taxsutra All rights reserved SECTION XIV

ITEM N0.4 COURT N0.12

S U p R E ME C O U R T O F I ND I A
RECORD OF PROCEEDINGS
Petition(s) for special Leave to Appeal (C) No(s). 1780-1701/28 24

~Arising out of impugned final judgment and order dated 22-03-2823

in ITA No. 233/2828 22-83-2023 in CMAP.PL No. 34737/2028 passed by
the High Court of Delhi at New Delhi)
COMMISSIONER OF INCOME TAX (INTERNATIONAL TAXATION) 1 Petitioner(s )
VERSUS

BHARTI AI&Eb LIMil~P Respondent(s )

(FOR ADMISSION and I.R. and IA No.6888/2824-CONDONATION OF DELAY IN

FILING and IA No.6879/2824-EXEMPTION FROM FILING C/C OF THE
IMPUGNED JUDGMENT)

Date: 86-82-2924 Jhese petitions were called on for hearing today.

CORAM:
HON'BLE MRS. JUSTICE B.V. NAGARATHNA
HON'BLE MR. JUSTICE AUGUSTINE GEORGE MASIH
For Petitioner(s )
<i:
Mr.
N venkatraman. A.s.g";)
Rupesh Kumar, Sr. Adv.
Raj Bahadur Yadav, AOR
Mr. Prashant Singh Ii, Adv.
Mr. Annirudh Sharma Ii, Adv.
Mr. Rajeev Ranjan, Adv.
Mr. Hemant Kumar, Adv.
Mr. Rohit Verma, Adv.

For Respondent(s ) Mr. Sachit Jolly, Adv.

UPON hearing the counsel the Court made the following
0 R D E R

Pursuant to our order dated ;s. 81. 2824, the commissioner of

Income Tax (Internation al Taxation-I), New Delhi has filed an

affidavit clearly stating that pursuant to the impugned order of

the ITAT dated 17.03.2816, a decision was taken not to file an
&p,-.,•HolV..-.d

p a l ~ That it was only after coming to know that in the case of

M/s Vodafone south Limited, the ITAT, Bangalore Bench had given a

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decision in favour of the Department that as an
decided to file an appeal in the instant case.

We do not think that the said explanation has any merit in

explaining the delay in filing the appeal before the High court and
neither can it be construed to be aG.;.tficient caus~for condoning
the same.
In the circumstances, the High Court was justified in
dismissing the ap~eal filed under section 260A of the Income Tax
Act on the~d of de~
We do not find any merit in the special leave petition(s) as
the impugned order not call for any interference.
Hence, special leave petition(s) is/are dismissed..
-
Pending application(s), if any, shall stand disposed of.

(RADHA SHARMA) (MALEKAR NAGARAJ)

COURT MASTER (SH) COURT MASTER (NSH)

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Bharti Airtel rulin

9-
oec1s1on
· · for Assessee or discipline for Revenue?
Apr 11, 2014

T P Ostwal
International Tax Expert and Chartered Accountant

Recently Hon'ble Delhi Income Tax Appellate Tribunal ('ITAT' or 'Tribunal') pronounced a landmark
decision in case of Bharti Airtel Ltd vs, ACII [TS-76-ITAT-2014(DEL)-TPJ, dealing with various important
questions of facts and law including whether provision of corporate guarantee falls within the meaning of
'ID.!_ernational Transaction' as gjyen io Section 92B of the locome-tax Act 1961 l'IIA').

Functioning of tax authorities

The Tribunal has heavily criticized the frivolous orders, passed casually by the Assessing Officers ('AO').
Tribunal even went to the extent of questioning the efficiency of the so called Dispute Resolution Panel
('DRP'). Tribunal in para 11 of the order clearly observes that t h o ~ cannot condone but may
understand such frivolous additions made by AO, who are relativel~nd inexperienced officers,
however, such decisions from DRP, the members of which are distinguished, senior and eminent
commissioners, is disservice to the cause of justice and cause of nation. It is in the right earnest that the
ITAT observed unprodyctjye fynctjgnjng pf DRP.

