TaxTMI 
TaxTMI 
TaxTMI 
2019 (9) TMI 437
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....the ld TPO was justified in making an adjustment to Arm's Length Price (ALP) on the said issuance of performance guarantee in the facts and circumstances of the case. 3. The brief facts of this issue are that the assessee filed its original return of income for the A.Y.2010-11 on 15/10/2010 declaring total income of Rs. Nil under normal provisions of the Act after claiming the set off of brought forward losses to the tune of Rs. 191,37,75,081/- and book profit u/s.115JB of the Act at Rs. 273,94,82,293/-. Later the assessee filed revised return of income on 31/03/2012 declaring total income at Rs. Nil under normal provisions of the Act after claiming set off of brought forward losses to the tune of Rs. 196,30,61,287/- and book profit u/s.115 JB of Rs. 273,94,82,293/- and computed the tax liability thereon. The assessee is engaged in the business of design, fabrication, galvanising and testing of transmission line towers and telecom towers; all types of masts; erection of complete transmission lines & telecom towers, supply and erection of Sub-station structures and overhead equipment for railway electrification and managing infrastructure sites for telecommunication services. Duri....
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....LC. The assessee while providing such performance guarantee to BEC did not incur any charges or cost whatsoever and accordingly, no commission was charged by the assessee to its AE for providing the said performance guarantee. 3.3. The ld. TPO sought to treat this performance guarantee as an international transaction and resorted to make adjustment to arm's length price (ALP) thereon for which purpose, a show cause notice was issued to the assessee. The assessee responded that in the case of assignment of the contract in the name of the assessee pursuant to failure of the AE to perform its duties and obligations as a sub-contractor to Bahwan Engineering Company LLC, the payments and amount receivable that are due to the AE would come naturally to the assessee company which would be a larger benefit that would be derived by the assessee than charging performance guarantee commission from its AE. It was also submitted that the entire profit on the contract assigned by the Bahwan Engineering Company LLC in favour of the assessee would automatically come to the assessee company and there is absolutely no risk involved for the assessee in this transaction of issuance of performance gu....
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....entered into another agreement with its AE wherein in the event of AE failing in execution of the contract and the performance guarantee issued by the assessee gets invoked by Bahwan Engineering Company LLC, then the contract which is awarded to the AE gets assigned in favour of the assessee, wherein the assessee would be obligated to execute the contract on its own by using its own infrastructure, which would in turn result in assessee deriving the entire contractual revenue and huge profits there from. In these circumstances, there is absolutely no risk involved for the assessee in issuing the performance guarantee on behalf of its AE, warranting charging of any commission to mitigate that risk. Hence, we hold that assessee was fully justified in not charging any commission from its AE in the subject mentioned performance guarantee transaction. Hence, there is no need to make any adjustment to arm's length price thereof. In view of this decision in the peculiar facts and circumstances, the issue as to whether issuance of performance guarantee would fall within the ambit of an international transaction or not is left open and no decision is given herein. Hence, the various decisio....
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....tified bank guarantees given by Allahabad Bank and HSBC bank with six customers and arrived at the average guarantee commission thereon at 1.04%. The ld. AO made an adjustment to the arm's length price in respect of this transaction by applying this average guarantee commission of 1.04% on the outstanding guarantee amount of Rs. 6,07,36,972/- and from that reduced the guarantee fee recovered by the assessee from its AE at 0.93%, and made adjustment to the differential sum of Rs. 39,354/- (Rs. 3,72,276-Rs. 3,32,722) to the ALP of the international transaction in respect of performance bank guarantee. 6.2. The assessee contended before the ld. CIT(A) that the ld. TPO while considering the rates of guarantee commission charged by the respective banks with regard to the comparable cases, completely ignored the credit ratings of the entities to whom the banks had issued the said guarantees. Accordingly, it was argued that the ld. TPO had erred in arriving at comparable rate for benchmarking the said transaction. The assessee also contended that the adoption of rate of guarantee commission is nothing but application of comparable uncontrolled price (CUP) method. As per Rule 10B(2) of t....
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.... assessee from its AE. 7. Aggrieved, revenue is in appeal before us. 8. We have heard rival submissions. The primary facts stated hereinabove remain undisputed and hence, the same are not reiterated for the sake of brevity. We find that the ld. CIT(A) had rightly appreciated the contentions of the assessee which are stated hereinabove and the same are not reproduced hereunder for the sake of brevity. It is well known in the financial market that the banks ascertain the rate of guarantee commission for each party based on its creditworthiness and the said creditworthiness would depend on several factors such as profitability ratios, economies of scale, number of years of relationship of the bank with those customers, future potential of that customer which in turn would enlarge the business of the bank, tangible and immovable securities offered by the customer, if any etc., Hence, the rate of commission issued by the bank for its customers would vary from one customer to another customer and accordingly, the same cannot be used as a benchmark for the purpose of comparability. In the instant case, the assessee's credit rating is A+ as given by a reputed credit rating agency CARE.....
