Deputy Commissioner of Income-tax, Central Circle -2(2), Pune V. M/s. Bilcare Limited, Pune

ITA 1713/PUN/2018

• Counselvise Citation: [2021] 108 COUNSELVISE.COM (IT) 8329 (ITAT-PUNE)
• Duration Of Justice: 2 year(s) 4 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-03-2021
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 24-03-2021
• Assessment Year: 2014-2015
• Appeal Filed On: 02-11-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ARISE OUT OF
• Assessee Lawyers: AND OTHER
• Keywords: Depreciation; Transfer pricing; Share purchase agreement; International transaction; Retrospective amendment; Revised return
• Section: 92C; 92B; 13; 22; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH C, PUNE BEFORE SHRI R.S. SYAL, VICE PRESIDENT AND SHRI S.S. VISWANETHRA RAVI, JUDICIAL MEMBER . / ITA NO.1693/PUN/2018 / ASSESSMENT YEAR : 2014-15 BILCARE LIMITED, 6 TH FLOOR, B-WING, ICC TRADE TOWER, SENAPATI BAPAT ROAD, PUNE 411 016, MAHARASHTRA PAN : AABCB2242F VS. ACIT, CIRCLE-2(2), PUNE APPELLANT RESPONDENT . / ITA NO.1713/PUN/2018 / ASSESSMENT YEAR : 2014-15 DCIT, CENTRAL CIRCLE-2(2), PUNE VS. M/S. BILCARE LIMITED, 6 TH FLOOR, B-WING, ICC TRADE TOWER, SENAPATI BAPAT ROAD, PUNE 411 016 PAN : AABCB2242F APPELLANT RESPONDENT / ORDER PER R.S.SYAL, VP : THESE TWO CROSS APPEALS - ONE BY THE ASSESSEE AND OTHE R BY THE REVENUE ARISE OUT OF THE ORDER DATED 27-08-2018 PASSE D BY THE COMMISSIONER OF INCOME-TAX (APPEALS)-13, PUNE IN RELATION TO THE ASSESSMENT YEAR 2014-15. ASSESSEE BY SHRI KISHOR PHADKE REVENUE BY SHRI T. VIJAYA BHASKARA REDDY, CIT DATE OF HEARING 24-03-2021 DATE OF PRONOUNCEMENT 26-03-2021 ITA NOS.1693 & 1713/PUN/2018 M/S. BILCARE LIMITED 2 A. TRANSFER PRICING ADDITION - CORPORATE GUARANTEE 2. THE FIRST ISSUE RAISED IN THE ASSESSEES APPEAL IS AGAINS T THE CONFIRMATION OF TRANSFER PRICING ADDITION OF RS.23.84 CRORE ON ACCOUNT OF CORPORATE GUARANTEE. 3. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT THE ASSESSE E IS AN INDIAN MNC, WHICH WAS INCORPORATED IN 1993. IT IS ENGAGED IN MANUFACTURING AND TRADING OF PHARMA PACKAGING PRODUCTS. A RETURN WAS ORIGINALLY FILED DECLARING TOTAL LOSS OF RS.279,66,86,286/- , WHICH WAS LATER ON REVISED WITH TOTAL LOSS OF RS.92,63,37,11 3/-. CERTAIN INTERNATIONAL TRANSACTIONS WERE REPORTED BY THE ASSESSE E. THE ASSESSING OFFICER (AO) MADE A REFERENCE TO THE TRA NSFER PRICING OFFICER (TPO) FOR DETERMINING THEIR ARMS LENGTH PRIC E (ALP). THE TPO OBSERVED THAT THE ASSESSEE GAVE CORPO RATE GUARANTEE FOR ITS ASSOCIATED ENTERPRISES (AES) BUT JUST REPOR TED IN ITS TRANSFER PRICING REPORT THAT IT HAD NOT INCURRED ANY COSTS IN PROVIDING GUARANTEES. HE HELD THAT ISSUING CORPORATE GUARANTE ES WAS AN INTERNATIONAL TRANSACTION WHICH NEEDED TO BE BENCHMARKED. THE ASSESSEE WAS CALLED UPON TO FURNISH THE DETAILS OF CORPOR ATE GUARANTEES GIVEN BY IT FOR ITS AES. THE ASSESSEE FURNISHE D SUCH DETAILS, ON PERUSAL OF WHICH, THE TPO OBSERVED THAT THE ASS ESSEE PAID $50,000 IN RESPECT OF GUARANTEE GIVEN FOR BILCARE A G IN ITA NOS.1693 & 1713/PUN/2018 M/S. BILCARE LIMITED 3 ADDITION TO CHARGES @1.5% TO THE BANK. THE TPO TOOK NOTE OF RULE 10TD GIVING CORPORATE GUARANTEE COMMISSION AT 1.75% UNDER SAFE HARBOR RULES IN RESPECT OF A TRANSACTION OF MORE THAN A SP ECIFIC AMOUNT. THE ASSESSEE HAD FURNISHED TEN GUARANTEES FOR ITS AES. THE TPO ANALYZED THE TRANSACTIONS OF GUARANTEES GIVEN BY THE AS SESSEE AND CAME TO HOLD THAT FIRSTLY, THE TRANSACTION OF GIVING GUARAN TEE WAS AN INTERNATIONAL TRANSACTION REQUIRING ALP DETERMINATION AND SECONDLY, THE ALP OF SUCH TRANSACTIONS WAS 2%. AFTER REDUC ING A SUM OF RS.2.43 CRORE RECOVERED BY THE ASSESSEE FROM ITS AE FROM TOTAL AMOUNT COMPUTED BY APPLYING THE RATE OF 2% AT RS.26.27 CRORE, HE WORKED OUT THE TRANSFER PRICING ADJUSTMENT AT RS.23. 84 CRORE. THE LD. CIT(A) DID NOT PROVIDE ANY SUCCOUR TO THE ASSESSEE ON THIS ISSUE. 4. WE HAVE HEARD BOTH THE SIDES AND GONE THROUGH THE R ELEVANT MATERIAL ON RECORD. IT IS OBSERVED THAT THE ASSESSEE ENTER ED INTO TEN TRANSACTIONS OF FURNISHING GUARANTEE IN RESPECT OF ITS AES SITU ATED IN DIFFERENT COUNTRIES OUTSIDE INDIA. SPECTRUM OF THIS ISSUE INVOLVE S CERTAIN SUB-ISSUES, WHICH WILL BE DEALT WITH SEPARATELY AD SERIATIM . I. WHETHER FURNISHING OF CORPORATE GUARANTEE IS AN INTERNATIO NAL TRANSACTION ? 5.1. THE ASSESSEE DID NOT TREAT THE TRANSACTION OF CORP ORATE GUARANTEE AS AN INTERNATIONAL TRANSACTION. ITS STAND THROUGHOUT HAS ITA NOS.1693 & 1713/PUN/2018 M/S. BILCARE LIMITED 4 BEEN THAT THE CORPORATE GUARANTEE IS NOT AN INTERNATIONAL TRANSA CTION, WHICH GOT REJECTED AT THE HANDS OF THE TPO. THE QUESTION WH ICH LOOMS LARGE BEFORE US IS TO DECIDE IF FURNISHING OF CORPOR ATE GUARANTEE IS AN INTERNATIONAL TRANSACTION? 5.2. THE TERM INTERNATIONAL TRANSACTION HAS BEEN DEFINE D IN SECTION 92B OF THE INCOME-TAX ACT, 1961 (HEREINAFTER CALLED THE ACT). THE FINANCE ACT, 2012 INSERTED EXPLANATION AT THE END OF SECTION 92B WITH RETROSPECTIVE EFFECT FROM 01-04-2002 CLARIFY ING THE MEANING OF THE EXPRESSION INTERNATIONAL TRANSACTION. CLAUSE (C) OF THE EXPLANATION, WHICH IS RELEVANT FOR OUR PURPOSE, READS A S UNDER:- ( C ) CAPITAL FINANCING, INCLUDING ANY TYPE OF LONG-TERM OR SHORT-TERM BORROWING, LENDING OR GUARANTEE, PURCHASE OR SALE OF MARKETABLE SECURITIES OR ANY TYPE OF ADVANCE, PAYMENTS OR DEFERRED PAYMENT OR RECEIVABLE OR ANY OTHER DEBT ARISING DURING THE COURSE OF BUSINESS. 