DCIT Vs KEC International Limited (ITAT Mumbai)
ITAT Mumbai directed TPO/ AO to recompute the transfer pricing adjustment by taking rate of 0.6% as arm’s length rate for corporate guarantee fee as against 1.16% determined by TPO/ AO.
Facts- The Assessee is a leading Engineering, Procurement, and Construction (EPC) company. The Appellant is engaged in laying of power transmission lines, providing telecommunication infrastructure and tower testing services. The Appellant had project offices in India as well as outside India to execute the erection or installation portion of Transmission Line Projects.
The TPO proposed aggregate transfer pricing adjustments of INR 22,34,84,414/- vide order, dated 31.10.2016, passed under Section 92CA(3) of the Act consisting of transfer pricing adjustment on account of (a) Performance Guarantee Fee of INR.98,43,602/-, (b) Corporate Guarantee Fee of INR.15,30,31,639/- and (c) Interest on advances/loan given to AE of INR.6,06,09,173/-.
AO incorporated the aforesaid transfer pricing adjustment of INR 22,34,84,414/- in the Assessment Order, dated 29/12/2016, passed u/s. 143(3) read with Section 144C(3) of the Act.
Being aggrieved, the Assessee preferred appeal before CIT(A) against the Assessment Order. CIT(A) held that the transaction of guarantee was international transaction. However, the CIT(A) granted substantial relief to the Assessee by following the decisions of the Tribunal in the case of the Assessee for the Assessment Year 2011-12 [ITA No 6447/Mum/2016, dated 23/03/2021] and 2012-13 [ITA No 17 & 115/Mum/2018, dated 14/09/2020].
Being aggrieved, both revenue and assessee has preferred the present appeal.
Conclusion- Held that we have accepted Assessee’s contention that 0.60% be accepted as arm’s length rate of corporate guarantee fee. Accordingly, given the facts and circumstances of the case, we accept the alternative contention of the Assessee and direct the TPO/Assessing Officer to recomputed the transfer pricing adjustment by taking rate of 0.6% as arm’s length rate for corporate guarantee fee for all corporate guarantee given by the Assessee.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
1. This is a batch of three appeals contains a cross appeals for the Assessment Year 2013-14 and appeal preferred by the Assessee for the Assessment Year 2017-18. All the appeals were heard together on account of common issues and are being disposed by way of a common order.
Assessment Year 2013-14
2. These are cross-appeals pertaining to Assessment Years 2013-14 arising from the order, dated 11/11/2021, passed by the Learned Commissioner of Income Tax (Appeals)-56, Mumbai [hereinafter referred to as ‘the CIT(A)’] partly allowing the appeal preferred by the Assessee against the Assessment Order, dated 29/12/2016, passed under Section 143(3) read with Section 144C(3) of the Income Tax Act, 1961 [hereinafter referred to as ‘the Act’].
3. The Revenue has raised the following grounds in ITA No. 33/Mum/2022:
“On TP issues:
1.Interest on Advances given to AE
i. On the facts and in the circumstances of the case and in law, the Ld CIT (A) erred in deleting an upward Transfer Pricing adjustment on account of interest on advance given to AE of Rs.6,06,09,173/- as this business advance being treated as loans given to AE.
2. Performance Guarantee
i. On the facts and circumstances of the case, the Hon’ble CIT(A) was not justified in deciding that the guarantee commission for performance of contract provided by assessee to Chadian Company for Water & Electricity (CCWE) on behalf of its AE KEC Global was at arm’s length without appreciating the fact that the AE get benefited from guarantee provided by the assessee, AE was a newly floated entity and the credit rating of the AE was very low.
ii. On the facts and circumstances of the case, the Hon’ble CIT(A) was not justified in deciding that the cost recovery was at arm’s length itself as the assessee has recovered 0.93% from its AE for providing guarantee for performance of contract to CCWE, and ignored that benefit derived as a whole by the AE and also not appreciated the fact that this service will be available to any third party by the assessee.
iii. On the facts and of the case, the Hon’ble CIT(A) was not justified in deciding that the guarantee for advance payment provided by assessee to Chadian Company for Water & Electricity (CCWE) on of its AE KEC Global was at length without appreciating the fact the AE get benefited from the guarantee provided by the applicant, the AE was a newly floated entity, and the credit rating of the AE was very low.
iv. On the facts and circumstances of the case, the Hon’ble CIT(A) was not justified in deciding that the cost recovery for providing guarantee for advance payment to CCWE was at arm’s length itself as the assessee has recovered 0.93% from its AE, and ignored the benefit derived as a whole by the AE and also not appreciated the fact that this service will not be available to any third party by the assessee.
v. On the facts and circumstances of the case, the Hon’ble CIT(A) was not justified in deciding that the performance guarantee provided to third party Le. Bahwan Engineering Company LLC on behalf of its AE ie. KEC Global FZ LLC was not an international transaction without appreciating the fact that the transaction was of nature of tripartite agreement and the AE get benefited from the performance guarantee provided by the assessee, which was a facility provided by the assessee to its AE
vi. On the facts and circumstances of the case, the Hon’ble CIT(A) was not justified in deciding that the performance guarantee provided to third party ie. Bahwan Engineering Company LLC on behalf of its AE ie. KEC Global FZ LLC was not an international transaction without appreciating the fact that the TPO has determined the benefits of the AE as ALP.
vii. On the facts and circumstances of the case, the Hon’ble CIT(A) was not justified in deciding that the performance guarantee provided to third party ie. Bahwan Engineering Company LLC on behalf of its AE Le. KEC Global FZ LLC was not an international transaction appreciating the fact that the term “guarantee” clearly mentioned in Explanation of section 92B(1)(c) of IT Act 1961 as an International Transaction.
