TMI Blog2016 (6) TMI 636X X X X Extracts X X X X X X X X Extracts X X X X ..... agreement, on the facts of this case, does not constitute a corporate guarantee akin to bank guarantee and, even if it could be treated as a corporate guarantee for benchmarking purposes, the corporate guarantee does not constitute an international transaction under section 92 B of the Act. In view of these discussions, as also bearing in mind entirety of the case, we are of the considered view that the arm’s length price adjustment is unsustainable in law. We, therefore, direct the Assessing Officer to delete the same.As the basic plea of the assessee has been upheld, we see no need to deal with the alternate pleawhich, given the fact that the assessee has succeeded on the basic plea, is rendered academic and infructuous.- Decided in favour of assessee Disallowance under section 14A - Held that:- As decided in assessee's own case in the immediately preceding assessment year since the assessee has earned the dividend income from the investment in shares and mutual funds and also given the working of disallowance u/s 14A on account of interest expenditure, therefore, so far as the disallowance u/s 14A is concerned, it is not the case of the assessee that no expenditure on accou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es in nature, which are allowed in the year in which the expenses are incurred. We are in considered agreement with this school of thought. Entire expenditure on participation in Drupa 2008 should be allowed as revenue expenditure.- Decided in favour of assessee Disallowance of an amount being reimbursement of expenses incurred by subsidiary of the Appellant - non deduction of tds - Held that:- The law in this regard is now well settled in the case of G E Technology Centre Ltd Vs CT [2010 (9) TMI 7 - SUPREME COURT OF INDIA ], and unless the payment is shown to have an embedded income, no tax deduction requirements under section 195 come into play. There is nothing on record to show taxability of these payments. The subsidiary does not have a PE in India, and, therefore, the amounts paid to the subsidiary, even if in the nature of the business profits, cannot be brought to tax in India. The payment is not for any services involving a transfer of technology, and, therefore, it cannot be brought to tax as fees for included services. There is no question of the payment being in the nature of ‘royalty’. The Assessing Officer has not even made out any case of taxability of the income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #8377; 1,35.05,896 on account of interest on loans advanced to Associated Enterprise (AE) The learned CIT (A) has erred in upholding the action of the Deputy Commissioner of Income-tax - Circle 3(2) (hereinafter referred to as the 'AO')/ Deputy Commissioner of Income-tax (Transfer Pricing) - 1 (9) (hereinafter referred to as TPO ): 1.1 in confirming the adjustment made by the AO/TPO under Section 92CA(3) of the Act of ₹ 1,35,05,896 on account of interest on loan given by the Appellant to its AE, Manugraph DGM Inc ('MDGM') by considering Arm's length Price (ALP) of 17.22% p.a. by rejecting benchmarking analysis undertaken by the Appellant of the advances given; 1.2 in confirming the addition on account of interest on loan given by Appellant to its AE, without appreciating the fact that the Appellant has charged interest at 5% p.a. [6 months LIBOR + 200 bps] on the advances given to the AE based on the internal comparable available; 1.3 in considering the yield method while determining the ALP of the interest to be charged on loan advanced to AE by assigning different ratings to the Appellant and its AE (basis of the CRISIL ratings) wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee did carry the matter in appeal before the CIT(A) but without any success. The assessee is aggrieved and is in further appeal before us. 4. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. 5. Learned representatives fairly agree that this issue is covered, in assessee s own case for the assessment years 2008-09 and 2010-11, in favour of the assessee. Vide order dated 16th September 2015 and following another decision in assessee s on case for the assessment year 2008-09, a coordinate bench of this Tribunal, has decided the issue in favour of the assessee for the assessment year 2010-11 as well, by observing as follows 7. We have heard rival submissions and also perused the impugned order and the material placed on record. On the loan given to its AE, the assessee has charged interest rate worked out on the basis of six months at LIBOR + 2%, which worked out at 3.75%. This Arm s Length interest was benchmarked by using Internal CUP on the basis of rate of interest paid on loans by the assessee availed from State Bank of India. However, the TPO has arrived at ALP 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s considered appropriate for lending to corporates , and that therefore, the adjusted interest percentage is to be taken the arm's length interest rate i.e. 5.53% . Such sweeping generalizations and vague justifications as inherent in the above comment in the TP study, in support of LIBOR+100 basis points as ALP, cannot meet any judicial approval. 6. What is important, however, is that even after this stated ALP of LIBOR + 100 basis points, there is still a cushion of further 147 basis points before the interest charged can be said to more than the arm's length price, and it is an old matter. It is, therefore, worth exploring whether, even within the limitations of somewhat sketchy information available on the facts of this case, the matter can be decided one way or the other rather than sending it back to the TPO for fresh adjudication. 7. While exploring such possibilities, it will be useful to take note of the fact that in the case of Bharti Airtel Ltd. v. Addl. CIT [2014] 64 SOT 50 (URO)/43 taxmann.com 50 (Delhi), and a coordinate bench had deleted a similar ALP adjustment on account of interest amounting to ₹ 10,11,786 wherein the same approach of ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing in view the financial health of the subsidiary, it may not be in a position to offer security. Thus an adjustment is required to be made for not offering a security. This may be computed as the difference between the interest rates prevailing for the bonds of equivalent credit rating of the AE and sovereign government bonds in the country in which the AE is located. This can also be considered as the guarantee cost payable to the taxpayer for giving guarantee for equivalent amount of loan given to the AE i.e. the rate differential for the difference in interest spread between the credit rating of the taxpayer and the AE. Thus after the above analysis, the equivalent interest rate is the interest rate including the transaction cost for a foreign currency loan, if given to the AE for its credit standing/rating. 66. We see no substance in this adjustment either. The TPO has taken the lender as the tested party, and yet made adjustments for higher risks on account of assumed lack of security and increased risk of single party dealing. This approach overlooks the fact that the assessee has advanced monies to its subsidiaries which are under its management and control- a factor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es which were under its management and control, which in fact substantially reduced the risk and in these circumstances there was no rationale of adjusting any amount of higher basis . When such are the views of Their Lordships, it is futile to suggest that the loans advanced by the parents to subsidiary can indeed be taken as BB to D grade investments which refers to, as noted by the TPO himself at page 28 of the order, investments with serious risks of inadequate safety, investments of high risk, investments of substantial risk and investments of default. The approach adopted by the DRP cannot, therefore, meet our approval. 10. Similarly, the DRPs observation to the effect that Generally, Indian banks are charging interest rate of 2.5% to 5% above the LIBOR/EURIBOR for foreign currency loans is not only devoid of any basis but, as our day to day experience on the bench shows, ex facie incorrect. 11. There are any number of decisions by the coordinate benches which show that the interest rates charged on foreign currency, say US dollars, loans are much lower than the 250 to 500 basis points above the LIBOR having been to be generally applicable rates. For instance, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arm s length price adjustment of ₹ 1,35,05,896 in respect of interest on loan advanced to the AE. The assessee gets the relief accordingly. 8. Ground no. 1 is allowed. 9. In ground no. 2, the assessee has raised the following grievance: 2. Adjustment of ₹ 2,31,71,100 on account of Corporate Guarantee (CG) given by MIL to overseas bank in favor of its AE The learned CIT (A) has erred in upholding the action of the Deputy Commissioner of Income-tax - Circle 3(2) (hereinafter referred to as the 'AO')/ Deputy Commissioner of Income-tax (Transfer Pricing) - 1 (9) (hereinafter referred to as TPO ): 2.1 in making an adjustment under Section 92CA(3) of the Act of ₹ 2,31,71,100/- on account of CG given by the Appellant to overseas bank in favor of its AE (MDGM) towards the loan taken by its AE from the said bank disregarding the fact that no benefit is accrued to AE; 2.2 in not appreciating the fact that the transaction of bank guarantee is not an International Transaction within the meaning of section 92B and the explanation to Section 92B inserted by Finance Act, 2012 cannot extend scope of transaction retrospectively and accordingly, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut there is an inherent cost in this and that the overall risk exposure of the assessee company becomes high by the quantum of guarantee . The TPO then referred to a decision of the Tax Court of Canada, in the case of General Electric Capital Canada Inc Vs Her Majesty the Queen [(2009) TCC 563], in support of his stand that the issuance of a corporate guarantee needs to be benchmarked. He was of the view that the credit rating of the MGDM USA was at best BB+, that difference in yields of BB+ and A+ bond is 5.79%, and, therefore, he is adopting 6% as arm s length price of the issuance of this guarantee to the AE s banker in the USA. It was in this backdrop that an arm s length price adjustment of ₹ 2,31,71,100 was made towards guarantee commission. Aggrieved, assessee carried the matter in appeal before the CIT(A) but, once again, without any success. Learned CIT(A) upheld the action of the TPO. 11. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. We have noted that in the assessment years 2008-09 and 2010-11,in assessee s own case, coordinate benches have, following de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . [Emphasis, by underlining, supplied by us now] . In the light of the guidance of the Special Bench, as above, we would proceed to deal with the main plea first. As for the question, as to whether the issuance of corporate guarantee, on the facts of this case, constitutes an international transaction under section 92B, we find that this corporate guarantee, which is a tripartite agreement between the assessee, its AE and the assessee s banker, inter alia, provides as follows: This SUPPORT AGREEMENT dated as of April 30, 2007 (the Agreement ) by and among MANUGRAPH DGM INC. (the Borrower ), PNC BNK, NATIONAL ASSOCIATION (the Lender ) and MANUGRAPH INDIA LD. (the Parent ) WITNESSETH: WHEREAS, concurrently herewith the Borrower and the Lender are entering into a Letter Agreement, certain promissory notes and certain other financing documents and security agreements, each dated as of the date hereof (collectively, the Loan Documents ) pursuant to which the Lender has agreed to make certain Loans (as defined in the Loan Documents) to the Borrower in the aggregate principal amount not to exceed $ 14,850,000 at any one time outstanding. WHEREAS, it is a c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ermining the ratio of Funded Debt to EBITDA as if it were part of the Borrower s net income would climate the Funded Debt Ratio Deficiency, (B) in the event of a Fixed Charge Ratio Deficiency shall be the minimum amount which if added to the numerator in determining the Fixed Charge Coverage Ratio for the Test Period as if it were part of the Borrower s net income for such Test Period would eliminate the Fixed Charge Ratio Deficiency for such Test Period and (C) in the event of any Shortfall shall be an amount equal to the Shortfall Amount) and (ii) the date on which such Deficiency Payment is required to be made (which date shall not be less than 5 Business Days from the date of such notice). (c) (1) The Parent shall satisfy its obligations to make Deficiency Payment hereunder by either contributing cash to the capital of the Borrower or by making a loan to the Borrower (which loan shall be fully subordinated to the obligations of the Borrower under the Loans of the Lender on terms and conditions satisfactory to the Lender in its sole discretion in either case in an aggregate principal amount equal to the required amounts. (ii) The proceeds of all Deficiency Payments s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the AE, it is obligation of the assessee to suitably capitalize the AE. To compare this arrangement with a bank guarantee is inherently inappropriate, and to benchmark it, on that basis, is unsustainable in law. A shareholder activity, as in this case, cannot be considered to be a corporate guarantee. 13. In any case, the issue whether such a corporate guarantee can be treated as an international transaction, we find that the issue is now covered against the assessee by a decision of a coordinate bench in the case of Micro Ink vs ACIT [(2016) 176 TTJ 8 (Ahd)] wherein it is, inter alia, observed as follows: 21. It is only elementary that the determination of arm's length price, under the scheme of the international transfer pricing set out in the Income-tax Act, 1961, can only be done in respect of an 'international transaction'. Section 92(1) provides that, (a)ny income arising from an international transaction shall be computed having regard to the arm's length price . In order to attract the arm's length price adjustment, therefore, a transaction has to be an 'international transaction' first. The expression 'international tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 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 service; (e) a transaction of business restructuring or reorganisation, entered into by an enterprise with an associated enterprise, irrespective of the fact that it has bearing on the profit, 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 knowhow; (c) artistic related intangible assets, such as, literary works and copyrights, musical compositions, copyrights, maps , engravings; (d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 statute vide Finance Act, 2012. 27. 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 character of definition of 'international transaction' under Section 92B. Clearly, therefore, this Explanation is to be read in conjunction with the main provisions, and in harmony with the scheme of the provisions, under Section 92B. Under this Explanation, five categories of trans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch 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, losses or assets of such enterprise at the time of transaction or on a future date . What is implicit in this statutory provision is that while impact on profit, income, losses or assets is sine qua non, 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 only its crystallization may t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 balances do not cost anything to the person allowing such use of funds. The situations can be endless, but the common thread is that when an assessee extends an assistance to the associated enterprise, which does not cost anything to the assessee and particularly for which the assessee could not have realized money by giving it to someone else during the course of its normal business, such an assistance or accommodation does not have any bearing on its profits, income, losses or assets, and, therefore, it is outside the ambit of international transaction under section 92B (1) of the Act. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntee 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 assessee on merits. It is difficult to understand as to how this decision is taken as supporting the proposition that the issuance 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: In the matter of guarantee commission, the adjustment made by the TPO were based on instances restricted to the commercial banks providing gu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etition, 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 . Thirdly, the amendment is with retrospective effect from 1st April, 1962. Fourthly, the Finance Act 2012 which introduced, inter alia, the amendment to section 2(47) and section 92CA(2B) is a validating act in view of section 119 thereof. 215. Explanation 2 to section 247 broadly has four elements. Disposal or parting with or creating any interest in an asset. The asset or any interest in the asset. The disposing of or parting with the asset or creating any interest therein may be: (a) Direct or indirect. (b) Absolute or conditional. (c) Voluntary or involuntary. (d) By amendment or otherwise. (iv) A non-obstante provision regarding the nature of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spect. 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 ambit, as always intended by the 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 future cases, including the proceedings in respect of the petitioner. Thus, even assuming that the judgment of the Supreme Court remains unaffected by the clarificatory amendment, the Revenue would be entitled hereafter in o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y 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 is noted by Hon'ble Supreme Court in the case of CIT v. Sun Engg. Works (P.) Ltd. [1992] 198 ITR 297/64 Taxman 442 (SC), It is neither desirable nor permissible to pick out a word or a sentence from the judgment of this Court, divorced from the context of the question under consideration and treat it to be the complete law declared by this Court. The judgment must be read as a whole and the observations from the judgment have to be considered in the light of the questions which were before 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 pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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- which is what we are concerned with at present. This TCC decision dealt with a situation in which the assessee was denied, in computation of its business income, tax deduction for payment of guarantee fees on the ground that there was no effective benefit to the assessee, in obtaining the said guarantee. Ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 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 between the related enterprises, Indian transfer pricing legislation covers only such transactions as are in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises . Our transfer pricing provisions, perhaps being in the quest of comprehensive 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 cla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ition 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 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 often the case, 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 . There can be number of reasons, including regulatory issues and market conditions in the related jurisdictions, in which such a contribution, by way of a guarantee, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red 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, the immense contribution of the OECD, in the field of the transfer pricing as well, is admired and respected. However, the relevance of this work, so far as interpretation to transfer pricing legislation is concerned, must remain confined to the areas which have remained intact from legislative or judicial guidance. There is no 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, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tances would have satisfied the identified need either by performing the activity in-house 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 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 (and would not be willing to pay for it were they independent enterprises). Such an activity would be one that a group member (usually the parent company or a regional holding company) performs solely because of its ownership interest in one or more other group members, i.e. in its capacity as shareholder. This type of activity would not justify a charge to the recipient companies. It may be referred to as a shareholder activity , distinguishable from the broader term ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der'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 Regulations 1.482-9(1)(3)(i) which defines 'benefit', form a US Transfer Pricing perspective, as an activity is considered to be provided a benefit to the recipient if the activity directly results in a reasonably identifiable increment of economic or commercial 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 are not there. Such importation would be not to construe but to amend the statute . Their Lordships noted that Even if there be casus omissus, the defect can be remedied only by legislation and not by judicial interpretation . The benefit test, which is set out in the OECD Guidance and which finds its place in the international best practices, does not find its place in the main definition of international transaction, even though there is a reference to the expression 'benefit' in the context ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 benchmarking the arm's length price of corporate guarantees. A bank guarantee is a surety that that the bank, or the financial institution issuing the guarantee, will pay off the debts and liabilities incurred by an individual or a business entity in case they are unable to do so. By providing a guarantee, a bank offers to honour 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 the risk assessment and provide security may ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 subsidiaries raising funds for acquisitions by such subsidiaries, these guarantees will be deemed to be services to the subsidiaries, and, as a corollary thereto, when corporate guarantees are issued for the subsidiaries to raise funds for their own needs, the corporate guarantees are to be treated as shareholder activity. The use of borrowed funds for own use is a reasonable presumption as it is a matter of course rather than exception. There has to be something on record to indicate or suggest that the funds raised by the subsidiary, with the help of the guarantee given by the assessee, are not for its own business purposes. As a plain look at the details of corporate guarantees would show, these guarantees were issued to various banks in respect of the credit facil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prises 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 separate entities rather than as inseparable parts of a single unified business. After referring to article 9 of the model convention and stating 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 reproduced 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 these are consistent with the methods described in Chapters II and III. In other than exceptional cases, the tax ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... perty 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 structured by the taxpayer to avoid or minimize tax. In such cases, the totality of its terms would be the result of a condition that would not have been made if the parties had been engaged in arm's length dealings. Article 9 would thus allow an adjustment of conditions to reflect those which the parties would have attained had the transaction been structured in accordance with the economic and commercial reality of parties dealing at arm's length. 17. The significance of the aforesaid guidelines 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 39;, 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 transactions' under section 92B. Of course, once a transaction 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 subsidiaries. 44. As for the words 'provision for services appearing in Section 92B, and connotations thereof, our humble understanding is that this expression, in its natural connotations, is rest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 residuary clause of definition of international transactions under section 92B. As for the learned Departmental Representative's argument that whether the service has caused any extra cost to the assessee should not be the deciding factor to determine whether it is an international and then gives an example of brand royalty to make his point. What, in the process, he overlooks is that Section 92B(1) specifically covers sale or lease of tangible or intangible property . The expression bearing on the profits, income, losses or assets of such enterprises is relevant only for residuary clause i.e. any other services not specifically covered by Section 92B. It was also contended that, while rendering Bharti Airtel decision, the Delhi Tribunal did go overb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... et development, marketing management, administration, technical service, repairs, design, consultation, agency, scientific research, legal or accounting service which are anyway covered in provision for services and mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to anyone or more of such enterprises . That leaves us with two clauses in the Explanation to Sect ion 92B which are not covered by any of the three categories discussed above or by other specific segments covered by Section 92B, namely borrowing or lending money. The remaining two items in the Explanation to Section 92B are set out in clause (c) and (e) thereto, dealing with (a) capital financing and (b) business restructuring or reorganization. These items can only be covered in the residual clause of definition in international transactions, as in Section 92B (1), which covers any other transaction having a bearing on profits, incomes, losses, or assets of such enterprises . It is, therefore, essential ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is set out in clause (e) of the Explanation which provides that the bearing on profits, income, losses or assets could be immediate or on a future date. These guarantees do not have any impact on income, profits, losses or assets of the assessee. There can be a hypothetical situation in which a guarantee default takes place and, therefore, the enterprise may have to pay the guarantee amounts but such a situation, even if that be so, is only a hypothetical situation, which are, as discussed above, excluded. When an assessee extends an assistance to the associated enterprise, which does not cost anything to the assessee and particularly for which the assessee could not have realized money by giving it to someone else during the course of its normal business, such an assistance or accommodation does not have any bearing on its profits, income, losses or assets, 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 v. Dy. CIT [(2011) 142 TTJ 358 (Hyd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . (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 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- -vis certain norms, and these norms cannot be given effect from a date earlier than the date norms are being introduced. However, as we have decided the issue in favour of the assessee on merits and even after taking into account the amendments brought about by Finance Act 2012, we need not deal with this aspect of the matter in greater detail. 48. In the present case, we have held tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 exercise can be done in the present case is, of course, something to be examined and our observations should not be construed as an expression on merits of that aspect of matter. Given the fact that the assessee has succeeded on merits in this case, it would not really be necessary to deal with that aspect of the matter. 49. The second issue is this. We must deal with the question whether in this 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 r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nch 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 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 deleted. As we do so, however, we must add that, in our considered view, the way forward, to avoid such issues being litigated and to ensure satisfactorily resolution of these disputes, must include a clear and unambiguous legislative guidance on the transfer pricing implications of the corporate guarantees as also on the methodology of determining its ALP, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibunal- 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 matter was decided against the assessee. The co-ordinate bench had further observed in this case, the assessee has itself charged 0.5% guarantee commission from its AE, therefore, it is not a case of not charging of any kind of commission from its AE. The only point which has to be seen in this case is whether the same is at ALP or not . Learned Departmental Representative has invited our attention to a decision of the Bangalore benches, in the case of Advanta India Limited Vs ACIT [(2015) TII-294-ITAT-BAN], which is in favour of the assessee. While learned Departmental Representative is indeed right, that is a case in which the assessee did infact recover charges, which included more than the cost incurred, from the ben ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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, in our humble understanding, no impact on the same as long as it is issued without a consideration and as long as the guarantee is not invoked by the beneficiary. To treat this phrase as implying a benefit test, will, in our considered view, stretching the things too far. The benefit test, as we see it, does not find place in the statute as yet. We are, therefore, not swayed by the arguments, though extremely well researched and thought provoking, of the learned Departmental Representative- particularly at this stage. He has raised a number of other arguments as well but as those arguments are already dealt with in the case of Micro Ink decision reproduced above, we see no need to again deal with the same. 16. We are, therefore, of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on account of interest expenditure, therefore, so far as the disallowance u/s 14A is concerned, it is not the case of the assessee that no expenditure on account of interest expenditure has been incurred. Further the activity of the investment is stated to have been looked after by the Finance Department of the assessee along with the accounts and finance, therefore, there may not be a separate expenditure incurred for the purpose of earning the dividend income. However the expenditure incurred on the activity resulting taxable and non taxable income has to be apportioned as required under provisions of section 14A. We note that the total investment comprising the investment in mutual fund and growth schemes / growth mutual funds as well as investment in foreign subsidiaries. The Assessing Officer itself has excluded the investment in foreign subsidiaries because the dividend from the foreign companies is taxable. However, the growth mutual fund does not yield any dividend/exempt income, therefore, the provisions of section 14A would not apply on the investment in growth mutual funds. A similar view was taken by the Co-ordinate Bench of this Tribunal in the case of Everest Kanto C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e matter to the file of the Assessing Officer for computing the disallowance under section 14A r.w.r. 8D in the light of the above directions which will also apply mutatis mutandis to this assessment year as well. 22. Ground no. 3 is thus allowed for statistical purposes in the terms indicated above. 23. In ground no. 4, the assessee has raised the following grievance: 4. Disallowance of expenses of ₹ 2,99,79,357/- incurred on DRUPA exhibition The learned CIT (A) has erred in upholding the action of the Deputy Commissioner of Income-tax - Circle 3(2) (hereinafter referred to as the 'AO')/ Deputy Commissioner of Income-tax (Transfer Pricing) - 1 (9) (hereinafter referred to as TPO ): 4.1 in disallowing expenses incurred for DRUPA Exhibition - Germany (2008) amounting to ₹ 2,99,79,357/- by treating it as capital expenses; 4.2 in appreciating the fact that said advertisement expense was revenue expenditure incurred wholly or exclusively for the propose of business and allowable under section 37(1) of the Act. 24. So far as this disallowance is concerned, the relevant material facts are like this. During the course of scrutiny assessmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . There is no, and there cannot be any, dispute on the fundamental position that the expenditure in participation in a trade exhibition is in the nature of sale promotion expenses and should be admissible as such under section 37(1). The concept of amortization or of deferred revenue expenditure is alien to the scheme of Section 37(1). All it requires, so far as this aspect of the matter is concerned, is that the expenditure should not a capital expenditure, in addition to the requirements that it should not be covered by Sections 30 to 36 of the Act, that it should not a personal expenditure and that it should be laid out wholly and exclusively for the purposes of business. It is not even the case of the Assessing Officer that it is a capital expenditure; all that is claimed is that since benefit of expense spreads over four years, the expense should be amortized over a period of four years. That is not a legally sustainable proposition as the very concept of deferred revenue expenditure is somewhat alien to the income tax law and as is clearly evident from the following observations made by Hon ble Gujarat High Court in the case of DCIT vs Core Healthcare Ltd [(2009) 308 ITR 263 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ely and the expenditure can be spread over that period, such as in the cases of issuance of debenture at a discount. That is a case in which precise period of benefit is known right at the stage of incurring the expenditure, and the nexus between the period of benefit and the expenditure is so direct that any other view of the matter will result in distorted picture in the books of accounts. We are not dealing with such a situation right now. Here is a case in which expenditure is incurred in the revenue field, though the occasion for incurring such an expenditure comes only once in four years, and the period of its benefit cannot be ascertained with any reasonable degree of certainty. Unless even the precise period of benefit ca be reasonably ascertained, there cannot be any occasion for spreading over the expenditure over the period of benefit. 31. There are large number of judicial precedents that participation costs in the trade exhibitions are inherently in the nature of revenue expenses, as these are marketing expenses in nature, which are allowed in the year in which the expenses are incurred. We are in considered agreement with this school of thought. 32. In the light ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. 37. We have noted that this payment made to the subsidiary has been held to be an arm s length payment by the TPO, in his order, and that this payment has been made by the assessee to its AE for certain marketing services incurred on behalf of the assessee. The approach of the Assessing Officer, in disallowing the payment made to the subsidiary, on the ground that there is no good reason for the subsidiary to render these services to the assessee, is not only wholly out of tune with the ground realities of group synergy and commerce but also amateurish. It is important to bear in mind the fact that there is specific marketing agreement that the assessee has entered into with the subsidiary, a copy of which is placed before us in the paperbook at pages 272 to 285, and the reimbursements are made in terms of the said agreement. The reimbursement is for salary of one person i.e. Ron Ehrhardt (US $ 1,54,171), who is exclusively engaged in marketing of assessee s products, his travelling expenses (US $ 58,156) and expenses incurred on trade show (US $ 25,392). The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ferred to as the 'AO')/ Deputy Commissioner of Income-tax (Transfer Pricing) - 1 (9) (hereinafter referred to as TPO ): 6.1 in confirming the adjustment under section 43A of the Act by considering the foreign currency translation loss of ₹ 6,57,75,845/- as capital loss on acquisition of asset instead of considering the same as revenue loss on account of mere restatement of loan liability. 41. The assessee has availed certain foreign currency loans, from Export Import Bank of India (Exim Bank) under production equipment finance program, for acquisition of fixed assets. During the relevant previous year, and as a result of the restatement of closing balance of loan liability in terms of INRs at the exchange rate applicable at the relevant point of time, the assessee incurred a foreign currency translation loss of ₹ 6,57,75,845. During the course of the assessment proceedings, the Assessing Officer noticed this claim and required the assessee to show cause as to why this deduction not be disallowed under section 43A. It was explained by the assessee that the loss on valuation is due to restatement of loan in INRs and not on account of acquisition of asset ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e following grievances: 7. Interest under section 234B of the Act The learned CIT (A) has erred in upholding the action of the Deputy Commissioner of Income-tax - Circle 3(2) (hereinafter referred to as the 'AO')/ Deputy Commissioner of Income-tax (Transfer Pricing) - 1 (9) (hereinafter referred to as TPO ): 7.1 in confirming levy of interest under section 234B of the Act of ₹ 2,32,38,893/-. 46. Learned counsel for the assesse fairly states that all he seeks in relief is the consequential relief. 47. Ground no. 7 is thus allowed to the extent of consequential relief. 48. In ground no. 8, the assessee has raised the following grievance: 8. Interest under section 234C of the Act The learned CIT (A) has erred in upholding the action of the Deputy Commissioner of Income-tax - Circle 3(2) (hereinafter referred to as the 'AO')/ Deputy Commissioner of Income-tax (Transfer Pricing) - 1 (9) (hereinafter referred to as TPO ): 8.1 in confirming levy of interest under section 234C of the Act of ₹ 3,50,239/-instead of ₹ 3,33,017/- as per revised computation of income submitted before the learned AO during the course of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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