AI Drafter 
TaxTMI 
TaxTMI 
2020 (3) TMI 430
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.... has filed its objection against the draft assessment order before the DRP and vide order dated 25/01/2017, the DRP disposed off the objections raised by the assessee. Against the order passed by the AO U/s 144C(13)giving effect to the directions of the DRP, the assessee is in further appeal before the ITAT. 2.1 Ground No. 1 of the appeal was not pressed by the ld AR, therefore, the same is dismissed as not pressed. 3. The second grievance of the assessee relates to transfer pricing adjustment of Rs. 55,48,550/- in respect of interest on purchase price of two ships. 4. At the outset, the ld AR of the assessee placed on record the order of the Tribunal dated 26/06/2019 in assessee's own case for the A.Y. 2011-12 wherein issue with regard to disallowance of interest was decided by the Tribunal in favour of the assessee. 5. We have considered the rival contentions and carefully gone through the orders of the authorities below and found from the record that during the year under consideration, the assessee had purchased two ships under Bare Boat Charter cum Demise (BBCD) agreement from Essar Shipping and Logistics Limited, Cyprus. The purchase price was agreed at USD 75 ....
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.... the Tonnage Tax Scheme covered under chapter XII-G of the Act. The option was exercised since AY 2005-06 till Ay 2014- 15. This fact is not disputed by ld. DR for the revenue as well as by the lower authorities. We have noted that on similar set of facts the coordinate bench of this Tribunal in Van Oord India Private Ltd. vs. ACIT (supra) held as under : "6. We have carefully considered the rival submissions, perused the relevant material, including the orders of the lower authorities as well as the case laws referred at the time of hearing. Notably, the controversy before us primarily revolves around the applicability of transfer pricing provisions to the income that is covered by Chapter XII-G of the Act i.e. Tonnage Tax Scheme. The TTS was introduced in the Finance (No. 2) Act, 2004, with the intention of increasing foreign direct investment in the Indian shipping industry and making it globally competitive. The income of a tonnage tax company depends on the tonnage capacity of the qualifying ships and the number of days for which it has been held. A reading of the provisions of TTS in Chapter XII-G suggest that the TTS is a charging section for the income generated by....
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....9;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 depicted in the financial statements or as per the profits adjusted in terms of Chapter-X. In fact, the related party transactions are not relevant for computing income chargeable to tax as per Chapter-XII G of the Act and therefore, the arm's length price determined under transfer pricing provisions would be of no relevance. In other words, determination of income/ expense having regard to arm's length price would not alter the computation of income and the taxability of tonnage income of an assessee covered by TTS. 8. Further, tonnage income is based on the weight of the vessel and not on "arm's length price". Section 92C prescribes methods for computation of arm's length price. None of the methods prescribed can have any application to computation of the tonnag....
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.... by the Parliament. There is no scope for tinkering with the provisions of section 115 VP of the Act. He has to follow the simple rule that no deduction is to be allowed or no disallowance is to be made under any of the normal provisions of the Act, once it is found that an assessee is to be assessed as per the provisions of chapter XIIG of the Act. Section 14A is not an exception to the TTS. Rather the scheme is an exception to the normal computation provisions, including the section 14A.Therefore,it cannot be said that when the income of the assessee from the business of operating ships was computed under the special provisions of Chapter XII-G, expenditure other than the expenditure incurred for the purpose of the business had been allowed. Considering the twin factors i.e. not claiming any expenditure against the nonshipping business income by the assessee and opting for TTS for shipping business, we are of the opinion that the order of the FAA does not suffer from any legal or factual infirmity. Therefore, confirming his order, we decide the effective ground of appeal against the AO." (underlined for emphasis by us) 10. On yet another occasion, our co-ordi....
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....section 115VA specifically states that the provision relates to the computation of profits and gains of the shipping business. Tonnage tax was intended to make the industry internationally competitive and also to induce more ships to fly the Indian flag. As the whole of FEFG is covered by the provisions of chapter XIIG of the Act, there is no justification in computing it under a different chapter or section." (underlined for emphasis by us) 12. Before parting, we also think it apposite to refer to the judgment rendered by the Hon'ble Supreme Court in the case of Trans Asian Shipping Services Pvt Ltd (supra). In the said case, the Supreme Court observed that ".......It may be stated in brief that in view of the stiff competition faced by the Indian shipping companies vis-a-vis foreign shipping lines, and in order to ensure an easily accessible, fixed rate, low tax regime for shipping companies, the Rakesh Mohan Committee in its report (of January, 2002) recommended the introduction of the TTS in India, which was similar to, and adopted some of the best global practices prevalent. The whole purpose of introduction of the Scheme was to make the Indian shipping industr....
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....f income, an aspect which is contrary to the judgment of the Hon'ble Bombay High court in the case of Vodafone Services Pvt.ltd. vs. UOI ( 2015) 53 Taxman.com 286 (Bom), wherein after referring to an earlier judgment dated 10th October, 2014 in the case of same assessee reported in 50 taxmann.com 300 (Bom) interalia , held that chapter X does not contain any charging provision but is a machinery provision to arrive at an arm's length price of a transaction between associated enterprises. 16. In the final analysis, it is seen that in the instant case, the provisions of chapter X have been invoked to alter an expenditure, namely the mobilisation and demobilisation charges paid for a qualifying ship, an item which has no bearing on the income as computed under Chapter XIIG and accordingly the provisions of Chapter X have no application in computing the income of the assessee chargeable to tax as per Chapter XII-G of the Act. 17. In view of the aforesaid discussion, in our considered view, the transfer pricing regulations do not apply to the assessee to the extent of operations carried out through operating qualifying ships where the income is taxed under TTS." ....
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.... Addl. CIT [157 ITD 132 (Mum)] ii) Siro Clinpharm Pvt. Ltd. v. Dy. CIT (ITA No: 2618/Mum/2014) dated 31.03.2016 iii) Marico Ltd v. ACIT (ITA No: 8858/Mum/2011) dated 18.05.2016 iv) Bharti Airtel Ltd v. Addl. CIT [161 TTJ 483 (Mum)] 13. On the other hand, the ld DR has relied on the order of the DRP. 14. We have considered the rival contentions and carefully gone through the orders of the authorities below and found from the record that the TPO/AO has made adjustment for providing letter of negative lien by assessee to the bank. The TPO has equated the said transaction with that of guarantee given to bank. In case of guarantee there is a possibility of a liability arising to the guarantor on account of providing guarantee. However, in the present case, even if EGL defaults in payment of loan, there will be no liability on assessee for paying any amount since assessee is not a guarantor. Hence, there would never be any liability on assessee even in case of default. However, keeping in view the nature of negative lien letter given by the assessee and the totality of facts and circumstances of the case and the terms of letter of negative lien given b....
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.... (Born)] (Head note) d) M/s Pan India Network Infravest Pvt . Ltd v. Addl . CIT ( ITA No: 7026/Mum/2013 dated 04.12.2015) 18. On the other hand, the ld. DR has relied on the order passed by the DRP. 19. We have considered the rival contentions and carefully gone through the orders of the authorities below. From the record, we found that the TPO has charged interest on advance for share application money to AE treating the same as a loan. 20. We have considered the judicial pronouncements referred by the ld AR and the ld. DR during the course before us as well as judicial pronouncements referred by the lower authorities in their respective orders. As per our considered view the A.O. has correctly charged interest by treating the advance for share application money as loans and advances, since the shares were not finally allotted and money was refunded back to the assessee, the A.O. has correctly made adjustment. However, the rate of interest to be applied on the said amount ought to be at LIBOR, since the transaction is in the foreign currency, our view is supported by the following decisions: i) CIT v. Aurionpro Solutions Ltd (ITA No: 1869 of 2014) (Bo....
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....DRP and contended that since the payment was not made within the period of 30 days of receipt of invoice, the assessee should have charged interest @ 1% per month which he failed to charge, accordingly, the TPO was justified in making the adjustment. 25. We have considered the rival contentions and carefully gone through the orders of the authorities below and found that the TPO has made adjustment by charging interest with regard to delay in receipt of payment for the services so rendered, accordingly, the TPO was justified in making the said adjustment. However, from the record, we found that the working of interest as determined by TPO is incorrect. The TPO has charged interest beyond the previous year relevant to assessment year under consideration. Accordingly, we restore the matter back to the file of TPO/AO to recalculate the chargeable interest and confine the same only up to the end of the year under consideration i.e. 31/3/2013 and not thereafter. We direct accordingly. 26. The next grievance of the assessee as contained in ground no.6 relates to taxing the interest income on loans / ICD given to subsidiaries and group concerns under the head "income from other sour....
