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Income Tax Appellate Tribunal, DELHI BENCH ‘I-2’ : NEW DELHI
Before: SHRI KULDIP SINGH & SHRI PRASHANT MAHARISHI
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.
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/-.”
The Objector, M/s. Spentex Industries Limited, by filing the 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%.”
Briefly stated the facts necessary for adjudication of the 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 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/-.
Assessee has brought on record the fact that it has not 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 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
AO thereby made an addition of Rs.7,45,97,179/- to the income of the assessee.
Assessee carried the matter by way of appeal before the ld. 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.
Assessee has not preferred to put in appearance despite 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. 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.
Ld. CIT (A) by invoking the provisions contained in 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.
It is brought to the notice of the Bench that identical issue 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 6243/Del/2014 & 6244/Del/2014 respectively vide order dated 17.05.2018.
Bare perusal of the order (supra) passed by the coordinate Bench of the Tribunal in assessee’s own case goes to prove that identical issue has been decided in favour of the assessee by 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.
The coordinate bench of the Tribunal at Delhi in the case of Bharti Airtel Ltd Vs. ACIT in 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 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)”.
A perusal of the aforesaid finding shows that no transfer pricing adjustment is to be made in case of no diversion of profits out of India. The flagship company of the assessee has accumulated brought forward losses to the tune of Rs. 290 crores and subsidiaries are also in heavy losses. Therefore, it cannot be said that there was any intention of diversion of profits out of India. Further, we find that the assessee has not incurred any cost in providing corporate guarantee.
A similar view was taken by the Ahmedabad Bench of the Tribunal in the case of Micro Ink Limited Vs. ACIT in ITA No. 2873/Ahd/2010. In this case, the Tribunal followed the decision of the Delhi Bench of the Tribunal.
The Chennai Bench of the Tribunal in the case of Redington India Ltd Vs. ACIT [2014] 49 TAxmann.com 146 has held 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 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
Similar views were taken by the Mumbai Bench of the Tribunal in the case of Videocon Industries Ltd Vs. ACIT in and Marico Ltd Vs. ACIT reported at 70 Taxmann.com 214.
The Coordinate Bench of the Tribunal at Hyderabad in the case of Vivimed labs Ltd Vs. DCIT in ITA No. 404 and 479/Hyd/2015 has held that “However, the amendment to section 92B of the Act by the Finance Act, 2012 can only be prospective and not retrospective as held in the case of Siro Clinpharm Private Ltd Vs. DCIT ITA No. 2618/MUM/2014. This provision is applicable from assessment year 2013-14 onwards. Hence, addition of corporate guarantee in this year is deleted.” 19. Considering the plethora of decisions of the coordinate benches as discussed hereinabove, we are of the opinion that the transfer pricing adjustment on account of corporate guarantee fee made during the years under consideration are bad in law. Respectfully following the decision of the coordinate benches [supra] we direct the Assessing Officer to delete the additions made on account of transfer pricing adjustments relating to corporate guarantee fee. Ground No. 1 in all the cross objections are allowed.”
13. Following the order passed by the coordinate Bench of the 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 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.
14. Since transaction qua corporate guarantee entered into by the 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. 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.