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2021 (3) TMI 1162 - AT - Income TaxTransfer pricing addition on account of Corporate guarantee - TPO observed that the assessee gave Corporate guarantee for its Associated Enterprises (AEs) but just reported in its Transfer Pricing report that it had not incurred any costs in providing guarantees - Whether furnishing of Corporate guarantee is an international transaction ? - HELD THAT - On going through the ambit of Shareholder activity as given in the OECD guidelines on a general perspective, it becomes imminent that such activities are certain acts performed by a company SOLELY because of its shareholding in other group companies, which is obviously not the case here. Au contraire, the effect of furnishing Corporate guarantee directly percolated to the principal debtor, namely, the AEs for whom the assessee stood surety. Thus, the ground urging that the act of furnishing guarantee be treated as a shareholder s activity, is devoid of merits. Moreover, now with the statutory amendment specifically treating guarantee as an international transaction, there remains no doubt whatsoever that the furnishing of corporate guarantee by an assessee is an international transaction. This ground is thus dismissed. Performance guarantee vs. Corporate guarantee - A corporate guarantee is ordinarily a legal agreement between a principal debtor, creditor and guarantor, whereby the guarantor takes responsibility for the debt repayment in case of repayment by the principal debtor to the creditor. A performance guarantee provides an assurance of compensation in the event of inadequate or delayed performance on a contract. If performance guarantee entails financial consequences, that is, on the failure of the other party to perform his obligation and the guarantor becoming liable to pay some amount, then it cannot be placed at a pedestal different from the regular corporate guarantee given for obtaining loan by the AE. In that sense, performance guarantees in the instant case are a specie of the genus of corporate guarantee and cannot be given a treatment different from the corporate guarantee as urged by the assessee. Ex consequenti, we hold that the so-called performance guarantee transactions at sr. nos. 3 and 4 are in the nature of corporate guarantee transactions and do not require any separate treatment vis- -vis the remaining eight transactions, which we will discuss infra . ALP of the Corporate guarantee transactions - As observed that when commercial banks issue bank guarantee, which is easily encashable in the event of default, higher commission is justified. On the other hand, where a Corporate guarantee is issued, the guarantor needs to make good the amount and repay the loan if the subsidiary defaults. It further observed that the considerations which apply for issuance of Corporate guarantee are distinct and separate from Bank guarantee. It, therefore, approved the rate of 0.5% as arm s length rate of Corporate guarantee fee. We have seen above that in some of the cases in which the assessee stood guarantor, it had to incur certain charges varying between 0.75% to 1.75%, whilst in other cases, nothing was required to be paid. Drawing support from Everest Kento Cylinders Ltd. 2015 (5) TMI 395 - BOMBAY HIGH COURT we hold that the arm s length price of the international transaction of rendering service of furnishing guarantee is 0.5%. All out-of-pocket expenses incurred by the assessee guarantor in furnishing guarantee will go to swell the ALP accordingly. In other words, where the assessee has not incurred any cost in furnishing guarantee, the ALP of the international transaction of furnishing guarantee will be 0.5%. If however, the assessee has incurred expenses at, say, 1.75%, then ALP will be 2.25% (consisting of compensation for rendering service of giving guarantee at 0.5% plus out of pocket expenses incurred at 1.75%). The effective arm s length rate of guarantee transaction is 0.50% plus actual expenses incurred by the assessee in furnishing the guarantee. The impugned order in confirming uniform rate of 2% as arm s length guarantee fee is set aside and the matter is restored to the AO to decide the issue in the terms held above. The assessee will be allowed a reasonable opportunity of hearing in this exercise. Transfer pricing addition in the Manufacturing activity - HELD THAT - The position would be entirely different if the AO invokes Explanation 5 to section 32 and allows full depreciation as per the original return. In that scenario, the contention of the assessee for considering only the reduced amount of depreciation in the revised return for the ALP determination would fail. As the AO in the instant case has computed the total income by considering the reduced claim of depreciation by ₹ 19.11 crore, we hold that only such reduced amount of depreciation be included in the operating cost base for determining the ALP of the transaction of Manufacturing