PFS SHIPPING (I) LIMITED,MUMBAI vs. DCIT CC 1(2), MUMBAI

We would first take up appeal preferred by the Assessee wherein following grounds have been raised: “1. On the facts and circumstances of the case and in law, the learned CIT (A)-57, Mumbai [hereafter, "CIT (A)"] erred in confirming the addition made by the Assessing Officer [hereafter, "AO" in treating interest income of Rs. 41,12,92,370/- on loans advanced to subsidiary companies and on deposit with banks as Income from Other Sources, ignoring the fact that such advances and deposits were made during the course of appellant's shipping business and hence interest earned was part of tonnage activity/income.

2. Without prejudice to the Ground No. 1, the learned CIT (A) erred in not allowing appellant's claim of interest income as tonnage income, i) Rs. 9,94,221/- on Security Deposit kept with Hon'ble Bombay High Court, ii) Rs. 17,64,630/- on deposit kept with State Bank of India as per instructions of Hon'ble Madras High Court, iii) Rs. 3,31,544/- on deposits as a margin money for bank/bid bond guarantee, and iv) Rs.62,74,567/- for maintaining minimum margin account as & 1462/Mum/2019 Assessment Year: 2013-14 Debt Service Reserve Account (DSRA) with bank, to avail loan.

Being aggrieved, the Assessee carried the issue in appeal before CIT(A) who confirm the order passed by the Assessing Officer.

We are not inclined to accept the contention that the interest income earned by the Assessee can be regarded as income earned from activity incidental to shipping business. Section 115V-I provides that the relevant shipping income would mean profit from core activities. Section 115V-I (2) of the Act provides that core activities of a tonnage tax company shall be (i) its activities from operating qualifying ships , and (ii) Other ship- related activities. Section 115V-I(5) provides that the incidental activities shall be the activities which are incidental to core activities and which may be prescribed for the purpose. Rule 11R of the Income Tax Rules, 1962 provides a list of incidental activities being (i) Maritime consultancy charge; (ii) Income from loading or unloading of cargo; (iii) Ship management fees or remuneration received for manager vessels and (iv) Maritime education or recruitment fees. Therefore, on a co-joint reading of Section 115V-I of the Act and Rule 11R it is clear that the interest 7 & 1462/Mum/2019 Assessment Year: 2013-14 income on loans to subsidiaries and the interest income earned from deposits do not form part of either core activities or the incidental or incidental activity. Therefore, we confirm the order passed by CIT(A) in this regard. Ground No. 1 to 3 raised by the Assessee are dismissed.

