TMI Blog2021 (3) TMI 1162X X X X Extracts X X X X X X X X Extracts X X X X ..... remains no doubt whatsoever that the furnishing of corporate guarantee by an assessee is an international transaction. This ground is thus dismissed. Performance guarantee vs. Corporate guarantee - A corporate guarantee is ordinarily a legal agreement between a principal debtor, creditor and guarantor, whereby the guarantor takes responsibility for the debt repayment in case of repayment by the principal debtor to the creditor. A performance guarantee provides an assurance of compensation in the event of inadequate or delayed performance on a contract. If performance guarantee entails financial consequences, that is, on the failure of the other party to perform his obligation and the guarantor becoming liable to pay some amount, then it cannot be placed at a pedestal different from the regular corporate guarantee given for obtaining loan by the AE. In that sense, performance guarantees in the instant case are a specie of the genus of corporate guarantee and cannot be given a treatment different from the corporate guarantee as urged by the assessee. Ex consequenti, we hold that the so-called performance guarantee transactions at sr. nos. 3 and 4 are in the nature of corporate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the ALP determination would fail. As the AO in the instant case has computed the total income by considering the reduced claim of depreciation by ₹ 19.11 crore, we hold that only such reduced amount of depreciation be included in the operating cost base for determining the ALP of the transaction of `Manufacturing activity . We want to clarify that the position as discussed hereinabove is about the effects of a suo motu disallowance offered by the assessee and not a disallowance made by the AO. CIT(A) not considering bank charges and commission/brokerage as non-operating cost - We find that the break-up of `Bank charges and commission/brokerage has been given on page 29 of the TPO s order, which comprises of Brokerage and commission on fixed deposits ₹ 10.42 lakh; Bank charges ₹ 178.48 lakh; Loan processing fee ₹ 338.32 lakh; and SBLC commission ₹ 216.26 lakh. On a perusal of the detail of ₹ 743.48 lakh, it is discernible that this expenditure is nothing but part and parcel of the overall Finance cost. It is rather an extension of the Finance cost.We, therefore, hold that the ld. CIT(A) was justified in excluding ₹ 743. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (ALP). The TPO observed that the assessee gave Corporate guarantee for its Associated Enterprises (AEs) but just reported in its Transfer Pricing report that it had not incurred any costs in providing guarantees. He held that issuing corporate guarantees was an international transaction which needed to be benchmarked. The assessee was called upon to furnish the details of Corporate guarantees given by it for its AEs. The assessee furnished such details, on perusal of which, the TPO observed that the assessee paid $50,000 in respect of guarantee given for Bilcare AG in addition to charges @1.5% to the bank. The TPO took note of Rule 10TD giving Corporate Guarantee commission at 1.75% under safe harbor rules in respect of a transaction of more than a specific amount. The assessee had furnished ten guarantees for its AEs. The TPO analyzed the transactions of Guarantees given by the assessee and came to hold that firstly, the transaction of giving Guarantee was an international transaction requiring ALP determination and secondly, the ALP of such transactions was 2%. After reducing a sum of ₹ 2.43 crore recovered by the assessee from its AE from total amount computed by applying ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... question whether furnishing of corporate guarantee is an international transaction recently came up for adjudication in Pr. CIT Vs. Redington (India) Ltd. (2021) 430 ITR 298 (Mad.). The assessee in that case furnished Corporate and Bank guarantees for its AEs, for which the TPO proposed transfer pricing adjustment, which was made by the AO in the final assessment order. The Tribunal deleted the disallowance on the ground that it did not have any bearing on profits, income, loss etc. of the assessee and hence was not an international transaction. The Revenue assailed such a finding of the Tribunal before the Hon ble High court. The assessee relied on certain Tribunal orders to buttress its point of view that the furnishing of Corporate and Bank guarantee was not an international transaction. The Hon ble High Court repelled such contention by observing that the Tribunal did not consider the legal position correctly in the hue of clause (c) of Explanation to section 92B. Transfer pricing addition made by the AO in this regard was restored. In view of the foregoing discussion, it is manifest that the question as to whether Corporate guarantee is an international transaction is no mor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the main argument that corporate guarantee was not an international transaction, the assessee contended before the authorities below that, at least, such Performance guarantee transactions should be ignored. Two such transactions claimed by the assessee to be of Performance guarantee have been given at Sr. nos. 3 4 of the Table drawn by the TPO on pages 6 to 8, as under: - Sr. No. Concerned AE party Guarantee Given from Guarantee Given to Remarks 3 Bilcare Incorporated USA INC (Delaware) INR 366.36 CR (Considering year end exchange rate) (Equivalent of 61 Million