Commissioner Of Income Tax, Jaipur-Ii, Jaipur v. M/S. Vaibhav Gems Ltd. (Now Known As Vaibhav Global Ltd.)K-6-B, Fateh Tiba, Adarsh Nagar, Jaipur

HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH ATJAIPUR D.B. Income Tax Appeal No. 14 / 2015 (1)Commissioner of Income Tax, Jaipur-II, Jaipur. ----Appellant Versus M/s. Vaibhav Gems Ltd. (Now known as Vaibhav Global Ltd.)K-6-B, Fateh Tiba, Adarsh Nagar, Jaipur. ----Respondent Connected With (2) D.B. Income Tax Appeal No. 149 / 2015 M/s Vaibhav Global Limited formerly known as Vaibhav GemsLimited, K-6B, Fateh Tiba, Adarsh Nagar Jaipur-302004 ----Appellant Versus Assistant Commissioner of Income Tax, Circle-5, NCR Building, Statue Circle Jaipur 302001. ----Respondent (3) D.B. Income Tax Appeal No. 150 / 2015 Commissioner of Income Tax, Jaipur-II, Jaipur. ----Appellant Versus M/s. Viabhav Global Limited earlier known as Vaibhav Gems K-GB,Fateh Tiba, Adarsh Nagar, Jaipur. ----Respondent (4) D.B. Cross Objection No. 31 / 2016 IN D.B. Income Tax Appeal No.14/2015 The Commissioner of Income Tax, Jaipur-II, Jaipur. Vs. …...Appellant M/s. Vaibhav Gems Ltd. K-6B, Fateh Tiba, Adarsh Nagar, Jaipur. ----Respondent _____________________________________________________ For Appellant(s) : Mr. Prateek Kedawat with Mr. K.D. MathurFor Respondent(s) : Mr. Gunjan Pathak with Ms. Ishita Rawat _____________________________________________________ HON'BLE MR. JUSTICE K.S. JHAVERIHON'BLE MR. JUSTICE DINESH CHANDRA SOMANIJudgment 13/10/2017 1. In all these appeals common question of law and facts areinvolved hence they are decided by this common judgment. Thecross objections filed by the assessee are also decided by thisjudgment. 2.By way of the appeals, the appellant has assailed thejudgment and order the tribunal whereby tribunal has partlyallowed the appeal of the assessee. 3.This court while admitting the appeal on 14.9.2016 framedfollowing substantial question of law:- 3.1Appeal no.14/2015 admitted on 14.9.2016 “1. Whether in the facts and circumstances of thecase, the ITAT was justified in law and has notacted perversely in deleting the additions withoutconsidering the amendment in Section 92B bywhich the explanation was inserted withretrospective effect from 1.4.2002. 2. Whether in the facts and in circumstances ofcase, the ITAT was justified in law and has notacted perversely in directing to delete adjustments on account of notional interest income in delay incollection of sales proceeds from the associatedenterprises.” 3.2Appeal No.149/2015 admitted on 14.9.2016 “1. Whether under the facts and circumstances ofthe case and in law the respondent and theappellate authorities are justified in confirmingapplicability of adjustment @ prevailing LIBOR rateplus 2% on account of interest free loans providedby the Appellant to its Associated Enterprises in theassessment year without considering the view thatthe average LIBOR rate existing at that time wasonly 0.79% and addition of adhoc 2% is unjustified,arbitrary and against the provisions of law? 2. Whether the Ld. ITAT is justified in approvingadjustment on account of charging of NationalInterest on the Loans advanced by the Appellant toits own foreign subsidiaries even though suchcompanies were formed for the expansion of its ownbusiness and funds were transferred for its workingcapital requirements, capacity expansion andexpansion in the areas of business?” 3.3Appeal No.150/2015 admitted on 14.9.2016 1. Whether in the facts and circumstances of case,the ITAT was justified in law and has not actedperversely in restricting the adjustment on accountof interest free loans advanced to associatedenterprises to prevailing LIBOR+ 2 % withoutaddressing the evidences and facts brought onrecord by the TPO. 2. Whether the Ld. ITAT is justified in approvingadjustment on account of charging of NationalInterest on the Loans advanced by the Appellant toits own foreign subsidiaries even though suchcompanies were formed for the expansion of its ownbusiness and funds were transferred for its workingcapital requirements, capacity expansion andexpansion in the areas of business?” 