9911796707
TMI Blog2023 (3) TMI 521X X X X Extracts X X X X X X X X Extracts X X X X ..... g into international transaction or specified domestic transaction in a particular previous year shall have to obtain a report from an accountant in a prescribed form duly signed and verified by the concerned accountant setting forth the information as prescribed in the form. Rule 10E prescribes that the report from the accountant has to be furnished in Form 3CEB. Section 92B defines the expression international transaction to mean a transaction between two or more AEs. In other wards in terms of section 92E read with rule 10E, an assessee entering into international transaction with AEs has to furnish an audit report in From 3CEB reporting all information relating to such international transaction. It is observed, in due compliance with section 92E read with rule 10E of the Act, the assessee had furnished the Audit Report in From 3CEB reporting international transactions with AEs - amount was received by the assessee from freight services provided to an AE. Whereas, the rest of the amount was paid towards services availed from the AEs. Since, the assessee had reported international transactions with AEs, the Assessing Officer made a reference to the TPO for examining the arm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... neous and prejudicial to the interest of Revenue for non examination of issues, which are beyond the mandate given to the Assessing Officer. What the Assessing Officer could not have done directly in view of limited scrutiny norms, in the garb of revisionary powers under section 263 of the Act, learned CIT cannot do indirectly by enlarging the scope of limited scrutiny.Assessing Officer having confined himself to the issues of limited scrutiny, the Assessment Order passed cannot be considered to be erroneous and prejudicial to the interest of Revenue. CIT has misconceived the facts and misapplied the legal position while concluding that the assessee is not entitled to treaty benefit as it has been interposed as a conduit company for treaty shopping purpose. The assessee company was incorporated in Singapore in the year 2007 and continued its business since then. It is also a fact that the assessee holds substantial fixed assets in Singapore amounting to Rs.1728 croers, out of which, an amount of Rs.1324 crores pertains to vessels. It is also a fact that Singapore has grown into a large shipping hub in the world. Therefore, there is valid reason for setting up of the assessee com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a way, he was justified in allowing benefit to the assessee under Article 8 of the Treaty. Though, the view of the Assessing Officer in granting benefit under treaty provisions may not be the only view but certainly it is one of the possible views under the given facts and circumstances. In any case of the matter, whether the assessee is entitled to treaty benefit or not is a highly debatable issue, hence, on such an issue an order cannot be considered to be erroneous and prejudicial to the interest of Revenue. Decision of learned CIT in treating the receipts from operation of ships in international traffic to be in the nature of royalty income - A conjoint reading of the show cause notice as well as order passed under section 263 of the Act coupled with the fact that ultimately he has restricted his directions only to inward freight income, thereby, accepting assessee s claim under section 44B in respect of income from coastal shipping and claim of exemption under Article 8 of the treaty in respect of income from outward freight amounting to Rs.56,13,86,432/-, reveals the mechanical approach of learned CIT in invoking jurisdiction under section 263 of the Act. Meaning the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... venture between Tata Steel Limited an Indian company and NYK Holding (BV), a company incorporated in Netherlands, which in turn is a subsidiary of a Japanese company, viz., Nippon Yusen Kabushiki Kaisha (NYK Japan). In the financial year relevant to the assessment year under dispute, incomes earned by the assessee are from the following activities: (i) Shipping from ports within India (coastal shipping) USD $ 9,62,019 (Rs.6,06,05,690/-) (ii) Shipping from ports outside India to ports in India (inward freight) USD $ 13,62,19,221(Rs.903,54,20,929/-) (iii) Shipping from ports in India to ports outside India (outward freight) USD $ 84,67,367 (Rs.56,13,86,432/-) 3. In the return of income filed for the impugned assessment year on 13.11.2016, the assessee offered total income of Rs.45,45,430/- comprising of coastal shipping income. Insofar as income from inward and outward freight, the assessee did not offer such income claiming that such income having earned from operation of ships in international traffic is exempt from taxation in India under Article 8 of India Singapore Double Taxation Avoidance Agreement (DTAA). Assessee s case was selected for limited scrutiny u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India Singapore DTAA. The Assessing Officer should have enquired whether the interposition of assessee in Singapore is a treaty shopping arrangement or whether the assessee is a conduit company in which event the treaty benefits are not available. (e) In course of assessment proceeding for assessment year 2018- 19, the Assessing Officer through extensive inquiry/verification has concluded that the arrangement is a tax avoidance one. (f) Since, the interposition of assessee in Singapore is a treaty shopping arrangement to obtain benefit under India Singapore DTAA, therefore, if the facts in assessment year 2016-17 are identical, then taxable outcome would be different than what is decided in the assessment order. 