TaxTMI 
TaxTMI 
2020 (3) TMI 430
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....sessment 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 million and USD 73 million. However, the TPO had determ....
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....tion 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 carrying out business of operating ships. Further, it also prescribes the ....
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....ed 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 tonnage income. In these circumstances, the computation provisions of Chapter X of the Act would fail and therefore, applicat....
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....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-ordinate bench in the case of Tag Off shore(supra) was concerned with a situation where the Revenue sought to make an addition by invoking the provisions of Sec....
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....ally 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 industry more competitive in the global space by rationalising its tax cost......" The Hon'ble Supreme Court further observed that, we would also like to refer to Circular No. 05/2005 dated 15.07.20....
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....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." 11. Considering the decision of coordinate bench of the Tribunal as referred above, the provisions of transfer pricing regulations are not applicable to the assessee to the extent of operation carried by assessee through qualifying shi....
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....d, 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 by the assessee, we direct the A.O. to make adjustment by applying 0.25% to the said transaction instead of 0.5% applied by the AO. We direct accordingly. 15. The next grievance of the assessee as contained in ground no.4 relates to transfer pricing adjustment in respect of interest on....
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....rom 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) (Bombay High Court) ii) Cotton Naturals (I) Pvt. Ltd. v DCIT [276 CTR 445 (Del)] iii) Hinduja Global Solutions Ltd v Addl.CIT [145 lTD 361 (Mum)] iv) Siva Industries & Holding Ltd. vs. CIT [145 TTJ 497 (Chen)] v) 3F Industries Ltd. Jt. Cit [63 SOT 314 (Visak)] vi) M/s. Everest Kanto Cylinder Ltd. v. ACIT being ITA No.7073/Mum/....
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.... 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 sources" as against "income from business" as claimed by assessee. In ground No.7, assessee has challenged AO's action for declining claim of interest expenditure u/s.36(1)(iii) of I.T. Act. As an alternate in ground No.8, the assessee has requested to allow interest expenses u/s.57(iii). All these three grounds are interrelated, therefore, disposed by us as under. 27. Rival content....
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.... 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 drilling business. Thus, the business so carried out by the subsidiary was as per the main objects of the assessee company. The assessee had not given ICD to its subsidiary for the purpose of earning interest income. Accordingly, the income on such ICD has to be treated as business income only, since it has been earned in the course of the business of the assessee and forms part of the bu....
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....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 subsidiary. It was also contended that similar interest expenditure has been allowed u/s.36(1)(iii) in A.Y. 2011-12. The Assessing Officer held that oil drilling is not the business of assessee. He further held that interest income earned from ICDs has been taxed under the head income from other sources and hence interest expenditure cannot be allowed u/s 36(1)(iii) of the Act. The A.O. further held that out of total interest ....
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....enditure 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 (Born)] b) CIT vs. Colgate Palmolive India Limited [(370 ITR 728) (Bom)] c) CIT v. Investa Industrial Corpn. Ltd. [(119 FUR 380) (Bom.)] d) CIT v. RPG Transmission Ltd. [359 ITR 673 (Mad)] e) Raptakos Brett & Co. Ltd vs. PCIT. (ITA No. 2251/Mu m/2015) (Mumbai Tribunal) 35. In all the above cases, it has been held that if the investment is made in subsidiary for the purpose of business, the loss or expenditure incurred by assessee would be allowable as busines....
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.... 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/- is otherwise liable to be allowed U/s 57(iii) of the Act. We direct accordingly. 41. From the record we found that AO had disallowed the interest paid on the funds borrowed which was given to subsidiaries / group companies. Since the ICDs were given to subsidiary in order to promote the business since an amount advanced to subsidiary would ultimately benefit the assessee, the interest paid is allowable as business expenditure. In order to support the said contention reliance is placed on the decision of the Hon'ble Supreme Court in the cas....
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....y 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 Essar Ports Limited and in case of assessee also as business income in scrutiny assessment framed u/s 143(3) of the Act. The relevant assessment order so passed U/s 143(3) of the Act for the A.Y. 2010-11 and 2011-12 are placed on record. However, during the year under consideration, the assessee continued to receive similar interest income on the lCD from EOSIL which was given out of money borrowed from LIC. The assessee offered the same as business income but the he A.O. treated the same as income from other sources. There is no change in the facts and ci....