JUBILANT ENERGY PVT. LTD. (NOW KNOWN AS JE ENERGY VENTURES PVT. LTD.),NOIDA vs. ACIT, CIRCLE-1, NOIDA

PER KULDIP SINGH, JUDICIAL MEMBER :

“1. On the facts and circumstances of the case and in law, the Learned Assessing Officer (Ld. AO)/ Learned Transfer Pricing Officer (Ld. TPO') [in pursuance to the directions of the Hon'ble Dispute Resolution Panel (‘Ld. DRP')], erred in not accepting the returned income of the appellant amounting to Rs.16,52,19,000/- and enhancing the same by Rs.20,57,19,110/-.

2. On the facts and circumstances of the case and in law, the Ld. AO/ Hon'ble DRP grossly erred in confirming the addition of Rs.20,09,07,000/- to the income of the Appellant proposed by the Ld. TPO by holding that provision of corporate guarantee to its Associated Enterprise (‘AE') do not satisfy the arm's length principle envisaged under the Income Tax Act, 1961 C the Act') and in doing so, the Ld. AO/ Hon'ble DRP grossly erred in upholding the Ld. TPO's action of:

2.1. considering provision of corporate guarantee as international transaction u/s 92B of the Act;

2.2. incorrectly holding that the Appellant has undertaken risk on behalf of its AEs and there is an inherent cost in giving corporate guarantees for which the Appellant should have charged a consideration;

2.3. disregarding the fact that the provision of corporate guarantee to the AE was in the nature of shareholder service;

2.4. disregarding the fact that III the absence of the corporate guarantee provided, the Appellant being the holding company would have provided the funds to the subsidiary by increasing the share capital, and thus the guarantee provided should be treated as quasi- equity in nature for which arm's length compensation is not required;

2.5. disregarding the detailed and proper comparability analysis submitted by the Appellant following the 'interest saved' approach;

2.6. imputing the corporate guarantee commission of 1.50% based on the average of guarantee commission rates of various banks without appreciating the fact that the same did not constitute a valid Comparable Uncontrolled Price (‘CUP');

2.7. disregarding the Appellant's contention that bank guarantee cannot be considered comparable to corporate guarantee and adjustments are required to nullify the differences between the two; and 2.8. disregarding the judicial precedents submitted by the Appellant on corporate guarantee.

3. Notwithstanding and without prejudice to the above grounds, the Ld. TPO erred in holding that there were no proper directions from Hon'ble DRP and in turn also erred by not following the Hon’ble DRP’s directions on restricting the adjustment basis arm’s length corporate guarantee commission of 1.50%, whereby violating the provisions of section 144C of the Act.

4. On the facts and circumstances of the case & in law, the Ld. AO/ Hon'ble DRP grossly erred in confirming addition of Rs.48,12,110/- to the income of the Appellant pertaining to payment of interest on inter-corporate deposit/loan from its related party does not satisfy the arm's length principle envisaged under the Act and in doing so, the Ld. AO/ Hon'ble DRP grossly erred in upholding the Ld. TPO's action of:

4.1. disregarding the Arm's Length Price as determined by the Appellant in the Transfer Pricing documentation maintained by it in terms of Section 92D of the Act read with Rule 10D of the Income Tax Rules, 1962;

4.2. incorrectly holding that the Appellant did not have a similar transaction with third parties in India and not considering the internal CUP applied by the Appellant;

4.3. comparing the return earned by the Appellant with return earned by investing in corporate bonds and applying the prime lending rate of State Bank of India , thereby resulting in an erroneous application of CUP method; 4.4. erred in computing the adjustment amount by reducing the amount of interest expenditure earlier disallowed under section 14A. In this regard, the Ld. TPO erred in disregarding the revised return of income: and 4.5. erroneously computing the adjustment amount under Section 92CA of the Act.

5. The Ld. AO has grossly erred in charging interest under section 234B and 234C of the Act; 6. The Ld. AO has grossly erred in initiating penalty under section 271(1)(c) of the Act mechanically and without recording any satisfaction for its initiation.”

