TaxTMI 
TaxTMI 
2020 (2) TMI 257
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....in India namely AT & S India Pvt. Ltd. (hereinafter referred to as 'AT&S India') which is a tax resident of India. The AT&S Austria and AT&S India are associated enterprises within the meaning of section 92A of the Income-tax Act, 1961. The AT&S Austria is regularly filing income tax return in India. The Transfer Pricing Officer (hereinafter referred to as the 'TPO') vide order dated 19/12/2016 under section 92CA (5) read with 154 / 92CA (3) of the Act directed the following arm's length price (hereinafter referred to as 'ALP') adjustments: (i).Receipt of interest on loan and advance (INR 12,59,12,941/-): ALP adjustment being INR 40,34,89,761/-; (ii).Receipt of corporate guarantee fee (INR 36,43,759/-): ALP adjustment being INR 36,43,760/; and (iii).Receipt of IT support service cost (INR 3,58,02,269/-): ALP adjustment being INR 9,48,760/- . Subsequently, being aggrieved by the order of TPO, the assessee filed his objections before the Dispute Resolution Panel (hereinafter referred to the 'DRP'). The Dispute Resolution Panel vide order dated 19/09/2017 issued directions under section 144C (5) of the Act and directed the lower authority to reduce the AL....
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....tes were fixed by complying with the all-in-cost ceilings fixed by the RBI vide circular issued at that material point of time. The said loans had an average maturity period of more than five years. The loan proceeds were agreed to be used by the borrower for the purpose of purchasing capital equipment. In this connection, all the instructions given in the circular issued by the RBI for ECB were followed by the borrower. AT&S Austria entered into a 'Distribution Agreement' with AT&S India under which AT&S India sold its manufactured goods to AT&S Austria for further sale to independent customers outside India. In this connection, attention is invited to the 'Addendum to Distribution Agreement dated 15th October 2002' wherein it is mentioned under 'Payment Terms' that the distributor (i.e. AT&S Austria) may make advance payments on request from the supplier (i.e. AT&S India) which would not exceed two months' projected sales or Euro 5.0 Mio whichever is less. The advance payment would bear interest at three months LIBOR(EURO) plus 100 basis points per annum from the date of receipt of advance. The advance received from the distributor would be adjusted against future billings. It....
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.... the Act to AT&S India. Therefore, where the transaction has been accepted at arms -length in the case of borrower (AT&S India) and no ALP adjustment was made, the same should be treated at arms -length in the hands of the lender (AT &S Austria) also. On merits also, the ld Counsel argued that the action of the AO in making an ALP adjustment of INR 3,13,68,273/- is based on the decision rendered by the DRP that the arm's length interest rate would be LIBOR plus 450 basis points in respect of an external commercial borrowing (ECB) carrying interest rate of LIBOR plus 350 basis points and short-term export advance carrying interest rate of LIBOR plus 100 basis points, which is not acceptable. It is necessary to consider LIBOR as the appropriate benchmark interest rate that conforms to the arm's length standard under the CUP Method. Since the assessee charged interest to AT&S India over and above LIBOR in case of loan and advance, therefore the ALP adjustment of INR 3,13,68,273/-made by the AO may be deleted. 7. On the other hand, the Ld. DR for the Revenue has invited our attention to the decision of the Special Bench of the Income Tax Appellate Tribunal (Kolkata) in the matter....
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....ds of AT&S India, but this does not mean that adjustment should not be made in the hands of AT&S Austria (Assessee). Therefore, the arms length price (ALP) adjustment is necessary in the hands of the AT&S Austria (assessee) irrespective of the fact that TPO had duly accepted the arm's length nature of the interest payments under the CUP Method in the hands of AT&S India. Therefore, in the light of the decision of the Special Bench of the Income Tax Appellate Tribunal (Kolkata) in the matter of Instrumentarium Corporation Ltd Finland vs. ADIT [ITA No. 1548 and 1549 / Kol / 2009](supra), it is abundantly clear that the provision of sub-section (3) of section 92 of the Act did not contemplate taking of a holistic view i.e. considering lowering of the overall profit or increasing overall loss for the group companies taken together. The provision of sub-section (3) of section 92 of the Act would be applied to the non-resident assessee (AT&S Austria) independent of the taxability of its Indian associated enterprise (AT&S India). Therefore, the transfer pricing adjustment made by the TPO should be sustained. 8. Per Contra, Rituparna Sinha, ld Counsel for the assessee, submitted before ....
