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software products to Global 2000 companies. Assessee is an ISO 9001-2000 certified company with CMMI initiative. The solutions include a line of outsourced product development and offshore software development services for medium to large corporations and emerging technology businesses. During the year SSTL acquired JYACC Inc. New York, USA. For the purpose of facilitating the acquisition, SSTL set up a holding subsidiary in United States - SST North America Inc. USA ('SST North America') as a Special Purpose Vehicle ("SPV"). The total purchase consideration to JYACC Inc. USA (now known as PROLIFICS) was agreed to be paid as follows :

(a) cash consideration of USD 276,33,633; and

(b) Deferred purchase consideration out of the profits of JYACC Inc. USA over the next two years

Rs.67,96,81,662.

The cash consideration of USD 2,76,33,633 was met as follows:

(i) Investment into Equity Capital of SST North America - INR 68,86,42,100

(ii) Loan by SSTL into SST North America - INR

3,37,12,600

For the balance of the cash consideration, SST North America borrowed funds from ICICI Bank, UK amounting to Rs.50,95,00,000 based on the corporate guarantee provided by SSTL to ICICI Bank, U.K. SSTL also provided a corporate guarantee to the share holders of JYACC towards the deferred purchase consideration of Rs.67,96,81,662.

3. On reference by AO, TPO noticed that assessee did not charge any interest on the loans and advances given to its subsidiary nor charged any guarantee commission on the guarantees provided. Accordingly, after giving due opportunity

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to assessee, made an adjustment of Rs.29,61,576 vide para 7.5 of the order considering loans given to Associated Enterprises. Coming to the issue of Corporate Guarantee given by tax payer the TPO discussed the issue vide para 8 of the order and calculated the fee of Rs.2% on the guarantee amount and arrived at an adjustment of Rs.2,37,83,633, thus, making a total addition of Rs.2,67,45,209. Assessee objected to the above adjustment before DRP. DRP even though took the objections on record, more or less, agreed with the findings of TPO and confirmed the amounts.

3.1. It was the submission that assessee for making an acquisition of JYACC Inc has created a SPV and provided for corporate guarantee to facilitate borrowing from ICICI Bank, UK and corporate guarantee for the deferred consideration to the shareholders of JYACC. To fulfil the responsibility as a parent and shareholder,Assessee instead of taking an international loan itself and then funding the SPVs, provided a corporate guarantee to the international lenders and to the former shareholders of JYACC Inc, which enabled the borrowing of the necessary finance at the SPY level;

3.2. Assessee submits that in view of the above, no service has actually been provided to its SPV and hence, it would be inappropriate on the part of the Ld. TPO to treat the corporate guarantees and the loan invested as narrated above as international transactions to consider levy of arm's length price of guarantee fee and interest.

3.3. In this regard Assessee relied on the views expressed by the Australian Taxation Officer) (' ATO'), on this aspect, in its discussion paper' which reads as under

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"An independent company that is unable to borrow the funds it needs on a standalone basis is unlikely to be in a position to obtain a guarantee from an independent party to support the borrowings it needs. Where such a guarantee is given, it actually compensates for the inadequacies in the financial position of the borrower:

specifically the [act that the subsidiary does not have enough shareholder's funds.

It would not be expected that a company pay for the acquisition of the equity it needs [or its formation and continued viability. Equity is generally supplied by the shareholder at its own cost and risk. Accordingly, to the extent that a guarantee substitutes (or the investment of the equity needed to allow a subsidiary to be self-sufficient and to raise the debt funding it needs, the costs of the guarantee (and the associated risk) should remain with the parent company providing the guarantee. "

(emphasis added)

This decision leads to a conclusion that there is no service in a scenario where a loan is extended by the Parent Investor or a guarantee is provided by a Parent investor, for a third party loan, where the loan is a substitute for the investment of the equity otherwise required to be made by the Parent investor, the same need to be considered as a part of the funding requirement of the parent investor and not as a service to the subsidiary.

