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Income Tax Appellate Tribunal, VISAKHAPATNAM BENCH, VISAKHAPATNAM
Before: SHRI DUVVURU RL REDDY, HON’BLE & SHRI S BALAKRISHNAN, HON’BLE
PER S. BALAKRISHNAN, Accountant Member :
This appeal filed by the assessee is directed against the order passed U/s. 143(3) r.w.s 144C(13) r.w.s 144B of the Income Tax Act, 1961 [the Act], for the AY 2017-18.
2 2. Brief facts of the case are that the assessee is engaged in the business of chartering of shipping vessels. The assessee has opted for presumptive taxation under the Chapter XII-G of the Act ie., Special Provisions relating to income from Shipping Companies. The assessee filed its return of income on 2/11/2017 declaring total income of Rs. 3,53,810/- which was subsequently revised U/s. 139(5) on 20/08/2018 admitting the same income. The case was selected for Limited Scrutiny under CASS. Notice U/s. 143(2) and 142(1) were issued and served on the assessee. In support of its return the assessee filed uploaded an order issued U/s 115VP(3)(i) of the Act dated 27/06/2013 permitting the assessee company to exercise the above option of Tonnage Tax Scheme for a period of 10 years. The Ld. AO on perusing the income tax return filed by the assessee found that the assessee has entered into international transaction with its Associated Enterprises [AEs] and referred the matter to the Ld. Transfer Pricing Officer [TPO] for valuation of Arm’s Length Price [ALP]. The Ld. TPO passed an order U/s. 92CA(3) of the Act on 24/12/2020 by making an adjustment of Rs. 2,08,21,534/- as Transfer Pricing adjustment on the international transactions entered into between the assessee and its AEs. The Ld. AO subsequently passed draft order U/s. 143(3) r.w.s 144C(1) of the Act on 18/3/2021. Aggrieved by the draft order, the assessee filed a petition before the Ld. Dispute Resolution Panel [DRP] raising its objections for the draft order. The Ld. DRP upheld the adjustment to the extent of Rs. 1,97,62,895/- with respect to Vessel Operating Cost and ship management fees. With regard to adjustment of Rs. 10,58,639/-, the Ld. DRP directed the Ld. TPO to verify the evidences and if found to be in order, directed to delete the adjustment. The Ld. TPO after providing various opportunities to the assessee and since no response was received from the assessee for the opportunities provided, subsequently passed the giving effect order in accordance with the direction of the Ld DRP U/s. 144C, dated 13/01/2022. The Ld. AO considering the order passed by the Ld. TPO giving effect to the directions of the Ld. DRP, passed final assessment order on 18/01/2022. Aggrieved by the final order of the Ld. AO, the assessee is in appeal before us.
3. The assessee has raised the following grounds of appeal:
“1. Failed to appreciate the fact that the Transfer Pricing regulations do not apply to the assessee. 1.1. On the facts and circumstances of the case and in law, the Ld. TPO / Ld. AO and further Hon’ble DRP failed to appreciate the fact that the Transfer Pricing regulations do not apply to the assessee, as the assessee is a company registered under the Tonnage Tax Scheme (TTS) as per the provisions of the Income Tax Act, 1961.
1.2. On the facts and circumstances of the case and in law, the Ld. TPO / Ld. AO and further Hon’ble DRP failed to appreciate the fact that the Transfer Pricing regulations do not apply to the assessee and hence no reference should have been made to the Ld. TPO U/s. 92C of the Income Tax Act, 1961. Accordingly, the reference made by the Ld. AO is bad in law. 1.3. On the facts and circumstances of the case and in law, the Ld. TPO / Ld. AO and further Hon’ble DRP failed to appreciate the fact that the appellant has filed the accountants report in Form 3CEB under section 92E of the act out of abundant caution. 1.4. On the facts and circumstances of the case and in law, the Hon’ble DRP erred in holding that the Chapter X of the Act is applicable to the appellant’s international transactions based on the similar view as taken by the Hon’ble DRP in AY 2013-14 without appreciating that the Tonnage Tax was not applicable to the appellant in AY 2013-14.
Erred in not considering that the ship management charges recovered from appellant are substantially various third party costs with a nominal mark-up.
On the facts and circumstances of the case and in law, Ld. AO / Ld. TPO and further Hon’ble DRP erred in not considering the fact that the ship management charges recovered by AE from assessee are recoveries of various third party costs incurred on behalf of assessee along with a nominal mark up of 10%.
Companies selected for benchmarking analysis by Ld. TPO are functionally dissimilar:
Without prejudice, on the facts and in the circumstances of the case and in law, the Ld. AO / Ld. TPO and further Hon’ble DRP erred in selecting functionally dissimilar companies.
Erred in rejecting the benchmarking approach consistently followed by the appellant with respect to ship management fees paid to AE and accepted by Ld. TPO / Ld. AO.
