TaxTMI 
TaxTMI 
2023 (5) TMI 1324
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....ed 29/12/2016, passed under Section 143(3) read with Section 144C(3) of the Income Tax Act, 1961 [hereinafter referred to as 'the Act']. 3. The Revenue has raised the following grounds in ITA No. 33/Mum/2022: "On TP issues: 1. Interest on Advances given to AE i. On the facts and in the circumstances of the case and in law, the Ld CIT (A) erred in deleting an upward Transfer Pricing adjustment on account of interest on advance given to AE of Rs.6,06,09,173/- as this business advance being treated as loans given to AE. 2. Performance Guarantee i. On the facts and circumstances of the case, the Hon'ble CIT(A) was not justified in deciding that the guarantee commission for performance of contract provided by assessee to Chadian Company for Water & Electricity (CCWE) on behalf of its AE KEC Global was at arm's length without appreciating the fact that the AE get benefited from guarantee provided by the assessee, AE was a newly floated entity and the credit rating of the AE was very low. ii. On the facts and circumstances of the case, the Hon'ble CIT(A) was not justified in deciding that the cost recovery was at arm&....
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....f IT Act 1961 as an International Transaction. viii. On the facts and circumstances of the case, the Hon'ble CIT(A) was not justified in deciding that the guarantee commission for performance of contract provided by assessee to that guarantee commission for performance of contract provided by assessee to SNC LAVALIAN, Canada on behalf of its AE SAE Towers Holding Towers USA was arm Length without appreciating the fact that the AE get benefited from the guarantee provided by the assessee, AE was a newly floated entity and the credit rating of the AE was very low. ix. On the facts and circumstances of the case, the Hon'ble CIT(A) was not justified in deciding that the cost recovery was at arm's length itself as the assessee has revered 0.70% from its AE for providing guarantee for performance of contract to SNC LAVALIAN, Canada and ignored the benefit derived as a whole by the AE and also not appreciated the fact that this service will not be available to any third party by the assessee. 3. Corporate guarantee: i. On the facts and circumstances of the case, the Hon'ble CIT(A) was not justified in deciding that the corporate guarante....
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....he Act ignoring the provisions of Finance Act of 2004 and 2011 as per which the education case is an additional surcharge levied on the income-tax. v. The CIT(A) erred in holding that education case and higher and secondary education case ignoring the Supreme Court ruling in K. Srinivasan where surcharge and additional surcharge were held to be a part of the income-tax. The appellant prays that the order of the Ld. CIT (A) be set aside and the order of the AO be restored. The appellant craves leave to amend or alter any ground or add any other grounds which may be necessary." 4. The Assessee has raised the following grounds of appeal in ITA No. 2453/Mum/2021: "Ground No. 1 i CIT(A) erred in confirming adjustment on account of computation of arm's length price of the corporate guarantee [email protected]% (Rs.115.23 lakh) which ought to be earned by the appellant for guarantee given on loans taken by Associated Enterprises (AE). ii. The learned CIT(A) erred in not appreciating corporate Guarantee by the appellant for its AE is not an "International Transaction "as per Provision of Income Tax Act, 1961. iii. The learned CIT (A) erred ....
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....guarantee on behalf of its AEs including foreign subsidiaries. However, in the Transfer Pricing Study Report (for short 'TPSR'), the Assessee had taken a position that providing guarantees to its AEs does not constitute an international transaction. However, without prejudice to the aforesaid, the Assessee carried out benchmarking analysis. The TPO noted that as per TPSR the Assessee had provided following performance/corporate guarantees to third parties on behalf of its AEs. 7.2. Performance Guarantee Name of Borrower AE KEC Global FZ LLC KEC Global FZ LLC RasUlkhaimah KEC Global FZ LLC RasUlkhaimah SAE Tower Holding LLC USA Country UAE UAE UAE USA Bank Name and Country Bank of India Bank of India N.A. Royal Bank of Scotland - India Whether amount borrowed by AE from third party without corporate guarantee No No No Yes Amount guaranteed 6,98,14,360 13,96,28,719 2,39,70,64,946 3,62,43,950 Loan amounted availed N.A. N.A. N.A. N.A. When guaranteed given 2009 2009 2009 2010 No. of days during the year which guarantee was given 365 365 365 365 Rate recovered ....
