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Micro Ink Limited Versus Additional Commissioner of Income Tax Vapi Range, Vapi

2015 (12) TMI 143 - ITAT AHMEDABAD

Transfer pricing adjustment - adjustment being notional value of excess credit period allowed by the assessee to its US based associated enterprise, i.e. Micro Inks USA, in respect of sale of semi finished goods, ingredients and raw materials - Held that:- 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 st .....

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l Representative’s reliance on Aztec decision (2007 (7) TMI 50 - ITAT BANGALORE ) 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 adju .....

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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 .....

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the ‘provision for services’ under the definition of ‘international transaction’ under section 92 B of the Act. We have also held, taking note of the insertion of Explanation to Section 92B of the Act, that the issuance of corporate guarantees is covered by the residuary clause of the definition under section 92 B of the Act but since such issuance of corporate guarantees, on the facts of the present case, did not have “bearing on profits, income, losses or assets”, it did not constitute an int .....

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s for inter division transfer and adjusting the same to the business income of various units as under while granting deduction u/s. 80IB and 10B - Held that:- The issue is covered in favour of the assessee, by the orders of the co-ordinate bench in assessee’s own cases for the assessment years 2002-2003 and 2005-06, to the extent that the matter is required to be remitted to the file of Assessing Officer for fresh adjudication in the light of the directions set out in those orders. We are, thus, .....

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s 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 expense .....

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point and decline to interfere in the matter. - Decided against assessee. - I.T.A. No.: 2873/Ahd/10 - Dated:- 27-11-2015 - Pramod Kumar AM and S S Godara JM For The Appellant : M K Patel, For The Respondent : B Y Chavan ORDER Per Pramod Kumar, AM: 1. By way of this appeal, the assessee appellant has challenged correctness of the order dated 5th August 2010 passed by the Assessing Officer under section 143(3) read with section 144C of the Income Tax Act, 1961, for the assessment year 2006-07. 2. .....

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sessee before us is a leading ink manufacturer in India. The assessee has a wholly owned subsidiary in Austria, by the name of Micro Inks GmbH which, in turn, owns Micro Ink Co USA. This step down subsidiary (Micro USA, in short) manufactures printing ink by using the base material supplied by the assessee. The inks meant for US markets thus are mixed, and given finishing touches, by Micro USA. The assessee company also has trading subsidiaries in China and Hong Kong. During the relevant previou .....

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e TPO being of the view that in a third party situation, such an allowance of use of money would have been possible only upon charge of a cost , the TPO required the assessee to show cause as to why ALP adjustment in respect of excess credit period of 56 days not be made, 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 t .....

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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 warranted in respect o, what was term .....

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ment, before the DRP but without any success. The Assessing Officer, therefore, proceeded to make the addition of ₹ 2,10,95,346, aggrieved by which the assessee is in appeal before us. 5. We find that this issue is covered, in favour of the assessee, by a decision of the coordinate bench in assessee s own case for the assessment year 2002-03 [reported as Micro Inks Ltd Vs ACIT [(2013)144 ITD 610 (Ahd)]. While deleting similar addition, the coordinate bench had observed as follows: 20. The .....

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s levied on the similar credit period allowed to those independent parties but not to Micro USA. The question of excess credit period arises only when there is a standard credit period for the product sold at the same price and the credit period allowed to the associated enterprises is more than the credit period allowed to independent enterprises. That is not the case here. The credit period for finished goods cannot be compared with credit period for unfinished goods and raw materials, and in .....

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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 .....

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e is squarely covered by the aforesaid decision, he submits that the aforesaid decision is severely flawed as no matter what is the goods sold, a credit period is a credit period . It is also submitted that the credit period for sale of raw material to an independent manufacturer would be lower as the supplier does not have to factor the lead time for the sale of finished goods by the manufacturer and that the supplier is entitled to receipt of payment immediately on delivery irrespective of whe .....

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cannot be deleted and that unless the ALP submitted by the taxpayer is specifically accepted, the appellate authorities, on the basis of material available on record have to determine ALP themselves. 7. We find that, as evident from audit report on form 3CEB (pages 39 to 52 of the paper-book), the arm s length price of exports to the AEs, including Micro USA, has been determined on the basis of the transactional net margin method (TNMM). By way of a note at page 51, it is specifically stated tha .....

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, inter alia, observed as follows: Where the Assessing Officer/TPO accepts the comparables adopted by the assessed, with or without making adjustments, as a bundled transaction, it would be illogical and improper to treat AMP expenses as a separate international transaction, for the simple reason that if the functions performed by the tested parties and the comparables match, with or without adjustments, AMP expenses are duly accounted for. It would be incongruous to accept the comparables and d .....

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rs 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 adequately compensated and, therefore, no transfer pricing adjustment is required. In case we treat the AMP expenses in case 2 as ₹ 501-, i.e. identical as case 1 and AMP of ₹ 100 as a separate transaction, the position in case 2 would be: Particulars Case .....

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will vitiate the picture, inasmuch as what has already been factored in the TNMM analysis, by taking operating profit figure which incorporate financial impact of the excess credit period allowed, will be adjusted again separately as well. Of course, in the example used by Hon ble Delhi High Court, the AMP expenses are deductibles in computation of operating profit but that does not make any material difference because the interest levy for late realization of debtors, being inextricably connec .....

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elf has been accepted as reasonable under the TNMM, there cannot be an occasion to make adjustment for notional interest on delayed realization of debtors. One can understand separate adjustment for excess credit period when the arm s length price for exports has been benchmarked on the CUP basis but not in 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 .....

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cro 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-à-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 comp .....

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length price and unless there is something, more than sweeping generalizations as implicit in the arguments before us, to at least indicate that such a delay in realization of debts in similar transactions is absent in arm s length transactions, these adjustments cannot be made even when sales are benchmarked on CUP basis. The delay in realization of debts, resulting in a continuing debit balance, is not a standalone international transaction per se, but is a result of the international transac .....

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priately, naivety. The real life trade and commerce is seldom so simple. It is not at all necessary that a payment is to be made as soon as goods or services are delivered. A call is to be taken by the vendor, in consultation with its client and based on the business exigencies, as to what should be the terms on which payments for the supplies is to be made. It is a harsh commercial reality that immediate payments are more of exceptions rather than rule, and more so in a complex case in which th .....

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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-à-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 .....

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me into existence, and the terms and conditions, including terms of payment, on which the said commercial transaction has been entered into. In this view of the matter, learned Departmental Representative s reliance on Aztec decision (supra) 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 coordin .....

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t material facts are like this. During the course of the proceedings before the Transfer Pricing Officer, it was noted that the assessee has issue various corporate guarantees on behalf of its associated enterprises, i.e. subsidiaries. The details of these guarantees are as follows: S.No. Financial Institution Guarantee Amount Loan o/s. as on 31.03.05 Loan o/s. as on 31.03.06 Average of o/s. Amount (a) (b) (c) (d) (e) (f) 1. Bank Leumi-USA(STL) $3,000,000 $3,000,000 $3,000,000 $3,000,000 2. UTI .....

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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 e .....

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ntees given for the purpose of computing cost but the fact remains that there was cost to guarantor. In view of above discussions, guarantee fees is calculated @ 2%, which is prevalent market rate for guarantee fees. 15. It was on this basis that an ALP adjustment of ₹ 2,23,62,603 was proposed on account of notional charges for corporate guarantees issued by the assessee. The assessee did raise an objection against this proposed adjustment by the TPO but without any success. While rejectin .....

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aggrieved and is in further appeal before us. 16. Learned counsel for the assessee submits that the transaction of issuance of a corporate guarantee, in favour of an AE, does not constitute an international transaction within the meanings of Section 92 B of the Act. Our attention is invited to the transfer pricing report which categorically states that the guarantees issued by the assessee are said to be in the form of corporate guarantees/ quasi capital and not in the nature of services and tha .....

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earned counsel then takes us through a number of decisions 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 .....

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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 behaved in the past. Learned counsel submits that none can lay down the norms now and expect the assessee to have complied with these norms in the past. Learned counsel then points out that while tax legislation in general may have retrospect .....

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tive effect. He submits that in the said case, the coordinate bench did note that Undoubtedly, the scope of a charging provision can be enlarged with retrospective effect, but an anti-avoidance measure, that the transfer pricing legislation inherently is, is not primarily a source of revenue as it mainly seeks compliant behaviour from the assessee vis-à-vis certain norms, and these norms cannot be given effect from a date earlier than the date norms are being introduced , yet it did not a .....

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n observations in Hon ble Supreme Court s judgment in the case of CIT Vs Vatika Townships Pvt Ltd [(2014) 367 ITR 466 (SC)] and relianced is placed on the same for presumption in favour of laws being prospective in nature. 17. Learned Departmental Representative, however, vehemently relied upon the stand of the Assessing Officer which has been approved by the Dispute Resolution Panel. He begins by inviting our attention to the fact that a coordinate bench of this Tribunal, in the case of Everest .....

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s 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 H .....

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the expression international transaction shall include......capital financing, including any type of long term or short term borrowing, lending or guarantee, purchase or sale of marketable securities, or any type of advance payments or deferred payments or receivable or any other debt arising during the course of business . We are then taken through the Memorandum to the Finance Act 2012 in support of the stand that the amendment in law was introduced as (a) the definition of international tran .....

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to Hon ble Supreme Court s judgment in the case of Vatika Townships (supra), he submits that it is categorically stated in the said judgment that the legislative amendment modifying the accrued rights, and imposing obligations or duties or attaching a new disability have to be treated as prospective unless the legislative amendment is clearly to give the enactment a retrospective effect and unless the amendment is for the purpose of supplying an obvious omission in a former legislation or to exp .....

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o be clarificatory nor there was any material to suggest that it was so intended by the legislature. We were thus urged to hold that the amendment in Section 92 B was retrospective in effect and in law. We were then taken through the decisions of 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 .....

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or 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 Bombay High Court has held the corporate guarantee to be an i .....

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y, Hon ble Bombay High Court. We are taken through the text of the judgment to demonstrate this point. A reference is then made to Hon ble Bombay High Court s judgment in the case of CIT vs. Sudhir Jayantilal Mulji [(1995) 214 ITR 154 (Bom)], in support of the proposition that a judicial precedent is only an authority for what it actually decides and not what may come to follow from some observations which find place therein. It is pointed out that the propositions which are assumed by the Court .....

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y or proper to indicate the application of section 2(47) as amended to the present proceedings. The application would depend upon the facts on record or those may be permitted to be brought on record . It was also pointed out that all issues were left open as evident from the observation to the effect The petitioner may well contend that the amended definition makes no difference it being clarificatory in nature. The provisions thereof must, therefore, be deemed always to have been in existence. .....

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nsidered 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 t .....

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o the learned counsel, are normally deeming provisions to check and control the avoidance of tax. A reference is then made to the introduction of General Anti Avoidance Rules in Chapter XA of the Act, and the circumstances leading to its deferral were highlighted. It was submitted that transfer pricing provisions belong to the same genus and what holds good for GAAR also applies to the transfer pricing. Elaborate arguments are then made on the Tribunal decisions cited by the learned Departmental .....

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come within the ambit of international transaction, the service should be such that it has a bearing on profits, incomes, losses or assets of the enterprise . That condition, according to the learned counsel, is admittedly not satisfied on the facts of this case. Without prejudice to this argument, learned counsel invites our attention to information furnished by the Central Board of Direct Taxes, in response to a requisition made under the Right to Information Act, 2005, which is published by t .....

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s as to why this issue should not be sent to a larger bench, none of the parties before us favoured this idea. Learned counsel submits that there is only decision on the issue is Bharti Airtel decision (supra) which holds that the issuance of corporate guarantee in a situation in which no costs are involved, and this decision has been followed in a number of other cases as well, such as Redington India Ltd (supra), Videocon Industries Limited (supra). According to the learned counsel, there are .....

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ann.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 contra .....

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s (supra) and Everest Kanto (supra). No useful purpose will be served, according to the learned Departmental Representative, by referring an issue, on which higher judicial forums have adjudicated, to a larger bench of this Tribunal. We are thus urged to follow the decisions of Hon ble Courts above as also subsequent decisions, following these precedents, of the coordinate benches. 20. We have heard the rival contentions, perused the material on record and duly considered facts of the case in th .....

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e an international transaction first. The expression international transaction is a defined expression. Section 92 B defines the expression international transaction as follows: 92 B - Meaning of international transaction (1) For the purposes of this section and sections 92, 92C, 92D and 92E, international transaction means a transaction between two or more associated enterprise s, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible proper .....

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tion 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 .....

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ship or the provision of use of rights regarding land use, copyrights, patents, trademarks, licences, franchises, customer list, marketing channel, brand, commercial secret, know -how, industrial property right, exterior design or practical and new design or any other business or commercial rights of similar nature; (c) capital financing, including any type of long -term or short -term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or .....

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fit, income, losses or assets of such enterprises at the time of the transaction or at any future date; (ii) the expression intangible property shall include - (a) marketing related intangible assets, such as, trademarks, trade names, brand names, logos; (b) technology related intangible assets, such as, process patents, patent applications, technical documentation such as laboratory notebooks, technical know -how; (c) artistic related intangible assets, such as, literary works and copyrights, m .....

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tionship, open purchase orders; (g) contract related intangible assets, such as, favourable supplier, contracts, licence agreements, franchise agreements, non -compete agreements; (h) human capital related intangible assets, such as, trained and organised work force, employment agreements, union contracts; (i) location related intangible assets, such as, leasehold interest, mineral exploitation rights, easements, air rights, water rights; (j) goodwill related intangible assets, such as, institut .....

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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 p .....

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facility provided or to be provided to any one or more of such enterprises. Section 92B (2), covering a deeming fiction, provides that even a transaction with non AE in a situation in which such a transaction is de facto controlled by prior agreement with AE or by the terms agreed with the AE. 26. Let us now deal with the Explanation, inserted with retrospective effect from 1st April 2002 i.e. right from the time of the inception of transfer pricing legislation in India, which was brought on the .....

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ries of transactions have been clarified to have been included in the definition of international transactions . 28. The first two categories of transactions, 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 2 (a) above which covered transacti .....

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nyway 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 a .....

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f 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 such as to have beating on profits, incomes, losses or assets of such enterprise. In other words, in a situation in which a transaction has no bearing on profits, incomes, losses or assets of such enterprise, the transaction will be outside the ambit of expression international transaction . This aspect of the matter is further highligh .....

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the mere fact that impact is not immediate, but on a future date, would not take the transaction outside the ambit of international transaction . It is also important to bear in mind that, as it appears on a plain reading of the provision, this exclusion clause is not for contingent impact on profit, income, losses or assets but on future impact on profit, income, losses or assets of the enterprise. The important distinction between these two categories is that while latter is a certainty, and .....

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hall include capital financing, including any type of long -term or shortterm borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business . In view of the discussions above, the scope of these 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 .....

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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 i .....

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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. One may have also have a situation in which there is a receivable or any other debt during the course of business and yet these receivables may not have any bearing on its profits, income, losses or assets, for example, when these receivables are out of cost free funds and these debit balance .....

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it is outside the ambit of international transaction under section 92B (1) of the Act. 33. In any event, the onus is on the revenue authorities to demonstrate that the transaction is of such a nature as to have bearing on profits, income, losses or assets of the enterprise, and there was not even an effort to discharge this onus. Such an impact on profits, income, losses or assets has to be on real basis, even if in present or in future, and not on contingent or hypothetical basis, and there ha .....

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t in the case of Everest Kanto (supra), it is necessary to appreciate the fact the assessee was charging a .5% commission 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 .....

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less, 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 Court was by the Commissioner, and not by the assessee, and, therefore, the grievance against the issuance of corporate guarantee being held to be an international transaction could not .....

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of corporate guarantee, even in a case in which neither any guarantee commission is charged nor any costs are incurred, is an international transaction. In any case, there is nothing in the operative portion which even remotely suggests that Their Lordships had any occasion to address themselves to the question as to whether the issuance of corporate guarantee amounts to international transaction. The operative portion of the judgment is reproduced below for ready reference: ……&hel .....

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er commission could have been justified. In the present case, it is assessee company that is issuing Corporate Guarantee to the effect that if the subsidiary AE does not repay loan availed of it from ICICI, then in such event, the assessee would make good the amount and repay the loan. The considerations which applied for issuance of a Corporate guarantee are distinct and separate from that of bank guarantee and accordingly we are of the view that commission charged cannot be called in question, .....

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roposition 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 f .....

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tition, is relevant. The effect of the amendment would have to be considered. It cannot be brushed aside. 214. Section 2(47), as amended, even on a cursory glance raises various issues. It is necessary to note four preliminary aspects of Explanation 2 to section 2(47). Firstly, as the opening words, For the removal of doubts it is hereby clarified that …... , indicate it is a clarificatory amendment. Secondly, it is an inclusive definition as is evident from the words transfer includes... .....

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ct or indirect. (b) Absolute or conditional. (c) Voluntary or involuntarily. (d) By amendment or otherwise. (iv) A non-obstante provision regarding the nature of a transfer. If an act, arrangement, transaction etc. constitutes a transfer as defined in the section it would be so notwithstanding the transfer of rights having been categorised as being effected or dependent upon or flowing from the transfer of a share or shares of a company registered or incorporated outside India. 216. Two aspects .....

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onal, voluntary or involuntary. It may be by way of an agreement or otherwise. Further, the concluding words constitute a non-obstante provision. It provides that the transfer contemplated therein would be notwithstanding that it has been characterised as being effected 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 .....

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uses 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 on record or those may be permitted to be brought on .....

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Parliament. On the other hand, it may be equally open to the Revenue to contend that certain ingredients of a transfer were not considered by the Revenue itself in the proceedings relating to Vodafone s case on account of the Revenue itself not having appreciated or realized the actual ambit of the term transfer which are now clarified by the amendment. Even assuming that the Revenue cannot re-open the Vodafone case, it cannot be barred from relying upon the true ambit of the term transfer in f .....

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oceedings from the channel provided 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 (Emphasis, by underlining, supplied by us) 27. Revenue s emphasis is on the last two sentences in paragraph no 213 which state that The effect of the amendment would have to be considered. It cannot be brushed aside but in doing so what it overlooks is the subsequent observations highlighted above which .....

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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 amendme .....

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connotations of transfer . As learned counsel rightly contends, in the light of Hon ble Bombay High Court s judgment in the case of Sudhir Jayantilal Mulji (supra) ratio of a decision alone is binding, because a case is only an authority for what it actually decides and not what may come to follow from some observations which find place therein . In view of these discussions, the reliance placed on Vodafone India Services (supra) is also equally misplaced and devoid of legally sustainable merits .....

