Indian Public School P Ltd., Coimbatore V. DCIT Corp Circle 1, Coimbatore

ITTPA 34/CHNY/2018

• Counselvise Citation: [2022] 104 COUNSELVISE.COM (IT) 3929 (ITAT-CHENNAI)
• Duration Of Justice: 3 year(s) 9 month(s) 18 day(s)
• Appeal Type: Income Tax (Transfer Pricing) Appeal
• Pronouncement Date: 14-06-2022
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: D
• Assessment Year: 2014-2015
• Appeal Filed On: 26-08-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Transfer pricing; International transaction
• Section: 92B; 14A

Judgement Text

आयकर अपील सं./IT (TP) A No.34/Chny/2018 िनधा रण वष /Assessment Year: 2014-15 M/s.Indian Public School Pvt. Ltd., No.70, Dr. Alagappa Chettiar Road, Tatabad, Coimbatore-641 012. v. The Dy. Commissioner- of Income Tax, Corporate Circle-1, Coimbatore. [PAN: AABCI 6331 A] (अपीलाथ /Appellant) ( यथ /Respondent) अपीलाथ क ओर से/ Appellant by : Mr.B. Ramakrishnan, CA यथ क ओर से /Respondent by : Dr.S.Palani Kumar, CIT सुनवाई क तारीख/Date of Hearing : 23.05.2022 घोषणा क तारीख /Date of Pronouncement : 15.06.2022 आदेश / O R D E R PER G. MANJUNATHA, ACCOUNTANT MEMBER: This appeal filed by the assessee is directed against the final assessment order passed by the Assessing Officer u/s.143(3) r.w.s.92CA r.w.s.144C(13) of the Act, dated 01.08.2018, in pursuant to directions of the Dispute Resolution Panel-2, Bangalore, dated 24.07.2018, issued u/s.143(3) r.w.s.92CA r.w.s.144C(1) of the Act, relevant to assessment year 2014-15. 2. The assessee has raised the following grounds of appeal: 1. The order passed by the learned Assessing Officer is against the law and facts of the case. आयकर अपीलीय अिधकरण, ’डी’ यायपीठ, चे ई। IN THE INCOME TAX APPELLATE TRIBUNAL ‘D’ BENCH: CHENNAI ी जी. मंजूनाथा, माननीय लेखा सद एवं ी अिनके श बनज , माननीय ाियक सद के सम BEFORE SHRI G. MANJUNATHA, HON’BLE ACCOUNTANT MEMBER AND SHRI ANIKESH BANERJEE, JUDICIAL MEMBER IT (TP) A No.34/Chny/2018 :: 2 :: 2. The learned Assessing Officer erred in making the addition of Rs.32,47,200/- without considering the evidence offered by the appellant. 3. The learned assessing officer ought to have considered the fact that the appellant has saved the interest payment to bank due to the fund transaction from the subsidiary company. 4. The learned assessing officer has wrongly interpreted that the appellant ought to have earned income out of the guarantee commission and disallowed the claim of the appellant. 5. The assessing officer erred in calculating presumptive valuation of guarantee commission made by the TPO. 6. The assessing officer ought not to have disallowed Rs.7,04,171/- under section 14A without considering the fact that sufficient reserve to make the investment subsidiary company. 7. The assessing officer is wrong in disallowing of Rs.3,49,260/- the routine payment to the valuation officer for the purpose of renewal of bank facilities and audit. For these grounds and such other grounds that may be urged at the time of hearing the appellant prays that the appeal may be allowed and justice may be rendered. 3. M/s.Indian Public School Pvt. Ltd., the assessee is a company running schools. The assessee had filed its return of income for the AY 2014-15 on 30.09.2014 declaring income of Rs.NIL under the normal provisions and book loss of Rs.10,75,296/- u/s.115JB of the Act. The case was taken up for scrutiny proceedings and during the course of assessment proceedings, a reference was made to the Transfer Pricing Officer (in short “TPO") u/s.92CA(1) of the Act, to determine Arm’s Length Price of international transactions of the assessee with its Associated Enterprises (in short “AE"). During the course of transfer pricing proceedings, the TPO noticed that the assessee company had provided corporate guarantee to its subsidiary company for obtaining ‘letter of credit’. However, there was no guarantee fee charged by the assessee for this transaction. Therefore, the TPO after considering relevant submissions of the assessee, has made an upward adjustment of Rs.32,47,200/- towards guarantee fee @ 1.98% on total IT (TP) A No.34/Chny/2018 :: 3 :: guarantee given by the assessee to its AE. The relevant findings of the TPO are as under: 7. The submissions of the assessee have been gone through in detail and the following observations are made: With regard to the guarantee extended by the assessee company, under normal conditions, an unrelated party would not have extended such guarantees without any compensation as in the assessee's case. Assessee's submission regarding the non-charging of bank guarantee commission is not acceptable, since the said loan has been transferred to India for setting up of new campus for the subsidiary company i.e., M/s TIPS South Hill Academy Inc. Further the said project has not materialized and the said amount has been transferred back to subsidiary company. Hence, ultimately the said amount has been used by subsidiary for its business purposes in the subsequent year. Further, the explanation about non-payment of Interest component lacks logic because the said amount has been transferred for the business of subsidiary and not used by assessee for its own purpose. In addition, for the guarantee given by assessee, it suffered payment of charges to Banks in India. Hence, it is a clear cut case that the fee amount should be collected from the related party. The assessee has extended a Stand-By Letter of Credit and margin money of 15-20% through bank to its AE to avail the loan as admitted in the financials and also treated as Contingent Liability on account of the exposure the assessee suffered. This constitutes a service to the AE which requires compensation at arm's length price along with recouping the expenses incurred in connection with the arrangement. Reliance is placed on the following decisions to support the above view point:  Delhi ITAT's decision in the case of Micromax Informatics Ltd. Vs. DCIT, Central New Delhi in ITA No. 6135 & 5829/Del/2014  Mumbai ITAT's decision in the case of Technocraft Industries (I) Ltd. in ITA No. 7519 &s 7990/Mum/2011 Backed by the legal precedents as above, this office made enquiries and found out the arm's length price of the service fee charged by the Banks at 2.19%. As per the recent amendment with effect from 01.04.2002 to the provisions of Section 92B of the Income Tax Act, it has been stated that any capital financing including any type of long term 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 should be considered as an International Transaction. In the case of Glenmark Pharmaceuticals Ltd in 2017-TII-09-HC-IvIUM-TP dated 2ad February 2017, the Hon'ble Bombay High Court has upheld the, decision of the ITAT, Mumbai wherein the ITAT, relying on its own decision in the case of Everest Kanto Cylinders Ltd in 2012-TII-145-ITAT-MUM-TP held that in view of the amendment to the Act, corporate guarantees are international transactions. The Hon'ble Tribunal in Chennai did not have the occasion of referring this decision of the High Court in its earlier decisions in various cases wherein it had. held that corporate guarantees are not international transactions. However, the Hon'ble High Court had also approved of the view taken by the Mumbai Bench of ITAT that corporate guarantee rates cannot be equated with bank guarantee rates. With due respect to various Judicial forums, by following the decision of the Hon'ble Mumbai High Court, the ALP of the transaction is fixed at 1.98% after giving risk adjustment and the benchmarking is done through the residual method specified under Rule 10AB of the IT Rules. IT (TP) A No.34/Chny/2018 :: 4 :: Based on the discussions above, the guarantee amount is charged as under: Guarantee amount = Rs.11,40,00,000 + 5,00,00,000 = Rs. 16,40,00,000 Rate of Interest as discussed above 1.98% (2.19%- 10% for contingent risk) Interest amount = Rs. 16,40,00,000 x 1.98% = Rs. 32,47,200/¬ Hence, an upward adjustment to the tune of Rs.32,47,200/- is made towards Guarantee Fee. 4. The assessee filed objections against draft assessment order passed by the AO before the Dispute Resolution Panel and contended that providing corporate guarantee to its AE per se is not an international transaction. The assessee had also challenged guarantee fee worked out by the AO by taking into account bank guarantee fee charged by commercial banks and submitted that corporate guarantee and bank guarantee are two different transactions and thus, the rate, commercial banks charged to its customers, cannot be applied to corporate guarantee provided by an AE. The DRP after taking note of submissions of the assessee and also relevant provisions held that corporate guarantee provided by the assessee to its subsidiary, is very much an international transaction and ALP need to be completed for the same. As regards, guarantee fee charged by the AO by taking note of bank guarantee rate charged by commercial banks, the TPO rejected the arguments of the assessee and sustained the additions made by the AO towards corporate guarantee and also enhanced the assessment by excluding risk adjustment provided by the TPO, on the ground that the adjustment proposed towards risk undertaken by the assessee for advanced in the bank guarantee, does not include the additional fiancé cost IT (TP) A No.34/Chny/2018 :: 5 :: and thus, the same need not be excluded. Thus, the DRP has confirmed the additions made by the AO and also enhanced the assessment. 5. The Ld.AR for the assessee submitted that providing corporate guarantee to AE, is not an international transaction and thus, same need to be bench marked. He further submitted that when it comes to compute rate of commission charged by commercial banks for providing bank guarantee cannot be a good yardstick. He further submitted that if at all, corporate guarantee provided by the assessee needs to be bench marked, then a reasonable rate may be adopted. In this regard, he relied upon the decision of the Hon’ble Bombay High Court in the case of CIT v. Everest Kento Cylinders Ltd., reported in [2015] 58 taxmann.com 254 (Bombay). The Ld.AR for the assessee further submitted that the assessee company had taken loan from its subsidiary, if assessee was payable interest on said loan, then, the assessee would have paid interest amount of Rs.1,94,00,215/- and thus, there is a reason for not charging corporate guarantee commission, because, the assessee has derived an advantage by saving interest cost, on loan taken from the subsidiary company and thus, if you take that benefit, then there is no question of charging guarantee commission. 6. The Ld.DR, on the other hand, supporting the order of the DRP submitted that corporate guarantee is an international transaction as per the provisions of Sec.92B of the Act. Therefore, the TPO has rightly bench marked the corporate guarantee given by the assessee to its AE and thus, IT (TP) A No.34/Chny/2018 :: 6 :: the arguments of the assessee needs to be rejected. The Ld.DR further submitted that when it comes to rate, at which, such guarantee commission needs to be charged, bank guarantee commission charged by a commercial bank, is a good comparable and thus, the AO has taken average bank guarantee commission charged by the commercial banks and computed commission on guarantee given by the assessee. Therefore, there is no reason to take different view on this issue. 7. We have heard both the parties, perused the materials available on record and gone through orders of the authorities below. As regards the first argument of the assessee that providing corporate guarantee per se is not an international transaction, we find that the provisions of Sec.92B of the Act, has been amended to expand the definition of international transaction, as per which, lending or borrowing money or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more AEs for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprise, is also an international transaction. From plain reading of definition, it is clear that lending or borrowing of money between two or more enterprises also comes under the definition of international transaction. Therefore, when the assessee has provided guarantee on behalf of its AE for availing loan facility, it definitely bearing on the profits IT (TP) A No.34/Chny/2018 :: 7 :: or loss of the assessee and thus, it falls within the definition of international transaction and thus, providing corporate guarantee is an international transaction, which needs to be bench marked to determine ALP of such transaction. Therefore, the TPO has rightly held that providing corporate guarantee is an international transaction and hence, we reject the arguments of the Counsel for the assessee. 8. As regards imputing rate of commission on guarantee, it is a well settled principle of law by the decision of various courts, including the decision of the Hon’ble Bombay High Court in the case of CIT v. Everest Kento Cylinders Ltd. (supra), wherein, it has been clearly held that no comparison can be made between the guarantee issued by commercial banks as against corporate guarantee issued by holding company for benefit of its AE, a subsidiary company for computing ALP of guarantee commission. The Hon’ble Bombay High Court further held that when it comes rate of commission, at which, such corporate guarantee needs to be bench marked, then depending upon each case, a reasonable rate may be adopted and thus, in the said case has upheld 0.5% commission on corporate guarantee. Therefore, considering the facts and circumstances of the present case and also by following the decision of the Hon’ble Bombay High Court in the case of CIT v. Everest Kento Cylinders Ltd. (supra), we are of the considered view that 0.5% is the reasonable rate for benchmarking corporate guarantee given by the assessee to its subsidiary AE. Therefore, we direct the AO to make adjustment towards corporate IT (TP) A No.34/Chny/2018 :: 8 :: guarantee fee @ 0.5% of total corporate guarantee given by the assessee to its AE. 9. The next issue that came up for our consideration from Ground Nos.6 & 7 of the assessee’s appeal is disallowance u/s.14A r.w.r.8D Income Tax Rules, 1962. The Counsel for the assessee, at the time of hearing, submitted that, the assessee does not want to press these two grounds challenging the findings of the DRP in upholding disallowance u/s.14A of the Act, and hence, Ground Nos.6 & 7 of the assessee’s appeal are dismissed as not pressed. 10. In the result, the appeal filed by the assessee is partly allowed. Order pronounced on the 15 th day of June, 2022, in Chennai. Sd/- ( अिनके श बनज ) (ANIKESH BANERJEE) याियक सद य/JUDICIAL MEMBER Sd/- (जी. मंजूनाथा) (G. MANJUNATHA) लेखा सद य/ACCOUNTANT MEMBER चे ई/Chennai, दनांक/Dated: 15 th June, 2022. TLN आदेश क ितिलिप अ ेिषत/Copy to: 1. अपीलाथ /Appellant 4. आयकर आयु"/CIT 2. यथ /Respondent 5. िवभागीय ितिनिध/DR 3. आयकर आयु" (अपील)/CIT(A) 6. गाड फाईल/GF