CASE LAWS

2017-TII-31-ITAT-MUM-INTL

DCIT Vs RELIANCE UTILITIES PVT LTD: MUMBAI ITAT (Date: February 03, 2017)

Income Tax - Sections 68, 131, 143(3), 147 - Protocol of India-Singapore DTAA - Article 1 & 3

Keywords: unexplained credit - investment made - cash credit - Compulsorily Convertible Preference Shares - tax residency certificate & exchange of information

The assessee company had filed its return for AY 2008-09 declaring a total income of Rs. 1,69,52,919. Assessee during the relevant year, had credited a transaction in its books for the receipt of Rs. 700 crores from Biometrix Marketing Private Limited, Singapore towards subscription of Compulsorily Convertible Preference Shares against which assessee had allotted seven crores CCPS of Rs. 10 each at a premium of Rs. 90 per share to Biometrix. This transaction was investigated by the Investigation Wing upon receipt of commercial intelligence report from High Commission of India, Singapore. AO had summarized the observations in the said report that the source of funds of Biometrix, which invested Rs 700 crores in the CCPS issued by assessee and also in other group companies (in all aggregating to USD 1627.24 millions), needs further investigation considering that the said company incorporated under the laws of Singapore had a paid-up capital of Singapore Dollars 1,10,000 only and its shares were held by two corporate entities, of which one entity in Singapore held 91% of the shares. The ultimate owner of the two companies in Singapore i.e. Biometrix and its shareholder entity was an individual based in Mumbai holding 100% of the capital. The quantum of investment made by Biometrix which was the largest FDI from Singapore to India, given its small capital base and other facts such as a single room office in Singapore remaining closed most of the time which reinforced that Biometrix was a small company, made it highly probable that Biometrix may have raised loans from Singapore or from other countries mostly tax havens and hence the report stated that the ultimate source needs to be ascertained.

The Investigation Wing in Mumbai vide a letter requested that assessment be kept in abeyance till further communication was issued to AO. The Investigation Wing forwarded another report to AO, which apart from the findings in its first report, carried the details of subsequent transactions of purchase of CCPS from Biometrix by the group companies of assessee and that the purchasers of CCPS had explained that the consideration was paid out of the proceeds from sale of units of mutual funds. The report stated that Biometrix had entered into separate Investment Agreement with the assessee and other group companies. It also stated that a Put & Call Option Agreement was entered into by Biometrix with a group company of assessee, which gave Biometrix the right to sell the CCPS and that the loan from ICICI Bank was secured by assigning the rights in the Investment Agreement, the Put and Call Option Agreement and the charge was filed with the authority in Singapore. Assessee filed a reply explaining that assessee issued 7 crores CCPS of Rs. 10/- each at a premium of Rs. 90/- each to Biometrix. An Investment Agreement between the assessee, Biometrix and persons named as promoters was furnished. Copies of the share certificates issued to Biometrix for the CCPS allotted were also furnished. It was stated that investment made by Biometrix fell under the automatic route of FDI under FEMA and it was not necessary to obtain the approval of FIPB. Assessee also submitted the form filed with RBI on the issue of CCPS along with the acknowledgment for filing the same. The terms of issue of CCPS were explained and the valuation report was furnished. Assessee explained its understanding that Biometrix had obtained a loan from ICICI Bank, Singapore for making the investment in the CCPS and stated that it was not in possession of any correspondence in this regard. The bank statements of the assessee were furnished and credit entries for the receipt of Rs. 700 crores from Biometrix were identified in the bank statements. AO also made reference through FT & TR Division of CBDT to Inland Revenue Authority in Singapore ("IRAS"). The reference was made as per requirement for exchange of information in relation to investments made by Biometrix in four reliance group companies including assessee. IRAS provided information pertaining to Biometrix. On finding that complete information as sought was not provided by IRAS including the bank statement of Biometrix tracing the receipt of loan amounts and the repayment of interest & principal.

