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Income Tax Appellate Tribunal, “K” BENCH, MUMBAI
Before: SHRI SAKTIJIT DEYAND SHRI G. MANJUNATHA
PER SAKTIJIT DEY. J.M.
The captioned appeals have been filed by the same assessee challenging the assessment orders passed under section 143(3) r/w section 144C(13) of the Income Tax Act, 1961 (for short "the Act") for the assessment years 2011–12 and 2012–13, in pursuance to the directions of the Dispute Resolution Panel–1 (DRP), Mumbai.
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./2016 Assessment Year – 2011–12
In ground no.1, the assessee has challenged the addition made on account of adjustment made to the arm’s length price of Corporate Guarantee issued in respect of payment of outstanding hire charges.
Brief facts are, the assessee, a resident company, is engaged in the business of chartering of off–shore supply vessels. The assessee’s Associated Enterprise (AE) Garware Offshore International Services Pte. Ltd. (GOISPL), Singapore, has hired certain vessels from third parties on a bareboat charter basis. In respect of the outstanding bareboat charter hire charges to be paid by the AE, the assessee provided a performance guarantee in case there is a default of payment to the owner. During the proceedings before him, the Transfer Pricing Officer on examining the material available on record noticed that assessee’s AE had hired three vessels on bareboat charter basis. He further found that as on 31st March 2011, the off–shore bareboat charges stood at ` 1,57,53,318. Noticing the above, the Transfer Pricing Officer called upon the assessee to justify the arm's length nature of performance guarantee provided by the assessee. In response, the assessee vide letter dated 15th February 2014, submitted that its liability is restricted to the unpaid monthly bareboat charges if any. It was submitted, since the owners had a right to take
3 Global Offshore Services Ltd. possession of the vessels on default, the actual liability, if any, that may devolve is not quantified. It was submitted, the performance guarantee provided by the assessee was a strategic investment for increasing the volume of its business sales and profit through the 100% subsidiary (AE). Therefore, no guarantee commission is charged.
Further, it was submitted, the performance guarantee provided by the assessee to the AE cannot be equated with financial guarantee. Without prejudice, it was submitted that if at all guarantee commission has to be charged, it should be calculated @ 0.50%. The Transfer Pricing Officer, however, did not find the submissions of the assessee acceptable. He observed, the AE has been granted a working capital facility wherein commission on bank guarantee provided by the State Bank of India, Singapore Branch, was charged @ 1.25%. Taking it as a basis, the Transfer Pricing Officer determined the guarantee commission towards provisions of performance guarantee @ 2.5% on the amount of ` 1,57,53,318, and suggested an adjustment of ` 3,93,832. The adjustment suggested by the Transfer Pricing Officer was added to the income of the assessee while framing the draft assessment order.
In the objections raised before the DRP, the assessee contested the aforesaid adjustment. After considering the submissions of the 4 Global Offshore Services Ltd.
assessee, learned DRP having found that the AE has obtained a bank guarantee from the State Bank of India, Singapore Branch, at commission rate of 1.75% and further, keeping in view the fact that the assessee has issued an unsecured performance guarantee, reduced the guarantee commission to 1.75%.
The learned Authorised Representative submitted, the performance guarantee provided by the assessee cannot be equated with bank guarantee. Therefore, the guarantee commission charged at 1.25% by the State Bank of India, Singapore Branch, for providing bank guarantee cannot be applied as a Comparable Uncontrolled Price (CUP) to determine the arm’s length price of performance guarantee. In this context, the learned Authorised Representative relied upon the decision of the Hon'ble Jurisdictional High Court in CIT v/s Everest Kento Cylinders Ltd., dated 8th May 2015. Further, he submitted, the assessee itself has availed a Bank guarantee from ICICI Bank with guarantee commission charged @ 0.25%. Therefore, he submitted, the guarantee commission charged by the ICICI Bank should be considered as internal CUP and arm’s length price of the commission for providing performance guarantee should be computed by applying the rate of 0.25%.
The learned Departmental Representative relied upon the observations of learned DRP.
