ESSAR SHIPPING LIMITED , MUMBAI V. ACIT-5(1)(2), MUMBAI

ITA 7371/MUM/2017

• Counselvise Citation: [2020] 111 COUNSELVISE.COM (IT) 3447 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 2 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-03-2020
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: K
• Assessment Year: 2013-2014
• Appeal Filed On: 26-12-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: NILLU JAGGI JT
• Keywords: Related party transaction; Business income; Transfer pricing; Business expenditure; International transaction; Rule of consistency; Wholly owned subsidiary; Commercial expediency; Set aside; CHAPTER IV
• Section: 92C; 143(3); 92B; 14A; 43; 73; 13; 22; 28; 11; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL K, BENCH MUMBAI BEFORE SHRI R.C.SHARMA, AM & SHRI VIKAS AWASTHY, JM ITA NO. 7371/MUM/2017 ( ASSESSMENT YEAR: 2013-14) ESSAR SHIPPING LTD., 11, K.K. MARG, MAHALAXMI, MUMBAI-400034. VS. A.C.I.T.-5(1)(2), MUMBAI. PAN/GIR NO.AACCE 3707 D (APPELLANT ) .. (RESPONDENT ) ASSESSEE BY SHRI VIJAY MEHTA (AR) REVENUE BY MS. NILLU JAGGI (JT.CIT) DATE OF HEARING 12/12/2019 DATE OF PRONOUNCEMENT 06/03/2020 / O R D E R PER: R.C. SHARMA, A.M. THIS IS THE APPEAL FILED BY THE ASSESSEE AGAINST T HE DIRECTION OF THE DISPUTE RESOLUTION PANEL-1(WZ), MUMBAI (IN SHORT, T HE DRP) U/S 144C(5) OF THE INCOME TAX ACT, 1961 (IN SHORT, THE ACT) DATED 29/09/2017 FOR THE A.Y. 2013-14 BY WAY OF GIVEN EFF ECT BY THE ORDER PASSED U/S 143(3) R.W.S. 144C(13) OF THE ACT. 2. RIVAL CONTENTIONS HAVE BEEN HEARD AND RECORD PER USED. FACTS IN BRIEF ARE THAT THE ASSESSEE M/S ESSAR SHIPPING LIMI TED (ESL) IS ENGAGED IN THE BUSINESS OF SHIPPING OPERATIONS, CRUDE OIL T RANSPORTATION, DRILLING OIL RIGS, TRANSPORTATION MANAGEMENT SERVICES AND IN TEGRATED DRY BULK ITA NO. 7371/MUM/2017 ESSAR SHIPING LTD. VS ACIT 2 TRANSPORTATION SERVICES. THE A.O. PASSED DRAFT ASSE SSMENT ORDER COMPRISING CERTAIN DISALLOWANCES AND ADDITIONS TO T HE TOTAL INCOME DECLARED BY THE ASSESSEE. THE ASSESSEE HAS FILED IT S OBJECTION AGAINST THE DRAFT ASSESSMENT ORDER BEFORE THE DRP AND VIDE ORDER DATED 25/01/2017, THE DRP DISPOSED OFF THE OBJECTIONS RAI SED BY THE ASSESSEE. AGAINST THE ORDER PASSED BY THE AO U/S 144C(13)GIVI NG EFFECT TO THE DIRECTIONS OF THE DRP, THE ASSESSEE IS IN FURTHER A PPEAL BEFORE THE ITAT. 2.1 GROUND NO. 1 OF THE APPEAL WAS NOT PRESSED BY T HE LD AR, THEREFORE, THE SAME IS DISMISSED AS NOT PRESSED. 3. THE SECOND GRIEVANCE OF THE ASSESSEE RELATES TO TRANSFER PRICING ADJUSTMENT OF RS. 55,48,550/- IN RESPECT OF INTERES T ON PURCHASE PRICE OF TWO SHIPS. 4. AT THE OUTSET, THE LD AR OF THE ASSESSEE PLACED ON RECORD THE ORDER OF THE TRIBUNAL DATED 26/06/2019 IN ASSESSEES OWN CASE FOR THE A.Y. 2011-12 WHEREIN ISSUE WITH REGARD TO DISALLOWANCE O F INTEREST WAS DECIDED BY THE TRIBUNAL IN FAVOUR OF THE ASSESSEE. 5. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND CAR EFULLY GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW AND FOU ND FROM THE RECORD THAT DURING THE YEAR UNDER CONSIDERATION, THE ASSES SEE HAD PURCHASED TWO SHIPS UNDER BARE BOAT CHARTER CUM DEMISE (BBCD) AGREEMENT FROM ESSAR SHIPPING AND LOGISTICS LIMITED, CYPRUS. THE P URCHASE PRICE WAS ITA NO. 7371/MUM/2017 ESSAR SHIPING LTD. VS ACIT 3 AGREED AT USD 75 MILLION AND USD 73 MILLION. HOWEVE R, THE TPO HAD DETERMINED ALP OF THE SAID TRANSACTIONS AT USD 73.7 5 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 SA ID SHIPS. AGAINST WHICH THE ASSESSEE IS IN FURTHER APPEAL BEFORE THE ITAT. 6. WE HAVE ALSO GONE THROUGH THE ORDERS OF THE TRIB UNAL DATED 26/06/2019 IN ASSESSEES 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 P ROVISION, INCOME FROM WHICH HAS BEEN OFFERED AND ACCEPTED ACC ORDINGLY. THE MANNER OF COMPUTING INCOME UNDER TONNAGE TAX SC HEME HAS BEEN PRESCRIBED U/S 115VE OF THE ACT. ACCORDING TO WHICH PROFITS OF TONNAGE TAXATION SHALL BE COMPUTED SEPAR ATELY FROM PROFITS AND GAINS OF ANY OTHER BUSINESS. THE FORMULAE FOR CALCU LATING TONNAGE INCOME HAS BEEN PRESCRIBED AND IS DEPENDENT ON PRES UMPTIVE RATE OF DAILY TONNAGE INCOME AND NUMBER OF DAYS OF OPERATIO N. ONCE THE ASSESSEE OPTS FOR TONNAGE TAX SCHEME, THE INCOME OF THE ASSESSEE HAS TO BE COMPUTED AS PER THE PROVISIONS PRESCRIBED IN THE SAID CHAPTER. CHAPTER XII-G IS A COMPLETE CODE IN ITSELF AND INCO ME HAS TO BE COMPUTED STRICTLY AS PER THE SAID PROVISIONS. ITA NO. 7371/MUM/2017 ESSAR SHIPING LTD. VS ACIT 4 7. FROM THE RECORD WE FOUND THAT THE SIMILAR ADDITI ONS WERE MADE BY THE TPO IN ASSESSEES OWN CASE IN THE A.Y. 2011-12 AND WERE CONFIRMED BY THE DRP, THE ASSESSEE HAS BEEN DEMERGED FROM ESS AR PORTS LIMITED W.E.F. 01/10/2010 I.E. A.Y. 2011-12. FROM THE RECOR D WE ALSO FOUND THAT SINCE EARLIER THE ACTIVITIES OF ASSESSEE BEING CARR IED ON BY ESSAR PORTS LTD., THE ASSESSMENT WAS MADE IN CASE OF ESSAR PORT S LTD. UP TO 30/09/2010. FOR THE SIMILAR DISALLOWANCE, THE ASSES SEE CAME IN APPEAL BEFORE THE TRIBUNAL AND THE TRIBUNAL VIDE ITS ORDER DATED 26/06/2019 FOR THE A.Y. 2011-12, DELETED THE SIMILAR ADDITION SO M ADE BY THE A.O. AFTER OBSERVING AS UNDER: 10. WE HAVE CONSIDERED THE SUBMISSION OF LD. AUTHOR IZED REPRESENTATIVE (AR) OF THE ASSESSEE AND LD. DEPARTMENTAL REPRESENT ATIVE (DR) FOR THE REVENUE AND PERUSED THE MATERIAL AVAILABLE ON RECOR D. THE LD. AR OF THE ASSESSEE SUBMITS THAT THE ASSESSEE HAS EXERCISED TH E OPTION OF OFFERING ITS INCOME TO TAX ON A PRESUMPTIVE BASIS UNDER THE TONN AGE TAX SCHEME COVERED UNDER CHAPTER XII-G OF THE ACT. THE OPTION WAS EXERCISED SINCE AY 2005-06 TILL AY 2014- 15. THIS FACT IS NOT DISPU TED BY LD. DR FOR THE REVENUE AS WELL AS BY THE LOWER AUTHORITIES. WE HAV E NOTED THAT ON SIMILAR SET OF FACTS THE COORDINATE BENCH OF THIS T RIBUNAL IN VAN OORD INDIA PRIVATE LTD. VS. ACIT (SUPRA) HELD AS UNDER : 6. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISS IONS, PERUSED THE RELEVANT MATERIAL, INCLUDING THE ORDERS OF THE LOWE R AUTHORITIES AS WELL AS THE CASE LAWS REFERRED AT THE TIME OF HEARI NG. NOTABLY, THE CONTROVERSY BEFORE US PRIMARILY REVOLVES AROUND THE APPLICABILITY OF TRANSFER PRICING PROVISIONS TO THE INCOME THAT I S COVERED BY CHAPTER XII-G OF THE ACT I.E. TONNAGE TAX SCHEME. T HE TTS WAS INTRODUCED IN THE FINANCE (NO. 2) ACT, 2004, WI TH THE INTENTION OF INCREASING FOREIGN DIRECT INVESTMENT I N THE INDIAN SHIPPING INDUSTRY AND MAKING IT GLOBALLY COMPETITIV E. THE INCOME OF A TONNAGE TAX COMPANY DEPENDS ON THE TONN AGE ITA NO. 7371/MUM/2017 ESSAR SHIPING LTD. VS ACIT 5 CAPACITY OF THE QUALIFYING SHIPS AND THE NUMBER 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 SE CTION FOR THE INCOME GENERATED BY CARRYING OUT BUSINESS OF OPERAT ING SHIPS. FURTHER, IT ALSO PRESCRIBES THE MECHANISM FOR COMPU TATION OF INCOME WHICH IS TO BE BROUGHT TO TAX. THUS, TTS IS A PRESUMPTIVE BASIS OF TAXATION, WHEREBY THE TAXABILI TY OF INCOME FROM QUALIFYING SHIPS IS RESTRICTED TO THE FRAMEWOR K PROVIDED IN THE TTS. FURTHER, THE TONNAGE TAX COMPANY IS LIABLE TO PAY TAXES EVEN IN A CASE WHERE THE FINANCIAL STATEMENTS REVEA L A LOSS ON ACTUAL OPERATIONS. FURTHER, ALL EXPENSES, DEDUCTION , ALLOWANCES OR TAX INCENTIVES ARE DEEMED TO BE ALLOWED WHILE COMPU TING THE TOTAL INCOME OF A COMPANY AS PER TTS. THE INCOME TH US COMPUTED SHALL BE DEEMED TO BE THE INCOME CHARGEABL E TO TAX UNDER THE HEAD 'PROFIT AND GAINS OF BUSINESS OR PRO FESSION'. HENCE, IT IS CLEAR FROM THE ABOVE THAT ACTUAL RECEI PTS/REVENUES EARNED AND EXPENSES INCURRED ARE NOT TAKEN INTO CON SIDERATION FOR THE PURPOSE OF DETERMINING THE TONNAGE INCOME OF TH E COMPANY. THE ENTIRE COMPUTATION OF THE TONNAGE INCOME DEPEND S ON THE TONNAGE CAPACITY OF QUALIFYING SHIPS AND NUMBER OF DAYS IT HAS BEEN HELD. AT THIS STAGE, WE MAY CONTRAST THE SPHER E IN WHICH THE TRANSFER PRICING PROVISIONS OF CHAPTER-X OPERATE. T HE TRANSFER PRICING PROVISIONS ENVISAGE COMPUTATION OF INCOME F ROM SPECIFIED INTERNATIONAL TRANSACTIONS OF RECEIPT OR EXPENDITURE, OFCOURSE WITH REFERENCE TO THE STATED PRICE OF SUCH TRANSACTIONS. THIS IS COMPLETELY IN CONTRAST TO CHAPTER-XII G, WH ERE THE STATED PRICE OF THE TRANSACTION HAS NO RELEVANCE TO THE CO MPUTATION OF INCOME OF QUALIFYING SHIPS, WHICH IS BASED ON THE W EIGHT OF THE SHIP AND THE NUMBER OF DAYS IT HAS BEEN HELD. IN OT HER WORDS, THE DETERMINATION OF INCOME/ EXPENSE HAVING REGARD TO ARM'S LENGTH PRICE AS ENVISAGED IN CHAPTER-X HAS NO RELEVANCE, A S IT WOULD NOT AFFECT THE COMPUTATION OF INCOME LIABLE FOR TAXATIO N IN CHAPTER- XII G. 7. SECTION 115VA OF THE ACT STARTS WITH NOTWITHS TANDING ANY TO THE CONTRARY CONTAINED IN SECTION 28 TO SECTION 43 .'. TTS THUS, PROVIDES FOR COMPUTATION OF INCOME TO THE EXCLUSION OF SECTION 28 OF THE ACT. IN CASE OF AN ASSESSEE ENTERING INTO INTERNATIONAL TRANSACTIONS WITH ASSOCIATED ENTERPRISE, THE AMOUNT OF ALLOWABLE EXPENSES IS REQUIRED TO BE DETERMINED AS PER THE AR M'S LENGTH PRINCIPLE AS PER THE MACHINERY PROVISIONS OF CHAPTE R X (SECTION 92 TO SECTION 92F). THE AMOUNT OF ALLOWABLE EXPENSE S DETERMINED AS PER THE ARM'S LENGTH PRINCIPLE UNDER SECTION 92(1) OF THE ACT WOULD THUS BE RELEVANT TO COMPUTE BUSINE SS PROFITS AS ITA NO. 7371/MUM/2017 ESSAR SHIPING LTD. VS ACIT 6 PROVIDED FOR IN SECTIONS 28 TO 43C OF THE ACT. THE ASSESSEE HAS OPTED TO BE GOVERNED BY TTS, THUS THE PROVISIONS OF SECTION 115VA WOULD OVERRIDE SECTION 28 TO SECTION 43C AND HENCE INCOME HAS TO BE CALCULATED WITH REFERENCE TO THE R EGISTERED TONNAGE OF THE SHIPS AND NOT ON BASIS OF NET PROFIT S DEPICTED IN THE FINANCIAL STATEMENTS OR AS PER THE PROFITS ADJU STED IN TERMS OF CHAPTER-X. IN FACT, THE RELATED PARTY TRANSACTIONS ARE NOT RELEVANT FOR COMPUTING INCOME CHARGEABLE TO TAX AS PER CHAPT ER-XII G OF THE ACT AND THEREFORE, THE ARM'S LENGTH PRICE DETER MINED UNDER TRANSFER PRICING PROVISIONS WOULD BE OF NO RELEVANC E. IN OTHER WORDS, DETERMINATION OF INCOME/ EXPENSE HAVING REGA RD TO ARM'S LENGTH PRICE WOULD NOT ALTER THE COMPUTATION OF INC OME AND THE TAXABILITY OF TONNAGE INCOME OF AN ASSESSEE COVERED BY TTS. 8. FURTHER, TONNAGE INCOME IS BASED ON THE WEIGHT OF THE VESSEL AND NOT ON 'ARM'S LENGTH PRICE'. SECTION 92C PRESCRIBES METHODS FOR COMPUTATION OF ARM'S LENGTH PRICE. NONE OF THE METH ODS PRESCRIBED CAN HAVE ANY APPLICATION TO COMPUTATION OF THE TONNAGE INCOME. IN THESE CIRCUMSTANCES, THE COMPUTA TION PROVISIONS OF CHAPTER X OF THE ACT WOULD FAIL AND T HEREFORE, APPLICATION OF CHAPTER X OF THE ACT IN SUCH CIRCUMS TANCES HAS TO FAIL. TONNAGE TAX PROVISIONS DETERMINE THE ENTIRE C HARGEABLE INCOME EARNED BY THE TONNAGE TAX VESSEL INCLUDING I NCOME FROM AN INTERNATIONAL TRANSACTION WITH ASSOCIATED ENTERP RISE. IN CONTRAST, TRANSFER PRICING PROVISIONS APPLY ONLY TO INTERNATIONAL TRANSACTIONS ENTERED WITH ASSOCIATED ENTERPRISES. I T IS NOT POSSIBLE TO SEGREGATE WHAT PORTION OF THE FINAL TAXABLE TONN AGE INCOME IS RELATABLE TO INTERNATIONAL TRANSACTIONS WITH ASSOCI ATED ENTERPRISES AND THEN APPLY TRANSFER PRICING PROVISIONS TO SUCH TRANSACTIONS, BECAUSE THE STATUTORILY PRESCRIBED FORMULA TO COMPU TE INCOME UNDER CHAPTER XII-G IS BASED ON THE WEIGHT OF THE Q UALIFYING SHIP AND NUMBER OF DAYS IT HAS BEEN HELD, IRRESPECTIVE O F WHETHER THE SHIP HAS BEEN USED FOR A RELATED PARTY OR AN UNRELA TED PARTY. ONCE AGAIN, THEREFORE, THE COMPUTATION PROVISIONS OF CHA PTER X OF THE ACT FAIL AND IN SUCH CIRCUMSTANCES, THE APPLICATION OF CHAPTER X OF THE ACT FAILS. 9. IN THIS CONTEXT, THE LEARNED COUNSEL POINTED OU T THAT A SIMILAR SITUATION HAS BEEN CONSIDERED BY THE CO-ORDINATE BE NCH OF THIS TRIBUNAL IN THE CASE OF SHREYAS SHIPPING LOGISTICS LTD (SUPRA) WHICH HAS HELD AS FOLLOWS: 5. ITA NO. 7371/MUM/2017 ESSAR SHIPING LTD. VS ACIT 7 NOW WE WOULD LIKE TO DISCUSS THE TTS. SECTION 115VA OF THE ACT IS UNIQUE IN THE SENSE THAT IT DEALS WITH T HE COMPUTATION OF INCOME FROM THE BUSINESS OF OPERATIN G QUALIFYING SHIPS WHICH OPT FOR TONNAGE TAX SCHEME(TTS).THE METHOD OF COMPUTATION OF INCOME UND ER THE SCHEME, AS PROVIDED BY THE SECTION, STIPULATES THAT INCOME HAS TO BE ASSESSED IN A PARTICULAR MANNER. I N OTHER WORDS, NO EXPENDITURE CAN BE ALLOWED OR DISALLOWANC E CAN BE MADE, WHILE COMPUTING THE INCOME UNDER TTS. THE INCOME OF THE ASSESSEE IS COMPUTED AT AFFIXED RATE AND ALL OTHER PROVISIONS OF THE ACT ARE NOT TO BE APPLIED, ONCE AN ASSESSEE OPTS FOR THE SCHEME. IN SHORT, IF THE ASSE SSEE CANNOT CLAIM ANY EXPENDITURE AFTER OPTING OUT OF TH E SCHEME, THEN THE AO IS ALSO BARRED BY MAKING ANY DISALLOWANCE FOR INCURRING OF EXPENDITURE. LEGISLAT URE, IN ITS WISDOM, HAS ALLOWED THE ASSESSEE FOR OPTING FOR THE SAID SCHEME AND WITH A SPECIFIC PURPOSE. THEREFORE, WHIL E COMPUTING THE INCOME OF THE ASSESSEE U/S. 115VP, TH E AO HAS TO PUT ON BLINKERS AND ASSESS THE INCOME AS SUG GESTED BY THE PARLIAMENT. THERE IS NO SCOPE FOR TINKERING WITH THE PROVISIONS OF SECTION 115 VP OF THE ACT. HE HAS TO FOLLOW THE SIMPLE RULE THAT NO DEDUCTION IS TO BE ALLOWED OR NO DISALLOWANCE IS TO BE MADE UNDER ANY OF THE NORMAL PROVISIONS OF THE ACT, ONCE IT IS FOUND THAT AN ASS ESSEE IS TO BE ASSESSED AS PER THE