M/S GREATSHIP (INDIA) LTD ,MUMBAI vs. ASSISTANT COMM.OF INCOME TAX 5(1)(1), MUMBAI

The AO/TPO/ DRP erred in rejecting the internal CUP method and arm's length price of 0.30% pa. adopted by the Appellant for benchmarking guarantee commission

The AO/TPO/DRP failed to appreciate that the internal CUP method has been consistently followed by the Appellant and accepted by the income- tax Appellate Tribunal in the preceding Assessment Years.

Without prejudice to Ground Nos. 1 to 8, the AO/TPO/ DRP erred in computing the arm's length price of the financial guarantees given by the Appellant on behalf of its AEs in an arbitrary manner

The AO/ DRP erred in holding that suo moto disallowance of expenditure u/s 14A of Rs 10,42,637 for earning exempt dividend income of Rs.1,92,00,113 was incorrect and on the lower side..

The AO DRP failed to appreciate that the suo moto disallowance of expenditure u/s 14A of Rs.10,42,637/-has been determined by the Appellant as per consistently followed method accepted by the AO in the past.

The AO/DRP erred in disallowing further expenses of Rs. 38,51,576/- under Section 14A read with Rule 8D(2)(ii).

The AO/DRP erred in invoking Rule 8D without recording an objective satisfaction that having regard to the accounts of the Appellant, the suo- moto disallowance of expenses of Rs.10,42,637/- by the Appellant under section 14A was incorrect.

The AO erred in assessing the Income from Other Sources at Rs 150,64,64,633/-vide the computation sheet attached to the assessment order under section 143(3) rw.s 144(13) when the AO had, in the assessment order, accepted the Returned Income from Other Sources of Rs 147,44,27,500/-

The AO erred in assessing the Business Loss at Rs 113,03,50,695/-vide the computation sheet attached to the assessment order under section 143(3) r.ws. 144(13) when the assessed Business Loss as per the assessment order was Rs. 116,59,91,838/-

The AO erred in computing the Book Profit under section 115JB at Rs 3,05,99,95,313/- vide the computation sheet attached to the assessment order under section 143(3) rws. 144(13) when no adjustments were P a g e | 3 M/s Greatship (India) Ltd. Vs. ACIT, 5(1)(1) made to the Returned Book Profit under section 115J8 of Rs 3,02,79,58,181/-vide the assessment order.

The AO erred in disallowing the transfer pricing adjustment on financial guarantee commission of Rs.2,81,85,557/- while calculating the Book Profit under section 115JB vide the computation sheet attached to the assessment order under section 143(3) r.ws. 144(13) when no adjustments were made to the Returned Book Profit under section 115JB of Rs 3,02,79,58,181/-vide the assessment order.

The AO erred in disallowing Rs.38,51,576/- calculated as per section 14A r.w.r 8D while computing the Book Profit under section 115JB vide the computation sheet attached to the assessment order under section 143(3) r.w.s. 144(13) when no adjustments were made to the Returned Book Profit under section 115JB of Rs.3,02,79,58,181/-vide the assessment order.

The AO erred in granting short TDS credit to the extent of Rs.28,33,048/- .

Fact in brief is that return of income declaring total income of Rs.147,44,27,500/- was filed 29.11.2018. The assessee is a company and it operates fleet of offshore support vessels which provides marine logistics and drilling services etc. The AO has passed assessment order u/s 143(3) r.w.s 144C of the Act on 24.09.2021 and proposed addition of Rs.2,81,85,557/- on account of guarantee commission in relation to the international transactions entered into by the assessee company with its associated enterprise during the F.Y. 2017-18 relevant to assessment year under consideration. The Assessing officer has also proposed disallowance u/s 14A r.w.Rule 8D to the amount of Rs.38,51,576/-.

The assessee has filed objections before the Dispute Resolution Panel against the addition disallowances proposed by the assessing officer in the draft assessment order. The Dispute Resolution Panel issued directions u/s 144C(5) of the Act on 12.06.2022. The ld. DRP has rejected both the objections filed by the assessee against the aforesaid two addition disallowance proposed by the assessing officer in the draft assessment order. Thereafter the assessing officer has passed final assessment order u/s 143(3) r.w.s 144C(13) of the Act on 31.07.2022 and assessed the total income of the assessee at P a g e | 4 M/s Greatship (India) Ltd. Vs. ACIT, 5(1)(1) Rs.147,44,27,500/- after making above referred additions in respect of transfer pricing adjustment u/s 92CA(3) of Rs.2,81,85,587/- and disallowance of Rs.38,51,576/- u/s 14A r.w.Rule 8D of the I.T. Rule.

