9911796707
TMI Blog2023 (5) TMI 1324X X X X Extracts X X X X X X X X Extracts X X X X ..... rd transfer pricing adjustment - Assessee had advanced sum without charging any interest - advance given by the Assessee were akin to loan - HELD THAT:- CIT(A) deleted the addition by placing reliance of the decision of the Tribunal in the case of the Assessee for the Assessment Year 2012-13 [ 2020 (9) TMI 1101 - ITAT MUMBAI] wherein as held that the advances were towards fulfilment of the assessee s obligation of being a JV partner as any financial incapacitation of JV would adversely affect the continuation of the project and ultimately jeopardize the interest of the assessee. Therefore, the said advances could not be put in the category of loans as done by the lower authorities. Further, it could not be said that JV entity derived / gained certain benefits out of such advances but rather it was the assessee who would ultimately gain by continuing with the projects and taste the fruits of the success of project. Hence, not convinced with impugned adjustments as confirmed by first appellate authority, we direct Ld. AO to delete the same - Decided against revenue. TP adjustment pertaining to different Performance Guarantees - HELD THAT:- There is nothing on record to persuade us to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ered in favour of the Revenue by the judgment passed by Chambal Fertilizers Chemicals Limited [ 2022 (12) TMI 1098 - SC ORDER] wherein it has been held that as per Explanation 3 to provision of Section 40(a)(ii) of the Act inserted by Finance Act, 2022 (with retrospective effect from 01.04.2005) surcharge or cess forms a part of tax and therefore, deduction for the same cannot be allowed under Section 37. Aggregation of Corporate guarantees - HELD THAT:- As we have accepted Assessee s contention that 0.60% be accepted as arm s length rate of corporate guarantee fee. Accordingly, given the facts and circumstances of the case, we accept the alternative contention of the Assessee and direct the TPO/Assessing Officer to recomputed the transfer pricing adjustment by taking rate of 0.6% as arm s length rate for corporate guarantee fee for all corporate guarantee given by the Assessee, (except for the corporate guarantees aggregating to USD 8,03,00,000/- given on behalf of wholly owned subsidiaries KEC Transmission LLC and KEC US LLC, USA in which case arm s length corporate guarantee fee shall be determined by adopting rate of 0.02%). X X X X Extracts X X X X X X X X Extracts X X X X ..... r Water & Electricity (CCWE) on of its AE KEC Global was at length without appreciating the fact the AE get benefited from the guarantee provided by the applicant, the AE was a newly floated entity, and the credit rating of the AE was very low. iv. On the facts and circumstances of the case, the Hon'ble CIT(A) was not justified in deciding that the cost recovery for providing guarantee for advance payment to CCWE was at arm's length itself as the assessee has recovered 0.93% from its AE, and ignored the benefit derived as a whole by the AE and also not appreciated the fact that this service will not be available to any third party by the assessee. v. On the facts and circumstances of the case, the Hon'ble CIT(A) was not justified in deciding that the performance guarantee provided to third party Le. Bahwan Engineering Company LLC on behalf of its AE i.e. KEC Global FZ LLC was not an international transaction without appreciating the fact that the transaction was of nature of tripartite agreement and the AE get benefited from the performance guarantee provided by the assessee, which was a facility provided by the assessee to its AE vi. On the facts and circumsta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... LLC USA was not an international transaction without appreciating the fact that the TPO has determined the benefits of the AE as ALP. iii. On the facts and circumstances of the case, the Hon'ble CIT(A) was not justified in deciding that the Corporate guarantee provided to ICICI Bank on behalf of its AE Le. KEC USA LLC & Transmission LLC USA was not an international transaction without appreciating the fact that the term "guarantee" clearly mentioned in Explanation of section 92B(1)(c) of the IT Act 1961 as an International Transaction. 