TATA NYK SHIPPING PTE. LTD. ,SINGAPORE vs. CIT INTERNATIONAL TAXATION-3, NEW DELHI

per the domestic law of the country. Therefore, the assessee cannot

be treated as tax resident of Singapore as it is not liable to tax in

Singapore. Thus, the assessee is not entitled to any tax treaty

benefit. Having held so, he further observed that the assessee

cannot be considered to be a legitimate resident of Singapore. After

referring to Base Erosion and Profit Shifting (BEPS) reports in

ITA No.1067/Del/2022 AY: 2016-17

relation to treaty abuse, he observed that India has ratified

Multilateral Instrument (MLI) which came into force in India from

1st October, 2019 and provisions will have effect on India’s DTAAs

from financial year 2020-21 onwards. He submitted, once MLI

provisions are given effect, tax residents using treaty shopping to

avoid payment of legitimate tax would no more be entitled to treaty

benefits. He observed, as per the details available, assessee’s

income is primarily from Tata group companies for transportation of

goods from various places in the world to Indian ports. The

operation of shipping activities is managed and supervised by NYK

India. There is rarely any sourcing and transportation of goods from

Singapore to Indian ports. Therefore, there is no commercial

rationale of incorporation of assessee in Singapore as a joint

venture of Indian and Netherlands based companies. Thus,

according to him, the interposing of assessee is only for getting

benefits under India–Singapore DTAA. He observed, there is a back

to back arrangement as receipts derived from Indian ports are

immediately passed on to other group entities in the form of lease

rental payments resulting in minimal taxation, even at the level of

ITA No.1067/Del/2022 AY: 2016-17

Singapore. He observed, the assessee has employed a sale and lease

back arrangement to create artificial payments in the form of lease

rental with an objective to reduce tax liability in Singapore. Vessels,

which are actually owned by the assessee are sold to group entities

and immediately leased back. This is done to maintain commercial

status quo while reducing the taxability by making a tax deductible

lease rental payment as the assessee becomes a lessee. At the level

of lessor the lease rental income is offset by the claim of

depreciation being the owner of the asset after execution of sale and

lease back arrangement. In this process, the tax liability is reduced

under the domestic laws of both countries. He observed, since

benefits similar to Article 8 of India–Singapore DTAA is not available

either under India–Netherlands DTAA or India–Japan DTAA and

shipping income is also differently treated in India, Netherlands and

Japan, the assessee has been interposed as a company in

Singapore to derive maximum tax benefit. Thus, he held that the

arrangement lacks commercial reasoning. Ultimately, learned CIT

held that the assessee is not entitled to the benefits of India–

Singapore DTAA due to the following reasons:

ITA No.1067/Del/2022 AY: 2016-17

available, the receipts of the assessee have to be taxed under the

Income Tax Act by applying the source rule as per section 5(2) read

with section 9 of the Act. Having held so, he proceeded to determine

the nature of income at the hands of the assessee. In this context,

he observed that the shipping income earned by the assessee

cannot be treated as business income as the definition of royalty

under Explanation 2(iva) provides, the use or right to use any

industrial, commercial or scientific equipment as royalty. He

observed, since, the receipts of the assessee from Indian customers

is for letting out of vessels, therefore, they have to be treated as

royalty income, once, section 44B would not apply as its scope 12

ITA No.1067/Del/2022 AY: 2016-17

extends only to business income. Thus, basis the aforesaid

reasoning, he held the assessment order to be erroneous and

prejudicial to the interest of Revenue and directed the Assessing

Officer to treat the receipts of USD $13,62,19,221/-

(Rs.903,54,20,929/-) as income from royalty and taxed it at the rate

of 10% on gross basis. Accordingly, he passed the order.

