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Income Tax Appellate Tribunal, “K” BENCH, MUMBAI
These are the cross appeals filed by KEC International Limited (assessee /appellant) ( Dy. Commissioner of Income Tax, 5(2)(1), Mumbai (the learned Assessing
The assessee/appellant aggrieved in , has raised following three grounds of appeal:-
Ground no.1 i. On the facts and in the circumstances of the case and in law, the Hon'ble CIT(A) erred in confirming adjustment on account of computation of arm's length price of the corporate guarantee commission@0.20% (Rs.127.46 lakh) which ought to be earned by the appellant for guarantee given on loans taken by Associated Enterprises (AE). ii. The learned CIT(A) erred in not appreciating corporate Guarantee by the appellant for its AE is not an International Transaction "as per Provision of Income Tax Act, 1961.
Ground no.2.
On the facts and circumstance of the case the learned CIT(A) erred in confirming disallowance /addition of Rs.93,145 made by AO under section 14A of the Income Tax Act r.w.r 8D of the Income Tax Rules in computing Book Profits under section 115JB of the Act.
Ground No.3 On the facts and circumstance of the case the learned CIT(A) erred in not allowing deduction in respect of tax paid at foreign location.”
The learned Assessing Officer aggrieved by the appellate order preferred the appeal in raising following grounds of appeal:-
“TP Issue:
Interest on advances given to Associated Enterprises (ii) On the facts and in the circumstances 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 (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% placing reliance upon the decision in assessee's own case by Hon'ble ITAT for AY 2012-13, which relied on Everest Kanto case | 58 Taxmann.com 254), without realizing the fact that the transfer pricing study is highly facts-based and it differs from case to case and that all the factors in Rule 10B have to be considered for every case and every year independently and that a rate decided in a different case for different set of facts and for different year cannot be adopted as such to the instant assessee, which would be violative of the specific provisions in Rule 10B?"
(iii) 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% placing reliance upon the decision in assessee's own case by Hon'ble ITAT for AY 2012-13, which relied on Everest Kanto case [58 Taxmann.com 254], without realizing (iv) Whether on the facts and circumstances of the case, the Hon'ble CIT(A) is right in directing to restrict the TP adjustment of corporate guarantee fee to 0.20% instead of 2% charged by the AO without discussing the facts of the case and deciding the issue on the merits of the case?"
(v) Whether on the facts and circumstances of the case, the Hon'ble CIT(A) is right in arriving at the ad hoc rate of 0.20%, without adopting any of the methods prescribed in section 92C which is violation of law?
Non-TP issues:
1. On the facts and circumstances of the case, whether the Ld. CIT(A) has erred in deleting the addition on account of unrealized foreign exchange loss (Mark to Market) under normal provisions as well as for the purpose of computation of book profit u/s 115JB of the Act failing to appreciate the CBDT's instruction no. 03/2010 dated 23.03.2010 which has clarified that in cases where no sale or settlement has actually taken place and loss on
As assessee has entered into several international transactions with its Associated Enterprises,
The learned Assessing Officer incorporated the above Arm's Length Price adjustment in the assessment order. As the learned Transfer Pricing Officer in his order mentioned that assessee has entered into international transaction of performance guarantee, corporate guarantee and interest on advances given to its Associated Enterprises and the penalty may be initiated under Section 271G of the Act.
During the course of assessment proceedings, the learned Assessing Officer noted that assessee has claimed an amount of ₹19,14,56,000/- on account of exchange loss and the learned Assessing Officer asked the assessee that why same should not be disallowed. Assessee submitted that this exchange loss is in respect of forward contracts on Mark to Market basis and same is neither contingent nor merely a provision and therefore, it should be allowed. The learned Assessing Officer noted that it is neither agreed loss nor an actual loss but is a notional loss of contingent nature and therefore,
The learned Assessing Officer further noted that the assessee has earned dividend of ₹70,23,31,373/- and no disallowance under Section 14A of the Act was offered. The assessee submitted that assessee has received dividend income from foreign companies and therefore, same are not exempt but are chargeable to tax under Section 115BBD of the Act. The learned Assessing Officer rejected the contention of the assessee and thereafter invoking the provisions of Rule 8D disallowed a sum of ₹93,145/- under Section 14A of the Act. Similar adjustment was also made in book profit computed u/s 115JB of the Act.
Accordingly, the assessment order under Section 143(3) read with section 144C of the Act dated 26th February, 2018, was passed determining the total income of the assessee at ₹276,39,20,405/- as per normal computation of total income. The book profit was also increased by provision of doubtful debts and also by an addition under Section 14A of the Act.
