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TMI Blog2020 (3) TMI 425X X X X Extracts X X X X X X X X Extracts X X X X ..... Entities mentioned as AEs do not fall within the definition of AEs as per Section 92A of the Income Tax Act, 1961. 5.The Hon'ble DRP has erred in holding the parties to be AE's u/s 92A(2)(c) of the Income Tax Act by taking the 'combined loan' granted by both the parties to the assessee and has also erred in calculation of book value of total assets. 7.The Ld. AO/ Hon'ble DRP erred in rejecting Cost plus method as the Most Appropriate Method and using TNMM instead without assigning any proper and valid reasons for the same. 8.The Ld. AO/ Hon'ble DRP has erred in accepting the comparables while applying the TNMM without considering the facts and circumstances of the case and the submissions of the assessee on the same." 4. We have heard the rival submissions and perused the materials available on record. We find that the assessee manages tankers, bulk carriers, speedboats and supply vessels. It mainly assists the owner / employers in procurement of stores, spares, lubricants, chemical, paints, charts and publications, stationery and arrangement of technical superintendents and specialized technicians for the various ships managed by the assessee. We fin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment Pvt. Ltd (India) (the assessee) in December 2008 wherein he held 90% shares and his wife held the balance 10%. h) This company used to provide services only to M/s. Suverign Ship Management Ltd, M/s. Premier Ship Management Ltd and M/s. Union Maritime Ltd for which he used to receive 5% service fees from them" 4.1. The ld TPO concluded that the overall management and control of the assessee company still lies with the management of M/s Sovereign Ship Management Ltd, UK ; M/s Premier Ship Management Ltd and M/s Union Maritime Ltd and that Shri Rajeev Kumar Singh's role is limited to managing ships like an employee who does not have any say in the decision making process of the company. Accordingly, he held that those concerns become AEs within the meaning of section 92A(1)(a) of the Act. The ld TPO also observed that the assessee company did work only for these AEs during the year and concluded that the assessee company in India was formed to serve the mutual interest and thus held that M/s Sovereign Ship Management Ltd, UK ; M/s Premier Ship Management Ltd and M/s Union Maritime Ltd are AEs of the assessee company during the year, as per the provisions of section 92A(2)(m) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h constitutes 68.84% of book value of total assets of the assessee. Therefore the assessee's case squarely falls under the provisions of section 92A(2)(c ) of the Act which would make these two entites as AEs of the assessee company. 6.1. The ld DRP further observed that the total borrowings made by the assessee company from the aforesaid parties including Union Maritime Ltd are as under:- Sovereign Ship Management Ltd - Advance 2,34,34,694/- Other Creditors Premier Ship Management Ltd 3,08,79,986/- Sovereign Ship Management Ltd 2,42,03,651/- Union Maritime Ltd 3,95,078/- 8,02,70,661/- 6.2. Accordingly, the ld DRP observed finally that Sovereign Ship Management Ltd and Premier Ship Management Ltd are participating directly, Union Maritime Ltd is participating indirectly, in the capital of the assessee company and hence these two concerns become AEs of the assessee company in terms of section 92A(2)(c ) of the Act. Accordingly, the ld DRP upheld the action of the ld AO / ld TPO in- a) Treating these two entities as Aes b) Gross amount received by the assessee company includes reimbursement of expenses on cost to cost basis and hence the same shoul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 51% of book value of total assets of the assessee company. In the instant case, we find that the ld DRP had combined the loans given by both Sovereign Ship Management Ltd , UK and Premier Ship Management Ltd, UK to arrive at the said percentage, which is not the mandate provided in the section. In our considered opinion, the language of section 92A(2)(c ) of the Act is unambiguous and clear that in order to fall within the ambit of deeming fiction of of becoming AEs, either Sovereign Ship Management Ltd, UK or Premier Ship Management Ltd, UK should have independently advanced loan to the assessee company which more than 51% of book value of total assets of the assessee company. In the instant case, only if the loans advanced by both Sovereign Ship Management Ltd, UK and Premier Ship Management Ltd, UK are combined, the said provision is satisfied. Moreover, the advances received by the assessee company from Sovereign Ship Management Ltd, UK in the sum of Rs. 2,34,34,694/- are in the nature of business advances for rendering ship management and consultancy services by the assessee company to the said party and hence the same cannot be construed as loan advanced to the assessee co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exhaustive and not simply illustrative- as clarified in the Memorandum Explaining the provisions of the Finance Bill 2002 which, while inserting the words "For the purpose of sub section (1) of section 92A" in Section 92A(2), observed that "It is proposed to amend subsection (2) of the said section to clarify that the mere fact of participation by one enterprise in the management or control or capital of the other enterprise, or the participation of one or more persons in the management or control or capital of both the enterprises shall not make them associated enterprises, unless the criteria specified in sub-section (2) are fulfilled". In this sense, Section 92A(2) governs the operation of Section 92A(1) by controlling the definition of participation in management or capital or control by one of the enterprise in the other enterprise. If a form of participation in management, capital or control is not recognized by Section 92A(2), even if it ends up in de facto or even de jure participation in management, capital or control by one of the enterprise in the other enterprise, it does not result in the related enterprises being treated as 'associated enterprises'. Section 92 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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