5.3. ON GOING THROUGH CLAUSE (C) OF THE EXPLANATION TO SECTION 92B, IT BECOMES EVIDENT THAT THE TERM INTERNATIONAL TRANSACTION INCLUDES, INTER ALIA, CAPITAL FINANCING, WHICH, IN TURN, ALSO INCLUDES GUARANTEE. WITH THIS STATUTORY INSERTION RETROSPECTIVELY FROM THE YEAR OF INCLUSION OF THE TRANSFER PRICING PROVISIONS IN THE ACT, NAMELY, 01-04-2002, THE LEGISLATURE HAS MADE ITS INTENTION CLEA R THAT FURNISHING OF GUARANTEE FALLS UNDER THE EXPRESSION INTERNA TIONAL TRANSACTION. THOUGH STRICTLY, THE INCOME-TAX RULES DO NOT HAV E THE ITA NOS.1693 & 1713/PUN/2018 M/S. BILCARE LIMITED 5 SAME FORCE AS THE PROVISIONS OF THE ACT, BUT THE INCLUSION O F CORPORATE GUARANTEE IN THE LIST OF ELIGIBLE INTERNATIONAL TRANSACTIO NS IN RULE 10TD (2) REINFORCES THE INTENTION OF THE LEGISLATURE. T HE QUESTION WHETHER FURNISHING OF CORPORATE GUARANTEE IS AN INTERNATIONAL TRANSACTION RECENTLY CAME UP FOR ADJUDICATION IN PR. CIT VS. REDINGTON (INDIA) LTD. (2021) 430 ITR 298 (MAD.). THE ASSESSEE IN THAT CASE FURNISHED CORPORATE AND BANK GUARA NTEES FOR ITS AES, FOR WHICH THE TPO PROPOSED TRANSFER PRICING ADJUSTM ENT, WHICH WAS MADE BY THE AO IN THE FINAL ASSESSMENT ORDER. T HE TRIBUNAL DELETED THE DISALLOWANCE ON THE GROUND THAT IT DID NOT H AVE ANY BEARING ON PROFITS, INCOME, LOSS ETC. OF THE ASSESSEE AND HENCE WAS NOT AN INTERNATIONAL TRANSACTION. THE REVENUE ASSAILED SUC H A FINDING OF THE TRIBUNAL BEFORE THE HONBLE HIGH COURT. THE A SSESSEE RELIED ON CERTAIN TRIBUNAL ORDERS TO BUTTRESS ITS POINT OF VIEW TH AT THE FURNISHING OF CORPORATE AND BANK GUARANTEE WAS NOT AN INTERNATIONAL TRANSACTION. THE HONBLE HIGH COURT REPELLED SUC H CONTENTION BY OBSERVING THAT THE TRIBUNAL DID NOT CONSIDER THE LEGAL POSITION CORRECTLY IN THE HUE OF CLAUSE (C) OF EXPLANATION TO SECTION 92B. TRANSFER PRICING ADDITION MADE BY THE AO IN THIS REGARD WAS RESTORED. IN VIEW OF THE FOREGOING DISCUSSION, IT IS MAN IFEST THAT THE QUESTION AS TO WHETHER CORPORATE GUARANTEE IS AN INTERNATIONA L ITA NOS.1693 & 1713/PUN/2018 M/S. BILCARE LIMITED 6 TRANSACTION IS NO MORE RES INTEGRA QUA THE FORUM OF THE TRIBUNAL IN THE LIGHT OF THE DIRECT JUDGMENT OF THE HONBLE HIGH COURT AVAILA BLE ON THE POINT. NO CONTRARY PRECEDENT OF ANY EQUIVALENT OR HIGHER JUDICIAL FORUM HAS BEEN BROUGHT TO OUR NOTICE BY THE LD. AR. 5.4. THE ASSESSEE HAS URGED THROUGH GROUND NO. 2. 2. THAT FURNISHING OF CORPORATE GUARANTEE IS A SHAREHOLDERS AC TIVITY AND HENCE CANNOT BE TREATED AS AN INTERNATIONAL TRANSACTION U/S 92B OF THE ACT. THE TERM `SHAREHOLDER ACTIVITY HAS BEEN DEFINED IN THE OECD GUIDELINES, 2010. THE DEFINITION REFERS TO AN ACTIVITY TH AT A GROUP MEMBER (USUALLY PARENT COMPANY OR REGIONAL HOLDING COMPANY) PERFORMS SOLELY BECAUSE OF ITS OWNERSHIP INTERES T IN ONE OR MORE GROUP MEMBERS, I.E. IN ITS CAPACITY AS SHAREHOLDE R. THEREAFTER, PARA 7.10 OF THE OECD GUIDELINES 2010 GIVES C ERTAIN EXAMPLES CONSTITUTING SHAREHOLDING ACTIVITY, SUCH AS:- (A) COSTS OF ACTIVITIES RELATING TO THE JURIDICAL STRUCTURE OF THE PARENT COMPANY ITSELF, SUCH AS MEETINGS OF SHAREHOLDERS OF THE PARENT, ISSUING OF SHARES IN THE PARENT COMPANY AND COSTS OF THE SUPERVISORY BOARD; (B) COSTS RELATING TO REPORTING REQUIREMENTS OF THE PARENT COMPANY INCLUDING THE CONSOLIDATION OF REPORTS; (C) COSTS OF RAISING FUNDS FOR THE ACQUISITION OF ITS PARTICIPATIONS. 5.5. ON GOING THROUGH THE AMBIT OF SHAREHOLDER ACTIVITY A S GIVEN IN THE OECD GUIDELINES ON A GENERAL PERSPECTIVE, IT BECO MES IMMINENT THAT SUCH ACTIVITIES ARE CERTAIN ACTS PERFORMED BY A ITA NOS.1693 & 1713/PUN/2018 M/S. BILCARE LIMITED 7 COMPANY SOLELY BECAUSE OF ITS SHAREHOLDING IN OTHER GROUP COMPANIES, WHICH IS OBVIOUSLY NOT THE CASE HERE. AU CONTRAIRE, THE EFFECT OF FURNISHING CORPORATE GUARANTEE DIRECTLY PERCOLATED TO THE PRINCIPAL DEBTOR, NAMELY, THE AES FOR WHOM THE ASSESSEE S TOOD SURETY. THUS, THE GROUND URGING THAT THE ACT OF FURNISHIN G GUARANTEE BE TREATED AS A SHAREHOLDERS ACTIVITY, IS DEVOID OF MERITS . MOREOVER, NOW WITH THE STATUTORY AMENDMENT SPECIFICALLY TREATING `GUARANTEE AS AN INTERNATIONAL TRANSACTION, THERE REMAINS NO DOUBT WHATSO EVER THAT THE FURNISHING OF CORPORATE GUARANTEE BY AN ASSESSEE IS AN INTERNATIONAL TRANSACTION. THIS GROUND IS THUS DISMISSED. II. PERFORMANCE GUARANTEE VS. CORPORATE GUARANTEE 6.1. THE ASSESSEE AGITATED BEFORE THE AUTHORITIES BELOW THA T ALL THE TEN TRANSACTIONS OF FURNISHING GUARANTEE WERE NOT OF CORPO RATE GUARANTEE INASMUCH AS TWO WERE IN THE NATURE OF PERFORMANC E GUARANTEE. WITHOUT PREJUDICE TO THE MAIN ARGUMENT THAT CORPOR ATE GUARANTEE WAS NOT AN INTERNATIONAL TRANSACTION, THE ASSESSEE CONTENDED BEFORE THE AUTHORITIES BELOW THAT, AT LEAST, SUCH PERFORMANCE GUARANTEE TRANSACTIONS SHOULD BE IGNORED. TWO SUCH TRANSACTIONS CLAIMED BY THE ASSESSEE TO BE OF PERFORMANCE GUARANTEE HAVE BEEN GIVEN AT SR. NOS. 3 & 4 OF THE TABLE DRAWN BY THE TPO ON PAGES 6 TO 8, AS UNDER: - ITA NOS.1693 & 1713/PUN/2018 M/S. BILCARE LIMITED 8 SR. NO. CONCERNED AE PARTY GUARANTEE GIVEN FROM GUARANTEE GIVEN TO REMARKS 3 BILCARE INCORPORATED USA INC (DELAWARE) INR 366.36 CR (CONSIDERING YEAR END EXCHANGE RATE) (EQUIVALENT OF 61 MILLION USD) SHARP CLINICAL SERVICES USA & UNITED DRUGS HOLDING LIMITED (UK) BILCARE INCORPORATED USA AGREED TO SALE ITS BUSINESS (ASSETS & LIABILITIES) ON GOING CONCERN TO SHARP CLINICAL SERVICES USA. BILCARE SINGAPORE PTE AGREED TO SALES 100% SHARES OF BILCARE UK LTD TO UNITED DRUGS HOLDING LIMITED (UK). TO COMPLETE ALL THIS TRANSACTION, BUYERS ASKED FOR CORPORATE GUARANTEES FROM BIL FOR 331.13 CRORES IN AY 2013-14. BIL PROVIDED CORPORATE GUARANTEE TO THESE BUYERS 4 BILCARE SINGAPORE PTE LTD 46.82 INR CR (CONSIDERING YEAR END EXCHANGE RATE) 7.79 MILLION USD (EQUIVALENT OF 9.5 MILLION SGD) HITACHI CAPITAL SINGAPORE BILCARE SINGAPORE PTE LIMITED AGREED TO SALE SOME ASSETS TO HITACHI CAPITAL SINGAPORE. FURTHER, BILCARE SINGAPORE AGREED TO LEASE BACK SAME ASSETS FROM HITACHI. BIL PROVIDED GUARANTEE TO HITACHI CAPITAL SINGAPORE FOR PERFORMANCE OF THE SALE & LEASE BACK TRANSACTION. 6.2. FOR THE TRANSACTION AT SL.NO.3, THE ASSESSEE STOOD GU ARANTOR IN RESPECT OF SALE OF BUSINESS (ASSETS AND LIABILITIES) OF BILCA RE INCORPORATED USA INC. TO SHARP CLINICAL SERVICES, USA; AND SA LES OF 100% SHARES OF BILCARE UK LTD. TO UNITED DRUGS HOLDING L TD. (UK). FOR FURNISHING THE GUARANTEES, THE ASSESSEE WAS NO T REQUIRED TO PAY ANY CHARGE. NOR DID THE ASSESSEE RECOVER ANY A MOUNT FROM ITS AES FOR WHOM IT FURNISHED GUARANTEE. ITA NOS.1693 & 1713/PUN/2018 M/S. BILCARE LIMITED 9 6.3. LET US PROCEED TO UNDERSTAND THE PRECISE PURPOS E FOR WHICH THE ASSESSEE GAVE GUARANTEE AND CONSEQUENCES OF DEFAULT BY THE AE, WHICH ASPECTS ARE PERTINENT FOR DETERMINING THE NATURE OF GUA RANTEE. UNDER THIS GUARANTEE TRANSACTION, THE ASSESSEE STOOD SURETY TO THE CREDITORS, NAMELY, SHARP CLINICAL SERVICES USA AND UNITED DRUG S HOLDING LTD. (UK) FOR THE TRANSACTIONS WHERE UNDER THE PRIN CIPAL DEBTORS, NAMELY, BILCARE INCORPORATED USA AGREED TO SELL ITS BUSINESS (ASSETS AND LIABILITIES) ON GOING CONCERN TO SHARP CL INICAL SERVICES USA; AND OTHER AE OF THE ASSESSEE, NAMELY, BILCA RE SINGAPORE PTE AGREED TO SELL 100% SHARES OF BILCARE UK LTD . TO UNITED DRUGS HOLDING LTD. (UK). FOR SUCH TRANSACTIONS, TH E BUYERS WANTED GUARANTEE, WHICH THE ASSESSEE PROVIDED. WE HAVE GONE THROUGH THE AGREEMENT UNDER WHICH THE ASSESSEE PROVIDED S UCH GUARANTEE, WHOSE COPY HAS BEEN PLACED AT PAGE 566 ONWA RDS OF THE PAPER BOOK. RECITALS OF THE AGREEMENT STATE THAT BILCARE INC., A DELAWARE CORPORATION (THE US SELLER) AND SHARP CLINICAL SERVICES , INC., A DELAWARE CORPORATION (THE US BUYER) ENTERED INTO AN ASSET PURCHASE AGREEMENT PURSUANT TO WHICH THE US SELLER GROUP AGREED TO SELL AND ASSIGN TO THE US BUYER SUBSTANTIALLY ALL OF THE ASSE TS AND CERTAIN SPECIFIED LIABILITIES OF THE BUSINESS. CLAUSE (D) OF TH E RECITAL STATES THAT: THE GUARANTOR (I.E. THE ASSESSEE BEFORE US) H AS AGREED TO ITA NOS.1693 & 1713/PUN/2018 M/S. BILCARE LIMITED 10 PROVIDE GUARANTEES OF THE OBLIGATIONS OF THE SELLERS UNDER THE US ASSET PURCHASE AGREEMENT, THE UK SHARE PURCHASE AGREEME NT, THE TAX DEED AND THE TSA. CLAUSE 2.1 OF THE AGREEMENT STATE S: THE GUARANTOR UNCONDITIONALLY AND IRREVOCABLY GUARANTEE TO THE UK BUYER (2.1.1.) THE DUE AND PUNCTUAL PAYMENT, OBSERV ANCE AND PERFORMANCE BY THE UK SELLER OF ALL OF THE UK SELLERS LIABILITIES AND OBLIGATIONS, WHETHER PRESENT OR FUTURE, ACTUAL OR CONTINGE NT, UNDER OR ARISING OUT OF THE UK SHARE PURCHASE AGREEMENT OR THE TAX DEED; AND (2.1.2.) THE DUE AND PUNCTUAL PAYMENT, OBS ERVANCE AND PERFORMANCE BY EACH OF THE SELLERS OF EACH AND ALL TH E SELLERS LIABILITIES AND OBLIGATIONS, WHETHER PRESENT OR FUTURE, ACTUAL OR CONTINGENT, UNDER OR ARISING OUT OF THE TSA. CLAUSE 2.4 OF THE AGREEMENT STATES: IF EITHER OF THE SELLERS DEFAULT ON THE PAYMENT OF ANY AMOUNT DUE AND PAYABLE TO ANY OF THE GUARANTEED PARTIES UNDER GUARANTEED OBLIGATIONS OR ARISING FROM THE TERMINATION O F ANY OF THE AGREEMENTS, THE GUARANTOR SHALL, IMMEDIATELY ON DEMAND BY THE RELEVANT GUARANTEED PARTY (AS APPROPRIATE), UNCONDITIONALL Y PAY THAT AMOUNT TO THE RELEVANT GUARANTEED PARTY (AS APPROPRIATE) IN THE MANNER PRESCRIBED IN THE US ASSET PURCHASE AGREEMENT , UK SHARE PURCHASE AGREEMENT, TAX DEED OR TSA, AS IF SUC H GUARANTOR WERE THE US SELLER OR UK SELLER. ON GOING THROUGH THE ABOV E ITA NOS.1693 & 1713/PUN/2018 M/S. BILCARE LIMITED 11 CLAUSES OF THE GUARANTEE AGREEMENT, IT IS GRAPHICALLY CLEAR THA T THE ASSESSEE FURNISHED GUARANTEE FROM THE SIDE OF ITS AES (P RINCIPAL DEBTORS) WHO ARE SELLERS THAT IN CASE THE DUE AND PUNCTUAL PA YMENT OF ITS AES LIABILITIES AND OBLIGATIONS WERE NOT MADE, IT WOULD BECOME LIABLE TO PAY THE AMOUNT TO US/UK BUYERS. 6.4. FOR THE TRANSACTION AT SL.NO.4, THE ASSESSEE STOOD AS A GUARANTOR FOR BILCARE SINGAPORE PTE LTD., WHICH AGREED TO S ELL SOME ASSETS TO HITACHI CAPITAL SINGAPORE. THE ASSESSEE PROVID ED GUARANTEE ON HITACHI CAPITAL SINGAPORE FOR PERFORMANCE. NEITH ER ANY EXPENDITURE WAS INCURRED BY THE ASSESSEE FOR FURNISH ING SUCH GUARANTEE NOR ANY AMOUNT WAS RECOVERED FROM THE CORRES PONDING AE. NATURE OF GUARANTEE AND CONSEQUENCES OF DEFAULT HE REIN ARE ADMITTEDLY SIMILAR TO THOSE AT SR. NO. 3 IN THE TABLE AS DISCUS SED ABOVE. 6.5. A CORPORATE GUARANTEE IS ORDINARILY A LEGAL AGREEMEN T BETWEEN A PRINCIPAL DEBTOR, CREDITOR AND GUARANTOR, WHEREBY THE GUA RANTOR TAKES RESPONSIBILITY FOR THE DEBT REPAYMENT IN CASE OF REPAY MENT BY THE PRINCIPAL DEBTOR TO THE CREDITOR. A PERFORMANCE GUARANTEE PROVIDES AN ASSURANCE OF COMPENSATION IN THE EV ENT OF INADEQUATE OR DELAYED PERFORMANCE ON A CONTRACT. IF PER FORMANCE GUARANTEE ENTAILS FINANCIAL CONSEQUENCES, THAT IS, ON THE FAILUR E OF ITA NOS.1693 & 1713/PUN/2018 M/S. BILCARE LIMITED 12 THE OTHER PARTY TO PERFORM HIS OBLIGATION AND THE GUARANTOR BECOMING LIABLE TO PAY SOME AMOUNT, THEN IT CANNOT BE PLACED A T A PEDESTAL DIFFERENT FROM THE REGULAR CORPORATE GUARANTEE GIVE N FOR OBTAINING LOAN BY THE AE. IN THAT SENSE, PERFORMANCE GUAR ANTEES IN THE INSTANT CASE ARE A SPECIE OF THE GENUS OF CORPORATE GU ARANTEE AND CANNOT BE GIVEN A TREATMENT DIFFERENT FROM THE CORPORATE G UARANTEE AS URGED BY THE ASSESSEE. EX CONSEQUENTI, WE HOLD THAT THE SO-CALLED PERFORMANCE GUARANTEE TRANSACTIONS AT SR. NOS. 3 AND 4 ARE IN THE NATURE OF CORPORATE GUARANTEE TRANSACTIONS AND DO NOT REQ UIRE ANY SEPARATE TREATMENT VIS--VIS THE REMAINING EIGHT TRANSACTIONS, WHICH WE WILL DISCUSS INFRA . III. ALP OF THE CORPORATE GUARANTEE TRANSACTIONS. 