TaxTMI 
TaxTMI 
2023 (3) TMI 653
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....guarantee by the Appellant on behalf of its Associated Enterprises (AEs) was an "international transaction" under Section 92B of the Act. 3. 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. 4. The AO/TPO/ DRP erred in making a transfer pricing adjustment of Rs.17,09,03,763/- on account of guarantee commission. 5. The TPO erred in not confronting the Appellant with the information / material collated by him under section 133(6) of the Income-tax Act and upon which he has relied upon to make an adjustment in respect of financial 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 rejecting the internal CUP method and arm's length price of 0.40% p.a. adopted by the Appellant for benchmarking guarantee commission. 8. Without prejudice to Ground Nos. 1 to 7, the AO/TPO/ DRP erred in computing the arm's length price of the financial guarantees given by the Appellant on behalf of....
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.... Transfer Pricing Officer (TPO) for computation of Arm's Length Price (ALP) under Section 92CA(1) of the Act. 5. The TPO noted that during the Assessment Year 2015-16, the Appellant had continued to provide financial guarantee to DnB Nor Bank ASA, Singapore, Bank of Nova Scotia Asia Ltd and ING Bank, NV, Singapore Branch (Now Axis Bank) on behalf of Ms/ Greatship Global Offshore Services Pte. Ltd., Singapore (GGOS) and Greatship Global Energy Services Pte. Ltd., Singapore (GGES) in respect of loans availed by the AEs from the said bank. Though the Appellant had charged 0.3% per annum as Guarantee Commission from his AEs, in the return of income the Appellant had computed ALP at 0.4% per annum following internal CUP being average rate of guarantee commission paid by the Appellant to the banks, i.e. Kotak Mahindra Bank, Yes Bank & ABN Amro Bank, for giving guarantee to third parties (such as ONGC, Reliance Industries, Crain Petroleum) on behalf of the Appellant. Thus, making suo-moto transfer pricing adjustment of INR 1,98,62,972/- on account of Guarantee Commission. However, the TPO, taking note of the fact that in the transfer pricing orders for earlier assessment years external C....
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....ons before Dispute Resolution Panel-1, (WZ) [hereinafter referred to as 'the DRP'] against the draft assessment order, dated 07.12.2018. The DRP granted relief to the Appellant by reducing the guarantee commission from 2.07% as determined by TPO to 1.25%. Apart from the aforesaid, no relief was granted by the DRP as all the objections raised by the Appellant were dismissed. The DRP issued directions under Section 144C(5) of the Act vide order, dated 13.08.2019, and on the basis of the same final assessment order was passed by the Assessing Officer on 20.09.2019 under Section 143(3) read with Section 144C(13) of the Act determining total income of the Appellant at INR 74,65,29,359/- after making (a) transfer pricing addition of INR 17,42,29,123/- under Section 92CA(3) of the Act and (b) a disallowance of INR 28,79,506/- under Section 14A read with Rule 8D of the Income Tax Rules, 1962. 8. Being aggrieved, the Appellant has filed the present appeal raising 16 grounds of appeals. Ground No.1 & 2 The Ld. Authorised Representative for the Appellant appearing before us submitted made a statement under instruction that he would not be pressing Ground No. 1 and Ground No.2. Ground No.1....
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....ainst the order of DRP for the Assessment Years 2013-14 (ITA No. 7151/Mum/2017) and 2014-15 (ITA No. 6083/Mum/2018), the Tribunal accepted the ALP for corporate guarantee determined by the Appellant and deleted the transfer pricing addition. We note that same view has been taken by the co-ordinate bench of the Tribunal in the case of the Appellant for the assessment years 2008-09 (ITA No. 7673/Mum/2012), 2009-10 (ITA No. 1703/Mum/2014), 2011-12 (ITA No. 1457/Mum/2016), and 2012-13 (ITA No. 1287/Mum/2017), 12. The relevant extract of the decision of the Tribunal for Assessment Year 2012-13 (ITA No. 1287/Mum/2017) & 2014-15 (ITA No. 6083/Mum/2018) read as under: "9. We have heard.....................................................In fact, involving identical facts the Tribunal in the assessee's own case for A.Y 2008-09, ITA No. 7673/Mum/2012 and A.Y 2009-10, ITA No. 1703/Mum/2014, vide a consolidated order dated 21.06.2019 had approved the determination of ALP of corporate guarantee provided by the assessee to a foreign bank for facilitating raising of loans by its foreign AE on the basis of the Internal CUP i.e guarantee commission that was paid by the assessee to a bank for sta....
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....connection with the borrowings made by the AE of the assessee therein. The TPO determined the arm's length price of such transaction based on the instance of commercial banks providing Guarantee on behalf of their clients. The Hon‟ble High Court held that the considerations which apply for issuance of Corporate Guarantee were distinct and separate from that of Guarantee provided by the banks and, therefore, the two transactions were incomparable. In our considered opinion, similar parity of reasoning is applicable in the present case too because the considerations which weigh for raising of bonds, that too in Indian market, are quite distinct and incomparable with the instance of providing of Corporate Guarantee to a bank abroad in connection with raising of loan from such bank by the AE of assessee outside India. Therefore, in our considered opinion, the exercise carried out by the TPO to arrive at the impugned arm's length rate suffers from an inherent misconception as the benchmarking has been done between two incomparable situations. Therefore, we are unable to uphold the stand of the income-tax authorities. 18. Insofar as the adequacy of 0.55% rate charged by the asses....
