Income Tax Appellate Tribunal - Delhi
Jubilant Energy Pvt. Ltd. (Now Known As ... vs Acit, Circle-1, Noida on 15 January, 2019
IN THE INCOME TAX APPELLATE TRIBUNAL
(DELHI BENCH 'I-1' : NEW DELHI)
BEFORE HON'BLE VICE PRESIDENT, SHRI G.D. AGRAWAL
and
SHRI KULDIP SINGH, JUDICIAL MEMBER
ITA No.7602/Del./2017
(ASSESSMENT YEAR : 2013--14)
M/s. JE Energy Venture Private Ltd., vs. ACIT, Circle 1,
(formerly known as Jubilant Energy Pvt. Ltd.) Noida.
Plot No.1A, Institutional Area,
Sector - 16A,
Noida - 201 301 (Uttar Pradesh)
(PAN : AAACE0653L)
(APPELLANT) (RESPONDENT)
ASSESSEE BY : Shri K.M. Gupta, Advocate
REVENUE BY : Shri Sanjay I. Bara, CIT DR
Date of Hearing : 19.11.2018
Date of Order : 15.01.2019
ORDER
PER KULDIP SINGH, JUDICIAL MEMBER :
The Appellant, M/s. JE Energy Venture Private Limited (hereinafter referred to as 'the taxpayer') by filing the present appeal sought to set aside the impugned order dated 24.10.2017 passed by the AO in consonance with the orders passed by the ld. DRP/TPO under section 143 (3) read with section 144C of the Income-tax Act, 1961 (for short 'the Act') qua the assessment year 2013-14 on the grounds inter alia that :-
2 ITA No.7602/Del/2017
"1. On the facts and circumstances of the case and in law, the Learned Assessing Officer (Ld. AO)/ Learned Transfer Pricing Officer (Ld. TPO') [in pursuance to the directions of the Hon'ble Dispute Resolution Panel ('Ld. DRP')], erred in not accepting the returned income of the appellant amounting to Rs.16,52,19,000/- and enhancing the same by Rs.20,57,19,110/-.
2. On the facts and circumstances of the case and in law, the Ld. AO/ Hon'ble DRP grossly erred in confirming the addition of Rs.20,09,07,000/- to the income of the Appellant proposed by the Ld. TPO by holding that provision of corporate guarantee to its Associated Enterprise ('AE') do not satisfy the arm's length principle envisaged under the Income Tax Act, 1961 C the Act') and in doing so, the Ld. AO/ Hon'ble DRP grossly erred in upholding the Ld. TPO's action of:
2.1. considering provision of corporate guarantee as international transaction u/s 92B of the Act;
2.2. incorrectly holding that the Appellant has undertaken risk on behalf of its AEs and there is an inherent cost in giving corporate guarantees for which the Appellant should have charged a consideration;
2.3. disregarding the fact that the provision of corporate guarantee to the AE was in the nature of shareholder service;
2.4. disregarding the fact that III the absence of the corporate guarantee provided, the Appellant being the holding company would have provided the funds to the subsidiary by increasing the share capital, and thus the guarantee provided should be treated as quasi- equity in nature for which arm's length compensation is not required;
2.5. disregarding the detailed and proper comparability analysis submitted by the Appellant following the 'interest saved' approach;
3 ITA No.7602/Del/20172.6. imputing the corporate guarantee commission of 1.50% based on the average of guarantee commission rates of various banks without appreciating the fact that the same did not constitute a valid Comparable Uncontrolled Price ('CUP');
2.7. disregarding the Appellant's contention that bank guarantee cannot be considered comparable to corporate guarantee and adjustments are required to nullify the differences between the two; and 2.8. disregarding the judicial precedents submitted by the Appellant on corporate guarantee.
3. Notwithstanding and without prejudice to the above grounds, the Ld. TPO erred in holding that there were no proper directions from Hon'ble DRP and in turn also erred by not following the Hon'ble DRP's directions on restricting the adjustment basis arm's length corporate guarantee commission of 1.50%, whereby violating the provisions of section 144C of the Act.