PROVISIONS OF CHAPTER XIIG O F THE ACT. SECTION 14A IS NOT AN EXCEPTION TO THE TTS. RA THER THE SCHEME IS AN EXCEPTION TO THE NORMAL COMPUTATIO N PROVISIONS, INCLUDING THE SECTION 14A. THEREFORE,IT CANNOT BE SAID THAT WHEN THE INCOME OF THE ASSESSEE FROM T HE BUSINESS OF OPERATING SHIPS WAS COMPUTED UNDER THE SPECIAL PROVISIONS OF CHAPTER XII-G, EXPENDITURE OTHER THAN THE EXPENDITURE INCURRED FOR THE PURPOSE OF THE BUSINES S HAD BEEN ALLOWED. CONSIDERING THE TWIN FACTORS I.E. NOT CLAIMING ANY EXPENDITURE AGAINST THE NONSHIPPING BU SINESS INCOME BY THE ASSESSEE AND OPTING FOR TTS FOR SHIPP ING BUSINESS, WE ARE OF THE OPINION THAT THE ORDER OF T HE FAA DOES NOT SUFFER FROM ANY LEGAL OR FACTUAL INFIRMITY . THEREFORE, CONFIRMING HIS ORDER, WE DECIDE THE EFFE CTIVE GROUND OF APPEAL AGAINST 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 ITA NO. 7371/MUM/2017 ESSAR SHIPING LTD. VS ACIT 8 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 PROVISI ONS OF CHAPTER XII-G. THE TRIBUNAL SET ASIDE THE ADDITION OBSERVING THUS' NO DISALLOWANCE UNDER SECTION 14A IS WARRANTE D IN THIS CASE WHEN THE ASSESSEE HAS ADMITTEDLY NOT CLAIMED A NY EXPENDITURE, TOWARDS TAXABLE INCOME I.E. IT HAS NOT CLAIMED ANY DEDUCTION OF EXPENDITURE DEBITED IN THE PROFIT & LO SS ACCOUNT WHILE COMPUTING THE TOTAL INCOME. 11. FURTHER, THE CO-ORDINATE BENCH OF THIS TRIBUN AL IN THE CASE OF CGU LOGISTICS LTD (SUPRA) WHILE DEALING ON THE ISSU E UNDER TTS HAS HELD AS UNDER: 10.A.WE FIND THAT SECTION 115VP DEALS METHOD AND T IME OF OPTING FOR TTS, SECTION 115VQ IS ABOUT PERIOD FOR W HICH TONNAGE TAX OPTION REMAINS IN FORCE. RENEWAL OF TTS IS SUBJECT MATTER OF SECTION115VR.CIRCUMSTANES AND CONDITIONS WHERE IN TONNAGE TAX SCHEME CANNOT BE OP TED ARE THE SUBJECT MATTER OF SECTION 115VS.AS PER THE PROV ISIONS OF SECTION 115VT EVERY ASSES SEE HAS TO TRANSFER PROFI TS TO TONNAGE TAX RESERVE ACCOUNT AT A FIX RATE AND HAS T O UTILISE IT FOR SPECIFIC PURPOSE, ONCE HE OPTS OF TTS. COMPANIE S OPTING FOR TTS HAVE TO COMPLY WITH MINIMUM TRAINING REQUIR EMENT AS REQUIRED BY SECTION 115VU.LIMIT FOR CHARTER IN O F TONNAGE HAS BEEN DETERMINED BY SECTION 115VV.MAINTENANCE AND AUDIT OF ACCOUNTS OF THE TTS COMPANIES IS GOVERNED BY THE PROVISIONS OF SECTION 115VW OF THE ACT, WHEREAS SECTION115VX DETERMINES TONNAGE . AMALGATION IS SUBJECT MATTER OF SECTION 115VY. NEXT SECTION I.E. SECTION 15VZBTAKES CARE OF THE TONNAGE TAX COM PANIES WHICH ARE FOUND TO BE A PARTY TO ANY TRANSACTION OR ARRANGEMENT THAT AMOUNTS TO AN ABUSE OF THE SCHEME. LAST SECTION, SECTION115VZC, DEALS WITH EXCLUSION FROM T TS. FROM THE ABOVE IT IS CLEAR THAT CHAPTER XII-G IS A COMPLETE CODE IN ITSELF AND IT PROVIDES FOR NON APPLICABILIT Y OF SECTION 28 TO 43C OF THE ACT I.E. CHAPTER IV OF THE ACT, WH EN INCOME IS TO BE COMPUTED AS PER THE PROVISIONS OF THE SAID SECTION. CHAPTER-XII-G, WAS INTRODUCED BY THE FINANCE (NO.2)ACT,2004,WITH EFFECT FROM APRIL 1,2005,AND IT PROVIDES FOR TTS, WHICH IS OPTIONAL. THE NOTES ON C LAUSES APPENDED TO THE FINANCE (NO.2) BILL,2004, REFERRING TO CLAUSE 28 AS REGARDS THE INTRODUCTION OF SECTION 115VA SPE CIFICALLY ITA NO. 7371/MUM/2017 ESSAR SHIPING LTD. VS ACIT 9 STATES THAT THE PROVISION RELATES TO THE COMPUTATIO N OF PROFITS AND GAINS OF THE SHIPPING BUSINESS. TONNAGE TAX WAS INTENDED TO MAKE THE INDUSTRY INTERNATIONALLY COMPE TITIVE AND ALSO TO INDUCE MORE SHIPS TO FLY THE INDIAN FLA G. AS THE WHOLE OF FEFG IS COVERED BY THE PROVISIONS OF CHAPT ER XII- G OF THE ACT, THERE IS NO JUSTIFICATION IN COMPUTIN G IT UNDER A DIFFERENT CHAPTER OR SECTION. (UNDERLINED FOR EMPHASIS BY US) 12. BEFORE PARTING, WE ALSO THINK IT APPOSITE TO REFER TO THE JUDGMENT RENDERED BY THE HON'BLE SUPREME COURT IN THE CASE O F TRANS ASIAN SHIPPING SERVICES PVT LTD (SUPRA). IN THE SAI D CASE, THE SUPREME COURT OBSERVED THAT .IT MAY BE STATED IN BRIEF THAT IN VIEW OF THE STIFF COMPETITION FACED BY THE INDIA N SHIPPING COMPANIES VIS-A-VIS FOREIGN SHIPPING LINES, AND IN ORDER TO ENSURE AN EASILY ACCESSIBLE, FIXED RATE, LOW TAX REGIME FO R SHIPPING COMPANIES, THE RAKESH MOHAN COMMITTEE IN ITS REPORT (OF JANUARY, 2002) RECOMMENDED THE INTRODUCTION OF THE TTS IN INDIA, WHICH WAS SIMILAR TO, AND ADOPTED SOME OF TH E BEST GLOBAL PRACTICES PREVALENT. THE WHOLE PURPOSE OF INTRODUCT ION OF THE SCHEME WAS TO MAKE THE INDIAN SHIPPING INDUSTRY MOR E COMPETITIVE IN THE GLOBAL SPACE BY RATIONALISING IT S TAX COST... THE HONBLE SUPREME COURT FURTHER OBSERVED THAT, WE WOULD ALSO LIKE TO REFER TO CIRCULAR NO. 05/2005 DA TED 15.07.2005 EXPLAINING THE NEED AND ESSENCE OF THE INTRODUCTION OF THESE PROVISIONS WHICH WAS ISSUED CONTEMPORANEOUSLY BY THE CENTRAL BOARD OF DIRECT TA XES (CBDT). THE CIRCULAR CLARIFIES THAT THE SCHEME IS A 'PREFERENTIAL REGIME OF TAXATION'. IT ALSO CLARIFIE S THAT 'CHARGING PROVISION IS UNDER SECTION 115VA READ WIT H SECTION 115VF AND SECTION 115VG..' 13. IT HAS ALSO BEEN BROUGHT TO OUR NOTICE THAT A N IDENTICAL SITUATION AROSE IN ASSESSEES OWN CASE FOR AY 2013-14 WHERE T HE DISPUTE RESOLUTION PANEL(DRP) VIDE ITS ORDER DATED 18.09. 2017 HELD THAT TRANSFER PRICING REGULATIONS DO NOT APPLY TO T HE ASSESSEE TO THE EXTENT OF OPERATIONS CARRIED OUT THROUGH OPERAT ING 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 SELF- CONTAINED CHANGING PROVISION AS WELL AS 'METHOD OF COMPUTATION OF INCOME IN THE CHAPTER, AND, THE METHOD OF COMPUT ATION OF ITA NO. 7371/MUM/2017 ESSAR SHIPING LTD. VS ACIT 10 INCOME UNDER TTS IS NOT DEPENDENT ON RECEIPT OR EXP ENDITURE OF THE ASSESSEE. UNDER TONNAGE TAX SCHEME, THE INCOME HAS TO BE COMPUTED AS PER THE METHOD PRESCRIBED IN SECTION 11 5VG. THE INCOME AS PER TONNAGE TAX SCHEME IS COMPUTED ON THE BASIS OF THE WEIGHT OF THE VESSEL AND NUMBER OF DAYS IT IS H ELD, IRRESPECTIVE OF ITS REVENUE REALISATIONS AND THE EX PENDITURE INCURRED FOR THE PURPOSE OF THE BUSINESS. HENCE, NE ITHER THE BUSINESS RECEIPTS NOR THE BUSINESS EXPENDITURE OF T HE ASSESSEE HAS ANY BEARING ON THE METHOD PRESCRIBED FOR COMPUTATIO N OF INCOME UNDER TTS AS PER SECTION 115VG. THE TONNAGE TAX SCH EME, IN THAT SENSE, IS A PRESUMPTIVE METHOD OF COMPUTATION OF TAXABLE INCOME WHICH IS NOT DEPENDENT ON ACTUAL RECEIPTS AN D EXPENDITURE OF THE ASSESSEE. 