TMI Blog2019 (2) TMI 1778X X X X Extracts X X X X X X X X Extracts X X X X ..... on behalf of its AEs a subsidiary is international transactions. However, while benchmarking the rate of commission, no comparison can be made between guarantee issued by the commercial bank as against corporate guarantee issued by holding company for benefit for its AE subsidiary company for computing ALP of guarantee commission. Corporate guarantee is international transaction which needs to be benchmarked to determine the ALP of said transaction whether or not the assessee has charged any commission on such guarantee. Although, there are divergence view from various bench of Tribunal in the light of Explanation to section 92B of the Act, on corporate guarantee to be not international transaction, but the Hon'ble jurisdictional High Court has taken view that corporate guarantee is an international transaction and accordingly bound by the judicial decision and also to follow the jurisdictional High Court decision, we are of the considered view that corporate guarantee issued by the assessee on behalf of its AE subsidiary company is an international transaction. However, while arriving at rate the AO has taken comparables from commercial banks to at arrive at mean margin of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under section 92CA(3) of the Act by the Ld. Transfer Pricing Officer (TPO) 3. The Ld. AO/TPO erred on facts and in law in disregarding that: (a) The issue of corporate/performance guarantee to AE does not qualify to be an international transaction under the TP regulations. (b) Provision of corporate/performance guarantee on behalf of the Associated Enterprise was not having any bearing on profits, income, losses or assets of the assessee company. The impact on the profits has to be on the real basis whether in the present or future and not on contingent or hypothetical basis. (c) In the provision of guarantee on behalf of the Associated Enterprise, no substantial costs have been incurred and moreover, the guarantee is a type of zero cost, strategic investment for the ultimate sole business interests of the assessee which were duly compensated in the form of high profit margins of the assessee company. (d) That the guarantee provided is incidental to the business of the assessee company and hence cannot be compared to the transaction of providing guarantee by the bank. The factors/consideration which applies for the issuance of a corpora ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o INR ₹ 319 crores and entered into the omnibus loan and security agreement on June 18, 2018. Under subsequent amendment to the aforesaid loan agreement, LARES was required by the lenders to provide good and sufficient performance bond to ensure completion of the project. The required performance bond was arranged by the LARES from Asia United Bank and PNB General Insurance Co. Inc. Philipines for PHP 294.5 Million and 105.5 million respectively. In turn, the assessee issued corporate guarantee in favour of Asia United Bank and PNB General Insurance Co. Inc. for an amount equivalent to performance bond issued by Asia United Bank and PNB General Insurance Co. Inc. 3. During the relevant years, the assessee has reported following international transactions with its AEs:- For the AY 2010-11 (TABLE-1) Sl. No. Associated Enterprise Description of transaction Method(s) used Transaction Value (INR) 1. LARES Providing technical services to LARES TNMM ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e guarantee that assessee was required to provide to LARES under clause 10(c) of the aforementioned integration and software development services agreement in order to determine ALP of the transactions for AY 2010-11. The Ld. TPO had collected the information regarding performance guarantee by making enquiry u/s 133(6) of the Act from various banks and arrived at a mean margin of 1.04% per annum and applied the said rate on total corporate guarantee given by the assessee and made addition of ₹ 31,41,729/- for the AY 2011-12. The Ld. TPO adopted the same average guarantee commission rate as was determined in the order of TPO for AY 2010-11. 5. Aggrieved by the order of the TPO, the assessee preferred an appeal for AY 2010-11 before the Ld. CIT(A) and for the AY 2011-12, the assessee filed its objection before the Ld. DRP. The Ld. CIT(A) and DRP for AY 2010-11 and 2011-12 respectively sustained the additions made by the TPO towards guarantee commission @ 1.04% on corporate guarantee given to Asia United Bank and PNB General Insurance Co. Inc. on behalf of LARES. The observations of the Ld. CIT(A) for AY 2010-11 are as under:- 8. Decision Since the gr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... illipines (LARES), a subsidiary of the assessee. The appellant claimed that the adjustment made by the TPO was not appropriate because issue of performance guarantee is not an International Transaction, therefore no guarantee is chargeable. Moreover, it is a part of contract obligation and shareholder activity along with an additional reason of commercial prudence. On the other hand, it has been pointed out by the TPO that performance guarantees issued by the assessee should not be-v4 compared with the bank guarantee because bank guarantee is secured against assets whereas a financial guarantee issued by the appellant is not. Thus, risk taken in issuing an unsecured financial guarantee by the appellant is much higher. Thus, the mean of guarantee rates charged by the bank cannot be taken as CUP but can be considered as a guide for benchrnarking the unsecured guarantees issued by the appellant. Looking into the mean of the secured guarantee rates and considering the fact that the appellant has issued unsecured performance guarantee, I am of the opinion that the guarantee commission of 1.04% as determined by the TPO is very much reasonable. On verifying the contention as made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tained. 2.3.3 In the present case also, the assessee had issued financial guarantee/ surety/indemnity for not less than Phillipine Peso 400 million (₹ 383 million) in aggregate to MIs PNB General Insurers Co. Inc. Phillipine Peso 105.5 million and Elvis Asia United Bank Phillipine Peso 294.5 million in connection with the issue of a combination of Performance Bond/Surent Bond by /on behalf of M/s Land Registration Systems Inc. Phillipines (LARES), a subsidiary of the of the assessee. The assessee has claimed that the rate of 1.04% charged by the TPO is not appropriate because issue of performance Bond is not an international transaction, therefore, no guarantee is chargeable. Moreover, it is a part of contract obligation and shareholder activity. Performance guarantee has been issued on account of commercial prudence. On the other hand, it has been pointed out by the TPO that performance guarantees issued by the assessee should not be compared with the bank guarantee because the bank guarantee is secured against assets whereas a financial guarantee issued by the assessee is not. Thus, risks taken in issuing an unsecured financial guarantee issued by the assessee is m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its, income, losses or assets of the assessee, therefore, as per the provisions of section 92B(1), if any international transaction does not have any bearing on profits, income, losses or assets shall not qualify as international transaction which needs to be benchmarked as per the provisions of section 92C of the Act. The Ld. AR further submitted that corporate guarantee was in the nature of share holder activity and the assessee did not incur any expenditure, therefore, benchmarking of inactivity of shareholder without any consideration is not in accordance with provisions of the Act, when the definition has been amended for the first time by the Finance Act, 2012. The Ld. AR further submitted that guarantee given by the assessee not as service to LARES, but to protect own interest because the assessee has derived revenue of 91% and 65% respectively for the AY 2010-11 and 2011-12 from its subsidiary LARES. Since, the majority of revenue is from its subsidiary to facilitate business of such a subsidiary is a paramount importance of the assessee, thus, the guarantee was given in a way to protect assessees own business interest in such subsidiary and any charge for the same would in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. v. Dy. CIT [2016] 76 taxmann.com 24 (Kol. - Trib.) xvi. Dr. Reddy's Laboratories Suzlon Energy Ltd. (supra) xvii. Suzlon Energy Ltd. v. Dy. CIT [IT Appeal No. 2074 (Ahd.) of 2013, dated 22-12-2017] xviii. Dy. CIT v. Spentex Industries Ltd. [2018] 94 taxmann.com 419 (Delhi-Trib.) xix. Bombay Dyeing Mfg. Co. Ltd. v. Dy. CIT [2017] 87 taxmann.com 213 (Mum.-trib.) xx. Everest Kanto Cylinder Ltd. v. Dy. CIT [2013] 34 taxmann.com 19 (Mum.-Trib.) xxi. Asstt. CIT v. Nimbus Communications Ltd. [2013] 34 taxmann.com 298/145 ITD 582 (Mum.-Trib.) xxii. Bombay Dyeing Mfg. Co. Ltd. (supra) 7. The Ld. DR on the other hand, strongly supported the order of the Ld. CIT(A) and DRP, and submitted that this issue is already subject matter of deliberations by the jurisdictional High Court Bombay in the case of CIT v. Everest Kentor Cylinders Ltd. [2015] 58 taxmann.com 254/232 Taxman 307/378 ITR 57 where the Hon'ble High Court held that corporate guarantee issued by holding company for the benefit of its AE, a subsidiary company is international transaction, however, while benchmarking, the commission on guarantee i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tees which are treated as the blood of commerce being easily encashable in the event of default, and if the bank guarantee had to be obtained from commercial banks, the higher commission could have been justified. In the present case, it is assessee-company that is issuing corporate guarantee to the effect that if the subsidiary AE does not repay loan availed of it from ICICI, then in such event, the assessee would make good the amount and repay the loan. The considerations which apply for issuance of a corporate guarantee are distinct and separate from that of bank guarantee and, accordingly, commission charged cannot be called in question, in the manner TPO has done. The comparison is not as between like transactions but the comparisons are between guarantees issued by the commercial banks as against a corporate Guarantee issued by holding company for the benefit of its AE, a subsidiary company. In view of the above discussion, appeal does not raise any substantial question of law and it is dismissed. [Para 10] 9. The ITAT, Mumbai in the case of Everest Kanto Cylinders Ltd. (supra) held that guarantee issued by an entity on behalf of its AEs a subsidiary company is inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mmission at the rate of 0.5 per cent from its AE can be said to be at arms length. The difference of 0.1 per cent can be ignored as the rate of interest on which ICICI Bank, Bahrain Branch has given loan to AE (i.e. subsidiary company) is at 5.5 per cent, whereas the assessee is paying interest rate of more than 10 per cent on its loan taken with ICICI Bank in India. Thus, such a minor difference can be on account of differential rate of interest. Thus, on these facts, there is no reason to uphold any kind of upward adjustment in ALP in relation to charging of guarantee commission. Hence, the addition on account of TP adjustment on guarantee commission is hereby deleted and the order of the Commissioner (Appeals) is set aside. [Para 21] 10. In another case, the ITAT, Mumbai Bench in the case of Dy. CIT v. Rolta India Ltd. [2019] 101 taxmann.com 40 had taken a similar view in the light of jurisdictional High Court in the case of Everest Kanto Cylinder Ltd. (supra) and held that guarantee issued on behalf of AE subsidiary is international transaction however no comparison can be made between issued by commercial bank and corporate guarantee issued by entity on be ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