As regards, the alternative contention raised by the Assessee regarding allowance of deduction under Section 57 of the Act for interest expenses and other expenses incurred for maintaining the investment, we find some merits in the contention advanced by the Assessee before the CIT(A). The Assessee has earned interest income of INR 62,74,567/- on Debt Service Reserve Account (DSRA) maintained by the Assessee with Standard Chartered Bank for repayment of loan. Interest expenses incurred by the Assessee to the extent of aforesaid interest income of INR 62,74,567/- are therefore, allowable as deduction under Section 57 of the Act. In Ground No. 6(ii) raised in appeal the Assessee has claimed that interest expenses of INR 4,36,31,599/- has been incurred for availing loan. Accordingly, the Assessee is allowed to claim deduction of INR 62,74,567/- under Section 57 of the Act. As regards, all the other interest and other expenses in respect of which deduction under Section 57 of the Act has been claimed by the Assessee, we concur with the findings returned by the Assessing Officer and the CIT(A) that the Assessee has failed to establish nexus between the interest expenditure incurred and interest income earned and therefore, deduction of the said expenses cannot be allowed under Section 57 of the Act from the interest income held to be liable to tax under the head Income from Other Sources. In terms of the aforesaid, Ground No. 4 to 6 raised by the Assessee in appeal are partly allowed. & 1462/Mum/2019 Assessment Year: 2013-14 Ground No. 7 12. Ground No. 7 pertains to transfer pricing adjustment of INR.10,44,49,477/- on account of guarantee commission. 13. The Assessing Officer had made an addition of INR.10,44,49,477/- in respect of guarantee commission on account of upward transfer pricing adjustment proposed by the Transfer Pricing Officer (TPO) vide order dated 31.10.2016, passed under Section 92CA(3) of the Act by taking the rate of guarantee commission at 1.5%. 14. In appeal preferred by the Assessee, the CIT(A) reduced the rate of guarantee commission to 0.5% by relying upon the judgment of the Hon'ble Bombay High Court, in the case of Everest Kento Cylinders Ltd. (ITA 1165 of 2013). 15. Being aggrieved the Assessee carried the issue in appeal before us. We have perused the order passed by CIT(A) on this issue and the submissions made on behalf of the Assessee before the CIT(A). We find that before CIT(A) the Assessee has contended that corporate guarantee provided by the Assessee to its subsidiaries did not constitute an international transaction, and in alternate the Assessee had pleaded that rate of 0.5% be accepted as arm‟s length rate of commission by placing reliance upon the judgment of the Hon‟ble Bombay High Court in the case of Everest Kento Cylinders Ltd. (supra). We note that the CIT(A) has held that corporate guarantee provided by the Assessee to its subsidiaries constitutes an international transaction, and has accepted the contention of the Assessee of upholding guarantee commission rate of 0.5% as arm‟s length rate. We do not find any infirmity in the order of CIT(A) as the same has been passed by following the above judgment of Hon‟ble Bombay High Court & 1462/Mum/2019 Assessment Year: 2013-14 cited by the Assessee. Accordingly, Ground No. 7 raised by the Assessee is dismissed. Ground No. 8 & 9 16. Ground No. 8 and 9 pertain to addition of INR 53,19,90,430/- made by the Assessing Officer under Section 68 of the Act holding the amount of loan taken by the Assessee from M/s One Ocean Shipping Pvt. Ltd. as unexplained cash credit. 17. During the assessment proceedings the Assessing Officer had noted that the Assessee had taken unsecured loan of INR 5320 Lacs from M/s One Ocean Shipping Pvt. Ltd. (hereinafter referred to as „the Lender‟). The Assessee was asked to substantiate the genuineness of the transaction, and identity & creditworthiness of the Lender. In response the Assessee filed income tax return and financial statement of the Lender. The Assessing Officer noted that the Lender was also assessed in his charge. On verification of the financial statements of the Lender for the financial year ending 31.03.2010 to 31.03.2012, the Assessing Officer concluded that the Lender had no substantial business and has suffered consistent losses over the years. Thus, the Lender did not have net worth or financial resource to give huge loan to the Assessee. Therefore, the Assessee was confronted to explain the source of funds given by the Lender. The Assessing Officer, noted that his predecessor had, in the case of one of group company of the Assessee (i.e. ABG International Pvt. Ltd.) for the Assessment Year 2012-13, wherein the said company had received funds as share premium from the Lender, made an addition of INR 278 Crores under Section 68 of the Act in the hands of ABG International Pvt. Ltd. after conducting detailed enquiries. The Assessing Officer concluded that in the assessment proceedings & 1462/Mum/2019 Assessment Year: 2013-14 the Assessee has failed to establish the genuineness of the transaction as well as identity & creditworthiness of the Lender as the Assessee