TaxTMI 
TaxTMI 
2019 (12) TMI 815
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....rs which, it is prayed, may be considered without prejudice to one another: General 1. On the facts and in the circumstances of the case and in law, the learned AO, based on directions of DRP erred in making addition of Rs. 17,24,50,468 in the Appellant's case. Applicability of transfer pricing provisions to companies covered under the Tonnage Tax Scheme 2. On the facts and in the circumstances of the case and in law, the learned AO/ DRP failed to appreciate that the transfer pricing regulations do not apply to the Appellant to the extent of operations carried out through operating qualifying ships, since the Appellant is a company registered under the Tonnage Tax Scheme ('TTS') provided under the Act. 3. The learned AO/DRP failed to appreciate that since the transfer pricing regulations do not apply to the Appellant, no reference should have been made to the Transfer Pricing Officer ('TPO') under section 92CA of the Act with regards to the income derived from operating qualifying ships by the Appellant. 4. The learned AO/ DRP erred in not appreciating the fact that section 92 of the Act is not a charging sec....
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.... pertaining to income covered under TTS, for which no deduction was claimed by the Appellant, since its TTS income is taxable on deemed basis and hence ought to be deleted. 13. On the facts and in the circumstances of the case and in law, the Hon'ble DRP erred in observing that the Appellant is having income under the normal provisions as well as under TTS provisions and stating that segregation of allocation of head office expenses into TTS and Non-TTS activity would lead to absurd results, as the Appellant has only TTS income in the relevant year. 14. Without prejudice to above, on the facts and in the circumstances of the case and in law, the learned AO/ TPO/ DRP erred in not accepting economic analysis undertaken by the Appellant and carrying out a transfer pricing adjustment of Rs. 17,24,50,468/- to the total income of the Appellant on account of allocation of head office expenses from its Associated Enterprises. 15. Without prejudice to above, the learned AO/ TPO/ DRP erred in making an adhoc adjustment of Rs. 17,24,50,468/- on account of allocation of head office expenses without appreciating the fact that the Appellant had submitted docu....
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....nt between India and Netherlands." 3. The matter concerning the additional ground shall be taken up post dealing with the original grounds. 4. The effective challenge, by way of all the 21 grounds originally taken, is to the action of the Assessing Officer in applying the Transfer Pricing Provisions, as contained in Chapter X of the Income Tax Act, to the case of the assessee company, Van Oord India Private Limited, which is a company covered as a Tonnage Company under the Tonnage Tax Scheme ('TTS', for short), as contained in Chapter XII-G of the Income Tax Act, i.e., sections 115V to 115VZC of the Income Tax Act. It has been submitted on behalf of the assessee, that ground No.2 pinpoints this grievance. 5. Facts first. The assessee is an Indian company incorporated under the provisions of the Companies Act, 1956. It is, during the year, as in the earlier years, inter-alia, engaged in the business of executing dredging contracts in India, involving capital & maintenance dredging & other survey and dredging related activities. It is a wholly owned subsidiary of Van Oord Dredging and Marine Contractors BV, which is incorporated in the Netherla....
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....ons of transfer pricing regulations do not apply to the companies, whose income is taxable under the Tonnage Tax Scheme, and hence, the adjustment/enhancement of income made in the transfer pricing order would not have any effect on the taxable income of the assessee. 7. The Assessing Officer held the Transfer Pricing Provisions of the Act to be applicable to the case of the assessee, on the following observations: "i. The Transfer Pricing Officer is a specialized person for determining Arm's Length Price with regard to international transactions with associated enterprises. His order is almost binding on the Assessing Officer, in view of the word 'shall' used in section 92CA(4), which is reproduced below: "On receipt of the order under sub-section (3), the Assessing Officer shall proceed to compute the total income of the assessee under subsection (4) of section 92C in conformity with the arm's length price as so determined by the Transfer Pricing Officer." "The Transfer Pricing Officer vide order u/s. 92CA(3) of the income-tax Act, 1961, dated 13/01/14 has held that adjustments aggregating to Rs. 17,24,50,468/- is made after considering all the subm....
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....ich is to be governed, by Tonnage Tax Scheme. Whereas, the transfer pricing provisions begin from section 92 and end with 92F. They are contained in chapter X in the special provisions relating to avoidance of tax. As such, it is not correct to interpret that the scheme of Tonnage Tax will override the provisions of section 92 to 90 2F The fact that they are special provisions (Transfer Pricing) puts them on an elevated position than other general provisions." 8. The Assessing Officer, thus, proposed to add back the amount of Rs. 17,24,50,468/- to the total income of the assessee, as ALP of the international transactions. 9. The assessee filed an objection against the transfer pricing adjustment of Rs. 17,24,50,468/- before the Dispute Resolution Panel (DRP)-II, Mumbai. The Dispute Resolution Panel-II, vide its order dated 8/12/2014, dismissed the objection of the assessee against the transfer pricing adjustment of Rs. 17,24,50,468/-. The DRP-II observed as follows: "6.2 Discussion and directions of DRP:- "6.2.1 The contentions raised by the assessee have been considered. At the outset, we would like to point out there is no exclusion prov....
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....lity or even borrowing and lending, etc., the transfer pricing provisions get attracted, whether there arises income from it which, requires to be adjusted depends on facts of each case. Thus even in cases where apparently there arises no income, the applicability of Transfer Pricing provisions may be called for TTS provisions are narrow and limited to few factors whereas Transfer Pricing Provisions takes into consideration wider and broader aspects. Verification of international transactions between assessee and its Associated Enterprise may lead to finding of income from factors which were not taken into consideration while arriving at income under TTS." 10. The Assessing Officer passed a final assessment order, dated 29/12/2014, i.e., the order under appeal. In para 3.3.5, at page 5 thereof, observing that the directions of the DRP are binding on the Assessing Officer, the TP adjustment of Rs. 17,24,50,468/-, as proposed in the draft assessment order (supra) dated 5/3/2014, was made to the returned income of the assessee. 11. Challenging the impugned order, the ld. A.R. of the assessee has, at the outset, submitted that if the transfer pricing prov....
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....r, it is not the case of the assessee that it has not undertaken any international transactions, which fall within the meaning of section 92B of the Act or it is not the case that the TP regulations of India are not applicable in the case of the assessee, as the assessee itself has filed the audit report in form 3CEB and further has also undertaken benchmarking process and having regard to the details mentioned in its TP report, has arrived at the conclusion that its international transactions are at arm's length; that if it was the contention of the assessee that the provisions of the T.P. do not apply in the case of the assessee, then it should not have itself filed the audit report in form 3CEB or should not have undertaken T.P. study to benchmark its international transactions; that when the facts of the case are such that the provisions of the T.P. Regulations of India are applicable to the case of the assessee, and the normal literal interpretation of the regulation are unambiguous and clear, then there is no need to go into the intention of the Regulations or proving the intent of the assessee, behind its transfer prices of services; that the assessee has raised the cont....
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....tonnage income of the company is computed, the same would be presumed to be the profits and gains of business; that actual receipt/ revenue earned and expenses incurred are not taken into consideration for the purpose of determining the income of the company.; that the TTS provides that in case the qualifying company is generating losses by operating qualifying ships, then such losses have to be ignored for the purpose of computation of tonnage income; that all the expenses, deduction, allowances or tax incentives are deemed to be allowed while computing the tonnage income of a qualifying company by operating qualifying ships; that since the tax is charged on deemed income on a presumptive basis, the income generated by operating qualifying ships should not be chargeable to tax; that section 115VA of the Act, starts with 'Notwithstanding anything to the contrary contained in section 28 to section 43C...."; that TTS, thus, provides for computation of income to the exclusion of sections 28 to 43C of the Act; that in case of companies which are into international transactions, the amount of allowable expenses is required to be determined under the arm's length principle under ....
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....to 92F of the Act. 16. This seeming imbroglio stands already resolved by the Tribunal in its order dated 22/5/2019 passed in the assessee's own case for assessment year 2007-08. In paragraphs 7 & 8 thereof, it has been observed as follows: "7. Section 115VA of the Act starts with "Notwithstanding any to the contrary contained in section 28 to section 43....". TTS thus, provides for computation of income to the exclusion of section 28 of the Act. In case of an assessee entering into international transactions with associated enterprise, the amount of allowable expenses is required to be determined as per the arm's length principle as per the machinery provisions of Chapter X (Section 92 to section 92F). The amount of allowable expenses determined as per the arm's length principle under section 92(1) of the Act would thus be relevant to compute business profits as provided for in sections 28 to 43C of the Act. The Assessee has opted to be governed by TTS, thus the provisions of section 115VA would override section 28 to section 43C and hence income has to be calculated with reference to the registered tonnage of the ships and not on basis of net profits depi....
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....(5) of the Act. 18. The Tribunal concluded by observing, thus: "14. To sum up, Tonnage Tax Scheme, as per Chapter XIT-G of the Act, is a separate code by itself in as much as it provides a selfcontained changing provision as well as method of computation of income in the chapter, and, the method of computation of income under TTS is not dependent on receipt or expenditure of the assessee. Under Tonnage Tax Scheme, the income has to be computed as per the method prescribed in section 115VG. The income as per Tonnage Tax Scheme is computed on the basis of the weight of the vessel and number of days it is held, irrespective of its revenue realizations and the expenditure incurred for the purpose of the business. Hence, neither the business receipts nor the business expenditure of the assessee has any bearing on the method prescribed for computation of income under TTS as per section 115VG. The tonnage tax scheme, in that sense, is a presumptive method of computation of taxable income which is not dependent on actual receipts and expenditure of the assessee. "15. In fact, the fallacy in the approach of the Assessing Officer can be gauged from a perusal....
