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Income Tax Appellate Tribunal, “K” BENCH, MUMBAI
Before: SHRI PRASHANT MAHARISHI, AM
Cross Appeals For assessment year 2009 – 10 [ITA number 3272/M/2015] filed by the Deputy Commissioner of Income Tax- 5 (3) (2), Mumbai (The Learned AO) and [ITA number 1656//M/2014] by The Great Eastern shipping Co Ltd, Mumbai (The Appellant/Assessee) challenges correctness of assessment order passed under section 143 (3) read with section 144C (13) of The Income Tax Act, 1961 (The Act) dated 15/1/2014 by The Deputy Commissioner Of Income Tax Circle 5 (3), Mumbai (The Learned AO) pursuance to the direction issued by The Dispute Resolution Panel – II, Mumbai [ The Ld DRP ] in objection number 95 dated 20/12/2013 in case of draft assessment order passed under section 144C (13) passed by the assessing officer on 15/3/2013.
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
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 the fact that the interest expenditure pertaining to the tonnage activities was not claimed by the Appellant against the non-tonnage activities.
3. The learned DRP further erred in directing the AO that in case the disallowance of interest expenditure computed under sub-clause (i) of Clause 2 of Rule 8D as above, exceeded the interest expenditure pertaining to the non-tonnage activities, the disallowance should be restricted to the extent of such interest expenditure, without appreciating the fact that such interest expenditure incurred for non- tonnage activities pertained to borrowings which were utilised for earning tax free and taxable income.
4. Without prejudice to Ground Nos. 2 and 3, the AO erred in considering the interest expenditure claimed against the non-tonnage activities at Rs 7,76,00,000/-, without excluding the interest
5. Without prejudice to what is stated in the above Ground Nos. 2 to 4 and in any event, the Appellant submits that the disallowance computed at Rs.7,76,00,000/- is not only erroneous, but also grossly excessive and arbitrary, and the same requires to be reduced substantially.
6. The learned DRP erred in confirming the disallowance of administrative and other expenditure aggregating to Rs.5,56,16,741/- computed in accordance with sub-clause (i) and (ii) of Clause 2 of Rule 8D towards the earning of exempt dividend income, as the same includes an adhoc amount of Rs.5,42,28,250/- computed in accordance with sub- clause (iii) of Clause 2 of Rule 8D at 0.5% of the average value of investments yielding tax free income, when in actual fact the aggregate actual administrative expenditure incurred by the Treasury Division of the Appellant was Rs.81,69,317/-
7) Without prejudice to the above Ground No.6 and in any event, the Appellant submits that the disallowance computed at Rs.5,56,16,741/- is grossly excessive and arbitrary and can in no event exceed Rs. 13,88,491/-, which is the proportionate amount computed on the basis of the actual administrative expenditure of Rs.81,69,317/- incurred by the 8) Without prejudice to the aforesaid Ground Nos.2 to 7, the learned DRP erred in rejecting the contention of the Appellant that the provisions of Section 14A of the Act are not applicable to investments held as stock-in-trade.
9) The AO erred in computing the tax on Long Term Capital Gains at 20% as against the correct rate of 10%, while faming the Assessment Order under Section 143(3) r.w.s. 144C(13) of the Act.
10. The AO erred in not granting credit for tax deducted at source aggregating to Rs 12,62,041/- while framing the Assessment Order under Section 143(3) rw.s. 144C(13) of the Act, without assigning any reasons for the non-grant of such credit.
TRANSFER PRICING ISSUES
11) The Assessing Officer (AO) / Transfer Pricing Officer (TPO) erred in making adjustments under Section 92CA(3) without providing reasons as to which condition of Section 92C(3) had not been satisfied.
Financial Guarantees given on behalf of the Associated Enterprise
12) The AO TPO erred in rejecting the arithmetic mean of internal comparable rates of guarantee commission of 0.60% per annum adopted by the 13) The AO/ TPO erred in holding that the arm's length price of the financial guarantees given by the Appellant on behalf of its Associated Enterprise was 1.5% per annum.
Performance Guarantees given on behalf of the Associated Enterprises
14) The AO/TPO erred in holding that the performance guarantees given by the Appellant on behalf of its Associated Enterprises constitute "international transaction" under Section 92B of the Act.
