2022 (8) TMI 1482 - AT - Income Tax

Attribution of interest expenditure pertaining to non-tonnage income to the tonnage income - HELD THAT - A perusal of assessment order would show that excerpts from the chart furnished by the assessee giving details of the loans initially taken for shipping business but subsequently utilised for non-tonnage activities has been reproduced. AO disallowed interest expenditure without appreciating the facts on record. Undisputedly, the loans were initially taken for acquiring/maintaining ships. Subsequently, the ships were sold and the sales proceeds were utilized for non-tonnage activities. Therefore, the loans taken for business of qualifying ships were eventually utilized for the purpose of business other than that of the business of qualifying ships (non-tonnage activities).Thus, in the facts of case and the decision of Co-ordinate Bench in assessee s own case for assessment year 2006-07 2018 (3) TMI 2027 - ITAT MUMBAI ground No.1 of the appeal is allowed. Disallowance u/s 14A - assessee has made suo motu disallowance - assessee submitted that AO while computing disallowance u/s 14A has included interest expenditure under tonnage scheme as well - HELD THAT - As the first argument of assessee, if any loan has been taken for shipping business (qualified for tonnage tax scheme) and live link is established between the loan taken and the particular purpose, interest payment on such loan should not form part of interest expenditure for the purpose of Section 14A of the Act. It is accepted position that the entire administrative cost cannot be allocated for earning income exempt from tax if the assessee has other businesses as well. In the instant case the contention of the assessee is that the assessing officer has made disallowance u/s 14A of the Act of an amount more than the entire administrative cost of the Treasury Department. Third contention of the assessee is own interest free funds of the assessee are sufficient to cover the investments made. It is a settled legal position that where assessee is having mixed bag of own interest free funds and interest bearing funds, the presumption would be that for investment purpose own interest free funds would be utilised by the assessee. Taking into consideration entire facts of the case, we deem it appropriate to restore this issue back to the file of Assessing Officer to reexamine the issue in light of above observations. If own interest free funds of the assessee are much more than the investments made no disallowance under rule 8D(2)(ii) is warranted. Income pertaining to tonnage tax business has to be excluded from non-tonnage tax income - HELD THAT - The Co-ordinate Bench in assessee s own case for assessment year 2006-07 2018 (3) TMI 2027 - ITAT MUMBAI following the decision rendered in the case of Shipping Corporation of India 2011 (7) TMI 588 - ITAT, MUMBAI decided these grounds in favour of the assessee as held though the assessee has computed other income while filing its return of income, in our opinion, the income arising from section 41(1), cannot be classified as, either income from other sources or income from incidental activities. When all the ships of the assessee are qualifying ships and when there is no other activity other than core activities and incidental activities, in our opinion, a third category of other business income cannot be created. As pointed out by the learned Sr. Counsel, if such introduction is allowed then, a claim of the assessee of deduction under section 43B i.e., deduction only on actual payment would be required through the expenditure actually belongs to pre-tonnage period, to be allowed. The Assessing Officer cannot take recourse to sections 28 to 43C, when there is no other activity or business carried on by the company, other than business of operating qualifying ships - we allow ground of the assessee Disallowance of expenditure in connection with transfer of residential flats while computing short term capital gains - whether the building repair fund and expenditure towards share certificate should be allowed to be deducted from total sale consideration while computing capital gain on sale of Manek flat. ? - contention of the assessee is, the said expenses were incurred at the time of sale of flat. 50% of the expenditure were borne by the assessee and the remaining 50% were paid by the purchaser - HELD THAT - It is a well settled legal position that expenditure incurred at the time of sale of asset, if borne by the seller/to the extent borne by the seller has to be reduced from the total consideration. In the instant case, the expenditure towards building repair funds and share certificate were paid by the assessee and the purchaser in equal ratio. Since, expenditure was incurred at the time of sale of flat, the said expenditure is allowable to the extent paid by the assessee and hence, deductible from total sale consideration. We find merit in ground of the appeal, hence, the same is allowed in the terms aforesaid. AO non-complying with directions of the DRP to grant credit of TDS - HELD THAT - AO is directed to comply with the directions of the DRP with respect to allowing credit of TDS. The ground of the appeal is thus allowed for statistical purpose. Benchmarking foreign loan transaction to the overseas Associated Enterprise (AE) - HELD THAT - We find that identical issue was subject of appeal before the Co-ordinate Bench in assessment year 2007-08 2014 (1) TMI 709 - ITAT MUMBAI as held 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 changed with the subsequent change in LIBOR , if any , and as the loan of USD 17 million has been repaid within the year itself, there is no logic in taking the rate for 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 on its own borrowings of loan in foreign currency from KEXIM bank and also from State 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 arm's length and therefore, no further adjustment is required. We, accordingly, reverse the findings of the Ld. CIT(A) with a direction that no Transfer Pricing adjustment is required. TP adjustment in respect of Performance Guarantee given by the assessee on behalf of AE - HELD THAT - 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 . The DRP has determined ALP of the transaction @1%. The agreement in respect of which performance guarantee has been extended by the assessee on behalf of its foreign subsidiary is with respect to construction of a ship. Guarantee has been extended to a shipyard. If guarantee is invoked, the assessee would be under obligation to pay guarantee, in turn the assessee would acquire the vessel. We find force in the argument of the Counsel for the assessee, there is no element of risk involved. In any case, on enforcement of guarantee clause the assessee would acquire vessel, the same can be used by the assessee in its own business. We find that the Tribunal in the case of ACIT vs. KEC International Ltd 2019 (9) TMI 437 - ITAT MUMBAI deleted adjustment made on account of performance guarantee where there was absolutely no risk involved for the assessee in issuing performance guarantee on behalf of its AE. Thus, in the facts of the case and the decision by the Coordinate Bench, we hold that no adjustment is warranted on account of performance guarantee. TP adjustment in respect of financial guarantee given by the assessee on behalf of its AE - TPO had made adjustment by determining guarantee commission @3%. The rate of guarantee commission was restricted by the DRP to 1.5% - HELD THAT - 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'ble Bombay High Court in the case of Everest Kanto Cylinders Ltd 2015 (5) TMI 395 - BOMBAY HIGH COURT , i.e 0.55%. We uphold guarantee commission charged by the assessee at 0.55%. Hence, no adjustment is warranted on this issue. The, assessee succeeds on this ground of the appeal.

