Case summary, Income Tax

Conditions as mentioned in section 92A(1) & 92A(2): Whether mutually inclusive?

Case: Sovereign Safeship Management Pvt. Ltd. vs. The Income Tax Officer Ward 13(2)-2, Mumbai ITAT

Outcome: Partial

Facts

  • Shri Rajeev Kumar Singh, the director of the Assessee Company after thorough discussions with its former employer, agreed to become a 13% shareholder in a newly floated company named M/s. Sovereign Ship Management Ltd, UK, in June 2007. The balance 87% of shares were held by M/s. Union Maritime Ltd. UK. M/s. Union Maritime Ltd, UK was formed in 2006, and it was a 50-50 partnership between M/s. South Central Property Ltd (UK) (owned by Cadji Family) and M/s. Solai Holding Ltd (UK) (owned by Kansaga family). Then, in April 2010, a new company was formed viz M/s, Premier Ship Management Ltd, UK, wherein he was made 20% shareholder and M/s. Union Maritime Lid, UK held the balance 80% shareholding. At the same nine, his shareholding in M/s. Sovereign Ship Management Ltd, UK was increased from 13% to 20% with the remaining 80% held by M/s. Union Maritime Ltd, UK. In the meantime, a new company was floated in his name, viz. M/s. Sovereign Safeship Management Pvt. Ltd (India) (the Assessee) in December 2008, wherein he held 90% shares and his wife held the balance 10%. This company used to provide services only to M/s. Sovereign Ship Management Ltd, M/s. Premier Ship Management Ltd and M/s. Union Maritime Ltd for which he used to receive 5% service fees from them”.
  • The Transfer Pricing Officer concluded that the overall management and control of the Assessee company still lied with the management of M/s Sovereign Ship Management Ltd, UK; M/s Premier Ship Management Ltd and M/s Union Maritime Ltd. The role of Shri Rajeev Kumar Singh’s was limited to managing ships like an employee who does not have any say in the decision making the process of the company. Accordingly, he held that those concerns become associated enterprises within the meaning of section 92A(1)(a) of the Act. The Transfer Pricing Officer also observed that the Assessee company did work only for these associated enterprises during the year and concluded that the Assessee company in India was formed to serve the mutual interest and thus, held that M/s Sovereign Ship Management Ltd, UK; M/s Premier Ship Management Ltd and M/s Union Maritime Ltd were associated enterprises of the Assessee company during the year, as per the provisions of section 92A(2)(m) of the Act.
  • The Dispute Resolution Panel observed that the book value of total assets of the Assessee company was Rs 8,00,13,738/- and the total amount of above loan was Rs 5,50,83,637/- which constituted 68.84% of the book value of total assets of the Assessee. Therefore, the Assessee’s case squarely fell under the provisions of section 92A(2)(c) of the Act, which would make these two entities as associated enterprises of the Assessee Company.

Key Points

  • The language of section 92A(2)(c) of the Act is unambiguous and clear that in order to fall within the ambit of deeming fiction of becoming associated enterprises, either Sovereign Ship Management Ltd, UK or Premier Ship Management Ltd, UK should have independently advanced loan to the Assessee Company which more than 51% of the book value of total assets of the Assessee company. In the present case, only if the loans advanced by both Sovereign Ship Management Ltd, UK and Premier Ship Management Ltd, UK were combined, the said provision was satisfied. Moreover, the advances received by the Assessee Company from Sovereign Ship Management Ltd, UK of Rs 2,34,34,694/- were like business advances for rendering ship management and consultancy services by the Assessee company to the said party. Hence, the same could not be construed as a loan advanced to the Assessee company. Once the same was excluded and the credits given by the two entities mentioned above were considered independently, none of those above parties had advanced loans more than 51% of the book value of total assets of the Assessee company. Hence, it could be safely concluded that the two entities as mentioned earlier could not be construed as associated enterprises of the Assessee Company within the meaning of section 92A(2)(c) of the Act.
  • Reliance was placed on the decision of Ahmedabad Tribunal in case of Kaybee Pvt Ltd vs ITO, wherein it was held that “As long as an enterprise participates in any of the three aspects of the other enterprise, i.e. (a) management; (b) capital; or (c) control, these enterprises are required to be treated as an associated enterprise, as also is the position when common persons participate in management, control or capital of both the enterprises. However, the expression ‘participation in management or capital or control’ is not a defined expression. To find the meaning of this expression, one has to take recourse to Section 92(2), which gives practical illustrations, which are exhaustive and not merely illustrative. As clarified in the Memorandum Explaining the provisions of the Finance Bill 2002 which, while inserting the words “For the purpose of subsection (1) of section 92A” in Section 92A(2), observed that “It is proposed to amend subsection (2) of the said section to clarify that the mere fact of participation by one enterprise in the management or control or capital of the other enterprise, or the participation of one or more persons in the management or control or capital of both the enterprises shall not make them associated enterprises unless the criteria specified in sub-section (2) are fulfilled”. In this sense, Section 92A(2) governs the operation of Section 92A(1) by controlling the definition of participation in management or capital or control by one of the enterprises in the other enterprise. If a form of participation in management, capital or control is not recognized by Section 92A(2), even if it ends up in de facto or even de jure participation in management, capital or control by one of the enterprises in the other enterprise, it does not result in the related enterprises being treated as ‘associated enterprises’. Section 92A(1) and (2), in that sense, are required to be read together, even though Section 92A(2) does provide several deeming fictions which prima facie stretch the basic rule in Section 92A(1) quite considerably based on, what appears to be, manner of participation in “control” of the other enterprise. What is thus, clear that as long as the provisions of one of the clauses in Section 92A(2) are not satisfied, even if an enterprise has a de facto participation capital, management or control over the other enterprises, the two enterprises cannot be said to be associated enterprises”.
  • Hence, it was inferred that section 92A(1) cannot be applied on a standalone basis, and has to be essentially considered in conjunction of section 92A(2) only when it satisfies at least one of the conditions set out therein, and accordingly, the Assessee Company and its KEs could not be said to be associated enterprises.

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