The Ld. TPO and Hon’ble DRP erred in not following the principle of consistency for payment of ship management services paid to the AE. The international transaction of payment of ship management fees has been accepted by the Revenue in the earlier assessment years ie AY 2014-15 to AY 2016-17 wherein the similar approach was adopted by the assessee to benchmark the international transaction of payment of ship management fees considering foreign AE as tested party.
5. Ld. TPO / Ld. AO erred in calculating the PLI of the appellant by considering abnormal impairment of ship as operating in nature. Without prejudice, on the facts and circumstances of the case and in law, the Ld. AO / Ld. TPO and further Hon’ble DRP erred in considering impairment of assets as an operating expenditure while calculating PLI of the appellant.
6. Erred in making adjustment for international transaction of reimbursement of dry docking expenses: The Ld. AO / Ld. TPO and further Hon’ble DRP erred in making an adjustment for the international transaction of reimbursement of dry docking expenses.
7. Erred in initiating penalty proceedings: The Ld. AO erred in proposing to initiate penalty U/s. 270(A) of the Act, in his assessment order, for concealment of income thereof. The above grounds of appeal are mutually exclusive & without prejudice to each other.”
4. At the outset, the Ld. AR argued that the Hon’ble DRP and the Ld. TPO / Ld. AO failed to appreciate the fact that the assessee has adopted Tonnage Tax Scheme U/s. 115V of the Act and hence the Transfer Pricing provisions are not applicable to the assessee. The Ld. AR referred to page 10 of the paper book wherein the order passed U/s. 115VP(3)(i) of the Act by the Joint Commissioner of Income Tax, Kakinada Range vide F. No. Tonnage Tax/2013-14, dated 27/06/2013, the Ld. AR argued that the assessee is entitled to exercise such option effective from the AY 2014-15 for a period of 10 years from the date of 6 exercising such option. The Ld. AR therefore pleaded that since the assessee has exercised its option for the first time during the impugned assessment year, the TP provisions cannot be applied to the assessee. In this regard, the Ld. AR placed heavy reliance on the following case laws:
(i) Essar Ports Ltd vs. DCIT [2020] 118 taxmann.com 433 (Mumbai); (ii) Van Oord India Private Limited vs. DCIT in IT(TP)A No.
720/Mum/2015 (AY: 2010-11), dated 11/11/2019; and (iii) Van Oord India Private Limite vs. ACIT in ITA
No.7228/Mum/2012 (AY 2007-08), dated 22/05/2019.
The Ld. AR referred to section 115VA of the Act stating that in the Computation of profits and gains from the business of operating qualifying ships, notwithstanding anything to the contrary contained in sections 28 to 43C, in the case of a company, the income from the business of operating qualifying ships, shall be computed in accordance with the provisions of this Chapter. The Ld. AR therefore pleaded that if the Bench upholds the applicability of Tonnage Tax Scheme, the adjudication of other grounds on merits shall become academic.
Countering the arguments of the Ld. AR, the Ld. DR submitted that 7 section 115VA starts with non-obstante clause covering section 28 to 43C of the Act hence section 92 is not covered and therefore Transfer Pricing provisions are applicable to the assessee-company. The Ld. DR further submitted that the assessee has not exercised its option under Tonnage Tax Scheme for the earlier assessment years. The Ld. DR also submitted that the assessee has not raised this objection before the lower authorities and are being raised for the first time before the Tribunal. The Ld. DR also further submitted that the assessee is not operating Ships on self basis but has chartered Ships to others. The Ld DR also referred to proviso to section 115VB of the Act stating that the a company shall not be regarded as the operator of a qualifying ships.
Contradicting the arguments of the Ld. DR, the Ld. AR submitted that the assessee is entitled to exercise its “option” under Tonnage Tax Scheme and it is not mandatorily applicable from the date of order u/s 115VP(3)(i) of the Act. The assessee exercised its option during the AY 2017-18 for the first time and hence the Ld. AR pleaded that the assessee is covered under the provisions of Chapter XII-G of the Act.
Further, the Ld. AR also referred to proviso to section 115VB of the Act stating that the a company shall not be regarded as the operator of a qualifying ships which has been chartered out by it on bareboat charter- cum-demise terms or on bareboat charter terms and hence it is not 8 applicable to the assessee company. The Ld. AR referred to the bareboat charter-cum-demise as mentioned in section 115V(b) of the Act. The Ld. AR pleaded that the assessee is in the business of operating qualifying ships and hence the provisions of Chapter XII-G are applicable for the impugned assessment year.