7.1. HAVING HELD THAT THE TRANSACTIONS OF GUARANTEE ARE IN THE NATURE OF INTERNATIONAL TRANSACTIONS, THE NEXT QUESTION IS THEIR ALP DETERMINATION. BEFORE DELVING INTO THIS QUESTION, IT WOULD BE A PT TO FIRST TAKE NOTE OF THE NATURE OF THE GUARANTEE TRANSACTIONS. 7.2. IN ALL, THERE ARE TEN TRANSACTIONS, OUT OF WHICH TWO TRANSACTIONS THAT THE ASSESSEE CLAIMED TO BE PERFORMANCE GUARANTEE HAV E BEEN DISCUSSED ABOVE. OTHER EIGHT TRANSACTIONS, TABULATED BY THE TP O ON PAGES 6 TO 8 OF HIS ORDER, ARE REPRODUCED AS UNDER:- ITA NOS.1693 & 1713/PUN/2018 M/S. BILCARE LIMITED 13 SR. NO. CONCERNED AE PARTY GUARANTEE GIVEN FROM GUARANTEE GIVEN TO REMARKS 1 BILCARE AG INR 455.00 CR (CONSIDERING YEAR END EXCHANGE RATE) (EQUIVALENT OF 55 MILLION EURO) SBI PUNE BILCARE AG WAS TO RECEIVE A LOAN OF RS.328 CR. IN AY 2010-11 (APPROX.) FROM SBI MUMBAI. SBI PUNE WAS REQUIRED TO PROVIDE BANK GUARANTEE/SBLC TO SBI BANK MUMBAI FOR THE SAID TRANSACTION. FURTHER SBI PUNE HAS NOT CHARGED ANY YEARLY/ONGOING COMMISSION ON THE OUTSTANDING SBLC/BANK GUARANTEE 2 BILCARE AG INR 269.68 CR. (CONSIDERING YEAR END EXCHANGE RATE) (EQUIVALENT OF 44.90 MILLION USD) SBI PUNE BILCARE AG WAS TO RECEIVE LOAN OF RS.243.76 CR. IN AY 2012-13 (APPROX.) FROM EXIM BANK. SBI PUNE WAS REQUIRED TO PROVIDE BANK GUARANTEE/SBLC TO EXIM BANK MUMBAI FOR THE SAID TRANSACTION. ASSESSEE HAS NOT RECOVERED ANYTHING IN THE CURRENT YEAR AGAINST THIS GUARANTEE, HOWEVER, IN THE NEXT YEARS, I.E.IN AY 2015-16 ASSESSEE HAS RECOVERED RS.6,56,63,675 CONSIST OF RS.3,35,43,125 PERTAINING 17- AUG-2012 TO 16-AUG-2013 AND RS.3,21,20,550 PERTAINING TO 17-AUG-2013 TO 16-AUG-2014. 5 BILCARE RESEARCH SRL & BILCARE FUCINE SRL 62.64 INR CR (CONSIDERING YEAR END EXCHANGE RATE) 9 MILLION USD) STANDARD BANK OF MAURITIUS BILCARE SRL (BOTH CO) WAS TO RECEIVE DISCOUNTING FACILITY OF 62.64 (APPROX.) FROM STANDARD BANK, MAURITIUS (SBM). BIL STOOD AS GUARANTOR FOR THE SAID FACILITY TO SBM BIL HAS NOT PAID ANYTHING FOR THE SAID GUARANTEE SAID FACILITY WAS CLOSED ON 30- AUG-2013 AND HENCE WAS OPERATIONAL ONLY FOR 151 DAYS IN THE CURRENT ASSESSMENT YEAR 6 BILCARE 39.04 INR CR SBLC-INDUSIND BILCARE PACKAGING LIMITED (BPL) TOOK LOAN AMOUNTING ITA NOS.1693 & 1713/PUN/2018 M/S. BILCARE LIMITED 14 SINGAPORE PTD LTD. (CONSIDERING YEAR END EXCHANGE RATE) 6.5 MILLION USD) BANK TO 6.5 MILLION USD (INR 39.04 CRORES) FROM PNB, LONDON. PNB LONDON INSISTED FOR STAND-BY-LETTER OF CREDIT (SBLC) INDIAN BANK. ASSESSEE ENTERED INTO AN AGREEMENT WITH INDUSIND BANK LIMITED FOR ISSUANCE OF SBLC TO PUNJAB NATIONAL BANK LONDON FOR THE SAID AMOUNT. SAID SBLC IS VALID TILL 10- JUNE-2015. ASSESSEE WAS NOT CHARGED ANYTHING FOR THE SAID SBLC EVEN THOUGH SOME CHARGES ARE STATED IN SANCTION LETTER IN THE CURRENT YEAR. ASSESSEE HAS NOT RECOVERED ANYTHING FROM THE AE COMPANY IN THE CURRENT YEAR. 7 BILCARE PACKAGING LTD. (MAURITIUS) 60.06 INR CR (CONSIDERING YEAR END EXCHANGE RATE) 10 MILLION USD) SBLC-THE JAMMU & KASHMIR BANK BILCARE PACKAGING LIMITED (BP) TOOK LOAN AMOUNTING TO 10 MILLION USD (INR 60 CRORES) FROM PUNJAB NATIONAL BANK (PNB) LONDON BRANCH, PNB, LONDON INSISTED FOR STAND-BY-LETTER OF CREDIT (SBLC) FROM INDIAN BANK. ASSESSEE ENTERED INTO AN AGREEMENT WITH JAMMU & KASHMIR BANK LIMITED FOR ISSUANCE OF SBL TO PNB LONDON FOR THE SAID AMOUNT. SAID SBLC IS VALID TILL 25-JUN- 2018. 8 BILCARE PACKAGING LTD. (MAURITIUS) 130.32 INR CR (CONSIDERING YEAR END EXCHANGE RATE) 21.7 MILLION USD) SBLC-THE SOUTH INDIAN BANK LTD. BILCARE PACKAGING LIMITED (BPL) TOOK LOAN AMOUNTING TO 21.7 MILLION USD (INR 130.32 CRORES) FROM EXPORT IMPORT BANK OF INDIA LONDON BRANCH (EXIM). EXIM LONDON INSISTED FOR STAND-BY- LETTER OF CREDIT (SBLC) FROM INDIAN BANK. ASSESSEE ENTERED INTO AN AGREEMENT WITH SOUTH INDIAN BANK LIMITED FOR ISSUANCE OF SBLC TO EXIM LONDON FOR THE SAID AMOUNT. SAID SBLC IS VALID TILL 22-OCT- 2018. ASSESSEE WAS CHARGED RS.1,00,56,322 WHICH IS 0.75% ITA NOS.1693 & 1713/PUN/2018 M/S. BILCARE LIMITED 15 OF THE SBLC AMOUNT PLUS OTHER HANDLING CHARGES. ASSESSEE HAS NOT RECOVERED ANYTHING FROM THE AE COMPANY IN THE CURRENT YEAR. 9 BILCARE PACKAGING LTD. (MAURITIUS) 60.06 INR CR (CONSIDERING YEAR END EXCHANGE RATE) 10 MILLION USD) SBLC-THE LAXMI VILAS BANK LTD. BILCARE PACKAGING LIMITED (BPL) TOOK LOAN AMOUNTING TO 10 MILLION USD (INR 60.65 CRORES) FROM EXPORT IMPORT BANK OF INDIA LONDON BRANCH (EXIM). EXIM LONDON INSISTED FOR STAND-BY-LETTER OF CREDIT (SBLC) FROM INDIAN BANK. ASSESSEE ENTERED INTO AN AGREEME NT WITH LAXMI VILAS BANK LIMITED FOR ISSUANCE OF SBLC TO EXIM LONDON FOR THE SAID AMOUNT. SAID SBLC IS VALID TILL 09-FEB-2019. ASSESSEE WAS CHARGED RS.1,25,66,131 WHICH IS 1.25% OF THE SBLC AMOUNT PLUS OTHER HANDLING CHARGES. ASSESSEE HAS NOT RECOVERED ANYTHING FROM THE AE COMPANY IN THE CURRENT YEAR. 10 BILCARE PACKAGING LTD. (MAURITIUS) 44.04 INR CR (CONSIDERING YEAR END EXCHANGE RATE) 7.33 MILLION USD) SBLC- IDBI BANK LTD. BILCARE PACKAGING LIMITED (BPL) TOOK LOAN AMOUNTING TO 7.33 MILLION USD (INR 44.04 CRORES) FROM EXPORT IMPORT BANK OF INDIA LONDON BRANCH (EXIM). EXIM LONDON INSISTED FOR STAND-BY- LETTER OF CREDIT (SBLC) FROM INDIAN BANK. ASSESSEE ENTERED INTO AN AGREEMENT WITH IDBI BANK LIMITED FOR ISSUANCE OF SBLC TO EXIM LONDON FOR THE SAID AMOUNT. SAID SBLC IS VALID TILL 28-MAR-2019. ASSESSEE WAS CHARGED RS.86,99,650 WHICH IS 1.75% OF THE SBLC AMOUNT PLUS OTHER HANDLING CHARGES. ASSESSEE HAS NOT RECOVERED ANYTHING FROM THE AE COMPANY IN THE CURRENT YEAR. ITA NOS.1693 & 1713/PUN/2018 M/S. BILCARE LIMITED 16 7.3. THE TRANSACTION AT SR. NO. 1 ABOVE IS OF GIVING G UARANTEE BY THE ASSESSEE FOR BILCARE AG IN RESPECT OF LOAN OF RS.328 CRO RE FROM SBI, MUMBAI. FOR THIS, SBI, PUNE WAS REQUIRED TO GIVE BANK GUARANTEE/STAND BY LETTER OF CREDIT (SBLC) TO SBI, MUMBAI. SB I, PUNE DID NOT CHARGE ANY COMMISSION OR GUARANTEE FEE FROM THE ASSESSEE IN THIS TRANSACTION. THE ASSESSEE, IN TURN, ALSO DID NOT CHARGE ANYTHING FROM ITS AE. 7.4. FOR THE TRANSACTION AT SL.NO.2, THE ASSESSEE GAVE GUARANTEE FOR BILCARE AG IN RESPECT OF LOAN OF RS.243.76 CRORE FROM EX IM BANK. SBI, PUNE WAS REQUIRED TO PROVIDE BANK GUARANTEE/SBLC TO E XIM BANK, MUMBAI FOR THE SAID TRANSACTION. THE ASSESSEE HAD TO PAY RS.6,56,63,675/- IN RESPECT OF THIS GUARANTEE TRANSACTION. AS AGAINST THAT, THE ASSESSEE RECOVERED A SUM OF RS.2,43,26,467/- FROM BILCARE AG DURING THE YEAR. 7.5. FOR THE TRANSACTION AT SL.NO.5, THE ASSESSEE FURNISHED GUARANTEE FOR BILCARE RESEARCH SRL AND BILCARE FUCINE SRL IN RESPECT O F DISCOUNTING FACILITY OF RS.62.64 CRORE FROM STANDARD BANK, MAURITIUS. THE ASSESSEE STOOD GUARANTEE FOR IT. NEITHER ANY EXPENSE WAS INCURRED BY THE ASSESSEE IN FURNISHING THE GUARANTEE NOR IT RECOVERED ANY AMOUNT FROM ITS AE. ITA NOS.1693 & 1713/PUN/2018 M/S. BILCARE LIMITED 17 7.6. FOR THE TRANSACTION AT SL.NO.6, THE ASSESSEE STOOD AS A GUARANTOR FOR BILCARE SINGAPORE PTE LTD. IN RESPECT OF LOAN OF RS.39.04 CRORE FROM PUNJAB NATIONAL BANK, LONDON. PUNJAB NATIONAL BANK INSISTED FOR SBLC FROM AN INDIAN BANK. THE ASSESSEE ENTERED INTO AGREEMENT WITH INDUSIND BANK LIMITED FOR ISSUANCE OF SBLC TO PUNJAB NATIONAL BANK, LONDON. NEITHER AN Y AMOUNT WAS CHARGED FROM THE ASSESSEE BY THE BANK FOR F URNISHING THE GUARANTEE NOR THE ASSESSEE RECOVERED ANYTHING FROM ITS AE. 7.7. FOR TRANSACTION AT SL.NO.7, THE ASSESSEE GAVE GUARA NTEE FOR BILCARE PACKAGING LTD. MAURITIUS IN RESPECT OF LOAN TRANSACTION O F RS.60 CRORE. THE ASSESSEE ENTERED INTO AGREEMENT WITH JAMMU & KASHMIR BANK FOR ISSUANCE OF SBLC TO PUNJAB NATIONAL BANK, LONDON. NO AMOUNT WAS CHARGED BY JAMMU & KASHMIR BA NK FROM THE ASSESSEE FOR FURNISHING GUARANTEE NOR THE ASSESSEE R ECOVERED ANY AMOUNT FROM ITS AE. 7.8. FOR THE TRANSACTION AT SL.NO.8, THE ASSESSEE STOOD GU ARANTOR FOR BILCARE PACKAGING LTD. MAURITIUS IN RESPECT OF LOAN OF RS.130. 32 CRORE FROM EXIM BANK, LONDON. THE ASSESSEE ENTERED INTO AGREEMENT WITH SOUTH INDIAN BANK LTD. FOR ISSUANCE OF SBLC TO EXIM BANK, LONDON, FOR WHICH THE ASSESSEE WAS CHARGED RS.1,00,56,322/- AT 0.75% OF THE SBLC AND OTHER HANDLING CHARGES. ITA NOS.1693 & 1713/PUN/2018 M/S. BILCARE LIMITED 18 THOUGH THE ASSESSEE PAID RS.1.00 CRORE AND ODD BUT IT DID NOT RECOVER ANYTHING FROM THE AE. 7.9. FOR THE TRANSACTION AT SL.NO.9, THE ASSESSEE STOOD S URETY FOR BILCARE PACKAGING LTD. MAURITIUS IN RESPECT OF LOAN OF RS.60. 05 CRORE FROM EXIM BANK, LONDON WHICH INSISTED FOR SBLC FRO M AN INDIAN BANK. THE ASSESSEE ENTERED INTO AGREEMENT WITH LAX MI VILAS BANK LTD. FOR ISSUANCE OF SBLC TO EXIM BANK, LONDON FOR WHICH IT WAS CHARGED RS.1,25,66,131/-, BEING, 1.25% OF SBLC AM OUNT. THE ASSESSEE DID NOT RECOVER ANYTHING FROM ITS AE IN RESPECT OF SUCH TRANSACTION. 7.10. FOR THE LAST TRANSACTION AT SL.NO.10, THE ASSESSEE STOOD GUARANTOR FOR BILCARE PACKAGING LTD. MAURITIUS IN RESPECT OF LO AN OF RS.44.04 CRORE FROM EXIM BANK, LONDON. THE ASSESSE E ENTERED INTO AGREEMENT WITH IDBI BANK LTD. FOR ISSUANCE OF SBLC TO EXI M BANK, LONDON. IT WAS CHARGED RS.86,99,650/-, BEING 1.75% OF SBLC AMOUNT PLUS OTHER HANDLING CHARGES. THE ASSESSEE D ID NOT RECOVER ANYTHING FROM THE AE IN RESPECT OF THIS GUARANTEE. 7.11. ON AN OVERVIEW OF THE ABOVE TRANSACTIONS, IT CAN BE SEEN THAT FOR SOME OF THE GUARANTEE TRANSACTIONS, THE ASSESSEE NEIT HER PAID ANY CHARGES TO BANKS NOR IT RECOVERED ANY AMOUNT FROM ITS AE; FOR SOME OTHER TRANSACTIONS, THE ASSESSEE PAID CERTAIN AMOUNT, SAY, AT 0.75%, ITA NOS.1693 & 1713/PUN/2018 M/S. BILCARE LIMITED 19 1.25%, 1.75% TO THE FINANCIAL INSTITUTIONS FOR ISSUING SLBC BU T DID NOT RECOVER ANYTHING FROM ITS AES; WHILST STILL IN OTHERS, THE AS SESSEE PAID CERTAIN AMOUNT FOR STANDING AS GUARANTEE AND RECOVERE D A PART OF THE AMOUNT FROM ITS AE. 7.12. THE TPO HAS APPLIED UNIFORM RATE OF 2% AS ARMS LENGTH GUARANTEE FEE, BY FIRSTLY, CONSIDERING THE SAFE HARBOUR RULE S STIPULATING 2% RATE OF GUARANTEE COMMISSION WHERE THE CORPO RATE GUARANTEE DOES NOT EXCEED RS.1.00 CRORE AND SECONDLY TH E AMOUNT CHARGED FROM THE ASSESSEE IN RESPECT OF 10 TH TRANSACTION AT 1.75%. 7.13. FIRST WE ESPOUSE THE FIRST RAISON D`ETRE , NAMELY, THE SAFE HARBOR RULES ASPECT. SECTION 92CB(1) OF THE ACT, AT THE MATE RIAL TIME, PROVIDED THAT THE DETERMINATION OF THE ALP U/SS 92C OR 92 CA SHALL BE SUBJECT TO SAFE HARBOUR RULES. SUB-SECTION (2) STATE S THAT: THE BOARD MAY, FOR THE PURPOSE OF SUB-SECTION (4), MAK E RULES FOR SAFE HARBOUR. RELEVANT RULES FROM 10TA TO 10TG CAME TO BE INSERTED BY THE INCOME-TAX (SIXTEENTH AMENDMENT) RULES, 2013 W.E.F. 18-09-2013. RULE 10TD(1) PROVIDES THAT THE TRANSF ER PRICE DECLARED BY THE ASSESSEE IN RESPECT OF ELIGIBLE TRANSACTION S HALL BE ACCEPTED BY THE INCOME-TAX AUTHORITIES AT ALP, IF IT IS IN ACC ORDANCE WITH THE CIRCUMSTANCES AS SPECIFIED IN SUB-RULES (2) OR (2A ). A CHART ITA NOS.1693 & 1713/PUN/2018 M/S. BILCARE LIMITED 20 HAS BEEN GIVEN IN THESE SUB-RULES IN WHICH THE SAFE HARBO UR HAS BEEN PROVIDED FOR THE ELIGIBLE INTERNATIONAL TRANSACTIONS. 