2013 (9) TMI 204 - ITAT MUMBAI

Transfer price adjustment - Bank guarantee commission - Details of the creditworthiness of the AEs not given - CIT upheld partial adjustment of arm's length price - Held that:- a financial loan guarantee is a commitment entered into by the assessee company with a third party lender of its Associated Enterprises which obliges the assessee company to cover the risk of default by its Associated Enterprise and this act thus involves performance or carrying out of service to cover the risk of default for which "price" has to be charged. Even the OECD Transfer Pricing Guidelines 2010 supports this view in para 7.13 where it is explained that where higher credit rating of Associated Enterprise is due to a guarantee by another group member, such association positively enhances the profit making potential of that Associated Enterprise.

There was a clear benefit accrued to the Associated Enterprises by the guarantee provided by the assessee and when such benefit was passed on by the assessee to the said Associated Enterprises, guarantee commission should have been charged at arm's length price. The commercial relationship between the assessee and its Associated Enterprises is distinct and separate from the transactions of giving guarantee and such transactions have to be considered and examined independently in order to determine the arm's length price. - Decided against the assessee.

Rate of guarantee commission - Arm's length price of guarantee commission was determined by the TPO by applying CUP method and the arithmetic mean of 1.5% of the guarantee commission charged by the HSBC Bank in the range of 0.15 to 3% was taken as arm's length price - CIT(A) upheld the CUP method applied by the TPO but adopted the rate of 0.25% of guarantee fee as arm's length price - Held that:- The universal application of rate of 3% for guarantee commission cannot be upheld in every case as it is largely dependent upon the terms and conditions, on which loan has been given, risk undertaken, relationship between the bank and the client, economic and business interest are some of the major factors which has to be taken into consideration - A.O. is directed to recompute the commission for guarantee given by the assessee to its Associated Enterprises @ 0.5% being the arm's length price - Decided partly in favour of Revenue.

Disallowance of software expenses - Amortised the entertainment software expenses - Held that:- details of television entertainment software expenses were not furnished by the assessee before the A.O. and the same furnished for the first time before him were relied upon by the ld. CIT(A) to give relief to the assessee on this issue without giving any opportunity to the A.O. to verify the same - Decided in favour Revenue.

Arm's length price - The assessee did not charge any interest on overdue payments - After a period of time of normally 30 days, would be the expected normal arm's length price - The quantification of notional interest was done by adopting interest at 2.19 % LIBOR on overdue amount beyond 30 days - A continuing debit balance, in our humble understanding, is not an international transaction per se, but is a result of the international transaction - What can be examined on the touchstone of arm's length principles is the commercial transaction itself, as a result of which the debit balance has come into existence, and the terms and conditions, including terms of payment, on which the said commercial transaction has been entered into - It appears that the TPO has adopted interest @ 2.19% LIBOR on balances which exceed 30 days, but LIBOR rate is relevant only in the case of lending or borrowing of funds, and not in the case of commercial overdues – Held that the impugned addition of ₹ 12,51,175 is unsustainable in law – Decided against Revenue.