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TMI Blog2023 (3) TMI 906X X X X Extracts X X X X X X X X Extracts X X X X ..... , would not be in a position to defend its case for TNMM method as MAM unless data collected is provided for its examination and rebuttal. It is manifest that the observations made by the Co-ordinate Bench in the first round had kept the issue entirely open to be decided denovo. We are thus not impressed by such counter argument on behalf of the Revenue. - I.T.A. No.1065/DEL/2022 - - - Dated:- 25-11-2022 - SHRI PRADIP KUMAR KEDIA, ACCOUNTANT MEMBER And SHRI NARENDER KUMAR CHOUDHRY, JUDICIAL MEMBER For the Appellant : Shri Nishant Thakkar, Adv. For the Respondent : Shri Rajesh Kumar, CIT-DR ORDER PER PRADIP KUMAR KEDIA, A.M.: The captioned appeal has been filed by the Assessee against the final order dated 29.04.2022 passed by the Assessing Officer for the Assessment Year 2013-14, in pursuance of direction given by the Dispute Resolution Panel-1 vide order dated 31.08.2021. 2. The grounds of appeal raised by the assessee read as under: Transfer Pricing adjustment of INR 13,66,36,735. 1.1 That on the facts and circumstances of the case and in law, the Hon ble DRP and Ld. AO/TPO erred in making an adjustment of INR 13,66,36,734 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... examine the third-party banks from whom data under Section 133(6) has been obtained for determining the ALP of the impugned transaction, thereby, violating the principles of natural justice; and (d )Not issuing the show cause notice proposing transfer pricing adjustment during remand back transfer pricing assessment proceedings, thereby, violating the principles of natural justice. 1.7 That on the facts and circumstances of the case and in law and without prejudice to any other ground, the Hon ble DRP and Ld. AO/TPO erred in using non-comparable guarantee rates from the data obtained under Section 133(6) of the Act, thereby, resorting to cherry picking of prices to determine the ALP of the impugned transaction. 1.8 That on the facts and circumstances of the case and in law, the Hon ble DRP and Ld. AO/TPO erred in not following the decisions of the Hon ble Tribunal in the Appellant s own case for earlier years. 2 Taxability of interest on income-tax refund of INK 8,00,57,085 2.1 That on the facts and circumstances of the case and in law, the Ld. AO has erred in applying tax rate of 42.024% while computing the tax demand for interest on income-tax refun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on to retail banking. For the assessment year 2013-14 in question, giving effect to DRP directions, the Assessing Officer while framing the assessment order under 144C(13) r.w. Section 143(3) of the Act dated 31st October, 2017 inter alia continued with the transfer pricing adjustments of INR 13,66,36,735/- made to the returned income of the assessee in respect of international transactions pertaining to receipt of counter guarantee commission (impugned international transaction) from its Associated Enterprises. The AO in terms of TPO/DRP directions in the instant case, made an upward adjustment to the income of the Assessee pertaining to impugned transaction by using bank guarantee rates ( average 2.63%) quoted by third party banks as comparable uncontrolled data for the purpose of determining the arms length price (ALP) of such impugned transaction. The dispute travelled upto the ITAT. The Co-ordinate Bench of Tribunal vide order dated 11.06.2018 in ITA No.7212/Del/2017 made certain observations and remanded the issue back to the Assessing Officer for fresh adjudication in accordance with law. The relevant paragraphs dealing with the issue in the first round of proceedings befo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons made by the co-ordinate bench. 6. In the second round of proceedings, the DRP, however, upheld the order of TPO following its own order for Assessment Year 2015-16 and passed the directions under Section 144C(5) of the Act vide order dated 23.02.2022 confirming the action of the TPO without any relief. The AO, in turn, its final order in pursuance of directions of DRP passed order dated 29.04.2022 and reiterated the additions of Rs.13,66,36,734/- towards transfer pricing adjustment on account of counter guarantee commission received from AE, applying arm length principles. 7. Aggrieved, the assessee has yet again filed the appeal before the Tribunal. 8. When the matter was called for hearing, the ld. counsel for the assessee broadly reiterated the submissions made before lower authorities. 8.1 The Ld. Counsel submitted that BTMU Japan (AE of the assessee) along with its overseas branches caters to many multinational corporations which operate across the globe and require the service of BTMU India (the assessee) to facilitate the operations in different countries. The customers of BTMU overseas branches may need a guarantee from a bank in India to participate in a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessee earns counter guarantee commission. Thus, in essence, issuance of guarantee by the Assessee is backed by counter guarantee and thus fully protected and such act is nearly risk free. 8.2 For the purpose of computation of ALP of the impugned transaction i.e. the counter-guarantee commission, the assessee considered Transactional Net Margin Method ( TNMM ) as the most appropriate method (MAM) by using combined transaction approach, wherein, the impugned transaction along with other international transactions was aggregated and benchmarked using aggregated approach. The operating profit/total assets ('OP/TA ) of the assessee was compared with the arithmetic mean of OP/TA of comparable uncontrolled companies. Since, the