TMI Blog2020 (4) TMI 522X X X X Extracts X X X X X X X X Extracts X X X X ..... ard adjustment of guarantee fee charges - determining the arm s length price of the international transactions - HELD THAT:- Corporate guarantee has been given for obtaining a loan from a bank which is used for redeeming assessee preference shares in the AE. BHPL has brought back moneys invested as preference shares + guarantee charges paid to the Bank. Hence, the ALP of that transaction equivalent to the guarantee commission expenses paid is not justified. BHPL not claimed guarantee charges paid as deduction against any taxable income. Chapter X Section 92 and 92Cconstitute anti-avoidance provisions which result in determination of ALP and adding back the ALP and the price recorded in the books of accounts to the total income to levy tax. In the instant case BHPL itself has not claimed it as a deduction from any income and guarantee charges accordingly has been offered to taxation. The amount paid as guarantee charges has already suffered disallowance while filling return of income itself. Hence, again addition the same to total income results in double taxation. TP Study report rejected without a speaking order. BHPL has filed Transfer Pricing Documentation and has undertake ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppellant company treated the capital gains as long-term capital gain in nature. The appellant company credited the proceeds thereof to the reserve account since the Promoters had contributed it as gift. The AO has arrived at a conclusion that as held by his predecessor that the act of transfer of shares, was not voluntary, moreover, there cannot be an love and affection between the assessee and the company and hence the perquisites of the gift i.e. it should be voluntary, and out of natural love and affection and without any consideration have not been fulfilled. In view of these facts, the AO has also considered the said receipts of shares as purchase at a discounted price and other gifts as in income as held by his predecessor for the assessment years 2002-03, 2003-04 and 2004-05 respectfully. While doing so, the AO reproduced the observations and conclusions of his predecessor assessing officer for assessment year 2003-04 in toto in the assessment year under consideration, and accordingly, treated that long-term capital gain as an addition under section 115JB of the Act. 6. Being, aggrieved, the assessee filed an appeal before the Ld.CIT(A). Before whom, it was submitted th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Co-ordinate Bench of this tribunal against the assessee company in I.T.A.No s.1505 1557/Ahd/2012 for A.Y. 2007-08 dated 08.02.2016. 8. Per contra, learned CIT(D.R.) relied on lower authorities. 9. We have heard the rival submissions and perused the relevant material on record. We find that the issue is covered against the assessee company by decision of Co-ordinate Bench in I.T.A.No.1505 1557/AHD/2012 dated 08.03.2016 for the assessment year 2007-08 of which relevant para is reproduced as under: 9. We have heard the rival contentions and perused the material on record and we find that similar ground regarding addition of surplus from sale of shares added to book profit u/s 115JB of the Act was held to be correct and the co-ordinate bench in the case of Addl. CIT vs. Bilakhia Holding Pvt. Ltd. others in ITA Nos.981 to 985/Ahd/2009 for Asst. Years 2001-02 to 2006-07 vide its order dated 30.05.2014 has held as under :- 10. 27. Ground no. 5 6 relate to adjustment to book profit u/s. 115JB of the Act. The AO during the assessment proceedings made an addition of ₹ 45,58,654/- being surplus to sale of shares to the book profit for taxation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of notes of accounts (as contained in Para 4.6 at Pg. 11 of the paper book) cannot amount to a qualification. 4. The decision in the case of Veekaylal (Bom)-249 ITR 597 relied upon by the AO is no longer good law in view of the later decisions of the Bombay High Court in the case of Commissioner of Income-tax Vs. Adbhut Trading Co. P. Ltd. [2011] 338 ITR 94 (Bom) and Commissioner of Income-tax Vs. Akshay Textiles Trading and Agencies P. Ltd [2008] 304 ITR 401 (Bom) which have held that in view of the decision of Apollo Tyres Vs. CIT (2555 ITR 273). Since in revenue s appeal we have held that shares received by the assessee-company were not gifts in the hands of assessee-company, the argument advanced on behalf of the assessee-company that shares received as gift do not constitute investment and hence gain on sale of these shares were not required to be routed through profit and loss account falls flat ( case laws in support of this argument are therefore not applicable to the facts of this case), the assessee was not justified in crediting the sale proceeds of the shares directly to capital reserve account