2020 (3) TMI 430 - AT - Income Tax

Transfer pricing adjustment in respect of interest on purchase price of two ships - Tonnage Tax Scheme applicability - HELD 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. 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. Considering the decision of coordinate bench of the Tribunal in own case 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. Transfer pricing adjustment on account of fees receivable for providing negative lien - HELD THAT - As 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. 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. Transfer pricing adjustment in respect of interest on advance given for allotment of preference shares - HELD THAT - 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. As 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. Rate of interest to be applied on the said amount ought to be at LIBOR, since the transaction is in the foreign currency as relying on M/S AURIONPRO SOLUTIONS LTD. 2017 (6) TMI 1087 - BOMBAY HIGH COURT and Cotton Naturals (I) Pvt. Ltd. v DCIT 2015 (3) TMI 1031 - DELHI HIGH COURT - we direct the TPO/AO to restrict the adjustment by taking LIBOR rate. We direct accordingly. This ground of appeal is allowed in part. Adjustment in respect of interest on outstanding receivables - 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 - HELD THAT - As 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. Interest income on loans / ICD given to subsidiaries and group concerns - Correct head of income - income from other sources or income from business as claimed by assessee - HELD THAT - In the present case, the assessee has advanced ICD to its subsidiary in order to promote their business and charged interest thereon. Applying the ratio laid down by the Hon'ble Supreme Court in the case of S.A. Builders v. CIT 2006 (12) TMI 82 - SUPREME COURT wherein it has been held that interest expenditure incurred by the assessee is allowable as business expenditure, the interest income earned by the assessee on ICD given to subsidiary to promote their business would be taxable as business income. We direct the AO to treat interest income as income from business and to allow interest expenditure u/s.36(1)(iii) of the I.T. Act. We direct accordingly. Disallowance of common interest expenditure - HELD THAT - Assessing Officer 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. We direct accordingly. Whether once the income is treated as income under tonnage tax income, the same should not again be taxed as part of normal income offered by the assessee ? - From the record we found that AO was justified in treating the income of ₹ 7,07,52,924/- as tonnage tax income, however, the same should not again form the part of normal business income. We found that AO has inadvertently again added the same income under the head normal business income, which amount to double taxation of same income, accordingly, we direct the AO to reduce the same from normal business income after due verification. We direct accordingly.

Summary

Issues Involved:
1. Transfer pricing adjustment concerning interest on the purchase price of two ships.
2. Transfer pricing adjustment concerning fees receivable for providing a negative lien.
3. Transfer pricing adjustment concerning interest on advance given for allotment of preference shares.
4. Transfer pricing adjustment concerning interest on outstanding receivables.
5. Tax treatment of interest income on loans/ICDs given to subsidiaries and group concerns.
6. Claim of interest expenditure under section 36(1)(iii) and alternatively under section 57(iii).
7. Allocation of common interest expenditure between tonnage and non-tonnage activities.
8. Double taxation issue concerning supervision management fees.

Detailed Analysis:

1. Transfer Pricing Adjustment on Interest for Purchase of Two Ships
The assessee contested the transfer pricing adjustment of ?55,48,550/- related to interest on the purchase price of two ships. The Tribunal referenced its earlier decision in the assessee's case for A.Y. 2011-12, where it was held that the income from qualifying ships under the Tonnage Tax Scheme (TTS) must be computed per Chapter XII-G. The Tribunal reiterated that TTS is a complete code, and transfer pricing provisions do not apply to income computed under TTS. Consequently, the Tribunal directed the AO to delete the addition.

2. Transfer Pricing Adjustment on Fees for Providing Negative Lien
The assessee challenged the adjustment of ?36,50,000/- for fees receivable for providing a negative lien. The AO treated the negative lien as a guarantee, applying a 0.5% guarantee commission rate. The Tribunal noted that a negative lien does not equate to a guarantee as it does not create a liability for the assessee. The Tribunal directed the AO to apply a 0.25% rate instead of 0.5%.

3. Transfer Pricing Adjustment on Interest for Advance Given for Preference Shares
The assessee gave an advance of ?52.97 crores for share application money, which was refunded as no shares were allotted. The TPO treated this as a loan and charged interest. The Tribunal upheld the AO's decision to treat the advance as a loan but directed the AO to apply the LIBOR rate for interest calculation, citing relevant judicial precedents.

4. Transfer Pricing Adjustment on Interest for Outstanding Receivables
The AO made an adjustment of ?9,12,541/- for interest on delayed payments from AE. The Tribunal agreed with the AO's adjustment but found the interest calculation incorrect. It directed the AO to recalculate interest only up to 31/3/2013.

5. Tax Treatment of Interest Income on Loans/ICDs Given to Subsidiaries
The AO treated interest income from loans/ICDs to subsidiaries as "income from other sources" instead of "business income." The Tribunal held that the interest income should be treated as business income, as the loans were given for business purposes. The Tribunal noted that similar treatment was given in earlier years and directed the AO to maintain consistency.

6. Claim of Interest Expenditure under Section 36(1)(iii) and Alternatively under Section 57(iii)
The assessee claimed interest expenditure of ?174,57,93,543/- under section 36(1)(iii). The Tribunal found that the interest expenditure was incurred for business purposes, including loans for ICDs to subsidiaries. It directed the AO to allow the interest expenditure under section 36(1)(iii). Alternatively, the Tribunal stated that if interest income is taxed as "income from other sources," the corresponding interest expenditure should be allowed under section 57(iii).

7. Allocation of Common Interest Expenditure
The AO allocated common interest expenditure based on turnover. The Tribunal found this method inappropriate, stating that allocation should be based on the value of assets employed. The issue was remanded to the AO for reallocation based on assets.

8. Double Taxation of Supervision Management Fees
The assessee argued that supervision management fees of ?7,07,52,924/- were taxed twice. The Tribunal agreed that the AO had inadvertently added the same income under normal business income, leading to double taxation. The Tribunal directed the AO to correct this error.

Conclusion
The appeal was allowed in part, with the Tribunal providing specific directions for each issue. The Tribunal emphasized the application of TTS provisions, consistency in tax treatment, and proper allocation methods for interest expenditure. The order was pronounced on 6th March 2020.