2022 (3) TMI 1463 - AT - Income Tax

TP Adjustment - transaction of Payment for Corporate Guarantee Fees - international transaction or not? - TPO treated Provision of Corporate Guarantee as a shareholder s functions - HELD THAT - TPO/AO/CIT(A) considered the provision of corporate guarantee only as a shareholder s function being not in the nature of any service rendered by the A.E. and thus no payment was required to be paid to the A.E. As the TPO/AO rejected the combined benchmarking analysis conducted by the assessee and did not consider the said transaction as an international transaction, as claimed by the assessee, and benchmarked the same accordingly, we are of the view that matter be remanded to TPO only to benchmark the transaction of Payment for Corporate Guarantee Fees as an international transaction. As in the present case, TPO/AO wrongly treated Provision of Corporate Guarantee as a shareholder s functions instead of treating the same as an international transaction under the provisions of Explanation (i) to section 92B of the Act and accordingly computed the ALP of the same at NIL. This is not a case where TPO computed the ALP by applying incorrect benchmarking method. Rather, in the present case, the TPO/AO erred in characterisation of the transaction resulting in erroneous conclusion and benchmarking. It is also not been disputed by the assessee that Payment for Corporate Guarantee Fees is an international transaction as per Explanation (i) to section 92B of the Act. Thus, in view of the settled legal position and also the relevant statutory provisions, we deem it appropriate to restore the matter to the TPO/AO only to benchmark the transaction of Payment for Corporate Guarantee Fees after considering the same as an international transaction. Needless to mention that before passing the order the AO/TPO shall grant opportunity of hearing to the assessee.

Summary

Issues:
1. Determination of arm's length price for payment of corporate guarantee fees
2. Characterization of corporate guarantee as an international transaction
3. Rejection of combined benchmarking analysis by the TPO

Analysis:
1. Determination of arm's length price for payment of corporate guarantee fees:
The appellant contested the determination of the arm's length price (ALP) of the international transaction involving payment of corporate guarantee fees. The Transfer Pricing Officer (TPO) rejected the combined benchmarking analysis conducted by the appellant and considered the corporate guarantee as a shareholder activity, leading to an ALP of NIL and an adjustment of INR 7,23,100. The Commissioner of Income Tax (Appeals) upheld this adjustment. However, the appellant argued that the payment for corporate guarantee was in line with Safe Harbour Rules and should be considered at ALP. The Tribunal acknowledged the settled legal position that the provision of a corporate guarantee constitutes an international transaction. Therefore, the matter was remanded to the TPO for benchmarking the transaction as an international transaction.

2. Characterization of corporate guarantee as an international transaction:
The TPO, Assessing Officer (AO), and CIT(A) initially considered the provision of a corporate guarantee as a shareholder's function rather than an international transaction. However, the Tribunal clarified that the provision of a corporate guarantee falls within the definition of an international transaction as per Explanation (i) to section 92B of the Income Tax Act. Citing relevant case law, the Tribunal emphasized that the issuance of a corporate guarantee constitutes an international transaction. The Tribunal directed the TPO to benchmark the transaction of payment for corporate guarantee fees as an international transaction, acknowledging the legal position and statutory provisions.

3. Rejection of combined benchmarking analysis by the TPO:
The TPO rejected the appellant's combined benchmarking analysis, stating that the international transactions were independent and not interrelated. This led to the incorrect characterization of the corporate guarantee transaction and the subsequent adjustment. The Tribunal noted that the TPO erred in characterizing the transaction and emphasized the need to consider the payment for corporate guarantee fees as an international transaction for proper benchmarking. The Tribunal allowed grounds 2 to 6 in the appellant's appeal for statistical purposes, emphasizing the need for a correct characterization and benchmarking of the transaction.

In conclusion, the Tribunal's judgment focused on the proper characterization of the corporate guarantee transaction as an international transaction and directed the TPO to benchmark the payment for corporate guarantee fees accordingly. The decision highlighted the importance of adhering to legal definitions and precedents in transfer pricing assessments to ensure accurate determination of arm's length prices.