TaxTMI 
TaxTMI 
2021 (3) TMI 1162
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....,66,86,286/-, which was later on revised with total loss of Rs. 92,63,37,113/-. Certain international transactions were reported by the assessee. The Assessing Officer (AO) made a reference to the Transfer Pricing Officer (TPO) for determining their Arm's Length Price (ALP). The TPO observed that the assessee gave Corporate guarantee for its Associated Enterprises (AEs) but just reported in its Transfer Pricing report that it had not incurred any costs in providing guarantees. He held that issuing corporate guarantees was an international transaction which needed to be benchmarked. The assessee was called upon to furnish the details of Corporate guarantees given by it for its AEs. The assessee furnished such details, on perusal of which, the TPO observed that the assessee paid $50,000 in respect of guarantee given for Bilcare AG in addition to charges @1.5% to the bank. The TPO took note of Rule 10TD giving Corporate Guarantee commission at 1.75% under safe harbor rules in respect of a transaction of more than a specific amount. The assessee had furnished ten guarantees for its AEs. The TPO analyzed the transactions of Guarantees given by the assessee and came to hold that fi....
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....on". Though strictly, the Income-tax Rules do not have the same force as the provisions of the Act, but the inclusion of Corporate guarantee in the list of eligible international transactions in Rule 10TD (2) reinforces the intention of the legislature. The question whether furnishing of corporate guarantee is an international transaction recently came up for adjudication in Pr. CIT Vs. Redington (India) Ltd. (2021) 430 ITR 298 (Mad.). The assessee in that case furnished Corporate and Bank guarantees for its AEs, for which the TPO proposed transfer pricing adjustment, which was made by the AO in the final assessment order. The Tribunal deleted the disallowance on the ground that it did not have any bearing on profits, income, loss etc. of the assessee and hence was not an international transaction. The Revenue assailed such a finding of the Tribunal before the Hon'ble High court. The assessee relied on certain Tribunal orders to buttress its point of view that the furnishing of Corporate and Bank guarantee was not an international transaction. The Hon'ble High Court repelled such contention by observing that the Tribunal did not consider the legal position correctly in the hue of c....
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....rformance guarantee vs. Corporate guarantee 6.1. The assessee agitated before the authorities below that all the ten transactions of furnishing guarantee were not of Corporate guarantee inasmuch as two were in the nature of Performance guarantee. Without prejudice to the main argument that corporate guarantee was not an international transaction, the assessee contended before the authorities below that, at least, such Performance guarantee transactions should be ignored. Two such transactions claimed by the assessee to be of Performance guarantee have been given at Sr. nos. 3 & 4 of the Table drawn by the TPO on pages 6 to 8, as under: - Sr. No. Concerned AE party Guarantee Given from Guarantee Given to Remarks 3 Bilcare Incorporated USA INC (Delaware) INR 366.36 CR (Considering year end exchange rate) (Equivalent of 61 Million USD) Sharp Clinical Services USA & United Drugs Holding Limited (UK) Bilcare Incorporated USA agreed to sale its business (Assets & Liabilities) on going concern to Sharp Clinical Services USA. Bilcare Singapore PTE agreed to sales 100% shares of Bilcare UK Ltd to United Drugs Holding Limited (UK). To complete all....
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....s) has agreed to provide guarantees of the obligations of the Sellers under the US Asset Purchase Agreement, the UK Share Purchase Agreement, the Tax Deed and the TSA'. Clause 2.1 of the Agreement states: '... the Guarantor unconditionally and irrevocably guarantee to the UK Buyer - (2.1.1.) the due and punctual payment, observance and performance by the UK Seller of all of the UK Seller's liabilities and obligations, whether present or future, actual or contingent, under or arising out of the UK Share Purchase Agreement or the Tax Deed; and (2.1.2.) the due and punctual payment, observance and performance by each of the Sellers of each and all the Sellers' liabilities and obligations, whether present or future, actual or contingent, under or arising out of the TSA'. Clause 2.4 of the Agreement states: 'If either of the Sellers default on the payment of any amount due and payable to any of the Guaranteed Parties under Guaranteed Obligations or arising from the termination of any of the Agreements, the Guarantor shall, immediately on demand by the relevant Guaranteed Party (as appropriate), unconditionally pay that amount to the relevant Guaranteed Party (as appropriate) in the mann....
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.... would be apt to first take note of the nature of the guarantee transactions. 7.2. In all, there are ten transactions, out of which two transactions that the assessee claimed to be performance guarantee have been discussed above. Other eight transactions, tabulated by the TPO on pages 6 to 8 of his order, are reproduced as under:- Sr. No. Concerned AE party Guarantee Given from Guarantee Given to Remarks 1 Bilcare AG INR 455.00 CR (Considering year end exchange rate) (Equivalent of 55 Million Euro) SBI Pune BILCARE AG was to receive a Loan of Rs. 328 Cr. in AY 2010-11 (Approx.) from SBI Mumbai. SBI Pune was required to provide Bank Guarantee/SBLC to SBI Bank Mumbai for the said transaction. Further SBI Pune has not charged any yearly/ongoing commission on the outstanding SBLC/Bank Guarantee 2 Bilcare AG INR 269.68 Cr. (Considering year end exchange rate) (Equivalent of 44.90 Million USD) SBI Pune BILCARE AG was to receive Loan of Rs. 243.76 Cr. in AY 2012-13 (Approx.) from EXIM Bank. SBI Pune was required to provide Bank Guarantee/SBLC to EXIM Bank Mumbai for the said transaction. Assessee has not recovered anythi....
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....to an agreement with South Indian Bank Limited for issuance of SBLC to EXIM London for the said amount. Said SBLC is valid till 22-Oct- 2018. Assessee was charged Rs. 1,00,56,322 which is 0.75% of the SBLC amount plus other handling charges. Assessee has not recovered anything from the AE company in the current year. 9 Bilcare Packaging Ltd. (Mauritius) 60.06 INR CR (Considering year end exchange rate) 10 Million USD) SBLC-The Laxmi Vilas Bank Ltd. Bilcare Packaging Limited ('BPL') took loan amounting to 10 Million USD (INR 60.65 Crores) from Export Import Bank of India London Branch ('EXIM'). EXIM London insisted for Stand-By-Letter of Credit ('SBLC') from Indian Bank. Assessee entered into an agreement with Laxmi Vilas Bank Limited for issuance of SBLC to EXIM London for the said amount. Said SBLC is valid till 09-Feb-2019. Assessee was charged Rs. 1,25,66,131 which is 1.25% of the SBLC amount plus other handling charges. Assessee has not recovered anything from the AE company in the current year. 10 Bilcare Packaging Ltd. (Mauritius) 44.04 INR CR (Considering year end exchange rate) 7.33 Million USD) SBLC- IDBI Bank Ltd. Bilcare....
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..... The assessee entered into agreement with Jammu & Kashmir Bank for issuance of SBLC to Punjab National Bank, London. No amount was charged by Jammu & Kashmir Bank from the assessee for furnishing guarantee nor the assessee recovered any amount from its AE. 7.8. For the transaction at Sl.No.8, the assessee stood guarantor for Bilcare Packaging Ltd. Mauritius in respect of loan of Rs. 130.32 crore from Exim Bank, London. The assessee entered into agreement with South Indian Bank Ltd. for issuance of SBLC to Exim Bank, London, for which the assessee was charged Rs. 1,00,56,322/- at 0.75% of the SBLC and other handling charges. Though the assessee paid Rs. 1.00 crore and odd but it did not recover anything from the AE. 7.9. For the transaction at Sl.No.9, the assessee stood surety for Bilcare Packaging Ltd. Mauritius in respect of loan of Rs. 60.05 crore from Exim Bank, London which insisted for SBLC from an Indian bank. The assessee entered into agreement with Laxmi Vilas Bank Ltd. for issuance of SBLC to Exim Bank, London for which it was charged Rs. 1,25,66,131/-, being, 1.25% of SBLC amount. The assessee did not recover anything from its AE in respect of such transaction.....
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.... is optional. Thus, it is axiomatic that the safe harbour rules are simply optional for an eligible assessee. One assessee may opt for them, another may not. The entire mechanism under the safe harbour rules gets triggered only when the option of the safe harbour rules is exercised by an assessee under due process mandated under Rule 10TE. A fortiori, where an assessee has not exercised option for the safe harbour, the entire set of Rules from 10TA to 10TG gets freezed and cannot be operationalised. This conclusion is further corroborated by the opening language of rule 10TA giving meaning to various expressions through clauses (a) to (m). It unambiguously mandates that the definitions given hereunder apply only for the purposes of this rule and rule 10TB to 10TG. Thus the definition clause in rule 10TA has its force only within the ambit of the safe harbour rules and not beyond that. 7.15. In the facts and circumstances of the instant case, it is seen that the assessee has not given any option to be governed by the safe harbor rules. As such, the TPO was not justified in getting support from rule 10TD for determining the arm's length rate of the guarantee commission. 7.16. N....
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....'s length rate of guarantee transaction is 0.50% plus actual expenses incurred by the assessee in furnishing the guarantee. The impugned order in confirming uniform rate of 2% as arm's length guarantee fee is set aside and the matter is restored to the AO to decide the issue in the terms held above. The assessee will be allowed a reasonable opportunity of hearing in this exercise. B.TRANSFER PRICING ADDITION -MANUFACTURING ACTIVITY 8. The only other issue pressed in the assessee's appeal is the transfer pricing addition of around Rs. 83.00 lakh in the 'Manufacturing activity'. The Revenue, in its appeal, has also assailed the impugned order on two aspects of the transfer pricing addition in the 'Manufacturing activity'. 9. Briefly stated, the facts of the case are that the assessee reported certain international transactions of purchase and sale from its AEs. A combined Transactional Net Marginal method (TNMM) was applied for benchmarking. The assessee worked out its Profit Level Indicator (PLI) of Operating Profit/Operating Revenue (OP/OR) at 5.39%. Certain comparables were chosen with weighted average at 4.17% for demonstrating that its international transactions were....
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....d. CIT(A). 10.3. The claim of the assessee before the Tribunal is that the reduction in the amount of depreciation should be given effect in the computation of its PLI as well by including only the reduced figure of depreciation actually claimed in the revised return in the operating cost base. It is noticed that the assessee furnished a revised return of income in which loss originally declared at Rs. 279.66 crore was reduced to Rs. 92.63 crore. In such computation of the revised income, the assessee, inter alia, reduced the amount of depreciation by Rs. 19.11 crore with a suo motu disallowance. The AO accepted the revised return and commenced the computation of total income with the figure of total loss as per revised return at Rs. 92.63 crore. Thus, it is evident that the AO acted upon the revised return and treated the original return as having been superseded with the revised one. Now the question is as to whether the amount of reduced depreciation as per the revised return or the enhanced amount of depreciation as per the original return should be included in the operating cost base for determining the ALP of the international transaction under the Manufacturing activity? ....
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....ck to the figure of depreciation as per the original return for the ALP determination, which ceased to exist after the filing of the revised return. We, therefore, hold that only the reduced claim of depreciation by Rs. 19.11 crore should be added to the operating cost base in the ALP determination. 10.6. Here, we want to clarify that we are not confronted with a situation in which albeit the assessee reduced its claim of depreciation by Rs. 19.11 crore but the AO still granted deduction for higher amount of depreciation on the basis of original return by taking recourse to Explanation 5 to section 32. The position would be entirely different if the AO invokes Explanation 5 to section 32 and allows full depreciation as per the original return. In that scenario, the contention of the assessee for considering only the reduced amount of depreciation in the revised return for the ALP determination would fail. As the AO in the instant case has computed the total income by considering the reduced claim of depreciation by Rs. 19.11 crore, we hold that only such reduced amount of depreciation be included in the operating cost base for determining the ALP of the transaction of `Manufactu....