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2023 (7) TMI 1582 - AT - Income TaxTP Adjustment - Arm s Length Price of three international transactions - transaction relates to the fees received by the assessee for giving Corporate Guarantee to its Associate Enterprises in U.K.- TPO was of the view that the assessee ought to have received fees @1.75% instead of 0.5% calculated in the TP Study Report - quantification of the fees required to be charged - HELD THAT - On the strength of host of orders at the end of the ITAT Mumbai Benches Hyderabad Benches it has been laid down that if an assessee has charged fees @0.5% on account of corporate guarantee provided by it then such a fee would be considered at Arm s Length Price and no further adjustment is required to be made. The assessee by adopting this method has worked out the value of Arm s Length Price at Rs. 24, 73, 927/- as against the fee of Rs. 61, 84, 092/- determined by the TPO. 1st Appellate Authority has followed the orders of the ITAT Coordinate Benches for holding that fee is to be charged at 0.50% for providing corporate guarantee. This finding is discernable from paragraph no. 7 of the ld. CIT(Appeals) s order extracted supra. After taking note of this finding we do not wish to interfere in this finding because it is based on the decisions of the Coordinate Benches. TP adjustment - inter-unit transfers of tea leaves by non-eligible units to eligible for deduction u/s 80IE - HELD THAT - Assessee in its T.P. Study Report has taken the price of leaves on average of the complete year whereas the ld. TPO found difference on the basis of monthly average. This methodology of the TPO has not been approved by the CIT(A) and after going through the paragraph 9 of the order of CIT(A) we do not find any ground to interfere with it because the method adopted by the ld. TPO would goad the adjudicating authority on contradictory findings. The TPO has not adopted any uniform method which can determine the inter-unit transfers of the tea leaves at the end of the year. It gives fluctuating results on quarterly basis which is not a correct method for determining the income of any assessee. Interest required to be charged by the respondent-assessee on the loans advanced to its A.E. BTHL which was denominated in USD currency - TPO was of the view that this interest ought to have been charged @9.05% and accordingly made adjustment in the Arm s Length Price towards upward adjustment - CIT(A) held that if both the rates are compared then the margin would fall within the range of /-3% of the ALP. Hence no addition is required to be made - HELD THAT - CIT(Appeals) has specifically held that the correct course of action would have been to compute the simple interest of 9.05% on daily balance basis or atleast monthly balance basis. Merely because on one particular date the peak balance was Rs. 6, 200 lacs does not authorize the TPO to presume that the said balance continued throughout the year to apply simple interest rate at 9.05% per annum for the entire year. Accordingly CIT(Appeals) has held that if this 9.05% interest rate be applied to daily balance basis or atleast monthly balance basis then actual interest charges @9% would be within the prescribed range of /-3% of the ALP and this aspect fall within the ambit provided in section 92C of the Income Tax Act and no adjustment is required. Therefore no interference is called for in this finding of the ld. CIT(Appeals). Appeal of the Revenue is dismissed.
The core legal questions considered by the Tribunal revolve around the determination of the Arm's Length Price (ALP) of three distinct international transactions involving the assessee and its Associate Enterprises (AEs) for the Assessment Year 2014-15. These issues are:
(i) Whether the fees charged for issuance of corporate guarantees to AEs qualify as an international transaction under Section 92B of the Income Tax Act, and if so, what is the appropriate ALP for such guarantee fees; (ii) The correctness of the transfer pricing adjustment relating to inter-unit transfers of tea leaves between non-eligible and eligible units for deduction under Section 80IE, specifically the methodology for determining the transfer price; (iii) The determination of the ALP for interest charged on loans advanced by the assessee to its AE, particularly the applicability of the LIBOR benchmark and the correctness of the transfer pricing adjustment made by the Transfer Pricing Officer (TPO). Issue 1: Corporate Guarantee Fees as an International Transaction and its Arm's Length Price The legal framework involves Section 92B of the Income Tax Act, which defines "international transaction," and the Explanation (c) inserted by the Finance Act, 2012, clarifying that capital financing including guarantees falls within the ambit of international transactions. Prior judicial precedents had divergent views on whether issuance of corporate guarantees constitutes an international transaction. The assessee contended that corporate guarantees are shareholder activities without direct bearing on profits and losses and thus not international transactions, relying on earlier ITAT decisions. However, the CIT(Appeals) and the Tribunal rejected this contention, relying on the amended statutory provision and a later ITAT decision which overruled the earlier view as per incuriam. The Tribunal noted that the amended Explanation to Section 92B explicitly includes guarantees within international transactions, making the issuance of corporate guarantees amenable to transfer pricing provisions under Chapter X of the Act. The Tribunal also examined the appropriate benchmark rate for guarantee fees. The TPO had applied a rate of 1.75%, while the assessee had benchmarked it at 0.5%. The Tribunal referred to multiple coordinate bench decisions from Mumbai, Hyderabad, and Kolkata, which consistently held that guarantee fees between 0.5% and 1% are reasonable and at arm's length. The Tribunal found the TPO's rate excessive and held that the 0.5% rate adopted by the assessee was fair and reasonable. Thus, the Tribunal concluded that the issuance of corporate guarantees is an international transaction under Section 92B, but the guarantee fee should be benchmarked at 0.5%, and the upward adjustment made by the TPO is not justified. Issue 2: Transfer Pricing Adjustment on Inter-Unit Transfers of Tea Leaves This issue concerns the transfer pricing adjustment of Rs. 5,94,091/- made by the TPO on account of inter-unit transfers of tea leaves from non-eligible to eligible units under Section 80IE. The assessee valued these transfers using an average annual weighted price method, whereas the TPO applied the Comparable Uncontrolled Price (CUP) method using monthly average prices selectively for some months where the monthly price exceeded the annual average, resulting in a downward adjustment. The Tribunal examined the methodology and found the TPO's selective application of monthly averages to be arbitrary and inconsistent. The TPO failed to apply the monthly average price uniformly across all months and units, which would have yielded results comparable to the annual average price method. The Tribunal held that the annual weighted average price method adopted by the assessee was more reliable due to the larger data set and uniformity it provided. Consequently, the Tribunal set aside the TPO's adjustment, finding it unsustainable and unjustified. Issue 3: Interest Rate Charged on Loans to Associate Enterprises The assessee had advanced loans denominated in USD to its AE and charged interest at 9%. The assessee benchmarked the interest rate using the CUP method against the prevailing USD LIBOR rate, concluding that the transaction was at arm's length. The TPO disagreed, computing an arm's length interest rate of 9.05% by adding a credit spread to the cost of funds and applying this rate to the peak loan balance, resulting in a transfer pricing adjustment of Rs. 2,16,33,836/-. The Tribunal analyzed the TPO's approach and found it flawed for the following reasons:
Accordingly, the Tribunal held that no transfer pricing adjustment was warranted on the interest charged by the assessee. Significant Holdings and Core Principles Established On the corporate guarantee issue, the Tribunal held:
This establishes that post-amendment, corporate guarantees are international transactions subject to transfer pricing, but the guarantee fee must be benchmarked reasonably, with 0.5% to 1% being accepted rates. Regarding inter-unit transfers of tea leaves, the Tribunal emphasized the need for consistent and uniform pricing methodology:
This underscores that transfer pricing adjustments must be based on consistent and reliable data and methods. On the interest rate charged on loans, the Tribunal held:
This affirms the principle that minor deviations within the statutory tolerance band do not warrant adjustments and that interest benchmarking should be done carefully considering actual loan balances. In conclusion, the Tribunal dismissed the Revenue's appeal, upholding the CIT(Appeals) order that:
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