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.... of computing tonnage income. A careful reading of section 115VG of the Act would make it clear that the mode and manner of computing tonnage income does not depend upon the income and expenditure stated in the profit and loss account but is on the basis of net tonnage of the qualifying ship multiplied by the number of days such ship was operated during the previous year." 20. It thus emerges, as rightly contended on behalf of the assessee, that since the assessee has opted to be governed by TTS, the provisions of section 115VA shall override sections 28 to 43C and hence, the income has to be calculated with reference to the registered tonnage of the ships and not on the basis of net profits; that consequently, the related party transactions are not considered for computing the income chargeable to tax, and, therefore, the arm's length price determined under the transfer pricing provisions would be of no relevance; that therefore, the determination of income/expense having regard to arm's length price would be of no relevance, as it would not affect the computation of income and the taxability of tonnage income of the assessee; and that even if the transfer pricin....
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....marking process and, having regard to the details mentioned in its TP report, has arrived at the conclusion that its international transactions are at arm's length. The assessee cannot, in the absence of anything to the contrary brought on record by the Revenue, be said to be incorrect in contending that the AO/ DRP erred in not appreciating the fact that the assessee has filed the accountant's report in Form 3CEB under section 92E of the Act out of abundant caution in respect of the tonnage tax income. Therefore, the Assessing Officer has erred in making these observations also and the assessment order fails on this count too. In fact, no reference to the TPO ought to have, at all, been made, in the first instance itself. 24. In view of the above discussion, the assessee is correct in contending that the AO/DRP failed to appreciate that the transfer pricing regulations do not apply to the assessee, to the extent of operations carried out through operating qualifying ships, since the assessee is a company registered under the Tonnage Tax Scheme ('TTS') provided under the Act. The facts in the year under consideration are not different from those i....
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....years 2007-08 and 2011-12. (i) The DRP has itself acceded to this legal claim of the assessee. 26. The assessee's grievance by way of ground No.2 is, thus, accepted and the TP addition of Rs. 17,24,50,468/- is deleted. As a consequence, ground Nos.3 to 21 stand rendered merely academic, requiring no adjudication. Ground No.1 is general. 27. Now, turning to the additional ground, for admission thereof, it has been contended by the ld. Counsel for the assessee that the additional ground could not be raised either at the time of filing of the return of income on 15th October, 2010, or during proceedings before the lower authorities (which culminated in passing of the Final Assessment order on 29th December, 2014), because during that period, the law that tax under section 115-O was a tax on the distributed profits of the company and not on dividend, as laid down by the Hon'ble Bombay High Court in the case of 'Godrej & Boyce Mfg. Co. Ltd. vs DCIT', 328 ITR 281 (Bom.), vide Judgment dated 12th August, 2010; that it was only when the Supreme Court, on 20th September, 2017 in the case of 'Union of India vs. Tata Tea Co. Ltd.', 85 taxmann.com 346 (SC), decid....
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....erein. 29. Insofar as regards the argument of the ld. DR that since the additional ground raised does not arise from the orders of the lower authorities, the same cannot be admitted, this argument deserves to be rejected in view of the decisions of the Hon'ble Supreme Court in the cases of 'National Thermal Power Co. Ltd. v. CIT', 229 ITR 383 (SC) and 'Jute Corporation of India Ltd. Vs. CIT', 187 ITR 688 (SC), and the Full Bench decision of the Hon'ble Bombay High Court in the case of 'Ahmedabad Electricity Co. Ltd. Vs. CIT', 199 ITR 351 (Bom.). In fact, as rightly submitted on behalf of the assessee, this is the settled position of law, as has been held by the Hon'ble Bombay High Court in the case of 'Ultratech Cement Ltd. Vs. ACIT', 81 taxmann.com 74. It remains undisputed that this issue could not be raised either at the time of filing of the return of income on 15th October, 2010, or during proceedings before the lower authorities (which culminated in passing of the Final Assessment order on 29th December, 2014), because during that period, the law as laid down by the Hon'ble Bombay High Court in the case of 'Godrej & Boyce Mfg. Co. Ltd. vs DCIT' ....
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.... the Treaty, by which Article, the claim of the assessee under Article 10(2) can be denied by the Revenue, is not necessary to decide the admissibility of the additional ground raised by the assessee. 31. With respect to the submission of the ld. DR that the procedure for making a claim, as prescribed in Article 10(3) of the DTAA, is not on record and hence, it requires factual investigation, we are of the view that the same does not, in any manner, relate to the assessee, or VODMC BV, or the project office, and hence, it cannot be regarded as a fact that needs to be examined for the purposes of admission and/or adjudication of the assessee's claim. In any case, as dwelt upon hereinabove, the assessee was prevented from raising the additional ground before the lower authorities, due to a reason beyond the control of the assessee, as considered above. This fact, by itself, is, in our opinion, sufficient to allow it to be raised at this stage. So, even if, arguendo, the objections of the Department were to be acceded to, the assessee's request for admission of the additional ground merits acceptance. 32. In view of the above, the additional gro....