FIRSTSOURCE SOLUTIONS LTD, MUMBAI V. ASST CIT CIR 6(2), MUMBAI

ITA 1725/MUM/2014

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 0250 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 3 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-06-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: K
• Next Hearing Date: 02-12-2015
• Assessment Year: 2008-2009
• Appeal Filed On: 12-03-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: MRS MALATHI SRIDHARANCIT
• Assessee Lawyers: F V IRANI
• Keywords: Transfer pricing; International transaction; Earning of tax free income; Question of law; Commercial expediency
• Section: 92B; 14A

Judgement Text

, INCOME-TAX APPELLATE TRIBUNAL -KBENCH MUMBAI , , , BEFORE S/SHRI RAJENDRA,ACCOUNTANT MEM BER AND SAKTIJIT DEY,JUDICIAL MEMBER / ITA NO.1725/MUM/2014: /ASSESSMENT YEAR:2008-09 FIRSTSOURCE SOLUTIONS LTD. 5TH FLOOR, PARADIGM B MINDSPACE NEW LINK ROAD MALAD (W), MUMBAI-400 064. PAN:AAACI 8904 M VS. THE ACIT-CIRCLE-6(2) MUMBAI, AAYAKAR BHAVAN-M.K. ROAD MUMBAI-400 020. ( /APPELLANT ) ( / RESPONDENT) REV ENUE BY: MRS. MALATHI SRIDHARAN-CIT ASS ESSEE BY: SHRI F.V. IRANI / DATE OF HEARING: 27/06/2017 / DATE OF PRONOUNCEMENT: 27/06/2017 ,1961 254(1) ORDER U/S.254(1)OF THE INCOME-TAX ACT,1961(ACT) , / PER RAJENDRA A.M. - CHALLENGING THE ORDER DATED 21/01/2014 OF THE CIT ( A)-15,MUMBAI THE ASSESSEE HAS FILED THE PRESENT APPEAL.ASSESSEE-COMPANY,ENGAGED IN THE BUSI NESS OF PROVIDING IT ENABLED SERVICES,FILED ITS RETURN OF INCOME ON 25/09/2009, DECLARING TOTAL LOSS AT RS. 5.02 CRORES AND BOOK PROFIT OF RS. 41.86 CRORES U/S.115 JB OF THE ACT. THE ASSESSING O FFICER(AO) COMPLETED THE ASSESSMENT UNDER SECTION 143 (3) READ WITH SECTION 144C (3) OF THE A CT,ON 24/02/2012, DETERMINING THE INCOME OF THE ASSESSEE AT RS. 2.98 CRORES. 2. FIRST GROUND OF APPEAL IS ABOUT DISALLOWANCE OF RS. 58.74 LAKHS UNDER SECTION 14 A OF THE ACT. DURING THE ASSESSMENT PROCEEDINGS,THE AO FOUND THAT THE ASSESSEE HAD RECEIVED DIVIDEND INCOME OF RS.3.23 CRORES FROM ITS INVESTMENT, THAT SAME WA S CLAIMED AS EXEMPT,THAT IT HAD NOT APPORTIONED ANY EXPENDITURE ELIGIBLE TO THE EXEMPT INCOME.ACCORDINGLY,HE DIRECTED THE ASSESSEE TO FURNISH THE BASIS OF EXPENDITURE DISALLOWED FOR EXEMPT INCOME. AFTER CONSIDERING THE SAME,HE MADE DISALLOWANCE UNDER SECTION 14A READ WITH RULE 8D OF THE INCOME TAX RULES, 1962 (RULES) OF RS.75.32 LAKHS.CONSIDERING THE FACT THAT THE ASS ESSEE HAD VOLUNTARILY DISALLOWED RS.16.58 LAKHS,HE MADE AN ADDITION OF RS. 58.72 LAKHS TO THE INCOME OF THE ASSESSEE. 