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....e CUP Method. We note that in the case of foreign currency loan advanced by one associated enterprise to the other, LIBOR is the appropriate benchmark interest rate which conforms to the arm's length standard under the CUP Method. The assessee claimed that the aforesaid international transactions are at arm's length under the CUP Method, for that he relied on the judgment of the Hon'ble Delhi High Court in the matter of CIT vs. Cotton Naturals (I) (P) Ltd reported in [2015] 231 Taxman 401/ 55 taxmann.com 523, wherein it was held as follows: "Facts The assessee, manufacturer and exporter of rider apparels, advanced a foreign currency loan to its associated enterprise (AE) in the US at the interest rate of 4% per annum. The assessee set up the AE in the US for the purpose of marketing and promoting its export in the USA. The assessee contended that the aforesaid interest rate was at arm's length as the rate was comparable to the export packing credit rate obtained from independent banks in India. The TPO determined the arm's length interest rate at 14% per annum. The DRP granted partial relief by determining the arm's length interest rate at 12.20%. On a....
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....question of law mentioned in the decision is answered against the Revenue. 10. We note that lending money is not one of the main businesses of the assessee (AT&S Austria) and AT&S India being a wholly-owned subsidiary of the assessee, the assessee is not exposed to significant credit risk in respect of the loan made to AT&S India. Therefore, the credit rating of AT&S India would broadly be the same as that of the assessee. Hence, the DRP was not justified in adding credit spread of 450 basis points to LIBOR, while determining the arm's length interest rate in respect of loan and advance. We note that in the instant case, the DRP did not mention in his order the comparability analysis prescribed under clause (a) of sub-rule (1) of rule 10B of the Income-tax Rules, 1962. The said Rule is reproduced below for ready reference as follows: "Determination of arm's length price under section 92C . 10B . (1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction [or a specified domestic transaction] shall be determined by any of the following methods, being the most appropriate method, in the follow....
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.... Tribunal confirmed the adjustment prevailing at the rate of LIBOR plus 2% on account of interest free loans provided by Vaibhav Gems Ltd to its associated enterprise for the relevant assessment year. In this connection, the Hon'ble High Court of Rajasthan placed reliance on the decision of the Hon'ble Delhi High Court in the matter of CIT v. Cotton Naturals (I) (P) Ltd reported in [2015] 231 Taxman 401 / 55 taxmann.com 523 (as referred to hereinabove). The Hon'ble High Court of Rajasthan held as follows: "11. Regarding ITA no.149/2015 preferred by the assessee in view of the Delhi High Court judgment (para no.14), the international transaction is required to be accepted, therefore, tribunal has committed serious error. The assessee will be entitled for the benefit of average LIBOR rate existing at that time which was 0.79% and addition of adhoc 2% is not proper. In that view of the matter, the addition of 2% interest in the income is required to be quashed and set aside." It may be noted here that the Hon'ble High Court of Rajasthan confirmed that LIBOR would be the appropriate benchmark for interest on intra-group loan in foreign currency and in this connection, no cr....
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....owever, the Hon'ble Bombay High Court in the case of CIT v. Tata Autocomp Systems Ltd held that the arm's length interest rate would be determined based on the benchmark prevailing in the country in which the loan was consumed. We note that as per the settled judicial principle, where there are two contrary views taken by different High Courts, then the view favourable to the assessee should be adopted, for that we rely on the judgment of the Hon'ble Supreme Court in the matter of CIT vs. Vegetable Products Ltd reported in [1972] 88 ITR 192 (SC), wherein the Hon'ble Supreme Court has laid down a principle that "...if two reasonable constructions of a taxing provisions are possible, that construction which favours the assessee must be adopted. This is a well-accepted rule of construction recognised by this court in several of its decisions." We also rely on the decision of the Hon'ble Supreme Court in the matter of CIT vs. Naga Hills Tea Co. Ltd. reported in [1973] 89 ITR 236 (SC), wherein it is held that: "If a provision of a taxing statute can be reasonably interpreted in two ways, that interpretation which is favourable to the assessee, has got to be accepted. This is a well acce....
