TMI Blog2016 (9) TMI 1456X X X X Extracts X X X X X X X X Extracts X X X X ..... itional evidence pertaining to credit rating. As we noticed in the additional evidences that the assessee has computed credit rating of Tega Australia at "BBB" and Tega US at "AA" by applying scientific and logical method, as explained above, and submitted before us additional evidences, accordingly, we are of the view that this issue requires fresh examination at the end of the TPO/AO, therefore we restore this issue to the file of the TPO/AO with the direction to ascertain, the arm's length price of the loan. Appeal filed by the assessee on this ground is allowed for statistical purposes. Corporate guarantee provided by the assessee for loans taken from ICICI bank, U.K. - Held that:- As the assessee's expectation from provision of loan and guarantee are not that of a lender or guarantor i.e. to earn a market rate of interest or guarantee fee, rather, the expectation was of a shareholder to protect its investment interest, help it to achieve acquisition of Tega Beruc for furtherance of its own business and get return in terms of appreciation in value and dividends. It can be verified from the fact that no third party would have agreed to grant loans, on an independent basis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CA(3) of the Act, proposed an upward adjustment of ₹ 900,979/- for providing corporate guarantee and an upward adjustment of ₹ 2,883,461/- for providing interest free loan. 3. Although in this appeal, the assessee has raised multiple grounds of appeal but at the time of hearing, the grievance of the assessee has been confined to two main issues, viz. : 1. Inter-Corporate loan (Ground of appeal Nos. 6 to 12 relate to inter-corporate loan, for determination of interest rate for loans provided to other associated enterprises) and 2. Corporate Guarantee (Grounds of appeal Nos. 1 to 5 relate to corporate guarantee provided by the assessee for loans taken from ICICI bank, U.K.). 4. Issue No. 1. Inter-Corporate loan (Ground of appeal Nos. 6 to 12 relate to inter-corporate loan for determination of interest rate for loans provided to other associated enterprises) The facts of this issue are stated in brief. During the financial year 2006-07. Tega India set up Tega Investment Ltd; Bahamas, an associated enterprise (AE). (herein referred to as Tega Bahamas) as a special purpose vehicle (SPV) in the Bahamas for undertaking an acquisition of companies based in South Africa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tered into between two associated enterprises, if there exists a prior agreement in relation to the relevant transaction between such other person and the associated enterprise [where the enterprise or the associated enterprise or both of them are non-residents irrespective of whether such other person is a non-resident or not], or the terms of the relevant transaction are determined in substance between such other person and the associated enterprise. [Explanation - For the removal of doubts, it is hereby clarified that- (i) the expression international transaction shall include- (a) . (b) . (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; .'. It is clearly mentioned in the above cited section 92B of the Income Tax Act 1961, that long-term or short-term borrowing, lending or guarantee, are international transactions. In this case, the Tega Industries Ltd gave long term loan to its AE(Tega Investment Ltd, Bahamas) and furnis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re an arms length price of transactions may be computed. Transfer Pricing Study (TP-Study Report) The assessee under consideration has conducted a Transfer Pricing Study (TP-Study Report) in respect of the said loan transaction which reads as under: 5.02.1. Selection of the Most Appropriate Method The Indian transfer pricing legislation requires taxpayers to select the method that under the facts and circumstances, provides the most reliable measure of an arm's length price. The regulations do not create any priority in the use of the variable methods and allow any method to be used as long as it is the most appropriate method . When determining which method provides the most reliable measure of the arm's length price the two most important factors to consider are the degree of comparability between the controlled and uncontrolled transactions, and the quality of the data and assumptions used in the analysis. CUP Method The CUP method evaluates the price charged in a controlled transaction with reference to the Price charged in comparable uncontrolled transactions, which could be identified either through internal or external comparables. In the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Transactions undertaken in years other than financial years 2006-07 and 2007-08. Hence a total of 20 borrowings were selected as being functionally comparable to Tega India in respect of its transaction relating to receipt of interest from its overseas affiliates. A summary of the 381 borrowings, identifying the 20 accepted and 361 rejected borrowings, along with reasons for acceptance/rejection is enclosed as an Annexure 6. 