5. Thus, on the aforesaid premises, learned CIT issued a show-cause notice to the assessee to explain, why the assessment order should not be revised. In response to the show-cause notice, the assessee furnished a detailed reply along with supporting evidences to justify its claim that the assessment order is neither erroneous, nor prejudicial to the interest of Revenue as the Assessing Officer has followed due process of law in completing the assessment. It was f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ices to the assessee for servicing the Indian market. He observed that both the assessee and the Indian subsidiary are under the supervision of the same Director Sh. Dinesh Shastri who has been a top ranking executive in the Tata Group for more than three decades. He further observed that as per the website of the assessee, its operation head and HR head are based in India. Therefore, setting up of a company in Singapore for the purpose of carrying out shipping operation, which is centered on India is contrary to facts of the case. Learned CIT observed that the treaty benefits are available to a person who is a tax resident of either of the two contracting states. Referring to Article 4(1) of India Mauritius treaty, learned CIT observed that the resident of a contracting State shall be the one who is liable to tax under the laws of that State. He observed, the liability to tax for treaty purpose refers to full or a comprehensive liability and not liability that is limited under the domestic law of the relevant contracting State. Referring to Commentaries on UN model and OECD model, he observed that fiscally transparent entities are excluded from the benefits of tax treaties. He obs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laws of both countries. He observed, since benefits similar to Article 8 of India Singapore DTAA is not available either under India Netherlands DTAA or India Japan DTAA and shipping income is also differently treated in India, Netherlands and Japan, the assessee has been interposed as a company in Singapore to derive maximum tax benefit. Thus, he held that the arrangement lacks commercial reasoning. Ultimately, learned CIT held that the assessee is not entitled to the benefits of India Singapore DTAA due to the following reasons: 1. The scheme of arrangement employed by the assessee is tax avoidance through treaty shopping mechanism. 2. The assessee company is not a tax resident for the purposes of tax treaty between India Singapore as it does not satisfy the condition of liable to tax . 3. The TRC is not sufficient to establish the tax residency if the substance establishes otherwise. 4. There is no commercial rationale of establishment of assessee company in Singapore. 5. The control and management of the assessee company is not conclusively established in Singapore in the light of the facts. 6. Thus, according to him, once the treaty benefits are not avai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 142(1) of the Act by calling for information in relation to the limited scrutiny issues. He submitted, in response to the questionnaire issued by the Assessing Officer, the assessee furnished a detailed reply with supporting evidences and details called for by the Assessing Officer. He submitted, since, the assessee had entered into international transactions with AEs, the Assessing Officer made a reference to the TPO in terms of section 92CA(1) of the Act to examine the arm s length nature of such transactions. He submitted, the TPO passed an order under section 92CA(3) of the Act holding that the international transactions referred in Form 3CEB are at arm s length requiring no further transfer pricing adjustments. In view of the order passed by the TPO, the Assessing Officer proceeded to complete the assessment under section 143(3) of the Act accepting the income returned by the Assessee. He submitted, since, the mandate of the Assessing Officer was to examine the limited scrutiny issues and he could not have travelled beyond them in view of the CBDT Instructions/directions, under the garb of revisionary jurisdiction, the CIT cannot venture into examining issues, which t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom shipping business in international traffic under Article 8 of the Treaty cannot be said to be erroneous and prejudicial to the interest of Revenue. Drawing our attention to Article 8 and specifically to the definition of the expression international traffic , he submitted, as per the treaty, transportation income from movement of cargo from one port in India to a port outside India (outward freight) and income from movement of cargo from one port outside India to a port in India (inward freight) derived by a resident of Singapore is exempt from tax in India. Whereas, he