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TMI Blog2022 (11) TMI 1058X X X X Extracts X X X X X X X X Extracts X X X X ..... the Appropriate CUP with mark-up as applied by the TPO? 1.3 Whether on the facts and circumstances of the case and in law, the Id. CIT(A) is correct in relying on the decision in the case of CIT Vs. Everest Kanto Cylinders Ltd.. [2015] 378 ITR 57 in arriving at the 0.50% rate of corporate guarantee fees, which is in violation of provisions of Rule 10B(4) of IT Rules as the determinants of corporate guarantee fee like the credit rating, interest rate and FAR analysis etc., differ case to case and year on year and so arate arrived at in a particular case and for particular assessment year cannot be blindly adopted in every case and in every assessment year which also violates Rule 108(4) of the I.T. Rules? 1.4 Whether on the facts and circumstances of the case and in law, the Id. CIT(A) is correct in relying on the decision in the case of Everest Kanto Cylinders Ltd., without appreciating certain important facts having bearing on the benchmarking such as: i) The quotation obtained by the Everest Kanto Cylinders Ltd.. India (EKC India) was in respect of transaction of a guarantee obtained by the Indian entity having strong financials and asset base and not in respect of Everest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... methods prescribed in Section 92C which is violation of law? 1.7 Whether on the facts and circumstances of the case and in law, the Id. CIT(A) is correct in failing to recognize the facts of the case that the assessee has given corporate guarantee to its AES, thereby exposing itself to a 'lending business' risk as well as the 'single customer risk by not charging fee for such guarantee at arm's length which the assessee would have done, had it stood guarantee to any third party in uncontrolled conditions as in section 92F(ii)? 1.8 Whether on the facts and circumstances of the case and in law, the Id. CIT(A) is correct in failing to see that AB had no credit-worthiness and financial capacity to service its own loan and in such a situation assessee standing guarantee for the loan, It had to be remunerated at arm's length as per section 92F(ii)? 1.9 Whether on the facts and circumstances of the case and in law, the Id. CIT(A) is correct in ignoring the decision in the case of Teenimont ICB Pvt. Ltd Vs DCIT TS-251-ITAT 2013(Mum)-TP. wherein the Hon'ble ITAT upheld the addition made by the TPO for guarantee commission at 3% on the ground that the taxpayer h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee. Pursuant to the reference by the Assessing Officer ('AO‟), the Transfer Pricing Officer ('TPO‟) vide order passed under section 92CA(3) of the Act proposed a total transfer pricing adjustment of INR 4,06,21,316. In conformity, the AO vide order dated 15/05/2015 passed under section 144C(3) r/w section 143(3) of the Act determined the total income of the assessee at INR 108,37,39,010, inter-alia, after making certain additions. The learned CIT(A) vide impugned order dated 31/03/2022 partly allowed the appeal filed by the assessee. Being aggrieved by the relief granted by the learned CIT(A), the Revenue is in appeal before us. 4. The issue arising in ground No. 1, raised in Revenue's appeal, is pertaining to transfer pricing adjustment on account of guarantee commission. 5. The brief facts of the case pertaining to this issue are: During the transfer pricing assessment proceedings, it was noticed that the assessee has given guarantees to lenders that enabled its overseas subsidiaries to borrow funds from the bank during the last 2 years. As the assessee has not charged any guarantee fee, the assessee was asked to show cause as to why the corporate guarant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s under: "32. Upon careful consideration and after hearing both the parties, we note that Hon'ble Bombay High Court in CIT vs.Everest Kento Cylinders Ltd. Kanto, order dated 08.05.2018 has confirmed the ITAT order of 0.5% corporate guarantee commission by observing as under:- "In the matter of guarantee commission, the adjustment made by the TPO were based on instances restricted to the commercial banks providing guarantees and did not contemplate the issue of a Corporate Guarantee. No doubt these are contracts of guarantee, however, when they are Commercial banks that issue bank guarantees which are treated as the blood of commerce being easily encashable in the event of default, and if the bank guarantee had to be obtained from Commercial Banks, the higher commission could have been justified. In the present case, it is assessee company that is issuing Corporate Guarantee to the effect that if the subsidiary AE does not repay loan availed of it from ICICI, then in such event, the assessee would 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e decision of the coordinate bench of the Tribunal in assessee's own case for the preceding assessment year. Being aggrieved, the Revenue is in appeal before us. 14. During the hearing, learned DR vehemently relied upon the order passed by the AO. 15. On the other hand, learned AR placed reliance upon the decision of the coordinate bench of the Tribunal on this issue. 16. We have considered the rival submissions and perused the material available on record. We find that the coordinate bench of the Tribunal in assessee's own case for assessment years 2009-10 and 2010-11 cited supra, decided similar issue in favour of the assessee by observing as under: "14. Upon careful consideration, we note that in this case, the assessee has claimed premium/interest payable at maturity of Zero Coupon Convertible Bonds(ZCCB) in the revised return of income. In the accounts of the assessee the said amount was debited to the share premium account. But, in the computation of income assessee claimed the said amount as deduction from income. For admissibility of this claim the assessee submission is that the claim is for each financial year although payment of premium amount shall be paid at the e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f any violation in this regard. The claim in income tax Act has to be made as per mercantile system and consistent method accounting. A liability which has been accrued has to be provided and allowed. It is not that liability is allowed only on the payment basis. Following case laws in this regard are relevant, germane and support the case of the assessee. i) Madras Industrial Investment Corporation Ltd (supra); ii) National Engineering Industries Ltd. (supra); iii) CIT vs Tungabhadra Industries Ltd. (supra); iv) Taparia Tools (supra). 