4. On the facts and circumstances of the case & in law, the Ld. AO/ Hon'ble DRP grossly erred in confirming addition of Rs.48,12,110/- to the income of the Appellant pertaining to payment of interest on inter-corporate deposit/loan from its related party does not satisfy the arm's length principle envisaged under the Act and in doing so, the Ld. AO/ Hon'ble DRP grossly erred in upholding the Ld. TPO's action of:
4.1. disregarding the Arm's Length Price as determined by the Appellant in the Transfer Pricing documentation maintained by it in terms of Section 92D of the Act read with Rule 10D of the Income Tax Rules, 1962;
4.2. incorrectly holding that the Appellant did not have a similar transaction with third parties in India and not considering the internal CUP applied by the Appellant;
4.3. comparing the return earned by the Appellant with return earned by investing in corporate 4 ITA No.7602/Del/2017 bonds and applying the prime lending rate of State Bank of India , thereby resulting in an erroneous application of CUP method;
4.4. erred in computing the adjustment amount by reducing the amount of interest expenditure earlier disallowed under section 14A. In this regard, the Ld. TPO erred in disregarding the revised return of income: and 4.5. erroneously computing the adjustment amount under Section 92CA of the Act.
5. The Ld. AO has grossly erred in charging interest under section 234B and 234C of the Act;
6. The Ld. AO has grossly erred in initiating penalty under section 271(1)(c) of the Act mechanically and without recording any satisfaction for its initiation."
2. Briefly stated the facts necessary for adjudication of the controversy at hand are : M/s. JE Energy Venture Private Limited, the taxpayer is a strategic "venture business" segment of Jubilant Bhartia Group. The taxpayer through its alliances with international companies provides business, marketing and technical support related to oil and gas services, power and infrastructure, financial services, trading, homeland & mega city security systems and aviation related services (sales, maintenance of aircrafts and helicopters). The taxpayer is the ultimate holding company having 100% share of Jubilant Energy Holdings BV (JEHBV). JEHBV holds 84.02% shares of Jubilant Energy NV (JENV) which indirectly holds 100% share in Indian subsidiaries.5 ITA No.7602/Del/2017
3. During the year under assessment, the taxpayer entered into international and Specific Domestic Transactions (SDTs) with its AE as under :-
No. Nature of transaction Method Value of
transaction
(in Rs.)
1 Receipt of guarantee 27,000,000
commission income Other method (As
2 Investment in cumulative prescribed by Rule 615,986,250
preference shares 10AB)
3 Redemption of cumulative 655,560,000
preference shares
4 Payment of interest on CUP 25,787,268
inter corporate loan/
deposit
4. The taxpayer in order to benchmark its international transactions qua provisions of corporate guarantee applied other method as Most Appropriate Method (MAM) and applied Comparable Uncontrolled Price (CUP) method to benchmark its SDTs of payment of interest on inter-corporate loan. The taxpayer by treating its transaction qua providing service of corporate guarantee as its shareholder activity, found the same at Arm's Length Price (ALP). The taxpayer found its transaction qua payment of interest (SDT) at ALP on the ground that the interest rate paid by the taxpayer to its domestic related party is less than the interest rate paid to an unrelated lender.6 ITA No.7602/Del/2017
5. However, the ld. TPO in order to benchmark its international transaction qua providing corporate guarantee applied CUP as the MAM by calling data from various banks u/s 133 (6) of the Act and enhanced the income of the taxpayer by Rs.40,84,82,000/- on account of ALP. The ld. TPO also rejected the internal CUP applied by the taxpayer to benchmark its SDT and compared the return of the taxpayer with prime lending rate of State Bank of India and thereby enhanced the income of the taxpayer by Rs.84,29,350/- on account of ALP.
6. The taxpayer carried the matter by way of filing objections before the ld. DRP who has given part relief by issuing directions to the TPO to revise the adjustment of Rs.40,84,82,000/- and Rs.84,29,350/- on account of corporate guarantee fee and with respect to interest to Rs.20,09,07,000/- and Rs.48,12,110/-
respectively. Feeling aggrieved, the taxpayer has come up before the Tribunal by way of filing the present appeal.
7. We have heard the ld. Authorized Representatives of the parties to the appeal, gone through the documents relied upon and orders passed by the revenue authorities below in the light of the facts and circumstances of the case.
7 ITA No.7602/Del/2017
8. By moving a separate application, assessee company sought to raise additional grounds on the ground that the same go to the root of the case which are as under :-
Ground No.7 : 7.1 That in the facts and circumstances of the case and in law, the Ld. Assessing Officer ('AO') / Transfer Pricing Officer ('TPO') has erred in disregarding the exclusion of disallowance u/s 14A of the Act made by the Appellant through its original return of income which is subsequently withdrawn by way of letter dated October 12, 2017 in accordance with judicial precedents and facts of the case.
7.2. Without prejudice, that on the facts and circumstances of the case and in law, disallowance should not be made on such investments where no exempt income has been earned by the Appellant.
7.3. Without prejudice, that on the facts and circumstances of the case and in law, disallowance should be restricted to the exempt income earned by the Appellant during the year."
