ACIT, NEW DELHI vs. M/S. SPENTEX INDUSTRIES LTD., NEW DELHI

PER KULDIP SINGH, JUDICIAL MEMBER :

The aforesaid appeal filed by the Revenue and cross

objections filed by the assessee are being disposed off by way of

composite order to avoid repetition of discussion.

2 ITA No.704/Del./2016 CO No.169/Del/2017 2. The Appellant, Assistant Commissioner of Income-tax,

Circle 24 (1), New Delhi (hereinafter referred to as ‘the Revenue’)

by filing the present appeal sought to set aside the impugned order

dated 26.10.2015 passed by the Commissioner of Income-tax

(Appeals) – 44, New Delhi qua the assessment year 2011-12 on the

grounds inter alia that :-

“On the facts and circumstances of the case, the ld. CIT (A) has erred in law and on facts in directing the AO to take Arms Length Price of compensation for providing corporate guarantee @ 1% which determined as Rs.2,89,13,635/- as against Rs.7,45,97,179/- (@ 2.58%) computed by AO/TPO and thereby allowing a consequential relief of Rs.4,56,83,544/-.”

present cross objections challenged the impugned order dated

26.10.2015 passed by the Commissioner of Income-tax (A)-44,

New Delhi qua the assessment year 2011-12 on the grounds inter

alia that :-

“1. That the CIT (A) erred on facts and in law in considering corporate guarantee as an international transaction. 2. Without prejudice to above, the CIT (A) erred on facts and in law in taking the arm’s length compensation rate on corporate guarantee @ 1%.”

controversy at hand are : Assessee is into the business of

manufacturer of polyester cotton yarn, cotton yarn, man-made fibre

yarn, viscose cotton yarn and synthetic yarn etc.. Assessing

3 ITA No.704/Del./2016 CO No.169/Del/2017 Officer (AO) noticed that during the year under assessment, the

assessee has undertaken international transaction with its

Associated Enterprises (AE) with the use of Transactional Net

Margin Method (TNMM) as the value of the international

transactions was at Rs.2,89,13,63,550/-. AO called upon the

assessee to explain as to why the arm’s length price of transactions

qua corporate guarantee be not determined. During the year under

assessment, corporate guarantee has been given by the taxpayer to

its AE in the following cases :-

(i) Corporate Guarantee to Tashkent Toyepa Textil for an amount of Rs.192,85,17,500. (ii) Corporate Guarantee to Lehman Brothers for an amount of Rs.87,36,66,050/-. (iii) Corporate Guarantee to CVCI for an amount of Rs.8,91,80,000/-.

realized the amount it had charged to AE for which plan for

restructuring dated 13.11.2009 had been approved by the

competent authority and the dues of the unsecured creditors have

been reduced to 29.15%. AO sought to apply mark up of 2.58% on

the corporate guarantee given by the assessee by following the

order passed in AY 2009-10. Declining the contentions raised by

the assessee, AO made adjustment in Arm’s Length Price (ALP) @

2.58% for the corporate guarantee on the ground that the assessee

4 ITA No.704/Del./2016 CO No.169/Del/2017 has exposed itself to greater risk without charging any amount

from its AE and thereby computed the same as under :-

S. Transaction Amount of Arm’s Length No. corporate Compensation guarantee @ 2.58% (Rs.) 1. Tashket Toyepa Textile 192,85,17,500 4,97,55,751 2. Lehman Brothers 87,36,66,050 2,25,40,584 3. Citi Venture Capitalists 8,91,80,000 23,00,844 Total 7,45,97,179

income of the assessee.

CIT (A) who has given part relief to the assessee by restricting the

arm’s length price of compensation for providing corporate

guarantee @ 1% as against 2.58% computed by the AO following

the order passed by his predecessor in assessee’s own case and

thereby partly allowed the appeal. Feeling aggrieved, the Revenue

as well as assessee have come up before the Tribunal by way of

filing the appeal and cross objections respectively.

issuance of the notice and consequently, we proceeded to decide

the present appeal with the assistance of the ld. DR as well as on

the basis of documents available on the file.

5 ITA No.704/Del./2016 CO No.169/Del/2017 9. We have heard the ld. Departmental Representative for the

revenue 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.

Explanation to section 92B which is with retrospective effect from

01.04.2002 and by relying upon the decision rendered by the

coordinate Bench of the Tribunal in case of Mahindra & Mahindra

Ltd. vs. DCIT (2012) 24 taxmann.com 267 (Mumbai) held the

transaction entered into by the assessee with its AE qua corporate

guarantee as an international transaction. Ld. CIT (A) followed the

decision of his predecessors of earlier years in restricting the ALP

of compensation for providing corporate guarantee @ 1% as

against 2.58% assessed by the AO.

has been decided in favour of the assessee by the coordinate Bench

of the Tribunal in its own case for AYs 2008-09, 2009-10 &

2010-11 in ITA Nos. 4959/Del/2014, 6243/Del/2014 &

6244/Del/2014 respectively vide order dated 17.05.2018.