1725/M/14(08-09) FIRST SOURCE 2 2.1. AGGRIEVED BY THE ORDER OF THE AO,THE ASSESSEE PREFE RRED AN APPEAL BEFORE THE FIRST APPELLA TE AUTHORITY (FAA),WHO CONFIRMED THE ORDER OF THE AO. 2.2. BEFORE US,IT WAS ARGUED THAT THE ASSESSEE HAD, ON I TS OWN, IDENTIFIED THE EXPENSES INCURRED FOR EARNING EXEMPT INCOME,THAT IT HAD DISALLOWED INTERE ST EXPENDITURE OF RS. 2.28 LAKHS, THAT OTHER ADMINISTRATIVE EXPENSES OF RS. 14.30 LAKHS-COMPRISI NG OF SALARY COST AND OTHER MISCELLANEOUS EXPENSES-WERE ALSO DISALLOWED,THAT THE AO HAD, WITH OUT ANY JUSTIFICATION, CHANGED THE DISALLOW - ANCE UNDER THE HEAD MISCELLANEOUS EXPENSES, THAT TH E ASSESSEE HAD CONSIDERED THE SALARY AND EXPENSES OF TWO EMPLOYEES FOR CALCULATING THE DISAL LOWANCE, THAT THE AO HAD ACCEPTED THE CALCULATION MADE BY IT,THAT HE INCREASED THE DISALL OWANCE TO RS. 75.32 LAKHS.THE DEPARTMENTAL REPRESENTATIVE (DR) LEFT THE ISSUE TO THE DISCRETIO N OF THE BENCH. 2.3. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US. WE FIND THAT THE ASSESSEE HAD SUO MOTU MADE A DISALLOWANCE OF RS.16. 58 LAKHS,WHILE CALCULATING THE EXPENDITURE INCURRED TOWARDS EARNING EXEMPT INCOME,THAT IT HAD MADE DISALLOWANCE UNDER THE HEAD INTEREST EXPENDITURE(RS. 2.28 LAKHS) SALARY COST IN RELATION TO EMPLOYEES ENGAGED(RS. 12.60 LAKHS) AND MISCELLANEOUS EXPENSES FOR EMPLOYEES(RS. 1.70 LAKHS ),THAT THE AO HAD NOT GIVEN ANY REASON AS TO HOW AND WHY THE DISALLOWANCE MADE BY THE ASSESSE E WAS NOT SATISFACTORY.BECAUSE OF THIS REASON ALONE DISALLOWANCE MADE CAN BE DELETED.BUT W E HAVE NOTED THAT THE AO HAD INCREASED THE MISCELLANEOUS EXPENSES TO THE TUNE OF RS.62.72 LAKH S WITHOUT GIVEN ANY REASON OR JUSTIFICATION.IN OUR OPINION,ANY DISALLOWANCE, INCLUDING THE DISALLO WANCE UNDER SECTION 14A,HAS TO BE REASON BASED AND IT CANNOT BE LEFT TO THE WHIMS AND FANCIE S OF THE AO.IN THE CASE UNDER CONSIDERATION THE FAA HAS ALSO NOT PASSED ANY REASONED THE ORDER. HE HAS MECHANICALLY CONFIRMED THE ORDER OF THE AO REFERRING TO THE JUDGMENT OF HONBLE BOMBAY HIGH COURT IN GODREJ BOYCE MANUFACTUR - ING COMPANY LTD.HE HAS ALSO NOT GIVEN ANY REASON AS TO WHY THE CALCULATION SUBMITTED BY THE ASSESSEE WAS NOT ACCEPTABLE.THEREFORE,REVERSING HIS ORDER,WE DECIDE THE FIRST EFFECTIVE GROUND OF APPEAL IN FAVOUR OF THE ASSESSEE. 3. NEXT TWO GROUNDS ARE ABOUT TRANSFER PRICING(TP)ADJU STMENTS.DURING THE ASSESSMENT PROCEED - INGS,THE AO FOUND THAT THE ASSESSEE HAD ENTERED INT O INTERNATIONAL TRANSACTIONS(IT.S)WITH ITS ASSOCIATE ENTERPRISES(AE). HE MADE A REFERENCE TO T HE TRANSFER PRICING OFFICER(TPO)FOR COMPUTATION OF ARMS LENGTH PRICE (ALP),AS PER THE PROVISIONS OF SECTION 92CA(2) OF THE ACT. 1725/M/14(08-09) FIRST SOURCE 3 FOLLOWING,THE ORDER OF THE TPO, THE AO MADE ADJUSTM ENT AT RS. 7.42 CRORES TO THE INCOME OF THE ASSESSEE. 