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Income Tax Appellate Tribunal, “J” BENCH, MUMBAI
Before: SHRI SAKTIJIT DEY & SHRI M.K AGGARWAL
PER SAKTIJIT DEY. J.M.
The aforesaid appeal by the revenue and cross objection by the assessee are directed against order dated 26.10.2017 passed by the Ld. Commissioner of Income Tax (Appeals)–55, Mumbai pertaining to the assessment year 2010–11.
ITA no.10/Mum./2018
The short issue arising for consideration in the appeal filed by the revenue is, whether transfer pricing provisions contained under chapter–X are applicable to an assessee who has opted for computation of its income under the Tonnage Tax Scheme (TTS) as provided under chapter XII–G of the Act? 3. Briefly stated, the assessee, an Indian company, is a wholly owned subsidiary of Van Oord Dreging and Marine Contractors BV of Netherlands. The assessee is basically engaged indredging and dredging related activities in India. For this purpose, assessee has set up a project office in India. For carrying out the dredging work,assessee charter hires dredgers from its overseas associated enterprise (AE) on payment of charter hire/ lease charges. For the assessment year under dispute assessee had originally filed its return of income 30.11.2011 declaring total income of `.
64,71,004/–. Subsequently, assessee filed revised return of income on 08.02.2013 claiming higher TDS credit. In the return of income assessee computed its profit from the dredging activity on presumptive basis as per the provision of TTS. Though, the assessing officer had no dispute which regard to the fact that profit from dredging activity has to be computed under the TTS, however he made a reference to the Transfer Pricing Officer todetermine the arm’s length price (ALP) of international transactions entered with the AE. Before the transfer pricing officer assessee pleaded that since its income is computed under the provisions of TTS, transfer pricing provisions are not applicable. However, the Transfer Pricing Officer did not find merit of the submissions of the assessee and proceeded to determine the ALP of various international transactions with its AE. Ultimately, he suggested an adjustment of `. 4,86,00,533/– to the ALP of head office costs allocated to the assessee. While completing the assessment the assessing officer added back the aforesaid adjustment suggested by the Transfer Pricing Officer. Being aggrieved with such addition, assessee preferred appeal before Ld. Commissioner (Appeals). Before Ld. First Appellate Authority assessee reiterated its stand that transfer pricing provisions are not applicable since, its income is computed under the TTS. After considering the submissions of the assesseeLd. Commissioner (Appeals) found that in assessee’s own case in assessment year 2013–14, the Dispute Resolution Panel (DRP) while
deciding identical nature of dispute has held that since assessee’s income is computed under TTS, the TP provisions would not be applicable. Following the aforesaid decision of Ld. DRP, Ld. Commissioner (Appeals) accepted assessee’s contention that TP provisions are not applicable to it. Accordingly, she deleted the addition made on account of transfer pricing adjustment. 4. We have heard the parties and perused the material on record. At the outset, Ld. Counsels appearing the parties have agreed before us that the issue arising in the appeal has been decided in favour of the assessee by the Tribunal in its own case in assessment year 2007–08. Before we proceed to decide the issue, it is necessary to deal with certain facts giving rise to the disputed issue in a nutshell. 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. No doubt, the Assessing Officer has computed the income of the assessee under section 115VG of the Act. Therefore, in the aforesaid factual backdrop and keeping in view the relevant statutory provisions as referred to hereinbefore, the conclusion drawn by Ld. Commissioner (Appeals) with regard to applicability of TP provisions to the present assessee needs to be tested. Notably, identical dispute came up for consideration before the Tribunal in assessee’s own case in assessment year 2007–08. While deciding the issue in ITA no. 7228/Mum/2012 dated 22.05.2019 the Tribunal has held as under:– 6. We have carefully considered the rival submissions, perused the relevant material, including the orders of the lower authorities as well as the case laws referred at the time of hearing. Notably, the controversy before us primarily revolves around the applicability of transfer pricing provisions to the income that is covered by Chapter XII-G of the Act i.e. Tonnage Tax Scheme. The TTS was introduced in the Finance (No. 2) Act, 2004, with the intention of increasing foreign direct investment in the Indian shipping industry and making it globally competitive. The income of a tonnage tax company depends on the tonnage capacity of the qualifying ships and the number of days for which it has been held. A reading of the provisions of TTS in Chapter XII-G suggest that the TTS is a charging section for the income generated by carrying out business of operating ships. Further, it also prescribes the mechanism for computation of income which is to be brought to tax. Thus, TTS is a presumptive basis of taxation, whereby the taxability of income from qualifying ships is restricted to the framework provided in the TTS. Further, the tonnage tax company is liable to pay taxes even in a case where the financial statements reveal a loss on actual operations. Further, all expenses, deduction, allowances or tax incentives are deemed to be allowed while computing the total income of a company as per TTS. The income thus computed shall be deemed to be the income chargeable to tax under the head 'Profit and gains of business or profession'. Hence, it is clear from the above that actual receipts/revenues earned and expenses incurred are not taken into
consideration for the purpose of determining the tonnage income of the company. The entire computation of the tonnage income depends on the tonnage capacity of qualifying ships and number of days it has been held. At this stage, we may contrast the sphere in which the transfer pricing provisions of Chapter-X operate. The transfer pricing provisions envisage computation of income from specified international 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.
In this context, the learned Counsel pointed out that a similar situation has been considered by the co-ordinate bench of this Tribunal in the case of Shreyas Shipping Logistics Ltd (supra) which has held as follows: “5……. Now we would like to discuss the TTS. Section 115VA of the Act is unique in the sense that it deals with the computation of income from the business of operating qualifying ships which opt for Tonnage Tax Scheme(TTS).The method of computation of income under the scheme, as provided by the section, stipulates that income has to be assessed in a particular manner. In other words, no expenditure can be allowed or disallowance can be made, while computing the income under TTS. The income of the assessee is computed at affixed rate and all other provisions of the Act are not to be applied, once an assessee opts for the scheme. In short, if the assessee cannot claim any expenditure after opting out of the scheme, then the AO is also barred by making any disallowance for incurring of expenditure. Legislature, in its wisdom, has allowed the assessees for opting for the said scheme and with a specific purpose. Therefore, while computing the income of the assessee u/s. 115VP, the AO has to put on blinkers and assess the income as suggested by the Parliament. There is no scope for tinkering with the provisions of section 115 VP of the Act. He has to follow the simple rule that no deduction is to be allowed or no disallowance is to be made under any of the normal provisions of the Act, once it is found that an assessee is to be assessed as per the provisions of chapter XIIG of the Act. Section 14A is not an exception to the TTS. Rather the scheme is an exception to the normal computation provisions, including the section 14A.Therefore,it cannot be said that when the income of the assessee from the business of operating ships was computed under the special provisions of Chapter XII-G, expenditure other than the expenditure incurred for the purpose of the business had been allowed. Considering the twin factors i.e. not claiming any expenditure against the nonshipping business income by the assessee and opting for TTS for shipping business, we are of the opinion that the order of the FAA does not suffer from any legal or factual infirmity. Therefore, confirming his order, we decide the effective ground of appeal against the AO.“ (underlined for emphasis by us) 10. On yet another occasion, our co-ordinate bench in the case of Tag Off shore(supra) was concerned with a situation where the Revenue sought to make an addition by invoking the provisions of Section 14A of the Act in case of a tonnage tax company, whose income was computed under the special provisions of Chapter XII-G. The Tribunal set aside the addition observing thus' No disallowance under section 14A is warranted in this case when the assessee has admittedly not claimed any expenditure, towards taxable income i.e, it has not claimed any deduction of expenditure debited in the Profit & Loss account while computing the total income. 11. Further, the co-ordinate bench of this Tribunal in the case of CGU Logistics Ltd(supra) while dealing on the issue under TTS has held as under: “10.a.We find that section 115VP deals method and time of opting for TTS, Section 115VQ is about period for which tonnage tax option remains in force. Renewal of TTS is subject matter of section115VR.Circumstanes and conditions where in tonnage tax scheme cannot be opted are the subject matter of Section 115VS.As per the provisions of section 115VT every assessee 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) 12. Before parting, we also think it apposite to refer to the judgment rendered by the Hon'ble Supreme Court in the case of Trans Asian Shipping Services Pvt Ltd (supra). In the said case, the Supreme Court observed that “…….It may be stated in brief that in view of the stiff competition faced by the Indian shipping companies vis-a-vis foreign shipping lines, and in order to ensure an easily accessible, fixed rate, low tax regime for shipping companies, the Rakesh Mohan Committee in its report (of January, 2002) recommended the introduction of the TTS in India, which was similar to, and adopted some of the best global practices prevalent. The whole purpose of introduction of the Scheme was to make the Indian shipping industry more competitive in the global space by rationalising its tax cost…...” The Hon‟ble Supreme Court further observed that, we would also like to refer to Circular No. 05/2005 dated 15.07.2005 explaining the need and essence of the introduction of these provisions which was issued contemporaneously by the Central Board of Direct Taxes (CBDT). The Circular clarifies that the Scheme is a "preferential regime of taxation". It also clarifies that "charging provision is under Section 115VA read with Section 115VF and Section 115VG….." 13. It has also been brought to our notice that an identical situation arose in assessee‟s own case for AY 2013-14 where the Dispute Resolution Panel(„DRP‟) vide its order dated 18.09.2017 held that transfer pricing regulations do not apply to the assessee to the extent of operations carried out through operating qualifying ships where the income is taxed under TTS 14. To sum up, Tonnage Tax Scheme, as per Chapter XIT-G of the Act, is a separate code by itself in as much as it provides a self-contained changing provision as well as 'method of computation of income in the chapter, and, the method of computation of income under TTS is not dependent on receipt or expenditure of the assessee. Under Tonnage Tax Scheme, the income has to be computed as per the method prescribed in section 115VG. The income as per Tonnage Tax Scheme is computed on the basis of the weight of the vessel and number of days it is held, irrespective of its revenue realisations and the expenditure incurred for the purpose of the business. Hence, neither the business receipts nor the business expenditure of the assessee has any bearing on the method prescribed for computation of income under TTS as
per section 115VG. The tonnage tax scheme, in that sense, is a presumptive method of computation of taxable income which is not dependent on actual receipts and expenditure of the assessee. 15. In fact, the fallacy in the approach of the Assessing Officer can be gauged from a perusal of the computation of taxable income made in para 11 of the assessment order. The Assessing Officer has sought to add ` 5,40,887/- as a separate line item captioned as “Proposed adjustment/addition in view of the above discussion. Thus, as per the perception of Assessing Officer, chapter X of the Act creates an independent or a separate charge of income, an aspect which is contrary to the judgment of the Hon'ble Bombay High court in the case of Vodafone Services Pvt.ltd. vs. UOI ( 2015) 53 Taxman.com 286 (Bom), wherein after referring to an earlier judgment dated 10th October, 2014 in the case of same assessee reported in 50 taxmann.com 300 (Bom) interalia, held that chapter X does not contain any charging provision but is a machinery provision to arrive at an arms 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 mobilisation and demobilisation charges paid for a qualifying ship, an item which has no bearing on the income as computed under Chapter XIIG and accordingly the provisions of Chapter X have no application in computing the income of the assessee chargeable to tax as per Chapter XII-G of the Act. 17. In view of the aforesaid discussion, in our considered view, the transfer pricing regulations do not apply to the assessee to the extent of operations carried out through operating qualifying ships where the income is taxed under TTS. 5. The aforesaid decision of the coordinate bench squarely applies to the facts of the present appeal also. Moreover, as discussed earlier, ld. DRP has also expressed identical view while deciding the issue in assessee’s own case in Assessment Year 2013- 14. In view of the aforesaid, we uphold the decision of Ld. Commissioner (Appeals) on the disputed issue. Grounds raised are dismissed. 6. In the result department’s appeal is dismissed. 7. In view of our decision in departments appeal hereinabove, the grounds raised in the cross objection on merits have become academic/Infructuous, hence, do not require adjudication at
present. Accordingly, the grounds raised in the cross objection are also dismissed. 8. To sum up, both the departmental appeal and assessee’s cross objection are dismissed. Order pronounced in the open Court on 21.06.2019
Sd/- Sd/- M.K AGGARWAL SAKTIJIT DEY ACCOUNTANT MEMBER JUDICIAL MEMBER
MUMBAI, DATED: 21.06.2019
Copy of the order forwarded to:
(1) The Assessee; (2) The Revenue; (3) The CIT(A); (4) The CIT, Mumbai City concerned; (5) The DR, ITAT, Mumbai; (6) Guard file. True Copy By Order Nishant Verma Sr. Private Secretary (Assistant Registrar) ITAT, Mumbai