TaxTMI 
TaxTMI 
2019 (9) TMI 437
X X X X Extracts X X X X
X X X X Extracts X X X X
....d issue involved therein is as to whether 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... as a Sub-Contractor to Bahwan Engineering Company LLC. 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 asses....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nce guarantee. We find that assessee had also parallelly 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 an....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sfer pricing regulations. For this purpose, the ld. TPO identified 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 compar....
X X X X Extracts X X X X
X X X X Extracts X X X X
....same as the said rate of 0.93% had been duly recovered by the 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 credi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed 0.93% as the guarantee commission and there was no formal guarantee 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 corpor....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n foreign currency 2006252 Euros Outstanding Guarantee Amount in INR 12,14,73,944 No. of days the guarantee is outstanding during The year 215 (28.8.2009 to 31.3.2010) Arms Length Guarantee Fee 2.71% Arms Length 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ng grounds in this regard:- 4. On the facts and in the circumstances of the case, the Ld. CIT(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 not a notional loss. 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/-....
X X X X Extracts X X X X
X X X X Extracts X X X X
....learned AO failed to explicate as to how the transfer would fall within the meaning of demerger as given under section 2(19AA) of the Act and as how all the condition specified under section 2(19AA) of the Act were satisfied. The Appellant further submits that the AO without assigning any cogent reasons has wrongly concluded that the court approved scheme 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 Gove....
X X X X Extracts X X X X
X X X X Extracts X X X X
....eciation of Rs, 15.98 crores allowed by the Assessing Officer and the second being deletion of disallowances made under the pvoviso to section 40(a) and section 43B by the CIT (Appeals). 28. After hearing rival contentions, we hold as follows. 29. On the first ground, the revenue has not disputed the findings of the first appellate authority that the transfer in question is a case of slump sale and not a case of demerger. The valuation has also not been disputed. Under these circumstances, 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 deci....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ency are decided at the time of entering into contract. The difference between the forward contract and the exchange rate on the date of entering into the contract has to be recognized as income or expenses, which is ascertained and definite, in terms of the contract and cannot be regarded as notional or contingent. It is a debt owed by the Appellant, which accrued on the date of entering into the forward contract itself. The expenditure under the accrual system of accounting had, thus, crystallized on the date of the contract and therefore the same has been 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 arisi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ction, a. Decision of the Mumbai Special Bench has in the case of DCIT v. Bank of Bahrain & Kuwait (41 SOT290) b. Decision of Delhi Tribunal in the case of Bechtel India (P.) Ltd v/s. CIT [2013] 33 taxmann.com 213 (Delhi - Trib.). c. Decision of the Bangalore Tribunal in the case Quality Engineering & Software Technologies (P) Ltd. v/s DCIT [2014] 52 taxmann.com (Bangalore - Trib.). d. Decision of Supreme Court in the case of Oil & Natural Gas Corpn. Ltd. v/s. CIT[2010]189 TAXMAN292 (SC) "Applying these factors on the facts of that case, it was held that the "loss" 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 agreemen....
X X X X Extracts X X X X
X X X X Extracts X X X X
....reduced from the debtors and advances figure on the asset side of the balance sheet. The assessee submitted that it is eligible to claim the deduction for this amount u/s.36(1)(vii) of the Act on the basis of decision of Hon'ble Supreme Court in the case of Vijaya Bank reported in 323 ITR 166. The ld. AO however, disregarded the contentions of the assessee stating that the assessee has not complied with the requirement of Section 36(2)(i)(b) of the Act and hence, it is not eligible for deduction of claim of bad debts in the instant case. Accordingly, the ld. AO disallowed the same of Rs. 4,63,28,957/- towards provision for doubtful debts and 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 su....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tually shown the provision for doubtful debts (net) in negative figure of Rs. 772.22 lakhs (which in effect represents income and not an expenditure). This itself goes to prove that there was no debit of any doubtful debts and advances in the P & L account warranting any disallowance thereof. We find from the notes of accounts in point No.28, the Directors of the company and the auditors thereof had observed as under:- "Provision for doubtful debts and for doubtful advances as at the year end include Rs. 442.59 lacs and Rs. 20.71 lacs respectively relating to the Sundry Debtors / Loans and Advances transferred to the Company in terms of the Scheme of 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'bl....
X X X X Extracts X X X X
X X X X Extracts X X X X
....paragraph 1.3 above has been credited to 'Capital Reserve'. 1.6 The amalgamation has been accounted for under the Purchase method as prescribed in Accounting Standard (AS- 14)-" Accounting for Amalgamations." 16.2. We find from the revised statement of computation of total income filed before the ld. AO which has been taken due cognizance by the ld. AO while framing the assessment, under the caption of "provision for doubtful debts' that the assessee had reflected the figure as "nil'. This itself again goes to prove that there was no debit to the profit and loss account in the sum of Rs. 4,63,28,957/- as alleged by the ld. AO while making the disallowance. We find from page 31 of the paper book 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 compu....