TaxTMI 
TaxTMI 
2019 (4) TMI 1934
X X X X Extracts X X X X
X X X X Extracts X X X X
.... were metallic / non-metallic minerals. Details of such International transactions were as under:- Sl.No Nature of international transaction Amount (in B.) Method adopted 1 Purchase of wood pulp 1,15,195 CUP 2 Sale of traded goods 2,61,20,19,702 3 Recovery of expenses 16,59,979 4 Reimbursement of expenses 66,890 Ld. AO made a reference to the ld. Transfer Pricing Officer for analyzing the Arms Length Prices of the international transactions of the assessee with its Associate Enterprises. Assessee had bench marked its transactions with AE considering Comparable Uncontrolled Pricing (CUP) as the most appropriate method (MAM). Break-up of the sales made by the assessee to its AEs during the relevant previous year were as under:- Sl. No Associated Enterprise Description transaction Unit of measurement Quantity Amount of transaction 1 SPG Minerals Pte Limited Sale of Millscale Metre Tonnes 85,744 67,60,20,585 Sale of Barytes Podwer Metre Tonnes 81,987 79,13,12,953 Sale of De Oil Rice Bran Metre Tonnes 32 36,47,925 Sale of Broken Rice Metre....
X X X X Extracts X X X X
X X X X Extracts X X X X
...., as per the assessee, MBG Commodities Pvt Ltd, Maheshwari Logistics Ltd, Narsingh Ispat Ltd, Oswal Minerals Ltd and Sharda Ma Enterprises Pvt Ltd which were selected by the ld. TPO for his comparable study were mainly engaged in logistics and coal trading and could not be considered as good comparables. However, ld. TPO was not impressed by the above reply. According to him, the comparables were selected by him using prowess database which was neutral in nature, that too, after applying filters for selecting companies trading in minerals, while excluding those having sales below one crore or related party transaction in excess of 25% or product dissimilarity. Thus, according to him, assessee's contention that companies considered for TNMM study was inappropriate was not acceptable. Further, as per ld. TPO, assessee's endeavor for using CUP as MAM could not be accepted since it failed to make a one to one comparison. Thus, as per the ld. TPO, ALP adjustment was required on the sale value of iron ore/mill scales to the AEs, applying the average PLI of 4.89% of the comparables. Ld. TPO proposed an upward adjustment of B14,61,31,923/-. 4. Apart from the above, ld. TPO also found th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e outstanding beyond the normally allowed credit period was exigible to a transfer pricing adjustment. Though the assessee relied on a decision of Delhi Bench of the Tribunal in the case of Techbooks International Pvt Ltd vs. DCIT (2015) 44 CCH 295, ld. TPO held that an upward adjustment applying an interest rate of 12.83% was required to be made on the receivables remaining outstanding beyond the credit period given by the assessee. An upward adjustment of B6,18,43,887/- was proposed. 6. When a draft order on the above lines was issued to the ld. AO, asseessee chose to move ld. Dispute Resolution Panel. Contentions taken by the assessee, viz-a-viz the ALP adjustment sought to be made on its sale of iron ore/ millscale to AE were as under:- a ''CUP method ought not to be rejected b Rates published by Plat s should be considered under CUP method c the Assessee has furnished invoices raised by third parties for sale of Millscale is an uncontrolled com arable price, which could be used as comparable data under CUP method for benchmarking "Millscale. d The TPO erred in carving out Iron ore /Millscale segment for the purpose of TNMM. e The....
