TaxTMI 
TaxTMI 
TaxTMI 
2023 (12) TMI 1458
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....d any cost for providing the guarantee; (b) as it is, in any case, a shareholder activity; (c) as it has recovered guarantee fee charged by Axis Bank thereto, i.e. Rs.45.64 lakh (@ 0.4% p.a. + taxes), from it's foreign subsidiary, the AE; and (d) as the charge of guarantee fee at the rate of 2.56% p.a.is, in any case, in excess; it being charged 1/5thereof by it's own Banks on the facilities availed. Reliance before us was placed on the guarantee fee charge by the assessee's bank, i.e., Federal Bank, to it, i.e., @ 0.52% per annum on a limit of Rs.5 crore, as well as LC issuance charges, again at 0.5% (PB pgs. 28, 30). 4. We have heard the parties, and perused the material on record. 4.1 Though no argument qua the issue of corporate guarantee being not an 'international transaction' u/s. 92B, which therefore needs to be tested for pricing, stands assumed before us, it was before the Dispute Resolution Panel (DRP), which has met the same with reference to a host of decisions by the Tribunal, reproducing there-from, as indeed had the Transfer Pricing Officer (TPO) prior thereto (vide his order dated 23.07.2021, PB pgs. 8-27). The matter is well-settled, for which we may refe....
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.... of the Income Tax Rules, 1962/Rules), even as Shri Thomson, the learned counsel for the assessee, would make it clear that the assessee had not opted for SHR, reference to which was being made only for guidance. The DRP, and prior thereto, the TPO, have relied on several decisions by the Tribunal upholding a higher rate, i.e., from 2% to 3.5% p.a. Further, SHR provide for charge of 2% or more per annum for guaranteeing Rs.100 crore and above. The CBDT (vide it's Notification dated 07.06.2017) has prescribed that the said rate should not be less than 1% p.a. (paras 2.1.18 and 2.1.19 of the DRP's order). It then proceeds to discuss the concept of 'demand guarantee', under which the beneficiary of the Guarantee can in case of default directly invoke the same without exhibiting proof of default, even where there is a difference or dispute as to default. That is, in contradistinction to a normal guarantee, the liability under a demand guarantee is immediate on demand and notwithstanding any objection raised by the Borrower. This aspect has not been disputed at any stage, including before us. 4.3 The matter at heart, i.e., pricing of a product, is principally factual, with reference to....
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....a premium on it's guarantee. However, Banks operate in a market place and, therefore, have to be competitive in their lending - fund and non-fund, rates. The (average) borrowing cost of Banks, who may attract institutional investors for placing funds with them, could still be vastly different. The lower a Bank's borrowing cost, the better rate it could offer it's customers. That apart, Banks themselves would vary in terms of their, besides financial standing (capitalization),risk profile, i.e. their risk exposure based on the credit rating of their borrowers. In fact, Banks may, besides following prudent accounting policies, themselves, paying a guarantee-fee, obtain a guarantee with a view to cover their default risk. Surely, lower this fee, depending in turn on it's risk assessment, the better the quote it can offer it's customers. These, of course, are inputs that go to define a Bank's risk management and lending strategy, yielding standard (rake) rates, and there is scope for reduction on the basis of credentials of individual borrowers. Here we may add that guarantee is essentially a service/product toward risk mitigation of the person extending credit to the borrower. As such....
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.... the instant case can, inasmuch as it enables the issue of bank guarantee, only rightly be regarded as a variant thereof. 4.4 We, for the reasons afore-stated, subject to the modification in the ALP rate to 2.45% p.a. (gross), validate the Revenue's case in principle. We decide accordingly, and the assessee gets part relief. 5. The next and only other TP adjustment is qua interest on trade receivables at Rs.78,297. The law stands amended (by FA, 2012, w.r.e.f. 01.04.2002) by defining international transaction to include deferred payment or receivable or any other debt arising during the course of business as an international transaction, which accords with the predominant judicial view in the matter held prior thereto, and toward which several decisions by the Hon'ble High Courts (viz. CIT v. Patni Computer Ltd. [2013] 215 taxmann.com 108 (Bom)) and Tribunal stand relied upon before us. The only question that therefore survives is the rate of interest to be applied on the amount representing excess credit upon benchmarking the normal credit period. The same has been applied at 6-month Libor + 450 basis points (as per RBI master circular on external commercial borrowings and trad....
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....his sum does not include direct expenditure incurred in relation to tax-exempt income, to be reckoned under r.8D(2)(i) where the AO is not satisfied with the disallowance as made by the assessee, being at Rs.103.74 lakhs. The AO, despite expressing his dissatisfaction therewith, as required u/s. 14A(2), has surprisingly not made any disallowance in its respect, which, therefore, is only with reference to indirect expenditure, worked u/r. 8D(2)(ii) at Rs.388.11 lakhs, i.e.,. at 1% of the average investment held during the year, reckoned, in terms of the said rule, w.r.t. the monthly opening and closing balance of the investment, i.e., a 12-month average. The same is, further, as required u/r. 8D, with reference to investment income from which does not or shall not form part of the total income. 7.2 The assessee has before us raised the following objections: (a) Investment in foreign subsidiaries (Rs.65.66 cr.) and taxable bonds (Rs.150 lakhs), income from which is/would be taxable, stand included. (b) Investment includes investment made for strategic reasons, and not for the purpose of earning income (Rs.54.354 cr.) (c) Only the investment having actually yielded tax-exempt inco....
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....irrespective of it being actually earned or not, which lies in the womb of future, is to be allowed, as explained, inter alia, in CIT v. Rajendra Prasad Mody [1978] 115 ITR 519 (SC), forming the basis of the assessee's claim at (a), which it thus contradicts. As such, per contra, all other expenditure, i.e., incurred, similarly, in relation to income not forming part of total income, is to be disallowed u/s. 14A.Whether the final outcome would be income, and to what extent, is irrelevant inasmuch as expenditure in any case stands incurred. How, one may ask, could it be otherwise, distorting the equation? A parity of the principles for computing income would thus dictate thus. Under which cannon of law, and under which provision of the Act, one wonders, could, then, an expenditure incurred in relation to an investment that would, where so, yield tax-exempt income, though has not any for the relevant year, is deductible, which is only toward income forming part of total income. The matter stands abundantly clarified per a series of decisions by the Apex Court, viz.CIT vs. Walfort Shares and Stock Brokers P. Ltd. [2010] 326 ITR 1 (SC);Godrej & Boyce (supra); Maxopp India (supra), exp....
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....me;' Section 14A, thus, provides legislatively what was always the given position, raising an issue, in the absence of formal guideline for apportionment of expenditure toward taxable and non-taxable income, in case of a composite business. Each of the several Circulars issued by the Board, beginning 14/2001, dated 22/11/2001 (reported at [2001] 252 ITR (St.) 65), and the Memorandum introducing the provision of section 14A by Finance Bill, 2001, w.r.e.f. 01/4/1962, ([2001] 248 ITR (St.) 192, 195-196), which provide the rationale for its insertion, has been, much less being struck down or contradicted, judicially noted with approval, including by the Apex Court, even reproducing there from. Circular No. 05/2014, dated 11/2/2014, explaining that s. 14A would hold even where there is no income, i.e., in gross, which does not form part of the total income, as long as expenditure stands incurred in its respect, finds its strength from Circular 14/2001, since upheld, and is thus in conformity with the law explained by the Apex Court. We have already noted the same to be consistent with r. 8D, and which is to be therefore accordingly adopted in the absence of the assessee's accounts pr....