M/S ESSAR SHIPPING LTD ,MUMBAI V. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 5(1)(1) , MUMBAI

ITA 4440/MUM/2024

AI Insights

The case involves M/s. Essar Shipping Ltd., which appealed against the final assessment order passed by the Deputy Commissioner of Income Tax, Mumbai, under the directions of the Dispute Resolution Panel (DRP). The primary contention was regarding the applicability of Transfer Pricing regulations to operations under the Tonnage Tax Scheme, where income is computed based on the weight of the vessel and the number of days it was held, rather than on receipts or expenses. The Tribunal examined whether the Transfer Pricing provisions should apply to the assessee's transactions involving qualifying ships and corporate guarantees. The Tribunal found that the Transfer Pricing provisions do not apply to the operations covered under the Tonnage Tax Scheme, aligning with previous decisions in the assessee's favor for earlier assessment years. However, for the corporate guarantee transactions, the Tribunal remanded the issue back to the AO to determine the ALP as per the prescribed methods under the Act.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 315825 (ITAT-MUMBAI)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-05-2025
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: K
• Assessment Year: 2020-2021
• Other Referred Cases: Van Oord India Private Ltd. vs. ACIT, Shreyas Shipping Logistics Ltd vs. ACIT, CGU Logistics Ltd vs. ACIT, Trans Asian Shipping Services Pvt Ltd vs. UOI, Essar Ports Ltd vs. ACIT, Aztec Software & Technology Services Ltd. v. Assistant Commissioner of Income-tax, Circle 11(1), Bangalore
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: KIRAN UNAVEKAR
• Assessee Lawyers: PIYUSH CHATURVEDI
• Keywords: Set aside; Business income; Revised return; Transfer pricing; International transaction; Business expenditure; Principle of natural justice; TDS; Earning of tax free income; Liquidation; Related party transaction; CHAPTER IV; FORM 26AS
• Section: 144; 28; 92; 14A; 244A; 92C; 92D

Judgement Text

" IN THE INCOME TAX APPELLATE TRIBUNAL “K” BENCH, MUMBAI BEFORE MS. KAVITHA RAJAGOPAL, JM AND SHRI OMKARESHWAR CHIDARA, AM ITA No. 4440/Mum/2024 (Assessment Year: 2020-21) M/s. Essar Shipping Ltd. 5th Floor, Essar House, 11, Keshav Rao Khadya Marg, Mahalaxmi, Mumbai – 400034. Vs. Deputy Commissioner of Income Tax, Circle 5(1)(1), Mumbai PAN/GIR No. AACCE3707D (Appellant) : (Respondent) Assessee by : Shri. Piyush Chaturvedi Respondent by : Shri. Kiran Unavekar, SR. DR. Date of Hearing : 19.02.2025 Date of Pronouncement : 16.05.2025 O R D E R Per Kavitha Rajagopal, J M: This appeal has been filed by the assessee, challenging the final assessment order dated 24.07.2024 of the learned Assessing Officer (‘ld. AO’ for short) passed u/s. 144 r.w.s. 144C(3) r.w.s. 144B of the Income Tax Act, 1961 (‘the Act'), pursuant to the directions of the Hon’ble Dispute Resolution Panel (‘DRP’ in short), relevant to the Assessment Year (‘A.Y.’ for short) 2020-21. 2. The assessee has raised various grounds of appeal and further filed its revised grounds of appeal dated 09.12.2024 and the same is reproduced herein under: “1. The FAO under the direction of DRP failed to appreciate that the Transfer Pricing regulations do not apply to Assessee to the extent of operations carried out through operating qualifying ships, where the income is taxed under the Tonnage Tax scheme. Accordingly, TP additions for Rs. 51,46,215/- being interest on lease loan from qualifying ITA No. 4440/Mum/2024 (A.Y. 2020-21) M/s. Essar Shipping Ltd. 2 assets being a Ship i.e. MV Maithili and MV Maanika to the AE M/s Essar Shipping DMCC was bad in Law. 2. The Ld. FAO and DRP both grossly erred in not following the binding order of the Hon'ble Supreme Court and High Court quoted before them. 3. The Ld. FAO and DRP both grossly erred in not following the ITAT Mumbai order in the Appellant Company's own case and also failed to appreciate that unless there is an order from the High Court to suspend the operation of the order of the ITAT, the order of ITAT in Appellant Company's case is binding on them. 4. The Ld. FAO under the direction of DRP had erred in law and in fact in proposing a TP adjustment of Rs. 3,95,78,000/- as Corporate Guarantee Commission taking calculated @1.75%. Without Prejudice the Learned FAO/TPO ought to have restricted the Guarantee Commission @ 0.25% following the ITAT order in the Assessee's own case. 5. The Ld. FAO under the direction of DRP erred in assessing the Interest income from income tax refund for Rs. 1,00,00,000/- (arises due to excess of TDS over-assessed tax liability) as Income from other sources instead of Business Income.” 3. Brief facts of the case are that the assessee is a limited company and engaged in fleet operating and chartering and operating of international and coastal voyages through its subsidiaries and further has invested in diverse business like oil field services and logistic services directly as well as through its subsidiaries. The assessee had filed its return of income dated 29.09.2021 declaring total income at Rs. 4,58,480/- and subsequently filed its revised return of income dated 18.11.2021, declaring total income at Rs. 4,58,480/-. The assessee’s case was selected for complete scrutiny on the following issues. a. High Creditors/Liabilities. b. Investments/Advances/Loans. c. Refund Claim. d. Unsecured Loans. e. ICDS Compliance and Adjustment. ITA No. 4440/Mum/2024 (A.Y. 2020-21) M/s. Essar Shipping Ltd. 3 f. Expenses incurred for Earning Exempt Income. g. International Related Party Transactions in Nature of Guarantee. h. Foreign Outward Remittance. i. Taxability of business liability written off u/s. 41 or any other section. j. High interest expenditure/finance costs. 