9. Keeping in view the fact that the additional ground sought to be raised by the assessee company, though not raised before the ld. CIT (A), is necessary for complete adjudication of the controversy at hand, the application for additional grounds is hereby allowed.
10. Undisputedly, this is first year of dispute for enhancing income of the taxpayer on account of ALP. It is also not in dispute that the taxpayer is a parent company. It is also not in dispute that the ld. TPO has applied the bank guarantee rate in order to decide the issue as to transaction of provision of corporate guarantee by treating as a lending business. It is also not in dispute that the ld. DRP vide order dated December 5, 2017 passed on the basis of 8 ITA No.7602/Del/2017 rectification application moved by the taxpayer reduced the corporate guarantee commission rate from 4.60% to 4.1% (i.e. 2.60% + 150bps).
11. Undisputedly, in case of international transactions qua provision of corporate guarantee, the bank has asked for guarantee by the parent company i.e. taxpayer. It is also not in dispute that for payment of interest, stated to be SDTs, the interest rate paid by the taxpayer to its domestic related party is less than the interest rate paid to an unrelated lender. Declining the contentions raised by the taxpayer, the TPO in order to apply CUP as the MAM collected data from various banks u/s 133 (6) of the Act which is as under :-
S.No. Name of Bank Bank
Guarantee
rates
1. Syndicate Bank 2.50%
2. SBI 1.30%
3. Punjab & Sind Bank 3%
4. Indusind Bank 2%
5. South Indian Bank 3.40%
6. Federal Bank 3%
7. PNB 3%
8. Karur Vysya Bank 3%
Average 2.65%
12. So, consequently, the ld. TPO recomputed the adjustment on account of corporate guarantee fee in compliance to the DRP's directions as under :-
9 ITA No.7602/Del/2017
S.No. Particulars Amount (in
Rs.)
1. Arm's Length Price 227,907,000
2. Guarantee Commission received from 27,000,000
AE
Adjustment u/s 92CA 200,907,000
13. Similarly, in compliance to the directions issued by the ld. DRP, the ld. TPO recomputed the adjustment by taking into consideration suo motu disallowance made u/s 14A read with Rule 8D qua SDT payment of interest as under :-
S. Nature of ALP Amount Revised ALP Adjustment No. specified determined already ALP determined u/s 92CA domestic by taxpayer disallowed determined by the TPO (INR) transaction (INR) by the by taxpayer (INR) assessee (INR) using CUP of SBI rates 1 Interest Paid 7.485125 1.324146 6.160979 6.642190 0.481211 Total 0.481211
14. In the backdrop of the aforesaid facts and circumstances of the case and the arguments addressed by ld. ARs of the parties to the appeal, ground-wise issues in controversies are determined as under.
GROUND NO.1
15. Ground No.1 is general in nature and do not require any adjudication.
10 ITA No.7602/Del/2017GROUNDS NO.2 TO 2.8 & 3
16. The taxpayer is the ultimate holding company, holding 100% shares in Jubilant Energy Holdings BV (JEHBV) and JEHBV holds 78% shares in Jubilant Energy NV (JENV) which indirectly holds 100% shares in Indian subsidiary. JENV entered into 2 loan agreements in October 2007 and August 2011 with Exim Bank. For the purpose of obtaining aforesaid loans, the taxpayer provided a corporate guarantee on behalf of JENV and as per loan agreement, the liability of the taxpayer in terms of guarantees was not to exceed the amount realized from all investments of the taxpayer in its subsidiary JEHBV and the assets and investments held by its subsidiary JEHBV or through its step down subsidiaries.
17. The ld. AR for the taxpayer challenging the impugned order contended that the primary guarantee provided by the taxpayer to JENV is in the nature of "downstream guarantee" with the guarantees provided by the parent company for the obligation of its subsidiary; that there is no economic and commercial benefit to the lender as well as borrowers; that the purpose of loan was investment in Indian subsidiaries; that the loan has been repaid by the JENV in the subsequent years; that the guarantees given by the taxpayer as the shareholder activities; that the provision of guarantee is quasi-equity transaction and that the provision of 11 ITA No.7602/Del/2017 guarantee is not covered in the definition of international transaction.
18. However, on the other hand, ld. DR for the Revenue to repel the arguments addressed by the ld. AR for the taxpayer relied upon the decision rendered by the TPO/DRP and the decision rendered by the Tribunal in case of M/s. Tecnimont ICB Pvt. Ltd. vs. DCIT ITA No.6394/Mum/2012 AY 2008-09).
