Suo-motto disallowance by Assessee cannot be disregarded by AO without recording his Satisfaction

Greatship (India) Ltd. Vs DCIT (ITAT Mumbai)

The assessee has further assailed the disallowance worked out by the A.O under Sec. 1 4A r.w Rule 8D, on the ground that there was no recording of an objective satisfaction by the A.O that the suo-motto disallowance offered by the assessee under Sec. 14A was not correct. Succinctly stated, the assessee company which during the year in question was in receipt of exempt dividend income of Rs. 1,05,08,214/- had on a pro-rata basis i.e percentage of exempt income to total income from investments suo-motto worked out the disallowance under Sec.14A at Rs.10,68,219/-. Observing that the aforesaid disallowance was worked out by the assessee de hors the methodology contemplated in Rule 8D of the Income tax Rules, 1962, the A.O reworked out the disallowance under Sec. 1 4A r.w. Rule 8D at Rs. 25,28,937/-. Accordingly, the A.O considering the suo moto disallowance that was already offered by the assessee in its return of income, therein made a further disallowance of Rs.14,60,718/- [Rs.25,28,937/- (-) Rs.10,68,219/-]. We have given a thoughtful consideration to the aforesaid issue pertaining to sustainability of the disallowance worked out by the A.O under Sec. 14A r.w Rule 8D at Rs. 25,28,937/-, which as observed by us hereinabove had been assailed by the assessee on the ground that the A.O while dislodging the suo-motto disallowance that was offered by the assessee under Sec. 1 4A in its return of income for the year in question had principally erred in not recording an objective satisfaction that the disallowance offered by the assessee was not correct. As a similar claim had been raised by the assessee in its appeal for the immediately preceding year i.e A.Y 2012-13 before us thus, in terms of our reasoning and observations therein recorded, we on the same terms restore the issue to the file of the A.O for fresh adjudication.

FULL TEXT OF THE ITAT JUDGEMENT

The captioned appeals filed by the assessee are directed against the respective orders passed by the A.O under Sec.143(3) r.w.s 144C(13) of the Income Tax Act, 1961 (for short „Act‟), dated 06.01.2017 and 28.08.2018 for A.Y 2012-13 & A.Y 2014-15, respectively. As common issues are involved in the captioned appeals, the same, thus, are being taken up and disposed off by way of a consolidated order. We shall first take up the appeal of the assessee for A.Y. 2012-13 wherein the impugned order has been assailed on the following grounds of appeal before us:

“This Appeal is filed against the order u/s. 143(3) r.w.s. 144C(13) of the Income-tax Act, 1961 passed by the Deputy Commissioner of Income Tax, Range 5(1)(1), Mumbai (‘hereinafter referred to as Assessing Officer7) and relates to the Assessment Year 2012-201 3.

(1) The Assessing Officer (AO) / Transfer Pricing Officer (TPO) / Dispute Resolution Panel (DRP) erred in holding that the transaction of giving financial guarantee by the Appellant on behalf of its Associated Enterprises (AEs) was an “international transaction” under Section 92B of the Act.

(2) The AO / TPO / DRP erred in determining the Arm’s Length Price of the financial guarantees given by the Appellant on behalf of its AEs @ 2% per annum.

(3) The AO / TPO / DRP erred in making a transfer pricing adjustment of Rs.28,69,70,745/-on account of guarantee commission.

(4) The AO /TPO / DRP failed to appreciate that giving of financial guarantees by the Appellant on behalf of its subsidiaries was a shareholder activity for which no charge is required.

(5) The AO / TPO / DRP erred in law and in facts in rejecting the benchmarking analysis undertaken by the Appellant in respect of guarantee commission in its transfer pricing documentation.

(6) Without prejudice to Ground Nos. 1 to 5, the Assessing Officer / Transfer Pricing Officer erred in computing the arm’s length price of the financial guarantees given by the Appellant in an arbitrary manner.

(7) Without prejudice to Ground Nos. 1 to 6, the Appellant submits it should be granted the benefit of +/-5% range as per the proviso to section 92CA(2) of the Income-tax Act.

(8) The AO / TPO / DRP erred in holding that the interest charged by the Appellant at the rate of LIBOR + 2.9% per annum in respect of loan of USD 71.5 million given to Greatship Global Holdings Ltd., Mauritius, was not at arm’s length

(9) The AO / TPO / DRP erred in making a transfer pricing adjustment of Rs.97,39,903/- in respect of loan of USD 71.5 million given by the Appellant to its AE Greatship Global Holdings Ltd., Mauritius by holding that the arm’s length price of the loan was LIBOR + 3.32% p.a.

(10) The AO / TPO / DRP erred in not following the order of the DRP for the Assessment Year 2011-2012 wherein this very loan given to Greatship Global Holdings Ltd. at interest rate of LIBOR + 2.9% was held to be at arm’s length.

(11) Without prejudice to Ground Nos. 8 to 10, the Appellant submits it should be granted the benefit of +/-5% range as per the proviso to section 92CA(2) of the Income-tax Act.

(12) The AO / TPO / DRP erred in making a transfer pricing adjustment of Rs.62,23,256/- in respect of sale of under construction vessel “Greatship Vimla” by Appellant to its AE, Greatship Global Offshore Services Pte. Ltd., Singapore.

(13) The AO / TPO / DRP erred in reclassifying the transaction of sale of the under construction
vessel as a loan given by the Appellant to its AE.

(14) Without prejudice to Ground Nos. 12 and 13, the Appellant submits that the transfer pricing adjustment of Rs.62,23,256/- in respect of the transaction of transfer of under construction vessel “Greatship Vimla” to its AE is highly arbitrary and excessive and needs to be reduced substantially.

(15) The AO / DRP erred in invoking Rule 8D without recording an objective satisfaction that having regard to the accounts of the Appellant, that the suo moto disallowance of expenses of Rs.22,63,129/- by the Appellant under section 14A was incorrect.

(16) The AO / DRP erred in disallowing further expenses of Rs.20,37,871/- under Section 14A read with Rule 8D(2)(iii).

(17) The AO erred in levying interest under section 234C of Rs.1,51,62,514/-. The interest under section 234C should be restricted to Rs. 11,74,709/-.

The Appellant craves leave to add to, amend, alter, modify or withdraw any or all the Grounds of Appeal before or at the time of hearing of the Appeal, as they may be advised from time to time.”

2. Briefly stated, the assessee company which is engaged in the business of owning, operating and charter hiring of supply vessels, tugs, barges, rigs and all types of vessels related to offshore services and undertaking activities related to drilling including deep water drilling and shipping related activities had e-filed its return of income for A.Y 2012-13 on 28.11.2012, declaring a total income of Rs.1 02,21,04,981/-. The return of income filed by the assessee was processed as such under Sec. 143(1) of the Act. Subsequently, the case of the assessee was selected for scrutiny assessment under Sec. 143(2) of the Act.

3. Observing that the assessee during the year in question had entered into international transactions with its associated enterprises (for short “AEs”) exceeding the prescribed limit of Rs.15 crore, the A.O, thus made a reference to the Transfer Pricing Officer (for short „TPO‟) for determining the Arm‟s Length Price (for short “ALP”) of the said transactions. TPO vide his order passed under Sec. 92CA(3), dated 29.01.2016 made an upward adjustment of Rs.30,29,33,904/- which included adjustments on account of viz. (a) corporate guarantee commission: Rs.28,69,70,745/-; (b) interest on loan: Rs.97,39,903/- ; and (c) sale of under construction vessel: Rs.62,23,256/-.

4. After receiving the order passed by the TPO under Sec. 92CA(3), dated 29.01.2016 the A.O passed a draft assessment order under Sec. 144C(1) r.w.s 143(3), dated 11.03.2016, wherein he proposed to make a transfer pricing addition of Rs. 30,29,33,904/-. It was further observed by the A.O that the assessee which during the year in question was in receipt of exempt dividend income of Rs.8,28,16,193/- had as per a self-devised method i.e percentage of exempt income to total income from investments offered a suo motto disallowance of Rs.22,63,129/- under Sec. 14A of the Act. Backed by the aforesaid facts, the A.O called upon the assessee to explain as to why the expenses attributable to earning of the exempt dividend income may not be computed as per the methodology prescribed in Sec. 14A r.w. Rule 8D. In reply, the assessee tried to impress upon the A.O that as it had rightly attributed and therein disallowed the expenses relating to earning of the exempt dividend income, the same, thus, was not required to be interfered with. However, the A.O not finding favour with the claim of the assessee worked out the disallowance under Sec. 14A r.w. Rule 8D at Rs.43,01,000/- and after considering the suo motto disallowance of Rs. 22,003,129/- that was already offered in the return of income proposed a further disallowance of Rs.20,37,871/- [Rs.43,01,000/- (-) Rs. 22,63,129/-]. Accordingly, the A.O on the basis of his aforesaid observations proposed to assess the income of the assessee vide his draft assessment order under Sec.144C(1) r.w.s 143(3), dated 11.03.2016 at Rs.132,70,76,760/-.

5. Objecting to the additions/disallowances as were proposed by the A.O vide his order passed under Sec. 1 44C(1) r.w.s 143(3), dated 11.03.2016, the assessee carried the matter before the Dispute Resolution Panel-1, Mumbai (for short „DRP‟). Before the panel the assessee objected both to the transfer pricing adjustments as well as the additional disallowance under Sec. 14A r.w. Rule 8D(2)(iii) that was proposed by the A.O. However, the DRP not finding favour with the contentions advanced by the assessee dismissed the respective objections as were raised before it.

6. After receiving the order passed by the DRP under Sec. 144C(5), dated 29.12.201 6, the A.O taking cognizance of the fact that pursuant to rejection of all the objections that were raised by the assessee before the DRP the draft assessment order passed by him had remained undisturbed, therein assessed the income of the assessee company vide his order passed under Sec. 143(3) r.w.s 144C(13), dated 06.01 .2017 at Rs.132,70,76,760/-.