3.4 Without prejudice to the above, Assessee submitted the following :

LEVY OF INTEREST ON THE LOAN GIVEN BY SSTL TO

SST NORTH AMERICA:

3.4.1 On the Loan Amount of Rs. 3,37,12,600: The Ld. TPO failed to evaluate any of the methods prescribed under the Act for the purpose of determining of ALP interest. Assessee in the Financial Year ('FY') 2011-12 (Assessment Year 2012-13) charged from SST North America on the loans

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outstanding at LIBOR + 4.75 Basis points ('Bps'). The Ld. TPO, without taking any methodological analysis of the Arms Length Price (,ALP'), blindly adopted this rate as a internal CUP rate for the current FY. The Associated Enterprise (' AE') - SST North America - borrowed funds from ICICI Bank UK at a rate of LIBOR + 2.75. Assessee contended before Ld. TPO and Ld. DRP to consider this rate instead, as the ALP has to be based on a CUP rate of a third party loan rate to the AE in the geographical area of United States. The loan agreement entered into by SST North America with ICICI Bank UK, in FY 2008-09 has been relied. However, the Ld. TPO and Ld. DRP refused to accept this rate.

3.4.2. On the advance amount of Rs. 4,28,37,001/-:

The total advances made by SSTL to SST North America comprises of two amounts.

The advance amount represents certain acquisition related

expenses incurred at the time of formation of the SPV- SST

North America. This amount is recoverable from - SST North

America. This does not represent any loan or advance given by

SSTL TO SST North America. These are cost to cost expenses

liable to be reimbursed by SST North America. This cannot be

considered as an "International Transaction" taking the colour

of a loan or an advance for the purpose of determination of the

ALP of interest.

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3.4.3. On loan amount of Rs. 1,14,89,463/- provided to Arsin Corporation ('Arsin'), another AE ofAssessee : The Ld. TPO erred in charging an ad-hoc interest rate at L1BOR + 4.75 Bps on the loan provided by SSTL to Arsin without taking into cognizance the fact thatAssessee itself has charged the interest rate on loan provided to Arsin at LIBOR + 1.50 Bps. The same is evident from the loan agreement betweenAssessee and Arsin. ThusAssessee prays that the rate of interest should be restricted to L1BOR + 1.5 % as against LIBOR + 4.75%, charged by the Ld. TPO.

LEVY OF GUARANTEE FEE :

3.4.4. The TPO levied guarantee fee @ 2% on both the following amounts :

3.4.5. With respect to the Corporate Guarantee of

Rs.50,95,00,000/-, against the loan taken by AE-SST North

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America from ICICI Bank, UK -Assessee relied on views expressed by the Australian Taxation Officer (' ATO'), on this aspect, in its discussion paper' which reads as under :

"an independent company that is unable to borrow the funds it needs on a standalone basis is unlikely to be in a position to obtain a guarantee from an independent part) to support the borrowings it needs. Where such a guarantee is given. it actually compensates (or the inadequacies in the financial position of the borrower:

specifically the fact that the subsidiary does not have enough shareholder's funds.

It would not be expected that a company pay [or the acquisition of the equity it needs for its formation and continued viability. Equity is generally supplied by the shareholder at its own cost and risk. Accordingly. to the extent that a guarantee substitutes [or the investment of the equity needed to allow a subsidiary to be self- sufficient and to raise the debt funding it needs. the costs of the guarantee (and the associated risk) should remain with the parent company providing the guarantee. "

3.4.6. Further, the ATO, in the above discussion paper, while dealing with the situation where a need for the guarantee which primarily stems from the decisions made by the parent company in relation to the capital structure it proposed to use in its subsidiary company, has expressed that if the level of indebtedness relating to the equity funding of the borrowed subsidiary exceeds the maximum beyond which it is not able to obtain the market without a guarantee from the parent, an argument may be taken that no guarantee fee may be chargeable.

3.4.7 With respect to the Corporate Guarantee of Rs.50,95,00,000/- Assessee would also like to humbly submit that the corporate guarantee agreement between ICICI Bank and Assessee restricts the Guarantor i.e. Assessee from

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receiving any commission from the borrower. The relevant extracts of the agreement with ICICI Bank for loan availed by SST North America were referred to.

NO COMMISSION

9. The guarantor hereby declares and agrees that it has not received and shall not, receive any commission from the borrower for giving this guarantee.

3.4.8. Assessee submits that the clause 9 with respect to

"No Commission" as referred above is insisted by the Banks in case of corporate guarantee agreements. Accordingly Assessee cannot charge guarantee fees. The Ld. TPO and Ld. DRP completely overlooked this clause and failed to consider the commercial negotiation and commercial expediency that Assessee has committed itself.

3.4.9 With respect to the Guarantee of Rs,

67,96,81,662/- given to the share holders of JYACC Inc on account of deferred purchase consideration Assessee draws reference to the decision of the Hon'ble Supreme Court of India in the case of Bombay Steam Navigation Co P. Ltd v. CIT [19531 561TR 52 (SC) wherein the Hon'ble Supreme Court of India held as under :

" ... In our judgment this is not a permissible approach in ascertaining the true nature of the transaction. The parties had agreed that assets of the value of Rs.81,55,000 be taken over by Assessee-company from the Scindias. Out of that consideration Rs. 29,99,000 were paid by Assessee-company and the balance remained unpaid. For agreeing to deferred payment of a part of the consideration, the Scindias were to be paid interest. An agreement to pay the balance of consideration due by the

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purchaser does not in truth nave rise to a loan. A loan of money undoubtedly results in a debt, but every debt does not involve a loan. Liability to pay a debt may arise from diverse sources, and a loan is only one of such sources. Every creditor who is entitled to receive a debt cannot be regarded as a lender ..... ,

3.4.10 Therefore, the corporate guarantee provided was not In respect of the category as amended by Finance Act 2012-

The explanation under Section 92 B of the Income-tax Act, 1961 ('Act) provides that the expression international transaction shall include, inter alia- "(c) capital financing, including any type of long-term or short-term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business;"

The interpretation of the definition must be made in a strict manner. It may be noticed that the word "guarantee" is sandwiched as part of capital financing, including borrowing or lending. Based on ejusdem generis principle, the above clause would apply, only if the guarantee is in respect of capital financing, long term or short term borrowing or lending. The above decision of Supreme Court clearly provide that - An agreement to pay the balance of consideration due by the purchaser does not in truth gave rise to a loan. Therefore, it is submitted that any guarantee given towards the balance of consideration due by the purchaser does not give rise to a situation of guarantee being provided on capital financing, long term or short term borrowing or lending. Thus, there should be no guarantee fee to be considered with respect

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to the Guarantee given to the share holders of JYACC Inc on account of deferred purchase consideration of Rs.67,96,81,662/-

3.4.11. Further, Assessee relied on the case of Bharti Airtel Limited vs. Additional Commissioner of Income Tax I.T.A No. 5816/DeI/2012, on the issue of the corporate guarantee. While the coordinate Bench of the Tribunal at hyderabad gave a contrary ruling in this regard recently in the case of Four Soft Pvt. Limited, Hyderabad v. Dcit, Cir-1(3) Hyderabad . Circle-1(3), Hyderabad [2014] 44 taxmann.com 479 (Hyderabad-Trib.)

distinguishing the earlier decision of ITAT Hyderabad Bench rendered ITA No. 1495/Hyd/2010 dated 09/09/2011 on the same question. The decision of Delhi ITAT is given subsequent to the amendment made to the definition of

"international transaction" by Finance Act 2012. Without prejudice to the above submission, Assessee submits that if the Bench decides to levy the Guarantee Fee with respect to the transactions highlighted above, attention was drawn to the decision of Four Soft (P.) Ltd. vs. DCIT, Circle- 1(3),Hyderabad [2014] 44 taxmann.com 479 (Hyderabad - Trib.)- ITAT Hyderabad Bench-A where the Hon'ble ITAT considered the history of judgments with respect to guarantee fee and held -

"25.4. In the aforesaid view of the matter, we agree with the TPO that ALP of the corporate guarantee has to be determined as it falls within the scope and ambit of an international transaction after the retrospective amendment to section 92B. However. it appears that the TPO has applied the rate of 3.75%, which is applicable to bank guarantee issued by the bank As the corporate guarantee is not in the nature of bank guarantee, the rate applicable to bank guarantee provided by the bank cannot be applied to corporate guarantee which is

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provided by a group company. In case of Glenmark Pharmaceuticals v. Add!. CIT [2014} 43 taxmann.com 191 (Mum-Trib). the Mumbai Bench of the Tribunal after analysing the facts in that case had held that 0.53% corporate guarantee rate in that case was appropriate. The 1TAT Hyderabad Bench in case of Infotech Enterprises Ltd. v. Add!. CIT [2014} 41 taxmann.com 364 (Hyd.-Tribu.) while considering identical issue of determining ALP of corporate guarantee provided by Assessee to its AE followed the ratio laid down in case of Glen mark Pharmaceuticals (supra) and remitted the issue back to the TPO to decide the quantum of corporate guarantee rate by following the method adopted in case of Glen m ark Pharmaceuticals (supra). "

