Transfer pricing rules don't apply to tonnage tax shipping operations, negative lien benchmarked at 0.25%

The ITAT Mumbai confirmed the CIT(A)'s order in favor of the assessee on multiple transfer pricing issues. The tribunal held that transfer pricing regulations do not apply to shipping operations under the tonnage tax scheme, following coordinate bench precedents. For negative lien provided to associated enterprises, the tribunal upheld benchmarking at 0.25% of investment amount. Interest income from subsidiary and bank was correctly classified as business income rather than income from other sources. The tribunal dismissed the AO's appeal on interest expenditure disallowance under section 36(1)(iii) and confirmed deletion of common interest expenditure disallowance, directing recomputation based on asset ratio rather than turnover ratio.

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Issues Involved:

1. Applicability of Arm's Length Pricing (ALP) adjustments under Chapter X in cases where tax is computed on a presumptive basis under the Tonnage Tax Scheme.
2. Determination of the rate for the fee for a negative lien issued by the assessee.
3. Classification of interest income from inter-corporate deposits (ICDs) as business income or income from other sources.
4. Disallowance of interest expenditure under sections 36(1)(iii) and 57(iii) of the Income Tax Act.
5. Apportionment of common interest expenditure between tonnage and non-tonnage activities.
6. Admission of additional grounds by the CIT(A) despite the assessee not filing a revised return.

Summary:

1. Applicability of ALP Adjustments under Chapter X:
The Tribunal held that the provisions of transfer pricing regulations are not applicable to the assessee to the extent of operations carried out through qualifying ships under the Tonnage Tax Scheme (TTS). It was emphasized that TTS is a complete code in itself and income is computed based on the tonnage capacity of ships and the number of days held, not on actual receipts or expenses. Therefore, the Arm's Length Pricing adjustments under Chapter X have no relevance in such cases.

2. Fee for Negative Lien:
The Tribunal upheld the CIT(A)'s decision to benchmark the fee for the negative lien at 0.25% instead of 0.5%, following the precedent set in the assessee's own case for earlier years. It was noted that the nature of the negative lien did not equate to a guarantee, and hence, a lower rate was justified.

3. Classification of Interest Income:
The Tribunal confirmed the CIT(A)'s decision that interest income from ICDs advanced to a subsidiary company and bank interest should be classified as business income. This was based on the precedent in the assessee's own case for earlier years, where it was held that such interest income is for the purpose of business and not income from other sources.

4. Disallowance of Interest Expenditure:
The Tribunal upheld the CIT(A)'s deletion of the disallowance of interest expenditure under sections 36(1)(iii) and 57(iii). It was established that the borrowed funds were used for the purpose of the business, including investments in subsidiaries for strategic purposes, and hence, the interest expenditure was allowable as business expenditure.

5. Apportionment of Common Interest Expenditure:
The Tribunal agreed with the CIT(A) that common interest expenditure should be apportioned based on the value of assets employed between tonnage and non-tonnage activities, not on turnover. This method was deemed appropriate as it reflects the cost of financing business activities.

6. Admission of Additional Grounds:
The Tribunal found no fault in the CIT(A)'s decision to admit the additional ground raised by the assessee regarding the set-off of tonnage business income against current year loss. This was deemed a rectifiable arithmetic error, and the CIT(A) had directed the AO to verify and compute the correct taxable income.

Conclusion:
The appeal filed by the AO was dismissed, and the order of the CIT(A) was upheld on all grounds. The Tribunal's decision was consistent with the precedents set in the assessee's own case for earlier years, reinforcing the principles of judicial discipline and consistency.

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