19. It is the case of the taxpayer that since the taxpayer being a parent company provided corporate guarantee, it is a shareholder activities and in such cases, CUP cannot be applied and relied upon the decision rendered by the coordinate Bench of the Tribunal in Glenmark Pharmaceuticals Ltd. vs. Addl.CIT (ITA No.5031/M/2012 AY 2008-09).
20. The taxpayer has furnished the details of the loans taken by its AE for which it had provided corporate guarantee, which is extracted for ready perusal as under :-
Details of Loans Loan 1 Loan 2
Loan receipt date October 10, 2008 August 17, 2011
Sanctioned amount 50,000,000 50,000,000
(USD)
Principal repayment as 50,000,000 -
on date
Date of repayment 10-Jan-14 NA
Interest Rate 6 Month's LIBOR 6 Month's LIBOR
plus 5.5% to 6 plus 5.5% to 6
Month's LIBOR Month's LIBOR
plus 8.5% plus 6%
12 ITA No.7602/Del/2017
21. The taxpayer also stated to have applied the interest saved approach and reached the conclusion that there has been no interest saving on the loan availed of by its AE and as such, no guarantee fees payable by JENV to the taxpayer and tabulated the total interest saving in para 2.3, available at page 392 of the paper book, which is extracted as under :-
Particulars Rate (bps) The Libor + rate at which JENV obtained 550 funds with corporate guarantee of JEPL (A) External comparable average interest rate of 400 or 475 margin over Libor (B) Interest saved (B-A) 0
22. Identical issue has already been decided in favour of the taxpayer wherein the TPO had also applied CUP method for benchmarking the transactions relating to corporate guarantee, by the coordinate Bench of the Tribunal in Glenmark Pharmaceuticals Ltd. (supra) by returning following findings :-
"23. It is in this background, we take out some time to distinguish these types of Guarantees. Normally, the Bank Guarantee or Corporate Guarantee is given by a Bank or the Company as the case may be to the financing Bank for acknowledging obligation to the Terms of Contract. Bank Guarantee is provided by the Company's Banker on behalf of the Company for a certain sum of money to the Customer. If all the terms of the Contract is not fulfilled by the Company then the Customer can claim that amount from the Bank and the Bank is obligated to pay and recover from the Company. Bank Guarantee is a foolproof instrument of security for the Customer and failure to honor the guarantee is treated as deficiency of services of the Bank under the Banking Laws. On the other hand, the CG - Corporate Guarantee is provided by the Company either to the Customer for the same or to the Bank for giving loans to the 13 ITA No.7602/Del/2017 sister concerns/AEs of the said company; but it is not foolproof. Failure to honor the guarantee may attract contract laws and it is however a legally valid document and the Customer/Bank can sue the Company in Court if it does not pay up. In the Corporate Guaranty, a guarantee of payment is made by a corporation on behalf of another business entity. The guarantee is provided in consideration of a vendor providing credit to a business on whose behalf the guarantee is made. In the Bank guaranty, a surety, surety bond or guaranty, in finance, is a promise by one party to assume responsibility for the debt obligation of a borrower if that borrower defaults. The person or company providing this promise is also known as a "surety" or as a "guarantor". Under banking regulation, the case of dishonored guaranty is considered as service deficiency. In fixing the charges, the type of Guarantee, track record of customers and their financial position are the guiding factors in deciding the Guarantee limit, security and margin are often considered on case to case basis. Therefore, there is conceptual differences in these two types of the guarantees. Hence, TPO's are not justified in mechanically picking up the BG rates as the external/internal CUPs, as the case may be. Yes, they may turn out to be appropriate good CUPs if they are properly bench marked after making due adjustments in accordance with the provisions of the relevant rules 10B (relating to CUP method) of the Income tax Rules, 1962. Since the TPOs have not been benching the naked quotes of the BG rates with proper and sustainable adjustments, Tribunal is constantly disapproving the said quotes. The case of Tecnimont ICB (P.) Ltd. (supra) is an aberration and the background facts this case are distinguishable. Therefore, unless the 'naked quotes' of the bank guarantee rates as given in the websites for public, are adjusted to various controlling factor narrated above, these rates are no good CUPs. AO/TPO/CIT(A) have not provided adjustments to such factors in benchmarking the impugned international transactions. Discussion on the Tribunal Orders on the Corporate Guarantee Rate- CGR:
A. Asia Paints Ltd - Order of the Tribunal: We shall first take up the facts relating to the case of CGR and the decision in the case (ITA No. 408 & 1937/M/2010). In this case, Asia Paints Ltd. (supra) gave a corporate guarantee to HSBC Bank, Singapore and Citibank, Singapore in connection with loans granted by the Bank to its AE (Berger International Ltd). 0.35% and nil are the guarantee rate charged by the HSBC and Citibank of India in year 2004-2005. Thus, it is the case of charge of CG by the Indian branches of the bank on the assessee for providing guarantee to the foreign banks. On these facts, the TPO rejected the said rates and picked the 'naked quotes' at 3% available in the website of ICICI Bank. TPO also considered the guarantee commission rates of (i) Allahabad Bank, (ii) HSBC Bank (iii) ICICI and (iv) Dutch State/FMO - Robo India Finance Ltd and rejected the same by 14 ITA No.7602/Del/2017 holding that the same is unsustainable. CIT(A) reasoned that bank commission rate never higher them the interest rates charged on the loans. He, however, deleted the addition in this case. The same confirmed by the Tribunal vide its order dated 31.10.2011 and the relevant portion from the said order of the Tribunal (para 38) reads as under:
"38.... Therefore, in view of the above facts of the 'naked quote' available in the website of the Allahabad Bank, HSBC Bank and ICICI Bank, where even the report itself indicate that the rates varied from 0.15% to 3%. In view of the facts of the case,.... there is no need to make any adjustment in the transfer pricing ... and the order of the CIT(A) required to be confirmed. Accordingly, the ground raised by the Revenue is rejected."