No. Nature of transaction Method Value of transaction (in Rs.) 1 Receipt of guarantee 27,000,000 commission income Other method (As prescribed by Rule 2 Investment in cumulative 615,986,250 preference shares 10AB) 3 Redemption of cumulative 655,560,000 preference shares 4 Payment of interest on CUP 25,787,268 inter corporate loan/ deposit

Ground No.7 : 7.1 That in the facts and circumstances of the case and in law, the Ld. Assessing Officer (‘AO’) / Transfer Pricing Officer (‘TPO’) has erred in disregarding the exclusion of disallowance u/s 14A of the Act made by the Appellant through its original return of income which is subsequently withdrawn by way of letter dated October 12, 2017 in accordance with judicial precedents and facts of the case. 7.2. Without prejudice, that on the facts and circumstances of the case and in law, disallowance should not be made on such investments where no exempt income has been earned by the Appellant. 7.3. Without prejudice, that on the facts and circumstances of the case and in law, disallowance should be restricted to the exempt income earned by the Appellant during the year.”

2.60% + 150bps).

S.No. Name of Bank Bank Guarantee rates 1. Syndicate Bank 2.50% 2. SBI 1.30% 3. Punjab & Sind Bank 3% 4. Indusind Bank 2% 5. South Indian Bank 3.40% 6. Federal Bank 3% 7. PNB 3% 8. Karur Vysya Bank 3% Average 2.65%

S.No. Particulars Amount (in Rs.) 1. Arm’s Length Price 227,907,000 2. Guarantee Commission received from 27,000,000 AE Adjustment u/s 92CA 200,907,000

S. Nature of ALP Amount Revised ALP Adjustment No. specified determined already ALP determined u/s 92CA domestic by taxpayer disallowed determined by the TPO (INR) transaction (INR) by the by taxpayer (INR) assessee (INR) using CUP of SBI rates 1 Interest Paid 7.485125 1.324146 6.160979 6.642190 0.481211 Total 0.481211

GROUND NO.1

GROUNDS NO.2 TO 2.8 & 3

For the purpose of obtaining aforesaid loans, the taxpayer provided a corporate guarantee on behalf of JENV and as per loan agreement, the liability of the taxpayer in terms of guarantees was not to exceed the amount realized from all investments of the taxpayer in its subsidiary JEHBV and the assets and investments held by its subsidiary JEHBV or through its step down subsidiaries.

Details of Loans Loan 1 Loan 2 Loan receipt date October 10, 2008 August 17, 2011 Sanctioned amount 50,000,000 50,000,000 (USD) Principal repayment as 50,000,000 - on date Date of repayment 10-Jan-14 NA Interest Rate 6 Month’s LIBOR 6 Month’s LIBOR plus 5.5% to 6 plus 5.5% to 6 Month’s LIBOR Month’s LIBOR plus 8.5% plus 6%

Particulars Rate (bps) The Libor + rate at which JENV obtained 550 funds with corporate guarantee of JEPL (A) External comparable average interest rate of 400 or 475 margin over Libor (B) Interest saved (B-A) 0

