Income Tax Appellate Tribunal - Kolkata
M/S Ifgl Refractories Ltd., Kolkata vs A.C.I.T.,(Osd)-Ward-6(2), Kolkata on 17 February, 2021
IN THE INCOME TAX APPELLATE TRIBUNAL
KOLKATA 'C' BENCH, KOLKATA
VIRTUAL COURT HEARING
(Before Sri J. Sudhakar Reddy, Hon'ble Accountant Member & Sri S.S. Godara, Hon'ble Judicial Member)
ITA No. 684/Kol/2019
Assessment Year: 2012-13
M/s. IFGL Refractories Ltd...................................................................................................Appellant
Mcleod House
3, Netaji Subhas Road
Kolkata - 700 001
[PAN : AABCI 7391 C]
Vs.
Asstt. Commissioner of Income Tax (OSD), Ward-6(2) Kolkata..............................Respondent
Appearances by:
Shri Ravi Tulsiyan, FCA, appeared on behalf of the assessee.
Shri Sanjay Paul, Addl. CIT, D/R, appearing on behalf of the Revenue.
Date of concluding the hearing : November 19th, 2020
Date of pronouncing the order : February 17th, 2021
ORDER
Per J. Sudhakar Reddy, AM :-
This appeal filed by the assessee is directed against the order of the Learned Commissioner of Income Tax (Appeals)- 22, Kolkata, (hereinafter the "ld. Pr. CIT"), passed u/s. 250 of the Income Tax Act, 1961 (the 'Act'), dt. 28/02/2019, for the Assessment Year 2012-13.
2. The assessee is a company and is in the business of manufacturing refractory items. It has a wholly owned subsidiary in the United Kingdom, M/s. Monocon International Refractories Ltd. (MIRL). The assessee company has given a corporate guarantee against a foreign currency loan taken by MIRL. The total loan outstanding as on 31/03/2012 is Rs.5.697 GBP. The assessee did not charge any corporate guarantee fee in respect of the above guarantee provided for its AE. 2.1. The Transfer Pricing Officer, held that that the corporate guarantee by the assessee to its Associate Enterprise (AE) constituted an international transaction as per explanation to Section 92B of the Act and determined the Arm's Length Price as per provisions of Section 92CA of the Act and determined an adjustment of Rs.28,53,625/- as ALP.
3. Aggrieved the assessee carried the matter in appeal before the ld. CIT(A). The assessee argued that the transaction of providing corporate guarantee is not an international transaction. The ld. CIT(A) rejected the contention by following the 2 ITA No. 684/Kol/2019 Assessment Year: 2012-13 M/s. IFGL Refractories Ltd decision of the Kolkata Bench of the Tribunal in the cas case of Dy. CIT vs. National Engineering Industries Ltd. (ITA No. 986 & 987/Kol/2017) 987/Kol/2017),, order dt. 12/09/2018. The ld. CIT(A) also upheld the action of the TPO in benchmarking the corporate guarantee fee @ 0.5% and consequently the T.P. Adjustment dertermined dertermined.
4. Aggrieved the assessee is before us on the following grounds:
grounds:-
"1. That, the Ld. C.I.T.(A) erred in upholding the action of the Ld. TPOIAO in benchmarking the corporate guarantee fee at 0.5%, resulting in upward TP adjustment of Rs.28,53,625/ Rs.28,53,625/- u/s.92CA(3) of the Act, against letter of comfort/corporate guarantee issued by the appellant appellant-company company to its AE (MIRL) for the loan obtained from HSBC Bank Plc, UK holding the same an international transaction in spite of the fact that such guarantee to AE was only provided in the capacity of ultimate shareholder.
2. That, the Ld. C.I.T.(A) further erred in not properly considering that as the letter of comfort/corporate guarantee issued for the benefit of the AE involved no costs to the Appellant holding company and consequently had no bearing on its profit or loss is outside the ambit of international transaction and hence the upward TP adjustment of Rs.28,53,625/ Rs.28,53,625/- u/s.92CA(3) was in violation of Explanation at clause (i)(c) of sec.92B of the Act.
3. That, at, the Ld. C.I.T.(A), erred in not properly considering that as the Appellant holding company has not incurred any cost against providing letter of comfort/corporate guarantee or having any bearing on profit or loss or assets of its AE, the addition of Rs Rs.28,53,625/- in the guise of guarantee fees at 0.5% is against the settled law.
