TaxTMI 
TaxTMI 
2016 (6) TMI 636
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 1.1 in confirming the adjustment made by the AO/TPO under Section 92CA(3) of the Act of Rs. 1,35,05,896 on account of interest on loan given by the Appellant to its AE, Manugraph DGM Inc ('MDGM') by considering Arm's length Price (ALP) of 17.22% p.a. by rejecting benchmarking analysis undertaken by the Appellant of the advances given; 1.2 in confirming the addition on account of interest on loan given by Appellant to its AE, without appreciating the fact that the Appellant has charged interest at 5% p.a. [6 months LIBOR + 200 bps] on the advances given to the AE based on the internal comparable available; 1.3 in considering the yield method while determining the ALP of the interest to be charged on loan advanced to AE by assigning different ratings to the Appellant and its AE (basis of the CRISIL ratings) without considering the fact that the credit rating of a holding company and its wholly-owned subsidiary is the same; 1.4 in making the interest adjustment on advances given to AE, without appreciating the fact that the said advances have been provided out of the internal accruals of the Appellant and no cost is associated with the said advances; 1.5 in n....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... in assessee's own case for the assessment years 2008-09 and 2010-11, in favour of the assessee. Vide order dated 16th September 2015 and following another decision in assessee's on case for the assessment year 2008-09, a coordinate bench of this Tribunal, has decided the issue in favour of the assessee for the assessment year 2010-11 as well, by observing as follows 7. We have heard rival submissions and also perused the impugned order and the material placed on record. On the loan given to its AE, the assessee has charged interest rate worked out on the basis of six months at LIBOR + 2%, which worked out at 3.75%. This Arm's Length interest was benchmarked by using Internal CUP on the basis of rate of interest paid on loans by the assessee availed from State Bank of India. However, the TPO has arrived at ALP 14.736% by taking the interest rate based on average yield rate of DB rated points based on data collected from CRISIL. The DRP has reduced the said interest rate by holding that domestic cost of borrowing + mark-up of 3% should be applied which works out 9.90%. The applicability of interest rate based on LIBOR had come-up for consideration before the Tribunal in the case ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... however, is that even after this stated ALP of LIBOR + 100 basis points, there is still a cushion of further 147 basis points before the interest charged can be said to more than the arm's length price, and it is an old matter. It is, therefore, worth exploring whether, even within the limitations of somewhat sketchy information available on the facts of this case, the matter can be decided one way or the other rather than sending it back to the TPO for fresh adjudication. 7. While exploring such possibilities, it will be useful to take note of the fact that in the case of Bharti Airtel Ltd. v. Addl. CIT [2014] 64 SOT 50 (URO)/43 taxmann.com 50 (Delhi), and a coordinate bench had deleted a similar ALP adjustment on account of interest amounting to Rs. 10,11,786 wherein the same approach of adopting 400 basis points above the LIBOR as ALP was adopted. While deleting this ALP adjustment, speaking through one of us, the Tribunal had, inter alia, observed as follows:- '62. As far as the first adjustment is concerned, while the TPO has adopted the rate as 4% over LIBOR rate, he has not set out the specific basis of this rate. He has mentioned about some information gather....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... guarantee cost payable to the taxpayer for giving guarantee for equivalent amount of loan given to the AE i.e. the rate differential for the difference in interest spread between the credit rating of the taxpayer and the AE. Thus after the above analysis, the equivalent interest rate is the interest rate including the transaction cost for a foreign currency loan, if given to the AE for its credit standing/rating. 