GREATSHIP (INDIA ) LTD,MUMBAI vs. DCIT 5(1)(1), MUMBAI

The Ld. AR, at the outset submitted that Transfer Pricing (TP) issues are squarely covered by the earlier decision of Tribunal in assessee‟s own case for AYs 2012-13 & 2014-15, & ors., common order dated 05/04/2021. The copy of the order has been placed on record. The Ld. AR submitted that the transactions are exactly the same and the assessee has benchmarked these transactions following same methodology which has finally been approved by Tribunal in the cited decision. The Ld. AR also assailed the corporate additions as sustained in the final assessment order by placing reliance on various judicial pronouncements. The Ld. DR, on the other hand, supported the assessment framed by Ld. AO. However, the submission that TP issues are covered by the earlier order of the Tribunal could not be controverted. In the above background, our adjudication to the subject-matter of appeal would be as given in succeeding paragraphs. Assessment Proceedings 3.1 The material facts are that the assessee being resident corporate assessee is stated to be engaged in providing offshore oilfield services in India and internationally and also offers offshore logistics and drilling services with a fleet of vessels and rigs owned by it. 3.2 Since the assessee carried out certain international transactions with its Associated Enterprises (AE), the same were referred to Ld. Transfer Pricing Officer-2(2), Mumbai (TPO) u/s 92CA (1) for determination of Arm‟s Length Price (ALP). The subject matter of dispute before us is with respect to guarantee commission charged by the assessee from its AEs. It transpired that the assessee tendered financial guarantee to banks on behalf of its two Associated Enterprises (AE) namely Greatship Global Energy Services Pte. Ltd. (GGES) and Greatship Global Offshore Services Pte. Ltd. (GGOS). Though the assessee did not charge any commission from the AEs, however, it suo-moto offered commission rate of 0.46% which was nothing but average guarantee commission paid by the assessee to various banks. In other words, the assessee benchmarked the same on the basis of internal CUP. However, Ld. TPO, rejecting the rate, worked out average Bank Guarantee Rate of 2.07% and opined that the rate charged for corporate guarantee should not be less than the rate charged by the banks for giving bank guarantees. Finally, adopting this average rate of 2.07%, Ld. TPO proposed net adjustment of Rs.3148.11 Lacs in its order dated 24/10/2016. The working of the same has been tabulated on page-11 of Ld. TPO‟s order. 3.3 Another TP adjustment was on account of interest on loans granted by the assessee to two of its AEs namely Greatship Global Holdings Ltd., Mauritius (GGHL) and Greatship UK Limited (GUK). With respect to loan to GGHL, the assessee charged interest rate of LIBOR+2.9% whereas it charged interest rate of LIBOR+3% on loan advanced to GUK. The loan to GUK was sanctioned as well as disbursed during financial year 2010-11 whereas loan to GGHL was sanctioned in financial year 2011-12 and disbursed in parts during financial years 2010-11 & 2011-12. Since the interest rates on both the loans were determined at the time of sanction of the loans, the assessee relied upon benchmarking exercise for financial year 2010-11. In that year, taking assessee as the tested party, these interest rates were benchmarked against mean interest rates charged by banks in respect of foreign currency loans availed by the assessee. Such arithmetic mean came to LIBOR+1.829% and therefore, it was concluded by the assessee that the interest rates were at Arm‟s Length. However, rejecting the rate adopted by the assessee, Ld. TPO conducted fresh search on website www.bloomberg.com and worked out average rate of interest @3.332 basis points. Accordingly, it was held that the assessee should have charged interest of LIBOR+3.332% from GGHL. Adopting the same, Ld. TPO proposed an adjustment of Rs.108.54 Lacs as computed on page-13 of Ld. TPO‟s order. However, no adjustment was proposed on loan advanced to GUK and the same was accepted to be at Arm‟s Length price. 3.4 The above-said TP adjustments aggregating to Rs.3256.65 Lacs as proposed by Ld.TPO were incorporated by Ld. AO in draft assessment order dated 23/12/2016. In the assessment order, Ld. AO also proposed disallowance u/s 14A for Rs.26.34 Lacs and also made another disallowance of Rs.4762.45 Lacs on account of exchange gain claimed by the assessee as capital expenditure. The draft assessment order was subjected to assessee‟s objections before Ld. DRP. 3.5 The disallowance u/s 14A stem from the fact that the assessee earned exempt income of Rs.388.87 Lacs and offered suo-moto disallowance of Rs.12.18 Lacs in the computation of income. The same was computed by applying proportion of exempt income to total income to cost incurred on treasury functions. However, rejecting assessee‟s methodology, Ld. AO computed disallowance of Rs.38.52 Lacs u/r 8D(2)(iii) being 0.5% of average investments. The differential of Rs.26.34 Lacs was added to the income of the assessee. 3.6 The disallowance of exchange gain stem from the computation of income. It was observed by Ld. AO that the assessee reduced on amount of Rs.4762.45 Lacs on account of exchange gain on repayment of loan by subsidiary treating it as capital receipts. It transpired that the assessee sanctioned loan of USD 75 million to its wholly owned subsidiary company Greatship Global Holdings Ltd., Mauritius (GGHL) in financial year 2010-11. GGHL was an investment company which held share capital in step down subsidiary of the assessee namely Greatship Global Energy Pte. Ltd., Singapore (GGES) as well as Greatship Global offshore Services Pte. Ltd., Singapore (GGOS). It was claimed that the loan was sanctioned in order to enable GGHL to fund capital expenditure of the assessee‟s step down subsidiaries GGES and GGOS. Accordingly, the assessee disbursed loan of 71.5 million during financial years 2010-11 & 2011-12. As per the plan, GGHL utilized the loan for part funding towards acquisition of rigs by GGES and funding of under-construction vessel by GGOS. During financial year, GGHL repaid loan of USD 58.5 million which resulted into foreign exchange gain of Rs.4762.45 Lacs to the assessee. In the computation of income, the assessee claimed the gains to be capital receipts not chargeable to tax. However, Ld. AO opined that the benefits so gained would be „Business Income‟ by virtue of Section 28 of the Act, The assessee filed submissions and relied on the decision of Hon‟ble Bombay High Court in the case of Cadell Weaving Mills Company Private Ltd. V/s CIT (116 Taxman 77; 06/02/2001) as well as the decision of Hon‟ble Apex Court in Sutlej Cotton Mills Ltd. V/s CIT (116 ITR 1; 27/09/1978). 3.7 However, Ld. AO, relying upon the decision of Hon‟ble Bombay High Court in the case of Solid Containers Limited V/s DCIT (222 CTR 455; 29/08/2008) opined that the assessee advanced loans to its subsidiaries to spread its own business through subsidiaries and any profit yielded from such investments, whether by way of interest or exchange fluctuation would be revenue receipt which call for taxation u/s 28 of the Act. The decision of Hon‟ble Supreme Court CIT Vs TV Sundaram Iyenger & Sons Ltd. (222 ITR 344; 11/09/1996) was also referred to strengthen the said conclusion. Accordingly, the amount of exchange fluctuation was added to the income of the assessee. Proceedings before Ld. DRP 4.1 The Ld. DRP, after due deliberations, directed Ld. TPO to adopt guarantee rate of 1.25% as against rate of 2.07% as proposed by Ld. TPO. Regarding benchmarking of loans, it was held that internal CUP used by the assessee was not appropriate and Ld. TPO correctly used external CUP. Therefore, the benchmarking rate proposed by Ld.TPO was confirmed. Regarding disallowance u/s 14A, it was observed that disallowance made by the assessee was a rough estimate and therefore, the disallowance was rightly computed as per Rule 8D(2). 4.2 Regarding taxability of exchange gains, the assessee submitted that the transactions were loan transactions which would be capital in nature and therefore, any gain or loss arising there-from would be capital in nature. Reliance was placed on the decision of Hon‟ble Supreme Court in CIT V/s Tata Locomotive & Engg. Co. Ltd. (60 ITR 405); Sutlej Cotton Mills Ltd. V/s CIT (116 ITR 1); CIT V/s Canara Bank (63 ITR 328); decision of Hon‟ble Bombay High Court in CIT V/s V.S.Dempo & Co. Pvt. Ltd. (206 ITR 291) & Cadell Weaving Mills Company Private Ltd. V/s CIT (116 Taxman 77) in support of the submissions. 4.3 In the light of all these decisions, the assessee submitted that capital receipt, except covered by Sec.45, are generally exempt from tax. It was also submitted that the provisions of Sec. 28(iv) as invoked by Ld. AO would apply only where the benefit was received in form other than the cash as held by Hon‟ble Bombay High Court in Mahindra & Mahindra Co.Ltd. V/s CIT (261 ITR 501) which held that Section 28(iv) could not apply to a benefit that arose in cash or in monetary terms. 4.4 However, the aforesaid submissions could not find favor with Ld. DRP who confirmed the stand of Ld. AO by observing as under: - Discussion & Directions of DRP 7.8 The submission made by the assessee has been examined. The reliance placed on various decisions has also been perused. The main theme of the assessee's submission is that the foreign exchange loss/gain constitutes a component of the capital advanced by it to the AE and hence, it would not be in the nature of income on revenue account and hence not liable to tax. We are not in agreement with this view. 7.9 While advancing any loan, the key returns expected out of the loan are (i) an amount to account for the depreciation of money value during the period (inflation), (ii) some profit element, (iii) cost of funds to the lender and (iv)return for risk taken by the lender. These four items together form the total interest which a lender is entitled to receive. The interest forms a revenue receipt and is exigible to tax. The first amount compensates for the inflation if the currency of loan and currency of accounts is same. If the inflation rate is high, the interest rate is correspondingly high as the value of the total corpus (amount lent) falls over the years. The inflation varies over different currencies based on the market conditions of the currency in which amount is lent. This is a reason why the interest rates in India are higher than the interest rates outside the country (in other currencies). 7.10. The assessee has advanced loans in US$ but on receipt back of the amount, it has received a higher amount on account of depreciation of Indian Rupee. Such depreciation (foreign exchange difference between the rate and the time of lending and at the time of return) would represent a component of interest. While receiving interest from the AE, the assessee has been benchmarking its interest at Libor rates which have a disconnect with the Indian inflation and hence such rates do not have Indian inflation rates built into them. However, the inflation is reflected in gradual weakening of the currency and the lender is compensated when he receives the corpus and converts it into Indian currency. This gain, received at the time of conversion, is a part and parcel of the interest component which the lender has received and is required to be treated in a similar fashion. 7.11. We are in agreement with the reliance placed by the AO on the decision in the case of Solid Containers Limited. The income, in the present case, is clearly arising out of the business activity of the assessee company which include investment in foreign subsidiaries for purpose of conduct of its business. The assessee itself, while arguing in respect of earlier grounds, has submitted that these loans represent its investment during the course of its business. There has been a judicial consensus that interest on borrowed funds used for the purpose of investment in subsidiaries is an allowable deduction in the case of investing company irrespective of the fact as to whether the investment is made in form of loans or equity. 7.12. We do not find any error on the part of the AO in bringing the amount to tax. The objection raised by the assessee stands dismissed.

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: Particulars Guarantee Commission rate 1. Everest Kento Cylinder Ltd. Vs. ACIT (201 2) 34 CCH 0528 (Mum) 0.5% [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. 4475/Mum/2007) 0.38% 3. Asian Paints Ltd. Vs. Addl. CIT (2014)149 ITD 511(Mumbai) 0.20% 4. Aditya Birla Minacs Worldwide Ltd. Vs. JCIT (2016) 47 CCH 760 0.5% p.a (Mum) 5. Godrej Household Products Ltd. Vs. Addl. CIT 41 taxmann.com 386 0.5 % p.a (Mum)

Thomas Cook (India) Limited (201 6) 47 CCH 01 62 (Mum) 0.5% p.a 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 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.

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: - 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.

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, 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 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% 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.

Ground Nos. 16 and 17 are related to disallowance u/s 14A. We find that this issue has also been dealt with by the coordinate bench in its order for AYs 2012-13 & 2014-15 (supra) wherein the matter has been restored back to the file of Ld. AO with following directions: - 25. We have heard the authorised representatives for both the parties in context of the aforesaid issue pertaining to the sustainability of disallowance computed by the A.O under Sec. 14A r.w Rule 8D. As observed by us hereinabove, the assessee had suo motto offered a disallowance u/s 14A of Rs.22,63,129/-. Basis of computing the aforesaid disallowance by the assessee was appropriation of the treasury expenses on a pro-rata basis i.e percentage of exempt income to the total income from its investments, which, however, was rejected by the A.O. It is the claim of the ld. A.R that as the A.O while rejecting the suo-motto disallowance that was offered by the assessee in its return of income had failed to record his satisfaction that having regard to the accounts of the assessee as placed before him it was not possible to generate the reasonable satisfaction with regard to the correctness of the claim of the assessee thus, on the said count itself the disallowance so enhanced by him was liable to be vacated. We have given a thoughtful consideration to the aforesaid contention of the assessee and find substantial force in the same. As observed by the Hon‟ble Supreme Court in the case of Godrej & Boyce Manufacturing Company Ltd. Vs. DCIT & Anr. (2017) 394 ITR 449 (SC), it is only after the A.O had recorded his dissatisfaction as regards the correctness of the claim of the assessee that he can thereafter invoke the provisions of Sec.14A(2) and (3) r.w. Rule 8D. The Hon‟ble Apex Court in its aforesaid order had observed as under: “37. We do not see how in the aforesaid fact situation a different view could have been taken for the Assessment Year 2002-2003. Sub-sections (2) and (3) of Section 14A of the Act read with Rule 8D of the Rules merely prescribe a formula for determination of expenditure incurred in relation to income which does not form part of the total income under the Act in a situation where the Assessing Officer is not satisfied with the claim of the assessee. Whether such determination is to be made on application of the formula prescribed under Rule 8D or in the best judgment of the Assessing Officer, what the law postulates is the requirement of a satisfaction in the Assessing Officer that having regard to the accounts of the assessee, as placed before him, it is not possible to generate the requisite satisfaction with regard to the correctness of the claim of the assessee. It is only thereafter that the provisions of Section 14A(2) and (3) read with Rule 8D of the Rules or a best judgment determination, as earlier prevailing, would become applicable.” Similar view had thereafter been taken by the Hon‟ble Apex Court in the case of Maxopp Investment Ltd. Vs. CIT (2018) 402 ITR 640 (SC). We find that involving identical facts in the case of the assessee for A.Y 2008-09 & A.Y 2009-10, wherein a suo-motto disallowance offered by the assessee was rejected by the A.O, and was thereafter substituted by an enhanced amount of disallowance as per the methodology contemplated in Sec. 14A r.w Rule 8D, that on appeal the Tribunal vide its consolidated order passed in and ITA No. 1703/Mum/2014, dated 21.06.2019 had set"aside the matter to the file of the A.O for the purpose of re- adjudicating the disallowance afresh in light of the law laid down by the Hon’ble Apex Court in the case of Maxopp Investment Ltd. Vs. CIT (2018) 402 ITR 640 (SC). As the fact situation in the case of the assessee before us remains the same as was there before the Tribunal in the assessee‟s case for A.Y 2008-09 & A.Y 2009-10, therefore, for the sake of consistency and in all fairness we herein on the same terms set-aside the matter to the file of the A.O for the purpose of readjudicating the issue afresh in light of the judgment of the Hon‟ble Apex Court in the case of Maxopp Investment Ltd. Vs. CIT (2018) 402 ITR 640 (SC). Needless to say, the A.O shall in the course of the set- aside proceedings afford a reasonable opportunity of being heard to the assessee who shall remain at a liberty to substantiate its claim that the suo-motto disallowance under Sec. 14A so offered by it in its return of income is in order. The Grounds of appeal