TaxTMI 
TaxTMI 
2023 (5) TMI 1324
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....ad 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's length itself as the assessee has recovered 0.93% from its AE for providing guar....
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....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 guarantee providing to ICICI Bank on behalf of KEC USA LLC & Transmission LLC USA was not an international transaction without appreciating the fact....
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....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 in not appreciating that transaction of Corporate Guarantee for loans taken by its associated enterprise has no bearing on the profit, income, loss or assets of the Appellant therefore same is not international und....
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....see 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 0.93% 0.93% 0.60% 0.70% Purpose Towards performance of contract Towards advance payment made by customer Towards performance of contract Towards performance of contract Corporate Guarantees Name of Borrower AE KEC US LLC & KEC Transmission LLC KEC Global FZ LLC RasUlkhaimah AI Sharif Group & KEC Ltd. Company AI Sharif Group & KEC Ltd. Company Country USA UAE Saudi Arab....
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....espectively. 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 balances of the aforesaid advances/loan for the Financial Year 2012-13. Thus, the AO computed aggregate arm's length interest of INR 6,06,09,173/- in respect of the aforesaid advances/loans. Since the Appellant had not charged any interest on advances/loan, the TPO proposed transfer pricing adjustment of INR 6,06,09,173/-. 7.5. Thus, the TPO proposed aggregate transfer pricing adjustments of INR 22,34,84,414/- vide order, dated 31.10.2016, passed under Section 92CA(3) of the Act consisting of transfer pricing adj....
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.... 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 the Assessment Year 2013-14. The grounds raised in appeal by the Revenue have been reproduced in paragraph 3 above and are taken up hereinafter. Ground No. 1 (i) 14. In Ground No. 1 the Revenue has challenged the order passed by the CIT(A) deleting the upward transfer pricing adjustment of INR.6,06,09,173/-. 15. On perusal of the record, we find that the Assessee had advanced INR 61,19,16,491/- to EJP KEC JV, South Africa without charging any interest. Assessee claimed that the advances were paid on account of business ....
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....see. 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 circumstances being identical, we dismiss Ground No.1 raised by the Revenue by following the above decisions of the Tribunal in the case of the Assessee for the Assessment Year 2012-13. Ground No. 2.(i) to (ix) 17. Ground No. 2(i) to (ix) raised by the Revenue are directed against the relief granted by the CIT(A) in relation to aggregate transfer pricing adjustment of INR 98,43,602/- pertaining to different Performance Guarantees. 18. We note that the Assessing Officer/TPO had arrived at the arm's length rate of guarantee fee for performance....
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....% 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 by the Revenue by following the above decisions of the Tribunal in the case of the Assessee for the Assessment Years 2010-11 [ITA No. 5611/Mum/2015, dated 10/07/2019], 2011-12 [ITA No 6447/Mum/2016, dated 23/03/2021] and 2012-13 [ITA No 17 & 115/Mum/2018, dated 14/09/2020]. Ground No. 3.(i) to (iii) : Corporate Guarantee 24. Ground No. 3(i) to (iii) raised by the Revenue are directed against the relief granted by the CIT(A) in relation to aggregate transfer pricing adjustment of INR 15,30,31,639/- pertaining to different Corporate Guarantees. 25. We n....
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....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 consider benchmarking of 3 transactions of Corporate guarantees Details are as under (i) Corporate guarantee given to National Bank of Oman on behalf of KEC Global FZ LLC RasUI Khaimah of OMR 52,60,323/-: As per the order of the TPO. this corporate guarantee was given in 2010 for availing loan of Rs 74.24.02,536/- (OMR 52,60,323) from National Bank of Oman The Appellant recovered guarantee fee @ 0.6% of Rs 44,54,415/-. The TPO determined the ALP at 2% and computed adjustment of Rs 91,32,568/- (ii) Corporate guarantee given to State Bank of India, Jeddah on behalf of Al Sharif G....
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....e 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 definition of International Transaction' u/s 92B rw. Explanation. As per Explanation (1) (c) of 92B (inserted with retrospective effect from 01.04.2002 by Finance Act 2012), 'guarantee' has been specifically clarified to be an international transaction. The legislature is aware that there are some conditions to be satisfied under section 92B for qualifying as an International transaction. The very fact that it has included certain items as international transaction in the explanation implies that in the view of the legislature, these items fulfil the conditions of section 92B(1) and have been included in the explanation as a matte....
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....as 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 Assessee that the corporate guarantee was given for working capital loan facility granted to the AE in which the Assessee was 50% partner, and therefore, there was no default risk. Further, repayment of loan was secured by way of charge against the receivables from Saudi Electric Company, a Government Undertaking and a client of the Assessee's AE and therefore, the Assessee had only provided secondary security. The aforesaid submission, at best, supports the view taken by the CIT(A) to adopt the lower rate of 0.6% proposed to be charged by the bank of the Assessee as the arm's length rate for corporate guarantee fee instead of 2% determined by the TPO/....
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.... 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 Ground Nos. (xiii) & (xiv) are related with mark-to-market losses arising on the foreign exchange contracts which were outstanding at the year-end. During assessment proceedings, it transpired that the assessee debited an amount of Rs.1227.24 Lacs on account of exchange (gain) / loss (net). An amount of Rs.873.55 Lacs represented foreign exchange losses due to marked-to-market (MTM) losses. The Ld. AO observed that unrealized foreign exchange loss was neither accrued loss nor actual loss and therefore, the same could not be allowed as deduction. Since the provision of AY 2011-12 for Rs.533.16 Lacs was disallowed in that year but reversed during the year under consideration, the net d....
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....(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 present appeal has to be allowed. 3. In view of the statement made, we direct that the Education cess paid by the respondent-assessee would not be allowed as an expenditure under section 37 read with 40(a)(ii) of the Income-tax Act, 1961. 4. Learned senior advocate appearing on behalf of the Respondent-assessee states that they have also paid the applicable tax on the disallowance." 37. In view of the above, Ground No. 4(iii) to (v) raised by the Revenue are allowed. ITA No. 2453/Mum/2021: Appeal by Assessee 38. We would now take up cross appeal preferred by the Assessee for the Assessment Year 2013-14. Ground No. 1(i) to (iii) 39. Ground No. 1(i) to (iii) raised by the Assessee pertains to transfer pricing ....
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....sment 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 of 1.16% of the guarantee amount. 2.2. He failed to appreciate and ought to have held that mere issuance of corporate guarantee is not an 'international transaction'. 2.3. The Appellant prays that the TPO/AO be directed to delete the transfer pricing adjustment on account of corporate guarantee. 2.4. Without prejudice to the above, the rate of corporate guarantee commission be reduced reasonably. 3. Disallowance of Education Cess: 3.1. On the and the circumstances of the case and in law, the DRP erred in not allowing the claim of Education and Secondary Higher Education Cess ("Education Cess") amounting to Rs. 1,99,58,060/- on the alleged ground that the claim was not made in the return of income. 3.2. The Appellant prays that the AO be directed to....
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....ed 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 business purposes, the TPO estimated applicable corporate guarantee fee at 2%. Thereafter, the TPO proceeded to examine judicial precedents wherein rate of arm's guarantee fee was determined and thereafter, estimated the arm's length corporate guarantee fee at 1.16%. Thus, the TPO computed the deficit in the corporate guarantee fee recovered by the Appellant from it's AE arrive at aggregate transfer pricing adjustment of INR 13,40,33,405/-. Hence, the TPO proposed aggregate transfer pricing adjustments of INR 13,40,33,405/- vide order, dated 28/01/2021. 44. The Assessing Officer incorporated the aforesaid transfer pricing adjustment of INR 13,40,33,405/- in the Draft Assessment Order, dated 31/03/2021, passed under Section 143(3) read with Section 144C of the Act. 45. Against the Draft Assessment Order, the Assessee filed objections which were rejected ....
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....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 for Assessment Year 2012-13 [ITA No. 1115/Mum/2018, dated 14.04.2020], the Tribunal had dismissed the ground raised by the Revenue challenging the order of the CIT(A) restricted the arm's length corporate guarantee fee rate to 0.2%. The aforesaid decision of the Tribunal was followed by the Tribunal in appeal by the Revenue for the Assessment Year 2011-12 [ITA No 6447/Mum/2016, dated 23/03/2021]. There is nothing on record to persuade us to take a view different from the view taken the Coordinate Benches of the Tribunal for the preceding assessment years in respect of the same corporate guarantee. Thus, facts and circumstances being identical, we restrict the rate of guarantee fee to 0.2% as against 1.16% determined by the TPO/Assessing Officer and confirmed by the CIT(A). 53. We find that the Assessee had granted three separate corporate guarantees on behalf of its foreig....
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....he 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 find that the contention runs counter to the commercial prudence subject to which the lender/vendors agreed to extent the credit facilities or better credit terms to the AEs. Clearly the corporate guarantees provided recourse to the lender/vedors of AEs to make recoveries from the Assessee in case of default by the AEs putting the Assessee at some risk. The fact that subsequently the Assessee would, in turn, be able to make recoveries from AE is a mitigation factor which may not eliminate the risk in entirety. An independent third party would have charged fee for providing such corporate guarantee. The fact that the credit facilities granted to the AEs by the Lender/Vendor were non-fund based or the fact that the AE did not actually commit a default during the relevant previous year cannot lead to a conclusion that there was no risk involved. Therefore, we are not inclined to ac....