TaxTMI 
TaxTMI 
2020 (9) TMI 1101
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....s. 2,45,43,617/- by treating the transaction of business advance as loans given to AE. The appellant prays that the aforesaid action of the Hon'ble CIT(A) may please be held as bad-in-law and be deleted. As evident, the sole subject matter of assessee's appeal is Transfer Pricing (TP) adjustment of Rs. 245.43 Lacs against business advances given by the assessee to its AE. 2.2 We have carefully considered the arguments advanced by both the representatives and perused relevant material on record including documents placed in the paper-book. We have also deliberated on various judicial pronouncements as cited before us during the course of hearing. Our adjudication to the subject matter of appeal would be as given in succeeding paragraphs. 2.3 Briefly stated, the assessee being resident corporate assessee is stated to be engaged in the business of designing, fabrication, galvanizing and testing of transmission lines & telecom towers, supply and erection of sub-station structures and overhead equipment for railway electrification and managing infrastructure sites for telecommunication services. The assessment for year consideration was framed u/s 143(3) r.w.s. 144C(3) on 3....
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....thing but a matter of commercial prudence primarily to protect the business interest of the assessee in projects of JV. This was just a fulfilment of the obligation of being a JV partner as any financial incapacitation of JV would adversely affect the continuation of the project and ultimately jeopardize the interest of the assessee. Since the advances were purely in the nature of business advances to fulfil the obligations of the assessee as a JV partner, the assessee has not charged any interest on the said advance. It was also submitted that relationship on account of advancing funds could not be considered in isolation without considering crucial business scenarios and expediency. 2.7 However, the aforesaid submissions could not convince Ld. AO and therefore, internal CUP as proposed by the assessee was rejected since loans taken by the assessee from Bank were secured loans and guaranteed by the assessee himself and therefore, the same could not constitute as internal CUP. 2.8 Since the assessee did not offer any suo-moto TP adjustment, the provisions of Sec. 92CA(3)(a) & (c) were invoked and Ld. AO proceeded to benchmark the same against appropriate rate. Finally, it was....
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....ounting to 162.80 Million Rands. The assessee's contribution in the JV account is 41.12 Million Rands. The JV incurred losses of 108.13 Million Rands during the year, which has primarily triggered the assessee to make the stated advances to its JV. These advances have been classified under the head Joint Venture partners' account. All these facts would lead strength to the argument of Ld. AR that there was pre-existing liability to make such advances to JV and the business interest of the assessee would have been adversely impacted by not making such advances. The advances were more in the nature of capital contribution and by advancing the same, the assessee had protected its own business interest which is evident from the financial statements of JV. The advances were towards fulfilment of the assessee's obligation of being a JV partner as any financial incapacitation of JV would adversely affect the continuation of the project and ultimately jeopardize the interest of the assessee. Therefore, the said advances could not be put in the category of loans as done by the lower authorities. Further, it could not be said that JV entity derived / gained certain benefits out of such advan....
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....on behalf of its AE i.e. KEC Global FZ LLC was not an international transaction without appreciating the fact that the transaction was of nature of tripartite agreement and the AE get benefited from the performance guarantee provided by the assessee, which was a facility provided by the assessee to its AE. vi. On the facts and circumstances of the case, the Ld.CIT(A) was not justified in deciding that the performance guarantee provided to third party i.e. Bahwan Engineering Company LLC on behalf of its AE i.e. KEC Global FZ LLC was not an international transaction without appreciating the fact that the TPO has determined the benefits of the AE as ALP. vii. On the facts and circumstances of the case, the Ld.CIT(A) was not justified in deciding that the performance guarantee provided to third party i.e. Bahwan Engineering Company LLC on behalf of its AE i.e. KEC Global FZ LLC was not an international transaction without appreciating the fact that the term "guarantee" clearly mentioned in Explanation of section 92B(l)(c) of IT Act 1961 as an International Transaction. viii. On the facts and circumstances of the case, the Ld.CIT(A) was not justified in decidi....
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....ces 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 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). As evident, the grounds raised by revenue are related with addition arising out of TP adjustment against performance guarantee and corporate guarantee given by the assessee on behalf of its AE. In ground nos. (xiii) & (xiv), the revenue has assailed the action of Ld.CIT(A) in treating the Market-to-mark (MTM) losses on forex contracts to be an accrued loss. 6.2 The Ld. AR, at the outset, submitted that substantial issues of revenue's appeal are covered in assessee's favor by the earlier decision of this Tribunal for AY 2010-11, ITA No.5611/Mum/2015 order dated 10/07/2019 and therefore, the same view may be taken in this year. The copy of the same has been placed on record. The Ld. DR could not controvert the said position but supported the adjustments proposed by Ld. TPO. 6.3 In the above background, during proceedings ....
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....CIT(A) directed Ld. AO to apply the first appellate decision for AY 2011-12 and partially allowed the appeal. The perusal of appellate order for AY 2011-12 dated 28/07/2016, as placed on record, would reveal that Ld. CIT(A) has preferred to follow the stand taken in AY 2010-11. Aggrieved, the assessee is under further appeal before us. 6.6 At the outset, the adjustment, as proposed by Ld. TPO, could be tabulated in the following manner: - Performance Guarantees: Name of Borrower AE KEC Global FZ LLC Ras Ul Khaimah KEC Global FZ LLC Ras Ul Khaimah KEC Global FZ LLC Ras Ul Khaimah SAE Tower Holding LLC USA Country UAE UAE UAE USA Bank Name and Country Bank of India -India Bank of India - India N.A. Royal Bank of Scotland - India Whether amount borrowed by AE from third party without corporate guarantee No No No Yes Amount guaranteed 68160907 136321814 2239650902 34652829 Loan Amount availed N.A. N.A. N.A. N.A. When guarantee given 2009 2009 2009 2010 No of days during the year which guarantee was given 365 365 365 365 Rate recovered 0.60% 0.60% - ....
