TMI Blog2023 (9) TMI 1427X X X X Extracts X X X X X X X X Extracts X X X X ..... the Appellant of Rs.145.88 crores for computing the disallowance under Rule 8D(2)(ii), same is not correct. Grounds of appeal concerning disallowance u/s 14 A rwr 8 D while computing normal computation of income to the file of the ld AO, assessee is directed to submit revised computation before ld Ao, The ld AO may examine the same and following our above directions and finding recompute the disallowance by :- i. No disallowance of expense or interest should be made out of tonnage tax income computation ii. As there is no interest expenditure liable for a disallowance as the own funds consisting of the share capital and reserves, are far more than the aggregate value of investments held by the company. No Interest disallowance should be made. iii. The administrative expenses cannot exceed the actual expenditure incurred. iv. Those investments on which no exempt dividend income was received by the Appellant during the year are to be excluded while computing the disallowance under Rule 8D(2)(iii). Disallowance u/s. 14A while computing the book profit u/s. 115JB - This issue now stands covered in the favour of the assessee by the decision of the Tribunal in assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he international transaction, despite the fact that, assessee has not charged any guarantee fees from its associated enterprises. For the purpose of benchmarking, the assessee adopted the comparable uncontrolled price method and considered the average corporate guarantee charges charged by the bankers to the assessee which is 0.56%. On that basis, the assessee has benchmarked these corporate guarantees at the rate of 0.55%. Therefore, there was no dispute with the method i.e. CUP method as well as the comparables selected as average corporate guarantee charges charged by the bankers. As average corporate guarantee charged by the bankers on the assessee is 0 .56%, is compared with the corporate guarantee issued by the assessee to the bankers on behalf of its associated enterprises, in any way cannot exceed 0.56%. Therefore, the adjustment made by the assessee is at maximum. Therefore, even otherwise, when the assessee has offered the income being adjustment of ALP of international transaction more than what it could have been in a worst-case scenario, no further adjustment can be made. Therefore, for this solitary reason we do not find that the method adopted by the assessee is i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to not to include the bad debts written back and insurance claim received separately as income of the assessee. Accordingly, ground number 1 and 2 of the appeal of the AO are dismissed. Direction of DRP of not taxing the forfeiture of the warrants u/s 41 (1) - HELD THAT:- The fact shows that assessee Company had on August 09, 2007, allotted 50,05,000 convertible warrants to certain Promoters and Non Executive Directors, pursuant to the resolution passed by the shareholders at their meeting held on July 26, 2007, at a price of Rs. 312.75 per share. Each warrant was convertible into one Equity Share of the face value of Rs. 10/-, at the option of the warrant holders, at any time prior to expiry of 18 months from the date of allotment of the warrants. Out of the 50,05,000 warrants, 10,000 warrants were converted into Equity Shares. Due to the unfavorable market conditions, which did not justify conversion of warrants, the balance 49,95,000 warrants were not converted. Accordingly the said warrants stood cancelled and the amount being the amount received upfront from the warrant holders @ Rs. 32/- has been forfeited and credited to capital reserve. The issue is squarely covered i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able for disallowance under sub-clause (ii) of Clause 2 of Rule 8D without appreciating the fact that the interest expenditure pertaining to the tonnage activities was not claimed by the Appellant against the non-tonnage activities. 3. The learned DRP further erred in directing the AO that in case the disallowance of interest expenditure computed under sub-clause (i) of Clause 2 of Rule 8D as above, exceeded the interest expenditure pertaining to the non-tonnage activities, the disallowance should be restricted to the extent of such interest expenditure, without appreciating the fact that such interest expenditure incurred for non-tonnage activities pertained to borrowings which were utilised for earning tax free and taxable income. 4. Without prejudice to Ground Nos. 2 and 3, the AO erred in considering the interest expenditure claimed against the non-tonnage activities at Rs 7,76,00,000/-, without excluding the interest expenditure of Rs.3,21,74,002/- suo moto disallowed by the Appellant as capital expenditure while filing the Return of Income and the interest paid on income tax amounting to Rs.3,65,433/- suo moto disallowed by the Appellant while filing the Return of Inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Appellant for benchmarking the financial guarantees given by it on behalf of its Associated Enterprise . 13) The AO/ TPO erred in holding that the arm's length price of the financial guarantees given by the Appellant on behalf of its Associated Enterprise was 1.5% per annum. Performance Guarantees given on behalf of the Associated Enterprises 14) The AO/TPO erred in holding that the performance guarantees given by the Appellant on behalf of its Associated Enterprises constitute international transaction under Section 92B of the Act. 15) Without prejudice, the AO/ TPO erred in rejecting the Appellant's contention that having regard to the facts and circumstances of the case, the arm's length price of the performance guarantees given by the Appellant on behalf of its Associated Enterprise was NIL 16) The AO/ TPO erred in holding that the arm's length price of the performance guarantees given by the Appellant to its Associated Enterprises was 1% per annum. The Appellant craves leave to add to, alter or amend, the above Grounds of Appeal as and when advised. 03. In ITA number 3272/M/2015 filed by the learned assessing officer fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r referred to the learned transfer-pricing officer for examination of the arm s-length price. The learned transfer-pricing officer noted that Assessee Company has a subsidiary in Singapore being agent of the assessee and renders agency services to the assessee company. The principal activity of the associated enterprise is to perform the role of shipping agent in Singapore. The assessee company has appointed the above company as a shipping agent for attending to the assessee company shipped following at Singapore. The subsidiary also incurs expenses on behalf of the assessee company has a shipping agent which are reimbursed to it. As assessee is paying income tax under Tonnage Tax Scheme under section 115VA of the act, learned transfer pricing officer examined that the assessee has given a financial guarantee in favour of great shipped global energy services PTE Ltd amounting to ₹ 23,692,073/ as the guarantee fee commission received. Further assessee has given performance guarantee in favour of Keepel Fels Limited amounting to ₹ 659,83,72,880/ . With respect to the financial guarantee given to Great ship global energy services PTE Ltd the guarantee was issued in favour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of arm s-length price of ₹ 23,692,073/ and therefore the difference of ₹ 94,768,291/- was made. 06. There is one more performance guarantee given by the assessee company in favour of its associated enterprises of ₹ 659 crores. The above transaction was not reported as an international transaction and no guarantee fee was also adjusted. The learned transfer-pricing officer was charged the assessee, assessee submitted that it is not an international transaction and therefore it is not been reported is an international transaction in form number 3CEB. However, on 17 February 2012 the assessee gave complete details of the performance guarantee. The learned transfer pricing officer noted that there are five vessels under construction and outstanding amount on which financial guarantees given is ₹ 659 crores. Therefore he held that the as the arm s-length price in case of financial guarantee is considered at 3%, the performance guarantee should also be benchmarked at the rate of 3%. Accordingly, he made an upward revision of arm s-length price of the guarantee fee commission on performance guarantee at ₹ 19,79,51,187. 07. Accordingly order under sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olders. Out of 50,05,000 warrants issued, 10,000 warrants were converted into equity shares and the balance were not converted at the option of the warrant holders thereby cancellation of this warrant occurred. Therefore the upfront amount of ₹ 32 per warrant was forfeited which was originally paid by the subscribers. The assessee credited the same to the capital reserve account. According to the learned assessing officer, the above sum is chargeable to tax under section 41 (1 of the act. Accordingly the learned assessing officer made an addition of ₹ 15.98 crores under section 41 (one) of the act. The learned assessing officer further held that in alternative, the above sum is also taxable under section 28 (iv) of the income tax act. 010. The learned assessing officer further found that assessee s computation of income for tonnage tax scheme, has interest expenditure of ₹ 77,574,874, which has been claimed, as deduction against the assessee is non-tonnage tax activities. The assessee was requested to furnish a fund flow statement providing details of the loans taken in the interest expenditure incurred on such loan, which was claimed as part of the non-tonnage ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing officer but in view of the decision of the coordinate bench, the objection was allowed and the learned assessing officer was directed to delete the disallowance of interest expenditure of ₹ 17,944,163. 