3.1. FIRST EFFECTIVE GROUND OF APPEAL (GOA-3),RELATING T O TP ADJUSTMENT IS REGARDING ADJUSTMENT ON ACCOUNT OF INTEREST RECEIVED FROM THE AE,AMOUNTI NG TO RS. 4.72 CRORES.DURING THE TP PROCEED -INGS,THE TPO OBSERVED THAT ASSESSEE HAD GIVEN LOAN TO ITS AE NAMELY,FIRST RING INC., USA, THAT IT HAD CHARGED THE INTEREST AT THE RATE OF 6%/7.5% PER ANNUM.HE DIRECTED IT TO FURNISH DETAILS OF INTEREST RECEIVED AND ITS BENCHMARKING PROCESS.IT W AS SUBMITTED THAT THE LOAN WAS DOLLAR DOMINAT -ED,THAT SAME HAD BEEN GIVEN OUT OF EXPORT EARNINGS , THAT THE INTEREST RATES WERE BENCHMARKED WITH LIBOR RATES. AFTER CONSIDERING THE SUBMISSION OF THE ASSESSEE, THE TPO HELD THAT INTEREST CHARGED FROM THE AE WAS NOT AT ARMS LENGTH,THAT TH E ARMS LENGTH INTEREST WOULD BE THE INTEREST THAT WOULD HAVE BEEN EARNED IF SUCH LOANS WERE ADVA NCED TO UNRELATED THIRD PARTIES WITH THE SAME FINANCIAL HEALTH AS THAT OF AE,THAT THE ASSESSEE HA D REFERRED TO TWO DECISION OF THE TRIBUNAL I.E. TECH MAHINDRA AND SIVA INDUSTRIES AND HOLDING LTD.F OR THE ARGUMENT THAT LIBOR RATE SHOULD BE APPLIED TO THE INTERNATIONAL TRANSACTIONS,THAT THE ASSESSEE HAD NOT BEEN ABLE TO ESTABLISH THE FACTS AND ECONOMICAL CIRCUMSTANCES TO JUSTIFY THE ARGUMEN T ADVANCED BY IT, THAT INTEREST RATE DEPENDED ON NUMEROUS FACTORS,THAT THE CHARGING OF INTEREST F ROM BORROWER WAS PURELY A QUESTION OF FACT AND WOULD VARY ON THE CREDITWORTHINESS,FINANCIAL SOUNDN ESS AND CREDIT OF THE BORROWER.HE FURTHER OBSERVED THAT THE ASSESSEE HAD ADVANCED LOAN TO ITS AE IN US DOLLAR THAT WOULD BE OPEN TO FOREIGN CURRENCY EXCHANGE RISK, THAT THE FLUCTUATIO N RISK WOULD ENTAIL CHARGING OF EXTRA INTEREST BEING THE COST RISK UNDERTAKEN BY THE ASSESSEE FOR ADVANCING A LOAN TO ITS AE,THAT ON THE BASIS OF FINANCIALS OF THE AE IT WOULD NOT BE EASY FOR IT TO OBTAIN THIRD PARTY LOANS,THAT THE ASSESSEE HAD NOT BENCH MARKED THE LOAN TRANSACTIONS AFTER TAKING ALL THESE FACTORS INTO CONSIDERATION.THE TPO PROPOSED ADJUSTMENT OF RS.4,72,77,108/-, APPLYING T HE RATE OF INTEREST AT 14.39% P.A.AS AGAINST THE INTEREST RATE OF 6 AND 7.5% PER ANNUM CHARGED B Y THE ASSESSEE.THE AO PASSED THE ORDER IN CONFORMITY TO THE ALP DETERMINED BY THE TPO. 3.2. AGGRIEVED BY THE ORDER OF THE AO,THE ASSESSEE PREFE RRED AN APPEAL BEFORE THE FAA AND MADE ELABORATE SUBMISSIONS.IT ALSO MADE REFERENCE TO CER TAIN CASE LAWS.AFTER CONSIDERING THE AVAILABLE MATERIAL,THE FAA HELD THAT THE ASSESSEE HAD NOT PR ODUCED ANY EVIDENCE REGARDING AVAILABILITY OF FUNDS AT THE TIME OF ADVANCING THE LOANS. HE REFERR ED TO THE CASES OF M/S. VVF LTD.,M/S. PEROT SYSTEMS TSI (INDIA) LTD. AND AURIONPRO SOLUTIONS LT D. ITA/7872/MUM/2011 (DT.12/4/2013) AND 1725/M/14(08-09) FIRST SOURCE 