2014 (1) TMI 709 - AT - Income Tax

Assessee's Appeal Partially Allowed on Section 14A & TP

The Great Eastern Shipping Co. Ltd. Versus The ACIT, Range 5(3), Mumbai

The assessee's appeal was partly allowed, primarily concerning the disallowance under Section 14A and Transfer Pricing (TP) adjustments. The Tribunal ... Disallowance u/s. 14A – Held that:- Following assessee's own case for A.Y. 2006-07 - In view of the decision of Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. [2010 (8) TMI 77 - BOMBAY HIGH COURT] – Rule 8D applied by the AO to work out the disallowance u/s. 14A was not applicable to the year under consideration - The said disallowance for the year under consideration, was required to be worked out on some reasonable basis - The working furnished by the assessee for making the disallowance u/s. 14A was fair and reasonable – Decided in favour of assessee. Transfer Pricing adjustments – held that:- A perusal of the order of the TPO clearly shows that the TPO has proceeded entirely on erroneous facts. In our considered opinion , if an assessing authority proceeds with facts which are remotely connected with the facts in issue and makes up his mind , such order cannot form any basis for higher authorities - The TPO has salvaged the situation by rectifying his order u/s. 154 of the Act - But he has rectified only the financial figures which were wrongly taken by him - The Ld. CIT(A) also erred in not appreciating the facts in their right perceptive - The Ld. CIT(A) completely ignored the fact that the loan of USD 4 million was given by the assessee to its AE in the earlier years - No TP adjustment was done in the earlier year - This year what the assessee has charged is only on the loan brought forward from the earlier year - The Ld. CIT(A) further erred in not considering the second USD loan of Rs. 17 Million in its right perceptive as the loan was repaid during the same year - The loan of USD 4 million was given in earlier accounting year and as per the agreement, the rate of interest was taken at 5% - The fixed rate of interest cannot be accepted to be changed with the subsequent change in LIBOR - As the loan of USD 17 million has been repaid within the year itself, there is no logic in taking the rate for more than 5 years at 6 months LIBOR plus 350 basis point - The benchmarking done by the assessee are based on the interest paid by it on its own borrowings of loan in foreign currency from KEXIM bank and also from State Bank of India - The interest charged by the assessee on the loan given by it to its AE is at arm's length and no further adjustment is required – Decided in favour of assessee. Issues Involved:1. Disallowance under Section 14A of the Income Tax Act.2. Transfer Pricing Adjustments.3. Treatment of various incomes as tonnage income.4. Deletion of interest expenditure attributed to non-tonnage income.5. Treatment of refund amounts, court proceeds, and sale of miscellaneous items.6. Treatment of general average claims.7. Treatment of liabilities of prior period written back.Issue-wise Detailed Analysis:1. Disallowance under Section 14A of the Income Tax Act:The assessee's appeal raised grounds related to disallowance under Section 14A. The Assessing Officer (AO) observed that the assessee earned a significant dividend income, part of which was exempt under Section 10(34). The AO applied Rule 8D to compute disallowance, resulting in an additional disallowance of Rs. 1,04,16,439/-. The CIT(A) modified this disallowance to Rs. 2,38,90,719/- using a different method. The Tribunal, referencing the assessee's case for the previous year, concluded that Rule 8D was not applicable for the assessment year in question and directed the AO to accept the assessee's suo motu disallowance. Consequently, Ground Nos. 1 to 4 were allowed, and Ground No. 5 became otiose.2. Transfer Pricing Adjustments:The assessee's appeal also challenged the Transfer Pricing (TP) adjustments. The AO, based on the TPO's report, initially made a substantial upward adjustment due to incorrect loan amounts and interest rates. Upon rectification, the TP adjustment was reduced to Rs. 4,17,34,739/-. The CIT(A) further modified the approach by considering RBI guidelines for ECB rates, resulting in a different interest rate application. The Tribunal found that the CIT(A) erred in not considering the correct facts, especially the benchmarking done by the assessee based on its own borrowings. The Tribunal directed that no further TP adjustment was required, allowing Ground Nos. 6 to 11.3. Treatment of Various Incomes as Tonnage Income:The Revenue's appeal included grounds related to the treatment of certain incomes as tonnage income. The Tribunal, referencing its decision in the assessee's case for the previous year and the Shipping Corporation of India case, dismissed the Revenue's grounds, affirming the CIT(A)'s treatment of these incomes as tonnage income.4. Deletion of Interest Expenditure Attributed to Non-Tonnage Income:The Revenue's appeal contested the deletion of interest expenditure attributed to non-tonnage income. The Tribunal, consistent with its decision on Section 14A disallowance, dismissed this ground.5. Treatment of Refund Amounts, Court Proceeds, and Sale of Miscellaneous Items:The Revenue's appeal also challenged the treatment of refund amounts, court proceeds, and sale of miscellaneous items as tonnage income. The Tribunal, following its previous decisions, dismissed this ground.6. Treatment of General Average Claims:The Revenue's appeal included a ground on the treatment of general average claims as tonnage income. The Tribunal, consistent with its earlier decisions, dismissed this ground.7. Treatment of Liabilities of Prior Period Written Back:The Revenue's appeal contested the treatment of liabilities of prior period written back as tonnage income. The Tribunal, referencing its decisions in the assessee's case and the Shipping Corporation of India case, dismissed this ground.Conclusion:The assessee's appeal was partly allowed, primarily concerning the disallowance under Section 14A and TP adjustments. The Revenue's appeal was dismissed in its entirety, affirming the CIT(A)'s treatment of various incomes as tonnage income and the deletion of interest expenditure attributed to non-tonnage income. The Tribunal's decisions were consistent with its previous rulings in the assessee's own case and similar cases.