15) Without prejudice, the AO/ TPO erred in rejecting the Appellant's contention that having regard to the facts and circumstances of the case, the arm's length price of the performance guarantees given by the Appellant on behalf of its Associated Enterprise was NIL
16) The AO/ TPO erred in holding that the arm's length price of the performance guarantees given by the Appellant to its Associated Enterprises was 1% per annum.
The Appellant craves leave to add to, alter or amend, the above Grounds of Appeal as and when advised.”
In ITA number 3272/M/2015 filed by the learned assessing officer following grounds of appeal are raised
“On the facts and circumstances of the case and in law, the Hon'ble DRP erred in law in directing that the shipping debts written back of Rs. 42,73,847/- be treated as part of tonnage tax income when the corresponding write off of the shipping debts as bad debts was done prior to the introduction of the tonnage tax scheme and as such the write back of such debts is not liable to be treated as Income arising out of tonnage tax activities carried out during the previous year relevant to the AY 2009-10.
(ii) On the facts and circumstances of the case and in law, the Hon'ble DRP erred in law in directing that the insurance claims received of Rs. 6,37,690/- be treated as part of tonnage tax income when the corresponding expenditure for which the claim was received was incurred in an earlier year when the tonnage tax scheme was not in existence and as such the insurance clam received in the previous year relevant to the AY 2009-10 was liable to be taxed u/s 41(1) and could not be treated as income arising out of tonnage tax activities carried out during the previous year relevant to the AY 2009-10.
(iii) On the facts and circumstances of the case and in law, the Hon'ble DRP erred in law in directing that the amount of Rs. 15,98,00,000/- forfeited and credited to Capital Reserve Account on account of non- conversion and forfeiture of Rs. 45,95,000 equity share warrants was neither taxable under section (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”
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 ₹ 1,040,312,390. It was picked up for scrutiny.
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 Assessee Company has a subsidiary in Singapore being agent of the assessee and renders agency services to the assessee company. The principal activity of the associated enterprise is to perform the role of shipping agent in Singapore. The assessee company has appointed the above company as a shipping agent for attending to the assessee company shipped following at Singapore. The subsidiary also incurs expenses on behalf of the assessee company has a
There is one more performance guarantee given by the assessee company in favour of its associated enterprises of ₹ 659 crores. The above transaction was not reported as an international transaction and no guarantee fee was also adjusted. The learned transfer-pricing officer was
Accordingly order under section 92CA (3) of the act was passed on 11/1/2013 wherein the total adjustment of ₹ 292,719,478/- was made on account of the arm‟s-length price of the international transaction of corporate guarantee fee income and performance guarantee fee income.
During the course of assessment proceedings the learned assessing officer noted that assessee company has shown an amount of ₹ 29.25 crores as dividend income, and ₹ 7,530,572 has been treated as expenditure attributable to earning of dividend income and amount of ₹ 283,156,857 has been claimed as exempt under section 10 (34) of the income tax act. The learned assessing officer questioned the assessee and asked the assessee to furnish details of the same and to furnish the details of expenditure incurred or attributable for earning of these
During the year the learned assessing officer noted that assessee company has credited and amount of ₹ 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 ₹ 300 ₹ 12.75 per share. Each of such warrant was convertible into an equity share of the face value of ₹ 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
The learned assessing officer further found that assessee‟s computation of income for tonnage tax scheme, has interest expenditure of ₹ 77,574,874, which has been claimed, as deduction against the assessee is non-tonnage tax activities. The assessee was requested to furnish a fund flow statement providing details of the loans taken in the interest expenditure incurred on such loan, which was claimed as part of the non-tonnage tax activities of the assessee company. The assessee furnished the details statement giving the particulars of loan by the interest expenditure and the purpose for which the loan was availed, along with the rate and amount of interest paid on reason for treating such expenditure as part of non-tonnage tax activities. The assessee also submitted the details reasoning for non- consideration of such interest as per last year. The learned assessing officer considered the contention of the assessee and rejected it. It was noted that as per the chart furnished by the assessee the substantial part of interest expenditure relates to loans, which were utilised
The learned assessing officer further noted that there are certain miscellaneous income which have been arising out of shipping that‟s written back amounting to ₹ 4,273,847 and general average claim of ₹ 637,690/– same was added back to the total income of the assessee for the reason that assessee is not entitled to take the benefit of the tonnage tax scheme on this income.
Accordingly draft assessment order was passed on 15/3/2013 determining total income of the assessee at ₹ 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 ₹ 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
With respect to the disallowance under section 14 A of the act the learned dispute resolution panel noted that the learned assessing officer has correctly disallowed invoking the provisions of section 14 A of the act. With respect to the quantum of disallowance, the assessee has disallowed a sum of ₹ 7,530,532/– under section 14 A of the act out of which can amount of ₹ 6,142,041/– was disallowed on account of interest expenditure under rule 8D (2) (ii) of the rules. The AO rejected the same holding that the assessee was having a common pool of funds from which business expenses from tonnage tax activity and non-tonnage tax activity as well as investments are being made and accordingly the disallowance under section 14 A read with rule 8D (2) (ii) was determined at ₹ 205,098,852/– out of the total interest expenses is by the assessee amounting to ₹ 1,536,389,275/–.. In principle, the learned DRP agreed with the contentions of the assessee however directed the learned assessing officer that the total disallowance computed under rule 8D the total interest expenditure debited against the non- tonnage income, the disallowance should be restricted to the total expenditure by way of interest under the head of non-tonnage income only. With respect to the administrative and other expenditure, the assessee has disallowed a sum of ₹ 1,388,491/– the learned assessing
With respect to the other income treating the same as non-tonnage tax income following the decision of the coordinate bench in assessee‟s case for assessment year 2006-07 the objection was accepted.
With respect to the taxation of forfeiture of share application money under section 41 (1) and section 28 (iv) of the act, the coordinate bench held that it is not taxable and therefore the learned assessing officer was directed to delete the addition.
With respect to the arm‟s-length computation of the financial guarantee given by the assessee to the associated enterprise where the learned assessing officer has computed the guarantee commission rate at the rate of 3%, the learned dispute resolution panel directed the learned assessing officer to compute at the rate of 1.5% per annum. For Holdings of the learned dispute shall panel has lifted that there is a declining trend of guarantee commission rate by the banks with respect to the amount involved in that the assessee has given financial guarantee on behalf of its associated Enterprise aggregating to ₹ 484 crores. For the preceding year the
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 ₹ 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.
Based on this the learned assessing officer passed the final assessment order on 15/1/2014 wherein the total income of the assessee was computed at ₹ 3,273,085,570/– only to adjustments were made by the learned assessing officer.
a. arm‟s-length price of the international transaction of ₹ 101,521,838 b. Disallowance under section 14 A of ₹ 125,686,209/– the identical adjustment was also made in the computation of the book profit under section hundred 115 JB of the act.
Thus, assessee aggrieved with the direction of the learned dispute resolution panel conquering with the findings of the learned TPO and the learned AO, the learned AO is aggrieved with the direction of the learned dispute resolution panel directing the learned assessing
By letter dated 30 June 2021, assessee has raised additional ground of appeal against the disallowance confirmed by the learned DRP/assessing officer under section 14 A of the act.
a. The first contention raised in the additional ground is that disallowance under section 14 A, for working out disallowance under rule 8D (2) (ii) and(iii) should be restricted to the investments on which dividend income is received. b. Further the disallowance is challenged stating that there is no objective satisfaction recorded by the AO and further for computing book profit under section 115JB, the disallowance computed in the normal computation of income cannot be imputed while working out the book profit.
We find that all these grounds are in fact related to grounds number 1 to 8 of the appeal of the assessee. Therefore treating them as an alternative claim, it would be dealt with.
As per ground number 1 – 8 of the appeal the assessee is contesting the disallowance under section 14 A of the act. Further three additional grounds raised
by the assessee are also revolving around the disallowance under section 14. A of the act. Contesting the disallowance under section 14. A of the act, the learned authorized representative submitted that assessee is offering its income under the tonnage tax scheme. Assessee has a. there is no interest expenditure liable for disallowance as the own funds consisting of the b. even otherwise that some part of the interest expenditure is liable for disallowance, the interest expenditure attributable to the tonnage tax business is required to be excluded, c. administrative expenses cannot exceed the actual expenditure incurred by the assessee, d. investments on which no exempt dividend income was received by the assessee during the year are to be excluded while computing the disallowance of administrative expenditure under rule 8D (2) (iii) of the act. e. allocation of expenditure between the tonnage tax activity and non-tonnage tax activity is completely explained. f. Reliance placed on decision of the coordinate bench in case of Varun shipping Co Ltd 134 ITD 339 wherein it has been held that where the income of the shipping company is computed as per the tonnage tax scheme, only those expenses incurred for the said business are deemed to have been allowed and no addition to such income can be made by way of a disallowance under section 14 A on account of any expenditure in relation to earning of the exempt dividend income. h. Therefore no further disallowance under section 14 A of the act is required to be made.
With respect to the addition to the book profit under section 115JB of the act by the amount disallowed under section 14 A of the act, it was submitted that same is covered in favour of the assessee by the decision of the special bench in case of [82 taxmann.com 415] as well as in case of the assessee for assessment year 2008 - 2009.
The learned departmental representative vehemently supported the order of the learned lower authorities and submitted that the disallowance under section 14 A of the act has been correctly worked out by the learned assessing officer and confirmed by the learned dispute resolution panel. He submitted that argument of the appellant that they are assessed in Tonnage Tax Scheme; therefore no disallowance should be made cannot be accepted because the assessment of total income is to be made and it cannot be assessed in parts. Therefore, if some income is earned by the appellant by other than shipping activities, then how it could be left without taxing though tax u/s 115VG has been brought
We have carefully considered the rival contention and perused the orders of the lower authorities. In issue in all these grounds is when the income of assessee is taxed under the Tonnage tax Scheme whether there can be any disallowance u/s 14A of the Act despite assessee earning exempt income such as Dividend. We find that identical issue arose in case of varun Shipping Limited V Addl CIT [2012] 17 taxmann.com 112 (Mum.) where in it has been held as under :-
“7. We have considered the rival submissions and also perused the relevant material on record. It is observed that the assessee is mainly engaged in the business of operation of ships and its income from the said business was declared and assessed as per the special provisions contained in Chapter XIIG which lay down tonnage tax scheme. As per the provisions of section 115VA contained in Chapter XIIG, the income from the business of operating qualifying ships can be computed at the option of the assessee in accordance
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 expenditure of the Appellant Company aggregating Rs.153.64 crores, which includes the interest expenditure of the tonnage tax business of the Appellant of Rs.145.88 crores for computing the disallowance under Rule 8D(2)(ii), same is not correct.
However in this case assessee has other business also, therefore, the income computation of Tonnage tax Scheme requires to be excluded but in other business, the disallowance u/s 14A is required to be made. It is submitted that Appellant is a tonnage tax company and the Profit & Loss Account for the tonnage tax and non-
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-end, aggregate to Rs.125096 lakhs, and are far lower as compared to the capital employed consisting of own funds of Rs.492822 lakhs. In fact, the investments are more than covered by the Reserves of the Company itself. There is, therefore, no borrowing attributable to the investments yielding tax free income and such investments are out of the own
With respect to the administrative expenses, ld AO has however disallowed a further sum of Rs.5.42 crores, under clause 2(iii) of Rule 8D, being the amount computed @0.5% of the average value of investments held by the Appellant. However, the actual expenditure claimed of the Treasury Division based on the divisional Profit & Loss Account was only Rs.81.69 lakhs. Hence, the disallowance can never exceed the total expenditure incurred by the Company. Thus, as against the actual aggregate administrative expenditure of Rs.81.69 lakhs incurred by the Treasury Division of the Appellant Company and claimed accordingly, the Assessing Officer has disallowed expenditure aggregating to Rs.5.42 crores under clause 2(iii) of Rule 8D, which is completely incorrect.
Further ld AO while applying Section 14A of the Act in respect of several investments on which the Appellant received no dividend income during the year was also considered in average investment. Thus disallowance under Section 14A read with Rule 8D2(ii) and (iii) should have been by excluding those investments on which no dividend income was received during the year.
Therefore we set aside these grounds of appeal
concerning disallowance u/s 14. A rwr
8. D while computing normal computation of income to the file of the ld AO, assessee is directed to submit revised computation before ld Ao, The ld AO may examine the i. No disallowance of expense or interest should be made out of tonnage tax income computation ii. As there is no interest expenditure liable for a disallowance as the own funds consisting of the share capital and reserves, are far more than the aggregate value of investments held by the company. No Interest disallowance should be made. iii. The administrative expenses cannot exceed the actual expenditure incurred. iv. Those investments on which no exempt dividend income was received by the Appellant during the year are to be excluded while computing the disallowance under Rule 8D(2)(iii).
32. 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
33. Accordingly, Ground, no 1 to 8 and additional contentions raised with respect to disallowance u/s 14A of the Act are allowed with above directions.
34. Ground number 9 of the appeal is with respect to the taxation of the long-term capital gain at the rate of 20% as against the current rate of 10% while passing the assessment order under section 143 (3) read with section 144C (13) of the act. On hearing the parties, we find that the learned assessing officer should have charged the correct rate of tax on the long-term capital gain. The learned assessing officer is directed to do so. Ground number 9 of the appeal of the assessee is allowed.
35. Ground number 10 is with respect to the not granting tax credit to the assessee of ₹ 1,262,041 while framing the assessment order. On hearing the parties, we direct the learned assessing officer to grant tax credit to the assessee of the above amount after proper verification. If the learned assessing officer finds that assessee is not entitled to any tax credit, he must give an opportunity to the assessee to explain the same and thereafter decide the issue. . Ground number 10 of the appeal is allowed.
37. Ground number 12 and 13 is with respect to the arm‟s- length price computation of the financial guarantee issued by the assessee. The facts relating to the same shows that assessee is a company engaged in the business of shipping. In order to expand its business, it formed two-step down subsidiaries in Singapore, Greatship Global Offshore Services Pte. Ltd. (GGOS) and Great ship Global Energy Services Pte. Ltd. (GGES) as Singapore is one of the busiest ports in the world. The Appellant‟s immediate subsidiary, Greatship India Ltd. infused share capital into the subsidiaries, USD 94.06 million into GGOS and USD 66.96 million into GGES by 31st March 2009. The subsidiaries placed orders on shipyards in Singapore for building of new vessels in the preceding financial years 2006-2007 and 2007-2008. Assessee issued guarantees to shipyards (referred to as performance guarantee).
38. 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
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 said loans as on 31st March 2009. The Appellant gave a financial guarantee to the Bank of Nova Scotia for the loan taken by GGES from the Bank of Nova Scotia. The Appellant did not charge a guarantee commission to GGES for issuing the financial guarantee to the Bank of Nova Scotia on its behalf. However, while filing its Return of Income, the Appellant made a suo moto transfer pricing adjustment @ 0.60% p.a. on the basis of the average guarantee commission paid by the Appellant to banks for giving unsecured guarantees on behalf of the Appellant . The suo-moto adjustment relating to financial guarantee given to Bank of Nova Scotia was calculated by the Appellant as under:
Particulars Amount (Rs.) Amount of guarantee as at 357,42,38,400 year end
Thus, total suo-moto adjustment made by the Appellant in respect of financial guarantees was Rs. 2,36,92,073/- (Rs. 76,08,000/- (ICICI Bank) + Rs. 1,60,84,073 (Bank of Nova Scotia). The working of the suo moto TP adjustment submitted to the TPO.
The Ld. Transfer Pricing Officer (TPO) accepted the transaction of guarantee to ICICI Bank to be at arm‟s length for the AY 2007-2008. However, For this AY he held that the arm‟s length price of the financial guarantee given by the Appellant to the ICICI Bank on behalf of its AE, GGES was 3% p.a. The TPO relied upon the letters issued by the Allahabad Bank and State Bank of India (pages 397 to 400) wherein the Allahabad Bank stated that it generally charges guarantee commission of 0.60% per quarter for a financial guarantee above Rs.10 crores and State Bank of India has stated that it charges guarantee commission of 1.75% per annum in respect of bank guarantee above Rs.10 crores. The TPO computed the ALP of the financial guarantee given by the Appellant to ICICI Bank as under:
Name of the Bank Guarantee Commission rate State Bank of India 1.75% Allahabad Bank 2.4%
The ld DRP (for the AY 2008-2009) held that the ALP of the financial guarantee given by the Appellant to ICICI Bank was 1.5% p.a. However, financial guarantee given by the Appellant to the ICICI Bank continued in AY 2009- 2010, ld TPO computed ALP @3% and LD DRP upheld it @1.5% by following their own findings in AY 2008- 2009.
