2025 (7) TMI 367 - AT - Income Tax

TP Adjustment - corporate guarantee to Associated Enterprises - international transaction or not? - scope of clarificatory amendment made to section 92B of the Act w.e.f 01/04/2022 - HELD THAT - Respectfully following the view taken by the Coordinate Bench of the ITAT Vizag Bench in the assessee s own case 2018 (10) TMI 127 - ITAT VISAKHAPATNAM wherein the Tribunal has relied on various decisions of the Tribunal on similar issue we hold that the corporate guarantee given by the assessee on behalf of the AE in the absence of any expenditure being incurred by the assessee would not constitute an international transaction within the meaning of section 92B of the Act. Accordingly we uphold the order of the Ld. CIT(A) and dismiss the grounds raised by the Revenue. Difference in price charged to assessee s AE when compared sale to non-AE - assessee has supplied instant coffee to the AEs and non-AEs in different sizes i.e. 11 sizes out of which the TPO has taken only two sizes i.e. 100 grams and 200 grams and suggested adjustment - CIT(A) deleted addition - HELD THAT - As decided in assessee s own case 2020 (2) TMI 558 - ITAT VISAKHAPATNAM assessee by submitting all the details explained before the TPO that the assessee has charged for AE as well as non-AE similar prices for the supply of instant coffee and no profit has been shifted to AE however the TPO not accepted the explanation given by the assessee and suggested TP adjustment without giving any reasons. The TPO has not given what is the reason for choosing only two sizes 100 grams and 200 grams when the assessee specifically submitted before the TPO that out of 11 sizes 6 sizes the assessee has charged high price and submitted that average has to be taken. Without considering the same the TPO simply suggested adjustment by taking only two sizes in our opinion the assessee has discharged the burden casted upon him to show that it has not shifted profits to AE therefore it is the duty of the TPO to establish that the assessee has shifted profits to AE. In this case without giving any reason simply suggested TP adjustment by the TPO. We find that TPO is not correct. Thus we find that the ld. CIT(A) has considered the facts and directed the Assessing Officer to delete the addition. Interest on receivables - as per TPO in case of trade receipts from AEs beyond credit period the delayed receipts are proposed to be treated as unsecured loans advanced to the AEs for the period of delay and the interest rate is proposed to be charged on the basis of average SBI PLR during the financial year 2015-16 - CIT(A) deleted addition - HELD THAT - Aa Vizag Bench in the assessee s own case 2019 (4) TMI 1820 - ITAT VISAKHAPATNAM held that transactions with the AEs are at arms length price. All the AEs are 100% subsidiary companies and the assessee is debt free company having large amount of reserves. The department has not made out a case of undue advantage of allowing credit. CIT(A) has given finding that the receivables were received in reasonable period and there was no delay. The department did not place any evidence to controvert the finding given by the Ld. CIT(A). Therefore we hold that there is no case for making adjustment of interest on receivables in the assessee s case.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in the appeals filed by the Revenue against the orders of the Commissioner of Income Tax (Appeals) relate primarily to transfer pricing adjustments under the Income Tax Act, 1961. The key issues are:

• Whether the corporate guarantees provided by the assessee to its Associated Enterprises (AEs), particularly 100% subsidiaries, constitute an "international transaction" within the meaning of section 92B of the Act, thereby attracting transfer pricing adjustments.
• The applicability and retrospective effect of the clarificatory amendment to section 92B of the Act, effective from 01/04/2022, defining corporate guarantees as international transactions.
• Whether the corporate guarantee creates a direct bearing on the profits, income, losses or assets of the assessee warranting adjustment of Arm's Length Price (ALP).
• Whether the decisions of the Commissioner of Income Tax (Appeals) violate the ratio laid down by the Madras High Court in PCIT vs. Redington (India) Ltd. regarding corporate guarantees as international transactions.
• On the issue of sale of instant coffee to AEs, whether the transfer pricing officer (TPO) erred in selecting comparables and in applying the CUP method, including the treatment of different packing sizes and currency invoicing.
• Whether the CIT(A) was justified in deleting the ALP adjustment suggested by the TPO on account of price differences between sales to AE and non-AE.
• Whether interest on delayed receivables from AEs constitutes an international transaction requiring transfer pricing adjustment, and whether the CIT(A) erred in rejecting the benchmarking analysis of the TPO.
• Whether the assessee's delay in receivables from AEs was reasonable and whether interest should be charged on such delayed payments.

