TMI Blog2017 (12) TMI 609X X X X Extracts X X X X X X X X Extracts X X X X ..... llowing grievances: 2. The Ld. Assessing Officer has erred in law and on facts of the case in making Transfer Pricing adjustment of ₹ 2,42,63,991/- as Commission on Corporate Guarantee u/s 92 of the Act in relation to the Corporate Guarantee provided by the Appellant as a Co-guarantor to the Bank on behalf of the Associate Enterprise (AE). 3. The Ld. Assessing Officer has erred in law and on facts of the case in not appreciating the commercial and economic interest of the Appellant in the AE on providing Corporate Guarantee to the Bank on behalf of the said AE. 4. The Ld. Assessing Officer has erred in law and on facts of the case in not appreciating that the granting of Corporate Guarantee is not an international transaction under Transfer Pricing regulations. 5. The Ld. Assessing Officer has further erred in law and on facts of the case in not appreciating that a granting of Corporate Guarantee to the AE is only an assistance to the AE, which does not cost anything to the Appellant and such assistance or accommodation does not have any bearing on its profits, income, loss or assets, and therefore, it is outside the ambit of international transaction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s nature. The current OECD guidelines as well as cases decided by the US and Canada Tax Courts have also held that provision of guarantee by the guarantor is a service rendered and the guarantor is justified in charging a suitable guarantee fee for such service. Hence, in case of the above guarantee given by you, it is proposed to benchmark suitable guarantee fees which should have been charged by you from your AE as an arm's length price for the services rendered by you. Please show cause as to why a suitable guarantee fee should not be taken as arm's length price for providing the corporate guarantee to its AE. The submission of the assessee is considered. The Issue and relevant objections of the assessee have been considered and analyzed. A guarantee is a legally enforceable agreement that intends to survive the insolvency of the person or concern on whose behalf it is issued and obliges the guarantor to provide for payment if that person or concern fails to. In case the guarantee is valid, unconditional and irrevocable and it requires prompt payment in full before pursuit of remedies, in principle it provides full credit substitution. If sufficient funding is not provid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st. The expression 'international transaction' is a defined expression. Section 92B defines the expression 'international transaction' as follows: '92B - Meaning of international transaction ( 1) For the purposes of this section and sections 92, 92C, 92D and 92E, international transaction'' means a transaction between two or more associated enterprises, either or both of whom are non-residents, 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 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 anyone 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, musical compositions, copyrights, maps, engravings; ( d) data processing related intangible assets, such as, proprietary computer software, software copyrights, automated databases, and integrated circuit masks and masters; ( e) engineering related intangible assets, such as, industrial design, product patents, trade secrets, engineering drawing and schematics, blueprints, proprietary documentation; ( f) customer related intangible assets, such as, customer lists, customer contracts, customer relationship, open purchase orders; ( g) contract related intangible assets, such as, favourable supplier, contracts, licence agreements, franchise agreements, non-compete agreements; ( h) human capital related intangible assets, such as, trained and organised 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; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e provisions, under Section 92B. Under this Explanation, five categories of transactions have been clarified to have been included in the definition of 'international transactions'. 28. The first two categories of transactions, which are stated to be included in the scope of expression 'international transactions' by the virtue of clause (a) and (b) of Explanation to Section 92B, are transactions with regard to purchase, sale, transfer, lease or use of tangible and intangible properties. These transactions were anyway covered by 2 (a) above which covered 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 by 2(b) and 3 above in provision for services and mutual agreement or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ategories is that while latter is a certainty, and only its crystallization may take place on a future date, there is no such certainty in the former case. In the case before us, it is an undisputed position that corporate guarantees issued by the assessee to the Deutsche Bank did not even have any such implication because no borrowings were resorted to by the subsidiary from this bank. 31. In this light now, let us revert to the provisions of clause (c) of Explanation to Section 92B which provides that the expression 'international transaction' shall include capital financing, including any type of long-term or short-term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business . In view of the discussions above, the scope of these transactions, as could be covered under Explanation to Section 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ide the ambit of international transaction under section 92B (1) of the Act. 33. In any event, the onus is on the revenue authorities to demonstrate that the transaction is of such a nature as to have bearing on profits, income, losses or assets of the enterprise, and there was not even an effort to discharge this onus. Such an impact on profits, income, losses or assets has to be on real basis, even if in present or in future, and not on contingent or hypothetical basis, and there has to be some material on record to indicate, even if not to establish it to hilt, that an intraAE international transaction has some impact on profits, income, losses or assets. Clearly, these conditions are not satisfied on the facts of this case.' 23. Learned Departmental Representative submits that this decision is no longer good law in the light of Everest Kanto Cylinders Ltd. decision (supra) and Vodafone India Services (P.) Ltd. decision (supra) by Hon'ble Bombay High Court. 24. As for Hon'ble High Court's judgment in the case of Everest Kanto Cylinders Ltd. (supra), it is necessary to appreciate the fact the assessee was charging a .5% commission on issuance o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the TPO were based on instances restricted to the commercial banks providing guarantees and did not contemplate the issue of a Corporate Guarantee. No doubt these are contracts of guarantee, however, when they are Commercial banks that issue bank guarantees which are treated as the blood of commerce being easily encashable in the event of default, and if the bank guarantee had to be obtained from Commercial Banks, the higher commission could have been justified. In the present case, it is assessee company that is issuing Corporate Guarantee to the effect that if the subsidiary AE does not repay loan availed of it from ICICI, then in such event, the assessee would make good the amount and repay the loan. The considerations which applied for issuance of a Corporate guarantee are distinct and separate from that of bank guarantee and accordingly we are of the view that commission charged cannot be called in question, in the manner TPO has done. In our view the comparison is not as between like transactions but the comparisons are between guarantees issued by the commercial banks as against a Corporate Guarantee issued by holding company for the benefit of its AE, a subsidiary company. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndment or otherwise. ( iv) A non-obstante provision regarding the nature of a transfer. If an act, arrangement, transaction etc. constitutes a transfer as defined in the section it would be so notwithstanding the transfer of rights having been categorised as being effected or dependent upon or flowing from the transfer of a share or shares of a company registered or incorporated outside India. 216. Two aspects of a transfer are clarified - the asset itself and the manner in which it is dealt with. The asset is no longer restricted to the asset per se or a right therein, but also extends to any interest therein . Prior to the amendment, the words any interest therein were absent. Further, the nature of the disposal is also expanded. It now includes the creation of any interest in any asset. Moreover, the disposal of or creation of any interest in the asset may be direct or indirect, absolute or conditional, voluntary or involuntary. It may be by way of an agreement or otherwise. Further, the concluding words constitute a nonobstante provision. It provides that the transfer contemplated therein would be notwithstanding that it has been characterised as being effected ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns unaffected by the clarificatory amendment, the Revenue would be entitled hereafter in other cases, at least, to appreciate, analyze and construe the transactions relating to call options, including the Framework agreements in a proper perspective which it may not have done earlier. 220. These are important issues. There is no justification for withdrawing the proceedings from the channel provided by the Income-tax Act, bypassing the Tribunal and considering all these questions in exercise of the High Court's extraordinary jurisdiction under Article 226.' (Emphasis supplied) 27. Revenue's emphasis is on the last two sentences in paragraph No 213 which state that The effect of the amendment would have to be considered. It cannot be brushed aside but in doing so what it overlooks is the subsequent observations highlighted above which recognize the fact that merely because a subsequent Explanation is introduced by the legislature, it is not an open and shut case against the assessee or the revenue, and that all these observations are in the context that there is no justification for withdrawing the proceedings from the channel provided by the Income-tax Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lying the decision to a later case, the Courts must carefully try to ascertain the true principle laid down by the decision of this Court and not to pick out words or sentences from the judgment, divorced from the context of the questions under consideration by this Court, to support their reasoning It was also recalled that in Madhav Rao Jivaji Rao Scindia Bahadur v. Union of India AIR 1971 SC 530, Hon'ble Supreme Court had cautioned that It is not proper to regard a word, clause or a sentence occurring in a judgment of the Supreme Court, divorced from its context, as containing a full exposition of the law on a question when the question did not even fall to be answered in that judgment. That precisely, however, has been the approach of the revenue authorities in placing reliance on Vodafone India Services (P.) Ltd. (supra) decision. We reject this approach. 