TMI Blog2019 (4) TMI 1934X X X X Extracts X X X X X X X X Extracts X X X X ..... inion there was no reason why an aggregated result could not have been considered for the Arms Length Price analysis when TNM was considered as MAM. Even if we presume that average PLI worked out by the ld. TPO was correct, and even if we substituted the negative PLI of 6.54% worked out by the ld. TPO with the negative PLI 3.39% of considered by the assessee for its iron ore/ millscale segment, still its aggregate PLI was much more than the average PLI of 4.89% of the selected comparables. In our opinion, in such circumstances, there was no scope for making any Arms Length Price adjustment based on TNMM method on the trading results of the assessee. We have thus no hesitation in deleting the upward adjustment of B12,66,82,138/- made by the ld. Assessing Officer on assessee s trading with its Associated Enterprises. Upward adjustment for corporate guarantee fees - whether corporate guarantee would be amenable to a Arms Length Price adjustment, when no fee is charged by assessee on an Associated Enterprise which was its wholly owned subsidiary, stands answered by Kolkata Bench of the Tribunal in the case of EIH Ltd [ 2018 (1) TMI 1372 - ITAT KOLKATA] - Following the decision of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (in short the Act ), pursuant to the direction dated 17th August, 2018 of ld. Dispute Resolution Panel. 2. Facts apropos are that assessee a company trading in minerals and maize, had international transactions with its Associate Enterprises abroad on five items of trading namely Barytes, Bentonite, Iron ore, Millscale, Coal and maize, during the relevant previous year. As per the assessee, the first five of these were metallic / non-metallic minerals. Details of such International transactions were as under:- Sl.No Nature of international transaction Amount (in B.) Method adopted 1 Purchase of wood pulp 1,15,195 CUP 2 Sale of traded goods 2,61,20,19,702 3 Recovery of expenses 16,59,979 4 Reimbursement of expenses 66,890 Ld. AO made a reference to the ld. Transfer Pricing Officer for analyzing the Arms Length Prices of the international transactions of the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es and arrived at an average Profit Level Indictor (PLI) of 4.89% for such companies. The companies identified by the ld. TPO and their PLIs were as under:- Sl.No Name of the company OP/OC Margin 1 MBG Commodities Pvt Ltd 1.98 2 Maheshwari Logistics Ltd 3.58 3 Narsingh Ispat Ltd 3.65 4 Oswal Minerals Ltd 9.45 5 Sharda Ma Enterprises Pvt Ltd 5.78 AVERAGE 4.89% As per the ld. TPO profit level indicator of the assessee for its iron ore / millscale segment reflected a loss of 6.54%. This was worked out by the ld. TPO as under:- Operating Income 3477725370 Operating Cost 3721251663 Operating Profit (-) 243526293 OP/OC (-) 6.54% Accord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AXIS Bank 1.75% Canara Bank 2.03% ICICI 1.28% Indian Bank 4% State Bank of India 1.30% Union Bank of India 3% Indian Overseas Bank ( Non Rural Branch) 1.56% Average 2.19% Though the assessee explained that the very same AE had provided an interest free security deposit of ₹ 26.95 crores to it and the corporate guarantee was given so as to enable the AE to avail of a loan, this was not accepted. Ld. TPO was of the opinion that by virtue of the Explanation inserted in Section 92B of the Act through Finance Act, 2012 with retrospective effect from 01.04.2002, such guarantee provided to an AE became international transaction. According to the ld. TPO, Hon ble Bombay High Court in the case of CIT vs. Glenmark Pharmaceuticals (2017) 398 ITR 439 had affirmed a decision of Mumbai Bench of this Tribunal in the name of in the case of Everest Kanto Cylinders Ltd vs. ACIT, (2015) 113 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment. g Margin of Oswal Minerals Ltd, has been erroneously computed by TPO. The net margin was considered at 9.45% instead of correct margin of 0.45% . Apart from the above, assessee also objected to the inclusion of MBG Commodities Pvt Ltd, Maheshwari Logistics Ltd, Narsingh Ispat Ltd, Oswal Minerals Ltd and Sharda Ma Enterprises Pvt Ltd, citing their functional incompatibility. 