TaxTMI 
TaxTMI 
2015 (12) TMI 143
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....subsidiary in Austria, by the name of Micro Inks GmbH which, in turn, owns Micro Ink Co USA. This step down subsidiary (Micro USA, in short) manufactures printing ink by using the base material supplied by the assessee. The inks meant for US markets thus are mixed, and given finishing touches, by Micro USA. The assessee company also has trading subsidiaries in China and Hong Kong. During the relevant previous year, the assessee sold goods worth Rs. 215.51 crores to Micro USA. The Transfer Pricing Officer, in the course of proceedings before the TPO, it was noted that the assessee has sold goods worth Rs. 215.51 crore to Micro USA and allowed it an average credit period of 186 days as against average credit period of 130 days allowed to independent enterprises, i.e. non AEs. It was also noted that out of total exports made by the assessee, 45% exports was to Micro USA. On these facts, and the TPO being of the view that "in a third party situation, such an allowance of use of money would have been possible only upon charge of a cost", the TPO required the assessee to show cause as to why ALP adjustment in respect of excess credit period of 56 days not be made, by computing time value....
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....t reason that it was part of the arrangement that specified credit period was allowed and thus the cost of funds blocked in the credit period was inbuilt in the sale price. There is no dispute that similar products are not sold to any other concern, at same price or even any other price, and interest is levied on the similar credit period allowed to those independent parties but not to Micro USA. The question of excess credit period arises only when there is a standard credit period for the product sold at the same price and the credit period allowed to the associated enterprises is more than the credit period allowed to independent enterprises. That is not the case here. The credit period for finished goods cannot be compared with credit period for unfinished goods and raw materials, and in any case, when products are not the same, there cannot be any question of prices being the same. Unless the prices of the product and the product are the same, and yet extra credit period is allowed, there cannot be any occasion for making ALP adjustment on the basis of the excess credit period. None of the authorities below have even disputed that the ingredients, raw materials and semi finish....
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....), the arm's length price of exports to the AEs, including Micro USA, has been determined on the basis of the transactional net margin method (TNMM). By way of a note at page 51, it is specifically stated that "further, the said amount of Rs. 2428.26 millions has also been determined/ computed by the assessee having regard to the arm's length price on application of Transactional Net Margin Method (TNMM), on aggregation of transactions, as prescribed under section 92C of the Income Tax Act, 1961". In this backdrop, we can usefully refer to the decision of Hon'ble Delhi High Court, in the case of Sony Ericsson Mobile Corporation Pvt Ltd Vs ACIT [(2015) 374 ITR 118(Del)] wherein Their Lordships had, inter alia, observed as follows: "Where the Assessing Officer/TPO accepts the comparables adopted by the assessed, with or without making adjustments, as a bundled transaction, it would be illogical and improper to treat AMP expenses as a separate international transaction, for the simple reason that if the functions performed by the tested parties and the comparables match, with or without adjustments, AMP expenses are duly accounted for. It would be incongruous to accept the comparable....
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.... to be taken as integral to sale proceeds, and, as such, includible in operating income. When such an interest is includible in operating income and the operating income itself has been accepted as reasonable under the TNMM, there cannot be an occasion to make adjustment for notional interest on delayed realization of debtors. One can understand separate adjustment for excess credit period when the arm's length price for exports has been benchmarked on the CUP basis but not in a case when the arm's length price of the exports has been benchmarked on the basis of TNMM. The very conceptual foundation, for separate adjustment for delayed realization of debtors and on the facts of this case, is thus devoid of legally sustainable merits. 10. The other aspect of the matter is that a separate adjustment for delayed realization of debtors can, even in a fit case, can only be made only to the extent the credit period allowed to the associated enterprises is more than the credit period allowed to independent enterprise in respect of the same or materially similar transactions. In the present case, it is an undisputed position that semi finished goods, as sold to Micro USA, is not sold to an....
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....re of exceptions rather than rule, and more so in a complex case in which the assessee is sole vendor and the very existence of the buyer is to process the semi- finished goods and sell it to the end buyers. Many factors, such normal business practices and the commercial exigencies, influence the fact of payment in respect of a commercial transaction. Whether a payment is made immediately by the AE or is made after six months cannot, therefore, be seen in isolation with what is the position is with respect to similar payments due from non AEs. The whole exercise of ALP adjustments is to neutralize the impact of inter se relationships between the AEs and it is, therefore, not the delay simplictor in payment but delay in payment vis-à-vis similar situations with non AEs (i.e. independent enterprises) which is of crucial consideration. Such a comparison cannot be based on the hypothesis as to what would have, in the wisdom of the TPO, happened if assessee was to have similar transactions with non-AEs. The comparison has to be based on real transactions of similar nature, if at all such transactions have taken place. When no such transactions have taken place, as is the case bef....