66. We see no substance in this adjustment either. The TPO has taken the lender as the tested party, and yet made adjustments for higher risks on account of assumed lack of security and increased risk of single party dealing. This approach overlooks the fact that the assessee has advanced monies to its subsidiaries which are under its management and control- a factor which substantially reduces the risk rather than increasing it. On these facts, it is difficult to understand, much less approve, any rationale for adjustment on account of higher risks. On this point also, we see no merits in the stand of the TPO. (Emphasis, by Underlining, Supplied by us now)' 8. When the matter was carried in further appeal, this time by the Commissioner, before Hon'ble Delhi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the order, investments with serious risks of inadequate safety, investments of high risk, investments of substantial risk and investments of default. The approach adopted by the DRP cannot, therefore, meet our approval. 10. Similarly, the DRPs observation to the effect that "Generally, Indian banks are charging interest rate of 2.5% to 5% above the LIBOR/EURIBOR for foreign currency loans" is not only devoid of any basis but, as our day to day experience on the bench shows, ex facie incorrect. 11. There are any number of decisions by the coordinate benches which show that the interest rates charged on foreign currency, say US dollars, loans are much lower than the 250 to 500 basis points above the LIBOR having been to be generally applicable rates. For instance, in the cases of Bharti Airtel Ltd. (supra), which pertains to the assessment years 2007-08 and 2008-09, the comparable cases were taken as 150 basis points above LIBOR and in the range of 140-170 basis points above LIBOR. In contrast to this comparable case, the interest charged in the present case is 247 points above the LIBOR rate. In the case of Siva Industries & Holdings Ltd. v. Asstt. CIT [2012] 26 taxmann.com 96....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f the Deputy Commissioner of Income-tax - Circle 3(2) (hereinafter referred to as the 'AO')/ Deputy Commissioner of Income-tax (Transfer Pricing) - 1 (9) (hereinafter referred to as 'TPO'): 2.1 in making an adjustment under Section 92CA(3) of the Act of Rs. 2,31,71,100/- on account of CG given by the Appellant to overseas bank in favor of its AE (MDGM) towards the loan taken by its AE from the said bank disregarding the fact that no benefit is accrued to AE; 2.2 in not appreciating the fact that the transaction of bank guarantee is not an International Transaction within the meaning of section 92B and the explanation to Section 92B inserted by Finance Act, 2012 cannot extend scope of transaction retrospectively and accordingly, transfer pricing provisions cannot apply to the said transaction; 2.3 in making adjustment in respect of CG given by the Appellant without appreciating the economic and commercial rationale behind the transaction and factors like strategic investment and shareholding activity; 2.4 in determining the ALP at 6% by adopting an arbitrary and ad hoc manner without recording a finding as regards to Most Appropriate Method for benchmarking the t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....at difference in yields of BB+ and A+ bond is 5.79%, and, therefore, he is adopting 6% as arm's length price of the issuance of this guarantee to the AE's banker in the USA. It was in this backdrop that an arm's length price adjustment of Rs. 2,31,71,100 was made towards guarantee commission. Aggrieved, assessee carried the matter in appeal before the CIT(A) but, once again, without any success. Learned CIT(A) upheld the action of the TPO. 11. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. We have noted that in the assessment years 2008-09 and 2010-11,in assessee's own case, coordinate benches have, following decision of this Tribunal in the case of Everest Kanto Cylinders Ltd Vs DCIT [(2013) 34 taxmann.com 19 (Mumbai)] held that the arm's length price for guarantee commission is .5%. Interestingly, that was a case in which, as the coordinate bench itself observed in so many words, ".....in this case, the assessee has itself charged 0.5% guarantee commission from its AE, therefore, it is not a case of not charging of any kind of commission from its AE. The only point which h....