8/14/23, 3:59 PM M/s Havells India Ltd.

Versus ACIT (LTU) , Circle-1, New Delhi

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2022 (5) TMI 685 - ITAT DELHI

Other Citation: [2023] 101 ITR (Trib) 81 (ITAT [Del])

M/S HAVELLS INDIA LTD. VERSUS ACIT (LTU) , CIRCLE-1, NEW DELHI

ITA No. 6509/Del/2018

Dated: - 9-5-2022

TP Adjustment - adjustment in respect of corporate guarantee - amount guarantee provided by Havells Holdings Ltd. was
Rs.143.13 crores against which the TPO has calculated guarantee fee @ 1.3 % amounting to Rs.1.86 crores - HELD THAT:- Keeping
in view, the judgments of the Hon’ble Bombay High Court Everest Kento Cylinders Ltd [2015 (5) TMI 395 - BOMBAY HIGH COURT]
and Thomas Cook (India) Ltd. [2019 (9) TMI 473 - BOMBAY HIGH COURT] in the absence of any other judgment contrarily brought
to our notice, we hereby direct that the adjustment in respect of corporate guarantee provided to AEs be determined at date of 0.5 %
instead of 1.3% determined by the revenue.

Disallowance in respect of provision made for sales incentive under “Shahenshah Scheme” - HELD THAT:- This issue stands
covered in the case of the assessee by the order of the Co- ordinate Bench of the Tribunal [2021 (1) TMI 741 - ITAT DELHI]. As a
result, the appeal of the assessee on this ground is allowed and it is to be kept outside the purview of Section 115 JB.

Denial of claim of deduction u/s 80IC on interest income - HELD THAT:- We find that the Hon’ ble Delhi High Court in the case of
PCIT vs. Bharat Sanchar Nigam Ltd. [2016 (8) TMI 270 - DELHI HIGH COURT] and the Co- ordinate Bench of Tribunal in the case of
M/ s. NHPC Ltd. [2019 (5) TMI 1664 - ITAT DELHI] has held that the Revenue was not justified in denying the claim of deduction on
such income. Before us, Revenue has not pointed any contrary binding decision in its support. We therefore, hold that AO not
justified in denying the claim of deduction u/ s 80IC of the Act and thus direct the AO to grant deduction u/ s 80 IC on the interest
income earned by the assessee.

Judgment / Order

Sh. A. D. Jain, Vice President And Dr. B. R. R. Kumar, Accountant Member

For the Assessee : Sh. Akshat Jain, CA And Sh. Rajat Jain, CA

For the Revenue : Sh. Manvendra Goyal, CIT DR

ORDER

PER DR. B. R. R. KUMAR, ACCOUNTANT MEMBER:

The present appeal has been filed by the assessee against the order of ld. CIT (A)- 22, New Delhi dated 21.08. 2018.

2. Following grounds have been raised by the assessee:

“1.1 That the impugned order of CIT (A)-22, New Delhi is bad in law and wrong on the facts and in the circumstances of the
case and legal position.

2.1 That on the facts and in the circumstances of the case and legal position, the learned CIT (A) has erred in confirming
additions of Rs.1,86,00,000/- on account of the alleged arm’s length price of corporate guarantee provided by the appellant
Company to the lenders on behalf of associate enterprises (AEs) on the basis of finding in the order passed by the Transfer
Pricing Officer (‘TPO’) u/ s 92 CA(3) of the IT Act, 1961.

2.02 That on the facts and in the circumstances of the case and the legal position, the learned CIT(A) has erred in arriving at
the arm’ s length price of service provided by the appellant in the form of corporate guarantee to AEs; where as:-

(i) Providing corporate guarantee is in the nature of shareholders’ activities and is not an ‘international transaction’ as
investment in subsidiary Company is not an ‘international transaction’ as held in the case of Vodafone India Services Private
Limited and Shell India Markets Private Limited.

(ii) The appellant has not incurred any cost for issuing corporate guarantee and such transaction has no bearing on the profits,
income, losses or assets of the appellant and it cannot be considered as an ‘international transaction’ in terms of section 92 B
of the Act.

(iii) The corporate guarantee issued by the appellant was purely on the commercial consideration with anticipation of significant
benefit in the form of profit income in the later years and to protect the interest of the appellant Company.

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(iv) The providing bank guarantee and corporate guarantee are different and distinct matters and cannot be compared with.

3.01 That on the facts and in the circumstances of the case and the legal position, the learned CIT (A) has erred in confirming
the disallowance off Rs.14 ,97,14 ,639/- in respect of provision made for sales incentive under “Shahenshah Scheme” and
holding that the provision made by the appellant under the aforesaid scheme was not being made on a scientific or logical
basis and therefore the provision, is not allowable as deduction.

3.02 That without prejudice of the above, on the facts and in the circumstances of the case and the legal position, the learned
CIT (A) has erred in confirming the addition on account of provision made for sales incentive scheme for computing book
profits u/ s 115JB of the IT Act, 1961 since the same is an ascertained liability.

4.01 That on the facts and in the circumstances of the case and the legal position, the learned CIT (A) has erred in confirming
the reduction of the deduction allowable u/ s 80 IC of the Act in respect of the units at Baddi and Haridwar, to the extent of
Rs.2,93 ,984/, by excluding interest income earned by the said units, while computing the eligible profits.

5.01 That on the facts and in the circumstances of the case and the legal position, the learned CIT (A) has erred in not allowing
the deduction of education cess and secondary and higher education cess of Rs.3 ,53,53,017/-.”

3. The assessee company is engaged in the business of manufacturing of electrical items and bath fittings viz. industrial and
domestic switchgears, capacitors, cable and wires, compact fluorescent lamps (CFL) and related components, electrical fans, electric
motors, electrical wire accessories and luminaries lighting fixtures during the year.

