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2016 (5) TMI 633

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..... legislations can only be prospective. It does not make sense that someone tells you today as to how you should have behaved yesterday, and then goes on to levy a tax because you did not behave in that manner yesterday. At best the amendment in Section 92B, at least to the extent it dealt with the question of issuance of corporate guarantees, is effective from 1st April 2012. The assessment year before us being an assessment year prior to that date, the amended provisions of Section 92 B have no application in the matter. For this reason also, the impugned ALP adjustment must stand deleted. We must, however, make it clear that what we have stated above, in the context of retrospective amendment, is specifically in the context of transfer pricing legislation which, as we have observed earlier, being an anti-abuse legislation, seeks a degree of compliant conduct by the taxpayers rather than being primarily a source of revenue. - Decided in favour of assessee - I.T.A. No. 2618/Mum/2014, I.T.A. Nos. 2876/Mum/2014 - - - Dated:- 31-3-2016 - Pramod Kumar AM and Pawan Singh JM For The Assessee : Prakash Shah and Jas Sanghvi For The Assessing Officer : N K Chand ORDER .....

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..... therefore the additional guarantee commission imputed by the learned AO/TPO should have been deleted; 1.6 erred in confirming the action of the learned AO in rejecting the determination of ALP made by the Appellant without satisfying the provisions of section 92C(3) of the Act; 1.7 erred in confirming the action of the learned AO/TPO in respect of ad-hoc addition of 3% of the loan amount as guarantee commission; 1.8 erred in not providing the benefit of the variation of 5 percent from the arithmetic mean as provided in the proviso to Section 92C(2) of the Act, while making the adjustment to the value of international transactions of the Appellant; 1.9 erred in observing that the Appellant has not benchmarked the subject transaction and under such circumstances Arm's length price would be determined on parity with a best judgment assessment. Grounds of Assessing Officer (ITA No.2876/Mum/2014) 1. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) was justified in holding that the assessee is entitled to deduction of ₹ 18,64,72,586/- u/s 80IB(8A) of the I.T. Act, 1961 without appreciating the fact that th .....

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..... sessee ought to have charged the compensation for providing guarantee and standing surety, on behalf of the associated enterprises, to the banks concerned. He was of the view that the corporate guarantees, as issued by the assessee to the bank- on behalf of its AEs, are specifically covered by the definition of international transaction under section 92B read with Explanation c to Section 92B(1). He was of the view that what is really important is that at the time of giving guarantee how an independent party would have behaved . In other words, according to the TPO, since no independent party, behaving in a commercially rational manner, would have stood surety for another enterprises, without charging a fees, the arm s length price of the corporate guarantee ought to have been charged by the assessee. It was also noted that this transaction would have bearing on the profits, income, losses or assets of the assessee . He thus concluded that thus, in all respects, the guarantee provided by the assessee to the lenders of its associated enterprises is a service provided by the assessee to its AE, and, hence, assessee should have charged fees at an arm s length price and that t .....

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..... g on the profits, income, losses or assets of such enterprises, and shall include a 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.. (2) A transaction entered into by an enterprise with a person other than an associated enterprise shall, for the purposes of sub-section (1), be. deemed to be a transaction entered into between two associated enterprises, if there exists a prior agreement in relation to the relevant transaction between such other person and the associated enterprise, or the terms of the relevant transaction are determined in substance between such other person and the associated enterprise. Explanation.-For the removal of doubts, it is hereby clarified that- (i) the expression international transaction shall include- a) the purchase, sale, transfer, lease or use of fungible property including building, transportation vehicle, machinery, equipment, tools, plant, furniture, commodity or any oth .....

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..... an capital related intangible assets, such as. trained and organised workforce, 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, institutional goodwill, professional practice goodwill, personal goodwill of professional, celebrity goodwill, general business going concern value; (k) methods, programmes, systems, procedures, campaigns, surveys, studies, forecasts, estimates, customer lists, or technical data; (l) any other similar item that derives its value from its intellectual content rather than its physical attributes.] ii. It can be seen from the explanation (i) (c) of the section 92B of the Act that the guarantee is an international transaction. After insertion by the Finance Act, 2012, with retrospective effect from 01.04.2002, there remains no dispute that the Guarantee is an international transaction. iii. The appellant has not considered the explanation which has been inserted in section 92B by the Finance Act, 2012, with retrospective effect from 01.04.2002. Acc .....

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..... er, reliance in this regard is placed on the decisions of Perot Systems TSI (India) Ltd. v/s. DOIT (2010 -TIOL-51-ITAT-DEL and VVF Ltd. vs. DCIT (ITA No.673/Mum/2006). This contention of the appellant is accordingly rejected. vi Further it is noted that in the facts of the case, the appellant has not benchmarked this international transaction and further even after given an opportunity by the TPO the appellant has not submitted any benchmarking which based on some figures of guarantee which are available in the public domain. Therefore such position would have to be handled as per para 134 of the ITAT judgment in the case of M/s. Aztec Software Technology Service ltd. reported at 294 ITR AT 32, where in it has been held that under such circumstances, the TPO has to determine ALP on the basis of material collected or available on record and in such circumstances, the ALP determined would be on the parity with a best judgement assessment. vii. The appellant has submitted that the rate of 3% adopted by TPO was quite high as compared to 1.75% adopted by the appellant. In this regard, it is mentioned that on page 3 4, the TPO has carried out a detailed exercise to find o .....

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..... s not in the business of providing guarantees and the guarantee provided by it was solely for its own benefit since it intended to expand its business operations overseas. In this regard, it is stated that whether or not it is the business of the appellant, the facts remains that the appellant has given corporate guarantee for the loan to be availed by the AE which has benefited the AE and has effect on income, profit or assets of the appellant and AE. Such activity on the part of the appellant being an international transaction has to be judged from the perspective of transfer pricing regulations and consequent income of this international transaction has to be determined having regard to arm's length price. x. This ground of appeal is therefore dismissed. 4. The Aggrieved by the stand so taken by the learned CIT(A), the assessee is in further appeal before us. 5. We have heard the rival contentions, perused the material on record and duly considered facts of the case and the applicable legal position. 6. While we will, in a short while, deal with very elaborate and detailed submissions made by learned Departmental Representative, we may begin by pointing out .....

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..... pression international transaction shall include- (a) the purchase, sale, transfer, lease or use of tangible property including building, transportation vehicle, machinery, equipment, tools, plant, furniture, commodity or any other article, product or thing; (b) the purchase, sale, transfer, lease or use of intangible property, including the transfer of ownership or the provision of use of rights regarding land use, copyrights, patents, trademarks, licences, franchises, customer list, marketing channel, brand, commercial 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 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; (d) provision of services, including provision of market research, market development, marketing management, administration, technical service, repairs, design, consultation, agency, scientific research, legal or accounting serv .....

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..... al transaction' under Section 92B, as it stood at the relevant point of time, and its breakup in plain words, shows the following: An international transaction can be between two or more AEs, at least one of which should be a non-resident. An international transaction can be a transaction of the following types: in the nature of purchase, sale or lease of tangible or intangible property, in the nature of provision of services, in the nature of lending or borrowing money, or in the nature of any other transaction having a bearing on the profits, income, losses or assets of such enterprises An international transaction shall include a 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 anyone 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 .....

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..... e remaining two items in the Explanation to Section 92B are set out in clauses (c) and (e) thereto, dealing with (a) capital financing and (b) business restructuring or reorganization. These items can only be covered in the residual clause of definition in international transactions, as in Section 92B(1), which covers any other transaction having a bearing on profits, incomes, losses, or assets of such enterprises . 30. It is, therefore, essential that in order to be covered by clauses (c) and (e) of Explanation to Section 92B, the transactions should be such as to have bearing 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 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 prof .....

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..... ncome, losses or assets' appearing in Section 92B(1). 32. There can be number of situations in which an item may fall within the description set out in clause (c) of Explanation to Section 92B, and yet it may not constitute an international transaction as the condition precedent with regard to the 'bearing on profit, income, losses or assets' set out in Section 92B(1) may not be fulfilled. For example, an enterprise may extend guarantees for performance of financial obligations by its associated enterprises. These guarantees do not cost anything to the enterprise issuing the guarantees and yet they provide certain comfort levels to the parties doing dealings with the associated enterprise. These guarantees thus do not have any impact on income, profits, losses or assets of the assessee. There can be a hypothetical situation in which a guarantee default takes place and, therefore, the enterprise may have to pay the guarantee amounts but such a situation, even if that be so, is only a hypothetical situation, which are, as discussed above, excluded. One may also have a situation in which there is a receivable or any other debt during the course of business and yet th .....

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..... ts AE . The Tribunal did note, in the immediately following sentence in paragraph 23 itself, that the only point to be seen in this case is whether the same is at ALP or not . The very fact of charging this guarantee commission brings the issuance of corporate guarantees to the net of transfer pricing. Nevertheless, the ALP adjustment made by the TPO was deleted by the Tribunal. Aggrieved by the relief so given by the Tribunal, the matter was carried in further appeal, by the Commissioner, before the Hon'ble Bombay High Court which eventually upheld the relief granted by the Tribunal. The appeal before the Hon'ble High 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 have come up for consideration. Of course, the assessee had no occasion to challenge the stand of the Tribunal on this aspect since the addition, on merits, was deleted anyway making revenue's success in this respect hollow and of no damage to the interests of the assessee. It was in this backdrop that the action of the Tribunal was upheld in granting relief to the assess .....

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..... ue, 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 (P.) Ltd. (supra), which has been relied upon by the learned Departmental Representative, we find that the operative portion of this judgment, so far as relevant to this discussion, is as follows: '213. The amendment to section 2(47) raises several important questions of fact and of law. Whether or not it affects the proceedings which were the subject matter before the Supreme Court is not relevant for the purpose of this Writ Petition. But, whether it is relevant or not for the purpose of the assessment proceedings in respect of the petitioner which are the subject matter of this Writ Petition, 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 def .....

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..... hat does arise is whether the amendment, albeit clarificatory, would make a difference in the construction of the provisions of the Framework agreements themselves, to wit as regards the construction of the clauses thereof without the aid of any other material for interpreting them. Vodafone's case obviously considered the ambit of the term transfer prior to the amendment. In the present assessment proceedings, it is the amended definition which would have to be considered. 218. We do not find it either necessary or proper to indicate the application of section 2(47) as amended to the present proceedings. The application would depend upon the facts on record or those may be permitted to be brought on record. 219. There is another aspect. 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. We will presume that it would be open to the petitioner to contend, therefore, that the judgment of the Supreme Court would remain entirely unaffected for the Supreme Court must be deemed to have considered the term as per its true ambi .....

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..... n, cannot be treated as decisive of the issue on merits. While it is true that Hon'ble Bombay High Court has observed that the effect of amendment will have to be considered, Hon'ble Bombay High Court has also observed that even after taking into account the amendments, the legal implications of this amendment is still an open issue which will have to be adjudicated in the light of pleadings of the parties. Even in these observations, which do not anyway decide anything on merits, effect of a retrospective amendment was not in the context of the precise issue before us, or on the scope of the international transaction, but in respect of 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 (P.) Ltd. (supra) is also equally misplaced and devoid of legally sustainable merits. In any case, as i .....

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..... e, therefore, reject the reliance on these decisions as devoid of legally sustainable merits. 29. Let us now deal with the reliance placed by the revenue authorities on GE Capital's case by the Tax Court of Canada. In the DRP's order, a reference is made to well known Canadian decision in the case of GE Capital Canada (supra). The said case, to quote the words of the DRP, also shows that the group company issuing the guarantee (i.e. guarantor) would, in principle, at least need to cover the cost that it incurs with respect to providing the guarantee and that these costs may include administrative expenses as well as the costs of maintaining an appropriate level of cash equivalents, capital, subsidiary credit lines or more expensive external funding conditions on other debt finance . The DRP had also noted that in addition, the guarantor would want to receive appropriate compensation for the risk it incurs and concluded that following the above discussions, an arm's length guarantee fees is typically required to be determined by establishing a range of fees that the guarantor would, at least, want to receive and the fees that the guaranteed group company woul .....

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..... includes a series of transactions, an arrangement or an event [See Section 247(1) of the Canadian Income-tax Act, 1985; http://lawslois. justice.gc.ca/eng/acts/I-3.3/page-419.html#h-156] coupled with the legal position that arm's length adjustment to the prices of such transaction come into play Where a taxpayer or a partnership and a nonresident person with whom the taxpayer or the partnership, or a member of the partnership, does not deal at arm's length [See Section 247(2) ibid]. When one takes into account these variations in the statutory provisions, it will become very obvious that the provisions of the Indian Income-tax Act, 1961 and the Canadian Income-tax Act, 1985 are so radically different that just because a particular 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 covered by the arm's length price adjustment, and, therefore, covers all transactions bet .....

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..... lisation.pdf ). The fact that this discussion paper did not travel beyond the stage of the discussion paper is not really relevant for the present purposes because all that we are concerned with right now is understanding the conceptual basis on which, contrary to popular but apparently erroneous belief, the issuance of corporate guarantees can indeed be kept outside the ambit of services. The relevant extracts from this document are as follows: 102. An independent company that is unable to borrow the funds it needs on a stand-alone basis is unlikely to be in a position to obtain a guarantee from an independent party to support the borrowings it needs. Where such a guarantee is given it compensates for the inadequacies in the financial position of the borrower; specifically, the fact that the subsidiary does not have enough shareholders' funds. ..... 103. It would not be expected that a company pay for the acquisition of the equity it needs for its formation and continued viability. Equity is generally supplied by the shareholders at their own cost and risk. 104. Accordingly to the extent that a guarantee substitutes for the investment of the equity needed to .....

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..... clude detailed planning services for particular operations, management or technical advice (trouble shooting) or in some cases assistance in day-to-day management . The shareholder activities are thus seen as conceptually distinct from the provision of services. The issuance of corporate guarantee, as long as it is in the nature of shareholder activity, can not, therefore, amount to a provision for services . 34. Undoubtedly, pioneering work done by the OECD, in the field of international taxation, has been judicially recognized worldwide by various judicial forums, including, most notably by Hon'ble Andhra Pradesh High Court in the case of CIT v. Visakhapatnam Port Trust [1983] 144 ITR 146/15 Taxman 72 (AP). Their Lordships also referred to Lord Radcliffe's observations in Ostime v. 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 transfer pricing is no less significant. No matter which part of the world we live in, and irrespective of whether or not that tax jurisdiction is an OECD member jurisdiction, t .....

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..... -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 intra-group services. However, some guidance may be given to elucidate how the analysis would be applied for some common types of activities undertaken in MNE groups. 7.8 Some intra-group services are performed by one member of an MNE group to meet an identified need of one or more specific members of the group. In such a case, it is relatively straightforward to determine whether a service has been provided. Ordinarily an independent enterprise in comparable circumstances would have satisfied the identified need either by performing the activity inhouse or by having the activity performed by a third party. Thus, in such a case, an intra-group service ordinarily would be found to exist. 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 wher .....

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..... ircumstances the activity is one that an independent enterprise would have been willing to pay for or to perform for itself.' (Emphasis supplied) 36. We have noticed that the 'OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations' specifically recognizes that an activity in the nature of shareholder activity, which is solely because of ownership interest in one or more of the group members, i.e. in the capacity as shareholder would not justify a charge to the recipient companies . It is thus clear that a shareholder activity, in issuance of corporate guarantees, is taken out of ambit of the group services. Clearly, therefore, as long as a guarantee is on account of, what can be termed as 'shareholder's activities', even on the first principles, it is outside the ambit of transfer pricing adjustment in respect of arm's length price. It is essential to appreciate, at this stage, the distinction in a service and a benefit. One may be benefited even when no services are rendered, and, therefore, in many a situation it's a 'benefit test' which is crucial for transfer pricing legislation, such as in US .....

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..... es which benefit the group entities but these activities need not necessarily be 'provision for services'. The fact that the OECD considers such activities in the services segment does not alter the character of the activities. While the group entity is thus indeed benefited by the shareholder activities, these activities do not necessarily constitute services. There is no such express reference to the benefit test, or to the concept of benefit attached to the activity, in relevant definition clause of 'international transaction' under the domestic transfer pricing legislation. As we take note of these things, it is also essential to take note of the legal position, in India, in this regard. No matter how desirable is it to read such a test in the definition of the international transaction' under our domestic transfer pricing legislation, as is the settled legal position, it is not open to us to infer the same. Hon'ble Supreme Court, in the case of Smt. Tarulata Shyam v. CIT [1977] 108 ITR 345 (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 a .....

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..... on for which the corporates issue guarantees for their subsidiaries, is ill-conceived because while banks seek to be compensated, even for the secured guarantees, for the financial risk of liquidating the underlying securities and meeting the financial commitments under the guarantee, the guarantees issued by the corporates for their subsidiaries are rarely, if at all, backed by any underlying security and the risk is entirely entrepreneurial in the sense that it seeks to maximize profitability through and by the subsidiaries. It is inherently impossible to decide arm's length price of a transaction which cannot take place in arm's length situation. The motivation or trigger for issuance of such guarantees is not the kind for consideration for which a banker, for example, issue the guarantees, but it is maximization of gains for the recipient entity and thus the MNE group as a whole. In general, thus, the consideration for issuance of corporate guarantees are of a different character altogether. 40. At this stage, it would appropriate to analyze the business model of bank guarantees, with which corporate guarantees are sometimes compared, in the context of benchmarkin .....

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..... of guarantee has no financial means to reimburse it for the defaulted guarantee amounts, when invoked, the group entity will issue the guarantee nevertheless because these are compulsions of his group synergy rather than the assurance that his future obligations will be met. We see no meeting ground in these two types of guarantees, so far their economic triggers and business considerations are concerned, and just because these instruments share a common surname, i.e. 'guarantee', these instruments cannot be said to be belong to the same economic genus. Of course, there can be situations in which there may be economic similarities, in this respect, may be present, but these are more of an exception than the rule. In general, therefore, bank guarantees are not comparable with corporate guarantees. 41. As evident from the OECD observation to the effect In contrast, if for example a parent company raises funds on behalf of another group member which uses them to acquire a new company, the parent company 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 subsidia .....

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..... ee without an underlying security as has been done by the assessee. We may, in this regard, refer to the observations made by Hon'ble High Court, speaking through Hon'ble Justice Easwar (as he then was), as follows: '16. The Organization for Economic Co-operation and Development ('OECD', for short) has laid down transfer pricing guidelines for Multi-National Enterprises and Tax Administrations. These guidelines give an introduction to the arm's length price principle and explains article 9 of the OECD Model Tax Convention. This article provides that when conditions are made or imposed between two associated enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises then any profit which would, but for those conditions, have accrued to one of the enterprises, but, by reason of those conditions, if not so accrued, may be included in the profits of that enterprise and taxed accordingly. By seeking to adjust the profits in the above manner, the arm's length principle of pricing follows the approach of treating the members of a multi-national enterprise group as operating as separ .....

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..... ses behaving in a commercially rational manner and the actual structure practically impedes the tax administration from determining an appropriate transfer price. An example of this circumstance would be a sale under a long-term contract, for a lump sum payment, of unlimited entitlement to the intellectual property rights arising as a result of future research for the term of the contract (as previously indicated in paragraph 1.10). While in this case it may be proper to respect the transaction as a transfer of commercial property, it would nevertheless be appropriate for a tax administration to conform the terms of that transfer in their entirety (and not simply by reference to pricing) to those that might reasonably have been expected had the transfer of property been the subject of a transaction involving independent enterprises. Thus, in the case described above it might be appropriate for the tax administration, for example, to adjust the conditions of the agreement in a commercially rational manner as a continuing research agreement. 1.38 In both sets of circumstances described above, the character of the transaction may derive from the relationship between the parties .....

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..... se subsidiaries loans on the same terms as without a guarantee. Such a guarantee transaction can only be, and is, motivated by the shareholder, or ownership considerations. No doubt, under the OECD Guidance on the issue, an explicit support, such as corporate guarantee, is to be benchmarked and, for that purpose, it is in the service category but that occasion comes only when it is covered by the scope of 'international transaction' under the transfer pricing legislation of respective jurisdiction. The expression 'provision for services' in its normal or legal connotations, as we have seen earlier, does not cover issuance of corporate guarantees, even though once a corporate guarantee is covered by the definition of international transaction', it is benchmarked in the service segment. In view of the above discussions, OECD Guidelines, as a matter of fact, strengthen the claim of the assessee that the corporate guarantees issued by the assessee were in the nature of quasi-capital or shareholder activity and, for this reason alone, the issuance of these guarantees should be excluded from the scope of services and thus from the scope of 'international transacti .....

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..... reated 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 because when guarantees are included in the international transactions, these guarantees are included in service segment in contradistinction with other heads under which international transactions are grouped, the guarantees should be treated as services, and, for that reason, included in the definition of international transactions. That is, in our considered view, purely fallacious logic. In our considered view, under Section 92B, corporate guarantees can be covered only under the residuary head i.e. any other transaction having a bearing on the profits, income, losses or assets of such enterprise . It is for this reason that Section 92B, 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 res .....

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..... inition of 'international transactions'. The first two categories of transactions, which are stated to be included in the scope of expression 'international transactions' by virtue of clause (a) and (b) of Explanation to Section 92B, are transactions with regard to purchase, sale, transfer, lease or use of tangible and intangible properties. These transactions were anyway covered by transactions 'in the nature of purchase, sale or lease of tangible or intangible property'. The only additional expression in the clarification is 'use' as also illustrative and inclusive descriptions of tangible and intangible assets. Similarly, clause (d) deals with the provision of services, including provision of market research, market development, marketing management, administration, technical service, repairs, design, consultation, agency, scientific research, legal or accounting service which are anyway covered in provision for services and mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, serv .....

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..... te guarantees issued by the assessee to the various banks and crystallization of liability under these guarantees, though a possibility, is not a certainty. In view of the discussions above, the scope of the capital financing transactions, as could be covered under Explanation to Section 92B read with Section 92B(1), is restricted to such capital financing transactions, including inter alia any guarantee, deferred payment or receivable or any other debt during the course of business, as will have a bearing on the profits, income, losses or assets or such enterprise . This precondition about impact on profits, income, losses or assets of such enterprises is a precondition embedded in Section 92B(1) and the only relaxation from this condition precedent is set out in clause (e) of the Explanation which provides that the bearing on profits, income, losses or assets could be immediate or on a future date. These guarantees do not have any impact on income, profits, losses or assets of the assessee. There can be a hypothetical situation in which a guarantee default takes place and, therefore, the enterprise may have to pay the guarantee amounts but such a situation, even if that be so, i .....

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..... definition, there cannot obviously be any occasion to deviate from the decision that the coordinate bench took in Four Soft Ltd. 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 are not inclined to be drawn into that controversy either. On the issue of implementing the amendment in transfer pricing law with retrospective effect, in the case of Bharti Airtel Ltd. (supra), a coordinate bench had observed as follows: 34. There is one more aspect of the matter. The Explanation to Section 92B has been brought on the statute by the Finance Act 2012. If one is to proceed on the basis that the provisions of Explanation to Section 92B enlarges the scope of Section 92B itself, even as it is modestly described as 'clarificatory' in nature, it is an issue to be examined whether an enhancem .....

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..... ase of Channel Guide India Ltd. v. Asstt. CIT [2012] 139 ITB 49/25 taxmann.com 25 (Mum.), held that even though the assessee had not deducted the applicable tax at source under section 195, the disallowance could not be made under section 40(a)(i) since the taxability was under the provisions which were amended, post the payment having been made by the assessee, with retrospective effect. All this only shows that even when law is specifically stated to have effect from a particular date, its being implemented in a fair and reasonable manner, within the framework of judge made law, may require that date to be tinkered with. When a proviso is introduced with effect from a particular date specified by the legislature, the judicial forums, including this Tribunal, at times read it as being effect from a date much earlier than that too. One such case, for example, is CIT v. Ansal Landmark Township (P.) Ltd. [2015] 377 ITR 635/234 Taxman 825/61 taxmann.com 45 (Delhi), wherein Hon'ble Delhi High Court confirmed the action of the Tribunal in holding that the provision, though stated to be effective from 1st April 2013 must be held to be effective from 1st April 2005. Whether such an ex .....

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..... stion on the facts of this case. In any event, in Prolific' Corp Ltd. 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 v. Dy. CIT [2005] 4 SOT 84 (Mum.) and following the Full bench decision of Hon'ble AP High Court in the case of CIT v. BR Constructions [1993] 202 ITR 222/[1994] 73 Taxman 473 (AP), a decision disregarding an earlier binding precedent on the issue is per incurium. Such decisions cannot be basis for sending the matters to special bench since occasion for reference to special bench arises when binding and conflicting judicial precedents from coordinate benches come up for consideration. That was not the case here. All these factors taken together, in our considered view, it was not possible in this case to refer the matter for constitution of a special bench. In any case, whatever we decide is, and shall always remain, subject to the judicial scrutiny by Hon'ble Courts above and our endeavour is to facilita .....

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..... cision. Our attention is also invited to the rectification petition filed by the Assessing Officer, which is said to be pending for disposal before the Tribunal. We donot find merits in this plea. Mahindra Mahindra decision (supra) was passed on 6th June 2012, though at a point of time when Finance Act 2012 had just come into force i.e. post 28th May 2012, without even being aware whether or not the Finance Act 2012 was passed as it gave certain directions depending upon the exact amendment by the said Finance Act. The matter was remitted to the file of the Assessing Officer in a rather summary manner. It cannot be, by any stretch of logic, an authority on any legal question arising out of the law which, as per the Tribunal- wrongly though, was not even in existence. As for the Everest Kanto decision (supra), the issue was decided against the assessee as, to borrow the words of the coordinate bench, 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 international transaction and CUP is the most appropriate method for benchmarking the charging of guarantee fee , and, it was for this short reason that the .....

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..... d not enterprise . It is thus contended that the impact on the profits, incomes, losses or assets of the entity issuing guarantee is important, but the impact on the profits, income, losses or assets of the entity, which is beneficiary of the guarantee, is also important. It is pointed out that Bharti Airtel decision has examined this aspect only from the point of view of the entity issuing the guarantee and that has also been decided wrongly. As for these issues being raised by the learned Departmental Representative, suffice to say that even if reasoning adopted by Bharti Airtel decision is incorrect, it is not for us to examine that aspect of the matter. Now that the matter is before Hon ble High Court, and the matter is already under hearing, there is no point in going into these fine points, which may at best be errors of judgment rather than a glaring error rendering the decision to be per incurium , at this stage. In any case, there is a subtle difference in impact on and influence on . The issuance of a corporate guarantee may have an influence on the profits, incomes, losses and assets of an entity, in whose favour the guarantee is issued, but it has no impact on the .....

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..... fundamental intent of law of law could not be conveyed by the words of the statute, or, perhaps for the judicial forums, as to what went so wrong that the interpretation was so off the mark vis- -vis fundamental principles of taxation or the sound policy considerations. However, amendment so made are generally prospective, and there is a sound conceptual foundation, as has been highlighted in the binding judicial precedents that we will deal with in a short while, for that approach. There is no dearth of examples on this aspect of the matter. Take for example, the amendment to Section 263 by the Finance Act, 1961. In many judicial precedents, [such as in the case of CIT Vs Sunbeam Auto Limited (332 ITR 167) wherein it was held that Learned counsel for the assessee is right in his submission that one has to keep in mind the distinction between lack of inquiry and inadequate inquiry . If there was any inquiry, even inadequate that would not by itself give occasion to the CIT to pass orders under s. 263 of the Act, merely because he has different opinion in the matter. It is only in cases of lack of inquiry that such a course of action would be open ], it was reiterated that .....

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..... resultantly introduces new principles, upon which liabilities might arise. Such amendments though framed as clarificatory, are in fact transformative substantive amendments, and incapable of being given retrospective effect . . 37. An important question, which arises in this context, is whether a clarificatory amendment remains true to its nature when it purports to annul, or has the undeniable effect of annulling, an interpretation given by the courts to the term sought to be clarified. In other words, does the rule against clarificatory amendments laying down new principles of law extend to situations where law had been judicially interpreted and the legislature seeks to overcome it by declaring that the law in question was never meant to have the import given to it by the Court? The general position of the courts in this regard is where the purpose of a special interpretive statute is to correct a judicial interpretation of a prior law, which the legislature considers inaccurate, the effect is prospective . Any other result would make the legislature a court of last resort. United States v. Gilmore 8 Wall [(75 US) 330, 19L Ed 396 (1869)] Peony Park v. O Malley .....

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..... know at the time of entering into the transactions rather than at the time of scrutiny of his affairs at a much later stage. 15. It is very important to bear in mind the fact that right now we are dealing with amendment of a transfer pricing related provision which is in the nature of a SAAR (specific anti abuse rule), and that every anti abuse legislation, whether SAAR (specific anti abuse rule) or GAAR (general anti abuse rule), is a legislation seeking the taxpayers to organize their affairs in a manner compliant with the norms set out in such anti abuse legislation. An anti-abuse legislation does not trigger the levy of taxes; it only tells you what behavior is acceptable or what is not acceptable. What triggers levy of taxes is non-compliance with the manner in which the anti-abuse regulations require the taxpayers to conduct their affairs. In that sense, all anti abuse legislations seek a certain degree of compliance with the norms set out therein. It is, therefore, only elementary that amendments in the anti-abuse legislations can only be prospective. It does not make sense that someone tells you today as to how you should have behaved yesterday, and then goes on to levy .....

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..... B, to the extent it pertains to the issuance of corporate guarantee being outside the scope of international transaction , cannot be said to be retrospective in effect. The fact that it is stated to be retrospective, in the light of the aforesaid guidance of Hon ble Delhi High Court, would not alter the situation, and it can only be treated as prospective in effect i.e. with effect from 1st April 2012 onwards. 19. As we deal with this question, it is also relevant to consider whether this Tribunal can, while adjudicating on the appeals, tinker with the date, as set out in the statute, from which an amendment is effective. In our humble understanding, as a judicial forum, we are bound not only by the law as legislated by the legislature, but by the judge made law as well. We are a part of the judicial hierarchy in this system. We are bound by the law laid down by Hon ble Courts above, and all that we are expected to do, and we do, is to decide the issues before us in accordance with the provisions of the statute, in accordance with the law laid down by Hon ble Courts above and in the light of binding judicial precedents. When a binding judicial precedent requires us to deviate f .....

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..... ns should, therefore, not come into play when an assessee is able to establish that there is no actual loss of revenue. This disallowance does deincentivize not deducting tax at source, when such tax deductions are due, but, so far as the legal framework is concerned, this provision is not for the purpose of penalizing for the tax deduction at source lapses. There are separate penal provisions to that effect. Deincentivizing a lapse and punishing a lapse are two different things and have distinctly different, and sometimes mutually exclusive, connotations. When we appreciate the object of scheme of section 40(a)(ia), as on the statute, and to examine whether or not, on a fair, just and equitable interpretation of law- as is the guidance from Hon ble Delhi High Court on interpretation of this legal provision, in our humble understanding, it could not be an intended consequence to disallow the expenditure, due to non deduction of tax at source, even in a situation in which corresponding income is brought to tax in the hands of the recipient. The scheme of Section 40(a)(ia), as we see it, is aimed at ensuring that an expenditure should not be allowed as deduction in the hands of a .....

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..... Act and its conclusion that the said proviso is declaratory and curative and has retrospective effect from 1st April 2005, merits acceptance. 15. In that view of the matter, the Court is unable to find any legal infirmity in the impugned order of the ITAT in adopting the ratio of the decision of the Agra Bench, ITAT in (Rajiv Kumar Agarwal v. ACIT). 22. When such are the views of Hon ble High Court, it is not open to us to proceed on the basis that even though the amendment is required to be read as prospective, the Tribunal cannot do so as it is a creature of the Income Tax Act itself. In our considered view, and for the detailed reasons set out above, at best the amendment in Section 92B, at least to the extent it dealt with the question of issuance of corporate guarantees, is effective from 1st April 2012. The assessment year before us being an assessment year prior to that date, the amended provisions of Section 92 B have no application in the matter. 23. For this reason also, the impugned ALP adjustment must stand deleted. We must, however, make it clear that what we have stated above, in the context of retrospective amendment, is specifically in the context of .....

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