5.02.03 Findings and conclusion A summary of the findings in respect of comparable borrowings identified in tabulated below: Name of Company Amount Borrowed (million) Rate of interest (percent over LIBOR) Bajaj Hindustan Limited USD 80 0.65 CEAT Limited USD 10 1.6 Corporation Bank (Proposed) USD 50 0.27 Essar Group USD 359 0.90 Essar Steel Limited USD 120 2.55 HPCL USD 200 0.60 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... est rate computed by the TPO is correct or not. The ld AR for the assessee stated before us that the shareholder's loan and guarantee were provided by the appellant as a substitute to equity funding to Tega Bahamas for furthering its own intent of acquiring the two South African Entities. Accordingly, the assessee classified the loan as performing a shareholder function, thus warranting no charge, and guarantee as shareholder service meriting be consideration. However, without prejudice to the contention of loan performing a shareholder function, the assessee offered LIBOR +100 bps as interest income to tax on the loan to Tega Bahamas. The assessee had also provided loans (interest free) to its AEs in Australia (Tega Industries Australia Pty Ltd.-Tega Australia) and USA (Tega Industries Inc.-TegaUS). However, at the time of documentation, the assessee, suo motu offered interest for such loans provided @ LIBOR + 100 hps) on the basis of a bench marking exercise undertaken by it. However, the ld. TPO disregarded the assessee's above cited contention for the provision of loans and computed an additional charge for interest free loans at ₹ 2,883,461, observing th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 36.16 527853.1 TIIB 160000 USD 13.75% 365 25209 39.52 99500 50000 USD 13.75% 288 7875 39.52 311220 15000 USD 13.75% 277 2362.5 39.52 93366 35000 USD 13.75% 94 5512.5 39.52 217851 2883461 Accordingly, an upward adjustment of ₹ 28,83,461/- is being made to the arm's length price of the loan. The total income is to be upwardly adjusted by this amount. If the assessee has offered the amount of ₹ 12,4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich has a bearing on any funds being lent to other independent parties. Just as the LIBOR indicates the cost of unsecured borrowing by bank but it does not mean that the bank which uses the LIBOR to price its loan has to actually borrow at that rate, in similar fashion, the cost of funds indicate the cost of borrowing in the hands of the lender company and it does not mean that the lender has to actually lend out of these funds. The arm's length principle envisages that the borrower is to be equated with an independent party and the dealings are to be construed in a manner in which the lender and borrower would have engaged themselves had they been completely independent 7.2.2 It is not the case of the assessee that it has utilized foreign currency funds (i.e. loans) to fund its international loans to the subsidiaries (AEs). Further, the foreign currency loans appear to be short term (low interest bearing) export credit funds (although no details have been filed). In any case, as per the principle mentioned above, the average cost of funds has been taken (which was provided by the assessee only). 7.2.3 Based on the above, it is felt that no recomputation is needed. W ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nated. The assessee had in the past i.e. (financial years 2003-04 and 2004-05) granted a nominal loan to Tega Industries Australia Pty Ltd. (Tega Australia) and Tega Industries Incorporation ('Tega US') whose balances as at 31st March 2008 stood at ₹ 48,00,344/- and Nil respectively. Tega Australia is a well established company in Australia engaged in distribution business. During the FY ended 31st March 2008 31st March 2007, Tega Australia had recorded reasonable profitability which stood at Indian Rupees (Rs.) 0.71 crores and 1.19 crores respectively. The reasonable profits earned by Tega Australia enabled it to service part of the loan taken from the assessee during the FY ended 31st March 2008. Additionally, Tega Australia's sales showed a healthy increase (56%) during FY 2008 vis-a-vis FY 2007. We have first given a brief summary of the loans provided by the assessee to its AEs. The table below captures the loans advanced/repaid during the year to/from AEs as well as the opening and closing balance of such loans. Sr. No. Name of the Associated Enterprise Particulars Date A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... les of the method appear in paragraphs 2.0 to 2.13 also