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Income Tax Appellate Tribunal, “J” BENCH,
Before: SHRI PRASHANT MAHARISHI, AM & SHRI RAHUL CHAUDHARY, JM
is filed by Nipro Corporation, Japan (the assessee / appellant) for A.Y. 2017-18, against the assessment order passed under Section 143(3) read with section 144C(13) of the Income-tax Act, 1961 (the Act), dated 27th May, 2022, by the Dy. Commissioner of income Tax,
Assessee is aggrieved and has raised following grounds of appeal:-
“Issue no. 1-Debt/Corporate guarantee fees taxed in India
The learned DCIT, Int. Tax-3(3)(1). Mumbai (referred to as AO) erred in law and on facts in taxing alleged arm's length Debt/Corporate guarantee fees of Rs. 2,70,84,735/- in India under "Article 22: Other Income" of the DTAA between India and Japan.
2. The learned DRP Panel-2, Mumbai (referred to as DRP Panel) and the learned AO erred in law and on facts in not appreciating that as per "Article-7: Business Profits" of DTAA between India and Japan, in the absence of PE in India, debt/corporate guarantee fees charged to Indian AE are taxable only in Japan.
3. The learned AO erred in law and on facts in taxing alleged arm's length Debt/Corporate guarantee fees of Rs. 2,70,84,735/- in India under "Article 22: Other Income" of the DTAA between India and Japan
The appellant craves leave to add/modify/ delete / amend all / any of the grounds of appeal.
Issue no. 2-TP adjustment in Interest on External Commercial Borrowings
5. The learned DRP Panel and the learned AO erred in law and on facts in deciding the arm's length rate of Interest charged on External Commercial Borrowing (ECB) by appellant to Indian AE @ SBI prime lending rate (PLR) of 14.05% instead of 10.50% as charged by appellant. As such, learned I-T authorities erred in law and on facts in computing arm's length amount of Interest charge on ECB at Rs. 3,36,33,234 instead of Rs. 2,51,35,157 and hence proposing upward adjustment of Rs. 84,98,077.
6. The learned IT authorities erred in law in not appreciating that, if the rate charged by appellant has to be compared, it is has to be done with the rates prevalent in Japan as assessee is a tax-resident of Japan. The learned 1-T authorities failed to understand that, assessee's rate of charging is at arm's length if rightly compared with prevalent rates in Japan.
7. The learned TPO and the learned DRP Panel erred in law in not appreciating that once the international transaction is at arm's length from AE's point of view,
The learned AO erred in law and on facts in making double addition of Interest on ECB amounting to Rs. 28,64,302 in the appellant's assessed income charged by appellant on JPY denominated loan given to AE (Nipro Pharma packaging India Pvt. Ltd.).
10. The appellant craves leave to add/modify/delete/amend all/any of the grounds of appeal.”
Brief fact of the case is that assessee is a company incorporated in Japan, engaged in the business of manufacturing of medical equipments.
For AY 2017-18, Assessee filed its return of income on 29th 04. November, 2017, at a total income of ₹2,80,77,580/-. In the computation of total income all these income is a disclosed under the head income from other sources. The assessee offered income of ₹ 78,126/– being interest received from Nipro India Corporation private limited being income offered for taxation as per the Double Taxation Avoidance Agreement rate at the rate of 10%. Accordingly tax of ₹ 7813/– was determined. Assessee has also received interest of ₹
Return of income was picked up for scrutiny for verification of international transaction in respect of lending or borrowing of money as per transfer pricing risk parameters. The notice under Section 143(2) of the Act was issued on 9 August 2018.
As the assessee has entered into an international transaction, reference was made to the learned Transfer Pricing Officer for determination of Arm's Length Price of international transaction.