USD) Sharp Clinical Services USA United Drugs Holding Limited (UK) Bilcare Incorporated USA agreed to sale its business (Assets Liabilities) on going concern to Sharp Clinical Services USA. Bilcare Singapore PTE agreed to sales 100% shares of Bilcare UK Ltd to United Drugs Holding Limited (UK). To complete all this transaction, buyers asked for Corporate Guarantees from BIL for 331.13 Crores in AY 2013-14. BIL provided Corpo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... antees of the obligations of the Sellers under the US Asset Purchase Agreement, the UK Share Purchase Agreement, the Tax Deed and the TSA . Clause 2.1 of the Agreement states: the Guarantor unconditionally and irrevocably guarantee to the UK Buyer (2.1.1.) the due and punctual payment, observance and performance by the UK Seller of all of the UK Seller s liabilities and obligations, whether present or future, actual or contingent, under or arising out of the UK Share Purchase Agreement or the Tax Deed; and (2.1.2.) the due and punctual payment, observance and performance by each of the Sellers of each and all the Sellers liabilities and obligations, whether present or future, actual or contingent, under or arising out of the TSA . Clause 2.4 of the Agreement states: If either of the Sellers default on the payment of any amount due and payable to any of the Guaranteed Parties under Guaranteed Obligations or arising from the termination of any of the Agreements, the Guarantor shall, immediately on demand by the relevant Guaranteed Party (as appropriate), unconditionally pay that amount to the relevant Guaranteed Party (as appropriate) in the manner prescribed in the US Ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e note of the nature of the guarantee transactions. 7.2. In all, there are ten transactions, out of which two transactions that the assessee claimed to be performance guarantee have been discussed above. Other eight transactions, tabulated by the TPO on pages 6 to 8 of his order, are reproduced as under:- Sr. No. Concerned AE party Guarantee Given from Guarantee Given to Remarks 1 Bilcare AG INR 455.00 CR (Considering year end exchange rate) (Equivalent of 55 Million Euro) SBI Pune BILCARE AG was to receive a Loan of ₹ 328 Cr. in AY 2010-11 (Approx.) from SBI Mumbai. SBI Pune was required to provide Bank Guarantee/SBLC to SBI Bank Mumbai for the said transaction. Further SBI Pune has not charged any yearly/ongoing commission on the outstanding SBLC/Bank Guarantee 2 Bilcare AG INR 269.68 Cr. (Considering year end exchange rate) (Equivalent of 44.90 Million USD) SBI Pune BILCARE AG was to receive L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mount. Said SBLC is valid till 25-Jun- 2018. 8 Bilcare Packaging Ltd. (Mauritius) 130.32 INR CR (Considering year end exchange rate) 21.7 Million USD) SBLC-The South Indian Bank Ltd. Bilcare Packaging Limited ( BPL ) took loan amounting to 21.7 Million USD (INR 130.32 Crores) from Export Import Bank of India London Branch ( EXIM ). EXIM London insisted for Stand-By- Letter of Credit ( SBLC ) from Indian Bank. Assessee entered into an agreement with South Indian Bank Limited for issuance of SBLC to EXIM London for the said amount. Said SBLC is valid till 22-Oct- 2018. Assessee was charged ₹ 1,00,56,322 which is 0.75% of the SBLC amount plus other handling charges. Assessee has not recovered anything from the AE company in the current year. 9 Bilcare Packaging Ltd. (Mauritius) 60.06 INR CR (Considering year end exchange rate) 10 Million USD) SBLC-The Laxmi Vilas Bank Ltd. Bilcare Packaging Limited ( BPL ) took loan amounting to 10 Million USD (INR 60.65 Crores) from Export Import Bank ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... incurred by the assessee in furnishing the guarantee nor it recovered any amount from its AE. 7.6. For the transaction at Sl.No.6, the assessee stood as a guarantor for Bilcare Singapore Pte Ltd. in respect of loan of ₹ 39.04 crore from Punjab National Bank, London. Punjab National Bank insisted for SBLC from an Indian bank. The assessee entered into agreement with IndusInd Bank Limited for issuance of SBLC to Punjab National Bank, London. Neither any amount was charged from the assessee by the bank for furnishing the guarantee nor the assessee recovered anything from its AE. 7.7. For transaction at Sl.No.7, the assessee gave guarantee for Bilcare Packaging Ltd. Mauritius in respect of loan transaction of ₹ 60 crore. The assessee entered into agreement with Jammu Kashmir Bank for issuance of SBLC to Punjab National Bank, London. No amount was charged by Jammu Kashmir Bank from the assessee for furnishing guarantee nor the assessee recovered any amount from its AE. 7.8. For the transaction at Sl.No.8, the assessee stood guarantor for Bilcare Packaging Ltd. Mauritius in respect of loan of ₹ 130.32 crore from Exim Bank, London. The assessee entered into ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bour . Relevant rules from 10TA to 10TG came to be inserted by the Income-tax (Sixteenth Amendment) Rules, 2013 w.e.f. 18-09-2013. Rule 10TD(1) provides that the transfer price declared by the assessee in respect of eligible transaction shall be accepted by the income-tax authorities at ALP, if it is in accordance with the circumstances as specified in sub-rules (2) or (2A). A chart has been given in these sub-rules in which the safe harbour has been provided for the eligible international transactions. 