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TMI Blog2015 (12) TMI 143X X X X Extracts X X X X X X X X Extracts X X X X ..... the matter, learned Departmental Representative’s reliance on Aztec decision (2007 (7) TMI 50 - ITAT BANGALORE ) is of no assistance to the case of the revenue. The international transaction is exports of goods which been benchmarked on TNMM basis and which is duly accepted by the TPO. In view of these discussions, and respectfully following the decision of the coordinate bench in assessee’s own case for the earlier years, we uphold the grievance of the assessee and direct the Assessing Officer to delete the impugned ALP adjustment - Decided in favour of assessee. Arm’s length price adjustment on account of corporate guarantees given by the assessee in respect of its associated enterprises - Held that:- The scope of the capital financing transactions, as could be covered under Explanation to Section 92 B read with Section 92B(1), is restricted to such capital financing transactions, including inter alia any guarantee, deferred payment or receivable or any other debt during the course of business, as will have “a bearing on the profits, income, losses or assets or such enterprise”. This pre-condition about impact on profits, income, losses or assets of such enterprises is a pre-cond ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tribunal’s order for the assessment years 2002-03 and 2005-06, even as learned. Departmental Representative dutifully relied upon the stand of the Assessing Officer. - Decided in favour of assessee by way of remand. Addition pertaining to telephone and electricity expenses of Managing Director - Held that:- On this issue also, the learned representatives fairly agree that the issue is covered by the order of co-ordinate bench for the assessment year 2005-06 in the sense that, on the same lines, while disallowance in respect of electricity expenses of 8,83,622/- is to be confirmed, the disallowance of telephone expenses to the tune of 1,03,272/- is to be deleted. In this issue also, we see no reasons to deviate from the stand taken by the co-ordinate bench in the earlier year and respectfully following the same, we delete the disallowance of telephone expenses and confirm the disallowance of electricity expenses as above. To the limited extent of deleting the disallowance of telephone expenses of 1,03,272, the assessee gets the relief. - Decided in favour of assessee in part. Addition out of software expenses - Held that:- This is a case when ERP has been introduced for the first ti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... time value of money @ 6.38% on LIBOR plus basis. In response to this show cause notice, it was, inter alia, explained by the assessee that what is exported to Micro USA is semi finished material which is required to be further processed and converted into saleable product. In effect thus, export to Micro USA cannot be compared with export of finished products as was done to the independent enterprises. The assessee had also pointed out that "average credit period of third parties is 120 days whereas credit period granted to Micro USA is 135 days" though "actual highest average debtor days to third parties is 161 days whereas for Micro USA it is 186 days". It was also explained that considering the time taken in shipping the semi finished goods to Micro US, its processing in US, maintenance of inventory at US and credit realization time in US, the total cycle was about 210 days, but even if bare minimum period to complete a sale cycle is taken account, it cannot be less than 170 days. It was thus pointed out that the average credit period to Micro USA, which was 135 days, was reasonable. On the basis of these arguments, it was submitted that no ALP adjustment is warranted in respect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ls and semi finished goods sold to Micro USA are not sold to any other concern. The very foundation of impugned addition in arm's length price on account of excess credit period is thus devoid of any legally sustainable merits or factual basis. When all these factors were pointed out to the learned Departmental Representative, he did not have much to say except to place his bland but dutiful reliance on the orders of the authorities below. However, for the reasons set out above and in the absence of any comparative price and credit period figures on comparable product to support the case of the revenue, we uphold the grievance of the assessee and direct the Assessing Officer to delete this ALP adjustment. The assessee gets the relief accordingly. 6. Learned counsel for the assessee submits that the issue being squarely covered, in favour of the assessee and on admittedly similar set of facts, there is no occasion to reconsider the mater. We are urged to follow the said decision and delete the impugned adjustment. On the other hand, while learned Departmental Representative does not dispute that this issue is squarely covered by the aforesaid decision, he submits that the aforesaid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accept the comparables and determine or accept the transfer price and still segregate AMP expenses as an international transaction," 8. By way of an example, this aspect of the matter was then explained by Hon'ble Delhi High Court as follows: "An example given below would make it clear: Particulars Case 1 Case 2 Sales 1000 1,000 Purchase Price 600 500 Gross Margin 400 (40%) 500 Marketing Sale promotion 50 150 Overhead expense 300 300 Net profit 50 (5%) 50 (5%) The above illustrations draw a distinction between two distributors having different marketing functions. In case 2, a distributor having significant marketing functions incurs substantial expenditure on AMP, three times more than in case 1, but the purchase price being lower, the Indian AE gets adequately compensated and, therefore, no transfer pricing adjustment is required. In case we treat the AMP expenses in case 2 as ₹ 501-, i.e. identical as case 1 and AMP of ₹ 100 as a separate transaction, the position in case 2 would be: Particulars Case 2 Sales 1,000 Purchase Price 500 Gross Margin 500 (50%) Overhead expenses 300 Marketing expenses 50 Net profit 150 (15%) It is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny other independent enterprises. The assessee did have trading transactions in respect of the finished goods with trading subsidiaries in China and Hong Kong but it is not even the case of the TPO that excessive credit period was allowed to these AEs vis-à-vis the credit period allowed to independent enterprises, nor any ALP adjustment has been recommended in connection with the same. This fact, if anything, shows that the credit period allowed to the AEs is comparable with credit period of non AEs in respect of similar goods. To compare credit period in respect of finished goods with the credit period in respect of semi-finished goods, is, therefore, somewhat fallacious in approach and untenable in law. In our considered view, merely because there is a delay in realization of debts cannot be reason enough to make an addition as long as such a delay is peculiar to the transactions with AEs. The adjustment before us is an adjustment to arrive at an arm's length price and unless there is something, more than sweeping generalizations as implicit in the arguments before us, to at least indicate that such a delay in realization of debts in similar transactions is absent in arm's ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore us, there is obviously no occasion of any comparison. The stand taken by the learned Departmental Representative, therefore, is not only quite detached from commercial reality but also wholly untenable in law. In any case, what can be examined on the touchstone of arm's length principles is the commercial transaction itself, as a result of which the debit balance has come into existence, and the terms and conditions, including terms of payment, on which the said commercial transaction has been entered into. In this view of the matter, learned Departmental Representative's reliance on Aztec decision (supra) is of no assistance to the case of the revenue. The international transaction is exports of goods which been benchmarked on TNMM basis and which is duly accepted by the TPO. In view of these discussions, and respectfully following the decision of the coordinate bench in assessee's own case for the earlier years, we uphold the grievance of the assessee and direct the Assessing Officer to delete the impugned ALP adjustment of ₹ 2,10,95,346. 11. Ground No. 2 is thus allowed. 12. In ground no. 3, the assessee is aggrieved of an arm's length price adjustment of ₹ 2, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... %, which is prevalent market rate for guarantee fees. 15. It was on this basis that an ALP adjustment of ₹ 2,23,62,603 was proposed on account of notional charges for corporate guarantees issued by the assessee. The assessee did raise an objection against this proposed adjustment by the TPO but without any success. While rejecting the grievance of the assessee, learned DRP referred to, and relied upon, 'OECD Transfer Pricing Guidelines for Multinational Enterprise and Tax Administrations', 'OECD Report on Attribution of Profits to Permanent Establishments' and decision of the Tax Court of Canada in the case of G E Capital Canada Vs Her Majesty the Queen [(2009) TCC 563]. The Assessing Officer thus proceeded to make the arm's length price adjustment in respect of corporate guarantees at ₹ 2,23,62,603. The assessee is aggrieved and is in further appeal before us. 16. Learned counsel for the assessee submits that the transaction of issuance of a corporate guarantee, in favour of an AE, does not constitute an 'international transaction' within the meanings of Section 92 B of the Act. Our attention is invited to the transfer pricing report which categorically states that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is point also, learned counsel takes us through certain observations in Bharti Airtel decision (supra) to the effect that it is an issue to be examined whether an enhancement of scope of this anti avoidance provision can be implemented with retrospective effect. He submits that in the said case, the coordinate bench did note that "Undoubtedly, the scope of a charging provision can be enlarged with retrospective effect, but an anti-avoidance measure, that the transfer pricing legislation inherently is, is not primarily a source of revenue as it mainly seeks compliant behaviour from the assessee vis-à-vis certain norms, and these norms cannot be given effect from a date earlier than the date norms are being introduced", yet it did not adjudicate on that question for the reason that the matter has been decided "in favour of the assessee on merits and even after taking into account the amendments brought about by Finance Act 2012". In case the issue is to be held against the assessee, learned counsel submits, this aspect of the matter must be adjudicated upon now. It is his contention that any amendment in the transfer pricing law, which is more onerous in nature, cannot have re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taken through the Memorandum to the Finance Act 2012 in support of the stand that the amendment in law was introduced as (a) the definition of 'international transaction' was cryptic and needed elaboration, (b) the said definition left scope for misinterpretation, and as (c) there was a need to clarify the true scope of the term 'international transaction'. Learned Departmental Representative then refers to the decision of Hon'ble Bombay High Court in the case of Vodafone India Services Limited Vs Union of India [(2013) 37 taxmann.com 250 (Bombay)] which holds that effect of this amendment will have to be considered and it can not be brushed aside. Coming to Hon'ble Supreme Court's judgment in the case of Vatika Townships (supra), he submits that it is categorically stated in the said judgment that the legislative amendment modifying the accrued rights, and imposing obligations or duties or attaching a new disability have to be treated as prospective "unless the legislative amendment is clearly to give the enactment a retrospective effect and unless the amendment is for the purpose of supplying an obvious omission in a former legislation or to explain a former legislation". Our att ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on before us now was not even raised before, much less adjudicated by, Hon'ble Bombay High Court. We are taken through the