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....r the same. The stand of the assessee was that these guarantees did not cost assessee anything nor any charges were recovered for the same, and that the "said guarantees were in the form of corporate guarantees/ quasi capital and not in the nature of any services". The TPO, however, proceeded to compute arm's length price for these guarantees @2% on the basis of following reasoning: 7.2 Guarantees are chances that someone will have to pay for them, if chance is 100% i.e. in all cases one has to pay for it, guarantee fees will be simply equal to it (i.e. the guarantee amount). However, if it is only a probability and only in few cases it will have to be paid, its charges are just percentage of it. Banks normally compute guarantee charges on the basis of their experience in handling such situation. 7.3 Guarantees given by an assessee makes its own borrowing costlier as its assets get used in guaranteeing, it has to raise costlier capital without being able to use its own those very assets. There cannot be direct link to the guarantees given for the purpose of computing cost but the fact remains that there was cost to guarantor. In view of above discussions, guarantee fees is calcul....
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....on. Without prejudice to this argument, learned counsel submitted that even if it is assumed that post 2012 amendment in the definition of 'international transaction' stand specifically included in the scope of international transactions, in respect of which arm's length price adjustments can be made, it is only elementary that such an amendment cannot have retrospective effect. He points out that the transfer pricing legislation is inherently an anti abuse legislation which seeks to ensure that the assesses behaves well within certain norms. This kind of legislation, according to the learned counsel, can never have retrospective application as assessee cannot be told today as to how should he have behaved in the past. Learned counsel submits that none can lay down the norms now and expect the assessee to have complied with these norms in the past. Learned counsel then points out that while tax legislation in general may have retrospective effect, even though presumption is in favour of the law being prospective, tax legislation in the nature of anti abuse legislation cannot be made retrospective as it would amount to an impossibility for the assesses to comply with the same. On th....
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....of the Tribunal has been approved by Hon'ble Bombay High Court in the judgment reported as CIT Vs Everest Kanto Cylinders Limited [(2015) 119 DTR 394 (Bom)]. As learned Departmental Representative puts it in his written submissions "the above decision of the ITAT has been sustained by Bombay High Court in [(2015) 58 taxmann.com 254 (Bombay)] wherein the High Court has not questioned the ITAT's decision with respect to the transaction being an international transaction, but has held that the comparables used by the TPO with respect to this transaction were not proper". He then invites our attention to the amendment brought about in Section 92B of the Act whereby an Explanation is inserted to the said section. It is pointed out that this Explanation, which is specifically stated to have been inserted "for the removal of doubts", it is provided that "the expression 'international transaction' shall include......capital financing, including any type of long term or short term borrowing, lending or guarantee, purchase or sale of marketable securities, or any type of advance payments or deferred payments or receivable or any other debt arising during the course of business". We are then ....
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....service or not" and added that "various Tribunal decisions have already held that provision for bank guarantee is a service and as such it needs to be benchmarked" and that "whether the service has caused any extra cost to the assessee should not be the deciding factor to determine whether it is an international transaction". He then gave an example of brand royalty to illustrate the above proposition. On the basis of this reasoning, learned Departmental Representative urged us to confirm the action of the Assessing Officer and decline to interfere in the matter. 18. In rejoinder, learned counsel for the assessee submitted that it is wholly incorrect to suggest that in Everst Kanto's case Hon'ble Bombay High Court has held the corporate guarantee to be an international transaction. It is pointed out that this issue was never before the Hon'ble High Court. Learned counsel submits that this issue was in principle decided against the assessee by the Tribunal but the reported decision by Hon'ble Bombay High Court was on the appeal filed before Hon'ble Bombay High Court which was confined to the question as to the correctness of comparables adopted on the facts of this case. The questi....
