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Income Tax Appellate Tribunal, MUMBAI BENCH “J”, MUMBAI
Before: SHRI. A. D. JAIN & SHRI RAJESH KUMAR
PER A. D. JAIN, V.P.: This is assessee’s appeal against the assessment order, dated 29/12/2014, passed under section 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961, for assessment year 2010-11, in pursuance to the directions by the DRP vide its order dated 5/12/2014. The following grounds have been raised: On being aggrieved by the final order dated 29 December 2014 passed by the learned Deputy Commissioner of Income-tax Range-5(3)(2), Mumbai ('AO') passed under section 143(3) read with section 144C(13) of the Income-tax Act, 1961 ('the Act') in pursuance of the directions issued by the DRP, the present appeal is being preferred on the following grounds amongst others which, it is prayed, may be considered without prejudice to one another:
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General 1. On the facts and in the circumstances of the case and in law, the learned AO, based on directions of DRP erred in making addition of Rs.17,24,50,468 in the Appellant's case. Applicability of transfer pricing provisions to companies covered under the Tonnage Tax Scheme 2. On the facts and in the circumstances of the case and in law, the learned AO/ DRP failed to appreciate that the transfer pricing regulations do not apply to the Appellant to the extent of operations carried out through operating qualifying ships, since the Appellant is a company registered under the Tonnage Tax Scheme ('TTS') provided under the Act. 3. The learned AO/DRP failed to appreciate that since the transfer pricing regulations do not apply to the Appellant, no reference should have been made to the Transfer Pricing Officer ('TPO') under section 92CA of the Act with regards to the income derived from operating qualifying ships by the Appellant. 4. The learned AO/ DRP erred in not appreciating the fact that section 92 of the Act is not a charging section but merely a computation mechanism for determination of arm's length price and that if the income is not chargeable to tax, the application of the computation mechanism has no relevance. 5. The learned AO/ DRP failed to appreciate the fact that proviso to section 92C(4) does not cover the sections 115V to section 115VZC or Chapter XII - G pertaining to taxability of companies covered under the TTS and thus the adjustment made by the learned AO/TPO/DRP would have no impact on the income pertaining to the tonnage tax activities of the Appellant. 6. The learned AO/ DRP erred in not appreciating the fact that the TTS of the Act is a self-contained code and the income can only be computed as per the provisions mentioned under Chapter XII - G of the Act (i.e. section 115VA to section 115VZC). 7. The learned Assessing Officer/DRP erred in not appreciating the fact that section 115VA of the Act starts with a non-obstante clause and thus overrides the provisions contained in section 28 to section 43C of the Act.
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The learned AO/TPO/DRP erred in holding that even if the Appellant's case is covered under the TTS, transfer pricing provisions under section 92(1) of the Act are applicable to the Appellant. 9. The learned AO/ DRP erred in not appreciating the fact that the Appellant has filed the accountants report in Form 3CEB under section 92E of the Act out of abundant caution in respect of the tonnage tax income. 10. The learned AO/ TPO/DRP has failed to appreciate the fact that the TTS and Non TTS income of the Appellant can be segregated and the same was submitted before the learned Assessing Officer/DRP. 11. The learned AO/ TPO/DRP failed to appreciate the fact that the adjustment proposed by the learned TPO of Rs.17,24,50,468 (Head office expenses allocation pertaining to income covered under TTS) has no relevance in computing the income from operating qualifying ships, which is determined on a presumptive basis as provided under the TTS of the Act, hence, the alleged excess payment cannot have any impact on the taxable income of the Appellant and ought to be deleted. Addition on account of allocation of head office expenses 12. The learned AO/TPO/DRP erred in law in making an adjustment of Rs.17,24,50,468 in respect of allocation of head office expenses pertaining to income covered under TTS, for which no deduction was claimed by the Appellant, since its TTS income is taxable on deemed basis and hence ought to be deleted. 13. On the facts and in the circumstances of the case and in law, the Hon'ble DRP erred in observing that the Appellant is having income under the normal provisions as well as under TTS provisions and stating that segregation of allocation of head office expenses into TTS and Non-TTS activity would lead to absurd results, as the Appellant has only TTS income in the relevant year. 14. Without prejudice to above, on the facts and in the circumstances of the case and in law, the learned AO/ TPO/ DRP erred in not accepting economic analysis undertaken by the
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Appellant and carrying out a transfer pricing adjustment of Rs.17,24,50,468/- to the total income of the Appellant on account of allocation of head office expenses from its Associated Enterprises. 15. Without prejudice to above, the learned AO/ TPO/ DRP erred in making an adhoc adjustment of Rs.17,24,50,468/- on account of allocation of head office expenses without appreciating the fact that the Appellant had submitted documentary evidence for the same and demonstrated that the Associated Enterprise had rendered such services and that the. Appellant had benefitted from such services. 16. On the facts and in the circumstances of the case and in law, the Hon'ble DRP erred in making an observation that the Appellant tried to take refuge under the claim that its serve had a breakdown and the Appellant is seeking to shift onus of furnishing the details under the excuse of server's breakdown. 17. On the facts and in the circumstances of the case and in law, the finding of the learned TPO that the details of services availed by the Appellant were not submitted and the Appellant did not submit evidence in respect of services availed is perverse and contrary to the records. 18. On the facts and in the circumstances of the case and in law, the learned AO/ DRP erred in upholding the adhoc disallowances made by the learned TPO of 50%, being contrary to the principles of transfer pricing, contrary to the records, made in the absence of showing any comparable and compliance with the transfer pricing provisions and the same therefore ought to be deleted. Interest under section 234B 19. On the facts and in the circumstances of the case and in law, the learned AO erred in levying interest under section 234B amounting to Rs.3,48,71,080/- Interest under section 234C 20. On the facts and in the circumstances of the case and in law, the learned AO erred in levying interest under section 234C amounting to Rs.1,27,057/-.
