2019 (12) TMI 815 - AT - Income Tax

Tribunal rules Tonnage Tax Scheme companies exempt from transfer pricing, interest, and penalty.

The Tribunal ruled in favor of the assessee, stating that transfer pricing provisions do not apply to companies covered under the Tonnage Tax Scheme ... Transfer pricing regulations applicability to operations carried out through operating qualifying ships - assessee is a company registered under the Tonnage Tax Scheme ('TTS') - HELD THAT:- Assessee is correct in contending that the AO/DRP failed to appreciate that the transfer pricing regulations do not apply to the assessee, to the extent of operations carried out through operating qualifying ships, since the assessee is a company registered under the Tonnage Tax Scheme ('TTS') provided under the Act. The facts in the year under consideration are not different from those in assessment years 2007-08 and 2011-12, where the very same issue has been decided by the Tribunal in favour of the assessee. (a) Section 115VA of the Income Tax Act, forming part of the TTS (for which, the assessee has made option) contained in Chapter XII-G of the Act, excludes the operation of sections 28 to 43C of the Act pertaining to the computation of total income under Chapter IV of the Act. (b) For computing taxable income under Chapter XII-G of the Act, related party transactions have no relevance, weight and length of user of qualifying ships, rather than the nature of party for which the user is, or ALP, or income, or expenses, being the formula prescribed for computation of income under Chapter XII-G. (c) Consideration of the TP provisions, enclosing within them, the arm’s length principle, under Chapter X (sections 92 to 92F) of the Act are, a fortiori, not applicable to the TTS and ALP does not affect the computation and taxability of the tonnage income of the assessee. (d) Computation of income under the TTS is, thus, not impinged upon by the adjustment made by the TPO. (e) Income computed under the TTS is, by virtue of section 115VF, deemed to be the profits taxable as profits & gains of business or profession. (f) The amount which represents reimbursement of Head Office Expenses by the assessee to its holding company and AE, has wrongly been added, by altering the expenditure, under Chapter X, despite the inapplicability of the Chapter and inspite of the fact that Chapter X contains only machinery provisions and no charging provisions, sans which, it is trite, no tax can be levied. (g) Non-applicability of Chapter X does not get altered by the factum of the assessee having either filed audit report in Form 3CEB, or undertaken the benchmarking process and concluding its international transactions to be at arm’s length. (h) The issue stands decided by the Tribunal in favour of the assessee vide its orders in the assessee’s case for assessment years 2007-08 and 2011-12. (i) The DRP has itself acceded to this legal claim of the assessee. Dividend Distribution Tax (DDT) under section 115-O on the dividends declared and paid by the assessee, to its foreign shareholder who is a tax resident of the Netherlands - excess of the rate provided under Article 10 read with the Most Favoured Nation clause under Article IV of the Protocol to the Double Taxation Avoidance Agreement between India and the Netherlands - Admission of additional grounds - HELD THAT:- With respect to the submission of the ld. DR that the procedure for making a claim, as prescribed in Article 10(3) of the DTAA, is not on record and hence, it requires factual investigation, we are of the view that the same does not, in any manner, relate to the assessee, or VODMC BV, or the project office, and hence, it cannot be regarded as a fact that needs to be examined for the purposes of admission and/or adjudication of the assessee's claim. In any case, as dwelt upon hereinabove, the assessee was prevented from raising the additional ground before the lower authorities, due to a reason beyond the control of the assessee, as considered above. This fact, by itself, is, in our opinion, sufficient to allow it to be raised at this stage. So, even if, arguendo, the objections of the Department were to be acceded to, the assessee’s request for admission of the additional ground merits acceptance. We set aside this issue to the file of the Assessing Officer to examine the same in the light of the judgments of the Hon’ble Supreme Court in the cases of ‘Union of India vs. Tata Tea Co. Ltd.’ [2017 (9) TMI 1300 - SUPREME COURT] and ‘Godrej & Boyce Manufacturing Company Ltd. vs. DCIT’ [2017 (5) TMI 403 - SUPREME COURT] , after providing due opportunity of hearing to the assessee. The assessee, no doubt, shall cooperate in the fresh proceedings before the Assessing Officer. Issues Involved:1. Applicability of transfer pricing provisions to companies covered under the Tonnage Tax Scheme (TTS).2. Addition on account of allocation of head office expenses.3. Levy of interest under sections 234B and 234C.4. Initiation of penalty proceedings under section 271(1)(c).5. Additional ground concerning Dividend Distribution Tax (DDT) under section 115-O.Issue-wise Detailed Analysis:1. Applicability of Transfer Pricing Provisions to Companies Covered under the Tonnage Tax Scheme (TTS):The primary issue in this case was whether the transfer pricing provisions under Chapter X of the Income Tax Act apply to a company registered under the Tonnage Tax Scheme (TTS) as per Chapter XII-G. The assessee contended that since it was governed by TTS, which provides for a presumptive basis of taxation based on the tonnage capacity of qualifying ships and the number of days operated, the transfer pricing provisions should not apply. The Tribunal noted that the TTS provisions override sections 28 to 43C of the Act, and the computation of income under TTS is based on the weight of the vessel and not on actual income or expenses. The Tribunal cited its earlier decisions in the assessee's own case for assessment years 2007-08 and 2011-12, where it was held that transfer pricing provisions do not apply to income from operating qualifying ships under TTS. Consequently, the Tribunal ruled in favor of the assessee, stating that the transfer pricing adjustment made by the TPO was not applicable.2. Addition on Account of Allocation of Head Office Expenses:The assessee challenged the adjustment of Rs. 17,24,50,468 made by the TPO towards head office expenses. The Tribunal observed that since the transfer pricing provisions do not apply to the assessee's income under TTS, the adjustment made by the TPO was irrelevant. The Tribunal noted that the income under TTS is computed on a presumptive basis and is not affected by actual expenses. Therefore, the addition made by the TPO was deleted.3. Levy of Interest under Sections 234B and 234C:The assessee contested the levy of interest under sections 234B and 234C amounting to Rs. 3,48,71,080 and Rs. 1,27,057, respectively. However, since the Tribunal ruled in favor of the assessee on the primary issue of transfer pricing provisions not being applicable, the grounds related to the levy of interest became academic and did not require adjudication.4. Initiation of Penalty Proceedings under Section 271(1)(c):The assessee also challenged the initiation of penalty proceedings under section 271(1)(c). As the Tribunal ruled in favor of the assessee on the primary issue, this ground also became academic and did not require further adjudication.5. Additional Ground Concerning Dividend Distribution Tax (DDT) under Section 115-O:The assessee raised an additional ground concerning the Dividend Distribution Tax (DDT) paid under section 115-O, arguing that the tax paid was in excess of the rate provided under the Double Taxation Avoidance Agreement (DTAA) between India and the Netherlands. The Tribunal admitted the additional ground, noting that the issue could not be raised earlier due to the prevailing legal position. The Tribunal set aside the issue to the file of the Assessing Officer to examine it in light of the Supreme Court judgments in the cases of Union of India vs. Tata Tea Co. Ltd. and Godrej & Boyce Manufacturing Company Ltd. vs. DCIT, which held that DDT is a tax on dividend income. The Assessing Officer was directed to provide an opportunity of hearing to the assessee and consider all relevant pleas.Conclusion:The Tribunal ruled in favor of the assessee on the primary issue of the applicability of transfer pricing provisions to income under TTS, leading to the deletion of the transfer pricing adjustment. Consequently, other related grounds became academic. The additional ground concerning DDT was admitted and remanded to the Assessing Officer for fresh examination. The appeal was treated as partly allowed for statistical purposes.