Counsel appearing for the assessee submitted that assessee’s case

was selected for limited scrutiny to examine, whether the value of

international transaction in services have been correctly shown in

Form 3CEB and return of income. In this context, he drew our

attention to notice dated 19.07.2017 issued under section 143(2) of

the Act. He submitted, as per Instruction no. 20 of 2015, dated

29.12.2015 issued by Central Board of Direct Taxes (CBDT), in

limited scrutiny assessments, the inquiry by the Assessing Officer

would remain confined only to the specific issues for which the case

has been picked up for scrutiny. Drawing our attention to

Instruction no. 5 of 2016, dated 14.07.2016 issued by CBDT,

learned counsel submitted that the limited scrutiny assessments

ITA No.1067/Del/2022 AY: 2016-17

should be restricted to the relevant parameters that form the basis

for selecting the case for scrutiny. He submitted, by Instruction

dated 30.11.2017 CBDT issued further directive on scope of limited

scrutiny and re-emphasized that the Assessing Officer cannot travel

beyond the issues for which the case was selected for scrutiny. He

submitted, strictly adhering to directives of the CBDT in the

Instructions issued, the Assessing Officer issued questionnaire

along with notice under section 142(1) of the Act by calling for

information in relation to the limited scrutiny issues. He submitted,

in response to the questionnaire issued by the Assessing Officer, the

assessee furnished a detailed reply with supporting evidences and

details called for by the Assessing Officer. He submitted, since, the

assessee had entered into international transactions with AEs, the

Assessing Officer made a reference to the TPO in terms of section

92CA(1) of the Act to examine the arm’s length nature of such

transactions. He submitted, the TPO passed an order under section

92CA(3) of the Act holding that the international transactions

referred in Form 3CEB are at arm’s length requiring no further

transfer pricing adjustments. In view of the order passed by the

ITA No.1067/Del/2022 AY: 2016-17

TPO, the Assessing Officer proceeded to complete the assessment

under section 143(3) of the Act accepting the income returned by

the Assessee. He submitted, since, the mandate of the Assessing

Officer was to examine the limited scrutiny issues and he could not

have travelled beyond them in view of the CBDT

Instructions/directions, under the garb of revisionary jurisdiction,

the CIT cannot venture into examining issues, which the Assessing

Officer could not have examined in the assessment proceedings due

to the mandate of limited scrutiny assessment. Thus, he submitted,

what the Assessing Officer could not have done directly, cannot be

done indirectly by the CIT in revisionary jurisdiction. In support of

such contention, he relied upon the following decisions:

ITA No.1067/Del/2022 AY: 2016-17

in invoking powers under section 263 of the Act in respect of issues

which are beyond the scope of limited scrutiny for which the

assessment proceedings were initiated. Thus, he submitted, the

Revision Order passed is nonest and bad in law. Without prejudice,

he submitted, the assessment order passed accepting the return of

income cannot be held to be erroneous and prejudicial to the

interest of the Revenue only for not bringing to tax income from

shipping in international traffic. He submitted, as per Article 8 of

Indian–Singapore DTAA, income earned from shipping business in

international traffic is taxable only in the country of residence of the

person/entity earning such income. He submitted, since, Assessing

Officer’s decision accepting assessee’s claim is in consonance with

Article 8 of India–Singapore DTAA, the assessment order cannot be

held to be erroneous. Referring to the decision of the Hon’ble

Supreme Court in case of Malabar Industries Co. Vs. CIT, 243 ITR

ITA No.1067/Del/2022 AY: 2016-17

83 (SC), learned counsel submitted, for invoking section 263 of the

Act twin conditions of the order being erroneous and at the same

time being prejudicial to the interest of the Revenue have to be

satisfied. He submitted, since, the assessee is a tax resident of

Singapore having valid TRC, Assessing Officer’s decision in allowing

exemption in respect of income from shipping business in

international traffic under Article 8 of the Treaty cannot be said to

be erroneous and prejudicial to the interest of Revenue. Drawing

our attention to Article 8 and specifically to the definition of the

expression “international traffic”, he submitted, as per the treaty,

transportation income from movement of cargo from one port in

India to a port outside India (outward freight) and income from

movement of cargo from one port outside India to a port in India

(inward freight) derived by a resident of Singapore is exempt from

tax in India. Whereas, he submitted, income from movement of

cargo from one port in India to another port in India is not covered

under Article 8 of the treaty. Hence, the assessee has offered such

income to tax in India under the provision of section 44B of the Act,

which is applicable to income from shipping business. In support of

ITA No.1067/Del/2022 AY: 2016-17

such contention, learned counsel relied upon the following

decisions:

resident of Singapore and is holding a valid TRC issued by

Singapore Tax Authorities, the assessee is entitled to benefit of

India–Singapore DTAA. He submitted, the TRC issued by another

sovereign State has to be accepted as evidence of residency of a

particular assessee and the revenue cannot go behind the TRC to

question the residential Status. In this regard, learned counsel

referred to the clarification dated 01.03.2013, issued by the Finance

Ministry. Further, he relied upon the following decisions:

ITA No.1067/Del/2022 AY: 2016-17

a tax resident of Singapore since its incorporation in 2007 and has

been filing its tax returns in Singapore. He submitted, the tax

returns filed by the assessee have been accepted by the Singapore

Tax Authorities all along without any adverse decision/remark,

either regarding the activities or the authenticity of the assessee. In

this regard, he drew our attention to tax returns filed in Singapore.

He submitted, when the Singapore Authorities have not made any

allegation with respect to non-fulfillment of any condition

mentioned under Article 4 of Indian – Singapore DTAA, no question

can be raised by the CIT regarding the residency of the assessee. He

submitted, as per the legal requirement in Singapore, the assessee

is regularly filing its annual return with Accounting and Corporate

Regulatory Authority (ACRA) in Singapore. Further, the assessee is

also required to obtain audited local business spending report as

per the directive issued by Maritime and Port Authorities of

Singapore (MPA) and assessee has obtained such report from the

auditor for the year under consideration. He submitted, the entire

shipping operations of the assessee are managed from Singapore

ITA No.1067/Del/2022 AY: 2016-17

and all key managerial personnel, i.e., Managing Director, Executive

Director, Chief Financial Officer, and Chartering Operation & Legal

Head are based in Singapore. In this regard, he drew our attention

to the list of key managerial persons with address, designation and

National Registration Identity Card number of Singapore. He

submitted, the assessee owns substantial fixed assets of USD

260,625,000/- (Rs.1,728 crores) in Singapore and majority of which

pertain to vessels. In this context, he drew our attention to the

balance sheet and notes attached to the balance sheet. Thus, he

submitted, it cannot be said that the assessee is not a tax resident

of Singapore and is not having any commercial substance. He

submitted, in past assessment years, assessee’s income from

international traffic has been held to be not taxable in India and

this is the first year in which, the CIT has held that income derived

from shipping business in international traffic is liable to tax in

India. He submitted, when the facts in this assessment year are

identical, the Revenue cannot be permitted to take a different view.

In this context, be relied upon a decision of the Hon’ble Supreme

ITA No.1067/Del/2022 AY: 2016-17

Court in case of Pr. CIT Vs. Maruti Suzuki India Ltd., [2019] 416

ITR 613 (SC).

benefit of India–Singapore DTAA is available to the assessee or not,

is a highly debatable issue, hence, outside the scope/ambit of

section 263 of the Act. In this context, he relied upon a decision in

case of CIT Vs. DLF Ltd., 350 ITR 555 (Delhi HC). He submitted,

even assuming for argument sake but not accepting that the

assessee is not entitled to treaty benefits in respect of income from

shipping business in international traffic, such income cannot be

taxed as royalty under section 9(1)(vi) of the Act. He submitted,

when there is a special provision under the Act in shape of section

44B, which provides for computing profits and gains of shipping

business of nonresident, it will override the general provision and

income has to be computed under the special provision. He

submitted, as per section 172 of the Act, in cases where treaty

exemptions were not available, income from shipping business has

to be taxed at the rate of 7.5% of the freight receipts. He submitted,

the revisionary order has given rise to a situation where the income

ITA No.1067/Del/2022 AY: 2016-17

earned from shipping business has been taxed in three different

manners. He submitted, income from coastal shipping has been

taxed under section 44B of the Act. Whereas, the income from

inward shipping has been taxed as royalty under section 9(1)(vi) of

the Act and income from outward shipping has not at all been

brought to tax in India. He submitted, different treatment given to

income derived by the assessee form shipping business shows

inconsistency in the order passed under section 263 of the Act.

Thus, he submitted, the order passed under section 263 of the Act,

being wholly without jurisdiction, should be quashed.