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On the facts and in the circumstances of the case and in law, the ld. AO/TPO erred in law by initiating penalty proceedings under section 271(1)c) when the Appellant had made full and true disclosures both, in the return of income and during assessment proceedings.
The assessee has also raised the following additional ground: "The Appellant prays that the Dividend Distribution Tax (DDT) paid under section 115-0 of the Income-tax Act, 1961 ('the Act) on dividends declared and paid by the Appellant to its parent foreign shareholder Van Oord Dredging & Marine Contractors bv, who is a tax resident of Netherlands, is in excess of the rate provided under Article 10 read with the Most Favoured Nation clause under Article IV of the Protocol to the Double Taxation Avoidance Agreement between India and Netherlands.”
The matter concerning the additional ground shall be taken up post dealing with the original grounds. 4. The effective challenge, by way of all the 21 grounds originally taken, is to the action of the Assessing Officer in applying the Transfer Pricing Provisions, as contained in Chapter X of the Income Tax Act, to the case of the assessee company, Van Oord India Private Limited, which is a company covered as a Tonnage Company under the Tonnage Tax Scheme (‘TTS’, for short), as contained in Chapter XII-G of the Income Tax Act, i.e., sections 115V to 115VZC of the Income Tax Act. It has been submitted on behalf of the assessee, that ground No.2 pinpoints this grievance. 5. Facts first. The assessee is an Indian company incorporated under the provisions of the Companies Act, 1956. It is, during the year, as in the earlier years, inter-alia, engaged in
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the business of executing dredging contracts in India, involving capital & maintenance dredging & other survey and dredging related activities. It is a wholly owned subsidiary of Van Oord Dredging and Marine Contractors BV, which is incorporated in the Netherlands. For its dredging and dredging-related activities in India, the assessee has set up a project office in India. For carrying out the dredging work, the assessee charter hires dredgers from its overseas associated enterprise (AE) on payment of charter hire/ lease charges. The assessee is registered as a Tonnage Tax Company under the Tonnage Tax Scheme (TTS) as provided under chapter XII-G of the Act. As per the provisions of TTS, the income derived from operating qualifying ships would be treated as shipping income and would be taxable as per the computation mechanism provided therein. The assessee offered income under the head 'Profits and gains from Business and Profession', of Rs.6,43,439/-, as computed under Chapter XIIG of the Income tax Act, 1961 (i.e. Tonnage Tax Scheme). An adjustment was proposed by the Transfer Pricing Officer (‘TPO') and confirmed by the Dispute Resolution Panel ('DRP') with respect to Rs.34,49,00,936/-, being reimbursement of Head Office ('HO') expenses made by the assessee to Van Oord Dredging and Marine Contractors BV [assessee's holding company and as such, its Associated Enterprise ('AE')]. The TPO and DRP have held that since the assessee has not submitted sufficient evidence to demonstrate benefit, 50% of the above mentioned expenses are regarded excessive. Therefore, an upward adjustment of Rs.17,24,50,468/- was made to the returned business income of Rs.6,43,439/- and, as a consequence, Rs.17,30,93,907/- was brought to tax as business income.
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On perusal of the records, it was seen by the Assessing Officer that the assessee Company has entered into International Transactions with its Associated Enterprise(s) (AE), amounting to more than Rs.15 crores. Hence, the matter was referred to the Transfer Ppricing Officer (TPO) for determination of Arm's Length Price (ALP) in relation to the international transactions. The TPO-II(6), Mumbai, by his order dated 13/01/14, made adjustment of Rs.17,24,50,468/- towards ALP of Head Office Expenses. The assessee Company was to show cause as to why an adjustment should not be made to the arm's length of head office expenses, amounting to Rs.17,24,50,468/- as per the order of TPO-II(6), Mumbai, by his order dated 13/01/14. The main contention of the assessee Company was that the provisions of transfer pricing regulations do not apply to the companies, whose income is taxable under the Tonnage Tax Scheme, and hence, the adjustment/enhancement of income made in the transfer pricing order would not have any effect on the taxable income of the assessee. 7. The Assessing Officer held the Transfer Pricing Provisions of the Act to be applicable to the case of the assessee, on the following observations: “i. The Transfer Pricing Officer is a specialized person for determining Arm’s Length Price with regard to international transactions with associated enterprises. His order is almost binding on the Assessing Officer, in view of the word ‘shall’ used in section 92CA(4), which is reproduced below: "On receipt of the order under sub-section (3), the Assessing Officer shall proceed to compute the total income of the assessee under subsection (4) of section 92C in conformity with the arm's length price as so determined by the Transfer Pricing Officer."