has failed to furnish any corroborating documents in support of the submissions and had only provided the basic details. Placing reliance on the aforesaid assessment order for the Assessment Year 2012-13 passed in the case of ABG International Pvt. Ltd., the Assessing Officer held that the loan transaction undertaken by the Assessee with the Lender was nothing but a planned device to avoid taxes and therefore, made an addition of INR 5,320 Lacs in the hands of the Assessee holding the same to be unexplained cash credit in terms of Section 68 of the Act. 18. Being aggrieved, the Assessee carried the issue in appeal before CIT(A) and contended that the documents/information on the basis of which conclusion has been arrived from the Assessing Officer were never furnished to the Assessee. It was contended that the entire loan amount was received through banking channels. The Assessee explained that loan amount of INR 2,040 Lacs was directly received from the Lender whereas the loan amount of INR 1,919 Lacs and INR 1,358 Lacs was received from PRP International and Nissim Traders Pvt. Ltd., respectively, on account of the Lender. It was submitted that the Lender was regularly being assessed to income tax and therefore the identity of the Lender was well established. Merely because the Lender had no net worth does not mean that the loan transaction was not genuine while the Assessing Officer has relied upon the assessment order passed in the case of ABG International Pvt. Ltd. for the Assessment Year 2012-13, the Assessing Officer has failed to appreciate that for the Assessment Year 2013-14, the Assessing Officer had assessed the Lender and made no additions by accepting the financial statement and return filed by the & 1462/Mum/2019 Assessment Year: 2013-14 Lender. The Assessee claimed that the findings returned by the Assessing Officer that the loan transaction was nothing but a circular trading of entries passed in the books of accounts was based upon conjecture and surmise as in the case of the Assessee there was actual movement of funds from banking channels. The aforesaid submissions made by the Assessee during the appellate proceedings did not find any favour with CIT(A) who confirmed the addition of INR 5,320 Lacs made by the Assessing Officer under Section 68 of the Act. 19. Being aggrieved, the Assessee preferred appeal on this issue before us. We have perused the material on record and taken into consideration the submission on behalf of the Assessee before Assessing Officer/CIT(A) as well as the submission of the Ld. Departmental Representative. We note that the Assessee has challenged the order passed by the CIT(A) on the ground that violation of principal of natural justice on the ground that relevant document/details relating to enquiry made by the Assessing Officer were not furnished to the Assessee. However, we note that the CIT(A) has while giving his decision on the issue recorded that the details asked for by the Assessee were provided to the Assessee by CIT(A). The CIT(A) also reiterated the finding returned by the Assessing Officer that the Appellant has not submitted any documentary evidence to substantiate its claim. However, we note that the submissions made by the Assessee before the CIT(A) have not been dealt with by the CIT(A) on the ground that the same are merely in the nature of narration of events. Further, it is not clear whether the Assessee was confronted with the documents/details on which reliance was placed by the Assessing Officer. The Assessee had specifically contended that for the Assessment Year 2013-14, the Lender has ITA. No. 1347 & 1462/Mum/2019 Assessment Year: 2013-14 been assessed to tax by the same Assessing Officer and the financial statement and returned filed by the Assessee for the Assessment Year 2013-14 have been accepted. We also note while making the addition of INR 5,320 Lacs the Assessing Officer has not taken into consideration the fact that a part of the loan was received from PRP International and Nissim Traders Pvt. Ltd. on account of the Lender which suggests that the aforesaid two entities were sourced of funds being lent to the Assessee by the Lender. This aspect has not been dealt with by the CIT(A). In view of the aforesaid facts and circumstances, we deem it appropriate to remand this issue back to the file of CIT(A) for fresh adjudication after taking into account all the details and documents already placed on record by the Assessee. The CIT(A) is directed to provide to the Assessee all the documents/details pertaining to ABG International Pvt. Ltd. and the Lender on which reliance was placed by the Assessing Officer, and consider the response/submissions, if any, furnished by the Assessee. The Assessee is directed to cooperate in the hearing and furnished details/documents, if any, requisition by the CIT(A). It is clarified that the onus to prove the identity & creditworthiness of the Lender as well as to prove genuine transaction undertaken by the Assessee with the Lender would vest with the Assessee. In terms of the aforesaid directions, Ground No. 8 and 9 raised by the Assessee are allowed for statistical purposes.

