11 Section 92B of the Act – Providing corporate guarantee in respect of loans taken by AE does not constitute international transaction; amendment to section 92B relating to international transaction of issuance of corporate guarantee applies prospectively from FY 2012-13. Transfer of funds with intention to make investment cannot be treated as international transaction especially where shares are allotted against such advances.

Bartronics
India Ltd. vs. DCIT

A.Y: 2012-13                                                                      

Date of Order:
27^th September, 2017

Section 92B of
the Act – Providing corporate guarantee in respect of loans taken by AE does
not constitute international transaction; amendment to section 92B relating to
international transaction of issuance of corporate guarantee applies
prospectively from FY 2012-13. Transfer of funds with intention to make
investment cannot be treated as international transaction especially where
shares are allotted against such advances.

FACTS

The Taxpayer,
an Indian company provided a corporate guarantee in respect of the borrowings
of one of its overseas associated enterprises (AEs) without charging any
guarantee fee. Further, the Taxpayer had provided certain interest free
advances to its AE. Such advances were recorded in the books of the Taxpayer as
loans.

The Taxpayer
contended that the furnishing of corporate guarantee is not an international
transaction for the reason that the amendment by Finance Act 2012 which
included corporate guarantee within the definition of “international
transaction” is prospective in nature and does not apply to the year under
consideration.

Further, the
advances were provided out of business expediency as an investment and/or as a
parental support to the AE from taxpayer’s surplus/owned funds; without
incurring any costs. Hence, they should not be treated as international
transaction. In any case, since AE had allotted shares against advances
provided by the Taxpayer in the subsequent assessment year, they could not be
treated as international transaction.

During the
course of assessment proceedings, Transfer Pricing Officer (TPO), imputed
corporate guarantee fee and interest on advances in the hands of the Taxpayer.
Aggrieved by the order of TPO, Taxpayer appealed before the DRP. DRP confirmed
the action of the TPO.

Aggrieved by
the order of DRP, Taxpayer appealed before the Tribunal.

HELD

–  Although
the definition of “international transaction” was amended by FA 2012, to
include corporate guarantee within its ambit with retrospective effect, such
amendment has to be treated as effective from FY 2012-13.

–   Although
different views have been taken by different Tribunals on the prospective
applicability of the FA 2012 amendment, Taxpayer can adopt a view which is
favourable to him until a contrary view is taken by a higher court. Reliance in
this regard was placed on the decision of Dr. Reddy Laboratories [2017] 81
taxmann.com 398 (Hyd. Trib). Thus, corporate guarantee granted by the Taxpayer
prior to FY 2012-13 did not qualify as an “international transaction”.

–   Though the
advances were classified in the books of the Taxpayer as “advances”, what is
relevant is to evaluate the intention of providing the advances. Mere
classification of transaction as loans and advances in the balance sheet did
not qualify them as loan.

–   Taxpayer
had transferred the funds with the intention of investing in its AE. In fact,
shares were allotted by the AE against such advances. Thus, granting of such
advances could not be treated as international transaction. Reliance was placed
on KAR Therapeutics & Estates (P.) Ltd. [IT Appeal No. 86 (Hyd.) of 2016].
Thus, ALP adjusted in this regard was also not warranted.