viii. On the facts and circumstances of the case, the Hon’ble CIT(A) was not justified in deciding that the guarantee commission for performance of contract provided by assessee to that guarantee commission for performance of contract provided by assessee to SNC LAVALIAN, Canada on behalf of its AE SAE Towers Holding Towers USA was arm Length without appreciating the fact that the AE get benefited from the guarantee provided by the assessee, AE was a newly floated entity and the credit rating of the AE was very low.
ix. On the facts and circumstances of the case, the Hon’ble CIT(A) was not justified in deciding that the cost recovery was at arm’s length itself as the assessee has revered 0.70% from its AE for providing guarantee for performance of contract to SNC LAVALIAN, Canada and ignored the benefit derived as a whole by the AE and also not appreciated the fact that this service will not be available to any third party by the assessee.
3. Corporate guarantee:
i. On the facts and circumstances of the case, the Hon’ble CIT(A) was not justified in deciding that the corporate guarantee providing to ICICI Bank on behalf of KEC USA LLC & Transmission LLC USA was not an international transaction without appreciating the fact that the transaction was of nature of guarantee given and the AE get benefited from the corporate guarantee provided by the assessee, was a facility provided to its AE.
ii. On the facts and circumstances of the case, the Hon’ble CIT(A) was not justified in deciding that the corporate guarantee provided to ICICI Bank on behalf of KEC USA LLC & Transmission LLC USA was not an international transaction without appreciating the fact that the TPO has determined the benefits of the AE as ALP.
iii. On the facts and circumstances of the case, the Hon’ble CIT(A) was not justified in deciding that the Corporate guarantee provided to ICICI Bank on behalf of its AE Le. KEC USA LLC & Transmission LLC USA was not an international transaction without appreciating the fact that the term “guarantee” clearly mentioned in Explanation of section 92B(1)(c) of the IT Act 1961 as an International Transaction.
4. Non-TP Issues
i. The Ld. CIT(A) erred in deleting the addition in respect of Mark-to- market losses on foreign contracts outstanding at the end of the year under normal provisions of Income tax Act as well as while computing book profits u/s. 115JB of the Act failing to appreciate the Boards Instruction No. 3/2010 dated 23.3.2010 which has clarified that in cases where no sale or settlement has actually taken place and loss on MTM basis has resulted in reduction of book profits, such a notional loss would be contingent in nature and cannot be allowed to be set off against taxable income?”
ii. The Ld. CIT(A) erred in deleting the addition in respect of Mark-to-market on foreign contracts outstanding at the end of the year by ignoring the Instruction No. 3/2010 dated 23.3.2010 when it is judicially acknowledged that CBDT Circulars constitute important clarifications of legislative intent?”
iii. The Ld. CIT(A) erred in allowing the addition ground raised by the assessee and thereby allowing deduction of education case and higher and secondary education case paid by the assessee as deductable while computing business income.
iv. The CITIA) erred in holding that education case and higher and secondary education case is not covered under provisions of section 40(a)(ii) of the Act ignoring the provisions of Finance Act of 2004 and 2011 as per which the education case is an additional surcharge levied on the income-tax.
v. The CIT(A) erred in holding that education case and higher and secondary education case ignoring the Supreme Court ruling in K. Srinivasan where surcharge and additional surcharge were held to be a part of the income-tax. The appellant prays that the order of the Ld. CIT (A) be set aside and the order of the AO be restored. The appellant craves leave to amend or alter any ground or add any other grounds which may be necessary.”
4. The Assessee has raised the following grounds of appeal in ITA No.2453/Mum/2021:
“Ground No. 1
i CIT(A) erred in confirming adjustment on account of computation of arm’s length price of the corporate guarantee [email protected]% (Rs.115.23 lakh) which ought to be earned by the appellant for guarantee given on loans taken by Associated Enterprises (AE).
ii. The learned CIT(A) erred in not appreciating corporate Guarantee by the appellant for its AE is not an “International Transaction “as per Provision of Income Tax Act, 1961.
iii. The learned CIT (A) erred in not appreciating that transaction of Corporate Guarantee for loans taken by its associated enterprise has no bearing on the profit, income, loss or assets of the Appellant therefore same is not international under section 92B of the Act. It does not come within ambit of section 92B of the Act as no income arises from the said transaction.
Ground No.2:
On the facts and circumstance of the case the learned CIT(A) erred in confirming disallowance /addition of Rs. 5.63 Lacs made by AO under section 14A of the Income Tax Act r.w.r 8D of the Income Tax Rules in computing Book Profits section 115JB of the Act
Ground No.3:
On the facts and circumstances of the case the learned CIT(A) erred in not allowing deduction in respect of tax paid at foreign location.”
5. The relevant facts in brief are that the Assessee is a leading Engineering, Procurement, and Construction (EPC) company. The Appellant is engaged in laying of power transmission lines, providing telecommunication infrastructure and tower testing services. The Appellant had project offices in India as well as outside India to execute the erection/installation portion of Transmission Line Projects.
6. The Assessee filed return of income for the Assessment Year 2013-14 on 30/11/2013 declaring total income of INR 24,88,63,040/-, which was revised to total income of INR 23,09,74,130/- vide revised return filed on 31/03/2015. The case of the Assessee was selected for regular scrutiny. During the assessment proceedings, the Assessing Officer noted that the Assessee had entered into international transactions with Associated Enterprises (AEs) and therefore, made a reference to the Transfer Pricing Officer (TPO) for computation of Arm’s Length Price (ALP) under Section 92CA(1) of the Act.
7. The TPO noted that the Assessee had reported, inter alia, following international transactions:
