Tonnage tax and transfer pricing: statutory shipping income, corporate guarantee benchmarking, and interest allocation rules upheld

Under the tonnage tax regime, qualifying shipping income is computed on the statutory tonnage basis, so transfer pricing adjustments to ship acquisition interest and hire charges were held inapplicable and the deletion was sustained. The negative lien fee, treated as a corporate guarantee, was benchmarked at 0.25% on the facts and that rate was affirmed. Interest earned on inter-corporate and bank deposits was treated as business income, and the related interest cost was allowable under section 36(1)(iii), or alternatively section 57(iii). Common interest expenditure was to be apportioned by assets employed, not turnover, and the turnover-based disallowance was rejected.

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Issues: (i) Whether transfer pricing adjustments on the ship acquisition interest and hire charges were sustainable when the assessee's shipping income was computed under the tonnage tax regime; (ii) whether the fee for negative lien, treated as a corporate guarantee, was correctly benchmarked at 0.25%; (iii) whether interest income from inter-corporate deposits and bank deposits was assessable as business income and the related interest expenditure was allowable; and (iv) whether common interest expenditure was to be apportioned by assets employed rather than turnover.

Issue (i): Whether transfer pricing adjustments on the ship acquisition interest and hire charges were sustainable when the assessee's shipping income was computed under the tonnage tax regime.

Analysis: The assessee's shipping operations were taxed under Chapter XII-G of the Income-tax Act, 1961. The tonnage tax scheme is a self-contained code, and income is computed on the statutory tonnage basis under Section 115VE, not on the basis of actual receipts or expenditure. Section 115VA overrides the normal business computation provisions in Sections 28 to 43, and the arm's length price mechanism under Chapter X has no bearing on the computation of tonnage income from qualifying ships. The Tribunal followed the binding coordinate bench view in the assessee's own case and found no basis to disturb the deletion of the adjustments.

Conclusion: The transfer pricing additions relating to ship acquisition interest and hire charges were not sustainable and the deletion was upheld in favour of the assessee.

Issue (ii): Whether the fee for negative lien, treated as a corporate guarantee, was correctly benchmarked at 0.25%.

Analysis: The negative lien undertaking provided a commercial benefit to the associated enterprise in obtaining finance and therefore required benchmarking. The Tribunal accepted the consistent view taken in earlier years in the assessee's own case that 0.25% was the appropriate arm's length charge on the facts, and found no change in the relevant risk profile or transaction characteristics to justify interference.

Conclusion: The benchmarking at 0.25% was affirmed and the Revenue's challenge failed.

Issue (iii): Whether interest income from inter-corporate deposits and bank deposits was assessable as business income and the related interest expenditure was allowable.

Analysis: The Tribunal held that the interest earned on deposits made in the course of the assessee's business operations was business income. It also held that the related borrowed-funds interest had the requisite nexus with the income-earning activity and was allowable as business expenditure under Section 36(1)(iii), or alternatively under Section 57(iii) if assessed under the head income from other sources. The consistent treatment accepted in earlier years supported the same conclusion.

Conclusion: The interest receipts were taxable as business income and the corresponding interest expenditure was allowable in favour of the assessee.

Issue (iv): Whether common interest expenditure was to be apportioned by assets employed rather than turnover.

Analysis: The Tribunal reiterated that interest is a periodic cost of borrowing linked to financing of assets and business activities. For that reason, the proper basis of apportionment between tonnage and non-tonnage activities is the value of assets employed, not turnover. The Revenue's turnover-based allocation was rejected in line with the assessee's earlier years' decisions.

Conclusion: The deletion of the turnover-based disallowance was upheld in favour of the assessee.

Final Conclusion: The Revenue's appeal failed on all substantive issues, and the appellate relief granted to the assessee was sustained.

Ratio Decidendi: Where shipping income is computed under the tonnage tax scheme, transfer pricing provisions cannot be used to alter the statutory computation of qualifying ship income, and recurring issues already settled in earlier years should be followed absent any material change in facts.

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