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 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 14th in dated September, 2020, with respect to the corporate guarantee of ICICI Bank on behalf of KEC US LLC and KEC transmission LLC USA global amounting to ₹567,15,50,461/-, which was benchmarked by the learned Transfer Pricing Officer determining the Arm's Length Price at the rate of 2% computing an adjustment of ₹12,74,68,445/-. iv. With respect to the disallowance under Section 14A, under Section 115JB of the Act was conformed.
Accordingly, the appellate order was passed, where both the parties are aggrieved.
The ld Authorised representative submitted that :- i. Coming to the appeal, in the grounds of appeal
of assessee, ground number 1 relates to the adjustment confirmed by the learned CIT – A on account of the arm‟s-length price of the corporate guarantee commission at the rate of 0.20% on guarantee given by the assessee to the bankers for the loans taken by the associated enterprises. He further stated that the assessee has challenged that the corporate guarantee issued by the assessee in favour of the bankers for the loan obtained by the iii. To the same associated enterprises assessee has also given a guarantee to bank of Muscat for availing working capital loan from the Bank of ₹ 52,28,78,445 which was benchmarked by the assessee at the rate of guarantee commission fee of 0.60%, the learned transfer pricing officer adopted the arm‟s-length price at the rate of 2% and made an addition of differential sum of ₹ 1,894,260/– which was iv. guarantee to the same associated enterprise which was given to bancs Saudi for availing working capital loan from Bank by the associated enterprises which is guaranteed by the assessee amounting to ₹ 1,183,322,139/– which has been benchmarked by the assessee adopting the corporate guarantee fee of 0.6% which was benchmarked by the learned transfer pricing officer at the rate of 2% and made a differential addition of ₹ 6,964,569/–. The learned CIT – A following the decision of the coordinate bench in assessee‟s own case for assessment year 2017 – 18 has determined the arm‟s-length price at the rate of 0.60%. v. On ground number 2 of the appeal of the assessee and stated that the learned CIT – A has confirmed the adjustment to the book profit computed under section 115JB of the income tax act by confirming the addition of ₹ 93,145/– made by the assessing officer under section 14 A of the act read with rule 8D of the income tax rules. He submits that no adjustment can be made to the book profit for disallowance under section 14 A of the income vi. Coming to the appeal of the learned assessing officer he submits that the second issue on transfer pricing is respect to the corporate guarantee which is already been discussed in the appeal of the assessee and therefore he supported the order of the learned CIT – A. vii. With respect to the interest on advance given to an associated enterprises which is raised as per issue number 1 where he referred to paragraph number 3 of appellate 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 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 submitted that issue is squarely covered in favour of the assessee as held by the learned CIT – A. Therefore he submits that this issue is also covered in favour of the assessee. ix. He extensively referred to the various orders of the coordinate benches in assessee‟s own case as well as the written submissions made before the learned CIT – A) in respect of transfer pricing additions/–. In the result, he submitted that there is no infirmity in the order of the i. corporate guarantee is an international transaction is now considered and decided in favour of the revenue by the several benches as well as the honourable madras High Court in case of Redington India Ltd. Therefore, the ground of the assessee that corporate guarantee cannot be considered as an international transaction is devoid of any merit. On the issue of the benchmarking he submitted that there are 2 types of guarantees provided by the assessee. Assessee has provided a performance guarantee as well as the corporate guarantees, performance guarantee is not considered by the assessee as an international transaction and also has not been benchmarked. He submits that the learned transfer pricing officer has considered the performance guarantee issued by the assessee as an international transaction and further arm‟s-length price of such guarantee fee was considered at 1%. He submitted that amount guaranteed is ₹ 82,834,635 which continued for the whole of the year the assessee has 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
During the course of hearing we directed the assessee to furnish the fresh guarantee fee benchmarking based on the present functions, assets and risk involved considering the economic circumstances. The assessee is adopted interest saving approach method and benchmarked the guarantee fee income by determination of the credit rating of the associated enterprises. The assessee benchmarked by adopting Moody‟s credit rating values of its associated enterprises, adjusted it with geographical scope and the terms of guarantee. It also applied several filters to the database and ultimately reached at four comparables. The comparison of interest spread was found that comparable interest paid as per the associated enterprise credit rating is 320 bps whereas actual interest spread as per loan agreement is 400 bps and indicative interest saving is 80 Bps. However it was
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 “2.1 First, we take up assessee‟s appeal wherein the ground read as under: -
