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TaxTMI 
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2023 (9) TMI 1427
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....sment 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 under sub-clause (ii) of Clause 2 of Rule 8D without appreciating t....
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....ithout 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 for benchmarking the financial guarantees given by it on behalf of its Associated Enterprise....
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....recting 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 learned assessing officer referred to the learned transfer-pricing officer for examination of the arm's-length price. The learned transfer-pricing officer noted that Assesse....
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....erprises. 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 account of arm's-length price of Rs. 23,692,073/- and therefore the difference of Rs. 94,768,291/- was made. 06. There is one more performance guarantee given by the assessee ....
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....putation 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 converted into equity shares and the balance were not converted at the option of the warrant holders thereby cancellation of this warrant occurred. Therefore the upfront amount o....
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....37,690/- 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 the learned assessing officer was directed to delete the disallowance of interest expenditure of Rs. 17,944,163. 013. With respect to the disallowance under section 14 A of the act th....
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....se 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 should be taken at 1% of the amount of guarantee. Accordingly, the objections of the assessee were disposed of. 018. Based on this the learned assessing officer passed the final assessment order on....
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....ess 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 dispute is with respect to the disallowance under rule 8D (2) (ii) and (iii) of the rules. It was submitted that the coordinate bench in assessee's own case has decided this issue for assessment year 2008-2009 so far as the interest expen....
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.... 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 8D is applicable from Assessment year 2008-09. In this case, the Assessing Officer has made his calculation as per Rule 8D that are perfectly correct. 025. We have carefully considered the rival contention and perused the orders of the lower authorities. In issue in all these grounds is when....
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.... 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 Scheme , no disallowance u/s 14A can be made. Therefore, the ld AO and ld DRP are incorrect in apportioning interest expenditure and other expenditure, which are part of computation of tonnage tax computation of Total income. The Assessing Officer and the learned DRP have considered the total interest ex....
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....e 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 Capital and Reserves and Surplus in the Balance Sheet as at the year end, the Reserves and Surplus amount to Rs.477593 lakhs and the Share Capital amounts to Rs.15229 lakhs. Hence, non-interest bearing own funds of the company aggregate to Rs.492822 lakhs. The investments held by the company, as at the year-....
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....l 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 read with Rule 8D of the Income-tax Rules, 1962. Honorable Bombay High court in THE COMMISSIONER OF INCOME TAX, MUMBAI V. JSW ENERGY LTD. 2015 SCC ONLINE BOM 5243 has also held that such adjustment is not permitted. Therefore adjustment to the book profit as computed u/s 115 JB of the act and further increasing it by disallowance computed u/s 1....
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....mance 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 rate of 0.60% and made suo moto adjustment of Rs, 76,08,000/-. 039. During the financial year 2008-09,relevant to the Assessment Year 2009-10, the year under consideration), the Associated Enterprise - GGES availed a bridge loan of USD 90 million from the Bank of Nova Scotia. The AE had drawn USD 70.47 million equivalents to INR 357.42 crores of the sai....
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....larly, 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 Year 2008-09 should be followed in Assessment Year 2009-10 for the following reasons: a. Consistency b. Guarantee given by the Appellant to the ICICI Bank in the Assessment Year 2007-08 continued in the Assessment Years 2008-09 and 2009-10. In other words, the same financial guarantee is involved as far as guarantee given to ICICI Bank is concerned. c. Internal CUP was accepted by the Tribunal in the case....
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.... 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 Bank @ 0.60% p.a. e. The Tribunal observed that the guarantee commission paid by the assessee company to ICICI Bank was a very good parameter and a comparable for taking it as internal CUP and comparing the same with the transaction with the AE. viii. In the case of the Appellant, the facts of the Appellant and that of Everest Kanto are identical and therefore the decision of the Tribunal and jurisdictional High Court needs to be followed in the case of the Appellant. ix. The Appellant relies on the following decisions wherein ....
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.... 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 commission (page 146 of the paper Book). He further referred to the decision of Tribunal in the case of Greatship (India) Ltd. in ITA NO.1287/Mum/2017 decided on 05/04/2020. The Tribunal after considering various case laws, wherein different rates for guarantee commission were charged, upheld 0.43% commission p.a. charged by the assessee as ALP. In the instant case, the TPO had made adjustment by determining guarantee commission @3%. The rate of guarantee commission was restricted by the DRP to 1.5%. As is evident from the letters from various banks on record, different rates of guarantee commission are charged b....
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....g 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 guarantees at the rate of 0.55%. Therefore, there was no dispute with the method i.e. CUP method as well as the comparables selected as average corporate guarantee charges charged by the bankers. As average corporate guarantee charged by the bankers on the assessee is 0 .56%, is compared with the corporate guarantee issued by the assessee to the bankers on behalf of its associated enterprises, in any way cannot exceed 0.56%. Therefore, the adjustment made by the assessee is at maximum. Therefore, even otherwise, when the assessee has offered the income being adjustment of ALP of international transaction more than what....