submitted, income from movement of cargo from one port in India to another port in India is not covered under Article 8 of the treaty. Hence, the assessee has offered such income to tax in India under the provision of section 44B of the Act, which is applicable to income from shipping business. In support of such contention, learned counsel relied upon the following decisions: 1. LR2 Management KS Vs. ITO, 174 TTJ 441 (Rajkot Trib.) 2. Pearl Logistics Ex-IM Corporation Vs. ITO [2017] 80 taxmann.com 217 3. Interworld Shipping Agency LLC Vs. DCIT, 189 ITD 213 (Mum. Trib.) 4. DDIT Vs. Cia De N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted, the assessee owns substantial fixed assets of USD 260,625,000/- (Rs.1,728 crores) in Singapore and majority of which pertain to vessels. In this context, he drew our attention to the balance sheet and notes attached to the balance sheet. Thus, he submitted, it cannot be said that the assessee is not a tax resident of Singapore and is not having any commercial substance. He submitted, in past assessment years, assessee s income from international traffic has been held to be not taxable in India and this is the first year in which, the CIT has held that income derived from shipping business in international traffic is liable to tax in India. He submitted, when the facts in this assessment year are identical, the Revenue cannot be permitted to take a different view. In this context, be relied upon a decision of the Hon ble Supreme Court in case of Pr. CIT Vs. Maruti Suzuki India Ltd., [2019] 416 ITR 613 (SC). 11. Without prejudice, he submitted, the question whether the benefit of India Singapore DTAA is available to the assessee or not, is a highly debatable issue, hence, outside the scope/ambit of section 263 of the Act. In this context, he relied upon a decision in ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bmitted, assessee s income is primarily from Tata group companies for transportation of goods from various places in the world to Indian ports. Further, the operation of shipping activities is managed and supervised by Tata NYK India, an Indian subsidiary of the assessee company. Thus, referring to India Netherlands DTAA and India Japan DTAA, learned Departmental Representative submitted, since, the effective management of shipping activity is not controlled from Netherlands, the income from shipping business would be liable for taxation in India as royalty income. Similarly, scope of Article 8 of India Japan DTAA is extremely limited and does not include the nature of profits as derived by the assessee in the present case. In order to avoid the payment of legitimate tax, assessee company was interposed in Singapore to get the benefit of India Singapore DTAA. More so, considering the fact that shipping income is not subjected to tax in Singapore. Therefore, it is a classic case of treaty shopping, which is contrary to the object of DTAA. He submitted, the arrangement in interposing the assessee in Singapore lacks commercial substance. As regards assessee s submission regarding enla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to tax income from shipping business, that too, only with regard to inward freight. Thus, he submitted, at this stage, the Revenue cannot add/supplement fresh reasons or furnish new grounds for justifying the invocation of revisionary power. He submitted, the show-cause notice issued under section 263 of the Act is not on the basis that the assessee has not correctly reported its income in Form 3CEB and return of income. Thus, he submitted, the Revenue cannot provide a new dimension to revisionary proceedings as it is not permissible at this stage to substitute the reasons for which the revisionary proceedings were initiated. In case, it is done, it will amount to exercising revisionary jurisdiction to revise the order of CIT. In this regard, he relied upon the following decisions: 1. CIT Vs. Jagadhri Electric Supply Industrial Co. [1983] 140 ITR 490 (P H) 2. DIT Vs. Shree Nashik Panchvati Panjrapole, 397 ITR 501 (Bom.) 14. He submitted, since, the Tribunal has no power to enhance the assessment and take back benefits granted by the Assessing Officer, the submissions made by the Revenue to modify the order of CIT to enlarge the scope of direction of CIT in the order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ave to obtain a report from an accountant in a prescribed form duly signed and verified by the concerned accountant setting forth the information as prescribed in the form. Rule 10E prescribes that the report from the accountant has to be furnished in Form 3CEB. Section 92B defines the expression international transaction to mean a transaction between two or more AEs. In other wards in terms of section 92E read with rule 10E, an assessee entering into international transaction with AEs has to furnish an audit report in From 3CEB reporting all information relating to such international transaction. 