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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 ..... mpany with CMMI initiative. The solutions include a line of outsourced product development and offshore software development services for medium to large corporations and emerging technology businesses. During the year SSTL acquired JYACC Inc. New York, USA. For the purpose of facilitating the acquisition, SSTL set up a holding subsidiary in United States - SST North America Inc. USA ('SST North America') as a Special Purpose Vehicle ("SPV"). The total purchase consideration to JYACC Inc. USA (now known as PROLIFICS) was agreed to be paid as follows : (a) cash consideration of USD 276,33,633; and (b) Deferred purchase consideration out of the profits of JYACC Inc. USA over the next two years Rs. 67,96,81,662. The cash consideration of USD 2,76,33,633 was met as follows: (i) Investment into Equity Capital of SST North America - INR 68,86,42,100 (ii) Loan by SSTL into SST North America - INR 3,37,12,600 For the balance of the cash consideration, SST North America borrowed funds from ICICI Bank, UK amounting to Rs. 50,95,00,000 based on the corporate guarantee provided by SSTL to ICICI Bank, U.K. SSTL also provided a corporate guarantee to the share holders of JYACC towards the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cted that a company pay for the acquisition of the equity it needs [or its formation and continued viability. Equity is generally supplied by the shareholder at its own cost and risk. Accordingly, to the extent that a guarantee substitutes (or the investment of the equity needed to allow a subsidiary to be self-sufficient and to raise the debt funding it needs, the costs of the guarantee (and the associated risk) should remain with the parent company providing the guarantee. " (emphasis added) This decision leads to a conclusion that there is no service in a scenario where a loan is extended by the Parent Investor or a guarantee is provided by a Parent investor, for a third party loan, where the loan is a substitute for the investment of the equity otherwise required to be made by the Parent investor, the same need to be considered as a part of the funding requirement of the parent investor and not as a service to the subsidiary. 3.4 Without prejudice to the above, Assessee submitted the following : LEVY OF INTEREST ON THE LOAN GIVEN BY SSTL TO SST NORTH AMERICA: 3.4.1 On the Loan Amount of Rs. 3,37,12,600: The Ld. TPO failed to evaluate any of the methods prescribed under the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture of International Transaction Amount ALP @ 2% p.a. of the guarantee amount Amount received by taxpayer Shortfall being adjustment u/s. 92CA 1. Corporate Guarantee against loan taken by A.E. SST North America from ICICI Bank, U.K. 50,95,00,000 1,01,90,000 NIL 1,01,90,000 2. Guarantee given to the shareholders of JYACC Inc on deferred purchase consideration 67,96,81,662 1,35,93,633 NIL 1,35,93,633 Total 2,37,83,633 3.4.5. With respect to the Corporate Guarantee of Rs. 50,95,00,000/-, against the loan taken by AE-SST North America from ICICI Bank, UK -Assessee relied on views expressed by the Australian Taxation Officer (' ATO'), on this aspect, in its discussion paper' which reads as under : "an independent company that is unable to borrow the funds it needs on a standalone basis is unlikely to be in a position to obtain a guarantee from an independent part) to support the borrowings it needs. Where such a guarantee is given. it actually compensates (or the inadequacies in the financial position of the borrower: specifically the fact that the subsidiary does not have enough shareholder's funds. It would not be expected that a company pay [or the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction. The parties had agreed that assets of the value of Rs. 81,55,000 be taken over by Assessee-company from the Scindias. Out of that consideration Rs. 29,99,000 were paid by Assessee-company and the balance remained unpaid. For agreeing to deferred payment of a part of the consideration, the Scindias were to be paid interest. An agreement to pay the balance of consideration due by the purchaser does not in truth nave rise to a loan. A loan of money undoubtedly results in a debt, but every debt does not involve a loan. Liability to pay a debt may arise from diverse sources, and a loan is only one of such sources. Every creditor who is entitled to receive a debt cannot be regarded as a lender ..... , 3.4.10 Therefore, the corporate guarantee provided was not In respect of the category as amended by Finance Act 2012- The explanation under Section 92 B of the Income-tax Act, 1961 ('Act) provides that the expression international transaction shall include, inter alia- "(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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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 v. Add!. CIT [2014} 43 taxmann.com 191 (Mum-Trib). the Mumbai Bench of the Tribunal after analysing the facts in that case had held that 0.53% corporate guarantee rate in that case was appropriate. The 1TAT Hyderabad Bench in case of Infotech Enterprises Ltd. v. Add!. CIT [2014} 41 taxmann.com 364 (Hyd.-Tribu.) while considering identical issue of determining ALP of corporate guarantee provided by Assessee to its AE followed the ratio laid down in case of Glen mark Pharmaceuticals (supra) and remitted the issue back to the TPO to decide the quantum of corporate guarantee rate by following the method adopted in case of Glen m ark Pharmaceuticals (supra). " Thus there is no rational or basis in TPO adopting 2% flat rate. Thus, as held in a detailed manner in Glenmark Pharmaceuticals v. Addl. ClT [2014] 43 taxmann.com 191 (Mum.-Trib), the rate of 0.53% may be considere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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. With this direction, the grounds raised by assessee in ground Nos. 2 and 3 are considered as allowed partly. 6. Coming to the issue of guarantee fee, one of the fundamental fact patterns in the evolution of international transfer pricing concepts and rules involves an enterprise's use of a financial resource belonging to an associated enterprise. An aspect of the use of money relates to the use of a credit enhancement instrument, which typically arises in the context of guarantees of the obligations of one controlled entity by another. Although the OECD Transfer Pricing Guidelines, 2010 acknowledge the role of the use of money in transfer pricing matters, they do not yet provide specific guidelines regarding how such issues are to be addressed and resolved. Nonetheless, the elements that are typically important in evaluating transfer pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lready considered similar issues in the case of Four Soft P. Ltd., reported at 44 taxmann.com 479 (wherein one of us a Member) and held as under : "25.2. Having considered the submissions of the parties, we are unable to accept the contention of the learned AR that corporate guarantee of the nature provided by the assessee will not come within the meaning of international transaction in terms with section 92B of the Act. It is not disputed that section 92B of the Act has been amended by the Finance Act, 2012 with the insertion of Explanation I (c) with retrospective effect from 01/04/2002. Explanation (i)(c) to section 92B, reads as under: "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." 25.3. A reading of the aforesaid clause from the Explanation would make it clear that the corporate guarantee provided by the assessee comes within the scope and ambit of 'international transaction' as per the aforesaid clause. Therefore, the contention of the learned AR that the i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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