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TMI Blog2023 (12) TMI 273X X X X Extracts X X X X X X X X Extracts X X X X ..... frastructure International Ltd. Mauritius. * Thirdly, the ld. AO has erred in not granting credit of tax at Rs. 13,419/- being additional income tax of distributed profits u/s.115JB. The last ground has not been argued, therefore, the same is dismissed as not pressed. 3. In so far as the Revenue appeal is concerned, the department has challenged- * Firstly, disallowance of interest u/s.36(1)(iii) in respect of loans to Afcons Pauling Joint Ventures. * Secondly, disallowance of depreciation of Rs. 75,000/- on the WDV of plant and machinery aggregating to Rs. 5.02 lakhs * Thirdly, Disallowance of professional fees of Rs. 64.33 lakhs paid for arbitration award. 4. In so far as the first issue raised by the assessee is with regard to adjustment of Rs. 1,73,58,778/- in respect of extension of corporate guarantee to Afcons Construction Mideast LLC. The assessee company is engaged in the business of executing large and complex civil engineering projects in the infrastructure sector for construction of roads, bridges, railways, jetties, transport terminals, tunnels, dams etc. in India and abroad. Assessee Company entered into contract with the Nad Al Sheba Race Course Developmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n substance the sole and entire purpose of incorporating Afcons Mideast was only to comply with the laws of UAE in order to be eligible to secure the said contract. Effectively, the contract has been executed by the assessee company either as a sub-contractor or indirectly by providing the necessary management, technical know-how, organizational and project management skills and support to Afcons Mideast. 6. Since the share capital of Afcons Mideast was only Rs. 42,62,400/-, therefore, it was required to obtain credit facilities including performance guarantee from First Gulf Bank (FGB) in Dubai for execution of the said contract. During the relevant F.Y. 2008-09, assessee extended a guarantee of Rs. 824 Crores (AED 580 million) to FGB for procuring 19 facilities by FGB to Afcons Mideast. The following 4 types of facilities were provided (and the amounts actually utilized) by FGB to Afcons Mideast during the year: Benefit Actually utilised (AED in million) Benefit % p.a. Benefit AED p.a. Benefit INR p.a. Letters of credit 24,730,000 0.5 123,650 1,756,818 Letters of Guarantee Advance payment 108,850,000 0.5 544,250 7,732,700 Letters of Guarantee Performance Bond 10 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contract work has been executed by the assessee but also almost entire profit has also been earned by the assessee. If more than 92% of the profits arising from the execution of the project as accrued to the assessee as a sub-contract and rendering support services and then it cannot be held for any kind of benefit has been given to AE for giving any kind of performance guarantee. Even for the balance contract performed by Afcons Mideast, then also necessary machines management, technical know-how, organizational and project management skills and support was provided by the assessee. Even assuming that a separate fee ought to have been charged for the guarantee it already stands factored in the remuneration received by the assessee from acting as a sub-contractor or for rendering the support services. 11. On the other hand, ld. CIT DR had given his written submissions which for the sake of ready reference are reproduced hereunder:- I. Factual background- The undisputed facts are as under:- * M/s Afcons Mideast, is an AE of the assessee, M/s Afcons Infrastructure Limited (AIL), which was setup in Dubai to bid for projects in that country The majority shares (51%) of M/s Afcons Mi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id argument is not tenable since- (i) As stated in the preceding paragraphs, the sub-contract given to the assessee by the AE was just 13.5% of the total contract value of 1,546.56 crores. Hence, the "performance" of the assessee in the contract can at most be considered the extent of 13.5% only. (ii) As far as "performance" and "share of profit" in the project related to the assessee and the AE are concerned, the financial details of both entities as on 31st March, 2009 are available on page no. 132-139 of the assessee's paper book. This is reproduced as below for the sake of convenience. Heads Afcons Constructions Mideast (AE) Afcons Infrastructure Ltd. {Assessee) Income & Expenditure Account (As on 31.03.2009) Amount in Rupees Remarks Amount in Rupees Remarks Income from Operations 138.96 crores 39.98 crores From AE as subcontract including Service charges Expenditure under different Heads 138.66 crores = 99.8% of Income of Project 6.06 Crores =15.15% of Income from Project Profit for the period 0.30 crores -0.21% of Income from Project 33.48 Crores = 83.4% of the Income from Project Balance Sheet (As on 31.03.2009) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct, which is a part of the said contract, resulted in an increase in revenue of the appellant. Comments- 1. It is respectfully submitted that in all International business involving multiple transactions with foreign AE, the intention has always remained to expand the business and to earn profit from the said transactions, by the domestic entities. However, as per the Indian Transfer Pricing Regulations, the moment an international transaction is entered into, the transaction has to be benchmarked keeping ALP principles. 2. Moreover, in the instant case, Corporate Guarantee was demanded by the AE as the Bank or financial institution did not consider its assets or creditworthiness as adequate securities and such Corporate Guarantee is given by the assessee, for which the AE is willing to pay the cost (whether paid or not) in the same manner as it it would pay to an independent enterprise providing guarantee to its financial requirements, it will not be a shareholder activity but would fall within the scope of intra group service (ii) It is also claimed that the appellant has benefitted by the extension of the said guarantee and not the said AE. Since it was in the form of quas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s pointed out which expenditure booked by the sub-contractor have been booked by Afcons Mideast in its books of accounts. 12. Before us ld. Counsel had also argued that such kind of performance guarantee is not an international transaction, however, at the time of hearing, we clearly stated that we are not inclined to agree with such a contention and accordingly, ld. Senior Counsel confined his arguments mostly on merits. Therefore, on this issue, we are not adjudicating the said plea. 13. We have heard rival submissions and perused the relevant finding given in the impugned order as well as material referred to before us. As noted above, assessee is in the business of construction of infrastructure projects and in order to secure the contract for construction of a bridge in Dubai with Road Transport Authority in Dubai, it had found limited liability Company in Dubai called as Afcons Mideast LLC. As per the UAE regulation assessee could not hold more than 49% in Afcons Mideast as 51% shareholding was to be held by local sponsorer. Despite the shareholding structure, the share capital of Afcons Mideast stood at Rs. 42,62,400/- and it was agreed that the shareholders of the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en for its own performance of the contract or a guarantee given for repayment of advance which would also only arise in the case of a non-performance of the contract by the assessee. Thus, we agree with the contention of the ld. Senior Counsel that giving the performance of the corporate guarantee was to execute the work which in effect was carried out by the assessee itself for which the majority of the profit and the benefit went to the assessee. Even it is to be treated as international transaction, then also under the scope and meaning of international transaction as defined in Section 92B- "92B. (1) For the purposes of this section and sections 92, 92C, 92D and 92E, "international transaction" means a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, 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 cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee only, then where is the question of making any adjustment of ALP in the hands of the assessee that any benefit has been passed on to the AE. 16. Even if it is reckoned as international transaction, then also on FAR analysis and looking to fact that the reward or profit to the AE is almost negligible, i.e. the ultimate profit is not even 1%, the adjustment if at all would also be negligible on the facts of the present case. Thus, on the facts of the present case we hold that no transfer pricing adjustment can be made on account of corporate guarantee. Accordingly, the addition made by the ld.TPO / ld. AO is deleted. 17. Next issue relates to adjustment of Rs. 55,59,523/- in respect of receipt of interest on loan given to Afcons Mideast and Afcons Infrastructure International Ltd. 18. The brief facts are that assessee had given advances amounting to Rs. 14.66 Crores to Afcons Construction Mideast LLC and assessee had charged interest @12% per annum on daily balance of such advances and amount of interest received from M/s. Afcons Mideast amounting to Rs. 2,16,19,153/-. Assessee has also given advance of Rs. 1.40 Crores to Afcons Infrastructure International Ltd., Mauritius, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stment made by the ld.AO is deleted. 21. In Revenue's appeal, the first issue is disallowance of interest u/s. 36(1)(iii) in respect of loans to Afcons Pauling Joint Venture. The ld. AO from the perusal of the balance sheet as on 31/03/2009 revealed that assessee had shown interest bearing secured loans at Rs. 31923.68 lakhs and unsecured loans of Rs. 37127.72 lakhs. On the interest bearing funds, assessee had paid interest of 8566.26 lakhs which resulted in average rate of 12.40%. The ld. AO noted that assessee has advanced loans to its joint ventures on which no interest has been charged for sums aggregating to Rs. 771.76 lakhs. Accordingly, ld. AO made disallowance @12% which worked out to Rs. 8.57 lakhs. The ld. DRP had given following directions to the ld. AO. "We have considered the facts of the case, the objections of the assessee and the evidences placed on record. The assessee has relied upon the decision of honourable Mumbai ITAT in its own case for the assessment year 1997-98, wherein it was directed to exclude the loans as on 1 April 1996 while computing the disallowance of interest. This direction was given on the fact that in the assessment years prior to Ay 97-98, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lakhs paid for arbitration award, the facts discussed in the assessment order reads as under:- "The assessee has stated that in its return of income, it had reduced the sum of Rs. 10,66,78,858/- on account of 'arbitration credits taken to Profit & Loss Account' on the basis that the award is being challenged by the clients before the Hon'ble High Court. However, now it is learnt by the assessee that its client viz. Chennai Port Trust has not challenged the Arbitration Award dated 03.07.2008 in respect of contract agreement No.62/1999 and Arbitration Award dated 15.07.2008 in respect of contract agreement No.13/2001 and moreover the assessee has also received the sum of arbitration awards together with interest, details of which are given hereunder; Arbitration Award date Contract Agreement No. Arbitration Award (Rs.) Interest on arbitration award (Rs.) 03.07.2008 62/1999 31005853 9332762 15.07.2008 13/2001 3315117 1011110 TOTAL 34320970 10343872 4.2 The assessee contended that, since the awards have not been challenged before the Hon'ble High Court by the said client and as the said sums of arbitration awards have been received ..... X X X X Extracts X X X X X X X X Extracts X X X X
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