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....Hon'ble Supreme Court's decision in the case of Vatika Township (supra) and highlights certain observations made therein which, according to the learned counsel show that the stand of the Departmental Representative with regard to the amendment in Section 92 B is clearly contrary to the scheme of law as laid down by a constitutional bench of Hon'ble Supreme Court. A reference is also made to the oft quoted book 'The Principles of Statutory Interpretation (13th Edition 2012)' by Justice G P Singh. It was also submitted that the transfer pricing provisions are set out in the 'special provisions relating to avoidance of tax' under chapter X. These provisions, according to the learned counsel, are normally deeming provisions to check and control the avoidance of tax. A reference is then made to the introduction of General Anti Avoidance Rules in Chapter XA of the Act, and the circumstances leading to its deferral were highlighted. It was submitted that transfer pricing provisions belong to the same genus and what holds good for GAAR also applies to the transfer pricing. Elaborate arguments are then made on the Tribunal decisions cited by the learned Departmental Representative and an e....
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....) 56 taxmann.317 (Mumbi)]. In Prolific Corporation Ltd Vs DCIT [(2015) 55 taxmann.com 226 (Hyd)], according to the learned counsel, the bench has accepted that "there may not be any charge to the P&L account but inherent risk cannot be ruled out in providing guarantees". As for Hindalco Industries Ltd vs ACIT [(2015) 62 taxmann.com 181 (Mumbai)], learned counsel submits that the bench had not held anything to the contrary to what has been decided in Bharti's case even though it has mentioned that the relevant observations were mere obiter dicta. When there is no contrary view expressed by any coordinate bench, according to the learned counsel, there cannot be any occasion to refer it to a larger bench. We are urged to maintain consistency and follow the decision in the case of Bharti Airtel (supra). Learned Departmental Representative, on the other hand, submits that the law is quite clear, it admits no ambiguity and the matter is now covered, in favour of the assessee, by two binding precedents of Hon'ble Bombay High Court- in cases of Vodafone India Services (supra) and Everest Kanto (supra). No useful purpose will be served, according to the learned Departmental Representative, ....
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....it is hereby clarified that - (*inserted by the Finance Act 2012, though with retrospective effect from 1st April 2002) (i) the expression "international transaction" shall include - (a) the purchase, sale, transfer, lease or use of tangible property including building, transportation vehicle, machinery, equipment, tools, plant, furniture, commodity or any other article, product or thing; (b) the purchase, sale, transfer, lease or use of intangible property, including the transfer of ownership or the provision of use of rights regarding land use, copyrights, patents, trademarks, licences, franchises, customer list, marketing channel, brand, commercial secret, know -how, industrial property right, exterior design or practical and new design or any other business or commercial rights of similar nature; (c) capital financing, including any type of long -term or short -term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business; (d) provision of services, including provision of market research, market development, marketing management, adm....
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....s of this definition of 'international transaction' under Section 92 B, as it stood at the relevant point of time, and its break up in plain words, shows the following: An international transaction can be between two or more AEs, at least one of which should be a non-resident. An international transaction can be a transaction of the following types: in the nature of purchase, sale or lease of tangible or intangible property, in the nature of provision of services, in the nature of lending or borrowing money, or in the nature of any other transaction having a bearing on the profits, income, losses or assets of such enterprises An international transaction shall include shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises. Section 92B (2), covering a deeming fiction, provides that even a transaction with non AE in a situation in which such a transaction is de facto controlled by prior agreement with AE or by the te....
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....n 92 B are set out in clause (c) and (e) thereto, dealing with (a) capital financing and (b) business restructuring or reorganization. These items can only be covered in the residual clause of definition in international transactions, as in Section 92B(1), which covers "any other transaction having a bearing on profits, incomes, losses, or assets of such enterprises". 30. It is, therefore, essential that in order to be covered by clause (c) and (e) of Explanation to Section 92 B, the transactions should be such as to have beating on profits, incomes, losses or assets of such enterprise. In other words, in a situation in which a transaction has no bearing on profits, incomes, losses or assets of such enterprise, the transaction will be outside the ambit of expression 'international transaction'. This aspect of the matter is further highlighted in clause (e) of the Explanation dealing with restructuring and reorganization, wherein it is acknowledged that such an impact could be immediate or in future as evident from the words "irrespective of the fact that it (i.e. restructuring or reorganization) has bearing on the profit, income, losses or assets of such enterprise at the time of ....
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....tuations in which an item may fall within the description set out in clause (c) of Explanation to Section 92B, and yet it may not constitute an international transaction as the condition precedent with regard to the 'bearing on profit, income, losses or assets' set out in Section 92B(1) may not be fulfilled. For example, an enterprise may extend guarantees for performance of financial obligations by its associated enterprises. These guarantees donot cost anything to the enterprise issuing the guarantees and yet they provide certain comfort levels to the parties doing dealings with the associated enterprise. These guarantees thus donot have any impact on income, profits, losses or assets of the assessee. There can be a hypothetical situation in which a guarantee default takes place and, therefore, the enterprise may have to pay the guarantee amounts but such a situation, even if that be so, is only a hypothetical situation, which are, as discussed above, excluded. One may have also have a situation in which there is a receivable or any other debt during the course of business and yet these receivables may not have any bearing on its profits, income, losses or assets, for example, wh....