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“The Transfer Pricing Officer vide order u/s. 92CA(3) of the income-tax Act, 1961, dated 13/01/14 has held that adjustments aggregating to Rs.17,24,50,468/- is made after considering all the submissions of the assessee. “The claim of the assessee is that since it is covered by provisions of Tonnage Tax Scheme under Chapter XlI-G of the Income-tax Act, 1961, no adjustment can be made to its income. It is claimed that provisions of sections 28 to 43C are not applicable. These submissions have been considered. The Indian Transfer Pricing Regulations have been brought into the statute, to prevent the erosion of the tax base of the country. But in implementing the provisions, it is not the encumbrance of the TPO/AO to prove the same. Further, it is not the case of the assessee that it has not undertaken any international transactions which fall within the meaning of section 92B of the Act or it is not the case that the TP regulations of India are not applicable in the case of the assessee, as assessee itself has filed the audit report in form 3CEB and further has also undertaken benchmarking process and having regard to the details mentioned in its TP report, has arrived at the conclusion that its international transactions are at arm's length if it was the contention of the assessee that the provisions of the TP do not apply in the case of the assessee, then it should not have itself filed the audit report in form 3CEB or should not have undertaken TP study to benchmark its international transactions. When the facts of the case are such that the provisions of the TP Regulations of India are applicable to the case of the assessee, and the normal literal interpretation of the regulation are unambiguous and clear, then there is no need to go into the intention of the regulations or proving the intent of the assessee, behind its transfer prices of services. “The assessee has raised the contention that it is covered under the Tonnage Tax Scheme vide chapter Xll-G and that the section II5VA specifically provides that notwithstanding anything to the contrary contained in the section 28 to 43C and accordingly the adjustment of Rs.17,24,50,468/- to its taxable income should not be made under the provisions of transfer pricing. In this regard, it is pertinent to mention here that this section 115VA begin with a non-obstante clause which says notwithstanding anything to the
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contrary contained in section 28 to 43C.....". This means that provisions beginning from 28 and ending at 43C are not applicable so far it applies to shipping industry which is to be governed, by Tonnage Tax Scheme. Whereas, the transfer pricing provisions begin from section 92 and end with 92F. They are contained in chapter X in the special provisions relating to avoidance of tax. As such, it is not correct to interpret that the scheme of Tonnage Tax will override the provisions of section 92 to 90 2F The fact that they are special provisions (Transfer Pricing) puts them on an elevated position than other general provisions.”
The Assessing Officer, thus, proposed to add back the amount of Rs.17,24,50,468/- to the total income of the assessee, as ALP of the international transactions. 9. The assessee filed an objection against the transfer pricing adjustment of Rs.17,24,50,468/- before the Dispute Resolution Panel (DRP)-II, Mumbai. The Dispute Resolution Panel-II, vide its order dated 8/12/2014, dismissed the objection of the assessee against the transfer pricing adjustment of Rs.17,24,50,468/-. The DRP-II observed as follows: “6.2 Discussion and directions of DRP:- “6.2.1 The contentions raised by the assessee have been considered. At the outset, we would like to point out there is no exclusion provided in Transfer Pricing Provisions to the effect that the Transfer Pricing Provisions would not apply to companies whose income is computed under Tonnage Tax Scheme. Having said that, we now deal, with the contentions raised by the assessee that Transfer Pricing Provisions would not apply to the assessee to the extent of the operations carried through operating qualifying ships as hereunder: “With regard to assessee’s contention that since the provisions of TTS override the provisions of section 28 to section 43C, the Transfer Pricing Provisions would not get attracted, it is noted that, TP provisions are applicable to computation of income under
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section 28 to 43C, what comes in place of section 28 to 43C is Section 115VA, hence Transfer Pricing would be equally applicable where income is computed in accordance with provisions of Section 115VA. To put it in other words, Transfer Pricing adjustments are over and above the additions made under section 28 to 43C. In the same way, Transfer Pricing adjustments would be over and above the income computed under the TTS." “6.2.2. With respect to assessee's contention, that since the income of Tonnage Tax company is taxed on the basis of tonnage capacity and the number of days of operation, the actual income earned would not be chargeable to tax, it is stated that TTS does not take into consideration the effects of international transactions between the assessee and its AEs on its income. To mitigate this provisions of computing income from International Transactions have been provided in the Act. In fact, the heading of Section 92(1) reads as- “Computation of income from international transaction having regard to arm's length price" This brings to the fore that these provisions are distinct, separate and over and above the provisions of computation of income under section 28 to 43C or even TTS. “6.2.3 Now with regard to assessee’s argument that since the income arising to the assessee is not as a result of international transaction but as a result of computation provided under TTS, the provisions of section 92(1) would not apply to the applicant, it is to be stated that it is not only when there arises income from international transaction that transfer pricing provisions get applied, even in cases of expenses, benefit, service, facility or even borrowing and lending, etc., the transfer pricing provisions get attracted, whether there arises income from it which, requires to be adjusted depends on facts of each case. Thus even in cases where apparently there arises no income, the applicability of Transfer Pricing provisions may be called for TTS provisions are narrow and limited to few factors whereas Transfer Pricing Provisions takes into consideration wider and broader aspects. Verification of international transactions between assessee and its Associated Enterprise may lead to finding of income from factors
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which were not taken into consideration while arriving at income under TTS.”