“23. It is in this background, we take out some time to distinguish these types of Guarantees. Normally, the Bank Guarantee or Corporate Guarantee is given by a Bank or the Company as the case may be to the financing Bank for acknowledging obligation to the Terms of Contract. Bank Guarantee is provided by the Company's Banker on behalf of the Company for a certain sum of money to the Customer. If all the terms of the Contract is not fulfilled by the Company then the Customer can claim that amount from the Bank and the Bank is obligated to pay and recover from the Company. Bank Guarantee is a foolproof instrument of security for the Customer and failure to honor the guarantee is treated as deficiency of services of the Bank under the Banking Laws. On the other hand, the CG - Corporate Guarantee is provided by the Company either to the Customer for the same or to the Bank for giving loans to the sister concerns/AEs of the said company; but it is not foolproof. Failure to honor the guarantee may attract contract laws and it is however a legally valid document and the Customer/Bank can sue the Company in Court if it does not pay up. In the Corporate Guaranty, a guarantee of payment is made by a corporation on behalf of another business entity. The guarantee is provided in consideration of a vendor providing credit to a business on whose behalf the guarantee is made. In the Bank guaranty, a surety, surety bond or guaranty, in finance, is a promise by one party to assume responsibility for the debt obligation of a borrower if that borrower defaults. The person or company providing this promise is also known as a "surety" or as a "guarantor". Under banking regulation, the case of dishonored guaranty is considered as service deficiency. In fixing the charges, the type of Guarantee, track record of customers and their financial position are the guiding factors in deciding the Guarantee limit, security and margin are often considered on case to case basis. Therefore, there is conceptual differences in these two types of the guarantees. Hence, TPO's are not justified in mechanically picking up the BG rates as the external/internal CUPs, as the case may be. Yes, they may turn out to be appropriate good CUPs if they are properly bench marked after making due adjustments in accordance with the provisions of the relevant rules 10B (relating to CUP method) of the Income tax Rules, 1962. Since the TPOs have not been benching the naked quotes of the BG rates with proper and sustainable adjustments, Tribunal is constantly disapproving the said quotes. The case of Tecnimont ICB (P.) Ltd. (supra) is an aberration and the background facts this case are distinguishable. Therefore, unless the 'naked quotes' of the bank guarantee rates as given in the websites for public, are adjusted to various controlling factor narrated above, these rates are no good CUPs. AO/TPO/CIT(A) have not provided adjustments to such factors in benchmarking the impugned international transactions. Discussion on the Tribunal Orders on the Corporate Guarantee Rate- CGR: A. Asia Paints Ltd - Order of the Tribunal: We shall first take up the facts relating to the case of CGR and the decision in the case (ITA No. 408 & 1937/M/2010). In this case, Asia Paints Ltd. (supra) gave a corporate guarantee to HSBC Bank, Singapore and Citibank, Singapore in connection with loans granted by the Bank to its AE (Berger International Ltd). 0.35% and nil are the guarantee rate charged by the HSBC and Citibank of India in year 2004-2005. Thus, it is the case of charge of CG by the Indian branches of the bank on the assessee for providing guarantee to the foreign banks. On these facts, the TPO rejected the said rates and picked the 'naked quotes' at 3% available in the website of ICICI Bank. TPO also considered the guarantee commission rates of (i) Allahabad Bank, (ii) HSBC Bank (iii) ICICI and (iv) Dutch State/FMO - Robo India Finance Ltd and rejected the same by holding that the same is unsustainable. CIT(A) reasoned that bank commission rate never higher them the interest rates charged on the loans. He, however, deleted the addition in this case. The same confirmed by the Tribunal vide its order dated 31.10.2011 and the relevant portion from the said order of the Tribunal (para 38) reads as under: "38.... Therefore, in view of the above facts of the 'naked quote' available in the website of the Allahabad Bank, HSBC Bank and ICICI Bank, where even the report itself indicate that the rates varied from 0.15% to 3%. In view of the facts of the case,.... there is no need to make any adjustment in the transfer pricing ... and the order of the CIT(A) required to be confirmed. Accordingly, the ground raised by the Revenue is rejected." B. Reliance Industries Ltd. (ITA No.4475/M/2007 & Others) (AYs2003-04 to 2005-06)). Benchmarking of CGC rate is the issue in this case too for the AY 2003-2004, Assessee provided a corporate guarantee to Bank of America in connection with loans of Euro

80. Million taken by its AE (i.e., Trevira GmbH). Parent company did not charge any guarantee commission to Trevira GmbH. Here also, Ld TPO did not accepted the same and again relied on the transactions with Robo India Finance Pvt Ltd, where 2.5% of Grantee commission was charged by the Dutch State FMO. During the assessment it, assessee cited BGR of ICICI with guarantee commission rate of 0.25%. However, for TPO, 2.5% of the guarantee commission of Euro

80. Million is at Arm's Length Price and made addition of Rs. 11.27 crs in this case. Assessee took an argument that it is the responsibility of the parent company to provide guarantee to its subsidiaries / AEs, therefore, in principle, no commission is chargeable. In this case, assessee also relied on the guarantee commission rate of Bank of India, which varies 0.25% to 0.6%. The guarantee commission should never exceed 0.25% in any case and relied on the bank guarantee rates of HSBC Bank, HDFC Bank, ICICI Bank, ABN AMRO Bank, Standard Chartered Bank, Bank of America etc. At the end, CIT(A) dismissed the TPO's guarantee commission rate of 2.% and benchmarked the international transactions applying the rate of 0.38% instead of 2.5%. The Tribunal confirmed the same and paras 52.10 to 52.12 of the order of the Tribunal dated 13.9.2013 are relevant in this regard. Relevant paras 52.10 to 52.12 of the order of the Tribunal read as under: "52.10.... However, It is a fact that while applying the external comparables, the TPO has not brought out anything on record that under which terms and conditions and circumstances the said public company has charged 2.5% rate of guarantee commission for providing guarantee on behalf of the Finance Company. The charging of a guarantee commission depends upon transactions to transaction and mutual understanding between the parties. There may by a case where bank may not charge any guarantee commission, depending upon its evaluation of relationship and with a guarantee commission, depending upon its evaluation of relationship with a particular client. Therefore, universal application of rate of 2.5% for guarantee commission cannot be considered a market rate as it largely depends upon the terms and conditions on which loan has been given, risk undertaken, relationship between bank and the client, economic and business interest etc. In the case, before us when the assessee has itself paid guarantee commission at the rate varying from 0.25% to 0.6% per annum to third party and considering the fact that the assessee has stated that it has not incurred any cost for providing guarantee to the bank for the loan given to its subsidiary, we are of the considered view that applying the rate of 2.5% by TPO based on external comparables is not justifiable and cannot be confirmed. 52.11. 52.12. We are of the considered view that the Ld CIT(A) on the facts and circumstances of the case has rightly taken average rate on which the assessee has paid guarantee commission to third party, which comes to 0.38%. Hence, we uphold the order of the CIT(A) to charge guarantee commission at the rate of 0.38% being ALP for guarantee given by the assessee to Bank of America on behalf of its AE Trevira GmbH. In view of the above, we reject ground no.9 of the appeal taken by assessee as well as ground no. 6 of the appeal taken by the department." C. Everest Kanto Cylinder Ltd. (ITA No.542/M/2012)(AY 2007-08) This is the case where the assessee provided the corporate guarantees to the Bank of Bahrain for obtaining the working capital facilities to its sister concerns up to USD 5 million and also for itting capital loans. Assessee charged 0.5% as guarantee commission from its subsidiary. Holding the said CGC rate is not at ALP, Ld TPO picked up BGCR of Allahabad Bank, Dutch State FMO -Robo India Finance (P.) Ltd. (supra) and benchmarked the transactions @ 3% against the assessee's guarantee rate of 0.5%. CIT(A) held that the guarantee rate charged by the assessee have to be seen from the perspective of the international transactions and held that the BGCR of 3% is good comparable i.e. 'Incomparable Uncontrolled Price' - IUP. Finally, relying on the decision of Mumbai Bench, ITAT in the case of Asia Paints Ltd. (supra) and other decisions of the Tribunal held that the guarantee commission of 0.5% is at Arm's Length. The decision of the Tribunal is given vide para 21 of its order dated, 23.11.2012 and the relevant portion from the said para reads as under; "21.... Thus, on these facts, we do not find any reason to uphold any kind of upward adjustment in ALP in relation to charging of guarantee commission. Hence, the addition of Rs, 28,50,353/- on account of TP adjustment on guarantee commission is hereby deleted and the order of the CIT(A) is set aside...."

From the above orders of the Tribunal, it is adequately clear that the "naked quotes" of the bank guarantee commission rates kept in the website of the banks should not be applied in the TP studies without adjustments to various factors of the transactions. These factors may be risk related ones, time related guaranteed amount, financial strength of the AEs, background of the customers and the relationship of the AEs with the parental companies etc. The additions made are legally unsustainable, if the additions are made solely based on the website information of the banks, In principle, bank guarantees (in short - BG) are different from that of the corporate guarantee. Though untested in this case, in our prima facie opinion, a Bank Guarantee comparable may not clear the test of FAR analysis, which applies equally and relevant for the CUP method of ALP studies. Reliance is placed in the case of Arvind Mills Ltd. v. Asstt. CIT [2011] 11 taxmann.com 67 (Ahd.). The commercial considerations are paramount in fixing the charges when providing guarantees to its customers. On the other hand, a corporate guarantee operates not for business considerations but to provide adequate safeguards for the financial health of its sister concerns / AEs, Guarantor, like the present assessee, sometimes duty-bound to provide guarantee to the loans given by the financial institutions to the sister concerns abroad, Bank rates are mostly customer-specific and they vary downward., if cash deposits equallent of loan are given to the Bank. Thus, comparing the bank guarantee commission transactions with the that of the corporate bank guarantee transactions is prima facie incorrect so long as the FAR analysis is applied successfully and the CUP are appropriately adjusted in accordance with the Rule 10B of the IT Rules, 1962. Therefore, applying the 'quote' available on the website of the banks without making adjustments, duly necessary, makes ALP studies erroneous.

So, we are of the considered view that adoption of 8 banks’ bank guarantee rates in order to benchmark the international transaction qua corporate guarantee are not appropriate external CUPs. So, the CUPs used by the TPO do not fall in the definition of external CUP. Moreover, ‘bank guarantee rates’ cannot be compared vis-à- vis with corporate guarantee rates by any standard. So, the contentions raised by the taxpayer that the rate charged in the case of bank guarantee and corporate guarantee cannot be compared under Rule 10B(2) of the Income-tax Rules, 1962 unless a reasonable adjustment for material differences is made to the general quotes of bank guarantee in respect of the factors inter alia that (a) risk profiles of the respondents for the guarantee; (b) financial position of the loan applicants; (c) terms of the guarantee; (d) securities involved; (e) quantum of guaranteed amount; (f) period of guarantee; and (g) past history of customers, is sustainable in view of the decisions rendered by the Tribunal cited as under :-

(i) M/s. Glenmark Pharmaceuticals Limited [TS-61-HC- 2017(BOM)-TP); (ii) Hon’ble Mumbai Tax Tribunal in the case of Glenmark Pharmaceuticals Limited vs. Addl. CIT (ITA No.5031/M/2012); (iii) Everest Kanto Cylinder Limited vs. DCIT (TS-714-ITAT-2012 (Mum)-TP) (iv) Asia Paints Ltd. (ITA No.408 & 1937/M/2010) (v) Noble Resources & Trading India Pvt. Ltd. [TS-73-ITAT- 2014 (Del)-TP] (vi) M/s. Britannia Industries Ltd. vs. DCIT [ITA No.745/Kol/2017)

24. So, following the decision rendered by the coordinate Bench of the Tribunal, we are of the considered view that in order to benchmark the international transactions qua corporate guarantee appropriate comparable data needs to be adopted and benchmarking made in this case on the basis of bank quotes is not sustainable, hence, the TP adjustment made by the TPO/DRP is not sustainable in the eyes of law. We are also not agreed with the contentions raised by the ld. AR for the taxpayer that providing corporate guarantee in case of its loan to its AE is not an international transaction and this issue has been rightly decided by the JTPO/DRP by treating the provision of corporate guarantee as international transaction.

GROUNDS NO.4 TO 4.5

But the TPO has not preferred to make any comment on the rejection of plea of applying internal CUP raised by the taxpayer.

Consequently, transfer pricing made by the TPO in respect of SDT payment of interest is not sustainable. When opportunity of being heard is not provided to the taxpayer that as to why internal CUP is not applied by the TPO, the issue is required to be set aside to the TPO to decide afresh after providing an opportunity of being heard to the taxpayer. Grounds No.4 to 4.5 are allowed for statistical purposes.

GROUND NO.5

GROUND NO.6