TMI Blog2023 (9) TMI 1428X X X X Extracts X X X X X X X X Extracts X X X X ..... sisting 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). MAT computation for addition u/s 14A - Both the lower authorities are not correct in holding that the disallowance made under Section 14A of the Act under the normal computation of income is also required to be added back for computing book profits under section 115JB of the Act. This issue is covered in favour of the assessee by the decision of Vireet Investment Pvt. Ltd. [ 2017 (6) TMI 1124 - ITAT DELHI] wherein it was held that the computation under clause (f) of Explanation 1 to Section 115JB(2) is to be made without resorting to the computation as contemplated under Section 14A read with Rule 8D of the Income-tax Rules, 1962. Non-granting of tax deduction at source credit - After hearing the parties we direct the learned assessing officer to verify the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd of this appeal are also set-aside to the file of the learned assessing officer with similar direction. - SHRI PRASHANT MAHARISHI, AM AND SHRI NARFENDRAKUMAR CHOUDHARY , JM For the Appellant : Shri Jeet Kamdar , Shri Falee H Bilimoria And Ms.Yasmin Dastur,AR For the Respondent : Shri Byomkesh Pradiptakumar Panda CIT DR ORDER PER PRASHANT MAHARISHI AM : 01. There are three appeals by the assessee for assessment year 2010 11, 2012 13 and 2014 15 as well as a cross appeal by the assessing officer for assessment year 2014 15 involving common grounds of appeal, argued together by the parties and therefore disposed of by this common order. 02. For assessment year 2010 11, assessee has preferred an appeal against the order of the learned deputy Commissioner of income tax, Circle 5 (3) (2), Mumbai (the learned AO) passed under section 143 (3) read with section 144C (13) of the income tax act for the impugned assessment year dated 6/1/2015 wherein the returned income of the assessee filed on 29/9/2010 declaring a total income of ₹ 464,468,113/ was assessed at ₹ 2,141,221,370/ in view of the transfer pricing adjustment of ₹ 23,672,543 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sub clause (i) and (iii) of clause 2 of rule 8D towards the earning of exempt dividend income, as the same includes an ad hoc amount of ₹ 85,704,000/ computed in accordance with sub clause (iii) of clause number 2 of rule 8D at 0.5% of the average value of investments yielding tax free income, when in actual fact the aggregate actual administrative expenditure incurred by the Treasury division of the appellant was only ₹ 2,237,696/ . 6. Without prejudice to the above ground number 5 and in any event, the appellant submits that the disallowance computed at ₹ 86,623,364/ is grossly excessive and arbitrary and can in no tax is ₹ 919,364/ which is proportionate amount computed on the basis of the actual administrative expenditure of ₹ 2,237,696/ incurred by the Treasury division of the appellant for earning tax free and taxable income. 7. Without prejudice to the above grounds, the appellant submits that the investment in ship (India) Ltd and CGU adjusted Ltd are strategy for long-term investment for business purposes and hence the same are not to be considered as investments yielding tax free income for computing the average value of investment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at both the lower authorities erred in applying section 14 A of the act in respect of several investments on which no dividend income was received by the appellant. The appellant submits that the disallowance under section 14 A) through rule 8D (2) (ii) and (iii). Computed by excluding those investments on which no dividend income was received during the year. ii. The assessing officer erred in assuming jurisdiction under section 14 A (2) of the act without recording objective satisfaction as to the correctness of the claim of the appellant. iii. The appellant submits that both the lower authorities erred in holding that the disallowance made under section 14 A of the act and under the normal computation of income is also required to be added back for computing book profits under section 115JB of the act. The appellant submits that section 115JB of the act is a separate code by itself and the provisions of section 14 A and rule 8D cannot be applied for computing the book profits under section 115JB of the act 05. Briefly stated the fact shows that the assessee company is engaged in the business of shipping, property development and finance operations including dealing in s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arm s-length price, as its ALP is nil. 09. The learned transfer pricing officer issued notice under section 133 (6) to the state bank of India and issued a show cause notice on that basis stating that financial performance guarantee and financial guarantee are both pari materia same and therefore deserves to be benchmarked. He found that the information received from the state bank of India shows that the guarantee commission rate for guarantee