activity . We want to clarify that the position as discussed hereinabove is about the effects of a suo motu disallowance offered by the assessee and not a disallowance made by the AO. CIT(A) not considering bank charges and commission/brokerage as non-operating cost - We find that the break-up of Bank charges and commission/brokerage has been given on page 29 of the TPO s order, which comprises of Brokerage and commission on fixed deposits ₹ 10.42 lakh; Bank charges ₹ 178.48 lakh; Loan processing fee ₹ 338.32 lakh; and SBLC commission ₹ 216.26 lakh. On a perusal of the detail of ₹ 743.48 lakh, it is discernible that this expenditure is nothing but part and parcel of the overall Finance cost. It is rather an extension of the Finance cost.We, therefore, hold that the ld. CIT(A) was justified in excluding ₹ 743.48 lakh from the operating costs base. The ground fails. Proportionate transfer pricing adjustment allowed by the ld. CIT(A) - TPO, while computing the transfer pricing adjustment, took into account the entity level figures and not the transactions with the AEs. The ld. CIT(A) directed to restrict the transfer pricing adjustment in respect of transactions with AEs alone - This issue is fairly settled by judgment of Hon ble jurisdictional High court in CIT Vs. Phoenix Mecano (India) Pvt. Ltd. 2018 (7) TMI 798 - SC ORDER , holding that the transfer pricing adjustment made at entity level should be restricted to the international transactions only. It is pertinent to mention that the Department s SLP against this judgment has since been dismissed by the Hon ble Supreme Court in CIT Vs. Phoenix Mecano (India) Pvt. Ltd - Similar view has been taken by the Hon ble Bombay High Court in CIT Vs. Thyssen Krupp Industries Pvt. Ltd. 2015 (12) TMI 1076 - BOMBAY HIGH COURT and CIT Vs. Tara Jewels Exports (P). Ltd. 2015 (12) TMI 1130 - BOMBAY HIGH COURT - We, therefore, uphold the impugned order on this score.
Issues Involved:
1. Transfer Pricing Addition - Corporate Guarantee 2. Transfer Pricing Addition - Manufacturing Activity Issue-wise Detailed Analysis: A. Transfer Pricing Addition - Corporate Guarantee I. Whether furnishing of Corporate guarantee is an international transaction? The assessee did not consider the Corporate guarantee as an international transaction. However, the TPO and the Tribunal referenced section 92B of the Income-tax Act, 1961, and its Explanation, which includes "guarantee" under capital financing as an international transaction. The Tribunal cited the case of Pr. CIT Vs. Redington (India) Ltd., where the High Court upheld that furnishing guarantees falls under international transactions. The Tribunal concluded that Corporate guarantees are indeed international transactions. II. Performance guarantee vs. Corporate guarantee The assessee argued that two out of ten guarantees were performance guarantees and should be treated differently. However, the Tribunal noted that performance guarantees, which entail financial consequences, are a subset of corporate guarantees. Therefore, all ten guarantees were treated uniformly as corporate guarantees. III. ALP of the Corporate guarantee transactions The Tribunal examined the nature of the guarantees and noted that the TPO applied a uniform rate of 2% based on Safe Harbour Rules and internal CUP. The Tribunal referenced the judgment in CIT Vs. Everest Kento Cylinders Ltd., which approved a rate of 0.5% for Corporate guarantees. The Tribunal held that the ALP of the guarantee transactions should be 0.5% plus actual expenses incurred. The matter was remanded to the AO to decide based on this principle. B. Transfer Pricing Addition - Manufacturing Activity I. Depreciation Adjustment The assessee argued that the depreciation amount disallowed in the revised return should be excluded from the operating cost base. The Tribunal agreed, noting that the AO accepted the revised return, which reduced the depreciation claim. Therefore, only the reduced depreciation should be included in the operating cost base for ALP determination. II. Bank Charges and Commission/Brokerage The Revenue contested the exclusion of bank charges and commission/brokerage from operating costs. The Tribunal upheld the CIT(A)'s decision, noting that these expenses are part of the overall finance cost and should be excluded from the operating cost base. III. Proportionate Transfer Pricing Adjustment The Tribunal agreed with the CIT(A) that transfer pricing adjustments should be restricted to transactions with AEs alone, referencing the judgment in CIT Vs. Phoenix Mecano (India) Pvt. Ltd., which was upheld by the Supreme Court. Conclusion: The appeal of the Revenue was dismissed, and that of the assessee was partly allowed. The Tribunal provided detailed guidance on the treatment of Corporate guarantees and adjustments in the manufacturing activity, ensuring that ALP determinations align with judicial precedents and statutory provisions.
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