TaxTMI 
TaxTMI 
2023 (12) TMI 1312
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....llowing three grounds of appeal:- "Ground No. 1 i. On the facts and in the circumstances of the case and in law, the Hon'ble CIT(A) erred in confirming adjustment on account of computation of arm's length price of the corporate guarantee [email protected]% (Rs.127.46 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 transaction under section 92B of the Act. It does not come within ambit of section 92B of the Act as no income arises from the said transaction. Ground No. 2. On the facts and circumstance of the case the learned CIT(A) erred in confirming disallowance /addition of Rs.93,145 made by AO under section 14A of the Income Tax Act r.w.r 8D of the Income Tax Rules in computing Bo....
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....the factors in Rule 10B have to be considered for every case and every year independently and that a rate decided in a different case for different set of facts and for different year cannot be adopted as such to the instant assessee, which would be violative of the specific provisions in Rule 10B?" (iii) Whether on the facts and circumstances of the case, the Hon'ble CIT(A) is right in holding that the fee for the guarantee issued by the instant assessee for the loans availed by KEC US LLC & KEC Transmission LLC from banks should be estimated at 0.20% placing reliance upon the decision in assessee's own case by Hon'ble ITAT for AY 2012-13, which relied on Everest Kanto case [58 Taxmann.com 254], without realizing the fact that there was an independent sanction letter of credit arrangement with ICICI Bank, wherein under a guarantee scheme commission of 0.6% per annum was paid by Everest Kanto and so the rate of 0.5% was adopted for corporate guarantee, whereas there are no such facts in the instant case? (iv) Whether on the facts and circumstances of the case, the Hon'ble CIT(A) is right in directing to restrict the TP adjustment of corporate guarantee fee to ....
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....ansaction and proposes a total adjustment of Rs.28,62,73,044/-, by order under Section 92CA(3) of the Act on 30th October, 2017. 07. The learned Assessing Officer incorporated the above Arm's Length Price adjustment in the assessment order. As the learned Transfer Pricing Officer in his order mentioned that assessee has entered into international transaction of performance guarantee, corporate guarantee and interest on advances given to its Associated Enterprises and the penalty may be initiated under Section 271G of the Act. 08. During the course of assessment proceedings, the learned Assessing Officer noted that assessee has claimed an amount of Rs.19,14,56,000/- on account of exchange loss and the learned Assessing Officer asked the assessee that why same should not be disallowed. Assessee submitted that this exchange loss is in respect of forward contracts on Mark to Market basis and same is neither contingent nor merely a provision and therefore, it should be allowed. The learned Assessing Officer noted that it is neither agreed loss nor an actual loss but is a notional loss of contingent nature and therefore, same is not allowable. Accordingly, Rs.19,14,56,000/- was dis....
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....2,74,68,445/-. iii. With respect to ground no.3, other corporate guarantees issued by the assessee where the assessee itself has charged guarantee and commission at the rate of 0.6% based on a facility letter by its own bank at the same rate was held to be at arm's length. Thus, on the corporate guarantee adjustment of Rs.14,16,12,705/-, was partly deleted. The learned CIT (A) followed the decision of the coordinate Bench in assessee's own case. iv. With respect to the disallowance under Section 14A, under Section 115JB of the Act was conformed. 012. Accordingly, the appellate order was passed, where both the parties are aggrieved. 013. The ld Authorised representative submitted that :- i. Coming to the appeal, in the grounds of appeal of assessee, ground number 1 relates to the adjustment confirmed by the learned CIT - A on account of the arm's-length price of the corporate guarantee commission at the rate of 0.20% on guarantee given by the assessee to the bankers for the loans taken by the associated enterprises. He further stated that the assessee has challenged that the corporate guarantee issued by the assessee in favour of the bankers for the loan obtained by the asso....
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....dition of differential sum of Rs. 1,894,260/- which was also considered by the learned CIT - A following the decision of the coordinate bench in assessee's own case adopted 0.60% as the arm's-length price. iv. guarantee to the same associated enterprise which was given to bancs Saudi for availing working capital loan from Bank by the associated enterprises which is guaranteed by the assessee amounting to Rs. 1,183,322,139/- which has been benchmarked by the assessee adopting the corporate guarantee fee of 0.6% which was benchmarked by the learned transfer pricing officer at the rate of 2% and made a differential addition of Rs. 6,964,569/-. The learned CIT - A following the decision of the coordinate bench in assessee's own case for assessment year 2017 - 18 has determined the arm's-length price at the rate of 0.60%. v. On ground number 2 of the appeal of the assessee and stated that the learned CIT - A has confirmed the adjustment to the book profit computed under section 115JB of the income tax act by confirming the addition of Rs. 93,145/- made by the assessing officer under section 14 A of the act read with rule 8D of the income tax rules. He submits that no adjustment can ....
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....se as well as the written submissions made before the learned CIT - A) in respect of transfer pricing additions/-. In the result, he submitted that there is no infirmity in the order of the learned CIT - A so far as the appeal of the learned AO is concerned. 014. The learned departmental representative vehemently supported the orders of the ld TPO and AO. He submitted that i. corporate guarantee is an international transaction is now considered and decided in favour of the revenue by the several benches as well as the Honorable madras High Court in case of Redington India Ltd. Therefore, the ground of the assessee that corporate guarantee cannot be considered as an international transaction is devoid of any merit. On the issue of the benchmarking he submitted that there are 2 types of guarantees provided by the assessee. Assessee has provided a performance guarantee as well as the corporate guarantees, performance guarantee is not considered by the assessee as an international transaction and also has not been benchmarked. He submits that the learned transfer pricing officer has considered the performance guarantee issued by the assessee as an international transaction and furth....
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....cision of the coordinate bench in assessee's own case for assessment year 2012 - 13. He submits that no independent party would have given such a huge advance to its joint-venture and therefore the interest should have been charged by the assessee, the deletion of the arm's-length price adjustment by the learned CIT - A is incorrect. 015. The learned authorised representative reiterated the submission already made in its rejoinder. 016. We have carefully considered the rival contention and perused the orders of the lower authorities. We have also carefully considered the various judicial precedents cited before us in the assessee's own case for earlier years and subsequent years. 017. During the course of hearing we directed the assessee to furnish the fresh guarantee fee benchmarking based on the present functions, assets and risk involved considering the economic circumstances. The assessee is adopted interest saving approach method and benchmarked the guarantee fee income by determination of the credit rating of the associated enterprises. The assessee benchmarked by adopting Moody's credit rating values of its associated enterprises, adjusted it with geographical scope and t....
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....rge any interest. The assessee also claimed that the advance has been made to the joint-venture to meet the deficit in cash flow while executing project in South Africa. It is the advance out of matter of commercial prudence to protect the business interest of the assessee in the project of the joint-venture. Assessee has also stated that there is a difference between providing advance and loan to its associated enterprises and providing advances as a business partner. It is also claimed by the assessee that the entire advances are not recoverable and therefore substantial part of those advances are written off in the financial year 2016 - 17. Therefore, no interest could be charged. The learned transfer pricing officer held that no independent party would have given such advance to any third-party and therefore the interest is required to be charged. As the advance was pertaining to financial year 2010 - 11 onwards, various rates on the Bloomberg database was adopted by the learned TPO for determination of the arm's-length price. We find that in ITA number 17/M/2018 for assessment year 2012 - 13 in ITA number 115/M/2018 for same assessment year dated 14/9/2020 [2021] 88 ITR (Trib)....
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....th Price (ALP) of these transactions. One of such transaction was advances given by the assessee to one of its AE for Rs. 2069.94 Lacs. The advances were given to an AE namely EJP KEC Joint Venture, South Africa in various tranches during the year, which has been tabulated at para 6.1 of Ld. TPO's order. The perusal of the same would show that the advances given in earlier years were Rs. 828.80 Lacs whereas fresh advances given during the year were for Rs. 1903.83 Lacs (after adjusting forex fluctuations of Rs. 166.11 Lacs), thus aggregating in all to Rs. 2732.63 Lacs. The currency of loan was denominated in US dollars without any security. Accordingly, the assessee was asked to provide requisite details as to benchmarking of this transaction. 2.5 The assessee submitted that comparable uncontrolled price (CUP) was selected as most appropriate method (MAM) with AE being the tested party. The assessee explained that its AE had availed a loan facility from ICICI Bank UK @ 3 months LIBOR + 120 bps. This transaction could be used as internal CUP to benchmark the transaction. The advances were stated to be given out of assessee's accumulated / undistributed profits and it was submi....
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....oan and hence, interest was not charged on such advances. The Ld. TPO failed to appreciate that assessee's role in the transaction as an entity substantially interested in the joint venture and proceeded to treat the assessee merely a fund provider. The funds were advanced as a business partner so as to sustain the business of joint venture and with a view to protect own interest. The advances were given to resolve the problem of cash crunch and the therefore, the ultimate beneficiary would be assessee himself since the assessee was 50% partner in the joint venture. Therefore, the concept of loan could not be applied to the assessee's case since the cost and benefit would ultimately accrue to the same person. However, not convinced, the adjustment was confirmed, against which the assessee is under further appeal before us. The Ld. CIT(A) agreed with assessee's submissions that that the ALP of the loans was to be determined on the basis of rate of interest being charged in the country where the loan was received /consumed and directed Ld. AO to recompute the ALP. 4. Upon careful consideration, the undisputed position that emerges are that the advances have been given by the asses....
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.... is dismissed 020. Issue number 2 is with respect to the corporate guarantee. The learned CIT - A has decided this issue following the decision of the coordinate bench in assessee's own case for earlier years. We find that identical issue has been considered by the coordinate bench in assessee's own case for earlier years as under:- "6.1 The grounds raised by the revenue read as under: - PERFORMANCE GUARANTEE: i. On the facts and circumstances of the case, the Ld.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 Ld.CIT(A) was not justified in deciding that the cost recovery was at arm's length itself as the assessee has recovered 0.60% from its AE for providing guarantee for performance of contract to CCWE, and ignored that benefit derived as a whole by the AE and also not appr....
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....ntee 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 Ld.CIT(A) was not justified in deciding that the cost recovery was at arm's length itself as the assessee has revered 0.60% 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. CORPORATE GUARANTEE : x. On the facts and circumstances of the case, the Ld.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 that the transaction was of nature of guarantee given and the AE get benefited from the corporate guarantee provided by the assessee, which was a facili....
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.... as follows: - Performance Guarantees: Name of Borrower AE KEC Global FZ LLC Ras Ul Khaimah KEC Global FZ LLC Ras UI Khaimah KEC Global FZ LLC Ras Ul Khaimah SAE Tower Holding LLC USA Country UAE UAE UAE USA Bank Name and Country Bank of India - India Bank of India - 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 6,81,60,907 13,63,21,814 223,96,50,902 3,46,52,829 Loan Amount availed N.A. N.A. N.A. N.A. When guarantee given 2009 2009 2009 2010 No of days during the year which guarantee was given 365 365 365 365 Rate recovered 0.60% 0.60% - 0.60% 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 Transmission LLC USA KEC US LLC, USA Country USA USA Bank Name and Country ICICI Bank-UK ICICI Bank-UK Whether amount borrowed by AE from third party without corporate guarantee No No Amount guaranteed 323,67,76,046 215,78,50,697 Loan Amount availed 323,67,....
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....tment 272,644 545,287 22,396,509 138,611 Corporate Guarantees: Name of Borrower AE KEC Transmission LLC USA KEC US LLC USA Country USA USA Bank Name and Country ICICI Bank -UK ICICI Bank -UK Whether amount borrowed by AE from third party without corporate guarantee No No Amount guaranteed 3236776046 2157850697 Loan Amount availed 3236776046 2157850697 When guarantee given 2010 2010 No of days during the year which guarantee was given 365 365 Rate recovered - - Purpose Towards availing a loan from bank Towards availing a loan from bank Guarantee fee charged ALP Guarantee fee 2.00% 2.00% ALP Guarantee fee (Rs.) 64,735,521 43,157,014 Adjustment 64,735,521 43,157,014 6.7 As evident from the impugned order, Ld. CIT(A) has directed Ld. AO to follow the first appellate order for AY 2011-12 which, in turn, relies upon appellate order for AY 2010-11. We find that revenue was under further appeal for AY 2010-11 before this Tribunal vide ITA No.5611/Mum/2015 order dated 10/07/2019, assailing the stand of Ld. first appellate authority in providing the relief to the assessee, in this regard. The copy of the order has been placed o....
