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TMI Blog2021 (5) TMI 816X X X X Extracts X X X X X X X X Extracts X X X X ..... et loss - assessee had debited a sum on account of foreign exchange gain/loss in the Profit Loss account for the year under consideration - AO was of the view that unrealized forex loss was neither an accrued loss nor an actual loss and it does not fit into any of the criteria prescribed for allowability of an expenditure or loss as per the provisions of the Act - HELD THAT:- As decided in own case [ 2019 (9) TMI 437 - ITAT MUMBAI] Loss claimed by the assessee on account of fluctuation in the rate of foreign exchange as on the date of balance-sheet is allowable as expenditure under section 37(1). Appellant has been actually providing for such MTM losses in its Books of Account in accordance with the applicable Accounting Standards and accordingly, even for this reason, the deduction would be allowable to the Appellant while computing its taxable income.Appellant prays that the MTM losses arising on account of forward contracts entered into by the Appellant be considered as an accrued loss to the Appellant and thereby allowed as deduction while computing the taxable income. Addition of performance guarantees for its AEs - HELD THAT:- As decided in own case [ 2019 (9) TMI 43 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... C USA - HELD THAT:- As relying on own case [ 2020 (9) TMI 1101 - ITAT MUMBAI] direct the TPO/AO to re-compute the arm s length of the guarantee commission @ 0.20%. - IT(TP)A No. 6447/MUM/2016 - - - Dated:- 23-3-2021 - Shri Vikas Awasthy (Judicial Member) And Shri N.K. Pradhan (Accountant Member) For the Assessee : Shri Anuj Kisnadwala, AR For the Revenue : Shri Sushil Kumar Mishra, DR ORDER PER N.K. PRADHAN, A.M. This is an appeal filed by the Revenue. The relevant assessment year is 2011-12. The appeal is directed against the order of the Commissioner of Income Tax (Appeals)-56, Mumbai [in short CIT(A) ] and arises out of the assessment completed u/s 143 (3) r.w.s. 144C (3) of the Income Tax Act 1961, (the Act ). 2. Briefly stated, the facts of the case are that the assessee filed its original return of income for the assessment year (AY) 2011-12 on 30.11.2011 declaring total income under normal provisions at ₹ 139,34,07,542/- after claiming set off of brought forward losses to the tune of ₹ 52,91,33,759/-. It has shown books profits u/s 115JB of the Act at ₹ 230,87,92,525/- and computed its tax liability thereon. Subsequently ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rlier years has dismissed the appeal filed by the Revenue. Facts being identical, we follow the above-mentioned order of the Coordinate Bench in assessee s own case and dismiss the 1st, 2nd and 3rd ground of appeal. 7. The 4th and 5th grounds of appeal relate to disallowance of ₹ 7,60,05,478/- made by the AO towards mark-to-market loss. The assessee had debited a sum of ₹ 1094.81 lacs on account of foreign exchange gain/loss in the Profit Loss account for the year under consideration. The AO was of the view that unrealized forex loss of ₹ 5,33,16,399/- was neither an accrued loss nor an actual loss and it does not fit into any of the criteria prescribed for allowability of an expenditure or loss as per the provisions of the Act. Part D of the Chp IV of the Act prescribes provision for computation of income under the head profits and gains from business and profession. None of the provisions of Part D of the Act specified any allowances or deductions of the unrealized forex loss computed on MTM basis by the assessee. Therefore, the AO added back a sum of ₹ 5,33,16,399/- to the total income of the assessee. By virtue of clause (c) to Expln1 of Section 115 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce Guarantee Fees they have already re-covered from that AE KEC Global Fee of ₹ 155 lakhs. The said fees is also offered to tax in the revised return of income. Therefore, TP Adjustment for the year should be net of such recovery and net TP adjustment should be ₹ 582 lakhs. However, no order to that effect has been received from TPO till date. Therefore the total income of the assessee is computed by making adjustment of ₹ 7,37,18,234/- to the total income assessee. 12. In appeal, the Ld. CIT(A) held that there is no element of cost in the case of indemnity given by the assessee and hence the transaction of issuance of guarantee is out of the ambit of Indian Transfer Pricing Regulations; since the transaction of issue of guarantee is not an international transaction, the provisions of Chapter-X of the Act is not warranted in the present case 13 Before us, the Ld. DR relies on the order of the AO, whereas the Ld. counsel relies specifically on the order of the Tribunal in assessee s own case for AY 2010-11. 14. Similar issue arose before the Tribunal in assessee s own case for AY 2010-11 (ITA No. 5611/Mum/2015). The Tribunal has held at para 5 the following ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e filed details of such guarantee in the TP report in response to notice u/s 92CA(2) of the Act. As the assessee had not benchmarked these transactions of corporate guarantee, the TPO called various details so as to enable him to compute the ALP of the guarantee. Based on the decision of the Court in Canada in GE Canada s case, the TPO computed the guarantee fee based on yield approach and the difference in the yields between the unsecured bonds corresponding to credit rating of the taxpayer and the AE on standalone basis. Thereby, the TPO made an adjustment of ₹ 5,31,59,988/- on corporate guarantee. 16. In appeal, the Ld. CIT(A) held that there is no cost element involved in the transaction of issuance of corporate guarantee, accordingly no income is chargeable to tax which is a pre-requisite of Indian Transfer Pricing Regulations ; the assistance provided by the assessee to its AE does not have any bearing on its profits, income, losses or assets. Relying on the order of the Tribunal in the case of Manugraph India Limited v. DCIT [TS-190-ITAT-2016 (Mum)-TP], Micro Inks Ltd. v. Addl. CIT [(2015) 63 taxmann.com 353 (Ahmedabad-Trib.), Bharti Airtel Limited v. Addl. CIT [ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f recovery of cost by assessee without any margin. We are inclined to accept the argument of the ld. AR that in the instant case, 0.93% of guarantee commission charged by Bank of India could be considered as the most direct comparable uncontrolled transaction to benchmark the rate of guarantee commission. In any case, the average rate adopted by the ld. TPO at 1.04% is only an external data in the form of third party guarantees issued by the bank. When internal comparable uncontrolled price is available that should be considered as the most direct and reliable way to apply the arm s length principle. In any case, there is absolutely no loss to the assessee and no bearing on the profits or losses as the entire cost of 0.93% has been duly recovered by the assessee from its AE. Hence, the action of the ld. CIT(A) in holding no further adjustment to ALP is required in respect of the subject mentioned guarantee commission transaction and consequently directing the deletion of addition of ₹ 39,354/- thereof, requires no interference. Accordingly, Ground No.1(b) and 2(a) raised by the revenue are dismissed. 19. As recorded by the Tribunal for AY 2010-11 in assessee s own case, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the ALP of guarantee commission should be 0.93% in case of advance payment guarantee also and held that no further adjustment towards that rate would be required. 10. Aggrieved, the revenue is in appeal before us. 11. We have heard the rival submissions. The findings given hereinabove in respect of performance guarantee to CCWE by us would hold good for this bank guarantee also. Accordingly, we hold that the finding of the ld. CIT(A) and consequently deletion of adjustment on account of bank guarantee of ₹ 12,73,646/- does not call for any interference. Accordingly, the Ground No.2(b) raised by the revenue is dismissed. 20. Facts being identical, we follow the above order of the Co-ordinate Bench in assessee s own case and dismiss the 9th, 10th and 11th grounds of appeal. 21. The 12th, 13th and 14th ground of appeal relate to corporate guarantee provided to ICICI Bank on behalf of KEC USA LLC and Transmission LLC USA. During the year under consideration, the assessee-company had given corporate guarantee to the ICICI Bank who had advanced to their AE $ 121 million (₹ 5394180000/-). This guarantee was required by the lender who had given advances to AE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ost element involved in the transaction of issuance of corporate guarantee, accordingly no income is chargeable to tax which is a pre-requisite of Indian Transfer Pricing Regulations ; the assistance provided by the assessee to its AE does not have any bearing on its profits, income, losses or assets. Thus it is held by him that the transaction of issuance of guarantee is out of the ambit of international transaction u/s 92B(1) of the Act. 23. Before us, the Ld. DR submits that since term guarantee is inserted in the definition of international transaction by an Explanation in Finance Act, 2012, with retrospective effect from 01.04.2002 and the said amendment is stated to be clarificatory, corporate guarantee provided by the assessee is an international transaction. The Ld. DR argues that following the judgment of the Hon ble Bombay High Court in the case of CIT v. Everest Kento Cylinders (2015) 378 ITR 57 (Bom), guarantee commission be charged at 0.5%. 24. On the other hand, the Ld. counsel submits that the above issue is covered by the order of the Tribunal in assessee s own case for A.Y 2012-13, wherein the Tribunal has stated that arm s length guarantee commission sho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 344 (Bom.), referring to the decision in Everest Kento Cylinders Ltd. (Supra) and agreeing with the order of the Tribunal held that considerations which apply for issuance of a corporate guarantee are distinct and separate from that of bank guarantee and, therefore, no transfer pricing adjustment can be made in respect of guarantee commission by making comparison between guarantees issued by commercial banks as against a corporate guarantee issued by holding company for benefit of its AE . On further appeal by the Revenue, the Hon ble Supreme Court (2019) 107 taxmann.com 445(SC) agreed with the decision of the High Court affirming the order of the Tribunal. 25.1 We are of the considered view that the decision in Everest Kento Cylinders Ltd. (supra), relied on by the ld. DR, has relevance in the instant case. In that case, the TPO observed that in the financial year 2006-07, the AE had taken loan of ₹ 86.88 crores i.e. USD 20,00,000 from ICICI Bank and one of the clause of term loan was to provide a corporate guarantee by the assessee. In this behalf, the assessee had provided a corporate guarantee/ guaranteeing repayment of borrowings made by the AE at Dubai for purch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 cannot be called in question, in the manner TPO has done. In our view the comparison is not as between like transactions but the comparisons are between guarantees issued by the commercial banks as against a Corporate Guarantee issued by holding company for the benefit of its AE, a subsidiary company. 25.2 However, in assessee s own case for A.Y.2012-13 (ITA 117 115 /Mum/2018) dated 14.09.2020, the Tribunal has held that:- 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and not the credit rating of assessee extending the guarantee to facilitate the borrowing of its AE. The banks would charge lower fees while giving guarantees for entities having high credit ratings and on the other hand, high fees would be charged for entities having low credit ratings and that too, in a foreign jurisdiction. Since the credit rating of the assessee guarantor was better 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 appl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2/10/2018, Kolkata Tribunal) (v) DCT V/s EIH Ltd. (89 Taxmann.com 417, Kolkata Tribunal) 7.10 Upon careful consideration of factual matrix, it is noted that the assessee has provided unconditional, absolute and irrevocable corporate guarantee to secure the finances advanced by ICICI bank to two of its wholly owned AEs. The guarantor guarantees to finance party the punctual performance by the borrower 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, interalia, 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 execu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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