EVEREST KANTO CYLINDER LTD, MUMBAI V. ASST CIT (LTU), MUMBAI

ITA 7073/MUM/2012

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 83887 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 9 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-09-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: K
• Next Hearing Date: 06-08-2014
• Assessment Year: 2008-2009
• Appeal Filed On: 26-11-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: K C P PATTNAIK
• Assessee Lawyers: R R VORA; HEMEN CHANDURIYA
• Keywords: Depreciation; Transfer pricing; International transaction; Retrospective amendment; Additional evidence; Wholly owned subsidiary; Capital expenditure
• Section: 143(3); 14A; 115JB; 92

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL K , BENCH MUMBAI , BEFORE SHRI R.C.SHARMA , A M & SHRI VIJAY PAL RAO , J M ITA NO. 7073 / MUM/20 1 2 ( ASSESSMENT YEAR : 200 8 - 09 ) M/S EVEREST KANTO CYLINDER LTD., 204, RAHEJA CENTRE, FREE PRESS JOURNAL MARG, NARIMAN POINT, MUMBAI - 400 021 VS. ACIT (LTU), MUMBAI PAN/G IR NO. : A A A C E 0836 F ( APPELLANT ) .. ( RESPONDENT ) /ASSESSEE BY : MR. R.R.VORA & MR. HEMEN CHANDURIYA /REVENUE BY : MR. K.C.P. PATTNAIK DATE OF HEARING : 6 TH AUGUST , 201 4 DATE OF PRONOUNCEMENT : 25 TH SEPT , 2014 O R D E R PER R.C.SHARMA (A.M) : TH IS IS AN APPEAL FILED BY THE ASSESSEE AGAINST THE ORDER PASSED U/S. 143(3) R.W.S. 144C(13) OF THE IT ACT TO GIVE EFFECT TO THE DIRECTION ISSUED BY THE DISPUTE RESOLUTION PANEL (IN SHORT THE DRP) FOR THE ASSESSMENT YEAR 2008 - 09 , WHEREIN FOLLOWING GROUNDS HAVE BEEN TAKEN BY THE ASSESSEE : - PART I - CORPORATE TAX GROUNDS: DISALLOWANCE UNDER SECTION 14A OF THE ACT OF RS.17,33,15 7/ - ORIGINAL GROUND 1. ERRED IN DISALLOWING AN AMOUNT OF RS.17,33, 157 / - UNDER SECTION 14A OF THE ACT READ WITH RULE 8D OF THE INCOME - TAX RULE, 1962; SUPPLEMENTARY GROUND ITA NO. 7073 /201 2 2 1.1 ERRED IN MAKING AN ADDITION OF RS.17 ,33,157 J - TO BOOK PROFITS FOR THE PURPOSE OF SECTION 115JB ON ACCOUNT OF DISALLOWANCE UNDER SECTION 14A OF THE ACT; PART II - TRANSFER PRICING GROUNDS : ADDITION OF RS.2,47,07,596/ - ON ACCOUNT OF ADJUSTMENT IN RESPECT OF GUARANTEE COMMISSION FOR GUARANTEE PROVIDED TO BANKS IN RESPECT O F LOANS TAKEN BY ASSOCIATED ENTERPRISES ('AES') ORIGINAL GROUND 2. ERRED IN MAKING ADJUSTMENT OF RS.2,47,07,596J - ON ACCOUNT OF GUARANTEE COMMISSION; SUPPLEMENTARY GROUND 2.1 WITHOUT PREJUDICE TO ABOVE, WHILE COMPUTING ADJUSTMENT ON ACCOUNT OF ARM' S LENGTH PRICE OF GUARANTEE COMMISSION, ERRED IN APPLYING THE RATE OF GUARANTEE COMMISSION TO THE ENTIRE AMOUNT OF GUARANTEE OF USD 2.34 MILLION, INSTEAD OF RESTRICTING THE ADJUSTMENT ONLY TO THE ACTUAL AMOUNT OF LOAN AVAILED BY THE AE FROM THE OVERSEAS BA NK DURING THE YEAR; ADDITION OF RS.63,44,9 0 1/ - ON ACCOUNT OF ADJUSTMENT IN RESPECT OF INTEREST ON LOAN GIVEN TO AES : ORIGINAL GROUND 3. ERRED IN MAKING ADJUSTMENT OFRS.63,44,901/ - ON ACCOUNT OF INTEREST ON LOAN GIVEN TO AE; SUPPLEMENTARY GROUND 3.1 WITHOUT PREJUDICE TO ABOVE, ERRED IN NOT PROVIDING THE BENEFIT OF THE VARIATION OF 5 PERCENT FROM THE ARITHMETIC MEAN AS PROVIDED IN THE PROVISO TO SECTION 92C(2) OF THE ACT, WHILE MAKING THE ADJUSTMENT TO THE VALUE OF INTERNATIONAL TRANSACTIONS OF THE APPELLANT; THE APPELLANT CRAVES, TO CONSIDER EACH OF THE ABOVE GROUNDS OF APPEAL WITHOUT PREJUDICE TO EACH OTHER AND CRAVES TO LEAVE OR ADD, ALTER, DELETE OR MODIFY ALL OR ANY OF THE ABOVE GROUNDS OF APPEAL. 2 . RIVAL CONTENTIONS HAVE BEEN HEARD AND FO UND FROM RECORD THAT THE ASSESSEE HAD EARNED DIVIDEND INCOME OF RS 8,57,149/ - WHICH WAS CLAIMED AS EXEMPT FROM TAX UNDER SECTION 10(33). THE TOTAL INVESTMENT IN SHARES AND SECURITIES AS ON 31/3/2008 WAS RS 102.62 CR WHICH REPRESENTED 13.81% OF THE TOTAL AS SETS. THE ASSESSEE HAD SOLD AND PURCHASED SHARES AND SECURITIES DURING THE YEAR. THE ASSESSING OFFICER COMPUTED DISALLOWANCE UNDER RULE 8D OF RS 17,33,157/ - . THE AO FOUND ITA NO. 7073 /201 2 3 THAT ASSESSEE HAS INCURRED THE INTEREST EXPENDITURE OF RS. 4.83 CRORES FOR WHICH ASSES SEE HAS SUBMITTED WORKING OF DISALLOWANCE U/S. 14A , WHICH WAS DECLINED BY AO AND HE COMPUTED DISALLOWANCE AT RS. 17,33,157/ - BY APPLYING RULE 8D(II). ON REFERENCE TO DRP, THE DRP UPHELD ACTION OF THE AO AND SUSTAINED THE DISALLOWANCE U/S. 14A. 3 . IT WAS CON TENDED BY THE LEARNED AR THAT WHILE COMPUTING DISALLOWANCE U/S. 14A, THE INVESTMENT OF THE ASSESSEE COMPANY ARE REQUIRED TO BE SEGREGATED IN FOUR PARTS I.E. I) INVESTMENTS UPTO AY 2006 - 07 II) INVESTMENTS IN AY 2007 - 08; AND III) INVESTMENT IN AY 2008 - 09. O UR ATTENTION WAS ALSO INVITED YEAR - WISE FUND FLOW STATEMENT WHICH WAS AS UNDER : - (RS. IN CRORES) PARTICULARS UPTO 31 - MAR - 07 31 - MAR - 08 AY 2006 - 07 AY 2007 - 08 AY 2008 - 09 PROFIT BEFORE DEPRECIATION & TAX 140.11 75.03 57.86 SOURCES OF FUNDS EQUI TY SHARE CAPITAL (A) 17.63 19.52 20.23 RESERVES AND SURPLUS (B) 133.30 256.01 375.51 NET WORTH(C=A+B) 150.93 275.53 395.74 TOTAL BORROWING (D) 39.50 26.57 187.51 DEFERRED TAX LIABILITY (E) 1.36 0.05 4.51 TOTAL (C+D+E) 191.78 302.15 587.76 APPLICATION OF FUNDS NET FIXED ASSETS (INCLUDING CAPITAL WIP) 93.93 91.25 149.43 NET WORKING CAPITAL 84.63 156.60 335.72 INVESTMENTS (REFER BELOW TABLE) 13.22 54.30 102.62 TOTAL 191.78 302.15 587.76 ITA NO. 7073 /201 2 4 BIFURCATION OF INVESTMENTS (RS. IN CRO RES) INVESTMENT IN SUBSIDIARIES UPTO AY 2006 - 07 AY 2007 - 08 AY 2008 - 09 EKC INTERNATIONAL (TIANJIN) LTD. (CHINA) 19.76 69.25 (NET ADDITION RS.49.49 CR EKC INTERNATIONAL FZE (DUBAI) 21.17 21.17 INVESTMENT IN ASSOCIATES EVEREST KANTO INVESTMENT &FINANCE LTD 0.09 0.09 0.09 EVEREST INDUSTRIAL GASES PRIVATE LTD. 0.00 0.01 0.00 TOTAL (A) 0.09 41.03 90.52 OTHER INVESTMENTS INVESTMENTS IN IMMOVABLE PROPERTIES 0.00 0.00 0.00 GPT STEEL INDUSTRIES PVT. LTD 2.00 2.00 2.00 SOLAR EXPLOSIVES LIMITE D 0.45 0.00 0.00 SHIVALIK GLOBAL LTD. 0.30 0.00 0.00 INVESTMENT IN MUTUAL FUNDS FIXED MATURITY PLAN/GROWTH ORIENTED SCHEMES 0.00 10.00 10.00 OTHER MUTUAL FUNDS/DIVIDEND ORIENTED SCHEMES 10.37 1.27 0.10 TOTAL 10.37 1.27 10.10 TOTAL(B) 13.12 1 3.27 12.10 GRAND TOTAL (A+B) 13.22 54.30 102.62 LEARNED AR ALSO INVITED OUR ATTENTION TO THE INVESTMENT MADE IN UTI FIXED MATURITY/GROWTH PLAN AMOUNTING TO RS.10 CRORES AND CONTENDED THAT IF IT IS EXCLUDED FROM OPENING AND CLOSING VALUE OF INVESTMENT, D ISALLOWANCE U NDER RULE 8D WOULD WORK OUT TO BE RS. 1.39 LAKHS ONLY . ACCORDINGLY, IT WAS PLEADED THAT EVEN IF ANY DISALLOWANCE IS TO BE MADE U/S.14A, THE SAME SHOULD BE RESTRICTED TO RS. 1.39 LAKHS. 4 . WE HAVE CONSIDERED RIVAL CONTENTIONS AND FOUND THAT DIS ALLOWANCE UNDER RULE 8D HAS BEEN WORKED OUT BY THE AO ON THE TOTAL INVESTMENT , WHICH INCLUDED I NVESTMENT MADE IN MUTUAL FUNDS WITH GROWTH SCHEME . SUCH MUTUAL FUND INVESTMENT IS REQUIRED TO BE EXCLUDED WHILE CALCULATING DISALLOWANCE UNDER RULE 8D, SINCE IT IS NOT GENERATING ANY TAX FREE ITA NO. 7073 /201 2 5 INCOME. THE ASSESSEE HAS ALSO FILED COPY OF THE SCHEME OF UTI FIXED MATURITY PLAN BEFORE US , ACCORDING TO WHICH IT IS A GROWTH ORIENTED FUND AND NOT ELIGIBLE FOR DIVIDEND. IF WE EXCLUDE THE AMOUNT INVESTED BY THE ASSESSEE IN THE GROWTH PLAN, DISALLOWANCE UNDER RULE 8D @0.5% WORKS OUT TO BE RS. 1.39 LAKHS. HOWEVER, COPY OF SCHEME OF UTI FIXED MATURITY PLAN WAS FIRST TIME FILED BEFORE TRIBUNAL AS AN ADDITIONAL EVIDENCE ALONG WITH APPLICATION FOR ADMISSION OF ADDITIONAL EVIDENCE DATED 27 - 2 - 2014. WE ACCEPT THE ADDITIONAL EVIDENCE AND MATTER IS RESTORED BACK TO THE FILE OF AO FOR DECIDING AFRESH THE QUANTUM OF DISALLOWANCE KEEPING IN VIEW OUR ABOVE OBSERVATIONS. 5 . THE AO HAS ALSO MADE ADDITION OF RS. 17,33,157/ - TO BOOK PROFIT UN DER SECTION 115JB ON ACCOUNT OF DISALLOWANCE UNDER SECTION 14A. 5.1 THE CONTENTION OF THE LEARNED AR WAS THAT THE ADJUSTMENT CANNOT BE MADE WHILE COMPUTING BOOK PROFIT UNDER SECTION 115JB OF THE ACT FOR THE ITEMS WHICH ARE NOT MENTIONED SPECIFICALLY IN TH E EXPLANATION TO SECTION 115JB AND FOR THIS, RELIANCE WAS PLACED IN THE DECISION OF THE HON BLE SUPREME COURT ON THE CASE OF APPOLLO TYRES LTD., 255 ITR 273 . 5.2 ON THE OTHER HAND, LEARNED DR RELIED ON THE ORDER OF THE LOWER AUTHORITIES. 5.3 WE HAVE CO NSIDERED RIVAL CONTENTIONS. THE AO HAS COMPUTED BOOK PROFIT BY ADDING THE AMOUNT OF EXPENSE DISALLOWED U/S. 14A. AS PER OUR CONSIDERED VIEW, NO ADDITION U/S. 115JB IS WARRANTED FOR AMOUNT OF ITA NO. 7073 /201 2 6 DIS A LL OW ANCE U/S .14A OF THE IT ACT. OUR VIEW IS SUPPORTED BY FOLLOW ING DECISIONS : - I) CADILA HEALTHCARE LTD (ITA NO. 3140/AHD/2010) DATED 25 MAY 2012 (AHMEDABAD); II) RELIANCE INDUSTRIAL INFRASTRUCTURE LTD (ITA NO. 69 & 70/MUM/2009) DATED 5 APRIL 2013 (MUMBAI); III) ESSAR TELEHOLDINGS LTD (ITA NO. 3B50/MUM/2010) DATED 29 JULY 2011 (MUMBAI); IV) J.K. PAPER LTD (ITA NO. 4027 & 40BO/AHD/200B) & (ITA NO. 979/AHD/2006) (AHMEDABAD) ; V) NATIONAL COMMODITY DERIVATIVES EXCHANGE LTD (ITA NO. 2923/MUM/2010) DATED 26 AUGUST 2011 (MUMBAI); AND VI) QUIPPO TELECOM INFRASTRUCTURE LTD (ITA NO. 4931/DE1/2010) DATED 18 FEBRUARY 2011 (DELHI). RESPECTFULLY FOLLOWING THE PROPOSITIONS LAID DOWN IN THE AFORESAID DECISION, WE DIRECT THE AO TO EXCLUDE THE AMOUNT OF DISALLOWANCE OF RS .17,33,157/ - MADE U/S. 14A, WHILE COMPUTING THE BOOK PROFIT U/S. 115JB. 6 . THE NEXT GRIEVANCE OF THE ASSESSEE RELATES TO ADDITION MADE IN RESPECT OF CORPORATE GUARANTEE AMOUNTING TO RS. 2,47,07,596/ - 6.1 RIVAL CONTENTIONS HAVE BEEN HEARD. THE ASSESSEE PROVIDED CORPORATE GUARANTEES TO ITS OWNED SUBSIDIARIES NAMELY , EKC INTERNATIONAL FZE (EKC DUBAI) AND EKC INDUSTRIES (TIANJIN) LIMITED (,EKC CHINA) AMOUNTING USD 23 MILLION AND USD 4 MILLION RESPECTIVELY. THE SAID SUBSIDIARIES ARE SET- UP FOR EXPANDING THE BUSINESS OF THE ASSESSEE OF MANUFACTURE OF CYLINDERS IN DUBAI & CHINA REGION WHICH ARE HUGE MARKETS FOR THE ASSESSEE . FOR THIS PURPOSE ASSESSEE APPROACHED ICICI BANK, BAHRAIN BRANCH AND THE SAID BANK AGREED TO PROVIDE TERM LOANS FOR ITA NO. 7073 /201 2 7 WORKING CAPITAL AND CAPITAL EXPENDITURE TO THE SUBSIDIARY COMPANY. FOR THIS PURPOSE A SSESSEE COMPANY PROVIDED CORPORATE GUARANTEE TO ICICI BANK BY WAY OF DEEDS OF GUARANTEES. THE ASSESSEE COMPANY CHARGED A GUARANTEE COMMISSION OF RS 44,00,799/ - @ 0.5% P.A FROM EKC DUBAI FOR SUCH CORPORATE GUARANTEE . THIS WAS ON THE BASIS OF INTERNAL CUP AV AILABLE TO THE ASSESSEE. IT WAS EXPLAINED THAT ASSESSEE HAD AN INDEPENDENT SANCTION 'LETTER OF CREDIT ARRANGEMENT' BETWEEN ICICI BANK INDIA IN RESPECT OF INLAND AND FOREIGN LC, WHERE A GUARANTEE COMMISSION OF 0.6% P.A WAS TO BE PAID BY THE ASSESSEE COMPAN Y TO ICICI BANK INDIA FOR THE BANK GUARANTEE PROVIDED. THE DIFFERENCE OF 0.10% WAS TOWARDS STRATEGIC BUSINESS INTEREST OF THE ASSESSEE COMPANY IN AE AND THE FACT THAT 0.5% WAS FAIR RATE, AS PER THE PREVAILING MARKET RATE. THE DIAGRAMMATIC REPRESENTATION OF THE TRANSACTION IS AS UNDER: IN THE TRANSFER PRICING STUDY AND FORM NO 3EB, THE APPELLANT COMPANY HAS CLASSIFIED THE SAID TRANSACTIONS AS INTERNATIONAL TRANSACTIONS AND BENCHMARKED THE SAME APPLYING CUP METHOD. IN THE ORDER PASSED UNDER SECTION 92CA(3) OF THE ACT, THE TRANSFER PRICING OFFICER ('TPO') HELD THAT THE APPELLANT COMPANY OUGHT TO HAVE CHARGED A COST OF GUARANTEE OF 3% IN AN ARM'S LENGTH SITUATION BY DRAWING COMPARISONS OF THE CORPORATE GUARANTEE COMMISSION RATE CHARGED BY HSBC LTD., ALLAHABAD BANK AND THE RATE CHARGED BY RABO INDIA FINANCE LTD. FURTHER, HE HAS OBSERVED THAT THE EXIM BANK OF USA HAS PROVIDED A GUARANTEE TO BOEING CO OF USA AGAINST HIRE PURCHASE AGREEMENT FOR PURCHASE OF AIRCRAFTS BY JET AIRWAYS INDIA AND HAS CHARGED A COMMISSION OF 3% FROM JET AIRWAYS INDIA LTD . 6.2 IN VIEW OF THE ABOVE, THE TPO ARRIVED AT A RATE OF 3% AND PROPOSED AN ADDITION OF RS.2,47,07,596/ - . THE SAME WAS AFFIRMED BY THE DRP , WHICH HAS BEEN CONTESTED BY THE ASSESSEE BEFORE US . THE CONTENTION OF THE A.R. WA S THAT T HE TRANSACTION OF GIVING CORPORATE GUARANTEE TO BANK ON BEHALF OF AE IS NOT AN INTERNATIONAL TRANSACTION AND FOR THIS PURPOSE ITA NO. 7073 /201 2 8 RELIANCE WAS PLACED ON THE RECENT DECISION OF HON'BLE DELHI TRIBUNAL IN CASE OF BHARTI AIRTEL LIMITED (ITA NO.5816/DEI/201 2) DATED 11 MARCH 2014 . RELIANCE WAS ALSO PLACED BY THE LEARNED AR ON THE DECISION OF CHENNAI TRIBUNAL IN CASE OF REDINGTON (INDIA) LIMITED (ITA NOS 513 & 619/MDS/2014) DATED 7 JULY 2014 , WHEREIN THE TRIBUNAL DELETED THE ADDITION MADE BY THE TPO OF GUARANT EE COMMISSION . 6.3 AS AN ALTERNATE, CONTENTION OF LEARNED AR WAS THAT THE TRANSACTION OF GIVING CORPORATE GUARANTEE TO BANK ON BEHALF OF AE, IS NOT AN INTERNATIONAL TRANSACTION, THE ASSESSEE COMPANY SUBMITS THAT, EVEN IF CORPORATE GUARANTEE GIVEN TO THE E KC DUBAI IS REGARDED AS AN INTERNATIONAL TRANSACTION, THE ASSESSEE HAS RECOVERED FROM THE AE, THE COMPARABLE COST OF GUARANTEE COMMISSION CHARGED BY ITS BANK IN INDIA. HENCE THE TRANSACTION IS AT ARMS LENGTH AND REQUIRES NO FURTHER ADJUSTMENT. ON THE FACTS OF THE CASE, ASSESSEE HAD PAID 0.6% AS GUARANTEE COMMISSION TO ICICI BANK INDIA AND HAS CHARGED @ 0.5% TO ITS AE. IN CONNECTION WITH CORPORATE GUARANTEE GIVEN TO EKC CHINA, IT IS SUBMITTED THAT THE NON - RECOVERY OF ANY GUARANTEE COMMISSION WAS ON ACCOUNT O F RESTRICTION UNDER CHINESE REGULATIONS AND ACCORDINGLY NON - RECOVERY OF GUARANTEE COMMISSION IS TO BE CONSIDERED AT ARM'S LENGTH. FURTHER, BY GIVING GUARANTEE, THE ASSESSEE PROTECTS ITS STRATEGIC, BUSINESS AND ECONOMIC INTEREST IN THE SUBSIDIARY AND ENSURE GOODWILL AND REPUTATION OF THE GROUP. 7 . ON THE OTHER HAND, LEARNED DR RELIED ON THE ORDER OF LOWER AUTHORITIES. ITA NO. 7073 /201 2 9 8 . WE HAVE CONSIDERED RIVAL CONTENTIONS, CAREFULLY GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW AND FOUND THAT ASSESSEE COMPANY HAD PROVI DED BANK GUARANTEE IN RESPECT OF ADVANCES GIVEN BY HSBC LTD. T O ITS AE. FOR THIS PURPOSE ASSESSEE COMPANY HAS CHARGED GUARANTEE COMMISSION OF RS. 44,00,799/ - @ .05% P.A. FROM EKC DUBAI FOR SUCH GUARANTEE. SIMILARLY ASSESSEE WAS HAVING SANCTIONED LETTER OF C REDIT ARRANGEMENT BETWEEN ICICI BANK INDIA LTD. IN RESPECT OF INLAND AND FOREIGN LC, WHERE A GUARANTEE COMMISSION OF 0.6% P.A WAS TO BE PAID BY THE ASSESSEE COMPANY TO ICICI BANK FOR THE BANK GUARANTEE PROVIDED. IT IS CLEAR FROM THE RECORD THAT IN RESPECT OF TRANSACTION OF GUARANTEE SO PROVIDED ASSESSEE HAS PAID CHARGES TO THE BANK AND ALSO RECOVERED CERTAIN AMOUNT FROM ITS AE. THE TRIBUNALS ORDER RELIED ON THE BY THE LEARNED AR IN CASE OF BHARTI AIRTEL LTD. , THE ORDER OF DELHI TRIBUNAL DATED 11 - 3 - 2014 EXC LUDED TRANSACTION OF GIVING SUCH CORPORATE GUARANTEE OUTSIDE THE PURVIEW OF INTERNATIONAL TRANSACTION ON THE PLEA THAT TRANSACTION OF SUCH A NATURE WAS NOT HAVING ANY BEARING ON THE PROFITS, INCOME OR LOSS OR ASSETS OF THE ENTERPRISE. IT WAS ALSO OBSERVED BY THE COORDINATE BENCH THAT SUCH TRANSACTION SHOULD HAVE BEEN AN IMPACT ON THE PROFITS, INCOME, LOSSES OR ASSETS ON THE REAL BASIS, EVEN IF IN THE PRESENT OR IN FUTURE, AND NOT O N CONTINGENT OR HYPOTHETICAL BASIS AND, THERE HAS TO BE SOME MATERIAL ON RECO RD TO INDICATE, NOT TO ESTABLISH IT TO HILT, THAT AN INTRA AE INTERNATIONAL TRANSACTION HAS SOME IMPACT ON PROFITS, INCOME, LOSSES OR ASSETS. THE PRECISE OBSERVATION OF THE BENCH WAS AS UNDER : - ITA NO. 7073 /201 2 10 33. IN ANY EVENT, THE ONUS IS ON THE REVENUE AUTHORITIES TO DEMONSTRATE THAT THE TRANSACTION IS OF SUCH A NATURE AS TO HAVE BEARING ON PROFITS, INCOME, LOSSES OR ASSETS OF THE ENTERPRISE, AND THERE WAS NOT EVEN AN EFFORT TO DISCHARGE THIS ONUS. SUCH AN IMPACT ON PROFITS, INCOME, LOSSES OR ASSETS HAS TO BE ON REAL BASIS, EVEN IF IN PRESENT OR IN FUTURE, AND NOT ON CONTINGENT OR HYPOTHETICAL BASIS, AND THERE HAS TO BE SOME MATERIAL ON RECORD TO INDICATE, EVEN IF NOT TO ESTABLISH IT TO HILT, THAT AN INTRA AE INTERNATIONAL TRANSACTION HAS SOME IMPACT ON PROFITS, INCOM E, LOSSES OR ASSETS. CLEARLY, THESE CONDITIONS ARE NOT SATISFIED ON THE FACTS OF THIS CASE. 34. THERE IS ONE MORE ASPECT OF THE MATTER. THE EXPLANATION TO SECTION 92 B HAS BEEN BROUGHT ON THE STATUTE BY THE FINANCE ACT 2012. IF ONE IS TO PROCEED ON THE B ASIS THAT THE PROVISIONS OF EXPLANATION TO SECTION 92 B ENLARGE THE SCOPE OF SECTION 92 B ITSELF, EVEN AS IT IS MODESTLY DESCRIBED AS 'CLARIFICATORY' IN NATURE, IT IS AN ISSUE TO BE EXAMINED WHETHER AN ENHANCEMENT OF SCOPE OF THIS ANTI AVOIDANCE PROVISION CAN BE IMPLEMENTED WITH RETROSPECTIVE EFFECT. UNDOUBTEDLY, THE SCOPE OF A CHARGING PROVISION CAN BE ENLARGED WITH RETROSPECTIVE EFFECT, BUT AN ANTI - AVOIDANCE MEASURE, THAT THE TRANSFER PRICING LEGISLATION INHERENTLY IS, IS NOT PRIMARILY A SOURCE OF REVENUE CIS IT MAINLY SEEKS COMPLIANT BEHAVIOUR FROM THE ASSESSEE VIS - A - VIS CERTAIN NORMS, AND THESE NORMS CANNOT BE GIVEN EFFECT FROM A DATE EARLIER THAN THE DATE NORMS ARE BEING INTRODUCED. HOWEVER, AS WE HAVE DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE ON MERI TS AND EVEN AFTER TAKING INTO ACCOUNT THE AMENDMENTS BROUGHT ABOUT BY FINANCE ACT 2012, WE NEED NOT DEAL WITH THIS ASPECT OF THE MATTER IN GREATER DETAIL. 35. WHEN IT WAS PUT TO THE LEARNED DEPARTMENTAL REPRESENTATIVE THAT THERE COULD BE A VIEW THAT ISSU ANCE OF GUARANTEES COULD BE OUTSIDE THE AMBIT OF SCOPE OF 'INTERNATIONAL TRANSACTION' ITSELF, HE SUB MITTED THAT THERE ARE LARGE NUM BER OF DECISIONS IN INDIA AND ABROAD, NOTABLY IN CANADA, DEALING WITH THE DETERMINATION OF ARM'S LENGTH PRICE OF GUARANTEES. HIS ARGUMENT SEEMED TO BE THAT EVEN SUCH A VIEW IS TO BE UPHELD, ENTIRE TRANSFER PRICING JURISPRUDENCE WILL BE TURNED UPSIDE DOWN. THERE DOES NOT SEEM TO BE ANY LEGALLY SUSTAINABLE MERITS IN THIS ARGUMENT EITHER. AS FOR THE DECISIONS DEALING WITH QUANTUM O F ALP ADJUSTMENTS IN THE GUARANTEE CHARGES, IN NONE OF THESE CASES THE SCOPE OF 'INTERNATIONAL TRANSACTIONS' UNDER SECTION 928(1) HAS COME UP FOR EXAMINATION. A JUDICIAL PRECEDENT CANNOT BE AN AUTHORITY FOR DEALING WITH A QUESTION WHICH HAS NOT EVEN COME U P FOR CONSIDERATION IN THAT CASE. IT IS ONLY ELEMENTARY THAT, AS WAS ALSO HELD BY HORI'BLE BOMBAY HIGH COURT IN THE CASE OF CIT VS SUDHIR JAYANTILAL MULJI (214 ITR 154), THAT A JUDICIAL PRECEDENT IS AN AUTHO RITY FOR WHAT IT ACTUALLY DECIDES AND NOT WHAT MA Y WHAT COME TO FOLLOW FROM SOME OBSERVATIONS MADE THEREIN. AS OBSERVED BY HO N'BLE SUPREME COURT IN THE CASE OF CIT VS. SUN ENGINEERING WORKS P. LTD. (198 ITR 297) A ' JUDGEMENT MUST BE READ AS A WHOLE AND THE OBSERVATIONS FROM THE JUDGEMENT HAVE TO BE CON SIDERED IN THE LIGHT OF THE QUESTION WHICH WERE BEFOR E COURT' AND THAT 'A DECISION.. TAKES ITS COLOUR FROM THE QUESTIONS ITA NO. 7073 /201 2 11 INVOLVED IN THE CASE IN WHICH IT IS RENDERED AND, WHILE APPLYING THE DECISION TO A LATER CASE, THE COURTS MUST CAREFULLY TRY TO A SCERTA IN THE TRUE PRINCIPLE LAID DOWN BY THE DECISION AND NOT TO PICK OUT WORDS OR SENTENCES FROM THE JUDGEMENT, DIVORCED FROM THE CONTEXT OF THE QUESTIONS UNDER CONSIDERATION BY THIS COURT, TO SUPPORT THEIR REASONING.' IT WOULD, THEREFORE, BE WHOLLY INAPPROPRIA TE TO USE THOSE JUDICIAL PRECEDENTS, DEALING WITH ALP OF GUARANTEE COMMISSION, TO DECIDE A QUESTION WHICH WAS NOT EVEN BEFORE THOSE JUDICIAL FORUMS. COMING TO THE FOREIGN DECISIONS ON THE ISSUE OF AL P ADJUSTMENTS IN GUARANTEE COMMISSION, WE HAVE NOTED THAT IN THE CASE OF GE CAPITAL CANADA INC VS THE QUEEN (2009 TCC 563), THE TAX COURT OF CANADA HAS INDEED DEALT WITH ALP DETERMINATION OF 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 LEGISLATION. UNLIKE ELABORATE WORDINGS OF SECTION 92 B OF THE INDIAN INCOME TAX ACT, 1961 DEFINING 'INTERNATIONAL TRANSACTION', SECTION 247 OF THE CANADIAN INCOME TAX ACT ONLY GIVES AN INCLUSIVE DEFINITION WHICH DOES NOT EVEN REALL Y ATTEMPT TO DEFINE THE EXPRESSION 'TRANSACTION'. IT IS NOBODY'S CASE THAT THE RELEVANT LEGAL PROVISIONS ARE IN PARI MATERIA. WE NEED NOT, THEREFORE, DEAL WITH THOSE FOREIGN JUDICIAL PRECEDENTS. SUFFICE TO SAY THAT WE HAVE REACHED OUR CONCLUSIONS ON THE BA SIS OF THE LEGAL PROVISIONS UNDER SECTION 92 B AND NO JUDICIAL PRECEDENT, CONTRARY TO OUR UNDERSTANDING OF THESE LEGAL PROVISIONS, HAS BEEN CITED BEFORE US. THERE I S A DECISION OF THE CO - ORDINATE BENCH IN THE CASE OF MAHINDRA & MAHINDRA (SUPRA), REFERRED T O IN THE DRP ORDER, BUT THAT DECISION DOES NOT DEAL WITH THE SCOPE OF AMENDED SECTION 92 B AND LEAVES THE ISSUE OPEN BY STATING THAT POST INSERTION OF EXPLANATION TO SECTION 92 B, THE MATTER WILL HAVE TO BE EXAMINED IN THE LIGHT OF THE AMENDED LAW. WE HAVE HELD THAT EVEN AFTER THE AMENDMENT IN SECTION 92 B, AMENDING EXPLANATION TO SECTION 92 B, A CORPORATE GUARANTEE ISSUED FOR THE BENEFIT OF THE AES, WHICH DOES NOT INVOLVE ANY COSTS TO THE ASSESSEE, DOES NOT HAVE ANY BEARING ON PROFITS, INCOME, LOSSES OR AS SETS OF THE ENTERPRISE AND, THEREFORE, IT IS OUTSIDE THE AMBIT OF 'INTERNATIONAL TRANSACTION' TO WHICH ALP ADJUSTMENT CAN BE MADE. AS WE HAVE DECIDED THE MATTER IN FAVOUR OF THE ASSESSEE ON THIS SHORT ISSUE, WE SEE NO NEED TO ADDRESS OURSELVES TO OTHER LEG AL ISSUES RAISED BY THE ASSESSEE AND THE JUDICIAL PRECEDENTS CITED BEFORE US. 36. FOR THE REASONS SET OUT ABOVE, AND AS WE HAVE HELD THAT THE ISSUANCE OF CORPORATE GUARANTEES IN QUESTION DID NOT CONSTITUTE 'INTERNATIONAL TRANSACTION' WITHIN MEANINGS THER EOF UNDER SECTION 92B, WE UPHOLD THE GRIEVANCE OF THE ASSESSEE AND DIRECT THE ASSESSING OFFICER TO DELETE THE IMPUGNED ALP ADJUSTMENT OF RS 33,10,161. THE ASSESSEE GETS THE RELIEF ACCORDINGLY. IT IS CLEAR THAT THE COORDINATE BENCH HAS EXCLUDED THE TRANSA CTION OF PROVIDING BANK GUARANTEE OUTSIDE THE PURVIEW OF INTERNATIONAL TRANSACTION ITA NO. 7073 /201 2 12 ON THE FINDING THAT SUCH TRANSACTION HAD NO EFFECT ON PROFITS, INCOME, LOSSES OR ASSETS OF THE ASSESSEE. HOWEVER, THE FACTS OF THE INSTANT CASE ARE CLEARLY DISTINGUISHABLE W HEREIN NOT ONLY THE ASSESSEE HAS INCURRED COST FOR PROVIDING BANK GUARANTEE BUT IT ALSO RECOVERED GUARANTEE COMMISSION FROM ITS AE. THUS, THE ASSESSEE HAD EFFECT ON ITS INCOME AND EXPENDITURE BOTH ON ENTERING INTO SUCH TRANSACTION OF PROVIDING BANK GUARANT EE. ACCORDINGLY, ASSESSEE WILL NOT GET HELP OF THE DECISION OF THE COORDINATE BENCH TO COME OUT OF THE PURVIEW OF INTERNATIONAL TRANSACTION. 9 . NOW, COMING TO THE MERIT OF THE ADDITION SO MADE, WE FOUND THAT THE ISSUE HAS ALREADY BEEN DECIDED BY THE TRIB UNAL IN IMMEDIATELY PRECEDING YEAR IN ASSESSEES OWN CASE, WHEREIN CHARGING OF 0 .5% GUARANTEE COMMISSION FROM AE WAS HELD TO BE QUITE NEAR TO 0.6%, WHERE ASSESSEE HAS PAID INDEPENDENTLY TO THE ICICI BANK AND CHARGING OF GUARANTEE COMMISSION @0.5% FROM ITS AE WAS HELD TO BE AT ARMS LENGTH. THE PRECISE OBSERVATION OF THE BENCH FOR THE ASSESSMENT YEAR 2007 - 08 ARE AS UNDER : - 'THE UNIVERSAL APPLICATION OF RATE OF 3 PERCENT 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 THE BANK AND THE CLIENT, ECONOMIC AND BUSINESS INTEREST ARE SOME OF THE MAJOR FACTORS WHICH HAS TO BE TAKEN INTO CONSIDERATION. ' .IN THIS CASE, THE ASSESSEE HAS ITSELF CHARGED 0.5% GUARANTEE COMMISSION FROM ITS AE, THEREFORE, IT IS NOT A CASE OF NOT CHARGING OF ANY KIND OF COMMISSION FROM ITS AE. THE ONLY POINT WHICH HAS TO BE SEEN IN THIS CASE IS WHETHER THE SAME IS AT ALP OR NOT. WE HAVE ALREADY COME TO A CO NCLUSION IN THE FOREGOING PARAS THAT THE RATE OF 3% BY TAKING EXTERNAL COMPARABLE BY THE TPO, CANNOT BE SUSTAINED IN FACTS OF THE PRESENT CASE. WE ALSO FIND THAT IN AN INDEPENDENT TRANSACTION, THE ASSESSEE HAS PAID 0.6% GUARANTEE COMMISSION TO IGIGI BANK I NDIA FOR ITS CREDIT ARRANGEMENT. THIS COULD BE A VERY GOOD PARAMETER AND A COMPARABLE FOR TAKING IT AS INTERNAL GUP AND ITA NO. 7073 /201 2 13 COMPARING THE SAME WITH THE TRANSACTION WITH THE AE. THE CHARGING OF 0.5% GUARANTEE COMMISSION FROM THE AE IS QUITE NEAR TO 0.6%, WHERE THE ASSESSEE HAS PAID INDEPENDENTLY TO THE IGIGI 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 IGIGI BANK, BAHRAIN BRANCH H AS GIVEN LOAN TO AE (I.E. SUBSIDIARY COMPANY) IS AT 5.5%, WHEREAS THE ASSESSEE IS PAYING INTEREST RATE OF MORE THAN 10% ON ITS LOAN TAKEN WITH IGIGI BANK IN INDIA. THUS, SUCH A MINOR DIFFERENCE CAN BE ON ACCOUNT OF DIFFERENTIAL RATE OF INTEREST. THUS, ON T HESE FACTS, WE DO NOT FIND ANY REASON TO UPHOLD ANY KIND OF UPWARD ADJUSTMENT IN ALP IN RELATION TO CHARGING OF GUARANTEE COMMISSION. AS THE FACTS AND CIRCUMSTANCES OF THE CASE DURING THE YEAR UNDER CONSIDERATION ARE PARI MATERIA , RESPECTFULLY FOLLOWING THE DECISION OF THE TRIBUNAL IN ASSESSEES OWN CASE, WE DIRECT THE AO TO COMPUTE ARMS LENGTH PRICE OF TRANSACTION AS PER THE DIRECTION GIVEN BY THE TRIBUNAL IN THE ABOVE ORDER FOR A.Y. 2007 - 08. 10 . THE NEXT GRIEVANCE OF THE ASSESSEE RELATES TO ADDITION O F RS. 63,44,901/ - ON ACCOUNT OF ADJUSTMENT IN RESPECT OF INTEREST ON LOAN ADVANCED TO EKC DUBAI AND EKC CHINA. 10.1 RIVAL CONTENTIONS HAVE BEEN HEARD, RECORD PERUSED AND FOUND THAT ASSESSEE COMPANY HAD PROVIDE D LOAN OF USD 10 MILLION TO EKC DUBAI AND USD 3 MILLION TO EKC CHINA FOR A PERIOD OF SIX MONTHS AND FURTHER RENEWABLE WITH MUTUAL CONSENT. THE ASSESSEE HAS CHARGED INTEREST @7% P.A. DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE HAS PAID INTEREST AT THE RATE OF 5.17% ON EURO LOAN AVAILED FROM CITIB ANK NA. ALSO, THE ASSESSEE HAD RAISED A SUM OF USD 35 MILLION BY ISSUE OF ZERO COUPON FOREIGN CURRENCY CONVERTIBLE BONDS (FCCB) ON 1 ST JULY, 2007, WHICH WERE DUE FOR REDEMPTION IN 2012. THE CONTENTION OF THE ASSESSEE BEFORE ITA NO. 7073 /201 2 14 THE LOWER AUTHORITIES WAS THAT F UNDS UTILIZED FOR SUCH LOAN WAS RAISED THROUGH ISSUE OF ZERO COUPON FOREIGN CURRENCY CONVERTIBLE BONDS WHICH WAS INTEREST FREE. THESE FCCBS WERE REDEEMABLE AT A PREMIUM IN 2012, SO THE ASSESSEE HAS AVAILED TERM LOAN AT CITIBANK AT 7% P.A. THE TPO HAS ASKED THE ASSESSEE TO JUSTIFY THE ARMS LENGTH NATURE OF INTEREST CHARGED ON ADVANCES GIVEN TO THE AES. HOWEVER, THE TPO MADE AN ADJUSTMENT ON ACCOUNT OF DIFFERENCE BETWEEN THE ALP DETERMINED BY THE TPO I.E. 14.39% AS AGAINST 7% CHARGED BY THE ASSESSEE. ON REFE RENCE TO THE DRP, THE DRP CONFIRMED THE ACTION OF THE TPO AND ASSESSEE IS IN FURTHER APPEAL BEFORE US. 10.2 IT WAS CONTENDED BY THE LEARNED AR THAT THE LOAN WAS GRANTED BY EKCL TO EKC DUB A I & EKC CHINA FROM THE PROCEEDS OF THE FCCBS. F UNDS RECEIVED UNDER FCCBS WERE INTEREST FREE FUNDS AVAILABLE WITH EKC. IN SPITE OF SUCH INTEREST FREE FUNDS AVAILABLE WITH EKCL, IT HAS CHARGED INTEREST AT RATE OF 7% FROM THE AES AND ACCORDINGLY THERE IS NO ADDITIONAL COST INCURRED BY EKCL ON SUCH FUNDS GIVEN TO AES. FURTHER , THE CONTENTION OF THE LEARNED AR WAS THAT FUNDS WERE PROVIDED BY EKCL FOR ITS OWN BENEFITS OF FINANCING ITS 100% SUBSIDIARY FOR GROWTH OF ITS BUSINESS IN DIFFERENT COUNTRIES AND THAT LOAN SO GRANTED TO EKCL WAS IN NATURE OF QUASI - EQUITY. OUR ATTENTION WA S INVITED TO THE LOAN GRANTED TO EKCL WHICH WAS CONVERTED INTO EQUITY DURING THE FINANCIAL YEAR 2011 - 12. ACCORDINGLY, IT WAS ARGUED THAT LOAN WAS IN THE NATURE OF EQUITY INVESTMENT, THE BENEFITS FROM SUCH INVESTMENT WERE EXPECTED TO ARISE TO EKCL IN FUTURE . FURTHER THE ARGUMENT OF THE LEARNED AR WAS THAT T HE LOAN HAS BEEN A VAILED IN ITA NO. 7073 /201 2 15 FOREIGN CURRENCY AND HAS BEEN PROVIDED TO THE SUBSIDIARIES IN FOREIGN CURRENCY. HENCE, EKCL THE LOAN SHOULD BE CONSIDERED TO BE AT ARM' S LENGTH AS NO RISK IS INVOLVED. 11 . WE HAD CONSIDERED RIVAL CONTENTIONS AND GONE THROUGH THE ORDERS OF LOWER AUTHORITIES. AS PER OUR CONSIDERED OPINION, APPROPRIATE INTERNATIONAL RATES SHOULD BE USED FOR THE PURPOSE OF THE COMPARABILITY ANALYSIS. FOR THIS PURPOSE, THE LONDON INTER BANK OFFER RA TE (LIBOR) IS AN INTERNATIONALLY RECOGNIZED RATE FOR BENCHMARKING LOANS DENOMINATED IN FOREIGN CURRENCY. FOR THIS PURPOSE, R ELIANCE MAY BE PLACED ON THE FOLLOWING DECISION OF THE COORDINATE BENCH : - I) GREAT EASTERN SHIPPING CO.LTD (ITA NO 397 /M/ 2012) DATE D 10 JANUARY 2014; II) MAHINDRA & MAHINDRA LIMITED (ITA NO 7999/ M / 2011) DATED 8 JUNE 2012; III) HINDUJA GLOBAL SOLUTIONS LIMITED (ITA NO 254 / M / 2013) DATED 5 JUNE 2013 IV) AURIONPRO SOLUTIONS LIMITED (ITA NO 7872 / M / 2011) DATED 12 APRIL 2013; V) AURO BINDO PHARMA LTD (ITA NO 1866 / HYD / 2012) DATED 29 NOVEMBER 2013 ; VI) COTTON NATURALS (I) PVT. LIMITED (ITA NO 5855 / DEL / 2012) DATED 8 FEBRUARY 2013; VII) SIVA INDUSTRIES AND HOLDINGS LTD. VS ACIT, IT APPEAL NO. 2148 (MDS.) OF 2010; VIII) BHARTI AIRTEL L TD (ITA NO 581 6/0EL/201Z) DATED 11 MARCH 2014 IX) INFOTECH ENTERPRISES LIMITED (ITA NO 115/HYD/2011) DATED 16 JANUARY 2014; X) KOHINOOR FOODS LTD (ITA NOS 3688 - 3691/0EL/2012 AND ITA NOS 3868 - 3869/0EL/2012) DATED 21 JULY 2014; AND XI) FOUR SOFT LTD VS. OCIT, IT APPEAL NO. 1495 OF 2011 (HYDERABAD TRIBUNAL) ITA NO. 7073 /201 2 16 12 . IN LIGHT OF THE ABOVE DECISIONS, THE R ATE TO BE USED FOR UNDERTAKING AN ADJUSTMENT SHOULD BE LLBOR AND NOT THE AVERAGE YIELD RATES CONSIDERED BY THE LEARNED TPO. THE LLBOR RATE FOR MARCH 2008 WAS 2.6798%. HOWEVER THE ASSESSEE HAS CHARGED 7% FROM ITS AE AS PER THE INTERNAL CUP AVAILABLE. THUS, THE ASSESSEE HAS CHARGED INTEREST TO EKC D UBAI AND EKC CHINA AT THE RATE HIGHER THAN EXISTING LLBOR RATES. ACCORDINGLY, THE SAID TRANSACTION OF PROVIDING LO AN TO EKC D UBAI AND EKC CHINA IS AT ARM'S LENGTH. ADDITIONS MADE BY THE AO ARE ACCORDINGLY SET ASIDE. 13 . IN THE RESULT, APPEAL FILED BY THE ASSESSEE IS ALLOWED IN PA RT , IN TERMS INDICATED HEREINABOVE. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 25/09/ 201 4 . 25/09/ 2014 SD/ - SD/ - ( ) ( VIJAY PAL RAO ) ( ) ( R.C .SHARMA ) / JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI; DATED 25/09 /2014 /PKM , PS COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. / THE CIT(A), MUMBAI. 4. / CIT 5. / DR, ITAT, MUMBAI 6. GUARD FILE. ITA NO. 7073 /201 2 17 / BY ORDER, (ASSTT. REGISTRAR) / ITAT, MUMBAI //TRUE COPY//