28. For the reasons set out above, learned Departmental Representative's reliance on Hon'ble Bombay High Court's judgments in the cases of Everest Kanto (supra) and Vodafone India Services (supra) is wholly misplaced and devoid of any merits. As for coordinate bench decision in the case of Hindalco In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that there was no effective benefit to the assessee, in obtaining the said guarantee. Aggrieved by denial of deduction, assessee carried the matter in appeal before the Canadian Tax Court, and the plea of the assessee was eventually upheld. It is also interesting to note that as a sequel to this Tax Court of Canada decision, the transfer pricing legislation was amended, to bring greater clarity on the issue and as a measure of abundant caution, and section 247 (7.1), granting specific exemption to guarantee fees, was introduced. This amendment is as follows: ( 7.1) Sub-section (2) does not apply to adjust an amount of consideration paid, payable or accruing to a corporation resident in Canada (in this sub-section referred to as the parent ) in a taxation year of the parent for the provision of a guarantee to a person or partnership (in this sub-section referred to as the lender ) for the repayment, in whole or in part, of a particular amount owing to the lender by a non-resident person, if (a) the non-resident person is a controlled foreign affiliate of the parent for the purposes of section 17 throughout the period in the year during which the particular amount is owing; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ision, a specific amendment was introduced in the Canadian transfer pricing law to clarify the position that all corporate guarantees issued by the assessee, in support of its subsidiaries, are not necessarily international transactions. Revenue, therefore, does not derive any advantage from the Tax Court of Canada's decision in the case of GE Capital Canada. There are many more aspects which make this decision wholly irrelevant in the present context but suffice to say that relevant legal provisions and context being radically different, the reliance of this decision must be rejected for this short reason alone. 32. As we take note of the above legal position in Canada, it is appropriate to take note of the concept of 'shareholder activities' in the context of corporate guarantees which provides conceptual justification for exclusion of corporate guarantees, under certain conditions, from the scope of transfer pricing adjustments. Taking note of these proposed amendments, 'Transfer Pricing and Intra Group Financing by Bakker Levvy, IBFD publication (ISBN- 978-90-8722-153-9)' observes that Proposed sub-section 247(7.1) of the ITA provides that the tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the related jurisdictions, in which such a contribution, by way of a guarantee, would justify to be a more appropriate and preferred mode of contribution vis-a-vis equity contribution. It is significant, in this context, that the case of the assessee has all along been, as noted in the assessment order itself, that said guarantees were in the form of corporate guarantees/ quasi-capital and not in the nature of any services . In other words, these guarantees were specifically stated to be in the nature of shareholder activities. The assessee's claim of the guarantees being in the nature of quasi-capital, and thus being in the nature of a shareholder's activity, is not rejected either. The concept of issuance of corporate guarantees as a shareholder activity is not alien to the transfer pricing literature in general. On the contrary, it is recognized in international transfer pricing literature as also in the official documentation and legislation of several transfer pricing jurisdictions. The 'OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations' itself recognizes the distinction between a shareholder activity and a provision fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t that when the domestic transfer pricing regulations do not provide any guidelines, it may have to be decided having regard to international best practices, we do not quite agree with it inasmuch as, in our considered view, Revenue cannot seek to widen the net of transfer pricing legislation by taking refuge of the best practices recognized by the OECD work. 35. While dealing with special consideration for intra-group services , the 'OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations' has noted that there are two fundamental issues with respect to the intra-group services- first, whether intragroup services have indeed been provided, and, second- if the answer to the first question is in positive, that charge to these services should be at an arm's length price. Dealing with the first question, which is relevant for the present purposes, these Guidelines (2010 version) state as follows: '7.6 Under the arm's length principle, the question whether an intra-group service has been rendered when an activity is performed for one or more group members by another group member should depend on whether the activity provide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t may be referred to as a shareholder activity , distinguishable from the broader term stewardship activity used in the 1979 Report. Stewardship activities covered a range of activities by a shareholder that may include the provision of services to other group members, for example services that would be provided by a coordinating centre. These latter types of non-shareholder activities could include detailed planning services for particular operations, emergency management or technical advice (trouble shooting), or in some cases assistance in day-to-day management. 7.10 The following examples (which were described in the 1984 Report) will constitute shareholder activities, under the standard set forth in paragraph 7.6: ( a) Costs of activities relating to the juridical structure of the parent company itself, such as meetings of shareholders of the parent, issuing of shares in the parent company and costs of the supervisory board; ( b) Costs relating to reporting requirements of the parent company including the consolidation of reports; ( c) Costs of raising funds for the acquisition of its participations. In contrast, if for example a parent comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly advantageous situation or circumstances); and making available to the recipient any property or other resources of the rendered [Regulation 1.482-9(1)(2)]. The issuance of guarantees is not within the ambit of transfer pricing in United States because it is a service but because it is covered by the specific definition discussed above. As a matter of fact, David S Miller, in a paper titled 'Federal Income Tax Consequences of Guarantees; A Comprehensive Framework for Analysis' published in the 'The American Lawyer Vol. 48, No. 1 (Fall 1994), pp. 103-165 (http://www.jstor.org/stable/20771688), has stated that a guarantee is not a service. The following observations, at pages 114, are important: The position that guarantees are services has been discredited by the courts with good reason38. Guarantee fees do not represent payments for services any more than payments with respect to other financial instruments constitute payment for services39. A guarantor does not arrange financing for the debtor, but merely executes a financial instrument in its favour. 38 See. e.g., Centel Communications Co. v. Commissioner, 92 T.C. 612, 632 (1989), aff d, 920 F2d 1335 (7 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal transaction, even though there is a reference to the expression 'benefit' in the context of cost or expense sharing arrangements but that is a different aspect of the matter altogether. In the absence of benefit test being mentioned in the definition for the present purposes, we cannot infer the same. 38. One more thing which is clearly discernable from the above discussions is that the tests recognized by these guidelines are interwoven twin tests of benefit and arm's length. Benefit test implies the recipient group member should get economic or commercial value to enhance its commercial position . The benefit test is interlinked with the an arm's length test in the sense that it seeks an answer to the question whether under a similar situation an independent enterprise would have been willing to pay for the activity concerned, or would have performed the activity in-house for itself. So far as the benefit test is concerned, as we have noted earlier, it is alien to the definition of international transaction' under the Indian transfer pricing legislation. So far as arm's length test is concerned, it presupposes that such a transaction is possible ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ape of cash or capital assets. Any entity that can pass the risk assessment and provide security may obtain a bank guarantee. The consideration for the issuance of bank guarantee, so far as a banker is concerned, is this. When the client is not able to honour the financial commitments and when client is not able to meet his financial commitments and the bank is called upon to make the payments, the bank will seek a compensation for the action of issuing the bank guarantee, and for the risk it runs inherent in the process of making the payment first and realizing it from the underlying security and the client. Even when such guarantees are backed by one hundred per cent deposits, the bank charges a guarantee fees. In a situation in which there is no underlying assets which can be realized by the bank or there are no deposits with the bank which can be appropriated for payment of guarantee obligations, the banks will rarely, if at all, issue the guarantees. Of course, when a client is so well placed in his credit rating that banks can issue him clean and unsecured guarantees, he gets no further economic value by a corporate guarantee either. Let us now compare this kind of a guarante ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e guarantees would show, these guarantees were issued to various banks in respect of the credit facilities availed by the subsidiaries from these banks. The guarantees were prima facie in the nature of shareholder activity as it was to provide, or compensate for lack of, core strength for raising the finances from banks. No material, indicating to the contrary, is brought on record in this case. Going by the OECD Guidance also, it is not really possible to hold that the corporate guarantees issued by the assessee were in the nature of 'provision for service' and not a shareholder activity which are mutually exclusive in nature. In the light of these discussions, we are of the considered view, and are fully supported by the OECD Guidance in this, that the issuance of corporate guarantees, in the nature of quasi-capital or shareholder activity- as is the uncontroverted position on the facts of this case, does not amount to a service in which respect of which arm's length adjustment can be done. 42. As observed by Hon'ble Delhi High Court in the case of CIT v. EKL Appliances Ltd. [2012] 345 ITR 241/209 Taxman 200/24 taxmann.com 199 (Delhi), a re-characterization ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sistent with the methods described in Chapters II and III. In other than exceptional cases, the tax administration should not disregard the actual transactions or substitute other transactions for them. Restructuring of legitimate business transactions would be a wholly arbitrary exercise the inequity of which could be compounded by double taxation created where the other tax administration does not share the same views as to how the transaction should be structured. 1.37 However, there are two particular circumstances in which it may, exceptionally, be both appropriate and legitimate for a tax administration to consider disregarding the structure adopted by a taxpayer in entering into a controlled transaction. The first circumstance arises where the economic substance of a transaction differs from its form. In such a case the tax administration may disregard the parties' characterization of the transaction and recharacterise it in accordance with its substance. An example of this circumstance would be an investment in an associated enterprise in the form of interest-bearing debt when, at arm's length, having regard to the economic circumstances of the borrowing compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x administration should not disregard the actual transaction or substitute other transactions for them and the examination of a controlled transaction should ordinarily be based on the transaction as it has been actually undertaken and structured by the associated enterprises. It is of further significance that the guidelines discourage re-structuring of legitimate business transactions. The reason for characterisation of such restructuring as an arbitrary exercise, as given in the guidelines, is that it has the potential to create double taxation if the other tax administration does not share the same view as to how the transaction should be structured. 18. Two exceptions have been allowed to the aforesaid principle and they are (i) where the economic substance of a transaction differs from its form and (ii) where the form and substance of the transaction are the same but arrangements made in relation to the transaction, viewed in their totality, differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner.' 43. It is thus clear that even if we accept the contention of the learned Departmental Representative ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons thereof, our humble understanding is that this expression, in its natural connotations, is restricted to services rendered and it does not extend to the benefits of activities per se. Whether we look at the examples given in the OECD material or even in Explanation to Section 92B, the thrust is on the services like market research, market development, marketing management, administration, technical service, repairs, design, consultation, agency, and scientific research, legal or accounting service or coordination services. As a matter of fact, even in the Explanation to Section 92B- which we will deal with a little later, guarantees have been grouped in item 'c' dealing with capital financing, rather than in item 'd' which specifically deals with 'provision for services'. When the legislature itself does not group 'guarantees' in the 'provision for services' and includes it in the 'capital financing', it is reasonable to proceed on the basis that issuance of guarantees is not to be treated as within the scope of normal connotations of expression 'provision for services'. Of course, the global best practices seem to be that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as also contended that, while rendering Bharti Airtel decision, the Delhi Tribunal did go overboard in deciding something which was not even raised before us. In the written submission, it was stated that Hon'ble Delhi ITAT was not requested by the contesting parties to decide the issue as to whether the provision of guarantee was a service or not . That's not factually correct. We are unable to see any merits in learned Departmental Representative's contention, particularly as decision categorically noted that not only before the Tribunal, but this issue was also raised before the DRP- as evident from the text of DRP decision. We now take up the issue with respect to specific mention of the words in Explanation to Section 92B which states that For the removal of doubts, it is hereby clarified that (i) the expression international transaction shall include .. (c) capital financing, including any type of long -term or short -term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business. There is no dispute that this Explanatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g on profits, incomes, losses, or assets of such enterprises . It is, therefore, essential that in order to be covered by clause (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 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&# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssue is this. We find that in the case of Four Soft Ltd v. Dy. CIT [(2011) 142 TTJ 358 (Hyd)], a co-ordinate bench had, vide order dated 9th September 2011, observed as follows: We find that the TP legislation provides for computation of income from international transaction as per Section 92B of the Act. The corporate guarantee provided by the assessee company does not fall within the definition of international transaction. The TP legislation does not stipulate any guidelines in respect to guarantee transactions. In the absence of any charging provision, the lower authorities are not correct in bringing aforesaid transaction in the TP study. In our considered view, the corporate guarantee is very much incidental to the business of the assessee and hence, the same cannot be compared to a bank guarantee transaction of the Bank or financial institution. 47. However, within less than four months of this decision having been rendered, the Finance Act 2012 came up with an Explanation to Section 92B stating that for the removal of doubts , as we have noted earlier in this decision, clarified that international transactions include, inter alia, capital financing by way ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this aspect of the matter in greater detail. 48. In the present case, we have held that the issuance of corporate guarantees were in the nature of shareholder activities- as was the uncontroverted claim of the assessee, and, as such, could not be included in the 'provision for services' under the definition of 'international transaction' under section 92B of the Act. We have also held, taking note of the insertion of Explanation to Section 92B of the Act, that the issuance of corporate guarantees is covered by the residuary clause of the definition under section 92B of the Act but since such issuance of corporate guarantees, on the facts of the present case, did not have bearing on profits, income, losses or assets , it did not constitute an international transaction, under section 92B, in respect of which an arm's length price adjustment can be made. In this view of the matter, and for both these independent reasons, we have to delete the impugned ALP adjustment. The question, which was raised in Bharti Airtel's case (supra) but left unanswered as the assessee had succeeded on merits, reamins unanswered here as well. However, we may add that in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing in the nature of shareholder activity and excludible from the scope of services for that reason alone, is an area which had come up for consideration for the first time. In effect, therefore, there was no conflict on this issue of and the other issues, given decision on the said issue, were wholly academic. It cannot be open to refer the academic questions to the special bench. No doubt, some decisions of the coordinate benches which have reached the different conclusions. There is, however, no conflict in the reasoning. Four Soft Ltd. decision (supra) had decided the issue in favour of the assessee but that was with respect to the law prior to insertion to Explanation to Section 92B. As for the post-amendment law and the impact of amendment in the definition of 'international transaction', the matter was again decided in favour of the assessee by Bharti Airtel Ltd. decision (supra) on the peculiar facts of that case. The decisions like Everest Kento Cylinders Ltd. (supra) and Aditya Birla Minacs Worldwide (supra) were decisions in which the assessee had charged the fees and, for that reason, such cases are completely distinguishable as discussed above. In Prolific' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... implications of the corporate guarantees as also on the methodology of determining its ALP, if necessary. 9. We are in considered agreement with the views so expressed by the coordinate bench. Respectfully following the views so expressed by the coordinate bench, we uphold the relief granted by the CIT(A) and decline to interfere in the matter. 10. Ground nos. 2 to 7 are thus allowed. 11. In ground nos.8 to 14, the assessee has raised the following grievances: 8. The Ld. Assessing Officer has erred in law and on facts of the case in making Transfer Pricing adjustment of ₹ 57,32,095/- u/s 92 of the Act in relation to the notional interest on the outstanding balance of receivables from the AE. 9. The Ld. Assessing Officer has erred in law and on facts of the case in not appreciating that notional interest on the outstanding balance of receivables is not an international transaction under Transfer Pricing regulations. 10. The Ld. Assessing Officer has erred in law and on facts of the case in not appreciating that outstanding balance of receivables cannot per se be treated as a separate international transaction u/s 92B of the IT Act. 11. The Ld ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd duly considered facts of the case in the light of the applicable legal position. 14. We find that this issue is also covered, in favour of the assessee, by Micro Ink (supra) decision, wherein the co-ordinate bench has, inter alia, observed as follows:- 7. We find that, as evident from audit report on form 3CEB (pages 39 to 52 of the paper-book), the arm's length price of exports to the AEs, including Micro USA, has been determined on the basis of the transactional net margin method (TNMM). By way of a note at page 51, it is specifically stated that further, the said amount of ₹ 2428.26 millions has also been determined/ computed by the assessee having regard to the arm's length price on application of Transactional Net Margin Method (TNMM), on aggregation of transactions, as prescribed under section 92C of the Income Tax Act, 1961 . In this backdrop, we can usefully refer to the decision of Hon'ble Delhi High Court, in the case of Sony Ericsson Mobile Corporation Pvt Ltd Vs ACIT [(2015) 374 ITR 118(Del)] wherein Their Lordships had, inter alia, observed as follows: Where the Assessing Officer/TPO accepts the comparables adopted by the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urchase price adjustments/set off would be mandated to arrive at the arm's length price, if the AMP expenses are segregated as an independent international transaction..... 9. By the same logic, even making an adjustment for interest on excess credit allowed on sales to AEs will vitiate the picture, inasmuch as what has already been factored in the TNMM analysis, by taking operating profit figure which incorporate financial impact of the excess credit period allowed, will be adjusted again separately as well. Of course, in the example used by Hon'ble Delhi High Court, the AMP expenses are deductibles in computation of operating profit but that does not make any material difference because the interest levy for late realization of debtors, being inextricably connected with the sales, is also part of operating income. In the case of Nirma Industries Limited Vs DCIT [(2006) 283 ITR 402 (Guj)], Hon'ble High Court has dealing with the nature of interest on debtors, held it to be integral to business income. The same is the principle for the transfer pricing cases to that extent interest is to be taken as integral to sale proceeds, and, as such, includible in operating ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... les are benchmarked on CUP basis. The delay in realization of debts, resulting in a continuing debit balance, is not a standalone international transaction per se, but is a result of the international transaction as it only reflects that the related payment has not been made by the debtor. As for the learned Departmental Representative's stand that the supplier is entitled to receipt of payment immediately on delivery irrespective of whether the finished goods is sold in the market, get spoiled in manufacturing or is damaged would probably be valid in the perfect market conditions which are more of a myth than reality. The only other merit of this approach is its simplicity, or, to put it more appropriately, naivety. The real life trade and commerce is seldom so simple. It is not at all necessary that a payment is to be made as soon as goods or services are delivered. A call is to be taken by the vendor, in consultation with its client and based on the business exigencies, as to what should be the terms on which payments for the supplies is to be made. It is a harsh commercial reality that immediate payments are more of exceptions rather than rule, and more so in a complex ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 16. We see no reasons to take any other view of the matter than the view so taken by us in the case of Micro Ink (supra). Respectfully following the same, we uphold the grievance of the assessee and delete the impugned ALP adjustment of ₹ 57,32,095/- on account of interest on receivables. The assessee gets relief accordingly. 17. Ground no. 8 to 14 are thus allowed. 18. In ground nos. 15 16, the assessee has raised the following grievances:- 15. The Ld. Assessing Officer has erred in law and on facts of the case in making addition of ₹ 2,14,139/- u/s 14A of the Act read with Rule 8D of the Income Tax Rules. 16. Alternatively and without prejudice to above raised ground, the Id. AO ought to have enhanced deduction u/s 10AA of the Act on account of addition of ₹ 2,14,139/-made u/s 14A of the Act read with Rule 8D of the Rules. 19. So far as this grievance of the assessee is concerned, it s sufficient to take note of the fact that the assessee did not raise any objection, to that effect, before the DRP and did not advance any specific adjustment, may be on account of smallness of the amount, before us. In view of this factual position, grieva ..... X X X X Extracts X X X X X X X X Extracts X X X X
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