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ollows: This SUPPORT AGREEMENT dated as of April 30, 2007 (the "Agreement") by and among MANUGRAPH DGM INC. (the "Borrower"), PNC BNK, NATIONAL ASSOCIATION (the "Lender") and MANUGRAPH INDIA LD. (the "Parent") WITNESSETH: WHEREAS, concurrently herewith the Borrower and the Lender are entering into a Letter Agreement, certain promissory notes and certain other financing documents and security agreements, each dated as of the date hereof (collectively, the "Loan Documents") pursuant to which the Lender has agreed to make certain Loans (as defined in the Loan Documents) to the Borrower in the aggregate principal amount not to exceed $ 14,850,000 at any one time outstanding. WHEREAS, it is a condition precedent to the Lender's obligation to make such Loans that the Parent and the Borrower shall have executed and delivered to the Lender this Agreement: WHEREAS, the Borrower is the wholly owned subsidiary of the Parent. WHEREAS, the Parent will derive substantial direct and indirect economic benefit from the extensions of credit to the Borrower by the Lender pursuant to the Loan Documents. NOW THEREFORE, in consideration of the premises and of the mutual agreements h....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... amount equal to the Shortfall Amount) and (ii) the date on which such Deficiency Payment is required to be made (which date shall not be less than 5 Business Days from the date of such notice). (c) (1) The Parent shall satisfy its obligations to make Deficiency Payment hereunder by either contributing cash to the capital of the Borrower or by making a loan to the Borrower (which loan shall be fully subordinated to the obligations of the Borrower under the Loans of the Lender on terms and conditions satisfactory to the Lender in its sole discretion in either case in an aggregate principal amount equal to the required amounts. (ii) The proceeds of all Deficiency Payments shall be paid directly to the Lender. The Lender shall apply all proceeds of Deficiency Payments received by it to the prepayment of principal of the Loans in such order as it may in its sole discretion determine, provided that such prepayment will be without penalty under the Loan Documents. (d) The Parent's obligation hereunder shall not exceed the lesser of (i) $ 14,850,000 or (ii) the amount outstanding under the Loan Documents and shall be a continuing and unlimited obligation and shall apply in each F....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n the case of Micro Ink vs ACIT [(2016) 176 TTJ 8 (Ahd)] wherein it is, inter alia, observed as follows: 21. It is only elementary that the determination of arm's length price, under the scheme of the international transfer pricing set out in the Income-tax Act, 1961, can only be done in respect of an 'international transaction'. Section 92(1) provides that, "(a)ny income arising from an international transaction shall be computed having regard to the arm's length price". In order to attract the arm's length price adjustment, therefore, a transaction has to be an 'international transaction' first. The expression 'international transaction' is a defined expression. Section 92B defines the expression 'international transaction' as follows: '92B - Meaning of international transaction (1) For the purposes of this section and sections 92, 92C, 92D and 92E, "international transaction'' means a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money,....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e, irrespective of the fact that it has bearing on the profit, income, losses or assets of such enterprises at the time of the transaction or at any future date; (ii) the expression "intangible property" shall include - (a) marketing related intangible assets, such as, trademarks, trade names, brand names, logos; (b) technology related intangible assets, such as, process patents, patent applications, technical documentation such as laboratory notebooks, technical knowhow; (c) artistic related intangible assets, such as, literary works and copyrights, musical compositions, copyrights, maps , engravings; (d) data processing related intangible assets, such as, proprietary computer software, software copyrights, automated databases, and integrated circuit masks and masters; (e) engineering related intangible assets, such as, industrial design, product patents, trade secrets, engineering drawing and schematics, blueprints, proprietary documentation; (f) customer related intangible assets, such as, customer lists, customer contracts, customer relationship, open purchase orders; (g) contract related intangible assets, such as, favourable supplier, contracts, licenc....
X X X X Extracts X X X X
X X X X Extracts X X X X
....m the time of the inception of transfer pricing legislation in India, which was brought on the statute vide Finance Act, 2012. 27. This Explanation states that it is merely clarificatory in nature inasmuch as it is 'for the removal of doubts', and, therefore, one has to proceed on the basis that it does not alter the basic character of definition of 'international transaction' under Section 92B. Clearly, therefore, this Explanation is to be read in conjunction with the main provisions, and in harmony with the scheme of the provisions, under Section 92B. Under this Explanation, five categories of transactions have been clarified to have been included in the definition of 'international transactions'. 28. The first two categories of transactions, which are stated to be included in the scope of expression 'international transactions' by the virtue of clause (a) and (b) of Explanation to Section 92B, are transactions with regard to purchase, sale, transfer, lease or use of tangible and intangible properties. These transactions were anyway covered by 2 (a) above which covered transactions 'in the nature of purchase, sale or lease of ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....is statutory provision is that while impact on " profit, income, losses or assets" is sine qua non, the mere fact that impact is not immediate, but on a future date, would not take the transaction outside the ambit of 'international transaction'. It is also important to bear in mind that, as it appears on a plain reading of the provision, this exclusion clause is not for "contingent" impact on profit, income, losses or assets but on "future" impact on profit, income, losses or assets of the enterprise. The important distinction between these two categories is that while latter is a certainty, and only its crystallization may take place on a future date, there is no such certainty in the former case. In the case before us, it is an undisputed position that corporate guarantees issued by the assessee to the Deutsche Bank did not even have any such implication because no borrowings were resorted to by the subsidiary from this bank. 31. In this light now, let us revert to the provisions of clause (c) of Explanation to Section 92B which provides that the expression 'international transaction' shall include "capital financing, including any type of long-term or s....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ables are out of cost free funds and these debit balances do not cost anything to the person allowing such use of funds. The situations can be endless, but the common thread is that 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. 33. In any event, the onus is on the revenue authorities to demonstrate that the transaction is of such a nature as to have "bearing on profits, income, losses or assets" of the enterprise, and there was not even an effort to discharge this onus. Such an impact on profits, income, losses or assets has to be on real basis, even if in present or in future, and not on contingent or hypothetical basis, and there has to be some material on record to indicate, even if not to establish it to hilt, that an intraAE international transaction has some ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....issuance of corporate guarantee, even in a case in which neither any guarantee commission is charged nor any costs are incurred, is an international transaction. In any case, there is nothing in the operative portion which even remotely suggests that Their Lordships had any occasion to address themselves to the question as to whether the issuance of corporate guarantee amounts to international transaction. The operative portion of the judgment is reproduced below for ready reference: "............In the matter of guarantee commission, the adjustment made by the TPO were based on instances restricted to the commercial banks providing guarantees and did not contemplate the issue of a Corporate Guarantee. No doubt these are contracts of guarantee, however, when they are Commercial banks that issue bank guarantees which are treated as the blood of commerce being easily encashable in the event of default, and if the bank guarantee had to be obtained from Commercial Banks, the higher commission could have been justified. In the present case, it is assessee company that is issuing Corporate Guarantee to the effect that if the subsidiary AE does not repay loan availed of it from I....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e effect from 1st April, 1962. Fourthly, the Finance Act 2012 which introduced, inter alia, the amendment to section 2(47) and section 92CA(2B) is a validating act in view of section 119 thereof. 215. Explanation 2 to section 247 broadly has four elements. Disposal or parting with or creating any interest in an asset. The asset or any interest in the asset. The disposing of or parting with the asset or creating any interest therein may be: (a) Direct or indirect. (b) Absolute or conditional. (c) Voluntary or involuntary. (d) By amendment or otherwise. (iv) A non-obstante provision regarding the nature of a transfer. If an act, arrangement, transaction etc. constitutes a transfer as defined in the section it would be so notwithstanding the transfer of rights having been categorised as being effected or dependent upon or flowing from the transfer of a share or shares of a company registered or incorporated outside India. 216. Two aspects of a transfer are clarified - the asset itself and the manner in which it is dealt with. The asset is no longer restricted to the asset per se or a right therein, but also extends to "any....