7.14. AT THIS JUNCTURE, IT IS APPOSITE TO TAKE NOTE OF RULE 10 TD(1), WHICH UNDERSCORES THAT THE EXERCISE OF OPTION FOR SAFE HAR BOUR RULES BY AN ELIGIBLE ASSESSEE [AS DEFINED UNDER RULE 10TB] IN RE SPECT OF AN ELIGIBLE INTERNATIONAL TRANSACTION [AS GIVEN IN RULE 10TC] IS OPTIONAL. THUS, IT IS AXIOMATIC THAT THE SAFE HARBOUR RULES ARE SIMPLY OPTIONAL FOR AN ELIGIBLE ASSESSEE. ONE ASSESSEE MAY OPT FO R THEM, ANOTHER MAY NOT. THE ENTIRE MECHANISM UNDER THE SAFE HARB OUR RULES GETS TRIGGERED ONLY WHEN THE OPTION OF THE SAFE HARBOUR RULE S IS EXERCISED BY AN ASSESSEE UNDER DUE PROCESS MANDATED U NDER RULE 10TE. A FORTIORI , WHERE AN ASSESSEE HAS NOT EXERCISED OPTION FOR THE SAFE HARBOUR, THE ENTIRE SET OF RULES FROM 10TA TO 10TG GETS FREEZED AND CANNOT BE OPERATIONALISED. THIS CONCLUSION IS F URTHER CORROBORATED BY THE OPENING LANGUAGE OF RULE 10TA GIVING M EANING TO VARIOUS EXPRESSIONS THROUGH CLAUSES (A) TO (M). IT UNA MBIGUOUSLY MANDATES THAT THE DEFINITIONS GIVEN HEREUNDER APPLY ONLY FOR TH E PURPOSES OF THIS RULE AND RULE 10TB TO 10TG. THUS THE DEF INITION CLAUSE IN RULE 10TA HAS ITS FORCE ONLY WITHIN THE AMBIT OF THE SAFE HARBOUR RULES AND NOT BEYOND THAT. ITA NOS.1693 & 1713/PUN/2018 M/S. BILCARE LIMITED 21 7.15. IN THE FACTS AND CIRCUMSTANCES OF THE INSTANT CASE , IT IS SEEN THAT THE ASSESSEE HAS NOT GIVEN ANY OPTION TO BE GOVERNED B Y THE SAFE HARBOR RULES. AS SUCH, THE TPO WAS NOT JUSTIFIED IN GETTING SU PPORT FROM RULE 10TD FOR DETERMINING THE ARMS LENGTH RATE OF THE GUARANTEE COMMISSION. 7.16. NOW WE TAKE UP THE SECOND REASON GIVEN BY THE TPO. HE NOTED THAT THE ASSESSEE PAID CHARGES FOR FURNISHING GUAR ANTEE TO BANK AT 1.75% AND ACCORDINGLY TREATED IT AS INTERNAL CUP FOR COMPUTIN G THE ALP OF THE TRANSACTION AT 2%. 7.17. AT THIS JUNCTURE, IT IS PERTINENT TO NOTE THE JUDGMENT OF TH E HONBLE JURISDICTIONAL HIGH COURT IN CIT VS. EVEREST KENTO CYLINDERS LTD. (2015) 378 ITR 57 (BOM.) . IN THAT CASE, THE ASSESSEE STOOD GUARANTOR IN RESPECT OF CERTAIN LOAN FOR ITS AE FOR WH ICH GUARANTEE COMMISSION @ 0.5% WAS CHARGED BY THE ASSESSE E. THE TPO DETERMINED THE ARMS LENGTH GUARANTEE FEE AT 3%, WHICH LED TO THE TRANSFER PRICING ADDITION. THE TRIBUNAL DELETED THE ADDITION. THE REVENUE APPROACHED THE HONBLE BOMBAY HIGH COURT WH ICH UPHELD THE ORDER OF THE TRIBUNAL BY NOTING THAT THE ADJUSTMEN T MADE BY THE TPO IN THE MATTER OF GUARANTEE COMMISSION CANNOT BE BA SED ON THE INSTANCES OF COMMERCIAL BANKS PROVIDING GUARANTEES. IT OBSERVED THAT WHEN COMMERCIAL BANKS ISSUE BANK GUARANTEE , WHICH ITA NOS.1693 & 1713/PUN/2018 M/S. BILCARE LIMITED 22 IS EASILY ENCASHABLE IN THE EVENT OF DEFAULT, HIGHER COMMISSIO N IS JUSTIFIED. ON THE OTHER HAND, WHERE A CORPORATE GUARANTEE IS ISSUED, THE GUARANTOR NEEDS TO MAKE GOOD THE AMOUNT AND REPAY TH E LOAN IF THE SUBSIDIARY DEFAULTS. IT FURTHER OBSERVED THAT THE CONS IDERATIONS WHICH APPLY FOR ISSUANCE OF CORPORATE GUARANTEE ARE DISTINC T AND SEPARATE FROM BANK GUARANTEE. IT, THEREFORE, APPROVED THE RATE OF 0.5% AS ARMS LENGTH RATE OF CORPORATE GUARANTEE FEE. 7.18. WE HAVE SEEN ABOVE THAT IN SOME OF THE CASES IN WHICH THE ASSESSEE STOOD GUARANTOR, IT HAD TO INCUR CERTAIN CHARGES VARYING BETWEEN 0.75% TO 1.75%, WHILST IN OTHER CASES, NOTHING W AS REQUIRED TO BE PAID. DRAWING SUPPORT FROM EVEREST KENTO CYLINDERS LTD. (SUPRA), WE HOLD THAT THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTION OF RENDERING SERVICE OF FURNISHING GUARANTEE IS 0.5%. HOWEVER, ALL OUT-OF-POCKET EXPENSES INCURRED BY THE ASS ESSEE- GUARANTOR IN FURNISHING GUARANTEE WILL GO TO SWELL THE ALP ACCORDINGLY. IN OTHER WORDS, WHERE THE ASSESSEE HAS NOT INCURRED ANY COST IN FURNISHING GUARANTEE, THE ALP OF THE INTERNATIONAL TRANSACTION OF FURNISHING GUARANTEE WILL BE 0.5%. IF HOWEVER , THE ASSESSEE HAS INCURRED EXPENSES AT, SAY, 1.75%, THEN AL P WILL BE 2.25% (CONSISTING OF COMPENSATION FOR RENDERING SERVICE OF GIVING GUARANTEE AT 0.5% PLUS OUT OF POCKET EXPENSES INCURRED AT 1.75%). ITA NOS.1693 & 1713/PUN/2018 M/S. BILCARE LIMITED 23 TO PUT IT SIMPLY, THE EFFECTIVE ARMS LENGTH RATE OF GUARANTEE TRANSACTION IS 0.50% PLUS ACTUAL EXPENSES INCURRED BY THE AS SESSEE IN FURNISHING THE GUARANTEE. THE IMPUGNED ORDER IN CONF IRMING UNIFORM RATE OF 2% AS ARMS LENGTH GUARANTEE FEE IS SET A SIDE AND THE MATTER IS RESTORED TO THE AO TO DECIDE THE ISSUE IN THE TERMS H ELD ABOVE. THE ASSESSEE WILL BE ALLOWED A REASONABLE OPPORTUNITY OF HEARING IN THIS EXERCISE. B.TRANSFER PRICING ADDITION -MANUFACTURING ACTIVITY 8. THE ONLY OTHER ISSUE PRESSED IN THE ASSESSEES APP EAL IS THE TRANSFER PRICING ADDITION OF AROUND RS.83.00 LAKH IN THE MANUFACTURING ACTIVITY. THE REVENUE, IN ITS APPEAL, HAS ALS O ASSAILED THE IMPUGNED ORDER ON TWO ASPECTS OF THE TRANSFE R PRICING ADDITION IN THE MANUFACTURING ACTIVITY. 9. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT THE ASSE SSEE REPORTED CERTAIN INTERNATIONAL TRANSACTIONS OF PURCHASE AND SALE FROM ITS AES. A COMBINED TRANSACTIONAL NET MARGINAL METHOD (TNMM) WAS APPLIED FOR BENCHMARKING. THE ASSESSEE WORKED OUT ITS PRO FIT LEVEL INDICATOR (PLI) OF OPERATING PROFIT/OPERATING REVENUE (OP/OR) AT 5.39%. CERTAIN COMPARABLES WERE CHOSEN WITH WEIGHTED AVER AGE AT 4.17% FOR DEMONSTRATING THAT ITS INTERNATIONAL TRANSACTIONS WERE AT ALP. THE TPO DID NOT ACCEPT THE ASSESSEES CALCULATION OF P LI AS ITA NOS.1693 & 1713/PUN/2018 M/S. BILCARE LIMITED 24 WELL AS THE LIST OF COMPARABLES. AFTER ENTERTAINING OBJECTIONS F ROM THE ASSESSEE, THE TPO COMPUTED THE ASSESSEES PLI AT (-) 0.94% AND THAT OF COMPARABLES AT 5.53%, WHICH LED TO THE TRANSFER PRIC ING ADJUSTMENT OF RS.2643.81 LAKH. THE ASSESSEE APPROACHE D THE LD. CIT(A) WHO MADE CERTAIN ALTERATIONS IN THE WORKING DONE BY TH E TPO. THAT IS HOW, BOTH THE PARTIES ARE IN APPEAL BEFORE THE TRIBUNAL. 