4. Non-TP Issues i. The Ld. CIT(A) erred in deleting the addition in respect of Markto-market losses on foreign contracts outstanding at the end of the year under normal provisions of Income tax Act as well as while computing book profits u/s. 115JB of the Act failing to appreciate the Boards Instruction No. 3/2010 dated 23.3.2010 which has clarified that in cases where no sale or settlement has actually taken place and loss on MTM basis has resulted in reduction of book profits, such a notional loss would be contingent in nature and cannot be allowed to be set off against taxable income?" ii. The Ld. CIT(A) erred in d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Income Tax Rules in computing Book Profits section 115JB of the Act Ground No.3: On the facts and circumstances of the case the learned CIT(A) erred in not allowing deduction in respect of tax paid at foreign location." 5. The relevant facts in brief are that the Assessee is a leading Engineering, Procurement, and Construction (EPC) company. The Appellant is engaged in laying of power transmission lines, providing telecommunication infrastructure and tower testing services. The Appellant had project offices in India as well as outside India to execute the erection/installation portion of Transmission Line Projects. 6. The Assessee filed return of income for the Assessment Year 2013-14 on 30/11/2013 declaring total income of INR 24,88,63,040/-, which was revised to total income of INR 23,09,74,130/- vide revised return filed on 31/03/2015. The case of the Assessee was selected for regular scrutiny. During the assessment proceedings, the Assessing Officer noted that the Assessee had entered into international transactions with Associated Enterprises (AEs) and therefore, made a reference to the Transfer Pricing Officer (TPO) for computation of Arm's Length Price (ALP) under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 50,461 74,24,02,536 1,61,66,73,437 1,22,45,86,450 When guaranteed given 2010 2010 2012 2012 No. of days during the year which guarantee was given 365 334 332 243 Rate recovered - 0.60% 0.60% 0.60% Purpose Towards availing a loan from bank Towards availing a loan from bank Towards availing a loan from bank Towards availing a loan from bank 7.3. After examining the details of various guarantees given by the Assessee to its AEs, the TPO called for information from various banks under Section 133(6) of the Act. After analysing the information furnished by State Bank of India, Central Bank of India, Bank of Baroda etc., the TPO asked for further details/information from the banks regarding factors which affect the charging of bank guarantee fee in the context of guarantees given by Indian companies to it AEs outside India which are newly formed with low credit ratings and are not in a position to raise loans from banks on their own. After taking into consideration the replies received from various banks, the TPO concluded that the rates for bank guarantee fee charged by the banks vary from 1.10% to 3% per annum depending upon various factors. Thereafter, the TPO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... passed under Section 143(3) read with Section 144C(3) of the Act. 9. Being aggrieved, the Assessee preferred appeal before CIT(A) against the Assessment Order dated 29/12/2016. Before the CIT(A) it was contended on behalf of the Assessee that the transaction of guarantee was not an international transaction and that TPO had incorrectly arrived at arm's length rate of guarantee fee. The CIT(A) held that the transaction of guarantee was international transaction. However, the CIT(A) granted substantial relief to the Assessee by following the decisions of the Tribunal in the case of the Assessee for the Assessment Year 2011-12 [ITA No 6447/Mum/2016, dated 23/03/2021] and 2012-13 [ITA No 17 & 115/Mum/2018, dated 14/09/2020]. 10. Being aggrieved, the Revenue has challenged the order, dated 11/11/2021, passed by the CIT(A) before the Tribunal on the grounds reproduced in paragraph 2 whereas the Assessee has, not being satisfied with the relief granted by the CIT(A), preferred cross appeal on the grounds reproduced in paragraph 3 above. 11. We note that the Assessee has in Ground No. 1 challenged the order of CIT(A) contending that the transaction of corporate guarantee do not constit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lculated the arm's length interest that should have been paid on the advance/loan to arrive at transfer pricing adjustment of INR.6,06,09,173/-. In appeal preferred by the Assessee, the CIT(A) deleted the addition by placing reliance of the decision of the Tribunal in the case of the Assessee for the Assessment Year 2012-13 [ITA No. 17&115/Mum/2018, dated 14/09/2020] wherein it was held by the Tribunal as under: "4. Upon careful consideration, the undisputed position that emerges are that the advances have been given by the assessee to an entity in which it held 50% share. The assessee has entered into a Joint Venture (JV) agreement with an entity namely Edison Jehamo Power (PTY) Ltd. (EJP) on 25/11/2009 with respect to transmission line construction project. The assessee's proportionate share in the JV was 50%. From the financial statements of JV entity as placed on record, it is quite discernible that the accumulated losses of that entity, at yearend, stood at 98.26 Million Rands which are substantially funded out of joint venture partners' account amounting to 162.80 Million Rands. The assessee's contribution in the JV account is 41.12 Million Rands. The JV incurred losses of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spect of performance guarantees by placing reliance of the decision of the Tribunal in the case of the Assessee for preceding assessment years. The CIT(A) observed that the issue relating to transfer pricing adjustment on account of guarantee fee to be recovered by the Assessee from its AEs in relation to performance guarantee was recurring in nature and was decided in favor of the Assessee and against the Revenue in appeals for the Assessment Year 2010-11/2011-12 as identical ground raised by the Revenue regarding the benchmarking of the transaction of giving performance guarantee was dismissed. 19. On perusal of the decision of the Tribunal in the case of the Assessee for the Assessment Year 2010-11, 2011-12 and 2012-13 (placed at pages 76 to 148 of the paper-book), we find that two performance guarantee on behalf of KEC Global FZ, LLC, UAE to Chadian Company for Water & Electricity (CCWE) have been continuing since Financial Year 2009-10 relevant to Assessment Year 2010-11. 20. First performance guarantee of Euro 10,03,126/- was granted in 2009 while the Second performance guarantee of Euro 20,06,252/- was granted in August, 2009. Both the aforesaid performance guarantees were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uarantees were given by the Assessee to ICICI Bank, UK on behalf of its wholly owned subsidiaries KEC Transmission LLC and KEC US LLC, USA, for the purpose of arranging financing provided for the aforesaid overseas SPVs for utilization for the purposes of downstream acquisition of the business of SAE Towers Ltd. USA. According to the CIT(A), the issue was covered by the decision of the Tribunal in appeal preferred by the Revenue for Assessment Year 2012-13 [ITA No. 1115/Mum/2018, dated 14.04.2020]. Therefore, the CIT(A) restricted the arm's length corporate guarantee fee rate to 0.2% by following the aforesaid decision of the Tribunal. We concur with the decision of the CIT(A). The issues stands decided in appeal preferred by the Revenue for the Assessment Year 2012-13 wherein it has been held as under: "7.11 Coming to the benchmarking rate of 2% as adopted by Ld. TPO, the same do not convince us since a pertinent fact to be noted that both the AEs were subsidiaries of the assessee which were special purpose vehicle to enable certain acquisition on behalf of the assessee and the assessee would be the ultimate beneficiary of such acquisition. Therefore, the assessee's risk in such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Rs 1,97,10,128/-. (iii) Corporate guarantee given to Bank Muscat SAOG on behalf of Al Sharif Group and KEC Limited Co. of SAR 8,45,29,440/-: As per the order of the TPO, this corporate guarantee was given in 2012 for availing loan of Rs 1.22 45,86,450/- (SAR 8,45,29,440) from Bank Muscat SAOG. The recovered guarantee fee @ 0.6% of Rs 73,47,519/- The TPO determined the ALP at 2% and computed adjustment of Rs 89,57,934/- 7.1 Submission: The Appellant has made a common submission. It is submitted that corporate guarantee is not an international transaction The Appellant has also submitted that corporate guarantees were issued to enable AEs to avail credit facilities as a matter of commercial prudence primarily to protect the business interest of the group by fulfilling the shareholder's obligations. The Appellant has also claimed that non-charging of commission is justified where additional security is provided. In case of Al Sharif Group which obtained financing facility from SBI. Jeddah and Bank of Muscat, the banks obtained primary right over AEs contract receivables of project of Saudi Electricity company. While these receivables were security for the credit facili ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... B(1), it is for the assessee to show that there is no service or impact on income xx 7.2.1 As regards the benchmarking rate, the Appellant has already charged 0.6% as guarantee commission. The TPO has increased this benchmarking rate to 2% in all the 3 cases. The Appellant has submitted that benchmarking be done at 0.2% following the decision of the Hon'ble ITAT in its case in respect of benchmarking of corporate guarantee Issued by the Appellant to ICICI, UK on behalf of its AE KEC US LLC & KEC Transmission LLC The operative