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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 ..... ingly the ground of appeal raised by the Assessee is hereby dismissed. TP Adjustment - Addition on account of interest free loan advances provided to its AE - assessee before the AO/TPO contended that there cannot be any adjustment of the notional interest under the provisions of section 92C read with rule 10B of the Income Tax Rules - HELD THAT:- As decided in own case [ 2021 (4) TMI 682 - ITAT AHMEDABAD] we hold that no adjustment under the transfer pricing provisions is required to be made with respect to the interest free loans and advances by the assessee to its associated enterprises in the given facts and circumstances. Hence, the ground of appeal of the assessee is allowed and the ground of appeal of the revenue is dismissed. Upward adjustment of corporate guarantee provided by the assessee - HELD THAT:- We find that the assessee has claimed the reimbursement of the actual charges incurred by it in providing the corporate guarantee from the associated enterprise. As such, no fee was charged by the assessee on account of corporate guarantee provided by the assessee. Thus the ITAT has directed to make the upward adjustment being 5% of the cost incurred by the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 as the most appropriate method for benchmarking the guarantee transaction. 7. Alternatively and without prejudice, the learned CIT(A) has erred both in law and on the facts of the case in confirming the upward adjustment to the extent of Rs.6,45,748/- @ 24.7% markup on account of corporate guarantee given to associate enterprise while determining arm's length price under the provisions of transfer pricing. 8. Both the lower authorities have passed the orders without properly appreciating the facts and they further erred in grossly ignoring various s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 assessee in the present case is a limited company and engaged in the business of facilitating the clinical research services to the pharmaceuticals industries. The assessee in the year under consideration has provided interest-free loans and advances to its associated enterprises as detailed under: S.No. Transaction Associated Enterprises Amount (₹) 1. Advance extended for setting up clinical lab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 have resulted the benefit exceeding the notional cost of interest as worked out by the AO/TPO. Had these foreign subsidiaries not been formed, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ₹ 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 ₹ 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/2015. 14. On the other hand, the Ld. DR contended that the transaction of advancing interest-free loans to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Testing of drug on patients to assess efficacy and safety India, Canada and Poland since Inception Phase III Testing of drug on patients to assess efficacy, effectiveness 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xmann.com 240 (Delhi) as under; Bundled/Inter-Connected Transactions ■ Clubbing of closely linked transactions, which would include continuous transactions, may be permissible and not excluded. Aggregation of closely linked transactions or segregation by the assessee should be tested by the Assessing Officer/TPO on the benchmark 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under: Revenue Details Year Wise Year Wise 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 Project Number 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 Grand Total 010-12 5,016,650 4,212,650 9,229,300 022-10 21,488,475 7,439,597 28,928,072 033-12 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses, in our considered view it is not necessary that the benefit will arise in the year in which such loans and advances were provided without interest. A drug normally takes 8 to 10 years time for its development. Furthermore, this associated enterprise was set up for the activities which are directly connected with the assessee as discussed/elaborated in the preceding paragraph. In our view, the generation of the benefit in terms of money in the year under consideration only cannot be a criteria for making any adjustment under the transfer pricing provisions in the given facts and circumstances. Such income may arise in subsequent years. 10.10 It is also important to note that the assessee has given advances to Lambda Therapeutic Research Z.O.O. Poland which have been converted into equity. Thus, what is inferred is this that the loans and advances were given primarily as the investment in equity. In such cases there cannot be any adjustment on account of interest free loans/advances. In holding so we draw support and guidance from the order of this Hon ble tribunal in the case of Micro Inks Ltd. vs. ACIT reported in [2013] 144 ITD 610 where it was held as under; In t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the fact of benefit derived by the assessee. 10.12 In view of the above and after considering the facts in totality, we hold that no adjustment under the transfer pricing provisions is required to be made with respect to the interest free loans and advances by the assessee to its associated enterprises in the given facts and circumstances. Hence, the ground of appeal of the assessee is allowed and the ground of appeal of the revenue is dismissed. 16.1 Before us, no material has been placed on record by the Revenue to demonstrate that the decision of Tribunal as discussed above has been set aside / stayed or overruled by the higher Judicial Authorities. Before us, Revenue has not placed any material on record to point out any distinguishing feature in the facts of the case for the year under consideration and that of earlier years nor has placed any contrary binding decision in its support. Thus, respectfully following the order this tribunal in own case of assessee the ground of appeal raised by the assessee is hereby allowed whereas ground of appeal of the revenue is hereby dismissed. 17. The next issue raised by the assessee vide ground no. 4 to 8 of its appeal is th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntended that it has already paid fee of Rs.28J4,368/- @ 0.9% as a fee for providing the corporate guarantee. The appellant relying on the various judicial pronouncements has stated that corporate guarantee commission given by assessee for its subsidiary company should be benchmarked by taking rate of 0.5%. The TPO in his order u/s. 92CA{3) has discussed the rational for adopting the profit margin of 24.7% on cost plus method in banking entities. I agree with the findings of the TPO that services of guarantee fee etc. falls in the domain of financial services and the risk assumed by the appellant in the present fact of the case is similar to the entities engaged in the business of providing financial services. !n the arm's length scenario, when the appellant company has incurred the cost to the tune of 0.9% of credit extended which is Rs.2*6rl 4,368/-, it would be expecting return equal to what is earned by such entities engaged in providing financial services. The TPO was required to make upward adjustment of 24.7% of Rs.26,14,368/-, which is Rs.6,45,748/-. However, he has made adjustment of Rs.35,09,5171- including the fee of Rs.26,14,368/- paid by appellant. In view of above ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al contentions and perused the materials on record. At the outset we note that the fact of issue on hand has been elaborated in previous paragraph, therefore we are not inclined to repeat the same for the sake of brevity. Hence we proceed to adjudicate the same accordingly. 52.1 The provisions of section 92B of the Act defines the parameters of what constitutes an international transaction. Although the ambit of international transaction was wide enough, yet due to judicial interpretation, certain classes of transactions were being left out of the transfer pricing net. To tackle the same, by the Finance Act of 2012 an Explanation to Section 92B[2] of the Act was brought on the statute with retrospective effect from 1st April 2002. The explanation is clarificatory in nature and added certain categories of transactions, inter alia, the transaction as specified under clause (c) of explanation (i) to section 92B of the Act within the ambit of international transactions which is reproduced as under: [Explanation.-For the removal of doubts, it is hereby clarified that- (i) the expression international transaction shall include- (a) *********** (b) ************* ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reported in 41 taxmann.com 364 wherein it was held as under: 13. We have heard both the parties and perused the material available on record. In the present case though the immediate transaction is that of the assessee and CITI Bank India the benefit of the guarantee is for the US Subsidiary and hence the assessee has rendered a service to its US subsidiary for which it must charge fees at an arm's-length. This same logic was applied in Asstt. CIT v. Nimbus Communications [2013] 34 taxmann.com 298 (Mum.). We also note the introduction of retrospective amendment in Section 92B Explanation (i)(c) which specifically covers such guarantee payments. Furthermore the decision of Swarnadhara IJMIT Integrated Township Development Co. (supra) (Tax Sutra) was in an altogether different factual matrix concerning the assessee (an Indian Joint Venture) reimbursing corporate guarantee fees paid by its Malaysian AE. We draw support from the order of Mumbai Tribunal in Glenmark Pharmaceuticals v. Asstt. CIT [ITA No.5031/Mum/2012 dated 13-11-2013) which has analyzed this issue in detail and held that 0.53% corporate guarantee rate in that case was appropriate. We therefore set aside the is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in providing financial services. For the purpose of identifying the valid comparables, the Google database was queried to identify top 10 private sector entities engaged in extending banking and other financial services. Such entities were identified from information available at www.moneYControl.com. The average margin (OP/OC) of such entities was computed at 24.1 % using data available on Capitaline database as under: Sr. No. Company Name Total Income [201303] Profit Before Tax|201303] Total Cost Margin 1 Kotak Mah. Bank 9203.15 1972.03 7231.12 27.3% 2 Karur Vysya Bank 4694.99 72f.44 3969.55 18.3% 3 Federal Bank 6832.01 1193.76 5638.25 21.2% 4 HDFC Bank 41917.49 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rking 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 the assessee which has been reimbursed to the assessee by the AE. This fees in absolute amount works out at ₹23,52,607/- only. However, the assessee has not added any markup on this international transaction with its AE. In the interest of justice and fair play, we are of the view that a sum of ₹ 1,17,630/- being 5% of the fees paid to the bank for the corporate guarantee of ₹ 23,52,607/- will be sufficient to add as margin of the assessee. 52.8 Regarding the revenue appeal, we note that the assessee has already made the disallowance of ₹ 23,52,607/- in its computation of income and further addition of the same amount to the total income of the assessee will lead to the double addition which is unwanted under the provisions of law. Accordingly, we are of the view that the decision of the learned CIT (A) for deleting the addition of ₹ 23,52,607/- does not require any interference. Hence, the ground of appeal of the assessee is partly allowed whereas the ground of appea ..... X X X X Extracts X X X X X X X X Extracts X X X X
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