7. Viz-a-viz upward adjustment on corporate guarantee, submissions of the assessee were as under:- a Share-holder activity necessity for compensation. The Appellant relies on the Kolkata Tribunal decision in the case of DClT Vs. EIH Ltd reported in [2018] 89 taxmann.com 417 (Kolkata - Trib.): EIH flight is a startup company, it required funds primarily for acquisition of capital assets for setting up i s operation and guarantee facilities given by the assessee/assessee company to the lender bank is normal business practice and obligation towards a subs diary. Since the AE was a startup company, the assessee extended corporate guarantee to the third party borrowers as a matter of commercial prudence to protect its interest by fulfilling the shareholders obligation. The contention of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... incomes, losses or ass of such enterprises. The condition precedent of a transaction having a bearing on profits, incomes, losses, or assets would apply to each of the aforesaid transaction namely purchase, sale, or lease of tangible or intangible property or provision of services, or lending or borrowing money or any such transaction. This understanding gets further clarified b way of insertion of Explanation in section 928(1) by the Finance Act, 2012 with retrospective effect from 14-2002 vide clauses (a) to (d). In the said Explanation, clause (e) alone has been carved out as an exception wherein, the transaction thereon has been specifically mandated to be an international transaction where a transaction of business restructuring or reorganization, entered into by an enterprise with an AE irrespective of the fact that it has bearing on the profits, incomes, losses, or assets of such enterprises at the time of transaction or at any future date . c.The assessee has not incur d any cost for providing guarantee and as such there is no impact on the profit of the Assessee. Accordingly, the adjustment for guarantee commission is unwarranted. The Appellant relies on the Jurisdicti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a. Outstanding receivables cannot be considered as an international transaction and it does not fall within the purview of capital financing as contemplated under Section 92B of the Act since the transaction itself is notional. Only section 92CE which comes into force from 1.4.2018 enables the AO to make secondary adjustment in case the primary adjustment is sustained. In this case, if iron ore/Millscale segment is aggregated and considered along with other minerals, the net margin would be 8.03% which would be higher than ALP determined by TPO at 4.89%. It is submitted that if the m in transactions are held to be at arms length then there is no necessity to separately impute interest as delay in realisation will be subsumed as part of the main transaction. The Appellant relies on the Ahmedabad Tribunal decision in the case of Bisazza India Pvt Ltd Vs ACIT reported in [2018) 97 taxmann.com 423 and Gemstone Glass Pvt Ltd [2018) 100 taxmann.com 5 [Ahmedabad Trib]. b. Apart from the above, it is submitted that the Appellant does not charge interest on delayed realization from AE as well as Non-AE debtors and accordingly there is no requirement to recover/charge interest only in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TNMM. As for the argument of the assessee that iron ore / millscale should be aggregated with its other segments, ld. DRP was of the opinion that unless there was a serious flaw or defect in segmental results prepared by the ld. TPO, assessee could not ask for such aggregation. However, ld. DRP did rework PLI of one of the comparables, namely M/s. Oswal Minerals Ltd and directed the ld. AO to adopt the PLI of this company as 1.9% while working out the average PLI of the five comparables selected by him. 10. Viz-a-viz corporate guarantee, ld. DRP was of the opinion that providing such guarantee gave a distinct advantage to the Associated Enterprise and there was inherent cost for the assessee by assuming such risk. According to them, there were various decisions of the Tribunal, which held that corporate guarantee given to an Associated Enterprise could be considered as an international transaction u/s.92B of the Act. Specific reliance were placed on the following decisions:- i) Zee Entertainment Enterprises Ltd vs. Ad. CIT, Range 11(1), Mumbai in 81 Taxmann. Com 379 (Mumbai-Tri) A.Y. 08-09 ii) Aster (P) Ltd vs. DCIT, Circle 1(1) Hyderabad in 81 taxmann.com 297 (Hyderabad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ispat Ltd was trading in coal, hard coke, iron ore, lime stone, manganese ore etc., Oswal Minerals Ltd was trading in alloys and minerals without separate reportable segments and Sharda Ma Enterprises Pvt Ltd was trading in coal. Thus, according to him, it was a mixture of companies selected by the ld. TPO having different segments, few of which were common. As per the ld. Authorised Representative, the ld. TPO fell in error when he worked out the PLI of the assessee for