Ground No. 1 to 15 raised in the present appeal by the Revenue pertain to the order of CIT(A) deleting the addition of INR 2,89,58,332/- made by the Assessing Officer on account of transfer pricing adjustment proposed by the TPO vide order, dated 31.10.2016, passed under Section 92CA(3) of the Act. 13 & 1462/Mum/2019 Assessment Year: 2013-14 21. During the assessment proceedings, the TPO noted that the Assessee had paid INR 152,32,04,463/- as share application money to its Associate Enterprise (AE), namely Varada Marine Pte. Ltd. According to the TPO, there was a unreasonable in allotment of shares as no shares were allotted till the date of undertaking assessment proceedings in financial year 2016-17. Therefore, the TPO treated the transaction of giving share application money as transaction of giving interest free loan to the AE. Taking rate of 4.26% the TPO computed arm‟s length interest which should have been charged from AE at INR 2,89,58,332/- and proposed transfer pricing adjustment of the like amount which was incorporated by the Assessing Officer in the Assessment Order dated 31.01.2017, passed under Section 143(3) read with Section 144C(3) of the Act. 22. Being aggrieved, the Assessee carried the issue before CIT(A). The CIT(A) deleted the addition by following, inter alia, the decision of Hon‟ble Bombay High Court Vodafone India Services Pvt. Ltd. vs. Union of India :[2014] 368 ITR 1 (Bombay) and DIT, International Taxation – II, Mumbai vs. Besix KierDabhol SA : [2012] 210 Taxman 151 (Bombay) (Mag.)[30-08-2012]. 23. Being aggrieved, the Revenue has preferred the present appeal. 24. We have considered the submissions advanced by the Ld. Departmental Representative and perused the material on record. We note that in the case of Besix KierDabhol SA (supra) it was held by the Hon‟ble Bombay High Court that in absence of specific provisions contained in the Act it was not possible to re- characterized a transaction of granting loan to a transaction of subscribing to equity and thereby, disallowing the payment of interest. In the present case, the TPO/Assessing Officer has ITA. No. 1347 & 1462/Mum/2019 Assessment Year: 2013-14 sought to tax notional interest in the hands of the Assessee by re- characterizing the share application money as loan. The CIT(A) deleted the addition holding that the aforesaid re- characterization was not possible in view of the decision of Mumbai Bench of the Tribunal in the case of Topsgrup Electronic Systems Ltd. vs. ITO 8(3)(3), Mumbai:[2016] 48 ITR(T) 753 (Mumbai) wherein it was held that re-characterization of investment in share capital into loan is not possible under the Indian transfer pricing provisions by drawing support from the discussions of the Hon'ble Bombay High Court in the case of Besix Kier Dabhol SA (supra). We further note that in the case of Vodafone India Pvt. Ltd. (supra), it has been held by the Hon‟ble Bombay High Court that income arising from international transaction is a condition-precedent for computing arm‟s length price and in absence of such income, the Indian transfer pricing provisions would not apply. In the present case, the Assessee has given majority of share application money to its wholly owned subsidiary between during the financial year 2012-13. It was not the case of the TPO/Assessing Officer that there was a delay in allotment of shares as regards Assessment Year 2013-14 which is before us is concerned. There is nothing on record to attribute any reasons that the transaction was in the nature of debt. Accordingly, we do not find any reason to interfere with order passed by the CIT(A) by relying binding judicial precedents of the Hon‟ble Bombay High Court which are applicable in the facts and circumstances of the present case. Accordingly, Ground No. 1 to 15 raised by the Revenue are dismissed.

Ground No. 16 to 26 raised by the Revenue pertains to transfer pricing addition on account of guarantee commission. In paragraph 12 to 15 above while disposing of Ground No. 7 raised & 1462/Mum/2019 Assessment Year: 2013-14 in appeal preferred by the Assessee we have concluded that we do not find any infirmity in order passed by the CIT(A) as the same is in line with the judgment of the Hon‟ble Bombay High Court in the case of Everst Kento Cylinder Ltd. (supra). Therefore, Ground No. 16 to 26 raised by the Revenue seeking enhancement of guarantee commission rate from 0.5%, as determined by the CIT(A), to 2.08%, as determined by the Assessing Officer are dismissed.

In the result, the appeal preferred by the Assessee [ Revenue [ITA No. 1462/Mum/2019] is dismissed. Order pronounced on 28.02.2023.