part of the decision is already. produced in Para 6.7. It is seen that the facts of 2 corporate guarantees are different. The 3 guarantees under consideration are for availing of regular credit facilities whereas credit facilities from ICICI, UK was for certain of which the Appellant was to be the ultimate beneficiary Therefore, the benchmarking rates cannot be same. The Appellant has already charged 0.6% rate which is based on a facility letter by its own bank, which is a good comparable. It is, therefore, held that no interference is called for in the benchmarking @ 0.6% done by the Appellant and the adjustments made by the TPO are deleted" (Emp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order of CIT(A) deleting the disallowance of INR 10,52,37,427/- made by the Assessing Officer while computing income normal provisions of the Act holding the same to be unrealized foreign exchange loss arising from foreign exchange contracts, and (b) the order of CIT(A) holding that the aforesaid amount of INR 10,52,37,427/- is not required to be added back to the profits as per Profit & Loss Account while computing Book Profits under Section 115JB of the Act read with Clause (c) of Explanation 1 thereto. 32. We note that the CIT(A) allowed the appeal of the Assessee on this issue by following the decision of CIT(A) for the Assessment Year 2012-13 as well as the decision of the Tribunal in the case of the Assessee for the preceding Assessment Years holding as under: "8.1 In the assessment order, the AO has noted that this amount is debited under the head other expenses. Before the AO, the appellant submitted that due to huge exports and foreign exchange transactions associated with foreign project, the Appellant has to hedge against forex losses. Therefore, loss if any on marked to market of such transaction is allowable business expenditure. Reliance was placed on Supreme Cour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Governor Ltd. (312 ITR 254). Also, the issue was stated to be covered in assessee's favor by the decision of Tribunal in assessee's own case for AY 2009-10. Similar view was taken by first appellate authority in AY 2010-11. 7.14 As evident from factual matrix itself, the issue is covered in assessee's favor by the decision of this Tribunal for AY 2009-10. In fact, the decision of learned first appellate authority for AY 2010-11 was under challenge before this Tribunal by the revenue vide ITA No. 5611/Mum/2015 order dated 10/07/2019 wherein the co-ordinate bench followed the order for AY 2009-10 and held that MTM losses on hedging contracts would be accrued losses and hence, an allowable expenditure. 7.15 Facts being pari-materia the same, we see no reason to deviate from the earlier stand of Tribunal in assessee's own case. Respectfully, following the same, both these grounds stands dismissed." 34. There is nothing on record to persuade us to take a view different from the consistent view taken by the Tribunal in the case of the Assessee for the Assessment Year 2009-10 to 2012-13. Accordingly, we dismiss Ground No. 4(i) & (ii) raised by the Revenue. Ground No. 4 (iii) to ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o (iii) raised by the Assessee are dismissed. Ground No. 2 & 3 40. Ground No. 2 raised by the Assessee is directed against the order of CIT(A) confirming the order passed by the Assessing Officer whereby the Assessing Officer had added the amount of INR 5,63,606/- disallowed by the Assessee under Section 14A of the Act read with Rule 8D of the Income Tax Rules, 1962 under normal provisions of the Act to the profits as per Profit & Loss Account while computing 'Book Profits' in terms of Section 115JB of the Act. The Ld. Authorised Representative for the Assessee appearing before us, under instructions, stated that the Assessee does not wish to pursue this ground on account of small amount involved. In view of the aforesaid, Ground No. 2 raised by the Assessee is dismissed as not pressed. In Ground No. 3 raised the Assessee has claimed that the CIT(A) erred in not allowing deduction for tax paid in foreign location. On perusal of grounds of appeal raised before CIT(A) we find that no such ground was raised before CIT(A). Ground No. 3 raised by the Assessee is dismissed as the same not arising from the order passed by the CIT(A) impugned by way of the present appeal. Assessment Y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he AO be directed to allow interest u/s. 244A for the period starting from the first day of April of the assessment year till the date of on which refund is granted." 