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TMI Blog2015 (1) TMI 551X X X X Extracts X X X X X X X X Extracts X X X X ..... also objecting to the adjustment on loan given to Arsin Corporation, another A.E. of Assessee. Here, assessee has charged interest at LIBOR + 1.50 BPS. Since, we have approved LIBOR + 2.75 points on the loan given to SST, North America (A.E.) we direct the A.O. to re-workout the interest on the loan provided to this A.E. at LIBOR + 2.75% only as against LIBOR + 4.75 charged by A.O./TPO. - Decided partly in favour of assessee. Guarantee fee - Held that:- We uphold the adjustment made on guarantee commission both on the guarantee provided to Bank directly and also on the guarantee provided to the erstwhile shareholders of JYACC for assuring the payment by AE. However, we direct the TPO to adopt the rate to 0.53% which is considered as arms length in other cases. - Decided partly in favour of assessee. X X X X Extracts X X X X X X X X Extracts X X X X ..... 633, thus, making a total addition of ₹ 2,67,45,209. Assessee objected to the above adjustment before DRP. DRP even though took the objections on record, more or less, agreed with the findings of TPO and confirmed the amounts. 3.1. It was the submission that assessee for making an acquisition of JYACC Inc has created a SPV and provided for corporate guarantee to facilitate borrowing from ICICI Bank, UK and corporate guarantee for the deferred consideration to the shareholders of JYACC. To fulfil the responsibility as a parent and shareholder,Assessee instead of taking an international loan itself and then funding the SPVs, provided a corporate guarantee to the international lenders and to the former shareholders of JYACC Inc, which enabled the borrowing of the necessary finance at the SPY level; 3.2. Assessee submits that in view of the above, no service has actually been provided to its SPV and hence, it would be inappropriate on the part of the Ld. TPO to treat the corporate guarantees and the loan invested as narrated above as international transactions to consider levy of arm's length price of guarantee fee and interest. 3.3. In this regard Assessee relied on the v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to be based on a CUP rate of a third party loan rate to the AE in the geographical area of United States. The loan agreement entered into by SST North America with ICICI Bank UK, in FY 2008-09 has been relied. However, the Ld. TPO and Ld. DRP refused to accept this rate. 3.4.2. On the advance amount of ₹ 4,28,37,001/-: The total advances made by SSTL to SST North America comprises of two amounts. Sl. No. Nature of International Transaction Name of the A.E. Amount (in INR) 1. Advances provided to A.E. SST North America 4,28,37,001 2. Loan provided SST North America 3,37,12,600 The advance amount represents certain acquisition related expenses incurred at the time of formation of the SPV- SST North America. This amount is recoverable from - SST North America. This does not represent any loan or advance given by SSTL TO SST North America. These are cost to cost expenses liable to be reimbursed by SST North America. This cannot be considered as an "International Transaction" taking the colour of a loan or an advance for the purpose of determination of the ALP of interest. 3.4.3. On loan amount of ₹ 1,14,89,463/- provided to Arsin Corporation ('Arsin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he decisions made by the parent company in relation to the capital structure it proposed to use in its subsidiary company, has expressed that if the level of indebtedness relating to the equity funding of the borrowed subsidiary exceeds the maximum beyond which it is not able to obtain the market without a guarantee from the parent, an argument may be taken that no guarantee fee may be chargeable. 3.4.7 With respect to the Corporate Guarantee of ₹ 50,95,00,000/- Assessee would also like to humbly submit that the corporate guarantee agreement between ICICI Bank and Assessee restricts the Guarantor i.e. Assessee from receiving any commission from the borrower. The relevant extracts of the agreement with ICICI Bank for loan availed by SST North America were referred to. NO COMMISSION 9. The guarantor hereby declares and agrees that it has not received and shall not, receive any commission from the borrower for giving this guarantee. 3.4.8. Assessee submits that the clause 9 with respect to "No Commission" as referred above is insisted by the Banks in case of corporate guarantee agreements. Accordingly Assessee cannot charge guarantee fees. The Ld. TPO and Ld. DRP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es not in truth gave rise to a loan. Therefore, it is submitted that any guarantee given towards the balance of consideration due by the purchaser does not give rise to a situation of guarantee being provided on capital financing, long term or short term borrowing or lending. Thus, there should be no guarantee fee to be considered with respect to the Guarantee given to the share holders of JYACC Inc on account of deferred purchase consideration of ₹ 67,96,81,662/- 3.4.11. Further, Assessee relied on the case of Bharti Airtel Limited vs. Additional Commissioner of Income Tax I.T.A No. 5816/DeI/2012, on the issue of the corporate guarantee. While the coordinate Bench of the Tribunal at hyderabad gave a contrary ruling in this regard recently in the case of Four Soft (P.) Ltd. v. DCIT Circle-1(3), Hyderabad [2014] 44 taxmann.com 479 (Hyderabad-Trib.) distinguishing the earlier decision of ITAT Hyderabad Bench rendered ITA No. 1495/Hyd/2010 dated 09/09/2011 on the same question. The decision of Delhi ITAT is given subsequent to the amendment made to the definition of "international transaction" by Finance Act 2012. Without prejudice to the above submission, Assessee s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... O. 5. We have considered the issue and perused the documents on record. The two issues to be considered are whether the interest free loans and guarantees provided by assessee to AE calls for any adjustment. As far as adjustment of interest on loans provided, assessee even though is objecting to adjustment per se but main thrust is on rate on which the adjustments were made. There is no dispute to the fact that providing of loans to AE is an International Transaction as per the TP provisions. Therefore, the commercial considerations advanced by assessee can not be considered while examining the ALP of the transactions. We are of the opinion that the transaction of providing loans to subsidiary whether a direct loan or providing credit for initial expenditure, which is stated to be reimbursable, do call for adjustment. Therefore, in principle we approve the adjustment made on these transactions. As far as the rate of interest is concerned, the A.O./TPO in our opinion, has considered the subsequent collection of interest in A.Y. 2012-2013 at LIBOR + 4.75 basis points as an internal CUP. This cannot be accepted as rate of interest in each year is a dynamic figure which varies accordi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny cost or risk to the shareholders. The assessee also argued that the retrospective amendment to section 92B of the ITL, by Finance Act, 2012 does not enlarge the scope of the term "International Transaction" to include the corporate guarantee in the nature provided by assessee. DR on the other hand, contended that the transaction of providing the corporate guarantee is covered by the definition of international transaction after the retrospective amendment made by Finance Act, 2012. Therefore, the transaction was subject to T.P. provisions and needed ALP determination. It was the submission that there is no service rendered by assessee to the A.E. Assessee relied on the views expressed by Australian Tax Officer placing relevant copy before us which was issued in 2008. Law has changed subsequently and provisions of Income Tax also were amended so as to include providing guarantees as service to the A.E. However guarantees involve express guarantee or implied guarantee which increases credit worthiness of AEs, if provided by main company. In case of default Guarantor has to fulfill the liability. Therefore, there is always an inherent risk in providing guarantees. That may be a rea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee by placing reliance on the decision of the Four Sof t Ltd.(supra), held as under: "15.2. After hearing the rival submissions we feel that Assessing Officer will have to follow the decision of the ITAT Hyderabad or the amended provision of the Act in this regard. If the Finance Bill of 2012 is passed by the Parliament amending the provisions of section 92B, with effect from 1st April, 2002, he will have to ignore the decision of the ITAT Hyderabad. In case section 92B is not amended with retrospective effect, he should grant relief to the appellant." 25.4. In the aforesaid view of the matter, we agree with the TPO that ALP of the corporate guarantee has to be determined as it falls within the scope and ambit of an international transaction af ter the retrospective amendment to section 92B. However, it appears that the TPO has applied the rate of 3.75%, which is applicable to bank guarantee issued by the bank. As the corporate guarantee is not in the nature of bank guarantee, the rate applicable to bank guarantee provided by the bank cannot be applied to corporate guarantee which is provided by a group company. In case of Glenmark Pharmaceuticals Vs. ACIT in ITA No. 5031/Mum/2 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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