B. Reliance Industries Ltd. (ITA No.4475/M/2007 & Others) (AYs2003-04 to 2005-06)).
Benchmarking of CGC rate is the issue in this case too for the AY 2003-2004, Assessee provided a corporate guarantee to Bank of America in connection with loans of Euro 80 Million taken by its AE (i.e., Trevira GmbH). Parent company did not charge any guarantee commission to Trevira GmbH. Here also, Ld TPO did not accepted the same and again relied on the transactions with Robo India Finance Pvt Ltd, where 2.5% of Grantee commission was charged by the Dutch State FMO. During the assessment it, assessee cited BGR of ICICI with guarantee commission rate of 0.25%. However, for TPO, 2.5% of the guarantee commission of Euro 80 Million is at Arm's Length Price and made addition of Rs. 11.27 crs in this case. Assessee took an argument that it is the responsibility of the parent company to provide guarantee to its subsidiaries / AEs, therefore, in principle, no commission is chargeable. In this case, assessee also relied on the guarantee commission rate of Bank of India, which varies 0.25% to 0.6%. The guarantee commission should never exceed 0.25% in any case and relied on the bank guarantee rates of HSBC Bank, HDFC Bank, ICICI Bank, ABN AMRO Bank, Standard Chartered Bank, Bank of America etc. At the end, CIT(A) dismissed the TPO's guarantee commission rate of 2.% and benchmarked the international transactions applying the rate of 0.38% instead of 2.5%. The Tribunal confirmed the same and paras 52.10 to 52.12 of the order of the Tribunal dated 13.9.2013 are relevant in this regard. Relevant paras 52.10 to 52.12 of the order of the Tribunal read as under:
"52.10.... However, It is a fact that while applying the external comparables, the TPO has not brought out anything on record that under which terms and conditions and circumstances the said public company has charged 2.5% rate of guarantee commission for providing guarantee on behalf of the Finance Company. The charging of a guarantee commission depends upon transactions to 15 ITA No.7602/Del/2017 transaction and mutual understanding between the parties. There may by a case where bank may not charge any guarantee commission, depending upon its evaluation of relationship and with a guarantee commission, depending upon its evaluation of relationship with a particular client. Therefore, universal application of rate of 2.5% for guarantee commission cannot be considered a market rate as it largely depends upon the terms and conditions on which loan has been given, risk undertaken, relationship between bank and the client, economic and business interest etc. In the case, before us when the assessee has itself paid guarantee commission at the rate varying from 0.25% to 0.6% per annum to third party and considering the fact that the assessee has stated that it has not incurred any cost for providing guarantee to the bank for the loan given to its subsidiary, we are of the considered view that applying the rate of 2.5% by TPO based on external comparables is not justifiable and cannot be confirmed. 52.11.
52.12. We are of the considered view that the Ld CIT(A) on the facts and circumstances of the case has rightly taken average rate on which the assessee has paid guarantee commission to third party, which comes to 0.38%. Hence, we uphold the order of the CIT(A) to charge guarantee commission at the rate of 0.38% being ALP for guarantee given by the assessee to Bank of America on behalf of its AE Trevira GmbH. In view of the above, we reject ground no.9 of the appeal taken by assessee as well as ground no. 6 of the appeal taken by the department."