42. The Assessee filed its return of income for the Assessment Year 2017-18 on 30/11/2017 which was revised on 30/03/2019. The case of the Assessee was selected for regular scrutiny. During the assessment proceedings, the Assessing Officer noted that the Assessee had entered into international transactions with Associated Enterprises (AEs) and therefore, made a reference to the Transfer Pricing Officer (TPO) for computation of Arm's Length Price (ALP) under Section 92CA(1) of the Act. 43. The TPO noted that the Appellant had reported, inter alia, into following international transactions: Sl. No Nature of transaction Amount (INR) Method 1 Corporate Guarantee (commission charge) 2,71,90,399 CUP Method 2 Corporate Guarantee (commission not charge) Nil Other Method 43.1. TPO noted that the Appellant had given guarantee on behalf of its foreign subsidiaries. However, in the Transfer Pricing Study Report (for short 'TPSR'), the Appellant had taken a position that providing guarantees to its AEs does not con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er Section 143(3) read with Section 144C(13) and 144B of the Act. 46. Being aggrieved, the Assessee has preferred the present appeal on the grounds reproduced in paragraph 41 above which are taken up hereinafter. 47. We have heard the rival submission and perused the material on record including the order passed by the lower authorities and the decision of the Tribunal relied upon by the Assessee. Ground No. 1 to 1.2 48. We do not find any merit in Ground No. 1 to 1.2 raised by the Assessee challenging the assessment order on the ground of violations of principles of natural justice. Perusal of the record shows that no objections were raised before the DRP to this effect. There is nothing on record to support the ground raised by the Assessee. Accordingly, Ground No. 1 to 1.2 raised by the Assessee are dismissed. Ground No. 2 to 2.4 49. Ground No. 2 pertains to transfer pricing adjustment of INR.13,40,33,405/- made in respect of corporate guarantee fee. The Assessee has contended that transaction of corporate guarantee does not constitute an international transaction, and has challenged the transfer pricing addition made by adopting 1.16% as arm's length rate of guarantee f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... charged by the Assessee from its AEs in respect of other corporate guarantees issued on behalf of (a) Al Sharif Group & KEC Ltd Company, (b) SEA Towers Mexico S De RL de CV Mexico and (c) SEA Towers Limited, USA. The Assessee has tried to justify not charging any corporate guarantee fee in respect of the aforesaid corporate guarantees by contending that (a) there was no risk element involved; (b) the Assessee was discharging shareholder obligations as financial incapacity of the AEs would have jeopardised the investment made by the Assessee; (c) credit facility secured for the AE was non-fund based, and (d) the corporate guarantees were granted on account of administrative requirements. It was contended on behalf of the Assessee that the Assessee gave corporate guarantee to Steal Force NV, Belgium aggregating to USD 30,00,000/- for the purpose of securing credit terms for its AE (i.e. SAE Towers Mexico S De RL de CV). Since no default was made by the in repayment, there was no credit risk of losses was borne by the Assessee. Corporate guarantee to EXIM Bank given on behalf of its AE (ie. SAE Towers Ltd) aggregating to USD 1,27,00,000/- were granted for the purpose of working capita ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of 1.16% determined by the TPO/Assessing Officer is high and should be reduced considerably. 55. We note that while the Assessee has sought rejection of the corporate guarantee fee rate of 1.16% adopted by the TPO/Assessing Officer on the ground of failure by the Assessing Officer to carry out comparability analysis taking into account the Function, Asset & Risk involved. However, the Assessee has itself not carried out any comparability analysis and has adopted the rate of 0.6% offered by the bank to the Assessee to benchmark the corporate guarantee fee in case of 3 corporate guarantees where recovery of guarantee fee has been made by the Assessee from the AEs. In case of the balance corporate guarantees where no recoveries have been made, the alternative contention of the Assessee is that the aforesaid rate of 0.6% may be closest to an internal CUP and therefore, the same may be adopted for benchmarking the transaction of corporate guarantee. The aforesaid alternative contention, in our view, merits consideration. Even for the Assessment Year 2013-14, in relation to some other corporate guarantees given by the Assessee on behalf of Al Sharif Group & KEC Ltd. Company for similar ..... X X X X Extracts X X X X X X X X Extracts X X X X
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