4 HELD THAT BANK FD RATE WAS A REASONABLE RATE TO BE APPLIED FOR BENCH MARKING THE TRANSACTION RELATING TO INTEREST RECEIVABLE ON LOANS GIVEN TO A E.S,THAT THE CONTENTION OF THE ASSESSEE REGARDING ENHANCEMENT OF BENEFIT BY GIVING LOAN TO AE WAS FAC TUALLY INCORRECT.WITH REGARD TO THE CONTENTION OF THE ASSESSEE THAT THE AE HAD TAKEN LO AN FROM ABN AMRO BANK AT A RATE OF LIBOR +200 BASIS POINTS,THE FAA OBSERVED THAT THE ASSESSE E HAD NOT PRODUCED CONFIRMATION FROM THE SAID BANK.FINALLY,HE HELD THAT ADJUSTMENT MADE BY T HE TPO @14.39% ON ACCOUNT OF INTEREST CHARGEABLE FROM AE WAS JUSTIFIED. 3.3. DURING THE COURSE OF HEARING BEFORE US,THE AR STATE D THAT LIBOR RATE AS ON 31/03/2008 WAS 2.49%, THAT IF 200BPS OR 300BPS WAS ADDED TO THE LI BOR RATE THE ASSESSEE WOULD FIT UNDER THE ALP,THAT EVEN AFTER ADDING 300BPS THE RATE WOULD CO ME TO 5.49%, THAT THE ASSESSEE HAD CHARGED 6%/7.5% INTEREST FROM ITS AE, THAT THE FAA, WHILE P ASSING ORDER FOR 2010-11,HAD GIVEN COMPLETE RELIEF ON THE INTEREST TRANSACTIONS,THAT HE HAD AC CEPTED THE LIBOR BASED ARGUMENTS, THAT THE TPO HAD MADE NO ADJUSTMENT ON ACCOUNT OF INTEREST RATE WHILE COMPLETING THE ASSESSMENT, FOR AY 2012-13.HE RELIED UPON THE CASES OF AITHENT TECHNOL OGIES PVT.LTD. (ITA NO.3647/DEL./2007); M/S AUROBINDO PHARMA LTD. (ITA/1866/HYD./2012);COTT ON NATURALS (I) PVT.LTD. (ITA 5855/ DEL/ 2012);.M/S.EKTA APPLIANCES (ITA/4878/DEL/2009);M/S. FOUR SOFT LTD. (ITA /1495/ HYD./ 2010) ; HINDUJA GLOBAL SOLUTIONS LTD.(ITA/254/MUM/2013);IND IAN HOTELS CO,AND MASCON GLOBAL LTD. (ITA/2205/MDS/2010).THE DR SUPPORTED THE ORDER OF AO/TPO. 3.4. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US. WE FIND THAT THE ASSESSEE HAD ADVANCED LOAN TO ITS AE IN US DOLLAR, THAT IT HAD CHARGED INTEREST @ 6%-7.5% PER ANNUM,THAT THE LIBOR RATE AS ON LAST DATE OF 2008 W AS 2.49%, THAT THE AE OF THE ASSESSEE HAD TAKEN LOAN FROM A THIRD PARTY NAMELY ANB AND AMRO BANK LTD.,THAT THE BANK HAD CHARGED LIBOR +200 BPS,THAT THE ASSESSEE HAD BENCHMARKED TH E TRANSACTION ACCORDINGLY,THAT IN THE SUBSEQUENT AY.(AY 2012-13),THE AO HIMSELF HAD MADE NO ADJUSTMENT ON ACCOUNT OF INTEREST RATE TRANSACTION EVEN THOUGH THE FACTS AND CIRCUMST ANCES WERE IDENTICAL TO THE FACTS TO THE YEAR UNDER APPEAL.WE ALSO FIND THAT IN THE CASES,RELIED UPON BY THE ASSESSEE,THE TRIBUNAL HAS TAKEN A CONSISTENT VIEW THAT LIBOR+ 200BPS OR 300BPS INTERE ST RATE HAS TO BE CONSIDERED ARMS LENGTH RATE OF INTEREST.IN THE CASE UNDER CONSIDERATION AF TER ADDING 300 BPS THE RATE WOULD COME TO 5.49 %,WHEREAS THE ASSESSEE HAS CHARGED 6%/7.5% INTERES T FROM ITS AE THUS, THERE WAS NO JUSTIFICA - TION FOR THE FAA TO UPHOLD THE ORDER OF THE TPO/AO WHO HAD CHARGED INTEREST @14.39%. 1725/M/14(08-09) FIRST SOURCE 5 THEREFORE,REVERSING THE ORDER OF THE FAA,WE DECIDE THIRD GROUND OF APPEAL IN FAVOUR OF THE ASSESSEE . 4. NEXT GROUND OF APPEAL IS WITH REGARD TO ADJUSTMENT OF GUARANTEE COMMISSION OF RS.2.70 CRORESS. DURING THE TP PROCEEDINGS,THE TPO FOUND TH AT THE ASSESSEE HAD RECEIVED GUARANTEE COMMISSIONS FROM ITS AE.S,THAT IT HAD CHARGED COMM ISSION @1.5% FROM ITS AE.S HE DIRECTED THE ASSESSEE TO PROVIDE COPY OF AGREEMENTS ENTERED IN TO AE.S AND TO FURNISH THE BASIS AND BENCHMARKING OF THE SAME.THE ASSESSEE SUBMITTED THA T THE GUARANTEE WAS BENCH MARKED ON A QUOTATION FROM THE BANK, THAT THE CORPORATE GUARANT EE WAS GIVEN TO THE BANK FOR THE LOAN TAKEN BY ITS AE.S.AFTER CONSIDER -ING THE SUBMISSION OF THE ASSESSEE ,THE AO OBSERVED THAT THE ASSESSEE HAD INCURRED CONSIDERABLE AMOUNT OF RISK ON ACCOUNT OF GUARANTEE COMMISSION.HE MADE ENQUIRIES FROM THE BANKS TO ASCERTAIN HOW MUCH THEY WERE CHARGING FOR FURNISHING BANK GUARANTEES.THE INQUIRY WITH THE HSBC LTD., AS PER T HE AO, REVEALED THAT THEY WERE CHARGING 0.15% TO 3%, THAT THE ALLAHABAD BANK WAS CHARGING R ATE OF 3% PER ANNUM. HE OBSERVED THAT BANK RATE DURING THE RELEVANT PERIOD WAS 6% WHILE T HE AVERAGE PLR RATE WAS ABOUT 11-12%, THAT THE RETURN FOR BEARING THE RISK WAS ABOUT 5-6%.ACCO RDINGLY,THE TPO BENCHMARKED THE ARMS- LENGTH PRICE FOR BANK GUARANTEE AT 3% OF THE AMOUNT GUARANTEED.HE PROPOSED AN ADJUSTMENT OF RS.2.70 CRORES UNDER THE HEAD GUARANTEE COMMISSION. THE AO PASSED ORDER IN CONFORMITY TO THE ORDER OF THE TPO. 4.1. DURING THE APPELLATE PROCEEDINGS,BEFORE THE FAA THE ASSESSEE MADE ELABORATE SUBMISSIONS AND REFERRED TO CERTAIN CASE LAWS.AFTER CONSIDERING THE AOS ORDER AND THE SUBMISSIONS OF THE ASSESSEE,HE HELD THAT COMMERCIAL EXPEDIENCY WAS NOT A FACTOR TO BE CONSIDERED IN TRANSFER PRICING PROVISIONS,THAT THE ASSESSEE HAD ACCEPTED THAT THE AE.S WERE RISK BEARING ENTITIES, THAT THE TPO HAD HIGHLIGHTED THE RISK INVOLVED IN GUARANTEE, THA T IT HAD NOT OBTAINED ANY SECURITY FROM ITS AE.S, THAT IT HAD JUST PROVIDED BANK GUARANTEE,THAT THE ARMS LENGTH COMPENSATION HAD TO BE MUCH MORE THAN THE RATE CHARGED BY THE BANKS FOR THEIR C OMMISSION.REFERRING TO THE CASES OF TECH MAHINDRA(ITA/8597/MUM/2010 DT.6/6/2012) & M/S. TECH NIMONT ICB PVT.LTD. (ITA/6394/MUM/ 2012-AY 08-09 DT.28/8/13),HE HELD THAT THE AO HAD R IGHTLY CHARGED THE GUARANTEE COMMISSION @3%. 