2023 (3) TMI 521 - AT - Income Tax

Revision u/s 263 - As per CIT AO has not called for any details to ascertain the amount and nature of total remittances received by the assessee during the year - assessee had received amount from various AEs in India towards services rendered, however, in course of assessment proceedings, no details were called for to ascertain the taxability of these receipts - Also AO has not called for any explanation from the assessee with regard to not offering these incomes to tax in India and also did not examine the chargeability of the aforesaid receipts as Fees for Technical Services (FTS) or business income by examining the relevant facts as well as provisions contained in Income Tax Act and India Singapore DTAA HELD THAT - The assessee operates ships in international traffic. Assessee s case for the assessment year under dispute was selected for limited scrutiny to examine whether the value of international transactions in services have been correctly shown in form 3CEB and return of income. As per section 92E of the Act, a person entering into international transaction or specified domestic transaction in a particular previous year shall have to obtain a report from an accountant in a prescribed form duly signed and verified by the concerned accountant setting forth the information as prescribed in the form. Rule 10E prescribes that the report from the accountant has to be furnished in Form 3CEB. Section 92B defines the expression international transaction to mean a transaction between two or more AEs. In other wards in terms of section 92E read with rule 10E, an assessee entering into international transaction with AEs has to furnish an audit report in From 3CEB reporting all information relating to such international transaction. It is observed, in due compliance with section 92E read with rule 10E of the Act, the assessee had furnished the Audit Report in From 3CEB reporting international transactions with AEs - amount was received by the assessee from freight services provided to an AE. Whereas, the rest of the amount was paid towards services availed from the AEs. Since, the assessee had reported international transactions with AEs, the Assessing Officer made a reference to the TPO for examining the arm s length nature of the international transactions with the AEs. The TPO passed a clean order under section 92CA(3) of the Act accepting the transactions with the AE s to be at arm s length. In pursuance to the order of the TPO, the assessee completed the assessment under section 143(3) of the Act accepting the return of income. In course of assessment proceeding, the Assessing Officer had issued a notice under section 143(2) of the Act on 19.07.2017 requiring the assessee to furnish the requisite information in respect of the limited scrutiny issues. Subsequently, the Assessing Officer issued a notice under section 142(1) of the Act on 01.04.2019 along with a questionnaire and in response to the query raised in the questionnaire, the assessee furnished its reply on 13.05.2019. Contents of the show cause notice issued under section 263 and the issues framed make it evident that there is no allegation of misreporting by the assessee in Form 3CEB or the return of income. The allegation is of not making any enquiry/verification. In this regard, we must say that learned CIT has completely misconceived the facts. A perusal of Form 3CEB report, a copy of which is at page 249 of the paper-book, clearly reveals that out of the amount of Rs.63,45,14,259/- reported by the assessee, only an amount of Rs.1,92,59,093/- represents income of the assessee and the rest of the amounts are payments made by the assessee. In fact, these facts are clearly reflected in the order passed by the TPO. Whereas, learned CIT has assumed that aggregate amount of transactions reported in Form 3CEB represents assessee s receipts. When the TPO has accepted the transactions with the AEs to be at arm s length, the Assessing Officer had nothing more to do. Moreover, when the assessee is a tax resident of Singapore holding a valid TRC issued by the Singapore Tax Authorities, the Assessing Officer had to grant benefit to the assessee as per the treaty. At the stage of assessment, the Assessing Officer certainly could not have enlarged the scope of limited scrutiny to examine, whether the assessee is entitled to treaty benefits or not, when the TRC is a valid piece of evidence available before him. Thus, when the Assessing Officer could not have examined the issues raised by learned CIT traversing beyond the scope of limited scrutiny, learned CIT cannot hold the assessment order to be erroneous and prejudicial to the interest of Revenue for non examination of issues, which are beyond the mandate given to the Assessing Officer. What the Assessing Officer could not have done directly in view of limited scrutiny norms, in the garb of revisionary powers under section 263 of the Act, learned CIT cannot do indirectly by enlarging the scope of limited scrutiny.Assessing Officer having confined himself to the issues of limited scrutiny, the Assessment Order passed cannot be considered to be erroneous and prejudicial to the interest of Revenue. CIT has misconceived the facts and misapplied the legal position while concluding that the assessee is not entitled to treaty benefit as it has been interposed as a conduit company for treaty shopping purpose. The assessee company was incorporated in Singapore in the year 2007 and continued its business since then. It is also a fact that the assessee holds substantial fixed assets in Singapore amounting to Rs.1728 croers, out of which, an amount of Rs.1324 crores pertains to vessels. It is also a fact that Singapore has grown into a large shipping hub in the world. Therefore, there is valid reason for setting up of the assessee company in Singapore for shipping business. Facts and materials on record reveal that the assessee regularly files tax returns before the tax authorities in Singapore. It also files reports before the corporate affairs authorities. There is no allegation by any of the authorities in Singapore or Netherlands against the assessee. That being the case, the allegations made by learned CIT that the assessee has not paid legitimate tax dues in Netherlands and Singapore are unsubstantiated, inasmuch as, are either baseless or imaginary. Allegation made by the CIT to hold that the assessee cannot be considered to be a tax resident of Singapore is because its key person is also a key person in Tata NYK India - As from the materials placed before us, we find the aforesaid allegation of learned CIT to be baseless. From the list of key managerial personnel furnished in the paper-book it is observed that all key managerial personnel are based in Singapore and were holding National Registration Identity Card issued by the Government of Singapore. It is also relevant to observe, whether the assessee is a tax resident of Singapore or not is a highly debatable issue and has to be decided based upon evidence gathered through proper investigation. Conclusion on these issues cannot be reached on conjectures, surmises, doubts and suspicion. Therefore, not only they are outside the scope of limited scrutiny, but, based on such debatable issues proceedings under section 263 of the Act cannot be invoked. As could be seen, holding the assessee not to be a tax resident of Singapore, learned CIT has observed that the assessee is liable to be taxed under the domestic law - assessee has not entered into any transaction of sale and lease back of vessels in the year under consideration. It is also evident that the assessee has not paid any lease rent to NYK Netherlands and even NYK Netherlands has not paid any dividend to NYK Japan. Therefore, the allegations of learned CIT are not borne out from record. As per Article 8 of India Singapore DTAA receipts from operation of ships and aircrafts in international traffic is taxable in the country of residence of the recipient. Therefore, as per the treaty provisions, amounts received by the assessee from operation of ships in international traffic would be exempt. Therefore, when the TRC was available before the Assessing Officer, in a way, he was justified in allowing benefit to the assessee under Article 8 of the Treaty. Though, the view of the Assessing Officer in granting benefit under treaty provisions may not be the only view but certainly it is one of the possible views under the given facts and circumstances. In any case of the matter, whether the assessee is entitled to treaty benefit or not is a highly debatable issue, hence, on such an issue an order cannot be considered to be erroneous and prejudicial to the interest of Revenue. Decision of learned CIT in treating the receipts from operation of ships in international traffic to be in the nature of royalty income - A conjoint reading of the show cause notice as well as order passed under section 263 of the Act coupled with the fact that ultimately he has restricted his directions only to inward freight income, thereby, accepting assessee s claim under section 44B in respect of income from coastal shipping and claim of exemption under Article 8 of the treaty in respect of income from outward freight amounting to Rs.56,13,86,432/-, reveals the mechanical approach of learned CIT in invoking jurisdiction under section 263 of the Act. Meaning thereby, various inconsistencies in the approach of learned CIT gives an impression that he himself was not sure about the nature and character of shipping income earned by the assessee. Though, before us, learned Departmental Representative made a submission that the deficiencies/shortcomings in the order passed under section 263 of the Act can be made good by the Tribunal, however, we are not impressed with such argument. In our view, we cannot assume the role of a second Revisionary Authority to review the order of learned CIT and fill up the lacunae in the said order. It is relevant to observe, in course of hearing, learned Departmental Representative has made extensive argument on the issue of treaty shopping, non-reporting of transactions with AEs in Form 3CEB report and various other issues. However, we are not able to take cognizance of such arguments as such issues were neither dealt with by learned CIT in the show-cause notice, nor in the revision order, hence, are extraneous for the purpose of adjudicating the validity of the order passed under section 263. Thus, in ultimate analysis, we hold that learned CIT was not justified in assuming jurisdiction under section 263 of the Act to revise the assessment order as the assessment order cannot be considered to be erroneous and prejudicial to the interest of revenue. Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of the order passed under section 263 of the Income-tax Act, 1961.
2. Examination of the taxability of income from shipping in international traffic under Article 8 of India-Singapore DTAA.
3. Examination of the taxability of shipping income from coastal traffic under section 44B of the Income-tax Act.

