ACIT CIRCLE 5(1)(1), MUMBAI vs. M/S ESSAR SHIPPING LIMITED, MUMBAI

The learned assessing officer is aggrieved with that order and has raised the following grounds

On the facts and circumstances of the case, whether the Ld. CIT (A) has not erred in holding that the income received in the nature of interest out of inter corporate deposits advanced to subsidiary company is in the nature of business income and not in the nature of 'income from other sources' and thereby treating the Income from interest receipts of Rs.55,50,56,455/- under

On the facts and circumstances of the case, whether the Ld. CIT (A) has not erred in deleting the disallowance of deduction u/s 57 (iil) of the Act on account of Interest paid to LIC of Rs.45,52,43,826/- and holding that the loan obtained by the assessee from LIC was not used for advancing ICD to subsidiary and not for the purpose of earning interest income under the head 'Income from Other Sources'?

On the facts and circumstances of the case, whether the Ld. CIT (A) has not erred in deleting the disallowance of Interest Expenditure of Rs.1,18,73,42,551/- claimed u/s 36(1)(iii) of the Income Tax Act, 1961?

On the facts and circumstances of the case, whether the Ld. CIT (A) has not erred in holding that interest expenditure is periodic cost of borrowing incurred for the purpose of financing business activities and common interest expensed have to be apportioned on the basis of cost of financing and not in the ration of turnover of tonnage and non-tonnage activities?

Assessee is a company engaged in the operation of ships and other services, filed its return of income on 29/11/2013 declaring a total loss of ₹ 813,300,364/–

As the assessee has entered into several international transaction the reference was made to the learned Joint Commissioner of Income Tax (Transfer Pricing) – 2 (1), Mumbai (the learned TPO). He passed the order under section 92CA (3) of the act wherein he proposed five adjustment to the international transaction.

The transactions were coming from assessment year 2009 – 10 wherein Assessee entered In to an agreement dated 22 July 2008 and acquired two ships on bare boat charter cum Demise basis from its associated enterprises Essar shipping and logistics Ltd Cyprus for an amount of US$ 148 million. Under such type of agreements by paying a fraction of the total cost of the ship as down payment, the balance sum is paid as per the said contract in 120 equal monthly installments payable from October 2008 to September 2018 with interest rate of 6% and bullet payment of the remaining amount at the end of the period. As in assessment year 2009 – 10 the purchase

During financial year 2010 – 11 assessee has issued non-lien undertaking to the lenders of Essar global Ltd who is the ultimate holding parent company of the assessee and that company has obtained

Assessee has paid vessel hire charges of ₹ 54.73 crores as stated in form number

The learned AO further noted and made corporate adjustments. Disallowances as under :-

The assessment order was passed on 16/ 5/2016 at ₹ 626,450,031/– under section 144C (3) read with section 143 (3) of the income tax act.

Aggrieved with assessment order assessee preferred appeal before the learned CIT – A whole of the appeal of the assessee was allowed and therefore the assessing officer is aggrieved.

The ld AR at the initial stage submitted a chart and stated that all the issues raised by the ld AO in his appeal are covered by the decision of coordinate benches in assesses own case for number of Assessment years, therefore the whole of the appeal is covered against the revenue.

The learned departmental representative reiterated the findings of the learned transfer-pricing officer.

The learned authorized representative stated that this issue is squarely covered in favour of the assessee by the decision of the coordinate bench in assessee‟s own case for assessment year 2013 – 14 and further for assessment year 2015 – 16 to assessment year 2018 – 19.

