Income Tax Appellate Tribunal - Pune
Deputy Commissioner Of Income-Tax, ... vs M/S. Bilcare Limited,, Pune on 26 March, 2021
IN THE INCOME TAX APPELLATE TRIBUNAL
PUNE BENCH "C", PUNE
BEFORE SHRI R.S. SYAL, VICE PRESIDENT AND
SHRI S.S. VISWANETHRA RAVI, JUDICIAL MEMBER
आयकर अपील सं. / ITA No.1693/PUN/2018
िनधा रण वष / Assessment Year : 2014-15
Bilcare Limited, Vs. ACIT, Circle-2(2),
6th Floor, B-Wing, Pune
ICC Trade Tower,
Senapati Bapat Road,
Pune - 411 016,
Maharashtra
PAN : AABCB2242F
Appellant Respondent
आयकर अपील सं. / ITA No.1713/PUN/2018
िनधा रण वष / Assessment Year : 2014-15
DCIT, Central Circle-2(2), Vs. M/s. Bilcare Limited,
Pune 6th Floor, B-Wing,
ICC Trade Tower,
Senapati Bapat Road,
Pune - 411 016
PAN : AABCB2242F
Appellant Respondent
Assessee by Shri Kishor Phadke
Revenue by Shri T. Vijaya Bhaskara Reddy, CIT
Date of hearing 24-03-2021
Date of pronouncement 26-03-2021
आदेश / ORDER
PER R.S.SYAL, VP :
These two cross appeals - one by the assessee and other by the Revenue - arise out of the order dated 27-08-2018 passed by the Commissioner of Income-tax (Appeals)-13, Pune in relation to the assessment year 2014-15.2
ITA Nos.1693 & 1713/PUN/2018 M/s. Bilcare Limited A. TRANSFER PRICING ADDITION - CORPORATE GUARANTEE
2. The first issue raised in the assessee's appeal is against the confirmation of transfer pricing addition of Rs.23.84 crore on account of Corporate guarantee.
3. Briefly stated, the facts of the case are that the assessee is an Indian MNC, which was incorporated in 1993. It is engaged in manufacturing and trading of Pharma packaging products. A return was originally filed declaring total loss of Rs.279,66,86,286/-, which was later on revised with total loss of Rs.92,63,37,113/-. Certain international transactions were reported by the assessee. The Assessing Officer (AO) made a reference to the Transfer Pricing Officer (TPO) for determining their Arm's Length Price (ALP). The TPO observed that the assessee gave Corporate guarantee for its Associated Enterprises (AEs) but just reported in its Transfer Pricing report that it had not incurred any costs in providing guarantees. He held that issuing corporate guarantees was an international transaction which needed to be benchmarked. The assessee was called upon to furnish the details of Corporate guarantees given by it for its AEs. The assessee furnished such details, on perusal of which, the TPO observed that the assessee paid $50,000 in respect of guarantee given for Bilcare AG in 3 ITA Nos.1693 & 1713/PUN/2018 M/s. Bilcare Limited addition to charges @1.5% to the bank. The TPO took note of Rule 10TD giving Corporate Guarantee commission at 1.75% under safe harbor rules in respect of a transaction of more than a specific amount. The assessee had furnished ten guarantees for its AEs. The TPO analyzed the transactions of Guarantees given by the assessee and came to hold that firstly, the transaction of giving Guarantee was an international transaction requiring ALP determination and secondly, the ALP of such transactions was 2%. After reducing a sum of Rs.2.43 crore recovered by the assessee from its AE from total amount computed by applying the rate of 2% at Rs.26.27 crore, he worked out the transfer pricing adjustment at Rs.23.84 crore. The ld. CIT(A) did not provide any succour to the assessee on this issue.
4. We have heard both the sides and gone through the relevant material on record. It is observed that the assessee entered into ten transactions of furnishing guarantee in respect of its AEs situated in different countries outside India. Spectrum of this issue involves certain sub-issues, which will be dealt with separately ad seriatim. I. Whether furnishing of Corporate guarantee is an international transaction ?
5.1. The assessee did not treat the transaction of Corporate guarantee as an international transaction. Its stand throughout has 4 ITA Nos.1693 & 1713/PUN/2018 M/s. Bilcare Limited been that the Corporate guarantee is not an international transaction, which got rejected at the hands of the TPO. The question which looms large before us is to decide if furnishing of Corporate guarantee is an international transaction?
5.2. The term "International transaction" has been defined in section 92B of the Income-tax Act, 1961 (hereinafter called 'the Act'). The Finance Act, 2012 inserted Explanation at the end of section 92B with retrospective effect from 01-04-2002 clarifying the meaning of the expression "international transaction". Clause (c) of the Explanation, which is relevant for our purpose, reads as under:-
"(c) 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."
