ADDL CIT RG 5(3), MUMBAI V. THE GREAT EASTERN SHIPPING CO. LTD, MUMBAI

ITA 437/MUM/2012

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 75209 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 11 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-01-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: K
• Next Hearing Date: 07-01-2014
• Assessment Year: 2007-2008
• Appeal Filed On: 19-01-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: M M GOLVALA SHRI F H BILIMORIA
• Keywords: Transfer pricing; International transaction; Wholly owned subsidiary
• Section: 14A; 154

Judgement Text

1 ITA NOS. 397 & 437/M/2012 , IN THE INCOME TAX APPELLATE TRIBUNAL K B ENCH, MUMBAI . . , , !'# , $ % BEFORE SHRI I.P. BANSAL, JM AND SHRI N.K. BILLAI YA, AM ./ I.T.A. NO.397/MUM/2012 ( & & & & / ASSESSMENT YEAR :2007-08 THE GREAT EASTERN SHIPPING CO. LTD., C/O KALYANIWALLA & MISTRY, ARMY & NAVY BLDG., 148 M.G. ROAD, FORT, MUMBAI-400 001 THE ACIT, RANGE 5(3), AAYAKAR BHAVAN, MUMBAI-400 020 ./ I.T.A. NO.437/MUM/2012 ( & & & & / ASSESSMENT YEAR :2007-08 THE ACIT, RANGE 5(3), AAYAKAR BHAVAN, MUMBAI-400 020 THE GREAT EASTERN SHIPPING CO. LTD., C/O KALYANIWALLA & MISTRY, ARMY & NAVY BLDG., 148 M.G. ROAD, FORT, MUMBAI-400 001 ' $ ./ () ./PAN/GIR NO. : AAACT 1565C ( '* /APPELLANT ) .. ( +,'* / RESPONDENT ) '* - / ASSESSEE BY : ` SHRI M.M. GOLVALA SHRI F.H. BILIMORIA +,'* . - /DEPARTMENT BY : SHRI NEERAJA PRADHAN . /0$ / DATE OF HEARING :07.01.2014 12& . /0$ / DATE OF PRONOUNCEMENT : 10.01.2014 3 / O R D E R 2 ITA NOS. 397 & 437/M/2012 PER N.K. BILLAIYA, AM: THESE CROSS APPEALS BY THE ASSESSEE AND THE REVE NUE ARE DIRECTED AGAINST THE VERY SAME ORDER OF THE LD. CIT(A)-15, MUMBAI DT . 21.11.2011 PERTAINING TO A.Y. 2007-08. AS BOTH THESE APPEALS WERE HEARD TOGE THER, THEY ARE DISPOSED OF BY THIS COMMON ORDER FOR THE SAKE OF CONVENIENCE AND B REVITY. ITA NO. 397/M/2012 ASSESSEES APPEAL 2. THE ASSESSEE HAS RAISED 11 SUBSTANTIVE GROUNDS O F APPEAL. GROUND NO. 1 TO 5 RELATE TO THE DISALLOWANCE MADE U/S. 14A OF THE ACT AND GROUND NO. 6 TO 11 RELATE TO TRANSFER PRICING ADJUSTMENT. 3. DURING THE COURSE OF THE SCRUTINY ASSESSMENT PRO CEEDINGS, THE ASSESSING OFFICER OBSERVED THAT THE ASSESSEE HAS EARNED TOTAL DIVIDEND INCOME OF RS. 10,51,05,927/- OUT OF WHICH INCOME OF RS. 17,41,670 /- IS RECEIVED FROM FOREIGN SUBSIDIARY AND IS TAXABLE AND THE BALANCE RS. 10,33 ,64,257/- HAS BEEN CLAIMED AS EXEMPT U/S. 10(34) OF THE ACT. THE AO FURTHER OBSE RVED THAT THE ASSESSEE HAS SUO MOTU DISALLOWED A SUM OF RS. 1,29,58,179/- IN ITS COMPUT ATION OF TOTAL INCOME. THE ASSESSEE HAS ALSO PROVIDED THE WORKING AND THE BASIS OF THE DISALLOWANCE MADE BY IT U/S. 14A OF THE ACT. THE ASSESSEE WAS A SKED TO EXPLAIN WHY THE PROVISIONS OF RULE 8D OF THE ACT SHOULD NOT BE MADE APPLICABLE TO THE ASSESSEE IN WORKING OUT THE DISALLOWANCE U/S. 14A OF THE ACT. THE ASSESSEE FILED A DETAILED REPLY DT. 26.10.2010. 3.1. THE MAIN CONTENTION OF THE ASSESSEE WAS THAT R ULE 8D WAS APPLICABLE FROM ASSESSMENT YEAR 2008-09. AFTER CONSIDERING THE SUB MISSIONS OF THE ASSESSEE, THE AO WAS OF THE FIRM BELIEF THAT EVEN IF STRICTLY TH E AMENDED PROVISIONS OF SECTION 3 ITA NOS. 397 & 437/M/2012 14A AND THE CORRESPONDING RULES ARE NOT APPLICABLE TO THE CURRENT ASSESSMENT YEAR, THE BASIS OF THE DISALLOWANCE EVOLVED THEREIN IS TH E MOST ADEQUATE IN THE PRESENT SCENARIO. THE AO FURTHER OBSERVED THAT WHILE COMP UTING THE DISALLOWANCE SUO MOTO , THE ASSESSEE HAS NOT GIVEN ANY JUSTIFICATION FOR TAKING ONLY 9.84% OF TREASURY EXPENSES WHICH ACCORDING TO THE AO WERE INCURRED SO LELY FOR EARNING DIVIDEND INCOME. ACCORDING TO THE AO, THE DISALLOWANCE MADE BY THE ASSESSEE IS INADEQUATE THEREFORE THE AO WENT ON TO COMPUTE THE DISALLOWANCE APPLYING RULE 8D AND COMPUTED THE FIGURE AT RS. 2,66,53,078/- GIV ING THE BENEFIT OF SUO MOTU DISALLOWANCE OF RS. 1,25,98,179/-, THE NET DISALLOW ANCE WAS TAKEN AT RS. 1,04,16,439/- AND ADDED TO THE INCOME OF THE ASSESS EE. 4. THE ASSESSEE STRONGLY AGITATED THIS ADDITION BEF ORE THE LD. CIT(A). IT WAS STRONGLY CONTENDED BEFORE THE LD. CIT(A) THAT THE A SSESSEE HAD SUO MOTU DISALLOWED A SUM OF RS. 1,29,58,179/- U/S. 14A OF T HE ACT AND HAS ALSO GIVEN THE DETAILED WORKING AND THE BASIS FOR SUCH DISALLOWANC E. IT WAS EXPLAINED TO THE LD. CIT(A) THAT THE AGGREGATE ADMINISTRATIVE AND OTHER EXPENDITURE CONSIDERED BY THE AO IS ERRONEOUS. THE AGGREGATE ADMINISTRATIVE AND OTHER EXPENDITURE INCURRED BY THE TREASURY DEPARTMENT WAS RS. 70,67,853/- ONLY WH ICH HAS BEEN BIFURCATED BY THE ASSESSEE BETWEEN THE TAXABLE AND NON TAXABLE INCOM E ON THE BASIS OF THE GROSS INCOME RECEIVED BY THE TREASURY DIVISION. THEREFOR E, THE ACTUAL AMOUNT OF EXPENDITURE LIABLE FOR DISALLOWANCE COMES TO RS. 6, 77,095/-. SINCE THE ASSESSEE HAS DISALLOWED THE ACTUAL AMOUNT, NO FURTHER DISALL OWANCE WAS NECESSARY. IT WAS POINTED OUT TO THE LD. CIT(A) THAT IN THE IMMEDIATE PRECEDING ASSESSMENT YEAR, THE DISALLOWANCE U/S. 14A AS COMPUTED BY THE ASSESSEE W AS UPHELD BY THE LD. CIT(A). 4.1. AFTER CONSIDERING THE FACTS AND SUBMISSIONS OF THE ASSESSEE, THE LD. CIT(A) WAS CONVINCED THAT APPLICATION OF RULE 8D IS FROM A .Y. 2008-09 BUT AT THE SAME 4 ITA NOS. 397 & 437/M/2012 TIME WAS OF THE VIEW THAT THE AO IS DUTY BOUND TO D ETERMINE THE EXPENDITURE WHICH HAS BEEN INCURRED IN RELATION TO THE INCOME WHICH D OES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT ON A REASONABLE BASIS. THE LD . CIT(A) ASKED THE ASSESSEE TO FURNISH CERTAIN DETAILS AS PER THE FORMULA GIVEN B Y HIM WHICH IS EXHIBITED ON PAGE- 11 OF HIS ORDER. THE ASSESSEE FILED NECESSARY DETA ILS WHICH IS AT CLAUSE (VII) ON PAGE-12 OF CIT(A)S ORDER. THE LD. CIT(A) WAS CONV INCED THAT AOS ACTION IN CONSIDERING THE ENTIRE TREASURY EXPENSES IS NOT CO RRECT, THE SAME SHOULD HAVE BEEN ALLOCATED ON THE PROPORTIONATE BASIS. THE LD. CIT( A) FURTHER OBSERVED THAT THOUGH RULE 8D IS NOT APPLICABLE FOR THE YEAR UNDER CONSID ERATION, THE METHOD WHICH IS THOUGHT TO BE CONSISTENT WITH FACTS AND CIRCUMSTANC ES OF THE CASE WAS THE ONE WHICH WAS PROPOSED BY HIM TO THE ASSESSEE AND FOLLO WING THE SAME METHOD THE DISALLOWANCE IS WORKED OUT AT RS. 2,38,90,719/-. T HE LD. CIT(A) ACCORDINGLY DIRECTED THE AO TO CONSIDER THE AMOUNT OF DISALLOWA NCE AT RS. 2,38,90,719/- AFTER REDUCING THE AMOUNT THAT HAS ALREADY BEEN OFFERED B Y THE ASSESSEE U/S. 14A OF THE ACT. 5. AGGRIEVED BY THIS, THE ASSESSEE IS BEFORE US. T HE LD. COUNSEL FOR THE ASSESSEE DREW OUR ATTENTION TO PAGE-30 OF THE PAPER BOOK AND POINTED OUT HOW THE INCOME HAS BEEN COMPUTED FROM THE BUSINESS OTHER TH AN THE BUSINESS OF QUALIFYING SHIPS. THE LD. COUNSEL FURTHER DREW OUR ATTENTION TO PAGE-31 OF THE PAPER BOOK WHERE THE ASSESSEE HAS COMPUTED THE DISALLOWANCE U/ S. 14A OF THE ACT. THE LD. COUNSEL FURTHER DREW OUR ATTENTION ON EXHIBIT 35 & 36 OF THE PAPER BOOK WHICH CONTAIN THE FORMULA GIVEN BY THE LD. CIT(A) FOR MAK ING OF THE DISALLOWANCE ACCORDINGLY. IT IS THE SAY OF THE LD. COUNSEL THAT THE LD. CIT(A) HAS DEVIATED FROM THE FINDINGS OF HIS PREDECESSOR FOR A.Y. 2006-07. THE LD. COUNSEL CONCLUDED THAT THIS ISSUE HAS BEEN DECIDED BY THE TRIBUNAL IN FAVO UR OF THE ASSESSEE IN ASSESSEES 5 ITA NOS. 397 & 437/M/2012 OWN CASE FOR A.Y. 2006-07. THE LD. COUNSEL PLACED THE ORDER OF THE TRIBUNAL BEFORE US. 6. PER CONTRA, THE LD. DEPARTMENTAL REPRESENTATIVE RELIED UPON THE FINDINGS OF THE LOWER AUTHORITIES. IT IS THE SAY OF THE LD. DR THAT FACTS OF A.Y. 2006-07 ARE NOT SIMILAR TO THE FACTS OF THE YEAR UNDER CONSIDERATIO N. 7. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND CAR EFULLY PERUSED THE ORDERS OF THE LOWER AUTHORITIES AND THE RELEVANT MATERIAL EVIDENCES BROUGHT ON RECORD. WE HAVE ALSO THE BENEFIT OF THE ORDER OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR A.Y. 2006-07 IN ITA NO. 4507/M/2011. WE FIND THAT ON ID ENTICAL FACTS OF DISALLOWANCES OF INTEREST EXPENDITURE AND DISALLOWA NCE OF ADMINISTRATIVE AND OTHER EXPENDITURE AFTER CONSIDERING THE FACTS, THE TRIBUN AL CAME TO THE CONCLUSION AT PARA-11 WHICH READS AS UNDER: WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDES AND ALSO PERUSED THE RELEVANT MATERIAL ON RECORD. AS RIGHTL Y SUBMITTED BY THE LEARNED COUNSEL FOR THE ASSESSEE, THE IMPUGNED ORDE R OF THE LEARNED CIT(A) IS WELL REASONED AND WELL DISCUSSED ON THIS ISSUE AND THE SAME IS SELF EXPLANATORY AS REGARDS THE REASONS GIVEN BY HIM FOR DELETING THE ADDITION DISALLOWANCE OF RS. 5,98,139/- MADE BY THE AO U/S. 14A. AS HELD BY HIM RELYING ON THE DECISION OF HONBLE B OMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. (SUPRA) , RULE 8D APPLIED BY THE AO TO WORK OUT THE DISALLOWANCE U/S. 14A WAS NOT APPLICABLE TO THE YEAR UNDER CONSIDERATION. THE SAID DISALLOWANC E FOR THE YEAR UNDER CONSIDERATION, THEREFORE, WAS REQUIRED TO BE WORKED OUT ON SOME REASONABLE BASIS AS HELD BY THE HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. (SUPRA) AN D SINCE THE WORKING FURNISHED BY THE ASSESSEE FOR MAKING THE DI SALLOWANCE U/S. 14A WAS FAIR AND REASONABLE AS FOUND BY THE LD. CIT (A), WE ARE OF THE VIEW THAT THE ADDITIONAL DISALLOWANCE MADE BY THE A O U/S. 14A BY APPLYING RULE 8D IS RIGHTLY DELETED BY THE LD. CIT( A). AT THE TIME OF HEARING BEFORE US, THE LEARNED DR HAS NOT BEEN ABLE TO CONTROVERT OR REBUT THE FINDING GIVEN BY THE LD. CIT(A) WHILE DEC IDING THIS ISSUE IN FAVOUR OF THE ASSESSEE AND HAS SIMPLY RELIED ON THE ORDER OF THE AO IN 6 ITA NOS. 397 & 437/M/2012 SUPPORT OF THE REVENUES CASE ON THIS ISSUE. WE, T HEREFORE, FIND NO INFIRMITY IN THE IMPUGNED ORDER OF THE LD. CIT(A) G IVING RELIEF TO THE ASSESSEE ON THIS ISSUE AND UPHOLDING THE SAME, WE D ISMISS THE ADDITIONAL GROUND RAISED BY THE REVENUE. 8. FACTS AND ISSUES BEING IDENTICAL FOR THE YEAR UN DER CONSIDERATION, RESPECTFULLY FOLLOWING THE AFOREMENTIONED FINDINGS OF THE TRIBUN AL IN ASSESSEES OWN CASE, WE REVERSE THE FINDINGS OF THE LD. CIT(A) ON THIS ISSU E AND DIRECT THE AO TO ACCEPT THE DISALLOWANCE MADE BY THE ASSESSEE SUO MOTO U/S. 14A OF THE ACT. GROUND NO. 1 TO 4 ARE ACCORDINGLY ALLOWED. 9. GRIEVANCE RAISED BY GROUND NO. 5 BECOMES OTIOSE. 10. GROUND NO. 6 TO 11 RELATE TO THE TRANSFER PRICI NG ADJUSTMENTS IN RESPECT OF INTERNATIONAL TRANSACTION. 11. THE INTERNATIONAL TRANSACTION REPORTED BY THE A SSESSEE RELATES TO GIVING OF TERM LOAN TO ITS 100% SUBSIDIARY USD 40,00,000/- FO R TWO YEARS FOR MEETING WORKING CAPITAL REQUIREMENTS AND TERM LOAN TO SUBSI DIARY USD 17 MILLION TO FINANCE THE STAGE PAYMENT FOR A NEW BUILDING RIG CO NTRACT. THE ASSESSEE HAS CHARGED INTEREST @ 5% PER ANNUM ON THE FIRST LOAN OF 40 LAKHS USD WHICH IS BASED ON THE TWO YEARS USD FIXED IRS RATE + 100 B PS AND ON THE SECOND LOAN OF USD OF 17 MILLION THE ASSESSEE HAS CHARGED INTEREST @ 7.3% PER ANNUM. A REFERENCE WAS MADE U/S. 91CA(1) OF THE ACT BY THE A O TO THE TRANSFER PRICING OFFICER (TPO). THE TPO PROCEEDED ON FACTS WHICH WE RE NOT EVEN REMOTELY CONNECTED WITH THE FACTS OF THE CASE. FIRSTLY THE TPO TOOK THE LOAN AMOUNT AT RS. 20,29,46,50,000/- AND WAS OF THE FIRM BELIEF THAT N O INTEREST IS CHARGED BY THE ASSESSEE ON THE SAID LOAN GIVEN TO ITS 100% SUBSIDI ARY. THE TPO FURTHER PROCEEDED WITH THESE ERRONEOUS FACTS AND MADE A BELIEF THAT T HESE AMOUNTS ARE IN THE NATURE OF 7 ITA NOS. 397 & 437/M/2012 WORKING CAPITAL EXTENDED FOR THE PURPOSE OF MEETING WORKING CAPITAL REQUIREMENTS OF ITS AES. THE TPO PROCEEDED WITH THE BELIEF THAT CHARGING OF ARMS LENGTH INTEREST IS NECESSARY BECAUSE THE ASSESSEE HAS MADE LOANS AND ADVANCES TO ITS AE WITHOUT CHARGING ANY INTEREST AND CAME TO THE CONCL USION THAT THE INTERNATIONAL TRANSACTION REPRESENTING LOAN WITHOUT CHARGING INTE REST IS NOT AT ARMS LENGTH PRICE WITHIN THE MEANING OF SEC. 92C(3) (A), (B) AND (C) OF THE ACT R.W. RULE 10B(10)(A) OF THE ACT. THE TPO WAS OF THE OPINION THAT ARMS LENGTH INTEREST IS TO BE DETERMINED BY FOLLOWING CUP METHOD WHEREIN THE INTE REST RATE IS DETERMINED UNDER THE CIRCUMSTANCES IN WHICH THE ASSESSEE AND ITS SUB SIDIARY IS OPERATING I.E. WHAT IS THE INTEREST THAT WOULD HAVE BEEN EARNED ON SUCH LO AN IF GIVEN TO UNRELATED PARTIES IN SIMILAR SITUATION IS THAT OF SUBSIDIARY. SINCE THE TESTED PARTY IS THE ASSESSEE THE PREVALENT INTEREST THAT COULD HAVE BEEN EARNED BY T HE ASSESSEE BY ADVANCING A LOAN TO AN UNRELATED PARTY IN INDIA HAVE TO BE DETERMINE D. THE TPO WENT ON TO TAKE THE INTEREST RATE AT 14% AND COMPUTED THE ARMS LENGTH PRICE ON THE INCORRECT FIGURE OF LOANS CONSIDERED BY HIM AT RS. 20,29,46,50,000/- AN D APPLYING 14% INTEREST RATE COMPUTED THE ALP AT RS. 28,41,25,100/- AFTER GIVING REBATE OF INTEREST RECEIVED MADE AN UPWARD ADJUSTMENT OF RS. 1,76,96,93,480/-. 11.1. AFTER RECEIVING THE ORDER OF THE TPO, THE ASS ESSEE POINTED OUT THE GRAVE FACTUAL ERRORS IN THE ORDER OF THE TPO AND REQUESTE D HIM TO RECTIFY HIS ORDER. IT WAS EXPLAINED TO HIM THAT THE TWO LOANS GIVEN BY THE A SSESSEE TO ITS SUBSIDIARY, ONE LOAN WAS OF USD 4 MILLION AND SECOND LOAN WAS OF US D 17 MILLION THE INDIAN RUPEES EQUIVALENT OF THE ABOVE COMES TO RS. 96.35 C RORES WHEREAS THE TPO HAS GONE WITH THE FIGURE OF 229.46 CRORES. IT WAS FURT HER POINTED OUT TO THE TPO THAT HE HAS TAKEN THE INTEREST RECEIVED BY THE ASSESSEE AT RS. 107.15 CRORES WHEREAS THE ASSESSEE HAS RECEIVED INTEREST FROM ITS AE ONLY RS. 3.67 CRORES AND IF THE TPO HAD TAKEN THE CORRECT FIGURE, THE TP ADJUSTMENT WOULD H AVE COME TO ONLY RS. 4.17 8 ITA NOS. 397 & 437/M/2012 CRORES AS AGAINST RS. 176.96 CRORES. THE TPO WAS K IND ENOUGH TO ADMIT HIS MISTAKE OF FACTUAL ERROR AND RECOMPUTED THE TP ADJU STMENTS AT RS. 4,17,34,739/- INSTEAD OF RS. 1,76,96,93,480/-. 12. AGGRIEVED BY THIS TP ADJUSTMENT, THE ASSESSEE C ARRIED THE MATTER BEFORE THE LD. CIT(A). THE LD. CIT(A) HAS CONSIDERED THIS GRI EVANCE OF THE ASSESSEE VIDE DISPOSING OF GROUND NO. 10 TO 14 OF HIS APPELLATE O RDER. IT WAS EXPLAINED TO THE LD. CIT(A) THAT THE ASSESSEE HAS GIVEN TWO FOREIGN CURR ENCY LOANS TO ITS WHOLLY OWNED SUBSIDIARY OF SHARJAH, FIRST LOAN WAS USD 4 MILLIO N AND THE SECOND LOAN WAS USD 17 MILLION. IT WAS FURTHER EXPLAINED THAT THE LOAN OF USD 17 MILLION WAS GIVEN AND REPAID DURING THE YEAR UNDER CONSIDERATION WHER EAS THE LOAN OF USD 4 MILLION WAS GIVEN IN THE IMMEDIATELY PRECEDING PREVIOUS YEA R AND WAS OUTSTANDING FOR THE PREVIOUS YEAR UNDER CONSIDERATION. THE ASSESSEE HAS CHARGED 5% INTEREST ON THE FIRST LOAN AND 7.3 % INTEREST ON THE SECOND LOAN. TOTAL INTEREST CHARGED DURING THE YEAR WAS RS. 3,67,14,785/-. IT WAS EXPLAINED THAT THE ASSESSEE HAS PAID INTEREST AT THE RATE OF 4.79% PER ANNUM ON TWO USD LOANS AVAILE D FROM THE EXPORT IMPORT BANK OF KOREA (KEXIM) AND STRONGLY CONTENDED THAT T HE RATE OF INTEREST CHARGED BY THE ASSESSEE ON THE LOANS GIVEN TO ITS AE IS CER TAINLY COMPARABLE WITH THE RATE OF INTEREST CHARGED BY THE KEXIM FROM THE ASSESSEE. T HEREFORE, THE INTEREST RATE CHARGED BY KEXIM FORMS A COMPARABLE UNCONTROLLED PR ICE (CUP) IN RESPECT OF THE INTEREST RATES CHARGED BY THE ASSESSEE. 