7. Aggrieved, the assessee has assailed the assessment framed by the A.O under Sec. 143(3) r.w.s 1 44C(1 3), dated 06.01.2017 in appeal before us. The Ld. Authorised Representative (for short “A.R”) for the assessee at the very outset of the hearing of the appeal took us through the respective issues which were being assailed in the present appeal. Ld. A.R had challenged the TP adjustment of Rs. 28,69,70,745/- that was made by the A.O/TPO as regards the corporate guarantee that was given by the assessee to foreign banks on behalf of its AEs. Elaborating on the facts therein involved, it was submitted by the ld. A.R that financial guarantees given by the assessee company to the foreign banks on behalf of its two AEs, viz. (i). Greatship Global Energy Services Pte. Ltd (for short “GGES”); and (ii). Greatship Offshore Services Pte. Ltd. (for short “GGOS”), both incorporated in Singapore had continued during the year in question. It was submitted by the ld. A.R that the guarantees were given by the assessee company for facilitating raising of loans from DnB Nor Bank, Singapore; Bank Of Nova Scotia, Singapore and ABN Amro Bank by its aforesaid AEs. It was submitted by the ld. A.R that though the assessee had not charged any guarantee fees as per its books of accounts, however, in Form 3CEB it had taken the ALP of the financial guarantee given to the banks on behalf of its AEs, viz. GGOS and GGES at 0.43% of the loan amount and had therein computed the same at Rs. 2,57,96,937/- and Rs. 5,38,48,438/-, respectively. Accordingly, the assessee had on a suo motto basis made an adjustment towards financial guarantee given to banks on behalf of its AEs amounting to Rs. 7,96,45,375/-. It was submitted by the ld. A.R that the assessee had benchmarked the guarantee fees on the basis of an Internal CUP i.e as per the average of the guarantee fees that was paid by it to certain banks, viz. RBS (formerly known as ABN Amro Bank); Kotak Mahindra Bank and Yes Bank, for guarantees stood by them on behalf of the assessee in case of third parties, viz. ONGC, BG Exploration, etc. It was submitted by the ld. A.R that the Internal CUP adopted by the assessee for benchmarking the transaction of providing guarantee fees was rejected by the TPO for the reasons, viz. (i). that for the multiple facilities provided to the assessee the banks had taken security; (ii). that the credit rating of the assessee was higher than its AEs; (iii). that for computing the ALP the assessee had taken only the guarantee fee rate charged by the bank and had not considered other fees and charges; (iv). that details gathered from the banks revealed that guarantee fee ranging from 1.08% to 3% was being charged by them and a discount or concession below these rates was given only where there was cash margin or security, or the credit rating of the company was sovereign. It was submitted by the ld. A.R that the TPO was of the view that the fee for the corporate guarantee given by the assessee to a foreign bank would be higher than the bank guarantee fee charged by the banks. Accordingly, the TPO backed by his aforesaid conviction, in substance, without adopting any specified method for benchmarking the transaction of providing of guarantee by the assessee to its foreign AEs had on an ad hoc basis took the ALP of the guarantee fees at 2% p.a and determined the same at Rs. 36,66,16,120/-. As the assessee had made a suo motto adjustment of Rs. 7,96,45,375/- i.e @0.43% thus, the TPO made an upward adjustment of Rs. 28,69,70,745/- [Rs. 36,66,16,120/- (-) Rs. 7,96,45,375/-]. Ld. A.R assailed the determination of the ALP of the financial guarantee that was provided by the assessee to the banks in order to facilitate raising of loans by its AEs. It was submitted by the ld. A.R that the TPO had grossly erred in law in rejecting the Internal CUP that was adopted by the assessee for benchmarking the transaction of providing of financial guarantee by the assessee to the foreign banks for facilitating raising of loans by its foreign AEs. It was further submitted by the ld. A.R that the TPO had erred in law by taking the ALP of the transaction of providing financial guarantees to the banks on an ad hoc basis at 2% p.a i.e without adopting any of the specified method contemplated in 92C(1) of the Act. It was submitted by the ld. A.R that the Tribunal in the assessee‟s own case for A.Y 2008-09, ITA No. 7673/Mum/201 2 and A.Y 2009-10, ITA NO. 1 703/Mum/201 4 wherein identical facts were involved, had for the purpose of benchmarking its transaction of providing corporate guarantee to a foreign bank in order to facilitate raising of loan by its AE, vide its consolidated order dated 21.06.2019 had approved the Internal CUP i.e guarantee commission paid by the assessee to a bank for standing guarantee on its behalf for a third party. It was submitted by the ld. A.R that the Tribunal in its aforesaid order had after relying on the order of the Hon‟ble High Court of Bombay in the case of CIT Vs. Everest Kanto Cylinders Ltd. (2015) 378 ITR 57 (Bom), had upheld the ALP of the financial guarantee that was given by the assessee to the bank for facilitating raising of loan by its AE. It was submitted by the ld. A.R that as the assessee by rightly adopting an Internal CUP had taken the ALP of guarantee fees at 0.43% of the loan amount thus, the substitution of the same on an ad hoc basis by 2% by the TPO could not be sustained and was liable to be vacated. As regards the adequacy of guarantee fees of 0.43% of the loan amount the ld. A.R had drawn support from certain judicial pronouncements.

8. Per contra, the ld. Departmental representative (for short “D.R”) relied on the orders of the lower authorities. It was submitted by the ld. D.R that the A.O/TPO had rightly taken the ALP of the guarantee fees at 2%. It was averred by the ld. D.R that as the provision of corporate guarantee was a business facility on the basis of which the AEs had raised loans from the banks thus the assessee company was to be compensated adequately. It was submitted by the ld. D.R that as observed by the TPO/DRP, as the credit rating of the AEs was lower than that of the assessee therefore the AE could raise funds from the market at a comparatively higher rate of interest. It was, thus, submitted by the ld. D.R that the lower authorities had rightly taken the ALP of the corporate guarantee provided by the assessee to the foreign banks in order to facilitate raising of the loans by its AEs at 2% p.a.

9. We have heard the authorised representatives for both the parties, perused the orders of the lower authorities and the material available on record, as well as considered the judicial pronouncements that have been pressed into service by the assessee‟s counsel to drive home his claim. As is discernible from the orders of the lower authorities, corporate guarantees were given by the assessee company to the foreign banks in order to facilitate raising of loans by its AEs viz, Greatship Global Energy Services Pte. Ltd; and Greatship Offshore Services Pte. Ltd., both Singapore based concerns; from DnB Nor Bank, Singapore; Bank Of Nova Scotia, Singapore; and ABN Amro Bank. Although the assessee had not charged any guarantee fees as per its books of accounts, however, in Form 3CEB it had taken the ALP of guarantee fees at 0.43% of the amount of loan and had computed the ALP of the corporate guarantee given to the banks on behalf of its AEs, viz. GGOS and GGES at Rs. 2,57,96,937/- and Rs. 5,38,48,438/-, respectively. Accordingly, the assessee had made a suo-motto adjustment of Rs. 7,96,45,375/- w.r.t the transaction of providing corporate guarantee to the banks in order to facilitate raising of loans by its AEs. As noticed by us hereinabove, the assessee had benchmarked the transaction of providing guarantee fees on the basis of an Internal CUP i.e as per the average of the guarantee fees that was paid by it to certain banks, viz. RBS (formerly known as ABN Amro Bank); Kotak Mahindra Bank; and Yes Bank, for the respective guarantees stood by them on behalf of the assessee in case of third parties, viz. ONGC; BG Exploration, etc. However, the Internal CUP that was adopted by the assessee for determining the ALP of the transaction of providing corporate guarantee was rejected by the TPO for the reasons, viz. (i). that for the multiple facilities provided to the assessee the banks had taken security; (ii). that the credit rating of the assessee was higher than its AEs; (iii). that for computing the ALP the assessee had taken only the guarantee fee rate charged by the bank and had not considered other fees and charges; (iv). that details gathered from the banks revealed that guarantee fee ranging from 1.08% to 3% was being charged by them and a discount or concession below these rates was given only where there was cash margin or security, or the credit rating of the company was sovereign. On a perusal of the order of the TPO, we find that he had determined the ALP of guarantee transaction on the basis of the guarantee fees rates that were being charged by the banks to Indian companies varying in the range of 1.10% to 3%, depending upon various factors. It was in the aforesaid backdrop that the TPO had thereafter concluded that as corporate guarantee rate would be normally higher than the bank guarantee rate, and further, as the corporate guarantee rate for a guarantee given to a foreign bank for foreign based companies would normally be higher than the corporate guarantee rate charged to an Indian entity thus, the same would conservatively be in the range of 1.5% to 3.5%. Backed by his said general observations, de hors adoption of any prescribed method contemplated in Sec. 92C(1) of the Act, the TPO had therein concluded that as the loans were being raised by the AEs for acquiring a vessel thus, the corporate guarantee could be estimated at 2% of the actual borrowed capital. We have deliberated at length on the observations of the lower authorities and are unable to persuade ourselves to subscribe to either the reasoning or the manner adopted by them for determining/sustaining the ALP of the transaction of provision of corporate guarantee by the assessee to the foreign banks for facilitating raising of loans by its AEs. Observing, that the guarantee fees rates charged by the banks to Indian companies varied from 1.10% to 3%, the TPO had adopted the same as a yard stick and had concluded that the range of corporate guarantee fee for foreign based transactions would conservatively be in the range of 1.5% to 3.5%. As such, in the backdrop of his aforesaid observations that the TPO had estimated the corporate guarantee fee at 2% of the actual borrowed capital. In our considered view the very basis adopted by the TPO for determining the ALP of the corporate guarantee i.e guarantee fees rates charged by the banks to Indian companies is inconsistent with the ratio laid down by the Hon’ble High Court of Bombay in the case of CIT Vs. Everest Kanto Cylinders Ltd. (2015) 378 ITR 57 (Bom). In its aforesaid order, it was held by the Hon‟ble High Court that the considerations which apply for issuance of corporate guarantee were distinct and separate from that of guarantee provided by the banks and, therefore, the two transactions were incomparable. In fact, involving identical facts the Tribunal in the assessee‟s own case for A.Y 2008- 09, ITA No. 7673/Mum/2012 and A.Y 2009-10, ITA No. 1703/Mum/2014, vide a consolidated order dated 21.06.2019 had approved the determination of ALP of corporate guarantee provided by the assessee to a foreign bank for facilitating raising of loans by its foreign AE on the basis of the Internal CUP i.e guarantee commission that was paid by the assessee to a bank for standing guarantee on its behalf for a third party. Further, the Tribunal after drawing support from the order of the Hon‟ble High Court of Bombay in the case of CIT Vs. Everest Kanto Cylinders Ltd. (2015) 378 ITR 57 (Bom), had approved the determination of ALP of the corporate guarantee given by the assessee to the bank in order to facilitate raising of loan by its AE i.e on the basis of the aforesaid Internal CUP applied by the assessee. In its aforesaid order the Tribunal had observed as under:

“17. We have carefully considered the rival submissions. In the present case, the assessee has made a suo-motto transfer pricing adjustment on Corporate Guarantee fee @0.55% from its AE , and such transaction has been considered as an „international transaction‟ within the meaning of Sec. 92B of the Act. Accordingly, the arm‟s length price of such transaction has been determined by the TPO at 3.00% which has resulted in enhancement of assessee‟s income, and the same was restricted by the DRP at 1.50%. The issue before us is restricted to whether the arm‟s length rate of the Corporate Guarantee is to be taken at 0.55%, which has been suo-motto taken as transfer pricing adjustment by the assessee, or the rate of 1.50% determined by the income-tax authorities. Notably, the TPO has benchmarked the instant transaction of provision of Corporate Guarantee on the basis of respective abilities of the assessee and AE to raise Bonds in the Indian domestic market. The TPO asserted that based on the debt-equity ratio, the credit rating of the assessee company was higher in comparison to that of the AE and, therefore, the rate of interest payable by the AE to raise bonds in the Indian market would be higher than the rate payable by the assessee-company. Such differential has been used to determine the Corporate Guarantee fee that should have been charged by the assessee company from its AE so as to determine the arm‟s length price of the instant transaction. In our considered opinion, the aforesaid approach of the TPO is clearly inconsistent with the ratio laid down by the Hon‟ble Bombay High Court in the case of Everest Kanto Cylinder Ltd. (supra). Notably, in the case of Everest Kanto Cylinder Ltd. (supra), the dispute was relating to the adjustment made by the TPO in the matter of Guarantee commission earned for providing a Corporate Guarantee to the Bank in connection with the borrowings made by the AE of the assessee therein. The TPO determined the arm‟s length price of such transaction based on the instance of commercial banks providing Guarantee on behalf of their clients. The Hon‟ble High Court held that the considerations which apply for issuance of Corporate Guarantee were distinct and separate from that of Guarantee provided by the banks and, therefore, the two transactions were incomparable. In our considered opinion, similar parity of reasoning is applicable in the present case too because the considerations which weigh for raising of bonds, that too in Indian market, are quite distinct and incomparable with the instance of providing of Corporate Guarantee to a bank abroad in connection with raising of loan from such bank by the AE of assessee outside India. Therefore, in our considered opinion, the exercise carried out by the TPO to arrive at the impugned arm‟s length rate suffers from an inherent misconception as the benchmarking has been done between two incomparable situations. Therefore, we are unable to uphold the stand of the income-tax authorities.

18. Insofar as the adequacy of 0.55% rate charged by the assessee is concerned, we find enough reasonableness in the same. In this context, the learned representative for the assessee referred to various decisions of the Tribunal, viz. Hindalco Industries Ltd. (supra), Thomas Cook (India) Ltd. (supra) and Godrej Consumer Products Ltd. (supra), wherein the arm‟ length rate of 0.5% has been approved in the matter of benchmarking Guarantee commission fee chargeable from AE. Thus. considering the entirety of the facts and circumstances of the case, in our view, Corporate Guarantee fee charged by the assessee @0.55% is well-founded and does not require any Transfer Pricing Adjustment. Thus, we set-aside the order of the CIT(A) and direct the Assessing Officer to delete the addition of Rs. 42,97,821/-. Thus, Ground of appeal nos. 6 to 9 are allowed.”

As the Tribunal in its aforesaid order passed in the assessee‟s own case for the preceding years had approved the determining of ALP of corporate guarantee provided by the assessee to a foreign bank for facilitating raising of loan by its AE by applying of Internal CUP by the assessee i.e the guarantee commission paid by the assessee to a bank for guarantee stood by it on behalf of the assessee for a third party thus, we respectfully follow the view therein taken. Accordingly, we find no infirmity in the adoption of internal CUP i.e the average guarantee fees that was paid by the assessee to, viz. RBS (formerly known as ABN Amro Bank); Kotak Mahindra Bank and Yes Bank, for standing guarantee on its behalf of the assessee in case of third parties, viz. ONGC, BG Exploration etc.

10. Insofar the adequacy of the ALP of the corporate guarantee fees determined by the assessee at 0.43% of the amount of loan is concerned, the same, as observed by us hereinabove is the average of the guarantee fees that was paid by the assessee to various banks for standing guarantees on its behalf for certain third parties. As observed by the Hon‟ble High Court in the case of Everest Kento Cylinders Ltd. (supra), higher commission is to be paid for obtaining bank guarantee, as they are easily encashable in the event of default as in comparison to corporate guarantee provided by an assessee company to a bank for facilitating raising of loan by its AE. Accordingly, we are of the considered view that insofar the adequacy of the ALP of the corporate guarantee fees determined by the assessee at 0.43% is concerned, the same in the backdrop of the aforesaid facts cannot be called in question. Apart from that, we find that it was also the claim of the assessee before the lower authorities that Kotak Mahindra Bank (as per its sanction letter) had expressed its willingness to give guarantee on behalf of the AEs at a commission rate of 0.40% p.a/0.50% p.a. In the backdrop of the aforesaid fact, we find substantial force in the claim of the ld. A.R that the aforesaid credit sanction letter too would constitute a CUP for benchmarking the transaction of providing of corporate guarantee by the assessee to the banks for facilitating raising of loans by its AEs. Be that as it may, the adequacy of the ALP of corporate guarantee fee at 0.43% can also safely be gathered by drawing support from the following judicial pronouncements as had been relied upon by the assessee before the lower authorities as well as before us :

Accordingly, in terms of our aforesaid observations we find no reason to dislodge the ALP of corporate guarantee determined by the assessee at 0.43% p.a by adopting Internal CUP method. In the backdrop of our aforesaid observations we are unable to persuade ourselves to subscribe to the determination of the ALP of the corporate guarantee at 2% p.a by the A.O/TPO. We, thus, uphold the ALP of corporate guarantee as determined by the assessee at 0.43% p.a and direct the A.O/TPO to vacate the upward transfer pricing adjustment of Rs. 28,69,70,745/- made in the hands of the assessee. The Grounds of appeal Nos. 1 to 7 are allowed in terms of our aforesaid observations.

11. We shall now deal with the grievance of the assessee that the A.O/TPO/DRP had erred in holding that the interest charged by the assessee at the rate of LIBOR + 2.9% per annum in respect of loan of USD 71.5 million advanced to its AE, viz. Greatship Global Holdings Ltd., Mauritius was not at arm‟s length. Briefly stated, the assessee had advanced interest bearing loans to its various AE‟s, as under:

(B). Greatship (UK) Limited:

The assessee had charged interest aggregating to Rs. 9,09,53,756/- [Rs. 8,90,20,949/- (+) Rs. 19,32,806/-] from its AEs, viz. (i) Greatship Global Holdings Ltd. (for short “GGHL”); and (ii). Greatship (UK) Limited (for short “GUK”) at the rate of LIBOR plus 2.9% mark-up and LIBOR plus 3% mark-up, respectively. Loan to GUK was sanctioned and disbursed in the immediately preceding year i.e F.Y 2010-11. On the other hand the loan to GGHL was sanctioned in the immediately preceding year i.e F.Y 2010-11 and was disbursed in parts in the said preceding year and the current financial year. As the interest rates on both the loans were determined at the time of their respective sanction in the immediately preceding financial year 2010-11, the assessee, thus, had relied upon the benchmarking exercise that was carried out in its TP study report for the said preceding year. Considering itself as the tested party the assessee had benchmarked the interest charged on the loans advanced to its AEs on the basis of the arithmetic mean of the interest rate that was charged by the banks in respect of the foreign currency loans availed by it. Such arithmetic mean of the interest rates charged by the banks in respect of the foreign currency loans availed by the assessee worked out at LIBOR + 1.829%. As the assessee had advanced the loans to its AEs at LIBOR + 2.9% and LIBOR + 3% thus the interest charged on the said respective loans was held by the assessee to be at arm‟s length. However, the Internal CUP adopted by the assessee for benchmarking the interest charged on the loans advanced to its AEs did not find favour with the TPO. It was observed by the TPO that all the foreign currency loans which had been used as comparable by the assessee were fully secured upto 130% of the value of loan alongwith mortgage of the ship. It was further observed by the TPO that the mortgage, legal, documentation, insurance and other charges as regards the loans availed by the assessee were paid by it. Also, it was observed by the TPO that not only penal interest was provided for in case of default of interest by the assessee, but the borrower was also obligated to comply with certain other requirements like maintaining of cash debt equity ratio, etc. Backed by his aforesaid observations, the TPO was of the view that if the transaction cost, hedging cost, penal cost and cost of security were taken into consideration, then the same would not be less than 700 basis points. Observing, that the assessee had not taken into consideration the aforesaid factors the TPO rejected the internal CUP method applied by the assessee. Further, the TPO was of the view that if the assessee opted to benchmark the loan transaction by treating the AE as a tested party under the external CUP method then the onus was cast upon it to find out comparable transactions where third parties (with same credit rating and in the same geography as the AE) under similar circumstances had borrowed funds in UK and Mauritius. Observing that the Hon‟ble High Court of Delhi in the case of CIT Vs. Cotton Naturals (I) Pvt. Ltd (55 taxmann.com 523), had held, that the ALP of the interest rate should be determined based on the rates prevailing with respect to the currency in which such loans were advanced the TPO conducted search on www.bloomberg.com to find out the average interest rate of foreign currency loans taken by companies in Mauritius and U.K. Based on his search, the TPO observed that though the average rate of interest in case of USD borrowings in UK was comparable to LIBOR + 3% charged by the assessee from its U.K based AE, viz. GUK, however, the average rate of interest on borrowings in Mauritius worked out to 431 .25 basis points. On being confronted with the aforesaid set of facts the assessee objected to the adoption of the interest rate w.r.t loan advanced to its Mauritius AE, viz, GGHL at LIBOR + 431.25% on multiple grounds, viz. (i). that as the loan was sanctioned in financial year 2010-11 therefore the rates applicable to the financial year 2011-12 could not be applied; (ii). that Internal CUP adopted by the assessee, viz. average mean of interest paid by it on its foreign currency loans was to be preferred as against the external CUP i.e interest rates paid by third parties; (iii). that the unsecured loans advanced by companies in Mauritius as per details gathered by the TPO from the data available on www.bloomberg.com were not comparable to the loan advanced by the assessee to its AE, viz. GGHL, Mauritius, for the reason that that as GGHL was a wholly owned subsidiary of the assessee company, the assessee company had full control over the said AE and consequently also on the repayment of loan and interest thereon; (iv). that the benchmarking carried out by the assessee of the interest charged on the loan advanced to its AE, viz. GGHL was accepted by the DRP in A.Y 2011-12; and (v). that the comparables selected by the TPO being financially inferior in terms of their balance sheets were thus incomparable. On the basis of the assessee‟s objection that the loan to the aforesaid AE, viz. GGHL, Mauritius was advanced in the financial year 2010-11 and not in financial year 2011-12 the TPO carried out fresh search on www.bloomberg.com and on the basis of comparables for the financial year 2010-11 determined the ALP of the interest charged on loans at LIBOR + 3.32%. Accordingly, the TPO reworked out the ALP of the interest on the loans advanced by the assessee to its aforesaid AE, viz. GGHL, Mauritius at Rs. 9,87,60,852/- and made a consequential TP adjustment of Rs. 97,39,903/-. Objection filed by the assessee as regards the TP adjustment w.r.t interest on loan advanced to its AE, viz. GGHL, Mauritius, did not find favour with the DRP. It was observed by the panel that the Internal CUP selected by the assessee was not correct and the TPO had rightly applied the external CUP. Further, it was observed by the DRP that the TPO had rightly held that as the credit rating of the assessee and its AE could not be same thus, the loans raised by the assessee could not be used to benchmark the loans given by it to its AE. Also, the DRP was of the view that the directions given by it in the assessee‟s case for the preceding year as regards a loan that was advanced by the assessee to its AE at Singapore could not be applied as a precedent for determining the ALP of the interest paid on the loan that was advanced to its AE, viz. GGHL, Mauritius. Accordingly, in the backdrop of its aforesaid observations the panel rejected the objection of the assessee as regards the TP adjustment w.r.t the interest charged by the assessee on the loan advanced to its Mauritius based AE, viz. GGHL. After receiving the order passed by the DRP under Sec. 144C(5), dated 29.12.2016 the A.O vide his order passed under Sec. 143(3) r.w.s 144C(13), dated 06.01.2017 inter alia made an addition towards TP adjustment of Rs. 97,39,903/- as regards the ALP of interest paid on loan advanced by the assessee to its AE, viz. GGHL, Mauritius.