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....timated the same @1%. We find that this issue is contained in paras 8.1 to 11 of the cited decision of Tribunal in assessee's own case for AY 2010-11. The Tribunal has concluded that the rate as applicable to performance guarantee would apply to this guarantee also. Following the same principle, we hold that the rate of 0.60% as adopted for performance guarantee to CCWE would apply to this guarantee also. Since, the assessee has already charged a rate of 0.60%, no further adjustment would be required. Accordingly, these grounds stand dismissed. 7.3 Ground Nos. (v), (vi) & (vii) are related with adjustment arising out of performance guarantee of Rs. 223.96 Crores provided by assessee to a third party i.e. Bahwan Engineering Company LLC (BEC, an Oman based entity), on behalf of its AE namely KEC Global FZ LLC. The transaction is in the form of indemnity provided by the assessee to BEC with a view to secure the performance of the contract entered into by BEC with assessee's AE. The assessee did not charge any commission by submitting that the assessee was entirely compensated and therefore, no further charge was called for. The Ld. TPO estimated the same @1%. We find that this i....
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....the SPV in any manner. Rather SPV provided services to KEC by way of facilitating the downstream acquisition. Therefore, no fees were charged against the same. Another plea raised was that the assessee merely fulfilled shareholders' functions. To put it differently, if the guarantee was not given, KEC would have to infuse equity capital in the company which would not have given rise to any taxable event. Merely because, KEC chose to provide a guarantee instead of infusing equity capital into the SPV, the transactions would not give rise to any taxable event. The assessee also placed reliance on the decision of Hon'ble Apex Court in S.A. Builders (238 ITR 1) to justify noncharging of fees / commission. 7.6 However, Ld. TPO, noticing the amendment made by Finance Act 2012 in Sec. 92B, concluded that international transactions would include capital financing by way of guarantees which were to be benchmarked on the principle of Arm's Length Price (ALP). The Ld. TPO also reached a conclusion that that on simple comparison of the risk borne in corporate guarantee would be more than risk borne in bank guarantee since the risk in the case of default would not be covered by any asset of ....
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....ion of issuance of corporate guarantee. The assistance provided by the assessee to its AE would not have any bearing on profits, incomes, losses or assets of the assessee and therefore, the transaction of issuance of guarantee would be out of ambit of international transactions u/s 92B(1) of the Act. Similar view has been applied in the year under consideration. Aggrieved, the revenue is in further appeal before us. 7.8 The Ld. DR specifically drew our attention to the amendment brought in by Finance Act, 2012 w.e.f. 0/04/2002 in Explanation (i)(c) to Sec. 92B, to submit that the capital financing by way of guarantees have specifically been included within the ambit of international transactions. 7.9 Au Contraire, Ld. AR, by way of written as well as oral submissions, pleaded that the transactions would not fall within the definition of international transaction as defined in Sec. 92B since the guarantee was provided by assessee to its subsidiary AEs so that AEs could avail loan for the purpose of acquiring the business. It was pleaded that guarantees issued by assessee would have no bearing on profits / losses of the assessee since there was no cost involved and no guaran....
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....t amount. The liability of the assessee extended to the guaranteed amount of 110 Million US Dollars. In the event of default, the assessee as a guarantor, was liable to pay without demur or protest the amount stated in the demand certificate. The assessee had independent contractual obligation to pay the guaranteed amount. Further, in case of default by the guarantor, the guarantor was liable to pay further interest also. Therefore, it is quite discernible that the assessee had definite obligation under the corporate guarantee and to say that that the same shall have no bearing on profits, incomes, losses or assets of the assessee would not be a correct proposition. Even as per assessee's own submissions, if the said guarantee was not provided, the assessee would have been obligated to infuse equity capital in its wholly owned SPV AEs with a view to enable downstream acquisition of SAE Towers Ltd. USA which would have entailed assessee's resources. This is further fortified by the fact that fact that guarantees have specifically been brought within the ambit of term international transactions by way of amendment to explanation (i)(c) to Sec.92B by Finance Act, 2012 w.e.f. 01/04/....
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....stances of the case as well as any variation in the functions, assets and risk of the parties or change in economic conditions and further as it is a continuing guarantee from earlier years, respectfully following the decision of the coordinate bench we uphold the order of the learned CIT - A in benchmarking the guarantee fee income at the rate of 0.20%. 023. Accordingly, issue number two of the appeal of the learned AO and ground number 1 of the appeal of the assessee are dismissed. 024. Coming to ground number (issue number 3) of the appeal of the learned assessing officer which is with respect to the deletion of the addition on account of foreign exchange loss mark to market provided by the assessee. The learned CIT - A has held that this issue is also covered in favour of the assessee by the decision of the coordinate bench in assessee's own case. We find that the coordinate bench has dealt with this issue 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 acc....