GU OCEAN PVT. LTD.,CHENNAI V. ITO, CORPORATE WARD-2(2), CHENNAI

ITTPA 108/CHNY/2024

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GU Ocean Private Ltd, engaged in marine transportation and logistics, appealed against the assessment order for the assessment year 2021-22, which included significant upward adjustments to its income based on transfer pricing provisions. The company argued that as a tonnage tax company, it is governed by the Tonnage Tax Scheme (TTS) under Chapter XII-G of the Income Tax Act, which provides a specific mechanism for income computation based on the net tonnage of qualifying ships, independent of the profit and loss account. The Tribunal examined whether the transfer pricing provisions should apply to the company's core activities under the TTS. After considering the statutory framework and relevant case law, the Tribunal concluded that the transfer pricing provisions do not apply to the core activities of a tonnage tax company, leading to the partial allowance of the appeal.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 712243 (ITAT-CHENNAI)
• Appeal Type: Income Tax (Transfer Pricing) Appeal
• Pronouncement Date: 30-07-2025
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Assessment Year: 2021-2022
• Other Referred Cases: M/s.Essar Shipping Ltd. v DCIT, Van Oord India (P.) Ltd. v DCIT, ACIT v Van Oord India P. Ltd., Essar Ports Ltd. v DCIT, ACIT v Essar Shipping Ltd., Lewek Altair Shipping Private Limited v DCIT, CIT v Trans Asian Shipping Services (P.) Ltd.
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: ARV SREENIVASAN
• Assessee Lawyers: T. BANUSEKAR
• Keywords: Business income; Transfer pricing; International transaction; Valuation report; Related party transaction; CHAPTER IV
• Section: 234B; 28; 92

Judgement Text

"आयकरअपीलीयअधिकरण,‘डी’ नयययपीी,चेन् IN THE INCOME TAX APPELLATE TRIBUNAL ‘D’ BENCH, CHENNAI श्जॉज्जॉज्क े, उपाध्एवंश्एस.आर.रघुनाथा, लेखासदसक ेसम् BEFORE SHRI GEORGE GEORGE K, VICE PRESIDENT AND SHRI S.R. RAGHUNATHA, ACCOUNTANT MEMBER आयकरअप्लसं./IT(TP)A No.:108/Chny/2024 ननरा्ररवर्/ Assessment Year: 2021-22 GU Ocean Private Ltd, 3/381, 4th Floor, AKDR Tower Rajiv Gandhi Salai (OMR), Mettukuppam Chennai– 600 097. vs. ITO, Corporate Ward -2(2), Chennai. [PAN:AAHCG-1425-H] (अप्लाथ्/Appellant) (प्थ्/Respondent) अप्लाथ्क्ओरसे/Appellant by : Shri. T. Banusekar, Advocate. प्थ्क्ओरसे/Respondent by : Mr. ARV Sreenivasan, CIT. सुनवाईक्तार्ख/Date of Hearing : 07.07.2025 घोरराक्तार्ख/Date of Pronouncement : 30.07.2025 आदेश/O R D E R PER S. R. RAGHUNATHA, AM : This appeal of the assessee arises from the order of assessment passed u/s.143(3) r.w.s.144C(13) r.w.s.144B of the Income Tax Act, 1961 (in short ‘the Act’) dated 24.10.2024 by the Assessment Unit, Income Tax Department for the A.Y.2021-22 passed in compliance to directions of Dispute Resolution Panel-2, Bengaluru vide order dated 11.05.2017. 2. The grounds raised by the assessee are as follows: Legal / General Grounds For that the reference made to the Transfer Pricing Officer was not in accordance with law, conferring no jurisdiction on the Transfer Pricing Officer and consequently rendering the entire proceedings void ab initio. Provisions of Chapter X not applicable Printed from counselvise.com :-2-: IT(TP)A. No:108/Chny/2024 For that the provisions of Chapter X (Transfer Pricing) are not applicable in computing the income of the appellant which is chargeable to tax as per Chapter XII-G under the Tonnage Tax Scheme. Issue of upward adjustment towards Charter Hire Charges For that the Dispute Resolution Panel and consequently the Assessing Officer erred in making an upward adjustment towards Charter Hire Charges to the tune of Rs.1,54,07,156/-. Issue of upward adjustment in respect of transaction of sale of vessel For that the Dispute Resolution Panel and consequently the Assessing Officer erred in making an upward adjustment towards transaction of sale of vessel “M.V.Ganesh” to the tune of Rs.7,49,00,991/- Income determined as per intimation u/s.143(1) ought not have been adopted For that the Assessing Officer ought not to have adopted the income determined as per the intimation passed u/s.143(1) while calculating the assessed income in the assessment order passed u/s.143(3) r.w.s.144C(13) r.w.s.144B. Upward adjustment of Rs.7,49,00,991/- by the Assessing Officer would result in double addition For that the Assessing Officer failed to appreciate that the upward adjustment of Rs.7,49,00,991/- would result in double addition to that extent since loss on sale of vessel was already subject to disallowance u/s.37 vide intimation u/s.143(1). Levy of interest u/s.234A, 234B and 234C For that the appellant objects to the levy of interest u/s.234A, 234B and 234C of the Income Tax Act. Prayer For these grounds and such other grounds that may be raised, may be altered, amended or modified with the leave of the Hon’ble Income Tax Appellate Tribunal before or during the hearing of the appeal, it is most humbly prayed that the Hon’ble Income Tax Appellate Tribunal may be pleased to: (a) Quash the order of the Assessing Officer and / or (b) Delete the upward adjustment towards charter hire charges to the tune of Rs.1,54,07,156/- and / or (c) Delete the upward adjustment in respect of transaction of sale of vessel MV Ganesh to the tune of Rs.7,49,00,991/- and / or (d) Direct the Assessing Officer to adopt the returned income and not the income as per intimation u/s.143(1) as the starting point for the purposes of computing assessed income of the appellant and / or Printed from counselvise.com :-3-: IT(TP)A. No:108/Chny/2024 (e) Pass such other orders as the Hon’ble Income Tax Appellate Tribunal may deem fit. 3. The brief facts of the case are that the assessee is a marine transportation and logistics company engaged in the business of distribution of cargo across the globe. The assessee is registered under the Tonnage Tax Scheme (TTS) and has obtained a certificate u/s.115VP of the Act which is an undisputed fact. The assessee filed its return of income for the A.Y.2021-22 on 16.02.2022 declaring a total income of Rs.1,59,27,270/-. The return was processed and intimation u/s.143(1) dated 22.09.2022 was passed by the Assistant Director of Income Tax, Centralized Processing Centre (CPC), Bengaluru wherein the total income of the assessee had been assessed at Rs.29,17,68,890/-, raising a demand of Rs.10,04,73,340/-. 