TMI Blog2021 (1) TMI 405X X X X Extracts X X X X X X X X Extracts X X X X ..... Also no merit in the alternative contention of the Revenue for adding under the TP adjustment following the decision of assessee itself for A.Y. 2006-07 as held Vega ME was a full-fledged distributor to the appellant and not marketing service provider during the year. Once if is held that the AE is a distributor, the ALP has is to be determined on the basis of profit on sale of goods rather than operating margin to value added expenses. Like earlier years, this year also appellant had margin of 20.3% as against average margin of comparable companies of 12.63%. Therefore the profit margin of the appellant is much higher than the average operating margin of comparable companies. In view of this, no TP adjustment can be made this year also. Disallowance u/s. 35D - On query the assessee explained that it has incurred expenses in connection with the issue of public subscription of shares and under the provision of section 35D an amount of equal to 1/5 of said expenditure will be allowed as business expenditure for each of the five successive previous years - HELD THAT:- After going through the findings of ld. CIT(A) we consider that Assessing Officer has incorrectly computed the di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re was no provision with respect to addition of warranty expenses as well as expenses disallowable u/s. 14A - CIT(A) has deleted the impugned addition - HELD THAT:- Hon ble Supreme Court in the case of Rotark Controls India (P) Ltd. [ 2009 (5) TMI 16 - SUPREME COURT] held that provision of warranty is an allowable expenditure in the year of provision. The ld. CIT(A) has also considered the reliance made by the assessee on the decision of Himalaya Machinery P. Ltd.[ 2010 (2) TMI 682 - GUJARAT HIGH COURT] that when actual expenditure is more than provision made by an assessee it can be concluded that provision made by assessee is capable of being estimated with reasonable certainty. In the light of the above facts, we do not find any infirmity in the decision of ld. CIT(A) holding that assessee has claimed warranty expenses on the basis of actual claim and the same is not required to be added u/s. 115JB of the Act. Disallowance u/s. 14A - AO observed that assessee had made substantial investment out of which it had earned substantial income claimed as exempt from tax - exempt income was constituted 11% of the total profit earned by the assessee company however the assessee has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... MI 143 - ITAT AHMEDABAD] holding that the issue of corporate guarantee were in the nature of share holder activity and the same could not be included in the provision for services under the definition of international transaction u/s. 92B of the Act. The Co-ordinate Bench has also stated that when an assessee extends assistance to AE which does not cost anything to the assessee and particularly for which the assessee could not have realized money by giving it to someone else during the course of normal business such an assistance or accommodation does not have any bearing on its profit, income, loses or asset and therefore it is outside the ambit of international transaction u/s. 92B of the Act. It is also held that these guarantee do not have any impact on profit, loses or assets of the company. It is further held that there can be a hypothetical situation in which a guarantee default takes place and therefore the enterprise may have to pay the guarantee amount but such a situation, even if that be so is only a hypothetical situation. Respectfully following the decision of the Co-ordinate Bench as supra, this ground of appeal of the Revenue is dismissed. Unutilized CENVAT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nwani, Sr. D.R. ORDER PER : AMARJIT SINGH, ACCOUNTANT MEMBER:- These twelve appeals filed six by revenue and six by assessee for A.Y. 2008-09 to 2013-14, arise from order of the CIT(A), Ahmedabad, in proceedings under section 143(3) r.w.s. 144C 143(3) of the Income Tax Act, 1961; in short the Act . 2. The fact in brief is that return of income declaring total income of ₹ 1,10,44,39,360/- was filed on 20th Sep, 2008. Subsequently, the assessee has filed revised return of income on 19th Feb, 2009 declaring total income of ₹ 1,10,44,39,360/-. The case was subject to scrutiny assessment and notice u/s. 143(2) of the Act was issued on 23rd Sep, 2011. The assessee company is engaged in the business of manufacturing and trading of alloy steel castings. After taking into consideration the submission of the assessee, the Assessing Officer has framed assessment u/s. 143(3) r.w.s. 144C of the act vide order dated 23rd Feb, 2012 whereas various additions were made. Assessee has not filed any objection against draft assessment order before the dispute resolution panel. Being aggrieved with the additions made by the Assessing Officer, the assessee has filed appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) to the Total Income of the Company, please note that this matter pertaining to A. Y. 2006-07 has been heard by ITA T in our case of A. Y. 2006-07 on 3-11-2011 and we are of the view that the matter will be decided in our favour and the ITAT order will be received by us before 31-12-2011. In view of this, you are requested not to make any addition on account of this ground. Further please note that Vega UAE is an independent Body Corporate. In support of this content/on, we attach herewith the fallowings: A copy of the Memorandum of Incorporation of Vega UAE dated 22 April 2002 (enclosed as Annexure A). The Tax Residence Certificate of Vega UAE dated 3rd February,2010 issued by Executive Director of Revenue and Budget, i.e., Ministry of Finance of UAE (enclosed as Annexure B). A Certificate issued by A/man Free Zone Authority (enclosed as Annexure C) dated 15 July 2009 confirming that Vega UAE is a registered company, a body corporate incorporated in the Free Zone of Ajrnan (UAE) under the law laid down by the Amiri Decree No, (2) of 1996 on amending the Arniri Decree No. (3) of 1988. In view of the above above, we submit that Vega UAE is an independent c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plicable in this case. Further, please note that Vega UAE is a Body Corporate under the laws of Ajman in accordance with the constitution of UAE and thus, there is no need to carry out test beyond this point and more so keeping in mind the proposition that Indian Tax Officers very respectfully are not expected to be experts in Constitutional, Legal and Company Law Matters of any Country outside India, including the UAE. Based on the above, the Company submits that Vega UAE is an independent body corporate being managed from UAE and not a proprietary concern of AI A. Therefore, the income of Vega Industries (Middle East) FZE should not be added in the total income of the Company, The Company also places reliance on the following: The decision of Union of India v. Azadi Bachao Andolan [2003] 263 ITR 706 (SC) wherein the Supreme Court held that the Tax Residence Certificate issued by the Government of other Contracting State would be a conclusive proof of residential status of the company. CBDT Circular No. 789, dated 13 April 2000, where it has been clarified that wherever a Certificate of Residence is issued by the Mauritian Authorities, such Certificate wil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he said order which is quoted below- 9. We have considered the rival submissions, perused the material on record and have gone through the orders of authorities below. We find that the objection of the A.O. is this that Vega UAE is not a legally independent entity and 'it is a sole proprietorship concern of the assessee and this view of the A.O. is based on this premise that the assessee is a sole shareholder having 100% shares holding in this entity and therefore, this entity is not a company and an independent entity. In this regard, we feel that the provisions of Section 2(17) of Income Tax Act ore very much relevant and the same are reproduced below: [(17) company means- (i) any Indian company, or (ii) any body corporate incorporated by or under the laws of a country outside India, or (iii) any institution, association or body which is or was assessable or was assessed as a company for any assessment year under the Indian Income-tax Act, 1922 {] I of 1922), or which is or was assessable or was assessed under this Act as a company for any assessment year commencing on or before the 1st day of April, 1970, or (iv) any institution, association or b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts, advertisement and invoices and that it will be pursuant to Amiri Decree No. (3) of 1988 as amended and if there is any omission on this account, the owner shall be personalty responsible for any omission of such information. On the basis of this Article {1} of the Memorandum of Incorporation, it is the allegation of the A.O. that this entity has no separate legal status because the owner is personally responsible for any omission of such information. In this regard, we do not find any force in this contention of the A.O. because as per Article (1) of the said Memorandum of Incorporation, it has been stated that this entity is established with corporate entity and independent and separate financial liability from those of its owner in accordance with this memorandum of incorporation and the only situation where the owner will be treated as personally responsible is regarding omission of some specified information that the entity is a free zone establishment (FZE) and it will be pursuant to Amiri Decree No.(3) of 1988 as amended. In our considered opinion, this is a situation where it specifies that corporate veil may be lifted. This may differ from country to country and in Indi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Once it is accepted, the addition made by the A.O by holding that Vega UAE is a sole proprietorship concern of the assessee company is not sustainable and hence, the addition made by the A.O. is to be deleted. We hold accordingly. Ground No. 1 of the assessee is allowed. Regarding various other contentions raised by both sides, we would like to observe that the same are not relevant in view of our above decision. From the aforesaid decision of jurisdictional ITAT in the appellant's own case on the same issue, it is clear that Vega ME is held to be an independent entity and not a proprietorship concern of the appellant. ITAT has met with all the arguments of the assessing officer and therefore the same are not repeated here. Since highest fact-finding authority has held that Vega UAE is an independent corporate body, the profit of Vega UAE cannot be taxed in the hands of appellant. Respectfully following the decision of jurisdictional tribunal in the appellant's own case in the immediate preceding year on the identical facts, it is held that Vega UAE is a separate company and accordingly profit of Vega UAE cannot be added to the income of the appellant. As a resu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vider and merely on this basis, the JP analysis conducted by the assessee had been rejected by the TPO. He has adopted the transfer pricing adjustment on the basis of operating cost/operating profit percentage of Vega UAE, Vega UK and Vega US. Regarding this aspect that as to whether Vega UIAE is a distributor or simply marketing service provider, we find that the objection of the revenue on this aspect is not sustainable in view of the facts of the present case because we find that the assessee company has executed proper distributor agreement with Vega UAE and it has been adhered to also and since the objection of the revenue that Vega UAE is not bearing any inventory and credit risk, we find that as per the facts of the present case, both these objections are not correct and Vega UAE is carrying both the inventory risk as well as credit risk and therefore, we hold that Vega UAE is not a marketing service provider in the facts of the present case but if is a distributor of the assessee company. Once it is accepted that Vega UAE is a distributor, ALP has to be determined on the basis of profit on sale of goods by the assessee company as compared to the comparable companies. The as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee is allowed. From the above, it is clear that honorable 1TAT has treated Vega UAE (Middle East) as full-fledged distributor of the appellant as against marketing service provider treated by TPO. All the arguments of TPO were considered and it was held that Vega Middle East was performing all the functions of a distributor. It was held to be taking inventory risk, credit risk and other risks associated with the business. Vega ME (Middle East) has now become global distributor with Vega US and Vega UK becoming its sub-distributors. This entity was found to be performing all the roles of a distributor of developing marketing strategy, logistic handling, inventory management, working capital management etc. The Vega ME remained full scale distributor even under the new distribution model in which it was made global distributor. Appellant executed distributorship agreement with Vega ME and also adopted associated risks as earlier years. There was no dilution of its activities during the year as compared to earlier years. Accordingly, the findings of ITAT in assessment year 2006-07 that Vega UAE was distributor to the appellant completely apply to this year. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... penditure incurred in connection with issue of shares for public subscription are allowable. Therefore, on verification, the Assessing Officer stated that assessee has debited number of expenses under this head which are not covered by section 35D(2) of the Act. Accordingly, the Assessing Officer stated that in the case of the assessee company the expenses which are not covered by section 35(2) are as under:- Travelling and Hotel Expenses 97323848 (Staff + Enam + SPI Cap + Amarchand) Other Expenses (Gift Vouchers to Press Reporters etc.) 41000.00 SEBI Filing Fees of Draft R.H.P. 250000 00 BSE For Processing fee to get their approval to use - 62600 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions of section, the Assessing Officer observed that only specific expenditure incurred in connection with issue of shares for public subscription are allowable. Accordingly, out of the total expenditure on which the assessee has made claim u/s. 35D of the Act, the Assessing Officer has reduced the aforesaid amount of ₹ 55,48,421/- and consequently 1/5 such expenses to the amount of ₹ 11,09,684/- was disallowed out of the claim pertaining to the year under consideration. 7. The assessee has filed appeal before the ld. CIT(A). The CIT(A) has partly allowed the appeal of the assessee. The relevant part of the findings of the ld. CIT(A) is as under:- 4.3 I have considered the facts of the case; assessment order and appellant's written submission. Assessing officer treated part of the public issue expenses as not eligible under section 35D and disallowed 20% of such ineligible expenses. Appellant submitted that 20% of the public issue expenses not in excess of 5% of total cost of project are eligible for deduction under section 35D [2). Since appellant incurred public issue expenses of RS 7,55,92,199 and claimed 20% of RS 7,20, 05,356 [5% of cost of project). Si ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenses of ₹ 7,55,92,199/-. In the light of the above facts and findings, we do not find any error in the findings of the ld. CIT(A) holding that difference of ₹ 7,20,05,356/- and ₹ 7,00,43,777/- is to be considered for the purpose of disallowance as against disallowance of ₹ 55,48,421/- made by the Assessing Officer. Therefore, we consider that ld. CIT(A) is justified in restricting the disallowance to the extent of ₹ 3,92,316/- as against disallowance of ₹ 11,09,684/- made by the Assessing Officer. In view of the above facts and findings of the ld. ld. CIT(A), we do not find any merit in the appeal of the Revenue and the assessee. Accordingly, this appeal of Revenue and assessee stands dismissed. Ground No. 3 (Deleting disallowance of ₹ 6,51,81,105/- towards burning loss) 9. During assessment on verification of production along with purchases and closing stock, the Assessing Officer noticed that assessee has shown loss of 3019 MT of raw materials in the manufacturing process. The Assessing Officer was of the view that materials cannot be destroyed in the process of manufacturing and material changes only the form. On query, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment order, first appeal order and ITAT's order for assessment year 2002-03 and 2004-05 in the case of its erstwhile subsidiary company Reclamation Welding Pvt Ltd [now merged with the appellant company and now appellant's division). This company was doing the job work of appellant during these periods and claimed burning loss in excess of 10%. Assessing officer allowed burning loss up to 5% and disallowed the balance. In appeal, CIT (A) allowed the burning loss completely. ITAT set aside the issue to the file of AO with the direction to allow burning loss after considering historical data and other informations received. After considering the same, assessing officer allowed complete burning loss in excess of 10% claimed by this company. Considering this, appellant claimed that this issue is covered in its favour by the order of ITAT in its own case since the said company is now merged with the appellant. It is not in dispute that the burning loss claimed by the appellant in various years varied from 2.5% to 8.19% which was always accepted Py the assessing officer. The products of the appellant are excisable and therefore under the supervision of Excise authorit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year. Even