2025 (6) TMI 1989 - AT - Income Tax

TP adjustment - international transaction of the guarantee commission - MAM Most Appropriate Method - benchmarking technique - TPO noted that the assessee charged corporate guarantee fee of 0.5% for international transactions in relation to Associated Enterprise (AE) namely OGDSHIL and NIL in respect of another AE namely Varada applying other method as most appropriate method for benchmarking - HELD THAT - We find that in the case of Foursoft P Ltd 2014 (4) TMI 285 - ITAT HYDERABAD held that the guarantee given to associated enterprises located abroad is in the nature of international transactions. In the case of Avanta India ltd 2015 (12) TMI 1406 - ITAT BANGALORE Tribunal after considering the decision of Bahrti Airtel ltd 2014 (3) TMI 495 - ITAT DELHI upheld the transactions of guarantee to associated enterprises as in the nature of international transactions. Thus no error in the finding of the Ld. DRP that providing corporate guarantee to associated enterprises in relation to borrowing is an international transaction. We uphold accordingly. Rate applied in an earlier assessment year relied for determining the arm s length price in a subsequent year - TPO has adopted a methodology consistent with the provisions of the Income Tax Act and the Rules framed thereunder for computing the arm s length price. Assessee was unable to demonstrate any infirmity either in the method of computation employed by the TPO or in the selection of comparables. It is pertinent to note that while bank guarantees issued by financial institutions to third-party independent entities are distinct in terms of risk profile from corporate guarantees issued between related parties they are nonetheless functionally comparable albeit with certain differentiating factors on the risk front. Corporate guarantees though not identical share substantial functional similarity with bank guarantees necessitating suitable adjustments for risk differentials. In the case at hand the TPO has relied upon the bank guarantee commission rates charged by various banks during the relevant financial year as a comparable uncontrolled price (CUP) and has prudently applied a downward adjustment of 0.5% to account for differences in risk and other qualitative factors. Hon ble Tribunal in Glenmark Pharmaceuticals Ltd 2013 (11) TMI 1583 - ITAT MUMBAI has endorsed the approach of considering the average bank guarantee commission rates as a valid CUP subject to appropriate adjustments for the unique features of corporate guarantees. We find no reason to depart from the said reasoning. Transfer pricing adjustment made by the learned TPO is in accordance with law and is therefore upheld. The ground No. 1 of the appeal of the assessee is accordingly dismissed. Interest from income-tax refund under the head business income as against considered by the AO under the head income from other sources - DRP has rightly rejected the assessee s contention and has correctly held that interest received on income-tax refund is to be assessed under the head Income from Other Sources. In our considered view the interest received on income-tax refund is not derived from any commercial or business activity undertaken by the assessee but is a statutory accretion arising solely as a consequence of excess payment of tax to the revenue. Such interest bears no proximate or real nexus with the business operations of the assessee and is in essence a statutory compensation granted by law for the delay in the refund of monies legitimately due. It does not partake the character of business income nor can it be construed as arising in the normal course of the assessee s business or trade. While it may be contended that classification under different heads is tax neutral in certain situations such neutrality does not hold in cases where the assessee is claiming losses or deductions against business income. Assessee appeal dismissed.

The primary legal issues considered in this appeal pertain to (i) the correctness and quantum of transfer pricing adjustment made on account of corporate guarantee commission charged on international transactions with associated enterprises, and (ii) the classification of interest income arising from income tax refund-whether it should be treated as business income or income from other sources.

Regarding the first issue, the core legal questions were:

Whether the corporate guarantee commission charged by the assessee constitutes an international transaction under the Income Tax Act, 1961, particularly in light of Explanation to section 92B.
Whether the Transfer Pricing Officer (TPO) and Dispute Resolution Panel (DRP) were justified in rejecting the assessee's benchmarked guarantee commission rate and in making an upward adjustment to Rs. 3,42,83,120/- by applying a rate of 1.40%.
Whether the assessee's reliance on earlier ITAT orders restricting guarantee commission rates to 0.25% or 0.5% is binding or applicable to the current assessment year.

The second issue involved:

The proper head of income under which interest income from income tax refund should be assessed-business income or income from other sources.

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustment on Corporate Guarantee Commission

Legal Framework and Precedents: The definition of "international transaction" under section 92B of the Income Tax Act, 1961, as amended by the Finance Act effective 01.04.2002, explicitly includes capital financing transactions such as guarantees. The Explanation to section 92B clarifies that guarantees given to associated enterprises constitute international transactions. This statutory provision is supported by judicial precedents including coordinate benches of the Tribunal in Foursoft P Ltd v DCIT and Avanta India Ltd v ACIT, which have upheld that guarantees to associated enterprises abroad are international transactions.

The Transfer Pricing Officer adopted the Comparable Uncontrolled Price (CUP) method under Rule 10B of the Income Tax Rules, 1962, benchmarking the guarantee commission against bank guarantee commission rates charged by various banks, collected under section 133(6) of the Act. The TPO rejected the assessee's internal benchmarking and the rate of 0.5% claimed by the assessee, relying on the decision in Everest Kanto Cylinder Ltd, upheld by the Bombay High Court, which recognized that bank guarantee rates vary depending on credit risk and other factors, and thus cannot be mechanically applied to corporate guarantees without appropriate adjustments.

Court's Interpretation and Reasoning: The Tribunal noted that while bank guarantees and corporate guarantees are not identical, they share functional similarities, making bank guarantee commission rates a valid external CUP with suitable adjustments. The TPO gathered data from eight banks, showing guarantee commission rates ranging from 0.45% to 3.00%, with a median of 1.90%. The TPO prudently applied a downward adjustment of 0.5% to account for differences in risk profiles and other qualitative factors, arriving at an arm's length rate of 1.40% for corporate guarantee commission.

The assessee's contention that the guarantee commission was part of shareholding activity and not an international transaction was dismissed based on the statutory Explanation to section 92B and relevant precedents. Further, the assessee's reliance on earlier ITAT orders restricting guarantee commission rates to 0.25% or 0.5% was found inapplicable for the current year because the facts and nature of the guarantee transactions differ materially. For example, earlier cases involved negative lien on shares or standby letters of credit with different risk and functional profiles, whereas the instant case involved a corporate guarantee for loan facilities, justifying a higher rate.

Key Evidence and Findings: The TPO's collection of bank guarantee commission rates, the functional and risk analysis distinguishing corporate guarantees from other types of guarantees, and the judicial precedents rejecting mechanical application of bank guarantee rates without adjustments were pivotal. The Tribunal also relied on the assessee's own adoption of a 0.5% rate for one transaction, which was considered but found insufficient in light of the external data.

Application of Law to Facts: The Tribunal applied the statutory provisions and transfer pricing principles to conclude that the guarantee commission charged by the assessee is an international transaction and the TPO's benchmarking methodology using external CUP with appropriate adjustment is justified. The Tribunal emphasized that transfer pricing adjustments must be made with reference to facts and comparables relevant to the assessment year under consideration, and prior years' rates are not binding precedents.

Treatment of Competing Arguments: The Tribunal considered the assessee's arguments on the nature of the transaction and reliance on earlier ITAT decisions but distinguished the facts and rejected the applicability of those precedents. The Tribunal also noted the absence of any infirmity in the TPO's methodology or selection of comparables. The DRP's concurrence with the TPO's findings was upheld.

Conclusion: The Tribunal dismissed the assessee's ground challenging the transfer pricing adjustment and upheld the addition of Rs. 3,42,83,120/- on account of corporate guarantee commission at 1.40%.

2. Classification of Interest Income from Income Tax Refund

Legal Framework and Precedents: Interest received on income tax refund arises under statutory provisions as compensation for delayed refund of excess tax paid. The question is whether such interest income should be treated as business income or income from other sources under the Income Tax Act.

Court's Interpretation and Reasoning: The Tribunal agreed with the DRP and Assessing Officer that the interest income on income tax refund does not arise from any commercial or business activity of the assessee. It is a statutory accretion without proximate nexus to the business operations, and thus does not qualify as business income. The interest is compensatory in nature and does not partake the character of income arising in the normal course of business or trade.

Key Evidence and Findings: The Tribunal relied on the nature of the interest income as a statutory compensation and the absence of any business nexus. The assessee's contention that classification is tax neutral was addressed, noting that such neutrality does not apply when losses or deductions against business income are claimed.

Application of Law to Facts: Applying the legal principles, the Tribunal held that the interest income must be assessed under the head "Income from Other Sources" and not under business income.

Treatment of Competing Arguments: The assessee's argument for classification as business income was rejected as lacking legal merit and contrary to established principles and precedents. The DRP's order was upheld.

Conclusion: The Tribunal dismissed the ground of the assessee challenging the classification of interest income and upheld the assessment of Rs. 1,27,00,000/- under income from other sources.

Significant Holdings:

On the issue of transfer pricing adjustment for corporate guarantee commission, the Tribunal held:

"In view of the foregoing, and respectfully following the decision of the Tribunal in Glenmark Pharmaceuticals Ltd., we are of the considered opinion that the transfer pricing adjustment made by the learned TPO is in accordance with law and is, therefore, upheld."
"It is a well-settled principle in transfer pricing jurisprudence that adjustments are to be made with reference to comparable transactions relevant to the assessment year under consideration. Consequently, the rate applied in an earlier assessment year does not constitute a binding precedent for determining the arm's length price in a subsequent year."

On the classification of interest income from income tax refund, the Tribunal stated:

"Interest received on income-tax refund is not derived from any commercial or business activity undertaken by the assessee, but is a statutory accretion arising solely as a consequence of excess payment of tax to the revenue. Such interest bears no proximate or real nexus with the business operations of the assessee and is, in essence, a statutory compensation granted by law for the delay in the refund of monies legitimately due."

These pronouncements establish the principles that corporate guarantees to associated enterprises constitute international transactions under section 92B, that benchmarking must be fact-specific and year-specific, and that interest on income tax refund is to be assessed as income from other sources due to its statutory compensatory nature.

In conclusion, the Tribunal dismissed the appeal on both grounds, affirming the transfer pricing adjustment on corporate guarantee commission at 1.40% and the classification of interest income under income from other sources.

← Previous Next →