CIT in the revision order, learned Departmental Representative

submitted that the assessee company has been set up in Singapore

only for the purpose of obtaining tax advantage under India–

Singapore DTAA. He submitted, considering the fact that the

assessee is a joint venture between an Indian company and a

Netherlands based company, which in turn is a subsidiary of

Japanese company, ideally, the said venture could have been set up

at Japan or Netherlands or India, as commercial outcome should be

ITA No.1067/Del/2022 AY: 2016-17

similar irrespective of the place of operation. Therefore, choosing the

operation base in Singapore by incorporating the joint venture lacks

commercial reasoning. The primary reason for doing so is to avoid

payment of legitimate tax by availing a favourable tax position

under India–Singapore DTAA as well as under domestic tax regime

of Singapore. He submitted, assessee’s income is primarily from

Tata group companies for transportation of goods from various

places in the world to Indian ports. Further, the operation of

shipping activities is managed and supervised by Tata NYK India,

an Indian subsidiary of the assessee company. Thus, referring to

India–Netherlands DTAA and India–Japan DTAA, learned

Departmental Representative submitted, since, the effective

management of shipping activity is not controlled from Netherlands,

the income from shipping business would be liable for taxation in

India as royalty income. Similarly, scope of Article 8 of India–Japan

DTAA is extremely limited and does not include the nature of profits

as derived by the assessee in the present case. In order to avoid the

payment of legitimate tax, assessee company was interposed in

Singapore to get the benefit of India–Singapore DTAA. More so,

ITA No.1067/Del/2022 AY: 2016-17

considering the fact that shipping income is not subjected to tax in

Singapore. Therefore, it is a classic case of treaty shopping, which is

contrary to the object of DTAA. He submitted, the arrangement in

interposing the assessee in Singapore lacks commercial substance.

As regards assessee’s submission regarding enlarging the scope of

limited scrutiny in revision proceeding, learned Departmental

Representative submitted that though, the assessee had substantial

related party transactions, however, in From 3CEB report, the

assessee has not reported all the transactions. He submitted, in

course of assessment proceedings, the Assessing Officer failed to

call for the necessary details and examine whether all the

transactions with related parties/AEs were reported by the assessee

in Form 3CEB report and return of income. He submitted, while

international transactions with AEs during the year aggregated to

more than Rs. 1141 crores, in Form 3CEB report, the assessee

declared transaction of Rs.63.5 crores only. He submitted, since,

the Assessing Officer failed to examine the issue in terms with

limited scrutiny, the assessment order is erroneous and prejudicial

to the interest of Revenue. Hence, validity of the proceedings

ITA No.1067/Del/2022 AY: 2016-17

initiated under section 263 cannot be challenged. Further, he

submitted, since, the assessee has been interposed as a company in

Singapore only for the purpose of availing benefit under India–

Singapore DTAA and there is back to back arrangement between

the assessee and other group entities for remitting the shipping

income as lease rent, the assessee is merely a conduit company and

entire arrangement lacks commercial substance and has been

created as a tax avoidance structure. Therefore, the assessee is not

entitled to treaty benefits. He submitted, in course of assessment

proceeding, the Assessing Officer has failed to examine this aspect.

Thus, he submitted, learned CIT has validly exercised his

jurisdiction under section 263 of the Act. Hence, the order passed

should be upheld. In support, he relied upon the following

decisions:

neither in the show-cause notice, nor in the order passed under 25

ITA No.1067/Del/2022 AY: 2016-17

section 263 of the Act, the CIT has sought to make out a case that

the Assessing Officer had erred in not examining or verifying the

limited scrutiny issue, i.e whether the value of international

transactions in services have been correctly shown in Form 3CEB

and return of income. He submitted, the CIT has invoked

jurisdiction under section 263 of the Act on extraneous grounds by

bringing to tax income from shipping business, that too, only with

regard to inward freight. Thus, he submitted, at this stage, the

Revenue cannot add/supplement fresh reasons or furnish new

grounds for justifying the invocation of revisionary power. He

submitted, the show-cause notice issued under section 263 of the

Act is not on the basis that the assessee has not correctly reported

its income in Form 3CEB and return of income. Thus, he

submitted, the Revenue cannot provide a new dimension to

revisionary proceedings as it is not permissible at this stage to

substitute the reasons for which the revisionary proceedings were

initiated. In case, it is done, it will amount to exercising revisionary

jurisdiction to revise the order of CIT. In this regard, he relied upon

the following decisions:

ITA No.1067/Del/2022 AY: 2016-17

the assessment and take back benefits granted by the Assessing

Officer, the submissions made by the Revenue to modify the order

of CIT to enlarge the scope of direction of CIT in the order passed

under section 263 of the Act is impermissible. He submitted, the

submissions of learned CIT(DR) that the shipping income from

inward and outward freight was derived out of the transactions with

AEs in terms of section 92A of the Act is totally misplaced in as

much as it is trite law that related parties under the relevant

accounting standard and under the Act are separately defined and

cannot be painted with the same brush. He submitted, AE has to be

determined in terms of sub-section (1) and (2) of section 92A, both

read together. In support of such contention, he relied upon the

following decision:

ITA No.1067/Del/2022 AY: 2016-17

which are exempt from taxation are not required to be reported in

form 3CEB. In support of such contention, he relied upon the

following decisions:

submissions made, both orally and in writing by the parties. We

have also applied our mind to the judicial precedents cited before

us. In the present appeal, we have been called upon to examine the

issue as to whether learned CIT was justified in holding the

assessment order passed under section 143(3) of the Act to be

erroneous and prejudicial to the interest of Revenue, so as to,

subject it to proceedings under section 263 of the Act. As discussed

earlier, the assessee is a tax resident of Singapore and holds a valid

TRC issued in its favour by the Singapore Tax Authorities. It is also

a fact that the assessee is engaged in the business of owning,

ITA No.1067/Del/2022 AY: 2016-17

operating and chartering of ships to carry dry-bulk and break-bulk

cargo. In other words, the assessee operates ships in international

traffic. Assessee’s case for the assessment year under dispute was

selected for limited scrutiny to examine whether the value of

international transactions in services have been correctly shown in

form 3CEB and return of income. As per section 92E of the Act, a

person entering into international transaction or specified domestic

transaction in a particular previous year shall have to obtain a

report from an accountant in a prescribed form duly signed and

verified by the concerned accountant setting forth the information

as prescribed in the form. Rule 10E prescribes that the report from

the accountant has to be furnished in Form 3CEB. Section 92B

defines the expression “international transaction” to mean a

transaction between two or more AEs. In other wards in terms of

section 92E read with rule 10E, an assessee entering into

international transaction with AEs has to furnish an audit report in

From 3CEB reporting all information relating to such international

transaction.

ITA No.1067/Del/2022 AY: 2016-17

16.1 It is observed, in due compliance with section 92E read with

rule 10E of the Act, the assessee had furnished the Audit Report in

From 3CEB reporting international transactions with AEs at

Rs.63,45,14,259/-. Out of which, an amount of Rs.1,92,59,093/-

was received by the assessee from freight services provided to an

AE. Whereas, the rest of the amount was paid towards services

availed from the AEs. Since, the assessee had reported international

transactions with AEs, the Assessing Officer made a reference to the

TPO for examining the arm’s length nature of the international

transactions with the AEs. The TPO passed a clean order under

section 92CA(3) of the Act accepting the transactions with the AE’s

to be at arm’s length. In pursuance to the order of the TPO, the

assessee completed the assessment under section 143(3) of the Act

accepting the return of income.

proceeding, the Assessing Officer had issued a notice under section

143(2) of the Act on 19.07.2017 requiring the assessee to furnish

the requisite information in respect of the limited scrutiny issues.

Subsequently, the Assessing Officer issued a notice under section

ITA No.1067/Del/2022 AY: 2016-17

142(1) of the Act on 01.04.2019 along with a questionnaire to

produce the following information/documents:

assessee furnished its reply on 13.05.2019. The reasons for which

the Revisionary Authority issued the show-cause notice under

section 263 of the Act have been delineated in the earlier part of

this order. In the revision order the Revisionary Authority has

framed the following issues:

ITA No.1067/Del/2022 AY: 2016-17

“The issues are primarily two fold. First, whether the assessment order passed by the AO without calling for relevant details and making necessary verification/inquiry would require revision under section 263 of the Act being erroneous and prejudicial to the interest of revenue. Second, whether the income from shipping in international traffic is exempt from taxation in India in view of Article 8 of India–Singapore DTAA. Third, whether the shipping income from coastal traffic is liable for taxation under section 44B of the Income-tax Act.” 19. Contents of the show cause notice issued under section 263 of

the Act and the issues framed make it evident that there is no

allegation of misreporting by the assessee in Form 3CEB or the

return of income. The allegation is of not making any

enquiry/verification. In this regard, we must say that learned CIT

has completely misconceived the facts. A perusal of Form 3CEB

report, a copy of which is at page 249 of the paper-book, clearly

reveals that out of the amount of Rs.63,45,14,259/- reported by the

assessee, only an amount of Rs.1,92,59,093/- represents income of

the assessee and the rest of the amounts are payments made by the

assessee. In fact, these facts are clearly reflected in the order passed

by the TPO. Whereas, learned CIT has assumed that aggregate

amount of transactions reported in Form 3CEB represents

assessee’s receipts.

ITA No.1067/Del/2022 AY: 2016-17

scope of limited scrutiny, it can be seen that the Assessing Officer

has confined himself to the mandate given to him as per the norms

of limited scrutiny. The questionnaire issued by the Assessing

Officer in course of the assessment proceeding bears testimony to

this fact. When the TPO has accepted the transactions with the AEs

to be at arm’s length, the Assessing Officer had nothing more to do.

Moreover, when the assessee is a tax resident of Singapore holding

a valid TRC issued by the Singapore Tax Authorities, the Assessing

Officer had to grant benefit to the assessee as per the treaty. At the

stage of assessment, the Assessing Officer certainly could not have

enlarged the scope of limited scrutiny to examine, whether the

assessee is entitled to treaty benefits or not, when the TRC is a valid

piece of evidence available before him. Thus, when the Assessing

Officer could not have examined the issues raised by learned CIT

traversing beyond the scope of limited scrutiny, learned CIT cannot

hold the assessment order to be erroneous and prejudicial to the

interest of Revenue for non examination of issues, which are beyond

the mandate given to the Assessing Officer. Therefore, what the

ITA No.1067/Del/2022 AY: 2016-17

Assessing Officer could not have done directly in view of limited

scrutiny norms, in the garb of revisionary powers under section 263

of the Act, learned CIT cannot do indirectly by enlarging the scope

of limited scrutiny. In this regard, we rely upon the decision of

Coordinate Bench in case of Antariksh Realtors Private Ltd. (supra)

and Balvinder Kumar (supra). Therefore, the Assessing Officer

having confined himself to the issues of limited scrutiny, the

Assessment Order passed cannot be considered to be erroneous and

prejudicial to the interest of Revenue.

and misapplied the legal position while concluding that the assessee

is not entitled to treaty benefit as it has been interposed as a

conduit company for treaty shopping purpose. In this regard, the

allegation of learned CIT is 75% of assessee’s receipts from shipping

business is centered around India. Further, the assessee is a JV of

Indian company and a Netherlands based company, which is a

subsidiary of Japanese company. Therefore, there was no

commercial rationale for incorporating Assessee Company in

Singapore. Learned CIT has alleged that only for the purpose of

ITA No.1067/Del/2022 AY: 2016-17

availing the benefits under India-Singapore Treaty the assessee has

been set up in Singapore as similar benefit could not have been

availed by the assessee either under India–Netherlands DTAA or

India–Japan DTAA. Having regard to the aforesaid allegation of

learned CIT, we must observe that the assessee company was

incorporated in Singapore in the year 2007 and continued its

business since then. It is also a fact that the assessee holds

substantial fixed assets in Singapore amounting to Rs.1728 croers,

out of which, an amount of Rs.1324 crores pertains to vessels. It is

also a fact that Singapore has grown into a large shipping hub in

the world. Therefore, there is valid reason for setting up of the

assessee company in Singapore for shipping business.

the mode and manner in which the assessee wants to carry on its

business activity. If the assessee is constituted within a legal

framework and its activities are legal, Revenue certainly cannot step

into the shoes of the assessee to question the business prudence. It

is also relevant to observe, though, learned CIT has made serious

allegations regarding scheme of tax avoidance, the arrangement

ITA No.1067/Del/2022 AY: 2016-17

lacking commercial rationale and substance, conduit company,

avoiding payment of tax in Singapore and Netherlands etc.,

however, these are found to be unilateral allegations without any

corroborative evidence. Facts and materials on record reveal that

the assessee regularly files tax returns before the tax authorities in

Singapore. It also files reports before the corporate affairs

authorities. There is no allegation by any of the authorities in

Singapore or Netherlands against the assessee. That being the case,

the allegations made by learned CIT that the assessee has not paid

legitimate tax dues in Netherlands and Singapore are

unsubstantiated, inasmuch as, are either baseless or imaginary.