iron ore/millscale, ignoring the other minerals traded by it. According to him, a comparison ought have been done only on aggregate basis. Further, according to the ld. Authorised Representative, there was no reason to consider each mineral as a separate segment when the admitted fact was that assessee had never done any segmentation in its books. As per the ld. AR, if all the minerals traded by the assessee were considered together, its profit margin would be 8.33%, which was much higher than the average margin of 4.89% for the comparables selected by the ld. TPO. Further, as per the ld. Authorised Representative, ld. TPO while computing assessee s PLI, had excluded forex expenditure without any justification. Ld ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the nature of providing corporate guarantee. 16. Alluding to the interest adjustment made on the overdue receivables from Associated Enterprise, ld. Authorised Representative submitted that out of total sales of B261 Crores to Associated Enterprises during the relevant previous year, substantial part was received much earlier to the expiry of the credit period of 45 days. The delay in receiving the dues, as per the ld. Authorised Representative was not many. According to him, it was normal in trading transactions, that some dues were received belatedly whereas some are received earlier. Relying on the decisions of Ahmedabad Bench of the Tribunal in the case of Bisazza India (P) Ltd vs. DCT, (2018) 97 taxmann.com 432 and that of Gemstone Glass Pvt Ltd vs. DCIT, (2018) 100 taxmann.com 5, ld. Authorised Representative submitted that once TNMM method was adopted, any notional charges for overdue receipts stood subsumed in the bench marking and no further adjustment was required for overdue receivables. Ld. Authorised Representative also relied on a judgment of Hon ble Bombay High Court in the case of CIT vs. Indo American Jewellery Ltd, (2014) 44 taxmann.com 310. 17. Per contra, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lts, ld. TPO was justified in rejecting CUP as the most appropriate method. As pointed out by the ld. DRP adopting CUP means there should be exact comparables and a comparability done with rates of minerals put out in a publication, in our opinion would not suffice the requirement of a CUP analysis. 21. Now coming to the TNM Method, adopted by the ld. TPO, he had arrived at an average PLI at 4.89% for the five comparable companies selected by him. Assessee had objected to these comparables but ld. TPO had justified his selection with the following comments. With regard to assessee's objection about comparables, it is pertinent to mention here that prowess is a neutral database and this office has applied standard filters (as given under), after qualitative and quantitative analysis to locate, potential comparables primarily they are tested or related party transactions, persistent loss making and to locate functional similarity. The selection of comparables is objective, hence no cherry picking exercise has be n adopted and the objection of the assessee is not acceptable. Also, the said companies are primarily engaged in the trading in minerals and in TNMM broad functio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which assessee traded were aggregated, which aggregation is available at paper book page 132, this would clearly indicate that PLI of the assessee came to 8.33%. This work-out, which was provided by the assessee to lower authorities is reproduced hereunder:- Particulars Iron ore Millscale fines Barytes Coal Bentonite Others (Yellow maize, brown rice, rice bran) Total OP/OC -3.39% 22.67% 5.27% 26% 25.30% 8.33% The above work out has not been disputed by the Revenue. It may be true that assessee had not maintained segmental accounts and the above working can have therein some allocation of common expenses. Nevertheless, ld. TPO considered assessee to have maintained no segmental data. When the trading was mainly in minerals, in our opinion there was no reason why an aggregated result could not have been considered for the Arms Length Price analysis when TNM was considered as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve, the Ld. AO/TPO and Ld. Panel failed to appreciate the corporate guarantee extended by the appellant is part and parcel of the management agreement entered into with the AE and said agreement take due care towards appropriate remuneration for corporate guarantee. 1.4 Without prejudice to the above, the Ld. Panel erred in arbitrarily confirming the arm s length guarantee commission rate of 3%, when a nominal guarantee commission rate of 0.3% - 0.5% has been accepted in various legal jurisprudence. 12.2. The ld. AR contended that the corporate guarantee was given by the assessee to the subsidiary AE M/s. EIH Mauritius herein (EIH Flight) to fund the set up of the said subsidiary company in its year of operation. According to the ld. AR, since M/s. EIHflight is a start up company, it required funds primarily for acquisition of capital assets for setting up its operation and guarantee facilities given by the assessee company to the lender bank is normal business practice. According to the ld. AR, the provision of the said funds for initial establishment was the responsibility of shareholders of M/s. EIH flight i.e. the assessee in this case and it was discharging that responsi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al in the case of Micro Ink Limited vs ACIT in ITA No.2873/Ahd/2010 and referred to various other case laws i) Redington India Limited vs ACIT [ITA No.513/Mds/2014] ii) Videocon Industries Limited vs ACIT Range 3(3), Mumbai [ITA NO.6145/Mum/2012, 1728/Mum/2014, 1729/Mum/2014]; iii) Manugraph India Limited vs Dy. Commissioner of Income Tax (I.T.A.No.2631/Mum/2015) iv) Siro Climpharm Private Limited vs DCIT, Mumbai (I.T.A.No.1269/Mum/2015); v) Siro Clinpharm Private Limited vs DCIT, Mumbai (I.T.A.2618/Mum/2014). 12.4. In response, the ld. CIT,DR brought to our notice the decision of co-ordinate bench of Hyderabad Tribunal in the case of Prolifics Corporation Ltd vs DCIT reported in (2015) 55 taxmann.com 226 (Hyderabad-Trib.) dated 31.12.2014 for Asst Year 2009- 10, wherein the Tribunal has accepted the arguments of the revenue that after the insertion of the Explanation by Finance Act 2012 with retrospective effect from 2002, the corporate guarantee also is an international taxation. The ld. DR also contended that the Hon ble Bombay High Court in the case of CIT vs Everest Kanto Cylinders Ltd. In ITA NO.1165 of 2013 where the guarantee fee transaction was bench ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the profits, incomes, losses or assets of such enterprises; and only in respect of transaction specified in (e) this requirement can be read into and in all other transactions specified in (a) to (d) no such requirement of profit/loss can be read into and, therefore, the transaction of corporate guarantee will be considered as an international transaction. Therefore, according to the ld. DR, the ld TPO was correct in not accepting the arguments of the assessee that transactions of giving corporate guarantee to the AE was not an international transaction. 12.6. The ld. AR in his rejoinder explained that the case cited in favour of Revenue on this issue by the Hon ble Bombay High Court in the case of Everest Kanto Cylinder Limited (supra) was when the parent company charged a fee of 0.5% on the AE for rendering this service. On this factual aspect, the Tribunal as well as the Hon ble High Court held that it is an international transaction. Since in the case in hand, the assessee has not charged a penny from the AE, the facts of the case is different and case law is distinguishable and, therefore, the Hon ble High Court s order cannot come to the rescue of the Revenue. The ld. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the records. We note that the assessee company had incorporated a 100% subsidiary called M/s. EIH Flight at Mauritius for the financial year 2007-08 by investing US $1.1 million for the purpose of setting up its off-shore flight catering unit there (Mauritius). The business objective of M/s. EIH flight was to provide in-flight catering services to airline companies operating in and out of Mauritius. According to assessee, i.e. M/s. EIH has been in the industry of catering facilities for over 50 years, and has been producing 50,000 meals per day for some of the biggest names in aviation industry including Air France, Air Mauritius, British Airways, Jet Airways, Etihad Airways, Lufthansa etc., For the purpose of setting up its catering unit at Mauritius, the Airport Authority of Mauritius provided EIH Flight (100% subsidiary company of assessee) a plot of land measuring 14,000 sq. meters on a renewable lease for 20 years. The facility was to have a serving capacity of 10,000 meals per day involving state-of-the-art kitchen with best equipment, latest technological innovations, practicing systems and procedures. For the purpose of setting up catering, the budgeted cost by an external ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /-. The ld DRP upheld the said adjustment pertaining to the receipt of corporate guarantee fee. Aggrieved by the decision of the ld. DRP and the final order of the AO, the assessee is in appeal before us. 12.10. We note that M/s. EIH flight is a startup company, it required funds primarily for acquisition of capital assets for setting up its operation and guarantee facilities given by the assessee/assessee company to the lender bank is normal business practice and obligation towards a subsidiary. Since the AE was a startup company, the assessee extended corporate guarantee to the third party borrowers as a matter of commercial prudence to protect its interest by fulfilling the shareholders obligation. We agree with the contention of the ld AR that the corporate guarantee as provided by the assessee was a matter of commercial prudence to protect and by fulfilling the shareholder obligation, as any financial incapacitation of the subsidiary would jeopardize the investment of the assessee. For that we rely on the order of the Coordinate Bench of this Tribunal in the case of Tega Industries Ltd. Vs DCIT (ITA No.1912/Kol/2012 wherein it was held that the provision of corporate guara ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase of tangible or intangible property (explained by clauses (a) and (b) of the Explanation), or provision of services, (explained by clause (d) of the Explanation), or lending or borrowing money (explained by Clause (c) of Explanation). The plain reading of provisions of sec. 92B(1) of the Act indicate that the various transactions mentioned in section 92B(1) of the Act, (i.e. purchases, sales, provision for services, lending or borrowing or any other transaction) should have bearing on the profits, incomes, losses or assets of such enterprises. In our opinion, the condition precedent of a transaction having a bearing on profits, incomes, losses, or assets would apply to each of the aforesaid transactions namely purchase, sale, or lease of tangible or intangible property or provision of services, or lending or borrowing money or any such transaction. This understanding of ours gets further clarified by way of insertion of Explanation in section 92B(1) by the Finance Act 2012 with retrospective effect from 01.04.2002 vide clause (a) to (d). We find that in the said explanation, clause (e) alone has been carved out as an exception wherein, the transaction thereon has been specifical ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ambit of definition of international transaction irrespective of whether or not such transactions have any bearing on profits, income, lossess or assets of such enterprises u/s. 92 B of the Act. We also note that the Ahmedabad Bench of this Tribunal supra after considering the decision of the Hon ble Bombay High Court in Everest Kanto Cylinder Ltd. (supra) observed as under: We are unable to see, in the judgment of Hon ble Bombay High Court, any support to the proposition that issuance of corporate guarantee 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. 12.14. The ld CIT DR would have had a case where a fee has been charged for the intra service which has been rendered (in the context of corporate guarantee), and, therefore, the assessee or the Court has treated it as an international transaction, then the charge of corporate guarantee has to be in accordance with Arm's Length principle. This means that the price for corpo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the Revenue that assessee had not charged interest either from its Associated Enterprise or from Non Associated Enterprises, for delay in collection of receivables. It is also not disputed that out of the total transactions of the assessee almost 57% were with its Non Associated Enterprises. Once there is complete uniformity followed by assessee in not charging any interest from any party, whether Associated Enterprise or Non Associated Enterprises, in our opinion there could not be any selective imputing of notional interest. Submission of the assessee that out of total sales of about of B261 Crores to its Associated Enterprise, B100 Crores was received well within the due date and small delays were only in the balance of B161 Crores has not been disputed by the ld. Departmental Representative. Assessee had not offered any discount to any party for payment of bills before the expiry of the credit period. Hence, it is only a natural corollary that it did not charge any interest for delays also. Where a good part of the dues were collected earlier to the due date, in our opinion the instances where there were delays could not be selectively elected for a levy of charge of notional ..... X X X X Extracts X X X X X X X X Extracts X X X X
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