TaxTMI 
TaxTMI 
2022 (3) TMI 1448
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....erred in confirming the addition of an amount of Rs.24,38,777/- in the income of the appellant company on account of adjustment in the arm's length price in respect of the interest charged on the advances by the appellant companies to its AE Virgo Europe SPA. 2. The learned CIT (Appeals) has erred in not appreciating the fact the appellant company has charged interest rate of 4.75% on the Euro denominated loan given to its associated enterprise namely, Virgo Europe SPA, based on EURIBOR plus basis for Euro currency, prevailing then. 3. The learned CIT (Appeals) has erred in not appreciating that the interest rate of Indian Rupees denominated lending is not material for the purpose of calculating arm's length interest rate in respect of loan denominated in Euro. 4. The learned CIT (Appeals) has erred in confirming the arm's length rate of interest applicable to lending in Euro by the appellant company to be at 10% for the year. 5. Briefly stated, the relevant material facts are like this. The assessee had granted a loan of Euro 5,00,000 to it"s associated enterprises Virgo Europe SPA, and of US Dollars 5,00,000 to it"s another enterprises Virgo Engineers Inc, USA.....
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....ransaction on the income of the assessee is to be seen and considered and not effect on the cost or income of the AE. Therefore, the tested party is always the tax payer and not the AE. None of the factors under the Transfer Pricing Regulations require to consider whether the AEs would have incurred or earned more or less; but it is always considered whether the assessee had earned more or less by doing a similar transaction with an unrelated parties. 8.11. Even under Rule 10B of the IT Rules, the factors prescribed for inclusion or exclusion of comparables to determine the ALP are also based on the comparison of the assessee with the chosen entities and the AE has no rule in the exercise of selecting the comparables. Thus, in our view, the interest that would have been earned by the assessee by advancing or placing the said amount with unrelated parties would be the Arm's Length interest in relation to the interest free loans/advances to the AE. The safest comparables, which can be taken as Arm's Length interest rate in such a case would be the interest on FD with the bank for a term equivalent to the term for which the loans given to the AEs. 8.12. It is pertinent to ....
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....sion of the Tribunal in VVF Ltd. (supra) and Tech Mahindra Ltd. (supra) on the above issue. No reason has been shown to us as to why the Revenue seeks to take a different view in respect of the impugned order from that taken in VVF Ltd. (supra) and Tech Mahindra Ltd. (supra). The Revenue not having filed any appeal, has in fact accepted the decision of the Tribunal in VVF Ltd. (supra) and Tech Mahindra Ltd. (supra). 8. In view of the above we see no reason to entertain the present appeal as in similar matters the Revenue has accepted the view of the Tribunal which has been relied upon by the impugned order. Accordingly, we see no reason to entertain the proposed questions of law. 9. Clearly, therefore, Their Lordships have held that since the Tribunal decisions in the cases of VVF Ltd (supra) [reported as VVF Ltd Vs DCIT- TS 84 ITAT 2010] and DCIT Vs Tech Mahindra Limited (supra) [reported as (2011) 12 taxmann.com132 (Mum) and as (2011) 46 SOT 141 (Mum)] were accepted by the revenue authorities, it cannot be open to the revenue authorities to challenge the same decision in other cases. Both of these decisions were incidentally authored by one of us (i.e. the Vice President) and ....
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.... not even the case of the revenue authorities that the basis points above the LIBOR are inadequate or too low. Accordingly, benchmarking by the assessee cannot be faulted with. 10. In view of the above discussions, as also bearing in mind entirety of the case, we delete the impugned ALP adjustment. The assessee gets the relief accordingly. 11. Ground nos 1 to 4 are thus allowed. 12. In ground nos. 5, 6 and 7, which we will take up together, the assessee has raised the following grievances:- 5. The learned CIT (Appeals) has erred in confirming that the pledge of shares of Virgo Europe SPA given to the State Bank of India, which is an Indian Bank, for the loan given by the State Bank of India to Virgo Europe SPA amount to an international transaction. 6. The learned CIT (Appeals) has erred in confirming the addition of the amount of Rs.15,94,478/- as adjustments towards arm's length price in respect of pledge of shares made by the appellant company of Virgo Europe SPA, pledged to the State Bank of India for credit line received by Virgo Europe SPA, whose shares are pledged. 7. The learned CIT (Appeals) has erred in confirming that the adjustment value of the pledge of sh....
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....een done. This argument of appellant is therefore not acceptable. ii. The appellant has stated that rate of 2.5% charged by the TPO is quite high. It is mentioned here that in a recent decision dated 6' June, 2012 in ITA Nos. 8597/Mum/2010 and 7999/Mum/2011 in the case of Mahendra & Mahendra Ltd., the Hon'ble ITAT, Mumbai Bench has held that guarantee fee of 3% would represent the arm's length price. Further, Hon'ble ITAT Mumbai in the case of M/s Tecnimont ICB Pvt. Ltd. Vs. DCIT vide ITA No. 6394/Mum/2012(A.Y. 2008-09) dated 28.8.2013, have upheld guarantee commission at a rate of 3%. In view of these decisions, the rate of 2.5% applied by the TPO is quite reasonable and cannot be stated to be high. Accordingly the contention of the appellant is not acceptable. iii. Without prejudice the appellant contended that it has pledged 32000 shares only and not the entire 1,10,000 shares. In this regard on perusal of the balance sheet of appellant, it is noted that in Schedule V appended to the annual accounts, it is clearly mentioned that these shares are pledged in favour of state bank of India Frankfurt as a security against loan advanced to Virgo Europe SPA." In vie....
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...." holding that "the adjustments made on guarantee commissions both on the guarantees provided by the Bank directly and also on the guarantee provided to the erstwhile shareholders for assuring the payment of Associate Enterprise". Once Their Lordships hold so and uphold the contention that "corporate guarantee" constitutes an international transaction under section 92B, even in the pre-amendment assessment year that Their Lordships were dealing with i.e. assessment year 2009-10, it cannot be open to us to take a stand diametrically opposed to view so taken by Their Lordships. We humbly bow to, to borrow the words of House of Lords in Casell & Co (supra), higher wisdom of the Hon"ble Courts above. As the things stand now, in the light of the above judicial development, the ratio of a series of decisions of this Tribunal, including in the cases of assesse"s own case (reported as 177 TTJ 609), in the case of Micro Ink Ltd Vs ACIT [(2016) 157 ITD 132 (Ahd)] and Bharati Airtel Ltd Vs ACIT [(2014) 63 SOT 113 (Del)], holding that issuance of corporate guarantees does not constitute "international transaction" under section 92B does not hold good in law any longer. The fact that these word....
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....mmercial banks as against a Corporate Guarantee issued by holding company for the benefit of its AE, a subsidiary company. 13. We see no reasons to take any other view of the matter than the view so taken by Hon"ble jurisdictional High Court. We, therefore, reject the determination of 3% arm"s length price by the authorities below and direct the Assessing Officer to adopt 0.5% as an arm"s length consideration for the corporate guarantee issued by the assessee in favour of its AE. To this limited extent, we uphold the plea of the assessee. 17. Respectfully following the above decision, while we uphold the action of the authorities below in principle but we scale down the ALP adjustment to .5% of the correct value of shares and for the actual pledge period. To this extent, the assessee will get relief. Ordered, accordingly. 18. Grounds 5, 6 and 7 stand allowed for statistical purposes in the terms indicated above. 19. In ground nos. 8 and 9, the assessee has raised the following grievances:- 8. The learned CIT (Appeals) has erred in not allowing the disallowance of Rs.30,99,342/- made by the assessing officer on account of unrealized receivables from exports amounting to Rs.30....
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....at Rs 15,94,478/- on 1,10,000 equity shares and further, for the period of whole year, is incorrect. 26. To adjudicate on this appeal it is sufficient to take note of the fact that the related quantum addition is in respect of pledge of shares for seeking financing for the associated enterprises. As we have held earlier in this consolidated order, this action was in the nature of a corporate guarantee. It is in this connection that the impugned penalty for concealment of income has been levied which has been upheld by the CIT(A). The assessee is aggrieved and is in appeal before us. 27. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. 28. We have noted that there are large number of decisions of the co-ordinate benches, which held filed at the relevant point of time, that issuance of corporate guarantees did not constitute an international transaction under section 92B, as it had no bearing on the profits, income, losses or assets of the enterprise giving such guarantee. This stream of decisions included decisions as in the cases of Micro Ink Ltd. vs. ACIT [(2016) 157 ITD 132 ....
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....34. In the result, ITA No 5617/Mum/2016 is partly allowed in the terms indicated above. 35. We now take up ITA No. 361/Mum/2015. 36. By way of this appeal, the assessee appellant has challenged correctness of the order dated 10.10.2014 passed by the CIT(A) in the matter of assessment under section 143(3) r.w.s 144C of the Income Tax Act 1961 for the assessment year 2010-11. 37. In ground nos. 1 to 3, which we will take together the assessee appellant has raised the following grievances:- 1. The learned CIT (A) has erred in upholding the addition of the amount of Rs. 55,61,575/- in the income of the appellant company as adjustment in the arm's length price of the interest charged on the advances given to the AE namely Virgo Engineers Inc. 2. The learned CIT (A) has erred in not appreciating the fact that the appellant company has charged fair rate of interest of 4.75% in US Dollars on the US Dollar denominated loan given to its associated enterprise namely, Virgo Engineers Inc., which was based on applicable LIBOR plus interest rate for US Dollar loans prevailing then. 3. The learned CIT (A) has erred in not appreciating that the interest rate paid by the appellant comp....