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....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 given on behalf of its AEs. The Appellant submits that if one were to take a comprehensive view of the arrangement between the Appellant and its AEs, one would conclude that if the Appellant was to, for whatever reason, called upon to perform its obligations in respect of the performance guarantees, the Appellant would step into the shoes of the AE and take delivery of the relevant vessel under construction and easily use it in its own business. 052. In the immediately preceding Assessment Year 2008-09 (i.e. the first year of furnishing of such performance guarantees), the TPO held that "From the above it is clear that the....
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....012, 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 nature and will apply w.e.f. 1.4.2012. The Appellant relies on the following decisions: a. Jindal Steel & Power Ltd. (ITA No.893/Del/2014)(ITAT, Delhi Bench). b. Dr. Reddy Laboratories Ltd. (81 taxmann.com 398)(ITAT, Hyderabad Bench). c. Rusabh Diamonds (68 taxmann.com 141)(ITAT, Mumbai Bench) d. KGK Enterprises (88 taxmann.com 264)(ITAT, Jaipur Bench) iv. Without prejudice to the contention in Points 1 to 3 above, the Appellant submits that under the performance guarantees given to the shipyards, the obligation is to acquire and take delivery when the construction of the vessel is completed, in case of any failure of the subsidiary to do so, and become owner of the vessel. On th....
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....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 taken unless the Appellant directly or indirectly through its immediate wholly owned subsidiary, Greatship (India) Ltd. or through guarantees to banks and shipyards agrees to fund the acquisition of vessels. e. Greatship (India) Ltd. infused USD 94.06 million and USD 66.96 million as share capital into GGOS and GGES respectively for acquisition of the vessels. f. One of the AE‟s GGES borrowed monies from Bank of Nova Scotia for which the Appellant gave a financial guarantee, whose arm's length price was benchmarked @ 0.60% p.a. g. Further, in cases of guarantees given by the holding company on behalf of its wholly owned step down subsidiary actually compensates for the inadequacies in the financial position of the subsidiary, specifically the fact that the subsidiary does not have enough....
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.... 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 acquired what kind of losses the assessee would incur. It was further submitted that there is no justification that why the assessee has benchmarked the arm's-length price of the performance guarantee facility at Rs. Nil. 057. We have carefully considered rival contentions, used the order of the learned transfer-pricing officer, direction of the learned dispute resolution panel and the order of the coordinate bench in assessee's own case for assessment year 2008 - 09. ITAT (ITA number 197/MUM/2013 (assessment year 2008 - 09)) has held as under :- "20. In ground No.19 to 21 of appeal, the assessee has assailed TP adjustment in respect of Performance Guarantee given by the assessee on behalf of AE. The ld. Counsel for the assessee submitted that the assessee had extended Performance Guarantee in respect of its 100% subsidiary in Singapore to the shipya....
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....orcement 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 of March 2009; certain guarantees were outstanding at the end of the financial year. The fact shows that the orders have been placed by the associated enterprises for construction of 2 vessels with a Singapore entity. Guarantees were given by the assessee on behalf of those associated enterprises that in the event of their failure to perform the agreed contract, assessee will step into the shoes of those associated enterprises and fulfil the obligation. The fulfillment of the obligation is to acquire those two vessels from Singapore entity. Thus, the assessee has given the guarantee to the Singapore entity that a of the associated enterprises default in making payment to that party or default in provision of letter of credit, the appellant would make good to such default. The assessee has entered into a separate agreement with its associated enterprises that in each of the perf....
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....ges 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 guarantees only. Undoubtedly, in these financial guarantees there is a requirement to determine the expected loss arising out of that if the probability of invocation of the guarantee/default arises. Over and above, there is risk mitigation also in the form of acquisition of vessels. Therefore, the issuance of performance guarantee by the assessee in favour of the associated enterprises to a Singapore entity is a financial guarantee transaction, which is less unfavorable to the assessee compared to the financial guarantee transaction issued to the bankers, requires to be benchmarked as it involves the financial risk on the assessee by adopting one of the methods as the most appropriate method. Merely because, vessels would be used in the business of the assessee, it does not reduce the financial implication as and when guarantee is invoked. Therefore, such a consideration is superfluous.....
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....le. 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 the insurance clam received during the year pertaining to earlier years. According to the assessing officer both these income should be out of the tonnage tax income of the assessee and should be taxed separately. The learned dispute resolution panel has directed the AO to not to include these to receipt separately as for this year the income would be taxed on the basis of tonnage tax scheme. 067. On careful consideration of the order of the learned AO and the direction of the learned DRP and considering the rival contention, we find that for this assessment year the assessee is chargeable to tax on the basis of the tonnage tax scheme. We find that the logic and reason given by the learned assessing officer for separately taxing the above income is unjustified in view of the fact that had there been a bad debt arising out of the sale made by the assessee prior to the tonnage tax regime would have been allowed t....