2023 (7) TMI 685 - AT - Income Tax

Tribunal Exempts Company Under Tonnage Tax Scheme from Transfer Pricing Regulations

The Tribunal concluded that Transfer Pricing (TP) regulations do not apply to a company under the Tonnage Tax Scheme (TTS) as it provides a presumptive ... TP Adjustment - Tonnage Tax Scheme Applicable - 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? - HELD THAT:- 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. 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. We also find that the proviso to section 115VB of the Act does not cover the charter of ships to others. 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 TPO / AO to delete the additions made on account of Transfer Pricing adjustment. Appeal of assessee allowed. Issues Involved:1. Applicability of Transfer Pricing (TP) regulations to a company under the Tonnage Tax Scheme (TTS).2. Ship management charges and their treatment under TP regulations.3. Selection of companies for benchmarking analysis.4. Consistency in benchmarking approach for ship management fees.5. Calculation of Profit Level Indicator (PLI) considering impairment of ships.6. Adjustment for international transaction of dry docking expenses.7. Initiation of penalty proceedings.Summary:Issue 1: Applicability of Transfer Pricing (TP) RegulationsThe primary issue was whether TP provisions apply to a company under TTS. The Tribunal concluded that since the assessee opted for TTS under Chapter XII-G of the Income Tax Act, TP provisions are not applicable. The Tribunal relied on multiple judicial precedents, including the Supreme Court's judgment in Trans Asian Shipping Services Pvt Ltd, which emphasized that TTS provides a presumptive basis for computing income based on the tonnage capacity of ships, excluding the relevance of TP adjustments.Issue 2: Ship Management ChargesThe assessee argued that ship management charges recovered from it were primarily third-party costs with a nominal markup. The Tribunal did not need to adjudicate this issue separately due to the ruling on the primary issue.Issue 3: Benchmarking AnalysisThe assessee contended that the companies selected for benchmarking by the TPO were functionally dissimilar. This issue became academic following the Tribunal's decision on the primary issue.Issue 4: Consistency in Benchmarking ApproachThe assessee argued that the benchmarking approach for ship management fees had been consistent and accepted in previous assessment years. This argument was also rendered academic due to the primary ruling.Issue 5: Calculation of PLIThe assessee challenged the inclusion of abnormal impairment of ships as an operating expenditure in calculating PLI. This issue was not separately adjudicated due to the primary ruling.Issue 6: Adjustment for Dry Docking ExpensesThe assessee contested the adjustment for the international transaction of dry docking expenses. This issue was not separately adjudicated due to the primary ruling.Issue 7: Initiation of Penalty ProceedingsThe assessee contested the initiation of penalty proceedings under Section 270(A) for concealment of income. This issue was not separately adjudicated due to the primary ruling.Conclusion:The Tribunal allowed the appeal, directing the deletion of TP adjustments, as the assessee's income under TTS is computed based on tonnage capacity, making TP provisions inapplicable. Other grounds raised by the assessee were rendered academic and not adjudicated. The judgment was pronounced on July 14, 2023.