5.3. On going through clause (c) of the Explanation to section 92B, it becomes evident that the term international transaction includes, inter alia, capital financing, which, in turn, also includes "guarantee". With this statutory insertion retrospectively from the year of inclusion of the transfer pricing provisions in the Act, namely, 01-04-2002, the legislature has made its intention clear that furnishing of guarantee falls under the expression "international transaction". Though strictly, the Income-tax Rules do not have the 5 ITA Nos.1693 & 1713/PUN/2018 M/s. Bilcare Limited same force as the provisions of the Act, but the inclusion of Corporate guarantee in the list of eligible international transactions in Rule 10TD (2) reinforces the intention of the legislature. The question whether furnishing of corporate guarantee is an international transaction recently came up for adjudication in Pr. CIT Vs. Redington (India) Ltd. (2021) 430 ITR 298 (Mad.). The assessee in that case furnished Corporate and Bank guarantees for its AEs, for which the TPO proposed transfer pricing adjustment, which was made by the AO in the final assessment order. The Tribunal deleted the disallowance on the ground that it did not have any bearing on profits, income, loss etc. of the assessee and hence was not an international transaction. The Revenue assailed such a finding of the Tribunal before the Hon'ble High court. The assessee relied on certain Tribunal orders to buttress its point of view that the furnishing of Corporate and Bank guarantee was not an international transaction. The Hon'ble High Court repelled such contention by observing that the Tribunal did not consider the legal position correctly in the hue of clause (c) of Explanation to section 92B. Transfer pricing addition made by the AO in this regard was restored. In view of the foregoing discussion, it is manifest that the question as to whether Corporate guarantee is an international 6 ITA Nos.1693 & 1713/PUN/2018 M/s. Bilcare Limited transaction is no more res integra qua the forum of the Tribunal in the light of the direct judgment of the Hon'ble High Court available on the point. No contrary precedent of any equivalent or higher judicial forum has been brought to our notice by the ld. AR. 5.4. The assessee has urged through ground no. 2.2. that furnishing of corporate guarantee is a shareholder's activity and hence cannot be treated as an international transaction u/s 92B of the Act. The term `Shareholder activity' has been defined in the OECD Guidelines, 2010. The definition refers to an activity that a group member (usually Parent Company or Regional Holding Company) performs solely because of its ownership interest in one or more group members, i.e. in its capacity as shareholder. Thereafter, para 7.10 of the OECD guidelines 2010 gives certain examples constituting shareholding activity, such as:-
" (a) Costs of activities relating to the juridical structure of the parent company itself, such as meetings of shareholders of the parent, issuing of shares in the parent company and costs of the supervisory board;
(b) Costs relating to reporting requirements of the parent company including the consolidation of reports;
(c) Costs of raising funds for the acquisition of its participations."
5.5. On going through the ambit of "Shareholder activity" as given in the OECD guidelines on a general perspective, it becomes imminent that such activities are certain acts performed by a 7 ITA Nos.1693 & 1713/PUN/2018 M/s. Bilcare Limited company SOLELY because of its shareholding in other group companies, which is obviously not the case here. Au contraire, the effect of furnishing Corporate guarantee directly percolated to the principal debtor, namely, the AEs for whom the assessee stood surety. Thus, the ground urging that the act of furnishing guarantee be treated as a shareholder's activity, is devoid of merits. Moreover, now with the statutory amendment specifically treating `guarantee' as an international transaction, there remains no doubt whatsoever that the furnishing of corporate guarantee by an assessee is an international transaction. This ground is thus dismissed. II. Performance guarantee vs. Corporate guarantee 6.1. The assessee agitated before the authorities below that all the ten transactions of furnishing guarantee were not of Corporate guarantee inasmuch as two were in the nature of Performance guarantee. Without prejudice to the main argument that corporate guarantee was not an international transaction, the assessee contended before the authorities below that, at least, such Performance guarantee transactions should be ignored. Two such transactions claimed by the assessee to be of Performance guarantee have been given at Sr. nos. 3 & 4 of the Table drawn by the TPO on pages 6 to 8, as under: -
8
ITA Nos.1693 & 1713/PUN/2018 M/s. Bilcare Limited Sr. Concerned Guarantee Given Guarantee Given Remarks No. AE party from to 3 Bilcare INR 366.36 CR Sharp Clinical Bilcare Incorporated USA Incorporated Services USA & agreed to sale its business USA INC (Considering year United Drugs (Assets & Liabilities) on going (Delaware) end exchange Holding Limited concern to Sharp Clinical rate) (UK) Services USA.
(Equivalent of 61 Bilcare Singapore PTE agreed Million USD) to sales 100% shares of Bilcare UK Ltd to United Drugs Holding Limited (UK).
To complete all this
transaction, buyers asked for
Corporate Guarantees from
BIL for 331.13 Crores in AY
2013-14.
BIL provided Corporate
Guarantee to these buyers
4 Bilcare 46.82 INR CR Hitachi Capital Bilcare Singapore PTE Limited
Singapore Singapore agreed to sale some assets to
PTE LTD (Considering year "HITACHI Capital
end exchange Singapore". Further, Bilcare
rate) Singapore agreed to lease back
same assets from Hitachi.
7.79 Million USD
(Equivalent of 9.5 BIL provided guarantee to
Million SGD) Hitachi Capital Singapore for
performance of the Sale &
Lease Back transaction.
6.2. For the transaction at Sl.No.3, the assessee stood guarantor in respect of sale of business (Assets and Liabilities) of Bilcare Incorporated USA Inc. to Sharp Clinical Services, USA; and sales of 100% shares of Bilcare UK Ltd. to United Drugs Holding Ltd. (UK). For furnishing the guarantees, the assessee was not required to pay any charge. Nor did the assessee recover any amount from its AEs for whom it furnished guarantee.
9
ITA Nos.1693 & 1713/PUN/2018 M/s. Bilcare Limited 6.3. Let us proceed to understand the precise purpose for which the assessee gave guarantee and consequences of default by the AE, which aspects are pertinent for determining the nature of guarantee. Under this guarantee transaction, the assessee stood surety to the creditors, namely, Sharp Clinical Services USA and United Drugs Holding Ltd. (UK) for the transactions where under the principal debtors, namely, Bilcare Incorporated USA agreed to sell its business (Assets and Liabilities) on going concern to Sharp Clinical Services USA; and other AE of the assessee, namely, Bilcare Singapore PTE agreed to sell 100% shares of Bilcare UK Ltd. to United Drugs Holding Ltd. (UK). For such transactions, the buyers wanted guarantee, which the assessee provided. We have gone through the Agreement under which the assessee provided such guarantee, whose copy has been placed at page 566 onwards of the paper book. Recitals of the Agreement state that Bilcare Inc., a Delaware Corporation (the US seller) and Sharp Clinical Services, Inc., a Delaware Corporation (the US Buyer) entered into an Asset Purchase Agreement pursuant to which the US seller group agreed to sell and assign to the US buyer substantially all of the assets and certain specified liabilities of the Business. Clause (d) of the Recital states that: 'the Guarantor (i.e. the assessee before us) has agreed to 10 ITA Nos.1693 & 1713/PUN/2018 M/s. Bilcare Limited provide guarantees of the obligations of the Sellers under the US Asset Purchase Agreement, the UK Share Purchase Agreement, the Tax Deed and the TSA'. Clause 2.1 of the Agreement states: '... the Guarantor unconditionally and irrevocably guarantee to the UK Buyer - (2.1.1.) the due and punctual payment, observance and performance by the UK Seller of all of the UK Seller's liabilities and obligations, whether present or future, actual or contingent, under or arising out of the UK Share Purchase Agreement or the Tax Deed; and (2.1.2.) the due and punctual payment, observance and performance by each of the Sellers of each and all the Sellers' liabilities and obligations, whether present or future, actual or contingent, under or arising out of the TSA'. Clause 2.4 of the Agreement states: 'If either of the Sellers default on the payment of any amount due and payable to any of the Guaranteed Parties under Guaranteed Obligations or arising from the termination of any of the Agreements, the Guarantor shall, immediately on demand by the relevant Guaranteed Party (as appropriate), unconditionally pay that amount to the relevant Guaranteed Party (as appropriate) in the manner prescribed in the US Asset Purchase Agreement, UK Share Purchase Agreement, Tax Deed or TSA, as if such Guarantor were the US Seller or UK Seller.' On going through the above 11 ITA Nos.1693 & 1713/PUN/2018 M/s. Bilcare Limited clauses of the Guarantee Agreement, it is graphically clear that the assessee furnished guarantee from the side of its AEs (principal debtors) who are Sellers that in case the due and punctual payment of its AEs' liabilities and obligations were not made, it would become liable to pay the amount to US/UK Buyers. 6.4. For the transaction at Sl.No.4, the assessee stood as a Guarantor for Bilcare Singapore PTE Ltd., which agreed to sell some assets to Hitachi Capital Singapore. The assessee provided Guarantee on Hitachi Capital Singapore for performance. Neither any expenditure was incurred by the assessee for furnishing such guarantee nor any amount was recovered from the corresponding AE. Nature of guarantee and consequences of default herein are admittedly similar to those at sr. no. 3 in the Table as discussed above.
6.5. A corporate guarantee is ordinarily a legal agreement between a principal debtor, creditor and guarantor, whereby the guarantor takes responsibility for the debt repayment in case of repayment by the principal debtor to the creditor. A performance guarantee provides an assurance of compensation in the event of inadequate or delayed performance on a contract. If performance guarantee entails financial consequences, that is, on the failure of 12 ITA Nos.1693 & 1713/PUN/2018 M/s. Bilcare Limited the other party to perform his obligation and the guarantor becoming liable to pay some amount, then it cannot be placed at a pedestal different from the regular corporate guarantee given for obtaining loan by the AE. In that sense, performance guarantees in the instant case are a specie of the genus of corporate guarantee and cannot be given a treatment different from the corporate guarantee as urged by the assessee. Ex consequenti, we hold that the so-called performance guarantee transactions at sr. nos. 3 and 4 are in the nature of corporate guarantee transactions and do not require any separate treatment vis-à-vis the remaining eight transactions, which we will discuss infra.
III. ALP of the Corporate guarantee transactions. 7.1. Having held that the transactions of guarantee are in the nature of international transactions, the next question is their ALP determination. Before delving into this question, it would be apt to first take note of the nature of the guarantee transactions. 7.2. In all, there are ten transactions, out of which two transactions that the assessee claimed to be performance guarantee have been discussed above. Other eight transactions, tabulated by the TPO on pages 6 to 8 of his order, are reproduced as under:- 13
ITA Nos.1693 & 1713/PUN/2018 M/s. Bilcare Limited Sr. Concerned Guarantee Given Guarantee Given Remarks No. AE party from to 1 Bilcare AG INR 455.00 CR SBI Pune BILCARE AG was to receive a Loan of Rs.328 Cr. in AY (Considering year 2010-11 (Approx.) from SBI end exchange Mumbai.
rate) SBI Pune was required to (Equivalent of 55 provide Bank Guarantee/SBLC Million Euro) to SBI Bank Mumbai for the said transaction.
Further SBI Pune has not charged any yearly/ongoing commission on the outstanding SBLC/Bank Guarantee 2 Bilcare AG INR 269.68 Cr. SBI Pune BILCARE AG was to receive (Considering year Loan of Rs.243.76 Cr. in AY end exchange 2012-13 (Approx.) from EXIM rate) Bank.
(Equivalent of SBI Pune was required to
44.90 Million provide Bank Guarantee/SBLC
USD) to EXIM Bank Mumbai for the
said transaction.
Assessee has not recovered
anything in the current year
against this guarantee,
however, in the next years,
i.e.in AY 2015-16 assessee has
recovered Rs.6,56,63,675
consist of
Rs.3,35,43,125 pertaining 17-
Aug-2012 to 16-Aug-2013 and
Rs.3,21,20,550 pertaining to
17-Aug-2013 to 16-Aug-2014.
5 Bilcare 62.64 INR CR Standard bank BILCARE SRL (Both Co) was
to receive discounting facility
Research of Mauritius
of 62.64 (Approx.) from
SRL & (Considering year Standard Bank, Mauritius
('SBM').
Bilcare end exchange
Fucine SRL rate) BIL Stood as Guarantor for the
said facility to SBM
9 Million USD) BIL has not paid anything for
the said guarantee
Said facility was closed on 30-
Aug-2013 and hence was
operational only for 151 days
in the current assessment year
6 Bilcare 39.04 INR CR SBLC-IndusInd Bilcare Packaging Limited
('BPL') took loan amounting
14
ITA Nos.1693 & 1713/PUN/2018
M/s. Bilcare Limited
Singapore Bank to 6.5 Million USD (INR 39.04
Crores) from PNB, London.
Ptd Ltd. (Considering year
PNB London insisted for
end exchange Stand-By-Letter of Credit
('SBLC') Indian Bank.
rate)
Assessee entered into an
agreement with IndusInd Bank
Limited for issuance of SBLC
6.5 Million USD)
to Punjab National Bank
London for the said amount.
Said SBLC is valid till 10-
June-2015.
Assessee was not charged
anything for the said SBLC
even though some charges are
stated in Sanction letter in the
current year.
Assessee has not recovered
anything from the AE
company in the current year.
7 Bilcare 60.06 INR CR SBLC-The Bilcare Packaging Limited
('BP') took loan amounting to
Packaging Jammu &
10 Million USD (INR 60
Ltd. (Considering year Kashmir Bank Crores) from Punjab National
Bank ('PNB') London Branch,
(Mauritius) end exchange
PNB, London insisted for
rate) Stand-By-Letter of Credit
('SBLC') from Indian Bank.
Assessee entered into an
10 Million USD) agreement with Jammu &
Kashmir Bank Limited for
issuance of SBL to PNB
London for the said amount.
Said SBLC is valid till 25-Jun-
2018.
8 Bilcare 130.32 INR CR SBLC-The Bilcare Packaging Limited
('BPL') took loan amounting
Packaging South Indian
to 21.7 Million USD (INR
Ltd. (Considering year Bank Ltd. 130.32 Crores) from Export
Import Bank of India London
(Mauritius) end exchange
Branch ('EXIM'). EXIM
rate) London insisted for Stand-By-
Letter of Credit ('SBLC') from
Indian Bank. Assessee entered
21.7 Million into an agreement with South
Indian Bank Limited for
USD)
issuance of SBLC to EXIM
London for the said amount.
Said SBLC is valid till 22-Oct-
2018.
Assessee was charged
Rs.1,00,56,322 which is 0.75%
15
ITA Nos.1693 & 1713/PUN/2018
M/s. Bilcare Limited
of the SBLC amount plus other
handling charges.
Assessee has not recovered
anything from the AE
company in the current year.
9 Bilcare 60.06 INR CR SBLC-The Bilcare Packaging Limited
('BPL') took loan amounting
Packaging Laxmi Vilas
to 10 Million USD (INR 60.65
Ltd. (Considering year Bank Ltd. Crores) from Export Import
Bank of India London Branch
(Mauritius) end exchange
('EXIM'). EXIM London
rate) insisted for Stand-By-Letter of
Credit ('SBLC') from Indian
Bank. Assessee entered into an
10 Million USD) agreement with Laxmi Vilas
Bank Limited for issuance of
SBLC to EXIM London for the
said amount. Said SBLC is
valid till 09-Feb-2019.
Assessee was charged
Rs.1,25,66,131 which is 1.25%
of the SBLC amount plus other
handling charges.
Assessee has not recovered
anything from the AE
company in the current year.
10 Bilcare 44.04 INR CR SBLC- IDBI Bilcare Packaging Limited
Packaging Bank Ltd. ('BPL') took loan amounting
Ltd. (Considering year to 7.33 Million USD (INR
(Mauritius) end exchange 44.04 Crores) from Export
rate) Import Bank of India London
Branch ('EXIM'). EXIM
7.33 Million London insisted for Stand-By-
USD) Letter of Credit ('SBLC') from
Indian Bank. Assessee entered
into an agreement with IDBI
Bank Limited for issuance of
SBLC to EXIM London for the
said amount. Said SBLC is
valid till 28-Mar-2019.
