TMI Blog2018 (3) TMI 1881X X X X Extracts X X X X X X X X Extracts X X X X ..... pments that the CIT(A) has rightly deleted the impugned adjustment after excluding the above two comparable entities from the array of comparables. The Revenue fails in its instant substantive ground as well. Upward adjustment on fee for performance guarantee from 2% to 0.11% as proposed in the transfer pricing officer s order - International transaction u/s 92B - HELD THAT:- We find that recent co-ordinate bench in M/s Suzlon Energy Ltd. vs. ACIT [ 2017 (4) TMI 1406 - ITAT AHMEDABAD] holds that such a guarantee does not amount to an international transaction under section 92B. TPO had himself taken financial guarantees given by various institutions as the relevant bench mark for the performance guarantee adjustment in question. assessee extending corporate guarantees to its AEs, particularly on the facts and in the circumstances of this case and when the assessee has done so in the course of its stewardship activities for its subsidiaries, does not constitute an international transaction, and, as such, no ALP adjustment can be made in respect of the same. Accordingly, entire ALP adjustment stands deleted. Upward adjustment to human resource management services - HELD ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the MUK was also involved in negotiating and concluding customer contract and key risks such as market and credit risk were also being taken by it. The appellant has contended that based on the FAR provided in the TP report MUK was characterized as a distributor assuming normal risk. It was doing normal selling functions and the arrangement between UK and Mastek was on principal to principal basis. MUK was acting as a distributor for Mastek for both on-site and offshore services Abilities of the appellant company. It scouts for a suitable buyer, promote the software solutions, establishes contacts with the prospective customers and solicit and address any inquiry of the prospective customer, it also builds relationship and prepares a proposal for sale. The MUK enters into negotiations with the buyer and a strike a sale or concludes the contract, it has therefore, been explained and contended by the appellant that MUK was acting as a distributor for the appellant company in UK. It has been contended by the appellant that once the contract is negotiated and signed, all the activities are done by the Mastek through its UK office. It has therefore, been requested by the appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore of the view that there was no direct evidence in the hands of the TPO to say that the assessee was simply a selling agent and that it appears that the TPO had proceeded on a presumption that the MUK has acted as a selling agent for the year under consideration. His presumption is primarily based upon one fact that there were a fixed percentage of awards given by MIL to MUK; which in his opinion is prevalent in selling agent's case. We have examined this thought of the TPO in depth ..... Even in the case of a distributor, it is expected from a distributor to consult with the manufacturer of the main concern while finalizing a contract so that the negotiation should be in line with the requirement of the main manufacturer. Though the parties i.e. MIL and MUK are associated to each other but simultaneously two separate legal entities having separate tax structure hence settled the terms of payment on sales basis, considering their respective advantages, though can be a fixed amount that there should be enviable incentive to generate more revenue. .. Another argument has also been raised that there was no advantage in shifting of profit from India to UK. A vehement conte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. The adjustment as made by the TPO is hereby reversed and, accordingly, the A.O. is directed to delete the impugned addition while computing the total income of the assessee. This ground No.10 is allowed. Respectfully following the judgment of honourable ITAT Ahmedabad and also my predecessor it is held that the operations of MUK can be characterized as distributor and accordingly the approach adopted by the TPO is set aside as it was not justified. The upward adjustment made by the TPO is accordingly directed to be deleted. The ground no.10 is allowed. 3. It is therefore clear that the CIT(A) has followed tribunal s order in assessee s case itself for assessment year 2006-07 in ITA No.3120/Ahd/2010. Ld. Departmental Representative fails to point out any distinction in facts or law therein. We thus affirm CIT(A) s above extracted finding by adopting the judicial consistency. The first issue is accordingly adjudicated in assessee s favour. 4. The Revenue s second substantive ground challenges correctness of the CIT(A) s findings deleting upward ALP adjustment of ₹ 29,07,087/- relating to assessee s international transaction of provisions of Information Technology ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Average 21.19% 19.78 The appellant has objected against the selection of certain comparables taken by the TPO for determining the arm's-length margin. It has submitted that Accentia Technologies Ltd should not be taken as comparable as the FAR of that company is different. It had acquired various companies and was also in the process of amalgamation. It has been submitted by the appellant that extraordinary events like acquisition, merger and demerger impacts the profitability the company and therefore, that company should not be treated as comparable. It has also placed reliance on the judgment of ITAT Hyderabad in the case of Capital IQ Information Systems India Pvt. Ltd. in ITA No.1961/Hyd/2011 wherein the same company was rejected as comparable owing to the above-mentioned facts. On careful consideration of the facts and circumstances, the submission given by the appellant appears to be acceptable as the events like merger demerger and acquisitions has a definite impact on the profitability of the company. Accordingly, it is held that Accentia Technologies Ltd should ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 30.32% Mean/Average 17.05% After applying the above profit margin the upward adjustment is required to be made would be as under:- Particulars Amount Operating Cost 43,608,853 Arm s length % determined 17.05% Arm s length value 51,043,617/- Actual Value 49,327,597/- Difference/upward adjustment 1716020 The 5% of the transaction would be as under:- 5% of arm s length value 25,52,181 5% of actual value 24,66,380 Since the value of adjustment is within 5% range, after considering the Actual Value and also the Arm s-Length Value, the transaction is considered to be at arm s-length in accordance with the second proviso to section 92C of the Act. The upward adjustment made by the AO is accordingly directed to be deleted. The eight ground of appeal is accordingly, allowed. 5. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by Mastek India while entering into the performance guarantees and other related commitments made with the parties to sales contract with it. The AO has accordingly adopted an estimate of 2% if the gross sales as guarantee fee for the guarantees and comfort letters given by the appellant company and accordingly the cost of such guarantee have been worked out at ₹ 10.87 Crores which the appellant was entitled to receive merely on the issue of providing guarantee to the AE. It has been held by the AO that since an addition of ₹ 26.07 Crores has already been suggested no further adjustment was recommended by the TPO. During, the course of appellate proceedings, the appellant has submitted that the service liability risk was borne by the appellant and the performance guarantee given to the customer with respect to the performance of software services was not on behalf of the AE. It has been submitted by the appellant that the MUK was the distributor of the appellant and does not provide any software services to the customers. The on-site component of the contract was provided by a branch of the appellant in UK whereas the offshore component was provided by the appellan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he guarantee. The appellant had given performance guarantee and not the financial Guaranty. The approach of the TPO to equate performance guarantee with the financial Guaranty was not justified. It has been submitted and claimed by the appellant that there was a fundamental difference between performance guarantee and the financial Guaranty. In case of financial Guaranty the AE obtains loan or cash credit facility and the benefit accruing to the AE is in the form of reduced interest rate or favourable terms of loan, whereas no such benefit accrues to the AE in case of performance guarantee. It has accordingly been submitted by the appellant that the methodology considered by the TPO was not justified. It has been pointed out by the appellant that it has not incurred any eexpenses while providing the performance guarantee and historically no customer has invoked the performance guarantee given by the appellant till date. The performance guarantee given by the appellant does not have a bearing on profit, income, losses or assets and was therefore not covered under the TP regulations. The appellant has also submitted that financial position and credit rating of the subsidiary would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the report. Therefore, the contention of the appellant is rejected. The other contention which has been taken by the appellant is that performance guarantee and financial Guaranty are entirely different products and therefore, it would not be appropriate to adopt the rates given for financial Guaranty for evaluating the performance guarantee. The contention of the appellant is justified. The criteria for giving the performance guarantee for a particular product would be entirely different than that of the financial Guaranty for a particular loan or credit. The performance guarantee would depend on the technical expertise and the skills of the company and the historical performance data of the product which is being sold by the distributor. It has been observed that the performance guarantee is worked out by evaluating the historical data of similar claims made in the past and the value of the product for which the performance guarantee that have been claimed, it is noted from the facts that no such historical figure or any comparable data is available for deciding the issue. The appellant is giving a commission of 5.5% of the revenues generated through MUK. It is this commission ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e applied to those sales made through MUK on which to performance guarantee has been given by the appellant. Accordingly, the sales made through MUK on which the performance guarantee was given by the appellant should only be considered for applying the above rate. The appellant has submitted that it has given performance guarantee on the sales of ₹ 260.35 Crores made through MUK. The AO is directed to verify this figure and apply the above rate accordingly. The addition made by the AO, on without prejudice basis, is accordingly upheld to that extent. The ground of appeal is partly allowed. 7. Both the parties vehemently reiterate their respective facts during the course of hearing. We find that recent co-ordinate bench in M/s Suzlon Energy Ltd. vs. ACIT (2017) 188 TTJ 278 (Ahd. Trib.) holds that such a guarantee does not amount to an international transaction under section 92B of the Act as under :- 22. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. 23. As learned counsel for the assessee rightly points out, this issue is covered, in favour of the assessee, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of sub-section (1), be deemed to be a transaction entered 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, 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 - (inserted by the Finance Act 2012, though with retrospective effect from 1st April 2002) (i) the expression international transaction shall include- (a) the purchase, sale, transfer, lease or use of tangible property including building, transportation vehicle, machinery, equipment, tools, plant, furniture, commodity or any other article, product or thing; (b) the purchase, sale, transfer, lease or use of intangible property, including the transfer of ownership or the provision of use of rights regarding land use, copyrights, patents, trademarks, licences, franchises, customer list, marketing channel, brand, commercial secret, know -how, industrial property right, exterior design or practical and new design or any other business or commercial ri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... programmes, systems, procedures, campaigns, surveys, studies, forecasts, estimates, customer lists, or technical data; (l) any other similar item that derives its value from its intellectual content rather than its physical attributes.' 22. As analyzed by a coordinate bench, in the case of Bharti Airtel Ltd. (supra) and speaking through one us, the legal position with respect to the above definition is as follows: '25. An analysis of this definition of 'international transaction' under Section 92B, as it stood at the relevant point of time, and its break-up in plain words, shows the following: An international transaction can be between two or more AEs, at least one of which should be a non-resident. An international transaction can be a transaction of the following types: in the nature of purchase, sale or lease of tangible or intangible property, in the nature of provision of services, in the nature of lending or borrowing money, or in the nature of any other transaction having a bearing on the profits, income, losses or assets of such enterprises An international transaction shall include a mutual agreement or arrangement between tw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to anyone or more of such enterprises . That leaves us with two clauses in the Explanation to Section 92B which are not covered by any of the three categories discussed above or by other specific segments covered by Section 92B, namely borrowing or lending money. 29. The remaining two items in the Explanation to Section 92B are set out in clauses (c) and (e) thereto, dealing with (a) capital financing and (b) business restructuring or reorganization. These items can only be covered in the residual clause of definition in international transactions, as in Section 92B(1), which covers any other transaction having a bearing on profits, incomes, losses, or assets of such enterprises . 30. It is, therefore, essential that in order to be covered by clauses (c) and (e) of Explanation to Section 92B, the transactions should be such as to have bearing on profits, incomes, losses or assets of such enterprise. In other words, in a situation in which a transaction has no bearing on profits, incomes, losses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut impact on profits, income, losses or assets of such enterprises is a precondition embedded in Section 92B(1) and the only relaxation from this condition precedent is set out in clause (e) of the Explanation which provides that the bearing on profits, income, losses or assets could be immediate or on a future date. The contents of the Explanation fortifies, rather than mitigates, the significance of expression 'having a bearing on profits, income, losses or assets' appearing in Section 92B(1). 