An Order Is Not Prejudicial To The Interest Of Revenue U/S 263 If It Is Based On An Uncertain Issue Of Entitlement Of Treaty Benefit: ITAT

The two-member bench of Saktijit Dey (Judicial member) and Pradip Kumar Kedia (Accountant member) has held that due to various inconsistencies in the order of Commissioner of Income Tax (CIT) regarding whether the assessee can claim the benefit of the treaty and such order passed by assessing officer is prejudicial to interest of revenue, he was not warranted in asserting jurisdiction to alter the assessment order under Section 263 of the Income Tax Act.

In this case, the assessee is a non-resident multinational corporation formed in Singapore in 2007 and a Singapore tax resident. The assessee is in the trade of owning, operating, and chartering ships to transport dry bulk and break-bulk cargo, such as coal, iron ore, bauxite, and steel products. The assessee is a joint venture between Tata Steel Company, an Indian firm, and NYK Holding (BV), a Netherland corporation that is a subsidiary of a Japanese company, Nippon Yusen Kabushiki Kaisha (NYK Japan).

The assessee did not provide for revenue from inbound and outbound freight, as it was obtained through the operation of ships in international traffic, which is immune from taxation in India under Article 8 of the India-Singapore Double Taxation Avoidance Agreement (DTAA).

The assessing officer (AO) accepted the said income declared by the assessee after referring the same to the Transfer Pricing officer (TPO), since he noticed certain international transaction to Associated Enterprises (AE) and requested him to check whether the assessee has complied with Arm’s Length principle (ALP). After meticulously analyzing the TPO’s order under section 92 CA (3) of the Act, he passed an order on June 14, 2019, accepting the assessee's claim over tax exemption from freight charges under Article 8 of the India-Singapore Double Taxation Avoidance Agreement (DTAA).

The CIT reviewed the assessment order in accordance with Section 263 of the Act. When doing so, he believed that the assessment order issued was erroneous and prejudicial to the interests of Revenue because the Assessing Officer failed to undertake sufficient verification and comprehend the proper legal position while accepting the return of income. The CIT held in his order that the AO failed to determine whether the assessee's arrangement in Singapore is a treaty shopping arrangement or if the assessee is a conduit company, in which case the treaty advantages are unavailable.

The Tribunal held that the CIT order shows multiple inconsistencies in its application of the law. The income earned from the shipping business is taxed in three different manners. Firstly, income from coastal shipping is taxed u/s 44B of the Act. Secondly, income from inward shipping is taxed under section 9(1)(vi) of the Income Tax Act. Lastly, income from outward shipping is not taxed in CIT’s order. The inconsistent handling of revenue obtained by the assessee from the shipping company demonstrates inconsistencies in the order issued u/s 263 of the Income Tax Act.

In the end, the Tribunal adjudicated that the CIT's order was not warranted in exercising authority u/s 263 of the Act to amend the assessment order since the assessment order could not be regarded as erroneous and adverse to the revenue interest of the department.

Case Title: M/s. Tata NYK Shipping Pte. Ltd. vs. Commissioner of Income Tax, International Taxation-3, New Delhi.

Citation: ITA No.1067/Del/2022

Date: 09.03.2023.

Counsels for Appellant: Ajay Vohra, Aditya Vohra, Hardeep Singh Chawla.

Counsel for Respondent: Gangadhar Panda.

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