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....nctioned to assessee while sanctioning aforesaid bank guarantee to assessee's AE. The assessee, based on letter obtained from the bank, charged guarantee commission of 0.60% from its subsidiary. The Ld. TPO estimated the same @1%. We find that this issue is contained in paras 5.1 to 8 of the cited decision of Tribunal in assessee's own case for AY 2010-11. The Tribunal has concluded that internal CUP in the shape of commission charged by the bank, would be most direct and reliable way to apply Arm's Length Principle. Further, when there was absolutely no loss to the assessee and entire cost was recovered from the AE, no further adjustment would be required. Applying the said principle to year under consideration, we find that the assessee has charged commission in accordance with the bank's sanction letter and therefore, no further adjustment, as proposed by Ld. TPO, would be justified. Accordingly, these grounds stand dismissed. 7.2 Ground Nos. (iii) & (iv) are related with adjustment arising out of guarantee for advance payment provided by assessee to Chadian Company for Water & Electricity (CCWE) on behalf of its AE KEC Global, FZ LLC for Rs. 13.63 Crores. The assessee has....
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.....4 Ground Nos. (viii) & (ix) are related with adjustment arising out of performance guarantee of Rs. 3.46 Crores provided by the assessee in favor of an entity namely SNC Lavalin, Canada (SNC) on behalf of its AE namely SAE Towers Limited, USA (a subsidiary of the assessee). The guarantee was towards performance of the contract entered into between SNC and assessee's AE-SAE Towers Limited. The bank utilized the guarantee facility sanctioned to assessee while giving the said guarantee and charged fees of 0.60%. The company, in turn, recovered the same from its AE. We find that facts are pari-materia the same as contained in Ground Nos. (i) & (ii) of the revenue's appeal. Following the same principle, we hold that the fees charged by the assessee was at Arm's Length Price. Therefore, the impugned order would not require any interference on our part. These grounds stand dismissed. 7.5 Ground Nos. (x) to (xii) arises out of corporate guarantees provided by the assessee on behalf of its 2 AEs namely KEC Transmission LLC, USA and KEC US LLC, USA. The corporate guarantees were given to ICICI Bank, UK to secure the finances provided by the said bank to two of assessee's AEs. The said....
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....ier than domestic ones because of the difficulties in enforcing recovery in foreign jurisdiction. Since the spread on loans depend on credit ratings of the borrowing party, it is the credit rating of borrower AE which would be relevant and not the credit rating of assessee extending the guarantee to facilitate the borrowing of its AE. The banks would charge lower fees while giving guarantees for entities having high credit ratings and on the other hand, high fees would be charged for entities having low credit ratings and that too, in a foreign jurisdiction. Since the credit rating of the assessee guarantor was better than the rating of the guaranteed, it was natural that rate charged by the bank from the guarantor would be different in comparison to situation where the guarantee was provided to the guaranteed. Therefore, the fees charged by the bank from the holding company could not constitute internal CUP for charging the rate from AE without proper adjustment. Since the rates charged by the banks to Indian companies ranged between 1.10% to 3% depending upon various factors, the ALP rate would be between 1.5% to 3.5%. Since the loan was taken for business purposes, the approp....
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....(ii) Siro Clinpharm Pvt. Ltd. V/s DCIT (ITA No. 2618/Mum/2014 31/03/2016, Mumbai Tribunal) (iii) Marico Ltd. V/s ACIT (ITA No. 8858/Mum/2011 dated 18/05/2016, Mumbai Tribunal) (iv) DCIT V/s Rohit Ferro Tech Ltd. (ITA Nos. 262 & 263/Kol/2018 dated 12/10/2018, Kolkata Tribunal) (v) DCT V/s EIH Ltd. (89 Taxmann.com 417, Kolkata Tribunal) 7.10 Upon careful consideration of factual matrix, it is noted that the assessee has provided unconditional, absolute and irrevocable corporate guarantee to secure the finances advanced by ICICI bank to two of its wholly owned AEs. The guarantor guarantees to finance party the punctual performance by the borrower of all the secured obligation and undertake with finance party that whenever either borrower does not pay the amount as and when due under or in connection with any finance document, the guarantor will immediately on demand by the bank, pay that amount as it was the principal obligor in respect of that amount. The AEs were stated to be Special purpose vehicle with a view to enable the assessee in downstream acquisition of the business of an entity namely SAE Towers Ltd., USA. The assessee has not charged any fees....
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....e, the assessee's risk in such a case would be very low since both the AEs were assessee's subsidiaries only. Therefore, considering the fact that it was a corporate guarantee for which no fees was paid by the assessee and going by the ratio of the decision of coordinate bench of the Tribunal in Everest Kanto Cylinders Ltd. Vs. DCIT [34 Taxmann.com 19] as affirmed by Hon'ble Bombay High Court on 08/05/2015 [58 Taxmann.com 254], we estimate the TP adjustments against both these transactions @0.20%. The Ld. TPO / Ld. AO is directed to recompute the same in terms of our above order. The grounds stand partly allowed. 7.12 Ground Nos. (xiii) & (xiv) are related with mark-to-market losses arising on the foreign exchange contracts which were outstanding at the year-end. During assessment proceedings, it transpired that the assessee debited an amount of Rs. 1227.24 Lacs on account of exchange (gain) / loss (net). An amount of Rs. 873.55 Lacs represented foreign exchange losses due to marked-to-market (MTM) losses. The Ld. AO observed that unrealized foreign exchange loss was neither accrued loss nor actual loss and therefore, the same could not be allowed as deduction. Since the provisi....