10.1. WE HAVE HEARD BOTH THE SIDES AND SCANNED THROUGH THE RELEVANT MATERIAL ON RECORD. AT THE OUTSET, WE WANT TO MAKE IT CLEAR THAT THE DISPUTE RAISED BY THE ASSESSEE AS WELL AS THE REVEN UE IS ONLY QUA THE COMPUTATION OF THE ASSESSEES PLI. THERE IS NO QUA RREL EITHER ON THE ADOPTION OR APPLICATION OF THE MOST APPROPRIATE ME THOD OR THE SELECTION OF COMPARABLES OR THEIR COMPUTATION OF PLI. TO BE MORE PRECISE, THE AREA OF DISPUTE IN THE ASSESSEES APPE AL IS RESTRICTED ONLY TO AN ITEM OF DEPRECIATION AMOUNTING TO RS.1911 .13 LAKH, WHICH WAS SUO MOTU DISALLOWED BY THE ASSESSEE IN THE REVISED RETURN BUT THE ORIGINAL ENHANCED AMOUNT OF DEPRECIATION WAS INCLUDED BY THE TPO IN THE OPERATING COST BASE BY THE AUTHORITIES IN COMPUTING THE ASSESSEES PLI. 10.2. THE ASSESSEE FILED ORIGINAL RETURN OF INCOME DECLAR ING TOTAL LOSS OF RS.279.66 CRORE. IN SUCH COMPUTATION OF TOTAL INCO ME, THE ASSESSEE CLAIMED DEPRECIATION AT A PARTICULAR LEVEL. THEREAF TER, THE ITA NOS.1693 & 1713/PUN/2018 M/S. BILCARE LIMITED 25 ASSESSEE FILED A REVISED RETURN WITH TOTAL LOSS OF RS.92,63,3 7,113/- IN WHICH CLAIM OF DEPRECIATION WAS REDUCED BY RS.1911.13 LAK H AND THE ASSESSEE SUO MOTU DISALLOWED SUCH AMOUNT IN ITS REVISED COMPUTATION OF TOTAL INCOME. WHILE WORKING OUT ITS PLI ORIGINALLY IN THE T.P. STUDY REPORT, THE ASSESSEE HAD CONSIDERED THE E NHANCED AMOUNT OF DEPRECIATION ALLOWANCE. HOWEVER, WITH THE REVISION O F RETURN AND THE VOLUNTARY DISALLOWANCE OF DEPRECIATION BY RS.1 911.13 LAKH, THE ASSESSEE LODGED A CLAIM BEFORE THE TPO THAT THE A MOUNT OF DEPRECIATION IN THE OPERATING COST BASE SHOULD BE ACCORDING LY REDUCED. THE TPO DID NOT ACCEPT THE ASSESSEES CONTENTION ON THIS COUNT. WHILE COMPUTING THE ASSESSEES OP/OR AT (-) 0.94%, H E WENT AHEAD WITH THE AMOUNT OF DEPRECIATION AS CLAIMED IN THE ORIGINA L RETURN AND DID NOT REDUCE THE OPERATING COSTS BY RS.19.11 CRORE TOWARDS THE AMOUNT OF DEPRECIATION FOREGONE IN THE REVISED RETURN. THE ASSESSEE REMAINED UNSUCCESSFUL BEFORE THE LD. CIT( A). 10.3. THE CLAIM OF THE ASSESSEE BEFORE THE TRIBUNAL IS THAT THE REDUCTION IN THE AMOUNT OF DEPRECIATION SHOULD BE GIVEN EFFE CT IN THE COMPUTATION OF ITS PLI AS WELL BY INCLUDING ONLY THE REDUCED FIG URE OF DEPRECIATION ACTUALLY CLAIMED IN THE REVISED RETURN IN THE OPERATING COST BASE. IT IS NOTICED THAT THE ASSESSEE FURNISHED A REVISED RETURN OF INCOME IN WHICH LOSS ORIGINALLY DECLARED AT ITA NOS.1693 & 1713/PUN/2018 M/S. BILCARE LIMITED 26 RS.279.66 CRORE WAS REDUCED TO RS.92.63 CRORE. IN SUCH COMPUTATION OF THE REVISED INCOME, THE ASSESSEE, INTER ALIA, REDUCED THE AMOUNT OF DEPRECIATION BY RS.19.11 CRORE WITH A SUO MOTU DISALLOWANCE. THE AO ACCEPTED THE REVISED RETURN AND COMM ENCED THE COMPUTATION OF TOTAL INCOME WITH THE FIGURE OF TOTAL LOSS AS PER REVISED RETURN AT RS.92.63 CRORE. THUS, IT IS EVIDENT THAT THE AO ACTED UPON THE REVISED RETURN AND TREATED THE ORIGINAL RETURN AS HAVING BEEN SUPERSEDED WITH THE REVISED ONE. NOW THE QUES TION IS AS TO WHETHER THE AMOUNT OF REDUCED DEPRECIATION AS PER THE RE VISED RETURN OR THE ENHANCED AMOUNT OF DEPRECIATION AS PER THE O RIGINAL RETURN SHOULD BE INCLUDED IN THE OPERATING COST BASE FOR DETE RMINING THE ALP OF THE INTERNATIONAL TRANSACTION UNDER THE MANUFACTURING ACTIVITY? 10.4. UNDER THE TNMM, OPERATING PROFITS OF AN ASSESS EE ARE COMPUTED BY REDUCING ALL OPERATING COSTS FROM THE OPERATING REVENUE. OPERATING COSTS ARE SUCH COSTS WHICH ARE INCURR ED IN CARRYING OUT THE OPERATIONS QUA THE INTERNATIONAL TRANSACTION UNDER CONSIDERATION. IF A PARTICULAR EXPENDITURE IS NOT INCURRED BY AN ASSESSEE, WHICH IS USUALLY INCURRED BY OTHERS IN AN UNCONTR OLLED SITUATION, SUCH EXPENDITURE IS NOT NOTIONALLY ADDED TO THE OPERA TING COST BASE OF THE ASSESSEE. IN THE LIKE MANNER, IF A PARTICU LAR ITA NOS.1693 & 1713/PUN/2018 M/S. BILCARE LIMITED 27 EXPENDITURE IS INCURRED BUT SUO MOTU DISALLOWED BY THE ASSESSEE IN THE COMPUTATION OF TOTAL INCOME, IT SHOULD ALSO HAVE THE SAME EF FECT OF GETTING REDUCED FROM THE OPERATING COST BASE BY CONSIDER ING AS IF SUCH EXPENDITURE WAS NOT AT ALL INCURRED. THERE IS NO QUA LITATIVE DIFFERENCE BETWEEN SITUATION ONE IN WHICH THE EXPENDITURE IS NO T INCURRED AND NOT CLAIMED AS DEDUCTION AND SITUATION TWO IN WHIC H THE EXPENDITURE IS INCURRED BUT SUO MOTU DISALLOWED BY THE ASSESSEE IN THE COMPUTATION OF TOTAL INCOME INASMUCH AS THE LATTER STANDS AT PAR WITH THE FORMER. IN BOTH THE SITUATIONS, SUCH EXPENDITUR E ACTUALLY UNINCURRED OR INCURRED CANNOT FORM PART OF THE OP ERATING COST BASE IN THE ALP DETERMINATION. THE REASON FOR SUCH AN EXCLUSION IS NOT THE DOUBLE ADDITION AS PUT FORTH ON BEHALF O F THE ASSESSEE BUT THE FACT THAT BY NOT CLAIMING A EXPENDITURE AS D EDUCTION IN THE COMPUTATION OF TOTAL INCOME, THE ASSESSEE HAS FORGONE ITS CLAIM ON THAT COUNT. IF A PARTICULAR CLAIM IS FOREGONE, THAT CLAIM DIES FOR ALL PURPOSES. IT CANNOT BE A CASE THAT THE CLAIM IS DEAD FOR THE COMPUTATION OF TOTAL INCOME BUT ALIVE FOR DETERMINING THE OPERATIN G COSTS FOR THE ALP DETERMINATION. INCLUSION OF SUCH AN EXPEN DITURE IN THE OPERATING COST BASE FOR DETERMINING THE ALP WOULD LEAD TO SKEWED PORTRAYAL OF THE OPERATING PROFITS AS IT WILL BE AKIN TO CONSIDERING SUCH EXPENDITURE AS HAVING BEEN INCURRED FOR THE ITA NOS.1693 & 1713/PUN/2018 M/S. BILCARE LIMITED 28 PURPOSE OF COMPUTATION OF ALP BUT NOT INCURRED FOR THE COMPUTATION OF TOTAL INCOME, WHICH BY NO LOGIC CAN BE A CORR ECT PROPOSITION. 