greater than ₹ 10 crores is 1.75% per annum. The assessee has relied on the rate quoted by a be a number of bank at the rate of 1.15% for the guarantee amount of ₹ 25 lakhs. Therefore that rate cannot be relied upon. He further held that as per the information available in public domain it could be seen that the banks and companies are charging rates of 3% for providing the guarantee. He therefore applied the external cup of the state bank of India and adopted 3% rate as arm s-length price. Therefore on the financial guarantee of ₹ 461 crores for 201 lazy computed the arm s-length price of ₹ 76,159,726/ and in respect of the performance guarantee outstanding of ₹ 147.87 crores he computed the arm s-length p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inst the assessee's non-tonnage activities. The assessee was asked to furnish the relevant evidences and to show cause as to why the interest expenses should not be relocated as in the previous assessment years. After considering the explanation of the assessee AO found that interest expenditure of ₹ 5,670,168/ needs to be attributed to the tonnage tax activities of the company since these expenditure has direct linkage with the loans which were utilised for acquiring qualifying ships. AO found that the loans on which interest is paid are actually utilised for construction of vessel in case of KFW 2 where the interest expenditure debited to the profit and loss account is of ₹ 3,007,894. AO also noted that in case of KFW 3 the interest expenditure of ₹ 486,510 has been incurred which shows that the loan fund was not fully utilised for acquisition of ships. Further from society general and interest of ₹ 2,175,764 was debited which was also not fully utilised immediately for acquisition of the ship therefore it the learned AO was of the view that the said expenditure has to be necessary classified as pertaining to the tonnage tax activity. Accordingly the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted that:- Submissions i) The Appellant is a tonnage tax company and the Profit Loss Account for the tonnage tax and non-tonnage tax business activities is 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 Loss Account of the other businesses of the company have been duly reconciled with the audited Profit Loss Account of the company (Page 2 of the Compilation). The gross receipts and the operating expenses and administrative and other costs pertaining to the Tonnage Tax and Non-Tonnage Tax Activities of the Appellant Company have been reflected in the segmental Profit Loss Account. The profit from the tonnage tax business of Rs.183.61 crores has been duly certified by the Auditors in accordance with the provisions of Section 115VW(ii) in the prescribed Form 66 in Clause 9(i) (Page 5 of the Compilation). ii) The computation of Total Income for the year ended March 31, 2010, relevant to the Assessment Year 2010-11 has been submitted in the compilation filed (Pages 3 4 of the Compilation). The tonnage ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 8D(2)(ii), without appreciating the fact that such interest expenditure was directly attributable to the tonnage tax activities and was therefore already excluded from the total income pursuant to which such interest expenditure was not claimed against the exempt income. Hence, interest expenditure directly attributable to the tonnage tax business cannot be considered as part of the indirect interest expenditure for computing the amount liable for disallowance under Rule 8D(2)(ii). Reliance is placed on the decision of Godrej Boyce Mfg. Co. Ltd. reported in 328 ITR 81 (Bom.) to contend that rule 8D(2)(ii) applies only to the portion of interest expenditure where it is not possible to determine the specified purpose for which the borrowing on which interest paidwas used. It is only the indirect interest on borrowed funds that will be apportioned and the amount of expenditure by way of interest that will be taken will exclude any expenditure by way of interest which is directly attributable to or has a proximate nexus to any particular income or receipt. It is only in such a case that Rule 8D(2)(ii) gets attracted and the Assessing Officer has to adopt the prescribed formula and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... istrative expenditure was allocated by the Appellant between the taxable and non-taxable gross receipts of the Treasury Division. Consequent thereto, the actual amount of expenditure liable for disallowance under clause 2(i) of rule 8D amounted Rs.9.19 lakhs. It is the submission of the Appellant that no further disallowance of indirect administrative expenditure is warranted. ix) The Assessing Officer has however disallowed a further sum of Rs.8.57 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 based on the divisional Profit Loss Account was only Rs.22.37 lakhs. The administrative expenditure under clause 2(i) 2(ii) of Rule 8D cannot exceed the actual expenditure incurred by the Treasury Division of Rs.22.37 lakhs. Since Rs.9.19 