in the case of Reclamation Welding Ltd a subsidiary concern of the assessee now merged with the assessee company, the Co-ordinate Bench of the ITAT on similar facts has considered that burning loss in excess of even 10% is allowable and the Assessing Officer while passing order u/s. 143(3) r.w.s. 254 of the act in the case Reclamation Weilding Ltd. accepted the burning loss in excess of 10%. The action of the Assessing Officer in restricting the burning loss @ 2% in a general manner is not justified. In the light of the above facts and circumstances, we do not find any infirmity in the decision of ld. CIT(A). Therefore, the appeal of the revenue on this issue is dismissed. Ground No. 4 (Deleting the addition of ₹ 1,73,93,300/- u/s. 115JB) 12. During the course of assessment, the Assessing Officer has made adjustment on account of product warranty expenses treating the same as unascertained liabilities. The Assessing Officer has asked the assessee to explain why the product warranty expenses of ₹ 1,73,93,300/- should not be added for the calculation of book profit u/s. 115JB of the Act. The assessee explained that there was no provision with respect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction of including expenses relating to exempt income to the book profit under section 115 JB. 14. Heard both the sides and perused the material on record. The assessee has incurred actual warranty expenses of ₹ 1,73,93,300/- as against which provision for warranties of ₹ 20 lacs was created during the year under consideration and net amount debited to P L account was ₹ 1,41,46,908/-. The Hon ble Supreme Court in the case of Rotark Controls India (P) Ltd. vs. CIT (2009) 314 ITR 62 held that provision of warranty is an allowable expenditure in the year of provision. The ld. CIT(A) has also considered the reliance made by the assessee on the decision of Hon ble Gujarat High Court in the case of CIT vs. Himalaya Machinery P. Ltd. (2011) 11 Taxmann.com 284 (Guj) that when actual expenditure is more than provision made by an assessee it can be concluded that provision made by assessee is capable of being estimated with reasonable certainty. In the light of the above facts, we do not find any infirmity in the decision of ld. CIT(A) holding that assessee has claimed warranty expenses on the basis of actual claim and the same is not required to be added u/s. 115JB ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee filed appeal before the ld. CIT(A). The ld. CIT(A) has dismissed the appeal of the assessee . The relevant part of the order of ld. CIT(A) is as under:- 3.3 I have considered The (acts of the case; assessment order and appellant's written submission. Assessing officer made disallowance of expense relating to exempt income. Such disallowance was considered necessary since appellant did not disallow any part of common interest and other expenses treating the same as relating to investment resulting in exempt income. Now rule 8D is held to be applicable with effect from assessment year 2008-09 by Bombay High Court, the disallowance of expenses relating to exempt income are to be made by the method prescribed in the said rule, it is not in dispute that appellant made investment of RS 13,857 Lacs which cars only result in exempt income in the form of dividend. Appellant paid interest of RS 8.49 Lacs on borrowed funds used for business purposes as well as making investments. Appellant incurred other administrative expenses, part of which may relate to investment only resulting in exempt income. Similarly payment of interest will also partly relate to investment res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has also placed reliance on the following decisions:- CIT vs. Torrent Power Ltd. - 363 ITR 474 (Guj.) CIT vs. Suzlon Energy Ltd. - 354 ITR 630 (Guj) CIT vs. Gujarat Power Corporation Ltd. - 352 ITR 583 (Guj) CIT vs. Hitachi Home Life Solutions (I). Ltd. - (2014) 41 taxmann.com 540 (Guj) CIT vs. Reliance Utilities Power Ltd. - 313 ITR 340 (Bom) Munjal Sales Corporation vs. CIT - 298 ITR 298 (SC) The ld. counsel also submitted that assessee was having substantial interest free funds than the investment. On the other hand, the ld. Departmental Representative has supported the order of lower authorities and contended that Assessing Officer has made dissatisfaction on the action of the assessee of not making disallowance according to provision of section 14A of the Act. 18. Heard both the sides and perused the material on record. During the course of assessment proceedings, the assessee has made detailed submission dated 18th Feb, 2013 explaining that it has not used any borrowed fund for the purpose of investment and also submitted that Assessing Officer should determine the expenditure in accordance with the prescribed formula only if he is sati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee in respect of expenditure related to exempt income. Hon ble Delhi High Court in the case of Maxopp Investment Ltd. vs. CIT (2011) taxman.com 390/203 taxman 364/[2012] 347 regarding recording of satisfaction prior to invoking section 14A held that before invoking 14A, the Assessing Officer has to record his satisfaction, having regard to the accounts of the assessee, that claim made by the assessee of an expenditure incurred in earning exempt income, or a claim that no expenditure is incurred by him in earning exempt income is not correct. It has been provided in the provisions that Assessing Officer has to record a satisfaction having regards to the accounts of the assessee. It means that the Assessing Officer has to examine the accounts of the assessee and arrived at a finding that claim made by the assessee about expenditure incurred in relation to exempt income is not correct. There has to be a reference to fact situation or any credible reasoning or material by the Assessing Officer and satisfaction has to be arrived at having regard to accounts of assessee. Further, in the case of the assessee itself, the C-ordinate Bench of the ITAT vide AIA Engineering vs. Additional ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income and expenditure along with the accounting notes. It is reflected from the annual account and schedule of the assessee that its major expenses are incurred for its main business operation in trading of alloy steel casting. Looking to the above facts and circumstances, it is noticed that Assessing Officer has not specifically considered the nature of expenses reflected in the annual accounts of the assessee before invoking the provision of rule 8D in computing the disallowance for earning exempt income. In the light of the above facts and finding given in the judicial pronouncement as referred supra in this order, we consider that Assessing Officer is not justified in computing the disallowance without recording specific satisfaction and examination of the detailed account of the assessee company. In view of the facts and finding and considering the nature of the investment and the main activities carried out by the assessee company, we consider that it would be appropriate to restrict the disallowance of administrative expenditure towards earning exempt income to the amount of ₹ 15 lacs. Since the assessee has itself made disallowance to the extent of ₹ 9,32,487/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld. CIT(A). The ld. CIT(A) has allowed appeal of the assessee. 23. Heard both the sides and perused the material on record. During the course of assessment, the Assessing Officer has not allowed the claim of the assessee of higher depreciation @ 50% stating that vehicle was not registered by the RTO as commercial vehicle. The ld. CIT(A) has allowed the claim of the assessee after following the decision of Co-ordinate Bench of the ITAT in the case of Dilip S. Chandmani vs. ACIT in ITA No. 7307/Ahd/2003. We have also perused the decision of the Co-ordinate Bench in the case of Shree Balaji Product vs. ITO vide ITA No. 2737/Ahd/2013 dated 12.08.2016 wherein after following the decision of the Co-ordinate Bench in the case of Daleep S. Chandnani, the similar issue was decided in favour of the assessee holding that there is no such condition that vehicle would qualify as commercial vehicle when licensed to be used as public transport. Considering the aforesaid facts and following the findings of the Co-ordinate Benches in aforesaid cited decisions, we do not find any infirmity in the decision of ld. CIT(A), therefore, this ground of appeal of revenue is dismissed. Ground No. 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dering appellant reply dt. 28/01/2013 (para 6 in TP order) rejected the detailed explanation offered by appellant and conducted a fresh FAR analysis (para 7 in TP order) and held that such functional analysis as well as perusal of the agreement between Vega ME and AIA appointing Vega as Global Distributor clearly establishes that Vega ME is a marketing support office of the assessee company which also offers basic technical support to the customers of AIA Engineering Ltd. For this function, the reasonable and arm's length remuneration would have been to give Vega a markup on the costs incurred by it. However, as per the agreement between Vega and AIA, while the sale price of AIA has been pegged to a fixed level, Vega has been allowed to charge a negotiated price from the ultimate customers thus effectively transferring the entrepreneurial rewards to Vega while the entrepreneurial role is played by AIA. The TPO further considered functional characterization of Vega ME i.e. brand Vega, Vega as reallocation of export office of appellant, contribution in lead generation and order followed-up, rising export and fall export related travel of appellant's personal, distribution ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nable in view of the facts of the present case because we find that the assessee company has executed proper distributor agreement with Vega JAE and if has been adhered to also and since the objection of the revenue that Vega UAE is not bearing any inventory and credit risk, we find that as per the facts of the present case, both these objections are not correct and Vega UAE is carrying both the inventory risk as well as credit risk and therefore, we hold that Vega UAE is not a marketing service provider in the facts of the present case but it is a distributor of the assessee company. Once it is accepted that Vega UAE is a distributor, ALP has to be determined on the basis of profit on sale of goods by the assessee company as compared to the comparable companies. The assessee has demonstrated that the arithmetic mean of 3 years weight age average NOPM of 12 comparable companies was 7.92% as against NOPM of 18.89% of the assessee for the present year. Later on the assessee has also furnished the revised arithmetic mean of NOPM of the comparable companies on the basis of current year data only and if was 7.04% whereas mean of 3 years weight age average NOPM of 12 comparable companies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... risk and other risks associated with the business. Vega ME (Middle East) has now become global distributor with Vega US and Vega UK becoming its sub-distributors. This entity was found to be performing all the roles of a distributor of developing marketing strategy, logistic handling, inventory management, working capital management etc. The Vega ME remained full scale distributor even under the new distribution model in which it was made global distributor. Appellant executed distributorship agreement with Vega ME and also adopted associated risks as earlier years. There was no dilution of its activities during the year as compared to earlier years. Accordingly, the findings of ITAT in assessment year 2006-07 that Vega UAE was distributor to the appellant completely apply to this year. Respectfully following the order of jurisdictional ITAT in appellant's own case in assessment year 2006-07, it is held that Vega ME was a full-fledged distributor to the appellant and not marketing service provider during the year. Once it is held that the AE is a distributor, the ALP has is to be determined on the basis of profit on sale of goods rather than operating margin to value added expe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... porate function. The A.O. observed that a performance guarantee carries a potential financial liability, which in the case of failure of the beneficiary, has to be met by the guarantor and affects the assets of the guarantor. The TPO followed the ratio of US Tax Court in the case of Container Corporation for treating providing of guarantee as service. The TPO for the bench marking analyzed the bond data in US market and found that the difference in coupon rate (Yield or interest rate) in respect of AA rated bond and BB rated bond comes to 2.706% point. This was further increased 25 basis point for the currency risk to arrive at 2.956%. The TPO computed upward revision as follows: Vega ME Vega UK Total Guarantee charged 20,00,000 10,00,000 30,00,000 Conversion at closing rate of 51.76 103520000 51760000 155280000 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r observed that no TP analysis of such transaction carried out. It was also observed that fees @ 0.5% for issuance of such guarantee were charged from VEGA UK but no such fess was recovered by VEGA ME. The TPO examined appellant's explanation that such guarantee had not been given for performance bonds and bids so the same are not qualify as guarantee but treated as a corporate function. The A.O. observed that a performance guarantee carries a potential financial liability, which in the case of failure of the beneficiary, has to be met by the guarantor and affects the assets of the guarantor. The TPO followed the ratio of US Tax Court in the case of Container Corporation for treating providing of guarantee as service. The TPO for the bench marking analyzed the bond data in US market and found that the difference in coupon rate (Yield or interest rate) in respect of AA rated bond and BB rated bond comes to 2.706% point. This was further increased 25 basis point for the currency risk to arrive at 2.956%. The TPO computed upward revision as follows: Vega ME Vega UK Total ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tentions of the appellant that providing corporate guarantee to AEs is outside the ambit of international transaction has to fail. This view is supported by the decision in Mumbai Tribunal in the case of Everest Kanto Cylinder [34 Taxman.Com 19 Mumbai ITAT]. The TPO was justified-in benchmarking the transactions. The Delhi Tribunal judgement [relied on by the A.R]-.in the case of Bharti Airtel Ltd. is not applicable to the instant case, as the appellant is not able to prove that it has not incurred any cost for the guarantee provided[as was done in the case of Bharti Airtel Ltd.], The next issue for the consideration is regarding the quantum of upward adjustment to be made. In this connection, it is seen that the TPO adopted the rate at 2.956% on the total amount of the guarantee provided by the appellant of ₹ 15.53 crores. In the case of Everest Kanto Cylinder, Mumbai Tribunal held as under: We have already come to the conclusion in the foregoing paras that the rate of 3% by taking external comparable by the TPO, cannot be sustained in facts of the present case. We also find that in an independent transaction, the assessee has paid 0.6% guarantee commission t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es has been charged to the Vega ME, a fees of 0.5% has been charged from Vega U.K. and for both these transactions no rational has been provided either in form no. 3CEB or in the TP study except merely stating that the transaction is at arms length. It is further submitted that the claim of the assessee that benchmarking on such guarantee at nil has been accepted by the Department in the earlier years found not to be tenable as perusal of these guarantees reveal that these guarantees put strain on the assets of the assessee company by shifting performance risk of Vega entities of the assessee company. It is further submitted that one way of benchmarking the service rendered by the assessee company would be to find out the difference in risk spread between high rated and medium rated corporate bonds being treated freely in the U.S. market. The coupon rate represents yield of various bonds and the rate is directly proportionate to the rating given to the bond. Higher the risk of default by the issuing company on this bond higher the coupon rate. Details of these bonds are available on the web. On analysis of over 1100 bond data from where the bonds issued during the F.Y. 2008-09 w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orate guarantees to banks on behalf of its AE Vega ME and Vega U.K.. The assessee has charged commission to Vega U.K. @ 0.5% for issue of such guarantee. However, no fee has been charged from Vega ME. The assessee has claimed that since the guarantee has been given for performance bonds and bids so the same are not qualified as guarantee but treated as corporate function, hence no fees is chargeable. The assessee has stated that the provision of guarantee was a corporate function. The Assessing Officer was of the view that performance guarantee carry a potential financial liability which in case of failure of the beneficiary is to be met with the guarantor. The Assessing Officer was of the view that services have been rendered by the assessee company to its associate enterprises in the form of provision of the guarantee and these services need to be bench marked. It is also stated that OECD guidelines as well as cases decided by the US and Canada tax court held that guarantee was a service rendered and the guarantor was justified in charging a suitable guarantee for such services. Therefore, the Assessing Officer has made bench marking as per the report of the TPO as stated supra o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises and shall include a mutual agreement or arrangement between two or more associated enterprises for the 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 any one or more of such enterprises. (2) A transaction entered into by an enterprise with a person other than an associated enterprise shall, for the purposes 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) t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... customer contracts, customer relationship, open purchase orders; (g) contract related intangible assets, such as, favourable supplier, contracts, licence agreements, franchise agreements, non -compete agreements; (h) human capital related intangible assets, such as, trained and organised work force, employment agreements, union contracts; (i) location related intangible assets, such as, leasehold interest, mineral exploitation rights, easements, air rights, water rights; (j) goodwill related intangible assets, such as, institutional goodwill, professional practice goodwill, personal goodwill of professional, celebrity goodwill, general business going concern value; (k) methods, 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 (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 'internationa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s were anyway covered by 2 (a) above which covered 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 anyway covered by 2(b) and 3 above in provision for services and mutual agreement or arrangement between two or more associated enterprises for the 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 any one or more of such enterprises . That leaves us with two clauses in the Explanation to Sect ion 92 B which are not covered by any of the three categories discussed above or by other specific segments covered by Section 92 B, namely borrowing or lending money. 29. The remain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 'international transaction' shall include capital financing, including any type of long -term or short- term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business . In view of the discussions above, the scope of these transactions, as could be covered under Explanation to Section 92 B 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 pre-condition about impact on profits, income, losses or assets of such enterprises is a pre-condition 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thetical basis, and there has to be some material on record to indicate, even if not to establish it to hilt, that an intra AE international transaction has some impact on profits, income, losses or assets. Clearly, these conditions are not satisfied on the facts of this case. 23. Learned Departmental Representative submits that this decision is no longer good law in the light of Everest Kanto decision (supra) and Vodafone India Services decision (supra) by Hon'ble Bombay High Court. 24. As for Hon'ble High Court's judgment in the case of Everest Kanto (supra), it is necessary to appreciate the fact the assessee was charging a .5% commission on issuance of corporate guarantees, on behalf of the AEs, and it could not, therefore, be said 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 Limited Vs DCIT [(2012) 34taxman.com 19 (Mum)], 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 no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esent case, it is assessee company that is issuing Corporate Guarantee to the effect that if the subsidiary AE does not repay loan availed of it from ICICI, then in such event, the assessee would make good the amount and repay the loan. The considerations which applied for issuance of a Corporate guarantee are distinct and separate from that of bank guarantee and accordingly we are of the view that commission charged cannot be called in question, in the manner TPO has done. In our view the comparison is not as between like transactions but the comparisons are between guarantees issued by the commercial banks as against a Corporate Guarantee issued by holding company for the benefit of its AE, a subsidiary company. In view of the above discussion we are of the view that the appeal does not raise any 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, lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in which it is dealt with. The asset is no longer restricted to the asset per se or a right therein, but also extends to any interest therein . Prior to the amendment, the words any interest therein were absent. Further, the nature of the disposal is also expanded. It now includes the creation of any interest in any asset. Moreover, the disposal of or creation of any interest in the asset may be direct or indirect, absolute or conditional, voluntary or involuntary. It may be by way of an agreement or otherwise. Further, the concluding words constitute a non-obstante provision. It provides that the transfer contemplated therein would be notwithstanding that it has been characterised as being effected or dependent upon or flowing from the transfer of a share or shares of a company registered or incorporated outside India. It 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 v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n exercise of the High Court's extra-ordinary jurisdiction under Article 226 (Emphasis, by underlining, supplied by us) 27. Revenue's emphasis is on the last two sentences in paragraph no 213 which state that The effect of the amendment would have to be considered. It cannot be brushed aside but in doing so what it overlooks is the subsequent observations highlighted above which recognize the fact that merely because a subsequent Explanation is introduced by the legislature, it is not an open and shut case against the assessee or the revenue, and that all these observations are in the context that I.T.A. No.: 2873/Ahd/10 Assessment year: 2006-07 there is no justification for withdrawing the proceedings from the channel provided by the Income Tax Act, bypassing the Tribunal and considering all these questions in exercise of the High Court's extra-ordinary jurisdiction under Article 226 . 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt had cautioned that It is not proper to regard a word, clause or a sentence occurring in a judgment of the Supreme Court, divorced from its context, as containing a full exposition of the law on a question when the question did not even fall to be answered in that judgment. That precisely, however, has been the approach of the revenue authorities in placing reliance on Vodafone India Services (supra) decision. We reject this approach. 28. For the reasons set out above, learned Departmental Representative's reliance on Hon'ble Bombay High Court's judgments in the cases of Everest Kanto (supra) and Vodafone India Services (supra) is wholly misplaced and devoid of any merits. As for co-ordinate bench decision in the case of Hindalco Industries (supra), all it does is to follow the Everest Kanto decision by Hon'ble Bombay High Court, but then, as we have seen earlier, that was 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bundant caution, and section 247 (7.1), granting specific exemption to guarantee fees, was introduced. This amendment is as follows: (7.1) Subsection (2) does not apply to adjust an amount of consideration paid, payable or accruing to a corporation resident in Canada (in this subsection referred to as the parent ) in a taxation year of the parent for the provision of a guarantee to a person or partnership (in this subsection referred to as the lender ) for the repayment, in whole or in part, of a particular amount owing to the lender by a non-resident person, if (a) the non-resident person is a controlled foreign affiliate of the parent for the purposes of section 17 throughout the period in the year during which the particular amount is owing; and (b) it is established that the particular amount would be an amount owing described in paragraph 17(8)(a) or (b) if it were owed to the parent. (http://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, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relevant in the present context but suffice to say that relevant legal provisions and context being radically different, the reliance of this decision must be rejected for this short reason alone. 