The Dy. Commr. Of Income Tax, Cir.-1(1), RAJKOT-GUJARAT v. M/s Jyoti CNC Automation Pvt. Ltd.,, RAJKOT-GUJARAT

ITA 301/RJT/2015 | 2010-2011
Pronouncement Date: 28-11-2017 | Result: Dismissed

Appeal Details

RSA Number 30124914 RSA 2015
Assessee PAN AABCJ1947R
Bench Rajkot
Appeal Number ITA 301/RJT/2015
Duration Of Justice 2 year(s) 5 month(s) 12 day(s)
Appellant The Dy. Commr. Of Income Tax, Cir.-1(1), RAJKOT-GUJARAT
Respondent M/s Jyoti CNC Automation Pvt. Ltd.,, RAJKOT-GUJARAT
Appeal Type Income Tax Appeal
Pronouncement Date 28-11-2017
Appeal Filed By Department
Tags covered
Order Result Dismissed
Bench Allotted DB
Tribunal Order Date 28-11-2017
Assessment Year 2010-2011
Appeal Filed On 15-06-2015
Judgment Text
ITA NO. 301/RJT/2015 & CO 57/RJT/2015 DCIT VS. M/S JYOTI AUTOMATION PVT LTD ASSESSMENT YEAR: 2010-11 PAGE 1 OF 36 IN THE INCOME TAX APPELLATE TRIBUNAL RAJKOT BENCH RAJKOT [CORAM: PRAMOD KUMAR AM AND RAJPAL YADAV JM] ITA NO. 301/RJT/2015 & CO NO.57/RJT/2015 ASSESSMENT YEAR: 2010-11 THE DCIT ..................APPELLANT CIRCLE-1(1) RAJKOT VS. M/S. JYOTI CNC AUTOMATION PVT LTD ........................ RESPONDENT & PLOT NO. G-506 LODHIKA GIDC CROSS OBJECTOR VILLAGE METODA RAJKOT [PAN : AABCJ 1947 R] APPEARANCES BY: HARGOVIND SINGH FOR THE APPELLANT DM RINDANI FOR THE RESPONDENT DATE OF CONCLUDING THE HEARING : 03.11.2017 DATE OF PRONOUNCING THE ORDER : 28.11.2017 O R D E R PER PRAMOD KUMAR AM: 1. THIS APPEAL FILED BY THE ASSESSING OFFICER AND THE CROSS OBJECTION FILED BY THE ASSESSEE CHALLENGE CORRECTNESS OF THE ORDER DATED 1 2 TH MARCH 2015 PASSED BY THE CIT(A)-1 RAJKOT IN THE MATTER OF ASSESSMENT UNDER SECTION 143(3) OF THE INCOME TAX ACT 1961 FOR THE ASSESSMENT YEAR 2010-11. 2. IN THE FIRST GROUND OF APPEAL OF THE ASSESSING O FFICER FOLLOWING GRIEVANCE HAS BEEN RAISED: 1. THE HONBLE CIT(A)-I RAJKOT HAS ERRED IN LAW A ND ON FACT OF THE CASE IN RESTRICTING THE ARMS LENGTH INTEREST RATE ON LOAN F ROM 4.31% TO 2.40% FOR LOAN GIVEN TO ASSOCIATED ENTERPRISE. 3. LEARNED REPRESENTATIVES FAIRLY AGREE THAT WHAT EVER WE DECIDE IN REVENUES APPEAL AND ASSESSEES CROSS OBJECTION FOR THE ASS ESSMENT YEAR 2009-10 WHICH WERE HEARD ALONGWITH THIS APPEAL AND THE CO WILL A LSO APPLY MUTATIS MUTANDIS FOR THIS ASSESSMENT YEAR AS WELL AS ALL THE MATERIAL F ACTS BARRING THE FIGURES ARE THE SAME. 4. VIDE OUR ORDER OF EVEN DATE WE HAVE REJECTED TH E GRIEVANCES OF BOTH THE PARTIES AND HELD AS FOLLOWS: 5. WE HAVE HEARD THE RIVAL CONTENTIONS PERUSED THE MATERIAL ON RECORD AND DULY CONSIDERED FACTS OF THE CASE IN THE LIGHT OF T HE APPLICABLE LEGAL POSITION. ITA NO. 301/RJT/2015 & CO 57/RJT/2015 DCIT VS. M/S JYOTI AUTOMATION PVT LTD ASSESSMENT YEAR: 2010-11 PAGE 2 OF 36 6. LEARNED COUNSEL FOR THE ASSESSEE HAS BEEN VERY F AIR IN NOT PRESSING THE CROSS OBJECTION AT ALL AND ALL THAT WE NEED TO DEC IDE THEREFORE IS THE CORRECTNESS OF TWO VARIATIONS MADE BY THE CIT(A) IN THE IMPUGNED ADJUSTMENT. WE MAY IN THIS REGARD REFER TO THE FOLLOWING OBSE RVATIONS MADE BY THE LEARNED CIT(A):- 4.3 I HAVE CAREFULLY CONSIDERED THE FINDINGS OF TH E ASSESSING OFFICER IN HIS ASSESSMENT OF ORDER AND THE SUBMISSION OF THE APPEL LATE COMPANY. AT THE FIRST INSTANCE I DO NOT ACCEPT THE APPELLAN TS CONTENTION REGARDING THE QUASI EQUITY AND COMMERCIAL EXPEDIENCY RELYING UPON THE DECISION OF THE MUMBAI TRIBUNAL IN THE CASE OF TATA AUTOCOMP SY STEMS LIMITED (ITA NO.7354/MUM/11) WHEREIN IT WAS HELD THAT THE INTE REST FREE LOAN IS SUBJECT TO ARMS LENGTH TEST IRRESPECTIVE OF COMMER CIAL EXPEDIENCY. THE APPELLANT COMPANY HAS ALSO CONTENDED THAT REQUI SITE APPROVAL OF THE RESERVE BANK OF INDIA (RBI) WAS OBTAINED AND RBI WH ILE GIVING APPROVAL KEEPS IN MIND ALL THE PROVISIONS OF LAW FURTHER RBI HAS ACCEPTS THE REMITTANCE AS IN THE FORM OF QUASI CAPITAL THEREFOR E NO INTEREST NEED TO BE COMPUTED FOR THE PURPOSE OF THE INCOME TAX ACT 1961 HOWEVER SAME VIEW IS NOT ACCEPTABLE BECAUSE PERMISSION IS GIVEN BY THE RBI IS FOR TOTALLY DIFFERENT PURPOSE. THE RBI IS ONLY CONCERNE D WITH FOREIGN EXCHANGE AND THEY WOULD LOOK MATTER FROM DIFFERENT POINT OF VIEW. HOWEVER WHAT IS THE ARMS LENGTH PRICE (ALP) OF LOAN ADVANCED TO ASS OCIATED ENTERPRISE IS NEED TO BE DECIDED CONSIDERING THE FACTS AND CIRCUM STANCES OF THE CASE. IN PRESENT CASE SINCE ASSOCIATED ENTERPRISE IS SITU ATED IN FRANCE IT IS MOST APPROPRIATE TO CONSIDER MARK UP ON THE BASIS O F AVERAGE SPREAD OVER LIBOR CHARGED IN FRANCE RATHER THAN ADOPTING MARK U P ON THE BASIS OF AVERAGE SPREAD OVER LIBOR CHARGED IN WHOLE EUROPEAN REGION. THE AVERAGE SPREAD CHARGED IN FRANCE OUT OF ANALYSIS CA RRIED OUT BY TPO HIMSELF IS 163 BASIS POINT AS COMPARED TO 273 BASIS POINT OF WHOLE EUROPE THE SPREAD OVER LIBOR WOULD DEPEND ON VARIO US ECONOMIC FACTORS OF EACH AND EVERY COUNTRY COMING IN EUROPEA N REGION. FURTHER THE ARGUMENT OF THE APPELLANT COMPANY REGARDING CONSIDE RING INTERNAL CUP OF IDBI BANK WHEREIN BANK HAS CHARGED INTEREST @ LIBOR + 100 BASIS POINTS IS NOT TENABLE AS THE TRANSACTIONS DOES NOT COMPARE ON THE MATRIX OF GEOGRAPHY AS WELL AS END USE OF FUND I.E. IDBI B ORROWING IS TO FINANCE THE WORKING CAPITAL WHEREAS THE TRANSACTION IN QUES TION IS FOR ACQUISITION OF FOREIGN BUSINESS THEREFORE IT WOULD NOT RESULT IN DETERMINING AN ALP UNDER COMPARABLE UNCONTROLLED PRICE (CUP) METHOD. I N ORDER TO DETERMINE ALP UNDER CUP METHOD COMPARISON SHOULD B E MADE BETWEEN TRANSACTIONS IN SAME REGION HAVING SAME ECONOMIC FA CTORS. AS THE COMPANY TO WHICH LOAN HAS BEEN GRANTED BY TH E APPELLANT COMPANY IS SITUATED IN FRANCE COMPARISON SHOULD BE MADE WITH OTHER COMPANIES SITUATED IN FRANCE ONLY AND NOT WHOLE EUR OPE THEREFORE I REDUCE THE SPREAD CHARGE OVER EUROPE FROM 273 BASIS POINT OF WHOLE EUROPE TO 163 BASIS POINT OF FRANCE. ITA NO. 301/RJT/2015 & CO 57/RJT/2015 DCIT VS. M/S JYOTI AUTOMATION PVT LTD ASSESSMENT YEAR: 2010-11 PAGE 3 OF 36 FURTHER TPO HAS ALSO ADDED 100 BASIS POINT TOWARDS FOREIGN EXCHANGE RISK COVERAGE. FOREIGN EXCHANGE RISK IS NORMAL IN EVERY BUSINESS WHICH CARRIES OUT TRANSACTIONS WITH PARTIES OUTSIDE INDI A. THE CURRENCY MAY FLUCTUATE BOTH WAYS I.E IT MAY INCREASE/DECREA SE RESULTING IN LOSS/GAIN TO THE APPELLANT COMPANY. NO PARTY F ACTORS THE FOREIGN EXCHANGE RISK ASSUMED BY HIM AT THE TIME OF ENTERIN G INTO ANY INTERNATIONAL TRANSACTIONS AND NO SEPARATE CHARGES ARE RECOVERED FOR THE SAME. THIS IS DUE TO THE FACT THAT IF THE CURRENCY FLUCTUATES AND PROFIT IS EARNED BY THE APPELLANT COMPANY IT WOULD NO! PASS ON THE PROFIT TO THE OTHER PARTY. HENCE I DIRECT THE ASSESSING OFFICER TO DETERMINE THE ARM'S LENGTH INTEREST BY CONSIDERING THE EURO LIBOR PLUS MARK UP @ 163 BASIS POINT ON THE INTEREST FREE LOAN WHICH SHALL WORK OUT @ 5. 75%. THE ASSESSEE GETS THE RELIEF ACCORDINGLY. 7. WE ARE IN CONSIDERED AGREEMENT WITH VERY WELL RE ASONED ANALYSIS BY THE LEARNED CIT(A) AND THE CONCLUSIONS ARRIVED AT B Y HIM. AS LEARNED CIT(A) HAS RIGHTLY HELD THE ARMS LENGTH INTEREST RATE FO R A FINANCING TRANSACTION IN FRANCE SHOULD TAKE INTO ACCOUNT ONLY THE AVERAGE FR ENCH INTEREST SPREAD AND NOT THE AVERAGE EUROPEAN INTEREST SPREAD AS ADMITTE DLY THE CONDITIONS IN ENTIRE EUROPEAN FINANCIAL MARKET ARE NOT THE SAME. SIMILAR LY SO FAR AS THE ADJUSTMENT ON ACCOUNT OF FOREIGN EXCHANGE RISK IS CONCERNED N EITHER IS IT BASED ON ANY COGENT MATERIAL NOR ANYWAY ONE CAN IGNORE THE FACT THAT THE EXCHANGE FLUCTUATIONS ARE INHERENT IN COMPARABLE TRANSACTION S AS WELL. THE ACTION OF THE LEARNED CIT(A) THUS MEETS OUR APPROVAL ON BOTH THE COUNTS. IN VIEW OF THESE DISCUSSIONS AS ALSO BEARING IN MIND ENTIRETY OF TH E CASE WE APPROVE THE CONCLUSIONS ARRIVED AT BY THE LEARNED CIT(A) AND DE CLINE TO INTERFERE IN THE MATTER. 5. RESPECTFULLY FOLLOWING THE VIEWS SO EXPRESSED B Y US IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2009-10 WHICH IS DEEMED TO BE ATTACHED TO AND FORMING PART OF THIS ORDER AS WELL WE DISMISS THE GRIEVANCES OF T HE ASSESSING OFFICER AS ALSO THE ASSESSEE. THE ORDER OF THE CIT(A) THUS STANDS CONFI RMED. 6. GROUND NO. 1 OF THE APPEAL AND THE CO ARE THUS D ISMISSED. 7. IN GROUND NO. 2 THE ASSESSING OFFICER HAS RAISE D THE FOLLOWING GRIEVANCE: 2. THE HONBLE CIT(A)-I RAJKOT HAS ERRED IN LAW AND ON FACT OF THE CASE IN DELETING THE ADDITION MADE BY THE AO OF RS.3 01 66 650/- ON ACCOUNT OF DETERMINATION OF ARMS LENGTH PRICE ON THE CORPORATE GUARANTEE PROVIDED BY THE APPELLANT COMPANY TO THE BANKS ON BEHALF OF ASSOCIA TED ENTERPRISE. 8. LEARNED REPRESENTATIVES FAIRLY AGREE THAT WHATEV ER WE DECIDE IN REVENUES APPEAL AND ASSESSEES CROSS OBJECTION FOR THE ASS ESSMENT YEAR 2009-10 WHICH WERE HEARD ALONGWITH THIS APPEAL AND THE CO WILL A LSO APPLY MUTATIS MUTANDIS FOR THIS ASSESSMENT YEAR AS WELL AS ALL THE MATERIAL F ACTS BARRING THE FIGURES ARE THE SAME. ITA NO. 301/RJT/2015 & CO 57/RJT/2015 DCIT VS. M/S JYOTI AUTOMATION PVT LTD ASSESSMENT YEAR: 2010-11 PAGE 4 OF 36 9. VIDE OUR ORDER OF EVEN DATE WE HAVE REJECTED TH IS GRIEVANCE OF THE ASSESSING OFFICER AND HELD AS FOLLOWS: 11. LEARNED REPRESENTATIVES FAIRLY AGREE THAT THIS ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY A COORDINATE BENCH DECISION OF THI S TRIBUNAL IN THE CASE OF MICRO INK LTD VS ACIT [(2016) 176 TTJ 8 (AHD)]. IN ALL FAIRNESS WE MUST PLACE ON RECORD THE FACT THAT HONBLE HIGH COURT HAS ADMI TTED APPEAL AGAINST THAT ORDER AND ON THE SAME ISSUE BUT THAT DOES NOT DILU TE BINDING NATURE OF THE DECISION AS NOW THOUGH FOR ALL PRACTICAL PURPOSES THE FORUM FOR ADJUDICATION OF ASSESSING OFFICERS GRIEVANCE GETS SHIFTED TO A HIG HER FORUM. 12. WE MAY ADD FOR THE SAKE OF COMPLETENESS THAT IN THE CASE OF MICRO INK (SUPRA) THE COORDINATE BENCH HAS INTER ALIA OBSE RVED AS FOLLOWS: 21. IT IS ONLY ELEMENTARY THAT THE DETERMINATION OF ARM'S LENGTH PRICE UNDER THE SCHEME OF THE INTERNATIONAL TRANSF ER PRICING SET OUT IN THE INCOME-TAX ACT 1961 CAN ONLY BE DONE I N RESPECT OF AN 'INTERNATIONAL TRANSACTION'. SECTION 92(1) PROVIDES THAT '(A)NY INCOME ARISING FROM AN INTERNATIONAL TRANSACTION SH ALL BE COMPUTED HAVING REGARD TO THE ARM'S LENGTH PRICE'. IN ORDER TO ATTRACT THE ARM'S LENGTH PRICE ADJUSTMENT THEREFORE A TRANSAC TION HAS TO BE AN 'INTERNATIONAL TRANSACTION' FIRST. THE EXPRESSIO N 'INTERNATIONAL TRANSACTION' IS A DEFINED EXPRESSION. SECTION 92B D EFINES THE EXPRESSION 'INTERNATIONAL TRANSACTION' AS FOLLOWS: '92B - MEANING OF INTERNATIONAL TRANSACTION (1) FOR THE PURPOSES OF THIS SECTION AND SECTIONS 92 92C 92D AND 92E 'INTERNATIONAL TRANSACTION'' MEANS A TRANS ACTION BETWEEN TWO OR MORE ASSOCIATED ENTERPRISES EITHER OR BOTH OF WHOM ARE NON-RESIDENTS IN THE NATURE OF PURCHASE SALE OR L EASE OF TANGIBLE OR INTANGIBLE PROPERTY OR PROVISION OF SERVICES O R LENDING OR BORROWING MONEY OR ANY OTHER TRANSACTION HAVING A BEARING ON THE PROFITS INCOME LOSSES OR ASSETS OF SUCH ENTERPRIS ES AND SHALL INCLUDE A MUTUAL AGREEMENT OR ARRANGEMENT BETWEEN T WO OR MORE ASSOCIATED ENTERPRISES FOR THE ALLOCATION OR APPORT IONMENT OF OR ANY CONTRIBUTION TO ANY COST OR EXPENSE INCURRED O R TO BE INCURRED IN CONNECTION WITH A BENEFIT SERVICE OR FACILITY P ROVIDED OR TO BE PROVIDED TO ANYONE OR MORE OF SUCH ENTERPRISES. (2) A TRANSACTION ENTERED INTO BY AN ENTERPRISE W ITH A PERSON OTHER THAN AN ASSOCIATED ENTERPRISE SHALL FOR THE PURPOSES OF SUB- SECTION (1) BE DEEMED TO BE A TRANSACTION ENTERED INTO BETWEEN TWO ASSOCIATED ENTERPRISES IF THERE EXISTS A PRIOR AGREEMENT IN RELATION TO THE RELEVANT TRANSACTION BETWEEN SUCH O THER PERSON AND THE ASSOCIATED ENTERPRISE OR THE TERMS OF THE RELE VANT TRANSACTION ARE DETERMINED IN SUBSTANCE BETWEEN SUCH OTHER PERS ON AND THE ASSOCIATED ENTERPRISE. EXPLANATION : - FOR THE REMOVAL OF DOUBTS IT IS HE REBY CLARIFIED THAT (INSERTED BY THE FINANCE ACT 2012 THOUGH WITH RE TROSPECTIVE EFFECT FROM 1ST APRIL 2002) ITA NO. 301/RJT/2015 & CO 57/RJT/2015 DCIT VS. M/S JYOTI AUTOMATION PVT LTD ASSESSMENT YEAR: 2010-11 PAGE 5 OF 36 (I) THE EXPRESSION 'INTERNATIONAL TRANSACTION' SH ALL INCLUDE (A) THE PURCHASE SALE TRANSFER LEASE OR USE OF TANGIBLE PROPERTY INCLUDING BUILDING TRANSPORTATION VEHICLE MACHINERY EQUIPMENT TOOLS PLANT FURNITURE COMMODITY OR AN Y OTHER ARTICLE PRODUCT OR THING; (B) THE PURCHASE SALE TRANSFER LEASE OR USE OF INTANGIBLE PROPERTY INCLUDING THE TRANSFER OF OWNERSHIP OR TH E PROVISION OF USE OF RIGHTS REGARDING LAND USE COPYRIGHTS PATEN TS TRADEMARKS LICENCES FRANCHISES CUSTOMER LIST MARKETING CHAN NEL BRAND COMMERCIAL SECRET KNOW -HOW INDUSTRIAL PROPERTY R IGHT EXTERIOR DESIGN OR PRACTICAL AND NEW DESIGN OR ANY OTHER BUS INESS OR COMMERCIAL RIGHTS OF SIMILAR NATURE; (C) CAPITAL FINANCING INCLUDING ANY TYPE OF LONG -TERM OR SHORT- TERM BORROWING LENDING OR GUARANTEE PURCHASE OR S ALE OF MARKETABLE SECURITIES OR ANY TYPE OF ADVANCE PAYME NTS OR DEFERRED PAYMENT OR RECEIVABLE OR ANY OTHER DEBT AR ISING DURING THE COURSE OF BUSINESS; (D) PROVISION OF SERVICES INCLUDING PROVISION OF MARKET RESEARCH MARKET DEVELOPMENT MARKETING MANAGEMENT ADMINISTRATION TECHNICAL SERVICE REPAIRS DESIGN CONSULTATION AGENCY SCIENTIFIC RESEARCH LEGAL OR ACCOUNTING SE RVICE; (E) A TRANSACTION OF BUSINESS RESTRUCTURING OR RE ORGANISATION ENTERED INTO BY AN ENTERPRISE WITH AN ASSOCIATED EN TERPRISE IRRESPECTIVE OF THE FACT THAT IT HAS BEARING ON THE PROFIT INCOME LOSSES OR ASSETS OF SUCH ENTERPRISES AT THE TIME OF THE TRANSACTION OR AT ANY FUTURE DATE; (II) THE EXPRESSION 'INTANGIBLE PROPERTY' SHALL I NCLUDE (A) MARKETING RELATED INTANGIBLE ASSETS SUCH AS TRADEMARKS TRADE NAMES BRAND NAMES LOGOS; (B) TECHNOLOGY RELATED INTANGIBLE ASSETS SUCH AS PROCESS PATENTS PATENT APPLICATIONS TECHNICAL DOCUMENTATI ON SUCH AS LABORATORY NOTEBOOKS TECHNICAL KNOWHOW; (C) ARTISTIC RELATED INTANGIBLE ASSETS SUCH AS LITERARY WORKS AND COPYRIGHTS MUSICAL COMPOSITIONS COPYRIGHTS M APS ENGRAVINGS; (D) DATA PROCESSING RELATED INTANGIBLE ASSETS SU CH AS PROPRIETARY COMPUTER SOFTWARE SOFTWARE COPYRIGHTS AUTOMATED DATABASES AND INTEGRATED CIRCUIT MASKS AND MASTERS ; (E) ENGINEERING RELATED INTANGIBLE ASSETS SUCH A S INDUSTRIAL DESIGN PRODUCT PATENTS TRADE SECRETS ENGINEERING DRAWING AND SCHEMATICS BLUEPRINTS PROPRIETARY DOCUMENTATION; (F) CUSTOMER RELATED INTANGIBLE ASSETS SUCH AS CUSTOMER LISTS CUSTOMER CONTRACTS CUSTOMER RELATIONSHIP O PEN PURCHASE ORDERS; ITA NO. 301/RJT/2015 & CO 57/RJT/2015 DCIT VS. M/S JYOTI AUTOMATION PVT LTD ASSESSMENT YEAR: 2010-11 PAGE 6 OF 36 (G) CONTRACT RELATED INTANGIBLE ASSETS SUCH AS FAVOURABLE SUPPLIER CONTRACTS LICENCE AGREEMENTS FRANCHISE AGREEMENTS NON-COMPETE AGREEMENTS; (H) HUMAN CAPITAL RELATED INTANGIBLE ASSETS SUCH AS TRAINED AND ORGANISED WORKFORCE EMPLOYMENT AGREEMENTS UNI ON CONTRACTS; (I) LOCATION RELATED INTANGIBLE ASSETS SUCH AS LEASEHOLD INTEREST MINERAL EXPLOITATION RIGHTS EASEMENTS A IR RIGHTS WATER RIGHTS; (J) GOODWILL RELATED INTANGIBLE ASSETS SUCH AS INSTITUTIONAL GOODWILL PROFESSIONAL PRACTICE GOODWILL PERSONAL GOODWILL OF PROFESSIONAL CELEBRITY GOODWILL GENERAL BUSINESS GOING CONCERN VALUE; (K) METHODS PROGRAMMES SYSTEMS PROCEDURES CAM PAIGNS SURVEYS STUDIES FORECASTS ESTIMATES CUSTOMER LI STS OR TECHNICAL DATA; (L) ANY OTHER SIMILAR ITEM THAT DERIVES ITS VALUE FROM ITS INTELLECTUAL CONTENT RATHER THAN ITS PHYSICAL ATTRI BUTES.' 