Adjustment u/s 92CA(3):

4. The relevant order of the TPO on the issue of corporate guarantees is as under:

4. Benchmarking of transactions of Corporate Guarantee

It was seen that Corporate Guarantee has been extended to AEs without charging adequate fee. After going through TP study
and case records a show cause notice dated 22.06.2017 was issued to the assessee. Relevant portion of the same is
produced as under:

[QUOTE]

2. As per the TP study furnished during the TP audit, the function of the assessee company is stated to be as under:

"Havells India is an electrical consumer product and power distribution equipment manufacturer. The company's product and
services include industrial and domestic circuit protection devices, cables and wires, motors, fans, power capacitors, compact
fluorescent lamps, luminaries fat domestic, commercial and Industrial applications, modular switches covering the entire gamut,
of household and commercial and industrial electrical needs, The company operates in four segment:-

3. Benchmarking of Corporate Guarantee:

It is seen from the audited financial that the assessee company has given corporate guarantee to lenders of the beneficiaries
which are AE of the assessee. On this guarantee no appropriate commission/fee has been charged by you for the above
arrangement.

3.2 On the basis of details furnished and other material on record, I am of the considered view that the international transaction
of providing corporate guarantee for the AE is an independent class of international transaction. In fact as per amendment
made in the Section 92B w.e.f. 01.04.2002, a new Explanation has been inserted which gives inclusive definition of
'International Transaction’ and guarantee is included in the same.

3.3 In order to benchmark the international transaction of corporate guarantee CUP is the most appropriate method. The
undersigned has therefore relied upon the data collected from the State Bank of India u/ s 133(6) of the Income Tax Act, 1961
for the relevant period. The information received from the State Bank of India u/ s 133 (6).

No. Name of the Bank Corporate Guarantee Rate

1. SBI 1.3 %

I have examined the risk profile of the assessee company vis- à- vis the risk profile of the Bank. For a bank, providing the
corporate guarantee is a normal business activity and they discount the losses arising out of such normal business activities in
their rates of commission. However, for a company which is engaged in electrical equipment and power distribution products,
providing of corporate guarantee is not a normal business activity. If the AE goes bankrupt or defaults in making the payment to
the Bank, the assessee would be liable to pay the entire loan to bank and the assessee may not be in a position to recover that
money from the AE. Such a situation warrants a higher price that the assessee should charge from the AE. In view of the
above facts, I am of the considered view that the assessee has exposed itself to a big risk by providing the corporate guarantee
for which the assessee has not charged any amount from the AE. The average fees charged by the SBI while issuing
guarantee is 1.30 %. Rate to be charged by the assessee from its AE is determined accordingly. Such fees shall be chargeable
on guarantee given in the AY 2013- 14 as well as outstanding guarantees of previous year.

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3.4 In this regard, it may show caused why a commission of 1.30% based on the commission rate of SBI in performance
guarantees exceeding Rs.10 Crores may not be charged on bank guarantees and taken as your income as an ALP on such
extension of guarantee to AE after treating bank guarantee transaction as an international transaction. You are also requested
to furnish credit rating of all the AEs with whom you have under taken aforesaid transactions.

3.5 The AE wise working of the corporate guarantee may also be submitted in following format:

S. No. In favour of Purpose Period Currency Amount (Rs.) Charges (1.30%)

From To

REPLY OF THE ASSESSEE AND COMMENTS OF TPO

5. Assessee replied to the show cause vide his submission dated 27.06.2017 and following issues has arisen on the objection
of the assessee:

On the issue of charging corporate guarantee fee assessee submitted the followings:

[Quote]

a) In light of the above reasons, it can be concluded that the provision of guarantee by the Appellant (i.e. group' s
parent company) to consortium of banks for the loan/credit facility was in the nature of shareholder activity.

b) That the amount of Corporate guarantee provided to wholly owned foreign subsidiary Companies present only equity
contribution of the assessee Company for which no guarantee fee was charged.

c) Furthermore, given that the long term credit worthiness of the overseas group companies are expected to Improve or
at least remain same, the Appellant wishes to highlight that any debt obligations taken/ to be taken by such companies
to repay the existing loan facility which are also guaranteed by Hit, represents MIL shareholder’s interest in such group
companies for which no guarantee fee needs to be charged by NIL.

d) That the Corporate guarantee provided to the wholly owned foreign subsidiary Companies to meet the financial
requirement and to protect the interest in the business of such wholly owned subsidiaries Companies. Thus the
guarantee provided are on account of the business exigency.

e) That no expenses has beers Incurred by (he assessee Company for providing the Corporate guarantee to wholly
owned foreign subsidiary Companies. Hence no expense should be adjusted.

f) That as aforesaid, providing guarantee is not an international transaction since the same is at par with the providing
equity to Associate Enterprises. Thus it can he concluded even though the Corporate guarantee given by the parent
Company is a Corporate guarantee in ‘form' but in ‘substance’. The same is 'equity participation’ which does not
warrant an arm' s length guarantee fee.

[Unquote]

6. Before proceeding to comment upon the submission of the assessee, it is necessary to discuss the concept of Guarantee.

What is a guarantee?

"A legally binding agreement under which the guarantor agrees to pay any or the entire amount, due on a loan instrument in
the event of non- payment by the borrower."

OECD Glossary of Statistical Terms

"A collateral agreement, for performance of another's undertaking. An undertaking or promise that is collateral to primary or
principal obligation and that binds guarantor to performance in event of non-performance, by the principal obligor."

Black's Law Dictionary

The key factors which could affect guarantee fee pricing are:

The credit quality of the borrower probability of default over a given period (the higher the likelihood of default, the more
valuable the guarantee);

The Seniority and quality of collateral (or loss given default);

The lifetime of the guarantee;

The terms of the guarantee, relative to the terms of the underlying loan;

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The prevailing interest rates (e.g. inter- bank rates, swap rates) and credit spreads above these rates (i.e. the ‘market
price of risk’)

The credit quality of the guarantor, which generally needs to be viewed both in isolation and in terms of the ability of the
guarantor to fulfill the guarantee obligation;

The ‘price of risk’ in financial markets and investor willingness to assume a given type of credit risk and

The uncertainty associated with the borrower’s and the guarantor’s credit quality.

Financial guarantees are usually provided in relation to loans by affiliates and can either be ‘explicit’ or ‘implicit’. Explicit
guarantees are those where a direct assurance is given by an affiliate. For example, a parent company may guarantee loans
taken by its subsidiary with third party banks, like the assessee has done. Implicit guarantees are those where being part of a
multinational group makes it possible to secure a loan, which one might not have been able to obtain as an independent entity
or secure more favourable terms. In these instances, the bank perceives that the parent would intervene in the case of any
default.

It may be of relevance to mention the OECD guidelines on the issue which can be of persuasive value.

Interpretation provided under paragraph 7.13 of the OECD Transfer Pricing Guidelines on this issue:

"... an associated enterprise should not be considered to receive an intra- group service when it obtains incidental benefits
attributable solely to its being part of a larger concern, and not to any specific activity being performed….passive association
should be distinguished from active promotion of the MNE group's attributes that positively enhances the profit-making potential
of particular members of the group".

In the light of this guidance, it follows that an associated enterprise should not be considered as I receiving an intra- group
service when it obtains incidental benefits attributable solely to its being part of a larger concern, and not to any specific activity
being performed. In addition, no service could be said to be received where an associated enterprise by reason of its affiliation
alone has a credit-rating higher than it would if it were unaffiliated, but an intra-group service would usually exist where the
higher credit rating were due to a guarantee by another group member, or where the enterprise benefited from the group’s
reputation deriving from global marketing and public relations campaigns.

It can be seen from the facts of the present case that the assessee company had provided the Guarantees to the AE for
obtaining the credit facilities/ acquisition of overseas subsidiary. This transaction has resulted into a direct benefit to the AE.
Therefore, in the present case there is active promotion of the multinational group's attributes which positively enhance the
profit- making potential of particular members of the group.

In a situation where a borrowing company could not borrow in its own right, given its difficult financial condition, would an
independent party provide a guarantee without any consideration to support die borrowing of the company? The answer is NO
in such a situation an independent party would not provide guarantee to any party without suitable compensation. Under similar
circumstances, if a parent provides a guarantee to its subsidiary, should an arm' s length guarantee fee be charged by it from
the subsidiary? Of course the parent should charge an appropriate guarantee fee else the transaction is hot at arm' s length,

8. Broadly, no Transfer Pricing regulation across the world prescribes or defines a method for benchmarking guarantee fees.
Few draft guidelines (under discussion stage) have been issued by some countries deliberating upon different methods and the
prudence of charging a guarantee fee. The ruling by the Tax Court of Canada in the case of GE Canada has deliberated upon
the 'interest saving approach’, but still leaves many questions unanswered as the case relates to Investment Company which is
functionally different from the assessee.

The ruling of tax court in any case is only persuasive in nature as held by Hon’ble ITAT Mumbai in the case of Serdia
Pharmaceuticals (India) Pvt. Ltd. (2011 - TII- 02-ITAT- MUM- TP) wherein it has held,

“the decision of Tax Court of Canada Is not a binding precedent, but it certainly deserves utmost respect and consideration not
only because It comes from a very eminent forum of tax judiciary in the world, but also because of its very comprehensive and
painstaking analysis of all the related issues and Its sheer technical excellence;”

The most common guarantees are financial guarantees. These provide credit enhancement to the guaranteed party, either (i)
to access cheaper funding, or (ii) to access capital markets, Different methods would apply to each as the first case could
happen without a guarantee in place, whereas in the second case, there could be no transaction in the absence of a
guarantee. Financial guarantees are typically provided in relating to a particular funding transaction and the guaranteed amount
would be the outstanding capital or the amount related to credit enhancement (i.e. the amount of additional capital required to
obtain the targeted credit rating). For benchmarking obviously methods under the Indian Act will have to be followed.

Recent judicial precedent on guarantee fee payment by a Tax Court in Canada

Facts of the Case

On December 2009, the Tax Court of Canada (TCC) gave a ruling relating to the years 1996 - 2000 for General Electric Capital
Canada Inc. (GE Canada) on a matter pertaining to financial guarantees. In this case, GE US had provided an explicit

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guarantee for the borrowings of GE Canada since 1988; however, it began charging a fee for the explicit guarantee only in
1995, equal to 1 % of the principal amount of debt securities outstanding per annum. GE Canada claimed deduction for the
guarantee fees that became payable to GE US for the tax years 1996 to 2000. The deductions claimed by GE Canada were
disallowed by Canada's Revenue Agency (CRA). CRA argued that the guarantee fees should be zero due to the implicit
guarantee inherent in the parent subsidiary relationship between the GE US and GE Canada.

TCC’s Judgment

TCC differed from the CRA’s position that GE US controlled the capital structure of GE Canada and therefore could choose the
amount of equity invested and control GE Canada's debt to equity ratio. TCC stated that this contradicts the well accepted
principle that a corporation is a separate person whose existence provides limited liability protection to its shareholders such
that the extent of a shareholder’s exposure is limited to the amount of capital the shareholder chooses to invest. TCC
recognized the difference between implicit support which does not provide for a guaranteed recourse and an explicit guarantee
which provides much stronger protection and legally enforceable recourse to the lender. TCC concluded that the yield curve
approach (interest saving approach) was the appropriate methodology for ascertaining the economic value of the explicit
guarantee. The approach would involve (i) estimating the standalone or status quo credit rating and noting the arrived credit
rating for the shareholding relationship, and (ii) capturing the spread between the parent’s credit rating and the estimated
standalone credit rating of GE Capital Canada (factoring the implicit support provided through the shareholding relationship).
Factoring implicit support for estimation of standalone credit rating would mean that the implicit support is consistent with the
arm’ s length principle as per the ruling.

9. Determination of Arm’s Length Price for inter- company guarantees: What are the approaches followed across the world for
benchmarking guarantee fees?

