Income Tax Appellate Tribunal - Chennai
Gimpex Private Ltd., Chennai vs Acit Central Circle 1(2), Chennai on 5 April, 2019
आयकर अपील य अ धकरण, 'डी' यायपीठ, चे नई
IN THE INCOME TAX APPELLATE TRIBUNAL, 'D (TPC)' BENCH : CHENNAI
ी अ ाहम पी. जॉज , लेखा सद य एवं
ी ध$ु व%
ु आर.एल रे &डी, या(यक सद य के सम* ।
[BEFORE SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER
AND SHRI DUVVURU RL REDDY, JUDICIAL MEMBER]
आयकर अपील सं./I.T(TP)A. No.57/CHNY/2018.
नधा रण वष /Assessment year : 2014-2015
M/s. Gimpex Private Ltd, Vs. The Assistant Commissioner of
No.282, Linghi Chetty Income Tax,
Street, Central Circle 1(2)
Chennai 600 001. Chennai.
[PAN AAACG 2482P]
(अपीलाथ-/Appellant) (./यथ-/Respondent)
अपीलाथ क ओर से/ Appellant by : Shri. D. Anand, Advocate
यथ क ओर से /Respondent by : Shri. Srinivasa Rao, IRS, CIT.
सन
ु वाई क तार ख/Date of Hearing : 27-03-2019
घोषणा क तार ख /Date of Pronouncement : 05-04-2019
आदे श / O R D E R
PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER
This is an appeal filed by the assessee which is directed against an order dated 11.09.2018 of ld. Assistant Commissioner of Income Tax, Central Circle 1(2), Chennai passed u/s.143(3) read with section 144C(5) of the Income Tax Act, 1961 (in short ''the Act''), :- 2 -: IT(TP)A No.57 /2018 pursuant to the direction dated 17th August, 2018 of ld. Dispute Resolution Panel.
2. Facts apropos are that assessee a company trading in minerals and maize, had international transactions with its Associate Enterprises abroad on five items of trading namely Barytes, Bentonite, Iron ore, Millscale, Coal and maize, during the relevant previous year. As per the assessee, the first five of these were metallic / non-metallic minerals. Details of such International transactions were as under:-
Sl.No Nature of international Amount Method
transaction (in B.) adopted
1 Purchase of wood pulp 1,15,195
2 Sale of traded goods 2,61,20,19,702
3 Recovery of expenses 16,59,979 CUP
4 Reimbursement of expenses 66,890
Ld. AO made a reference to the ld. Transfer Pricing Officer for
analyzing the Arms Length Prices of the international transactions of the assessee with its Associate Enterprises. Assessee had bench marked its transactions with AE considering Comparable Uncontrolled Pricing (CUP) as the most appropriate method (MAM). Break-up of :- 3 -: IT(TP)A No.57 /2018 the sales made by the assessee to its AEs during the relevant previous year were as under:-
Sl. Associated Description Unit of Quantity Amount of No Enterprise transaction measurement transaction 1 SPG Minerals Sale of Metre Tonnes 85,744 67,60,20,585 Pte Limited Millscale Sale of Barytes Metre Tonnes 81,987 79,13,12,953 Podwer Sale of De Oil Metre Tonnes 32 36,47,925 Rice Bran Sale of Broken Metre Tonnes 247 39,00,572 Rice Sale of Yellow Metre Tonnes 9,000 3,97,54,025 Maize/ Corn Sale of Metre Tonnes 200 12,61,647 Bentonite Sale of Barytes Metre Tonnes 56,100 46,20,10,428 Lumps Sale of Iron ore Metre Tonnes 78,115 51,83,67,368 fines 2 SPG Vietnam Sale of Yellow Metre Tonnes 987 1,57,44,199 Trading Ltd Maize/ Corn Total 261,38,61,766 Assessee had considered the rates published in PLATT (presumably S&P Global Platts Insight Magazine) for its CUP analysis. Ld. TPO sought to reject this methodology on a reasoning that assessee could not provide one to one transaction mapping to justify adoption :- 4 -: IT(TP)A No.57 /2018 of CUP as MAM. Ld. TPO, thereafter sought to bench mark the international transactions of the assessee considering TNMM. While doing so, ld. TPO segmented the iron ore/ millscale trading from other business operations of the assessee. Ld. TPO identified five companies as proper comparables and arrived at an average Profit Level Indictor (PLI) of 4.89% for such companies. The companies identified by the ld. TPO and their PLIs were as under:-
Sl.No Name of the company OP/OC Margin
1 MBG Commodities Pvt Ltd 1.98
2 Maheshwari Logistics Ltd 3.58
3 Narsingh Ispat Ltd 3.65
4 Oswal Minerals Ltd 9.45
5 Sharda Ma Enterprises Pvt Ltd 5.78
AVERAGE 4.89%
As per the ld. TPO profit level indicator of the assessee for its iron ore / millscale segment reflected a loss of 6.54%. This was worked out by the ld. TPO as under:-
Operating Income 3477725370
Operating Cost 3721251663
Operating Profit (-) 243526293
OP/OC (-) 6.54%
According to him, PLI of the assessee was way below that of the comparable selected by him, calling for an ALP adjustment.
..
:- 5 -: IT(TP)A No.57 /2018
3. Based on the above reasoning's, ld. TPO put the assessee on notice as to why its profit from iron ore / millscale segment should not be considered at 4.89%. Reply of the assessee was that such commodities were sold in bulk and in its line of business TNMM could not be considered as MAM. As per the assessee, it had made similar sales to third parties and invoices raised on such parties clearly indicated that the prices which were charged by it on its AEs for millscales were far higher. Further, as per the assessee, MBG Commodities Pvt Ltd, Maheshwari Logistics Ltd, Narsingh Ispat Ltd, Oswal Minerals Ltd and Sharda Ma Enterprises Pvt Ltd which were selected by the ld. TPO for his comparable study were mainly engaged in logistics and coal trading and could not be considered as good comparables. However, ld. TPO was not impressed by the above reply. According to him, the comparables were selected by him using prowess database which was neutral in nature, that too, after applying filters for selecting companies trading in minerals, while excluding those having sales below one crore or related party transaction in excess of 25% or product dissimilarity. Thus, according to him, assessee's contention that companies considered for TNMM study was inappropriate was not acceptable. Further, as per ld. TPO, assessee's endeavor for using CUP as MAM could not be accepted since it failed to make a one to one comparison. Thus, as per the ld. :- 6 -: IT(TP)A No.57 /2018 TPO, ALP adjustment was required on the sale value of iron ore/mill scales to the AEs, applying the average PLI of 4.89% of the comparables. Ld. TPO proposed an upward adjustment of B14,61,31,923/-.
4. Apart from the above, ld. TPO also found that assessee had provided corporate guarantee for a loan of US Dollar 16 Million raised by its Associated Enterprise named M/s. SPG Mining Pte Ltd in Singapore. According to him, assessee had not charged any guarantee fee for this. As per the ld. TPO, analysis of bank guarantee rates charged by various banks revealed an average rate of 2.19% . This was arrived by the ld. TPO as under:-
Bank Annual Rate
Punjab National Bank 3%
HDFC Bank 1.80%
AXIS Bank 1.75%
Canara Bank 2.03%
ICICI 1.28%
Indian Bank 4%
State Bank of India 1.30%
Union Bank of India 3%
Indian Overseas Bank 1.56%
( Non Rural Branch)
Average 2.19%
Though the assessee explained that the very same AE had provided an interest free security deposit of Rs.26.95 crores to it and the :- 7 -: IT(TP)A No.57 /2018 corporate guarantee was given so as to enable the AE to avail of a loan, this was not accepted. Ld. TPO was of the opinion that by virtue of the Explanation inserted in Section 92B of the Act through Finance Act, 2012 with retrospective effect from 01.04.2002, such guarantee provided to an AE became international transaction. According to the ld. TPO, Hon'ble Bombay High Court in the case of CIT vs. Glenmark Pharmaceuticals (2017) 398 ITR 439 had affirmed a decision of Mumbai Bench of this Tribunal in the name of in the case of Everest Kanto Cylinders Ltd vs. ACIT, (2015) 113 DTR 108 and had held that pursuant to the above amendment in Section 92B of the Act, corporate guarantee could be considered as an international transaction. Assessee did rely on a decision of a Co-ordinate Bench of this Tribunal in assessee's own case for an earlier year, but the ld. TPO refused to take cognizance of that since, according to him, the said decision was rendered without considering the amendment made to Section 92B of the Act. According to him, assessee ought have charged atleast 1.98% as interest on the value of corporate guarantee given by it. An upward adjustment of B2,02,75,200/- was proposed by the ld. TPO.
5. In addition to above, ld. TPO also found that assessee had receivables of Rs.261,20,19,702/- due from M/s. SPG Mining Pte Ltd :- 8 -: IT(TP)A No.57 /2018 and M/s. SPG Vietnam Trading, both of which were AEs. As per the ld. TPO by virtue of the Explanation added to Section 92B of the Act through Finance Act, 2012 with retrospective effect from 01.04.2002, receivables which were outstanding beyond the normally allowed credit period was exigible to a transfer pricing adjustment. Though the assessee relied on a decision of Delhi Bench of the Tribunal in the case of Techbooks International Pvt Ltd vs. DCIT (2015) 44 CCH 295, ld. TPO held that an upward adjustment applying an interest rate of 12.83% was required to be made on the receivables remaining outstanding beyond the credit period given by the assessee. An upward adjustment of B6,18,43,887/- was proposed.
6. When a draft order on the above lines was issued to the ld. AO, asseessee chose to move ld. Dispute Resolution Panel. Contentions taken by the assessee, viz-a-viz the ALP adjustment sought to be made on its sale of iron ore/ millscale to AE were as under:-
a ''CUP method ought not to be rejected b Rates published by Plat s should be considered under CUP method c the Assessee has furnished invoices raised by third parties for sale of Millscale is an uncontrolled com arable price, which could be used as comparable data under CUP method for benchmarking "Millscale.
d The TPO erred in carving out Iron ore /Millscale segment for the purpose of TNMM.:- 9 -: IT(TP)A No.57 /2018
e The overall entity margin is at 8.33%
f Without prejudice to the above, the TPO has considered
comparable companies which are into trading in coal as well. Similarly, coal segment should also be aggregated with Iron ore/Millscale segment.
g Margin of Oswal Minerals Ltd, has been erroneously computed by TPO. The net margin was considered at 9.45% instead of correct margin of 0.45%''.
Apart from the above, assessee also objected to the inclusion of MBG Commodities Pvt Ltd, Maheshwari Logistics Ltd, Narsingh Ispat Ltd, Oswal Minerals Ltd and Sharda Ma Enterprises Pvt Ltd, citing their functional incompatibility.
7. Viz-a-viz upward adjustment on corporate guarantee, submissions of the assessee were as under:-
a. ''Share-holder activity necessity for compensation. The Appellant relies on the Kolkata Tribunal decision in the case of DClT Vs. EIH Ltd reported in [2018] 89 taxmann.com 417 (Kolkata - Trib.):
"EIH flight is a startup company, it required funds primarily for acquisition of capital assets for setting up i s operation and guarantee facilities given by the assessee/assessee company to the lender bank is normal business practice and obligation towards a subs diary. Since the AE was a startup company, the assessee extended corporate guarantee to the third party borrowers as a matter of commercial prudence to protect its interest by fulfilling the shareholders obligation. The contention of the assessee that the corporate guarantee as provided by the assessee was a matter of commercial prudence to protect and by fulfilling the shareholder obligation, as any financial incapacitation of the subsidiary would jeopardize the investment of the assessee is agreeable. 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 :- 10 -: IT(TP)A No.57 /2018 receive dividends and, therefore, no TP- adjustment ought to have been made in the facts and circumstance of the case is agreeable''.
b. Provision of Guarantee cannot be considered as international transaction. The Appellant relies on the Kolkata Tribunal Decision in the case of DCIT vs. EIH Ltd (supra) "Coming to the alternate plea of the assessee that, in the facts and circumstances the corporate guarantee is not an International Transaction under section 928, it is noted that term 'guarantee' as inserted in the definition of 'international transaction' in section 92B by inserting an Explanation in the Finance Act, 2012 with retrospective effect from 1-4-2002. e 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 928. 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 (ii) business restructuring or reorganization. Clause (c) refers to lending or guarantee. But the Explanation which is or removal of doubts or is clarificatory , cannot be read independent of section 92B(1). Section 928(1), provides those transactions international transactions which are in the nature of purchase, sale or lease tangible or intangible property (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 section 92B(1) (i.e. purchases, sales, provision for services, lending or borrowing any other transaction) should have bearing on the profits, incomes, losses or ass of such enterprises. The condition precedent of a transaction having a bearing on profits, incomes, losses, or assets would apply to each of the aforesaid transaction namely purchase, sale, or lease of tangible or intangible property or provision of services, or lending or borrowing money or any such transaction. This understanding gets further clarified b way of insertion of Explanation in section 928(1) by the Finance Act, 2012 with retrospective effect from 1- 4-2002 vide clauses (a) to (d). 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 :- 11 -: IT(TP)A No.57 /2018 transaction where a transaction of business restructuring or reorganization, entered into 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''.
c.The assessee has not incur d any cost for providing guarantee and as such there is no impact on the profit of the Assessee. Accordingly, the adjustment for guarantee commission is unwarranted. The Appellant relies on the Jurisdictional Tribunal decision in the case of Redington (India) Ltd Vs ACIT [2016] 69 taxmann.com 351 and Kolkata Tribunal decision in the case of DC IT Vs. EIH Ltd (supra). The DRP refused t follow the jurisdictional Tribunal decision in the case of Redington (supra) only 0 the ground that the said case was distinguished by the "'Mumbai Tribunal in the case of Everest Kanto Cylinder P Ltd. However, it is pertinent to note that Mumbai Tribunal has not dissented from Redington decision rather it has distinguished and held that it is not applicable as the facts are different. The relevant excerpts are as under:
It is clear that the coordinate bench has excluded the transaction of providing bank guarantee outside the purview of international transaction on the finding that such transaction had no effect on profits: income, losses or assets of the assessee. However, the facts of the instant case are clearly distinguishable wherein not only the assessee has incurred cost for providing bank guarantee but it also recovered guarantee commission from its AE. Thus, the assessee had effect on its income and expenditure both on entering into such transaction of providing bank guarantee. Accordingly, assessee' will at get help of the decision of the coordinate bench to come out of the purview of international transaction.
In the instant case, similar to Redington case there is no fee charged and therefore the principle laid down by he jurisdictional Tribunal will be squarely applicable.
d.Apart from the above the AE has kept an interest free deposit with Assessee to the tune of Rs.26.75 Crores, wjich covers 25% of the loan guaranteed. TPO's Working for Guarantee fees Loan: s.102,40,00,000· 1.98% = 2,02,75,2001-. If interest is levied at PLR rate of 14.7 % on interest free security deposit: Rs.26,75,00,000 •14.75% = 3,94,56,250. Sin e the imputed interest on security deposit is higher, there is no requirement t charge guarantee commission. The TPO has accepted this contention in the immediately succeeding AY 2015-16 :- 12 -: IT(TP)A No.57 /2018 (refer Page 148 & 149 of the paper book) and held t at since the interest on security deposit is much higher than guarantee commission there is no requirement to make adjustment for guarantee commission''.
8. Viz-a-viz addition proposed imputing interest on trade receivables, submissions of the assessee before ld. DRP were as under:-
a. Outstanding receivables cannot be considered as an international transaction and it does not fall within the purview of capital financing as contemplated under Section 92B of the Act since the transaction itself is notional. Only section 92CE which comes into force from 1.4.2018 enables the AO to make secondary adjustment in case the primary adjustment is sustained. In this case, if iron ore/Millscale segment is aggregated and considered along with other minerals, the net margin would be 8.03% which would be higher than ALP determined by TPO at 4.89%. It is submitted that if the m in transactions are held to be at arms length then there is no necessity to separately impute interest as delay in realisation will be subsumed as part of the main transaction. The Appellant relies on the Ahmedabad Tribunal decision in the case of Bisazza India Pvt Ltd Vs ACIT reported in [2018) 97 taxmann.com 423 and Gemstone Glass Pvt Ltd [2018) 100 taxmann.com 5 [Ahmedabad Trib].
b. Apart from the above, it is submitted that the Appellant does not charge interest on delayed realization from AE as well as Non-AE debtors and accordingly there is no requirement to recover/charge interest only in respect of AE transactions. The Appellant relies on the Bombay High Court decision in the case of CIT Vs Indo American Jewellery L [2014] 44 taxmann.com 310 (Bombay). Further, the Appellant submits that even if this Hon'ble Tribunal holds that CUP is the Most Appropriate Method, t en also interest on delayed recovery from AE debtors cannot be levied as the Appellant has not charged interest on delayed recovery from Non-AE debtors.
c. The TPO failed to appreciate that is was regular business transaction and there are trade receivables which were received within the credit period and beyond the credit period. :- 13 -: IT(TP)A No.57 /2018 d. In fact, the Assessee h s received payments to the extent of RS.1 00,90,15,630 out of total revenue of s.261, 70,22,213 well within the credit period, which is equivalent to 38.4.1% f the total revenue. Only Rs.161 ,03,29,136 was collected belatedly e. Apart from the above, he AE has kept an interest free deposit with Assessee to the tune of Rs.26.75 Crore . If interest is levied at PLR rate of 14.75% on interest free security deposit: Rs.2 ,75,00,000 * 14.75% = 3,94,56,250 would be payable by Appellant.
f. Considering early receipt of money and interest free security deposit, there is no necessity to recover in rest on outstanding. g. Even assuming without admitting, if interest is to be charged, the same should be on the basis of LIBOR rates as the receivables are in foreign exchange.
h. Irrespective of the above, the "base rate" adopted by TPO has no sanctity. The "base rate" has publish d in the 5BI website is only in the range of 9.5% to 10% .
i. Further, there is an error in the computation of interest. The TPO has double counted interest to the tune of Rs.l,37,31,786 (11,94,319 + 50,67,241 + 30,23,770 + 44,46,455), which requires to be deleted''.
9. However, ld. DRP rejected all the above contentions of the assessee. According to them, assessee had failed to provide complete transaction details on its trading with AEs. As per the ld. DRP, assessee did not keep segmented results in its book for its AEs and Non AEs. According to them, CUP method, though it was desirable, required accurate comparison which could not be done here. As per the ld. DRP, average value of product taken from a publication could not be considered as a basis for CUP. Thus, according to them, ld. :- 14 -: IT(TP)A No.57 /2018 TPO was justified in adopting TNMM. As for the argument of the assessee that iron ore / millscale should be aggregated with its other segments, ld. DRP was of the opinion that unless there was a serious flaw or defect in segmental results prepared by the ld. TPO, assessee could not ask for such aggregation. However, ld. DRP did rework PLI of one of the comparables, namely M/s. Oswal Minerals Ltd and directed the ld. AO to adopt the PLI of this company as 1.9% while working out the average PLI of the five comparables selected by him.
10. Viz-a-viz corporate guarantee, ld. DRP was of the opinion that providing such guarantee gave a distinct advantage to the Associated Enterprise and there was inherent cost for the assessee by assuming such risk. According to them, there were various decisions of the Tribunal, which held that corporate guarantee given to an Associated Enterprise could be considered as an international transaction u/s.92B of the Act. Specific reliance were placed on the following decisions:-
i) Zee Entertainment Enterprises Ltd vs. Ad. CIT, Range 11(1), Mumbai in 81 Taxmann. Com 379 (Mumbai-Tri) A.Y. 08-09
ii) Aster (P) Ltd vs. DCIT, Circle 1(1) Hyderabad in 81 taxmann.com 297 (Hyderabad - Tri) (A.Y. 10-11 &11-12) :- 15 -: IT(TP)A No.57 /2018
iii) Manugraph India Ltd vs. DICT 3(2) Mumbai in 62 taxmann.com 347 (Mumbai-Tri) (A.Y. 10-11)
iv) Ladshya Media (P) Ltd vs. DCIT 10(2)(1), Mumbai in 80 taxman.com 309 (A.Y. 10-11) Thus, according to them, ld. Assessing Officer/TPO was justified in considering the corporate guarantee given by the assessee to its Associated Enterprise to be an international transaction requiring an Arms Length Price adjustment.
11. Viz-a-viz, notional interest on outstanding trade receivables, ld. DRP was of the opinion that non-charging or under-charging of interest on excess period of credit allowed to an Associated Enterprise was an international transaction coming within the ambit of ''deferred payment or receivable or any other debt arising during the course of business'' appearing in clause (c) of the Explanation introduced in Section 92B of the Act through Finance Act, 2012 with retrospective effect from 01.04.2002. Relying on the decision of Delhi Bench of the Tribunal in the case of Bechtel India Pvt Ltd. Vs. ACIT, (2017) 50 CCH 30, ld. DRP held that ld. Assessing Officer/ TPO was justified in considering the excess period of credit given to the Associated Enterprise on the receivables as international transaction requiring an Arms Length Price adjustment.
:- 16 -: IT(TP)A No.57 /2018
12. Based on the directions from the ld. DRP, ld. Assessing Officer thereafter completed the assessment.
13. Now the grounds taken by the assessee assail the upward Arms Length Price adjustments made on its Associated Enterprise sales to Associated Enterprise, corporate guarantee and overdue receivables as also adoption of TNMM as most appropriate method as against CUP.
14. Ld. Authorised Representative strongly assailing the orders of the lower authorities submitted that even if TNMM was considered as the most appropriate method, mistake was committed by the ld. TPO in carving out assessee's trading in iron ore/ millscale as a separate segment. As per the ld. Authorised Representative, operating margin of the comparables were arrived on an aggregate basis. However, according to him, such average profit rate of the comparables were used for bench-marking the transactions of the assessee in the iron ore/ millscale segment alone. According to him, MBG Commodities Pvt Ltd was trading in coal and logistics, Maheshwari Logistics Ltd was trading in variety of papers, Narsingh Ispat Ltd was trading in coal, hard coke, iron ore, lime stone, manganese ore etc., Oswal Minerals Ltd was trading in alloys and minerals without separate reportable segments and Sharda Ma :- 17 -: IT(TP)A No.57 /2018 Enterprises Pvt Ltd was trading in coal. Thus, according to him, it was a mixture of companies selected by the ld. TPO having different segments, few of which were common. As per the ld. Authorised Representative, the ld. TPO fell in error when he worked out the PLI of the assessee for iron ore/millscale, ignoring the other minerals traded by it. According to him, a comparison ought have been done only on aggregate basis. Further, according to the ld. Authorised Representative, there was no reason to consider each mineral as a separate segment when the admitted fact was that assessee had never done any segmentation in its books. As per the ld. AR, if all the minerals traded by the assessee were considered together, its profit margin would be 8.33%, which was much higher than the average margin of 4.89% for the comparables selected by the ld. TPO. Further, as per the ld. Authorised Representative, ld. TPO while computing assessee's PLI, had excluded forex expenditure without any justification. Ld. Authorised Representative submitted that only 43% of the assessee's revenue was from Associated Enterprise whereas 57% of its sale were to Non Associated Enterprise, that too similar to what were traded with its Associated Enterprises. According to him, lower authorities had refused to segregate the Associated Enterprise/ Non Associated Enterprise transactions, while doing such a segmentation artificially for Arms Length adjustment. Submission was :- 18 -: IT(TP)A No.57 /2018 that ld. TPO took only the iron ore/millscale, ignoring the other segments which had substantial profits. According to him, all the trading activities of the assessee with its Associated Enterprises should be considered as one segment and if so considered, the profit margin of the assessee would be 8.33% as worked out in paper book page No.72 and this was more than comparable to the margin of 4.89% of the selected comparables. In any case according to him, if the ld. TPO wanted to stick to a segmentation, M/s. Maheswari Logistics Limited, M/s. Sharda Ma Enterprises Ltd and M/s. Narsingh Ispat Limited should go out of the list of comparables due to their functional dissimilarity.
15. Viz-a-viz, corporate guarantee, ld. Authorised Representative submitted that the Associated Enterprise to which assessee had given such guarantee provided on interest free deposit of B26.95 crores to the assessee. According to him, providing corporate guarantee without any fees could not be considered as an international transaction even after the explanation added to Section 92B of the Act, through Finance Act, 2012 w.e.f. 01.04.2002. Specific reliance was placed on a decision of Kolkata Bench of the Tribunal in the case of DCIT vs. EIH Ltd (2018) 52 CCH 37. According to him, when a parent company extended an assistance to its wholly owned :- 19 -: IT(TP)A No.57 /2018 subsidiary in the nature of a corporate guarantee, which did not have any bearing on its Profit, loss, incomes, losses or assets, it would be outside the ambit of the definition of international transaction as given in Section 92B(1) of the Act, even after the amendment to the said section, through Finance Act, 2012 with retrospective effect w.e.f. 01.04.2002. As per the ld. Authorised Representative the case of Everest Kanto Cylinders Ltd (supra) relied on by the lower authorities was not comparables on facts, since in the said case the parent company had charged 0.5% for rendering services in the nature of providing corporate guarantee.
16. Alluding to the interest adjustment made on the overdue receivables from Associated Enterprise, ld. Authorised Representative submitted that out of total sales of B261 Crores to Associated Enterprises during the relevant previous year, substantial part was received much earlier to the expiry of the credit period of 45 days. The delay in receiving the dues, as per the ld. Authorised Representative was not many. According to him, it was normal in trading transactions, that some dues were received belatedly whereas some are received earlier. Relying on the decisions of Ahmedabad Bench of the Tribunal in the case of Bisazza India (P) Ltd vs. DCT, (2018) 97 taxmann.com 432 and that of Gemstone Glass Pvt Ltd vs. DCIT, (2018) 100 taxmann.com 5, ld. Authorised Representative :- 20 -: IT(TP)A No.57 /2018 submitted that once TNMM method was adopted, any notional charges for overdue receipts stood subsumed in the bench marking and no further adjustment was required for overdue receivables. Ld. Authorised Representative also relied on a judgment of Hon'ble Bombay High Court in the case of CIT vs. Indo American Jewellery Ltd, (2014) 44 taxmann.com 310.
17. Per contra, ld. Departmental Representative strongly supporting the orders of the lower authorities submitted that segmentation of results, between the different minerals traded by the assessee was rightly done by the ld. TPO considering the nature of the various minerals dealt by the assessee. According to the ld. Departmental Representative, ld. TPO had applied correct filters for selecting the comparables. Further, as per the ld. Departmental Representative, CUP could not be adopted since assessee had not maintained one to one comparability data but had relied on certain publications, authenticity of which was questionable. Contention was that mistake pointed out by the assessee on the PLI of M/s.Oswal Minerals Ltd one of the selected comparables was accepted by the ld. DRP, and there was no reason why any further relief should be given to the assessee.
:- 21 -: IT(TP)A No.57 /2018
18. Viz-a-viz the adjustment for corporate guarantee, ld. Departmental Representative submitted that by virtue of Explanation added to Section 92B of the Act through Finance Act, 2012 with retrospective effect from 01.04.2002 providing corporate guarantee became an international transaction amenable to an Arms Length Price adjustment. Specific reliance was placed on the decision of Mumbai Bench of the Tribunal in the case of Everest Kanto Cylinders Ltd (supra). According to him, the said decision was sought to be distinguished by the ld. Authorised Representative applying a wrong logic. As per the ld. Departmental Representative, assessee was in a worse position since it did not charge any fee at all, when in the case of Everest Kanto Cylinders Ltd the concerned assessee had charged fees of 0.5%.
19. In so far as interest on overdue receivables was concerned, ld. Departmental Representative submitted that this was also covered by the explanation to Section 92B of the Act added through Finance Act, 2012. According to him, ld. Assessing Officer/TPO had adopted a rate of interest taking proper comparables and therefore assessee could not be aggrieved on the upward adjustment carried out.
20. We have considered the rival contentions and perused the orders of the authorities below. First we take up the issue regarding :- 22 -: IT(TP)A No.57 /2018 adoption of TNM Method as MAM against CUP considered by the assessee. We are of the opinion that assessee having not maintained segmental results in its books of accounts, nor prepared segmental results, ld. TPO was justified in rejecting CUP as the most appropriate method. As pointed out by the ld. DRP adopting CUP means there should be exact comparables and a comparability done with rates of minerals put out in a publication, in our opinion would not suffice the requirement of a CUP analysis.
21. Now coming to the TNM Method, adopted by the ld. TPO, he had arrived at an average PLI at 4.89% for the five comparable companies selected by him. Assessee had objected to these comparables but ld. TPO had justified his selection with the following comments.
''With regard to assessee's objection about comparables, it is pertinent to mention here that prowess is a neutral database and this office has applied standard filters (as given under), after qualitative and quantitative analysis to locate, potential comparables primarily they are tested or related party transactions, persistent loss making and to locate functional similarity. The selection of comparables is objective, hence no cherry picking exercise has be n adopted and the objection of the assessee is not acceptable. Also, the said companies are primarily engaged in the trading in minerals and in TNMM broad function similarity only can be achieved and surgical precision is not required.
:- 23 -: IT(TP)A No.57 /2018Search filters:-
Search Process for Gimpex Limited A.Y. 2014-15.
Criteria Produce Name - Trading in Minerals Sales above one crore Cos. Making persistent loss Related party transaction >25% Product similarity Thus admittedly, ld. TPO himself has admitted that in a TNM Method only broad functional similarity could be achieved and surgical precision was not required. The type of functional profile of the comparables selected by the ld. TPO clearly corroborates this view of the ld. TPO since very few among these comparables, if at all any, was involved only in iron ore / millscale segment. In the case of M/s.
MBG Commodities Pvt Ltd, it is clearly stated in its Balance Sheet as on 31.03.2013 (paper book page No. 62) that their operations mainly were trading in coal and logistics. M/s. Maheshwari Logistics Ltd :- 24 -: IT(TP)A No.57 /2018 (paper book page No.68) were in logistics services, supply of coal, lignite & pet coke, manufacturing kraft paper and trading in variety of papers. M/s. Narsingh Ispat Ltd (paper book page No.64) was trading in coal, hard coke, iron ore, lime stone, dolomite manganese ore and a variety of other items. M/s.Oswal Minerals Ltd (paper book page No.67) which was fourth comparable selected by the ld. TPO was primarily trading in alloys & minerals and there were no separate reportable segments. M/s. Sharda Ma Enterprises Pvt Ltd (paper book page No.63) was in a single line of business of trading in coal. Ld. TPO does say that the PLI worked out by him for the above comparison were for their iron ore/ millscale segment, but clearly, this could not have been so. None of the comparables were trading in iron ore/ millscale, except may be M/s. Oswal Minerals Ltd. They were all doing varied business comprising of logistics, supplying coal, lignite & pet coke, trading in variety of papers. Thus, the PLI of the comparables selected by the ld. TPO could only be the result of their aggregate trading activities and not for the millscale or iron ore segment alone. Nevertheless the ld. TPO chose to compare the said average PLI with the segmented PLI of the assessee for its iron ore/ millscale trading. If all the segments in which assessee traded were aggregated, which aggregation is available at paper book page 132, this would clearly indicate that PLI of the assessee came to 8.33%.:- 25 -: IT(TP)A No.57 /2018
This work-out, which was provided by the assessee to lower authorities is reproduced hereunder:-
Particulars Iron ore Barytes Coal Bentonite Others Total & (Yellow Millscale maize, fines brown rice, rice bran) OP/OC -3.39% 22.67% 5.27% 26% 25.30% 8.33% The above work out has not been disputed by the Revenue. It may be true that assessee had not maintained segmental accounts and the above working can have therein some allocation of common expenses. Nevertheless, ld. TPO considered assessee to have maintained no segmental data. When the trading was mainly in minerals, in our opinion there was no reason why an aggregated result could not have been considered for the Arms Length Price analysis when TNM was considered as MAM. Even if we presume that average PLI worked out by the ld. TPO was correct, and even if we substituted the negative PLI of 6.54% worked out by the ld. TPO with the negative PLI 3.39% of considered by the assessee for its iron ore/ millscale segment, still its aggregate PLI was much more than the average PLI of 4.89% of the selected comparables. In our opinion, in such circumstances, there was no scope for making any Arms :- 26 -: IT(TP)A No.57 /2018 Length Price adjustment based on TNMM method on the trading results of the assessee. We have thus no hesitation in deleting the upward adjustment of B12,66,82,138/- made by the ld. Assessing Officer on assessee's trading with its Associated Enterprises.
22. Now we take up the question of upward adjustment for corporate guarantee fees. In our opinion, the question whether corporate guarantee would be amenable to a Arms Length Price adjustment, when no fee is charged by assessee on an Associated Enterprise which was its wholly owned subsidiary, stands answered by Kolkata Bench of the Tribunal in the case of EIH Ltd (supra). The Bench after considering the judgment of Hon'ble Bombay High Court in the case Everest Kanto Cylinders Ltd (supra), had held as under at para 12.1 to 12.17 of its order:-
12.1. The assessee filed objections before the ld DRP. The ld. DRP upheld the transfer pricing adjustment pertaining to the receipt of corporate guarantee fee.
Aggrieved by the decision of the ld. DRP and the final order of the AO, the assessee is in appeal before us on the following grounds:-
1.1. On the facts and circumstances of the case and in law, the Ld. Assessing Officer ("AO") / Transfer Pricing Officer ("TPO") erred in treating the Corporate Guarantee extended by the appellant to its AE as international transaction and Dispute Resolution Panel (hereinafter referred to as "Ld. Panel") erred in confirming as the same as an international transaction without appreciating the fact that it does not fall within the ambit of "International transaction" u/s 92B of the Act.
1.2 The Ld. AO/TPO and the Ld. Panel failed to appreciate the fact that corporate guarantee has been advanced by the appellant as a matter of commercial prudence to protect the business interest of the group by fulfilling the shareholder's obligation as any financial incapacitation would jeopardize the investment of the appellant.:- 27 -: IT(TP)A No.57 /2018
1.3 Without prejudice to the above, the Ld. AO/TPO and Ld. Panel failed to appreciate the corporate guarantee extended by the appellant is part and parcel of the management agreement entered into with the AE and said agreement take due care towards appropriate remuneration for corporate guarantee.
1.4 Without prejudice to the above, the Ld. Panel erred in arbitrarily confirming the arm's length guarantee commission rate of 3%, when a nominal guarantee commission rate of 0.3% - 0.5% has been accepted in various legal jurisprudence.
12.2. The ld. AR contended that the corporate guarantee was given by the assessee to the subsidiary AE M/s. EIH Mauritius herein (EIH Flight) to fund the set up of the said subsidiary company in its year of operation. According to the ld. AR, since M/s.
EIHflight is a start up company, it required funds primarily for acquisition of capital assets for setting up its operation and guarantee facilities given by the assessee company to the lender bank is normal business practice. According to the ld. AR, the provision of the said funds for initial establishment was the responsibility of shareholders of M/s. EIH flight i.e. the assessee in this case and it was discharging that responsibility to its subsidiary as shareholder. As said before, 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 guarantee 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 Coordinate 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. Our attention was drawn to that case wherein the Tribunal after examining the facts of that case observed 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, according to the ld. AR, 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. Therefore he prayed that the adjustment made by the ld TPO may be deleted.
12.3. Alternatively, the ld AR also contended that the corporate guarantee is not an international transaction u/s 92B of the Act. The assessee according to him has not incurred any cost in providing corporate guarantee to its subsidiary company at Mauritius. According to him, since the issuance of corporate guarantee does not haveany impact on profits, income, losses or assets of the guarantor as there is no cost associated with it, and when the transaction in question has no bearing on profits, incomes, losses or assets of such enterprise, it will be outside the ambit of expression 'International Transactions' under section 92B of the Act. For the aforesaid proposition, the ld. AR relied on the co-ordinate bench decision of Delhi :- 28 -: IT(TP)A No.57 /2018 Tribunal in the case of Bharti Airtel Limited in ITA No.5816/Del/2012. According to the ld AR, this proposition has been followed by the co-ordinate bench of Ahmedabad Tribunal in the case of Micro Ink Limited vs ACIT in ITA No.2873/Ahd/2010 and referred to various other case laws
i) Redington India Limited vs ACIT [ITA No.513/Mds/2014]
ii) Videocon Industries Limited vs ACIT Range 3(3), Mumbai [ITA NO.6145/Mum/2012, 1728/Mum/2014, 1729/Mum/2014];
iii) Manugraph India Limited vs Dy. Commissioner of Income Tax (I.T.A.No.2631/Mum/2015)
iv) Siro Climpharm Private Limited vs DCIT, Mumbai (I.T.A.No.1269/Mum/2015);
v) Siro Clinpharm Private Limited vs DCIT, Mumbai
(I.T.A.2618/Mum/2014).
12.4. In response, the ld. CIT,DR brought to our notice the decision of co-ordinate bench of Hyderabad Tribunal in the case of Prolifics Corporation Ltd vs DCIT reported in (2015) 55 taxmann.com 226 (Hyderabad-Trib.) dated 31.12.2014 for Asst Year 2009- 10, wherein the Tribunal has accepted the arguments of the revenue that after the insertion of the Explanation by Finance Act 2012 with retrospective effect from 2002, the corporate guarantee also is an international taxation. The ld. DR also contended that the Hon'ble Bombay High Court in the case of CIT vs Everest Kanto Cylinders Ltd. In ITA NO.1165 of 2013 where the guarantee fee transaction was bench marked and arms length price ALP was made by TPO and was upheld by the Tribunal as well as by the Hon'ble Bombay High Court in favour of the department. According to the ld. CIT DR , subsequent amendment by the insertion of Explanation by Finance Act, 2012 with retrospective effect from 2002 in section 92B(1) of the Act, the transaction in respect of lending or borrowing money has been expanded to include capital financing including any type of long term or short term borrowing, lending or guarantee, purchase or sale of marketable securities or any time of advance, payments or deferred payments or receivable or any other debt arising during the course of business. So, according to the ld. CIT,DR, since the Explanation gives retrospective effect from 01.04.2002 it is abundantly clear that the act of granting corporate guarantee by the assessee to the AE is in fact an international transaction and therefore the TPO was right to hold it accordingly. The ld. CIT,DR drew our attention to the decision of Hon'ble Bombay High Court in the case CIT Vs. Everest Kanto Cylinders Ltd., ITA No. 1165 of 2013 wherein the Hon'ble High Court upheld the adjustment of 0.50% made by the TPO in respect of guarantee fee in a similar case as that of assessee, and, therefore, according to him, the Tribunal decision of Bharti Airtel Ltd of Delhi Bench is not good law.
12.5. According to the ld. DR, the transaction mentioned in section 92B of the Act i.e. purchase, sale or lease of tangible or intangible property, or provision of services or lending or borrowing money has to be treated as an international :- 29 -: IT(TP)A No.57 /2018 transaction and the arguments of the ld. AR is not correct to say that the transaction should have a bearing on the profits, incomes losses or assets of such enterprises,. According to him, only in other transaction i.e. in sec. 92B [not falling in (a) to (d)] which is not specifically stated that is purchase, sale or lease of tangible or intangible property or provision of services or lending or borrowing money there is a requirement of bearing on profit, incomes, assets of such enterprises. According to the ld. DR, explanation below sec. 92B of the Act, clearly includes the corporate guarantee as an international transaction and a reading of residual clause (e) makes it abundantly clear that in case of other transactions which fall in (a) to (d) there is no requirement of bearing on the profits, incomes, losses or assets of such enterprises; and only in respect of transaction specified in (e) this requirement can be read into and in all other transactions specified in (a) to (d) no such requirement of profit/loss can be read into and, therefore, the transaction of corporate guarantee will be considered as an international transaction. Therefore, according to the ld. DR, the ld TPO was correct in not accepting the arguments of the assessee that transactions of giving corporate guarantee to the AE was not an international transaction.
12.6. The ld. AR in his rejoinder explained that the case cited in favour of Revenue on this issue by the Hon'ble Bombay High Court in the case of Everest Kanto Cylinder Limited (supra) was when the parent company charged a fee of 0.5% on the AE for rendering this service. On this factual aspect, the Tribunal as well as the Hon'ble High Court held that it is an international transaction. Since in the case in hand, the assessee has not charged a penny from the AE, the facts of the case is different and case law is distinguishable and, therefore, the Hon'ble High Court's order cannot come to the rescue of the Revenue. The ld. AR pointed out that in the said case, the Hon'ble Bombay High Court did not answer the specific question as to whether the issuance of corporate guarantee is inherently within the ambit of definition of 'international transaction' irrespective of whether or not such transactions have any "bearing on profits, income, lossess or assets of such enterprises" u/s. 92 B of the Act. According to Ld. Counsel, the Hon'ble High court was examining whether the adjustment made by the TPO when the assessee in that case in fact had charged 0.5% on the AE as corporate guarantee commission and that was the question before the Hon'ble Court and the Hon'ble High Court did not answer as to whether the corporate guarantee given without any financial liability on the AE is an International Transaction. Thus, according to ld. AR, the decision in the case of Everest Kanto Cylinder Limited (supra) cannot come to the rescue of the revenue. The ld. AR cited the decision of the Hon'ble Supreme Court in the case of Padmasundara Rao (Decd.) & Ors vs State of Tamil Nadu & Ors reported in 255 ITR 147 (SC) at page 148 to bring to our notice that a change even on a single fact may change the ratio of the entire decision and so the Hon'ble Bombay High Court decision is distinguishable and cannot be taken as a precedent to adjudicate the issue before us.
12.7. According to the ld. AR, the Hyderabad Tribunal in the case of Prolifics Corporation Ltd (supra) does not discuss as to whether corporate guarantee is a service or not and has not expressly dealt with the question as to whether the explanation inserted by Finance Act 2012 is retrospective or not. According to the ld. AR, the Delhi Tribunal in the case of Bharti Airtel Ltd. has gone in depth to decide the issue which was framed before it on this issue. So, according to him, the :- 30 -: IT(TP)A No.57 /2018 decision of Bharti Airtel Ltd is legally sustainable. For a question from the Bench that since there is a contradictory decision on the issue in hand, whether the question needs to be referred to the Special Bench of the Tribunal, the ld. Counsel drew our attention to the fact that the question of law arising from the Tribunal's decision in Bharti Airtel Ltd has already been admitted by the Hon'ble Delhi High Court, therefore referring the question and convening of the Special Bench would be a futile exercise.
12.8. We have heard both the parties and perused the records. We note that the assessee company had incorporated a 100% subsidiary called M/s. EIH Flight at Mauritius for the financial year 2007-08 by investing US $1.1 million for the purpose of setting up its off-shore flight catering unit there (Mauritius). The business objective of M/s. EIH flight was to provide in-flight catering services to airline companies operating in and out of Mauritius. According to assessee, i.e. M/s. EIH has been in the industry of catering facilities for over 50 years, and has been producing 50,000 meals per day for some of the biggest names in aviation industry including Air France, Air Mauritius, British Airways, Jet Airways, Etihad Airways, Lufthansa etc., For the purpose of setting up its catering unit at Mauritius, the Airport Authority of Mauritius provided EIH Flight (100% subsidiary company of assessee) a plot of land measuring 14,000 sq. meters on a renewable lease for 20 years. The facility was to have a serving capacity of 10,000 meals per day involving state-of-the-art kitchen with best equipment, latest technological innovations, practicing systems and procedures. For the purpose of setting up catering, the budgeted cost by an external consultant which was estimated to be around US$24.3 million. We further note that according to the assessee, its 100% subsidiary (EIH flight) was incorporated with a minimal equity capital of US$1.1 million i.e. which was only 4% of the total project cost and it was a promoter's/shareholder's strategy to fund, the start-up company through third party borrowings made available to it with the help of the parent company's corporate guarantee. Accordingly, the project was planned to start-off in the year 2009 and remaining balance of US$ 23.2 million was planned by the share holder to be funded in the following manner :-
Particulars Source of funds Amount Subsequent equity funding EIH Limited US$4.2 million
External Loan funding To be provided by third US$ 19 million with the help of party bankers with the shareholder's guarantee help of shareholder guarantee 12.9. We note that since assessee's 100% subsidiary M/s. EIH Flight was a new company, the lenders would not risk granting loans unless corporate guarantee is given by the parent company i.e. the assessee. Thus, the assessee company being the parent company gave corporate guarantee to the lender bank, so that loan could be disbursed to its 100% subsidiary i.e. M/s. EIH Flight Mauritius. It was brought to the notice of ld TPO that the assessee had not charged any fee for providing such guarantee since it was the obligation of the assessee towards its subsidiary. :- 31 -: IT(TP)A No.57 /2018 According to the assessee, since there was no fees charged by the assessee company from its 100% subsidiary for providing corporate guarantee, this fact was not reported as an international transaction. The aforesaid contention was not accepted by the ld TPO and according to the ld TPO, the arrangement between the company and its subsidiary was in the nature of providing services to AE and, therefore, had to be categorized as an international transaction. Thereafter the ld TPO applied the CUP method as the MAM for benchmarking the guarantee fee and held that the guarantee fee rate of 3% to be the arms length for bench marking the transactions of receipt of corporate guarantee from the subsidiary and thus made an addition of Rs.2,62,09,659/-. The ld DRP upheld the said adjustment pertaining to the receipt of corporate guarantee fee. Aggrieved by the decision of the ld. DRP and the final order of the AO, the assessee is in appeal before us.
12.10. We note that M/s. EIH flight is a startup company, it required funds primarily for acquisition of capital assets for setting up its operation and guarantee facilities given by the assessee/assessee company to the lender bank is normal business practice and obligation towards a subsidiary. Since the AE was a startup company, the assessee extended corporate guarantee to the third party borrowers as a matter of commercial prudence to protect its interest by fulfilling the shareholders obligation. We agree with the contention of the ld AR that the corporate guarantee as provided by the assessee was a matter of commercial prudence to protect and by fulfilling the shareholder obligation, as any financial incapacitation of the subsidiary would jeopardize the investment of the assessee. For that we rely on the order of the Coordinate 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.
12.11. Coming to the alternate plea of the assessee that, in the facts and circumstances the corporate guarantee is not an International Transaction 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 01/04/2002. The Explanation states that-
"For the removal of doubts, it is hereby clarified that (i) the expression "international transaction" shall include .... (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." 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 :- 32 -: IT(TP)A No.57 /2018 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 (ii) business restructuring or reorganization.
Clause (c ) refers to lending or guarantee. But the Explanation which is 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 (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 indicate that the various transactions mentioned in section 92B(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 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, or 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 that 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 into 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.
12.12. Thus, we hold that when a parent company extends an assistance to the subsidiary, being associated enterprise, such as corporate guarantee to a financial institution for lending money to the subsidiary, which does not cost anything to the parent company, and which does not have any bearing on its profits, income, losses or assets, it will be outside the ambit of international transaction under section 92B(1) of the Act. In this regard, we would like to hold that issuance of corporate guarantee by the assessee to its AE would have 'influence on the profits , incomes, losses or assets of enterprise' but not necessarily have 'any impact on the profits, incomes, losses or assets' as admittedly no consideration was received by the assessee in respect of this corporate guarantee from its AE. We find that the Ahmedabad Tribunal in the case of Micro Ink in ITA No. 2873/Ahd/2010 had observed that if a subsidiary (AE in the instant case) could not borrow money from third party sources on its own standing and the guarantee provided by the parent (assessee in the instant case) enables it to make such borrowing, then the guarantee could be said to be a shareholder function, not warranting a guarantee fee. This ratio would squarely be applicable to the facts of the instant case before us. 12.13. The Ld. CIT, DR's reliance in the case of Everest Kanto Cylinder Ltd. (supra) would not come to the rescue of Revenue because in that case, the parent company charged a fee of 0.5% on the AE for rendering this service. On this factual aspect, the Tribunal as well as the Hon'ble High Court held that it is an international transaction. Since in the case in hand, the assessee has not charged a penny from the AE, so the facts of the case are different and case law is distinguishable and, :- 33 -: IT(TP)A No.57 /2018 therefore, the Hon'ble High Court's order cannot come to the rescue of the Revenue. We find that the ld. AR pointed out that in the said case, the Hon'ble Bombay High Court did not answer the specific question as to whether the issuance of corporate guarantee is inherently within the ambit of definition of 'international transaction' irrespective of whether or not such transactions have any "bearing on profits, income, lossess or assets of such enterprises" u/s. 92 B of the Act. We also note that the Ahmedabad Bench of this Tribunal supra after considering the decision of the Hon'ble Bombay High Court in Everest Kanto Cylinder Ltd. (supra) observed as under:
"We are unable to see, in the judgment of Hon'ble Bombay High Court, any support to the proposition that issuance of corporate guarantee is inherently within the ambit of definition of 'international transaction' under section 92B irrespective of whether or not such transactions have any 'bearing on profits' incomes, losses, or assets of such enterprises'. Revenue, therefore, does not derive any help from the said decision."
12.14. The ld CIT DR would have had a case where a fee has been charged for the intra service which has been rendered (in the context of corporate guarantee), and, therefore, the assessee or the Court has treated it as an international transaction, then the charge of corporate guarantee has to be in accordance with Arm's Length principle. This means that the price for corporate guarantee should be that which would have been paid and accepted by independent enterprises in comparable circumstances. In that case transfer pricing adjustments are required. In that case, it has to be determined what will be the ALP of corporate guarantee commission paid by associate enterprise to the parent company providing corporate guarantee. Since that is not the case before us, we need not go into it.
12.15. We also find that this very same issue came up for adjudication by this tribunal in assessee's own case for the Asst Year 2010-11 in ITA No. 530/Kol/2015 dated 9.6.2017 , wherein by placing reliance on the decision of co-ordinate bench of Mumbai Tribunal in the case of
a) Marico Ltd vs ACIT reported in (2016) 70 taxmann.com 214 (Mumbai Trib) wherein it was held that corporate guarantee was not an international transaction ; and
b) Siro Clinpharm P Ltd vs DCIT in ITA No. 2618/Mum/2014 dated 31.3.2016 , wherein it was held that the Explanation introduced by Finance Act 2012 can be made applicable only from Asst Year 2013-14 onwards.
12.16. Moreover, we find that though the Explanation was introduced by Finance Act 2012, the rules were notified only on 10.6.2013. Hence the assessee cannot be expected to report this transaction also as an international transaction in its transfer pricing study and the audit report thereon.
12.17. In view of the aforesaid findings and respectfully following the various judicial precedents, we allow the Grounds 1.1. to 1.4 raised by the assessee''. :- 34 -: IT(TP)A No.57 /2018 The Bench had duly considered the Explanation introduced to Section 92B of the Act through Finance Act, 2012 with retrospective effect from 01.04.2002 while giving the above decision. The facts in the said case, in our opinion are very similar to the one here. Assessee had not charged any corporate guarantee fee and corporate guarantee was given by it to its 100% subsidiary. Following the decision of Kolkata Bench of the Tribunal in the case of EIH Ltd (supra), we are of the opinion that there was no scope for making any adjustment for corporate guarantee fees on the corporate guarantee given by the assessee to its Associated Enterprise. Upward addition of B2,02,75,200/- on corporate guarantee fees stands deleted.
23. Now we take up the dispute regarding the Arms Length Price adjustment imputing interest on overdue receivables. It is not disputed by the Revenue that assessee had not charged interest either from its Associated Enterprise or from Non Associated Enterprises, for delay in collection of receivables. It is also not disputed that out of the total transactions of the assessee almost 57% were with its Non Associated Enterprises. Once there is complete uniformity followed by assessee in not charging any interest from any party, whether Associated Enterprise or Non Associated Enterprises, in :- 35 -: IT(TP)A No.57 /2018 our opinion there could not be any selective imputing of notional interest. Submission of the assessee that out of total sales of about of B261 Crores to its Associated Enterprise, B100 Crores was received well within the due date and small delays were only in the balance of B161 Crores has not been disputed by the ld. Departmental Representative. Assessee had not offered any discount to any party for payment of bills before the expiry of the credit period. Hence, it is only a natural corollary that it did not charge any interest for delays also. Where a good part of the dues were collected earlier to the due date, in our opinion the instances where there were delays could not be selectively elected for a levy of charge of notional interest. Such an approach if accepted will completely overlook commercial realties. That apart, once TNMM method is considered as the most appropriate method, as held by Ahmedabad Bench of the Tribunal in the cases of Bisazza India (P) Ltd (supra) and Gemstone Glass Pvt Ltd (supra) the net margin worked out there under could take care of all such notional interest cost, wherever it could be imputed and there could be no Arms Length Price adjustment for any overdue receivables. We therefore delete Arms Length Price adjustment of B6,18,43,887/- made on overdue receivables.
:- 36 -: IT(TP)A No.57 /2018
24. In the result, the appeal of the assessee is partly allowed. Order pronounced on Friday, the 5th day of April, 2019, at Chennai.
Sd/- Sd/-
(ध$ु व%
ु आर.एल रे &डी) (अ ाहम पी. जॉज )
(DUVVURU RL REDDY) (ABRAHAM P. GEORGE)
या(यक सद य/JUDICIAL MEMBER लेखा सद य /ACCOUNTANT MEMBER
चे#नई/Chennai
$दनांक/Dated:5th April, 2019
KV
आदे श क त'ल(प अ)े(षत/Copy to:
1. अपीलाथ /Appellant 3. आयकर आयु*त (अपील)/CIT(A) 5. (वभागीय त न/ध/DR
2. यथ /Respondent 4. आयकर आयु*त/CIT 6. गाड फाईल/GF