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TMI Blog2013 (11) TMI 1583X X X X Extracts X X X X X X X X Extracts X X X X ..... r of the CIT(A)/TPO/AO on the TP adjustments is set aside. Deduction u/s 35(2AB) - Held that:- Original claim of deduction u/s 35(2AB) in the AY 2005-2006 is allowed and therefore, the alternate claim of depreciation is rightly rejected. Considering the relief granted by the Tribunal, allowing depreciation on the said amount is not sustainable. Therefore, we are of the considered opinion that the order of the CIT(A)j is fair and reasonable-and it does not call for any interference. Deduction u/s 80-IB of the Act in respect of export benefits in the form of DEPB licenses not allowed Interest could not be levied u/s 234B of the Act in respect of such enhanced book profits under section 115JB - ITA Nos. 5031 & 5488 (Mum.) of 2012 - - - Dated:- 13-11-2013 - D. KARUNAKARA RAO, ACCOUNTANT MEMBER AND VIVEK VARMA, JUDICIAL MEMBER For the Appellant: Vijay Mehta For the Respondent: Ajeet Kumar Jain and O.P. Singh ORDER D Karunakara Rao, There are two appeals under consideration and they are cross appeals. ITA No.5031/M/2012 is filed by the assessee and ITA No. 5488/M/2012 is filed by the Revenue for the Assessment Year 2008-2009. Both these appeals are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enses. 7. On the facts and in the circumstances of the case, the ld CIT(A) has erred in law and in facts in upholding AO's action in disallowing deduction u/s 80-IB on export benefits in the form of DEPB licences amounting to ₹ 2,81,75,586/-. 8. On the facts and in the circumstances of the case, the ld CIT(A) has erred in law and in facts in dismissing the appeal against AO's action in charging interest u/s 234B amounting to ₹ 54,86,525/- on enhanced assessed book profit u/s 115Jb due to amendment in section 115Jb by Finance Act, 2009 with retrospective effect from 1.4.2001, which amendment was introduced after filing of the return for AY 2008-2009 . 3. Briefly stated relevant facts of the case are that the assessee is engaged in the business of manufacturing and marketing the pharmaceutical products and the related Research and Development (R D) activities. Assessee filed the return of income declaring the total income of ₹ 25,78,93,610/- and the book profits u/s 115JB is at ₹ 4,22,66,10,367/-. There are international transactions involved in this case. The details of international transactions showing the details of the AEs, amounts of loa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Glenmark Generics SA, Argentina 1,97,673/- CUP 5. Further details of the international transactions with AEs include that the assessee's AEs at Switzerland and Argentina raised finance from ICICI Bank and Citibank for which, the assessee stood as guarantor. For these services, assessee received sums of ₹ 2,46,75,600/- from Glenmark Holding SA, Switzerland and ₹ 1,97,673/- from Glenmark Generics SA, Argentina. Assessee benchmarked these transactions and came to the conclusion that they are at the Arm's Length. TPO rejected the said TP study of the assessee by mentioning that the assessee failed to discharge its primary onus of benchmarking the transactions and issued a show-cause notice dated 17.3.2011. In the show-cause notice, the TPO proposed to consider (i) Allahabad Bank (charges guarantee fee @3% per annum); (ii) Dutch State, FMO (charges 2.5% per annum); (iii) HSBS Ltd (charges 0.15% to 3% per annum); and (iv) EXIM Bank of USA (charges 3% per annum). Finally, the TPO proposed to benchmark the ALP for guarantee commission given to the banks for the benefit of AEs @ 3% of the guaranteed amount. 6. Assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xternal comparables to support the benchmarking done by the TPO. 7. As a result of such benchmarking resulting the addition by way of adjustment at ₹ 13,99,97,606/-. Relevant conclusions of the additions are as under: Considering the facts and circumstances of the case and in view of the discussion made above, I benchmark the Arm's Length Price for the bank guarantee at 3% of the amount of Guarantee. The relevant calculations are as under: Sr.No. Name of the lender to whom guarantee is given Name of the beneficiary AE Amount of loan for which guarantee was given (in USD) Date of giving guarantee No. of days for which this guarantee was existent during the year Arm's lenght price @ 3% for No. of days that the guarantee was existent in the year Terms of loan 1 Citibank N. A. Bahrain Glenmark Holdings S.A. Switzerland 100,000,000 1-4-2007 365 122,129,652 Term Loan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eave it there. 10. Further on the merits of the TPO's comparable, Assessee submitted that on the ground of interest savings and on the ground of adjustments towards the negotiations/the guaranteed commission benchmarked by the assessee is at Arm's Length. The discussion given above quoting the case of a bank guarantee using the Bank of India rates is relevant. Assesses took objection to the case of General Electric Capital Canada Inc. v. Her MajestyThe Queen 2009 TCC 563, where, on the higher purchase transactions, guarantee commission @ 1 % was paid by the GE to GECUS and it was found to be at Arm's Length. Of course, there aren't many details available in the public domain. Further, in the impugned order, there was some discussion on the risk factors and as per the assessee, in this corporate guarantee, the assessee has borne which is almost NIL when the AEs capital rich and in this regard, the assessee submitted that the AEs made substantial repayments to the said Banks in the subsequent years. Assessee was extremely critical of the TPO's conclusions on all the 4-5 comparables cited by the TPO and also critical of benchmarking the transactions of guarant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submission has also contended to take average rates charged by the various banks. In this regard it is mentioned that such computation of the average rates cannot be considered for the benchmarking. As the rate of ECGC is not in respect of the fee and rate of HSBC cannot be taken as average of 0.15% to 3%. Further, the rate of HSBC actually speaks of guarantee fee and not commission. Further such rates are or /and inclusive of the guarantee commission is not clear. Further in such average computation the risk evaluation by considering the ordinary lending rate and the bank rate has not been mentioned either for India or of the country of AE. Accordingly, the submission of the appellant to consider average of various rates that it has submitted is not found to be acceptable.... The premium of 350 basis point above LIBOR is for the loan above the period of 5 years. In the facts of the ease while searching comparables the maturity of the loan by the AE has been taken as 5 years. Accordingly the such interest spread between interbank rate and interest on loan / ECB has to be considered at 350 basis point. Accordingly also the consideration of 3% as guarantee commission by the TPO i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arged by the assessee, are improper as these comparables are either rejected by the Tribunal in other cases or they are not property adjusted as per the provisions of the Rule-10B(l)(a) of IT Rules, 1962, Further, he is very critical of the conclusion given by the CIT(A) in confirming the above additions. Further, he took objection not only for rejecting the assessee's guarantee commission @ 0.53% of the loan guaranteed without any sustainable reasons but also for upholding the CU Price at 3% of the TPO. However, he fairly mentioned that for the sake of settlement of the litigation, he has not pressed certain related issues raised before the CIT(A) ie (i) whether the impugned transactions constitute international transactions or not; (ii) whether the CUP Method is an appropriate method or not and (iii) whether the comparables cited by the assessee are meritorious or not with the exception of Bank of India, which is the assessee's bank. Further, referring to the comparables submitted without prejudice, ld Counsel mentioned that they are since rejected by the CIT(A), the said submission is no longer relevant as neither the assessee nor the revenue raised the same in these app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... applicable to assessee's transaction; (c) Bank Guarantee given to its customers vs Corporate guarantee given to the AEs of the assessee; (d) extent of Risk involved and the AEs are strong financially and therefore, the risk is minimum; and (e) In similar circumstances, Allahabad Bank is rejected by the Tribunal as the comparable in CUP method in the cases of Asian Paints Ltd. and Everest Kanto Cylinder Ltd etc. (ii) FMO (Netherland Financier) charged Guarantee Commission @ 2.5 in the case of Rabo India Finance (P.) Ltd (Rabo): FMO is JV of the Netherland Government with 51% share. TPO used this transaction for benchmarking the impugned international transaction. On this comparable, Ld Counsel submitted that the essential facts relating to this comparable are not available in the public domain. In that case, it is not proper to use this transaction as Comparable Uncontrolled one. It is the submission of the assessee's counsel that considering the absence of full details in the public domain, the comparable should not be considered for CUP method, which is rated as the direct method for ALP study. Further, ld mentioned that the said transaction is not found to be. good com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Tribunal as good comparable again in the case of Everest Kanto Cylinder Ltd., (supra) 14. During the proceedings before the CIT(A), the Assessee cited the case of BANK OF INDIA as a good comparable: We find relevant to discuss this case too if it fits into the scheme of CUP method of TP studies. In this regard, Ld Counsel submitted that the Bank of India (BOI) is the financier for the assessee and the guarantee commission rates announced by the BOI to its customers can also be used as the good comparable. In connection with the Bank of India as good comparable, Ld Counsel mentioned that the rate of guarantee fee charged by this bank is 2.48% per an (page 13 of the paper book) for guaranteed amount exceeding ₹ 4 Crs. However, the Bank Manager has discretion to reduce up to 70% of such rate of guarantee specified. In that case, the guarantee rate is amenable to downward revision up to 0.75% (i.e. 2.48% X 3%) (page 11 of the letter as annexure-IV), Further, he mentioned that the figure of rate of guarantee can be reduced further by 50% of the rates, if the guarantee by way of 100% of the cash deposit is provided. Therefore, Bank guarantees are customer specific and the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mbus Communication Ltd. 2005-06 0.5% M/s Everest Kanto has been taken as an external comparable - Page No 10 of order. 5 Asst. CIT v. M/s. Nimbus Communication Ltd. 2006-07 and 2007-08 0.5% Based on rate approved in assessee's own case for A.Y. 2005-06 Thus, Ld Counsel's summed up and stated that Ld TPO's CUPs (Allahabad Bank, HSBC Bank, US- EXIM Bank etc.) are neither internal nor external CUPs and he failed to pick up a single appropriate 'Comparable Uncontrolled Price'. He also asserted the fact of the Tribunal has already approved the above CUPs with Corporate Guarantee commission prices/rates in the range of 0.25% to 0.6% as the benchmarked rates. In the Everest Kanto case, ICICI provides the Bank GC rate (in short, BGCR) of 0.6% and if the adjustments are made to this rate, the corporate GC rate (in short, CGCR) may fall below the said mark up of 0.53%. Further, Ld Counsel took objection to the justification given by the CIT(A) on the 'interest savings based argument' of the revenue and mentioned the impug ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the said order or the Tribunal in the case of Tecnimont ICB (P.) Ltd. (supra) are not covered by the RBI approvals and this fact was not brought to the notice of the Tribunal at the time of adjudication. Therefore, this case is distinguishable. In any case, this is the case of the 'bank guarantee' and not the corporate guarantee' and therefore, the bank guarantee prices/rates with 'naked quotes' are not good comparables. Ld. Counsel stated that the 'naked quotes' of guarantee commission published by the banks/websites of the Banks should not be adopted without granting adjustments as the differences have materially impact on the price Further, bringing our attention to the decision of the ITAT cited above., Ld. Counsel mentioned that the Tribunal has been consistently approving the guarantee commission @ 0.5% of the guaranteed amount, therefore, the guarantee commission @ 0.53% charged by the assessee from the AEs is at Arm's Length. Decisions of Tribunal on the TP addition 19. We have heard both the parties, perused the orders of the Revenue Authorities, paper book filed before us along with the copies of the judgments furnished by both ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... B. Per contra, the case of the Revenue is that the decision of the CIT(A)/TPO/AO is proper and should be confirmed without any changes. However, the Revenue has nothing to counter on the fact of relying on the naked quotes', which are unadjusted before using them in the TP study of the TPO. Of course, Sri Jain, in principle, agreed with the existence of the difference between the Bank and Corporate guarantees. Further on the issue of considering the Allahabad Bank or HSBC or Bank of India or the SBI, Ld Counsel fairly mentioned that if the Bank of India is considered as good comparable, SBI should also be taken into account as a good comparable. On the cases cited by the Ld Mehta, it is the argument of the Ld DR that the guarantee commission rate @ 0.5% is considered at Arm's Length. Regarding SBI as the good comparable, Ld DR mentioned it is another case of bank guarantee and Tribunal approved the same for TP study in the case of Tecnimont ICB (P.) Ltd. (supra). 20. We have considered the above divergent stands of both the parties. Undisputed facts are that the assessee started with the presumption that the transactions of providing corporate guaranty to the Ban ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt third party, who does not belong to the controlled group. The External CUP involves the comparison to the price of a comparable transaction between third party enterprises. In the instant case, admittedly, there are no internal CUPs. Therefore, the external CUPs have to be identified ideally for the TP study. It is in this background, we need to study the Bank GC prices are good external CUPs. 22. Now we shall address to the contangurous issue of equating the BG with the CG for TP studies and use of the BG rates for benchmarking the CG rates in CUP method. In most of the TP studies, the TPOs are frequently using the BG rates, that to, the naked quotes for benchmarking the CG Rates without making requisite downward adjustments to the said BG Rates by factoring the obvious differences. List of differences are detailed in the preceding paragraphs of this order. The Tribunal is consistently disapproving this trend as evident from the plethora of cited decisions. We shall now discuss if the BGR and CGR are equal and comparable. 23. It is in this background, we take out some time to distinguish these types of Guarantees. Normally, the Bank Guarantee or Corporate Guarantee is giv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tly disapproving the said quotes. The case of Tecnimont ICB (P.) Ltd. (supra) is an aberration and the background facts this case are distinguishable. Therefore, unless the 'naked quotes' of the bank guarantee rates as given in the websites for public, are adjusted to various controlling factor narrated above, these rates are no good CUPs. AO/TPO/CIT(A) have not provided adjustments to such factors in benchmarking the impugned international transactions. Discussion on the Tribunal Orders on the Corporate Guarantee Rate- CGR: A. Asia Paints Ltd - Order of the Tribunal: We shall first take up the facts relating to the case of CGR and the decision in the case (ITA No. 408 1937/M/2010). In this case, Asia Paints Ltd. (supra) gave a corporate guarantee to HSBC Bank, Singapore and Citibank, Singapore in connection with loans granted by the Bank to its AE (Berger International Ltd). 0.35% and nil are the guarantee rate charged by the HSBC and Citibank of India in year 2004-2005. Thus, it is the case of charge of CG by the Indian branches of the bank on the assessee for providing guarantee to the foreign banks. On these facts, the TPO rejected the said rates and picked th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... national transactions applying the rate of 0.38% instead of 2.5%. The Tribunal confirmed the same and paras 52.10 to 52.12 of the order of the Tribunal dated 13.9.2013 are relevant in this regard. Relevant paras 52.10 to 52.12 of the order of the Tribunal read as under: 52.10.... However, It is a fact that while applying the external comparables, the TPO has not brought out anything on record that under which terms and conditions and circumstances the said public company has charged 2.5% rate of guarantee commission for providing guarantee on behalf of the Finance Company. The charging of a guarantee commission depends upon transactions to transaction and mutual understanding between the parties. There may by a case where bank may not charge any guarantee commission, depending upon its evaluation of relationship and with a guarantee commission, depending upon its evaluation of relationship with a particular client. Therefore, universal application of rate of 2.5% for guarantee commission cannot be considered a market rate as it largely depends upon the terms and conditions on which loan has been given, risk undertaken, relationship between bank and the client, economic and busi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion is hereby deleted and the order of the CIT(A) is set aside.... From the above orders of the Tribunal, it is adequately clear that the naked quotes of the bank guarantee commission rates kept in the website of the banks should not be applied in the TP studies without adjustments to various factors of the transactions. These factors may be risk related ones, time related guaranteed amount, financial strength of the AEs, background of the customers and the relationship of the AEs with the parental companies etc. The additions made are legally unsustainable, if the additions are made solely based on the website information of the banks, In principle, bank guarantees (in short - BG) are different from that of the corporate guarantee. Though untested in this case, in our prima facie opinion, a Bank Guarantee comparable may not clear the test of FAR analysis, which applies equally and relevant for the CUP method of ALP studies. Reliance is placed in the case of Arvind Mills Ltd. v. Asstt. CIT [2011] 11 taxmann.com 67 (Ahd.). The commercial considerations are paramount in fixing the charges when providing guarantees to its customers. On the other hand, a corporate guarantee opera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... porate guarantee' 25. Further, we find there are various GC rates in existence. While there is GC rate of 0.38% which is approved by the Tribunal in the case of Reliance Industries Ltd. (supra) there is GC rate of 0.5% as approved by the Tribunal in the case of Everest Kanto Cylinders Ltd. (supra) and Asstt. CIT v. Nimbus Communications Ltd. v. [2013] 34 taxmann.com 298/145 ITD 502 (Mum.) there is GC rate of 0.25% as approved by the Tribunal in the case of the Asian Paints Ltd. (supra). The GC rate of 3% as announced by the Bank for the Bank guarantee Transactions stand dismissed by Tribunal in all the above cases. Reasons for such rejection include: these are the 'naked quotes'; and (ii) the said 3% is always subjected to negotiations between the Bank and its customer; (iii) TPO has not provided adjustments at all before benchmarking the impugned transactions at 3%, etc. In any case, it is our opinion that the Bank Guarantee Commission Prices cannot be used as External CUPs to benchmark the Corporate Guarantee Commission Prices. Further, we find that, unlike in other cases of NIL corporate guarantee commission, the present assessee has charged the GC Rate of 0.53% a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orders of Revenue Authorities. 27. We have heard both the parties on this issue and perused the orders of the Revenue Authorities, in general, and para 12.3 of the CIT(A)'s order in particular. We have also perused the cited decision of the Tribunal. On perusal of the CIT(A)'s order, we find the said para 12.3 is relevant here and the same is reproduced hereunder. 12.3. The facts of the case have been considered together with the submissions of the appellant as against the observations / findings of the AO, in his order. As in the facts of the case as it stands today, the entire expenditure as incurred by the appellant of ₹ 20,28,55,097/- has been allowed by the Hon'ble ITAT u/s 35(2AB) in the AY 2005-2006, the question of such expenses being capital in nature and allowing of consequent depreciation as would be otherwise admissible for the A Y under consideration, does not arise. Accordingly, this ground of appeal is dismissed. 28. The original claim of deduction u/s 35(2AB) in the AY 2005-2006 is allowed and therefore, the alternate claim of depreciation is rightly rejected. Considering the relief granted by the Tribunal, allowing depreciation on the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this regard. We have perused the ratio of the said judgment and the held portion of the said judgment of the High Court reads as under: Held, that the last date of the relevant financial year was 31-3-2001 and on that day, admittedly, the assessee had no liability to pay any amount of advance tax in accordance with the law then prevailing in the country. Consequently, the assessee paid no advance tax and submitted its regular return on 31 10-2001 within the rime fixed by law wherein it declared its total income and the book profit both as nil. However, consequent to the amendment of the provisions contained in section 11SJB by virtue of the Finance Act, 2002 which was published in the official gazette on 11-5-2002 giving retrospective effect to the amendment from 1-4-2001, the assessee first voluntarily paid a sum of ₹ 1,55,62,511 on account of the tax payable on book profit as provided in amended provision of section 115JB and then filed its revised return 31-3-2003 declaring its business income as nil but the book profit under section 11530 as ₹ 20,63,65,711. The Assessing Officer accepted such return of income but imposed interest under sections 234B and 234' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 31,67,622/- pertains to 232 creditors, which had been taxed in the AYs 2005-06; 2006-07 and 2007-08. The remaining amount of ₹ 6,88,842/- pertains to 49 creditors and there was no movement in the creditors account in the books of the assessee. In this regard, assessee contended before the AO that some of the creditors have been subsequently paid off but no evidences were furnished to support his contention. After considering the assessee's submission, AO came to the conclusion that since, these liabilities are outstanding for a period of 3 years, the same ceases to exist and AO made addition u/s 41(1) of the Act and the said amount of ₹ 6,88,842/- was brought to tax. Aggrieved with the decision of the AO, assessee filed an appeal before the first appellate authority. 34. During the proceedings before the first appellate authority, assessee submitted that in the earlier assessment years the Revenue Authorities have considered the assessee's argument and deleted the addition made u/s 41(1) of the Act by following the decision of the Tribunal in the assessee's own case for the AY 2005-2006 vide ITA NO.6916/M/2008, dated 20.10.2010 (paras 35 to 37 of the said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2006, dated 20.10.210 (supra) and the CIT(A) has rightly adjudicated the issue in favour of the assessee by following the said order of the Tribunal. Therefore, in our view the order of the CIT(A) is fair and reasonable and it does not call for any interference. Accordingly, ground no. l raised by the Revenue is dismissed. 38. Referring to ground no.2, at the outset, Ld Counsel brought our attention to the order of the Tribunal in the assessee's own case for the AY 2005-2006 vide ITA No.6831/M/2008 and mentioned that the ground no.6, in the said appeal for the AY 2005-2006, is exactly similar to the ground no.6 in the present appeal. Further, he mentioned that this issue has to be decided in favour of the assessee. Paras 5 6 of the said order of the Tribunal (supra) for the AY 2005-06 dated 20.10.2010 are relevant in this regard. Ld DR also fairly mentioned that the ground no.2 is similar to that the ground no.6 and the same may be decided in favour of the assessee. 39. We have heard both the parties and perused the orders of the Revenue Authorities as well as the cited decisions of the Tribunal (supra). We have also perused the relevant facts in the assessee's own ..... X X X X Extracts X X X X X X X X Extracts X X X X
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