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TMI Blog2023 (12) TMI 1312X X X X Extracts X X X X X X X X Extracts X X X X ..... erable and therefore substantial part of those advances are written off in the financial year 2016 17. Therefore, no interest could be charged. The learned transfer pricing officer held that no independent party would have given such advance to any third-party and therefore the interest is required to be charged. We find that in KEC International Ltd. Versus DCIT-5 (1) (1) , Mumbai And (Vice-Versa) [ 2020 (9) TMI 1101 - ITAT MUMBAI ] wherein as per ground number 1 transfer pricing adjustment were made on account of interest on business advances, the coordinate bench has deleted the adjustment as held that advances were more in the nature of capital contribution and by advancing the same, the assessee had protected its own business interest which is evident from the financial statements of JV. 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. It could not be said that JV entity derived / gained c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .r. 8D in computing the book profit under section 115JB - HELD THAT:- We find that this issue is squarely covered in favour of the assessee by the decision of special bench in case of ACIT versus Vireet investments private limited [ 2017 (6) TMI 1124 - ITAT DELHI ] Even otherwise it is stated that assessee has not received any exempt income during the year and therefore there is no question of making any disallowance under section 14 A of the income tax act even in the normal computation of total income and therefore the same also cannot be imputed while computing the book profit u/s 115JB of the act. - Shri Prashant Maharishi, Am And Ms. Kavitha Rajagopal, Jm For the Assessee : Shri Vijay Mehta, AR. For the Revenue : Shri Akhtar Hussain Ansari, DR. ORDER PER PRASHANT MAHARISHI, AM: 01. These are the cross appeals filed by KEC International Limited (assessee /appellant) (ITA No.1852/Mum/2022) and the Dy. Commissioner of Income Tax, 5(2)(1), Mumbai (the learned Assessing Officer) (ITA No.1883/Mum/2022) against the appellate order passed by The Commissioner of Income-tax (Appeals)-56, Mumbai [the learned CIT (A)] for A.Y. 2014-15, wherein the appeal filed by the assessee against th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cumstances of the case and in law, the Ld CIT (A) erred in deleting an upward Transfer Pricing adjustment on account of interest on advance given to AE of Rs. 13.90.72.569/- without considering that there is cost associated with these advances to the assessee, therefore the interest need to be charged. Corporate guarantee: (i) Whether on the facts and circumstances of the case, the Hon'ble CIT(A) is right in not recognizing the facts of the case that the assessee has given corporate guarantee, as a co-guarantor, on behalf of its AE i.e. Al Sharif Group KEC Ltd. Company KEC US LLC KEC Transmission LLC, thereby exposing itself to a lending business; risk, foreign exchange rate risk, country specific risk as well as the 'single customer' risk, without charging any fee for such guarantee at ALP which the assessee would have done, had it stood guarantee to any third party uncontrolled conditions as section 92F(ii)? (ii) Whether on the facts and circumstances of the case, the Hon'ble CIT(A) is right in holding that the fee for the guarantee issued by the instant assessee for the loans availed by KEC US LLC KEC Transmission LLC from banks should be estimated at 0.20% placi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lowed to be set off against taxable income. 2. On the facts and circumstances of these, whether the CIT(A) has erred in deleting the addition on account of realized Foreign exchange (Mark to Market) under normal provisions as well as the pose of compute book profit u/s 115JB of the Act ignoring the CBDT ruction no. 03/2010 dated 23.03.2010 when it is judicially acknowledged that CBI circulars constitute important clarifications of legislative intent. 04. Brief facts of the case shows that assessee is a company engaged in the business of designing, fabrication, galvanizing and testing of transmission line towers and telecom, supply and erection of sub infrastructure station structures, overhead equipment s for Railway electrification. During the year, the assessee has also started manufacturing of power cables, optical fiber cables, Jelly filled telephone cables, etc. 05. Assessee filed its return of income on 30th November, 2014, which was revised on 31st March, 2016, at a total income of ₹239,13,35,680/-. The return of income was selected for scrutiny. 