32. There can be number of situations in which an item may fall within the description set out in clause (c) of Explanation to Section 92B, and yet it may not constitute an international transaction as the condition precedent with regard to the 'bearing on profit, income, losses or assets' set out in Section 92B(1) may not be fulfilled. For example, an enterprise may extend guarantees for performance of financial obligations by its associated enterprises. These guarantees do not cost anything to the enterprise issuing the guarantees and yet they provide certain comfort levels to the parties doing dealings with the associated enterprise. These guarantees thus do not have a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that the transaction will have no impact on profits, incomes, losses or assets of such enterprise . This aspect of the matter is clear from an observations in the related Tribunal order, which is reported as Everest Kanto Cylinders Ltd (supra), to the effect that However, in this case, the assessee has itself charged 0.5% guarantee commission from its AE and, therefore, it is not a case of not charging any kind of commission from its AE . The Tribunal did note, in the immediately following sentence in paragraph 23 itself, that the only point to be seen in this case is whether the same is at ALP or not . The very fact of charging this guarantee commission brings the issuance of corporate guarantees to the net of transfer pricing. Nevertheless, the ALP adjustment made by the TPO was deleted by the Tribunal. Aggrieved by the relief so given by the Tribunal, the matter was carried in further appeal, by the Commissioner, before the Hon'ble Bombay High Court which eventually upheld the relief granted by the Tribunal. The appeal before the Hon'ble High Court was by the Commissioner, and not by the assessee, and, therefore, the grievance against the issuance of corporate guara ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... substantial question of law and it is dismissed. 25. We are unable to see, in the judgment of Hon'ble Bombay High Court, any support to the proposition that issuance of corporate guarantees is inherently within the ambit of definition of 'international transaction' under section 92B irrespective of whether or not such transactions have any bearing on profits, incomes, losses, or assets of such enterprises . Revenue, therefore, does not derive any help from the said decision. 26. Coming to Hon'ble Bombay High Court in the case of Vodafone India Services (P.) Ltd. (supra), which has been relied upon by the learned Departmental Representative, we find that the operative portion of this judgment, so far as relevant to this discussion, is as follows: '213. The amendment to section 2(47) raises several important questions of fact and of law. Whether or not it affects the proceedings which were the subject matter before the Supreme Court is not relevant for the purpose of this Writ Petition. But, whether it is relevant or not for the purpose of the assessment proceedings in respect of the petitioner which are the subject matter of this Writ Petition, is rele ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would be evident, therefore, that a lot more must now be seen and considered than before while arriving at a conclusion whether the terms and conditions of the Framework agreement constituted a transfer or assignment of the call options by one party to another. 217. At the cost of repetition, we are not concerned here with whether the amendment is valid or not. One of the issues, however, that does arise is whether the amendment, albeit clarificatory, would make a difference in the construction of the provisions of the Framework agreements themselves, to wit as regards the construction of the clauses thereof without the aid of any other material for interpreting them. Vodafone's case obviously considered the ambit of the term transfer prior to the amendment. In the present assessment proceedings, it is the amended definition which would have to be considered. 218. We do not find it either necessary or proper to indicate the application of section 2(47) as amended to the present proceedings. The application would depend upon the facts on record or those may be permitted to be brought on record. 219. There is another aspect. The petitioner may well contend that the am ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... When Their Lordships have made it clear that they would not like to bypass the channels under the Income-tax Act and proceed to decide these issues in writ jurisdiction under article 226, there cannot obviously be any question of Their Lordships deciding the matter one way or the other. Any observations made by Their Lordships, while declining to decide the matter in writ jurisdiction, cannot be treated as decisive of the issue on merits. While it is true that Hon'ble Bombay High Court has observed that the effect of amendment will have to be considered, Hon'ble Bombay High Court has also observed that even after taking into account the amendments, the legal implications of this amendment is still an open issue which will have to be adjudicated in the light of pleadings of the parties. Even in these observations, which do not anyway decide anything on merits, effect of a retrospective amendment was not in the context of the precise issue before us, or on the scope of the international transaction, but in respect of connotations of 'transfer'. As learned counsel rightly contends, in the light of Hon'ble Bombay High Court's judgment in the case of Sudhir Jaya ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a case in which Their Lordships were in seisin of a situation in which guarantee commission was actually charged by the assessee. That is not the case before us. The coordinate bench decisions dealing with the situations in which the guarantee commission was actually charged, and as such there was indeed a bearing on the profits of the assessee, clearly donot apply on this case. We, therefore, reject the reliance on these decisions as devoid of legally sustainable merits. 29. Let us now deal with the reliance placed by the revenue authorities on GE Capital's case by the Tax Court of Canada. In the DRP's order, a reference is made to well known Canadian decision in the case of GE Capital Canada (supra). The said case, to quote the words of the DRP, also shows that the group company issuing the guarantee (i.e. guarantor) would, in principle, at least need to cover the cost that it incurs with respect to providing the guarantee and that these costs may include administrative expenses as well as the costs of maintaining an appropriate level of cash equivalents, capital, subsidiary credit lines or more expensive external funding conditions on other debt finance . The DRP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ://www.fin.gc.ca/drleg-apl/ita-lrir-dec12-l-eng.pdf) 31. It is also important to bear in mind the fact that, under the Canadian law, the definition of 'international transaction', unlike an exhaustive definition under section 92B of the Indian Income-tax Act, 1961, is a very brief but inclusive and broad definition to the effect that 'transaction' includes a series of transactions, an arrangement or an event [See Section 247(1) of the Canadian Income-tax Act, 1985; http://laws-lois.justice.gc.ca/eng/acts/I-3.3/page-419.html#h-156] coupled with the legal position that arm's length adjustment to the prices of such transaction come into play Where a taxpayer or a partnership and a nonresident person with whom the taxpayer or the partnership, or a member of the partnership, does not deal at arm's length [See Section 247(2) ibid]. When one takes into account these variations in the statutory provisions, it will become very obvious that the provisions of the Indian Income-tax Act, 1961 and the Canadian Income-tax Act, 1985 are so radically different that just because a particular transaction is to be examined on arm's length principle in Canada cannot b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d foreign affiliates to support the active business operations of those affiliates . As to what could be conceptual support for such an exclusion, we find interesting references in a discussion paper issued by the Australian Tax Officer in June 2008 and titled as Intra-group finance guarantees and loans (http://www.transferpricing.com/pdf/Australia_Thin%20Capitalisation.pdf). The fact that this discussion paper did not travel beyond the stage of the discussion paper is not really relevant for the present purposes because all that we are concerned with right now is understanding the conceptual basis on which, contrary to popular but apparently erroneous belief, the issuance of corporate guarantees can indeed be kept outside the ambit of services. The relevant extracts from this document are as follows: 102. An independent company that is unable to borrow the funds it needs on a stand-alone basis is unlikely to be in a position to obtain a guarantee from an independent party to support the borrowings it needs. Where such a guarantee is given it compensates for the inadequacies in the financial position of the borrower; specifically, the fact that the subsidiary does not have en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dship activities covered a range of activities by a shareholder that may include provision for services to other group members, for example services that would be provided by a coordinating centre . It proceeded to add, in the immediately following sentence at page 207 of 2010 Guidelines, that These latter type of non-shareholder activities could include detailed planning services for particular operations, management or technical advice (trouble shooting) or in some cases assistance in day-to-day management . The shareholder activities are thus seen as conceptually distinct from the provision of services. The issuance of corporate guarantee, as long as it is in the nature of shareholder activity, can not, therefore, amount to a provision for services . 34. Undoubtedly, pioneering work done by the OECD, in the field of international taxation, has been judicially recognized worldwide by various judicial forums, including, most notably by Hon'ble Andhra Pradesh High Court in the case of CIT v. Visakhapatnam Port Trust [1983] 144 ITR 146/15 Taxman 72 (AP). Their Lordships also referred to Lord Radcliffe's observations in Ostime v. Australian Mutual Provident Society [1960 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cumstances would have been willing to pay for the activity if performed for it by an independent enterprise or would have performed the activity in-house for itself. If the activity is not one for which the independent enterprise would have been willing to pay or perform for itself, the activity ordinarily should not be considered as an intra-group service under the arm's length principle. 7.7 The analysis described above quite clearly depends on the actual facts and circumstances, and it is not possible in the abstract to set forth categorically the activities that do or do not constitute the rendering of intra-group services. However, some guidance may be given to elucidate how the analysis would be applied for some common types of activities undertaken in MNE groups. 7.8 Some intra-group services are performed by one member of an MNE group to meet an identified need of one or more specific members of the group. In such a case, it is relatively straightforward to determine whether a service has been provided. Ordinarily an independent enterprise in comparable circumstances would have satisfied the identified need either by performing the activity in-house or by having t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sts of managerial and control (monitoring) activities related to the management and protection of the investment as such in participations . Whether these activities fall within the definition of shareholder activities as defined in these Guidelines would be determined according to whether under comparable facts and circumstances the activity is one that an independent enterprise would have been willing to pay for or to perform for itself.' (Emphasis supplied) 36. We have noticed that the 'OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations' specifically recognizes that an activity in the nature of shareholder activity, which is solely because of ownership interest in one or more of the group members, i.e. in the capacity as shareholder would not justify a charge to the recipient companies . It is thus clear that a shareholder activity, in issuance of corporate guarantees, is taken out of ambit of the group services. Clearly, therefore, as long as a guarantee is on account of, what can be termed as 'shareholder's activities', even on the first principles, it is outside the ambit of transfer pricing adjustment in res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s treatment of guarantee fees under other provisions. See P.L.R. 9410008 (Dec. 13, 1993). 39But cf Federal Nat'l Mortgage Ass'n v. Commissioner, 100 T.C. 541, 579 (1993) (Fannie Mae provided services by buying mortgages). 37. We are in agreement with these views. There can thus be activities which benefit the group entities but these activities need not necessarily be 'provision for services'. The fact that the OECD considers such activities in the services segment does not alter the character of the activities. While the group entity is thus indeed benefited by the shareholder activities, these activities do not necessarily constitute services. There is no such express reference to the benefit test, or to the concept of benefit attached to the activity, in relevant definition clause of 'international transaction' under the domestic transfer pricing legislation. As we take note of these things, it is also essential to take note of the legal position, in India, in this regard. No matter how desirable is it to read such a test in the definition of the international transaction' under our domestic transfer pricing legislation, as is the settled legal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 39. The issuance of financial guarantee in favour of an entity, which does not have adequate strength of its own to meet such obligations, will rarely be done. The very comparison, between the consideration for which banks issue financial guarantees on behalf of its clients with the consideration for which the corporates issue guarantees for their subsidiaries, is ill-conceived because while banks seek to be compensated, even for the secured guarantees, for the financial risk of liquidating the underlying securities and meeting the financial commitments under the guarantee, the guarantees issued by the corporates for their subsidiaries are rarely, if at all, backed by any underlying security and the risk is entirely entrepreneurial in the sense that it seeks to maximize profitability through and by the subsidiaries. It is inherently impossible to decide arm's length price of a transaction which cannot take place in arm's length situation. The motivation or trigger for issuance of such guarantees is not the kind for consideration for which a banker, for example, issue the guarantees, but it is maximization of gains for the recipient entity and thus the MNE group as a whol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... overing payment of defaulted guarantees. The guarantees are not based on the credit assessment of the entity, in respect of which the guarantees are issued, but are based on the business needs of the entity in question. Even in a situation in which the group entity is sure that the beneficiary of guarantee has no financial means to reimburse it for the defaulted guarantee amounts, when invoked, the group entity will issue the guarantee nevertheless because these are compulsions of his group synergy rather than the assurance that his future obligations will be met. We see no meeting ground in these two types of guarantees, so far their economic triggers and business considerations are concerned, and just because these instruments share a common surname, i.e. 'guarantee', these instruments cannot be said to be belong to the same economic genus. Of course, there can be situations in which there may be economic similarities, in this respect, may be present, but these are more of an exception than the rule. In general, therefore, bank guarantees are not comparable with corporate guarantees. 41. As evident from the OECD observation to the effect In contrast, if for example a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n to the transaction, viewed in their totality, differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner . The case of a corporate guarantee clearly falls in the second category as no independent enterprise would issue a guarantee without an underlying security as has been done by the assessee. We may, in this regard, refer to the observations made by Hon'ble High Court, speaking through Hon'ble Justice Easwar (as he then was), as follows: '16. The Organization for Economic Co-operation and Development ('OECD', for short) has laid down transfer pricing guidelines for MultiNational Enterprises and Tax Administrations. These guidelines give an introduction to the arm's length price principle and explains article 9 of the OECD Model Tax Convention. This article provides that when conditions are made or imposed between two associated enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises then any profit which would, but for those conditions, have accrued to one of the enterprises, but, by reason of those conditions, if not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a subscription of capital. The second circumstance arises where, while the form and substance of the transaction are the same, the arrangements made in relation to the transaction, viewed in their totality, differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner and the actual structure practically impedes the tax administration from determining an appropriate transfer price. An example of this circumstance would be a sale under a longterm contract, for a lump sum payment, of unlimited entitlement to the intellectual property rights arising as a result of future research for the term of the contract (as previously indicated in paragraph 1.10). While in this case it may be proper to respect the transaction as a transfer of commercial property, it would nevertheless be appropriate for a tax administration to conform the terms of that transfer in their entirety (and not simply by reference to pricing) to those that might reasonably have been expected had the transfer of property been the subject of a transaction involving independent enterprises. Thus, in the case described above it might be appropriate for the tax administ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hose which would have been adopted by independent enterprises behaving in a commercially rational manner . No bank would be willing to issue a clean guarantee, i.e. without underlying asset, to assessee's subsidiaries when the banks are not willing to extend those subsidiaries loans on the same terms as without a guarantee. Such a guarantee transaction can only be, and is, motivated by the shareholder, or ownership considerations. No doubt, under the OECD Guidance on the issue, an explicit support, such as corporate guarantee, is to be benchmarked and, for that purpose, it is in the service category but that occasion comes only when it is covered by the scope of 'international transaction' under the transfer pricing legislation of respective jurisdiction. The expression 'provision for services' in its normal or legal connotations, as we have seen earlier, does not cover issuance of corporate guarantees, even though once a corporate guarantee is covered by the definition of international transaction', it is benchmarked in the service segment. In view of the above discussions, OECD Guidelines, as a matter of fact, strengthen the claim of the assessee that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent, apart, Transfer Pricing and Intra-Group Financing by Bakker Levvy (ibid) notes that the IRS has issued a non-binding Field Service Advice (FSA 1995 WL 1918236, 1 May 1995) stating that, in certain circumstances (emphasis supplied), a guarantee may be treated as a service . If the natural connotations of a 'service' were to cover issuance of guarantee in general, there could not have been an occasion to give such hedged advice. This will be stretching the things too far to suggest that just because when guarantees are included in the international transactions, these guarantees are included in service segment in contradistinction with other heads under which international transactions are grouped, the guarantees should be treated as services, and, for that reason, included in the definition of international transactions. That is, in our considered view, purely fallacious logic. In our considered view, under Section 92B, corporate guarantees can be covered only under the residuary head i.e. any other transaction having a bearing on the profits, income, losses or assets of such enterprise . It is for this reason that Section 92B, in a way, expands the scope of int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Accordingly, this Explanation is to be read in conjunction with the main provisions, and in harmony with the scheme of the provisions, under Section 92B. Under this Explanation, five categories of transactions have been clarified to have been included in the definition of 'international transactions'. The first two categories of transactions, which are stated to be included in the scope of expression 'international transactions' by virtue of clause (a) and (b) of Explanation to Section 92B, are transactions with regard to purchase, sale, transfer, lease or use of tangible and intangible properties. These transactions were anyway covered by transactions 'in the nature of purchase, sale or lease of tangible or intangible property'. The only additional expression in the clarification is 'use' as also illustrative and inclusive descriptions of tangible and intangible assets. Similarly, clause (d) deals with the provision of services, including provision of market research, market development, marketing management, administration, technical service, repairs, design, consultation, agency, scientific research, legal or accounting service which are anywa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e important distinction between these two categories is that while latter is a certainty, and only its crystallization may take place on a future date, there is no such certainty in the former case. In the case before us, it is an undisputed position that corporate guarantees issued by the assessee to the various banks and crystallization of liability under these guarantees, though a possibility, is not a certainty. In view of the discussions above, the scope of the capital financing transactions, as could be covered under Explanation to Section 92B read with Section 92B(1), is restricted to such capital financing transactions, including inter alia any guarantee, deferred payment or receivable or any other debt during the course of business, as will have a bearing on the profits, income, losses or assets or such enterprise . This precondition about impact on profits, income, losses or assets of such enterprises is a precondition embedded in Section 92B(1) and the only relaxation from this condition precedent is set out in clause (e) of the Explanation which provides that the bearing on profits, income, losses or assets could be immediate or on a future date. These guarantees do no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndeed enlarge the scope of definition of 'international transaction' under section 92B, and it did so with retrospective effect. If, for argument sake, it is assumed that the insertion of Explanation to Section 92B did not enlarge the scope of definition, there cannot obviously be any occasion to deviate from the decision that the coordinate bench took in Four Soft Ltd. case (supra), but if the scope of the provision was indeed enlarged, as is our opinion, the question that really needs to be addressed whether, given the peculiar nature and purpose of transfer pricing provision, is it at all a workable idea to enlarge the scope of transfer pricing provisions with retrospective effect There can be little doubt about the legislative competence to amend tax laws with retrospective effect, and, in any case, we are not inclined to be drawn into that controversy either. On the issue of implementing the amendment in transfer pricing law with retrospective effect, in the case of Bharti Airtel Ltd. (supra), a coordinate bench had observed as follows: 34. There is one more aspect of the matter. The Explanation to Section 92B has been brought on the statute by the Finance Act 2012 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... general aphorisms, all intention of compelling impossibilities, and the administration of law must adopt that general exception in the consideration of particular cases. It was for this reason that a coordinate bench of this Tribunal, in the case of Channel Guide India Ltd. v. Asstt. CIT [2012] 139 ITB 49/25 taxmann.com 25 (Mum.), held that even though the assessee had not deducted the applicable tax at source under section 195, the disallowance could not be made under section 40(a)(i) since the taxability was under the provisions which were amended, post the payment having been made by the assessee, with retrospective effect. All this only shows that even when law is specifically stated to have effect from a particular date, its being implemented in a fair and reasonable manner, within the framework of judge made law, may require that date to be tinkered with. When a proviso is introduced with effect from a particular date specified by the legislature, the judicial forums, including this Tribunal, at times read it as being effect from a date much earlier than that too. One such case, for example, is CIT v. Ansal Landmark Township (P.) Ltd. [2015] 377 ITR 635/234 Taxman 825/61 tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ea has been specifically accepted in the present case. Therefore, the question whether issuance of corporate guarantee per se in general constitutes a 'international transaction' under section 92B would have been somewhat academic question on the facts of this case. In any event, in Prolific' Corp Ltd. case (supra), an earlier considered decision on the same issue by coordinate bench of equal strength was simply disregarded and that fact takes this decision out of the ambit of binding judicial precedents. We have also noted that in view of the decision a coordinate bench, in the case of JKT Fabrics v. Dy. CIT [2005] 4 SOT 84 (Mum.) and following the Full bench decision of Hon'ble AP High Court in the case of CIT v. BR Constructions [1993] 202 ITR 222/[1994] 73 Taxman 473 (AP), a decision disregarding an earlier binding precedent on the issue is per incurium. Such decisions cannot be basis for sending the matters to special bench since occasion for reference to special bench arises when binding and conflicting judicial precedents from coordinate benches come up for consideration. That was not the case here. All these factors taken together, in our considered view, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here were two decisions of this Tribunal, in the case of Everest Kanto Cylinders Ltd Vs DCIT [(2012) 34 taxmann.com 9 (Mum)] and Mahindra Mahindra Ltd Vs DCIT [2012- TII-70-ITATMum], which were not considered by the Bharti Airtel decision. Our attention is also invited to the rectification petition filed by the Assessing Officer, which is said to be pending for disposal before the Tribunal. We donot find merits in this plea. Mahindra Mahindra decision (supra) was passed on 6th June 2012, though at a point of time when Finance Act 2012 had just come into force i.e. post 28th May 2012, without even being aware whether or not the Finance Act 2012 was passed as it gave certain directions depending upon the exact amendment by the said Finance Act. The matter was remitted to the file of the Assessing Officer in a rather summary manner. It cannot be, by any stretch of logic, an authority on any legal question arising out of the law which, as per the Tribunal- wrongly though, was not even in existence. As for the Everest Kanto decision (supra), the issue was decided against the assessee as, to borrow the words of the coordinate bench, Here in this case, it is undisputed that the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... emphasized, apparently to highlight the fact that it is not only the impact on entity issuing the guarantee but also beneficiary of the guarantee that matters in this context, that the word used in section 92 B is enterprises and not enterprise . It is thus contended that the impact on the profits, incomes, losses or assets of the entity issuing guarantee is important, but the impact on the profits, income, losses or assets of the entity, which is beneficiary of the guarantee, is also important. It is pointed out that Bharti Airtel decision has examined this aspect only from the point of view of the entity issuing the guarantee and that has also been decided wrongly. As for these issues being raised by the learned Departmental Representative, suffice to say that even if reasoning adopted by Bharti Airtel decision is incorrect, it is not for us to examine that aspect of the matter. Now that the matter is before Hon ble High Court, and the matter is already under hearing, there is no point in going into these fine points, which may at best be errors of judgment rather than a glaring error rendering the decision to be per incurium, at this stage. In any case, there is a subtle dif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, when legislature has to take an extreme measure to nullifying the impact of a judicial ruling in taxation, it is the time for, at least on a theoretical note, introspection for the draftsman as to what went so wrong that fundamental intent of law of law could not be conveyed by the words of the statute, or, perhaps for the judicial forums, as to what went so wrong that the interpretation was so off the mark vis- -vis fundamental principles of taxation or the sound policy considerations. However, amendment so made are generally prospective, and there is a sound conceptual foundation, as has been highlighted in the binding judicial precedents that we will deal with in a short while, for that approach. There is no dearth of examples on this aspect of the matter. Take for example, the amendment to Section 263 by the Finance Act, 1961. In many judicial precedents, [such as in the case of CIT Vs Sunbeam Auto Limited (332 ITR 167) wherein it was held that Learned counsel for the assessee is right in his submission that one has to keep in mind the distinction between lack of inquiry and inadequate inquiry . If there was any inquiry, even inadequate that would not by itself give occa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... given effect to), but because the law which was intended to be given retrospective effect to as a clarificatory amendment, is in its true nature one that expands the scope of the section it seeks to clarify, and resultantly introduces new principles, upon which liabilities might arise. Such amendments though framed as clarificatory, are in fact transformative substantive amendments, and incapable of being given retrospective effect. . 37. An important question, which arises in this context, is whether a clarificatory amendment remains true to its nature when it purports to annul, or has the undeniable effect of annulling, an interpretation given by the courts to the term sought to be clarified. In other words, does the rule against clarificatory amendments laying down new principles of law extend to situations where law had been judicially interpreted and the legislature seeks to overcome it by declaring that the law in question was never meant to have the import given to it by the Court? The general position of the courts in this regard is where the purpose of a special interpretive statute is to correct a judicial interpretation of a prior law, which the legislatu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ective and, as in this case, it deals with transfer pricing legislation which essentially seeks a degree of compliant behavior from the assessee vis- -vis certain norms- the norms the assessee should know at the time of entering into the transactions rather than at the time of scrutiny of his affairs at a much later stage. 15. It is very important to bear in mind the fact that right now we are dealing with amendment of a transfer pricing related provision which is in the nature of a SAAR (specific anti abuse rule), and that every anti abuse legislation, whether SAAR (specific anti abuse rule) or GAAR (general anti abuse rule), is a legislation seeking the taxpayers to organize their affairs in a manner compliant with the norms set out in such anti abuse legislation. An anti-abuse legislation does not trigger the levy of taxes; it only tells you what behavior is acceptable or what is not acceptable. What triggers levy of taxes is non-compliance with the manner in which the anti-abuse regulations require the taxpayers to conduct their affairs. In that sense, all anti abuse legislations seek a certain degree of compliance with the norms set out therein. It is, therefore, only elem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his reason, in the light of Hon ble Delhi High Court s guidance in the case of New Skies Satellite BV (supra) also, the amendment in the definition of international transaction under Section 92B, to the extent it pertains to the issuance of corporate guarantee being outside the scope of international transaction , cannot be said to be retrospective in effect. The fact that it is stated to be retrospective, in the light of the aforesaid guidance of Hon ble Delhi High Court, would not alter the situation, and it can only be treated as prospective in effect i.e. with effect from 1st April 2012 onwards. 19. As we deal with this question, it is also relevant to consider whether this Tribunal can, while adjudicating on the appeals, tinker with the date, as set out in the statute, from which an amendment is effective. In our humble understanding, as a judicial forum, we are bound not only by the law as legislated by the legislature, but by the judge made law as well. We are a part of the judicial hierarchy in this system. We are bound by the law laid down by Hon ble Courts above, and all that we are expected to do, and we do, is to decide the issues before us in accordance with the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of revenue by corresponding income not being taken into account in computation of taxable income in the hands of the recipients of the payments. Such a policy motivated deduction restrictions should, therefore, not come into play when an assessee is able to establish that there is no actual loss of revenue. This disallowance does deincentivize not deducting tax at source, when such tax deductions are due, but, so far as the legal framework is concerned, this provision is not for the purpose of penalizing for the tax deduction at source lapses. There are separate penal provisions to that effect. Deincentivizing a lapse and punishing a lapse are two different things and have distinctly different, and sometimes mutually exclusive, connotations. When we appreciate the object of scheme of section 40(a)(ia), as on the statute, and to examine whether or not, on a fair, just and equitable interpretation of law- as is the guidance from Hon ble Delhi High Court on interpretation of this legal provision, in our humble understanding, it could not be an intended consequence to disallow the expenditure, due to non deduction of tax at source, even in a situation in which corresponding incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... follows: 14. The Court is of the view that the above reasoning of the Agra Bench of ITAT as regards the rationale behind the insertion of the second proviso to Section 40(a) (ia) of the Act and its conclusion that the said proviso is declaratory and curative and has retrospective effect from 1st April 2005, merits acceptance. 15. In that view of the matter, the Court is unable to find any legal infirmity in the impugned order of the ITAT in adopting the ratio of the decision of the Agra Bench, ITAT in (Rajiv Kumar Agarwal v. ACIT). 22. When such are the views of Hon ble High Court, it is not open to us to proceed on the basis that even though the amendment is required to be read as prospective, the Tribunal cannot do so as it is a creature of the Income Tax Act itself. In our considered view, and for the detailed reasons set out above, at best the amendment in Section 92B, at least to the extent it dealt with the question of issuance of corporate guarantees, is effective from 1st April 2012. The assessment year before us being an assessment year prior to that date, the amended provisions of Section 92 B have no application in the matter. 23. For this reason also, the im ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accepted in assessment as pertaining to human resource management services. We find that the CIT(A) has followed this tribunal s order in assessee s case itself in preceding assessment year 2006-07 (supra) as under :- I have carefully considered the facts of the case, the assessment order, the order of the TPO and the written submission of the appellant. It is noted that the TPO had made adjustment on account of Arm's Length Price of the charges levied by the appellant on HRM function. The appellant had not taken this transaction as the International transactions and accordingly the same was not referred by the AO to the TPO. However, the TPO considered the same as international transaction holding that it was a separate service and made an adjustment by computing the arms length price of the same. The appellant on the other hand has objected that it is not a separate service and the HRM function forms an integral part of the software development service and therefore, it should not have been regarded as a separate international transaction. The appellant has explained that it was engaged in providing offshore software development and technical support services while, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... site' service, the assessee has seconded its employees to those AEs. 26.1. To deal with this problem it is better to first examine the correct meaning of this notion i.e. Secondment and have found that a 'secondment' takes place when an employee or a group of employees are temporarily assigned to work for an another organization. The 'secondment' is a practice through which one entity makes the services of it's employee/ employees available to another entity for a short period of time while continuing to treat that person as if's employee either by remunerating him or by not removing from the roll of employment. Possible reasons for the 'secondment' are viz. career development, to gain new skill/experience, enabling such employee to remain with the parent-employer so as to preserve benefits such as pension benefit etc., income generation for the parent-employer, to provide cover for offshore short term projects, to provide cover for short term absence etc. The idea behind a secondment arrangement' is that the 'secondee' (the employee) will remain employed with the 'seconder' (the parent or seconding-employer) during the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ect onsite'. Such facility is provided by the Head Office, i.e. MIL. In return, MIL has also heaped the prize i.e. high revenue generation. By displaying different FAR, the TPO had made an attempt to distinguish the two activities. Nevertheless, the law prescribes that FAR should be appropriately documented, so that the correct figures is in the knowledge of the Revenue Department. 26.2. As far as the Commercial and business expediency is concerned, we have been informed that the Id. CIT(A) in past four years has decided this issue in favour of the assessee. It was held that in the business Interest of the assessee to second its employees to its AEs, the MIL has seconded the employees. However, the allegation of the TPO is that the AEs have been benefited from such secondments. Be that the position, even if it was so, that Associate Enterprise is benefited, then there should not be any scope to draw an adverse inference that MIL should also snatch the profit out of the pockets of AEs. As long as the MIL has got his pound of flash and disclosed better-revenue generation, there should not be any objection to the revenue. 26.2. As far as the non-mentioning of HRM function i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... some compensation on secondments. It is not a correct approach because one has to examine the business strategies and the business model of an Enterprise and if it is found that other benefits are much higher than the small amount of compensation, then naturally applying a common business acumenship, no compensation or mark-ups should be asked for. In the present case as well, facts and figures have revealed that following the said business strategy the business growth as a whole was much higher than the impugned compensation amount. This allegation is also to be ruled out that those very employees were otherwise regular employees of the assessee-company and they have been absorbed after their return for the period for which they were sent abroad and worked offshore with AEs. It is true that such employees are the regular group of experts but they have been paid by AEs when worked on-site abroad, which means the burden of salary for the offshore period was in fact borne by AEs, otherwise to maintain bunch of trained employees the MIL had to incur the expenditure on salary. Therefore, there was an argument of counter claims and in support reliance was placed on Boston Scientifi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hile filing the Return of income, the appellant itself, on a conservative basis, tentatively allocated certain indirect expenses and offered disallowance of ₹ 2 Lakhs under section 14A of the Act being expenditure incurred to earn exempt income. It has been submitted by the appellant that major administrative work was performed by mutual fund distributors and they are paid brokerage by the mutual funds. Further, the advisory services in respect of purchase/sale of mutual funds were also provided by mutual fund distributors for which no payment was made. The decision in respect of investment is taken only by Chief Financial Officer of the appellant and no other person was involved. No specific staff or any other arrangement was required to manage the investment portfolio of mutual funds. It is accordingly been requested by the appellant that the disallowance made by the AO should be deleted. After examining all the facts and the law related to the issue it is noted that the fact that appellant has earned dividend income of ₹ 7.71 Crores and it has claimed exemption from tax on this income is undisputed. The disallowance made by the AO pertains to the administrative ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ks of account or the correctness of the relevant expenditure in its profit loss account. He quotes Hon ble Delhi High Court s decision in CIT vs. Taikishah Engineering India Limited (2015) 370 ITR 338 (Delhi) that the impugned disallowance in absence of such satisfaction is not sustainable. We find no reason to accept assessee s instant argument. It is seen that the lower authorities dealt with interest expenditure and that too on proportionate basis in the said case than direct one whereas the issue before us is that of administrative expenditure disallowance. We observe in this facts that the impugned administrative expenses disallowance is not alike former two limbs since falling in different head as well as the fact that it has to be based on computation formula only. There is no dispute that we are dealing with assessment year 2008-09 i.e. starting point of application of Rule 8D of IT Rules. The assessee admittedly has not challenged the relevant computation @ .5% given in the above statutory computation formula. We conclude in these facts that both the lower authorities have acted as per law in invoking the impugned disallowance in relation to assessee s exempt income amou ..... X X X X Extracts X X X X X X X X Extracts X X X X
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