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....based on lending rates of banks within India for commercial borrowing), it would be appropriate to apply LIBOR rate (i.e. not the domestic lending rate). Regarding credit spread, the Tribunal has placed reliance on the decision of the Hon'ble Delhi Tribunal in the matter of Kohinoor Foods Ltd vs. ACIT reported in (2014) 52 taxmann.com 454 (Delhi - Trib.). The Hon'ble Delhi Tribunal in the aforesaid case has held that there are well settled modalities for advancing of loan by financial institutions whose primary purpose is to advance funds with commercial consideration to earn interest out of the transactions. Such transactions are governed by different considerations like earnings, guarantee of loan, market conditions, political and legal situation of various countries etc. The advancing of loan between two associated enterprises cannot be akin to financial institutions. Hence, the Hon'ble Tribunal is of the view that the correct comparable which can be applied in these facts and circumstances is the LIBRO rate which is internationally recognized." We note that TPO, after verifying the details submitted by AT&S India, did not direct any ALP adjustment in the hands of AT....
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....f the assessee. 14. The Indian Transfer Pricing Laws contained in Chapter X of the Act has not contemplated determination of arm's length price of an international transaction in two different ways in the hands of payee (i.e. assessee in the instant case- AT & S Austria) and the payer (i.e. AT&S India in the instant case). In the event it is done, the same would produce anomalous result which is never intended by the Legislature. Thus, the approach adopted by the TPO to benchmark the same international transaction in two different ways in the hands of two different taxpayers for the same assessment year signifies arbitrariness in the action of the TPO. In the instant case, the payment of interest made by AT&S India to AT&S Austria on the one hand and the receipt of interest by AT&S Austria from AT&S India on the other hand have taken place under the same agreement i.e. Loan Agreement and Distribution Agreement. In this scenario, if the arm's length interest rate is determined by the DRP at LIBOR plus 450 basis points in the hands of AT&S Austria, then the international transactions under consideration would never be at arm's length in the hands of AT&S India. Similarly, if th....
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....object of arranging IT products and related services primarily from unrelated IT companies. It is pertinent to note that the assessee, in order to arrange IT products and related services for the benefit of group companies, entered into several agreements with unrelated IT companies such as IBM, Microsoft, Siemens, T-Systems and so forth.The cost incurred by the assessee for arranging IT products and related services was allocated on actual basis to all the parties to the agreement using appropriate allocation keys as mentioned in the aforesaid agreement. No profit element was added to the actual cost for the purpose of allocation of the same to the parties to the aforesaid agreement. AT&S Austria acted as administrator to the periodical cost pooling process and collected the total costs from the parties to the agreement. The cost allocation was duly verified and certified by the independent auditor of AT&S Austria, namely, PwC Wirtschaftsprüfung GmbH, vide letter dated 3rd May 2013. The TPO could not appreciate the aforesaid arrangement made within the group for securing IT products and related services from unrelated IT companies. The TPO held in his order that the assess....
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....ts made to the service providers were allocated to the group companies which actually utilised the services. Placing reliance inter alia on the decision of the Hon'ble High Court of Calcutta in the case of CIT v Dunlop Rubber Co. Ltd. reported in 142 ITR 493, Tribunal held that the transaction under consideration was reimbursement of expenditure and no income could be said to have generated requiring deduction of tax. Since there was no liability of deduction of tax at source, section 40(a)(i) of the Act could not be invoked. It is to be noted that for the succeeding assessment years (AY 2004-05, AY 2005- 06, AY 2006-07 and AY 2008-09), the Hon'ble Tribunal followed their own decision as stated hereinabove on the same facts and circumstances of the case and granted relief to AT&S India. In view of the above, ld Counsel prayed the Bench that the shared IT cost recovered by the assessee from AT&S India in the instant to neither fees for technical services nor royalty in the hands of the assessee in India, therefore arms length price adjustment of Rs. 9,48,760/- should be deleted. 19. On the other hand, the Ld. DR for the Revenue has primarily reiterated the stand taken by the D....