15. IN FACT, THE FALLACY IN THE APPROACH OF THE AS SESSING OFFICER CAN BE GAUGED FROM A PERUSAL OF THE COMPUTATION OF TAXA BLE INCOME MADE IN PARA 11 OF THE ASSESSMENT ORDER. THE ASSESS ING OFFICER HAS SOUGHT TO ADD ` 5,40,887/- AS A SEPARATE LINE I TEM CAPTIONED AS PROPOSED ADJUSTMENT/ADDITION IN VIEW OF THE ABO VE DISCUSSION. THUS, AS PER THE PERCEPTION OF ASSESSIN G OFFICER, CHAPTER X OF THE ACT CREATES AN INDEPENDENT OR A SE PARATE CHARGE OF INCOME, AN ASPECT WHICH IS CONTRARY TO THE JUDGM ENT OF THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF VODAFONE S ERVICES PVT.LTD. VS. UOI ( 2015) 53 TAXMAN.COM 286 (BOM), W HEREIN AFTER REFERRING TO AN EARLIER JUDGMENT DATED 10TH O CTOBER, 2014 IN THE CASE OF SAME ASSESSEE REPORTED IN 50 TAXMANN.CO M 300 (BOM) INTERALIA , HELD THAT CHAPTER X DOES NOT CONT AIN ANY CHARGING PROVISION BUT IS A MACHINERY PROVISION TO ARRIVE AT AN ARMS LENGTH PRICE OF A TRANSACTION BETWEEN ASSOCIA TED ENTERPRISES. 16. IN THE FINAL ANALYSIS, IT IS SEEN THAT IN THE INSTANT CASE, THE PROVISIONS OF CHAPTER X HAVE BEEN INVOKED TO ALTER AN EXPENDITURE, NAMELY THE MOBILISATION AND DEMOBILISA TION CHARGES PAID FOR A QUALIFYING SHIP, AN ITEM WHICH HAS NO BE ARING ON THE INCOME AS COMPUTED UNDER CHAPTER XIIG AND ACCORDING LY THE PROVISIONS OF CHAPTER X HAVE NO APPLICATION IN COMP UTING THE INCOME OF THE ASSESSEE CHARGEABLE TO TAX AS PER CHA PTER XII-G OF THE ACT. 17. IN VIEW OF THE AFORESAID DISCUSSION, IN OUR CO NSIDERED VIEW, THE TRANSFER PRICING REGULATIONS DO NOT APPLY TO THE AS SESSEE TO THE EXTENT OF OPERATIONS CARRIED OUT THROUGH OPERATING QUALIFYING SHIPS WHERE THE INCOME IS TAXED UNDER TTS. ITA NO. 7371/MUM/2017 ESSAR SHIPING LTD. VS ACIT 11 11. CONSIDERING THE DECISION OF COORDINATE BENCH OF THE TRIBUNAL AS REFERRED ABOVE, THE PROVISIONS OF TRANSFER PRICING REGULATIO NS ARE NOT APPLICABLE TO THE ASSESSEE TO THE EXTENT OF OPERATION CARRIED BY ASSESSEE THROUGH QUALIFYING SHIPS WHICH IS COVERED BY TONNAGE TAX SC HEME. THUS, WE HOLD THAT THE GROUNDS OF APPEAL NO. 2 TO 6 &9 ARE C OVERED 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 U NDER CONSIDEATION ARE SAME, RESPECTFULLY FOLLOWING THE ORDER OF THE T RIBUNAL IN ASSESSEES OWN CASE, WE DO NOT FIND ANY JUSTIFICATION FOR THE ADDITION MADE BY THE A.O. IN RESPECT OF INTEREST ON PURCHASE PRICE OF TW O 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 RS. 36,50 ,000/- ON ACCOUNT OF FEES RECEIVABLE FOR PROVIDING NEGATIVE LIEN. 10. RIVAL CONTENTIONS HAVE BEEN HEARD AND RECORD PE RUSED. FACTS IN BRIEF ARE THAT DURING THE RELEVANT ASSESSMENT YEAR UNDER CONSIDERATION, THE ESSAR GLOBAL LIMITED (EGL), THE ULTIMATE PARENT COMPANY OF ASSESSEE HAD TAKEN LOAN FROM ICICI BANK, HONG KONG BRANCH AN D SINGAPORE BRANCH. AS PER THE LETTER GIVEN BY ASSESSEE TO ICIC I BANK, THE ASSESSEE HAS UNDERTAKEN NOT TO TRANSFER, ASSIGN AND DISPOSE OF 49% OF EQUITY SHARES IN ESSAR LOGISTICS LTD (ELL) WITHOUT PRIOR W RITTEN APPROVAL OF LENDERS DURING PENDENCY OF LOAN. ELL IS WHOLLY OWNE D INDIAN SUBSIDIARY OF ASSESSEE AND AS PER AGREEMENT 49% OF THE SHAREHO LDING WILL NOT BE ITA NO. 7371/MUM/2017 ESSAR SHIPING LTD. VS ACIT 12 TRANSFERRED WITHOUT PRIOR APPROVAL OF LENDER I.E. A LIEN WAS PROVIDED ON TRANSFER OF SHARES. 11. THE A.O. HELD THAT THE ASSESSEE OUGHT TO HAVE C HARGED GUARANTEE COMMISSION @ 0.5% AND ACCORDINGLY WORKED OUT ADJUST MENT OF RS. 36,50,000/-, WHICH WAS CONFIRMED BY THE DRP. 12. IT WAS ARGUED BY THE LD AR OF THE ASSESSEE THAT THE ASSESSEE HAS PROVIDED A NEGATIVE LIEN I.E. IT HAS AGREED NOT TO SELL 49% OF ITS STAKE IN ESSAR LOGISTICS LTD WITHOUT PRIOR CONSENT FROM THE BANK. IT IS SUBMITTED THAT NEGATIVE LIEN PROVIDED BY ASSESSEE DO NOT HAVE A BEARING ON PROFIT, INCOME, LOSSES, ETC OF ASSESSEE AND HENCE IT DOES N OT COME WITHIN THE PURVIEW OF INTERNATIONAL TRANSACTION AS DEFINED U/S 92B OF THE ACT, RELIANCE WAS PLACED ON THE ORDERS OF THE HON'B LE TRIBUNAL IN CASE OF; I) MICRO INKS V. ADDL. CIT [157 ITD 132 (MUM)] II) SIRO CLINPHARM PVT. LTD. V. DY. CIT (ITA NO: 26 18/MUM/2014) DATED 31.03.2016 III) MARICO LTD V. ACIT (ITA NO: 8858/MUM/2011) DAT ED 18.05.2016 IV) BHARTI AIRTEL LTD V. ADDL. CIT [161 TTJ 483 (MU M)] 13. ON THE OTHER HAND, THE LD DR HAS RELIED ON THE ORDER OF THE DRP. 14. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND CA REFULLY GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW AND FOU ND FROM THE RECORD THAT THE TPO/AO HAS MADE ADJUSTMENT FOR PROVIDING L ETTER OF NEGATIVE LIEN BY ASSESSEE TO THE BANK. THE TPO HAS EQUATED T HE SAID ITA NO. 7371/MUM/2017 ESSAR SHIPING LTD. VS ACIT 13 TRANSACTION WITH THAT OF GUARANTEE GIVEN TO BANK. I N CASE OF GUARANTEE THERE IS A POSSIBILITY OF A LIABILITY ARI SING TO THE GUARANTOR ON ACCOUNT OF PROVIDING GUARANTEE. HOWEVER, IN THE PRE SENT CASE, EVEN IF EGL DEFAULTS IN PAYMENT OF LOAN, THERE WILL BE NO L IABILITY ON ASSESSEE FOR PAYING ANY AMOUNT SINCE ASSESSEE IS NOT A GUARANTOR . HENCE, THERE WOULD NEVER BE ANY LIABILITY ON ASSESSEE EVEN IN CA SE OF DEFAULT. HOWEVER, KEEPING IN VIEW THE NATURE OF NEGATIVE LIE N LETTER GIVEN BY THE ASSESSEE AND THE TOTALITY OF FACTS AND CIRCUMSTANCE S OF THE CASE AND THE TERMS OF LETTER OF NEGATIVE LIEN GIVEN BY THE ASSES SEE, WE DIRECT THE A.O. TO MAKE ADJUSTMENT BY APPLYING 0.25% TO THE SAID TR ANSACTION 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 O F INTEREST ON ADVANCE GIVEN FOR ALLOTMENT OF PREFERENCE SHARES. 16. RIVAL CONTENTIONS HAVE BEEN HEARD AND RECORD PE RUSED. FACTS IN BRIEF ARE THAT DURING THE PREVIOUS YEAR RELEVANT TO YEAR UNDER CONSIDERATION, THE ASSESSEE GAVE ADVANCE OF RS. 52. 97 CRORES TOWARDS SHARE APPLICATION MONEY TO ITS WHOLLY OWNED SUBSIDI ARY I.E. ESSAR OILFIELD SERVICES LIMITED (EOSL) FOR ISSUE OF PREFERENCE SHA RES. SINCE ULTIMATELY NO SHARES WERE ALLOTTED, EOSL HAS REFUNDED FULL MON EY TO ASSESSEE. THE TPO TREATED THE ABOVE TRANSACTION AS A LOAN AND CHA RGED INTEREST ON THE ITA NO. 7371/MUM/2017 ESSAR SHIPING LTD. VS ACIT 14 SAID LOAN. BY THE IMPUGNED ORDER, THE DRP CONFIRMED THE ACTION OF THE A.O., AGAINST WHICH THE ASSESSEE IS IN FURTHER APPE AL BEFORE THE ITAT. 17. IT WAS ARGUED BY THE LD AR OF THE ASSESSEE THAT THE MONEY WAS ADVANCED TOWARDS SHARE APPLICATION MONEY. THE ASSES SEE SUBMITTED ODI FORMS FILED BEFORE RBI WHEREIN THE PURPOSE FOR REMI TTANCE HAS BEEN STATED TO BE FOR INVESTMENT IN PREFERENCE SHARES. I T WAS SUBMITTED THAT WHEN THE SAID ADVANCE WAS RETURNED BY EOSL, IT WAS CLEARLY MENTIONED IN FIRC TO BE REFUND OF ADVANCE GIVEN FOR INVESTMEN T IN PREFERENCE SHARES. IT WAS FURTHER SUBMITTED THAT THE TPO HAS N O POWER TO RE- CHARACTERIZE THE TRANSACTION IN ABSENCE OF ANY DOCU MENTARY EVIDENCE. THE TPO DID NOT AGREE WITH THE CONTENTION OF THE ASSESSEE AND HELD THAT IT WAS AN ARRANGEMENT AS PER S. 92F(V ) OF THE ACT BETWEEN EOSL AND ASSESSEE. HE RELIED ON THE DECISION OF THE HON'BLE DELHI HIGH COURT IN CASE OF CIT V. EKL APPLIANCES (345 ITR 241 ) AND CIT V. ABHINANDAN INVESTMENT (ITA NO: 130 OF 2001 DATED 19 .11.2015). HE FURTHER HELD THAT THE ASSESSEE HAS NOT RECEIVED DIV IDEND @ 1% ON INVESTMENTS WHICH IT SHOULD HAVE RECEIVED. THE LD. AR HAS FURTHER SUBMITTED THAT THE TPO CANNOT RECHARACTERISE THE TR ANSACTION WITHOUT BRINGING ANY MATERIAL ON RECORD. IN ORDER T O SUPPORT THE SAID CONTENTION RELIANCE IS PLACED ON THE FOLLOWING DECISIONS: A) AEGIS LTD V. ADDL. CIT BEING ITA NO: 1213/MUM/20 14 DATED 27.07.2015 ITA NO. 7371/MUM/2017 ESSAR SHIPING LTD. VS ACIT 15 B) BHARTI AIRTEL LIMITED V ADDL. CIT BEING ITA NO: 5816/DEL/2012 DATED 11.03.2014 C) DIT V. BESIX KIER DABHOL SA [210 TAXMAN 151 (BOR N)] (HEAD NOTE) D) M/S PAN INDIA NETWORK INFRAVEST PVT. LTD V. ADDL . CIT (ITA NO: 7026/MUM/2013 DATED 04.12.2015) 18. ON THE OTHER HAND, THE LD. DR HAS RELIED ON THE ORDER PASSED BY THE DRP. 19. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND CA REFULLY GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW. FROM T HE RECORD, WE FOUND THAT THE TPO HAS CHARGED INTEREST ON ADVANCE FOR SH ARE APPLICATION MONEY TO AE TREATING THE SAME AS A LOAN. 20. WE HAVE 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 COR RECTLY CHARGED INTEREST BY TREATING THE ADVANCE FOR SHARE APPLICAT ION MONEY AS LOANS AND ADVANCES, SINCE THE SHARES WERE NOT FINALLY ALL OTTED AND MONEY WAS REFUNDED BACK TO THE ASSESSEE, THE A.O. HAS CORRECT LY MADE ADJUSTMENT. HOWEVER, THE RATE OF INTEREST TO BE APPLIED ON THE SAID AMOUNT OUGHT TO BE AT LIBOR, SINCE THE TRANSACTION IS IN THE FOREIG N CURRENCY, OUR VIEW IS SUPPORTED BY THE FOLLOWING DECISIONS: ITA NO. 7371/MUM/2017 ESSAR SHIPING LTD. VS ACIT 16 I) CIT V. AURIONPRO SOLUTIONS LTD (ITA NO: 1869 OF 2014) (BOMBAY HIGH COURT) II) COTTON NATURALS (I) PVT. LTD. V DCIT [276 CTR 4 45 (DEL)] III) HINDUJA GLOBAL SOLUTIONS LTD V ADDL.CIT [145 L TD 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 DOW N IN THE ABOVE JUDICIAL PRONOUNCEMENTS, WE DIRECT THE TPO/AO TO RE STRICT THE ADJUSTMENT BY TAKING LIBOR RATE. WE DIRECT ACCORDIN GLY. 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 RS. 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 16/01/2 012 TO PROVIDE BUSINESS SUPPORT SERVICES. THIS AGREEMENT WAS ENTER ED WITH EFFECT FROM 01.04.2011. AS PER THE SAID AGREEMENT, ESSL SHALL P AY THE CONSIDERATION WITHIN 30 DAYS OF RECEIPT OF INVOICE AND DELAY IN P AYMENT WOULD ATTRACT INTEREST @ 1% PER MONTH. DURING THE YEAR, THERE WAS DELAY IN RECEIVING ITA NO. 7371/MUM/2017 ESSAR SHIPING LTD. VS ACIT 17 PAYMENT FROM ESSL, HOWEVER, THE ASSESSEE HAD NOT CH ARGED ANY INTEREST ON ACCOUNT OF DELAY. ACCORDINGLY, THE A.O. WORKED OUT INTEREST ON THE OUTSTANDING DUES BEYOND THE STIPULATED PERIO D AND MADE ADJUSTMENT OF RS. 9,12,541/-. 23. IT WAS ARGUED BY THE LD AR OF THE ASSESSEE THAT THE INTEREST ON OUTSTANDING RECEIVABLES IS NOT AN INDEPENDENT INTER NATIONAL TRANSACTION SINCE THE INTERNATIONAL TRANSACTION ENTERED INTO BY ASSESSE IS ACCEPTED TO BE AT ARM'S LENGTH WHEREIN THE ASSESSEE IS CHARG ING IT'S A.E. A PROFIT MARGIN OF 29.71% AS AGAINST 5.79% WHICH IS AVERAGE MARGIN OF COMPARABLE CASES PROVIDING SIMILAR SERVICES. IT IS SUBMITTED THAT WHEN THE ASSESSEE IS CHARGING SUCH HUGE MARGINS FROM IT'S A. E., THE ASSESSEE WOULD HAVE TAKEN INTO ACCOUNT ALL THE FACTORS SUCH AS DELAY IN RECEIPT OF PAYMENT AND HENCE THERE IS NO JUSTIFICATION FOR TPO TO SUGGEST ADJUSTMENT IN RESPECT OF INTEREST ON OUTSTANDING RE CEIVABLES. IT IS SUBMITTED THAT NO SEPARATE ADJUSTMENT CAN BE MADE B Y TREATING THE EXTENSION OF CREDIT PERIOD TO AE AS A SEPARATE INTE RNATIONAL TRANSACTION. 24. ON THE OTHER HAND, THE LD DR HAS RELIED ON THE ORDER OF THE DRP AND CONTENDED THAT SINCE THE PAYMENT WAS NOT MADE W ITHIN THE PERIOD OF 30 DAYS OF RECEIPT OF INVOICE, THE ASSESSEE SHOU LD HAVE CHARGED ITA NO. 7371/MUM/2017 ESSAR SHIPING LTD. VS ACIT 18 INTEREST @ 1% PER MONTH WHICH HE FAILED TO CHARGE, ACCORDINGLY, THE TPO WAS JUSTIFIED IN MAKING THE ADJUSTMENT. 25. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND CA REFULLY GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW AND FOU ND THAT THE 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. HOWEVER, FROM THE RE CORD, WE FOUND THAT THE WORKING OF INTEREST AS DETERMINED BY TPO IS INC ORRECT. THE TPO HAS CHARGED INTEREST BEYOND THE PREVIOUS YEAR RELEVANT TO ASSESSMENT YEAR UNDER CONSIDERATION. ACCORDINGLY, WE RESTORE THE MA TTER BACK TO THE FILE OF TPO/AO TO RECALCULATE THE CHARGEABLE INTEREST AN D CONFINE THE SAME ONLY UP TO THE END OF THE YEAR UNDER CONSIDERATION I.E. 31/3/2013 AND NOT THEREAFTER. WE DIRECT ACCORDINGLY. 26. THE NEXT GRIEVANCE OF THE ASSESSEE AS CONTAINED IN GROUND NO.6 RELATES TO TAXING THE INTEREST INCOME ON LOANS / IC D GIVEN TO SUBSIDIARIES AND GROUP CONCERNS UNDER THE HEAD INCOME FROM OTHE R SOURCES AS AGAINST INCOME FROM BUSINESS AS CLAIMED BY ASSESS EE. IN GROUND NO.7, ASSESSEE HAS CHALLENGED AOS ACTION FOR DECLINING C LAIM OF INTEREST EXPENDITURE U/S.36(1)(III) OF I.T. ACT. AS AN ALTER NATE 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. ITA NO. 7371/MUM/2017 ESSAR SHIPING LTD. VS ACIT 19 27. RIVAL CONTENTIONS HAVE BEEN HEARD AND RECORD PE RUSED. THE FACTS IN BRIEF ARE THAT THE ASSESSEE IS IN THE BUSINESS O F OPERATION OF SHIPS, LOGISTICS AND DRILLING OIL RIGS. ONE OF THE MAIN OB JECTS 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/O R HIRING AND/OR OPERATING ALL TYPES OF ONSHORE AND OFFSHORE DRILLIN G RIGS. THE SHIPPING AND LOGISTICS BUSINESS IS BEING CARRIED OUT BY THE ASSESSEE ITSELF WHEREAS THE OILFIELD BUSINESS IS BEING CARRIED OUT BY THE A SSESSEE THROUGH ITS SUBSIDIARY. FOR THE PURPOSE OF CARRYING OIL FIELD B USINESS, 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 SERV ICES BUSINESS OF THE ASSESSEE. IT IS EVIDENT FROM THE RECORD THAT THE AS SESSEE HAS GIVEN THE ICD TO ITS SUBSIDIARY COMPANY TO DEVELOP THE OILFIL ED SERVICES BUSINESS OF THE COMPANY WHICH IS ONE OF MAIN OBJECTS OF THE COM PANY AND THUS FORMS PART OF THE BUSINESS OF THE ASSESSEE. DURING THE YEAR THE ASSESSEE HAS BORROWED MONEY FROM LIC AND BANK WHICH HAD BEEN GIVEN AS INTER CORPORATE DEPOSITS (ICDS) TO ITS WHOLLY OW NED SUBSIDIARY M/S ESSAR OILFIELD SERVICES INDIA LTD. (EOSIL) AND OTHE R SUBSIDIARY WHO IS CARRYING OUT THE BUSINESS OF OIL DRILLING OPERATION S. WE ALSO FOUND THAT IN THE EARLIER YEARS I.E. A.Y. 2011-12 A ND 2012-13, THE ASSESSEE HAS GIVEN SIMILAR ICD TO EOSIL. THE IN COME EARNED ITA NO. 7371/MUM/2017 ESSAR SHIPING LTD. VS ACIT 20 ON SUCH ICD WAS OFFERED BY THE ASSESSEE FOR TAXATIO N AS BUSINESS INCOME. THE A.O. HAS ACCEPTED THE ASSESSEES CONTEN TION AND ASSESSED THE INTEREST INCOME AS INCOME FROM BUSINESS. HOWE VER, DURING THE YEAR UNDER CONSIDERATION I.E. A.Y. 2013-14, THE INT EREST INCOME OFFERED BY THE ASSESSEE AS BUSINESS INCOME WAS NOT ACCEPTED BY AO, THE A.O. WAS OF THE VIEW THAT THE ASSESSEE HAD ADVANCED MONE Y TO SUBSIDIARIES FOR EARNING INTEREST INCOME, THEREFORE, TAXED THE S AME AS INCOME FROM OTHER SOURCES. THE AO HAD DISCUSSED THIS GROUND AT PAGE NO.3 TO 4 OF HIS ORDER. THE A.O. ALSO OBSERVED THAT THE ASSESSEE HAS NOT PROVED THAT THE BORROWED MONEY WAS USED FOR GIVING ICDS, HENCE, THE INTEREST EXPENDITURE CANNOT BE ALLOWED AS DEDUCTION EVEN IF THE INTEREST INCOME IS HELD TAXABLE UNDER THE HEAD INCOME FROM OTHER SO URCES. 28. FROM THE RECORD, WE FOUND THAT THE BUSINESS ACT IVITIES OF THE ASSESSEE COMPRISES OF SHIPPING BUSINESS, LOGISTICS BUSINESS AND OILFIELD BUSINESS. THE SHIPPING AND LOGISTICS BUSINESS IS BE ING CARRIED OUT BY THE ASSESSEE ITSELF WHEREAS THE OILFIELD BUSINESS IS BE ING CARRIED OUT BY THE ASSESSEE THROUGH ITS SUBSIDIARY. WE HAD ALSO GONE T HROUGH THE MEMORANDUM OF ASSOCIATION OF THE ASSESSEE AND FOUND THAT THE MAIN OBJECT OF THE ASSESSEE IS TO ENTER INTO AND CONDUC T THE BUSINESS OF OWNING AND/ OR LEASING AND/ OR HIRING AND/ OR OPERA TING ALL TYPES OF ONSHORE AND OFFSHORE DRILLING RINGS. THUS, IT IS C LEAR THAT EVEN AS PER THE MEMORANDUM, IT WAS MAIN OBJECTION OF THE ASSESSEE. THE ASSESSEE WAS ITA NO. 7371/MUM/2017 ESSAR SHIPING LTD. VS ACIT 21 CARRYING OUT BUSINESS OF DRILLING OIL RIGS THROUGH ITS SUBSIDIARY FOR THIS PURPOSE THE ASSESSEE BORROWED MONEY AND ADVANCED TH E SAME AS ICDS TO ITS SUBSIDIARY TO CARRY OUT THE DRILLING BUSINES S. THUS, THE BUSINESS SO CARRIED OUT BY THE SUBSIDIARY WAS AS PER THE MAIN O BJECTS 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, SINC E IT HAS BEEN EARNED IN THE COURSE OF THE BUSINESS OF THE ASSESSEE AND F ORMS PART OF THE BUSINESS OF THE COMPANY. 29. FROM THE RECORD, WE FOUND THAT DURING THE PREVI OUS YEAR RELEVANT TO ASSESSMENT YEAR UNDER CONSIDERATION, THE ASSESSE E HAS EARNED INTEREST INCOME FROM ICDS OF RS. 60.16 CRORES AND F ROM BANKS OF RS. 1.81 CRORES. THE BREAK UP OF THE INTEREST INCOME IS AS U NDER:- 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 GROU P COMPANY OF ASSESSEE. 3. ESSAR OILFIELD SERVICES LTD MAURITIUS 53,45,802/ - THIS COMPANY IS WHOLLY OWNED SUBSIDIARY OF ASSESSEE 4. ENERGY TRANSPORTATION INTERNATIONAL LTD. 7,80,763/ - THIS COMPANY IS WHOLLY OWNED SUBSIDIARY OF ASSESSEE 5. INTEREST FROM BANKS 1,81,44,909 INTEREST ON MARGIN MONEY GIVEN TO BANK THE MONEY ADVANCED TO COMPANIES AT SR. NO. 1 TO 4 A RE GROUP/ SUBSIDIARY COMPANIES AND THE MONEY HAS BEEN GIVEN F OR BUSINESS ITA NO. 7371/MUM/2017 ESSAR SHIPING LTD. VS ACIT 22 PURPOSE OF ASSESSEE. THE A.O. HAS NOT BROUGHT ANY M ATERIAL ON RECORD TO SUGGEST THAT THE ASSESSEE HAD GIVEN INTERCORPORA TE DEPOSIT TO SUBSIDIARIES FOR EARNING INTEREST INCOME. IT IS ALS O NOT THE CASE OF AO THAT THE ASSESSEE HAD GIVEN ITS SURPLUS FUNDS TO SU BSIDIARY FOR EARNING INTEREST INCOME. THUS, THE INCOME ON ICD IS TO BE A SSESSED UNDER THE HEAD BUSINESS INCOME. SIMILAR VIEW HAS BEEN TAKEN BY THE COORDINATE BENCH OF THE ITAT, MUMBAI IN THE CASE OF TOLANI PRI VATE LIMITED IN ITA NO. 5562/MUM/2013, ORDER DATED 04/01/2018 WHEREIN T HE ASSESSEE WAS ENGAGED IN OPERATION OF SHIPS HAD ADVANCED LOAN /ICD TO ITS SUBSIDIARY FOR ACQUIRING SHIP, IT WAS HELD THAT EVE N ON THE BASIS OF COMMERCIAL EXPEDIENCY, THE ASSESSEE WAS BOUND TO AS SIST ITS SUBSIDIARY, THE INTEREST INCOME EARNED ON SUCH LOAN S/ICD IS LIABLE TO BE ASSESSED AS INCOME UNDER THE HEAD BUSINESS INCO ME AND NOT UNDER THE HEAD INCOME FROM OTHER SOURCES. 30. WITH REGARD TO BANK INTEREST INCOME AMOUNTING T O RS. 1,81,44,909/-, THE SAME HAS BEEN RECEIVED ON MARGI N MONEY WHICH THE ASSESSEE WAS REQUIRED TO KEEP WITH BANKS AS PER TERMS OF SANCTION, HENCE THE SAME IS ALSO FOR PURPOSE OF BUSINESS. THE MONEY SO KEPT WITH THE BANK AS MARGIN MONEY WAS OUT OF BUSINESS COMPUL SION AND NOT AS PER THE SWEET WILL OF THE ASSESSEE, THEREFORE, THE INTEREST EARNED ON SUCH MARGIN MONEY IS ALSO LIABLE TO BE TAXED AS BUSINESS INCOME. ITA NO. 7371/MUM/2017 ESSAR SHIPING LTD. VS ACIT 23 31. ASSESSEE IS ALSO AGGRIEVED FOR DISALLOWANCE OF INTEREST EXPENDITURE. THE A.O. HAS DEALT WITH THE ISSUE AT PAGE NOS. 9 TO 14. FROM THE RECORD WE FOUND THAT DURING THE YEAR, INTE REST OF RS. 136,82,29,020/- WAS DIRECTLY INCURRED FOR NON TONNA GE ACTIVITY AND COMMON INTEREST OF RS. 37,75,64,523/- WAS ALLOCATED TOWARDS NON- TONNAGE ACTIVITY. THUS, THE TOTAL INTEREST EXPENDIT URE OF RS. 174,57,93,543/- WAS CLAIMED U/S 36(1)(III) OF T HE ACT AS BUSINESS EXPENDITURE. IT WAS CONTENDED BEFORE THE ASSESSING OFFICER THAT THE ASSESSEE IS INVOLVED IN BUSINESS OF OIL DRILLING AN D THE INTEREST EXPENDITURE INCURRED WAS ON ACCOUNT OF LOAN TAKEN F ROM BANK AND LIC. THE AMOUNT OF MONEY TAKEN FROM BANK AND LIC WAS USE D FOR PROVIDING ICDS TO ITS SUBSIDIARIES, AS THE BUSINESS OF OIL DR ILLING WAS CARRIED OUT BY ASSESSEE THROUGH ITS SUBSIDIARY. IT WAS ALSO CONTEN DED THAT SIMILAR INTEREST EXPENDITURE HAS BEEN ALLOWED U/S.3 6(1)(III) IN A.Y. 2011-12. THE ASSESSING OFFICER HELD THAT OIL DRILLI NG IS NOT THE BUSINESS OF ASSESSEE. HE FURTHER HELD THAT INTEREST INCOME EARN ED FROM ICDS HAS BEEN TAXED UNDER THE HEAD INCOME FROM OTHER SOURCES AND HENCE INTEREST EXPENDITURE CANNOT BE ALLOWED U/S 36(1)(II I) OF THE ACT. THE A.O. FURTHER HELD THAT OUT OF TOTAL INTEREST AN AMOUNT O F RS. 1,56,83,680 HAS BEEN PAID FOR AIRCRAFT TAKEN ON LEASE AND THE ASSES SEE HAS NOT EXPLAINED THE NEXUS BETWEEN EXPENSES CLAIMED WITH RECEIPT OF NON TONNAGE ITA NO. 7371/MUM/2017 ESSAR SHIPING LTD. VS ACIT 24 ACTIVITIES. ACCORDINGLY, HE DISALLOWED THE SAID INT EREST EXPENDITURE U/S 36(1)(III) OF THE ACT. 32. WE HAD CAREFULLY GONE THROUGH THE ENTIRE DETAIL S PLACED ON RECORD AND FOUND THAT THE INTEREST EXPENDITURE OF RS. 136, 82,29,021 (174,57,93,544 - 37,75,64,523) IS AS UNDER: SR.NO. PARTICULARS AMOUNT (RS) PURPOSE OF LOAN 1. INTEREST PAID TO YES BANK 19,91,29,094 AMOUNT BORROWED IN A.Y. 2012-13 AND USED FOR INVESTMENT IN SHARES OF ESSAR OILFIELDS SERVICES LIMITED, MAURITIUS WHICH IS WHOLLY OWNED SUBSIDIARY OF ASSESSEE ESTABLISHED FOR PURPOSE OF CARRYING OUT OILFIELD BUSINESS. 