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2023 (9) TMI 1427
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.... 95 dated 20/12/2013 in case of draft assessment order passed under section 144C (13) passed by the assessing officer on 15/3/2013. 02. In ITA number 1656/M/2014 in assessee's appeal following grounds are raised :- "This Appeal is against the Order of the Deputy Commissioner of Income Tax, Range 5(3), Mumbai, med under section 143(3) r.w.s. 144C(13) of the Act and relates to the Assessment Year 2009- 2010 NON TRANSFER PRICING ISSUES 1. The learned DRP erred in holding that the provisions of Section 14A of the Act were applicable in the case of the Appellant, since the dividend from shares/units of mutual funds is subjected to tax in the hands of the payer under section 115-0115-R of the Act and as the Appellant receives an amount after the tax has been paid, it cannot be said that such dividend income is not chargeable to tax under the Act and, hence, the provisions of Section 14A are not attracted in the case of the Appellant 2) 2. The learned DRP erred in holding that the aggregate interest expenditure incurred by the Appellant pertaining to the tonnage and non-tonnage activities was to be considered for computing the amount liable for disallowance u....
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....Treasury Division of the Appellant for earning tax free and taxable income. 8) Without prejudice to the aforesaid Ground Nos.2 to 7, the learned DRP erred in rejecting the contention of the Appellant that the provisions of Section 14A of the Act are not applicable to investments held as stock-in-trade. 9) The AO erred in computing the tax on Long Term Capital Gains at 20% as against the correct rate of 10%, while faming the Assessment Order under Section 143(3) r.w.s. 144C(13) of the Act. 10. The AO erred in not granting credit for tax deducted at source aggregating to Rs 12,62,041/- while framing the Assessment Order under Section 143(3) rw.s. 144C(13) of the Act, without assigning any reasons for the non-grant of such credit. TRANSFER PRICING ISSUES 11) The Assessing Officer (AO) / Transfer Pricing Officer (TPO) erred in making adjustments under Section 92CA(3) without providing reasons as to which condition of Section 92C(3) had not been satisfied. Financial Guarantees given on behalf of the Associated Enterprise 12) The AO TPO erred in rejecting the arithmetic mean of internal comparable rates of guarantee commission of 0.60% per annum adopted by the Appellant....
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....the previous year relevant to the AY 2009-10. (iii) On the facts and circumstances of the case and in law, the Hon'ble DRP erred in law in directing that the amount of Rs. 15,98,00,000/- forfeited and credited to Capital Reserve Account on account of non-conversion and forfeiture of Rs. 45,95,000 equity share warrants was neither taxable under section 41(1) nor under section 28(iv) of the Income-tax Act, 1961. (iv) The appellant prays that the order of the Hon'ble DRP be set aside and the additions proposed in the draft assessment order u/s, 143(3) r.w.s. 144C(1) dated 15.03.2013 be restored. The appellant craves leave to amend or alter any ground or add any other ground which may be necessary" 04. Assessee is a company engaged in the business of shipping, property development and finance operation including dealing in shares, securities, mutual funds and other money market operation in granting of loans and advances. Assessee filed return of income [ROI] on 29/9/2010 declaring a total income of Rs. 1,040,312,390. It was picked up for scrutiny. 05. As assessee has entered into international transaction with its associated enterprises, the le....
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....anel has held that the assessee should have charged the guarantee fee commission at the rate of 1.5% per annum on financial guarantee given on behalf of its associated enterprises. The learned transfer pricing officer considered the explanation of the assessee and rejected the benchmarking methodology by accepting the average rate of guarantee for the reason that guarantee depends on several factors. It noted that while calculating the average the minimum guaranteed rate was 0.3% and highest guarantee rate was 1%. Therefore, he rejected the benchmarking at the rate of 0.6% made by the assessee. The learned TPO held that as assessee has also given a performance guarantee which is a huge liability on behalf of associates associated Enterprises on the assessee and further the performance guarantee given is on outstanding balance of Rs. 659 crore which is more than the free reserves of the assessee company. Therefore, he held that the arm's-length price of the above guarantee commission fee should be at the rate of 3%. Accordingly he determine the arm's-length price of guarantee fee commission at Rs. 118,460,364/-. The assessee has already made suo moto disallowance/adjustment on accou....
