Income Tax Appellate Tribunal - Hyderabad
Prolifics Corporation Limited ... vs Assessee on 28 September, 2016
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCHES "A" : HYDERABAD
BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER
AND
SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER
ITA.No.1646/Hyd/2014
Assessment Year 2010-2011
Prolifics Corporation Ltd.,
(previously known as Semantic vs. DCIT, Circle-3(1),
Space Technologies Ltd.,) Hyderabad.
Hyderabad - 500 032.
PAN AAGCS6868P
(Appellant) (Respondent)
For Assessee : Mr. Raghunathan S.
For Revenue : Mr. M. Jagadish Babu
Date of Hearing : 06.09.2016
Date of Pronouncement : 28.09.2016
ORDER
PER SMT. P. MADHAVI DEVI, J.M.
This is assessee's appeal for the A.Y. 2010-2011. In this appeal, the assessee has raised the following grounds of appeal :
1. "Based on the facts and circumstances of the case and in contrary to law, the Appellant respectfully craves leave to prefer an appeal against the order passed by the Deputy Commissioner of Income Tax, Circle-3(l), Hyderabad (hereinafter referred to as 'AO') in pursuance of the directions of the Dispute Resolution Panel (hereinafter referred as 'DRP'), Hyderabad dated 20 August 2014 under Section 143(3) read with section 144C(5) of the Income-tax Act, 1961 (hereinafter referred to as 'Act').
2. The assessment order passed by the Learned AO under section 143(3) read with section 144C and read with the 2 ITA.No.1646/Hyd/2014 Prolifics Corporation Ltd., Hyderabad.
order passed by the Learned Transfer Pricing Officer (hereinafter referred to as 'TPO'), under section 92CA(3) of the Income Tax Act, 1961 (hereinafter referred to as 'the Act') is bad in law and void ab-initio.
3. The Learned AO/DRP erred in upholding the transfer pricing adjustment of Rs. 2,48,32,927 as determined by the Learned TPO without appreciating the functions performed, assets employed and risk assumed by the Appellant with regard to the international transactions.
4. On the facts and circumstances of the case and in contrary to law, the Learned AO/DRP erred in confirming the TPO's stand with regard to the corporate guarantee given by the Appellant.
4.1. In not appreciating the fact that the transaction of corporate guarantee given as a shareholder is not in the nature of "international transaction" as defined in section 92B and hence is outside the purview and scope of Chapter X of the Act.
4.2. In making a transfer pricing adjustment for the corporate guarantees given by the Appellant to various third parties on behalf of its Associated Enterprise (' AE') which is continuing from prior years and was also subjected to transfer pricing adjustment in A.Y. 2009-
10. 4.3. In not appreciating the fact that as per the loan agreement between ICICI bank and the AE for which the corporate guarantee was provided by the Appellant, the Appellant was commercially restricted from charging any guarantee fee to the A.E. 4.4. In not appreciating the concept of shareholder services as contained in the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations released by the Organisation for Economic Cooperation and Development ('OECD guidelines').
4.5. In adopting corporate guarantee rate of @ 2% in an ad-
hoc manner without following one of the prescribed 3 ITA.No.1646/Hyd/2014 Prolifics Corporation Ltd., Hyderabad.
methods as provided under rule 10B of the Income-tax Rules, 1962.
5. Without prejudice to the ground nos. 4.1,4.2,4.3 4.4 and 4.5, on facts and circumstances of the case, the Hon'ble DRP/Ld.TPO ought to have considered the corporate guarantee fees @ 0.5% instead of 2% by following various judicial precedents.
6. On the facts and circumstances of the case and in contrary to law, the Learned AO/DRP erred in confirming the TPO's stand with regard to Loans & Advances given by the Appellant.
6.1. In making a transfer pricing adjustment of INR.
1,22,65,874/- (INR. 98,67,002 on account of loan + INR. 23,98,872 on account of reimbursements) by determining the interest rate @ 6 month Libor plus 4.75% on loans & advances given by the Appellant to its AE.
6.2. In not appreciating the fact that the loan & advances given by the Appellant to the AE is for the business and commercial exigency and thereby not appreciating the concept of shareholders activity as given in the OECD guidelines.
6.3. In considering the promissory note entered into between SST North America and the Appellant as internal Comparable Uncontrolled Price for arriving at the ALP of interest on loans & advances provided by the Appellant to its AE; and
7. Without prejudice to the ground nos. 6.1, 6.2 and 6.3, on the facts and circumstances of the case, the Hon'ble DRP/Ld.TPO ought to have considered only LIBOR as the maximum rate of interest on the loans & advances given by the Appellant to its AE.
8. The Appellant craves leave to add to/alter/amend/ substitute any of the above grounds of appeal, at the time, before or at the time of hearing of the appeal, so as to enable the Appellate authority to decide this appeal according to law."
4 ITA.No.1646/Hyd/2014Prolifics Corporation Ltd., Hyderabad.
2. Brief facts of the case are that the assessee company, engaged in the business of providing software development and support services, has filed its return of income for the A.Y. 2010- 2011 on 11.10.2010 admitting total income of Rs.11,41,14,552 under normal provisions and book profit of Rs.18,28,79,806 under section S.115JB of the I.T. Act, 1961. During the assessment proceedings under section 143(3) of the Act, the Assessing Officer observed that the assessee has entered into international transactions with it's A.E. Therefore, the determination of the Arms Length Price ("ALP") of the international transactions was referred to the TPO under section 92CA of the Act. The TPO, by order dated 28.08.2013, computed the ALP adjustment at Rs.2,48,32,927. The Assessing Officer accordingly, proposed draft assessment order, against which the assessee preferred its objections before the DRP. The DRP, vide orders dated 28.07.2014, rejected the objections 1 and 2 of the assessee and allowed the objections 3 and 4. In consonance with the directions of the DRP, final assessment order is passed and aggrieved by the denial of the relief to the assessee by the DRP, the assessee is in appeal before us.
3. We find that ground Nos. 1 to 3 and 8 are general in nature which need no adjudication.
4. As regards ground No.4, brief facts of the case are that during the F.Y. 2008-09, the assessee had provided bank guarantee to the extent of Rs.62,83,52,637 to it's A.E. The bank guarantee provided by the assessee to it's A.E. is absolute, irrevocable and continued guarantee. Therefore, according to the TPO, this is an international transaction and the fee of 2% 5 ITA.No.1646/Hyd/2014 Prolifics Corporation Ltd., Hyderabad.
thereon was found to be reasonable by the TPO. The DRP accepted the finding of the TPO and held the issue against the assessee. Against the same, the assessee has preferred this appeal before us.
5. The Learned Counsel for the assessee, submitted that similar issue had arisen in the assessee's own case for the earlier A.Y. 2009-2010 wherein the Tribunal has held the corporate guarantee to be an international transaction and therefore, this issue is covered against the assessee. However, he submitted that the Tribunal had directed the Assessing Officer to re-work-out the corporate guarantee fee at 0.53% as an arms length adjustment. He prayed for similar directions in the relevant assessment year also.
6. The Ld. D.R. supported the orders of the authorities below.
7. Having regard to the rival contentions and the material on record, we find that the Tribunal vide orders dated 31.12.2014 in assessee's own case for the A.Y. 2009-2010 has considered the issue at length at paras 6 to 8 which are reproduced hereunder for ready reference :
"6. Coming to the issue of guarantee fee, one of the fundamental fact patterns in the evolution of international transfer pricing concepts and rules involves an enterprise's use of a financial resource belonging to an associated enterprise. An aspect of the use of money relates to the use of a credit enhancement instrument, which typically arises in the context of guarantees of the obligations of one controlled entity by another. Although the GECD Transfer Pricing Guidelines, 2010 acknowledge the role of the use of 6 ITA.No.1646/Hyd/2014 Prolifics Corporation Ltd., Hyderabad.
money in transfer pricing matters, they do not yet provide specific guidelines regarding how such issues are to be addressed and resolved. Nonetheless, the elements that are typically important in evaluating transfer pricing issues involving the use of money within multinational enterprise groups can be outlined by drawing on general arm's length principles. Whether the mere presence of a guarantee support to an A.E. is subject to T.P. provisions has been a contentious issue in the Indian context. However, the issue of whether a charge should be imposed for provision of a guarantee is primarily a factual inquiry. The assessee argued that the corporate guarantee is an additional guarantee provided by the parent company and it does not involve any cost or risk to the shareholders. The assessee also argued that the retrospective amendment to section 928 of the ITL, by Finance Act, 2012 does not enlarge the scope of the term "International Transaction" to include the corporate guarantee in the nature provided by assessee. DR on the other hand, contended that the transaction of providing the corporate guarantee is covered by the definition of international transaction after the retrospective amendment made by Finance Act, 2012. Therefore, the transaction was subject to T.P. provisions and needed ALP determination. It was the submission that there is no service rendered by assessee to the A.E. Assessee relied on the views expressed by Australian Tax Officer placing relevant copy before us which was issued in 2008. Law has changed subsequently and provisions of Income Tax also were amended so as to include providing guarantees as service to the A.E. However guarantees involve express guarantee or implied guarantee which increases credit worthiness of AEs, if provided by main company. In case of default Guarantor has to fulfill the liability. Therefore, there is always an inherent risk in providing guarantees. That may be a reason that Finance provider insist on non charging any commission from AE as a commercial principle. This indicates that, provision of guarantee always involve risk and there is a service provided to AE in increasing is creditworthiness in obtaining loans in market, be from Financial institutions or from others. There may 7 ITA.No.1646/Hyd/2014 Prolifics Corporation Ltd., Hyderabad.
not be immediate charge on P& L account but inherent risk can not be ruled out in providing guarantees.
7. Considering the above, we are of the opinion that there is service rendered to A.E. by providing guarantees and therefore, invoking provisions of T.P. does arise on the facts of the case. The Coordinate Bench of Hyderabad Tribunal has already considered similar issues in the case of Four Soft P. Ltd., reported at 44 taxmann.com 479 (wherein one of us a Member] and held as under:
"25.2. Having considered the submissions of the parties, we are unable to accept the contention of the learned AR that corporate guarantee of the nature provided by the assessee will not come within the meaning of international transaction in terms with section 92B of the Act. It is not disputed that section 92B of the Act has been amended by the Finance Act, 2012 with the insertion of Explanation I (c) with retrospective effect from 01/04/2002. Explanation (i)(c) to section 92B, reads as under:
"capital financing, including any type of long-term or short-term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business. "
25.3. A reading of the aforesaid clause from the Explanation would make it clear that the corporate guarantee provided by the assessee comes within the scope and ambit of 'international transaction' as per the aforesaid clause. Therefore, the contention of the learned AR that the issue is covered in favour of the assessee by virtue of the order passed in assessee's own case for AY 200607 no longer holds good since the order passed by the coordinate bench is prior to the amendment made to provision of section 92B of the Act. It will be pertinent to mention here that this issue was also considered by the ITAT Mumbai Bench in case of Mahindra & Mahin.dra Vs. DCIT in ITA No. 8597/Mum/2010, 54 SOT (UR) 146. The coordinate bench of this Tribunal while considering similar argument advanced on behalf 8 ITA.No.1646/Hyd/2014 Prolifics Corporation Ltd., Hyderabad.
of the assessee by placing reliance on the decision of the Four Soft Ltd. (supra), held as under:
"15.2. After hearing the rival submissions we feel that Assessing Officer will have to follow the decision of the ITAT Hyderabad or the amended provision. of the Act in this regard. If the Finance Bill of 2012 is passed by the Parliament amending the provisions of section 92B, with effect from 1st April, 2002, he will have to ignore the decision of the ITAT Hyderabad. In case section 92B is not amended with retrospective effect, he should grant relief to the appellant."
25.4. In the aforesaid view of the matter, we agree with the TPO that ALP of the corporate guarantee has to be determined as it falls within the scope and ambit of all international transaction after the retrospective amendment to section 92B. However, it appears that the TPO has applied the rate of 3.75%, which is applicable to bank guarantee issued by the bank. As the corporate guarantee is not in the nature of bank guarantee, the rate applicable to bank guarantee provided by the bank cannot be applied to corporate guarantee which is provided by a group company. In case of Glenmark Pharmaceuticals Vs. ACIT in ITA No. 5031/Mum/2012, dated 13/11/2013, the Mumbai Bench of the Tribunal after analysing the facts in that case had held that 0.53% corporate guarantee rate in that case was appropriate. The ITAT Hyderabad Bench in case of Infotech Enterprises Ltd. in ITA No. 115/Hyd/2011 and in ITA No. 2184/Hyd/2011, dated 16/01/2014 while considering identical issue of determining ALP of corporate guarantee provided by the assessee to its AE followed the ratio laid down in case of Glenmark Pharmaceuticals Vs. ACIT (supra) and remitted the issue back to the TPO to decide the quantum of corporate guarantee rate by following the method adopted in case of Glenmark Pharmaceuticals (supra).
8. In view of this, we uphold the adjustment made on guarantee commission both on the guarantee provided to Bank directly and also on the guarantee provided to the erstwhile shareholders of JYACC for assuring the 9 ITA.No.1646/Hyd/2014 Prolifics Corporation Ltd., Hyderabad.
payment by AE. However, we direct the TPO to adopt the rate to 0.53% which is considered as arms length in other cases. With these directions, grounds are considered partly allowed."
7.1. Since the DRP has also followed its earlier order for the A.Y. 2009-2010, we uphold the finding of the DRP that the corporate guarantee is an international transaction. Thereafter, we also direct the Assessing Officer to adopt rate as 0.53% as corporate guarantee commission as done in the earlier assessment year. Thus, Ground of appeal No.4 is rejected and ground of appeal No.5 is treated as allowed for statistical purposes.
8. As regards ground No.6, brief facts of the case are that the assessee had provided an advance of Rs.9,28,37,001 on behalf of it's A.E., to SST North America Inc., due to business and commercial exigencies for the sole purpose of acquisition of JYACC Inc, New York and the same were to be recovered from SST later on cost-to-cost basis. The TPO observed that SST was a start-up company with no significant business activities. The TPO therefore, treated the same as an international transaction and charged interest on the same. The DRP confirmed the chargeability of interest thereon but however, directed the TPO to adopt LIBOR+ 4.75% basis points. For coming to this conclusion also, the DRP relied upon its order for the A.Y. 2009-2010. The Learned Counsel for the assessee submitted that this issue also was decided by the Coordinate Bench of this Tribunal for the A.Y. 2009-2010 wherein the Tribunal has directed the Assessing Officer to adopt LIBOR+ 2.75% only as against the LIBOR+ 4.75% charged by the Assessing Officer/TPO. He therefore, prayed for similar direction for the impugned A.Y. as well.
10 ITA.No.1646/Hyd/2014Prolifics Corporation Ltd., Hyderabad.
9. The Ld. D.R. was also heard.
10. Having regard to the rival contentions and the material on record, we find that the Tribunal in the A.Y. 2009- 2010 has considered this issue at para-5 which is reproduced hereunder for ready reference.
"5. We have considered the issue and perused the documents on record. The two issues to be considered are whether the interest free loans and guarantees provided by assessee to AE calls for any adjustment. As far as adjustment of interest on loans provided, assessee even though is objecting to adjustment per se but main thrust is on rate on which the adjustments were made. There is no dispute to the fact that providing of loans to AE is an International Transaction as per the TP provisions. Therefore, the commercial considerations advanced by assessee can not be considered while examining the ALP of the transactions. We are of the opinion that the transaction of providing loans to subsidiary whether a direct loan or providing credit for initial expenditure, which is stated to be reimbursable, do call for adjustment. Therefore, in principle we approve the adjustment made on these transactions. As far as the rate of interest is concerned, the A.O./TPO in our opinion, has considered the subsequent collection of interest in A.Y. 2012-2013 at LIBOR + 4.75 basis points as an internal CUP. This cannot be accepted as rate of interest in each year is a dynamic figure which varies according to the period, demand and supply. The rate at which assessee charged interest from the sister concern in A.Y. 20122013 cannot be accepted as internal CUP in AY. 2009-2010. A.O. has not only went beyond the rules which does not provide for later years information to be adopted, but also ignored assessee's objections why a higher rate was charged in those years. Since, AE. borrowed funds from ICICI Bank, U.K. @ LIBOR + 2.75%, we are of the opinion that, that rate should be considered as ALP of interest and AO. is directed to workout the interest at that rate on the loan provided to SSTL north America. Assessee is also objecting to the 11 ITA.No.1646/Hyd/2014 Prolifics Corporation Ltd., Hyderabad.
adjustment on loan given to Arsin Corporation, another A.E. of Assessee. Here, assessee has charged interest at LIBOR + 1.50 BPS. Since, we have approved LIBOR + 2.75 points on the loan given to SST, North America (A.E.) we direct the Assessing Officer to re-workout the interest on the loan provided to this A.E. at LIBOR + 2.75% only as against LIBOR + 4.75% charged by A.O./TPO. With this direction, the grounds raised by assessee in ground Nos. 2 and 3 are considered as allowed partly."
10.1. Respectfully following the same, we direct the Assessing Officer to re-workout the interest on the loan brought by the assessee to it's a.E. at LIBOR+ 2.75% as against LIBOR+ 4.75% charged by the Assessing Officer/TPO. Grounds of appeal No.6 is accordingly rejected and grounds of appeal No.7 is partly allowed.
11. In the result, assessee's appeal is partly allowed.
Order pronounced in the open Court on 28th September, 2016.
Sd/- Sd/- (S. RIFAUR RAHMAN) (SMT. P. MADHAVI DEVI) ACOUNTANT MEMBER JUDICIAL MEMBER Hyderabad, Dated 28th September, 2016 VBP/- Copy to :
1. Prolifics Corporation Limited (previously known as Semantics Space Technologies Limited), Plot No.1, Survey # 14, 5th Floor, DHLFVC Silicon Towers, Madhapur Road, Kondapur, Hyderabad - 500 032.
2. The DCIT, Circle-3(1), Hyderabad.
3. The Dispute Resolution Panel-1, Hyderabad.
4. The DCIT (Transfer Pricing)-II, Hyderabad.
5. The Director of Income Tax (IK.T. & T.P.) Hyderabad.
6. The Commissioner of Incoem Tax-III, Hyderabad.
7. D.R. ITAT "A" Bench, Hyderabad.
8. Guard File.