TaxTMI 
TaxTMI 
TaxTMI 
2018 (10) TMI 1845
X X X X Extracts X X X X
X X X X Extracts X X X X
....as well as corporate guarantee adjustment amounting to Rs. 23,36,190/- and Rs. 2,01,72,645/- (assessment yearwise) respectively. The CIT(A)'s relevant findings under the challenge identical in both assessment year qua this first issue read as follows: "1. I have carefully considered the submissions of the appellant-company in the light of the adjustments made by the Ld. TPO/AO. In Ground No. 1 raised by the appellant-company, the relevant question to be decided is the determination of the ALP of the loans/advances given by the appellant to its AEs, SKPOP & RPMI which was denominated in USD & FURO currency respectively. The details of the loans & advances in question are as follows: Name of AE Amount SKPOP 70.23 lacs RPMI 67.69 lacs 2. Before the Ld. TPO, the appellant has contended that the sums advanced to SKPOP & RPMI were in the nature of trade advance given in the course of business for supply of goods and therefore the same could not be equated with a 'loan' and hence no benchmarking exercise was carried out in this regard. On examination of the transfer pricing order, it is noted that the Ld. TPO was not in agreement with the contention put forth by the ap....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e calculation of ALP of interest on loans at 20o/o / 22o/oi I find considerable force in the appellant's submissions that the Ld, TPO was not justified in presuming that it was only the domestic borrowings obtained by the appellant carrying interest rate of 14.5o/o; which was utilized to advance loans to AEs. No material was brought on record by the ld. TPO to justify this proposition or establish a direct link between the loans borrowed by appellant and the loans advanced to AEs. It is apparent from the appellant's balance sheet that substantial portion of its own surplus funds have been deployed in making investments in shares of other bodies corporate as also loans & deposits. In the circumstances the Ld. TPO's calculation of "cost of funds" as the interest rate paid on domestic borrowings obtained by the appellant was not justifiable. From the balance sheet it is apparent that the advances were made from mixed account and therefore the ld. TPO calculation of "cost of funds" was unsustainable. Further one also needs to factor in the currency in which the funds were borrowed or funds were lent, so as to remove the dissimilarities, I further note that even the calculat....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nt currency denominated benchmark LIBOR rate i.e, LIBOR USD & LIBOR EURO, prevailing in the relevant year. The Ld. AO/TPO is thus directed to compute the ALP of loans as explained in the foregoing. Ground No. 1 is therefore partly allowed. 8. In Ground No. 2, the Ld. AO has concludeci that Rs. 23,36,190/- is to be considered as income by way of corporate guarantee fees in the hands of the appellant-assessee in respect of corporate guarantee issued by the appellant towards the bank loan availed by its wholly owned foreign subsidiary, SKPOP. I have also carefully considered the submissions of the appellant-company made before the Ld. AO / TPO as well as during the appeal proceedings. 9. However, it has also to be examined whether the Corporate Guarantee is an international transaction at all, and as a corollary amenable to benchmarking. I find that there has been a certain presumption on the part of the Ld. AO/ TPO in so far as observing that the corporate guarantee provides a certain benefit to the AE and being in the nature of a service it constitutes an international transaction. It is also to be said that as has been pleaded by the appellant, Hon'ble Courts have held that....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... not involve cost to the Taxpayer, does not have a bearing on profits, incomes, losses or assets of the Taxpayer and hence the transaction does not fall within the ambit of the amended definition of "international transaction". It would be significant to note that, the Hon'ble ITAT took cognizance of variations brought in under the amended definition and held that the precondition of a transaction having bearing on profit/ losses or assets of an enterprise cannot dispensed with even after the explanation was added to the definition of international transaction by the Finance Act of 2012 since such explanation was merely a clarification. The Hon'ble Tribunal further held that the onus was on the Income Tax Authorities to demonstrate the transaction has a "bearing on profits, income, /losses or assets" of the enterprise. Such an impact on profits, income, losses or assets has to be on a real basis, whether in the present or in the future, and not on a contingent or hypothetical basis. Furthermore, there has to be some evidence on record to indicate, even if not to fully establish, that an international transaction has some impact on profits, income, losses or assets. Taking i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....er resistant rubber lining. During FY 2006-07, the assessee had set up an AE/subsidiary as a special purpose vehicle in Bahamas for acquiring two South Africa based companies. The assessee had provided interest-free loan and corporate guarantee to its AE, and used comparable uncontrolled price ('CUP') as the most appropriate method for measuring the transaction at ALP. The assessee had suo-motto offered interest on such loan at LIBOR+ 100 bps. However, the Ld. TPO disregarded the contentions of the assessee, preferred cost plus method ('CPM') and made upward adjustments for the same, Aggrieved by the order, the assessee filed application before the Ld. Dispute Resolution Panel ('DRP'), which confirmed the order of the Ld, TPO, Further aggrieved, the assessee filed an appeal before the Hon'ble Tribunal. The Hon'ble ITAT inter-alia decided that the assessee had injected loan to its subsidiary and provided guarantee for commercial expediency as the assessee had merged to expand its foreign operations; thus, the loan injected by the assessee was a kind of quasi-equity i.e. in the form of equity Further, the Hon'ble Tribunal preferred internal CUP or ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ad. I therefore find substantial force in the ld. AR's submission that the assessee's expectation from the guarantee provided for the third-party borrowings of AE, was never to earn a guarantee fee. From the facts it is thus clear that the intention of the Appellant for guaranteeing the AEs was that of an investor and not a guarantor. In light of the same, it would be appropriate to classify the guarantee provided to infuse third party funds as a shareholder service meriting no monetary consideration. Therefore, in view of the judgment of the ITAT, there is legal merit in the contention of the appellant that the international transaction pertaining to the provision of corporate guarantee on behalf of the AE is a pure shareholder service and hence merits no charge. 12. There is no gainsaying that in the factual matrix present in the case, the corporate guarantee tantamount to the functions of a shareholder. Therefore, I find myself in agreement with the contention that there can be no element of service in a shareholder's function as there is no benefit derived by the shareholder in the said business, except that of earning more dividend income, which in any case was taxab....