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Income Tax Appellate Tribunal, MUMBAI BENCHES “J”, MUMBAI
Before: SHRI G.S. PANNU & SHRI SAKTIJIT DEY
O R D E R PER G.S. PANNU, VICE PRESIDENT:
The captioned appeal by the assessee is directed against the order of CIT(A)-15, Mumbai dated 08.10.2012, pertaining to the Assessment
Year 2007-08, which in turn has arisen from the order dated
03.11.2010 passed by the Assessing Officer, Mumbai under section 143(3) r.w.s 144C(3) of the Income-tax Act, 1961 (in short 'the Act').
In this appeal, assessee has raised the following Grounds of appeal:
“Based on the facts and circumstances of the case, Van Oord India Private Limited ('Appellant') craves leave to prefer an appeal against the order passed by the learned Commissioner of Income-tax (Appeals) 15 ('CIT(A)') under section 250 of the Income-tax Act, 1961 (the 'Act') on 8 October 2012 (received on 3 November 2012) in respect of the order passed by the Assistant Commissioner of Income-tax - Circle 5(3), Mumbai ('AO') under section 143(3) of the Act, on the following grounds which are independent and without prejudice to each other.
General
1. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in upholding the addition of Rs 5,40,887 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 CIT(A) failed to appreciate that the transfer pricing regulations does not apply to the extent of operations carried out through operating qualifying ships, being company registered under the Tonnage Tax Scheme provided under the Act.
The learned CIT(A) failed to appreciate that since the transfer pricing regulations does 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 CIT(A) 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 CIT(A) 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 Tonnage Tax Scheme and thus the adjustment made by the learned AO/ TPO would have no impact on the income pertaining to the tonnage tax activities of the Appellant, and hence, ought to be deleted.
6. The learned CIT(A) erred in not appreciating the fact that the Tonnage Tax Scheme 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 (ie section 115VA to section 115VZC).
7. The learned CIT(A) 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.
8. The learned CIT(A) 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.
9. The learned CIT(A) erred in holding that income from international transaction be treated as an additional and separate source of income, thus being contrary to law and facts of the case and ought to be deleted.
The learned CIT(A) erred in holding that provisions of transfer pricing are distinct from the provisions of computation of income under the Tonnage Tax Scheme.
11. The learned CIT(A) failed to appreciate the fact that the out of all the adjustment proposed by the learned TPO, an amount of Rs 5,40,887 (mobilization and demobilization charges of Rs 5,40,887) 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, and hence the alleged excess payment cannot have any impact on the taxable income of the Appellant, thus ought to be deleted.
The Appellant submits that each of the above grounds of appeal are without prejudice to the other.
The Appellant craves leave to add, alter, omit or substitute any or all of the above grounds of appeal, at any time before or at the time of the appeal”.
Although the assessee has raised multiple Grounds of appeal, but the entire dispute emanates from the stand of the Assessing Officer that the transfer pricing provisions contained in Chapter-X of the Act also apply to an income determined in terms of the Chapter XII-G of the Act i.e. Tonnage Tax Scheme.
3. Briefly put, the relevant facts are that the appellant assessee is a company incorporated under the provisions of the Companies Act, 1956 and is, inter-alia engaged in the business of executing dredging contracts and is a subsidiary of Van Oord Dredging and Marine Contractors BV which is incorporated in Netherlands. 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, income derived from operating qualifying ships would be treated as shipping income and would be taxable as per the computation mechanism provided therein. The appellant had filed its return of income on 31st October, 2007 declaring income of Rs 3,50,365/- from operating qualifying ships and declaring loss of Rs 2,747,814/- on account of non- tonnage operations. Subsequently, pursuant to the retrospective amendment introduced to the section 115JB (i.e. Minimum Alternate Tax provisions) by the Finance Act, 2008, the appellant filed a revised return on 19th November, 2008 declaring income of Rs 3,149,813 under section 115JB of the Act. During the course of scrutiny assessment proceedings initiated by the Assessing Officer, a reference was made to the Transfer Pricing Officer (‘TPO’) for the computation of the arm’s length price in relation to the international transactions carried out by the assessee with its associated enterprise. The TPO suggested an adjustment of Rs 540,887 to the value of international transactions on account of the charter hire rentals paid by the assessee to its associated enterprise for lease of dredger HAM 312 (‘Qualifying Ship’). In the Assessment Order, while computing the final income made an addition to the income of the appellant of Rs 5,40,887, based on the findings of the learned TPO. The TPO suggested an adjustment of ` 5,40,887/- to the value of international transaction on account of charter hire/lease charges paid to its associated enterprise, namely, sleephpperzuigur 1 bv. for leasing of the Qualifying Ship , ie. dredger HAM 312 . Pertinently, the adjustment was suggested for the hire/lease charges paid for the mobilisation and demobilisation period, and not for operational period. The hire /lease charges paid by the assessee was uniform during the mobilisation, operational and de-mobilisation periods. When the matter was carried in appeal before the CIT(A), assessee assailed the stand of the Assessing Officer in law inter-alia, asserting that the transfer pricing provisions are not attracted in the present case, as the income is determined on a presumptive basis in terms of Chapter XII-G of the Act. However, the CIT(A) has upheld the stand of the Assessing Officer. Not being satisfied with the order of the CIT(A), assessee is in further appeal before us.
Before us, Ld. Senior Counsel for the assessee has explained that HAM 312 is a qualifying dredger under TTS, and hence the income thereof is to be determined and taxed in accordance with the provisions of Chapter XII G (i.e. section 115V to 115VZC) which is a self-contained code.
The provisions of transfer pricing regulations does not apply to the companies whose income is taxable under TTS, and hence, the enhancement of income based on the order of TPO on account of transfer pricing adjustment would not have any effect on the taxable income of the assessee. The Ld. Senior Counsel also submitted that Section 115VA starts with a non-obstante clause stating that sections 28 to 43C are not applicable to the tonnage tax company and the income has to be computed as per the computation mechanism provided under the TTS.
For the present purpose, the Explanation to section 92(1) was referred to point out that it deals with allowance for any expense; and in the present case, the assessee does not claim any allowance for any expense, thus the provisions of section 92(1) or the Explanation thereto, and including the provisions of section 92CA, have no application in the instant case.
In support of its contention, the assessee has relied on following decisions: i. CGU Logistics Ltd (Mumbai ITAT – ITA No. 1053/Mum/2014) ii. TAG Offshore Limited (Mumbai ITAT – ITA No. 710/Mum/2014) iii. Shreyas Shipping Logistics Ltd (Mumbai ITAT – ITA
7406/Mum/2014) iv. Trans Asian Shipping Services Pvt Ltd (Supreme Court – (Civil
Appeal No. 5869 and 5870 of 2016)
In this background, the Ld. Departmental Representative for the Revenue has merely reiterated the stand of the lower authorities which is to the effect that any person who has undertaken international transaction with its associated enterprise has to be taxed as per the normal /applicable provisions of the Act and in addition, he has to be governed and consequently taxed, if there is an additional income that is arrived at, out of the international transactions on account of transfer pricing adjustment. It only leads to the conclusion that in the scheme of the things under the Act, the income from the international transactions is to be treated as additional income and separate source of the income and that such income from the international transaction is to be determined having regard to the arm’s length principle and taxed accordingly.
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.
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.
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 non- shipping 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.
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….."
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.
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.
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) inter- alia, 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.
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 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.
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 the result, the appeal of the assessee is allowed as above. Order pronounced in the open court on 22nd May, 2019.