TMI Blog2015 (12) TMI 143X X X X Extracts X X X X X X X X Extracts X X X X ..... GALORE ) is of no assistance to the case of the revenue. The international transaction is exports of goods which been benchmarked on TNMM basis and which is duly accepted by the TPO. In view of these discussions, and respectfully following the decision of the coordinate bench in assessee’s own case for the earlier years, we uphold the grievance of the assessee and direct the Assessing Officer to delete the impugned ALP adjustment - Decided in favour of assessee. Arm’s length price adjustment on account of corporate guarantees given by the assessee in respect of its associated enterprises - Held that:- The scope of the capital financing transactions, as could be covered under Explanation to Section 92 B read with Section 92B(1), is restricted to such capital financing transactions, including inter alia any guarantee, deferred payment or receivable or any other debt during the course of business, as will have “a bearing on the profits, income, losses or assets or such enterprise”. This pre-condition about impact on profits, income, losses or assets of such enterprises is a pre-condition embedded in Section 92B(1) and the only relaxation from this condition precedent is set out in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Representative dutifully relied upon the stand of the Assessing Officer. - Decided in favour of assessee by way of remand. Addition pertaining to telephone and electricity expenses of Managing Director - Held that:- On this issue also, the learned representatives fairly agree that the issue is covered by the order of co-ordinate bench for the assessment year 2005-06 in the sense that, on the same lines, while disallowance in respect of electricity expenses of ₹ 8,83,622/- is to be confirmed, the disallowance of telephone expenses to the tune of ₹ 1,03,272/- is to be deleted. In this issue also, we see no reasons to deviate from the stand taken by the co-ordinate bench in the earlier year and respectfully following the same, we delete the disallowance of telephone expenses and confirm the disallowance of electricity expenses as above. To the limited extent of deleting the disallowance of telephone expenses of ₹ 1,03,272, the assessee gets the relief. - Decided in favour of assessee in part. Addition out of software expenses - Held that:- This is a case when ERP has been introduced for the first time and the expenditure is not in the support or maintenance o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de, by computing time value of money @ 6.38% on LIBOR plus basis. In response to this show cause notice, it was, inter alia, explained by the assessee that what is exported to Micro USA is semi finished material which is required to be further processed and converted into saleable product. In effect thus, export to Micro USA cannot be compared with export of finished products as was done to the independent enterprises. The assessee had also pointed out that average credit period of third parties is 120 days whereas credit period granted to Micro USA is 135 days though actual highest average debtor days to third parties is 161 days whereas for Micro USA it is 186 days . It was also explained that considering the time taken in shipping the semi finished goods to Micro US, its processing in US, maintenance of inventory at US and credit realization time in US, the total cycle was about 210 days, but even if bare minimum period to complete a sale cycle is taken account, it cannot be less than 170 days. It was thus pointed out that the average credit period to Micro USA, which was 135 days, was reasonable. On the basis of these arguments, it was submitted that no ALP adjustment is war ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gredients, raw materials and semi finished goods sold to Micro USA are not sold to any other concern. The very foundation of impugned addition in arm s length price on account of excess credit period is thus devoid of any legally sustainable merits or factual basis. When all these factors were pointed out to the learned Departmental Representative, he did not have much to say except to place his bland but dutiful reliance on the orders of the authorities below. However, for the reasons set out above and in the absence of any comparative price and credit period figures on comparable product to support the case of the revenue, we uphold the grievance of the assessee and direct the Assessing Officer to delete this ALP adjustment. The assessee gets the relief accordingly. 6. Learned counsel for the assessee submits that the issue being squarely covered, in favour of the assessee and on admittedly similar set of facts, there is no occasion to reconsider the mater. We are urged to follow the said decision and delete the impugned adjustment. On the other hand, while learned Departmental Representative does not dispute that this issue is squarely covered by the aforesaid decision, he s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or. It would be incongruous to accept the comparables and determine or accept the transfer price and still segregate AMP expenses as an international transaction, 8. By way of an example, this aspect of the matter was then explained by Hon ble Delhi High Court as follows: An example given below would make it clear: Particulars Case 1 Case 2 Sales 1000 1,000 Purchase Price 600 500 Gross Margin 400 (40%) 500 Marketing Sale promotion 50 150 Overhead expense 300 300 Net profit 50 (5%) 50 (5%) The above illustrations draw a distinction between two distributors having different marketing functions. In case 2, a distributor having significant marketing functions incurs substantial expenditure on AMP, three times more than in case 1, but the purchase price being lower, the Indian AE gets adequate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a case when the arm s length price of the exports has been benchmarked on the basis of TNMM. The very conceptual foundation, for separate adjustment for delayed realization of debtors and on the facts of this case, is thus devoid of legally sustainable merits. 10. The other aspect of the matter is that a separate adjustment for delayed realization of debtors can, even in a fit case, can only be made only to the extent the credit period allowed to the associated enterprises is more than the credit period allowed to independent enterprise in respect of the same or materially similar transactions. In the present case, it is an undisputed position that semi finished goods, as sold to Micro USA, is not sold to any other independent enterprises. The assessee did have trading transactions in respect of the finished goods with trading subsidiaries in China and Hong Kong but it is not even the case of the TPO that excessive credit period was allowed to these AEs vis- -vis the credit period allowed to independent enterprises, nor any ALP adjustment has been recommended in connection with the same. This fact, if anything, shows that the credit period allowed to the AEs is comparable with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... position is with respect to similar payments due from non AEs. The whole exercise of ALP adjustments is to neutralize the impact of inter se relationships between the AEs and it is, therefore, not the delay simplictor in payment but delay in payment vis- -vis similar situations with non AEs (i.e. independent enterprises) which is of crucial consideration. Such a comparison cannot be based on the hypothesis as to what would have, in the wisdom of the TPO, happened if assessee was to have similar transactions with non-AEs. The comparison has to be based on real transactions of similar nature, if at all such transactions have taken place. When no such transactions have taken place, as is the case before us, there is obviously no occasion of any comparison. The stand taken by the learned Departmental Representative, therefore, is not only quite detached from commercial reality but also wholly untenable in law. In any case, what can be examined on the touchstone of arm s length principles is the commercial transaction itself, as a result of which the debit balance has come into existence, and the terms and conditions, including terms of payment, on which the said commercial transaction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 00 $4,900,000 6. HDFC Bank-August 2005 $3,000,000 - $3,000,000 $3,000,000 Total $31,000,000 $20,349,998 $24,673,331 $26,461,665 14. It was also noted that guarantees were issued without charging the AEs any consideration for the same. The stand of the assessee was that these guarantees did not cost assessee anything nor any charges were recovered for the same, and that the said guarantees were in the form of corporate guarantees/ quasi capital and not in the nature of any services . The TPO, however, proceeded to compute arm s length price for these guarantees @2% on the basis of following reasoning: 7.2 Guarantees are chances that someone will have to pay for them, if chance is 100% i.e. in all cases one has to pay for it, guarantee fees will be simply equal to it (i.e. the guarantee amount). However, if it is only a probability and only in few cases it will have to be paid, its charges are just percentage of it. Banks normally co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the coordinate benches following the same proposition, including the decisions in the cases of Redington India Limited Vs ACIT [(2014) 49 taxmann.com 146] (Chennai)],Redington India Ltd Vs JCIT [(2015) 61 taxmann.com 312 (Chennai)], Videocon Industries Ltd Vs ACIT [(2015) 55 taxmann.com 263 (Mum)]. He thus urged us to delete the impugned ALP adjustment on the short ground that the issuance of corporate guarantees, on the facts of this case, did not constitute an international transaction. Without prejudice to this argument, learned counsel submitted that even if it is assumed that post 2012 amendment in the definition of international transaction stand specifically included in the scope of international transactions, in respect of which arm s length price adjustments can be made, it is only elementary that such an amendment cannot have retrospective effect. He points out that the transfer pricing legislation is inherently an anti abuse legislation which seeks to ensure that the assesses behaves well within certain norms. This kind of legislation, according to the learned counsel, can never have retrospective application as assessee cannot be told today as to how should he have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n is not an international transaction and there could not be any method for evaluating the ALP for the guarantee commission, we do not find any merit in the said contention in view of the amendment brought by the Finance Act, 2012 with retrospective effect from 1-4- 2002 by way of Explanation added in Section 92B. Payment of guarantee fee is included in the expression international transaction in view of the Explanation i(c) of Section 92B . It is then submitted that this decision of the Tribunal has been approved by Hon ble Bombay High Court in the judgment reported as CIT Vs Everest Kanto Cylinders Limited [(2015) 119 DTR 394 (Bom)]. As learned Departmental Representative puts it in his written submissions the above decision of the ITAT has been sustained by Bombay High Court in [(2015) 58 taxmann.com 254 (Bombay)] wherein the High Court has not questioned the ITAT s decision with respect to the transaction being an international transaction, but has held that the comparables used by the TPO with respect to this transaction were not proper . He then invites our attention to the amendment brought about in Section 92B of the Act whereby an Explanation is inserted to the said sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the coordinate benches, which have decided this issue in favour of the revenue, including in the cases of Foursoft Limited (ITA No. 1903/Hyd/2011), Mahindra Mahindra Ltd Vs DCIT (54 SOT URO 146 Hyd), and Prolific Corporation Ltd Vs DCIT [(2015) 68 SOT 104 (Hyd)]. Coming to Bharti Airtel decision (supra), learned Departmental Representative states that Hon ble Delhi ITAT was not requested by the contesting parties to decide the issue as to whether the provision of guarantee was a service or not and added that various Tribunal decisions have already held that provision for bank guarantee is a service and as such it needs to be benchmarked and that whether the service has caused any extra cost to the assessee should not be the deciding factor to determine whether it is an international transaction . He then gave an example of brand royalty to illustrate the above proposition. On the basis of this reasoning, learned Departmental Representative urged us to confirm the action of the Assessing Officer and decline to interfere in the matter. 18. In rejoinder, learned counsel for the assessee submitted that it is wholly incorrect to suggest that in Everst Kanto s case Hon ble Bom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mended definition. In these circumstances, according to the learned counsel, Hon ble High Court s observation that the effect of the amendment would have to be considered is to be taken in the wider context and not simply meaning that the effect of the amendment is to be implemented in its literal sense. We are thus urged to consider the impact of the amendment in accordance with the law as has been done in the case of Bharti Airtel (supra). Learned counsel once again taken us through Hon ble Supreme Court s decision in the case of Vatika Township (supra) and highlights certain observations made therein which, according to the learned counsel show that the stand of the Departmental Representative with regard to the amendment in Section 92 B is clearly contrary to the scheme of law as laid down by a constitutional bench of Hon ble Supreme Court. A reference is also made to the oft quoted book The Principles of Statutory Interpretation (13th Edition 2012) by Justice G P Singh. It was also submitted that the transfer pricing provisions are set out in the special provisions relating to avoidance of tax under chapter X. These provisions, according to the learned counsel, are normall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dustries Limited (supra). According to the learned counsel, there are no decisions pointing out anything incorrect, or holding to the contrary, to the said decision. He submits that Everest Kanto Cylinder Ltd Vs ACIT [(2014) 52 taxmann.com 395 (Mumbai)], Bharti Airtel (supra) decision is distinguished on the ground that guarantee commission has been paid to the bank which is not the case before us. The same was the position with respect to Aditya Birla Minacs Worldwide Ltd vs DCIT [(2015) 56 taxmann.317 (Mumbi)]. In Prolific Corporation Ltd Vs DCIT [(2015) 55 taxmann.com 226 (Hyd)], according to the learned counsel, the bench has accepted that there may not be any charge to the P L account but inherent risk cannot be ruled out in providing guarantees . As for Hindalco Industries Ltd vs ACIT [(2015) 62 taxmann.com 181 (Mumbai)], learned counsel submits that the bench had not held anything to the contrary to what has been decided in Bharti s case even though it has mentioned that the relevant observations were mere obiter dicta. When there is no contrary view expressed by any coordinate bench, according to the learned counsel, there cannot be any occasion to refer it to a larger ben ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on entered into by an enterprise with a person other than an associated enterprise shall, for the purposes of sub-section (1), be deemed to be a transaction entered into between two associated enterprises, if there exists a prior agreement in relation to the relevant transaction between such other person and the associated enterprise, or the terms of the relevant transaction are determined in substance between such other person and the associated enterprise. Explanation*: - For the removal of doubts, it is hereby clarified that - (*inserted by the Finance Act 2012, though with retrospective effect from 1st April 2002) (i) the expression international transaction shall include - (a) the purchase, sale, transfer, lease or use of tangible property including building, transportation vehicle, machinery, equipment, tools, plant, furniture, commodity or any other article, product or thing; (b) the purchase, sale, transfer, lease or use of intangible property, including the transfer of ownership or the provision of use of rights regarding land use, copyrights, patents, trademarks, licences, franchises, customer list, marketing channel, brand, commercial secr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ible assets, such as, institutional goodwill, professional practice goodwill, personal goodwill of professional, celebrity goodwill, general business going concern value; (k) methods, programmes, systems, procedures, campaigns, surveys, studies, forecasts, estimates, customer lists, or technical data; (l) any other similar item that derives its value from its intellectual content rather than its physical attributes. . 22. As analyzed by a coordinate bench, in the case of Bharti Airtel (supra) and speaking through one us, the legal position with respect to the above definition is as follows: 25. An analysis of this definition of international transaction under Section 92 B, as it stood at the relevant point of time, and its break up in plain words, shows the following: An international transaction can be between two or more AEs, at least one of which should be a non-resident. An international transaction can be a transaction of the following types: in the nature of purchase, sale or lease of tangible or intangible property, in the nature of provision of services, in the nature of lending or borrowing money, or in the nature of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng service which are anyway covered by 2(b) and 3 above in provision for services and mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises . That leaves us with two clauses in the Explanation to Sect ion 92 B which are not covered by any of the three categories discussed above or by other specific segments covered by Section 92 B, namely borrowing or lending money. 29. The remaining two items in the Explanation to Section 92 B are set out in clause (c) and (e) thereto, dealing with (a) capital financing and (b) business restructuring or reorganization. These items can only be covered in the residual clause of definition in international transactions, as in Section 92B(1), which covers any other transaction having a bearing on profits, incomes, losses, or assets of such enterprises . 