2024 (1) TMI 549 - AT - Income Tax

TP Adjustment - differential interest on account of bareboat Charter cum demise lease - HELD THAT - We have carefully considered the rival contention and find that the assessee has offered income under tonnage tax scheme for it shipping operations. The coordinate bench in case of the assessee for assessment year 2013 14 2020 (3) TMI 430 - ITAT MUMBAI held that the provisions of transfer pricing regulations are not applicable to the assessee to the extent of operation carried by assessee through qualifying ships which is covered by Tonnage Tax Scheme. Thus we find that this issue has already been decided by the coordinate bench in assessee s favour in assessee s own case for earlier years and also in case of subsequent assessment years. DR could not point out us any reason to deviate from the same and this judicial precedent binds us. As the learned CIT A has also followed the decision of the coordinate bench we do not find any infirmity in the order of the first appellate authority in deleting the above addition and therefore his order is confirmed. The main ground and sub grounds of ground number 1 are dismissed. TP adjustment - Addition as made at the rate of 0.5% in respect of negative lien provided in favour of associated enterprises for obtaining bank loan by AE - HELD THAT - We find that undertaking by the assessee to not to transfer its holding in another company without prior approval of the bankers of the AE is an international transaction resulting in to a benefit to the AE in obtaining loan. IT needs to be benchmarked. Coordinate bench has held that benchmarking at rate of 0.25 % of the amount of investment. As the issue is decided by the coordinate bench in assessee s own case , we do not find any reason to disturb the order of the learned CIT A as the transaction has originated in the earlier years and not in this year and further there is no difference in the facts and circumstances as well as the risk and assets employed by the assessee pointed out before us. In view of this, the benchmarking at the rate of 0.25% adopted by the learned CIT A was found to be correct as same is also not agitated by assessee, accordingly ground number 2 and its sub- grounds are dismissed confirming the order of the learned CIT appeal. TP adjustment on hire charges - CIT(A) deleted adjustment - HELD THJAT - As the issue is decided by the coordinate bench in assessee s own case , we do not find any reason to disturb the order of the learned CIT A as the transaction has originated in the earlier years and not in this year and further there is no difference in the facts and circumstances as well as the risk and assets employed by the assessee pointed out before us. In view of this, the benchmarking at the rate of 0.25% adopted by the learned CIT A was found to be correct as same is also not agitated by assessee, accordingly ground number 2 and its sub- grounds are dismissed confirming the order of the learned CIT appeal. TP adjustment on hire charges - HELD THAT - The fact that is undisputed is that the assessee has offered income under the tonnage taxation scheme for its shipping operation and as it has been held that since tonnage tax scheme actual receipt and expenses incurred are not taken into consideration for the purpose of determining the income of the assessee but it is decided on the basis of the tonnage of the ship and therefore transfer pricing provisions do not apply. This was held by the coordinate benches in assessee s own case for earlier years and therefore we do not find any infirmity in the order of the learned CIT A who followed the decision of the coordinate bench in assessee s own case. Accordingly, ground number 3 of the appeal of learned AO is dismissed and order of the learned CIT A is confirmed. Correct head of income - Consideration of the interest treated by the assessee as income from business, which is treated by the learned assessing officer as income from other sources - HELD THAT - The money With the bank as margin money was out of the business compulsion and not as per the will of the assessee and therefore such interest income was also considered to be taxable as business income. There is no change in the facts and circumstances of the case and therefore respectfully following the decision of the coordinate bench in assessee s own case for assessment year 2013 14, we have no hesitation in holding that interest received from subsidiary company and the bank are for the purpose of the business and therefore same is required to be charged to tax under the head income from business and not income from other sources. Accordingly ground number 4 of the appeal of the learned assessing officer is dismissed. Interest expenditure disallowed as business expenditure u/s 36 (1) - HELD THAT - As per assessee s own case for earlier years, we held that the disallowance made by AO has been correctly deleted by the CIT A of the business interest expenditure under section 36 (1) (iii) of the act. Accordingly ground of the appeal of the learned assessing officer is dismissed confirming the order of the learned CIT- A. Disallowance of common interest expenditure - HELD THAT - We found that the identical issue arose in the case of the assessee for assessment year 2013 14 2020 (3) TMI 430 - ITAT MUMBAI AO apportioned the said expenditure on the basis of turnover between tonnage and non tonnage activities. We do not find any merit in the order of the A.O. in so far as the interest expenditure is periodic cost of borrowing incurred for the purpose of financing business activities. Therefore it has to be apportioned on basis of cost of financing i.e. value of assets and not on basis of turnover, since the turnover of the business has got no relation with the interest expenditure so incurred by the assessee. We, accordingly, restore this issue to the file of the A.O. to recompute the same by allocating interest expenditure in the ratio of assets employed between the tonnage and non tonnage activities. Decided against revenue. Admission of the additional ground by the learned CIT- A - CIT - A admitted the additional claim made by the learned assessing officer for set off of tonnage business income of the current year loss - HELD THAT - The ground was admitted by the learned CIT A subject to verification of the learned assessing officer. The learned departmental representative did not agitated the same before us stating any specific reason that why the learned CIT A is not correct in admitting the additional ground of appeal. The facts clearly show that the assessee company in the return of income has shown tonnage tax business income and non-tonnage business loss and computed thereafter the net business loss. However while calculating the tax liability the assessee made an error of calculating the tax at the rate of 30% inadvertently. It was merely an arithmetic error which required to be rectified, allowed by the CIT A in the additional ground. No infirmity in the order of the learned CIT A in admitting the additional ground and directing the learned assessing officer to compute the correct taxable income. Accordingly, the ground of the appeal of the learned assessing officer is dismissed.

