TaxTMI 
TaxTMI 
2013 (11) TMI 1583
X X X X Extracts X X X X
X X X X Extracts X X X X
....case, the ld CIT(A) has erred in law and in facts in upholding the addition of Rs. 11,51,24,333/- made by the AO/TPO towards adjustment on account of Arm's Length Price (ALP) of the Guarantee Commission of Loan and LC facility guarantees provided by the assessee-company to its Associated Enterprises (AE). 2. On the facts in rejecting the benchmark of the guarantee commission by the assessee @ 0.53% of the loan guaranteed and upholding the ALP of guarantee commission determined by the AO/TPO @ 3% of loan guaranteed. 3. On the facts and in the circumstances of the case, the ld CIT(A) has erred in law and in facts in upholding the methods adopted by the AO/TPO for determining the ALP of guarantee @ 3% of loan guaranteed, although the said method adopted by the AO/TPO is not in accordance with the first Proviso to section 92C(2) of IT Act, 1961 and Rule - 10B(1)(a) of IT Rules, 1962. 4. On the facts and in the circumstances of the case, the ld CIT(A) has erred in law and in facts in rejecting some comparable uncontrolled transactions of guarantee fees/commission cited by the assessee before the AO/TPO as well as before the CIT(A) for determination Arithmetical Means of ALP....
X X X X Extracts X X X X
X X X X Extracts X X X X
....- US$ 13M LIBOR (3.24%)+0.95%=4.19% 0.53% 3% Guarantee of L/C facility to AE Glanmark Generies SA, Argentina US$ 3M NA 1.47% 3% 4. Assessee has Associated Enterprises (AEs) namely Glenmark Holding SA, Switzerland and Glenmark Generics SA, Argentina. In addition, assessee has various other international transactions with different AEs relating to exports of API and export of finished formulation, contract research services etc. There is dispute about the ALP many of these transactions. However, the transactions of charging of guarantee fee on the AEs in connection with (i) the bank loans and (ii) the L/C facilities guaranteed to the said AEs are the disputed international transactions. Assessee conducted TP studies on the said 'guarantee fee' linked international transactions with the AEs and arrived to the conclusion that the rate of guarantee fee charged from the AEs @ 0.53% of the guaranteed amounts is at Arm's Length. However, during the assessment proceedings, AO referred these transactions to the TPO as per the procedure laid down in the Act. The details of guarantee commission charged at the rate of 0.53% of the guarantee....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nancier, assessee submitted that BOI charges the guarantee commission @ 0.31% per quarter i.e. 1.21% per annum and it is negotiable up to the limit of 30% and final figures vary from one customer to the other. As a result of the discount for said negotiations @ 30%, the guarantee commission by the bank may go down 0.88% against aforementioned figure of 1.21%. This elucidation applied to the cases of guaranteed amount exceeding the sum of Rs. 4 crs. As per the assessee, considering the guaranteed sum in this case is Rs. 450 crs, the commission charged @ 0.53%, benchmarked by the assessee is at Arm's Length. He has also reasoned out on the basis of the saving in interest. As per the assessee, 5% is charged when there is no guarantee is given and with guarantee, the Citibank charged grossly @ 4.41%. Thus, the interest saving worked out to 0.59%. He also tried to made out all the objections raised by the TPO as mentioned in para 4 and its sub-paras of his order. Finally, the TPO rejected the submission of the assessee and benchmarked the ALP for the bank guarantee @ 3% of the amount guaranteed and para 5 of the TPO order is relevant in this regard. The said para 5 of the TPO's&....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n up for adjudication. Finally, the assessment was finally completed determining the total income under normal provisions at Rs. 42,66,34,740/- and the book profit as per the special provisions u/s 115JB of the Act at Rs. 48,39,73,455/-. Since, the tax payable under section 115JB of the Act is higher than that of the normal provisions, assessment was completed applying the provisions of section 115JB of the Act. Aggrieved with the said assessment, the assessee filed an appeal before the CIT(A). 9. During the proceedings before the CIT(A), assessee raised the issue of treating the impugned transactions i.e. charging of guarantee commission from AEs as 'international transactions'. CIT(A) dismissed the same. At the outset, ld Counsel mentioned that the said issue is not pressed here. Therefore, we leave it there. 10. Further on the merits of the TPO's comparable, Assessee submitted that on the ground of interest savings and on the ground of adjustments towards the negotiations/the guaranteed commission benchmarked by the assessee is at Arm's Length. The discussion given above quoting the case of a bank guarantee using the Bank of India rates is relevant. Assesse....
