Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, K BENCH, MUMBAI
IN THE INCOME TAX APPELLATE TRIBUNAL "K" BENCH, MUMBAI SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER SHRI RAHUL CHAUDHARY, JUDICIAL MEMBER M/s Greatship (India) Ltd., C/o Kalyaniwala & Mistry LLP, Esplanade House, 29, Hazarimal Somani Marg, Fort, Mumbai - 400001 [PAN: AABCG8542K] ……………. Appellant Vs Assistant Commissioner of Income Tax, Range - 5(2)(2), Mumbai, Room No. 568, Aayakar Bhavan, …………….. Respondent Maharishi Karve Road, Mumbai - 400020
Appearances For the Appellant/ Assessee : Shri M M Golvala, Shri Akram Khan For the Respondent/Department : Dr. Yogesh Kamat Date of conclusion of hearing : 29.03.2022 Date of pronouncement of order : 27.06.2022 O R D E R Per Rahul Chaudhary, Judicial Member: 1. The present appeal is directed against assessment order dated, 20.09.2019 passed under Section 143(3) read with Section 144C(13) of the Income Tax Act, 1961 [hereinafter referred to as ‘the Act’] for the Assessment Year 2015-16, as per directions issued Assessment Year: 2015-16 by Dispute Resolution Panel-1, (WZ),Mumbai (hereinafter referred to as ‘the DRP’) under Section 144C(5) of the Act.
Appellant has raised following rounds of appeal: 1. “The Transfer Pricing Officer (TPO) erred in passing the order under section 92CA(3) in gross violation of the principle of natural justice. 2. The Assessing Officer (AO)/Transfer Pricing Officer (TPO) /Dispute Resolution Panel (DRP) erred in holding that the transaction of giving financial guarantee by the Appellant on behalf of its Associated Enterprises (AEs) was an "international transaction" under Section 92B of the Act. 3. The AO/ TPO / DRP erred in determining the Arm's Length Price of the financial guarantees given by the Appellant on behalf of its AES @ 1.25% per annum. 4. The AO/TPO/ DRP erred in making a transfer pricing adjustment of Rs.17,09,03,763/- on account of guarantee commission. 5. The TPO erred in not confronting the Appellant with the information / material collated by him under section 133(6) of the Income-tax Act and upon which he has relied upon to make an adjustment in respect of financial guarantee commission. 6. The AO/TPO / DRP failed to appreciate that giving of financial guarantees by the Appellant on behalf of its subsidiaries was a shareholder activity for which no charge is required.
The AO/TPO/ DRP erred in rejecting the internal CUP method and arm's length price of 0.40% p.a. adopted by the Appellant for benchmarking guarantee commission.
2 Assessment Year: 2015-16
Without prejudice to Ground Nos. 1 to 7, 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. 9. The AOTPO/ DRP erred in holding that the interest charged by the Appellant at the rate of LIBOR + 2.9% per annum in respect of loan of USD 71.5 million given to its AE, Greatship Global Holdings Ltd., Mauritius, was not at arm's length. 10. The TPO DRP erred in making a transfer pricing adjustment of Rs.33,25,360 in respect of loan of USD 71.5 million given by the Appellant to Greatship Global Holdings Ltd., Mauritius by holding that the arm's length price of the loan was LIBOR +3.332% p.a. 11. The AO/TPO/DRP erred in not following the order of the DRP for the Assessment Year 2011-2012 wherein this very loan given to Greatship Global Holdings Ltd. (GGHL) at interest rate of LIBOR + 2.9% was held to be at arm's length.
The AO/TPO/DRP erred in rejecting the benchmarking analysis conducted by the Appellant in respect of interest on loan given to AE, GGHL.
Without prejudice to Ground Nos. 9 to 12, the Assessing Officer/TPO/DRP erred in computing the arm/s length price of the loan given by the Appellant to its AE in an arbitrary manner.
The AO/DRP erred in disallowing further expenses of Rs. 28,79,506/-under Section 14A read with Rule 8D(2)(iii).
3 Assessment Year: 2015-16 15. Without prejudice to Ground Nos. 9 to 12, the AO/TPO/ DRP erred in computing the arm's length price of the loan 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.11,21,602/- by the Appellant under section 14A was incorrect.
The Assessing Officer erred in not granting TDS credit of Rs. 45,41,995/-.” 3. Brief facts of the case are that the Appellant is a shipping company, provides offshore oilfield services. The Appellant operates a fleet of offshore support vessels and jack-up rigs for providing marine logistics and drilling services to its clients for supporting their offshore oil & gas exploration and production services.
The Appellant filed its return of income for the Assessment Year 2015-16 on 29.11.2015 declaring total income of INR 56,94,20,730/-. The case of the Appellant was selected for scrutiny. During the assessment proceedings, the Assessing Officer noted that the Appellant had entered into international transactions with Associated Enterprises (AEs) and therefore, made a reference to the Transfer Pricing Officer (TPO) for computation of Arm’s Length Price (ALP) under Section 92CA(1) of the Act.
The TPO noted that during the Assessment Year 2015-16, the Appellant had continued to provide financial guarantee to DnB Nor Bank ASA, Singapore, Bank of Nova Scotia Asia Ltd and ING Bank, NV, Singapore Branch (Now Axis Bank) on behalf of Ms/ Greatship Global Offshore Services Pte. Ltd., Singapore (GGOS) and Greatship Global Energy Services Pte. Ltd., Singapore (GGES) in respect of 4 Assessment Year: 2015-16 loans availed by the AEs from the said bank. Though the Appellant had charged 0.3% per annum as Guarantee Commission from his AEs, in the return of income the Appellant had computed ALP at 0.4% per annum following internal CUP being average rate of guarantee commission paid by the Appellant to the banks, i.e. Kotak Mahindra Bank, Yes Bank & ABN Amro Bank, for giving guarantee to third parties (such as ONGC, Reliance Industries, Crain Petroleum) on behalf of the Appellant. Thus, making suo-moto transfer pricing adjustment of INR 1,98,62,972/- on account of Guarantee Commission. However, the TPO, taking note of the fact that in the transfer pricing orders for earlier assessment years external CUP was used for determining the ALP, adopted a rate of 2.07% per annum as ALP for guarantee commission, and proposed upwards transfer pricing adjustment of INR 33,50,97,840/-.
Further, the TPO also proposed upward transfer pricing adjustment in respect of interest on loan granted to AEs amounting to INR 33,25,360/-. The board of directors of the Appellant had sanctioned loan of USD 75 Million to its subsidiary, Greatship Global Holdings Ltd. Mauritius (GGHL) in the financial year 2010-2011. Part of the loan was disbursed in the financial year 2010-2011 and thereafter, in financial year 2011-2012. In total USD 71.5 Million was disbursed out of which USD 58.5 Million was repaid in the financial year 2012- 13 and therefore, USD 13 Million was outstanding as on 31.03.2014 which was repaid in full on 20.03.2015. For the relevant previous year, the Appellant charged interest at the rate of LIBOR Plus 2.9% per annum from GGHL which was benchmarked by the Appellant with the arithmetic mean of interest paid by the Appellant to various banks on foreign currency loans during the financial year 2010-11 relevant to Assessment Year 2011-12 which came to LIBOR Plus 1.829% and therefore, the Appellant contended that the 5 Assessment Year: 2015-16 interest rate of LIBOR Plus 2.9% charged by the Appellant to GGHL was at arm’s length. However, the TPO rejected the contention of the Appellant and conducted afresh search on www.bloomberg.com to arrive at the rate of interest on foreign currency loans availed by the companies in Mauritius during the relevant financial year to arrive at the average borrowing rate of LIBOR Plus 3.332% (as opposed to LIBOR Plus 2.9% determined by the Appellant). Thus, proposing upward transfer pricing adjustment of INR 33,25,260/-.
Accordingly, order dated 01.11.2018 was passed by the TPO under Section 92CA(3) of the Act proposing aggregate transfer pricing adjustment of INR 36,85,04,867/-.
On 07.12.2018, the Assessing Officer passed draft assessment order under Section 143(3) read with Section 144C(1) of the Act proposing aforesaid transfer pricing adjustment of INR 36,85,04,867/-. Further, the Assessing Officer also proposed a disallowance of INR 28,79,506/- under Section 14A of the Act read with Rule 8D of the Income Tax Rules, 1962 in addition to the suo motu disallowance of INR 11,21,602/- made by the Appellant in the return of income.
The Appellant filed objections before Dispute Resolution Panel-1, (WZ) [hereinafter referred to as ‘the DRP’] against the draft assessment order, dated 07.12.2018. The DRP granted relief to the Appellant by reducing the guarantee commission from 2.07% as determined by TPO to 1.25%. Apart from the aforesaid, no relief was granted by the DRP as all the objections raised by the Appellant were dismissed. The DRP issued directions under Section 144C(5) of the Act vide order, dated 13.08.2019, and on the basis
6 Assessment Year: 2015-16 of the same final assessment order was passed by the Assessing Officer on 20.09.2019 under Section 143(3) read with Section 144C(13) of the Act determining total income of the Appellant at INR 74,65,29,359/- after making (a) transfer pricing addition of INR 17,42,29,123/- under Section 92CA(3) of the Act and (b) a disallowance of INR 28,79,506/- under Section 14A read with Rule 8D of the Income Tax Rules, 1962. 8. Being aggrieved, the Appellant has filed the present appeal raising 16 grounds of appeals.
