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TMI Blog2020 (2) TMI 257X X X X Extracts X X X X X X X X Extracts X X X X ..... after referred to as 'AT&S India') which is a tax resident of India. The AT&S Austria and AT&S India are associated enterprises within the meaning of section 92A of the Income-tax Act, 1961. The AT&S Austria is regularly filing income tax return in India. The Transfer Pricing Officer (hereinafter referred to as the 'TPO') vide order dated 19/12/2016 under section 92CA (5) read with 154 / 92CA (3) of the Act directed the following arm's length price (hereinafter referred to as 'ALP') adjustments: (i).Receipt of interest on loan and advance (INR 12,59,12,941/-): ALP adjustment being INR 40,34,89,761/-; (ii).Receipt of corporate guarantee fee (INR 36,43,759/-): ALP adjustment being INR 36,43,760/; and (iii).Receipt of IT support service cost (INR 3,58,02,269/-): ALP adjustment being INR 9,48,760/- . Subsequently, being aggrieved by the order of TPO, the assessee filed his objections before the Dispute Resolution Panel (hereinafter referred to the 'DRP'). The Dispute Resolution Panel vide order dated 19/09/2017 issued directions under section 144C (5) of the Act and directed the lower authority to reduce the ALP adjustments in respect of interest on loan & advance and corporate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... time. The said loans had an average maturity period of more than five years. The loan proceeds were agreed to be used by the borrower for the purpose of purchasing capital equipment. In this connection, all the instructions given in the circular issued by the RBI for ECB were followed by the borrower. AT&S Austria entered into a 'Distribution Agreement' with AT&S India under which AT&S India sold its manufactured goods to AT&S Austria for further sale to independent customers outside India. In this connection, attention is invited to the 'Addendum to Distribution Agreement dated 15th October 2002' wherein it is mentioned under 'Payment Terms' that the distributor (i.e. AT&S Austria) may make advance payments on request from the supplier (i.e. AT&S India) which would not exceed two months' projected sales or Euro 5.0 Mio whichever is less. The advance payment would bear interest at three months LIBOR(EURO) plus 100 basis points per annum from the date of receipt of advance. The advance received from the distributor would be adjusted against future billings. It is pertinent to note that the tenure of the export advance was less than three years (short-term export advance). In this c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d no ALP adjustment was made, the same should be treated at arms -length in the hands of the lender (AT &S Austria) also. On merits also, the ld Counsel argued that the action of the AO in making an ALP adjustment of INR 3,13,68,273/- is based on the decision rendered by the DRP that the arm's length interest rate would be LIBOR plus 450 basis points in respect of an external commercial borrowing (ECB) carrying interest rate of LIBOR plus 350 basis points and short-term export advance carrying interest rate of LIBOR plus 100 basis points, which is not acceptable. It is necessary to consider LIBOR as the appropriate benchmark interest rate that conforms to the arm's length standard under the CUP Method. Since the assessee charged interest to AT&S India over and above LIBOR in case of loan and advance, therefore the ALP adjustment of INR 3,13,68,273/-made by the AO may be deleted. 7. On the other hand, the Ld. DR for the Revenue has invited our attention to the decision of the Special Bench of the Income Tax Appellate Tribunal (Kolkata) in the matter of Instrumentarium Corporation Ltd Finland vs. ADIT [ITA No. 1548 and 1549 / Kol / 2009], wherein the Coordinate Bench rendered the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h price (ALP) adjustment is necessary in the hands of the AT&S Austria (assessee) irrespective of the fact that TPO had duly accepted the arm's length nature of the interest payments under the CUP Method in the hands of AT&S India. Therefore, in the light of the decision of the Special Bench of the Income Tax Appellate Tribunal (Kolkata) in the matter of Instrumentarium Corporation Ltd Finland vs. ADIT [ITA No. 1548 and 1549 / Kol / 2009](supra), it is abundantly clear that the provision of sub-section (3) of section 92 of the Act did not contemplate taking of a holistic view i.e. considering lowering of the overall profit or increasing overall loss for the group companies taken together. The provision of sub-section (3) of section 92 of the Act would be applied to the non-resident assessee (AT&S Austria) independent of the taxability of its Indian associated enterprise (AT&S India). Therefore, the transfer pricing adjustment made by the TPO should be sustained. 8. Per Contra, Rituparna Sinha, ld Counsel for the assessee, submitted before us that in the judgment of the Coordinate Bench of Kolkata in the matter of Instrumentarium Corporation Ltd Finland vs. ADIT [ITA No. 1548 and 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mark interest rate which conforms to the arm's length standard under the CUP Method. The assessee claimed that the aforesaid international transactions are at arm's length under the CUP Method, for that he relied on the judgment of the Hon'ble Delhi High Court in the matter of CIT vs. Cotton Naturals (I) (P) Ltd reported in [2015] 231 Taxman 401/ 55 taxmann.com 523, wherein it was held as follows: "Facts The assessee, manufacturer and exporter of rider apparels, advanced a foreign currency loan to its associated enterprise (AE) in the US at the interest rate of 4% per annum. The assessee set up the AE in the US for the purpose of marketing and promoting its export in the USA. The assessee contended that the aforesaid interest rate was at arm's length as the rate was comparable to the export packing credit rate obtained from independent banks in India. The TPO determined the arm's length interest rate at 14% per annum. The DRP granted partial relief by determining the arm's length interest rate at 12.20%. On appeal by the assessee, the Tribunal held that the CUP method is the most appropriate method in order to ascertain the arm's length price of the international transaction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd AT&S India being a wholly-owned subsidiary of the assessee, the assessee is not exposed to significant credit risk in respect of the loan made to AT&S India. Therefore, the credit rating of AT&S India would broadly be the same as that of the assessee. Hence, the DRP was not justified in adding credit spread of 450 basis points to LIBOR, while determining the arm's length interest rate in respect of loan and advance. We note that in the instant case, the DRP did not mention in his order the comparability analysis prescribed under clause (a) of sub-rule (1) of rule 10B of the Income-tax Rules, 1962. The said Rule is reproduced below for ready reference as follows: "Determination of arm's length price under section 92C . 10B . (1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction [or a specified domestic transaction] shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely :- (a) comparable uncontrolled price method, by which,- (i) the price charged or paid for property transferred or services provided in a comparable uncontrolled trans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Hon'ble High Court of Rajasthan placed reliance on the decision of the Hon'ble Delhi High Court in the matter of CIT v. Cotton Naturals (I) (P) Ltd reported in [2015] 231 Taxman 401 / 55 taxmann.com 523 (as referred to hereinabove). The Hon'ble High Court of Rajasthan held as follows: "11. Regarding ITA no.149/2015 preferred by the assessee in view of the Delhi High Court judgment (para no.14), the international transaction is required to be accepted, therefore, tribunal has committed serious error. The assessee will be entitled for the benefit of average LIBOR rate existing at that time which was 0.79% and addition of adhoc 2% is not proper. In that view of the matter, the addition of 2% interest in the income is required to be quashed and set aside." It may be noted here that the Hon'ble High Court of Rajasthan confirmed that LIBOR would be the appropriate benchmark for interest on intra-group loan in foreign currency and in this connection, no credit spread is to be added to LIBOR for determining the arm's length interest rate. The aforesaid decision of the Hon'ble High Court of Rajasthan is confirmed by the Hon'ble Supreme Court in the matter of CIT vs. Vaibhav Gems Ltd re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as per the settled judicial principle, where there are two contrary views taken by different High Courts, then the view favourable to the assessee should be adopted, for that we rely on the judgment of the Hon'ble Supreme Court in the matter of CIT vs. Vegetable Products Ltd reported in [1972] 88 ITR 192 (SC), wherein the Hon'ble Supreme Court has laid down a principle that "...if two reasonable constructions of a taxing provisions are possible, that construction which favours the assessee must be adopted. This is a well-accepted rule of construction recognised by this court in several of its decisions." We also rely on the decision of the Hon'ble Supreme Court in the matter of CIT vs. Naga Hills Tea Co. Ltd. reported in [1973] 89 ITR 236 (SC), wherein it is held that: "If a provision of a taxing statute can be reasonably interpreted in two ways, that interpretation which is favourable to the assessee, has got to be accepted. This is a well accepted view of law." In view of this, we adopt the aforesaid view taken by the Hon'ble Delhi High Court in the case of CIT v. Cotton Naturals (I) (P) Ltd (supra) and the Hon'ble Rajasthan High Court in the case of CIT vs. Vaibhav Gems Ltd and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e matter of Kohinoor Foods Ltd vs. ACIT reported in (2014) 52 taxmann.com 454 (Delhi - Trib.). The Hon'ble Delhi Tribunal in the aforesaid case has held that there are well settled modalities for advancing of loan by financial institutions whose primary purpose is to advance funds with commercial consideration to earn interest out of the transactions. Such transactions are governed by different considerations like earnings, guarantee of loan, market conditions, political and legal situation of various countries etc. The advancing of loan between two associated enterprises cannot be akin to financial institutions. Hence, the Hon'ble Tribunal is of the view that the correct comparable which can be applied in these facts and circumstances is the LIBRO rate which is internationally recognized." We note that TPO, after verifying the details submitted by AT&S India, did not direct any ALP adjustment in the hands of AT&S India for the assessment year 2013-14 in respect of payment of interest on loan and advance for the assessment year under consideration. However, the TPO directed ALP adjustment in the hands of the assessee ( AT &S Austria) in respect of the same international transact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the payer (i.e. AT&S India in the instant case). In the event it is done, the same would produce anomalous result which is never intended by the Legislature. Thus, the approach adopted by the TPO to benchmark the same international transaction in two different ways in the hands of two different taxpayers for the same assessment year signifies arbitrariness in the action of the TPO. In the instant case, the payment of interest made by AT&S India to AT&S Austria on the one hand and the receipt of interest by AT&S Austria from AT&S India on the other hand have taken place under the same agreement i.e. Loan Agreement and Distribution Agreement. In this scenario, if the arm's length interest rate is determined by the DRP at LIBOR plus 450 basis points in the hands of AT&S Austria, then the international transactions under consideration would never be at arm's length in the hands of AT&S India. Similarly, if the international transactions under consideration are accepted by the TPO to be at arm's length in the hands of AT&S India, the same would never be at arm's length in the hands of AT&S Austria. Thus, the international transactions under consideration would never be at arm's length ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as IBM, Microsoft, Siemens, T-Systems and so forth.The cost incurred by the assessee for arranging IT products and related services was allocated on actual basis to all the parties to the agreement using appropriate allocation keys as mentioned in the aforesaid agreement. No profit element was added to the actual cost for the purpose of allocation of the same to the parties to the aforesaid agreement. AT&S Austria acted as administrator to the periodical cost pooling process and collected the total costs from the parties to the agreement. The cost allocation was duly verified and certified by the independent auditor of AT&S Austria, namely, PwC Wirtschaftsprüfung GmbH, vide letter dated 3rd May 2013. The TPO could not appreciate the aforesaid arrangement made within the group for securing IT products and related services from unrelated IT companies. The TPO held in his order that the assessee provided the requisite services on cost to cost basis. However, in the commercial world, any third party would have provided services along with an element of profit mark-up. The TPO had just mentioned names of five independent companies and their OP/TC ratio in his order. He computed t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er consideration was reimbursement of expenditure and no income could be said to have generated requiring deduction of tax. Since there was no liability of deduction of tax at source, section 40(a)(i) of the Act could not be invoked. It is to be noted that for the succeeding assessment years (AY 2004-05, AY 2005- 06, AY 2006-07 and AY 2008-09), the Hon'ble Tribunal followed their own decision as stated hereinabove on the same facts and circumstances of the case and granted relief to AT&S India. In view of the above, ld Counsel prayed the Bench that the shared IT cost recovered by the assessee from AT&S India in the instant to neither fees for technical services nor royalty in the hands of the assessee in India, therefore arms length price adjustment of Rs. 9,48,760/- should be deleted. 19. On the other hand, the Ld. DR for the Revenue has primarily reiterated the stand taken by the DRP/TPO, which we have already noted in our earlier para and is not being repeated for the sake of brevity. 20. We heard both the parties and carefully gone through the submission put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n [1997] 92 Taxmann 278 (SC), wherein the Hon'ble Apex Court, by taking a cue from Halsbury Laws of England, has enunciated the following principle: "Where a number of persons combine together and contribute to a common fund for the financing of some venture or object and will in this respect have no dealings or relations with any outside body, then any surplus returned to those persons cannot be regarded in any sense as profit. There must be complete identity between the contributors and the participators. If these requirements are fulfilled, it is immaterial what particular form the association takes. Trading between persons associating together in this way does not give rise to profits which are chargeable to tax." We note that the assessee entered into 'IT Cost Pooling Agreement' with its group companies including AT&S India under which all the parties to the aforesaid agreement combined together for financing the object of arranging IT products and related services for all the parties to the aforesaid agreement. No third party (i.e. third party means entity not being party to the 'IT Cost Pooling Agreement') was given access to the IT products and related services arranged ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omising to pay the lender the money owed to it by the borrower (obligor) on whose behalf the guarantee is given, if the borrower fails to pay back the debt due to the lender. A guarantee to a lender that a loan will be repaid, guaranteed by a company other than the one who took the loan, is called a corporate guarantee. The ld Counsel for the assessee submitted before us that extending corporate guarantee for borrowings by subsidiaries was a shareholder activity, that it was not an international transaction, that no fee was warranted since no cost was incurred, and that bank guarantees were not comparable to corporate guarantees since the business of the bank was different from that of a corporate. Before us, ld DR for the Revenue submitted that there are plethora of judicial pronouncements wherein it has been held that the corporate guarantee is in the nature of service provided by the taxpayer to its associate enterprises (AEs) and hence should bear a charge. The judgments have explicitly held that after the Income Tax Act,1961 was amended by the Finance Act, 2012 to include 'guarantee' within the definition of "international transaction" with retrospective effect fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... either. The concept of issuance of corporate guarantees as a shareholder activity is not alien to the transfer pricing literature in general .." ".... We have noticed that the 'OECD' Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations specifically recognizes that an activity in the nature of shareholder activity, which is solely because of ownership interest in one or more of the group members, i.e. in the capacity as shareholder "would not justify a charge to the recipient companies". It is thus clear that a shareholder activity, in issuance of corporate guarantees, is taken out of ambit of the group services. Clearly, therefore, as long as a guarantee is on account of, what can be termed as 'shareholder's activities', even on the first principles, it is outside the ambit of transfer pricing adjustment in respect of arm's length price. " " .... We are in agreement with these views. There can thus be activities which benefit the group entities but these activities need not necessarily be 'provision for services'. The fact that the OECD considers such activities in the services segment does not alter the character of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me losses or assets of the enterprise ...:" "Para 31.... The contents of the Explanation fortifies, rather than mitigates, the significance of expression 'having a bearing on profits, income, losses or assets' appearing in section 92B( 1) of the Act ... " "Para 33 .... The onus is on the tax authorities to demonstrate that the transaction is of such nature as to have 'bearing on profits, income, losses or assets of the enterprise' and has to be on real basis even if in present or in future, and not on contingent or hypothetical basis ...." "Para 32.... There can be a situation in which a guarantee default takes place and therefore, the enterprise may have to pay the guarantee amount but such a situation even if that be so is only a hypothetical situation ....." "Para 32 ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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