Case Law Details
Van Oord India Pvt Ltd Vs DCIT (ITAT Mumbai)
Held that the transfer pricing provisions are not applicable to the assessee to the extent of operations carried out through operating qualifying ships where the income is taxed under Tonnage Tax Scheme.
Facts- The assessee is a wholly owned subsidiary of Van Oord Dredging and Marine Contractors BV, a company registered in the Netherlands. The assessee over the years has become a main contractor directly entering into contracts with Government and port authorities in India. The assessee also owns certain equipment which it uses for undertaking specified dredging activities. The assessee is registered as a Tonnage Tax Company under the Tonnage Tax Scheme (TTS) as provided under Chapter XXIIHG of the Act. As per the provisions of TTS, income derived from porting qualified ships would be treated as shipping income and would be taxable as per the computation mechanism provided therein.
The case of the assessee was selected for scrutiny under CASS and the statutory notices were duly served on the assessee. A reference was made to the Transfer Pricing Officer (TPO) in order to determine the arm’s length price from the international transaction detailed in the audit report in form 3CEB.
TPO made an adjustment of Rs.10,60,78,531/-. AO passed a draft assessment order incorporating the said addition. Aggrieved, the assessee filed its objections before DRP. The DRP rejected the objections from the assessee and confirmed the TP adjustment. AO passed final assessment order pursuant to the directions of the DRP against which the assessee is in appeal before the Tribunal.
Conclusion- Co-ordinate bench in assessee’s own case has held that 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.
Held that the transfer pricing provisions are not applicable to the assessee to the extent of operations carried out through operating qualifying ships where the income is taxed under TTS.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
This appeal is against the final order of assessment passed by the Deputy Commissioner of Income-tax-5(3), M umbai dated 11/12/2013 passed under section 143(3) read with section 144C(14) of the Income-tax Act, 1961 (in short, ‘the Act’) for the assessment year 2009-10.
2. The issues contended by the assessee through grounds of appeal are –
- General (Ground 1)
- Applicability of transfer pricing provisions to companies covered under the Tonnage Tax Scheme (Grounds 2 – 11)
- Addition on account of allocation of head office expenses (Grounds 12- 16)
- Initiation o penalty under section 271(1) (c) (Ground 17)
Applicability of transfer pricing provisions to companies covered under the Tonnage Tax Scheme (Grounds 2 – 11)
3. The assessee is a company incorporated on 05/11/1997 and is a wholly owned subsidiary of Van Oord Dredging and Marine Contractors BV, a company registered in Netherlands. The assessee over the years has become a main contractor directly entering into contracts with Government and port authorities in India. The assessee also owns certain equipment which it uses for undertaking specified dredging activities. The assessee is registered as a Tonnage Tax Company under the Tonnage Tax Scheme (TTS) as provided under Chapter XXIIHG of the Act. As per the provisions of TTS, income derived from porting qualified ships would be treated as shipping income and would be taxable as per the computation mechanism provided therein. The assessee filed the return of income for A.Y.2009-10 on 30/09/2010 declaring total income at Rs.10,92,1 1,700/-. Subsequently, the assessee filed a revised return on 30/03/2011 declaring a total income of Rs. 10,97,33,32/-. The case was selected for scrutiny under CASS and the statutory notices were duly served on the assessee. A reference was made to the Transfer Pricing Officer (TPO) in order to determine the arm’s length price from the international transaction detailed in the audit report in form 3CEB. The TPO, vide order dated 29/01/2013 made an adjustment of Rs.10,60,78,531/-. The Assessing Officer passed a draft assessment order incorporating the said addition. Aggrieved, the assessee filed its objections before the Dispute Resolution Panel (DRP). The DRP rejected the objections from the assessee and confirmed the TP adjustment. The Assessing Officer passed the final assessment order pursuant to the directions of the DRP against which the assessee is in appeal before the Tribunal.
4. The Ld.AR submitted that the issue of applicability of transfer pricing provisions to companies covered under the Tonnage Tax Scheme has been considered by the co-ordinate bench in assessee’s own case for A.Ys. 2007-08, 2010-11 & 2011-12. The Ld.AR submitted that the issues are identical for the year under consideration and, therefore, the issue is covered by the decision of the co-ordinate bench. The Ld.DR relied on the orders of the lower authorities.
5. We heard the parties and perused the materials on record. We notice that the co-ordinate bench in assessee’s own case for A.Y. 2007-08 in ITA 7228/Mum/2012 dated 22/05/2019 has considered identical issue and held that –
“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.”