16.1 It is observed, in due compliance with section 92E read with rule 10E of the Act, the assessee had furnished the Audit Report in From 3CEB reporting international transactions with AEs at Rs.63,45,14,259/-. Out of which, an amount of Rs.1,92,59,093/- was received by the assessee from freight services provided to an AE. Whereas, the rest of the amount was paid towards services availed from the AEs. Since, the assessee had reported international transactions with AEs, the Assessing Officer made a reference to the TPO for examining the arm s length nature of the international trans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Income-tax Act. 19. Contents of the show cause notice issued under section 263 of the Act and the issues framed make it evident that there is no allegation of misreporting by the assessee in Form 3CEB or the return of income. The allegation is of not making any enquiry/verification. In this regard, we must say that learned CIT has completely misconceived the facts. A perusal of Form 3CEB report, a copy of which is at page 249 of the paper-book, clearly reveals that out of the amount of Rs.63,45,14,259/- reported by the assessee, only an amount of Rs.1,92,59,093/- represents income of the assessee and the rest of the amounts are payments made by the assessee. In fact, these facts are clearly reflected in the order passed by the TPO. Whereas, learned CIT has assumed that aggregate amount of transactions reported in Form 3CEB represents assessee s receipts. 20. Keeping in perspective the aforesaid facts, if we examine the scope of limited scrutiny, it can be seen that the Assessing Officer has confined himself to the mandate given to him as per the norms of limited scrutiny. The questionnaire issued by the Assessing Officer in course of the assessment proceeding bears testimo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egation of learned CIT, we must observe that the assessee company was incorporated in Singapore in the year 2007 and continued its business since then. It is also a fact that the assessee holds substantial fixed assets in Singapore amounting to Rs.1728 croers, out of which, an amount of Rs.1324 crores pertains to vessels. It is also a fact that Singapore has grown into a large shipping hub in the world. Therefore, there is valid reason for setting up of the assessee company in Singapore for shipping business. 22. In any case of the matter, the Revenue certainly cannot control the mode and manner in which the assessee wants to carry on its business activity. If the assessee is constituted within a legal framework and its activities are legal, Revenue certainly cannot step into the shoes of the assessee to question the business prudence. It is also relevant to observe, though, learned CIT has made serious allegations regarding scheme of tax avoidance, the arrangement lacking commercial rationale and substance, conduit company, avoiding payment of tax in Singapore and Netherlands etc., however, these are found to be unilateral allegations without any corroborative evidence. Facts a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able to be taxed under the domestic law. Having held so, he has held that the receipts from shipping business in international traffic cannot be treated as business profit to be taxed under section 44B of the Act. He has held, since, the assessee leases vessels and earns lease rentals, such receipts are to be treated as royalty under section 9(1)(vi) read with explanation (2)(iva), as, it amounts to equipment royalty. While coming to such conclusion, learned CIT has observed that the assessee does not own any ships/vessels but has taken them on lease from NYK Japan through its subsidiary based in Netherlands. On perusal of record, including the balance sheet of the assessee, we find the aforesaid observations contrary to facts and materials on record. As per the balance sheet of the assessee, the assessee owns substantial number of vessels and large numbers of vessels are under construction. It is further observed that contrary to the allegation of learned CIT, the assessee has not entered into any back to back arrangement, wherein, receipts derived by it from Indian customers has been passed on to other group entities in the form of lease rent. Further, the assessee has not entere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessing Officer to tax such income amounting to Rs.903,54,20,929/- by applying the rate of 10% on gross basis. However, in respect of income from coastal shipping and outward freight, learned CIT has accepted the claim of the assessee as his specific direction is only with regard to the income from inward freight. Further, though, in the show cause notice issued under section 263 of the Act learned CIT has observed assessee s receipts are in the nature of FTS, however, ultimately he has treated a part of the receipts as royalty. Thus, there are gross inconsistencies in the approach of learned CIT. A conjoint reading of the show cause notice as well as order passed under section 263 of the Act coupled with the fact that ultimately he has restricted his directions only to inward freight income, thereby, accepting assessee s claim under section 44B in respect of income from coastal shipping and claim of exemption under Article 8 of the treaty in respect of income from outward freight amounting to Rs.56,13,86,432/-, reveals the mechanical approach of learned CIT in invoking jurisdiction under section 263 of the Act. Meaning thereby, various inconsistencies in the approach of learned CI ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