Assessee was charged
Rs.86,99,650 which is 1.75%
of the SBLC amount plus other
handling charges.
Assessee has not recovered
anything from the AE
company in the current year.
16
ITA Nos.1693 & 1713/PUN/2018
M/s. Bilcare Limited
7.3. The transaction at sr. no. 1 above is of giving guarantee by the assessee for Bilcare AG in respect of loan of Rs.328 crore from SBI, Mumbai. For this, SBI, Pune was required to give Bank Guarantee/Stand by Letter of Credit (SBLC) to SBI, Mumbai. SBI, Pune did not charge any commission or Guarantee fee from the assessee in this transaction. The assessee, in turn, also did not charge anything from its AE.
7.4. For the transaction at Sl.No.2, the assessee gave guarantee for Bilcare AG in respect of loan of Rs.243.76 crore from Exim Bank. SBI, Pune was required to provide Bank guarantee/SBLC to Exim Bank, Mumbai for the said transaction. The assessee had to pay Rs.6,56,63,675/- in respect of this guarantee transaction. As against that, the assessee recovered a sum of Rs.2,43,26,467/- from Bilcare AG during the year.
7.5. For the transaction at Sl.No.5, the assessee furnished guarantee for Bilcare Research SRL and Bilcare Fucine SRL in respect of discounting facility of Rs.62.64 crore from Standard Bank, Mauritius. The assessee stood guarantee for it. Neither any expense was incurred by the assessee in furnishing the guarantee nor it recovered any amount from its AE.
17
ITA Nos.1693 & 1713/PUN/2018 M/s. Bilcare Limited 7.6. For the transaction at Sl.No.6, the assessee stood as a guarantor for Bilcare Singapore Pte Ltd. in respect of loan of Rs.39.04 crore from Punjab National Bank, London. Punjab National Bank insisted for SBLC from an Indian bank. The assessee entered into agreement with IndusInd Bank Limited for issuance of SBLC to Punjab National Bank, London. Neither any amount was charged from the assessee by the bank for furnishing the guarantee nor the assessee recovered anything from its AE. 7.7. For transaction at Sl.No.7, the assessee gave guarantee for Bilcare Packaging Ltd. Mauritius in respect of loan transaction of Rs.60 crore. The assessee entered into agreement with Jammu & Kashmir Bank for issuance of SBLC to Punjab National Bank, London. No amount was charged by Jammu & Kashmir Bank from the assessee for furnishing guarantee nor the assessee recovered any amount from its AE.
7.8. For the transaction at Sl.No.8, the assessee stood guarantor for Bilcare Packaging Ltd. Mauritius in respect of loan of Rs.130.32 crore from Exim Bank, London. The assessee entered into agreement with South Indian Bank Ltd. for issuance of SBLC to Exim Bank, London, for which the assessee was charged Rs.1,00,56,322/- at 0.75% of the SBLC and other handling charges. 18
ITA Nos.1693 & 1713/PUN/2018 M/s. Bilcare Limited Though the assessee paid Rs.1.00 crore and odd but it did not recover anything from the AE.
7.9. For the transaction at Sl.No.9, the assessee stood surety for Bilcare Packaging Ltd. Mauritius in respect of loan of Rs.60.05 crore from Exim Bank, London which insisted for SBLC from an Indian bank. The assessee entered into agreement with Laxmi Vilas Bank Ltd. for issuance of SBLC to Exim Bank, London for which it was charged Rs.1,25,66,131/-, being, 1.25% of SBLC amount. The assessee did not recover anything from its AE in respect of such transaction.
7.10. For the last transaction at Sl.No.10, the assessee stood guarantor for Bilcare Packaging Ltd. Mauritius in respect of loan of Rs.44.04 crore from Exim Bank, London. The assessee entered into agreement with IDBI Bank Ltd. for issuance of SBLC to Exim Bank, London. It was charged Rs.86,99,650/-, being 1.75% of SBLC amount plus other handling charges. The assessee did not recover anything from the AE in respect of this guarantee. 7.11. On an overview of the above transactions, it can be seen that for some of the guarantee transactions, the assessee neither paid any charges to Banks nor it recovered any amount from its AE; for some other transactions, the assessee paid certain amount, say, at 0.75%, 19 ITA Nos.1693 & 1713/PUN/2018 M/s. Bilcare Limited 1.25%, 1.75% to the financial institutions for issuing SLBC but did not recover anything from its AEs; whilst still in others, the assessee paid certain amount for standing as guarantee and recovered a part of the amount from its AE.