Summary of Judgment:

1. Validity of the Order Under Section 263:
The Appellate Tribunal held that the assessment order passed by the Assessing Officer (AO) under section 143(3) of the Income-tax Act, 1961, was not erroneous and prejudicial to the interest of the Revenue. The AO had confined himself to the scope of limited scrutiny, which was to examine whether the value of international transactions in services was correctly shown in Form 3CEB and the return of income. The Tribunal noted that the AO had issued statutory notices and called for necessary details, and the Transfer Pricing Officer (TPO) had accepted the transactions with Associated Enterprises (AEs) to be at arm's length. Thus, the AO had followed due process, and the CIT could not enlarge the scope of limited scrutiny in the garb of revisionary powers under section 263.

2. Taxability of Income from Shipping in International Traffic:
The Tribunal observed that the assessee, a tax resident of Singapore holding a valid Tax Residency Certificate (TRC), was entitled to the benefits of Article 8 of the India-Singapore DTAA. The income earned from shipping business in international traffic was taxable only in the country of residence of the entity earning such income. The Tribunal noted that the CIT's allegations regarding tax avoidance, treaty shopping, and lack of commercial rationale were unsubstantiated and based on conjectures and surmises. The Tribunal emphasized that the Revenue could not control the mode and manner in which the assessee carried on its business activity if it was within a legal framework.

3. Taxability of Shipping Income from Coastal Traffic:
The Tribunal noted that the assessee had offered the income from coastal shipping to tax under section 44B of the Income-tax Act. The CIT had accepted the assessee's claim regarding coastal shipping income but had treated the inward freight income as royalty, which the Tribunal found to be inconsistent and contrary to facts on record. The Tribunal concluded that the CIT's approach was mechanical and lacked a proper basis.

Conclusion:
The Tribunal set aside the order passed by the CIT under section 263 of the Income-tax Act and restored the assessment order passed by the AO. The Tribunal emphasized that its discussions, observations, and findings were purely in the context of the validity of the exercise of revisionary jurisdiction within the contours of section 263 of the Act. The appeal was allowed, and the order was pronounced in the open court on 9th March 2023.