C. Everest Kanto Cylinder Ltd. (ITA No.542/M/2012)(AY 2007-08) This is the case where the assessee provided the corporate guarantees to the Bank of Bahrain for obtaining the working capital facilities to its sister concerns up to USD 5 million and also for itting capital loans. Assessee charged 0.5% as guarantee commission from its subsidiary. Holding the said CGC rate is not at ALP, Ld TPO picked up BGCR of Allahabad Bank, Dutch State FMO -Robo India Finance (P.) Ltd. (supra) and benchmarked the transactions @ 3% against the assessee's guarantee rate of 0.5%. CIT(A) held that the guarantee rate charged by the assessee have to be seen from the perspective of the international transactions and held that the BGCR of 3% is good comparable i.e. 'Incomparable Uncontrolled Price' - IUP. Finally, relying on the decision of Mumbai Bench, ITAT in the case of Asia Paints Ltd. (supra) and other decisions of the Tribunal held that the guarantee commission of 0.5% is at Arm's Length. The decision of the Tribunal is given vide para 21 of its order dated, 23.11.2012 and the relevant portion from the said para reads as under;
"21.... Thus, on these facts, we do not find any reason to uphold any kind of upward adjustment in ALP in relation to charging of 16 ITA No.7602/Del/2017 guarantee commission. Hence, the addition of Rs, 28,50,353/- on account of TP adjustment on guarantee commission is hereby deleted and the order of the CIT(A) is set aside...."
From the above orders of the Tribunal, it is adequately clear that the "naked quotes" of the bank guarantee commission rates kept in the website of the banks should not be applied in the TP studies without adjustments to various factors of the transactions. These factors may be risk related ones, time related guaranteed amount, financial strength of the AEs, background of the customers and the relationship of the AEs with the parental companies etc. The additions made are legally unsustainable, if the additions are made solely based on the website information of the banks, In principle, bank guarantees (in short - BG) are different from that of the corporate guarantee. Though untested in this case, in our prima facie opinion, a Bank Guarantee comparable may not clear the test of FAR analysis, which applies equally and relevant for the CUP method of ALP studies. Reliance is placed in the case of Arvind Mills Ltd. v. Asstt. CIT [2011] 11 taxmann.com 67 (Ahd.). The commercial considerations are paramount in fixing the charges when providing guarantees to its customers. On the other hand, a corporate guarantee operates not for business considerations but to provide adequate safeguards for the financial health of its sister concerns / AEs, Guarantor, like the present assessee, sometimes duty-bound to provide guarantee to the loans given by the financial institutions to the sister concerns abroad, Bank rates are mostly customer-specific and they vary downward., if cash deposits equallent of loan are given to the Bank. Thus, comparing the bank guarantee commission transactions with the that of the corporate bank guarantee transactions is prima facie incorrect so long as the FAR analysis is applied successfully and the CUP are appropriately adjusted in accordance with the Rule 10B of the IT Rules, 1962. Therefore, applying the 'quote' available on the website of the banks without making adjustments, duly necessary, makes ALP studies erroneous.
24. Summary: Therefore, there is no dispute on the use of CUP method as most appropriate method to these GC transactions. Controllable Uncontrolled Price - CUP method is applied when a price is charged for a product or service and service is the case here. Further, academically, the CUP can be internal or external. Internal CUP, being the comparability of the similar transaction between the assessee and the unrelated party, are admittedly not available to either parties of the dispute. Therefore, the exploration is for external CUP Revenue authorities have roped in four, or such CUPs and mostly Banks with bank guarantee transaction prices/rates. As detailed above the GC transaction rates available on the websites of Bank of India, Allahabad Bank, HSBC, EXIM BANK OF USA and the Rabo India Finance (P.) Ltd, are held by the Tribunal as not 17 ITA No.7602/Del/2017 good comparables on comparable facts. On this facts of the present case too, we are of the opinion, they are not appropriate external CUPs. The 'external CUP' by definition is a price charged in comparable Uncontrolled price between third parties when compared to the price of a controlled transaction with the AE. None of the CUPs used by the TPO falls within the said definition of external CUP. Thus, there are no 'internal CUP' on one side and the CUPs used by the TPO/CIT(A) are also outside the scope of the definition of the 'external CUP'. Further, as stated earlier, we find that the 'bank guarantee' rates are practically different from that of the 'corporate guarantee'