Note:- A Multifaceted Legal Analysis on Transfer Pricing and Tonnage Tax Scheme, Bareboat Charter, Interest on loan and other issues

Issues Involved:

1. Applicability of Arm's Length Pricing (ALP) adjustments under Chapter X in cases where tax is computed on a presumptive basis under the Tonnage Tax Scheme.
2. Determination of the rate for the fee for a negative lien issued by the assessee.
3. Classification of interest income from inter-corporate deposits (ICDs) as business income or income from other sources.
4. Disallowance of interest expenditure under sections 36(1)(iii) and 57(iii) of the Income Tax Act.
5. Apportionment of common interest expenditure between tonnage and non-tonnage activities.
6. Admission of additional grounds by the CIT(A) despite the assessee not filing a revised return.

Summary:

1. Applicability of ALP Adjustments under Chapter X:
The Tribunal held that the provisions of transfer pricing regulations are not applicable to the assessee to the extent of operations carried out through qualifying ships under the Tonnage Tax Scheme (TTS). It was emphasized that TTS is a complete code in itself and income is computed based on the tonnage capacity of ships and the number of days held, not on actual receipts or expenses. Therefore, the Arm's Length Pricing adjustments under Chapter X have no relevance in such cases.

2. Fee for Negative Lien:
The Tribunal upheld the CIT(A)'s decision to benchmark the fee for the negative lien at 0.25% instead of 0.5%, following the precedent set in the assessee's own case for earlier years. It was noted that the nature of the negative lien did not equate to a guarantee, and hence, a lower rate was justified.

3. Classification of Interest Income:
The Tribunal confirmed the CIT(A)'s decision that interest income from ICDs advanced to a subsidiary company and bank interest should be classified as business income. This was based on the precedent in the assessee's own case for earlier years, where it was held that such interest income is for the purpose of business and not income from other sources.

4. Disallowance of Interest Expenditure:
The Tribunal upheld the CIT(A)'s deletion of the disallowance of interest expenditure under sections 36(1)(iii) and 57(iii). It was established that the borrowed funds were used for the purpose of the business, including investments in subsidiaries for strategic purposes, and hence, the interest expenditure was allowable as business expenditure.

5. Apportionment of Common Interest Expenditure:
The Tribunal agreed with the CIT(A) that common interest expenditure should be apportioned based on the value of assets employed between tonnage and non-tonnage activities, not on turnover. This method was deemed appropriate as it reflects the cost of financing business activities.

6. Admission of Additional Grounds:
The Tribunal found no fault in the CIT(A)'s decision to admit the additional ground raised by the assessee regarding the set-off of tonnage business income against current year loss. This was deemed a rectifiable arithmetic error, and the CIT(A) had directed the AO to verify and compute the correct taxable income.

Conclusion:
The appeal filed by the AO was dismissed, and the order of the CIT(A) was upheld on all grounds. The Tribunal's decision was consistent with the precedents set in the assessee's own case for earlier years, reinforcing the principles of judicial discipline and consistency.

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