without routing through profit and loss account. We are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under audit. As per 3CEB Audit Report, the assessee had international transactions with the assessee enterprises of which details are given as under . Sr.No Name of the AE Nature of transaction Amount in Rs.million 1 M3 Holdings (Singapore) Pte Ltd. Redemption of preferential shares of M3 Holdings (Singapore) Pte Ltd 1749.06 2 Meeba Holdings Pte Ltd Transfer of equity shares of M3 Holdings (Singapore) Pte Ltd 47.37 3 M3 Holdings (Singapore) Pte Ltd. Provided corporate guarantee on behalf of M3 Holdings (Singapore) Pte Ltd 2218.65 4 M3 Holdings (Singapore) Pte Ltd. Interest free unsecured loan 281.25 14. The assessee has shown outstanding loan of Dollar 7 million (₹ 28.125 crore) which were given to M3 for its day to day functioning as it is an SPV not having any cash flow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vailable to the AE in the form of loan, the character of such funds remained loan unless the agreement for circumstances covering loan prove otherwise. Accordingly, the contention of the assessee company was not accepted on this issue. The TPO further observed that the action of advancing of ₹ 28 crore cannot be said to be a shareholder s activity or an act to ensure continuance of the activities of the company, especially when the company is an SPV without many employees and has no substantive routine expenses. The assessee has failed to explain the reason for advancing such a huge loan. It is also not been able to justify that the loan was essential to ensure running of the AE. Since the AE is an SPV and is engaged in only financial activities, it is clear that the loan would be used for financial activities of the AE's. Hence, assessee needs to advance such a sum at normal arm s length financial level. Hence, with regard to contention of the assessee regarding use of SIBOR for bench marking of the interest rate as against LIBOR proposed in show-cause notice. The TPO noted that data given by the assessee for SIBOR pertains to one month of SIBOR which is not applicable t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re, the interest free loan has been given to ensure continuity of investment and easy repatriation of the money from Singapore to India as and when the AE earns any profit. In view of the same, even though the transaction has been shown as an interest free loan, the same amounts to quasi-equity. Therefore, the amount is subject to the same risk that may arise to the equity share holder for a similar type of activity. Reliance was also placed on the extract from the OECD commentary for making such reasonable inference in the circumstances of the case. It was further submitted that even in the event of the transaction being construed as a loan transaction by rejecting the contention of the appellant company, the rate of interest adopted for calculating the ALP shall be the bank lending rates based on Singapore Inter Bank Offer Rate (SIBOR). This was based on the premise that if a third party obtains loan from another third party it will be able to obtain such loans in Singapore at the SIBOR rate. Further, as per Rule 10B to Section 92C of the Act the ALP shall be adopted after benchmarking the same with comparable transactions. It was further submitted the TPO has arrived at a r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pparently, the TPO has considered and compared the rate of interest, risk margin and other factors applicable to corporate bonds and similar rated instruments in India. Thereafter he has arrived at the risk premium of 4% over and above the SIBOR rate of interest. The TPO has also considered the credit rating of the SPV to be significantly down than the parent company. Admittedly, the SPV is fully owned by the appellant company and has been formed as SPV to hold investments. It does not carry on any other activity and the entire risk and reward of the AE shall be borne and enjoyed by the appellant company. Accordingly, CIT(A) observed that he has agreed with the TPO s observations that the risk premium of 4% over and above the SIBOR rate of interest is justified. Accordingly, the findings of the TPO were upheld. 16. Being aggrieved, the assessee filed an appeal before this Tribunal. The ld. counsel submitted that the Bhilakhia Holdings Pvt. Ltd [in short BHPL ] i.e. an appellant-company is an investment company and was holding 46.2% shares in a Printing Ink Company known as Sterling + Hostag and for that purpose created a wholly owned subsidiary in Singapore as a Special Purpo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tegrated transaction by the lower authorities. BHPL had filed TP Study report justifying the transactions as shareholder s activity and after detailed analysis justified the ALP for interest at Nil. The TPO/CIT(A) has rejected the aforesaid T P Study report and arbitrarily adopted the CUP method. The finding in the case of Perot Systems TSI v. DCIT [2010] 37 SOT 358 (Delhi-Trib) that profits are shifted out of India to Bermuda, a Tax Heaven. However, in the instant case, the AE subsidiary has been formed with the intention and the structure of the transaction is to bring back the capital and profits to India after payment of due taxes. Therefore, the decision in the case of Perot System TSI (India) Limited vs. DCIT (2010) 37 SOT 358 (Delhi) relied by the TPO/ CIT(A) is distinguishable on fact as in that case the result of the transaction was that the income of the assessee in India would be reduced, while in the case of the assessee the income would be increased. It is seen that the assessee has brought back an amount of ₹ 1,31,30,08,025/- as dividend during the assessment year 2012-13 and in assessment year 2013-14 as could be seen from financial accounts chart filed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st simplicitor on amount advanced but opportunity to own profits and capital on certain favourable terms. It was submitted that the consideration for extending the loan simplicitor is materially distinct and different from extending a loan which is given in consideration for or mainly in consideration for, option to convert the same into capital on certain terms which are favourable vis- -vis the terms available or to put it more realistically, hypothetically available, to an independent enterprise. It was further submitted that the TPO has not considered Rule 10A(d) which includes number of closely linked transactions. The nature of transaction carried out by BHPL as per its objective effected a redemption of preference shares held by it to bring back its money to India which will increase its asset base and income into India. In order to redeem the preference shares, the AE do not have any funds and the BHPL has extended the loan of ₹ 22.125 crores and carried out all necessary activities to a facilitated redemption of preference shares. This is a closely linked integrated transaction under Rule 10A(d) i.e. functioning his shareholder s function and as well as the loan exte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rewards accrue to BHPL only as a result of the investments made. As per Rule 10B, adjustment for contractual terms are to be considered while applying CUP method. In this case the AE is not authorised by law to undertake any functions or pursue any business. Once BHPL decides to sell investments held, the AE has to wind up and BHPL has to bring back the entire proceeds to India. Thus, the aforesaid FAR analysis as required under Rule 10B has not been carried out by the TPO/CIT(A) while rejecting the contention of BHPL that even though in form the transaction is structured as a loan, in substance this is a quasi-equity capital. Thus, the aforesaid material differences and considerations for extending the loan to AE as compared to a loan simplicitor has not been considered by the TPO/CIT(A) as required by Rule 10B, which is more particularly analyzed by the Hon ble Ahmedabad Tribunal in the case of Cadila Healthcare Ltd. v. ACIT-Circle-1, Ahmedabad [2017] 80 taxmann.com 24 (Ahmedabad-Trib) in Para 11 12 of the judgement. The ld. counsel further, without prejudice, as an alternative argument stated that in the event if the transaction is not considered as quasi-equity in n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the case, in arriving at the conclusion, hence these decisions have no application in the case of assessee. 20. We have heard the rival submissions and perused the relevant material available on record. We find that the assessee is an investment company and was holding 46.2% shares in a Printing Ink Company known as Sterling + Hostag and for that purpose created a wholly owned subsidiary in Singapore as a Special Purpose Vehicle (SPV) known as M3 Holdings (Singapore) Pvt. Ltd (M3). The BHPL has invested in equity, preference shares and loan in the subsidiary AE, which in turn invested in Sterling + Hostage a printing ink manufacturing company in Europe. Once the investments are sold, it has to wind up and bring back entire proceeds to India and pay all applicable taxes as if any other resident company is required to do, if it has directly invested from India. As per the terms of the investment as applicable to the SPV under FEMA as well in the year 2012-13 (07.09.2012) the said Singapore AE has been winded up and all the capital remitted from India and investment/gains on disposal of investments has been completely brought back to India during year 2012-13 and 2013-14 and pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cable laws of Singapore and accordingly, received dividend of ₹ 1,27,25,34,505 during A.Y.2012- 13 and ₹ 4,01,73,520/- in A.Y.2013-14 which has been duly reflected in annual accounts placed at Paper Book Page No. 55 (and Chart filed with written submissions filed by the counsel). Therefore, we are in agreement with the assessee that as per OECD guidelines, the substances over form has to be considered. The transaction in the case of assessee is therefore, be considered as a quasi-equity in substance, as against the transactions considered and characterized by the TPO as pure loan simplicitor as given by a financial institution. The finding recorded by the AO, that the AE of the assessee company was engaged in the financial services activities in Singapore is not found to be correct as it is clearly borne out from the letter of disbursement of loan and purpose as setout the terms of loan as discussed herein above. The term of quasi-equity was explained by the Co-ordinate Bench of Ahmedabad in the decision of Cadila Healthcare Limited [2017] 80 taxmann.com 24 (Ahmedabad-Trib.), wherein, it was held that where assessee-company advanced loan to its AE within optio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le Industries Ltd. v. Asst.ClT [2015] 154 ITD 745/59 taxmann.com 152 (Ahd.), as follows: '5 ........ The question, however, arises as to what are the connotations of expression 'quasi capital in the context of the transfer pricing legislation. 6. Hon'ble Delhi High Court, in the case Chryscapital Investment Advisors India Ltd. v. ACIT [(2015) 56 taxmann.com 417 (Delhi)], has begun by quoting the thought provoking words of Justice Felix Frankfurter to the effect that A phrase begins life as a literarily expression; its felicity leads to its lazy repetition; and repetition soon establishes it as a legal formula, undiscriminatingly used to express different and sometimes contradictory ideas . The reference so made to the words of Justice Frankfurter was in the context of the concept of super profits but it is equally valid in the context of concept of quasi capitals also. As in the case of the super profits, to quote the words of Their Lordships, many decisions of different benches of the ITAT indicate a rote repetition (in the words of Felix Frankfurter J, quoted in the beginning of this judgment a lazy repetition ) of this reasoning, without an ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or, for example, a nonrefundable loan which is to be converted into equity. It is in this context that the loans, which are in the nature of quasi capital, are treated differently than the normal loan transactions. 9. The expression 'quasi capital', in our humble understanding, is relevant from the point of view of highlighting that a quasi capital loan or advance is not a routine loan transaction simplilcitor. The substantive reward for such a loan transaction is not interest but opportunity to own capital. As a corollary to this position, in the cases of quasi capital loans or advances, the comparison of the quasi capital loans is not with the commercial borrowings but with the loans or advances which are given in the same or similar situations. In all the decisions of the coordinate benches, wherein references have been made to the advances being in the nature of'quasi capital', these cases referred to the situations in which (a) advances were made as capital could not subscribed to due to regulatory issues and the advancing of loans was only for the period till the same could be converted into equity, and (b) advances were made for subscribing to the cap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tax Court, broadly at the same level of judicial hierarchy as this Tribunal. This decision deals with the limited question whether a particular transaction is required to be treated as debt or as equity. The precise question, which came up for consideration of the US Tax Court, were (1) whether advance agreements issued by Pepsi Co's Netherlands subsidiaries to certain Pepsi Co domestic subsidiaries and PPR are more appropriately characterized as debt than as equity; and, (2) if the advance agreements are characterized as debt, whether, and to what extent payments on the advance agreements constitute original issue discount, relating to contingent payment debt instruments under section 1.1275-4(c), Income Tax Regulations. This provision is a deduction provision and not a provision relating to determination of arm's length price. Nothing, therefore, turns on this decision. In any event, it is nobody's case that the transaction before us is of the debt. The case of the assessee is that since in consideration of this transaction, the assessee is entitled to own the capital at certain admittedly favourable terms, the true reward of this debt is the availability of such an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d have been higher because the returns from funds employed by the enterprise is higher is putting cart before the horse. In the commercial world, interest does not represent any participation of profits, and it does not vary because of the profits made by the borrower from monies so raised. In any event, while determining arm's length price of a transaction, it is immaterial as to what 'benefit* an AE subsequently derives from such a transaction. What is to be determined is the consideration of a transaction in a hypothetical situation, in which AEs are independent of each other, and not the benefit that AEs derive from such transactions. It is not even the case of the authorities below that in the event of hypothetically dealing with an independent enterprise, no independent enterprise would not have given him an interest free loans even if there was an option, coupled with such a deal, to subscribe to the capital of the AE on the terms as offered by the AE to the assessee. Unless that happens, there is not even a prima facie case made out for an ALP adjustment. 16. We have also noted that, in any event, whenever the assessee's right to exercise the option of c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rib.). 15. As regards ground No. 3 regarding addition of ₹ 1,22,27,058/- in respect of corporate guarantee provided to AE, ld. AR submitted that the corporate guarantee given to AE does not fall within the scope of international transaction u/s 92B. He submitted that the corporate guarantee is provided to AE for commercial and business expediency and the assessee has not incurred any cost for providing such guarantee. 15.1 Without prejudice to the above, ld. AR submitted that the Corporate Guarantee was brought under section 92B under Finance Act, 2012 w.e.f. AY 2013-14. It is not applicable to the current AY. For this proposition, he relied on the following cases: 17 ITA No. 259 /Hyd/2017 Bartronics India Ltd., Hyd.. 1. Dr. Reddy s Laboratories, ITA No. 294/Hyd/2014 ITA No. 458/Hyd/2015. 2. Siro Clinpharm Pvt. Ltd. Vs. DCIT, ITA No. 2876/Mum/2014 3. Bharati Airtel Ltd. Vs. ACIT, ITA No. 5816/Del/2012 4. Asian Paints Ltd. Vs. ACIT, ITA No. 7801/Mum/2010 5. Lanco Infratech Ltd. Vs. DCIT, ITA No. 450/hyd/2016 16. Ld. DR, on the other hand, submitted that even though the amended section is introduced in Finance Act, 2012, but, it is introduced with retrosp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provisions of the Act. In our considered opinion, the view taken by the Delhi Bench of ITAT in the case of Bharati Airtel Ltd., (supra) is one of the possible views on the matter and so long as there is no binding decision of any other Higher Forum taking a contrary view, the one which is favourable to the assessee has to be adopted even though other Benches have taken a different view. We, therefore, hold that the Explanation to Section 92B cannot be applied retrospectively and for the years under consideration the assessee having not incurred any costs in providing corporate guarantee it would not constitute International Transaction within the meaning of Section 92B of the Act and consequently, ALP adjustment is not warranted on this aspect. Respectfully following the above decision, we reject the treatment of corporate guarantee as international transaction and consequently, ALP adjustment is not warranted on this aspect. Accordingly, the ground raised by assessee is allowed. 18. As regards addition of ₹ 48,10,26,558/- towards interest on advances given to AE, ld. AR submitted that the TPO erred in recharacterizing the nature of transactions from i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d., Hyd.. assessee has transferred funds with an intention to make investment, it cannot be treated as international transaction as held by various courts, particularly, in the case of KAR Therapeutics Estates Pvt. Ltd. (supra) wherein the coordinate bench has held as under: 9. Considered the submissions of both the parties and perused the material facts on record as well as the orders of revenue authorities. There is no dispute that the assessee had remitted $ 3387182 towards investment in share capital. The shares were allotted to the extent of $ 2654797 in the same AY. The subsidiary company has treated the balance remittance as interest free unsecured loan and repayable on demand in their financial statement. In the next AY, the subsidiary company has allotted the shares on 15/03/2012. Now, can these transactions be treated as international transaction, which qualifies for ALP adjustment. In our considered view, the amount $ 732.385 is towards investment in share capital of the subsidiary outside India and the transactions are not in the nature of international transaction referred to section 92-B of the IT Act and transfer pricing provisions are not applicable as there is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee and ultimately, shares were allotted, it shows that there is no adjustment need to be made, on the CUP method adopted by the AO/TPO, even if the transaction is considered as one that of international transaction. (AY. 2008-09 to 2011-12). We also note that it is only a classification of accounting entry in the books, but, what is relevant and important is whether such transfer of funds were duly treated as investment and accordingly shares were allotted in the subsequent AY. Assessee has submitted brought back the preferential shares Since the transfer of funds were duly accounted by the AE and there is no restriction on the part of the AE to allot shares in the same AY of receipt of funds, as long as the shares allotted, it gives true nature of the transaction. therefore, in our considered view, there is no element of profit in the above transaction. Moreover charging of interest is depending upon the contractual obligations between the parties. Further, we find the amount representing loan was towards investment in share capital of the subsidiaries outside India as the transactions are not in the nature of transactions referred to section 92-B of the IT Act and the transfer pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ied out any functions. The entire risks are borne by the assessee company only and the entire investments in Sterling + Hostag has been funded as equity capital, preference capital and loan only by BHPL as part of its shareholder function. The AE itself has not employed any assets. As per the contractual terms and law, the moment this investment is sold the entire proceeds of capital and profits are to be repatriated to India compulsorily and subject the same to taxation in India. Therefore, in this manner the entire risks are to be borne by and rewards accrue to BHPL only as a result of the investments made. As per Rule10B adjustment for contractual terms are to be considered while applying CUP method. In this case the AE is not authorised by law to undertake any functions or pursue any business. Once BHPL decides to sell investments held, the AE has to wind up and BHPL has to bring back the entire proceeds to India. Thus, the aforesaid FAR analysis as required under Rule 10B has not been carried out by the TPO/CIT(A) while rejecting the contention of BHPL that even though in form the transaction is structured as a loan, in substance this is a quasi-equity capital. Thus, the afore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pothetical situation in which AEs are independent of each other, and, as such, impact of intra AE association on pricing of transaction is neutralized. Once we do so, as is the compulsion of hypothesis involved in arm s length price, the fact that normally a parent company has a right to subscribe to the capital of the subsidiary at such price as suits the assessee is required to be ignored. An arm s length price is hypothetical price at which independent enterprises would have entered the transaction, and, as such the impact of intra AE association cannot have any role to play in determination of arm s length price. The stand so taken by the TPO, which has met the approval of the DRP as well, does not, therefore, meet our approval. We have also noted that the assessee has given loan of ₹ 30,84,40,000/- and brought back ₹ 32,56,53,750/- as repayments. Similarly, investment in preferential shares were at ₹ 1,71,68,40,000/- as against which the assessee has brought back by way of redemption of preference shares for an amount of ₹ 1,74,90,59,944/-. Therefore, the transactions under consideration is in the nature of quasi capital. Hence, there was no requir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l at this assets base of the assessee company initiation country. The assessee company submitted that by letting the AE has raised funds in Singapore, effectively the cost of the funds have been shifted to Singapore while assets brought in the country would enable it to earn more from its investments. In support of his contention, the assessee company relied in the case of Four Soft Ltd. v. DCIT [I.T.A.No. 1495/HYD/2010) of Hyderabad Tribunal wherein it was held that corporate guarantee provided by the assessee does not fall within the definition of international transactions. However, the AO was of the view that the word any provision of service whether it fall within the routine course of business or not, or is includible as international transaction and hence, liable to be benchmarked. The AO further observed that OECD commentaries on this issue also acknowledge the corporate guarantee to be in the nature of service as held by the US Tax Court in the case of Container Corporation v. Commissioner. The assessee has explained that for the purpose of issue of a comfort letter to the SCB, Mauritius, the assesse company has incurred bank charges of ₹ 1,78,86,359/-. The asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en shifted from the assessee to the AE. In addition, the funds of the assessee, having been invested earlier as preferential shares, have now been brought back into the country. Hence, while assessee has a bigger asset base resulting in higher income in India, the cost of funds will be borne by the AE. Without provision of the guarantee, there was no way to bring in the preferential shares issued earlier. However, the explanation given by the assessee with respect to the amount of ₹ 1,78,86,359/- was not found acceptable in light of express provisions of the Act on this issue. As per section 92(1) and 92(2) of the Income Tax Act which reads as under: 92. (1) Any income arising from an international transaction shall be computed having regard to the arm s length price. Explanation, - For the removal of doubts, it is hereby clarified that the allowance for any expense or interest arising from an international transaction shall also be determined having regard to the arm s length price. (2) Where in an international transaction, two or more associated enterprises enter into a mutual agreement or arrangement for the allocation or apportionment of, or any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the arm s length value of that transaction to be Nil. The important point to be ascertained is whether the amount has gone in to contribute towards the cost of the loan and that whether a nonrelated party would have charged this amount from other party or not. It was submitted that as per provisions of Section 92 of the Act, any cost incurred by the assessee company while providing any services or benefit to its AE, the same needs to be charged and recovered from the AE. The appellant company is wrong in submitting that since the ultimate benefit was for the assessee, this cost need not be recovered from the AE. The responsibility for redemption of the preferential shares was on the AE and not on the appellant company and the AE had benefitted from the shares subscribed by the appellant company by investing the same in its ventures. Hence any cost for its redemption was a cost logically to be borne by the AE. Accordingly the TPO made an upward adjustment of ₹ 1,78,86,359/- on account of guarantee fees given for loan to M3 an AE located at Singapore. However, CIT (A) observed that with regards upward adjustment on account of corporate guarantee ₹ 2218.65 Million on behal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Guarantee given for bringing back funds into the country which will increase asset base and taxable income in India. This does not result in any shifting of profit abroad rather shifts the future profits into India. The TPO has relied on plain reading of Section 92(1) and 92(2) which is not applicable owing to facts that there is no mutual arrangements to provide any service and the guarantee has been provided to enable the AE to repatriate ₹ 174.90 Crores by redeeming the preference shares issued to the AE by raising a loan from Standard Chartered Bank, Mauritius which has resulted in increase in asset base and taxable income of the assessee in India, hence, it is shareholder function, which does not amount to an international transaction. The AE had no funds available to redeem preference shares. Redemption of preference shares was undertaken by the assessee to bring back the money to India which will increase the asset base and tax base in India. The guarantee was given and guarantee commission paid to facilitate granting of loan to the AE and achieve the goal of bringing back the moneys back to India. The guarantee fee paid to the foreign bank was incurred to achieve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the norms set- out. In short, it is an anti-abuse legislation which tells you as to what is the acceptable behavior but it does not trigger levy of tax in a retrospective manner because no party can be asked to do impossibility. Analyzing further the Bench observed that though Explanation to Section 92B is stated to be clarificatory, it has to be necessarily treated as effective from the A.Y. 2013- 2014 and in this regard, relied upon the observations of the Hon'ble Delhi High Court in the case of Skies Satellite. We have also analyzed the case law relied upon by the Ld. D.R. and also the provisions of the Act. In our considered opinion, the view taken by the Delhi Bench of ITAT in the case of Bharati Airtel Ltd (supra) is one of the possible views on the matter and so long as there is no binding decision of any other Higher Forum taking a contrary view, the one which is favourable to the assessee has to be adopted even though other Benches have taken a different view. We, therefore, hold that the Explanation to Section 92B cannot be applied retrospectively and for the years under consideration the assessee having not incurred any costs in providing corporate gu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tudy report without a speaking order. The accuracy of the T P Study report is not disputed by the TPO/ CIT(A). When the T P Analysis of BHPL has not been disputed TP adjustment made in this regard is not as per Law. Hence, same needs to be deleted. 31. Per contra, the Ld. CIT (DR) submitted the argument of the counsel are misleading fact that ₹ 171.68 crores profit shown in year 2005 and brought back ₹ 174.90 crores. No such claim was made before TPO or CIT (A). The charge are incurred by the parent company in India and not recovered and only booking charge paid by the assessee. The Ld. CIT (DR) submitted that there is amendment in section 92B of the Act which is retrospective in nature, hence, same is applicable to the assessee. The Ld. CIT (DR) relied in the case of CIT v. Everest Kento Cylinders Ltd. [2015] 58 taxmann.com 254 (Bombay) in support of his contentions. 32. In rejoinder, the learned counsel for the assessee submitted that the amount of ₹ 174.90 crores has been recorded in the books of accounts and same forma part of assessment records,which is more than ₹ 171.68 crores of corporate guarantee given by the assessee, hence, the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to the foreign bank was incurred to achieve this objective which increases the asset base and tax base in India and not as a service to the AE. In-fact when the preference shares were redeemed the aforesaid expenses has been received back along with the principle amount and there is no loss to the assessee and no deduction has been claimed on account of such payments under any head of income by the assessee. We are also of the view that the Corporate guarantee provided before 2012 is not an international transaction as per provisions of section 92(2) and even after the amendment in 2012 in section 92(2) of the Act. The Corporate guarantee provided before 2012 is not an international transaction even after the amendment in 2012. The learned counsel for the assessee has placed reliance on the decision of Hyderabad Tribunal in the case of Bartronics India Ltd v. DCIT (2017) 86 taxmann.com 254 (Hyderabad-Trib.) of which relevant part is reproduced as under: 17. Considered the rival submissions and perused the material facts on record as well as various case laws submitted by the assessee. Assessee has provided corporate guarantee to its AE in the current AY without charging an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... different view. We, therefore, hold that the Explanation to Section 92B cannot be applied retrospectively and for the years under consideration the assessee having not incurred any costs in providing corporate guarantee it would not constitute International Transaction within the meaning of Section 92B of the Act and consequently, ALP adjustment is not warranted on this aspect. Respectfully following the above decision, we reject the treatment of corporate guarantee as international transaction and consequently, ALP adjustment is not warranted on this aspect. Accordingly, the ground raised by assessee is allowed. 34. Therefore, respectfully following the ratio of above decision, the treatment of corporate guarantee as international transaction and consequently, ALP adjustment is not warranted on this aspect. Thus, in the light of above discussion, we hold that the Explanation to Section 92B cannot be applied retrospectively and for the years under consideration the assessee having not incurred any costs in providing corporate guarantee it would not constitute International Transaction within the meaning of Section 92B of the Act and consequently, ALP adjustm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4/- out of total upward adjustment of ₹ 1,94,15,214/- made by AO/TPO on account of interest on loan to AE s while determining arm s length price of international transactions. 39. We have heard the rival submissions and perused the relevant material on record. We find that both parties have agreed that the fact for this assessment year are identical as in assessment year 2008-09 in assessee`s own case. Therefore, our findings as given in assessment year 2008-09 in Ground No. 4 above, would mutatis mutandis apply to this ground also. Accordingly, following the same these grounds of appeal of the assessee is allowed. 40. In the result, the appeal of the assessee is allowed for assessment year 2009-10. I.T.A.No.1416/AHD/2015/A.Y. 2010-11/ by the assessee: 41. Ground No. 1 2 are general in nature; hence, does not require our separate adjudication. 42. Ground No. 3 4 are against the confirmation of upward adjustment of ₹ 94,09,829/- out of total upward adjustment of ₹ 1,55,78,150/- made by AO/TPO on account of interest on loan to AE s while determining arm s length price of international transactions. 43. We have heard the rival su ..... X X X X Extracts X X X X X X X X Extracts X X X X
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