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TMI Blog2023 (12) TMI 273X X X X Extracts X X X X X X X X Extracts X X X X ..... om that, even the assets deployed belonged to the assessee. The entire risk lied upon the assessee that is the risk assumed for executing the contract and carrying out the entire work solely belonged to the assessee. Ergo the rewards of the risks were also entirely reaped by the assessee in the form of 99% profit. Thus, even if one does FAR analysis of the performance guarantee given by the assessee to FGB for execution of the contract where entire risk and rewards and the benefit was of the assessee only, then where is the question of making any adjustment of ALP in the hands of the assessee that any benefit has been passed on to the AE. Even if it is reckoned as international transaction, then also on FAR analysis and looking to fact that the reward or profit to the AE is almost negligible, i.e. the ultimate profit is not even 1%, the adjustment if at all would also be negligible on the facts of the present case. Thus, on the facts of the present case we hold that no transfer pricing adjustment can be made on account of corporate guarantee. Accordingly, the addition made by the ld.TPO / ld. AO is deleted. Disallowance of interest u/s. 36(1)(iii) - Adjustment in respect of receipt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enue is dismissed. X X X X Extracts X X X X X X X X Extracts X X X X ..... een pointed out that it an undisputed fact that, for the year under consideration, the assessee had earned 99.10% of the profits (Rs. 31.19 crore) in respect of the said project as a sub-contractor as well as for providing the aforesaid support services, while Afcons Mideast earned only 0.90% (Rs. 0.30 crore). The entire profit earned by the assessee as a sub-contractor and for providing support services was Rs. 130.05 crore while Afcons Mideast earned was only Rs. 10.86 crore from execution of the said project. Thus, 92.29% of the profits from the said project accrued to the assessee as a sub-contractor and for the support services. In respect of the balance 7.71% of the profits accruing to Afcons Mideast, as mentioned above, 80% of such profits again belonged to the assessee as its share of profit. Effectively, the assessee had earned 99.10% of the profits. It has been stated that, in substance the sole and entire purpose of incorporating Afcons Mideast was only to comply with the laws of UAE in order to be eligible to secure the said contract. Effectively, the contract has been executed by the assessee company either as a sub-contractor or indirectly by providing the necessary m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facts and background of the case submitted that one has to keep in mind that here in this case the contract work was carried out by the assessee i.e. Afcons Infrastructure Ltd. only. Though it was in the nature of sub-contract given by Afcons Mideas or by support services, however, the entire contract was executed by the assessee company only. He pointed out that almost entire profit from the said contract i.e. almost 99.10% of the profits were earned by the assessee only and Afcons Mideast have earned only 0.90% during the year. Once, the entire contract has been undertaken by the assessee, then providing performance guarantee to carry out its own work, it cannot be held that any kind of benefit has been given to the AE. He further submitted that the role of the assessee in the performance of the contract has to be seen in a holistic manner because not only the entire contract work has been executed by the assessee but also almost entire profit has also been earned by the assessee. If more than 92% of the profits arising from the execution of the project as accrued to the assessee as a sub-contract and rendering support services and then it cannot be held for any kind of benefit h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gainst various types of Guarantees extended by the assessee. It is apparent that the Bank does not distinguish among "letter of Credit", "Performance Guarantee", "Maintenance Guarantee" etc while charging Commission. Hence, the distinction made by the Ld. AR between "Corporate Guarantee" and "Performance Guarantee" is only artificial and will not have any bearing in present set of factual matrix. II. The crux of the argument of the Ld. Sr. Counsel of the assessee is that since the has received dominant share in the profit from the project awarded to its AE {in the profit sharing ratio of 80:20), one should automatically concluded that the entire "performance" of the project was undertaken by the assessee, and not by its AE. And hence, the Guarantee given to Bank gets the colour of "Performance Guarantee" to self, instead of "Corporate Guarantee" given to the bank on behalf of its AE. Comments- The aforesaid argument is not tenable since- (i) As stated in the preceding paragraphs, the sub-contract given to the assessee by the AE was just 13.5% of the total contract value of 1,546.56 crores. Hence, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g of expenditure related to the sub-contract from the assessee to the AE. The financial results no-where indicate that the assessee has "performed" the project, in any manner, for which Corporate guarantee to the tune of Rs. 824 crores was given to the bank on behalf of the AE. The cash and bank balance of Rs. 72.96 crores as on 31 March, 2009, in the books of the assessee, only reinforce this observations. The documents or agreements prepared in this regard can only be considered as a self serving document. III.(a) Claim of a Share holder activity (1) According to the assessee, the whole intention of availing the banking facilities by AE from Bank was to execute the contract awarded in which appellant has significant interest. Hence, in order to achieve its own interest of earning a profit from the said contract, the appellant decided to extend the said guarantee to Bank on behalf of AE. The profit earned by the appellant from the sub-contract, which is a part of the said contract, resulted in an increase in revenue of the appellant. Comments- 1. It is respectfully submitted that in all International business involving multiple transactions with foreign AE, the int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 't be overlooked at this stage that the sub-contract given to the assessee by the AE was just 13.5% of the total contract value of 1,546.56 crores. Moreover, extending of Guarantee (to the bank) on behalf of the AE and sharing/shifting of profit after completion of a project two different international transactions that need separate benchmarking exercises. 