X X X X Extracts X X X X
X X X X Extracts X X X X
....8, it is noted that term 'guarantee' as inserted in the definition of 'international transaction' in section 92B by inserting an Explanation in the Finance Act, 2012 with retrospective effect from 1-4-2002. e Explanation states that it is clarificatory in nature and is 'for the removal of doubts'. Thus, it does not alter the basic character of definition of 'international transaction' under the main section 928. Under this Explanation, five categories of transactions have been clarified to have been included in the definition of 'international transactions'. Clauses (a), (b) and (d) do not cover guarantee lending or loans. Other two, (c) and (e) deal with (i) capital financing, and (ii) business restructuring or reorganization. Clause (c) refers to lending or guarantee. But the Explanation which is or removal of doubts or is clarificatory , cannot be read independent of section 92B(1). Section 928(1), provides those transactions international transactions which are in the nature of purchase, sale or lease tangible or intangible property (explained by clauses (a) and (b) of the Explanation ), or provision of services (explained by clause (d) o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tinguishable wherein not only the assessee has incurred cost for providing bank guarantee but it also recovered guarantee commission from its AE. Thus, the assessee had effect on its income and expenditure both on entering into such transaction of providing bank guarantee. Accordingly, assessee' will at get help of the decision of the coordinate bench to come out of the purview of international transaction. In the instant case, similar to Redington case there is no fee charged and therefore the principle laid down by he jurisdictional Tribunal will be squarely applicable. d.Apart from the above the AE has kept an interest free deposit with Assessee to the tune of Rs. 26.75 Crores, wjich covers 25% of the loan guaranteed. TPO's Working for Guarantee fees Loan: s.102,40,00,000* 1.98% = 2,02,75,2001-. If interest is levied at PLR rate of 14.7 % on interest free security deposit: Rs. 26,75,00,000 *14.75% = 3,94,56,250. Sin e the imputed interest on security deposit is higher, there is no requirement t charge guarantee commission. The TPO has accepted this contention in the immediately succeeding AY 2015-16 (refer Page 148 & 149 of the paper book) and hel....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... e. Apart from the above, he AE has kept an interest free deposit with Assessee to the tune of Rs. 26.75 Crore . If interest is levied at PLR rate of 14.75% on interest free security deposit: Rs. 2 ,75,00,000 * 14.75% = 3,94,56,250 would be payable by Appellant. f. Considering early receipt of money and interest free security deposit, there is no necessity to recover in rest on outstanding. g. Even assuming without admitting, if interest is to be charged, the same should be on the basis of LIBOR rates as the receivables are in foreign exchange. h. Irrespective of the above, the "base rate" adopted by TPO has no sanctity. The "base rate" has publish d in the 5BI website is only in the range of 9.5% to 10% . i. Further, there is an error in the computation of interest. The TPO has double counted interest to the tune of Rs.l,37,31,786 (11,94,319 + 50,67,241 + 30,23,770 + 44,46,455), which requires to be deleted''. 9. However, ld. DRP rejected all the above contentions of the assessee. According to them, assessee had failed to provide complete transaction details on its trading with AEs. As per the ld. DRP, assessee did not keep segmented resul....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n introduced in Section 92B of the Act through Finance Act, 2012 with retrospective effect from 01.04.2002. Relying on the decision of Delhi Bench of the Tribunal in the case of Bechtel India Pvt Ltd. Vs. ACIT, (2017) 50 CCH 30, ld. DRP held that ld. Assessing Officer/ TPO was justified in considering the excess period of credit given to the Associated Enterprise on the receivables as international transaction requiring an Arms Length Price adjustment. 12. Based on the directions from the ld. DRP, ld. Assessing Officer thereafter completed the assessment. 13. Now the grounds taken by the assessee assail the upward Arms Length Price adjustments made on its Associated Enterprise sales to Associated Enterprise, corporate guarantee and overdue receivables as also adoption of TNMM as most appropriate method as against CUP. 14. Ld. Authorised Representative strongly assailing the orders of the lower authorities submitted that even if TNMM was considered as the most appropriate method, mistake was committed by the ld. TPO in carving out assessee's trading in iron ore/ millscale as a separate segment. As per the ld. Authorised Representative, operating margin of the comparables we....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f 4.89% of the selected comparables. In any case according to him, if the ld. TPO wanted to stick to a segmentation, M/s. Maheswari Logistics Limited, M/s. Sharda Ma Enterprises Ltd and M/s. Narsingh Ispat Limited should go out of the list of comparables due to their functional dissimilarity. 15. Viz-a-viz, corporate guarantee, ld. Authorised Representative submitted that the Associated Enterprise to which assessee had given such guarantee provided on interest free deposit of B26.95 crores to the assessee. According to him, providing corporate guarantee without any fees could not be considered as an international transaction even after the explanation added to Section 92B of the Act, through Finance Act, 2012 w.e.f. 01.04.2002. Specific reliance was placed on a decision of Kolkata Bench of the Tribunal in the case of DCIT vs. EIH Ltd (2018) 52 CCH 37. According to him, when a parent company extended an assistance to its wholly owned subsidiary in the nature of a corporate guarantee, which did not have any bearing on its Profit, loss, incomes, losses or assets, it would be outside the ambit of the definition of international transaction as given in Section 92B(1) of the Act, even....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ssessee. 18. Viz-a-viz the adjustment for corporate guarantee, ld. Departmental Representative submitted that by virtue of Explanation added to Section 92B of the Act through Finance Act, 2012 with retrospective effect from 01.04.2002 providing corporate guarantee became an international transaction amenable to an Arms Length Price adjustment. Specific reliance was placed on the decision of Mumbai Bench of the Tribunal in the case of Everest Kanto Cylinders Ltd (supra). According to him, the said decision was sought to be distinguished by the ld. Authorised Representative applying a wrong logic. As per the ld. Departmental Representative, assessee was in a worse position since it did not charge any fee at all, when in the case of Everest Kanto Cylinders Ltd the concerned assessee had charged fees of 0.5%. 19. In so far as interest on overdue receivables was concerned, ld. Departmental Representative submitted that this was also covered by the explanation to Section 92B of the Act added through Finance Act, 2012. According to him, ld. Assessing Officer/TPO had adopted a rate of interest taking proper comparables and therefore assessee could not be aggrieved on the upward adjus....