The Assessing Officer passed a final assessment order, dated 29/12/2014, i.e., the order under appeal. In para 3.3.5, at page 5 thereof, observing that the directions of the DRP are binding on the Assessing Officer, the TP adjustment of Rs.17,24,50,468/-, as proposed in the draft assessment order (supra) dated 5/3/2014, was made to the returned income of the assessee. 11. Challenging the impugned order, the ld. A.R. of the assessee has, at the outset, submitted that if the transfer pricing provisions do not apply to the income computed under the Tonnage Tax Scheme (Chapter XIIG), the adjustment made by the TPO and DRP is rendered unlawful; that this issue came up for consideration the first time before the ITAT in Assessment Year 2007-08 and the Mumbai ‘J’ Bench of the ITAT, vide order dated 22/5/2019 in ITA No.7228/Mum/2012 (copy placed on record), held that the transfer pricing provisions will not be applicable to the income from operation of qualifying ships; that the same issue once again came up for consideration before the Mumbai Benches of the Tribunal, for assessment year 2011-12, wherein also, the TPO sought to make Transfer Pricing ('TP') adjustment to the Head Office expenses, however, the ITAT, vide order (copy filed) dated 21/6/2019 in ITA No.10/Mum/2018, following its said earlier order for A.Y. 2007-08, deleted the adjustment, reiterating that TP provisions do not apply; that, therefore, following the view taken by the ITAT in the above cases, Ground No. 2 be decided in favour of the assessee and consequently the
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TP addition of Rs.17,24,50,468/- for the year under consideration, be deleted. 12. The ld. D.R., on the other hand, has placed strong reliance on the assessment order. It has been contended that as rightly held by the Assessing Officer, the TPO is a specialized person for determining the Arm’s Length Price with regard to the international transactions with associated enterprises and his order is almost binding on the Assessing Officer; that the TPO, in his order dated 13/1/2014, has held that in its TP study report, it was stated that since the assessee is a resident, and it would be entering into international transactions with its AEs, each of which is a non-resident for Indian tax purposes, the Indian transfer pricing regulations would be applicable to the transactions to be undertaken between the assessee and its AEs; that admittedly, the assessee has entered into international transactions as defined in section 92B of the Income Tax Act and hence the transfer pricing provisions would be applicable and the ALP of the international transactions has to be determined; that the Indian Transfer Pricing Regulations have been brought into the statute to prevent the erosion of the tax base of the country, but in implementing the provisions, it is not the encumbrance of the TPO/AO to prove the same; that further, it is not the case of the assessee that it has not undertaken any international transactions, which fall within the meaning of section 92B of the Act or it is not the case that the TP regulations of India are not applicable in the case of the assessee, as the assessee itself has filed the audit report in form 3CEB and further has also undertaken benchmarking process and having regard to the details mentioned in its TP report, has arrived at the conclusion that its international transactions are at arm's length; that if it
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was the contention of the assessee that the provisions of the T.P. do not apply in the case of the assessee, then it should not have itself filed the audit report in form 3CEB or should not have undertaken T.P. study to benchmark its international transactions; that when the facts of the case are such that the provisions of the T.P. Regulations of India are applicable to the case of the assessee, and the normal literal interpretation of the regulation are unambiguous and clear, then there is no need to go into the intention of the Regulations or proving the intent of the assessee, behind its transfer prices of services; that the assessee has raised the contention that it is covered under the Tonnage Tax Scheme vide chapter XII-G, and that section 115VA specifically provides that notwithstanding anything to the contrary contained in the section 28 to 43C, and accordingly the adjustment of Rs.17,24,50,468/- to its taxable income should not be made under the provisions of transfer pricing; that section 115VA of the Act begins with a non-obstante clause, which says "notwithstanding anything to the contrary contained in section 28 to 43C….."; that this means that the provisions beginning from 28 and ending at 43C are not applicable so far it applies to shipping industry which is to be governed by the Tonnage Tax Scheme, whereas, the transfer pricing provisions begin from section 92 and end with 92F; that they are contained in Chapter X of the Act in the special provisions relating to avoidance of tax; and that as such, it is not correct to interpret that the scheme of Tonnage Tax will override the provisions of section 92 to 92F. 13. Apropos the Tribunal orders (supra) in the assessee’s own case for assessment years 2007-08 and 2011-12, it has not been disputed that these orders were passed in facts and circumstances similar to those presently before us. These orders
