DCIT, CIRCLE-5(1), KOLKATA vs. S K SARAWAGI AND COMPANY PRIVATE LIMITED, KOLKATA

“Ground no 2 to 6 [Arms length adjustment] I have considered the submission of the appellant. Similar additions on account of arms length adjustments were made in the case of the appellant for the AY-20113- 14 which was fully deleted by the Hon'ble ITAT Kolkata vide order dl. 09.08.2019 in which while dealing with the same issue held as under: "It emerges during the course of hearing that the assessee's solitary substantive grievance pleaded in the instant appeal seeks to reverse the learned lower authorities action making transfer pricing adjustment in the nature of the taxpayer's corporate guarantee for overseas Associate Enterprises (A) involving addition amount of Rs.4,38,85,509/-. The assessee's pleadings comprise of multiple faced arguments against the impugned adjustment. It transpires during the course of hearing that this tribunal's co-ordinate bench's order in ACIT, Circle-6(2), Kolkata vs. Mis Emami Ltd. decided on 03.04.2019 holds that a corporate guarantee is not an international transactions u/s 92B of the Act as under:- …………………. We adopt the above detailed discussion mutatis mutandis to reject the Revenue's argument supportive of the impugned corporate guarantee adjustment taken as international transactions. The assessee succeeds in its solitary grievance for this precise reason alone. All other pleadings are accordingly rendered infructuous. This assessee's appeal is allowed." A copy of the order of ITAT filed during the course of appeal proceedings has been ed and respectfully following the order of the Hon'ble ITAT Kolkata Bench, the count of arms length adjustments is hereby deleted in full.” 3.1 The Ld. AO had, for this year, made another addition of Rs. 1,94,580/- on account of land conversion charges paid by the assessee, by holding it to be capital in nature. This addition has been deleted by the Ld. CIT(A) on the ground that this expenditure was a business expense incurred wholly and exclusively thereon.

3.2 The Revenue is aggrieved by the action of Ld. CIT(A), concerning the two additions, and has approached the ITAT with the following grounds:

ITA 150/Kol/2024

“1. That on the facts and circumstances of the case in law the Ld. CIT(A) has erred in deleting the arm's length price adjustment of Rs. 5,62,33,818/-made by & 151/Kol/2024 S K Sarawagi and Company Private Limited the TPO on account of corporate guarantee provided by the assesses to its associated enter. 2 That on the facts and circumstances of the case in law the Ld CITIA has erred in ignoring the fact that the corporate guarantee extended by the assessee company to its AE is an international transaction as per explanation to section 92B with retrospective effect front 01.04.2002 and accordingly an arm's length charge should be computed in relation to the same.

3. That on the facts and circumstances of the case in law the Ld. CITIA) has erred in law as it failed to appreciate that the corporate guarantee has provided benefit to the AE and the assessee should charge a fee for its services in the form of guarantee charge.

4. That on the facts and circumstances of the case and in law the Ld CIT(A) has erred in deleting the addition of Rs 194580-being the expenditure made on conversion of land which will give an advantage of enduring benefit for the business of the assessee making the expenditure capital in nature and revenue in nature as has been held by the Ld. CIT(A). 5 That the appellant craves leave to add to and/or alter, amend, modify or rescind the grounds herein above before or hearing of this appeal.”