12.1. IT WAS EXPLAINED TO THE LD. CIT(A) THAT ASSE SSEE IS A CASH RICH COMPANY AND IT BORROWS MONEY ONLY FOR THE PURPOSE OF ACQUIRIN G OF SHIPS. THE BANK STATEMENTS WERE FURNISHED BEFORE THE LD. CIT(A) TO SUBSTANTIAT E ITS CLAIM. THE ASSESSEE FURTHER EXPLAINED THE BASIS FOR CHARGING INTEREST O N FIRST LOAN AT THE RATE OF 5% WHICH WAS BASED ON 2 YEAR USD IRS RATE PLUS 100 BA SIS POINT. IT WAS EXPLAINED THAT THE IRS I.E. INTEREST CHARGED FOR SWAP IS TH E RATE OF INTEREST CHARGED FOR 9 ITA NOS. 397 & 437/M/2012 SWAPPING RATE OF BORROWING TO FIXED RATE. IT WAS E XPLAINED THAT THE TWO YEAR USD FIXED IRS RATE PREVAILING AT THE TIME WHEN THE ASS ESSEE GAVE THE LOAN OF. 4 MILLION USD WAS AT 3,9560%, THE ASSESSEE HAS CHARGED INTERE ST AT 5%. TO SUBSTANTIATE ITS CLAIM, THE ASSESSEE ALSO FILED A LETTER FROM THE HO NGKONG AND SHANGHAI BANKING CORPORATION LTD. TO FURTHER SUBSTANTIATE ITS CLAIM , THE ASSESSEE RELIED UPON THE RBI CIRCULAR A.P (DIR SERIES) CIRCULAR NO. 87 DT. 17 TH APRIL, 2004. 13. AFTER CONSIDERING THE FACTS AND THE SUBMISSIONS AND THE MATERIAL EVIDENCES PLACED BEFORE HIM, THE LD. CIT(A) OBSERVED THAT THE TPO HAS ADOPTED A RATE OF INTEREST AT 14% FOR WHICH NO BASIS HAS BEEN GIVEN C OUPLED WITH THE OBSERVATION THAT THE AVERAGE RATE OF BORROWING BY THE ASSESSEE IS AT 9.5% WHICH IS ERRONEOUS. THE LD. CIT(A) WAS CONVINCED THAT WHEN THE LOAN IS GIVEN IN FOREIGN CURRENCY, THE APPLICABLE RATE OF INTEREST WOULD BE LIBOR BASED AN D NOT ANY RATE BASED APPLICABLE TO THE RUPEE LOAN RATES IN INDIA AND REJECTED THE B ENCHMARKING DONE BY THE TPO. HOWEVER, AT THE SAME TIME, THE LD. CIT(A) ALSO DID NOT ACCEPT THE ASSESSEES SUBMISSION TO ACCEPT 2-YEAR USD IRS RATE PLUS 100 B ASIS POINTS AND ALSO REJECTED THE CEILING RATE PRESCRIBED BY THE RBI FOR EXPORT CREDIT. ACCORDING TO THE LD. CIT(A), THE 2-YEAR USD IRS RATE IS FOR CONVERSION O F FLOATING RATE OF INTEREST TO THE FIXED RATE OF INTEREST AND EXPORT CREDIT RATES ARE IN RESPECT OF EXPORT CONSIGNMENTS AND NOT FOR THE PURPOSE OF WORKING CAPITAL. THE LD . CIT(A) FURTHER OBSERVED THAT ON THE FACTS OF THE CASE, NO INDEPENDENT CUP RATE I S AVAILABLE TO BENCHMARK THE INTERNATIONAL TRANSACTION. IT WAS CONSIDERED FIT T O LOOK INTO THE RBI GUIDELINES WHICH ARE IN RESPECT OF ECB. THE ASSESSEE WAS ASKE D TO PROVIDE THE RELEVANT DETAILS. AFTER CONSIDERING THE DETAILS, THE LD. CI T(A) OBSERVED THAT DURING THE RELEVANT PERIOD RESERVE BANK OF INDIAS MASTER CIRC ULAR NO. 07/2006-07 DT. 1 ST JULY, 2006 ON EXTERNAL COMMERCIAL BORROWING (ECB) P ROVIDED THAT ALL IN COST CEILING FOR ECB WITH AVERAGE MATURITY PERIOD OF THR EE YEARS AND UPTO FIVE YEARS IS 10 ITA NOS. 397 & 437/M/2012 TO BE 6 MONTHS LIBOR PLUS 200 BASIS POINTS AND FOR PERIOD MORE THAN FIVE YEARS THE RATE IS 6 MONTHS LIBOR PLUS 350 BASIS POINTS. THE LD. CIT(A) ACCORDINGLY DIRECTED TO WORK-OUT THE QUANTUM OF ADJUSTMENT BY A DOPTING RATE OF INTEREST AS 6 MONTHS LIBOR PLUS 200 BASIS POINT FOR THE LOAN OF USD 4 MILLIONS AND 6 MONTHS LIBOR PLUS 350 BASIS POINTS FOR LOAN OF USD 17 MILLIONS. 14. AGGRIEVED BY THIS FINDING OF LD. CIT(A), THE AS SESSEE IS BEFORE US. THE LD. COUNSEL FOR THE ASSESSEE REITERATED WHAT HAS BEEN STATED BEFORE THE LOWER AUTHORITIES. IT IS THE SAY OF THE LD. COUNSEL THAT THE FIRST LOAN OF USD 4 MILLION WAS BENCHMARKED AT THE TIME WHEN THE LOANS WERE GIV EN AND THE BENCHMARKING WAS DONE BY TAKING USD INTEREST RATE SWAP RATE IRS RATE PLUS 100 BASIS POINT AND AT THAT POINT IN TIME THE IRS RATE WAS 3.956 % AND ADDING 100BPS THE ASSESSEE HAS CHARGED INTEREST AT THE RATE OF 5% AS PER THE RATES PREVAILING AS ON 31.5.2005. THE LD. COUNSEL FURTHER SUBMITTED THAT AT THAT POINT IN TIME 6 MONTHS LIBOR WAS 3.531% SO EFFECTIVE RATE FOR 6 MONTHS LIBOR + 147 B ASIS POINT WOULD BE APPROXIMATELY THE SAME WHAT THE ASSESSEE HAS CHAR GED. THE LD. COUNSEL FURTHER SUBMITTED THAT SO FAR AS THE LOAN OF USD 17 MILLION , IT WAS DISBURSED ON 23.6.2006 AT THAT POINT IN TIME 6 MONTHS LIBOR WAS 5.6382%, THE ASSESSEE HAS CHARGED 7.3% PER ANNUM WHICH COMES TO LIBOR PLUS 166 BASIS POINT. THE LD. COUNSEL FURTHER STATED THAT THERE WAS A CUP AVAILABLE INASM UCH AS THREE LOANS HAVE BEEN OBTAINED BY THE ASSESSEE AT LOWER RATES OF INTEREST USD 21.46 MILLION LOAN WAS AVAILED FROM KEXIM AT THE RATE OF 4.79% PER ANNUM. SECOND USD 34.8 MILLION LOAN AVAILED BY THE ASSESSEE AGAIN FROM KEXIM AT TH E RATE OF 4.79%. THIRD LOAN OF USD 37.40 MILLION WAS AVAILED BY THE ASSESSEE FR OM STATE BANK OF INDIA AT LIBOR+ 100 BASIS POINT. IT IS THE SAY OF THE LD. C OUNSEL THAT CONSIDERING THESE FACTS FROM EVERY POSSIBLE ANGLE, THE INTEREST RATE CHARGED BY THE ASSESSEE IS AT ARMS LENGTH AND THEREFORE, NO FURTHER ADJUSTMENT IS REQU IRED. 11 ITA NOS. 397 & 437/M/2012 15. PER CONTRA, THE LD. DEPARTMENTAL REPRESENTATIVE STRONGLY SUPPORTED THE FINDINGS OF THE LOWER AUTHORITIES. 16. WE HAVE HEARD THE RIVAL PARTIES AND CAREFULLY P ERUSED THE ORDERS OF THE LOWER AUTHORITIES AND THE RELEVANT MATERIAL EVIDENCES BRO UGHT ON RECORD IN THE FORM OF PAPER BOOK. A PERUSAL OF THE ORDER OF THE TPO CLEA RLY SHOWS THAT THE TPO HAS PROCEEDED ENTIRELY ON ERRONEOUS FACTS. IN OUR CONS IDERED OPINION , IF AN ASSESSING AUTHORITY PROCEEDS WITH FACTS WHICH ARE REMOTELY C ONNECTED WITH THE FACTS IN ISSUE AND MAKES UP HIS MIND , SUCH ORDER CANNOT FORM ANY BASIS FOR HIGHER AUTHORITIES. NO DOUBT, THE TPO HAS SALVAGED THE SITUATION BY REC TIFYING HIS ORDER U/S. 154 OF THE ACT BUT ONE CANNOT IGNORE THE FACT THAT HE HAS RECT IFIED ONLY THE FINANCIAL FIGURES WHICH WERE WRONGLY TAKEN BY HIM. BUT AT THE SAME T IME ONE ALSO CANNOT IGNORE THE FACT THAT THE TPO HAS BASED HIS FINDING ENTIRELY ON WRONG FACTS. THE LD. CIT(A) WAS JUDICIOUS ENOUGH TO CONSIDER THE CORRECT FACTS AND FIGURES. HOWEVER, THE LD. CIT(A) ALSO ERRED IN NOT APPRECIATING THE FACTS IN THEIR RIGHT PERCEPTIVE. FIRSTLY, THE LD. CIT(A) COMPLETELY IGNORED THE FACT THAT THE LOA N OF USD 4 MILLION WAS GIVEN BY THE ASSESSEE TO ITS AE IN THE EARLIER YEARS. T HE BENCHMARKING WAS DONE BY THE ASSESSEE AS PER THE PREVAILING RATE IN THE EARLIER. NO TP ADJUSTMENT WAS DONE IN THE EARLIER YEAR. THIS YEAR WHAT THE ASSESSEE HAS CHAR GED IS ONLY ON THE LOAN BROUGHT FORWARD FROM THE EARLIER YEAR. THIS FACT HAS NOT A T ALL BEEN APPRECIATED BY THE LD. CIT(A). SECONDLY, THE LD. CIT(A) FURTHER ERRED IN NOT CONSIDERING THE SECOND USD LOAN OF RS. 17 MILLION IN ITS RIGHT PERCEPTIVE. THOUGH THE LOAN WAS GIVEN FOR A LONG TERM BUT THE UNDENIABLE FACT IS THAT THE LO AN WAS REPAID WITHIN THE YEAR ITSELF I.E. WITHIN 179 DAYS. THE LD. CIT(A) HAS TAKEN LEA F OUT OF THE RBI CIRCULAR BEARING NO. 5 DT. 1 ST AUGUST, 2005 WHEREIN CEILING RATES HAVE BEEN LA ID DOWN FOR INTEREST PAYABLE ON EXTERNAL COMMERCIAL BORROWINGS WHICH ARE AS UNDER: 12 ITA NOS. 397 & 437/M/2012 AVERAGE MATURITY PERIOD ALL-IN-COST CEILINGS OVER 6 MONTHS LIBOR THREE YEARS AND UPTO FIVE YEARS 200 BASIS POINTS MORE THAN FIVE YEARS 350 BASIS PINTS. 