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have not been shown to have been upset on appeal or otherwise, or even stayed pendente lite. 14. Heard. The Assessing Officer has observed that the order of the TPO is ‘almost’ binding on the Assessing Officer, as it has been mandated in section 92C(4) of the Act that the Assessing Officer shall compute the total income of the assessee in conformity with the ALP determined by the TPO. The assessee, per contra, has maintained all through, that VOIPL, the assessee, is a company registered under the TTS of the Act; that it is a presumptive basis of taxation and the income of the company arising from the operations of qualifying ships (which, inter alia, includes dredgers) is to be computed on a deemed tonnage basis; that the entire computation of the tonnage income depends on the tonnage capacity of qualifying ships and number of days they have been operated; that accordingly, the income of a tonnage tax company depends on the tonnage capacity of the qualifying ships and the number of days for which they have been operated, rather than the income generated by the qualifying ships; that as per the provisions of the TTS, once the tonnage income of the company is computed, the same would be presumed to be the profits and gains of business; that actual receipt/ revenue earned and expenses incurred are not taken into consideration for the purpose of determining the income of the company.; that the TTS provides that in case the qualifying company is generating losses by operating qualifying ships, then such losses have to be ignored for the purpose of computation of tonnage income; that all the expenses, deduction, allowances or tax incentives are deemed to be allowed while computing the tonnage income of a qualifying company by operating qualifying ships; that since the tax is charged on deemed income on a
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presumptive basis, the income generated by operating qualifying ships should not be chargeable to tax; that section 115VA of the Act, starts with 'Notwithstanding anything to the contrary contained in section 28 to section 43C….”; that TTS, thus, provides for computation of income to the exclusion of sections 28 to 43C of the Act; that in case of companies which are into international transactions, the amount of allowable expenses is required to be determined under the arm's length principle under the machinery provisions of Chapter X (Sections 92 to 92F); that the amount of allowable expenses determined under the arm's length principle under section 92 of the Act would, thus, be relevant to compute business profits as provided for in sections 28 to 43C; that as the assessee has opted to be governed by TTS, the provisions of section 115VA shall override sections 28 to 43C, and hence, the income has to be calculated with reference to the registered tonnage of the ships and not on the basis of net profits; that consequently, the related party transactions are not considered for computing the income chargeable to tax and, therefore, the arm's length price determined under the transfer pricing provisions would be of no relevance; and that therefore, the determination of income/ expense having regard to arm's length price would be of no consequence, as it would not affect the computation of income and the taxability of tonnage income of the assessee. It was submitted that even if the transfer pricing provisions were to apply, the provisions of TTS do not allow the adjustment made by the TPO to affect the computation of income under TTS; that further, all the expenses, deduction, allowances (including depreciation) or tax incentives are deemed to be allowed while computing the Tonnage Income of a company; that the income thus computed shall be deemed to be the income
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chargeable to tax under the head ‘Profits and gains of business or profession’; and that hence, it can be said that allowance/disallowance of any expenditure does not have any bearing on the taxable income of the assessee, a Tonnage Company under TTS. 15. The Assessing Officer has observed that section 115VA of the Act begins with a non-obstante clause, which says "notwithstanding anything to the contrary contained in section 28 to 43C….."; that this means that the provisions beginning from section 28 and ending at section 43C are not applicable so far it applies to the shipping industry, which is to be governed by the Tonnage Tax Scheme, whereas, the transfer pricing provisions begin from section 92 and end at section 92F; that they are contained in Chapter X of the Income Tax Act, in the special provisions relating to avoidance of tax; and that as such, it is not correct to interpret that the scheme of Tonnage Tax will override the provisions of sections 92 to 92F of the Act. 16. This seeming imbroglio stands already resolved by the Tribunal in its order dated 22/5/2019 passed in the assessee’s own case for assessment year 2007-08. In paragraphs 7 & 8 thereof, it has been observed as follows: “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
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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.”
While passing that order, the Tribunal considered, in favour of the assessee, the following decisions:
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i. Shreyas Shipping Logistics Ltd. (Mumbai ITAT-ITA 7406/Mum/2014). ii. TAG Offshore Ltd. (Mumbai ITAT-ITA No. 710/Mum/2014). iii. CGU Logistics Ltd. (Mumbai ITAT-ITA No. 1053/Mum/2014). iv. Trans Asian Shipping Services Pvt. Ltd. (Supreme Court - (Civil Appeal No. 5869 and 5870 of 2016). v. DRP order dated 8/12/2014, passed under section 144C (5) of the Act.
The Tribunal concluded by observing, thus:
“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 computed on the basis of the weight of the vessel and number of days it is held, irrespective of its revenue realizations 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 Rs.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 the same assessee, reported in 50
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taxmann.com 300 (Bom) inter alia, 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.
“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 mobilization and demobilization charges paid for a qualifying ship, an item which has no bearing on the income as computed under Chapter XII- G 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.”
In its order dated 21/6/2019, passed in the assessee’s case for assessment year 2011-12, the Tribunal has observed as follows:
“4. ………….. Undisputedly, the assessee has opted for computation of its profit derived from the shipping business under TTS as provided under chapter XII-G of the Act. As per section 115VE of the Act TTS will apply only if an option to that effect is made in terms of section 115VP of the Act. In the facts of the present appeal, there is no dispute that assessee has exercised its option for computation of income under TTS in terms of section 115VP of the Act and the department has also approved it. Section 115VF of the Act provides that tonnage income shall be computed in the manner provided under section 115VG of the Act. Section 115VG lays down the mode and manner of computing tonnage income. A careful reading of section 115VG of the Act would make it clear that the mode and manner of computing tonnage income does not depend upon the income and expenditure stated in the profit and loss account but is on the basis of net tonnage of the qualifying ship multiplied by the number of days such ship was operated during the previous year.”
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It thus emerges, as rightly contended on behalf of the assessee, that since the assessee has opted to be governed by TTS, the provisions of section 115VA shall override sections 28 to 43C and hence, the income has to be calculated with reference to the registered tonnage of the ships and not on the basis of net profits; that consequently, the related party transactions are not considered for computing the income chargeable to tax, and, therefore, the arm's length price determined under the transfer pricing provisions would be of no relevance; that therefore, the determination of income/expense having regard to arm's length price would be of no relevance, as it would not affect the computation of income and the taxability of tonnage income of the assessee; and that even if the transfer pricing provisions were to apply, the provisions of TTS do not allow the adjustment made by the TPO to affect the computation of income under TTS. That being so, the adjustment made by the TPO would not affect the income of the assessee. This, more so, because the first proviso to section 92C(4) does not cover the provisions of Chapter XII-G of the Act. 21. The Assessing Officer has, thus, gone wrong in observing that he was ‘almost’ bound by the TPO’s directions, and that the TTS does not over right the provisions of Chapter X of the Income Tax Act. His self-doubt rather shows in the usage of the highlighted expression employed. 22. The Assessing Officer has also observed that the Indian Transfer Pricing Regulations have been brought into the statute to prevent the erosion of the tax base of the country, but in implementing the provisions, it is not the encumbrance of the TPO/AO to prove the same; that it is not the case of the assessee that it has not undertaken any international transactions which
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fall within the meaning of section 92B of the Act or it is not the case that the T.P. regulations of India are not applicable in the case of the assessee, as the assessee itself has filed the audit report in Form 3CEB and, further, has also undertaken the benchmarking process and having regard to the details mentioned in its TP report, has arrived at the conclusion that its international transactions are at arm's length; that if it was the contention of the assessee that the provisions of T.P. do not apply in the case of the assessee, then it should not have itself filed the audit report in Form 3CEB, or should not have undertaken the T.P. study to benchmark its international transactions; and that when the facts of the case are such that the provisions of the T.P. Regulations of India are applicable to the case of the assessee, and the normal literal interpretation of the regulation are unambiguous and clear, then there is no need to go into the intention of the regulations or proving the intent of the assessee behind its transfer prices of services. 23. Now, once Chapter X of the Act is, as held hereinabove, of no relevance to the assessee’s case and the TP provisions do not apply, it does not make any difference, if the assessee itself has filed the audit report in Form 3CEB and further, has also undertaken the benchmarking process and, having regard to the details mentioned in its TP report, has arrived at the conclusion that its international transactions are at arm’s length. The assessee cannot, in the absence of anything to the contrary brought on record by the Revenue, be said to be incorrect in contending that the AO/ DRP erred in not appreciating the fact that the assessee has filed the accountant’s report in Form 3CEB under section 92E of the Act out of abundant caution in respect of the tonnage tax income. Therefore, the Assessing Officer has
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erred in making these observations also and the assessment order fails on this count too. In fact, no reference to the TPO ought to have, at all, been made, in the first instance itself. 24. In view of the above discussion, the assessee is correct in contending that the AO/DRP failed to appreciate that the transfer pricing regulations do not apply to the assessee, to the extent of operations carried out through operating qualifying ships, since the assessee is a company registered under the Tonnage Tax Scheme ('TTS') provided under the Act. The facts in the year under consideration are not different from those in assessment years 2007-08 and 2011-12, where the very same issue has been decided by the Tribunal in favour of the assessee. So, we see no reason as to why the decision this year be not consistent therewith. Too, even the DRP, vide its order dated 8/12/2014, has held in favour of the assessee qua this issue, which fact was also taken cognizance of by the Tribunal. 25. Our findings on this issue are summed up a savoir: (a) Section 115VA of the Income Tax Act, forming part of the TTS (for which, the assessee has made option) contained in Chapter XII-G of the Act, excludes the operation of sections 28 to 43C of the Act pertaining to the computation of total income under Chapter IV of the Act. (b) For computing taxable income under Chapter XII-G of the Act, related party transactions have no relevance, weight and length of user of qualifying ships, rather than the nature of party for which the user is, or ALP, or income, or expenses, being the formula prescribed for computation of income under Chapter XII-G.
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(c) Consideration of the TP provisions, enclosing within them, the arm’s length principle, under Chapter X (sections 92 to 92F) of the Act are, a fortiori, not applicable to the TTS and ALP does not affect the computation and taxability of the tonnage income of the assessee. (d) Computation of income under the TTS is, thus, not impinged upon by the adjustment made by the TPO. (e) Income computed under the TTS is, by virtue of section 115VF, deemed to be the profits taxable as profits & gains of business or profession. (f) The amount of Rs.17,24,50,468/-, which represents reimbursement of Head Office Expenses by the assessee to its holding company and AE, has wrongly been added, by altering the expenditure, under Chapter X, despite the inapplicability of the Chapter and inspite of the fact that Chapter X contains only machinery provisions and no charging provisions, sans which, it is trite, no tax can be levied. (g) Non-applicability of Chapter X does not get altered by the factum of the assessee having either filed audit report in Form 3CEB, or undertaken the benchmarking process and concluding its international transactions to be at arm’s length. (h) The issue stands decided by the Tribunal in favour of the assessee vide its orders in the assessee’s case for assessment years 2007-08 and 2011-12. (i) The DRP has itself acceded to this legal claim of the assessee.
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The assessee’s grievance by way of ground No.2 is, thus, accepted and the TP addition of Rs.17,24,50,468/- is deleted. As a consequence, ground Nos.3 to 21 stand rendered merely academic, requiring no adjudication. Ground No.1 is general. 27. Now, turning to the additional ground, for admission thereof, it has been contended by the ld. Counsel for the assessee that the additional ground could not be raised either at the time of filing of the return of income on 15th October, 2010, or during proceedings before the lower authorities (which culminated in passing of the Final Assessment order on 29th December, 2014), because during that period, the law that tax under section 115-O was a tax on the distributed profits of the company and not on dividend, as laid down by the Hon'ble Bombay High Court in the case of ‘Godrej & Boyce Mfg. Co. Ltd. vs DCIT’, 328 ITR 281 (Bom.), vide Judgment dated 12th August, 2010; that it was only when the Supreme Court, on 20th September, 2017 in the case of ‘Union of India vs. Tata Tea Co. Ltd.’, 85 taxmann.com 346 (SC), decided that the tax under section 115-O is a tax on dividend, that the occasion to raise the additional ground arose; that the Hon'ble Supreme Court, in the aforesaid case, was hearing appeals challenging the constitutional validity of section 115-O; that the challenge was that by taxing, under section 115-O, the distributed profits of a company engaged in agricultural activities, the Central Government sought to levy tax on the agricultural income earned by the company; that since the taxability of agricultural income fell within the State List, the Central Government did not have the power to tax the same; that the Hon'ble Supreme Court rejected this argument by holding that the tax was not on the profits/income of the companies, but on the dividend income and taxing of dividend income was within
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the purview of Entry 82 of the List I, i.e., the list of subjects for which the Central Government had the power to enact laws; that the same view, as in the case of ‘Union of India vs. Tata Tea Co. Ltd.’ (supra), was also taken by the Hon'ble Supreme Court in the case of ‘Godrej & Boyce Mfg. Co. Ltd. vs DCIT’, 81 taxmann.com 111; that the assessee was under a bona fide belief that it was prevented from raising the aforesaid issue owing to the law laid down as per the jurisdictional High Court in the case of ‘Godrej & Boyce Mfg. Co. Ltd. vs. DCIT’ (supra); that the reasonableness of the reasons explaining its belief of inability, is to be looked at liberally, as held by the Hon'ble Bombay High Court in the case of ‘CIT vs. Pruthvi Brokers & Shareholders’, 23 taxmann.com 23 (Bom.); and that therefore, the additional ground may be admitted. 28. Opposing the admission of the additional ground, the ld. D.R. has contended that since the additional ground raised does not arise from the orders of the lower authorities, the same should not be admitted; that Article 10(6) of the DTAA provides that if the non-resident has a Permanent Establishment in India and if the dividend income is effectively connected with the PE in India, then the benefit of Article 10(2) is not available and since in the present case, the fact regarding the existence or non- existence of the PE is not on record, the additional ground is not maintainable; and that the procedure for making a claim, as provided in Article 10(3) of Indo-Netherland Treaty, is also not on record herein. 29. Insofar as regards the argument of the ld. DR that since the additional ground raised does not arise from the orders of the lower authorities, the same cannot be admitted, this argument deserves to be rejected in view of the decisions of the Hon'ble