“7. Ground nos. 9 to 15 pertain to the issue of transfer pricing adjustment with respect to Corporate Guarantee (in short ‘CG’) given by the assessee to its Associated Enterprises (in short ‘AE’), assessed at Rs. 3,35,13,140/-. The facts on this issue may be mentioned briefly to appreciate the controversy. The assessee is in the business of manufacturing and marketing of graphite electrodes, anodes, carbon paste etc. and to expand its business globally the appellant set up wholly owned subsidiaries in Netherlands and Germany. For the purposes of overseas expansion, a total amount of Euro 6.5 million were required to acquire assets. For arranging the said amount of Euro 6.5 million the assessee made an equity infusion of Euro 2.5 million and arranged a debt funding of Euro 4 million through ICICI Bank UK Ltd. The AEs also availed the loans for working capital purposes. It is for arranging this amount that the appellant provided a CG for arranging the said loans. The Transfer Pricing Officer (in short ‘TPO’) assessed a CG fees @ 3% per annum as an Arm’s Length Price (in short ‘ALP’) for the CG so provided by the appellant. It is a matter of record that this issue is a recurring matter in the appellant’s case and the ld. CIT(A) has relied on the assessee’s own case for AY 2006-07 (ITA No. 2022/KOL/2010 dated 08.09.2017) and the cases of Tega Industries Limited vs. DCIT in and the case of Bharti Airtel Ltd. vs. ACIT reported in [2014] 161 TTJ 428 (Delhi - Trib.) to grant relief to the appellant on the basis of finding that CG could not be an international transaction for the purposes of Section 92B of the Act. Though the appellant has relied on the findings in its own case in the previous year relied upon by the ld. CIT(A) but the ld. A/R has also relied on a number of other authorities to contend that provision of CG were in the nature of shareholder service for which no amount was chargeable or payable by him. Needless to say, the ld. A/R has relied on a number of authorities to canvas his point. It is seen that the findings in the appellant’s own case for AY 2008-09 in & 474/KOL/2018 and CO Nos. 64 & 66/KOL/2018 order dated 22.11.2019. In this case the issue of CG has been dealt with as under: “6. The Revenue's latter substantive ground in Assessment Year 2008-09 pleads that the CIT(A) has erred in law and on facts in deleting assessee's corporate guarantee's arm's length price's adjudication of Rs.2,35,40,061/- made by the Assessing Officer as per the Transfer Pricing Officer's order. Its case is that a corporate guarantee amounts to an international transaction as per section 92B Explanation inserted by the Finance Act 2012 w.e.f. 01.04.02. We find no merit in Revenue's instant grievance since various judicial precedents (2016) 157 ITD 132(Ahd), Tega Industries Ltd. vs. DCIT (ITA 1912/Kol/2012 dated 21.09.16) & Bharti Airtel Ltd. vs. Addl. CIT (2014 64 SOT 50 (URO) take note of the foregoing legislative amendment to hold that a corporate guarantee is not an international transaction u/s 92B of the Act. We decline the Revenue's instant grievance and main appeal ITA No.474/KOl/2018 therefore.”