16.1. THE LD. CIT(A) HAS DIRECTED TO APPLY THE AFOR ESTATED RATES FOR THE PURPOSE OF DETERMINING THE ARMS LENGTH PRICE. WE DO NOT AGRE E WITH THIS FINDING OF THE LD. CIT(A) FOR THE SIMPLE REASON THAT THE LOAN OF USD 4 MILLION WAS GIVEN IN EARLIER ACCOUNTING YEAR AND AS PER THE AGREEMENT, THE RATE OF INTEREST WAS TAKEN AT 5%. THE FIXED RATE OF INTEREST CANNOT BE ACCEPTED TO BE CHA NGED WITH THE SUBSEQUENT CHANGE IN LIBOR , IF ANY , AND AS THE LOAN OF USD 17 MILLI ON HAS BEEN REPAID WITHIN THE YEAR ITSELF, THERE IS NO LOGIC IN TAKING THE RATE F OR MORE THAN 5 YEARS AT 6 MONTHS LIBOR PLUS 350 BASIS POINT. IN OUR HUMBLE OPINION, THE BENCHMARKING DONE BY THE ASSESSEE ARE BASED ON THE INTEREST PAID BY IT O N ITS OWN BORROWINGS OF LOAN IN FOREIGN CURRENCY FROM KEXIM BANK AND ALSO FROM STAT E BANK OF INDIA AS MENTIONED ELSEWHERE IN THIS ORDER WE FIND THAT THE INTEREST CHARGED BY THE ASSESSEE ON THE LOAN GIVEN BY IT TO ITS AE IS AT ARMS LENGT H AND THEREFORE, NO FURTHER ADJUSTMENT IS REQUIRED. WE, ACCORDINGLY, REVERSE T HE FINDINGS OF THE LD. CIT(A) WITH A DIRECTION THAT NO TRANSFER PRICING ADJUSTMEN T IS REQUIRED ON THE INTEREST CHARGED BY THE ASSESSEE TO ITS AE. GROUND NO. 6 TO 11 ARE ACCORDINGLY ALLOWED. 17. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED. ITA NO. 437/M/2012 REVENUES APPEAL 18. THE REVENUE HAS RAISED FOLLOWING SUBSTANTIAL GR OUNDS OF APPEAL: 13 ITA NOS. 397 & 437/M/2012 1. I) WHETHER ON THE FACTS, CIRCUMSTANCES AND IN T HE LAW, THE LD. CIT(A) ERRED IN DELETING THE ADDITION OF RS. 6, 35,32,753/- BEING INTEREST EXPENDITURE ATTRIBUTED TO NON-TONNAG E INCOME. II) WHETHER ON THE FACTS, CIRCUMSTANCES AND IN THE LAW, THE LD. CIT(A) ERRED IN COMPUTING THE DISALLOWANCE U/S . 14A/8D AT RS. 2,38,90,719/- AS AGAINST RS. 2,66,53,078/- COMP UTED BY THE AO AND FURTHER HOLDING THAT RULE 8D PROVISIONS ARE NOT APPLICABLE FOR THE YEAR FOR THE PURPOSE TO COMPUTE DISALLOWANCE U/S. 14A OF THE I.T. ACT, 1961. III) WHETHER ON THE FACTS, CIRCUMSTANCES AND IN TH E LAW, THE LD. CIT(A) ERRED IN DIRECTING THE AO TO TREAT REFUND AM OUNT OF RS. 3,203/- FOR SUPPLY OF CRUDE OIL, AMOUNT OF RS. 17,0 8,699/- CULMINATION PROCEEDS FROM COURT FOR THE VESSEL JAG DHIR AND RS. 92,000/- RECEIVED ON SALE OF MISCELLANEOUS ITEM S AS TONNAGE INCOME WITHOUT APPRECIATING THAT THESE AMOUNTS WERE RELATED TO THE PERIOD WHEN TONNAGE TAX SCHEME WAS NOT IN EXIST ENCE? IV) WHETHER ON THE FACTS, CIRCUMSTANCES AND IN THE LAW, THE LD. CIT(A) ERRED IN DIRECTING THE AO TO TREAT RS. 9 8,970/- BEING THE AMOUNT RECEIVED BY THE ASSESSEE TOWARDS GENERAL AVERAGE CLAIMS AS INSURANCE CLAIM AS TONNAGE INCOME WITHOUT APPRECIATING THAT THE ASSESSEE ITSELF DECLARED THE SAME AS MISCELLANEOUS RECEIPTS IN ITS BOOKS OF ACCOUNT AND THAT THE EXPENDITURE FOR WHICH THE CLAIM WAS RECEIVED WAS IN CURRED IN THE YEAR 1995-96 WHEN THE TONNAGE TAX SCHEME WAS NO T IN EXISTENCE? V) WHETHER ON THE FACTS, CIRCUMSTANCES AND IN THE LAW, THE LD. CIT(A) ERRED IN DIRECTING THE AO TO TREAT THE A MOUNT OF RS. 5,00,000/- BEING LIABILITIES OF PRIOR PERIOD WRITTE N BACK AS FORMING PART OF THE TONNAGE INCOME WITHOUT APPRECIA TING THAT THE SAID LIABILITIES OF RS. 5,00,000/- REPRESENTED THE EXPENSES OF EARLIER YEARS PRIOR TO THE INTRODUCTION OF TONNAGE TAX SCHEME? VI) WHETHER ON THE FACTS, CIRCUMSTANCES AND IN THE LAW, THE LD. CIT(A) ERRED IN DELETING THE ADDITION/ADJUSTMEN T OF RS. 4,17,34,739/- MADE BY THE AO/TPO ON ACCOUNT OF ARM S LENGTH PRICE U/S. 92CA(3) OF THE I.T. ACT, WITHOUT APPRECI ATING THE FACTS 14 ITA NOS. 397 & 437/M/2012 AND REASONS DISCUSSED BY THE AO/TPO IN THE ASSESSME NT ORDERS? VII) WHETHER ON THE FACTS, CIRCUMSTANCES AND IN TH E LAW, THE LD. CIT(A) ERRED IN IGNORING THAT THE ASSESSEE WOUL D HAVE EARNED THE INTEREST ON THE LOAN ADVANCES OF SUCH LO ANS WERE GIVEN TO UNRELATED PARTIES AND FURTHER NOT APPRECIA TING THAT THE TRANSFER PRICING OFFICER/AO HAS DISCUSSED THE BASIS FOR APPLYING THE RATE @ 14% OF INTEREST? 