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We have considered rival submissions and perused the material on record. Before we proceed to decide the issue, we deem it appropriate to put on record that before us the learned Authorised Representative has fairly submitted that the assessee would not like to raise the issue as to whether provision of performance/corporate guarantee comes within the purview of international transaction as defined under section 92B of the Act. Keeping in view the aforesaid submission of the learned Authorised Representative, we will proceed to deal with the issue on the footing that provision of performance / corporate guarantee comes within the purview of international transaction as contemplated u/s 92B of the Act.
9. Having held so, let us deal with the issue at hand. Undisputedly, the assessee has provided performance guarantee in respect of bareboat hire charges payable by the AE towards hiring of three vessels. It is evident, the assessee has not charged any guarantee commission/fee to the AE for provision of performance guarantee. Whereas, the Transfer Pricing Officer rejecting assessee’s claim has charged guarantee commission at 2.5% which has been reduced to 1.75% by learned DRP. As can be seen, the basis on which the Transfer Pricing Officer and learned DRP have determined the arm’s length price of guarantee commission is the commission charged by the State Bank of India, Singapore Branch, @ 1.25% per annum on 6 Global Offshore Services Ltd.
the bank guarantee availed by the AE. However, we find substantial merit in the submission of the learned Authorised Representative that performance/corporate guarantee cannot be equated with bank guarantee. Even, learned DRP has also observed that the assessee has provided an unsecured performance guarantee. It is further evident, the assessee itself has availed a bank guarantee from ICICI Bank on payment of guarantee commission of 0.25%. Keeping in view the aforesaid facts, we are of the considered opinion that the arm’s length price of the guarantee commission can be reasonably fixed at 0.25% by adopting as internal CUP the guarantee commission charged by the ICICI Bank on provision of bank guarantee to the assessee. Ground no.1, raised by the assessee is partly allowed.
10. The issue raised in ground no.2, relates to the addition made on account of adjustment made to the arm’s length price of interest on short term loan granted to the AE.
Brief facts are, for catering to its business needs the assessee is required to set–up overseas subsidiaries which are peculiar to shipping industry. For setting–up such subsidiaries advancing loans to subsidiary is essential. Thus, looking at the financial needs of the subsidiary, the assessee had provided short term loan for a period of 15 days or thereabout. For providing such loan, the assessee had charged interest at LIBOR plus 1.5%. The Transfer Pricing Officer,
7 Global Offshore Services Ltd. however, did not accept the rate of interest charged by the assessee. Adopting the prime lending rate of State Bank of India @ 7.50% and adding a mark–up of 1.50%, the Transfer Pricing Officer determined the arm's length interest rate @ 9.% and accordingly determined the arm’s length price of interest to be charged on the loan provided to the AE. While deciding the issue, learned DRP directed the Assessing Officer to charge interest @ LIBOR plus 4%.
We have considered rival submissions and perused the material on record. The fact that the assessee has provided a short term loan only for a period of 15 days to the AE has not been disputed. It is further noticed that assessee’s AE in Singapore has availed a loan from SBI, Singapore branch at interest rate of six months LIBOR plus 250 basis points. Considering the above, we are of the view that the rate of interest charged by the assessee is at arm's length requiring no further adjustment. Ground no.2, is allowed.
In ground no.3, the assessee has challenged the addition on account of adjustment made to arm’s length price of corporate guarantee provided to the AE.
Brief facts are, assessee’s subsidiary in Netherland acquired a vessel by availing loan. For availing of loan by the AE, the assessee provided unsecured corporate guarantee by charging guarantee fee @
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0.25%. The Transfer Pricing Officer, however, did not agree with the assessee and charged guarantee fee of 2.25%.
While considering the objections of the assessee, learned DRP reduced the rate of guarantee fee to 2%.
We have considered rival submissions and perused the material on record. It is the contention of the learned Authorised Representative that guarantee provided by the assessee is unsecured with no risk attached. He submitted, the value of vessels itself is more than the amount payable by the AE towards loan. Thus, he submitted, outstanding loan amount is fully secured against the asset. Therefore, the loan provided by the lender is fully secured. Thus, he submitted, in such circumstances, the guarantee fee charged at 0.25% is at arm’s length.
Having considered rival submissions, we find that the value of the vessels which has been provided as a security to the lender bank is much more than the amount borrowed. Therefore, the loan provided by the lender bank is fully secured. It is also a matter of record that the corporate guarantee provided by the assessee is unsecured. Keeping in view the aforesaid facts, we are of the considered view that the guarantee fee charged by the assessee @ 0.25% is at arm's length requiring no further adjustment. Ground no.3 is allowed.
