to deviate from the view taken by the coordinate bench in assessee's own case for earlier years and we therefore deem it fit to allow ground no. 1 to 3 raised by the assessee. 14. Ground no. 4 pertains to the TP adjustment of Rs. 3,95,78,000/- as corporate guarantee commission computed at the rate of 1.75% and without prejudice the assessee claims 0.25% as per the Tribunal order for earlier years in assessee's own case. It is observed that the assessee has provided an assurance for execution of the transaction of transfer of rigs from its group compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assumed by the guarantor. The Hon'ble DRP further held that the assessee acts as an insurer and the guarantee fee amounts to the insurance premium paid to the insurer. The Hon'ble DRP failed to be convinced that the said transaction does not have any finance implication on the assessee for the reason that defaulting by the AE with risk forfeiture of preference shares. The Hon'ble DRP relied on the decision of the coordinate bench in the case of Aztec Software & Technology Services Ltd. v. Assistant Commissioner of Income-tax, Circle 11(1), Bangalore, [2007] 162 Taxman 119 (Bangalore - Trib.) (SB)/[2007] 107 ITD 141 (Bangalore - Trib.) (SB) (12.07.2007), wherein it was held that in the failure on the part of the assessee to benchmark the transaction, the ld. TPO can benchmark the same with the available information at hand. 17. On the above facts of the issue, it is settled preposition of law that the corporate guarantee is to be treated as an international transaction for which Arm's Length Price of corporate guarantee has to be determined by adopting the most appropriate method (MAM) from the prescribed methods as per Section 92C of the Act. The ld. AR though has rel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terial or information furnished by the assessee or collected by them. However, such ALP has to be determined having in mind provisions of sections 92 and 92C and other Rules and regulations. While determining ALP, tax authorities are bound to follow principles of natural justice and be fair and reasonable to the taxpayer. Any material collected to be used against the taxpayer is to be put to tax payer to explain. Having regard to the purpose of the legislation and application of similar enactment world over, it must further be held that adjustments made on account of ALP by tax authorities can be deleted in appeal only if the appellate authorities are satisfied and records a finding that ALP submitted by the assessee is fair and reasonable. Merely by finding faults with the transfer price determined by the revenue authorities (A.O. / TPO), addition on account of "adjustments" cannot be deleted. This is because the mandate of section 92(1) is that in every case of international transaction, income has to be determined having regard to ALP. Therefore, unless ALP furnished by the taxpayer is specifically accepted, the appellate authorities on the basis of material available on record ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 'Income from other sources'. 23. The ld. AR contended that the tax was deducted on the business income by the payer and the same is duly reflected in form 26AS. The ld. AR further stated that tax was also deducted on the interest received by the assessee on bank fixed deposits which were maintained as margin money for obtaining ALC for the business of the assessee. The ld. AR further stated that the order of Hon'ble DRP has categorically stated that the same should be treated as 'business income' and not 'Income from other sources'. 24. The ld. DR on the other hand controverted the said fact and stated that only interest on fixed deposit which was maintained as margin money was proposed to be treated as business income and the balance interest income was to be treated as 'Income from other sources'. 25. On perusal of the rival contentions and the materials available on record. It is observed that the assessee has challenged the interest income of Rs. 1 crore treated as 'Income from other sources' by the ld. AO. The assessee's contentions is that the same is to be treated as business income. The ld. AR had relied on the order of the Tribunal in assessee's case for A.Y. 2013 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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