12. The assessee has assailed the TP adjustment carried out by the A.O/TPO as regards the interest charged on the loan advanced by it to its AE, viz. GGHL, Mauritius. Before us, it was submitted by the ld. A.R that the TPO/DRP had wrongly rejected the Internal CUP i.e average mean of the interest rate that was paid by the assessee on its foreign currency loans, as was applied by the assessee for the purpose of benchmarking the interest charged on the loan advanced to its AE, viz. GGHL, Mauritius. It was submitted by the ld. A.R that it had advanced a loan of USD 71.5 million to its AE, viz. GGHL, Mauritius, out of which USD 58.5 million was repaid during the year in question and the balance outstanding remained at USD 13 million. It was submitted by the ld. A.R that as the assessee had charged interest from its AE at LIBOR + 2.9% p.a i.e at a rate higher than the arithmetic mean of the rate of interest that was paid by it on the foreign loans that were availed by it from various banks thus, the charging of interest by the assessee from its AE viz. GGHL, Mauritius was at arm‟s length. It was further submitted by the ld. A.R that the comparables selected by the TPO for benchmarking the interest charged on the loan advanced to its AE, viz. GGHL, Mauritius unlike the assessee were all non-indian companies. It was submitted by the ld. A.R that the DRP in the assessee‟s own case for the immediately preceding year i.e A.Y 2011-12 had held the interest charged by the assessee on the loan advanced to its AE, viz. GGHL, Mauritius at LIBOR + 2.9% p.a at arm‟s length. Elaborating on his aforesaid contention, it was submitted by the ld. A.R that the board of directors of the assessee company had sanctioned a loan of USD 75 million in the immediately preceding year i.e financial year 2010-11 on which the interest rate of LIBOR + 2.9% p.a was fixed. Out of the aforesaid loan an amount of USD 40 million was disbursed by the assessee to its AE in the year of sanction itself. Further, during the year in question i.e financial year 2011-12 a further loan of 31.5 million was disbursed by the assessee to its AE. It was submitted by the ld. A.R that the TPO in the immediately preceding year i.e the period relevant to A.Y 2011-12 had made a transfer pricing adjustment in respect of the loan of USD 40 million that was advanced to the AE and had taken the ALP of the interest charged on the said loan at 6.17% p.a. However, as submitted by the ld. A.R the DRP had vide its order for A.Y 2011-12 had therein vacated the view taken by the TPO and had accepted that the interest charged by the assessee at LIBOR + 2.9% p.a on the said loan was at arm‟s length. It was further submitted by the ld. A.R that the DRP in the assessee‟s case for A.Y 2010-11 had accepted the interest rate of LIBOR + 300 basis points to be at arm‟s length in respect of loan of USD 4 million that was given to its another AE, viz. GGES and was repaid by the latter during the said year itself. In the backdrop of the aforesaid facts, it was submitted by the ld. A.R that the DRP had consistently been holding the interest rate of LIBOR + 2.9% / 3% p.a charged by the assessee on the loans advanced to its AEs as being at arm‟s length. It was the claim of the ld. A.R that qua the loan transaction in question the DRP had in the immediately preceding year held that the interest charged by the assessee at LIBOR + 2.9% p.a was at arm‟s length. Ld. A.R in order to drive home his claim that the interest charged by the assessee on the loan advanced to its AE, viz. GGHL, Mauritius was at arm‟s length, relied on the order of the Tribunal passed in the case of its holding company, viz. The Great Eastern Shipping Co. Ltd. Vs. ACIT, Mumbai, ITA No. 397 and 437/Mum/2012, dated 10.01.2014 for A.Y 2007-08 (copy placed on record). It was submitted by the ld. A.R that the Tribunal in its aforesaid order had observed that the interest paid by an assessee on foreign currency loans raised from banks could safely be taken as an Internal CUP for determining the ALP of interest charged by the assessee on the loans advanced to its foreign AEs. It was further submitted by the ld. A.R that the TPO had wrongly observed that the Internal CUP adopted by the assessee was to be rejected as the foreign loans availed by the assessee were secured and could not be compared with the loans advanced to its AEs. It was averred by the ld. A.R that the TPO while concluding as hereinabove had lost sight of the fact that as the assessee company had an indirect control over its AEs thus, the risk in transactions between them was lower as in comparison to the risk involved in the transactions inter se independent entities. It was further submitted by the ld. A.R that the TPO had erred in applying the external CUP when the Internal CUP was therein available.

13. Per contra, the ld. D.R relied on the orders of the lower authorities. It was submitted by the ld. D.R that as the Internal CUP i.e arithmetic mean of the interest paid by the assessee on its foreign currency loans was not found to be a good comparable for benchmarking the interest charged by the assessee on the loan advanced to its AE thus, the TPO had rightly applied the external CUP for determining the ALP of the same.

14. We have in the backdrop of the contentions advanced by the authorised representatives for both the parties and perusing the orders of the lower authorities in context thereto, deliberated at length on the issue pertaining to benchmarking of the interest charged by the assessee on the loan advanced by it to its AE, viz. GGHL, Mauritius. Succinctly stated, the assessee had charged interest of Rs. 8,90,20,949/- from its AE, viz. Greatship Global Holdings Ltd. (for short “GGHL”) at the rate of LIBOR plus 2.9% mark-up. As noticed by us hereinabove, the loan to GGHL was sanctioned in the immediately preceding year i.e F.Y 2010-11 and was disbursed in parts in the said preceding year and the current financial year. Considering itself as the tested party, the assessee had benchmarked the interest charged on the loans advanced to its AE, viz. GGHL on the basis of the arithmetic mean of the interest rate that was paid by it on the foreign currency loans that were availed by it from foreign banks. As the arithmetic mean of the interest rates charged by the banks in respect of the foreign currency loans availed by the assessee worked out at LIBOR + 1.829%, as against the interest that was charged by the assessee on the loan given by it to its AE, viz. GGHL, Mauritius at LIBOR + 2.9% thus, the interest charged on the loan advanced to the AE was claimed to be at arm‟s length. As observed by us at length hereinabove, the TPO had rejected the Internal CUP that was applied by the assessee for benchmarking the interest charged on the loan advanced to its aforesaid AE, viz. GGHL, Mauritius, primarily for the reason that all the foreign currency loans which had been used as comparable by the assessee were fully secured upto 130% of the value of loan alongwith mortgage of the ship. Further, it was observed by the TPO that the assessee while benchmarking the interest transaction had failed to take cognizance of the mortgage, legal, documentation, insurance and other charges that were paid by the borrower. Also, it was observed by the TPO that not only penal interest was provided for in case of default of interest by the assessee, but the borrower assessee was also obligated to satisfy certain other requirements like maintaining of cash debt equity ratio etc. Backed by his aforesaid observations, the TPO was of the view that if the transaction cost, hedging cost, penal cost and cost of security were taken into consideration then rate of such borrowing would not be less than 700 basis points. On the basis of his aforesaid observations the TPO conducted search on www.bloomberg.com to find out the average interest rate of foreign currency loans taken by companies in Mauritius and finally determined the ALP of interest charged by the assessee on loan advanced to its AE, viz. GGHL, Mauritius at LIBOR + 3.32%. Accordingly, the TPO reworked out the ALP of the interest on the loans advanced by the assessee to its aforesaid AE, viz. GGHL, Mauritius at Rs. 9,87,60,852/- and made an consequential TP adjustment of Rs. 97,39,903/-.

15. Before us, it is the contention of the ld. A.R that as the DRP in the assessee‟s own case for the immediately preceding year i.e A.Y 2011-12 had held the interest charged by the assessee at LIBOR + 2.9% p.a on the loan in question as at arm‟s length, therefore, in the absence of any shift in facts during the year in question there was no justification on the part of the TPO/DRP to have held the same as not being at arm‟s length. We have deliberated at length on the issue in question i.e transfer pricing adjustment carried out by the TPO/DRP as regards the interest charged by the assessee on the loan advanced to its AE, viz. GGHL, Mauritius. In our considered view, the benchmarking of the interest charged by the assessee on the loan advanced to its AE, viz. GGHL by applying internal CUP i.e arithmetic mean of the interest rates that were charged by the banks as regards the foreign currency loans availed by the assessee could not have been rejected by the TPO/DRP. Our aforesaid view is fortified by the order passed by the Tribunal while disposing off the cross-appeals in the case of the holding company of the assessee, viz. The Great Eastern Shipping Company Limited, ITA No. 397/Mum/2012 & ITA No. 437/Mum/2012, dated 10.01 .2014 for A.Y 2007-08 (copy on record). In its said order the Internal CUP in the form of interest paid by the assessee company on its own borrowings from bank to benchmark the interest charged by the assessee on a loan given to its AE was accepted. The Tribunal in its said order had upheld the benchmarking of the interest charged by the asseseee on the loan given to its AE, on the basis of the Internal CUP applied by the assessee i.e interest paid by the assessee on its foreign currency borrowings from KEIXM bank and State Bank of India. Accordingly, respectfully following the view taken by the Tribunal in its aforesaid order, we find no infirmity in benchmarking of the interest charged by the assessee on the loans advanced to its AE, viz. GGHL, Mauritius by applying of an Internal CUP i.e arithmetic mean of the interest rate charged by the banks on the foreign currency loans availed by the assessee during the year in question. Apart from that, we also find substance in the claim raised by the assessee before the lower authorities that the foreign currency loans obtained by its holding company viz. Great Eastern Shipping Company Ltd. at an interest rate of LIBOR + 1.79% p.a and LIBOR + 1.50% p.a during the year in question would also form a suitable Internal CUP. Further, we are of the considered view that in case of availability of an Internal CUP there was no need on the part of the TPO to have benchmarked the transaction by applying an external CUP. Our aforesaid conviction is supported from Para 3.26 of OECD guidelines, which reads as under:

“Internal comparables may have a more direct and closer relationship to the transaction under review than external comparable.”

As observed by us hereinabove, the Board of Directors of the assessee company had sanctioned a loan of USD 75 million in the immediately preceding financial year 2010-11 on which interest rate of LIBOR + 2.9% p.a was fixed. Loan of USD 40 million was disbursed by the assessee to its AE in the financial year 201-11. Further, during the year in question i.e period relevant to A.Y 201 2-13 a further loan of USD 31.5 million was disbursed to the AE. TPO in the immediately preceding year i.e period relevant to A.Y 2011-12 had made a TP adjustment in respect of the loan of USD 40 million that was disbursed during the said preceding year and had determined the ALP of the interest charged by the assessee on the said loan at 6.17% p.a. However, the DRP had vide its order for A.Y 2011-12 held that the interest charged by the assessee on the loan advanced to its AE was at arm‟s length. In our considered view, now when DRP in the case of the assessee for A.Y 2011-12 had held that the interest charged by the assessee on the loan advanced to its AE at LIBOR + 2.9% was at arm‟s length, therefore, there would be no justification in holding the same as not being at arm‟s length during the year in question i.e A.Y 2012-13. Also, the DRP in the assessee‟s case for A.Y 2010-11 had held that the interest rate of LIBOR + 300 basis points that was charged by the assessee on a loan of USD 4 million given to its AE, viz. GGES (and repaid) as being at arm‟s length. In the backdrop of the aforesaid facts, we find that the DRP had consistently been holding the interest rate of LIBOR + 2.9% / 3% charged by the assessee on the loans advanced to its AEs as at arm‟s length. On the basis of our aforesaid observations, we uphold the Internal CUP applied by the assessee for benchmarking the interest charged on the loans advanced to its AE, viz. GGHL; and hold the interest charged by it on the loan advanced to its AE, viz. GGHL at LIBOR + 2.9% as being at arm‟s length. The Grounds of appeal Nos. 8 to 11 are allowed in terms of our aforesaid observations.

16. We shall now deal with the assessee‟s grievance that the A.O/TPO/DRP had erred in making a transfer pricing adjustment of Rs. 62,23,256/- in respect of sale of an under construction vessel, viz. “Greatship Vimla” by the assessee to its AE, viz. Greatship Global Offshore Services Pte. Ltd., Singapore (for short “GGOS”). Briefly stated, the assessee had entered into a ship building contract dated 23rd July, 2008 with Drydocks World Singapore Pte. Ltd for construction of an Anchor Handling Tug and Supply Vessel (for short “AHTSV”), viz. „Vimla‟ having Bollard pull of minimum 150 tons. The contract price for the construction of the said vessel was SGD 4,96,20,000. The assessee paid 10% of the contract price towards the first instalment of SGD 49,62,000 on 11th August, 2008. Further, the assessee had also incurred certain expenses towards salary and expenses of employees deputed to supervise the construction of the vessel and loss on cancellation of forward foreign exchange contracts which were entered to hedge against loss on foreign exchange fluctuation for payment of instalments of the vessel under construction and such loss was capitalized. However, due to certain business considerations the Board of Directors passed a resolution to transfer the said vessel to the assessee‟s AE, viz. GGOS, Singapore. Accordingly, during the year in question i.e A.Y 2012-13 the aforesaid vessel by virtue of a tripartite novation agreement dated 3rd January, 2012 was transferred at cost by the assessee for USD 3881,105 [INR 19,38,70,892/-]. Thereafter, the AE, viz. GGOS paid the balance 90% of purchase consideration to the shipyard and acquired the vessel. As per the records, the assessee for benchmarking the international transaction of sale of the said under construction vessel, viz. “Vimla” had applied CUP method. Apart from that, the assessee as per “any other method” as prescribed under Rule 10AB of the Income-tax Rules had obtained a valuation report of the vessel under consideration from a reputed independent valuer, viz. M/s Offshore Shipbrokers Ltd., London, who valued the vessel in the range of USD 3,00,00,000 to USD 3,20,00,000 [Equivalent to SGD 3,84,78,857 to SGD 4,10,44,114]. As the assessee had paid only 10% of the cost of the vessel, therefore, it was entitled to recover USD 30,00,000 to USD 32,00,000. However, the assesses actually recovered USD 38,81,105 i.e excess of USD 6,81,105 [USD 38,81,105 (minus) USD 32,00,000‟] over the value of the vessel i.e approximately 21% more than the market price. In the backdrop of the aforesaid facts, it was the claim of the assessee that the international transaction of transfer of the under construction vessel was at arm‟s length. However, the TPO observed that though the assessee had made the aforesaid investment 3 years back but it had recovered only the cost of its investment from the AE. Observing, that the assessee had not acted in a manner it would had otherwise as per its prudence acted in case the transaction would have been with a third party, the TPO, was of the view that the transaction in question was akin to keeping the funds idle for three years and loosing the “opportunity cost”. Backed by his aforesaid observation, the TPO computed the ALP of the transaction by computing the price of a loan given to the aforesaid AE, viz. GGOS, Singapore for a period of three years. Accordingly, the TPO taking the interest on loans for the financial year 2008- 09 at 3.21%, as was gathered by him from the website www.bloomberg.com, therein worked out the ALP of the notional interest at Rs. 62,23,256/-.

17. Aggrieved, the assessee assailed the aforesaid transfer pricing adjustment of Rs. 62,23,256/- before the DRP. It was the claim of the assessee that the TPO was not vested with the jurisdiction to reclassify the international transaction of sale of vessel by the assessee to its AE into a transaction of loan advanced to the AE. It was submitted by the assessee that as it was not the case of the TPO that the form of the transaction was different from its substance thus, he was not justified in recharacterising the transaction of sale of vessel by the assessee to that of a loan advanced by it to its AE. It was further submitted by the assessee that the TPO had exceeded his jurisdiction while observing that the assessee by investing the funds of SGD 49,62,000 on the construction of vessel had lost the “opportunity cost”, as he could have otherwise earned a decent interest on the same. It was submitted by the assessee that the A.O/TPO cannot step into the shoes of a businessman to decide as to whether a particular transaction should have been undertaken or not, as the same was the sole prerogative of the assessee and was not to be left to the prudence of the said authorities. Apart from that, it was submitted by the assessee that though the assessee had placed on record documentary evidence in support of its claim that the market situation for sale of ship was not appropriate/favourable, the TPO, however, had wrongly observed that no material was led by the assessee in support of its contention that the market situation for sale of ship was not favourable. It was further submitted by the assessee that as it had recovered an amount in excess of the market value, therefore, the transaction of sale of vessel was at arm‟s length and the TP adjustment carried out by the TPO was liable to be vacated. Alternatively, it was stated by the assessee that as the transaction of sale of under construction vessel was in the capital field and would give rise to capital gains, the same, thus, would lead to a long term capital loss of Rs. 4,55,32,552/- in the hands of the assessee. However, the contentions advanced by the assessee did not find favour with the DRP. After referring to the “Ship building Contract” between Drydocks World Singapore Pte. Ltd. and the assessee company, the DRP, observed, that as the payment made by the assessee to the shipbuilders was in the nature of an advance only thus, in the event of rescission of the contract the shipbuilders were only required to pay interest on the amount of such advance at the rates specified therein. Backed by its aforesaid observation, the DRP was of the view that in order to arrive at the arm‟s length price of the transfer of the under construction vessel by the assessee to its AE by way of a tripartite novation agreement, the TPO was correct in treating the monies spent on the contract as a loan and therein computing the interest thereon. Accordingly, the DRP upheld the determination of the ALP of the notional interest of Rs. 62,23,256/- which as per the TPO the assessee ought to have charged on the aforesaid impugned loan that was advanced to its AE, viz. viz. GGOS, Singapore. After receiving the order passed by the DRP under Sec. 144C(5), dated 29.12.2016 the A.O vide his order passed under Sec. 143(3) r.w.s 144C(13), dated 06.01.2017 inter alia made an addition towards TP adjustment of Rs. 62,23,256/- as regards the ALP of notional interest on the impugned loan which was allegedly stated to have been advanced by the assessee to its AE, viz. GGHL, Mauritius.

18. The assessee has assailed the TP adjustment carried out by the A.O/TPO as regards the determination of ALP of the notional interest of Rs. 62,23,256/- which as per the TPO the assessee ought to have charged from its AE, viz. GGOS, Singapore. Before us, it was submitted by the ld. A.R that as it was not the case of the TPO that the form of the transaction was different from its substance, therefore, he was not justified in recharacterising the transaction of sale of vessel by the assessee as a loan advanced to its AE, viz. GGOS, Singapore. In order to support his aforesaid contention the ld. A.R had drawn support from the order passed by the Tribunal in its own case for A.Y 2008-09 and A.Y 2009-10 in ITA No. 7673/Mum/2012 & 1703/Mum/2014, dated 21.06.2019 (copy placed on record). Our attention was drawn by the ld. A.R to the relevant observations of the Tribunal, wherein by drawing support from the judgments of the Hon‟ble High Court of Delhi in the case of EKL Appliances Ltd. (2012) 345 ITR 241 (Del) and Sony Ericsson Mobile Communications India Pvt. Ltd. Vs. CIT (2015) 374 ITR 118 (Del), the Tribunal had observed that re-characterization of a transaction can be done by the revenue authorities only when the transactions are found to be substantially at variance with the stated form. Accordingly, it was submitted by the ld. A.R that the TP adjustment carried out by the TPO/DRP by re-characterising the transaction of sale of vessel by the assessee as a loan advanced to its AE, and therein determining the ALP of the notional interest at Rs. 62,23,256/-, which as per the TPO the assessee ought to have charged from its AE, viz. GGOS, Singapore, not being as per the mandate of law was liable to be vacated.

19. Per contra, the ld. D.R relied on the orders of the lower authorities. It was submitted by the ld. D.R that as per “Article 10” of the ship building contract dated 23rd July, 2008 entered into by the assessee with Drydocks World Singapore Pte. Ltd., the payment made by the assessee prior to the delivery of the vessel was in the nature of an „advance‟ to the builder. It was, thus, submitted by the ld. D.R that in the backdrop of the aforesaid facts the TPO/DRP had rightly worked out the ALP of the notional interest of Rs. 62,23,256/- which the assessee ought to have charged from its AE, viz. GGOS, Singapore for providing an advance to purchase the under construction vessel..

20. We have heard the authorized representatives for both the parties in context of the aforesaid issue in question i.e determining of the ALP of the notional interest that the assessee ought to have charged from its AE, viz. GGOS, Singapore. Undisputedly, it is not the case of the revenue that the form of the transaction of sale of vessel was different from its substance. In fact the authenticity of the transaction of transfer of vessel by the assessee company to its AE, viz. GGOS, Singapore had at no stage been doubted by the revenue. In our considered view, as claimed by the ld. A.R, and rightly so, it is not open to the revenue authorities to re-characterize the transaction unless it was found to be a sham or bogus transaction. Such re-characterization of a transaction can be done by the revenue authorities only when the transactions are found to be substantially at variance with the stated form. Our aforesaid view is fortified by the judgment of the Hon’ble High Court of Delhi in the case of CIT Vs. EKL Appliances Limited. (2012) 345 ITR 241 (Del), wherein the Hon‟ble High Court after drawing support from OECD guidelines had observed as under:

1.36 A tax administration’s examination of a controlled transaction ordinarily should be based on the transaction actually undertaken by the associated enterprises as it has been structured by them, using the methods applied by the taxpayer insofar as these are consistent with the methods described in Chapters II and III. In other than exceptional cases, the tax administration should not disregard the actual transactions or substitute other transactions for them. Restructuring of legitimate business transactions would be a wholly arbitrary exercise the inequity of which could be compounded by double taxation created where the other tax administration does not share the same views as to how the transaction should be structured.

1.37 However, there are two particular circumstances in which it may, exceptionally, be both appropriate and legitimate for a tax administration to consider disregarding the structure adopted by a taxpayer in entering into a controlled transaction. The first circumstance arises where the economic substance of a transaction differs from its form. In such a case the tax administration may disregard the parties’ characterization of the transaction and re-characterise it in accordance with its substance. An example of this circumstance would be an investment in an associated enterprise in the form of interest-bearing debt when, at arm’s length, having regard to the economic circumstances of the borrowing company, the investment would not be expected to be structured in this way. In this case it might be appropriate for a tax administration to characterize the investment in accordance with its economic substance with the result that the loan may be treated as a subscription of capital. The second circumstance arises where, while the form and substance of the transaction are the same, the arrangements made in relation to the transaction, viewed in their totality, differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner and the actual structure practically impedes the tax administration from determining an appropriate transfer price. An example of this circumstance would be a sale under a long-term contract, for a lump sum payment, of unlimited entitlement to the intellectual property rights arising as a result of future research for the term of the contract (as previously indicated in paragraph 1.10). While in this case it may be proper to respect the transaction as a transfer of commercial property, it would nevertheless be appropriate for a tax administration to conform the terms of that transfer in their entirety (and not simply by reference to pricing) to those that might reasonably have been expected had the transfer of property been the subject of a transaction involving independent enterprises. Thus, in the case described above it might be appropriate for the tax administration, for example, to adjust the conditions of the agreement in a commercially rational manner as a continuing research agreement.

1.38 In both sets of circumstances described above, the character of the transaction may derive from the relationship between the parties rather than be determined by normal commercial conditions as may have been structured by the taxpayer to avoid or minimize tax. In such cases, the totality of its terms would be the result of a condition that would not have been made if the parties had been engaged in arm’s length dealings. Article 9 would thus allow an adjustment of conditions to reflect those which the parties would have attained had the transaction been structured in accordance with the economic and commercial reality of parties dealing at arm’s length.”

17. The significance of the aforesaid guidelines lies in the fact that they recognise that barring exceptional cases, the tax administration should not disregard the actual transaction or substitute other transactions for them and the examination of a controlled transaction should ordinarily be based on the transaction as it has been actually undertaken and structured by the associated enterprises. It is of further significance that the guidelines discourage re-structuring of legitimate business transactions. The reason for characterisation of such re-structuring as an arbitrary exercise, as given in the guidelines, is that it has the potential to create double taxation if the other tax administration does not share the same view as to how the transaction should be structured.

18. Two exceptions have been allowed to the aforesaid principle and they are (i) where the economic substance of a transaction differs from its form and (ii) where the form and substance of the transaction are the same but arrangements made in relation to the transaction, viewed in their totality, differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner.”

Accordingly, in the backdrop of our aforesaid observations, now when the form of the transaction of sale of vessel is not found to be different from its substance, the TPO, thus, was not justified in re-characterising the same as a loan transaction and therein working out the ALP of the notional interest which the assesseee ought to have charged on such impugned advance/loan given to its AE, viz. GGOS, Singapore. In so far the observation of the lower authorities that the assessee had failed to lead any document in support of its claim that the market situation for sale of ship was not found favourable, we are unable to concur with the same. As observed by us hereinabove, the assessee vide its detailed submissions filed before the lower authorities had placed on record requisite supporting documents, viz. (i) article downloaded from the website www.gcaptain.com, an online maritime magazine which captured the downturn faced by the ship builders globally during the year in question; and (ii). valuation report from a reputed independent valuer/ship broker, viz. Offshore Shipbrokers, London, wherein the vessel under consideration was valued at lower than its cost of construction. Be that as it may, we find that it is a matter of fact borne from the records that the assessee had transferred the vessel to its AE, viz. GGOS, Singapore at a price of USD 38,81,105 which is more by USD 8,81,105 to USD 6,81,105 compared to its market price at the relevant point of time. Although the TPO had made a TP adjustment by adding a mark-up of 3.21% on the cost as a notional gain, however, he had erred in failing to appreciate that as the assessee had recovered 29.37% to 21.28% more than the market price thus, no such TP adjustment was called for in the hands of the assessee. As regards the observation of the TPO that the assessee had lost the “Opportunity cost” by not investing the amount and earning a decent interest on the same, we are afraid the same does not find favour with us. In our considered view the scope and domain of the jurisdiction of a TPO is restricted to the determination of the arm‟s length price of the international transaction of an assessee, and the same by no means could be stretched to providing of advise or commenting on the prudence of the assessee as regards its business decisions or providing guidance as regards the manner in which the business ought to have been carried out. We, thus, are of the considered view that the TPO by observing that the assessee had lost the “Opportunity cost” had clearly exceeded his jurisdiction. Backed by our aforesaid observations, we are unable to uphold the transfer pricing adjustment of Rs. 62,23,256/- worked out by the TPO/DRP as regards the notional interest which as per them the assessee ought to have charged from its AE, viz. viz. GGOS, Singapore. Accordingly, we herein direct the A.O/TPO to vacate the transfer pricing adjustment of Rs. 62,23,256/- made towards notional interest. The Grounds of appeal nos. 12 to 14 are allowed in terms of our aforesaid observations.

21. We shall now deal with the claim of the assessee that the A.O/DRP had erred in invoking Rule 8D without recording an objective satisfaction that having regard to the accounts of the asssessee the suo-motto disallowance offered by the assessee under Sec. 1 4A was incorrect. Succinctly stated, the assessee had made investments in equities and mutual funds amounting to Rs. 104,44,00,000/- as on 31.03.2011 and Rs. 67,60,00,000 as on 31 .03.2012. The assessee had during the year in question earned exempt dividend income of Rs. 8,28,16,193/-, against which it had suo-motto disallowed an amount of Rs. 22,63,129/- under Sec. 14A of the Act. It was observed by the A.O that the assessee by applying a formula of its own i.e percentage of exempt income to total income on investments had therein worked out the disallowance under Sec. 14A. Observing, that the formula adopted by the assessee was not in conformity with the procedure contemplated in Rule 8D of the Income-tax Rules, 1962, the A.O declined to accept the suo-motto disallowance offered by the assessee u/s 1 4A of the Act. In turn, the A.O applied the methodology contemplated in Rule 8D and computed the disallowance under Sec.14A r.w Rule 8D(2)(iii) at Rs. 43,0 1 ,000/. As the assessee had already offered a disallowance on a suo- motto basis of an amount of Rs. 22,63,129/- under Sec. 14A of the Act, the A.O, therefore, made a further disallowance of Rs. 20,37,871/-[Rs. 43,01,000/- (-) Rs. 22,63,129/-].

22. Aggrieved, the assessee assailed the disallowance u/s 14A proposed by the A.O vide his draft assessment order passed under Sec. 1 44C(1) r.w.s 143(3), dated 11.03.2016 before the DRP. It was observed by the DRP that the assessee had taken only the expenses of the treasurary department for computing the disallowance under Sec.14A. Observing that the top management was involved in making the investment decisions, and also the fact that no part of the administrative overheads had been attributed by the assessee towards earning of the exempt dividend income, the DRP was of the view that the suo-motto disallowance computed by the assessee under Sec. 14A was not correct. Accordingly, the DRP finding no infirmity in the view taken by the A.O who had worked out the disallowance under Sec. 1 4A as per the procedure contemplated in Rule 8D of the Income-tax Rules, 1962, upheld the same. After receiving the order passed by the DRP under Sec. 144C(5), dated 29.12.2016, the A.O vide his order passed under Sec. 143(3) r.w.s 144C(13), dated 06.01.2017 inter alia made a further disallowance of Rs. 20,37,871/- under Sec. 14A of the Act.

23. The assessee has assailed the disallowance u/s 14A as had been worked out/sustained by the A.O/DRP. The ld. A.R assailed the disallowance computed by the A.O under Sec. 14A, on the ground, that the latter had without recording any satisfaction dislodged the suo-motto disallowance that was offered by the assessee in its return of income. It was submitted by the ld. A.R that as held by the Hon’ble Supreme Court in the case of Godrej & Boyce Manufacturing Company Ltd. Vs. DCIT & Anr (2017) 394 ITR 449 (SC) and Maxopp Investment Ltd. Vs. CIT (2018) 402 ITR 640 (SC), the A.O before dislodging the suo-moto disallowance worked out by the assessee under Sec. 14A of the Act therein remained under a statutory obligation to record his satisfaction that having regard to the accounts of the assessee as placed before him, it was not possible to generate the reasonable satisfaction with regard to the correctness of the claim of the assessee. It was submitted by the ld. A.R that the Hon‟ble Apex Court had observed that it was only after the A.O had recorder his dissatisfaction as regards the correctness of the claim of the assessee that the provisions of Sec. 14A(2) and (3) r.w Rule 8D could be invoked. In the backdrop of his aforesaid contentions, it was submitted by the ld. A.R that as the A.O san recording of any dissatisfaction as regards the correctness of the suo-motto disallowance offered by the assessee under Sec. 14A had rejected the same and substituted it by an enhanced amount, therefore, the said action on his part being not as per the mandate of law was liable to be vacated. On merits, it was submitted by the ld. A.R that as the assessee had adopted a fair method for allocating the expenses incurred in relation to earning of exempt dividend income thus, there was no justification on the part of the A.O for dislodging the same. It was further submitted by the ld. A.R that a similar suo-motto disallowance offered by the assessee in its case for A.Y 2008-09 and A.Y 2009-10 was under identical circumstances rejected and thereafter substituted by the A.O as per the methodology contemplated in Rule 8D. It was submitted by the ld. A.R that on appeal the Tribunal vide its consolidated order passed in ITA No. 7673/Mum/2012 & ITA No. 1703/Mum/2014, dated 21.06.2019 for A.Y 2008- 09 and A.Y 2009-10 had set-aside the matter to the file of the A.O for the purpose of re-adjudicating the disallowance afresh in the light of the law laid down by the Hon’ble Apex Court in the case of Maxopp Investment Ltd. Vs. CIT (2018) 402 ITR 640 (SC).

24. Per contra, the ld. D.R relied on the orders of the lower authorities. It was submitted by the ld. D.R that as the A.O had worked out the disallowance as per the mandate of Sec. 14A r.w Rule 8D, therefore, no infirmity did emerge therefrom.

25. We have heard the authorised representatives for both the parties in context of the aforesaid issue pertaining to the sustainability of disallowance computed by the A.O under Sec. 14A r.w Rule 8D. As observed by us hereinabove, the assessee had suo motto offered a disallowance u/s 1 4A of Rs. 22,63,129/-. Basis of computing the aforesaid disallowance by the assessee was appropriation of the treasury expenses on a pro-rata basis i.e percentage of exempt income to the total income from its investments, which, however, was rejected by the A.O. It is the claim of the ld. A.R that as the A.O while rejecting the suo-motto disallowance that was offered by the assessee in its return of income had failed to record his satisfaction that having regard to the accounts of the assessee as placed before him it was not possible to generate the reasonable satisfaction with regard to the correctness of the claim of the assessee thus, on the said count itself the disallowance so enhanced by him was liable to be vacated. We have given a thoughtful consideration to the aforesaid contention of the assessee and find substantial force in the same. As observed by the Hon’ble Supreme Court in the case of Godrej & Boyce Manufacturing Company Ltd. Vs. DCIT & Anr. (2017) 394 ITR 449 (SC), it is only after the A.O had recorded his dissatisfaction as regards the correctness of the claim of the assessee that he can thereafter invoke the provisions of Sec.14A(2) and (3) r.w. Rule 8D. The Hon‟ble Apex Court in its aforesaid order had observed as under:

“37. We do not see how in the aforesaid fact situation a different view could have been taken for the Assessment Year 2002-2003. Sub-sections (2) and (3) of Section 14A of the Act read with Rule SD of the Rules merely prescribe a formula for determination of expenditure incurred in relation to income which does not form part of the total income under the Act in a situation where the Assessing Officer is not satisfied with the claim of the assessee. Whether such determination is to be made on application of the formula prescribed under Rule 8D or in the best judgment of the Assessing Officer, what the law postulates is the requirement of a satisfaction in the Assessing Officer that having regard to the accounts of the assessee, as placed before him, it is not possible to generate the requisite satisfaction with regard to the correctness of the claim of the assessee. It is only thereafter that the provisions of Section 14A(2) and (3) read with Rule 8D of the Rules or a best judgment determination, as earlier prevailing, would become applicable.”

Similar view had thereafter been taken by the Hon‟ble Apex Court in the case of Maxopp Investment Ltd. Vs. CIT (2018) 402 ITR 640 (SC). We find that involving identical facts in the case of the assessee for A.Y 2008-09 & A.Y 2009-10, wherein a suo-motto disallowance offered by the assessee was rejected by the A.O, and was thereafter substituted by an enhanced amount of disallowance as per the methodology contemplated in Sec. 1 4A r.w Rule 8D, that on appeal the Tribunal vide its consolidated order passed in ITA No. 7673/Mum/2012 and ITA No. 1703/Mum/2014, dated 21.06.2019 had set-aside the matter to the file of the A.O for the purpose of re-adjudicating the disallowance afresh in light of the law laid down by the Hon’ble Apex Court in the case of Maxopp Investment Ltd. Vs. CIT (2018) 402 ITR 640 (SC). As the fact situation in the case of the assessee before us remains the same as was there before the Tribunal in the assessee‟s case for A.Y 2008-09 & A.Y 2009-10, therefore, for the sake of consistency and in all fairness we herein on the same terms set-aside the matter to the file of the A.O for the purpose of readjudicating the issue afresh in light of the judgment of the Hon’ble Apex Court in the case of Maxopp Investment Ltd. Vs. CIT (2018) 402 ITR 640 (SC). Needless to say, the A.O shall in the course of the set-aside proceedings afford a reasonable opportunity of being heard to the assessee who shall remain at a liberty to substantiate its claim that the suo-motto disallowance under Sec. 14A so offered by it in its return of income is in order. The Grounds of appeal Nos. 15 & 16 are allowed for statistical purposes.