4. Notices u/s. 143(2) of the Act dated 29.06.2021 was issued and served upon the assessee. The ld. AO observed that the assessee has reported international transaction u/s. 92B(2) of the Act in form 3CEB for which the ld. AO made a reference to the Transfer Pricing Officer (‘TPO’ in short) u/s. 92CA(1) of the Act. The ld. TPO vide order dated 14.06.2023 proposed adjustments on the Arm’s Length Price of the international transaction towards interest of lease loan payment for ships taken on Bare Boat Charter cum Demise amounting to Rs. 51,46,215/- and guarantee commission of Rs. 3,95,78,000/-, where the TP adjustment aggregated to Rs. 4,47,24,215/-. The ld. AO then passed the draft assessment order u/s. 144C(1) of the Act, dated 29.09.2023, determining total income at Rs. 1,62,13,55,800/- after making various additions/adjustments. The assessee then filed its objection before the Hon’ble DRP which after duly disposing off the objection of the assessee passed its directions dated 24.06.2024. The ld. AO passed the final assessment order dated 24.07.2024, u/s. 144 r.w.s. 144C(3) r.w.s. 144B of the Act, thereby determining total income at Rs. 17,94,82,695/- after duly giving effect to the Hon’ble DRP’s directions. 5. Aggrieved the assessee is in appeal before us, challenging the impugned additions made by the ld. AO. ITA No. 4440/Mum/2024 (A.Y. 2020-21) M/s. Essar Shipping Ltd. 4 6. First ground raised by the assessee pertains to the addition of Rs. 51,46,215/- towards interest of lease loan from qualifying assets to its AE viz. M/s. Essar Shipping DMCC. During the assessment proceeding, the ld. TPO/AO observed that the assessee had taken ships on lease basis from its AE viz. Essar DMCC for which it has paid interest. It is observed that during assessment year 2009-10, the assessee has declared purchase price of Rs. 75 million USD for the ship (MV Maithili) which the ld. TPO had benched marked the purchase price at USD 73.75 million during that year under consideration. It was further observed that the AE has borrowed funds from banks at a interest rate of LIBOR plus 400 basis point for purchase of the ships which was leased out to the assessee and the AE has charged the lease rent on the basis of the principal loan amount and interest payable on EMI basis (based on amortization schedule) at the rate of interest rate paid by the AE to third party bank with a total interest of finance lease paid by the assessee to its AE amounted to Rs. 25,68,82,295/-. The ld. TPO proposed an adjustment on the interest incurred towards the purchase of ship (MV Maithili). The interest disallowance to the extent of the excess payment made by the assessee company to the AE was made for each year proportionately in respect of ship MV Maithili (MV Malathi) and MV Maanika. The ld. TPO worked out the disallowance as tabulated herein under: Sr No. Month MV Maithili MV Maanika Total Difference Original Revised Difference Original Revised Difference 1 April 1,07,29.977 1,05,51,144 1,78,833 96,68,543 94,06,345 2,62,198 H.41,031 ITA No. 4440/Mum/2024 (A.Y. 2020-21) M/s. Essar Shipping Ltd. 5 2 May 1,06,79,694 1,05,01,699 1,77,995 96,26,629 93,65,568 2,61,061 4,39,056 3 June 1,06,29,337 1,04,52,181 1,77,156 95,84,563 93,24,643 2,59,920 4,37,076 4 July 1,05,78.953 1,04,02,440 1,76,313 95.42,347 92,83,572 2,58,776 4,35,088 5 Aug 1,05,27,942 1,03,52,477 1,75,466 95,00,056 92,42,427 2,57.629 4,33,094 6 Sept 1,04,50,446 1,02,76,272 1,74,174 94,57,532 92,01,057 2,56,475 4,30,650 7 Oct 1,03.72,648 1,01,99,770 1,72,877 94,14,870 91,59,551 2,55,318 4,28,196 8 Nov 1,02,94,623 1,01,23,046 1,71,577 93,72,126 91,17,967 2,54,159 4,25,736 9 Dec 1,02,16,297 1,00,46,026 1,70,272 93,29,156 90,76,162 2,52,994 4,23,266 10 Jan 1,01,37,745 99,68,783 1,68,962 92,86,035 90,34,210 2,51,825 4,20,787 11 Feb 1,00,58,891 98,91,243 1,67,648 92,19,846 89,69,817 2,50,030 4,17,678 12 Mar 99,79,736 98.13,407 1,66,329 91,53,431 89,05,203 2,48,229 4,14,558 Total 12,46,56,089 12,26,78,487 20,77,601 11,31,55,135 11,00,86,521 30,68,614 51,46,215 7. The ld. TPO then made an adjustment of Rs. 51,46,215/- for the year under consideration on account of interest disallowance on the excess payment. The assessee filed its objection before the Hon'ble DRP, the Hon'ble DRP rejected the objection raised by the assessee on the ground that in order to keep the issue alive as the Tribunal in assessment year 2013-14 has decided this issue in favour of the assessee and since the revenue is in appeal against the said order before the Hon'ble Jurisdictional High Court. The ld. AO confirmed the impugned addition pursuant to the directions of the Hon'ble DRP. 8. The assessee is in appeal before us, challenging the impugned addition. ITA No. 4440/Mum/2024 (A.Y. 2020-21) M/s. Essar Shipping Ltd. 6 9. The learned Authorised Representative ('ld. AR' for short) for the assessee contended that the said transaction pertains to tonnage business of the assessee, where the income was offered under the tonnage tax scheme where the income has to be computed only on the basis of the weight of vessel and number of days it was held per ton rate prescribed u/s. 115VG of the Act, and not on receipts or expenses. The ld. AR further stated that transfer pricing provisions cannot be invoked for disallowing expenditure incurred towards interest on the qualifying ship which does not pertain to the tonnage tax scheme. The ld. AR further contended that in assessee’s own case for A.Y. 2013- 14, 2016-17 and 2018-19, this issue was decided in favour of the assessee. The ld. AR relied on a catena of decisions in favour of the assessee’s contentions. 