assessee's OP/TA of 4.17 percent was higher than the OP/TA of comparable uncontrolled companies of 1.08 percent (update single year margin of 0.93 percent for FY 2012-13), these international transactions were considered to be at arm s length from an Indian TP perspective. For benchmarking the aforesaid guarantee commission, the TPO rejected the economics analysis conducted and the TNMM approach resorted by the assessee and obtained information from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT(DR) adverted to the decision of the co-ordinate bench dated 11.06.2018 in first round of proceedings and submitted that the ITAT set aside the issue to the file of AO in the wake of the fact that the comparables collected under S. 133(6) namely data obtained from third party banks were not confronted to assessee. It was submitted that such data are of use only when CUP method is applied and is redundant it TNMM method is endorsed. It was thus asserted the directions of the ITAT implies that CUP method adopted by AO has been endorsed by the ITAT. It was next submitted that the decisions and actions of other years relied upon by the Assessee is of no consequence in such a scenario where in those years, the proceedings were completed on the basis of TNMM method in contrast to the CUP method as vetoed by co-ordinate bench in AY 2013-14 in question. The Ld. CIT(DR) thus backed the action of the AO to be in terms of directions of ITAT in first round of proceedings and submitted that no interference therewith is called for. 10. In rejoinder, the ld. counsel submitted that ITAT in its order dated 11.06.2018 has not decided the issue of application of CUP method at all and on the con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rseas branches, whereas the assessee had limited role in issuing letter of guarantee, it received 1% guarantee commission. In these facts, there is no merit in comparing the rate received by the assessee with the rate charged by different banks who are operational in India and providing financial guarantee to its customers, with all risk involved therein. In such facts and circumstances, the Assessing Officer/TPO erred in applying the rate charged by Axis Bank, Canara Bank, Punjab National Bank and State Bank of India, etc. with arithmetic mean of 2.71% to benchmark the international transactions between the assessee and its overseas branches of receipt of bank guarantee commission. The details of the international transaction are tabulated in the order of the TPO itself and the same clearly reflect that no transaction is undertaken except with overseas branches. The assessee undoubtedly is also providing the services to its customers in India where it a risk bearing entity. We are of the view that where the assessee has undertaken bundle of international transactions with its AE and the same has been benchmarked by applying combined approach and the method of TNMM has been used an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ise, issuance/delivery of the guarantee on stamp paper, seeking confirmation from the associated enterprise for cancellation/extension of the guarantee. Therefore the claim of the assessee is that assessee does not perform any function apart from issuing the guarantee in favour of the beneficiary. The claim of the assessee is also that that it does not undertake any separate evaluation of the beneficiary and all background and creditworthiness checks are performed by the associated enterprise only. It is further stated that in case a guarantee is invoked, the assessee is fully protected by the counter guarantee issued by the associated enterprise and associated cost and risk is passed on back to back by the assessee to its associated enterprises. Therefore, the entire risk of default by the borrower is completely assumed by the associated enterprise and the assessee does not bear any risk in the entire arrangement or transaction. For issuance of guarantee the associated enterprises pay the assessee commission up to 1% of the guaranteed amount. Assessee aggregated the all transaction with other banking transactions with associated enterprise as according to it it is interlinked and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o why the aggregation of the transaction is incorrect, he used the CUP method for benchmarking the impugned international transaction. Therefore the claim of the assessee is that once the aggregation of the transaction is accepted for the purpose of applying transactional net margin method, then, it is not open to the learned transfer pricing officer to delink one transaction and apply a different method. For this proposition he relied upon the decision of the honourable Delhi High Court in case of 389 ITR 469 in case of Magneti Marelli powertrain India private limited versus the Deputy Commissioner of Income Tax. He further submitted that even otherwise the external CUP in the form of guarantees issued by the local banks with hundred percent cash margin shall be considered is the local banks do not bear any risk on account of being secured by hundred percent cash margin which is similar to the risk profile of the assessee in case of the impugned international transaction where the assessee is completely secured by back-to-back counter guarantee of the associated enterprise. He submitted that the learned TPO has used the guarantee rate of risk bearing guarantees for the purpose of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capacity as facilitator only. When the persons needed guarantee in India to participate in a tender, then service of the Bank was utilized for issuing guarantee in favour of the beneficiary. The evaluation of the beneficiary for the creditworthiness