FIVE STARS BULKCARRIERS P.LTD,MUMBAI vs. DCIT CIR 15(1), MUMBAI

आदेश / ORDER PER ANIL CHATURVEDI, AM :

Assessee is a company stated to be engaged in the business of Charter and Hire of Ships. Assessee electronically filed its return of income for A.Y. 2007-08 on 12.10.2010 declaring total income at

Rs.52,64,808/-. The case was selected for scrutiny and thereafter

assessment was framed u/s 143(3) of the Act vide order dt.01.03.2013

and the total income was determined at Rs.1,92,66,830/-. Aggrieved by

the order of AO, assessee carried the matter before Ld.CIT(A), who vide

order dated 31.11.2014 (in appeal No.CIT(A)-15/Curr.172/14-15)

granted partial relief to the assessee. Aggrieved by the order of

Ld.CIT(A), assessee is now in appeal before us and has raised the

following grounds :

“1.1 The learned CIT(A) erred in confirming the Transfer Pricing adjustment of Rs. 1,20,23,900/- made by the learned Assessing Officer in respect of corporate guarantee given by the appellant company to the banks for the purpose of loans given by them to the Appellant Company's AE.

1.2 The learned CIT(A) erred in not appreciating that giving of corporate guarantee as a collateral security does not fall within the definition of International Transaction as defined in section 92B( 1) of the Income Tax Act, 1961 as the said transaction has no bearing on profits, income, losses or assets of the appellant company.

1.3. The learned CIT(A) erred in not appreciating that -

• The corporate guarantee was a collateral security

• The banks had specifically provided that no guarantee commission shall be payable by the AE to the Appellant Company and hence, there was no question of charging any commission by the assessee company from its AE.

• the corporate guarantee which is a collateral security does not fall within the definition of an "international transaction"

1.4 Without prejudice to above, the learned CIT(A) erred in not appreciating that giving and taking of a corporate guarantee are part of closely linked transactions and the ALP of said "international transaction" will have to be computed at Rs. Nil as the company is prohibited from charging any guarantee commission to its AE as per the sanction letter of the banks and the documents filed under the FEMA regulations.

1.5. The learned CIT(A) erred in not appreciating that the Bank of Baroda, London had confirmed that the rate of interest charged to the AE was as per the commercial understanding irrespective of availability of corporate guarantee provided by the appellant company and hence the addition of Rs. 1,20,23,900/- on account of corporate guarantee was not warranted on the facts of the case. "

1.6 Without prejudice to above, the learned CIT(A) erred in not appreciating that the ALP of the above "international transaction" worked out by the learned Assessing Officer is very high and needs to be reduced substantially as the said guarantee is only a collateral security and

secondly, as the primary security provided by the AE adequately covered the credit facility provided by the banks. 2.1 The learned CIT(A) erred in not appreciating that the interest on Escrow Accounts of Rs. 6,12,860/- was not chargeable to tax as non- tonnage income because the interest on Escrow Accounts was inextricably linked to the loans taken from banks for shipping activity and hence was part of shipping income of a tonnage tax company. 2.2 Without prejudice to above, the above interest income had to be netted out against interest paid on shipping loans.”

Corporate Guarantee Commission.

3.1. During the course of assessment proceedings, AO noticed that

assessee company had opted for Tonnage Tax Scheme u/s 115VP of the

Act being the special provision relating to income of shipping companies.

AO further noticed that assessee had given corporate guarantee in

respect of loans provided to its Associated Enterprise (A.E.) M/s. Ganesh

Shipping Inc. Panama, a foreign company, subsidiary of the assessee.

The assessee was asked to show cause as to why in computing Arms

Length Price (ALP) of the international transactions in respect of

corporate guarantee commission necessary Transfer Pricing

Adjustments not be made. In response to the query of the AO, assessee

made the submissions which were not found acceptable to the AO. AO

noted that M/s. Ganesh Shipping Inc. Panama was 100% subsidiary of

assessee and the assessee company jointly with B.G. Shrike

Construction Technology Pvt. Ltd., had given guarantee on behalf of

M/s. Ganesh Shipping Inc. Panama towards facilitation of loans for

acquisition of vessels. AO noted that assessee has not recovered any

amount towards guarantee fee from it. AO noted that the Corporate

Guarantee Agreement was jointly signed by the assessee and M/s. B.G.

Shirke Construction Technology Pvt. Ltd., in favour of Bank of Baroda.

As per the agreement, the nature of guarantee furnished was irrevocable

and unconditional. AO was of the view that irrevocable and

unconditional guarantee furnished to the Bank carries a high level of

risk and the transaction relating to the provision of corporate guarantee

for the benefit of A.E. falls within the meaning of international

transaction as per Sec.92B(1) and 92B(2) of the Act. He was further of

the view that for the guarantee in the form of separate agreement as

given to ship owners provides a benevolent advantage to the A.E. in

obtaining credit facilities from the banks. He was of the view that but

for the guarantee of the assessee, no one would have lent money to M/s.

Ganesh Shipping Inc. Panama or would have lent the amount at a much

higher rate. He was further of the view that providing a guarantee

represents a transfer of benefit to the guarantee company from the

guarantor of the company and therefore, an arm’s length consideration

should be recovered by the guarantor for providing such a benefit. AO

therefore decided to compute the Arms Length Price (ALP) at 1.5% on

outstanding (as on 31.03.2010) net value of corporate guarantee given

and availed by the assessee and calculated the corporate guarantee

commission at Rs.1,20,23,900/- and accordingly, the addition was

made in the hands of the assessee. Aggrieved by the order of AO,

assessee carried the matter before Ld.CIT(A), who upheld the order of

AO.

Aggrieved by the order of Ld.CIT(A), assessee is now in appeal

before us.

Ld.CIT(A) and further submitted that assessee had given corporate

guarantee to Bank of Baroda, London for acquisition of M/s. Five Stars

Bulkcarriers Pvt. Ltd. costing 11.5 mln USD approximately. He

submitted that as per the terms and conditions stipulated by the Bank

of Baroda, an irrevocable and unconditional corporate guarantee was to

be given by Five Star Bulkcarriers Pvt. Ltd (assessee) and B.G. Shrike

Construction Technology Pvt. Ltd., in accordance with the law

applicable and as per the Reserve Bank of India (RBI) guidelines. He

submitted that the sanction letter also stipulated that no guarantee

commission shall be payable by the company to the guarantors. He

pointed to the copy of the sanctioned letter which is placed at Page 30 to

38 of the Paper Book. He submitted that when the sanctioning bank

had stipulated the condition of no guarantee commission being payable

to the guarantors in accordance with the applicable R.B.I guidelines, the

payment of commission if made to the assessee would have been in

violation of the applicable rules and regulations and in such a situation,

the AO was not justified in making addition of the guarantee

commission. He further submitted that B.G. Shrike Construction

Technology Pvt. Ltd., had also given the guarantee jointly to M/s.

Ganesh Shipping Inc. Panama but no addition on account of corporate

guarantee commission was made in the hands of assessee though the

transaction arose from the same guarantee given. Without prejudice to

the contention of the assessee that no addition be made, Ld.A.R.

submitted that the rate of guarantee commission of 1.5% considered

by the AO is too high. He submitted that Hon’ble Bombay High Court in

the case of CIT Vs. Everest Kanto Cylinder Ltd., Vs. DCIT reported in

378 ITR 57 has held the addition on account of guarantee commission

be made at 0.5%. He further submitted that in the case of Everest

Kanto Cylinder Ltd., (supra), there was no stipulation or condition by

the Bank for not charging commission. He therefore submitted that no

addition is called for in the present case. Ld. D.R. on the other hand

supported the order of AO and Ld.CIT(A).

record. The issue in the present ground is with respect to addition

made on account of ALP transaction on corporate guarantee. It is an

undisputed fact that for purchase of vessels by Ganesh Shipping Inc.

Panama, an irrevocable and unconditional corporate guarantee was

given by the assessee and M/s. B.G. Shirke Construction Technology

Pvt. Ltd., pursuant to the conditions stipulated by the Bank of Baroda,

London. The sanction letter issued by the Bank of Baroda, London

which is also placed on record by the assessee also reveals that the

corporate guarantee was to be given in accordance with the applicable

R.B.I. guidelines and it further stipulated that no guarantee commission

was payable by Ganesh Shipping Inc. Panama it to the guarantors. It is

thus seen that the guarantee has been given in terms of sanction letter

issued by Bank of Baroda and the non-charging of guarantee

commission is also as per the conditions stipulated by the Bank. It is

also a fact that the corporate guarantee has been given by the assessee

as well as B.G. Shirke Construction Technology Pvt. Ltd., and no

addition on account of guarantee commission has been made in the

hands of B.G. Shirke Construction Technology Pvt. Ltd. It is only in the

hands of the assessee that the addition has been made by the AO. We

are of the view that when the guarantee has been given by two concerns

and on similar terms and conditions arising out of the same transaction,

two different and contradictory stands cannot be taken by the Revenue

i.e., no addition is made on account of guarantee commission in the

case of B.G. Shirke Construction Technology Pvt. Ltd., and addition is

made only in the hands of the assessee. Further since the non-charging

of guarantee commission is pursuant to the conditions stipulated by the

sanctioning Bank, we are of the view that no addition on account of

non-receipt of guarantee commission is called for in the present case.

We therefore direct the deletion of the addition made by the AO in the

hands of assessee. Thus, the grounds of the assessee are allowed.

together.

6.1. During the course of assessment proceedings, AO noticed that

assessee had received interest income of Rs.6,12,860/-. The assessee

was show caused as to why the same should not be considered as non-

tonnage income and not brought to tax. Assessee inter-alia submitted

that assessee had availed loans for purchase of vessels and had paid

interest of Rs.6.42 crore during the year. As per the sanction condition

of loan, assessee was required to maintain the minimum balance of

0.186 mln USD throughout the tenure of loan in DSRA account and it

could not be utilized for re-payment of outstanding balances. It was

submitted that assessee had earned Rs.6,12,860/- on DSRA account

and assessee as per the prevailing accounting standards has shown

interest income separately and had not netted off interest payment

against the interest expenditure. It was further submitted that no

addition of similar interest earned by the assessee was made in A.Y.

2008-09 and 2009-10. The submissions of the assessee were not found

acceptable to the AO. AO also noted that assessee also earned interest

on income tax refund of Rs.4,64,641/- AO considered the aggregate

amount of Rs.10,77,501/- as normal income. Aggrieved by the order

of AO, assessee carried the matter before Ld.CIT(A), who upheld the

order of AO by observing as under :

“The submissions of-the appellant are summarized as under.-

i. Appellant submitted that, the interest is earned on ESCROW accounts kept with banks who had lent money to the company for acquisition for vessels. Thus interest earned has a direct nexus to the interest paid by our company and if the same are I netted out then the net income is Rs. Nil. ii. It was further submitted that appellant has received interest of Rs. 6,12,860/- on ESCROW A/c kept with the Bank of India who had lent loan funds to the appellant company for acquisition of Vessel “Maha Padmaja”. As per the sanctioned loan terms a minimum balance of USD 0.186 mln in Indian Rupees is to be maintained throughout the tenure of the loan with Bank of India, Chakala Branch in Debt Service Reserve Account (DSRA]. The DSRA account has to be compulsorily maintained and cannot be utilized for repayment of outstanding loan balance. Thus the above interest received is in the nature of Business Income and needs to be netted off against the interest paid to Bank: of India for the said loan. As the interest paid is higher than the interest earned there is no net income earned by our company and hence the interest received of Rs.6,12,860/- cannot be taxed in isolation i. e. without allowing deduction of the interest paid. In view of above, the Assessing Officer clearly erred in making the addition of Rs. 10,77,501/-. It may be noted that, company is subject to' tax under Tonnage Tax Scheme and the addition of Rs.1 0,77,501/- is not justified-in light of the above facts. iii. In view of above, it was requested to delete the addition of Rs.10,77,501/-.

5.4. I have considered the facts of the case, observations of the AO in the order U/S 143(3) of the 1.T. Act. The contentions 1 submissions of the appellant as above are being discussed and decided as under : i. Appellant submitted that the interest of Rs. 6,12,860 received by it was on escrow account which was compulsorily required to be maintained and hence it was business income and required to be netted off against interest paid. However I do not agree with this contention of the appellant since in the case of South India Shipping Corporation vs CIT 240 ITR 024, it was held by Hon'ble Madras High Court that interest income earned from deposits in banks is to be taxed under the head "income from other sources". Similar observations were made by Hon’ble Supreme Court in the case of Tuticorin Alkali Chemical and Fertilizer 227 ITR 172 and Pandian Chemicals 183 CTR 99. Further no netting of interest can be allowed since the interest income is to be taxed under the head "income from other sources" while interest paid is

admittedly a business expenditure. Accordingly this contention of the appellant is not acceptable. ii. No submissions have been made with reference to the interest on income tax refund of Rs.4,64,641. Accordingly the same is held to be business income and has rightly been taxed by the assessing officer as such. iii. This ground of appeal is therefore dismissed.”

authorities and with respect to the interest earned from Bank,

submitted that the interest received was not in the nature of business

income and should be netted off against the income paid for the loan

and since the interest paid is higher than the interest earned then there

is no income earned by the assessee and therefore the amount cannot

be taxed. He further submitted that assessee has opted for special

provision relating to income of shipping companies under Chapter XIIG

of the Income Tax Act. He submitted that as per the provisions of

Sec.115VP, the tonnage income of taxing company has to be computed

as per the provisions stipulated therein. He submitted that the

provisions of Sec.115 VP are akin to the deeming provision of Sec.44AD

of the Act and since the business of the assessee is only operating of

the ships, the entire income earned by assessee is to be computed

under the Chapter XIIG. He submitted that interest earned by the

assessee was on the amount of ESCROW deposits kept by the assessee

and which the assessee was required to maintain as per the conditions

stipulated by the Bank. In such a situation, the interest received by the

assessee is to be considered to be normal business income from

shipping business and cannot be considered to be income from other

sources. He further submitted that if the interest received is netted

against the interest payment, the assessee has not earned net interest

and in such a situation also the amount is to be considered as normal

business income from shipping business and not be taxed at normal

rates. With respect to interest earned on income tax refund he fairly

agreed with the action of AO.

record. The issue in the present ground is with respect to considering

the amount earned on interest as income from other sources and

therefore held by the AO to be as income earned from non-tonnage

activity and accordingly taxable at normal income. Before us, at the

outset, Ld.A.R. submitted that as far as interest from income tax refund

of Rs.4,64,641/- is concerned, he does not dispute the action of AO and

Ld.CIT(A). The only dispute is with respect to the interest received of

Rs.6,12,860/- from the bank. It is assessee’s contention that assessee

had availed loan from Bank of India for purchase of vessel “Maha

Padmaja” and as per the terms and conditions, the assessee was

required to maintain a minimum balance of 0.186 mln USD throughout

the tenure of the loan. On such balance maintained by the assessee it

had earned interest of Rs.6,12,860/-. It is also a fact that assessee had

paid interest of Rs.6,42,99,091/- on loan for purchase of vessels and

which has been claimed as expenditure in the Profit and Loss account.

It is a fact that if the interest paid and earned are considered in totality,

the assessee has paid net interest. Further considering the fact that the

assessee was required to maintain the deposits as per the sanction

terms of the bank and in view of the facts cited hereinabove, we are of

the view that AO was not justified in considering the interest of

Rs.6,12,860/- to be non tonnage activity. We therefore set aside the

order of AO and direct the AO to consider it as income from shipping

business and thus, the grounds of assessee are partly allowed.

Order pronounced on 16th day of October, 2019.

Sd/- Sd/- (SUSHMA CHOWLA) (ANIL CHATURVEDI) �या�यक सद�य / JUDICIAL MEMBER लेखा सद�य / ACCOUNTANT MEMBER

पुणे Pune; �दनांक Dated : 16th October, 2019. Yamini

आदेश क� ��त�ल�प अ�े�षत/Copy of the Order forwarded to : 1. अपीलाथ� / The Appellant 2. ��यथ� / The Respondent 3. CIT(A)-15, Mumbai. 4. Pr. CIT-5, Mumbai. 5 �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, “बी” / DR, ITAT, “B” Pune; गाड� फाईल / Guard file. 6.

आदेशानुसार/ BY ORDER

// True Copy // व�र�ठ �नजी स�चव / Sr. Private Secretary आयकर अपील�य अ�धकरण ,पुणे / ITAT, Pune.