Assessee has entered in to following international transaction of corporate guarantee over and above the interest disclosed in the return of income, which are in dispute :-
Sr Transa Associate Amount Most Method of No ction d Approp benchmarking Enterpris riate e Method
1 Corpor Nipro Guarantee Other Mizhuo bank ate India Fees of method rates Guaran Corporati 45,16,626/- tee on Pvt being Ltd 01.10% of Guarantee Amount
2 Corpor Nipro Guarantee ate Pharma Fees of Rs Guaran Packagin 360123/- tee g Pvt Ltd being 0.10 % of Guarantee Amount
3 Corpor Nipro Guarantee ate Tubes Fees of Rs Guaran Glass 540198 tee India p being 0.10 Ltd % of Guarantee
In form number 3CEB dated 29/11/2017, assessee in serial number 15 with respect to particulars in respect of transaction in the nature of guarantee has disclosed the above three transactions. Corporate guarantee fee is received on the same by the assessee of ₹ 5,416,947/– has not been offered for taxation in the return of income. Thus the assessee has disclosed this as international transaction but the above guarantee fee income is stated to be not chargeable to tax in the hands of the assessee for the reason that it is chargeable to tax as business income and as the assessee does not have any permanent establishment in India, in terms of article 5 and article 7 of the Double Taxation Avoidance Agreement between India and Japan, such income is not taxable in India.
[1] Arm’s length price of Guarantee fee on corporate guarantee transaction of Rs 54,16,947/- was determined at ₹5,41,69,470/- by adopting CUP method as Most Appropriate method by taking comparables of four banks having Average rate of Guarantee charged by banks determined at 1.15% reducing therefrom 0.15 % as downward adjustments and arriving at Alp rate of 1 % of Guarantee amount.
[2] [a] On interest from ECB Loan the ld TPO determined ALP of interest received of Rs 28,64,302/- at Rs 7733,615/- by taking interest rate of 3.51% against assessee’s rate of 1.30% and [2][b] On Japanese Yen Loan [ INR 30 Crs] interest transaction of Rs 25135157/- @ 10.50% was determined @ 14.50% of Rs. 3,3633,234/-. Thus on account of ALP of Interest income adjustments was determined at ₹1,33,67,390/-.
Assessee also raised a contention before the learned transfer pricing officer that the guarantee fee charged to the Indian associated enterprises exempt from tax in India as per India Japan double taxation avoidance agreement, the learned TPO held that it would be the jurisdiction of the assessing officer to examine the taxability of the guarantee commission fee.
The learned Assessing Officer held that guarantee is provided in order to avail credit facility from banks in India and therefore, the Guarantee Fees income is chargeable to tax under the head income from other sources taxable at normal rate being 40% plus surcharge.
With respect to the second adjustment of interest receivable under the head income from other sources was taxable at the rate of 5% under Section 194LC of the Act read with section 115A of the Act of ₹1,33,67,390/-.
Against the above adjustment, assessee preferred the objection before the learned Dispute Resolution Panel, wherein the directions were issued on 29 April 2022.
i. On objection of the assessee to taxability of corporate guarantee fee at the rate of 40%, The learned Dispute Resolution Panel vide paragraph no.5, categorically held that guarantee fee and commission is chargeable to tax as interest under Article 11 of DTAA and not as income from other source as ‘other income’ under Article 22(3) of the Double Taxation Avoidance Agreement. The Arm's Length Price of the guarantee commission of ₹ 5,41,69,470/-, was also reduced to ₹2,70,84,745/-. In fact, the guarantee commission at 1% determined by the learned Transfer Pricing Officer was reduced to 0.5% against international transaction of 0.10% amounting to ₹54,16,947/-. ii. With respect to the adjustment of interest receivable it was found that assessee has provided loans to two different Indian entities and rates charged on a loan given to Nipro Pharma Packaging private limited under external commercial borrowings was at 1.30% and to Nipro Tubes / glass India Pvt. Ltd., where the loan was provided in Indian rupees, interest was charged @ of ₹10.50%. The assessee benchmarked the interest received by adopting the Comparable Uncontrolled
Based on the direction of learned Dispute Resolution Panel, the learned Assessing Officer made the adjustment on account of guarantee fee commission of ₹2,70,84,735/-, however, taxed same as under head ‘income from other sources’ taxable at the rate of 40%. Further, transfer-pricing adjustment on account of interest receivable was also taxed under the head income from other sources at the rate of 5% as provision of Section 194LC of the Act read with section 115A of the Act. The total income
Assessee is aggrieved with the same.