Bench of the Tribunal in assessee’s own case goes to prove that

identical issue has been decided in favour of the assessee by

6 ITA No.704/Del./2016 CO No.169/Del/2017 holding that Explanation introduced in section 92B by the Finance

Act, 2012 is not retrospective in nature, thus transfer pricing

adjustment on account of corporate guarantee fee made by the AO

and confirmed by the ld. CIT (A) is not sustainable in the eyes of

law. For facility of reference, operative part of the order is

extracted as under :-

“12. The bone of contention is the amendment brought in the Act in section 292B of the Act which defines ‘international transaction’ for the purpose of transfer pricing legislation. Explanation to section 92B of the Act was inserted w.r.e from 1.4.2002 i.e. right from the time of inception of transfer pricing legislation in India. 13. The coordinate bench of the Tribunal at Delhi in the case of Bharti Airtel Ltd Vs. ACIT in ITA No. 5816/DEL/2012 vide order dated 11.03.2014 had an occasion to deal with the issue of classification of corporate guarantee as international transaction. The relevant findings of the Tribunal read as under: (i) A transaction between two enterprises constitutes an “international transaction” u/s 92B only if it has a bearing on profits, incomes, losses, or assets of such enterprises”. Even the transactions referred to in the Explanation to s. 92 B, which was inserted with retrospective effect (which includes giving of guarantees under clauses (c)), should also be such as to have a bearing on profits, incomes, losses or assets of such enterprise; (ii) The onus is on the revenue to demonstrate that the transaction has a bearing on profits, income, losses or assets of the enterprise. The said impact has to be on real basis, even if in present or in future, and not on contingent or hypothetical basis. There has to be some material on record to indicate, even if not to establish it to hilt, that an intra AE international transaction has some impact on profits, income, losses or assets; (iii) When an assessee extends assistance to the AE, which does not cost anything to the assessee and particularly for which the assessee could not have realized money by giving it to someone else during the course of

7 ITA No.704/Del./2016 CO No.169/Del/2017

its normal business, such an assistance or accommodation does not have any bearing on its profits, income, losses or assets, and, therefore, it is outside the ambit of international transaction u/s 92B (1)”.

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

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

(iii) When an assessee extends assistance to the AE, which does not cost anything to the assessee and particularly for which the assessee could not have realized money by giving it to someone else during the course of its normal business, such an assistance or accommodation does not have any bearing on its profits, income, losses or assets, and, therefore, it is outside the ambit of international transaction u/s 92B (1).” 11

8 ITA No.704/Del./2016 CO No.169/Del/2017

Tribunal in assessee’s own case vide order (supra), we are of the

considered view that old amendment vide which Explanation to

section 92B has been introduced has been held to be prospective in

nature, thus not applicable to the year under assessment. Because

ALP of international transactions qua corporate guarantee has been

determined by the AO as well as by the ld. CIT (A) merely by

relying upon the amendment vide which Explanation to section

92B of the Act by the Finance Act, 2012 has been introduced by

treating the same having retrospective effect, which is no more a

9 ITA No.704/Del./2016 CO No.169/Del/2017 valid and sustainable legal proposition. So, when explanation to

section 92B of the Act is not applicable to the year under

assessment, ALP of international transaction qua corporate

guarantee cannot be determined. Furthermore, assessee company

has filed the return of income declaring loss of Rs.1,35,26,955/- as

on 27.09.2011 and the flagship of the assessee company has

accumulated brought forward losses to the tune of about Rs.290

crores, there is no question of diversion of profit by the assessee

company out of India. Moreover, there is not an iota of material on

file to prove that the assessee company has incurred any cost in

providing corporate guarantee. Consequently, addition made in

this case on account of TP adjustment qua corporate guarantee fee

is ordered to be deleted, hence, the appeal filed by the Revenue is

hereby dismissed.

assessee company with its AE is held not to be an international

transaction, there is no question of determining the ALP of

compensation for providing corporate guarantee. So, the ld.

CIT(A) has erred in passing the impugned order confirming the

order passed by the AO to the extent of determining the ALP of

corporate guarantee transaction @ 1% which is not sustainable in

the eyes of law.

10 ITA No.704/Del./2016 CO No.169/Del/2017 15. So far as cross objections filed by the assessee challenging the impugned order passed by the ld. CIT (A) is concerned, the

objections are hopelessly time barred having been filed with delay of 512 days. Application filed for condonation of delay is too generic in nature and reasons given in the application for

condonation of delay are not acceptable. In any case, facts as to reshuffling of staff of the company and even the Financial Controller and Finance Head “have left the company” have also not been explained. It is settled principle of law that the

appellant/cross objector, as the case may be, is to prove the delay of every single day by giving cogent reasons. So, we hereby dismiss the application for condonation of delay and cross

objections filed by the assessee company are dismissed being hopelessly time barred. 16. Resultantly, the appeal filed by the Revenue and the cross

objections filed by the assessee are dismissed. Order pronounced in open court on this 31st day of December, 2019.

Sd/- sd/- (PRASHANT MAHARISHI) (KULDIP SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated the 31st day of December, 2019 TS

11 ITA No.704/Del./2016 CO No.169/Del/2017