lakhs has been disallowed by the Appellant under Rule 8D(2)(i), the balance amount of Rs.13.18 lakhs can be considered under Rule 8D(2)(iii). Thus, as against the actual aggregate administrative expenditure of Rs.22.37 lakhs incurred by the Treasury Division of the Appellant Company and claimed accordin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in it was held that the computation under clause (f) of Explanation 1 to Section 115JB(2) is to be made without resorting to the computation as contemplated under Section 14A read with Rule 8D of the Income-tax Rules, 1962. This issue is covered in favour of the Appellant by the Hon ble Income Tax Appellate Tribunal, Mumbai, in the Appellant s own case for the Assessment Year 2008-09 (Page 9, Para 10.5). xii) Considering what is stated in the foregoing, the working of the disallowance under section 14A of the Act computed in accordance with Rule 8D of the Rules by considering the following contentions of the Appellant is attached herewith: 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. Without prejudice to the foregoing contention, even assuming though not conceding that some part of the interest expenditure is liable for a disallowance, the interest expenditure attributable to the tonnage tax business is required to be excluded. The administrative expenses cannot exceed the actual expenditure incurred. Without pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der Section 14A of the Act under the normal computation of income is also required to be added back for computing book profits under section 115JB of the Act. This issue is covered in favour of the assessee by the decision of Special Bench of the Income Tax Appellate Tribunal, Delhi, in the case of Vireet Investment Pvt. Ltd. reported in 82 taxmann.com 415 (Delhi - Trib.) (SB), wherein it was held that the computation under clause (f) of Explanation 1 to Section 115JB(2) is to be made without resorting to 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. 21. Accordingly, with similar direction allowing ground number 1 8 of the appeal along with three additional issues raised, we restore the issue back to the file of the learned assessing officer. 22. Ground number ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... el referred pages 92 to 95 of the paper book to show different rates of guarantee commission charged by different banks. He pointed that vide letter dated 15/07/2011 State Bank of India has given rate of commission charged by it. The rates vary from 2.75% to 1.75% depending upon the quantum of facility availed. Similarly, information was sought by the Transfer Pricing Officer from 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 guara ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansaction in accordance with the provisions of section 92C (3) of the act. Therefore, we disapprove both the above orders and directions. 050. Coming to the benchmarking analysis adopted by the assessee, we noted that assessee has made a suo moto adjustment considering 0.55% as arm s-length price of the 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 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 mad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 of Performance Guarantee being invoked, the assessee would acquire the asset. Thus, the assessee would not be at loss in any case. The business of assessee and its AE is the same i.e. operation of ships, therefore, the asset that would be acquired by the assessee in eventuality of operation of Performance Guarantee would be utilized for the purpose of assessee s business. It would not be an unwanted asset. The ld. Counsel submitted that the DRP has upheld performance guarantee commission @1% p.a. instead of 3% proposed by the TPO. 21. Per contra, the ld. Departmental Representative vehemently defended the impugned order and the directions of the DRP on this issue and prayed for dismissing the grounds raised by the assessee assailing the adjustment. 22. Both sides heard. The assessee had extended performance guarantee to shipyard in respect of its 100% subsidiary based in Singapore. The assessee has taken ALP of the performance guarantee facility as Nil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eement 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. Therefore, there are two transactions, (1) issue of corporate guarantee in favour of Singapore entity on behalf of its associated enterprises by the assessee to make good the payment of construction of 2 vessels, if those associated enterprises failed to perform their obligation of payment with respect to that agreement, (2) to mitigate the liability that may arise on the assessee, assessee entered into another agreement with its associated enterprises to take possession of those two vessels, which those associated enterprises failed to take delivery in the event this performance guarantee issued by the assessee to Singapore entity is invoked. Therefore, basically there is a risk involved of making a payment to the Singapore entity in the event of failure of payment by associated Enterprises to Singapore entity, by the assessee. Therefore, there is a financial liability involved. The agreement of the assessee with its associated enterprises to take the possess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... antee 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) Guarantees given by banks counter guaranteed by the Company. 