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2023 (5) TMI 1324 - AT - Income TaxTP Adjustment - transaction of corporate guarantee constitute international transaction or not? - HELD THAT - On perusal of order passed by CIT(A) we find that the CIT(A) has held that transaction of granting corporate/performance guarantee constitutes an international transaction keeping in view Explanation (i)(c) to Section 92B of the Act (inserted with retrospective effect from 01.04.2002 by Finance Act 2012) whereby guarantee has been specifically included in the definition of international transaction as defined in Section 92B of the Act. The view taken by the CIT(A) is supported by decision of the Tribunal in Assessee s own case for the Assessment Year 2012-13 2020 (9) TMI 1101 - ITAT MUMBAI . Accordingly we hold that the transaction of giving guarantee is international transaction requiring determination of ALP and transfer pricing adjustment. Upward transfer pricing adjustment - Assessee had advanced sum without charging any interest - advance given by the Assessee were akin to loan - HELD THAT - CIT(A) deleted the addition by placing reliance of the decision of the Tribunal in the case of the Assessee for the Assessment Year 2012-13 2020 (9) TMI 1101 - ITAT MUMBAI wherein as held that the advances were towards fulfilment of the assessee s obligation of being a JV partner as any financial incapacitation of JV would adversely affect the continuation of the project and ultimately jeopardize the interest of the assessee. Therefore the said advances could not be put in the category of loans as done by the lower authorities. Further it could not be said that JV entity derived / gained certain benefits out of such advances but rather it was the assessee who would ultimately gain by continuing with the projects and taste the fruits of the success of project. Hence not convinced with impugned adjustments as confirmed by first appellate authority we direct Ld. AO to delete the same - Decided against revenue. TP adjustment pertaining to different Performance Guarantees - HELD THAT - There is nothing on record to persuade us to take a view different from the view taken by the Co-ordinate Benches of the Tribunal for the preceding assessment years for the same performance guarantees as held performance guarantees were given by the Bank of India Mumbai Branch in favour of CCWE a customer of Assessee s AE (i.e. KEC Global FZ LLC) and Bank of India had charged guarantee commission of 0.93% per annum in respect of the same which was recovered by the Assessee from the AE. For Assessment Year 2010-11 2011-12 and 2012-13 the Tribunal has accepted the aforesaid rate of 0.93% as arm s length rate of guarantee fee. Thus facts and circumstances being identical we dismiss Ground No.2(i) to (ix) raised by the Revenue. Arm s length rate of guarantee fee for corporate guarantees at 2% - HELD THAT - Perusal of the order passed by TPO shows that the TPO had determined arm s length guarantee fee at the rate of 2% by way of estimation. During the course of hearing it was pointed out by the Learned Authorised Representative for Assessee that the corporate guarantee was given for working capital loan facility granted to the AE in which the Assessee was 50% partner and therefore there was no default risk. Further repayment of loan was secured by way of charge against the receivables from Saudi Electric Company a Government Undertaking and a client of the Assessee s AE and therefore the Assessee had only provided secondary security. The aforesaid submission at best supports the view taken by the CIT(A) to adopt the lower rate of 0.6% proposed to be charged by the bank of the Assessee as the arm s length rate for corporate guarantee fee instead of 2% determined by the TPO/Assessing Officer. Given the facts and circumstances of the present case we are not inclined to interfere with the order passed by the CIT(A) on this issue. Accordingly Ground No. 3(ii) (iii) raised by the Revenue are dismissed. Unrealized foreign exchange loss arising from foreign exchange contracts - HELD THAT - As relying on the Assessment Year 2009-10 to 2012-13 in assessee own case 2019 (9) TMI 437 - ITAT MUMBAI 2021 (5) TMI 816 - ITAT MUMBAI 2020 (9) TMI 1101 - ITAT MUMBAI held that MTM losses on hedging contracts would be accrued losses and hence an allowable expenditure. Deduction for education cess as well as higher secondary education cess - HELD THAT - Both sides agreed that this issue stands covered in favour of the Revenue by the judgment passed by Chambal Fertilizers Chemicals Limited 2022 (12) TMI 1098 - SC ORDER wherein it has been held that as per Explanation 3 to provision of Section 40(a)(ii) of the Act inserted by Finance Act 2022 (with retrospective effect from 01.04.2005) surcharge or cess forms a part of tax and therefore deduction for the same cannot be allowed under Section 37. Aggregation of Corporate guarantees - HELD THAT - As we have accepted Assessee s contention that 0.60% be accepted as arm s length rate of corporate guarantee fee. Accordingly given the facts and circumstances of the case we accept the alternative contention of the Assessee and direct the TPO/Assessing Officer to recomputed the transfer pricing adjustment by taking rate of 0.6% as arm s length rate for corporate guarantee fee for all corporate guarantee given by the Assessee (except for the corporate guarantees aggregating to USD 8, 03, 00, 000/- given on behalf of wholly owned subsidiaries KEC Transmission LLC and KEC US LLC USA in which case arm s length corporate guarantee fee shall be determined by adopting rate of 0.02%).
Issues Involved:
1. Transfer Pricing (TP) Issues 2. Non-TP Issues 3. Corporate Guarantee 4. Mark-to-Market (MTM) Losses 5. Education Cess and Higher & Secondary Education Cess 6. Interest on Advances given to AE 7. Performance Guarantee 8. Computation of Interest under Section 244A Summary: Transfer Pricing (TP) Issues: Interest on Advances given to AE: The Revenue challenged the deletion of an upward transfer pricing adjustment of INR 6,06,09,173/- made by the CIT(A) for advances given to EJP KEC JV, South Africa without charging any interest. The Tribunal upheld the CIT(A)'s decision, referencing the Tribunal's earlier ruling that such advances were made out of business expediency and were not akin to loans. Performance Guarantee: The Revenue's grounds challenging the deletion of transfer pricing adjustments related to performance guarantees were dismissed. The Tribunal upheld the CIT(A)'s decision that the rates of 0.93%, 0.60%, and 0.70% accepted in previous years were arm's length. Corporate Guarantee: The Revenue's appeal against the CIT(A)'s decision to restrict the arm's length rate of corporate guarantee fee to 0.2% was dismissed. The Tribunal confirmed the CIT(A)'s decision based on previous rulings that a lower rate was justified due to the nature of the transactions and the low risk involved. Non-TP Issues: Mark-to-Market (MTM) Losses: The Revenue's appeal against the deletion of disallowance of INR 10,52,37,427/- for unrealized foreign exchange losses was dismissed. The Tribunal upheld the CIT(A)'s decision, which followed the Supreme Court's ruling in the case of Woodward Governor India Pvt. Ltd., allowing such losses on an accruable basis. Education Cess and Higher & Secondary Education Cess: The Revenue's appeal was allowed, and the Tribunal held that education cess and higher & secondary education cess are not deductible under Section 37 of the Act, following the Supreme Court's judgment in JCIT Vs. Chambal Fertilizers & Chemicals Limited. Corporate Guarantee: Assessment Year 2017-18: The Assessee's appeal against the transfer pricing adjustment of INR 13,40,33,405/- for corporate guarantee fees was partly allowed. The Tribunal held that the transaction qualifies as an international transaction and directed the TPO/Assessing Officer to recompute the adjustment using a rate of 0.6% for most guarantees and 0.2% for specific guarantees given to wholly owned subsidiaries. Computation of Interest under Section 244A: The Tribunal directed the Assessing Officer to recompute interest under Section 244A of the Act as per law while passing the appeal effect order. Conclusion: For the Assessment Year 2013-14, the Revenue's appeal was partly allowed, and the Assessee's appeal was dismissed. For the Assessment Year 2017-18, the Assessee's appeal was partly allowed. The Tribunal upheld several decisions of the CIT(A) and previous Tribunal rulings, emphasizing consistency in the application of arm's length principles and the non-deductibility of education cess as per the Supreme Court's ruling.
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