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In ground no.4, the assessee has challenged the levy of interest under section 234A of the Act.
Having considered rival submissions, we find that the return of income for the impugned assessment year has been filed within the due date provided under section 139(1) of the Act. That being the case, no interest under section 234A of the Act is chargeable. Ground no.4, is allowed.
In ground no.5, the assessee has challenged levy of interest under sections 234B and 234C of the Act.
Having considered rival submissions, we hold that since levy of interest under section 234B of the Act is consequential, assessee’s ground insofar as this issue is concerned, need not be adjudicated. As regards levy of interest under section 234C of the Act, we direct the Assessing Officer to charge such interest not on the assessed income, but on the income returned by the assessee. Thus, ground no.5, is partly allowed.
Ground no.6, relates to initiation of penalty proceedings under section 271(1)(c) of the Act.
The ground raised by the assessee being pre–mature at this stage is dismissed.
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In the result, appeal is partly allowed. ./2016 Assessment Year – 2012–13
In ground no.1, the assessee has challenged the adjustment made to the arm’s length price of performance guarantee provided towards outstanding bareboat charter hire charges.
The issue raised in this ground is similar to ground no.1 raised by the assessee in its appeal being ITA no.2055/Mum./2016. Facts being identical, therefore, our decision therein will apply mutatis mutandis to this ground also. Accordingly, we direct the Assessing Officer to compute the arm’s length price of performance guarantee commission @ 0.25%.
In ground no.2, the assessee has challenged the addition made on account of adjustment to the arm’s length price of corporate guarantee provided for loan availed by the AE.
The issue raised in this ground is similar to ground no.3, raised by the assessee in its appeal being ITA no.2055/Mum./2016. Facts being identical, our decision therein will apply mutatis mutandis to this ground also. Following our decision as aforesaid, we direct the Assessing Officer to compute the arm’s length price of corporate
11 Global Offshore Services Ltd. guarantee commission @ 0.25%. Ground raised by the assessee is partly allowed.
In ground no.4, the assessee has challenged the addition made by the Assessing Officer on account of difference between the interest credited to the Profit & Loss account and interest as shown in Form no.26AS.
We have considered rival submissions and perused the material on record. As could be seen, the addition of ` 18,62,317, has been made on account of difference in interest credited to the Profit & Loss account and as reflected in Form no.26AS. It is further seen that the disputed amount is received towards interest from IDBI Bank, State Bank of Travancore and United Bank of India. It has been submitted before us that interest income for the last quarter was not accounted in the books in the financial year 2011–12, but was accounted in the financial year 2012–13. Further, it has been submitted that the Assessing Officer without seeking any explanation from the assessee has added the differential amount suo–motu. Further, it has been submitted that interest amounting to ` 9,48,516, has been offered to tax by the assessee in the subsequent financial year. Considering the submissions made by the learned Authorised Representative, we are of the view that the issue requires to be restored back to the file of the Assessing Officer for verifying assessee’s claim. The assessee must be 12 Global Offshore Services Ltd.
given sufficient opportunity to reconcile the difference. After considering the submissions of the assessee, the Assessing Officer must decide the issue by taking into consideration all the evidences submitted by the assessee. With the aforesaid observations, the issue is restored back to the file of the Assessing Officer for fresh adjudication after due opportunity of being heard to the assessee.
In ground no.5, the assessee has challenged levy of interest under section 234A
Having considered rival submissions, we direct the Assessing Officer not to levy any interest under section 234A of the Act if the return of income has been filed within the due date as provided under section 139(1) of the Act.
In ground no.6, the assessee has challenged the levy of interest under sections 234B and 234C of the Act.
Having considered rival submissions, we hold that since levy of interest under section 234B of the Act is consequential, there is no need for adjudication. As regards levy of interest under section 234C of the Act, we direct the Assessing Officer to charge such interest not on the assessed income, but on the income returned by the assessee. Thus, ground no.6, is partly allowed.
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Ground no.7, relates to initiation of penalty proceeding under section 271(1)(c) of the Act.
The ground raised by the assessee being pre–mature at this stage is dismissed.
In the result, appeal is partly allowed.
To sum up, both the appeals are partly allowed.
Before we part, it is necessary for us to deal with a procedural issue relating to pronouncement of the order. The hearing of this appeal was concluded on 06.02.2020. As per rule 34(5) of the Income Tax (Appellate Tribunal) Rules,1963, ordinarily the appeal order has to be pronounced before expiry of ninety (90) days from the date of conclusion of hearing of appeal. Though, order was dictated and draft order was ready, however, it could not be finalized and pronounced, since, on 24.03.2020 a nationwide lockdown was enforced by the Government of India in view of COVID–19 pandemic. Due to the unprecedented situation arising out of such lockdown all activities ceased and no normal official work could be done. For this reason only the appeal order could not be pronounced within the period of 90 days. Being faced with a similar situation the Tribunal in case of DCIT V/s JSW Limited, & 6103/Mum/2018, dated 14th May 2020, after interpreting rule 34(5) of the Income Tax (Appellate Tribunal)
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Rules, 1963 as well as various decisions of the Hon’ble Supreme Court as well as the Hon’ble Jurisdictional High Court held that keeping in view the extraordinary situation prevailing due to the pandemic, the lockdown period has to be excluded for the purpose time limit fixed for pronouncement of order as per rule 34(5). The relevant observation of the Bench in this regard is reproduced hereunder for better clarity:– “7. However, before we part with the matter, we must deal with one procedural issue as well. While hearing of these appeals was concluded on 7th January 2020, this order thereon is being pronounced today on 14th day of May, 2020, much after the expiry of 90 days from the date of conclusion of hearing. We are also alive to the fact that rule 34(5) of the Income Tax Appellate Tribunal Rules 1963, which deals with pronouncement of orders, provides as follows: (5) The pronouncement may be in any of the following manners: — (a) The Bench may pronounce the order immediately upon the conclusion of the hearing. (b) In case where the order is not pronounced immediately on the conclusion of the hearing, the Bench shall give a date for pronouncement. (c) In a case where no date of pronouncement is given by the Bench, every endeavour shall be made by the Bench to pronounce the order within 60 days from the date on which the hearing of the case was concluded but, where it is not practicable so to do on the ground of exceptional and extraordinary circumstances of the case, the Bench shall fix a future day for pronouncement of the order, and such date shall not ordinarily (emphasis supplied by us now) be a day beyond a further period of 30 days and due notice of the day so fixed shall be given on the notice board.
8. Quite clearly, “ordinarily” the order on an appeal should be pronounced by the bench within no more than 90 days from the date of concluding the hearing. It is, however, important to note that the expression “ordinarily” has been used in the said rule itself. This rule was inserted as a result of directions of Hon‟ble jurisdictional High Court in the case of Shivsagar Veg Restaurant
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Vs ACIT [(2009) 317 ITR 433 (Bom)] wherein Their Lordships had, inter alia, directed that “We, therefore, direct the President of the Appellate Tribunal to frame and lay down the guidelines in the similar lines as are laid down by the Apex Court in the case of Anil Rai (supra) and to issue appropriate administrative directions to all the benches of the Tribunal in that behalf. We hope and trust that suitable guidelines shall be framed and issued by the President of the Appellate Tribunal within shortest reasonable time and followed strictly by all the Benches of the Tribunal. In the meanwhile (emphasis, by underlining, supplied by us now), all the revisional and appellate authorities under the Income-tax Act are directed to decide matters heard by them within a period of three months from the date case is closed for judgment”. In the ruled so framed, as a result of these directions, the expression “ordinarily” has been inserted in the requirement to pronounce the order within a period of 90 days. The question then arises whether the passing of this order, beyond ninety days, was necessitated by any “extraordinary” circumstances.