3.3Appeal No.150/2015 admitted on 14.9.2016 1. Whether in the facts and circumstances of case,the ITAT was justified in law and has not actedperversely in restricting the adjustment on accountof interest free loans advanced to associatedenterprises to prevailing LIBOR+ 2 % withoutaddressing the evidences and facts brought onrecord by the TPO. 2. Whether in the facts and in circumstances ofcase, the ITAT was justified in law and has notacted perversely in directing to delete theadjustment of Rs.63,61,3950/- made by theTPO/AO on account of notional guarantee chargesfor the corporate and bank guarantee given by theassessee on behalf of its associated enterprises. 3.4Only the assessee has preferred cross objection beingno.31/2016 in appeal No.14/2015 which was admitted onfollowing substantial question of law:- “1. Whether under the facts and circumstances ofthe case in law the respondent and the appellateauthorities are justified in confirming applicabilityof adjustment @ prevailing LIBOR rate plus 2%on account of interest free loans provided by theAppellant to its Associated Enterprises in theassessment year without considering the viewthat the average LIBOR rate existing at that timewas only 0.79% and addition of adhoc 2% isunjustified, arbitrary and against the provisions oflaw?” 4.The facts of the case are that the assessee deals in preciousstones. The return of income was furnished declaring loss ofRs.25,18,68,568/- which was processed u/s 143(1) of the Act.Thereafter the case was selected for scrutiny. The case involvestransfer pricing, therefore, the same was referred to the TransferPricing Officer (for short ‘the TPO’). The TPO proposed adjustmentin respect of notional interest income on alleged delay inrealization of sale proceeds from AEs. It was found that theassessee had extended corporate guarantee and advances to AEsfor which no charges were levied. Similarly, adjustment in respectof sales to AEs were also proposed to be adjusted. The TPO thusproposed the transfer pricing adjustment in respect of the issues:- (I) Notional interest on delayed payments. (ii) Corporate guarantee provided to AEs without anyconsideration. (iii) Notion interest on loans advanced to AEs. (iv) Sales made by the assessee to AEs under the Transaction NetMargin Method (for short ‘TNMM’) The assessee filed the detailed submissions which were rejectedby the TPO and the transfer pricing adjustments on above countswere made which is subject matter of the grounds raised above.Similarly, the AO further made corporate addition by rejecting thebooks of the assessee u/s 145(3) of the Act and made addition ofRs.12,15,891/- in respect of DTA Units. Accordingly a draft noticewas served on the assessee on 20.03.2013. The assessee in termsof Section 144C of the Act approached the Dispute ResolutionPanel (for short ‘DRP’) which also confirmed these additions. 5.Counsel for the department has strongly relied upon thedecision of the Hyderabad Tribunal in the case of Four Soft Pvt.Ltd. Vs. DCIT ITA No.1903/Hyd/2011 decided on 28.3.2014wherein it has been held as under:- The assessee filed the detailed submissions which were rejectedby the TPO and the transfer pricing adjustments on above countswere made which is subject matter of the grounds raised above.Similarly, the AO further made corporate addition by rejecting thebooks of the assessee u/s 145(3) of the Act and made addition ofRs.12,15,891/- in respect of DTA Units. Accordingly a draft noticewas served on the assessee on 20.03.2013. The assessee in termsof Section 144C of the Act approached the Dispute ResolutionPanel (for short ‘DRP’) which also confirmed these additions. 5.Counsel for the department has strongly relied upon thedecision of the Hyderabad Tribunal in the case of Four Soft Pvt.Ltd. Vs. DCIT ITA No.1903/Hyd/2011 decided on 28.3.2014wherein it has been held as under:- “25.2 Having considered the submissionsof the parties, we are unable to accept thecontention of the learned AR thatcorporate guarantee of the natureprovided by the assessee will not comewithin the meaning of internationaltransaction in terms with section 92B ofthe Act. It is not disputed that section 92Bof the Act has been amended by theFinance Act, 2012 with the insertion ofExplanation I (c) with retrospective effectfrom 01/04/2002. Explanation (i)(c) tosection 92B, reads as under:of the parties, we are unable to accept thecontention of the learned AR thatcorporate guarantee of the natureprovided by the assessee will not comewithin the meaning of internationaltransaction in terms with section 92B ofthe Act. It is not disputed that section 92Bof the Act has been amended by theFinance Act, 2012 with the insertion ofExplanation I (c) with retrospective effectfrom 01/04/2002. Explanation (i)(c) tosection 92B, reads as under: capital financing, including any type oflong-term or short-term borrowing,lending or guarantee, purchase or sale ofmarketable securities or any type oflong-term or short-term borrowing,lending or guarantee, purchase or sale ofmarketable securities or any type of advance, payments or deferred paymentor receivable or any other debt arisingduringthecourseofbusiness. 25.3 A reading of the aforesaid clausefrom the Explanation would make it clearthat the corporate guarantee provided bythe assessee comes within the scope andambit of 'international transaction' as perthe aforesaid clause. Therefore, thecontention of the learned AR that the issueis covered in favour of the assessee byvirtue of the order passed in assessee'sown case for AY 2006-07 no longer holdsgood since the order passed by thecoordinate bench is prior to theamendment made to provision of section92B of the Act. It will be pertinent tomention here that this issue was alsoconsidered by the ITAT Mumbai Bench incase of Mahindra & Mahindra v. DCIT inITA No. 8597/Mum/2010, 54 SOT (UR)146. The coordinate bench of this Tribunalwhile considering similar argumentadvanced on behalf of the assessee byplacing reliance on the decision of the FourSoft Ltd. (supra), held as under: 15.2 After hearing the rival submissionswe feel that Assessing Officer will have tofollow the decision of the ITAT Hyderabador the amended provision of the Act in thisregard. If the Finance Bill of 2012 ispassed by the Parliament amending theprovisions of section 92B, with effect from1st April, 2002, he will have to ignore thedecision of the ITAT Hyderabad. In casesection 92B is not amended withretrospective effect, he should grant reliefto the appellant. 25.4 In the aforesaid view of the matter,we agree with the TPO that ALP of thecorporate guarantee has to be determinedas it falls within the scope and ambit of aninternational transaction after theretrospective amendment to section 92B.However, it appears that the TPO hasapplied the rate of 3.75%, which isapplicable to bank guarantee issued by thebank. As the corporate guarantee is not inthe nature of bank guarantee, the rate 25.4 In the aforesaid view of the matter,we agree with the TPO that ALP of thecorporate guarantee has to be determinedas it falls within the scope and ambit of aninternational transaction after theretrospective amendment to section 92B.However, it appears that the TPO hasapplied the rate of 3.75%, which isapplicable to bank guarantee issued by thebank. As the corporate guarantee is not inthe nature of bank guarantee, the rate applicable to bank guarantee provided bythe bank cannot be applied to corporateguarantee which is provided by a groupcompany. In case of GlenmarkPharmaceuticals v. ACIT in ITA No.5031/Mum/2012, dated 13/11/2013, theMumbai Bench of the Tribunal afteranalysing the facts in that case had heldthat 0.53% corporate guarantee rate inthat case was appropriate. The ITATHyderabad Bench in case of InfotechEnterprises Ltd. in ITA No. 115/Hyd/2011and in ITA No. 2184/Hyd/2011, dated16/01/2014 while considering identicalissue of determining ALP of corporateguarantee provided by the assessee to itsAE followed the ratio laid down in case ofGlenmark Pharmaceuticals v. ACIT (supra)and remitted the issue back to the TPO todecide the quantum of corporateguarantee rate by following the methodadoptedincaseofGlenmarkPharmaceuticals (supra).” 5.1The same has been subsequently diluted by the High Court.5.2He contended that the tribunal has committed serious errorin allowing the appeal and it is a fit case to be decided in favour ofthe department and the finding of CIT(A) ought to have beenaccepted. The benefit granted by the tribunal u/s 92B of IncomeTax reads as under:- “92B.Meaningofinternationaltransaction.