26. We shall now take up the claim of the assessee that the A.O had principally erred in quantifying interest saddled upon it under Sec. 234C of the Act. It was submitted by the ld. A.R that though as per the mandate of Sec. 234C the interest for deferment of advance tax is to be levied on the basis of the tax due on the returned income, the A.O, however, had wrongly computed the same on the basis of the tax due on the assessed income of the assessee. In order to fortify his aforesaid claim the ld. A.R had drawn our attention to the „Explanation‟ to Sec. 234C(1) of the Act. On the basis of his aforesaid contention it was submitted by the ld. A.R that the interest u/s 234C in its case was liable to be restricted to an amount of Rs. 11,74,709.

27. Per contra, it was submitted by the ld. D.R that no infirmity did emerge from the computation of interest u/s 234C by the A.O.

28. We have deliberated at length on the aforesaid contention of the counsel for the assessee. Before adverting any further, we deem it fit to cull out Sec. 234C of the Act, which during the year in question read as under :

“Interest for deferment of advance tax.

[(1) Where in any financial year,—

[(a) an assessee, other than an eligible assessee in respect of theeligible business referred to in section 44D, who is liable to pay advance tax under section 208 has failed to pay such tax or—

(i) the advance tax paid by such assessee on its current income on or before the 15th day of June is less than fifteen per cent, of the tax due on the returned income or the amount of such advance tax paid on or before the 15th day of September is less than forty-five per cent, of the tax due on the returned income or the amount of such advance tax paid on or before the 15th day of December is less than seventy-five per cent, of the tax due on the returned income, then, the assessee shall be liable to pay simple interest at the rate of one per cent, per month for a period of three months on the amount of the shortfall from fifteen per cent, or forty-five per cent, or seventy-five per cent., as the case may be, of the tax due on the returned income;

(ii) the advance tax paid by the assessee on the current income on or before the 15th day of March is less than the tax due on the returned income, then, the assessee shall be liable to pay simple interest at the rate of one per cent, on the amount of the shortfall from the tax due on the returned income:

Provided that if the advance tax paid by the assessee on the current income, on or before the 15th day of June or the 15th day of September, is not less than twelve per cent, or, as the case may be, thirty-six per cent, of the tax due on the returned income, then, the assessee shall not be liable to pay any interest on the amount of the shortfall on those dates;]

(b) an eligible assessee in respect of the eligible business referred to in section 44AD, who is liable to pay advance tax under section 208 has failed to pay such tax or the advance tax paid by the assessee on its current income on or before the 15th day of March is less than the tax due on the returned income, then, the assessee shall be liable to pay simple interest at the rate of one per cent, on the amount of the shortfall from the tax due on the returned income:]

Provided that nothing contained in this sub-section shall apply to any shortfall in the payment of the tax due on the returned income where such shortfall is on account of underestimate or failure to estimate—

(a) the amount of capital gains; or

(b) income of the nature referred to in sub-clause (ix) of clause (24) of [section 2; or], and the assessee has paid the whole of the amount of tax payable in respect of income referred to in clause (a) or clause (b), as the case may be, had such income been a part of the total income, as part of the remaining instalments of advance tax which are due or where no such instalments are due], by the 31st day of March of the financial year:]

[Provided further that nothing contained in this sub-section shall apply to any shortfall in the payment of the tax due on the returned income where such shortfall is on account of increase in the rate of surcharge under section 2 of the Finance Act, 2000 (10 of 2000), as amended by the Taxation Laws (Amendment) Act, 2000(1 of 2001), and the assessee has paid the amount of shortfall, on or before the 15th day of March, 2001, in respect of the instalment of advance tax due on the 15th day of June, 2000, the 15th day of September, 2000, and the 15th day of December, 2000:]

[Provided also that nothing contained in this sub-section shall apply to any shortfall in the payment of the tax due on the returned income where such shortfall is on account of increase in the rates of surcharge under section 2 of the Finance Act, 2000 (10 of 2000), as amended by the Taxation Laws (Amendment) Act, 2001(4 of 2001), and the assessee has paid the amount of shortfall on or before the 15th day of March, 2001, in respect of the instalment of advance tax due on the 15th day of June, 2000, the 15th day of September, 2000, and 15th day of December, 2000.]

[Explanation.—In this section, “tax due on the returned income” means the tax chargeable on the total income declared in the return of income furnished by the assessee for the assessment year commencing on the 1st day of April immediately following the financial year in which the advance tax is paid or payable, as reduced by the amount of,—

(i) any tax deductible or collectible at source in accordance with the provisions of Chapter XVII on any income which is subject to such deduction or collection and which is taken into account in computing such total income;

(ia) any relief of tax allowed under section 89;]

(ii) any relief of tax allowed under section 90 on account of tax paid in a country outside India;

(iii) any relief of tax allowed under section 90A on account of tax paid in a specified territory outside India referred to in that section;

(iv) any deduction, from the Indian income-tax payable, allowed under section 91, on account of tax paid in a country outside India; and

(v) any tax credit allowed to be set off in accordance with the provisions of section 115JAA.

(2) The provisions of this section shall apply in respect of assessments for the assessment year commencing on the 1st day of April, 1989, and subsequent assessment years.]”

On a perusal of the aforesaid statutory provision, we find that the same therein contemplates levy of interest for deferment of advance tax by the assessee. For the purpose of quantification of the interest therein provided, the aforesaid statutory provision clearly envisages levy of such interest on the “tax due on the returned income”. In order to dispel all doubts, the „Explanation‟ to Sec. 234C(1) therein defines the term “tax due on the returned income” as used in the said section, as under:

“Explanation.—In this section, “tax due on the returned income” means the tax chargeable on the total income declared in the return of income furnished by the assessee for the assessment year commencing on the 1st day of April immediately following the financial year in which the advance tax is paid or payable, as reduced by the amount of,²

(i) any tax deductible or collectible at source in accordance with the provisions of Chapter XVII on any income which is subject to such deduction or collection and which is taken into account in computing such total income;

(ia) any relief of tax allowed under section 89;]

(ii) any relief of tax allowed under section 90 on account of tax paid in a country outside India;

(iii) any relief of tax allowed under section 90A on account of tax paid in a specified territory outside India referred to in that section;

(iv) any deduction, from the Indian income-tax payable, allowed under section 91, on account of tax paid in a country outside India; and

(v) any tax credit allowed to be set off in accordance with the provisions of section 115JAA.”

Accordingly, on the basis of our aforesaid observations, we concur with the claim of the ld. A.R that the interest under Sec. 234C is to be computed on the tax due on the returned income i.e the tax chargeable on the total income declared in the return of income furnished by the assessee for the year in question, as reduced by the amounts contemplated in the „Explanation‟ to Sec. 234C(1) of the Act. We, thus, in terms of our aforesaid observations restore the issue to the file of the A.O with a direction to recompute the liability of the assessee towards interest under Sec. 234C on its tax due on returned income as contemplated in the „Explanation‟ to Sec. 234C(1) of the Act. The Ground of appeal No. 17 is allowed for statistical purposes in terms of our aforesaid observations.

29. The appeal of the assessee is allowed in terms of our aforesaid observations.

ITA No.6083/MUM/2018
(Assessment Year: 2014-15)

30. We shall now take up the appeal of the assessee for A.Y. 2014-15. The assessee has assailed the impugned order on the following grounds of appeal before us:

“This Appeal is filed against the order u/s. 143(3) r.w.s. 144C(13) of the Income-tax Act, 1961 passed by the Deputy Commissioner of Income Tax, Range 5(1)(1), Mumbai (‘hereinafter referred to as Assessing Officer’) and relates to the Assessment Year 2014-201 5.

TRANSFER PRICING ISSUES

(1). The Transfer Pricing Officer (TPO) erred in passing the order under section 92CA(3) in gross violation of principle of natural justice.

(2) The TPO erred in not confronting the Appellant with the information / material collated by him under section 133(6) of the Income-tax Act and upon which he has relied upon to make an adjustment in respect of financial guarantee commission.

(3) The Assessing Officer (AO) / Transfer Pricing Officer (TPO) / Dispute Resolution Panel (DRP) erred in holding that the transaction of giving financial guarantee by the Appellant on behalf of its Associated Enterprises (AEs) was an “international transaction” under Section 92B of the Act.

(4) The AO / TPO / DRP erred in determining the Arm’s Length Price of the financial guarantees given by the Appellant on behalf of its AEs @ 1.25% per annum.

(5). The AO / TPO / DRP erred in making a transfer pricing adjustment of Rs.17,59,03,276/- on account of guarantee commission.

(6). The AO / TPO / DRP failed to appreciate that giving of financial guarantees by the Appellant on behalf of its subsidiaries was a shareholder activity for which no charge is required.

(7). The AO / TPO / DRP erred in law and in facts in rejecting the benchmarking analysis undertaken by the Appellant in respect of guarantee commission in its transfer pricing documentation.

(8). Without prejudice to Ground Nos. 1 to 7, the AO / TPO / DRP erred in computing the arm’s length price of the financial guarantees given by the Appellant on behalf of its AEs in an arbitrary manner.

(9). The AO / TPO / DRP erred in holding that the interest charged by the Appellant at the rate of LIBOR + 2.9% per annum in respect of loan of USD 71.5 million given to its AE, Greatship Global Holdings Ltd., Mauritius, was not at arm’s length.

(10). The AO / TPO / DRP erred in making a transfer pricing adjustment of Rs. 33,85,759/-in respect of loan of USD 71.5 million given by the Appellant to Greatship Global Holdings Ltd., Mauritius by holding that the arm’s length price of the loan was LIBOR + 3.332% p. a.

(11). The AO / TPO / DRP erred in not following the order of the DRP for the Assessment Year 2011-2012 wherein this very loan given to Greatship Global Holdings Ltd. (GGHL) at interest rate of LIBOR + 2.9% was held to be at arm’s length.

(12). The AO / TPO / DRP erred in rejecting the benchmarking analysis conducted by the Appellant in respect of interest on loan given to AE, GGHL.

(13). Without prejudice to Ground Nos. 9 to 12, the AO / TPO / DRP erred in computing the arm’s length price of the loan given by the Appellant to its AE in an arbitrary manner.

NON-TRANSFER PRICING ISSUES

(14). The AO / DRP erred in invoking Rule 8D without recording an objective satisfaction that having regard to the accounts of the Appellant, the suo-moto disallowance of expenses of Rs.10,68,219/- by the Appellant under section 14A was incorrect.

(15). The AO / DRP erred in disallowing further expenses of Rs.14,60,718/- under Section 14A read
with Rule 8D(2)(iii).

The Appellant craves leave to add to, amend, alter, modify or withdraw any or all the Ground of Appeal before or at the time of hearing of the appeal, as they may be advised from time to time.”