10.5. ADVERTING TO THE FACTS OF THE INSTANT CASE, IT IS SEE N THAT THE ASSESSEE IN THE REVISED RETURN MADE A SUO MOTU DISALLOWANCE OF DEPRECIATION TO THE EXTENT OF RS.19.11 CRORE. WHEN THE AO A CCEPTED THE REVISED RETURN BY TAKING REDUCED INCOME/LOSS AS PER THE REVISED RETURN FOR THE PURPOSE OF COMPUTING THE TOTAL INCOME, THERE CAN BE NO RATIONALE IN GOING BACK TO THE FIGURE OF DEPRECIATION AS P ER THE ORIGINAL RETURN FOR THE ALP DETERMINATION, WHICH CEASED TO EXIS T AFTER THE FILING OF THE REVISED RETURN. WE, THEREFORE, HOLD THAT ONLY THE REDUCED CLAIM OF DEPRECIATION BY RS.19.11 CRORE SHOULD BE ADDED TO THE OPERATING COST BASE IN THE ALP DETERMINATION. 10.6. HERE, WE WANT TO CLARIFY THAT WE ARE NOT CONFRONTE D WITH A SITUATION IN WHICH ALBEIT THE ASSESSEE REDUCED ITS CLAIM OF DEPRECIATION BY RS.19.11 CRORE BUT THE AO STILL GRANTED DEDUC TION FOR HIGHER AMOUNT OF DEPRECIATION ON THE BASIS OF ORIGINAL RE TURN BY TAKING RECOURSE TO EXPLANATION 5 TO SECTION 32. THE POSITION W OULD BE ENTIRELY DIFFERENT IF THE AO INVOKES EXPLANATION 5 TO SECTIO N 32 AND ALLOWS FULL DEPRECIATION AS PER THE ORIGINAL RETURN. IN TH AT SCENARIO, THE CONTENTION OF THE ASSESSEE FOR CONSIDERING ONLY THE ITA NOS.1693 & 1713/PUN/2018 M/S. BILCARE LIMITED 29 REDUCED AMOUNT OF DEPRECIATION IN THE REVISED RETURN FOR TH E ALP DETERMINATION WOULD FAIL. AS THE AO IN THE INSTANT CASE HAS COMPUTED THE TOTAL INCOME BY CONSIDERING THE REDUCED CLAIM OF DEPRECIATION BY RS.19.11 CRORE, WE HOLD THAT ONLY SUCH RE DUCED AMOUNT OF DEPRECIATION BE INCLUDED IN THE OPERATING COST BASE FOR DETERMINING THE ALP OF THE TRANSACTION OF `MANUFACTURING ACTIVITY . BEFORE PARTING, WE WANT TO CLARIFY THAT THE POSITION AS DISCUSSE D HEREINABOVE IS ABOUT THE EFFECTS OF A SUO MOTU DISALLOWANCE OFFERED BY THE ASSESSEE AND NOT A DISALLOWANCE MADE BY THE AO. 11.1. THE REVENUE IN ITS APPEAL IS AGGRIEVED BY THE DE CISION OF LD. CIT(A) IN NOT CONSIDERING BANK CHARGES AND COMMISSION/BR OKERAGE AMOUNTING TO RS.743.482 AS NON-OPERATING COST. 11.2. THE ASSESSEE REDUCED FINANCE COST OF RS.14,703 .82 LAKH, AS REFLECTED IN THE PROFIT AND LOSS ACCOUNT, FROM TOTAL COSTS FOR ASCERTAINING THE AMOUNT OF OPERATING COSTS FOR THE ALP DETERMINATION. THE AO EXAMINED ITS BIFURCATION AND OPINED THAT ONLY INTEREST EXPENSE OF RS.10,206.20 LAKH WAS LIABLE TO BE CONSIDERED AS NON-OPERATING AND THE REMAINING AMOUNT AS OP ERATING. THE ASSESSEE ARGUED BEFORE THE LD. CIT(A) THAT THE `OTHER BORROWING COSTS OF RS.3754.14 LAKH AND `BANK CHARGES AND COMMISSION/BROKERAGE OF RS.743.48 LAKH SHOULD ALSO BE CO NSIDERED ITA NOS.1693 & 1713/PUN/2018 M/S. BILCARE LIMITED 30 AS PART OF INTEREST COST AND HENCE TREATED AS NON-OPERATING IN NATURE. THE LD. CIT(A) CONCURRED WITH THE ASSESSEE. THOUGH THE REVENUE HAS ACCEPTED THE DECISION OF THE LD. CIT(A) ON `OTHER OPER ATING COSTS OF RS.3754.14 LAKH, BUT HAS CHALLENGED THE IMPUGNE D ORDER ON `BANK CHARGES AND COMMISSION/BROKERAGE OF RS.743.4 8 LAKH. 11.3. HAVING HEARD BOTH THE SIDES AND GONE THROUGH TH E RELEVANT MATERIAL ON RECORD, WE FIND THAT THE BREAK-UP OF `BANK CHA RGES AND COMMISSION/BROKERAGE HAS BEEN GIVEN ON PAGE 29 OF THE TPOS ORDER, WHICH COMPRISES OF BROKERAGE AND COMMISSION ON FIXED DEPOSITS RS.10.42 LAKH; BANK CHARGES RS.178.48 LAKH; LOAN PROCESSING FEE RS.338.32 LAKH; AND SBLC COMMISSION RS.216.26 LAKH. ON A PERUSAL OF THE DETAIL OF RS.743.48 LAKH, IT IS DISCERNIBLE THAT THIS EXPENDITURE IS NOTHING BUT PART AND PARCEL O F THE OVERALL FINANCE COST. IT IS RATHER AN EXTENSION OF THE FINANCE COST. WE, THEREFORE, HOLD THAT THE LD. CIT(A) WAS JUSTIFIED IN EXCLUD ING RS.743.48 LAKH FROM THE OPERATING COSTS BASE. THE GROU ND FAILS. 12.1. THE ONLY OTHER ISSUE RAISED BY THE REVENUE IN ITS APPEAL IS AGAINST THE PROPORTIONATE TRANSFER PRICING ADJUSTMENT ALLOWED B Y THE LD. CIT(A). THE TPO, WHILE COMPUTING THE TRANSFER PRICING ADJUSTMENT, TOOK INTO ACCOUNT THE ENTITY LEVEL FIGURES AND NOT TH E TRANSACTIONS WITH THE AES. THE LD. CIT(A) DIRECTED TO RESTRIC T THE ITA NOS.1693 & 1713/PUN/2018 M/S. BILCARE LIMITED 31 TRANSFER PRICING ADJUSTMENT IN RESPECT OF TRANSACTIONS WITH AES ALONE. 12.2. IN OUR CONSIDERED OPINION, THIS ISSUE IS FAIRLY SETTLED BY JUDGMENT OF HONBLE JURISDICTIONAL HIGH COURT IN CIT VS. PHOENIX MECANO (INDIA) PVT. LTD. (2019) 414 ITR 704 (BOM.), HOLDING THAT THE TRANSFER PRICING ADJUSTMENT MADE AT ENTITY LEVEL SHOULD BE RESTRICTED TO THE INTERNATIONAL TRANSACTIONS ONLY. IT IS PERTINENT TO MENTION THAT THE DEPARTMENTS SLP AGAINST THIS JUDGMENT HAS SINC E BEEN DISMISSED BY THE HONBLE SUPREME COURT IN CIT VS. PHOENIX MECANO (INDIA) PVT. LTD. (2018) 402 ITR 32 (ST.). SIMILAR VIEW HAS BEEN TAKEN BY THE HONBLE BOMBAY HIGH COURT IN CIT VS. THYSSEN KRUPP INDUSTRIES PVT. LTD. (2016) 381 ITR 413 (BOM.) AND CIT VS. TARA JEWELS EXPORTS (P). LTD. (2010) 381 ITR 404 (BOM.) . WE, THEREFORE, UPHOLD THE IMPUGNED ORDER ON THIS SCORE. 13. IN THE RESULT, THE APPEAL OF THE REVENUE IS DISMISSED AND THAT OF THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 26 TH MARCH, 2021. SD/- SD/- ( S.S.VISWANETHRA RAVI ) (R.S.SYAL) JUDICIAL MEMBER VIC E PRESIDENT PUNE; DATED : 26 TH MARCH, 2021 ITA NOS.1693 & 1713/PUN/2018 M/S. BILCARE LIMITED 32 / COPY OF THE ORDER IS FORWARDED TO : 1. / THE APPELLANT; 2. / THE RESPONDENT; 3. THE CIT(A)-13, PUNE 4. 5. 6. THE PR.CIT-V, PUNE , , / DR C, ITAT, PUNE; / GUARD FILE. / BY ORDER, / TRUE COPY // SENIOR P RIVATE SECRETARY , / ITAT, PUNE DATE 1. DRAFT DICTATED ON 24-03-2021 SR.PS 2. DRAFT PLACED BEFORE AUTHOR 26-03-2021 SR.PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER. JM 5. APPROVED DRAFT COMES TO THE SR.PS/PS SR.PS 6. KEPT FOR PRONOUNCEMENT ON SR.PS 7. DATE OF UPLOADING ORDER SR.PS 8. FILE SENT TO THE BENCH CLERK SR.PS 9. DATE ON WHICH FILE GOES TO THE HEAD CLERK 10. DATE ON WHICH FILE GOES TO THE A.R. 11. DATE OF DISPATCH OF ORDER. **