TMI Blog2019 (9) TMI 437X X X X Extracts X X X X X X X X Extracts X X X X ..... e that the said guarantee rate of 0.93% which is charged by the bank on the assessee for issuing the bank guarantee in favour of CCWE on behalf of its AE, had been duly recovered by the assessee from its AE. Hence, it is only a case of recovery of cost by assessee without any margin. We are inclined to accept the argument of the AR that in the instant case, 0.93% of guarantee commission charged by Bank of India could be considered as the most direct comparable uncontrolled transaction to benchmark the rate of guarantee commission. The average rate adopted by the TPO at 1.04% is only an external data in the form of third party guarantees issued by the bank. When internal comparable uncontrolled price is available that should be considered as the most direct and reliable way to apply the arm s length principle. In any case, there is absolutely no loss to the assessee and no bearing on the profits or losses as the entire cost of 0.93% has been duly recovered by the assessee from its AE. Hence, the action of the CIT(A) in holding no further adjustment to ALP is required in respect of the subject mentioned guarantee commission transaction and consequently directing the deletion of ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h under normal provisions of the Act as well as in computation of book profit u/s.115JB - HELD THAT:- AO has been taken due cognizance by the AO while framing the assessment, under the caption of provision for doubtful debts that the assessee had reflected the figure as nil . This itself again goes to prove that there was no debit to the profit and loss account in the sum as alleged by the AO while making the disallowance All the confusion which is not in consonance with the profit and loss account of the assessee (audited financial statements) and the revised computation of total income of the assessee. However, the note No.4(b) is relevant for the computation of total income which has already been discussed hereinabove, which in any case is not in dispute before us. CIT(A) had categorically observed from the ledgers of provision for doubtful debts and advances that there was absolutely no debit to the P L account in the sum of ₹ 4,63,28,957/- warranting any disallowance thereof. CIT(A) has not been controverted by the ld. DR before us. Hence, we do not find any infirmity in the order of CIT(A) granting relief to the assessee in this regard. - Appeal of the Revenue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee company acquired business of manufacturing and trading of power cables, optical fibre cables, jelly filled telephone cables, networking / datacom cables, house wiring cables and turnkey contractors. 3.1. KEC Global FZ LLC (hereinafter referred to as KEC Global or AE ) is a wholly owned subsidiary of the assessee company. During the year under consideration, the assessee provided guarantees on behalf of KEC Global to customers of KEC Global. The details of guarantees provided by the assessee were filed by the assessee before the ld. TPO vide letter dated 22/11/2013. The details are as under:- i) Performance Guarantee (indemnity against loss) provided to Bahwan Engineering Company LLC on behalf of AE During the year under consideration, Bahwan Engineering Company LLC (BEC) had entered into sub-contract agreement with KEC Global (AE) to construct 132/33 KV Grid Station Associated Transmission System in Y1T1 Area, Muscat Governorate. As a pre-condition for execution of the sub-Contract, BEC has requested KEC Global to provide the assessee s indemnity against all liabilities, claims, damages or costs which Bahwan Enginee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee in this transaction of issuance of performance guarantee to Bahwan Engineering Company LLC on behalf of its AE. Accordingly, the assessee pleaded that it was justified in not charging any commission from its AE for issuing the said performance guarantee. 3.3. The ld. TPO however, did not agree to this contention of the assessee and stated that in case of default committed by the AE in not performing its duties and obligations in the Sub-contract work allotted to AE, then the assessee had to step-in as the entire sub-contract would come to the assessee company and the assessee has to put all resources in place for executing the contract or as to find another sub-contractor to complete the contract. In such circumstances, the assessee company had to take the risk which needs to be compensated to the assessee by its AE. Accordingly, the ld. TPO treated this issuance of performance guarantee transaction as an international transaction and proceeded to benchmark the same by applying the bank guarantee commission. For this purpose, the ld. TPO adopted the comparable guarantee commissions charged by Allahabad Bank and HSBC Bank to various comparables which are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hin the ambit of an international transaction or not is left open and no decision is given herein. Hence, the various decisions quoted by the ld. Counsel for both the sides need not be gone into. Accordingly, the addition made in the sum of ₹ 69,45,342/- is hereby directed to be deleted. Accordingly, the ground No.1(a) raised by the revenue are partly allowed. 5.1. The ground Nos.1(b) 2(a) raised by the revenue are with regard to the action of the ld. CIT(A) deleting the adjustment to arm s length price in respect of performance bank guarantee issued to Chandian Company for Water Electricity (CCWE). 6. The brief facts of this issue are that during the year under consideration, Bank of India at the request of the assessee had provided performance guarantee dated 28/08/2009 to CCWE for an amount of Euro 1003126 (INR 6,07,36,972) on behalf of AE. Actually the said guarantee was given in the name of Al Sharif Group for Cont. Dev. (Holding) Ltd, The entrepreneur (through AE). CCWE is a customer of the wholly owned subsidiary of assessee i.e. KEC Global (AE), who had given a contract to the AE. However, the CCWE, as a pre-condition for executio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the said transaction. The assessee also contended that the adoption of rate of guarantee commission is nothing but application of comparable uncontrolled price (CUP) method. As per Rule 10B(2) of the IT rules, CUP method compares the price charged for property or services transferred in a controlled transaction to the price charged for property or services transferred in a comparable uncontrolled transaction in comparable circumstances. Where it is possible to locate comparable transaction, CUP method is the most direct and reliable way to apply arm s length principle. The assessee pleaded that the ld. TPO had ignored the rate of commission of 0.93% which was charged by the Bank of India to the assessee while issuing guarantee to CCWE. In the case of the assessee, this rate could be considered as most direct comparable uncontrolled transaction to benchmark the rate of guarantee commission. Further, it was argued that the rates adopted by the ld. TPO could not be assumed as comparable in the business of any specific information regarding the comparability analysis of the same. It was also submitted that the banks ascertained the rate of guarantee commission based on the creditwo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m one customer to another customer and accordingly, the same cannot be used as a benchmark for the purpose of comparability. In the instant case, the assessee s credit rating is A+ as given by a reputed credit rating agency CARE. The rate of 0.93% charged by the bank includes the commission rate of 0.25% + 0.68% for the Export Credit Guarantee Corporation (ECGC) cover. The credit rating of the AE was not done in the instant case. It is not in dispute that the said guarantee rate of 0.93% which is charged by the bank on the assessee for issuing the bank guarantee in favour of CCWE on behalf of its AE, had been duly recovered by the assessee from its AE. Hence, it is only a case of recovery of cost by assessee without any margin. We are inclined to accept the argument of the ld. AR that in the instant case, 0.93% of guarantee commission charged by Bank of India could be considered as the most direct comparable uncontrolled transaction to benchmark the rate of guarantee commission. In any case, the average rate adopted by the ld. TPO at 1.04% is only an external data in the form of third party guarantees issued by the bank. When internal comparable uncontrolled price is available that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubmitted that this guarantee fee of 0.93% had been duly recovered by it from its AE and hence, there is no impact on profit or loss of the assessee. 9.1. The ld. TPO considered the issuance of said guarantee as a corporate guarantee given by Bank of India to CCWE to enable them to release the advance payment to the AE of the assessee. He observed that in the absence of any credit rating of AE and as the AE is an operating company, the credit rating of AE is taken at BBB whereas the assessee credit rating is A+. In an uncontrolled transaction like this between unrelated parties, guarantee fee would have been charged taking into account creditworthiness of the AE, margins, security or any other consideration relevant for deciding the financial stability of the AE. The ld. TPO observed that the guarantee income would have accrued to the assessee if the said amounts were given to unrelated parties in the similar circumstances as that of its AE s. The ld. TPO applied the CUP method for benchmarking this transaction and determined the arm s length price thereon as under:- (B) Methodology: Application of this method begins by quantifying the benefit rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e fee is arrived at as below. Credit rating of Guarantor (i.e. the taxpayer) 'A' Yield or interest rate for 2-3 year unsecured bond 8.89 Credit rating of AE (as discussed above) 'BBB' Yield or interest rate for 5 year unsecured bond 11.60% p.a. Benefit to AE on account of Guarantee given by the taxpayer Particulars CCWE V:Outstanding Guarantee Amount in foreign currency 2006252 Euros Outstanding Guarantee Amount in INR 12,14,73,944 No. of days the guarantee is outstanding during The year 215 (28.8.2009 to 31.3.2010) Arms Length Guarantee Fee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The grounds raised by the revenue in this regard as under:- 3(a). Whether on the facts and circumstances of the case, the Ld. C1T(A) was justified in allowing the depreciation of ₹ 65,31,55,991/- which was claimed on the actual cost of assets of the power transmission business acquired by the assessee. 3(b). Whether on the facts and circumstances of the case, the Ld. C1T(A) had failed to appreciate that the transfer of assets to the assessee company was by way of demerger falling within the definition given under section 2(19AA) of the Income Tax Act and, therefore, the written down value of the transferred assets in the hands of the assessee company is the written down value of the said assets prior to the demerger. 3(c). Whether on the facts and in the circumstances of the case, the Ld. CIT(A) ought to have upheld the order of the Assessing Officer restricting the depreciation claim of the assessee to ₹ 41.79.82.080/- as against the claim of ₹ 65,31,55,991/- made by the assessee. 12.1. Ground No. 4 5 raised by the revenue are with regard to action of the ld. CIT(A) in allowing the mark t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quired by the Appellant pursuant to a court approved Scheme of Arrangement. 2. The court approved scheme under section 391 to 394 of the Companies Act, 1956 did not satisfy the conditions laid down under section 2(19AA) of the Act. 3. Under the court approved Scheme, the shares were issued to the transferor company and not to the shareholders of the transferor company as laid down by section 2(19AA) of the Act. 4. Further the transfer to the Appellant was for a lump sum consideration and no values either market value or book value were ascribed to individual assets. 5. Since the assets were not transferred at book values, the condition for the transfer under a Scheme of Arrangement to qualify as 'demerger' within the meaning of 11 section 2(19AA) of the Act was not satisfied. 6. Clearly, the conditions specified in section 2(19AA) of the Act were not satisfied and therefore, the acquisition of the assets was not pursuant to a demerger. 7. Since the transaction could not be said to be a demerger, Explanation 2A and 2B to section 43(6) of the Act and explanation 7A to s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt out growth initiatives through expansion and acquisitions. Further, the restructuring was carried out under a Composite Scheme of Arrangement under provisions of Sections 391 -394 of the Companies Act, 1956. In order to implement the scheme, approvals/ sanction were obtained as under: (a) Board of directors; (b) Shareholders of the Company under a court-convened meeting; (c) Secured creditors of the Company under a court-convened meeting; (d) Unsecured creditors of the Company under a court-convened meeting; (e) Bombay High Court; (j) Stock exchanges where the shares of the Company are listed; (g)Regulatory bodies such as Registrar of Companies, Regional Director and Official Liquidator (in case of Bespoke Finvest Limited) Since the Court Approved Scheme which has undergone detailed scrutiny by several governmental/non-governmental agencies it cannot be rendered as a colorable device merely on the basis of conjectures and surmises. The Appellant further submits that the issue relating to the above ground has been decide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oreign exchange contracts outstanding at the end of the year, both the parties before us agreed that this issue is also covered by the decision of this Tribunal in assessee s own case in earlier year which was relied upon by the ld. CIT(A) by observing as under:- 6.2 During the course of appellate proceedings, detailed submissions were made as follows: It is pertinent to note that the said issue relating to the above ground has been decided in the favour of the Appellant by the Hon'ble CIT(A) vide order dated 11.07.12 for Assessment Year 2009-10. Thus, the Appellant prays that the MTM losses arising on account of forward contracts entered into by the Appellant be considered as an accrued loss to the Appellant and thereby allowed as deduction while computing the taxable income. The relevant extract of the CIT(A) Order is reproduced hereunder: Thus, from the ratio of the above cited decision, it is quite clear that loss accruing on mark to market valuation of hedging contract is an accrued loss. Further in this regard, the Appellant humbly submits that the forward contract is an agreement between two partie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e main ingredient of a contingent liability was that it depended upon the happening of a certain event. The change in the value of foreign currency in relation to Indian currency was a fait accompli and not a notional one. Therefore the increase in liability due to foreign exchange fluctuation as per the exchange rate prevailing on the last date of the financial year was allowable as a deduction and was not a notional or a contingent liability......The decision of the Supreme Court, in Bharat Earth Movers Ltd. v. CIT [2000] 245 ITR 428/112 Taxman 61, settled the position. That decision explains that what should be certain is the incurring of the liability and it being estimated with reasonable certainty, even if the exact quantification is not feasible. Even if the liability is discharged at a future date, it will nevertheless be a liability which is certain and not contingent. This approach is consistent with and informed by the accounting practices in the mercantile system, with further guidance from the accounting standards of the ICAl which have received judicial acknowledgement.' From the foregoing decision, it is a settled legal position that any loss ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eduction for such provision under the Act. In the present case too, the Appellant has been actually providing for such MTM losses in its Books of Account in accordance with the applicable Accounting Standards and accordingly, even for this reason, the deduction would be allowable to the Appellant while computing its taxable income. Thus, the Appellant prays that the MTM losses arising on account of forward contracts entered into by the Appellant be considered as an accrued loss to the Appellant and thereby allowed as deduction while computing the taxable income. 6.3 The issue stands covered by the decision of the Hon'ble CIT(A) in Appellant's own case for A.Y. 2009-10. Subsequently, the order of CIT(A) on this issue is also being upheld by the Hon'ble Mumbai Tribunal vide its order for A.Y 2009-10. 6.4 Thus, from the above facts and case of the above ground and from the ratio of the above cited decisions, it is quite clear that loss accruing on mark to market valuation of hedging contract is an accrued loss. In view of the above the aforesaid ground is allowed. 12.5. Respectfully following the Co-or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tails and the picture before the ld. AO and hence, the same were submitted before the ld. CIT(A). The assessee submitted a statement showing the movement of provision for doubtful debts and advances during the year under consideration to drive home the point that there was no debit of ₹ 4,42,58,139/- and ₹ 20,70,818/- in its P L account. The assessee also drew the attention of notes of accounts Point No.28 in schedule 19 and the statement showing the movement of provision for doubtful debts and advances during the year. On due appreciation of the same, the ld. CIT(A) observed that there is no debit made to the profit and loss account of the assessee and hence, the entire basis of the ld. AO for making the said disallowance fails and accordingly deleted the same both under normal provisions as well as under computation of book profit u/s.115JB of the Act. 15. Aggrieved, the revenue is in appeal before us on the following grounds:- 6. On the facts and in the circumstances of the case, the Ld. CIT(A) erred in allowing deduction of the provision for doubtful debts of ₹ 4,42.58,139/- and the provision for doubtful advances amounting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nies 1 Scheme of Amalgamation: 1.1 A Scheme of Amalgamation (the Scheme) between RPG Cables Limited (RPGCL) and the Company and their respective shareholders under section 391 to 394 of the Companies Act, 1956 was sanctioned by the Hon'ble High Court of Judicature at Bombay on 26th February, 2010 and at Karnataka, Banglore on 17th March, 2010. The Scheme, which has become operative from 31st March, 2010 upon filing of the certified copies of the Orders of the Hon'ble High Courts with the Registrar of Companies in the respective States, is effective from 1st March, 2010 (The Appointed date). 1.2 Pursuant to the Scheme, with effect from the Appointed date RPGCL (Transferor Company) is amalgamated in the Company, as a going concern, with all its assets, liabilities, properties, rights, benefits and interest therein subject to existing charges thereon in favour of banks and financial institutions. 1.3 In consideration for the amalgamation, for every 20 fully paid-up equity shares of ₹ 10 each of RPGCL, 1 fully paid-up equity share aggregating 20,73,068 fully paid-up equity shares of ₹ 10 each of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omputation of total income was duly supported by detailed notes which were also filed before the ld. AO, which is not in dispute before us. The relevant note No.4 in respect of provision for doubtful debts and advances is as under:- 4. PROVISION FOR DOUBTFUL DEBTS Advances: ₹ 4.63,28,957. The Company has made the provision for doubtful debts amounting to ₹ 4,42,58,139 and provision for doubtful advance of ₹ 20,70,818 during the year. Those amounts were reduced from the debtors and loans advance on the asset side of the Balance sheet. It is, submitted that the Company is eligible to claim the deduction for this amount under section 36(1)(vii) relying upon the decision of the Gujarat High Court in the case of Vithaldas Dhanjibhai Bardanwala (130 ITR 95). Supreme court decision in the case of Vijaya Bank ( 323 ITR 166). In the Banks case it was clarified by the Supreme Court that pursuant to inserted w.e.f 1.4.89 a mere provision for bad debt is not entitled to Deduction u/s 36 (1) (vii) . However in present case , besides debiting the profit and loss account and creating a provision for bad and doubtful debt , the assessee cor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed herewith. The book profit as per Return and CA certificate defer to that extent. 16.4. We find that this note No.4(a) had created all the confusion which is not in consonance with the profit and loss account of the assessee (audited financial statements) and the revised computation of total income of the assessee. However, the note No.4(b) is relevant for the computation of total income which has already been discussed hereinabove, which in any case is not in dispute before us. We find that the ld. CIT(A) had categorically observed from the ledgers of provision for doubtful debts and advances that there was absolutely no debit to the P L account in the sum of ₹ 4,63,28,957/- warranting any disallowance thereof. This finding of the ld. CIT(A) has not been controverted by the ld. DR before us. Hence, we do not find any infirmity in the order of CIT(A) granting relief to the assessee in this regard. Accordingly, the ground No.6 7 raised by the revenue are dismissed. 17. In the result, appeal of the Revenue is partly allowed. Order pronounced in the open court on this 10/07/2019 - - TaxTMI - TMITax - Income T ..... X X X X Extracts X X X X X X X X Extracts X X X X
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