4. The CPC while processing the return of income of the assessee has disallowed a sum of Rs.27,53,66,059/- u/s.37 of the Act being loss on sale of vessel, a sum of Rs.3,50,080/- u/s.36(1)(va) of the Act being contribution from various employees from various funds and has added a sum of Rs.1,25,476/- u/s.40A(3) of the Act being expenditure in respect of purchase of sim card, inspection charges and salary advance. 5. Meanwhile, the case was selected for scrutiny and a reference was made to the Transfer Pricing Officer (TPO) who passed an order u/s.92CA dated 27.10.2023 proposing adjustments to the tune of Rs.9,03,08,147/- comprising of the following: a) Upward adjustment on charter hire charges earned from Global Grace Shipping Pte. Ltd. to the tune of Rs.1,54,07,156/- and b) Upward adjustment to the value of sale of vessel MV Ganesh to Grace Ocean Private Limited to the tune of Rs.7,49,00,991/-. 6. The Draft Assessment Order was passed on 21.12.2023 confirming the transfer pricing adjustments and assessing the total income at Rs.38,20,77,037/-. The Assessing Officer(AO) in doing so has added the income of Rs.29,17,68,890/- determined vide intimation u/s.143(1) which includes disallowances u/s.28 to 43C and thereafter added the upward adjustments as proposed by the TPO amounting to Rs.9,03,08,147/- in total. Printed from counselvise.com :-4-: IT(TP)A. No:108/Chny/2024 7. Aggrieved, the assessee filed objections before the Dispute Resolution Panel, Bengaluru (DRP) against the disallowances made as per intimation u/s.143(1) and also against the above mentioned transfer pricing adjustments. The DRP vide directions u/s.144C(5) dated 10.09.2024 dismissed all the objections raised by the assessee. 8. Thereafter, the AO passed the assessment order u/s.143(3) r.w.s.144C(13) r.w.s.144B dated 24.10.2024 assessing the total income at Rs.38,20,77,037/- and raising demand of Rs.16,18,02,250/-. It may be noted that the disallowances made u/s.28 to 43C vide intimation u/s.143(1) and the upward adjustments to the tune of Rs.9,03,08,147/- proposed by the TPO were added as income under the head Profits and Gains from Business or Profession in the hands of the assessee. 9. Aggrieved by the order of assessment passed by the AO, the assessee filed an appeal before this Tribunal on 06.12.2024 on various grounds. 10. In this connection, at the outset, the Ld. AR of the assessee urged that the application of transfer pricing provisions (Chapter X) to the assessee being a tonnage tax company, governed by the tonnage tax scheme (Chapter XII-G) is not permissible in the facts and circumstances of the case. This is due to the fact that the assessee has opted and is governed by the Tonnage Tax Scheme (TTS) in the impugned assessment year and that the said provisions provide for an entirely different scheme for computation of income which is self-contained and independent. Printed from counselvise.com :-5-: IT(TP)A. No:108/Chny/2024 11. It was submitted by the Ld. AR that the TTS as provided in Chapter XII-G is a presumptive basis of taxation, which prescribes the mechanism for computation of income and the framework for the taxability of such income, the computation which is based on the net tonnage of the qualifying ships and not on the basis of the net profit as per the profit and loss account is dealt with in section 115VG which prescribes as under: “Computation of tonnage income. 115VG. (1) The tonnage income of a tonnage tax company for a previous year shall be the aggregate of the tonnage income of each qualifying ship computed in accordance with the provisions of sub-sections (2) and (3). (2) For the purposes of sub-section (1), the tonnage income of each qualifying ship shall be the daily tonnage income of each such ship multiplied by— (a) the number of days in the previous year; or (b) the number of days in part of the previous year in case the ship is operated by the company as a qualifying ship for only part of the previous year, as the case may be. (3) For the purposes of sub-section (2), the daily tonnage income of a qualifying ship having tonnage referred to in column (1) of the Table below shall be the amount specified in the corresponding entry in column (2) of the Table: TABLE Qualifying ship having net tonnage Amount of daily tonnage income (1) (2) up to 1,000 Rs. 70 for each 100 tons exceeding 1,000 but not more than 10,000 Rs. 700 plus Rs. 53 for each 100 tons exceeding 1,000 tons exceeding 10,000 but not more than 25,000 Rs. 5,470 plus Rs. 42 for each 100 tons exceeding 10,000 tons exceeding 25,000 Rs. 11,770 plus Rs. 29 for each 100 tons exceeding 25,000 tons. ………………...” Printed from counselvise.com :-6-: IT(TP)A. No:108/Chny/2024 12. The purpose of introduction of TTS is to make the Indian shipping business globally competitive with notional income at a fixed rate on the basis of net registered tonnage. Therefore, to apply the other normal provisions of the Act to the segment of a company declaring income under TTS would defeat the very purpose for which the scheme was introduced. 13. The Ld. AR in this connection had drawn our attention to the relevant extracts of the memorandum explaining the provisions of the Finance Bill, 2004 pertaining to the introduction of the tonnage tax scheme. The Ld. AR further drew our attention to the relevant provisions of the tonnage tax scheme in Chapter XII-G namely section 115VA which provides for the computation of profits and gains from the business of operating qualifying ships and section 115VG which prescribes the computation mechanism for determining the tonnage income of a company which is based on tonnage capacity and number of days of usage of qualifying ships. 14. To sum up, it was vehemently contended by the Ld. AR that on a plain reading of the relevant provisions of the tonnage tax scheme along with the purpose of introduction of the said scheme which was introduced through the Finance Bill, 2004, one may note that section 115VA specifically excludes the operation of sections 28 to 43C, i.e. the normal provisions of the Act based on which companies which do not come under the Tonnage Tax Scheme would compute their business income. The assessee however having opted to be governed by Chapter XII-G in respect of the segment comprising of its core activities, thus the provisions of section 115VA would override section 28 to section 43C and hence income would 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, it was submitted that 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. 15. In other words, the determination of income or expenditure having regard to Arm’s Length Price would have no relevance as it would not impact the computation of income under Tonnage Tax Scheme. It was also pointed out that one of the features of the TTS is that tax would be payable even if there is a loss in a year. It was further submitted that a tonnage tax company irrespective of earning income or incurring loss would nevertheless have to compute its income from business of Printed from counselvise.com :-7-: IT(TP)A. No:108/Chny/2024 operating qualifying ships which is eventually based on the net tonnage of the qualifying ships. 16. To support the contention that the provisions of transfer pricing will not apply to a tonnage tax company, the Ld. AR relied on decisions of various benches of the Income Tax Appellate Tribunal and the memorandum explaining the provisions of Finance Bill, 2004 pertaining to the introduction of the tonnage tax scheme. 17. It was submitted that in the instant case, the TPO and the AO have failed to appreciate that any variation in the determination of ALP in respect of the charter hire rates or sale value of ship will not have any kind of impact on the computation and consequent declaration of business income under TTS since income under TTS is computed on a separate and independent mechanism, i.e., on the basis of tonnage of ships. In simple words, any variation or adjustment in the charter hire rates or sale value of ship will not affect the income declared based on the tonnage of the ships. 18. During the course of hearing, the Ld. DR submitted that out of the two upward adjustments made proposed by the TPO and confirmed by the AO, as far as the adjustment regarding sale value of ship was concerned, the transfer pricing provisions would still apply despite the assessee being a tonnage tax company and in support of the same, reliance was placed on the decision of M/s.Essar Shipping Ltd. v DCIT in ITA No.: 4440 / Mum / 2024 – Mumbai ITAT. In the said decision, the Ld. DR relied on the fact that the addition made by the TPO regarding corporate guarantee commission was confirmed and set-aside to the file of the TPO / AO for determination of ALP in accordance with the provisions of the Act by adopting the most appropriate method. 19. To this, the Ld. AR of the assessee submitted that the reliance placed on the above decision of the Mumbai Bench of the Tribunal by the Ld. DR is misplaced due to the fact that the addition made by the TPO on account of corporate guarantee commission has no connection whatsoever to an addition / disallowance made to the income declared by a tonnage tax company since the same is not a core activity as defined in Chapter XII-G and thus cannot be taken for comparison. The Ld. AR further stressed on the point that the Mumbai Bench of the Tribunal referred to by the Ld. DR only goes to support the contention of the assessee that the provisions of transfer pricing will not apply to a tonnage tax company. Printed from counselvise.com :-8-: IT(TP)A. No:108/Chny/2024 20. It was further submitted by the Ld. AR that as far as the adjustment made by the TPO in respect of sale value of ship in the instant case is concerned, the assessee has a solitary ship during the year under consideration using which the business of operating qualifying ships was carried out. It may be noted that the usage of the said ship for the business of operating qualifying ships constitutes the core activity of a tonnage tax company, thus eventually leading to a conclusion that the activity of purchase and sale of the said ship also to be regarded as the core activity of the tonnage tax company but for which the core activity of business of operating qualifying ships could not have been carried out. 21. Therefore, it was submitted by the Ld. AR that any adjustment to the purchase or sale value of ship is not permitted on application of the transfer pricing provisions on the basis of the very same principle that the transfer pricing provisions shall not apply to a tonnage tax company. 22. The Ld. AR had also contended that since the provisions of transfer pricing do not apply to a tonnage tax company, the reference made in the instant case to the TPO is an invalid reference and thus the upward adjustments proposed by the TPO in the instant case would not survive since the TPO technically did not get any jurisdiction to further proceed in this matter and that consequently, the extended time period taken by the AO in completing the assessment, on account of reference to TPO is not valid. 23. As regards the submissions of the Ld.AR regarding the merits of the case, the Ld.AR had stated that there were two transfer pricing adjustments that were made by the TPO and consequently confirmed by the AO namely: a) Upward adjustment on charter hire charges to the tune of Rs.1,54,07,156/- and b) Upward adjustment to the sale value of the ship to the tune of Rs.7,49,00,991/- 24. At the outset, the Ld. AR had submitted that without prejudice to the claim that all adjustments made by the AO are part of the income arising from core activity of the assessee from operating qualifying ships, it was urged that the transaction of charter hire charges and sale of qualifying ship, without a doubt were the core Printed from counselvise.com :-9-: IT(TP)A. No:108/Chny/2024 activity of the assessee which forms part of the business of the assessee of operating qualifying ships and thus the said transactions are squarely covered under the tonnage tax scheme. Having said so, once the said transaction is covered under the tonnage tax scheme, no adjustment in respect of the said transactions from a transfer pricing perspective would be permissible to be made by the TPO. 25. The brief facts related to the transaction of charter hire charges in respect of which an adjustment was made by the TPO are that during the impugned year under consideration, vessel ‘MV Sri Ganesh’ had been given on hire on time charter basis to Global Grace Shipping Pte Ltd (AE of the assessee) on a time charter at a rate of USD 9,000 per day and the entire services were being rendered only to the AE. This rate was fixed based on the prevailing market conditions, negotiations after factoring relevant adjustments. 26. To benchmark the said transaction, the assessee adopted external CUP data in terms of research report by Clarkson Research, a professional firm engaged in providing data on shipping companies on subscription basis. As per the data revealed by the said report, the average daily charter hire rate ‘Supramax’ vessels during the year 2020 was USD 9,834 per day. The said report and rate had been accepted for benchmarking by the TPO. The only dispute between the assessee and the TPO was the difference of charter hire charges to the tune of USD 834 (USD 9,834 less USD 9,000). 27. In this regard, the Ld. AR submitted that the cost of dry dock repairs aggregating to USD 550,000 which is done once in 2.5 years was agreed to be incurred by the charterer (AE of the assessee) due to which the charter hire rate was reduced to that extent. It was submitted that usually, it is the owner of the vessel who bears the cost of dry dock repairs whereas in the instant case, it was agreed that the charterer would bear the entire cost. Therefore, an adjustment to the extent of USD 602.74 per day (USD 550,000 / 2.5) / 365 was to be made to arrive at the daily rate for benchmarking purpose. It was submitted that since the adjusted charter hire rate worked out to USD 9,231.26 per day (USD 9,834 less USD 602.74) and that the same was within the 3% safe harbour range as prescribed by the second proviso to section 92C(2) of the Act, it was concluded that the charter hire rate fixed at USD 9,000 per day with the AE was at Arm’s Length. Printed from counselvise.com :-10-: IT(TP)A. No:108/Chny/2024 28. The Ld. AR stated that all documentary evidence in this regard was provided before the lower authorities substantiating the claim of dry dock adjustment in determination of charter hire charges and submitted that in the instant case, since it was specifically agreed between the charterer and the assessee that the dry dock costs were to be borne by the charterer, the charter hire charges were fixed at a rate lower than the rates as per the Clarksons report, thereby rendering the said transaction at Arm’s Length and prayed for the deletion of such upward adjustment made by the TPO. 29. Coming to the facts of the transaction of sale of ship in respect of which an adjustment was made by the TPO, it was submitted that the ship ‘MV Sri Ganesh’ was purchased from Grace Ocean Private Limited, Singapore on 08.01.2018 on account of deferred credit facility and was subsequently given on long term time charter at the prevailing market rate. The Ld. AR submitted that during the impugned year under consideration, with the advent of COVID-19 pandemic, several economies collapsed and the impact on global shipping industry was huge. It was observed during the time charter period that the rates were fluctuating due to global slump in the level of business activity. Considering the Indian market scenario and envisaging the difficulty in meeting the deferred credit instalments in future, the management decided to sell the vessel. 30. It was submitted that due to sluggish market, the assessee approached the lender, Grace Ocean Private Limited (also the seller of the vessel) to buy back the vessel on an ‘as is where is’ basis on completion of the charter period. The lender, Grace Ocean Private Limited, after several rounds of discussion acceded to the appellant’s request to buy back the vessel due to good relationship and prompt payment in the past. The lender offered to buy back the vessel at USD 5.30 million (all inclusive). At the time of redelivering the vessel by the charterers after the long term agreement, the loan outstanding was USD 7.876 million. After several negotiations, the lender accepted to waive the balance outstanding loan after adjusting the sale price. The details of sale price and effective sale consideration of sale of ship MV Sri Ganesh is tabulated as under: Printed from counselvise.com :-11-: IT(TP)A. No:108/Chny/2024 S.No. Particulars Amount in USD Exchange Rate Amount in INR 1. Purchase price of vessel 10.80 62.50 67,50,00,000 2. Deferred credit outstanding as on date of sale 7.876 74.67 58,81,11,158 3. Sale value of vessel 5.30 74.67 39,57,57,890 4. Balance outstanding loan waived off 2.576 74.67 19,23,53,268 5. Effective sale value of vessel 7.876 74.67 58,81,11,158 6. Sale value of ship as per TPO 6.325 73.07 46,21,67,750 31. The assessee before the TPO furnished a valuation report based on which it was inferred that the sale of the vessel was concluded at arm’s length. The assessee in support of the above had also filed the details regarding the agreement of waiver of outstanding deferred credit, letter filed for requesting RBI approval for ECB loan and mail confirmation in respect of RBI approval for loan waiver. Apart from this, the assessee had chosen one comparable transaction from the Clarkson’s report which report was accepted for benchmarking purposes for determining the ALP of the said transaction. 32. The TPO, however rejected the approach of the assessee using valuation report for benchmarking the transaction of sale of ship and considered the Clarkson’s report to choose another comparable apart from the one chosen by the assessee and averaged the selling prices of both the comparable to arrive at the ALP for sale of ship at USD 6.325 million, resulting in an upward adjustment of sale value of ship MV Sri Ganesh to the tune of USD 1.025 million amounting to Rs.7,49,00,991/-. 33. In this regard, the Ld.AR submitted that the TPO without adducing any reasons erred in not considering the valuation report furnished by the assessee and that the TPO did not point out any defects for the same to be rejected. It was further vehemently contended by the Ld.AR that the effective sale consideration of the vessel that should be taken into consideration for purposes of benchmarking the sale transaction since the sale proceeds had been adjusted against the aggregate of outstanding deferred credit instalments. It was submitted that the instant transaction is one of buy back of the said vessel by Grace Ocean Private Limited. The aggregate of deferred credit instalments payable amounting to USD 2.576 million (Rs.19,23,53,268/-) has been waived by Grace Ocean Private Limited which implies Printed from counselvise.com :-12-: IT(TP)A. No:108/Chny/2024 that the effective sale price is USD 7.876 million (Rs.58,81,11,158/-), which is much higher than the price arrived at by the TPO of USD 6.325 million (Rs.46,21,67,750/-) after averaging the prices of comparable vessels chosen by him and the assessee. The above figures were depicted in the form of a table as under: 34. Apart from this, the Ld.AR also submitted that determination of ALP of transaction of sale of vessel by assessee on comparing the same with average of sale price of 2 vessels as done by the TPO in the instant case is arbitrary in nature. The Ld.AR further submitted that only the comparable chosen by the assessee (Blue Martin) and not the comparable chosen by the TPO (Royal Epic) ought to have been considered as an appropriate comparable for ALP determination of the sale transaction. 35. The Ld.AR in this regard had submitted a table showing the features of all three vessels including that of the assessee and stated there is a difference in the dates of sale of both vessels Blue Martin (28.08.2020) and Royal Epic (07.05.2020) as compared to that of the tested vessel (18.06.2020) and went on to state that the transaction of sale of vessel (Blue Martin) which is the comparable chosen by the assessee is much closer to the date of sale of tested vessel (MV Sri Ganesh). It was further submitted that the time of the sale transaction has a huge role to play in the shipping industry since the same is very volatile, more particularly considering that the impugned period was impacted by the COVID-19 pandemic. The time period of sale of a particular vessel is relevant in determining the price of the vessel and it is mostly dependent on market conditions. In comparison, it was submitted that since the time gap of sale transaction has a role in determining the price of the vessel, the comparable chosen by the TPO would not be appropriate since it was sold after a month and a half approximately when compared to the date of sale of the tested vessel, which is sufficient time for market conditions to change, thereby making it difficult to establish the arm’s length pricing of the sale transaction. S.No. Particulars Amount in INR 1. Outstanding loan waived off 19,23,53,268 2. Sale value of vessel 39,57,57,890 3. Effective sale value of vessel 58,81,11,158 4. Sale value of ship as per TPO 46,21,67,750 Printed from counselvise.com :-13-: IT(TP)A. No:108/Chny/2024 36. It was further submitted that there is hardly a difference of 1.6% in the tonnage capacities of the comparable chosen by the assessee vis-à-vis the comparable chosen by the TPO and the same is a negligible difference which would not have any impact on the market value of a ship and thus on this count also, the comparable chosen by the TPO would not be appropriate for benchmarking. 