of the customers was performed by the overseas branches, whereas the assessee had limited role in issuing letter of guarantee, it received 1% guarantee commission. In these facts, there is no merit in comparing the rate received by the assessee with the rate charged by different banks who are operational in India and providing financial guarantee to its customers, with all risk involved therein. In such facts and circumstances, the Assessing Officer/TPO erred in applying the rate charged by Axis Bank, Canara Bank, Punjab National Bank and State Bank of India, etc. with arithmetic mean of 2.71% to benchmark the international transactions between the assessee and its overseas branches of receipt of bank guarantee commission. The details of the international transaction are tabulated in the order of the TPO itself and the same clearly reflect that no transaction is undertaken except with overseas branches. The assessee undoubtedly is also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . TPO/AO by issuance of notice u/s 133 (6) of the Act which was used for computing the ALP of impugned transaction. 31.During the year under assessment, the taxpayer reportedly entered into international transactions as under:- S.No. Description of the transactions Amount (Rs.) 1 Payment of software license fee 3,427,875 2 Payment for software development Services 1,997,513 3 Payment of annual maintenance charges for software maintenance 6,634,714 4 Payment of account maintenance charges and clearing charges 518,007 5 Payment of communication charges 4,009,696 6 Receipt of counter guarantee commission 22,085,511 7 Net interest received on Nostro/Vostro Accounts 5237307 8 Receipt of service income for ECB syndication ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the taxpayer, at the very outset, contended that identical issue has already been decided by the coordinate Bench of the Tribunal in taxpayer s own case for AYs 2009-10 2015-16 in ITA Nos.ll62/Del/2014 7895/Del/2019 respectively. However, at the same time, ld. AR for the taxpayer by filing cross objection challenged the order passed by the ld. DRP for not accepting its primary and secondary analysis by using CUP and TNMM as the MAM respectively and also challenged the order of the ld. DRP to the extent of not rejecting the erroneous CUP data obtained by the TPO by invoking the provisions contained u/s 133 (6) of the Act. 35.However, on the other hand, ld. DR for the Revenue challenged the impugned order passed by the ld. DRP by contending inter alia that every year is separate and independent year and as such, earlier decisions by the ld. DRP/ Tribunal are not binding on the Revenue Department; that since the taxpayer performs all the significant functions viz. creditworthiness violation, negotiation of terms, etc. before issuance of the guarantee to the customer, it is wrong to consider that the taxpayer performs limited function; that the taxpayer bears significant ris ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Collection of claims from the defaulter No Yes Yes Risk Analysis Default Risk No Yes Yes Credit and Collection Risk No Yes Yes 38.Aforesaid FAR analysis was made and brought before the Id. TPO by applying the CUP method and as a secondary analysis TNMM. 39.Bare perusal of the aforesaid FAR analysis made by the taxpayer goes to prove that the taxpayer only performs limited functions, such as, processing the request of issuance of guarantee from the AEs, issuance/delivery of the guarantee on stamp paper, seeking confirmation from the AEs for cancellation or extension of the guarantee and at the same time, AE of taxpayer performs significant functions, namely, evaluation of background and credit worthiness of the borrower, negotiation of the terms and conditions of the facility, issuance of bank guarantee, maintaining and building client relationship, processing for payments in case of default, collection of claims from the defaulter. So, when ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e comparison of the price so charged from or paid to its AE with some external independent reliable price data under similar circumstances of transaction with AE. Ordinarily the Internal CUP method should be preferred over the External CUP method as it neutralizes several distinguishing factors, such as the local factors and the economies available or unavailable to the assessee in particular, having bearing over the comparison of price charged from unrelated parties and AE. The essence of determining ALP under CUP method is to ensure that the price charged by the Indian Enterprise from its AE should be consistent with that charged from unrelated parties under similar circumstances. The importance of the similar circumstances cannot be lost sight of in this context because a round cannot be compared with a square and a rectangle with a triangle. In other words the uncontrolled transactions which are contemplated for comparison should be alike, if not identical. Similarity between the two sets of transactions can be judged by the quality, grade and quantity of the material. In addition, the factors like the location of the parties, availability of raw material; demand and supply e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e taxpayer qua the transaction under consideration. 