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TMI Blog2016 (6) TMI 636X X X X Extracts X X X X X X X X Extracts X X X X ..... O/TPO under Section 92CA(3) of the Act of Rs. 1,35,05,896 on account of interest on loan given by the Appellant to its AE, Manugraph DGM Inc ('MDGM') by considering Arm's length Price (ALP) of 17.22% p.a. by rejecting benchmarking analysis undertaken by the Appellant of the advances given; 1.2 in confirming the addition on account of interest on loan given by Appellant to its AE, without appreciating the fact that the Appellant has charged interest at 5% p.a. [6 months LIBOR + 200 bps] on the advances given to the AE based on the internal comparable available; 1.3 in considering the yield method while determining the ALP of the interest to be charged on loan advanced to AE by assigning different ratings to the Appellant and its AE (basis of the CRISIL ratings) without considering the fact that the credit rating of a holding company and its wholly-owned subsidiary is the same; 1.4 in making the interest adjustment on advances given to AE, without appreciating the fact that the said advances have been provided out of the internal accruals of the Appellant and no cost is associated with the said advances; 1.5 in not accepting the fact that the advances given by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd 2010-11, in favour of the assessee. Vide order dated 16th September 2015 and following another decision in assessee's on case for the assessment year 2008-09, a coordinate bench of this Tribunal, has decided the issue in favour of the assessee for the assessment year 2010-11 as well, by observing as follows 7. We have heard rival submissions and also perused the impugned order and the material placed on record. On the loan given to its AE, the assessee has charged interest rate worked out on the basis of six months at LIBOR + 2%, which worked out at 3.75%. This Arm's Length interest was benchmarked by using Internal CUP on the basis of rate of interest paid on loans by the assessee availed from State Bank of India. However, the TPO has arrived at ALP 14.736% by taking the interest rate based on average yield rate of DB rated points based on data collected from CRISIL. The DRP has reduced the said interest rate by holding that domestic cost of borrowing + mark-up of 3% should be applied which works out 9.90%. The applicability of interest rate based on LIBOR had come-up for consideration before the Tribunal in the case of the assessee in AY 2008-09 wherein, the Tribunal relying ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s points, there is still a cushion of further 147 basis points before the interest charged can be said to more than the arm's length price, and it is an old matter. It is, therefore, worth exploring whether, even within the limitations of somewhat sketchy information available on the facts of this case, the matter can be decided one way or the other rather than sending it back to the TPO for fresh adjudication. 7. While exploring such possibilities, it will be useful to take note of the fact that in the case of Bharti Airtel Ltd. v. Addl. CIT [2014] 64 SOT 50 (URO)/43 taxmann.com 50 (Delhi), and a coordinate bench had deleted a similar ALP adjustment on account of interest amounting to Rs. 10,11,786 wherein the same approach of adopting 400 basis points above the LIBOR as ALP was adopted. While deleting this ALP adjustment, speaking through one of us, the Tribunal had, inter alia, observed as follows:- '62. As far as the first adjustment is concerned, while the TPO has adopted the rate as 4% over LIBOR rate, he has not set out the specific basis of this rate. He has mentioned about some information gathered from websites of financial institutions which, according to him ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lent amount of loan given to the AE i.e. the rate differential for the difference in interest spread between the credit rating of the taxpayer and the AE. Thus after the above analysis, the equivalent interest rate is the interest rate including the transaction cost for a foreign currency loan, if given to the AE for its credit standing/rating. 66. We see no substance in this adjustment either. The TPO has taken the lender as the tested party, and yet made adjustments for higher risks on account of assumed lack of security and increased risk of single party dealing. This approach overlooks the fact that the assessee has advanced monies to its subsidiaries which are under its management and control- a factor which substantially reduces the risk rather than increasing it. On these facts, it is difficult to understand, much less approve, any rationale for adjustment on account of higher risks. On this point also, we see no merits in the stand of the TPO. (Emphasis, by Underlining, Supplied by us now)' 8. When the matter was carried in further appeal, this time by the Commissioner, before Hon'ble Delhi High Court, Their Lordships were, vide judgment, dated 25th February 201 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts of substantial risk and investments of default. The approach adopted by the DRP cannot, therefore, meet our approval. 10. Similarly, the DRPs observation to the effect that "Generally, Indian banks are charging interest rate of 2.5% to 5% above the LIBOR/EURIBOR for foreign currency loans" is not only devoid of any basis but, as our day to day experience on the bench shows, ex facie incorrect. 11. There are any number of decisions by the coordinate benches which show that the interest rates charged on foreign currency, say US dollars, loans are much lower than the 250 to 500 basis points above the LIBOR having been to be generally applicable rates. For instance, in the cases of Bharti Airtel Ltd. (supra), which pertains to the assessment years 2007-08 and 2008-09, the comparable cases were taken as 150 basis points above LIBOR and in the range of 140-170 basis points above LIBOR. In contrast to this comparable case, the interest charged in the present case is 247 points above the LIBOR rate. In the case of Siva Industries & Holdings Ltd. v. Asstt. CIT [2012] 26 taxmann.com 96/54 SOT 49 (Chennai), dealing with the assessment year 2006-07 and while referring to LIBOR at 4.42, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Commissioner of Income-tax (Transfer Pricing) - 1 (9) (hereinafter referred to as 'TPO'): 2.1 in making an adjustment under Section 92CA(3) of the Act of Rs. 2,31,71,100/- on account of CG given by the Appellant to overseas bank in favor of its AE (MDGM) towards the loan taken by its AE from the said bank disregarding the fact that no benefit is accrued to AE; 2.2 in not appreciating the fact that the transaction of bank guarantee is not an International Transaction within the meaning of section 92B and the explanation to Section 92B inserted by Finance Act, 2012 cannot extend scope of transaction retrospectively and accordingly, transfer pricing provisions cannot apply to the said transaction; 2.3 in making adjustment in respect of CG given by the Appellant without appreciating the economic and commercial rationale behind the transaction and factors like strategic investment and shareholding activity; 2.4 in determining the ALP at 6% by adopting an arbitrary and ad hoc manner without recording a finding as regards to Most Appropriate Method for benchmarking the transaction of providing CG; 2.5 Without prejudice to above, in not restricting arm's length rate of guarant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssuance of this guarantee to the AE's banker in the USA. It was in this backdrop that an arm's length price adjustment of Rs. 2,31,71,100 was made towards guarantee commission. Aggrieved, assessee carried the matter in appeal before the CIT(A) but, once again, without any success. Learned CIT(A) upheld the action of the TPO. 11. 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. We have noted that in the assessment years 2008-09 and 2010-11,in assessee's own case, coordinate benches have, following decision of this Tribunal in the case of Everest Kanto Cylinders Ltd Vs DCIT [(2013) 34 taxmann.com 19 (Mumbai)] held that the arm's length price for guarantee commission is .5%. Interestingly, that was a case in which, as the coordinate bench itself observed in so many words, ".....in this case, the assessee has itself charged 0.5% guarantee commission from its AE, therefore, it is not a case of not charging of any kind of commission from its AE. The only point which has to be seen in this case is whether the same is at ALP or not.". That is quite different a situation so far as the ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ower"), PNC BNK, NATIONAL ASSOCIATION (the "Lender") and MANUGRAPH INDIA LD. (the "Parent") WITNESSETH: WHEREAS, concurrently herewith the Borrower and the Lender are entering into a Letter Agreement, certain promissory notes and certain other financing documents and security agreements, each dated as of the date hereof (collectively, the "Loan Documents") pursuant to which the Lender has agreed to make certain Loans (as defined in the Loan Documents) to the Borrower in the aggregate principal amount not to exceed $ 14,850,000 at any one time outstanding. WHEREAS, it is a condition precedent to the Lender's obligation to make such Loans that the Parent and the Borrower shall have executed and delivered to the Lender this Agreement: WHEREAS, the Borrower is the wholly owned subsidiary of the Parent. WHEREAS, the Parent will derive substantial direct and indirect economic benefit from the extensions of credit to the Borrower by the Lender pursuant to the Loan Documents. NOW THEREFORE, in consideration of the premises and of the mutual agreements herein contained and for other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereto ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not be less than 5 Business Days from the date of such notice). (c) (1) The Parent shall satisfy its obligations to make Deficiency Payment hereunder by either contributing cash to the capital of the Borrower or by making a loan to the Borrower (which loan shall be fully subordinated to the obligations of the Borrower under the Loans of the Lender on terms and conditions satisfactory to the Lender in its sole discretion in either case in an aggregate principal amount equal to the required amounts. (ii) The proceeds of all Deficiency Payments shall be paid directly to the Lender. The Lender shall apply all proceeds of Deficiency Payments received by it to the prepayment of principal of the Loans in such order as it may in its sole discretion determine, provided that such prepayment will be without penalty under the Loan Documents. (d) The Parent's obligation hereunder shall not exceed the lesser of (i) $ 14,850,000 or (ii) the amount outstanding under the Loan Documents and shall be a continuing and unlimited obligation and shall apply in each Founded Debt Ratio Deficiency. Fixed Charge Coverage Ratio Deficiency or Shortfall which occurs during the term of the Loan Documents ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 92B defines the expression 'international transaction' as follows: '92B - Meaning of international transaction (1) For the purposes of this section and sections 92, 92C, 92D and 92E, "international transaction'' means a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises and shall include a mutual agreement or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uture 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 knowhow; (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 documentation; (f) customer related intangible assets, such as, customer lists, customer contracts, customer relationship, open purchase orders; (g) contract related intangible assets, such as, favourable supplier, contracts, licence agreements, franchise agreements, non-compete agreements; (h) human capital related intangible assets, such as, trained and organised workforce, employmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or 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 92B. 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 92B. 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 92B, are transactions with regard to purchase, sale, transfer, lease or use of tangible and intangible properties. These transactions were anyway covered by 2 (a) above which covered transactions 'in the nature of purchase, sale or lease of tangible or intangible property'. The only additional expression in the clarification is 'use' as also illustrative and inclusive descriptions of tangible and intangible assets. Similarly, clause (d) deals with the " provisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... '. 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, 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". In view of the discussions above, the scope ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 intraAE international transaction has some impact on profits, income, losses or assets. Clearly, these conditions are not satisfied on the facts of this case.' 23. Learned Departmental Representative submits that this decision is no longer good law in the light of Everest Kanto Cylinders Ltd. decision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad 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 event, the assessee would make good the amount and repay the loan. The considerations which applied for issuance of a Corporate guarantee are distinct and separate from that of bank guarantee and accordingly we are of the view that commission charged cann ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 involuntary. (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 of the disposal is also expanded. It now includes the creation of any interest in any asset. Moreover, the disposal of or creation of any interest in the asset may be direct or indirect, absolute or conditional, voluntar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 extraordinary jurisdiction under Article 226.' (Emphasis supplied) 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 considered. It cannot be brushed aside" but in doing so what it overlooks is the subsequent observations highlighted above which recognize the fact that merely because a subsequent Explanation is introduced by the legislat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 v. Union of India 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 placing reliance on Vodafone India Services (P.) Ltd. (supra) decision. We reject this approach. 28. For the reasons set out above, learned Departmental Representative's relian ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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) Sub-section (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 partnership (in this sub-section referred to as the "lender") for the repayment, in whole or in part, of a particular amount owing to the len ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 conditions, from the scope of transfer pricing adjustments. Taking note of these pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 quasicapital, 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 documentation and legislation of several transfer pricing jur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 do not 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, secondif 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 que ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its ownership 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 inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tangible or intangible property or other resources 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 fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Guidance and which finds its place in the international best practices, does not find its place in the main 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 inhouse 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 India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he guaranteed sum can be retrieved back from the business. This may require the business to furnish a security in the shape of cash or capital assets. Any 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 per cent 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 g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e guarantee given by the assessee, are not for its own business purposes. As a plain look at the details of corporate guarantees would show, these guarantees were 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s as it has been structured by them, using the methods applied by the taxpayer insofar as these are consistent with the methods described in Chapters II and III. In other than exceptional cases, the tax administration should not disregard the actual 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-bearin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oresaid guidelines lies in the fact that they recognise that barring exceptional cases, the tax administration should not disregard the actual transaction or substitute other transactions for them and the examination of a controlled transaction should ordinarily be based 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... As for the words 'provision for services" appearing in Section 92B, and connotations thereof, our humble understanding is that this expression, in its natural connotations, is restricted to services rendered and it does not extend to the benefits of activities per se. Whether we look at the examples given in the OECD material or even in Explanation to Section 92B, 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 92B- 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... residuary clause i.e. any other services not specifically covered by Section 92B. It was also contended that, while rendering Bharti Airtel decision, the Delhi Tribunal did go overboard in deciding something which was not even raised before us. In the written submission, it was stated that "Hon'ble Delhi ITAT was not requested by the contesting parties to decide the issue as to whether 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l transactions, as in Section 92B (1), which covers "any other transaction having a bearing on profits, incomes, losses, or assets of such enterprises". It is, therefore, essential that in order to be covered by clause (c) and (e) of Explanation to Section 92B, the transactions should be such as to have bearing on profits, incomes, losses or assets of such enterprise. In other words, in a situation in which a transaction 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are a couple of things that we would like to briefly deal with. 46. The first issue is this. We find that in the case of Four Soft Ltd v. Dy. CIT [(2011) 142 TTJ 358 (Hyd)], a co-ordinate bench had, vide order dated 9th September 2011, observed as follows: "We find that the TP legislation provides for computation of income from international transaction as per Section 92B of the Act. The corporate guarantee provided by the assessee 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ount the amendments brought about by Finance Act 2012, we need not deal with this aspect of the matter in greater detail." 48. In the present case, we have held that the issuance of corporate guarantees were in the nature of shareholder activities- as was the uncontroverted claim of the assessee, and, as such, could not be included in the 'provision for services' under the definition of 'international transaction' under section 92B of the Act. We have also held, 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 92B 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or which the grievance of the assessee is upheld, i.e. guarantees being in the nature of shareholder activity and excludible from the scope of services for that reason alone, is an area which had come up for consideration for the first time. In effect, therefore, there was no conflict on this issue of and the other issues, given decision on the said issue, were wholly academic. It cannot be open to refer the academic questions to the special bench. No doubt, some decisions of the coordinate benches which have reached the different conclusions. There is, however, no conflict in the reasoning. Four Soft Ltd. 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 Ltd. decision (supra) on the peculiar facts of that case. The decisions like Everest Kento Cylinders Ltd. (supra) and Aditya Birla Minacs Worldwide (supra) were decisions in which the assessee had charged the fees and, for that reason, such cases ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and unambiguous legislative guidance on the transfer pricing implications of the corporate guarantees as also on the methodology of determining its ALP, if necessary. Of course, no matter how good is the legislative framework, the importance of a very comprehensive analysis, in the transfer pricing study, of the nature of corporate guarantees issued by the assessees, can never be overemphasized. The sweeping generalizations, vague statements and evasive approach in the transfer pricing study reports, which are quite common in most of the transfer pricing reports, cannot do good to a reasonable cause. When judicial calls on the complex transfer pricing 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. 14. We are in considered agreement with the views so expressed by the coordinate bench. Learned Departmental Representative's well researched arguments, which are common in all the cases before our bench on this issue, do not persua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tative is indeed right, that is a case in which the assessee did infact recover charges, which included more than the cost incurred, from the beneficiary, and, as such, it clearly had an impact on the profits of the assessee. That is a case distinct from the present situation in which there is no impact on the profits or losses or assets or income of the assessee. In Advanta decision (supra), this aspect of the matter and the distinguishing feature has been discussed at considerable length. Learned Departmental Representative has then invited our attention to the fact a substantial question of law has been admitted by Hon'ble Delhi High Court in ITA No. 607/2014 against the order passed by the Tribunal in the case of Bharti Airtel (supra). While no doubt the matter is now pending before Hon'ble High Court for the judicial scrutiny by Their Lordships, that fact by itself does not reverse the stand taken by the Tribunal in the order so impugned. As regards the decision of Bharti Airtel being on its own peculiar facts, there can be no denial of this position but that does not mean that the so far as issues of general application are concerned, the stand of the Tribunal cannot hold goo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dy dealt with in the case of Micro Ink decision reproduced above, we see no need to again deal with the same. 16. We are, therefore, of the considered view that being a signatory to the tripartite support agreement, on the facts of this case, does not constitute a corporate guarantee akin to bank guarantee and, even if it could be treated as a corporate guarantee for benchmarking purposes, the corporate guarantee does not constitute an international transaction under section 92 B of the Act. In view of these discussions, as also bearing in mind entirety of the case, we are of the considered view that the arm's length price adjustment of Rs. 2,31,71,100 is unsustainable in law. We, therefore, direct the Assessing Officer to delete the same.As the basic plea of the assessee has been upheld, we see no need to deal with the alternate pleawhich, given the fact that the assessee has succeeded on the basic plea, is rendered academic and infructuous. 17. Ground no. 2 is thus allowed. 18. In ground no. 3, the assessee has raised the following grievance: 3. Disallowance under section 14A of the Act The learned CIT (A) has erred in upholding the action of the Deputy Commissioner of Inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mutual funds. A similar view was taken by the Co-ordinate Bench of this Tribunal in the case of Everest Kanto Cylinders Ltd. (supra) in para 4 as under:- "4. Before us, the Ld. Authorised Representative of the assessee has submitted that up to the A.Y. 2007-08, the Tribunal has held that the assessee was having sufficient non interest bearing fund for making the investment. For the A.Y. 2008-09, the Investment was made by the assessee in foreign subsidiaries, therefore, to the extent of investment made by the assessee in the A.Y. 2008-09, no disallowance is called for on account of balance interest expenditure in view of the order of this Tribunal in assessee's own case. Even for the A.Y. 2008-09, the Tribunal observed that disallowance under Rule 8D has been worked out by the Assessing Officer on the total investment which included investment mode in the mutual funds with growth scheme does not yield any dividend income. Therefore, the id. Authorized Representative has submitted that no fresh investment was made for the A.Y. 2009-10 and accordingly no disallowance can be made on account of interest expenditure u/s 14A of the income Tax Act. As far as the disallowance of ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cts are like this. During the course of scrutiny assessment proceedings, the Assessing Officer noticed that the assessee has incurred an expenditure of Rs. 3,99,72,476 on attending and participating in an Drupa 2008- a trade exhibition which takes place every four years in Germany. The Assessing Officer was of the view that the expenditure so incurred is not a purely revenue expenditure inasmuch as the benefit from participation in this exhibition is availed for several years. The assessee's explanation was that it is a revenue expenditure in nature, incurred wholly and exclusively for the purposes of business, not being in the nature of a capital expenditure, and, as such, eligible for deduction under section 37(1). The Assessing Officer rejected this explanation by observing, inter alia, as follows: .....It is evident that exhibition expenses of Drupa 2007, Germany, are incurred once in four years, therefore, only 1/4th of said expenses pertain to the year under consideration and the balance 3/4th is to be disallowed. As such, disallowance being 3/4th of said expenses works out to Rs. 2,99,79,357 and is added to the total income of the assessee. 25. Aggrieved, assessee carried ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Core Healthcare Ltd [(2009) 308 ITR 263 (Guj)]: 14. In relation to the first item, namely, advertisement expenses, it is not in dispute that the expenditure of Rs. 70 lakhs and odd was incurred on a special advertisement campaign. However, that by itself would not be sufficient to determine as to whether the expenditure in question is on revenue account or capital account. The approach of CIT(A) that the expenditure in question was treated as deferred revenue expenditure and hence was capital in nature, cannot be termed to be a correct approach because insofar as the IT Act is concerned, there is no such category of deferred revenue expenditure. Similarly, making of an entry or absence of an entry does not determine the allowability or otherwise of the item of expenditure and the same cannot be considered to be a factor adverse, if the expenditure is otherwise of allowable nature. Every expenditure incurred by a business concern, if incurred for the purposes of business, is bound to result in some benefit, direct or indirect, immediate or after some time, but the benefit to the business cannot be termed capital or revenue only on the basis of the period for which the benefit is de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 32. In the light of the above discussions, as also bearing in mind entirety of the case, we are of the considered view that entire expenditure on participation in Drupa 2008 should be allowed as revenue expenditure. Accordingly, the disallowance of Rs Rs. 2,99,79,357 stands deleted. However, in the event of the Assessing Officer having allowed the deduction for this amount spread over three subsequent assessment years, the deduction, to that extent, shall also withdrawn. 33. Ground no. 4 is thus allowed in the terms indicated above. 34. In ground no. 5, the assessee has raised the following grievance: 5. Disallowance of an amount of Rs. 1,21,27,829/- being reimbursement of expenses incurred by subsidiary of the Appellant The learned CIT (A) has erred in upholding the action of the Deputy Commissioner of Income-tax - Circle 3(2) (hereinafter referred to as the 'AO')/ Deputy Commissioner of Income-tax (Transfer Pricing) - 1 (9) (hereinafter referred to as 'TPO'): 5.1 in upholding disallowance of reimbursement of expenses of Rs.,1,21,27,829 to the foreign subsidiary MDGM which was incurred wholly and exclusively for the purpose of business and hence allowable under secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... controvert the claim of the assessee, as supported by material before us, that these expenses were incurred for the business purposes of the assessee. The assessee has claimed that assessee has able to generate sales of US $ 2.6 million, through these efforts, in the subsequent years. The apprehensions of the assessee are thus devoid of any substance. There is no justification for disallowing the expenses by question commercial expediency, nor can the Assessing Officer raise such issues anyway. As for the tax deduction at source obligations, the requirements of deducting tax at source come into play only when there is an income, taxable in India, embedded in the payments in question. Once the payments are found to be in the nature of reimbursement, without any mark up or income embedded in the same, there cannot any question of treating the same as subject to tax deduction at source requirements. The law in this regard is now well setted in the case of G E Technology Centre Ltd Vs CT [(2010) 327 ITR 456 (SC)], and unless the payment is shown to have an embedded income, no tax deduction requirements under section 195 come into play. There is nothing on record to show taxability of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... play. The Assessing Officer, however, did not agree. He was of the considered view that "even when the payment is made by the other party any loss on foreign exchange related to acquisition of fixed assets would increase the cost of fixed assets, which ultimately lead to increase in depreciation on the said fixed assets" and that "this section does debars the assessee to claim foreign exchange loss related to acquisition of fixed assets as revenue expenses under section 37 or any other provision of the Act". Accordingly, the foreign exchange loss of Rs. 6,57,75,845 was disallowed, though depreciation @ 15% was granted in respect of the same. Aggrieved, assessee carried the matter in appeal before the CIT(A) but without any success. 42. 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. 43. We have noticed that, as pointed out by the CIT(A), similar disallowance was confirmed by the DRP for the assessment year 2010-11 which has already come up for scrutiny before a coordinate bench of this Tribunal. On our perusal of the order dated 16th September 2015, however, we did not find a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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