Income Tax Appellate Tribunal - Chennai
Sical Logistics Ltd., Chennai vs Department Of Income Tax on 15 September, 2011
IN THE INCOME-TAX APPELLATE TRIBUNAL
CHENNAI 'D' BENCH, CHENNAI.
Before Dr. O.K. Narayanan, Vice President and
Shri Hari Om Maratha, Judicial Member
I.T.A. No. 1206/Mds/2011
Assessment Year: 2007-08
The Assistant Commissioner of M/s. Sical Logistics Ltd.,
Income Tax Vs. 73, Armenian Street,
Company Circle - V(1)I Chennai - 1.
Chennai. [PAN:AAACS3789B]
(Appellant) (Respondent)
I.T.A. No. 779/Mds/2011
Assessment Year: 2007-08
M/s. Sical Logistics Ltd., The Deputy Commissioner of
73, Armenian Street, Income Tax
Vs.
Chennai - 1. Company Circle - V(1) Chennai.
Revenue by Shri K.E.B. Rengarajan,
:
Jr. Standing Counsel
Assessee by : Shri S. Sathiyanarayanan, Advocate
Date of Hearing : 15.09.2011
Date of pronouncement 04.10.2011
ORDER
PER Hari Om Maratha, J.M.
The above captioned cross appeals, pertaining to the assessment year 2007-08 are directed against the order of the ld. CIT(A) VI, Chennai dated 29.03.2011.
2. The relevant facts leading to these appeals, in brief, are that the assessee company filed its return of income (ROI) on 27.10.2007, declaring total income of `.49,22,10,652/-. Subsequently, the company filed revised return on 31.03.2009 returning total income of `.52,10,17,000/-. The demerger took place on 2 I.T.A. Nos Nos. 1206 & 779/Mds/ 779/Mds/11 /Mds/11 30.05.2008. The assessee company comprises of several divisions and its main business is as under:
a. Shipping, clearing and forwarding, stevedoring, trucking, warehousing, travel agency, offshore vessel management, ship owning, coal handing, windmill.
b. Marketing of building materials and vehicle, coal and governors.
c. Uncured coffee and minor produce, palm oil, specially chemicals.
d. Manufacturing of auto components, comprising construction of property and development, boat building, refractoring bricks, drums and flexible shaft, etc. 2.1 The assessment was completed vide order dated 24.12.2009 in which various additions were made, which are reproduced below, for ready reference, from the computation part of the assessment order, as under:
I. Income from business or profession : `. (42,07,34,059) Add:
1. Excess Depreciation as per IT Act : 9,335 Disallowed on foreign cars
2. Provision for warranty disallowed : 5,83,000
3. Club payments : 3,13,560
4. Pooja expenses : 3,68,023
5. Expenses on dividend income : 4,19,38,000
6. New product development cost disallowed : 7,21,072
7. Bad debts disallowed : 52,74,395
8. Addition under agricultural produce:
Sale of timber : 11,48,573 9. Disallowance u/s 40(a)(i) : 5,94,98,541 10. Income of wholly owned subsidiary : 5,91,34,782 Brought forward : (25,17,44,778) Less I. Depreciation allowable under IT Act on new product development cost of AY 2006-07 & 2007- 08 : 1,61,073 Income from business : (25,19,05,851) II. Income from house property (as reworked above) : `. 14,11,781 III. L.Term Capital Gains (as per Ann. - I) : `. 98,68,58,049 Short Term Capital Gains : `. 4,58,65,932 Income from Capital Gain : `. 1,03,27,23,981 IV. Income from Other Sources 3 I.T.A. Nos Nos. 1206 & 779/Mds/ 779/Mds/11 /Mds/11 Interest Income : `. 10,64,09,496 Total income assessed : `. 88,88,00,480 Tax on LTCG @ 20% (as the total income assessed represents LTCG as per Section 112) : `. 17,77,60,096 Add: Surcharge @ 10% : `. 1,77,76,009 : `. 19,55,36,105 Add: Education Cess @ 2% : `. 39,10,722 Total tax payable : `. 19,94,46,827 Less: Tax deducted at source : `. 12,68,87,617 Advance tax paid : `. 2,75,59,377 Balance tax payable : `. 4,49,99,833 Add: Interest under section 234B : `. 1,48,49,944 Balance payable : `. 5,98,49,777
3. Against the additions made by the Assessing officer, the assessee preferred appeal before the ld. CIT(A), who, has partly allowed the claim made by the assessee company. Consequently, both the parties are aggrieved - the assessee is aggrieved against sustained additions and the Revenue is aggrieved against relief granted to the assessee. Both the parties have raised their respective grounds of appeals.
4. The first issue raised vide ground No.2 by the assessee and the connected issue raised vide ground No. 2 by the Revenue, relates to the common item of income. Therefore, we are deciding them simultaneously.
5. The facts apropos of this issue are that the assessee company has claimed Long Term Capital Gains (LTCG) from the sale of Vanagaram land at `.22,10,23,750/-. The Assessing Officer did not agree with the computation of capital gains arrived at the above figure by the assessee. The main dispute between the parties is regarding ascertaining the fair market value (FMV) as on 01.04.1981, which according to the assessee is based on a report obtained by the 4 I.T.A. Nos Nos. 1206 & 779/Mds/ 779/Mds/11 /Mds/11 assessee from the Registered Valuer, who has adopted the rate as on 01.04.1981 at `665.80 per sq.mt. The Assessing Officer found this report to be not supported by any proof to arrive at conclusion. Therefore, the Assessing Officer has rejected the same. In a bid to arrive at the fair market value as on 01.04.1981, the Assessing Officer obtained guideline value from the Sub-Registrar's office, vide letter dated 03.08.2009. According to this letter, fair market value of this property as on 01.04.1981, could be between `.15,000/- to `.50,000/-, per acre. The assessee objected to adoption of such vague report and with the contention that the guideline value is stamp-duty specific and invariably the fair market value cannot be derived from the guideline value of the Sub-Registrar office. But the Assessing Officer has proceeded to rework the fair market value of this land as on 01.04.1981 at `.3,25,861/- and has worked out the long term capital gains at `.98,68,58,048/- resulting in an addition of `.18,41,57,238/-.
6. On the contrary, the ld. CIT(A) has adopted average rate of guideline value and value estimated by the registered valuer and has directed the Assessing Officer to recompute the cost of acquisition taking the average rate of `.20,04,172/-
(36,65,143 + 43,200 = 40,08,343/2 = 20,04,172/-) per acre as fair market value as on 01.04.1981. Now both the parties are aggrieved.
7. We have heard rival submissions and have perused the entire record available before us. The assessee company sold 9.03 acres of land during the previous year, which was acquired during 1971 and 1974. The assessee company has relied on the valuation of registered valuer, M/s. Anbu Sivam Valuers determining the cost of acquisition on the basis of fair market value as on 5 I.T.A. Nos Nos. 1206 & 779/Mds/ 779/Mds/11 /Mds/11 01.04.1981. The basis of arriving at the fair market value as on 01.04.1981 at `.39,65,143/- per acre has been stated to be based on enquiries made in the surroundings during the year 1981-82 and more particularly the planned development by various business entities commenced in the surrounding area during that period. On the contrary, the Assessing Officer has relied on the guideline value obtained from the Sub-Registrar's Office, who has stated that the fair market value could be between `.15,000/- to `.50,000/- per acre as on 01.04.1981. But the Assessing Officer has worked out the average value at `43,200/- per acre. The case of the assessee is that the value adopted by the registered valuer is more reasonable, reliable and dependable because it is based on local survey made by the registered valuer. On the other hand, the case of the Revenue is that, at best, the average of entitled ranged of fair market value of the land in question, given by the Sub-Registrar's office with reference to guideline value obtained as on 01.04.1981. When we have examined the reasons given by both the parties to arrive at the fair market value as on 01.04.1981, we have found that the Assessing Officer is not correct in adopting `.43,200/- per acre because the Sub-Registrar's office has given tentative value per acre having a wide range running between `.15,000/- to `.50,000/- per acre. This cannot be a correct approach of any Government office. The guideline value, in our opinion as has been repeatedly held by various Courts cannot represent fair market value of a particular piece of land situated in anywhere in India because, the parameters, where adopting guideline value of a particular land are entirely different and they do not represent the fair market value of a property as on a given date. The report 6 I.T.A. Nos Nos. 1206 & 779/Mds/ 779/Mds/11 /Mds/11 of the Sub-Registrar itself is self-explanatory in this regard because he has given the rate, which is extreme on one side and extreme on other side and that too without any basis. Had there been a guideline value specific to a given land, the Sub-Registrar would have quoted a fixed amount only. The guideline value for the purpose of stamp duty is always a fixed amount and not in variables. The Sub- Registrar has no option but to adopt stamp duty valuation as per his discretion, but has to go by a specific and definite guideline value fixed in this regard. Moreover, the fair market value depends on various factors like, the situation of the land, proximity to road, distance from city, nearness with either residential colony or industrial estate et al. It seems that there were no comparable instances of sales during that particular period, otherwise, the Sub-Registrar's office would have given the same and the Assessing Officer would have ascertained from him. Even in case of comparable case to ascertain the fair market value as on 01.04.1981, each and every transaction is to be critically examined and analyzed before accepting the same as a base evidence regarding market value of the land in question. In this case, it is an undisputed fact that the land is situated on the national highway and falls in the industrial estate/area as against which, the registered value has given detailed reasons for arriving at his conclusion. We have gone through the valuer's report and have found that the parameters like proximity to road with the city, its location and adequate water facility, have been considered and the report has given by a Chartered Engineer. The Hon'ble Madras High Court, while deciding the case of Thulasimani Ammal vs. CIT & Anr. Reported in 158 CTR 5 has held as under:
7 I.T.A. Nos Nos. 1206 & 779/Mds/ 779/Mds/11 /Mds/11 "It is well settled that guideline value of the registration department regarding valuation of the property has evidentiary value and they are only intended to give information or instruction to the registering authorities but the guidelines, as such, would not establish the market value of the land."
The land in question is undenially a prime commercial land with locational advantages in terms of frontage on main road, infrastructure and surrounding commercial centers.
8. The assessee has correctly disputed the adoption of average rate as this cannot be a correct method when the evidence contained in the registered valuer's report, who is a Chartered Engineer is pitted against the guideline value, the former has to prevail, which is more scientific in nature. The decision of the Hon'ble Madras High Court in the case of CIT v. J V K Rao reported in (2002) 258 ITR 90 in which reliance has been placed by the Revenue was rendered entirely on a different set of facts. In that case, the house property had been sold and there were no comparable sale instance. No certificate of the chartered engineer i.e. Registered Valuer had been filed and the question of determination of fair market value of the house as on 01.01.1964. The assessee had relied on a certificate obtained from the Office of the Sub-Registrar, when the Sub-Registrar had given a fixed value on that date, which was made a basis by the assessee to ascertain fair market value. The Revenue wanted to dispute that method and in that context, the Hon'ble Madras High Court has held that while determining the fair market value of the property, certificate from the Sub-Registrar and Municipal tax can be taken into account. The Hon'ble Court has not directed in that case that the guideline value to be adopted in that given case, a certificate from Municipal tax was also evidence 8 I.T.A. Nos Nos. 1206 & 779/Mds/ 779/Mds/11 /Mds/11 produced before the Hon'ble High Court. Thus, the facts of the case are entirely distinguishable, whereas the later case, which, we have referred, is directly relevant in this case.
9. When we have accepted the report of the chartered engineer as correct and rejected the vague report of the Sub-Registrar, who has made an estimate regarding the fair market value as on 01.04.1981. The Sub-Registrar cannot do that. He can only tell about a guideline value on a given date. But, astonishingly, he has given two distantly divergent values and arrived at an Arithmetic Mean, which is not in his domain. Moreover, it is a common factor that the guideline values were not updated in earlier period. The valuer's report has taken into account all the relevant factors. Therefore, we left with no option but to accept the valuer's report. The Assessing Officer could confront the chartered valuer, if he was not satisfied with the valuer's report. The Assessing Officer has not done anything in this direction and has simply rejected the report without any reasons and rhymes. To our great chagrin, when the fair market value has to be ascertained on the date of sale, the Department itself refused to rely on guideline value and it is only when the cost of asset (land) is being ascertained, the Assessing Officer usually try to take shelter under the guideline value. On the contrary, the approved valuer in his report has relied on the market value, which is based on local enquiries made from the surroundings and he has also relied on the local status of this land existing in that year. Hence, we accept the computation given by the assessee and delete the entire addition made in this regard. This results in allowance of ground No. 2 of assessee's appeal and dismisses ground No. 2 of the Revenue's appeal.
9 I.T.A. Nos Nos. 1206 & 779/Mds/ 779/Mds/11 /Mds/11
10. The next issue raised in assessee's appeal in ground No. 3 is in relation to disallowance under section 40(a)(i) of the Act.
10.1 The facts apropos this issue are that the assessee is in the business of shipping and freight. During the financial year 2006-07, the assessee had taken two ships on hire from foreign companies. These ships were used for transporting coal between ports in India. The assessee had remitted hire charges to foreign companies without deducting any tax thereon. The Assessing Officer was of the opinion that the income of the foreign companies would be chargeable to tax in India for the reason that the foreign vessels are put to use in Indian ports only. The ports are being Chennai and Paradeep. The payment made for hiring the ships was made by the assessee to the foreign companies on per day basis and not on tonnage basis. On perusal of the charter party/ agreement, it was noticed that the entire control and direction of the ship during the period of charter lies with the assessee. The relevant clause of this agreement as has been incorporated by the Assessing Officer in his order are being extracted here under:
"...16)Charters have liberty to sublet the vessel for all or any part of the time covered by this charter;
18) Vessel to be placed at the disposal of the charterers ...... at on arrival at first Sea Pilot Station .......
39) That whilst on hire the charterers shall provide and pay for all the fuel except as otherwise agreed, port charges, customary pilotages, agencies commissions .......
71) That the whole reach of the vessels hold, decks and usual places of loading ..... shall be at the charterers' disposal, reserving only proper and sufficient space for the ships, officers, crew .....
10 I.T.A. Nos Nos. 1206 & 779/Mds/ 779/Mds/11 /Mds/11
77) The captain (although appointed by the owners), shall be under the orders and directions of the charterers as regards employment and agency.
82) That the charteres shall have permission to appoint a Supercargo, who shall accompany the vessel and see that the voyages are prosecuted with utmost dispatch.
145) Vessel to work night and day, if required by charterers, and all cranes to be at charterers disposal during loading and discharging steamer ..."
10.2 The Assessing Officer has concluded that the entire payment to the foreign companies is like payment made while hiring of car with Chauffeur. The Assessing Officer has invoked section 9(1)(vi) to say that the term 'Royalty' includes payment for use of Commercial and Industrial Equipment and agreed to his term equipment also includes a ship. So, he has treated the payment for the use of the ship as royalty and has opined that TDS is deductible on gross amount paid to the foreign company and the same is liable to be disallowed under section 40(a)(i). the case of the assessee is explained by following version:
"The assessee submitted that "the income of the foreign company is chargeable under section 172 of the IT Act, 1961. It is well settled law that the provisions of section 172 are a complete code by itself covering all aspects of taxation and its recovery including identification of subject of the levy. Reliance is placed on the decision of the Karnataka HC in the case of CBDT Vs. Chowgule & Co Ltd 192 ITR 40 Kar and Lima Lettoa & CO Ltd Vs UOl 70 ITR 518. The provisions of section 172 contain a non-obstanticle clause and shall apply notwithstanding anything contained in any other provisions of the Act. It therefore follows that section 172 overrides section 40 (a)(i) read
11 I.T.A. Nos Nos. 1206 & 779/Mds/ 779/Mds/11 /Mds/11 with section 195 of the Act. Admittedly we have paid tax for all our freight charges as per the provisions of section 172 of the Act". The assessee's contention that the payment is covered u/s 172 is not acceptable since the payment is made for usage of ship within ports in India. The payments would not come under the purview of Article 8 of the DTAA which covers only international traffic. The payments made by the assessee to foreign companies are liable to tax in India and they were in default of deduction of tax at source thereon. It is pertinent to point out that the decision of the Supreme Court in the case of transmission corporation of Andhra Pradesh Ltd in 239 ITR 587, would be applicable in this case and therefore the assessee should have filed an application U/S 195(2), 195(3) or section 197 for making payment without deduction of tax. It is not the case with the assessee. They have not applied or obtained such a certificate."
11. But the Assessing Officer has not agreed with the above submissions of the assessee and has added a sum of `.5,94,98,541/-, which was paid by the assessee to the foreign company and added the same under section 40(a)(i) of the Act. The assessee is now aggrieved.
12. It was argued that section 40(a) disallows only those expenses which are covered under section 30 to 38 of the Act. The payments made to non-resident company in the nature of direct cost for earning the profit, the same are not covered by section 40(a), hence this expenditure needs to be allowed from the costs while arriving at the profit as defined under section 28 and there cannot be any disallowance under section 40(a)(i) in respect of this expenditure. It was vehemently argued that the payments made to foreign shipping companies are covered under section 172 and hence the provisions of section 195 do not apply to 12 I.T.A. Nos Nos. 1206 & 779/Mds/ 779/Mds/11 /Mds/11 this case. It was argued that once it is found that the provisions of section 195 are not applicable to a specific payment then there cannot be any disallowance under section 40(a)(i). It was further argued that the facts of this year is entirely different from the facts of the earlier year, and that decision is not applicable because in that case, the decision of the Hon'ble Supreme Court was not considered, and so also the decision of the Hon'ble Delhi High Court in the case of Asia Satellite Telecommunication Co. Ltd. vs. DCIT reported in 332 ITR 340.
13. We have heard rival submissions and have perused the entire record available before us. The assessee had hired vessels from Foreign Shipping Companies (FSC) for the transportation of coal for Karanataka Power Corporation Limited; based on the availability of cargo and vessels. The vessels were hired, admittedly, on a time charter basis. The assessee paid the time charter hire charges as agreed by the vessel owner. The Captain/Master of the vessel, crew and other staff of the ship are controlled by the ship owner, namely FSC only. The assessee company would intimate the availability of the cargo and from where to where the cargo has to be moved. The repairs and maintenance of the ship are all done and born by the owner of the ship. The vessel is also to be insured by the owner. The cargo was being transported between Paradeep Port and Chennai Port as and when so required. For doing this work, the vessel was converted from Foreign Run Vessel (FRV) to Coastal Vessel and then reconvert to time charter thereafter. During the year under consideration, the assessee company had taken one charterer from a vessel from London Shipping Company and one from a Denmark based Shipping Company namely Hazi Trading and Shipping Limited, 13 I.T.A. Nos Nos. 1206 & 779/Mds/ 779/Mds/11 /Mds/11 London and M/s. Atlas Shipping, A/S, Denmark. The vessels taken on time charter during the relevant previous years are namely M.V. Lok Maheshwari and M.V. Noni. The vessel M.V. Lok Maheshwari was taken on time charter on four tiems for a total period of 37.31 days and the other vessel M.V. Noni was taken on time charter only once for a period 21.28 days. The Department has relied on the judgment of this Bench in the case of Pomphuhar Shipping Corporation Ltd. reported in 109 ITD 226, which was also applied in assessee's own case for the assessment years 2002-03 and 2004-05 against the proceedings initiated under section 201(1) of the Act. The issue in that case was different and the Bench relied on Pomphuhar Shipping Corporation Ltd., which was rendered on different facts. In that case, the assessee had facility of berthing at an Indian port guaranteed for foreign ship chartered by Pomphuhar Shipping Corporation Ltd . Based on this, the Tribunal had concluded that there is a Permanent Establishment (PE) for foreign Shipping Companies. But, in the instant appeal, the assessee does not enjoy any dedicated berthing facility guarantee for foreign ships. Hence, the contention of the Department that the Pomphuhar Shipping Corporation Ltd case applies to this case is not correct to our mind. Further, in this case, the vessel runs in Indian water only for a shorter duration as discussed above and thus, the FSC did not have any permanent establishment in India. We are also not in agreement in Department's contention that the payment made in time charter of vessels in this case constitutes 'royalty'. This perception seems to be misconceived. The Hon'ble Delhi High Court in the case of Asia Satellite Telecommunication Co. Ltd. vs. DCIT (supra) has held that two things are necessary to christen a payment as a 'royalty' under 14 I.T.A. Nos Nos. 1206 & 779/Mds/ 779/Mds/11 /Mds/11 Explanation 2 appended to clause (vi), which speaks about possession and control of the vessel in the given case, the assessee neither has control nor possession over the vessels. The Captain/Master and the crew is instructed, directed and controlled by the ship owner only and not by the assessee. The assessee simply informs the description of the cargo to be carried on and from which port to which port the cargo has to be transported. Thus, it becomes clear that the assessee neither has control nor the possession over the vessel in question. The decision of the Hon'ble Supreme Court in the case of Bharat Sanchar Nigam Limited and others vs. UOI (2006) 282 ITR 273 (SC), of which the ld. AR has placed reliance, the Hon'ble Apex Court has laid down the significance to hold license required to be operated in question. It is only a person but holds requisite license as required by the statute, who can be stated to operate, use and control the equipment whatever it may be. In this case, the requisite approvals have to be obtained from Maritime Authorities to hold and operate the vessels. It is not the case that anybody or everybody can operate a vessel. The powers of charterer (in this case this assessee) under the time charter agreement is extremely limited like the charterer cannot dry-dock the vessel and the vessel is operated by its Captain/Master and its crews, who are appointed by the ship owner and not by the charterer (the assessee). There is a distinction between 'letting the asset' and 'use of asset' by the owner for providing services. The payment made for the use of asset by owner for the purposes cannot be tantamount to a 'royalty'. In this case, the consideration is not for use of the ship only, but also for the services of moving the goods by a fully manned ship. In the decision of the Hon'ble Delhi High Court in 15 I.T.A. Nos Nos. 1206 & 779/Mds/ 779/Mds/11 /Mds/11 the case of Asia Satellite Telecommunications Co. Ltd. (supra), the payment so made by the assessee cannot be treated as royalty for he use of industrial or commercial or scientific use of the equipment. The ld. CIT(A) should have appreciated that the case has only booked the freight space in the ship (time charter) and has not taken the vessel on hire, it is done under what is called "bare boat charter. Therefore, the payment made in this case would not constitute 'royalty' paid for the use of industrial, or commercial, or scientific equipments. The essence of the time charter agreement executed between the parties speaks clearly that the assessee can utilize the space in the vessel and not that the assessee is authorized to operate or exercise control over the vessel. The Hon'ble Karnataka High Court in the case of CBDT vs. Chowgule & Co. Ltd. 192 ITR 40 and in the case of Kar and Lima Lettoa & Co. Ld. Vs. UOI 70 ITR 518 has held that section 172 is a complete code by itself. Thus, the amount paid by the assessee to the FSC on time charter agreement would not amount to 'royalty' neither under Explanation 2 or under section 9(1)(b)(ii) or under the DTAA and in this case only section 172 applies. This, no tax is needed to be deducted at source under section 195 as the amount paid does not amount to 'royalty'. Therefore, the disallowance under section 40(a)(i) for non-deduction at source on the amount paid to FSC for the time charter hire is erroneous and the same is set aside.
14. The disallowance under section 40A r.w. Rule 8D has been correctly held by the ld. CIT(A) to be applicable from the assessment year 2008-09 onwards and not for the earlier assessment years. Therefore, he has rightly restricted the disallowance under section 40A of the Act. In view of the decision of the Bench in 16 I.T.A. Nos Nos. 1206 & 779/Mds/ 779/Mds/11 /Mds/11 the case of Sundaram Finance' case, we do not find any fallacy in the findings of the ld. CIT(A).
15. In the result, the appeal of the assessee stands allowed and that of the Revenue stands dismissed.
Order pronounced in the open Court on 04.10.2011.
Sd/- Sd/- (O.K. NARAYANAN) (HARI OM MARATHA) VICE PRESIDENT JUDICIAL MEMBER Chennai, Dated, the 04.10.2011 Vm/- To: The assessee//A.O./CIT(A)/CIT/D.R.