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TMI Blog2020 (3) TMI 430X X X X Extracts X X X X X X X X Extracts X X X X ..... nt 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erest 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 determined ALP of the said transactions at USD 73.75 million and USD 71.75 million respectively. The TPO has treated the excess payment as advance given to AE and adjustment has been made on account of interest receivable from AE on purchase price of said ships. Against which the assessee is in further appeal before the ITAT. 6. We have also gone through the orders of the Tribunal dated 26/06/2019 in assessee s own case for the A.Y. 2010-11. From the record, we found that the assessee is offering its income as per tonnage taxation scheme under Chapter XII-G of the Act. The Ships so purchased are qualifying ships as per tonnage tax provision, income from which has been offered and accepted accordingly. The manner of computing income under tonnage tax scheme has been prescribed u/s 115VE of the Act. According to which profits of tonnage taxation shall be computed separately from profits and gains of any other business. The formulae for calculating tonnage i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... umber 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 mechanism for computation of income which is to be brought to tax. Thus, TTS is a presumptive basis of taxation, whereby the taxability of income from qualifying ships is restricted to the framework provided in the TTS. Further, the tonnage tax company is liable to pay taxes even in a case where the financial statements reveal a loss on actual operations. Further, all expenses, deduction, allowances or tax incentives are deemed to be allowed while computing the total income of a company as per TTS. The income thus computed shall be deemed to be the income chargeable to tax under the head 'Profit and gains of business or profession'. Hence, it is clear from the above that actual receipts/revenues earned and expenses incurred are not taken into consideration for the purpose of determining the tonnage income of the company. The entire computation of the tonnage income depends on the tonnage capacity of qualifying ships and number of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or 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, application of Chapter X of the Act in such circumstances has to fail. Tonnage tax provisions determine the entire chargeable income earned by the tonnage tax vessel including income from an international transaction with associated enterprise. In contrast, transfer pricing provisions apply only to international transactions entered with associated enterprises. It is not possible to segregate what portion of the final taxable tonnage income is relatable to international transactions with associated enterprises and then apply transfer pricing provisions to such transactions, because the statutorily prescribed formula to compute income under chapter XII-G is based on the weight of the qualifying ship and number of days it has been held, irrespective of whether the ship has been used for a related party or an unrelated party. Once again, therefore, the computation provisions of Chapter X of the Act fail and in such circumstances, the application of Cha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inst 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 Section 14A of the Act in case of a tonnage tax company, whose income was computed under the special provisions of Chapter XII-G. The Tribunal set aside the addition observing thus' No disallowance under section 14A is warranted in this case when the assessee has admittedly not claimed any expenditure, towards taxable income i.e. it has not claimed any deduction of expenditure debited in the Profit Loss account while computing the total income. 11. Further, the co-ordinate bench of this Tribunal in the case of CGU Logistics Ltd (supra) while dealing on the issue under TTS has held as under: 10.a.We find that section 115VP deals method and time of opting for TTS, Section 115VQ is about period for which tonnage tax option remains in force. Renewal of TTS is subject matter of section115VR.Circumstanes and conditions where in tonnage tax scheme cannot be opted are the subject matter of Section 115VS.As per the provisions of section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 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 15.07.2005 explaining the need and essence of the introduction of these provisions which was issued contemporaneously by the Central Board of Direct Taxes (CBDT). The Circular clarifies that the Scheme is a preferential regime of taxation . It also clarifies that charging provision is under Section 115VA read with Section 115VF and Section 115VG .. 13. It has also been brought to our notice that an identical situation arose in assessee s own case for AY 2013-14 where the Dispute Resolution Panel( DRP ) vide its order dated 18.09.2017 held that 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. 14. To sum up, Tonnage Tax Scheme, as per Chapter XIT-G of the Act, is a separate code by itself in as much as it provides a selfcontained changing provision as well as 'method of computation of income in the chapter, and, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 ships which is covered by Tonnage Tax Scheme. Thus, we hold that the grounds of appeal No. 2 to 6 9 are covered in favour of the assessee and against the revenue. In the result the ground No.2 to 6 9 are allowed. 8. As the facts and circumstances during the year under consideation are same, respectfully following the order of the Tribunal in assessee s own case, we do not find any justification for the addition made by the A.O. in respect of interest on purchase price of two ships. Accordingly, we direct the A.O. to delete the same. 9. The next grievance of the assessee as contained in ground No.3 relates to transfer pricing adjustment of ₹ 36,50,000/- on account of fees receivable for providing negative lien. 10. Rival contentions have been heard and record perused. Facts in brief are that during the relevant assessment year under consideration, the Essar Global Limited (EGL), the ultimate parent company of asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y 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 advance given for allotment of preference shares. 16. Rival contentions have been heard and record perused. Facts in brief are that during the previous year relevant to year under consideration, the assessee gave advance of ₹ 52.97 crores towards share application money to its wholly owned subsidiary i.e. Essar Oilfield Services Limited (EOSL) for issue of preference shares. Since ultimately no shares were allotted, EOSL has refunded full money to assessee. The TPO treated the above transaction as a loan and charged interest on the said loan. By the impugned order, the DRP confirmed the action of the A.O., against which the assessee is in further appeal before the ITAT. 17. It was argued by the ld AR of the assessee that the money was advanced towards share application money. The assessee submitted ODI forms filed before RBI wherein the purpose for remittance has been stated to be for i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tton 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/2012 for 2008-09 dated 25.09.2014 21. Respectfully following the proposition laid down in the above judicial pronouncements, we direct the TPO/AO to restrict the adjustment by taking LIBOR rate. We direct accordingly. This ground of appeal is allowed in part. 22. The next grievance of the assessee as contained in ground no.5 relates to adjustment of ₹ 9,12,541/- in respect of interest on outstanding receivables. In this respect, facts of the case are that the assessee has entered into a service agreement with its AE Essar Shipping and Logistics Limited (ESSL) dated 16/01/2012 to provide business support services. This agreement was entered with effect from 01.04.2011. As per the said agreement, ESSL shall pay the consideration within 30 days of receipt of invoice and delay in payment would attract interest @ 1% per month. During the year, there was delay in rece ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 contentions have been heard and record perused. The facts in brief are that the assessee is in the business of operation of ships, logistics and drilling oil rigs. One of the main objects of the assessee as per Memorandum of Association of the Company 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 rigs. 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. For the purpose of carrying oil field business, the assessee had given ICD to its subsidiaries. Thus, the funds given to its subsidiary company engaged in oil drilling business represents the business activity of the company and forms part of the Oilfields Services Business of the assessee. It is evi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 business of the company. 29. From the record, we found that during the previous year relevant to assessment year under consideration, the assessee has earned interest income from ICDs of ₹ 60.16 crores and from banks of ₹ 1.81 crores. The break up of the interest income is as under:- Sr. No. Name Amount of interest Remarks 1. Essar oilfield Services India Ltd. 53,97,05,043 This company is step down subsidiary of assessee 2. Essar Steel India Ltd. 5,57,23,697 This company is group company of assessee. 3. Essar Oilfield Services ltd Mauritius 53,45,802/- This comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore 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 an amount of ₹ 1,56,83,680 has been paid for aircraft taken on lease and the assessee has not explained the nexus between expenses claimed with receipt of non tonnage activities. Accordingly, he disallowed the said interest expenditure u/s 36(1)(iii) of the Act. 32. We had carefully gone through the entire details placed on record and found that the interest expenditure of ₹ 136,82,29,021 (174,57,93,544 - 37,75,6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 business expenditur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ₹ 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 Cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 chang ..... X X X X Extracts X X X X X X X X Extracts X X X X
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