TMI Blog2013 (9) TMI 204X X X X Extracts X X X X X X X X Extracts X X X X ..... ntee commission should have been charged at arm's length price. The commercial relationship between the assessee and its Associated Enterprises is distinct and separate from the transactions of giving guarantee and such transactions have to be considered and examined independently in order to determine the arm's length price. - Decided against the assessee. Rate of guarantee commission - Arm's length price of guarantee commission was determined by the TPO by applying CUP method and the arithmetic mean of 1.5% of the guarantee commission charged by the HSBC Bank in the range of 0.15 to 3% was taken as arm's length price - CIT(A) upheld the CUP method applied by the TPO but adopted the rate of 0.25% of guarantee fee as arm's length price - Held that:- The universal application of rate of 3% for guarantee commission cannot be upheld in every case as it is largely dependent upon the terms and conditions, on which loan has been given, risk undertaken, relationship between the bank and the client, economic and business interest are some of the major factors which has to be taken into consideration - A.O. is directed to recompute the commission for guarantee given b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 71,000/-. 3. The assessee in the present case is a company which is engaged in the business of airtime marketing available on television programmes, cricket and other sports events. It is also engaged in the business of production, telecasting and marketing of T.V. serials. The return of income for the year under consideration was filed by it on 29-10-2005 declaring total income of Rs. 3,57,32,785/-. Since there were certain international transactions entered into by the assessee with its Associated Enterprises (AE) during the year under consideration, reference was made by the A.O. to the TPO for determining the Arm's Length Price (ALP) of the said transactions. As directed by the TPO, the assessee had given corporate guarantee of US $ 30,00,000 through ICICI Bank, U.K. for a term loan given to its AE namely Nimbus Communication Worldwide Ltd. Another guarantee of US $ 1,50,00,000 was given by the assessee to the same Bank for the financial facility given to another AE namely Nimbus Sports International Pte Limited. Both these guarantees were given by the assessee without charging any commission on the ground of commercial expediency which, according to the assessee, was to go l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on was charged for giving such guarantee. 5. After considering the submissions made by the assessee as well as the material available on record, the ld. CIT(A) decided this issue vide para No. 6 to 6.7 of his impugned order which read as under:- "6. I have considered the submission and perused the assessment order as well as the TPO's order. Guarantee fees or a financial loan guarantee is a commitment entered into by a parent corporation with a third party lender of the parent companys subsidiary which obliges the parent to cover the risk of default for the subsidiary should it fail to meet :its financial obligation to the third party lender. 6.1 At times this transaction is labeled as gratuitous transaction by the taxpayer and so no consideration is charged. Sometimes tax payers take the position that a parent company's support for a subsidiary is implied and therefore no specific guarantee fee payment is required. However, it has to be accepted that this act does involve performance or carrying out of service to cover the risk of default and so 'price' has to be charged. 6.2 The TPO has collected Data from HSBC Bank and applied the rate of 1.5%. This means that the TPO ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for providing the service of a guarantee with the general rule that a parent company may provide a free services as long as it can justify that the act was in its own interest. I modify the adjustment originally made at 1.5% and fix the compensation at 0.25% on the guaranteed amounts. In monetary terms the amount at the rate of .25% comes to Rs.19,71 lacs. Thus the appellant get a relief of Rs.98,56,350/-". The ld. CIT(A) thus held that the transaction of providing bank guarantee to its AEs by the assessee was an international transaction for which commission at arm's length rate should have been charged by the assessee. As regards the arm's length rate of guarantee commission, he relied on the decision of Societe Carrefour (French case) where 0.25% rate for guarantee commission was accepted by the Court. Adopting the said rate as arm's length rate of guarantee commission, the ld. CIT(A) worked out the commission for guarantee given by the assessee to its AEs at 19.71 lacs and accordingly sustained the addition made by the A.O. to that extent thereby giving relief of Rs. 98,56,350/- to the assessee on this issue. Aggrieved by the same, the Revenue and the assessee both have raise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssible on the basis of commercial relationship or expediency. He contended that every transaction has to be examined independently to determine the ALP. He also contended that if the assessee is not in the business of guarantee, higher fees should be charged as the assessee is not expert or conversant with the activity and even no guarantee was taken by it from the AE as it is normally done by the banks engaged in the business of giving guarantee regularly. 8. As regards the rate of guarantee commission, the ld. D.R. submitted that the TPO had taken arithmetic mean of the guarantee commission charged by the HSBC Bank in the rate of 0.15% to 3% while the ld. CIT(A) has adopted the rate of 0.25% as ALP relying on the decision of French Court in the case of Societe Carrefour. He relied on the decision of the co-ordinate Bench of this Tribunal in the case of M/s Everest Kanto Cylinder Ltd. v. DCIT (ITA No. 542/Mum/2012 for A.Y. 2007-08 order dtd. 23-11-2012) wherein the guarantee commission rate charged by the HSBC Bank was accepted by the Tribunal as per CUP method. He contended that the decision of French Court in the case of Societe Carrefour relied upon by the ld. counsel for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quated with business strategy, which is specific and well laid out. As rightly held by the ld. CIT(A), a financial loan guarantee is a commitment entered into by the assessee company with a third party lender of its Associated Enterprises which obliges the assessee company to cover the risk of default by its Associated Enterprise and this act thus involves performance or carrying out of service to cover the risk of default for which "price" has to be charged. Even the OECD Transfer Pricing Guidelines 2010 supports this view in para 7.13 where it is explained that where higher credit rating of Associated Enterprise