KEC International Ltd. Vs. DCIT (ITAT Mumbai)
In this case The undisputed position that emerges are that the advances have been given by the assessee to an entity in which it held 50% share. The assessee has entered into a Joint Venture (JV) agreement with an entity namely Edison Jehamo Power (PTY) Ltd. (EJP) on 25/11/2009 with respect to transmission line construction project. The assessee’s proportionate share in the JV was 50%. From the financial statements of JV entity as placed on record, it is quite discernible that the accumulated losses of that entity, at year-end, stood at 98.26 Million Rands which are substantially funded out of joint venture partners’ account amounting to 162.80 Million Rands. The assessee’s contribution in the JV account is 41.12 Million Rands. The JV incurred losses of 108.13 Million Rands during the year, which has primarily triggered the assessee to make the stated advances to its JV. These advances have been classified under the head Joint Venture partners’ account. All these facts would lead strength to the argument of Ld. AR that there was pre-existing liability to make such advances to JV and the business interest of the assessee would have been adversely impacted by not making such advances. The advances were more in the nature of capital contribution and by advancing the same, the assessee had protected its own business interest which is evident from the financial statements of JV. The advances were towards fulfilment of the assessee’s obligation of being a JV partner as any financial incapacitation of JV would adversely affect the continuation of the project and ultimately jeopardize the interest of the assessee. Therefore, the said advances could not be put in the category of loans as done by the lower authorities. Further, it could not be said that JV entity derived / gained certain benefits out of such advances but rather it was the assessee who would ultimately gain by continuing with the projects and taste the fruits of the success of project. Hence, not convinced with impugned adjustments as confirmed by first appellate authority, we direct Ld. AO to delete the same.
FULL TEXT OF THE ITAT JUDGEMENT
Manoj Kumar Aggarwal (Accountant Member)
1. Aforesaid cross-appeals for Assessment Year [in short referred to as ‘AY’] 2012-13 contest the order of Ld. Commissioner of Income-Tax (Appeals)-56, Mumbai, [in short referred to as ‘CIT(A)’], Appeal No. CIT(A)-56/DCIT-5(1)(1)/2017-18/473 dated 13/10/2017 on certain grounds of appeal.
Assessee’s Appeal ITA No. 17/Mum/2018
2.1 First, we take up assessee’s appeal ITA No.17/Mum/2018 wherein the ground read as under: –
1. On the facts and in the circumstances of the case and in law, the Hon’ble CIT(A) erred in making an upward Transfer Pricing adjustment under Section 92CA of the Income Tax Act, 1961 of Rs.2,45,43,617/- by treating the transaction of business advance as loans given to AE. The appellant prays that the aforesaid action of the Hon’ble CIT(A) may please be held as bad-in-law and be deleted.
As evident, the sole subject matter of assessee’s appeal is Transfer Pricing (TP) adjustment of Rs.245.43 Lacs against business advances given by the assessee to its AE.
2.2 We have carefully considered the arguments advanced by both the representatives and perused relevant material on record including documents placed in the paper-book. We have also deliberated on various judicial pronouncements as cited before us during the course of hearing. Our adjudication to the subject matter of appeal would be as given in succeeding paragraphs.
2.3 Briefly stated, the assessee being resident corporate assessee is stated to be engaged in the business of designing, fabrication, galvanizing and testing of transmission lines & telecom towers, supply and erection of sub-station structures and overhead equipment for railway electrification and managing infrastructure sites for telecommunication services. The assessment for year consideration was framed u/s 143(3) r.w.s. 144C(3) on 31/03/2016 wherein the income was determined at Rs.251.41 Crores after certain additions / disallowances / adjustments as against returned income of Rs.185.05 Crores e-filed by the assessee on 29/11/2012 which was later on revised to Rs.198.26 Crores. However, during assessment proceedings, the assessee furnished revised computation of total income reflecting income of Rs.229.71 Crores.
2.4 Since the assessee carried out certain international transactions with its Associated Enterprises (AE), a reference u/s 92 CA (1) was made to Ld. Joint Commissioner of Income Tax (Transfer Pricing)-2(3), Mumbai (in short ‘TPO’) for determination of Arm’s Length Price (ALP) of these transactions. One of such transaction was advances given by the assessee to one of its AE for Rs.2069.94 Lacs. The advances were given to an AE namely EJP KEC Joint Venture, South Africa in various tranches during the year, which has been tabulated at para 6.1 of Ld. TPO’s order. The perusal of the same would show that the advances given in earlier years were Rs.828.80 Lacs whereas fresh advances given during the year were for Rs.1903.83 Lacs (after adjusting forex fluctuations of Rs.166.11 Lacs), thus aggregating in all to Rs.2732.63 Lacs. The currency of loan was denominated in US dollars without any security. Accordingly, the assessee was asked to provide requisite details as to benchmarking of this transaction.
2.5 The assessee submitted that comparable uncontrolled price (CUP) was selected as most appropriate method (MAM) with AE being the tested party. The assessee explained that its AE had availed a loan facility from ICICI Bank UK @ 3 months LIBOR + 120 bps. This transaction could be used as internal CUP to benchmark the transaction. The advances were stated to be given out of assessee’s accumulated / undistributed profits and it was submitted that the assessee did not avail any external commercial borrowings (ECB). Since the transaction was stated to be in the nature of advances, no interest was charged during the year.
2.6 The assessee explained that during year under consideration, the joint venture (JV) faced cash crunch due to huge operational losses in the project. In support, financials of the JV were placed on record. It was submitted that the funds were advanced to meet the deficit in cash flow while executing projects in South Africa. The advancement was nothing but a matter of commercial prudence primarily to protect the business interest of the assessee in projects of JV. This was just a fulfilment of the obligation of being a JV partner as any financial incapacitation of JV would adversely affect the continuation of the project and ultimately jeopardize the interest of the assessee. Since the advances were purely in the nature of business advances to fulfil the obligations of the assessee as a JV partner, the assessee has not charged any interest on the said advance. It was also submitted that relationship on account of advancing funds could not be considered in isolation without considering crucial business scenarios and expediency.
2.7 However, the aforesaid submissions could not convince Ld. AO and therefore, internal CUP as proposed by the assessee was rejected since loans taken by the assessee from Bank were secured loans and guaranteed by the assessee himself and therefore, the same could not constitute as internal CUP.
2.8 Since the assessee did not offer any suo-moto TP adjustment, the provisions of Sec. 92CA(3)(a) & (c) were invoked and Ld. AO proceeded to benchmark the same against appropriate rate. Finally, it was held that the interest should be charged at the rates applicable for fixed rates loan. The benchmarking was to be done on the basis of LIBOR plus some spread. Adopting Bloomberg database, the benchmark rates were held to be 15.36% for FY 2010-11 & 11.29% for FY 2011-12. Applying the said rates to opening advances and fresh advances, net TP adjustment thus proposed worked out to be Rs.245.43 Lacs, as computed in para 6.1 of the order. The TP adjustment, thus proposed, was incorporated while framing assessment order.
3. Before Ld. CIT(A), the assessee reiterating the submissions asserted that the advances given to its AE were not in the nature of loan and hence, interest was not charged on such advances. The Ld. TPO failed to appreciate that assessee’s role in the transaction as an entity substantially interested in the joint venture and proceeded to treat the assessee merely a fund provider. The funds were advanced as a business partner so as to sustain the business of joint venture and with a view to protect own interest. The advances were given to resolve the problem of cash crunch and the therefore, the ultimate beneficiary would be assessee himself since the assessee was 50% partner in the joint venture. Therefore, the concept of loan could not be applied to the assessee’s case since the cost and benefit would ultimately accrue to the same person. However, not convinced, the adjustment was confirmed, against which the assessee is under further appeal before us. The Ld. CIT(A) agreed with assessee’s submissions that that the ALP of the loans was to be determined on the basis of rate of interest being charged in the country where the loan was received /consumed and directed Ld. AO to recompute the ALP.
4. Upon careful consideration, the undisputed position that emerges are that the advances have been given by the assessee to an entity in which it held 50% share. The assessee has entered into a Joint Venture (JV) agreement with an entity namely Edison Jehamo Power (PTY) Ltd. (EJP) on 25/11/2009 with respect to transmission line construction project. The assessee’s proportionate share in the JV was 50%. From the financial statements of JV entity as placed on record, it is quite discernible that the accumulated losses of that entity, at year-end, stood at 98.26 Million Rands which are substantially funded out of joint venture partners’ account amounting to 162.80 Million Rands. The assessee’s contribution in the JV account is 41.12 Million Rands. The JV incurred losses of 108.13 Million Rands during the year, which has primarily triggered the assessee to make the stated advances to its JV. These advances have been classified under the head Joint Venture partners’ account. All these facts would lead strength to the argument of Ld. AR that there was pre-existing liability to make such advances to JV and the business interest of the assessee would have been adversely impacted by not making such advances. The advances were more in the nature of capital contribution and by advancing the same, the assessee had protected its own business interest which is evident from the financial statements of JV. The advances were towards fulfilment of the assessee’s obligation of being a JV partner as any financial incapacitation of JV would adversely affect the continuation of the project and ultimately jeopardize the interest of the assessee. Therefore, the said advances could not be put in the category of loans as done by the lower authorities. Further, it could not be said that JV entity derived / gained certain benefits out of such advances but rather it was the assessee who would ultimately gain by continuing with the projects and taste the fruits of the success of project. Hence, not convinced with impugned adjustments as confirmed by first appellate authority, we direct Ld. AO to delete the same.
5. The assessee’s appeal stands allowed in terms of our order.
Revenue’s Appeal ITA No.115/Mum/2018
6.1 The grounds raised by the revenue read as under: –
PERFORMANCE GUARANTEE:
i. On the facts and circumstances of the case, the Ld.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 Ld.CIT(A) was not justified in deciding that the cost recovery was at arm’s length itself as the assessee has recovered 0.60% 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 circumstances of the case, the Ld.CIT(A) was not justified in deciding that the guarantee for advance payment 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 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 Ld.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 0.60% 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 Ld.CIT(A) was not justified in deciding that the performance guarantee provided to third party i.e. Bahwan Engineering Company LLC on behalf of its AE i.e. 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 Ld.CIT(A) was not justified in deciding that the performance guarantee provided to third party i.e. Bahwan Engineering Company LLC on behalf of its AE i.e. 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 Ld.CIT(A) was not justified in deciding that the performance guarantee provided to third party i.e. Bahwan Engineering Company LLC on behalf of its AE i.e. KEC Global FZ LLC was not an international transaction without appreciating the fact that the term “guarantee” clearly mentioned in Explanation of section 92B(l)(c) of IT Act 1961 as an International Transaction.
viii. On the facts and circumstances of the case, the Ld.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 Ld.CIT(A) was not justified in deciding that the cost recovery was at arm’s length itself as the assessee has revered 0.60% 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.
CORPORATE GUARANTEE :
x. On the facts and circumstances of the case, the Ld.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, which was a facility provided to its AE.
xi. On the facts and circumstances of the case, the Ld.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.
xii. On the facts and circumstances of the case, the Ld.CIT(A) was not justified in deciding that the Corporate guarantee provided to ICICI Bank on behalf of its AE i.e. 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.
xiii. Mark to Market Loss: “On the facts and in the circumstances of the case, the Ld.CIT(A) erred in holding that the mark to market loss arising on the foreign exchange contracts which were outstanding as at the year end is an accrued loss and not a notional loss.
xiv. On the facts and in the circumstances of the case, the Ld CIT(A) erred in holding that the mark to market loss arising on the foreign exchange contracts which were outstanding as at the year end, is an accrued loss and is not contingent, unascertained or notional in nature and hence, no adjustment could be made to the book profit under clause (c ) of the Explanation (1) to section 115JB(2).
As evident, the grounds raised by revenue are related with addition arising out of TP adjustment against performance guarantee and corporate guarantee given by the assessee on behalf of its AE. In ground nos. (xiii) & (xiv), the revenue has assailed the action of Ld.CIT(A) in treating the Market-to-mark (MTM) losses on forex contracts to be an accrued loss.
6.2 The Ld. AR, at the outset, submitted that substantial issues of revenue’s appeal are covered in assessee’s favor by the earlier decision of this Tribunal for AY 2010-11, ITA No.5611/Mum/2015 order dated 10/07/2019 and therefore, the same view may be taken in this year. The copy of the same has been placed on record. The Ld. DR could not controvert the said position but supported the adjustments proposed by Ld. TPO.
6.3 In the above background, during proceedings before Ld. TPO, it transpired that the assessee advanced certain corporate and performance guarantee for its AE, the details of which are as follows: –
Performance Guarantees:
