Solution here:
ActionBarSherlock - Tabs appearing ABOVE actionbar with custom view
and here: https://github.com/JakeWharton/ActionBarSherlock/issues/327
This seems a little hacky to me but here's the workaround: Add this piece of code in your onCreate and hide the Home Icon. Now the ActionBar and Tabs work as expected.
Remember not to Disable/Mask the DISPLAY_HOME_HOME in the ActionBar.setDisplayOptions().This will not work if you mask/disable it.
View homeIcon = findViewById(android.R.id.home);
((View) homeIcon.getParent()).setVisibility(View.GONE);