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Supreme Court in the cases of ‘National Thermal Power Co. Ltd. v. CIT’, 229 ITR 383 (SC) and ‘Jute Corporation of India Ltd. Vs. CIT’, 187 ITR 688 (SC), and the Full Bench decision of the Hon'ble Bombay High Court in the case of ‘Ahmedabad Electricity Co. Ltd. Vs. CIT’, 199 ITR 351 (Bom.). In fact, as rightly submitted on behalf of the assessee, this is the settled position of law, as has been held by the Hon'ble Bombay High Court in the case of ‘Ultratech Cement Ltd. Vs. ACIT’, 81 taxmann.com 74. It remains undisputed that this issue could not be raised either at the time of filing of the return of income on 15th October, 2010, or during proceedings before the lower authorities (which culminated in passing of the Final Assessment order on 29th December, 2014), because during that period, the law as laid down by the Hon'ble Bombay High Court in the case of ‘Godrej & Boyce Mfg. Co. Ltd. vs DCIT’ (supra), held the filed. It is only by virtue of the Supreme Court order dated 20th September, 2017 passed in the case of ‘Union of India vs. Tata Tea Co. Ltd.’ (supra), that the law now is that the tax under section 115-O is a tax on dividend. The impugned order was passed by the Assessing Officer on 29/12/2014, when ‘Godrej & Boyce Mfg. Co. Ltd. vs DCIT’ (supra) was the governing law. It cannot be gainsaid that it is a legal adage that the Hon'ble Supreme Court declares the law as it always was. Therefore, the position settled by the Hon'ble Supreme Court in the case of ‘Union of India vs. Tata Tea Co. Ltd.’ (supra), is applicable, with full force, as on the date of passing of the judgment in that case, i.e., on 20/9/2017, and is deemed to be the law as it was as on the date of passing of the impugned order, i.e., on 5/12/2014. Hence, it is the supervening Supreme Court decision which has prompted the assessee to raise the additional ground. It has not been disputed
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that the Supreme Court decision, on facts, to be determined, permitting, entitles the assessee to stake the claim made in the additional ground. So, the mere fact that the additional ground does not arise out of the impugned order, is in no way detrimental to the request for admission of the additional ground. 30. The ld. D.R.’s next objection is that in the present case, the factum of expenses, or otherwise, of PE is not on record. Would that it were so! The contention on behalf of the assessee, that the assessee’s holding company has a PE in the form of a project office in India is on the records of the lower authorities, remains undisputed before us. Therefore, the argument of the DR, that the fact regarding existence of the PE of VODMC BV is not on record, is factually incorrect. Further, it also remains unchallenged that the fact that the shares are not effectively connected to the PE, i.e., the project office of VODMC BV, is also on record. Be that as it may, whether the PE exists in India or not, rightly, is not relevant to decide the admissibility of the additional ground, as these facts are required for the adjudication of the merits of the claim made by the assessee, and are not necessary to decide the admissibility of the same. Further, proving the compliance of the provisions of Article 10(6) of the Treaty, by which Article, the claim of the assessee under Article 10(2) can be denied by the Revenue, is not necessary to decide the admissibility of the additional ground raised by the assessee. 31. With respect to the submission of the ld. DR that the procedure for making a claim, as prescribed in Article 10(3) of the DTAA, is not on record and hence, it requires factual investigation, we are of the view that the same does not, in any manner, relate to the assessee, or VODMC BV, or the project
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office, and hence, it cannot be regarded as a fact that needs to be examined for the purposes of admission and/or adjudication of the assessee's claim. In any case, as dwelt upon hereinabove, the assessee was prevented from raising the additional ground before the lower authorities, due to a reason beyond the control of the assessee, as considered above. This fact, by itself, is, in our opinion, sufficient to allow it to be raised at this stage. So, even if, arguendo, the objections of the Department were to be acceded to, the assessee’s request for admission of the additional ground merits acceptance. 32. In view of the above, the additional ground is admitted. 33. On the merits of the additional ground raised by the assessee, the ld. Counsel for the assessee submitted that the Dividend Distribution Tax (DDT) under section 115-O of the Income Tax Act, on the dividends declared and paid by the assessee, to its foreign shareholder, Van Oord Dredging & Marine Contractors bv., who is a tax resident of the Netherlands, is in excess of the rate provided under Article 10 read with the Most Favoured Nation clause under Article IV of the Protocol to the Double Taxation Avoidance Agreement between India and the Netherlands. In this regard, he relied on the decisions of the Hon'ble Supreme Court in the cases of ‘Union of India vs. Tata Tea Co. Ltd. (SC) (supra) and ‘Godrej & Boyce Manufacturing Company Ltd. vs. DCIT’, (SC) (supra), wherein the Hon'ble Apex Court has held that the dividend distribution tax under section 115-O of the Act is a tax on ‘dividend income’ paid by the company. 34. The ld. D.R., on the other hand, has submitted that Article 10(6) of the DTAA provides that if the non-resident has a permanent establishment in India and if the dividend income is
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effectively connected with the PE in India, then the benefit of Article 10(2) is not available; and that as provided in Article 10(3) of the DTAA, the procedure for making a claim requires factual investigation. 35. Considering the arguments of the parties, we set aside this issue to the file of the Assessing Officer to examine the same in the light of the judgments of the Hon’ble Supreme Court in the cases of ‘Union of India vs. Tata Tea Co. Ltd.’ (supra) and ‘Godrej & Boyce Manufacturing Company Ltd. vs. DCIT’ (supra), after providing due opportunity of hearing to the assessee. The assessee, no doubt, shall cooperate in the fresh proceedings before the Assessing Officer. All pleas available under the law shall remain so available to the assessee. Ordered accordingly. 36. In the result, the appeal of the assessee is treated as partly allowed for statistical purposes. Order pronounced in the open Court on 11/11/2019.
Sd/- Sd- [RAJESH KUMAR] [A. D. JAIN] ACCOUNTANT MEMBER VICE PRESIDENT
DATED: 11/11/2019 JJ:2310 Copy forwarded to: 1. Appellant 2. Respondent 3. CIT(A) 4. CIT 5. DR By order
Assistant Registrar