Professional persons' experience is not any different. It is high time that Government should set up
autonomous and full time DRP, rather than part time body consisting of persons who are over occupied
with other activities. How do they justify dual role, having required handling conflicting and exactly ~l/:J-

t
opposite functions? In fact without a full-fledged secretariat DRP, most cases get orders by the same c.o,r
person who passed original order i.e. either AO or TPO and hence how can one expect justice from them? mt
It is commonly observed that few DRP directions do not deal wjth the jsspes coJ:J1preh0r:isbcety and in an
efficient manner. The experience amongst tax professionals shows that the few DRP members do not
provide sufficient time for hearing the dispute and the directions resulting from such hurried process
never provides resolutions for the disputes.

Tribunal precisely observed that the members of DRP have a heavy work load and demanding schedules
but these factors should not become the reasons for futile proceedings of resolving disputes. Government
& Central Board of Direct Taxes ('CBDT') need to take a serious note of such fcuitfess functionjng of the
gae. Government or CBDT should take adequate measures to achieve the real objective of resolving the
disputes and thereby make the DRP proceedings fruitful, effective and efficient.

The society demands a 'good governance', 'transparent' and 'accountable' functioning of the civil
authorities, but general experience in dealing with civil authorities indicates otherwise. The approach of
the few Income-tax authorities at times appears to be high handed, which brings bad name to the
community.
5015'0~
In my opinion, ITAT was very charitable in its observations on DRP as well as on Departmental
Representatives ('DR'). leave aside AO who made an addition of Rs. 5,739 crores ~hout application of
mind. Time has come to appoint a commission to look into excuses committettby such officers which are
patently in violation of law and/or intentionally done and hence are not pardonable. If it is ignorance then

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it is necessary to ascertain competence of

such officers.
T n'b unal also · reprim
·
anded the mechanical reliance on the order
a nd experienced DR. ITAT observed that many s of Income-tax auth on·t·,es bY learn
.. ed
a times DRs place blind reliance on the frivol
made by AOs and then attem pt to defend ous addi,t,o~s
the same witho ut reasonable defense. Tribu
held th at it is impo rtant for learned DRs to nal categonca Y
scrutinize the blata ntly unreasonable cond
th en defend the
case before Tribunals. uct of th e AOs a nd

It is ~ost impo rtant to note that after deali

ng with irrationalities in behavior of Income
described above, the Tribunal felt the need tax authori_tie~ as
for rejuvenation of the Income-tax depa rtme
The Tribu nal at para 11 of the orde r observed nt's funct ionin g.
as follows:
l'The time has come that a strong institution
and de-incentivizing this kind of a cond uct"
al check is put in place for dealing with such
even tualit ies J •
. . . .
o... lht >~ ...\--0 " ' ~ '*• ~~ p,v'3 vt.T
1

The said dec1s1on Is thus crucial from the view .tY<A - '-I}) - C>, s-~ ~SC .
of accountable, transparent and reaso nable functioning of
the few Income-tax authorities and also learn
ed DRs. Hence, one can conclude that the
ITAT comes out of sheer frustration, lookin observation of
g at the casual attitu de in functions of erson
which is nothing but realit y and ITAT must s at all levels,
e complimente to ar Icu ate these issues in
also suggesting discipline and measures for r orde r and
officers, DRP as well as DRs.
Such bold decisions from the Tribunal dese
rve grea t appreciation and applaud.
Deci sion on corp orate guar ante e

Anot her aspect of the said decision in case

of Bharti Airtel case is transfer pricing in case
guara ntee, which is a classic and landm of corporate
ark decision. The decision exhibits a uniqu
comm ercia l sense and judicial interp retat ion e combination of
of law.
Today_ in India, we are facing an era wher
e trans fer pricing regulations are applied
f~llow ing a mechanical process and witho ut th§preticall)r bx
understanding the nitigrities of the business
prude nce. In most cases, Transfer Pricin and commercial
g Officers ('TPO') are carrying out economic
relate d party trans actio ns witho ut heeding analysis of the
to the ground reality of the transactions and
They cann ot be blamed for such functionin economic sense.
g as it is a systemic error, where officers are
TP scrut iny in most cases (Financial limit told to carry out
set at Rs.15 Crores in the year 2003 as per
03/20 03 has not been changed till today , wher CBDT instruction
eas MP's entitl emen t to spend money in their
is doubled and 6th and 7 th pay comm constituency
ission increased remuneration of gove rnme
signi fican tly). Unlike other coun try practices, nt employees
in India, by and large, almost every internation
enter ed into by the taxpa yers is subject matte al transaction
r of audit by the Income-tax authorities, resul
and non-sustainable additions by the depa ting in heavy
rtme nt to meet targets. A firm, autho ritativ
is needed to avoid the endless ljtigatiao aod e judicial guidance
bar ~..Q .U:~ taxpayers. 75% of worlds tcaostec
l~ga tion exist s in India and that tqQ pr;ic;ing
so quickly in last 10 years.
In a dyna mic world, business realities chan
ge so frequ ently that one cannot afford to do
based on earlie r year' s orders. Therefore, copy paste work
one cannot be ignor ant of commercial realit
being a share holde r, is required to fund all ies i.e. a parent
its subsidiaries adequately. If it cannot do
allow them to raise funds on the ba_sis of
corp_ora~e guarantee. Then, how can one
so then it has to t IN
commissioo) foe ooo pelfo rman ce of its own charg e !guarantee I j(
ob~ atI0 ~
\
Generally the infere nce is draw n from the
fact that, when a third party like bank gives
indep ende nt trans actio ns, they charge guara guarantee in
ntee fees and similarly even when a guara
to subsidiary then, commission should be ntee is provided
charged on arm's length basis. This approach
and devo id of comm ercia l and economic sense is grossly wrong
. The iss of cor orate uarantee does not have an
impa ct on profits, income, losses or asset
s oUhe gll,grantoi;...as.£,.orres._tly obs~rve,d.J
no cost associated with it whereas in bank lv,,ITAT. A sot er~ 1s
ing world the facts are totall y differ ent. Bank
unlim ited guara ntee on b~ha lf of their clien s cannot give
ts. Provision of bank guarantee is a funct ion
adeg uac~ norms prescribed by Res$[Ve Bank based on ca_p~tal
of India, ~hich ~eeds to be_ ~omplled by ban.k
bank gus:?rantee. Hence, there is cost asso s beffil e gJY-m_g
ciatea with funct ion of provIs1on of g~ara_ntee
there fore, they need to charge adeq uate by banks _and
compensation. Further, such compensation
1s based on vanous

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factors such as size of uarantee, credit rating of clients, bankin relations of such clients etc. Therefore,
to compare the corporate uaran ee wit an guarantee is farfetc It is certainly difficult to conduct
proper benchmar mg for the simple reason a in case o corporate guarantee, there is no cost and
~ntrepreneur has vested interest jp future earnings of the subsidiary. Parent company has right to enjoy
all profits earned by subsidiary which is again dependent on their ability to borrow funds at concessional
rate of interest due to corporate guarantee of parent. Such a right to enjoy profits and provision of
corporate guarantee are inseparable. Whereas there is no such benefit expected by the third party
banker who provides guarantee at cost and hence, these two types of transactions are not at all
comparable for determining arms length price Thus, the logic behind charging a guarantee commission
and benchmarking methodology based on guarantee commission charged by bank in itself is based on
wrong analysis.

In this case, TPO adopted bank guarantee comm1ss1on rate of 2.68% plus 200% basis points i.e.
guarantee commission of 4.68%. In international markets, the borrowing rates are less than this. How can
one expect such a high commission for guarantee, which is e uivalent to or hi her than borrowing rate.
In India, FOi is far higher than 001. Thus, the question arises, 1 ore1gn companie s a argmg
corporate guarantee commission to its Indian subsidiaries, whether Income tax department will allow the
payment of corporate guarantee commission at the rates as high as 4.68%? This will result in heavy
impact on Indian foreign exchange outflow. For foreign companies, it would be excellent source of tax
free revenues from India. Whether it is in the interest of Indian economy to encourage the heavy outflow
on account of such corporate guarantee fees? It will be appropriate for Revenue authorities to first peruse
the adverse impact of the actions taken and then carry out such arbitrary adjustments.

It is therefore important to welcome, admire and follow the decision of Delhi ITAT in case of Bharti Airtel.
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