The learned Authorized Representative on ground no.1 stated that corporate guarantee fee of ₹2,70,84,735/- though directed by the learned Dispute Resolution Panel to be taxed as ‘business income’ or as an ‘interest’ but the learned Assessing Officer has taxed it as ‘income from other sources’ and taxed it @ of 40%. Therefore, the learned Assessing Officer has failed to carry out the direction of the learned Dispute Resolution Panel and therefore, such adjustment is not valid.
With respect to ground no.2, it was submitted that the assessee received interest from Indian Associated Enterprise wherein adjustment is made by the learned Transfer Pricing Officer/Dispute Resolution Panel/Assessing Officer, stating that assessee should have received higher interest by the permanent establishment of Japanese company in India. This resulted in Arm’s Length price of interest paid by an Indian entity to the PE of a Foreign entity at higher sum. Therefore, such an adjustment will result into the erosion of tax base in India for the reason that Indian entities would claim higher deduction of interest. He relied upon the Pune Bench decision of Cummins Incorporation Vs. ACIT, in and Kolkata Bench decision of At & S Austria Technologie & Systemtechnik Aktiongesellschaft DCIT in ITA No. 95/Kol/2018. Even with respect to the rupee loan, he submits that the State Bank of India PLR rate are ranging from 11% and therefore, the Arm's Length Price determined by the Revenue authorities at the rate of 14.5% is on higher side. Accordingly, the transfer pricing adjustment deserves to be deleted.
He further submitted that for A.Y. 2014-15 in dated 23 June, 2021, the issue of corporate guarantee was decided by the co-ordinate Bench as per paragraph nos.12-15, wherein the matter is remitted back to the file of the learned Assessing Officer for fresh adjudication as per paragraph no. 15 of the order. He extensively read the paragraph no.15, wherein it has been held that article 22 can be applied only when an amount in question is not taxable under any other specific provision of Double Taxation Avoidance Agreement. He also submitted a chart of the bank rates showing bank group wise average lending rates on fresh rupee loans stating that nowhere 14.50% rate is available . He further referred to the decision of the co-ordinate Bench in 117 taxmann.com 343, wherein it has been held that corporate guarantee fee also not be taxable under Article 11 of Double Taxation Avoidance Agreement. He specifically referred to Para nos.23 and 24 of that decision.
The learned CIT Departmental Representative vehemently supported the order of learned lower authorities.
We come with respect to the first ground of appeal wherein it has been challenged that (1) that the learned assessing officer has not followed the direction of the learned dispute resolution panel, (2) of the act that guarantee fee is not chargeable to tax in India, (3) the guarantee fee is not an interest, (4) the guarantee fee is also not chargeable to tax under the head income from other sources and, (5) even if the guarantee fee is chargeable to tax in India, the arm’s-length price of the same cannot exceed 0.5% of the guarantee amount, (6) as the issue
“ 15. So for as the head of taxability is concerned, we find that the assessing officer has proceeded on the basis that the income is taxable under article 11 is also under article 22 of the Indo Japan tax treaty.
Coming to issue number 2 , on the transfer pricing adjustment in respect of interest on external commercial borrowings, The only dispute is with respect to the arm’s-length price of interest charged on external commercial borrowing lent to associated enterprises in India. The assessee has advanced a loan to Nipro tube glass India private limited in Indian rupees wherein the assessee has received total interest of ₹ 25,135,155/– wherein
In the result, appeal of the assessee is partly allowed as indicated above for statistical purposes. Order pronounced in the open court on 11.12. 2023.