Ground No.1 & 2 The Ld. Authorised Representative for the Appellant appearing before us submitted made a statement under instruction that he would not be pressing Ground No. 1 and Ground No.2. Ground No.1 pertains to violation of principle of natural justice and Ground No. 2 pertains to the claim of the Appellant that providing guarantee does not constitute an international transaction. Accordingly, Ground No. 1 & 2 are disposed off as being not pressed.
Ground No. 3 to 8 9. Ground No. 3 to 8 are directed against determination of ALP of the financial guarantee given by the Appellant to its AEs @ 1.25% per annum by the DRP. The Learned Authorised Representative of the Appellant appearing before us, referring to the submission filed before DRP, submitted that the TPO/DRP has failed to appreciate that (i) the AEs on whose behalf Appellant had given financial guarantees to banks were wholly owned step-down subsidiaries of the Appellant. The aforesaid AEs were incorporated in 2006/2007 and had been functioning as fully operational companies since then. (ii) The AEs had provided adequate securities to the banks and had 7 Assessment Year: 2015-16 enough assets of their own and therefore there was negligible risk of default in repayment of loan (iii) The TPO/Assessing Officer erred in holding that credit rating of AEs was poor. The AEs had credit rating of BWR A which was similar to the credit rating of CRISIL AA/stable given to the Appellant and therefore, an unrelated guarantor would have perceived same level of risk in providing financial guarantee to the Appellant and/or the AEs and therefore the rate of 0.4% per annum, being average rate of guarantee commission paid by the Appellant to the banks for providing guarantee on behalf of the Appellant to the third parties, constituted an internal CUP for benchmarking the transactions. The Ld. Authorised Representative for the Appellant submitted this issue was decided in favour of the Appellant by the decision of the Tribunal in the case of the Assessee for the Assessment Years 2008-09, 2009-10, 2011-12, 2013-14 and 2014-15. 10. On the other hand, the Ld. Departmental Representative defended the impugned order on the issues raised by the Appellant in the appeal and prayed for upholding the findings of Assessing Officer/TPO/DRP.
We have considered the rival submission and perused the material on record. The DRP has while reducing the rate of guarantee commission from 2.07% as determined by the TPO to 1.25% relied upon the order of DRP for the Assessment Year 2013-14 and 2014- 15. However, we note that in appeal filed by the Appellant against the order of DRP for the Assessment Years 2013-14 (ITA No. 7151/Mum/2017) and 2014-15 (ITA No. 6083/Mum/2018), the Tribunal accepted the ALP for corporate guarantee determined by the Appellant and deleted the transfer pricing addition. We note that same view has been taken by the co-ordinate bench of the 8 Assessment Year: 2015-16 Tribunal in the case of the Appellant for the assessment years 2008-09 (ITA No. 7673/Mum/2012), 2009-10 (ITA No. 1703/Mum/2014), 2011-12 (ITA No. 1457/Mum/2016), and 2012-13 (ITA No. 1287/Mum/2017),
The relevant extract of the decision of the Tribunal for Assessment Year 2012-13 (ITA No. 1287/Mum/2017) & 2014-15 (ITA No. 6083/Mum/2018) read as under:
“9. We have heard.....................................................In fact, involving identical facts the Tribunal in the assessee’s own case for A.Y 2008-09, ITA No. 7673/Mum/2012 and A.Y 2009- 10, ITA No. 1703/Mum/2014, vide a consolidated order dated 21.06.2019 had approved the determination of ALP of corporate guarantee provided by the assessee to a foreign bank for facilitating raising of loans by its foreign AE on the basis of the Internal CUP i.e guarantee commission that was paid by the assessee to a bank for standing guarantee on its behalf for a third party. Further, the Tribunal after drawing support from the order of the Hon‟ble High Court of Bombay in the case of CIT Vs. Everest Kanto Cylinders Ltd. (2015) 378 ITR 57 (Bom), had approved the determination of ALP of the corporate guarantee given by the assessee to the bank in order to facilitate raising of loan by its AE i.e on the basis of the aforesaid Internal CUP applied by the assessee. In its aforesaid order the Tribunal had observed as under:
“17. We have carefully considered the rival submissions. In the present case, the assessee has made a suo-motto transfer pricing adjustment on Corporate Guarantee fee @0.55% from its AE, and such transaction has been considered as an ‘’international transaction‟ within the meaning of Sec. 92B of the Act. Accordingly, the arm’s length price of such transaction has been determined by 9 Assessment Year: 2015-16 the TPO at 3.00% which has resulted in enhancement of assessee’s income, and the same was restricted by the DRP at 1.50%. The issue before us is restricted to whether the arm’s length rate of the Corporate Guarantee is to be taken at 0.55%, which has been suo- motto taken as transfer pricing adjustment by the assessee, or the rate of 1.50% determined by the income-tax authorities. Notably, the TPO has benchmarked the instant transaction of provision of Corporate Guarantee on the basis of respective abilities of the assessee and AE to raise Bonds in the Indian domestic market. The TPO asserted that based on the debt-equity ratio, the credit rating of the assessee company was higher in comparison to that of the AE and, therefore, the rate of interest payable by the AE to raise bonds in the Indian market would be higher than the rate payable by the assessee-company. Such differential has been used to determine the Corporate Guarantee fee that should have been charged by the assessee company from its AE so as to determine the arm’s length price of the instant transaction. In our considered opinion, the aforesaid approach of the TPO is clearly inconsistent with the ratio laid down by the Hon‟ble Bombay High Court in the case of Everest Kanto Cylinder Ltd. (supra). Notably, in the case of Everest Kanto Cylinder Ltd. (supra), the dispute was relating to the adjustment made by the TPO in the matter of Guarantee commission earned for providing a Corporate Guarantee to the Bank in connection with the borrowings made by the AE of the assessee therein. The TPO determined the arm’s length price of such transaction based on the instance of commercial banks providing Guarantee on behalf of their clients. The Hon‟ble High Court held that the considerations which apply for issuance of Corporate Guarantee were distinct and separate from that of Guarantee provided by the banks and, therefore, the two
10 Assessment Year: 2015-16 transactions were incomparable. In our considered opinion, similar parity of reasoning is applicable in the present case too because the considerations which weigh for raising of bonds, that too in Indian market, are quite distinct and incomparable with the instance of providing of Corporate Guarantee to a bank abroad in connection with raising of loan from such bank by the AE of assessee outside India. Therefore, in our considered opinion, the exercise carried out by the TPO to arrive at the impugned arm’s length rate suffers from an inherent misconception as the benchmarking has been done between two incomparable situations. Therefore, we are unable to uphold the stand of the income-tax authorities.
Insofar as the adequacy of 0.55% rate charged by the assessee is concerned, we find enough reasonableness in the 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 11 Assessment Year: 2015-16 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
12 Assessment Year: 2015-16 pronouncements as had been relied upon by the assessee before the lower authorities as well as before us :
Particulars Guarantee Commission rate 1 Everest Kento Cylinder Ltd. Vs. ACIT (2012) 0.5 34 CCH 0528 (Mum) [Note : Order of Tribunal upheld by the Hon‟ble High Court of Bombay : CIT Vs. Everest Kento Cylinder Ltd. Vs. CIT (2015) 378 ITR 57 (Bom). 2 Reliance Industries Ltd. Vs. Addl. CIT (ITA No. 0.38% 4475/Mum/2007) 0.38% 0.38% 3 Asian Paints Ltd. Vs. Addl. CIT (2014) 149 .20% ITD 511 (Mumbai) 0.20% 4 Aditya Birla Minacs Worldwide Ltd. Vs. JCIT .5% (2016) 47 CCH 760 (Mum) 5 Godrej Household Products Ltd. Vs. Addl. CIT .5% 41 taxmann.com 386 (Mum) 6 Nimbus Communications Limited Vs. Addl. .5% CIT (2014) 149 ITD 0508 (Mumbai) 7 Hindalco Industries Ltd. Vs. Addl. CIT (62 .5% taxmann.com 181)(Mum) 8 Manugraph India Ltd. Vs. DCIT (2015) 43 .5% CCH 348 (Mum) 9 Prolific Corporation Ltd. Vs. DCIT (55 .5% taxmann.com)(Hyd) 10 Glenmark Pharmaceuticals Ltd. Vs. Addl. CIT .5% Addl. CIT Vs. Glenmark Pharmaceuticals Ltd. (43 taxmann.com 191)(Mum) 11 Thomas Cook (India) Limited (2016) 47 CCH .5% 0162 (Mum)
Accordingly, in terms of our aforesaid observations we find no reason to dislodge the ALP of corporate guarantee determined by the assessee at 0.43% p.a by adopting Internal CUP method. In the backdrop of our aforesaid observations we are unable to persuade ourselves to subscribe to the determination of the ALP of the corporate guarantee at 2% p.a by the A.O/TPO. We, thus, uphold the ALP of corporate guarantee as determined by the assessee at 0.43% p.a and direct the A.O/TPO to vacate the upward transfer
13 Assessment Year: 2015-16 pricing adjustment of Rs. 28,69,70,745/- made in the hands of the assessee. The Grounds of appeal Nos. 1 to 7 are allowed in terms of our aforesaid observations.” (Emphasis Supplied)
In view of the above, we are not persuaded to depart from a view consistently taken by the Tribunal in the case of the Appellant for preceding assessment years. Respectfully following the above said decisions of the co-ordinate benches of the Tribunal in the case of the Appellant for the Assessment Years 2011-12, 2012-13, 2013-14 and 2014-15, we hold that corporate guarantee commission determined by the Appellant at the rate of 0.40 per cent per annum is at arm’s length not requiring any transfer pricing adjustment. Consequently, the transfer pricing additions of INR 33,50,97,840/- made by the AO to the extend confirmed by the DRP is deleted, and Ground No. 3 to 7 of the Appeal are allowed. Ground No. 8 is disposed off as being infructuous.
Ground No. 9 to 13 14. Ground No. 9 to 13 are directed against adoption of interest rate @ LIBOR plus 3.332% per annum as appropriate rate to benchmark interest charged on loan to AEs.
Ld. Authorised Representative of the Appellant appearing before us placed reliance on the written submission filed before DRP. Part loan of USD 40 Million was disbursed by the Appellant to GGHL during the financial year 2010-11 relevant to Assessment Year 2011-12. During the assessment proceedings for the Assessment Year 2011-12, the TPO had determined ALP taking interest rate of 6.17 percent per annum which was reduced to LIBOR plus 2.9% by the DRP. However, in the subsequent Assessment Years 2012-13, 2013-14 and 2014-15, the DRP did not follow the order of DRP for 14 Assessment Year: 2015-16 the Assessment Year 2011-12 on the basis of incorrect premise that loan was granted to a Singapore AE which is factually incorrect. Loan has been granted to GGHL a wholly owned Mauritius subsidiary of the Appellant. The Learned Authorised Representative for the Appellant submitted that the issue is covered in the favour of the Appellant by the decision of the Tribunal in Appellant’s own case of the Assessment Year 2012-13 (ITA No. 1287/Mum/2017), 2013-14 (ITA No. 7151/Mum/2017) and 2014-15 (ITA No. 6083/Mum/2018).
Per Contra, Ld. Departmental Representative supported the order passed by DRP on this issue and relied upon the order passed by TPO.
We have considered the rival submission and perused the material on record. We note that the Tribunal has in Appellant’s own case for the Assessment Years 2012-13, 2013-14 and 2014-15 decided this issue in favour of the Appellant. Since the same loan is continuing during the relevant assessment year, we do not see any reason to depart from a view consistently taken by the Tribunal in the case of the Appellant for the immediately preceding assessment years in respect of the same loan transaction. We note that the Tribunal has in the case of the Appellant for the Assessment Year 2013-14 (ITA No. 7151/mum/2017) has held as under:
“6. Similarly the issue of benchmarking of loan transaction is also recurring in nature and covered by the decision for AYs 2012-13 & 2014-15 (supra) wherein the bench observed as under: -
15 Assessment Year: 2015-16 14. We have in the backdrop of the contentions advanced by the authorised representatives for both the parties and perusing the orders of the lower authorities in context thereto, deliberated at length on the issue pertaining to benchmarking of the interest charged by the assessee on the loan advanced by it to its AE, viz. GGHL, Mauritius. Succinctly stated, the assessee had charged interest of Rs. 8,90,20,949/- from its AE, viz. Greatship Global Holdings Ltd. (for short “GGHL”) at the rate of LIBOR plus 2.9% mark-up. As noticed by us hereinabove, the loan to GGHL was sanctioned in the immediately preceding year i.e F.Y 2010-11 and was disbursed in parts in the said preceding year and the current financial year. Considering itself as the tested party, the assessee had benchmarked the interest charged on the loans advanced to its AE, viz. GGHL on the basis of the arithmetic mean of the interest rate that was paid by it on the foreign currency loans that were availed by it from foreign banks. As the arithmetic mean of the interest rates charged by the banks in respect of the foreign currency loans availed by the assessee worked out at LIBOR + 1.829%, as against the interest that was charged by the assessee on the loan given by it to its AE, viz. GGHL, Mauritius at LIBOR + 2.9% thus, the interest charged on the loan advanced to the AE was claimed to be at arm‟s length. As observed by us at length hereinabove, the TPO had rejected the Internal CUP that was applied by the assessee for benchmarking the interest charged on the loan advanced to its aforesaid AE, viz. GGHL, Mauritius, primarily for the reason that all the foreign currency loans which had been used as comparable by the assessee were fully secured upto 130% of the value of loan alongwith mortgage of the ship. Further, it was observed by the TPO that the assessee while benchmarking the interest transaction had failed to take cognizance of the 16 Assessment Year: 2015-16 mortgage, legal, documentation, insurance and other charges that were paid by the borrower. Also, it was observed by the TPO that not only penal interest was provided for in case of default of interest by the assessee, but the borrower assessee was also obligated to satisfy certain other requirements like maintaining of cash debt equity ratio etc. Backed by his aforesaid observations, the TPO was of the view that if the transaction cost, hedging cost, penal cost and cost of security were taken into consideration then rate of such borrowing would not be less than 700 basis points. On the basis of his aforesaid observations the TPO conducted search on www.bloomberg.com to find out the average interest rate of foreign currency loans taken by companies in Mauritius and finally determined the ALP of interest charged by the assessee on loan advanced to its AE, viz. GGHL, Mauritius at LIBOR + 3.32%. Accordingly, the TPO reworked out the ALP of the interest on the loans advanced by the assessee to its aforesaid AE, viz. GGHL, Mauritius at Rs. 9,87,60,852/- and made an consequential TP adjustment of Rs. 97,39,903/-.
Before us, it is the contention of the ld. A.R that as the DRP in the assessee’s own case for the immediately preceding year i.e A.Y 2011-12 had held the interest charged by the assessee at LIBOR + 2.9% p.a on the loan in question as at arm‟s length, therefore, in the absence of any shift in facts during the year in question there was no justification on the part of the TPO/DRP to have held the same as not being at arm‟s length. We have deliberated at length on the issue in question i.e transfer pricing adjustment carried out by the TPO/DRP as regards the interest charged by the assessee on the loan advanced to its AE, viz. GGHL, Mauritius. In our considered view, the benchmarking of the interest charged by the assessee on the loan advanced to its AE,
17 Assessment Year: 2015-16 viz. GGHL by applying internal CUP i.e arithmetic mean of the interest rates that were charged by the banks as regards the foreign currency loans availed by the assessee could not have been rejected by the TPO/DRP. Our aforesaid view is fortified by the order passed by the Tribunal while disposing off the cross-appeals in the case of the holding company of the assessee, viz. The Great Eastern Shipping Company Limited, & ITA No. 437/Mum/2012, dated 10.01.2014 for A.Y 2007-08 (copy on record). In its said order the Internal CUP in the form of interest paid by the assessee company on its own borrowings from bank to benchmark the interest charged by the assessee on a loan given to its AE was accepted. The Tribunal in its said order had upheld the benchmarking of the interest charged by the asseseee on the loan given to its AE, on the basis of the Internal CUP applied by the assessee i.e interest paid by the assessee on its foreign currency borrowings from KEIXM bank and State Bank of India. Accordingly, respectfully following the view taken by the Tribunal in its aforesaid order, we find no infirmity in benchmarking of the interest charged by the assessee on the loans advanced to its AE, viz. GGHL, Mauritius by applying of an Internal CUP i.e arithmetic mean of the interest rate charged by the banks on the foreign currency loans availed by the assessee during the year in question. Apart from that, we also find substance in the claim raised by the assessee before the lower authorities that the foreign currency loans obtained by its holding company viz. Great Eastern Shipping Company Ltd. at an interest rate of LIBOR + 1.79% p.a and LIBOR + 1.50% p.a during the year in question would also form a suitable Internal CUP. Further, we are of the considered view that in case of availability of an Internal CUP there was no need on the part of the TPO to have benchmarked the transaction by applying an 18 Assessment Year: 2015-16 external CUP. Our aforesaid conviction is supported from Para 3.26 of OECD guidelines, which reads as under:
“Internal comparables may have a more direct and closer relationship to the transaction under review than external comparable.”
As observed by us hereinabove, the Board of Directors of the assessee company had sanctioned a loan of USD 75 million in the immediately preceding financial year 2010- 11 on which interest rate of LIBOR + 2.9% p.a was fixed. Loan of USD 40 million was disbursed by the assessee to its AE in the financial year 201-11. Further, during the year in question i.e period relevant to A.Y 2012-13 a further loan of USD 31.5 million was disbursed to the AE. TPO in the immediately preceding year i.e period relevant to A.Y 2011-12 had made a TP adjustment in respect of the loan of USD 40 million that was disbursed during the said preceding year and had determined the ALP of the interest charged by the assessee on the said loan at 6.17% p.a. However, the DRP had vide its order for A.Y 2011-12 held that the interest charged by the assessee on the loan advanced to its AE was at arm‟s length. In our considered view, now when DRP in the case of the assessee for A.Y 2011-12 had held that the interest charged by the assessee on the loan advanced to its AE at LIBOR + 2.9% was at arm‟s length, therefore, there would be no justification in holding the same as not being at arm‟s length during the year in question i.e A.Y 2012-13. Also, the DRP in the assessee‟s case for A.Y 2010-11 had held that the interest rate of LIBOR + 300 basis points that was charged by the assessee on a loan of USD 4 million given to its AE, viz. GGES (and repaid) as being at arm‟s length. In the backdrop of the aforesaid facts, we find that the DRP had consistently been holding the interest rate of LIBOR + 2.9% / 3%
19 Assessment Year: 2015-16 charged by the assessee on the loans advanced to its AEs as at arm‟s length. On the basis of our aforesaid observations, we uphold the Internal CUP applied by the assessee for benchmarking the interest charged on the loans advanced to its AE, viz. GGHL; and hold the interest charged by it on the loan advanced to its AE, viz. GGHL at LIBOR + 2.9% as being at arm‟s length. The Grounds of appeal Nos. 8 to 11 are allowed in terms of our aforesaid observations.”
The bench has approved the benchmarking of these transactions on the basis of internal CUP. We find the facts to be similar in this year. The assessee has followed same methodology to benchmark the loan transactions. Therefore, the adjustment as confirmed by Ld. DRP would stand deleted. We order so. Ground Nos. 9 to 12 stands allowed which render alternative ground no.13 as infructuous in nature.” (Emphasis Supplied)
Respectfully following the above said decisions of the co-ordinate benches of the Tribunal in the case of the Appellant, we delete the addition of INR 33,25,360/- on account of upward transfer pricing adjustment relating to interest charged to AEs.
In view of the above, Ground No. 9 to 12 of the Appeals are allowed and Ground No. 13 is disposed off as being infructuous.
Ground No. 14 & 15 20. Ground No. 14 to 15 pertain to disallowance of INR 28,79,506/- under Section 14A of the Act read with Rule 8D of the Rules.
20 Assessment Year: 2015-16 21. The brief facts relevant to the adjudication of the issue before us are that during the relevant previous year the Appellant earned exempt dividend income of INR 1,14,75,994/- from surplus funds parked in Mutual Funds. In the return of income, the Appellant suo- moto disallowance of INR 11,21,602/- under Section 14A of the Act. Detail working of suo moto disallowance was given in Annexure 6 to tax audit report. However, the Assessing Officer computed disallowance under Section 14A by applying Rule 8D(2)(iii) of the Income Tax Rules, 1962 at INR 40,01,108/- and made a further disallowance of INR 28,79,506/- which was confirmed by the DRP. Now the Appellant is before us in appeal on this issue.
The Ld. Authorised Representative for the Appellant appearing before us submitted as that the Appellant had methodically identified actual expenses which can be reasonably treated as relatable to the exempt income and disallowed such expenses. The working of disallowance under Section 14A formed part of tax audit report of the Appellant. No part of interest expenditure was directly or indirectly related to the earning of exempt income as the Appellant had taken loans for acquiring qualifying ships. The Appellant has not claimed the interest expenditure as a deduction while computing its taxable income. Employee Costs of common employees (common to both tonnage and non-tonnage activities of the assessee company) who are engaged in functions like Accounts, Finance, HR, etc. were bifurcated between tonnage activities and non-tonnage activities in the ratio of operating revenue from the said activities which was 41 (tonnage): 59 (non-tonnage). The common administration expenses aggregating to INR 27,41,48,785/ were divided into expenses related to tonnage, non-tonnage and common expenses on the basis of the number of on-shore employees working for tonnage and non-tonnage activities and also 21 Assessment Year: 2015-16 common employees. The statement giving details of allocation made between tonnage, non tonnage and common expenses was filed during the assessment proceedings. Thereafter, the common administration expenses related to common employees of the Appellant were allocated between tonnage and non-tonnage activity in the ratio of operating revenue. i.e., 41 (tonnage) : 59 (non-tonnage). The statement of segmental profit and loss account was also filed during the assessment proceedings. The expenses which are allocated to non-tonnage activity have been further bifurcated between Treasury and Drilling activity. The expenses allocated to Treasury activity on the above basis aggregate to INR.45,19,667/- whereas the Treasury Income comprises of dividend income, interest on term deposits, interest on inter- company loans, gain on sale of mutual funds and other miscellaneous income. On the basis of the aforesaid, expenditure related to treasury department was computed at INR 45,19,667/- and arrived at an amount of INR 11,21,602/- being percentage of exempt income to the total income from investments for suo moto disallowance under Section 14A of the Act.
Treasury expenditure Exempt Income (INR 1,14,75,994/-) (INR 45,19,667) X __________________________________ Total Income (INR 4,62,44,293/-) On the basis of aforesaid, the Ld. Authorised Representative for the Appellant submitted that the Assessing Officer had failed to record objective satisfaction before invoking provision of Rule 8D of the Income Tax Rules, 1962. 23. Per contra, Ld. Departmental Representative submitted that since the Appellant had not made disallowance as per Rule 8D of the 22 Assessment Year: 2015-16 Income Tax Rules, 1962, the Assessing Officer was justified in making disallowance by applying the aforesaid rule. As regards, satisfaction the Ld. Authorised Representative for the Appellant submitted that satisfaction is discernible from the order passed by the Assessing Officer.
