TaxTMI 
TaxTMI 
2023 (12) TMI 273
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....oan given to Afcons Construction Mideast LLC and Afcons Infrastructure International Ltd. Mauritius. * Thirdly, the ld. AO has erred in not granting credit of tax at Rs. 13,419/- being additional income tax of distributed profits u/s.115JB. The last ground has not been argued, therefore, the same is dismissed as not pressed. 3. In so far as the Revenue appeal is concerned, the department has challenged- * Firstly, disallowance of interest u/s.36(1)(iii) in respect of loans to Afcons Pauling Joint Ventures. * Secondly, disallowance of depreciation of Rs. 75,000/- on the WDV of plant and machinery aggregating to Rs. 5.02 lakhs * Thirdly, Disallowance of professional fees of Rs. 64.33 lakhs paid for arbitration award. 4. In so far as the first issue raised by the assessee is with regard to adjustment of Rs. 1,73,58,778/- in respect of extension of corporate guarantee to Afcons Construction Mideast LLC. The assessee company is engaged in the business of executing large and complex civil engineering projects in the infrastructure sector for construction of roads, bridges, railways, jetties, transport terminals, tunnels, dams etc. in India ....
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....of profit. Effectively, the assessee had earned 99.10% of the profits. It has been stated that, in substance the sole and entire purpose of incorporating Afcons Mideast was only to comply with the laws of UAE in order to be eligible to secure the said contract. Effectively, the contract has been executed by the assessee company either as a sub-contractor or indirectly by providing the necessary management, technical know-how, organizational and project management skills and support to Afcons Mideast. 6. Since the share capital of Afcons Mideast was only Rs. 42,62,400/-, therefore, it was required to obtain credit facilities including performance guarantee from First Gulf Bank (FGB) in Dubai for execution of the said contract. During the relevant F.Y. 2008-09, assessee extended a guarantee of Rs. 824 Crores (AED 580 million) to FGB for procuring 19 facilities by FGB to Afcons Mideast. The following 4 types of facilities were provided (and the amounts actually utilized) by FGB to Afcons Mideast during the year: Benefit Actually utilised (AED in million) Benefit % p.a. Benefit AED p.a. Benefit INR p.a. Letters of credit 24,730,000 0.5 123,650 1,756,818....
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....ven to the AE. He further submitted that the role of the assessee in the performance of the contract has to be seen in a holistic manner because not only the entire contract work has been executed by the assessee but also almost entire profit has also been earned by the assessee. If more than 92% of the profits arising from the execution of the project as accrued to the assessee as a sub-contract and rendering support services and then it cannot be held for any kind of benefit has been given to AE for giving any kind of performance guarantee. Even for the balance contract performed by Afcons Mideast, then also necessary machines management, technical know-how, organizational and project management skills and support was provided by the assessee. Even assuming that a separate fee ought to have been charged for the guarantee it already stands factored in the remuneration received by the assessee from acting as a sub-contractor or for rendering the support services. 11. On the other hand, ld. CIT DR had given his written submissions which for the sake of ready reference are reproduced hereunder:- I. Factual background- The undisputed facts are as under:- * M/s Afcons Midea....
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.... not by its AE. And hence, the Guarantee given to Bank gets the colour of "Performance Guarantee" to self, instead of "Corporate Guarantee" given to the bank on behalf of its AE. Comments- The aforesaid argument is not tenable since- (i) As stated in the preceding paragraphs, the sub-contract given to the assessee by the AE was just 13.5% of the total contract value of 1,546.56 crores. Hence, the "performance" of the assessee in the contract can at most be considered the extent of 13.5% only. (ii) As far as "performance" and "share of profit" in the project related to the assessee and the AE are concerned, the financial details of both entities as on 31st March, 2009 are available on page no. 132-139 of the assessee's paper book. This is reproduced as below for the sake of convenience. Heads Afcons Constructions Mideast (AE) Afcons Infrastructure Ltd. {Assessee) Income & Expenditure Account (As on 31.03.2009) Amount in Rupees Remarks Amount in Rupees Remarks Income from Operations 138.96 crores 39.98 crores From AE as subcontract including Service charges Expenditure under different Heads 138.....
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....anking facilities by AE from Bank was to execute the contract awarded in which appellant has significant interest. Hence, in order to achieve its own interest of earning a profit from the said contract, the appellant decided to extend the said guarantee to Bank on behalf of AE. The profit earned by the appellant from the sub-contract, which is a part of the said contract, resulted in an increase in revenue of the appellant. Comments- 1. It is respectfully submitted that in all International business involving multiple transactions with foreign AE, the intention has always remained to expand the business and to earn profit from the said transactions, by the domestic entities. However, as per the Indian Transfer Pricing Regulations, the moment an international transaction is entered into, the transaction has to be benchmarked keeping ALP principles. 2. Moreover, in the instant case, Corporate Guarantee was demanded by the AE as the Bank or financial institution did not consider its assets or creditworthiness as adequate securities and such Corporate Guarantee is given by the assessee, for which the AE is willing to pay the cost (whether paid or not) in the same mann....
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....ollowing judgments 11. In rejoinder, it has been clarified that in so far as submission of the ld. DR that arithmetically, the profit has been earned by the assessee by shifting of expenditure relating to sub-contract to its AE i.e. Afcons Mideast is completely incorrect and also it is neither in the case of the ld. TPO or ld. DRP at any stage of the proceedings. Nowhere, the ld. DR has pointed out which expenditure booked by the sub-contractor have been booked by Afcons Mideast in its books of accounts. 12. Before us ld. Counsel had also argued that such kind of performance guarantee is not an international transaction, however, at the time of hearing, we clearly stated that we are not inclined to agree with such a contention and accordingly, ld. Senior Counsel confined his arguments mostly on merits. Therefore, on this issue, we are not adjudicating the said plea. 13. We have heard rival submissions and perused the relevant finding given in the impugned order as well as material referred to before us. As noted above, assessee is in the business of construction of infrastructure projects and in order to secure the contract for construction of a bridge in Dubai with Road T....
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.... execute irrevocable and unconditional corporate guarantee and accordingly, performance guarantee was given by FGB in favour of Road Transport Authority, Dubai. It was only a guarantee that Afcons Mideast would not suspend or delay repayment of the advance of AED 108 million. The assessee had not charged any guarantee fee from Afcons Mideast on the ground that effectively guarantee has been given for its own performance of the contract or a guarantee given for repayment of advance which would also only arise in the case of a non-performance of the contract by the assessee. Thus, we agree with the contention of the ld. Senior Counsel that giving the performance of the corporate guarantee was to execute the work which in effect was carried out by the assessee itself for which the majority of the profit and the benefit went to the assessee. Even it is to be treated as international transaction, then also under the scope and meaning of international transaction as defined in Section 92B- "92B. (1) For the purposes of this section and sections 92, 92C, 92D and 92E, "international transaction" means a transaction between two or more associated enterprises, either or both of whom....
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....essee that is the risk assumed for executing the contract and carrying out the entire work solely belonged to the assessee. Ergo the rewards of the risks were also entirely reaped by the assessee in the form of 99% profit. Thus, even if one does FAR analysis of the performance guarantee given by the assessee to FGB for execution of the contract where entire risk and rewards and the benefit was of the assessee only, then where is the question of making any adjustment of ALP in the hands of the assessee that any benefit has been passed on to the AE. 16. Even if it is reckoned as international transaction, then also on FAR analysis and looking to fact that the reward or profit to the AE is almost negligible, i.e. the ultimate profit is not even 1%, the adjustment if at all would also be negligible on the facts of the present case. Thus, on the facts of the present case we hold that no transfer pricing adjustment can be made on account of corporate guarantee. Accordingly, the addition made by the ld.TPO / ld. AO is deleted. 17. Next issue relates to adjustment of Rs. 55,59,523/- in respect of receipt of interest on loan given to Afcons Mideast and Afcons Infrastructure Internatio....
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..../03/2009 was 3.12% and he apply 200 basis points on the LIBOR rate, then also interest worked out to 4.12%. Thus, in any scenario, the interest @12% free loan given to AE is much more than the arm's length rate of interest because arm's length rate of interest has to be taken because arm's length rate of interest has to be taken on the respective market rate of the AE and not by Indian market. Accordingly, the adjustment made by the ld.AO is deleted. 21. In Revenue's appeal, the first issue is disallowance of interest u/s. 36(1)(iii) in respect of loans to Afcons Pauling Joint Venture. The ld. AO from the perusal of the balance sheet as on 31/03/2009 revealed that assessee had shown interest bearing secured loans at Rs. 31923.68 lakhs and unsecured loans of Rs. 37127.72 lakhs. On the interest bearing funds, assessee had paid interest of 8566.26 lakhs which resulted in average rate of 12.40%. The ld. AO noted that assessee has advanced loans to its joint ventures on which no interest has been charged for sums aggregating to Rs. 771.76 lakhs. Accordingly, ld. AO made disallowance @12% which worked out to Rs. 8.57 lakhs. The ld. DRP had given following directions to the ld. AO. ....
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....ed the cost of machinery to the assessee's account and the assessee has capitalized it in its books of account. (iii) The Tribunal applying the ratio laid down in the decisions of Mysore Minerals Ltd (SC), Dilip Singh Sardarsingh Bagga (Bom.) Varanasi Auto Sales (All.), dismissed the department's ground. 24. Accordingly, ground raised by the Revenue is dismissed. 25. In so far as the disallowance of professional fees of Rs. 64.33 lakhs paid for arbitration award, the facts discussed in the assessment order reads as under:- "The assessee has stated that in its return of income, it had reduced the sum of Rs. 10,66,78,858/- on account of 'arbitration credits taken to Profit & Loss Account' on the basis that the award is being challenged by the clients before the Hon'ble High Court. However, now it is learnt by the assessee that its client viz. Chennai Port Trust has not challenged the Arbitration Award dated 03.07.2008 in respect of contract agreement No.62/1999 and Arbitration Award dated 15.07.2008 in respect of contract agreement No.13/2001 and moreover the assessee has also received the sum of arbitration awards together with interest, d....