X X X X Extracts X X X X
X X X X Extracts X X X X
....assessee failed to furnish any comparables for benchmarking impugned transactions. In that case, the examples given by the TPO should be accepted. In this regard, he relied on the decision of the ITAT in the case of Aztec. Software & Technology Services Ltd. v. Asstt. CIT [2007] 15 SOT 49/107 ITD 141/162 Taxman 119 (Bang.) (SB). Further, CIT(A) also referred to the transactions between the GE Capital Canada Inc. and GECUS (supra), where the guarantee commission @ 1% is held to be at Arm's Length. Finally, the CIT(A) rejected the guarantee commission data followed by the HSBC Ltd, where the commission rate varies from 0.15% to 3%. At the end, the CIT(A) confirmed the decision of the TPO and AO. Relevant discussion was given item no. xxiii to xxiv and the same read as under: "xxiii. The appellant in its submission has also contended to take average rates charged by the various banks. In this regard it is mentioned that such computation of the average rates cannot be considered for the benchmarking. As the rate of ECGC is not in respect of the fee and rate of HSBC cannot be taken as average of 0.15% to 3%. Further, the rate of HSBC actually speaks of guarantee fee and not commi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n'ble Tribunal on TP related Addition 13. Grounds No.l to 5 relate to the TP adjustments-oriented net addition of Rs. 11,51,24,333/-. In this regard, Sri Vijay Mehta, Ld Counsel for the assessee submitted that there is no dispute about the Comparable Uncontrolled Price - CUP method used for benchmarking the transactions relating to 'guarantee commission price' charged on the AEs. Ground No. 3 is relevant here. Further, referring to the issue relating to if the said transactions are of the nature of 'international transactions' or not, he mentioned that the said issue raised before the CIT(A) is no longer pressed. Later, Sri Mehta is extremely critical of the comparables, used by the TPO for benchmarking the ALP of the said international transactions of guarantee commission price charged by the assessee, are improper as these comparables are either rejected by the Tribunal in other cases or they are not property adjusted as per the provisions of the Rule-10B(l)(a) of IT Rules, 1962, Further, he is very critical of the conclusion given by the CIT(A) in confirming the above additions. Further, he took objection not only for rejecting the assessee's guarantee....
X X X X Extracts X X X X
X X X X Extracts X X X X
....er bank guarantees. The fact that the Allahabad Bank which was rejected as an extra CUP, was brought to our notice. In this regard. Ld Counsel relied on the order of the Tribunal in the case of Asstt. CIT v. Asian Paints Ltd. [IT Appeal No. 1937 (Mum.) of 2010, dated 31-10-2011] and Everest Kanto Cylinder Ltd. v. Dy. CIT (LTU) [2013] 34 taxmann.com 19 (Bom.). Thus, as far as the case of Allahabad Bank as a comparable is concerned, it is the case of ld Counsel that rate of 3% is factually wrong as the correct figure works out to only 2.4% ie 0.60 multiplied by 4. Further, the said 2.4% needs to be adjusted downwards because of various factors namely,- (a) guarantee commission rates applicable to rupee loan vs impugned Foreign currency loans; (b) guaranteed amount of Rs. 10 cr vs Rs. 450 cr applicable to assessee's transaction; (c) Bank Guarantee given to its customers vs Corporate guarantee given to the AEs of the assessee; (d) extent of Risk involved and the AEs are strong financially and therefore, the risk is minimum; and (e) In similar circumstances, Allahabad Bank is rejected by the Tribunal as the comparable in CUP method in the cases of Asian Paints Ltd. and Everest Ka....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed the guarantee to the Jet Airways and charged commission @ 3% of the agreement value. In this regard, Id counsel for the assessee mentioned that it is not the case of corporate guarantee between the AEs. Considering the fact full details of negotiations were not available in the public domain, this comparable is no longer good one. Further, ld Counsel demonstrated that when the rate of LIBOR is nearly 3%, the guarantee commission charged by the said bank cannot be 3%. The LIBOR (London Inter-bank offered rate) is the world's most widely used benchmark for short-term interest rates. Therefore, there must be many other reasons for charging the said rate of 3% in that case, which are not available in the public domain. Further, he also narrated the fact that this comparable was rejected by the Tribunal as good comparable again in the case of Everest Kanto Cylinder Ltd., (supra) 14. During the proceedings before the CIT(A), the Assessee cited the case of BANK OF INDIA as a good comparable: We find relevant to discuss this case too if it fits into the scheme of CUP method of TP studies. In this regard, Ld Counsel submitted that the Bank of India (BOI) is the financier for the a....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... of Hon'ble Mumbai Bench of Tribunal A.Y. Guarantee fee commission Remarks 1 Asst. CIT v. Reliance Industries Ltd. 2006-07 0.38% Based on 10 instances given on page No. 66 of order 2 ACIT v. Asian Paints Ltd. 2005-06 0.25% 0% 0.35% Citibank - Page No. 17 of order HSBC - Page No. 19 of order 3 Everest Kanto Cylinder Ltd. v. Dy. CIT 2007-08 0.60% ICICI bank - Page No. 21 of order. 4 Asst. CIT v. M/s. Nimbus Communication Ltd. 2005-06 0.5% M/s Everest Kanto has been taken as an external comparable - Page No 10 of order. 5 Asst. CIT v. M/s. Nimbus Communication Ltd. 2006-07 and 2007-08 0.5% Based on rate approved in assessee's own case for A.Y. 2005-06 Thus, Ld Counsel's summed up and stated that Ld TPO's CUPs (Allahabad Bank, HSBC Bank, US- EXIM Bank etc.) are neither internal nor external CUPs and he failed to pick up a single appropriate 'Comparable Uncontrolled Price'. He also asserted the fact of the Tribunal has already approved the above CUPs with Corporate Guarantee commission prices/rates in the range of 0.25% to 0.6% as the benchmarked rates. In the Everest Kan....
