TaxTMI 
TaxTMI 
2024 (3) TMI 1116
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in upholding the action of the Assessing Officer (AO") and Transfer Pricing Officer ("TPO") in benchmarking "corporate guarantee" given to a bank on behalf of the Appellant's subsidiary as an "international transaction" u/s 92B of the Act 2. The Appellant prays that Arm's length adjustment made by the TPO and confirmed by the AO be deleted. WITHOUT PREJUDICE TO GROUND I : GROUND II: ADDITION ON ACCOUNT OF ARM'S LENGTH ADJUSTMENT TO INCOME FROM GUARANTEE COMMISSION: 1 On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in computing the arms length price u/s 92C(3) for the corporate guarantees provided by the Appellant and thereby making an addition of notional guarantee fee at the rate of 0.7% on the availed guarantee amount. 2 The Appellant therefore prays that the AO be directed to delete the Arm's length adjustment made in the form of income from guarantee commission GROUND NO. III ADDITION ON ACCOUNT OF ARM'S LENGTH ADJUSTMENT TO INCOME FROM INTEREST ON LOANS ADVANCED TO ASSOCIATED ENTERPR....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Transaction Amount (INR) 1 Export of empty hard getatin and cellulose capsules 53,16,08,191 2 Interest charged on Loan advanced to the AE 22,58,894 3 Reimbursement of expenses by ACPL to AEs 12,54,320 4 Reimbursement of expenses by AEs to ACPL 30,63,727 Total 53,81,85,132 4. Reference was made u/s. 92CA of the Act to the Transfer Pricing Officer ('TPO' for short) for determining the arm's length price ('ALP' for short) pertaining to the international transaction entered into by the assessee as per the audit report in Form No. 3CEB. The ld. TPO vide order dated 01.11.2013 passed u/s. 92CA(3) of the Act made an adjustment of Rs. 1,07,98,788/- towards guarantee commission given on behalf of the Associated Enterprises ('AE' for short) aggregating to Rs. 2,27,59,004/- and adjustment to Rs. 1,19,60,216/- towards the interest on the loan advanced by the assessee to the AE. 5. The ld. Assessing Officer ('A.O.' for short) vide order dated 24.03.2014 passed the assessment order u/s. 143(3) r.w.s 147C(1) of the Act thereby determining the total income at Rs. 102,16,86,410/- by making an adjustment propos....
X X X X Extracts X X X X
X X X X Extracts X X X X
....lders 288 ITR 1 (SC) where the Revenue cannot determine the arm's length price ('ALP' for short) when it cannot prove the nexus between the expenditure and the business. Further the assessee contended that amendment to clause (c) to Explanation (i) of section 92B is retrospective amendment which includes guarantee in the purview of international transaction where the said amendment will not be applicable to the year under consideration. 10. The lower authorities have failed to accept the contention of the assessee and held that the amendment to section 92B(2) brought about by Finance Act, 2012 was applicable retrospectively w.e.f. 01.04.2002 from A.Y. 2002-03. The ld. A.O./TPO held 4.03% to be the rate of guarantee commission after considering the interest rate for unsecured bonds of AAA rate companies which is 8.25% and BBB rated companies @ 12.28% for a period of five years of unsecured bonds and made an adjustment of Rs. 1,07,98,788/- from the total guarantee committee amounting of Rs. 26,79,60,000/-. 11. The first appellate authority upheld the finding of the ld. A.O./TPO that the amendment to section 92B of the Act applies retrospectively from A.Ys. 2002 to 2....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he decision of the Hon'ble Jurisdictional High Court in the case of CIT vs. Everest Kento Cylinders [2015] 378 ITR 57 (Bom). It is also pertinent to point out that the issue of the impugned transaction whether an international transaction falling within the meaning of section 92B of the Act has also been dealt with by the Tribunal holding the said transaction to be an international transaction. The ld. DR relied on the decision in the case of Glenmark Pharmaceuticals Ltd. (in ITA No. 5031/Mum/2012 vide order dated 13.11.2013) and stated that the ld. CIT(A) has failed to look into the credit rating of the AEs and has also failed to evaluate the risk factor involved by the assessee in providing the corporate guarantee on behalf of its AE. On considering the rival submissions it is observed that the corporate guarantee given by the assessee on behalf of its AE for availing loan facility is for the purpose of reducing the interest rate charged by the banks and while determining the ALP of the said transaction the same has to be considered on the perspective of the benefit received by the AE as per the interest saving approach by reason of the corporate guarantee given by the assess....
