ESSAR PORTS LTD,MUMBAI vs. ACIT-6(2)(2), MUMBAI

PER PAWAN SINGH, JUDICIAL MEMBER; 1. This appeal by assessee is directed against the order of ld. Commissioner of

Income Tax (Appeals)-56 [the ld. CIT(A)], Mumbai dated 07.03.2017, which

in turn arises from the assessment order dated 28.03.2015 passed under

section 143(3) r.w.s. 144C(3) for Assessment Year 2011-12. The assessee

has raised the following grounds of appeal:

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additional grounds of appeal:

(1) The ld CIT(A) erred in law and on facts in upholding the disallowances u/s 14A of the Act while computing income u/s 115JB of the Act. 3. Brief facts of the case are that the assessee is a company engaged in the

business of shipping operation. The assessee filed its return of income for

Assessment Year 2011-12 on 29.11.2011 declaring loss. In the computation

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of income the assessee computed its income under the Tonnage Tax Scheme

(TTS). The assessee while filing the return of income also furnished report

under Form No. 3CEB for reporting international transaction with its

associated enterprises (AE). During the assessment proceeding, the

Assessing Officer made reference to the Transfer Pricing Officer (TPO) for

computation of Arms Length Price (ALP) in relation to international

transaction carried out by assessee with its Associates Enterprises (AEs). The

TPO vide its order dated 22.01.2015 suggested the adjustment of Rs.

60,16,28,858/-. Therefore, based on the finding of the TPO, the Assessing

Officer made addition of Rs.60,16,28,858/-. 4. The assessing officer while passing the draft assessment noted that the

assessee has shown investment in the equity shares of Rs. 3312,96,60,089/-,

which are capable of yielding the exempt income. The assessee has not made show moto disallowance. The assessing officer issued show cause notice to

the assessee as to why disallowance under section 14 A should not be made.

The assessing officer recorded that no working under section 14A was

furnished by asssessee. The assessing officer invoked the provisions of Rule

8D and made disallowance of Rs. 158.17 Crore, which consist of Rs.131.78

Crore on account of disallowance under Rule 8D2(ii) and Rs.26.38 Crore

under Rule 8D2(iii). 5. The assessee instead of filing objection before the Dispute Resolution Panel

(DRP) exercised its option to file appeal before the ld. CIT(A). Before ld 3

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CIT(A) the assessee besides challenging the transfer pricing (TP) adjustment

on the ground that the Transfer Pricing provisions are not applicable of

acquisition of Ship ‘MV Kiran’ as the assessee has exercised the option of

offering its income to tax on a presumptive basis under the Tonnage Tax

Scheme covered under chapter XII-G of the Act also challenged disallowance

under section14A. The assessee also urged that option of TTS was exercised

since AY 2005-06 till Ay 2014-15. Accordingly the assessee is liable to be

assessed on the Tonnage scheme. The assessee has not avail any deduction i.e

separate interest or depriciation benefits for taxation purpose. The plea of the

assessee was not accepted by ld CIT(A). The ld. CIT(A) confirmed the

adjustment suggested by TPO as well as addition under section 14A made by

Assessing Officer. Thus, further aggrieved by the order of ld. CIT(A), the

assessee has filed the present appeal before us. 6. We have heard the submissions of the ld. Authorized representative (AR) for

the assessee and the ld. departmental representative (DR) for the revenue and

also perused the record of the case. The assessee vide its application dated

03.01.2019 has filed an application for admitting additional ground of appeal.

In the application the assessee stated that no new facts are required to be

brought on record. The additional grounds are purely question of law, which

was omitted due to inadvertent error. In support of its contention the assessee

has relied on the case law in National Thermal Power Corporation Vs CIT

(229 ITR 383SC), Jute Corporation of India Ltd Vs CIT (187 ITR 688 SC) 4

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and Ahmedabad Electricity Co. Vs CIT (199 ITR 351 Bom). The ld AR for

the assessee made his submissions on the lines of the contents of the

application. On the contrary the ld. DR for the revenue has not strongly

opposed the submissions of the assessee. Considering the facts that the

assessee has raised additional ground of appeal which is purely legal in

nature and no new facts are required to be brought on record, therefore, the

application for filing additional ground of appeal is allowed. Now, we shall

proceed to hear the plea of the parties on merit of the case. 7. At the outset of hearing, the ld. AR of the assessee submits that he is not

pressing Ground No.1 of appeal. Considering his submissions the ground

No.1 of the appeal is dismissed as not pressed. 8. Ground No.2, to 6 & 9 relates to Transfer Pricing Adjustment suggested by

TPO. The ld. AR of the assessee submits that Transfer Pricing provisions are

not applicable in the case of assessee as the assessee has exercised the option

of offering its income to tax on a presumptive basis under the Tonnage Tax

Scheme covered under chapter XII-G of the Act. The option was exercised

since AY 2005-06 till AY 2014-15. Accordingly the assessee is liable to be

assessed on the Tonnage scheme on presumptive basis. The assessee

prepared its computation of income as per TTS. The assessee has not avail

any deduction i.e. separate interest or depriciation benefits for taxation

purpose. The ld AR for the assessee submits that these grounds of appeal are

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covered by the decision of Tribunal in Van Oord India Private Ltd. vs. ACIT

in ITA No. 7228/Mum/2012 dated 22.05.2019.