22. AS ANALYZED BY A COORDINATE BENCH IN THE CASE OF BHARTI AIRTEL LTD. (SUPRA) AND SPEAKING THROUGH ONE US THE LEGAL POSITION WITH RESPECT TO THE ABOVE DEFINITION IS AS FOLLOWS: '25. AN ANALYSIS OF THIS DEFINITION OF 'INTERNATION AL TRANSACTION' UNDER SECTION 92B AS IT STOOD AT THE RELEVANT POINT OF TIME AND ITS BREAK-UP IN PLAIN WORDS SHO WS THE FOLLOWING: AN INTERNATIONAL TRANSACTION CAN BE BETWEEN TWO OR MORE AES AT LEAST ONE OF WHICH SHOULD BE A NON-RESIDENT . AN INTERNATIONAL TRANSACTION CAN BE A TRANSACTION O F THE FOLLOWING TYPES: IN THE NATURE OF PURCHASE SALE OR LEASE OF TANGIBL E OR INTANGIBLE PROPERTY IN THE NATURE OF PROVISION OF SERVICES IN THE NATURE OF LENDING OR BORROWING MONEY OR IN THE NATURE OF ANY OTHER TRANSACTION HAVING A BEA RING ON THE PROFITS INCOME LOSSES OR ASSETS OF SUCH ENTER PRISES AN INTERNATIONAL TRANSACTION SHALL INCLUDE A MUTUAL AGREEMENT OR ARRANGEMENT BETWEEN TWO OR MORE ASSOCI ATED ENTERPRISES FOR THE ALLOCATION OR APPORTIONMENT OF OR ANY CONTRIBUTION TO ANY COST OR EXPENSE INCURRED OR TO BE ITA NO. 301/RJT/2015 & CO 57/RJT/2015 DCIT VS. M/S JYOTI AUTOMATION PVT LTD ASSESSMENT YEAR: 2010-11 PAGE 7 OF 36 INCURRED IN CONNECTION WITH A BENEFIT SERVICE OR F ACILITY PROVIDED OR TO BE PROVIDED TO ANYONE OR MORE OF SUC H ENTERPRISES. SECTION 92B (2) COVERING A DEEMING FICTION PROVID ES THAT EVEN A TRANSACTION WITH NON-AE IN A SITUATION IN WH ICH SUCH A TRANSACTION IS DE FACTO CONTROLLED BY PRIOR AGREE MENT WITH AE OR BY THE TERMS AGREED WITH THE AE. 26. LET US NOW DEAL WITH THE EXPLANATION INSERTED WITH RETROSPECTIVE EFFECT FROM 1ST APRIL 2002 I.E. RIGHT FROM THE TIME OF THE INCEPTION OF TRANSFER PRICING LEGISLATI ON IN INDIA WHICH WAS BROUGHT ON THE STATUTE VIDE FINANCE ACT 2012. 27. THIS EXPLANATION STATES THAT IT IS MERELY CLARI FICATORY IN NATURE INASMUCH AS IT IS 'FOR THE REMOVAL OF DOUBTS ' AND THEREFORE ONE HAS TO PROCEED ON THE BASIS THAT IT DOES NOT ALTER THE BASIC CHARACTER OF DEFINITION OF 'INTERNA TIONAL TRANSACTION' UNDER SECTION 92B. CLEARLY THEREFORE THIS EXPLANATION IS TO BE READ IN CONJUNCTION WITH THE M AIN PROVISIONS AND IN HARMONY WITH THE SCHEME OF THE PROVISIONS UNDER SECTION 92B. UNDER THIS EXPLANATI ON FIVE CATEGORIES OF TRANSACTIONS HAVE BEEN CLARIFIED TO H AVE BEEN INCLUDED IN THE DEFINITION OF 'INTERNATIONAL TRANSA CTIONS'. 28. THE FIRST TWO CATEGORIES OF TRANSACTIONS WHICH ARE STATED TO BE INCLUDED IN THE SCOPE OF EXPRESSION 'INTERNAT IONAL TRANSACTIONS' BY THE VIRTUE OF CLAUSE (A) AND (B) O F EXPLANATION TO SECTION 92B ARE TRANSACTIONS WITH R EGARD TO PURCHASE SALE TRANSFER LEASE OR USE OF TANGIBLE AND INTANGIBLE PROPERTIES. THESE TRANSACTIONS WERE ANYW AY COVERED BY 2 (A) ABOVE WHICH COVERED TRANSACTIONS ' IN THE NATURE OF PURCHASE SALE OR LEASE OF TANGIBLE OR IN TANGIBLE PROPERTY'. THE ONLY ADDITIONAL EXPRESSION IN THE CL ARIFICATION IS 'USE' AS ALSO ILLUSTRATIVE AND INCLUSIVE DESCRIP TIONS OF TANGIBLE AND INTANGIBLE ASSETS. SIMILARLY CLAUSE ( D) DEALS WITH THE ' PROVISION OF SERVICES INCLUDING PROVISI ON OF MARKET RESEARCH MARKET DEVELOPMENT MARKETING MANAGEMENT ADMINISTRATION TECHNICAL SERVICE REPA IRS DESIGN CONSULTATION AGENCY SCIENTIFIC RESEARCH LEGAL OR ACCOUNTING SERVICE' WHICH ARE ANYWAY COVERED BY 2(B ) AND 3 ABOVE IN 'PROVISION FOR SERVICES' AND 'MUTUAL AGR EEMENT OR ARRANGEMENT BETWEEN TWO OR MORE ASSOCIATED ENTER PRISES FOR THE ALLOCATION OR APPORTIONMENT OF OR ANY CONT RIBUTION TO ANY COST OR EXPENSE INCURRED OR TO BE INCURRED IN C ONNECTION WITH A BENEFIT SERVICE OR FACILITY PROVIDED OR TO BE PROVIDED TO ANYONE OR MORE OF SUCH ENTERPRISES'. THAT LEAVES US WITH TWO CLAUSES IN THE EXPLANATION TO SECTION 92B WHICH ARE NOT COVERED BY ANY OF THE THREE CATEGORIES DISCUSSED AB OVE OR BY OTHER SPECIFIC SEGMENTS COVERED BY SECTION 92B NAMELY BORROWING OR LENDING MONEY. ITA NO. 301/RJT/2015 & CO 57/RJT/2015 DCIT VS. M/S JYOTI AUTOMATION PVT LTD ASSESSMENT YEAR: 2010-11 PAGE 8 OF 36 29. THE REMAINING TWO ITEMS IN THE EXPLANATION TO S ECTION 92B ARE SET OUT IN CLAUSES (C) AND (E) THERETO DEA LING WITH (A) CAPITAL FINANCING AND (B) BUSINESS RESTRUCTURIN G OR REORGANIZATION. THESE ITEMS CAN ONLY BE COVERED IN THE RESIDUAL CLAUSE OF DEFINITION IN INTERNATIONAL TRAN SACTIONS AS IN SECTION 92B(1) WHICH COVERS 'ANY OTHER TRANSACT ION HAVING A BEARING ON PROFITS INCOMES LOSSES OR AS SETS OF SUCH ENTERPRISES'. 30. IT IS THEREFORE ESSENTIAL THAT IN ORDER TO BE COVERED BY CLAUSES (C) AND (E) OF EXPLANATION TO SECTION 92B THE TRANSACTIONS SHOULD BE SUCH AS TO HAVE BEARING ON P ROFITS INCOMES LOSSES OR ASSETS OF SUCH ENTERPRISE. IN OT HER WORDS IN A SITUATION IN WHICH A TRANSACTION HAS NO BEARING ON PROFITS INCOMES LOSSES OR ASSETS OF SUCH ENTER PRISE THE TRANSACTION WILL BE OUTSIDE THE AMBIT OF EXPRESSION 'INTERNATIONAL TRANSACTION'. THIS ASPECT OF THE MAT TER IS FURTHER HIGHLIGHTED IN CLAUSE (E) OF THE EXPLANATIO N DEALING WITH RESTRUCTURING AND REORGANIZATION WHEREIN IT I S ACKNOWLEDGED THAT SUCH AN IMPACT COULD BE IMMEDIATE OR IN FUTURE AS EVIDENT FROM THE WORDS 'IRRESPECTIVE OF T HE FACT THAT IT (I.E. RESTRUCTURING OR REORGANIZATION) HAS BEARING ON THE PROFIT INCOME LOSSES OR ASSETS OF SUCH ENTERP RISE AT THE TIME OF TRANSACTION OR ON A FUTURE DATE'. WHAT IS I MPLICIT IN THIS STATUTORY PROVISION IS THAT WHILE IMPACT ON ' PROFIT INCOME LOSSES OR ASSETS' IS SINE QUA NON THE MERE FACT THAT IMPACT IS NOT IMMEDIATE BUT ON A FUTURE DATE WOUL D NOT TAKE THE TRANSACTION OUTSIDE THE AMBIT OF 'INTERNAT IONAL TRANSACTION'. IT IS ALSO IMPORTANT TO BEAR IN MIND THAT AS IT APPEARS ON A PLAIN READING OF THE PROVISION THIS E XCLUSION CLAUSE IS NOT FOR 'CONTINGENT' IMPACT ON PROFIT IN COME LOSSES OR ASSETS BUT ON 'FUTURE' IMPACT ON PROFIT INCOME LOSSES OR ASSETS OF THE ENTERPRISE. THE IMPORTANT D ISTINCTION BETWEEN THESE TWO CATEGORIES IS THAT WHILE LATTER I S A CERTAINTY AND ONLY ITS CRYSTALLIZATION MAY TAKE PL ACE ON A FUTURE DATE THERE IS NO SUCH CERTAINTY IN THE FORM ER CASE. IN THE CASE BEFORE US IT IS AN UNDISPUTED POSITION TH AT CORPORATE GUARANTEES ISSUED BY THE ASSESSEE TO THE DEUTSCHE BANK DID NOT EVEN HAVE ANY SUCH IMPLICATIO N BECAUSE NO BORROWINGS WERE RESORTED TO BY THE SUBSI DIARY FROM THIS BANK. 31. IN THIS LIGHT NOW LET US REVERT TO THE PROVISI ONS OF CLAUSE (C) OF EXPLANATION TO SECTION 92B WHICH PROVIDES TH AT THE EXPRESSION 'INTERNATIONAL TRANSACTION' SHALL INCLUD E 'CAPITAL FINANCING INCLUDING ANY TYPE OF LONG-TERM OR SHORT -TERM BORROWING LENDING OR GUARANTEE PURCHASE OR SALE O F MARKETABLE SECURITIES OR ANY TYPE OF ADVANCE PAYME NTS OR DEFERRED PAYMENT OR RECEIVABLE OR ANY OTHER DEBT AR ISING DURING THE COURSE OF BUSINESS'. IN VIEW OF THE DISC USSIONS ABOVE THE SCOPE OF THESE TRANSACTIONS AS COULD BE COVERED UNDER EXPLANATION TO SECTION 92B READ WITH SECTION 92B(1) IS RESTRICTED TO SUCH CAPITAL FINANCING TRANSACTION S INCLUDING ITA NO. 301/RJT/2015 & CO 57/RJT/2015 DCIT VS. M/S JYOTI AUTOMATION PVT LTD ASSESSMENT YEAR: 2010-11 PAGE 9 OF 36 INTER ALIA ANY GUARANTEE DEFERRED PAYMENT OR RECEI VABLE OR ANY OTHER DEBT DURING THE COURSE OF BUSINESS AS WI LL HAVE 'A BEARING ON THE PROFITS INCOME LOSSES OR ASSETS OR SUCH ENTERPRISE'. THIS PRECONDITION ABOUT IMPACT ON PROF ITS INCOME LOSSES OR ASSETS OF SUCH ENTERPRISES IS A PRECONDITION EMBEDDED IN SECTION 92B(1) AND THE ONL Y RELAXATION FROM THIS CONDITION PRECEDENT IS SET OUT IN CLAUSE (E) OF THE EXPLANATION WHICH PROVIDES THAT THE BEAR ING ON PROFITS INCOME LOSSES OR ASSETS COULD BE IMMEDIAT E OR ON A FUTURE DATE. THE CONTENTS OF THE EXPLANATION FORTIF IES RATHER THAN MITIGATES THE SIGNIFICANCE OF EXPRESSION 'HAV ING A BEARING ON PROFITS INCOME LOSSES OR ASSETS' APPEA RING IN SECTION 92B(1). 32. THERE CAN BE NUMBER OF SITUATIONS IN WHICH AN I TEM MAY FALL WITHIN THE DESCRIPTION SET OUT IN CLAUSE (C) O F EXPLANATION TO SECTION 92B AND YET IT MAY NOT CONSTITUTE AN IN TERNATIONAL TRANSACTION AS THE CONDITION PRECEDENT WITH REGARD TO THE 'BEARING ON PROFIT INCOME LOSSES OR ASSETS' SET O UT IN SECTION 92B(1) MAY NOT BE FULFILLED. FOR EXAMPLE A N ENTERPRISE MAY EXTEND GUARANTEES FOR PERFORMANCE OF FINANCIAL OBLIGATIONS BY ITS ASSOCIATED ENTERPRISES . THESE GUARANTEES DO NOT COST ANYTHING TO THE ENTERPRISE I SSUING THE GUARANTEES AND YET THEY PROVIDE CERTAIN COMFORT LEVELS TO THE PARTIES DOING DEALINGS WITH THE ASSOCIATED E NTERPRISE. THESE GUARANTEES THUS DO NOT HAVE ANY IMPACT ON INC OME PROFITS LOSSES OR ASSETS OF THE ASSESSEE. THERE CA N BE A HYPOTHETICAL SITUATION IN WHICH A GUARANTEE DEFAULT TAKES PLACE AND THEREFORE THE ENTERPRISE MAY HAVE TO PA Y THE GUARANTEE AMOUNTS BUT SUCH A SITUATION EVEN IF THA T BE SO IS ONLY A HYPOTHETICAL SITUATION WHICH ARE AS DIS CUSSED ABOVE EXCLUDED. ONE MAY ALSO HAVE A SITUATION IN W HICH THERE IS A RECEIVABLE OR ANY OTHER DEBT DURING THE COURSE OF BUSINESS AND YET THESE RECEIVABLES MAY NOT HAVE ANY BEARING ON ITS PROFITS INCOME LOSSES OR ASSETS F OR EXAMPLE WHEN THESE RECEIVABLES ARE OUT OF COST FREE FUNDS A ND THESE DEBIT BALANCES DO NOT COST ANYTHING TO THE PERSON A LLOWING SUCH USE OF FUNDS. THE SITUATIONS CAN BE ENDLESS B UT THE COMMON THREAD IS THAT WHEN AN ASSESSEE EXTENDS AN ASSISTANCE TO THE ASSOCIATED ENTERPRISE WHICH DOES NOT COST ANYTHING TO THE ASSESSEE AND PARTICULARLY FOR WHICH THE ASSESSEE COULD NOT HAVE REALIZED MONEY BY GIVING IT TO SOMEONE ELSE DURING THE COURSE OF ITS NORMAL BUSINE SS SUCH AN ASSISTANCE OR ACCOMMODATION DOES NOT HAVE A NY BEARING ON ITS PROFITS INCOME LOSSES OR ASSETS A ND THEREFORE IT IS OUTSIDE THE AMBIT OF INTERNATIONAL TRANSACTION UNDER SECTION 92B (1) OF THE ACT. 33. IN ANY EVENT THE ONUS IS ON THE REVENUE AUTHOR ITIES TO DEMONSTRATE THAT THE TRANSACTION IS OF SUCH A NATUR E AS TO HAVE 'BEARING ON PROFITS INCOME LOSSES OR ASSETS' OF THE ENTERPRISE AND THERE WAS NOT EVEN AN EFFORT TO DIS CHARGE ITA NO. 301/RJT/2015 & CO 57/RJT/2015 DCIT VS. M/S JYOTI AUTOMATION PVT LTD ASSESSMENT YEAR: 2010-11 PAGE 10 OF 36 THIS ONUS. SUCH AN IMPACT ON PROFITS INCOME LOSSE S OR ASSETS HAS TO BE ON REAL BASIS EVEN IF IN PRESENT OR IN FUTURE AND NOT ON CONTINGENT OR HYPOTHETICAL BASIS AND THERE HAS TO BE SOME MATERIAL ON RECORD TO INDICATE EVEN IF NOT TO ESTABLISH IT TO HILT THAT AN INTRAAE INTERN ATIONAL TRANSACTION HAS SOME IMPACT ON PROFITS INCOME LOS SES OR ASSETS. CLEARLY THESE CONDITIONS ARE NOT SATISFIED ON THE FACTS OF THIS CASE.' 23. LEARNED DEPARTMENTAL REPRESENTATIVE SUBMITS THA T THIS DECISION IS NO LONGER GOOD LAW IN THE LIGHT OF EVER EST KANTO CYLINDERS LTD. DECISION (SUPRA) AND VODAFONE INDIA SERVICES (P.) LTD. DECISION (SUPRA) BY HON'BLE BOMBAY HIGH COURT. 24. AS FOR HON'BLE HIGH COURT'S JUDGMENT IN THE CAS E OF EVEREST KANTO CYLINDERS LTD. (SUPRA) IT IS NECESSARY TO AP PRECIATE THE FACT THE ASSESSEE WAS CHARGING A .5% COMMISSION ON ISSUA NCE OF CORPORATE GUARANTEES ON BEHALF OF THE AES AND IT COULD NOT THEREFORE BE SAID THAT THE TRANSACTION WILL HAVE N O IMPACT ON 'PROFITS INCOMES LOSSES OR ASSETS OF SUCH ENTERPR ISE'. THIS ASPECT OF THE MATTER IS CLEAR FROM AN OBSERVATIONS IN THE RELATED TRIBUNAL ORDER WHICH IS REPORTED AS EVEREST KANTO CYLINDERS LTD (SUPRA) TO THE EFFECT THAT 'HOWEVER IN THIS CASE THE ASSESSE E HAS ITSELF CHARGED 0.5% GUARANTEE COMMISSION FROM ITS AE AND THEREFORE IT IS NOT A CASE OF NOT CHARGING ANY KIND OF COMMISSIO N FROM ITS AE'. THE TRIBUNAL DID NOTE IN THE IMMEDIATELY FOLLOWING SENTENCE IN PARAGRAPH 23 ITSELF THAT 'THE ONLY POINT TO BE SEE N IN THIS CASE IS WHETHER THE SAME IS AT ALP OR NOT'. THE VERY FACT O F CHARGING THIS GUARANTEE COMMISSION BRINGS THE ISSUANCE OF CORPORA TE GUARANTEES TO THE NET OF TRANSFER PRICING. NEVERTHE LESS THE ALP ADJUSTMENT MADE BY THE TPO WAS DELETED BY THE TRIBU NAL. AGGRIEVED BY THE RELIEF SO GIVEN BY THE TRIBUNAL T HE MATTER WAS CARRIED IN FURTHER APPEAL BY THE COMMISSIONER BEF ORE THE HON'BLE BOMBAY HIGH COURT WHICH EVENTUALLY UPHELD THE RELIE F GRANTED BY THE TRIBUNAL. THE APPEAL BEFORE THE HON'BLE HIGH CO URT WAS BY THE COMMISSIONER AND NOT BY THE ASSESSEE AND THEREFO RE THE GRIEVANCE AGAINST THE ISSUANCE OF CORPORATE GUARANT EE BEING HELD TO BE AN INTERNATIONAL TRANSACTION COULD NOT HAVE C OME UP FOR CONSIDERATION. OF COURSE THE ASSESSEE HAD NO OCCAS ION TO CHALLENGE THE STAND OF THE TRIBUNAL ON THIS ASPECT SINCE THE ADDITION ON MERITS WAS DELETED ANYWAY MAKING REVE NUE'S SUCCESS IN THIS RESPECT HOLLOW AND OF NO DAMAGE TO THE INTERESTS OF THE ASSESSEE. IT WAS IN THIS BACKDROP THAT THE A CTION OF THE TRIBUNAL WAS UPHELD IN GRANTING RELIEF TO THE ASSES SEE ON MERITS. IT IS DIFFICULT TO UNDERSTAND AS TO HOW THIS DECISION IS TAKEN AS SUPPORTING THE PROPOSITION THAT THE ISSUANCE OF COR PORATE GUARANTEE EVEN IN A CASE IN WHICH NEITHER ANY GUAR ANTEE COMMISSION IS CHARGED NOR ANY COSTS ARE INCURRED I S AN INTERNATIONAL TRANSACTION. IN ANY CASE THERE IS NO THING IN THE OPERATIVE PORTION WHICH EVEN REMOTELY SUGGESTS THAT THEIR LORDSHIPS HAD ANY OCCASION TO ADDRESS THEMSELVES TO THE QUESTION AS TO WHETHER THE ISSUANCE OF CORPORATE GUARANTEE A MOUNTS TO ITA NO. 301/RJT/2015 & CO 57/RJT/2015 DCIT VS. M/S JYOTI AUTOMATION PVT LTD ASSESSMENT YEAR: 2010-11 PAGE 11 OF 36 INTERNATIONAL TRANSACTION. THE OPERATIVE PORTION OF THE JUDGMENT IS REPRODUCED BELOW FOR READY REFERENCE: 'IN THE MATTER OF GUARANTEE COMMISSION THE ADJUSTMENT MADE BY THE TPO WERE BASED ON INSTANCES RESTRICTED TO THE COMMERCIAL BANKS PROVIDING GUARAN TEES AND DID NOT CONTEMPLATE THE ISSUE OF A CORPORATE GUARANTEE. NO DOUBT THESE ARE CONTRACTS OF GUARANTE E HOWEVER WHEN THEY ARE COMMERCIAL BANKS THAT ISSUE BANK GUARANTEES WHICH ARE TREATED AS THE BLOOD OF COMMER CE BEING EASILY ENCASHABLE IN THE EVENT OF DEFAULT AN D IF THE BANK GUARANTEE HAD TO BE OBTAINED FROM COMMERCIAL B ANKS THE HIGHER COMMISSION COULD HAVE BEEN JUSTIFIED. IN THE PRESENT CASE IT IS ASSESSEE COMPANY THAT IS ISSUIN G CORPORATE GUARANTEE TO THE EFFECT THAT IF THE SUBSI DIARY AE DOES NOT REPAY LOAN AVAILED OF IT FROM ICICI THEN IN SUCH EVENT THE ASSESSEE WOULD MAKE GOOD THE AMOUNT AND REPAY THE LOAN. THE CONSIDERATIONS WHICH APPLIED FO R ISSUANCE OF A CORPORATE GUARANTEE ARE DISTINCT AND SEPARATE FROM THAT OF BANK GUARANTEE AND ACCORDINGLY WE ARE OF THE VIEW THAT COMMISSION CHARGED CANNOT BE CALLED IN QU ESTION IN THE MANNER TPO HAS DONE. IN OUR VIEW THE COMPARI SON IS NOT AS BETWEEN LIKE TRANSACTIONS BUT THE COMPARISON S ARE BETWEEN GUARANTEES ISSUED BY THE COMMERCIAL BANKS A S AGAINST A CORPORATE GUARANTEE ISSUED BY HOLDING COM PANY FOR THE BENEFIT OF ITS AE A SUBSIDIARY COMPANY. IN VIEW OF THE ABOVE DISCUSSION WE ARE OF THE VIEW THAT THE AP PEAL DOES NOT RAISE ANY SUBSTANTIAL QUESTION OF LAW AND IT IS DISMISSED.' 25. WE ARE UNABLE TO SEE IN THE JUDGMENT OF HON'BL E BOMBAY HIGH COURT ANY SUPPORT TO THE PROPOSITION THAT ISS UANCE OF CORPORATE GUARANTEES IS INHERENTLY WITHIN THE AMBIT OF DEFINITION OF 'INTERNATIONAL TRANSACTION' UNDER SECTION 92B IRRES PECTIVE OF WHETHER OR NOT SUCH TRANSACTIONS HAVE ANY 'BEARING ON PROFITS INCOMES LOSSES OR ASSETS OF SUCH ENTERPRISES'. RE VENUE THEREFORE DOES NOT DERIVE ANY HELP FROM THE SAID D ECISION. 26. COMING TO HON'BLE BOMBAY HIGH COURT IN THE CASE OF VODAFONE INDIA SERVICES (P.) LTD. (SUPRA) WHICH HA S BEEN RELIED UPON BY THE LEARNED DEPARTMENTAL REPRESENTATIVE WE FIND THAT THE OPERATIVE PORTION OF THIS JUDGMENT SO FAR AS RELEV ANT TO THIS DISCUSSION IS AS FOLLOWS: '213. THE AMENDMENT TO SECTION 2(47) RAISES SEVERAL IMPORTANT QUESTIONS OF FACT AND OF LAW. WHETHER OR NOT IT AFFECTS THE PROCEEDINGS WHICH WERE THE SUBJECT MATT ER BEFORE THE SUPREME COURT IS NOT RELEVANT FOR THE PU RPOSE OF THIS WRIT PETITION. BUT WHETHER IT IS RELEVANT OR NOT FOR THE PURPOSE OF THE ASSESSMENT PROCEEDINGS IN RESPECT OF THE PETITIONER WHICH ARE THE SUBJECT MATTER OF THIS WRI T PETITION ITA NO. 301/RJT/2015 & CO 57/RJT/2015 DCIT VS. M/S JYOTI AUTOMATION PVT LTD ASSESSMENT YEAR: 2010-11 PAGE 12 OF 36 IS RELEVANT. THE EFFECT OF THE AMENDMENT WOULD HAVE TO BE CONSIDERED. IT CANNOT BE BRUSHED ASIDE. 214. SECTION 2(47) AS AMENDED EVEN ON A CURSORY G LANCE RAISES VARIOUS ISSUES. IT IS NECESSARY TO NOTE FOUR PRELIMINARY ASPECTS OF EXPLANATION 2 TO SECTION 2(4 7). FIRSTLY AS THE OPENING WORDS FOR THE REMOVAL OF D OUBTS IT IS HEREBY CLARIFIED THAT ...' INDICATE IT IS A CLARI FICATORY AMENDMENT. SECONDLY IT IS AN INCLUSIVE DEFINITION AS IS EVIDENT FROM THE WORDS 'TRANSFER' INCLUDES '. THIRD LY THE AMENDMENT IS WITH RETROSPECTIVE EFFECT FROM 1ST APR IL 1962. FOURTHLY THE FINANCE ACT 2012 WHICH INTRODUCED IN TER ALIA THE AMENDMENT TO SECTION 2(47) AND SECTION 92CA(2B) IS A VALIDATING ACT IN VIEW OF SECTION 119 THEREOF. 215. EXPLANATION 2 TO SECTION 247 BROADLY HAS FOUR ELEMENTS. DISPOSAL OR PARTING WITH OR CREATING ANY INTEREST I N AN ASSET. THE ASSET OR ANY INTEREST IN THE ASSET. THE DISPOSING OF OR PARTING WITH THE ASSET OR CREAT ING ANY INTEREST THEREIN MAY BE: (A) DIRECT OR INDIRECT. (B) ABSOLUTE OR CONDITIONAL. (C) VOLUNTARY OR INVOLUNTARY. (D) BY AMENDMENT OR OTHERWISE. (IV) A NON-OBSTANTE PROVISION REGARDING THE NATURE OF A TRANSFER. IF AN ACT ARRANGEMENT TRANSACTION ETC. CONSTITUTES A TRANSFER AS DEFINED IN THE SECTION IT WOULD BE SO NOTWITHSTANDING THE TRANSFER OF RIGHTS HAVING BEEN CATEGORISED AS BEING EFFECTED OR DEPENDENT UPON OR FLOWING FROM THE TRANSFER OF A SHARE OR SHARES OF A COMPANY REGISTERED OR INCORPORATED OUTSIDE INDIA. 216. TWO ASPECTS OF A TRANSFER ARE CLARIFIED - THE ASSET ITSELF AND THE MANNER IN WHICH IT IS DEALT WITH. THE ASSET IS NO LONGER RESTRICTED TO THE ASSET PER SE OR A RIGHT TH EREIN BUT ALSO EXTENDS TO 'ANY INTEREST THEREIN'. PRIOR TO TH E AMENDMENT THE WORDS 'ANY INTEREST THEREIN' WERE AB SENT. FURTHER THE NATURE OF THE DISPOSAL IS ALSO EXPANDE D. IT NOW INCLUDES THE CREATION OF ANY INTEREST IN ANY ASSET. MOREOVER THE DISPOSAL OF OR CREATION OF ANY INTEREST IN THE ASSET MAY BE DIRECT OR INDIRECT ABSOLUTE OR CONDITIONAL VOL UNTARY OR INVOLUNTARY. IT MAY BE BY WAY OF AN AGREEMENT OR OT HERWISE. FURTHER THE CONCLUDING WORDS CONSTITUTE A NON-OBST ANTE PROVISION. IT PROVIDES THAT THE TRANSFER CONTEMPLAT ED THEREIN WOULD BE NOTWITHSTANDING THAT IT HAS BEEN CHARACTER ISED AS BEING EFFECTED OR DEPENDENT UPON OR FLOWING FROM TH E TRANSFER OF A SHARE OR SHARES OF A COMPANY REGISTER ED OR INCORPORATED OUTSIDE INDIA. ITA NO. 301/RJT/2015 & CO 57/RJT/2015 DCIT VS. M/S JYOTI AUTOMATION PVT LTD ASSESSMENT YEAR: 2010-11 PAGE 13 OF 36 IT WOULD BE EVIDENT THEREFORE THAT A LOT MORE MUS T NOW BE SEEN AND CONSIDERED THAN BEFORE WHILE ARRIVING AT A CONCLUSION WHETHER THE TERMS AND CONDITIONS OF THE FRAMEWORK AGREEMENT CONSTITUTED A TRANSFER OR ASSIG NMENT OF THE CALL OPTIONS BY ONE PARTY TO ANOTHER. 217. AT THE COST OF REPETITION WE ARE NOT CONCERNE D HERE WITH WHETHER THE AMENDMENT IS VALID OR NOT. ONE OF THE ISSUES HOWEVER THAT DOES ARISE IS WHETHER THE AME NDMENT ALBEIT CLARIFICATORY WOULD MAKE A DIFFERENCE IN TH E CONSTRUCTION OF THE PROVISIONS OF THE FRAMEWORK AGR EEMENTS THEMSELVES TO WIT AS REGARDS THE CONSTRUCTION OF T HE CLAUSES THEREOF WITHOUT THE AID OF ANY OTHER MATERI AL FOR INTERPRETING THEM. VODAFONE'S CASE OBVIOUSLY CONSID ERED THE AMBIT OF THE TERM 'TRANSFER' PRIOR TO THE AMENDMENT . IN THE PRESENT ASSESSMENT PROCEEDINGS IT IS THE AMENDED DEFINITION WHICH WOULD HAVE TO BE CONSIDERED. 218. WE DO NOT FIND IT EITHER NECESSARY OR PROPER T O INDICATE THE APPLICATION OF SECTION 2(47) AS AMENDED TO THE PRESENT PROCEEDINGS. THE APPLICATION WOULD DEPEND UPON THE FACTS ON RECORD OR THOSE MAY BE PERMITTED TO BE BROUGHT O N RECORD. 219. THERE IS ANOTHER ASPECT. THE PETITIONER MAY WE LL CONTEND THAT THE AMENDED DEFINITION MAKES NO DIFFER ENCE IT BEING CLARIFICATORY IN NATURE. THE PROVISIONS THERE OF MUST THEREFORE BE DEEMED ALWAYS TO HAVE BEEN IN EXISTEN CE. WE WILL PRESUME THAT IT WOULD BE OPEN TO THE PETITIONE R TO CONTEND THEREFORE THAT THE JUDGMENT OF THE SUPREM E COURT WOULD REMAIN ENTIRELY UNAFFECTED FOR THE SUPREME CO URT MUST BE DEEMED TO HAVE CONSIDERED THE TERM AS PER I TS TRUE AMBIT AS ALWAYS INTENDED BY THE PARLIAMENT. ON THE OTHER HAND IT MAY BE EQUALLY OPEN TO THE REVENUE TO CONT END THAT CERTAIN INGREDIENTS OF A TRANSFER WERE NOT CONSIDER ED BY THE REVENUE ITSELF IN THE PROCEEDINGS RELATING TO VODAF ONE'S CASE ON ACCOUNT OF THE REVENUE ITSELF NOT HAVING APPRECIATED OR REALIZED THE ACTUAL AMBIT OF THE TER M 'TRANSFER' WHICH ARE NOW CLARIFIED BY THE AMENDMENT . EVEN ASSUMING THAT THE REVENUE CANNOT RE-OPEN THE VODAFO NE CASE IT CANNOT BE BARRED FROM RELYING UPON THE TRU E AMBIT OF THE TERM 'TRANSFER' IN FUTURE CASES INCLUDING THE PROCEEDINGS IN RESPECT OF THE PETITIONER. THUS EVE N ASSUMING THAT THE JUDGMENT OF THE SUPREME COURT REM AINS UNAFFECTED BY THE CLARIFICATORY AMENDMENT THE REVE NUE WOULD BE ENTITLED HEREAFTER IN OTHER CASES AT LEAS T TO APPRECIATE ANALYZE AND CONSTRUE THE TRANSACTIONS R ELATING TO CALL OPTIONS INCLUDING THE FRAMEWORK AGREEMENTS IN A PROPER PERSPECTIVE WHICH IT MAY NOT HAVE DONE EARLI ER. 220. THESE ARE IMPORTANT ISSUES. THERE IS NO JUSTIF ICATION FOR WITHDRAWING THE PROCEEDINGS FROM THE CHANNEL PROVID ED BY ITA NO. 301/RJT/2015 & CO 57/RJT/2015 DCIT VS. M/S JYOTI AUTOMATION PVT LTD ASSESSMENT YEAR: 2010-11 PAGE 14 OF 36 THE INCOME-TAX ACT BYPASSING THE TRIBUNAL AND CONS IDERING ALL THESE QUESTIONS IN EXERCISE OF THE HIGH COURT'S EXTRAORDINARY JURISDICTION UNDER ARTICLE 226.' (EMP HASIS SUPPLIED) 27. REVENUE'S EMPHASIS IS ON THE LAST TWO SENTENCES IN PARAGRAPH NO 213 WHICH STATE THAT 'THE EFFECT OF THE AMENDMEN T WOULD HAVE TO BE CONSIDERED. IT CANNOT BE BRUSHED ASIDE' BUT I N DOING SO WHAT IT OVERLOOKS IS THE SUBSEQUENT OBSERVATIONS HIGHLIG HTED ABOVE WHICH RECOGNIZE THE FACT THAT MERELY BECAUSE A SUBS EQUENT EXPLANATION IS INTRODUCED BY THE LEGISLATURE IT IS NOT AN OPEN AND SHUT CASE AGAINST THE ASSESSEE OR THE REVENUE AND THAT ALL THESE OBSERVATIONS ARE IN THE CONTEXT THAT 'THERE IS NO J USTIFICATION FOR WITHDRAWING THE PROCEEDINGS FROM THE CHANNEL PROVID ED BY THE INCOME-TAX ACT BYPASSING THE TRIBUNAL AND CONSIDER ING ALL THESE QUESTIONS IN EXERCISE OF THE HIGH COURT'S EXTRAORDI NARY JURISDICTION UNDER ARTICLE 226'. WHEN THEIR LORDSHIPS HAVE MADE IT CLEAR THAT THEY WOULD NOT LIKE TO BYPASS THE CHANNELS UNDER TH E INCOME-TAX ACT AND PROCEED TO DECIDE THESE ISSUES IN WRIT JURI SDICTION UNDER ARTICLE 226 THERE CANNOT OBVIOUSLY BE ANY QUESTION OF THEIR LORDSHIPS DECIDING THE MATTER ONE WAY OR THE OTHER. ANY OBSERVATIONS MADE BY THEIR LORDSHIPS WHILE DECLINI NG TO DECIDE THE MATTER IN WRIT JURISDICTION CANNOT BE TREATED AS DECISIVE OF THE ISSUE ON MERITS. WHILE IT IS TRUE THAT HON'BLE BOMB AY HIGH COURT HAS OBSERVED THAT THE EFFECT OF AMENDMENT WILL HAVE TO BE CONSIDERED HON'BLE BOMBAY HIGH COURT HAS ALSO OBSE RVED THAT EVEN AFTER TAKING INTO ACCOUNT THE AMENDMENTS THE LEGAL IMPLICATIONS OF THIS AMENDMENT IS STILL AN OPEN ISS UE WHICH WILL HAVE TO BE ADJUDICATED IN THE LIGHT OF PLEADINGS OF THE PARTIES. EVEN IN THESE OBSERVATIONS WHICH DO NOT ANYWAY DEC IDE ANYTHING ON MERITS EFFECT OF A RETROSPECTIVE AMENDMENT WAS NOT IN THE CONTEXT OF THE PRECISE ISSUE BEFORE US OR ON THE S COPE OF THE INTERNATIONAL TRANSACTION BUT IN RESPECT OF CONNOT ATIONS OF 'TRANSFER'. AS LEARNED COUNSEL RIGHTLY CONTENDS IN THE LIGHT OF HON'BLE BOMBAY HIGH COURT'S JUDGMENT IN THE CASE OF SUDHIR JAYANTILAL MULJI (SUPRA) 'RATIO OF A DECISION ALONE IS BINDING BECAUSE A CASE IS ONLY AN AUTHORITY FOR WHAT IT ACT UALLY DECIDES AND NOT WHAT MAY COME TO FOLLOW FROM SOME OBSERVATI ONS WHICH FIND PLACE THEREIN'. IN VIEW OF THESE DISCUSSIONS THE RELIANCE PLACED ON VODAFONE INDIA SERVICES (P.) LTD. (SUPRA) IS ALSO EQUALLY MISPLACED AND DEVOID OF LEGALLY SUSTAINABLE MERITS. IN ANY CASE AS IS NOTED BY HON'BLE SUPREME COURT IN THE CASE OF CIT V. SUN ENGG. WORKS (P.) LTD. [1992] 198 ITR 297/64 TAXMAN 442 (SC) 'IT IS NEITHER DESIRABLE NOR PERMISSIBLE TO PICK OUT A WORD OR A SENTENCE FROM THE JUDGMENT OF THIS COURT DIVORCED FROM THE CONTEXT OF THE QUESTION UNDER CONSIDERATION AND TRE AT IT TO BE THE COMPLETE 'LAW' DECLARED BY THIS COURT. THE JUDGMENT MUST BE READ AS A WHOLE AND THE OBSERVATIONS FROM THE JUDGMENT H AVE TO BE CONSIDERED IN THE LIGHT OF THE QUESTIONS WHICH WERE BEFORE THIS COURT' THEIR LORDSHIPS FURTHER NOTED THAT 'A DECISI ON OF THIS COURT TAKES ITS COLOUR FROM THE QUESTIONS INVOLVED IN THE CASE IN WHICH IT IS RENDERED AND WHILE APPLYING THE DECISION TO A L ATER CASE THE ITA NO. 301/RJT/2015 & CO 57/RJT/2015 DCIT VS. M/S JYOTI AUTOMATION PVT LTD ASSESSMENT YEAR: 2010-11 PAGE 15 OF 36 COURTS MUST CAREFULLY TRY TO ASCERTAIN THE TRUE PRI NCIPLE LAID DOWN BY THE DECISION OF THIS COURT AND NOT TO PICK OUT W ORDS OR SENTENCES FROM THE JUDGMENT DIVORCED FROM THE CONT EXT OF THE QUESTIONS UNDER CONSIDERATION BY THIS COURT TO SUP PORT THEIR REASONING' IT WAS ALSO RECALLED THAT IN MADHAV RAO JIVAJI RAO SCINDIA BAHADUR V. UNION OF INDIA AIR 1971 SC 530 HON'BLE SUPREME COURT HAD CAUTIONED THAT 'IT IS NOT PROPER TO REGARD A WORD CLAUSE OR A SENTENCE OCCURRING IN A JUDGMENT OF THE SUPREME COURT DIVORCED FROM ITS CONTEXT AS CONTAI NING A FULL EXPOSITION OF THE LAW ON A QUESTION WHEN THE QUESTI ON DID NOT EVEN FALL TO BE ANSWERED IN THAT JUDGMENT.' THAT PRECISE LY HOWEVER HAS BEEN THE APPROACH OF THE REVENUE AUTHORITIES IN PLA CING RELIANCE ON VODAFONE INDIA SERVICES (P.) LTD. (SUPRA) DECIS ION. WE REJECT THIS APPROACH. 