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Rain Commodities Ltd. Versus Addl. Commissioner of Income-tax, Range - 3, Hyderabad. and Dy. Commissioner of Incometax, Circle – 3 (1) , Hyderabad Versus Rain Commodities Ltd.

2016 (1) TMI 936 - ITAT HYDERABAD

Transfer pricing adjustment - bench marking technique - Held that:- The assessee facilitated the acquisition of CII Carbon LLC by RCUSA by lending loan to its wholly owned enterprises. The assessee has taken the decision to make investment in its AE either on share capital or lending loan using its business expediency. Since, it had made the decision to make loan to its AE. By virtue of amendment to section 92B, it is international transaction. Once it is considered as international transaction, .....

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venue’s appeal are treated as allowed for statistical purposes. - ITA No. 157/Hyd/2014, ITA No. 276/Hyd/2014 - Dated:- 4-12-2015 - SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER For The Assessee : Shri Deepak Chopra and Miss Manasvani Baj Pai For The Revenue : Shri Mohan Singh Singhania ORDER PER S. RIFAUR RAHMAN, A.M.: The cross appeals of the assessee and revenue are filed against the order of the CIT(A)-IV, Hyderabad, dated 13/12/2013. These appeals are dis .....

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9/2011. The AO also disallowed expenses to the extent of ₹ 54,31,383/-. The total income assessed to tax was ₹ 77,16,84,021/-. 3. In brief, the AO had made following disallowances: a) TPO noticed that assessee had lent loan to its AE to the extent of ₹ 104.28 crores. TPO added arm s length interest on the amounts advanced to AE on the basis of internal commercial borrowing and rejected assessee s submission to treat the advance on external commercial borrowing based on LIBOR ra .....

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tions effected. 4. Aggrieved with the assessment order, assessee preferred appeal before the CIT(A). CIT(A) had given relief to the assessee as under: i) ALP Adjustment on interest on advance to AE: CIT(A) had directed AO to adopt LIBOR PLUS for the purpose of TP adjustments in respect of interest on loan advanced to the AE by relying on the coordinate bench of this Tribunal in the case of a) Four Soft Pvt. Ltd., Vs. DCIT, [2014] 149 ITD 732 (Hyd.) and b) Siva Industries & Holdings Ltd. ii) .....

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d loan was to fund the acquisition. 3. Making TP adjustments to the loans provided to WOS without appreciat ing the fact that the same was provided as a measure of commercial expediency. 4. Not appreciat ing the fact that acquisit ion resulted in benefit and expansion of the appellant s business. 5. Discr iminat ing the US WOS in determining the Arm s Length Pr ice (ALP) for loans vis-à-vis similar loans provided by parent company to Indian subsidiar ies in violation of Ar ticle 26 of Ind .....

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tes Department of Just ice for at tempted manipulat ion of the LIBOR and Eur ibor rates and ult imately UBS agreed to pay to regulators. Ld. AR submitted that the assessee through its SPV, RCUSA acquired Juniper Investment LLC, which in turn owned another company, CII Carbon LLC for a sum of USD 620,175,000. The assessee provided loans to RCUSA which in turn invested the amount as preferred stock in Rain CII Holdings LLC. With the above investment, RCL operated seven coke calcining plants in USA .....

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efficiency and bargaining power with suppliers and customers. Ld. AR submitted that the above financing of loan to its AE are not international transaction as basic objection and even otherwise it is accepted as international transaction, the TPO erred in bench marking international transactions with interest rates in the domestic market instead of LIBOR as the base and not the Indian PLR/interbank rate. Ld. AR relied on the following decisions: 1. Four Soft Pvt. Ltd. Vs. DCIT [2014] 149 ITD 73 .....

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their return of income and the funds invested were borrowed funds from banks. 9. In rejoinder, ld. AR submitted that the assessee had not reported this transaction due to the fact that the section 92B was amended in AY 2011-12 with retrospective effect. Assessee was not in default and insisted that the bench marking on interest rate should be on LIBOR Plus. 10. We have considered the submissions of both the parties and perused the material facts on record as well as the orders of the revenue aut .....

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onal arena. Similar views were expressed by the coordinate bench of this Tribunal in the cases of Four Soft Pvt. Ltd. (supra), Siva Industries & Holdings Ltd. (supra) and Vijay Elecricals Ltd., (ITA No. 1159/Hyd/2013. It was held in the case of Siva Industries as below: Once the transact ion between the assessee and the AE is in foreign currency and the transact ion is an internat ional transact ion, then, the transact ion would have to be looked upon by applying the commercial principles in .....

