ESSAR PORTS LTD,MUMBAI vs. DCIT 5(1)(2), MUMBAI

P a g e | 1 ITA No.1831/Mum/2015 A.Y. 2010-11 M/s Essar Ports Ltd. Vs. DCIT,5(1)(2) IN THE INCOME TAX APPELLATE TRIBUNAL “K” Bench, Mumbai Before Shri M.Balaganesh, Accountant Member and Shri Ravish Sood, Judicial Member ITA No.1831/Mum/2015 (Assessment Year: 2010-11) M/s Essar Ports Ltd. DCIT, 5(1)(2) (formerly known as Essar Shipping Ports & Logistics Ltd.) Aayakar Bhavan, 11, K.K. Marg, Mahalaxmi, Vs. Mumbai - 400020 Mumbai – 400 034

PAN – AAACE8391D (Appellant) (Respondent)

Appellant by: Shri Anuj Kisnadwala, A.R Respondent by: Shri Anand Mohan, cit D.R Date of Hearing: 11.10.2019 Date of Pronouncement: 06.01.2020

O R D E R PER RAVISH SOOD, JM The present appeal filed by the assessee is directed against the final assessment order passed by the A.O under Sec. 143(3) r.w.s 144C(13) of the Income Tax Act, 1961 (for short „Act‟), dated 30.01.2015 for A.Y. 2010-11. The assessee has assailed the impugned order on the following grounds of appeal before us :

“1. The order passed by the Assessing Officer u/s. 143(3) r.w.s. 144C(13) of the Act is illegal and bad in law. 2. The Assessing Officer has erred in law and on facts in computing the total income of the appellant in the order passed u/s. 143(3) 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.

P a g e | 2 ITA No.1831/Mum/2015 A.Y. 2010-11 M/s Essar Ports Ltd. Vs. DCIT,5(1)(2) 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 (c) Rs.66,17,419/- on account of interest on ship acquisition on BBCD basis. 6. The Assessing Officer, under the directions of the DRP, has erred in law and on facts in disallowing a sum of Rs.9,63,30,238/- u/s. 14A of the Act r.w.r. 8D of I.T. Rules. The Assessing Officer ought not have made any such disallowance since the appellant was engaged in shipping operations, its income was offered under the tonnage tax scheme and assessed as such. 7. The DRP ought to have directed the Assessing Officer that no transfer pricing adjustment can be made since the appellant was engaged in shipping operations and its income was offered under tonnage tax scheme. 8. The Assessing Officer has erred in law and on facts in levying interest u/ss. 234A, 234B and 234C of the Act. 9. The appellant craves leave to add to, amend, alter or delete all or any of the foregoing grounds of appeal.” Also, the assessee has raised the following additional ground of appeal:

“1. The Assessing Officer, under directions of DRP, has erred in law and on facts in making disallowance u/s 14A of the Act while computing income u/s 115JB of the Act.” 2. Briefly stated, the assessee company which is engaged in the business of carrying on shipping operations had e-filed its return of income for A.Y. 2010-11 on 10.10.2010, declaring a total income at Rs.10,21,73,631/-. Subsequently, a revised return of income was e-filed by the assessee on 30.03.2012, declaring a total income at Rs.5,88,38,525/-. The return of income filed by the assessee was processed as such under Sec. 143(1) of the Act. Thereafter, the case of the assessee was selected for scrutiny assessment under Sec. 143(2) of the Act.

P a g e | 3 ITA No.1831/Mum/2015 A.Y. 2010-11 M/s Essar Ports Ltd. Vs. DCIT,5(1)(2) 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/-

P a g e | 4 ITA No.1831/Mum/2015 A.Y. 2010-11 M/s Essar Ports Ltd. Vs. DCIT,5(1)(2) Sec.14A in its „Original‟ return of income. Subsequently, the assessee on the basis of a „revised‟ return of income filed on 30.03.2012 had reworked out the disallowance under Sec. 14A at Rs. 5,29,95,132/-. Observing, that the „revised‟ return of income filed by the assessee was neither voluntary nor backed by discovery of any omission on its part, the A.O declined to admit the same. Resultantly, the disallowance u/s 14A that was revised by the assessee at Rs. 5,29,95,132/- was not considered by the A.O. On the basis of his draft assessment order passed under Sec. 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‟ return of income at Rs.9,63,30,238/-. 8. We find that the assessee has assailed the disallowance made by the A.O under Sec.14A on the ground that the same as per the mandate of law could not have exceeded the exempt income that was earned by the assessee during the year. Accordingly, it was the claim of the ld. A.R that the disallowance under Sec.14A was liable to be restricted to the extent of the exempt dividend income of Rs.53,04,157/- earned by the assessee during the year under consideration. In the backdrop of the aforesaid facts, we find, that our indulgence has been sought by the assessee for adjudication of two issues viz. (i). that, as to whether the disallowance under Sec.14A is liable to be restricted to the extent of the exempt dividend income earned by the assessee during the year; and (ii) that, is it permissible for the assessee to seek restriction of the disallowance under Sec.14A at an amount lower than that which was suo moto offered in its return of income. Insofar, the first issue is concerned i.e as to whether