013. With respect to the disallowance under section 14 A of the act the learned dispute resolution panel noted that the learned assessing officer has correctly disallowed invoking the provisions of section 14 A of the act. With respect to the quantum of disallowance, the assessee has disallowed a sum of ₹ 7,530,532/ under section 14 A of the act out of which can amount of ₹ 6,142,041/ was disallowed on account of interest expenditure under rule 8D (2) (ii) of the rules. The AO rejected the same holding that the assessee was having a common pool of funds from which business expenses from tonnage tax activity and non-tonnage tax activity as well as investments are being made and accordingly the disallowance under section 14 A read with rule 8D (2) (ii) was determined at ₹ 205,098,852/ out of the total interest expenses is by the assessee amounting to ₹ 1,536,389,275/ .. In principle, the learned DRP agreed with the contentions of the assessee how ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... international transaction, the learned dispute resolution panel held that the arm s-length price of the performance guarantee should be taken at 1% of the amount of guarantee. Accordingly, the objections of the assessee were disposed of. 018. Based on this the learned assessing officer passed the final assessment order on 15/1/2014 wherein the total income of the assessee was computed at ₹ 3,273,085,570/ only to adjustments were made by the learned assessing officer. a. arm s-length price of the international transaction of ₹ 101,521,838 b. Disallowance under section 14 A of ₹ 125,686,209/ the identical adjustment was also made in the computation of the book profit under section hundred 115 JB of the act. 019. Thus, assessee aggrieved with the direction of the learned dispute resolution panel conquering with the findings of the learned TPO and the learned AO, the learned AO is aggrieved with the direction of the learned dispute resolution panel directing the learned assessing officer to delete certain addition/disallowance, have a preferred this appeal is with us. 020. By letter dated 30 June 2021, assessee has raised additional ground of appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the tonnage tax business are excluded while computing the business income of the assessee. Assessee explained that only dispute is with respect to the disallowance under rule 8D (2) (ii) and (iii) of the rules. It was submitted that the coordinate bench in assessee s own case has decided this issue for assessment year 2008-2009 so far as the interest expenditure is concerned. Thus based on the above submission the claim of the assessee is a. there is no interest expenditure liable for disallowance as the own funds consisting of the share capital and free reserve are far more than the aggregate value of investments held by the assessee company, b. even otherwise that some part of the interest expenditure is liable for disallowance, the interest expenditure attributable to the tonnage tax business is required to be excluded, c. administrative expenses cannot exceed the actual expenditure incurred by the assessee, d. investments on which no exempt dividend income was received by the assessee during the year are to be excluded while computing the disallowance of administrative expenditure under rule 8D (2) (iii) of the act. e. allocation of expenditure between the tonna ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in the case of Godrej Boyce Mfg Co. Ltd. 328 ITR 81. It is very clear that Rule 8D is applicable from Assessment year 2008-09. In this case, the Assessing Officer has made his calculation as per Rule 8D that are perfectly correct. 025. We have carefully considered the rival contention and perused the orders of the lower authorities. In issue in all these grounds is when the income of assessee is taxed under the Tonnage tax Scheme whether there can be any disallowance u/s 14A of the Act despite assessee earning exempt income such as Dividend. We find that identical issue arose in case of varun Shipping Limited V Addl CIT [2012] 17 taxmann.com 112 (Mum.) where in it has been held as under :- 7. We have considered the rival submissions and also perused the relevant material on record. It is observed that the assessee is mainly engaged in the business of operation of ships and its income from the said business was declared and assessed as per the special provisions contained in Chapter XIIG which lay down tonnage tax scheme. As per the provisions of section 115VA contained in Chapter XIIG, the income from the business of operating qualifying ships can be computed at the option ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e hold that where the income of the assessee is assessed under Tonnage tax Scheme , no disallowance u/s 14A can be made. Therefore, the ld AO and ld DRP are incorrect in apportioning interest expenditure and other expenditure, which are part of computation of tonnage tax computation of Total income. The Assessing Officer and the learned DRP have considered the total interest expenditure of the Appellant Company aggregating Rs.153.64 crores, which includes the interest expenditure of the tonnage tax business of the Appellant of Rs.145.88 crores for computing the disallowance under Rule 8D(2)(ii), same is not correct. 027. However in this case assessee has other business also, therefore, the income computation of Tonnage tax Scheme requires to be excluded but in other business, the disallowance u/s 14A is required to be made. It is submitted that Appellant is a tonnage tax company and the Profit Loss Account for the tonnage tax and non-tonnage tax business activities are prepared from the separate books of account maintained by the Appellant in accordance with the provisions of Section 115VW(i) of the Act. The Profit Loss Account of the tonnage tax business and the Profit Lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue, which is pending as on date. 028. Further On a perusal of the Share Capital and Reserves and Surplus in the Balance Sheet as at the year end, the Reserves and Surplus amount to Rs.477593 lakhs and the Share Capital amounts to Rs.15229 lakhs. Hence, non-interest bearing own funds of the company aggregate to Rs.492822 lakhs. The investments held by the company, as at the year-end, aggregate to Rs.125096 lakhs, and are far lower as compared to the capital employed consisting of own funds of Rs.492822 lakhs. In fact, the investments are more than covered by the Reserves of the Company itself. There is, therefore, no borrowing attributable to the investments yielding tax free income and such investments are out of the own funds and internal accruals generated by the Company itself. For this reason, itself there cannot be any disallowance of interest expenditure u/s 14A of the Act. 029. With respect to the administrative expenses, ld AO has however disallowed a further sum of Rs.5.42 crores, under clause 2(iii) of Rule 8D, being the amount computed @0.5% of the average value of investments held by the Appellant. However, the actual expenditure claimed of the Treasury Division b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the computation as contemplated under Section 14A read with Rule 8D of the Income-tax Rules, 1962. Honorable Bombay High court in THE COMMISSIONER OF INCOME TAX, MUMBAI V. JSW ENERGY LTD. 2015 SCC ONLINE BOM 5243 has also held that such adjustment is not permitted. Therefore adjustment to the book profit as computed u/s 115 JB of the act and further increasing it by disallowance computed u/s 14A rwr 8D is not warranted. Hence, we direct ld AO to delete the same. 033. Accordingly, Ground, no 1 to 8 and additional contentions raised with respect to disallowance u/s 14A of the Act are allowed with above directions. 034. Ground number 9 of the appeal is with respect to the taxation of the long-term capital gain at the rate of 20% as against the current rate of 10% while passing the assessment order under section 143 (3) read with section 144C (13) of the act. On hearing the parties, we find that the learned assessing officer should have charged the correct rate of tax on the long-term capital gain. The learned assessing officer is directed to do so. Ground number 9 of the appeal of the assessee is allowed. 035. Ground number 10 is with respect to the not granting tax credit to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his year it computed ALP of Guarantee Commission at the rate of 0.60% and made suo moto adjustment of Rs, 76,08,000/-. 039. During the financial year 2008-09,relevant to the Assessment Year 2009-10, the year under consideration), the Associated Enterprise - GGES availed a bridge loan of USD 90 million from the Bank of Nova Scotia. The AE had drawn USD 70.47 million equivalents to INR 357.42 crores of the said loans as on 31st March 2009. The Appellant gave a financial guarantee to the Bank of Nova Scotia for the loan taken by GGES from the Bank of Nova Scotia. The Appellant did not charge a guarantee commission to GGES for issuing the financial guarantee to the Bank of Nova Scotia on its behalf. However, while filing its Return of Income, the Appellant made a suo moto transfer pricing adjustment @ 0.60% p.a. on the basis of the average guarantee commission paid by the Appellant to banks for giving unsecured guarantees on behalf of the Appellant . The suo-moto adjustment relating to financial guarantee given to Bank of Nova Scotia was calculated by the Appellant as under: Particulars Amount (Rs.) Amount of guarantee as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... banks for unsecured financial guarantees given by the banks on behalf of the Appellant. For the Assessment Year 2008-09, the Tribunal has, in the Appellant s own case, held that the suo-moto adjustment made by the Appellant @ 0.55% p.a. (on the basis of guarantee commission paid by the Appellant to banks) was at arm s length. The Appellant submits that the order of the Tribunal for the Assessment Year 2008-09 should be followed in Assessment Year 2009-10 for the following reasons: a. Consistency b. Guarantee given by the Appellant to the ICICI Bank in the Assessment Year 2007-08 continued in the Assessment Years 2008-09 and 2009-10. In other words, the same financial guarantee is involved as far as guarantee given to ICICI Bank is concerned. c. Internal CUP was accepted by the Tribunal in the case of the Appellant for Assessment Year 2007-08 (ITA Nos. 397/Mum/2012 and 437/Mum/2012 dated 10.01.2014), in respect of interest on loan to AE which order has been followed in Assessment Year 2008-09. The Tribunal held that interest charged by banks on loans availed by the Appellant constitutes an internal CUP for the purpose of benchmarking interest on loans received by the Appel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llows: a. Everest Kanto had a subsidiary,EKC Dubai. b. Dubai subsidiary availed a loan from the ICICI Bank, Bahrain branch. Everest Kanto provided a financial guarantee to ICICI Bank. c. Everest Kanto charged guarantee commission @ 0.5% p.a.on behalf of its AE. d. In order to benchmark the rate of guarantee commission charged to its AE, the assessee company relied upon guarantee commission paid by it to ICICI Bank @ 0.60% p.a. e. The Tribunal observed that the guarantee commission paid by the assessee company to ICICI Bank was a very good parameter and a comparable for taking it as internal CUP and comparing the same with the transaction with the AE. viii. In the case of the Appellant, the facts of the Appellant and that of Everest Kanto are identical and therefore the decision of the Tribunal and jurisdictional High Court needs to be followed in the case of the Appellant. ix. The Appellant relies on the following decisions wherein internal CUPs were accepted and the guarantee commission rate between 0.2% to 0.5% p.a. was accepted to be at Arm s Length. i) Asian Paints Ltd. (149 ITD 511)(Mum.) guarantee commission of 0.2% p.a. held to be at arm s length. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Allahabad Bank. As per letter dated 12/07/2011 from Allahabad Bank (at page 94 of the paper book) for extending facility of financial guarantee, charges varies from 0.75% per quarter to 0.60% per quarter. The ld Counsel pointed that ABN AMRO Bank charges guarantee commission @0.35% p.a. (page 139 of paper book) and HSBC Banks charges 0.55% p.a. guarantee commission (page 146 of the paper Book). He further referred to the decision of Tribunal in the case of Greatship (India) Ltd. in ITA NO.1287/Mum/2017 decided on 05/04/2020. The Tribunal after considering various case laws, wherein different rates for guarantee commission were charged, upheld 0.43% commission p.a. charged by the assessee as ALP. In the instant case, the TPO had made adjustment by determining guarantee commission @3%. The rate of guarantee commission was restricted by the DRP to 1.5%. As is evident from the letters from various banks on record, different rates of guarantee commission are charged by different banks depending upon the extent and duration of facility availed. Taking note of wide-ranging guarantee commission rates being charged by different banks, we adopt guarantee commission rate approved by Hon&# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny guarantee fees from its associated enterprises. For the purpose of benchmarking, the assessee adopted the comparable uncontrolled price method and considered the average corporate guarantee charges charged by the bankers to the assessee placed at page number 383 of the paper book, which is 0.56%. On that basis, the assessee has benchmarked these corporate guarantees at the rate of 0.55%. Therefore, there was no dispute with the method i.e. CUP method as well as the comparables selected as average corporate guarantee charges charged by the bankers. As average corporate guarantee charged by the bankers on the assessee is 0 .56%, is compared with the corporate guarantee issued by the assessee to the bankers on behalf of its associated enterprises, in any way cannot exceed 0.56%. Therefore, the adjustment made by the assessee is at maximum. Therefore, even otherwise, when the assessee has offered the income being adjustment of ALP of international transaction more than what it could have been in a worst-case scenario, no further adjustment can be made. Therefore, for this solitary reason we do not find that the method adopted by the assessee is improper and further for comparison, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Appellant submits that the vessel construction agreements had a Right of Assignment clause whereby the AEs could easily assign the under-construction vessels to the Appellant. Therefore, neither did the Appellant charge any guarantee commission to its AEs, nor did the Appellant make any suo moto TP adjustment, in respect of the performance guarantees given on behalf of its AEs. The Appellant submits that if one were to take a comprehensive view of the arrangement between the Appellant and its AEs, one would conclude that if the Appellant was to, for whatever reason, called upon to perform its obligations in respect of the performance guarantees, the Appellant would step into the shoes of the AE and take delivery of the relevant vessel under construction and easily use it in its own business. 052. In the immediately preceding Assessment Year 2008-09 (i.e. the first year of furnishing of such performance guarantees), the TPO held that From the above it is clear that the assessee has taken upon itself the liability of its AE in the event of default and passed on a tangible benefit to its AE without getting duly compensated for the same (page 15 of the TP order for Assessme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... short-term borrowing, lending or guarantee Thus, the amendment to Section 92B is intended to cover financing transactions and would, if at all, cover a financial guarantee but not a performance guarantee. iii. Without prejudice, the Appellant submits that the amendment to section 92B is prospective in nature and will apply w.e.f. 1.4.2012. The Appellant relies on the following decisions: a. Jindal Steel Power Ltd. (ITA No.893/Del/2014)(ITAT, Delhi Bench). b. Dr. Reddy Laboratories Ltd. (81 taxmann.com 398)(ITAT, Hyderabad Bench). c. Rusabh Diamonds (68 taxmann.com 141)(ITAT, Mumbai Bench) d. KGK Enterprises (88 taxmann.com 264)(ITAT, Jaipur Bench) iv. Without prejudice to the contention in Points 1 to 3 above, the Appellant submits that under the performance guarantees given to the shipyards, the obligation is to acquire and take delivery when the construction of the vessel is completed, in case of any failure of the subsidiary to do so, and become owner of the vessel. On the other hand, in the case of the financial guarantees, given by the Appellant, the Appellant has undertaken timely repayment of principal and interest to the lender bank and the bank, which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned. c. Incorporation of step down subsidiaries in Singapore was a strategic decision as Singapore is one of the busiest ports. d. Decisions of placing orders for new vessels by the Singapore AEs cannot be taken unless the Appellant directly or indirectly through its immediate wholly owned subsidiary, Greatship (India) Ltd. or through guarantees to banks and shipyards agrees to fund the acquisition of vessels. e. Greatship (India) Ltd. infused USD 94.06 million and USD 66.96 million as share capital into GGOS and GGES respectively for acquisition of the vessels. f. One of the AE‟s GGES borrowed monies from Bank of Nova Scotia for which the Appellant gave a financial guarantee, whose arm s length price was benchmarked @ 0.60% p.a. g. Further, in cases of guarantees given by the holding company on behalf of its wholly owned step down subsidiary actually compensates for the inadequacies in the financial position of the subsidiary, specifically the fact that the subsidiary does not have enough shareholders‟ funds. It would not be expected that a company should pay for the acquisition of the equity it needs for its formation and continued viability. Equity is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es of the associated enterprises and would-be obliged to acquire the assets. He further submitted that nobody would be in a position to say that when the assets were acquired what kind of losses the assessee would incur. It was further submitted that there