19. AT THE VERY OUTSET BOTH PARTIES AGREED THAT THE DISALLOWANCES U/S. 14A ARE COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION O F THE TRIBUNAL IN ASSESSEES OWN CASE FOR A.Y. 2006-07. THE ISSUE OF DISALLOWANCE U /S. 14A R.W. RULE 8D HAS ALSO BEEN CONSIDERED IN ASSESSEES APPEAL IN ITA NO. 397 /M/12. SINCE THE ISSUE HAS BEEN DECIDED IN FAVOUR OF THE ASSESSEE, GROUND NO. 1(I) AND 1(II) ARE ACCORDINGLY DISMISSED. 20. GROUND NO. 1 (III) RELATES TO THE GRIEVANCE OF TREATING THREE INCOME (A) TONNAGE INCOME (B) REFUND AMOUNT FOR SUPPLY OF CRUD E OIL CULMINATION PROCEEDS FROM COURT FOR THE VESSEL AND (C) SALE OF MISCELLAN EOUS ITEMS. 21. SIMILAR ISSUE CAME UP BEFORE THE TRIBUNAL IN A. Y. 2006-07 IN ITA NO. 4507 AND 4992/M/2011 WHICH WERE CONSIDERED BY THE TRIBUN AL AT PARA-12 ON PAGE 13 OF ITS ORDER WHEREIN THE TRIBUNAL HAS FOLLOWED THE RAT IO OF THE DECISION OF THE TRIBUNAL IN THE CASE OF SHIPPING CORPORATION OF INDIA IN ITA NO. 145/M/2011. THE FINDINGS OF THE TRIBUNAL CAN BE FOUND AT PARA-15 ON PAGE-16 OF THE ORDER. AS THE LD. DEPARTMENTAL REPRESENTATIVE HAS FAIRLY CONCEDED, TH E FACTS ARE IDENTICAL, RESPECTFULLY FOLLOWING THE FINDINGS OF THE TRIBUNAL IN ASSESSEES OWN CASE, GROUND NO. 1 (III) IS DISMISSED. 22. GROUND NO. 1(IV) RELATES TO THE TREATMENT OF GE NERAL AVERAGE CLAIMS RECEIVED BY THE ASSESSEE AS FORMING PART OF THE TONNAGE INCO ME OF THE ASSESSEE. 15 ITA NOS. 397 & 437/M/2012 23. THIS ISSUE HAS ALSO BEEN DECIDED IN FAVOUR OF T HE ASSESSEE BY THE TRIBUNAL AS MENTIONED IN GROUND HEREINABOVE. FOLLOWING THE SAM E, THIS GROUND IS ACCORDINGLY DISMISSED. 24. GROUND NO. 1(V) RELATES TO THE TREATMENT OF LIA BILITIES OF PRIOR PERIOD WRITTEN BACK AS FORMING PART OF THE TONNAGE INCOME OF THE A SSESSEE. AN IDENTICAL ISSUE WAS DECIDED BY THE TRIBUNAL IN THE CASE OF THE SHIPPING CORPN. OF INDIA IN ITA NO. 145/M/2011. 25. THE LD. DR FAIRLY CONCEDED THAT THE FACTS UNDER ISSUE ARE IDENTICAL WITH THE FACTS IN ASSESSEES OWN CASE FOR A.Y. 2006-07 AND A LSO WITH THE FACTS CONSIDERED BY THE TRIBUNAL IN ITA NO. 145/M/2011. THAT BEING T HE FACT OF THE MATTER, RESPECTFULLY FOLLOWING THE FINDINGS OF THE TRIBUNA L IN ASSESSEES OWN CASE AND ALSO IN THE CASE OF SHIPPING CORPN. OF INDIA, GROUND NO. 1(V) IS ALSO DISMISSED. 26. GROUND NO. 1(VI) AND 1(VII) RELATE TO THE TP AD JUSTMENT. AS THIS ISSUE HAS BEEN CONSIDERED AT LENGTH IN ASSESSEES APPEAL IN I TA NO. 397/M/12 AND AS WE HAVE DECIDED THIS ISSUE IN FAVOUR OF THE ASSESSEE FOLLOWING OUR OWN FINDINGS, THESE GROUNDS ARE ACCORDINGLY DISMISSED. 27. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 10.1.2014 . 3 . 2& $ 4 56 10.1.2014 2 . 7 SD/- SD/- (I.P. BANSAL ) (N. K. BILLAIYA) /JUDICIAL MEMBER $ / ACCOUNTANT MEMBER 16 ITA NOS. 397 & 437/M/2012 MUMBAI; 5 DATED 10.1.2014 . . ./ RJ , SR. PS 3 . 3 . 3 . 3 . +/ 8 &/ +/ 8 &/ +/ 8 &/ +/ 8 &/ / COPY OF THE ORDER FORWARDED TO : 1. '* / THE APPELLANT 2. +,'* / THE RESPONDENT. 3. 9 ( ) / THE CIT(A)- 4. 9 / CIT 5. :7 +/ , , / DR, ITAT, MUMBAI 6. 7; < / GUARD FILE. 3 3 3 3 / BY ORDER, , / +/ //TRUE COPY// = == = / > ( > ( > ( > ( (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI