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

Opening his argument, Sh. Ajay Vohra, learned Senior 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 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 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:

He submitted, the CIT has committed gross jurisdictional error 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 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 such contention, learned counsel relied upon the following decisions:

Proceeding further, learned counsel submitted, the assessee is 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.

In this context, be relied upon a decision of the Hon’ble Supreme Court in case of Pr. CIT Vs. Maruti Suzuki India Ltd., [2019] 416 ITR 613 (SC).

Without prejudice, he submitted, the question whether the 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 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.

Strongly relying upon various observations made by learned 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 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, 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.

He further submitted, transactions between two non-residents 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:

At this stage, we must observe, in course of assessment 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.

Furnish copy of Income Tax Computation, Profit & Loss Accounts, Balance Sheet, Audit Report in form 3CA/3CB/3CD, 3CEB (u/s 92E r.w.r. 10E) etc. (if applicable) for the last two years. 3. Furnish copy of Tax Residency Certificate. 4. Details of invoices raised to the Indian Customers/Income received during the relevant year. 5. Please furnish the nature of receipts along with the total amount received against these services during the year under consideration. 6. Please furnish whether value of international transactions in services have been correctly shown in Form 3CEB and return of income and correctly offered for tax for the year under consideration. 18. In response to the query raised in the questionnaire, the 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:

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.

Keeping in perspective the aforesaid facts, if we examine the 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.

Even otherwise also, learned CIT has misconceived the facts 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 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.

In any case of the matter, the Revenue certainly cannot control 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 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.

One more allegation made by the CIT to hold that the assessee 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 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.

As could be seen, holding the assessee not to be a tax resident 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 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.

In any case of the matter, whether the assessee is entitled to treaty benefit or not is a highly debatable issue, hence, on such an issue an order cannot be considered to be erroneous and prejudicial to the interest of Revenue.

Lastly, we will deal with the decision of learned CIT in treating 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.

Though, before us, learned Departmental Representative made 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 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.

Insofar as, the judicial precedents cited before us by learned 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 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.

In view of the aforesaid, we set aside the impugned order of 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.

In the result, the appeal is allowed.