×Latest Case Laws on Income Tax by various Income Tax Appellate Tribunals in India
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This appeal in ITA No.5611/Mum/2015 for A.Y.2010-11 arises out of the order by the ld. Commissioner of Income Tax (Appeals)-56, Mumbai in appeal No.CIT(A)-56/Trf/2014-15/162-F dated 30/09/2015 (ld. CIT(A) in short) against the order of assessment passed u/s.143(3) r.w.s. 144C(13) of the IT Act, 1961 of the Income Tax Act, 1961 (hereinafter referred to as Act) dated 29/04/2014 by the ld. Addl. Commissioner of Income Tax, Range-8(2), Mumbai (hereinafter referred to as ld. AO).
2. The Ground No. 1(a) to be decided in this appeal is as to whether the ld. CIT(A) was justified in deciding that the performance guarantee provided by the assessee to a third party was not an international transaction in the facts and circumstances of the case. The inter connected issue involved therein is as to whether the ld TPO was justified in making an adjustment to Arm‟s Length Price (ALP) on the said issuance of performance guarantee in the facts and circumstances of the case.
3. The brief facts of this issue are that the assessee filed its original return of income for the A.Y.2010-11 on 15/10/2010 declaring total income of Rs. Nil under normal provisions of the Act after claiming the set off of brought forward losses to the tune of Rs.191,37,75,081/- and book profit u/s.115JB of the Act at Rs.273,94,82,293/-. Later the assessee filed revised return of income on 31/03/2012 declaring total income at Rs. Nil under normal provisions of the Act after claiming set off of brought forward losses to the tune of Rs.196,30,61,287/- and book profit u/s.115 JB of Rs.273,94,82,293/- and computed the tax liability thereon. The assessee is engaged in the business of design, fabrication, galvanising and testing of transmission line towers and telecom towers; all types of masts; erection of complete transmission lines & telecom towers, supply and erection of Sub-station structures and overhead equipment for railway electrification and managing infrastructure sites for telecommunication services. During the year, the assessee company acquired business of manufacturing and trading of power cables, optical fibre cables, jelly filled telephone cables, networking / datacom cables, house wiring cables and turnkey contractors.
3.1. KEC Global FZ LLC (hereinafter referred to as “KEC Global” or “AE”) is a wholly owned subsidiary of the assessee company. During the year under consideration, the assessee provided guarantees on behalf of KEC
Global to customers of KEC Global. The details of guarantees provided bythe assessee were filed by the assessee before the ld. TPO vide letter
dated 22/11/2013. The details are as under:-
i) Performance Guarantee (indemnity against loss) provided to Bahwan Engineering Company LLC on behalf of AE During the year under consideration, Bahwan Engineering Company LLC (BEC) had entered into sub-contract agreement with KEC Global (AE) to construct 132/33 KV Grid Station & Associated Transmission System in Y1T1 Area, Muscat Governorate. As a pre-condition for execution of the sub-Contract, BEC has requested KEC Global to provide the assessee‟s
indemnity against all liabilities, claims, damages or costs which Bahwan Engineering Company LLC may be subjected to, while KEC Global (AE) is performing the sub-contract works. Accordingly, the assessee had executed the Deed of Indemnity dated 28/11/2009 in favour of Bahwan Engineering Company LLC providing an indemnity against all liabilities, claims, demands, damages or costs caused by KEC Global‟s (AE‟s) failure to perform in all its duties and applications amounting to Omani Riyal Rs.1,69,84,500/- (INR 198,17,46,365).
3.2. In other words, the assessee had given performance guarantee to Bahwan Engineering Company LLC on behalf of its AE guaranteeing the performance of duties and applications that would be done by its AE and in the event of any such failure of performance by the AE, the assessee would indemnify Bahwan Engineering Company LLC against all liabilities, claims, demands, damages etc., Subsequent to the Deed of Indemnity, the assessee had also entered into agreement dated 28/11/2009 with its AE stating that in the event of indemnity provisions being invoked by Bahwan Engineering Company LLC on failure of performance by the AE, then the entire sub-contract shall be assigned to the assessee substituting them in place of AE as a Sub-Contractor to Bahwan Engineering Company LLC. The assessee while providing such performance guarantee to BEC did not incur any charges or cost whatsoever and accordingly, no commission was charged by the assessee to its AE for providing the said performance guarantee.
3.3. The ld. TPO sought to treat this performance guarantee as an international transaction and resorted to make adjustment to arm‟s length price (ALP) thereon for which purpose, a show cause notice was issued to the assessee. The assessee responded that in the case of assignment of the contract in the name of the assessee pursuant to failure of the AE to perform its duties and obligations as a sub-contractor to Bahwan Engineering Company LLC, the payments and amount receivable that are due to the AE would come naturally to the assessee company which would be a larger benefit that would be derived by the assessee than charging performance guarantee commission from its AE. It was also submitted that the entire profit on the contract assigned by the Bahwan Engineering Company LLC in favour of the assessee would automatically come to the assessee company and there is absolutely no risk involved for the assessee in this transaction of issuance of performance guarantee to Bahwan Engineering Company LLC on behalf of its AE. Accordingly, the assessee pleaded that it was justified in not charging any commission from its AE for issuing the said performance guarantee.
3.3. The ld. TPO however, did not agree to this contention of the assessee and stated that in case of default committed by the AE in not performing its duties and obligations in the Sub-contract work allotted to AE, then the assessee had to step-in as the entire sub-contract would come to the assessee company and the assessee has to put all resources in place for executing the contract or as to find another sub-contractor to complete the contract. In such circumstances, the assessee company had to take the risk which needs to be compensated to the assessee by its AE. Accordingly, the ld. TPO treated this issuance of performance guarantee