DEPUTY CIT-5(1)(1), MUMBAI, MUMBAI vs. M/S ESSAR SHIPPING LIMITED , MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL “E” BENCH, MUMBAI BEFORE SHRI AMIT SHUKLA, JM, & SHRI M BALAGANESH, AM आयकरअपीलसं./ I.T.A. No. 821/Mum/2022 (निर्धारणवर्ा / Assessment Year: 2015-16) M/s Essar Shipping Dy. CIT-Circle – 5(3)(1), Limited R. No. 568, Aayakar बिधम/ Essar House, 11, K K Bhavan, M. K. Road, Vs. Marg, Mahalaxmi, Mumbai-400 020 Mumbai-400 034 स्थायीलेखासं./जीआइआरसं./ PAN No. AACCE3707D (अपीलाथी/Appellant) (प्रत्यथी / Respondent) : अपीलाथीकीओरसे/ Appellant by : Shri Prakash R. Mane, Ld. DR प्रत्यथीकीओरसे/Respondent by : Shri Manoj Patwari/ Shri Rishav Patwari, Ld. ARs सुनवाईकीतारीख/ : 18.08.2022 Date of Hearing घोषणाकीतारीख / : 14.11.2022 Date of Pronouncement आदेश / O R D E R Per Amit Shukla, Judicial Member: The aforesaid appeal has been filed by the revenue against impugned order dated 28.02.2022, passed by Ld. CIT (Appeals)-56, Mumbai for the quantum of assessment passed u/s 143(3) r.w.s.

2 I.T.A. No. 821/Mum/2022 M/s Essar Shipping Limited 144C for AY 2015-16. The revenue has taken following grounds of appeal:-

1 The Ld. CIT(A) has vacated the adjustment of Rs.6,93,533/- made on account of interest on ship acquisition on BBCD basis (hire purchase basis) on the grounds that this income forms part of assessee's presumptive income determined as per the provisions of tonnage tax scheme contemplated in Section 115V under Chapter XII-G of the Act and the Arm's Length Pricing adjustment made as per Section 92 to Section 92F under Chapter X of the Act has no application in this case. On this issue; 1.1 "Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) is justified in not appreciating that Section 115VA starts with "Notwithstanding any to the contrary contained in section 28 to section 43...."; therefore it overrides Section 28 to Section 43 only and therefore the Arm's Length Pricing adjustment made under provisions of Section 92 to Section 92F under Chapter X is fully applicable.". 1.2 "Whether the Ld. CIT(A) is right in law in holding that the Arm's Length Pricing adjustment made under Chapter X has no application in cases where assessee has computed tax on presumptive basis under Tonnage Tax Scheme as per Chapter XII- G of the Act even when CBDT Circular No 05/2005 dated 15.07.2005 explicitly confirms that principles pertaining to arm's length price will be applicable to transactions between tonnage tax

3 I.T.A. No. 821/Mum/2022 M/s Essar Shipping Limited companies and unconnected (as well as connected) non-tonnage and tonnage tax entities" 1.3 "Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in ignoring the intent of the legislature evident in the fact that Chapter XII-G has specific sections to address exclusions i.e. Sections 115VL & 115VM and does not have any section that specifically provides for exclusion / non- applicability of Transfer Pricing Provisions" 1.4 "Whether, on facts and circumstances of the case and in law, the Ld. CIT(A) was justified in deleting the adjustment of Rs.6,93,533/- made on account of interest on ship acquisition on BBCD basis (hire purchase basis) by relying on Hon'ble ITAT's decision in assessee's own case, without deciding on the merits of benchmarking of the transaction and without appreciating that the judgment relied upon by the honourable ITAT has been contested on merits by the Department & is pending for adjudication before the Hon'ble Bombay High Court?" 2 The Ld. CIT(A) has restricted the transfer pricing adjustment of Rs. 1,46,00,000/- that was made at the rate of 2.0% to 0.25%, in respect of negative lien transaction which was treated by the TPO as a corporate guarantee transaction. On this issue; 2.1 "Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) is right in holding that the fee for the negative lien issued by the instant assessee, which is in the nature of corporate guarantee, should be charged at 0.25%, without realizing

4 I.T.A. No. 821/Mum/2022 M/s Essar Shipping Limited the fact that the transfer pricing study is highly facts-based and it differs from case to case and that all the factors in Rule 10B have to be considered for every case and every year independently and that a rate decided in a different case for different set of facts and for different year cannot be adopted as such to the instant assessee, which would be violative of the specific provisions in Rule 10B?" 2.2 "Whether on the facts and circumstances of the case and law, the Ld. CIT(A) is right in arriving at the 0.25% rate of fee for the negative lien issued by the instant assessee, which is in the nature of corporate guarantee, without providing any basis, which is in violation of provisions of Rule 10B of IT Rules as credit ratings and the interest rate vary every year?" 2.3 "Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) is right in directing to restrict the TP adjustment of fee for the negative lien issued by the instant assessee, which is in the nature of corporate guarantee, to 0.5% charged by the AO without discussing the facts of the case issue on the merits of the case?" 2.4 "Whether on the facts and circumstances of the case and in law, the Ld. in arriving at the ad hoc rate of 0.25%, without adopting any of the methods prescribed in Section 92C which is violation of law? " 2.5 "Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) is right in not recognizing the facts of the case

5 I.T.A. No. 821/Mum/2022 M/s Essar Shipping Limited that the assessee has given lien, which is in the nature of a corporate guarantee, for its AE, thereby exposing i to a 'lending business' risk, foreign exchange rate risk, country specific risk as wd the 'single customer' risk without charging any fee for such guarantee which assessee would have done, had it stood guarantee to any third party in uncor, conditions as in section 92F(ii)?" 2.6 "Whether, on facts and circumstances of the case and in law, the Ld. CIT(A) was justified in deleting the adjustment of Rs.1,46,00,000/- by relying on Hon'ble ITATs decision in assessee's own case, without deciding on the merits of benchmarking of the transaction and without appreciating that the judgment relied upon by the honourable IT AT has been contested on merits by the Department & is pending for adjudication before the Hon'ble Bombay High Court?" 3.1 "Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) was justified in allowing the ground raised by assessee on allowability of interest expenditure claimed u/s.36(1)(iii) of the Income-tax Act, 1961. 3.2 "Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) was right in holding that the income received in the nature of interest out of inter corporate deposits advanced to subsidiary companies is in the nature of business income and not from other sources". 3.3 Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) failed to appreciate the fact that loan

6 I.T.A. No. 821/Mum/2022 M/s Essar Shipping Limited obtained by the assessee company from L/C was used for advancing /CD to subsidiary which is for the purpose of earning interest income which is taxed under the head other sources. 3.4 "Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) was justified in allowing the disallowance made on account of interest was at Rs.82,21,73,747/- and Rs.1,98,73,6967- totalling to Rs.83,70,43,071/- which was claimed under section 36(1)(iii) as allowable expenditure being the case that interest expenditure was incurred on loan availed from the L/C by the assessee company for the oil drilling business. 4 "Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in allowing the interest expenditure of Rs.163,63,09,157/- as business expenditure u/s.36(1)(iii) of the I. T. Act, 1961". 5 "Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in directing the AO to re-compute the disallowance of Rs.28,78,54,258/- from common interest expenditure by allocating it in the ratio of assets employed between the tonnage and non-tonnage activities instead of in the ratio of turnover of tonnage and non-tonnage activities. 6.1 "Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in allowing the set off of foreign dividend income of Rs.10,98,56,941/- against the current year's loss". 6.2 "Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in not appreciating the legal position that

7 I.T.A. No. 821/Mum/2022 M/s Essar Shipping Limited the foreign dividend income is taxable u/s. 115BBD and no adjustment against current year's loss is allowable in view of the subsection (2) of the section 115BBD". 6.3 "Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in allowing the set off of foreign dividend income of Rs.10,98,56,941/- against the current year's loss without appreciating the fact that the CIT(A) is not empowered to admit any new claim of the assessee not claimed earlier in original return or revised return". 2. At the outset, Ld. Counsel for the assessee submitted that except for the issue raised in Ground no. 6, all the issues now stands covered by the decision of ITAT in the case of assessee in ITA No. 1471/Mum/2018 dated 16.03.2020 for AY 2011-12 and ITA No. 7371/Mum/2017 dated 06.03.2020 for Ay 2013-14. He has also filed a chart giving ground-wise details and the paragraphs from which the issues are covered from the decision of the Tribunal.

8 I.T.A. No. 821/Mum/2022 M/s Essar Shipping Limited 4. The facts in brief are that, assessee is engaged in the business of operation of ships and other shipping related activities. It has shown revenue from fleet operations and other operating income from supervision and management fees. In so far as shipping income is concerned, assessee has been offering its income as per ‘Tonnage Taxation Scheme’ under chapter XII-G of the Act. The assessee has computed the income under tonnage taxation scheme prescribed u/s 115VE of the Act, according to which, profits of tonnage taxation is computed separately from profit and gains of any other business. The formal calculating tonnage income has been prescribed and is dependent on presumptive rate of tonnage income and number of its operations. Thus, when the assessee has opted for tonnage taxation scheme, the income of the assessee has been computed as per the provision prescribed in Chapter XII-G. Apart from shipping business, the activity of the assessee company also comprises of logistics and oilfield business. The oilfield business is carried on by its subsidiaries.

9 I.T.A. No. 821/Mum/2022 M/s Essar Shipping Limited interest on account of Bare Boat Charter cum Demise (BBCD), the brief facts are that, assessee had entered into an agreement dated 22.07.2008 for acquiring a ship named as, ‘MV Malathi’ on BBCD basis from Essar Shipping and Logistics Ltd. The assessee was required to pay the said company a partial principal amount in the form of 120 equal monthly installments starting from October, 2008 to September 2018 with an interest rate of 0.5% to 6% per annum and a bullet payment of remaining amount at the end of the period. During the year, Assessee had paid Rs. 4,16,11,970/- and has paid reduced interest rate on the balance amount to the said company for lease loan. The TPO noted that assessee had shown purchase price of ship at 75 Million USD, whereas the TPO had benchmarked the same in AY 2009-10 at 73.75 Million USD. The interest disallowance was being made by the TPO every year. The disallowance of interest for the year was computed at Rs. 6,93,533/-. Accordingly, the adjustment of the said amount has been made.

10 I.T.A. No. 821/Mum/2022 M/s Essar Shipping Limited 7. After considering the findings given in the impugned orders as well as ITAT orders placed before us, we find that assessee has offered income for its shipping operations under Tonnage Taxation Scheme. Once the actual receipts /revenues earned and expenses incurred are not taken into consideration for the purpose of determining tonnage income of eligible company, therefore it has been held by the Tribunal in the earlier years that transfer pricing provision as given in Chapter X would be excluded. The relevant observation of the Tribunal reads as under:-

11 I.T.A. No. 821/Mum/2022 M/s Essar Shipping Limited 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

12 I.T.A. No. 821/Mum/2022 M/s Essar Shipping Limited 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 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

13 I.T.A. No. 821/Mum/2022 M/s Essar Shipping Limited 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 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.

14 I.T.A. No. 821/Mum/2022 M/s Essar Shipping Limited 8. 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. 9. In this context, the learned Counsel pointed out that a similar situation has been considered by the co-ordinate bench

15 I.T.A. No. 821/Mum/2022 M/s Essar Shipping Limited of this Tribunal in the case of Shreyas Shipping Logistics Ltd (supra) which has held as follows: “5……. Now we would like to discuss the TTS. Section 115VA of the Act is unique in the sense that it deals with the computation of income from the business 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 assessed as per the provisions of chapter XIIG of the

16 I.T.A. No. 821/Mum/2022 M/s Essar Shipping Limited Act. Section 14A is not an exception to the TTS. Rather the scheme is an exception to the normal computation provisions, including the section 14A.Therefore,it cannot be said that when the income of the assessee from the business of operating ships was computed under the special provisions of Chapter XII-G, expenditure other than the expenditure incurred for the purpose of the business had been allowed. Considering the twin factors i.e. not claiming any expenditure against the nonshipping business income by the assessee and opting for TTS for shipping business, we are of the opinion that the order of the FAA does not suffer from any legal or factual infirmity. Therefore, confirming his order, we decide the effective ground of appeal against the AO.” 10. On yet another occasion, our co-ordinate bench in the case of Tag Off shore(supra) was concerned with a situation where the Revenue sought to make an addition by invoking the provisions of Section 14A of the Act in case of a tonnage tax company, whose income was computed under the special provisions of Chapter XII-G. The Tribunal set aside the addition observing thus' No disallowance under section 14A is warranted in this case when the assessee has admittedly not claimed any expenditure, towards taxable income i.e. it has not claimed any deduction of expenditure debited in the Profit & Loss account while computing the total income.

17 I.T.A. No. 821/Mum/2022 M/s Essar Shipping Limited 11. Further, the co-ordinate bench of this Tribunal in the case of CGU Logistics Ltd (supra) while dealing on the issue under TTS has held as under: “10.a.We find that section 115VP deals method and time of opting for TTS, Section 115VQ is about period for which tonnage tax option remains in force. Renewal of TTS is subject matter of section115VR.Circumstanes and conditions where in tonnage tax scheme cannot be opted are the subject matter of Section 115VS.As per the provisions of section 115VT every Asses see has to transfer profits to tonnage tax reserve account at a fix rate and has to utilise it for specific purpose, once he opts of TTS. Companies opting for TTS have to comply with minimum training requirement as required by Section 115VU.Limit for charter in of tonnage has been determined by section 115VV.Maintenance and audit of accounts of the TTS companies is governed by the provisions 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

18 I.T.A. No. 821/Mum/2022 M/s Essar Shipping Limited 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 XIIG of the Act, there is no justification in computing it under a different chapter or section.” 12. Before parting, we also think it apposite to refer to the judgment rendered by the Hon'ble Supreme Court in the case of Trans Asian Shipping Services Pvt Ltd (supra). In the said case, the Supreme Court observed that “…….It may be stated in brief that in view of the stiff competition faced by the Indian shipping companies vis-a-vis foreign shipping lines, and in order to ensure an easily accessible, fixed rate, low tax regime for shipping companies, the Rakesh Mohan Committee in its report (of January, 2002) recommended the introduction of the TTS in India, which was similar to, and adopted some of the best global practices prevalent. The whole purpose of introduction of the Scheme was to make the Indian shipping

19 I.T.A. No. 821/Mum/2022 M/s Essar Shipping Limited industry more competitive in the global space by rationalising its tax cost…...” The Hon‟ble Supreme Court further observed that, we would also like to refer to Circular No. 05/2005 dated 15.07.2005 explaining the need and essence of the introduction of these provisions which was issued contemporaneously by the Central Board of Direct Taxes (CBDT). The Circular clarifies that the Scheme is a "preferential regime of taxation". It also clarifies that "charging provision is under Section 115VA read with Section 115VF and Section 115VG….." 13. 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 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. 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 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

20 I.T.A. No. 821/Mum/2022 M/s Essar Shipping Limited 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. 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 is a machinery provision to arrive at an arm‟s length price of a transaction between associated enterprises.

21 I.T.A. No. 821/Mum/2022 M/s Essar Shipping Limited 16. In the final analysis, it is seen that in the instant case, the provisions of chapter X have been invoked to alter an expenditure, namely the mobilisation and demobilisation charges paid for a qualifying ship, an item which has no bearing on the income as computed under Chapter XIIG and accordingly the provisions of Chapter X have no application in computing the income of the assessee chargeable to tax as per Chapter XII-G of the Act. 17. In view of the aforesaid discussion, in our considered view, the 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.” 11. 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 Tax Scheme. Thus, we hold that the grounds of appeal No. 2 to 6 &9 are covered in favour of the assessee and against the revenue. In the result the ground No.2 to 6 & 9 are allowed. 8. As the facts and circumstances during the year under consideation are same, respectfully following the order of the Tribunal in assessee‟s own case, we do not find any justification for the addition made by the A.O. in respect of interest on purchase price of two ships. Accordingly, we direct the A.O. to delete the same.

22 I.T.A. No. 821/Mum/2022 M/s Essar Shipping Limited 8. Thus, following the aforesaid order of the Tribunal, this issue is decided in favour of the assessee and the additions made by the AO /TPO in respect of interest on purchase price of the ships is deleted. Consequently, the Ground no. 1 to 1.4 is dismissed.

23 I.T.A. No. 821/Mum/2022 M/s Essar Shipping Limited its profits, income, losses or assets either present, future or contingent or hypothetical on account of failure of the AE to fulfill its obligation to lenders. The TPO held that it is in the nature of corporate guarantee and it is an international transaction in view of Explanation (1)(c) of Sec 92B. After detail discussion and relying on certain judgments, TPO made adjustment of 2% as corporate guarantee.

24 I.T.A. No. 821/Mum/2022 M/s Essar Shipping Limited been contended that the negative lien did not entail financial commitments on the part of the assessee rather a restriction was imposed which obliged the assessee not to deal in certain specified securities during the tenure of loan. The assessee was required to obtain prior permission of the lender to deal in those shares. The assessee did not charge any fees for the same inter-alia on the ground that the transaction was not an international transaction within the meaning of Sec.92B. The TPO has however equated the said transaction with that of guarantee given to bank. In case of guarantee there is a possibility of a liability arising to the guarantor on account of providing guarantee. Ld. Counsel before us submitted that in the present case, even if EGL defaults in payment of loan, there will be no liability on assessee for paying any amount since assessee is not a guarantor but just gave an undertaking. Hence, there would never be any liability on assessee even in case of default.

25 I.T.A. No. 821/Mum/2022 M/s Essar Shipping Limited 14. We have considered the rival contentions and carefully gone through the orders of the authorities below and found from the record that the TPO/AO has made adjustment for providing letter of negative lien by assessee to the bank. The TPO has equated the said transaction with that of guarantee given to bank. In case of guarantee there is a possibility of a liability arising to the guarantor on account of providing guarantee. However, in the present case, even if EGL defaults in payment of loan, there will be no liability on assessee for paying any amount since assessee is not a guarantor. Hence, there would never be any liability on assessee even in case of default. However, keeping in view the nature of negative lien letter given by the assessee and the totality of facts and circumstances of the case and the terms of letter of negative lien given by the assessee, we direct the A.O. to make adjustment by applying 0.25% to the said transaction instead of 0.5% applied by the AO. We direct accordingly. 14. Thus following the aforesaid order of the Tribunal, we direct the AO to make adjustment by applying 0.25% to the said transaction. Accordingly, Ground no. 2 to 2.6 is dismissed.

26 I.T.A. No. 821/Mum/2022 M/s Essar Shipping Limited 16. Assessee had received income from non tonnage activity which has been shown as business income by the assessee and AO has treated as income from other sources. The interest earned by the assessee from the banks amounting to Rs. 1.99 crores and interest earned on ICDs amounting to Rs. 83.71 crores. Apart from that, assessee has also earned interest income from the income tax refund amounting to Rs. 3.10 crores. So far as interest on ICDs are concerned, the same was received from Essar Oilfield Services India Ltd. Ld. AO held that assessee has not substantiated that borrowed funds were utilized for giving ICDs to wholly owned subsidiary company so to prove the nexus between the interest earned and paid in order to make it eligible for claim of expenses u/s 57 of the Act. Accordingly, he taxed the entire interest income of Rs. 88,79,64,276/- under the head income from other sources.

27 I.T.A. No. 821/Mum/2022 M/s Essar Shipping Limited not pressed by the assessee on the ground that it is taxable under income from other sources.

28 I.T.A. No. 821/Mum/2022 M/s Essar Shipping Limited been stated that the facts and circumstances are identical to the preceding years, wherein it has been held as business income by Hon'ble ITAT. The break up of interest income is as under: -

(i) Interest from ICDs to wholly owned subsidiaries which undertake Oil Drilling for assessee - INR 82,23,73,747/-

(ii) Interest from BID deposits with ESIL for getting the shipping business under contract - INR 1,46,69,324/-

(iii) Interest from banks - INR 1,98,73,696/-

(iv) Interest on IT refund -INR 3,10,47,500/-

29 I.T.A. No. 821/Mum/2022 M/s Essar Shipping Limited objection of the assessee. The assessee was carrying out business of drilling oil rigs through its subsidiary for this purpose the assessee borrowed money and advanced the same as ICDs to its subsidiary to carry out the drilling business. Thus, the business so carried out by the subsidiary was as per the main objects of the assessee company. The assessee had not given ICD to its subsidiary for the purpose of earning interest income. Accordingly, the income on such ICD has to be treated as business income only, since it has been earned in the course of the business of the assessee and forms part of the business of the company. 29. From the record, we found that during the previous year relevant to assessment year under consideration, the assessee has earned interest income from ICDs of Rs. 60.16 crores and from banks of Rs. 1.81 crores. The break up of the interest income is as under:- Sr. No. Name Amount of interest Remarks 1. Essar oilfield 53,97,05,043 This company is step down Services India Ltd. subsidiary of assessee 2. Essar Steel India 5,57,23,697 This company is group Ltd. company of assessee. 3. Essar Oilfield 53,45,802/- This company is wholly Services ltd owned subsidiary of Mauritius assessee 4. Energy 7,80,763/- This company is wholly Transportation owned subsidiary of assessee International Ltd. 5. Interest from 1,81,44,909 Interest on margin money banks given to bank The money advanced to companies at Sr. No. 1 to 4 are group/ subsidiary companies and the money has been given for

30 I.T.A. No. 821/Mum/2022 M/s Essar Shipping Limited business purpose of assessee. The A.O. has not brought any material on record to suggest that the assessee had given intercorporate deposit to subsidiaries for earning interest income. It is also not the case of AO that the assessee had given its surplus funds to subsidiary for earning interest income. Thus, the income on ICD is to be assessed under the head „business income.‟ Similar view has been taken by the Coordinate Bench of the ITAT, Mumbai in the case of Tolani Private Limited in ITA No. 5562/Mum/2013, order dated 04/01/2018 wherein the assessee was engaged in operation of ships had advanced loan/ICD to its subsidiary for acquiring ship, it was held that even on the basis of commercial expediency, the assessee was bound to assist its subsidiary, the interest income earned on such loans/ICD is liable to be assessed as income under the head “business income” and not under the head “income from other sources”. 30. With regard to bank interest income amounting to Rs. 1,81,44,909/-, the same has been received on margin money which the assessee was required to keep with banks as per terms of sanction, hence the same is also for purpose of business. The money so kept with the bank as margin money was out of business compulsion and not as per the sweet will of the assessee, therefore, the interest earned on such margin money is also liable to be taxed as business income.

31 I.T.A. No. 821/Mum/2022 M/s Essar Shipping Limited 20. Thus, following the aforesaid order of the Tribunal, we hold that interest on ICDs received from subsidiary company is to be assessed under the head business income and not income from other sources. Accordingly, the order of Ld. CIT(A) is confirmed and this grounds raised by the revenue are dismissed.

