ITAT Bench upholds CIT(A) order making ALP adjustment representing corporate guarantee adjustment and rejects the plea seeking to reverse sponsorship fee(s) paid disallowance

NCC Limited, Hyderabad vs Asst. Commissioner of Income Tax, Circle -16(1), Hyderabad; ITAT Hyderabad; 27.09.2021

Appeals filed by the Assessee against the order of CIT(A), Hyderabad against the proceedings u/s 144 C(3) & 143 (3) of the Income Tax Act, 1961 on the following grounds:

I. Correctness of both the lower authorities’ action making Arm’s Length Price (ALP) adjustment of Rs.29,68,60,000/- representing corporate guarantee adjustment involving its overseas Associated Enterprises (AEs).

The said issue had arisen in assessee’s cases for preceding assessment years i.e. AYs. 2012-13, 2013-14 & 2014-15 wherein the coordinate bench has upheld an identical adjustment on the following grounds:

• From the Annual Report of the assessee, it was seen that the assessee had issued guarantees on behalf of its subsidiaries. The assessee stated that they had not issued any fresh guarantee during the Assessment Year 2009-10 and the guarantee is outstanding, is purely on account of the currency transition adjustment on restatement of guarantees outstanding at the closing rates prevailing on 31st March 2009 for disclosure in financial statement in compliance with the Accounting Standards.
• In terms of the amended section 92 B, which was introduced with retrospective effect from 01.04.2002, examined the factual aspect and pointed out that though the assessee stated that they have not issued any fresh guarantee during the Assessment Year 2009-10, the guarantees were live and were not closed as on 31.03.2009 and the liability continued on the assessee as on 31.03.2009.
• Noting that providing such guarantee is one of the financial service rendered by the assessee for which it has to be remunerated appropriately and that concerned parties in whose favour these guarantees were extended, where Associated Enterprises of the assessee and the transactions were largely influenced by related parties, the Associated Enterprises benefited and consequently, the income would accrue only to such non-resident and to that extent, shifting of tax base from the country is bound to happen in such transaction and the assessee should have been remunerated appropriately.
• The concept of Bank Guarantees and Corporate Guarantees was explained in the decision of the Hyderabad Tribunal in the case of Prolifies Corporation Limited. In the said case, the Revenue contended that the transaction of providing Corporate Guarantee is covered by the definition of international transaction after retrospective amendment made by Finance Act, 2012. The assessee argued that the Corporate Guarantee is an additional guarantee, provided by the Parent company. It does not involve any cost of risk to the shareholders. Further, the retrospective amendment of Section 92B does not enlarge the scope of the term international transaction to include the Corporate Guarantee in the nature provided by the assessee therein.
• The Tribunal held that in case of default, Guarantor has to fulfill the liability and therefore, there is always an inherent risk in providing guarantees and that may be a reason that Finance provider insist on non-charging any commission from Associated Enterprise as a commercial principle. Further, it has been observed that this position indicates that provision of guarantee always involves risk and there is a service provided to the Associate Enterprise in increasing its creditworthiness in obtaining loans in the market, be from Financial institutions or from others. There may not be immediate charge on P & L account, but inherent risk cannot be ruled out in providing guarantees. Ultimately, the Tribunal upheld the adjustments made on guarantee commissions both on the guarantees provided by the Bank directly and also on the guarantee provided to the erstwhile shareholders for assuring the payment of Associate Enterprise.

In the present case, the Bench noted that since the Appellant failed to pinpoint any any distinction on any legal and factual aspect, assessee’s grievance deserves to be set aside.

II. Correctness of the lower authorities’ action invoking Section 36(1)(va) r.w.s.43B ESI/PF disallowance of Rs.14,14,41,324/- and Rs.3,42,98,657/-; respectively.

It is an admitted fact that the assessee had very much deposited the said employees’ contribution before the due date of filing return u/s.139(1) of the Act. Learned lower authorities’ case on the other hand is that the impugned employees’ contribution is covered u/s.36(1)(va) of the Act rather than Section 43B applicable in case of employer’s contribution.

• In this factual backdrop the legislature has not only incorporated necessary amendment in Sections 36(1)(va) as well as u/s. 43B vide Finance Act, 2021 to this effect but also the CBDT has issued Memorandum of Explanation that the same applies w.e.f. 01-04-2021 only.
• It is further not an issue that the foregoing legislative amendments have proposed employers’ contribution/disallowance u/s.43B as against employee’s contribution u/s.36(va) of the Act; respectively.
• However, keeping in mind the fact that the same has been clarified to be applicable only with prospective effect from 01-04-2021 only, it was held that the impugned disallowance is not sustainable in view of all these latest developments. Therefore, the impugned ESI/PF disallowance was deleted.

III. The assessee’s third ground in both these assessment years seeking to reverse sponsorship fee(s) paid disallowance of Rs.17,30,400/- each; respectively.

• The bench held that there was no merit in the assessee’s instant grievance. This is for the reason that it has failed to pin point even a distinct direct nexus between its day to day business activity viz-a-viz the impugned alleged sponsorship fee paid to the eligible women for their life time achievements.
• This tribunal’s Third Member’s decision in ITA No.2157/MAS/2011, M/s. Hyundai Motors India Ltd. Vs. DCIT, after considering the hon’ble apex court’s landmark decision Sassoon J. David and Company (P) Ltd [118 ITR 26] (SC), holds that any expenditure claim raised u/s.37 of the Act ought to be wholly and exclusively incurred for the purpose of the concerned business only.

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