& 151/Kol/2024 S K Sarawagi and Company Private Limited 7.1. However, for the immediately preceding year (AY 2006-07), the appellant’s contention was accepted on different grounds in as much as the contention of the appellant was supported on the basis of a two limbed argument: (i) that CG is not an international transaction; and (ii) that the amendments brought in by the Finance Act, 2012 with retrospective effect from 1.4.2002, are not retrospective but prospective. Expanding on this theme further the Coordinate Bench of ITAT is seen to have relied on the case of EIH Ltd. vs. Commissioner of Income Tax (AY 2010-11), order dated 09.06.2017 (Kolkata ITAT) and the case of Marico Ltd. Vs. ACIT (2016) reported in 70 taxmann.com 214 (Mum Trib) to arrive at the conclusion, in favour of the assessee, that CG is neither an international transaction, nor is the amendment to section 92B of the Act retrospective. 7.2. Perhaps anticipating a counter view to this line of reasoning the Ld. AR has submitted as under: “Hon'ble High Court of Madras in the case of PCIT vs. M/s. Redington (India) Limited [T.C.A. Nos. 590 & 591 of 2019] has not considered the aforesaid judgments while deciding the issue. Hence, the judgment in case of Redington (Supra) is per-incuriam. It is submitted that when there is a conflict between different High Courts, the view which is favourable to the assessee needs to be adopted. Reliance in this regard has been placed on the decision of Bombay High Court in the case of K. Subramanian & ANR. Vs. Siemen's India Ltd. & ANR. (1985) 156 ITR 11 (BOM): (1983) 36 CTR (BOM) 197: (1983) 15 Taxman 594 [Annexure - 18 of CLPB (Refer page 164 of CLPB; Para No. 2)]. Further, in Redington, Madras High Court placed reliance on the decision of Prolifics Corporation Limited [TS-497-ITAT-2014 (HYD)-TP] to uphold that there may not be immediate charge on P & L account, but inherent risk cannot be ruled out in providing guarantees. However, Madras High Court has not considered the decision in case of Micro Inks (Supra) while deciding the issue. Further, the judgment in case of Prolifics was upheld as "Non-Binding" in Micro Inks (Supra) [Annexure - 13 of CLPB (Refer page 121 of CLPB; Para No. 49)]. Thus reliance by Madras High Court on the decision of Prolifics (supra) is misplaced and accordingly the decision is per-incuriam.” 7.3. It is seen that in neither of the years sought to be relied upon, in the appellant’s own case, the Hon’ble Benches of ITAT- Kolkata had the benefit of a subsequent judgement of the Hon’ble Madras High Court in the case of PCIT vs. Redington (India) Ltd. reported in [2021] 430 ITR 298 (Madras), order dated 10.12.2020 in which this issue involving an unambiguously worded statute stating clearly that the amendment to section 92B of the Act was retrospectively effective from 01.04.2002, has been settled conclusively as under: The argument of the assessee is that prior to the amendment brought about in section 92B by Finance Act, 2012, the Tribunal had decided that furnishing of a guarantee by an assessee was not an 'international transaction' as it did not fall within any of the limbs of section 92B. It is submitted that to get over the judicial pronouncement, the explanation was inserted. The argument is that clause (c) of the Explanation supports the case of the assessee inasmuch as the Explanation makes it clear that giving of a Corporate Guarantee is not a service. Without prejudice to the said contention, it is submitted that only Corporate Guarantee is given by the assessee, which are in the nature of lending are covered under clause (c) of Explanation 1 to section 92B. Further, it is submitted that the nature of transactions covered by clause (e) specifically include even those transactions which may not have a 'bearing on the profit, income, losses or assets of such enterprises at the time of transaction' are covered if they have such a bearing 'at any future date'. It is argued that the language used in the Explanation makes it clear that in so far as the transactions that fall within the main part of section 92B are concerned, such transactions must have a bearing on profit, income, losses or assets of an assessee in the year in which the transaction is effected. In the assessee's case, the Corporate Guarantees represent a contingent liability and lay dormant and have no bearing on the current year's profits, income or losses of an assessee and Corporate Guarantee are not covered within the definition of international transaction. It is submitted that applying 'doctrine of fairness' as explained by the Supreme Court of India in the case CIT v. Vatika Township (P.) Ltd. [2014] 49 taxmann.com 249/227 Taxman 121/367 ITR 466 the explanation ought to be read as prospective in its application and retrospective in its effect such that it will also cover within its ambit guarantees issued prior to the introduction of the Explanation by Finance Act, 2012. [Para 70] & 151/Kol/2024 S K Sarawagi and Company Private Limited ■ A new Enactment or an Amendment meant to explain the earlier Act has to be considered retrospective. The Explanation inserted in section 92B by Finance Act, 2012 with retrospective effect from 1-4-2002 commences with the sentence 'for the removal of doubts, it is hereby clarified that'. [Para 72] ■ An Amendment made with the object of removal of doubts and to clarify, undoubtedly has to be read to be retrospective and Courts are bound to give effect to such retrospective legislation. [Para 73] ■ In Co-operative Co. Ltd. v. CIT 2008 taxmann.com 1086 (SC), it was held that when an amendment is brought into force from a particular date, no retrospective operation thereof can be contemplated prior thereto. The Explanation in section 92B specifically has been given retrospective effect and it is clarificatory in nature and for the purpose of removal of doubts. This issue was considered by this Court in the case of Sudexo Food Solutions India (P.) Ltd. v. State of Tamil Nadu [Tax Case (Revision) Nos. 14 & 15 of 2013, dated 30-4-2019]. [Para 74] ■ The concept of bank Guarantees and Corporate Guarantees was explained in the decision of the Hydrabad Tribunal in the case of Prolifics Corpn. Ltd v. Dy. CIT [2015] 55 taxmann.com 226/68 SOT 104 (URO). In the said case, the revenue contended that the transaction of providing Corporate Guarantee is covered by the definition of international transaction after retrospective amendment made by Finance Act, 2012. The assessee argued that the Corporate Guarantee is an additional guarantee, provided by the Parent company. It does not involve any cost of risk to the shareholders. Further, the retrospective amendment of section 92B does not enlarge the scope of the term 'international transaction' to include the Corporate Guarantee in the nature provided by the assessee therein. The Tribunal held that in case of default, Guarantor has to fulfil the liability and therefore, there is always an inherent risk in providing guarantees and that may be a reason that Finance provider insist on non-charging any commission from Associated Enterprise as a commercial principle. Further, it has been observed that his position indicates that provision of guarantee always involves risk and there is a service provided to the Associate enterprise in increasing its creditworthiness in obtaining loans in the market, be from financial institutions or from others. There may not be immediate charge on profit & loss account, but inherent risk cannot be ruled out in providing guarantees. U1 and adjustment are to be made on guarantee commissions on such guarantees provided by the Bank directly and also on the guarantee provided to the erstwhile shareholders for assuring the payment of Associate Enterprise. The case of Redington (India) Ltd. (supra) leaves no room for doubt that the amendment in question is retrospective, as clearly mentioned in the statute itself, and would thus apply to the present case. Accordingly, it is required to respectfully differ from the findings of the Coordinate Bench orders in the appellant’s own case to hold that CG is an international transaction and would need to be considered for arm’s length pricing. 7.4. Before parting with this issue, the contention of the Ld. AR that the Redington case is per- incuriam of several authorities relied upon in as much as “anti-abuse legislation” can only be prospective, needs to be briefly discussed. The broader issue here would be of judicial discipline in as much as when there is a clear judgement of a High Court on the issue of whether the amendment to section 92B of the Act is retrospective or prospective, then to be persuaded by any argument that the same is per-incuriam of several Apex Court judgements on general issues, other than the one under consideration, would amount to violating the principles of judicial discipline. To illustrate this reasoning, we can refer to the case of Yucca Finvest (P.) Ltd. vs. Dy. CIT reported in [2006] 101 ITD 403, where it has been held that: "Unless a contrary decision is given by the jurisdictional High Court which is binding on the Tribunal, it should respect the law laid down by another High Court." It has been stated, inter alia, by the ITAT, Mumbai Bench that: "Our view is fortified by the decision of the Hon’ble Bombay High Court in CIT v. Smt. Godavaridevi Saraf [1978] 113 ITR 589, wherein it was held that unless a contrary decision is given by a competent High Court which is binding on the Tribunal in Bombay, it should respect the law laid down by another High Court. It observed as under:

& 151/Kol/2024 S K Sarawagi and Company Private Limited It should not be overlooked that the Income-tax Act is an All-India stature and if an Income-tax Tribunal in Madras, in view of the decision of the Madras High Court, has to proceed on the footing that section 140A(3) was non-existent, the order of penalty there-under cannot be imposed by the authority under the Act. Until a contrary decision is given by any other competent High Court, which is binding on a Tribunal in the State of Bombay, it has to proceed on the footing that the law declared by the High Court, though of another State, is the final law of the land. When the Tribunal set aside the order of penalty it did not go into the question of intra vires or ultra vires. It did not go into the question of constitutionality of section 140A(3). That section was already declared ultra vires by a competent High Court in the country and an authority like an Income-tax Tribunal acting anywhere in the country has to respect the law laid down by the High Court, though of a different State, so long as there is no contrary decision of any other High Court on that question." The above ruling that the decision of another High Court should be followed unless there is a contrary decision of another High Court was approved by the Hon’ble Bombay High Court in CIT vs. Jayantial Ramanlal & Co. [1982] 137 ITR 257/8 Taxman 188, Siemens India Ltd. vs. K. Subramanian, ITO [1983] 143 ITR 120/13 Taxman 146 and R. Parthasarathy, Asstt. Collector of Central Excise vs. Dipsi Chemicals (P.) Ltd. [1988] 173 ITR 497 (Bom.). The ITAT, Panaji Bench in ITO v. Dilip Shirodkar [2004] 2 SOT 947, also expressed the view that once a higher authority than the Tribunal has expressed a view, the Tribunal has to respectfully follow the same even though that decision may be of a non-jurisdictional High Court, it observed as under: ". . . In the hierarchical judicial system that we have, better wisdom of the Court below has to yield to higher wisdom of the Court above and, therefore, once an authority higher than this Tribunal has expressed an opinion on that issue, we have to respectfully follow the same. Such a High Court being a non-jurisdictional High Court does not alter the position as laid down by the Hon’ble Bombay High Court in the matter of CIT v. Smt. Godavaridevi Saraf [1978] 113 ITR 589…. “ Considering the discussion above it is clear that till either the Hon’ble Jurisdictional High Court or the Hon’ble Apex Court do not pass any orders having a contrary position to the judgement of Redington (India) Ltd. (supra), this Bench is bound to follow that judgement, considering the norms of judicial discipline. To this extent, orders of different Benches of ITAT relied upon by the appellant would not constitute valid reference points. For instance, the case of M/s. Emami Ltd (ITA No. 1958/Kol/2017), order dated 03.04.2019), relied upon by the Ld. AR does not have the benefit of the Redington judgement (supra) and it has been held that neither is CG an international transaction nor does the amendment to section 92B of the Act retrospective. Clearly the Redington case (supra) changes this position. Accordingly, it is held that the said amendment to section 92B of the Act will be applicable to the year under consideration and there can be no hesitation in holding that “Corporate Guarantee” is an international transaction and will thus be eligible for ALP. 7.5. The records reveal that the Ld. TPO has adopted an ALP of 3% following some rates quoted by the HSBC Bank and is seen to have made an upward adjustment of Rs. 3,35,13,140. On this issue it is felt that a CG offered by a commercial bank would definitely be on the higher side as compared to a CG offered by a company to its subsidiaries or associated enterprises. The Ld. AR has argued, without prejudice to their claim of CG not being an international transaction for the year under consideration, and has stated that in any case there cannot be any upward adjustment of more than 0.25%. For this proposition reliance has been placed on the case of M/s. Everest Kanto reported in 232 Taxman 307 (Bom), a copy of which was supplied to us during the course of hearing. On a perusal of the Everest Kanto case (supra) it is seen that if one were to read paras 4 and 10 of this order conjointly then it is clear that CG charged by a commercial Bank cannot be equated with CG charged by a corporate entity from its AEs. There can obviously be no argument on this proposition, as has already been mentioned earlier. However, the Hon’ble Bombay High Court has confirmed the 0.5% commission charged by the Appellant and merely disagreed with the upward adjustment @ 3%. Thus, the appellant does not have a sound case for considering 0.25% as commission, as asked for based on the Everest Kanto case (supra). On the other hand, a review of cases on this subject, reveals that a CG commission of 0.5% or even above this has been held to be reasonable in the following cases:

& 151/Kol/2024 S K Sarawagi and Company Private Limited (i) NCC Ltd 157 taxmann.com 144 (Hyd-Trib) (ii) Aurobindo Pharma Ltd 152 taxmann.com 469 (Hyd-Trib) (iii) Havells India Ltd 140 taxmann.com 576 (Delhi-Trib) (iv) Electro Steel Castings Ltd 125 taxmann.com 308 (Kol-Trib) (v) Mahindra & Mahindra Ltd 117 taxmann.com 518 (Mum-Trib) (vi) Tata Consultancy Services Ltd 121 taxmann.com 190 (Mum-Trib) It is understood that TP adjustments are actually estimations arrived at after analysis of relevant data. Accordingly, here also there would need to be an estimation of CG commission. It is in this light that following the decisions in the above mentioned cases, the CG commission is restricted to 0.5% as against 3% worked out by the ld. AO/TPO. The appellant gets consequential relief.” 5.1 Considering the detailed finding given in the case of M/s Graphite India Ltd. (supra), it is held that the CG commission must be restricted to 0.5% as against 1.3% worked out by the Ld. TPO. To this extent, the revenue succeeds partially.

5.2 Regarding the issue of land conversion charges, it is seen that the Ld. CIT(A) has applied the facts and law correctly to the impugned addition and hence there can be no interference with his findings. Accordingly, on this account, the revenue fails. the single issue is on the ground of Corporate Guarantee commission. Since the finding is already given for AY 2015-16 ( ), hence that finding shall apply mutatis mutandis to this appeal also. Accordingly, the revenue succeeds partially on this issue.

Order pronounced on 25.06.2025