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....ering several judicial precedent worked out disallowance invoking the provisions of rule 8D amounting to Rs. 260,715,583/-. As the assessee has already disallowed the sum in computation of total income of Rs. 7,530,532/-, so net disallowance under section 14 A was made of Rs. 253,185,050/-. Identical addition was also made to the book profit under section 115JB of the act. 09. During the year the learned assessing officer noted that assessee company has credited and amount of Rs. 15.98 crores to the capital reserve amount as forfeited on non-conversion of warrants. The contention of the assessee is that it is a capital receipt not liable to tax. The learned assessing officer rejected the contention of the assessee and noted that that forfeiture of non-commercial of warrant is a trading liability and provisions of section 41 (1) of the income tax act applies. Assessee has raised money through convertible warrants from certain promoters and non-executive director enterprise of Rs. 300 Rs. 12.75 per share. Each of such warrant was convertible into an equity share of the face value of Rs. 10 at the option of the warrant holders. Out of 50,05,000 warrants issued, 10,000 warrants were....
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....cer further noted that there are certain miscellaneous income which have been arising out of shipping that's written back amounting to Rs. 4,273,847 and general average claim of Rs. 637,690/- same was added back to the total income of the assessee for the reason that assessee is not entitled to take the benefit of the tonnage tax scheme on this income. 012. Accordingly draft assessment order was passed on 15/3/2013 determining total income of the assessee at Rs. 1,768,872,620/-. Aggrieved, with the draft assessment order assessee preferred an objection before the learned dispute resolution panel who gave its direction on 20/12/2013. The learned dispute resolution panel against the disallowance of Rs. 17,944,163 being interest expenditure disallowed/added by the learned assessing officer, the learned dispute resolution panel held that the identical issue is covered in favour of the assessee by the decision of the coordinate bench in assessee's own case for assessment year 2006 - 07 and the learned dispute resolution panel also for assessment year 2008 - 09 given a direction to the assessing officer but in view of the decision of the coordinate bench, the objection was allowed and....
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....e learned assessing officer was directed to delete the addition. 016. With respect to the arm's-length computation of the financial guarantee given by the assessee to the associated enterprise where the learned assessing officer has computed the guarantee commission rate at the rate of 3%, the learned dispute resolution panel directed the learned assessing officer to compute at the rate of 1.5% per annum. For Holdings of the learned dispute shall panel has lifted that there is a declining trend of guarantee commission rate by the banks with respect to the amount involved in that the assessee has given financial guarantee on behalf of its associated Enterprise aggregating to Rs. 484 crores. For the preceding year the learned dispute resolution dialect and divert direction was also the same. 017. With respect to the computation of the arm's-length price of the performance guarantee fee on behalf of its associated enterprises where the learned transfer pricing officer has made an adjustment of Rs. 197,951,187 and the assessee has not shown the same as international transaction, the learned dispute resolution panel held that the arm's-length price of the performance guarantee sho....
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....x and non-tonnage tax business activities are prepared from the separate books of account maintained by the assessee in accordance with the provisions of section 115 VW of the act. The profit and loss account of the tonnage tax business and the profit and loss account of the other business of the assessee company are duly reconciled with the audited profit and loss account of the company. The gross receipt and the operating expenses and administrative and other cost pertaining to non-tonnage tax activity as well as tonnage tax activities of the assessee company have been reflected in the segmental profit and loss account. The profit from the tonnage tax business of Rs. 1141 crores has been duly certified by the auditors in accordance with the provisions of tonnage tax scheme. Thus the tonnage tax income of Rs. 1141 crores have been excluded while computing the business income in accordance with the provisions of that section and taxes paid on the income computed therein. Therefore, the gross receipts of the tonnage tax business and the expenses pertaining to the tonnage tax business are excluded while computing the business income of the assessee. Assessee explained that only dispu....