4.2. BEFORE US,THE AR STATED THAT THE ASSESSEE HAD CHAR GED GUARANTEE COMMISSION IN RESPECT OF BANK LOAN (FROM FLS US AND FLS-UK) AND PERFORMANCE GUARANTEE (FROM PIPAL-US AND FSL- 1725/M/14(08-09) FIRST SOURCE 6 UK),THAT IT HAD OBTAINED QUOTATIONS FROM ICICI BANK FOR CHARGING GUARANTEE COMMISSION, THAT THE FAA,WHILE ADJUDICATING APPEAL FOR AY.2010-11 HA D MADE NO ADJUSTMENT ON PERFORMANCE GUARANTEE TRANSACTIONS, THAT HE HAD UPHELD FINANCIA L GUARANTEE @1.5% FOR THAT YEAR, THAT THE TPO FOR THE AY.2012-13,HAD ADOPTED RATE OF 1.5% TO BENC H MARK THE GUARANTEE FEE,(FINANCE GUARAN - TEE),THAT FOR PERFORMANCE GUARANTEE NO ADJUSTMENT W AS MADE.THE AR RELIED UPON MORE THAN A DOZEN CASES,ADJUDICATED UPON BY THE TRIBUNAL,WHEREI N THE IDENTICAL ISSUE WAS DECIDED AGAINST THE DEPARTMENT.THE DR LEFT THE ISSUE TO THE DISCRETION OF THE BENCH. 4.3. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US.WE FIND THAT THE ASSESSEE HAD GIVEN GUARANTEE IN RESPECT OF BANK LOA NS IN CASE OF TWO OF ITS AE.S, THAT IT HAD ALSO GIVEN GUARANTEE IN RESPECT OF PERFORMANCE GUARANTEE FOR TWO OTHER AE.S,THAT IT HAD CHARGED THE COMMISSSION @1.5% ON THE BASIS OF QUOTATIONS OBTAIN ED FROM ICICI BANK,THAT THE TPO/AO TOOK THE RATE AT 3% AND MADE ADJUSTMENT AT RS.2.70 CROR ESS. WE FIND THAT THE TPO, WHILE DETERMINING THE ALP FOR THE AY.2012-13 THE TPO HAD APPROVED THE RATE OF 1.5% FOR THE FINANCIAL GUARANTEE, THAT FOR PERFORMANCE GUARANTEE HE DID NOT MAKE ANY ADJUSTMENT. THERE IS NOTHING ON RECORD TO PROVE THAT FACTS FOR YEAR UNDER CONSIDERATION AND T HE FACTS FOR AY.2012-13 WERE DIFFERENT.THUS, THE TPO HIMSELF HAS ACCEPTED THAT THE BENCHMARKING DONE BY THE ASSESSEE WAS BASED ON RELIABLE DATA AND WAS AT ARMS LENGTH.THEREFORE,WE ARE OF TH E OPINION THAT THERE WAS NO JUSTIFICATION FOR MAKING TP ADJUSTMENT WITH REGARD TO GUARANTEE COMMI SSION. HERE,WE WOULD LIKE TO REPRODUCE THE RELEVANT PORTIO N OF JUDGMENT OF HON'BLE BOMBAY HIGH COURT IN THE CASE OF EVEREST KANTO CYLINDERS LTD. (378 ITR 77).IN THAT MATTER THE QUESTION RAISED BEFORE THE HONBLE COURT WAS AS UNDER: (3) WHETHER, ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE HON'BLE INCOME- TAX APPELLATE TRIBUNAL, 'K' BENCH, MUM BAI, WAS RIG HT IN DELETING THE ADDITION OF RS. 28,50,353 ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT ON GUARAN TEE COMMISSION ?' AFTER MENTIONING THE FACTS OF THE CASE THE HONBLE COURT DECIDED THE ISSUE AS FOLLOW: 4.THE TRANSFER PRICING OFFICER IN HIS ORDER DATED OCTOBER 28, 2010, OBSERVED THAT DURING THE FINANCIAL YEAR 2006-07 THE ASSOCIATED ENTERPRISE HA D TAKEN A LOAN OF RS. 86.88 CRORESS, THAT IS, USD 20,000,000 FROM ICICI BANK AND ONE OF THE CLAUS ES OF THE TERM LOAN WAS TO PROVIDE A CORPORATE GUARANTEE BY THE ASSESSEE. IN THIS BEHALF , THE ASSESSEE PROVIDED A CORPORATE GUARANTEE/GUARANTEEING REPAYMENT OF BORROWINGS MADE BY THE ASSOCIATED ENTERPRISE AT DUBAI FOR PURCHASE OF ASSETS AND INVENTORIES AND FOR WORKING CAPITAL AND AS A TERM LOAN. THE ASSESSEE HAD CHARGED GUARANTEE COMMISSION AT 0.5 PER CENT. THE T RANSFER PRICING OFFICER FOUND THAT THE GUARANTEE FEE CHARGED WAS AT A LOWER RATE AND PROCE EDED TO COMPARE THE GUARANTEE COSTS. THE PROVISION OF GUARANTEE WAS FOUND TO BE AN INTERNATI ONAL TRANSACTION AS DEFINED UNDER SECTION 92B OF THE ACT AND IT WAS FOUND THAT THE TRANSACTION WO ULD HAVE A BEARING ON THE PROFITS, INCOME, 1725/M/14(08-09) FIRST SOURCE 7 LOSSES OR ASSETS OF THE ASSESSEE. IT WAS OBSERVED T HAT THE OVERALL RISK EXPOSURE OF THE ASSESSEE- COMPANY BECOMES HIGHER BY VIRTUE OF THE AMOUNT OF G UARANTEE AND THE COMPANY BECOMES MORE LEVERAGED INCLUDING BY VIRTUE OF ITS DEBIT EQUITY R ATIO WHICH WOULD ULTIMATELY EFFECT THE COST OF BORROWING. THE DUBAI SUBSIDIARY WAS NEWLY FORMED WA S UNKNOWN HAD A LOW CREDIT RATING AND AS SUCH THE TRANSFER PRICING OFFICER CONCLUDED THAT IF THE GUARANTEE HAD NOT BEEN PROVIDED, ICICI BANK WOULD NOT HAVE LENT AND ADVANCED MONIES TO THE ASSOCIATED ENTERPRISE. RELYING UPON THE PRINCIPLES OF COMPUTING GUARANTEE FEES IN A CASE OF GENERAL ELECTRIC CAPITAL CANADA INC. V. HER MAJESTY, THE QUEEN [2009] TCC 563, THE DIFFERENCE B ETWEEN THE BANK RATE AND THE PRIME LENDING RATE IT SHOWED A RETURN FOR BEARING RISK FOLLOWED B Y OTHER BANKS DURING THE RELEVANT YEAR WAS 6 PER CENT., WHILE THE AVERAGE PRIME LENDING RATE WAS 11.35 PER CENT. THIS SHOWS THAT THE RETURN FOR BEARING THE RISK WAS AROUND 5.35 PER CENT. IT WAS A LSO FOUND IN ANOTHER CASE TAKEN UP FOR COMPARISON THAT A PUBLIC COMPANY WITH LIMITED LIABI LITY IN WHICH 51 PER CENT. STAKE WAS HELD BY DUTCH STATE, FMO (NEDERLANDS FINANCIERINGS MAATSCHA PPIJ VOOR ONTWIKKELINGSLANDEN N. V.) HAD CHARGED 2.5 PER CENT. FOR FURNISHING GUARANTEE IN THE CASE OF RABO INDIA FINANCE PVT. LTD., DESPITE THE FACT THAT FMO AND RABO WERE NOT RELATED ENTITIES. THE TRANSFER PRICING OFFICER CAME TO THE CONCLUSION THAT THE BANKS AND COMPANIES ARE CHARGING AT LEAST 3 PER CENT. FOR PROVIDING GUARANTEES AND, THEREFORE, THE BENCH MARK ARM'S LEN GTH PRICE FOR THE GUARANTEE GIVEN BY THE ASSESSEE TO ICICI FOR THE BENEFIT OF THE ASSOCIATED ENTERPRISE AT 3 PER CENT. OF THE AMOUNT OF GUARANTEE. IN THIS MANNER, HE ARRIVED AT AN AMOUNT OF RS. 34,99,003 AS GUARANTEE COMMISSION AND MADE ADJUSTMENT OF RS. 28,50,353 SINCE THE AMOU NT OF RS. 6,48,650 (EQUIVALENT TO 0.5 PER CENT.) HAD ALREADY BEEN PROVIDED FOR. XXXXX ON THE SECOND ISSUE, NAMELY, MAKING OF ADDITION OF RS. 28,50,353 UNDER SECTION 92CA THE COMMISSIONER (APPEALS), AFTER DETAIL CONSIDERATION OF THE ORDER OF THE TRANSFER PRICING OFFICER, CAME TO THE CONCLUSION THAT THE BANK RATE AND THE G UARANTEE OF THE RELEVANT PERIOD