M/s. S.K. Sarawagi & Co. Pvt. Ltd., , Kolkata V. ACIT, Circle - 5(2), Kolkata, Kolkata

ITA 2267/KOL/2017

• Counselvise Citation: [2019] 116 COUNSELVISE.COM (IT) 3786 (ITAT-KOLKATA)
• Duration Of Justice: 1 year(s) 9 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-08-2019
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Assessment Year: 2013-2014
• Appeal Filed On: 03-11-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: RADHEY SHYAM
• Keywords: Transfer pricing; International transaction; Retrospective amendment
• Section: 143(3); 92B

Judgement Text

, B , IN THE INCOME TAX APPELLATE TRIBUNAL KOLKATA BENCH B KOLKATA BEFORE SHRI S.S.GODARA, JUDICIAL MEMBER AND DR. A.L. SAINI, ACCOUNTANT MEMBER ITA NO. 2267 / KOL / 2017 ASSESSMENT YEAR :2013-14 M/S S. K. SARAWAGI & CO. PVT. LTD., 1, SAROJINI NAIDU SARANI, 507, SHUBHAM, 5 TH FLOOR, KOLKATA-700 017 [ PAN NO.AADCS 8887 R ] V/S . ACIT, CIRCLE-5(2), AAYAKAR BHAWAN, P- 7, CHOWRINGHEE SQUARE, KOLKATA-700 069 /APPELLANT .. / RESPONDENT /BY APPELLANT SHRI KETAN VED, FCA /BY RESPONDENT SHRI RADHEY SHYAM, CIT-DR /DATE OF HEARING 09-08-2019 /DATE OF PRONOUNCEMENT 09-08-2019 / O R D E R PER S.S.GODARA, JUDICIAL MEMBER:- THIS ASSESSEES APPEAL FOR ASSESSMENT YEAR 2013-14 ARISES AGAINST THE ASSISTANT COMMISSIONER OF INCOME TAX-II KOLKATAS A SSESSMENT DATED 30.08.2017 FRAMED IN FURTHERANCE TO THE DISPUTE RES OLUTION PANEL-2 NEW DELHIS DRP DIRECTIONS DATED 26.07.2017, INVOLVI NG PROCEEDINGS U/S 143(3) / 144C(5) OF THE INCOME TAX ACT, 1961; IN SHORT THE ACT. HEARD BOTH THE PARTIES. CASE FILE PERUSED. 2. IT EMERGES DURING THE COURSE OF HEARING THAT THE ASSESSEES SOLITARY SUBSTANTIVE GRIEVANCE PLEADED IN THE INSTANT APPEAL SEEKS TO REVERSE THE LEARNED LOWER AUTHORITIES ACTION MAKING TRANSFER PR ICING ADJUSTMENT IN THE NATURE OF THE TAXPAYERS CORPORATE GUARANTEE FOR OV ERSEAS ASSOCIATE ITA NO.2267/KOL/2017 A.Y. 2013-14 M/ S.K. SARAWAGI & CO. PVT. LTD. VS. ACIT, CI R-5(2), KOL. PAGE 2 ENTERPRISES (AE) INVOLVING ADDITION AMOUNT OF 4,38,85,509/-. THE ASSESSEES PLEADINGS COMPRISE OF MULTIPLE FACED ARGUMENTS AGAI NST THE IMPUGNED ADJUSTMENT. IT TRANSPIRES DURING THE COURSE OF HEAR ING THAT THIS TRIBUNALS CO- ORDINATE BENCHS ORDER IN ITA NO.1958/KOL/2017 ACIT, CIRCLE-6(2), KOLKATA VS. M/S EMAMI LTD. DECIDED ON 03.04.2019 HOLDS THAT A CORPORATE GUARA NTEE IS NOT AN INTERNATIONAL TRANSACTIONS U/S 92B OF THE AC T AS UNDER:- 8. GROUND NO. 2 TO 4 RELATE TO CORPORATE GUARANTEE FEE EXTENDED BY THE ASSESSEE COMPANY TO ITS ASSOCIATE ENTERPRISE (AE). 9. AFTER GIVING OUR THOUGHTFUL CONSIDERATION TO THE SUBMISSION OF THE PARTIES AND PERUSING THE JUDICIAL DECISIONS RELIED UPON BY THE LD. AR, WE FIND THAT THE ISSUE INVOLVED, IN RESPECT TO CORPORATE GUARANTEE, IN THE PRESENT APPEAL IS NO LONGER RES INTEGRA. WE NOTE THAT FINANCIAL GUARANTEE IS A PROM ISE MADE BY A PERSON (THE GUARANTOR) TO A LENDER (GUARANTEED PARTY) PROMISING TO PAY THE LENDER THE MONEY OWED TO IT BY THE BORROWER (OBLIGOR) ON WHOSE BEHAL F THE GUARANTEE IS GIVEN, IF THE BORROWER FAILS TO PAY BACK THE DEBT DUE TO THE LEND ER. A GUARANTEE TO A LENDER THAT A LOAN WILL BE REPAID, GUARANTEED BY A COMPANY OTHER THAN THE ONE WHO TOOK THE LOAN, IS CALLED A CORPORATE GUARANTEE. THE LD COUNSEL FOR THE ASSESSEE SUBMITTED BEFORE US THAT EXTENDING CORPORATE GUARANTEE FOR BORROWINGS BY SUBSIDIARIES WAS A SHAR EHOLDER ACTIVITY, THAT IT WAS NOT AN INTERNATIONAL TRANSACTION, THAT NO FEE WAS WARRA NTED SINCE NO COST WAS INCURRED, AND THAT BANK GUARANTEES WERE NOT COMPARABLE TO COR PORATE GUARANTEES SINCE THE BUSINESS OF THE BANK WAS DIFFERENT FROM THAT OF A C ORPORATE. BEFORE US, LD DR FOR THE REVENUE SUBMITTED THAT THE RE ARE PLETHORA OF JUDICIAL PRONOUNCEMENTS WHEREIN IT HAS BEEN HELD THAT THE CO RPORATE GUARANTEE IS IN THE NATURE OF SERVICE PROVIDED BY THE TAXPAYER TO ITS A SSOCIATE ENTERPRISES (AES) AND HENCE SHOULD BEAR A CHARGE. THE JUDGMENTS HAVE EXPL ICITLY HELD THAT AFTER THE INCOME TAX ACT, 1961 WAS AMENDED BY THE FINANCE ACT, 2012 TO INCLUDE ' GUARANTEE ' WITHIN THE DEFINITION OF ' INTERNATIONAL TRANSACTION ' WITH RETROSPECTIVE EFFECT FROM 01.04.2002, THE CORPORATE GUARANTEE SHOULD BE BENCH MARKED FROM ARMS LENGTH PERSPECTIVE. 10. HOWEVER, AFTER HEARING BOTH THE PARTIES, WE NOT E THAT THERE ARE PLETHORA OF JUDICIAL PRONOUNCEMENTS WHEREIN IT HAS BEEN HELD THAT CORPOR ATE GUARANTEE DOES NOT CONSTITUTE AN INTERNATIONAL TRANSACTION AND ACCORDI NGLY THERE SHOULD NOT BE A CHARGE. WE NOTE THAT IN ASSESSEES CASE UNDER CONSIDERATION , THE ASSESSEE, IN ORDER TO AVOID PROTRACTED LITIGATION MADE AN ESTIMATED ADJUSTMENT OF RS.51,50,327/- @ 1% OF THE CORPORATE GUARANTEE AMOUNT AS FEES FOR CORPORATE GU ARANTEE, FOR INCOME TAX PURPOSES. HOWEVER, THE TPO REJECTED THE METHOD ADOP TED BY THE ASSESSEE AND RECOMPUTED THE ARMS LENGTH PRICE BY MAKING UPWARD ADJUSTMENT. WE NOTE THAT THE ASSESSEE HAS EXTENDED THIS CORPORATE GUARANTEE AS A SHAREHOLDER ACTIVITY HENCE THE ADJUSTMENT SHOULD NOT BE MADE. THE PRIMARY OBJECT O F THE ASSESSEE IS TO HELP THE SUBSIDIARY COMPANY AND PROTECT ITS INTEREST AND THE RE IS NO OBJECT OF THE ASSESSEE COMPANY TO EARN THE INTEREST INCOME BY FURNISHING T HE CORPORATE GUARANTEE TO THE ASSOCIATED ENTERPRISES. WE NOTE THAT IN THE JUDGMEN T OF THE CO-ORDINATE BENCH OF ITAT AHMADABAD, IN THE CASE OF MICRO LINK LIMITED V S. ACIT [TS-568-ITAT-2015] (AHD) WHEREIN THE CO-ORDINATE BENCH HAS HELD THAT C ORPORATE GUARANTEE DOES NOT ITA NO.2267/KOL/2017 A.Y. 2013-14 M/ S.K. SARAWAGI & CO. PVT. LTD. VS. ACIT, CI R-5(2), KOL. PAGE 3 CONSTITUTE INTERNATIONAL TRANSACTION AS PER SECTION 92B OF THE ACT AS AMENDED BY THE FINANCE ACT, 2012. THE RELEVANT EXTRACTS OF THE JUD GMENT IS REPRODUCED AS UNDER: ON A CONCEPTUAL NOTE, THUS, THERE IS A VALID SCHOO L OF THOUGHT THAT THE CORPORATE GUARANTEES CAN INDEED BE A MODE OF OWNERS HIP CONTRIBUTION, PARTICULARLY WHEN AS IS OFTEN THE CASE, WHERE SUCH A GUARANTEE IS GIVEN, IT COMPENSATES FOR THE INADEQUACY IN THE FINANCIAL POS ITION OF THE BORROWER; SPECIFICALLY THE FACT THAT THE SUBSIDIARY DOES NOT HAVE ENOUGH SHAREHOLDERS FUNDS. THERE CAN BE NUMBER OF REASONS, INCLUDING RE GULATORY ISSUES AND MARKET CONDITIONS IN THE RELATED JURISDICTIONS, IN WHICH SUCH A CONTRIBUTION, BY WAY OF A GUARANTEE, WOULD JUSTIFY TO BE A MORE APPR OPRIATE AND PREFERRED MODE OF CONTRIBUTION VIS-A-VIS EQUITY CONTRIBUTION ... ' ' ... IN OTHER WORDS, THESE GUARANTEES WERE SPECIFI CALLY STATED TO BE IN THE NATURE OF SHAREHOLDER ACTIVITIES. THE ASSESSEE'S CL AIM OF THE GUARANTEES BEING IN THE NATURE OF QUASI CAPITAL, AND THUS BEING IN T HE NATURE OF A SHAREHOLDER'S ACTIVITY, IS NOT REJECTED EITHER. THE CONCEPT OF IS SUANCE OF CORPORATE GUARANTEES AS A SHAREHOLDER ACTIVITY IS NOT ALIEN T O THE TRANSFER PRICING LITERATURE IN GENERAL.. .... WE HAVE NOTICED THAT THE 'OECD TRANSFER PRICI NG GUIDELINES FOR MULTINATIONAL ENTERPRISES AND TAX ADMINISTRATIONS S PECIFICALLY RECOGNIZES THAT AN ACTIVITY IN THE NATURE OF SHAREHOLDER ACTIVITY, WHICH IS SOLELY BECAUSE OF OWNERSHIP INTEREST IN ONE OR MORE OF THE GROUP MEMB ERS, I.E. IN THE CAPACITY AS SHAREHOLDER ' WOULD NOT JUSTIFY A CHARGE TO THE RECIPIENT COMPANI ES '. IT IS THUS CLEAR THAT A SHAREHOLDER ACTIVITY, IN ISSUA NCE OF CORPORATE GUARANTEES, IS TAKEN OUT OF AMBIT OF THE GROUP SERVICES. CLEARL Y, THEREFORE, AS LONG AS A GUARANTEE IS ON ACCOUNT OF, WHAT CAN BE TERMED AS ' SHAREHOLDER'S ACTIVITIES', EVEN ON THE FIRST PRINCIPLES, IT IS OUTSIDE THE AMB IT OF TRANSFER PRICING ADJUSTMENT IN RESPECT OF ARM'S LENGTH PRICE. ' ' .... WE ARE IN AGREEMENT WITH THESE VIEWS. THERE CAN THUS BE ACTIVITIES WHICH BENEFIT THE GROUP ENTITIES BUT THESE ACTIVITIES NEE D NOT NECESSARILY BE ' PROVISION FOR SERVICES '. THE FACT THAT THE OECD CONSIDERS SUCH ACTIVITIES IN THE SERVICES SEGMENT DOES NOT ALTER THE CHARACTER O F THE ACTIVITIES. WHILE THE GROUP ENTITY IS THUS INDEED BENEFITED BY THE SHAREH OLDER ACTIVITIES, THESE ACTIVITIES DO NOT NECESSARILY CONSTITUTE SERVICES . .. ' ' .... THE ISSUANCE OF FINANCIAL GUARANTEE IN FAVOU R OF AN ENTITY, WHICH DOES NOT HAVE ADEQUATE STRENGTH OF ITS OWN TO MEET SUCH OBLI GATIONS, WILL RARELY BE DONE. THE VERY COMPARISON, BETWEEN THE CONSIDERATIO N FOR WHICH BANKS ISSUE FINANCIAL GUARANTEES ON BEHALF OF ITS CLIENTS WITH THE CONSIDERATION FOR WHICH THE CORPORATE ISSUE GUARANTEES FOR THEIR SUBSIDIARI ES, IS ILL CONCEIVED. ... THESE GUARANTEES DO NOT HAVE ANY IMPACT ON INCO ME, PROFITS, LOSSES OR ASSETS OF THE ASSESSEE. THERE CAN BE A HYPOTHETICAL SITUATION IN WHICH A GUARANTEE DEFAULT TAKES PLACE AND, THEREFORE, THE E NTERPRISE MAY HAVE TO PAY THE GUARANTEE AMOUNTS BUT SUCH A SITUATION, EVEN IF THAT BE SO, IS ONLY A HYPOTHETICAL SITUATION, WHICH ARE, AS DISCUSSED ABO VE, EXCLUDED. WHEN AN ASSESSEE EXTENDS AN ASSISTANCE TO THE ASSOCIATED EN TERPRISE, WHICH DOES NOT COST ANYTHING TO THE ASSESSEE AND PARTICULARLY FOR WHICH THE ASSESSEE COULD NOT HAVE REALIZED MONEY BY GIVING IT TO SOMEONE ELS E DURING THE COURSE OF ITS NORMAL BUSINESS, SUCH AN ASSISTANCE OR ACCOMMODATIO N DOES NOT HAVE ANY BEARING ON ITS PROFITS, INCOME, LOSSES OR ASSETS, A ND, THEREFORE, IT IS OUTSIDE THE AMBIT OF INTERNATIONAL TRANSACTION UNDER SECTIO N 92B (1) OF THE ACT .... ' ITA NO.2267/KOL/2017 A.Y. 2013-14 M/ S.K. SARAWAGI & CO. PVT. LTD. VS. ACIT, CI R-5(2), KOL. PAGE 4 11. WE RELY ON THE JUDGMENT OF THE CO-ORDINATE BENC H OF ITAT, DELHI IN THE CASE OF BHARTI AIRTEL LTD. VS. ACIT IN I.T.A. NO. 5816/KOL/ 2012, WHEREIN THE DEFINITION OF INTERNATIONAL TRANSACTION IN VIEW OF THE AMENDMENTS , VIDE FINANCE ACT, 2012, HAD BEEN DISCUSSED AND IT WAS HELD THAT THE PROVISION O F CORPORATE GUARANTEE IS NOT AN INTERNATIONAL TRANSACTION. THE RELEVANT EXTRACT OF THE JUDGMENT IS REPRODUCED AS UNDER: PARA 23 .... THE ISSUE WHETHER GIVING A CORPORATE GUARANTEE AMOUNTS TO AN INTERNATIONAL TRANSACTION' HAS NOT BEEN RAISED OR DISCUSSED IN THE CASES WHERE ALP ADJUSTMENTS HAVE BEEN UPHELD AND THEREFOR E THOSE DECISIONS CANNOT BE PUT AGAINST THE TAXPAYER ..... ' 'PARA 27.... THE EXPLANATION INSERTED VIDE FINANCE ACT 2012 IS TO BE READ IN CONJUNCTION WITH THE MAIN PROVISION AND IN HARMONY WITH THE SCHEME OF PROVISION UNDER SECTION 92B OF THE ACT. IT IS ESSEN TIAL THAT IN ORDER TO BE AN 'INTERNATIONAL TRANSACTION' PROVIDING CORPORATE GUA RANTEE SHOULD HAVE A BEARING ON THE PROFITS, INCOME LOSSES OR ASSETS OF THE ENTERPRISE ...:' 'PARA 31. THE CONTENTS OF THE EXPLANATION FORTIFIE S, RATHER THAN MITIGATES, THE SIGNIFICANCE OF EXPRESSION 'HAVING A BEARING ON PROFITS, INCOME, LOSSES OR ASSETS' APPEARING IN SECTION 92B( 1) OF THE ACT ... ' 'PARA 33 .... THE ONUS IS ON THE TAX AUTHORITIES TO DEMONSTRATE THAT THE TRANSACTION IS OF SUCH NATURE AS TO HAVE 'BEARING O N PROFITS, INCOME, LOSSES OR ASSETS OF THE ENTERPRISE' AND HAS TO BE ON REAL BAS IS EVEN IF IN PRESENT OR IN FUTURE, AND NOT ON CONTINGENT OR HYPOTHETICAL BASIS ....' PARA 32.... THERE CAN BE A SITUATION IN WHICH A GU ARANTEE DEFAULT TAKES PLACE AND THEREFORE, THE ENTERPRISE MAY HAVE TO PAY THE G UARANTEE AMOUNT BUT SUCH A SITUATION EVEN IF THAT BE SO IS ONLY A HYPOTHETIC AL SITUATION .....' 'PARA 32 ..... WHEN AN ASSESSEE EXTENDS AN ASSISTAN CE TO THE ASSOCIATED ENTERPRISE WHICH DOES NOT COST ANYTHING TO THE ASSE SSEE AND PARTICULARLY FOR WHICH THE ASSESSEE COULD NOT HAVE REALIZED MONEY BY GIVING IT TO SOMEONE ELSE DURING THE COURSE OF ITS NORMAL BUSINESS, SUCH AN ASSISTANCE OR ACCOMMODATION DOES NOT HAVE ANY BEARING ON ITS PROF ITS, INCOME, LOSSES OR ASSETS AND THEREFORE IT IS OUTSIDE THE AMBIT OF INT ERNATIONAL TRANSACTION UNDER SECTION 92B(1) OF THE ACT. ...' 'PARA 35 .... IN THE CASE OF GE CAPITAL CANADA -VS- THE QUEEN, THE TAX COURT OF CANADA HAS INDEED DEALT WITH ALP DETERMINATION O F THE GUARANTEE FEES, BUT THEN IT WAS DONE IN THE LIGHT OF THEIR DOMESTIC LAW PROVISIONS WHICH ARE QUITE AT VARIANCE WITH THE INDIAN TRANSFER PRICING LEGISLATI ON .....' SIMILAR VIEWS HAVE BEEN HELD BY VARIOUS COORDINATE BENCHES, INCLUDING JURISDICTIONAL AS UNDER: I) TEGA INDUSTRIES LTD. VS. DCIT [I.T.A. NO. 912/20 12 DATED. 03.08.2016, [KOL TRIB.] II) MARICO LTD. VS. ACIT [TS-411-ITAT-2016 (MUM)-T P] III) TVS LOGISTICS SERVICES LTD. [TS-324-ITAT-2016 (CHNY)-TP] IV) MANUGRAPH IV)INDIA LTD. [TS 324-ITAT 2016 (MUM)-TP] V) SIRO CLINPHARM PVT. LTD. VS. DCIT [ITS-185- ITAT 2016 (MUM)-TP] VI) APOLLO HEALTH STREET LTD. VS. DCIT [TS-184- ITA T 2014 (HYD)-TP] ITA NO.2267/KOL/2017 A.Y. 2013-14 M/ S.K. SARAWAGI & CO. PVT. LTD. VS. ACIT, CI R-5(2), KOL. PAGE 5 THEREFORE, BASED ON THE ABOVE MENTIONED PRECEDENTS, WE NOTE THAT THE PROVISION OF CORPORATE GUARANTEE IS NOT AN INTERNATIONAL TRANSAC TION. HENCE, RESPECTFULLY FOLLOWING THE JUDGMENT OF THE CO-ORDINATE BENCHES CITED ABOVE, WE CONFIRM THE FINDINGS OF THE LD. CIT(A). 3. WE ADOPT THE ABOVE DETAILED DISCUSSION MUTATIS M UTANDIS TO REJECT THE REVENUES ARGUMENT SUPPORTIVE OF THE IMPUGNED CORPO RATE GUARANTEE ADJUSTMENT TAKEN AS INTERNATIONAL TRANSACTIONS. THE ASSESSEE SUCCEEDS IN ITS SOLITARY GRIEVANCE FOR THIS PRECISE REASON ALONE. A LL OTHER PLEADINGS ARE ACCORDINGLY RENDERED INFRUCTUOUS. THIS ASSESSEES A PPEAL IS ALLOWED. ORDER PRONOUNCED IN THE COURT AT THE CLOS E OF THE HEARING ON 9 TH DAY OF FRIDAY, 2019 SD/- SD/- ( %) (' %) ( A.L.SAINI) (S.S.GODARA) (ACCOUNTANT MEMBER) (JUDICIAL MEMBER) KOLKATA, *DKP (- 09/08 /201 9 / COPY OF ORDER FORWARDED TO:- 1. /APPELLANT-M/S S.K. SARAWAGI & CO. PVT. LTD.1, SARO JINI NAIDU SARANI, 507, SHUBHAM, 5 TH FLOOR, KOLKATA-17 2. /RESPONDENT-ACIT, CIR-5(2), AAYAKAR BHAWAN, P-7, CH OWRINGHEE SQ. KOLKATA-69 3. 3 4 / CONCERNED CIT KOLKATA 4. 4- / CIT (A) KOLKATA 5. 7 ''3, 3, / DR, ITAT, KOLKATA 6. < / GUARD FILE. BY ORDER/ , /TRUE COPY/ 3,