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....nn.com 415] as well as in case of the assessee for assessment year 2008 -2009. 024. The learned departmental representative vehemently supported the order of the learned lower authorities and submitted that the disallowance under section 14 A of the act has been correctly worked out by the learned assessing officer and confirmed by the learned dispute resolution panel. He submitted that argument of the appellant that they are assessed in Tonnage Tax Scheme; therefore no disallowance should be made cannot be accepted because the assessment of total income is to be made and it cannot be assessed in parts. Therefore, if some income is earned by the appellant by other than shipping activities, then how it could be left without taxing though tax u/s 115VG has been brought to tax shipping. However, it does not mean that they are excluded from taxation for any income earned by them. So far as the applicability of Sec. 14A and Rule 8D is concerned, as regards dividend income it cannot claim that no expenditure at all has been incurred for earning this exempted income. After the decision of Bombay High Court in the case of Godrej Boyce Mfg Co. Ltd. 328 ITR 81. It is very clear that Rule ....
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....omputed in accordance with the provisions of Chapter XIIG, only the expenses incurred for the said business are deemed to have been allowed and no addition to such income can be made by way of disallowance u/s 14A on account of any expenditure incurred in relation to earning of exempt dividend income. In our opinion, if at all the assessee has claimed any such expenditure in computation of profit of business of shipping, the same are to be taken as disallowed when the income of the said business is finally computed in accordance with the provisions of Chapter XIIG and no separate disallowance on account of such expenditure u/s 14A can be made. We, therefore, delete the disallowance made by the AO u/s 14A and confirmed by the learned CIT (Appeals) and allow ground No. 1 of the assessee's appeal." 026. Same view is also taken by coordinate benches in ITA 1940/CHNY/2016 in ACIT , chennai v. West Asia Maritime ltd., Chennai and in [2013] 37 taxmann.com 395 (Chennai - Trib.) in Four M Maritime (P.) Ltd. No contrary view is shown to us. Therefore respectfully following the decision of coordinate benches, we hold that where the income of the assessee is assessed under Tonnage tax S....
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.... incurred by the Treasury Division including employee costs and other relatable expenses were allocated between the taxable and non-taxable gross receipts of the Treasury Division and the disallowance of Rs.13.88 lacs under Rule 8D(2)(i) was computed . It has also considered the interest expenditure of the non-tonnage tax business at Rs.7.76 crores as reduced by interest expenditure suo moto disallowed by the Appellant of Rs.3.26 crores whereby the net interest expenditure claimed in the computation of total income was Rs.4.50 crores and has computed the disallowance of interest expenditure at Rs.61.42 lacs under Rule 8D(2)(ii) in accordance with the formula prescribed. On the issue of interest expenditure, though assessee confirms that there is no disallowance warranted even assuming though not conceding that some part of the non-tonnage tax interest expenditure is liable for disallowance, it is respectfully submitted that the correct figure of interest expenditure of Rs.4.50 crores may please be considered for computing the disallowance. The Appellant has filed an application for rectification on this issue, which is pending as on date. 028. Further On a perusal of the Share C....
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....come computation ii. As there is no interest expenditure liable for a disallowance as the own funds consisting of the share capital and reserves, are far more than the aggregate value of investments held by the company. No Interest disallowance should be made. iii. The administrative expenses cannot exceed the actual expenditure incurred. iv. Those investments on which no exempt dividend income was received by the Appellant during the year are to be excluded while computing the disallowance under Rule 8D(2)(iii). 032. Both the lower authorities are not correct in holding that the disallowance made under Section 14A of the Act under the normal computation of income is also required to be added back for computing book profits under section 115JB of the Act. This issue is covered in favour of the assessee by the decision of Special Bench of the Income Tax Appellate Tribunal, Delhi, in the case of Vireet Investment Pvt. Ltd. reported in 82 taxmann.com 415 (Delhi - Trib.) (SB), wherein it was held that the computation under clause (f) of Explanation 1 to Section 115JB(2) is to be made without resorting to the computation as contemplated under Section 14A re....