4. That, the Ld. C.I.T.(A) upheld the action of the TPO/AO relying on a decision of ITAT, Kolkata holding another decision of the same Bench to be per incuriam when there are series of decisions on the legitimacy of the appellant's claim and in that view of the matter, he erred in not having decided the issue favouring the appellant as per settled position in law."
4.1. The assessee filed the following additional ground of app appeal:-
"1. That, on the facts and in the circumstances of the case, the appellant is entitled to refund of Dividend Distribution Tax (DDT) paid @ 16.22% u/s.115 u/s.115-O O of the Act to its Japanese shareholders during A.Y. 20122012-13, 13, which was in excess of rate applicable at 10% specified in DTAA between India and Japan."
4.2. The assessee filed a ssecond additional ground, which is as follows:-
follows:
"That, on the facts and in th thee circumstances of the case, the appellant is entitled to deduction of Education Cess paid @ 3% of income tax and surcharge thereon amounting to Rs.26,53,314/ Rs.26,53,314/- u/s 37 of the Act while arriving at its total taxable income during A.Y. 2012-13."3 ITA No. 684/Kol/2019
Assessment Year: 2012-13 M/s. IFGL Refractories Ltd
5. The ld. Counsel ounsel for the assessee submitted that the transaction in question is not an international transaction in terms of Section 92B of the Act. For this proposition, he relied on a number of case case-law law including the order of the ITAT in the case of DCIT, Circle-8(1) (1) vs. EIH Limited in ITA Nos. 153/Kol/2016 and 110/Kol/2016; order dt. 12/01/2018 and the decision in the case of CIT vs. Rohit Ferro Tech Ltd. in ITA Nos. 262 and 263/Kol/2018, dt. 12/10/2018 and other case-law.
law. He submitted that the ld. CIT(A) has wron wrongly gly relied on the decision of the Tribunal in the case of DCIT vs. M/s. National Engineering Industries Ltd. (supra) as this order was per incurium.
6. The ld. D/R, on the other hand, relied on the order of the ld. CIT(A) and submitted that the decision of the M/s. National Engineering Industries Ltd. (supra) has been followed by the ld. CIT(A) and hence there is no infirmity in the order.
7. We have heard rival contentions. On careful consideration of the facts and circumstances of the case, perusal of the papers on record, orders of the authorities below as well as case law cited, we hold as follows:
follows:-
8. This Bench of the Tribunal in the case of EIH Limited (supra), held as follows:-
follows:
"Since the AE was a start up company, the assessee extended corporate guarantee to the third party borrowers as a matter of commercial prudence to protect the interest by fulfilling the shareholders obligation. According to the ld AR, the corporate guarant guaranteeee as provided by the assessee was a matter of commercial prudence to protect by fulfilling the shareholder obligation as any financial incapacitation of the subsidiary would jeopardize the investment of the assessee. He relied on the order of the Coordina Coordinate te Bench of this Tribunal in the case of Tega Industries Ltd. Vs DCIT (ITA No.1912/Kol/2012) wherein it was held that the provision of corporate guarantee is in the nature of shareholder activity and hence, no TP adjustment on account of corporate guarantee is required. In the said case, this tribunal had held that "the assessee's expectation from provision of guarantee was not that of a guarantor i.e. to earn a guarantee fee, rather, the expectation was of a shareholder to protect its investment interest, to help it achieve the assessee's business objective". Thus, we agree with the contention of the assessee that the objective of the assessee for providing guarantee was not to earn guarantee fee but to earn returns in the form of appreciation in investment value and receive dividends and, therefore, no TP adjustment ought to have been made in the facts and circumstances of the case.
Coming to the alternate plea of the assessee that, in the facts and circumstances the corporate guarantee is not an International Transaction u u/s.. 92B of the Act, we note that term 'guarantee' was inserted in the definition of 'international transaction' in section 92B by inserting an Explanation in the Finance Act, 2012 with retrospective effect from 01 01/04/2002. The Explanation states that-
"For the removal of doubts, it is hereby clarified that (i) the expression "international transaction" shall include ....4 ITA No. 684/Kol/2019
Assessment Year: 2012-13 M/s. IFGL Refractories Ltd
(c) capital financing, including any type of long long-term or short-term term borrowing, lending or guarantee, purchase ase 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. "
The Explanation states that it is clarificatory in nature and is 'for the removal of doubts '. Thus, it does not alter the basic character of definition of 'international transaction' under the main section 92B. Under this Explanation, five categories of transactions have been clarified to have been included in the definition of 'international transactions'. Clauses (a)(b) and (d) do not cover guarantee, lending or loans. Other two, (c) and (e) deal with (i) capital financing, and (U) business restructuring or reorganization. Clause (c) refers to lending or guarantee. But the Explanation which iss for removal of doubts or is clarificatory, cannot be read independent of Section 92B(1). Section 92B(1), provides those transactions as international transactions which are in the nature of purchase, sale or lease of tangible or intangible property (expl (explained by clauses (a) and (b) of the Explanation), or provision of services, (explained by clause (d) of the Explanation), or lending or borrowing money (explained by Clause (c) of Explanation). The plain reading of provisions of sec. 92B(1) of the Act indi indicate cate that the various transactions mentioned in section 92B 2B (1) of the Act, (i. e. purchases, sales, provision for services, lending or borrowing or any other transaction) should have bearing on the profits, incomes, losses or assets of such enterprises. In n our opinion, the condition precedent of a transaction having a bearing on profits, incomes, losses, or assets would apply to each of the aforesaid transactions namely purchase, sale, or lease of tangible or intangible property or provision of services, oorr lending or borrowing money or any such transaction. This understanding of ours gets further clarified by way of insertion of Explanation in section 92B(1) by the Finance Act 2012 with retrospective effect from 01.04.2002 vide clause (a) to (d). We find tthathat in the said explanation, clause (e) alone has been carved out as an exception wherein, the transaction thereon has been specifically mandated to be an international transaction where a transaction of business restructuring or reorganization, entered iintonto by an enterprise with an AE irrespective of the fact that it has bearing on the profits, incomes, losses, or assets of such enterprises at the time of transaction or at any future date. "
8.1. This Bench of the Tribunal in the case of CIT vs. Ferro Tech Ltd. in ITA Nos. 262 & 263/Kol/2018 (supra), held as follows:
follows:-
"4. Next comes corporate guarantees issue in both these assessment years. Learned CIT(A) A) has referred to this tribunal various decisions (supra) in concluding that a corporate guarantee does not amount to an international transaction within the meaning of Section 92B of the Act. The revenue fails to quote any judicial precedent to the contrary.
ary. We affirm the CIT(A) findings on the instant legal issue as well. The Revenue's identical first substantive ground seeking to revive ALP adjustment on interest as loans and corporate guarantee fails therefore."
8.2. Further, the Delhi Bench of the IT ITAT in the case of Bharti Airtel vs. Addl. CIT in ITA No. 5816/Del/2012, order dt. 11/03/2014, held as follows:- "In any event, the onus is on the Revenue authorities to demonstrate that the transaction is of such a nature as to have "bearing on profits, in income, come, losses or assets" of the enterprise, and there was not even an effort to discharge this onus. Such an impact on profits, income, losses or assets has to be on real basis, even if in present or in future, and not on contingent or hypothetical basis, a and nd there has to be some material on record to indicate, even if not to establish it to hilt, that an intraintra--AE international transaction has some impact on profits, income, losses or assets. Clearly, these conditions are not satisfied on the facts of this ccase.
5 ITA No. 684/Kol/2019Assessment Year: 2012-13 M/s. IFGL Refractories Ltd We have held that even after the amendment in section 92B, by amending Explanation to section 92B, a corporate guarantee issued for the benefit of the AEs, which does not involve any costs to the assessee, does not have any bearing on profits, incom income, losses or assets of the enterprise and, therefore, it is outside the ambit of international transaction to which ALP adjustment can be made. As we have decided the matter in favour of the assessee on this short issue, we see no need to address ourselves to other legal issues raised by the assessee and the judicial precedents cited before us."
8.4. The Chennai Bench of the ITAT in the case of Siva Industries and Holdings Ltd. vs. DCIT, in ITA No. 2756/CHNY/2017 and S.P. 90/CHNY/2018, order dt. 20/03/2018, held as follows:-
"15.
