Prolifics Corporation Limited (previously known as Semantic Space Technologies LImited), Hyderabad V. Dy. Commissioner of income Tax, Circle-3(1), Hyderabad

ITA 237/HYD/2014

• Counselvise Citation: 23722514 RSA 2014
• Duration Of Justice: 10 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-12-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Assessment Year: 2009-2010
• Appeal Filed On: 14-02-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: D SUDHAKAR RAO
• Assessee Lawyers: SAMPAT RAGHUNATHAN
• Keywords: Transfer pricing; International transaction; Retrospective amendment; Commercial expediency
• Section: 143(3); 92B; 92

Judgement Text

1 ITA.NO.237/HYD/2014 PROLIFICS CORPORATION LTD., HYDERABAD. IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES B : HYDERABAD BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER ITA.NO.237/HYD/2014 ASSESSMENT YEAR 2009-2010 PROLIFICS CORPORATION LIMITED (PREVIOUSLY KNOWN AS SEMANTIC SPACE TECHNOLOGIES LTD., ) HYDERABAD 500 032. PAN AAGCS6868P VS. DCIT, CIRCLE 3(1) HYDERABAD. (APPELLANT) (RESPONDENT) FOR ASSESSEE : MR. SAMPAT RAGHUNATHAN FOR REVENUE : MR. D. SUDHA KAR RAO DATE OF HEARING : 30.10.2014 DATE OF PRONOUNCEMENT : 31.12.2014 ORDER PER B. RAMAKOTAIAH, A.M. THIS APPEAL BY ASSESSEE IS DIRECTED AGAINST THE ORDER OF DCIT, HYDERABAD UNDER SECTION 143(3) READ WITH SECTION 144C(13) OF THE I.T. ACT CONSEQUENT TO THE DIRECTIONS OF DRP, HYDERABAD DATED 25.11.2013. THE ISSUE IN THIS APPEAL IS WITH REFERENCE TO T.P. ADJUSTMENT MADE BY A.O. ASSE SSEE HAS RAISED SIX GROUNDS AND FILED PAPER BOOKS IN TWO VOL UMES. WE HAVE HEARD LD. COUNSEL AND LD. D.R. 2. BRIEFLY STATED, SEMANTIC SPACE TECHNOLOGIES LIMITED (PRESENTLY KNOWN AS PROLIFICS CORPORATION L IMITED REFERRED HEREIN AS ASSESSEE OR SSTL) IS A GLOBAL SO FTWARE SOLUTIONS CONGLOMERATE WITH A TRACK RECORD OF PROVI DING ENTERPRISE PROJECT SERVICES, QUALITY ASSURANCE SERV ICES AND 2 ITA.NO.237/HYD/2014 PROLIFICS CORPORATION LTD., HYDERABAD. SOFTWARE PRODUCTS TO GLOBAL 2000 COMPANIES. ASSESSE E IS AN ISO 9001-2000 CERTIFIED COMPANY WITH CMMI INITIATIV E. THE SOLUTIONS INCLUDE A LINE OF OUTSOURCED PRODUCT DEVE LOPMENT AND OFFSHORE SOFTWARE DEVELOPMENT SERVICES FOR MEDI UM TO LARGE CORPORATIONS AND EMERGING TECHNOLOGY BUSINESS ES. DURING THE YEAR SSTL ACQUIRED JYACC INC. NEW YORK, USA. FOR THE PURPOSE OF FACILITATING THE ACQUISITION, SSTL S ET UP A HOLDING SUBSIDIARY IN UNITED STATES SST NORTH AME RICA INC. USA (SST NORTH AMERICA) AS A SPECIAL PURPOSE VEHI CLE (SPV). THE TOTAL PURCHASE CONSIDERATION TO JYACC INC. USA (NOW KNOWN AS PROLIFICS) WAS AGREED TO BE PAID AS F OLLOWS : (A) CASH CONSIDERATION OF USD 276,33,633; AND (B) DEFERRED PURCHASE CONSIDERATION OUT OF THE PROF ITS OF JYACC INC. USA OVER THE NEXT TWO YEARS RS.67,96,81,662. THE CASH CONSIDERATION OF USD 2,76,33,633 WAS MET A S FOLLOWS: (I) INVESTMENT INTO EQUITY CAPITAL OF SST NORTH AMERICA INR 68,86,42,100 (II) LOAN BY SSTL INTO SST NORTH AMERICA INR 3,37,12,600 FOR THE BALANCE OF THE CASH CONSIDERATION, SST NORT H AMERICA BORROWED FUNDS FROM ICICI BANK, UK AMOUNTING TO RS.50,95,00,000 BASED ON THE CORPORATE GUARANTEE PR OVIDED BY SSTL TO ICICI BANK, U.K. SSTL ALSO PROVIDED A CORPO RATE GUARANTEE TO THE SHARE HOLDERS OF JYACC TOWARDS THE DEFERRED PURCHASE CONSIDERATION OF RS.67,96,81,662. 3. ON REFERENCE BY AO, TPO NOTICED THAT ASSESSEE D ID NOT CHARGE ANY INTEREST ON THE LOANS AND ADVANCES G IVEN TO ITS SUBSIDIARY NOR CHARGED ANY GUARANTEE COMMISSION ON THE GUARANTEES PROVIDED. ACCORDINGLY, AFTER GIVING DUE OPPORTUNITY 3 ITA.NO.237/HYD/2014 PROLIFICS CORPORATION LTD., HYDERABAD. TO ASSESSEE, MADE AN ADJUSTMENT OF RS.29,61,576 VID E PARA 7.5 OF THE ORDER CONSIDERING LOANS GIVEN TO ASSOCIATED ENTERPRISES. COMING TO THE ISSUE OF CORPORATE GUARANTEE GIVEN BY TAX PAYER THE TPO DISCUSSED THE ISSUE VIDE PARA 8 OF THE ORDE R AND CALCULATED THE FEE OF RS.2% ON THE GUARANTEE AMOUNT AND ARRIVED AT AN ADJUSTMENT OF RS.2,37,83,633, THUS, M AKING A TOTAL ADDITION OF RS.2,67,45,209. ASSESSEE OBJECTED TO THE ABOVE ADJUSTMENT BEFORE DRP. DRP EVEN THOUGH TOOK T HE OBJECTIONS ON RECORD, MORE OR LESS, AGREED WITH THE FINDINGS OF TPO AND CONFIRMED THE AMOUNTS. 3.1. IT WAS THE SUBMISSION THAT ASSESSEE FOR MAKIN G AN ACQUISITION OF JYACC INC HAS CREATED A SPV AND PROV IDED FOR CORPORATE GUARANTEE TO FACILITATE BORROWING FROM IC ICI BANK, UK AND CORPORATE GUARANTEE FOR THE DEFERRED CONSIDE RATION TO THE SHAREHOLDERS OF JYACC. TO FULFIL THE RESPONSIBI LITY AS A PARENT AND SHAREHOLDER,ASSESSEE INSTEAD OF TAKING A N INTERNATIONAL LOAN ITSELF AND THEN FUNDING THE SPVS , PROVIDED A CORPORATE GUARANTEE TO THE INTERNATIONAL LENDERS AN D TO THE FORMER SHAREHOLDERS OF J Y ACC INC, WHICH ENABLED THE BORROWING OF THE NECESSARY FINANCE AT THE SPY LEVEL ; 3.2. ASSESSEE SUBMITS THAT IN VIEW OF THE A BOVE, NO SERVICE HAS ACTUALLY BEEN PROVIDED TO ITS SPV AND H ENCE, IT WOULD BE INAPPROPRIATE ON THE PART OF THE LD. TPO T O TREAT THE CORPORATE GUARANTEES AND THE LOAN INVESTED AS NARRA TED ABOVE AS INTERNATIONAL TRANSACTIONS TO CONSIDER LEVY OF A RM'S LENGTH PRICE OF GUARANTEE FEE AND INTEREST. 3.3. IN THIS REGARD ASSESSEE RELIED ON THE VIEWS EXPRESSED BY THE AUSTRALIAN TAXATION OFFICER) (' AT O'), ON THIS ASPECT, IN ITS DISCUSSION PAPER' WHICH READS AS UND ER 4 ITA.NO.237/HYD/2014 PROLIFICS CORPORATION LTD., HYDERABAD. 'AN INDEPENDENT COMPANY THAT IS UNABLE TO BORROW TH E FUNDS IT NEEDS ON A STANDALONE BASIS IS UNLIKELY TO BE IN A POSITION TO OBTAIN A GUARANTEE FROM AN INDEPENDENT PARTY TO SUPPORT THE BORROWINGS IT NEEDS. WHERE SUCH A GUARANTEE IS GIVEN, IT ACTUALLY COMPENSATES FOR THE INADEQUACIES IN THE FINANCIAL POSITION OF THE BORR OWER: SPECIFICALLY THE [ACT THAT THE SUBSIDIARY DOES NOT HAVE ENOUGH SHAREHOLDER'S FUNDS. IT WOULD NOT BE EXPECTED THAT A COMPANY PAY FOR THE ACQUISITION OF THE EQUITY IT NEEDS [OR ITS FORMATIO N AND CONTINUED VIABILITY. EQUITY IS GENERALLY SUPPLIED B Y THE SHAREHOLDER AT ITS OWN COST AND RISK. ACCORDINGLY, TO THE EXTENT THAT A GUARANTEE SUBSTITUTES (OR THE INVESTMENT OF THE EQUITY NEEDED TO ALLOW A SUBSIDIARY TO BE SELF-SUFFICIENT AND TO RAISE THE D EBT FUNDING IT NEEDS, THE COSTS OF THE GUARANTEE (AND T HE ASSOCIATED RISK) SHOULD REMAIN WITH THE PARENT COMPANY PROVIDING THE GUARANTEE . ' (EMPHASIS ADDED) THIS DECISION LEADS TO A CONCLUSION THAT THERE IS N O SERVICE IN A SCENARIO WHERE A LOAN IS EXTENDED BY THE PAREN T INVESTOR OR A GUARANTEE IS PROVIDED BY A PARENT INV ESTOR, FOR A THIRD PARTY LOAN, WHERE THE LOAN IS A SUBSTIT UTE FOR THE INVESTMENT OF THE EQUITY OTHERWISE REQUIRED TO BE MADE BY THE PARENT INVESTOR, THE SAME NEED TO BE CONSIDERED AS A PART OF THE FUNDING REQUIREMENT OF THE PARENT INVESTOR AND NOT AS A SERVICE TO THE SUBSIDI ARY. 3.4 WITHOUT PREJUDICE TO THE ABOVE, ASSESSEE SUBMITTED THE FOLLOWING : LEVY OF INTEREST ON THE LOAN GIVEN BY SSTL TO SST NORTH AMERICA: 3.4.1 ON THE LOAN AMOUNT OF RS. 3,37,12,600: THE LD. TPO FAILED TO EVALUATE ANY OF THE METHODS PRESC RIBED UNDER THE ACT FOR THE PURPOSE OF DETERMINING OF ALP INTER EST. ASSESSEE IN THE FINANCIAL YEAR ('FY') 2011-12 (ASSE SSMENT YEAR 2012-13) CHARGED FROM SST NORTH AMERICA ON THE LOAN S 5 ITA.NO.237/HYD/2014 PROLIFICS CORPORATION LTD., HYDERABAD. OUTSTANDING AT LIBOR + 4.75 BASIS POINTS ('BPS'). T HE LD. TPO, WITHOUT TAKING ANY METHODOLOGICAL ANALYSIS OF THE A RMS LENGTH PRICE (,ALP'), BLINDLY ADOPTED THIS RATE AS A INTERNAL CUP RATE FOR THE CURRENT FY . THE ASSOCIATED ENTERPRISE (' AE') - SST NORTH AMERICA - BORROWED FUNDS FROM ICICI BANK UK AT A RA TE OF LIBOR + 2.75. ASSESSEE CONTENDED BEFORE LD. TPO AND LD. DRP TO CONSIDER THIS RATE INSTEAD, AS THE ALP HAS T O BE BASED ON A CUP RATE OF A THIRD PARTY LOAN RATE TO THE AE IN THE GEOGRAPHICAL AREA OF UNITED STATES. THE LOAN AGREEM ENT ENTERED INTO BY SST NORTH AMERICA WITH ICICI BANK UK, IN FY 2008-09 HAS BEEN RELIED. HOWEVER, THE LD. TPO AND LD. DRP R EFUSED TO ACCEPT THIS RATE. 3.4.2. ON THE ADVANCE AMOUNT OF RS. 4,28,37,001/-: THE TOTAL ADVANCES MADE BY SSTL TO SST NORTH AMERIC A COMPRISES OF TWO AMOUNTS. SL.NO. NATURE OF INTERNATIONAL TRANSACTION NAME OF THE A.E. AMOUNT (IN INR) 1. ADVANCES PROVIDED TO A.E. SST NORTH AMERICA 4,28,37,001 2. LOAN PROVIDED SST NORTH AMERICA 3,37,12,600 THE ADVANCE AMOUNT REPRESENTS CERTAIN ACQUISITION R ELATED EXPENSES INCURRED AT THE TIME OF FORMATION OF THE S PV- SST NORTH AMERICA . THIS AMOUNT IS RECOVERABLE FROM - SST NORTH AMERICA. THIS DOES NOT REPRESENT ANY LOAN OR ADVANC E GIVEN BY SSTL TO SST NORTH AMERICA. THESE ARE COST TO COST E XPENSES LIABLE TO BE REIMBURSED BY SST NORTH AMERICA. THIS CANNOT BE CONSIDERED AS AN 'INTERNATIONAL TRANSACTION' TAKING THE COLOUR OF A LOAN OR AN ADVANCE FOR THE PURPOSE OF DETERMIN ATION OF THE ALP OF INTEREST. 6 ITA.NO.237/HYD/2014 PROLIFICS CORPORATION LTD., HYDERABAD. 3.4.3. ON LOAN AMOUNT OF RS. 1,14,89,463/- PROVIDE D TO ARSIN CORPORATION ('ARSIN'), ANOTHER AE OFASSESSEE : THE LD. TPO ERRED IN CHARGING AN AD-HOC INTEREST RATE AT L1 BOR + 4.75 BPS ON THE LOAN PROVIDED BY SSTL TO ARSIN WITHOUT T AKING INTO COGNIZANCE THE FACT THATASSESSEE ITSELF HAS CHARGED THE INTEREST RATE ON LOAN PROVIDED TO ARSIN AT LIBOR + 1.50 BPS. THE SAME IS EVIDENT FROM THE LOAN AGREEMENT BETWEENASSESSEE AND ARSIN. THUSASSESSEE PRAYS THAT THE RATE OF INTEREST SHOULD BE RESTRICTED TO L1BOR + 1.5 % AS AGAINST LIBOR + 4.75 %, CHARGED BY THE LD. TPO. LEVY OF GUARANTEE FEE : 3.4.4. THE TPO LEVIED GUARANTEE FEE @ 2% ON BOTH T HE FOLLOWING AMOUNTS : SL. NO . NATURE OF INTERNATIONAL TRANSACTION AMOUNT ALP @ 2% P.A. OF THE GUARANTEE AMOUNT AMOUNT RECEIVED BY TAXPAYER SHORTFALL BEING ADJUSTMENT U/S. 92CA 1. CORPORATE GUARANTEE AGAINST LOAN TAKEN BY A.E. SST NORTH AMERICA FROM ICICI BANK, U.K. 50,95,00,000 1,01,90,000 NIL 1,01,90,000 2. GUARANTEE GIVEN TO THE SHAREHOLDERS OF JYACC INC ON DEFERRED PURCHASE CONSIDERATION 67,96,81,662 1,35,93,633 NIL 1,35,93,633 TOTAL 2,37,83,633 3.4.5. WITH RESPECT TO THE CORPORATE GUARANTEE OF RS.50,95,00,000/- , AGAINST THE LOAN TAKEN BY AE-SST NORTH 7 ITA.NO.237/HYD/2014 PROLIFICS CORPORATION LTD., HYDERABAD. AMERICA FROM ICICI BANK, UK ASSESSEE RELIED ON VIE WS EXPRESSED BY THE AUSTRALIAN TAXATION OFFICER (' ATO'), ON THIS ASPECT, IN ITS DISCUSSION PAPER' WHICH READS AS UNDER : 'AN INDEPENDENT COMPANY THAT IS UNABLE TO BORROW TH E FUNDS IT NEEDS ON A STANDALONE BASIS IS UNLIKELY TO BE IN A POSITION TO OBTAIN A GUARANTEE FROM AN INDEPENDENT PART) TO SUPPORT THE BORROWINGS IT NEEDS. WHERE SUCH A GUARANTEE IS GIVEN. IT ACTUALLY COMPENSATES (OR THE INADEQUACIES IN THE FINANCIAL POSITION OF THE BORRO WER: SPECIFICALLY THE FACT THAT THE SUBSIDIARY DOES NOT HAVE ENOUGH SHAREHOLDER'S FUNDS. IT WOULD NOT BE EXPECTED THAT A COMPANY PAY [OR THE ACQUISITION OF THE EQUITY IT NEEDS FOR ITS FORMATIO N AND CONTINUED VIABILITY. EQUITY IS GENERALLY SUPPLIED B Y THE SHAREHOLDER AT ITS OWN COST AND RISK. ACCORDINGLY. TO THE EXTENT THAT A GUARANTEE SUBSTITUTES [OR THE INVESTM ENT OF THE EQUITY NEEDED TO ALLOW A SUBSIDIARY TO BE SELF- SUFFICIENT AND TO RAISE THE DEBT FUNDING IT NEEDS. THE COSTS OF THE GUARANTEE (AND THE ASSOCIATED RISK) SHOULD R EMAIN WITH THE PARENT COMPANY PROVIDING THE GUARANTEE. ' 3.4.6. FURTHER, THE ATO, IN THE ABOVE DISCUSSION P APER, WHILE DEALING WITH THE SITUATION WHERE A NEED FOR T HE GUARANTEE WHICH PRIMARILY STEMS FROM THE DECISIONS MADE BY TH E PARENT COMPANY IN RELATION TO THE CAPITAL STRUCTURE IT PRO POSED TO USE IN ITS SUBSIDIARY COMPANY, HAS EXPRESSED THAT IF TH E LEVEL OF INDEBTEDNESS RELATING TO THE EQUITY FUNDING OF THE BORROWED SUBSIDIARY EXCEEDS THE MAXIMUM BEYOND WHICH IT IS NOT ABLE TO OBTAIN THE MARKET WITHOUT A GUARANTEE FROM THE PARENT , AN ARGUMENT MAY BE TAKEN THAT NO GUARANTEE FEE MAY B E CHARGEABLE. 3.4.7 WITH RESPECT TO THE CORPORATE GUARANTEE OF RS.50,95,00,000/- ASSESSEE WOULD ALSO LIKE TO HUMB LY SUBMIT THAT THE CORPORATE GUARANTEE AGREEMENT BETWEEN ICIC I BANK AND ASSESSEE RESTRICTS THE GUARANTOR I.E. ASSESSEE FROM 8 ITA.NO.237/HYD/2014 PROLIFICS CORPORATION LTD., HYDERABAD. RECEIVING ANY COMMISSION FROM THE BORROWER . THE RELEVANT EXTRACTS OF THE AGREEMENT WITH ICICI BANK FOR LOAN AVAILED BY SST NORTH AMERICA WERE REFERRED TO. NO COMMISSION 9. THE GUARANTOR HEREBY DECLARES AND AGREES THAT IT HAS NOT RECEIVED AND SHALL NOT, RECEIVE ANY COMMISSION FROM THE BORROWER FOR GIVING THIS GUARANTEE. 3.4.8. ASSESSEE SUBMITS THAT THE CLAUSE 9 WITH RES PECT TO 'NO COMMISSION' AS REFERRED ABOVE IS INSISTED BY TH E BANKS IN CASE OF CORPORATE GUARANTEE AGREEMENTS. ACCORDINGLY ASSESSEE CANNOT CHARGE GUARANTEE FEES. THE LD. TPO AND LD. D RP COMPLETELY OVERLOOKED THIS CLAUSE AND FAILED TO CON SIDER THE COMMERCIAL NEGOTIATION AND COMMERCIAL EXPEDIENCY TH AT ASSESSEE HAS COMMITTED ITSELF. 3.4.9 WITH RESPECT TO THE GUARANTEE OF RS, 67,96,81,662/- GIVEN TO THE SHARE HOLDERS OF JYACC INC ON ACCOUNT OF DEFERRED PURCHASE CONSIDERATION ASSESSEE DRAWS REFERENCE TO THE DECISION OF THE HON'BLE SUPREME CO URT OF INDIA IN THE CASE OF BOMBAY STEAM NAVIGATION CO P. LTD V. CIT [19531 561TR 52 (SC) WHEREIN THE HON'BLE SUPREME COURT OF INDIA HELD AS UNDER : ' ... IN OUR JUDGMENT THIS IS NOT A PERMISSIBLE APPROACH IN ASCERTAINING THE TRUE NATURE OF THE TRANSACTION. TH E PARTIES HAD AGREED THAT ASSETS OF THE VALUE OF RS.81,55,000 BE TAKEN OVER BY ASSESSEE-COMPANY FROM THE SCINDIAS. O UT OF THAT CONSIDERATION RS. 29,99,000 WERE PAID BY ASSESSEE-COMPANY AND THE BALANCE REMAINED UNPAID. F OR AGREEING TO DEFERRED PAYMENT OF A PART OF THE CONSIDERATION, THE SCINDIAS WERE TO BE PAID INTERES T. AN AGREEMENT TO PAY THE BALANCE OF CONSIDERATION DUE B Y THE 9 ITA.NO.237/HYD/2014 PROLIFICS CORPORATION LTD., HYDERABAD. PURCHASER DOES NOT IN TRUTH NAVE RISE TO A LOAN. A LOAN OF MONEY UNDOUBTEDLY RESULTS IN A DEBT, BUT EVERY DEBT DOES NOT INVOLVE A LOAN. LIABILITY TO PAY A DEBT MAY ARI SE FROM DIVERSE SOURCES, AND A LOAN IS ONLY ONE OF SUCH SOU RCES. EVERY CREDITOR WHO IS ENTITLED TO RECEIVE A DEBT CA NNOT BE REGARDED AS A LENDER .... . , 3.4.10 THEREFORE, THE CORPORATE GUARANTEE PROVIDED WAS NOT IN RESPECT OF THE CATEGORY AS AMENDED BY FINANC E ACT 2012- THE EXPLANATION UNDER SECTION 92 B OF THE INCOME-TAX ACT, 1961 ('ACT) PROVIDES THAT THE EXPRESSION INTERNATIO NAL TRANSACTION SHALL INCLUDE, INTER ALIA- '(C) CAPITAL FINANCING, INCLUDING ANY TYPE OF LONG-TERM OR SHORT-TERM BORRO WING, LENDING OR GUARANTEE, PURCHASE OR SALE OF MARKETABL E SECURITIES OR ANY TYPE OF ADVANCE, PAYMENTS OR DEFE RRED PAYMENT OR RECEIVABLE OR ANY OTHER DEBT ARISING DUR ING THE COURSE OF BUSINESS;' THE INTERPRETATION OF THE DEFINITION MUST BE MADE I N A STRICT MANNER. IT MAY BE NOTICED THAT THE WORD 'GUARANTEE' IS SANDWICHED AS PART OF CAPITAL FINANCING, INCLUDING BORROWING OR LENDING. BASED ON EJUSDEM GENERIS PRINCIPLE, THE ABOVE CLAUSE WOULD APPLY, ONLY IF THE GUARANTEE IS IN RESPECT OF CAPITAL FINANCING, LONG TERM OR SHORT TERM BORROWING OR LEN DING. THE ABOVE DECISION OF SUPREME COURT CLEARLY PROVIDE THA T - AN AGREEMENT TO PAY THE BALANCE OF CONSIDERATION DU E BY THE PURCHASER DOES NOT IN TRUTH GAVE RISE TO A LOAN. THEREFORE, IT IS SUBMITTED THAT ANY GUARANTEE GIVEN TOWARDS THE BALANCE OF CONSIDERATION DUE BY THE PURCHASER DOES NOT GIVE RISE TO A SITUATION OF GUARANTEE BEING PROVIDED ON CAPITAL FINANCING, LONG TERM OR SHORT TERM BORROWING OR LEN DING. THUS, THERE SHOULD BE NO GUARANTEE FEE TO BE CONSIDERED W ITH RESPECT 10 ITA.NO.237/HYD/2014 PROLIFICS CORPORATION LTD., HYDERABAD. TO THE GUARANTEE GIVEN TO THE SHARE HOLDERS OF JYAC C INC ON ACCOUNT OF DEFERRED PURCHASE CONSIDERATION OF RS.67,96,81,662/- 3.4.11. FURTHER, ASSESSEE RELIED ON THE CASE OF B H ARTI AIRTEL LIMITED V S. ADDITIONAL COMMISSIONER OF INCOME T AX I. T.A NO. 5816/DEI/2012, ON THE ISSUE OF THE CORPORATE GUARANTEE. WHILE THE COORDINATE BENCH OF THE TRIBUN AL AT HYDERABAD GAVE A CONTRARY RULING IN THIS REGARD REC ENTLY IN THE CASE OF FOUR SOFT (P.) LTD. V. DCIT C IRCLE-1(3), HYDERABAD [2014] 44 TAXMANN.COM 479 (HYDERABAD-TRIB.) DI STINGUISHING THE EARLIER DECISION OF ITAT HYDERABAD BENCH RENDERED ITA NO. 1495/HYD/2010 DATED 09/09/2011 ON THE SAME QUESTION. THE DECISION OF DELHI ITAT IS GI VEN SUBSEQUENT TO THE AMENDMENT MADE TO THE DEFINITION OF 'INTERNATIONAL TRANSACTION' BY FINANCE ACT 2012. WITHOUT PREJUDICE TO THE ABOVE SUBMISSION, ASSESSEE SUBMITS THAT IF THE BENCH DECIDES TO LEVY THE GUARANTEE FEE WITH RE SPECT TO THE TRANSACTIONS HIGHLIGHTED ABOVE, ATTENTION WAS D RAWN TO THE DECISION OF FOUR SOFT (P.) LTD. VS. DCIT, CIRCLE- 1(3),HYDERABAD [2014] 44 TAXMANN.COM 479 (HYDERABAD - TRIB.)- ITAT HYDERABAD BENCH-A WHERE THE HON'BLE ITAT CONSIDERED THE HISTORY OF JUDGMENTS WITH RESPECT TO GUARANTEE FEE AND HELD - '25.4. IN THE AFORESAID VIEW OF THE MATTER, WE AG REE WITH THE TPO THAT ALP OF THE CORPORATE GUARANTEE HA S TO BE DETERMINED AS IT FALLS WITHIN THE SCOPE AND AMBI T OF AN INTERNATIONAL TRANSACTION AFTER THE RETROSPECTIVE AMENDMENT TO SECTION 92B. HOWEVER. IT APPEARS THAT THE TPO HAS APPLIED THE RATE OF 3.75%, WHICH IS APPLICABLE TO BANK GUARANTEE ISSUED BY THE BANK AS THE CORPORATE GUARANTEE IS NOT IN THE NATURE OF BANK GUARANTEE, T HE RATE APPLICABLE TO BANK GUARANTEE PROVIDED BY THE BANK CANNOT BE APPLIED TO CORPORATE GUARANTEE WHICH IS 11 ITA.NO.237/HYD/2014 PROLIFICS CORPORATION LTD., HYDERABAD. PROVIDED BY A GROUP COMPANY. IN CASE OF GLENMARK PHARMACEUTICALS V. ADD!. CIT [2014} 43 TAXMANN.COM 191 (MUM-TRIB). THE MUMBAI BENCH OF THE TRIBUNAL AFTER ANALYSING THE FACTS IN THAT CASE HAD HELD THAT 0.53 % CORPORATE GUARANTEE RATE IN THAT CASE WAS APPROPRIA TE. THE 1TAT HYDERABAD BENCH IN CASE OF INFOTECH ENTERPRISES LTD. V. ADD!. CIT [2014} 41 TAXMANN.COM 364 (HYD.-TRIBU.) WHILE CONSIDERING IDENTICAL ISSUE OF DETERMINING ALP OF CORPORATE GUARANTEE PROVIDED BY ASSESSEE TO ITS AE FOLLOWED THE RATIO LAID DOWN IN CASE OF GLEN MARK PHARMACEUTICALS (SUPRA) AND REMITTED THE ISSUE BACK TO THE TPO TO DECIDE THE QUANTUM OF CORPORATE GUARANTEE RATE BY FOLLOWING THE METHOD ADOPTED IN C ASE OF GLEN M ARK PHARMACEUTICALS (SUPRA). ' THUS THERE IS NO RATIONAL OR BASIS IN TPO ADOPTING 2% FLAT RATE. THUS, AS HELD IN A DETAILED MANNER IN GLENMARK PHARMACEUTICALS V. ADDL. CLT [2014] 43 TAXMANN.COM 191 (MUM.-TRIB), THE RATE OF 0.53% MAY BE CONSIDERED. W HILE ARRIVING AT THIS RATE, THE HON'BLE ITAT MUMBAI BENC H CONSIDERED VARIOUS OTHER DECISIONS SL.NO. ORDER OF MUMBAI TRIBUNAL A.Y. GUARANTEE FEE COMMISSION 1. ACIT VS. RELIANCE INDUSTRIES LTD., A.Y. 2006-07 0.38% 2. ACIT VS. ASIAN PAINTS LTD., - 2005-06 0.25% 0%0 0.35% 3. EVEREST KANTO CYLINDER LTD., VS. DCIT 2007-08 0.60% 4. ACIT VS. M/S. NIMBUS COMMUNICATION LTD., - 2005-06 0.5% 5. ACIT VS. M/S. NIMBUS COMMUNICATION LTD., - 2006-07 & 2007-08 0.5% 4. LD. D.R. HOWEVER, RELIED ON THE ORDERS OF TPO. 5. WE HAVE CONSIDERED THE ISSUE AND PERUSED THE DOCUMENTS ON RECORD. THE TWO ISSUES TO BE CONSIDERE D ARE WHETHER THE INTEREST FREE LOANS AND GUARANTEES PROV IDED BY 12 ITA.NO.237/HYD/2014 PROLIFICS CORPORATION LTD., HYDERABAD. ASSESSEE TO AE CALLS FOR ANY ADJUSTMENT. AS FAR AS ADJUSTMENT OF INTEREST ON LOANS PROVIDED, ASSESSEE EVEN THOUGH IS OBJECTING TO ADJUSTMENT PER SE BUT MAIN THRUST IS O N RATE ON WHICH THE ADJUSTMENTS WERE MADE. THERE IS NO DISPUT E TO THE FACT THAT PROVIDING OF LOANS TO AE IS AN INTERNATIO NAL TRANSACTION AS PER THE TP PROVISIONS. THEREFORE, TH E COMMERCIAL CONSIDERATIONS ADVANCED BY ASSESSEE CAN NOT BE CONSIDERED WHILE EXAMINING THE ALP OF THE TRANSACTI ONS. WE ARE OF THE OPINION THAT THE TRANSACTION OF PROVIDIN G LOANS TO SUBSIDIARY WHETHER A DIRECT LOAN OR PROVIDING CREDI T FOR INITIAL EXPENDITURE, WHICH IS STATED TO BE REIMBURSABLE, DO CALL FOR ADJUSTMENT. THEREFORE, IN PRINCIPLE WE APPROVE THE ADJUSTMENT MADE ON THESE TRANSACTIONS. AS FAR AS THE RATE OF I NTEREST IS CONCERNED, THE A.O./TPO IN OUR OPINION, HAS CONSIDE RED THE SUBSEQUENT COLLECTION OF INTEREST IN A.Y. 2012-2013 AT LIBOR + 4.75 BASIS POINTS AS AN INTERNAL CUP. THIS CANNOT B E ACCEPTED AS RATE OF INTEREST IN EACH YEAR IS A DYNAMIC FIGUR E WHICH VARIES ACCORDING TO THE PERIOD, DEMAND AND SUPPLY. THE RAT E AT WHICH ASSESSEE CHARGED INTEREST FROM THE SISTER CONCERN I N A.Y. 2012- 2013 CANNOT BE ACCEPTED AS INTERNAL CUP IN A.Y. 200 9-2010. A.O. HAS NOT ONLY WENT BEYOND THE RULES WHICH DOES NOT PROVIDE FOR LATER YEARS INFORMATION TO BE ADOPTED, BUT ALSO IGNORED ASSESSEES OBJECTIONS WHY A HIGHER RATE WAS CHARGED IN THOSE YEARS. SINCE, A.E. BORROWED FUNDS FROM ICICI BANK, U.K. @ LIBOR + 2.75%, WE ARE OF THE OPINION THAT, THAT R ATE SHOULD BE CONSIDERED AS ALP OF INTEREST AND A.O. IS DIRECT ED TO WORKOUT THE INTEREST AT THAT RATE ON THE LOAN PROVI DED TO SSTL NORTH AMERICA. ASSESSEE IS ALSO OBJECTING TO THE AD JUSTMENT ON LOAN GIVEN TO ARSIN CORPORATION, ANOTHER A.E. OF AS SESSEE. HERE, ASSESSEE HAS CHARGED INTEREST AT LIBOR + 1.50 BPS. SINCE, WE HAVE APPROVED LIBOR + 2.75 POINTS ON THE LOAN GIVEN 13 ITA.NO.237/HYD/2014 PROLIFICS CORPORATION LTD., HYDERABAD. TO SST, NORTH AMERICA (A.E.) WE DIRECT THE A.O. TO RE-WORKOUT THE INTEREST ON THE LOAN PROVIDED TO THIS A.E. AT L IBOR + 2.75% ONLY AS AGAINST LIBOR + 4.75 CHARGED BY A.O./TPO. W ITH THIS DIRECTION, THE GROUNDS RAISED BY ASSESSEE IN GROUND NOS. 2 AND 3 ARE CONSIDERED AS ALLOWED PARTLY. 6. COMING TO THE ISSUE OF GUARANTEE FEE, ONE OF TH E FUNDAMENTAL FACT PATTERNS IN THE EVOLUTION OF INTER NATIONAL TRANSFER PRICING CONCEPTS AND RULES INVOLVES AN ENT ERPRISES USE OF A FINANCIAL RESOURCE BELONGING TO AN ASSOCIATED ENTERPRISE. AN ASPECT OF THE USE OF MONEY RELATES TO THE USE OF A CREDIT ENHANCEMENT INSTRUMENT, WHICH TYPICALLY ARISES IN T HE CONTEXT OF GUARANTEES OF THE OBLIGATIONS OF ONE CONTROLLED ENTITY BY ANOTHER. ALTHOUGH THE OECD TRANSFER PRICING GUIDELI NES, 2010 ACKNOWLEDGE THE ROLE OF THE USE OF MONEY IN TRANSFE R PRICING MATTERS, THEY DO NOT YET PROVIDE SPECIFIC GUIDELINE S REGARDING HOW SUCH ISSUES ARE TO BE ADDRESSED AND RESOLVED. NONETHELESS, THE ELEMENTS THAT ARE TYPICALLY IMPORT ANT IN EVALUATING TRANSFER PRICING ISSUES INVOLVING THE US E OF MONEY WITHIN MULTINATIONAL ENTERPRISE GROUPS CAN BE OUTLI NED BY DRAWING ON GENERAL ARMS LENGTH PRINCIPLES. WHETHER THE MERE PRESENCE OF A GUARANTEE SUPPORT TO AN A.E. IS SUBJE CT TO T.P. PROVISIONS HAS BEEN A CONTENTIOUS ISSUE IN THE INDI AN CONTEXT. HOWEVER, THE ISSUE OF WHETHER A CHARGE SHOULD BE IM POSED FOR PROVISION OF A GUARANTEE IS PRIMARILY A FACTUAL INQ UIRY. THE ASSESSEE ARGUED THAT THE CORPORATE GUARANTEE IS AN ADDITIONAL GUARANTEE PROVIDED BY THE PARENT COMPANY AND IT DOE S NOT INVOLVE ANY COST OR RISK TO THE SHAREHOLDERS. THE A SSESSEE ALSO ARGUED THAT THE RETROSPECTIVE AMENDMENT TO SECTION 92B OF THE ITL, BY FINANCE ACT, 2012 DOES NOT ENLARGE THE SCOP E OF THE TERM INTERNATIONAL TRANSACTION TO INCLUDE THE COR PORATE 14 ITA.NO.237/HYD/2014 PROLIFICS CORPORATION LTD., HYDERABAD. GUARANTEE IN THE NATURE PROVIDED BY ASSESSEE. DR ON THE OTHER HAND, CONTENDED THAT THE TRANSACTION OF PROVIDING T HE CORPORATE GUARANTEE IS COVERED BY THE DEFINITION OF INTERNATIONAL TRANSACTION AFTER THE RETROSPECTIVE A MENDMENT MADE BY FINANCE ACT, 2012. THEREFORE, THE TRANSACTI ON WAS SUBJECT TO T.P. PROVISIONS AND NEEDED ALP DETERMINA TION. IT WAS THE SUBMISSION THAT THERE IS NO SERVICE RENDERE D BY ASSESSEE TO THE A.E. ASSESSEE RELIED ON THE VIEWS E XPRESSED BY AUSTRALIAN TAX OFFICER PLACING RELEVANT COPY BEFORE US WHICH WAS ISSUED IN 2008. LAW HAS CHANGED SUBSEQUENTLY AN D PROVISIONS OF INCOME TAX ALSO WERE AMENDED SO AS TO INCLUDE PROVIDING GUARANTEES AS SERVICE TO THE A.E. HOWEVER GUARANTEES INVOLVE EXPRESS GUARANTEE OR IMPLIED GUA RANTEE WHICH INCREASES CREDIT WORTHINESS OF AES, IF PROVID ED BY MAIN COMPANY. IN CASE OF DEFAULT GUARANTOR HAS TO FULFIL L THE LIABILITY. THEREFORE, THERE IS ALWAYS AN INHERENT R ISK IN PROVIDING GUARANTEES. THAT MAY BE A REASON THAT FIN ANCE PROVIDER INSIST ON NON CHARGING ANY COMMISSION FROM AE AS A COMMERCIAL PRINCIPLE. THIS INDICATES THAT, PROVISIO N OF GUARANTEE ALWAYS INVOLVE RISK AND THERE IS A SERVIC E PROVIDED TO AE IN INCREASING IS CREDITWORTHINESS IN OBTAINING L OANS IN MARKET, BE FROM FINANCIAL INSTITUTIONS OR FROM OTHE RS. THERE MAY NOT BE IMMEDIATE CHARGE ON P& L ACCOUNT BUT INH ERENT RISK CAN NOT BE RULED OUT IN PROVIDING GUARANTEES. 7. CONSIDERING THE ABOVE, WE ARE OF THE OPINION TH AT THERE IS SERVICE RENDERED TO A.E. BY PROVIDING GUAR ANTEES AND THEREFORE, INVOKING PROVISIONS OF T.P. DOES ARISE O N THE FACTS OF THE CASE. THE COORDINATE BENCH OF HYDERABAD TRIBUNA L HAS ALREADY CONSIDERED SIMILAR ISSUES IN THE CASE OF FO UR SOFT P. 15 ITA.NO.237/HYD/2014 PROLIFICS CORPORATION LTD., HYDERABAD. LTD., REPORTED AT 44 TAXMANN.COM 479 (WHEREIN ONE O F US A MEMBER) AND HELD AS UNDER : 25.2. HAVING CONSIDERED THE SUBMISSIONS OF THE PARTIES, WE ARE UNABLE TO ACCEPT THE CONTENTION OF THE LEARNED AR THAT CORPORATE GUARANTEE OF THE NATURE PROVIDED BY THE ASSESSEE WILL NOT COME WITHIN THE MEANING OF INTERNATIONAL TRANSACTION IN TERMS WITH SECTION 92B OF THE ACT. IT IS NOT DISPUT ED THAT SECTION 92B OF THE ACT HAS BEEN AMENDED BY THE FINANCE ACT, 2012 WITH THE INSERTION OF EXPLANATION I (C) WITH RETROSPECTIVE EFFECT FROM 01/04/2002. EXPLANATION (I)(C) TO SECTION 92B, READS AS UNDER: CAPITAL FINANCING, INCLUDING ANY TYPE OF LONG-TER M 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. 25.3. A READING OF THE AFORESAID CLAUSE FROM THE EXPLANATION WOULD MAKE IT CLEAR THAT THE CORPORATE GUARANTEE PROVIDED BY THE ASSESSEE COMES WITHIN THE SCOPE AND AMBIT OF INTERNATIONAL TRANSACTION AS PER THE AFORESAID CLAUSE. THEREFORE, THE CONTENTION OF THE LEARNED AR THAT THE ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY VIRTUE OF THE ORDER PASSED IN ASSESSEES OWN CASE FOR AY 2006- 07 NO LONGER HOLDS GOOD SINCE THE ORDER PASSED BY THE COORDINATE BENCH IS PRIOR TO THE AMENDMENT MADE TO PROVISION OF SECTION 92B OF THE ACT. IT WI LL BE PERTINENT TO MENTION HERE THAT THIS ISSUE WAS ALSO CONSIDERED BY THE ITAT MUMBAI BENCH IN CASE OF MAHINDRA & MAHINDRA VS. DCIT IN ITA NO. 8597/MUM/2010, 54 SOT (UR) 146. THE COORDINATE BENCH OF THIS TRIBUNAL WHILE CONSIDERING SIMILAR ARGUMENT ADVANCED ON BEHALF OF THE ASSESSEE BY PLACING RELIANCE ON THE DECISION OF THE FOUR SOFT LTD.(SUPRA), HELD AS UNDER: 15.2. AFTER HEARING THE RIVAL SUBMISSIONS WE FEEL THAT ASSESSING OFFICER WILL HAVE TO FOLLOW THE DECISION OF THE ITAT HYDERABAD OR THE AMENDED 16 ITA.NO.237/HYD/2014 PROLIFICS CORPORATION LTD., HYDERABAD. PROVISION OF THE ACT IN THIS REGARD. IF THE FINANCE BILL OF 2012 IS PASSED BY THE PARLIAMENT AMENDING THE PROVISIONS OF SECTION 92B, WITH EFFECT FROM 1 ST APRIL, 2002, HE WILL HAVE TO IGNORE THE DECISION OF THE ITAT HYDERABAD. IN CASE SECTION 92B IS NOT AMENDED WITH RETROSPECTIVE EFFECT, HE SHOULD GRANT RELIEF TO THE APPELLANT. 25.4. IN THE AFORESAID VIEW OF THE MATTER, WE AGREE WITH THE TPO THAT ALP OF THE CORPORATE GUARANTEE HAS TO BE DETERMINED AS IT FALLS WITHIN THE SCOPE AND AMBIT OF AN INTERNATIONAL TRANSACTION AFTER THE RETROSPECTIVE AMENDMENT TO SECTION 92B. HOWEVER, IT APPEARS THAT THE TPO HAS APPLIED THE RATE OF 3.75%, WHICH IS APPLICABLE TO BANK GUARANTEE ISSUED BY THE BANK. AS THE CORPORATE GUARANTEE IS NOT IN THE NATURE OF BANK GUARANTEE, THE RATE APPLICABLE TO BANK GUARANTEE PROVIDED BY THE BANK CANNOT BE APPLIED TO CORPORATE GUARANTEE WHICH IS PROVIDED BY A GROUP COMPANY. IN CASE OF GLENMARK PHARMACEUTICALS VS. ACIT IN ITA NO. 5031/MUM/2012, DATED 13/11/2013, THE MUMBAI BENCH OF THE TRIBUNAL AFTER ANALYSING THE FACTS IN THAT CASE HAD HELD THAT 0.53% CORPORATE GUARANTEE RATE IN THAT CASE WAS APPROPRIATE. THE ITAT HYDERABAD BENCH IN CASE OF INFOTECH ENTERPRISES LTD. IN ITA NO. 115/HYD/2011 AND IN ITA NO. 2184/HYD/2011, DATED 16/01/2014 WHILE CONSIDERING IDENTICAL ISSUE OF DETERMINING ALP OF CORPORATE GUARANTEE PROVIDED BY THE ASSESSEE TO ITS AE FOLLOWED THE RATIO LAID DOWN IN CASE OF GLENMARK PHARMACEUTICALS VS. ACIT (SUPRA) AND REMITTED THE ISSUE BACK TO THE TPO TO DECIDE THE QUANTUM OF CORPORATE GUARANTEE RATE BY FOLLOWING THE METHOD ADOPTED IN CASE OF GLENMARK PHARMACEUTICALS (SUPRA). 8. IN VIEW OF THIS, WE UPHOLD THE ADJUSTMENT MADE ON GUARANTEE COMMISSION BOTH ON THE GUARANTEE PROVIDED TO BANK DIRECTLY AND ALSO ON THE GUARANTEE PROVIDED TO THE ERSTWHILE SHAREHOLDERS OF JYACC FOR ASSURING THE PAYMENT BY A E. HOWEVER, WE DIRECT THE TPO TO ADOPT THE RATE TO 0.5 3% WHICH IS 17 ITA.NO.237/HYD/2014 PROLIFICS CORPORATION LTD., HYDERABAD. CONSIDERED AS ARMS LENGTH IN OTHER CASES. WITH THES E DIRECTIONS, GROUNDS ARE CONSIDERED PARTLY ALLOWED. 9. IN THE RESULT, APPEAL OF ASSESSEE IS PARTLY ALL OWED. ORDER PRONOUNCED IN THE OPEN COURT ON 31.12.2014. SD/- SD/- (ASHA VIJAYARAGHAVAN) (B.RAMAKOTAIAH) JUDICIAL MEMBER ACCOUNTANT MEMBER HYDERABAD, DATED 31 ST DECEMBER, 2014 VBP/- COPY TO 1. PROLIFICS CORPORATION LIMITED (PREVIOUSLY KNOWN AS SEMANTIC SPACE TECHNOLOGIES LTD., ) PLOT NO.1, SURV EY NO. 14, 5 TH FLOOR, DHLFVC SILICON TOWERS, MADHAPUR ROAD, KONDAPUR, HYDERABAD 500 032. 2. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 3(1), I.T . TOWERS, HYDERABAD. 3. DISPUTES RESOLUTION PANEL, 2 ND FLOOR, I.T. TOWERS, 10-2-3, A.C. GUARDS, HYDERABAD 500 004. 4. DIRECTOR OF INCOME TAX, INTERNATIONAL TAXATION, I.T . TOWERS, 10-2-3, A.C. GUARDS, HYDERABAD 500 004. 5. ACIT-(TRANSFER PRICING), HYDERABAD 500 004. 6. D.R. ITAT B BENCH, HYDERABAD.