TR 94/14, paragraphs 88 to 93 and 353 to 358). Therefore, in application of CUP as the most appropriate method, the loan instrument (the price charged for property or services) itself should be tested. The loan instrument and the rate of interest should be tested on different parameters (as applicable) to look for similar comparable uncontrolled loan instrument which has similar circumstances as of the international transaction. For benchmarking the interest rate on loan, either an internal CUP or an external CUP in the same priority of application could have been applied in a case. An internal CUPcould be applied where same/similar transactions (i.e. with same/similar terms and conditions) have been entered into by the assesses/AF with third parties. If no internal CUP is available, an external CUP could be looked at i.e., transactions entered outside the group between third parties under same/similar terms and conditions. The above definition of CUP method in the Indian Income Tax Rules as well as Australian Taxation Ruling 97/20, states that in a CUP method it is the price charged for the services provided that is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and other key terms and conditions need to be factored. The said approach has been followed by the assessee. However, the ld. TPO rejected the scientific analysis undertaken by the assessee. The ld. TPO maintained that CUP as the most appropriate method and while applying the CUP method as the most appropriate method for benchmarking financial transactions, there would be no concept of tested party. (Refer pages 10 11 of the TP Order. Exhibit I of the paper book). To search for comparable borrowing arrangement the assessee used ECBs of major Indian companies and arrived at an arm's length interest rate of LIBOR + 0.87%. Accordingly, the assessee charged its AEs interest at LIBOR + 1% for the duration of the loan during the financial year. However, the ld. TPO has rejected the benchmarking study undertaken by the assessee and have imputed an additional charge for loans provided by the assessee to its AHs. The approach adopted by the ld. TPO for undertaking benchmarking analysis is contested by the assessee on the following grounds: (1) The ld. TPO has erroneously applied CPM instead of CUP even after accepting the fact that CUP was the most appropriate method: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting of the assesses, the ld. TPO selected certain ratios while ignoring others. The ld. TPO cherry-picked two of the seven ratio's recommended under the S P model for arriving at the AE credit rating. 4 Arbitrary adjustments to the credit rating arrived at based on the ratios selected by the ld. TPO for reducing the credit rating. The ld. TPO after selecting the ratios for ascertaining the credit rating of the AEs of the assessee, arbitrarily downgraded the ratings arrived at after adopting the cherry-picked ratios. The same can be referred to on pages 19, 20 and 21 of the TP order (enclosed as Exhibit E to the paper book) where the rating of Tega US was downgraded from a BBB to B. Further, the assessee would also like to place reliance to the ITAT Rulings, Income Tax Appellate Tribunal Bench 'A' Chennai, ITA No. 2148/Mds/2010, AY 2006-07 in Siva Industries Holdings Ltd. v. Asstt. CIT [2011] 46 SOT 112, which has provided that the selection of LIBOR over the assessee's cost of funds should be considered to benchmark the loan provided by the Indian enterprise to its associate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n produced below: (1) The Ld TPO has taken the assessee to be the tested party and inadvertently applied CPM method to compute the arm's length rate of interest; (2) In considering the assessee to be the tested party, the ld. TPO has taken the assessee cost of funds to be the base rate instead of DBOR. (3) Further, the TPO in assessing the creditability of the AEs has used the S P Criteria in a biased and unscientific manner and have has committed the following errors. a. The ld. TPO has only placed reliance on two out of seven ratios as prescribed by the S P Criteria to arrive at the credit rating for AEs. b. The ld. TPO has further downgraded the rating that was arrived at post the credit rating exercise, without application of any sound principles for doing so. (4) Further, while identifying comparable uncontrolled loan instruments for computing the margin to be earned over and above the base rate based on the risk profile of the TPO has committed following errors. a. The ld. TPO has not undertaken any scientific methodology to arrive at the comparable uncontrolled transaction. b. The ld. TPO has identified only a single comparable loan agreement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Date of Study Rating data Rating Score 1. FBTT interest coverage (x) 2. EBITDA interest coverage (X) 3 FFO/total debt (%) 92.98 AA 3.00 4. Free operating cash flow/total debt (%) 68.27 AA 3.00 5 Total debt/EBITOA(x) 1,08 AA 4.00 6. Return on capital (%) 36.12 AAA 4.00 7. Total debt/total debt - equity (%) 40.33 BBB 8.00 Total score 19.00 S P&# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... edit risk than older, declining companies. While this is intuitively appealing to come, it ignores some important considerations. Large companies have substantial staying power, even it their businesses are troubled. Their constituencies including large numbers of employees can influence their fates. Banks' exposure to these companies may be quite extensive, creating a reluctance to abandon them. Moreover, such companies often have accumulated a lot of peripheral assets that can be sold. In contrast, the promise of small companies can fade very quickly and their minuscule equity bases will offer scant protection, especially given the high debt burdensome companies deliberately assume. Fast growth often is subject to poor execution, even if the idea is well conceived. There also is the risk of overambition. Moreover, some companies tend to continue high-risk financial policies as they aggressively pursue ever-greater objectives, limiting any credit quality improvement. There is little evidence to suggest growth companies initially receiving speculative-grade ratings have particular upgrade potential. Many more defaulted overtime than achieved investment grade. Oil exploration ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Completed, Mandated Completed, Mandated Deal Amount Tranches which had an amount of USD 250 million or less Not applied (ranging from 150mm to 310mm) Tenure Revolver/Line =1 Yr. Revolver/Line =1 Yr. Structure Unsecured Unsecured Currency/Amount deal Currency US dollars/AUD US dollars Rating (S P: BBB+, BBB, BBB-) (S P: AA+, AA, AA) Further, as the loan was provided for Australian asset, country risk adjustment was undertaken by the assessee using Australia as the base. A summary of the results from the search process is provided below. Tega Australia Particulars No. of Loans/Tranches (Australia) No. of Loans/Tranches (United States) Total loans yielded 166 8 Manually rejected Deals with different tranch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stralia, the assessee humbly submits that it has undertaken an interest benchmarking study applying CUP as the most appropriate method in its TP study report and determined the arm's length interest rate to be LIBOR plus 100 bps. The relevant para of transfer pricing study (TP-Study Report) as cited above, proves this fact. The ld. TPO during the course of the hearing proceedings rejected the assessee's approach by stating that for determining the arm's length interest rate on loan provided, comparable instruments would comprise of similar uncontrolled transactions where loan has been provided in the same foreign currency by some Indian entity to any entity in the same foreign country in which the AF is situated under similar terms and conditions. (Para 13, page 10 of the TP order). The ld. TPO provided that interest rate comprises of two components i.e. 'base rate' for cost of funds and 'credit spread' for bearing the risks of default by the lender and thereby erred in applying CPM as most appropriate method rather than CUP (Para 15.2 16. page 11-13 of the TP order) with respect to determination of base rate, the ld. TPO has erred by providing that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... up between third parties under same/similar terms and conditions. To illustrate, if the price charged in the open market for a particular type of product could be say INR 100. In order to manufacture that product a person incurs a cost or INR 105 or INR 60. The market pays INR 100 only as the market price is INR 100 and not INR 105 or INR 60 i.e. the cost incurred by him. In order to benchmark the transaction under CUP method, a comparable price should be considered which is being charged by other parties in the open market. In this regard the appellant again reiterates the fact that LIBOR should be considered as base rate for determining the comparable uncontrolled price as LIBOR is in general used by the lenders in order to charge a rate of interest. International best practice is to compare interest rates with reference to Credit rating of borrower. Country of operation of borrower and Currency of borrowing. The principle also finds support in several Indian Rulings by the Hon'ble High Courts in India, which are given below: CIT v. Cotton Naturals (I.) Pvt. Ltd. [2015] 55 taxmann.com 523 (Delhi) CIT v. Tata Aulocomp Systems Ltd. 374 ITR 516 Varroc Engg. (P. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... seven ratios as prescribed by the S P Criteria to arrive at the credit rating. (2) Evaluating the rating arrived with sovereign rating to cap the same as any company rating could not be more than its country sovereign rating. The credit rating methodology as adopted by the assessee provided the 'BBB' rating for Tega Australia and' AA' for Tega US. (Submission before DRP dated 14 June 2012, Page 313 to 320 of the paper book) The ld. TPO has further downgraded the rating arrived at after using the ratios in a biased manner citing the following subjective qualitative criteria: (1) Credit rating could be determined under 'Model driven ratings' which considers only the quantitative data to arrive at credit rating or 'Analyst driven ratings' where analyst/specialists are assigned to consider the subjective economic criteria as well along with the financial numbers before assigning a rating. As S P follows 'Analyst driven rating' so it is imperative to undertake adjustment with respect to certain qualitative factors such as size considerations, cash flow adequacy etc. to arrive at a rating (para 5.2.9 to 5.2.10 of the remand report u/s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #39; rating commanding a spread of 3% for the risks associated with its rating. Following evaluation of credit rating for the purpose of determining arm's length guarantee charge and interest rate for provision of guarantee and loan, the ld. TPO then identified a single loan transaction as comparable from 'Loan Connector' having B rating and commanding a spread of 3% for the risks associated with its rating. First of all, any search for instruments bearing B rating should not be undertaken as the rating determined herein is 'BBB' rating for Tega Australia and 'AA' for Tega US (determined TPO's S P approach in an unbiased manner) rather than uniform rating of B as already explained herein above. The appellant has undertaken scientific methodology to identify comparable loan instruments of mentioned ratings or equivalent rating from the I.oan Connector database and were able to identify 10 deals for Australia and 6 deals for US which provides an average of spread of 57.42 BPS and 15.75 BPS respectively on the base rate. (Submission before DRP dated 14 June 2012. Page 313 to 320 of the paperbook) Based on the above, the appellant has suo motu char ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9;. Following the approach as provided in S P Criteria, the ld. TPO moved on to arrive at a credit rating of Tega US and Tega Australia for computation of credit spread. The ld. TPO assigned a credit rating of 'B', following a biased and unscientific application of S P criteria, and determined 300 bps as credit spread to be applied on base rate. The assessee would humbly like to highlight that the ld. TPO has followed a biased and unscientific manner of deriving the credit rating which has led to commit the following errors: a. The ld. TPO has only placed reliance on four out of seven ratios as prescribed by the S P Criteria to arrive at the credit rating for AEs even after acknowledging the fact that S P prescribes all seven ratios (para 22.1 to 22.2 page 19 to 21 of the paper book) Considering, the above mentioned flaw in the ld. TPO's approach the appellant undertook the credit rating process on a suo motu basis placing reliance on the same SAP Criteria as referred by the ld. TPO. (Page 271 of the paper book). The steps to determine the credit rating by the appellant were as under: a. Pursuing the financial statement of Tega Australia and Tega US for c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o like to submit the credit rating report generated from Moody's RiskCalc software for Tega US and Tega Australia as part of additional evidences (Page 8 to 20 of Additional evidences) which provides rating through use of computer base algorithm vis-a-vis manual compulation of ratios. The appellant pleads to consider the same for avoidance of any scope for manipulation. On perusal of the said credit rating report it has been determined that Tega US could be rated as Bal (Page 8 to 15 of Additional evidences) and Tega Australia could be rated as Baa2 (Page 16 to 20 of Additional evidences). The appellant has further undertaken a search on Loan Connector database for the said ratings to identity comparable uncontrolled US and AUD denominated loan instruments. The same was determined to have a credit spread of 72.68 bps (Page 31 to 33 of Additional evidences) and 52 bps (Page 39 to 40 of Additional evidences) over and above the base rate respectively for US and AUD denominated loans. As appellant had charged interest at the rate of 100 bps over the base rate, the same could be considered to be at arm's length. c. In determining the quantum of spread that a B rated bond o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lant's products in US and Australian markets. Thus, these subsidiaries were of high importance to appellant for