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....ase is whether the same is at ALP or not". The very fact of charging this guarantee commission brings the issuance of corporate guarantees to the net of transfer pricing. Nevertheless, the ALP adjustment made by the TPO was deleted by the Tribunal. Aggrieved by the relief so given by the Tribunal, the matter was carried in further appeal, by the Commissioner, before the Hon'ble Bombay High Court which eventually upheld the relief granted by the Tribunal. The appeal before the Hon'ble High Court was by the Commissioner, and not by the assessee, and, therefore, the grievance against the issuance of corporate guarantee being held to be an international transaction could not have come up for consideration. Of course, the assessee had no occasion to challenge the stand of the Tribunal on this aspect since the addition, on merits, was deleted anyway making revenue's success in this respect hollow and of no damage to the interests of the assessee. It was in this backdrop that the action of the Tribunal was upheld in granting relief to the assessee on merits. It is difficult to understand as to how this decision is taken as supporting the proposition that the issuance of corporate guarante....
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....been relied upon by the learned Departmental Representative, we find that the operative portion of this judgment, so far as relevant to this discussion, is as follows: 213. The amendment to section 2(47) raises several important questions of fact and of law. Whether or not it affects the proceedings which were the subject matter before the Supreme Court is not relevant for the purpose of this Writ Petition. But, whether it is relevant or not for the purpose of the assessment proceedings in respect of the petitioner which are the subject matter of this Writ Petition, is relevant. The effect of the amendment would have to be considered. It cannot be brushed aside. 214. Section 2(47), as amended, even on a cursory glance raises various issues. It is necessary to note four preliminary aspects of Explanation 2 to section 2(47). Firstly, as the opening words, "For the removal of doubts it is hereby clarified that ......", indicate it is a clarificatory amendment. Secondly, it is an inclusive definition as is evident from the words " "transfer" includes.....". Thirdly, the amendment is with retrospective effect from 1st April, 1962. Fourthly, the Finance Act 2012 which introduced, inter....
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....ut the aid of any other material for interpreting them. Vodafone's case obviously considered the ambit of the term "transfer" prior to the amendment. In the present assessment proceedings, it is the amended definition which would have to be considered. 218. We do not find it either necessary or proper to indicate the application of section 2(47) as amended to the present proceedings. The application would depend upon the facts on record or those may be permitted to be brought on record. 219. There is another aspect. The petitioner may well contend that the amended definition makes no difference it being clarificatory in nature. The provisions thereof must, therefore, be deemed always to have been in existence. We will presume that it would be open to the petitioner to contend, therefore, that the judgment of the Supreme Court would remain entirely unaffected for the Supreme Court must be deemed to have considered the term as per its true ambit, as always intended by the Parliament. On the other hand, it may be equally open to the Revenue to contend that certain ingredients of a transfer were not considered by the Revenue itself in the proceedings relating to Vodafone's case on ac....
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....ccount the amendments, the legal implications of this amendment is still an open issue which will have to be adjudicated in the light of pleadings of the parties. Even in these observations, which donot anyway decide anything on merits, effect of a retrospective amendment was not in the context of the precise issue before us, or on the scope of the international transaction, but in respect of connotations of 'transfer'. As learned counsel rightly contends, in the light of Hon'ble Bombay High Court's judgment in the case of Sudhir Jayantilal Mulji (supra) "ratio of a decision alone is binding, because a case is only an authority for what it actually decides and not what may come to follow from some observations which find place therein". In view of these discussions, the reliance placed on Vodafone India Services (supra) is also equally misplaced and devoid of legally sustainable merits. In any case, as is noted by Hon'ble Supreme Court in the case of CIT Vs Sun Engineering Works Pvt Ltd (1992) 198 ITR 297 (SC)], "It is neither desirable nor permissible to pick out a word or a sentence from the judgment of this Court, divorced from the context of the question under consideration and....