28. FOR THE REASONS SET OUT ABOVE LEARNED DEPARTME NTAL REPRESENTATIVE'S RELIANCE ON HON'BLE BOMBAY HIGH CO URT'S JUDGMENTS IN THE CASES OF EVEREST KANTO (SUPRA) AND VODAFONE INDIA SERVICES (SUPRA) IS WHOLLY MISPLACED AND DEVO ID OF ANY MERITS. AS FOR COORDINATE BENCH DECISION IN THE CAS E OF HINDALCO INDUSTRIES (SUPRA) ALL IT DOES IS TO FOLLOW THE EV EREST KANTO DECISION BY HON'BLE BOMBAY HIGH COURT BUT THEN AS WE HAVE SEEN EARLIER THAT WAS A CASE IN WHICH THEIR LORDSH IPS WERE IN SEISIN OF A SITUATION IN WHICH GUARANTEE COMMISSION WAS ACTUALLY CHARGED BY THE ASSESSEE. THAT IS NOT THE CASE BEFOR E US. THE COORDINATE BENCH DECISIONS DEALING WITH THE SITUATI ONS IN WHICH THE GUARANTEE COMMISSION WAS ACTUALLY CHARGED AND AS S UCH THERE WAS INDEED A BEARING ON THE PROFITS OF THE ASSESSEE CLEARLY DONOT APPLY ON THIS CASE. WE THEREFORE REJECT THE RELIA NCE ON THESE DECISIONS AS DEVOID OF LEGALLY SUSTAINABLE MERITS. 29. LET US NOW DEAL WITH THE RELIANCE PLACED BY THE REVENUE AUTHORITIES ON GE CAPITAL'S CASE BY THE TAX COURT O F CANADA. IN THE DRP'S ORDER A REFERENCE IS MADE TO WELL KNOWN CANADIAN DECISION IN THE CASE OF GE CAPITAL CANADA (SUPRA). THE SAID CASE TO QUOTE THE WORDS OF THE DRP 'ALSO SHOWS THAT THE GROUP COMPANY ISSUING THE GUARANTEE (I.E. GUARANTOR) WOUL D IN PRINCIPLE AT LEAST NEED TO COVER THE COST THAT IT INCURS WITH RESPECT TO PROVIDING THE GUARANTEE' AND THAT 'THESE COSTS MAY INCLUDE ADMINISTRATIVE EXPENSES AS WELL AS THE COSTS OF MAI NTAINING AN APPROPRIATE LEVEL OF CASH EQUIVALENTS CAPITAL SUB SIDIARY CREDIT LINES OR MORE EXPENSIVE EXTERNAL FUNDING CONDITIONS ON OTHER DEBT FINANCE'. THE DRP HAD ALSO NOTED THAT 'IN ADDITION THE GUARANTOR WOULD WANT TO RECEIVE APPROPRIATE COMPENSATION FOR THE RISK IT INCURS' AND CONCLUDED THAT 'FOLLOWING THE ABOVE DIS CUSSIONS AN ARM'S LENGTH GUARANTEE FEES IS TYPICALLY REQUIRED T O BE DETERMINED BY ESTABLISHING A RANGE OF FEES THAT THE GUARANTOR WOULD AT LEAST WANT TO RECEIVE AND THE FEES THAT THE GUARANTEED GR OUP COMPANY WOULD BE WILLING TO PAY DEPENDING ON THE PREVAILING CONDITIONS WITHIN FINANCIAL MARKETS IN PRACTICE'. ITA NO. 301/RJT/2015 & CO 57/RJT/2015 DCIT VS. M/S JYOTI AUTOMATION PVT LTD ASSESSMENT YEAR: 2010-11 PAGE 16 OF 36 30. HOWEVER WHILE DEALING WITH THIS ASPECT OF THE MATTER IT IS NECESSARY TO BEAR IN MIND THE FACT THAT THIS JUDICI AL PRECEDENT WHATEVER BE ITS WORTH IN THE HIERARCHY OF BINDING J UDICIAL PRECEDENTS IN INDIA DOES NOT EVEN DEAL WITH THE FU NDAMENTAL QUESTION AS TO WHETHER ISSUANCE OF A CORPORATE GUAR ANTEE IS AN INTERNATIONAL TRANSACTION AT ALL- WHICH IS WHAT WE ARE CONCERNED WITH AT PRESENT. THIS TCC DECISION DEALT WITH A SIT UATION IN WHICH THE ASSESSEE WAS DENIED IN COMPUTATION OF ITS BUSI NESS INCOME TAX DEDUCTION FOR PAYMENT OF GUARANTEE FEES ON THE GROUND THAT THERE WAS NO EFFECTIVE BENEFIT TO THE ASSESSEE IN OBTAINING THE SAID GUARANTEE. AGGRIEVED BY DENIAL OF DEDUCTION A SSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE CANADIAN TA X COURT AND THE PLEA OF THE ASSESSEE WAS EVENTUALLY UPHELD. IT IS ALSO INTERESTING TO NOTE THAT AS A SEQUEL TO THIS TAX CO URT OF CANADA DECISION THE TRANSFER PRICING LEGISLATION WAS AMEN DED TO BRING GREATER CLARITY ON THE ISSUE AND AS A MEASURE OF AB UNDANT CAUTION AND SECTION 247 (7.1) GRANTING SPECIFIC EXEMPTION TO GUARANTEE FEES WAS INTRODUCED. THIS AMENDMENT IS AS FOLLOWS: (7.1) SUB-SECTION (2) DOES NOT APPLY TO ADJUST AN A MOUNT OF CONSIDERATION PAID PAYABLE OR ACCRUING TO A CORPOR ATION RESIDENT IN CANADA (IN THIS SUB-SECTION REFERRED TO AS THE 'PARENT') IN A TAXATION YEAR OF THE PARENT FOR THE PROVISION OF A GUARANTEE TO A PERSON OR PARTNERSHIP (IN THIS SUB -SECTION REFERRED TO AS THE 'LENDER') FOR THE REPAYMENT IN WHOLE OR IN PART OF A PARTICULAR AMOUNT OWING TO THE LENDER BY A NON- RESIDENT PERSON IF (A) THE NON-RESIDENT PERSON IS A CONTROLLED FOREIGN AFFILIATE OF THE PARENT FOR THE PURPOSES OF SECTION 17 THROUGHOUT THE PERIOD IN THE YEAR DURING WHICH THE PARTICULAR AMOUNT IS OWING; AND (B) IT IS ESTAB LISHED THAT THE PARTICULAR AMOUNT WOULD BE AN AMOUNT OWING DESC RIBED IN PARAGRAPH 17(8)(A) OR (B) IF IT WERE OWED TO THE PARENT. (HTTP://WWW.FIN.GC.CA/DRLEG-APL/ITA-LRIR-DEC12-L-EN G.PDF) 31. IT IS ALSO IMPORTANT TO BEAR IN MIND THE FACT T HAT UNDER THE CANADIAN LAW THE DEFINITION OF 'INTERNATIONAL TRAN SACTION' UNLIKE AN EXHAUSTIVE DEFINITION UNDER SECTION 92B OF THE INDI AN INCOME-TAX ACT 1961 IS A VERY BRIEF BUT INCLUSIVE AND BROAD DEFINITION TO THE EFFECT THAT ''TRANSACTION' INCLUDES A SERIES OF TRA NSACTIONS AN ARRANGEMENT OR AN EVENT' [SEE SECTION 247(1) OF THE CANADIAN INCOME-TAX ACT 1985; HTTP://LAWS-LOIS.JUSTICE.GC.C A/ENG/ACTS/I- 3.3/PAGE-419.HTML#H-156] COUPLED WITH THE LEGAL POS ITION THAT ARM'S LENGTH ADJUSTMENT TO THE PRICES OF SUCH TRANS ACTION COME INTO PLAY 'WHERE A TAXPAYER OR A PARTNERSHIP AND A NON-RESIDENT PERSON WITH WHOM THE TAXPAYER OR THE PARTNERSHIP O R A MEMBER OF THE PARTNERSHIP DOES NOT DEAL AT ARM'S LENGTH' [SE E SECTION 247(2) IBID]. WHEN ONE TAKES INTO ACCOUNT THESE VAR IATIONS IN THE STATUTORY PROVISIONS IT WILL BECOME VERY OBVIOUS T HAT THE PROVISIONS OF THE INDIAN INCOME-TAX ACT 1961 AND T HE CANADIAN INCOME-TAX ACT 1985 ARE SO RADICALLY DIFFERENT THA T JUST BECAUSE A PARTICULAR TRANSACTION IS TO BE EXAMINED ON ARM'S L ENGTH PRINCIPLE IN CANADA CANNOT BE A REASON ENOUGH TO HOLD THAT IT MUST MEET ITA NO. 301/RJT/2015 & CO 57/RJT/2015 DCIT VS. M/S JYOTI AUTOMATION PVT LTD ASSESSMENT YEAR: 2010-11 PAGE 17 OF 36 THE SAME IN INDIA AS WELL. WHILE THE CANADIAN TRANS FER PRICING LEGISLATION AS INDEED THE TRANSFER PRICING LEGISLA TION IN MANY OTHER JURISDICTIONS DOES NOT PUT ANY FETTERS ON THE NATU RE OF TRANSACTIONS BETWEEN THE AES SO AS TO BE COVERED BY THE ARM'S L ENGTH PRICE ADJUSTMENT AND THEREFORE COVERS ALL TRANSACTIONS BETWEEN THE RELATED ENTERPRISES INDIAN TRANSFER PRICING LEGISL ATION COVERS ONLY SUCH TRANSACTIONS AS ARE 'IN THE NATURE OF PURCHASE SALE OR LEASE OF TANGIBLE OR INTANGIBLE PROPERTY OR PROVISION OF SERVICES OR LENDING OR BORROWING MONEY OR ANY OTHER TRANSACTIO N HAVING A BEARING ON THE PROFITS INCOME LOSSES OR ASSETS OF SUCH ENTERPRISES'. OUR TRANSFER PRICING PROVISIONS PERH APS BEING IN THE QUEST OF COMPREHENSIVE COVERAGE HAVE ENDED UP IN A LIMITED SCOPE OF THE TRANSACTIONS BEING COVERED BY THE ARM' S LENGTH PRICE ADJUSTMENTS FOR TRANSFER PRICING. IN ANY EVENT AS EMPHASIZED EARLIER AS WELL THE DECISION WAS IN THE CONTEXT OF THE DEDUCTION AND POST THIS DECISION A SPECIFIC AMENDMENT WAS I NTRODUCED IN THE CANADIAN TRANSFER PRICING LAW TO CLARIFY THE PO SITION THAT ALL CORPORATE GUARANTEES ISSUED BY THE ASSESSEE IN SUP PORT OF ITS SUBSIDIARIES ARE NOT NECESSARILY INTERNATIONAL TRA NSACTIONS. REVENUE THEREFORE DOES NOT DERIVE ANY ADVANTAGE F ROM THE TAX COURT OF CANADA'S DECISION IN THE CASE OF GE CAPITA L CANADA. THERE ARE MANY MORE ASPECTS WHICH MAKE THIS DECISIO N WHOLLY IRRELEVANT IN THE PRESENT CONTEXT BUT SUFFICE TO SA Y THAT RELEVANT LEGAL PROVISIONS AND CONTEXT BEING RADICALLY DIFFER ENT THE RELIANCE OF THIS DECISION MUST BE REJECTED FOR THIS SHORT RE ASON ALONE. 32. AS WE TAKE NOTE OF THE ABOVE LEGAL POSITION IN CANADA IT IS APPROPRIATE TO TAKE NOTE OF THE CONCEPT OF 'SHAREHO LDER ACTIVITIES' IN THE CONTEXT OF CORPORATE GUARANTEES WHICH PROVID ES CONCEPTUAL JUSTIFICATION FOR EXCLUSION OF CORPORATE GUARANTEES UNDER CERTAIN CONDITIONS FROM THE SCOPE OF TRANSFER PRICING ADJU STMENTS. TAKING NOTE OF THESE PROPOSED AMENDMENTS 'TRANSFER PRICIN G AND INTRA GROUP FINANCING BY BAKKER & LEVVY IBFD PUBLICATI ON (ISBN- 978-90-8722-153-9)' OBSERVES THAT 'PROPOSED SUB-SEC TION 247(7.1) OF THE ITA PROVIDES THAT THE TRANSFER PRIC ING RULES WILL NOT APPLY TO GUARANTEES PROVIDED BY CANADIAN PARENT COR PORATIONS IN RESPECT OF CERTAIN FINANCIAL COMMITMENTS OF THEIR C ANADIAN CONTROLLED FOREIGN AFFILIATES TO SUPPORT THE ACTIVE BUSINESS OPERATIONS OF THOSE AFFILIATES'. AS TO WHAT COULD B E CONCEPTUAL SUPPORT FOR SUCH AN EXCLUSION WE FIND INTERESTING REFERENCES IN A DISCUSSION PAPER ISSUED BY THE AUSTRALIAN TAX OFFIC ER IN JUNE 2008 AND TITLED AS 'INTRA-GROUP FINANCE GUARANTEES AND LOANS' (HTTP://WWW.TRANSFERPRICING.COM/PDF/AUSTRALIA_THIN% 20CAPITALISATI ON.PDF). THE FACT THAT THIS DISCUSSION PAPER DID NO T TRAVEL BEYOND THE STAGE OF THE DISCUSSION PAPER IS NOT REALLY REL EVANT FOR THE PRESENT PURPOSES BECAUSE ALL THAT WE ARE CONCERNED WITH RIGHT NOW IS UNDERSTANDING THE CONCEPTUAL BASIS ON WHICH CONTRARY TO POPULAR BUT APPARENTLY ERRONEOUS BELIEF THE ISSUAN CE OF CORPORATE GUARANTEES CAN INDEED BE KEPT OUTSIDE THE AMBIT OF SERVICES. THE RELEVANT EXTRACTS FROM THIS DOCUMENT ARE AS FOLLOWS : ITA NO. 301/RJT/2015 & CO 57/RJT/2015 DCIT VS. M/S JYOTI AUTOMATION PVT LTD ASSESSMENT YEAR: 2010-11 PAGE 18 OF 36 '102. AN INDEPENDENT COMPANY THAT IS UNABLE TO BORR OW THE FUNDS IT NEEDS ON A STAND-ALONE BASIS IS UNLIKELY T O BE IN A POSITION TO OBTAIN A GUARANTEE FROM AN INDEPENDENT PARTY TO SUPPORT THE BORROWINGS IT NEEDS. WHERE SUCH A GUARA NTEE IS GIVEN IT COMPENSATES FOR THE INADEQUACIES IN THE FI NANCIAL POSITION OF THE BORROWER; SPECIFICALLY THE FACT TH AT THE SUBSIDIARY DOES NOT HAVE ENOUGH SHAREHOLDERS' FUNDS . ..... 103. IT WOULD NOT BE EXPECTED THAT A COMPANY PAY FO R THE ACQUISITION OF THE EQUITY IT NEEDS FOR ITS FORMATIO N AND CONTINUED VIABILITY. EQUITY IS GENERALLY SUPPLIED B Y THE SHAREHOLDERS AT THEIR OWN COST AND RISK. 104. ACCORDINGLY TO THE EXTENT THAT A GUARANTEE SUB STITUTES FOR THE INVESTMENT OF THE EQUITY NEEDED TO ALLOW A SUBSIDIARY TO BE SELF-SUFFICIENT AND RAISE THE DEBT FUNDING IT NEEDS THE COSTS OF THE GUARANTEE (AND THE ASSOCIATED RISK) SH OULD REMAIN WITH THE PARENT COMPANY PROVIDING THE GUARAN TEE.' 33. ON A CONCEPTUAL NOTE THUS THERE IS A VALID SC HOOL OF THOUGHT THAT THE CORPORATE GUARANTEES CAN INDEED BE A MODE OF OWNERSHIP CONTRIBUTION PARTICULARLY WHEN AS IS OFTEN THE CA SE 'WHERE SUCH A GUARANTEE IS GIVEN IT COMPENSATES FOR THE INADEQUAC IES IN THE FINANCIAL POSITION OF THE BORROWER; SPECIFICALLY T HE FACT THAT THE SUBSIDIARY DOES NOT HAVE ENOUGH SHAREHOLDERS' FUNDS '. THERE CAN BE NUMBER OF REASONS INCLUDING REGULATORY ISSUES A ND MARKET CONDITIONS IN THE RELATED JURISDICTIONS IN WHICH S UCH A CONTRIBUTION BY WAY OF A GUARANTEE WOULD JUSTIFY TO BE A MORE A PPROPRIATE AND PREFERRED MODE OF CONTRIBUTION VIS-A-VIS EQUITY CON TRIBUTION. IT IS SIGNIFICANT IN THIS CONTEXT THAT THE CASE OF THE ASSESSEE HAS ALL ALONG BEEN AS NOTED IN THE ASSESSMENT ORDER ITSELF THAT 'SAID GUARANTEES WERE IN THE FORM OF CORPORATE GUARANTEES / QUASI- CAPITAL AND NOT IN THE NATURE OF ANY SERVICES'. IN OTHER WORDS THESE GUARANTEES WERE SPECIFICALLY STATED TO BE IN THE NATURE OF SHAREHOLDER ACTIVITIES. THE ASSESSEE'S CLAIM OF THE GUARANTEES BEING IN THE NATURE OF QUASI-CAPITAL AND THUS BEIN G IN THE NATURE OF A SHAREHOLDER'S ACTIVITY IS NOT REJECTED EITHER. T HE CONCEPT OF ISSUANCE OF CORPORATE GUARANTEES AS A SHAREHOLDER A CTIVITY IS NOT ALIEN TO THE TRANSFER PRICING LITERATURE IN GENERAL . ON THE CONTRARY IT IS RECOGNIZED IN INTERNATIONAL TRANSFER PRICING LIT ERATURE AS ALSO IN THE OFFICIAL DOCUMENTATION AND LEGISLATION OF SEVER AL TRANSFER PRICING JURISDICTIONS. THE 'OECD TRANSFER PRICING G UIDELINES FOR MULTINATIONAL ENTERPRISES AND TAX ADMINISTRATIONS' ITSELF RECOGNIZES THE DISTINCTION BETWEEN A SHAREHOLDER AC TIVITY AND A PROVISION FOR SERVICES WHEN CONTRASTING THE SHARE HOLDER ACTIVITY WITH BROADER TERM 'STEWARDSHIP ACTIVITY' AND THUS H IGHLIGHTING NARROW SCOPE OF SHAREHOLDER ACTIVITY IT STATES THA T 'STEWARDSHIP ACTIVITIES COVERED A RANGE OF ACTIVITIES BY A SHARE HOLDER THAT MAY INCLUDE PROVISION FOR SERVICES TO OTHER GROUP MEMBE RS FOR EXAMPLE SERVICES THAT WOULD BE PROVIDED BY A COORDI NATING CENTRE'. IT PROCEEDED TO ADD IN THE IMMEDIATELY FO LLOWING SENTENCE AT PAGE 207 OF 2010 GUIDELINES THAT 'THESE LATTER TYPE OF NON- ITA NO. 301/RJT/2015 & CO 57/RJT/2015 DCIT VS. M/S JYOTI AUTOMATION PVT LTD ASSESSMENT YEAR: 2010-11 PAGE 19 OF 36 SHAREHOLDER ACTIVITIES COULD INCLUDE DETAILED PLANN ING SERVICES FOR PARTICULAR OPERATIONS MANAGEMENT OR TECHNICAL ADVI CE (TROUBLE SHOOTING) OR IN SOME CASES ASSISTANCE IN DAY-TO-DAY MANAGEMENT'. THE SHAREHOLDER ACTIVITIES ARE THUS SE EN AS CONCEPTUALLY DISTINCT FROM THE PROVISION OF SERVICE S. THE ISSUANCE OF CORPORATE GUARANTEE AS LONG AS IT IS IN THE NAT URE OF SHAREHOLDER ACTIVITY CAN NOT THEREFORE AMOUNT TO A 'PROVISION FOR SERVICES'. 