is due to a guarantee by another group member, such association positively enhances the profit making potential of that Associated Enterprise. We, therefore, find ourselves in agreement with the contention of the ld. D.R. that there was a clear benefit accrued to the Associated Enterprises by the guarantee provided by the assessee and when such benefit was passed on by the assessee to the said Associated Enterprises, guarantee commission should have been charged at arm's length price. The commercial relationship between the assessee and its Associated Enterprises is disti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the said deduction inspite of specific opportunity afforded to it. He, therefore, disallowed the entire entertainment software expenditure claimed by the assessee. Before the ld. CIT(A), the assessee furnished the details of television entertainment software produced during the year under consideration. It was contended on behalf of the assessee before the ld. CIT(A) that the entire cost of the production of the television serials was allowable in the case of the assessee as the assessee was engaged in the production of television serial. It was pointed out that similar television entertainment software was produced by the assessee in the earlier years and the expenditure incurred for the same was entirely allowed by the A.O. himself. The ld. CIT(A) found merit in the claim of the assessee on this issue and deleted the disallowance made by the A.O. on account of television entertainment software expenditure for the following reasons given in para No. 16 of his impugned order:- "I have perused the assessment order and the written submissions. A pattern of arbitrariness and whimsically is evident in this order, be it invoking section 144 or making disallowances. The present disallo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t aside the impugned order of the ld. CIT(A) on this issue and restore the matter to the file of the A.O. to decide the same afresh after verifying the relevant details. Ground No. 2 of Revenue's appeal is thus treated as allowed for statistical purpose. 14. The issue raised in ground No. 1 of assessee's appeal relates to the addition of Rs. 3,20,288/- made by the A.O. and confirmed by the ld. CIT(A) by way of transfer pricing adjustment being the difference between the interest actually charged by the assessee on its loan to Associated Enterprises and the interest that would have been received by it at arm's length price. 15. The assessee had granted a loan to its Associated Enterprise M/s Nimbus Communication Worldwide Ltd. and interest on the said loan amounting to Rs. 5,57,944/- was charged during the year under consideration as calculated @ 3.26% per annum. This transaction was claimed to be benchmarked by the assessee against six months LIBOR plus 100 basis points. During the course of proceedings before the TPO, it was, however, revealed that interest @ 3.26% actually worked out to Rs. 8,78,232/- as against interest of Rs. 5,57,944/- charged by the assessee. The differe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o perused the relevant material available on record. The ld. counsel for the assessee has submitted that similar issue involved in assessee's own case for earlier years i.e. assessment years 2003-04 and 2004-05 has been decided by the Tribunal in favour of the assessee. The ld. D.R., however, has submitted that similar issue was decided by the Tribunal in favour of the assessee in the earlier years holding that the continuing debit balance was not an international transaction. He has contended that the law on this point, however, has undergone a change by insertion of Explanation to section 92-B with restrospective effect from 1-4-1992 and clause (i)(c) of the said Explanation is clearly applicable in the present case. The ld. counsel for the assessee, on the other hand, has contended that although the law has changed on this point and continuing debit balance is now treated as an international transaction as per the restrospective amendment, the Tribunal vide its order dtd. 5-1-2011 passed in ITA No. 6597/Mum/09 for A.Y. 2004-05 has given relief to the assessee on this issue even on merit. In this regard, he has referred to para 5 6 of the said order which is reproduced hereunde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of lending or borrowing of funds, and not in the case of commercial overdues. Even assuming that the continuing debit balances of associated enterprises can be treated as 'international transactions' under section 92 B, the right course of applying the CUP method, in the case of non charging of interest on overdue balances, would have been by comparing this not charging of interest with other cases in which the assessee has charged interest on overdues with independent enterprises (internal CUP) or with the cases in which other enterprises have charged interest, in respect of overdues in respect of similar business transactions, with independent enterprises (external CUP). No such exercise has been carried out in this case, nor is it shown, as is the condition precedent for bringing this continuing debit balance in the ambit of 'international transaction', that as a result of not realizing the debts from associated enterprises, there has been any impact on profits, incomes, losses or assets of the assessee. 6. For all these reasons set out above, as also respectfully following the decision dated 28th January 2010 of the coordinate bench in assessee's own case in the imm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee has made investment of more than Rs. 10 crores in shares mostly of its subsidiary company. According to the A.O., the dividend income on the said shares being exempt from tax, the interest and other expenses attributable to the investment made in shares was liable to be disallowed u/s 14 of the Act. Accordingly he worked out such expenses by applying Rule 8D at Rs. 25,07,118/- and made a disallowance to that extent u/s 14A of the Act. On appeal, the ld. CIT(A) confirmed the said disallowance relying on the decision of the Special Bench of ITAT in the case of Daga Capital management Pvt. Ltd. ((2009)119 TTJ 289 (Mum.)[SB] wherein it was held that Rule 8-D is applicable restrospectively. 23. We have heard the arguments of both the sides and also perused the relevant material available on record. As agreed by the ld. representatives of both the sides, the issue relating to the applicability of Rule 8D has been decided by the Hon'ble Bombay High Court in the case of Godrej and Boyce Mfg.Co. Ltd. v. DCIT [2010] 328 ITR 81 (Bom.) wherein it was held that Rule 8D is applicable only prospectively i.e. from A.Y. 2008-09. As held by the Hon'ble jurisdictional High Court, the disallow ..... X X X X Extracts X X X X X X X X Extracts X X X X
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