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TMI Blog2022 (12) TMI 799X X X X Extracts X X X X X X X X Extracts X X X X ..... Enterprises (AE) and bench marked it's international transactions under Transaction Net Margin Method (TNMM). The assessee filed it's return of income for the assessment year 2018-19 on 28.11.2018 admitting a total income of Rs.300,91,81,980/-. The case was referred to the Transfer Pricing Officer [TPO] for determining Arms Length Price (ALP) u/s 92CA(3) in respect of its international transaction entered into with AE. In response to the notices of the Ld. TPO, the assessee filed various submissions online, through e-proceeding facility from time to time. The Ld.TPO vide its order in DIN No. ITBA/TPO/F/92CA3/2021-22/1034557999(1) dated 31/07/2021 has recommended the following adjustments : Sl. No. Description Adjustment u/s 92CA(3)(in Rs.) 1. Corporate Guarantee 1,62,65,401 2. Outstanding Trade receivable 6,06,88,411 Total adjustment u/s 92CA(3) 7,69,33,812 3. Pursuant to the order of the Ld.TPO, the AO has passed a draft assessment order u/s 143(3) r.w.s. 144C of the Act on 21.09.2021 and made an upward TP adjustment and assessed the total income at Rs.308,75,13,245/- by making the following disallowances : 1. Disallowance u/s 80G 1,69,500 2. Disallowance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ery high arms length net margin than that of the comparable companies (ie., 2 0.98% as against 4.38% to 6.03% with export incentive considered as operating income and 12.49% and -0.38% without export incentive). It impliedly demonstrates that the appellant is compensated for cost o f delayed receivables through higher operating margin embedded in sales to AE. 2.7. Without prejudice to the above, the DRP/TPO/AO erred in not appreciating that the appellant has not charged interest on delayed realization of outstanding receivables from Non-AE's and as such trade receivable transactions with respect to AE are to be deemed to have been done on arm's length basis by applying internal CUP method, as resorted by the appellant. 2.8. The DRP/AO/TPO ought to have appreciated that the internal CUP is superior and more appropriate in the given facts of the case compared to external CUP method adopted by TPO. 2.9. Without prejudice to the above, the DRP/TPO/AO erred in not considering the fact that that the CUP method mandates precise and exact comparability and as such the TPO erred in incorrectly adopting external CUP method and imputing interest as per SBI short term deposit rat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (xii) Indo American Jewellery Ltd vs. CIT - [2014] 44 taxmann.com 310 (Bombay HC). (xiii) Sharda Spuntex vs. PCIT - 93 taxmann.com 498 (Raj. HC) (xiv) CIT vs. Vaibhav Gems Ltd - 99 taxmann.com 2 (SC) (xv) CIT vs. Vaibhav Gems Ltd - [2017] 88 taxmann.com 12 (Raj. HC) The Ld. AR heavily relied on the ratio laid down in PCIT vs. Kusum Health Care (P) Ltd [2018] 99 taxmann.com 431 (Delhi). 6. The Ld. Departmental Representative (Ld. DR) argued that there are huge delays in the receivables from AEs and hence interest is to be charged on the same on notional basis. The Ld. DR referred to the expression of "international transaction" as given in Explanation (i)(c) to section 92B of the Act and argued that deferred receivables would constitute international transaction. The Ld. DR further argued that the deferred payments or receivables arising during the course of business is in the nature international transaction and hence interest to be charged on the same. The Ld. DR further countered that the notional interest cannot be subsumed in the TNMM. The Ld. DR also argued that non-charging of interest to non-AEs is irrelevant. The Ld. DR referred to the decision of the Delhi Tribuna ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vis that of its comparables. We therefore are of the considered view that any further adjustment to the margin of the assessee on the outstanding receivables cannot be justified and no separate upward adjustment on outstanding export receivables is required and therefore we direct the Ld.AO to delete the upward adjustment made towards overdue receivables from AE. We therefore allow this ground raised by the assessee." Respectfully following the ratio laid down by the coordinate bench of the Tribunal, we allow this ground raised by the assessee. 8. The assessee raised the following grounds with respect to adjustment towards corporate guarantee: "3.1. The TPO/AO erred in imputing corporate guarantee commission at the rate of 1.8% of the actual loan utilized by AE and the DRP erred in partially sustaining the said adjustment though it has given direction to reduce it to 1% of the actual loan utilized by A.E. 3.2. The DRP/TPO/AO failed to appreciate that the extending guarantee for loan taken by AE cannot be considered as an international transaction as it does not fall within the purview of "capital financing" as contemplated under section 92B of the Act. 3.3. The DRP/TPO/AO e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y of a shareholder. 3.12. The DRP/TPO/AO ought to have appreciated that the provision of corporate guarantee has not resulted in reduction of rate of interest and the AE has not derived any benefit which has an impact on its profits or loss or assets. 3.13. The DRP/TPO/AO erred in not adopting any of the prescribed methods for benchmarking the corporate guarantee transaction. 3.14. Without prejudice to the above, the DRP/TPO/AO ought to have to appreciate that the 0.50% of the guarantee commission charged by the assessee on corporate guarantee given which comes to 0.80% of the actual loan utilized by A.E is higher than that of the 0.5% rate of guarantee commission as held in various judicial precedents. 3.15. In any event, the rate of 1% rate of corporate guarantee determined by DRP is high and arbitrary. 9. The issue raised in the Grounds of Appeal is with respect to adjustments made by the TPO/DRP in the corporate guarantee commission on the gross guarantee given to AE. The Ld. AR pleaded that it is not an international transaction as the assessee has not charged the AE. However, the Ld. AR submitted that in the case of CIT vs. Redington India Ltd [2021] 430 ITR 298, Hon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal (supra) as under : "11. We have heard both the parties and perused the material available on record and the orders of the Authorities below. It is observed from the order of the Ld. TPO that the Ld. TPO has obtained from various banks the rate of fees charged by them on the issuance of financial guarantees for the computation of ALP. The Ld. TPO has thus concluded that the median of the ALP works out to 1.9% for the corporate guarantee of above Rs. 10 Crs. The Ld. TPO referred to section 92B of the Act which read as "any other transaction having a bearing on the profits, income, losses or assets of such enterprises" and thus concluded that in the instant case the corporate guarantee issued on behalf of its AEs must be taxed @ 1.9% on the guaranteed amount. The Ld. TPO also observed in para 12.10 of his order that "when a default is made in making repayment by the principal debtor, the banker will be able to proceed against the guarantor/surely" and hence this being the contingent liability on the assessee, we find that the Ld. TPO made the adjustment by instances referring to the commercial banks providing financial guarantees but did not contemplate the issue of corporate gu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the foregoing grounds of appeal at or before the hearing of the appeal. 15. The issue raised by the assessee in the Grounds of Appeal is with respect to disallowance U/s. 14A of the Act r.w.r 8D. The Ld. AR argued that the assessee has not earned any exempt income warranting the disallowance u/s. 14A of the Act. The Ld. AR pleaded that the assessee's holding shares is merely to retain the controlling interest and no income has been received by the assessee during the impugned assessment year. The Ld. AR relied on the following decisions: (i) CIT vs. Chettinad Logistics P. Ltd - 95 taxmann.com 250 (Supreme Court). (ii) CIT vs. Chettinad Logistics P. Ltd - [2017] 80 taxmann.com 221 (Madras) (iii) Marg Ltd vs. CIT - 120 taxmann.com 84 (Madras) 16. The Ld. AR placed heavy reliance on the judgment of the Hon'ble Supreme Court in the case of CIT vs. Chettinad Logistics P. Ltd., [2018] 95 taxmann.com 250 (SC). 17. Per contra, the Ld. DR supported the order of the Ld. AO. 18. We have heard both the sides and perused the materials available on record and the orders of the Authorities below. Similar issue was considered in assessee's own case for the A.Y.2017-18 in I.T.A.No.75/Viz ..... X X X X Extracts X X X X X X X X Extracts X X X X
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