TaxTMI 
TaxTMI 
2024 (12) TMI 547
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....34,02,439/-. 1.2 The Ld. AO/ Ld. TPO have erred in enhancing 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....
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....uarantee fees adopting Hull-White method for bench marking the transaction. Aggrieved, the assessee preferred an appeal before Dispute Resolution Panel (DRP) and after 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 ('J....
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....ts held by its subsidiary JEHBV or through its step down subsidiaries. 1.3 Besides the above, other securities were also provided in relation to the above loan facility availed by JEBV and JEHBV and the details of the same are mentioned on [page 143-146 of the paper book]. 1.4 In relation 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....
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.... 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 17 May 2016 [Re: Page 249 and 254 of Paperbook) This disclosure is made in the financial statements of the Appellant as well as the transfer pricing report 4.3 As soon as the borrowers i.e. JEBV and JEHBV default in their 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, Ho....
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....risk is borne by JEPL as a result of providing this corporate guarantee which warrants any guarantee fee. 4.11 It should be evaluated that whether the provision of guarantee has resulted in any economic or commercial benefit for the borrower or whether the company providing guarantee would have to face any exposure because of guarantee provided for loan obtained by the borrower. 4.12 In the instant case, the bank has asked for guarantee by the parent company but the 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. ....
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.... risk linked to an underlying financial asset. In the absence of information regarding the underlying asset that could be used as a comparable transaction, taxpayers and tax administrations may use the spreads of credit default swaps to calculate the risk premium associated to intra-group loans. 10.102. As financial instruments traded in the market, credit default swaps may be subject to a high degree of volatility. This volatility may affect the reliability of credit default swaps as proxies to measure the credit risk associated to a particular investment 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....
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.... variable of probability of default cannot be taken at 2.46% since the borrowers have already defaulted in payment and therefore the entire exercise is vitiated because incorrect variables have been applied while calculating corporate guarantee fees. The Hull white model takes into account the probability of default, which in the present case ceased to exist as the borrowers have already made a default in payment to the EXIM bank in May 2016. 4.28 The Assessee also submits that neither the Hull White Model nor the BEPS guideines have any statutory recognition in the Indian Tax regime. Therefore, the same cannot be blindly relied upon by the TPO as vital parameters 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 inte....
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....rating as a member of the MNE group and those attainable on the basis of the stand-alone credit rating it would have had if it were an entirely unaffiliated enterprise. If the borrower has its own independent credit rating from an unrelated credit rating agency, this will usually reflect its membership of the MNE group and so ordinarily no adjustment would be needed to this credit rating to reflect implicit support. 10.177. The result of this analysis sets a maximum fee for the guarantee (the maximum amount that the recipient of the guarantee will be willing to pay), namely, the difference between the interest rate with the guarantee and the interest rate without the guarantee but with the benefit of implicit support (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." ....
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....porate guarantee has been invoked by the bank, the Appellant is now liable to pay the amount of debt and interest thereon to the EXIM bank. Since, the same is irrecoverable; it is to be written off and can be claimed as a legitimate business loss u/s 37(1). Reliance in this regard can be placed on the decision of Chennai bench of the ITAT in the case of Refex Industries Ltd. Vs DCIT, Corporate Circle 5(3)/5(4), Chennai (ITA 2938 &2939/ CHNY/2017) [RE: Page 90,91 of Case Law Compendium] wherein it has been held that corporate guarantee once invoked can be claimed as a revenue expenditure u/s 37(1) of the Income Tax Act, 1961. Further, reliance can be placed on the decision of Madras High Court in the matter of CIT vs Amalgamation Pvt. Ltd. (108 ITR 895) and later affirmed 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 ....
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.... after considering this aspect, the Hon'ble. Tribunal has upheld CG Commission in para 6/7/8 of its order. Thus, if a Hon'ble high Court has approved the decision of Hon'ble. Hyderabad Tribunal in the case of Prolifics Corporations Ltd., than it is clearly implied that even the facts about giving CG as shareholders services also stands approved by Hon'ble Madras High court in the case of Redington. Also this aspect of giving /issuing CG as shareholders activity has now been approved in umpteen number of cases including Hon'ble Special Bench in the case of Instrumentarium Corporation Ltd. Vs. ADIT in 71 taxmann.com 193 (Kolkata Tribunal) (Special Bench). 3. Issues raised by assessee with regard to CG's are fully covered in its case by Hon'ble ITAT decision for A.Y 2013-14 published in 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....
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....uch, the commission received by the taxpayer for providing corporate guarantee has to be at arm's length. However, the amount received by the taxpayer on account of commission charged for providing corporate guarantee to its AE needs to be at arm's length price in view of the ratio of the order passed by the coordinate Bench of the Tribunal in Glenmark Pharmaceuticals Ltd. (supra) as discussed in Para 21 of this order So the TPO is directed to benchmark the intemational transaction providing corporate guarantee to its AE by providing an opportunity of being heard to the taxpayer. So, grounds no.2 to 2.8 & 3 are determined in favour of the taxpayer for statistical purposes. So from the perusal of the above order of the ITAT in the case of assessee only, the following facts are culled out i) The Tribunal on identical facts, as that 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....
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....explained above and decision in assessee's own case by ITAT). In other words when, on the first day of financial year, the assessee has taken the liability and risk associated with issuance of CG on behalf of AE's accordingly, the asseessee was required to be compensated for the risk assumed on that day itself and the assessee's argument has no force and merits that no CG commission was to be charged as loan was defaulted during the year. In fact going by the assessee's contentions, the banks would not have given the loans / recovered that entire amount on the first day of the year if CG was not given by the assessee's company. Analogy is drawn to the bank guarantees / insurance policies issued by banks / insurance companies. If the bank guarantee commission / insurance policy premium is not deposited with the bank / insurance companies on the very first days of this issuance/renewal, 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....
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....r the sake of AE's and if that is the case then the assessee's company should have received far higher CG commission than the normal standards. As the TPO was aware for the higher risk involved in the case of assessee's company in giving CG's to AE's, whose credit rating were of non investment categorised as speculative and were B-,minus (page 6 to 8 of TPO order) and providing any guarantee to such companies clearly carries a risk of high defaults Accordingly after analysing the case in detail, the TPO has rightly rejected the interest saving approach and adopted the Hull and white model for benchmarking the international transaction related to CG. This model has been recommended by OECD and is a good method for calculation of probability of default in high risk transaction like giving of CG by the holding company to the AE's. In fact OECD guidelines were referred and relied upon by several courts including jurisdictional 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 def....
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....addled with huge liability arising because of default by the AE's in repayments of loans. Thus, in view of above arguments, the assessee appeal may kindly be dismissed and the order of TPO / AO /DRP may kindly be upheld. 6. Considered the rival submissions and material placed on record. We observed from the record that the assessee has provided primary guarantee to its step down foreign subsidiaries against the loan taken by them and obligations towards servicing of the loan to EXIM Bank for first loan of USD 50 Million in the Financial Year 2011-12 and for second loan of USD 45 Million in the Financial Year 2013-14. It is fact on record that the assessee always classified the above guarantee as share holder activities, not provided any economic/commercial benefit to the lender as well as borrower and denied that this falls under the definition/category of corporate guarantee in the past. We observed that similar issue was considered by the coordinate bench in the AY 2013-14, 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....
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....lf. Therefore, in our considered view, in the beginning of the year, there was no existence of any guarantee to the EXIM bank and it is also relevant to notice that the assessee has not recovered any fees for guarantee, as in the past, during the year under consideration and the EXIM bank has initiated the recovery proceedings from the assessee. The liability of the assessee towards the guarantee are restricted to the extent of its investments in the subsidiaries and to the extent of recovery of the assets held by the subsidiaries. Therefore, the liabilities of the assessee was converted from guarantor to the actual liabilities to the extent of default by the step down subsidiaries, absolutely nothing left for the assessee itself to recover from its subsidiaries till the bank recovers their dues. Similar submissions were made by the Ld DR and are not in agreement of the views. Further, no doubt, as per the submissions of the Ld DR, the statutory provisions may cause hardship or inconvenience but court has no choice but to enfore it, irrespective of the situation, the transaction has to be bench marked. After considering the facts on record, what is relevance is whether the guarante....