06. As assessee has entered into several international transactions with its Associated Enterprises, reference was made to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ful debts and also by an addition under Section 14A of the Act. 011. Assessee aggrieved with that assessment order preferred an appeal before the learned CIT (A). i. The learned CIT (A) with respect to the transfer pricing adjustment of interest on advances given to its Associated Enterprises amounting to ₹30,90,72,569/-, the learned CIT (A) held that the issue is squarely covered in favour of the assessee by the decision of the co-ordinate bench for A.Y. 2012-13, wherein it was held that the advances given by the assessee cannot be put into category of loan as the advances were given towards the fulfillment of assessee s obligation of being joint venture partner to avoid financial incapacitation of the joint venture. Accordingly, the transfer pricing adjustment of ₹13,40,72,569/- was deleted. ii. On the issue of performance guarantee adjustment of ₹2,87,730/- and corporate guarantee adjustment of ₹14,69,12,705/-, the learned CIT (A) directed the learned Assessing Officer to apply corporate guarantee rate of 0.2% based on the decision of the co-ordinate Bench in assessee s own case for A.Y. 2012-13 in ITA No.115/Mum/2018, dated 14th September, 2020, with res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arm slength price of the guarantee commission at the rate of 0.20 percentage. He further stated that the guarantee was given in earlier years and the coordinate bench in assessee s own case for assessment year 2011 12, 2012 13 and 2013 14 and 2017 18 has confirmed the arm s-length price of the guarantee commission at the rate of 0.20%. Therefore in the earlier years as well as in the subsequent years the coordinate bench has decided this issue upholding the guarantee commission rate at the rate of 0.20%. ii. With respect to guarantee given by the assessee to the state bank of India, Jeddah for working capital loans availed by its associated concern Al Sharif group and KEC limited company of ₹ 798,558,730/ was benchmarked by the assessee adopting the corporate guarantee rate of 0.60%. The learned transfer pricing officer computed the arm s-length price at the rate of 2% and therefore for differential sum and adjustment of ₹ 10,585,431/ was made. The learned CIT A relying on the decision of the coordinate bench in assessee s own case for assessment year 2013 14 accepted the benchmarking at the rate of 0.60%. iii. To the same associated enterprises assessee has also given ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te order wherein the learned CIT A has allowed the deletion of the adjustment based on the decision of the coordinate bench in assessee s own case for assessment year 2012 13. He extensively read that and submitted that the issue is decided by the learned CIT A for the reason that advances cannot be put on the category of loan as considered by the learned transfer pricing Officer as the advances were made towards the fulfilment of the assessee s obligation of being a joint-venture partner to avoid financial incapacitation of the joint venture. He submits that this issue is squarely covered in favour of the assessee by the decision of the coordinate bench in assessee s own case for assessment year 2012 13. viii. Coming to the third issue of corporate adjustment where the learned CIT A deleted the addition on account of unrealised foreign exchange loss on Mark to market basis under the normal provisions as well as for the purpose of computation of the book profit under section 115JB of the act where the learned assessing officer s claim is that same is against the instruction number 03/2010 dated 23/3/2010. He specifically referred to paragraph number 7 of the appellate order and sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ein 0.6% of the guarantee fee is considered to be at arm s-length price. He submitted that there is no benchmarking and the learned CIT A has also followed that order and therefore same is not sustainable without fresh benchmarking. ii. On the issue of advance provided to the associated enterprises in South Africa the learned departmental representative submitted that assessee has advanced loan of ₹ 863,645,539 on various dates. Assessee has not charged any interest on the same and therefore the assessee should have charged interest thereon, as no independent party would have paid such an amount of capital financing transaction without interest. He submits that the assessee has stated that the amount advanced to the joint-venture was to meet the business requirement of the associated enterprises which was facing cash deficit to an enormous losses from the Project of the JV and that the transaction was a matter of business expediency. He submitted that this could not be a consideration for not charging interest on the advance given by the assessee. Therefore the learned transfer pricing officer based on the Bloomberg data determined interest rate at the rate of 15.52% for fina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be charged it can be very negligible in the given scenario. We find that interest saving approach is the maximum guarantee fee that can be charged. The coordinate bench in assessee s own case in earlier years has upheld the higher rate of corporate guarantee fee as arm s-length price. 