text of the judgment to demonstrate this point. A reference is then made to Hon'ble Bombay High Court's judgment in the case of CIT vs. Sudhir Jayantilal Mulji [(1995) 214 ITR 154 (Bom)], in support of the proposition that a judicial precedent is only an authority for what it actually decides and not what may come to follow from some observations which find place therein. It is pointed out that the propositions which are assumed by the Court to be correct for the purpose of deciding the same are, according to this judgment of the Hon'ble jurisdictional High Court, lack precedence value and are not binding in nature.Turning to Hon'ble Bombay High Court's decision in the case of Vodafone India Services Pvt Ltd (supra), learned counsel submits that this decision was in altogether a different context. Learned counsel points out that it was in the context of Section 2(47) but even then it was added that "We do not find it either necessary or proper to indicate the application of section 2(47) as amended to the present proceedings. The application would depend upon t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ffort is made to demonstrate that there is no contrary findings even in these decisions. As for our question as to why issuance of corporate guarantees not be treated as intra group services in the light of OECD guidance on the issue, learned counsel submitted that in the light of the Indian legal position, which is what is material for our adjudication, the issuance of corporate guarantee cannot be treated as a service and even if it is treated as a service, in order to come within the ambit of international transaction, the service should be such that it has "a bearing on profits, incomes, losses or assets of the enterprise". That condition, according to the learned counsel, is admittedly not satisfied on the facts of this case. Without prejudice to this argument, learned counsel invites our attention to information furnished by the Central Board of Direct Taxes, in response to a requisition made under the Right to Information Act, 2005, which is published by the website www.itatonline.org at http://www.itatonline.org/info/index.php/relevanceof-oecd-guidelines-departments-view. On the strength of this information, it is submitted that the revenue authorities cannot lean on the OE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by referring an issue, on which higher judicial forums have adjudicated, to a larger bench of this Tribunal. We are thus urged to follow the decisions of Hon'ble Courts above as also subsequent decisions, following these precedents, of the coordinate benches. 20. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. 21. It is only elementary that the determination of arm's length price, under the scheme of the international transfer pricing set out in the Income Tax Act, 1961, can only be done in respect of an 'international transaction'. Section 92(1) provides that, "(a)ny income arising from an international transaction shall be computed having regard to the arm's length price". In order to attract the arm's length price adjustment, therefore, a transaction has to be an 'international transaction' first. The expression 'international transaction' is a defined expression. Section 92 B defines the expression 'international transaction' as follows: 92 B - Meaning of international transaction (1) For the purposes of this section and sections 92, 92C, 92D and 92E, "international tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inistration, technical service, repairs, design, consultation, agency, scientific research, legal or accounting service; (e) a transaction of business restructuring or reorganisation, entered into by an enterprise with an associated enterprise, irrespective of the fact that it has bearing on the profit, income, losses or assets of such enterprises at the time of the transaction or at any future date; (ii) the expression "intangible property" shall include - (a) marketing related intangible assets, such as, trademarks, trade names, brand names, logos; (b) technology related intangible assets, such as, process patents, patent applications, technical documentation such as laboratory notebooks, technical know -how; (c) artistic related intangible assets, such as, literary works and copyrights, musical compositions, copyrights, maps , engravings; (d) data processing related intangible assets, such as, proprietary computer software, software copyrights, automated databases, and integrated circuit masks and masters; (e) engineering related intangible assets, such as, industrial design , product patents, trade secrets, engineering drawing and schematics, blueprints, proprietary docu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rms agreed with the AE. 26. Let us now deal with the Explanation, inserted with retrospective effect from 1st April 2002 i.e. right from the time of the inception of transfer pricing legislation in India, which was brought on the statute vide Finance Act, 2012. 27. This Explanation states that it is merely clarificatory in nature inasmuch as it is 'for the removal of doubts', and, therefore, one has to proceed on the basis that it does not alter the basic character of definition of 'international transaction' under Section 92 B. Clearly, therefore, this Explanation is to be read in conjunction with the main provisions, and in harmony with the scheme of the provisions, under Section 92 B. Under this Explanation, five categories of transactions have been clarified to have been included in the definition of 'international transactions'. 28. The first two categories of transactions, which are stated to be included in the scope of expression 'international transactions' by the virtue of clause (a) and (b) of Explanation to Section 92 B, are transactions with regard to purchase, sale, transfer, lease or use of tangible and intangible properties. These transactions were anyway covered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transaction or on a future date". What is implicit in this statutory provision is that while impact on " profit, income, losses or assets" is sine qua non , the mere fact that impact is not immediate, but on a future date, would not take the transaction outside the ambit of 'international transaction'. It is also important to bear in mind that, as it appears on a plain reading of the provision, this exclusion clause is not for "contingent" impact on profit, income, losses or assets but on "future" impact on profit, income, losses or assets of the enterprise. The important distinction between these two categories is that while latter is a certainty, and only its crystallization may take place on a future date, there is no such certainty in the former case. In the case before us, it is an undisputed position that corporate guarantees issued by the assessee to the Deutsche Bank did not even have any such implication because no borrowings were resorted to by the subsidiary from this bank. 31. In this light now, let us revert to the provisions of clause (c) of Explanation to Section 92B which provides that the expression 'international transaction' shall include "capital financing, inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en these receivables are out of cost free funds and these debit balances donot cos t anything to the person allowing such use of funds. The situations can be endless, but the common thread is that when an assessee extends an assistance to the associated enterprise, which does not cost anything to the assessee and particularly for which the assessee could not have realized money by giving it to someone else during the course of its normal business, such an assistance or accommodation does not have any bearing on its profits, income, losses or assets, and, therefore, it is outside the ambit of international transaction under section 92B (1) of the Act. 33. In any event, the onus is on the revenue authorities to demonstrate that the transaction is of such a nature as to have "bearing on profits, income, losses or assets" of the enterprise, and there was not even an effort to discharge this onus. Such an impact on profits, income, losses or assets has to be on real basis, even if in present or in future, and not on contingent or hypothetical basis, and there has to be some material on record to indicate, even if not to establish it to hilt, that an intra AE international transaction h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, even in a case in which neither any guarantee commission is charged nor any costs are incurred, is an international transaction. In any case, there is nothing in the operative portion which even remotely suggests that Their Lordships had any occasion to address themselves to the question as to whether the issuance of corporate guarantee amounts to international transaction. The operative portion of the judgment is reproduced below for ready reference: …………In the matter of guarantee commission, the adjustment made by the TPO were based on instances restricted to the commercial banks providing guarantees and did not contemplate the issue of a Corporate Guarantee. No doubt these are contracts of guarantee, however, when they are Commercial banks that issue bank guarantees which are treated as the blood of commerce being easily encashable in the event of default, and if the bank guarantee had to be obtained from Commercial Banks, the higher commission could have been justified. In the present case, it is assessee company that is issuing Corporate Guarantee to the effect that if the subsidiary AE does not repay loan availed of it from ICICI, then in such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 which introduced, inter-alia, the amendment to section 2(47) and section 92CA(2B) is a validating act in view of section 119 thereof. 215. Explanation 2 to section 247 broadly has four elements. Disposal or parting with or creating any interest in an asset. The asset or any interest in the asset. The disposing of or parting with the asset or creating any interest therein may be: (a) Direct or indirect. (b) Absolute or conditional. (c) Voluntary or involuntarily. (d) By amendment or otherwise. (iv) A non-obstante provision regarding the nature of a transfer. If an act, arrangement, transaction etc. constitutes a transfer as defined in the section it would be so notwithstanding the transfer of rights having been categorised as being effected or dependent upon or flowing from the transfer of a share or shares of a company registered or incorporated outside India. 216. Two aspects of a transfer are clarified - the asset itself and the manner in which it is dealt with. The asset is no longer restricted to the asset per se or a right therein, but also extends to "any interest therein". Prior to the amendment, the words "any interest therein" were absent. Further, the nature o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to Vodafone's case on account of the Revenue itself not having appreciated or realized the actual ambit of the term "transfer" which are now clarified by the amendment. Even assuming that the Revenue cannot re-open the Vodafone case, it cannot be barred from relying upon the true ambit of the term "transfer" in future cases, including the proceedings in respect of the petitioner. Thus, even assuming that the judgment of the Supreme Court remains unaffected by the clarificatory amendment, the Revenue would be entitled hereafter in other cases, at least, to appreciate, analyze and construe the transactions relating to call options, including the Framework agreements in a proper perspective which it may not have done earlier. 220. These are important issues. There is no justification for withdrawing the proceedings from the channel provided by the Income Tax Act, bypassing the Tribunal and considering all these questions in exercise of the High Court's extra-ordinary jurisdiction under Article 226 (Emphasis, by underlining, supplied by us) 27. Revenue's emphasis is on the last two sentences in paragraph no 213 which state that "The effect of the amendment would have to be consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n under consideration and treat it to be the complete "law" declared by this Court. The judgment must be read as a whole and the observations from the judgment have to be considered in the light of the questions which were before this Court" Their Lordships further noted that "A decision of this Court takes its colour from the questions involved in the case in which it is rendered and, while applying the decision to a later case, the Courts must carefully try to ascertain the true principle laid down by the decision of this Court and not to pick out words or sentences from the judgment, divorced from the context of the questions under consideration by this Court, to support their reasoning" It was also recalled that in Madhav Rao Jivaji Rao Scindia Bahadur vs. Union of India (1971) 3 SCR 9 : AIR 1971 SC 530, Hon'ble Supreme Court had cautioned that "It is not proper to regard a word, clause or a sentence occurring in a judgment of the Supreme Court, divorced from its context, as containing a full exposition of the law on a question when the question did not even fall to be answered in that judgment." That precisely, however, has been the approach of the revenue authorities in placi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dia, does not even deal with the fundamental question as to whether issuance of a corporate guarantee is an international transaction at all- which is what we are concerned with at present. This TCC decision dealt with a situation in which the assessee was denied, in computation of its business income, tax deduction for payment of guarantee fees on the ground that there was no effective benefit to the assessee, in obtaining the said guarantee. Aggrieved by denial of deduction, assessee carried the matter in appeal before the Canadian Tax Court, and the plea of the assessee was eventually upheld. It is also interesting to note that as a sequel to this Tax Court of Canada decision, the transfer pricing legislation was amended, to bring greater clarity on the issue and as a measure of abundant caution, and section 247 (7.1), granting specific exemption to guarantee fees, was introduced. This amendment is as follows: (7.1) Subsection (2) does not apply to adjust an amount of consideration paid, payable or accruing to a corporation resident in Canada (in this subsection referred to as the "parent") in a taxation year of the parent for the provision of a guarantee to a person or partner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icing provisions, perhaps being in the quest of comprehensive coverage, have ended up in a limited scope of the transactions being covered by the arm's length price adjustments for transfer pricing. In any event, as emphasized earlier as well, the decision was in the context of the deduction, and, post this decision, a specific amendment was introduced in the Canadian transfer pricing law to clarify the position that all corporate guarantees issued by the assessee, in support of its subsidiaries, are not necessarily international transactions. Revenue, therefore, does not derive any advantage from the Tax Court of Canada's decision in the case of GE Capital Canada. There are many more aspects which make this decision wholly irrelevant in the present context but suffice to say that relevant legal provisions and context being radically different, the reliance of this decision must be rejected for this short reason alone. 32. As we take note of the above legal position in Canada, it is appropriate to take note of the concept of 'shareholder activities' in the context of corporate guarantees which provides conceptual justification for exclusion of corporate guarantees, under certain c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... given it compensates for the inadequacies in the financial position of the borrower; specifically, the fact that the subsidiary does not have enough shareholders' funds". There can be number of reasons, including regulatory issues and market conditions in the related jurisdictions, in which such a contribution, by way of a guarantee, would justify to be a more appropriate and preferred mode of contribution vis-a-vis equity contribution. It is significant, in this context, that the case of the assessee has all along been, as noted in the assessment order itself, that "said guarantees were in the form of corporate guarantees/ quasi capital and not in the nature of any services". In other words, these guarantees were specifically stated to be in the nature of shareholder activities. The assessee's claim of the guarantees being in the nature of quasi capital, and thus being in the nature of a shareholder's activity, is not rejected either. The concept of issuance of corporate guarantees as a shareholder activity is not alien to the transfer pricing literature in general. On the contrary, it is recognized in international transfer pricing literature as also in the official documentatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, as long as an area is adequately covered by the work of legislation, things like guidance of the OECD, or for that purpose any other multilateral forum, are not decisive. While we are alive to the school of thought that when the domestic transfer pricing regulations do not provide any guidelines, it may have to be decided having regard to international best practices, we donot quite agree with it inasmuch as, in our considered view, Revenue cannot seek to widen the net of transfer pricing legislation by taking refuge of the best practices recognized by the OECD work. 35. While dealing with "special consideration for intra group services", the 'OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations' has noted that there are two fundamental issues with respect to the intra group services- first, whether intra group services have indeed been provided, and, second- if the answer to the first question is in positive, that charge to these services should be at an arm's length price. Dealing with the first question, which is relevant for the present purposes, these Guidelines (2010 version) state as follows: 7.6 Under the arm's length principle, the qu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rship interest in one or more other group members, i.e. in its capacity as shareholder. This type of activity would not justify a charge to the recipient companies. It may be referred to as a "shareholder activity", distinguishable from the broader term "stewardship activity" used in the 1979 Report. Stewardship activities covered a range of activities by a shareholder that may include the provision of services to other group members, for example services that would be provided by a coordinating centre. These latter types of non-shareholder activities could include detailed planning services for particular operations, emergency management or technical advice (trouble shooting), or in some cases assistance in day-to-day management. 7.10 The following examples (which were described in the 1984 Report) will constitute shareholder activities, under the standard set forth in paragraph 7.6: a) Costs of activities relating to the juridical structure of the parent company itself, such as meetings of shareholders of the parent, issuing of shares in the parent company and costs of the supervisory board; b) Costs relating to reporting requirements of the parent company including the consol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es capabilities or knowledge (including knowledge of and ability to take advantage of a particularly advantageous situation or circumstances); and making available to the recipient any property or other resources of the rendered" [Regulation 1.482-9(1)(2)]. The issuance of guarantees is not within the ambit of transfer pricing in United States because it is a service but because it is covered by the specific definition discussed above. As a matter of fact, David S Miller, in a paper titled 'Federal Income Tax Consequences of Guarantees; A Comprehensive Framework for Analysis' published in the 'The American Lawyer Vol. 48, No. 1 (Fall 1994), pp. 103-165 (http://www.jstor.org/stable/20771688), has stated that a guarantee is not a service. The following observations, at pages 114, are important: The position that guarantees are services has been discredited by the courts with good reason38. Guarantee fees do not represent payments for services any more than payments with respect to other financial instruments constitute payment for services39. A guarantor does not arrange financing for the debtor, but merely executes a financial instrument in its favour. 38See. e.g., Centel Communic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... definition of international transaction, even though there is a reference to the expression 'benefit' in the context of cost or expense sharing arrangements but that is a different aspect of the matter altogether. In the absence of benefit test being mentioned in the definition for the present purposes, we cannot infer the same. 38. One more thing which is clearly discernable from the above discussions is that the tests recognized by these guidelines are interwoven twin tests of benefit and arm's length. Benefit test implies the recipient group member should get "economic or commercial value to enhance its commercial position". The benefit test is interlinked with the an arm's length test in the sense that it seeks an answer to the question whether under a similar situation an independent enterprise would have been willing to pay for the activity concerned, or would have performed the activity in-house for itself. So far as the benefit test is concerned, as we have noted earlier, it is alien to the definition of international transaction' under the Indian transfer pricing legislation. So far as arm's length test is concerned, it presupposes that such a transaction is possible in a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny entity that can pass the risk assessment and provide security may obtain a bank guarantee. The consideration for the issuance of bank guarantee, so far as a banker is concerned, is this. When the client is not able to honour the financial commitments and when client is not able to meet his financial commitments and the bank is called upon to make the payments, the bank will seek a compensation for the action of issuing the bank guarantee, and for the risk it runs inherent in the process of making the payment first and realizing it from the underlying security and the client. Even when such guarantees are backed by one hundred percent deposits, the bank charges a guarantee fees. In a situation in which there is no underlying assets which can be realized by the bank or there are no deposits with the bank which can be appropriated for payment of guarantee obligations, the banks will rarely, if at all, issue the guarantees. Of course, when a client is so well placed in his credit rating that banks can issue him clean and unsecured guarantees, he gets no further economic value by a corporate guarantee either. Let us now compare this kind of a guarantee with a corporate guarantee. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issued to various banks in respect of the credit facilities availed by the subsidiaries from these banks. The guarantees were prima facie in the nature of shareholder activity as it was to provide, or compensate for lack of, core strength for raising the finances from banks. No material, indicating to the contrary, is brought on record in this case. Going by the OECD Guidance also, it is not really possible to hold that the corporate guarantees issued by the assessee were in the nature of 'provision for service' and not a shareholder activity which are mutually exclusive in nature. In the light of these discussions, we are of the considered view, and are fully supported by the OECD Guidance in this, that the issuance of corporate guarantees, in the nature of quasi capital or shareholder activity- as is the uncontroverted position on the facts of this case, does not amount to a service in which respect of which arm's length adjustment can be done. 42. As observed by Hon'ble Delhi High Court in the case of CIT Vs EKL Appliances Ltd [(2012) 345 ITR 241 (Del)], a re-characterization of a transaction is indeed permissible, inter alia, in a situation "(i) where the economic substance o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transactions or substitute other transactions for them. Restructuring of legitimate business transactions would be a wholly arbitrary exercise the inequity of which could be compounded by double taxation created where the other tax administration does not share the same views as to how the transaction should be structured. 1.37 However, there are two particular circumstances in which it may, exceptionally, be both appropriate and legitimate for a tax administration to consider disregarding the structure adopted by a taxpayer in entering into a controlled transaction. The first circumstance arises where the economic substance of a transaction differs from its form. In such a case the tax administration may disregard the parties' characterization of the transaction and recharacterise it in accordance with its substance. An example of this circumstance would be an investment in an associated enterprise in the form of interest-bearing debt when, at arm's length, having regard to the economic circumstances of the borrowing company, the investment would not be expected to be structured in this way. In this case it might be appropriate for a tax administration to characterize the invest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed on the transaction as it has been actually undertaken and structured by the associated enterprises. It is of further significance that the guidelines discourage re-structuring of legitimate business transactions. The reason for characterisation of such re-structuring as an arbitrary exercise, as given in the guidelines, is that it has the potential to create double taxation if the other tax administration does not share the same view as to how the transaction should be structured. 18. Two exceptions have been allowed to the aforesaid principle and they are (i) where the economic substance of a transaction differs from its form and (ii) where the form and substance of the transaction are the same but arrangements made in relation to the transaction, viewed in their totality, differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner. 43. It is thus clear that even if we accept the contention of the learned Departmental Representative that issuance of a corporate guarantee amounts to a 'provision for service', such a service needs to be re-characterized to bring it in tune with commercial reality as "arrangements made in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ial or even in Explanation to Section 92 B, the thrust is on the services like market research, market development, marketing management, administration, technical service, repairs, design, consultation, agency, and scientific research, legal or accounting service or coordination services. As a matter of fact, even in the Explanation to Section 92 B- which we will deal with a little later, guarantees have been grouped in item 'c' dealing with capital financing, rather than in item 'd' which specifically deals with 'provision for services'. When the legislature itself does not group 'guarantees' in the 'provision for services' and includes it in the 'capital financing', it is reasonable to proceed on the basis that issuance of guarantees is not to be treated as within the scope of normal connotations of expression 'provision for services'. Of course, the global best practices seem to be that guarantees are sometimes included in 'services' but that is because of the extended definition of 'international transaction' in most of the tax jurisdictions. Such a wide definition of services, which can be subject to arm's length price adjustment, apart, "Transfer Pricing and Intra Group Fina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ether the provision of guarantee was a service or not". That's not factually correct. We are unable to see any merits in learned Departmental Representative's contention, particularly as decision categorically noted that not only before the Tribunal, but this issue was also raised before the DRP- as evident from the text of DRP decision. We now take up the issue with respect to specific mention of the words in Explanation to Section 92B which 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." There is no dispute that this Explanation states that it is merely clarificatory in nature inasmuch as it is 'for the removal of doubts', and, therefore, one has to proceed on the basis that it does not alter the basic character of definition of 'international transaction' under Section 92 B. Accordingly, this Explanation is to be re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion has no bearing on profits, incomes, losses or assets of such enterprise, the transaction will be outside the ambit of expression 'international transaction'. This aspect of the matter is further highlighted in clause (e) of the Explanation dealing with restructuring and reorganization, wherein it is acknowledged that such an impact could be immediate or in future as evident from the words "irrespective of the fact that it (i.e. restructuring or reorganization) has bearing on the profit, income, losses or assets of such enterprise at the time of transaction or on a future date". What is implicit in this statutory provision is that while impact on " profit, income, losses or assets" is sine qua non , the mere fact that impact is not immediate, but on a future date, would not take the transaction outside the ambit of 'international transaction'. It is also important to bear in mind that, as it appears on a plain reading of the provision, this exclusion clause is not for "contingent" impact on profit, income, losses or assets but on "future" impact on profit, income, losses or assets of the enterprise. The important distinction between these two categories is that while latter is a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e company does not fall within the definition of international transaction. The TP legislation does not stipulate any guidelines in respect to guarantee transactions. In the absence of any charging provision, the lower authorities are not correct in bringing aforesaid transaction in the TP study. In our considered view, the corporate guarantee is very much incidental to the business of the assessee and hence, the same cannot be compared to a bank guarantee transaction of the Bank or financial institution." 47. However, within less than four months of this decision having been rendered, the Finance Act 2012 came up with an Explanation to Section 92B stating that "for the removal of doubts", as we have noted earlier in this decision, "clarified" that international transactions include, inter alia, capital financing by way of guarantee. This legislative clarification did indeed go well beyond what a coordinate bench of this Tribunal held to be the legal position and we are bound by the esteemed views of the coordinate bench. We are, therefore, of the opinion that the Explanation to Section 92 B did indeed enlarge the scope of definition of 'international transaction' under section 92 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , taking note of the insertion of Explanation to Section 92B of the Act, that the issuance of corporate guarantees is covered by the residuary clause of the definition under section 92 B of the Act but since such issuance of corporate guarantees, on the facts of the present case, did not have "bearing on profits, income, losses or assets", it did not constitute an international transaction, under section 92B, in respect of which an arm's length price adjustment can be made. In this view of the matter, and for both these independent reasons, we have to delete the impugned ALP adjustment. The question, which was raised in Bharti Airtel's case (supra) but left unanswered as the assessee had succeeded on merits, reamins unanswered here as well. However, we may add that in the case of Krishnaswamy S PD Vs Union of India [(2006) 281 ITR 305 (SC)], wherein Their Lordships had, inter alia, observed that "the law does not compel a man to do what he cannot possibly perform. The law itself and its administration is understood to disclaim as it does in its general aphorisms, all intention of compelling impossibilities, and the administration of law must adopt that general exception in the cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er, no conflict in the reasoning. Four Soft decision (supra) had decided the issue in favour of the assessee but that was with respect to the law prior to insertion to Explanation to Section 92B. As for the post amendment law and the impact of amendment in the definition of 'international transaction', the matter was again decided in favour of the assessee by Bharti Airtel decision (supra) on the peculiar facts of that case. The decisions like Everest Kento (supra) and Aditya Birla Minacs Worldwide (supra) were decisions in which the assessee had charged the fees and, for that reason, such cases are completely distinguishable as discussed above. In Prolific's case (supra), as indeed in any other case so far, it was case not the case of the assessee that corporate guarantees are quasi capital, or shareholder activity, in nature, and, for that reason, excludible from chargeable services, even if these are held to be services in nature. That plea has been specifically accepted in the present case. Therefore, the question whether issuance of corporate guarantee per se in general constitutes a 'international transaction' under section 92B would have been somewhat academic question on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cing issues are to be taken, utmost clarity in the legislative framework and a comprehensive analysis of relevant facts, in the transfer pricing documentation, are basic inputs. Unfortunately, both of these things leave a lot to be desired. We can only hope, and we do hope, that things will change for better. 51. Ground no. 3 is thus also allowed. 52. In ground no.4, the assessee has raised the grievance that the Assessing Officer has erred in not accepting the profits of various units as declared by the appellant company by reducing certain items as adjustments for inter division transfer and adjusting the same to the business income of various units as under while granting deduction u/s. 80IB and 10B. 53. Learned Representatives fairly agree that the issue is covered in favour of the assessee, by the orders of the co-ordinate bench in assessee's own cases for the assessment years 2002-2003 and 2005-06, to the extent that the matter is required to be remitted to the file of Assessing Officer for fresh adjudication in the light of the directions set out in those orders. We are, thus, urged to remit the matter to the file of the Assessing Officer for fresh adjudication in the lig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5-06, the matter is required to be sent back to the file of Assessing Officer for fresh adjudication. Learned Departmental Representative does not seriously oppose the matter being remitted to the file of Assessing Officer but relies on the stand of the Assessing Officer. 61. We see no reasons to take any other view of the matter than the view taken by the Co-ordinate bench. Respectfully following the same, as far as the income from sale of scrap to the tune of ₹ 48,01,099/- for Silvassa-I and ₹ 26,89,679/- for Silvassa-II Units, we direct the Assessing Officer to include the same in computation of deduction under section 80IB. As regards remaining items, on the line of orders for the earlier years, we direct the Assessing Officer to adjudicate the mater fresh in the light of directions of the coordinate benches in accordance with law and by way of a speaking order. 62. Ground no.6 is also thus allowed for statistical purposes. 63. In ground no.7 the assessee has raised the following grievance :- "On appreciation of the facts and circumstances of the case, the learned Addl. Commissioner of Income Tax has erred in making addition to the tune of ₹ 1,03,272/- and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any of the arguments and proceeded to treat the same as capital expenditure. The benefit of the additional depreciation was, nonetheless, allowed. The total deprecation thus allowed was ₹ 67,41,569/-. In effect, a disallowance of ₹ 51,22,143/- was made to the total income of the assessee. Aggrieved, the assessee did raise grievance before the DRP but without any success. The DRP rejected the grievance of the assessee by, inter alia, observing as follows:- The various submissions made by the assessee in this regard have been carefully considered by us and are not found acceptable. With effect from 01.04.2003, computer software has been classified as tangible asset under heading "Plant" in Appendix-I to the Rules which is entitled to deprecation @ 60%. In the various decisions relied upon by the assessee, the aforesaid change brought with effect from 01.04.2003 in the I.T. Rules has not been considered by the Hon'ble Courts and the same are therefore distinguishable from the facts of the assessee's case. The decision of Hon'ble ITAT Pune 'B' Bench in the case of Sudarshan Chemical Industries Ltd. vs. Assistant Commissioner of Income-tax, 110 ITD 171 (Pune) is directly ..... X X X X Extracts X X X X X X X X Extracts X X X X
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