TaxTMI 
TaxTMI 
2018 (1) TMI 662
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....AE). During the assessment proceedings, the AO found that the assessee had entered into following international transaction (IT. s) with its AE. s. Nature of transactions Details of AE Amount (Rs. ) Method Loans Laqshya Media International, Mauritius Loans granted during the year Rs. 4, 78, 47, 714/- CUP Loans granted in earlier years Rs. 85, 99, 87, 807/- CUP Corporate Guarantee Laqshya Media International, Mauritius Rs. 62, 88, 30, 000/- NIL. 2.1. To determine arms length price (ALP)of the transactions, he made a reference to the Transfer Pricing Officer(TPO). During the Transfer Pricing (TP) proceedings, the TPO found that the assessee had given CG to its AE namely Laqhya Media International-Mauritius(LMI)which had in term issued a CG to HSBC Bank Middle East Ltd, Dubai of AED 33 millions and to National Bank Dubai for AED 20 million for due repayment of term loan availed by Right Angle Media FZ LLC (RAM FZ)a stepped-down-subsidy of the assessee, that CG provided by the assessee to LMI was reduced to 51 million vide amendment to deed of guarantee, dated 04/01/ 2010, that CG was subsequently adjusted....
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....ejudice'it also submitted that the ALP of the CG Fee should be restricted to 0. 5%. After considering the available material, the DRP held that CG provided a benefit to the AE, that guarantee fee had to be charged from the AE, that as per amended provision of section 92B(1)explanation(c) guarantee of any type constituted an IT. The DRP referred to the case Mahindra and Mahindra Ltd. , (40 taxmann. com 522) and observed that the TPO had adopted 4. 66% as arm's length CG rate, that the Tribunal had accepted the contention of the tax payer that CG should be taken at 3%. It also referred to the case of Tecnimont ICB Private Limited(TS-251-ITAT-2013(Mum)-TP)wherein GC@3% was upheld upheld. Finally, the DRP held that GC fees @1. 75%, in respect of unsecured financial guarantees, issued by the assessee, would be appropriate to benchmark the IT. s. It directed the AO to modify the amount accordingly. 2.3. During the course of hearing before us, the Authorised Representative (AR) stated that the identical issue was deliberated upon and decided by the Tribunal on 04/01/2017(ITA/500/ Mum/2015-A. Y 2010-11). The DR contended that facts of the Everest Kanto relied upon by the ITAT were not sim....
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.... corresponding to credit rating of two entities after considering following judgments of foreign courts:- i. General Electric Capital Canada Inc. V. The Queen (Tax court of Canada 2009 TCC 563) ii. Container Corporation Vs. Commissioner (Tax court of USA 134 TC No. 5 2010) TPO adopted 5 years annualized average yield data obtained from CRISIL. The TPO assigned rating of CARE BB+ to assessee company and CARE B+ to its AE i. e. one notch below the assessee. After making suitable adjustments for these ratings, TPO arrived at TP adjustment of 2. 74% which came to Rs. 1, 71, 18, 150/- and following the same, DCIT passed draft assessment order. The assessee assailed benchmarking by TPO before DRP and raised various contentions in his support but rejecting the same, DRP affirmed the stand of TPO. Aggrieved, the assessee is in appeal before us. 4. 2 The initial contention of the Ld. Senior counsel for assessee [AR], Sh. Rajan Vora was that the said transaction was not an international transaction but fairly conceded that in view of amendment in Section 92B and jurisdictional Bombay High Court judgment in CIT Vs. Everest Kento Cylinders Ltd. 378 ITR 57, the said transaction constit....
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....n CG given by the assessee. Further, we are of the considered opinion that CG stood in force at all time and the assessee was contingently liable for the Gross amount of CG provided to its AE notwithstanding the amount of actual loan availed by the AE and further, AE, at all times, got insulated to the extent of guarantee provided by the assessee and therefore, the adjustment has to be calculated on Gross value of CG provided by the assessee. We direct so. This ground is partly allowed. " Respectfully, following the above and considering the judgments of Bombay High Court in the cases of Everest Kanto and Glen Pharmaceutical (supra), we hold that CG Fee should be restricted to 0. 50% on CG given by the assessee. First ground of appeal is decided in favour of the assessee, in part. 3. Second ground of appeal is about disallowance of interest u/s. 36(1)(iii) of the Act, amounting to Rs. 2. 36 crores. It was brought to our notice that identical issue was dealt by the Tribunal while deciding the appeal for AY. 2010-11(supra). We are reproducing the relevant portion of the order: 5.1 Ground Nos. 14 to 16 assails interest disallowance u/s 36(1)(iii) for Rs. 492. 15 Lacs. DCIT noted ....
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....allowance of Rs. 11. 23 Lacs comprising of 'Interest on TDS' and 'Interest provision to MSME'. The balance amount mainly represents Interest on Service Tax. This being the factual position, we conclude that amount of Rs. 15. 20 Lacs has wrongly been disallowed by DCIT. 5. 3 Further, DCIT has computed interest of Rs. 198. 80 Lacs on Term Loan whereas, as per the above break-up the same stood at Rs. 248. 17 Lacs giving rise to further difference of Rs. 49. 37 Lacs. At this juncture, it would be prudent to take up the matter on merits. 5. 4 The Ld. AR has contended that assessee and its AE are into same line of business viz. display / hoardings advertisement. The separate subsidiaries have been floated for the purpose of business exigencies and getting business contracts and licenses at various places. To achieve the common objective, quasi-equity has been introduced in these concerns as a part of overall financial arrangement. A major portion of these loans have been converted into equity in subsequent years. Subsidiaries have carried out common business and have not made any further investments. These subsidiaries are engaged in the business of providing out of home advertisin....
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....unds 64. 22 Investments 12. 60 Loans & Advances 143. 23 Net Current Assets 4. 82 Profit & Loss A/c 125. 12 Total 313. 22 313. 22 It can be observed that against Share Holders' funds of Rs. 249. 00 crores, the loans & advances stood at Rs. 143. 23 Crores out of which impugned interest free loans are Rs. 102. 02 Crores and hence owned funds are sufficient to cover the said loans. It is well settled by catena of judgments that in such a scenario, it is to be presumed that the investment made in subsidiary were out of own funds and not out of borrowed funds. Hon'ble jurisdictional Bombay High Court in CIT Vs. HDFC Bank Ltd. (supra) have observed that if assessee's capital, profits reserves and surplus were higher than the investment in tax free securities then it would have to be presumed that investment made by assessee would be out of interest free funds available with the assessee. Further, we find that the assessee and its subsidiaries are in the same line of business and the said loans are out of commercial expediency. The funds advanced to subsidiaries have been used for its business and this fact....