TaxTMI 
TaxTMI 
2023 (3) TMI 906
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....ounter guarantee commission from Associated Enterprises ('AEs')" ('impugned transaction'). 1.2 That on the facts and circumstances of the case and in law, the Hon'ble DRP and Ld. AO/TPO erred in rejecting the primary as well as corroborative analysis undertaken by the Appellant for determining the arm's length price ('ALP') of the impugned transaction and conducting a fresh economic analysis for the determination of ALP of the Appellant's impugned transaction and holding that the impugned transaction is not at arm's length. 1.3 That on the facts and circumstances of the case and in law, the Hon'ble DRP and Ld. AO/TPO erred in de-linking the impugned transaction from other international, transactions which are closelylinked to the overall banking business of the Appellant and have been benchmarked using Transactional Net Margin Method ('TNMM') as the most appropriate method applying a combined transaction approach, and have been accepted by the Hon'ble DRP and Ld. AO/TPO to be at arm's length. 1.4 That on the facts and circumstances of the case and in law, the Hon'ble DRP and Ld. AO/ TPO erred in characterizing the impugned transaction as corporate/ bank g....
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....x refund is to be taxed @ 10% under Article 11 of India-Japan tax treaty. 2.2 That on the facts and circumstances of the case and in law, the Ld. AO has failed to appreciate that interest on income-tax refund earned by the Appellant is taxable @ 10% under Article 11 of India-Japan tax treaty. 3. Non-reduction of interest of INR 8,46,996 received by Indian benches from Head Office ('HO')/other overseas branches . That on the facts and circumstances of the case and in law, the Ld. AO erred in not reducing interest of INR 8,46,996 received by the Indian branches of the Appellant from its HO/other overseas branches from the assessed income of the Appellant. 4. Short grant of TDS credit of INR 2,26,026. That on the facts and circumstances of the case and in law, the ld. AO erred in not granting credit for tax deducted at source of INR 2,26,026. 5. Excess withdrawal of interest under section 244A(3) of the Act. That on the facts and circumstances of the case and in law, the Ld. AO erred in withdrawing excess interest under section 244A(3) of the Act. 6 Initiation of penalty proceedings That on the facts and ....
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.... reproduced herein for ready reference: "Ground Nos. 9 to 9.6 relates to the issue on transfer pricing adjustment. The main grievance of the assessee in these grounds is that the Id. DRP/AO/TPO used the erroneous comparable uncontrolled price (CUP) data obtained by issuing the notices u/s 133(6) of the Act but without providing any opportunity to assessee, while determining the arm's length price of the international transaction. 30. The Id. Counsel for the assessee submitted that the Id. DRP decided, the similar issue in the assessment years 2010-11 and 2011-12 in favour of the assessee and the department had not preferred any appeal against the directions of the Id. DRP. Therefore, by keeping in view the principles of consistency, this issue is required to be decided in favour of the assessee and no addition could have been made on account of receipt of 'Counter Guarantee Commission. The reliance was placed on the judgment of the Hon'ble Supreme Court in the case of Bharat Sanchar Nigam ltd. and Another Vs Union of India and Others reported at (2006) 2 SCC 1. 31. In her rival submissions, the ld. CIT-DR supported the order of the AP/TPO. 32....
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.... tender, performance guarantee, etc. in India whereby BTMU Japan, by virtue of its nature of transaction that it enters into with the beneficiary, needs to arrange for a guarantee from a financial institution in favour of the beneficiary ensuring that its liabilities will be duly met, i.e., if the third party fails to settle a debt that it owes to the beneficiary, BTMU India will cover it. In such a case, the customer of BTMU overseas branches approach BTMU overseas branches (AEs) to arrange for a guarantee in India. BTMU overseas branches issue a counter guarantee in favour of BTMU branches in India for issuing a further guarantee in favour of a beneficiary in India. It has further been submitted that BTMU overseas branch evaluates the credit worthiness of the applicant and sets credit limits. For the guarantee provided by BTMU India to the beneficiary, BTMU Overseas branches (AEs) provides guarantee to BTMU India. This guarantee provided by BTMU Overseas branches to BTMU India is termed as "counter- guarantee". On receipt of counter guarantee from BTMU Overseas branch, BTMU India prepares and issues a guarantee letter in favour of the beneficiary. BTMU Overseas branch regulates t....
