Transfer Pricing Rules Don't Apply to Tonnage Tax Assessees Under Section 115VP, Says ITAT

The ITAT Chennai held that transfer pricing provisions do not apply to an assessee taxed under the Tonnage Tax Scheme per section 115VP, as income computation under this scheme is based solely on ship tonnage and not on arm's length pricing. The upward adjustments made by the TPO and confirmed by the AO regarding charter hire charges and sale value of ships were deleted, being untenable in law. The tribunal also rejected the assessee's contention that disallowances made under section 143(1) could be challenged in the appeal arising from the assessment order under section 143(3). Consequently, the appeal was partly allowed, affirming that transfer pricing provisions are inapplicable to core activities of tonnage tax companies and disallowances under section 143(1) are not adjudicable in the present appeal.

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ISSUES:

Whether the provisions of Chapter X (Transfer Pricing) apply to a tonnage tax company governed by Chapter XII-G (Tonnage Tax Scheme) under the Income Tax Act, 1961.Whether the reference made to the Transfer Pricing Officer (TPO) was valid and conferred jurisdiction in the context of a tonnage tax company.Whether upward adjustments made by the TPO regarding charter hire charges and sale value of vessel are sustainable under the tonnage tax scheme.Whether the Assessing Officer (AO) erred in adopting income determined under intimation u/s. 143(1) as the starting point for assessment u/s. 143(3) r.w.s.144C(13) r.w.s.144B.Whether the upward adjustment on sale of vessel results in double addition considering disallowance u/s. 37 already made in intimation u/s. 143(1).Whether disallowances made u/s. 28 to 43C in intimation u/s. 143(1) are open to challenge in appeal arising out of assessment order u/s. 143(3).Whether levy of interest u/s. 234A, 234B and 234C is justified.

RULINGS / HOLDINGS:

The provisions of Chapter X (Transfer Pricing) do not apply to a tonnage tax company for computation of income under Chapter XII-G (Tonnage Tax Scheme), as the latter provides a self-contained and independent mechanism for income computation based on net tonnage of qualifying ships, overriding sections 28 to 43C of the Act.The reference made to the Transfer Pricing Officer in respect of a tonnage tax company is invalid and confers no jurisdiction, rendering the transfer pricing proceedings and consequent adjustments void ab initio.The upward adjustments towards charter hire charges and sale value of vessel proposed by the TPO and confirmed by the AO are untenable in law and must be deleted, since such transactions form part of the core activity of the tonnage tax company and are governed exclusively by the tonnage tax scheme.The AO erred in adopting the income determined under intimation u/s. 143(1) as the starting point for assessment under section 143(3) r.w.s.144C(13) r.w.s.144B; however, disallowances made u/s. 28 to 43C in the intimation are not adjudicable in the appeal arising from the assessment order.The upward adjustment on sale of vessel results in double addition because loss on sale of vessel was already disallowed u/s. 37 in the intimation u/s. 143(1), and the AO failed to make consequential adjustments.The disallowances made u/s. 28 to 43C in intimation u/s. 143(1) are not within the scope of appeal against the assessment order u/s. 143(3), and thus cannot be challenged therein.The objections against levy of interest u/s. 234A, 234B and 234C were not upheld by the Tribunal (no specific ruling recorded in the provided text).

RATIONALE:

The Tribunal applied the statutory framework of the Income Tax Act, 1961, particularly sections 115VA, 115VG, and Chapter XII-G, which establish the tonnage tax scheme as a presumptive and self-contained regime for shipping companies, excluding the application of normal income computation provisions (sections 28 to 43C) and transfer pricing provisions (Chapter X).The Tribunal relied on authoritative precedents including the decision in Van Oord India (P.) Ltd. v DCIT and other Tribunal rulings that consistently held that transfer pricing provisions do not apply to tonnage tax companies for their core shipping activities.The Tribunal emphasized that the computation of tonnage income is based on net registered tonnage and days of operation, making related party transactions and arm's length price determinations irrelevant for income computation under the tonnage tax scheme.The Tribunal rejected the revenue's reliance on a Mumbai ITAT decision concerning corporate guarantee commission, distinguishing it as unrelated to core tonnage tax activities.The Tribunal noted that the TPO's failure to consider the valuation report and the effective sale consideration (including loan waiver) rendered the upward adjustment on sale value arbitrary and unjustified.The Tribunal clarified that disallowances made in the intimation u/s. 143(1) cannot be re-agitated in appeals arising from assessment orders u/s. 143(3), maintaining procedural propriety.The Tribunal's decision reflects a doctrinal reaffirmation that the tonnage tax scheme's provisions override conflicting provisions of the Income Tax Act, ensuring the scheme's integrity and purpose to foster competitiveness of Indian shipping business globally.

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