Similarly, the ld TPO also benchmarked Financial Guarantee Given to Bank of Nova Scotia @ 3 % and Ld DRP upheld it @ 1, 5 %.
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
Associate Loan for Security Total Assets d which the provided of the AE Enterprise Assessee by the AE. company GGES, has itself provided guarantee GGES USD 70.47 First USD Million assignment 152.906 (outstandin on the Million g as on vessel (Vessel 31.3.2009) being under constructe constructio d by n + Current Keppel Fels Assets) (Note 13 of the Accounts) v. Therefore, the Appellant submits that the risk of default by the AE was extremely low and, hence, the rate of commission charged in respect of financial guarantees given by the Appellant @ 0.60% p.a. is more than the Arm‟s Length Price. vi. Further, the Appellant relies on the decision of the Mumbai Tribunal in the case of Everest Kanto Cylinders Ltd. (ITA No. 542/Mum/2012 dated 23rd November, 2012) wherein internal CUP was accepted as ALP. The Appellant submits that this decision has been affirmed by the Bombay High Court in 378 ITR 57. vii. The facts of Everest Kanto were as follows: a. Everest Kanto had a subsidiary,EKC Dubai.
The Ld DR vehemently supported the orders of the lower authorities.
We have carefully considered the rival contentions and perused the order of The LD TPO as well as directions of the ld DRP on this issue. The coordinate bench in assessee‟s own case has decided this issue in Para no 197/Mum/2023 for Ay 2008-09 per Para no 23 as under :-
“23. In ground No. 22 to 24 of appeal, the assessee has assailed TP adjustment in respect of financial guarantee given by the assessee on behalf of its AE. The ld. Counsel for the assessee submitted that the assessee has made suo-motto charge of 0.55%. The
We have carefully considered the reasons given by the coordinate bench while deleting the adjustment on account of corporate guarantee commission. However, we are not inclined to accept that as the honourable Bombay High Court in case of Everest Kanto cylinders Ltd (378 ITR 57 (Bom)) has upheld the benchmarking of corporate guarantee commission at the rate of 0.5%, for all the years and in all economic circumstances and for all the assessee is across the globe, that rate should be accepted as arm‟s-length price of corporate guarantee commission. If we accept that proposition, the requirement of maintaining contemporary erroneous document for each tax assessment year, transfer pricing order by the revenue authorities of international transaction every year would go for a toss. Further the decision of honourable Bombay High Court will become a safe harbour judicial precedent with respect to the arm‟s- length price of corporate guarantee issued by one corporate entity of MNE to other, irrespective of their creditworthiness, interest saving, cost of capital, the
However, for this assessment year, we find that the learned TPO and the learned DRP has repeated their own orders of earlier years i.e. assessment year 2008 – 09. Therefore, both these orders/directions are not in accordance with the transfer pricing provisions as they do not determine the arm‟s-length price of the international transaction in accordance with the provisions of section 92C (3) of the act. Therefore, we disapprove both the above orders and directions.
Coming to the benchmarking analysis adopted by the assessee, we noted that assessee has made a suo moto adjustment considering 0.55% as arm‟s-length price of the international transaction, despite the fact that, assessee has not charged any guarantee fees from its associated enterprises. For the purpose of benchmarking, the assessee adopted the comparable uncontrolled price method and considered the average corporate guarantee charges charged by the bankers to the assessee placed at page number 383 of the paper book, which is 0.56%. On that basis, the assessee has benchmarked these corporate 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
Ground no 14 to 16 of the appeal are with respect to ALP determination of performance guarantee issued by the assessee. During the immediately preceding financial year 2007-08 (Assessment Year 2008-09), the Appellant had given performance guarantees (5 nos.) to shipyards on behalf of its AEs, Greatship Global Offshore Services Pte. Ltd., Singapore (GGOS) (4 nos) and Greatship Global Energy Services Pte. Ltd., Singapore (GGES) (1 no.). The same guarantees have continued in financial year 2008- 09 (Assessment Year 2009-10). A statement giving details of the performance guarantees furnished for the Assessment Year 2009-10 was submitted. The performance guarantees are in respect of orders for
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 assessee has taken upon itself the liability of its AE in the event of default and passed on a tangible benefit to its AE without getting duly compensated for the same” (page 15 of the TP order for Assessment Year 2008-09).
The TPO held that the ALP of the performance guarantees given by the Appellant is 3% p.a. The TPO arrived at the ALP of 3% p.a. on the basis of guarantee commission charged by Allahabad Bank on bank guarantees (2.4% p.a) and State Bank of India (1.75% p.a.), the average of which guarantee commission rates came to 2.075% p.a. to which the TPO added an adhoc “mark-up” of 0.925% p.a. to arrive at the guarantee commission rate of 3% p.a.
It cannot be the case of the assessee that an unrelated party would have granted such guarantee without any fee. However, there is a distinguishing feature in the assessee‟s case that there is a back to back arrangement to guard against the invocation of the performance guarantee. In case any of the performance guarantees given by the shipyard are invoked, then the vessel in respect of which the performance guarantee is given will vest into the hands of the assessee. This peculiar feature of the agreement reduces the risk element with the assessee substantially. Yet, the grant of financial service by way of performance guarantee cannot be denied. It is seen that the DRP has held ALP of guarantee commission to be at 1% p.a. in the immediately preceding year, which is a fairly reasonable view. Therefore, we are in agreement with the order of the DRP for the preceding assessment year. We decide accordingly.
Thus it resulted in to total adjustments of Rs.6,59,83,729/-. Therefore, Assessee is in appeal before us.
Assessee submitted that :-
i. The Appellant relies on the following decisions of the Tribunal wherein it has been held that giving of a guarantee on behalf of an AE is not an international transaction as it has no bearing on the profits, income, losses or assets of the enterprises involved: a. Marico Ltd. (ITA No. 8858/M/11 and 8713/M/11) dated 18.5.2016 b. Micro Ink Ltd. (157 ITD 132) (Ahd.) c. Videocon Industries Ltd. (55 taxmann.com 263) (Mum.) a) CIT v. Cotton Naturals (I) (P.) Ltd.55 taxmann.com 523 (Del.) b) VVF Ltd. v/s. DCIT (ITA No: 673/M/06) (Mum.) c) Bharti Airtel Ltd. (43 taxmann.com 50) (Del. Trib.) d) GTO v. Venesta Foils Ltd. (124 ITR 660) (Cal.) vi. Therefore, there is no risk / liability undertaken by the Appellant for which it needs to be compensated by way of guarantee commission. Reliance is placed upon the decision of the Mumbai Bench of the Tribunal in the Appellant‟s own case for the Assessment Year 2008-09 wherein in respect of thesevery same performance guarantees (5 nos.) to shipyards the Tribunal held that if the guarantee is invoked, the assessee would acquire the vessel and therefore, there is no risk involved. Tribunal relied upon the decision of the co-ordinate Bench in the case of KEC International Ltd. (108 taxmann.com 172)(Mum.) to hold that no adjustment is warranted on account of performance guarantees.
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 shipyard. The terms and conditions of the Performance
21. Per contra, the ld. Departmental Representative vehemently defended the impugned order and the directions of the DRP on this issue and prayed for dismissing the grounds raised
by the assessee assailing the adjustment.
22. Both sides heard. The assessee had extended performance guarantee to shipyard in respect of its 100% subsidiary based in Singapore. The assessee has taken ALP of the performance guarantee facility as „Nil‟. The DRP has determined ALP of the transaction @1%. The agreement in respect of which performance guarantee has been extended by the assessee on 22.1. We find that the Tribunal in the case of ACIT vs. KEC International Ltd. 108 taxmann.com 172 (Mumbai) deleted adjustment made on account of performance guarantee where there was absolutely no risk involved for the assessee in issuing performance guarantee on behalf of its AE. Thus, in the facts of the case and the decision by the Coordinate Bench, we hold that no adjustment is warranted because of performance guarantee. The assessee succeeds on ground no. 19 to 20 of the appeal.”
The coordinate bench has held that wherein it has been held that there is no element of risk involved, in even to of enforcement of guarantee clause the assessee would acquire vessel, that can be used by the assessee in its own business, and therefore the coordinate bench has held that no adjustment is warranted on account of performance guarantee.
Performance guarantee is sharing the advantage of MNE against the individual standalone companies, whereby, less competent, less capable, less resourceful associated enterprise can ride on the shoulders of more competent, more capable, more resourceful another associated enterprise to boost their credibility if a related entity provides them with a performance guarantee, i.e., pledges to fulfill their contractual obligations in case they fail to do so themselves. Of course, independent party can also issue
Even the annual accounts of the assessee also depicts these financial guarantees as contingent liabilities in schedule “20”: Notes on Accounts
(a) Guarantees given by banks counter guaranteed by the Company. 26712 lakhs (b) Guarantees by bank given on behalf of a subsidiary company/joint venture. 409 lakhs (c) Guarantees given to banks/ shipyard on behalf of
However, we are also conscious of the fact that assessee has made us you a Moto adjustment with respect to the financial guarantee of 0.55% of the outstanding guarantees. These performance guarantees in the nature of financial guarantees needs to be benchmarked, which can be remunerated at less than that rate. As in the case of financial guarantees without any security, the assessee has offered SUO Moto disallowance of 0.55% as guarantee. In addition, here the assessee has adequate security and therefore the benchmarking of this performance guarantee needs to be substantially lower than pure financial guarantees. Thus the rates adopted by the learned TPO and the learned dispute resolution panel are not at all relevant and are exorbitant high without any basis. Therefore, those rates are already rejected by us.
Accordingly ground number 14 – 16 of the appeal of the assessee is set-aside to the file of the learned assessing officer with a direction to the assessee to benchmarked the above international transaction and produce relevant details of benchmarking to the learned assessing officer/transfer pricing officer, the learned AO/TPO may
In the result, appeal filed by the assessee is allowed with the above directions.
Now we come to the appeal of the learned AO. The learned AO as per ground number 1 and 2 has challenged non-taxability of bad debts written back and an insurance claim received during the year but pertaining to the years prior to the tonnage tax scheme applicability to the assessee directed by the learned dispute resolution panel to be not taxable. The fact shows that the bad debts written back by the assessee were pertaining to the sale consideration/remuneration received by the assessee in the earlier year written also during the earlier year but written back during this year. Similar is the case with respect to 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.
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
As per ground number 3 of the AO Coming to the appeal of the learned assessing officer wherein the learned AO has challenged the direction of the learned dispute resolution panel of not taxing the forfeiture of the warrants under section 41 (1) of the act. The facts shows that Out of the 5005000 warrants allotted on August 09, 2007 to certain Promoters and Non Executive Directors on preferential basis, 10000 warrants were converted into Equity Shares at the predetermined price of Rs. 312.75. The balance 4995000 warrants, which were not converted due to unfavourable market conditions, stood cancelled at the expiry of the 18 months period. As per the terms of the issue, the amount of Rs. 1598.40 lakhs being the amount
On careful consideration of the rival contention, the orders of the learned AO and the direction of the learned dispute resolution we do not find any infirmity in the order of the learned dispute resolution panel in directing the learned assessing officer to not to tax the above amount under section 41 (1) and section 28 (iv) of the act. The fact shows that assessee Company had on August 09, 2007, allotted 50,05,000 convertible warrants to certain Promoters and Non Executive Directors, pursuant to the resolution passed by the shareholders at their meeting held on July 26, 2007, at a price of Rs. 312.75 per share. Each warrant was convertible into one Equity Share of the face value of Rs. 10/-, at the option of the warrant holders, at any time prior to expiry of 18 months from the date of allotment of the warrants. Out of the 50,05,000 warrants, 10,000 warrants were converted into Equity Shares. Due to the unfavorable market conditions, which did not justify conversion of warrants, the balance 49,95,000 warrants were not converted. Accordingly the said warrants stood cancelled and the amount of Rs. 1598 lakhs being
In the result, appeal filed by the learned assessing officer is dismissed.
Thus, cross appeals for assessment year 2009 – 10 are disposed of as above.
Order pronounced in the open court on 13.09. 2023.