25. Further, we find there are various GC rates in existence. While there is GC rate of 0.38% which is approved by the Tribunal in the case of Reliance Industries Ltd. (supra) there is GC rate of 0.5% as approved by the Tribunal in the case of Everest Kanto Cylinders Ltd. (supra) and Asstt. CIT v. Nimbus Communications Ltd. v. [2013] 34 taxmann.com 298/145 ITD 502 (Mum.) there is GC rate of 0.25% as approved by the Tribunal in the case of the Asian Paints Ltd. (supra). The GC rate of 3% as announced by the Bank for the Bank guarantee Transactions stand dismissed by Tribunal in all the above cases. Reasons for such rejection include: these are the 'naked quotes'; and (ii) the said 3% is always subjected to negotiations between the Bank and its customer; (iii) TPO has not provided adjustments at all before benchmarking the impugned transactions at 3%, etc. In any case, it is our opinion that the Bank Guarantee Commission Prices cannot be used as External CUPs to benchmark the Corporate Guarantee Commission Prices. Further, we find that, unlike in other cases of NIL corporate guarantee commission, the present assessee has charged the GC Rate of 0.53% and 1.47% from its AEs. Therefore, in our opinion, these rates are competent given the facts of the present case qua the rates discussed and approved by the Tribunal in adjudicating the other cases relating to the Guarantee commission transactions benchmarked using the CUP method. Therefore, the TPO's comparables are IUPs' i.e. Incomparable Uncontrolled Prices. Therefore, .we are of the opinion, the GC rates of 0.53% and 1.47% benchmarked by the assessee are fair and reasonable and they should be accepted without any modification. Therefore', we dismiss the TPO's CUP and order deletion of the additions made by the AO on account of Transfer pricing, provisions. In the result, the order of the CIT(A)/TPO/AO on the TP adjustments is set aside. Thus, the grounds 1 to 5 are allowed as above."
23. When we examine the facts and circumstances of this case in the light of the ratio of the order passed by the coordinate Bench of the Tribunal in Glenmark Pharmaceuticals Ltd. (supra), we find 18 ITA No.7602/Del/2017 that in the instant case, TPO has used 8 banks for applying CUP, charging bank guarantee transaction prices/rates specifically on bank guarantee not a corporate guarantee as in the instant case, which is certainly not a good comparable on the comparable facts. So, we are of the considered view that adoption of 8 banks' bank guarantee rates in order to benchmark the international transaction qua corporate guarantee are not appropriate external CUPs. So, the CUPs used by the TPO do not fall in the definition of external CUP. Moreover, 'bank guarantee rates' cannot be compared vis-à- vis with corporate guarantee rates by any standard. So, the contentions raised by the taxpayer that the rate charged in the case of bank guarantee and corporate guarantee cannot be compared under Rule 10B(2) of the Income-tax Rules, 1962 unless a reasonable adjustment for material differences is made to the general quotes of bank guarantee in respect of the factors inter alia that (a) risk profiles of the respondents for the guarantee; (b) financial position of the loan applicants; (c) terms of the guarantee;
(d) securities involved; (e) quantum of guaranteed amount; (f) period of guarantee; and (g) past history of customers, is sustainable in view of the decisions rendered by the Tribunal cited as under :-
19 ITA No.7602/Del/2017
(i) M/s. Glenmark Pharmaceuticals Limited [TS-61-HC-
2017(BOM)-TP);
(ii) Hon'ble Mumbai Tax Tribunal in the case of Glenmark Pharmaceuticals Limited vs. Addl. CIT (ITA No.5031/M/2012);
(iii) Everest Kanto Cylinder Limited vs. DCIT (TS-714-ITAT-2012 (Mum)-TP)
(iv) Asia Paints Ltd. (ITA No.408 & 1937/M/2010)
(v) Noble Resources & Trading India Pvt. Ltd. [TS-73-ITAT-
2014 (Del)-TP]
(vi) M/s. Britannia Industries Ltd. vs. DCIT [ITA No.745/Kol/2017)
24. So, following the decision rendered by the coordinate Bench of the Tribunal, we are of the considered view that in order to benchmark the international transactions qua corporate guarantee appropriate comparable data needs to be adopted and benchmarking made in this case on the basis of bank quotes is not sustainable, hence, the TP adjustment made by the TPO/DRP is not sustainable in the eyes of law. We are also not agreed with the contentions raised by the ld. AR for the taxpayer that providing corporate guarantee in case of its loan to its AE is not an international transaction and this issue has been rightly decided by the JTPO/DRP by treating the provision of corporate guarantee as international transaction.
25. However, at the same time, we are not inclined to agree with the contentions raised by the taxpayer that since no benefit has 20 ITA No.7602/Del/2017 been passed on to its AE, there is no need to compensate the taxpayer because in a business transaction there is no concept of free lunch. Because without providing corporate guarantee by the taxpayer no loan would have been given to the AE; that the taxpayer has taken the risk on behalf of its AE which would not have been taken by any third party without consideration and that keeping in view the high risk involved in giving loan by any lender to the AE, the cost needs to be charged from the AE and as such, the commission received by the taxpayer for providing corporate guarantee has to be at arm's length. However, the amount received by the taxpayer on account of commission charged for providing corporate guarantee to its AE needs to be at arm's length price in view of the ratio of the order passed by the coordinate Bench of the Tribunal in Glenmark Pharmaceuticals Ltd. (supra) as discussed in Para 21 of this order. So, the TPO is directed to benchmark the international transaction providing corporate guarantee to its AE by providing an opportunity of being heard to the taxpayer. So, grounds no.2 to 2.8 & 3 are determined in favour of the taxpayer for statistical purposes.
GROUNDS NO.4 TO 4.5
26. The ld. TPO has made transfer pricing adjustment of Rs.84,29,350/- qua SDT of payment of interest. Undisputedly, the 21 ITA No.7602/Del/2017 taxpayer has borrowed 2 different loans from third party bank i.e. IL&FS and IFIN at the interest rate of 15.13% per annum and 14.50% per annum. It is also not in dispute that during the year under assessment, the taxpayer has paid interest of Rs.2,57,87,268/- to TPPL out of which an amount of Rs.1,32,41,460/- has been suo motu disallowed by the taxpayer under section 14A read with Rule 8D of the Act/Rules.
27. The ld. TPO made the transfer pricing adjustment on account of payment of interest of deposit used external CUP i.e. SBI PLR rate by holding that this loan was available to the taxpayer @ 9.86% per annum.
28. However, it is contended by ld. AR for the taxpayer that since internal CUP is available one loan transaction requires to be compared with another loan transaction only by analyzing borrower's credit rating, the currency of loan, the country risk involved, the tenor, the maturity term of the loan, in the light of the loan agreements.
29. It is also the case of the taxpayer that since the rate of interest paid by the taxpayer to its related party is lower than the rate of interest paid by it to the third party lender the transaction of payment of interest by the taxpayer to its related party was at arm's length.
22 ITA No.7602/Del/2017
30. We are inclined to agree with the aforesaid contentions raised by the ld. AR for the taxpayer inter alia that when internal CUP was available and the complete data has been supplied for comparable study to the TPO/DRP, the same was required to be applied by providing an opportunity of being heard to the taxpayer. But the TPO has not preferred to make any comment on the rejection of plea of applying internal CUP raised by the taxpayer. Consequently, transfer pricing made by the TPO in respect of SDT payment of interest is not sustainable. When opportunity of being heard is not provided to the taxpayer that as to why internal CUP is not applied by the TPO, the issue is required to be set aside to the TPO to decide afresh after providing an opportunity of being heard to the taxpayer. Grounds No.4 to 4.5 are allowed for statistical purposes.
GROUND NO.5
31. Ground No.5 qua levy of interest u/s 234B and 234C of the Act need no specific finding being consequential in nature. GROUND NO.6
32. Ground No.6 being premature needs no specific findings ADDITIONAL GROUND (7, 7.1, 7.2 & 7.3)
33. Undisputedly, the taxpayer has suo motu disallowed the amount of Rs.21 crores u/s 14A read with Rule 8D which is more 23 ITA No.7602/Del/2017 than the dividend income earned during the year under assessment which fact has been duly disclosed in the JTP study and has also brought to the notice of the TPO vide letter, available at page 398 of the paper book. But the ld. TPO/AO has not preferred to decide the issue in controversy. It is settled principle of law that in order to make disallowance u/s 14A, Rule 8D cannot be applied mechanically and in any case, the disallowance u/s 14A cannot be more than the exempt income received by the taxpayer during the year under assessment. In these circumstances, we set aside this issue to the AO to recompute disallowance u/s 14A in the light of the decisions rendered by Hon'ble Delhi High Court in Maxopp Investments Limited vs. CIT (2012) 347 ITR 272 (Delhi) by providing an opportunity of being heard to the taxpayer. Consequently, additional ground is allowed for statistical purposes.
34. Resultantly, the appeal filed by the taxpayer is allowed for statistical purposes.
Order pronounced in open court on this 15th day of January, 2019.
Sd/- sd/-
(G.D. AGRAWAL) (KULDIP SINGH)
VICE PRESIDENT JUDICIAL MEMBER
Dated the 15th day of January, 2019
TS
24 ITA No.7602/Del/2017
Copy forwarded to:
1.Appellant
2.Respondent
3.CIT
4.CIT (A).
5.CIT(ITAT), New Delhi. AR, ITAT
NEW DELHI.