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....l Canada (supra). The said case, to quote the words of the DRP, "also shows that the group company issuing the guarantee (i.e. guarantor) would, in principle, at least need to cover the cost that it incurs with respect to providing the guarantee" and that "these costs may include administrative expenses as well as the costs of maintaining an appropriate level of cash equivalents, capital, subsidiary credit lines or more expensive external funding conditions on other debt finance". The DRP had also noted that "in addition, the guarantor would want to receive appropriate compensation for the risk it incurs" and concluded that "following the above discussions, an arm's length guarantee fees is typically required to be determined by establishing a range of fees that the guarantor would, at least, want to receive and the fees that the guaranteed group company would be willing to pay depending on the prevailing conditions within financial markets in practice". 30. However, while dealing with this aspect of the matter, it is necessary to bear in mind the fact that this judicial precedent, whatever be its worth in the hierarchy of binding judicial precedents in India, does not even deal w....
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....m the taxpayer or the partnership, or a member of the partnership, does not deal at arm's length" [See Section 247(2) ibid]. When one takes into account these variations in the statutory provisions, it will become very obvious that the provisions of the Indian Income Tax Act, 1961 and the Canadian Income Tax Act, 1985 are so radically different that just because a particular transaction is to be examined on arm's length principle in Canada cannot be a reason enough to hold that it must meet the same in India as well. While the Canadian transfer pricing legislation, as indeed the transfer pricing legislation in many other jurisdictions, does not put any fetters on the nature of transactions between the AEs, so as to be covered by the arm's length price adjustment, and, therefore, covers all transactions between the related enterprises, Indian transfer pricing legislation covers only such transactions as are "in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises". Our transfer pricing provisions, perhaps....
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....s from this document are as follows: 102. An independent company that is unable to borrow the funds it needs on a stand-alone basis is unlikely to be in a position to obtain a guarantee from an independent party to support the borrowings it needs. Where such a guarantee is given it compensates for the inadequacies in the financial position of the borrower; specifically, the fact that the subsidiary does not have enough shareholders' funds. ..... 103. It would not be expected that a company pay for the acquisition of the equity it needs for its formation and continued viability. Equity is generally supplied by the shareholders at their own cost and risk. 104. Accordingly to the extent that a guarantee substitutes for the investment of the equity needed to allow a subsidiary to be self-sufficient and raise the debt funding it needs, the costs of the guarantee (and the associated risk) should remain with the parent company providing the guarantee. 33. On a conceptual note, thus, there is a valid school of thought that the corporate guarantees can indeed be a mode of ownership contribution, particularly when, as is often the case, "where such a guarantee is given it compensates for....
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....e OECD, in the field of international taxation, has been judicially recognized worldwide by various judicial forums, including, most notably by Hon'ble Andhra Pradesh High Court in the case of CIT VS Visakhapatnam Port Trust [(1983) 144 ITR 146 (AP)]. Their Lordships also referred to Lord Radcliffe's observations in Ostime vs. Australian Mutual Provident Society [(1960) 39 ITR 210 (HL)], which has described the language employed in the models developed by the OECD as the "international tax language". The work done by OECD in the field of transfer pricing is no less significant. No matter which part of the world we live in, and irrespective of whether or not that tax jurisdiction is an OECD member jurisdiction, the immense contribution of the OECD, in the field of the transfer pricing as well, is admired and respected. However, the relevance of this work, so far as interpretation to transfer pricing legislation is concerned, must remain confined to the areas which have remained intact from legislative or judicial guidance. There is no scope for parallel or conflicting guidance by such forums. Legislation is an exclusive domain of the sovereign, and, therefore, as long as an area is ....
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....up to meet an identified need of one or more specific members of the group. In such a case, it is relatively straightforward to determine whether a service has been provided. Ordinarily an independent enterprise in comparable circumstances would have satisfied the identified need either by performing the activity in-house or by having the activity performed by a third party. Thus, in such a case, an intra-group service ordinarily would be found to exist. For example, an intra-group service would normally be found where an associated enterprise repairs equipment used in manufacturing by another member of the MNE group. 7.9 A more complex analysis is necessary where an associated enterprise undertakes activities that relate to more than one member of the group or to the group as a whole. In a narrow range of such cases, an intra-group activity may be performed relating to group members even though those group members do not need the activity (and would not be willing to pay for it were they independent enterprises). Such an activity would be one that a group member (usually the parent company or a regional holding company) performs solely because of its ownership interest in one or ....