Broadly, no Transfer Pricing regulation across the world prescribes or defines a method for benchmarking guarantee fees. Few
draft guidelines (under discussion Stage) have been issued by some countries deliberating upon different methods and the
prudence of charging a guarantee fee. The ruling by the Tax Court of Canada in the case of GE Canada has deliberated upon
the 'interest saving approach’, but stilt leaves many questions unanswered. Since no single and concrete approach has been
finalized in any country or by the OECD guidelines, it is better to follow the methods which have been prescribed by the Indian
Transfer Pricing legislation. The most common guarantees are financial guarantees. These provide credit enhancement to the
guaranteed party, either (i) to access cheaper funding, or (ii) to access capital markets. Different methods would apply to each
as the first case could happen without a guarantee in place, whereas in the second case, there could be no transaction in the
absence of a guarantee. Financial guarantees are typically provided in relation to a particular funding transaction and the
guaranteed amount would be the outstanding capital or the amount related to credit enhancement (i.e. the amount of additional
capital required to obtain the targeted credit rating).

10. CUP Approach

Under the CUP approach, the guarantee fee is quantified through a comparison of arm’s length guarantee fee rates charged by
unrelated third parties providing similar guarantees under similar terms and conditions (i.e. third party comparable rates). This
approach identifies what guarantee fee the borrower would have been required to pay if it were to have secured the guarantee
through an unrelated third party, such as a bank or a finance company. Under this approach, two variables are estimated: (i)
the assets at risk, and (ii) the guarantee fee rate. To estimate an appropriate guarantee fee rate, the borrower's credit
Worthiness is evaluated by estimating an "implied" credit rating using credit rating guidelines published by a third party credit
rating agency. An implied credit rating is a quantitatively derived estimate of an actual credit rating. The borrower's implied
credit rating is used to identify comparable guarantee fees charged by third party lenders to borrowers with similar credit
ratings. This approach is most appropriate in cases where the guarantee results in a measurable and material credit
enhancement for the borrower and hence lowers the cost of its third party debt The application, of a CUP could either be:

11. Internal Guarantee CUP

Take into account guaranteed and un- guaranteed third- party loans.

Ensure that the guarantee fee is equal to the spread between the two loans.

12. External Guarantee CUP:

For example, the rates at which the financial Institutions are providing guarantee to its constituents.

13. In the present case the assessee hasn't come up with any internal CUP. The assessee also conceded that the credit ratings
of its AEs are not sound enough and they could not obtain credit terms from the lender banks without the corporate guarantee
given by the assessee.

14. Shareholder's activity/ Commercial expediency

The assessee in its reply contended that the act of extending corporate guarantee on the further investment activities by HHI
was purely driven by the sole business and commercial objective of the Assessee i.e. to enable HHI, make further investments
across the globe and strengthen the global presence of the Assessee Group.
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The argument put forth by the assessee stipulates that by providing the guarantees, it was only serving its own interest. This is
generally called the 'shareholder activity’ argument. Thus, as a shareholder, it was interested in the functioning of the
subsidiaries which in turn benefitted from its own activities. However, this approach totally contradicts the arm' s length principle
which is based on the premise of interaction between independent enterprises. This approach requires the transactions
between two parties to be examined as transactions taking place in a market- place with both parties acting on the basis- of
cost-benefit analysis and maximization of profits. Further, the rights and duties of a shareholder do not envisage participation in
the day- to- day business affairs of the company. The shareholder is not required to participate in the commercial dealings of
the company. It is not that the 'shareholder activity’ argument is arising for the first time, in fact, in the Canadian tax ease
referred above, this matter came up for discussion. This discussion is contained in paragraphs 240 - 246 of the referred order
of the Tax Court of Canada. The views of the Court are mentioned below in brief:

In theory, or in corporate law, directors manage, or supervise the, management of, the business arid affairs of a
corporation, while officers run the daily operations within the framework of the policies and directions set by the elected
board of directors. Yet, in practice, whore economic forces' come into play, officers of large corporations determine the
corporate destiny; they nave the vision; they hold the reins of the corporation; and they often select the.ir own
successors. (Para 241)

Shareholders elect the board of directors. However, in case of the day- to- day operations of a business, the Canada
Business Corporations Act (the "CBCA”) does not specifically allow for shareholders to appropriate powers of officers.
(Paras 242 -43)

The Court referred to the decision in case of Duha Printers (Western) Ltd. Vs. Canada, where it was held that “…
Directors generally owe a duty not to the shareholders but to the corporation and shareholders could not therefore,
control the day- to- day business decisions made by the directors and their appointed officers. In other words, although
the shareholders could elect the individuals who would make up the board, the board members, cone elected wielded
virtually all the decision making power, subject to the ability of the shareholders to remove or fail to reelect
unsatisfactory directors.” (Para 244, emphasis added by the Court)

All in all, the fundamental distinction remains that shareholders can appropriate the powers to appoint the officers but
not the powers of the officers to in fact manage the business. This is the result of a close reading of subsection 146 (1)
of the CBCA. (Para 245)

Thus, the Tax Court of Canada is of the view that by virtue of being a shareholder, the parent company cannot legally
appropriate the money management and other commercial and business functions of the subsidiary.

In India also, the shareholders (i.e. ' members') have voting rights (Section 87 of the Companies Act, 1956) participate in the
statutory (Section 165) and the annual general meetings (Section 166) and appoint (Sections 255 & 258) and remove the
Directors (section 284). However, the business of the company is entrusted to the Board of Directors (Section 291) with
applicable restrictions (Section 292 & 293). In fact, in the case of Rolta India Ltd. & Another Vs. Venire Industries Ltd. & Others
(2000-(001)-CLJ -0161 - BOM), Hon’ble Bombay High Court had occasion to look into the powers of the Directors in relation to
the shareholders in the conduct of the business of the company in case of pooling arrangements. The Hon'ble High Court held
that "a pooling agreement, cannot be used to supersede the statutory rights given to the Board of directors to manage the
company, the underlying reason being that the shareholders cannot achieve by pooling agreement that which is prohibited to
them, if they are voting individually. Therefore, the power of shareholders to unite is not extended to contracts, whereby
restrictions are placed on the powers of the Directors to manage the business of the Corporation. It is for this reason that a
pooling agreement cannot be between the Directors regarding their powers as the Directors. There is a vast difference in
principle between the case of a shareholder binding himself by such a contract and the Director of the company undertaking
such an obligation by compromising his fiduciary status. The shareholder is dealing with his own property. He is entitled to
consider his own interests, without regard to interests of other shareholders. However, Directors are fiduciaries of the company,
the shareholders. It is their duty to do what they consider best in the interests of the company" (Para 22 of the order). Hon’ble
Court also cited several international case laws which were of the same view. Thus, running of business in the interest of the
company is the task of the management It needs to be noted that several civil and criminal actions are also provided in the
Companies Act, 1956 against ‘officers' of a company for their acts of omission and commission associated with the running of
the business of the company.