TPO and the order passed by ld. CIT (A). The ld. DR further submits that the

international transaction has to be taxed in accidence with the provisions of

the Act. Moreover, the international transaction is to be treated as additional

income which is correctly determined by the TPO.

the assessee and ld. Departmental Representative (DR) for the revenue and

perused the material available on record. The ld. AR of the assessee submits

that the assessee has exercised the option of offering its income to tax on a

presumptive basis under the Tonnage Tax Scheme covered under chapter

XII-G of the Act. The option was exercised since AY 2005-06 till Ay 2014-

authorities. We have noted that on similar set of facts the coordinate bench of

this Tribunal in Van Oord India Private Ltd. vs. ACIT (supra) held as under :

“6. We have carefully considered the rival submissions, perused the relevant material, including the orders of the lower authorities as well as the case laws referred at the time of hearing. Notably, the controversy before us primarily revolves around the applicability of transfer pricing provisions to the income that is covered by Chapter XII-G of the Act i.e. Tonnage Tax Scheme. The TTS was introduced in the Finance (No. 2) Act, 2004, with the intention of increasing foreign direct investment in the Indian shipping industry and making it globally competitive. The income of a tonnage tax company depends on the tonnage capacity of the qualifying ships and the number of days for which it has been held. A reading of the provisions of TTS in Chapter XII-G suggest that the TTS is a charging section for the income generated by carrying out business of operating ships. Further, it also prescribes the mechanism for 6

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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.

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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.

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an addition by invoking the provisions of Section 14A of the Act in case of a tonnage tax company, whose income was computed under the special provisions of Chapter XII-G. The Tribunal set aside the addition observing thus' No disallowance under section 14A is warranted in this case when the assessee has admittedly not claimed any expenditure, towards taxable income i.e, it has not claimed any deduction of expenditure debited in the Profit & Loss account while computing the total income.

“10.a.We find that section 115VP deals method and time of opting for TTS, Section 115VQ is about period for which tonnage tax option remains in force. Renewal of TTS is subject matter of section115VR.Circumstanes and conditions where in tonnage tax scheme cannot be opted are the subject matter of Section 115VS.As per the provisions of section 115VT every Asses see has to transfer profits to tonnage tax reserve account at a fix rate and has to utilise it for specific purpose, once he opts of TTS. Companies opting for TTS have to comply with minimum training requirement as required by Section 115VU.Limit for charter in of tonnage has been determined by section 115VV.Maintenance and audit of accounts of the TTS companies is governed by the provisions of section 115VW of the Act, whereas section115VX determines tonnage. Amalgation is subject matter of section 115VY.Next section i.e. Section 15VZBtakes care of the tonnage tax companies which are found to be a party to any transaction or arrangement that amounts to an abuse of the scheme. Last section,section115VZC,deals with exclusion from TTS.

From the above it is clear that chapter XII-G is a complete code in itself and it provides for non applicability of section 28 to 43C of the Act i.e. chapter IV of the Act, when income is to be computed as per the provisions of the said section. Chapter-XII-G, was introduced by the Finance (No.2)Act,2004,with effect from April 1,2005,and it provides for TTS, which is optional. The Notes on Clauses appended to the Finance (No.2) Bill,2004, referring to clause 28 as regards the introduction of section 115VA specifically states that the provision relates to the computation of profits and gains of the shipping business. Tonnage tax was intended to make the industry internationally competitive and also to induce more ships to fly the Indian flag. As the whole of FEFG is covered by the provisions of chapter XII-G of the Act, there is no justification in computing it under a different chapter or section.” (underlined for emphasis by us)

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introduction of the TTS in India, which was similar to, and adopted some of the best global practices prevalent. The whole purpose of introduction of the Scheme was to make the Indian shipping industry more competitive in the global space by rationalising its tax cost…...”

The Hon’ble Supreme Court further observed that, we would also like to refer to Circular No. 05/2005 dated 15.07.2005 explaining the need and essence of the introduction of these provisions which was issued contemporaneously by the Central Board of Direct Taxes (CBDT). The Circular clarifies that the Scheme is a "preferential regime of taxation". It also clarifies that "charging provision is under Section 115VA read with Section 115VF and Section 115VG….."