X X X X Extracts X X X X
X X X X Extracts X X X X
....heir operations mainly were trading in coal and logistics. M/s. Maheshwari Logistics Ltd (paper book page No.68) were in logistics services, supply of coal, lignite & pet coke, manufacturing kraft paper and trading in variety of papers. M/s. Narsingh Ispat Ltd (paper book page No.64) was trading in coal, hard coke, iron ore, lime stone, dolomite manganese ore and a variety of other items. M/s.Oswal Minerals Ltd (paper book page No.67) which was fourth comparable selected by the ld. TPO was primarily trading in alloys & minerals and there were no separate reportable segments. M/s. Sharda Ma Enterprises Pvt Ltd (paper book page No.63) was in a single line of business of trading in coal. Ld. TPO does say that the PLI worked out by him for the above comparison were for their iron ore/ millscale segment, but clearly, this could not have been so. None of the comparables were trading in iron ore/ millscale, except may be M/s. Oswal Minerals Ltd. They were all doing varied business comprising of logistics, supplying coal, lignite & pet coke, trading in variety of papers. Thus, the PLI of the comparables selected by the ld. TPO could only be the result of their aggregate trading activities ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....order:- 12.1. The assessee filed objections before the ld DRP. The ld. DRP upheld the transfer pricing adjustment pertaining to the receipt of corporate guarantee fee. Aggrieved by the decision of the ld. DRP and the final order of the AO, the assessee is in appeal before us on the following grounds:- 1.1. On the facts and circumstances of the case and in law, the Ld. Assessing Officer ("AO") / Transfer Pricing Officer ("TPO") erred in treating the Corporate Guarantee extended by the appellant to its AE as international transaction and Dispute Resolution Panel (hereinafter referred to as "Ld. Panel") erred in confirming as the same as an international transaction without appreciating the fact that it does not fall within the ambit of "International transaction" u/s 92B of the Act. 1.2 The Ld. AO/TPO and the Ld. Panel failed to appreciate the fact that corporate guarantee has been advanced by the appellant as a matter of commercial prudence to protect the business interest of the group by fulfilling the shareholder's obligation as any financial incapacitation would jeopardize the investment of the appellant. 1.3 Without prejudice to th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ness objective". Thus, according to the ld. AR, the objective of the assessee for providing guarantee was not to earn guarantee fee but to earn returns in the form of appreciation in investment value and receive dividends. Therefore he prayed that the adjustment made by the ld TPO may be deleted. 12.3. Alternatively, the ld AR also contended that the corporate guarantee is not an international transaction u/s 92B of the Act. The assessee according to him has not incurred any cost in providing corporate guarantee to its subsidiary company at Mauritius. According to him, since the issuance of corporate guarantee does not haveany impact on profits, income, losses or assets of the guarantor as there is no cost associated with it, and when the transaction in question has no bearing on profits, incomes, losses or assets of such enterprise, it will be outside the ambit of expression 'International Transactions' under section 92B of the Act. For the aforesaid proposition, the ld. AR relied on the co-ordinate bench decision of Delhi Tribunal in the case of Bharti Airtel Limited in ITA No.5816/Del/2012. According to the ld AR, this proposition has been followed by the co-ordinate be....
X X X X Extracts X X X X
X X X X Extracts X X X X
....gh Court upheld the adjustment of 0.50% made by the TPO in respect of guarantee fee in a similar case as that of assessee, and, therefore, according to him, the Tribunal decision of Bharti Airtel Ltd of Delhi Bench is not good law. 12.5. According to the ld. DR, the transaction mentioned in section 92B of the Act i.e. purchase, sale or lease of tangible or intangible property, or provision of services or lending or borrowing money has to be treated as an international transaction and the arguments of the ld. AR is not correct to say that the transaction should have a bearing on the profits, incomes losses or assets of such enterprises,. According to him, only in other transaction i.e. in sec. 92B [not falling in (a) to (d)] which is not specifically stated that is purchase, sale or lease of tangible or intangible property or provision of services or lending or borrowing money there is a requirement of bearing on profit, incomes, assets of such enterprises. According to the ld. DR, explanation below sec. 92B of the Act, clearly includes the corporate guarantee as an international transaction and a reading of residual clause (e) makes it abundantly clear that in case of othe....
X X X X Extracts X X X X
X X X X Extracts X X X X
....o our notice that a change even on a single fact may change the ratio of the entire decision and so the Hon'ble Bombay High Court decision is distinguishable and cannot be taken as a precedent to adjudicate the issue before us. 12.7. According to the ld. AR, the Hyderabad Tribunal in the case of Prolifics Corporation Ltd (supra) does not discuss as to whether corporate guarantee is a service or not and has not expressly dealt with the question as to whether the explanation inserted by Finance Act 2012 is retrospective or not. According to the ld. AR, the Delhi Tribunal in the case of Bharti Airtel Ltd. has gone in depth to decide the issue which was framed before it on this issue. So, according to him, the decision of Bharti Airtel Ltd is legally sustainable. For a question from the Bench that since there is a contradictory decision on the issue in hand, whether the question needs to be referred to the Special Bench of the Tribunal, the ld. Counsel drew our attention to the fact that the question of law arising from the Tribunal's decision in Bharti Airtel Ltd has already been admitted by the Hon'ble Delhi High Court, therefore referring the question and convening of the S....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nt company i.e. the assessee. Thus, the assessee company being the parent company gave corporate guarantee to the lender bank, so that loan could be disbursed to its 100% subsidiary i.e. M/s. EIH Flight Mauritius. It was brought to the notice of ld TPO that the assessee had not charged any fee for providing such guarantee since it was the obligation of the assessee towards its subsidiary. According to the assessee, since there was no fees charged by the assessee company from its 100% subsidiary for providing corporate guarantee, this fact was not reported as an international transaction. The aforesaid contention was not accepted by the ld TPO and according to the ld TPO, the arrangement between the company and its subsidiary was in the nature of providing services to AE and, therefore, had to be categorized as an international transaction. Thereafter the ld TPO applied the CUP method as the MAM for benchmarking the guarantee fee and held that the guarantee fee rate of 3% to be the arms length for bench marking the transactions of receipt of corporate guarantee from the subsidiary and thus made an addition of Rs. 2,62,09,659/-. The ld DRP upheld the said adjustment pertaining to the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n "international transaction" shall include .... (c) capital financing, including any type of long-term or short-term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business." The Explanation states that it is clarificatory in nature and is 'for the removal of doubts'. Thus, it does not alter the basic character of definition of 'international transaction' under the main section 92B. Under this Explanation, five categories of transactions have been clarified to have been included in the definition of 'international transactions'. Clauses (a) (b) and (d) do not cover guarantee, lending or loans. Other two, (c) and (e) deal with (i) capital financing, and (ii) business restructuring or reorganization. Clause (c ) refers to lending or guarantee. But the Explanation which is for removal of doubts or is clarificatory, cannot be read independent of Section 92B(1). Section 92B(1), provides those transactions as international transactions which are in the nature of purchase, sale or lease of tangible or intangible property (ex....
X X X X Extracts X X X X
X X X X Extracts X X X X
....y (AE in the instant case) could not borrow money from third party sources on its own standing and the guarantee provided by the parent (assessee in the instant case) enables it to make such borrowing, then the guarantee could be said to be a shareholder function, not warranting a guarantee fee. This ratio would squarely be applicable to the facts of the instant case before us. 12.13. The Ld. CIT, DR's reliance in the case of Everest Kanto Cylinder Ltd. (supra) would not come to the rescue of Revenue because in that case, the parent company charged a fee of 0.5% on the AE for rendering this service. On this factual aspect, the Tribunal as well as the Hon'ble High Court held that it is an international transaction. Since in the case in hand, the assessee has not charged a penny from the AE, so the facts of the case are different and case law is distinguishable and, therefore, the Hon'ble High Court's order cannot come to the rescue of the Revenue. We find that the ld. AR pointed out that in the said case, the Hon'ble Bombay High Court did not answer the specific question as to whether the issuance of corporate guarantee is inherently within the ambit of definition of 'inter....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ified only on 10.6.2013. Hence the assessee cannot be expected to report this transaction also as an international transaction in its transfer pricing study and the audit report thereon. 12.17. In view of the aforesaid findings and respectfully following the various judicial precedents, we allow the Grounds 1.1. to 1.4 raised by the assessee''. The Bench had duly considered the Explanation introduced to Section 92B of the Act through Finance Act, 2012 with retrospective effect from 01.04.2002 while giving the above decision. The facts in the said case, in our opinion are very similar to the one here. Assessee had not charged any corporate guarantee fee and corporate guarantee was given by it to its 100% subsidiary. Following the decision of Kolkata Bench of the Tribunal in the case of EIH Ltd (supra), we are of the opinion that there was no scope for making any adjustment for corporate guarantee fees on the corporate guarantee given by the assessee to its Associated Enterprise. Upward addition of B2,02,75,200/- on corporate guarantee fees stands deleted. 23. Now we take up the dispute regarding the Arms Length Price adjustment imputing interest on overdue receivables....