M/S ESSAR SHIPPING LTD ,MUMBAI vs. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 5(1)(1) , MUMBAI

The assessee has raised various grounds of appeal

Brief facts of the case are that the assessee is a limited company and engaged in fleet operating and chartering and operating of international and coastal voyages through its subsidiaries and further has invested in diverse business like oil field services and logistic services directly as well as through its subsidiaries. The assessee had filed its return of income dated 29.09.2021 declaring total income at Rs. 4,58,480/- and subsequently filed its revised return of income dated 18.11.2021, declaring total income at Rs. 4,58,480/-. The assessee’s case was selected for complete scrutiny on the following issues. a. High Creditors/Liabilities. b. Investments/Advances/Loans. c. Refund Claim. d. Unsecured Loans. e. ICDS Compliance and Adjustment.

Notices u/s. 143(2) of the Act dated 29.06.2021 was issued and served upon the assessee. The ld. AO observed that the assessee has reported international transaction u/s. 92B(2) of the Act in form 3CEB for which the ld. AO made a reference to the Transfer Pricing Officer (‘TPO’ in short) u/s. 92CA(1) of the Act. The ld. TPO vide order dated 14.06.2023 proposed adjustments on the Arm’s Length Price of the international transaction towards interest of lease loan payment for ships taken on Bare Boat Charter cum Demise amounting to Rs. 51,46,215/- and guarantee commission of Rs. 3,95,78,000/-, where the TP adjustment aggregated to Rs. 4,47,24,215/-. The ld. AO then passed the draft assessment order u/s. 144C(1) of the Act, dated 29.09.2023, determining total income at Rs. 1,62,13,55,800/- after making various additions/adjustments. The assessee then filed its objection before the Hon’ble DRP which after duly disposing off the objection of the assessee passed its directions dated 24.06.2024. The ld. AO passed the final assessment order dated 24.07.2024, u/s. 144 r.w.s. 144C(3) r.w.s. 144B of the Act, thereby determining total income at Rs. 17,94,82,695/- after duly giving effect to the Hon’ble DRP’s directions.

Aggrieved the assessee is in appeal before us, challenging the impugned additions made by the ld. AO. interest of lease loan from qualifying assets to its AE viz. M/s. Essar Shipping DMCC.

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 order of the lower authorities.

From the above facts of the case, it is observed that this issue is recurring in nature, where the coordinate benches have held that transfer pricing provisions does 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 (A.Y. 2020-21) M/s. Essar Shipping Ltd. 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 noted that on similar set of facts the coordinate bench of this Tribunal in Van Oord India Private Ltd. vs. ACIT (supra) held as under : “6. We have carefully considered the rival submissions, perused the relevant material, including the orders of the lower authorities as well as the case laws referred at the time of hearing. Notably, the controversy before us primarily revolves around the applicability of transfer pricing provisions to the income that is covered by Chapter XII-G of the Act i.e. Tonnage Tax Scheme. The TTS was introduced in the Finance (No. 2) Act, 2004, with the intention of increasing foreign direct investment in the Indian shipping industry and making it globally competitive. The income of a tonnage tax company depends on the tonnage capacity of the qualifying ships and the number of days for which it has been held. A reading of the provisions of TTS in Chapter XII-G suggest that the TTS is a charging section for the income generated by carrying out business of operating ships. Further, it also prescribes the mechanism for computation of income which is to be brought to tax. Thus, TTS is a presumptive basis 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 (A.Y. 2020-21) M/s. Essar Shipping Ltd. transactions of receipt or expenditure, ofcourse with reference to the stated price of such transactions. This is completely in contrast to Chapter-XII G, where the stated price of 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.

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 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 provisions would be of no relevance. In other words, determination of income/ expense having regard to arm's length price would not alter the computation of income and the taxability of tonnage income of an assessee covered by TTS.

Further, tonnage income is based on the weight of the vessel and not on "arm's length price". Section 92C prescribes methods for computation of arm's length price. None 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.

In this context, the learned Counsel pointed out that a similar situation has been considered by the co-ordinate bench of this Tribunal in the case of Shreyas Shipping Logistics Ltd (supra) which has held as follows:

It has also been brought to our notice that an identical situation arose in assessee’s own case for AY 2013-14 where the Dispute Resolution (A.Y. 2020-21) M/s. Essar Shipping Ltd. Panel(‘DRP’) vide its order dated 18.09.2017 held that transfer pricing regulations do not apply to the assessee to the extent of operations carried out through operating qualifying ships where the income is taxed under TTS.

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 self-contained changing provision as well as 'method of computation of income in the chapter, and, the method of computation of income 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 realisations 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.

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 is a machinery provision to arrive at an arm’s length price of a transaction between associated enterprises.

Considering the decision of coordinate bench of the Tribunal as referred above, the provisions of transfer pricing regulations are not applicable to the assessee to the extent of operation carried by assessee through qualifying ships which is covered by Tonnage (A.Y. 2020-21) M/s. Essar Shipping Ltd. Tax Scheme. Thus, we hold that the grounds of appeal

It is observed that the assessee has not benchmarked the said transaction, where it had extended guarantee and had not charged guarantee commission for the same. The assessee had relied on a catena of decisions and without prejudice claim 0.25% guarantee commission by relying on the Tribunal’s decision in assessee’s case for earlier years. The Hon'ble DRP has held that providing corporate guarantee is an international transaction as per Section 92 of the Act and such guarantee is on the basis of the credit rating of the company giving guarantee which generally considered by banks which lend money to associated enterprises. The borrower generally is benefited out of such corporate guarantee which provides for a lesser rate of interest, where the risks are 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 (A.Y. 2020-21) M/s. Essar Shipping Ltd. 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.

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 relied on the decision of the Hon'ble Jurisdictional Bombay High Court in the case of CIT vs. Everest Kanto Cylinders Ltd. [378 ITR 57, [2015] 277 CTR 511 (Bom.) where rate of 0.5% is determined as Arm’s Length Price of the guarantee commission and 0.25% has been determined in assessee’s case for earlier years. It is pertinent to point out that the rate determined in the case of Everest Kanto Cylinder Ltd. (supra) pertains to A.Y. 2011-12 by adopting the CUP as the most appropriate method for the determination of Arm’s Length Price of the said transaction. As the year under consideration pertains to A.Y. 2020-21, the same cannot be adopted for the reason that in transfer pricing the method of determination of ALP of any international transaction has to be in accordance with the provision of Section 92C(1)(3) of the Act. Pertinently, the assessee has not benchmarked the international transaction on corporate guarantee and the ld. TPO has merely applied the interest rate of banks which is not akin to that corporate guarantee. We would place our reliance on the decision of the Special Bench in the case of Aztec Software & Technology Services Ltd. (supra) which was then affirmed by the Hon'ble Karnataka High Court [2012] 23 taxmann.com 413 (Karnataka), wherein it was held that the ALP has to be determined as per the provisions of Section 92 and 92C and the other rules and regulations in every case of international transaction. In the absence of the same, the lower authorities can be directed to carry out this exercise in (A.Y. 2020-21) M/s. Essar Shipping Ltd. accordance with law. The relevant extract of the said judgment is cited herein under for ease of reference: “133. Having regard to the statutory provisions, particularly the mandate of section 92(1) and 92D read with relevant rules, we hold that it is obligatory on the part of the taxpayer to furnish information relating to controlled international transactions, select a suitable method for determination and furnish ALP of such international transactions carried by it and give basis and supporting authentic evidence of ALP and adjustments made. The Taxpayer has further to cooperate in the determination of the ALP by the tax authorities by furnishing all relevant information. The tax authorities in cases where they are of the opinion that ALP has not been correctly determined by the taxpayer, can substitute their own ALP on the basis of material 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 has to determine ALP itself. Subject to statutory provisions, Appellate authorities can direct lower revenue authorities to carry this exercise in accordance with law. The matter cannot be left hanging in between. ALP of international transaction has to be determined in every case.”

From the above, there is iota of doubt that the ALP of corporate guarantee has to be determined by adopting any one of the prescribed methods and cannot be on an adhoc basis. In view of the same, we deem it fit remand this issue back to the file of the ld. TPO/AO for determination of the ALP of the international transaction of corporate guarantee in accordance with provisions of the Act by adopting most appropriate method prescribed by the Act.

In the result, ground no. 4 raised by the assessee is allowed for statistical purpose.

Ground no. 5 pertains to the addition on interest income from income tax refund of Rs. 1 crore as ‘Income from other sources’ which the assessee claimed to be ‘business income’.

The facts of this ground is that the assessee has earned interest from non-tonnage activities which according to the ld. AO was Rs. 24,90,33,161/- but as per the assessee was only Rs. 1,20,45,629/- as per the P & L account, where assessee is said to have bifurcated the tonnage and non-tonnage activities. During the assessment proceeding, though the assessee contends that it had raised the said discrepancy before the ld. AO, in the draft assessment order, the ld. AO proposed to tax at Rs. 24,90,33,161/-, the said interest income under the head ‘Income from other sources’ and also rejected the assessee’s contentions to treat the same as business income. The Hon'ble DRP restricted the same to Rs. 12.53 crores which includes interest incomes from banks amounting to Rs. 20 lacs, from other Rs. 1 crore income, on liquidation of subsidiary of Rs. 8 lacs and other non-operating income at Rs. 11.25 crores aggregating to Rs. 12.53 crores towards the interest income. The ld. AO in the final assessment order made impugned addition of Rs. 12,53,00,000/- towards the interest income as income from other sources.

The assessee is in appeal before us, challenging the addition of Rs. 1 crore made as ‘Income from other sources’ which the assessee claims to be interest from income tax refund on account of TDS which ought to have taxed under the head business income and not ‘Income from other sources’.

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’.

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’.

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. 2013-14, where the Tribunal had given a categorical finding that the bank interest received on the margin money which was kept in the bank as per the terms of sanction was towards business exigencies and any interest received out of the said margin money was liable to be taxed as business income. The Hon'ble DRP has also proposed the same in assessee’s case during the year under consideration. This has been constantly followed by the Tribunal in A.Y. 2015-16 to 2018-19. The Tribunal as well as the Hon'ble DRP has already held that interest received from bank FDs are to be treated as business income. The Hon'ble DRP has consciously held only that (A.Y. 2020-21) M/s. Essar Shipping Ltd. interest received from bank to be treated as business income and the remaining interest received from income tax refund are consciously excluded from treating the same to be a business income. It is observed that Section 244A of the Act provides that the revenue shall pay simple interest on the refund amount. The interest received out of the same is treated as income under the head ‘Income from other sources’. We do not find any justification in treating the same as business income as the same is paid by the Revenue to the assessee for the delay caused due to refund of excess tax paid by the assessee. The same will not come under the preview of business income. We therefore are inclined to dismiss this ground of appeal