ASSOCIATED CAPSULES P.LTD,MUMBAI vs. ASST CIT CEN CIR 42, MUMBAI

Shri J.D. Mistry, appearing on behalf of the assessee submitted that in ground No.1 of the appeal, the assessee has assailed the findings of Assessing Officer and the CIT(A) in treating the provision of Corporate Guarantee by the assessee for its Associate Enterprise (AE) as International Transaction. The ld. Counsel for the assessee submitted that the Corporate Guarantee offered by the assessee on behalf of its AE is not an International Transaction and hence, no Arms Length Price (ALP) is required to be determined for said transaction. To support his contention, the ld. Counsel for the assessee placed reliance on the following decisions:-

In respect of ground No.3, the ld. Counsel for the assessee narrating the facts submitted, that the assessee is a collector of paintings. The assessee had collection of rare paintings acquired over a long period of time. During the course of search action under section 132 of the Act on 17/4/2007 at the premises of the group companies and the residential premises of promoters certain costly paintings were seized. The assessee had furnished bills, vouchers and various other evidences in the form of magazine reports, etc. to establish that the paintings were acquired/purchased by the assesse either directly from the painters or from the galleries over the period of time. Out of 288 paintings found at the business premises of the assessee 71 paintings amounting to Rs.9,99,20,000/- were seized. The Revenue accepted the evidences furnished by the assessee in respect of majority of the paintings, however, the Assessing Officer was not convinced by the documents furnished by the assessee in respect of paintings (as per annexure to Assessment Order) valued at Rs.1,66,80,000/-. The ld. Counsel of the assessee asserted that even otherwise the addition is unsustainable as the paintings in question were acquired prior to search block period, therefore, addition qua such paintings cannot be made in search block period. The ld. Counsel for the assessee submitted that similar additions in respect of paintings were made in the case of Ms. Kavita Singh, one of the promoters of the assessee company. The issue travelled to the Tribunal in ITA No. 1242/Mum/2012. The Tribunal vide order dated 08/12/2017 accepted the documentary evidences furnished by the assesse during search and assessment stage and deleted the addition. The case of the assessee is on same pedestal, therefore, the additions in the case of assesse deserves to be deleted on same analogy.

Per contra, Shri Akhtar H. Ansari, representing the Department vehemently defended the impugned order and prayed for dismissing the appeal of assessee. The ld. Departmental Representative submitted that the Hon'ble Bombay High Court in the case CIT vs. Everest Kento Cylinders Ltd. reported as 378 ITR 57, has held that Corporate Guarantee to an overseas AE is an international transaction.

Controverting the arguments advanced by ld. Departmental Representative, the ld. Counsel for the assessee asserted that the details of the payments for purchase of paintings were provided to the Assessing Officer/CIT (A). Since some of the paintings were purchased long time back, the assessee could not trace the painters. The ld. Counsel for the assesse referring to Annexure I, II and III at pages 14 to 91 of the paper book, as a sample check explained from the documents on record the details of paintings seized, proof of payment for the said paintings, source of paintings and the date of purchase.

We have heard the submissions made by rival sides and have perused orders of the authorities below. We have also examined the documents placed on record by the assessee in the form of paper book and the decisions on which reliance has been placed.

The assessee in ground No.1 of the appeal has assailed addition made on account of Corporate Guarantee facility provided by the assessee for its overseas AE. The assessee is engaged in the business of manufacturing empty hard gelatine capsules. The assessee provided Corporate Guarantee of 2.4 million Euros (Equivalent to Rs.15,19,44,000/-) to its Croatian AE. The assessee did not make any adjustment on account of Corporate Guarantee facility provided to it’s AE. The Transfer Pricing Officer (TPO) held that the Corporate Guarantee is an international transaction. The TPO applied CUP to bench mark the international transaction holding guarantee commission @3% and made adjustment of Rs.20,89,230/- . The assessee carried the issue in appeal before the CIT(A). The first appellate authority upheld the findings of TPO in treating corporate guarantee as international transactions. However, the rate of commission was reduced from 3% to 2.5%. Against the addition confirmed, the assessee is in appeal.

The ld. Counsel for the assesse in support of his submissions that corporate guarantee is not an international transaction has placed reliance on Tribunal decisions. The contentions raised by ld.Counsel are unsustainable in the light of decision rendered by Hon'ble Jurisdictional High Court in the case of Everest Kento Cylinders Ltd. (supra). Thus, we hold Corporate Guarantee facility provided to overseas AE by the assesse is an international transaction. In so far as the rate of commission is concerned, the Hon’ble High Court in the aforementioned decision has upheld corporate guarantee commission at 0.5%. The corporate guarantee rate in the present case is accordingly restricted to 0.5%. The ground No.1 of the appeal is partly allowed in the terms aforesaid.

In ground No.2 of the appeal, the assessee has assailed that the ALP of the corporate guarantee commission should be restricted to the extent of facility availed by assessee’s A.E. The ld. Counsel for the assesse has pointed that as against the facility of Rs.15.19 crores, the AE ofassesse has availed benefit to the extent of Rs.2.48 crores only. We find merit in the submissions made by the ld. Counsel. The Tribunal in catena of decisions has held that Bank Guarantee and Corporate Guarantee are at variance. In the case of Bank Guarantee financial and capital assets of the entity are taken as security by the Bank to cover the financial risk. Thus, the assets of the entity are blocked to meet the obligation in the case of default As a consideration for extending guarantee facility, the Bank charges commission on the entire guarantee facility extended. Whereas, in the case of Corporate Guarantee there is no commitment of financial or capital assets of the entity. The guarantee is issued without any security or underlying asset. Corporate guarantee is extended by one corporate entity to a third party for or on behalf of its subsidiary/group entity/associated enterprise. It is in the nature of contingent liability. Keeping in view, the nature and extent of exposure and liability of guarantor in the case of corporate guarantee, it would be justified if guarantee commission is charged to the extent of actual exposure of facility availed instead of gross amount of facility extended. Similar view has been taken by the Tribunal in the case of M/s BS Limited vs. Asst. Commissioner of Income Tax reported as 94 taxmann.com 346 (Hyd.). The relevant extract of the order is reproduced herein below: “14.2 Further, ld. AR submitted that the assessee has extended the corporate guarantee to the AE whereas AE has not utilized the full financial facility during the year, hence, the quantum cannot be determined in full value of corporate guarantee. We are in agreement with the assessee that corporate guarantee is contingent liability, relevant consequence depends upon future event. However, the quantum of exposure should be on the basis of actual exposure. In this case, it is not clear from the document submitted before us the actual exposure. Therefore, we find it appropriate to remit this issue back to the file of TPO/AO to determine the actual exposure of contingent liability for this AY and apply the rate of 0.53% as per the ratio of Glenmark Pharmaceuticals Ltd. (supra) on the actual contingent liability.” In view of our above discussion, the ground No. 2 is allowed in principle. In the instant case, the assesse has purportedly availed facility of Rs.2.48 crores as against corporate guarantee of Rs.15.19 crores. For the purpose of determination of corporate guarantee commission in line with our observations and for the purpose to ascertain/verify the extent of corporate guarantee exposure, we deem it appropriate to restore this issue to the Assessing Officer. The ground No. 2 of the appeal is allowed for statistical purpose in the above said terms.

The third ground of appeal is in respect of addition of Rs.1,66,80,000/- on account of unexplained paintings found during search operation at the premises of the assessee. There were in total 288 paintings which were inventoried having aggregate value of Rs. 19,39,92,950/-. The assesse was asked to explain source of purchase of the said paintings. Out of 288 paintings, 71 paintings having aggregate value of Rs.9,99,20,000/- were put under constructive seizure. The assessee furnished evidences in the form of bills, vouchers, magazines, etc. to show the purchase cost of the paintings, as well as the date of purchase of paintings. The Assessing Officer did not accept the explanation and the documents furnished by the assesse in respect of some of the paintings. The primary reasons for rejection of evidences by the Assessing Officer were:- (i) The description of the paintings mentioned on the vouchers do not match; (ii) Kutcha Bills furnished by the assessee do not have the description of the paintings; (iii) Vouchers furnished are without descriptions of the painters/artists; (iv) Evidence furnished in the form of old Magazines are not verifiable and therefore, difficult to ascertain genuineness. The Assessing Officer thus, made addition of Rs.1,66,80,000/- in respect of 40 paintings (as per annexure to the assessment order) as unexplained investment. In first appeal, the CIT(A),, unconvinced with the explanations and contentions made on behalf of the assesse, confirmed the addition in toto.

The ld. Counsel for the assessee reiterated the submissions made before the authorities below. The ld. Counsel for the assessee was asked to demonstrate from the documents on record that the descriptions of the paintings found at the premises of the assessee tally with the descriptions mentioned in the documents furnished. As a sample, the ld. Counsel explained that the first painting mentioned in the annexure to the assessment order is “Woman with Pots” by B. Prabha. The ld. Counsel referred to pages 16 and 110 to 116 of the paper book. At page 16 the details of the painting are given along with its image, location and the area where the painting is placed. In the description of the painting the name of artist is mentioned along with the medium of painting i.e. Oil on Canvass and the size of the painting i.e. 39 x 93 inches. At pages 110 to 116 is an article from magazine ‘Inside Outside’ October/November 1991 edition. The article titled ‘Style Encapsulated’ is on the collection of paintings by Associated Capsules Group. At page 111 is a photograph wherein the painting “Woman with Pots” can be seen placed at office reception. The edition of magazine in which the article was published indicates that the painting was purchased by the assessee prior to October/November, 1991. Since the painting is old and was not acquired during the block period, the addition cannot be made in respect of said painting. The reason given by Assessing Officer for rejecting the evidence furnished by the assessee is that it is difficult to ascertain that it is the same painting as shown in the old magazine. The addition has been made by the Assessing Officer purely on surmises and conjectures.

The next paintings taken as a test sample by the ld. Counsel for the assessee is at serial no.2 and 3 of the annexure to Assessment order i.e. paintings titled “2 Hands (Bronze)” and “2 Hands (Black)” by Shamshad. The ld. Counsel for the assessee referring to pages 19, 20 and 21 of the Paper Book submitted that the paintings were purchased from Lawrence Art Gallery on 19/12/1997. The invoice of the painting is at page 19 of the Paper Book. At pages 20 and 21 are the description of paintings along with the image as well as the location of the office where paintings are placed. The Assessing Officer has rejected the documents furnished by the assessee on the ground that the description of the paintings does not match with the bill dated 19/12/97. A perusal of the invoice at page 19 of the paper book would show that the name of Artist ‘Shamshad’ is mentioned against 2 paintings. Both the paintings bear the signature of the artist on reverse. The ld. Counsel for the assesse pointed that in so far as title of the paintings is concerned, it may differ as the titles were given by the assessee. As regards size, medium and name of the Artist, there can be no dispute. The ld. Counsel for the assessee submitted that likewise for other paintings in respect of which additions have been made, evidences were furnished by the assesse. The Assessing Officer rejected the evidences merely on presumptions, without assigning any valid and sustainable reasons.

We have examined the evidences furnished by the assessee to substantiate genuineness of purchase of the paintings. We find that for similar reasons additions were made in the hands of Ms. Kavita Singh and another group concern M/s. ACG Arts and Properties Pvt. Ltd. in the assessment year 2008-09. The Co-ordinate Bench of the Tribunal in the case of Ms. Kavita Singh in decided on 08/12/2017 deleted the addition qua unexplained investments in paintings. Since the number of paintings involved in the aforesaid appeal were comparatively less, the Co-ordinate Bench took pains to examine evidence in each of the paintings.

We have examined the evidence on record in respect of only three paintings, as test check. The Assessing Officer has failed to rebut the evidences furnished by the assesse. The Assessing Officer has rejected the evidences furnished by the assessee by making generic remarks. We find merit in the contentions of ld. Counsel, these paintings were acquired by the assesse in assessment years much prior to the date of search. Hence, addition in respect of said paintings cannot be made in search proceedings. There are other 37 paintings in respect of which documents/evidences on record are required to be examined. The factual matrix, manner of addition and nature of evidence in the present case is similar to the case of Ms. Kavita Singh (supra). Taking into consideration entirety of facts, we deem it appropriate to restore this issue to the file of Assessing Officer with a direction to decide the issue in line with the Tribunal decision in the case of Ms. Kavita Singh (supra). The Assessing Officer while re-appreciating the evidences shall grant reasonable opportunity of hearing to the assesse, in accordance with law. Ergo, ground No.3 of the appeal is allowed for statistical purpose.

In the result, appeal of the assessee is partly allowed.