During the course of appellate proceedings before us the ld. Counsel submitted that TPO has erred in making a transfer pricing adjustment of Rs.2,81,85,587/- on account of guarantee commission (1.25 per annum). The further facts of the case are discussed while adjudicating the ground of appeal filed by the assessee. Ground No. 1 to 9: Making transfer Pricing Adjustment of Rs.2,81,85,587/-:

During the year under consideration the assesse company has given guarantee commission to DnB NOR Bank ASA Singapore Branch on behalf of its associate enterprise M/s Greatship Global Offshore Services Pte. Ltd. Singapore (GGES) and Greatship Global Energy Services Pte. Ltd. Singapore (GGES) in respect of loan availed by the associate enterprise from the said bank. In this regard, the assessee has charged guarantee commission of Rs.87,59,974/- @ 0.30% per annum in respect of the guarantees given on behalf of the above mentioned AE’s. The assessee has used internal CUP to benchmark the guarantee given. The average rate of guarantee commission paid by the assessee was determined at 0.27 per annum on the basis of rate at which the assessee had paid guarantee commission to banks constitute internal CUP for the purpose of benchmarking the guarantee given by it on behalf of its associate enterprises. However, the TPO has determined the ALP on guarantees given by the assessee at 1.25% per annum and has proposed a transfer pricing adjustment of Rs.2,81,85,557/-. In its submission the assessee has submitted before the DRP that ITAT Mumbai in the case of assessee itself in the preceding assessment years has held that the guarantee commission paid by the assessee to banks

In this regard, the ld. Counsel submitted that similar issue on identical facts has been adjudicated in favour of the assessee in assessee own case for assessment year 2011-12 to 2015-16 and 2017- 18 by the coordinate bench of the ITAT Mumbai. The assessee has also placed copies of the orders of the ITAT in the paper book filed.

On the other hand, the ld. D.R supported the order of lower authorities.

Heard both the sides and perused the material on record. With the assistance of the ld. Representative we have perused the decision of ITAT, Mumbai in the case of the assessee itself for assessment year 2017-18 vide ITA No. 650/Mum/2022 dated 07.12.2022 wherein after referring the decision of ITAT for assessment year 2012-13 (ITA No. 1827/Mum/2017) and 2014-15 (ITA No. 6083/Mum/2018 deleted the transfer pricing addition after accepting the ALP for corporate guarantee determined by the assessee. The relevant part of the decision of Tribunal is reproduced as under:

Insofar as the adequacy of 0.55% rate charged by the assessee is concerned, we find enough reasonableness in the P a g e | 7 M/s Greatship (India) Ltd. Vs. ACIT, 5(1)(1) same. In this context, the learned representative for the assessee referred to various decisions of the Tribunal, viz. Hindalco Industries Ltd. (supra), Thomas Cook (India) Ltd. (supra) and Godrej Consumer Products Ltd. (supra), wherein the arm‟ length rate of 0.5% has been approved in the matter of benchmarking Guarantee commission fee chargeable from AE. Thus, considering the entirety of the facts and circumstances of the case, in our view, Corporate Guarantee fee charged by the assessee @0.55% is well- founded and does not require any Transfer Pricing Adjustment. Thus, we setaside the order of the CIT(A) and direct the Assessing Officer to delete the addition of Rs.42,97,821/-. Thus, Ground of appeal nos. 6 to 9 are allowed.” As the Tribunal in its aforesaid order passed in the assessee‟s own case for the preceding years had approved the determining of ALP of corporate guarantee provided by the assessee to a foreign bank for facilitating raising of loan by its AE by applying of Internal CUP by the assessee i.e the guarantee commission paid by the assessee to a bank for guarantee stood by it on behalf of the assessee for a third party thus, we respectfully follow the view therein taken. Accordingly, we find no infirmity in the adoption of internal CUP i.e the average guarantee fees that was paid by the assessee to, viz. RBS (formerly known as ABN Amro Bank); Kotak Mahindra Bank and Yes Bank, for standing guarantee on its behalf of the assessee in case of third parties, viz. ONGC, BG Exploration etc.

Insofar the adequacy of the ALP of the corporate guarantee fees determined by the assessee at 0.43% of the amount of loan is concerned, the same, as observed by us hereinabove is the average of the guarantee fees that was paid by the assessee to various banks for standing guarantees on its behalf for certain third parties. As observed by the Hon‟ble High Court in the case of Everest Kento Cylinders Ltd. (supra), higher commission is to be paid for obtaining bank guarantee, as they are easily encashable in the event of default as in comparison to corporate guarantee provided by an assessee company to a bank for facilitating raising of loan by its AE. Accordingly, we are of the considered view that insofar the adequacy of the ALP of the corporate guarantee fees determined by the assessee at 0.43% is concerned, the same in the backdrop of the aforesaid facts cannot be called in question. Apart from that, we find that it was also the claim of the assessee before the lower authorities that Kotak Mahindra Bank (as per its sanction letter) had expressed its willingness to give guarantee on behalf of the AEs at a commission rate of 0.40% p.a/0.50% p.a. In the backdrop of the aforesaid fact, we find substantial force in the claim of the ld. A.R that the aforesaid credit sanction letter too would constitute a CUP for benchmarking the transaction of providing of corporate guarantee by the assessee to the banks for facilitating raising of loans by its AEs. Be that as it may, the adequacy of the ALP of corporate guarantee fee at 0.43% can also safely be gathered by drawing support from the following judicial pronouncements as had been relied upon by the assessee before the lower authorities as well as before us :

We are not persuaded to depart from a view consistently taken by the Tribunal in the case of the Appellant for preceding assessment years.

However, the Assessing Officer had rejected the computation/statements furnished by the Appellant. The satisfaction recorded by the Assessing Officer in paragraph 5.3.3 of the Final Assessment Order read as under: “5.3.3 Recording of satisfaction The AO is satisfied that the assessee has incurred more expenditure on account of maintaining/acquiring/selling investments then already disallowed by assessee, due to the following reasons:  It is seen that there is substantial amount of new investment in mutual funds to the tune of Rs 221 crores and ale of same to the tune of Rs 238 crores made during FY 2017-18. This investment had led company to earn exempt income of Rs 90.47.692as dividend on Mutual Funds. It follows that such huge investment and trading decisions are not taken casually in any business. It entails research, deliberations, large funds and engagement of personnel at various levels, especially at the managerial level, to make such decisions, such decisions assume significance for the business.  Assessee has simply disallowed expenses taking percentage of exempted income total income from investments and disallowed certain percentage of staff cost and other expenses without giving complete details.  Further there is huge churn in investment in Mutual Funds. The change in monthly investments is as per para 5.1.3 above.  Various expenses have been incurred by the assessee, significantly managerial remuneration, salaries bonus & allowances, Employee benefits expenses, Interest expenses, Administrative expenses, travelling and communication which also entail a portion relating to make such investments and earn income on same. Accordingly, in view of the above, the AO is satisfied that the assessee has incurred expenditure much greater than already disallowed by assessee on account of making Investments, income of which will be exempt. The proportionate expense of Rs 6,55,409 is less and not accurate as already disallowed by assessee. Assessee has disallowed such expenses which is not in order as compared to the proportion of new investments made.”

In the present case the dissatisfaction has been recorded, however, the same is not in accordance with mandate of Section 14A(2) of the Act as the Assessing Officer has acted in a mechanical manner based upon conjecture/surmise and has recorded dissatisfaction without having regard to the accounts of the Appellant and/or the computation of suo moto disallowance made by the Appellant under Section 14A of the Act. The general hypothesis made by the Assessing Officer fails to meet the mandate of Section 14A(2) of the Act in view of the methodical computation of disallowance furnished by the Appellant taking into the account the actual expenditure incurred by the Appellant. Accordingly, we delete the addition of INR 10,67,893/- made by the Assessing Officer under Section 14A of the Act read with Rule 8D of the Rules. Thus, Ground No. 10 to 13 raised by the Appellant are allowed.”