018. Coming to the first ground of appeal of the learned assessing officer on the issue of interest on advances given to associated enterprises, we find that the assessee has disclosed the international transaction of advances given (outstanding balances) of ₹ 863,645,534/ to its joint-venture entity and adopting Other method as the most appropriate method did not charge any interest. The facts show that the assessee has advanced loans to its associated enterprises in South Africa and assessee has not charged any interest. There is joint-venture entity in South Africa of the assessee and a South African entity wherein share of profit of each of the members is 50%. This JV was awarded the contract for construction of transmission lines in South Africa. The assessee manufactures and supplies transmission towers to joint-venture. The assessee being one of the JV partner advanced a sum of ₹ 86 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsidered the arguments advanced by both the representatives and perused relevant material on record including documents placed in the paper-book. We have also deliberated on various judicial pronouncements as cited before us during the course of hearing. Our adjudication to the subject matter of appeal would be as given in succeeding paragraphs. 2.3 Briefly stated, the assessee being resident corporate assessee is stated to be engaged in the business of designing, fabrication, galvanizing and testing of transmission lines telecom towers, supply and erection of sub-station structures and overhead equipment for railway electrification and managing infrastructure sites for telecommunication services. The assessment for year consideration was framed u/s 143(3) r.w.s. 144C(3) on 31/03/2016 wherein the income was determined at ₹ 251.41 Crores after certain additions / disallowances / adjustments as against returned income of ₹ 185.05 Crores e-filed by the assessee on 29/11/2012 which was later on revised to ₹ 198.26 Crores. However, during assessment proceedings, the assessee furnished revised computation of total income reflecting income of ₹ 229.71 Crores. 2.4 S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s advances to fulfil the obligations of the assessee as a JV partner, the assessee has not charged any interest on the said advance. It was also submitted that relationship on account of advancing funds could not be considered in isolation without considering crucial business scenarios and expediency. 2.7 However, the aforesaid submissions could not convince Ld. AO and therefore, internal CUP as proposed by the assessee was rejected since loans taken by the assessee from Bank were secured loans and guaranteed by the assessee himself and therefore, the same could not constitute as internal CUP. 2.8 Since the assessee did not offer any suo-moto TP adjustment, the provisions of Sec. 92CA(3)(a) (c) were invoked and Ld. AO proceeded to benchmark the same against appropriate rate. Finally, it was held that the interest should be charged at the rates applicable for fixed rates loan. The benchmarking was to be done on the basis of LIBOR plus some spread. Adopting Bloomberg database, the benchmark rates were held to be 15.36% for FY 2010-11 11.29% for FY 2011-12. Applying the said rates to opening advances and fresh advances, net TP adjustment thus proposed worked out to be ₹ 245.43 L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re-existing liability to make such advances to JV and the business interest of the assessee would have been adversely impacted by not making such advances. The advances were more in the nature of capital contribution and by advancing the same, the assessee had protected its own business interest which is evident from the financial statements of JV. 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. 5. The assessee s appeal stands allowed in terms of our order. 019. As there is no change in the facts and circumstances of the case, and the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case, the Ld.CIT(A) was not justified in deciding that the performance guarantee provided to third party i.e. 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 circumstances of the case, the Ld.CIT(A) was not justified in deciding that the performance guarantee provided to third party i.e. 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 TPO has determined the benefits of the AE as ALP. vii. On the facts and circumstances of the case, the Ld.CIT(A) was not justified in deciding that the performance guarantee provided to third party i.e. 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 term guarantee clearly mentioned in Explanation of section 92B(l)(c) of IT Act 1961 as an Inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . xiv. On the facts and in the circumstances of the case, the Ld CIT(A) erred in holding that the mark to market loss arising on the foreign exchange contracts which were outstanding as at the year end, is an accrued loss and is not contingent, unascertained or notional in nature and hence, no adjustment could be made to the book profit under clause (c ) of the Explanation (1) to section 115JB(2). As evident, the grounds raised by revenue are related with addition arising out of TP adjustment against performance guarantee and corporate guarantee given by the assessee on behalf of its AE. In ground nos. (xiii) (xiv), the revenue has assailed the action of Ld.CIT(A) in treating the Market-to-mark (MTM) losses on forex contracts to be an accrued loss. 6.2 The Ld. AR, at the outset, submitted that substantial issues of revenue s appeal are covered in assessee s favor by the earlier decision of this Tribunal for AY 2010-11, ITA No.5611/Mum/2015 order dated 10/07/2019 and therefore, the same view may be taken in this year. The copy of the same has been placed on record. The Ld. DR could not controvert the said position but supported the adjustments proposed by Ld. TPO. 6.3 In the above b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as preferred to follow the stand taken in AY 2010-11. Aggrieved, the assessee is under further appeal before us. 6.6 At the outset, the adjustment, as proposed by Ld. TPO, could be tabulated in the following manner: - Performance Guarantees: Name of Borrower AE KEC Global FZ LLC Ras Ul Khaimah KEC Global FZ LLC Ras Ul Khaimah KEC Global FZ LLC Ras Ul Khaimah SAE Tower Holding LLC USA Country UAE UAE UAE USA Bank Name and Country Bank of India -India Bank of India India N.A. Royal Bank of Scotland - India Whether amount borrowed by AE from third party without corporate guarantee No No No Yes Amount guaranteed 68160907 136321814 2239650902 34652829 Loan Amount availed N.A. N.A. N.A. N.A. When guarantee given 2009 2009 2009 2010 No of days during the year which guarantee was given 365 365 365 365 Rate recovered 0.60% 0.60% - 0.60% Purpose Towards performance of contract Towards advance payment made by customer Towards performance of contract Towards performance of contract Guarantee fee charged 408,965 817,931 207,917 ALP Guarantee fee 1.00% 1.00% 1.00% 1.00% ALP Guarantee fee (Rs.) 681,609 1,363,218 22,396,509 346,528 Adjustment 272,644 545,287 22,396,509 138,611 Corporate Guarantees ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... recovered from the AE, no further adjustment would be required. Applying the said principle to year under consideration, we find that the assessee has charged commission in accordance with the bank s sanction letter and therefore, no further adjustment, as proposed by Ld. TPO, would be justified. Accordingly, these grounds stand dismissed. 7.2 Ground Nos. (iii) (iv) are related with adjustment arising out of guarantee for advance payment provided by assessee to Chadian Company for Water Electricity (CCWE) on behalf of its AE KEC Global, FZ LLC for ₹ 13.63 Crores. The assessee has given a bank guarantee to its wholly owned subsidiary company (KEC Global, FZ LLC), to guarantee the advance payments by assessee to its AE towards a contract to be executed by the AE. The bank guarantee was given by Bank of India. The bank utilized the guarantee facility sanctioned to assessee while sanctioning bank guarantee to assessee s AE. The bank charged a guarantee commission of 0.60% from assessee and the said rate was recovered from its AE. The Ld. TPO estimated the same @1%. We find that this issue is contained in paras 8.1 to 11 of the cited decision of Tribunal in assessee s own case for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e as contained in Ground Nos. (i) (ii) of the revenue s appeal. Following the same principle, we hold that the fees charged by the assessee was at Arm s Length Price. Therefore, the impugned order would not require any interference on our part. These grounds stand dismissed. 7.5 Ground Nos. (x) to (xii) arises out of corporate guarantees provided by the assessee on behalf of its 2 AEs namely KEC Transmission LLC, USA and KEC US LLC, USA. The corporate guarantees were given to ICICI Bank, UK to secure the finances provided by the said bank to two of assessee s AEs. The said financing was stated to be utilized for the purpose of downstream acquisition of the business of SAE Towers Ltd., USA. The assessee submitted that for the aforesaid purposes, a special purpose vehicle (SPV) i.e. KE US LLC was formed to facilitate KEC to make downstream acquisition of business in USA. The guarantee was stated to be wholly and exclusively for the purpose of facilitating the assessee and hence, it was not a case where any services were rendered to the SPV in any manner. Rather SPV provided services to KEC by way of facilitating the downstream acquisition. Therefore, no fees were charged against the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r than the rating of the guaranteed, it was natural that rate charged by the bank from the guarantor would be different in comparison to situation where the guarantee was provided to the guaranteed. Therefore, the fees charged by the bank from the holding company could not constitute internal CUP for charging the rate from AE without proper adjustment. Since the rates charged by the banks to Indian companies ranged between 1.10% to 3% depending upon various factors, the ALP rate would be between 1.5% to 3.5%. Since the loan was taken for business purposes, the appropriate rate would be 2%. Accordingly, the transactions were benchmarked @2% and adjustments were proposed. The TP adjustments, thus proposed, were incorporated in the assessment order. Upon further appeal, Ld. CIT(A) directed Ld. AO to apply the appellate decision dated 28/07/2016 for AY 2011-12. 7.7 The perusal of appellate order for AY 2011-12, as placed on record, would show that Ld. CIT(A) observed that there was no cost element involved in the transaction of issuance of corporate guarantee. The assistance provided by the assessee to its AE would not have any bearing on profits, incomes, losses or assets of the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecured obligation and undertake with finance party that whenever either borrower does not pay the amount as and when due under or in connection with any finance document, the guarantor will immediately on demand by the bank, pay that amount as it was the principal obligor in respect of that amount. The AEs were stated to be Special purpose vehicle with a view to enable the assessee in downstream acquisition of the business of an entity namely SAE Towers Ltd., USA. The assessee has not charged any fees from its AEs in providing the corporate guarantee, inter-alia, by submitting that no cost was involved and the stated transactions would have no bearing on profits, incomes, losses or assets of the assessee. However, upon perusal of terms of corporate guarantee deed executed by the assessee in favor of the bank, as placed on record, we find that in case of payment default, the assessee was obligated to pay the amount demanded by the bank as if it was the principle obligor in respect of that amount. The liability of the assessee extended to the guaranteed amount of 110 Million US Dollars. In the event of default, the assessee as a guarantor, was liable to pay without demur or protest t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ered by the decision of the coordinate bench in assessee s own case wherein the guarantee fees with respect to various guarantees where the assessee has recovered the guarantee commission at the rate of 0.6% was upheld, therefore all these guarantees are continuing guarantee from the earlier years and there is no change pointed out before us in the functions, assets and risk of the parties or any change in the economic conditions, respectfully following the decision of the coordinate bench we confirm the order of the learned CIT A. 022. With respect to the financial guarantee given to ICICI bank United Kingdom on behalf of keys the transmission LLC and KC US LLC (whole owned subsidiary of the assessee), no guarantee fee was charged, the learned CIT A following the decision of the coordinate bench in assessee s own case has upheld the arm s-length guarantee fees of 0.20%. As the learned departmental representative could not point out any change in the facts and circumstances of the case as well as any variation in the functions, assets and risk of the parties or change in economic conditions and further as it is a continuing guarantee from earlier years, respectfully following the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 025. Therefore, respectfully following the decision of the coordinate bench in assessee s own case we also dismiss ground number 3 of the appeal of the learned assessing officer and uphold the order of the learned CIT A. 026. Coming to the remaining grounds of appeal of assessee, as per ground number 2 the learned CIT A has confirmed the addition of ₹ 93,145/ paid by the learned assessing officer under section 14 A of the income tax act read with rule 8D of the income tax rule in computing the book profit under section 115JB of the act. We find that this issue is squarely covered in favour of the assessee by the decision of special bench in case of ACIT versus vireet investments private limited 165 ITD 27. Even otherwise it is stated that assessee has not received any exempt income during the year and therefore there is no question of making any disallowance under section 14 A of the income tax act even in the n ..... X X X X Extracts X X X X X X X X Extracts X X X X
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