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TMI Blog2022 (7) TMI 780X X X X Extracts X X X X X X X X Extracts X X X X ..... on of the AO of disallowing employee's contribution towards ESIC amounting to Rs.2,29,053/- u/s 36(l)(va) of the Act. 2. The learned CIT(A) has erred both in law and on the facts of the case in holding that giving loan which is in the nature of "quasi capital", is an "international transaction" falling within the purview of transfer pricing provisions. 3. Alternatively and without prejudice, the learned CIT(A) has erred both in law and on the facts of the case in confirming the action of the AO of making an addition of Rs.43,04,408/- as proposed by TPO on account of interest free loans and advances to Lambda Therapeutic Ltd., UK. 4. Alternatively and without prejudice, the learned CIT(A) has erred in confirming the marking up of LIBOR rate by average comparable rate and by Forex risk. 5. The learned CIT(A) has erred both in law and on the facts of the case in holding that Corporate Guarantee given to associate enterprise is an "international transaction" falling within the purview of transfer pricing provisions. 6. Alternatively and without prejudice, the learned CIT(A) has erred both in law and on the facts of the case in confirming the adoption of Cost Plus Method a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nds on or before the "due date" mentioned in explanation to section 36(1)(va). Consequently, it is held that the learned tribunal has erred in deleting respective disallowances being employees' contribution to PF Account / ESI Account made by the AO as, as such, such sums were not credited by the respective assessee to the employees' accounts in the relevant fund or funds (in the present case Provident Fund and/or ESI Fund on or before the due date as per the explanation to section 36(1)(va) of the Act i.e. date by which the concerned assessee was required as an employer to credit employees' contribution to the employees' account in the Provident Fund under the Provident Fund Act and/or in the ESI Fund under the ESI Act. 4.1 Therefore, respectfully following the same we confirm the addition made by the AO in this regard. Accordingly the ground of appeal raised by the Assessee is hereby dismissed. 5. The second issue raised by the assessee vide ground No. 2 to 4 in its appeal is that the learned CIT-A erred in confirming the addition of Rs. 43,04,408 made by TPO/AO on account of interest free loan advances provided to its AE. 6. The facts in brief are that the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT-A. The assessee before the ld. CIT-A submitted that interest free loans and advances given to the associated enterprises based in foreign countries were in the nature of quasi capital which is akin to shareholders fund. While making equity investments in the foreign subsidiaries, there was the need of taking prior approval from the RBI but no such approval was required for giving loans and advances to foreign subsidiary. 8. Furthermore, there was no cost incurred by the assessee on such loans and advances given to the foreign subsidiaries as there was surplus fund available with it. 9. The assessee also submitted that it was able to achieve lot of business from the countries outside India as a result of establishment of the foreign subsidiaries. Therefore, the transaction for advancing the loan to the foreign subsidiaries should not be seen in isolation rather the other benefits received by the assessee from these foreign countries should also be taken into consideration. As such, the interest-free loans and advances have been given as a measure of commercial expediency. In other words, the business transactions carried out by the assessee with these foreign subsidiaries hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Es. Hence the learned CIT (A) allowed the grounds of appeal of the assessee in part. 12. Being aggrieved by the order of the Ld. CIT-A both the assessee and the Revenue are in appeal before us. The assessee is in appeal before us against the confirmation of the addition made by the AO for the amount of interest of Rs. 43,04,408/- with respect to the interest free loans and advances given to its UK AE whereas the Revenue is in appeal against the deletion of the addition made by the AO for the amount of interest of Rs. 1,74,37,572/- with respect to the interest free loans and advances given to M/s Lambda Poland and M/s Jina Pharma USA and Lambda Therapeutic Research Canada respectively. The ground of appeal of the Revenue in ITA No. 409/AHD/2018 stands as under: The Ld.CIT(A) has erred in law and on facts in deleting the addition of Rs. 2,17,41,980/- made by the TPO on account of loans/advances extended to various AEs. 13. The Ld. AR before us filed a paper book running from pages 1 to 197 and submitted that the impugned issue has been covered in favour of assessee by the order this tribunal in the own case of the assessee for the Assessment Year 201011 bearing ITA No. 3492/Ahd/2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ffectiveness and safety India, Canada and Poland since Inception Phase IV Postmarketing surveillancewatching drug use in public. UK and India since Inception. 10.2 On perusal of the activities of the assessee along with its group associated enterprises, it is revealed that there are different activities which are carried out by the different associated enterprises. For example, the preclinical phase activity is carried out in India and Canada. Similarly, the phase-0 activities carried out in India, Canada and Poland so on and so forth. In other words, the project of the research activity can be ended upon the completion of process of the different phases as discussed above. 10.3 Once the activities of the assessee and its associated enterprises are so interrelated and interconnected then the transactions should be seen in aggregation for working out the ALP. In this regard we find Para 3.9 of OECD Transfer Pricing Guidelines which reiterates that though ideally the arm's length principles should be applied on a transaction by transaction basis, there are often situations where separate transactions are so closely linked or continuous that they cannot be evaluated ade ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rk and the exemplar; whether such aggregation/segregation by the assessee should be interfered in terms of the four clauses stipulated in section 92C(3), read with the rules. It would, among other aspects, refer to the method adopted and whether reliability and authenticity of the arm's length determination is affected or corrupted.[Para 82] 10.6 Now proceedings further, we find that the associated enterprise based in UK has got the business from the USA for which the clinical study was conducted in India. The assessee for such activity received its service charges from the USA company. The details of the same stand as under: S.N. Name of Sponsor Study held on Drug Name Country of Origin Country of Sponsor No. of Patient Enrolled Currency Quote Value 1. Stason Pharma India Diclofenac Epolamine Patch UK USA Q80 USD USD 377,700 2. Par Pharmaceuticals, INC India Mesalamine Tablets 1.2g comparision with Placebo and Lialda 1.2 UK USA 250 INR USD 1,178,530 10.7 Indeed, the assessee has advanced interest-free loan to its associated enterprises based in the UK. Now the question arises whether any adjustment is required under the transfer pri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 1,783,600 069-1 1 * 603,200 603,200 072-10 8,336,100 8,336,100 073-10 10,306,570 10,306,570 081-11 16,471,482 16,471,482 085-08 3,452,600 3,366,200 6,818,800 089-06 2,041,500 2,041,500 089-09 1,296,885 091-10 350,672 350,672 05-1 1 m 331,875 110,625 442.500 118-11 9,292,500 9,292,500 139-07 4,089,000 425,000 4,514,000 140-07 4,680,400 4,680,400 159-1 1 8,681,900 8,681,900 162-11 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t factors pertaining to this interest free loan, and both these aspects deserve to be examined in detail. The first important aspect of this interest free advance is that the loan was said to be in the nature of quasi-capital, and it was so given out of EEFC (Exchange Earners Foreign Currency) account, because while the assessee could have given loan up to US $ 50 million, it was not open to the assessee to subscribe to the equity capital without the permission of the Reserve Bank of India. There was, thus, indeed a technical problem in subscribing to the capital directly. It is also important to note that immediately upon obtaining the permission of the Reserve Bank of India, which assessee did obtain at later stages, the advances were converted into shares. Except for an amount of US $10,000, entire advances received by the step down subsidiary were converted into shares. It is also not in dispute that when RBI permission to convert loan into equity was sought, it was sought effective from the date on which remittance was made. The second very important aspect of this interest free loan is that the entity receiving the interest free advances 'M' USA, existed only to facil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adjustment of Rs. 6,45,748 made by the TPO/AO with respect to corporate guarantee provided by the assessee. 18. During the year under consideration, Axis Bank of India has issued a standby letter of credit for Rs. 32.75 crores in favour of assessee's AE namely M/s Lambda Therapeutic Research Inc (Canada) on the request of the assessee. For which the Axis bank has charged a commission @ 0.90% of credit limit from the assessee. The assessee claimed that the corporate guarantee provided to AE is in the nature of Shareholder activity and an intragroup activity carried out because of ownership interest. Therefore the provision of transfer pricing will not apply in the case on hand. 18.1 However the TPO observed that due to the standby letter credit issued to the AE i.e. M/s Lambda Therapeutic Research Inc (Canada) got direct benefit and incurred low interest charges on loans taken from Canadian Imperial Bank of Commerce. Thus, the act of the assessee for issuing the corporate guarantee is in the nature of financial services provided by it to its AE for which it has incurred cost in the form of commission paid to Axis Bank (India). Therefore, the same needs to be determined at arm len ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the order of the learned CIT (A), both the Assessee and the Revenue are in appeal before us. The assessee is in appeal against the confirmation of upward adjustment for Rs. 6,45,748/- whereas the Revenue is in appeal for addition deleted of Rs. 26,14,368/- only by the ld. CIT-A. The relevant ground of the Revenue's appeal in ITA No 409/Ahd/2018 reads as under: The Ld.CIT(A) has erred in law and on facts in restricting the addition of Rs.35,09,517/- to Rs.6,45,748/- made by TPO on account of Corporate Gurantee Fee. 21. The learned AR before us submitted that the corporate guarantee furnished by the assessee on behalf of its subsidiary is in the nature of quasi capital/shareholder activity. Therefore the same needs to be excluded from the scope of international transaction. Further the issue on hand is covered in favour of the assessee by the order of this tribunal in own case of the assessee for the Assessment year 2013-14 bearing ITA No. 2114/Ahd/2017. 22. The Learned DR before us submitted that the assessee for furnishing the bank guarantee to the AE has incurred the cost. Likewise, the AE has got the benefit of low interest on the loan obtained by it after procuring the ban ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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; 52.2 It can be seen that the guarantee was included within the ambit of international transaction vide the Finance Act 2012 with retrospective effect. Thus there remains no ambiguity to the fact that corporate guarantee extended by the assessee to its AE is an international transaction and therefore the same has to be benchmarked at the arm length price. However, we note that the different benches of the ITAT have taken different view. Some of them held that the transaction of corporate guarantee is an international transaction whereas some of them held that the transaction of corporate guarantee is outside the purview of the international transaction including the Ahmedabad tribunal in the case of Micro Ink Ltd. vs. Addl. CIT reported in [2015] taxmann.com 353, wherein it was held that the corporate guarantee is not international transaction. At the time of hearing, the learned AR heavy relied on this order of the tribunal. 52.3 However, we find that the facts of the order of this tribunal in the case of Micro Ink Ltd. (Supra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... armaceuticals (supra). 52.4 In this regard we also find support and guidance from the order of the Bangalore ITAT in case of Advanta India Ltd. vs. ACIT reported in 64 taxmann.com 251 where it was held as under: 29. In the case of Bharti Airtel Ltd. (supra), it was an undisputed position that the issuance of the guarantee did not cost the assessee anything and it was for this reason that the coordinate bench concluded that the issuance of guarantee did not have any "bearing on the profits, income, losses or assets or such enterprise" thus taking it out of the ambit of international transaction which could be subjected to arm's length price adjustment. That was a case in which the assessee had issued a comfort letter to the banker and it was the consideration for issuance of this comfort letter which was sought to be subjected to the ALP adjustments. 30. However, material facts of the case in the present case are different inasmuch as it is an admitted position that the assessee did incur costs on issuance of this guarantee (i.e. payment of Rs 4,39.005 to the ICICI Bank in this respect), and, for that reason, the issuance of guarantee indeed had a bearing on the profits an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 586/- and accordingly, the assessee company was issued with the show-cause notice as mentioned in Para 3 of the order. 52.6 From the above, it is revealed that the TPO/AO has treated the assessee as if it was engaged in the business of financial services and accordingly the ALP was determined by comparing with the average margin earned by the banks on cost. Admittedly, the assessee is not carrying out any financial activity and therefore we are not convinced with the basis adopted by the authorities below. 52.7 Moving ahead, we note that there is no difference between the banks or a corporate entity as far as corporate guarantee is concerned. Both have to consider the functions performed, assets employed and risks assumed. In case of default by the borrower, the corporate guarantor is exposed to the same risk of a bank. In case of an AE the risk would not be as high as in case of an outsider. Therefore, the rate charged by the bank for providing the corporate guarantee should be a benchmarked for working out the ALP for the corporate guarantee extended by the assessee to its AE. In the case on hand, the bank has charged .79% of the amount of the corporate guarantee as fees from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evenue for the Assessment year 2012-13 26. The Revenue has following ground of appeal: 1. The Ld.CIT(A) has erred in law and on facts in deleting the addition of Rs.2,17,41,980/- made by the TPO on account of loans/advances extended to various AEs. 2. The Ld.CIT(A) has erred in law and on facts in restricting the addition of Rs.35,09,517/- to Rs.6,45,748/- made by TPO on account of Corporate Gurantee Fee. The appellant craves leave to amend or alter any ground or add a new ground, which may be necessary. 27. The first issue raised by the Revenue is that the learned CIT-A erred in deleting the upwards adjustment to the tune Rs. 1,74,37,572/- ( wrongly written as Rs. 2,17,41,980.00) made on account of interest free loan and advances provided to the AE. 28. At the outset, we note that the issue raised by the Revenue has been decided along with the ground of appeal raised by the assessee in ITA No. 91/Ahd/2018 where the issue has been decided in favour of the assessee and against the Revenue vide paragraph no. 16 of this order. Hence, respectfully following the same, the ground of appeal Raised by the revenue is hereby dismissed. 29. The second issue raised by the Revenue is ..... X X X X Extracts X X X X X X X X Extracts X X X X
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