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ore this Court Their Lordships further noted that A decision of this Court takes its colour from the questions involved in the case in which it is rendered and, while applying the decision to a later case, the Courts must carefully try to ascertain the true principle laid down by the decision of this Court and not to pick out words or sentences from the judgment, divorced from the context of the questions under consideration by this Court, to support their reasoning It was also recalled that in .....

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ervices (supra) decision. We reject this approach. 28. For the reasons set out above, learned Departmental Representative s reliance on Hon ble Bombay High Court s judgments in the cases of Everest Kanto (supra) and Vodafone India Services (supra) is wholly misplaced and devoid of any merits. As for co-ordinate bench decision in the case of Hindalco Industries (supra), all it does is to follow the Everest Kanto decision by Hon ble Bombay High Court, but then, as we have seen earlier, that was a .....

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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 wel .....

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ceive and the fees that the guaranteed group company would be willing to pay depending on the prevailing conditions within financial markets in practice . 30. However, while dealing with this aspect of the matter, it is necessary to bear in mind the fact that this judicial precedent, whatever be its worth in the hierarchy of binding judicial precedents in India, does not even deal with the fundamental question as to whether issuance of a corporate guarantee is an international transaction at all .....

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s a sequel to this Tax Court of Canada decision, the transfer pricing legislation was amended, to bring greater clarity on the issue and as a measure of abundant caution, and section 247 (7.1), granting specific exemption to guarantee fees, was introduced. This amendment is as follows: (7.1) Subsection (2) does not apply to adjust an amount of consideration paid, payable or accruing to a corporation resident in Canada (in this subsection referred to as the parent ) in a taxation year of the pare .....

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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 Ca .....

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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 transaction is to be examined on arm s length principle in Canada cannot be a reason enough to hold that it must meet the same in India as well. While the Canadian transfer pricing legislation, as indeed the transfer pricing legislation in many other jurisdictions, does not put any fetters on the nature of transactions between the AEs, so as to be .....

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ehensive coverage, have ended up in a limited scope of the transactions being covered by the arm s length price adjustments for transfer pricing. In any event, as emphasized earlier as well, the decision was in the context of the deduction, and, post this decision, a specific amendment was introduced in the Canadian transfer pricing law to clarify the position that all corporate guarantees issued by the assessee, in support of its subsidiaries, are not necessarily international transactions. Rev .....

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activities in the context of corporate guarantees which provides conceptual justification for exclusion of corporate guarantees, under certain conditions, from the scope of transfer pricing adjustments. Taking note of these proposed amendments, Transfer Pricing and Intra Group Financing - by Bakker & Levvy, IBFD publication (ISBN- 978-90-8722-153-9) observes that Proposed subsection 247(7.1) of the ITA provides that the transfer pricing rules will not apply to guarantees provided by Canadian .....

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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 .....

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at their own cost and risk. 104. Accordingly to the extent that a guarantee substitutes for the investment of the equity needed to allow a subsidiary to be self-sufficient and raise the debt funding it needs, the costs of the guarantee (and the associated risk) should remain with the parent company providing the guarantee. 33. On a conceptual note, thus, there is a valid school of thought that the corporate guarantees can indeed be a mode of ownership contribution, particularly when, as is ofte .....

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this context, that the case of the assessee has all along been, as noted in the assessment order itself, that said guarantees were in the form of corporate guarantees/ quasi capital and not in the nature of any services . In other words, these guarantees were specifically stated to be in the nature of shareholder activities. The assessee s claim of the guarantees being in the nature of quasi capital, and thus being in the nature of a shareholder s activity, is not rejected either. The concept of .....

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the shareholder activity with broader term stewardship activity and thus highlighting narrow scope of shareholder activity, it states 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 includ .....

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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 [(1960) 39 ITR 210 (HL)], which has described the language employed in the models developed by the OECD as the international tax language . The work done by OECD in the field of trans .....

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scope for parallel or conflicting guidance by such forums. Legislation is an exclusive domain of the sovereign, and, therefore, as long as an area is adequately covered by the work of legislation, things like guidance of the OECD, or for that purpose any other multilateral forum, are not decisive. While we are alive to the school of thought that when the domestic transfer pricing regulations do not provide any guidelines, it may have to be decided having regard to international best practices, .....

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eed been provided, and, second- if the answer to the first question is in positive, that charge to these services should be at an arm s length price. Dealing with the first question, which is relevant for the present purposes, these Guidelines (2010 version) state as follows: 7.6 Under the arm s length principle, the question whether an intra-group service has been rendered when an activity is performed for one or more group members by another group member should depend on whether the activity p .....

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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 servic .....

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t. For example, an intra-group service would normally be found where an associated enterprise repairs equipment used in manufacturing by another member of the MNE group. 7.9 A more complex analysis is necessary where an associated enterprise undertakes activities that relate to more than one member of the group or to the group as a whole. In a narrow range of such cases, an intra-group activity may be performed relating to group members even though those group members do not need the activity (a .....