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....lear that a shareholder activity, in issuance of corporate guarantees, is taken out of ambit of the group services. Clearly, therefore, as long as a guarantee is on account of, what can be termed as 'shareholder's activities', even on the first principles, it is outside the ambit of transfer pricing adjustment in respect of arm's length price. It is essential to appreciate, at this stage, the distinction in a service and a benefit. One may be benefited even when no services are rendered, and, therefore, in many a situation it's a 'benefit test' which is crucial for transfer pricing legislation, such as in US Regulations 1.482- 9(1)(3)(i) which defines 'benefit', form a US Transfer Pricing perspective, as "an activity is considered to be provide a benefit to the recipient if the activity directly results in a reasonably identifiable increment of economic or commercial value that enhances the recipient's commercial position, or that may be reasonably anticipated to do so". The expression "activity", in turn is defined, as "including the performance of functions; the assumption of risks; the use by a rendered of tangible or intangible property or other resources capabilities or knowle....
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.... take note of the legal position, in India, in this regard. No matter how desirable is it to read such a test in the definition of the international transaction' under our domestic transfer pricing legislation, as is the settled legal position, it is not open to us to infer the same. Hon'ble Supreme Court, in the case of Tarulata Shyam Vs CIT [(1977) 108 ITR 351 (SC)], took note of the situation before Their Lordships in these words: "We have given anxious thoughts to the persuasive arguments of Mr Sharma. His arguments, if accepted, will certainly soften the rigour of this extremely drastic provision and bring it more in conformity with logic and equity". However, Their Lordships declined to do so on the ground that "There is no scope for importing into the statute the words which are not there. Such importation would be not to construe but to amend the statue". Their Lordships noted that "Even if there be casus omissus, the defect can be remedied only by legislation and not by judicial interpretation". The benefit test, which is set out in the OECD Guidance and which finds its place in the international best practices, does not find its place in the main definition of internation....
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....rantees is not the kind for consideration for which a banker, for example, issue the guarantees, but it is maximization of gains for the recipient entity and thus the MNE group as a whole. In general, thus, the consideration for issuance of corporate guarantees are of a different character altogether. 40. At this stage, it would appropriate to analyze the business model of bank guarantees, with which corporate guarantees are sometimes compared, in the context of benchmarking the arm's length price of corporate guarantees. A bank guarantee is a surety that that the bank, or the financial institution issuing the guarantee, will pay off the debts and liabilities incurred by an individual or a business entity in case they are unable to do so. By providing a guarantee, a bank offers to honor related payment to the creditors upon receiving a request. This requires that bank has to be very sure of the business or individual to whom the bank guarantee is being issued. So, banks run risk assessments to ensure that the guaranteed sum can be retrieved back from the business. This may require the business to furnish a security in the shape of cash or capital assets. Any entity that can pass t....
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....eneral, therefore, bank guarantees are not comparable with corporate guarantees. 41. As evident from the OECD observation to the effect "In contrast, if for example a parent company raises funds on behalf of another group member which uses them to acquire a new company, the parent company would generally be regarded as providing a service to the group member", it is also to be clear that when the corporate guarantees are issued for the purpose of subsidiaries raising funds for acquisitions by such subsidiaries, these guarantees will be deemed to be services to the subsidiaries, and, as a corollary thereto, when corporate guarantees are issued for the subsidiaries to raise funds for their own needs, the corporate guarantees are to be treated as shareholder activity. The use of borrowed funds for own use is a reasonable presumption as it is a matter of course rather than exception. There has to be something on record to indicate or suggest that the funds raised by the subsidiary, with the help of the guarantee given by the assessee, are not for its own business purposes. As a plain look at the details of corporate guarantees would show, these guarantees were issued to various banks ....
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....tions, have accrued to one of the enterprises, but, by reason of those conditions, if not so accrued, may be included in the profits of that enterprise and taxed accordingly. By seeking to adjust the profits in the above manner, the arm's length principle of pricing follows the approach of treating the members of a multi-national enterprise group as operating as separate entities rather than as inseparable parts of a single unified business. After referring to article 9 of the model convention and stating the arm's length principle, the guidelines provide for "recognition of the actual transactions undertaken" in paragraphs 1.36 to 1.41. Paragraphs 1.36 to 1.38 are important and are relevant to our purpose. These paragraphs are re-produced below: - "1.36 A tax administration's examination of a controlled transaction ordinarily should be based on the transaction actually undertaken by the associated enterprises as it has been structured by them, using the methods applied by the taxpayer insofar as these are consistent with the methods described in Chapters II and III. In other than exceptional cases, the tax administration should not disregard the actual transactions or substitut....