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....y, Greatship India Ltd. infused share capital into the subsidiaries, USD 94.06 million into GGOS and USD 66.96 million into GGES by 31st March 2009. The subsidiaries placed orders on shipyards in Singapore for building of new vessels in the preceding financial years 2006-2007 and 2007-2008. Assessee issued guarantees to shipyards (referred to as performance guarantee). 038. One of the shipyards, viz., Keppel Fels Ltd. required a bank guarantee for USD 25 million(Rs. 126.80 crores) from GGES. The ICICI Bank provided a Standby Letter of Credit to Keppel Fels Ltd. The Appellant in turn at the request of the Bank gave a financial guarantee to ICICI Bank for USD 25 million in financial years 2006-2007. The ICICI Bank charged guarantee commission @ 0.135% p.a. to GGES for issuing the Standby Letter of Credit. The Appellant did not charge guarantee commission to GGES for issuing the financial guarantee to ICICI Bank on its behalf. However, while filing its Return of Income, the Appellant made a suo moto transfer pricing adjustment on the basis of guarantee commission paid by the Appellant to banks during each financial year, For this year it computed ALP of Guarantee Commission at the ....
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....dhoc markup 0.925% ALP of Guarantee commission 3% 042. The ld DRP (for the AY 2008-2009) held that the ALP of the financial guarantee given by the Appellant to ICICI Bank was 1.5% p.a. However, financial guarantee given by the Appellant to the ICICI Bank continued in AY 2009-2010, ld TPO computed ALP @3% and LD DRP upheld it @1.5% by following their own findings in AY 2008-2009. 043. Similarly, the ld TPO also benchmarked Financial Guarantee Given to Bank of Nova Scotia @ 3 % and Ld DRP upheld it @ 1, 5 %. 044. Assessee submitted that :- i. as far as financial guarantees are concerned, the TPO has (for the Assessment Year 2007-08) accepted that the rate of 0.60% p.a. adopted by the Appellant on the basis of the guarantee commission paid by the Appellant itself to banks for unsecured financial guarantees given by the banks on behalf of the Appellant. For the Assessment Year 2008-09, the Tribunal has, in the Appellant's own case, held that the suo-moto adjustment made by the Appellant @ 0.55% p.a. (on the basis of guarantee commission paid by the Appellant to banks) was at arm's length. The Appellant submits that the order of the Tribunal for the Assessment....
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....sel being constructed by Keppel Fels (Note 13 of the Accounts) USD 152.906 Million (Vessel under construction + Current Assets) v. Therefore, the Appellant submits that the risk of default by the AE was extremely low and, hence, the rate of commission charged in respect of financial guarantees given by the Appellant @ 0.60% p.a. is more than the Arm's Length Price. vi. Further, the Appellant relies on the decision of the Mumbai Tribunal in the case of Everest Kanto Cylinders Ltd. (ITA No. 542/Mum/2012 dated 23rd November, 2012) wherein internal CUP was accepted as ALP. The Appellant submits that this decision has been affirmed by the Bombay High Court in 378 ITR 57. vii. The facts of Everest Kanto were as follows: a. Everest Kanto had a subsidiary,EKC Dubai. b. Dubai subsidiary availed a loan from the ICICI Bank, Bahrain branch. Everest Kanto provided a financial guarantee to ICICI Bank. c. Everest Kanto charged guarantee commission @ 0.5% p.a.on behalf of its AE. d. In order to benchmark the rate of guarantee commission charged to its AE, the assessee company relied upon guarantee commission paid by it to ICICI B....
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....well as directions of the ld DRP on this issue. The coordinate bench in assessee's own case has decided this issue in Para no 197/Mum/2023 for Ay 2008-09 per Para no 23 as under :- "23. In ground No. 22 to 24 of appeal, the assessee has assailed TP adjustment in respect of financial guarantee given by the assessee on behalf of its AE. The ld. Counsel for the assessee submitted that the assessee has made suo-motto charge of 0.55%. The ld. Counsel referred pages 92 to 95 of the paper book to show different rates of guarantee commission charged by different banks. He pointed that vide letter dated 15/07/2011 State Bank of India has given rate of commission charged by it. The rates vary from 2.75% to 1.75% depending upon the quantum of facility availed. Similarly, information was sought by the Transfer Pricing Officer from the Allahabad Bank. As per letter dated 12/07/2011 from Allahabad Bank (at page 94 of the paper book) for extending facility of financial guarantee, charges varies from 0.75% per quarter to 0.60% per quarter. The ld Counsel pointed that ABN AMRO Bank charges guarantee commission @0.35% p.a. (page 139 of paper book) and HSBC Banks charges 0.55% p.a. guarantee....