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....arties to the aforesaid agreement. No third party was given access to the IT products and related services arranged by the assessee under the 'IT Cost Pooling Agreement'. At this juncture it is appropriate to quote the judgment of the Hon'ble Supreme Court in the case of CIT vs. Bankipur Club Ltd reported in [1997] 92 Taxmann 278 (SC), wherein the Hon'ble Apex Court, by taking a cue from Halsbury Laws of England, has enunciated the following principle: "Where a number of persons combine together and contribute to a common fund for the financing of some venture or object and will in this respect have no dealings or relations with any outside body, then any surplus returned to those persons cannot be regarded in any sense as profit. There must be complete identity between the contributors and the participators. If these requirements are fulfilled, it is immaterial what particular form the association takes. Trading between persons associating together in this way does not give rise to profits which are chargeable to tax." We note that the assessee entered into 'IT Cost Pooling Agreement' with its group companies including AT&S India under which all the parties to the afor....
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....ideration to the submission of the parties and perusing the judicial decisions relied upon by the Ld. AR, we find that the issue involved, in respect to corporate guarantee, in the present appeal is no longer res integra. We note that financial guarantee is a promise made by a person (the guarantor) to a lender (guaranteed party) promising to pay the lender the money owed to it by the borrower (obligor) on whose behalf the guarantee is given, if the borrower fails to pay back the debt due to the lender. A guarantee to a lender that a loan will be repaid, guaranteed by a company other than the one who took the loan, is called a corporate guarantee. The ld Counsel for the assessee submitted before us that extending corporate guarantee for borrowings by subsidiaries was a shareholder activity, that it was not an international transaction, that no fee was warranted since no cost was incurred, and that bank guarantees were not comparable to corporate guarantees since the business of the bank was different from that of a corporate. Before us, ld DR for the Revenue submitted that there are plethora of judicial pronouncements wherein it has been held that the corporate gu....
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....justify to be a more appropriate and preferred mode of contribution vis-a-vis equity contribution ... " " ... 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 quasi capital, and thus being in the nature of a shareholder's activity, is not rejected either. The concept of issuance of corporate guarantees as a shareholder activity is not alien to the transfer pricing literature in general .." ".... We have noticed that the 'OECD' Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations specifically recognizes that an activity in the nature of shareholder activity, which is solely because of ownership interest in one or more of the group members, i.e. in the capacity as shareholder "would not justify a charge to the recipient companies". It is thus clear that a shareholder activity, in issuance of corporate guarantees, is taken out of ambit of the group services. Clearly, therefore, as long as a guarantee is on account of, what can be termed as 'shareholder's activities', even on the first principles, it....
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....ments have been upheld and therefore those decisions cannot be put against the taxpayer ..... " "Para 27.... The Explanation inserted vide Finance Act 2012 is to be read in conjunction with the main provision and in harmony with the scheme of provision under section 92B of the Act. It is essential that in order to be an 'international transaction' providing corporate guarantee should have a bearing on the profits, income losses or assets of the enterprise ...:" "Para 31.... The contents of the Explanation fortifies, rather than mitigates, the significance of expression 'having a bearing on profits, income, losses or assets' appearing in section 92B( 1) of the Act ... " "Para 33 .... The onus is on the tax authorities to demonstrate that the transaction is of such nature as to have 'bearing on profits, income, losses or assets of the enterprise' and has to be on real basis even if in present or in future, and not on contingent or hypothetical basis ...." "Para 32.... There can be a situation in which a guarantee default takes place and therefore, the enterprise may have to pay the guarantee amount but such a situation even ....