DCIT(CC)-8(3), MUMBAI vs. SHAPOORJI PALLONI AND COMPANY PRIVATE LIMITED, MUMBAI

The learned Commissioner of Income-tax (Appeals)-58 erred in Assessment Year 2012-2013 & 2013-2014 not allowing 3/5th of deduction under Section 35DD of the Act amounting to Rs.15,81,015/- during the year under consideration without appreciating the fact that year under consideration was the last year i.e. 5th year of claiming deduction under Section 35DD of the Act

Without prejudice to the above, the Assessee may please be allowed 1/5th of the merger expenses as deduction under Section 35DD of the Act (i.e. Rs. 5,27,005/- in each year) from AY 2011-12 (i.e. year in which scheme was sanctioned by Hon'ble High Court) till AY 2015-16 and Ld. AO may be directed to allow the same in AY 2013-14, AY 2014-15 and AY 2015-16 (since in AY 2011-12 and AY 2012-13, 1/5th expenditure already claimed);

The Revenue has raised following grounds of appeal in ITA No.1217/Mum/2025 [Assessment Year 2013-2014]:

The facts relevant for adjudication of Cross-Appeals pertaining to Assessment Year 2013-2014 are as follows. The Assessee is a domestic company primarily engaged in the business of civil construction, real estate, trading of construction materials and construction related services. For the Assessment Year 2013-2014, the Assessee filed Return of income on 29/11/2013 declaring 'Nil' income under normal provisions of the Act and Book Profit of INR.37,27,12,684/- under Section 115JB of the Act. The case of the Assessee was selected for scrutiny. During the course of assessment proceeding, the Assessing Officer noted that the Assessee had entered into International Transactions with its Associated Enterprises (AEs). Therefore, reference was made under Section 92CA(1) of the Act to the Transfer Pricing Officer (TPO) for determination of the Arm's Length Price (ALP) in relation to the International Transaction with its AE. Vide Order Sheet noting, dated 03/10/2016, the TPO raised queries regarding Guarantee Commission and the Assessee was asked to show cause as to why Guarantee Commission at the rate of 1.5% should not be charged on the guarantees given by the Assessee to its AEs. In response, the Assessee provided the following details of Letter of Comfort and Financial/Performance Guarantees provided by the Assessee to third parties on behalf of its AE's during the relevant previous year and filed submissions vide letter, dated 13/10/2016.: A. Letter of Comfort [LOC] SNo. Name of AE Guarantee extended to Amount (INR) A1. Shapoorji Pallonji Mid East LLC ICICI Bank, Bahrain 3,20,69,45,000 A2. Emirates NBD Bank PJSC 1,40,40,26,500 A3. Armada D1 Allahabad Bank - Hong Kong Branch 1,35,88,75,000 Assessment Year 2012-2013 & 2013-2014 B. Financial Guarantee SNo. Name of AE Guarantee extended to Amount (INR) B1. Natural Oil Ventures Co. Ltd. Exim Bank 51,56,60,000 C. Performance Guarantee SNo. Name of AE Guarantee extended to Amount (INR) C1. Shapoorji Pallonji Mid Qatar WLL Barwa City Real Estate Company, WLL 1,00,86,12,280

The TPO noted that the Assessee had raised following contentions: (a) Giving LOC/Guarantee by the Assessee on behalf of its AEs does not constitute an 'International Transaction' (b) The LOC/Guarantees provided were incidental to the business and in the nature of shareholder activity (c) Without prejudice to the above, it was contented that the arm's length commission to be charged by the Assessee from AEs should be determined in the range of 0.25% to 0.50%

The TPO, after considered the submissions made by the Assessee, concluded that the LOC/Guarantees given by the Assessee fell within the definition of 'International Transactions' as contained in Section 92B of the Act read with Explanation thereto (inserted with retrospective effect from 01/04/2002). Thereafter, the TPO proceeded to determine the ALP of LOC/Guarantee Commission in respect of each of the LOC/Guarantees and concluded as under:

The computation of arm's length margin for Guarantee Commission is done as follows: Sr. ΑΕ Amount Guarantee/ Cost Paid Remarks No.

