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Income Tax Appellate Tribunal, VISAKHAPATNAM BENCH, VISAKHAPATNAM
Before: SHRI DUVVURU RL REDDY, HON’BLE & SHRI S BALAKRISHNAN, HON’BLE
PER S. BALAKRISHNAN, Accountant Member :
This appeal is filed by the assessee against the order of the Ld. Commissioner of Income Tax (Appeals)-10, Hyderabad [Ld. CIT(A)], in DIN & Order No. ITBA/APL/S/250/2022- 23/1045814173(1), dated 22/09/2022 arising out of the order
2 passed U/s. 143(3) r.w.s 144C of the Income Tax Act, 1961 for the AY 2016-17.
Brief facts of the case are that the assessee-company is engaged in the business of manufacture and trading of edible oils and agro-based products, filed its original return of income on 30/11/2016 for the AY 2016-17 declaring an income of Rs. 39,53,75,920/-. Thereafter, the assessee filed the revised return on 27/11/2017 admitting a total income of Rs. 39,53,75,920/-.
The return was initially processed U/s. 143(1) of the Act.
Subsequently, the case was selected for scrutiny under CASS and a notice U/s. 143(2) was issued to the assessee and in response the assessee’s Authorized Representative Mr. M.S. Venu Gopal, Asst. General Manager (Accounts) appeared from time to time and furnished the details as called for by the Ld. AO. During the assessment proceedings, on examining the details furnished by the assessee-company, the Ld. AO noted that the assessee- company has entered into various transactions during the AY 2016-17 with its Associated Enterprises being the subsidiary companies situated outside India. Accordingly, as per the provisions of section 92E, the assessee-company was requested to furnish the details of international transaction in Form No.
3 3CEB. On receiving the report from the assessee in Form No.3CEB, the same was forwarded to the Addl. Commissioner of Income Tax (Transfer Pricing), Hyderabad for computation of Arm’s Length Price [ALP] of the transactions entered into by the assessee with its Associated Enterprises [AEs] outside India. The Ld. TPO in his report made U/s. 92CA(3) of the Act observed that during the year, the assessee has provided Corporate Guarantee on behalf of 3F Singapore and 3F Ghana. The Ld. TPO also observed that the assessee has reported the same in Form 3CEB as “shareholder activity” by using other method. Before the Ld. TPO it is the submission of the assessee that the corporate guarantee given by them does not fall within the definition of international transaction. The assessee further submitted that 3F India has provided shareholder corporate guarantee on behalf of its overseas subsidiaries 3F Global (Singapore) Pte Limited, Singapore (3F Singapore) and 3F Ghana Commodities Limited, Ghana (3F Ghana) in the capacity of a holding company. The guarantee provided by the company is due to the AEs being subsidiaries to 3F India, which is provided for the benefit of the Group and not as a revenue earning service and hence no guarantee fee should be computed. Accordingly, the assessee does not agree that the Shareholders Corporate Guarantee fall
4 within the definition of International Transaction. The assessee’s contention before the Ld. TPO was in order to attract the ALP adjustment, the transaction has to qualify as an ‘international transaction’ in the first stage. Referring to section 92(1) the assessee submitted before the Ld. TPO that the said section provides for computation of income arising from international transaction by applying arm’s length principle. The assessee also submitted that no service has been rendered by 3F India and further when a parent company extends an assistance to the subsidiary, being an AE, such as corporate guarantee to a financial institution for lending money to the subsidiary, which does not cost anything to the parent company and which does not have any bearing on its profits, income losses or assets, it will be outside the ambit of international transaction u/s. 92B(1) of the Act. Thus, the assessee submitted that the transaction can be said to be one of quasi-equity or shareholder activity. Therefore, it is in the interest of the group that the assessee has provided corporate guarantee to its AEs. It is the submission of the assessee that as the AEs are not benefitted by the guarantee so given and it was the assessee who benefitted as a result of commercial benefits secured for future and that the business
5 strategy should be taken into consideration while making any TP adjustments in respect of such transaction.
3. After considering the submissions of the assessee as well as on perusal of the relevant information obtained from 7 commercial banks u/s. 133(6) of the Act and the fee charged by them on the Financial Guarantee, the Ld. TPO observed that the various banks charge fee ranging from 1.6% to 3% . Hence, for computation of ALP the median of the various rates was adopted as the ALP as provided in Rule 10B of the IT Rules, 1962 and thus the Ld. TPO worked out the ALP to 2% for the corporate guarantee of above Rs. 10 Crs. Accordingly, the Ld. TPO computed the corporate guarantee at Rs. 1,24,27,379/- and made the adjustment u/s. 92CA of the Act. The Ld. TPO also made addition of Rs. 13,94,456/- on account of capitalization.
Thus, the Ld. AO giving effect to the order of the Ld. TPO passed the Assessment Order U/s. 143(3) on 30/12/2019. Thereafter, the Ld. AO passed rectification order U/s 154 r.w.s 143(3) of the Act dated 09/09/2021 rectifying the errors crept in while passing the assessment order in respect of the figures in MAT credits, refund claimed and demand raised in ITBA. Aggrieved by the order of the Ld. AO, the assessee preferred an appeal before the Ld. CIT(A). On appeal, the Ld. CIT(A) considered the submissions of the assessee and directed the Ld. AO to adopt 1% guarantee fee and arrive at the corporate guarantee fees on the guaranteed amounts to its AE’s by the appellant. Aggrieved by the order of the Ld. CIT(A), the assessee is in appeal before us.
The assessee has raised the following grounds of appeal:
“Based on the facts and circumstances of the case, 3F India respectfully submits that Hon’ble Commissioner of Income Tax (Appeals)-10 has passed order u/s. 250 of the Act dated 22nd Spetember, 2022, the Ld. AO / Ld. TPO and the Ld. CIT(A) erred in:
Notional Guarantee fee on shareholders guarantee
a. Making adjustment on the shareholders corporate guarantee provided to the banks for loans availed by the AE without appreciating the fact that guarantee was provided for the benefit of the 3F Group. b. Not appreciating that the shareholder corporate guarantee is not covered under definition of international transaction u/s. 92B of the Act. c. Without prejudice to the above ground, not undertaking an objective analysis for determining the ALP on the shareholders corporate guarantee. d. Further, without prejudice to the above ground, not making adjustments for the differences in the comparable transactions selected vis-à-vis corporate guarantee provided by the company. e. Without prejudice to the above, not considering the bank guarantee commission rate charged by the bank to the appellant as a benchmark.
OTHER GROUNDS
2. Levy of interest U/s. 234B of the Act.
3. Levy of interest U/s. 234C of the Act. 4. Initiating penalty proceedings U/s. 271(1)(c) of the Act.”
In the grounds of appeal, though the assessee has raised four grounds, but the main issues involved are:
(i) Whether the corporate guarantee given by the assessee- company to its AEs for the loan taken by the AEs can be considered as an international transaction as per the provisions of section 92B of the Act or not?
(ii) Whether the TP adjustment made by the Ld. TPO in the corporate guarantee commission @ 2% and restricted by the Ld. CIT(A) @ 1% on the amount guaranteed as corporate guarantee given to AEs is justifiable or not?
On these issues, at the outset, the Ld. AR submitted and pleaded that the corporate guarantee given by the assessee- company to its AEs is not an international transaction as the assessee has not charged the AE. The Ld. AR relied on the decision of this Tribunal in the assessee’s own case in (AY: 2014-15), order dated 16/02/2023 and submitted that since the facts and circumstances of the instant case are similar to that of the assessee’s own case for the AY 2014-15, the Tribunal’s decision may be applied to the present case also.
On the other hand, Ld. DR relied on the orders of the Ld. Revenue Authorities and the decision taken by them.
We have heard both the sides and perused the material available on record and the orders of the Ld. Revenue Authorities. We have also gone through the decision of this Tribunal in the assessee’s own case for the AY 2014-15 (ITA No.473/Viz/2017, dated 16/2/2023) wherein the Tribunal, after analyzing the issues at length, held that the corporate guarantee commission is an international transaction and should be charged @ 0.50% on the corporate guarantee amount given to the AEs. For the sake of reference and brevity, we hereby extract the relevant paragraphs of the said Tribunal’s order for the AY 2014- 15 (supra) which reads as under:
“6. We have heard the rival submissions and perused he material available on record and the orders of the Ld. Revenue Authorities. It is observed from the order of the Ld. TPO that the Ld. TPO has obtained a rate of fees charged by State Bank of India on the issuance of financial guarantees given for the computation of ALP and the tested party with respect to the guarantees given to the AEs. The Ld. TPO has thus concluded that the median of the ALP works out to 1.60% on the corporate guarantee given to AEs. In the case of CIT vs. Redington India Ltd [2021] 430 ITR 298, Hon’ble Madras High Court held that corporate guarantee given to the AE is covered by the retrospective amendment made by the Finance Act, 2012. In the case of CIT vs. Everest Kanto
9 Ltd reported in 378 ITR 57 the Hon’ble Bombay High Court held that the corporate guarantee commission is an international transaction and should be charged @ 50% on the corporate guarantee amount given to the AEs. In the case of M/s. Devi Sea Foods Limited vs. DCIT, Circle-3(1), Visakhapatnam in (AY; 2017-18), dated 09/09/2022 this Bench of the Tribunal has held that the corporate guarantee given to the AE is an international transaction and shall be chargeable @ 0.50% on the amount of corporate guarantee given to the AEs. In view of the above discussions and by respectfully following the ratio laid down in various judicial pronouncements as discussed above, we are of the considered view that the corporate guarantee commission is an international transaction and should be charged @ 0.50% on the corporate guarantee amount given to the AEs. We therefore partly allowed the grounds raised by the assessee.”
Considering the identical facts and circumstances of the instant case with that of the assessee’s own case decided by this Tribunal in (supra) as well as following the principles of consistency and respectfully following the decision of this Tribunal, we hereby hold that the corporate guarantee commission is an international transaction and should be charged @ 0.50% on the corporate guarantee amount given to the AEs. It is ordered accordingly. Thus, the Ground No.1 raised by the assessee in its grounds of appeal is partly allowed.
10 10. Grounds No. 2, 3 & 4 raised by the assessee are consequential in nature and therefore need no separate adjudication.
In the result, appeal of the assessee is partly allowed.
Pronounced in the open Court on the 06th March,2023.
Sd/- Sd/- (दु�वू�आर.एलरे�डी) (एसबालाकृ�णन) (DUVVURU RL REDDY) (S.BALAKRISHNAN) �या�यकसद�य/JUDICIAL MEMBER लेखासद�य/ACCOUNTANT MEMBER Dated : 06.03.2023 OKK - SPS आदेशक���त�ल�पअ�े�षत/Copy of the order forwarded to:- �नधा�रती/ The Assessee–3F Industries Limited, P.B. No. 15, Tanuku Road, 1. Tadepalligudem, West Godavari District, Andhra Pradesh-534101. राज�व/The Revenue –Deputy Commissioner of Income Tax, Circle-1, Aayakar 2. Bhavan, Veerabhadrapura, Rajahmundry, Andhra Pradesh- 533105.
The Principal Commissioner of Income Tax, आयकरआयु�त (अपील)/ The Commissioner of Income Tax 4. (ii) Deputy Commissioner of Income Tax (Transfer Pricing Officer)-1, Hyderabad. �वभागीय��त�न�ध, आयकरअपील�यअ�धकरण, �वशाखापटणम/ DR,ITAT, 5. Visakhapatnam गाड�फ़ाईल / Guard file 6. आदेशानुसार / BY ORDER
Sr. Private Secretary ITAT, Visakhapatnam