Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, DELHI BENCH ‘I-2’ : NEW DELHI
Before: SHRI R.K. PANDA & SHRI KULDIP SINGH
Date of Hearing : 16.03.2021 Date of Order : 27.05.2021 O R D E R PER KULDIP SINGH, JUDICIAL MEMBER : objections filed by the taxpayer/assessee are being disposed off by way of composite order to avoid repetition of discussion.
2. Appellant, Deputy Commissioner of Income-tax, Circle 1(1)(2), International Taxation, New Delhi (hereinafter referred to as ‘the Revenue’) by filing the present appeal sought to set aside the impugned order dated 18.12.2015 passed by the Assessing Officer (AO) in consonance with the orders passed by the ld. DRP/TPO under section 143 (3) read with section 144C (13) of the Income-tax Act, 1961 (for short ‘the Act’) qua the assessment year 2011-12 on the grounds inter alia that :-
“1. The DRP erred in law and on facts of the case in directing to delete the addition proposed on account or salary of expatriates employees.
2. The DRP erred in law and on facts of the case in directing to delete the addition pertaining to the interest paid to HO and other overseas branches of the bank ignoring the provisions of Circular No.740 dated 17/07/1996 of the CBDT and provisions of Section 9 of the Income Tax Act,1961.
3. The DRP erred in law and on facts of the case in directing to delete the addition made on account of interest from Indian Branches to the Head Office and claimed as expenditure.
4. The DRP erred in law and on facts of the case in directing to delete the addition made on account of accrued Deferred Bank Guarantee commission to the assessee from its HO/Overseas Branches.
The DRP erred in law and on facts of the case in not considering that the commission receipt is like a fee for issuing the guarantee and is not a contingent receipt or advance and therefore the amount of commission received is an income which accrues at the time of bank issuing the guarantee and should have been included in the income of the assessee.
./2016 CO No.126/Del/2016 6. The DRP erred in law on facts of the case in directing to delete the addition of Rs.10,43,55,168/- proposed to be made on account of Transfer Pricing adjustment in respect of Arms Length Price (ALP) of Corporate Guarantee.
The DRP erred in law and on facts of the case in holding that the provisions of section 115JB of Act relating to computing of Book Profit for MAT purpose shall not be applicable to the assessee and thereby ignoring the provisions of section 2(17) of the Act.”
3. The Objector, The Bank of Tokyo Mitsubishi UFJ Ltd., by filing the present cross objections challenged the assessment order dated 18.12.2015 passed by the Assessing Officer qua the assessment year 2011-12 on the grounds inter alia that :-
1. The Hon'ble DRP has erred, in law and on the facts of the case, by not accepting the primary analysis undertaken by the Respondent using Comparable Uncontrolled Price Method (CUP) for determination of the arm's length price of the international transaction pertaining to receipt of guarantee commission for guarantees counter guaranteed by the associated enterprise ( impugned transaction").
The Hon'ble DRP has erred, in law and on the facts of the case, by not accepting the secondary analysis undertaken by the Respondent to determine the arm's length price of the impugned transaction wherein all the international transactions of the Respondent were aggregated and the arm's length price was determined using "Transactional Net Margin Method" ("TNMM") as the most appropriate method using "Operating profits / Total Assets" as the profit level indicator.
The Hon'ble DRP has erred, in law and on the facts of the case, by not rejecting the erroneous comparable uncontrolled price data, obtained by Ld. TPO / Ld. AO by issuance of 133(6) notice which was used for computing the arm's length price of the impugned transaction.”
Briefly stated the facts necessary for adjudication of the controversy at hand are : The Bank of Tokyo Mitsubishi UFJ Ltd. (BTMU India), the taxpayer is a non-resident company incorporated in Japan, engaged in wholesale banking operations, individual clients. The taxpayer operates in India under the licence from the Reserve Bank of India (RBI) and is governed by Banking Regulation Act, 1949. The taxpayer is not significantly engaged in retail banking in India.
5. All the branches of taxpayer in India constitute Permanent Establishment (PE) of the taxpayer in India within the meaning of Article 5 of the Double Tax Avoidance Agreement (DTAA). For the year under assessment, the taxpayer filed its return declaring income of Rs.228,02,36,682/-. The taxpayer reportedly entered into international transactions with its Associated Enterprises (AEs) as under :-
S.No. Description of the transactions Amount (Rs.) 1 Payment of software license fee 3,427,875 2 Payment for software development services 1,997,513 3 Payment of annual maintenance charges for 6,634,714 software maintenance 4 Payment of account maintenance charges and 518,007 clearing charges 5 Payment of communication charges 4,009,696 6 Payment of counter guarantee commission 22,085,511 7 Net Interest received on Nostro/Vostro 524,307 Accounts 8 Receipt of service income for ECB syndication 258,549,017 9 Receipt of sundry commission 517,292 10 Interest paid on inter-office borrowing 76,865,733 11 Interest received from overnight placement of 1,054,887 funds 12 Interest received on interest rate swap 8,010,000 13 Interest paid on interest rate swap 9,875,721 14 Interest received on currency swap 141,388,812 15 Interest paid on currency swap 255,573,472 transactions of “Counter Guarantee Commission” adopted Comparable Uncontrolled Price (CUP) as Most Appropriate Method (MAM) wherein the representative guarantee fee charged by BTMU India from some of its local customers were compared with the counter guarantee commission rates received by BTMU from its overseas branches/AEs.