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....imum available data. On the basis of the aforesaid, the TPO observed that guarantee fee varied from 1.5% to 3.5%, and thereafter, estimated the arm's length corporate guarantee fee at 2% and arm's length performance guarantee fee at 1% for the Appellant. Thus, the TPO computed the deficit in the fee recovered by the Appellant from it's AE to arrive at aggregate transfer pricing adjustment of INR 98,43,602/- and INR 15,30,31,639/- on account of the performance guarantees fee and corporate guarantees fee, respectively. 7.4. In addition the TPO also proposed transfer pricing adjustment of INR 6,06,09,173/- in respect of advances given by the Appellant to its AE (i.e. EJP KEC JV, South Africa). According to the TPO, the Assessee had advanced loans to its AE in South Africa without charging any interest. After carrying out search process on Bloomberg Database, the TPO arrive at the interest of 14.16% for the advance/loan of INR 8,28,80,000/- given by the Appellant to its AE for the Financial Year 2010-11; interest rate of 10.92% for the advance/loan of INR 19,03,83,00/- given by the Assessee to its AE for the Financial Year 2011-12; and interest rate of 10.81% for the running balance....
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....at the CIT(A) has held that transaction of granting corporate/performance guarantee constitutes an international transaction keeping in view Explanation (i)(c) to Section 92B of the Act (inserted with retrospective effect from 01.04.2002 by Finance Act 2012), whereby 'guarantee' has been specifically included in the definition of 'international transaction' as defined in Section 92B of the Act. The view taken by the CIT(A) is supported by decision of the Tribunal in Assessee's own case for the Assessment Year 2012-13 (ITA No. 17 & 115/Mum/2018, dated 14/09/2020). Accordingly, we hold that the transaction of giving guarantee is international transaction requiring determination of ALP and transfer pricing adjustment, if any, as per applicable provisions of the Act, and we proceed to adjudicate the grounds raised in the cross-appeals. 12. We have heard both the sides and perused the material on record including the order passed by the authorities below and the decision of the Tribunal in the case of the Assessee on which reliance was placed during the course of the hearing. ITA No. 33/Mum/2022 : Appeal By Revenue 13. We would first take up Appeal of the Revenue for th....
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....to JV and the business interest of the assessee would have been adversely impacted by not making such advances. The advances were more in the nature of capital contribution and by advancing the same, the assessee had protected its own business interest which is evident from the financial statements of JV. The advances were towards fulfilment of the assessee's obligation of being a JV partner as any financial incapacitation of JV would adversely affect the continuation of the project and ultimately jeopardize the interest of the assessee. Therefore, the said advances could not be put in the category of loans as done by the lower authorities. Further, it could not be said that JV entity derived / gained certain benefits out of such advances but rather it was the assessee who would ultimately gain by continuing with the projects and taste the fruits of the success of project. Hence, not convinced with impugned adjustments as confirmed by first appellate authority, we direct Ld. AO to delete the same." (Emphasis Supplied) 16. There is nothing on record to persuade us to take a view different from the view taken by the Co-ordinate Bench of the Tribunal. Thus, facts and circu....