Summary

Issues Involved:
1. Reallocation of interest expenditure between tonnage and non-tonnage activities.
2. Disallowance under Section 14A of the Income Tax Act.
3. Classification of income received under tonnage business as non-tonnage income.
4. Disallowance of expenditure while computing Short Term Capital Gain.
5. Non-compliance with DRP directions regarding TDS credit.
6. Transfer Pricing adjustments on interest on foreign currency loans to Associated Enterprises (AEs).
7. Transfer Pricing adjustments in respect of performance guarantees given on behalf of AEs.
8. Transfer Pricing adjustments in respect of financial guarantees given on behalf of AEs.
9. Additional grounds related to disallowance under Section 14A and inclusion in book profits under Section 115JB.

Detailed Analysis:

1. Reallocation of Interest Expenditure:
The assessee challenged the reallocation of interest expenditure from non-tonnage to tonnage activities. The Tribunal noted that similar issues were resolved in favor of the assessee in previous years (2006-07 and 2007-08). The Assessing Officer (AO) had disallowed interest expenditure without proper appreciation of facts. The Tribunal upheld that interest expenditure related to loans initially taken for shipping (tonnage) but later diverted to non-tonnage activities should be treated as non-tonnage expenditure. Consequently, ground No.1 of the appeal was allowed.

2. Disallowance under Section 14A:
The assessee contested the disallowance under Section 14A, arguing that:
- Interest expenditure under tonnage scheme should not be considered.
- Only dividend-yielding investments should be considered.
- Own funds were sufficient for investments.
The Tribunal accepted that interest on loans for shipping business should not be included in Section 14A disallowance. It also agreed that administrative costs should not be entirely allocated to exempt income. The issue was remanded to the AO for re-examination. Additional grounds related to disallowance under Section 14A and its inclusion in book profits under Section 115JB were addressed, with the Tribunal directing the AO to consider only dividend-yielding investments and disregard Section 14A disallowance while computing book profits. Grounds No.2 to 9 were allowed for statistical purposes, and additional grounds No.1 and 3 were allowed, while No.2 was dismissed as not pressed.

3. Classification of Income:
The assessee argued that certain incomes (crude oil refund, miscellaneous income, general average claims, and prior period liabilities written back) should be classified under tonnage income. The Tribunal referred to its previous decisions in the assessee's case and similar cases, concluding that such incomes should indeed be classified as tonnage income. Therefore, grounds No.10 to 12 were allowed.

4. Disallowance of Expenditure for Short Term Capital Gain:
The assessee contested the disallowance of certain expenditures (building repair funds and share certificate expenses) while computing short term capital gains. The Tribunal agreed that expenses incurred at the time of sale should be deductible, provided they were borne by the seller. Consequently, ground No.13 was allowed.

5. Non-compliance with DRP Directions on TDS Credit:
The assessee sought compliance with DRP directions to grant TDS credit. The Tribunal directed the AO to comply with these directions, allowing ground No.14 for statistical purposes.

6. Transfer Pricing Adjustment on Interest on Foreign Currency Loans:
The assessee challenged the Transfer Pricing adjustment on interest rates for loans to AEs. The Tribunal referred to its decision in the previous year (2007-08), where it found the interest rates charged by the assessee to be at arm's length. Thus, no further adjustment was required, and grounds No.16 to 18 were allowed.

7. Transfer Pricing Adjustment on Performance Guarantees:
The assessee disputed the adjustment on performance guarantees provided to AEs, arguing no financial liability existed. The Tribunal found merit in the assessee's argument that no risk was involved as the asset acquired upon guarantee invocation would be useful for the business. Referring to a similar case (KEC International Ltd.), the Tribunal concluded no adjustment was warranted, allowing grounds No.19 to 21.

8. Transfer Pricing Adjustment on Financial Guarantees:
The assessee contested the adjustment on financial guarantees, arguing that the suo-motu charge of 0.55% was appropriate. The Tribunal reviewed various bank rates and upheld the guarantee commission rate of 0.55%, as approved by the Bombay High Court in a similar case (Everest Kanto Cylinders Ltd.). Thus, no adjustment was warranted, and grounds No.22 to 24 were allowed.

Conclusion:
The appeal by the assessee was partly allowed, with several grounds remanded for further examination or allowed based on previous Tribunal decisions and consistent legal principles. The order was pronounced on August 11, 2022.