|CORAM:||G. S. Pannu (AM), Sandeep Gosain (JM)|
|CATCH WORDS:||ALP, corporate guarantee, Transfer Pricing|
|DATE:||April 29, 2016 (Date of pronouncement)|
|DATE:||May 7, 2016 (Date of publication)|
|FILE:||Click here to download the file in pdf format|
|Transfer Pricing: Corporate Guarantees are not comparable to Bank Guarantees & so the commission of 3% charged by Banks is not a benchmark to evaluate the ALP of a corporate guarantee but it has to taken at 0.5%. ITAT decisions which upheld the 3% rate cannot be followed as they are contrary to Everest Kanto 378 ITR 57 (Bom)|
The only dispute that the assessee has contested before us relates to the application of the rate of 3% take by the Transfer Pricing Officer to determine the arm’s length rate of the international transaction of provision of corporate guarantee on behalf of the associated enterprise. Therefore, we confine ourselves to examine the veracity of the arm’s length rate adopted by the income-tax authorities. In the present case, assessee company issued corporate guarantee on behalf of the it’s associated enterprise which enabled it’s associated enterprise to avail banking facilities from HSBC Bank in Mauritius. The Hon’ble Bombay High Court in the case of Everest Kento Cylinders Ltd 232 Taxman 307/ 378 ITR 57 / 277 CTR 511 was considering a somewhat similar situation, where in the matter of guarantee commission fee the adjustment made by the income-tax authorities was based on instances of commercial banks providing guarantees. The Hon’ble Bombay High Court has explained that instances of commercial banks providing guarantees could not be compared to instances of issuance of corporate guarantee. As per Hon’ble Bombay High Court, when commercial banks issue bank guarantees, the same is quite distinct in character, than the situation where a corporate issues guarantee to the effect that, if a subsidiary associated enterprise does not repay a loan, the same would be made good by such corporate. Keeping the said ratio of the Hon’ble Bombay High Court in mind, it is quite clear that the manner in which the Transfer Pricing Officer has proceeded to determine the arm’s length rate based on the probable rate being charged by the commercial banks is not justified. In this view of the matter, we are unable to approve 3% rate of guarantee commission fee determined as arm’s length rate by the income-tax authorities. In the alternative, the addition that is required to be sustained is the position canvassed by the assessee before the Transfer Pricing Officer i.e. adoption of 0.50% as arm’s length rate for the purpose of determining the arm’s length income on account of guarantee commission fee in the present case. The Departmental Representative had referred to certain decisions of the Mumbai Tribunal, wherein a rate higher than 0.50% has also been approved in order to determine the guarantee commission fee. All those decisions are based on the probable rates at which the guarantees are issued by the commercial banks, and in view of the judgment of Hon’ble Bombay High Court in the case of Everest Kento Cylinders Ltd.(supra), such an approach cannot be upheld since the instant is a case, where a corporate guarantee has been issued by holding company for the benefits of its step-down subsidiary associated enterprise. Considering the entirety of facts and circumstances of the case and on the basis of the material available on record, we, therefore proceed to uphold the rate of 0.50% for the purpose of determining the arm’s length rate of the guarantee commission fee.
(1) M/s.Everest Kanto Cylinders Ltd. vs. DCIT,ITA No.542/Mum/2012 order dated 23/11/2012. (232 Taxman 307/ 378 ITR 57 / 277 CTR 511)
(2) Aditya Birla Minacs Worldwide Ltd. vs. DCIT, 56 taxman.com 317 (Mum-Trib)
(3) M/s. Godrej Household Products Ltd. vs. Addl. CIT, ITA No.7369/Mum/2010 order dated 22/11/2013
(4) ACIT vs. Nimbus Communications Ltd., ITA No.3664/Mum/2010 dated 12/06/2013.
Note: Issues as to (i) whether providing of a corporate guarantee on behalf of the associated enterprise is an ‘international transaction’ within the meaning of section 92B of the Act, (ii) whether the corporate guarantee given on behalf of a step-down subsidiary was a strategic requirement of business and was a shareholder activity and (iii) whether providing of corporate guarantee has not resulted to in any interest savings for the associated enterprise and that assessee had also not incurred any cost in respect of such corporate guarantee not considered at the behest of the assessee.