6. Respectfully following the above decision of the co-ordinate bench, we hold that the transfer pricing provisions are not applicable to the assessee to the extent of operations carried out through operating qualifying ships where the income is taxed under TTS.
Addition on account of allocation of head office expenses (Grounds 12-16)
7. The TPO, for the purpose of making the transfer pricing adjustment, has added a sum of Rs.10,60,78,531/- being 50% of the expenses allocated to the assessee for the cost incurred centrally at head office towards rendering various services. The TPO made the adjustment for the reason that the assessee failed to provide details services rendered, breakup of cost allocated etc., and therefore made the adhoc addition. The DRP confirmed the disallowance made by the TPO
8. The Ld.AR submitted that the head office expenses are allocated based on the revenue generation from qualifying activity and other activities. The Ld.AR further submitted that the qualifying activities under TTS is outside the provisions of TP and, therefore, the head office expenses incurred towards qualifying activity cannot be a subject matter of any adjustment. Therefore, the Ld.AR made a without prejudice submission that if at all there is a disallowance, it has to be restricted to what is attributable to other activities i.e. non-tonnage/non-qualifying activities. The Ld.AR drew our attention to page 40 of the paper book where the working with regard to the head office expenses between qualifying and non qualifying activities are separately claimed as expenses. The Ld.AR further relied on the decision of the co-ordinate bench in assessee’s own case for A.Y. 2008-09 in ITA No.6960/Mum/2012 dated 11/05/2023 where a similar issue has been considered. The Ld.DR relied on the order of the lower authorities.
9. We heard the parties and perused the material on record. We notice that the co-ordinate bench in assessee’s own case (supra) has considered similar issue and held that –
“27. Considered the rival submissions and material placed on record, we observe that assessee is a wholly owned subsidiary of “Van Oord Dredging and Marine Contractors BV” to provide administrative and logistic support to its holding company with respect to dredging contracts undertaken by it with the various Ports / Government Authorities. However, over the years, assessee as the main contractor directly entered into direct contract with Government and Port Authorities in India, The assessee also own certain equipments which it for undertaking the specified dredging activities. We observe from rd that majority of the revenue earned by the assessee is from its return of income is based on net Tonnage of qualifying ships. The total income of the assessee is ₹178.35 crores and out of which ₹165.28 crores are from qualifying activities and income from other activities is only ₹.13.06 crores. We observe from the record that assessee has incurred Head Office Expenses to the extent of ₹9,71 crores. The same was allocated by the assessee between various activities, i.e., qualifying activities and other activities. It is clear from the facts on record that major income is generated out of TTS, the relevant Head Office Expenses are incurred towards qualifying activities which are assessed to tax separately. The income generated under TTS are offered to tax separately as qualifying activities. Therefore, the TP adjustment has to be done only to the other
activities and the allocation of Head Office Expenses to the extent of other activities are only ₹.71,82,289/- (based on turnover basis), we are inclined to restrict the same to the extent of Head Office Expenses related to other activities and we direct the Assessing Officer/TPO to eliminate the share of Head Office Expenses to the activities of TTS”
10. During the course of hearing the ld AR conceded that the adhoc addition made towards 50% of expenses pertaining to non-qualifying activities is not contended. Therefore respectfully following the above decision of the coordinate bench we direct the assessing officer / TPO to delete the adjustment made towards the qualifying activities under TTS only.
Initiation o penalty under section 271(1)(c) (Ground 17)
11. Issue with regard to initiation of penalty under section 271(1)(c) is premature at this stage hence dismissed.
Rate applicable for Dividend Distribution Tax (DDT) – Additional Ground
12. The assessee also has raised additional ground, which reads as under:-
“The Appellant prays that the Dividend Distribution Tax („DDT‟) paid under section 115-O of the Income-tax Act, 1961 („the Act‟) on dividends declared and paid by the Appellant to its parent foreign shareholder Van Oord Dredging & Marine Contractors bv, who is a tax resident of Netherlands, is in excess of the rate provided under Article 10 read with the Most Favoured Nation clause under Article IV of the Protocol to the Double Taxation Avoidance Agreement between India and Netherlands.”
13. In support of the admission of this additional ground, the ld A.R. submitted that it involved adjudication of only legal issues and no fresh facts were required to be examined. The ld DR opposed the admission of additional ground. Keeping into consideration the entire conspectus of the facts and circumstances of the case and the additional ground raised before us we are convinced that its adjudication does not require any fresh investigation of facts. Respectfully following the judgment of the Hon’ble Supreme Court in the case of National Thermal Power Company Ltd. CIT [(1998) 229 ITR 383 (SC)] we admit this additional ground for disposal on merits.
14. The ld AR submitted that the India-Netherlands DTAA contains the Most Favoured Nation (MFN) clause under Article IV of the Protocol according to which if India signs any DTAA after the date of India Netherlands DTAA which has a more restrictive scope towards taxation of dividends then such restrictive scope shall apply to India Netherlands DTAA also. The ld AR further submitted that the India Netherlands DTAA is notified on 27.03.1989 and came into force from 21.01.1989 whereas the India Hungary DTAA which was notified on 31 .03.2005 that came into effect on 04.03.2005 has a more restrictive scope with regard to taxation of dividend. Therefore the ld AR submitted that the Protocol With reference to Article 10 of India Hungary DTAA with regard to taxation of dividend should be applicable to taxation of dividend as per India Netherlands DTAA. The ld AR contended that accordingly the rate at which Dividend Distribution Tax (DDT) paid is in excess of the rate prescribed under DTAA. While doing so, the ld AR drew our attention to the decision of the Mumbai Special Bench of the Tribunal in the case of DCIT vs Total Oil India (P.) Ltd., [2023] 149 taxmann.com 332 (Mumbai – Trib.) (SB), to submit that though the Hon’ble Tribunal has held that the domestic company under section 115-O does not enter the domain of DTAA at all, the Hon’ble Tribunal has observed that it is the sovereign’s prerogative to extend the treaty protection to domestic companies paying dividend distribution tax through the mechanism of DTAAs. The ld AR argued that therefore the treaty protection given to tax on distributed profits under DTAA between India and Hungary and India and Netherlands through MFN is applicable to assessee’s case. The ld AR further drew our attention to the relevant observations of the Hon’ble Tribunal in Para 81 to 83 of the order and submitted that if the ratio laid down by the Hon’ble Tribunal therein is applied in assessee’s case then the DDT rate as per the Treaty should be applied and excess DDT paid as per rate mentioned under section 115-O should be refunded.
15. The ld DR on the other hand vehemently argued that the excess DDT cannot be refunded to the assessee for the reason that section 237 of the Act which contains provisions with regard to refund should be read with section 2(43) in which the term “tax” is defined. The ld DR submitted that tax would include only the income tax and DDT cannot be considered as income tax. Therefore the excess DDT cannot be claimed as refund under section 237 which only income tax shall be refunded.
16. The ld AR as a counter argument submitted that DDT is a tax on the income of the assessee and is a tax paid in addition to the regular income tax. The ld AR therefore submitted that DDT is very much covered by the definition of tax under section 2(43) and accordingly can be refunded under section 237.
17. We heard the parties and perused the material on record. Before proceeding further we will look at the relevant clauses pertaining to Dividends in the DTAA between India and Netherlands and in the DTAA between India and Hungary.
India and Netherlands
ARTICLE 10
DIVIDENDS
1. Dividends paid by a company which is a resident of one of the States to a resident of the other State may be taxed in that other State.
2. However, such dividends may also be taxed in the Contracting State of which the company paying the dividends is a resident and according to the laws of that State, but if the recipient is the beneficial owner of the dividends, the tax so charged shall not exceed 10 per cent of the gross amount of the dividends.]
3. The competent authorities of the States shall by mutual agreement settle the mode of application of paragraph 2.
4. The provisions of paragraph 2 shall not affect the taxation of the company in respect of the profits out of which the dividends are paid.
5. The term “dividend” as used in this Article means income from shares, “jouissance” shares or “jouissance” rights, mining shares, founders’ shares or other rights participating in profits, as well as income from debt-claims participating in profits and income from other corporate rights which is subjected to the same taxation treatment as income from shares by the laws of the State of which the company making the distribution is a resident.
6. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the dividends, being a resident of one of the States, carries on business in the other State of which the company paying the dividends is a resident, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the holding in respect of which the dividends are paid is effectively connected with such permanent establishment or fixed base. In such case, the provisions of Article 7 or Article 14, as the case may be, shall apply.
7. Where a company which is a resident of one of the States derives profits or income from the other State, that other State may not impose any tax on the dividends paid by the company, except insofar as such dividends are paid to a resident of that other State or insofar as the holding in respect of which the dividends are paid is effectively connected with a permanent establishment or a fixed base situated in that other State, nor subject the company’s undistributed profits to a tax on the company’s undistributed profits, even if the dividends paid or the undistributed profits consist wholly or partly of profits or income arising in such other State.
Protocol
IV.Ad Articles 10, 11 and 12
1. ***
2. If after the signature of this convention under any Convention or Agreement between India and a third State which is a member of the OECD India should limit its taxation at source on dividends, interests, royalties, fees for technical services or payments for the use of equipment to a rate lower or a scope more restricted than the rate or scope provided for in this Convention on the said items of income, then as from the date on which the relevant Indian Convention or Agreement enters into force the same rate or scope as provided for in that Convention or Agreement on the said items of income shall also apply under this Convention.
India and Hungary
Protocol
With reference to Article 10
When the company paying the dividends is a resident of India the tax on distributed profits shall be deemed to be taxed in the hands of the shareholders and it shall not exceed 10 per cent of the gross amount of dividend.
18. The contention of the ld AR is that as per the M FN clause of India Netherlands DTAA as reproduced above, the protocol reference to Article 10 of India Hungary DTAA should be read into India Netherlands DTAA. From the plain reading of Protocol with reference to Article 10 of India Hungary DTAA it is clear that the taxability of dividend is more restrictive whereby the dividend paid by the Indian company shall be taxable in the hands of the shareholders at the rate of 10% of gross dividend. It is relevant here to note that it is no longer res integra that the protocol is an indispensable part of the treaty with the same binding force as the main clauses therein and therefore the protocol with reference to Article 10 of India Hungary DTAA is to be considered as part of the Treaty. It is also relevant to note that both Hungary and Netherlands are members of the OECD and as per the M FN protocol the restrictive conditions in subsequent DTAA applicable to one OECD nation would apply to the other OECD member nation even though the DTAA comes into effect earlier in time. From the perusal of effective dates as mentioned in the earlier part of this order, it is noted that the India Hungary DTAA came into effect after the India Netherlands DTAA. The combined examination of these facts leads us to the conclusion that as per the M FN protocol of India Netherlands DTAA as extracted above, the protocol with reference to Article 10 of India Hungary DTAA, with regard to taxation of dividend should be applicable to taxation of dividend as per India Netherlands DTAA.
20. Given this the crucial point that needs to be examined for the purpose of issue under consideration is whether by virtue of this clause, the benefit of DTAA can be extended to domestic company. If we look at the wordings in the India Hungary DTAA, what it provides is that the tax on the profits distributed by an Indian company is taxable at the rate of 10% in the hands of the shareholders. The treaty does not contain anything whereby the domestic company is protected by the DTAA and that the rate mentioned therein shall be considered by domestic company distributing the profit for the purpose of DDT. The clause only specifies that the distributed profits will be taxable in the hands of the shareholders who are residents of Hungary/Netherlands at the rate of 10% which otherwise be subject to tax in accordance with Article 10 of the Treaty. If the tax laws of recipient shareholder country so provides, they can take the benefit of tax credit. The argument of the ld AR is that the Tribunal in the case of Total Oil India (P.) Ltd (supra) has laid down the ratio that as per the India Hungary DTAA the treaty protection is extended to domestic companies. However we are unable to agree with this contention of the ld AR, on perusal of the order it is not coming out that the Special Bench has held that as per the India Hungary DTAA the domestic companies are covered under the Treaty. In conclusion the Special Bench has observed that –
Conclusion:
83. For the reasons give above, we hold that where dividend is declared, distributed or paid by a domestic company to a non-resident shareholder(s), which attracts Additional Income-tax (Tax on Distributed Profits) referred to in sec. 115-O of the Act, such additional income tax payable by the domestic company shall be at the rate mentioned in section 115-O of the Act and not at the rate of tax applicable to the non-resident shareholder(s) as specified in the relevant DTAA with reference to such dividend income. Nevertheless, we are conscious of the sovereign’s prerogative to extend the treaty protection to domestic companies paying dividend distribution tax through the mechanism of DTAAs. Thus, wherever the Contracting States to a tax treaty intend to extend the treaty protection to the domestic company paying dividend distribution tax, only then, the domestic company can claim benefit of the DTAA, if any. Thus, the question before the Special Bench is answered, accordingly.
(Emphasis supplied)
21. Thus the Tribunal only held that it is the sovereign’s prerogative to extend the treaty protection to domestic companies paying dividend distribution tax through the mechanism of DTAAs whereas in the instant case the DTAAs referred to by the ld AR nowhere suggests that domestic companies are allowed to enter the arena of DTAA. Therefore, in our considered view, the Protocol with reference to Article 10 as per India Hungary DTAA on taxability of distributed profits cannot be interpreted so as to say that it covers the domestic companies, since there is no specific clause in the Treaty to that effect. Consequently assessee’s claim of refund of DDT in respect of shareholders covered under India Netherlands DTAA is rejected.
22. In the result, appeal filed by the assessee is partly allowed.
Order pronounced in the open court on 20/09/2023
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