2. INTEREST PAID ON NCS FROM LIC 48,03,11,032 AMOUNT RECEIVED FROM LIC IN A.Y. 2010-11 WAS UTILIZED FOR GIVING ICD TO SUBSIDIARY COMPANY FOR CARRYING OUT OILFIELD BUSINESS. THE INCOME FROM ICD HAS BEEN OFFERED AS BUSINESS INCOME UNDER NON TONNAGE ACTIVITY. 3. INTEREST ON FCCB 67,31,05,2015 AMOUNT BORROWED IN A.Y. 2011-12 AND USED FOR INVESTMENT IN PREFERENCE SHARES IN WHOLLY OWNED SUBSIDIARY FOR CARRYING OUT OILFIELD BUSINESS. 4. INTEREST ON AIRCRAFT TAKEN ON LEASE 1,56,83,680 INCOME EARNED FROM OPERATION OF AIRCRAFT HAS BEEN OFFERED AS BUSINESS INCOME UNDER NON TONNAGE ACTIVITY. ITA NO. 7371/MUM/2017 ESSAR SHIPING LTD. VS ACIT 25 5. TOTAL 136,82,29,021/ - 33. IT IS EVIDENT FROM THE ABOVE CHART THAT INTERES T EXPENDITURE OF RS. 135,25,45,341/- HAS BEEN INCURRED ON AMOUNT BOR ROWED FOR PURPOSE OF GIVING LCD TO ITS SUBSIDIARY AND INTERES T OF RS. 1,56,83,680/- HAS BEEN INCURRED ON AIRCRAFT TAKEN O N LEASE. 34. AS DISCUSSED HEREINABOVE, THE ASSESSEE DERIVES BUSINESS INCOME FROM TONNAGE ACTIVITY AND NON-TONNAGE ACTIVITY. ONE OF THE ACTIVITIES, INCOME FROM WHICH IS OFFERED AS BUSINESS INCOME UND ER NON TONNAGE, IS OILFIELD BUSINESS. AS PER OBJECT CLAUSE OF THE MEMO RANDUM, ONE OF THE MAIN OBJECT OF THE ASSESSEE WAS TO CARRY OUT OIL DR ILLING BUSINESS, WHICH IS ALSO EVIDENT FROM THE DIRECTORS REPORT PLACED O N RECORD. SINCE THE OIL DRILLING BUSINESS WAS CARRIED OUT BY THE ASSESSEE T HROUGH ITS SUBSIDIARY, LOAN WAS TAKEN FOR GIVING AS ICD TO ITS SUBSIDIARY AND ASSESSEE INVESTED IN SUBSIDIARY TO ACQUIRE COMPLETE CONTROL OVER IT S INCE THE ASSESSEE WAS TO CARRY OUT ITS BUSINESS OF OIL DRILLING THROUGH I TS SUBSIDIARIES. THEREFORE, THE INTEREST EXPENDITURE SHOULD BE ALLOWED AS BUSIN ESS EXPENDITURE U/S 36(1)(III) OF THE ACT. SINCE THE INVESTMENT WAS MAD E IN THE GROUP COMPANY FOR STRATEGIC PURPOSE AND NOT FOR EARNING D IVIDEND. 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 FRO M SUBSIDIARIES WAS LIABLE TO BE TAXED UNDER THE HEAD INCOME FROM BUSIN ESS. FROM THE RECORD ITA NO. 7371/MUM/2017 ESSAR SHIPING LTD. VS ACIT 26 WE FOUND THAT THE SAID INTEREST EXPENDITURE WAS EFF ECTIVELY 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. I N ORDER TO SUPPORT OUR PROPOSITION, RELIANCE IS PLACED ON FOLLOWING DECISI ONS; A) CIT V. PHIL CORPORATION LTD [244 CTR 226 (BORN)] B) CIT VS. COLGATE PALMOLIVE INDIA LIMITED [(370 IT R 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 I F THE INVESTMENT IS MADE IN SUBSIDIARY FOR THE PURPOSE OF BUSINESS, THE LOSS OR EXPENDITURE INCURRED BY ASSESSEE WOULD BE ALLOWABLE AS BUSINESS EXPENDITURE. WITH RESPECT TO INTEREST ON AIRCRAFT TAKEN ON LEASE , WE OBSERVE THAT ASSESSEE HAD OFFERED INCOME EARNED FROM OPERAT ION OF AIRCRAFT AS BUSINESS INCOME, THE INTEREST PAID FOR AIRCRAFT TAK EN ON LEASE IS ESSENTIALLY ALLOWABLE AS BUSINESS EXPENSE U/S.36(1) (III) OF THE IT ACT. 36. WE ALSO OBSERVE THAT EVEN OTHERWISE THE INTERES T EXPENDITURE INCURRED ON THE LOANS WHICH ARE GIVEN TO ITS SUBSID IARIES AS ICD ON WHICH INTEREST WAS RECEIVED BY THE ASSESSEE, SUCH INTERES T EXPENDITURE IS ITA NO. 7371/MUM/2017 ESSAR SHIPING LTD. VS ACIT 27 ELIGIBLE TO BE ALLOWED U/S 57(III) OF THE ACT WHILE COMPUTING NET INTEREST INCOME, OUR THIS OBSERVATION IS WITHOUT PREJUDICE T O OUR ABOVE OBSERVATION THAT INTEREST ON LOAN IS ELIGIBLE FOR D EDUCTION U/S 36(1)(III) OF THE ACT. 37. IT WAS ALSO ARGUED BY THE LD AR THAT NO INTERES T DISALLOWANCE ON OLD/OUTSTANDING LOAN CAN BE MADE IN THE CURRENT YEA R, IF THE SAME WAS ALLOWED IN EARLIER YEAR. IT WAS SUBMITTED THAT THE SAID INTEREST EXPENDITURE PERTAINING TO AMOUNT BORROWED FROM LIC HAS BEEN ALLOWED IN A.Y. 2010-11 IN CASE OF ESSAR PORTS LIMITED AND A.Y . 2011-12 IN CASE OF ASSESSEE BY THE ASSESSING OFFICER IN THE SCRUTINY A SSESSMENT ORDER PASSED U/S 143(3) OF THE ACT. IN ORDER TO SUPPORT THIS PRO POSITION, RELIANCE WAS PLACED ON THE FOLLOWING DECISIONS; A) CIT V SRIDEV ENTERPRISES [192 ITR 165 (KAR)] B) ESCORTS LTD. V. ACIT [104 ITD 427 (DEL)] C) MAIWA COTTON SPG. MILLS V. ACIT [89 LTD 65 (TM)( CHD)] D) ITO V. J.M.P. ENTERPRISES [101 LTD 324 (SMC)(ASR )] E) VIRENDRA R. GANDHI V. ACIT (TAX APPEAL NO. 20 OF 2004 WITH TAX APPEAL NO. 124 OF 2005) DATED 27.11.2014( (GUJA RAT HIGH COURT) 38. SINCE WE HAVE ALREADY DIRECTED THE A.O. TO ALLO W DEDUCTION OF INTEREST EXPENDITURE U/S 36(1)(III) OF THE ACT, EVE N FOLLOWING THE RULE OF CONSISTENCY, THE A.O. SHOULD HAVE ALLOWED THE SAME AS PER THE ITA NO. 7371/MUM/2017 ESSAR SHIPING LTD. VS ACIT 28 TREATMENT GIVEN BY HIM IN EARLIER YEARS SINCE THERE IS NO CHANGE IN FACTS AND CIRCUMSTANCES OF THE CASE DURING THE YEAR UNDER CONSIDERATION. THUS, EVEN ON THE DOCTRINE OF CONSISTENCY, WE FIND SUFFICIENT FORCE IN THE ARGUMENT OF THE LD AR THAT THE INTEREST EXPENDITURE WHICH HAVE ALREADY BEEN ALLOWED UNDER BUSINESS HEAD OF INCOME IN EARLI ER YEAR, THE SAME SHOULD BE ALLOWED IN THE SIMILAR MANNER EVEN DURING THE YEAR SINCE THERE IS NO CHANGE IN THE FACTS AND CIRCUMSTANCES OF THE CASE. 39. WE HAD ALSO CAREFULLY PERUSED THE BANK STATEMEN T DEMONSTRATING THE SAID NEXUS WHICH IS PLACED ON RECORD. IT IS EVI DENT FROM THE SAID BANK STATEMENT AND LEDGER ACCOUNT THAT THERE IS A D IRECT NEXUS BETWEEN THE BORROWED FUNDS AND THE FUNDS ADVANCED TO THE SU BSIDIARY AND HENCE THE INTEREST EXPENDITURE SHOULD OTHERWISE BE ALLOWE D AS DEDUCTION U/S 57(III) OF THE ACT. 40. WE ARE ALSO OF THE VIEW THAT EVEN IF THE INTERE ST INCOME IS TAXED AS INCOME FROM OTHER SOURCES, THEN THE INTEREST EXP ENDITURE 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 FUN DS BORROWED FROM THE LIC AND THE MONEY ADVANCED TO THE SUBSIDIARY CO MPANY AND HENCE THE INTEREST EXPENDITURE OF RS. 48,03,11,032/- IS O THERWISE LIABLE TO BE ALLOWED U/S 57(III) OF THE ACT. WE DIRECT ACCORDING LY. ITA NO. 7371/MUM/2017 ESSAR SHIPING LTD. VS ACIT 29 41. FROM THE RECORD WE FOUND THAT AO HAD DISALLOWED THE INTEREST PAID ON THE FUNDS BORROWED WHICH WAS GIVEN TO SUBSIDIARI ES / 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 ALLOWABL E AS BUSINESS EXPENDITURE. IN ORDER TO SUPPORT THE SAID CONTENTIO N RELIANCE IS PLACED ON THE DECISION OF THE HON'BLE SUPREME COURT IN THE CA SE OF S.A, BUILDERS V. CIT (288 ITR1). IN THE SAID DECISION THE HON'BLE SU PREME COURT HAS HELD THAT IF THE ASSESSEE HAS BORROWED FUNDS AND ADVANCE D THE SAME TO ITS SUBSIDIARY IN ORDER TO PROMOTE THE BUSINESS OF ITS SUBSIDIARY, THEN THE INTEREST PAID BY THE ASSESSEE ON BORROWED FUNDS IS A BUSINESS EXPENDITURE AND NO INTEREST DISALLOWANCE CAN BE MAD E U/S 36(L)(III) OF THE ACT. IN THE PRESENT CASE, THE ASSESSEE