TaxTMI 
TaxTMI 
2022 (5) TMI 685
X X X X Extracts X X X X
X X X X Extracts X X X X
....passed by the Transfer Pricing Officer ('TPO') u/ s 92 CA(3) of the IT Act, 1961. 2.02 That on the facts and in the circumstances of the case and the legal position, the learned CIT(A) has erred in arriving at the arm' s length price of service provided by the appellant in the form of corporate guarantee to AEs; where as:- (i) Providing corporate guarantee is in the nature of shareholders' activities and is not an 'international transaction' as investment in subsidiary Company is not an 'international transaction' as held in the case of Vodafone India Services Private Limited and Shell India Markets Private Limited. (ii) The appellant has not incurred any cost for issuing corporate guarantee and such transaction has no bearing on the profits, income, losses or assets of the appellant and it cannot be considered as an 'international transaction' in terms of section 92 B of the Act. (iii) The corporate guarantee issued by the appellant was purely on the commercial consideration with anticipation of significant benefit in the form of profit income in the later years and to protect the interest of the appellant Company. (iv) The providing ba....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... stated to be as under: "Havells India is an electrical consumer product and power distribution equipment manufacturer. The company's product and services include industrial and domestic circuit protection devices, cables and wires, motors, fans, power capacitors, compact fluorescent lamps, luminaries fat domestic, commercial and Industrial applications, modular switches covering the entire gamut, of household and commercial and industrial electrical needs, The company operates in four segment:- 3. Benchmarking of Corporate Guarantee: It is seen from the audited financial that the assessee company has given corporate guarantee to lenders of the beneficiaries which are AE of the assessee. On this guarantee no appropriate commission/fee has been charged by you for the above arrangement. 3.2 On the basis of details furnished and other material on record, I am of the considered view that the international transaction of providing corporate guarantee for the AE is an independent class of international transaction. In fact as per amendment made in the Section 92B w.e.f. 01.04.2002, a new Explanation has been inserted which gives inclusive definitio....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... REPLY OF THE ASSESSEE AND COMMENTS OF TPO 5. Assessee replied to the show cause vide his submission dated 27.06.2017 and following issues has arisen on the objection of the assessee: On the issue of charging corporate guarantee fee assessee submitted the followings: [Quote] a) In light of the above reasons, it can be concluded that the provision of guarantee by the Appellant (i.e. group' s parent company) to consortium of banks for the loan/credit facility was in the nature of shareholder activity. b) That the amount of Corporate guarantee provided to wholly owned foreign subsidiary Companies present only equity contribution of the assessee Company for which no guarantee fee was charged. c) Furthermore, given that the long term credit worthiness of the overseas group companies are expected to Improve or at least remain same, the Appellant wishes to highlight that any debt obligations taken/ to be taken by such companies to repay the existing loan facility which are also guaranteed by Hit, represents MIL shareholder's interest ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the guarantor to fulfill the guarantee obligation; • The 'price of risk' in financial markets and investor willingness to assume a given type of credit risk and • The uncertainty associated with the borrower's and the guarantor's credit quality. Financial guarantees are usually provided in relation to loans by affiliates and can either be 'explicit' or 'implicit'. Explicit guarantees are those where a direct assurance is given by an affiliate. For example, a parent company may guarantee loans taken by its subsidiary with third party banks, like the assessee has done. Implicit guarantees are those where being part of a multinational group makes it possible to secure a loan, which one might not have been able to obtain as an independent entity or secure more favourable terms. In these instances, the bank perceives that the parent would intervene in the case of any default. It may be of relevance to mention the OECD guidelines on the issue which can be of persuasive value. Interpretation provided under paragraph 7.13 of the OECD Transfer Pricing Guidelines on this issue: "... an associated enterprise should not be considere....
X X X X Extracts X X X X
X X X X Extracts X X X X
....countries deliberating upon different methods and the prudence of charging a guarantee fee. The ruling by the Tax Court of Canada in the case of GE Canada has deliberated upon the 'interest saving approach', but still leaves many questions unanswered as the case relates to Investment Company which is functionally different from the assessee. The ruling of tax court in any case is only persuasive in nature as held by Hon'ble ITAT Mumbai in the case of Serdia Pharmaceuticals (India) Pvt. Ltd. (2011 - TII- 02-ITAT- MUM- TP) wherein it has held, "the decision of Tax Court of Canada Is not a binding precedent, but it certainly deserves utmost respect and consideration not only because It comes from a very eminent forum of tax judiciary in the world, but also because of its very comprehensive and painstaking analysis of all the related issues and Its sheer technical excellence;" The most common guarantees are financial guarantees. These provide credit enhancement to the guaranteed party, either (i) to access cheaper funding, or (ii) to access capital markets, Different methods would apply to each as the first case could happen without a guarantee in place, ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rived credit rating for the shareholding relationship, and (ii) capturing the spread between the parent's credit rating and the estimated standalone credit rating of GE Capital Canada (factoring the implicit support provided through the shareholding relationship). Factoring implicit support for estimation of standalone credit rating would mean that the implicit support is consistent with the arm' s length principle as per the ruling. 9. Determination of Arm's Length Price for inter- company guarantees: What are the approaches followed across the world for benchmarking guarantee fees? Broadly, no Transfer Pricing regulation across the world prescribes or defines a method for benchmarking guarantee fees. Few draft guidelines (under discussion Stage) have been issued by some countries deliberating upon different methods and the prudence of charging a guarantee fee. The ruling by the Tax Court of Canada in the case of GE Canada has deliberated upon the 'interest saving approach', but stilt leaves many questions unanswered. Since no single and concrete approach has been finalized in any country or by the OECD guidelines, it is better to follow the methods which hav....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ase the assessee hasn't come up with any internal CUP. The assessee also conceded that the credit ratings of its AEs are not sound enough and they could not obtain credit terms from the lender banks without the corporate guarantee given by the assessee. 14. Shareholder's activity/ Commercial expediency The assessee in its reply contended that the act of extending corporate guarantee on the further investment activities by HHI was purely driven by the sole business and commercial objective of the Assessee i.e. to enable HHI, make further investments across the globe and strengthen the global presence of the Assessee Group. The argument put forth by the assessee stipulates that by providing the guarantees, it was only serving its own interest. This is generally called the 'shareholder activity' argument. Thus, as a shareholder, it was interested in the functioning of the subsidiaries which in turn benefitted from its own activities. However, this approach totally contradicts the arm' s length principle which is based on the premise of interaction between independent enterprises. This approach requires the transactions between two parties to ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....(1) of the CBCA. (Para 245) Thus, the Tax Court of Canada is of the view that by virtue of being a shareholder, the parent company cannot legally appropriate the money management and other commercial and business functions of the subsidiary. In India also, the shareholders (i.e. ' members') have voting rights (Section 87 of the Companies Act, 1956) participate in the statutory (Section 165) and the annual general meetings (Section 166) and appoint (Sections 255 & 258) and remove the Directors (section 284). However, the business of the company is entrusted to the Board of Directors (Section 291) with applicable restrictions (Section 292 & 293). In fact, in the case of Rolta India Ltd. & Another Vs. Venire Industries Ltd. & Others (2000-(001)-CLJ -0161 - BOM), Hon'ble Bombay High Court had occasion to look into the powers of the Directors in relation to the shareholders in the conduct of the business of the company in case of pooling arrangements. The Hon'ble High Court held that "a pooling agreement, cannot be used to supersede the statutory rights given to the Board of directors to manage the company, the underlying reason being that the shareholders ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....further been argued that Transfer Pricing document maintained by the assessee clearly mention that these loans/ advances are in the nature of quasi- equity and hence the transaction of granting interest free loan Is at arm's length. The loan agreements mentioned that these are interest free loans. Reliance in this regard is placed upon the decision of Delhi Tribunal in the case of Sony India Ltd. 114 ITD 440 Para 100 that " under fiscal loans actual transaction as entered between the parties is to be considered. Authorities have no right to re- write the transaction unless it is held that it is sham or bogus or entered into by the parties to avoid and evade taxes." Further reference has been made la para 1.37 of 1995 of OECD guidelines for the proposition that it is legitimate to consider the economic substance of the transactions. The transactions has been said to be commercially expedient and loan granted to support the subsidiary and obtain returns in loan had been duly granted by the approval of the RBI. The Income Tax Act, 1961 and OECD guidelines support the contention that the effect of government control/ intervention should be considered while determining the arm' ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... length price. Other case laws cited by the assessee are not germane to the facts off this case. Hence, in our considered opinion they do not help the case of the assessee. The real income theory is also not applicable in the context of Chapter-X of the IT Act, which contains special provisions relating to arm' s length price. Further, business expediency does not have any role to play here as while applying arm's length principle, one has to see what the independent parties in comparable transactions would do i.e. if the same loan/ guarantee transaction takes place between two independent entities; what they would expect in terms of compensation for the loan transaction/ guarantee entered into between them. This view was upheld by ITAT, Mumbai in a recent decision in the case of VVF Ltd. Vs. DCIT (2010 - TIOL- 55- ITAT- MUM), wherein it was discussed and held as under: "6. On a conceptual note, the purpose of making arm's length adjustments, in prices at which transactions have been entered into with associated enterprises, is to nullify the impact of interrelationship between the associated enterprises. Unless the method on the basis of which such hypothetic....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s Hindalco Industries Ltd. A.Y. 2008 - 09, on corporate guarantee has held that: [QU0TE] "7.1 The contention of the assessee that income in the form of guarantee fee cannot be taxed in the hands of the assessee as it represents only a notional income, is without merit. It is true that section 92 is not a charging section, but this fact is not relevant. What is relevant is that by providing a corporate guarantee, the assessee has conferred a benefit on its AE and such benefit has the potential of affecting the income, profits or assets of the concerned parties. The provision of corporate guarantee is, therefore, clearly an international transaction u/ s 92B. Moreover, the retrospective amendments made by the Finance Act 2012 in the section now place the issue beyond debate. 7.2 Once it is accepted that providing such a guarantee is an international transaction, the arm's length price of the transaction is required to be ascertained, because under section 92, the income arising from, an international transaction is required to be determined on the basis of the arm's length price, in which case no income can be said to arise from the transaction. But....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ormal principles of transfer pricing, a reasonable mark-up has to be added to this cost considering the nature of benefit. Further, it is relevant to consider the foreign exchange risk and the foreign exchange fluctuation risk borne by the assessee in providing the corporate guarantee. In case the guarantee devolves upon the assessee at a future date, adverse movements in exchange rates can effect the assessee very significantly. This is particularly relevant since A V Minerals has apparently been repaying the loan and interest only with the help of capital infused by the assessee from time to time in the subsequent months. There are other risks also that should be kept in mind, such as sovereign risk and entity risk. The assessee would be put to considerable loss in the event of the business of the AE having to be wound up, which could even be due to a general financial crisis in its country of residence. Another factor to be considered in the present case is that AV Minerals does not have the capacity to meet the interest and principal repayments, of the loan on its own. The assessee has been advancing large sums to the AE,.which have been converted into equity after varying peri....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ee is indeed an international transaction amenable to adjustment. 8. Rebutting the argument of the ld. DR, the ld. AR alternatively argued that determination of the corporate guarantee at 1.3 % is on a higher side and relied on the judgment of Hob'ble High Court of Bombay in the case of CIT Vs. Everest Kento Cylinders Ltd. 58 Taxmann 254 and also on the judgment of Hon'ble High Court of Bombay in the case of CIT Vs Thomas Cook (India) Ltd. in ITA No. 712 of 2017 order dated 26.08.2019. Keeping in view, the judgments of the Hon'ble Bombay High Court and in the absence of any other judgment contrarily brought to our notice, we hereby direct that the adjustment in respect of corporate guarantee provided to AEs be determined at date of 0.5 % instead of 1.3% determined by the revenue. Shahenshah Scheme: 9. This issue stands covered in the case of the assessee by the order of the Co- ordinate Bench of the Tribunal in ITA No. 6194/ Del/ 2015 and ITA No. 463/Del/ 2016 vide order dated 19.01.2021. The relevant part of the said order is reproduced for ready reference: "15. Ground No.3 is with respect to disallowance of Rs.2,47,68,964/- in respect of provision made for sales....
X X X X Extracts X X X X
X X X X Extracts X X X X
....re submitted that since the issue in the year under consideration is identical to that of earlier years, therefore following the order of tribunal in earlier years, the additions made by AO be deleted. 19. Learned DR on the other hand supported the order of AO in CIT(A). 20. We have heard the rival submissions and perused all the materials available on record. The issue in the present ground is with respect to the disallowance of provision made with respect to the sales incentive payable under "Shahenshah Scheme". The AO had disallowed the provision by holding that the provision made by the assessee was not based on any scientific method and there is an element of contingent liability and therefore the sum is not allowable. We find that identical issue arose in assessee' s own case in AY 2006- 07, 2007- 08 and 2008- 09 before the co- ordinate Bench of Tribunal. The Co- ordinate Bench of Tribunal in earlier years has decided the issue in favour of the assessee by holding that the provision made by the assessee in respect to "Shahenshah Scheme" to be on scientific basis. Before us, no material has been placed by the Revenue to point out any ITA No. 6194/ Del/ 2015 I....