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2023 (2) TMI 1159
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....s noted that the period of delay falls during the time of Pandemic of Covid-19, which has been excluded by the Hon'ble Supreme Court in the case of Suo moto Writ Petition (C) No. 3 of 2020 dated 10.01.2022 by which the period from 15.03.2020 to 28.02.2022 has been directed to be excluded for the purpose of limitation. Vide this order a further period of 90 days has been granted for providing the limitation from 01.03.2022. Accordingly, we condone the delay and proceed to adjudicate upon the matters. 3. Grounds of appeal taken by the Revenue are reproduced as under:- Assessment Year: 2015-2016 (1) That on the facts and circumstances of the Case, the Ld. CIT(A) has erred in deleting the Transfer Pricing adjustment of INR 7,53,60,879 (later on rectified at 7,71,77,867) made on account of Corporate guarantee given by the assessee on behalf of its AE. (2) That on the facts and circumstances of the Case, the Ld. CIT(A) has erred in not following a recognised approach for arriving at the CG Fee and further erred in arbitrarily adopting a rate of CG Fees based on judgments which are factually distinguishable. (3) That on the facts and circumstances of the C....
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....d by the assessee, but received by it, - whether in the form of deductions, or otherwise, as receipts, were to be treated as income. The inclusion of a class of receipt, i.e., amounts received (or deducted from the employees) were to be part of the employer/assessee's income. Since these amounts were not receipts that belonged to the assessee, but were held by it, as trustees, as it were, Section 36(1)(va) was inserted specifically to ensure that if these receipts were deposited in the EPF/ESI accounts of the employees concerned, they could be treated as deductions. Section 36(1)(va) was hedged with the condition that the amounts/receipts had to be deposited by the employer, with the EPF/ESI, on or before the due date. The last expression "due date" was dealt with in the explanation as the date by which such amounts had to be credited by the employer, in the concerned enactments such as EPF/ESI Acts. Importantly, such a condition (i.e., depositing the amount on or before the due date) has not been enacted in relation to the employer's contribution (i.e., Section 36(1)(iv)). The significance of this is that Parliament treated contributions under Section 36(1)(va) fr....
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....ing Section 36(1)(va) and simultaneously inserting the second proviso of Section 43B, its intention was not to treat the disparate nature of the amounts, similarly. As discussed previously, the memorandum introducing the Finance Bill clearly stated that the provisions - especially second proviso to Section 43B - was introduced to ensure timely payments were made by the employer to the concerned fund (EPF, ESI, etc.) and avoid the mischief of employers retaining amounts for long periods. That Parliament intended to retain the separate character of these two amounts, is evident from the use of different language. Section 2(24)(x) too, deems amount received from the employees (whether the amount is received from the employee or by way of deduction authorized by the statute) as income - it is the character of the amount that is important, i.e., not income earned. Thus, amounts retained by the employer from out of the employee's income by way of deduction etc. were treated as income in the hands of the employer. The significance of this provision is that on the one hand it brought into the fold of "income" amounts that were receipts or deductions from employees income; at the time, ....
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....or before the due date, is correct and justified. The non-obstante clause has to be understood in the context of the entire provision of Section 43B which is to ensure timely payment before the returns are filed, of certain liabilities which are to be borne by the assessee in the form of tax, interest payment and other statutory liability. In the case of these liabilities, what constitutes the due date is defined by the statute. Nevertheless, the assessees are given some leeway in that as long as deposits are made beyond the due date, but before the date of filing the return, the deduction is allowed. That, however, cannot apply in the case of amounts which are held in trust, as it is in the case of employees' contributions- which are deducted from their income. They are not part of the assessee employer's income, nor are they heads of deduction per se in the form of statutory pay out. They are others' income, monies, only deemed to be income, with the object of ensuring that they are paid within the due date specified in the particular law. They have to be deposited in terms of such welfare enactments. It is upon deposit, in terms of those enactments and on or before t....
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....ssee went in appeal before the ld. CIT(Appeals). After elaborate discussion on the factual matrix as well as the applicable law and the judicial precedents, ld. CIT(Appeals) deleted the addition made in this respect. While giving relief to the assessee, ld. CIT(Appeals) dealt with the proposition of treating the Corporate Guarantee as an International Transaction within the meaning of section 92B of the Act. He also dealt with the proposition relating to Corporate Guarantee being purely owner-shareholder activity in respect of the adjustment so made. Ld. CIT(Appeals) also analyzed the manner and methodology adopted by the ld. TPO for the purpose of arriving at an upward adjustment towards fees for Corporate Guarantee after considering plethora of judgments including those stated above. Ld. CIT(Appeals) held that since the assessee has already charged Corporate Guarantee Fee @ 0.50% from its AE, no upward adjustment is called for and thus deleted the same. Detailed and analytical observations and findings given by the ld. CIT(Appeals) are reproduced as under:- 11.1. Aggrieved, Revenue is in appeal before the Tribunal. 12. Before us, ld. Sr. D.R. vehemently argued and supported....
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....he Revenue for AY 2015-16 is partly allowed and appeal for AY 2016-17 is dismissed. Order pronounced in the open Court on 28th February, 2023 ============= Document 1 2.1) The brief facts of the case are that the assessee company stood guarantor to a Standby Letter of Credit (SBLC - in short) issued by DBS Bank and Axis Bank in favour of its wholly-owned subsidiary KCT Global Pte Ltd against likely purchase of imported coal. The TPO/AO treated the same as an international transaction. According to the TPO/AO as per the International Transfer Pricing Study Report, the method to be applied to such a transaction for determining the arm's length price of the transaction is a comparable uncontrolled price method. The assessee company submitted before the TPO/AO that it provided only 15% security deposit against the SBLC issued in favour of subsidiary company KCT Global Pte Ltd. Details of SBLC utilization, security deposit and guarantee commission charges are as follows: Bank SBLC Utilization Security Issue Amount Amount Deposit Date Date Calculation Day Comm. Used Amount(USD) Effective Rate DBS 10....
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.... creditworthiness/credit ratings without any guarantee behind it. INCOM TMENT 2.5) The TPO then observed that on the standalone financial of the AE its credit rating analysis has to be considered. As the borrower is an investment company its credit rating would not be more than CCC therefore a search was undertaking for comparable loan instruments or CC rating and the following instruments were identified. Name of borrower Bio Scrip Inc Secured Margin Credit rating Yes 546 CC Laureate Education Yes 750 CCC+ Mashantucket Pequot Tribal Nation Yes 688 CCC- Sprint Industrial Holdings LLC Yes 710 CCC- Azure Midstream Energy LLC Yes 592 CCC+ Azure midstream energy LLC Yes 580 CCC+ Sungard Availability Services Capital Inc Yes 510 CCC Average 625 bps 2.6) The TPO thereafter observed that a difference by way of uplift due to guarantee will come to 625 basis points required to be shared between the guarantor and the borrower in an arms-length situation. Accordingly, he computed the adjustments as under: Value of CG Days CG fee Conversion CG Amount i....
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....d that any indirect cost/ liability was incurred by the assessee. In the foregoing background, therefore, one has to see the economic and business interests of the assessee behind issuing such corporate guarantee to KCT GLOBAL PTE LTD. Such kind of corporate comfort was given by the assessee to its wholly-owned subsidiary for making strategic investments to increase the volume of the business, sales and profit. It is thus submitted that the corporate guarantees were given on purely commercial considerations and therefore it was like quasi-capital for which no benchmarking exercise was required. Issuance of corporate guarantee did not entail any cost or expenditure in the hands of the Assessee. The corporate guarantee was extended to the wholly-owned (100%) subsidiary of the Assessee. Accordingly, it was a pure shareholder activity and like quasi-capital to further the business interests of the Group. Document 2 4.3 I have gone through the submissions of the appellant, perused the material available on record and gone through the order of the TPO/AO. The only solitary issue that needs to be resolved is whether corporate guarantee issued....
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....the manner TPO has done. The comparison is not as between like transactions but the comparisons are between guarantees issued by the commercial banks as against a corporate guarantee issued by holding company for the benefit of its AE, a subsidiary company. In view of the above discussion, appeal does not raise any substantial question of law and it is dismissed." 4.4 In another case, the ITAT, Mumbai Bench in the case of DCIT vs Rolta India Ltd. (101 taxmann.com 40) had taken a similar view in the light of the judgment of the Hon'ble Bombay High Court in IL & FS Technology Limited the case of CIT vs Everest Kanto Cylinder Ltd. and held that guarantee issued on behalf of AE subsidiary is international transaction however no comparison can be made between issued by commercial bank and corporate guarantee issued by entity on behalf of its AE subsidiary company while benchmarking the ALP transaction, accordingly estimated guarantee. ME TAX DEPAN 0.5% commission on corporate 4.5 I find that in the computation of the arm's length price of corporate guarantee provided on behalf of the AE the AO/TPO followed an approach to determine....
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....he standalone credit rating of the AE, the entire exercise of selecting seven comparable based upon similar standalone credit ratings, undertaken by the AO/TPO to arrive at the median of 6.25%, becomes vitiated and can hardly be relied upon to arrive at an ALP. 4.9 The comparable data points considered by AO/TPO are not backed by a structured search process and do not consider the specific terms and conditions of the loan covered under the guarantee. When the TPO says that "This difference (of 625 points arrived at by him) is required to be shared between the curator and borrower I an arm's length situation". He is ignoring the particular facts of the case wherein the guarantor and borrower stand in a close knit situation and are not standalone entities, nor are they driven by profit making motive from within the structure of the transaction itself. The solution of appropriate comparables should have reflected the particular setting of the standalone credit guarantee in a situation where the two entities were in close relationship that exists between the appellant and AE, with motions not being making profit. 4.10 In this connection, ....
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....n. 4.13 Further, I find that in a series of rulings, the corporate guarantee commission has been taken to be 0.5%. They are as follows:- Name of the Sr No. Ruling Synopsis 2 3 4 Nimbus Communication Limited ALP was determined @ 0.5%. against TPO's determination of 1.5% [ITA No. 3644/Mum/2010] Godrej Household Mumbai ITAT restricted TP Products limited adjustment on guarantee commission to 0.5%, following co-ordinate bench ruling in Nimbus Communications[TS-229-ITAT- 2013(Mum)-TP] [ITA No. 7369/Mum/2010] Godrej Sara Lee Mumbai ITAT referred to the Ltd Everest Kanto Cylinder Ltd. assessee's case in AY 2006-07, wherein ITAT, following the Tribunal ruling in Nimbus Communications Ltd had directed the AO to re-compute TP adjustment by applying the rate of 0.5% for guarantee commission [ITA No. 7227/Mum/2011] Mumbai ITAT held that TPO was not correct in determining arm's length guarantee commission @3% bases on quotes on the bank's website and considered 0.5% as ALP for guarantee commission. [2015](58 taxmann.com 254) Name of the Sr No. Synops....
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....not an international transaction, has been held to be per incuriam by the Co-ordinate bench of ITAT Kolkata in the case National Engineering Industries Ltd (supra). 21.2 Further, we are inclined to follow the recent judgment of Hon'ble High Court of Madras in the case of PCIT v. Redington (India) Ltd [2020] 122 taxmann.com 136 (Mad) dated 10.12.2020 which has held that corporate guarantees are covered by the definition of international transaction after the retrospective amendment made by the Finance Act, 2012. Relevant extract is reproduced as under: "75. The concept of Bank Guarantees and Corporate Guarantees was explained in the decision of the Hyderabad Tribunal in the case of Prolifics Corpn. Ltd. (supra). In the said case, the Revenue contended that the transaction of providing Corporate Guarantee is covered by the definition of international transaction after retrospective amendment made by Finance Act, 2012. The assessee argued that the Corporate Guarantee is an additional guarantee, provided by the Parent company. It does not involve any 30 ITA Nos.917 & 918/Kol/2017 by Dept ITA Nos.2294 & 2295/Kol/2019 by Asse....