TMI Blog2022 (3) TMI 1448X X X X Extracts X X X X X X X X Extracts X X X X ..... ledge of shares - HELD THAT:- We find that there is no dispute that the shares are pledged, at the instance of or and for the benefit of, an associated enterprises of the assessee, keeping this in mind, when we look at definition of transaction in section 92F(v), it is clear that transaction includes an arrangement, understanding or action in concert-(A) whether or not such arrangement, understanding or action in concert is formal or in writing; or (B) whether or not such arrangement, understanding or action is concert is intended to enforced by legal proceedings . It cannot, therefore, be said that pledging shares for the benefit of an associated enterprises is not a transaction between the associated enterprise. It is akin to a corporate guarantee and is, therefore, required to be benchmarked as such. What is the rate at which such corporate guarantee is to be benchmarked, and whether a corporate guarantee constitutes international transaction at all ? - As relying on case of Siro Clinpharm Pvt. Ltd [ 2021 (10) TMI 754 - ITAT MUMBAI] we uphold the action of the authorities below in principle but we scale down the ALP adjustment to 0.5% of the correct value of shares and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iating that the interest rate of Indian Rupees denominated lending is not material for the purpose of calculating arm's length interest rate in respect of loan denominated in Euro. 4. The learned CIT (Appeals) has erred in confirming the arm's length rate of interest applicable to lending in Euro by the appellant company to be at 10% for the year. 5. Briefly stated, the relevant material facts are like this. The assessee had granted a loan of Euro 5,00,000 to it s associated enterprises Virgo Europe SPA, and of US Dollars 5,00,000 to it s another enterprises Virgo Engineers Inc, USA. The assessee had charged interest @4.75% and @7.75% respectively on the basis of referencing to LIBOR. The Transfer Pricing Officer was, however, unsatisfied. He proposed to make arm s length price adjustments to these interest charges on the basis of Indian Prime Lending Rate @9.50%. He thus proceeding to benchmark these loan interest @10%. Aggrieved, assessee carried the matter in appeal before the CIT(A) but without any success. Learned CIT(A) confirmed the action of the Assessing Officer/TPO and observed as follows:- 4.3 I have considered the facts of the case, submission of the ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed on the comparison of the assessee with the chosen entities and the AE has no rule in the exercise of selecting the comparables. Thus, in our view, the interest that would have been earned by the assessee by advancing or placing the said amount with unrelated parties would be the Arm's Length interest in relation to the interest free loans/advances to the AE. The safest comparables, which can be taken as Arm's Length interest rate in such a case would be the interest on FD with the bank for a term equivalent to the term for which the loans given to the AEs. 8.12. It is pertinent to note that in case of FD with the Bank, the investment is safe as it is free from risk of credit and interest. On the other hand, if the loan/advance is given to the unrelated party, then always there is some risk of credit and interest involved in such transaction. There is one more reason for taking the FD as an appropriate and good comparable because the lending rate by financial institutions/bank varies depending upon the credit rating of the borrower and further on the guarantee and security provided to secure the loans . In view of the above observations it may be noted that FD rate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d upon by the impugned order. Accordingly, we see no reason to entertain the proposed questions of law. 9. Clearly, therefore, Their Lordships have held that since the Tribunal decisions in the cases of VVF Ltd (supra) [reported as VVF Ltd Vs DCIT- TS 84 ITAT 2010] and DCIT Vs Tech Mahindra Limited (supra) [reported as (2011) 12 taxmann.com132 (Mum) and as (2011) 46 SOT 141 (Mum)] were accepted by the revenue authorities, it cannot be open to the revenue authorities to challenge the same decision in other cases. Both of these decisions were incidentally authored by one of us (i.e. the Vice President) and an important common thread in both of these decisions is that there has been a mark up on the Euro and USD denominated LIBOR, rather than LIBOR simpliciter. In Tech Mahindra case(supra), for example, it is specifically stated, in paragraph 7, that We have adopted the same approach by taking into account the commercial principles and practices with regard to a US Dollar denominated extended credit for arriving at the benchmark rate, and take LIBOR as the base. Accordingly, the LIBOR (US Dollar) has to be a benchmark for US Dollar transactions - rather than the rate of interest o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of Virgo Europe SPA given to the State Bank of India, which is an Indian Bank, for the loan given by the State Bank of India to Virgo Europe SPA amount to an international transaction. 6. The learned CIT (Appeals) has erred in confirming the addition of the amount of Rs.15,94,478/- as adjustments towards arm's length price in respect of pledge of shares made by the appellant company of Virgo Europe SPA, pledged to the State Bank of India for credit line received by Virgo Europe SPA, whose shares are pledged. 7. The learned CIT (Appeals) has erred in confirming that the adjustment value of the pledge of shares with the State Bank of India at Rs.15,94,478/- being 2.5% of the book value of 1,10,000 no. of shares costing Rs.6,37,79,120/- owned by the appellant company, though only 32,000 shares costing Rs. 1,86,89,400/- were provided as pledge by the appellant company, and the said shares were pledged only for part of the year. 13. So far as this grievance of the assessee is concerned the relevant material facts are like this. The assessee has pledged certain shares with State Bank of India as a collateral security for loan to it s associated enterprises Virgo Euro SPA. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... guarantee commission at a rate of 3%. In view of these decisions, the rate of 2.5% applied by the TPO is quite reasonable and cannot be stated to be high. Accordingly the contention of the appellant is not acceptable. iii. Without prejudice the appellant contended that it has pledged 32000 shares only and not the entire 1,10,000 shares. In this regard on perusal of the balance sheet of appellant, it is noted that in Schedule V appended to the annual accounts, it is clearly mentioned that these shares are pledged in favour of state bank of India Frankfurt as a security against loan advanced to Virgo Europe SPA. In view of this fact this contention of the appellant being factually incorrect is not acceptable. Consequently the adjustments made by the AO in this case is upheld. 14. The assessee is aggrieved and in further appeal before us. 15. We have heard the rival contentions perused the material on record and duly considered facts of the case in the light of the applicable legal position. 16. We find that there is no dispute that the shares are pledged, at the instance of or and for the benefit of, an associated enterprises of the assessee, keeping this in mind, when ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y Their Lordships. We humbly bow to, to borrow the words of House of Lords in Casell Co (supra), higher wisdom of the Hon ble Courts above. As the things stand now, in the light of the above judicial development, the ratio of a series of decisions of this Tribunal, including in the cases of assesse s own case (reported as 177 TTJ 609), in the case of Micro Ink Ltd Vs ACIT [(2016) 157 ITD 132 (Ahd)] and Bharati Airtel Ltd Vs ACIT [(2014) 63 SOT 113 (Del)], holding that issuance of corporate guarantees does not constitute international transaction under section 92B does not hold good in law any longer. The fact that these words are of non-jurisdictional High Court, in view of anything contrary thereto having been expressed by Hon ble jurisdictional High Court and for the detailed reasons set out in our analysis earlier, does not make any material difference. Many of these decisions are authored by one of us (i.e. the Vice President) but that does not make any difference either. Once a higher judicial forum has expressed it s views on an issue, our views have to make way for the same. We are bound to follow the views expressed by the Hon ble Courts above, and it is this discipline ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fully following the above decision, while we uphold the action of the authorities below in principle but we scale down the ALP adjustment to .5% of the correct value of shares and for the actual pledge period. To this extent, the assessee will get relief. Ordered, accordingly. 18. Grounds 5, 6 and 7 stand allowed for statistical purposes in the terms indicated above. 19. In ground nos. 8 and 9, the assessee has raised the following grievances:- 8. The learned CIT (Appeals) has erred in not allowing the disallowance of Rs.30,99,342/- made by the assessing officer on account of unrealized receivables from exports amounting to Rs.30,99,342/- from the deduction allowable u/s 10B of the Income Tax Act. 9. The learned CIT (Appeals) has erred in not giving relief to the appellant company in respect of the mistaken disallowance made by the assessing officer of the export turnover of Rs.30,99,324/-, which could not be bought in India within the required time, though that turnover was already excluded from the export turnover of the appellant company for the purpose of calculation of deduction u/s 10B. 20. Learned representative fairly agree that this issue has not been adjudi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The assessee is aggrieved and is in appeal before us. 27. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. 28. We have noted that there are large number of decisions of the co-ordinate benches, which held filed at the relevant point of time, that issuance of corporate guarantees did not constitute an international transaction under section 92B, as it had no bearing on the profits, income, losses or assets of the enterprise giving such guarantee. This stream of decisions included decisions as in the cases of Micro Ink Ltd. vs. ACIT [(2016) 157 ITD 132 (Ahd)], Siro Clinpharm Pvt. Ltd vs. DCIT [(2017) 88 taxmann.com 338 (Mum)], Bharti Airtel Ltd Vs. ACIT [(2014) 43 taxmann.com 150 (Del)]. In view of this position, it cannot be said that assessee s explanation that the guarantee given by the pledge of shares did not constitute international transaction was not a reasonable explanation. Accordingly, it was not a fit case for imposition of penalty u/s. 271(1)(c). In view of these discussions, as also bearing in mind entirety of the case, we are of the considered view that the im ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed CIT (A) has erred in upholding the addition of the amount of Rs. 55,61,575/- in the income of the appellant company as adjustment in the arm's length price of the interest charged on the advances given to the AE namely Virgo Engineers Inc. 2. The learned CIT (A) has erred in not appreciating the fact that the appellant company has charged fair rate of interest of 4.75% in US Dollars on the US Dollar denominated loan given to its associated enterprise namely, Virgo Engineers Inc., which was based on applicable LIBOR plus interest rate for US Dollar loans prevailing then. 3. The learned CIT (A) has erred in not appreciating that the interest rate paid by the appellant company in Indian Rupees denominated borrowing is not material for the purpose of calculating arm's length interest rate in respect of loan advanced to an AE denominated in US Dollars. 4. The learned CIT (A) has erred in concluding that the arm's length rate of interest applicable to lending in US Dollar by the appellant company was 11.26% for the year. 38. Learned representatives fairly agree that whatever we decide in the above issues for the assessment year 2008-09 will apply mutatis mutand ..... X X X X Extracts X X X X X X X X Extracts X X X X
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