37. Two other issues that were raised by the Ld.AR were with respect to the disallowances made in the intimation passed u/s.143(1) in the instant case, which were added again by the AO while computing the business income of the assessee in the computation sheet annexed to the assessment order. The disallowances were with regard to a sum of Rs.3,50,080/- u/s.36(1)(va) of the Act being contribution from various employees from various funds, a sum of Rs.27,53,66,059/- u/s.37 of the Act being loss on sale of vessel and a sum of Rs.1,25,476/- u/s.40A(3) of the Act being expenditure in respect of purchase of sim card, inspection charges and salary advance. 38. In this connection, the Ld.AR submitted that since the assessee is a Tonnage Tax Company offering income earned from operating qualifying ships based on the net tonnage of the ships, the provisions of section 115VA would be applicable which prohibits the operation of provisions of section 28 to 43C of the Act. In simple terms, when the assessee is offering income from operating qualifying ships under the Tonnage Tax Scheme, the assessee is barred from claiming any expenditure. Thus, in a case where the company offers income under the Tonnage Tax Scheme, no disallowances u/s.28 to 43C of the Act can be made. 39. To support the above contention, the Ld.AR placed on various case laws and also stated that the assessee is entitled to agitate the adjustments made u/s.143(1) in appeal proceedings arising out of the assessment order u/s.143(3), therefore praying that disallowances made u/s.28 to 43C in the instant case vide intimation passed u/s.143(1) ought to be deleted in view of the provisions of section 115VA of the Act. 40. As an extension to the one of the disallowances made in the intimation passed u/s.143(1) of Rs.27,53,66,059/- u/s.37 of the Act being loss on sale of vessel, the Ld.AR contended that the AO erred in confirming the upward adjustment of Rs.7,49,00,991/- in respect of sale of vessel while computing the total income of Printed from counselvise.com :-14-: IT(TP)A. No:108/Chny/2024 the assessee in the Final Assessment Order which resulted in a double addition to that extent since loss on sale of vessel was already subject to disallowance u/s.37 vide intimation passed u/s.143(1). The above double addition made by the AO was presented in the form of a table as under: A. Total income before upward adjustment in respect of sale value of ship Particulars Amount (In INR) Income as per ITR 1,59,27,270 Add: Loss on sale of ship disallowed u/s.37(1) by CPC [(a) – (b)] a) Book value of vessel – Rs.66,26,58,995 b) Sale value of vessel – Rs.38,72,92,931 27,53,66,063 Add: Disallowance u/s.36(1)(va) 3,50,080 Add: Disallowance u/s.40A(3) 1,25,476 Total income as determined by CPC in intimation u/s.143(1) 29,17,68,889 B. Total income if increase in sale value of ship by Rs.7,49,00,991/- as determined by the TPO was considered by CPC u/s.143(1): Particulars Amount (In INR) Income as per ITR 1,59,27,270 Add: Loss on sale of ship that ought to have been disallowed u/s.37(1) by CPC [(a) – (b)] a) Book value of vessel – Rs.66,26,58,995 b) Sale value of vessel – Rs.46,21,93,922 (38,72,92,931 + Rs.7,49,00,991) 20,04,65,072 Add: Disallowance u/s.36(1)(va) 3,50,080 Add: Disallowance u/s.40A(3) 1,25,476 Total income that ought to have been determined by the CPC u/s.143(1) had the sale value of ship been taken as determined by the TPO 21,68,67,898 41. It was submitted that on comparison of the above tables, one may note that when the sale value of ship was taken as declared by the appellant, the loss on sale of such ship that was disallowed u/s.37(1) in the intimation u/s.143(1) was Rs.27,53,66,063/-. However, it may be noted that had the sale value of the ship of Rs.46,21,93,922/- as determined by the TPO, then the loss on sale of such ship that Printed from counselvise.com :-15-: IT(TP)A. No:108/Chny/2024 could have been disallowed u/s.37(1) by the CPC would be Rs.20,04,65,072/- instead of Rs.27,53,66,063/- which was disallowed in the intimation u/s.143(1). 42. Therefore, the Ld.AR submitted that on one hand, the sale value of ship has been increased by Rs.7,49,00,991/- but the consequent adjustment in the loss on sale of such ship has not been made in the final assessment order passed by the AO which is nothing but a double addition to such extent. 43. On the other hand, the Ld.DR of the revenue relied on the findings of the lower authorities. 44. We have heard the rival contentions and perused all the material available on record before us and gone through the orders of the authorities along with the case laws relied on. The Ld.AR has urged that the disallowances made u/s.143(1) can also be adjudicated in the present appellate proceedings arising from the order passed u/s.143(3) r.w.s.144C(13) r.w.s.144B. We are not inclined to accept this argument of the Ld.AR that the disallowances made u/s.143(1), which were added again in the computation of income in the final assessment order can be agitated in appeal proceedings arising out of the assessment order since in our view the disallowances made u/s.143(1) are not within the purview of adjudication in the instant appeal as the same stems from the intimation passed u/s.143(1) and not from the order u/s.143(3) r.w.s.144C(13) r.w.s.144B. We accordingly hold this ground of appeal against the assessee. 