TMI Blog2024 (3) TMI 1116X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee lending money to its AE - A.O./TPO has considered 10.68% to be a reasonable estimation on the notional interest to be levied by the assessee on the basis of the crisil bonds and made an adjustment for the loan advanced by the assessee - TPO/A.O. has also without prejudice considered the safe Harbour Rules notified on 18.09.2013 for the loan transaction upto Rs. 50 crores where the interest rate to be applied has to be the base rate of State Bank of India as on 30th June which is 12.28% + 150 basis point during the year under consideration and held that 10.68% to be at arm s length rate would be reasonable - HELD THAT:- CIT(A) has also not bench marked the said transaction and had merely restricted the rate of interest to be 5% keeping in view the earlier interest rate charged by the assessee and by stating that 5% would be a reasonable rate had the assessee advanced loan within India. The assessee, on the other hand, has also not bench marked the said transaction and had charged 2% notional interest on the loan advanced to its AE. It is evidenced that to determine the arm s length price of any international transaction, there has to be a reasonable bench marking conducted by b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pholding the action of the Assessing Officer (AO ) and Transfer Pricing Officer ( TPO ) in benchmarking corporate guarantee given to a bank on behalf of the Appellant's subsidiary as an international transaction u/s 92B of the Act 2. The Appellant prays that Arm's length adjustment made by the TPO and confirmed by the AO be deleted. WITHOUT PREJUDICE TO GROUND I : GROUND II: ADDITION ON ACCOUNT OF ARM'S LENGTH ADJUSTMENT TO INCOME FROM GUARANTEE COMMISSION : 1 On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in computing the arms length price u/s 92C(3) for the corporate guarantees provided by the Appellant and thereby making an addition of notional guarantee fee at the rate of 0.7% on the availed guarantee amount. 2 The Appellant therefore prays that the AO be directed to delete the Arm's length adjustment made in the form of income from guarantee commission GROUND NO. III ADDITION ON ACCOUNT OF ARM'S LENGTH ADJUSTMENT TO INCOME FROM INTEREST ON LOANS ADVANCED TO ASSOCIATED ENTERPRISE: 1. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in holding that the interest charged on the loans advan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 85,132 4. Reference was made u/s. 92CA of the Act to the Transfer Pricing Officer ('TPO' for short) for determining the arm's length price ('ALP' for short) pertaining to the international transaction entered into by the assessee as per the audit report in Form No. 3CEB. The ld. TPO vide order dated 01.11.2013 passed u/s. 92CA(3) of the Act made an adjustment of Rs. 1,07,98,788/- towards guarantee commission given on behalf of the Associated Enterprises ( AE for short) aggregating to Rs. 2,27,59,004/- and adjustment to Rs. 1,19,60,216/- towards the interest on the loan advanced by the assessee to the AE. 5. The ld. Assessing Officer ('A.O.' for short) vide order dated 24.03.2014 passed the assessment order u/s. 143(3) r.w.s 147C(1) of the Act thereby determining the total income at Rs. 102,16,86,410/- by making an adjustment proposed by the ld. TPO along with the disallowance u/s. 14A of the Act to Rs. 92,16,774/- and disallowance on account of bogus purchase amounting to Rs. 28,444/-. 6. Aggrieved the assessee was in appeal before the ld. CIT(A) who vide order dated 30.03.2016 had partly allowed the appeal filed by the assessee. 7. Both the assessee as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w of international transaction where the said amendment will not be applicable to the year under consideration. 10. The lower authorities have failed to accept the contention of the assessee and held that the amendment to section 92B(2) brought about by Finance Act, 2012 was applicable retrospectively w.e.f. 01.04.2002 from A.Y. 2002-03. The ld. A.O./TPO held 4.03% to be the rate of guarantee commission after considering the interest rate for unsecured bonds of AAA rate companies which is 8.25% and BBB rated companies @ 12.28% for a period of five years of unsecured bonds and made an adjustment of Rs. 1,07,98,788/- from the total guarantee committee amounting of Rs. 26,79,60,000/-. 11. The first appellate authority upheld the finding of the ld. A.O./TPO that the amendment to section 92B of the Act applies retrospectively from A.Ys. 2002 to 2003 and disagreed with the findings of the ld. TPO on the view that the ld. TPO has considered the rates of lending funds which is not the case of the assessee where it has given guarantee to two bank for its own subsidiary Lukaps. The ld. CIT(A) further held that the average rate of lending of unsecured bonds computed by the ld. TPO is not just ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e an international transaction. The ld. DR relied on the decision in the case of Glenmark Pharmaceuticals Ltd. (in ITA No. 5031/Mum/2012 vide order dated 13.11.2013) and stated that the ld. CIT(A) has failed to look into the credit rating of the AEs and has also failed to evaluate the risk factor involved by the assessee in providing the corporate guarantee on behalf of its AE. On considering the rival submissions it is observed that the corporate guarantee given by the assessee on behalf of its AE for availing loan facility is for the purpose of reducing the interest rate charged by the banks and while determining the ALP of the said transaction the same has to be considered on the perspective of the benefit received by the AE as per the interest saving approach by reason of the corporate guarantee given by the assessee and to compare the same as to what would be the interest rate charged by the bank for the loan availed by the AEs if the corporate guarantee is not given by the assessee for availing the said loan. It is observed that both the lower authorities have failed to look into this issue before determining the ALP of the said transaction. Reliance placed on the decision in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therland which was given in the earlier financial year and had continued during the year under consideration along with another loan of Euro 20 lacs equivalent to Rs. 13,75,18,000/- lent on 24.07.2009 which again continued during the impugned year for which the assessee had charged interest @ 2% which the ld. A.O./TPO observed that the assessee had reduced the interest rate from 5% to 2% for the earlier loan w.e.f. 01.04.2009 and 2% interest rate for the fresh loan advanced on 24.07.2009 as per the report in Form No. 3CEB. 18. During the assessment proceeding, the assessee contended that the loan was granted out of the own funds through ODA direct investments to its AE under automatic route that has been duly noted by the RBI for the purpose of financing the working capital requirements of Lukapsd.o.o which was the step down subsidiary company of the assessee as per FEMA Regulation. The assessee has not bench marked the said transaction for the reason that the transaction of lending money to its 100% subsidiary company would not come under the purview of arm's length price ('ALP' for short). The assessee further stated that 2% interest rate was more than the prevailing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iary. The ld. CIT(A) further held that the assessee had charged 2% rate of interest including foreign exchange currency which according to the ld. CIT(A) was if the investment in India was made then it would have fetched higher rate of interest, thereby restricting the rate of interest to 5%. 21. Both the assessee and the Revenue are in appeal challenging the order of the ld. CIT(A). 22. From the above factual matrix, it is observed that neither the assessee nor the lower authorities have bench marked the transaction of the assessee lending money to its AE. The ld. A.O./TPO has considered 10.68% to be a reasonable estimation on the notional interest to be levied by the assessee on the basis of the crisil bonds and made an adjustment of Rs. 1,19,60,216/- for the loan advanced by the assessee during the earlier financial year and during the year under consideration. The ld. TPO/A.O. has also without prejudice considered the safe Harbour Rules notified on 18.09.2013 for the loan transaction upto Rs. 50 crores where the interest rate to be applied has to be the base rate of State Bank of India as on 30th June which is 12.28% + 150 basis point during the year under consideration and hel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wings has also increased from Rs. 59,21,27,417/- to Rs. 78,24,58,634/- for which interest of Rs. 6,34,73,013/- was paid during the year under consideration. The assessee has made a suo moto disallowance only towards the salary of two employees who are incharge of the treasury funds pertaining to the assessee s investment. Both the lower authorities have rejected the assessee s contention that its own funds were more than the borrowed funds for which disallowance ought not to have been made and also the contention that only the investments which has yielded exempt income has to be considered while determining the average value of investment. 29. The ld. AR for the assessee has relied on the decision of the Hon'ble Jurisdictional High Court in the case of CIT vs Reliance Utilities Power Ltd [2009] 313 ITR 340 (Bom) for the proposition that when own funds are more than borrowed funds, no interest disallowance is warranted and the Special Bench decision of ITAT Delhi in the case of ACIT vs. Vireet Investment Pvt. Ltd. (in ITA No. 502/Del/2012 and CO NO.68/Del/2014 vide order dated 16.06.2017), wherein it was held that only those investments which has yielded income are to be consid ..... X X X X Extracts X X X X X X X X Extracts X X X X
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