15. We have heard both the parties and perused the material on record. This issue came up for consideration before this Tribunal in the Case of Redington India Ltd. Vs. JCIT in ITA No.513/Mds./2014 dated 07.07.2014 for assess assessment ment year 2009-10 2009 wherein held that:-
"47. Regarding the above issue, the learned senior counsel contended that corporate guarantee granted by the assessee company is not an "international transaction". The assessee has not granted any new guarantee in the previous year. Therefore, the relianc reliancee placed by the TPO on the definition of the term "international transaction" as retrospectively amended by the Finance Act, 2012, is erroneous and bad in law. The corporate guarantees provided by the assessee ssee company to its AEs enable them to secure credit in their respective overseas jurisdictions and to comply with the laws, in those jurisdictions. Such corporate guarantees granted by the assessee to the AEs enabled them to secure funds for their working on competitive rates in the relevant jurisdictions. In the absence of such locally sourced funding, the assessee would have to support its AEs business operations by providing funds through equity or otherwise. Accordingly, the transaction can be said to be one of quasi-equity equity or shareholder activity. The well well-being being of the AEs is of deep interest to the assessee; especially, where the business of the subsidiary generates synergies for the assessee. It is in the best interest of the group that the assessee has provided corporate guarantees to its AEs. The learned senior counsel relied on the decision of the ITAT, Delhi Bench, rendered in the ::- 6 -:: ITA No. 2756/2017 & SP No.90/2018 case of Bharti Airtel Ltd. v. ACIT (43 taxman.com 150), wherein it has held that providing corporate guarantee does not involve any cost to the assessee and it is not an "international transaction", even under the definition of the said term as amended by the Finance Act, 2012, as it does not have any bearing on profits, income, losses or assets of the assessee company.
48. As an alternative contention, the learned senior counsel argued that guarantees are provided to the assessee on behalf of AEs as an integral business activity of the assessee relating to supply of general management and distribution of logistic business, worldwide. Therefore, the transaction must be tested under the combined transaction TNMM approach rather than on a stand stand- alone basis. The ITAT, Pune Bench in th thee case of Demag Cranes & Components (India) (P.) Ltd. v. DCIT DCIT,, 56 SOT 187(Pune) and ITAT, Delhi Bench in the case of McCann Erikson India Pvt. Ltd. vv. Addl.CIT (24 Taxmann.com 21) have held that 6 ITA No. 684/Kol/2019 Assessment Year: 2012-13 M/s. IFGL Refractories Ltd TNMM applied on an entity entity-wide wide basis is the most appropriate method for Benchmarking transactions that are not independent of the business carried on by an assessee. The learned senior counsel submitted that th thee adjustment made against the corporate guarantee may be deleted."
Accordingly this ground is decided in favour of the as assessee sessee and against the Revenue."
9. Applying the proposition of law laid down in the above case case-law law to the facts of the case, we hold that provision of bank guarantee guarantee, is not ot an international transaction within the meaning of Section 92B of the Act.
10. Now we take up the decision of the Tribunal in the case of M/s. National Engineering Industries Ltd. (supra). In this decision, the Tribunal relied upon the decision of the Special Bench of the Tribunal in the case of Instrumentarium Corporation vs DDIT, ITA No. 1548 & 1549/Kol/2009, for Assessment Year 2003 2003-04 and 2004-05, 05, order dt. 15/07/2016 15/07/2016, for coming to the conclusion that corporate guarantee for the Assessment Year 2011 2011-12 and 2012-13, 13, is an international transaction. While doing so, the ITAT erroneously held that the order of the Tribunal, as it was held that M/s Tega Industries Limited Vs. DCIT, ITA No. 19 1912/Kol/2012, was per incuriam, as this order was passed without considering the judgment of the coordinate bench in the case of M/s Electrosteel Casting Ltd, IT (SS) No.47 to 53 /Kol/2014, for A.Y. 2003 2003- 04 to 2011-12, 12, order dated 25.11.2016 25.11.2016. The order in the case of M/s. Electrosteel Casting Ltd. (supra) could have been considered in the case of M/s Tega Industries Limited (supra) as that order was passed much latter latter. The Special Bench of the ITAT in the case of Instrumentarium Corporation vs DDIT (supra) (supra), does not deal on the issue of corporate guarantee. It was a case relat relating to determination of ALP on an interest free loan given by a Company to its fully owned Indian subsidiary. Thus, on both counts the order of the Bench in the case of M/s. National Engineering Industries Ltd. (supra) is based on wrong facts and precedents.
11. Thus, we are not able to follow the ratio of decision laid down in M/s. National Engineering Industries Ltd. (supra). Thus, respectfully following our own decision decisio in the case of EIH Ltd. (supra) and CIT vs. Rohit Ferro Tech Ltd. (supra),, we hold that the corporate guarantee issued by the assessee company to its fully owned subsidiary, is not an international transaction in terms of Section 92B of the Act. Conseque Consequently, the 7 ITA No. 684/Kol/2019 Assessment Year: 2012-13 M/s. IFGL Refractories Ltd adjustment made u/s 92CA of the Act is hereby deleted and this ground of the assessee is allowed.
