2019 (6) TMI 1176 - AT - Income Tax

Applicability of transfer pricing provisions contained under chapter X - assessee who has opted for computation of its income under the Tonnage Tax Scheme (TTS) as provided under chapter XII G of the Act - HELD THAT - Undisputedly, the assessee has opted for computation of its profit derived from the shipping business under TTS as provided under chapter XII G of the Act. As per section 115VE of the Act TTS will apply only if an option to that effect is made in terms of section 115VP of the Act. In the facts of the present appeal, there is no dispute that assessee has exercised its option for computation of income under TTS in terms of section 115VP of the Act and the department has also approved it. Section 115VF of the Act provides that tonnage income shall be computed in the manner provided under section 115VG of the Act. Section 115VG lays down the mode and manner of computing tonnage income. 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. No doubt, the Assessing Officer has computed the income of the assessee under section 115VG - Conclusion drawn by Ld. Commissioner (Appeals) with regard to applicability of TP provisions to the present assessee needs to be tested. Notably, identical dispute came up for consideration before the Tribunal in assessee s own case in assessment year 2007 08 held that 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. 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.

Summary

Issues Involved:
1. Applicability of Transfer Pricing (TP) provisions under Chapter X to an assessee opting for Tonnage Tax Scheme (TTS) under Chapter XII-G.
2. Computation of income under TTS.
3. Relevance of arm's length price determination under TP provisions for TTS.

Issue-wise Detailed Analysis:

1. Applicability of Transfer Pricing (TP) Provisions under Chapter X to an Assessee Opting for Tonnage Tax Scheme (TTS) under Chapter XII-G:

The core issue in the appeal was whether the transfer pricing provisions under Chapter X apply to an assessee whose income is computed under the Tonnage Tax Scheme (TTS) as per Chapter XII-G. The assessee, a wholly-owned subsidiary of a foreign company, engaged in dredging activities in India, computed its income under TTS. The Transfer Pricing Officer (TPO) determined the arm’s length price (ALP) for transactions with the associated enterprise (AE) and suggested an adjustment which was added back by the Assessing Officer (AO). The Commissioner of Income Tax (Appeals) [CIT(A)] deleted the addition, following the Dispute Resolution Panel's (DRP) decision in the assessee’s favor for a subsequent year, holding that TP provisions do not apply to income computed under TTS.

2. Computation of Income under TTS:

The Tribunal acknowledged that the assessee opted for TTS, which is governed by Chapter XII-G. Under Section 115VG, the tonnage income is computed based on the net tonnage of the qualifying ship and the number of days it was operated, not on the actual income and expenditure. The Tribunal emphasized that TTS provides a presumptive basis of taxation, where the actual financial performance is irrelevant. The income is computed based on the tonnage capacity and operational days of the ship, making the actual receipts and expenses immaterial.

3. Relevance of Arm's Length Price Determination under TP Provisions for TTS:

The Tribunal highlighted that the TP provisions under Chapter X, which involve determining income/expenses based on the arm's length price, are irrelevant for TTS. The TTS computation is independent of the actual transactions' prices and focuses solely on the ship's tonnage and operational days. The Tribunal referenced various case laws and decisions, including the assessee’s own case for earlier years and other similar cases, to support this view. It was noted that the TP provisions do not alter the computation of income under TTS, as the latter is a self-contained code.

In conclusion, the Tribunal upheld the CIT(A)’s decision, affirming that TP provisions do not apply to the assessee’s income computed under TTS. The department’s appeal was dismissed, and the grounds raised in the cross-objection by the assessee were deemed academic/infructuous and dismissed accordingly.

Final Judgment:

Both the departmental appeal and the assessee’s cross-objection were dismissed. The Tribunal's order was pronounced in the open court on 21.06.2019.