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TMI Blog2020 (9) TMI 1101X X X X Extracts X X X X X X X X Extracts X X X X ..... ess advance as loans given to AE. The appellant prays that the aforesaid action of the Hon'ble CIT(A) may please be held as bad-in-law and be deleted. As evident, the sole subject matter of assessee's appeal is Transfer Pricing (TP) adjustment of Rs. 245.43 Lacs against business advances given by the assessee to its AE. 2.2 We have carefully considered the arguments advanced by both the representatives and perused relevant material on record including documents placed in the paper-book. We have also deliberated on various judicial pronouncements as cited before us during the course of hearing. Our adjudication to the subject matter of appeal would be as given in succeeding paragraphs. 2.3 Briefly stated, the assessee being resident corporate assessee is stated to be engaged in the business of designing, fabrication, galvanizing and testing of transmission lines & telecom towers, supply and erection of sub-station structures and overhead equipment for railway electrification and managing infrastructure sites for telecommunication services. The assessment for year consideration was framed u/s 143(3) r.w.s. 144C(3) on 31/03/2016 wherein the income was determined at Rs. 251.41 C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business interest of the assessee in projects of JV. This was just a fulfilment of the obligation of being a JV partner as any financial incapacitation of JV would adversely affect the continuation of the project and ultimately jeopardize the interest of the assessee. Since the advances were purely in the nature of business advances to fulfil the obligations of the assessee as a JV partner, the assessee has not charged any interest on the said advance. It was also submitted that relationship on account of advancing funds could not be considered in isolation without considering crucial business scenarios and expediency. 2.7 However, the aforesaid submissions could not convince Ld. AO and therefore, internal CUP as proposed by the assessee was rejected since loans taken by the assessee from Bank were secured loans and guaranteed by the assessee himself and therefore, the same could not constitute as internal CUP. 2.8 Since the assessee did not offer any suo-moto TP adjustment, the provisions of Sec. 92CA(3)(a) & (c) were invoked and Ld. AO proceeded to benchmark the same against appropriate rate. Finally, it was held that the interest should be charged at the rates applicable for f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is 41.12 Million Rands. The JV incurred losses of 108.13 Million Rands during the year, which has primarily triggered the assessee to make the stated advances to its JV. These advances have been classified under the head Joint Venture partners' account. All these facts would lead strength to the argument of Ld. AR that there was pre-existing liability to make such advances to JV and the business interest of the assessee would have been adversely impacted by not making such advances. The advances were more in the nature of capital contribution and by advancing the same, the assessee had protected its own business interest which is evident from the financial statements of JV. The advances were towards fulfilment of the assessee's obligation of being a JV partner as any financial incapacitation of JV would adversely affect the continuation of the project and ultimately jeopardize the interest of the assessee. Therefore, the said advances could not be put in the category of loans as done by the lower authorities. Further, it could not be said that JV entity derived / gained certain benefits out of such advances but rather it was the assessee who would ultimately gain by continuing with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion was of nature of tripartite agreement and the AE get benefited from the performance guarantee provided by the assessee, which was a facility provided by the assessee to its AE. vi. On the facts and circumstances of the case, the Ld.CIT(A) was not justified in deciding that the performance guarantee provided to third party i.e. Bahwan Engineering Company LLC on behalf of its AE i.e. KEC Global FZ LLC was not an international transaction without appreciating the fact that the TPO has determined the benefits of the AE as ALP. vii. On the facts and circumstances of the case, the Ld.CIT(A) was not justified in deciding that the performance guarantee provided to third party i.e. Bahwan Engineering Company LLC on behalf of its AE i.e. KEC Global FZ LLC was not an international transaction without appreciating the fact that the term "guarantee" clearly mentioned in Explanation of section 92B(l)(c) of IT Act 1961 as an International Transaction. viii. On the facts and circumstances of the case, the Ld.CIT(A) was not justified in deciding that the guarantee commission for performance of contract provided by assessee to that guarantee commission for performance of contract provided ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngent, unascertained or notional in nature and hence, no adjustment could be made to the book profit under clause (c ) of the Explanation (1) to section 115JB(2). As evident, the grounds raised by revenue are related with addition arising out of TP adjustment against performance guarantee and corporate guarantee given by the assessee on behalf of its AE. In ground nos. (xiii) & (xiv), the revenue has assailed the action of Ld.CIT(A) in treating the Market-to-mark (MTM) losses on forex contracts to be an accrued loss. 6.2 The Ld. AR, at the outset, submitted that substantial issues of revenue's appeal are covered in assessee's favor by the earlier decision of this Tribunal for AY 2010-11, ITA No.5611/Mum/2015 order dated 10/07/2019 and therefore, the same view may be taken in this year. The copy of the same has been placed on record. The Ld. DR could not controvert the said position but supported the adjustments proposed by Ld. TPO. 6.3 In the above background, during proceedings before Ld. TPO, it transpired that the assessee advanced certain corporate and performance guarantee for its AE, the details of which are as follows: - Performance Guarantees: Name of Borrower AE KEC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as proposed by Ld. TPO, could be tabulated in the following manner: - Performance Guarantees: Name of Borrower AE KEC Global FZ LLC Ras Ul Khaimah KEC Global FZ LLC Ras Ul Khaimah KEC Global FZ LLC Ras Ul Khaimah SAE Tower Holding LLC USA Country UAE UAE UAE USA Bank Name and Country Bank of India -India Bank of India - India N.A. Royal Bank of Scotland - India Whether amount borrowed by AE from third party without corporate guarantee No No No Yes Amount guaranteed 68160907 136321814 2239650902 34652829 Loan Amount availed N.A. N.A. N.A. N.A. When guarantee given 2009 2009 2009 2010 No of days during the year which guarantee was given 365 365 365 365 Rate recovered 0.60% 0.60% - 0.60% Purpose Towards performance of contract Towards advance payment made by customer Towards performance of contract Towards performance of contract Guarantee fee charged 408,965 817,931 207,917 ALP Guarantee fee 1.00% 1.00% 1.00% 1.00% ALP Guarantee fee (Rs.) 681,609 1,363,218 22,396,509 346,528 Adjustment 272,644 545,287 22,396,509 138,611 Corporate Guarantees: Name of Borrower AE KEC Transmission LLC USA KEC US LLC USA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed from the AE, no further adjustment would be required. Applying the said principle to year under consideration, we find that the assessee has charged commission in accordance with the bank's sanction letter and therefore, no further adjustment, as proposed by Ld. TPO, would be justified. Accordingly, these grounds stand dismissed. 7.2 Ground Nos. (iii) & (iv) are related with adjustment arising out of guarantee for advance payment provided by assessee to Chadian Company for Water & Electricity (CCWE) on behalf of its AE KEC Global, FZ LLC for Rs. 13.63 Crores. The assessee has given a bank guarantee to its wholly owned subsidiary company (KEC Global, FZ LLC), to guarantee the advance payments by assessee to its AE towards a contract to be executed by the AE. The bank guarantee was given by Bank of India. The bank utilized the guarantee facility sanctioned to assessee while sanctioning bank guarantee to assessee's AE. The bank charged a guarantee commission of 0.60% from assessee and the said rate was recovered from its AE. The Ld. TPO estimated the same @1%. We find that this issue is contained in paras 8.1 to 11 of the cited decision of Tribunal in assessee's own case for AY ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontained in Ground Nos. (i) & (ii) of the revenue's appeal. Following the same principle, we hold that the fees charged by the assessee was at Arm's Length Price. Therefore, the impugned order would not require any interference on our part. These grounds stand dismissed. 7.5 Ground Nos. (x) to (xii) arises out of corporate guarantees provided by the assessee on behalf of its 2 AEs namely KEC Transmission LLC, USA and KEC US LLC, USA. The corporate guarantees were given to ICICI Bank, UK to secure the finances provided by the said bank to two of assessee's AEs. The said financing was stated to be utilized for the purpose of downstream acquisition of the business of SAE Towers Ltd., USA. The assessee submitted that for the aforesaid purposes, a special purpose vehicle (SPV) i.e. KE US LLC was formed to facilitate KEC to make downstream acquisition of business in USA. The guarantee was stated to be wholly and exclusively for the purpose of facilitating the assessee and hence, it was not a case where any services were rendered to the SPV in any manner. Rather SPV provided services to KEC by way of facilitating the downstream acquisition. Therefore, no fees were charged against the sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r than the rating of the guaranteed, it was natural that rate charged by the bank from the guarantor would be different in comparison to situation where the guarantee was provided to the guaranteed. Therefore, the fees charged by the bank from the holding company could not constitute internal CUP for charging the rate from AE without proper adjustment. Since the rates charged by the banks to Indian companies ranged between 1.10% to 3% depending upon various factors, the ALP rate would be between 1.5% to 3.5%. Since the loan was taken for business purposes, the appropriate rate would be 2%. Accordingly, the transactions were benchmarked @2% and adjustments were proposed. The TP adjustments, thus proposed, were incorporated in the assessment order. Upon further appeal, Ld. CIT(A) directed Ld. AO to apply the appellate decision dated 28/07/2016 for AY 2011-12. 7.7 The perusal of appellate order for AY 2011-12, as placed on record, would show that Ld. CIT(A) observed that there was no cost element involved in the transaction of issuance of corporate guarantee. The assistance provided by the assessee to its AE would not have any bearing on profits, incomes, losses or assets of the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rower of all the secured obligation and undertake with finance party that whenever either borrower does not pay the amount as and when due under or in connection with any finance document, the guarantor will immediately on demand by the bank, pay that amount as it was the principal obligor in respect of that amount. The AEs were stated to be Special purpose vehicle with a view to enable the assessee in downstream acquisition of the business of an entity namely SAE Towers Ltd., USA. The assessee has not charged any fees from its AEs in providing the corporate guarantee, inter-alia, by submitting that no cost was involved and the stated transactions would have no bearing on profits, incomes, losses or assets of the assessee. However, upon perusal of terms of corporate guarantee deed executed by the assessee in favor of the bank, as placed on record, we find that in case of payment default, the assessee was obligated to pay the amount demanded by the bank as if it was the principle obligor in respect of that amount. The liability of the assessee extended to the guaranteed amount of 110 Million US Dollars. In the event of default, the assessee as a guarantor, was liable to pay without ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... losses arising on the foreign exchange contracts which were outstanding at the year-end. During assessment proceedings, it transpired that the assessee debited an amount of Rs. 1227.24 Lacs on account of exchange (gain) / loss (net). An amount of Rs. 873.55 Lacs represented foreign exchange losses due to marked-to-market (MTM) losses. The Ld. AO observed that unrealized foreign exchange loss was neither accrued loss nor actual loss and therefore, the same could not be allowed as deduction. Since the provision of AY 2011-12 for Rs. 533.16 Lacs was disallowed in that year but reversed during the year under consideration, the net disallowance was worked out to be Rs. 340.38 Lacs and added to the income under normal provisions as well as while computing Book Profits u/s 115JB. 7.13 The Ld. CIT(A), relying upon appellate order for AY 2011-12, deleted the addition. The decision for AY 2011-12 was based on the decision of Hon'ble Supreme Court rendered in Woodward Governor Ltd. (312 ITR 254). Also, the issue was stated to be covered in assessee's favor by the decision of Tribunal in assessee's own case for AY 2009-10. Similar view was taken by first appellate authority in AY 2010-11. 7. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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