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....3, the Tribunal has accepted the aforesaid rate of 0.93% as arm's length rate of guarantee fee. 21. Similarly, the third performance guarantee granted by the Assessee to Bahawan Engineering Company, LLC, Oman on behalf of KEC Global FZ, LLC for securing performance of the contract has also been continuing since Financial Year 2009-10 relevant to Assessment Year 2010-11. The AE had assigned its rights and obligation under the aforesaid contract to the Assessee. For Assessment Year 2010- 11, 2011-12 and 2012-13, the Tribunal has accepted rate of 0.60% as arm's length rate of guarantee fee. 22. Whereas, the fourth performance guarantee was given in December 2010 by Royal Bank of Scotland, Mumbai Branch to SNC Lavalin Canada on behalf of Assessee's AE (i.e. SAE Tower Holding, LLC). For Assessment Year 2012-13, the Tribunal has accepted rate of 0.70% as arm's length rate of guarantee fee. 23. There is nothing on record to persuade us to take a view different from the view taken by the Co-ordinate Benches of the Tribunal for the preceding assessment years for the same performance guarantees. Thus, facts and circumstances being identical, we dismiss Ground No.2(i) to (ix) raised ....
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.... Ltd. Vs. DCIT [34 Taxmann.com 19] as affirmed by Hon'ble Bombay High Court on 08/05/2015 [58 Taxmann.com 254], we estimate the TP adjustments against both these transactions @0.20%. The Ld. TPO / Ld. AO is directed to recompute the same in terms of our above order. The grounds stand partly allowed." 27. The above decision of the Tribunal was followed in appeal by the Revenue for the Assessment Year 2011-12. 28. There is nothing on record to persuade us to take a view different from the view taken the Co-ordinate Benches of the Tribunal for the preceding assessment years for the same corporate guarantee. Thus, facts and circumstances being identical, we dismiss Ground No. 3(i) raised by the Revenue by following the above decisions of the Tribunal in the case of the Assessee for the Assessment Years 2011- 12 [ITA No 6447/Mum/2016, dated 23/03/2021] and 2012-13 [ITA No 17 & 115/Mum/2018, dated 14/09/2020]. 29. As regards the balance 3 corporate guarantees, we find that same were given by the Assessee on behalf of its AEs to banks for the purpose of availing loans. In respect of the aforesaid three corporate guarantees that the CIT(A) has held as under: "7. Now I con....
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.... The Appellant has further stated that benchmarking rate of 2% adopted by the TPO is ad hoc and is not justified Reliance is placed on decision of the Hon'ble Bombay High Court in the case of Everest Kanto Cylinders Ltd v CIT (ITA 1165 of 2013) for the proposition that consideration applied for issuance of corporate guarantee are from that of the bank guarantee and that high rate of commission in case of corporate guarantee issued by holding company for subsidiary is not justified. It is submitted without prejudice that Appellant has charged guarantee commission @ 0.6% to AES. The said rate is based on rate mentioned under the facility letter issued by the assessee's bank. It is claimed that this rate is most direct comparable uncontrolled transaction to benchmark the rate of guarantee commission Lastly, the Appellant has relied on ITAT's decision in its case for AY 2012-13. by reproducing Para 7.11 of the order (already reproduced in Para 6.7 1 above) and submitted that benchmarking be done @ 0.2% 7.2 I have considered the order and submissions of the Appellant. The transaction of issue of corporate guarantee is covered under the definitio....
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....ction 92B of the Act (inserted with retrospective effect from 01.04.2002 by Finance Act 2012). The CIT(A) rejected the contention of the Assessee to benchmark the guarantee fee in respect of the three corporate guarantees at the rate of 0.2% by highlighting the difference in the purpose of giving corporate guarantees and the reasoning given by the Tribunal that corporate guarantee issued by the Assessee to ICICI, UK on behalf of its AE KEC US LLC and KEC Transmission LLC, was for the ultimate benefit of the Assessee. The CIT(A) pointed out that the 3 guarantees under consideration were given for the purpose of availing of regular credit facilities whereas credit facilities from ICICI, UK benchmarked at the rate of 0.2% was for the ultimate benefit of the Assessee itself. The CIT(A) noted that the Assessee had already recovered the guarantee fee at the rate of 0.6% from the AEs on the basis of letter issued to the Appellant by its bank for similar facility. Perusal of the order passed by TPO shows that the TPO had determined arm's length guarantee fee at the rate of 2% by way of estimation. During the course of hearing, it was pointed out by the Learned Authorised Representative for....
