HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH AT JAIPUR D.B. Income Tax Appeal No. 14 / 2015 (1) Commissioner of Income Tax, Jaipur-II, Jaipur. ----Appellant Versus M/s. Vaibhav Gems Ltd. (Now known as Vaibhav Global Ltd.) K-6-B, Fateh Tiba, Adarsh Nagar, Jaipur. ----Respondent Connected With (2) D.B. Income Tax Appeal No. 149 / 2015 M/s Vaibhav Global Limited formerly known as Vaibhav Gems Limited, K-6B, Fateh Tiba, Adarsh Nagar Jaipur-302004 ----Appellant Versus Assistant Commissioner of Income Tax, Circle-5, NCR Building, Statue Circle Jaipur 302001. ----Respondent (3) D.B. Income Tax Appeal No. 150 / 2015 Commissioner of Income Tax, Jaipur-II, Jaipur. ----Appellant Versus M/s. Viabhav Global Limited earlier known as Vaibhav Gems K-GB, Fateh Tiba, Adarsh Nagar, Jaipur. ----Respondent (4) D.B. Cross Objection No. 31 / 2016 IN D.B. Income Tax Appeal No.14/2015 Commissioner of Income Tax, Jaipur-II, Jaipur. ...Appellant Vs. (2 of 14) [ ITA-14/2015] M/s. Vaibhav Gems Ltd. K-6B, Fateh Tiba, Adarsh Nagar, Jaipur. ----Respondent For Appellant(s) : Mr. Prateek Kedawat with Mr. K.D. Mathur For Respondent(s) : Mr. Gunjan Pathak with Ms. Ishita Rawat HON'BLE MR. JUSTICE K.S. JHAVERI HON'BLE MR. JUSTICE DINESH CHANDRA SOMANI Judgment 13/10/2017 1. In all these appeals common question of law and facts are involved hence they are decided by this common judgment. cross objections filed by assessee are also decided by this judgment. 2. By way of appeals, appellant has assailed judgment and order tribunal whereby tribunal has partly allowed appeal of assessee. 3. This court while admitting appeal on 14.9.2016 framed following substantial question of law:- 3.1 Appeal no.14/2015 admitted on 14.9.2016 1. Whether in facts and circumstances of case, ITAT was justified in law and has not acted perversely in deleting additions without considering amendment in Section 92B by which explanation was inserted with retrospective effect from 1.4.2002. 2. Whether in facts and in circumstances of case, ITAT was justified in law and has not acted perversely in directing to delete adjustments (3 of 14) [ ITA-14/2015] on account of notional interest income in delay in collection of sales proceeds from associated enterprises. 3.2 Appeal No.149/2015 admitted on 14.9.2016 1. Whether under facts and circumstances of case and in law respondent and appellate authorities are justified in confirming applicability of adjustment @ prevailing LIBOR rate plus 2% on account of interest free loans provided by Appellant to its Associated Enterprises in assessment year without considering view that average LIBOR rate existing at that time was only 0.79% and addition of adhoc 2% is unjustified, arbitrary and against provisions of law? 2. Whether Ld. ITAT is justified in approving adjustment on account of charging of National Interest on Loans advanced by Appellant to its own foreign subsidiaries even though such companies were formed for expansion of its own business and funds were transferred for its working capital requirements, capacity expansion and expansion in areas of business? 3.3 Appeal No.150/2015 admitted on 14.9.2016 1. Whether in facts and circumstances of case, ITAT was justified in law and has not acted perversely in restricting adjustment on account of interest free loans advanced to associated enterprises to prevailing LIBOR+ 2 % without addressing evidences and facts brought on record by TPO. 2. Whether in facts and in circumstances of case, ITAT was justified in law and has not acted perversely in directing to delete adjustment of Rs.63,61,3950/- made by TPO/AO on account of notional guarantee charges for corporate and bank guarantee given by assessee on behalf of its associated enterprises. (4 of 14) [ ITA-14/2015] 3.4 Only assessee has preferred cross objection being no.31/2016 in appeal No.14/2015 which was admitted on following substantial question of law:- 1. Whether under facts and circumstances of case in law respondent and appellate authorities are justified in confirming applicability of adjustment @ prevailing LIBOR rate plus 2% on account of interest free loans provided by Appellant to its Associated Enterprises in assessment year without considering view that average LIBOR rate existing at that time was only 0.79% and addition of adhoc 2% is unjustified, arbitrary and against provisions of law? 4. facts of case are that assessee deals in precious stones. return of income was furnished declaring loss of Rs.25,18,68,568/- which was processed u/s 143(1) of Act. Thereafter case was selected for scrutiny. case involves transfer pricing, therefore, same was referred to Transfer Pricing Officer (for short TPO ). TPO proposed adjustment in respect of notional interest income on alleged delay in realization of sale proceeds from AEs. It was found that assessee had extended corporate guarantee and advances to AEs for which no charges were levied. Similarly, adjustment in respect of sales to AEs were also proposed to be adjusted. TPO thus proposed transfer pricing adjustment in respect of issues:- (I) Notional interest on delayed payments. (ii) Corporate guarantee provided to AEs without any consideration. (5 of 14) [ ITA-14/2015] (iii) Notion interest on loans advanced to AEs. (iv) Sales made by assessee to AEs under Transaction Net Margin Method (for short TNMM ) assessee filed detailed submissions which were rejected by TPO and transfer pricing adjustments on above counts were made which is subject matter of grounds raised above. Similarly, AO further made corporate addition by rejecting books of assessee u/s 145(3) of Act and made addition of Rs.12,15,891/- in respect of DTA Units. Accordingly draft notice was served on assessee on 20.03.2013. assessee in terms of Section 144C of Act approached Dispute Resolution Panel (for short DRP ) which also confirmed these additions. 5. Counsel for department has strongly relied upon decision of Hyderabad Tribunal in case of Four Soft Pvt. Ltd. Vs. DCIT ITA No.1903/Hyd/2011 decided on 28.3.2014 wherein it has been held as under:- 25.2 Having considered submissions of parties, we are unable to accept contention of learned AR that corporate guarantee of nature provided by assessee will not come within meaning of international transaction in terms with section 92B of Act. It is not disputed that section 92B of Act has been amended by Finance Act, 2012 with 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-term or short-term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of (6 of 14) [ ITA-14/2015] advance, payments or deferred payment or receivable or any other debt arising during course of business. 25.3 reading of aforesaid clause from Explanation would make it clear that corporate guarantee provided by assessee comes within scope and ambit of 'international transaction' as per aforesaid clause. Therefore, contention of learned AR that issue is covered in favour of assessee by virtue of order passed in assessee's own case for AY 2006-07 no longer holds good since order passed by coordinate bench is prior to amendment made to provision of section 92B of Act. It will be pertinent to mention here that this issue was also considered by ITAT Mumbai Bench in case of Mahindra & Mahindra v. DCIT in ITA No. 8597/Mum/2010, 54 SOT (UR) 146. coordinate bench of this Tribunal while considering similar argument advanced on behalf of assessee by placing reliance on decision of Four Soft Ltd. (supra), held as under: 15.2 After hearing rival submissions we feel that Assessing Officer will have to follow decision of ITAT Hyderabad or amended provision of Act in this regard. If Finance Bill of 2012 is passed by Parliament amending provisions of section 92B, with effect from 1st April, 2002, he will have to ignore decision of ITAT Hyderabad. In case section 92B is not amended with retrospective effect, he should grant relief to appellant. 25.4 In aforesaid view of matter, we agree with TPO that ALP of corporate guarantee has to be determined as it falls within scope and ambit of international transaction after retrospective amendment to section 92B. However, it appears that TPO has applied rate of 3.75%, which is applicable to bank guarantee issued by bank. As corporate guarantee is not in nature of bank guarantee, rate (7 of 14) [ ITA-14/2015] applicable to bank guarantee provided by bank cannot be applied to corporate guarantee which is provided by group company. In case of Glenmark Pharmaceuticals v. ACIT in ITA No. 5031/Mum/2012, dated 13/11/2013, Mumbai Bench of Tribunal after analysing facts in that case had held that 0.53% corporate guarantee rate in that case was appropriate. 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 assessee to its AE followed ratio laid down in case of Glenmark Pharmaceuticals v. ACIT (supra) and remitted issue back to TPO to decide quantum of corporate guarantee rate by following method adopted in case of Glenmark Pharmaceuticals (supra). 5.1 same has been subsequently diluted by High Court. 5.2 He contended that tribunal has committed serious error in allowing appeal and it is fit case to be decided in favour of department and finding of CIT(A) ought to have been accepted. benefit granted by tribunal u/s 92B of Income Tax reads as under:- 92B. Meaning of international transaction.- (1) For purposes of this section and sections 92, 92C, 92D and 92E, international transaction means transaction between two or more associated enterprises, either or both of whom are non-residents, in nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having bearing on profits, income, losses or assets of such enterprises, and shall include (8 of 14) [ ITA-14/2015] mutual agreement or arrangement between two or more associated enterprises for allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with benefit, service or facility provided or to be provided to any one or more of such enterprises. (2) transaction entered into by enterprise with person other than associated enterprise shall, for purposes of sub-section (1), be deemed to be transaction entered into between two associated enterprises, if there exists prior agreement in relation to relevant transaction between such other person and associated enterprise, or terms of relevant transaction are determined in substance between such other person and associated enterprise. 5.3 On second ground, he has also relied upon decision of Bombay High Court in Commissioner of Income Tax vs. Tata Autocomp systems Ltd. (2015) 374 ITR 516 wherein it has been held as under:- 7. We find that impugned order of Tribunal inter alia has followed decisions of Bombay Bench of Tribunal in cases of VVF Ltd. v. Dy. CIT (supra) and Dy. CIT v. Tech Mahindra Ltd. (supra) to reach conclusion that ALP in case of loans advanced to AEs would be determined on basis of rate of interest being charged in country where loan is received/consumed. Mr. Suresh Kumar learned counsel for Revenue informed us that Revenue has not preferred any appeal against decision of Tribunal in VVF Ltd. v. Dy. CIT (supra) and Dy. CIT v. Tech Mahindra Ltd. (supra) on above issue. No reason has been shown to us as to why Revenue seeks to take different view in (9 of 14) [ ITA-14/2015] respect of impugned order from that taken in VVF Ltd. v. Dy. CIT (supra) and Dy. CIT v. Tech Mahindra Ltd. (supra). Revenue not having filed any appeal, has in fact accepted decision of Tribunal in VVF Ltd. v. Dy. CIT (supra) and Dy. CIT v. Tech Mahindra Ltd. (supra). 5.4 Counsel for appellant has also relied upon decision of Delhi High Court in Commissioner of Income Tax vs. Cotton Naturals (I) Pvt. Ltd. reported in (2015) 276 CTR 445 (Del.) wherein Delhi High Court held as under:- 14. We note that CUP method is most appropriate method in order to ascertain arms length price of international transaction as that of assessee. We agree with assessee's contention that where transaction was of lending money in foreign currency to its foreign subsidiaries comparable transactions, therefore, was of foreign currency Tended by unrelated parties. financial position and credit rating of subsidiaries will be broadly same as holding company. In such situation,-domestic prime lending rate would have no applicability and international Rate Mixed being LIBOR should be taken as benchmark rate for international transactions. 6. Counsel for respondent Mr. Pathak has relied upon recent decision of Bombay High Court in Commissioner of Income Tax vs. Everest Kento Cylinders Ltd. reported in 378 ITR 57 wherein it has been held as under:- 10. Having considered submissions of Mr. Malhotra for revenue and Mr. Pardiwalla for assessee, we are of view that order of Tribunal as regards (10 of 14) [ ITA-14/2015] disallowance under section 14A and restricting same to Rs.1 lac was justified in view of material before Tribunal. Furthermore, having considered fact that sum of Rs.4,47,649/- was not conceded in return but was ad hoc acceptance during course of assessment, assessee could not be bound by it. Tribunal as second fact finding authority had gone into factual aspects in great detail and therefore having interpreted law as it stood on relevant date order passed cannot be faulted. In matter of guarantee commission, adjustment made by TPO were based on instances restricted to commercial banks providing guarantees and did not contemplate issue of Corporate Guarantee. No doubt these are contracts of guarantee, however, when they are Commercial banks that issue bank guarantees which are treated as blood of commerce being easily encashable in event of default, and if bank guarantee had to be obtained from Commercial Banks, higher commission could have been justified. In present case, it is assessee company that is issuing Corporate Guarantee to effect that if subsidiary AE does not repay loan availed of it from ICICI, then in such event, assessee would make good amount and repay loan. considerations which applied for issuance of Corporate guarantee are distinct and separate from that of bank guarantee and accordingly we are of view that commission charged cannot be called in question, in manner TPO has done. In our view comparison is not as between like transactions but comparisons are between guarantees issued by commercial banks as against Corporate Guarantee issued by holding company for benefit of its AE, subsidiary company. In view of above discussion we are of view that appeal does not raise any substantial question of law and it is dismissed. There will be no order as to costs. (11 of 14) [ ITA-14/2015] 6.1 He relied upon another decision of Hindalco Industries Ltd. Vs. Additional Commissioner of Income Tax (2013) 359 ITR 46 (Bom) wherein it has been held as under:- 3. On 25 September 2009, Assessing Officer addressed letter to Commissioner of Income-tax-VI, Mumbai seeking approval for reference under Section 92CA(1) to Transfer Pricing Officer for computation of Arms Length Price in relation to 17 Assessees of which Petitioner was mentioned at Serial No.12. In seeking approval of Commissioner, Assessing Officer relied upon instruction of Central Board of Direct Taxes requiring that all cases where international transactions exceed stipulated amount of Rs. 15 crores and covered by Section 92C be selected for compulsory scrutiny. approval of Commissioner of Income-tax - VI was communicated to Assessing Officer under intimation dated 30 September 2009. Assessing Officer made reference to Transfer Pricing Officer on 9 October 2009 stating that she considered