1. On the facts and in the circumstances of the case and in law, the Hon'ble CIT(A) erred in making an upward Transfer Pricing adjustment under Section 92CA of the Income Tax Act, 1961 of ₹ 2,45,43,617/- by treating the transaction of business advance as loans given to AE. The appellant prays that the aforesaid action of the Hon'ble CIT(A) may please be held as bad-in-law and be deleted. As evident, the sole subject matter of assessee‟s appeal is Transfer Pricing (TP) adjustment of ₹ 245.43 Lacs against business advances given by the assessee to its AE. 2.2 We have carefully considered 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
Issue number 2 is with respect to the corporate guarantee. The learned CIT – A has decided this issue following the decision of the coordinate bench in assessee‟s own case for earlier years. We find that identical issue has been considered by the coordinate bench in assessee‟s own case for earlier years as under:-
“6.1 The grounds raised by the revenue read as under: - PERFORMANCE GUARANTEE: i. On the facts and circumstances of the case, the Ld.CIT(A) was not justified in deciding that the guarantee commission for performance of contract ii. On the facts and circumstances of the case, the Ld.CIT(A) was not justified in deciding that the cost recovery was at arm's length itself as the assessee has recovered 0.60% from its AE for providing guarantee for performance of contract to CCWE, and ignored that benefit derived as a whole by the AE and also not appreciated the fact that this service will be available to any third party by the assessee. iii. On the facts and circumstances of the case, the Ld.CIT(A) was not justified in deciding that the guarantee for advance payment provided by assessee to Chadian Company for Water & Electricity (CCWE) on behalf of its AE KEC Global was at arm's 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 Ld.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 v. 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 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 viii. On the facts and circumstances of the case, the Ld.CIT(A) was not justified in deciding that the guarantee commission for performance of contract provided by assessee to that guarantee commission for performance of contract provided by assessee to SNC LAVALIAN, Canada on behalf of its AE SAE Towers Holding Towers USA was arm Length without appreciating the fact that the AE get benefited from the guarantee provided by the assessee, AE was a newly floated entity and the credit rating of the AE was very low. ix. On the facts and circumstances of the case, the Ld.CIT(A) was not justified in deciding that the cost recovery was at arm‟s length itself as the assessee has revered 0.60% from its AE for providing guarantee for performance of contract to SNC LAVALIAN, Canada 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.
CORPORATE GUARANTEE :
XI. On the facts and circumstances of the case, the Ld.CIT(A) was not justified in deciding that the corporate guarantee provided to ICICI Bank on behalf of KEC USA LLC & Transmission LLC USA was not an international transaction without appreciating the fact that the TPO has determined the benefits of the AE as ALP. xii. On the facts and circumstances of the case, the Ld.CIT(A) was not justified in deciding that the Corporate guarantee provided to ICICI Bank on behalf of its AE i.e. 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. xiii. Mark to Market Loss: "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 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, 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.
Performance Guarantees: Name of KEC Global KEC Global FZ KEC Global FZ SAE Tower Borrower AE FZ LLC Ras LLC Ras UI LLC Ras Ul Holding LLC Ul Khaimah Khaimah Khaimah USA Country UAE UAE UAE USA Bank Name Bank of Bank of India N.A. Royal Bank and Country India – India – India of Scotland - India Whether No No No Yes amount borrowed by AE from third party without corporate guarantee Amount 6,81,60,907 13,63,21,814 223,96,50,902 3,46,52,829 guaranteed Loan N.A. N.A. N.A. N.A. Amount availed When 2009 2009 2009 2010 guarantee given No of days 365 365 365 365 during the year which guarantee was given Rate 0.60% 0.60% - 0.60% recovered Purpose Towards Towards Towards Towards performance advance performance of performance of contract payment contract of contract made by
With respect to the financial guarantee given to ICICI bank United Kingdom on behalf of keys the
Accordingly, issue number two of the appeal of the learned AO and ground number 1 of the appeal of the assessee are dismissed.
Coming to ground number (issue number 3) of the appeal of the learned assessing officer which is with respect to the deletion of the addition on account of foreign exchange loss mark to market provided by the assessee. The learned CIT – A has held that this issue is also covered in favour of the assessee by the decision of the coordinate bench in assessee‟s own case. We find that the coordinate bench has dealt with this issue as under:-
7.13 The Ld. CIT(A), relying upon appellate order for AY 2011-12, deleted the addition. The decision for AY 2011-12 was based on the decision of Hon‟ble Supreme Court rendered in Woodward Governor Ltd. (312 ITR 254). Also, the issue was stated to be covered in assessee‟s favor by the decision 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 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.”
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.
Ground number 3 of the appeal of the assessee is with respect to the deduction of taxes paid at foreign location. This ground of appeal was not substantiated by any argument by the learned authorized representative and therefore same is dismissed.
Order pronounced in the open court on 04 December 2023.