2019 (6) TMI 1451 - AT - Income Tax

Tribunal rules in favor of assessee on transfer pricing under Tonnage Tax Scheme; Section 14A disallowance remanded

Essar Ports Ltd. Versus ACIT-6 (2) (2), Mumbai

The Tribunal ruled in favor of the assessee regarding transfer pricing adjustments under the Tonnage Tax Scheme, stating they do not apply. Issues ... Applicability of TP provisions of Chapter-X on Tonnage Tax Scheme of the Chapter XII-G - HELD THAT:- As relying on VAN OORD INDIA PRIVATE LIMITED, VERSUS ASSISTANT COMMISSIONER OF INCOME TAX - 5 (3) , MUMBAI [2019 (6) TMI 1238 - ITAT MUMBAI] 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. Addition u/s 14A r.w.r. 8D - HELD THAT:- The assessee has not furnished any working of suo moto disallowance of section14A. The assessing officer issued show cause notice to the assessee as to why disallowance under section 14 A should not be made. The assessing officer recorded that no working under section 14A was furnished by assessee. The assessing officer invoked the provisions of Rule 8D and made disallowance of ₹ 158.17 Crore, which consist of ₹ 131.78 Crore on account of disallowance under Rule 8D2(ii) and ₹ 26.38 Crore under Rule 8D2(iii). On appeal the ld CIT(A) concurred with the finding of the assessing officer. Before us, the ld AR for the assessee submits that only those investment which yielded the exempt income should be considered form disallwawances under section 14A and relied on the decision of ACB India [2015 (4) TMI 224 - DELHI HIGH COURT] and in assessee Vireet Investment [2017 (6) TMI 1124 - ITAT DELHI] considering the fact that the ld AR for the assessee has raised this plea for the first time before the Tribunal, therefore, this ground of appeal is restored to the file of assessing officer to adjudicate this issue afresh after following the decisions of Delhi High Court in ACB India [2015 (4) TMI 224 - DELHI HIGH COURT] CIT Vs Interglobe Enterprises Ltd. [2016 (9) TMI 552 - DELHI HIGH COURT] and decision of Special Bench of Delhi Tribunal in assessee Vireet Investment [2017 (6) TMI 1124 - ITAT DELHI] and in accordance with law. Needless to order that before passing the order the assessing officer shall grant opportunity to the assessee. Since, we have restored this issue to the file of assessing officer, hence, the other alternative contentions raised by the assessee has become academic. In the result this ground of appeal is allowed. Disallowances u/s 14A while computing income under section 115JB - Assessee submits that only disallowances which are determined under section 14A can be adopted to the purpose of minimum alternative tax (MAT). Considering the facts that we have already restored the issue of disallowance under section 14A to the file of assessing officer, therefore, this issue is also restored to the file of assessing officer to decide it after determining the disallowance under section 14A. However, the assessing officer is directed to consider the submissions of ld. AR for the assessee as recorded above and pass the order in accordance with law. Issues Involved:1. Legality of the CIT(A)'s order.2. Transfer pricing adjustments for the purchase price of a ship.3. Transfer pricing adjustments for fees receivable for providing a negative lien on shares.4. Transfer pricing adjustments for hire charges payable in respect of ships.5. Transfer pricing adjustments for ship management income.6. Transfer pricing adjustments for interest on ship acquisition on BBCD basis.7. Disallowance under Section 14A of the Income Tax Act.8. Additional disallowance under Section 14A beyond the amount already disallowed by the assessee.9. Applicability of transfer pricing adjustments to shipping operations under the Tonnage Tax Scheme.10. Additional ground regarding disallowance under Section 14A while computing income under Section 115JB.Detailed Analysis:1. Legality of the CIT(A)'s Order:The appellant did not press Ground No. 1, and thus, it was dismissed as not pressed.2. Transfer Pricing Adjustments for Purchase Price of Ship:The assessee argued that transfer pricing provisions are not applicable as it opted for the Tonnage Tax Scheme (TTS) under Chapter XII-G of the Act. This scheme provides a presumptive basis for taxation, where income is computed based on the tonnage capacity of qualifying ships and the number of days held, not actual transactions. The Tribunal referred to the decision in Van Oord India Private Ltd. vs. ACIT, which supported the assessee's position that transfer pricing provisions do not apply under the TTS. Consequently, the Tribunal ruled in favor of the assessee.3. Transfer Pricing Adjustments for Fees Receivable for Providing Negative Lien on Shares:Similar to the purchase price of the ship, the Tribunal found that transfer pricing adjustments are not applicable for fees receivable for providing a negative lien on shares, as the income from shipping operations is covered under the TTS.4. Transfer Pricing Adjustments for Hire Charges Payable in Respect of Ships:The Tribunal reiterated that transfer pricing provisions are not applicable under the TTS. Therefore, the adjustments for hire charges payable in respect of ships were also ruled in favor of the assessee.5. Transfer Pricing Adjustments for Ship Management Income:The Tribunal held that ship management income, being part of the shipping operations covered under the TTS, is not subject to transfer pricing adjustments.6. Transfer Pricing Adjustments for Interest on Ship Acquisition on BBCD Basis:The Tribunal ruled that interest on ship acquisition on BBCD basis, being part of the shipping operations covered under the TTS, is not subject to transfer pricing adjustments.7. Disallowance Under Section 14A of the Income Tax Act:The assessee had suo moto disallowed Rs. 36.10 Crore under Section 14A. The Assessing Officer (AO) made an additional disallowance of Rs. 158.17 Crore, invoking Rule 8D. The Tribunal found merit in the assessee's argument that only those investments that yielded exempt income during the year should be considered for disallowance under Section 14A. The Tribunal restored this issue to the AO for fresh adjudication, following relevant case laws.8. Additional Disallowance Under Section 14A Beyond the Amount Already Disallowed by the Assessee:The Tribunal restored this issue to the AO for fresh adjudication, considering the assessee's argument and relevant case laws. The AO is directed to grant an opportunity to the assessee before passing the order.9. Applicability of Transfer Pricing Adjustments to Shipping Operations Under the Tonnage Tax Scheme:The Tribunal concluded that transfer pricing regulations do not apply to the assessee's operations covered under the TTS. This conclusion was based on the principle that TTS is a self-contained code for computing income from qualifying ships, which is not influenced by actual transactions or transfer pricing provisions.10. Additional Ground Regarding Disallowance Under Section 14A While Computing Income Under Section 115JB:The Tribunal restored this issue to the AO for fresh adjudication, considering the submissions of the assessee and relevant case laws. The AO is directed to decide the issue after determining the disallowance under Section 14A.Conclusion:The Tribunal ruled in favor of the assessee on issues related to transfer pricing adjustments under the Tonnage Tax Scheme, stating that these adjustments do not apply. The issues related to disallowance under Section 14A were restored to the AO for fresh adjudication, following relevant case laws. The appeal was partly allowed.