Further, commercial expediency is not important here and this view was upheld by ITAT, New Delhi In a recent decision in the
case of Perot Systems TSI (India) Ltd. Vs DCIT, wherein it was discussed and held as under:

"9. Before us, the Id. Counsel of the assessee contended that income means real income and not fictitious Income and since
the assessee has not earned any Income, the same cannot be taxed. Reliance in this regard has been placed upon in the case
of CIT Vs. KRMTT Thiagaraja Chetty & Co., reported in 24 ITR 525 (SC) & in the case of Morvi Industries Ltd. Vs. CIT reported

In 82 ITR 835 (SC) for the proposition that liability to tax can arise only when there Is Income. No tax can be charged as
notional income on accrual. Further reliance has been placed upon the ruling of Authority for Advance Rulings delivered in the
case of Veneburg Group B. V. Vs. CIT 727 of 2006 for the proposition that in the absence of any income, transfer Pricing

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provisions being machinery provision shall not apply. It has further been argued that Transfer Pricing document maintained by
the assessee clearly mention that these loans/ advances are in the nature of quasi- equity and hence the transaction of
granting interest free loan Is at arm's length. The loan agreements mentioned that these are interest free loans. Reliance in this
regard is placed upon the decision of Delhi Tribunal in the case of Sony India Ltd. 114 ITD 440 Para 100 that " under fiscal
loans actual transaction as entered between the parties is to be considered. Authorities have no right to re- write the
transaction unless it is held that it is sham or bogus or entered into by the parties to avoid and evade taxes." Further reference
has been made la para 1.37 of 1995 of OECD guidelines for the proposition that it is legitimate to consider the economic
substance of the transactions. The transactions has been said to be commercially expedient and loan granted to support the
subsidiary and obtain returns in loan had been duly granted by the approval of the RBI. The Income Tax Act, 1961 and OECD
guidelines support the contention that the effect of government control/ intervention should be considered while determining the
arm' s length price.

10. We have carefully considered the submissions and perused the records. The primary contention before us, as submitted by
the Id. Counsel of the assessee is that it was commercially expedient for assessee to advance interest free loans to the AEs
and that since no interest has actually been charged, there is no real income exigible to tax. As observed by the Id. CIT(A) the
agreements show that these art loan amounts given by the assessee to Associated Enterprises (AEs). This in fact is an
admitted position. There is no case that any special feature in the contract makes the transaction as capital in nature. It is also
an admitted proposition that the assessee has extended the loan to its AE's who are 100% subsidiaries. The Assessee' s case
is that it has actually not earned any interest and it was commercially expedient to extend these interest free loans. Now it is
noted that this is not a case of ordinary business transaction. The question relates to scrutiny of international transaction to
determine whether or not the same is at arm' s length. The principle of transfer pricing aims at determining the pricing in the
situations of cross border international transactions where two enterprises which are subject to the same centre or direction or
control (associated enterprise) maintain commercial or financial relations with other. In such a situation, the possibility exists
that by way of intervention from the centre or otherwise, business conditions must be accepted by the acting units which differs
from those which in the same circumstances would have agreed upon between un- related parties. The aim is to examine
whether there is anomaly in the transaction which arises out of special relationship between the creditor and the debtor. Hence,
the contention of having actually not earned any income cannot come to the rescue of the assessee in this scenario. The case
laws from the Apex Court cited by the ld. Counsel of the assessee are in the contest of the proposition that only the real income
has to be taxed and interest free advances can be given by companies (domestic) to their subsidiaries on the ground of
commercial expediency. But these decisions are not in the context of Chapter-X of the IT Act which relates to special provision
relating to computation of income from international transactions having regard to arm’s length price. Other case laws cited by
the assessee are not germane to the facts off this case. Hence, in our considered opinion they do not help the case of the
assessee.

The real income theory is also not applicable in the context of Chapter-X of the IT Act, which contains special provisions
relating to arm’ s length price. Further, business expediency does not have any role to play here as while applying arm’s length
principle, one has to see what the independent parties in comparable transactions would do i.e. if the same loan/ guarantee
transaction takes place between two independent entities; what they would expect in terms of compensation for the loan
transaction/ guarantee entered into between them. This view was upheld by ITAT, Mumbai in a recent decision in the case of
VVF Ltd. Vs. DCIT (2010 - TIOL- 55- ITAT- MUM), wherein it was discussed and held as under:

“6. On a conceptual note, the purpose of making arm's length adjustments, in prices at which transactions have been entered
into with associated enterprises, is to nullify the impact of interrelationship between the associated enterprises. Unless the
method on the basis of which such hypothetical prices are computed is such that costs are to be taken into account, these
hypothetical prices have nothing to do with the actual costs. CUP method seeks to ascertain arm' s length price by taking into
account prices at which similar transactions have been entered into by the assessee with unrelated parties (Internal CUP) or at
which other unrelated parties have entered into similar transactions inter se (External CUP). None of these inputs have
anything to do with the costs; they only refer to prevailing prices in similar unrelated transactions instead of adopting the prices
at which the transactions have been actually entered in such cases, the hypothetical arm's length prices, at which these
associated enterprises, but for their relationship, would have entered into the same transaction, are taken into account Whether
the funds are advanced out of interest bearing funds or out of funds on which 14 % interest is being paid, or whether such
interest free advances are commercially expedient for the assessee or not, is wholly irrelevant in this context. The transaction
in the present case is of lending money, In foreign currencies, co its foreign subsidiaries. The comparable transaction therefore
is of foreign currency lending by unrelated parties."

Thus comparable uncontrolled transaction is relevant rather than commercial expediency for determining the arm’ s length
price.

15. Following the discussion above, by the application of CUP which is the most appropriate method in the facts &
circumstances of the case, the arm's length price of providing service of corporate guarantee is computed in the subsequent
paragraphs.

The information received from State Bank of India u/s 133 (6) of the I.T. Act was compiled and supplied to the assessee as
annexure to the Show Cause Notice. The rate charged by State Bank of India represents the rates charged by the banking

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industry in India. Moreover in view of £he fact that there is stiff competition in the banking industry, there are no major
differences in the rates charged by various financial Institutions. Rate charged by State Bank of India as applicable to the
present case subject to the fact that adjustment has to be made for the high risk that the assessee has borne on providing the
guarantee.

The Hon’ble DRP Mumbai in its order dated 04.09.2012 in the case of M/ s Hindalco Industries Ltd. A.Y. 2008 - 09, on
corporate guarantee has held that:

[QU0TE]

“7.1 The contention of the assessee that income in the form of guarantee fee cannot be taxed in the hands of the assessee as
it represents only a notional income, is without merit. It is true that section 92 is not a charging section, but this fact is not
relevant. What is relevant is that by providing a corporate guarantee, the assessee has conferred a benefit on its AE and such
benefit has the potential of affecting the income, profits or assets of the concerned parties. The provision of corporate
guarantee is, therefore, clearly an international transaction u/ s 92B. Moreover, the retrospective amendments made by the
Finance Act 2012 in the section now place the issue beyond debate.

7.2 Once it is accepted that providing such a guarantee is an international transaction, the arm's length price of the transaction
is required to be ascertained, because under section 92, the income arising from, an international transaction is required to be
determined on the basis of the arm's length price, in which case no income can be said to arise from the transaction. But if it is
shown that a non- zero arm's length price can be computed, the income from the transaction must be computed and taxed.

7.3 The assessee' s contention that the guarantee was fair its own benefit bind not for the benefit of the AE, is again not
relevant. A transfer pricing analysis seeks to determine the price that would be charged in an uncontrolled transaction between
unrelated parties in comparable circumstances. Commercial expediency, business motives or business strategies are not
included in the factors prescribed in the Rules for judging the comparability of a transaction. We, therefore, are in agreement
with the TPO that the provision of corporate guarantee must he analyzed and an arm' s length charge must be assigned to it
and income of the assessee should be computed accordingly.

7.6 The AE is a distinct company and it cannot be said that it has no existence of its own apart from the relationship with the
assessee. Obtaining the loan was crucial to the business of the AE and hence the guarantee provided by the assessee
certainly benefits the AE when viewed in an arm’s length scenario. We are of the view that the assessee is incorrectly clouding
its perspective by looking at the controlled situation in which it is place, without realizing that the TP analysis must be made in
an uncontrolled situation.

7.9 We are not in agreement with the assessee that only 50% of the above differential of 139 bps should be taken as the
guarantee fee. The assessee’s argument that no independent concern would agree to bear the entire guarantee fee does not
hold goods in a normal situation involving the giving of corporate guarantee. It is only because the valuation of the guarantee is
being made in a particular manner. In this case that the question of sharing an interest differential has arises. In a normal
uncontrolled situation, the guarantee fee would be arrived at under mutual agreement after considering various factors. Further,
the interest rate differentials are being considered. In the present case only to evaluate the economic risk assumed by the
guarantee provider. There can be no issue of reducing such risk by 50 % on extraneous concerns.

7.10 We are also of the considered view that the above amount would represent only the basic cost of the guarantee provided
by the assessee. In accordance with the normal principles of transfer pricing, a reasonable mark-up has to be added to this
cost considering the nature of benefit. Further, it is relevant to consider the foreign exchange risk and the foreign exchange
fluctuation risk borne by the assessee in providing the corporate guarantee. In case the guarantee devolves upon the assessee
at a future date, adverse movements in exchange rates can effect the assessee very significantly. This is particularly relevant
since A V Minerals has apparently been repaying the loan and interest only with the help of capital infused by the assessee
from time to time in the subsequent months. There are other risks also that should be kept in mind, such as sovereign risk and
entity risk. The assessee would be put to considerable loss in the event of the business of the AE having to be wound up,
which could even be due to a general financial crisis in its country of residence. Another factor to be considered in the present
case is that AV Minerals does not have the capacity to meet the interest and principal repayments, of the loan on its own. The
assessee has been advancing large sums to the AE,.which have been converted into equity after varying period of time. There
is, therefore, also an element of interest that is being forgone by the assessee in the process of funding its AE.

16. Price Received vis- à-vis the Arm’s Length Price:

16.1 Arm’s length price of providing the services in the form of bank guarantee is determined under CUP method and made a
part of the order as given below:

Sl. No. In favour of Amount of Guarantee Provided (Amount in Crs.) Guarantee fees @ 1.30 %

1. Havells Holding Ltd. 143.13 1.86 Crs.

  Total   1.86 Crs.

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16.2 An adjustment u/ s 92 CA of Rs.1.86 Crores is to be made to the income of the assessee, being the arm’s length price of
the services provided by the assessee in the shape of bank guarantee to AE. Thus, the above amount of Rs.1,86,00,000/- is
treated as transfer pricing adjustment for the FY 2013 -14.”

5. The amount guarantee provided by Havells Holdings Ltd. was Rs.143.13 crores against which the TPO has calculated guarantee
fee @ 1.3 % amounting to Rs.1.86 crores.

6. At the outset, the ld. AR argued that providing corporate guarantee is in the nature of shareholders activities and is not an ‘
international transaction’ as investment in subsidiary company is not an ‘international transaction’ as held in the case of Vodafone
India Services Pvt. Ltd. and Shell India Markets Pvt. Ltd. It was argued that the assessee has not incurred any cost for issuing
corporate guarantee and such transaction has no bearing on the profits, income, losses or assets of the assessee and it cannot be
considered as an ‘international transaction’ in terms of Section 92 B of the Act. It was further argued that the corporate guarantee
issued by the assessee was purely on the commercial consideration with anticipation of significant benefit in the form of profit income
in the later years and to protect the interest of the assessee company. It was argued that the bank guarantee and corporate
guarantee are different and distinct matters and cannot be compared with.

7. The ld. DR argued that Hon’ble Madras high court’ s latest decision in Redington India Pvt. Ltd., Vs. DCIT, Tax Appeal No.590 and
591 of 2019 , dt.10 - 12 - 2020 has settled the law that a corporate guarantee indeed forms an international transaction. Relying on
the order of the TPO, the ld. DR argued that corporate guarantees given by the assessee is indeed an international transaction
amenable to adjustment.

8. Rebutting the argument of the ld. DR, the ld. AR alternatively argued that determination of the corporate guarantee at 1.3 % is on a
higher side and relied on the judgment of Hob’ble High Court of Bombay in the case of CIT Vs. Everest Kento Cylinders Ltd. 58
Taxmann 254 and also on the judgment of Hon’ble High Court of Bombay in the case of CIT Vs Thomas Cook (India) Ltd. in ITA No.
712 of 2017 order dated 26.08.2019. Keeping in view, the judgments of the Hon’ble Bombay High Court and in the absence of any
other judgment contrarily brought to our notice, we hereby direct that the adjustment in respect of corporate guarantee provided to
AEs be determined at date of 0.5 % instead of 1.3% determined by the revenue.

Shahenshah Scheme:

9. This issue stands covered in the case of the assessee by the order of the Co- ordinate Bench of the Tribunal in ITA No. 6194/ Del/
2015 and ITA No. 463/Del/ 2016 vide order dated 19.01.2021. The relevant part of the said order is reproduced for ready reference:

“15. Ground No.3 is with respect to disallowance of Rs.2,47,68,964/- in respect of provision made for sales incentive under
“Shahenshah Scheme”.

16. During the course of assessment proceedings, AO noticed that assessee had made provision in respect of “Shahenshah
Scheme” and the assessee was asked to furnish the details of the same. Assessee inter alia submitted that it had made
provision of Rs.5, 67, 26, 847/- in respect of “Shahenshah Scheme” towards sales incentive payable to dealers and distributors
and had paid Rs.2, 61, 14, 170/- in respect to the said scheme and Rs.58, 43, 713/- was written back and credited to Excess
Provisions of bad debts/ sales incentive written back. The assessee also pointed to the relevant features to the “Shahenshah
Scheme” and it was further submitted that the provision made for the scheme is not a contingent liability but rather a
contractual liability which is legally enforceable by the dealers and distributors. The submissions made by the assessee were
not found acceptable to AO. AO considering the fact that as against the provision of Rs. 5,67,26,847/-, the actual payment
made by the assessee was Rs.2 ,61, 14,170/- and Rs.58, 43,713/- was written back, concluded that the provision made by the
assessee was not based on any scientific method but was in the nature of contingent liability. He also noted that CIT(A) while
deciding the issue in assessee’ s own case for A. Y. 2008- 09 had analyzed scheme and had confirmed the addition made by
the AO. He therefore disallowed Rs. 2,47,68,964/- [5,67,26,847 – 2,61,14, 170 – (5843713/-)].

17. Aggrieved by the order of AO, assessee carried the matter before the CIT(A), who following the order of his predecessor in
assessee’ s own case for A.Y. 2008- 09, upheld the action of the AO. Aggrieved by the order of CIT(A), assessee is now before
us.

18. Before us, Learned AR reiterated the submissions made before the AO and CIT(A) and further submitted that against the
order of CIT(A) for A. Y. 2008- 09, assessee had carried the matter before the Tribunal. The Tribunal vide order dated
30.09.2019 in ITA No. 4695/ Del/ 2012 has decided the issue in favour of the assessee by holding that the provision made in
respect of “Shahenshah Scheme” is on a scientific basis. He further submitted that the Co-ordinate Bench of Tribunal had
deleted the similar additions made by AO in A.Y. 2007- 08 & 2006- 07. He pointed to the relevant findings in the synopsis filed
by him. He therefore submitted that since the issue in the year under consideration is identical to that of earlier years, therefore
following the order of tribunal in earlier years, the additions made by AO be deleted.

19. Learned DR on the other hand supported the order of AO in CIT(A).

20. We have heard the rival submissions and perused all the materials available on record. The issue in the present ground is
with respect to the disallowance of provision made with respect to the sales incentive payable under “Shahenshah Scheme”.
The AO had disallowed the provision by holding that the provision made by the assessee was not based on any scientific
method and there is an element of contingent liability and therefore the sum is not allowable. We find that identical issue arose

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in assessee’ s own case in AY 2006- 07, 2007- 08 and 2008- 09 before the co- ordinate Bench of Tribunal. The Co- ordinate
Bench of Tribunal in earlier years has decided the issue in favour of the assessee by holding that the provision made by the
assessee in respect to “Shahenshah Scheme” to be on scientific basis. Before us, no material has been placed by the
Revenue to point out any ITA No. 6194/ Del/ 2015 ITA No.463/ Del/ 2016 M/ s. Havells India Ltd. vs DCIT A. Y. 2009- 10 14
distinguishing feature in the facts of the case in the year under consideration and that of earlier years. Further Revenue has
also not placed any material to demonstrate that the decision of the Tribunal in assessee’ s own case in A. Y. 2006- 07, 2007-
08, 2008- 09 has been set aside/ stayed or over ruled by the higher judicial forum. Considering the totality of the aforesaid facts
and following the order of the Co-ordinate bench in the assessee’ s own case and for similar reasons, we hold that the
Revenue was not justified in making the addition. We therefore set aside the action of AO. Thus the ground of the assessee is
allowed.”

