Section 92A(2)(c) of the Act – Loan given by each enterprise should be considered independently and an enterprise can be deemed to be an AE only if loan given by it exceeds 51% of book value of total assets – Business advances cannot be construed as loan to determine AE

10. Soveresign Safeship Management Pvt. Ltd. vs.
ITO ITA No. 2070/Mum/2016 A.Y.: 2011-12 Date of order: 5^th March, 2020

Section 92A(2)(c) of the Act – Loan given
by each enterprise should be considered independently and an enterprise can be
deemed to be an AE only if loan given by it exceeds 51% of book value of total
assets – Business advances cannot be construed as loan to determine AE

FACTS

The assessee was
engaged in providing ship management and consultancy services. In Form 3CEB it
had considered two group companies as AEs (Associated Enterprises) and reported
international transactions by way of advances received in the course of
business from these entities. The assessee was providing ship management and
consultancy services to one of the entities from which it had received business
advances.

Before the TPO, the
assessee contended that though the said entities were not AEs, it had
inadvertently disclosed them in Form 3CEB as AEs. The TPO deemed the two group
entities as AEs u/s 92A(2)(m) on the basis that there was a relationship of
mutual interest between the taxpayer and the two group entities.

The DRP observed
that business advances received were separately reported and included within
‘sundry creditors’. The assessee had not rendered any service to the entities
for which it had received advances. Hence, advances received by the assessee
from the said entities were to be treated as loans taken from the AEs. The DRP
further observed that since the aggregate loans taken from the two entities
exceeded 51% of the book value of the total assets of the assessee, u/s
92A(2)(c) of the Act they were AEs of the assessee.

Being aggrieved,
the assessee appealed before the Tribunal.

HELD

(A) In terms of section 92A(2)(c),
an enterprise will be deemed to be an AE if ‘loan advanced by one enterprise
to the other enterprise constitutes not less than fifty-one per cent of the
book value of the total assets of the other enterprise’. As the language of
the section is unambiguous, only lending enterprises which had advanced loan
exceeding 51% of the book value of the total assets could be deemed as AEs.

(B) Advances received by the assessee from one of
the entities were towards ship management and consultancy services rendered by
it to the said entity. Business advances cannot be construed as loans.
Accordingly, such advances should be excluded while determining AE
relationship.

(C)       The tax authority could not rely merely on
self-disclosure of AEs by the assessee in Form 3CEB when the facts in the
financial statements of the assessee were clear and the language of the statute
was unambiguous.