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grounds of assessee as well as ground 2 of the revenue. 11. ALP adjustment on corporate guarantee Assessee s grounds of appeal: The ld. CIT(A) has erred in 7. Making adjustment while determinat ion of ALP on the shareholders corporate guarantee provided to bank on behalf of WOS. 8. Determining the ALP on the shareholder corporate guarantee provided by the Appellant @ 1.25% on the guarantee amount. 9. Not appreciating the fact that WOS was set up as a SPY for acquisition of business in USA. 10. .....

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Appellant. 14. Discr iminat ing the US WOS by determining the ALP for shareholder-corporate guarantee vis-a-vis similar shareholder corporate guarantee provided by parent companies to Indian subsidiar ies in violat ion of Ar ticle 26 of India - US Double Taxation Avoidance Agreement. ('DTAA') . Revenue s ground 3. The learned CIT (A) ought to have appreciated the fact that ALP is calculated by the TPO after consider ing the guarantee fee and by depending on the credit rat ing of the AE .....

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within the meaning of international transaction as defined in section 92B, that it was in the nature of shareholder activity in the business interest of parent, that the assessee was restricted by law from charging fee for a corporate guarantee provided by it in terms of para 2.2.9 of the RBI Master Circular on guarantees and Co-acceptance dated 02/07/2012, that a corporate guarantee is secondary with no cost or risk to shareholders and that it was in the business interest of the assessee. Ld. .....

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Pvt. Ltd., (supra) 2. Bharti Airtel Ltd. Vs. ACIT (ITA No. 5816/Del/2012 3. Redington (India) Ltd., Vs. JCIT, (ITA No. 513/MDS/2014). 12. Ld. DR submitted that the assessee had not reported this transaction as international transaction. He submitted that the case Glenmark Pharmaceuticals Vs. ACIT (ITAT-Mumbai) had made after considering some calculation to arrive the figure 0.53% whereas the CIT(A) in the present case had adopted 1.25% without any basis. He also submitted that the TPO had analy .....

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ity and ready reference, we reproduce the relevant paras below: 25.4 In the aforesaid view of the matter, we agree with the TPO that ALP of the corporate guarantee has to be determined as it falls within the scope and ambit of an international transaction after the retrospective amendment to section 92B. However, it appears that the TPO has applied the rate of 3.75%, which is applicable to bank guarantee issued by the bank. As the corporate guarantee is not in the nature of bank guarantee, the r .....

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4 while considering identical issue of determining ALP of corporate guarantee provided by the assessee to its AE followed the ratio laid down in case of Glenmark Pharmaceuticals Vs. ACIT (supra) and remitted the issue back to the TPO to decide the quantum of corporate guarantee rate by following the method adopted in case of Glenmark Pharmaceuticals (supra). 26. Since the issue in the present case is identical to the issue decided by the ITAT, Hyderabad Bench in case of Infotech Enterprises (sup .....

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cted. 14. As regards grounds 12 to 14 are concerned, we find that they are relating to computation of ALP. The average margin of the comparables in similar transactions has to be arrived at before determining ALP. This issue of the percentage at which the corporate guarantee can be benchmarked has come up before various benches of the Tribunal. We find that in the case of Glenmark Pharmaceuticals Vs. ACIT in ITA No. 5031/Mum/2012, dated 13/11/2013, the Tribunal has examined the approach of the a .....

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e Hon ble Mumbai High Court in the case of M/s Everest Kanto Cylinder Ltd. Vs. DCIT, it was held that commercial banks guarantees are easily encashable in the event of default hence higher commission is justified for them, whereas in case of corporate guarantee the parent company would repay loan in case its AE defaults. Further, it was held that the conditions for issuance of corporate guarantees are distinct and separate from bank guarantee. Accordingly, the Hon ble High Court upheld ITAT deci .....

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n Sect ion 92B. Payment of guarantee fee is included in the expression ' internat ional transact ion' in view of the Explanat ion i(c) of Sect ion 92B. Once the guarantee fee falls within the meaning of 'internat ional transact ion', then the methodology provided in the rules also becomes applicable. Here in this case, it is undisputed that the assessee in its T.P. Study Report and also the TPO, have accepted that it is an internat ional transact ion and CUP is the most appropr i .....

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from its AE. The only point which has to be seen in this case is whether the same is at ALP or not. We have already come to a conclusion in the foregoing paras that the rate of 3% by taking external comparable by the TPO, cannot be sustained in facts of the present case. We also f ind that in an independent transact ion, the assessee has paid 0.6% guarantee commission to ICICI Bank India for its credit arrangement. This could be a very good parameter and a comparable for taking it as internal C .....

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