WAS 6 PER CENT. WHEREAS THE PRIME LENDING RATE WAS 10.5 PER CENT. W HICH SHOWS THAT THE RETURN FOR BEARING RECEIVED WAS 4.5 PER CENT.HE, THEREFORE, FOUND THAT THE RETURN OF 3 PER CENT. ARRIVED AT BY THE TRANSFER PRICING OFFICER IS JUSTIFIED AND THE CHALL ENGE ON THIS GROUND OF THE APPELLANT WAS ALSO REJECTED. XXXXX IN THE MATTER OF GUARANTEE COMMISSION, THE ADJUSTME NT MADE BY THE TRANSFER PRICING OFFICER WERE BASED ON INSTANCES RESTRICTED TO THE COMMERCIAL BAN KS PROVIDING GUARANTEES AND DID NOT CONTEMPLATE THE ISSUE OF A CORPORATE GUARANTEE. NO DOUBT THESE ARE CONTRACTS OF GUARANTEE, HOWEVER, WHEN THEY ARE COMMERCIAL BANKS THAT ISSUE BANK GUARANTEES WHICH ARE TREATED AS THE BLOOD OF COMMERCE BEING EASILY ENCASHABLE IN THE EV ENT OF DEFAULT, AND IF THE BANK GUARANTEE HAD TO BE OBTAINED FROM COMMERCIAL BANKS, THE HIGHER CO MMISSION COULD HAVE BEEN JUSTIFIED. IN THE PRESENT CASE, IT IS ASSESSEE-COMPANY THAT IS ISSUIN G CORPORATE GUARANTEE TO THE EFFECT THAT IF THE SUBSIDIARY ASSOCIATED ENTERPRISE DOES NOT REPAY THE LOAN AVAILED OF IT FROM ICICI, THEN IN SUCH EVENT, THE ASSESSEE WOULD MAKE GOOD THE AMOUNT AND REPAY THE LOAN. THE CONSIDERATIONS WHICH APPLIED FOR ISSUANCE OF A CORPORATE GUARANTEE ARE D ISTINCT AND SEPARATE FROM THAT OF THE BANK GUARANTEE AND, ACCORDINGLY, WE ARE OF THE VIEW THAT THE COMMISSION CHARGED CANNOT BE CALLED IN QUESTION, IN THE MANNER THE TRANSFER PRICING OFFICE R HAS DONE. IN OUR VIEW, THE COMPARISON IS NOT AS BETWEEN LIKE TRANSACTIONS BUT THE COMPARISONS AR E BETWEEN GUARANTEES ISSUED BY THE COMMERCIAL BANKS AS AGAINST A CORPORATE GUARANTEE I SSUED BY HOLDING COMPANY FOR THE BENEFIT OF ITS ASSOCIATED ENTERPRISE, A SUBSIDIARY COMPANY. IN VIEW OF THE ABOVE DISCUSSION, WE ARE OF THE VIEW THAT THE APPEAL DOES NOT RAISE ANY SUBSTANTIAL QUESTION OF LAW AND IT IS DISMISSED. CONSIDERING THE ABOVE AND RESPECTFULLY FOLLOWING TH E JUDGMENT OF EVEREST KANTO CYLINDERS LTD.(SUPRA), WE DECIDE THIRD EFFECTIVE GROUND OF AP PEAL (GOA-4) IN FAVOUR OF THE ASSESSEE . 1725/M/14(08-09) FIRST SOURCE 8 5. GOA-5 IS ABOUT LEVY OF PENALTY U/S. 271(1)(C) OF THE ACT AND GROUND NO.6 IS GENERAL IN NATURE. WE ARE NOT ADJUDICATING BOTH OF THEM. AS A RESULT APPEAL FILED BY THE ASSESSEE STANDS ALLOWED ORDER PRONOUNCED IN THE OPEN COURT ON 27 TH JUNE,2017. 27 2017 SD/- SD/- ( / SAKTIJIT DEY ) ( / RAJENDRA ) / JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI; /DATED :27.06..2017. JV.SR.PS. / COPY OF THE ORDER FORWARDED TO : 1. APPELLANT / 2. RESPONDENT / 3. THE CONCERNED CIT(A)/ , 4. THE CONCERNED CIT / 5. DR K BENCH, ITAT, MUMBAI / , , . . . 6. GUARD FILE/ //TRUE COPY// / BY ORDER, / DY./ASST. REGISTRAR , /ITAT, MUMBAI.