32. As we take note of the above legal position in Canada, it is appropriate to take note of the concept of 'shareholder activities' in the context of corporate guarantees which provides conceptual justification for exclusion of corporate guarantees, under certain conditions, from the scope of transfer pricing adjustments. Taking note of these proposed amendments, 'Transfer Pricing and Intra Group Financing - by Bakker Levvy, IBFD publication (ISBN- 978-90-8722- 153-9)' observes that Proposed subsection 247(7.1) of the ITA provides that the transfer pricing rules will not apply to guarantees provided by Canadian parent corporations in respect of certain financial commitments of their Canadian controlled 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 Int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es . In other words, these guarantees were specifically stated to be in the nature of shareholder activities. The assessee's claim of the guarantees being in the nature of quasi capital, and thus being in the nature of a shareholder's activity, is not rejected either. The concept of issuance of corporate guarantees as a shareholder activity is not alien to the transfer pricing literature in general. On the contrary, it is recognized in international transfer pricing literature as also in the official documentation and legislation of several transfer pricing jurisdictions. The 'OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations' itself recognizes the distinction between a shareholder activity and a provision for services, when, contrasting the shareholder activity with broader term stewardship activity and thus highlighting narrow scope of shareholder activity, it states that Stewardship 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 se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces , the 'OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations' has noted that there are two fundamental issues with respect to the intra group services- first, whether intra group services have indeed been provided, and, second- if the answer to the first question is in positive, that charge to these services should be at an arm's length price. Dealing with the first question, which is relevant for the present purposes, these Guidelines (2010 version) state as follows: 7.6 Under the arm's length principle, the question whether an intra-group service has been rendered when an activity is performed for one or more group members by another group member should depend on whether the activity provides a respective group member with economic or commercial value to enhance its commercial position. This can be determined by considering whether an independent enterprise in comparable circumstances 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icular operations, emergency management or technical advice (trouble shooting), or in some cases assistance in day-to-day management. 7.10 The following examples (which were described in the 1984 Report) will constitute shareholder activities, under the standard set forth in paragraph 7.6: a) Costs of activities relating to the juridical structure of the parent company itself, such as meetings of shareholders of the parent, issuing of shares in the parent company and costs of the supervisory board; b) Costs relating to reporting requirements of the parent company including the consolidation of reports; c) Costs of raising funds for the acquisition of its participations. In contrast, if for example a parent company raises funds on behalf of another group member which uses them to acquire a new company, the parent company would generally be regarded as providing a service to the group member. The 1984 Report also mentioned costs 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 thes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Guarantees; A Comprehensive Framework for Analysis' published in the 'The American Lawyer Vol. 48, No. 1 (Fall 1994), pp. 103-165 (http://www.jstor.org/stable/20771688), has stated that a guarantee is not a service. The following observations, at pages 114, are important: The position that guarantees are services has been discredited by the courts with good reason38. Guarantee fees do not represent payments for services any more than payments with respect to other financial instruments constitute payment for services39. A guarantor does not arrange financing for the debtor, but merely executes a financial instrument in its favour. See. e.g., Centel Communications Co. V. Commissioner, 92 T.C. 612, 632 (1989), aff d, 920 F2d 1335 (7th Cir. 1990); Bank of Am. V. United States, 680 F.2d 142, 150 (Cl. Ct. 1982). The Service's current position on the characterization of guarantee I.T.A. No.: 2873/Ahd/10 Assessment year: 2006-07 fees as payment for services under section 482 is inconsistent with its treatment of guarantee fees under other provisions. See P.L.R. 9410008 (Dec. 13, 1993). But cf Federal Nat'l Mortgage Ass'n v. Commissioner, 100 T.C. 541 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s is that the tests recognized by these guidelines are interwoven twin tests of benefit and arm's length. Benefit test implies the recipient group member should get economic or commercial value to enhance its commercial position . The benefit test is interlinked with the an arm's length test in the sense that it seeks an answer to the question whether under a similar situation an independent enterprise would have been willing to pay for the activity concerned, or would have performed the activity in-house for itself. So far as the benefit test is concerned, as we have noted earlier, it is alien to the definition of international transaction' under the Indian transfer pricing legislation. So far as arm's length test is concerned, it presupposes that such a transaction is possible in arm's length situation. However, in a situation in which the subsidiary does not have adequate financial standing of its own and is inadequately capitalized, none will guarantee financial obligations of such a subsidiary. 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the payments, the bank will seek a compensation for the action of issuing the bank guarantee, and for the risk it runs inherent in the process of making the payment first and realizing it from the underlying security and the client. Even when such guarantees are backed by one hundred percent deposits, the bank charges a guarantee fees. In a situation in which there is no underlying assets which can be realized by the bank or there are no deposits with the bank which can be appropriated for payment of guarantee obligations, the banks will rarely, if at all, issue the guarantees. Of course, when a client is so well placed in his credit rating that banks can issue him clean and unsecured guarantees, he gets no further economic value by a corporate guarantee either. Let us now compare this kind of a guarantee with a corporate guarantee. The guarantees are issued without any security or underlying assets. When these guarantees are invoked, there is no occasion for the guarantor to seek recourse to any assets of the guaranteed entity for recovering payment of defaulted guarantees. The guarantees are not based on the credit assessment of the entity, in respect of which the guarantees ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rial, indicating to the contrary, is brought on record in this case. Going by the OECD Guidance also, it is not really possible to hold that the corporate guarantees I.T.A. No.: 2873/Ahd/10 Assessment year: 2006-07 issued by the assessee were in the nature of 'provision for service' and not a shareholder activity which are mutually exclusive in nature. In the light of these discussions, we are of the considered view, and are fully supported by the OECD Guidance in this, that the issuance of corporate guarantees, in the nature of quasi capital or shareholder activity- as is the uncontroverted position on the facts of this case, does not amount to a service in which respect of which arm's length adjustment can be done. 42. As observed by Hon'ble Delhi High Court in the case of CIT Vs EKL Appliances Ltd [(2012) 345 ITR 241 (Del)], a re-characterization of a transaction is indeed permissible, inter alia, in a situation (i) where the economic substance of a transaction differs from its form and (ii) where the form and substance of the transaction are the same but arrangements made in relation to the transaction, viewed in their totality, differ from those which wou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere the other tax administration does not share the same views as to how the transaction should be structured. 1.37 However, there are two particular circumstances in which it may, exceptionally, be both appropriate and legitimate for a tax administration to consider disregarding the structure adopted by a taxpayer in entering into a controlled transaction. The first circumstance arises where the economic substance of a transaction differs from its form. In such a case the tax administration may disregard the parties' characterization of the transaction and re- characterise it in accordance with its substance. An example of this circumstance would be an investment in an associated enterprise in the form of interestbearing debt when, at arm's length, having regard to the economic circumstances of the borrowing company, the investment would not be expected to be structured in this way. In this case it might be appropriate for a tax administration to characterize the investment in accordance with its economic substance with the result that the loan may be treated as a subscription of capital. The second circumstance arises where, while the form and substance of the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce that the guidelines discourage re-structuring of legitimate business transactions. The reason for characterisation of such re-structuring as an arbitrary exercise, as given in the guidelines, is that it has the potential to create double taxation if the other tax administration does not share the same view as to how the transaction should be structured. 