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bearing on the income as computed under Chapter XIIG and accordingly the provisions of Chapter X have no application in computing the income of the assessee chargeable to tax as per Chapter XII-G of the Act. 17. In view of the aforesaid discussion, in our considered view, the transfer pricing regulations do not apply to the assessee to the extent of operations carried out through operating qualifying ships where the income is taxed under TTS.” 11. Considering the decision of coordinate bench of the Tribunal as referred

above, the provisions of transfer pricing regulations are not applicable to the

assessee to the extent of operation carried by assessee through qualifying

ships which is covered by Tonnage Tax Scheme. Thus, we hold that the

grounds of appeal No. 2 to 6 &9 are covered in favour of the assessee and

against the revenue. In the result the ground No.2 to 6 & 9 are allowed.

section 14A. The ld. AR further submits that for the purpose of disallowance

under section 14A only those investments are to be considered which yielded

exempt income during the year. In support of his submissions the ld AR for

the assessee relied on the decision of Delhi High Court in CIT Vs Interglobe

Enterprises Ltd (-------), ACB India Vs ACIT [374ITR 108 (Delhi)] and

Special Bench of Delhi Tribunal in ACIT Vs Vireet Investment [ 165 ITD 25

(Del) (SB). In alternative submissions the ld AR for the assessee submits that

disallowances under section14A is to be restricted to the amount of exempt

income earned during the year. In support of this submissions the ld AR for

the assessee relied on the decision of Delhi High Court in Joint Investment 11

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Vs CIT ( 372 ITR 694 Delhi) , PCIT Vs State Bank of India [99taxmann.com

286 (SC)] PCIT Vs State Bank of Patiala {393 ITR476 (P&H)}, Delhi

Tribunal in Indus Valley Investment Vs DCIT (ITA No. 3763/Delhi/ 2013

dated 29.04.2015 and M/s Slyvex Cable Co. Pvt Ltd VS DCIT ( ITA No.

8582/Mum/2011 dated 24.02.2016. 13. On the other hand, the ld. Departmental Representative (DR) for the revenue

supported the order of lower authorities. 14. We have considered the submissions of the ld. representatives of the parties

and have gone through the orders of the authorities below. During the

assessment the assessing officer noted that the assessee has shown

investment in the equity shares of Rs. 3312,96,60,089/-, which are capable of

yielding the exempt income. The assessee has not furnished any working of

suo moto disallowance of section14A. The assessing officer issued show

cause notice to the assessee as to why disallowance under section 14 A

should not be made. The assessing officer recorded that no working under

section 14A was furnished by assessee. The assessing officer invoked the

provisions of Rule 8D and made disallowance of Rs. 158.17 Crore, which

consist of Rs.131.78 Crore on account of disallowance under Rule 8D2(ii)

and Rs.26.38 Crore under Rule 8D2(iii). On appeal the ld CIT(A) concurred

with the finding of the assessing officer. Before us, the ld AR for the assessee

submits that only those investment which yielded the exempt income should

be considered form disallwawances under section 14A and relied on the 12

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decision of Delhi High Court in ACB India (supra), CIT Vs Interglobe

Enterprises Ltd. (supra), and decision of Special Bench of Delhi Tribunal in

assessee Vireet Investment (supra). considering the fact that the ld AR for the

assessee has raised this plea for the first time before the Tribunal, therefore,

this ground of appeal is restored to the file of assessing officer to adjudicate

this issue afresh after following the decisions of Delhi High Court in ACB

India (supra), CIT Vs Interglobe Enterprises Ltd. (supra), and decision of

Special Bench of Delhi Tribunal in assessee Vireet Investment (supra) and in

accordance with law. Needless to order that before passing the order the

assessing officer shall grant opportunity to the assessee. Since, we have

restored this issue to the file of assessing officer, hence, the other alternative

contentions raised by the assessee has become academic. In the result this

ground of appeal is allowed. 15. Additional ground of appeal relates to disallowances u/s 14A of the Act

while computing income under section 115JB of the Act. The ld. AR for

the assessee submits that only disallowances which are determined under

section 14A can be adopted to the purpose of minimum alternative tax

(MAT). Considering the facts that we have already restored the issue of

disallowance under section14A to the file of assessing officer, therefore,

this issue is also restored to the file of assessing officer to decide it after

determining the disallowance under section 14A. However, the assessing

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officer is directed to consider the submissions of ld. AR for the assessee as

recorded above and pass the order in accidence with law.

Order pronounced in the open court on 26/06/2019.

Sd/- Sd/- G.S. PANNU PAWAN SINGH VICE-PRESIDENT JUDICIAL MEMBER Mumbai, Date: 26.06.2019 SK Copy of the Order forwarded to : 1. Assessee 2. Respondent 3. The concerned CIT(A) 4. The concerned CIT 5. DR “K” Bench, ITAT, Mumbai 6. Guard File

BY ORDER,

Dy./Asst. Registrar ITAT, Mumbai