Tribunal Decision: Adjustments to Transfer Pricing, Interest Rates, and Income Classification

The Tribunal allowed the appeal in part, directing the AO to delete the transfer pricing adjustment on interest for the purchase of two ships under the Tonnage Tax Scheme. It also instructed the AO to adjust the fees for providing a negative lien at a lower rate, treat interest on the advance for preference shares using the LIBOR rate, recalculate interest on outstanding receivables until March 31, 2013, classify interest income on loans to subsidiaries as business income, allow interest expenditure under specified sections, reallocate common interest expenditure based on assets, and rectify double taxation of supervision management fees.

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Issues Involved:
1. Transfer pricing adjustment concerning interest on the purchase price of two ships.
2. Transfer pricing adjustment concerning fees receivable for providing a negative lien.
3. Transfer pricing adjustment concerning interest on advance given for allotment of preference shares.
4. Transfer pricing adjustment concerning interest on outstanding receivables.
5. Tax treatment of interest income on loans/ICDs given to subsidiaries and group concerns.
6. Claim of interest expenditure under section 36(1)(iii) and alternatively under section 57(iii).
7. Allocation of common interest expenditure between tonnage and non-tonnage activities.
8. Double taxation issue concerning supervision management fees.

Detailed Analysis:

1. Transfer Pricing Adjustment on Interest for Purchase of Two Ships
The assessee contested the transfer pricing adjustment of Rs. 55,48,550/- related to interest on the purchase price of two ships. The Tribunal referenced its earlier decision in the assessee's case for A.Y. 2011-12, where it was held that the income from qualifying ships under the Tonnage Tax Scheme (TTS) must be computed per Chapter XII-G. The Tribunal reiterated that TTS is a complete code, and transfer pricing provisions do not apply to income computed under TTS. Consequently, the Tribunal directed the AO to delete the addition.

2. Transfer Pricing Adjustment on Fees for Providing Negative Lien
The assessee challenged the adjustment of Rs. 36,50,000/- for fees receivable for providing a negative lien. The AO treated the negative lien as a guarantee, applying a 0.5% guarantee commission rate. The Tribunal noted that a negative lien does not equate to a guarantee as it does not create a liability for the assessee. The Tribunal directed the AO to apply a 0.25% rate instead of 0.5%.

3. Transfer Pricing Adjustment on Interest for Advance Given for Preference Shares
The assessee gave an advance of Rs. 52.97 crores for share application money, which was refunded as no shares were allotted. The TPO treated this as a loan and charged interest. The Tribunal upheld the AO's decision to treat the advance as a loan but directed the AO to apply the LIBOR rate for interest calculation, citing relevant judicial precedents.

4. Transfer Pricing Adjustment on Interest for Outstanding Receivables
The AO made an adjustment of Rs. 9,12,541/- for interest on delayed payments from AE. The Tribunal agreed with the AO's adjustment but found the interest calculation incorrect. It directed the AO to recalculate interest only up to 31/3/2013.

5. Tax Treatment of Interest Income on Loans/ICDs Given to Subsidiaries
The AO treated interest income from loans/ICDs to subsidiaries as "income from other sources" instead of "business income." The Tribunal held that the interest income should be treated as business income, as the loans were given for business purposes. The Tribunal noted that similar treatment was given in earlier years and directed the AO to maintain consistency.

6. Claim of Interest Expenditure under Section 36(1)(iii) and Alternatively under Section 57(iii)
The assessee claimed interest expenditure of Rs. 174,57,93,543/- under section 36(1)(iii). The Tribunal found that the interest expenditure was incurred for business purposes, including loans for ICDs to subsidiaries. It directed the AO to allow the interest expenditure under section 36(1)(iii). Alternatively, the Tribunal stated that if interest income is taxed as "income from other sources," the corresponding interest expenditure should be allowed under section 57(iii).

7. Allocation of Common Interest Expenditure
The AO allocated common interest expenditure based on turnover. The Tribunal found this method inappropriate, stating that allocation should be based on the value of assets employed. The issue was remanded to the AO for reallocation based on assets.

8. Double Taxation of Supervision Management Fees
The assessee argued that supervision management fees of Rs. 7,07,52,924/- were taxed twice. The Tribunal agreed that the AO had inadvertently added the same income under normal business income, leading to double taxation. The Tribunal directed the AO to correct this error.

Conclusion
The appeal was allowed in part, with the Tribunal providing specific directions for each issue. The Tribunal emphasized the application of TTS provisions, consistency in tax treatment, and proper allocation methods for interest expenditure. The order was pronounced on 6th March 2020.

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