expansion of its business in key global markets and could be considered as 'core' subsidiaries. The appellant has provided them with working capital loan, payable on demand and for the purpose of evaluation of arm's length interest rate, credit rating of appellant for FY 2007-08 could be considered appropriate for identifying comparable loan instruments. The appellant rating for March 2008 has been determined to be as Bal (Page 1 to 7 of additional evidence). The appellant undertook for comparable loan instruments in USD and AUD from Loan Connector database and determined the same to be as base rate plus 72.68 bps (Page 34 to 36 of Additional evidences) and 52 bps (page 39 to 40 of Additional evidences) respectively for USD and AUD denominated loans. The appellant has charged interest rate @ Libor plus 100 bps. Thus, the transaction has been undertaken at arm's length price. 4.3 The ld. Departmental Representative (DR) for the Revenue has primarily reiterated the stand taken by the TPO and the DRP, which we have already noted in earlier paragraphs c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ;B'. The ld. TPO has only placed reliance on four out of seven ratios as prescribed by the S P Criteria to arrive at the credit rating for AEs even after acknowledging the fact that S P prescribes all seven ratios. ld. TPO has identified a single loan transaction as comparable from 'Loan Connector' having 'B' rating commanding a spread of 3% for the risks associated with its rating therefore, we find that the methodology adopted by the TPO may be wrong. However, the assessee has submitted before us some additional evidence pertaining to credit rating. As we noticed in the additional evidences that the assessee has computed credit rating of Tega Australia at BBB and Tega US at AA by applying scientific and logical method, as explained above, and submitted before us additional evidences, accordingly, we are of the view that this issue requires fresh examination at the end of the TPO/AO, therefore we restore this issue to the file of the TPO/AO with the direction to ascertain, the arm's length price of the loan. 4.5 In the result, the appeal filed by the assessee on this ground is allowed for statistical purposes. 5. Issue No. 2:Corporate Guaran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ars to have been brought to the notice of the Hon'ble Tribunal. 38. The Hon'ble Supreme Court has laid out on many occasion that an issue decision has been discussed in detail in a judicial pronouncement if cannot make good law. In the case of Shanmugavel Nadar v. State of Tamil Nadu (263 TTR 658), the Apex court has pronounced the following: Rup Diamonds v. Union of India. AIR 1989 SC 674 is an authority for the proposition that apart altogether from the merits of the grounds for rejection, the mere rejection by a superior forum, resulting in refusal of exercise of its jurisdiction which was invoked, could not by itself be construed as the imprimatur of the superior forum on the correctness of the decisions Sought to he appealed against. In Supreme Court Employees Welfare Association v. Union of India. AIR 1990 SC 334 this Court observed that a summary dismissal, without laying down any law, is not a declaration of law envisaged by Article 141 of the Constitution. When reasons are not given, the decision of the Supreme Court becomes one which attracts article 141 of tin Constitution which provides that the law declared by the Supreme Court shall be binding on all the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... afely considered the price of the guarantee. 42. Based on the above, it is held that the assesses should have charged a Guarantee commission at the annual rate of 2.5% on the amount of credit availed by the subsidiary which was guaranteed by it. The loan amount stood at ₹ 3,60,39 150-as on 31-3-2008 Accordingly, the guarantee fee is computed at ₹ 9,00,97/- Thus, the total income of the assesses is to be upwardly adjusted by this amount.' 5.1 Aggrieved from the order of the TPO, the assessee filed an application before the Hon'ble DRP. The Hon'ble DR.P has also confirmed the action of the TPO by observing the following: 5.1.6 The Assesses has submitted in the reply to the remand report that from the facts as already presented and discussed before the ld. Panel Members vide submission dated 14-06-2012, it is evident that the purpose of setting up of the SPV Bahamas) was to facilitate the acquisition of the South African entities. The assessee's expectation from the loan funds provided to Tega Bahamas and the guarantee provided for the third party borrowings of Tega Bahamas was never to earn on interest income or a guarantee fee but to benefit its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loan and Guarantee fee from AT. If Assessee does not do so it leads to erosion of tax base as third parties charge interest and fees for such services Therefore this Panel holds the view that the TPO was right in making adjustment in the TP Order on this account. There is no scope in our view to restructure the international transaction of interest free loan as Shareholder service or quasi-equity. Restructuring should be the judicious discretion of the Tax Administration and it could be applied only if the Assessee had claimed expenditure for interest or fees on Guarantee. In this case facts are different and interest and Guarantee fees adjustment made by the TPO are in the nature of income and not expenditure. Being aggrieved from the order of the Hon,ble DRP, the assessee is in further appeal before us. 5.2 The ld. Authorised Representatives for the assessee has submitted that: i. During the FY 2006-07, the assessee set up Tega Bahamas as a special purpose vehicle ('SPV') for acquiring two companies based in South Africa (a) Beruc Equipment Pty Limited; and (b) Bentod Manufacturing Limited (now merged collectively referred to as Tega Beruc South Afric ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntity would have lent any funds to Tega Bahamas given its skewed debt - equity ratio evident from its balance sheet and thus, the basis of providing funds to Tega Bahamas was as an investment and not as loan. Thus, it would be appropriate to classify the funds loaned and guarantee provided to infuse third party funds as quasi-equity in nature and as a shareholder service meriting no consideration. vi. The assessee has referred to UK Manual INTM 501010 issued by 'IMRC' which deals with the case of a UK lender and guarantor. The assesses has then mentioned that the UK Transfer Pricing Legislation further provides guidance as to how one could decide whether a loan or a guarantee provided for a loan is quasi-equity in nature or a shareholder service. This assertion is based on a reference to the U.K. transfer pricing legislation Taxation (International and Other Provisions) Act 2010 . The sections referred to are 152 and 153 of that Legislation. The assessee is of the view that on considering the above sections of the UK transfer pricing legislation, it is evident that prima facie the question that needs to be addressed is whether the loan would be provided in a third part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pital structures that were employed by multinational corporations to enable profit extraction from their AEs in the form of interest . The assessee has referred to HMRC INTM 542005 where it has been mentioned that thin capitalization is a form of transfer pricing. Based on the above, the ld.AR for the assessee has submitted before us that the TPO's determination of arm's length price of the guarantee fee is erroneous. Ld. AR also submitted that assessee's expectation from provision of loan and guarantee are not that of a lender or guarantor i.e. to earn a market rate of interest or guarantee fee, rather, the expectation was of a shareholder to protect its investment interest, help it to achieve acquisition of Tega Beruc for furtherance of its own business and get return in terms of appreciation in value and dividends. It can be verified from the fact that no third party would have agreed to grant loans on an independent basis, to the tune of ₹ 5 Crores to Tega Bahamas given its skewed debt-equity ratio reflected in the balance sheet, as equity funding is mere ₹ 23 Lakhs. The AR also relied on various (OECD) guidelines dealing with the arm's length ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proach in the transfer pricing study reports, which are Quite common in most of the transfer pricing reports, cannot do good to a reasonable cause. When judicial calls on the complex transfer pricing issues are to be taken, utmost clarity in the legislative framework and a comprehensive analysis of relevant facts, in the transfer pricing documentation, are basic inputs, unfortunately, both of these things leave a lot to be desired. ITAT can only hope, and ITAT do hope, that things will change for better. (Para 51) Based on the above cited facts and case law, the ld AR for the assesses has prayed before us to treat the guarantee as shareholder activity and therefore the addition made by the TPO/AO may be deleted. 5.3 On the other band the ld. Departmental Representative (DR) has primarily reiterated the stand taken by TPO and DRP, which we have already noted in earlier paras, cited above, and is not being repeated for the sake of brevity. 5.4 Having heard the rival submissions, we are of the view that there is merit in the submissions of the assessee, as the propositions canvassed by the ld AR for the assessee have been supported by the facts and precedents (case law) cite ..... X X X X Extracts X X X X X X X X Extracts X X X X
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