cannot be considered to be a tax resident of Singapore is because

its key person is also a key person in Tata NYK India. However, from

the materials placed before us, we find the aforesaid allegation of

learned CIT to be baseless. From the list of key managerial

personnel furnished in the paper-book it is observed that all key

managerial personnel are based in Singapore and were holding

National Registration Identity Card issued by the Government of

ITA No.1067/Del/2022 AY: 2016-17

Singapore. It is also relevant to observe, whether the assessee is a

tax resident of Singapore or not is a highly debatable issue and has

to be decided based upon evidence gathered through proper

investigation. Conclusion on these issues cannot be reached on

conjectures, surmises, doubts and suspicion. Therefore, not only

they are outside the scope of limited scrutiny, but, based on such

debatable issues proceedings under section 263 of the Act cannot

be invoked. Further, learned CIT has observed that the assessee

cannot be treated as tax resident of Singapore as it is not liable to

tax in Singapore. Reason being, shipping income is exempt from

taxation in Singapore. In this context he has referred to Article 4(1)

of the India-Mauritius DTAA. However, he has completely ignored

the fact that unlike India-Mauritius Treaty, there is no such

condition that a person liable to tax can only be a resident as per

definition of resident under Article 4 of India-Singapore DTAA. In

any case, whether a particular person is a resident of a particular

country or not is a highly debatable issue requiring interpretation of

treaty provisions. It is more so in a case where the assessee is

holder of valid TRC as TRC is recognized to carry proof of residency.

ITA No.1067/Del/2022 AY: 2016-17

of Singapore, learned CIT has observed that the assessee is liable to

be taxed under the domestic law. Having held so, he has held that

the receipts from shipping business in international traffic cannot

be treated as business profit to be taxed under section 44B of the

Act. He has held, since, the assessee leases vessels and earns lease

rentals, such receipts are to be treated as royalty under section

9(1)(vi) read with explanation (2)(iva), as, it amounts to equipment

royalty. While coming to such conclusion, learned CIT has observed

that the assessee does not own any ships/vessels but has taken

them on lease from NYK Japan through its subsidiary based in

Netherlands. On perusal of record, including the balance sheet of

the assessee, we find the aforesaid observations contrary to facts

and materials on record. As per the balance sheet of the assessee,

the assessee owns substantial number of vessels and large numbers

of vessels are under construction. It is further observed that

contrary to the allegation of learned CIT, the assessee has not

entered into any back to back arrangement, wherein, receipts

derived by it from Indian customers has been passed on to other

ITA No.1067/Del/2022 AY: 2016-17

group entities in the form of lease rent. Further, the assessee has

not entered into any transaction of sale and lease back of vessels in

the year under consideration. It is also evident that the assessee

has not paid any lease rent to NYK Netherlands and even NYK

Netherlands has not paid any dividend to NYK Japan. Therefore, the

allegations of learned CIT are not borne out from record. As per

Article 8 of India–Singapore DTAA receipts from operation of ships

and aircrafts in international traffic is taxable in the country of

residence of the recipient. Therefore, as per the treaty provisions,

amounts received by the assessee from operation of ships in

international traffic would be exempt. Therefore, when the TRC was

available before the Assessing Officer, in a way, he was justified in

allowing benefit to the assessee under Article 8 of the Treaty.

Though, the view of the Assessing Officer in granting benefit under

treaty provisions may not be the only view but certainly it is one of

the possible views under the given facts and circumstances.

treaty benefit or not is a highly debatable issue, hence, on such an

ITA No.1067/Del/2022 AY: 2016-17

issue an order cannot be considered to be erroneous and prejudicial

to the interest of Revenue.

the receipts from operation of ships in international traffic to be in

the nature of royalty income. As discussed earlier, the assessee

owns substantial number of vessels for transportation of goods from

the ports outside India to ports in India and vice versa. Invoices

raised by the assessee demonstrate that the assessee charged fee

for transportation of goods and not towards leasing of the vessels.