We have heard both the sides and perused the material available on record and the orders of the Ld. Revenue Authorities. The issue before us is whether the TP provisions are applicable to the assessee company covered under the Special Provisions relating to income of shipping company as prescribed under Chapter XII-G of the Act. In the instant case, the assessee has applied for registration for approval U/s. 115VP(3) of the Act allowing the company to exercise option under the Tonnage Tax Scheme. Accordingly, the Ld. JCIT, Kakinada Range vide F.No.
Tonnage Tax/2013-14, dated 27/06/2013 granted approval for a period of ten years effective from the AY 2014-15 from the date on which such option has been exercised by the assessee. As per the submissions of the Ld. AR, the assessee has exercised its option for the first time for the AY 2017-18. Further, we also find that the proviso to section 115VB of the Act does not cover the charter of ships to others. For reference sake, we hereby extract the section 115VB with proviso as follows:
9 “115VB. Operating ships.—For the purposes of this Chapter, a company shall be regarded as operating a ship if it operates any ship whether owned or chartered by it and includes a case where even a part of the ship has been chartered in by it in an arrangement such as slot charter, space charter or joint charter :
Provided that a company shall not be regarded as the operator of a ship which has been chartered out by it on bareboat charter-cum- demise terms or on bareboat charter terms for a period exceeding three years.”
Further, we also extract the definition of “bareboat charter-cum- demise" as defined U/s. 115V(b) of the Act:
“Sec. 115V(b) "bareboat charter-cum-demise" means a bareboat charter where the ownership of the ship is intended to be transferred after a specified period to the company to whom it has been chartered;”
7. Since the assessee is not engaged in the bareboat charter-cum- demise, argument of the Ld. DR is of no relevance. The Coordinate Bench of the Tribunal at Mumbai in the case of Van Oord India Private Limited vs. ACIT, (AY 2007-08), dated 22/05/2019, relying on the judgment of the Hon’ble Supreme Court in the case of Trans Asian Shipping Services Pvt Ltd (SC) (Civil Appeal No. 5869 and 5870 of 2016) held 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 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.
9…… 10….. 11……
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...... 13…… 14…. 15……
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.”
Further, a similar view has also been held by the Coordinate Bench 8. of Mumbai in the case of Van Oord India Private Limited vs. Dy. CIT in IT(TP)A No. 720/Mum/2015 (AY: 2010-11), dated 11/11/2019 and the relevant portion is extracted herein below:
“20. 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.”
Similar view was also held by Coordinate Bench at Mumbai in the case of Essar Ports Ltd vs. DCIT [2020] 118 taxmann.com 433 (Mumbai – Trib.) and the relevant para is extracted herein below:
“22. We have given a thoughtful consideration to the issue before us and find substantial force in the aforesaid claim of the assessee. In our considered view, the determination of income/expense having regard to arm's length price as envisaged in Chapter-X would have no bearing on the computation of income liable for taxation in Chapter-XII G of the Act. On a perusal of the tonnage tax scheme, it can safely be gathered that the same contemplates a presumptive basis for computing the taxable income of the qualifying ships. It lays down the mechanism for computation of income of the qualifying ships which is dependent on the tonnage capacity of the qualifying ships and number of days of operation. All the expenses, deductions, allowances or tax incentives are deemed to have been allowed while computing the income of the qualifying ship under the tonnage tax scheme. In sum and substance, the taxability of the income from qualifying ships is circumscribed by the framework provided in the tonnage tax scheme. In fact, the income determined as per the provisions of tonnage tax scheme contemplated in Chapter XII-G is to be deemed to be the income chargeable to tax under the head "Profits and gains of business or profession". As under the tonnage tax scheme, the actual receipts/revenues earned and expenses incurred are not taken into consideration for the purpose of determining the tonnage income of the company, therefore, in our considered view the applicability of the transfer pricing provisions as envisaged in Chapter X of the Act would stand excluded. Our aforesaid view is fortified by the order of the coordinate bench of the Tribunal viz. ITAT, Mumbai Benches "J", Mumbai in the case of Van Oord India (P.) Ltd. (supra). In the said case, the Tribunal had observed that the determination of income/expense having regard to arm's length price as envisaged in Chapter-X would have no relevance for the purpose of computing the income liable for tax under Chapter-XII G. It was observed by the Tribunal, 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.
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 14 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." 10. On perusal of the facts and circumstances of the instant case, as well as the judicial pronouncements extracted above, we are of the considered view that since the assessee has exercised its option under Tonnage Tax Scheme as per the provisions of Chapter XII-G of the Act, the provisions of Chapter-X cannot be applied in the computation of total income by the assessee. We therefore direct the Ld. TPO / Ld. AO to delete the additions made on account of Transfer Pricing adjustment. It is ordered accordingly.
Since the appeal has been decided in favour of the assessee based on the technical ground, the other grounds raised by the assessee on merits need not be adjudicated.
In the result, appeal filed by the assessee is allowed.
Pronounced in the open Court on the 14th July, 2023.