45. We note that the next contention of the Ld.AR is that the transfer pricing provisions are not applicable to the facts and circumstances of the instant case for the reason that the assessee is a tonnage tax company which is governed by the provisions of the Tonnage Tax Scheme (TTS). We have perused the certificate evidencing approval of applicability of the provisions of the Tonnage Tax Scheme and note that the certificate is in vogue for the year under consideration and that all the statutory conditions in relation to the scheme have been complied with by the assessee for the impugned assessment year, a fact that was not disputed at any point of time by the lower authorities. 46. The Ld.AR had taken us through the provisions of section 115VA which specifically excludes the operation of sections 28 to 43C, i.e., the normal provisions Printed from counselvise.com :-16-: IT(TP)A. No:108/Chny/2024 of the Act based on which companies which do not come under the Tonnage Tax Scheme would compute their business income. Since the assessee however having opted to be governed by Chapter XII-G in respect of the segment comprising of its core activities, we are of the view that the provisions of section 115VA would override section 28 to section 43C and hence income would have 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. Thus, we observe that the related party transactions are not relevant for computing income chargeable to tax as per Chapter XII-G of the Income Tax Act and therefore, the arm's length price determined under transfer pricing provisions would be of no relevance. 47. On consideration of the case laws and also the relevant extracts of the memorandum explaining the provisions of Finance Bill, 2004 pertaining to the introduction of tonnage tax scheme relied upon by the Ld. AR, we find force in the contention of the Ld.AR that the provisions of Chapter X (Transfer Pricing) would not apply in determining income under Chapter XII-G (Tonnage Tax Scheme) for a tonnage tax company. On perusal of various judgments placed on record, we find it apposite to refer to one of the many decisions relied upon by the Ld.AR which is in the case of Van Oord India (P.) Ltd. v DCIT [2019] 111 taxmann.com 480 (Mum Trib) wherein the same issue was dealt with and the Mumbai Bench of the Tribunal held as under: “20. It thus emerges, as rightly contended on behalf of the assessee, that since the assessee has opted to be governed by TTS, the provisions of section 115VA shall override sections 28 to 43C and hence, the income has to be calculated with reference to the registered tonnage of the ships and not on the basis of net profits; that consequently, the related party transactions are not considered for computing the income chargeable to tax, and, therefore, the arm's length price determined under the transfer pricing provisions would be of no relevance; that therefore, the determination of income/expense having regard to arm's length price would be of no relevance, as it would not affect the computation of income and the taxability of tonnage income of the assessee; and that even if the transfer pricing provisions were to apply, the provisions of TTS do not allow the adjustment made by the TPO to affect the computation of income under TTS. That being so, the adjustment made by the TPO would not affect the income of the assessee. This, more so, because the first proviso to section 92C(4) does not cover the provisions of Chapter XIIG of the Act. 24. In view of the above discussion, the assessee is correct in contending that the AO/DRP failed to appreciate that the transfer pricing regulations do not apply to the assessee, to the extent of operations carried out through operating qualifying ships, Printed from counselvise.com :-17-: IT(TP)A. No:108/Chny/2024 since the assessee is a company registered under the Tonnage Tax Scheme ('TTS') provided under the Act. The facts in the year under consideration are not different from those in assessment years 2007-08 and 2011-12, where the very same issue has been decided by the Tribunal in favour of the assessee. So, we see no reason as to why the decision this year be not consistent therewith. Too, even the DRP, vide its order dated 8/12/2014, has held in favour of the assessee qua this issue, which fact was also taken cognizance of by the Tribunal. 25. Our findings on this issue are summed up a savoir: (a) Section 115VA of the Income Tax Act, forming part of the TTS (for which, the assessee has made option) contained in Chapter XII-G of the Act, excludes the operation of sections 28 to 43C of the Act pertaining to the computation of total income under Chapter IV of the Act. (b) For computing taxable income under Chapter XII-G of the Act, related party transactions have no relevance, weight and length of user of qualifying ships, rather than the nature of party for which the user is, or ALP, or income, or expenses, being the formula prescribed for computation of income under Chapter XII-G. (c) Consideration of the TP provisions, enclosing within them, the arm's length principle, under Chapter X (sections 92 to 92F) of the Act are, a fortiori, not applicable to the TTS and ALP does not affect the computation and taxability of the tonnage income of the assessee. (d) Computation of income under the TTS is, thus, not impinged upon by the adjustment made by the TPO. (e) Income computed under the TTS is, by virtue of section 115VF, deemed to be the profits taxable as profits & gains of business or profession. (f) The amount of Rs.17,24,50,468/-, which represents reimbursement of Head Office Expenses by the assessee to its holding company and AE, has wrongly been added, by altering the expenditure, under Chapter X, despite the inapplicability of the Chapter and inspite of the fact that Chapter X contains only machinery provisions and no charging provisions, sans which, it is trite, no tax can be levied. (g) Non-applicability of Chapter X does not get altered by the factum of the assessee having either filed audit report in Form 3CEB, or undertaken the benchmarking process and concluding its international transactions to be at arm's length. Printed from counselvise.com :-18-: IT(TP)A. No:108/Chny/2024 (h) The issue stands decided by the Tribunal in favour of the assessee vide its orders in the assessee's case for assessment years 2007-08 and 2011-12. (i) The DRP has itself acceded to this legal claim of the assessee. 