TaxTMI 
TaxTMI 
2021 (10) TMI 453
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.... to make an adjustment in respect of financial guarantee commission. 3) The Assessing Officer (AO) / Transfer Pricing Officer (TPO) / Dispute Resolution Panel (DRP) erred in holding that the transaction of giving financial guarantee by the Appellant on behalf of its Associated Enterprises (AEs) was an "international transaction" under Section 92B of the Act. 4) The AO / TPO / DRP erred in determining the Arm's Length Price of the financial guarantees given by the Appellant on behalf of its AEs @ 1.25% per annum. 5) The AO / TPO / DRP erred in making a transfer pricing adjustment of Rs. 15,45,56,760/- on account of guarantee commission. 6) The AO / TPO / DRP failed to appreciate that giving of financial guarantees by the Appellant on behalf of its subsidiaries was a shareholder activity for which no charge is required. 7) The AO / TPO / DRP erred in law and in facts in rejecting the benchmarking analysis undertaken by the Appellant in respect of guarantee commission in its transfer pricing documentation. 8) Without prejudice to Ground Nos. 1 to 7, the AO / TPO / DRP erred in computing the arm's length price of the financi....
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..../2017 & ors., common order dated 05/04/2021. The copy of the order has been placed on record. The Ld. AR submitted that the transactions are exactly the same and the assessee has benchmarked these transactions following same methodology which has finally been approved by Tribunal in the cited decision. The Ld. AR also assailed the corporate additions as sustained in the final assessment order by placing reliance on various judicial pronouncements. The Ld. DR, on the other hand, supported the assessment framed by Ld. AO. However, the submission that TP issues are covered by the earlier order of the Tribunal could not be controverted. In the above background, our adjudication to the subject-matter of appeal would be as given in succeeding paragraphs. Assessment Proceedings 3.1 The material facts are that the assessee being resident corporate assessee is stated to be engaged in providing offshore oilfield services in India and internationally and also offers offshore logistics and drilling services with a fleet of vessels and rigs owned by it. 3.2 Since the assessee carried out certain international transactions with its Associated Enterprises (AE), the same were referred to ....
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....interest @3.332 basis points. Accordingly, it was held that the assessee should have charged interest of LIBOR+3.332% from GGHL. Adopting the same, Ld. TPO proposed an adjustment of Rs. 108.54 Lacs as computed on page-13 of Ld. TPO‟s order. However, no adjustment was proposed on loan advanced to GUK and the same was accepted to be at Arm‟s Length price. 3.4 The above-said TP adjustments aggregating to Rs. 3256.65 Lacs as proposed by Ld.TPO were incorporated by Ld. AO in draft assessment order dated 23/12/2016. In the assessment order, Ld. AO also proposed disallowance u/s 14A for Rs. 26.34 Lacs and also made another disallowance of Rs. 4762.45 Lacs on account of exchange gain claimed by the assessee as capital expenditure. The draft assessment order was subjected to assessee‟s objections before Ld. DRP. 3.5 The disallowance u/s 14A stem from the fact that the assessee earned exempt income of Rs. 388.87 Lacs and offered suo-moto disallowance of Rs. 12.18 Lacs in the computation of income. The same was computed by applying proportion of exempt income to total income to cost incurred on treasury functions. However, rejecting assessee‟s methodology, Ld. AO....
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....er & Sons Ltd. (222 ITR 344; 11/09/1996) was also referred to strengthen the said conclusion. Accordingly, the amount of exchange fluctuation was added to the income of the assessee. Proceedings before Ld. DRP 4.1 The Ld. DRP, after due deliberations, directed Ld. TPO to adopt guarantee rate of 1.25% as against rate of 2.07% as proposed by Ld. TPO. Regarding benchmarking of loans, it was held that internal CUP used by the assessee was not appropriate and Ld. TPO correctly used external CUP. Therefore, the benchmarking rate proposed by Ld.TPO was confirmed. Regarding disallowance u/s 14A, it was observed that disallowance made by the assessee was a rough estimate and therefore, the disallowance was rightly computed as per Rule 8D(2). 4.2 Regarding taxability of exchange gains, the assessee submitted that the transactions were loan transactions which would be capital in nature and therefore, any gain or loss arising there-from would be capital in nature. Reliance was placed on the decision of Hon‟ble Supreme Court in CIT V/s Tata Locomotive & Engg. Co. Ltd. (60 ITR 405); Sutlej Cotton Mills Ltd. V/s CIT (116 ITR 1); CIT V/s Canara Bank (63 ITR 328); decision of HonR....
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....ence between the rate and the time of lending and at the time of return) would represent a component of interest. While receiving interest from the AE, the assessee has been benchmarking its interest at Libor rates which have a disconnect with the Indian inflation and hence such rates do not have Indian inflation rates built into them. However, the inflation is reflected in gradual weakening of the currency and the lender is compensated when he receives the corpus and converts it into Indian currency. This gain, received at the time of conversion, is a part and parcel of the interest component which the lender has received and is required to be treated in a similar fashion. 7.11. We are in agreement with the reliance placed by the AO on the decision in the case of Solid Containers Limited. The income, in the present case, is clearly arising out of the business activity of the assessee company which include investment in foreign subsidiaries for purpose of conduct of its business. The assessee itself, while arguing in respect of earlier grounds, has submitted that these loans represent its investment during the course of its business. There has been a judicial consensus tha....
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....he adequacy of the ALP of the corporate guarantee fees determined by the assessee at 0.43% is concerned, the same in the backdrop of the aforesaid facts cannot be called in question. Apart from that, we find that it was also the claim of the assessee before the lower authorities that Kotak Mahindra Bank (as per its sanction letter) had expressed its willingness to give guarantee on behalf of the AEs at a commission rate of 0.40% p.a/0.50% p.a. In the backdrop of the aforesaid fact, we find substantial force in the claim of the ld. A.R that the aforesaid credit sanction letter too would constitute a CUP for benchmarking the transaction of providing of corporate guarantee by the assessee to the banks for facilitating raising of loans by its AEs. Be that as it may, the adequacy of the ALP of corporate guarantee fee at 0.43% can also safely be gathered by drawing support from the following judicial pronouncements as had been relied upon by the assessee before the lower authorities as well as before us: Particulars Guarantee Commission rate 1. Everest Kento Cylinder Ltd. Vs. ACIT (201 2) 34 CCH 0528 (Mum) [Note : Order of Tribunal upheld by the Hon'ble High Cou....
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....erein the bench observed as under: - 14. We have in the backdrop of the contentions advanced by the authorised representatives for both the parties and perusing the orders of the lower authorities in context thereto, deliberated at length on the issue pertaining to benchmarking of the interest charged by the assessee on the loan advanced by it to its AE, viz. GGHL, Mauritius. Succinctly stated, the assessee had charged interest of Rs. 8,90,20,949/- from its AE, viz. Greatship Global Holdings Ltd. (for short "GGHL") at the rate of LIBOR plus 2.9% mark-up. As noticed by us hereinabove, the loan to GGHL was sanctioned in the immediately preceding year i.e F.Y 2010-11 and was disbursed in parts in the said preceding year and the current financial year. Considering itself as the tested party, the assessee had benchmarked the interest charged on the loans advanced to its AE, viz. GGHL on the basis of the arithmetic mean of the interest rate that was paid by it on the foreign currency loans that were availed by it from foreign banks. As the arithmetic mean of the interest rates charged by the banks in respect of the foreign currency loans availed by the assessee worked out at LIB....
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....h on the issue in question i.e transfer pricing adjustment carried out by the TPO/DRP as regards the interest charged by the assessee on the loan advanced to its AE, viz. GGHL, Mauritius. In our considered view, the benchmarking of the interest charged by the assessee on the loan advanced to its AE, viz. GGHL by applying internal CUP i.e arithmetic mean of the interest rates that were charged by the banks as regards the foreign currency loans availed by the assessee could not have been rejected by the TPO/DRP. Our aforesaid view is fortified by the order passed by the Tribunal while disposing off the cross-appeals in the case of the holding company of the assessee, viz. The Great Eastern Shipping Company Limited, ITA No. 397/Mum/2012 & ITA No. 437/Mum/2012, dated 10.01.2014 for A.Y 2007-08 (copy on record). In its said order the Internal CUP in the form of interest paid by the assessee company on its own borrowings from bank to benchmark the interest charged by the assessee on a loan given to its AE was accepted. The Tribunal in its said order had upheld the benchmarking of the interest charged by the asseseee on the loan given to its AE, on the basis of the Internal CUP applied by....
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....refore, there would be no justification in holding the same as not being at arm‟s length during the year in question i.e A.Y 2012-13. Also, the DRP in the assessee‟s case for A.Y 2010-11 had held that the interest rate of LIBOR + 300 basis points that was charged by the assessee on a loan of USD 4 million given to its AE, viz. GGES (and repaid) as being at arm‟s length. In the backdrop of the aforesaid facts, we find that the DRP had consistently been holding the interest rate of LIBOR + 2.9% / 3% charged by the assessee on the loans advanced to its AEs as at arm‟s length. On the basis of our aforesaid observations, we uphold the Internal CUP applied by the assessee for benchmarking the interest charged on the loans advanced to its AE, viz. GGHL; and hold the interest charged by it on the loan advanced to its AE, viz. GGHL at LIBOR + 2.9% as being at arm‟s length. The Grounds of appeal Nos. 8 to 11 are allowed in terms of our aforesaid observations. The bench has approved the benchmarking of these transactions on the basis of internal CUP. We find the facts to be similar in this year. The assessee has followed same methodology to benchmark the loan ....
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....under the Act in a situation where the Assessing Officer is not satisfied with the claim of the assessee. Whether such determination is to be made on application of the formula prescribed under Rule 8D or in the best judgment of the Assessing Officer, what the law postulates is the requirement of a satisfaction in the Assessing Officer that having regard to the accounts of the assessee, as placed before him, it is not possible to generate the requisite satisfaction with regard to the correctness of the claim of the assessee. It is only thereafter that the provisions of Section 14A(2) and (3) read with Rule 8D of the Rules or a best judgment determination, as earlier prevailing, would become applicable." Similar view had thereafter been taken by the Hon‟ble Apex Court in the case of Maxopp Investment Ltd. Vs. CIT (2018) 402 ITR 640 (SC). We find that involving identical facts in the case of the assessee for A.Y 2008-09 & A.Y 2009-10, wherein a suo-motto disallowance offered by the assessee was rejected by the A.O, and was thereafter substituted by an enhanced amount of disallowance as per the methodology contemplated in Sec. 14A r.w Rule 8D, that on appeal the Tribuna....
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....st. Further, while receiving interest from the AE, the assessee has been benchmarking its interest at LIBOR which have a disconnect with the Indian inflation and hence such rates do not have Indian inflation rates built into them. However, the inflation is reflected in gradual weakening of the currency and the lender is compensated when he receives the corpus and converts it into Indian currency. This gain, received at the time of conversion, is a part and parcel of the interest component which the lender has received and is required to be treated in a similar fashion. Further, the income was arising out of business activity of the assessee which includes investment in foreign subsidiaries for the purpose of conduct of its business. Accordingly, the action of Ld. AO was upheld. 8.2 We find that the assessee has sanctioned loan of USD 75 million to its wholly owned subsidiary entity GGHL during financial year 2010-11 in order to enable GGHL to fund capital expenditure of the assessee‟s step down subsidiaries viz. GGES and GGOS. The loan of USD 40 million was disbursed in FY 2010-11 whereas loan of USD 31.5 million was disbursed in FY 2011-12. GGHL is stated to be an investm....
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....circulating capital, would be a trading loss, but depreciation of fixed capital on account of alteration in exchange rate would be capital loss. (v) For determining whether devaluation loss is revenue loss or capital loss what is relevant is the utilisation of the amount at the time of devaluation and not the object for which the loan had been obtained. Even if the foreign currency was intended or had originally been utilised, for acquisition of fixed asset, if at the time of devaluation it had changed its character and had assumed the new character of stock-in-trade or circulating capital, the loss that occurred on account of devaluation shall be a revenue loss and not a capital loss. (vii) The way in which the entries are made by an assessee in the books of account is not determinative of the question whether the assessee has earned any profit or suffered any loss. What is necessary to be considered is the true nature of the transaction and whether in fact it has resulted in profit or loss to the assessee. Similarly, Hon‟ble Supreme Court has confirmed the decision of Hon‟ble High Court in CIT V/s Tata Locomotive & Engg. Co. Ltd. (60 ITR 405) whic....