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....mation from different banks u/s 133(6) of the Act and proposed to apply CUP. The TPO also held that the assessee has provided services in the shape of bank guarantee to clients of its AEs and these transactions are within the ambit of 'international transaction' and proceeded to compute the arm's length price of the said transaction using CUP as the most appropriate method for determination of ALP. 8.3 In this factual backdrop, the ld. counsel contended that the Revenue Authorities have committed error in treating the impugned transaction as corporate/bank guarantee of independent nature without appreciating the distinction in function performed, assets utilized and risk assumed (FAR Analysis) between impugned transaction and the corporate/bank guarantee transaction undertaken by independent third party banks. It was asserted that the revenue failed to notice the negligible risk parameters in the instant case where the risk of the assessee was protected and secured by back to back counterguarantee given by the AE and the assessee was essentially a mere facilitator unlike other guarantees where the guarantor ordinarily agrees to take responsibilities for debt repayment ....
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....CUP method at all and on the contrary, the Tribunal has directed the TPO to provide CUP data to assessee as collected by him under Section 133(6) of the Act to enable the Assessee to place its response and defend its stance on application of MAM. It was thus submitted that ITAT, in first round, has not adjudicated the application of CUP as MAM to benchmark the impugned transactions. 11. We have heard the rival submission on the transfer pricing adjustment in issue. 11.1 As noted in the preceding paragraphs, it is the case of the assessee that the issue is squarely covered by the order of the Co-ordinate Bench of Tribunal in AY 2009-10, AY 2015-16 & AY 2010-11. The assessee contends that the ITAT in these assessment years, in similar facts, has essentially held that a bank guarantee transaction is not comparable to the impugned transaction on account functional and risk differences. Similar view has been acknowledged by the DRP itself in AY 2010-11 & 2011-12 as well. 11.2 As noted above, the Co-ordinate Bench of Tribunal in ITA No.1162/Del/2014 order dated 21.05.2020 relevant to Assessment Year 2009-10 has examined the impugned issu....
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....ed by applying combined approach and the method of TNMM has been used and the margins shown by the assessee have been accepted; then there is no merit in segregating the international transaction of the receipt of the guarantee commission and benchmarking the same separately. The margins of the combined approach has been accepted at Arm's Length. Consequently, there is no merit in the transfer pricing adjustment made in the hands of the assessee. The same is thus directed to be deleted. The ground of appeal No. 12 is thus deleted." 11.3 Likewise, the Co-ordinate Bench of Tribunal in ITA No.7895/Del/2019 order dated 16.10.2020 concerning Assessment Year 2015-16 in assessee's own case has followed the findings rendered in Assessment Year 2009-10 and yet again decided the issue in favour of the assessee. "Ground number [9] is related to the transfer pricing adjustment proposed by the learned transfer pricing officer confirmed by the learned Dispute Resolution Panel of? 103,485,509 to the returned income of the appellant in respect of international transaction pertaining to receipt of counter guarantee commission from associated enterprises. The fact shows that ....
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....ing transactions with associated enterprise as according to it it is interlinked and since all the international transactions form part of the assessee's banking operation, the assessee benchmarked the transactions applying the Transactional Net Margin Method as the Most Appropriate Method and as according to the assessee as these transaction cannot be looked into isolation for benchmarking purposes. The learned transfer pricing officer has benchmarked the above transaction applying CUP method as the most appropriate method and used naked bank guarantee rates of other banks for the purpose of benchmarking the transaction. Accordingly the TPO held that the commission at the rate of 2.23 percentage on the value of the bank guarantees/standby letter of credit issued should have been charged by the assessee from its . associated enterprise . Therefore he computed the guarantee commission receivable by the assessee of Rs. 134,380,249/-, assessee has already been paid Rs. 30,894,740/-, therefore, the net adjustment of Rs. 103,485,509 was made. On objection before the learned Dispute Resolution Panel the order of the learned Transfer Pricing Officer was upheld. Therefore assessee is aggri....
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.... that the learned TPO has used the guarantee rate of risk bearing guarantees for the purpose of benchmarking, however, I've guarantee rates 400% cash margin guarantees are considered than the arm's-length range comes to 0.50% to 0.60% with a median of 0.5433% which is lower than the average guarantee rate of 0.70% on by the assessee from its associated enterprise. Therefore, the transfer pricing adjustment is not warranted. He further submitted that even otherwise guarantee rates of the risk bearing guarantees issued by the assessee for its customers in India without any counter guarantee from associated enterprise shall be considered. He submitted that even in that case the median of 0.75% and the average guarantee fee rate of 0.70% received by the assessee from its associated enterprise for issuing completely risk-free guarantees is at arm's-length. In view of this he submitted that, the issue is squarely covered in favour of the assessee that the international transaction of guarantee cannot be separately benchmark and further even if it is separately to be benchmarked it is at arm's length. The learned departmental representative vehemently supported the order of....
