TaxTMI 
TaxTMI 
TaxTMI 
2019 (1) TMI 845
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....16,52,19,000/- and enhancing the same by Rs. 20,57,19,110/-. 2. On the facts and circumstances of the case and in law, the Ld. AO/ Hon'ble DRP grossly erred in confirming the addition of Rs. 20,09,07,000/- to the income of the Appellant proposed by the Ld. TPO by holding that provision of corporate guarantee to its Associated Enterprise ('AE') do not satisfy the arm's length principle envisaged under the Income Tax Act, 1961 C the Act') and in doing so, the Ld. AO/ Hon'ble DRP grossly erred in upholding the Ld. TPO's action of: 2.1. considering provision of corporate guarantee as international transaction u/s 92B of the Act; 2.2. incorrectly holding that the Appellant has undertaken risk on behalf of its AEs and there is an inherent cost in giving corporate guarantees for which the Appellant should have charged a consideration; 2.3. disregarding the fact that the provision of corporate guarantee to the AE was in the nature of shareholder service; 2.4. disregarding the fact that III the absence of the corporate guarantee provided, the Appellant being the holding company would have provided the funds to the subsidiary by increasing the share cap....
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...., the Ld. TPO erred in disregarding the revised return of income: and 4.5. erroneously computing the adjustment amount under Section 92CA of the Act. 5. The Ld. AO has grossly erred in charging interest under section 234B and 234C of the Act; 6. The Ld. AO has grossly erred in initiating penalty under section 271(1)(c) of the Act mechanically and without recording any satisfaction for its initiation." 2. Briefly stated the facts necessary for adjudication of the controversy at hand are : M/s. JE Energy Venture Private Limited, the taxpayer is a strategic "venture business" segment of Jubilant Bhartia Group. The taxpayer through its alliances with international companies provides business, marketing and technical support related to oil and gas services, power and infrastructure, financial services, trading, homeland & mega city security systems and aviation related services (sales, maintenance of aircrafts and helicopters). The taxpayer is the ultimate holding company having 100% share of Jubilant Energy Holdings BV (JEHBV). JEHBV holds 84.02% shares of Jubilant Energy NV (JENV) which indirectly holds 100% share in Indian subsidiaries. 3. During the year under assessment....
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....ise additional grounds on the ground that the same go to the root of the case which are as under :- Ground No.7 : 7.1 That in the facts and circumstances of the case and in law, the Ld. Assessing Officer ('AO') / Transfer Pricing Officer ('TPO') has erred in disregarding the exclusion of disallowance u/s 14A of the Act made by the Appellant through its original return of income which is subsequently withdrawn by way of letter dated October 12, 2017 in accordance with judicial precedents and facts of the case. 7.2. Without prejudice, that on the facts and circumstances of the case and in law, disallowance should not be made on such investments where no exempt income has been earned by the Appellant. 7.3. Without prejudice, that on the facts and circumstances of the case and in law, disallowance should be restricted to the exempt income earned by the Appellant during the year." 9. Keeping in view the fact that the additional ground sought to be raised by the assessee company, though not raised before the ld. CIT (A), is necessary for complete adjudication of the controversy at hand, the application for additional grounds is hereby allowed. 10. Undisputedly, this is first y....
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....ground-wise issues in controversies are determined as under. GROUND NO.1 15. Ground No.1 is general in nature and do not require any adjudication. GROUNDS NO.2 TO 2.8 & 3 16. The taxpayer is the ultimate holding company, holding 100% shares in Jubilant Energy Holdings BV (JEHBV) and JEHBV holds 78% shares in Jubilant Energy NV (JENV) which indirectly holds 100% shares in Indian subsidiary. JENV entered into 2 loan agreements in October 2007 and August 2011 with Exim Bank. For the purpose of obtaining aforesaid loans, the taxpayer provided a corporate guarantee on behalf of JENV and as per loan agreement, the liability of the taxpayer in terms of guarantees was not to exceed the amount realized from all investments of the taxpayer in its subsidiary JEHBV and the assets and investments held by its subsidiary JEHBV or through its step down subsidiaries. 17. The ld. AR for the taxpayer challenging the impugned order contended that the primary guarantee provided by the taxpayer to JENV is in the nature of "downstream guarantee" with the guarantees provided by the parent company for the obligation of its subsidiary; that there is no economic and commercial benefit to the lender as....
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....ing findings :- "23. It is in this background, we take out some time to distinguish these types of Guarantees. Normally, the Bank Guarantee or Corporate Guarantee is given by a Bank or the Company as the case may be to the financing Bank for acknowledging obligation to the Terms of Contract. Bank Guarantee is provided by the Company's Banker on behalf of the Company for a certain sum of money to the Customer. If all the terms of the Contract is not fulfilled by the Company then the Customer can claim that amount from the Bank and the Bank is obligated to pay and recover from the Company. Bank Guarantee is a foolproof instrument of security for the Customer and failure to honor the guarantee is treated as deficiency of services of the Bank under the Banking Laws. On the other hand, the CG - Corporate Guarantee is provided by the Company either to the Customer for the same or to the Bank for giving loans to the sister concerns/AEs of the said company; but it is not foolproof. Failure to honor the guarantee may attract contract laws and it is however a legally valid document and the Customer/Bank can sue the Company in Court if it does not pay up. In the Corporate Guaranty, a gu....
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....arge of CG by the Indian branches of the bank on the assessee for providing guarantee to the foreign banks. On these facts, the TPO rejected the said rates and picked the 'naked quotes' at 3% available in the website of ICICI Bank. TPO also considered the guarantee commission rates of (i) Allahabad Bank, (ii) HSBC Bank (iii) ICICI and (iv) Dutch State/FMO - Robo India Finance Ltd and rejected the same by holding that the same is unsustainable. CIT(A) reasoned that bank commission rate never higher them the interest rates charged on the loans. He, however, deleted the addition in this case. The same confirmed by the Tribunal vide its order dated 31.10.2011 and the relevant portion from the said order of the Tribunal (para 38) reads as under: "38.... Therefore, in view of the above facts of the 'naked quote' available in the website of the Allahabad Bank, HSBC Bank and ICICI Bank, where even the report itself indicate that the rates varied from 0.15% to 3%. In view of the facts of the case,.... there is no need to make any adjustment in the transfer pricing ... and the order of the CIT(A) required to be confirmed. Accordingly, the ground raised by the Revenue is re....
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....antee commission cannot be considered a market rate as it largely depends upon the terms and conditions on which loan has been given, risk undertaken, relationship between bank and the client, economic and business interest etc. In the case, before us when the assessee has itself paid guarantee commission at the rate varying from 0.25% to 0.6% per annum to third party and considering the fact that the assessee has stated that it has not incurred any cost for providing guarantee to the bank for the loan given to its subsidiary, we are of the considered view that applying the rate of 2.5% by TPO based on external comparables is not justifiable and cannot be confirmed. 52.11. 52.12. We are of the considered view that the Ld CIT(A) on the facts and circumstances of the case has rightly taken average rate on which the assessee has paid guarantee commission to third party, which comes to 0.38%. Hence, we uphold the order of the CIT(A) to charge guarantee commission at the rate of 0.38% being ALP for guarantee given by the assessee to Bank of America on behalf of its AE Trevira GmbH. In view of the above, we reject ground no.9 of the appeal taken by assessee as well as ground no. 6 ....
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....he case of Arvind Mills Ltd. v. Asstt. CIT [2011] 11 taxmann.com 67 (Ahd.). The commercial considerations are paramount in fixing the charges when providing guarantees to its customers. On the other hand, a corporate guarantee operates not for business considerations but to provide adequate safeguards for the financial health of its sister concerns / AEs, Guarantor, like the present assessee, sometimes duty-bound to provide guarantee to the loans given by the financial institutions to the sister concerns abroad, Bank rates are mostly customer-specific and they vary downward., if cash deposits equallent of loan are given to the Bank. Thus, comparing the bank guarantee commission transactions with the that of the corporate bank guarantee transactions is prima facie incorrect so long as the FAR analysis is applied successfully and the CUP are appropriately adjusted in accordance with the Rule 10B of the IT Rules, 1962. Therefore, applying the 'quote' available on the website of the banks without making adjustments, duly necessary, makes ALP studies erroneous. 24. Summary: Therefore, there is no dispute on the use of CUP method as most appropriate method to these GC transact....
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....ices cannot be used as External CUPs to benchmark the Corporate Guarantee Commission Prices. Further, we find that, unlike in other cases of NIL corporate guarantee commission, the present assessee has charged the GC Rate of 0.53% and 1.47% from its AEs. Therefore, in our opinion, these rates are competent given the facts of the present case qua the rates discussed and approved by the Tribunal in adjudicating the other cases relating to the Guarantee commission transactions benchmarked using the CUP method. Therefore, the TPO's comparables are IUPs' i.e. Incomparable Uncontrolled Prices. Therefore, .we are of the opinion, the GC rates of 0.53% and 1.47% benchmarked by the assessee are fair and reasonable and they should be accepted without any modification. Therefore', we dismiss the TPO's CUP and order deletion of the additions made by the AO on account of Transfer pricing, provisions. In the result, the order of the CIT(A)/TPO/AO on the TP adjustments is set aside. Thus, the grounds 1 to 5 are allowed as above." 23. When we examine the facts and circumstances of this case in the light of the ratio of the order passed by the coordinate Bench of the Tribunal in Gl....
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....l transaction and this issue has been rightly decided by the JTPO/DRP by treating the provision of corporate guarantee as international transaction. 25. However, at the same time, we are not inclined to agree with the contentions raised by the taxpayer that since no benefit has been passed on to its AE, there is no need to compensate the taxpayer because in a business transaction there is no concept of free lunch. Because without providing corporate guarantee by the taxpayer no loan would have been given to the AE; that the taxpayer has taken the risk on behalf of its AE which would not have been taken by any third party without consideration and that keeping in view the high risk involved in giving loan by any lender to the AE, the cost needs to be charged from the AE and as such, the commission received by the taxpayer for providing corporate guarantee has to be at arm's length. However, the amount received by the taxpayer on account of commission charged for providing corporate guarantee to its AE needs to be at arm's length price in view of the ratio of the order passed by the coordinate Bench of the Tribunal in Glenmark Pharmaceuticals Ltd. (supra) as discussed in Para 21 of ....