7. However, the TPO proceeded to disagree with TP analysis made by the taxpayer to benchmark its international transactions to adopt the average bank guarantee rate at Arm’s Length Price (ALP) and proposed an addition of Rs.10,43,55,168/- on this account.
AO made addition on account of Rs.24,56,85,915/- by way of disallowance of salary paid to expat employees. AO also made disallowance of Rs.7,69,92,545/- on account of interest paid by Indian branches to HO/overseas branches. AO further made addition of Rs.7,69,92,545/- on account of taxing interest received by HO/overseas branches from Indian branches and also made addition of Rs.98,33,728 on account of treatment in respect of deferred bank guarantee commission.
The taxpayer carried the matter before the ld. DRP by way of filing the objections who has deleted the addition of ALP of corporate guarantee. Ld. DRP also held that provisions of section 115JB of the Act relating to computing of book profit for MAT purpose shall not be applicable to the taxpayer. Feeling aggrieved by the order passed by the ld. DRP/TPO/AO, the Revenue as well as the taxpayer have come up before the Tribunal by way of filing the present appeal and cross objections respectively.
We have heard the ld. Authorized Representatives of the parties to the appeal, gone through the documents relied upon and orders passed by the Revenue authorities below in the light of the facts and circumstances of the case.
GROUND NO.1 OF (REVENUE’S APPEAL) 11. AO has made disallowance of Rs.24,56,85,915/- paid as salaries by the Head Office including Indian taxes thereon to the expatriate employees working in India exclusively for the PE of the taxpayer in India. However, ld. DRP deleted the addition it being an identical issue decided by the Tribunal in taxpayer’s own case for AYs 2007-08 & 2008-09.
Ld. DR for the Revenue has failed to controvert the findings raised by the ld. DRP that this issue is covered in favour of the Hon’ble Delhi High Court in ITA 604/2015 & ITA 605/2015 in taxpayer’s own case for AYs 2007-08 & 2008-09 and vide order passed by the Tribunal in taxpayer’s own case for Assessment Years 2005-06, 2007-08, 2008-09, 2009-10, 2010-11 & 2015-16 in & 3755/Del/2014, ITA No.5364/Del/2010, ITA No.5104/Del/2011, ITA No.1162/Del/2014, ITA No.1174/Del/2015 & ITA No.7895/Del/2019 respectively.
We have perused the order passed by the coordinate Bench of the Tribunal in taxpayer’s own case for earlier years from 1998-99 to 2010-11 and order passed by the Hon’ble Delhi High Court in case of taxpayer for AYs 2007-08 & 2008-09 (supra).
The issue before the Bench is squarely covered by the order (supra) passed by the Hon’ble Delhi High Court, operative part of which is extracted for ready perusal as under :-
“Salaries paid to expatriates 9. The first question urged concerns the payment of salaries to the expatriates. In deciding this issue in favour of the Assessee, the ITAT has in the impugned common order referred to and relied upon the decision of its coordinate bench at Kolkata in ABN Amro Bank v. JCIT (2005)97 ITD 1(ITAT [Kol]). Further the ITAT followed the decision of the Bombay High Court in CIT v. Emirates Commercial Bank Ltd. (2003) 262 ITR 55 (Bom.) where the Bombay High Court approved the view taken by the ITAT. The ITAT agreed that the expenses have been incurred wholly and exclusively by the Indian branch and therefore no part of these expenses can be allocated to any other ./2016 CO No.126/Del/2016 branch of the HO and that there was no dispute with regard to the non-applicability of Section 44C of the Act.
10. This Court has perused the order of the Bombay High Court in Emirates Commercial (supra) where on identical facts, the issue was decided in favour of the Assessee. This order of the Bombay High Court has been affirmed by the Supreme Court by order dated 26th August 2008 in Commissioner of Income Tax v. M/s Emirates Commercial Bank Ltd., which in turn referred to an order of the same date in Commissioner of Income Tax. v. Deutsche Bank AG (CA No. 1544 of 2006).
In that view of the matter, this Court declines to frame a question on this issue.”
So, following the order passed by Hon’ble High Court discussed in preceding paras, the ld. DRP has rightly deleted the addition made by the AO by holding that expenses have been incurred wholly and exclusively by the Indian Branch and as no part of these expenses can be allocated to any other Branch of HO section 44C of the Act is not applicable, hence ground no.1 raised by the Revenue is determined against the Revenue.
GROUNDS NO.2 & 3 OF (REVENUE’S APPEAL)
15. The Revenue has challenged the disallowance of interest paid by the Indian branches to HO/overseas branches and taxing interest received by HO/overseas branches from Indian branches made by the AO/DRP by ignoring the provisions of Circular No.740 dated 17.07.1996 of CBDT and provisions contained u/s 9 of the Act. findings raised by the ld. DRP that this issue is covered by the order passed by the Hon’ble Delhi High Court in taxpayer’s own case for AYs 2007-08 & 2008-09, order passed by the Hon’ble Calcutta High Court in taxpayer’s own case for AY 1995-96 order dated 17.11.2014 and order passed by the Tribunal in taxpayer’s own case for AY 2009-10.
We have perused the order (supra) passed by the Hon’ble Delhi High Court in taxpayer’s own case in which both these issues have also been decided in favour of the taxpayer by returning following findings :-
“Interest paid to the HO and interest received from Indian branches 12. This issue appears to be covered against the Revenue by the decision of the Calcutta High Court dated 23rd December 2010 in ABN Amro Bank(2012) 343 ITR 81 (Cal). The ITAT has followed the above decision of the Calcutta High Court and decided the question in favour of the Assessee.
13. On this issue, the Court further finds that the order of the Calcutta High Court dated 17th November 2014 in of 2004 (Bank of Tokyo-Mitsubishi Ltd. v. Director of Income Tax, International Taxation, Mumbai) has also decided this issue in favour of the Assessee by following its judgment of ABN Amro Bank(supra). The two specific questions urged by the Assessee in that case were answered in its favour: (i) Whether interest payment made by the Indian Branch of the appellant to its head office abroad was to be allowed as a deduction in computing the profits of the appellant's branch in India ? (ii) Whether making such payment to the head office, the appellant's said branch was required to deduct tax at source under section 195 of the Income Tax Act, 1961?
./2016 CO No.126/Del/2016 14. It is significant that in the aforementioned order, the Calcutta High Court noted the fact that the Special Leave Petition preferred by the Revenue against the judgment of the Calcutta High Court in ABN Amro Bank(supra) was dismissed by the Supreme Court on 3rd August 2012.
Accordingly, this Court declines to frame any question on this issue of interest paid to the HO as well as the interest received from the Indian branches. Deferred bank guarantee commission.”
So, we are of the considered view that ld. DRP has passed the impugned order by following the decision rendered by Hon’ble Delhi High Court and order passed by the Tribunal in taxpayer’s own case in earlier years, we find no ground to interfere the findings returned by the ld. DRP, hence grounds no.2 & 3 raised by the Revenue are dismissed.
GROUNDS NO.4 & 5 OF (REVENUE’S APPEAL)
The Revenue have also challenged the deletion of addition by the ld. DRP on account of accrued deferred bank guarantee commission to the taxpayer from its HO/overseas branches and has also challenged the findings returned by the ld. DRP in not considering that the commission received is like a fee for issuing the guarantee and is not a contingent receipt or defence and, therefore, the amount of commission received is an income which accrues at the time of bank issuing the guarantee and should have been included in the income of the taxpayer. raised by the ld. DRP that this issue is covered by the order passed by the Hon’ble Calcutta High Court in taxpayer’s own case for AY 1981-82 and ld. DRP has followed that decision for various subsequent assessment years.
This issue has been successively decided by the Tribunal in AYs 1998-99, 2000-01, 2001-02, 2002-03, 2007-08, 2008-09, 2009-10 & 2010-11 in favour of the taxpayer in its own cases and the order passed by the Tribunal in taxpayer’s own case for AYs 2007-08 & 2008-09 have been confirmed by Hon’ble Delhi High Court.
Coordinate Bench of the Tribunal in taxpayer’s own case for AY 2007-08 (supra) decided the issue in favour of the taxpayer by following the decision rendered by Hon’ble Calcutta High Court in taxpayer’s own case for AY 1995-96 (supra) by returning following findings :-
“86. Ground no. 8 is regarding treatment in respect of deferred bank guarantee commission. The AO noted that the commission received on guarantees in respect of the period which had not expired was not offered as income accrued for the year but had been treated as an advance in line with the accounting policy followed by the bank. He observed that amount of commission received is an income which accrues at the time the bank issues the guarantee. The period of guarantee has nothing to do with the assessee's right to receive having arisen. He pointed out that the commission received was like a fee for issuing the guarantee and was not a contingent receipt or advance and it was also not returnable at the end of the guarantee period. Thus, the amount of commission received was income, which accrued at the time the bank issued the guarantee. Ld. DRP confirmed the AO's action, inter alia, observing that the decision of Hon'ble Kolkata High Court ./2016 CO No.126/Del/2016 in assessee's own case was not accepted by the Department and SLP had been filed before the Supreme Court. 86.1 Having heard both the parties, we find that this issue is squarely covered by the decision of Hon'ble Kolkata High Court in the case of CIT v. Bank of Tokyo Ltd. [1993] 71 Taxman 85, wherein under similar circumstances, it has been held that full commission though payable at the outset did not crystallize into perfect right to receive so far as unexpired period was concerned because the payability or receivability from the view of the assessee bank was counter-balanced by the refundability diluting the right to receive into a contingent right as regards unexpired period of the guarantee. The assessee clarified that FEDAI Guidelines places an obligation on the assessee to refund the proportionate commission for the unexpired period. Therefore, respectfully following the decision of Hon'ble Kolkata High Court in assessee's own case, this ground is allowed.”
This issue was agitated by the Revenue before the Hon’ble Delhi High Court in the judgment (supra) but Hon’ble High Court has confirmed the findings returned by the Tribunal on this issue by returning following findings :-
“16. This issue appears to be covered in favour of the Assessee by the decision of the Calcutta High Court in CIT v. Bank of Tokyo Ltd. (1993) 71 Taxman 85 (Cal). 17. Accordingly, this Court declines to frame any question on this issue.” 24. So, following the decision rendered by the coordinate Bench of the Tribunal, confirmed by the Hon’ble Delhi High Court, as this issue has been decided in favour of the taxpayer on numerous occasions right from AYs 1998-99 till 2010-11 and as such, ld. DRP has based their findings on the order passed by the Tribunal and Hon’ble Delhi High Court. Consequently, there is no ground to interfere in the findings returned by the ld. DRP and as such, grounds no.4 & 5 are determined against the Revenue.
GROUND NO.7 OF (REVENUE’S APPEAL)
The Revenue has also challenged the findings returned by the ld. DRP that provisions of section 115JB of the Act relating to computing of book profit for MAT purpose are not applicable to the taxpayer on the ground that the ld. DRP has ignored the provisions contained u/s 2 (17) of the Act.
Ld. DR for the Revenue has failed to controvert the findings raised by the ld. DRP that this issue is covered by the order passed by the Tribunal in taxpayer’s own case for Assessment Years 2007-08 & 2008-09.
We have perused the order passed by the Tribunal in taxpayer’s own case for AYs 2007-08 & 2008-09 (supra) wherein instant issue has been thrashed in detail and decided in favour of the taxpayer by returning following findings :-
“71.1 We have considered the rival submissions and have perused the record of the case. The facts are not disputed.
Admittedly the assessee had prepared its accounts as per the requirements of Banking Regulation Act and while filing the return of income, though it had computed the book profits as per the provisions of section 115JB also, but had given a note that the provisions of section 115JB were not applicable. It is also not disputed that profit and loss account of assessee had not been prepared as per part II & III of schedule VI to the Companies Act.
Ld. Counsel has relied on the decision in the case of Maharashtra State Electricity Board (supra), Reliance Energy ./2016 CO No.126/Del/2016 Limited (supra), Kerala State Electricity Board (supra), which have been rendered with reference to Electricity (Supply) Act, 1948. The decision in the case of ICICI Lombard General Insurance Company Ltd. has been rendered with reference to accounts prepared as per the Insurance Regulatory and Development Authority (preparation of financial statements on auditor's report of Insurance Company) Regulation, 2002. In all these decisions it has been held that since the accounts were not prepared as per the provisions of part II of schedule VI of Companies Act and the accounts were not laid before the Annual General Meeting in accordance with the provisions of section 210 of the Companies Act as per the requirements of sub-section (2) of section 115JB, therefore, the provisions of section 115JB were not applicable. Explanation 3 has been inserted by the Finance Act, 2012 w.e.f. 01/04/2013 as per which now the book profits can be computed on the basis of accounts prepared under the governing Act to such company.
73.1 Ld. Counsel pointed out that in the case of State Bank of Hyderabad (supra) it has been held that this amendment is prospective and, therefore, it is not applicable for the present assessment year.
Ld. CIT(DR) however, pointed out that Tribunal has not considered in detail the import of this amendment and has simply on the basis of date of insertion has observed that it is prospective. He has pointed out that in the case of State Bank of Hyderabad primarily the decision in the case of Maharashtra State Electricity Board has been followed and Explanation 3 has not been considered. In our opinion this explanation cannot be held to be retrospective in operation because it has brought in a substantial change in the computation provision. Till the insertion of this amendment, various decisions clearly held that in case of Banking Companies, Electricity Companies and Insurance Companies, since they were governed by Special Acts and the profit and loss account was not prepared as per part II of schedule VI to the Companies Act, therefore, the computation provisions failed. Accordingly, in view of the decision of Supreme Court in the case of B.C. Srinivasa Setty (supra), the law till the insertion of this explanation was that the provisions of section 115JB were not applicable on account of impossibility of computation as the accounts were not prepared in accordance with part II, schedule VI to the Companies Act. Now by incorporating Explanation 3, the Companies governed by Special Acts which come within the ambit of company u/s 2(17) are covered by the provisions of section 115JB. Therefore, this amendment brings substantial change in the taxability of companies governed by the special acts and, therefore, cannot be held to be retrospective. In this regard we also find strength from the ratio laid down by the Supreme Court in its decision dated ./2016 CO No.126/Del/2016 16.9.2014 in the case of CIT v. Vatika Township (P.) Ltd. In Civil Appeals arising out of SLP(C) No. 1362 of 2009 and others. The five judges Bench of the Supreme Court strikes down division Bench ruling on retrospective applicability of proviso to section 113 of the Income Tax Act holding the proviso to operate prospectively. Laying down perusal principles governing retrospectivity, the Supreme Court has been pleased to rule that unless contrary intention appears, a legislation is presumed not to be intended to have retrospective operation, current law ought to govern current activities, law passed today cannot apply to past events.
Ld. Counsel has also relied on the decision in the case of Krung Thai Bank PCL (supra) in which it has been held that since in the case of banking companies schedule VI is not applicable, therefore, section 115JB cannot be applied.
The MAT provisions were brought in statute by the Income Tax Act by Finance Bill, 1996 and the Hon'ble Finance Minister while introducing this provision, inter alia, observed that company engaged in the power and infrastructure sector will remain exempt from the levy of MAT. This provision was brought in to bring within the tax-net the zero tax companies. In Finance Bill, 2000, the Hon'ble Finance Minister, inter alia, proposed that the MAT be levied at the revised rate of 7.5% of book profits as determined under the Companies Act instead of the existing effective rate of 10.5%. The Finance Bill, 2002 vide clause (49) amended section 115JB observing as under:
"Clause 49 seeks to amend section. 115JB of the. Income- tax Act relating to special provision for payment of tax by certain companies. The existing provisions of the said section provide for levy of a minimum, tax on domestic companies of an amount equal to seven and one-half per cent., of the book profit, if the tax payable on the total income chargeable to tax as per the provisions of the Income-tax Act, 1961, is less than seven and one-half per cent of the book profit.. .