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....arly reflect that no transaction is undertaken except with overseas branches. The assessee undoubtedly is also providing the services to its customers in India where it a risk bearing entity. We are of the view that where the assessee has undertaken bundle of international transactions with its AE and the same has been benchmarked by applying combined approach and the method of TNMM has been used and the margins shown by the assessee have been accepted; then there is no merit in segregating the international transaction of the receipt of the guarantee commission and benchmarking the same separately. The margins of the combined approach has been accepted at Arm's Length. Consequently, there is no merit in the transfer pricing adjustment made in the hands of the assessee. The same is thus directed to be deleted. The ground of appeal No. 12 is thus deleted." 40.As the facts and circumstances of the case are identical to the facts decided in case of the assessee for assessment year 2009 - 10, respectfully following the decision of the coordinate bench, we allow this ground of appeal of the assessee holding that as the banking business of the assessee and the transactions relat....
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....3 Interest paid on interest rate swap 9,875,721 14 Interest received on currency swap 141,388,812 15 Interest paid on currency swap 255,573,472 32.The taxpayer in order to benchmark its international transactions qua "counter guarantee commission" i.e. Comparable Uncontrolled Price (CUP) as Most Appropriate Method (MAM) by comparing representative guarantee fee charged by BTMU India from some of its local customers with counter guarantee commission rate received by BTMU from its overseas branches/AE. However, Id. TPO while rejecting the TP study made by the taxpayer proceeded to adopt average bank guarantee rate as ALP of the transaction and proposed an addition of Rs. 10,43,55,168/-. 33.However, Id. DRP by accepted the FAR India made by the following its earlier year order for AY analysis of BTMU India and AE of taxpayer and proceeded to delete the proposed TP addition made by the Id. TPO by returning following findings "33.0 Finding: DRP has duly considered submissions of the assessee. It has been noted that TPO has treated counter guarantee commission at the same footing as guarantee commission. However, from the ....
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....vis preceding years as well as succeeding years "the rule of consistency" gets attracted in view of the law laid down by Hon'ble Supreme Court in case of Radhasoami Satsang vs. CIT in Civil Appeal Nos.10574-10583 of 1983 and Hon'ble Delhi High Court in Rayban Sun Optics India Ltd. vs. CIT in ITA 880/2016 & CM Appl.45967/2016. So, when Id. DR has failed to point out any dissimilarity in the functional profile and facts & circumstances of the case of the year under consideration vis- a-vis preceding and succeeding years, this contention is not sustainable. 37.So far as second contention raised by the Id. DR for the Revenue that the taxpayer performs significant functions and bears significant risk is concerned, this contention is not sustainable when we examine the FAR analysis of BTMU India and AE of BTMU India made by the taxpayer with regard to the transaction under consideration which is extracted for ready perusal as under: Nomenclature MUFG India AEs of MUFG India Third Party Banks Counter Guarantee Bank Guarantee Functions Performs Evaluation of background and credit worthiness of the borrower No Yes Yes Negotiation of the ter....
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....mstances, bank guarantee rates used by the Id. TPO to benchmark the international transactions cannot be used as CUP as has been held by the coordinate Bench of the Tribunal in case of Gharda Chemicals Ltd. vs. DCIT in ITA No.2242/Mum/2006 order dated 30.11.2009 by returning following findings:- "16. Albeit no such distinction between Internal and External CUP method is recognized in the Act or Rules but since the arguments of the rival parties and findings of the authorities below have revolved around these two, we will try to ascertain the difference between them. Basically the purpose of computing ALP on the basis of CUP method is to compare the adjusted price charged from or paid to the assessee for the international transactions with its AE vis-a-vis that charged from or paid to the unrelated parties under similar circumstances. In case of difference, the price settled in the uncontrolled transactions, as adjusted as per rule, is taken as ALP with the AE. The Internal CUP method envisages comparing the uncontrolled transactions of the assessee itself with other unrelated parties so as to determine the ALP with the AE. However the External CUP method disregards the pri....
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....such natural resources. Similarly the price may vary from one country to another depending upon climatic conditions and the demand and supply factors. Thus the price charged by an Indian party from UK or Australia may be at much variance with that charged from USA. In such a scenario no valid comparison can be made between the price charged by the assessee from other countries with that from USA, more particularly when we view the quantity exported to USA on wholesale basis with that to other countries in small lots on retail basis. We, therefore, hold that the Internal CUP method is not suitable in the present circumstances. " 43.Coordinate Bench of the Tribunal in taxpayer's own case for AY 2009-10 (supra) has also held that the transaction under consideration cannot be compared with bank guarantee rates charged by the third party bank from their customers because such banks performed all the functions and bear all the risks performed/ borne by AE of the taxpayer whereas, in the instant case, the taxpayer in the subject transaction has merely facilitated its AE and bears no risk. 44.In view of the matter, we are of the considered view that Id. DRP has r....
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....ry analysis already undertaken by the taxpayer to determine the ALP of the transaction under consideration wherein all the international transactions of the taxpayer were aggregated and the ALP was determined using TNMM as the MAM using OP/total assets as the PLI as the same has already been upheld by the Tribunal in taxpayer's own case in AYs 2009-10 & 2015-16 (supra). 50.However, on the other hand, Id. DR for the Revenue contended that this contention of the Id. AR for the taxpayer has already been examined by the TPO and has rightly been rejected and relied upon the order passed by the Id. TPO. We have perused para 6 of the transfer pricing order wherein the Id. TPO has discussed the TP analysis made by the taxpayer to benchmark its international transactions including transaction of receipt of guarantee commissions by the taxpayer as a bundled transactions but the Id. TPO declined to accept the contention raised by the taxpayer that all the international transactions of taxpayer are to be benchmarked in aggregated form by applying TNMM as the MAM with Operating Profit/total assets as the Profit Level Indicator rather proceeded to use the CUP qua receipt of gua....
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....of guarantee commission. The case of the assessee before us is that as PE in India, it has limited role and was not bearing any risks. The assessee received part of guarantee commission in its capacity as facilitator only. When the persons needed guarantee in India to participate in a tender, then service of the Bank was utilized for issuing guarantee in favour of the beneficiary. The evaluation of the beneficiary for the creditworthiness of the customers was performed by the overseas branches, whereas the assessee had limited role in issuing letter of guarantee, it received 1% guarantee commission. In these facts, there is no merit in comparing the rate received by the assessee with the rate charged by different banks who are operational in India and providing financial guarantee to its customers, with all risk involved therein. In such facts and circumstances, the Assessing Officer/TPO erred in applying the rate charged by Axis Bank, Canara Bank, Punjab National Batik and State Bank of India, etc. with arithmetic mean of 2.71% to benchmark the international transactions between the assessee and its overseas branches of receipt of bank guarantee commission. The d....
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.... AE cannot be segregated from other international transactions undertaken by the taxpayer as has been held by the Id. TPO/DRP, the margin of combined approach has been accepted at arm's length, hence addition made by the TPO is not sustainable and as such is ordered to be deleted. 57.Consequently, ground no.6 of the Revenue is determined against the Revenue and the cross objections filed by the taxpayer are partly allowed." 12. Apart from the decision rendered by ITAT in three different assessment years in assesses' own case, as noted above, it would be significant to note that the DRP itself in Assessment Years 2010-11 & 2011-12 has acknowledged the stand of the assessee on FAR analysis and the benchmarking, i.e., TNMM method adopted by the assessee in affirmative. 13.In the identically placed factual matrix, we see no reason to depart therefrom. We find rationale in the plea of the assessee that the counter guarantee with negligible risks can not per se be compared with guarantee offered by independent parties/ banks shouldering very high risk parameters as also observed by the co-ordinate bench in other assessment years. The Transfer Pricing Adjustment....
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....thus not impressed by such counter argument on behalf of the Revenue. 15.In the result, the Ground No.1 of the assessee is allowed. 16.Ground No.2 concerns applicability of appropriate tax rate payable on interest earned from refund of excess payment of Income tax in India. It is the case of the assessee that the Assessing Officer while framing the assessment order has already observed that interest on income tax refund is chargeable @ 10% in consonance with Article 11 of the IndoJapan DTAA but however, while determining the tax liability, has wrongly applied the tax rate of 40% together with surcharge and Education cess as applicable thereon in deviation to the assessment order admitting 10% tax rate. It was next pointed out that a rectification application against such action of the Assessing Officer dated 16th May, 2022 has been filed but however remains pending before AO and not disposed off as yet. In this backdrop, it was submitted that no fresh determination of issue on merits is required and it would suffice the purposes of this ground, where appropriate directions are given to the revenue to dispose of the rectification application filed and pending on the issu....