it necessary and expedient to make reference under Section 92CA(1) for computation of Arms Length Price. Transfer Pricing Officer initially issued notice to Petitioner under Section 92CA on 3 March 2010. During course of proceedings, Transfer Pricing Officer issued further notice dated 4 October 2011 recording that from Form 3CEB submitted on 30 September 2008, it appeared that Petitioner had furnished guarantee on behalf of its Associated Enterprise for Financial Year 2007-08 in amount of Rs.15,988 crores. notice adverted to fact that Transfer Pricing report furnished on 11 March 2011 stated as follows :- As part of its global expansion strategy Hindalco acquired giant company Novelis Inc. Canada on 15 May (12 of 14) [ ITA-14/2015] 2007, in transaction aggregating US $ 3.48 billion. In order to consummate this transaction, Hindalco had to avail borrowing and financing from international lenders. Hindalco therefore created 100% subsidiary company in Netherlands known as AV Minerals, Netherlands ('BVCo'). BVCo in turn created another 100% subsidiary in Canada, V Metals ('SubCo'). Both BVCo and SubCo were specifically created as Special Purpose Vehicles ('SPVs') by Hindalco for purpose of this acquisition. acquisition of Novelis was funded by bridge loan from consortium of international banks. This loan was drawn by BVCo (the 100% SPV created by Hindalco). Hindalco, as parent company had prime responsibility to arrange availability of funds to these SPVs. Hindalco, in discharge of this obligation, provided corporate guarantee to international banks for due performance of facility agreement entered into by BVCo with these banks for availing bridge loan for acquisition of Novelis. acquisition of Novelis was done with express purpose of strengthening Hindalco's global position as integrated aluminium producer with presence in entire value chain. This acquisition positioned Hindalco as globally integrated aluminium producer with low-cost alumina and aluminium production facilities combined with high-end aluminium rolled product capabilities. Therefore, looking at objective and intent behind this acquisition, it is clear that acquisition was intended to increase global reach of growth under flagship parent company i.e. Hindalco. In present case, provision of Corporate Guarantee by Hindalco to international banks was in substance only to serve limited purpose of arranging funds for overseas business (13 of 14) [ ITA-14/2015] expansion for Hindalco itself through SPV. Further, in discharging its responsibility to arrange funds for this acquisition, Hindalco has provided corporate guarantee to international banks who have in turn provided funds to BVCo. Thus in opinion of company, and having regard to economic and commercial factors, it would be inappropriate for Hindalco to charge fee from BVCo for providing such guarantee as there was no service provided by Hindalco to BVCo, which was merely SPV, and like all SPVs, was created to fulfill specific objective of acquiring Novell for parent company, Hindalco. Hence, looking to overall substance of transaction no scope remains to charge Guarantee Fee for Corporate Guarantee provided to such SPV. Thus no determination of arm's length price is warranted from Indian transfer pricing perspective. In alternative, charge of NIL guarantee fee satisfies criteria of arm's length return to Hindalco, considering facts and circumstances of case. 6.2 He has also relied upon judgment of ITAT Hyderabad which is subsequently diluted by High Court judgments. 7. We have heard counsel for parties. 8. Taking into account observations made by Bombay High Court as reproduced above, first issue is answered in favour of assessee and against department. Tribunal while relying on international transaction granted benefit of Section 92B to assessee which is just and proper. 9. In that view of matter, view taken by tribunal is required to be upheld. (14 of 14) [ ITA-14/2015] 10. Regarding LIBOR rate plus 2% on account of interest free loans provided by appellant to its associated enterprises, in view of observations made by Delhi High Court in para no.14 as reproduced above, same is required to be answered in favour of assessee. 11. Regarding ITA no.149/2015 preferred by assessee in view of Delhi High Court judgment (para no.14), international transaction is required to be accepted, therefore, tribunal has committed serious error. assessee will be entitled for benefit of average LIBOR rate existing at that time which was 0.79% and addition of adhoc 2% is not proper. In that view of matter, addition of 2% interest in income is required to be quashed and set aside. 12. appeal and cross objection of assessee stands allowed to aforesaid extent. 13. All issues are answered in favour of assessee and against department. 14. appeals filed by department (DB ITA No.14/2015, 150/2015) stands dismissed and that of assessee (149/2015) stands allowed as aforesaid. cross objection (31/2016) is also allowed in terms of aforesaid. (DINESH CHANDRA SOMANI)J. (K.S. JHAVERI)J. BRIJESH 46-49. Commissioner of Income-tax, Jaipur-II, Jaipur v. Vaibhav Gems Ltd. (Now known as Vaibhav Global Ltd.)