10. The learned Departmental Representative ('ld. DR' for short) for the revenue on the other hand controverted the said fact and stated that the revenue is in appeal against the order of the Tribunal before the Hon'ble Jurisdictional High Court and that this issue has not attend its finality. The ld. DR relied on the order of the lower authorities. 11. We have heard the rival submissions and perused the materials available on record. It is observed that the assessee has purchased a ship by name MV Malathi under Bare Boat Charter Cum Demise Agreement (BBCD) for a consideration of US dollar 75 million from its AE viz. Essar Shipping and Logistics Limited and in A.Y. 2009-10, the TPO determined the ALP of the said transaction at US dollar 73.75 million by treating the alleged excess payment as advances given by the assessee company to its AE. The TPO further held that the assessee has accepted the adjustment in A.Y. 2009-10 and therefore made an adjustment on the proportionate disallowance in respect of vessel ITA No. 4440/Mum/2024 (A.Y. 2020-21) M/s. Essar Shipping Ltd. 7 MV Maithili and MV Mannika for the impugned year amounting to Rs. 51,46,215/-. The assessee’s contention that the ships are qualifying asset for which no adjustment ought to have been made for the reason that the assessee has offered the income under tonnage tax scheme and the same was reiterated by the coordinate bench in assessee’s case for A.Y. 2013-14, 2016-17 to 2018-19. The assessee also denies that it has accepted the proposed adjustment made by the ld. AO. The assessee further contended that for computation of profit under the tonnage tax scheme provided under Chapter XII-G as per Section 115VE of the Act, where the only income that has to be assessed as profit and gain from business and profession has to be on the basis of the weight of the vessel and number of days per ton rate it has held prescribed u/s. 115VG of the Act, irrespective of the revenue realization and expenditure incurred for the purpose of the said business. The assessee also contended that under the tonnage tax scheme presumptive method of computation is adopted and that the lower authorities have erred in invoking the transfer pricing provisions for alternating the interest expenditure on qualifying ships. The assessee has relied on a catena of decisions including the assessee’s own case by the coordinate bench. The revenue on the other hand rejected the assessee’s contention for the reason that the earlier years orders of the Tribunal has been challenged by the department before the Hon'ble Jurisdictional High Court. 12. From the above facts of the case, it is observed that this issue is recurring in nature, where the coordinate benches have held that transfer pricing provisions does not apply to in assessee’s case for the operations carried out through qualifying ships when income arising out of the said activities are liable to be taxed under the tonnage tax ITA No. 4440/Mum/2024 (A.Y. 2020-21) M/s. Essar Shipping Ltd. 8 scheme. Further, in A.Y. 2011-12, the adjustments were made on the similar grounds in the case of Essar Ports Ltd. in which the assessee got demerged w.e.f. 01.10.2010, where the coordinate bench has categorically held that no adjustments could be made under the TP provisions for transactions carried through qualifying ships which has been covered by the tonnage tax scheme. The relevant extract of the said decision is cited herein under for ease of reference: “10.We have considered the submission of ld. Authorized Representative (AR) of the assessee and ld. Departmental Representative (DR) for the revenue and perused the material available on record. The ld. AR of the assessee submits that the assessee has exercised the option of offering its income to tax on a presumptive basis under the Tonnage 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 disputed by ld. DR for the revenue as well as by the lower authorities. We have noted that on similar set of facts the coordinate bench of this Tribunal in Van Oord India Private Ltd. vs. ACIT (supra) held as under : “6. We have carefully considered the rival submissions, perused the relevant material, including the orders of the lower authorities as well as the case laws referred at the time of hearing. Notably, the controversy before us primarily revolves around the applicability of transfer pricing provisions to the income that is covered by Chapter XII-G of the Act i.e. Tonnage Tax Scheme. The TTS was introduced in the Finance (No. 2) Act, 2004, with the intention of increasing foreign direct investment in the Indian shipping industry and making it globally competitive. The income of a tonnage tax company depends on the tonnage 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 section for the income generated by carrying out business of operating ships. Further, it also prescribes the mechanism for computation of income which is to be brought to tax. Thus, TTS is a presumptive basis of taxation, whereby the taxability of income from qualifying ships is restricted to the framework provided in the TTS. Further, the tonnage tax company is liable to pay taxes even in a case where the financial statements reveal a loss on actual operations. Further, all expenses, deduction, allowances or tax incentives are deemed to be allowed while computing the total income of a company as per TTS. The income thus computed shall be deemed to be the income chargeable to tax under the head 'Profit and gains of business or profession'. Hence, it is clear from the above that actual receipts/revenues earned and expenses incurred are not taken into consideration for the purpose of determining the tonnage income of the company. The entire computation of the tonnage income depends on the tonnage capacity of qualifying ships and number of days it has been held. At this stage, we may contrast the sphere in which the transfer pricing provisions of Chapter-X operate. The transfer pricing provisions envisage computation of income from specified international ITA No. 4440/Mum/2024 (A.Y. 2020-21) M/s. Essar Shipping Ltd. 9 transactions of receipt or expenditure, ofcourse with reference to the stated price of such transactions. This is completely in contrast to Chapter-XII G, where the stated price of the transaction has no relevance to the computation of income of qualifying ships, which is based on the weight of the ship and the number of days it has been held. In other words, the determination ‘of income/ expense having regard to arm's length price as envisaged in Chapter-X has no relevance, as it would not affect the computation of income liable for taxation in Chapter-XII G. 7. Section 115VA of the Act starts with “Notwithstanding 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 arm's length principle as per the machinery provisions of Chapter X (Section 92 to section 92F). The amount of allowable expenses determined as per the arm's length principle under section 92(1) of the Act would thus be relevant to compute business profits as 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 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, 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. In other words, determination of income/ expense having regard to arm's length price would not alter the computation of income 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 methods prescribed can have any application to computation of the tonnage income. In these circumstances, the computation provisions of Chapter X of the Act would fail and therefore, application of Chapter X of the Act in such circumstances has to fail. Tonnage tax provisions determine the entire chargeable income earned by the tonnage tax vessel including income from an international transaction with associated enterprise. In contrast, transfer pricing provisions apply only to international transactions entered with associated enterprises. It is not possible to segregate what portion of the final taxable tonnage income is relatable to international transactions with associated enterprises and then apply transfer pricing provisions to such transactions, because the statutorily prescribed formula to compute income under chapter XII-G is based on the weight of the qualifying ship and number of days it has been held, irrespective of whether the ship has been used for a related party or an unrelated party. Once again, therefore, the computation provisions of Chapter X of the Act fail and in such circumstances, the application of Chapter X of the Act fails. 9. In this context, the learned Counsel pointed out that a similar situation has been considered by the co-ordinate bench of this Tribunal in the case of Shreyas Shipping Logistics Ltd (supra) which has held as follows: ITA No. 4440/Mum/2024 (A.Y. 2020-21) M/s. Essar Shipping Ltd. 10 “5……. Now we would like to discuss the TTS. Section 115VA of the Act is unique in the sense that it deals with the computation of income from the business of operating qualifying ships which opt for Tonnage Tax Scheme(TTS).The method of computation of income under the scheme, as provided by the section,stipulates that income has to be assessed in a particular manner. In other words, no expenditure can be allowed or disallowance 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 assessee cannot claim any expenditure after opting out of the scheme, then the AO is also barred by making any disallowance for incurring of expenditure. Legislature, in its wisdom, has allowed the assessee for opting for the said scheme and with a specific purpose. Therefore, while computing the income of the assessee u/s. 115VP, the AO has to put on blinkers and assess the income as suggested 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 assessee is to be assessed as per the provisions of chapter XIIG of the Act. Section 14A is not an exception to the TTS. Rather the scheme is an exception to the normal computation provisions, including the section 14A.Therefore,it cannot be said that when the income of the assessee from the 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 business had been allowed. Considering the twin factors i.e. not claiming any expenditure against the nonshipping business income by the assessee and opting for TTS for shipping business, we are of the opinion that the order of the FAA does not suffer from any legal or factual infirmity. Therefore, confirming his order, we decide the effective 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 Revenue sought to make an addition by invoking the provisions of Section 14A of the Act in case of a tonnage tax company, whose income was computed under the special provisions of Chapter XII-G. The Tribunal set aside the addition observing thus' No disallowance under section 14A is warranted in this case when the assessee has admittedly not claimed any expenditure, towards taxable income i.e, it has not claimed any deduction of expenditure debited in the Profit & Loss account while computing the total income. 11. Further, the co-ordinate bench of this Tribunal in the case of CGU Logistics Ltd (supra) while dealing on the issue under TTS has held as under: “10.a.We find that section 115VP deals method and time of opting for TTS, Section 115VQ is about period for which tonnage tax option remains in force. Renewal of TTS is subject matter of section115VR.Circumstanes and conditions where in tonnage tax scheme cannot be opted are the subject matter of Section 115VS.As per the provisions of section 115VT every Asses see has to transfer profits to tonnage tax reserve account at a fix rate and ITA No. 4440/Mum/2024 (A.Y. 2020-21) M/s. Essar Shipping Ltd. 11 has to utilise it for specific purpose, once he opts of TTS. Companies opting for TTS have to comply with minimum training requirement as required by Section 115VU.Limit for charter in of 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 companies 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 TTS. From the above it is clear that chapter XII-G is a complete code in itself and it provides for non applicability of section 28 to 43C of the Act i.e. chapter IV of the Act, when 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 Clauses appended to the Finance (No.2) Bill,2004, referring to clause 28 as regards the introduction of section 115VA specifically states that the provision relates to the computation of profits and gains of the shipping business. Tonnage tax was intended to make the industry internationally competitive and also to induce more ships to fly the Indian flag. As the whole of FEFG is covered by the provisions of chapter XII-G of the Act, there is no justification in computing 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 of Trans Asian Shipping Services Pvt Ltd (supra). In the said case, the Supreme Court observed that “…….It may be stated in brief that in view of the stiff competition faced by the Indian shipping companies vis-a-vis foreign shipping lines, and in order to ensure an easily accessible, fixed rate, low tax regime for 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 the best global practices prevalent. The whole purpose of introduction of the Scheme was to make the Indian shipping industry more competitive in the global space by rationalising its tax cost…...” The Hon’ble Supreme Court further observed that, we would also like to refer to Circular No. 05/2005 dated 15.07.2005 explaining the need and essence of the introduction of these provisions which was issued contemporaneously by the Central Board of Direct Taxes (CBDT). The Circular clarifies that the Scheme is a \"preferential regime of taxation\". It also clarifies that \"charging provision is under Section 115VA read with Section 115VF and Section 115VG…..\" 13. It has also been brought to our notice that an identical situation arose in assessee’s own case for AY 2013-14 where the Dispute Resolution ITA No. 4440/Mum/2024 (A.Y. 2020-21) M/s. Essar Shipping Ltd. 12 Panel(‘DRP’) vide its order dated 18.09.2017 held that transfer pricing regulations do not apply to the assessee to the extent of operations carried out through operating qualifying ships where the income is taxed under TTS. 14. To sum up, Tonnage Tax Scheme, as per Chapter XIT-G of the Act, is a separate code by itself in as much as it provides a self-contained changing provision as well as 'method of computation of income in the chapter, and, the method of computation of income under TTS is not dependent on receipt or expenditure of the assessee. Under Tonnage Tax Scheme, the income has to be computed as per the method prescribed in section 115VG. The income as per Tonnage Tax Scheme is computed on the basis of the weight of the vessel and number of days it is held, irrespective of its revenue realisations and the expenditure incurred for the purpose of the business. Hence, neither the business receipts nor the business expenditure of the assessee has any bearing on the method prescribed for computation of income under TTS as per section 115VG. The tonnage tax scheme, in that sense, is a presumptive method of computation of taxable income which is not dependent on actual receipts and expenditure of the assessee. 15. In fact, the fallacy in the approach of the Assessing Officer can be gauged from a perusal of the computation of taxable income made in para 11 of the assessment order. The Assessing Officer has sought to add 5,40,887/- as a separate line item captioned as “Proposed adjustment/addition in view of the above discussion. Thus, as per the perception of Assessing Officer, chapter X of the Act creates an independent or a separate charge of income, an aspect which is contrary to the judgment of the Hon'ble Bombay High court in the case of Vodafone Services Pvt.ltd. vs. UOI ( 2015) 53 Taxman.com 286 (Bom), wherein after referring to an earlier judgment dated 10th October, 2014 in the case of same assessee reported in 50 taxmann.com 300 (Bom) interalia , held that chapter X does not contain any charging provision but is a machinery provision to arrive at an arm’s length price of a transaction between associated 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 demobilisation charges paid for a qualifying ship, an item which has no bearing on the income as computed under Chapter XIIG and accordingly the provisions of Chapter X have no application in computing the income of the assessee chargeable to tax as per Chapter XII-G of the Act. 17. In view of the aforesaid discussion, in our considered view, the transfer pricing regulations do not apply to the assessee to the extent of operations carried out through operating qualifying ships where the income is taxed under TTS.” 11. Considering the decision of coordinate bench of the Tribunal as referred above, the provisions of transfer pricing regulations are not applicable to the assessee to the extent of operation carried by assessee through qualifying ships which is covered by Tonnage ITA No. 4440/Mum/2024 (A.Y. 2020-21) M/s. Essar Shipping Ltd. 13 Tax Scheme. Thus, we hold that the grounds of appeal No. 2 to 6 &9 are covered in favour of the assessee and against the revenue. In the result the ground No.2 to 6 & 9 are allowed.” 13. On perusal of the above findings, it is observed that the coordinate bench has relied on the decision of the Tribunal in the case of VAN Oord India Pvt. Ltd. vs. ACIT, ITA No. 7228/Mum/2012, order dated 22.05.2019 which has held that the provisions in chapter XII-G is in complete contrast with the provisions of the transfer pricing, where the said price of any transaction cannot be applied to while computing income of qualifying ships which are merely based on the weight of the ship and the number of days it has been held for which Arm’s Length Price has no relevance. It further held that the provisions of Section 115VA overrides Section 23 to 43C of the Act, for computation of business profits while determining the allowable expenses as per Arm’s Length Price enumerated u/s. 92(1) of the Act. It also held that the tonnage income is determined on the basis of the weight of the vessel and not on the ALP and further the methods prescribed u/s. 92C does not have any application for computation of the tonnage income. It further had relied on the decision of the Hon'ble Apex Court in the case of Trans Asian Shipping Private Limited (Supreme Court – (Civil Appeal No. 5869 and 5870 of 2016), where the purpose of the tonnage tax scheme which is a preferential regime of taxation as per CBDT circular dated 05/2005 was to ensure that the Indian Shipping companies sustained the competition based on the vis-à-vis foreign shipping lines by providing easy accessibility, fixed rate and low tax regime on the basis of the recommendation of the Rakesh Mohan committee. The Tribunal following the said decision had given relief to the assessee for the earlier years and the same has ITA No. 4440/Mum/2024 (A.Y. 2020-21) M/s. Essar Shipping Ltd. 14 been accepted by the Hon'ble DRP. On identical facts, we do not find any justification to deviate from the view taken by the coordinate bench in assessee’s own case for earlier years and we therefore deem it fit to allow ground no. 1 to 3 raised by the assessee. 14. Ground no. 4 pertains to the TP adjustment of Rs. 3,95,78,000/- as corporate guarantee commission computed at the rate of 1.75% and without prejudice the assessee claims 0.25% as per the Tribunal order for earlier years in assessee’s own case. It is observed that the assessee has provided an assurance for execution of the transaction of transfer of rigs from its group companies to parties identified by third party bank, where the assessee has provided put options to buy certain preference shares worth USD 30 million. The assessee contends that it had not incurred any cost for providing the guarantee as it does not have any barring on the profit and loss of the assessee and is not an explicit guarantee. The assessee further contended that the put option to buy preference shares is not an issuance of guarantee. The ld. AO observed that the assessee has charged guarantee commission @ 3.05% to Essar DMCC for the guarantee extended to third party on behalf of OGDSHL (earlier known as EOSL), where it had charged 0.5% as suo moto guarantee commission as per the tribunal’s decision in assessee’s case for A.Y. 2011-12 and 2013-14. The assessee has extended the guarantee to Varada amounting to Rs. 226.16 crore which is presently under going liquidation process, the assessee is said to have not charged guarantee commission on the said transaction. The ld. AO alleged that since the assessee has charged guarantee commission @3.5% from Essar DMCC but has failed to do so in the case of Varada, the ld. AO/TPO benchmarked the said transaction by using Comparable Uncontrolled ITA No. 4440/Mum/2024 (A.Y. 2020-21) M/s. Essar Shipping Ltd. 15 Price (CUP method) as the most appropriate method (MAM) and rejected the Nil adjustment made by the assessee. The ld. AO determined 0.75% as guarantee commission. The assessee’s objection was dismissed by the Hon'ble DRP on the ground that the since the assessee has not benchmarked the said transaction, bench marking adopted by the ld. TPO was to be followed. 15. Aggrieved the assessee is in appeal before us. 16. It is observed that the assessee has not benchmarked the said transaction, where it had extended guarantee and had not charged guarantee commission for the same. The assessee had relied on a catena of decisions and without prejudice claim 0.25% guarantee commission by relying on the Tribunal’s decision in assessee’s case for earlier years. The Hon'ble DRP has held that providing corporate guarantee is an international transaction as per Section 92 of the Act and such guarantee is on the basis of the credit rating of the company giving guarantee which generally considered by banks which lend money to associated enterprises. The borrower generally is benefited out of such corporate guarantee which provides for a lesser rate of interest, where the risks are assumed by the guarantor. The Hon'ble DRP further held that the assessee acts as an insurer and the guarantee fee amounts to the insurance premium paid to the insurer. The Hon'ble DRP failed to be convinced that the said transaction does not have any finance implication on the assessee for the reason that defaulting by the AE with risk forfeiture of preference shares. The Hon'ble DRP relied on the decision of the coordinate bench in the case of Aztec Software & Technology Services Ltd. v. Assistant Commissioner of Income-tax, Circle 11(1), Bangalore, [2007] 162 Taxman ITA No. 4440/Mum/2024 (A.Y. 2020-21) M/s. Essar Shipping Ltd. 16 119 (Bangalore - Trib.) (SB)/[2007] 107 ITD 141 (Bangalore - Trib.) (SB) (12.07.2007), wherein it was held that in the failure on the part of the assessee to benchmark the transaction, the ld. TPO can benchmark the same with the available information at hand. 17. On the above facts of the issue, it is settled preposition of law that the corporate guarantee is to be treated as an international transaction for which Arm’s Length Price of corporate guarantee has to be determined by adopting the most appropriate method (MAM) from the prescribed methods as per Section 92C of the Act. The ld. AR though has relied on the decision of the Hon'ble Jurisdictional Bombay High Court in the case of CIT vs. Everest Kanto Cylinders Ltd. [378 ITR 57, [2015] 277 CTR 511 (Bom.) where rate of 0.5% is determined as Arm’s Length Price of the guarantee commission and 0.25% has been determined in assessee’s case for earlier years. It is pertinent to point out that the rate determined in the case of Everest Kanto Cylinder Ltd. (supra) pertains to A.Y. 2011-12 by adopting the CUP as the most appropriate method for the determination of Arm’s Length Price of the said transaction. As the year under consideration pertains to A.Y. 2020-21, the same cannot be adopted for the reason that in transfer pricing the method of determination of ALP of any international transaction has to be in accordance with the provision of Section 92C(1)(3) of the Act. Pertinently, the assessee has not benchmarked the international transaction on corporate guarantee and the ld. TPO has merely applied the interest rate of banks which is not akin to that corporate guarantee. We would place our reliance on the decision of the Special Bench in the case of Aztec Software & Technology Services Ltd. (supra) which was then affirmed by the Hon'ble Karnataka High Court [2012] 23 taxmann.com 413 (Karnataka), wherein it was held that the ALP has to be determined as per the provisions of Section 92 and 92C and the other rules and regulations in every case of international transaction. In the absence of the same, the lower authorities can be directed to carry out this exercise in ITA No. 4440/Mum/2024 (A.Y. 2020-21) M/s. Essar Shipping Ltd. 17 accordance with law. The relevant extract of the said judgment is cited herein under for ease of reference: “133. Having regard to the statutory provisions, particularly the mandate of section 92(1) and 92D read with relevant rules, we hold that it is obligatory on the part of the taxpayer to furnish information relating to controlled international transactions, select a suitable method for determination and furnish ALP of such international transactions carried by it and give basis and supporting authentic evidence of ALP and adjustments made. The Taxpayer has further to cooperate in the determination of the ALP by the tax authorities by furnishing all relevant information. The tax authorities in cases where they are of the opinion that ALP has not been correctly determined by the taxpayer, can substitute their own ALP on the basis of material or information furnished by the assessee or collected by them. However, such ALP has to be determined having in mind provisions of sections 92 and 92C and other Rules and regulations. While determining ALP, tax authorities are bound to follow principles of natural justice and be fair and reasonable to the taxpayer. Any material collected to be used against the taxpayer is to be put to tax payer to explain. Having regard to the purpose of the legislation and application of similar enactment world over, it must further be held that adjustments made on account of ALP by tax authorities can be deleted in appeal only if the appellate authorities are satisfied and records a finding that ALP submitted by the assessee is fair and reasonable. Merely by finding faults with the transfer price determined by the revenue authorities (A.O. / TPO), addition on account of \"adjustments\" cannot be deleted. This is because the mandate of section 92(1) is that in every case of international transaction, income has to be determined having regard to ALP. Therefore, unless ALP furnished by the taxpayer is specifically accepted, the appellate authorities on the basis of material available on record has to determine ALP itself. Subject to statutory provisions, Appellate authorities can direct lower revenue authorities to carry this exercise in accordance with law. The matter cannot be left hanging in between. ALP of international transaction has to be determined in every case.” 18. From the above, there is iota of doubt that the ALP of corporate guarantee has to be determined by adopting any one of the prescribed methods and cannot be on an adhoc basis. In view of the same, we deem it fit remand this issue back to the file of the ld. TPO/AO for determination of the ALP of the international transaction of corporate guarantee in accordance with provisions of the Act by adopting most appropriate method prescribed by the Act. 19. In the result, ground no. 4 raised by the assessee is allowed for statistical purpose. ITA No. 4440/Mum/2024 (A.Y. 2020-21) M/s. Essar Shipping Ltd. 18 20. Ground no. 5 pertains to the addition on interest income from income tax refund of Rs. 1 crore as ‘Income from other sources’ which the assessee claimed to be ‘business income’. 21. The facts of this ground is that the assessee has earned interest from non-tonnage activities which according to the ld. AO was Rs. 24,90,33,161/- but as per the assessee was only Rs. 1,20,45,629/- as per the P & L account, where assessee is said to have bifurcated the tonnage and non-tonnage activities. During the assessment proceeding, though the assessee contends that it had raised the said discrepancy before the ld. AO, in the draft assessment order, the ld. AO proposed to tax at Rs. 24,90,33,161/-, the said interest income under the head ‘Income from other sources’ and also rejected the assessee’s contentions to treat the same as business income. The Hon'ble DRP restricted the same to Rs. 12.53 crores which includes interest incomes from banks amounting to Rs. 20 lacs, from other Rs. 1 crore income, on liquidation of subsidiary of Rs. 8 lacs and other non-operating income at Rs. 11.25 crores aggregating to Rs. 12.53 crores towards the interest income. The ld. AO in the final assessment order made impugned addition of Rs. 12,53,00,000/- towards the interest income as income from other sources. 22. The assessee is in appeal before us, challenging the addition of Rs. 1 crore made as ‘Income from other sources’ which the assessee claims to be interest from income tax refund on account of TDS which ought to have taxed under the head business income and not ‘Income from other sources’. ITA No. 4440/Mum/2024 (A.Y. 2020-21) M/s. Essar Shipping Ltd. 19 23. The ld. AR contended that the tax was deducted on the business income by the payer and the same is duly reflected in form 26AS. The ld. AR further stated that tax was also deducted on the interest received by the assessee on bank fixed deposits which were maintained as margin money for obtaining ALC for the business of the assessee. The ld. AR further stated that the order of Hon'ble DRP has categorically stated that the same should be treated as ‘business income’ and not ‘Income from other sources’. 24. The ld. DR on the other hand controverted the said fact and stated that only interest on fixed deposit which was maintained as margin money was proposed to be treated as business income and the balance interest income was to be treated as ‘Income from other sources’. 25. On perusal of the rival contentions and the materials available on record. It is observed that the assessee has challenged the interest income of Rs. 1 crore treated as ‘Income from other sources’ by the ld. AO. The assessee’s contentions is that the same is to be treated as business income. The ld. AR had relied on the order of the Tribunal in assessee’s case for A.Y. 2013-14, where the Tribunal had given a categorical finding that the bank interest received on the margin money which was kept in the bank as per the terms of sanction was towards business exigencies and any interest received out of the said margin money was liable to be taxed as business income. The Hon'ble DRP has also proposed the same in assessee’s case during the year under consideration. This has been constantly followed by the Tribunal in A.Y. 2015-16 to 2018-19. The Tribunal as well as the Hon'ble DRP has already held that interest received from bank FDs are to be treated as business income. The Hon'ble DRP has consciously held only that ITA No. 4440/Mum/2024 (A.Y. 2020-21) M/s. Essar Shipping Ltd. 20 interest received from bank to be treated as business income and the remaining interest received from income tax refund are consciously excluded from treating the same to be a business income. It is observed that Section 244A of the Act provides that the revenue shall pay simple interest on the refund amount. The interest received out of the same is treated as income under the head ‘Income from other sources’. We do not find any justification in treating the same as business income as the same is paid by the Revenue to the assessee for the delay caused due to refund of excess tax paid by the assessee. The same will not come under the preview of business income. We therefore are inclined to dismiss this ground of appeal raised by the assessee as there is no merit in the same. 26. In the result, ground no. 5 raised by the assessee is dismissed. 27. In the result, the appeal filed by the assessee is partly allowed. Order pronounced in the open court on 16.05.2025 Sd/- Sd/- (OMKARESHWAR CHIDARA) (KAVITHA RAJAGOPAL) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai; Dated: 16.05.2025 Karishma J. Pawar (Stenographer) Copy of the Order forwarded to: 1. The Appellant 2. The Respondent 3. CIT- concerned 4. DR, ITAT, Mumbai 5. Guard File BY ORDER, (Dy./Asstt.Registrar) ITAT, Mumbai "