7.12. The TPO has applied uniform rate of 2% as arm's length guarantee fee, by firstly, considering the Safe Harbour Rules stipulating 2% rate of Guarantee commission where the Corporate guarantee does not exceed Rs.1.00 crore and secondly the amount charged from the assessee in respect of 10th transaction at 1.75%. 7.13. First we espouse the first raison d`etre, namely, the safe harbor rules aspect. Section 92CB(1) of the Act, at the material time, provided that the determination of the ALP u/ss 92C or 92CA shall be subject to safe harbour rules. Sub-section (2) states that:
'the Board may, for the purpose of sub-section (4), make rules for Safe Harbour'. Relevant rules from 10TA to 10TG came to be inserted by the Income-tax (Sixteenth Amendment) Rules, 2013 w.e.f. 18-09-2013. Rule 10TD(1) provides that the transfer price declared by the assessee in respect of eligible transaction shall be accepted by the income-tax authorities at ALP, if it is in accordance with the circumstances as specified in sub-rules (2) or (2A). A chart 20 ITA Nos.1693 & 1713/PUN/2018 M/s. Bilcare Limited has been given in these sub-rules in which the safe harbour has been provided for the eligible international transactions. 7.14. At this juncture, it is apposite to take note of rule 10TD(1), which underscores that the exercise of option for safe harbour rules by an eligible assessee [as defined under Rule 10TB] in respect of an eligible international transaction [as given in Rule 10TC] is optional. Thus, it is axiomatic that the safe harbour rules are simply optional for an eligible assessee. One assessee may opt for them, another may not. The entire mechanism under the safe harbour rules gets triggered only when the option of the safe harbour rules is exercised by an assessee under due process mandated under Rule 10TE. A fortiori, where an assessee has not exercised option for the safe harbour, the entire set of Rules from 10TA to 10TG gets freezed and cannot be operationalised. This conclusion is further corroborated by the opening language of rule 10TA giving meaning to various expressions through clauses (a) to (m). It unambiguously mandates that the definitions given hereunder apply only for the purposes of this rule and rule 10TB to 10TG. Thus the definition clause in rule 10TA has its force only within the ambit of the safe harbour rules and not beyond that.21
ITA Nos.1693 & 1713/PUN/2018 M/s. Bilcare Limited 7.15. In the facts and circumstances of the instant case, it is seen that the assessee has not given any option to be governed by the safe harbor rules. As such, the TPO was not justified in getting support from rule 10TD for determining the arm's length rate of the guarantee commission.
7.16. Now we take up the second reason given by the TPO. He noted that the assessee paid charges for furnishing guarantee to bank at 1.75% and accordingly treated it as internal CUP for computing the ALP of the transaction at 2%.
7.17. At this juncture, it is pertinent to note the judgment of the Hon'ble jurisdictional High Court in CIT Vs. Everest Kento Cylinders Ltd. (2015) 378 ITR 57 (Bom.). In that case, the assessee stood guarantor in respect of certain loan for its AE for which Guarantee commission @ 0.5% was charged by the assessee. The TPO determined the arm's length guarantee fee at 3%, which led to the transfer pricing addition. The Tribunal deleted the addition. The Revenue approached the Hon'ble Bombay High Court which upheld the order of the Tribunal by noting that the adjustment made by the TPO in the matter of Guarantee commission cannot be based on the instances of commercial banks providing guarantees. It observed that when commercial banks issue bank guarantee, which 22 ITA Nos.1693 & 1713/PUN/2018 M/s. Bilcare Limited is easily encashable in the event of default, higher commission is justified. On the other hand, where a Corporate guarantee is issued, the guarantor needs to make good the amount and repay the loan if the subsidiary defaults. It further observed that the considerations which apply for issuance of Corporate guarantee are distinct and separate from Bank guarantee. It, therefore, approved the rate of 0.5% as arm's length rate of Corporate guarantee fee. 7.18. We have seen above that in some of the cases in which the assessee stood guarantor, it had to incur certain charges varying between 0.75% to 1.75%, whilst in other cases, nothing was required to be paid. Drawing support from Everest Kento Cylinders Ltd. (supra), we hold that the arm's length price of the international transaction of rendering service of furnishing guarantee is 0.5%. However, all out-of-pocket expenses incurred by the assessee- guarantor in furnishing guarantee will go to swell the ALP accordingly. In other words, where the assessee has not incurred any cost in furnishing guarantee, the ALP of the international transaction of furnishing guarantee will be 0.5%. If however, the assessee has incurred expenses at, say, 1.75%, then ALP will be 2.25% (consisting of compensation for rendering service of giving guarantee at 0.5% plus out of pocket expenses incurred at 1.75%). 23
ITA Nos.1693 & 1713/PUN/2018 M/s. Bilcare Limited To put it simply, the effective arm's length rate of guarantee transaction is 0.50% plus actual expenses incurred by the assessee in furnishing the guarantee. The impugned order in confirming uniform rate of 2% as arm's length guarantee fee is set aside and the matter is restored to the AO to decide the issue in the terms held above. The assessee will be allowed a reasonable opportunity of hearing in this exercise.
B.TRANSFER PRICING ADDITION -MANUFACTURING ACTIVITY
8. The only other issue pressed in the assessee's appeal is the transfer pricing addition of around Rs.83.00 lakh in the 'Manufacturing activity'. The Revenue, in its appeal, has also assailed the impugned order on two aspects of the transfer pricing addition in the 'Manufacturing activity'.