2. ISSUE-WISE DETAILED ANALYSIS

A. Corporate Guarantee as an International Transaction

Relevant legal framework and precedents: Section 92B of the Income Tax Act defines "international transaction" and includes transactions between associated enterprises. A clarificatory amendment effective 01/04/2022 explicitly includes corporate guarantees within the ambit of international transactions. Judicial precedents include the Madras High Court decision in PCIT vs. Redington (India) Ltd. which held corporate guarantees as international transactions. Various ITAT decisions, including those in the assessee's own cases for AYs 2013-14, 2014-15, and 2015-16, have held that corporate guarantees provided by a parent company to its 100% subsidiaries, where no expenditure is incurred by the parent, do not constitute international transactions.

Court's interpretation and reasoning: The Tribunal examined the facts and found that the assessee provided corporate guarantees to its 100% subsidiaries without incurring any cost or guarantee fee. The Tribunal relied on earlier coordinate bench decisions and the assessee's own precedents, which consistently held that such guarantees are shareholder functions rather than commercial transactions warranting transfer pricing adjustments. The Tribunal distinguished the Madras High Court decision in Redington on facts, noting that in that case bank guarantees (not corporate guarantees) were provided and the guarantees were not fully secured, unlike the present case.

Key evidence and findings: The assessee's subsidiaries had fully secured loans, and no bank guarantees were given. The assessee did not incur any expenditure or receive any consideration for the corporate guarantees. The guarantees were extended as a matter of commercial support to wholly owned subsidiaries.

Application of law to facts: Since no expenditure was incurred and no consideration received, the guarantees did not have a direct impact on profits or assets in a manner that would constitute an international transaction under section 92B. The clarificatory amendment to section 92B was not retrospective and thus not applicable to the assessment years under consideration.

Treatment of competing arguments: The Revenue argued that the clarificatory amendment and the Redington decision mandated treating corporate guarantees as international transactions. The Tribunal rejected these contentions on the basis of factual distinctions and the principle of consistency with prior decisions in the assessee's own cases.

Conclusions: The Tribunal upheld the CIT(A)'s orders deleting the additions on account of corporate guarantee fees, holding that corporate guarantees given by the assessee to its AEs without incurring any expenditure do not constitute international transactions within the meaning of section 92B of the Act.

B. Transfer Pricing Adjustment on Sale of Instant Coffee to AEs

Relevant legal framework and precedents: Transfer pricing provisions require that international transactions be conducted at arm's length price. The CUP (Comparable Uncontrolled Price) method is a prescribed method under Rule 10B of the Income Tax Rules, 1962. The proviso to section 92C(2) allows a tolerance band of 3% in price differences. Judicial precedents emphasize the need for appropriate selection of comparables and consideration of material differences.

Court's interpretation and reasoning: The Tribunal observed that the TPO selected only two packing sizes out of eleven for comparison, disregarding the fact that in some sizes the price charged to AEs was higher and in others lower, resulting in an overall difference within the permissible range. The CIT(A) rightly directed deletion of the adjustment as the TPO failed to consider the entire range of products and did not provide reasons for selective comparison. The Tribunal found no reason to interfere with the CIT(A)'s order.

Key evidence and findings: The assessee supplied instant coffee in various pack sizes to both AEs and non-AEs. The overall price difference was only 1.49%, within the 3% tolerance limit. The TPO did not consider currency invoicing differences or cost components like insurance and freight in the comparison.

Application of law to facts: The Tribunal applied the CUP method correctly by considering the entire product range and found no basis for adjustment. The selective approach by the TPO was deemed unfair and unjustified.

Treatment of competing arguments: The Revenue contended the TPO's approach was correct; the Tribunal disagreed, emphasizing the need for holistic comparison and adherence to prescribed methods.

Conclusions: The Tribunal upheld the CIT(A)'s deletion of the transfer pricing adjustment on sales to AEs.

C. Interest on Delayed Receivables from AEs

Relevant legal framework and precedents: Section 92B includes transactions involving the provision of services and loans between AEs. The Explanation to section 92B introduced by the Finance Act, 2012, clarifies that delayed payments may attract transfer pricing adjustments for interest. However, judicial precedents including decisions of the ITAT and High Courts have held that if the overall profit level indicator (PLI) is comparable or higher than comparables, and no undue advantage is established, no separate interest adjustment is warranted. Key cases include McKinsey Knowledge Centre India Pvt. Ltd. and Kusum Healthcare Pvt. Ltd.

Court's interpretation and reasoning: The Tribunal noted that the assessee had a higher PLI than comparables, indicating no profit shifting. The TPO's interest rate applied (8%) was challenged as excessive given the assessee's cash-rich position and low borrowing costs. The Tribunal found that the assessee had not extended loans but only had trade receivables, and delays were commercially justified and consistent with non-AE transactions. The CIT(A) rightly deleted the addition for interest on delayed receivables.

Key evidence and findings: The assessee's outstanding receivables from AEs were within reasonable credit periods, with no evidence of systematic undue credit extension or financial advantage. The assessee's net profit margin was significantly higher than comparables. The TPO failed to provide detailed evidence of delay periods or undue benefit.

Application of law to facts: The Tribunal applied the principle that no notional interest should be charged where the overall transfer pricing is at arm's length and no undue advantage is established. The commercial realities and business practices were duly considered.

Treatment of competing arguments: The Revenue relied on the Finance Act amendment and various decisions to argue for interest adjustment. The Tribunal distinguished these on facts and emphasized the absence of evidence for undue benefit or systematic delay.

Conclusions: The Tribunal upheld the CIT(A)'s deletion of interest on delayed receivables additions.

3. SIGNIFICANT HOLDINGS

"Thus, we hold that when a parent company extends an assistance to the subsidiary, being associated enterprise, such as corporate guarantee to a financial institution for lending money to the subsidiary, which does not cost anything to the parent company, and which does not have any bearing on its profits, income, losses or assets, it will be outside the ambit of international transaction under section 92B(1) of the Act."

"The Explanation to Section 92B cannot be applied retrospectively and for the years under consideration the assessee having not incurred any costs in providing corporate guarantee it would not constitute 'International Transaction' within the meaning of Section 92B of the Act and consequently, ALP adjustment is not warranted on this aspect."

"The TPO's selective comparison of only two sizes out of eleven for CUP analysis without considering the entire sales and without giving reasons is unjustified. The overall price difference of 1.49% is within the permissible limit of 3% as per proviso to sub-section (2) of section 92C."

"No separate benchmark is required on receivables when PLI is comparable or higher. The delay in receivables was commercially justified and there was no undue advantage or systematic planning to allow undue credit to the AE."

"The Revenue has not made out case of disallowance of notional interest on delayed payments and accordingly, we set aside the orders of the authorities below and delete the addition."

Core principles established include the non-retrospective application of clarificatory amendments, the distinction between corporate and bank guarantees in transfer pricing, the necessity of comprehensive and reasoned comparable selection in CUP method, and the principle that notional interest on delayed receivables is not chargeable where overall transfer pricing is at arm's length and no undue advantage is demonstrated.

Final determinations on each issue resulted in dismissal of the Revenue's appeals and upholding of the CIT(A)'s orders in all three assessment years under consideration.