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TMI Blog2024 (2) TMI 513X X X X Extracts X X X X X X X X Extracts X X X X ..... 3. The ground Nos.1 to 9 and additional ground Nos.1& 2 relate to disallowance u/s. 14A of the Act made by the ld. AO has been challenged by the assessee. 4. The brief facts qua the issue of disallowance u/s. 14A of the Act are that assessee while filing the return of income has computed disallowance of Rs. 1,17,99,604/- u/s. 14A. The working of the disallowance by the assessee was in the following manner:- * The actual administrative expenditure incurred by the Treasury Division, including employee costs and other relatable expenses aggregating to Rs. 22,54,612/-, was allocated by the assessee between the taxable and non-taxable gross receipts of the Treasury Division and the disallowance of Rs. 9,93,218/- under Rule 8D(2)(1) was computed by the assessee. * The interest payable on the borrowings utilized for the investment in equity and preference shares of Greatship (India) Ltd. of Rs. 1,46,69,996/- as reduced by the amount disallowed under Section 43B of the Act of Rs. 75,26,834/-, has also been considered as direct expenditure when computing the disallowance under Rule 8D(2)(i). * Hence, the total disallowance under Rule 8D(2)(i) was computed by the assessee at Rs. 81,36 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 45,25,78,710/- as reduced by the amount disallowed under Section 43B of the Act of Rs. 4,30,66,574/-. The ld. AO has further reduced the interest on service tax of Rs. 2,67,363/- and interest on income tax of Rs. 1,77,08,310/-, which were suo moto disallowed by the assessee in the Return of Income. The ld. AO has also reduced the interest payable on the borrowings utilized for the investment in Great Eastern ship (India) Ltd. of Rs. 1,46,69,996/-. The ld. AO has, therefore, considered the interest expenditure at Rs. 137,68,66,467/- (as against the net interest expenditure attributable to the non-tonnage tax activities of Rs. 1,34,16,234/- considered by the assessee while applying clause 2(ii) of Rule 8D) and computed the disallowance under Rule 8D(2)(ii) at Rs. 34,47,00,310/-, The AO also disallowed a further notional amount of Rs. 12,01,70,250/- as indirect administrative expenditure under clause 2(iii) of Rule 8D, being the amount computed @0.5% of the average value of investments held by the assessee. Hence, the aggregate disallowance under Section 14A computed by the ld. AO was Rs. 47,30,06,940/-. 6. The ld. DRP directed the AO to consider the aggregate interest expenditure in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erating expenses and administrative and other costs pertaining to the tonnage tax and non-tonnage activities have been reflected in the segmental profit and loss account. The tonnage tax income of Rs. 1,80,53,56,326/- have been excluded while computing the business income in accordance with the provisions of Section 115V-I of the Act and the tax is paid of income computed in accordance with the provisions of Section 115V-I of the Act based on the tonnage of the ships operated by the assessee company. Accordingly, the gross receipts of the tonnage tax business (Rs. 14,03,07,80,962/-) and the expenses pertaining to the tonnage tax business (Rs. 12,22,54,24,636/-) have been excluded while computing the business income of the assessee company. 9. In so far as disallowance under Rule 8D(2)(ii) is concerned, the actual administrative expenditure incurred by the Treasury division including employee costs and other relatable expenses has been allocated by the assessee company between the taxable and non-taxable gross receipts of the Treasury division and disallowance has been computed accordingly. There is no dispute regarding disallowance under this clause. However, as regards disallowan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uals generated by the company. From the perusal of the balance sheet we find the aforesaid contention is correct and once it is an admitted fact that assessee has own surplus funds for exceeding the investments made, then no disallowance of interest can be made. This issue now stands covered by the judgment of the Hon'ble Supreme Court in the case of South Indian Bank Ltd., reported in 130 taxmann.com 178. Accordingly, disallowance made by the ld.AO under Rule 8D(2) is deleted. 12. In so far as indirect administrative expenditure is concerned, the total expenditure of the Treasury Division aggregates to Rs. 22,54,612/. This actual administrative expenditure was allocated by the assessee 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 to Rs 9,93,218/- It is the submission of the assessee that no further disallowance of indirect administrative expenditure is warranted. 13. The AO has however disallowed a further sum of Rs. 12,01,70,250/-, under clause 2(iii) of Rule 8D, being the amount computed 0.5% of the average value of investments held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capital asset. The AO has, therefore, proceeded to tax the said amount as a revenue receipt. 