Thus there is no rational or basis in TPO adopting 2% flat rate. Thus, as held in a detailed manner in Glenmark Pharmaceuticals v. Addl. ClT [2014] 43 taxmann.com 191 (Mum.-Trib), the rate of 0.53% may be considered. While arriving at this rate, the Hon'ble ITAT Mumbai bench considered various other decisions

4. Ld. D.R. however, relied on the orders of TPO.

5. We have considered the issue and perused the documents on record. The two issues to be considered are whether the interest free loans and guarantees provided by

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assessee to AE calls for any adjustment. As far as adjustment of interest on loans provided, assessee even though is objecting to adjustment per se but main thrust is on rate on which the adjustments were made. There is no dispute to the fact that providing of loans to AE is an International Transaction as per the TP provisions. Therefore, the commercial considerations advanced by assessee can not be considered while examining the ALP of the transactions. We are of the opinion that the transaction of providing loans to subsidiary whether a direct loan or providing credit for initial expenditure, which is stated to be reimbursable, do call for adjustment. Therefore, in principle we approve the adjustment made on these transactions. As far as the rate of interest is concerned, the A.O./TPO in our opinion, has considered the subsequent collection of interest in A.Y. 2012-2013 at LIBOR +

4.75 basis points as an internal CUP. This cannot be accepted as rate of interest in each year is a dynamic figure which varies according to the period, demand and supply. The rate at which assessee charged interest from the sister concern in A.Y. 2012- 2013 cannot be accepted as internal CUP in A.Y. 2009-2010. A.O. has not only went beyond the rules which does not provide for later years information to be adopted, but also ignored assessee's objections why a higher rate was charged in those years. Since, A.E. borrowed funds from ICICI Bank, U.K. @ LIBOR + 2.75%, we are of the opinion that, that rate should be considered as ALP of interest and A.O. is directed to workout the interest at that rate on the loan provided to SSTL north America. Assessee is also objecting to the adjustment on loan given to Arsin Corporation, another A.E. of Assessee. Here, assessee has charged interest at LIBOR + 1.50 BPS. Since, we have approved LIBOR + 2.75 points on the loan given

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to SST, North America (A.E.) we direct the A.O. to re-workout the interest on the loan provided to this A.E. at LIBOR + 2.75% only as against LIBOR + 4.75 charged by A.O./TPO. With this direction, the grounds raised by assessee in ground Nos. 2 and 3 are considered as allowed partly.

6. Coming to the issue of guarantee fee, one of the fundamental fact patterns in the evolution of international transfer pricing concepts and rules involves an enterprise's use of a financial resource belonging to an associated enterprise. An aspect of the use of money relates to the use of a credit enhancement instrument, which typically arises in the context of guarantees of the obligations of one controlled entity by another. Although the OECD Transfer Pricing Guidelines, 2010 acknowledge the role of the use of money in transfer pricing matters, they do not yet provide specific guidelines regarding how such issues are to be addressed and resolved. Nonetheless, the elements that are typically important in evaluating transfer pricing issues involving the use of money within multinational enterprise groups can be outlined by drawing on general arm's length principles. Whether the mere presence of a guarantee support to an A.E. is subject to T.P. provisions has been a contentious issue in the Indian context. However, the issue of whether a charge should be imposed for provision of a guarantee is primarily a factual inquiry. The assessee argued that the corporate guarantee is an additional guarantee provided by the parent company and it does not involve any cost or risk to the shareholders. The assessee also argued that the retrospective amendment to section 92B of the ITL, by Finance Act, 2012 does not enlarge the scope of the term "International Transaction" to include the corporate

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guarantee in the nature provided by assessee. DR on the other hand, contended that the transaction of providing the corporate guarantee is covered by the definition of international transaction after the retrospective amendment made by Finance Act, 2012. Therefore, the transaction was subject to T.P. provisions and needed ALP determination. It was the submission that there is no service rendered by assessee to the A.E. Assessee relied on the views expressed by Australian Tax Officer placing relevant copy before us which was issued in 2008. Law has changed subsequently and provisions of Income Tax also were amended so as to include providing guarantees as service to the A.E. However guarantees involve express guarantee or implied guarantee which increases credit worthiness of AEs, if provided by main company. In case of default Guarantor has to fulfill the liability. Therefore, there is always an inherent risk in providing guarantees. That may be a reason that Finance provider insist on non charging any commission from AE as a commercial principle. This indicates that, provision of guarantee always involve risk and there is a service provided to AE in increasing is creditworthiness in obtaining loans in market, be from Financial institutions or from others. There may not be immediate charge on P& L account but inherent risk can not be ruled out in providing guarantees.

7. Considering the above, we are of the opinion that there is service rendered to A.E. by providing guarantees and therefore, invoking provisions of T.P. does arise on the facts of the case. The Coordinate Bench of Hyderabad Tribunal has already considered similar issues in the case of Four Soft P.

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Ltd., reported at 44 taxmann.com 479 (wherein one of us a Member) and held as under :

"25.2. Having considered the submissions of the parties, we are unable to accept the contention of the learned AR that corporate guarantee of the nature provided by the assessee will not come within the meaning of international transaction in terms with section 92B of the Act. It is not disputed that section 92B of the Act has been amended by the Finance Act, 2012 with the insertion of Explanation I (c) with retrospective effect from 01/04/2002. Explanation (i)(c) to section 92B, reads as under:

" capital financing, including any type of long-term or short-term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business."

25.3. A reading of the aforesaid clause from the Explanation would make it clear that the corporate guarantee provided by the assessee comes within the scope and ambit of 'international transaction' as per the aforesaid clause. Therefore, the contention of the learned AR that the issue is covered in favour of the assessee by virtue of the order passed in assessee's own case for AY 2006- 07 no longer holds good since the order passed by the coordinate bench is prior to the amendment made to provision of section 92B of the Act. It will be pertinent to mention here that this issue was also considered by the ITAT Mumbai Bench in case of Mahindra & Mahindra Vs. DCIT in ITA No. 8597/Mum/2010, 54 SOT (UR) 146. The coordinate bench of this Tribunal while considering similar argument advanced on behalf of the assessee by placing reliance on the decision of the Four Soft Ltd.(supra), held as under:

"15.2. After hearing the rival submissions we feel that Assessing Officer will have to follow the decision of the ITAT Hyderabad or the amended

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provision of the Act in this regard. If the Finance Bill of 2012 is passed by the Parliament amending the provisions of section 92B, with effect from 1^st April, 2002, he will have to ignore the decision of the ITAT Hyderabad. In case section 92B is not amended with retrospective effect, he should grant relief to the appellant."

25.4. In the aforesaid view of the matter, we agree with the TPO that ALP of the corporate guarantee has to be determined as it falls within the scope and ambit of an international transaction after the retrospective amendment to section 92B. However, it appears that the TPO has applied the rate of 3.75%, which is applicable to bank guarantee issued by the bank. As the corporate guarantee is not in the nature of bank guarantee, the rate applicable to bank guarantee provided by the bank cannot be applied to corporate guarantee which is provided by a group company. In case of Glenmark Pharmaceuticals Vs. ACIT in ITA No. 5031/Mum/2012, dated 13/11/2013, the Mumbai Bench of the Tribunal after analysing the facts in that case had held that 0.53% corporate guarantee rate in that case was appropriate. The ITAT Hyderabad Bench in case of Infotech Enterprises Ltd. in ITA No. 115/Hyd/2011 and in ITA No. 2184/Hyd/2011, dated 16/01/2014 while considering identical issue of determining ALP of corporate guarantee provided by the assessee to its AE followed the ratio laid down in case of Glenmark Pharmaceuticals Vs. ACIT (supra) and remitted the issue back to the TPO to decide the quantum of corporate guarantee rate by following the method adopted in case of Glenmark Pharmaceuticals (supra).

8. In view of this, we uphold the adjustment made on guarantee commission both on the guarantee provided to Bank directly and also on the guarantee provided to the erstwhile shareholders of JYACC for assuring the payment by AE. However, we direct the TPO to adopt the rate to 0.53% which is

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considered as arms length in other cases. With these directions, grounds are considered partly allowed.

9. In the result, appeal of Assessee is partly allowed. Order pronounced in the open Court on 31.12.2014. Sd/- Sd/-

(ASHA VIJAYARAGHAVAN) (B.RAMAKOTAIAH)

JUDICIAL MEMBER ACCOUNTANT MEMBER

Hyderabad, Dated 31^stDecember, 2014 VBP/-

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