We have carefully considered the rival contention and find that the assessee has offered income under tonnage tax scheme for it shipping operations. The coordinate bench in case of the assessee for assessment year 2013 – 14 has held as under :-

We have also gone through the orders of the Tribunal dated 26/06/2019 in assessee’s own case for the A.Y. 2010-11. From the record, we found that the assessee is offering its income as per tonnage taxation scheme under Chapter XII-G of the Act. The Ships so purchased are qualifying ships as per tonnage tax provision, income from which has been offered and accepted accordingly. The manner of computing income under tonnage tax scheme has been prescribed u/s 115VE of the Act. According to which profits of tonnage taxation shall be

From the record we found that the similar additions were made by the TPO in assessees own case in the A.Y. 2011-12 and were confirmed by the DRP, the assessee has been demerged from Essar Ports Limited w.e.f. 01/10/2010 i.e. A.Y. 2011-12. From the record we also found that since earlier the activities of assessee being carried on by Essar Ports Ltd., the assessment was made in case of Essar Ports Ltd. up to 30/09/2010. For the similar disallowance, the assessee came in appeal before the Tribunal and the Tribunal vide its order dated 26/06/2019 for the A.Y. 2011-12, deleted the similar addition so made by the A.O. after observing as under:

We have considered the submission of ld. Authorized Representative (AR) of the assessee

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

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,

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:

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

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 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

It has also been brought to our notice that an identical situation arose in assessees own case for AY 2013-14 where the Dispute

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 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

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.

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.

As the facts and circumstances during the year under consideation are same, respectfully following the order of the Tribunal in assessees own case, we do not find any justification for the addition made by the A.O. in respect of interest on purchase price of two ships. Accordingly, we direct the A.O. to delete the same.”

Ground number 2 of the appeal is with respect to the transfer pricing adjustment of ₹ 3,650,000 which was made at the rate of 0.5% in respect of negative lien provided in favour of associated enterprises for obtaining bank loan by AE. The assessee has stated it has provided a negative lien of not transferring the shares owned by assessee without the prior approval of the bankers of the associated enterprises. The learned CIT – A decided the issue in favour of the assessee holding that in the case of the assessee‟s own case for assessment year 2011 – 12 and 20 13 – 14 the Tribunal has held that

The learned Department representative stated that there is no infirmity in the order of the learned transfer pricing officer in determining the no lien right at the rate of 0.5% and the learned CIT – A merely followed the decision of the coordinate bench in assessee‟s own case in earlier years and adopted 0.25%. He submitted that the transfer pricing provisions shows that the benchmarking has to be done every year.

The learned authorized representative submitted that the transaction has arose in the earlier years which has continued in this year also. The coordinate bench on identical facts and circumstances has held that 0.25% is the ideal benchmark rate for the purpose of taking obligation of the assessee for not to sale the investment in the subsidiary company. Therefore, the issue is squarely covered in favour of the assessee.

We have carefully considered the rival contention and find that this issue is squarely covered in favour of the assessee by the decision of the coordinate bench in assessee‟s own case for assessment year 2013 – 14 first and thereafter it has followed for assessment year 2011 – 12 and 2015 – 16, 2016 –

On carefully considering the decision of coordinate bench, we find that undertaking by the assessee to not to transfer its holding in another company

Ground number 3 is with respect to the transfer pricing adjustment on hire charges. The learned CIT – A has decided this issue holding that in assessment year 2011 – 12 and assessment year 2013 – 14 on identical facts and circumstances the coordinate bench has deleted the adjustment. Therefore the learned CIT – A following the decision of the coordinate bench decided in favour of the assessee. Main reason is that when income of assessee is chargeable under tonnage tax scheme, there is no applicability of transfer pricing provisions.

The learned authorized representative supported the order of the learned CIT – A.

We have carefully considered the rival contention and perused the orders of the lower authorities. The fact that is undisputed is that the assessee has offered income under the tonnage taxation scheme for its shipping operation and as it has been held that since tonnage tax scheme actual receipt and expenses incurred are not taken into consideration for the purpose of determining the income of the assessee but it is decided on the basis of the tonnage of the ship and therefore transfer pricing provisions do not apply. This was held by the coordinate benches in assessee‟s own case for earlier years and therefore we do not find any infirmity in the order of the learned CIT – A who followed the decision of the coordinate bench in assessee‟s own case. Accordingly, ground number 3 of the appeal of learned AO is dismissed and order of the learned CIT – A is confirmed.

Ground number 4 of the appeal of the AO is with respect to the consideration of the interest of ₹ 555,056,455/– treated by the assessee as income from business, which is treated by the learned assessing officer as income from other sources. The

The learned departmental representative vehemently submitted that the interest of Rs. 54.15 crores received by the assessee from subsidiary companies is not the business income of the assessee and further the bank interest of ₹ 1.36 crores received by the assessee cannot be said to be the business income and therefore it has been rightly charged by

The learned authorized representative vehemently supported the order of the learned CIT – A which followed the decision of the coordinate bench in assessee‟s own case for earlier years and therefore stated that the issue is squarely covered in favour of the assessee and the judicial discipline demands that same judgment should be followed in absence of any change in the facts and circumstances of the case.

We have carefully considered the rival contention and perused the orders of the lower authorities. We find that for assessment year 2013 – 14 coordinate bench decided the issue in favour of the assessee vide paragraph number 28 of that decision wherein the interest received from the group concern was held to be the business income and further by paragraph number 30 the bank interest income was also held to be business income for the reason that assessee has put the margin money with the bank for business purpose of the assessee. The money With the bank as margin money was out of the business compulsion and not as per the will of the assessee and therefore such interest income was also considered to be taxable as business income. There is no change in the facts and circumstances of the case and therefore respectfully following the decision of the coordinate bench in assessee‟s own

Ground number 5 and 6 are with respect to the interest expenditure disallowed of ₹ 1,187,342,551/– as business expenditure under section 36 (1) (iii) of the act. The learned assessing officer has made this addition that the borrowed funds were not used for the purposes of the business. The learned CIT – A has held that the utilization of borrowed funds by the assessee company is allowable business expenditure under that section. The learned CIT – A has followed the decision of the coordinate bench in assessee‟s own case for assessment year 2013 – 14.

The learned departmental representative vehemently supported the order of the learned assessing officer holding that when the interest expenditure incurred by the assessee is not for the purpose of the business of shipping, same cannot be allowed as deduction to the assessee under section 36 (1) (iii) of the act.

The learned authorized representative vehemently supported the order of the learned CIT – A stating

We have carefully considered the rival contention and perused the orders of the lower authorities. We have also considered the decision of the coordinate bench in assessee‟s own case for earlier years i.e. assessment year 2013 – 14 where the identical issue arose about the interest expenditure of ₹ 1,368,229,021/– which has been decided by the coordinate bench as per paragraph number 32 as under:-

Interest paid to Yes Bank 19,91,29,094 Amount borrowed in A.Y. 2012-13 and used for investment in shares of Essar Oilfields Services Ltd Mauritius which is wholly owned subsidiary of assessee established for purpose of carrying out oilfield business.

Interest on FCCB 67,31,05,2015 Amount borrowed in A.Y. 2011-12 and used for investment in preference shares in wholly owned subsidiary for carrying out oilfield business. 4. Interest on aircraft taken on lease 1,56,83,680 Income earned from operation of aircraft has been offered as business income under non tonnage activity. Total 136,82,29,021/-

It is evident from the above chart that interest expenditure of Rs. 135,25,45,341/- has been incurred on amount borrowed for purpose of giving lCD to its subsidiary and interest of Rs. 1,56,83,680/- has been incurred on aircraft taken on lease.

As discussed hereinabove, the assessee derives business income from tonnage activity and non- tonnage activity. One of the activities, income from which is offered as business income under non

We also observe that even otherwise the interest expenditure incurred on the loans which are given to its subsidiaries as ICD on which interest was received by the assessee, such interest expenditure is eligible to be allowed U/s 57(iii) of the Act while computing net interest income, our this observation is without prejudice to our above observation that interest on loan is eligible for deduction U/s 36(1)(iii) of the Act.

It was also argued by the ld AR that no interest disallowance on old/outstanding loan can be made in the current year, if the same was allowed in earlier year. It was submitted that the said interest

We had also carefully perused the bank statement demonstrating the said nexus which is placed on record. It is evident from the said bank statement and ledger account that there is a direct nexus between the borrowed funds and the funds advanced to the subsidiary and hence the interest expenditure should otherwise be allowed as deduction U/s 57(iii) of the Act.

We are also of the view that even if the interest income is taxed as income from other sources, then the interest expenditure so incurred for earning the same should be allowed as deduction U/s 57(iii) of the Act. Since there was a direct nexus between the funds borrowed from the LIC and the money advanced to the subsidiary company and hence the interest expenditure of Rs. 48,03,11,032/- is otherwise liable to be allowed U/s 57(iii) of the Act. We direct accordingly.

From the record we found that AO had disallowed the interest paid on the funds borrowed which was given to subsidiaries / group companies. Since the ICDs were given to subsidiary in order to promote the business since an amount advanced to subsidiary would ultimately benefit the assessee,

The interest expenditure of INR48.03 crores was incurred during the year on the loan taken from LIC for giving the same as ICD to EOSIL on which interest income of INR53.97 crores was earned. As per the bank statement, there is direct nexus between the loan received from LIC and the ICD given, therefore, without prejudice to our conclusion that the income from ICD forms part of the business income of the assessee, corresponding interest expense has to be allowed against interest income earned by the assessee irrespective of the head of the income under which it is assessed. Thus, we observe that interest expenditure is otherwise allowable u/s.57(iii) since there is direct nexus between the interest expenditure and interest income earned by assessee. 43. From the record we also found that the money was borrowed from LIC and advanced to its wholly

In view of the above discussion, we direct the AO to treat interest income as income from business and to allow interest expenditure u/s.36(1)(iii) of the I.T. Act. We direct accordingly.” 033. As the above issue is decided by the coordinate bench on the basis of the facts and circumstances prevailing in that year which are also prevailing for this year undisputedly, therefore, respectfully following the decision of the coordinate bench in assessee‟s own case for earlier years, we held that the disallowance made by the learned assessing officer has been correctly deleted by the learned CIT – A of ₹ 1,187,342,551/– of the business interest expenditure under section 36 (1) (iii) of the act. Accordingly ground number 5 and 6 of the appeal of the learned assessing officer is dismissed confirming the order of the learned CIT – A.

Ground number 7 of the appeal of the learned assessing officer is with respect to the disallowance of common interest expenditure of ₹ 329,101,317/–.

The learned CIT – A the decision of the coordinate bench in assessee‟s own case for assessment year 2013 – 14 wherein identical issue arose.

The learned departmental representative supported the order of the learned assessing officer whereas the learned authorized of Representatives submitted that the learned CIT – A has followed the decision of the coordinate bench in assessee‟s own case for earlier years which has not been challenged by the learned assessing officer and therefore same is required to be followed. He referred to the order of the coordinate bench for assessment year 2013 – 14 and also for assessment year 2015 – 16 to 2018 – 19.

The learned CIT – A followed the decision of the coordinate bench in assessee‟s own case for earlier years and therefore we do not find any infirmity in his order in deleting the disallowance as the learned departmental representative could not show us any reason to deviate from the same. Accordingly, ground number 7 of the appeal of the learned assessing officer is dismissed.

Ground number 8 of the appeal of the learned assessing officer is with respect to admission of the additional ground by the learned CIT – A. The learned CIT – A admitted the additional claim made by the learned assessing officer for set off of tonnage business income of the current year loss by following the decision of the honourable Bombay High Court in case of 349 ITR 336. Ld CIT (A) has given findings in paragraph number 18 of the appellate order after obtaining the remand report from the assessing officer. The ground was admitted by the learned CIT – A subject to verification of the learned assessing officer. The learned departmental representative did not agitated the same before us stating any specific

In the result, appeal filed by the learned AO is dismissed.