30. It is, therefore, essential that in order to be covered by clause (c) and (e) of Explanation to Section 92 B, the transactions should be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble or any other debt during the course of business, as will have a bearing on the profits, income, losses or assets or such enterprise . This pre-condition about impact on profits, income, losses or assets of such enterprises is a pre-condition embedded in Section 92B(1) and the only relaxation from this condition precedent is set out in clause (e) of the Explanation which provides that the bearing on profits, income, losses or assets could be immediate or on a future date. The contents of the Explanation fortifies, rather than mitigates, the significance of expression having a bearing on profits, income, losses or assets appearing in Section 92B(1). 32. There can be number of situations in which an item may fall within the description set out in clause (c) of Explanation to Section 92B, and yet it may not constitute an international transaction as the condition precedent with regard to the bearing on profit, income, losses or assets set out in Section 92B(1) may not be fulfilled. For example, an enterprise may extend guarantees for performance of financial obligations by its associated enterprises. These guarantees donot cost anything to the enterprise issuing the guara ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion on issuance of corporate guarantees, on behalf of the AEs, and it could not, therefore, be said that the transaction will have no impact on profits, incomes, losses or assets of such enterprise . This aspect of the matter is clear from an observations in the related Tribunal order, which is reported as Everest Kanto Cylinders Limited Vs DCIT [(2012) 34taxman.com 19 (Mum)], to the effect that However, in this case, the assessee has itself charged 0.5% guarantee commission from its AE and, therefore, it is not a case of not charging any kind of commission from its AE . The Tribunal did note, in the immediately following sentence in paragraph 23 itself, that the only point to be seen in this case is whether the same is at ALP or not . The very fact of charging this guarantee commission brings the issuance of corporate guarantees to the net of transfer pricing. Nevertheless, the ALP adjustment made by the TPO was deleted by the Tribunal. Aggrieved by the relief so given by the Tribunal, the matter was carried in further appeal, by the Commissioner, before the Hon ble Bombay High Court which eventually upheld the relief granted by the Tribunal. The appeal before the Hon ble High ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of its AE, a subsidiary company. In view of the above discussion we are of the view that the appeal does not raise any substantial question of law and it is dismissed 25. We are unable to see, in the judgment of Hon ble Bombay High Court, any support to the proposition that issuance of corporate guarantees is inherently within the ambit of definition of international transaction under section 92B irrespective of whether or not such transactions have any bearing on profits, incomes, losses, or assets of such enterprises . Revenue, therefore, does not derive any help from the said decision. 26. Coming to Hon ble Bombay High Court in the case of Vodafone India Services (supra), which has been relied upon by the learned Departmental Representative, we find that the operative portion of this judgment, so far as relevant to this discussion, is as follows: 213. The amendment to section 2(47) raises several important questions of fact and of law. Whether or not it affects the proceedings which were the subject matter before the Supreme Court is not relevant for the purpose of this Writ Petition. But, whether it is relevant or not for the purpose of the assessment proceedings ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or dependent upon or flowing from the transfer of a share or shares of a company registered or incorporated outside India. It would be evident, therefore, that a lot more must now be seen and considered than before while arriving at a conclusion whether the terms and conditions of the Framework agreement constituted a transfer or assignment of the call options by one party to another. 217. At the cost of repetition, we are not concerned here with whether the amendment is valid or not. One of the issues, however, that does arise is whether the amendment, albeit clarificatory, would make a difference in the construction of the provisions of the Framework agreements themselves, to wit as regards the construction of the clauses thereof without the aid of any other material for interpreting them. Vodafone s case obviously considered the ambit of the term transfer prior to the amendment. In the present assessment proceedings, it is the amended definition which would have to be considered. 218. We do not find it either necessary or proper to indicate the application of section 2(47) as amended to the present proceedings . The application would depend upon the facts o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the Income Tax Act, bypassing the Tribunal and considering all these questions in exercise of the High Court s extra-ordinary jurisdiction under Article 226 . When Their Lordships have made it clear that they would not like to bypass the channels under the Income Tax Act and proceed to decide these issues in writ jurisdiction under article 226, there cannot obviously be any question of Their Lordships deciding the matter one way or the other. Any observations made by Their Lordships, while declining to decide the matter in writ jurisdiction, cannot be treated as decisive of the issue on merits. While it is true that Hon ble Bombay High Court has observed that the effect of amendment will have to be considered, Hon ble Bombay High Court has also observed that even after taking into account the amendments, the legal implications of this amendment is still an open issue which will have to be adjudicated in the light of pleadings of the parties. Even in these observations, which donot anyway decide anything on merits, effect of a retrospective amendment was not in the context of the precise issue before us, or on the scope of the international transaction, but in respect of conn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ollow the Everest Kanto decision by Hon ble Bombay High Court, but then, as we have seen earlier, that was a case in which Their Lordships were in seisin of a situation in which guarantee commission was actually charged by the assessee. That is not the case before us. The coordinate bench decisions dealing with the situations in which the guarantee commission was actually charged, and as such there was indeed a bearing on the profits of the assessee, clearly donot apply on this case. We, therefore, reject the reliance on these decisions as devoid of legally sustainable merits. 29. Let us now deal with the reliance placed by the revenue authorities on GE Capital s case by the Tax Court of Canada. In the DRP s order, a reference is made to well known Canadian decision in the case of GE Capital Canada (supra). The said case, to quote the words of the DRP, also shows that the group company issuing the guarantee (i.e. guarantor) would, in principle, at least need to cover the cost that it incurs with respect to providing the guarantee and that these costs may include administrative expenses as well as the costs of maintaining an appropriate level of cash equivalents, capital, subs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount owing described in paragraph 17(8)(a) or (b) if it were owed to the parent. (http://www.fin.gc.ca/drleg-apl/ita-lrir-dec12-l-eng.pdf) 31. It is also important to bear in mind the fact that, under the Canadian law, the definition of international transaction , unlike an exhaustive definition under section 92B of the Indian Income Tax Act, 1961, is a very brief but inclusive and broad definition to the effect that transaction includes a series of transactions, an arrangement or an event [See Section 247(1) of the Canadian Income Tax Act, 1985; http://laws-lois.justice.gc.ca/eng/acts/I-3.3/page-419.html#h-156] coupled with the legal position that arm s length adjustment to the prices of such transaction come into play Where a taxpayer or a partnership and a non-resident person with whom the taxpayer or the partnership, or a member of the partnership, does not deal at arm s length [See Section 247(2) ibid]. When one takes into account these variations in the statutory provisions, it will become very obvious that the provisions of the Indian Income Tax Act, 1961 and the Canadian Income Tax Act, 1985 are so radically different that just because a particular transactio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mitments of their Canadian controlled foreign affiliates to support the active business operations of those affiliates . As to what could be conceptual support for such an exclusion, we find interesting references in a discussion paper issued by the Australian Tax Officer in June 2008 and titled as Intra-group finance guarantees and loans (http://www.transferpricing.com/pdf/Australia_Thin%20Capitalisation.pdf). The fact that this discussion paper did not travel beyond the stage of the discussion paper is not really relevant for the present purposes because all that we are concerned with right now is understanding the conceptual basis on which, contrary to popular but apparently erroneous belief, the issuance of corporate guarantees can indeed be kept outside the ambit of services. The relevant extracts from this document are as follows: 102. An independent company that is unable to borrow the funds it needs on a stand-alone basis is unlikely to be in a position to obtain a guarantee from an independent party to support the borrowings it needs. Where such a guarantee is given it compensates for the inadequacies in the financial position of the borrower; specifically, the fact t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tes that Stewardship activities covered a range of activities by a shareholder that may include provision for services to other group members , for example services that would be provided by a coordinating centre . It proceeded to add, in the immediately following sentence at page 207 of 2010 Guidelines, that These latter type of non-shareholder activities could include detailed planning services for particular operations, management or technical advice (trouble shooting) or in some cases assistance in day to day management . The shareholder activities are thus seen as conceptually distinct from the provision of services. The issuance of corporate guarantee, as long as it is in the nature of shareholder activity, can not, therefore, amount to a provision for services . 34. Undoubtedly, pioneering work done by the OECD, in the field of international taxation, has been judicially recognized worldwide by various judicial forums, including, most notably by Hon ble Andhra Pradesh High Court in the case of CIT VS Visakhapatnam Port Trust [(1983) 144 ITR 146 (AP)]. Their Lordships also referred to Lord Radcliffe s observations in Ostime vs. Australian Mutual Provident Society [ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould have been willing to pay for the activity if performed for it by an independent enterprise or would have performed the activity in-house for itself. If the activity is not one for which the independent enterprise would have been willing to pay or perform for itself, the activity ordinarily should not be considered as an intra-group service under the arm s length principle. 7.7 The analysis described above quite clearly depends on the actual facts and circumstances, and it is not possible in the abstract to set forth categorically the activities that do or do not constitute the rendering of intragroup services. However, some guidance may be given to elucidate how the analysis would be applied for some common types of activities undertaken in MNE groups. 7.8 Some intra-group services are performed by one member of an MNE group to meet an identified need of one or more specific members of the group. In such a case, it is relatively straightforward to determine whether a service has been provided. Ordinarily an independent enterprise in comparable circumstances would have satisfied the identified need either by performing the activity in-house or by having the activity pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f managerial and control (monitoring) activities related to the management and protection of the investment as such in participations . Whether these activities fall within the definition of shareholder activities as defined in these Guidelines would be determined according to whether under comparable facts and circumstances the activity is one that an independent enterprise would have been willing to pay for or to perform for itself. (Emphasis, by underlining, supplied by us) 36. We have noticed that the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations specifically recognizes that an activity in the nature of shareholder activity, which is solely because of ownership interest in one or more of the group members, i.e. in the capacity as shareholder would not justify a charge to the recipient companies . It is thus clear that a shareholder activity, in issuance of corporate guarantees, is taken out of ambit of the group services. Clearly, therefore, as long as a guarantee is on account of, what can be termed as shareholder s activities , even on the first principles, it is outside the ambit of transfer pricing adjustment in respect o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isions. See P.L.R. 9410008 (Dec. 13, 1993). 39 But cf Federal Nat l Mortgage Ass n v. Commissioner, 100 T.C. 541, 579 (1993) (Fannie Mae provided services by buying mortgages). 37. We are in agreement with these views. There can thus be activities which benefit the group entities but these activities need not necessarily be provision for services . The fact that the OECD considers such activities in the services segment does not alter the character of the activities. While the group entity is thus indeed benefited by the shareholder activities, these activities do not necessarily constitute services. There is no such express reference to the benefit test, or to the concept of benefit attached to the activity, in relevant definition clause of international transaction under the domestic transfer pricing legislation. As we take note of these things, it is also essential to take note of the legal position, in India, in this regard. No matter how desirable is it to read such a test in the definition of the international transaction under our domestic transfer pricing legislation, as is the settled legal position, it is not open to us to infer the same. Hon ble Supreme C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of its own to meet such obligations, will rarely be done. The very comparison, between the consideration for which banks issue financial guarantees on behalf of its clients with the consideration for which the corporates issue guarantees for their subsidiaries, is ill conceived because while banks seek to be compensated, even for the secured guarantees, for the financial risk of liquidating the underlying securities and meeting the financial commitments under the guarantee, the guarantees issued by the corporates for their subsidiaries are rarely, if at all, backed by any underlying security and the risk is entirely entrepreneurial in the sense that it seeks to maximize profitability through and by the subsidiaries. It is inherently impossible to decide arm s length price of a transaction which cannot take place in arm s length situation. The motivation or trigger for issuance of such guarantees is not the kind for consideration for which a banker, for example, issue the guarantees, but it is maximization of gains for the recipient entity and thus the MNE group as a whole. In general, thus, the consideration for issuance of corporate guarantees are of a different character altoget ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct of which the guarantees are issued, but are based on the business needs of the entity in question. Even in a situation in which the group entity is sure that the beneficiary of guarantee has no financial means to reimburse it for the defaulted guarantee amounts, when invoked, the group entity will issue the guarantee nevertheless because these are compulsions of his group synergy rather than the assurance that his future obligations will be met. We see no meeting ground in these two types of guarantees, so far their economic triggers and business considerations are concerned, and just because these instruments share a common surname, i.e. guarantee , these instruments cannot be said to be belong to the same economic genus. Of course, there can be situations in which there may be economic similarities, in this respect, may be present, but these are more of an exception than the rule. In general, therefore, bank guarantees are not comparable with corporate guarantees. 41. As evident from the OECD observation to the effect In contrast, if for example a parent company raises funds on behalf of another group member which uses them to acquire a new company, the parent company wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of a corporate guarantee clearly falls in the second category as no independent enterprise would issue a guarantee without an underlying security as has been done by the assessee. We may, in this regard, refer to the observations made by Hon ble High Court, speaking through Hon ble Justice Easwar (as he then was), as follows: 16. The Organization for Economic Co-operation and Development ( OECD , for short) has laid down transfer pricing guidelines for Multi-National Enterprises and Tax Administrations. These guidelines give an introduction to the arm s length price principle and explains article 9 of the OECD Model Tax Convention. This article provides that when conditions are made or imposed between two associated enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises then any profit which would, but for those conditions, have accrued to one of the enterprises, but, by reason of those conditions, if not so accrued, may be included in the profits of that enterprise and taxed accordingly. By seeking to adjust the profits in the above manner, the arm s length principle of pricing follows the approach ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er from those which would have been adopted by independent enterprises behaving in a commercially rational manner and the actual structure practically impedes the tax administration from determining an appropriate transfer price. An example of this circumstance would be a sale under a long-term contract, for a lump sum payment, of unlimited entitlement to the intellectual property rights arising as a result of future research for the term of the contract (as previously indicated in paragraph 1.10). While in this case it may be proper to respect the transaction as a transfer of commercial property, it would nevertheless be appropriate for a tax administration to conform the terms of that transfer in their entirety (and not simply by reference to pricing) to those that might reasonably have been expected had the transfer of property been the subject of a transaction involving independent enterprises. Thus, in the case described above it might be appropriate for the tax administration, for example, to adjust the conditions of the agreement in a commercially rational manner as a continuing research agreement. 1.38 In both sets of circumstances described above, the character of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the banks are not willing to extend those subsidiaries loans on the same terms as without a guarantee. Such a guarantee transaction can only be, and is, motivated by the shareholder, or ownership considerations. No doubt, under the OECD Guidance on the issue, an explicit support, such as corporate guarantee, is to be benchmarked and, for that purpose, it is in the service category but that occasion comes only when it is covered by the scope of international transaction under the transfer pricing legislation of respective jurisdiction. The expression provision for services in its normal or legal connotations, as we have seen earlier, does not cover issuance of corporate guarantees, even though once a corporate guarantee is covered by the definition of international transaction , it is benchmarked in the service segment. In view of the above discussions, OECD Guidelines, as a matter of fact, strengthen the claim of the assessee that the corporate guarantees issued by the assessee were in the nature of quasi capital or shareholder activity and, for this reason alone, the issuance of these guarantees should be excluded from the scope of services and thus from the scope of internat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... service were to cover issuance of guarantee in general, there could not have been an occasion to give such hedged advice. This will be stretching the things too far to suggest that just because when guarantees are included in the international transactions, these guarantees are included in service segment in contradistinction with other heads under which international transactions are grouped, the guarantees should be treated as services, and, for that reason, included in the definition of international transactions. That is, in our considered view, purely fallacious logic. In our considered view, under Section 92 B, corporate guarantees can be covered only under the residuary head i.e. any other transaction having a bearing on the profits, income, losses or assets of such enterprise . It is for this reason that Section 92 B, in a way, expands the scope of international transaction in the sense that even when guarantees are issued as a shareholder activity but costs are incurred for the same or, as a measure of abundant caution, recoveries are made for this non chargeable activity, these guarantees will fall in the residuary clause of definition of international transactions und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, which are stated to be included in the scope of expression international transactions by the virtue of clause (a) and (b) of Explanation to Section 92 B, are transactions with regard to purchase, sale, transfer, lease or use of tangible and intangible properties. These transactions were anyway covered by transactions in the nature of purchase, sale or lease of tangible or intangible property . The only additional expression in the clarification is use as also illustrative and inclusive descriptions of tangible and intangible assets. Similarly, clause (d) deals with the provision of services, including provision of market research, market development, marketing management, administration, technical service, repairs, design, consultation, agency, scientific research, legal or accounting service which are anyway covered in provision for services and mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises . That leaves us with tw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ough a possibility, is not a certainty. In view of the discussions above, the scope of the capital financing transactions, as could be covered under Explanation to Section 92 B read with Section 92B(1), is restricted to such capital financing transactions, including inter alia any guarantee, deferred payment or receivable or any other debt during the course of business, as will have a bearing on the profits, income, losses or assets or such enterprise . This pre-condition about impact on profits, income, losses or assets of such enterprises is a pre-condition embedded in Section 92B(1) and the only relaxation from this condition precedent is set out in clause (e) of the Explanation which provides that the bearing on profits, income, losses or assets could be immediate or on a future date. These guarantees do not have any impact on income, profits, losses or assets of the assessee. There can be a hypothetical situation in which a guarantee default takes place and, therefore, the enterprise may have to pay the guarantee amounts but such a situation, even if that be so, is only a hypothetical situation, which are, as discussed above, excluded. When an assessee extends an assistance t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ), but if the scope of the provision was indeed enlarged, as is our opinion, the question that really needs to be addressed whether, given the peculiar nature and purpose of transfer pricing provision, is it at all a workable idea to enlarge the scope of transfer pricing provisions with retrospective effect There can be little doubt about the legislative competence to amend tax laws with retrospective effect, and, in any case, we are not inclined to be drawn into that controversy either. On the issue of implementing the amendment in transfer pricing law with retrospective effect, in the case of Bharti Airtel (supra), a coordinate bench had observed as follows: 34. There is one more aspect of the matter. The Explanation to Section 92 B has been brought on the statute by the Finance Act 2012. If one is to proceed on the basis that the provisions of Explanation to Section 92 B enlarges the scope of Section 92 B itself, even as it is modestly describe d as clarificatory in nature, it is an issue to be examined whether an enhancement of scope of this anti avoidance provision can be implemented with retrospective effect. Undoubtedly, the scope of a charging provision can be enlarged ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d not be made under section 40(a)(i) since the taxability was under the provisions which were amended, post the payment having been made by the assessee, with retrospective effect. All this only shows that even when law is specifically stated to have effect from a particular date, its being implemented in a fair and reasonable manner, within the framework of judge made law, may require that date to be tinkered with. When a proviso is introduced with effect from a particular date specified by the legislature, the judicial forums, including this Tribunal, at times read it as being effect from a date much earlier than that too. One such case, for example, is CIT Vs Ansal Landmark Township Pvt Ltd [(2015) 377 ITR 635 (Delhi)] wherein Hon ble Delhi High Court confirmed the action of the Tribunal in holding that the provision, though stated to be effective from 1st April 2013 must be held to be effective from 1st April 2005. Whether such an exercise can be done in the present case is, of course, something to be examined and our observations should not be construed as an expression on merits of that aspect of matter. Given the fact that the assessee has succeeded on merits in this case, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w of the decision a coordinate bench, in the case of JKT Fabrics Vs DCIT [(2005) 4 SOT 84 (Mum)] and following the Full bench decision of Hon ble AP High Court in the case of CIT Vs BR Constructions [(1993) 202 ITR 222 (AP)], a decision disregarding an earlier binding precedent on the issue is per incurium. Such decisions cannot be basis for sending the matters to special bench since occasion for reference to special bench arises when binding and conflicting judicial precedents from coordinate benches come up for consideration. That was not the case here. All these factors taken together, in our considered view, it was not possible in this case to refer the matter for constitution of a special bench. In any case, whatever we decide is, and shall always remain, subject to the judicial scrutiny by Hon ble Courts above and our endeavor is to facilitate and expedite, within our inherent limitations, that process of such a judicial scrutiny, if and when occasion comes, by analyzing the issues in a comprehensive and holistic manner. 50. In the light of the detailed discussions above, and for the detailed reasons set out above, we uphold the grievance raised by the assessee. The impugn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. Respectfully following these views, we remit the matter to the file of the Assessing Officer with the direction to adjudicate the matter afresh in the light of, inter alia, the directions given for the assessment years 2002-03 which has been followed in Assessment Year 2005-06 as well. Ordered, accordingly. 55. Ground no.4 is thus allowed for statistical purposes in the terms indicated above. 56. In ground no.5, the assessee has raised the following grievance against the Assessing Officer s including excise duty, sales tax, insurance and freight while calculating the amount of total turnover for the purpose of working out deduction u/s. 10B of the Act. 57. With the consent of the parties, this issue is remitted to the file of the Assessing Officer for fresh adjudication on merits by way of a speaking order, in accordance with the law and after giving yet another opportunity of hearing to the assessee. The assessee will be at liberty to raise all such factual and legal aspects, as he may be advised to. 58. Ground no. 5 is also thus allowed for statistical purpose. 59. In ground no.6, the assessee has raised the following grievance: On appreciation of the facts a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no.7 the assessee has raised the following grievance :- On appreciation of the facts and circumstances of the case, the learned Addl. Commissioner of Income Tax has erred in making addition to the tune of ₹ 1,03,272/- and ₹ 8,83,622/- pertaining to telephone and electricity expenses of Managing Director respectively, claimed by the appellant company as revenue expenditure. The action of the Learned Addl. Commissioner of Income Tax is contrary to the facts and law and deserves to be deleted. 64. On this issue also, the learned representatives fairly agree that the issue is covered by the order of co-ordinate bench for the assessment year 2005-06 in the sense that, on the same lines, while disallowance in respect of electricity expenses of ₹ 8,83,622/- is to be confirmed, the disallowance of telephone expenses to the tune of ₹ 1,03,272/- is to be deleted. In this issue also, we see no reasons to deviate from the stand taken by the co-ordinate bench in the earlier year and respectfully following the same, we delete the disallowance of telephone expenses and confirm the disallowance of electricity expenses as above. To the limited extent of deleting t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the same are therefore distinguishable from the facts of the assessee s case. The decision of Hon ble ITAT Pune B Bench in the case of Sudarshan Chemical Industries Ltd. vs. Assistant Commissioner of Income-tax, 110 ITD 171 (Pune) is directly on this issue and the Hon ble Tribunal in the said decision has held as under : The expression a know-how, a patent, a copy right and a trademark , are examples of intellectual property , or a license acquired in respect of such a property, are all intangible assets under clause (ii) of Section 32(1). In view of the discussion made above, explaining the nature and scope of the ERP implementation and the software used for this purpose, there is no doubt that the R/3 software and a license to use this software were both intangible assets within the meaning of clause (ii) of Section 32(1) In view of the above, the disallowance of ₹ 51,22,143/- proposed by the AO as a result of treating the said amount of ₹ 1,18,63,712/- as capital expenditure and allowing depreciation @ 60% there on is hereby confirmed. 68. The assessee is aggrieved and is in appeal before us. 69. Having heard the rival contentions and having pe ..... X X X X Extracts X X X X X X X X Extracts X X X X
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