Therefore, the finding of learned CIT that the receipts from the

shipping business is in the nature lease rental, hence royalty,

appears to be contrary to facts on record. At this stage, we must

observe, the assessee had three types of shipping income in the year

under consideration, viz., income from coastal shipping, income

from inward freight and income from outward freight. Insofar as,

income from coastal shipping is concerned, the assessee has offered

it to tax under section 44B of the Act. Whereas, income from inward

freight and outward freight was claimed as exempt under Article 8

of the treaty. Interestingly, learned CIT has held the inward freight

ITA No.1067/Del/2022 AY: 2016-17

income as royalty and has directed the Assessing Officer to tax such

income amounting to Rs.903,54,20,929/- by applying the rate of

10% on gross basis. However, in respect of income from coastal

shipping and outward freight, learned CIT has accepted the claim of

the assessee as his specific direction is only with regard to the

income from inward freight. Further, though, in the show cause

notice issued under section 263 of the Act learned CIT has observed

assessee’s receipts are in the nature of FTS, however, ultimately he

has treated a part of the receipts as royalty. Thus, there are gross

inconsistencies in the approach of learned CIT. A conjoint reading of

the show cause notice as well as order passed under section 263 of

the Act coupled with the fact that ultimately he has restricted his

directions only to inward freight income, thereby, accepting

assessee’s claim under section 44B in respect of income from

coastal shipping and claim of exemption under Article 8 of the

treaty in respect of income from outward freight amounting to

Rs.56,13,86,432/-, reveals the mechanical approach of learned CIT

in invoking jurisdiction under section 263 of the Act. Meaning

thereby, various inconsistencies in the approach of learned CIT

ITA No.1067/Del/2022 AY: 2016-17

gives an impression that he himself was not sure about the nature

and character of shipping income earned by the assessee.

a submission that the deficiencies/shortcomings in the order

passed under section 263 of the Act can be made good by the

Tribunal, however, we are not impressed with such argument. In

our view, we cannot assume the role of a second Revisionary

Authority to review the order of learned CIT and fill up the lacunae

in the said order. It is relevant to observe, in course of hearing,

learned Departmental Representative has made extensive argument

on the issue of treaty shopping, non-reporting of transactions with

AEs in Form 3CEB report and various other issues. However, we are

not able to take cognizance of such arguments as such issues were

neither dealt with by learned CIT in the show-cause notice, nor in

the revision order, hence, are extraneous for the purpose of

adjudicating the validity of the order passed under section 263 of

the Act. In case of DIT vs Shree Nashik Panchvati Panjrapole

(supra), the Hon’ble Bombay High Court has held that an appeal

arising out of an order passed under section 263 of the Act has to

ITA No.1067/Del/2022 AY: 2016-17

be decided only on the grounds based on which the CIT exercised

powers of revision under section 263 of the Act. Therefore, at this

stage, learned Departmental Representative cannot improve upon

the basis and reasoning on which learned CIT has assumed

jurisdiction under section 263 of the Act and passed the impugned

order. In any case of the matter, whether a particular entity is an

AE depends upon fulfillment of both conditions of section 92A and

is a matter of deep enquiry and investigation. Neither learned CIT

has made any allegation that all transactions of the assessee are

coming within the definition of “international transaction” nor there

is any specific allegation that such transactions are with AEs.

Rather, it is evident, the major factor for initiating proceeding under

section 263 of the Act is the assessment order passed for

assessment year 2018-19, which, in any case, was posterior to

completion of assessment for the impugned assessment year.

counsel for the assessee, though, we do not find the need to

deliberate in detail on them, suffice to say, they support the view

expressed by us in foregoing paragraphs. Thus, in ultimate

ITA No.1067/Del/2022 AY: 2016-17

analysis, we hold that learned CIT was not justified in assuming

jurisdiction under section 263 of the Act to revise the assessment

order as the assessment order cannot be considered to be erroneous

and prejudicial to the interest of revenue.

learned CIT passed under section 263 of the Act and restore the

assessment order. Before parting, we must observe, our

discussions, observations and findings in foregoing paragraphs are

purely in the context of validity of exercise of revisionary jurisdiction

within the contours of section 263 of the Act.

Order pronounced in the open court on 9th March, 2023

Sd/- Sd/- (PRADIP KUMAR KEDIA) (SAKTIJIT DEY) ACCOUNTANT MEMBER JUDICIAL MEMBER

Dated: 9th March, 2023. RK/- Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR Asst. Registrar, ITAT, New Delhi