Sub-clause (a) seeks to provide that where the tax payable on the total income chargeable to tax is less than seven and one-half per cent. of book profit, such book profit shall be deemed to be the total income of the assessee and the tax payable by the assessee on such total income shall be the. amount of income-tax at the rate of seven and one- half per cent."
This amendment will take effect retrospectively from 1st April, 2001, and will, accordingly, apply in relation to the assessment years 2001-2002 and subsequent years. 76.1 This makes the intention of legislature very clear that the MAT provisions are applicable only to domestic companies and not to the foreign companies.
Ld. DR has relied on various decisions of Authority for Advance Ruling which have elaborately been considered in the arguments advanced by him. These decisions have only persuasive value and are not binding on us. We find that consistent view of various coordinate benches is that section 115JB is not applicable in case of banking companies.
Even if for sake the of argument ld. CIT(DR)'s contention is accepted still in view of the provisions of section 90(2), the assessee's claim for lower impost of tax will have to be accepted because the provisions of section 115JB are subordinate to section 90(2) and have no overriding effect on the said section. 78.1 In view of the above discussion, this ground is allowed because it has been clarified by ld. Counsel that the taxable income had been computed as per the provisions of article 7(3) of the DTAA.”
Aforesaid findings returned by the coordinate Bench of the Tribunal have been confirmed by the Hon’ble Delhi High Court in taxpayer’s own case (supra) by returning following findings :-
“Applicability of Section 115JB 20. The ITAT has after an elaborate discussion had come to the conclusion that the Assessee's claim for lower tax will have to be accepted because Section 115JB is subject to Section 90(2) of the Act and the taxable income of the Assessee would have to be computed in terms of Article 7(3) of the DTAA. What is significant is that the profit and loss account of the Assessee has not been prepared in terms of Part II of Schedule VI of the Companies Act, 1956 and in fact could not have been prepared in terms thereof. Consequently, the question of applicability of Section 115JB did not arise. As rightly pointed out till the insertion of Section 115JB, banking companies were required to prepare their accounts in terms of special acts that they were governed by, and therefore there were no computation provisions ./2016 CO No.126/Del/2016 as regards such banking companies. The change brought out by Section 115JB was therefore not retrospective. 21. The reasoning and the conclusion of the ITAT on this issue appears to suffer from no legal infirmity. Consequently, the Court declines to frame any question on this issue as well.”
So, following the order passed by the coordinate Bench of the Tribunal and confirmed by Hon’ble Delhi High Court, we are of the considered view that ld. DRP by following the order passed by the Tribunal has rightly decided this issue in favour of the taxpayer and as such, we find no scope to interfere into the findings on this issue. Consequently, ground no.7 is determined against the Revenue.
GROUND NO.6 OF (REVENUE’S APPEAL)
GROUNDS NO.1, 2 & 3 OF CO No.126/Del/2016 FILED BY THE TAXPAYER
The Revenue by raising ground no.6 challenged the deletion of addition of Rs,10,43,55,168/- by the ld. DRP proposed to be made by the ld. TPO qua the ALP of corporate guarantee. At the same time, the taxpayer by filing cross objection also challenged inter alia that the rejection of primary analysis made by the ld. DRP by applying CUP method for benchmarking the ALP of international transactions qua receipt of guarantee commission for guarantees counter guaranteed by the AE; that the taxpayer also challenged rejection of secondary analysis made by the taxpayer to commission by applying TNMM using operating profit/total assets as the PLI; and that the taxpayer also challenged rejection of acceptance of erroneous CUP data obtained by the ld. TPO/AO by issuance of notice u/s 133 (6) of the Act which was used for computing the ALP of impugned transaction.
During the year under assessment, the taxpayer reportedly entered into international transactions as under :-
S.No. Description of the transactions Amount (Rs.) 1 Payment of software license fee 3,427,875 2 Payment for software development 1,997,513 services 3 Payment of annual maintenance 6,634,714 charges for software maintenance 4 Payment of account maintenance 518,007 charges and clearing charges 5 Payment of communication charges 4,009,696 6 Receipt of counter guarantee 22,085,511 commission 7 Net interest received on 524,307 Nostro/Vostro Accounts 8 Receipt of service income for ECB 258,549,017 syndication 9 Receipt of sundry commission 517,292 10 Interest paid on inter-office 76,865,733 borrowing 11 Interest received from overnight 1,054,887 placement of funds 12 Interest received on interest rate 8,010,000 swap 13 Interest paid on interest rate swap 9,875,721 14 Interest received on currency swap 141,388,812 15 Interest paid on currency swap 255,573,472
The taxpayer in order to benchmark its international transactions qua “counter guarantee commission” i.e. Comparable comparing representative guarantee fee charged by BTMU India from some of its local customers with counter guarantee commission rate received by BTMU from its overseas branches/AE. However, ld. TPO while rejecting the TP study made by the taxpayer proceeded to adopt average bank guarantee rate as ALP of the transaction and proposed an addition of Rs.10,43,55,168/-.
However, ld. DRP by following its earlier year order for AY 2010-11 accepted the FAR analysis of BTMU India and AE of BTMU India made by the taxpayer and proceeded to delete the proposed TP addition made by the ld. TPO by returning following findings :-
“33.0 Finding : DRP has duly considered submissions of the assessee. It has been noted that TPO has treated counter guarantee commission at the same footing as guarantee commission. However, from the above chart of FAR analysis, it is clear that in transaction of counter guarantee, BTMU India has very few functions to perform and few risks to' assume as compared to its foreign AEs. Moreover, counter guarantee commission of 0.10 to 1.0% as charged by BTMU India is in line with what has been held by various tribunal's decisions on issue of corporate guarantee. The facts of case under consideration are identical to those in preceding year wherein then DRP has decided the issue in favour of the assessee. Hence, the panel directs the TPOI AO to delete the addition. The objection is allowed.” identical issue has already been decided by the coordinate Bench of the Tribunal in taxpayer’s own case for AYs 2009-10 & 2015-16 in & 7895/Del/2019 respectively. However, at the same time, ld. AR for the taxpayer by filing cross objection challenged the order passed by the ld. DRP for not accepting its primary and secondary analysis by using CUP and TNMM as the MAM respectively and also challenged the order of the ld. DRP to the extent of not rejecting the erroneous CUP data obtained by the TPO by invoking the provisions contained u/s 133 (6) of the Act.
However, on the other hand, ld. DR for the Revenue challenged the impugned order passed by the ld. DRP by contending inter alia that every year is separate and independent year and as such, earlier decisions by the ld. DRP/ Tribunal are not binding on the Revenue Department; that since the taxpayer performs all the significant functions viz. creditworthiness violation, negotiation of terms, etc. before issuance of the guarantee to the customer, it is wrong to consider that the taxpayer performs limited function; that the taxpayer bears significant risk as the volume of transaction is huge and taxpayer still bears the risk of default even if there is a counter guarantee by the AE. Ld. made part of the judicial record.
No doubt, the first contention raised by the ld. DR for the Revenue that every year is to be treated as a separate and independent year for the purpose of assessment but, at the same time, we are of the considered view that when there is no change in the business model of the taxpayer in the year under assessment vis-à-vis preceding years as well as succeeding years “the rule of consistency” gets attracted in view of the law laid down by Hon’ble Supreme Court in case of Radhasoami Satsang vs. CIT in Civil Appeal Nos.10574-10583 of 1983 and Hon’ble Delhi High Court in Rayban Sun Optics India Ltd. vs. CIT in ITA 880/2016 & CM Appl.45967/2016. So, when ld. DR has failed to point out any dissimilarity in the functional profile and facts & circumstances of the case of the year under consideration vis-à-vis preceding and succeeding years, this contention is not sustainable.
So far as second contention raised by the ld. DR for the Revenue that the taxpayer performs significant functions and bears significant risk is concerned, this contention is not sustainable when we examine the FAR analysis of BTMU India and AE of under consideration which is extracted for ready perusal as under:-
Nomenclature MUFG AEs of Third Party India MUFG Banks India Counter Guarantee Bank Guarantee Functions Performs Evaluation of background No Yes Yes and credit worthiness of the borrower Negotiation of the terms and No Yes Yes conditions of the facility Issuance of bank guarantee Limited Yes Yes Maintaining and building No Yes Yes client relationship Processing for payments in Limited Yes Yes case of default Collection of claims from the No Yes Yes defaulter Risk Analysis Default Risk No Yes Yes Credit and Collection Risk No Yes Yes
Aforesaid FAR analysis was made and brought before the ld. TPO by applying the CUP method and as a secondary analysis TNMM.
Bare perusal of the aforesaid FAR analysis made by the taxpayer goes to prove that the taxpayer only performs limited functions, such as, processing the request of issuance of guarantee from the AEs, issuance/delivery of the guarantee on stamp paper, seeking confirmation from the AEs for cancellation or extension of the guarantee and at the same time, AE of taxpayer performs worthiness of the borrower, negotiation of the terms and conditions of the facility, issuance of bank guarantee, maintaining and building client relationship, processing for payments in case of default, collection of claims from the defaulter. So, when we compare both these functions performed by the taxpayer and its AE, we have no hesitation to record that the taxpayer performs secretarial functions assigned to it by its AE and all the significant functions are performed by its AE.
Similarly, so far as risk attributed to the taxpayer by the ld. DR is concerned, we are of the considered view that the taxpayer bears no risk because the taxpayer issued guarantee as per instruction of its AE in favour of the beneficiary only on the basis of “counter guarantee” provided by the AE to the taxpayer. In other words, counter guarantee issued by AE completely protects the taxpayer by way of reimbursement by the AE in the form of counter guarantee, in case guarantee issued by the taxpayer is invoked.
By applying the aforesaid yardsticks, ld. DRP in the Assessment Year 2010-11 in taxpayer’s own case decided the issue in favour of the taxpayer, which has been accepted by the Revenue Department. this issue in favour of the taxpayer having identical issue. So, in these circumstances, bank guarantee rates used by the ld. TPO to benchmark the international transactions cannot be used as CUP as has been held by the coordinate Bench of the Tribunal in case of Gharda Chemicals Ltd. vs. DCIT in order dated 30.11.2009 by returning following findings :-
“16. Albeit no such distinction between Internal and External CUP method is recognized in the Act or Rules but since the arguments of the rival parties and findings of the authorities below have revolved around these two, we will try to ascertain the difference between them. Basically the purpose of computing ALP on the basis of CUP method is to compare the adjusted price charged from or paid to the assessee for the international transactions with its AE vis-à-vis that charged from or paid to the unrelated parties under similar circumstances. In case of difference, the price settled in the uncontrolled transactions, as adjusted as per rule, is taken as ALP with the AE. The Internal CUP method envisages comparing the uncontrolled transactions of the assessee itself with other unrelated parties so as to determine the ALP with the AE. However the External CUP method disregards the price charged or paid by the assessee to or from its unrelated parties and contemplates the comparison of the price so charged from or paid to its AE with some external independent reliable price data under similar circumstances of transactions with AE. Ordinarily the Internal CUP method should be preferred over the External CUP method as it neutralizes several distinguishing factors, such as the local factors and the economies available or unavailable to the assessee in particular, having bearing over the comparison of price charged from unrelated parties and AE. The essence of determining ALP under CUP method is to ensure that the price charged by the Indian Enterprise from its AE should be consistent with that charged from unrelated parties under similar circumstances. The importance of the “similar circumstances” cannot be lost sight of in this context because a round cannot be compared with a square and a rectangle with a triangle. In other words the uncontrolled transactions which are contemplated for comparison should be alike, if not identical. Similarity between the two sets of transactions can be judged by the quality, grade and quantity of the material. In addition, the factors like the ./2016 CO No.126/Del/2016 location of the parties, availability of raw material; demand and supply equation also play pivotal role in finding out as to whether the two are really comparable or not. Thus in the Internal CUP method the local factors of AE in the other country and all the relevant factors which could have bearing on the price so charged from AE must be taken into consideration. We are dealing with a case in which the assessee has its AE in USA and rate charged is 14.66 US$ per Kg of Dicamba. There is no other export by the assessee to USA. The uncontrolled transactions of export made by the assessee are to other countries such as UK, Netherlands, Newzealand, Australia, France etc. in respect of which average rate of 20.67 US $ per Kg. of Dicamba has been determined by the TPO for computing the ALP. All other transactions of export by the assessee are to non-USA countries. The price on which a particular product is available in one country may largely vary from the price prevailing in other countries due to host of factors. The country which is producer of a particular commodity or its raw material may have lower sale price in comparison with the country which is short of such natural resources. Similarly the price may vary from one country to another depending upon climatic conditions and the demand and supply factors. Thus the price charged by an Indian party from UK or Australia may be at much variance with that charged from USA. In such a scenario no valid comparison can be made between the price charged by the assessee from other countries with that from USA, more particularly when we view the quantity exported to USA on wholesale basis with that to other countries in small lots on retail basis. We, therefore, hold that the Internal CUP method is not suitable in the present circumstances.”
Coordinate Bench of the Tribunal in taxpayer’s own case for AY 2009-10 (supra) has also held that the transaction under consideration cannot be compared with bank guarantee rates charged by the third party bank from their customers because such banks performed all the functions and bear all the risks performed/ borne by AE of the taxpayer whereas, in the instant case, the taxpayer in the subject transaction has merely facilitated its AE and bears no risk.
DRP has rightly deleted the addition by using FAR analysis of the functions performed and risk assumed by the taxpayer qua the transaction under consideration.
No doubt, ld. DRP has extended relief to the taxpayer by deleting the impugned addition but the taxpayer by filing cross objection challenged the DRP’s order for not accepting the primary analysis undertaken by the taxpayer using CUP method and not accepting secondary analysis undertaken by the taxpayer to determine ALP of impugned transactions by aggregating all the international transactions by using TNMM with OP/total assets as PLI.
Perusal of the order passed by the ld. TPO at page 29 goes to prove that ld. TPO has rejected the internal CUP applied by the taxpayer to benchmark its international transactions qua guarantee commission on the ground that it has failed to establish high degree of comparability along with dimension of contractual terms, date of transaction, alternatives realistically available with the guarantor & the guarantee and market conditions to substantiate its case.
Challenging the aforesaid findings returned by the ld. TPO, ld. AR for the taxpayer contended that if local guarantee issued by the taxpayer cannot be considered as a valid CUP as observed by the ld. TPO are also liable to be rejected on the same rationale and further contented that judgment rendered by the Hon’ble Delhi High Court in case of Cotton Naturals (I) Pvt. Ltd. in ITA 233/2014 relied upon by the ld. TPO and ld. DR is not applicable to the facts and circumstances of the case.
We have perused the judgement passed in case of Cotton Naturals (I) Pvt. Ltd. (supra) which does not cover the issue before the Bench rather the same is qua benchmarking of loan advanced by the taxpayer to its AE whereas the issue in the instant case is benchmarking of international transactions qua receipt of guarantee commission for guarantees counter guaranteed by the AE.
At the very outset, ld. AR for the taxpayer contended that in case, local guarantees issued by the taxpayer cannot be considered as valid CUP on account of comparability factors, in that case bank guarantee rates used by the ld. TPO also required to be rejected for the same reasons and consequently, taxpayer come up with the secondary analysis already undertaken by the taxpayer to determine the ALP of the transaction under consideration wherein all the international transactions of the taxpayer were aggregated and the ALP was determined using TNMM as the MAM using the Tribunal in taxpayer’s own case in AYs 2009-10 & 2015-16 (supra).
However, on the other hand, ld. DR for the Revenue contended that this contention of the ld. AR for the taxpayer has already been examined by the TPO and has rightly been rejected and relied upon the order passed by the ld. TPO.
We have perused para 6 of the transfer pricing order wherein the ld. TPO has discussed the TP analysis made by the taxpayer to benchmark its international transactions including transaction of receipt of guarantee commissions by the taxpayer as a bundled transactions but the ld. TPO declined to accept the contention raised by the taxpayer that all the international transactions of taxpayer are to be benchmarked in aggregated form by applying TNMM as the MAM with Operating Profit/total assets as the Profit Level Indicator rather proceeded to use the CUP qua receipt of guarantee commission issued by comparing with the bank guarantee rates. Ld. TPO however has not found any fault with the Transactional Net Margin Method analysis made by the taxpayer.
As discussed in the preceding paras, TPO’s finding using CUP method comparing the counter guarantee transaction with bank guarantee issued by the third party banks to their customers returning any finding rejected the secondary analysis undertaken by the taxpayer by applying the TNMM as the MAM by OP/total assets as the PLI.
Undisputedly, TNMM as the MAM with OP/total assets as PLI as the MAM has been held to be sustainable by the coordinate Bench of the Tribunal to benchmark the international transactions qua receipt of counter guarantee commission from AE in AYs 2009-10 and 2015-16. Undisputedly there is no change in the functional profile of the taxpayer qua year under assessment vis-à-vis AYs 2009-10 & 2015-16.
We have examined the order passed by the coordinate Bench of the Tribunal for AY 2015-16 (supra) wherein identical issue as to receipt of counter guarantee commission from AE has been decided in favour of the taxpayer by applying TNMM by benchmarking the bundled of international transactions with its AE by applying the combined approach by returning following findings:-
“39. We have carefully considered the rival contention and perused the orders of the lower authority and the direction of the learned dispute resolution panel. As in the case of the assessee In for Assessment Year: 2009-10 dated 21/5/2020 has considered the identical issue as Under:- “53. We have heard the rival contentions and perused the record. The issue raised vide ground of appeal no.12 is ./2016 CO No.126/Del/2016 against the transfer pricing adjustment made on account of Receipt of guarantee commission. The assessee while benchmarking its international transactions in the transfer pricing report applied combined approach and has benchmarked under TNMM method. The case of the assessee is that the Transfer pricing analysis undertaken by applying TNMM method on combined approach should be accepted, as the margins of the assessee has been accepted and no adjustment has been made in the hands of the assessee. The only adjustment which was made in the hands of the assessee was on account of Receipt of guarantee commission. The case of the assessee before us is that as PE in India, it has limited role and was not bearing any risks. The assessee received part of guarantee commission in its capacity as facilitator only. When the persons needed guarantee in India to participate in a tender, then service of the Bank was utilized for issuing guarantee in favour of the beneficiary. The evaluation of the beneficiary for the creditworthiness of the customers was performed by the overseas branches, whereas the assessee had limited role in issuing letter of guarantee, it received 1% guarantee commission. In these facts, there is no merit in comparing the rate received by the assessee with the rate charged by different banks who are operational in India and providing financial guarantee to its customers, with all risk involved therein. In such facts and circumstances, the Assessing Officer/TPO erred in applying the rate charged by Axis Bank, Canara Bank, Punjab National Bank and State Bank of India, etc. with arithmetic mean of 2.71% to benchmark the international transactions between the assessee and its overseas branches of receipt of bank guarantee commission. The details of the international transaction are tabulated in the order of the TPO itself and the same clearly reflect that no transaction is undertaken except with overseas branches. The assessee undoubtedly is also providing the services to its customers in India where it a risk bearing entity. We are of the view that where the assessee has undertaken bundle of international transactions with its AE and the same has been benchmarked by applying combined approach and the method of TNMM has been used and the margins shown by the assessee have been accepted; then there is no merit in segregating the international transaction of the receipt of the guarantee commission and benchmarking the same separately. The margins of the combined approach has been accepted at Arm�s Length. Consequently, there is no merit in the transfer pricing adjustment made in the hands of the assessee. The same ./2016 CO No.126/Del/2016 is thus directed to be deleted. The ground of appeal
No.12 is thus deleted.”
40. As the facts and circumstances of the case are identical to the facts decided in case of the assessee for assessment year 2009 – 10, respectfully following the decision of the coordinate bench, we allow this ground of appeal of the assessee holding that as the banking business of the assessee and the transactions related to the issue of guarantee commission on by the assessee are interlinked and closely connected, they should have been benchmarked in a bundled manner. Accordingly ground number 9 of the appeal of the assessee is allowed.”
So, following the decision rendered by the coordinate Bench of the Tribunal in taxpayer’s own case for AY 2015-16 (supra), we are of the considered view that since issue is identical international transactions qua rate of bank guarantee commission is to be benchmarked by applying the TNMM as the MAM on combined approach basis. The taxpayer in its TP analysis has duly followed the TP analysis undertaken by the taxpayer in Assessment Years 2009-10 & 2015-16, which was perused by the ld. TPO, but has not disputed the same.
Consequently, benchmarking of bundle of international transactions by the taxpayer with its AE by applying combined approach and TNMM has been used and margin shown by the taxpayer has otherwise been accepted, in these circumstances, the international transactions qua receipt of counter guarantee commission by the AE cannot be segregated from other international transactions undertaken by the taxpayer as has been been accepted at arm’s length, hence addition made by the TPO is not sustainable and as such is ordered to be deleted.
Consequently, ground no.6 of the Revenue is determined against the Revenue and the cross objections filed by the taxpayer are partly allowed.
54. Resultantly, the appeal filed by the Revenue is dismissed and the cross objections filed by the taxpayer are partly allowed. Order pronounced in open court on this 27th day of May, 2021.