We have considered the rival submissions and perused the material on record including letter dated, 11.10.2018, filed before during the course of assessment proceedings, the statement of allocation of expenses, statement of segmental profits, Annexure 7 of tax audit report placed at page 39 to 49 of the paper book. We note that the Appellant had methodically identified actual expenses which can be reasonably treated as relatable to the exempt income and disallowed such expenses under Section 14A. However, the Assessing Officer had, without recording dissatisfaction, rejected the computation/statements furnished by the Appellant. The Tribunal has, in identical facts and circumstances, decided this issue in favour of the Appellant vide order dated 31.08.2021 passed in ITA No. 1457/Mum/2016 pertaining Assessment Year 2011-12 holding that the satisfaction recorded by the Assessing Officer in rejecting Appellant’s computation was not in accordance with the mandate envisaged under section 14A(2) of the Act. The relevant extract of the aforesaid decision of the Tribunal read as under:
“6. In ground no. 8 & 9 of appeal, assessee has assailed additional disallowance of Rs. 4,23,051/- made under section 14A read with Rule 8D. The primary contention of the assessee on this issue is that no satisfaction has been recorded by the AO before rejecting assessee’s computation of suo-moto disallowance. The assessee during the period relevant to the AY under appeal has earned dividend income of Rs. 5,29,42,293/-, the assessee has 23 Assessment Year: 2015-16 made suomoto disallowance of Rs. 35,74,694/- under section 14A for earning exempt income. The provisions of section 14A(2) of the Act mandates that having regard to the accounts of assessee, if the AO is not satisfied with correctness of the claim of the assessee in respect of expenditure incurred in relation to earning of exempt income, the AO shall determine the expenditure to be disallowed for earning exempt income in accordance with Rule 8D. Thus, the AO is under obligation to record his dissatisfaction before rejecting assessee’s computation of suo-moto disallowance under section 14A. Such satisfaction has to be recorded in objective manner having regard to the accounts of the assessee. A perusal of the draft assessment order reveals that the AO has rejected the computation of assessee without even examining the computation furnished by the assessee. The AO in the draft assessment order has discussed general principles for making disallowance under section 14A read with Rule 8D and has also referred to a case laws. However, there is no observation/comments whatsoever by the AO on the computation made by the AO. Thus, the satisfaction recorded by the AO in rejecting assessee’s computation is not in accordance with the mandate envisaged under section 14A(2) of the Act.”
Respectfully following the above decision of the co-ordinate Bench of the Tribunal we delete the disallowance of INR 28,79,506/- made by the Assessing Officer under Section 14A of the Act read with Rule 8D(2)(iii) of the Income Tax Rules, 1962. 26. In view of the above Ground No. 14 & 15 raised by the Appellant are allowed.
Ground No. 16 27. Ground No. 16 pertains to failure of the Assessing Officer to grant credit of tax deducted at source amounting to INR 45,41,995/-.
24 Assessment Year: 2015-16 28. The brief facts relevant to the issue are that the Appellant being aggrieved by the intimation, dated 31.01.2017, issued under Section 143(1) of the Act filed appeal before CIT(A) – 10, Mumbai which was disposed off vide order, dated 28.06.2018. The Appellant not being satisfied filed appeal (ITA No. 5562/Mum/2018) before the Tribunal which was disposed off vide order, dated 08.01.2020 giving certain directions to the Assessing Officer. The Ld. Authorised Representative for the Appellant submits that the Assessing Officer has not taken any steps pursuant to the order passed by the Tribunal. In the interest of justice we deem it appropriate to comply with the order dated 08.01.2020 passed by the Tribunal in ITA No. 5562/Mum/2018 while passing appeal effect order. Accordingly, Ground No. 16 is allowed.
In the result, appeal filed by the Appellant is allowed.
Order pronounced on 27.06.2022. (Prashant Maharishi) Judicial Member
म ुंबई Mumbai; दिन ुंक Dated : 27.06.2022 Alindra, PS
25 Assessment Year: 2015-16
आदेश की प्रतितिति अग्रेतिि/Copy of the Order forwarded to : 1. अपील र्थी / The Appellant 2. प्रत्यर्थी / The Respondent. 3. आयकर आय क्त(अपील) / The CIT(A)- 4. आयकर आय क्त / CIT 5. दिभ गीय प्रदिदनदि, आयकर अपीलीय अदिकरण, म ुंबई / DR, ITAT, Mumbai 6. ग र्ड फ ईल / Guard file.
आिेश न स र/ BY ORDER, सत्य दपि प्रदि //// उप/सह यक पुंजीक र /(Dy./Asstt.