7.14. At this juncture, it is apposite to take note of rule 10TD(1), which underscores that the exercise of option for safe harbour rules by an eligible assessee [as defined under Rule 10TB] in respect of an eligible international transaction [as given in Rule 10TC] is optional. Thus, it is axiomatic that the safe harbour rules are simply optional for an eligible assessee. One assessee may opt for them, another may not. The entire mechanism under the safe harbour rules gets triggered only when the option of the safe harbour rules is exercised by an assessee under due process mandated under Rule 10TE. A fortiori , where an assessee has not exercised option for the safe harbour, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in other cases, nothing was required to be paid. Drawing support from Everest Kento Cylinders Ltd. (supra), we hold that the arm s length price of the international transaction of rendering service of furnishing guarantee is 0.5%. However, all out-of-pocket expenses incurred by the assesseeguarantor in furnishing guarantee will go to swell the ALP accordingly. In other words, where the assessee has not incurred any cost in furnishing guarantee, the ALP of the international transaction of furnishing guarantee will be 0.5%. If however, the assessee has incurred expenses at, say, 1.75%, then ALP will be 2.25% (consisting of compensation for rendering service of giving guarantee at 0.5% plus out of pocket expenses incurred at 1.75%). To put it simply, the effective arm s length rate of guarantee transaction is 0.50% plus actual expenses incurred by the assessee in furnishing the guarantee. The impugned order in confirming uniform rate of 2% as arm s length guarantee fee is set aside and the matter is restored to the AO to decide the issue in the terms held above. The assessee will be allowed a reasonable opportunity of hearing in this exercise. B.TRANSFER PRICING ADDITION ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otu disallowed such amount in its revised computation of total income. While working out its PLI originally in the T.P. Study report, the assessee had considered the enhanced amount of depreciation allowance. However, with the revision of return and the voluntary disallowance of depreciation by ₹ 1911.13 lakh, the assessee lodged a claim before the TPO that the amount of depreciation in the operating cost base should be accordingly reduced. The TPO did not accept the assessee s contention on this count. While computing the assessee s OP/OR at (-) 0.94%, he went ahead with the amount of depreciation as claimed in the original return and did not reduce the operating costs by ₹ 19.11 crore towards the amount of depreciation foregone in the revised return. The assessee remained unsuccessful before the ld. CIT(A). 10.3. The claim of the assessee before the Tribunal is that the reduction in the amount of depreciation should be given effect in the computation of its PLI as well by including only the reduced figure of depreciation actually claimed in the revised return in the operating cost base. It is noticed that the assessee furnished a revised return of income in whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e that the claim is dead for the computation of total income but alive for determining the operating costs for the ALP determination. Inclusion of such an expenditure in the operating cost base for determining the ALP would lead to skewed portrayal of the operating profits as it will be akin to considering such expenditure as having been incurred for the purpose of computation of ALP but not incurred for the computation of total income, which by no logic can be a correct proposition. 10.5. Adverting to the facts of the instant case, it is seen that the assessee in the revised return made a suo motu disallowance of depreciation to the extent of ₹ 19.11 crore. When the AO accepted the revised return by taking reduced income/loss as per the revised return for the purpose of computing the total income, there can be no rationale in going back to the figure of depreciation as per the original return for the ALP determination, which ceased to exist after the filing of the revised return. We, therefore, hold that only the reduced claim of depreciation by ₹ 19.11 crore should be added to the operating cost base in the ALP determination. 10.6. Here, we want to clarify tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses of Brokerage and commission on fixed deposits ₹ 10.42 lakh; Bank charges ₹ 178.48 lakh; Loan processing fee ₹ 338.32 lakh; and SBLC commission ₹ 216.26 lakh. On a perusal of the detail of ₹ 743.48 lakh, it is discernible that this expenditure is nothing but part and parcel of the overall Finance cost. It is rather an extension of the Finance cost. We, therefore, hold that the ld. CIT(A) was justified in excluding ₹ 743.48 lakh from the operating costs base. The ground fails. 12.1. The only other issue raised by the Revenue in its appeal is against the proportionate transfer pricing adjustment allowed by the ld. CIT(A). The TPO, while computing the transfer pricing adjustment, took into account the entity level figures and not the transactions with the AEs. The ld. CIT(A) directed to restrict the transfer pricing adjustment in respect of transactions with AEs alone. 12.2. In our considered opinion, this issue is fairly settled by judgment of Hon ble jurisdictional High court in CIT Vs. Phoenix Mecano (India) Pvt. Ltd. (2019) 414 ITR 704 (Bom.), holding that the transfer pricing adjustment made at entity level should be restr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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