2018 (5) TMI 1816 - AT - Income Tax

TPA - Determination the ALP of the charge for giving a corporate guarantee - CUP method applicability - Held that - Issuance of a corporate guarantee is a non-fund based transaction. The assessee in this case has obtained the quotes from RBS and as well as from Indusind Bank. The credit rating of the assessee and other financial data were considered by the banks before giving a free quote to the assessee. Thus in our view the free quotes taken by the assessee for the very same transactions do constitute material for determination of ALP. Though the assessee has quoted a decision in the case of Asian Paints 2011 (10) TMI 629 - ITAT MUMBAI in support of its contention that the CUP method should be used for determination of arm s length price and that such exercise would result in determination of ALP at 0.20% we do not apply the same as factually they are variations in facts. The credit rating of an organisation etc. plays an important role in determination of the rate. Geographical location local government regulations etc. are also to be considered. In this case corporate guarantee has been provided by the assessee to ABN AMRO Bank for AE BAMPL Mauritius and Strategic Food International Co. LLC Dubai. Royal Bank of Scotland has given a free quote of 0.25%. This quote constitutes the ALP of this International Transaction in question. The average adopted by the assessee as ALP is in our view not the right approach as averages do not always give logical results. As this quote is the basis on which this transaction has taken place we are of the opinion that this should be taken as the ALP. Hence we direct the TPO as well as the Assessing Officer to adopt 0.25% as the ALP. Appeal of the Assessee is allowed in part.

Summary

Issues:
- Transfer pricing adjustment on a corporate guarantee provided by the assessee to its AEs.
- Applicability of international transaction definition under Section 92B.
- Methodology for determining arm's length price (ALP) of corporate guarantee commission.
- Use of interbank lending rate as a benchmark for ALP determination.
- Dismissal of some grounds by the assessee.
- ALP determination based on free quotes obtained.

Transfer Pricing Adjustment on Corporate Guarantee:
The appeal concerned a transfer pricing adjustment made on a corporate guarantee provided by the assessee to its associated enterprises (AEs). The assessee, a public limited company engaged in manufacturing and trading bakery and dairy products, had given guarantees to ABN AMRO Bank NV. The Transfer Pricing Officer (TPO) determined the ALP at 3%, while the assessee calculated it at 0.2% based on quotes from Royal Bank of Scotland and Indusind Bank. The Dispute Resolution Panel (DRP) directed the TPO to use the interbank lending rate as a benchmark, considering the credit rating and other factors. The assessee appealed against this adjustment, arguing that corporate guarantees did not impact profits directly and were not international transactions under Section 92B.

Applicability of International Transaction Definition:
The assessee contended that the Finance Act, 2012, which amended the definition of "international transaction" in Explanation to Section 92B, applied prospectively from FY 2012-13 and not to the relevant FY 2011-12. This argument aimed to establish that the corporate guarantees provided to AEs should not be considered international transactions and, therefore, not subject to transfer pricing adjustments.

Methodology for Determining ALP:
The methodology for determining the ALP of the corporate guarantee commission was a key issue. The DRP used the interbank lending rate as a benchmark, but the appellate tribunal found this approach inappropriate as it was for fund-based transactions, whereas the guarantee was a non-fund based transaction. The tribunal considered the free quotes obtained by the assessee from banks, especially a quote of 0.25% from Royal Bank of Scotland, as a more suitable basis for determining the ALP.

Use of Interbank Lending Rate as Benchmark:
The tribunal disagreed with the DRP's use of the interbank lending rate as a benchmark for determining the ALP of the corporate guarantee commission. It emphasized that the quotes obtained by the assessee from banks, reflecting factors like credit rating and financial data, were more relevant for determining the ALP in this case.

Dismissal of Some Grounds by the Assessee:
The assessee decided not to press certain grounds related to whether corporate guarantees constituted international transactions and whether the Finance Act, 2012, applied retrospectively. These grounds were dismissed as not pressed by the tribunal.

ALP Determination Based on Free Quotes Obtained:
Ultimately, the tribunal allowed the appeal in part, directing the TPO and the Assessing Officer to adopt the 0.25% quote obtained from Royal Bank of Scotland as the ALP for the international transaction involving the corporate guarantee. This decision was based on the importance of considering the actual quotes obtained by the assessee for determining the arm's length price accurately.