26. The assessee's grievance by way of ground No.2 is, thus, accepted and the TP addition of Rs.17,24,50,468/- is deleted. As a consequence, ground Nos.3 to 21 stand rendered merely academic, requiring no adjudication. Ground No.1 is general.” 48. We note that in addition to the above decision, the Ld.AR has also relied on the following decisions which concur with the view that transfer pricing provisions will not apply to a tonnage tax company:  Van Oord India (P.) Ltd. v CIT [2019] 177 ITD 687 (Mumbai Trib)  ACIT v Van Oord India P. Ltd. in ITA No.10 / Mum / 2018 – Mumbai ITAT  Essar Ports Ltd. v DCIT [2020] 118 taxmann.com 433 (Mumbai Trib)  ACIT v Essar Shipping Ltd. [2024] 159 taxmann.com 391 (Mumbai Trib)  Lewek Altair Shipping Private Limited v DCIT 2023 (7) TMI 685 – ITAT Visakhapatnam 49. We further note that in the instant case, since the assessee has opted to be taxed under the Tonnage Tax Scheme as per section 115VP of the Act which has been accepted by the AO, its business income ought to be computed only on the basis of the provisions of Tonnage Tax Scheme and hence the transfer pricing provisions would not be applicable. In our view, the Transfer Pricing Officer and the AO have missed to consider the fact that any variation in the determination of Arm’s Length Price in respect of the charter hire rates or sale value of ship will not have any kind of impact on the computation and consequent declaration of income under the Tonnage Tax Scheme since income under the Tonnage Tax Scheme is computed on a separate and independent mechanism, i.e., on the basis of tonnage of ships. Hence, the invocation of the transfer pricing provisions to benchmark the transactions in respect of which upward adjustments have been made by the TPO and consequently confirmed by the AO is untenable in law. Printed from counselvise.com :-19-: IT(TP)A. No:108/Chny/2024 50. Even otherwise, we note that the Hon’ble Supreme Court in the case of CIT v Trans Asian Shipping Services (P.) Ltd. [2016] 385 ITR 637 (SC) observed as follows: “25. We may also point out that in terms of Section 115VI(2), relevant shipping income of a Tonnage Tax Company means its profits from core activities and its profits from incidental activities. Core activities of a Tonnage Tax Company have been specified in sub-section (2) of the said section. These include its activities from operating qualifying ships and other ship related activities including slot charter.” 51. We note that the core activities as per section 115VI(2) of the Act includes activities from operating qualifying ships and other ship related activities which thereby shows that the transaction relating to charter hire charges is definitely the core activity of the appellant and nevertheless, even the profit or sale arising on sale of a qualifying asset, i.e., ship in the instant case would also be regarded as the core activity of the appellant since it is the very same ship that has been let out on charter hire and that the purchase and sale of the said ship would constitute core activity without which the business of operating qualifying ships cannot be carried out by a tonnage tax company. Therefore, the adjustment made by the TPO towards sale value of ship which is the core activity of the assessee would squarely fall within the purview of TTS and hence the provisions of transfer pricing cannot be applied to benchmark the said transaction. 52. Taking into consideration the facts of the case, we are inclined to hold that the provisions of transfer pricing indeed do not apply to a tonnage tax company in relation to the core activity and the ALP does not affect the computation and taxability of the tonnage income of the assessee and hence direct the AO to delete the upward adjustments in the nature of charter hire charges and sale value of ship proposed by the TPO which were added as business income of the assessee since the same are untenable in law, particularly in view of operation of section 115VA of the Act which prohibits the operation of sections 28 to 43C of the Act. Printed from counselvise.com :-20-: IT(TP)A. No:108/Chny/2024 53. As a result, since we are of the view that transfer pricing provisions will not apply to a tonnage tax company, the grounds raised on merits are not adjudicated as the very basis of assessment in this case has been nullified as a result of non- application of the transfer pricing provisions, resulting in ousting the jurisdiction of the TPO to make any adjustments as such. 54. In the result, the appeal of the assessee is partly allowed. Order pronounced in the court on 30th July, 2025 at Chennai. Sd/- Sd/- (जॉज्जॉज्क े) (GEORGE GEORGE K) उपाध्/VICE PRESIDENT (एस. आर. रघुनाथा) (S. R. RAGHUNATHA) लेखासदस/ACCOUNTANT MEMBER चेनई/Chennai, नदनांक/Dated, the 30th July, 2025 SP आदेशक्पनतनलनपअगेनरत/Copy to: 1. अप्लाथ्/Appellant 2. प्थ्/Respondent 3.आयकरआयुक/CIT– Chennai/Coimbatore/Madurai/Salem 4. नवभाग्यपनतनननर/DR 5. गार्फाईल/GF Printed from counselvise.com "