is no justification that why the assessee has benchmarked the arm s-length price of the performance guarantee facility at Rs. Nil. 057. We have carefully considered rival contentions, used the order of the learned transfer-pricing officer, direction of the learned dispute resolution panel and the order of the coordinate bench in assessee s own case for assessment year 2008 09. ITAT (ITA number 197/MUM/2013 (assessment year 2008 09)) has held as under :- 20. In ground No.19 to 21 of appeal, the assessee has assailed TP adjustment in respect of Performance Guarantee given by the assessee on behalf of AE. The ld. Counsel for the assessee submitted that the assessee had extended Performance Guarantee in respect of its 100% subsidiary in Singapore to the shipyard. The terms and conditions of the Performance Guarantee agreement clearly indicate that there was no financial liability on the assessee company. In the eventuality ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o adjustment is warranted on account of performance guarantee. 059. No doubt, the guarantees were given in earlier years however, as on 31st of March 2009; certain guarantees were outstanding at the end of the financial year. The fact shows that the orders have been placed by the associated enterprises for construction of 2 vessels with a Singapore entity. Guarantees were given by the assessee on behalf of those associated enterprises that in the event of their failure to perform the agreed contract, assessee will step into the shoes of those associated enterprises and fulfil the obligation. The fulfillment of the obligation is to acquire those two vessels from Singapore entity. Thus, the assessee has given the guarantee to the Singapore entity that a of the associated enterprises default in making payment to that party or default in provision of letter of credit, the appellant would make good to such default. The assessee has entered into a separate agreement with its associated enterprises that in each of the performance guarantee when such guarantees are invoked, the assessee shall step into the shoes of the AE and take delivery of the vessels for use in its own business. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es but it cannot be either without cost or without remuneration. Therefore, these performance guarantees are in the nature of financial guarantees only. Undoubtedly, in these financial guarantees there is a requirement to determine the expected loss arising out of that if the probability of invocation of the guarantee/default arises. Over and above, there is risk mitigation also in the form of acquisition of vessels. Therefore, the issuance of performance guarantee by the assessee in favour of the associated enterprises to a Singapore entity is a financial guarantee transaction, which is less unfavorable to the assessee compared to the financial guarantee transaction issued to the bankers, requires to be benchmarked as it involves the financial risk on the assessee by adopting one of the methods as the most appropriate method. Merely because, vessels would be used in the business of the assessee, it does not reduce the financial implication as and when guarantee is invoked. Therefore, such a consideration is superfluous. 061. Even the annual accounts of the assessee also depicts these financial guarantees as contingent liabilities in schedule 20 : Notes on Accounts (a) Guara ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the earlier year written also during the earlier year but written back during this year. Similar is the case with respect to the insurance clam received during the year pertaining to earlier years. According to the assessing officer both these income should be out of the tonnage tax income of the assessee and should be taxed separately. The learned dispute resolution panel has directed the AO to not to include these to receipt separately as for this year the income would be taxed on the basis of tonnage tax scheme. 067. On careful consideration of the order of the learned AO and the direction of the learned DRP and considering the rival contention, we find that for this assessment year the assessee is chargeable to tax on the basis of the tonnage tax scheme. We find that the logic and reason given by the learned assessing officer for separately taxing the above income is unjustified in view of the fact that had there been a bad debt arising out of the sale made by the assessee prior to the tonnage tax regime would have been allowed to the assessee as a deduction separately or not. Clear-cut answer is no. Therefore similarly, the bad debts of earlier if written back during the y ..... X X X X Extracts X X X X X X X X Extracts X X X X
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