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....ational transaction by adopting the most appropriate method and also by showing comparable/comparability analysis. 049. However, for this assessment year, we find that the learned TPO and the learned DRP has repeated their own orders of earlier years i.e. assessment year 2008 - 09. Therefore, both these orders/directions are not in accordance with the transfer pricing provisions as they do not determine the arm's-length price of the international transaction in accordance with the provisions of section 92C (3) of the act. Therefore, we disapprove both the above orders and directions. 050. Coming to the benchmarking analysis adopted by the assessee, we noted that assessee has made a suo moto adjustment considering 0.55% as arm's-length price of the international transaction, despite the fact that, assessee has not charged any guarantee fees from its associated enterprises. For the purpose of benchmarking, the assessee adopted the comparable uncontrolled price method and considered the average corporate guarantee charges charged by the bankers to the assessee placed at page number 383 of the paper book, which is 0.56%. On that basis, the assessee has benchmarked these corporate....
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....n of letter of credit to the shipyards, the Appellant would make good such defaults. At the same time, the Appellant entered into separate agreements with its AEs in respect of each of the performance guarantee / vessel under construction, to the effect that if and when the performance guarantee is invoked, the Appellant shall step into the shoes of the AE and take delivery of the vessel, for use in its own business. In other words, if the performance guarantee given by the Appellant to the shipyard is invoked, the Appellant will become the owner of the vessel and use the vessel in its own business. The situation is akin to the Appellant placing an order for construction of vessels. The Appellant already had 39 vessels in its business in the current year. Agreements between the Appellant and its AEs were also placed on record. The Appellant submits that the vessel construction agreements had a Right of Assignment clause whereby the AEs could easily assign the under-construction vessels to the Appellant. Therefore, neither did the Appellant charge any guarantee commission to its AEs, nor did the Appellant make any suo moto TP adjustment, in respect of the performance guarantees give....
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....djustments of Rs.6,59,83,729/-. Therefore, Assessee is in appeal before us. 055. Assessee submitted that :- i. The Appellant relies on the following decisions of the Tribunal wherein it has been held that giving of a guarantee on behalf of an AE is not an international transaction as it has no bearing on the profits, income, losses or assets of the enterprises involved: a. Marico Ltd. (ITA No. 8858/M/11 and 8713/M/11) dated 18.5.2016 b. Micro Ink Ltd. (157 ITD 132) (Ahd.) c. Videocon Industries Ltd. (55 taxmann.com 263) (Mum.) ii. Without prejudice, the Appellant submits that section 92B, as amended retrospectively by the Finance Act, 2012, does not cover a performance guarantee of the type given by the Appellant as the words used in the Explanation below Section 92B are "capital financing, including any type of long-term or short-term borrowing, lending or guarantee..." Thus, the amendment to Section 92B is intended to cover financing transactions and would, if at all, cover a financial guarantee but not a performance guarantee. iii. Without prejudice, the Appellant submits that the amendment to section 92B is prospective in....
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....ant for which it needs to be compensated by way of guarantee commission. Reliance is placed upon the decision of the Mumbai Bench of the Tribunal in the Appellant's own case for the Assessment Year 2008-09 wherein in respect of these very same performance guarantees (5 nos.) to shipyards the Tribunal held that if the guarantee is invoked, the assessee would acquire the vessel and therefore, there is no risk involved. Tribunal relied upon the decision of the co-ordinate Bench in the case of KEC International Ltd. (108 taxmann.com 172)(Mum.) to hold that no adjustment is warranted on account of performance guarantees. vii. The Appellant submits that the following facts are relevant and should not be lost sight of the while deciding this issue: a. The Appellant is the ultimate holding company of The Great Eastern Shipping Company Group. b. The Appellant is responsible and in charge of strategic decision making as far as the Group is concerned. c. Incorporation of step down subsidiaries in Singapore was a strategic decision as Singapore is one of the busiest ports. d. Decisions of placing orders for new vessels by the Singapore AEs cannot be....
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.... by the Appellant should be much less than that of a financial guarantee. ix. Without prejudice to all that is stated above, the guarantee rates of Allahabad Bank (pages 397 and SBI Bank (page 398 to 400) show a declining trend i.e. as the guaranteed amount increases the rate of guarantee commission as a percentage of the amount guaranteed decreases. Therefore, without conceding that the guarantee commission in respect of performance guarantee should be Nil as there is no risk involved, the Appellant submits that for performance guarantee of Rs. 659 crores, the guarantee rate cannot exceed 0.1% p.a. as per chart submitted at page 476. This is buttressed by the Letter of Credit rate offered by the ICICI Bank to GGES directly. 056. The learned departmental representative vehemently supported the orders of the lower authorities and submitted that the performance guarantee involves the financial commitment as the terms and conditions of the guarantee clearly indicate that the assessee would step into the shoes of the associated enterprises and would-be obliged to acquire the assets. He further submitted that nobody would be in a position to say that when the assets were acq....
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....ld acquire the vessel. We find force in the argument of the Counsel for the assessee, there is no element of risk involved. In any case, on enforcement of guarantee clause, the assessee would acquire vessel, the assessee can use the same in its own business. 22.1. We find that the Tribunal in the case of ACIT vs. KEC International Ltd. 108 taxmann.com 172 (Mumbai) deleted adjustment made on account of performance guarantee where there was absolutely no risk involved for the assessee in issuing performance guarantee on behalf of its AE. Thus, in the facts of the case and the decision by the Coordinate Bench, we hold that no adjustment is warranted because of performance guarantee. The assessee succeeds on ground no. 19 to 20 of the appeal." 058. The coordinate bench has held that wherein it has been held that there is no element of risk involved, in even to of enforcement of guarantee clause the assessee would acquire vessel, that can be used by the assessee in its own business, and therefore the coordinate bench has held that no adjustment is warranted on account of performance guarantee. 059. No doubt, the guarantees were given in earlier years however, as on 31st o....
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....aterial aspect is that whether any independent party would have issued such performance guarantee on behalf of associated enterprises of the assessee without charging any commission for issue of such guarantee. The answer is clearly in negative. Therefore, there exists an international transaction; this international transaction should have resulted into remuneration to the assessee. Such remuneration should have been benchmarked and it should have been demonstrated that it is at arm's-length. 060. Performance guarantee is sharing the advantage of MNE against the individual standalone companies, whereby, less competent, less capable, less resourceful associated enterprise can ride on the shoulders of more competent, more capable, more resourceful another associated enterprise to boost their credibility if a related entity provides them with a performance guarantee, i.e., pledges to fulfill their contractual obligations in case they fail to do so themselves. Of course, independent party can also issue such guarantee for another enterprises but it cannot be either without cost or without remuneration. Therefore, these performance guarantees are in the nature of financial guarantee....
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....h without any basis. Therefore, those rates are already rejected by us. 064. Accordingly ground number 14 - 16 of the appeal of the assessee is set-aside to the file of the learned assessing officer with a direction to the assessee to benchmarked the above international transaction and produce relevant details of benchmarking to the learned assessing officer/transfer pricing officer, the learned AO/TPO may examine the same and decide the issue in accordance with the law. 065. In the result, appeal filed by the assessee is allowed with the above directions. 066. Now we come to the appeal of the learned AO. The learned AO as per ground number 1 and 2 has challenged non-taxability of bad debts written back and an insurance claim received during the year but pertaining to the years prior to the tonnage tax scheme applicability to the assessee directed by the learned dispute resolution panel to be not taxable. The fact shows that the bad debts written back by the assessee were pertaining to the sale consideration/remuneration received by the assessee in the earlier year written also during the earlier year but written back during this year. Similar is the case with respect to t....