If Transfer pricing adjustment on account of corporate guarantee fee made during years under consideration are bad in law, then addition made by AO could be deleted.

The above appeals filed by the Revenue and cross objections filed by the assessee are directed against the order of the Commissioner of Income Tax (Appeals)- 20, New Delhi pertaining to assessment years 2008-09, 2009-10 and 2010-11. All these appeals and cross objections pertain to same assessee and were heard together. Hence these are being disposed of by this common order for the sake of convenience and brevity.

2. In its cross objections, the assessee has challenged the transfer pricing adjustment considering corporate guarantee as international transaction and since this challenge goes to the root of the matter, we decided to proceed with the cross objection first.

3. Briefly stated, the facts of the case are that the assessee group is in the business of manufacturing yarn and markets its products under the CLC brand name. The group is headquartered at New Delhi and has major presence in India, Uzbekistan, Czech Republic, Germany and Turkey with world class manufacturing facilities coupled with excellent networks of offices.

4. Pursuant to a reference received from the Assessing Officer to determine the ALP u/s 92CA(3) (of Income Tax Act, 1961) [hereinafter referred to as 'the Act' for short] in respect of international transaction entered into by the assessee during the year under consideration, the TPO issued a notice u/s 92C (of Income Tax Act, 1961). The documentation prescribed u/r 10D (of Income Tax Rules, 1962) of the Income tax Act/Rules and other related details were called for and examined by the TPO.

5. While scrutinizing the balance sheet of the assessee, it was found that the assessee has given corporate guarantee to various banks and financial institutions and the same read as under:

S.No. Description F.Y.2008-09 (Rs)

1.Corporate Guarantee given to Tashkent Toytepa Textile for deferred payment of purchase consideration on behalf of Spentex Tashkent Toytepa LLC Current Year USD 48,600,000 2,45,72,16,000 Corporate Guarantee given to CVCI

for investment in Spentex (Netherlands) B.V. Current Year USD 20,00,000 10,11,20,000

Corporate Guarantee given to Lehman Brothers and SBI- Tokyo Branch for loan to Spentex (Netherlands) B.V. Current Year USD 21,650,704. 1,09,46,59,594

6. The TPO found that the assessee has not charged any compensation on the corporate guarantee provided on behalf of its AEs. The TPO further found that these transactions have not been shown as international transaction and bench marked. The TPO was of the firm belief that providing corporate guarantee for AEs is an independent class of international transaction and has to be bench marked by applying CUP as the most appropriate. The assessee was accordingly show caused to explain as to why corporate guarantee given should not be considered as international transaction and bench marked by using CUP as most appropriate method. The assessee filed detailed reply, the relevant part of which reads as under: “The assessee has given 3 corporate guarantees in respect of the associated enterprises as under:

(i) Assessee's subsidiary Spentex Tashkent Toyepa LLC (STTL) had entered into an assets Sale and purchase agreement with Tashkent Toyepa Textile LLC, a state owned spinning company in Uzbekistan, on July 21, 2006 for purchase of its assets under the privatisation programme of Government of Uzbekistan. The payment consideration was spread over 4 years. STTL was a Special Purpose Vehicle for the assessee’s newly started Uzbekistan operations and the company was incorporated on 24.7.2006. Since STTL was only floated afresh, the Government of Uzbekistan required a letter of comfort from the assessee for deferred purchase consideration and hence, there was a corporate guarantee extended by the assessee. This is the same activity as in case of personal guarantee given by a Promoter Director for loan taken by his company for which he otherwise does not charge anything. Without providing this corporate guarantee, the assessee could not expand business and the business decision was taken on commercial expediency. Further, the assessee did not incur any cost in providing corporate guarantee and the subsidiary company did into benefit anything by way of reduced interest costs. On the contrary, the assessee benefited significantly by way of bigger market for its products.

(ii) Further, to part finance the deal, the assessee obtained loan from Lehman Brothers and SBI-Tokyo Branch for STTL and provided corporate guarantee to them. Thus, this amount was already included In the guarantee figure provided to the Government of Uzbekistan and need not to be included again.

(iii) The assessee had given corporate guarantee to Citi Venture Capitalist, for investment made by them in Spentex Netherlands, 3. V. As already explained supra, the same is in the nature of shareholder activity and does not result in an international transaction, per se, no adjustment is called for.

The Hyderabad Bench of Tribunal in the case of Four Soft Limited: ITA No. 1495/Hyd/2010, vide decision dated 9.9.2011 has held that issuance of corporate guarantee, per Se, is not an international transaction and is incidental to the business of the assessee. Hence, no TP adjustment was deemed proper by the IT AT Bench”.

7. The TPO was not convinced with the reply of the assessee and was of the opinion that by providing bank guarantees to AEs, the assessee has exposed itself to a big risk and has not charged any amount from the AEs. After discarding the reply/submissions of the assessee, the TPO made upward adjustment of Rs. 9,79,00,282/-.

8. Pursuant to the order of the TPO, the AO framed assessment u/s 143(3) (of Income Tax Act, 1961) r.w.s 144C (of Income Tax Rules, 1962) of the Act and made addition of Rs. 9,79,00,282/-. 9. The assessee carried the matter before the CIT(A) and strongly contended that the bank guarantee does not come within the purview of international transaction and further pointed out that the bank guarantee fee bench marked by the TPO was excessive. In support, reliance was placed on various judicial decisions of the Tribunal.

10. After considering the facts and submissions and after considering the judicial decisions relied upon by the assessee, the CIT(A) treated the bank guarantee as international transaction but directed to compute the same @ 1% instead of 4.25%.