X X X X Extracts X X X X
X X X X Extracts X X X X
....pen 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 account of the Revenue itself not having appreciated or realized the actual ambit of the term "transfer" which are now clarified by the amendment. Even assuming that the Revenue cannot re-open the Vodafone case, it cannot be barred from relying upon the true ambit of the term "transfer" in future cases, including the proceedings in respect of the petitioner. Thus, even assuming that the judgment of the Supreme Court remains unaffected by the clarificatory amendment, the Revenue would be entitled hereafter in other cases, at least, to appreciate, analyze and construe the transactions relating to call options, including the Framework agreements in a proper perspective which it may not have done earlier. 220. These are important issues. There is no justification for withdrawing the proceedings from the channel provided by the Income-tax Act, bypassing the Tribunal and considering all these questions in exercise of the High Court's extraordinary jurisdiction under Article 226.' (Emphasis supplied) 27. Re....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Ltd. [1992] 198 ITR 297/64 Taxman 442 (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 treat it to be the complete "law" declared by this Court. The judgment must be read as a whole and the observations from the judgment have to be considered in the light of the questions which were before this Court" Their Lordships further noted that "A decision of this Court takes its colour from the questions involved in the case in which it is rendered and, while applying the decision to a later case, the Courts must carefully try to ascertain the true principle laid down by the decision of this Court and not to pick out words or sentences from the judgment, divorced from the context of the questions under consideration by this Court, to support their reasoning" It was also recalled that in Madhav Rao Jivaji Rao Scindia Bahadur v. Union of India AIR 1971 SC 530, Hon'ble Supreme Court had cautioned that "It is not proper to regard a word, clause or a sentence occurring in a judgment of the Supreme Court, divorced from its context, as containing a full exposition....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n 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 with the fundamental question as to whether issuance of a corporate guarantee is an international transaction at all- which is what we are concerned with at present. This TCC decision dealt with a situation in which the assessee was denied, in computation of its business income, tax deduction for payment of guarantee fees on the ground that there was no effective benefit to the assessee, in obtaining the said guarantee. Aggrieved by denial of deduction, assessee carried the matter in appeal before the Canadian Tax Court, and the plea of the assessee was eventually upheld. It is also interesting to note that as a sequel to this Tax Court of Canada decision, the transfer pricing legislation was amended, to bring greater clarity on the issue and as a measure of abundant caution, and section 247 (7.1), granting specific exemption to guarantee fees, was introduced. This amendment is as follows: (7.1) Sub-section (2) does not apply to adj....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nsactions 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 being in the quest of comprehensive coverage, have ended up in a limited scope of the transactions being covered by the arm's length price adjustments for transfer pricing. In any event, as emphasized earlier as well, the decision was in the context of the deduction, and, post this decision, a specific amendment was introduced in the Canadian transfer pricing law to clarify the position that all corporate guarantees issued by the assessee, in support of its subsidiaries, are not necessarily international transactions. Revenue, therefore, does not derive any advantage from the Tax Court of Canada's decision in the case of GE Capital Canada. There are many more aspects which make this decision wholly irrelevant in the present context but suffice to say that relevant legal provisions and context being radically different, the reliance of this decision must be rejected for this short r....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he 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 the inadequacies in the financial position of the borrower; specifically, the fact that the subsidiary does not have enough shareholders' funds". There can be number of reasons, including regulatory issues and market conditions in the related jurisdictions, in which such a contribution, by way of a guarantee, would justify to be a more appropriate and preferred mode of contribution vis-a-vis equity contribution. It is significant, in this context, that the case of the assessee has all along been, as noted in the assessment order itself, that "said guarantees were in the form of corporate guarantees/ quasi-capital and not in the nature of any services". In other words, these guarantees were specifically stated to be in the nature of shareholder activities. The assessee's claim of the guarantees being in the nature of quasica....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 adequately covered by the work of legislation, things like guidance of the OECD, or for that purpose any other multilateral forum, are not decisive. While we are alive to the school of thought that when the domestic transfer pricing regulations do not provide any guidelines, it may have to be decided having regard to international best practices, we do not quite agree with it inasmuch as, in our considered view, Revenue cannot seek to widen the net of transfer pricing legislation by taking refuge of the best practices recognized by the OECD work. 35. While dealing with "special consideration for intra-group services", the 'OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations' has noted that there are two fundamental issues with respect to the intra-gro....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 more other group members, i.e. in its capacity as shareholder. This type of activity would not justify a charge to the recipient companies. It may be referred to as a "shareholder activity", distinguishable from the broader term "stewardship activity" used in the 1979 Report. Stewardship activities covered a range of activities by a shareholder that may include the provision of services to other group members, for example services that would be provided by a coordinating centre. These latter types of non-shareholder activities could include detailed planning services for particular operations, emergency management or technical advice (trouble shooting), or in some cases assistance in day-to-day management. 7.10 The following examp....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Pricing perspective, as "an activity is considered to be provided 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 knowledge (including knowledge of and ability to take advantage of a particularly advantageous situation or circumstances); and making available to the recipient any property or other resources of the rendered" [Regulation 1.482-9(1)(2)]. The issuance of guarantees is not within the ambit of transfer pricing in United States because it is a service but because it is covered by the specific definition discussed above. As a matter of fact, David S Miller, in a paper titled 'Federal Income Tax Consequences of Guarantees; A Comprehensive Framework for Analysis' published in the 'The American Lawyer Vol. 48, No. 1 (Fall 1994), pp. 103-165 (http://www.jstor.org/stable/2077168....
X X X X Extracts X X X X
X X X X Extracts X X X X
....on 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 statute". 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 international transaction, even though there is a reference to the expression 'benefit' in the context of cost or expense sharing arrangements but that is a different aspect of the matter altogether. In the absence of benefit test being mentioned in the definition for the present purposes, we cannot infer the same. 38. One more thing which is clearly discernable from the above discussions is that the tests recognized by these guidelines are interwoven twin tests of benefit and arm's length. Benefit test implies the recipient group member should get "economic or commercial value to enhance its c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....at 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 honour 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 the risk assessment and provide security may obtain a bank guarantee. The consideration for the issuance of bank guarantee, so far as a banker is concerned, is this. When the client is not able to honour the financial commitments and when client is not able to meet his financial commitments and the bank is called upon to make the payments, the bank will seek a compensation for the action of issuing the bank guarantee, and for the risk it runs inherent in the process of making the payment first and realizing it from the underlying security and the client.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d 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 in respect of the credit facilities availed by the subsidiaries from these banks. The guarantees were prima facie in the nature of shareholder activity as it was to provide, or compensate for lack of, core strength for raising the finances from banks. No material, indicating to the contrary, is brought on record in this case. Going by the OECD Guidance also, it is not really possible to hold that the corporate guarantees issued by the assessee were in the nature of 'provision for service' and not a shareholder activity which are mutua....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ng 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 reproduced 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 substitute other transactions for them. Restructuring of legitimate business transactions would be a wholly arbitrary exercise the inequity of which could be compounded by double taxation created where the other tax administration does not share the same views as to how the transaction should be structured. 1.37 However, there are two particular circumstances in which it may, exceptionally, be both appropriate and legitimate for a tax administ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ured by the taxpayer to avoid or minimize tax. In such cases, the totality of its terms would 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 it has been actually undertaken and structured by the associated enterprises. It is of further significance that the guidelines discourage re-structuring of legitimate business transactions. The reason for characterisation of such re-structuring as an arbitrary exercise, as given in the guidelines, is that it has the potential to create double taxation if the other tax administration does not share the same....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed 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 92B, 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 Explanation to Section 92B, the thrust is on the services like market research, market development, marketing management, administration, technical service, repairs, design, consultation, agency, and scientific research, legal or accounting service or coordination services. As a matter of fact, even in the Explanation to Section 92B- which we will de....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 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 92B. 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 guarantee was a service or not". That's not factually correct. We are unable to see any merits in learned Departmental Representative's contention, particularly as decision categorically noted that not only before the Tribunal, but this issue was also raised before the DRP- as ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rises ". That leaves us with two clauses in the Explanation to Sect ion 92B which are not covered by any of the three categories discussed above or by other specific segments covered by Section 92B, namely borrowing or lending money. The remaining two items in the Explanation to Section 92B 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 92B, the transactions should be such as to have bearing 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 restructur....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hen 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 v. Dy. CIT [(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 definition of international transaction. The TP legislation does not stipulate any guidelines in respect to guarantee transactions. In the absence of any charging provision, the lower authorities are not correct i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ctive 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 92B of the Act. We have also held, taking note of the insertion of Explanation to Section 92B of the Act, that the issuance of corporate guarantees is covered by the residuary clause of the definition under section 92B of the Act ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ined 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. Four Soft Ltd. decision (supra) had decided the issue in favour of the assessee ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....icial scrutiny, 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 assessees, 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 t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....h had further observed "in this case, the assessee has itself charged 0.5% guarantee commission from its AE, therefore, it is not a case of not charging of any kind of commission from its AE. The only point which has to be seen in this case is whether the same is at ALP or not". Learned Departmental Representative has invited our attention to a decision of the Bangalore benches, in the case of Advanta India Limited Vs ACIT [(2015) TII-294-ITAT-BAN], which is in favour of the assessee. While learned Departmental Representative is indeed right, that is a case in which the assessee did infact recover charges, which included more than the cost incurred, from the beneficiary, and, as such, it clearly had an impact on the profits of the assessee. That is a case distinct from the present situation in which there is no impact on the profits or losses or assets or income of the assessee. In Advanta decision (supra), this aspect of the matter and the distinguishing feature has been discussed at considerable length. Learned Departmental Representative has then invited our attention to the fact a substantial question of law has been admitted by Hon'ble Delhi High Court in ITA No. 607/2014 agai....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t a consideration and as long as the guarantee is not invoked by the beneficiary. To treat this phrase as implying a benefit test, will, in our considered view, stretching the things too far. The benefit test, as we see it, does not find place in the statute as yet. We are, therefore, not swayed by the arguments, though extremely well researched and thought provoking, of the learned Departmental Representative- particularly at this stage. He has raised a number of other arguments as well but as those arguments are already dealt with in the case of Micro Ink decision reproduced above, we see no need to again deal with the same. 16. We are, therefore, of the considered view that being a signatory to the tripartite support agreement, on the facts of this case, does not constitute a corporate guarantee akin to bank guarantee and, even if it could be treated as a corporate guarantee for benchmarking purposes, the corporate guarantee does not constitute an international transaction under section 92 B of the Act. In view of these discussions, as also bearing in mind entirety of the case, we are of the considered view that the arm's length price adjustment of Rs. 2,31,71,100 is unsustai....
X X X X Extracts X X X X
X X X X Extracts X X X X
....able income has to be apportioned as required under provisions of section 14A. We note that the total investment comprising the investment in mutual fund and growth schemes / growth mutual funds as well as investment in foreign subsidiaries. The Assessing Officer itself has excluded the investment in foreign subsidiaries because the dividend from the foreign companies is taxable. However, the growth mutual fund does not yield any dividend/exempt income, therefore, the provisions of section 14A would not apply on the investment in growth mutual funds. A similar view was taken by the Co-ordinate Bench of this Tribunal in the case of Everest Kanto Cylinders Ltd. (supra) in para 4 as under:- "4. Before us, the Ld. Authorised Representative of the assessee has submitted that up to the A.Y. 2007-08, the Tribunal has held that the assessee was having sufficient non interest bearing fund for making the investment. For the A.Y. 2008-09, the Investment was made by the assessee in foreign subsidiaries, therefore, to the extent of investment made by the assessee in the A.Y. 2008-09, no disallowance is called for on account of balance interest expenditure in view of the order of this T....
X X X X Extracts X X X X
X X X X Extracts X X X X
....3(2) (hereinafter referred to as the 'AO')/ Deputy Commissioner of Income-tax (Transfer Pricing) - 1 (9) (hereinafter referred to as 'TPO'): 4.1 in disallowing expenses incurred for DRUPA Exhibition - Germany (2008) amounting to Rs. 2,99,79,357/- by treating it as capital expenses; 4.2 in appreciating the fact that said advertisement expense was revenue expenditure incurred wholly or exclusively for the propose of business and allowable under section 37(1) of the Act. 24. So far as this disallowance is concerned, the relevant material facts are like this. During the course of scrutiny assessment proceedings, the Assessing Officer noticed that the assessee has incurred an expenditure of Rs. 3,99,72,476 on attending and participating in an Drupa 2008- a trade exhibition which takes place every four years in Germany. The Assessing Officer was of the view that the expenditure so incurred is not a purely revenue expenditure inasmuch as the benefit from participation in this exhibition is availed for several years. The assessee's explanation was that it is a revenue expenditure in nature, incurred wholly and exclusively for the purposes of business, not being in the natu....
X X X X Extracts X X X X
X X X X Extracts X X X X
....diture and that it should be laid out wholly and exclusively for the purposes of business. It is not even the case of the Assessing Officer that it is a capital expenditure; all that is claimed is that since benefit of expense spreads over four years, the expense should be amortized over a period of four years. That is not a legally sustainable proposition as the very concept of deferred revenue expenditure is somewhat alien to the income tax law and as is clearly evident from the following observations made by Hon'ble Gujarat High Court in the case of DCIT vs Core Healthcare Ltd [(2009) 308 ITR 263 (Guj)]: 14. In relation to the first item, namely, advertisement expenses, it is not in dispute that the expenditure of Rs. 70 lakhs and odd was incurred on a special advertisement campaign. However, that by itself would not be sufficient to determine as to whether the expenditure in question is on revenue account or capital account. The approach of CIT(A) that the expenditure in question was treated as deferred revenue expenditure and hence was capital in nature, cannot be termed to be a correct approach because insofar as the IT Act is concerned, there is no such category of deferr....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the period of its benefit cannot be ascertained with any reasonable degree of certainty. Unless even the precise period of benefit ca be reasonably ascertained, there cannot be any occasion for spreading over the expenditure over the period of benefit. 31. There are large number of judicial precedents that participation costs in the trade exhibitions are inherently in the nature of revenue expenses, as these are marketing expenses in nature, which are allowed in the year in which the expenses are incurred. We are in considered agreement with this school of thought. 32. In the light of the above discussions, as also bearing in mind entirety of the case, we are of the considered view that entire expenditure on participation in Drupa 2008 should be allowed as revenue expenditure. Accordingly, the disallowance of Rs Rs. 2,99,79,357 stands deleted. However, in the event of the Assessing Officer having allowed the deduction for this amount spread over three subsequent assessment years, the deduction, to that extent, shall also withdrawn. 33. Ground no. 4 is thus allowed in the terms indicated above. 34. In ground no. 5, the assessee has raised the following grievance: 5. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... realities of group synergy and commerce but also amateurish. It is important to bear in mind the fact that there is specific marketing agreement that the assessee has entered into with the subsidiary, a copy of which is placed before us in the paperbook at pages 272 to 285, and the reimbursements are made in terms of the said agreement. The reimbursement is for salary of one person i.e. Ron Ehrhardt (US $ 1,54,171), who is exclusively engaged in marketing of assessee's products, his travelling expenses (US $ 58,156) and expenses incurred on trade show (US $ 25,392). There is nothing to controvert the claim of the assessee, as supported by material before us, that these expenses were incurred for the business purposes of the assessee. The assessee has claimed that assessee has able to generate sales of US $ 2.6 million, through these efforts, in the subsequent years. The apprehensions of the assessee are thus devoid of any substance. There is no justification for disallowing the expenses by question commercial expediency, nor can the Assessing Officer raise such issues anyway. As for the tax deduction at source obligations, the requirements of deducting tax at source come into play....
X X X X Extracts X X X X
X X X X Extracts X X X X
....a result of the restatement of closing balance of loan liability in terms of INRs at the exchange rate applicable at the relevant point of time, the assessee incurred a foreign currency translation loss of Rs. 6,57,75,845. During the course of the assessment proceedings, the Assessing Officer noticed this claim and required the assessee to show cause as to why this deduction not be disallowed under section 43A. It was explained by the assessee that the loss on valuation is due to restatement of loan in INRs and not on account of acquisition of assets, and, therefore, Section 43 A does not come into play. The Assessing Officer, however, did not agree. He was of the considered view that "even when the payment is made by the other party any loss on foreign exchange related to acquisition of fixed assets would increase the cost of fixed assets, which ultimately lead to increase in depreciation on the said fixed assets" and that "this section does debars the assessee to claim foreign exchange loss related to acquisition of fixed assets as revenue expenses under section 37 or any other provision of the Act". Accordingly, the foreign exchange loss of Rs. 6,57,75,845 was disallowed, though....