2. it is further submitted that commercial expediency has no role in examination of a transaction from the perspective of transfer pricing, therefore, guarantee fee ought to be charged for the services being rendered. Reliance is placed on the following judgments 11. In rejoinder, it has been clarified that in so far as submission of the ld. DR that arithmetically, the profit has been earned by the assessee by shifting of expenditure relating to sub-contract to its AE i.e. Afcons Mideast is completely incorrect and also it is neither in the case of the ld. TPO or ld. DRP at any stage of the proceedings. Nowhere, the ld. DR has pointed out which expenditure booked by the sub-contractor have been booked by Afcons Mideast in its books of accounts. 12. Before us ld. Counsel had also argued that such kind of performance guara ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mining the arm's length price where is the real benefit arisen or accrued is very crucial and FAR analysis of the transaction. 14. As noted above, for the performance of the entire contract work, guarantee was provided by FGB for provision of banking facilities to Afcons Mideast which in the F.Y. 2008-09 was of Rs. 824 Crores. During the year four types of facilities were provided as noted above which mostly consist of letters of credit, letters of guarantee and letters of advance payment, performance bond and letter. By way of security for providing these facilities FGB required the assessee to execute irrevocable and unconditional corporate guarantee and accordingly, performance guarantee was given by FGB in favour of Road Transport Authority, Dubai. It was only a guarantee that Afcons Mideast would not suspend or delay repayment of the advance of AED 108 million. The assessee had not charged any guarantee fee from Afcons Mideast on the ground that effectively guarantee has been given for its own performance of the contract or a guarantee given for repayment of advance which would also only arise in the case of a non-performance of the contract by the assessee. Thus, we agree wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case what has to be seen that the entire functions to carry out the work either in the form of sub-contract or executing the contract work by providing entire support services through its own infrastructure, man power, management, technological support, organizational support, etc. all has been done by the assessee. The function of the AE in the execution of work was only on paper and as a legal entity to comply with the domestic laws. In substance there is negligible function performed by the AE. Apart from that, even the assets deployed belonged to the assessee. The entire risk lied upon the assessee that is the risk assumed for executing the contract and carrying out the entire work solely belonged to the assessee. Ergo the rewards of the risks were also entirely reaped by the assessee in the form of 99% profit. Thus, even if one does FAR analysis of the performance guarantee given by the assessee to FGB for execution of the contract where entire risk and rewards and the benefit was of the assessee only, then where is the question of making any adjustment of ALP in the hands of the assessee that any benefit has been passed on to the AE. 16. Even if it is reckoned as internation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest works out to approximately 3.50%. Since the assessee has charged 12% which is much more than the rate prevailing in the local market, hence no addition is warranted. 19. On the other hand, ld. DR strongly relied upon the order of the ld. AO. 20. It is an undisputed fact that loan has been provided to the AE at UAE and Mauritius. The assessee was provided EIBOR rate which was applicable in UAE was 1.50% and if 200 basis points is applied considering the RBI circular or External Commercial Borrowings, then it will come down to 3.50%. The one year LIBOR rate prevailing as on 31/03/2009 was 3.12% and he apply 200 basis points on the LIBOR rate, then also interest worked out to 4.12%. Thus, in any scenario, the interest @12% free loan given to AE is much more than the arm's length rate of interest because arm's length rate of interest has to be taken because arm's length rate of interest has to be taken on the respective market rate of the AE and not by Indian market. Accordingly, the adjustment made by the ld.AO is deleted. 21. In Revenue's appeal, the first issue is disallowance of interest u/s. 36(1)(iii) in respect of loans to Afcons Pauling Joint Venture. The ld. AO fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue is dismissed. 23. In so far as disallowance of depreciation of Rs. 25,000/- and written down value of speed boat, it has been submitted that the issue is in favour of the assessee by ITAT in assessee's own case for the A.Y. 2001-02, A.Yrs. 2002-03 to 2005-06 and A.Yrs 2006-07 to 2008-09. As per the Tribunal order, it was held that:- (i) As per the facts on record, machinery was purchased by the principal but the assessee had been vested with the possession of them and utilized them for its business. (ii) It is not disputed that the principal has debited the cost of machinery to the assessee's account and the assessee has capitalized it in its books of account. (iii) The Tribunal applying the ratio laid down in the decisions of Mysore Minerals Ltd (SC), Dilip Singh Sardarsingh Bagga (Bom.) Varanasi Auto Sales (All.), dismissed the department's ground. 24. Accordingly, ground raised by the Revenue is dismissed. 25. In so far as the disallowance of professional fees of Rs. 64.33 lakhs paid for arbitration award, the facts discussed in the assessment order reads as under:- "The assessee has stated that in its return of income, it had reduced the sum of Rs. 10,66,7 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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