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....ntee agreement entered in this regard. The assessee stated that the Credit Rating issued by CARE is A+ and Credit Rating of the AE was not done. The assessee pleaded that no benchmarking was done by the assessee as executing guarantee in favour of a bank on behalf of the AE was not an international transaction in the opinion of the assessee. The assessee also stated that the Corporate bond rates for United Arab Emirates (UAE) were not available. However, it contended that rate of interest on borrowings made in the country in which the AE is situated is quite low in comparison with bond rate prevailing in India. Therefore, Indian Corporate Bond rates should not be applied for benchmarking. The assessee also pleaded that the bank had charged the assessee 0.93% for issuing this bank guarantee to CCWE on behalf of its AE for securing the advance payment for executing the contract. The assessee also submitted that this guarantee fee of 0.93% had been duly recovered by it from its AE and hence, there is no impact on profit or loss of the assessee. 9.1. The ld. TPO considered the issuance of said guarantee as a corporate guarantee given by Bank of India to CCWE to enable them to relea....
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....h Price on the outstanding corporate guarantee (INR) 1939090 Guarantee fee charged @ 0,93% from the AE 6,65,444 Adjustment oh a/c of Corporate guarantee 1273646" 9.2. Accordingly, the ld. TPO made adjustment of Rs. 12,73,646/- on account of issuance of corporate guarantee. 9.3. The assessee pleaded that the ld. TPO had adopted two different rates for benchmarking the bank guarantees given by the assessee. It may be noted that the two bank guarantees, one is performance bank guarantee and other is advance payment guarantee were given to CCWE on behalf of AE of the assessee. The bank had charged the assessee the same rate of 0.93% for both the cases as guarantee commission. The assessee pleaded that there is no much difference with regard to the said two guarantees and being identical in nature, the ld. TPO had adopted two different principles to benchmark the said transactions. The ld. CIT(A) observed that advance payment guarantee and also the performance guarantee are identical in nature. Hence, both the guarantees being identical in nature, the arm's length rate of commission in case of both the guarantees should be the same. Accordingly, he held that the ALP of guarantee....
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....ss. 3 5. On the facts and in the circumstances of the case, the Ld. C1T(A) erred in holding that the mark to market loss arising on the foreign exchange contracts which were outstanding as at the year end is an accrued loss and is not contingent, unascertained or notional in nature and, hence, no adjustment could be made to the book profit under clause (c) of the Explanation (1) to" section 115JB(2). 12.2. At the outset we find both the parties agreed that this issue is already covered by the decision of this Tribunal in assessee's own case in earlier years. We find that the ld. CIT(A) had granted relief to the assessee by following the earlier orders of this Tribunal by observing as under:- 5.1 The facts of the case and the observations/findings of the A.O. are summarized as under: 1. During the year under consideration, the appellant had claimed depreciation of Rs. 65,31,55,991/- in respect of assets acquired by it, in A.Y. 2006-07, upon acquisition of Power Transmission business ("PTB"), from KEC infrastructure Limited ("the Transferor Company"), pursuant to Court approved Scheme of Arrangement ("the Scheme" or "the Arrangement) 2. The AO restricted the claim for d....
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....was a device to reduce the income-tax liability and thereby wrongly invoked Explanation 3 to section 43(1) of the Act. The Appellant humbly submits that the Scheme had undergone detailed scrutiny by the Hon'ble Mumbai High Court, several Financial Institutions which were principal shareholders of the company, its Bankers, Secured and Unsecured Creditors, the Registrar of Companies and several other governmental and non-governmental agencies. The Hon'ble High Court and all the above institutions/ offices have granted their permission /accord in the reorganization of business only after considering the object of the Scheme. If the said transaction was merely to reduce income tax liability, the above offices would not have accorded their assent to such Scheme as these parties included several Banks and Government Departments. The Appellant further submits that the main intention of the Scheme was to achieve A further growth and efficiency, and to address the following issues: (a) Achieve greater focus on business operations (b) Unlock the value of investments made / extended to group companies (c) Unlock the value of "core power transmission business" (d) Address ....
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....tances, for the reasons noted in the assessee's appeal, we have to necessarily uphold the order of the first appellate authority and dismiss ground No, 1 of the revenue. Also the issue relating to the above ground has been decided in the favour of the Appellant by the Hon'ble CIT(A) vide its orders dated 29.10.10, 23.08.13 and 11.07.12 for Assessment "Years 2007-08 to 2009-10 respectively. Photocopies of the said Orders are enclosed in the paper book. In view of the above, the Appellant prays that the AO be directed to allow the depreciation as claimed by the Appellant in its Return of Income.'' 5.3 The issue stands covered by the decision of the Hon'ble Mumbai Tribunal in Appellant's own case for A.Y. 2006-07 and by the Hon'ble CIT(A) in Appellant's own case for A.Ys 2007-08 to 2009-10. Subsequently, this issue is also being upheld by the Hon'ble Mumbai Tribunal vide its order for A.Ys 2007-08 to 2009-10. Thus, in view of the above the aforesaid ground is allowed. 12.3. Respectfully following the Co-ordinate bench decision of this Tribunal in assessee's own case supra, the ground raised in 3(a), 3(b)& 3(c) raised by the revenue ....
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....een rightly claimed by the Appellant. Reliance in this regard is placed on the decision of Hon'ble Delhi High Court in CIT v/s. Woodward Governor India Pvt. Ltd. (294 ITR 451), which has been subsequently affirmed by the Hon'ble Supreme Court in 312 ITR 254, (a copy of the said decision is enclosed in the compilation of case laws) wherein it has been categorically held that the increase in the liability of the assessee on account of the fluctuation in the rate of foreign exchange remaining on the last day of the financial year cannot be disallowed by treating the same as notional or contingent, since the loss arising to the assessee due to such increase in the liability, accrues to the assessee in that year itself. The relevant extract of the decision is reproduced hereunder: "The liability arose out of contracts already concluded. The liability already stood accrued the minute the contract was entered into. The mere postponement of the payment to a different date cannot extinguish the liability and render it notional or contingent. Even if the liability was discharged at a future date, it would nevertheless be a liability which was certain and not contingent. The mai....
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...." suffered by the Assessee, maintaining accounts regularly on mercantile system and following accounting standards prescribed by the Institute of Chartered Accountants of India (ICAI), on account of fluctuation in the rate of foreign exchange as on the date of balance-sheet was an item of expenditure under section 37(1) of the Act, notwithstanding that the liability had not been discharged in the year in which the fluctuation in the rate of foreign exchange occurred. 11. We are of the opinion that the ratio of the said decision, with which we are .in respectful agreement, squarely applies to the facts at-hand and, therefore, the loss claimed by the assessee on account of fluctuation in the rate of foreign exchange as on the date of balance-sheet is allowable as expenditure under section 37(1) of the Act." . Further, it is submitted that since the Accounting Standards mandatorily requires the Appellant to provide for such MTM losses, such accounting treatment needs to be considered even for the purposes of determining the allowability of deduction for such provision under the Act. In the present case too, the Appellant has been actually providing for such MTM losses in its Boo....
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....d advance both under normal provisions of the Act as well as in the computation of book profits u/s.115JB of the Act based on amendment brought in Explanation-1 of Section 115JB (2) of the Act by Finance Act, 2009 with retrospective effect from 01/04/2001. The assessee pleaded before the ld. CIT(A) that the disallowance was made by the ld. AO on the understanding that assessee company had debited the profit and loss account with the provision for doubtful debts of Rs. 4,42,58,139/- and provision for doubtful advances of Rs. 20,70,818/-. It was submitted that this position is factually incorrect. It was pleaded that the increase in the respective ledger accounts during the year was due to take over of the assets and liabilities of RPG Cables Ltd., in pursuance of its merger with the assessee company. The assessee also stated that since no showcause notice was issued by the ld. AO, in this regard, the assessee could not submit entire details and the picture before the ld. AO and hence, the same were submitted before the ld. CIT(A). The assessee submitted a statement showing the movement of provision for doubtful debts and advances during the year under consideration to drive home the....
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....Amalgamation referred to in Note 1 above." 16.1. The note No.1 to the notes of accounts explaining the entire scheme of amalgamation as reproduced in the audited financial statements in page 15 of the paper book is also reproduced hereinbelow for the sake of convenience:- 1 Scheme of Amalgamation: 1.1. A Scheme of Amalgamation (the Scheme) between RPG Cables Limited (RPGCL) and the Company and their respective shareholders under section 391 to 394 of the Companies Act, 1956 was sanctioned by the Hon'ble High Court of Judicature at Bombay on 26tfl February, 2010 and at Karnataka, Banglore on 17* March, 2010. The Scheme, which has become operative from 31st March, 2010 upon filing of the certified copies of the Orders of the Hon'ble High Courts with the Registrar of Companies 1 Scheme of Amalgamation: 1.1 A Scheme of Amalgamation (the Scheme) between RPG Cables Limited (RPGCL) and the Company and their respective shareholders under section 391 to 394 of the Companies Act, 1956 was sanctioned by the Hon'ble High Court of Judicature at Bombay on 26th February, 2010 and at Karnataka, Banglore on 17th March, 2010. The Scheme, which has become operative from 31st....
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....that assessee had reduced the following sums from the net profit as per profit and loss account for the purpose of determining the profits and accounts of the business. (i) Bad debts written off out of provision for Doubtful debts Rs. 11,26,55,000/- (ii) Provision for doubtful debts written back (since the provision was not allowed as Deduction in earlier year while creating The provision) Rs. 7,72,21,516/- 16.3. We also find that the said computation of total income was duly supported by detailed notes which were also filed before the ld. AO, which is not in dispute before us. The relevant note No.4 in respect of provision for doubtful debts and advances is as under:- 4. PROVISION FOR DOUBTFUL DEBTS & Advances: Rs. 4.63,28,957. The Company has made the provision for doubtful debts amounting to Rs. 4,42,58,139 and provision for doubtful advance of Rs. 20,70,818 during the year. Those amounts were reduced from the debtors and loans advance on the asset side of the Balance sheet. It is, submitted that the Company is eligible to claim the deduction for this amount under section 36(1)(vii) relying upon the decision of the Gujarat High Court in the case of Vithaldas....