Case Law Details
Bennett Coleman & Co Ltd Vs DCIT (ITAT Mumbai)
What is being termed as a guarantee is the obligation of the assessee company, in terms of “agreement for the sale and purchase of entire equity share capital of Virgin Radion Holdings Ltd UK” dated 30thMay 2008, which has led to the actual crystallization of sale on 30th June 2008. The related agreement clause was, at the cost of repetition, ““In consideration of the seller entering into this agreement, …(the TIML-India), as primary obligor and not merely as surety, unconditionally and irrevocably guarantees to the seller the proper and punctual performance of the purchaser’s obligations under this agreement and the transaction documents, including, without limitation, due and punctual payment of any sum which the purchaser is liable to pay”. The first question that arises before us is whether it can be treated as a performance guarantee by the SPV. As we explore the answer to this question, we have to bear in mind the fact this agreement is also not a standalone agreement in the sense it is to be read in conjunction with several other preparatory documents, such as bid document, final offer, and emails exchanged concerning the terms, leading to the acquisition of the target entity.
In this background, we may refer to the final offer dated 19th March 2008, which specifically states, inter alia, that (i) 5- Identity of shareholders (with immediate and ultimate ownership); Bidco (an SPV formed specifically for the purpose of acquiring Virgin Radio) is 100% owned by TIML. The immediate and ultimate shareholder of TIML is Bennett Coleman & Co Ltd…..; (ii) 6- Financing: The transaction will be 100% equity-financed from the internal resources of TIML/BCCL. No further financing is required to be given the size of this transaction relative to the TIML/BCCL group; and (iii) 7- Internal approvals: (a) we confirm that all the relevant internal approvals from TIML/BCCL have been received. There are no other providers of equity finance. (b) Following on from point 6 above, the financing is unconditional (other than general conditions set out above) , and, therefore, bank commitment letters are not required to support this final proposal.
It was acceptance of this proposal, which was followed by exclusivity agreement dated 3rd April 2008, subsequent modifications thereto, agreement to purchase and sell dated 30th May 2008, eventually culminating in the acquisition of target company on 30th June 2008. Quite clearly, therefore, the financial obligation for financing the acquisition of the target company by the SPV was already assumed by the assessee company, and, for that reason, the clause in question in the agreement dated 30th May 2008 did not put any additional obligations on the assessee vis-à-vis seller of the target company.
When the assessee already has an obligation to finance the transaction the acquisition of the target company by the SPVs, the same obligation being reiterated, in different words, does not amount to a performance guarantee by the SPV. And if such a commitment is reiterated for the performance of own obligations, the reiteration of this own commitment cannot have an arm’s length price. As a matter of fact, what is being reiterated, in clause 22.1 of the agreement dated 30th May 2008, is own commitments which are being discharged through SPV. This cannot be compared with a third-party guarantee which alone can have an arm’s length price, and, in any case, such a third party guarantee consideration, as has been adopted as a comparable in this case, does not constitute a valid CUP comparable. As we have noted earlier, the entire sale transaction in question was at the initiative of the assessee company itself. The exclusivity agreement dated 3rd April 2008, which is the foundational basis of the entire transaction and eventual sale of the Virgin Radios, was entered into by the assessee company. A copy of this exclusivity agreement is placed before us at pages 55 and 56 of the paper book.
It is not even in dispute that the SPVs in question came into existence due to the decision to purchase, taken by the assessee company, and to execute the said decision at the operational level. Thus, the entire transaction of acquiring Virgin Radios was in furtherance of the business interests of the assessee company, finalized by the assessee much before even the AE in question came into existence, and the assessee company was de-facto beneficiary of this transaction. Under these circumstances, the assessee company cannot be treated as a guarantor but rather as a primary obligor for its own transaction undertaken through the SVP. Viewed in totality, the service is not by the assessee company to the SVP, but the other way round. That is quite unlike and incomparable to a performance guarantee issued by a third party that is issued for the benefit of the entity for which it is issued, and not for the benefit of the entity issuing the guarantee. Let us assume, for a minute, that such a guarantee can hypothetically be issued, by or for an independent enterprise. In that case, it cannot have an arm’s length price because the beneficiary and the issuer of the guarantee is the same entity.
In any event, the CUP input is taken as the bank guarantee, which guarantees the performance of a commitment assumed under a contract in which the bank has no role to play. The bank, in such a case, is not only an independent enterprise but also a rank outsider so far as the transaction in respect of which performance guarantee is issued. That cannot be compared with a case in which the enterprise issuing the guarantee, whether an associated enterprise or an independent enterprise, is also a beneficiary of, and party to, the main transaction itself. The very comparison of this different genus of obligations is vitiated in law and on facts.
To summarise, the impugned ALP adjustment must stand deleted on the ground that the clause in question in the agreement dated 30th May 2008 does not constitute a third party guarantee- like a bank guarantee which is taken as a comparable, and, even if it is assumed that it does so constitute a guarantee, the arm’s length price of such a performance guarantee, if at all it can be so held to be in character, will not be ascertainable under the CUP method for want of a valid comparable of the similar nature of guarantee. The very foundation and rationale of the impugned ALP adjustment, on the CUP basis, is thus devoid of any legally sustainable basis. We, therefore, delete this ALP adjustment of Rs 75,06,520. The assessee gets the relief accordingly. There are many other facets of this case but we have not dealt with those factual and legal aspects because we have decided this issue on the short grounds on which both the parties have been heard at length anyway. All these issues thus remain open for adjudication as and when really required.
FULL TEXT OF THE ORDER OF ITAT DELHI
1. This appeal challenges correctness of the order dated 25thNovember 2013, passed by the Assessing Officer, pursuant to directions of the Dispute Resolution Panel, under section 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961, for the assessment year 2009-10.
2. The core issue requiring our adjudication, in this case, is whether an interest-free debt funding of an overseas company in the nature of a special purpose vehicle (SPV), with a corresponding obligation to use it for the purpose of acquisition of a target company abroad, can be compared with a loan simpliciter, and be, subjected to an arm’s length price adjustment, on the basis of Comparable Uncontrolled Price (CUP) method accordingly,. The issue in dispute is an ALP adjustment of Rs 44.26 crores on account of notional interest on a loan stated to be of this nature by the assessee company to its fully owned foreign subsidiary, which is used as an SPV for overseas acquisitions.
3. To adjudicate on this issue, a few material facts, as discernible from material on record, need to be stated. The assessee before us is a company now merged in Bennett Coleman & Co Ltd, the flagship company of a well-known Indian media group- commonly known as ‘Times Group’. At the relevant point of time, the assessee company, then known as Times Infotainment Media Ltd (TIML-India, in short), was a fully owned subsidiary of Bennett Coleman & Co Ltd and was engaged, inter alia, in the radio broadcasting business. When the Times Group decided to expand its wings in the radio broadcasting business and acquire overseas companies engaged in this line of business, as is stated, it was considered commercially expedient to make these investments through the assessee company. A public listed company in the United Kingdom, by the name of Scottish Media Group plc (SMG-UK, in short), wanted to disinvest in its radio broadcasting business, and that is the reason it put to auction its entire shareholding in Virgin Radio Holdings Limited, UK, (Virgin Radio, in short) which was held through SMG’s wholly-owned subsidiary Ginger Media Group Ltd, UK. (Ginger-UK, in short). TIML-India was one of the successful bidders in this auction. The assessee was then invited to participate in the ‘final proposal’ phase of this disinvestment deal. A final proposal dated 19th March 2008 was submitted by the TIML-India. This offer, at point no. 5, specifically stated, under title ‘Identity of the shareholders (with immediate and ultimate ownership)’ that the purchasing company will be “an SPV formed specifically for the purpose of acquiring Virgin Radio”, which is “100% owned by TIML” and that “the immediate and ultimate shareholder of TIML is Bennett Coleman & Co Ltd”. In point no. 6, it was further stated that “the transaction will be 100% equity-financed from internal resources of TIML/BCCL” and that “no further financing is required given the size of this transaction relative to the TIML/BCCL group”. What followed is an exclusivity agreement dated 3rd April 2008 with respect to possible sale by Ginger Media Group Ltd, one of SMG plc’s wholly-owned subsidiaries to TIML-India “the entire share capital of Virgin Radio Holdings Ltd”, which ultimately culminated in, on 30th May 2008, a sale agreement was entered into between Ginger UK, SMG-UK, TIML-India and a company by the name of TML Golden Square Ltd, UK (TIML Golden, in short). The TIML Golden was thus evidently the SPV (special purpose vehicle company) for the purpose of acquiring Virgin Radio. TIML was initially incorporated by a third party, Huntsmoor Nominees Limited, with a paid-up capital of £ 1, on 22nd May 2008, and it was subsequently acquired by TIML, on 30th May 2008, by purchasing the £ 1 share. Subsequently, one more UK based SPV came into the picture as the assessee acquired another TIML Global Limited (TIML Global, in short), a company incorporated with a £ 1 paid-up capital by Huntsmoor Nominees Limited, on 13th June 2008. This company was acquired by TIML-India, by purchased the £ 1 share on 16th June 2008. On acquisition of TIML Global, and with a view to make TIML Golden a step down subsidiary, the only £ 1 share of TIML Golden, which was held by TIML-India, was transferred to TIML Global. TIML Golden and TIML Global, at this point of time, were typical £ 1 companies without substance- which were to be used special purpose vehicles for the acquisition of Virgin Radios. This transaction also took place on 16th June 2008 itself. As a result of these transactions, TIML Golden became a wholly-owned subsidiary of TIML Global, TIML Global became a wholly-owned subsidiary of TIML, and, TIML anyway was already a wholly-owned subsidiary of BCCL. With this structure in place and the deal having been finalized, the flow of funds started to complete the transaction. TIML received Rs 388.85 crores as interest-free deposits from its holding company, i.e. BCCL, and Rs 100 crores as a subscription for 1% non-cumulative preference shares. TIML-India then remitted UK £ 56,824,316 (UK £ 1.2 million for equity, and balance UK £ 55.824 million as an interest-free loan to TIML-Global on 27th June 2008. Once this amount of UK £ 56.82 million was received by TIML-Global, it paid UK £ 53.51 million, on that day itself, on behalf of TIML-Golden, for the acquisition of Virgin Radio shares, and the balance amount of TIML-Golden for other acquisition-related costs. The acquisition of shares in Virgin Radios by TIML-Golden was completed on 30th June 2008. A further payment of UK £ 3,75,000, as an interest-free loan, was made by TIML India to TIML Global for the working capital costs. It was in this backdrop that form 3CEB filed by the assessee company disclosed the following transaction with its AE: “Amount remitted Rs 477,10,41,750”.
4. When the aforesaid transaction came up for scrutiny before the Transfer Pricing Officer, as a result of the reference under section 92CA(1) having been made to him, the Transfer Pricing Officer was of the considered view that the amount has been as a loan by the assessee in its annual return, and, therefore, the benchmarking of this loan transaction is required to be done as “an independent entity would have charged interest on such a transaction”. The plea of the assessee that this activity was in the nature of the stewardship activity was rejected. The claim of the assessee that the loan was in the nature of quasi-equity and as it was for the purpose of making strategic investments for and on behalf of TIML India and the Times Group, and, therefore, the arm’s length price adjustment for the interest was not warranted. This plea did not find favour with the TPO. He was of the view that once the transaction is characterized as a loan, in an arm’s length situation, interest will have to be charged for the same and that any non-charging of interest, in such a situation, will invite ALP adjustment. As for the claim that the assessee had received interest-free funds from its parent company and paid over the same to its wholly-owned subsidiary, for the purposes of making a strategic investment on behalf of the Group, while the Transfer Pricing Officer noted that the assessee had paid only Rs 13,80,991 as interest during the entire year, he observed that in an arm’s length scenario. “not only the would the loaning party meet the cost of serving its loan, it would build a profit element into the rate to be received”. As regards the reliance on Reserve Bank of India’s approval for the character of remittance, the Transfer Pricing Officer was of the view that the “RBI’s approval does not put a seal of approval on the true character of the transaction from the perspective of transfer pricing regulations”. The Transfer Pricing Officer also rejected the plea that since the funds were given for a specific purpose, no interest can be attributed to the same even in an arm’s length situation. The TPO was of the view that “(a) the assessee has provided loan to its subsidiary without adequate arm’s length compensation; (b) the loan is unsecured as the borrower did not provide any security; (c) lending or borrowing is not main business of the assessee; and (d) in an uncontrolled transaction like this between the unrelated parties, interest would have been charged taking into account creditworthiness of the subsidiary, risks, security or any other consideration relevant for deciding financial solvency of the borrower”. The TPO then proceeded to adopt the “CUP method” for determining the arm’s length price. It was also observed that “it can be reasonably concluded that the interest rates prevalent in India are relevant for benchmarking outbound foreign currency loan is extended by the assessee to its AE, mainly for the reason that source of loan is Rupees, and Rupees are then converted into GBP the time of advancing a loan and the benchmarking is for the loan advanced and not for conversion of loan from Rupees to GBPs”. As for the applicability of LIBOR rate, the stand of the TPO was that “LIBOR does not apply to the transactions originating in currencies, such as INR, i.e. a currency which is not the LIBOR basket. The discussions about the rate at which benchmarking of interest is done, not being relevant for the present purposes, is not being referred to. Suffice to say that the Transfer Pricing Officer thus proceeded to benchmark this loan transaction as a transaction of unsecured loan, and taking the arm’s length interest @ 13% on the remittance of Rs 477.10 crores, and the TPO computed the arm’s length interest at Rs 47,20,68,074. When this disallowance was proposed by the Assessing Officer, the assessee raised the objections before the Dispute Resolution Panel, but without any success. Learned DRP confirmed the action of the authorities below in principle but reduced the quantum of ALP adjustment by altering the benchmarking rate to 12.25% and correcting the period for which the loan was given. While doing so, the DRP observed as follows:
3.4.1 Brief fact of the case is that the assesses M/s. TIML India is a company having investment in companies engaged in private FM radio broadcastings. It also has investment in film entertainment business and event management and experiential marketing business through investment in its subsidiary. During the period under consideration, the assessee made maiden entry in the international media business through participation in an auction m March, 2008 for its radio business in the UK. The proposed acquisition of Virgin Radio was for and by TIML India. Therefore, the assessee claimed that the potential sales of Virgin Radio was strictly between SMG Plc and TIML India, though the same got executed through SPV created for effecting the acquisition. The assessee contended that since a direct acquisition by TIML India would have imposed additional legal obligation in the UK on TIML -India, It was decided to effect the acquisition through SPV which are 100% equity financed from the international resources of TIML India / BCCL.
3.4.2 On the other hand, the Ld. TPO has given the fund flow chart of the assessee at Pg. 5 para 6.2 of his order which demonstrates that the assessee has given interest free loan to its AEs. In response to the show cause given by the TPO the assessee reiterated his submissions to the effect that TIML made investment in Virgin Radio via TIGL and TIML Golden for expanding its presence in the UK radio market. It further submitted that FEMA, 1999 permits an Indian company to make an investment in its overseas WOS through a mix of equity loan and provision of guarantee. The loan provided by the parent is merely an arrangement enabling the subsidiary to avail funding through debt rather than shareholders equity and therefore the same partakes the character of quasi equity. The assessee claimed that the debt equity ratio of the wholly owned subsidiary and adequacy of capitalization is determined by the parent. Since the subsidiary capital structure is factually and economically controlled by the parent, any action taken by the parent to supplement or strengthen the creditworthiness are integral part of equity support which parent provides to the subsidiary.
3.4.3 Thus, there seems to be no dispute regarding the treatment of fund in this case of the TPO and the assessee. The only point of dispute is that the Ld. TPO has obtained that though the assessee’s stated intention was to invest in the equity, the actual mode adopted by it is that of loan. Once it is accepted by the assessee that it has given loan to the AE, the only possible treatment for the transaction has to be to treat it as a loan to the AE. The Ld. TPO has also pointed out that the assessee itself has referred this transaction as loan in its annual report. In the opinion of the ld. TPO, any independent entity would have charged interest on such transactions.
3.4.4 Thus, it is seen that, both the assessee and the TPO have accepted the fund to be a loan. However, the assessee has contended that significantly the fund is equity in nature. In our considered opinion, there is no need to look beyond the proximate nature of funding and the purported nature of the same while doing the transfer pricing study. It is not material whether the asssessee could have contributed to the AE in any farm other than the loan. It is stated position that the assessee advanced the loan to the AE for which it did not charge any interest. As long as the fund stood as loan in the AE’s books and the assessee’s books, the law not only permitted but required the TPO to undertake transfer pricing adjustment in respect of the transaction treating the same as loan. The ld. TPO has further differentiated the risk reward matrix of loan and equity transaction at para 6.5.2 to conclude the transaction as the loan transaction. Under the circumstances, we are of the considered opinion that the Ld. TPO and AO have correctly treated the transactions as loan and conducted the TP study based on this finding.
3.5 This brings us further to the issue of quantification of the adjustment on this account. The assessee has contended before the TPO and now again before the DRP that LIBOR rates should be considered for benchmarking outbound loans from India. During the course of hearing the assessee was required to submit the working of the L1BOR rate along with an appropriate spread. It was stated that TIML India funded its AE TIML Global with GBP 55,999,316 on 27/6/2008. Average rate of six months of GBP LIBOR for the period June, 2008 to March, 2009 was 4.515%. As regards the premium over LIBOR, the assessee relied on ECB search. The arithmetic mean of the spread worked out to 102 basis point. Accordingly, it was claimed that LIBOR plus for this tranche worked out to 5.535%.
3.5.1 As regards the funding of GBP 375,000 on 19/9/2008, the six months GBP LIBOR for the period September, 2003 to March, 2009 was 3.861%. ECB search yielded 102 basis points as premium. Accordingly, the LIBOR plus for this tranche worked out to 4.881%.
3.5.2 This working given by the Ld. AR of the appellant is in contradiction to the working furnished by the Ld. TPO at para 6.5.7 to 6.5.11. There is substance in Ld. TPO’s contention that the assessee has provided loans to its AE without adequate arm’s length compensation. Subsidiary has not given any security. If it was an uncontrolled transaction between unrelated parties, interest would have been charged taking into account creditworthiness of the subsidiary and associate risks and securities.
3.5.3 As regards interest rate, the TPO has considered the rate of 10% p.a., which is also the rate paid to BCCL for a short term borrowing. He further added risk premium of 3% to cover risk on international transaction including risk from foreign exchange fluctuation. Accordingly, the TPO has charged interest at the rate of 13% p. a. In this connection, the assessee submitted without prejudice that the notional interest should not be charged on the outstanding dues, that even if the interest is to be charged, it should be charged at the LIBOR rate.
3.5.4 As regards premium of 3% the assesses has submitted that between Group entities so there is no credit collection risk. It is stated that as for the year under consideration, there is foreign exchange gain amounting to INR 55,883,891 and in fact no loss, the risk on account of foreign exchange fluctuation is irrelevant.
3.5.5 The TPO has applied 10% p.a. rate which is also the rate of interest paid by the assessee on other loans plus Risk premium of 3% amounting to 13% for charging interest. However, it is seen that the SBI PLR rate for the relevant period is 12.25%. There cannot be a justification for the gross interest rate exceeding the SBI PLR rate. The assessee’s argument is not acceptable as the LIBOR is the rate prevailing for lending or borrowings made by the banks where as when persons other than banks borrow, LIBOR has to be increased by a mark up. The mark up on LIBOR depends upon the credit rating and securities offered by the borrower. The assessee has not furnished any particulars relevant to its AE’s credit worthiness. Therefore, application of LIBOR plus rate is not possible. Even if the credit worthiness particulars are provided the assessee has to provide comparable instances of 3rd party with similar credit worthiness procuring loan at LIBOR plus rate. In the absence of any such comparable instances, the LIBOR plus rate as contended by the assessee cannot be applied. As regards application of SBI PLR, it is the rate at which persons other than banks can lend / borrow in India. Further, it is also seen that as per the safe harbor norms recently notified, the rate of interest to be charged on loans is SBI PLR. Though safe harbor norms are not applicable in this year, the same shows the legislative recognition given to the PLR for the purpose of ALP determination. Therefore, the action of the AO for charging interest exceeding that rate cannot be approved. Accordingly, the AO is directed to re-compute the adjustment by applying the rate of 12.25%.
4. The assessee’s contention in ground of objection No.10 is correct in so far as it has pointed out that though TIML India provided funds in two tranches to its AE, the Ld. TPO erred in considering the period of loan for the second tranche of GBP 375,000 from 27/6/08 instead of 19/9/08. The Ld. TPO / AO will cause necessary corrections in this regard besides carrying out the directions in respect of percentage of 12.25% to be applied for working out the interest component.
5. Accordingly, the ALP adjustment was recomputed by the Assessing Officer at Rs 44,26,61,264 and added to the income of the assessee. So aggrieved, the assessee is in appeal before us, and has raised the following grievances so far as the above issue is concerned:
On the facts and in the circumstances of the case and in law, the learned AO based on directions of Hon’ble DRP has:
Transfer pricing adjustment on the funds provided to TIML Global Limited (hereinafter referred as ‘AE’)
2. erred in computing the arm’s length interest with respect to the alleged international transaction of provision of loan to the AE resulting in an addition of Rs. 44,26,61,264 to the total income of the Assessee.
Transaction akin to stewardship activity
3. erred in not appreciating the fact that the alleged loan transaction was given for the purpose of acquiring a controlling stake in company outside India, which was in the same business of the Assessee and hence the transaction was akin to stewardship activity which does not require any benchmarking analysis.
4. erred in not appreciating the impugned loan transaction was entered into purely out of commercial expediency and hence the intent of giving loan to the AE should be taken into consideration.
Funds to AE are quasi-equity
5. erred in not accepting the fact the funds provided by the Assessee to its AE are quasi-equity in nature and hence the question of charging any interest on the same does not arise.
Funds provided to the AE do not bear any cost
6. erred in not considering the fact that Assessee has remitted funds to its AE out of the funds received from its holding company, which have been provided to the Assessee free of cost for the purposes of acquisition.
Arm’s length interest rate
7. erred in law and in facts in considering the SBI Prime Lending Rate (PLR) of 12.25% p.a. as the arm’s length interest rate for imputation of notional interest on the alleged loan transaction.
8. without prejudice to the above, erred in not appreciating the fact that certain adjustments would be required to the SBI PLR rate considered for arriving at the arm’s length interest rate, considering the fact that the impugned loan transaction involved minimal risk in respect of repayment, complete transparency of the transaction and control over the AE’s activities.
9. without prejudice to the above, erred in not considering the LIBOR rates as the arm’s length interest rate for benchmarking of the alleged loan transaction as the said loan was given in foreign currency.
6. We have heard the rival contentions at considerable length, perused the material on record and duly considered facts of the case in the light of the applicable legal position. The basic plea of the assessee, on which we are deciding this appeal, is the limited scope of application of the CUP method, and whether any commercial interest can be attributed, as an ALP adjustment, to such interest-free debt funding on the peculiar facts of this case. There have been considerable arguments on judicial precedents on the broad proposition that there can not be any arm’s length price adjustments, under the transfer pricing legislation, on the interest-free debt funding to the SPVs, but, for the reasons we will set out in a short while, it is not really required to deal with that aspect of the matter. Learned counsel for the assessee has highlighted the peculiar nature of this transaction, emphasized that no interest can be attributed to such funding, particularly when the funds advanced are to be used only in the manner specified and in furtherance of the commercial interests of the assessee rather than the SPV, and submitted that, in any case, it could not be compared with loans simpliciter – as has been done by the authorities below. He has painstakingly taken us through the orders of the authorities below, including the Transfer Pricing Officer and the Dispute Resolution Panel, and made an effort to demonstrate glaring fallacies in the application of CUP method. He has also taken us through a large number of judicial precedents, but then, as we are deciding the matter on the first principles, and none of the judicial precedents come in the way of that exercise, we see no need to deal with all these judicial precedents at this stage. Learned Departmental Representative’s basic argument has been that since such funding of SPV is required to be treated as an international transaction, it is required to be benchmarked anyway. On the question of application of CUP on the facts of this case, his plea has been that since the funding is admittedly in the nature of, and described in the books of accounts, as a loan, the interest imputation is inevitable. When learned Departmental Representative was confronted with, what appeared to us, infirmities in the application of CUP method, it was his submission that even if there are some shortcomings in the determination of the arm’s length price, though he maintains that there are no such infirmities in substance, the matter may be remitted at the assessment stage for fresh adjudication on the determination of arm’s length price. He fairly submits that if Indian PLR is not good enough as a benchmark for this loan, in all fairness, at least LIBOR is a good enough benchmarking tool for GBP denominated loan. Learned counsel reiterates his submissions, submits that this transaction is shown as a loan in the books of accounts as that is the only way in which it can shown, under the legal requirements, but then nothing really turns on how the transaction is treated for accounting purposes. Learned counsel for the assessee has vehemently opposed this suggestion and submitted that what is before this Tribunal is an adjudication on the arm’s length price adjustment made and confirmed by the authorities below; if this arm’s length price adjustment is incorrect, the Tribunal has to delete the same. As for what other remedies are available to the authorities below to correct their mistakes, it is not for the Tribunal to do anything parallel or to override the same. He thus reminds us, in his inimitable subtle way, of our role as a neutral forum and our limitation of not being able to supplement or improve the case of the Assessing Officer and the Transfer Pricing Officer. In addition to these arguments, many other facets of the matter have been argued before us, but then, in our considered view, it is not really necessary to deal with those facets.
7. On a conceptual note, the determination of arm’s length price is essentially an effort to neutralize the impact of intra- AE relationship in a transaction between two associated enterprises as also the impact of controlled conditions in such a transaction. In other words, the entire ALP ascertainment exercise is to determine if a hypothetical or real but same or materially similar transaction was to take place between two independent enterprises in uncontrolled conditions, whether such a hypothetical transaction would have been any different vis-à-vis the subject transaction entered into two associated enterprises, and, if so, to quantify the impact of such variations.
8. While Section 92(1) that any income arising from an international transaction, which essentially refers to the transactions with associated enterprises- under section 92B, shall be computed “having regard to the arm’s length price”, Section 92 F (ii) provides that “arm’s length price means a price which is applied or proposed to be applied in a transaction between persons other than associated enterprises, in uncontrolled conditions”. It could thus be a historical price, which is applied in a transaction in the uncontrolled transaction, or a hypothetical price “proposed” to be applied in a transaction which is yet to take place or a transaction which is purely hypothetical, or even an entirely imaginary, formula-based, price- as is inherent in the scheme of the computation of ALP by methods permitted under section 92C– which includes indirect methods as well. We will come back to this aspect a little later.
9. It is interesting to take note of the expression “uncontrolled conditions” in Section 92F(ii), and that is in addition to the transaction being “between persons other than associated enterprises”. One way of looking at the impact of expression “controlled conditions” could be that any conditions restricting the plain vanilla nature of that transaction are required to be ignored for the purpose of the ascertainment of the arm’s length price. That would mean that not only that we have to assume that the arm’s length price has to be a real, hypothetical and imaginary price of the same or similar transaction between independent enterprises but also the price of a transaction in which the ‘controlled conditions do not exist. Of course, there could be another school of thought that the expression ‘control conditions’ essentially refers to a situation in which the parties to the transactions have no control on each other in the sense the parties are not the associated enterprises under section 92A, and that the fact of the parties to a transaction being associated enterprises, by implication, renders it a transaction in controlled conditions inasmuch Section 92A(1) and (2) recognizes various situations in which such control or influence would vitiate the purely commercial nature of the transactions. That only incongruity in that approach, incongruity if it is, will be that the expression ‘controlled conditions’ will then be rendered infructuous, unless viewed as a measure of abundant caution (ex abundanti cautela), inasmuch as Section 92F(ii) specifically refers to the situations in which the transactions are between persons other than associated enterprises. Be that as it may, given the facts of this case in which CUP method is applied, which specifically does not refer to the transaction between independent enterprises separately, and uses the expression ‘uncontrolled transaction’, rather than ‘transaction between persons other than associated enterprises (i.e. independent enterprises) in the uncontrolled conditions’, and the expression ‘uncontrolled transaction’ on a standalone basis, can reasonably refer to the transaction simply being between independent enterprises, the issue regarding the impact of neutralizing other ‘controlled conditions’, even if that expression is seen independent of Section 92A, may not really arise, and we need not, therefore, be drawn into this aspect of the matter any further.
10. Then comes the mechanism through which this arm’s length price is to be arrived at. Section 92C(1) lays down the manner in which arm’s length price is computed, by providing that “the arm’s length price in relation to an international transaction shall be determined by any of the following method, being the most appropriate method having regard to the nature of transaction, class of transaction or class of associated persons or functions performed by such persons or such other relevant factors as the Board may prescribe, namely (a) comparable uncontrolled price method; (b) resale price method; (c) cost plus method; (d) profit split method; (e) transactional net margin method; or (f) such other method as may be prescribed by the Board”. The methodology of computing the arm’s length price in this case, as adopted by the TPO, is Comparable Uncontrolled Price (CUP) method, which is explained by rule 10B(1)(a) as follows: “comparable uncontrolled price method, by which,—(i) the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified; (ii) such price is adjusted to account for differences, if any, between the international transaction and the comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the price in the open market; (iii) the adjusted price arrived at under sub-clause (ii) is taken to be an arm’s length price in respect of the property transferred or services provided in the international transaction 92.”
11. The destination is thus arm’s length price as defined in section 92F(ii), and the means to reach that destination are ser out in the methods of determining arm’s length price under section 92C(1), and the path chosen by the Assessing Officer, which is in challenge before us, is CUP method which is defined under rule 10B(1)(a) of the Income Tax Rules, 1962. It is in this light we have to address the issue before us. To ascertain the arm’s length price in this case, therefore, the starting point of this exercise is to understand, in the right commercial perspective, the nature of the transaction itself, and then find out the terms of the materially similar transaction in an uncontrolled situation, in the sense it should be between the independent enterprise, and visualize the terms of the materially similar transaction in an uncontrolled situation.
12. It is important to understand the true nature of this transaction because everything hinges on what is the true nature of the transaction in question. The transaction is a remittance of Rs 477.10 crores to a wholly-owned subsidiary for making further payment of the cost of acquisition of a target company in the name of a step-down subsidiary which is fully owned by this fully owned subsidiary of the assessee company. Let us not forget the fact that the assessee company was one of the successful bidders in the purchase of the entire equity capital of Virgin Radios, which was held by Ginger Group plc UK- a wholly-owned subsidiary of the Scottish Media Group plc. Upon carrying the due diligence, and completion of other prerequisite steps, the assessee makes a final proposal, on 10thMarch 2008, with respect to the acquisition of Virgin Radios from Ginger Group plc UK, when TIML Global UK was not even in existence. TIML Global, the AE to which the remittance in question is made, was incorporated on 13th June 2008 in the UK and acquired by the assessee on 18th June 2008. Yet this final offer states that an SPV is formed especially for the purpose of acquiring Virgin Radios, and this SPV will be entirely funded from internal resources of the assessee company and its Indian parent company. Clearly, therefore, the agreement to acquire the Virgin Radios was reached much before the AE in question, i.e. TIML-Global, even came into existence, and the AE in question, i.e. TIML-Global, was used as a medium to acquire Virgin Radios. It is not thus a loan simpliciter to TIML-Global, but it is in the nature of an advance to TIML-Global with a corresponding obligation to use the funds advanced in the manner specified. The entire funds so remitted to the TIML-Global UK were spent by TIML-Global UK on the acquisition of Virgin Radios UK for TIML-Golden UK, a step-down subsidiary, and this end-use of funds remitted was essentially an integral part of the entire transaction. The role of the assessee company, though technically described as ‘purchaser’s guarantor in the agreement dated 30th May 2008, is so foundational and critical that the said agreement, in paragraph 22.1, states that “In consideration of the seller entering into this agreement, …(the TIML-India), as primary obligor and not merely as surety, unconditionally and irrevocably guarantees to the seller the proper and punctual performance of the purchaser’s obligations under this agreement and the transaction documents, including, without limitation, due and punctual payment of any sum which the purchaser is liable to pay”. The assessee company is into the radio broadcasting business, and, much before even the AE came into existence, the assessee company had bid for, and successfully bid for, the target company, which was eventually acquired by its wholly-owned step-down subsidiary. The acquisition of the target company was thus at the instance of, in furtherance of business interests of the assessee company, and structured by the assessee company. The remittance of funds to TIML-Global was for this limited and controlled purpose, and sequence events and the material on record unambiguously confirm this factual situation- and that is not even called into question by the revenue authorities. The transaction of remittance to TIML-Global cannot, therefore, be considered on a standalone basis and can only be viewed in conjunction with the restricted use of these funds, for the strictly limited purposes, by the TIML-Global.
13. If at all, therefore, this transaction can be compared with any other transaction, such other transaction can only be for the purpose of making remittance to an independent enterprise with the corresponding obligation to use the funds so remitted for acquiring a target company already selected by, and on the terms already finalized by, the entity remitting the funds. The essence of the transaction is a targeted acquisition and providing enabling funds for that purpose. Such a transaction, in our humble understanding, cannot be equated with providing funds to another enterprise as a loan simpliciter, on a commercial basis, which essentially implies that such a borrower can use the funds so received in such manner, even if subject to broad guidelines for purpose test, in furtherance of borrower’s business interests. Ironically, however, that is precisely what the Transfer Pricing Officer has done and has been approved by the Dispute Resolution Panel as well.
14. It is also an admitted position that TIML-Global is a special purpose vehicle. A special purpose vehicle, or SPV as it is commonly called, is an entity that is set up for a special purpose or a special project. SPVs are often used by the promoters of a project or business to isolate the financial or legal risk associated with the project or activity for which the SPV was set up or because sometimes the activity or project in question requires an entity registered in a specific jurisdiction or specific jurisdictions. The business structuring through SPVs, particularly SPVs structured abroad, could be warranted on account of a variety of commercial and legal considerations, ranging from the comfort level of the outside parties dealing with entities incorporated in certain jurisdictions to the legal framework within which such entities operate, as also to cushion owners of these structures from financial, commercial or legal risk exposures emanating from the transactions that are undertaken through these SPVs. These SPVs are typical, to use transfer pricing terminology, “capital-rich low function entity”.
15. As a matter of fact, its difficult to visualize an SPV in isolation with the owner of that structure, as these SPVs carry no financial and other risks, and such risks are assumed by the owner of that structure. It is important to bear in mind the fact that there is a dichotomy in the SPV structure business model in the sense that while risks of a SPV investments are assumed by the owner of the SPV, all the rewards, in whatever form, go to the SPV itself. There is, as such, a clear gap between the entity assuming the risks and the entity getting the rewards of this risk. It is this gap or, to borrow Prof John Prebble QC’s terminology-‘ectopia’, in tax laws that gives rise to the possibilities of profit shifting. As Prof Prebble puts it, in one of his published papers, “Not surprisingly, the greatest opportunities for tax avoidance occur where the ectopia of tax law is most apparent”. There has been an effort, consciously or subliminally, to address this ectopia in tax laws in several ways.
16. Of late, in certain jurisdictions and subject to certain conditions, the profits of the SPVs are taxed with the profits of the owner of that structure. Rule 8(1) of the Nigerian Income Tax (Transfer Pricing) Regulations 2018, for example, provides that “A Capital-rich, low-function company, that does not control the financial risks associated with its funding activities, for tax purposes, shall not be allocated the profits associated with those risks and will be entitled to no more than a risk-free return. The profits or losses associated with the financial risks would be allocated to the entity (or entities) that manage those risks and have the capacity to bear them”.
17. What this provision does support, as its foundational basis, is the fact that capital-rich low function companies, which SPVs inherently are, despite their legal independence, are not seen in isolation with the companies bearing the related risks, that is, owners of these structures. The transactions between the owner of SPV and the SPV are, in that sense, belong to a genus different from the transactions between lenders and borrowers.
18. There are three fundamental questions that arise in this context- first, whether there can be such a funding transaction between the parties which are not associated enterprises, or, to put it differently, whether there can be valid comparables, under the CUP method, for such a transaction of SPV funding; second, whether if such a transaction is hypothetically possible, what could be the rate of interest in such financing is done in an uncontrolled situation; and, third- if interest is not the arm’s length consideration for such funding, what could constitute an arm’s length price of such financing.
19. As for the first question, the answer is obvious. Once we have held that transactions between the owner of SPV and the SPV belong to a genus different from the transactions between lenders and borrowers, such transactions between an SPV and the entity creating such an SPV, as long as it is for a specific transaction structured by the owner entity- as in this case, is inherently incapable of taking place between independent enterprise. The moment this kind of funding is done, the relationship between the entity funding the SPV and the SPV will be rendered as of ‘associated enterprise’ within the meanings of Section 92A(1) as also 92A(2). It is also elementary that the transactions between associated enterprises, even if held to be arm’s length in character, cease to be valid comparable under the CUP method. Such a controlled end use of the monies is possible when the lender has functional control over the borrower, and that very control vitiates the arm’s length situation. Section 92F(ii), as we have noted earlier, defines arm’s length price as a real or hypothetical price in the same or materially similar transaction “between persons other than associated enterprises, in uncontrolled conditions”. In the first place, an enterprise and its SPV are inherently associated enterprises. The definition of ‘associated enterprises’ under section 92A(1) covers “an enterprise which participates, directly or through one or more intermediaries, in the management or control or capital of the other enterprise”. An SPV is entirely managed, entirely controlled and entirely owned by the enterprise which sets up the SPV. So far as section 92A(2) is concerned, SPVs are covered by more than one clause as the entire voting power (clause a) and entire share capital (clause b) of the SPV is held by the owner of that SPV, but loan advanced, if the remittance is to be treated as a loan to the SPV, by the owner of the SPV is clearly more than 50% of the book value of the assets owned by the SPV (clause c) at each stage. That is one thing. The other aspect of the matter is that not only the transaction has to be between independent enterprises but also in uncontrolled conditions. When a strict condition about end-use, and that too end-use being decided by the owner of the SPV so much in advance that the SPV was not even in existence when the end-use decision was taken, is an inherent part of the transaction of funds being remitted, this is anything but an uncontrolled condition. Viewed thus, there could indeed be a valid school of thought that the requirement of arm’s length standards can, therefore, never be met, under the CUP method, so far as the nature of the present transaction is concerned.
20. As for the second question, even if one proceeds on the basis that one can assume or hypothesize a transaction similar to SPV funding in a non-AE relationship situation and fiduciary in nature- and such a hypothesis may also have some merits, it is important to bear in mind the fact that interest is compensation for the time value of money in the sense that when lender puts the money at the disposal of the borrower for a certain period, the interest that the borrower pays the lender is compensation for placing the money at the disposal of the borrower for borrower’s use during this period. In a situation in which a borrower has sufficient opportunities to gainfully use the funds so placed at his disposal, and the gains from such use are high, interest rates are also high, and when there are no gains from such funds placed at the borrower’s disposal, or when the gains from such funds are low or minimal, the interest rate also correspondingly travel south. In a situation, therefore, when the borrower has no discretion of using the funds gainfully, the commercial interest rates do not come into play at all.
21. That brings us to the third question, academic as it may sound at this stage, as to what, hypothetically speaking, could be a reasonable compensation under the CUP method, in an arm’s length situation or, to borrow the terminology used in rule 10B(1)(a), ‘comparable uncontrolled transaction’, for making remittance to another corporate entity, even a special purpose vehicle, when the remitter decides the end-use of these funds in the strictest possible manner. Let us assume, for this analysis, that there is no intra-AE relationship between the two entities (i.e. Indian entity and the overseas entity set up for a particular purpose or project), and these entities are independent of each other. In our humble understanding, when the overseas entity is, from a commercial perspective, a de facto non-entity and it has come into legal existence only for the furtherance of the interests of the company providing the wherewithal, all the gains that such an overseas entity belongs to the Indian company. The SPV in such a situation is no more than a conduit entity. In an arm’s length situation, when an SPV is created for some specific project or purpose, therefore, the net gains of that project or purpose must go to the person(s) sponsoring the SPV. The next logical question then would be as to how does this principle translate into actionable reality. We find inputs from transfer pricing legislation in a developing economy in the African continent. Rule 8(1) of the Nigerian Income Tax (Transfer Pricing) Regulations 2018, which we have referred to and reproduced earlier in this order, throws important light on this aspect. What this rule holds, in plain words, is that an SPV, which does not control the financial risks associated with its funding activities, shall not be allocated the profits associated with those risks, and the profits or losses associated with such risks would be allocated to the owner(s) of the SPV. This approach addresses the dichotomy in the SPV structure business model in the sense that while risks of an SPV investment are assumed by the owner(s) of the SPV, all the rewards, in whatever form, go to the SPV itself, by removing the gap, or ectopia in tax law, between the assumption of risks and the taxation of rewards thereof. It proceeds on the hypothesis that in an arm’s length situation, the risks and rewards for the risks go hand in hand, and when someone assumes particular risks, the rewards for that risk cannot be assigned to someone else. The hypothesis underlying such an approach appeals to us, and, in our humble understanding, perhaps it truly reflects the arm’s length compensation for the role played by the owner of the SPV in providing all the requisite wherewithal to the SPV to achieve its objectives. Therefore, when the CUP method is to be adopted for ascertaining arm’s length price of providing wherewithal to the SPV, for achieving its objectives and purpose, the arm’s length consideration thereof could at best be the corresponding gain to the SPV concerned- whether directly or indirectly.
22. To sum up, there cannot be a transaction, between the independent enterprises, of interest-free debt funding of an overseas SPV by its sponsorer; if such a transaction between independent enterprises is at all hypothetically possible, the arm’s length interest on such funding will be ‘nil’; and, if there has to be an arm’s length consideration under the CUP method, other than interest, for such funding, it has to be net effective gains- direct and indirect, attributable to the risks assumed by the sponsorer of the SPV, to the SPV in question.
23. So far as the arm’s length consideration for SPV funding, for consideration other than interest is concerned, it is academic in the present case because the entire case of the revenue proceeds on the basis that interest was leviable on this funding, and benchmarking the same on CUP basis. In any event, that aspect of the matter would be wholly academic because, in the present case, the consolidated financial statements of the TIML-Global, which takes into account the financial affairs of its step-down subsidiary TIML-Golden as well, reflect a loss figure. In other words, there is no economic gain to the SPV in the relevant financial period, and, therefore, even going by this theory, the arm’s length price of providing funds to the SPV, under the CUP method, would be ‘nil’. Except for this arm’s length price imputation- if all it can be so imputed under the CUP method, no amount of commercial interest, as in a borrowing simpliciter- whether LIBOR based or PLR based, can be attributed to the funding to the SPVs. The action of the authorities below on this point, thus, is unsustainable in law. Ground nos 2 to 9 are thus allowed in the terms indicated above.
24. As we part with this aspect of the matter, we, however, make it clear that as we deal with the question as to whether the ALP adjustment for interest-free debt funding to the SPV abroad is concerned, we are only concerned about its application under the CUP method as in this case. That cannot be an authority for the proposition that ALP adjustment cannot be made, under any other permissible method under the transfer pricing legislation, in respect of interest-free debt funding to the overseas SPV. The arm’s length price is not something which is always from a world of a reality inasmuch as even a price of a hypothetical independent transaction, which will also be a hypothetical price in nature, is taken as arm’s length price, and when comparable price based method, or traditional methods- as these are termed, cannot be pressed into service, transactional profit methods, of computing arm’s length price, are pressed into service. Thus, when one is unable to find a comparable independent transaction, real or hypothetical, that is not the end of the road, and there is an arm’s length price determination nevertheless, and that is where indirect methods or transactional profit methods such as TNMM (transactional net margin method) and PSM (profit split method), may actually have a critical role to play. The tested party, as is by and large a settled legal position, need not be the assessee and even its AE, when it is least complex party, can be a tested party. There could thus be several ways in which the SVP funding can be benchmarked, and we are not inclined to adjudicate whether or not such a benchmarking is possible. It is so for the reason that, in our considered view, such an adjudication is not really warranted on the facts of this case. In the present case, we are only concerned about the application of the CUP method on the facts of this case. The limited question before us was whether such an adjustment could be made, under the CUP method and on the given facts, in respect to the interest-free debt funding to the SPV. The observations should not, therefore, be construed as an authority for the proposition that no ALP adjustments can be made in respect of the interest-free debt funding to the SPVs under the transfer pricing legislation at all. Similarly, there have been many other facets of the arguments of the learned counsel for the assessee, which may need to be adjudicated in a fit case, but we have not dealt with those arguments because we have decided this issue on a short issue on which both the parties have been heard at length anyway. All these issues thus remain open for adjudication as and when really required.
25. In view of the above discussions, and bearing in mind the entirety of the case, we are of the considered view that the arm’ length price, under the CUP method and on the facts of this case, of funding of the SPVs by the assessee company, or providing them with the wherewithal to achieve objectives of the SPVs- which were determined by the commercial exigencies of the assessee company, is ‘nil’. We, therefore, delete the impugned ALP adjustment of Rs 44,26,61,264. The assessee gets the relief accordingly.
26. There is one more issue in this appeal that is required to be adjudicated by us, and that is with regard to the ALP adjustment of Rs 75,06,520 on account of the guarantee commission. The related grievances raised by the assessee are as follows:
On the facts and in the circumstances of the case and in law, the learned AO based on directions of Hon’ble DRP has:
Transfer pricing adjustment on account of the alleged guarantee transaction
10. erred in holding that the obligation of the Assessee under the Sale and Purchase agreement tantamount to provision of guarantee to its AE and accordingly treating the same as an international transaction with the AE, thereby resulting in an addition of Rs. 75,06,520 to the total income of the Assessee;
11. erred in making adjustment on account of the alleged guarantee transaction without appreciating the commercial and economic interest of the Appellant in the AE as well as disregarding the fact that the it was not providing any benefit to AE;
12. without prejudice to the above, has erred in not considering the lower rate of guarantee commission of 0.15% from the range of rates being charged by banks, for imputation of guarantee commission as minimal risk was involved in the alleged guarantee transaction;
13. Without prejudice to the above, has erred in not considering the average rate of guarantee commission of 1.575 % of the rates charged by the banks [average of lower and upper rate (0.15-3%)], for imputation of guarantee commission as minimal risk was involved in the alleged guarantee transaction;
27. So far as this set of grievances is concerned, the relevant material facts are like this. When the agreement to sell for sale of Virgin Radio was concluded, one of the clauses in the said agreement, inter alia, provided that “In consideration of the seller entering into this agreement, …(the TIML-India), as primary obligor and not merely as surety, unconditionally and irrevocably guarantees to the seller the proper and punctual performance of the purchaser’s obligations under this agreement and the transaction documents, including, without limitation, due and punctual payment of any sum which the purchaser is liable to pay”. The Transfer Pricing Officer treated this clause as a performance guarantee issued by the assessee in favour of the TIML-Global for payment of purchase consideration for Virgin Radio. The TPO proceeded to apply the CUP method for the determination of arm’s length price of this guarantee, and adopted 3% as its arm’s length price. It was thus quantified at Rs 4,53,62,000. Aggrieved, assessee raised the objections before the Dispute Resolution Panel, but without any success. While confirming the action of the TPO in principle, but reducing the same in quantum, learned DRP observed as follows:
5.1 Vide ground no. 11 to 14, the assessee has objected to proposed adjustment of Rs.4,53,62,000/- as guarantee commission for securing the loan by the AE.
5.2 The fact of the case has been stated while dealing with the earlier grounds. As stated, TIML India entered into an agreement dated 30/5/2008 with SMG for purchase of Virgin Radio through its SPV TIML Golden. TIML India was specifically required to provide comfort to the seller group since TIML Golden was a newly set up entity for the purpose of acquisition of Virgin Radio. Similar assurance was also sought from the seller’s parent entity SMG Plc. The assessee contended that it provided confirmation/assurances for the purpose of acquiring the stake in Virgin Radio which is for its own business interest and not for the SPV, i.e., TIML Golden. Therefore, TIML India cannot be said to have provided guarantee to its own self. It was further stated by the assessee that even if the confirmation /assurance was to be treated as financial guarantee, it can at best be treated as an implicit guarantee enjoyed by a company on account of being part of a larger group. The provision of the confirmation/assurance is not the nature of an intra group service/guarantee and hence did not warrant charging of guarantee fee.
5.3 The Ld. TPO, on the other hand, has referred to the agreement between Ginger Media Group Ltd. And TIML Golden Square Ltd. dated 30/05/2008 in which TIML is shown as purchase guarantor. The Ld. TPO has specifically required page 14 of the said agreement wherein it has been clearly mentioned that the said guarantee is a continuing guarantee and shall remain in force until all of the purchase guarantee obligations have been satisfied in full.
5.4 The Panel has carefully considered the said agreement and the nature of a purchase guarantee given by the assessee. In view of the fact narrated by the Ld. TPO at para 7.3, 7.4 and 7.5 of his order, it is apparent that the purchase guarantee is a financial service provided by the assessee to its AE. It is not under dispute that it is the AE which has concluded the transaction and it was in no position to do so without the guarantee of the assessee. The assessee’s attempt to distinguish between primary obligator and guarantor lacks substance. The assessee’s emphasis that it acted ‘not merely as a surety’ is not a matter of great significance. What is material is that it acted as surety besides having other larger role to play. The assessee has taken over certain obligations and the commercial expediency thereof does not exclude from transfer pricing jurisdiction. The assessee’s arguments that sec. 92B do not cover the provisions of guarantee as an international transaction is also not material since the provision has been brought in the Finance Act, 2012 with retrospective effect from 01/04/2002. The assessee’s further arguments that being a primary obligator the assessee’s comparison with guarantor is not tenable and therefore no adjustment is possible in the face of failure of computation mechanism, is also devoid of any substance. The distinction between primary obligator and guarantor has been effaced in the facts and circumstances of the assessee’s case and that is precisely the reason that the transaction carried out through the agreement has been held to be an international transaction. The assessee’s argument that there is considerable difference in the guarantee provided by a bank in its normal course of business vis-à-vis a loan guarantee, also cuts across the basic principle behind the transfer pricing adjustment policy. If a service has been rendered by the assessee which is normally rendered by a bank, the arm’s length price will have to be determine on the basis of the financial considerations of the bank.
5.5 However, there is merit in the without prejudice argument taken by the assessee in ground Nos.13 & 14 in respect of computation of guarantee fee. The Ld. TPO has cosndiered the value of alleged guarantee at GBP 53.51 milliion whereas the assesee seems to have provided assurance of GBP 53.20 millions. Further, the sale and purchase agreement was entered into on 30/05/2008 and the acquisiton was completed on 30/06/2008, thereby the guarantee subsisting only for a month. The bank rate for charging of guarantee commission ranges from 0.15% to 3%. However, banks give guarantee only to customers who have regular dealings with them. Further, they take full security before issuing guarantee. The rate between 0.15% to 3%. However, banks give guarantee only to customers who have regular dealings with them. Further, they take full security before issuing guarantee. The rate between 0.15% to 3% depends on the credit rating of the borrower. The assessee has not brought any material on record regarding credit rating of its AE. Now the safe harbour rule takes the same at 2%. Since the assessee has not given any data to satisfy the Panel as to the rate at which such guarantee would have been available to its AE in the market, it is held that working out the guarantee at 2% on the revised amount and period subject to verification by the ld. AO will meet the ends of justice. This ground of objection is accordingly partly allowed.
28. Accordingly, an ALP adjustment of Rs 75,06,520 was made in respect of the alleged guarantee issued by the assessee company in favour of its SPV. The assessee is aggrieved and is in appeal before us.
29. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position.
30. What is being termed as a guarantee is the obligation of the assessee company, in terms of “agreement for the sale and purchase of entire equity share capital of Virgin Radion Holdings Ltd UK” dated 30th May 2008, which has led to the actual crystallization of sale on 30th June 2008. The related agreement clause was, at the cost of repetition, ““In consideration of the seller entering into this agreement, …(the TIML-India), as primary obligor and not merely as surety, unconditionally and irrevocably guarantees to the seller the proper and punctual performance of the purchaser’s obligations under this agreement and the transaction documents, including, without limitation, due and punctual payment of any sum which the purchaser is liable to pay”. The first question that arises before us is whether it can be treated as a performance guarantee by the SPV. As we explore the answer to this question, we have to bear in mind the fact this agreement is also not a standalone agreement in the sense it is to be read in conjunction with several other preparatory documents, such as bid document, final offer, and emails exchanged concerning the terms, leading to the acquisition of the target entity. In this background, we may refer to the final offer dated 19th March 2008, which specifically states, inter alia, that (i) 5- Identity of shareholders (with immediate and ultimate ownership); Bidco (an SPV formed specifically for the purpose of acquiring Virgin Radio) is 100% owned by TIML. The immediate and ultimate shareholder of TIML is Bennett Coleman & Co Ltd…..; (ii) 6- Financing: The transaction will be 100% equity-financed from the internal resources of TIML/BCCL. No further financing is required to be given the size of this transaction relative to the TIML/BCCL group; and (iii) 7- Internal approvals: (a) we confirm that all the relevant internal approvals from TIML/BCCL have been received. There are no other providers of equity finance. (b) Following on from point 6 above, the financing is unconditional (other than general conditions set out above) , and, therefore, bank commitment letters are not required to support this final proposal. It was acceptance of this proposal, which was followed by exclusivity agreement dated 3rd April 2008, subsequent modifications thereto, agreement to purchase and sell dated 30th May 2008, eventually culminating in the acquisition of target company on 30th June 2008. Quite clearly, therefore, the financial obligation for financing the acquisition of the target company by the SPV was already assumed by the assessee company, and, for that reason, the clause in question in the agreement dated 30th May 2008 did not put any additional obligations on the assessee vis-à-vis seller of the target company. When the assessee already has an obligation to finance the transaction the acquisition of the target company by the SPVs, the same obligation being reiterated, in different words, does not amount to a performance guarantee by the SPV. And if such a commitment is reiterated for the performance of own obligations, the reiteration of this own commitment cannot have an arm’s length price. As a matter of fact, what is being reiterated, in clause 22.1 of the agreement dated 30th May 2008, is own commitments which are being discharged through SPV. This cannot be compared with a third-party guarantee which alone can have an arm’s length price, and, in any case, such a third party guarantee consideration, as has been adopted as a comparable in this case, does not constitute a valid CUP comparable. As we have noted earlier, the entire sale transaction in question was at the initiative of the assessee company itself. The exclusivity agreement dated 3rd April 2008, which is the foundational basis of the entire transaction and eventual sale of the Virgin Radios, was entered into by the assessee company. A copy of this exclusivity agreement is placed before us at pages 55 and 56 of the paper book. It is not even in dispute that the SPVs in question came into existence due to the decision to purchase, taken by the assessee company, and to execute the said decision at the operational level. Thus, the entire transaction of acquiring Virgin Radios was in furtherance of the business interests of the assessee company, finalized by the assessee much before even the AE in question came into existence, and the assessee company was de-facto beneficiary of this transaction. Under these circumstances, the assessee company cannot be treated as a guarantor but rather as a primary obligor for its own transaction undertaken through the SVP. Viewed in totality, the service is not by the assessee company to the SVP, but the other way round. That is quite unlike and incomparable to a performance guarantee issued by a third party that is issued for the benefit of the entity for which it is issued, and not for the benefit of the entity issuing the guarantee. Let us assume, for a minute, that such a guarantee can hypothetically be issued, by or for an independent enterprise. In that case, it cannot have an arm’s length price because the beneficiary and the issuer of the guarantee is the same entity. In any event, the CUP input is taken as the bank guarantee, which guarantees the performance of a commitment assumed under a contract in which the bank has no role to play. The bank, in such a case, is not only an independent enterprise but also a rank outsider so far as the transaction in respect of which performance guarantee is issued. That cannot be compared with a case in which the enterprise issuing the guarantee, whether an associated enterprise or an independent enterprise, is also a beneficiary of, and party to, the main transaction itself. The very comparison of this different genus of obligations is vitiated in law and on facts. To summarise, the impugned ALP adjustment must stand deleted on the ground that the clause in question in the agreement dated 30th May 2008 does not constitute a third party guarantee- like a bank guarantee which is taken as a comparable, and, even if it is assumed that it does so constitute a guarantee, the arm’s length price of such a performance guarantee, if at all it can be so held to be in character, will not be ascertainable under the CUP method for want of a valid comparable of the similar nature of guarantee. The very foundation and rationale of the impugned ALP adjustment, on the CUP basis, is thus devoid of any legally sustainable basis. We, therefore, delete this ALP adjustment of Rs 75,06,520. The assessee gets the relief accordingly. There are many other facets of this case but we have not dealt with those factual and legal aspects because we have decided this issue on the short grounds on which both the parties have been heard at length anyway. All these issues thus remain open for adjudication as and when really required.
31. Ground nos. 10 to 13 are also thus allowed.
32. Ground nos. 1 and 14, being general in nature, do not call for any adjudication, but as the assessee succeeds on the main issues, these grievances are academic anyway.
33. In the result, the appeal is allowed in the terms indicated above. Pronounced in the open court today on the 30th day of August 2021.