- (1) For the purposes of thissection and sections 92, 92C, 92D and92E, “international transaction” means atransaction between two or moreassociated enterprises, either or both ofwhom are non-residents, in the nature ofpurchase, sale or lease of tangible orintangible property, or provision ofservices, or lending or borrowing money, orany other transaction having a bearing onthe profits, income, losses or assets ofsuch enterprises, and shall include a mutual agreement or arrangementbetween two or more associatedenterprises for the allocation orapportionment of, or any contribution to,any cost or expense incurred or to beincurred in connection with a benefit,service or facility provided or to beprovided to any one or more of suchenterprises. (2) A transaction entered into by anenterprise with a person other than anassociated enterprise shall, for thepurposes of sub-section (1), be deemed tobe a transaction entered into between twoassociated enterprises, if there exists aprior agreement in relation to the relevanttransaction between such other person andthe associated enterprise, or the terms ofthe relevant transaction are determined insubstance between such other person andthe associated enterprise.” 5.3On second ground, he has also relied upon the decision ofBombay High Court in Commissioner of Income Tax vs. TataAutocomp systems Ltd. (2015) 374 ITR 516 wherein it has beenheld as under:- “7. We find that the impugned order of theTribunal inter alia has followed thedecisions of the Bombay Bench of theTribunal in cases of VVF Ltd. v. Dy. CIT(supra) and Dy. CIT v. Tech Mahindra Ltd.(supra) to reach the conclusion that ALP inthe case of loans advanced to AEs wouldbe determined on the basis of rate ofinterest being charged in the countrywhere the loan is received/consumed. Mr.Suresh Kumar the learned counsel for theRevenue informed us that the Revenue hasnot preferred any appeal against thedecision of the Tribunal in VVF Ltd. v. Dy.CIT (supra) and Dy. CIT v. Tech MahindraLtd. (supra) on the above issue. No reasonhas been shown to us as to why theRevenue seeks to take a different view in “7. We find that the impugned order of theTribunal inter alia has followed thedecisions of the Bombay Bench of theTribunal in cases of VVF Ltd. v. Dy. CIT(supra) and Dy. CIT v. Tech Mahindra Ltd.(supra) to reach the conclusion that ALP inthe case of loans advanced to AEs wouldbe determined on the basis of rate ofinterest being charged in the countrywhere the loan is received/consumed. Mr.Suresh Kumar the learned counsel for theRevenue informed us that the Revenue hasnot preferred any appeal against thedecision of the Tribunal in VVF Ltd. v. Dy.CIT (supra) and Dy. CIT v. Tech MahindraLtd. (supra) on the above issue. No reasonhas been shown to us as to why theRevenue seeks to take a different view in respect of the impugned order from thattaken in VVF Ltd. v. Dy. CIT (supra) andDy. CIT v. Tech Mahindra Ltd. (supra). TheRevenue not having filed any appeal, has infact accepted the decision of the Tribunal inVVF Ltd. v. Dy. CIT (supra) and Dy. CIT v.Tech Mahindra Ltd. (supra).” 5.4Counsel for the appellant has also relied upon the decision ofDelhi High Court in Commissioner of Income Tax vs. CottonNaturals (I) Pvt. Ltd. reported in (2015) 276 CTR 445 (Del.)wherein Delhi High Court held as under:- “14. We note that CUP method is the mostappropriate method in order to ascertainarms length price of the internationaltransaction as that of the assessee. Weagree with the assessee's contention thatwhere the transaction was of lendingmoney in foreign currency to its foreignsubsidiaries the comparable transactions,therefore, was of foreign currency Tendedby unrelated parties. The financial positionand credit rating of the subsidiaries will bebroadly the same as the holding company.In such a situation,-domestic primelending rate would have no applicabilityand the international Rate Mixed beingLIBOR should be taken as the benchmarkrate for international transactions.” 