TaxTMI 
TaxTMI 
2024 (12) TMI 547
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....cing the income of the Appellant by INR 12,32,98,585/- by: 1.2.1 incorrectly considering the provision of corporate guarantee as an international transaction u/s 92B of the Income-tax Act 1961 ('the Act'); 1.2.2 incorrectly holding that the international transaction of provision of corporate guarantee to its Associated Enterprises ('AEs') do not satisfy the arm's length principle envisaged under the Act; 1.2.3 ignoring the fact that no service subsists after default of loan by the borrower thus warranting no payment of corporate guarantee fees. 1.2.4 ignoring the fact that the Hull-White model has no legal recognition under the Income Tax Act, 1961. 1.2.5 ignoring the fact that critical variables required for application of Hull-White model were not available/ applied incorrectly and therefore, TPO's benchmarking of the international transaction of provision of corporate guarantee is erroneous. 1.2.6 incorrectly holding that the Appellant has undertaken risk on behalf of its AEs and there is an inherent cost in providing corporate guarantees for which the Appellant should have charged a consideration; 1.2.7 disregarding the fact that the provis....
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....er considering the submissions of the assessee, they sustained the ALP adjustment proposed by the TPO. Aggrieved with the above order, the assessee is in appeal before us. 4. At the time of hearing, the Ld. AR of the assessee has submitted brief facts of the case and his submissions are as under:- 1.1 Jubilant Energy Ventures Private Limited ('JEPL'/the 'Company'/ the 'Appellant') is a strategic 'venture business' segment of Jubilant Bhartia Group. JEPL, through its alliances with international companies, provides business, marketing and technical support related to oil and gas services, power and infrastructure services and aviation related services (sales/maintenance of aircrafts and helicopters). 1.2 The Appellant provided corporate guarantee for two loan arrangements between its AEs and EXIM Bank. The Appellant is the ultimate holding company having 100% shares of Jubilant Energy Holding BV ('JEHBV'). JEHBV holds 84.02% shares of Jubilant Energy NV ('JENV') which indirectly holds 100% share in Indian subsidiaries. The detailed holding structure is placed at page 62 of Paperbook. The details of the loan arrangement are as foll....
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....tion to the international transaction of provision of corporate guarantee, the bank had asked for guarantee by the parent company i.e. JEPL but the obligation of the parent is restricted upto its investment in its subsidiary being the borrower and the assets and investments held by the borrower and its step down subsidiaries. The Appellant by treating its transaction qua providing service of corporate guarantee as its shareholder activity, found the same at Arm's Length Price (ALP) [RE: Page 78-79 of S. No. Particulars selected by Appellant Amount in INR 1 Provision of corporate guarantee Other Method NIL 1.5 Since, the invocation of guarantee did not result in any additional obligation of the Assessee nor it provide any economic and commercial benefit to the lender as well as the borrower, therefore the provision of corporate guarantee was held to be at arm's length [RE: Page 79 of the paper book] 1.6 It is also pertinent to mention that during the year JEBV and JEHBV were not able to meet its obligations for payment of interest and principal of the outstanding amount of loan and the same were classified as nonperforming assets by the EXIM bank with effect from....
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....heir payment obligations to the bank, the provision of service of corporate guarantee ceases to exist and the repayment obligation of loan and interest thereon by the Appellant becomes crystalised. Thus, the service of guarantee towards the loan facility availed by JEBV and JEHBV does not exist anymore. As a result, the Appellant cannot avail any guarantee fees from the borrowers ie. JEBV and JEHBV 4.4 Assuming that the provision of corporate guarantee, falls within the purview of international transaction under section 92B of the Act (though not admitted), it is pertinent to mention that in order to constitute an international transaction, the requirement of the law is that it must be in existence or in effect an actual transaction undertaken by the AE, However, in the present case services have not been provided on account of the event of invoking of guarantee by the banker. Therefore, there is no transaction per se which is in existence, much less an international transaction. 4.5 Reliance in this regard can be placed on the special bench ruling in the case of New Delhi Television Ltd. Vs ACIT, Circle 13(1), New Delhi (ITA 3865/Del/2014) [RE: Page 1-3 of Case Law Compendium]....
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....e obligation of the parent is restricted upto the assets owned by JEHBV (which derive its value from the borrower) and its step down subsidiaries. Thus, it is a typical example of belt and brace policy where the bank has tried to cover a bundle of duplicative securities by this arrangement but in essence has got access to the assets ultimately owned and controlled by the borrower company and has not got access to any additional assets over and above the assets owned by the borrower. 4.13 Accordingly, no guarantee fee is payable by JEBV/JEHBV to its parent company because the guarantee provided by JEPL does not provide any economic or commercial benefit to the lender as well as the borrower. 4.14 Guarantees given by the Appellant is a shareholder activity 4.15 Any support to the subsidiaries, is in the business interest of the shareholder (i.e. the Appellant) and treated as part of its own core business. 4.16 It is noteworthy that the Appellant could have alternatively infused funds by way of equity capital in the subsidiaries. However, the same would have resulted in additional blockage of funds for the Appellant itself. Thus, instead of infusing equity for this purpose, it....
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.... in isolation, since the credit default spreads may reflect not only the risk of default but also other non-related factors such as the liquidity of the credit default swaps contracts or the volume of contracts negotiated. Those circumstances could lead to situations where, for instance, the same instrument may have different credit default swaps spreads. 4.22 From the above, it can be said that the above method/instruments is with regard to the treasury function of the AE which is mentioned in Section C of the Transfer Pricing Guidance on Financial Transactions and not applicable to the facts of the present case whereas there is a specific chapter of financial guarantees i.e. Chapter D, wherein the expected loss method is mentioned. However, it does not recognize CDS but recommends Capital Asset Pricing Model. [RE: Page 329 of Paper book] 4.23 In order to determine the arm's length price of guarantees, the BEPS plan gives guidance on 5 methods namely: 1 CUP method 2 Yield approach 3 Cost approach 4 Valuation of expected loss approach 5 Capital support method 4.24 The Ld. TPO has applied the cost approach which requires the identification of the default event wh....
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....eters essential for application of Hull White model are missing in the present case. 4.29 Interest Saving Approach to be followed to determine the quantum of guarantee fees payable by the borrower. 4.30 Without prejudice to our contentions that the corporate guarantee provided by the Appellant does not warrant an arm's length compensation, in case this Hon'ble Tribunal determines the arm's length compensation, interest saving approach needs to be applied. The difference between market interest rate payable by JEBV/JEHBV on a standalone basis (had it not received the corporate guarantee from JEPL) and the interest rate it pays to the bank after being guaranteed by JEPL, provides an indicative range of the benefit derived by JEBV/JEHBV on account of interest saved due to the higher credit quality of the guarantor i.e. JEPL. In case the borrower, does not derive any benefit in terms of saving of interest in those circumstances no guarantee fees is warranted by the Appellant. 4.31 As evident from Para 4.28 (supra) the interest savings approach is not only an accepted method recognised by various courts in India and abroad and also recognised in OECD BEPS action plan 4....
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....ort (and taking into account any costs). The borrower would have no incentive to enter into the guarantee arrangement if, in total, it pays the same to the bank in interest and to the guarantor in fees as it would have paid to the bank in interest without the guarantee. Therefore this maximum fee does not of itself necessarily reflect the outcome of a bargain made at arm's length but represents the maximum that the borrower would be prepared to pay." 4. 32 In the present case, the interest rate paid by JEHBV/JEBV to bank is Libor plus 650 and 550 basis points respectively. The difference between the interest rate and the comparable arithmetic mean of interest rate reflects the value attributable to the guarantee. Since the arithmetic mean of interest rate of comparable agreements of Libor plus 400 basis points is less than the interest rate paid by JEBV/JEHBV, no guarantee fee is payable to JEPL on the guaranteed loan amount as no interest was actually saved. This indicates that the international transaction of provision of corporate guarantee was in accordance with the arm's length standard required under the Indian Regulations. 4.33 The interest savings approach is a ....
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....ed by the Hon'ble Supreme Court wherein it has been held that any Loss arising from guarantee liability was allowable as a business loss. 5. On the other hand, the Ld. DR submitted that in this case the assessee company has provided the Corporate Guarantee (CG) for the two loan arrangements between its AEs of USD 50 Millions and 45 Millions and EXIM bank. The assessee company has stated that providing of CG's is the shareholder activity and as such no service has been rendered to the AE's. The assessee company also made the contentions that provision of CG's is not covered under the definition of international transactions. Further assessee company by treating the CG's as the shareholder activity, has benchmarked is by applying "Other Method" and the "Interest saving approach" and came to the conclusion that 'Nil' addition/adjustment are warranted on account of giving CG. Issue involved in the case:- 1. Whether providing of the corporate quarantee is a separate international transaction: At the outset, it is humbly submitted that the issue of corporate guarantee is no more res integra after the amendment brought in the IT Act in explanation 1c of ....
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....108 Taxmann.com 418 As stated above also, the assessee has raised the issue of CG as shareholder services, not a separate international transaction and tried to justify the interest saving approach for making nil adjustments. It is seen that all these issues have been dealt in detail by Hon'ble coordinate bench in assessee's own case for A.Y 2013-14 in IT appeal no. 7602 of 2017. In this case, the fact are identical and the assessee has provided CG to its AE's for claiming loans from Banks and in fact the loan no. 2 in that year is the same loan as in instant year. Also in that year, the assessee has shown the CG's commissions of Rs. 2.7 Crores. Further in that year also, the assessee has applied the "Other Method" and "Interest saving approach" for benchmarking the CG's commission. The Hon'ble tribunal after discussing the issue in detail and also relying on several case laws rejected the assessee's contentions, assessee's approach of benchmarking by applying interest saving approach and held that because of the risk taken by the assessee company for proving CG on behalf of AE's the assessee has to suitably compensated and after rejecting asse....
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.... of the present year also (even the assessee's counsel has admitted in the hearing) rejected the assessee's contentions, of treating CG's as shareholder services, and CG as a separate international transaction. ii) Even though the assessee has shown the CG commission of Rs. 2.70 Crores, still the tribunal found, it not proper and insufficient and remitted the matter to TPO for the fresh benchmarking after rejecting assessee's use of Other Methods and Interest saving approach. The revenue is on the stronger footing for the current year because the assessee has even not followed its earlier practice of showing CG's commission on similar loans to AE's (Last time shown 2.70 Crores) and totally disregarded the Hon'ble ITAT order in its own case. 4. Other Contentions raised by the assessee's During the course of hearing, the assessee has raised the contention as the AE's have defaulted in the loan payments and EXIM Bank has already initiated the proceeding for the recovery of loans, accordingly no CG commission is to be received by the assessee's company. Before addressing the assessee's contentions it is first imperative to go throug....
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....al, then the banks / insurance companies are not liable to discharge the liability stipulated in the policy / guarantee document. C) The other argument that as the AE's have already defaulted in repaying loans during the years and even the assessee's was aware of the defaults and assessee's itself is required pay the amount and therefore no CG commission is to be charged for the defaulted amount is clearly preposterous and absurd because of the following facts. i) TP provision are to strictly applied- in this connection, it is submitted that TP provisions clearly provides for determining ALP in the case of related parties and as these are anti tax avoidance provisions which hits at tax base of the country and accordingly are required to be strictly applied as held by several courts including the Pune Tribunal in the case of M/s. AGS Customer Services India P. Ltd., ITA No.162/PUN/2022 & C.O. No.22/PUN/2022. Being pertinent the relevant extract of the Hon'ble Tribunals order is given below:- 5. We have given our thoughtful consideration to the forgoing rival pleadings and find forced in the Revenue's stand since an advance pricing agreement "APA" is applica....
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....onal High Court in various Case like- Cotton naturals (1) Pvt. Ltd., ITA No. 233/2014, Sony Ericson Mobile (1) Pvt. Ltd., ITA No. 16/2014, etc. Moreover it is also submitted that details and the facts and figures for computation of default risk for application of Hull and White model in the instant case was provided by assessee's company only. iii) The assessee has also taken the ground that amount payable by an assessee on invocation of CG's is allowable expenditure U/s 37(1), First of all, as this amount is payable because of capital loan taken by the AE's, accordingly the payment made to bank by assessee is to be treated as capital expenditure. However without prejudice to the above contentions, if assessee's arguments for revenue expenditures are accepted for the moment, then it becomes more the case for the bringing CG's commission as the income of assessee because if expenditure against claim raised by the bank is treated as revenue expenditure, then corresponding income is treated as revenue income. iv) The Assessee has raised a point that as it has been saddled with huge liability accordingly, no income should be imputed to it on account of CG given.....
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....4, in that AY, the assessee had received fee for providing corporate guarantee of Rs. 2.7 crores and with the similar facts on record, on appeal, the coordinate bench held that the services provided by the assessee to their step down subsidiary falls within the definition of Corporate Guarantee and remitted the issue back to the file of AO/TPO to bench mark the same as an international transaction. From the decision of coordinate bench, it is clear that the submissions of the assessee for performing shareholder services do not fall under corporate guarantee were rejected. Therefore, before us also, the assessee submitted the similar arguments and we are inclined to reject the same. 7. The issue has to be analyzed based on the facts of each year, coming to the real issue in this year under consideration are, the assessee has given corporate guarantee to its step down subsidiaries while availing the loan by them in the past. In order to bench mark the transaction, it has to be evaluated every year and it cannot be held that once the guarantee is given in the past, it continued to have impact on every assessment year subsequently. In this case, the assessee has given guarantee toward....