While the directors and shareholders of Biometrix omitted to attend and ICICI Bank Limited expressed inability to divulge information on account of restrictions imposed by Banking Secrecy Act of Singapore in respect of bank account statements and KYC documents of Biometrix. AO also found that the receipt of share application money by assessee for the issue of CCPS was an international transaction between two AE which the assessee failed to report in the prescribed form and with the prior approval of CIT, AO referred the transaction to TPO for determination of ALP. TPO issued an Order u/s 92CA confirming that the transaction had been done at ALP. TPO also suggested that the source of the loan had to be examined by AO. AO analysed the material gathered from ICICI Bank, the other group companies of assessee and information received from IRAS through FT & TR division confirmed that loan amounts were remitted by ICICI Bank, Singapore Branch on various dates between 18.09.2007 to 12.12.2007 to the bank account of Biometrix with OCBC. The audited financial statements of Biometrix as at 30th September 2008 showed entries for Secured Term Loan obtained for financing its long term investments. From the Facility Agreement entered into between Biometrix and ICICI Bank, AO inferred that the loan had been advanced to Biometrix by ICICI Bank Limited through its overseas branches and ICICI Bank, Singapore Branch had also acted as an agent for facilitating the loan. In other words, ICICI Bank, Singapore Branch handled the disbursements, collection of interest and principal repayments. AO found that ICICI Bank, Singapore Branch had not monitored the loan it granted to Biometrix strictly as per the terms of the contract. Hence, AO added the amount of Rs. 700 crores received by assessee and invested by Biometrix in the CCPS issued by the assessee as income of the assessee as unexplained cash credit u/s. 68. On appeal, CIT(A) had decided in favour of assessee.

Having heard the matter, the Tribunal held that,

Whether addition u/s 68 on account of unexplained credit can be made, when SWIFT messages and audited financial statements of foreign investor company prove investment in assessee company in CCPS with borrowings made from a foreign bank - NO: ITAT

+ the Revenue's ground is that Biometrix is a shell/conduit company. The DR argued before us that Biometrix was incorporated just few months before this investment transaction and was liquidated in 2011 and therefore Biometrix is a shell entity. The Counsel for the assessee argued that Biometrix was a tax resident of Singapore and to ascertain whether an entity is a shell/ conduit company in Singapore, the various tests laid down in India Singapore DTAA is the only relevant factor and that all the positive and negative tests laid down therein is fulfilled by Biometrix during every year of its existence. The Revenue has not contested this position. The CIT (A) has upheld that Biometrix is not a shell/ conduit company. We concur with the finding of the CIT(A) though we are of the considered view, that that this issue is not at all relevant for the purpose of section 68 in the facts and circumstances of the case, since it is abundantly clear from the materials on record that Biometrix was to be an SPV. Next, we will deal with the fifth and sixth ground of appeal by the Revenue. It concerns as to how Biometrix sold the CCPS at lower than the market value disclosed by them to ICICI Bank. The CIT(A) has dealt with these and observed that the debt-cover ratio at all times was more than that prescribed in the Facility Agreement based on the higher of two different valuation reports furnished using different methods of valuation and that the loan has been repaid by Biometrix to ICICI Bank and hence these issues are not relevant for the purpose of section 68. We are unable to fathom as to how these events that relate to periods post the investment are relevant for ascertaining the source nature and genuineness of the investment transaction u/s 68 and hence concur with the finding of the CIT(A);

Whether addition on account of unexplained credit can be made, when it is apparent that the requirements of section 68 regarding nature, source and genuineness of the transaction including the identity and the creditworthiness of the investor are fulfilled - NO: ITAT

+ the third ground of appeal which was vehemently argued by the DR is non-availability of bank statement of Biometrix from ICICI Bank was actually invested in the CCPS issued by the assessee. Counsel for the assessee on the other hand furnished a chart showing the flow of funds from ICICI Bank, Singapore to Biometrix and from Biometrix to the assessee based on evidence in the form of utilization requests, disbursal certificate, swift messages and foreign inward remittance certificate. It was also brought to our notice the AO in the assessment order has recorded reasons for the non-availability of bank statements of Biometrix viz., ICICI Bank has not furnished the statements due to banking secrecy laws under the Banking Act of Singapore and Inland Revenue Authority of Singapore has not furnished the bank statements since the exchange of information protocol was effective only for periods staring 01-01-2008 and not for earlier periods. CIT(A) has also linked the flow of funds from ICICI Bank, Singapore to the bankers of Biometrix viz., OCBC Bank, Singapore and from OCBC Bank, Singapore to the bankers of the assessee viz., HDFC Bank, India based on the swift messages and held that what can be ascertained by bank statements can as well be satisfactorily ascertained from the swift messages. It was also argued by Revenue that due to non-availability of bank statement there is a possibility that monies other than the monies borrowed by Biometrix from ICICI Bank having been invested in CCPS issued by assessee. Counsel for assessee brought to our notice the audited financial statements of Biometrix which is on record to prove that only one credit entry is found in the books of Biometrix proving the fact only once money entered Biometrix in the form of loan from ICICI Bank and the same borrowed money stands invested in the CCPS issued by assessee. In our considered view, the bank statement of assessee and the foreign inward remittance certificate issued by HDFC Bank, Mumbai showing the receipt of money from Biometrix is on record. What is not on record is the bank statement of Biometrix. However, the other materials on record viz., the swift messages and audited financial statements of Biometrix clearly prove that Biometrix borrowed from ICICI Bank and invested the same money in the CCPS issued by the assessee. We are convinced from the materials available on record that Biometrix borrowed from ICICI Bank and invested the same in the CCPS invested by the assessee. Regarding the first ground of appeal questioning the deletion of addition made u/s 68, we hold that on review of the materials available on record, we are satisfied that the requirements of section 68 of the Act viz., nature, source and genuineness of the transaction including the identity and the creditworthiness of the investor, are fulfilled;

Whether the burden of proof shifts to the AO under section 68, once an assessee has discharges its primary responsibility to prove the credibility of investor - YES: ITAT

+ we find that the burden of proving the source of cash credit is on the assessee. When a cash credit entry appears in the assessee's books of accounts, it is assessee's legal obligation to explain the source of such credit entry. This has been clearly held by SC in the case Sreelekha Banerjee vs. CIT (1963) 49 ITR 112 (SC). But, if the assessee offers an explanation about the cash credit, the department can put the assessee to proof of his explanation and if assessee fails to tender evidence or brukes an enquiry, then the AO is justified in the rejecting the explanation and holding the income from undisclosed sources or unexplained cash credit. But, SC in the case Parimisetti Seetharamanna vs. CIT 2003-TII-01-SC-LB-INTL has held that the burden of proof casted upon the assessee to prove the source, the nature and the character and the credit would apply to a case where the source of receipt is disclosed by assessee and there is no dispute about the truth of that disclosure and, in such event, the revenue would not be entitled to raise any inference that the receipt is assessable to tax as undisclosed income or unexplained cash credit on the ground that the assessee failed to lead all the evidences in support of his contention that it is not within the taxing provision. Similarly, Guwahati HC in the case Nemi Chand Kothari vs. CIT (2003) 264 ITR 254 (GAUH) held that the assessee where established the identity of the creditor and also shown, in accordance with the burden, which rested on him u/s 106 of the Evidence Act, 1872 that the amounts had been received by him by way cheques from the creditors which was not in dispute. Once the assessee had established these facts, the assessee must have taken to have proved that the creditor had the credibility to advance the loan. Thereafter the burden shifted to AO to the contrary. The failure on the part of the creditor to show that their sub-creditor had credit worthiness to advance the said loan amount to the assessee, could not, under the law be treated as income from undisclosed sources particularly, when there was neither direct or circumstantial evidence on record that the said loan amount actually belong to, or were owned by, the assessee.

Whether a company can be asked to explain the source of investment, when assssee has directly established nexus of loan taken by its investor to invest in assessee in the form of CCPS - NO: ITAT

+ Supreme Court in the case Sreelekha Banerjee has also held that if the explanation given by the assessee shows that the receipt was not of an income nature, the department cannot act unreasonably and reject the explanation to hold that it was income. If, however, the explanation is unconvincing one which deserved to be rejected, the revenue can reject it and draw inference that the amount represents income either from sources already disclosed by assessee or from some undisclosed sources. But in the present case before us the assessee has directly established the nexus of loan taken by Biometrix from ICICI Bank, Singapore and this was invested in the CCPS issued by assessee and this is proved by the swift messages (above reproduced) that the money has actually travelled to assessee. Here the assessee is able to prove the source of the source despite the fact the assessee cannot be presumed to have special knowledge about the source of source or the origin of origin. It is to be mentioned that the case is discussed in the above were almost all decided under the provisions of 1922 Act. But, we find that it was held in every case, where a person is sought to be taxed for something which, he claims, does not belong to him, the findings of fact and the material on record must support the claim of the revenue. Moreover there should be some direct nexus between the confusion of fact arrived at by the revenue and the primary facts upon which that conclusion is based. This view is taken by SC in the case CIT vs. Daulat Ram Rawatmull 2002-TIOL-1540-SC-IT. But in the present case this is not the case of revenue rather the assessee able to prove conclusively that the CCPS issued by it to Biometrix is directly financed by ICICI Bank, Singapore. In view of these facts and circumstance and precedents cited above, we are of the considered view that AO has made this addition of unexplained cash credit without any basis and CIT (A) has rightly deleted the same on the basis of evidences and facts. We confirm the order of CIT(A) and the appeal of Revenue is dismissed. As conceded by both the sides, the facts are exactly identical in the appeal of Reliance Ports & Terminals Ltd in ITA No.223/M/2016 for the AY 2008-09 and hence taking a consistent view, we confirm the order CIT(A) in this appeal also and the appeal of Revenue is also dismissed.

Revenue's appeal dismissed

 

2017-TII-30-ITAT-MUM-INTL

APL COMPANY PTE LTD Vs ADDL DIT: MUMBAI ITAT (Dated: February 16, 2017)

Income Tax - Sections 44BB, 143(3), 144C, 209(1)(d), 234B, 234D - India-Singapore DTAA - Article 4(1), 5(8), 8 & 24

Keywords: freight collection - feeder vessel - operation of ships - mother vessel - charter party agreement - limitation clause & charter arrangements

The assessee is a non-resident company incorporated under the laws of Singapore and is also a tax-resident of Singapore. It was engaged in business of operation of ships in international waters, mainly transportation of cargo and container ships all across the globe. The business operations as well as the management team were based in Singapore. Assessee also accepts cargo for carriage internationally to and fro from India. Assessee had a shipping agent in the form of a wholly owned subsidiary, 'APL India Pvt. Ltd". Being a tax-resident of Singapore in terms of Article 4(1), it sought the benefit of Article 8 for its gross freight earnings collected from India. Accordingly, the return of income was filed at NIL income on the ground that the gross earnings of Rs.1106,88,52,343/- was not taxable in India in view of Article 8(1) of DTAA. AO noted that assessee had shown income from shipping in respect of 136 ships and claimed the entire freight income as exempt. AO noted that assessee could produce ship Registration Certificates and copies of Charter Party agreements and other evidences in respect of 128 ships and for the balance 8 ships assessee could not produce any evidences. Accordingly, AO held that freight proceeds from following ships will not be entitled for benefit under Article 8. AO further held that assessee could not establish that it was operating these 8 ships on its own and it was quite possible that these ships might be operated by third parties. Accordingly, AO applied the provisions of Sec. 44B and taxed the said receipt @ 7.5%. AO further observed that assessee had an exclusive agent in the form of "APL India Pvt. Ltd.", who performed all the work relating to assessee in all the Indian ports where assessee"s ships arrived. AO held that 'APL India Pvt. Ltd." was dependent agent PE in terms of Article 5 of India-Singapore DTAA. On appeal, CIT(A) enhanced the income, firstly, by holding that benefit of Article 8 cannot be given in respect of total freight of Rs.98.67 crores on the ground that there was no linkage between the feeder vessel and mother vessel for transportation of cargo as they have been transported through third party under Charter Party agreement and; secondly, it proceeded to deny the entire exemption/benefit of Article 8 by holding that the entire freight of Rs.1106.89 crores was to be assessed in India by invoking the limitation clause of Article 24 of India-Singapore DTAA.

Having heard the matter, the Tribunal held that,

Whether para 1 of Article 24 of DTAA regarding limitation of relief would be applicable if income of a singapore based shipping company is held taxable on accrual basis - NO: ITAT

+ from the aforesaid Certificate/Confirmation given by IRAS, it is ostensibly clear that the freight income derived by the assessee-company from the Indian operations was accrued in or derived from business carried on in Singapore. As such, it is regarded as Singapore sourced income and assessed to tax in Singapore on accrual basis and not on remittance basis. In light of this Certificate, there cannot remain any iota of doubt that the freight income derived by assessee-company from Indian operations in terms of Singapore Income Tax Act is to be reckoned as accrued in or derived from business carried in Singapore and not some kind of foreign income which is to be taxed on remittance basis. The authenticity of the aforesaid Certificate had come up for consideration before Gujarat HC in the case of India-Singapore DTAA and that too, in the case of a shipping company, M.T. Maersk Mikage vs. DIT (IT) 2016-TII-43-HC-AHM-INTL. The aforesaid judgment of Gujarat High Court clearly clinches the issue in favour of the assessee, wherein HC has categorically held that the shipping income is not taxable in Singapore on the basis of remittance, but on accrual basis and, therefore, para 1 of Article 24 would not be applicable. Here, in this case also, the Court has heavily relied upon the confirmation letter/Certificate issued by IRAS which confirmed the taxability of global shipping income in Singapore on accrual basis. Their Lordships have also referred to the Rajkot Bench of the Tribunal in the case of Alabra Shipping Pte Ltd., , which also lays down the same proposition. Thus, the conclusion and finding of CIT(A) stands negated by these decisions and same is rejected;

Whether there can be any question of grant of exemption or reduced rate of taxation in the source state, if India does not have any taxation right on a shipping income of non- resident entity - NO: ITAT

+ shipping income is dealt with under Article 8, which states that "profits derived by an enterprise of a contracting state from the operation of ships ... in international traffic shall be taxable only in that state, i.e., resident state." The word "only" debars the other contracting state to tax the shipping income, that is, India is precluded from taxing the shipping income even if it is sourced from India. An enterprise which is tax-resident of Singapore is liable for taxation on its shipping income only in Singapore and not in India. Whence India does not have any taxation right on a shipping income of non- resident entity, which is exclusive domain of the resident state, there is no question of any kind of exemption or reduced rate of taxation in the source state. It only envisages territorial and jurisdictional rights for taxing the income and India has no jurisdiction for any taxing right which are governed by Article 8. There is no stipulation about exemption under Article 8 of the shipping income which as pointed out by Senior Counsel has been specifically provided in some of the Articles like Article 20, 21 & 22. Hence, it cannot be reckoned that shipping income earned from India is to be treated as exempt from tax or taxed at reduced rate, which is a condition precedent for applicability of Article 24, albeit India at the threshold does not have the jurisdiction to tax the shipping income of the non-resident entity. Thus, the condition of Article 24 is not satisfied in the present case from this angle also. In conclusion, we hold that CIT (A) was not justified in denying the benefit of Article 8 by invoking the limitation clause of Article 24 of India-Singapore DTAA as per our discussion above and most important, now this issue stands squarely covered by the decision of Gujarat HC as referred above. In the light of our aforesaid finding, we do not deem fit to enter into the semantics of other findings of CIT (A) like nexus between remittance of freight collected in India and finally to Singapore various and other aspects raised by her and also the various arguments as raised by Sr. Counsel and CIT-DR qua the issue of Article 24;

Whether benefit of Article 8 can be denied merely on the ground that transportation has been done either partly or fully through slot charter or joint charter arrangement, when such chartering falls within the ambit of 'operation of ships"- NO: ITAT

+ the definition of "operation of ships" also alludes to the concept of charterer of ships, which even includes part of ship in an arrangement such as slot charter, space charter or joint charter. The slot charter and space charter of a ship cannot be segregated or read in isolation from the meaning of 'charterer' as appearing in para 4 of Article 8. The Jurisdictional HC in the case of Balaji Shipping U.K Ltd. has clearly explained the concept of slot charter. Even though the judgment has been rendered in the context of Article 9 of India-U.K DTAA, wherein there is no specific definition of 'operation of ships", i.e., it is not qualified by the words, 'owner, lessee or charterer", however, the interpretation of the word 'slot charter" within the ambit of definition of 'operation of ships" clearly indicates that even if the journey has been undertaken either partly by feeder vessel under a charter/slot charter arrangement and partly by mother vessel or through and through a charter/ slot charter arrangement, it would still fall within the ambit of 'operation of ships" in terms of Article 8. The observations of HC may be general but is universally applicable wherever interpretation of 'operation of ships" is required, because their Lordships have explained the concept of 'operation of ships" qua slot/space charter arrangements with third party, especially as explained in para 26 & 27 of the judgment. Once the word 'Charter of a ship" is reckoned or understood as slot/space charter arrangement or joint service arrangement with third party, then it would be too myopic to restrict the meaning of 'operation of ships" only to the journey undertaken as owner or lessee or charterer of a ship either for whole leg of journey or part of journey. There is no stipulation under Article 8 that wherever passengers or cargos etc. are transported under charter arrangement with third party which includes slot or space charter, then, one leg of journey should be on vessel owned or leased by the shipping or Aircraft Company. As mentioned above, the word "Charterer" will include third party/joint service arrangement of slot or space in a ship and hence the transportation under such arrangement will be reckoned as profit from operation of ships. Thus, we agree with the contentions of the Senior Counsel that even if the entire leg of journey is undertaken by a shipping company through and through charter arrangement or joint service arrangement, the benefit of Article 8 cannot be denied, because it will still fall within the ambit and scope of 'operation of ships" under Article 8. Once it is held that chartering includes slot charter, space charter and it falls within the ambit of 'operation of ships", then the benefit of Article 8 cannot be denied simple on the ground that the transportation has been done either partly or fully through slot charter arrangement or joint charter arrangement, etc. Thus, in view of our discussion above, we hold that so far as denial of benefit of Article 8 in respect of 97 ships for sums aggregating to Rs.97,29,89,746/- is not justified and we direct AO to give the benefit of Article 8 in respect of 97 ships, which has been denied by the CIT(A). So far as the freight receipt of Rs.1,36,89,191/- in respect of 4 ships is concerned, it is an admitted fact that no evidence whatsoever or documents could be furnished by the assessee either before AO or CIT(A) or even before us and, therefore, we hold that to the extent of freight receipt of Rs.1,36,89,191/-, the benefit of Article 8 will not be available to the assessee and same is directed to be taxed in India under the relevant statutory provisions. Thus, the issue relating to benefit of Article 8 is decided partly in favour of the assessee. In the result, appeal of assessee is partly allowed.

Assessee's appeal partly allowed