AI OCR 
TaxTMI 
TaxTMI 
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2023 (3) TMI 906
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....es ('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 guarantee without appreciating the distinction in functions performed, a....
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....d 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 in the circumstances of the case and in law, the ld. AO erred in initiating penalty proceedings under section 271(l)(c) of the Act, being against the provisions of the Act. 7. Genera....
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....rroneous 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. We have considered the submissions of both the parties and perused the material available on the record. In the present case, it appears that the AO/TPO collected comparable uncontrolled price (CUP) data by issuing the notices u/....
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....suring 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 the terms and conditions of the guarantee services as well. The procedure followed is as under: Step 1 - Initially, a SWIFT message is received by BTMU India from BTMU overseas branch for issuance of the guarantee in favour of the benefici....
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....roceeded 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 in case of default. 8.4 The ld. counsel next submitted that the identical issue has cropped up in Assessment Year 2009-10 as well where the Coordinate Bench of Tribunal in ITA No.1162/Del/2014 order dated 24.05.2020 appreciated the facts in correct prospective an....
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....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 issue of transfer pricing adjustments on account of guarantee commission as under: "We have heard the rival contentions and perused the record. The issue raised vide ground of appeal no.12 is against the transfer pricing adjustment made on account of Receipt of guarantee commission. The ....
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....he 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 during the year the assessee has entered into various international transactions with its associated enterprises. One of the international transactions is receipt of commission for issuance of guarantee to 3rd parties against the counter counter guarantees issued by the overseas branches. The assesse....
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....ording 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 aggrieved with that adjustment and is in appeal as per this ground. 36.The learned authorised representative submitted that the identical issue has been decided in favour of the assessee by the coordinate bench for assessment year 2009-10 in assessee's own case wherein it has been held that when ....
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....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 the learned transfer pricing officer and direction of the learned dispute resolution panel. We have carefully considered the rival contention and perused the orders of the lower authority and the direction of the learned dispute resolution panel. As in the case of the assessee In ITA No. 1162/Del/2014 for Assessme....
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....d 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 related to the issue of guarantee commission on by the assessee are interlinked and closely connected, they should have been benchmarked in a bundled manner. Accordingly ground number 9 of the appeal of the assessee is allowed." 11.4 As observed earlier, the identical issue was also a subject matter of controversy in Assessment Year 2011-....
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....ith 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 above chart of FAR analysis, it is clear that in transaction of counter guarantee, BTMU India has very few functions to perform and few risks to' assume as compared to its foreign AEs. Moreover, counter guarantee commission of 0.10 to 1.0% as charged by BTMU India is in line with what has been held by various tribunal's decisions on issue of corporate guarantee. The facts of case under consideration are identical to those in preceding year wherein then DRP ha....
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....is- 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 terms and conditions of the facility No Yes Yes Issuance of bank guarantee Limited Yes Yes Maintaining and building client relationship No Yes Yes Processing for payments in case of default Limited Yes Yes Collection of claims from the defaulter No Yes Yes Risk Analysis Default Risk No Yes Yes Credit and Collection Risk No Yes Yes 38.Aforesaid FAR analysis was made and brought before the Id. TPO by applying the CUP method and as a secondary analysis TNMM. 39.Bare perusal ....
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....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 price charged or paid by the assessee to or from its unrelated parties and contemplates the comparison of the price so charged from or paid to its AE with some external independent reliable price data under similar circumstances of transaction with AE. Ordinarily the Internal CUP method should be preferred over the External CUP method as it neutralizes several distinguishing factors, such as the local factors and the economies available or unavailable to the assessee in particular, having bearing over the comparison of price charged from unrelated parties and AE. The essence of determining ALP under CUP method is....
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....umstances. " 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 rightly deleted the addition by using FAR analysis of the functions performed and risk assumed by the taxpayer qua the transaction under consideration. 45.No doubt, Id. DRP has extended relief to the taxpayer by deleting the impugned addition but the taxpayer by filing cross objection challenged the DRP's order for not accepting the primary analysis undertaken by the taxpayer using CUP method and not accepting secondary analysis undertaken by the taxpayer to determine ALP of impugned transactions by aggregating all the international transactions by using TNMM with OP/total assets as PLI. 46.Perusal of the order passed by the Id.....
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....d. 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 guarantee commission issued by comparing with the bank guarantee rates. Ld. TPO however has not found any fault with the Transactional Net Margin Method analysis made by the taxpayer. 52. As discussed in the preceding paras, TPO's finding using CUP method comparing the counter guarantee transaction with bank guarantee issued by the third party banks to their customers has been rejected by the Id. DRP. However, Id. TPO has without returning any finding rejected the secondary analysis undertaken by the taxpayer by applying the TNMM as the MAM by OP/total assets as the PLI. 53.Undisputedly, TNMM as the MAM with OP/total assets as PLI as the MAM has been held to be sustainable by the ....
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.... 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 details of the international transaction are tabulated in the order of the TPO itself and the same clearly 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 c....
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....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 made in the impugned assessment order towards counter guarantee commission is thus grossly at odds with the factual position enunciated by the co-ordinate benches and hence such adjustment is totally uncalled for. 14.While holding so, we also advert to the plea raised on behalf of the revenue. The argument on behalf of the Revenue that the Assessment Year 2013-14 in question rests on a different footings vis-à-vis Assessment Year 2009-10 and other assessment years is apparently devoid of any rationale. The Coordinate Bench of Tribunal in Assessment Year 2009-10 has remanded the matter back simplicitor for fresh adjudication in accordance with law after taking note of the plea that the data obtained by issuing notices under Section 133(6) for a....
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.... 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 issue. 17.The ld. CIT-DR for the Revenue, on the other hand, contended that the benefit of Article 11 to apply concessional rate of tax at 10% cannot be given to the interest on income tax refund which, in the instant case, is attributable to activities carried out by PE in India and consequently the normal rate applicable to such income has been rightly applied by the revenue authorities. 18.In the wake of assertions made on behalf of the assessee, we do not consider it expedient to determine the issue on merits. As fairly suggested on behalf of the assessee, we direct the Assessing Officer to determine the issue and dispose of the rectification application dated 16th March, 2022 in accordance with law after giving proper opportunity to the assessee. The Asse....