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the 1979 Report. Stewardship activities covered a range of activities by a shareholder that may include the provision of services to other group members, for example services that would be provided by a coordinating centre. These latter types of non-shareholder activities could include detailed planning services for particular operations, emergency management or technical advice (trouble shooting), or in some cases assistance in day-to-day management. 7.10 The following examples (which were desc .....

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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 would generally be regarded as providing a service to the group member. The 1984 Report also mentioned costs of 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 Gu .....

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re 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 of arm s length price. It is essential to appreci .....

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ial value that enhances the recipient s commercial position, or that may be reasonably anticipated to do so . The expression activity , in turn is defined, as including the performance of functions; the assumption of risks; the use by a rendered of tangible or intangible property or other resources capabilities or knowledge (including knowledge of and ability to take advantage of a particularly advantageous situation or circumstances); and making available to the recipient any property or other .....

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ated that a guarantee is not a service. The following observations, at pages 114, are important: The position that guarantees are services has been discredited by the courts with good reason38. Guarantee fees do not represent payments for services any more than payments with respect to other financial instruments constitute payment for services39. A guarantor does not arrange financing for the debtor, but merely executes a financial instrument in its favour. 38See. e.g., Centel Communications Co .....

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es). 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 th .....

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le Supreme Court, in the case of Tarulata Shyam Vs CIT [(1977) 108 ITR 351 (SC)], took note of the situation before Their Lordships in these words: We have given anxious thoughts to the persuasive arguments of Mr Sharma. His arguments, if accepted, will certainly soften the rigour of this extremely drastic provision and bring it more in conformity with logic and equity . However, Their Lordships declined to do so on the ground that There is no scope for importing into the statute the words which .....

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cost or expense sharing arrangements but that is a different aspect of the matter altogether. In the absence of benefit test being mentioned in the definition for the present purposes, we cannot infer the same. 38. One more thing which is clearly discernable from the above discussions is that the tests recognized by these guidelines are interwoven twin tests of benefit and arm s length. Benefit test implies the recipient group member should get economic or commercial value to enhance its commerc .....

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th test is concerned, it presupposes that such a transaction is possible in arm s length situation. However, in a situation in which the subsidiary does not have adequate financial standing of its own and is inadequately capitalized, none will guarantee financial obligations of such a subsidiary. 39. The issuance of financial guarantee in favour of an entity, which does not have adequate strength of its own to meet such obligations, will rarely be done. The very comparison, between the considera .....

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nd 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 .....

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business entity in case they are unable to do so. By providing a guarantee, a bank offers to honor related payment to the creditors upon receiving a request. This requires that bank has to be very sure of the business or individual to whom the bank guarantee is being issued. So, banks run risk assessments to ensure that the guaranteed sum can be retrieved back from the business. This may require the business to furnish a security in the shape of cash or capital assets. Any entity that can pass t .....

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d realizing it from the underlying security and the client. Even when such guarantees are backed by one hundred percent deposits, the bank charges a guarantee fees. In a situation in which there is no underlying assets which can be realized by the bank or there are no deposits with the bank which can be appropriated for payment of guarantee obligations, the banks will rarely, if at all, issue the guarantees. Of course, when a client is so well placed in his credit rating that banks can issue him .....

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f 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 guar .....

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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 would generally be regarded as providing a service to the group member , it is also to be clear that when the corporate guarantees are issued for the purpose of subsidiaries raising funds for acquisitions by such subsidiaries, these guarantees will be deemed to be services to the subsidiaries, and, as a corolla .....

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at the details of corporate guarantees would show, these guarantees were issued to various banks in respect of the credit facilities availed by the subsidiaries from these banks. The guarantees were prima facie in the nature of shareholder activity as it was to provide, or compensate for lack of, core strength for raising the finances from banks. No material, indicating to the contrary, is brought on record in this case. Going by the OECD Guidance also, it is not really possible to hold that the .....

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length adjustment can be done. 42. As observed by Hon ble Delhi High Court in the case of CIT Vs EKL Appliances Ltd [(2012) 345 ITR 241 (Del)], a re-characterization of a transaction is indeed permissible, inter alia, in a situation (i) where the economic substance of a transaction differs from its form and (ii) where the form and substance of the transaction are the same but arrangements made in relation to the transaction, viewed in their totality, differ from those which would have been adop .....

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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, hav .....

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the arm s length principle, the guidelines provide for recognition of the actual transactions undertaken in paragraphs 1.36 to 1.41. Paragraphs 1.36 to 1.38 are important and are relevant to our purpose. These paragraphs are re-produced below: - 1.36 A tax administration s examination of a controlled transaction ordinarily should be based on the transaction actually undertaken by the associated enterprises as it has been structured by them, using the methods applied by the taxpayer insofar as t .....

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ere are two particular circumstances in which it may, exceptionally, be both appropriate and legitimate for a tax administration to consider disregarding the structure adopted by a taxpayer in entering into a controlled transaction. The first circumstance arises where the economic substance of a transaction differs from its form. In such a case the tax administration may disregard the parties characterization of the transaction and recharacterise it in accordance with its substance. An example o .....

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e arises where, while the form and substance of the transaction are the same, the arrangements made in relation to the transaction, viewed in their totality, differ 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 unlim .....

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erty 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 the transaction may derive from the relationship between the parties rather than be determined by normal commercial conditions as may have been st .....

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lies in the fact that they recognise that barring exceptional cases, the tax administration should not disregard the actual transaction or substitute other transactions for them and the examination of a controlled transaction should ordinarily be based on the transaction as it has been actually undertaken and structured by the associated enterprises. It is of further significance that the guidelines discourage re-structuring of legitimate business transactions. The reason for characterisation of .....

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ransaction, viewed in their totality, differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner. 43. It is thus clear that even if we accept the contention of the learned Departmental Representative that issuance of a corporate guarantee amounts to a provision for service , such a service needs to be re-characterized to bring it in tune with commercial reality as arrangements made in relation to the transaction, viewed in their totality .....

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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 i .....

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is held to be covered by the definition of international transaction, whether in the nature of the shareholder activity or quasi capital or not, ALP determination must depend on what an independent enterprise would have charged for such a transaction. In this light of these discussions, we hold that the issuance of corporate guarantees in question was not in the nature of provision for services and these corporate guarantees were required to be treated as shareholder participation in the subsid .....

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ervice, repairs, design, consultation, agency, and scientific research, legal or accounting service or coordination services. As a matter of fact, even in the Explanation to Section 92 B- which we will deal with a little later, guarantees have been grouped in item c dealing with capital financing, rather than in item d which specifically deals with provision for services . When the legislature itself does not group guarantees in the provision for services and includes it in the capital financing .....

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nd Intra Group Financing - by Bakker & Levvy (ibid) notes that the IRS has issued a non binding Field Service Advice (FSA 1995 WL 1918236, 1 May 1995) stating that, in certain circumstances (emphasis, by underling, supplied by us), a guarantee may be treated as a service . If the natural connotations of a 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 bec .....

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d 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 transact .....

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terprises is relevant only for residuary clause i.e. any other services not specifically covered by Section 92 B. It was also contended that, while rendering Bharti Airtel decision, the Delhi Tribunal did go overboard in deciding something which was not even raised before us. In the written submission, it was stated 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 . That s not factually correct. .....

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p;.. (c) capital financing, including any type of long -term or short -term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business. There is no dispute that this Explanation states that it is merely clarificatory in nature inasmuch as it is for the removal of doubts , and, therefore, one has to proceed on the basis that it does not alter the basic charact .....

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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 .....

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ility 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. 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 .....

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no bearing on profits, incomes, losses or assets of such enterprise, the transaction will be outside the ambit of expression international transaction . This aspect of the matter is further highlighted in clause (e) of the Explanation dealing with restructuring and reorganization, wherein it is acknowledged that such an impact could be immediate or in future as evident from the words irrespective of the fact that it (i.e. restructuring or reorganization) has bearing on the profit, income, losse .....

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, income, losses or assets but on future impact on profit, income, losses or assets of the enterprise. The important distinction between these two categories is that while latter is a certainty, and only its crystallization may take place on a future date, there is no such certainty in the former case. In the case before us, it is an undisputed position that corporate guarantees issued by the assessee to the various banks and crystallization of liability under these guarantees, though a possibil .....

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s 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 .....

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s, and, therefore, it is outside the ambit of international transaction under section 92B (1) of the Act. 45. Before we part with this issue, there are a couple of things that we would like to briefly deal with. 46. The first issue is this. We find that in the case of Four Soft Ltd Vs DCIT [(2011) 142 TTJ 358 (Hyd)], a co-ordinate bench had, vide order dated 9th September 2011, observed as follows: We find that the TP legislation provides for computation of income from international transaction .....

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cannot be compared to a bank guarantee transaction of the Bank or financial institution. 47. However, within less than four months of this decision having been rendered, the Finance Act 2012 came up with an Explanation to Section 92B stating that for the removal of doubts , as we have noted earlier in this decision, clarified that international transactions include, inter alia, capital financing by way of guarantee. This legislative clarification did indeed go well beyond what a coordinate bench .....

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decision that the coordinate bench took in Four Soft case (supra), 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 a .....

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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 with retrospective effect, but an anti-avoidance measure, that the transfer pricing legislation inherently is, is not primarily a source of revenue as it mainly seeks compliant behaviour from the assessee vis-à-vis certain norms, an .....

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nd, as such, could not be included in the provision for services under the definition of international transaction under section 92 B of the Act. We have also held, taking note of the insertion of Explanation to Section 92B of the Act, that the issuance of corporate guarantees is covered by the residuary clause of the definition under section 92 B of the Act but since such issuance of corporate guarantees, on the facts of the present case, did not have bearing on profits, income, losses or asset .....

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ITR 305 (SC)], wherein Their Lordships had, inter alia, observed that the law does not compel a man to do what he cannot possibly perform. The law itself and its administration is understood to disclaim as it does in its general aphorisms, all intention of compelling impossibilities, and the administration of law must adopt that general exception in the consideration of particular cases. It was for this reason that a coordinate bench of this Tribunal, in the case of Channel Guide India Ltd Vs A .....

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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 t .....

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case the matter should have been referred to a larger bench. The parties before us were opposed to the matter being sent for consideration by the special bench, and at least one of the reasons for which the grievance of the assessee is upheld, i.e. guarantees being in the nature of shareholder activity and excludible from the scope of services for that reason alone, is an area which had come up for consideration for the first time. In effect, therefore, there was no conflict on this issue of an .....

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of amendment in the definition of international transaction , the matter was again decided in favour of the assessee by Bharti Airtel decision (supra) on the peculiar facts of that case. The decisions like Everest Kento (supra) and Aditya Birla Minacs Worldwide (supra) were decisions in which the assessee had charged the fees and, for that reason, such cases are completely distinguishable as discussed above. In Prolific s case (supra), as indeed in any other case so far, it was case not the cas .....

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ific s case (supra), an earlier considered decision on the same issue by coordinate bench of equal strength was simply disregarded and that fact takes this decision out of the ambit of binding judicial precedents. We have also noted that in view 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 ear .....

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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 impugned ALP adjustment of ₹ 2,23,62,603, thus stands delet .....

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g study, of the nature of corporate guarantees issued by the assesses, can never be overemphasized. The sweeping generalizations, vague statements and evasive approach in the transfer pricing study reports, which are quite common in most of the transfer pricing reports, cannot do good to a reasonable cause. When judicial calls on the complex transfer pricing issues are to be taken, utmost clarity in the legislative framework and a comprehensive analysis of relevant facts, in the transfer pricing .....

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f various units as under while granting deduction u/s. 80IB and 10B. 53. Learned Representatives fairly agree that the issue is covered in favour of the assessee, by the orders of the co-ordinate bench in assessee s own cases for the assessment years 2002-2003 and 2005-06, to the extent that the matter is required to be remitted to the file of Assessing Officer for fresh adjudication in the light of the directions set out in those orders. We are, thus, urged to remit the matter to the file of th .....

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lia, 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. Wit .....

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the facts and circumstances of the case and law, the Learned Addl. Commissioner of Income Tax has erred in excluding the following items of income while granting deduction u/s. 80IB Amount Rs. Silvassa-I Silvassa-I-I Other Income:- Income from sale of scrap 48,01,099 26,89,679 Discount on purchase of DEPB 1,33,662 1,42,902 Gain on sale of DFRC 1,81,694 5,209 Insurance Claim 2,55,382 4,41,751 Other Operating Income:- Income from DEPB/DFRC 5,82,963 3,68,68,545 60. So far as this ground is concerne .....

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er for fresh adjudication. Learned Departmental Representative does not seriously oppose the matter being remitted to the file of Assessing Officer but relies on the stand of the Assessing Officer. 61. We see no reasons to take any other view of the matter than the view taken by the Co-ordinate bench. Respectfully following the same, as far as the income from sale of scrap to the tune of ₹ 48,01,099/- for Silvassa-I and ₹ 26,89,679/- for Silvassa-II Units, we direct the Assessing Off .....

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he 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 o .....

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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. 65. Ground no.7 is thus partly allowed in the terms indicated above. 66. In ground no.8, 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 out of software expenses to the tune of ₹ 51,22,14 .....

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cense for other software. When the Assessing Officer required the assessee to show cause as to why this expenditure not be treated as capital expenditure, the assessee submitted that the expenses incurred on implementing the SAP software is mainly increasing the efficiency of the assessee- company so far as the financial results are concerned. It was also submission that these expenses do not give enduring benefit and frequent updating of software required. The Assessing Officer, however, did no .....

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missions made by the assessee in this regard have been carefully considered by us and are not found acceptable. With effect from 01.04.2003, computer software has been classified as tangible asset under heading Plant in Appendix-I to the Rules which is entitled to deprecation @ 60%. In the various decisions relied upon by the assessee, the aforesaid change brought with effect from 01.04.2003 in the I.T. Rules has not been considered by the Hon ble Courts and the same are therefore distinguishabl .....

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