Let us in this light revert to the prevailing situation in the country. On 24th March, 2020, Hon‟ble Prime Minister of India took the bold step of imposing a nationwide lockdown, for 21 days, to prevent the spread of Covid 19 epidemic, and this lockdown was extended from time to time. As a matter of fact, even before this formal nationwide lockdown, the functioning of the Income Tax Appellate Tribunal at Mumbai was severely restricted on account of lockdown by the Maharashtra Government, and on account of strict enforcement of health advisories with a view of checking spread of Covid 19. The epidemic situation in Mumbai being grave, there was not much of a relaxation in subsequent lockdowns also. In any case, there was unprecedented disruption of judicial wok all over the country. As a matter of fact, it has been such an unprecedented situation, causing disruption in the functioning of judicial machinery, that Hon‟ble Supreme Court of India, in an unprecedented order in the history of India and vide order dated 6.5.2020 read with order dated 23.3.2020, extended the limitation to exclude not only this lockdown period but also a few more days prior to, and after, the lockdown by observing that “In case the limitation has expired after 15.03.2020 then the period from 15.03.2020 till the date on which the lockdown is lifted in the jurisdictional area where the dispute lies or where the cause of action arises shall be extended for a period of 15 days after the lifting of lockdown”. Hon‟ble Bombay High Court, in an order dated 15th April 2020, has, besides extending the validity of all interim orders, has also observed that, “It is also clarified that while calculating time for disposal of matters made time-bound by this Court, the period for which the order dated 26th March 2020 continues to operate shall be added and time shall stand extended accordingly”, and also 16 Global Offshore Services Ltd.
observed that “arrangement continued by an order dated 26th March 2020 till 30th April 2020 shall continue further till 15th June 2020”. It has been an unprecedented situation not only in India but all over the world. Government of India has, vide notification dated 19th February 2020, taken the stand that, the coronavirus “should be considered a case of natural calamity and FMC (i.e. force majeure clause) maybe invoked, wherever considered appropriate, following the due procedure…”. The term „force majeure‟ has been defined in Black‟s Law Dictionary, as „an event or effect that can be neither anticipated nor controlled‟ When such is the position, and it is officially so notified by the Government of India and the Covid-19 epidemic has been notified as a disaster under the National Disaster Management Act, 2005, and also in the light of the discussions above, the period during which lockdown was in force can be anything but an “ordinary” period.
In the light of the above discussions, we are of the considered view that rather than taking a pedantic view of the rule requiring pronouncement of orders within 90 days, disregarding the important fact that the entire country was in lockdown, we should compute the period of 90 days by excluding at least the period during which the lockdown was in force. We must factor ground realities in mind while interpreting the time limit for the pronouncement of the order. Law is not brooding omnipotence in the sky. It is a pragmatic tool of the social order. The tenets of law being enacted on the basis of pragmatism, and that is how the law is required to interpreted. The interpretation so assigned by us is not only in consonance with the letter and spirit of rule 34(5) but is also a pragmatic approach at a time when a disaster, notified under the Disaster Management Act 2005, is causing unprecedented disruption in the functioning of our justice delivery system. Undoubtedly, in the case of Otters Club Vs DIT [(2017) 392 ITR 244 (Bom)], Hon‟ble Bombay High Court did not approve an order being passed by the Tribunal beyond a period of 90 days, but then in the present situation Hon‟ble Bombay High Court itself has, vide judgment dated 15th April 2020, held that directed “while calculating the time for disposal of matters made timebound by this Court, the period for which the order dated 26th March 2020 continues to operate shall be added and time shall stand extended accordingly”. The extraordinary steps taken suo motu by Hon‟ble jurisdictional High Court and Hon‟ble Supreme Court also indicate that this period of lockdown cannot be treated as an ordinary period during which the normal time limits are to remain in force. In our considered view, even without the words “ordinarily”, in the light of the above analysis of the legal position, the period during which lockout was in force is to excluded for the purpose of time limits set out in rule 34(5) of the Appellate Tribunal Rules, 1963. Viewed
17 Global Offshore Services Ltd. thus, the exception, to 90-day time-limit for pronouncement of orders, inherent in rule 34(5)(c), with respect to the pronouncement of orders within ninety days, clearly comes into play in the present case. Of course, there is no, and there cannot be any, bar on the discretion of the benches to refix the matters for clarifications because of considerable time lag between the point of time when the hearing is concluded and the point of time when the order thereon is being finalized, but then, in our considered view, no such exercise was required to be carried out on the facts of this case.‟‟
Following the aforesaid decision of the Coordinate Bench, we proceed to pronounce the order today the 10th day of June, 2020 by placing in the notice board in terms of rule 34(4) of the Income Tax (Appellate tribunal) Rule,1963.