2019 (11) TMI 357 - AT - Income Tax

TP Adjustment - addition made on account of ALP transaction on corporate guarantee - HELD THAT - Sanction letter issued by the Bank of Baroda, London which is also placed on record by the assessee also reveals that the corporate guarantee was to be given in accordance with the applicable R.B.I. guidelines and it further stipulated that no guarantee commission was payable by Ganesh Shipping Inc. Panama it to the guarantors. It is thus seen that the guarantee has been given in terms of sanction letter issued by Bank of Baroda and the non-charging of guarantee commission is also as per the conditions stipulated by the Bank. It is also a fact that the corporate guarantee has been given by the assessee as well as B.G. Shirke Construction Technology Pvt. Ltd., and no addition on account of guarantee commission has been made in the hands of B.G. Shirke Construction Technology Pvt. Ltd. It is only in the hands of the assessee that the addition has been made by the AO. When the guarantee has been given by two concerns and on similar terms and conditions arising out of the same transaction, two different and contradictory stands cannot be taken by the Revenue i.e., no addition is made on account of guarantee commission in the case of B.G. Shirke Construction Technology Pvt. Ltd., and addition is made only in the hands of the assessee. Since the non-charging of guarantee commission is pursuant to the conditions stipulated by the sanctioning Bank, we are of the view that no addition on account of non-receipt of guarantee commission is called for in the present case. - Decided in favour of assessee. Amount earned on interest as income from other sources and therefore held by the AO to be as income earned from non-tonnage activity and accordingly taxable at normal income - HELD THAT - Interest received from the bank. It is assessee s contention that assessee had availed loan from Bank of India for purchase of vessel Maha Padmaja and as per the terms and conditions, the assessee was required to maintain a minimum balance of 0.186 mln USD throughout the tenure of the loan. On such balance maintained by the assessee it had earned interest. It is also a fact that assessee had paid interest of ₹ 6,42,99,091/- on loan for purchase of vessels and which has been claimed as expenditure in the Profit and Loss account. It is a fact that if the interest paid and earned are considered in totality, the assessee has paid net interest. Assessee was required to maintain the deposits as per the sanction terms of the bank and in view of the facts cited hereinabove, we are of the view that AO was not justified in considering the interest to be non tonnage activity. We therefore set aside the order of AO and direct the AO to consider it as income from shipping business and thus, the grounds of assessee are partly allowed.

Summary

Issues Involved:
1. Transfer Pricing Adjustment on Corporate Guarantee Commission.
2. Taxability of Interest on Escrow Accounts as Non-Tonnage Income.

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustment on Corporate Guarantee Commission:

The assessee, engaged in the business of Charter and Hire of Ships, filed its return declaring a total income of ?52,64,808/-. The assessment was framed determining the total income at ?1,92,66,830/-. The primary issue was the addition of ?1,20,23,900/- as a Transfer Pricing adjustment for a corporate guarantee given by the assessee to its AE, M/s. Ganesh Shipping Inc. Panama. The AO considered this corporate guarantee as an "international transaction" under Section 92B(1) and 92B(2) of the Income Tax Act, 1961, and computed the Arms Length Price (ALP) at 1.5% on the outstanding net value of the corporate guarantee.

The assessee contended that the corporate guarantee was a collateral security, and as per the sanction letter from the Bank of Baroda, no guarantee commission was payable. The assessee argued that this transaction did not fall within the definition of an international transaction as it had no bearing on profits, income, losses, or assets of the company. Additionally, it was highlighted that B.G. Shrike Construction Technology Pvt. Ltd., which also provided a guarantee, did not face a similar addition.

Upon review, the Tribunal found that the corporate guarantee was given in accordance with the Bank of Baroda's sanction letter, which stipulated no guarantee commission. The Tribunal noted the inconsistency in the Revenue's approach, as no addition was made for B.G. Shrike Construction Technology Pvt. Ltd. under similar circumstances. Consequently, the Tribunal directed the deletion of the addition made by the AO, allowing the grounds of the assessee.

2. Taxability of Interest on Escrow Accounts as Non-Tonnage Income:

The second issue pertained to the taxability of interest income of ?6,12,860/- earned on Escrow Accounts, which the AO considered as non-tonnage income and thus taxable. The assessee argued that this interest was inextricably linked to the loans taken for shipping activities and should be considered part of the shipping income under the Tonnage Tax Scheme. The assessee also contended that the interest should be netted off against the interest paid on shipping loans, resulting in no net income.

The AO, however, treated the interest as "income from other sources" based on precedents like South India Shipping Corporation vs. CIT and Tuticorin Alkali Chemical and Fertilizer, which held that interest income from bank deposits should be taxed under this head. The CIT(A) upheld the AO's decision.

The Tribunal examined the facts and noted that the interest was earned on deposits maintained as per the loan terms with Bank of India for acquiring a vessel. It was observed that the assessee had paid a significantly higher amount of interest on the loan, and if netted, there was no net interest income. The Tribunal concluded that the interest earned was indeed linked to the shipping business and should not be considered as non-tonnage income. Therefore, the Tribunal set aside the AO's order and directed that the interest income be treated as part of the shipping business income, thus partly allowing the grounds of the assessee.

Conclusion:

The Tribunal allowed the appeal of the assessee partly, directing the deletion of the addition made on account of the corporate guarantee commission and treating the interest on Escrow Accounts as part of the shipping business income. The order was pronounced on 16th October 2019.