9. Briefly stated, the facts of the case are that the assessee reported certain international transactions of purchase and sale from its AEs. A combined Transactional Net Marginal method (TNMM) was applied for benchmarking. The assessee worked out its Profit Level Indicator (PLI) of Operating Profit/Operating Revenue (OP/OR) at 5.39%. Certain comparables were chosen with weighted average at 4.17% for demonstrating that its international transactions were at ALP. The TPO did not accept the assessee's calculation of PLI as 24 ITA Nos.1693 & 1713/PUN/2018 M/s. Bilcare Limited well as the list of comparables. After entertaining objections from the assessee, the TPO computed the assessee's PLI at (-) 0.94% and that of comparables at 5.53%, which led to the transfer pricing adjustment of Rs.2643.81 lakh. The assessee approached the ld. CIT(A) who made certain alterations in the working done by the TPO. That is how, both the parties are in appeal before the Tribunal. 10.1. We have heard both the sides and scanned through the relevant material on record. At the outset, we want to make it clear that the dispute raised by the assessee as well as the Revenue is only qua the computation of the assessee's PLI. There is no quarrel either on the adoption or application of the most appropriate method or the selection of comparables or their computation of PLI. To be more precise, the area of dispute in the assessee's appeal is restricted only to an item of depreciation amounting to Rs.1911.13 lakh, which was suo motu disallowed by the assessee in the revised return but the original enhanced amount of depreciation was included by the TPO in the operating cost base by the authorities in computing the assessee's PLI.
10.2. The assessee filed original return of income declaring total loss of Rs.279.66 crore. In such computation of total income, the assessee claimed depreciation at a particular level. Thereafter, the 25 ITA Nos.1693 & 1713/PUN/2018 M/s. Bilcare Limited assessee filed a revised return with total loss of Rs.92,63,37,113/- in which claim of depreciation was reduced by Rs.1911.13 lakh and the assessee suo motu disallowed such amount in its revised computation of total income. While working out its PLI originally in the T.P. Study report, the assessee had considered the enhanced amount of depreciation allowance. However, with the revision of return and the voluntary disallowance of depreciation by Rs.1911.13 lakh, the assessee lodged a claim before the TPO that the amount of depreciation in the operating cost base should be accordingly reduced. The TPO did not accept the assessee's contention on this count. While computing the assessee's OP/OR at (-) 0.94%, he went ahead with the amount of depreciation as claimed in the original return and did not reduce the operating costs by Rs.19.11 crore towards the amount of depreciation foregone in the revised return. The assessee remained unsuccessful before the ld. CIT(A). 10.3. The claim of the assessee before the Tribunal is that the reduction in the amount of depreciation should be given effect in the computation of its PLI as well by including only the reduced figure of depreciation actually claimed in the revised return in the operating cost base. It is noticed that the assessee furnished a revised return of income in which loss originally declared at 26 ITA Nos.1693 & 1713/PUN/2018 M/s. Bilcare Limited Rs.279.66 crore was reduced to Rs.92.63 crore. In such computation of the revised income, the assessee, inter alia, reduced the amount of depreciation by Rs.19.11 crore with a suo motu disallowance. The AO accepted the revised return and commenced the computation of total income with the figure of total loss as per revised return at Rs.92.63 crore. Thus, it is evident that the AO acted upon the revised return and treated the original return as having been superseded with the revised one. Now the question is as to whether the amount of reduced depreciation as per the revised return or the enhanced amount of depreciation as per the original return should be included in the operating cost base for determining the ALP of the international transaction under the Manufacturing activity?
10.4. Under the TNMM, operating profits of an assessee are computed by reducing all operating costs from the operating revenue. Operating costs are such costs which are incurred in carrying out the operations qua the international transaction under consideration. If a particular expenditure is not incurred by an assessee, which is usually incurred by others in an uncontrolled situation, such expenditure is not notionally added to the operating cost base of the assessee. In the like manner, if a particular 27 ITA Nos.1693 & 1713/PUN/2018 M/s. Bilcare Limited expenditure is incurred but suo motu disallowed by the assessee in the computation of total income, it should also have the same effect of getting reduced from the operating cost base by considering as if such expenditure was not at all incurred. There is no qualitative difference between situation one in which the expenditure is not incurred and not claimed as deduction and situation two in which the expenditure is incurred but suo motu disallowed by the assessee in the computation of total income inasmuch as the latter stands at par with the former. In both the situations, such expenditure actually unincurred or incurred cannot form part of the operating cost base in the ALP determination. The reason for such an exclusion is not the double addition as put forth on behalf of the assessee but the fact that by not claiming a expenditure as deduction in the computation of total income, the assessee has forgone its claim on that count. If a particular claim is foregone, that claim dies for all purposes. It cannot be a case that the claim is dead for the computation of total income but alive for determining the operating costs for the ALP determination. Inclusion of such an expenditure in the operating cost base for determining the ALP would lead to skewed portrayal of the operating profits as it will be akin to considering such expenditure as having been incurred for the 28 ITA Nos.1693 & 1713/PUN/2018 M/s. Bilcare Limited purpose of computation of ALP but not incurred for the computation of total income, which by no logic can be a correct proposition.