HAS ADVA NCED ICD TO ITS SUBSIDIARY IN ORDER TO PROMOTE THEIR BUSINESS AND C HARGED INTEREST THEREON. APPLYING THE RATIO LAID DOWN BY THE HON'BL E SUPREME COURT IN THE CASE OF S.A. BUILDERS V. CIT (SUPRA), WHEREIN I T HAS BEEN HELD THAT INTEREST EXPENDITURE INCURRED BY THE ASSESSEE IS AL LOWABLE AS BUSINESS EXPENDITURE, THE INTEREST INCOME EARNED BY THE ASSE SSEE ON ICD GIVEN TO SUBSIDIARY TO PROMOTE THEIR BUSINESS WOULD BE TAXAB LE AS BUSINESS INCOME. THE SAID DECISION OF THE HON'BLE SUPREME CO URT IN THE CASE OF S.A. BUILDERS V. CIT (SUPRA) WAS FOLLOWED BY THE HO N'BLE SUPREME COURT IN THE CASE OF HERO CYCLES V. CIT (379 ITR 347). FU RTHER RELIANCE IS ALSO ITA NO. 7371/MUM/2017 ESSAR SHIPING LTD. VS ACIT 30 PLACED ON THE DECISIONS OF THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF CIT V PIRAMAL GLASS LIMITED IN INCOME TAX APPEAL NO 566 OF 2017 DATED 11.06.2019 (BOM), CIT V SESA RESOURCES LTD. [404 IT R 707 (BOM)] AND CIT V REEBOK INDIA COMPANY (98 TAXMANN.COM 413) IN ORDER TO SUPPORT OUR CONTENTION THAT INTEREST EXPENDITURE IS TO BE A LLOWED U/S.36(1)(III) WHILE COMPUTING THE INCOME UNDER HEAD OF BUSINESS AND PROFESSION. CORRESPONDING INTEREST INCOME IS TO BE ASSESSED UND ER HEAD OF BUSINESS INCOME. 42. THE INTEREST EXPENDITURE OF INR48.03 CRORES WAS INCURRED DURING THE YEAR ON THE LOAN TAKEN FROM LIC FOR GIVING THE SAME AS ICD TO EOSIL ON WHICH INTEREST INCOME OF INR53.97 CRORES WAS EAR NED. AS PER THE BANK STATEMENT, THERE IS DIRECT NEXUS BETWEEN THE L OAN RECEIVED FROM LIC AND THE ICD GIVEN, THEREFORE, WITHOUT PREJUDICE TO OUR CONCLUSION THAT THE INCOME FROM ICD FORMS PART OF THE BUSINESS INCOME OF THE ASSESSEE, CORRESPONDING INTEREST EXPENSE HAS TO BE ALLOWED AGAINST INTEREST INCOME EARNED BY THE ASSESSEE IRRESPECTIVE OF THE HEAD OF THE INCOME UNDER WHICH IT IS ASSESSED. THUS, WE OBSERVE THAT INTEREST EXPENDITURE IS OTHERWISE ALLOWABLE U/S.57(III) SINC E THERE IS DIRECT NEXUS BETWEEN THE INTEREST EXPENDITURE AND INTEREST INCOM E EARNED BY ASSESSEE. ITA NO. 7371/MUM/2017 ESSAR SHIPING LTD. VS ACIT 31 43. FROM THE RECORD WE ALSO FOUND THAT THE MONEY WA S BORROWED FROM LIC AND ADVANCED TO ITS WHOLLY OWNED SUBSIDIARY EOS IL AS LCD IN THE EARLIER A.Y. 2010-11. THE ASSESSEE WAS DEMERGED FRO M 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 INC OME. 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 POR TS LIMITED. SUBSEQUENTLY ALSO IN THE ASSESSMENT PROCEEDINGS FOR A.Y. 2011-12, THE SAME HAS BEEN ACCEPTED BY ASSESSING OFFICER AS BUSI NESS 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. T HE RELEVANT ASSESSMENT ORDER SO PASSED U/S 143(3) OF THE ACT FO R THE A.Y. 2010-11 AND 2011-12 ARE PLACED ON RECORD. HOWEVER, DURING T HE YEAR UNDER CONSIDERATION, THE ASSESSEE CONTINUED TO RECEIVE SI MILAR INTEREST INCOME ON THE LCD FROM EOSIL WHICH WAS GIVEN OUT OF MONEY BORROWED FROM LIC. THE ASSESSEE OFFERED THE SAME AS BUSINESS INCO ME BUT THE HE A.O. TREATED THE SAME AS INCOME FROM OTHER SOURCES. THE RE IS NO CHANGE IN THE FACTS AND CIRCUMSTANCES OF THE CASE DURING THE YEAR UNDER CONSIDERATION AS COMPARED TO EARLIER YEARS WHEREIN THE AO HAD ASSESSED THE VERY SAME INCOME UNDER THE HEAD OF BUSINESS INC OME. HENCE, EVEN ON THE PRINCIPLES OF CONSISTENCY, THE INTEREST INCO ME RECEIVED BY THE ITA NO. 7371/MUM/2017 ESSAR SHIPING LTD. VS ACIT 32 ASSESSEE SHOULD BE TAXED AS BUSINESS INCOME. IN ORD ER TO SUPPORT THE SAID CONTENTION RELIANCE IS PLACED ON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. EXCEL INDUSTRIES (358 ITR 295). ACCORDINGLY, WE DO NOT FIND ANY JUSTIFICATION IN THE ORDER OF AO FOR TREATING INTEREST INCOME AS INCOME FROM OTHER SOURCES. 44. IN VIEW OF THE ABOVE DISCUSSION, WE DIRECT THE AO TO TREAT INTEREST INCOME AS INCOME FROM BUSINESS AND TO ALLOW INTER EST EXPENDITURE U/S.36(1)(III) OF THE I.T. ACT. WE DIRECT ACCORDING LY. 45. THE LAST GRIEVANCE OF THE ASSESSEE RELATES TO D ISALLOWANCE OF COMMON INTEREST EXPENDITURE OF RS. 35,98,89,248/-. THE A.O. HAS DEALT WITH THE ISSUE AT PAGE NO. 11 AND 12. FROM THE RECO RD WE FOUND THAT THE ASSESSEE HAD CLAIMED COMMON INTEREST EXPENDITURE OF RS. 48,82,67,263/- WHICH HAS BEEN APPORTIONED TO TONNAGE AND NON TONNA GE ACTIVITY. THE ASSESSEE ALLOCATED THE SAID EXPENDITURE IN THE RATI O OF ASSETS EMPLOYED BETWEEN TONNAGE AND NON TONNAGE ACTIVITIES . THE 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 APPORTI ONED ON BASIS OF COST OF FINANCING I.E. VALUE OF ASSETS AND NOT ON BASIS OF TURNOVER, SINCE THE ITA NO. 7371/MUM/2017 ESSAR SHIPING LTD. VS ACIT 33 TURNOVER OF THE BUSINESS HAS GOT NO RELATION WITH T HE INTEREST EXPENDITURE SO INCURRED BY THE ASSESSEE. WE, ACCORD INGLY, 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. 46. THE NEXT GRIEVANCE OF THE ASSESSEE AS CONTAINED AT GROUND NO.9 RELATES TO ASSESSING THE SUPERVISION MANAGEMENT FEE S OF RS. 7,07,52,924/-, AS BELONGING TO TONNAGE BUSINESS . THIS GROUND WAS NOT PRESSED BY LD. AR, WE THEREFORE, DISMISS THIS G ROUND AS NOT PRESSED. ACCORDINGLY, THIS GROUND OF APPEAL IS DISMISSED. 47. GROUND NO.10 IS CONSEQUENTIAL TO GROUND NO.9, W HEREIN IT WAS CONTENTION OF LD. AR THAT ONCE THE INCOME IS TREATE D AS INCOME UNDER TONNAGE TAX INCOME, THE SAME SHOULD NOT AGAIN BE TA XED AS PART OF NORMAL INCOME OFFERED BY THE ASSESSEE. IT WAS POINT ED OUT BY LD. AR THAT AO HAS INADVERTENTLY ADDED THE SAME INCOME IN NORMA L BUSINESS INCOME SHOWN BY THE ASSESSEE WHICH AMOUNT TO DOUBLE TAXATI ON OF SAME INCOME. FROM THE RECORD WE FOUND THAT AO WAS JUSTIF IED IN TREATING THE INCOME OF RS.7,07,52,924/- AS TONNAGE TAX INCOME, H OWEVER, THE SAME SHOULD NOT AGAIN FORM THE PART OF NORMAL BUSINESS I NCOME. WE FOUND THAT AO HAS INADVERTENTLY AGAIN ADDED THE SAME INCO ME UNDER THE HEAD NORMAL BUSINESS INCOME, WHICH AMOUNT TO DOUBLE TAXA TION OF SAME ITA NO. 7371/MUM/2017 ESSAR SHIPING LTD. VS ACIT 34 INCOME, ACCORDINGLY, WE DIRECT THE AO TO REDUCE THE SAME FROM NORMAL BUSINESS INCOME AFTER DUE VERIFICATION. WE DIRECT A CCORDINGLY. 48. IN THE RESULT, GROUND NO.10 IS ALLOWED FOR STAT ISTICAL PURPOSES. 49. IN THE RESULT, THIS APPEAL OF THE ASSESSEE IS A LLOWED IN PART, IN TERMS INDICATED HEREINABOVE . ORDER PRONOUNCED IN THE OPEN COURT ON 06 TH MARCH, 2020. SD/- (VIKAS AWASTHY) SD/- (R.C.SHARMA) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI; DATED 06/ 03/2020 *RANJAN COPY OF THE ORDER FORWARDED TO : BY ORDER, (ASSTT. REGISTRAR) ITAT, MUMBAI 1. THE APPELLANT 2. THE RESPONDENT. 3. THE CIT(A), MUMBAI. 4. CIT 5. DR, ITAT, MUMBAI 6. GUARD FILE. //TRUE COPY//