6.Counsel for the respondent Mr. Pathak has relied upon therecent decision of Bombay High Court in Commissioner of IncomeTax vs. Everest Kento Cylinders Ltd. reported in 378 ITR 57wherein it has been held as under:- “10. Having considered submissions of Mr.Malhotra for the revenue and Mr. Pardiwallafor the assessee, we are of the view thatthe order of the Tribunal as regards 6.Counsel for the respondent Mr. Pathak has relied upon therecent decision of Bombay High Court in Commissioner of IncomeTax vs. Everest Kento Cylinders Ltd. reported in 378 ITR 57wherein it has been held as under:- “10. Having considered submissions of Mr.Malhotra for the revenue and Mr. Pardiwallafor the assessee, we are of the view thatthe order of the Tribunal as regards disallowance under section 14A andrestricting the same to Rs.1 lac wasjustified in view of the material before theTribunal. Furthermore, having consideredthe fact that a sum of Rs.4,47,649/- wasnot conceded in the return but was ad hocacceptance during the course ofassessment, the assessee could not bebound by it. The Tribunal as the second factfinding authority had gone into factualaspects in great detail and therefore havinginterpreted the law as it stood on therelevant date the order passed cannot befaulted. In the matter of guaranteecommission, the adjustment made by theTPO were based on instances restricted tothe commercial banks providing guaranteesand did not contemplate the issue of aCorporate Guarantee. No doubt these arecontracts of guarantee, however, when theyare Commercial banks that issue bankguarantees which are treated as the bloodof commerce being easily encashable in theevent of default, and if the bank guaranteehad to be obtained from Commercial Banks,the higher commission could have beenjustified. In the present case, it is assesseecompany that is issuing CorporateGuarantee to the effect that if thesubsidiary AE does not repay loan availed ofit from ICICI, then in such event, theassessee would make good the amount andrepay the loan. The considerations whichapplied for issuance of a Corporateguarantee are distinct and separate fromthat of bank guarantee and accordingly weare of the view that commission chargedcannot be called in question, in the mannerTPO has done. In our view the comparisonis not as between like transactions but thecomparisons are between guarantees issuedby the commercial banks as against aCorporate Guarantee issued by holdingcompany for the benefit of its AE, asubsidiary company. In view of the abovediscussion we are of the view that theappeal does not raise any substantialquestion of law and it is dismissed. Therewill be no order as to costs.” 6.1He relied upon the another decision of Hindalco IndustriesLtd. Vs. Additional Commissioner of Income Tax (2013) 359 ITR46 (Bom) wherein it has been held as under:- 6.1He relied upon the another decision of Hindalco IndustriesLtd. Vs. Additional Commissioner of Income Tax (2013) 359 ITR46 (Bom) wherein it has been held as under:- “3. On 25 September 2009, theAssessing Officer addressed a letter tothe Commissioner of Income-tax-VI,Mumbai seeking approval for a referenceunder Section 92CA(1) to the TransferPricing Officer for computation of theArms Length Price in relation to 17Assessees of which the Petitioner wasmentioned at Serial No.12. In seekingthe approval of the Commissioner, theAssessing Officer relied upon aninstruction of the Central Board of DirectTaxes requiring that all cases whereinternational transactions exceed astipulated amount of Rs. 15 crores andcovered by Section 92C be selected forcompulsory scrutiny. The approval of theCommissioner of Income-tax - VI wascommunicated to the Assessing Officerunder an intimation dated 30 September2009. The Assessing Officer made areference to the Transfer Pricing Officeron 9 October 2009 stating that sheconsidered it necessary and expedientto make a reference under Section92CA(1) for the computation of theArms Length Price. The Transfer PricingOfficer initially issued a notice to thePetitioner under Section 92CA on 3March 2010. During the course of theproceedings, the Transfer Pricing Officerissued a further notice dated 4 October2011 recording that from Form 3CEBsubmitted on 30 September 2008, itappeared that the Petitioner hadfurnished a guarantee on behalf of itsAssociated Enterprise for Financial Year2007-08 in the amount of Rs.15,988crores. The notice adverted to the factthat the Transfer Pricing report furnishedon 11 March 2011 stated as follows :- As a part of its global expansionstrategy Hindalco acquired a giantcompany Novelis Inc. Canada on 15 May 2007, in a transaction aggregating US $3.48 billion. In order to consummate thistransaction, Hindalco had to availborrowingandfinancingfrominternational lenders. Hindalco thereforecreated 100% subsidiary company inthe Netherlands known as AV Minerals,Netherlands ('BVCo'). BVCo in turncreated another 100% subsidiary inCanada, A V Metals ('SubCo'). BothBVCo and SubCo were specificallycreated as Special Purpose Vehicles('SPVs') by Hindalco for the purpose ofthis acquisition. The acquisition ofNovelis was funded by a bridge loanfrom a consortium of internationalbanks. This loan was drawn by BVCo(the 100% SPV created by Hindalco). Hindalco, as the parent company hadthe prime responsibility to arrange theavailability of funds to these SPVs.Hindalco, in discharge of this obligation,provided a corporate guarantee to theinternational banks for due performanceof the facility agreement entered into byBVCo with these banks for availing thebridge loan for the acquisition ofNovelis. The acquisition of Novelis was done withthe express purpose of strengtheningHindalco's global position as anintegrated aluminium producer with thepresence in the entire value chain. Thisacquisition positioned Hindalco as aglobally integrated aluminium producerwith low-cost alumina and aluminiumproduction facilities combined with ahigh-end aluminium rolled productcapabilities. Therefore, looking at theobjective and intent behind thisacquisition, it is clear that theacquisition was intended to increase theglobal reach of the growth under theflagship parent company i.e. Hindalco. In the present case, the provision ofCorporate Guarantee by Hindalco tointernational banks was in substanceonly to serve the limited purpose ofarranging funds for overseas business In the present case, the provision ofCorporate Guarantee by Hindalco tointernational banks was in substanceonly to serve the limited purpose ofarranging funds for overseas business expansion for Hindalco itself through theSPV. Further, in discharging itsresponsibility to arrange funds for thisacquisition, Hindalco has provided acorporate guarantee to the internationalbanks who have in turn provided fundsto BVCo. Thus in the opinion of thecompany, and having regard to theeconomic and commercial factors, itwould be inappropriate for Hindalco tocharge a fee from BVCo for providingsuch a guarantee as there was noservice provided by Hindalco to BVCo,which was merely a SPV, and like allSPVs, was created to fulfill the specificobjective of acquiring Novell for theparentcompany,Hindalco.Hence, looking to the overall substanceof the transaction no scope remains tocharge a Guarantee Fee for CorporateGuarantee provided to such SPV. Thusno determination of arm's length price iswarranted from an Indian transferpricing perspective. In the alternative,charge of a NIL guarantee fee satisfiesthe criteria of arm's length return toHindalco, considering the facts andcircumstances of the case.” 6.2He has also relied upon the judgment of the ITAT Hyderabadwhich is subsequently diluted by High Court judgments. 7.We have heard counsel for the parties. 8.Taking into account the observations made by the BombayHigh Court as reproduced above, the first issue is answered infavour of the assessee and against the department. Tribunal whilerelying on the international transaction granted benefit of Section92B to the assessee which is just and proper. 9.In that view of the matter, the view taken by the tribunal isrequired to be upheld. 10.Regarding LIBOR rate plus 2% on account of interest freeloans provided by the appellant to its associated enterprises, inthe view of the observations made by the Delhi High Court in parano.14 as reproduced above, the same is required to be answeredin favour of the assessee. 11.Regarding ITA no.149/2015 preferred by the assessee inview of the Delhi High Court judgment (para no.14), theinternational transaction is required to be accepted, therefore,tribunal has committed serious error. The assessee will be entitledfor the benefit of average LIBOR rate existing at that time whichwas 0.79% and addition of adhoc 2% is not proper. In that view ofthe matter, the addition of 2% interest in the income is required tobe quashed and set aside. 12.The appeal and cross objection of the assessee standsallowed to the aforesaid extent. 13.All the issues are answered in favour of the assessee andagainst the department. 14.The appeals filed by the department (DB ITA No.14/2015,150/2015) stands dismissed and that of assessee (149/2015)stands allowed as aforesaid. The cross objection (31/2016) is alsoallowed in terms of the aforesaid. (DINESH CHANDRA SOMANI)J. (K.S. JHAVERI)J. BRIJESH 46-49.