11. Aggrieved by this, the Revenue is in appeal before us and the assessee has preferred cross objection. As mentioned elsewhere, the issues raised by the assessee in its cross objection go to the root of the matter. The ld. counsel for the assessee was heard at length. Rebuttal by the ld. DR was accordingly considered and judicial decisions relied upon were perused.

12. The bone of contention is the amendment brought in the Act in section 292B (of Income Tax Act, 1961) which defines ‘international transaction’ for the purpose of transfer pricing legislation. Explanation to section 92B (of Income Tax Act, 1961) was inserted w.r.e from 1.4.2002 i.e. right from the time of inception of transfer pricing legislation in India.

13. The coordinate bench of the Tribunal at Delhi in the case of Bharti Airtel Ltd Vs. ACIT in ITA No. 5816/DEL/2012 vide order dated 11.03.2014 had an occasion to deal with the issue of classification of corporate guarantee as international transaction. The relevant findings of the Tribunal read as under:

(i) A transaction between two enterprises constitutes an “international transaction” u/s 92B (of Income Tax Act, 1961) only if it has a bearing on profits, incomes, losses, or assets of such enterprises”. Even the transactions referred to in the Explanation to s. 92 B, which was inserted with retrospective effect (which includes giving of guarantees under clauses (c)), should also be such as to have a bearing on profits, incomes, losses or assets of such enterprise;

(ii) The onus is on the revenue to demonstrate that the transaction has a bearing on profits, income, losses or assets of the enterprise. The said impact has to be on real basis, even if in present or in future, and not on contingent or hypothetical basis. There has to be some material on record to indicate, even if not to establish it to hilt, that an intra AE international transaction has some impact on profits, income, losses or assets; (iii) When an assessee extends assistance to the AE, which does not cost anything to the assessee and particularly for which the assessee could not have realized money by giving it to someone else during the course of its normal business, such an assistance or accommodation does not have any bearing on its profits, income, losses or assets, and, therefore, it is outside the ambit of international transaction u/s 92B(1) (of Income Tax Act, 1961)”.

14. A perusal of the aforesaid finding shows that no transfer pricing adjustment is to be made in case of no diversion of profits out of India. The flagship company of the assessee has accumulated brought forward losses to the tune of Rs. 290 crores and subsidiaries are also in heavy losses. Therefore, it cannot be said that there was any intention of diversion of profits out of India. Further, we find that the assessee has not incurred any cost in providing corporate guarantee.

15. A similar view was taken by the Ahmedabad Bench of the Tribunal in the case of Micro Ink Limited Vs. ACIT in ITA No. 2873/Ahd/2010. In this case, the Tribunal followed the decision of the Delhi Bench of the Tribunal. 16. The Chennai Bench of the Tribunal in the case of Redington India Ltd Vs. ACIT [2014] 49 TAxmann.com 146 has held as under:

(i) A transaction between two enterprises constitutes an “international transaction” u/s 92B (of Income Tax Act, 1961) only if it has a bearing on profits, incomes, losses, or assets of such enterprises”. Even the transactions referred to in the Explanation to s. 92 B, which was inserted with retrospective effect (which includes giving of guarantees under clauses (c)), should also be such as to have a bearing on profits, incomes, losses or assets of such enterprise;

(ii) The onus is on the revenue to demonstrate that the transaction has a bearing on profits, income, losses or assets of the enterprise. The said impact has to be on real basis, even if in present or in future, and not on contingent or hypothetical basis. There has to be some material on record to indicate, even if not to establish it to hilt, that an intra AE international transaction has some impact on profits, income, losses or assets;

(iii) When an assessee extends assistance to the AE, which does not cost anything to the assessee and particularly for which the assessee could not have realized money by giving it to someone else during the course of its normal business, such an assistance or accommodation does not have any bearing on its profits, income, losses or assets, and, therefore, it is outside the ambit of international transaction u/s 92B(1) (of Income Tax Act, 1961).” 17. Similar views were taken by the Mumbai Bench of the Tribunal in the case of Videocon Industries Ltd Vs. ACIT in ITA No 6145/MUM/2012 and Marico Ltd Vs. ACIT reported at 70 Taxmann.com 214.

18. The Coordinate Bench of the Tribunal at Hyderabad in the case of Vivimed labs Ltd Vs. DCIT in ITA No. 404 and 479/Hyd/2015 has held that “However, the amendment to section 92B (of Income Tax Act, 1961) by the Finance Act, 2012 can only be prospective and not retrospective as held in the case of Siro Clinpharm Private Ltd Vs. DCIT ITA No. 2618/MUM/2014. This provision is applicable from assessment year 2013-14 onwards. Hence, addition of corporate guarantee in this year is deleted.”

19. Considering the plethora of decisions of the coordinate benches as discussed hereinabove, we are of the opinion that the transfer pricing adjustment on account of corporate guarantee fee made during the years under consideration are bad in law. Respectfully following the decision of the coordinate benches [supra] we direct the Assessing Officer to delete the additions made on account of transfer pricing adjustments relating to corporate guarantee fee. Ground No. 1 in all the cross objections are allowed.

20. Since we have decided the issue on the point of law, we do not find it necessary to dwell into the merits of the case. Accordingly, the appeals filed by the Revenue are dismissed.

21. In the result, the appeals of the Revenue are dismissed and the cross objections of the assessee are allowed.

The order is pronounced in the open court on 17.05.2018.

Sd/- Sd/-

[SUDHANSHU SRIVASTAVA] [N.K. BILLAIYA]

JUDICIAL MEMBER ACCOUNTANT MEMBER

Dated: 17th May, 2018