26712 lakhs (b) Guarantees by bank given on behalf of a subsidiary company/joint venture. 409 lakhs (c) Guarantees given to banks/ shipyard on behalf of subsidiaries. 128192 lakhs 062. In view of the above findings, and as the international transaction is required to be benchmarked for each financial/assessment year, we are of the view that the issue of performance guarantee which is a financial guarantee with risk mitigation, should also be benchmarked as it involves financial risk on the assessee. 063. However, we are also conscious of the fact that assessee has made Suo Motto adjustment with respect to the financial guarantee of 0.55% of the outstanding guarantees. These performance guarantees in the nature of financial guarantees needs to be benchmarked, which can be remunerated at less than that rate. As in the case of financial guarantees without any security, the assessee has offered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esolution panel 2, Mumbai dated 15/9/2016. 32. The learned assessing officer has made only to addition to the normal computation of total income, (1) arm s-length price of the international transaction of ₹ 49,103,000/ with respect to the determination of ALPA of performance guarantee issued by the assessee to its associated enterprises in terms of order passed under section 92CA (3) dated 30/11/2015, (2) disallowance under section 14 A of ₹ 128,971,000/ . While computing the book profit, the disallowance made by the learned assessing officer under section 14 A of the income tax act was also made while computing the book profit. 33. Ground number 1 8 of the appeal is with respect to the disallowance under section 14 A of the act. The learned authorized representative submitted that identical issue has arose in the case of the assessee for assessment year 2009 10. The facts and circumstances are also similar. The learned departmental representative also confirmed the above fact. 34. On careful consideration of the facts and circumstances of the case, we find that identical issue arose in the case of the assessee for assessment year 2009 10 wherein we ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lt ITA number 374/M/2017 for assessment year 2012 13 is allowed with above directions for statistical purposes. ITA number 1597/M/2018 (by assessee) ITA number 2077/M/2018 (by AO) Assessment Year 2014 15 38. These are the cross appeals filed by the parties against the appellate order passed by the Commissioner of income tax (appeals) 10, Mumbai (the learned CIT A) wherein the appeal filed by the assessee against, assessment order passed under section 143 (3) of the income tax act 1961 dated 29/11/2016 by the assistant Commissioner of income tax, Circle (5) (3) (2), Mumbai (the learned assessing officer for assessment year 2014 15 wherein the total income of the assessee was determined according to the normal computation of total income at ₹ 784,560,302 and the book profit was computed at ₹ 877,743,075 against the returned income as per return of income dated 28/11/2014 as per normal computation of income at ₹ 129,580,418 and the book profit of ₹ 249,557,343., Was partly allowed. Therefore both the parties are aggrieved and are in appeal. 39. The assessee is aggrieved with the order of the learned CIT A wherein the disa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... confirmed that identical issue has been dealt with by the coordinate bench in assessee s own case for assessment year 2006 07 and 2007 08 and further the learned dispute resolution panel has also not confirm the disallowance made by the learned assessing officer. Therefore the learned CIT A has deleted the disallowance of interest expenditure of ₹ 26,794,152/ holding that the same is pertaining to the tonnage tax computation of the total income and not the normal computation of total income of other income. After hearing both the parties we find that identical issue has been decided in favour of the assessee by the coordinate bench. Accordingly, we find no infirmity in the order of the learned CIT A was followed the decision of the coordinate bench in assessee s own case. Accordingly the order of the learned CIT A is confirmed and solitary ground of appeal in case of the AO is dismissed. 45. In the result, appeal filed by the learned AO is dismissed. 46. Accordingly, for assessment year 2014 15 the appeal of the assessee is allowed for statistical purposes and appeal of the learned AO is dismissed. 47. In the result, all the four appeals are disposed of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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