18. The learned DRP has held that the assessee has not clarified the treatment given to Capital Work-in-Progress on cancellation of the contract and has, therefore, directed the ld. AO to provide an opportunity to the assessee to explain the relevant facts. The facts which have been brought before the ld. AO can be highlighted in the following manner:- i) The assessee company had entered into a contract with the shipyard for construction of vessels Hull No. 2311 and Hull No. 2312. ii) Some of the stage payments to the shipyard were made out of the foreign currency loans. iii) The exchange difference on revaluation of the foreign currency loans was credited to the Ships under Construction account and formed part of the Capital Work in Progress of the assessee iv) Subsequently, the said contracts were cancelled and the interest expenditure attributable thereto up to the date of the cancellation was written off to the Profit and Loss Account of the assessee as there was no qualifying asset on which to capitalize such interest. The said interest expenditure was suo moto disallowed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income-tax under the head "Profits and gains of business or profession: (iv) the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession. Thus, chargeability of income u/s. 28(iv) of the Act, the following conditions are relevant:- a) For any receipt to be chargeable as income under Section 28(iv) of the Act, the receipt must be on revenue account, must arise from the business of the Appellant and must form part of the income stream of the Appellant. b) The word 'income" used in the operative part of the aforesaid section is capable of different meaning as defined in Section 2(24) of the Act wherein it covers income relating to capital and also to the revenue account transactions. However, since Section 28 forms part of Part "D" of Chapter IV of the Act, what is to be considered under this section is 'income' on revenue account and not on capital account. Section 28(iv) is nothing but the extended definition of business income and therefore, the benefit of perquisite must relate to the revenue account of the assessee. 21. Here in this case the said receipt was in capital account and there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usiest ports in the world. The Appellant's immediate subsidiary, Greatship (India) Ltd infused substantial share capital into the subsidiaries). 25. During the current financial year 2010-2011, one of the step- down subsidiaries, GGES placed an order on Lamprell Energy Ltd., a shipyard in Singapore for building of a new vessel in the financial year 2010-11. The assessee gave a performance guarantee to the shipyard on behalf of its AE, GGES for USD 128.68 million (Rs.573.77 crores) on 28/02/ 2011. Before us, copy of vessel construction agreement dated 16/01/2011 has been placed in the paper book from pages 22-90 and performance guarantee given by the assessee to the shipyard on behalf of its AE, GGES is also placed at pages 20 & 21. Further, statement giving details of performance guarantee to the shipyard on behalf of its AE has also been given. It has been stated that performance guarantee was in existence for the period of one month during the F.Y.2010-11. Further, it has been stated that the performance guarantee given to the shipyard was to secure GGES' obligations to make payments of certain installments under the vessel construction agreement with Lamprell Energy Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l and the same can be used by the assessee in its own business. Paras 22 and 22.1 at page 16 of the Tribunal's order for the Assessment Year 2008-2009 which contain the findings of the Tribunal are reproduced hereunder for ready reference: "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 AP of the performance guarantee facility as Nil. The DRP has determined ALP of the transaction @19%. 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. 22.1 We find that the Tribunal in the case of ACIT vs. KEC International Ltd 108 taxmann.com 172 (Mumbai) dele ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2. Without prejudice to grounds 14 to 17, the Appellant submits that transfer pricing adjustment cannot exceed Rs. 47,81,422/- as against the transfer pricing adjustment 35. On the other hand, ld. DR submitted that this issue has already been decided by the Tribunal in A.Y.2009-10 which has been followed in subsequent years. 36. First of all we find that in A.Y.2008-09, the Tribunal has deleted the said adjustment on account of performance guarantee on the ground that there was absolutely no risk involved in issuing performance guarantee on behalf of its AE and accordingly, no adjustment was deleted. However, in the subsequent years, the Tribunal held that performance guarantee given by the assessee is in the nature of performance guarantee with a risk mitigation and therefore, performance guarantee needs to be benchmarked. However, it has been held that since assessee had adequate security, therefore, benchmarking of the performance guarantee needs to be substantially lower than the pure financial guarantee an accordingly, the Tribunal has rejected the rate of 1% p.a. is exorbitant, high and without any basis. However, it has been pointed out that in A.Y.2010-11 assessee has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on delayed payment of taxes suo moto disallowed by the assessee in the Return of Income of Rs. 10,875/-. The interest payable on the borrowings utilized for the investment in Greatship (India) Ltd. of Rs. 16,57,59,189/-, has been excluded when computing the indirect interest expenditure disallowed in accordance with the provisions of Rule 8D(2)(ii), as such interest expenditure has already been considered as a direct expenditure under Rule 8D(2)(1). The assessee has further reduced the interest expenditure on borrowings which were fully utilized for investment in growth schemes of Mutual Fund units aggregating to Rs. 71,59,74,830/-, whereby the net interest expenditure attributable to the earning of exempt dividend income was Rs. Nil. The disallowance of such indirect interest expenditure has therefore been computed at Rs. Nil in accordance with the formula prescribed under Rule 8D(2)(ii). 42. Further, as the actual administrative expenditure was disallowed by the assessee under sub-clause (i), no further disallowance was warranted under sub-clause (iii) of clause (2) of Rule 8D. Hence, the aggregate disallowance under Section 14A was computed at Rs. 16,92,25,210/-. 43. The ld. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the non-tonnage income, the interest expenditure liable for disallowance has been restricted to the total expenditure by way of interest claimed against the non-tonnage income only, whereby the Assessing Officer has computed the disallowance under Rule 8D(2)(ii) at Rs. Nil. Further, the learned CIT(A) has directed the Assessing Officer to compute the amount liable for disallowance under clause 2(i) of Rule 8D at Rs. 16,92,25,210/- and has confirmed the disallowance under clause 2(iii) of Rule 8D of Rs. 12,99,65,500/-. Hence, the aggregate disallowance under Section 14A will be Rs. 29,91,90,710/-. 45. We have already given our finding in appeal for A.Y.2011-12 and accordingly, our finding given therein will apply mutatis mutandis in this appeal also and accordingly, the disallowance made by the ld. AO over and above the amount offered by the assessee are deleted. 46. In 2015-16 Revenue has raised the following grounds:- "The Ld. CIT(A) has erred in attributing interest expenditure pertaining to the tonnage income of the assessee, aggregating to Rs. 2,52,41,504/- to the non tonnage income of the assessee. Having regard to the facts and circumstances of the case, and to all that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... confirmed in the Assessment Order that it is evident from the chart furnished by the assessee company that a substantial part of the interest expenditure relates to loans which were utilised for the purpose of either acquiring qualifying ships or for other ship related activities, which have subsequently been diverted to non-tonnage tax activities. Consequent thereto, the interest expenditure would also form part of the non-tonnage tax activities. vi) The Assessing Officer has stated that in view of the consistent stand taken in previous assessment years, interest expenditure aggregating to Rs. 4,72,31,989/- is attributed to the tonnage tax activities of the company since this expenditure has direct linkage with loans which were utilized for acquiring qualifying ships within the meaning of Section 115VD of the Act. 48. We find that this issue is already covered in favour of the assessee by the Tribunal in assessee's own case for A.Y.2006-07, 2007-08 and 2008-09 and also for A.Y.2014-15. Therefore, this issue is decided in favour of the assessee. 49. The ground No.2 relates to general average claims. During the year under consideration, the assessee company had received certain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r year and which has accrued as the income for the year to which the tonnage tax scheme applies would also most certainly have to be considered as part of the tonnage tax income accordingly. In any case, this issue is covered in favour of the assessee by the Tribunal in assessee's own case for A.Y.2006-07, 2007-08 and 2008-09, respectfully following the same, this issue is passed against the department. Accordingly, the appeal of Revenue is dismissed. 53. Now, we take up the cross appeal in A.Y.2015-16. 54. In assessee's appeal in ground Nos.1-4 and additional ground Nos. 1 & 2 relates to disallowance u/s. 14A of the Act. Facts in the present year are as under:- (i) While filing the return of income, the assessee has computed the disallowance of Rs. 19,04,37,434/- u/s. 14A as under:- The actual administrative expenditure incurred by the Treasury Division, including employee costs and other relatable expenses aggregating to Rs. 80,68,758/-, was allocated by the assessee between the taxable and non- taxable gross receipts of the Treasury Division and the disallowance of Rs. 34,09,857/- under Rule 8D(2)(i) was computed by the assessee. The interest payable on the borrowings ut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eatship (India) Ltd. of Rs. 18,57,59,523/-. The ld.AO has therefore considered the interest expenditure at Rs. 169,97,21,908/-, as against the net interest expenditure attributable to the non-tonnage tax activities of Rs. Nil considered by the assessee while applying clause 2(ii) of Rule 8D and has computed the disallowance under Rule 8D(2)(ii) at Rs. 35,96,50,523/-. The ld.AO also disallowed a further notional amount of Rs. 9,87,35,619/- as indirect administrative expenditure under clause 2(iii) of Rule 8D, being the amount computed @0.5% of the average value of investments held by the assessee. Hence, the aggregate disallowance under Section 14A was computed by the ld.AO at Rs. 64,88,23,575/-. (iii) The ld CIT(A) has directed the ld.AO to compute the disallowance under section 14A of the Act in accordance with the provisions of Rule 8D. The learned CIT(A has directed the ld.AO to consider the aggregate interest expenditure incurred by the assessee pertaining to the tonnage and non-tonnage activities for computing the amount liable for disallowance under clause 2(ii) of Rule 8D. However, in case the total disallowance so computed exceeds the total interest expenditure claimed ag ..... X X X X Extracts X X X X X X X X Extracts X X X X
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