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....n the case described above it might be appropriate for the tax administration, for example, to adjust the conditions of the agreement in a commercially rational manner as a continuing research agreement. 1.38 In both sets of circumstances described above, the character of the transaction may derive from the relationship between the parties rather than be determined by normal commercial conditions as may have been structured by the taxpayer to avoid or minimize tax. In such cases, the totality of its termswould be the result of a condition that would not have been made if the parties had been engaged in arm's length dealings. Article 9 would thus allow an adjustment of conditions to reflect those which the parties would have attained had the transaction been structured in accordance with the economic and commercial reality of parties dealing at arm's length." 17. The significance of the aforesaid guidelines lies in the fact that they recognise that barring exceptional cases, the tax administration should not disregard the actual transaction or substitute other transactions for them and the examination of a controlled transaction should ordinarily be based on the transaction as ....
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....e assessee that the corporate guarantees issued by the assessee were in the nature of quasi capital or shareholder activity and, for this reason alone, the issuance of these guarantees should be excluded from the scope of services and thus from the scope of 'international transactions' under section 92B. Of course, once a transaction is held to be covered by the definition of international transaction, whether in the nature of the shareholder activity or quasi capital or not, ALP determination must depend on what an independent enterprise would have charged for such a transaction. In this light of these discussions, we hold that the issuance of corporate guarantees in question was not in the nature of 'provision for services' and these corporate guarantees were required to be treated as shareholder participation in the subsidiaries. 44. As for the words 'provision for services" appearing in Section 92 B, and connotations thereof, our humble understanding is that this expression, in its natural connotations, is restricted to services rendered and it does not extend to the benefits of activities per se. Whether we look at the examples given in the OECD material or even in Explanatio....
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....s are issued as a shareholder activity but costs are incurred for the same or, as a measure of abundant caution, recoveries are made for this non chargeable activity, these guarantees will fall in the residuary clause of definition of international transactions under section 92B. As for the learned Departmental Representative's argument that "whether the service has caused any extra cost to the assessee should not be the deciding factor to determine whether it is an international and then gives an example of brand royalty to make his point. What, in the process, he overlooks is that is that Section 92B(1) specifically covers sale or lease of tangible or intangible property". The expression "bearing on the profits, income, losses or assets of such enterprises" is relevant only for residuary clause i.e. any other services not specifically covered by Section 92 B. It was also contended that, while rendering Bharti Airtel decision, the Delhi Tribunal did go overboard in deciding something which was not even raised before us. In the written submission, it was stated that "Hon'ble Delhi ITAT was not requested by the contesting parties to decide the issue as to whether the provision of gu....
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....ed enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises ". That leaves us with two clauses in the Explanation to Sect ion 92 B which are not covered by any of the three categories discussed above or by other specific segments covered by Section 92 B, namely borrowing or lending money. The remaining two items in the Explanation to Section 92 B are set out in clause (c) and (e) thereto, dealing with (a) capital financing and (b) business restructuring or reorganization. These items can only be covered in the residual clause of definition in international transactions, as in Section 92B (1), which covers "any other transaction having a bearing on profits, incomes, losses, or assets of such enterprises". It is, therefore, essential that in order to be covered by clause (c) and (e) of Explanation to Section 92 B, the transactions should be such as to have beating on profits, incomes, losses or assets of such enterprise. In other words, in a situation in which a transaction has no bearing on profits, inco....
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....in which a guarantee default takes place and, therefore, the enterprise may have to pay the guarantee amounts but such a situation, even if that be so, is only a hypothetical situation, which are, as discussed above, excluded. When an assessee extends an assistance to the associated enterprise, which does not cost anything to the assessee and particularly for which the assessee could not have realized money by giving it to someone else during the course of its normal business, such an assistance or accommodation does not have any bearing on its profits, income, losses or assets, and, therefore, it is outside the ambit of international transaction under section 92B (1) of the Act. 45. Before we part with this issue, there are a couple of things that we would like to briefly deal with. 46. The first issue is this. We find that in the case of Four Soft Ltd Vs DCIT [(2011) 142 TTJ 358 (Hyd)], a co-ordinate bench had, vide order dated 9th September 2011, observed as follows: "We find that the TP legislation provides for computation of income from international transaction as per Section 92B of the Act. The corporate guarantee provided by the assessee company does not fall within the ....