10.5. Adverting to the facts of the instant case, it is seen that the assessee in the revised return made a suo motu disallowance of depreciation to the extent of Rs.19.11 crore. When the AO accepted the revised return by taking reduced income/loss as per the revised return for the purpose of computing the total income, there can be no rationale in going back to the figure of depreciation as per the original return for the ALP determination, which ceased to exist after the filing of the revised return. We, therefore, hold that only the reduced claim of depreciation by Rs.19.11 crore should be added to the operating cost base in the ALP determination. 10.6. Here, we want to clarify that we are not confronted with a situation in which albeit the assessee reduced its claim of depreciation by Rs.19.11 crore but the AO still granted deduction for higher amount of depreciation on the basis of original return by taking recourse to Explanation 5 to section 32. The position would be entirely different if the AO invokes Explanation 5 to section 32 and allows full depreciation as per the original return. In that scenario, the contention of the assessee for considering only the 29 ITA Nos.1693 & 1713/PUN/2018 M/s. Bilcare Limited reduced amount of depreciation in the revised return for the ALP determination would fail. As the AO in the instant case has computed the total income by considering the reduced claim of depreciation by Rs.19.11 crore, we hold that only such reduced amount of depreciation be included in the operating cost base for determining the ALP of the transaction of `Manufacturing activity'. Before parting, we want to clarify that the position as discussed hereinabove is about the effects of a suo motu disallowance offered by the assessee and not a disallowance made by the AO. 11.1. The Revenue in its appeal is aggrieved by the decision of ld. CIT(A) in not considering bank charges and commission/brokerage amounting to Rs.743.482 as non-operating cost. 11.2. The assessee reduced Finance cost of Rs.14,703.82 lakh, as reflected in the Profit and loss account, from total costs for ascertaining the amount of operating costs for the ALP determination. The AO examined its bifurcation and opined that only interest expense of Rs.10,206.20 lakh was liable to be considered as non-operating and the remaining amount as operating. The assessee argued before the ld. CIT(A) that the `Other borrowing costs' of Rs.3754.14 lakh and `Bank charges and commission/brokerage' of Rs.743.48 lakh should also be considered 30 ITA Nos.1693 & 1713/PUN/2018 M/s. Bilcare Limited as part of interest cost and hence treated as non-operating in nature. The ld. CIT(A) concurred with the assessee. Though the Revenue has accepted the decision of the ld. CIT(A) on `Other operating costs' of Rs.3754.14 lakh, but has challenged the impugned order on `Bank charges and commission/brokerage' of Rs.743.48 lakh. 11.3. Having heard both the sides and gone through the relevant material on record, we find that the break-up of `Bank charges and commission/brokerage' has been given on page 29 of the TPO's order, which comprises of Brokerage and commission on fixed deposits - Rs.10.42 lakh; Bank charges - Rs.178.48 lakh; Loan processing fee - Rs.338.32 lakh; and SBLC commission - Rs.216.26 lakh. On a perusal of the detail of Rs.743.48 lakh, it is discernible that this expenditure is nothing but part and parcel of the overall Finance cost. It is rather an extension of the Finance cost. We, therefore, hold that the ld. CIT(A) was justified in excluding Rs.743.48 lakh from the operating costs base. The ground fails. 12.1. The only other issue raised by the Revenue in its appeal is against the proportionate transfer pricing adjustment allowed by the ld. CIT(A). The TPO, while computing the transfer pricing adjustment, took into account the entity level figures and not the transactions with the AEs. The ld. CIT(A) directed to restrict the 31 ITA Nos.1693 & 1713/PUN/2018 M/s. Bilcare Limited transfer pricing adjustment in respect of transactions with AEs alone.
12.2. In our considered opinion, this issue is fairly settled by judgment of Hon'ble jurisdictional High court in CIT Vs. Phoenix Mecano (India) Pvt. Ltd. (2019) 414 ITR 704 (Bom.), holding that the transfer pricing adjustment made at entity level should be restricted to the international transactions only. It is pertinent to mention that the Department's SLP against this judgment has since been dismissed by the Hon'ble Supreme Court in CIT Vs. Phoenix Mecano (India) Pvt. Ltd. (2018) 402 ITR 32 (St.). Similar view has been taken by the Hon'ble Bombay High Court in CIT Vs. Thyssen Krupp Industries Pvt. Ltd. (2016) 381 ITR 413 (Bom.) and CIT Vs. Tara Jewels Exports (P). Ltd. (2010) 381 ITR 404 (Bom.). We, therefore, uphold the impugned order on this score.
13. In the result, the appeal of the Revenue is dismissed and that of the assessee is partly allowed.
Order pronounced in the Open Court on 26th March, 2021.
Sd/- Sd/-
(S.S.VISWANETHRA RAVI) (R.S.SYAL)
JUDICIAL MEMBER VICE PRESIDENT
पुणे Pune; िदनां क Dated : 26th March, 2021 सतीश 32 ITA Nos.1693 & 1713/PUN/2018 M/s. Bilcare Limited आदे श की ितिलिप अ ेिषत/Copy of the Order is forwarded to:
1. अपीलाथ / The Appellant;
2. थ / The Respondent;
3. The CIT(A)-13, Pune
4. The Pr.CIT-V, Pune
5. िवभागीय ितिनिध, आयकर अपीलीय अिधकरण, पुणे "सी" / DR 'C', ITAT, Pune;
6. गाड फाईल / Guard file.
आदे शानुसार/ BY ORDER, / True Copy // Senior Private Secretary आयकर अपीलीय अिधकरण ,पुणे / ITAT, Pune Date
1. Draft dictated on 24-03-2021 Sr.PS
2. Draft placed before author 26-03-2021 Sr.PS
3. Draft proposed & placed before JM the second member
4. Draft discussed/approved by JM Second Member.
5. Approved Draft comes to the Sr.PS Sr.PS/PS
6. Kept for pronouncement on Sr.PS
7. Date of uploading order Sr.PS
8. File sent to the Bench Clerk Sr.PS
9. Date on which file goes to the Head Clerk
10. Date on which file goes to the A.R.
11. Date of dispatch of Order.
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