X X X X Extracts X X X X
X X X X Extracts X X X X
....uaranteed amount of Rs. 2.9 Crs. and Tribunal sustained the same for want of evidences from the assessee. Of course, he fairly mentioned that Tecnimont ICB Ltd. (supra) was decided using Bank GCR of SBI and not the Corporate BGC rates and for want of other evidences. 18. During the rebuttal time, as per the Ld. Counsel the transactions referred to in the said order or the Tribunal in the case of Tecnimont ICB (P.) Ltd. (supra) are not covered by the RBI approvals and this fact was not brought to the notice of the Tribunal at the time of adjudication. Therefore, this case is distinguishable. In any case, this is the case of the 'bank guarantee' and not the "corporate guarantee' and therefore, the bank guarantee prices/rates with 'naked quotes' are not good comparables. Ld. Counsel stated that the 'naked quotes' of guarantee commission published by the banks/websites of the Banks should not be adopted without granting adjustments as the differences have materially impact on the price Further, bringing our attention to the decision of the ITAT cited above., Ld. Counsel mentioned that the Tribunal has been consistently approving the guarantee commission @....
X X X X Extracts X X X X
X X X X Extracts X X X X
....bunal. He also demonstrated how it is the case of 'naked quotes' pertaining to the Bank Guarantee and not to the corporate guarantee and TP study based on such naked quotes are unsustainable in law as held by the Tribunal. He also mentioned that the tribunal accepted the CG rate of 0.38% as valid in case of Reliance Industries Ltd. (supra). B. Per contra, the case of the Revenue is that the decision of the CIT(A)/TPO/AO is proper and should be confirmed without any changes. However, the Revenue has nothing to counter on the fact of relying on the "naked quotes', which are unadjusted before using them in the TP study of the TPO. Of course, Sri Jain, in principle, agreed with the existence of the difference between the Bank and Corporate guarantees. Further on the issue of considering the Allahabad Bank or HSBC or Bank of India or the SBI, Ld Counsel fairly mentioned that if the Bank of India is considered as good comparable, SBI should also be taken into account as a good comparable. On the cases cited by the Ld Mehta, it is the argument of the Ld DR that the guarantee commission rate @ 0.5% is considered at Arm's Length. Regarding SBI as the good comparable, L....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ompares the price or rate or value of the transactions. This method uses comparable rates concluded by the uncontrolled parties of a transaction. Depending on parties to the transaction, the CUP may be of two types: (i) Internal CUP or the (ii) External CUP. Internal CUP involves the transaction between the assessee and the unrelated or Independent third party, who does not belong to the controlled group. The External CUP involves the comparison to the price of a comparable transaction between third party enterprises. In the instant case, admittedly, there are no internal CUPs. Therefore, the external CUPs have to be identified ideally for the TP study. It is in this background, we need to study the Bank GC prices are good external CUPs. 22. Now we shall address to the contangurous issue of equating the BG with the CG for TP studies and use of the BG rates for benchmarking the CG rates in CUP method. In most of the TP studies, the TPOs are frequently using the BG rates, that to, the naked quotes for benchmarking the CG Rates without making requisite downward adjustments to the said BG Rates by factoring the obvious differences. List of differences are detailed in the preceding p....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... turn out to be appropriate good CUPs if they are properly bench marked after making due adjustments in accordance with the provisions of the relevant rules 10B (relating to CUP method) of the Income tax Rules, 1962. Since the TPOs have not been benching the naked quotes of the BG rates with proper and sustainable adjustments, Tribunal is constantly disapproving the said quotes. The case of Tecnimont ICB (P.) Ltd. (supra) is an aberration and the background facts this case are distinguishable. Therefore, unless the 'naked quotes' of the bank guarantee rates as given in the websites for public, are adjusted to various controlling factor narrated above, these rates are no good CUPs. AO/TPO/CIT(A) have not provided adjustments to such factors in benchmarking the impugned international transactions. Discussion on the Tribunal Orders on the Corporate Guarantee Rate- CGR: A. Asia Paints Ltd - Order of the Tribunal: We shall first take up the facts relating to the case of CGR and the decision in the case (ITA No. 408 & 1937/M/2010). In this case, Asia Paints Ltd. (supra) gave a corporate guarantee to HSBC Bank, Singapore and Citibank, Singapore in connection with loans grant....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... of India, which varies 0.25% to 0.6%. The guarantee commission should never exceed 0.25% in any case and relied on the bank guarantee rates of HSBC Bank, HDFC Bank, ICICI Bank, ABN AMRO Bank, Standard Chartered Bank, Bank of America etc. At the end, CIT(A) dismissed the TPO's guarantee commission rate of 2.% and benchmarked the international transactions applying the rate of 0.38% instead of 2.5%. The Tribunal confirmed the same and paras 52.10 to 52.12 of the order of the Tribunal dated 13.9.2013 are relevant in this regard. Relevant paras 52.10 to 52.12 of the order of the Tribunal read as under: "52.10.... However, It is a fact that while applying the external comparables, the TPO has not brought out anything on record that under which terms and conditions and circumstances the said public company has charged 2.5% rate of guarantee commission for providing guarantee on behalf of the Finance Company. The charging of a guarantee commission depends upon transactions to transaction and mutual understanding between the parties. There may by a case where bank may not charge any guarantee commission, depending upon its evaluation of relationship and with a guarantee commission,....
X X X X Extracts X X X X
X X X X Extracts X X X X
....a 21 of its order dated, 23.11.2012 and the relevant portion from the said para reads as under; "21.... Thus, on these facts, we do not find any reason to uphold any kind of upward adjustment in ALP in relation to charging of guarantee commission. Hence, the addition of Rs, 28,50,353/- on account of TP adjustment on guarantee commission is hereby deleted and the order of the CIT(A) is set aside...." From the above orders of the Tribunal, it is adequately clear that the "naked quotes" of the bank guarantee commission rates kept in the website of the banks should not be applied in the TP studies without adjustments to various factors of the transactions. These factors may be risk related ones, time related guaranteed amount, financial strength of the AEs, background of the customers and the relationship of the AEs with the parental companies etc. The additions made are legally unsustainable, if the additions are made solely based on the website information of the banks, In principle, bank guarantees (in short - BG) are different from that of the corporate guarantee. Though untested in this case, in our prima facie opinion, a Bank Guarantee comparable may not clear the test of F....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... within the said definition of external CUP. Thus, there are no 'internal CUP' on one side and the CUPs used by the TPO/CIT(A) are also outside the scope of the definition of the 'external CUP'. Further, as stated earlier, we find that the 'bank guarantee' rates are practically different from that of the 'corporate guarantee' 25. Further, we find there are various GC rates in existence. While there is GC rate of 0.38% which is approved by the Tribunal in the case of Reliance Industries Ltd. (supra) there is GC rate of 0.5% as approved by the Tribunal in the case of Everest Kanto Cylinders Ltd. (supra) and Asstt. CIT v. Nimbus Communications Ltd. v. [2013] 34 taxmann.com 298/145 ITD 502 (Mum.) there is GC rate of 0.25% as approved by the Tribunal in the case of the Asian Paints Ltd. (supra). The GC rate of 3% as announced by the Bank for the Bank guarantee Transactions stand dismissed by Tribunal in all the above cases. Reasons for such rejection include: these are the 'naked quotes'; and (ii) the said 3% is always subjected to negotiations between the Bank and its customer; (iii) TPO has not provided adjustments at all before benchmarking ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... On hearing the assessee, CIT(A) dismissed the claim of the assessee considering the binding nature of the order of the Tribunal (supra) and also the relief granted by the Tribunal to the assessee u/s 35(2AB) of the Act. In this regard, para 12.3 of the order of the CIT(A) is relevant here. Per contra, Ld DR relied on the orders of Revenue Authorities. 27. We have heard both the parties on this issue and perused the orders of the Revenue Authorities, in general, and para 12.3 of the CIT(A)'s order in particular. We have also perused the cited decision of the Tribunal. On perusal of the CIT(A)'s order, we find the said para 12.3 is relevant here and the same is reproduced hereunder. "12.3. The facts of the case have been considered together with the submissions of the appellant as against the observations / findings of the AO, in his order. As in the facts of the case as it stands today, the entire expenditure as incurred by the appellant of Rs. 20,28,55,097/- has been allowed by the Hon'ble ITAT u/s 35(2AB) in the AY 2005-2006, the question of such expenses being capital in nature and allowing of consequent depreciation as would be otherwise admissible for the A Y....
X X X X Extracts X X X X
X X X X Extracts X X X X
....6/12 taxmann.com 64 the proposition that the interest u/s 234 need not be charged when the returns are filed prior to the amendment and the assessee cannot be expected to do the impossible by expecting such amendments. Paras 15 & 16 of the said judgment of the Hon'ble Calcutta High Court (supra) is relevant in this regard. We have perused the ratio of the said judgment and the held portion of the said judgment of the High Court reads as under: "Held, that the last date of the relevant financial year was 31-3-2001 and on that day, admittedly, the assessee had no liability to pay any amount of advance tax in accordance with the law then prevailing in the country. Consequently, the assessee paid no advance tax and submitted its regular return on 31 10-2001 within the rime fixed by law wherein it declared its total income and the book profit both as nil. However, consequent to the amendment of the provisions contained in section 11SJB by virtue of the Finance Act, 2002 which was published in the official gazette on 11-5-2002 giving retrospective effect to the amendment from 1-4-2001, the assessee first voluntarily paid a sum of Rs. 1,55,62,511 on account of the tax payable on bo....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Briefly stated relevant facts in this regard are that the during the assessment proceedings AO observed that a list of 281 creditors was furnished by the assessee, where Rs. 38,56,464/- was shown outstanding for more than 3 years. AO further noticed that out of the said amount, Rs. 31,67,622/- pertains to 232 creditors, which had been taxed in the AYs 2005-06; 2006-07 and 2007-08. The remaining amount of Rs. 6,88,842/- pertains to 49 creditors and there was no movement in the creditors account in the books of the assessee. In this regard, assessee contended before the AO that some of the creditors have been subsequently paid off but no evidences were furnished to support his contention. After considering the assessee's submission, AO came to the conclusion that since, these liabilities are outstanding for a period of 3 years, the same ceases to exist and AO made addition u/s 41(1) of the Act and the said amount of Rs. 6,88,842/- was brought to tax. Aggrieved with the decision of the AO, assessee filed an appeal before the first appellate authority. 34. During the proceedings before the first appellate authority, assessee submitted that in the earlier assessment years the Re....
X X X X Extracts X X X X
X X X X Extracts X X X X
....made by the AO cannot be sustained. Accordingly, this ground of appeal filed by the appellant is allowed." 37. Considering the above settled position, we are of the opinion that the issue under consideration is squarely covered by the order of the Tribunal for the AY 2005-2006, dated 20.10.210 (supra) and the CIT(A) has rightly adjudicated the issue in favour of the assessee by following the said order of the Tribunal. Therefore, in our view the order of the CIT(A) is fair and reasonable and it does not call for any interference. Accordingly, ground no. l raised by the Revenue is dismissed. 38. Referring to ground no.2, at the outset, Ld Counsel brought our attention to the order of the Tribunal in the assessee's own case for the AY 2005-2006 vide ITA No.6831/M/2008 and mentioned that the ground no.6, in the said appeal for the AY 2005-2006, is exactly similar to the ground no.6 in the present appeal. Further, he mentioned that this issue has to be decided in favour of the assessee. Paras 5 & 6 of the said order of the Tribunal (supra) for the AY 2005-06 dated 20.10.2010 are relevant in this regard. Ld DR also fairly mentioned that the ground no.2 is similar to that the g....