34. UNDOUBTEDLY PIONEERING WORK DONE BY THE OECD IN THE FIELD OF INTERNATIONAL TAXATION HAS BEEN JUDICIALLY RECO GNIZED WORLDWIDE BY VARIOUS JUDICIAL FORUMS INCLUDING MOST NOTABLY BY HON'BLE ANDHRA PRADESH HIGH COURT IN THE CASE OF CIT V. VIS AKHAPATNAM PORT TRUST [1983] 144 ITR 146/15 TAXMAN 72 (AP). TH EIR LORDSHIPS ALSO REFERRED TO LORD RADCLIFFE'S OBSERVA TIONS IN OSTIME V. AUSTRALIAN MUTUAL PROVIDENT SOCIETY [1960] 39 IT R 210 (HL) WHICH HAS DESCRIBED THE LANGUAGE EMPLOYED IN THE MO DELS DEVELOPED BY THE OECD AS THE 'INTERNATIONAL TAX LAN GUAGE'. THE WORK DONE BY OECD IN THE FIELD OF TRANSFER PRICING IS NO LESS SIGNIFICANT. NO MATTER WHICH PART OF THE WORLD WE L IVE IN AND IRRESPECTIVE OF WHETHER OR NOT THAT TAX JURISDICTIO N IS AN OECD MEMBER JURISDICTION THE IMMENSE CONTRIBUTION OF TH E OECD IN THE FIELD OF THE TRANSFER PRICING AS WELL IS ADMIRED A ND RESPECTED. HOWEVER THE RELEVANCE OF THIS WORK SO FAR AS INTE RPRETATION TO TRANSFER PRICING LEGISLATION IS CONCERNED MUST REM AIN CONFINED TO THE AREAS WHICH HAVE REMAINED INTACT FROM LEGISLATI VE OR JUDICIAL GUIDANCE. THERE IS NO SCOPE FOR PARALLEL OR CONFLIC TING GUIDANCE BY SUCH FORUMS. LEGISLATION IS AN EXCLUSIVE DOMAIN OF THE SOVEREIGN AND THEREFORE AS LONG AS AN AREA IS ADEQUATELY CO VERED BY THE WORK OF LEGISLATION THINGS LIKE GUIDANCE OF THE OE CD OR FOR THAT PURPOSE ANY OTHER MULTILATERAL FORUM ARE NOT DECIS IVE. WHILE WE ARE ALIVE TO THE SCHOOL OF THOUGHT THAT WHEN THE DO MESTIC TRANSFER PRICING REGULATIONS DO NOT PROVIDE ANY GUIDELINES IT MAY HAVE TO BE DECIDED HAVING REGARD TO INTERNATIONAL BEST PRAC TICES WE DO NOT QUITE AGREE WITH IT INASMUCH AS IN OUR CONSIDE RED VIEW REVENUE CANNOT SEEK TO WIDEN THE NET OF TRANSFER PR ICING LEGISLATION BY TAKING REFUGE OF THE BEST PRACTICES RECOGNIZED BY THE OECD WORK. 35. WHILE DEALING WITH 'SPECIAL CONSIDERATION FOR I NTRA-GROUP SERVICES' THE 'OECD TRANSFER PRICING GUIDELINES FO R MULTINATIONAL ENTERPRISES AND TAX ADMINISTRATIONS' HAS NOTED THAT THERE ARE TWO FUNDAMENTAL ISSUES WITH RESPECT TO THE INTRA-GROUP SERVICES- FIRST WHETHER INTRA-GROUP SERVICES HAVE INDEED BEEN PROVI DED AND SECOND- IF THE ANSWER TO THE FIRST QUESTION IS IN P OSITIVE THAT CHARGE TO THESE SERVICES SHOULD BE AT AN ARM'S LENG TH PRICE. DEALING WITH THE FIRST QUESTION WHICH IS RELEVANT FOR THE PRESENT PURPOSES THESE GUIDELINES (2010 VERSION) STATE AS FOLLOWS: '7.6 UNDER THE ARM'S LENGTH PRINCIPLE THE QUESTION WHETHER AN INTRA-GROUP SERVICE HAS BEEN RENDERED WHEN AN AC TIVITY IS PERFORMED FOR ONE OR MORE GROUP MEMBERS BY ANOTHER GROUP ITA NO. 301/RJT/2015 & CO 57/RJT/2015 DCIT VS. M/S JYOTI AUTOMATION PVT LTD ASSESSMENT YEAR: 2010-11 PAGE 20 OF 36 MEMBER SHOULD DEPEND ON WHETHER THE ACTIVITY PROVID ES A RESPECTIVE GROUP MEMBER WITH ECONOMIC OR COMMERCIAL VALUE TO ENHANCE ITS COMMERCIAL POSITION. THIS CAN BE DETERMINED BY CONSIDERING WHETHER AN INDEPENDENT ENTERPRISE IN COMPARABLE CIRCUMSTANCES WOULD HAVE B EEN WILLING TO PAY FOR THE ACTIVITY IF PERFORMED FOR IT BY AN INDEPENDENT ENTERPRISE OR WOULD HAVE PERFORMED THE ACTIVITY IN-HOUSE FOR ITSELF. IF THE ACTIVITY IS NOT ONE FOR WHICH THE INDEPENDENT ENTERPRISE WOULD HAVE BEEN WILLING TO P AY OR PERFORM FOR ITSELF THE ACTIVITY ORDINARILY SHOULD NOT BE CONSIDERED AS AN INTRA-GROUP SERVICE UNDER THE ARM' S LENGTH PRINCIPLE. 7.7 THE ANALYSIS DESCRIBED ABOVE QUITE CLEARLY DEPE NDS ON THE ACTUAL FACTS AND CIRCUMSTANCES AND IT IS NOT P OSSIBLE IN THE ABSTRACT TO SET FORTH CATEGORICALLY THE ACTIVIT IES THAT DO OR DO NOT CONSTITUTE THE RENDERING OF INTRA-GROUP SERV ICES. HOWEVER SOME GUIDANCE MAY BE GIVEN TO ELUCIDATE HO W THE ANALYSIS WOULD BE APPLIED FOR SOME COMMON TYPES OF ACTIVITIES UNDERTAKEN IN MNE GROUPS. 7.8 SOME INTRA-GROUP SERVICES ARE PERFORMED BY ONE MEMBER OF AN MNE GROUP TO MEET AN IDENTIFIED NEED O F ONE OR MORE SPECIFIC MEMBERS OF THE GROUP. IN SUCH A CA SE IT IS RELATIVELY STRAIGHTFORWARD TO DETERMINE WHETHER A S ERVICE HAS BEEN PROVIDED. ORDINARILY AN INDEPENDENT ENTERPRISE IN COMPARABLE CIRCUMSTANCES WOULD HAVE SATISFIED THE IDENTIFIED NEED EITHER BY PERFORMING THE ACTIVITY I N-HOUSE OR BY HAVING THE ACTIVITY PERFORMED BY A THIRD PARTY. THUS IN SUCH A CASE AN INTRA-GROUP SERVICE ORDINARILY WOUL D BE FOUND TO EXIST. FOR EXAMPLE AN INTRA-GROUP SERVICE WOULD NORMALLY BE FOUND WHERE AN ASSOCIATED ENTERPRISE RE PAIRS EQUIPMENT USED IN MANUFACTURING BY ANOTHER MEMBER O F THE MNE GROUP. 7.9 A MORE COMPLEX ANALYSIS IS NECESSARY WHERE AN ASSOCIATED ENTERPRISE UNDERTAKES ACTIVITIES THAT RE LATE TO MORE THAN ONE MEMBER OF THE GROUP OR TO THE GROUP A S A WHOLE. IN A NARROW RANGE OF SUCH CASES AN INTRA-GR OUP ACTIVITY MAY BE PERFORMED RELATING TO GROUP MEMBERS EVEN THOUGH THOSE GROUP MEMBERS DO NOT NEED THE ACTIVITY (AND WOULD NOT BE WILLING TO PAY FOR IT WERE THEY INDEPE NDENT ENTERPRISES). SUCH AN ACTIVITY WOULD BE ONE THAT A GROUP MEMBER (USUALLY THE PARENT COMPANY OR A REGIONAL HO LDING COMPANY) PERFORMS SOLELY BECAUSE OF ITS OWNERSHIP I NTEREST IN ONE OR MORE OTHER GROUP MEMBERS I.E. IN ITS CAP ACITY AS SHAREHOLDER. THIS TYPE OF ACTIVITY WOULD NOT JUSTIF Y A CHARGE TO THE RECIPIENT COMPANIES. IT MAY BE REFERRED TO A S A 'SHAREHOLDER ACTIVITY' DISTINGUISHABLE FROM THE BR OADER TERM 'STEWARDSHIP ACTIVITY' USED IN THE 1979 REPORT. STE WARDSHIP ACTIVITIES COVERED A RANGE OF ACTIVITIES BY A SHARE HOLDER THAT MAY INCLUDE THE PROVISION OF SERVICES TO OTHER GROU P ITA NO. 301/RJT/2015 & CO 57/RJT/2015 DCIT VS. M/S JYOTI AUTOMATION PVT LTD ASSESSMENT YEAR: 2010-11 PAGE 21 OF 36 MEMBERS FOR EXAMPLE SERVICES THAT WOULD BE PROVIDE D BY A COORDINATING CENTRE. THESE LATTER TYPES OF NON-SHAR EHOLDER ACTIVITIES COULD INCLUDE DETAILED PLANNING SERVICES FOR PARTICULAR OPERATIONS EMERGENCY MANAGEMENT OR TECH NICAL ADVICE (TROUBLE SHOOTING) OR IN SOME CASES ASSISTA NCE IN DAY-TO-DAY MANAGEMENT. 7.10 THE FOLLOWING EXAMPLES (WHICH WERE DESCRIBED I N THE 1984 REPORT) WILL CONSTITUTE SHAREHOLDER ACTIVITIES UNDER THE STANDARD SET FORTH IN PARAGRAPH 7.6: (A) COSTS OF ACTIVITIES RELATING TO THE JURIDICAL STRUCTURE OF THE PARENT COMPANY ITSELF SUCH AS MEETINGS OF SHAR EHOLDERS OF THE PARENT ISSUING OF SHARES IN THE PARENT COMP ANY AND COSTS OF THE SUPERVISORY BOARD; (B) COSTS RELATING TO REPORTING REQUIREMENTS OF T HE PARENT COMPANY INCLUDING THE CONSOLIDATION OF REPORTS; (C) COSTS OF RAISING FUNDS FOR THE ACQUISITION OF ITS PARTICIPATIONS. IN CONTRAST IF FOR EXAMPLE A PARENT COMPANY RAISES FUNDS ON BEHALF OF ANOTHER GROUP MEMBER WHICH USES THEM TO A CQUIRE A NEW COMPANY THE PARENT COMPANY WOULD GENERALLY B E REGARDED AS PROVIDING A SERVICE TO THE GROUP MEMBER . THE 1984 REPORT ALSO MENTIONED 'COSTS OF MANAGERIAL AND CONTROL (MONITORING) ACTIVITIES RELATED TO THE MANA GEMENT AND PROTECTION OF THE INVESTMENT AS SUCH IN PARTICI PATIONS'. WHETHER THESE ACTIVITIES FALL WITHIN THE DEFINITION OF SHAREHOLDER ACTIVITIES AS DEFINED IN THESE GUIDELIN ES WOULD BE DETERMINED ACCORDING TO WHETHER UNDER COMPARABLE FACTS AND CIRCUMSTANCES THE ACTIVITY IS ONE THAT AN INDEP ENDENT ENTERPRISE WOULD HAVE BEEN WILLING TO PAY FOR OR TO PERFORM FOR ITSELF.' (EMPHASIS SUPPLIED) 36. WE HAVE NOTICED THAT THE 'OECD TRANSFER PRICING GUIDELINES FOR MULTINATIONAL ENTERPRISES AND TAX ADMINISTRATIO NS' SPECIFICALLY RECOGNIZES THAT AN ACTIVITY IN THE NATURE OF SHAREH OLDER ACTIVITY WHICH IS SOLELY BECAUSE OF OWNERSHIP INTEREST IN ON E OR MORE OF THE GROUP MEMBERS I.E. IN THE CAPACITY AS SHAREHOL DER 'WOULD NOT JUSTIFY A CHARGE TO THE RECIPIENT COMPANIES'. IT IS THUS CLEAR THAT A SHAREHOLDER ACTIVITY IN ISSUANCE OF CORPORATE GUAR ANTEES IS TAKEN OUT OF AMBIT OF THE GROUP SERVICES. CLEARLY THEREF ORE AS LONG AS A GUARANTEE IS ON ACCOUNT OF WHAT CAN BE TERMED AS ' SHAREHOLDER'S ACTIVITIES' EVEN ON THE FIRST PRINCIPLES IT IS OU TSIDE THE AMBIT OF TRANSFER PRICING ADJUSTMENT IN RESPECT OF ARM'S LEN GTH PRICE. IT IS ESSENTIAL TO APPRECIATE AT THIS STAGE THE DISTINC TION IN A SERVICE AND A BENEFIT. ONE MAY BE BENEFITED EVEN WHEN NO SE RVICES ARE RENDERED AND THEREFORE IN MANY A SITUATION IT'S A 'BENEFIT TEST' WHICH IS CRUCIAL FOR TRANSFER PRICING LEGISLATION SUCH AS IN US REGULATIONS 1.482-9(1)(3)(I) WHICH DEFINES 'BENEFIT ' FORM A US TRANSFER PRICING PERSPECTIVE AS 'AN ACTIVITY IS CO NSIDERED TO BE PROVIDED A BENEFIT TO THE RECIPIENT IF THE ACTIVITY DIRECTLY RESULTS IN A REASONABLY IDENTIFIABLE INCREMENT OF ECONOMIC OR CO MMERCIAL VALUE ITA NO. 301/RJT/2015 & CO 57/RJT/2015 DCIT VS. M/S JYOTI AUTOMATION PVT LTD ASSESSMENT YEAR: 2010-11 PAGE 22 OF 36 THAT ENHANCES THE RECIPIENT'S COMMERCIAL POSITION OR THAT MAY BE REASONABLY ANTICIPATED TO DO SO'. THE EXPRESSION 'A CTIVITY' IN TURN IS DEFINED AS 'INCLUDING THE PERFORMANCE OF FUNCTI ONS; THE ASSUMPTION OF RISKS; THE USE BY A RENDERED OF TANGI BLE OR INTANGIBLE PROPERTY OR OTHER RESOURCES CAPABILITIES OR KNOWLEDGE (INCLUDING KNOWLEDGE OF AND ABILITY TO TAKE ADVANTA GE OF A PARTICULARLY ADVANTAGEOUS SITUATION OR CIRCUMSTANCE S); AND MAKING AVAILABLE TO THE RECIPIENT ANY PROPERTY OR OTHER RE SOURCES OF THE RENDERED' [REGULATION 1.482-9(1)(2)]. THE ISSUANCE OF GUARANTEES IS NOT WITHIN THE AMBIT OF TRANSFER PRICING IN UNIT ED STATES BECAUSE IT IS A SERVICE BUT BECAUSE IT IS COVERED BY THE SP ECIFIC DEFINITION DISCUSSED ABOVE. AS A MATTER OF FACT DAVID S MILLE R IN A PAPER TITLED 'FEDERAL INCOME TAX CONSEQUENCES OF GUARANTE ES; A COMPREHENSIVE FRAMEWORK FOR ANALYSIS' PUBLISHED IN THE 'THE AMERICAN LAWYER VOL. 48 NO. 1 (FALL 1994) PP. 103 -165 (HTTP://WWW.JSTOR.ORG/STABLE/20771688) HAS STATED THAT A GUARANTEE IS NOT A SERVICE. THE FOLLOWING OBSERVATI ONS AT PAGES 114 ARE IMPORTANT: THE POSITION THAT GUARANTEES ARE SERVICES HAS BEEN DISCREDITED BY THE COURTS WITH GOOD REASON38. GUARA NTEE FEES DO NOT REPRESENT PAYMENTS FOR SERVICES ANY MOR E THAN PAYMENTS WITH RESPECT TO OTHER FINANCIAL INSTRUMENT S CONSTITUTE PAYMENT FOR SERVICES39. A GUARANTOR DOES NOT ARRANGE FINANCING FOR THE DEBTOR BUT MERELY EXECUT ES A FINANCIAL INSTRUMENT IN ITS FAVOUR. 38 SEE. E.G. CENTEL COMMUNICATIONS CO. V. COMMISSI ONER 92 T.C. 612 632 (1989) AFF D 920 F2D 1335 (7TH C IR. 1990); BANK OF AM. V. UNITED STATES 680 F.2D 142 150 (CL. CT. 1982). THE SERVICE'S CURRENT POSITION ON THE CHARACTERIZATION OF GUARANTEE FEES AS PAYMENT FOR S ERVICES UNDER SECTION 482 IS INCONSISTENT WITH ITS TREATMEN T OF GUARANTEE FEES UNDER OTHER PROVISIONS. SEE P.L.R. 9 410008 (DEC. 13 1993). 39 BUT CF FEDERAL NAT'L MORTGAGE ASS'N V. COMMISSIO NER 100 T.C. 541 579 (1993) (FANNIE MAE PROVIDED SERVI CES BY BUYING MORTGAGES). 37. WE ARE IN AGREEMENT WITH THESE VIEWS. THERE CAN THUS BE ACTIVITIES WHICH BENEFIT THE GROUP ENTITIES BUT THE SE ACTIVITIES NEED NOT NECESSARILY BE 'PROVISION FOR SERVICES'. THE FA CT THAT THE OECD CONSIDERS SUCH ACTIVITIES IN THE SERVICES SEGMENT D OES NOT ALTER THE CHARACTER OF THE ACTIVITIES. WHILE THE GROUP EN TITY IS THUS INDEED BENEFITED BY THE SHAREHOLDER ACTIVITIES THE SE ACTIVITIES DO NOT NECESSARILY CONSTITUTE SERVICES. THERE IS NO SU CH EXPRESS REFERENCE TO THE BENEFIT TEST OR TO THE CONCEPT OF BENEFIT ATTACHED TO THE ACTIVITY IN RELEVANT DEFINITION CLAUSE OF ' INTERNATIONAL TRANSACTION' UNDER THE DOMESTIC TRANSFER PRICING LE GISLATION. AS WE TAKE NOTE OF THESE THINGS IT IS ALSO ESSENTIAL TO TAKE NOTE OF THE LEGAL POSITION IN INDIA IN THIS REGARD. NO MATTER HOW DESIRABLE IS IT ITA NO. 301/RJT/2015 & CO 57/RJT/2015 DCIT VS. M/S JYOTI AUTOMATION PVT LTD ASSESSMENT YEAR: 2010-11 PAGE 23 OF 36 TO READ SUCH A TEST IN THE DEFINITION OF THE INTERN ATIONAL TRANSACTION' UNDER OUR DOMESTIC TRANSFER PRICING LEGISLATION AS IS THE SETTLED LEGAL POSITION IT IS NOT OPEN TO US TO INFER THE S AME. HON'BLE SUPREME COURT IN THE CASE OF SMT. TARULATA SHYAM V . CIT [1977] 108 ITR 345 (SC) TOOK NOTE OF THE SITUATION BEFOR E THEIR LORDSHIPS IN THESE WORDS: 'WE HAVE GIVEN ANXIOUS TH OUGHTS TO THE PERSUASIVE ARGUMENTS OF MR SHARMA. HIS ARGUMENTS I F ACCEPTED WILL CERTAINLY SOFTEN THE RIGOUR OF THIS EXTREMELY DRASTIC PROVISION AND BRING IT MORE IN CONFORMITY WITH LOGIC AND EQUI TY'. HOWEVER THEIR LORDSHIPS DECLINED TO DO SO ON THE GROUND THA T 'THERE IS NO SCOPE FOR IMPORTING INTO THE STATUTE THE WORDS WHIC H ARE NOT THERE. SUCH IMPORTATION WOULD BE NOT TO CONSTRUE BUT TO AM END THE STATUTE'. THEIR LORDSHIPS NOTED THAT 'EVEN IF THERE BE CASUS OMISSUS THE DEFECT CAN BE REMEDIED ONLY BY LEGISLA TION AND NOT BY JUDICIAL INTERPRETATION'. THE BENEFIT TEST WHICH I S SET OUT IN THE OECD GUIDANCE AND WHICH FINDS ITS PLACE IN THE INTE RNATIONAL BEST PRACTICES DOES NOT FIND ITS PLACE IN THE MAIN DEFI NITION OF INTERNATIONAL TRANSACTION EVEN THOUGH THERE IS A R EFERENCE TO THE EXPRESSION 'BENEFIT' IN THE CONTEXT OF COST OR EXPE NSE SHARING ARRANGEMENTS BUT THAT IS A DIFFERENT ASPECT OF THE MATTER ALTOGETHER. IN THE ABSENCE OF BENEFIT TEST BEING ME NTIONED IN THE DEFINITION FOR THE PRESENT PURPOSES WE CANNOT INFE R THE SAME. 38. ONE MORE THING WHICH IS CLEARLY DISCERNABLE FRO M THE ABOVE DISCUSSIONS IS THAT THE TESTS RECOGNIZED BY THESE G UIDELINES ARE INTERWOVEN TWIN TESTS OF BENEFIT AND ARM'S LENGTH. BENEFIT TEST IMPLIES THE RECIPIENT GROUP MEMBER SHOULD GET 'ECON OMIC OR COMMERCIAL VALUE TO ENHANCE ITS COMMERCIAL POSITION '. THE BENEFIT TEST IS INTERLINKED WITH THE AN ARM'S LENGTH TEST I N THE SENSE THAT IT SEEKS AN ANSWER TO THE QUESTION WHETHER UNDER A SIM ILAR SITUATION AN INDEPENDENT ENTERPRISE WOULD HAVE BEEN WILLING T O PAY FOR THE ACTIVITY CONCERNED OR WOULD HAVE PERFORMED THE ACT IVITY IN-HOUSE FOR ITSELF. SO FAR AS THE BENEFIT TEST IS CONCERNED AS WE HAVE NOTED EARLIER IT IS ALIEN TO THE DEFINITION OF INTERNATI ONAL TRANSACTION' UNDER THE INDIAN TRANSFER PRICING LEGISLATION. SO F AR AS ARM'S LENGTH TEST IS CONCERNED IT PRESUPPOSES THAT SUCH A TRANS ACTION IS POSSIBLE IN ARM'S LENGTH SITUATION. HOWEVER IN A S ITUATION IN WHICH THE SUBSIDIARY DOES NOT HAVE ADEQUATE FINANCIAL STA NDING OF ITS OWN AND IS INADEQUATELY CAPITALIZED NONE WILL GUAR ANTEE FINANCIAL OBLIGATIONS OF SUCH A SUBSIDIARY. 39. THE ISSUANCE OF FINANCIAL GUARANTEE IN FAVOUR O F AN ENTITY WHICH DOES NOT HAVE ADEQUATE STRENGTH OF ITS OWN TO MEET SUCH OBLIGATIONS WILL RARELY BE DONE. THE VERY COMPARIS ON BETWEEN THE CONSIDERATION FOR WHICH BANKS ISSUE FINANCIAL GUARA NTEES ON BEHALF OF ITS CLIENTS WITH THE CONSIDERATION FOR WHICH THE CORPORATES ISSUE GUARANTEES FOR THEIR SUBSIDIARIES IS ILL-CONCEIVED BECAUSE WHILE BANKS SEEK TO BE COMPENSATED EVEN FOR THE SECURED GUARANTEES FOR THE FINANCIAL RISK OF LIQUIDATING THE UNDERLYIN G SECURITIES AND MEETING THE FINANCIAL COMMITMENTS UNDER THE GUARANT EE THE GUARANTEES ISSUED BY THE CORPORATES FOR THEIR SUBSI DIARIES ARE RARELY IF AT ALL BACKED BY ANY UNDERLYING SECURIT Y AND THE RISK IS ITA NO. 301/RJT/2015 & CO 57/RJT/2015 DCIT VS. M/S JYOTI AUTOMATION PVT LTD ASSESSMENT YEAR: 2010-11 PAGE 24 OF 36 ENTIRELY ENTREPRENEURIAL IN THE SENSE THAT IT SEEKS TO MAXIMIZE PROFITABILITY THROUGH AND BY THE SUBSIDIARIES. IT I S INHERENTLY IMPOSSIBLE TO DECIDE ARM'S LENGTH PRICE OF A TRANSA CTION WHICH CANNOT TAKE PLACE IN ARM'S LENGTH SITUATION. THE MO TIVATION OR TRIGGER FOR ISSUANCE OF SUCH GUARANTEES IS NOT THE KIND FOR CONSIDERATION FOR WHICH A BANKER FOR EXAMPLE ISSU E THE GUARANTEES BUT IT IS MAXIMIZATION OF GAINS FOR THE RECIPIENT ENTITY AND THUS THE MNE GROUP AS A WHOLE. IN GENERAL THUS THE CONSIDERATION FOR ISSUANCE OF CORPORATE GUARANTEES ARE OF A DIFFERENT CHARACTER ALTOGETHER. 40. AT THIS STAGE IT WOULD APPROPRIATE TO ANALYZE THE BUSINESS MODEL OF BANK GUARANTEES WITH WHICH CORPORATE GUAR ANTEES ARE SOMETIMES COMPARED IN THE CONTEXT OF BENCHMARKING THE ARM'S LENGTH PRICE OF CORPORATE GUARANTEES. A BANK GUARAN TEE IS A SURETY THAT THAT THE BANK OR THE FINANCIAL INSTITUTION IS SUING THE GUARANTEE WILL PAY OFF THE DEBTS AND LIABILITIES I NCURRED BY AN INDIVIDUAL OR A BUSINESS ENTITY IN CASE THEY ARE UN ABLE TO DO SO. BY PROVIDING A GUARANTEE A BANK OFFERS TO HONOUR RELA TED PAYMENT TO THE CREDITORS UPON RECEIVING A REQUEST. THIS REQUIR ES THAT BANK HAS TO BE VERY SURE OF THE BUSINESS OR INDIVIDUAL TO WH OM THE BANK GUARANTEE IS BEING ISSUED. SO BANKS RUN RISK ASSES SMENTS TO ENSURE THAT THE GUARANTEED SUM CAN BE RETRIEVED BAC K FROM THE BUSINESS. THIS MAY REQUIRE THE BUSINESS TO FURNISH A SECURITY IN THE SHAPE OF CASH OR CAPITAL ASSETS. ANY ENTITY THA T CAN PASS THE RISK ASSESSMENT AND PROVIDE SECURITY MAY OBTAIN A B ANK GUARANTEE. THE CONSIDERATION FOR THE ISSUANCE OF BA NK GUARANTEE SO FAR AS A BANKER IS CONCERNED IS THIS. WHEN THE CLIENT IS NOT ABLE TO HONOUR THE FINANCIAL COMMITMENTS AND WHEN CLIENT IS NOT ABLE TO MEET HIS FINANCIAL COMMITMENTS AND THE BANK IS CALL ED UPON TO MAKE THE PAYMENTS THE BANK WILL SEEK A COMPENSATIO N FOR THE ACTION OF ISSUING THE BANK GUARANTEE AND FOR THE R ISK IT RUNS INHERENT IN THE PROCESS OF MAKING THE PAYMENT FIRST AND REALIZING IT FROM THE UNDERLYING SECURITY AND THE CLIENT. EVEN W HEN SUCH GUARANTEES ARE BACKED BY ONE HUNDRED PER CENT DEPOS ITS THE BANK CHARGES A GUARANTEE FEES. IN A SITUATION IN WH ICH THERE IS NO UNDERLYING ASSETS WHICH CAN BE REALIZED BY THE BANK OR THERE ARE NO DEPOSITS WITH THE BANK WHICH CAN BE APPROPRIATED FOR PAYMENT OF GUARANTEE OBLIGATIONS THE BANKS WILL RARELY IF AT ALL ISSUE THE GUARANTEES. OF COURSE WHEN A CLIENT IS SO WELL PLA CED IN HIS CREDIT RATING THAT BANKS CAN ISSUE HIM CLEAN AND UNSECURED GUARANTEES HE GETS NO FURTHER ECONOMIC VALUE BY A CORPORATE GU ARANTEE EITHER. LET US NOW COMPARE THIS KIND OF A GUARANTEE WITH A CORPORATE GUARANTEE. THE GUARANTEES ARE ISSUED WITH OUT ANY SECURITY OR UNDERLYING ASSETS. WHEN THESE GUARANTEE S ARE INVOKED THERE IS NO OCCASION FOR THE GUARANTOR TO SEEK RECOURSE TO ANY ASSETS OF THE GUARANTEED ENTITY FOR RECOVERING PAYMENT OF DEFAULTED GUARANTEES. THE GUARANTEES ARE NOT BASED ON THE CREDIT ASSESSMENT OF THE ENTITY IN RESPECT OF WHICH THE G UARANTEES ARE ISSUED BUT ARE BASED ON THE BUSINESS NEEDS OF THE ENTITY IN QUESTION. EVEN IN A SITUATION IN WHICH THE GROUP EN TITY IS SURE THAT THE BENEFICIARY OF GUARANTEE HAS NO FINANCIAL MEANS TO REIMBURSE ITA NO. 301/RJT/2015 & CO 57/RJT/2015 DCIT VS. M/S JYOTI AUTOMATION PVT LTD ASSESSMENT YEAR: 2010-11 PAGE 25 OF 36 IT FOR THE DEFAULTED GUARANTEE AMOUNTS WHEN INVOKE D THE GROUP ENTITY WILL ISSUE THE GUARANTEE NEVERTHELESS BECAUS E THESE ARE COMPULSIONS OF HIS GROUP SYNERGY RATHER THAN THE AS SURANCE THAT HIS FUTURE OBLIGATIONS WILL BE MET. WE SEE NO MEETI NG GROUND IN THESE TWO TYPES OF GUARANTEES SO FAR THEIR ECONOMI C TRIGGERS AND BUSINESS CONSIDERATIONS ARE CONCERNED AND JUST BEC AUSE THESE INSTRUMENTS SHARE A COMMON SURNAME I.E. 'GUARANTEE ' THESE INSTRUMENTS CANNOT BE SAID TO BE BELONG TO THE SAME ECONOMIC GENUS. OF COURSE THERE CAN BE SITUATIONS IN WHICH THERE MAY BE ECONOMIC SIMILARITIES IN THIS RESPECT MAY BE PRES ENT BUT THESE ARE MORE OF AN EXCEPTION THAN THE RULE. IN GENERAL THEREFORE BANK GUARANTEES ARE NOT COMPARABLE WITH CORPORATE GUARAN TEES. 41. AS EVIDENT FROM THE OECD OBSERVATION TO THE EFF ECT 'IN CONTRAST IF FOR EXAMPLE A PARENT COMPANY RAISES FU NDS ON BEHALF OF ANOTHER GROUP MEMBER WHICH USES THEM TO ACQUIRE A NEW COMPANY THE PARENT COMPANY WOULD GENERALLY BE REGA RDED AS PROVIDING A SERVICE TO THE GROUP MEMBER' IT IS ALS O TO BE CLEAR THAT WHEN THE CORPORATE GUARANTEES ARE ISSUED FOR THE PU RPOSE OF SUBSIDIARIES RAISING FUNDS FOR ACQUISITIONS BY SUCH SUBSIDIARIES THESE GUARANTEES WILL BE DEEMED TO BE SERVICES TO T HE SUBSIDIARIES AND AS A COROLLARY THERETO WHEN COR PORATE GUARANTEES ARE ISSUED FOR THE SUBSIDIARIES TO RAISE FUNDS FOR THEIR OWN NEEDS THE CORPORATE GUARANTEES ARE TO BE TREAT ED AS SHAREHOLDER ACTIVITY. THE USE OF BORROWED FUNDS FOR OWN USE IS A REASONABLE PRESUMPTION AS IT IS A MATTER OF COURSE RATHER THAN EXCEPTION. THERE HAS TO BE SOMETHING ON RECORD TO I NDICATE OR SUGGEST THAT THE FUNDS RAISED BY THE SUBSIDIARY WI TH THE HELP OF THE GUARANTEE GIVEN BY THE ASSESSEE ARE NOT FOR IT S OWN BUSINESS PURPOSES. AS A PLAIN LOOK AT THE DETAILS OF CORPORA TE GUARANTEES WOULD SHOW THESE GUARANTEES WERE ISSUED TO VARIOUS BANKS IN RESPECT OF THE CREDIT FACILITIES AVAILED BY THE SUB SIDIARIES FROM THESE BANKS. THE GUARANTEES WERE PRIMA FACIE IN THE NATURE OF SHAREHOLDER ACTIVITY AS IT WAS TO PROVIDE OR COMPE NSATE FOR LACK OF CORE STRENGTH FOR RAISING THE FINANCES FROM BAN KS. NO MATERIAL INDICATING TO THE CONTRARY IS BROUGHT ON RECORD IN THIS CASE. GOING BY THE OECD GUIDANCE ALSO IT IS NOT REALLY POSSIBL E TO HOLD THAT THE CORPORATE GUARANTEES ISSUED BY THE ASSESSEE WER E IN THE NATURE OF 'PROVISION FOR SERVICE' AND NOT A SHAREHO LDER ACTIVITY WHICH ARE MUTUALLY EXCLUSIVE IN NATURE. IN THE LIGH T OF THESE DISCUSSIONS WE ARE OF THE CONSIDERED VIEW AND ARE FULLY SUPPORTED BY THE OECD GUIDANCE IN THIS THAT THE IS SUANCE OF CORPORATE GUARANTEES IN THE NATURE OF QUASI-CAPITA L OR SHAREHOLDER ACTIVITY- AS IS THE UNCONTROVERTED POSITION ON THE FACTS OF THIS CASE DOES NOT AMOUNT TO A SERVICE IN WHICH RESPECT OF WH ICH ARM'S LENGTH ADJUSTMENT CAN BE DONE. 42. AS OBSERVED BY HON'BLE DELHI HIGH COURT IN THE CASE OF CIT V. EKL APPLIANCES LTD. [2012] 345 ITR 241/209 TAXMAN 2 00/24 TAXMANN.COM 199 (DELHI) A RE-CHARACTERIZATION OF A TRANSACTION IS INDEED PERMISSIBLE INTER ALIA IN A SITUATION '(I) WHERE THE ECONOMIC SUBSTANCE OF A TRANSACTION DIFFERS FROM IT S FORM AND (II) ITA NO. 301/RJT/2015 & CO 57/RJT/2015 DCIT VS. M/S JYOTI AUTOMATION PVT LTD ASSESSMENT YEAR: 2010-11 PAGE 26 OF 36 WHERE THE FORM AND SUBSTANCE OF THE TRANSACTION ARE THE SAME BUT ARRANGEMENTS MADE IN RELATION TO THE TRANSACTION V IEWED IN THEIR TOTALITY DIFFER FROM THOSE WHICH WOULD HAVE BEEN A DOPTED BY INDEPENDENT ENTERPRISES BEHAVING IN A COMMERCIALLY RATIONAL MANNER'. THE CASE OF A CORPORATE GUARANTEE CLEARLY FALLS IN THE SECOND CATEGORY AS NO INDEPENDENT ENTERPRISE WOULD ISSUE A GUARANTEE WITHOUT AN UNDERLYING SECURITY AS HAS BEE N DONE BY THE ASSESSEE. WE MAY IN THIS REGARD REFER TO THE OBSE RVATIONS MADE BY HON'BLE HIGH COURT SPEAKING THROUGH HON'BLE JUS TICE EASWAR (AS HE THEN WAS) AS FOLLOWS: '16. THE ORGANIZATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT ('OECD' FOR SHORT) HAS LAID DOWN 'TRAN SFER PRICING GUIDELINES' FOR MULTI-NATIONAL ENTERPRISES AND TAX ADMINISTRATIONS. THESE GUIDELINES GIVE AN INTRODUCT ION TO THE ARM'S LENGTH PRICE PRINCIPLE AND EXPLAINS ARTICLE 9 OF THE OECD MODEL TAX CONVENTION. THIS ARTICLE PROVIDES TH AT WHEN CONDITIONS ARE MADE OR IMPOSED BETWEEN TWO ASSOCIATED ENTERPRISES IN THEIR COMMERCIAL OR FINAN CIAL RELATIONS WHICH DIFFER FROM THOSE WHICH WOULD BE MA DE BETWEEN INDEPENDENT ENTERPRISES THEN ANY PROFIT WHI CH WOULD BUT FOR THOSE CONDITIONS HAVE ACCRUED TO ON E OF THE ENTERPRISES BUT BY REASON OF THOSE CONDITIONS IF NOT SO ACCRUED MAY BE INCLUDED IN THE PROFITS OF THAT ENT ERPRISE AND TAXED ACCORDINGLY. BY SEEKING TO ADJUST THE PRO FITS IN THE ABOVE MANNER THE ARM'S LENGTH PRINCIPLE OF PRICING FOLLOWS THE APPROACH OF TREATING THE MEMBERS OF A MULTI-NAT IONAL ENTERPRISE GROUP AS OPERATING AS SEPARATE ENTITIES RATHER THAN AS INSEPARABLE PARTS OF A SINGLE UNIFIED BUSIN ESS. AFTER REFERRING TO ARTICLE 9 OF THE MODEL CONVENTION AND STATING THE ARM'S LENGTH PRINCIPLE THE GUIDELINES PROVIDE FOR 'RECOGNITION OF THE ACTUAL TRANSACTIONS UNDERTAKEN' IN PARAGRAPHS 1.36 TO 1.41. PARAGRAPHS 1.36 TO 1.38 AR E IMPORTANT AND ARE RELEVANT TO OUR PURPOSE. THESE PARAGRAPHS ARE REPRODUCED BELOW: '1.36 A TAX ADMINISTRATION'S EXAMINATION OF A CONTROLLED TRANSACTION ORDINARILY SHOULD BE BASED O N THE TRANSACTION ACTUALLY UNDERTAKEN BY THE ASSOCIAT ED ENTERPRISES AS IT HAS BEEN STRUCTURED BY THEM USIN G THE METHODS APPLIED BY THE TAXPAYER INSOFAR AS THES E ARE CONSISTENT WITH THE METHODS DESCRIBED IN CHAPTERS II AND III. IN OTHER THAN EXCEPTIONAL CASE S THE TAX ADMINISTRATION SHOULD NOT DISREGARD THE ACT UAL TRANSACTIONS OR SUBSTITUTE OTHER TRANSACTIONS FOR T HEM. RESTRUCTURING OF LEGITIMATE BUSINESS TRANSACTIONS WOULD BE A WHOLLY ARBITRARY EXERCISE THE INEQUITY O F WHICH COULD BE COMPOUNDED BY DOUBLE TAXATION CREATED WHERE THE OTHER TAX ADMINISTRATION DOES NOT SHARE THE SAME VIEWS AS TO HOW THE TRANSACTION SHOULD BE STRUCTURED. ITA NO. 301/RJT/2015 & CO 57/RJT/2015 DCIT VS. M/S JYOTI AUTOMATION PVT LTD ASSESSMENT YEAR: 2010-11 PAGE 27 OF 36 1.37 HOWEVER THERE ARE TWO PARTICULAR CIRCUMSTANCE S IN WHICH IT MAY EXCEPTIONALLY BE BOTH APPROPRIATE AND LEGITIMATE FOR A TAX ADMINISTRATION TO CONSIDER DISREGARDING THE STRUCTURE ADOPTED BY A TAXPAYER IN ENTERING INTO A CONTROLLED TRANSACTION. THE FIRST CIRCUMSTANCE ARISES WHERE THE ECONOMIC SUBSTANCE OF A TRANSACTION DIFFERS FROM ITS FORM. IN SUCH A CASE THE TAX ADMINISTRATION MAY DISREGARD THE PARTIES' CHARACTERIZATION OF THE TRANSACTION AND RE-CHARACTE RISE IT IN ACCORDANCE WITH ITS SUBSTANCE. AN EXAMPLE OF THIS CIRCUMSTANCE WOULD BE AN INVESTMENT IN AN ASSOCIATED ENTERPRISE IN THE FORM OF INTEREST-BEARI NG DEBT WHEN AT ARM'S LENGTH HAVING REGARD TO THE ECONOMIC CIRCUMSTANCES OF THE BORROWING COMPANY THE INVESTMENT WOULD NOT BE EXPECTED TO BE STRUCTUR ED IN THIS WAY. IN THIS CASE IT MIGHT BE APPROPRIATE F OR A TAX ADMINISTRATION TO CHARACTERIZE THE INVESTMENT I N ACCORDANCE WITH ITS ECONOMIC SUBSTANCE WITH THE RESULT THAT THE LOAN MAY BE TREATED AS A SUBSCRIPTI ON OF CAPITAL. THE SECOND CIRCUMSTANCE ARISES WHERE WHILE THE FORM AND SUBSTANCE OF THE TRANSACTION ARE THE SAME THE ARRANGEMENTS MADE IN RELATION TO THE TRANSACTION VIEWED IN THEIR TOTALITY DIFFER FROM THOSE WHICH WOULD HAVE BEEN ADOPTED BY INDEPENDENT ENTERPRISES BEHAVING IN A COMMERCIALLY RATIONAL MANNER AND THE ACTUAL STRUCTURE PRACTICALLY IMPEDES THE TAX ADMINISTRATION FROM DETERMINING AN APPROPRIATE TRANSFER PRICE. AN EXAMPLE OF THIS CIRCUMSTANCE WOULD BE A SALE UNDER A LONG-TERM CONTRACT FOR A LUMP SUM PAYMENT OF UNLIMITED ENTITLEMENT TO THE INTELLECTUAL PROPERTY RIGHTS ARI SING AS A RESULT OF FUTURE RESEARCH FOR THE TERM OF THE CONTRACT (AS PREVIOUSLY INDICATED IN PARAGRAPH 1.10 ). WHILE IN THIS CASE IT MAY BE PROPER TO RESPECT THE TRANSACTION AS A TRANSFER OF COMMERCIAL PROPERTY I T WOULD NEVERTHELESS BE APPROPRIATE FOR A TAX ADMINISTRATION TO CONFORM THE TERMS OF THAT TRANSFE R IN THEIR ENTIRETY (AND NOT SIMPLY BY REFERENCE TO PRIC ING) TO THOSE THAT MIGHT REASONABLY HAVE BEEN EXPECTED HAD THE TRANSFER OF PROPERTY BEEN THE SUBJECT OF A TRANSACTION INVOLVING INDEPENDENT ENTERPRISES. THUS IN THE CASE DESCRIBED ABOVE IT MIGHT BE APPROPRIATE FOR THE TAX ADMINISTRATION FOR EXAMPLE TO ADJUST THE CONDITIONS OF THE AGREEMENT IN A COMMERCIALLY RATIO NAL MANNER AS A CONTINUING RESEARCH AGREEMENT. 1.38 IN BOTH SETS OF CIRCUMSTANCES DESCRIBED ABOVE THE CHARACTER OF THE TRANSACTION MAY DERIVE FROM TH E RELATIONSHIP BETWEEN THE PARTIES RATHER THAN BE DETERMINED BY NORMAL COMMERCIAL CONDITIONS AS MAY HAVE BEEN STRUCTURED BY THE TAXPAYER TO AVOID OR MINIMIZE TAX. IN SUCH CASES THE TOTALITY OF ITS TE RMS ITA NO. 301/RJT/2015 & CO 57/RJT/2015 DCIT VS. M/S JYOTI AUTOMATION PVT LTD ASSESSMENT YEAR: 2010-11 PAGE 28 OF 36 WOULD BE THE RESULT OF A CONDITION THAT WOULD NOT H AVE BEEN MADE IF THE PARTIES HAD BEEN ENGAGED IN ARM'S LENGTH DEALINGS. ARTICLE 9 WOULD THUS ALLOW AN ADJUSTMENT OF CONDITIONS TO REFLECT THOSE WHICH THE PARTIES WOULD HAVE ATTAINED HAD THE TRANSACTION BEE N STRUCTURED IN ACCORDANCE WITH THE ECONOMIC AND COMMERCIAL REALITY OF PARTIES DEALING AT ARM'S LENG TH.' 17. THE SIGNIFICANCE OF THE AFORESAID GUIDELINES LI ES IN THE FACT THAT THEY RECOGNISE THAT BARRING EXCEPTIONAL C ASES THE TAX ADMINISTRATION SHOULD NOT DISREGARD THE ACTUAL TRANSACTION OR SUBSTITUTE OTHER TRANSACTIONS FOR TH EM AND THE EXAMINATION OF A CONTROLLED TRANSACTION SHOULD ORDI NARILY BE BASED ON THE TRANSACTION AS IT HAS BEEN ACTUALLY UN DERTAKEN AND STRUCTURED BY THE ASSOCIATED ENTERPRISES. IT IS OF FURTHER SIGNIFICANCE THAT THE GUIDELINES DISCOURAGE RE-STRU CTURING OF LEGITIMATE BUSINESS TRANSACTIONS. THE REASON FOR CHARACTERISATION OF SUCH RE-STRUCTURING AS AN ARBIT RARY EXERCISE AS GIVEN IN THE GUIDELINES IS THAT IT HA S THE POTENTIAL TO CREATE DOUBLE TAXATION IF THE OTHER TA X ADMINISTRATION DOES NOT SHARE THE SAME VIEW AS TO H OW THE TRANSACTION SHOULD BE STRUCTURED. 18. TWO EXCEPTIONS HAVE BEEN ALLOWED TO THE AFORESA ID PRINCIPLE AND THEY ARE (I) WHERE THE ECONOMIC SUBST ANCE OF A TRANSACTION DIFFERS FROM ITS FORM AND (II) WHERE TH E FORM AND SUBSTANCE OF THE TRANSACTION ARE THE SAME BUT ARRAN GEMENTS MADE IN RELATION TO THE TRANSACTION VIEWED IN THEI R TOTALITY DIFFER FROM THOSE WHICH WOULD HAVE BEEN ADOPTED BY INDEPENDENT ENTERPRISES BEHAVING IN A COMMERCIALLY RATIONAL MANNER.' 43. IT IS THUS CLEAR THAT EVEN IF WE ACCEPT THE CON TENTION OF THE LEARNED DEPARTMENTAL REPRESENTATIVE THAT ISSUANCE O F A CORPORATE GUARANTEE AMOUNTS TO A 'PROVISION FOR SERVICE' SUC H A SERVICE NEEDS TO BE RE-CHARACTERIZED TO BRING IT IN TUNE WI TH COMMERCIAL REALITY AS 'ARRANGEMENTS MADE IN RELATION TO THE TR ANSACTION VIEWED IN THEIR TOTALITY DIFFER FROM THOSE WHICH W OULD HAVE BEEN ADOPTED BY INDEPENDENT ENTERPRISES BEHAVING IN A CO MMERCIALLY RATIONAL MANNER'. NO BANK WOULD BE WILLING TO ISSUE A CLEAN GUARANTEE I.E. WITHOUT UNDERLYING ASSET TO ASSESS EE'S SUBSIDIARIES WHEN THE BANKS ARE NOT WILLING TO EXTE ND THOSE SUBSIDIARIES LOANS ON THE SAME TERMS AS WITHOUT A G UARANTEE. SUCH A GUARANTEE TRANSACTION CAN ONLY BE AND IS M OTIVATED BY THE SHAREHOLDER OR OWNERSHIP CONSIDERATIONS. NO DO UBT UNDER THE OECD GUIDANCE ON THE ISSUE AN EXPLICIT SUPPORT SU CH AS CORPORATE GUARANTEE IS TO BE BENCHMARKED AND FOR THAT PURPOSE IT IS IN THE SERVICE CATEGORY BUT THAT OCCASION COM ES ONLY WHEN IT IS COVERED BY THE SCOPE OF 'INTERNATIONAL TRANSACTI ON' UNDER THE TRANSFER PRICING LEGISLATION OF RESPECTIVE JURISDIC TION. THE EXPRESSION 'PROVISION FOR SERVICES' IN ITS NORMAL O R LEGAL CONNOTATIONS AS WE HAVE SEEN EARLIER DOES NOT COV ER ISSUANCE OF ITA NO. 301/RJT/2015 & CO 57/RJT/2015 DCIT VS. M/S JYOTI AUTOMATION PVT LTD ASSESSMENT YEAR: 2010-11 PAGE 29 OF 36 CORPORATE GUARANTEES EVEN THOUGH ONCE A CORPORATE GUARANTEE IS COVERED BY THE DEFINITION OF INTERNATIONAL TRANSACT ION' IT IS BENCHMARKED IN THE SERVICE SEGMENT. IN VIEW OF THE ABOVE DISCUSSIONS OECD GUIDELINES AS A MATTER OF FACT STRENGTHEN THE CLAIM OF THE ASSESSEE THAT THE CORPORATE GUARANTEES ISSUED BY THE ASSESSEE WERE IN THE NATURE OF QUASI-CAPITAL OR SHA REHOLDER ACTIVITY AND FOR THIS REASON ALONE THE ISSUANCE O F THESE GUARANTEES SHOULD BE EXCLUDED FROM THE SCOPE OF SER VICES AND THUS FROM THE SCOPE OF 'INTERNATIONAL TRANSACTIONS' UNDER SECTION 92B. OF COURSE ONCE A TRANSACTION IS HELD TO BE CO VERED BY THE DEFINITION OF INTERNATIONAL TRANSACTION WHETHER IN THE NATURE OF THE SHAREHOLDER ACTIVITY OR QUASI-CAPITAL OR NOT ALP D ETERMINATION MUST DEPEND ON WHAT AN INDEPENDENT ENTERPRISE WOULD HAVE CHARGED FOR SUCH A TRANSACTION. IN THIS LIGHT OF TH ESE DISCUSSIONS WE HOLD THAT THE ISSUANCE OF CORPORATE GUARANTEES I N QUESTION WAS NOT IN THE NATURE OF 'PROVISION FOR SERVICES' AND T HESE CORPORATE GUARANTEES WERE REQUIRED TO BE TREATED AS SHAREHOLD ER PARTICIPATION IN THE SUBSIDIARIES. 44. AS FOR THE WORDS 'PROVISION FOR SERVICES' APPEA RING IN SECTION 92B AND CONNOTATIONS THEREOF OUR HUMBLE UNDERSTAN DING IS THAT THIS EXPRESSION IN ITS NATURAL CONNOTATIONS IS RE STRICTED TO SERVICES RENDERED AND IT DOES NOT EXTEND TO THE BENEFITS OF ACTIVITIES PER SE. WHETHER WE LOOK AT THE EXAMPLES GIVEN IN THE OECD M ATERIAL OR EVEN IN EXPLANATION TO SECTION 92B THE THRUST IS O N THE SERVICES LIKE MARKET RESEARCH MARKET DEVELOPMENT MARKETING MANAGEMENT ADMINISTRATION TECHNICAL SERVICE REPA IRS DESIGN CONSULTATION AGENCY AND SCIENTIFIC RESEARCH LEGA L OR ACCOUNTING SERVICE OR COORDINATION SERVICES. AS A MATTER OF FA CT EVEN IN THE EXPLANATION TO SECTION 92B- WHICH WE WILL DEAL WITH A LITTLE LATER GUARANTEES HAVE BEEN GROUPED IN ITEM 'C' DEALING WI TH CAPITAL FINANCING RATHER THAN IN ITEM 'D' WHICH SPECIFICAL LY DEALS WITH 'PROVISION FOR SERVICES'. WHEN THE LEGISLATURE ITSE LF DOES NOT GROUP 'GUARANTEES' IN THE 'PROVISION FOR SERVICES' AND IN CLUDES IT IN THE 'CAPITAL FINANCING' IT IS REASONABLE TO PROCEED ON THE BASIS THAT ISSUANCE OF GUARANTEES IS NOT TO BE TREATED AS WITH IN THE SCOPE OF NORMAL CONNOTATIONS OF EXPRESSION 'PROVISION FOR SE RVICES'. OF COURSE THE GLOBAL BEST PRACTICES SEEM TO BE THAT G UARANTEES ARE SOMETIMES INCLUDED IN 'SERVICES' BUT THAT IS BECAUS E OF THE EXTENDED DEFINITION OF 'INTERNATIONAL TRANSACTION' IN MOST OF THE TAX JURISDICTIONS. SUCH A WIDE DEFINITION OF SERVICES WHICH CAN BE SUBJECT TO ARM'S LENGTH PRICE ADJUSTMENT APART 'T RANSFER PRICING AND INTRA-GROUP FINANCING BY BAKKER & LEVVY' (IBI D) NOTES THAT 'THE IRS HAS ISSUED A NON-BINDING FIELD SERVICE ADV ICE (FSA 1995 WL 1918236 1 MAY 1995) STATING THAT IN CERTAIN CI RCUMSTANCES (EMPHASIS SUPPLIED) A GUARANTEE MAY BE TREATED AS A SERVICE'. IF THE NATURAL CONNOTATIONS OF A 'SERVICE' WERE TO COV ER ISSUANCE OF GUARANTEE IN GENERAL THERE COULD NOT HAVE BEEN AN OCCASION TO GIVE SUCH HEDGED ADVICE. THIS WILL BE STRETCHING TH E THINGS TOO FAR TO SUGGEST THAT JUST BECAUSE WHEN GUARANTEES ARE IN CLUDED IN THE INTERNATIONAL TRANSACTIONS THESE GUARANTEES ARE IN CLUDED IN SERVICE SEGMENT IN CONTRADISTINCTION WITH OTHER HEA DS UNDER WHICH ITA NO. 301/RJT/2015 & CO 57/RJT/2015 DCIT VS. M/S JYOTI AUTOMATION PVT LTD ASSESSMENT YEAR: 2010-11 PAGE 30 OF 36 INTERNATIONAL TRANSACTIONS ARE GROUPED THE GUARANT EES SHOULD BE TREATED AS SERVICES AND FOR THAT REASON INCLUDED IN THE DEFINITION OF INTERNATIONAL TRANSACTIONS. THAT IS IN OUR CONS IDERED VIEW PURELY FALLACIOUS LOGIC. IN OUR CONSIDERED VIEW UN DER SECTION 92B CORPORATE GUARANTEES CAN BE COVERED ONLY UNDER THE RESIDUARY HEAD I.E. 'ANY OTHER TRANSACTION HAVING A BEARING O N THE PROFITS INCOME LOSSES OR ASSETS OF SUCH ENTERPRISE'. IT IS FOR THIS REASON THAT SECTION 92B IN A WAY EXPANDS THE SCOPE OF IN TERNATIONAL TRANSACTION IN THE SENSE THAT EVEN WHEN GUARANTEES ARE ISSUED AS A SHAREHOLDER ACTIVITY BUT COSTS ARE INCURRED FOR T HE SAME OR AS A MEASURE OF ABUNDANT CAUTION RECOVERIES ARE MADE FO R THIS NON- CHARGEABLE ACTIVITY THESE GUARANTEES WILL FALL IN THE RESIDUARY CLAUSE OF DEFINITION OF INTERNATIONAL TRANSACTIONS UNDER SECTION 92B. AS FOR THE LEARNED DEPARTMENTAL REPRESENTATIVE 'S ARGUMENT THAT 'WHETHER THE SERVICE HAS CAUSED ANY EXTRA COST TO THE ASSESSEE SHOULD NOT BE THE DECIDING FACTOR TO DETER MINE WHETHER IT IS AN INTERNATIONAL AND THEN GIVES AN EXAMPLE OF BR AND ROYALTY TO MAKE HIS POINT. WHAT IN THE PROCESS HE OVERLOOKS IS THAT SECTION 92B(1) SPECIFICALLY COVERS SALE OR LEASE OF TANGIBL E OR INTANGIBLE PROPERTY'. THE EXPRESSION 'BEARING ON THE PROFITS INCOME LOSSES OR ASSETS OF SUCH ENTERPRISES' IS RELEVANT ONLY FOR RESIDUARY CLAUSE I.E. ANY OTHER SERVICES NOT SPECIFICALLY COVERED BY SECTION 92B. IT WAS ALSO CONTENDED THAT WHILE RENDERING BHARTI AIR TEL DECISION THE DELHI TRIBUNAL DID GO OVERBOARD IN DECIDING SOM ETHING WHICH WAS NOT EVEN RAISED BEFORE US. IN THE WRITTEN SUBMI SSION IT WAS STATED THAT 'HON'BLE DELHI ITAT WAS NOT REQUESTED B Y THE CONTESTING PARTIES TO DECIDE THE ISSUE AS TO WHETHE R THE PROVISION OF GUARANTEE WAS A SERVICE OR NOT'. THAT'S NOT FACT UALLY CORRECT. WE ARE UNABLE TO SEE ANY MERITS IN LEARNED DEPARTMENTA L REPRESENTATIVE'S CONTENTION PARTICULARLY AS DECISI ON CATEGORICALLY NOTED THAT NOT ONLY BEFORE THE TRIBUNAL BUT THIS I SSUE WAS ALSO RAISED BEFORE THE DRP- AS EVIDENT FROM THE TEXT OF DRP DECISION. WE NOW TAKE UP THE ISSUE WITH RESPECT TO SPECIFIC M ENTION OF THE WORDS IN EXPLANATION TO SECTION 92B WHICH STATES TH AT 'FOR THE REMOVAL OF DOUBTS IT IS HEREBY CLARIFIED THAT (I) THE EXPRESSION 'INTERNATIONAL TRANSACTION' SHALL INCLUDE.. (C) C APITAL FINANCING INCLUDING ANY TYPE OF LONG -TERM OR SHORT -TERM BOR ROWING LENDING OR GUARANTEE PURCHASE OR SALE OF MARKETABLE SECURI TIES OR ANY TYPE OF ADVANCE PAYMENTS OR DEFERRED PAYMENT OR RE CEIVABLE OR ANY OTHER DEBT ARISING DURING THE COURSE OF BUSINES S.' THERE IS NO DISPUTE THAT THIS EXPLANATION STATES THAT IT IS MER ELY CLARIFICATORY IN NATURE INASMUCH AS IT IS 'FOR THE REMOVAL OF DOUBTS ' AND THEREFORE ONE HAS TO PROCEED ON THE BASIS THAT IT DOES NOT AL TER THE BASIC CHARACTER OF DEFINITION OF 'INTERNATIONAL TRANSACTI ON' UNDER SECTION 92B. ACCORDINGLY THIS EXPLANATION IS TO BE READ IN CONJUNCTION WITH THE MAIN PROVISIONS AND IN HARMONY WITH THE SCHEME OF THE PROVISIONS UNDER SECTION 92B. UNDER THIS EXPLANATI ON FIVE CATEGORIES OF TRANSACTIONS HAVE BEEN CLARIFIED TO H AVE BEEN INCLUDED IN THE DEFINITION OF 'INTERNATIONAL TRANSA CTIONS'. THE FIRST TWO CATEGORIES OF TRANSACTIONS WHICH ARE STATED TO BE INCLUDED IN THE SCOPE OF EXPRESSION 'INTERNATIONAL TRANSACTIONS ' BY VIRTUE OF CLAUSE (A) AND (B) OF EXPLANATION TO SECTION 92B A RE TRANSACTIONS ITA NO. 301/RJT/2015 & CO 57/RJT/2015 DCIT VS. M/S JYOTI AUTOMATION PVT LTD ASSESSMENT YEAR: 2010-11 PAGE 31 OF 36 WITH REGARD TO PURCHASE SALE TRANSFER LEASE OR U SE OF TANGIBLE AND INTANGIBLE PROPERTIES. THESE TRANSACTIONS WERE ANYWAY COVERED BY TRANSACTIONS 'IN THE NATURE OF PURCHASE SALE OR LEASE OF TANGIBLE OR INTANGIBLE PROPERTY'. THE ONLY ADDIT IONAL EXPRESSION IN THE CLARIFICATION IS 'USE' AS ALSO ILLUSTRATIVE AND INCLUSIVE DESCRIPTIONS OF TANGIBLE AND INTANGIBLE ASSETS. SIM ILARLY CLAUSE (D) DEALS WITH THE ' PROVISION OF SERVICES INCLUDING P ROVISION OF MARKET RESEARCH MARKET DEVELOPMENT MARKETING MANAGEMENT ADMINISTRATION TECHNICAL SERVICE REPAIRS DESIGN CONSULTATION AGENCY SCIENTIFIC RESEARCH LEGAL OR ACCOUNTING SE RVICE' WHICH ARE ANYWAY COVERED IN 'PROVISION FOR SERVICES' AND 'MUT UAL AGREEMENT OR ARRANGEMENT BETWEEN TWO OR MORE ASSOCIATED ENTER PRISES FOR THE ALLOCATION OR APPORTIONMENT OF OR ANY CONTRIBU TION TO ANY COST OR EXPENSE INCURRED OR TO BE INCURRED IN CONNECTION WITH A BENEFIT SERVICE OR FACILITY PROVIDED OR TO BE PROVIDED TO A NYONE OR MORE OF SUCH ENTERPRISES '. THAT LEAVES US WITH TWO CLAUSES IN THE EXPLANATION TO SECT ION 92B WHICH ARE NOT COVERED B Y ANY OF THE THREE CATEGORIES DISCUSSED ABOVE OR BY OTHER SPECIF IC SEGMENTS COVERED BY SECTION 92B NAMELY BORROWING OR LENDING MONEY. THE REMAINING TWO ITEMS IN THE EXPLANATION TO SECTION 9 2B ARE SET OUT IN CLAUSE (C) AND (E) THERETO DEALING WITH (A) CAP ITAL FINANCING AND (B) BUSINESS RESTRUCTURING OR REORGANIZATION. THESE ITEMS CAN ONLY BE COVERED IN THE RESIDUAL CLAUSE OF DEFINITION IN INTERNATIONAL TRANSACTIONS AS IN SECTION 92B (1) WHICH COVERS ' ANY OTHER TRANSACTION HAVING A BEARING ON PROFITS INCOMES L OSSES OR ASSETS OF SUCH ENTERPRISES'. IT IS THEREFORE ESSENTIAL T HAT IN ORDER TO BE COVERED BY CLAUSE (C) AND (E) OF EXPLANATION TO SEC TION 92B THE TRANSACTIONS SHOULD BE SUCH AS TO HAVE BEARING ON P ROFITS INCOMES LOSSES OR ASSETS OF SUCH ENTERPRISE. IN OT HER WORDS IN A SITUATION IN WHICH A TRANSACTION HAS NO BEARING ON PROFITS INCOMES LOSSES OR ASSETS OF SUCH ENTERPRISE THE T RANSACTION WILL BE OUTSIDE THE AMBIT OF EXPRESSION 'INTERNATIONAL T RANSACTION'. THIS ASPECT OF THE MATTER IS FURTHER HIGHLIGHTED IN CLAU SE (E) OF THE EXPLANATION DEALING WITH RESTRUCTURING AND REORGANI ZATION WHEREIN IT IS ACKNOWLEDGED THAT SUCH AN IMPACT COULD BE IMM EDIATE OR IN FUTURE AS EVIDENT FROM THE WORDS 'IRRESPECTIVE OF T HE FACT THAT IT (I.E. RESTRUCTURING OR REORGANIZATION) HAS BEARING ON THE PROFIT INCOME LOSSES OR ASSETS OF SUCH ENTERPRISE AT THE TIME OF TRANSACTION OR ON A FUTURE DATE'. WHAT IS IMPLICIT IN THIS STATUTORY PROVISION IS THAT WHILE IMPACT ON ' PROFIT INCOME LOSSES OR ASSETS' IS SINE QUA NON THE MERE FACT THAT IMPACT IS NOT I MMEDIATE BUT ON A FUTURE DATE WOULD NOT TAKE THE TRANSACTION OUTSI DE THE AMBIT OF 'INTERNATIONAL TRANSACTION'. IT IS ALSO IMPORTANT T O BEAR IN MIND THAT AS IT APPEARS ON A PLAIN READING OF THE PROVISION THIS EXCLUSION CLAUSE IS NOT FOR 'CONTINGENT' IMPACT ON PROFIT IN COME LOSSES OR ASSETS BUT ON 'FUTURE' IMPACT ON PROFIT INCOME LO SSES OR ASSETS OF THE ENTERPRISE. THE IMPORTANT DISTINCTION BETWEEN T HESE TWO CATEGORIES IS THAT WHILE LATTER IS A CERTAINTY AND ONLY ITS CRYSTALLIZATION MAY TAKE PLACE ON A FUTURE DATE TH ERE IS NO SUCH CERTAINTY IN THE FORMER CASE. IN THE CASE BEFORE US IT IS AN UNDISPUTED POSITION THAT CORPORATE GUARANTEES ISSUE D BY THE ASSESSEE TO THE VARIOUS BANKS AND CRYSTALLIZATION O F LIABILITY UNDER ITA NO. 301/RJT/2015 & CO 57/RJT/2015 DCIT VS. M/S JYOTI AUTOMATION PVT LTD ASSESSMENT YEAR: 2010-11 PAGE 32 OF 36 THESE GUARANTEES THOUGH A POSSIBILITY IS NOT A CE RTAINTY. IN VIEW OF THE DISCUSSIONS ABOVE THE SCOPE OF THE CAPITAL FINANCING TRANSACTIONS AS COULD BE COVERED UNDER EXPLANATION TO SECTION 92B READ WITH SECTION 92B(1) IS RESTRICTED TO SUCH CAPITAL FINANCING TRANSACTIONS INCLUDING INTER ALIA ANY GU ARANTEE DEFERRED PAYMENT OR RECEIVABLE OR ANY OTHER DEBT DURING THE COURSE OF BUSINESS AS WILL HAVE 'A BEARING ON THE PROFITS I NCOME LOSSES OR ASSETS OR SUCH ENTERPRISE'. THIS PRECONDITION ABOUT IMPACT ON PROFITS INCOME LOSSES OR ASSETS OF SUCH ENTERPRIS ES IS A PRECONDITION EMBEDDED IN SECTION 92B(1) AND THE ONL Y RELAXATION FROM THIS CONDITION PRECEDENT IS SET OUT IN CLAUSE (E) OF THE EXPLANATION WHICH PROVIDES THAT THE BEARING ON PROF ITS INCOME LOSSES OR ASSETS COULD BE IMMEDIATE OR ON A FUTURE DATE. THESE GUARANTEES DO NOT HAVE ANY IMPACT ON INCOME PROFIT S LOSSES OR ASSETS OF THE ASSESSEE. THERE CAN BE A HYPOTHETICAL SITUATION IN WHICH A GUARANTEE DEFAULT TAKES PLACE AND THEREFOR E THE ENTERPRISE MAY HAVE TO PAY THE GUARANTEE AMOUNTS BU T SUCH A SITUATION EVEN IF THAT BE SO IS ONLY A HYPOTHETIC AL SITUATION WHICH ARE AS DISCUSSED ABOVE EXCLUDED. WHEN AN ASSESSEE EXTENDS AN ASSISTANCE TO THE ASSOCIATED ENTERPRISE WHICH DOES NOT COST ANYTHING TO THE ASSESSEE AND PARTICULARLY FOR WHICH THE ASSESSEE COULD NOT HAVE REALIZED MONEY BY GIVING IT TO SOMEO NE ELSE DURING THE COURSE OF ITS NORMAL BUSINESS SUCH AN ASSISTAN CE OR ACCOMMODATION DOES NOT HAVE ANY BEARING ON ITS PROF ITS INCOME LOSSES OR ASSETS AND THEREFORE IT IS OUTSIDE THE AMBIT OF INTERNATIONAL TRANSACTION UNDER SECTION 92B (1) OF THE ACT. 45. BEFORE WE PART WITH THIS ISSUE THERE ARE A COU PLE OF THINGS THAT WE WOULD LIKE TO BRIEFLY DEAL WITH. 46. THE FIRST ISSUE IS THIS. WE FIND THAT IN THE CA SE OF FOUR SOFT LTD V. DY. CIT [(2011) 142 TTJ 358 (HYD)] A CO-ORDINA TE BENCH HAD VIDE ORDER DATED 9TH SEPTEMBER 2011 OBSERVED AS FO LLOWS: 'WE FIND THAT THE TP LEGISLATION PROVIDES FOR COMPU TATION OF INCOME FROM INTERNATIONAL TRANSACTION AS PER SECTIO N 92B OF THE ACT. THE CORPORATE GUARANTEE PROVIDED BY THE AS SESSEE COMPANY DOES NOT FALL WITHIN THE DEFINITION OF INTE RNATIONAL TRANSACTION. THE TP LEGISLATION DOES NOT STIPULATE ANY GUIDELINES IN RESPECT TO GUARANTEE TRANSACTIONS. IN THE ABSENCE OF ANY CHARGING PROVISION THE LOWER AUTHOR ITIES ARE NOT CORRECT IN BRINGING AFORESAID TRANSACTION IN TH E TP STUDY. IN OUR CONSIDERED VIEW THE CORPORATE GUARANTEE IS VERY MUCH INCIDENTAL TO THE BUSINESS OF THE ASSESSEE AND HENCE THE SAME CANNOT BE COMPARED TO A BANK GUARANTEE TRANSACTION OF THE BANK OR FINANCIAL INSTITUTION.' 47. HOWEVER WITHIN LESS THAN FOUR MONTHS OF THIS D ECISION HAVING BEEN RENDERED THE FINANCE ACT 2012 CAME UP WITH AN EXPLANATION TO SECTION 92B STATING THAT 'FOR THE REMOVAL OF DOU BTS' AS WE HAVE NOTED EARLIER IN THIS DECISION 'CLARIFIED' THAT IN TERNATIONAL TRANSACTIONS INCLUDE INTER ALIA CAPITAL FINANCING BY WAY OF ITA NO. 301/RJT/2015 & CO 57/RJT/2015 DCIT VS. M/S JYOTI AUTOMATION PVT LTD ASSESSMENT YEAR: 2010-11 PAGE 33 OF 36 GUARANTEE. THIS LEGISLATIVE CLARIFICATION DID INDEE D GO WELL BEYOND WHAT A COORDINATE BENCH OF THIS TRIBUNAL HELD TO BE THE LEGAL POSITION AND WE ARE BOUND BY THE ESTEEMED VIEWS OF THE COORDINATE BENCH. WE ARE THEREFORE OF THE OPINION THAT THE EXPLANATION TO SECTION 92B DID INDEED ENLARGE THE S COPE OF DEFINITION OF 'INTERNATIONAL TRANSACTION' UNDER SEC TION 92B AND IT DID SO WITH RETROSPECTIVE EFFECT. IF FOR ARGUMENT SAKE IT IS ASSUMED THAT THE INSERTION OF EXPLANATION TO SECTIO N 92B DID NOT ENLARGE THE SCOPE OF DEFINITION THERE CANNOT OBVIO USLY BE ANY OCCASION TO DEVIATE FROM THE DECISION THAT THE COOR DINATE BENCH TOOK IN FOUR SOFT LTD. CASE (SUPRA) BUT IF THE SCO PE OF THE PROVISION WAS INDEED ENLARGED AS IS OUR OPINION T HE QUESTION THAT REALLY NEEDS TO BE ADDRESSED WHETHER GIVEN THE PEC ULIAR NATURE AND PURPOSE OF TRANSFER PRICING PROVISION IS IT AT ALL A WORKABLE IDEA TO ENLARGE THE SCOPE OF TRANSFER PRICING PROVI SIONS WITH RETROSPECTIVE EFFECT THERE CAN BE LITTLE DOUBT ABOU T THE LEGISLATIVE COMPETENCE TO AMEND TAX LAWS WITH RETROSPECTIVE EFF ECT AND IN ANY CASE WE ARE NOT INCLINED TO BE DRAWN INTO THAT CONTROVERSY EITHER. ON THE ISSUE OF IMPLEMENTING THE AMENDMENT IN TRANSFER PRICING LAW WITH RETROSPECTIVE EFFECT IN THE CASE OF BHARTI AIRTEL LTD. (SUPRA) A COORDINATE BENCH HAD OBSERVED AS FO LLOWS: '34. THERE IS ONE MORE ASPECT OF THE MATTER. THE EXPLANATION TO SECTION 92B HAS BEEN BROUGHT ON THE STATUTE BY THE FINANCE ACT 2012. IF ONE IS TO PROCEED ON TH E BASIS THAT THE PROVISIONS OF EXPLANATION TO SECTION 92B E NLARGES THE SCOPE OF SECTION 92B ITSELF EVEN AS IT IS MODE STLY DESCRIBED AS 'CLARIFICATORY' IN NATURE IT IS AN IS SUE TO BE EXAMINED WHETHER AN ENHANCEMENT OF SCOPE OF THIS AN TI AVOIDANCE PROVISION CAN BE IMPLEMENTED WITH RETROSP ECTIVE EFFECT. UNDOUBTEDLY THE SCOPE OF A CHARGING PROVIS ION CAN BE ENLARGED WITH RETROSPECTIVE EFFECT BUT AN ANTI- AVOIDANCE MEASURE THAT THE TRANSFER PRICING LEGISLATION INHE RENTLY IS IS NOT PRIMARILY A SOURCE OF REVENUE AS IT MAINLY SEEK S COMPLIANT BEHAVIOUR FROM THE ASSESSEE VIS--VIS CER TAIN NORMS AND THESE NORMS CANNOT BE GIVEN EFFECT FROM A DATE EARLIER THAN THE DATE NORMS ARE BEING INTRODUCED. H OWEVER AS WE HAVE DECIDED THE ISSUE IN FAVOUR OF THE ASSES SEE ON MERITS AND EVEN AFTER TAKING INTO ACCOUNT THE AMEND MENTS BROUGHT ABOUT BY FINANCE ACT 2012 WE NEED NOT DEAL WITH THIS ASPECT OF THE MATTER IN GREATER DETAIL.' 48. IN THE PRESENT CASE WE HAVE HELD THAT THE ISSU ANCE OF CORPORATE GUARANTEES WERE IN THE NATURE OF SHAREHOL DER ACTIVITIES- AS WAS THE UNCONTROVERTED CLAIM OF THE ASSESSEE AN D AS SUCH COULD NOT BE INCLUDED IN THE 'PROVISION FOR SERVICE S' UNDER THE DEFINITION OF 'INTERNATIONAL TRANSACTION' UNDER SEC TION 92B OF THE ACT. WE HAVE ALSO HELD TAKING NOTE OF THE INSERTIO N OF EXPLANATION TO SECTION 92B OF THE ACT THAT THE ISSUANCE OF COR PORATE GUARANTEES IS COVERED BY THE RESIDUARY CLAUSE OF TH E DEFINITION UNDER SECTION 92B OF THE ACT BUT SINCE SUCH ISSUANC E OF CORPORATE GUARANTEES ON THE FACTS OF THE PRESENT CASE DID N OT HAVE ITA NO. 301/RJT/2015 & CO 57/RJT/2015 DCIT VS. M/S JYOTI AUTOMATION PVT LTD ASSESSMENT YEAR: 2010-11 PAGE 34 OF 36 'BEARING ON PROFITS INCOME LOSSES OR ASSETS' IT DID NOT CONSTITUTE AN INTERNATIONAL TRANSACTION UNDER SECTION 92B IN RESPECT OF WHICH AN ARM'S LENGTH PRICE ADJUSTMENT CAN BE MADE. IN THIS VIEW OF THE MATTER AND FOR BOTH THESE INDEPENDENT REASO NS WE HAVE TO DELETE THE IMPUGNED ALP ADJUSTMENT. THE QUESTION W HICH WAS RAISED IN BHARTI AIRTEL'S CASE (SUPRA) BUT LEFT UNA NSWERED AS THE ASSESSEE HAD SUCCEEDED ON MERITS REAMINS UNANSWERE D HERE AS WELL. HOWEVER WE MAY ADD THAT IN THE CASE OF KRISH NASWAMY SPD V. UNION OF INDIA [2006] 281 ITR 305/151 TAXMAN 286 (SC) WHEREIN THEIR LORDSHIPS HAD INTER ALIA OBSERVED T HAT 'THE LAW DOES NOT COMPEL A MAN TO DO WHAT HE CANNOT POSSIBLY PERFORM. THE LAW ITSELF AND ITS ADMINISTRATION IS UNDERSTOOD TO DISCLAIM AS IT DOES IN ITS GENERAL APHORISMS ALL INTENTION OF COM PELLING IMPOSSIBILITIES AND THE ADMINISTRATION OF LAW MUST ADOPT THAT GENERAL EXCEPTION IN THE CONSIDERATION OF PARTICULA R CASES. IT WAS FOR THIS REASON THAT A COORDINATE BENCH OF THIS TRI BUNAL IN THE CASE OF CHANNEL GUIDE INDIA LTD. V. ASSTT. CIT [2012] 13 9 ITB 49/25 TAXMANN.COM 25 (MUM.) HELD THAT EVEN THOUGH THE AS SESSEE HAD NOT DEDUCTED THE APPLICABLE TAX AT SOURCE UNDER SEC TION 195 THE DISALLOWANCE COULD NOT BE MADE UNDER SECTION 40(A)( I) SINCE THE TAXABILITY WAS UNDER THE PROVISIONS WHICH WERE AMEN DED POST THE PAYMENT HAVING BEEN MADE BY THE ASSESSEE WITH RETR OSPECTIVE EFFECT. ALL THIS ONLY SHOWS THAT EVEN WHEN LAW IS S PECIFICALLY STATED TO HAVE EFFECT FROM A PARTICULAR DATE ITS BEING IM PLEMENTED IN A FAIR AND REASONABLE MANNER WITHIN THE FRAMEWORK OF JUDGE MADE LAW MAY REQUIRE THAT DATE TO BE TINKERED WITH. WHE N A PROVISO IS INTRODUCED WITH EFFECT FROM A PARTICULAR DATE SPECI FIED BY THE LEGISLATURE THE JUDICIAL FORUMS INCLUDING THIS TR IBUNAL AT TIMES READ IT AS BEING EFFECT FROM A DATE MUCH EARLIER TH AN THAT TOO. ONE SUCH CASE FOR EXAMPLE IS CIT V. ANSAL LANDMARK TO WNSHIP (P.) LTD. [2015] 377 ITR 635/234 TAXMAN 825/61 TAXMANN.C OM 45 (DELHI) WHEREIN HON'BLE DELHI HIGH COURT CONFIRMED THE ACTION OF THE TRIBUNAL IN HOLDING THAT THE PROVISION THOUGH STATED TO BE EFFECTIVE FROM 1ST APRIL 2013 MUST BE HELD TO BE EF FECTIVE FROM 1ST APRIL 2005. WHETHER SUCH AN EXERCISE CAN BE DONE IN THE PRESENT CASE IS OF COURSE SOMETHING TO BE EXAMINED AND OU R OBSERVATIONS SHOULD NOT BE CONSTRUED AS AN EXPRESSI ON ON MERITS OF THAT ASPECT OF MATTER. GIVEN THE FACT THAT THE A SSESSEE HAS SUCCEEDED ON MERITS IN THIS CASE IT WOULD NOT REAL LY BE NECESSARY TO DEAL WITH THAT ASPECT OF THE MATTER. 49. THE SECOND ISSUE IS THIS. WE MUST DEAL WITH THE QUESTION WHETHER IN THIS CASE THE MATTER SHOULD HAVE BEEN RE FERRED TO A LARGER BENCH. THE PARTIES BEFORE US WERE OPPOSED TO THE MATTER BEING SENT FOR CONSIDERATION BY THE SPECIAL BENCH AND AT LEAST ONE OF THE REASONS FOR WHICH THE GRIEVANCE OF THE ASSES SEE IS UPHELD I.E. GUARANTEES BEING IN THE NATURE OF SHAREHOLDER ACTIVITY AND EXCLUDIBLE FROM THE SCOPE OF SERVICES FOR THAT REAS ON ALONE IS AN AREA WHICH HAD COME UP FOR CONSIDERATION FOR THE FI RST TIME. IN EFFECT THEREFORE THERE WAS NO CONFLICT ON THIS IS SUE OF AND THE OTHER ISSUES GIVEN DECISION ON THE SAID ISSUE WER E WHOLLY ACADEMIC. IT CANNOT BE OPEN TO REFER THE ACADEMIC Q UESTIONS TO THE SPECIAL BENCH. NO DOUBT SOME DECISIONS OF THE COORDINATE ITA NO. 301/RJT/2015 & CO 57/RJT/2015 DCIT VS. M/S JYOTI AUTOMATION PVT LTD ASSESSMENT YEAR: 2010-11 PAGE 35 OF 36 BENCHES WHICH HAVE REACHED THE DIFFERENT CONCLUSION S. THERE IS HOWEVER NO CONFLICT IN THE REASONING. FOUR SOFT LT D. DECISION (SUPRA) HAD DECIDED THE ISSUE IN FAVOUR OF THE ASSE SSEE BUT THAT WAS WITH RESPECT TO THE LAW PRIOR TO INSERTION TO E XPLANATION TO SECTION 92B. AS FOR THE POST-AMENDMENT LAW AND THE IMPACT OF AMENDMENT IN THE DEFINITION OF 'INTERNATIONAL TRANS ACTION' THE MATTER WAS AGAIN DECIDED IN FAVOUR OF THE ASSESSEE BY BHARTI AIRTEL LTD. DECISION (SUPRA) ON THE PECULIAR FACTS OF THAT CASE. THE DECISIONS LIKE EVEREST KENTO CYLINDERS LTD. (SUPRA) AND ADITYA BIRLA MINACS WORLDWIDE (SUPRA) WERE DECISIONS IN WH ICH THE ASSESSEE HAD CHARGED THE FEES AND FOR THAT REASON SUCH CASES ARE COMPLETELY DISTINGUISHABLE AS DISCUSSED ABOVE. IN PROLIFIC' CORP LTD. CASE (SUPRA) AS INDEED IN ANY OTHER CASE SO FAR IT WAS NOT THE CASE OF THE ASSESSEE THAT CORPORATE GUARANT EES ARE QUASI- CAPITAL OR SHAREHOLDER ACTIVITY IN NATURE AND F OR THAT REASON EXCLUDIBLE FROM CHARGEABLE SERVICES EVEN IF THESE ARE HELD TO BE SERVICES IN NATURE. THAT PLEA HAS BEEN SPECIFICALLY ACCEPTED IN THE PRESENT CASE. THEREFORE THE QUESTION WHETHER ISSUA NCE OF CORPORATE GUARANTEE PER SE IN GENERAL CONSTITUTES A 'INTERNATIONAL TRANSACTION' UNDER SECTION 92B WOULD HAVE BEEN SOME WHAT ACADEMIC QUESTION ON THE FACTS OF THIS CASE. IN ANY EVENT IN PROLIFIC' CORP LTD. CASE (SUPRA) AN EARLIER CONSID ERED DECISION ON THE SAME ISSUE BY COORDINATE BENCH OF EQUAL STRENGT H WAS SIMPLY DISREGARDED AND THAT FACT TAKES THIS DECISION OUT O F THE AMBIT OF BINDING JUDICIAL PRECEDENTS. WE HAVE ALSO NOTED THA T IN VIEW OF THE DECISION A COORDINATE BENCH IN THE CASE OF JKT FAB RICS V. DY. CIT [2005] 4 SOT 84 (MUM.) AND FOLLOWING THE FULL BENCH DECISION OF HON'BLE AP HIGH COURT IN THE CASE OF CIT V. BR CONS TRUCTIONS [1993] 202 ITR 222/[1994] 73 TAXMAN 473 (AP) A DEC ISION DISREGARDING AN EARLIER BINDING PRECEDENT ON THE IS SUE IS PER INCURIUM. SUCH DECISIONS CANNOT BE BASIS FOR SENDIN G THE MATTERS TO SPECIAL BENCH SINCE OCCASION FOR REFERENCE TO SP ECIAL BENCH ARISES WHEN BINDING AND CONFLICTING JUDICIAL PRECED ENTS FROM COORDINATE BENCHES COME UP FOR CONSIDERATION. THAT WAS NOT THE CASE HERE. ALL THESE FACTORS TAKEN TOGETHER IN OUR CONSIDERED VIEW IT WAS NOT POSSIBLE IN THIS CASE TO REFER THE MATTER FOR CONSTITUTION OF A SPECIAL BENCH. IN ANY CASE WHATE VER WE DECIDE IS AND SHALL ALWAYS REMAIN SUBJECT TO THE JUDICIA L SCRUTINY BY HON'BLE COURTS ABOVE AND OUR ENDEAVOUR IS TO FACILI TATE AND EXPEDITE WITHIN OUR INHERENT LIMITATIONS THAT PRO CESS OF SUCH A JUDICIAL SCRUTINY IF AND WHEN OCCASION COMES BY A NALYZING THE ISSUES IN A COMPREHENSIVE AND HOLISTIC MANNER. 50. IN THE LIGHT OF THE DETAILED DISCUSSIONS ABOVE AND FOR THE DETAILED REASONS SET OUT ABOVE WE UPHOLD THE GRIEV ANCE RAISED BY THE ASSESSEE. THE IMPUGNED ALP ADJUSTMENT OF RS 2 2 3 62 603 THUS STANDS DELETED. AS WE DO SO HOWEVER WE MUST ADD THAT IN OUR CONSIDERED VIEW THE WAY FORWARD TO AVOID SUCH ISSUES BEING LITIGATED AND TO ENSURE SATISFACTORILY RESOLUTION O F THESE DISPUTES MUST INCLUDE A CLEAR AND UNAMBIGUOUS LEGISLATIVE GU IDANCE ON THE TRANSFER PRICING IMPLICATIONS OF THE CORPORATE GUAR ANTEES AS ALSO ON THE METHODOLOGY OF DETERMINING ITS ALP IF NECES SARY. ITA NO. 301/RJT/2015 & CO 57/RJT/2015 DCIT VS. M/S JYOTI AUTOMATION PVT LTD ASSESSMENT YEAR: 2010-11 PAGE 36 OF 36 13. WE ARE IN CONSIDERED AGREEMENT WITH THE VIEWS S O EXPRESSED BY THE COORDINATE BENCH. RESPECTFULLY FOLLOWING THE VI EWS SO EXPRESSED BY THE COORDINATE BENCH WE UPHOLD THE RELIEF GRANTED BY THE CIT(A) AND DECLINE TO INTERFERE IN THE MATTER. 10. RESPECTFULLY FOLLOWING THE VIEWS SO EXPRESSED B Y US IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2009-10 WHICH IS DEEMED TO BE ATTACHED TO AND FORMING PART OF THIS ORDER AS WELL WE DISMISS THE GRIEVANCES OF TH E ASSESSING OFFICER AS ALSO THE ASSESSEE. THE ORDER OF THE CIT(A) THUS STANDS CONFI RMED. 11. GROUND NO. 2 IS ALSO THUS DISMISSED. 12. IN THE RESULT THE APPEAL FILED BY THE ASSESSIN G OFFICER AS ALSO THE CROSS OBJECTION FILED BY THE ASSESSEE ARE DISMISSED. PRON OUNCED IN THE OPEN COURT TODAY ON THE 28 TH DAY OF NOVEMBER 2017 SD/- SD/- RAJPAL YADAV PRAMOD KUMAR (JUDICIAL MEMBER) (ACCOUNTANT MEMBER) AHMEDABAD THE 28 TH DAY OF NOVEMBER 2017 **AM**BT COPIES TO: (1) THE APPELLANT (2) THE RESPONDENT (3) COMMISSIONER (4) CIT(A) (5) DEPARTMENTAL REPRESENTATIVE (6) GUARD FILE BY ORDER TRUE COPY ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL RAJKOT BENCH RAJKOT 1. DATE OF DICTATION: ..27.11.2017- PREPARED BY HO NBLE AM ON HIS COMPUTER-...... ... 2. DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE T HE DICTATING MEMBER: ....27.11.2017....... 3. DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR . P.S./P.S.: .28.11.2017...... . 4. DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE TH E DICTATING MEMBER FOR PRONOUNCEMENT: 28.11.2017.. 5. DATE ON WHICH THE FILE GOES TO THE BENCH CLERK : 28.11.2017.. 6. DATE ON WHICH THE FILE GOES TO THE HEAD CLERK : . 7. THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT REGISTRAR FOR SIGNATURE ON THE ORDER: ..