45.No doubt, Id. DRP has extended relief to the taxpayer by deleting the impugned addition but the taxpayer by filing cross objection challenged the DRP s order for not accepting the primary analysis undertaken by the taxpayer using CUP method and not accepting secondary analysis undertaken by the taxpayer to determine ALP of impugned transactions by aggregating all the international transactions by using TNMM with OP/total assets as PLI. 46.Perusal of the order passed by the Id. TPO at page 29 goes to prove that Id. TPO has rejected the internal CUP applied by the taxpayer to benchmark its international transactions qua guarantee commission on the ground that it has failed to establish high degree of comparability along with dimension of contractual terms, date of transaction, alternatives realistically available with the guarantor the guarantee and market conditions to substantiate its case. 47.Challenging the aforesaid findings returned by the Id. TPO, Id. AR for the taxpayer contended that if local guarantee issued by the taxpayer cannot be considered as a valid CUP as observed by the Id. TPO in the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal Net Margin Method analysis made by the taxpayer. 52. As discussed in the preceding paras, TPO s finding using CUP method comparing the counter guarantee transaction with bank guarantee issued by the third party banks to their customers has been rejected by the Id. DRP. However, Id. TPO has without returning any finding rejected the secondary analysis undertaken by the taxpayer by applying the TNMM as the MAM by OP/total assets as the PLI. 53.Undisputedly, TNMM as the MAM with OP/total assets as PLI as the MAM has been held to be sustainable by the coordinate Bench of the Tribunal to benchmark the international transactions qua receipt of counter guarantee commission from AE in AYs 2009-10 and 2015-16. Undisputedly there is no change in the functional profile of the taxpayer qua year under assessment vis-a-vis AYs 2009-10 2015-16. 54.We have examined the order passed by the coordinate Bench of the Tribunal for AY 2015-16 (supra) wherein identical issue as to receipt of counter guarantee commission from AE has been decided in favour of the taxpayer by applying TNMM by benchmarking the bundled of international transactions with its AE by applying the combined approac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith overseas branches. The assessee undoubtedly is also providing the services to its customers in India where it a risk bearing entity. We are of the view that where the assessee has undertaken bundle of international transactions with its AE and the same has been benchmarked by applying combined approach and the method of TNMM has been used and the margins shown by the assessee have been accepted; then there is no merit in segregating the international transaction of the receipt of the guarantee commission and benchmarking the same separately. The margins of the combined approach has been accepted at Arm s Length. Consequently, there is no merit in the transfer pricing adjustment made in the hands of the assessee. The same is thus directed to be deleted. The ground of appeal No. 12 is thus deleted. 40. As the facts and circumstances of the case are identical to the facts decided in case of the assessee for assessment year 2009 - 10, respectfully following the decision of the coordinate bench, we allow this ground of appeal of the assessee holding that as the banking business of the assessee and the transactions related to the issue of guarantee commission on by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... justment is totally uncalled for. 14.While holding so, we also advert to the plea raised on behalf of the revenue. The argument on behalf of the Revenue that the Assessment Year 2013-14 in question rests on a different footings vis- -vis Assessment Year 2009-10 and other assessment years is apparently devoid of any rationale. The Coordinate Bench of Tribunal in Assessment Year 2009-10 has remanded the matter back simplicitor for fresh adjudication in accordance with law after taking note of the plea that the data obtained by issuing notices under Section 133(6) for applying Comparable Uncontrolled Price [CUP] method for benchmarking the international transaction was not justified without confronting the assessee. When seen in proper perspective, the observations made by the Co-ordinate Bench not be read to mean that CUP method or benchmarking adopted by the Revenue Authorities was endorsed in any manner. There is no discussion in the order to such effect. The Tribunal has merely set aside the action of the Assessing Officer and remanded the matter back for confronting the data obtained behind the back of the assessee to enable it to counter the same effectively. Manifestly, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d which, in the instant case, is attributable to activities carried out by PE in India and consequently the normal rate applicable to such income has been rightly applied by the revenue authorities. 18.In the wake of assertions made on behalf of the assessee, we do not consider it expedient to determine the issue on merits. As fairly suggested on behalf of the assessee, we direct the Assessing Officer to determine the issue and dispose of the rectification application dated 16th March, 2022 in accordance with law after giving proper opportunity to the assessee. The Assessing Officer is directed to dispose of the rectification application at the earliest and preferably within three months of the date of service of this order. 19.Ground No.2 of the appeal of the assessee is thus allowed for statistical purposes. 20.As regards Grounds No.3, 4 and 5, it was fairly submitted on behalf of the assessee that these issues are errors of apparent nature to be adjudicated by the AO and Assessee needs a direction from the Tribunal for expeditious disposal at the end of the AO for which rectification application is pending before Assessing Officer. Having regard to the submissions mad ..... X X X X Extracts X X X X X X X X Extracts X X X X
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