EVEREST KANTO CYLINDER LTD, MUMBAI V. DCIT (LTU), MUMBAI

ITA 542/MUM/2012

• Counselvise Citation: [2012] 119 COUNSELVISE.COM (IT) 9328 (ITAT-MUMBAI)
• Duration Of Justice: 9 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-11-2012
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: K
• Next Hearing Date: 05-11-2012
• Assessment Year: 2007-2008
• Appeal Filed On: 25-01-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: AJEET KUMAR JAIN; SASMITA MISHRA
• Keywords: Transfer pricing; International transaction; Earning of tax free income; Retrospective amendment; Wholly owned subsidiary; Capital expenditure
• Section: 143(3); 92B; 14A; 115JB; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL K, BENC H MUMBAI BEFORE SHRI B.RAMAKOTAIAH, AM & SHRI AMIT SHUKLA, J M ITA NO.542/MUM/2012 (ASSESSMENT YEAR :2007-2008) M/S EVEREST KANTO CYLINDER LTD., 204, RAHEJA CENTRE, FREE PRESS JOURNAL MARG, NARIMAN POINT, MUMBAI-400 021. VS. DCIT (LTU), MUMBAI PAN NO. : AA A C E 0836 F ( APPELLANT ) .. ( RESPONDENT ) ASSESSEE BY : MR. RAJAN VORA REVENUE BY : MR.AJEET KUMAR JAIN & MS. SASMITA MISHRA / DATE OF HEARING : 5 TH NOV., 2012 / DATE OF PRONOUNCEMENT : 23 RD NOV.,2012 / O R D E R PER BENCH : THIS APPEAL HAS BEEN PREFERRED BY THE ASSESSEE AGAI NST THE IMPUGNED ORDER DATED 12-12-2011, PASSED BY CIT(A)-1 5, MUMBAI IN RELATION TO THE QUANTUM OF ASSESSMENT PASSED UNDER SECTION 143(3) R.W.S. 144C OF THE ACT, FOR THE ASSESSMENT YEAR 200 7-08. IN THIS APPEAL, THE ASSESSEE HAS RAISED FOLLOWING TWO GROUNDS :- 1. THE LEARNED COMMISSIONER OF INCOME TAX (APPEAL) HAS ERRED IN LAW AND ON THE FACTS OF THE CASE IN SUSTAI NING THE ORDER OF THE ASSESSING OFFICER DISALLOWING RS.20,27 ,896/- U/S. 14A OF THE I.T. ACT. 2. THE LEARNED COMMISSIONER OF INCOME TAX (APPEAL) HAS ERRED IN LAW AND ON THE FACTS OF THE CASE IN SUSTA INING THE ORDER OF THE ASSESSING OFFICER DISALLOWING RS.28,50 ,353/- U/S. 92CA OF THE I.T. ACT. 2. THE ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS O F MANUFACTURING OF HIGH PRESSURE SEAMLESS GAS CYLINDE R SERVICES AND ITA NO.542/2012 2 COMPRESSED NATURAL GAS CYLINDERS. IN THE YEAR UNDER CONSIDERATION, THE ASSESSEE HAD FILED ITS RETURN OF INCOME DECLARING T OTAL INCOME OF RS.71,90,77,156/- UNDER THE NORMAL PROVISIONS OF TH E INCOME TAX ACT AND RS.70,18,79,265/- UNDER SECTION 115JB OF THE AC T. 3 . THE BRIEF FACTS APROPOS GROUND NO.1 ARE THAT THE ASSESSEE HAD SHOWN A DIVIDEND INCOME OF RS.31,98,330/- AND HAS C LAIMED THE SAME AS EXEMPT FROM TAX U/S. 10(33). IN RESPONSE TO THE SHOW CAUSE NOTICE DURING THE COURSE OF THE ASSESSMENT PROCEEDINGS AS TO WHY DISALLOWANCE UNDER SECTION 14A SHOULD NOT BE MADE, THE ASSESSEE SUBMITTED THAT MOST OF THE INVESTMENTS IN THE EQUIT Y SHARES AND MUTUAL FUNDS WERE MADE OUT SURPLUS FUNDS RECEIVED DURING T HE FINANCIAL YEAR 2005-06 FROM THE INITIAL PUBLIC OFFER( IN SHORT IP O), WHICH HAS BEEN ACCEPTED BY THE APPELLATE ORDERS IN THE ASSESSMENT YEAR 2006-07, WHEREIN IT WAS HELD THAT THE FUNDS RAISED FROM IPO WERE UTILIZED FOR MAKING THE INVESTMENTS. IT WAS FURTHER SUBMITTED TH AT WITHOUT PREJUDICE IF ANY DISALLOWANCE IS CALLED FOR THEN THE SAME SHO ULD BE MADE OUT OF THE BALANCE FUND ONLY. LEARNED ASSESSING OFFICER RE JECTED THE CONTENTION OF THE ASSESSEE AND OBSERVED THAT THE TO TAL INVESTMENT IN SHARES AND SECURITIES AS ON 31 ST MARCH, 2007 WAS AROUND RS.54.30 LAKHS, OUT OF WHICH INVESTMENT IN SHARES WAS AT RS. 43.03 LAKHS AND MUTUAL FUNDS WAS AT RS.11.26 LAKHS. THE ASSESSEES TOTAL ASSETS AS ON 31 ST MARCH, 2007 WERE RS.386.75 LAKHS (INCLUDING CURREN T LIABILITIES AND PROVISIONS). THUS, INVESTMENTS IN SHARES AND MUTUAL FUNDS WERE ITA NO.542/2012 3 14.04% OF TOTAL ASSETS. THE ASSESSEE HAS NOT MAINTA INED ANY SEPARATE BANK ACCOUNTS FOR THE INVESTMENTS AND OTHER ASSETS AND ALL THE FUNDS ARE MIXED WITH THE BUSINESS FUND AND THE ASSESSEE W AS UNABLE TO DEMONSTRATE THE FLOW OF FUNDS SEPARATELY FOR INVEST MENTS AND OTHER ACTIVITIES. ACCORDINGLY, HE APPLIED RULE 8D, WHICH THOUGH CAME INTO STATUTE W.E.F. A.Y. 2008-2009 AND WORKED OUT THE DI SALLOWANCE AT RS.20,27,896/- AS PER WORKING GIVEN IN PARA 4.3 OF THE ASSESSMENT ORDER. 4 . LEARNED CIT (A) RELYING UPON THE DECISION OF GODREJ BOYCE MFG. CO.LTD. VS. DCIT, 328 ITR 81 (BOM) , THOUGH HELD THAT RULE 8D IS APPLICABLE FROM AY 2008-09, HOWEVER, AS PER THE SAI D DECISION ONLY, THE ASSESSING OFFICER IS BOUND TO DETERMINE THE EXP ENDITURE WHICH HAS BEEN INCURRED IN RELATION TO THE INCOME WHICH DO NO T FORM PART OF THE TOTAL INCOME ON A REASONABLE BASIS. LEARNED CIT(A) ACCORDINGLY ISSUED A SHOW CAUSE NOTICE TO THE ASSESSEE TO FURNISH THE DETAILS TO WORK OUT THE AMOUNT OF DISALLOWANCE. THE ASSESSEE REITERATED THE SAME SUBMISSIONS AND HEAVILY RELIED UPON THE FACT THAT I N THE EARLIER ASSESSMENT YEAR, IT HAS BEEN CATEGORICALLY HELD BY THE CIT(A) THAT INVESTMENT MADE OUT OF FUNDS COLLECTED BY WAY OF IP O, CANNOT BE HELD FOR DISALLOWANCE UNDER SECTION 14A AND SUCH A DECIS ION OF CIT(A) HAS NOW BEEN AFFIRMED BY THE ITAT, WHEREIN THE DEPARTME NTAL APPEAL HAS BEEN DISMISSED. THE LEARNED CIT(A), HOWEVER, HELD T HAT THE ASSESSEE DESPITE SPECIFIC SHOW CAUSE NOTICE HAS NOT SUBMITTE D ITS REPLY FOR ITA NO.542/2012 4 QUANTUM OF DISALLOWANCE, HE, THEREFORE, CONFIRMED T HE ENTIRE ADDITION AFTER OBSERVING AND HOLDING AS UNDER :- VII. AS FAR AS THE APPELLANTS SUBMISSION IN RESPE CT OF ITS INVESTMENTS FROM PROCEEDS OF IPO AND DECISION OF CI T(A) FOR AY. 2006-07 IS CONCERNED, IT IS MENTIONED THAT THE METHOD PROPOSED BY THIS OFFICE CLEARLY PROVIDE OF CONSIDER ATION OF INTEREST EXPENSES WHICH WERE ONLY DIRECTLY RELATED TO INVESTMENTS AND FURTHER TO EXCLUDE SUCH INTEREST EX PENSES FROM THE PURVIEW OF THE COMPUTATION SUCH INTEREST W HICH WOULD BE DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR IN COME OR RECEIPT. IF THE APPELLANT HAS INVESTED THE PROCEEDS OF IPO IN TO THE INVESTMENT EARNING EXEMPT INCOME AND THERE IS N O INTEREST COST OF SUCH FUNDS THEN IN THE GIVEN SITUA TION DISALLOWANCE OF INTEREST WOULD ONLY RELATE TO SUCH OTHER INVESTMENTS WHICH ARE OTHER THAN FROM THE FUNDS OF IPO AND FROM SUCH INTEREST COSTS WHICH ARE NOT DIRECTLY REL ATABLE TO ANY INCOME OR RECEIPT. VIII. THE APPELLANT HAS ALSO RELIED UPON ON CERTAIN CASE LAWS AND RULING OF HONBLE ITAT. THE DECISION IN THE CASE OF BALRAMPUR CHINI IS IN RESPECT OF THE POSITION THAT SECTION 14 A AND RULE 8D CAN BE ONLY INVOKED WHEN THE O IS NOT SATISFIED WITH REGARD TO THE ACCOUNTS OF THE ASSESSEE THAT THE CLA IM OF EXPENDITURE MADE BY THE ASSESSEE IS NOT CORRECT AND THE CLAIM MADE BY THE ASSESSEE THAT NO EXPENDITURE HAS BEEN MADE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME UNDER THE ACT. IN THE FACTS OF THE CASE NO E XPENDITURE HAS BEEN DISALLOWED BY THE APPELLANT UNDER SECTION 14A AND IT IS NOT THE CASE THAT THERE IS NO SUCH EXPENDITUR E WHICH HAS BEEN INCURRED IN RELATION TO THE EARNING OF SUCH IN COME WHICH DOES NOT FORM PART OF TOTAL INCOME. ACCORDINGLY, SU CH DECISION RELIED UPON BY THE APPELLANT ONLY SUPPORTS THE CASE OF THE AO. AS FAR AS THE CASE LAW IN THE CASE OF CIT VS. RAHEJ A CORPORATION PVT. LTD. (SUPRA) IS CONCERNED, IT IS M ENTIONED THAT IN THE FACTS OF THE CASE UNDER CONSIDERATION T HE AO IN HIS ORDER HAS OBSERVED THAT THE APPELLANT HAS SOLD AND PURCHASED SHARES & SECURITIES DURING THE YEAR AND T HE APPELLANT HAS NOT MAINTAINED ANY SEPARATE BOOKS OF ACCOUNTS FOR INVESTMENTS & OTHER ASSETS. IT HAS BEEN FURTHER OBSERVED THAT IN SO FAR AS FUNDS FROM IPO ARE CONCERNED, THE FUNDS HAVE BEEN MIXED WITH THE BUSINESS OF THE APPELLANT AND THE APPELLANT HAS NOT BEEN ABLE TO SHOW HOW IN THE YEAR UNDER CONSIDERATION, THE FLOW OF FUNDS IS SEPARATE FRO IN VESTMENTS AND OTHER ACTIVITIES. ACCORDINGLY, THE OBSERVATION OF THE AO CLEARLY LEADS TO THE CONCLUSION THAT THERE ARE INDI RECT INTEREST EXPENSES WHICH AHS BEEN INCURRED BY THE APPELLANT T OWARDS THE EARNING OF EXEMPT INCOME. ACCORDINGLY THE CASE LAW RELIED UPON IS DISTINGUISHABLE ON FACTS AS IN THAT CASE THE AO COULD NOT POINT OUT AS TO HOW INTEREST ON BORROWED FUNDS WAS ITA NO.542/2012 5 ATTRIBUTABLE TO EARNING DIVIDEND INCOME. AS FAR AS THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS T IN BOX CO. 260 ITR 637 IS CONCERNED, IT IS MENTIONED THAT THE SAME IS NOT IN RESPECT OF SECTION 14A OF THE ACT. IX. IN THE SET OF FACTS OF THE CASE THAT THE APPEL LANT HAS NOT SUBMITTED INFORMATION AND DETAILS WHICH WAS CONSIDE RED NECESSARY TO ARRIVE AT THE FIGURE OF DISALLOWANCE U /S. 14A AND HAS FURTHER NOT REPLIED SPECIFICALLY TO THE SHOW CA USE NOTICE ISSUED TO THE APPELLANT, THE DISALLOWANCE REACHED B Y THE AO IS CONSIDERED JUSTIFIED AND THE DISALLOWANCE MADE B Y HIM IS THEREFORE UPHELD. 5 . BEFORE US, LEARNED SENIOR COUNSEL, SHRI RAJAN VOR A, FIRST AND FOREMOST SUBMITTED THAT EVEN THOUGH THE CIT(A) HAS HELD THAT RULE 8D IS APPLICABLE FROM THE AY 2008-09, HOWEVER, HAS CON FIRMED THE DISALLOWANCE MADE BY THE AO, WHICH WAS WORKED OUT O N THE BASIS OF WORKING GIVEN IN RULE 8D, WHICH IS COMPLETELY IN VI OLATION OF THE JUDGMENT OF THE HONBLE JURISDICTIONAL HIGH COURT I N THE CASE OF GODREJ BOYCE MFG. CO. (SUPRA) . HE FURTHER SUBMITTED THAT THE INVESTMENTS OF THE ASSESSEE COMPANY ARE TO BE SEGREGATED INTO THRE E PARTS VIZ. (I) INVESTMENT MADE PRIOR TO ASSESSMENT YEAR 2006-07; ( II) INVESTMENT MADE DURING THE ASSESSMENT YEAR 2006-07 AND (III) I NVESTMENT MADE DURING THE YEAR 2007-08. HE DREW OUR ATTENTION TO Y EARWISE FUND FLOW STATEMENT APPEARING AT PAGE 46 OF THE PAPER BOOK AN D POINTED OUT THE DETAILS OF INTEREST FREE FUND AVAILABLE WITH THE AS SESSEE RIGHT FROM THE ASSESSMENT YEAR 2004-05 TO THE ASSESSMENT YEAR 2008 -09 WHICH WERE FAR MORE THAN THE AGGREGATE INVESTMENTS MADE BY THE ASSESSEE. HE ALSO PROVIDED US THE CHART GIVING BIFURCATION OF TH E INVESTMENTS MADE IN VARIOUS YEARS. FROM THIS, HE SUBMITTED THAT THE INV ESTMENTS AS ON 31 ST ITA NO.542/2012 6 MARCH, 2005, WERE TO THE TUNE OF RS.2.12 CRORES, WH EREAS THE ASSESSEES INTEREST FREE FUNDS WERE TO THE TUNE OF RS.41.67 CRORES WHICH INCLUDED THE ACCUMULATED PROFITS OF RS.29.69 CRORES. REGARDING INVESTMENTS MADE IN THE AY 2006-07, HE SUBMITTED TH AT THE ASSESSEE HAD MADE INVESTMENTS OF RS.11.09 CRORES AND DURING THE SAME YEAR, THE ASSESSEE HAD GONE FOR PUBLIC ISSUE (IPO), WHERE IN IT HAS RAISED RS.90 CRORES AND THE SAID FUNDS WERE USED FOR INVES TMENTS IN SHARES AND MUTUAL FUND DURING THAT YEAR. THIS FACT HAS BEE N ACCEPTED BY THE CIT(A) IN THE SAID YEAR, WHO HAS HELD THAT INVESTME NTS MADE FROM IPO ARE ITS OWN FUNDS, HENCE, NO DISALLOWANCE SHOULD BE MADE UNDER SECTION 14A. THIS ORDER AS POINTED BY HIM, HAS NOW BEEN AFFIRMED BY THE MUMBAI BENCH OF THE ITAT IN ITA NO.5985/MUM/201 0, COPY OF WHICH HAS BEEN GIVEN IN THE PAPER BOOK AT PAGES 27 TO 29. FOR THE INVESTMENT MADE IN THE ASSESSMENT YEAR 2007-08 I.E THE YEAR UNDER CONSIDERATION, HE SUBMITTED THAT THE INVESTMENTS OF RS.41.83 CRORES, WERE MOSTLY MADE IN FOREIGN SUBSIDIARIES AND ASSOC IATES OF THE ASSESSEE COMPANY AND THE DIVIDEND INCOME FROM SUCH SHARES OF THE FOREIGN COMPANIES ARE TAXABLE AND, THEREFORE, NO DI SALLOWANCE UNDER SECTION 14A CAN BE MADE UNDER LAW. HE, THUS, CONCLU DED THAT IF THE ENTIRE INVESTMENT VIS--VIS SURPLUS FUNDS AND INVES TMENT IN FOREIGN SUBSIDIARIES ARE TAKEN INTO CONSIDERATION, THEN THE RE WOULD HARDLY BE ANY SCOPE FOR MAKING ANY DISALLOWANCE UNDER SECTION 14A. IN SUPPORT OF HIS CONTENTION THAT, IF THE INVESTMENTS ARE MADE OUT OF SURPLUS FUNDS ITA NO.542/2012 7 OR INTEREST FREE FUND AVAILABLE, NO DISALLOWANCE UN DER SECTION 14A CAN BE MADE, HE RELIED UPON THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. RELIANCE UTILITIES AND POWER LIMITED, 313 ITR 340 AND HOST OF OTHER DECISIONS, WHICH HAVE BEEN ENUME RATED AT PAGES 56 & 57 OF THE SEPARATE COMPILATION OF CAS E LAWS. 6 . ON THE OTHER HAND, LEARNED CIT DR STRONGLY RELIED UPON THE REASONINGS AND THE CONCLUSION DRAWN BY THE CIT(A) A ND SUBMITTED THAT EVEN THOUGH THE RULE 8D IS NOT APPLICABLE IN THIS Y EAR, HOWEVER, SOME REASONABLE ESTIMATE OF THE DISALLOWANCE HAS TO BE M ADE. IT CANNOT BE HELD THAT NO EXPENDITURE IS ATTRIBUTABLE TO EARNING OF EXEMPT INCOME, SPECIFICALLY WHEN THE ASSESSEE HAS A HUGE INTEREST LIABILITY AND ADMINISTRATIVE COST. SHE SUBMITTED THAT ON THE FACT S OF THE CASE SOME REASONABLE DISALLOWANCE IS DEFINITELY CALLED FOR. 7. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIONS, PERUSED THE MATERIAL PLACED ON RECORD AND THE ALSO THE FINDINGS GIVEN BY THE AO AS WELL AS THE CIT(A). FROM THE RECORDS, IT IS BORNE O UT THAT THE ASSESSEE HAS MADE AGGREGATE INVESTMENTS OF RS.54.30 CRORES U PTO 31 ST MARCH, 2007, OUT OF WHICH SUM OF RS.41.03 CRORES HAVE BEEN INVESTED IN THE EQUITY SHARES OF FOREIGN SUBSIDIARIES IN UAE. UNDER THE INCOME TAX ACT, THE DIVIDEND INCOME FROM THE SHARES HELD IN FO REIGN COMPANIES ARE TAXABLE AND, THEREFORE, THE PROVISIONS OF 14A WILL NOT GET ATTRACTED. THEREFORE, NO DISALLOWANCE CAN BE MADE UNDER SECTIO N 14A ON THIS ITA NO.542/2012 8 AMOUNT. OUT OF THE BALANCE AMOUNT, SUM OF RS.11.09 CORES WHICH HAS BEEN INVESTED IN THE ASSESSMENT YEAR 2006-07, IT HA S BEEN HELD TO BE MADE OUT OF THE FUNDS RAISED BY WAY OF IPO FOR SUMS AGGREGATING TO RS.90 CRORES TO THE INTEREST FREE FUNDS BY THE CIT( A). THE SAID ORDER OF THE CIT(A) HAS NOW BEEN AFFIRMED BY THE TRIBUNAL VI DE ORDER DATED 21- 10-2011, WHEREIN IT HAS BEEN HELD THAT WHEN THE ASS ESSEE WAS HAVING SUFFICIENT NON-INTEREST BEARING FUNDS FOR MAKING IN VESTMENTS DURING THE YEAR, THEN THERE IS NO REASON TO DEVIATE FROM THE F INDINGS OF THE CIT(A). THUS, THIS AMOUNT ALSO CANNOT BE TAKEN INTO CONSIDE RATION FOR MAKING ANY KIND OF DISALLOWANCE UNDER SECTION 14A. NOW, TH E REMAINING BALANCE AMOUNT OF INVESTMENT [I.E 54.30 (41.03+11 .09) = 2.18], WHICH WAS INVESTED PRIOR TO ASSESSMENT YEAR 2006-07, IT I S SEEN FROM THE RECORDS THAT THE ASSESSEE HAS HUGE SURPLUS FUNDS, S PECIFICALLY OUT OF ACCUMULATED PROFITS AND RESERVE SURPLUS. IN SUCH A SITUATION AND IN VIEW OF THE DECISION OF THE HONBLE BOMBAY HIGH COU RT IN THE CASE OF RELIANCE UTILITIES (SUPRA) , THE NORMAL PRESUMPTION IS THAT INVESTMENT MUST HAVE BEEN MADE OUT OF THE SURPLUS FUNDS, UNLES S CONTRARY IS BROUGHT ON RECORD. THUS, FROM THE FUND FLOW STATEME NT AND AS PER OUR FINDING GIVEN ABOVE, THERE IS HARDLY ANY SCOPE FOR UPHOLDING THE VIEW OF THE CIT(A) AND A.O. THAT THE ASSESSEE HAS MADE ALL THE INVESTMENT OUT OF INTEREST BEARING FUNDS. HOWEVER, THERE ARE HUGE ADMINISTRATIVE COST INCURRED BY THE ASSESSEE AND IT CANNOT BE SAID THAT NO COST CAN BE ATTRIBUTABLE TO THE EARNING OF EXEMPT INCOME. THERE FORE, LOOKING TO THE ITA NO.542/2012 9 FACT THAT SOME ADMINISTRATIVE COST MAY BE ATTRIBUTA BLE FOR MAKING OF INVESTMENT AND EARNING OF EXEMPT INCOME, THEREFORE, A FAIR ESTIMATE OF SUM OF RS.1 LAKH IS UPHELD FOR THE PURPOSE OF DISAL LOWANCE UNDER SECTION 14A, WHICH WILL TAKE CARE OF ANY KIND OF PO SSIBLE EXPENSES, WHICH CAN BE SAID TO BE ATTRIBUTABLE TO EARNING OF THE EXEMPT INCOME. ACCORDINGLY, GROUND NO.1 IS TREATED AS PARTLY ALLOW ED . 8. GROUND NO.2 , RELATES TO ADJUSTMENT OF RS.28,50,353/- MADE ON ACCOUNT OF ARMS LENGTH PRICE (ALP) UNDER SECTION 92 CA BY THE TPO. 9 . THE RELEVANT FACTS AS NOTED BY THE TPO, TO WHOM R EFERENCE WAS MADE UNDER SECTION 92CA(1) BY THE ASSESSING OFFICER ARE THAT THE ASSESSEE IS A LARGEST DOMESTIC AND ONE OF THE LARGE ST INTERNATIONAL MANUFACTURER OF HIGH PRESSURE SEAMLESS GAS CYLINDER S. DURING THE RELEVANT YEAR, THE ASSESSEE HAD SHOWN FOLLOWING INT ERNATIONAL TRANSACTIONS IN ITS TP STUDY REPORT :- SL. NO. NATURE OF TRANSACTION AMOUNT METHOD I PURCHASE OF RAW MATERIALS 13,76,83,652 COST PLUS II SALE OF FINISHED GOODS 2,35,14,425 CUP III SALE OF TRADING ITEM (SPARES, CONSUMABLES ETC) 7,95,24,820 CUP IV GUARANTEE COMMISSION ON GUARANTEE GIVEN 6,48,650 COST PLUS V SALE OF FIXED ASSETS OF DUBAI BRANCH 27,88,24,837 CUP VI SALE OF INVENTORIES OF DUBAI BRANCH 14,56,79,123 COST PLUS TOTAL 66,58,75,507 OUT OF THE ABOVE INTERNATIONAL TRANSACTIONS EXCEPT FOR GUARANTEE COMMISSION, ALL THE TRANSACTIONS WERE HELD TO BE A T ARMS LENGTH. IT WAS ITA NO.542/2012 10 ONLY WITH RESPECT TO GUARANTEE COMMISSION CHARGED FROM ITS SUBSIDIARY COMPANY THAT THE TPO HELD THAT SAME WAS NOT AT ALP AND ADJUSTMENT IS REQUIRED TO BE MADE. 10. THE BRIEF FACTS WHICH LED TO THE ALP ADJUSTMENT MA DE BY THE TPO ARE THAT THE ASSESSEE FORMED A WHOLLY OWNED SUB SIDIARY COMPANY IN DUBAI, NAMELY, EKC INTERNATIONAL FZE. EARLIER, T HIS SUBSIDIARY COMPANY WAS A BRANCH OF THE ASSESSEE COMPANY AND DU RING THE YEAR IT HAD SOLD ALL THE FIXED ASSETS OF ITS BRANCH IN DUB AI TO ITS WHOLLY OWNED SUBSIDIARY EKC DUBAI. THE SUBSIDIARY COMPANY IS ALS O ENGAGED IN THE SIMILAR BUSINESS OF MANUFACTURE OF CYLINDERS. IT NE EDED FUNDS FOR WORKING CAPITAL REQUIREMENTS AND CAPITAL EXPENDITUR E, FOR WHICH THE SAID COMPANY APPROACHED THE ICICI BANK, BAHRAIN BRA NCH, WHICH AGREED TO PROVIDE TERM LOANS FOR THE WORKING CAPITA L AND CAPITAL EXPENDITURE TO SAID SUBSIDIARY COMPANY. IN ORDER TO ENABLE THE ICICI BANK, BAHRAIN BRANCH TO PROVIDE LOANS TO EKC DUBAI, THE ASSESSEE COMPANY PROVIDED A CORPORATE GUARANTEE TO THE SAID BANK BY WAY OF TWO DEEDS OF GUARANTEE, ONE FOR THE WORKING CAPITAL FACILITIES UPTO USD 15 MILLION AND ANOTHER FOR CAPITAL EXPENDITURE UPTO USD 5 MILLION. FOR PROVIDING SUCH GUARANTEE TO THE BANK IN BAHRAIN FOR LOAN GIVEN TO SUBSIDIARY, THE ASSESSEE HAS CHARGED 0.5% AS GUARAN TEE COMMISSION FROM ITS SUBSIDIARY. THE ASSESSEE ALSO HAD AN INDEP ENDENT SANCTION LETTER OF CREDIT ARRANGEMENT BETWEEN ICICI BANK, IN DIA BRANCH, WHERE A GUARANTEE FEE OF 0.6% P.A IS TO BE PAID BY THE ASS ESSEE COMPANY TO ITA NO.542/2012 11 ICICI BANK INDIA FOR THE BANK GUARANTEE PROVIDED BY THE SAID BANK IN INDIA IN FAVOUR OF THE ASSESSEE. ON THE OTHER HAND, THE ASSESSEE COMPANY HAS CHARGED GUARANTEE COMMISSION OF RS.6,4 8,650/- @ 0.5% FROM ITS SUBSIDIARY COMPANY. 11. THE TPO OBSERVED THAT THE ASSESSEE IS A PROMINENT A ND REPUTED INDUSTRIAL COMPANY AND ON ACCOUNT OF ITS FINANCIAL STRENGTH HAS TIE UP WITH MANY LARGE BANKS. THE BANK GUARANTEE PROVIDED BY THE ASSESSEE TO ITS AES PROVIDES A BENEVOLENT ADVANTAGE TO THEM IN OBTAINING CREDIT FACILITIES FROM THE BANKS ON BETTER TERMS. APPARENT LY THE ASSESSEE MAY NOT HAVE INCURRED ANY COST, BUT THERE IS AN INHEREN T COST IN THE OVERALL SANCTION OF CREDIT LIMITS TO THE GROUP ITSELF. OVER ALL RISK EXPOSURE OF THE ASSESSEE COMPANY BECOMES HIGH BY THE AMOUNT OF GUAR ANTEE, WHICH BECOMES MORE LEVERAGED TO THAT EXTENT, THEREBY INCR EASING THE DEBT EQUITY RATIO WHICH WILL ULTIMATELY AFFECT THE COST OF BORROWING. THE SUBSIDIARY IN DUBAI, WHICH WAS NEWLY FORMED AND UNK NOWN, HAD A LOW CREDIT RATING AND AS SUCH THE LENDING RATE TO THE S AME IF THERE WERE WILLING LENDERS WOULD HAVE BEEN MUCH HIGHER. BUT FO R THE GUARANTEE BY THE ASSESSEE, ICICI BANK WOULD NOT HAVE LENT THE MO NEY, OR MIGHT HAVE GIVEN IT AT A MUCH HIGHER RATE CONSIDERING THE ENTERPRISE RISK. IN SUPPORT OF HIS OBSERVATION, HE REFERRED TO A CASE OF GENERAL ELECTRIC CAPITAL CANADA INC. VS. HER MAJESTY THE QUEEN, REPO RTED IN 2009 TCC 563 . ITA NO.542/2012 12 12. BEFORE THE TPO, THE ASSESSEE HAD NOT BENCHMARKED T HE GUARANTEE COMMISSION. IT HAD TAKEN THE ALP OF THE SAID TRANSACTION AT NIL AS IT HAD CONTENDED THAT NO COST HAS BEEN INC URRED IN PROVIDING THE BANK GUARANTEE FOR ITS AE. THE TPO ISSUED A DETAILE D SHOW CAUSE NOTICE TO THE ASSESSEE ON THE FOLLOWING GROUNDS :- A. THE RATE OF INTEREST CHARGED FROM THE AE WOULD HAVE BEEN FAR HIGHER HAD THE ASSESSEE NOT GIVEN ITS GUARANTEE . B. IN FACT, WITHOUT THE GUARANTEE BEING PROVIDED B Y THE ASSESSEE, THE LOAN GIVER (I.E. THE THIRD PARTY LEND ER) WOULD NOT EVEN HAVE GIVEN THE LOAN AT ALL. C. THE CLERKAGE CHARGES/ FEE (OR WHATEVER BE THE NOMENCLATURE) BY A LOAN GIVER SHOULD NOT BE CONFUSE D WITH THE RISK ELEMENT BORNE BY THE ASSESSEE IN GIVING SU CH A GUARANTEE FOR THE AE. THE CLERKAGE CHARGES ETC. IS MERELY FOR THE PAPERWORK AND THE ADMINISTRATIVE WORK ETC. ONLY. D. THAT SUCH A GUARANTEE (OR CORPORATE GUARANTEE) DID NOT COST ANYTHING TO THE ASSESSEE IS OF NO CONSEQUENCE. THE FACT REMAINS THAT THE TAXPAYER HAD UNDERTAKEN THE RISK O N BEHALF OF ITS AES WHICH IN ANY THIRD PARTY SITUATION HE WO ULD NOT HAVE UNDERTAKEN OR WOULD HAVE CHARGED A CONSIDERATI ON FOR THE SAME. E. AN ARGUMENT THAT NO COST HAS BEEN INCURRED BY T HE ASSESSEE AND, THEREFORE, THERE WAS NOTHING TO RECOVER, IS OF NO CONSEQUENCE AS THE ASSESSEE (ALSO) REFERRED TO AS T HE TAXPAYER) HAS BORNE RISKS. THERE IS AN INHERENT COS T IN GIVING SUCH A GUARANTEE (OR CORPORATE GUARANTEE OR LETTER OF COMFORT OR ANY SIMILAR ASSURANCE). F. THE AE WITH ITS RESOURCES AND ECONOMIC POSITION HAD A VERY LOW CREDIT RATING, ON A STANDALONE BASIS. IF AT ALL , THE AE WERE TO BE GRANTED A LOAN BY A THIRD PARTY, THE LOAN-GIV ER WOULD HAVE CHARGED AT THE PRIME LENDING RATE (BESIDES THE FEE ETC). THIS IS BECAUSE OF THE VERY HIGH RISK INVOLVED IN G IVING LOAN BY ANY LENDER TO AN ENTITY SUCH AS YOUR AE. THEREFO RE, A MARK UP WHICH IS INDICATIVE OF RISK INVOLVED NEEDS TO HAVE BEEN CHARGED BY YOU FROM YOUR AE. A WIDELY USED MET HOD FOR RISK EVALUATION IS BY COMPARING THE BANK RATE A ND THE PLR RATE. THE BANK RATE IS THE RATE AT WHICH THE RE SERVE BANK OF INDIA LENDS MONEY TO THE BANKS AND PLR REPR ESENTS THE RATE AT WHICH BANKS LEND THEIR MONEY TO CUSTOME RS. LENDING TO CUSTOMERS ENTAILS A GREAT DEAL OF RISK. IT IS A LOGICAL STANDARD INFERENCE THAT THE DIFFERENCE BETW EEN THE RATE AT WHICH THE BANKS BORROW AND AT WHICH THEY LE ND SHOWS THE RISK PERCEPTION OF THE BANKS. THEREFORE, THE DI FFERENCE ITA NO.542/2012 13 BETWEEN THE BANK RATE AND PLR RATE DOES SHOW THE RE TURN FOR BEARING RISK. THE BANK RATE DURING THE RELEVANT YEAR WAS 6% DURING THE RELEVANT YEAR WHILE THE AVERAGE PLR R ATE WAS 11.35%. THIS WAS THAT THE RETURN FOR BEARING THE RI SK WAS AROUND 535 %. C. THE WEBSITE OF ALLAHABAD BANK ALSO SHOWS THAT T HEY CHARGE RATE OF 0.75% PER QUARTER I.E, 3% PER ANNUM. H. IT HAS ALSO BEEN FOUND THAT A PUBLIC COMPANY WI TH LIMITED LIABILITY IN WHICH 51% STAKE WAS HELD BY THE DUTCH STATE, FMO (NEDERLANDS FINANCIERINGS -MAATSCHAPPIJ VOOR ONTWIKKELINGSLANDEN N.V) HAS CHARGED Z5% FOR FURNIS HING GUARANTEE IN THE CASE OF RABO INDIA FINANCE PVT.LTD . FORBES BLDG, 2 FLOOR, CHARANJIT RAI MARG, FORT, MURNBAI-4 00 001. THE FMO AND RABO INDIA FINANCE PVT. LTD ARE NOT REL ATED ENTITIES. I. THE ABOVE EXAMPLE SHOWS THAT THE BANKS AND COMP ANIES ARE CHARGING RATES UPTO 3% FOR PROVIDING THE GUARAN TEES. THE COST OF RISK UNDERTAKEN IS NOT REFLECTED IN THI S RATE BECAUSE THESE GUARANTORS SECURE THEMSELVES FULLY WH ILE FURNISHING THE GUARANTEES. THESE RATES ARE QUOTED A FTER OBTAINING ADEQUATE SECURITY FOR COVERING THE RISK I NVOLVED IN THE GUARANTEE. IN THE PRESENT CASE THE ASSESSEE HAS NOT OBTAINED ANY SECURITY FROM ITS AE. IT HAS JUST PROV IDED A BLANKET GUARANTEE. THEREFORE, THE ARMS LENGTH COMPENSATION SHOULD BE MUCH MORE THAN THE RATE CHAR GED BY THE BANKS FOR THEIR COMMISSION. HE, THEREFORE, PROPOSED TO BENCHMARK THE ALP FOR TH E GUARANTEE COMMISSION AT THE RATE OF 3% OF THE AMOUNT OF THE G UARANTEE. 13. THE ASSESSEE IN RESPONSE HAD FILED ITS DETAILED SUB MISSIONS AND THE OBJECTIONS TO THE PROPOSED SHOW CAUSE NOTICE ON EACH AND EVERY ACCOUNT WHICH HAS BEEN ELABORATELY DISCUSSED AT PAG E 6 TO 8 OF THE TPOS ORDER. THE TPO REJECTED THE ASSESSEES SAID C ONTENTIONS AND GATHERED INFORMATION FROM THE VARIOUS BANKS TO ASCE RTAIN HOW MUCH BANKS ARE CHARGING FOR FURNISHING OF THE BANK GUARA NTEES, SO THAT CUP METHOD COULD USED TO BENCHMARK THIS TRANSACTION. FR OM THE INFORMATION GATHERED, HE FOUND THAT GUARANTEE RATES RANGES FROM 0.15% TO 3%, ITA NO.542/2012 14 HOWEVER, HELD THAT 3% OF THE AMOUNT OF GUARANTEE WO ULD BE APPROPRIATE AND FOR THIS HE HAS TAKEN VARIOUS INSTA NCES OF THE BANKS GIVING SUCH KIND OF GUARANTEE. HE, ACCORDINGLY, WOR KED OUT THE ALP AT 3% OF COMMISSION AT RS.34,99,003/- AND MADE UPWARD ADJUSTMENT OF RS.28,50,353/-. 14 . BEFORE THE CIT(A), THE ASSESSEE MADE DETAIL SUBMI SSIONS, WHICH HAVE BEEN SUMMARIZED IN PARA 6.3 OF THE CIT(A), REA DING AS UNDER :- 6.3 IN RESPECT OF THIS GROUND OF APPEAL THE SUBMIS SION OF THE APPELLANT ARE SUMMARIZED AS UNDER: I. DURING THE YEAR, THE ASSESSEE HAD A SUBSIDIARY : COMPANY IN DUBAI NAMELY EKC INTERNATIONAL FZE. EARLIER THE SUB SIDIARY COMPANY WAS A BRANCH OF THE ASSESSEE COMPANY. THE SUBSIDIARY COMPANY IS ALSO ENGAGED IN THE BUSINESS OF MANUFACTURE OF CYLINDERS. II. THE SUBSIDIARY CO. NEEDED FUNDS FOR WORKING CA PITAL REQUIREMENTS. THE SUBSIDIARY COMPANY APPROACHED ICI CI BANK, BAHRAIN BRANCH AND THE SAID BANK AGREED TO PROVIDE WORKING CAPITAL REQUIREMENTS TO THE SUBSIDIARY COMPANY. IN TERMS OF THE SANCTION, CORPORATE GUARANTEE HAD TO BE GIVEN BY HE ASSESSEE COMPANY. III. THE ASSESSEE COMPANY HAS GIVEN THE CORPORATE: GUARANTEE AND CHARGED GUARANTEE COMMISSION IV. THE ASSESSING OFFICER HAS BENCHMARKED THE ARMS LENGTH PRICE FOR THE BANK GUARANTEE @ 3% OF THE AMOUNT OF GUARAN TEE. THE ASSESSING OFFICER IN HIS SHOW CAUSE NOTICE DT. 05.1 0.2010 HAS GIVEN THE REASONS FOR ADOPTING B INK GUARANTEE @ 3% . THE APPELLANT SUBMITTED THAT ASSESSING OFFICER WAS NOT CORRECT IN HIS APPROACH TO BENCHMARK THE GUARANTEE COMMISSION DUE TO THE FOLLOWING A) THAT THE ASSESSEE COMPANY HAS CHARGED COMMISSION @0.5% BASED ON THE RATE WHICH WOULD HAVE BEEN CHARG ED IF THE SAME WAS OBTAINED FROM A BANK. THE ASSESSEE COM PANY IS HOLDING 100% EQUITY O THE SUBSIDIARY COMPANY. HE NCE ALL THE ASSETS UNLESS EXCLUSIVELY CHARGED OR MORTGAGED BELONGS TO THE HOLDING COMPANY. FURTHER, GUARANTEE GIVEN TO THE BANK HAVE A CLAUSE THAT THE SAID GUARANTEE CAN BE INVOKE D ONLY AFTER THE CHARGED ASSETS HAVE BEEN LIQUIDATED. IN O THER WORDS THE GUARANTEE CAN BE INVOKED ON) Y AFTER THE CHARGE D ASSETS HAVE BEEN LIQUIDATED. HENCE, THERE IS NO REAL FINAN CIAL BURDEN ON THE ASSESSEE COMPANY FOR GIVING THE GUARANTEE. ITA NO.542/2012 15 B) THAT AE HAS BORROWED MONEY AS PER PREVAILING MAR KET RATE IN AE COUNTRY. THE PREVAILING RATES IN AE COUNTRY W ERE AROUND 5.5 % P.A. (SOURCE CENTRAL BANK OF UAE). DURING THE SAID PERIOD AE HAS BORROW RD AT THE RATE OF LIBOR + 0.8 3% OR TERM LOAN AND LIBOR + 0.5% FOR WORKING M:APTAL PURPOSE. PREVAILING LIBOR RATES WHERE RANGING AROUND 5.3% TH US MAKING EFFECTIVE RATE OF BORROWING @ 6.13% FOR TERM LOAN AND 5.8% FOR WORKING CA ,ITAL LOAN, WHICH IS IN LINE WI TH THE NORMAL RATES PREVAILING IN AE COUNTRY DURING THE SAID PERI OD. THUS, THERE HAVE BEEN NO BENEFIT OF INTEREST RATE DERIVED BY AE IN CONNECTION WITH CORPORATE GUARANTEE FURNISHED BY AS SESSEE TO THE BANKERS ) OF AE. C) THAT AE HAD CAPITAL BASE IN FORM OF EQUITY OF US D 4.70 MILLION, AGAINST THE SAID EQUITY BASE THE BANKS HAV E FUNDED USD 10 ML LION (DEBT TO EQUITY RATIO OF 2.13:1) WEL L BELOW THE ACCEPTED NORMS OF LONG TERM LENDING OF 4:1. FURTHER BY END OF MARCH 2007, AE HAD NET WORTH OF USD 12.4 MILLION VI S--VIS BANK FUNDING OF USD 10 MILLION, GIVING DEBT TO EQUI TY RATIO OF 0.80:1. BASED ON THE EQUITY COMMITMENT BY MANAGEMENT, ANY COMPANY COULD HAVE AVAILED THE SAID LOAN WITHOUT TH IRD PARTY INTERFERENCES FROM BANK AT THE PREVAILING MARKET PRICES D) THAT AE HAS OBTAINED LOAN FROM ITS BANKERS BASED ON FIRST CHARGE TOWARDS THE FIXED ASSET AND FURTHER HYPOTHEC ATION OF INVENTORIES AND BOOK DEBTS AND THAT AE HAD GROSS FI XED ASSET BASE OF USD 13 MILLION AND NOT FIXED ASSET BASE OF USD 12.6 MILLION. FURTHER AS AT 31.03.2007 AE HAD INVENTORIE S VALUED AT COST WORTH USD 7.6 MILLION. BOOK DEBTS OF 5.4 MILLI ON AND CASH AND BANK BALANCE OF USD 1.8 MILLION. IN NUTSHELL AG AINST THE LOAN OUTSTANDING AS AT 3 1.03.2007 OF USD 10 MILLIO N, ASSETS AVAILABLE IN CASE OF ANY DEFAULT WAS TO THE TUNE OF USD 27.4 MILLION. FROM ABOVE IT CAN BE DEDUCED THAT THE SAID LOAN FOR WHICH CORPORATE GUARANTEE WAS ISSUED WAS SECURED BY 2.7 TIMES O THE LOAN VALUE, THUS CATEGORIZING THE SAID LOAN AT THE LEAST RISK LOAN: E)THAT THE CORPORATE GUARANTEE GIVEN BY THE ASSESSE E WAS AN INTERNATIONAL TRANSACTION AND HENCE THE TRANSACTION WOULD HAVE TO BE LOOKED UPON THE PRINCIPLES WITH REGARD TO INT ERNATIONAL TRANSACTIONS. THE ASSESSEE COMPANY RELIES ON THE FO LLOWING DECISIONS: A) ITAT BENCH A CHENNAI IN THE CASE OF SIVA INDUSTR IES & HOLDINGS LTD. VS B) ITAT MUMBAI BENCH E IN THE CASE OF DCIT VS TECH MAHINDRA LTD. 46 SOT 141 (MUM) C) ITAT HYDERABAD A BENCH IN THE CASE OF MIS. FOUR SOFT LTD. VS DCIT ITA NO.542/2012 16 F) THAT THE ASSESSING OFFICER HAS BENCHMARKED THE R ATE BY DRAWING COMPARISONS OF THE RATE CHARGED BY ALLAHABA D BANK AND THE RATE CHARGED BY RABO INDIA FINANCE LTD; THA T THE RATE CHARGED BY ALLAHABAD BANK IS INDIAN RATE AND CANNOT APPLY TO INTERNATIONAL TRANSACTIONS. IN RESPECT OF GUARANTEE COMMISSION CHARGED BY RABO INDIA FIILAN.2E LTD., THE SAID COMP ANY IS A FINANCE COMPANY AND THE RATE CHARGED BY THE FINANCE COMPANY DEPENDS ON VARIOUS FACTORS LIKE FINANCIAL P OSITION OF THE BORROWER, NET WORTH ETC. HENCE, THE RATE IS NOT COMPARABLE ALSO. BESIDES, THE SAID TRANSACTION IS ALSO AN INDI AN TRANSACTION. V. ACCORDINGLY IT WAS SUBMITTED THAT THE GUARANTEE COMMISSION @ 0.5% CHARGED BY THE ASSESSEE COMPANY WAS FAIR AND REASONABLE.. 15 . FINALLY, THE LD. CIT(A) REJECTED THE SAID SUBMISS IONS AFTER DETAIL DISCUSSION APPEARING AT PARA 6.4 FROM PAGES 15 TO 1 9 OF THE APPELLATE ORDER, BY WHICH HE CONFIRMED THE REASONING AND THE ACTION OF THE TPO AND ALSO HELD THAT THE ASSESSEE HAS NOT BENCHMARKED THIS TRANSACTION OF GUARANTEE COMMISSION AND, THEREFORE, 3% OF THE COMMISSION FOR BENCHMARKING THE GUARANTEE COMMISSION TRANSACTION W OULD BE AT ALP. THE COMPARABLES OF VARIOUS BANKS CHARGING 3% GUARAN TEE COMMISSION WAS HELD TO BE JUSTIFIED. 16 . LEARNED SENIOR COUNSEL SHRI RAJAN VOHRA, SUBMITTE D THAT EARLIER THE ASSESSEE HAD A BRANCH IN DUBAI AND FROM 1 ST NOVEMBER, 2006, A SUBSIDIARY COMPANY WAS SET UP AND ALL THE FIXED ASS ETS OF ITS ERSTWHILE BRANCH WAS OWNED BY ITS SUBSIDIARY COMPANY. SINCE T HE SUBSIDIARY COMPANY NEEDED FUNDS FOR WORKING CAPITAL REQUIREMEN TS AND CAPITAL EXPENDITURE, IT HAS APPROACHED ICICI BANK BAHRAIN B RANCH FOR PROVIDING TERM LOAN. THE ASSESSEE ONLY TO PROVIDE F OR CORPORATE ITA NO.542/2012 17 COMFORT, HAS GIVEN THE CORPORATE GUARANTEE TO THE S AID BANK. THE SUBSIDIARY COMPANY HAD HYPOTHECATED ITS ASSETS AND NO COST WAS INCURRED BY THE ASSESSEE FOR PROVIDING THE GUARANTE E TO THE BANK FOR LOAN TO ITS SUBSIDIARY. HE FURTHER POINTED OUT THAT THE ASSESSEE HAD INDEPENDENT SANCTION OF CREDIT ARRANGEMENT WITH THE ICICI BANK INDIA, WHEREIN THE GUARANTEE FEE OF 0.6% PER ANNUM WAS PAI D, WHEREAS THE ASSESSEE HAS CHARGED A GUARANTEE COMMISSION OF 0.5% FROM ITS SUBSIDIARY COMPANY. THE DIFFERENCE OF 0.1% WAS TOWA RDS STRATEGIC BUSINESS INTEREST OF THE ASSESSEE COMPANY. RELYING UPON THE DECISION OF THE HYDERABAD BENCH OF THE ITAT IN THE CASE OF M/S FOUR SOFT LTD. VS. DCIT, REPORTED IN (2011) 62 DTR (HYD)(TRIB) 308 , HE SUBMITTED THAT TRANSACTION OF GIVING CORPORATE GUARANTEE TO A BANK IS NOT AN INTERNATIONAL TRANSACTION. HE FURTHER REITERATED TH AT THERE IS NO DETRIMENT TO THE ASSESSEE WHILE GIVING GUARANTEE AS IT HAS IN CURRED NO COST AS ENTIRE HYPOTHECATION OF ASSETS WAS DONE BY THE SUBS IDIARY ONLY. EVEN THOUGH THE ASSESSEE WAS NOT REQUIRED TO RECOVER THE GUARANTEE COMMISSION FROM ITS SUBSIDIARY BEING WHOLLY A BUSI NESS STRATEGIC DECISION, STILL IT HAD CHARGED 0.5%. 16.1 HIS OTHER LIMB OF ARGUMENT WAS THAT THERE IS NO MET HOD PRESCRIBED UNDER THE STATUTE TO BENCHMARK SUCH A TR ANSACTION OF GUARANTEE COMMISSION AND IN SUCH A CASE, THE ENTIRE CHARGING PROVISIONS UNDER SECTION 92B GETS FAILED. EVEN THE COMPARABLES GIVEN BY THE TPO WOULD NOT BE APPLICABLE AS THE SAME ARE INSTANCES OF ITA NO.542/2012 18 INDEPENDENT DEALING OF THE BANKS DIRECTLY WITH THE CLIENTS. THE OTHER PLANK OF ARGUMENT WAS THAT IN SUCH TYPE OF TRANSACT ION, ONE HAS TO SEE THE ECONOMIC AND BUSINESS INTEREST ALSO BECAUSE SUC H KIND OF CORPORATE COMFORT BY THE ASSESSEE FOR ITS WHOLLY OW NED SUBSIDIARY IS A STRATEGIC INVESTMENT FOR INCREASING THE VOLUME OF T HE BUSINESS, SALES AND PROFIT, WHICH IS IN THE NATURE OF BUSINESS INTE REST AND NO BENCHMARKING IS REQUIRED FOR DETERMINING THE ALP IN PROVIDING CORPORATE COMFORT IN THE FORM OF GUARANTEE FOR WHIC H ASSESSEE HAS NOT INCURRED ANY REAL COST. IN SUPPORT OF HIS CONTENTIO NS THAT APPLICATION OF 3% RATE OF GUARANTEE COMMISSION CANNOT BE UPHELD IN THE ASSESSEES CASE, HE HAS RELIED UPON THE DECISION OF MUMBAI BEN CH OF ITAT IN THE CASE OF ASIAN PAINTS LIMITED VS. CIT, PASSED IN ITA 408/MUM /2010, VIDE ORDER DATED 31-10-2011 , WHEREIN IT WAS HELD THAT CHARGING OF GUARANTEE COMMISSION AT THE RATE OF 3% ON THE BASIS OF RATES AVAILABLE ON THE WEBSITE OF ALLAHABAD BANK, HSBC BANK AND ICI CI BANK, CANNOT BE UPHELD. 17. ON THE OTHER HAND, LEARNED CITDR SUBMITTED THAT AT THE TIME WHEN TPO WAS MAKING THE ASSESSMENT, THE LAW WAS NOT CLEAR WHETHER THE GUARANTEE COMMISSION IS AN INTERNATIONAL TRANSA CTION OR NOT, HOWEVER, IN VIEW OF THE AMENDMENT BROUGHT BY THE F INANCE ACT, 2012 WITH RETROSPECTIVE EFFECT FROM 1-4-2012, BY WAY OF EXPLANATION TO SECTION 92B, GUARANTEE COMMISSION IS NOW CONSIDERED TO BE AN INTERNATIONAL TRANSACTION. THE ASSESSEE ITSELF HAS SHOWN THIS GUARANTEE ITA NO.542/2012 19 COMMISSION AS INTERNATIONAL TRANSACTION, WHICH IS E VIDENT FROM ITS TP STUDY REPORT AVAILABLE AT PAGE 31 OF THE PAPER BOOK . THE ASSESSEE HAS SHOWN COST PLUS METHOD (CPM) FOR BENCHMARKING T HIS TRANSACTION. THEREFORE, THE CONTENTION OF THE LEARNED AR, FIRSTLY , IT IS NOT AN INTERNATIONAL TRANSACTION AND SECONDLY , NO METHOD CAN BE APPLIED FOR BENCHMARKING THIS TRANSACTION, IS NOT CORRECT. THE ONLY METHOD WHICH CAN BE APPLIED IN A TRANSACTION LIKE THIS IS, CUP M ETHOD, WHICH HAS BEEN DONE BY THE TPO. THERE CAN BE AN INTERNAL CUP OR EXTERNAL CUP IN SUCH CASES AND THE TPO HAS TAKEN EXTERNAL CUP FO R BENCHMARKING THE ALP ON TRANSACTION OF GUARANTEE COMMISSION, WHI CH IS LEGALLY AND FACTUALLY CORRECT AND THE DATA WHICH HAS BEEN TAKEN IS BASED ON PUBLIC DOMAIN. THE ASSESSEE ITSELF HAS CHARGED 0.5% GUARAN TEE COMMISSION FROM ITS SUBSIDIARY AND THE ISSUE BEFORE THE TPO WA S THAT WHETHER SUCH CHARGING OF GUARANTEE COMMISSION IS AT ALP OR NOT. IN THESE CIRCUMSTANCES, THE TPO HAS TAKEN EXTERNAL COMPARABL ES AND BASED ON DETAIL REASONING FOR TAKING THESE COMPARABLES, HE H AS RIGHTLY BENCHMARKED AT THE RATE OF 3%, WHICH IS GENERALLY A CCEPTED RATE IN THE CASES OF GUARANTEE COMMISSION. 18 . IN THE REJOINDER, LEARNED SENIOR COUNSEL SUBMITTE D THAT EVEN IF THE GUARANTEE COMMISSION HAS BEEN BROUGHT WITHIN TH E PURVIEW OF INTERNATIONAL TRANSACTION, HOWEVER, THE METHOD PRES CRIBED UNDER THE RELEVANT RULES CANNOT BE MADE APPLICABLE IN THE CAS E OF GUARANTEE COMMISSION. THE ONLY PROVISIONS WHICH CAN BE SAID T O BE APPLICABLE, IF ITA NO.542/2012 20 AT ALL, HAS BEEN BROUGHT IN RULE 10AB WITH EFFECT F ROM MAY, 2012, WHICH CANNOT BE HELD TO BE APPLICABLE FOR THIS YEAR. REGA RDING APPLICABILITY OF CUP METHOD, HE SUBMITTED THAT IN CASE OF THE ASSESS EE, INTERNAL CUP WAS AVAILABLE I.E. ICICI BANK INDIA WAS CHARGING TH E RATE OF 0.6% OF GUARANTEE COMMISSION FROM THE ASSESSEE, THEN THERE WAS NO NEED FOR LOOKING AT THE EXTERNAL CUPS. IN CUP METHOD, ONE HA S TO SEE LIKIE TO LIKE AND THERE IS NO REASON AS TO WHY 3% IS BEING A PPLIED IN THE CASE OF THE ASSESSEE AND WHY NOT 0.15% AS RATES AVAILABLE I N THE EXTERNAL CUP RANGES BETWEEN 0.15% TO 3%. IN CASE OF THE ASSE SSEE, NO RISK HAS BEEN TAKEN WHILE PROVIDING GUARANTEE FOR ITS SU BSIDIARY AND, THEREFORE 0.5% CHARGED BY IT SHOULD BE CONSIDERED A T ALP. FURTHER, THE ASSESSEE IS NOT A BANKING COMPANY, THEREFORE, THE E XAMPLES GIVEN BY THE TPO ARE NOT APPLICABLE. 19 . WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSION S, PERUSED THE MATERIAL ON RECORD AND GONE THROUGH THE ORDERS OF T HE CIT(A) AS WELL AS THE TPO. THE ONLY ISSUE BEFORE US IS THE UPWARD ADJUSTMENT OF ARMS LENGTH PRICE IN RELATION TO CORPORATE GUARANTEE GIV EN BY THE ASSESSEE TO THE ICICI BANK, BAHRAIN BRANCH FOR LOAN TAKEN BY IT S SUBSIDIARY IN DUBAI. EARLIER THE ASSESSEE CARRIED OUT ITS BUSINES S THROUGH ITS BRANCH AT DUBAI, WHICH WAS LATER ON TAKEN OVER BY WHOLLY O WNED SUBSIDIARY COMPANY OF THE ASSESSEE FOR CARRYING OUT THE BUSINE SS OF MANUFACTURING OF CYLINDERS. THE SAID SUBSIDIARY COM PANY HAS ITA NO.542/2012 21 HYPOTHECATED ITS ASSETS FOR GETTING THE TERM LOAN F OR WORKING CAPITAL AND CAPITAL EXPENDITURE. THE ASSESSEE HAS PROVIDED A CO RPORATE GUARANTEE TO ICICI BANK BAHRAIN BRANCH BY TWO DEALS OF GUARAN TEE ONE FOR WORKING CAPITAL FACILITY (USD 15 MILLION) AND ANOTH ER FOR CAPITAL EXPENDITURE(USD 5 MILLION). THE ASSESSEE HAS CHARGE D 0.5% AS GUARANTEE COMMISSION FROM ITS SUBSIDIARY IN FAVOUR OF THE GUARANTEE PROVIDED TO THE SAID BANK. FROM THE RECORDS, IT IS ALSO SEEN THAT THE ASSESSEE HAD AN INDEPENDENT SANCTION LETTER OF CRED IT ARRANGEMENT WITH ICICI BANK INDIA, WHEREIN UNDER A GUARANTEE SC HEME COMMISSION OF 0.6% PER ANNUM IS PAID BY THE ASSESSEE FOR THE B ANK GUARANTEE PROVIDED BY THE ICICI BANK INDIA IN FAVOUR OF THE A SSESSEE. THE TPO FOUND THAT CHARGING OF 0.5% OF GUARANTEE COMMISSION BY THE ASSESSEE FROM ITS SUBSIDIARY IS NOT AT ALP AS WITHOUT THE GU ARANTEE PROVIDED BY THE ASSESSEE THE BANK EITHER WOULD NOT HAVE GIVEN T HE LOAN AT ALL OR WOULD HAVE CHARGED HIGHER RATE OF INTEREST FROM ITS AE. AS PER THE TPO, THE ASSESSEE HAS UNDERTAKEN A RISK ON BEHALF OF ITS AE WHICH IN ANY CASE OF THIRD PARTY SITUATION, THE SAME WOULD NOT H AVE BEEN UNDERTAKEN OR WOULD HAVE CHARGED A HUGE CONSIDERATION FOR THE SAME. FOR RISK EVALUATION, HE HAS COMPARED THE BANK RATE BASED ON THE PLR RATE AND WORKED OUT THE RATE OF RETURN FOR BEARING THE RISK AROUND 4.5%. THUS, ON THIS PREMISE, HE WENT FOR EXTERNAL COMPARABLES AND FOUND THAT VARIOUS BANKS HAVE BEEN CHARGING RATE OF AROUND 3% LIKE HSB C LTD MUMBAI WAS CHARGING RATE OF 0.15% TO 3%, ALLAHABAD BANK IS CHARGING 0.75% ITA NO.542/2012 22 PER QUARTER I.E. 3% P.A.; EXIM BANK USA WHICH HAS P ROVIDED A GUARANTEE TO BOEING CO. OF USA AGAINST HIRE PURCHAS E AGREEMENT FOR PURCHASE OF AIRCRAFTS BY JET AIRWAYS INDIA, HAS CHA RGED A COMMISSION OF 3% PLUS COMMITMENT CHARGES. ACCORDINGLY, HE HAS BENCHMARKED THE ALP FOR BANK GUARANTEE AT THE RATE OF 3% FOR THE AM OUNT OF GUARANTEE. 20 . WHILE APPLYING THESE EXTERNAL COMPARABLES OF THE BANKS, THE TPO HAS NOT BROUGHT ANYTHING ON THE RECORD THAT UND ER WHICH TERMS AND CONDITIONS AND CIRCUMSTANCES, THE BANKS HAVE BE EN CHARGING GUARANTEE COMMISSION AT THE RATE OF 3%. THE CHARGIN G OF A GUARANTEE COMMISSION DEPENDS UPON TRANSACTION TO TRANSACTION AND MUTUAL UNDERSTANDING BETWEEN THE PARTIES. THERE MAY BE A C ASE WHERE THE BANK MAY NOT CHARGE ANY GUARANTEE COMMISSION, DEPEN DING UPON ITS EVALUATION OF RELATIONSHIP WITH A PARTICULAR CLIENT . EVEN OTHERWISE ALSO THE TPO HIMSELF HAS NOTED THAT GUARANTEE COMMISSION RANGES BETWEEN 0.15% TO 3% IN CASE OF HSBC. THE UNIVERSAL APPLICAT ION OF RATE OF 3% FOR GUARANTEE COMMISSION CANNOT BE UPHELD IN EVERY CASE AS IT IS LARGELY DEPENDENT UPON THE TERMS AND CONDITIONS, ON WHICH LOAN HAS BEEN GIVEN, RISK UNDERTAKEN, RELATIONSHIP BETWEEN T HE BANK AND THE CLIENT, ECONOMIC AND BUSINESS INTEREST ARE SOME OF THE MAJOR FACTORS WHICH HAS TO BE TAKEN INTO CONSIDERATION. IN THE PR ESENT CASE, WHEN THE ASSESSEE HAS SPECIFICALLY STATED THAT NEITHER IT HA S INCURRED ANY COST FOR PROVIDING THE GUARANTEE TO THE BANK FOR LOAN TAKEN BY ITS SUBSIDIARY NOR HAS UNDERTAKEN ANY KIND OF RISK, AS IT WAS THE SUBS IDIARY COMPANY ITA NO.542/2012 23 WHICH HAS HYPOTHECATED ITS ASSETS AGAINST THE LOAN, THE TPO HAS NOT BROUGHT ANYTHING ON THE RECORD TO CONTROVERT THE SA ME. HE HAS PROCEEDED ON THE PREMISE THAT THERE IS ALWAYS A RIS K IN PROVIDING THE GUARANTEE AND SOME KIND OF SECURITY IS NEEDED FOR G IVING A GUARANTEE. SUCH A PREMISE OF THE ASSESSING OFFICER IS WITHOUT BASIS OR MATERIAL ON RECORD. THUS, APPLYING THE RATE OF 3% ON THE GUARAN TEE COMMISSION BASED ON EXTERNAL COMPARABLES AND THAT TO BE ON NAK ED QUOTE GIVEN IN THE WEBSITE, IS UNCALLED FOR IN THE PRESENT CASE. 21 . SO FAR AS THE LEARNED SENIOR COUNSELS CONTENTION THAT GUARANTEE COMMISSION IS NOT AN INTERNATIONAL TRANSACTION AND THERE COULD NOT BE ANY METHOD FOR EVALUATING THE ALP FOR THE GUARANTEE COMMISSION, WE DO NOT FIND ANY MERIT IN THE SAID CONTENTION IN VIE W OF THE AMENDMENT BROUGHT BY THE FINANCE ACT, 2012 WITH RETROSPECTIVE EFFECT FROM 1-4- 2002 BY WAY OF EXPLANATION ADDED IN SECTION 92B. PAYMENT OF GUARANTEE FEE IS INCLUDED IN THE EXPRESSION INTERN ATIONAL TRANSACTION IN VIEW OF THE EXPLANATION I(C) OF SECTION 92B. ONCE T HE GUARANTEE FEE FALLS WITHIN THE MEANING OF INTERNATIONAL TRANSACT ION, THEN THE METHODOLOGY PROVIDED IN THE RULES ALSO BECOMES APPL ICABLE. HERE IN THIS CASE, IT IS UNDISPUTED THAT THE ASSESSEE IN I TS T.P.STUDY REPORT AND ALSO THE TPO, HAVE ACCEPTED THAT IT IS AN INTER NATIONAL TRANSACTION AND CUP IS THE MOST APPROPRIATE METHOD FOR BENCHMAR KING THE CHARGING OF GUARANTEE FEE. WE ALSO DO NOT AGREE WIT H THE CONTENTION OF ITA NO.542/2012 24 THE LEARNED COUNSEL THAT THERE COULD NOT BE ANY COS T OR CHARGE OF GUARANTEE FEE BY PROVIDING CORPORATE GUARANTEE TO I TS SUBSIDIARY BECAUSE THERE IS AN ALWAYS ELEMENT OF BENEFIT OR CO ST WHILE PROVIDING SUCH KIND OF GUARANTEE TO AE. HOWEVER, IN THIS CASE , THE ASSESSEE HAS ITSELF CHARGED 0.5% GUARANTEE COMMISSION FROM ITS A E, THEREFORE, IT IS NOT A CASE OF NOT CHARGING OF ANY KIND OF COMMISSIO N FROM ITS AE. THE ONLY POINT WHICH HAS TO BE SEEN IN THIS CASE IS WHE THER THE SAME IS AT ALP OR NOT. WE HAVE ALREADY COME TO A CONCLUSION IN THE FOREGOING PARAS THAT THE RATE OF 3% BY TAKING EXTERNAL COMPAR ABLE BY THE TPO, CANNOT BE SUSTAINED IN FACTS OF THE PRESENT CASE. W E ALSO FIND THAT IN AN INDEPENDENT TRANSACTION, THE ASSESSEE HAS PAID 0 .6% GUARANTEE COMMISSION TO ICICI BANK INDIA FOR ITS CREDIT ARRAN GEMENT. THIS COULD BE A VERY GOOD PARAMETER AND A COMPARABLE FOR TAKIN G IT AS INTERNAL CUP AND COMPARING THE SAME WITH THE TRANSACTION WIT H THE AE. THE CHARGING OF 0.5% GUARANTEE COMMISSION FROM THE AE I S QUITE NEAR TO 0.6%, WHERE THE ASSESSEE HAS PAID INDEPENDENTLY TO THE ICICI BANK AND CHARGING OF GUARANTEE COMMISSION AT THE RATE OF 0.5% FROM ITS AE CAN BE SAID TO BE AT ARMS LENGTH. THE DIFFERENCE OF 0.1% CAN BE IGNORED AS THE RATE OF INTEREST ON WHICH ICICI BANK , BAHRAIN BRANCH HAS GIVEN LOAN TO AE (I.E. SUBSIDIARY COMPANY) IS A T 5.5%, WHEREAS THE ASSESSEE IS PAYING INTEREST RATE OF MORE THAN 10% O N ITS LOAN TAKEN WITH ICICI BANK IN INDIA. THUS, SUCH A MINOR DIFFER ENCE CAN BE ON ACCOUNT OF DIFFERENTIAL RATE OF INTEREST. THUS, ON THESE FACTS, WE DO NOT ITA NO.542/2012 25 FIND ANY REASON TO UPHOLD ANY KIND OF UPWARD ADJUST MENT IN ALP IN RELATION TO CHARGING OF GUARANTEE COMMISSION. HENCE , THE ADDITION OF RS.28,50,353/- ON ACCOUNT OF TP ADJUSTMENT ON GUARA NTEE COMMISSION IS HEREBY DELETED AND THE ORDER OF THE CIT(A) IS SE T ASIDE. ACCORDINGLY, GROUND NO.2 IS TREATED TO BE ALLOWED . 22. RESULTANTLY, APPEAL FILED BY THE ASSESSEE IS PA RTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 23 RD DAY OF NOV.,2012. SD/- SD/- (B.RAMAKOTAIAH) (AMIT SHUKLA) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI ; DATED : 23 RD NOV./ 2012. .. /PKM , . / PS COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT. 3. THE CIT(A)-X, MUMBAI. 4. CIT 5. DR, ITAT, MUMBAI 6. GUARD FILE. //TRUE COPY// BY ORDER, ( DY./ASSTT. REGISTRAR) ITAT, MUMBAI