Shapoorji Pallonji Mid East LLC AED=97,000,000 Rs 1,404,026,500 Details not available As the details are not available, the arm's length guarantee commission in this case is held to be the average of the arm's length guarantee commissions charged in other international transactions of the assessee ie average of 1.5%, 0.66% and 0.70%, which comes to 0.95%

Armada D1 U = 25,000,000 Rs. 1,358,875,000 Recovered @ 0.75% for FY 2012-13 Amount recovered based on costs charged by the banks. As direct internal CUP is available, this transaction is considered to be at ALP.

Shapoorji Pallonji Mid Qatar WLL 1,008,612,280 Rs. Nil The arm's length guarantee commission in this case is held to be the average of the arm's length guarantee commissions charged in other international transactions of the assessee ie average of 1.5%, 0.66% and 0.70%, which comes to 0.95%

Natural Oil Ventures Co Ltd 515,660,000 One time guarantee commission of 0.50% of the Loan Facility plus service tax The arm's length guarantee commission is held to be 0.50% plus 0.20% (to cover the various applicable taxes and the risks associated with the transactions, like the credit risk of the AE, currency and country risk etc.) Total (INR) 7,494,118,780 Assessment Year 2012-2013 & 2013-2014

In view of the above, the total adjustment with regard to Guarantee Commission is as under: ` Sr. No. ΑΕ Amount Arm's Length Guarantee Margin Amount of Adjustment

1 In view of above, an adjustment of Rs.5,67,32,905/- is proposed to the international transaction of the assessee.”

Thus, vide order, dated 20/10/2016, passed under Section 92CA(3) of the Act, the TPO proposed Transfer pricing addition of INR.5,67,32,905/-. The Assessing Officer passed Draft Assessment Order, dated 16/12/2016, under Section 143(3) read with Section 144C(1) proposing the aforesaid Transfer Pricing Addition of INR. INR.5,67,32,905/-. The Assessing Officer also disallowed deduction of INR.12,95,04,995/- claimed by the Assessee under Section 35DD of the Act in the computation of income for the Assessment Year 2013-2014. Since the Assessee preferred not to file any objections before the Dispute Resolution Panel, the Assessing Officer passed the Assessment Order, dated 07/02/2017 under Section 143(3) read with Section 144C(3) of the Act making (a) Transfer Pricing Addition of INR.5,67,32,905/- and (b) Disallowance of INR.12,95,04,995/- as per Section 35DD of the Act. Assessment Year 2012-2013 & 2013-2014

In appeal preferred by the Assessee challenging the above additions/disallowance, the Learned CIT(A) vide Order, dated 23/12/2024, provided partial relief. The Learned CIT(A) deleted the Transfer Pricing Addition made in respect of LOC and the disallowance of INR12,95,04,995/- made by the Assessing Officer under Section 35DD of the Act. The Learned CIT(A) sustained the Transfer Pricing Addition in respect of Financial/Performance Guarantee to the extent of the following: Particulars Adjustment Sustained by Learned CIT(A) Amount Sustained by Learned CIT(A) (in INR.) LOC issued to bankers Nil Nil Performance guarantee to third party customers 0.5% or actual cost incurred by assessee plus 10% markup 50,43,061 Financial guarantees to bankers 0.5% or actual cost incurred by assessee plus 10% markup 25,78,300 Total 76,21,361

Now, both, the Revenue as well as Assessee are in appeal before this Tribunal being aggrieved by the above Order, dated 23/12/2024, passed by the Learned CIT(A). Transfer Pricing Addition Ground No.1.1 to 1.7 Ground No.2 to 8 [Assessee's Appeal] [Revenue's Appeal]

Ground No. 1.1 to 1.7 raised by the Assessee as well as Ground No.2 to 8 raised by the Revenue pertains to Transfer Pricing addition. We have heard both the sides in relation to the transfer pricing additions and have perused the material on record. We have also taken into consideration the judicial precedents cited by both the sides to the extent the same were relevant to adjudication of issue before us. Assessment Year 2012-2013 & 2013-2014

Transfer Pricing Addition - Letter of Comfort (LOC) It was contended on behalf of the Revenue that the Learned CIT(A) erred in holding that Letter of Comfort (for short `LOC') issued by the Assessee to third parties on behalf of its AE's did not fell into the definition of `International Transactions' contained in Section 92B of the Act whereas it was contended on behalf of the Assessee that the Learned CIT(A) was justified in dealing with the Transfer Pricing Addition of INR.4,47,73,850/- made by the Assessing Officer in respect of LOC issued by the Assessee since the same did not have any bearing on the profit, income or assets of the Assessee. It was submitted that the three LOC under consideration did not create any binding legal commitment or obligation on the Assessee. Reliance in this regard was placed upon the decisions of the Tribunal in the case of the Assessee for the subsequent Assessment Years (i.e.

We have given thoughtful consideration to the rival submissions.

We note that the Assessee had provided following LOCs which were in effect during the relevant previous year: (a) LOC to ICICI Bank, Bahrain in Financial Year 2008-09 which was continuing in the relevant previous year. The principle activity of Shapoorji Pallonji MidEast LLC, Dubai (for short 'SP Mid East') was building construction. ICICI Bank, Bahrain had granted the non-fund based facilities to SP Mid East for completion of the huge construction projects. In relation thereto, the Assessee had issued LOC to ICICI Bank, Bahrain. (b) LOC issued to Emirates NBD Bank PJSC during Financial Year 2011-12 for performance/advance payment/ retention guarantee facilities provided to SP Mid East. SP Mid East did not availed any loan/funds from the said Bank. However, it has availed non-fund based facility during the relevant previous Assessment Year 2012-2013 & 2013-2014 year. (c) LOC issued during the relevant previous year by the Assessee along with its joint venture partner Armada D1 Pte Ltd. to Allahabad Bank (Hong Kong Branch) through Bank of India Singapore Branch.

The Assessing Officer treated the issuance of LOCs by the Assessee to third parties as International Transactions defined in Section 92B of the Act read with Explanation thereto. However, in appeal preferred by the Assessee, the Learned CIT(A) concluded that issuance of LOCs did not constitute international Transaction in the facts and circumstances of the present case. The findings returned by the Learned CIT(A) are as under: "In the present case The assessee has also placed reliance on the judgment of Asian Paints (ITA No. 2754/Mum/2014). In this case, the Hon. Tribunal has given finding on the basis of nature of 'letter of comfort'. In this case, as mentioned in Para 5 as per the terms of letter of comfort, the assessee was required to intimate the bank in the case of any disinvestment/divestment of shares. The assessee has given unconditional undertaking that:

On perusal of LOCs issued by the Assessee placed before us, we are of the view that the findings returned by the Learned CIT(A) are consistent with the content of the LOCs. We note that while adjudicating cross-appeals in the case of the Assessee for the Assessment Year 2015-2016 and 2016-2017 [ITA No. 2026 & 2027/Mum/2021, Common Order dated 06/03/2025], the Co- ordinate Bench of the Tribunal had concluded that issuance of the LOC by the Assessee to ICICI Bank, Bahrain did not qualify as International Transaction in terms of Section 92B of the Act. The relevant findings of the Tribunal are as under:

The assessee has issued letter of comfort to ICICI Bank Bahrain in F.Y. 2007-08 which was continuing in the year under consideration for performance guarantee given by ICICI Bank to the construction parties of Shapoorji Pallonji Mid-East. The TPO has applied Comparable Uncontrolled Price (CUP) method using information called from various banks u/s 133(6) of the Act since there was no internal CUP available. Thereafter, considering the decision of Bombay High Court in the case of Everest Kanto and Mumbai ITAT in Glenmark Pharmaceuticals Ltd., the TPO has determined arm's length rate for performance guarantee at 1.16%. The Id. CIT(A) after considering the decision of Asian Paints of ITAT, Mumbai vide ITA No. 2754/Mum/2014 and CIT vs Everest Kento Cylinders Ltd. restricted the arm's length to the amount of Rs. 27,80,525/- after adopting rate of 0.2% of the investment blocked by the assessee. Before us, the assessee has placed reliance on the decision of ITAT, Mumbai in the case of the assessee itself for A.Y. 2014-15 vide ITA No. 2025/Mum/2021 and CO No. 55/Mum/2022 wherein it is held that letter of comfort is not international transaction. It is also held that letter of comfort given by the assessee on behalf of its AE does not come under the purview of an international transaction and the provisions also clearly excludes letter of comfort within the expression of international transaction. The assessee has also submitted that letter of comfort does not have bearing on the profit, income, assets or losses of the assessee and the same was of the nature of shareholder activity. It is also submitted that in the Safe Harbour Rules Rule 10TA it is referred as under: Assessment Year 2012-2013 & 2013-2014 "(c) corporates guarantee means explicit corporate guarantee extended by a company to its wholly owned subsidiary being a non-resident in respect of any short term or long term borrowing." 31. 4376/Mum/2010 & Others) wherein it is held that in letter of comfort, the party issues only a letter that a subsidiary or group company would comply term of financial transaction and have no obligation to indemnify, also in the case of Asian Paints Ltd. vs CIT vide ITA No. 2754/M/2014 held that in the letter of comfort the only promise made by the assessee is, it will not made any disinvestment of the shares during the pending of the loan and there is no financial implication of the assessee. On the similar proposition, the assessee has also referred the decision of ITAT, Mumbai in the case of The Indian Hotels Co. Ltd. vs Addl. CIT vide ITA No. 371/Mum/2010 & Others). Looking to the above facts and findings, we consider that nowhere the TPO and the Id. CIT(A) establish that letter of comfort create any contractual financial obligation on the assessee company for only providing letter of comfort for keeping the investment in its holding company. Therefore, following the findings of the ITAT in the decisions as referred supra, the addition of Rs. 27,80,525/- is deleted. Accordingly, the grounds of appeal of Revenue are dismissed and grounds of appeal of the assessee are allowed.” (Emphasis Supplied)

During the course of hearing the Learned Departmental Representative had vehemently contended that above decision of Tribunal was not applicable; the LOCs contained terms having impact on the assets of the Assessee and therefore, the LOCs fell within the definition of 'International Transactions' contained in Section 92B of the Act. We find that the Co-ordinate Bench of the Tribunal had in the case of the Assessee for a subsequent

The Assessee had provided financial guarantee to Export Import Bank of India ('EXIM Bank') in respect of loan availed by AE of the Assessee [i.e. National Oil Ventures Limited ('NOVL')] from EXIM Bank. The aforesaid financial guarantee facilitated NOVL to finance its agricultural business carried on by its subsidiary in Ethiopia. The TPO/Assessing Officer treated the aforesaid transaction of granting financial guarantee by the Assessee as an International Transaction and made transfer pricing addition of INR.70,60,286/- holding that the Assessee should have charged commission at the arm's length rate of 0.70%¹. In appeal preferred by the Assessee, the Learned CIT(A) granted partial relief by directing the Assessing Officer to restrict the transfer pricing addition to (a) rate of 0.5% or (b) actual cost incurred by the Assessee plus 10% markup, whichever is more; and directed the Assessing Officer to delete the balance amount of transfer pricing adjustment made in respect of the Financial Guarantee. Both the Assessee and Revenue have challenged the aforesaid order of the Learned CIT(A).

We have heard both the sides on the issue under consideration and have perused the material on record. 1 The arm's length guarantee commission is held to be 0.50% plus 0.20% (to cover the various applicable taxes and the risks associated with the transactions, like the credit risk of the AE, currency and country risk etc.) - [Paragraph 7 of the Transfer Pricing Order passed under Section 92CA(3) of the Act] Assessment Year 2012-2013 & 2013-2014

We note that in the case of the Assessee for the Assessment Years 2014-2015 to 2016-2017 the Tribunal has rejected the contentions of the Assessee that Financial/Corporate Guarantee transaction do not fall within the ambit of definition of term 'International Transactions' contained in Section 92B of the Act. Therefore,

As regards determination of ALP for Financial/Corporate Guarantee transaction, the Tribunal restored the issue back to the file of TPO/Assessing Officer with certain directions. The relevant extract of decision of Tribunal in the Assessee's own case for the Assessment Year 2015-2016 and 2016-2017 [ITA No. 2026 & 2027/Mum/2021, Common Order, dated 06/03/2025] reads as under:

On perusal of the above, it becomes clear that for the Assessment Year 2015-2016, the conclusion drawn by the Tribunal was pegged upon the fact that the Revenue had failed to bring any material on record to show that on failure of the AE to execute the contract, the Assessee was required to undertake the obligation to execute the contract using its own resourced. Whereas in the present case, bare perusal of the performance guarantee document placed before this Tribunal, it becomes clear that in case of failure of the AE to fulfil contract obligations, the Assessee would step into the shoes of the AE for performance of contract obligation and would be liable to indemnify the guarantee holder for any expenses, cost or losses suffered on account of the aforesaid failure of the Assessee. The relevant extract of the performance guarantee is set out herein under: