TMI Blog2019 (1) TMI 845X X X X Extracts X X X X X X X X Extracts X X X X ..... ause without providing corporate guarantee by the taxpayer no loan would have been given to the AE; that the taxpayer has taken the risk on behalf of its AE which would not have been taken by any third party without consideration and that keeping in view the high risk involved in giving loan by any lender to the AE, the cost needs to be charged from the AE and as such, the commission received by the taxpayer for providing corporate guarantee has to be at arm’s length. However, the amount received by the taxpayer on account of commission charged for providing corporate guarantee to its AE needs to be at arm’s length price in view of the ratio of the order passed by the coordinate Bench of the Tribunal in Glenmark Pharmaceuticals Ltd. (2013 (11) TMI 1583 - ITAT MUMBAI) Transfer pricing adjustment qua SDT of payment of interest - since the rate of interest paid by the taxpayer to its related party is lower than the rate of interest paid by it to the third party lender the transaction of payment of interest by the taxpayer to its related party was at arm’s length - Held that:- When internal CUP was available and the complete data has been supplied for comparable study to the TPO/DRP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is an inherent cost in giving corporate guarantees for which the Appellant should have charged a consideration; 2.3. disregarding the fact that the provision of corporate guarantee to the AE was in the nature of shareholder service; 2.4. disregarding the fact that III the absence of the corporate guarantee provided, the Appellant being the holding company would have provided the funds to the subsidiary by increasing the share capital, and thus the guarantee provided should be treated as quasiequity in nature for which arm's length compensation is not required; 2.5. disregarding the detailed and proper comparability analysis submitted by the Appellant following the 'interest saved' approach; 2.6. imputing the corporate guarantee commission of 1.50% based on the average of guarantee commission rates of various banks without appreciating the fact that the same did not constitute a valid Comparable Uncontrolled Price ( CUP'); 2.7. disregarding the Appellant's contention that bank guarantee cannot be considered comparable to corporate guarantee and adjustments are required to nullify the differences between the two; and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l companies provides business, marketing and technical support related to oil and gas services, power and infrastructure, financial services, trading, homeland mega city security systems and aviation related services (sales, maintenance of aircrafts and helicopters). The taxpayer is the ultimate holding company having 100% share of Jubilant Energy Holdings BV (JEHBV). JEHBV holds 84.02% shares of Jubilant Energy NV (JENV) which indirectly holds 100% share in Indian subsidiaries. 3. During the year under assessment, the taxpayer entered into international and Specific Domestic Transactions (SDTs) with its AE as under :- No. Nature of transaction Method Value of transaction (in Rs.) 1 Receipt of guarantee commission income Other method (As prescribed by Rule 10AB) 27,000,000 2. Investment in cumulative preference shares 615,986,250 3. Redemption of cumulative preference shares 655,560,000 4. Payment of inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppellant through its original return of income which is subsequently withdrawn by way of letter dated October 12, 2017 in accordance with judicial precedents and facts of the case. 7.2. Without prejudice, that on the facts and circumstances of the case and in law, disallowance should not be made on such investments where no exempt income has been earned by the Appellant. 7.3. Without prejudice, that on the facts and circumstances of the case and in law, disallowance should be restricted to the exempt income earned by the Appellant during the year. 9. Keeping in view the fact that the additional ground sought to be raised by the assessee company, though not raised before the ld. CIT (A), is necessary for complete adjudication of the controversy at hand, the application for additional grounds is hereby allowed. 10. Undisputedly, this is first year of dispute for enhancing income of the taxpayer on account of ALP. It is also not in dispute that the taxpayer is a parent company. It is also not in dispute that the ld. TPO has applied the bank guarantee rate in order to decide the issue as to transaction of provision of corporate guarantee by treating as a lendi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allowance made u/s 14A read with Rule 8D qua SDT payment of interest as under :- S. No. Nature of specified domestic transaction ALP determined by taxpayer (INR) Amount already disallowed by the assessee Revised ALP determined by taxpayer (INR) ALP determined by the TPO (INR) using CUP of SBI rates Adjustment u/s 92CA (INR) 1 Interest Paid 7.485125 1.324146 6.160979 6.642190 0.481211 14. In the backdrop of the aforesaid facts and circumstances of the case and the arguments addressed by ld. ARs of the parties to the appeal, ground-wise issues in controversies are determined as under. GROUND NO.1 15. Ground No.1 is general in nature and do not require any adjudication. GROUNDS NO.2 TO 2.8 3 16. The taxpayer is the ultimate holding company, holding 100% shares in Jubilant Energy Holdings BV (JEHBV) and JEHBV holds 78% shares in Jubilant Energy NV (JENV) which indirectly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l repayment as on date 50,000,000 - Date of repayment 10-Jan-14 NA Interest Rate 6 Month s LIBOR plus 5.5% to 6 Month s LIBOR plus 8.5% 6 Month s LIBOR plus 5.5% to 6 Month s LIBOR plus 6% 21. The taxpayer also stated to have applied the interest saved approach and reached the conclusion that there has been no interest saving on the loan availed of by its AE and as such, no guarantee fees payable by JENV to the taxpayer and tabulated the total interest saving in para 2.3, available at page 392 of the paper book, which is extracted as under :- Particulars Rate (bps) The Libor + rate at which JENV obtained funds with corporate guarantee of JEPL (A) 550 External comparable average interest rate of margin over Libor (B) 400 or 475 Interest saved (B-A) 0 22. Identical issue has already been decided in fav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as the external/internal CUPs, as the case may be. Yes, they may turn out to be appropriate good CUPs if they are properly bench marked after making due adjustments in accordance with the provisions of the relevant rules 10B (relating to CUP method) of the Income tax Rules, 1962. Since the TPOs have not been benching the naked quotes of the BG rates with proper and sustainable adjustments, Tribunal is constantly disapproving the said quotes. The case of Tecnimont ICB (P.) Ltd. (supra) is an aberration and the background facts this case are distinguishable. Therefore, unless the 'naked quotes' of the bank guarantee rates as given in the websites for public, are adjusted to various controlling factor narrated above, these rates are no good CUPs. AO/TPO/CIT(A) have not provided adjustments to such factors in benchmarking the impugned international transactions. Discussion on the Tribunal Orders on the Corporate Guarantee Rate- CGR: A. Asia Paints Ltd - Order of the Tribunal: We shall first take up the facts relating to the case of CGR and the decision in the case (ITA No. 408 1937/M/2010). In this case, Asia Paints Ltd. (supra) gave a corporate guarantee to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idiaries / AEs, therefore, in principle, no commission is chargeable. In this case, assessee also relied on the guarantee commission rate of Bank of India, which varies 0.25% to 0.6%. The guarantee commission should never exceed 0.25% in any case and relied on the bank guarantee rates of HSBC Bank, HDFC Bank, ICICI Bank, ABN AMRO Bank, Standard Chartered Bank, Bank of America etc. At the end, CIT(A) dismissed the TPO's guarantee commission rate of 2.% and benchmarked the international transactions applying the rate of 0.38% instead of 2.5%. The Tribunal confirmed the same and paras 52.10 to 52.12 of the order of the Tribunal dated 13.9.2013 are relevant in this regard. Relevant paras 52.10 to 52.12 of the order of the Tribunal read as under: 52.10.... However, It is a fact that while applying the external comparables, the TPO has not brought out anything on record that under which terms and conditions and circumstances the said public company has charged 2.5% rate of guarantee commission for providing guarantee on behalf of the Finance Company. The charging of a guarantee commission depends upon transactions to transaction and mutual understanding between the parti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch, ITAT in the case of Asia Paints Ltd. (supra) and other decisions of the Tribunal held that the guarantee commission of 0.5% is at Arm's Length. The decision of the Tribunal is given vide para 21 of its order dated, 23.11.2012 and the relevant portion from the said para reads as under; 21.... Thus, on these facts, we do not find any reason to uphold any kind of upward adjustment in ALP in relation to charging of guarantee commission. Hence, the addition of Rs, 28,50,353/- on account of TP adjustment on guarantee commission is hereby deleted and the order of the CIT(A) is set aside.... From the above orders of the Tribunal, it is adequately clear that the naked quotes of the bank guarantee commission rates kept in the website of the banks should not be applied in the TP studies without adjustments to various factors of the transactions. These factors may be risk related ones, time related guaranteed amount, financial strength of the AEs, background of the customers and the relationship of the AEs with the parental companies etc. The additions made are legally unsustainable, if the additions are made solely based on the website information of the banks, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 'external CUP' by definition is a price charged in comparable Uncontrolled price between third parties when compared to the price of a controlled transaction with the AE. None of the CUPs used by the TPO falls within the said definition of external CUP. Thus, there are no 'internal CUP' on one side and the CUPs used by the TPO/CIT(A) are also outside the scope of the definition of the 'external CUP'. Further, as stated earlier, we find that the 'bank guarantee' rates are practically different from that of the 'corporate guarantee' 25. Further, we find there are various GC rates in existence. While there is GC rate of 0.38% which is approved by the Tribunal in the case of Reliance Industries Ltd. (supra) there is GC rate of 0.5% as approved by the Tribunal in the case of Everest Kanto Cylinders Ltd. (supra) and Asstt. CIT v. Nimbus Communications Ltd. v. [2013] 34 taxmann.com 298/145 ITD 502 (Mum.) there is GC rate of 0.25% as approved by the Tribunal in the case of the Asian Paints Ltd. (supra). The GC rate of 3% as announced by the Bank for the Bank guarantee Transactions stand dismissed by Tribunal in all the above cases. Reasons fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1962 unless a reasonable adjustment for material differences is made to the general quotes of bank guarantee in respect of the factors inter alia that (a) risk profiles of the respondents for the guarantee; (b) financial position of the loan applicants; (c) terms of the guarantee; (d) securities involved; (e) quantum of guaranteed amount; (f) period of guarantee; and (g) past history of customers, is sustainable in view of the decisions rendered by the Tribunal cited as under :- ( i) M/s. Glenmark Pharmaceuticals Limited [TS-61-HC- 2017(BOM)-TP); ( ii) Hon ble Mumbai Tax Tribunal in the case of Glenmark Pharmaceuticals Limited vs. Addl. CIT (ITA No.5031/M/2012); ( iii) Everest Kanto Cylinder Limited vs. DCIT (TS-714-ITAT-2012 (Mum)-TP) ( iv) Asia Paints Ltd. (ITA No.408 1937/M/2010) ( v) Noble Resources Trading India Pvt. Ltd. [TS-73-ITAT- 2014 (Del)-TP] ( vi) M/s. Britannia Industries Ltd. vs. DCIT [ITA No.745/Kol/2017) 24. So, following the decision rendered by the coordinate Bench of the Tribunal, we are of the considered view that in order to benchmark the international transactions qua corporate guarantee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 14A read with Rule 8D of the Act/Rules. 27. The ld. TPO made the transfer pricing adjustment on account of payment of interest of deposit used external CUP i.e. SBI PLR rate by holding that this loan was available to the taxpayer @ 9.86% per annum. 28. However, it is contended by ld. AR for the taxpayer that since internal CUP is available one loan transaction requires to be compared with another loan transaction only by analyzing borrower s credit rating, the currency of loan, the country risk involved, the tenor, the maturity term of the loan, in the light of the loan agreements. 29. It is also the case of the taxpayer that since the rate of interest paid by the taxpayer to its related party is lower than the rate of interest paid by it to the third party lender the transaction of payment of interest by the taxpayer to its related party was at arm s length. 30. We are inclined to agree with the aforesaid contentions raised by the ld. AR for the taxpayer inter alia that when internal CUP was available and the complete data has been supplied for comparable study to the TPO/DRP, the same was required to be applied by providing an opportunity of being heard to the taxp ..... X X X X Extracts X X X X X X X X Extracts X X X X
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