31. Briefly stated, the assessee company had filed its return of income for A.Y. 2014-15 on 29.11.2014, declaring a total income of Rs.151,46,77,700/-. The return of income filed by the assessee was processed as such under Sec. 143(1) of the Act. Subsequently, the case of the assessee was selected for scrutiny assessment under Sec. 143(2) of the Act.

32. Observing that the assessee during the year in question had carried out international transactions exceeding the prescribed limit of Rs.15 crore, the A.O made a reference to the TPO under Sec. 92CA(1) of the Act for determining the ALP of the said transactions. TPO vide his order passed under Sec. 92CA(3), dated 31.10.2017 made an upward adjustment of Rs.36,85,04,867/- which included adjustments on account of viz. (a) interest on loan to AE: Rs.32,85,759/-; and (b) guarantee commission: Rs.36,51 ,1 9,108/-.

33. The A.O after receiving the order passed by the TPO under Sec. 92CA(3), dated 31.10.2016 therein vide his draft assessment order passed under Sec. 143(3) r.w.s 1 44C(5), dated 23.11.2017 proposed to make a TP addition under Sec. 92CA(3) of Rs.36,85,04,867/-. Apart from that, it was observed by the A.O that the assessee company which during the year in question was in receipt of exempt dividend income of Rs.1,05,08,214/- had by applying a self-devised formula of its own i.e percentage of exempt income to total income from investments suo-motto worked out the disallowance under Sec.14A at Rs.10,68,219/-. Observing that the aforesaid disallowance was worked out by the assessee de hors the methodology contemplated in Rule 8D of the Income tax Rules, 1962, the A.O reworked out the disallowance under Sec. 14A r.w. Rule 8D at Rs. 25,28,937/-. Accordingly, the A.O considering the suo moto disallowance that was already offered by the assessee in its return of income therein made a further disallowance of Rs.14,60,718/- [Rs.25,28,937/- (-) Rs.10,68,219/-]. On the basis of his aforesaid observations the A.O vide his order passed under Sec.143(3) r.w. Rule 144C(5), dated 23.11.2017 proposed to assess the income of the assessee company at Rs.188,46,43,290/-.

34. Objecting to the additions/disallowances proposed by the A.O vide his draft assessment order passed under Sec. 143(3) r.w.s. 144C(5), dated 23.11.2017 the assessee carried the matter before the DRP. Observing that its predecessor panel while disposing off the objections of the assessee for the immediately preceding year i.e A.Y. 201 3-14 had modified the ALP of the guarantee fee from 2.07% as worked out by the TPO to 1.25% per annum, the DRP taking note of the fact that there was no shift in the facts or the financial conditions of the AEs during the year in question thus, directed the TPO/A.O to adopt the ALP at 1.25% for computing the guarantee fee that was liable to be charged by the assessee from its AE.

35. The A.O after receiving the order passed by the DRP under Sec.144C(5), dated 15.06.2018 therein vide his order passed under Sec.143(3) r.w.s 144C(13), dated 28.08.2018 assessed the income of the assessee company at Rs.1 69,20,41 ,700/-.

36. Aggrieved with the order passed by the A.O under Sec. 143(3) r.w.s. 144C(13), dated 28.08.2018 the assessee has carried the matter in appeal before us. We have heard the authorised representatives for both the parties, perused the orders of the lower authorities and the material available on record, as well as considered the judicial pronouncements pressed into service by them.

37. We shall first deal with the claim of the assessee that the A.O/DRP had erred in determining the ALP of the financial/corporate guarantee given by it to the banks on behalf of its AEs at 1.25% p.a. Briefly stated, the assessee company had given financial guarantees to DnB Nor Bank ASA, Singapore Branch; Axis Bank; DVB Bank; and Bank Of Nova Scotia Asia Ltd. for facilitating raising of loans by its AEs, viz. GGOS, Singapore and GGES, Singapore. It was submitted by the ld. A.R that though the assessee had not charged any guarantee fees as per its books of accounts, however, in Form 3CEB the assessee taking the ALP of guarantee fees at 0.49% of the loan amount had therein computed the ALP of the financial guarantee given to the banks on behalf of its AEs at Rs. 11,25,35,496/-. It was submitted by the ld. A.R that the assessee had benchmarked the guarantee fees on the basis of an Internal CUP i.e as per the average of the guarantee fees that was paid by the assessee to Yes Bank and Kotak Mahindra Bank for standing guarantee on its behalf in case of third parties. However, the Internal CUP applied by the assessee for benchmarking the transaction of providing guarantee fees was rejected by the TPO inter alia for the reason that the credit rating of the assessee was significantly different from its AEs. In turn, the TPO backed by his said conviction therein on the basis of the financial guarantee charged by various financial institutions determined the ALP of the financial guarantee given by the assessee to the banks to facilitate raising of loan by its AEs at 2.07% p.a. Accordingly, the TPO made an upward TP adjustment of Rs. 36,51,19,108/- as regards the financial guarantee given by the assessee to the banks on behalf of its AEs. Aggrieved, the assessee objected before the DRP to the determination of the ALP of financial guarantee that was provided by it on behalf of its AEs to the banks at 2.07% by the TPO. Observing that the predecessor panel while disposing off the objections of the assessee for the immediately preceding year i.e A.Y. 201 3-14 had modified the ALP of the guarantee fee from 2.07% as worked out by the TPO to 1.25% per annum, the DRP taking note of the fact that there was no shift in the facts or the financial conditions of the AEs during the year in question thus directed the TPO/AO to adopt the ALP at 1.25% for computing the guarantee fee that the assessee ought to have charged from its AE.

38. The assessee being aggrieved with the order of the A.O/DRP wherein they had determined the ALP of the corporate guarantee @ 1.25% p.a has carried the matter in appeal before us. As the facts and the issue involved as regards determination of the ALP of corporate guarantee provided to the banks by the assessee in order to facilitate raising of loans by its foreign AEs, viz. GGOS, Singapore and GGES, Singapore remains the same as were there before us in its case for A.Y 2012-13 in ITA No. 1287/Mum/2017, therefore, our order therein passed shall apply mutatis mutandis for disposal of the present issue. Accordingly, in terms of our observations and reasoning adopted while determining the ALP of the corporate/financial guarantee given by the assessee to the foreign banks in order to facilitate raising of loans by its foreign AEs by applying Internal CUP i.e the arithmetic mean of the guarantee commission paid by the assessee to various banks for standing guarantee on its behalf to various parties, we, thus, on the same terms direct the A.O/TPO to take the ALP of the corporate guarantee at 0.49% p.a i.e the arithmetic mean of the guarantee commission that was paid by the assessee to various banks for standing guarantee on its behalf to various parties during the year in question. The Grounds of appeal nos. 1 to 8 are allowed in terms of our aforesaid observations.

39. We shall now deal with the claim of the assessee that the A.O/TPO/DRP had erred in holding that the interest charged by the assessee at the rate of LIBOR + 2.9% per annum in respect of the loan of USD 71.5 million given to its AE, viz. Greatship Global Holdings Ltd., Mauritius, was not at arm‟s length. Briefly stated, the assessee had sanctioned a loan of USD 75 million to its AE, viz. Greatship Global Holdings Ltd., Mauritius in the immediately preceding financial year 2010-11 and partly in financial year 2011-12. The assessee had actually given a loan of USD 71.5 million (as against sanctioned amount of USD 75 million). The AE had repaid USD 58.5 million during the financial year 201 2-13 and therefore the outstanding loan as on 31 .03.2014 was USD 13 million. The assessee company had charged interest at the rate of LIBOR + 2.9% p.a. on the loan advanced to its foreign AE, viz. GGHL, Mauritius. The assessee had arrived at the ALP of the interest rate by taking the arithmetic mean of the interest rate paid by the assessee to various banks on its foreign currency loans, viz. LIBOR + 1.829% p.a. However, the Internal CUP adopted by the assessee for benchmarking the interest charged on the loans advanced to its AEs did not find favour with the TPO and was rejected by him. Thereafter, the TPO carried out search on www.bloomberg.com to find out the average rate of interest on foreign currency loans given by various companies to their AEs in Mauritius, and taking the ALP at LIBOR + 3.32% p.a made a TP adjustment of Rs. 33,85,759/-. Objection filed by the assessee as regards the TP adjustment w.r.t interest on loan advanced to its AE, viz. GGHL, Mauritius, did not find favour with the DRP, who therein principally upheld the view taken by the TPO. However, the DRP directed the TPO to examine as to whether or not the TP adjustment was within the range of 3% of the international transaction value (actual interest charged) mandated by the above provision.

40. Before us, the assessee has assailed the TP adjustment carried out by the A.O/TPO as regards the interest that was charged by it on the loan advanced to its AE, viz. GGHL, Mauritius. As the facts and the issue involved as regards the determination of ALP of interest charged by the assessee on the loans given to its AE, viz. GGHL remains the same as were there before us in its case for A.Y 201 2-1 3, therefore, our order therein passed shall apply mutatis mutandis for the purpose of disposal of the present issue. Accordingly, in terms of our observations and reasoning adopted while disposing off the present issue in the case of the assessee for A.Y 2012-13 in ITA No. 1287/Mum/2017, we herein uphold the Internal CUP applied by the assessee for benchmarking the interest charged on the loans advanced to its AE, viz. GGHL and hold the interest charged by it on the loan advanced to its AE, viz. GGHL at LIBOR + 2.9% as being at arm‟s length. The Grounds of appeal nos. 9 to 13 are allowed in terms of our aforesaid observations.

41. The assessee has further assailed the disallowance worked out by the A.O under Sec. 1 4A r.w Rule 8D, on the ground that there was no recording of an objective satisfaction by the A.O that the suo-motto disallowance offered by the assessee under Sec. 14A was not correct. Succinctly stated, the assessee company which during the year in question was in receipt of exempt dividend income of Rs. 1,05,08,214/- had on a pro-rata basis i.e percentage of exempt income to total income from investments suo-motto worked out the disallowance under Sec.14A at Rs.10,68,219/-. Observing that the aforesaid disallowance was worked out by the assessee de hors the methodology contemplated in Rule 8D of the Income tax Rules, 1962, the A.O reworked out the disallowance under Sec. 1 4A r.w. Rule 8D at Rs. 25,28,937/-. Accordingly, the A.O considering the suo moto disallowance that was already offered by the assessee in its return of income, therein made a further disallowance of Rs.14,60,718/- [Rs.25,28,937/- (-) Rs.10,68,219/-]. We have given a thoughtful consideration to the aforesaid issue pertaining to sustainability of the disallowance worked out by the A.O under Sec. 14A r.w Rule 8D at Rs. 25,28,937/-, which as observed by us hereinabove had been assailed by the assessee on the ground that the A.O while dislodging the suo-motto disallowance that was offered by the assessee under Sec. 1 4A in its return of income for the year in question had principally erred in not recording an objective satisfaction that the disallowance offered by the assessee was not correct. As a similar claim had been raised by the assessee in its appeal for the immediately preceding year i.e A.Y 2012-13 before us thus, in terms of our reasoning and observations therein recorded, we on the same terms restore the issue to the file of the A.O for fresh adjudication. The Grounds of appeal Nos. 14 & 15 are allowed for statistical purposes.

42. The appeal of the assessee is allowed in terms of our aforesaid observations.

43. Resultantly, the appeals of the assessee for A.Y 2012-13, ITA No. 1 287/Mum/201 7 and for A.Y 2014-15, ITA 6083/Mum/201 8 are both allowed in terms of our aforesaid observations.

Order pronounced in the open court on 05.04.2021