P a g e | 5 ITA No.1831/Mum/2015 A.Y. 2010-11 M/s Essar Ports Ltd. Vs. DCIT,5(1)(2) the disallowance under Sec.14A cannot exceed the amount of exempt income earned by the assessee during the year, we find, that the said issue is squarely covered by the judgment of the Hon‟ble High Court of Delhi in the case of Joint Investments Vs. CIT ( 372 ITR 694) (Del). Also, a similar view had been taken by the Hon‟ble High Court of Punjab & Haryana in Pr. CIT Vs. State Bank of Patiala (2017) 393 ITR 476 (P & H). The „Special Leave Petition‟ (for short „SLP‟) filed by the revenue against the aforesaid the order of the Hon‟ble High Court of Punjab and Haryana had been dismissed by the Hon‟ble Supreme Court in Principal CIT, Patiala Vs. State Bank of Patiala (2018) 259 Taxman 314 (SC). Further, the coordinate benches of the Tribunal had also concluded that the disallowance under Sec.14A cannot exceed the amount of exempt income earned by the assessee during the year in the following cases:

“(i) M/s Slyvex Cable Co. Pvt. ltd. Vs. Dy. CIT [ITA No.8581/Mum/2011 for A.Y. 2008-09, dated 24.02.2016]. (ii) Indus Valley Investments Vs. DCIT [ITA No. 3763/Del/2013 for A.Y. 2009-10, dated 29.04.2015]. (iii) M/s Daga Global Chemicals Vs. Asst. CIT [ITA No. 5592/Mum/2012 dated 01.01.2015]. (iv) M/s Global Capital Ltd. Vs. ACIT [ITA No.6586/Del/2013 for A.Y. 2009-10, dated 27.11.2015]. (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.

P a g e | 6 ITA No.1831/Mum/2015 A.Y. 2010-11 M/s Essar Ports Ltd. Vs. DCIT,5(1)(2) initially in his draft assessment order passed under Sec. 144C(1) r.w.s 143(3), dated 18.03.2014, had worked out the disallowance under Sec.14A r.w.r 8D at Rs.130,98,64,725/-. However, pursuant to the directions of the DRP that the the disallowance under Sec. 14A r.w. Rule 8D was to computed after considering only those investments which had yielded exempt income during the year, the A.O had scaled down the said disallowance to an amount of Rs.9,63,30,238/- i.e upto the extent the assessee had voluntarily offered the same in its „Original‟ return of income. Now, the assessee had for the first time claimed before us that the disallowance under Sec. 14A was liable to be restricted to the extent of the exempt dividend income of Rs.53,04,157/- that was earned by it during the year under consideration. To sum up, the assessee by raising the aforesaid claim had sought the scaling down of the disallowance under Sec. 14A upto the amount of the exempt dividend income that was earned during the year, despite the fact that a higher amount was voluntarily offered as a disallowance under the aforesaid statutory provision in its return of income for the year under consideration. In our considered view, as there can be no estoppel in law, therefore, no infirmity can be related to the aforesaid claim of the assessee. As such, we hold a strong conviction that the assessed income can be lower than the returned income, if what the assessee had offered for tax was found as not taxable under the law. To sum up, the claim of the assessee that the disallowance under Sec.14A be restricted upto the extent of the exempt dividend income of Rs.53,04,157/- cannot be jeopardised, for the reason, that the same would lead to an assessed income lower than the assesse‟s returned income. Our aforesaid view is fortified by the judgment of the Hon‟ble High Court of Gujarat in the case of CIT Vs. Milton Laminates Ltd. (2013) 37 taxmann.com 249 (Guj). In the aforesaid case, the issue before the Hon‟ble High Court was as to whether the Tribunal was justified in law and on facts in directing the A.O to give effect 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

P a g e | 7 ITA No.1831/Mum/2015 A.Y. 2010-11 M/s Essar Ports Ltd. Vs. DCIT,5(1)(2) 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. The Hon‟ble High Court while concluding as hereinabove, had observed, that the judgment of the Hon‟ble Apex Court in the case of CIT Vs. Shelly Products (2003) 261 ITR 367 (SC) relied upon by the revenue was distinguishable on facts. Also, we find that a similar view had been taken by a coordinate bench of the Tribunal in the case of Tejaskiran Pharamachem Industries Pvt. Ltd. Vs. Dy. CIT [ITA 3307/Mum/2014, dated 13.12.2017] (Mum). In the said case, the Tribunal relying on the judgment of the Hon‟ble High Court of Bombay in the case of Ahmedabad Electricity Company ltd. Vs. CIT, & Godavari Sugar Mills Ltd. Vs. CIT (1993) 199 ITR 351 (Bom), had observed, that the purpose of an appeal in an income tax matter is to ascertain the correct tax liability of the assessee in accordance with law. On the basis of its aforesaid observation, the tribunal had observed that as there is no estoppel against law, therefore, income wrongly declared under a wrong notion or under mistaken notion can be deleted. 10. In the backdrop of our aforesaid deliberations, we are of considered view that as the disallowance under Sec.14A on the basis of the settled position of law cannot exceed the amount of the exempt income, therefore, without prejudice to the fact that the assessee had voluntarily offered the disallowance under the aforesaid statutory provision at a higher amount in its return of income, the consequential relief to the assessee by restricting the disallowance under Sec. 14A up to the extent of its exempt income of Rs.53,04,157/- cannot be denied. To sum up, we herein direct the A.O to restrict the disallowance under Sec. 14A upto the extent of the exempt dividend income of the assessee of Rs.53,04,157/-. The Grounds of appeal Nos. 3 and 6 are allowed in terms of our aforesaid observations. 11. We shall now advert to the additional „Ground of appeal‟ raised by the assessee, which we find is inextricably interlinked or in fact interwoven with the aforesaid „Grounds of appeal Nos. 3 & 6‟ . Assessee by raising the aforesaid additional „ground of appeal‟, had assailed the addition of the disallowance under Sec. 14A r.w Rule 8D, for the purpose of computing the „book profit‟ under Sec. 115JB of the Act. As is discernible from the orders of the lower

P a g e | 8 ITA No.1831/Mum/2015 A.Y. 2010-11 M/s Essar Ports Ltd. Vs. DCIT,5(1)(2) authorities, the A.O had added the disallowance worked out under Sec. 14A r.w 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 „book profit‟ under Sec.115JB of the Act. On the basis of our aforesaid observations, we restore the issue to the file of the A.O who is directed to rework out the „book profit‟ of the assessee under Sec. 115JB in terms of our aforesaid observations. The additional „Ground of appeal‟ is allowed in terms of our aforesaid observations. 13. We shall now advert to the transfer pricing adjustment of Rs.10,39,44,092/- that was made the A.O/TPO in respect of corporate guarantee of Rs.1,320 crores that was provided by the assesee as a co-guarantor alongwith its holding company viz. M/s Essar Shipping and Logistics Ltd., Cyprus to M/s Essar Oilfields Services Ltd., Mauritius (subsidiary company of the assessee). Briefly stated, the assessee during the year alongwith its holding company viz. M/s Essar Shipping & Logistics Ltd, Cyprus, as co-guarantors, had given a corporate guarantee of Rs.1,320 crores to Commercial Bank of Qatar, with respect to the borrowings made by its AE i.e M/s Essar Oilfield Services Ltd., Mauritius. In the course of the transfer pricing proceedings, it was the claim of the assessee that as providing of corporate guarantee was not an international transaction, therefore, the same could not be benchmarked. Alternatively, it was submitted by the assessee that if some rate of guarantee commission was to be applied, then the same could fairly be taken in the range of 0.3% to 0.5% as was consistently adopted by the

P a g e | 9 ITA No.1831/Mum/2015 A.Y. 2010-11 M/s Essar Ports Ltd. Vs. DCIT,5(1)(2) Tribunal in various cases. However, the TPO did not find favour with the aforesaid claim of the assessee and after determining the ALP of the guarantee commission at 9.38%, therein worked out the assesse‟s share as a co-guarantor at 4.69% [½ of 9.83%]. Objection filed by the assessee with the DRP that the A.O/TPO were in error in considering the transaction of providing of corporate guarantee by the assessee (as a co-guarantor) to its AE as an international transaction and consequently proposing an upward adjustment of Rs.32,49,98,527/-, was however rejected by the DRP. However, the DRP after deliberating on the contentions advanced by the assessee restricted the ALP of guarantee commission at 3% and worked out the assesses share as a co-guarantor at 1.5% [½ of 3%]. 14. Aggrieved, the assessee has assailed the addition of corporate guarantee commission @ 3% by the DRP. It was submitted by the ld. A.R that the ITAT, 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 its hands at 1.5% [½ of 3%]. We find that the Tribunal 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. On appeal by the revenue, the Hon‟ble High Court of Bombay had upheld the order of the Tribunal in CIT Vs. Everest Kento Cylinder Ltd. (2015) 378 ITR 57 (Bom). Also, we find that the Hon‟ble High Court of Bombay in the case of CIT Vs. Glenmark

P a g e | 10 ITA No.1831/Mum/2015 A.Y. 2010-11 M/s Essar Ports Ltd. Vs. DCIT,5(1)(2) Pharmaceuticals Ltd. (2017) 398 ITR 439 (Bom), had upheld the order of the Tribunal wherein the ALP of the corporate guarantee commission was determined at 0.5%. Further, the Hon‟ble Supreme Court while disposing off the „Special Leave Petition‟ (for short, „SLP‟) filed by the revenue against the aforesaid order of the Hon‟ble High Court in CIT Vs. Glenmark Pharmaceuticals Ltd. [Civil Appeal No.12632/2017, dated 11.12.2018], had approved the order of the High Court which had upheld the determining of the ALP of the corporate guarantee commission given by the assessee to its AE at 0.5%. On the basis of the aforesaid facts, we are of the considered view that the 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% [½ of 0.5%]. On the basis of our aforesaid observations, we restore the matter to the file of the A.O/TPO with a direction to restrict the TP adjustment as regards the corporate guarantee commission given by the assessee with respect to the borrowings made by its AE i.e M/s Essar Oilfield Ltd., Mauritius at 0.25%. The Ground of appeal No. 4 is dismissed, and the Ground of appeal No. 5(a) is partly allowed in terms of our aforesaid observations. 17. We shall now advert to the TP adjustment on account of Ship management income of Rs.1,34,21,990/- made by the A.O/TPO. The assessee company which is engaged in the business of shipping operations had entered into a ship management agreement with M/s Essar Shipping and Logstics Ltd. (for short, „ESLL‟) for providing ship and crew management services in respect of a ship viz. “M.V.Kiran”. As per the agreement, the assessee was to be paid an annualised management fees of USD 7,000 per day. However, as the assessee 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

P a g e | 11 ITA No.1831/Mum/2015 A.Y. 2010-11 M/s Essar Ports Ltd. Vs. DCIT,5(1)(2) 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 transfer pricing adjustment made by the A.O/TPO in respect of its shipping income. It was the claim of the ld. A.R, that as it had offered its shipping income for tax as per the deeming provisions of the „tonnage tax scheme‟ contemplated in Chapter XII-G of the Act, therefore, the application of the transfer pricing provisions would stand excluded. As such, it was the claim of the ld. A.R that the TP provisions were not applicable in a case where the assessee had offered its shipping income based on tonnage taxation scheme. In support of his aforesaid claim, it was submitted by the ld. A.R that the manner of computing the income under the „tonnage tax scheme‟ had been prescribed under Sec.115VE of the Act, as per which the profits of tonnage taxation were to be computed separately from profits and gains of any other business. It was the claim of the ld. A.R that once the assessee had opted for „tonnage tax scheme‟, its income had to be computed as per Sec. 115VG of the Act, wherein the formula for calculating the tonnage income was prescribed. Ld. A.R drawing our attention to Sec. 115VG of the Act, submitted, that as per the said section the calculation of the tonnage income was dependant on daily tonnage capacity of ship and its number of days of operation. In sum and substance, it was the claim of the ld. A.R that as Chapter XII-G was a complete code in itself, therefore, the income had to be computed strictly as per the provisions therein contemplated. On the basis of his aforesaid contention, it was the claim of the ld. A.R that once the income under the tonnage tax scheme was computed at a fixed rate, the application of the other provisions of the Act would stand excluded. In order to support his aforesaid contention, the ld. A.R had relied on the order of ITAT, Mumbai, in the case of Van Oord India Pvt. ltd. Vs. ACIT [ITA No.7228/Mum/2012 dated 22.05.2019]. On the basis of his aforesaid contentions, it was the claim of the ld. A.R that as Sec.115VA overrides the provisions of Sec. 28 to 43 of the Act, and the income from the business of operating qualifying ships have to be computed in accordance with Chapter XII-G, therefore, the provisions of transfer Pricing would not be applicable to the said shipping companies.