15. Another plank of the AO in rejecting the claim is that no TDS on such expenses was deducted and such amount cannot be allowed as deduction u/s. 40(a)(ia) of the I.T.Act, 1961. In this regard assessee has referred CBDT circular which provides that TDS in case of Deep Discount Bond is to be deducted on redemption. Further it has been submitted that as regards, the deduction of TDS, these bonds are listed on Singapore Stock Exchange and till redemption on maturity, the beneficiary of the premium is not known. In this regard, assessee‟s claim is that liability to tax arises when the recipient is identified and TDS deducted can be give ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd debit to share premium account is correct, but the same is still a contingent amount. The assessee could have very well debited the amount to the profit and loss account, but it has chosen to debit the amount to share premium account in the books, which is also permitted as per Companies Act. No infraction of law in this regard was pointed out. Since revenue has accepted the debit of the premium to share premium account, it is clear that revenue has accepted that redemption premium amount has been accepted as accrued. Nevertheless the case law in this regard duly support the proposition. In this regard, we may refer to the decision of Hon'ble Bombay High Court in the case of S.M.Holding & Finance (P) Ltd. 264 ITR 370 as under:- "Both the above appeals raised a common question of law and fact and, therefore, they are heard together and disposed of by this common judgment. Both the appeals have been preferred by the Department. They concern asst. yrs. 1995-96 and 1996-97, respectively. For the sake of convenience, we reproduce herein the facts in IT Appeal No. 215 of 2001. The following question is referred for opinion of this Court: "Whether, on the facts and in the circumsta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... during the life of the issued debentures. He submitted that originally the debentures were issued at 2 per cent. which was changed to 0 per cent during the life of issued debentures. That, originally the issued debenture was for 5 years which was changed to 10 years during the existence of the issued debentures. He submitted that in the case of Madras Industrial Investment Corporation (supra) as also in the case of Taparia Tools Ltd. (supra), there was no discretion vested in the assessee to alter the terms of the issued debentures during the subsistence of the issued debentures whereas in the present case the borrower had the discretion to change the terms of the issued convertible debentures. He, therefore, submitted that during the assessment year in question, there was no ascertainment of liability to the tune of Rs. 54,75,000 and, therefore, the AO was right in disallowing the claim for deduction. Findings 5. We do not find any merit in the above arguments advanced on behalf of the Department. Firstly, we have gone through the records and proceedings (R & P). In the entire R & P, there is nothing to indicate alterations of terms and conditions during the subsistence of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "Next ground of appeal is about disallowance of pro rata premium of Rs.5.39 crores payable on redemption of 'Foreign Currency Convertible Bonds' (FCCB). As per the AO the bonds were convertible into shares and, therefore, could not be construed as a borrowing, that they increased capital base of the company and that the expenditure incurred was capital in nature. The AR submitted that FCCB were a form of borrowing thai they were shown in the balance- sheet under loans that premium payable on redemption was cost of borrowing, that option of conversion of bonds into shares was only with the bond holders, that conversion was a subsequent event which did not change the initial character of the bonds of a debt, that in the event of redemption payment of premium was mandatory, that premium being a cost of borrowing was allowable on time ,that premium was neither capital nor contingent in nature, that issue of FCCB had been held to be revenue in appellant is own case for the assessment year 1997-98 (ITA/7845/M/2004).DR supported the order of the AO." 20. From the above, it is clear that the amount of debenture redemption premium is accrued and liable to be deducted. Hence, in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ra, decided similar issue in favour of assessee by observing as under: "27. We note that assessee has given the reasons for expenditure, which as per the assessee is disallowable u/s.14A. Assesee has provided the basis of working of disallowance, however, the same has been rejected by the authorities below without cogent reasoning. The AO and Ld.CIT(A) are mentioning that "it is difficult to accept that assessee has incurred only that much of expenditure." This is no reason at all. It is settled law that proper satisfaction is necessary in this regard in rejecting assessee‟s contentions. In this regard, we note that Hon'ble Bombay High court in the case of Bombay Stock Exchange 113 taxmann.com 303 has held as under:- "Non-satisfaction with the disallowance offered by the assessee has to be arrived at on the basis of the accounts submitted by the assessee. In this case, the Assessing Officer had not carried out the aforesaid exercise but rejected the disallowance claimed by the assessee only on the ground that it was not in accordance with Rule 8D of the Rules. The application of Rule 8D of the Rules would only arise once the Assessing Officer is not satisfied on an object ..... X X X X Extracts X X X X X X X X Extracts X X X X
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