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....e AO had discussed this ground at page No.3 to 4 of his order. The A.O. also observed that the assessee has not proved that the borrowed money was used for giving ICDs, hence, the interest expenditure cannot be allowed as deduction even if the interest income is held taxable under the head income from other sources. 28. From the record, we found that the business activities of the assessee comprises of shipping business, logistics business and oilfield business. The shipping and logistics business is being carried out by the assessee itself whereas the oilfield business is being carried out by the assessee through its subsidiary. We had also gone through the Memorandum of Association of the assessee and found that the main object of the assessee is "to enter into and conduct the business of owning and/ or leasing and/ or hiring and/ or operating all types of onshore and offshore drilling rings." Thus, it is clear that even as per the memorandum, it was main objection of the assessee. The assessee was carrying out business of drilling oil rigs through its subsidiary for this purpose the assessee borrowed money and advanced the same as ICDs to its subsidiary to carry out the drill....
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....ved on margin money which the assessee was required to keep with banks as per terms of sanction, hence the same is also for purpose of business. The money so kept with the bank as margin money was out of business compulsion and not as per the sweet will of the assessee, therefore, the interest earned on such margin money is also liable to be taxed as business income. 31. Assessee is also aggrieved for disallowance of interest expenditure. The A.O. has dealt with the issue at page Nos. 9 to 14. From the record we found that during the year, interest of Rs. 136,82,29,020/- was directly incurred for non tonnage activity and common interest of Rs. 37,75,64,523/- was allocated towards non-tonnage activity. Thus, the total interest expenditure of Rs. 174,57,93,543/- was claimed u/s 36(1)(iii) of the Act as business expenditure. It was contended before the Assessing Officer that the assessee is involved in business of oil drilling and the interest expenditure incurred was on account of loan taken from bank and LIC. The amount of money taken from bank and LIC was used for providing ICDs to its subsidiaries, as the business of oil drilling was carried out by assessee through its su....
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.... main object of the assessee was to carry out oil drilling business, which is also evident from the Director's report placed on record. Since the oil drilling business was carried out by the assessee through its subsidiary, loan was taken for giving as ICD to its subsidiary and assessee invested in subsidiary to acquire complete control over it since the assessee was to carry out its business of oil drilling through its subsidiaries. Therefore, the interest expenditure should be allowed as business expenditure U/s 36(1)(iii) of the Act. Since the investment was made in the group company for strategic purpose and not for earning dividend. Thus, the interest expenditure is allowable U/s 36(1)(iii) of the Act in so far as we have already held that the income on ICD earned from subsidiaries was liable to be taxed under the head income from business. From the record we found that the said interest expenditure was effectively incurred for oil drilling business of assessee and hence the same is on account of business and allowable u/s 36(1)(iii) of the Act. In order to support our proposition, reliance is placed on following decisions; a) CIT v. Phil Corporation Ltd [244 CTR 226 ....
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.... change in facts and circumstances of the case during the year under consideration. Thus, even on the doctrine of consistency, we find sufficient force in the argument of the ld AR that the interest expenditure which have already been allowed under business head of income in earlier year, the same should be allowed in the similar manner even during the year since there is no change in the facts and circumstances of the case. 39. We had also carefully perused the bank statement demonstrating the said nexus which is placed on record. It is evident from the said bank statement and ledger account that there is a direct nexus between the borrowed funds and the funds advanced to the subsidiary and hence the interest expenditure should otherwise be allowed as deduction U/s 57(iii) of the Act. 40. We are also of the view that even if the interest income is taxed as income from other sources, then the interest expenditure so incurred for earning the same should be allowed as deduction U/s 57(iii) of the Act. Since there was a direct nexus between the funds borrowed from the LIC and the money advanced to the subsidiary company and hence the interest expenditure of Rs. 48,03,11,032/-....
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....e loan received from LIC and the ICD given, therefore, without prejudice to our conclusion that the income from ICD forms part of the business income of the assessee, corresponding interest expense has to be allowed against interest income earned by the assessee irrespective of the head of the income under which it is assessed. Thus, we observe that interest expenditure is otherwise allowable u/s.57(iii) since there is direct nexus between the interest expenditure and interest income earned by assessee. 43. From the record we also found that the money was borrowed from LIC and advanced to its wholly owned subsidiary EOSIL as lCD in the earlier A.Y. 2010-11. The assessee was demerged from Essar Port Limited w.e.f. 01.10.2010 i.e. in A.Y. 2011-12. The money was advanced by Essar Ports Limited to EOSIL in A.Y. 2010-11 and Essar Ports Ltd received interest which was offered as business income. The same has been accepted by Assessing Officer in A.Y. 2010-11 as business income in the assessment order passed in case of Essar Ports Limited. Subsequently also in the assessment proceedings for A.Y. 2011-12, the same has been accepted by Assessing Officer as business income in case of E....