10. As a result, the appeal of the assessee on this ground is allowed and it is to be kept outside the purview of Section 115 JB.

Deduction u/ s 80IC:

11. This issue stands covered in the case of the assessee by the order of the Co- ordinate Bench of the Tribunal in ITA No. 6194/ Del/
2015 and ITA No. 463/Del/ 2016 vide order dated 19.01.2021. The relevant part of the said order is reproduced for ready reference:

“21. Ground No. 4 is with respect to the denial of claim of deduction u/ s 80IC on interest income.

22. AO noticed that assessee had credited Rs. 16, 725/- and Rs.6, 334/- on account of interest income in the accounts of Baddi
Unit and Haridwar Unit. The assessee was asked to show cause as to why the deduction u/s 80 IC not be disallowed on such
interest income as it was not derived from the business activity of the industrial undertaking. Assessee made the submissions
which were not found acceptable to AO. AO was of the view that as per the provisions of Section 80IC, deduction is available
only on income derived from business activity of industrial undertaking and since interest has been derived from fixed deposits,
the interest was not eligible for deduction. He accordingly denied the claim of deduction u/ s 80IC on such interest income.

23. Aggrieved by the order of AO, assessee carried the matter before the CIT(A) who upheld the order of AO. Aggrieved by the
order of CIT(A), assessee is now before us.

24. Before us, Learned AR reiterated the submissions made before the lower authorities and further submitted that interest
income was earned on the fixed deposits which was required to be maintained as per the statutory requirements of the
respective state. He submitted that since the interest income was inextricably linked to the main business activity of the
assessee, it should be considered to be treated as eligible for claiming deduction. In support of its claim for interest being
eligible for deduction, he also relied on the decision of Hon’ble Delhi High Court in the case of PCIT vs. Bharat Sanchar Nigam
Ltd. in ITA No. 477/ 2016 dated 01. 08.2016 and the decision of ITAT in the case of M/s. NHPC Ltd vs. ACIT in ITA No. 3738/
Del/ 2015 in order dated 08. 05.2019.

25. Learned DR on the other hand supported the order of lower authorities.

26. We have heard the rival submissions and perused all the materials available on record. The issue in the present ground is
with respect to the denial of claim of deduction u/s 80IC on the interest income earned by the assessee. Before us it is Learned
AR’ s contention that the interest income earned is inextricably l inked to the main business activity of the assessee as it was
earned from fixed deposits which was required to be maintained as per the statutory requirements. The aforesaid contentions
of the assessee have not been controverted by the Revenue. We find that the Hon’ ble Delhi High Court in the case of PCIT vs.
Bharat Sanchar Nigam Ltd. (supra) and the Co- ordinate Bench of Tribunal in the case of M/ s. NHPC Ltd. (supra) has held that
the Revenue was not justified in denying the claim of deduction on such income. Before us, Revenue has not pointed any
contrary binding decision in its support. We therefore, hold that AO not justified in denying the claim of deduction u/ s 80IC of
the Act and thus direct the AO to grant deduction u/ s 80 IC on the interest income earned by the assessee. Thus the ground of
the assessee is allowed.”

12. As a result, the appeal of the assessee on this ground is allowed

13. In the result, the appeal of the assessee is allowed. Order Pronounced in the Open Court on 09/ 05/ 2022.

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Citations: in 2022 (5) TMI 685 - ITAT DELHI

1. Morvi Industries Limited Versus Commissioner of Income-Tax (Central) , Calcutta - 1971 (10) TMI 5 - Supreme Court

2. Commissioner Of Income-Tax, Madras Versus KRMTT Thiagaraja Chetty And Company - 1953 (10) TMI 7 - Supreme Court

3. Principal Commissioner of Income Tax 5, Chennai Versus M/s. Redington (India) Limited - 2020 (12) TMI 516 - MADRAS HIGH
COURT

4. The Pr. Commissioner of Income Tax-1 Versus Thomas Cook (India) Ltd., - 2019 (9) TMI 473 - BOMBAY HIGH COURT

5. Pr. Commissioner of I. Tax-Delhi Versus Bharat Sanchar Nigam Ltd. - 2016 (8) TMI 270 - DELHI HIGH COURT

6. The Commissioner of Income Tax, Mumbai Versus M/s. Everest Kento Cylinders Ltd. - 2015 (5) TMI 395 - BOMBAY HIGH
COURT

7. Rolta India Ltd. Versus Venire Industries Ltd. - 1999 (10) TMI 661 - HIGH COURT OF BOMBAY

8. Havells India Ltd. Versus DCIT (LTU) , NBCC Plaza, New Delhi - 2021 (1) TMI 741 - ITAT DELHI

9. Havells India Ltd. Versus ACIT LTU New Delhi - 2020 (11) TMI 478 - ITAT DELHI

10. DCIT, Circle-II, Faridabad Versus M/s NHPC Ltd., And M/s NHPC Ltd. Versus ACIT, Circle-II, Faridabad - 2019 (5) TMI 1664 -
ITAT DELHI

11. Serdia Pharmaceuticals India (P) Ltd. Versus ACIT - 2010 (12) TMI 60 - ITAT, Mumbai

12. VVF Ltd. Versus DCIT - 2010 (1) TMI 781 - ITAT, Mumbai

13. Perot Systems TSI (India) Ltd. Versus Deputy Commissioner of Income-tax, Circle-14 (1) , New Delhi - 2009 (10) TMI 638 -
ITAT DELHI

14. Sony India (P) Limited. Versus Deputy Commissioner Of Income-tax, Circle - 9 (1). - 2008 (9) TMI 420 - ITAT DELHI-H

15. Vanenburg Group, In re - 2007 (1) TMI 109 - AUTHORITY FOR ADVANCE RULINGS

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