X X X X Extracts X X X X
X X X X Extracts X X X X
....& 1(b) of the Revenue's appeal are hereby allowed for statistical purpose. 17. Ground no. 3 pertains to the addition on account of arm's length adjustment to income on interest from loans advance to AE amounting to Rs. 1,19,60,216/-. The facts of this ground is that the assessee had given loan of Euro 6 lacs which is equivalent to Rs. 3,89,47,332/- to its AE, ACG Holding BV Netherland which was given in the earlier financial year and had continued during the year under consideration along with another loan of Euro 20 lacs equivalent to Rs. 13,75,18,000/- lent on 24.07.2009 which again continued during the impugned year for which the assessee had charged interest @ 2% which the ld. A.O./TPO observed that the assessee had reduced the interest rate from 5% to 2% for the earlier loan w.e.f. 01.04.2009 and 2% interest rate for the fresh loan advanced on 24.07.2009 as per the report in Form No. 3CEB. 18. During the assessment proceeding, the assessee contended that the loan was granted out of the own funds through ODA - direct investments to its AE under automatic route that has been duly noted by the RBI for the purpose of financing the working capital requirements of Lukapsd.o.o ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t arm's length. The ld. A.O./TPO has held that the assessee has not charged the interest as per the prevailing rate as per the provision of section 92C(1) read with Rule 10B of the Rules. 20. The ld. CIT(A), on the other hand, has restricted the charging of interest @ 5% to be reasonable rate after duly considering the earlier years rate of interest charged by the assessee from its subsidiary. The ld. CIT(A) further held that the assessee had charged 2% rate of interest including foreign exchange currency which according to the ld. CIT(A) was if the investment in India was made then it would have fetched higher rate of interest, thereby restricting the rate of interest to 5%. 21. Both the assessee and the Revenue are in appeal challenging the order of the ld. CIT(A). 22. From the above factual matrix, it is observed that neither the assessee nor the lower authorities have bench marked the transaction of the assessee lending money to its AE. The ld. A.O./TPO has considered 10.68% to be a reasonable estimation on the notional interest to be levied by the assessee on the basis of the crisil bonds and made an adjustment of Rs. 1,19,60,216/- for the loan advanced by the assesse....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 25. The assessee was in appeal before the first appellate authority. 26. The ld. CIT(A) upheld the addition made by the ld. A.O. by rejecting the assessee's contention. 27. The assessee is in appeal before us challenging the order of the ld. CIT(A). 28. It is observed that the assessee's investment had increased from Rs. 123,16,27,498/- as on 01.04.2009 to Rs. 176,27,96,352/- as on 31.03.2010 and the borrowings has also increased from Rs. 59,21,27,417/- to Rs. 78,24,58,634/- for which interest of Rs. 6,34,73,013/- was paid during the year under consideration. The assessee has made a suo moto disallowance only towards the salary of two employees who are incharge of the treasury funds pertaining to the assessee's investment. Both the lower authorities have rejected the assessee's contention that its own funds were more than the borrowed funds for which disallowance ought not to have been made and also the contention that only the investments which has yielded exempt income has to be considered while determining the average value of investment. 29. The ld. AR for the assessee has relied on the decision of the Hon'ble Jurisdictional High Court in the case of CIT vs ....