2019 (2) TMI 1778 - AT - Income Tax

TP Adjustment - whether corporate guarantee issued by entity on behalf of its AEs comes within the definition of international transactions before insertion of explanation to section 92B of Act by the Finance Act 2012? - HELD THAT - No doubt the Finance Act 2012 has inserted Explanation to section 92B with retrospective effect from 01 April 2002 to include the term guarantee within the definition of international transaction. But various benches of the Tribunal have taken view that insertion of explanation to section 92B by the Finance Act 2012 is considered to be prospective in nature therefore held that corporate guarantee issued by an entity on behalf of its AEs is not an international transaction and accordingly no need to compute ALP of said transactions. However we find that the jurisdictional High Court in the case of Everest Kentor Cylinder Ltd 2015 (5) TMI 395 - BOMBAY HIGH COURT has considered identical issue in the light of provision of section 92B and explanation to come to the conclusion that guarantee issued by an entity 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 1.04% and adopted such rate to determine the ALP of corporate guarantee issued by the assessee. Since the jurisdictional High Court in the case of Everest Kanto Cylinder Ltd.has considered the issue and upheld the findings of the Tribunal in estimating 0.5% commission on guarantee. AO as well as the Ld. CIT(a)/DRP erred in adopting 1.04% commission on corporate guarantee issued by the assessee for both assessment years. Hence by following jurisdictional High Court decision we direct the Ld. AO to adopt 0.5% commission on guarantee issued by the assessee on behalf of its AE a subsidiary company in the result appeals filed by the assessee for AY 2010-11 and 2011-12 are partly allowed.

Issues Involved:
1. Legality of corporate guarantee as an international transaction.
2. Determination of arm's length price (ALP) for corporate guarantee.
3. Appropriateness of the rate of commission on corporate guarantee.
4. Use of data obtained under section 133(6) of the Act.
5. Initiation of penalty proceedings under section 271(1)(c) of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Legality of Corporate Guarantee as an International Transaction:
The assessee contested that the provision of a corporate guarantee does not qualify as an international transaction under the Transfer Pricing (TP) regulations. The assessee argued that the guarantee was a shareholder activity and did not have any substantial impact on the profits, income, losses, or assets of the company. However, the Tribunal referred to the jurisdictional High Court decision in the case of CIT v. Everest Kanto Cylinders Ltd., which held that a corporate guarantee issued by a holding company for the benefit of its AE (subsidiary) is indeed an international transaction. Therefore, the Tribunal concluded that the corporate guarantee provided by the assessee qualifies as an international transaction.

2. Determination of Arm's Length Price (ALP) for Corporate Guarantee:
The Transfer Pricing Officer (TPO) made additions to the arm's length price of the international transactions by imputing a commission on the corporate guarantee provided by the assessee. The TPO used data obtained from various banks under section 133(6) of the Act to determine a mean margin of 1.04% per annum and applied this rate to the total corporate guarantee given by the assessee. The CIT(A) and DRP upheld the TPO's findings, stating that the corporate guarantee provides a benefit to the AE and thus a guarantee fee is to be charged.

3. Appropriateness of the Rate of Commission on Corporate Guarantee:
The assessee argued that the 1.04% rate applied by the TPO was too high and not comparable to the nature of the corporate guarantee provided. The Tribunal noted that the jurisdictional High Court in the case of Everest Kanto Cylinders Ltd. held that the considerations for a corporate guarantee are distinct from those of a bank guarantee. The Tribunal concluded that the rate of 1.04% adopted by the TPO was not appropriate and directed the AO to adopt a 0.5% commission on the corporate guarantee, as per the jurisdictional High Court's decision.

4. Use of Data Obtained Under Section 133(6) of the Act:
The assessee contended that the TPO erred in using data obtained from various banks under section 133(6) of the Act without providing adequate opportunity for the assessee to be heard. However, the Tribunal upheld the use of such data, stating that there is no bar in using information collected under section 133(6) for determining the ALP. The Tribunal emphasized that the TPO is obligated to determine the ALP correctly and can use all powers available for this purpose.

5. Initiation of Penalty Proceedings Under Section 271(1)(c) of the Income Tax Act, 1961:
The assessee argued that the initiation of penalty proceedings for concealment of income or furnishing inaccurate particulars of income was erroneous, as the assessee had fully disclosed all material facts and documents during the assessment proceedings. The Tribunal did not specifically address this issue in the detailed analysis, focusing instead on the primary issues related to the corporate guarantee and its ALP.

Conclusion:
The Tribunal concluded that the corporate guarantee provided by the assessee qualifies as an international transaction and must be benchmarked to determine the ALP. However, the Tribunal directed the AO to adopt a 0.5% commission rate on the corporate guarantee, aligning with the jurisdictional High Court's decision. Consequently, the appeals filed by the assessee for AY 2010-11 and 2011-12 were partly allowed.

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