18. Two exceptions have been allowed to the aforesaid principle and they are (i) where the economic substance of a transaction differs from its form and (ii) where the form and substance of the transaction are the same but 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. 43. It is thus clear that even if we accept the contention of the learned Departmental Representative that issuance of a corporate guarantee amounts to a 'provision for service', such a service needs to be re-characterized to bring it in tune with commercial reality as arrangements made in relation to the transaction, viewed in their totality, differ from those which would have been adopted by in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the services like market research, market development, marketing management, administration, technical service, repairs, design, consultation, agency, and scientific research, legal or accounting service or coordination services. As a matter of fact, even in the Explanation to Section 92 B- which we will deal with a little later, guarantees have been grouped in item 'c' dealing with capital financing, rather than in item 'd' which I.T.A. No.: 2873/Ahd/10 Assessment year: 2006-07 specifically deals with 'provision for services'. When the legislature itself does not group 'guarantees' in the 'provision for services' and includes it in the 'capital financing', it is reasonable to proceed on the basis that issuance of guarantees is not to be treated as within the scope of normal connotations of expression 'provision for services'. Of course, the global best practices seem to be that guarantees are sometimes included in 'services' but that is because of the extended definition of 'international transaction' in most of the tax jurisdictions. Such a wide definition of services, which can be subject to arm's length ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ritten submission, it was stated that Hon'ble Delhi ITAT was not requested by the contesting parties to decide the issue as to whether the provision of guarantee was a service or not . That's not factually correct. We are unable to see any merits in learned Departmental Representative's contention, particularly as decision categorically noted that not only before the Tribunal, but this issue was also raised before the DRP- as evident from the text of DRP decision. We now take up the issue with respect to specific mention of the words in Explanation to Section 92B which states that For the removal of doubts, it is hereby clarified that (i) the expression international transaction shall include........ (c) capital financing, including any type of long - term or short -term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business. There is no dispute that this Explanation states that it is merely clarificatory in nature inasmuch as it is 'for the removal of doubts', and, therefore, one has to proceed on the basis tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n order to be covered by clause (c) and (e) of Explanation to Section 92 B, the transactions should be such as to have beating 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 or assets of such enterprise, the transaction will be outside the ambit of expression 'international transaction'. This aspect of the matter is further highlighted in clause (e) of the Explanation dealing with restructuring and reorganization, wherein it is acknowledged that such an impact could be immediate or in future as evident from the words irrespective of the fact that it (i.e. restructuring or reorganization) has bearing on the profit, income, losses or assets of such enterprise at the time of transaction or on a future date . What is implicit in this statutory provision is that while impact on profit, income, losses or assets is sine qua non , the mere fact that impact is not immediate, but on a future date, would not take the transaction outside the ambit of 'international transaction'. It is also important to bear in mind that, as it appears on a plain reading of the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Four Soft Ltd Vs DCIT [(2011) 142 TTJ 358 (Hyd)], a co-ordinate bench had, vide order dated 9th September 2011, observed as follows: We find that the TP legislation provides for computation of income from international transaction as per Section 92B of the Act. The corporate guarantee provided by the assessee company does not fall within the definition of international transaction. The TP legislation does not stipulate any guidelines in respect to guarantee transactions. In the absence of any charging provision, the lower authorities are not correct in bringing aforesaid transaction in the TP study. In our considered view, the corporate guarantee is very much incidental to the business of the assessee and hence, the same cannot be compared to a bank guarantee transaction of the Bank or financial institution. 47. However, within less than four months of this decision having been rendered, the Finance Act 2012 came up with an Explanation to Section 92B stating that for the removal of doubts , as we have noted earlier in this decision, clarified that international transactions include, inter alia, capital financing by way of guarantee. This legislative clarification d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the present case, we have held that the issuance of corporate guarantees were in the nature of shareholder activities- as was the uncontroverted claim of the assessee, and, as such, could not be included in the 'provision for services' under the definition of 'international transaction' under section 92 B of the Act. We have also held, taking note of the insertion of Explanation to Section 92B of the Act, that the issuance of corporate guarantees is covered by the residuary clause of the definition under section 92 B of the Act but since such issuance of corporate guarantees, on the facts of the present case, did not have bearing on profits, income, losses or assets , it did not constitute an international transaction, under section 92B, in respect of which an arm's length price adjustment can be made. In this view of the matter, and for both these independent reasons, we have to delete the impugned ALP adjustment. The question, which was raised in Bharti Airtel's case (supra) but left unanswered as the assessee had succeeded on merits, reamins unanswered here as well. However, we may add that in the case of Krishnaswamy S PD Vs Union of India [(2006) 281 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvices for that reason alone, is an area which had come up for consideration for the first time. In effect, therefore, there was no conflict on this issue of and the other issues, given decision on the said issue, were wholly academic. It cannot be open to refer the academic questions to the special bench. No doubt, some decisions of the coordinate benches which have reached the different conclusions. There is, however, no conflict in the reasoning. Four Soft decision (supra) had decided the I.T.A. No.: 2873/Ahd/10 Assessment year: 2006-07 issue in favour of the assessee but that was with respect to the law prior to insertion to Explanation to Section 92B. As for the post amendment law and the impact of amendment in the definition of 'international transaction', the matter was again decided in favour of the assessee by Bharti Airtel decision (supra) on the peculiar facts of that case. The decisions like Everest Kento (supra) and Aditya Birla Minacs Worldwide (supra) were decisions in which the assessee had charged the fees and, for that reason, such cases are completely distinguishable as discussed above. In Prolific's case (supra), as indeed in any other case so far, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... LP, if necessary. Of course, no matter how good is the legislative framework, the importance of a very comprehensive analysis, in the transfer pricing study, of the nature of corporate guarantees issued by the assesses, can never be overemphasized. The sweeping generalizations, vague statements and evasive approach in the transfer pricing study reports, which are quite common in most of the transfer pricing reports, cannot do good to a reasonable cause. When judicial calls on the complex transfer pricing issues are to be taken, utmost clarity in the legislative framework and a comprehensive analysis of relevant facts, in the transfer pricing documentation, are basic inputs. Unfortunately, both of these things leave a lot to be desired. We can only hope, and we do hope, that things will change for better. With the assistance of ld. representatives, we have gone through the decision of Co-ordinate Bench of the ITAT in the case of Micro Ink Ltd. supra holding that the issue of corporate guarantee were in the nature of share holder activity and the same could not be included in the provision for services under the definition of international transaction u/s. 92B of the Act. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /2012 Assessment Year 2008-09 are similar as in ITA No. 2343/Ahd/2015 Assessment Year 2010-11 therefore after applying the decision adjudicated vide ITA No. 1766/Ahd/2012 as supra in this order, this ground of appeal of the revenue stands dismissed. Ground No. 2 Deleting the disallowance of excess claim of depreciation of ₹ 15,51,795/- on vehicle u/s. 32 of the Act) 32. As the facts and issue involved in ground of appeal no. 2 vide ITA No. 2342/Ahd/2015 Assessment Year 2009-10 are similar as in ITA No. 2343/Ahd/2015 Assessment Year 2010-11 therefore after applying the decision adjudicated vide ITA No. 2342/Ahd/2015 as supra in this order, this ground of appeal of the revenue stands dismissed. Ground No. 3 (unutilized CENVAT credit of ₹ 16,61,993) 33. During the course of assessment, the Assessing Officer noticed that assessee has shown unutilized CENVAT credit at the end of the year to the amount of ₹ 16,61,993/-. The Assessing Officer further stated that assessee has followed exclusive method for accounting of CENVAT as against inclusive method required u/s. 145A of the Act. On query, the assessee explained that assessee company has been const ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... This aspect is also evidenced by the plain reading of Section 145A and we also draw our inference from the decision of Income Tax Appellate Tribunal, Mumbai Bench B Mumbai . In case of M/s Navdeep Chemicals Pvt. Ltd Vs. the Deputy Commissioner of Income Tax Circle 2(2) OSD, Mumbai, ITA NO. 3755/MUM/2011 A.Y. 2007-08. The details so submitted from tax audit report as Statement no. 6 is as follows: Details of Excise MODVAT Credit A.Y. 2010-2011 Capital Goods Rs. Offers Rs. Opening balance of Excise 273900 44843319 MODVATE Credit Availed During the year 20569147 275462556 MQDVATE Credit Utilised During the Year 18907154 281 93577 Balance representing outstanding Amount as at the End of the year *935893 38374298 Note: 1) Purchase valued at exclusive of modvat 2) Balance of modvat credit is shown in Balance sheet as Current -Assets under heading o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and decision of ITAT Ahmedabad in the case of the assessee itself vide ITA No. 1122/Ahd/2015. With the assistance of ld. authorized representatives, we have gone through the decision of Hon ble ITAT Ahmedabad in the case of the assessee itself for assessment year 2006-07 vide ITA 1122/Ahd/2015 dated 26-09-2017 wherein similar issue on identical fact has been decided in favour of the assessee. The relevant part of the decision of the ITAT is as under:- 3. At the time of hearing before us, learned representatives fairly agree that the above grievance is covered, in favour jf the assessee, by the decision dated 31.08,2016 of the Co-ordinate Bench of this Tribunal in the case of ITO vs. Mamata Brampton Engg. Pvt. Ltd. in ITA No.2387/Ahd/2013 for assessment year 2008-09 wherein the Tribunal has, inter alia, observed as follows:- 5. We have heard the rival submissions, perused the material available on record and gone through the orders of the authorities below. The issue in the present case is with respect to the addition of unutilised CENVAT credit to the closing stock. We find that the Id.CIT(A) while deciding the issue in favour of assesses has given a finding that assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee. 37. Aggrieved assessee has filed appeal before the ld. CIT(A). The ld. CIT(A) has allowed the appeal of the assessee. 38. After considering the material on record, facts and finding of ld. CIT(A) it is noticed that during the year under consideration the assessee had installed new plant and machinery and also incurred electric installation expenditure. Since the electric fitting and installation was part and parcel of the plant and machinery without which the plant and machinery cannot be operated therefore we consider that decision of ld. CIT(A) is justified in holding that electric installation was part and parcel of plant and machinery and the same cannot be considered separately. Therefore, we do not find any error in the decision of ld. CIT(A). Accordingly, this ground of appeal of the Revenue stands dismissed. Ground No. 5 ( Deleting the addition of ₹ 25,22,50,297/- made on account of upward revision of arms length price) 39. As the facts and issue involved in ground of appeal no. 3 vide ITA No. 2342/Ahd/2015 Assessment Year 2009-10 are similar as in ITA No. 2343/Ahd/2015 Assessment Year 2010-11 therefore after applying the decision adju ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in this order, this ground of appeal of the revenue stands dismissed. Ground No. B (Deleting disallowance u/s. 14A of assessee vide ITA No. 1028/Ahd/2017 and revenue vide ITA No. 1112/Ahd/2017) 45. The similar issue on identical facts was adjudicated for assessment year 2008-09. Therefore, applying the findings on the similar issue adjudicated vide ITA No. 1757/Ahd/2012 for A.Y. 2008-09 as supra, we restrict the disallowance as administrative expenses to the amount of ₹ 15 lacs. Since the assessee itself made disallowance to the extent of ₹ 6,69,616/-,therefore, disallowance is restricted to the extent of ₹ 8,30,384/- (₹ 15,00,000- 6,69,616/-). Accordingly, this ground of appeal of the assessee is partly allowed and ground of appeal of Revenue for deleting addition of ₹ 61,159/- by ld. CIT(A) is dismissed. Ground No. C (Deleting disallowance u/s. 35D) 46. As the facts and issue involved in ground of appeal no. 2 vide ITA No. 1766/Ahd/2012 Assessment Year 2008-09 are similar as in ITA No. 1112/Ahd/2017 Assessment Year 2011-12 therefore after applying the decision adjudicated vide ITA No. 1112/Ahd/2017 as supra in this order, this gr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al fittings) 52. As the facts and issue involved in ground of appeal no. 4 vide ITA No. 2343/Ahd/2012 Assessment Year 2010-11 are similar as in ITA No. 1028/Ahd/2015 Assessment Year 2011-12 therefore after applying the decision adjudicated vide ITA No. 2343/Ahd/2012 as supra in this order, this ground of appeal of the assessee is stands dismissed. Ground No. 4 (Addition of ₹ 7,00,275/- on account of Corporate Guarantee charges) 53. As the facts and issue involved in ground of appeal for Assessment Year 2009-10 are similar as in ITA No. 1028/Ahd/2017 Assessment Year 2012-13 therefore after applying the decision adjudicated vide assessment year 2009-10 as supra in this order, this ground of appeal of the assessee is allowed. ITA No. 1835/Ahd/2017 A.Y. 2012-13 filed by revenue Ground No. 1 (Deleting the addition of ₹ 31,56,69,000/- being income of Vega Industries ME) 54. As the facts and issue involved in ground of appeal no. 1 vide ITA No. 1766/Ahd/2012 Assessment Year 2008-09 are similar as in ITA No. 1835/Ahd/2015 Assessment Year 2012-13 therefore after applying the decision adjudicated vide ITA No. 1766/Ahd/2012 as supra in this order, this gro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt Year 2008-09 are similar as in ITA No. 2805/Ahd/2015 Assessment Year 2013-14 therefore after applying the decision adjudicated vide ITA No. 1766/Ahd/2012 as supra in this order, this ground of appeal of the revenue stands dismissed. Ground No. 2 (Deleting the addition on higher depreciation on electric installation of ₹ 9,52,934/-) 61. As the facts and issue involved in ground of appeal no. 4 vide ITA No. 2343/Ahd/2015 Assessment Year 2010-11 are similar as in ITA No. 2805/Ahd/2017 Assessment Year 2013-14 therefore after applying the decision adjudicated vide ITA No. 2343/Ahd/2015 as supra in this order, this ground of appeal of the revenue stands dismissed. ITA No. 2726/Ahd/2017 A.Y. 2013-14 filed by assessee Ground No. 1 (Depreciation on electrical fittings) 62. As the facts and issue involved in ground of appeal no. 4 vide ITA No. 2343/Ahd/2015 Assessment Year 2010-11 are similar as in ITA No. 2726/Ahd/2017 Assessment Year 2013-14 therefore after applying the decision adjudicated vide ITA No. 2343/Ahd/2015 as supra in this order, this ground of appeal of the assessee stands dismissed. Ground No. 2 (Levy of interest u/s. 234B) 63. Levy of in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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