P a g e | 12 ITA No.1831/Mum/2015 A.Y. 2010-11 M/s Essar Ports Ltd. Vs. DCIT,5(1)(2) 19. Per contra, the ld. Departmental Representative (for short „D.R‟) relied on the orders of the lower authorities. 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 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. On a perusal of the orders of the lower authorities, we find, that the assessee treating the provision of ship management services to ESLL as an international transaction had itself benchmarked the same by using TNMM. On a reference by the A.O, the TPO updating the multiple year data used by the assessee to the data for the current year had arrived at a PLI (OP/TC) of 14.76%. Accordingly, the TPO had worked out an adjustment of Rs. 1,34,21,990/- to the ALP of the transaction of provision of ship management services by the assessee to its AE viz. ESLL.

P a g e | 13 ITA No.1831/Mum/2015 A.Y. 2010-11 M/s Essar Ports Ltd. Vs. DCIT,5(1)(2) purpose of tonnage tax scheme, therefore, the same could not be separately benchmarked under Chapter X of the Act.

“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

P a g e | 14 ITA No.1831/Mum/2015 A.Y. 2010-11 M/s Essar Ports Ltd. Vs. DCIT,5(1)(2) 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 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 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. 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.” 23. 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 encompasses within its sweep viz. (i).

P a g e | 15 ITA No.1831/Mum/2015 A.Y. 2010-11 M/s Essar Ports Ltd. Vs. DCIT,5(1)(2) maritime consultancy charges; (ii). income from loading or unloading of cargo; (iii). ship management fees or remuneration received for managed vessels; and (iv). maritime education or recruitment fees. Further, as per 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/s Essar Shipping Ports & Logistics Ltd, Cyprus for a consideration of USD 75 million (Rs. 320.70 crores) and USD 73 million (Rs. 312.15 crores), respectively. The BBCD instalments comprising of the principal portion and interest portion was payable in 120 monthly instalments at an interest rate of 6% p.a. In the year under consideration, the interest payable in respect of “MV Malathi” was Rs. 19,88,67,480/- (USD 4,191,026), while for in the case of “MV Malavika” the interest payable was 19,28,92,911/- (USD 4,063,923). In the immediately preceding year i.e A.Y 2009-10, an adjustment was made by the TPO to the cost of acquisition of the ships and the ALP of the aforesaid ships viz. “MV Malathi” and “MV Malavika” was determined at USD 73.75 million and USD 71.75 million/. Consequent to the aforesaid adjustment to the cost of the ships, the corresponding interest expenses for the year under consideration was reworked out by the A.O/TPO viz. (i). “MV Malathi” : Rs. 19,55,53,022/-; and (ii). “MV Malavika” : Rs. 18,95,89,950/-. Resultantly, the TPO made an adjustment of Rs. 66,17,419/- as regards the BBCD interest viz. (i). “MV Malathi” : Rs. 33,14,458/- [Rs. .19,88,67,480/- (-) Rs. 19,55,53,022/-]; and (ii).“MV Malavika” :[Rs. 19,28,92,911/- (-) Rs. 18,95,89,950/-].

P a g e | 16 ITA No.1831/Mum/2015 A.Y. 2010-11 M/s Essar Ports Ltd. Vs. DCIT,5(1)(2)

P a g e | 17 ITA No.1831/Mum/2015 A.Y. 2010-11 M/s Essar Ports Ltd. Vs. DCIT,5(1)(2) TP adjustment of Rs. 66,17,419/- made on account of interest on the modified cost of ship acquisition by the assessee on BBCD basis (hire purchase basis). The Ground of appeal No. 5(c) is allowed.

Order pronounced in the open court on 06/01/2020

Sd/- Sd/- (M. Balaganesh) (Ravish Sood) ACCOUNTANT MEMBER JUDICIAL MEMBER भ ुंफई Mumbai; ददन ुंक 06.01.2020 PS. Rohit आदेश की प्रतिलऱपि अग्रेपिि/Copy of the Order forwarded to : 1. अऩीर थी / The Appellant प्रत्मथी / The Respondent. 2. आमकय आम क्त(अऩीर) / The CIT(A)- 3. 4. आमकय आम क्त / CIT 5. विब गीम प्रतततनधध, आमकय अऩीरीम अधधकयण, भ ुंफई / DR, ITAT, Mumbai 6. ग र्ड प ईर / Guard file. सत्म वऩत प्रतत //True Copy// आदेशानुसार/ BY ORDER, उि/सहायक िंजीकार (Dy./Asstt. Registrar) आयकर अिीऱीय अधिकरण, भ ुंफई / ITAT, Mumbai