12. The assessee has raised two additional grounds. Both the additional ground are legal grounds and do not require enquiry into facts. All the factss are on record. Under the circumstances, we admit both these additional grounds by applying the judgment of the Hon'ble Supreme Court in the case of National Thermal Power Co. Ltd. vs Commissioner Of Income 1998 229 ITR 383 SC.
13. After hearing rival con contentions, tentions, we find that the issue of deduction of education cess is covered in favour of the assessee by the decision of the Hon'ble Rajasthan High Court in the case of Chambal Fertilizers and Chemicals Ltd. vs. CIT [D.B. Income Tax Appeal No. 52/2018] 52/2018]. The he Hon'ble Bombay High Court in the case of Sesa Goa Ltd. vs. JCIT reported in [2020] 117 taxmann.com 96 (Bombay) held that education cess cannot be disallowed by invoking Section 40(a)(ii) of the Act. Both the Hon'ble High Courts have elaborately ly discussed this issue, in their judgments. This Bench of the Tribunal has followed this decision in the case of ITC Limited vs. ACIT in ITA Nos. 685 and 1267/Kol/2014, order dt. 27/11/2018. Respectfully following the same, we allow this ground of the assessee.
14. The second additional ground is on the issue whether the assessee is entitled to refund on dividend distribution tax (DDT) paid @ 16.22% u/s. 115 115-O of the Act.
The assessee submits that during the year it has paid dividend to Japanese Companies i.e., M/s Krosaki rosaki Harima Corporation and M/s. Sojitz Corporation. DDT @ 16.22% was paid by the assessee on these payments. The assessee claims that the DDT on dividend paid to the foreign companies should be restricted to 10% as per DTAA. The ld. Counsel submitted th that at Article 10 of the DTAA between India and Japan provides that tax on dividend shall be paid @ 10%. DDT in India is paid as per the provisions of the Section 115O of the Act. On the issue where DDT on dividend shall be paid as per the provision of Section 115-O O of the Act or Article 10 of DTAA between India and Japan,, the ld. Counsel for the assessee relied on the decision of the Delhi Bench of the Tribunal in the case of Giesecke and Devrient [India] Pvt. Ltd. vs. ACIT in ITA No. 7075/Del/2017, order dt. 13/10/2020.
8 ITA No. 684/Kol/2019Assessment Year: 2012-13 M/s. IFGL Refractories Ltd 14.1. The ld. D/R opposed the contentions and submitted that all the facts are not on record and that Dividend Distribution Tax (DDT) is a tax on domestic company. Reliance was placed on the decision of the Hon'ble Bombay High Court in the case of Godrej and Boyce vs. DCIT (328 328 ITR 81
81).
15. After hearing rival contentions, we find that in the case of Giesecke and Devrient [India] Pvt. Ltd. (supra) (supra),, the Tribunal had restored the matter to the file of the Assessing Officer by observing as follows:-
"72. Article 10.4 above specifies that clause 1 and 2 will not be applicable if beneficial owner of dividend carries on business in other contracting state of which the company paying dividend is a resident through PE situated therein. Though supporting porting documents have been filed before us, but these documents need verification from primary officer, that is, the Assessing Officer. We, therefore, deem it fit to restore this issue for limited purpose of verification in the light of the aforesaid Articles cles of DTAA.
73. Considering the above in totality, in our considered opinion, the DDT levied by the appellant should not exceed the rate specified in Article 10 in India Germany DTAA."
16. In the case on hand also, we restore the entire issue to the fil filee of the Assessing Officer with a direction that the claim of the assessee may be examined de novo. The assessee is directed to furnish all the necessary details in support of its claim. This ground of the assessee is allowed for statistical purposes. No other ther ground is argued before us.
17. In the result, appeal of the assessee is allowed in part.
Kolkata, the 17th day of February, 2021.
Sd/- Sd/-
[S. S. Godara] [J.
J. Sudhakar Reddy]
Reddy
Judicial Member Accountant Member
Dated : 17.02.2021
{SC SPS}
9
ITA No. 684/Kol/2019
Assessment Year: 2012-13
M/s. IFGL Refractories Ltd
Copy of the order forwarded to:
1. M/s. IFGL Refractories Ltd
Mcleod House
3, Netaji Subhas Road
Kolkata - 700 001
2. Asstt. Commissioner of Income Tax (OSD), Ward Ward-6(2) Kolkata
3. CIT(A)-
4. CIT- ,
5. CIT(DR), Kolkata Benches, Kolkata.
True copy By order Assistant Registrar ITAT, Kolkata Benches