32 I.T.A. No. 821/Mum/2022 M/s Essar Shipping Limited the assessee company was allowable as business expenditure. The company borrowed money in the form of FCCB and invested it in wholly owned subsidiary M/s Essar Oilfield Services Ltd, Mauritius (EOSL). Necessary details of outward remittance were submitted. It was also submitted that interest expenditure of Rs 48.62 crores on borrowings from LIC was directly allowable against interest income from ICDs. In conclusion, it was stated that the assessee utilized money for giving ICDs for investing in wholly owned subsidiary which was for commercial expediency only and therefore, allowable u/s 36(1)(iii) of the Act. The AO did not accept the submission and held that borrowed funds were not used for the purpose of business. He further observed that, if it is presumed that interest relates to shipping business, then it needs to be adjusted against income from tonnage scheme. Interest of Rs 81.21 crores has been incurred on borrowings made for making investment in subsidiary companies with long term perspective. AO held that income from such investments whenever realized shall be taxed under the head capital gain and thus interest expenses incurred are not for business purposes. As regards, interest of Rs 81.45 crores utilized for ICDs given to wholly owned subsidiary, it was noted by the AO

33 I.T.A. No. 821/Mum/2022 M/s Essar Shipping Limited that interest income of Rs 88.79 crores received on ICDs from the subsidiary has been held taxable as income from other sources and as such no interest expense can be claimed under provisions of the Act. The AO further disallowed claim of interest of Rs 96,62,141/- on aircraft taken on lease, holding that nexus between the expenses claimed with the receipt of non tonnage activity has not been explained. The AO further noted that the principle of res judicata is not applicable to income tax proceedings and proceeded to disallow interest expenditure of Rs 1,63,63,09,157/-.

Sr. Particulars Amount Rupees Utilization of Loan Amount No. i. Interest paid to Yes 17,38,73,372/- Amount borrowed during the Bank A.Y 2012-13 only for Investment in Wholly Owned subsidiary Essar Oilfield Services Limited Mauritius ii. Interest paid on 48,62,15,600/- Amount borrowed From LIC in NCD of LIC A.Y 2010-11 was utilized for ICD given to Subsidiary for

34 I.T.A. No. 821/Mum/2022 M/s Essar Shipping Limited carrying out oilfield justness. The income from ICD has been offered, as business income under non-tonnage activity. iii. Interest on FCCB 63,82,59,630/- Amount borrowed in AY 2011- 12 and used for investment in preference shares in wholly owned subsidiary company for carrying out oilfield business Essar Oilfield Services Limited Mauritius. iv. Interest on Aircraft 96,62,141/- Income earned from operation taken on Lease of Aircraft which has been offered under non tonnage income. v. Interest on Loan 29,26,73,415/- Amount borrowed during the from SREI year and used for giving inter Infrastructure & Corporate Deposits (ICD) to Finance Ltd subsidiaries in AY 2014-15. vi Interest on Loan 3,56,24,999/- Amount used for giving inter from India Growth Corporate Deposits (ICD) to Opportunities Fund subsidiaries in AY 2014-15 Total 1,63,63,09,157/-

35 I.T.A. No. 821/Mum/2022 M/s Essar Shipping Limited drilling business through its subsidiaries. The Tribunal has discussed this issue in the following manner:-

36 I.T.A. No. 821/Mum/2022 M/s Essar Shipping Limited

b) CIT vs. Colgate Palmolive India Limited [(370 ITR 728) (Bom)] c) CIT v. Investa Industrial Corpn. Ltd. [(119 FUR 380) (Bom.)] d) CIT v. RPG Transmission Ltd. [359 ITR 673 (Mad)] Raptakos Brett & Co. Ltd vs. PCIT. (ITA No. 2251/Mu e) m/2015) (Mumbai Tribunal) 35. In all the above cases, it has been held that if the investment is made in subsidiary for the purpose of business, the loss or expenditure incurred by assessee would be allowable as business expenditure. With respect to interest on aircraft taken on lease, we observe that assessee had offered income earned from operation of aircraft as business income, the interest paid for aircraft taken on lease is essentially allowable as business expense u/s.36(1)(iii) of the IT Act. 36. We also observe that even otherwise the interest expenditure incurred on the loans which are given to its subsidiaries as ICD on which interest was received by the assessee, such interest expenditure is eligible to be allowed U/s 57(iii) of the Act while computing net interest income, our this observation is without prejudice to our above observation that interest on loan is eligible for deduction U/s 36(1)(iii) of the Act. 25. Thus, following the aforesaid order of the Tribunal, we hold that interest expenditure is allowable as business expenditure u/s

37 I.T.A. No. 821/Mum/2022 M/s Essar Shipping Limited 36(i)(iii). Consequently, this ground raised by the revenue is dismissed.

38 I.T.A. No. 821/Mum/2022 M/s Essar Shipping Limited 28. After considering the findings given in the impugned orders as well as ITAT orders placed before us, we find that Tribunal has discussed this issue in the following manner:-

39 I.T.A. No. 821/Mum/2022 M/s Essar Shipping Limited 29. Thus, following the aforesaid order of the Tribunal, the order of Ld. CIT (A) is confirmed and this ground raised by the revenue is dismissed.

"14. The Learned AO failed to appreciate that provision of a set of and carry forward of losses under the provision of income tax Act 1961 are non-discretionary, accordingly the Foreign Dividend income earned by the assessee for Rs. 10,98,56,941/- out to have adjusted against the current year's business loss, if any, irrespective of the fact whether or not the assessee company in the Return of Income have claimed such set-off. 32. Ld. CIT (A) accepted the assessee’s contention holding that it is a purely a legal ground and all the facts for adjudicating this

40 I.T.A. No. 821/Mum/2022 M/s Essar Shipping Limited ground is on record. He then, after incorporating the relevant provision of section 115BBD, followed the decision of ITAT in the case of Tata Motors Ltd. vrs. DCIT reported in (2020) 184 ITD 680, to give set-off from the total income.

41 I.T.A. No. 821/Mum/2022 M/s Essar Shipping Limited 34. It is an undisputed fact that assessee had declared loss of Rs. 103,44,94,701/- in the return of income. It has also shown foreign dividend income of Rs. 10,98,56,941/- u/s 115BBD, which relates to taxing of dividend income received from specified foreign companies at a lower rate of 15%. Section 115BBD reads as under:-

"115BBD. (1) Where the total income of an assesses, being an Indian company, includes any income by way of dividends declared, distributed or paid by a specified foreign company, the income-tax payable shall be the aggregate of— (a) the amount of income-tax calculated on the income by way of such dividends, at the rate of fifteen per cent; and (b) the amount of income-tax with which the assesses, would have been chargeable had its total income been reduced by the aforesaid income by way of dividends. (2) Notwithstanding anything contained in this Act, no deduction in respect of any expenditure or allowance, shall be allowed to the assessee under any provision of this Act in computing its income by way of dividends referred to in sub- section (1). (3) In this section,— (i) "dividends" shall have the same meaning as is given to "dividend" in clause (22) of section 2 but shall not include sub clause (e) thereof;

42 I.T.A. No. 821/Mum/2022 M/s Essar Shipping Limited (ii) "specified foreign company" means a foreign company in which the Indian company holds twenty-six per cent or more in nominal value of the equity share capital of the company." 35. The above section clearly provides that where the ‘total income’ of the assessee includes income by way of dividend declared, distributed or paid by a specified foreign company, then such dividend income shall be subject to tax at 15% (plus applicable surcharge, and cess) and balance part of the total income, that is, as reduced by foreign dividend income would be subjected to tax at the prevailing rate of taxes.

“Total income" means the total amount of income referred to in section 5, computed in the manner laid down in this Act” Thus, the total income encompasses income of the assessee which is received or deemed to be received, accrued or arises or is deemed to accrue or arise or accrues outside India as provided in section 5 of the Act. The total income is required to be computed in the manner laid down in the Act and it is to be computed independently, as per the provisions guiding the same as per

43 I.T.A. No. 821/Mum/2022 M/s Essar Shipping Limited Chapter IV of the Act. The set off and carry forward of losses are required to be computed as provided under Chapter VI of the Act before setting off any deductions from the total income as provided under Chapter VIA of the Act.

44 I.T.A. No. 821/Mum/2022 M/s Essar Shipping Limited provision of this Act in computing its income by way of foreign dividend. This inter-alia means that Legislature has provided lower rate of tax @ 15% on foreign dividend and therefore, no deduction towards in respect of any expenditure will be allowed from that income. However, nowhere there is any restriction or curb provided in sub section (2) that foreign dividend income cannot be set off against the current year loss while computing the total income. As stated above, in the total income, the assessee has made computation for various streams of income separately. Out of the said total income, if there is any foreign dividend income, the same shall be taken into account while computing the total income and if there is a loss, then the same shall be set off in accordance with section 71 of the Act.

45 I.T.A. No. 821/Mum/2022 M/s Essar Shipping Limited 115BBDA. (1) Notwithstanding anything contained in this Act, where the total income of (a specified assessee) resident in India, includes any income in aggregate exceeding ten lakh rupees, by way of dividends declared, distributed or paid by a domestic company or companies (on or before the 31st day of March 2020), the income tax payable shall be the aggregate of a) the amount of income tax calculated on the income by way of such dividends in aggregate exceeding ten lakh rupees, at the rate of ten per cent and b) the amount of income tax with which the assessee would have been chargeable had the total income of the assessee been reduced by the amount of income by way of dividends. (2) No deduction in respect of any expenditure or allowance or set off of loss shall be allowed to the assessee under any provision of this Act in computing the income by way of dividends referred to in clause (a) of sub section (1). ------------- --------. 40. If sub section (2) of 115BBD and sub section (2) of section 115BBDA are juxtaposed, then it is clear that in so far as dividend received from a domestic company, not only there is restriction for not allowing the deduction of any expenditure or allowance but also the set off of loss is also not allowable. On the contrary, there is no such restriction in set off of loss in sub section (2) of section

46 I.T.A. No. 821/Mum/2022 M/s Essar Shipping Limited 115BBD. Thus, it clearly shows the intention of the Legislature in putting restrictions in both the sections is different. One of the reasons is that, domestic dividend (before 31st March 2020) was exempted from tax, that is, domestic dividend was not forming part of the total income. Whereas, foreign dividend income was never exempted from tax and was treated as part of the total income. Ostensibly, if domestic dividend does not form part of the total income or is exempted from tax, then there is no question of allowing any deduction of expenses or set off of loss while computing the total income. It is precisely for this reason that, this distinction has been made by the Legislature between the foreign dividend income and domestic dividend income.

47 I.T.A. No. 821/Mum/2022 M/s Essar Shipping Limited provision of this Act in computing the income referred to section 68 to 69D. Again this goes to show that there is a specific bar or restriction for allowing of any set off of any loss from any part of stream of income. This bar and restriction is completely absent in sub section (2) of section 115BBD. If we take this analogy of section 115BBDA and Section 115BBE, then it indicates that, whenever Legislature has intended not to allow deduction or set off of loss, it has been clearly provided in the statute and wherever only restriction is for not allowing the deduction in respect of any expenditure or allowance, then same has to be confined to the language given in the statute and nothing can be inferred or read into to import any other restriction in the said provision, i.e., the set off of loss should also be read into. Section 115BBD is similar to section 115BBF, which is tax on income on patent and there only restriction provided in sub section (2) is with regard to non- allowability of non-deduction in respect of any expenditure or allowance. No amendment has been brought in section 115BBD in sub section (2) as was brought in sub section (2) of section 115BBE w.e.f. 01.04.2017.

48 I.T.A. No. 821/Mum/2022 M/s Essar Shipping Limited 42. Further, whenever income is proposed to be taxed on gross basis at a specified rates without grant of any deduction towards expenditure allowance or any set off of loss, then it is expressly provided in statute which in the case of foreign dividend income u/s 115BBD, no such restriction has been provided for not allowing the set off of loss, albeit the only restriction is for allowability of any expenditure or allowance.

49 I.T.A. No. 821/Mum/2022 M/s Essar Shipping Limited is not there in the statute nor should try to gauge the intention of the Legislature. It is only where the language of the statute in its ordinary meaning and grammatical construction, leads to a manifest contradiction of the apparent purpose of the enactment, or to some inconvenience or absurdity, hardship or injustice, presumably not intended, then a construction may be given which modifies the meaning of the words and even the structure of the sentence. In such circumstances, the Courts while interpreting the provision probable can go what was the purpose of bringing that legislation. Here we have already discussed the various provisions of sections in the statute where different set of limitation and restriction has been provided while computing different kinds of income and hence restriction applicable for one source of income cannot be applied to other source of income nor can same be imported and read into other section. Here, there no such ambiguity or contradiction in the language used in the section to import any such fetters.

50 I.T.A. No. 821/Mum/2022 M/s Essar Shipping Limited computing the total income. Accordingly, the order of Ld. CIT (A) is confirmed. In any case similar view has been taken by the Coordinate Bench in the case of Tata Motors Ltd. vs. DCIT (supra) which has been followed by the Ld. CIT (A), hence we do not find any infirmity in following the principle laid down therein. Accordingly, ground nos. 6.1 to 6.3 raised by the revenue is dismissed.

Orders pronounced in the open court on 14th November, 2022.

Sd/- Sd/- (M. Balaganesh) (Amit Shukla) Accountant Member Judicial Member मुंबई Mumbai;ददनांक Dated : 14/11/2022 Sr.PS. Dhananjay आदेशकीप्रनिनिनिअग्रेनर्ि/Copy of the Order forwarded to : अपीलाथी/ The Appellant 1. 2. प्रत्यथी/ The Respondent 3. आयकरआयुक्त(अपील) / The CIT(A) 4. आयकरआयुक्त/ CIT- concerned 5. दवभागीयप्रदतदनदध, आयकरअपीलीयअदधकरण, मुंबई/ DR, ITAT, Mumbai 6. गार्डफाईल / Guard File आदेशधिुसधर/ BY ORDER,

51 I.T.A. No. 821/Mum/2022 M/s Essar Shipping Limited

.उि/सहधयकिंजीकधर (Dy./Asstt.Registrar) आयकरअिीिीयअनर्करण, मुंबई/ ITAT, Mumbai

52 I.T.A. No. 821/Mum/2022 M/s Essar Shipping Limited