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....on and disallowed unrealised exchange loss of Rs 10,52,37,427/- in the same manner as in AY 2012-13 Observing that provision was reversed during the current year, provision for AY 2012- 13 (Rs 8,73,55,000/-) was allowed as deduction and net disallowance was worked out at Rs 1,78,82,427/-. 8.2 During the appellate proceedings, the Appellant has reiterated the submission before the AO In addition, it is stated that the issue has been decided in its favour by CIT(A) as well as the Tribunal in addition to placing reliance on decision in case of Woodward Governor India Pvt. Ltd 294 ITR 451(Del), affirmed in 312 ITR 254 (SC) by the Hon'ble Supreme Court 8.3 The issue stands covered in favour of the assessee for earlier years including AY 2012-13 by CIT(A) as well as the Tribunal. Facts and circumstances remaining the same, the AO is directed to delete the addition. The ground no 4(a) is allowed." 33. The decision of CIT(A) for the Assessment Year 2012-13 followed by the CIT(A) in the Assessment Year 2013-14 has, since, been confirmed by the Tribunal vide order, dated 14/09/2020, passed in ITA No. 17 & 115/Mum/2018 wherein it has been held as under: "7.12....
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....f INR 44,06,085/- claimed by the Assessee by way of additional ground filed before CIT(A) by following the decision of Hon'ble Rajasthan High Court in the case of Chambal Fertilizers and Chemicals Limited Vs. Joint Commission of Income Tax: [2019] 107 taxmann.com 484 (Rajasthan)[31-07-2018]. 36. Both sides agreed that this issue stands covered in favour of the Revenue by the judgment, dated 14.12.2022, passed by the Hon'ble Supreme Court in the case of JCIT Vs. Chambal Fertilizers & Chemicals Limited [SLP APPEAL (C) NO(S). 6655 OF 2019] reported in [2023] 291 Taxman 438 (SC) wherein it has been held that as per Explanation 3 to provision of Section 40(a)(ii) of the Act inserted by Finance Act, 2022 (with retrospective effect from 01.04.2005) surcharge or cess forms a part of 'tax' and therefore, deduction for the same cannot be allowed under Section 37 of the Act. The aforesaid judgment read as under: "1. Leave granted. 2. Learned senior advocate appearing on behalf of the respondent-assessee states that in view of the amendment vide the Finance Act, 2022 with retrospective effect from 1-4-2005 to section 40(a)(ii) of the Income Tax Act, 1961, the prese....
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....43(3) read with Section 144C(13) read with Section 144B of the Income Tax Act, 1961 [hereinafter referred to as 'the Act'], as per directions, dated 27/12/2021, issued by the CIT [Dispute Resolution Panel-I, Mumbai[1] (hereinafter referred to as 'the DRP') under Section 144C(5) of the Act pertaining to the Assessment Years 2017-18. 41. The Assessee has raised the following grounds of appeal in ITA No. 502/Mum/2021: 1. "Denial of natural justice: 1.1. On the facts and circumstances of the case and in law, the AO erred in passing the draft order in contrary to and without complying with the provisions of section 144B of the Act. 1.2. The Appellant prays that the draft assessment order be held as bad in law and consequently, the assessment proceedings and the final assessment order be quashed. 2. Transfer pricing addition on corporate guarantee: 2.1. On the facts and circumstances of the case and in law, the DRP erred in conforming the action of the TPO/AO in holding that issuance of corporate guarantee is an 'international transaction' and consequently, transfer pricing addition of Rs. 13,40,33,405/- should be made at the rate o....
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....n international transaction, and without prejudice to the aforesaid, carried out benchmarking analysis. The TPO noted that as per TPSR the Appellant had provided thirteen corporate guarantees to third parties on behalf of its AEs. After undertaking analysis similar to one undertaken for the Assessment Year 2013-14, the TPO rejected the contention of the Assessee that transaction of granting corporate guarantee does not constitute an international transaction. As regards, the benchmarking of rate of corporate guarantee fee, the TPO concluded the TPO concluded that Comparable Uncontrolled Price (CUP) Method with adjustments could be adopted as the Most Appropriate Method for benchmarking the transaction of giving corporate guarantee as the same offers least complicated approach with maximum available data and . On the basis of the aforesaid, the TPO observed that guarantee fee charged by banks to Indian companies varied from 1.10 % to 3% per annum depending upon various factors. On the basis of the aforesaid, the TPO arrived at the range of 1.5% to 3.5% for corporate guarantee fee for foreign based transactions. Observing that in the case of the Assessee the loan has been taken for b....
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....tee fee. 50. While disposing of appeal for the Assessment Year 2013-14 we have confirmed the order of CIT(A) holding that transaction of corporate guarantee qualifies as an international transaction in view Explanation (i)(c) to Section 92B of the Act (inserted with retrospective effect from 01.04.2002 by Finance Act 2012), whereby 'guarantee' has been specifically included in the definition of 'international transaction' as defined in Section 92B of the Act and the decision of the Tribunal in appeal for the Assessment Years 2012- 13 (ITA No. 17 & 115/Mum/2018, dated 14/09/2020). Accordingly, Ground No. 2.2 raised by the Assessee is dismissed. 51. We note that during the relevant previous year, Assessee had provided various corporate guarantees. 52. The corporate guarantees aggregating to USD 8,03,00,000/- were given in the earlier years by the Assessee to ICICI Bank, UK on behalf of its wholly owned subsidiaries KEC Transmission LLC and KEC US LLC, USA, for the purpose of arranging financing provided for the aforesaid overseas SPVs for utilization for the purposes of downstream acquisition of the business of SAE Towers Ltd. USA. In appeal preferred by the Revenue ....
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....orking capital, export project cash flow deficit financing etc. in discharge of shareholder obligation. It was also contended on behalf of the Assessee that corporate guarantees granted on behalf of Al Sharif Group & KEC Ltd Company to Bank Muscat SAOG, Banque Saudi Fransi, Jeddah, Abu Dhabi Commercial Bank, Deutsche Bank AG, Axis Bank, Kotak Mahindra Bank Ltd and ICICI Bank Ltd were given by the Assessee is only as a secondary security since the amount borrowed by the AE were primarily secured against receivables from Saudi Electric Company, a government undertaking. 54. However, we find that there is nothing on record to support the averments/contentions made by the Assessee that investments made by the Assessee in AEs would have been adversely impacted if the corporate guarantees under consideration (except corporate guarantees for USD 8,03,00,000/-) were not granted by the Assessee, or that the corporate guarantees were given on account of administrative requirements only. We are also not inclined to accept that the grant of corporate guarantee was merely on account of shareholding obligation. As regards contention of the Assessee that there was no risk element involved we f....
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....pany for similar purposes and on similar terms, we have accepted Assessee's contention that 0.60% be accepted as arm's length rate of corporate guarantee fee. Accordingly, given the facts and circumstances of the case, we accept the alternative contention of the Assessee and direct the TPO/Assessing Officer to recomputed the transfer pricing adjustment by taking rate of 0.6% as arm's length rate for corporate guarantee fee for all corporate guarantee given by the Assessee, (except for the corporate guarantees aggregating to USD 8,03,00,000/- given on behalf of wholly owned subsidiaries KEC Transmission LLC and KEC US LLC, USA in which case arm's length corporate guarantee fee shall be determined by adopting rate of 0.02%). With the aforesaid directions, Ground No. 2.1 and 2.3 raised by the Assessee is partly allowed. We have already dismissed Ground No. 2.2 in paragraph 50 above. Ground No. 2.4 is disposed off as being infructuous. Ground No. 3.1. & 3.2 56. Ground No. 3.1. & 3.2 raised by the Assessee are directed against the order of CIT(A) rejecting claim of deduction for education cess as well as higher & secondary education cess of INR 1,98,58,060/- claimed by the Assesse....