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.... 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 (2012) 34 CCH 0528 (Mum) [Note : Order of Tribunal upheld by the Hon‟ble High Court of Bombay : CIT Vs. Everest Kento Cylinder Ltd. Vs. CIT (2015) 378 ITR 57 (Bom). 0.5 2 ....
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....ed on loan to AEs. 15. Ld. Authorised Representative of the Appellant appearing before us placed reliance on the written submission filed before DRP. Part loan of USD 40 Million was disbursed by the Appellant to GGHL during the financial year 2010-11 relevant to Assessment Year 2011-12. During the assessment proceedings for the Assessment Year 2011-12, the TPO had determined ALP taking interest rate of 6.17 percent per annum which was reduced to LIBOR plus 2.9% by the DRP. However, in the subsequent Assessment Years 2012-13, 2013-14 and 2014-15, the DRP did not follow the order of DRP for the Assessment Year 2011-12 on the basis of incorrect premise that loan was granted to a Singapore AE which is factually incorrect. Loan has been granted to GGHL a wholly owned Mauritius subsidiary of the Appellant. The Learned Authorised Representative for the Appellant submitted that the issue is covered in the favour of the Appellant by the decision of the Tribunal in Appellant's own case of the Assessment Year 2012-13 (ITA No. 1287/Mum/2017), 2013-14 (ITA No. 7151/Mum/2017) and 2014-15 (ITA No. 6083/Mum/2018). 16. Per Contra, Ld. Departmental Representative supported the order passed by DRP....
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....benchmarking the interest charged on the loan advanced to its aforesaid AE, viz. GGHL, Mauritius, primarily for the reason that all the foreign currency loans which had been used as comparable by the assessee were fully secured upto 130% of the value of loan alongwith mortgage of the ship. Further, it was observed by the TPO that the assessee while benchmarking the interest transaction had failed to take cognizance of the mortgage, legal, documentation, insurance and other charges that were paid by the borrower. Also, it was observed by the TPO that not only penal interest was provided for in case of default of interest by the assessee, but the borrower assessee was also obligated to satisfy certain other requirements like maintaining of cash debt equity ratio etc. Backed by his aforesaid observations, the TPO was of the view that if the transaction cost, hedging cost, penal cost and cost of security were taken into consideration then rate of such borrowing would not be less than 700 basis points. On the basis of his aforesaid observations the TPO conducted search on www.bloomberg.com to find out the average interest rate of foreign currency loans taken by companies in Mauritius an....
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....al CUP i.e arithmetic mean of the interest rate charged by the banks on the foreign currency loans availed by the assessee during the year in question. Apart from that, we also find substance in the claim raised by the assessee before the lower authorities that the foreign currency loans obtained by its holding company viz. Great Eastern Shipping Company Ltd. at an interest rate of LIBOR + 1.79% p.a and LIBOR + 1.50% p.a during the year in question would also form a suitable Internal CUP. Further, we are of the considered view that in case of availability of an Internal CUP there was no need on the part of the TPO to have benchmarked the transaction by applying an external CUP. Our aforesaid conviction is supported from Para 3.26 of OECD guidelines, which reads as under: "Internal comparables may have a more direct and closer relationship to the transaction under review than external comparable." As observed by us hereinabove, the Board of Directors of the assessee company had sanctioned a loan of USD 75 million in the immediately preceding financial year 2010-11 on which interest rate of LIBOR + 2.9% p.a was fixed. Loan of USD 40 million was disbursed by the assessee to its AE....
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....0/- on account of upward transfer pricing adjustment relating to interest charged to AEs. 19. In view of the above, Ground No. 9 to 12 of the Appeals are allowed and Ground No. 13 is disposed off as being infructuous. Ground No. 14 & 15 20. Ground No. 14 to 15 pertain to disallowance of INR 28,79,506/- under Section 14A of the Act read with Rule 8D of the Rules. 21. The brief facts relevant to the adjudication of the issue before us are that during the relevant previous year the Appellant earned exempt dividend income of INR 1,14,75,994/- from surplus funds parked in Mutual Funds. In the return of income, the Appellant suo-moto disallowance of INR 11,21,602/- under Section 14A of the Act. Detail working of suo moto disallowance was given in Annexure 6 to tax audit report. However, the Assessing Officer computed disallowance under Section 14A by applying Rule 8D(2)(iii) of the Income Tax Rules, 1962 at INR 40,01,108/- and made a further disallowance of INR 28,79,506/- which was confirmed by the DRP. Now the Appellant is before us in appeal on this issue. 22. The Ld. Authorised Representative for the Appellant appearing before us submitted as that the Appellant had methodically....
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....p; Exempt Income (INR 1,14,75,994/-) __________________________________ ....
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....he period relevant to the AY under appeal has earned dividend income of Rs. 5,29,42,293/-, the assessee has made suomoto disallowance of Rs. 35,74,694/- under section 14A for earning exempt income. The provisions of section 14A(2) of the Act mandates that having regard to the accounts of assessee, if the AO is not satisfied with correctness of the claim of the assessee in respect of expenditure incurred in relation to earning of exempt income, the AO shall determine the expenditure to be disallowed for earning exempt income in accordance with Rule 8D. Thus, the AO is under obligation to record his dissatisfaction before rejecting assessee's computation of suo-moto disallowance under section 14A. Such satisfaction has to be recorded in objective manner having regard to the accounts of the assessee. A perusal of the draft assessment order reveals that the AO has rejected the computation of assessee without even examining the computation furnished by the assessee. The AO in the draft assessment order has discussed general principles for making disallowance under section 14A read with Rule 8D and has also referred to a case laws. However, there is no observation/comments whatsoever by ....