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.... is modestly describe d as 'clarificatory' in nature, it is an issue to be examined whether an enhancement of scope of this anti avoidance provision can be implemented with retrospective effect. Undoubtedly, the scope of a charging provision can be enlarged with retrospective effect, but an anti-avoidance measure, that the transfer pricing legislation inherently is, is not primarily a source of revenue as it mainly seeks compliant behaviour from the assessee vis-à-vis certain norms, and these norms cannot be given effect from a date earlier than the date norms are being introduced. However, as we have decided the issue in favour of the assessee on merits and even after taking into account the amendments brought about by Finance Act 2012, we need not deal with this aspect of the matter in greater detail 48. In the present case, we have held that the issuance of corporate guarantees were in the nature of shareholder activities- as was the uncontroverted claim of the assessee, and, as such, could not be included in the 'provision for services' under the definition of 'international transaction' under section 92 B of the Act. We have also held, taking note of the insertion of E....
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....h an exercise can be done in the present case is, of course, something to be examined and our observations should not be construed as an expression on merits of that aspect of matter. Given the fact that the assessee has succeeded on merits in this case, it would not really be necessary to deal with that aspect of the matter. 49. The second issue is this. We must deal with the question whether in this case the matter should have been referred to a larger bench. The parties before us were opposed to the matter being sent for consideration by the special bench, and at least one of the reasons for which the grievance of the assessee is upheld, i.e. guarantees being in the nature of shareholder activity and excludible from the scope of services for that reason alone, is an area which had come up for consideration for the first time. In effect, therefore, there was no conflict on this issue of and the other issues, given decision on the said issue, were wholly academic. It cannot be open to refer the academic questions to the special bench. No doubt, some decisions of the coordinate benches which have reached the different conclusions. There is, however, no conflict in the reasoning. F....
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....y, if and when occasion comes, by analyzing the issues in a comprehensive and holistic manner. 50. In the light of the detailed discussions above, and for the detailed reasons set out above, we uphold the grievance raised by the assessee. The impugned ALP adjustment of Rs. 2,23,62,603, thus stands deleted. As we do so, however, we must add that, in our considered view, the way forward, to avoid such issues being litigated and to ensure satisfactorily resolution of these disputes, must include a clear and unambiguous legislative guidance on the transfer pricing implications of the corporate guarantees as also on the methodology of determining its ALP, if necessary. Of course, no matter how good is the legislative framework, the importance of a very comprehensive analysis, in the transfer pricing study, of the nature of corporate guarantees issued by the assesses, can never be overemphasized. The sweeping generalizations, vague statements and evasive approach in the transfer pricing study reports, which are quite common in most of the transfer pricing reports, cannot do good to a reasonable cause. When judicial calls on the complex transfer pricing issues are to be taken, utmost cla....
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....all such factual and legal aspects, as he may be advised to. 58. Ground no. 5 is also thus allowed for statistical purpose. 59. In ground no.6, the assessee has raised the following grievance: On appreciation of the facts and circumstances of the case and law, the Learned Addl. Commissioner of Income Tax has erred in excluding the following items of income while granting deduction u/s. 80IB Amount Rs. Silvassa-I Silvassa-I-I Other Income:- Income from sale of scrap 48,01,099 26,89,679 Discount on purchase of DEPB 1,33,662 1,42,902 Gain on sale of DFRC 1,81,694 5,209 Insurance Claim 2,55,382 4,41,751 Other Operating Income:- Income from DEPB/DFRC 5,82,963 3,68,68,545 60. So far as this ground is concerned, learned representatives fairly agree that as far as income from sale of scrap is concerned, the issue is covered in favour of the assessee by the order of co-ordinate bench in assessee's own case for the Assessment Year 2005-06. As regards discount on purchase of DEPB, Gain on sale of DFRC, Insurance claim, Income from DEPB/DFRC, following order of another coordinate bench in assessee's own cas....
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....eciation of the facts and circumstances of the case, the Learned Addl. Commissioner of Income Tax has erred in making addition out of software expenses to the tune of Rs. 51,22,143/- claimed as revenue expenditure by the appellant company. The action of the Learned Addl. Commissioner of Income Tax is contrary to the facts and law and deserves to be deleted." 67. So far as this grievance of the assessee is concerned, the material facts are like this. During the course of assessment proceedings, the Assessing Officer noted that the assessee had debited Rs. 11,86,371 towards professional fees for implementation of SAP software, user license (for SAP software) and user license for other software. When the Assessing Officer required the assessee to show cause as to why this expenditure not be treated as capital expenditure, the assessee submitted that the expenses incurred on implementing the SAP software is mainly increasing the efficiency of the assessee- company so far as the financial results are concerned. It was also submission that these expenses do not give enduring benefit and frequent updating of software required. The Assessing Officer, however, did not agree with any of the....