2021 (4) TMI 203 - AT - Income Tax

TP Adjustment - Arm's length price of the corporate guarantee fee - international transaction u/s 92B or not? - HELD THAT - A corporate guarantee indeed forms an international transaction u/s. 92B of the Act. And that Explanation to section 92B; inserted by the Finance Act 2012 w.e.f. 01/04/2002 is applicable with retrospective effect. As assessee's reliance on Bharthi Airtel 2014 (3) TMI 496 - ITAT DELHI and other catena of case law (supra) in this regard stand overruled. We thus decline the assessee's argument against the corporate guarantee as an international transaction in principle. Lower authorities have also included a letter of comfort as part of corporate guarantee which goes against the case law PCIT Vs. Redington (India) Ltd., Chennai 2020 (12) TMI 516 - MADRAS HIGH COURT Therefore, we find prima-facie merit in assessee's instant latter argument. The fact also remains that the learned TPO is yet to examine the corporate guarantee fee amount as segregated by the so called letter of comfort amount. We thus affirm the impugned corporate guarantee adjustment addition in principle and leave it to open for the TPO to finalize consequential computation in above terms. We are also of the considered opinion that the issue should be examined by the TPO calling for information from the Bank that what is the impact of the counter bank guarantee given by the assessee whether is there any liability fasten on the company in case of counter bank guarantee. If found yes, then the DRP's decision is correct. If there is no liability as submitted by the ld. AR or the assessee, then, it is a mere letter of comfort and no addition is called for. The case law relied upon by the ld. AR of the assessee is distinguishable on fact to the case of the assessee and the same are not of any help to the assessee' case. We reject the submissions of the ld. AR of the assessee that the issue of corporate guarantee by the assessee to its AEs is not an international transaction and direct the AO/TPO to decide the issue - Appeal of the assessee is treated as allowed for statistical purposes.

Issues Involved:
1. Adjustment of ?2,43,30,447/- on the corporate guarantee/letter of comfort provided to banks for loan/credit limits availed by wholly owned subsidiaries/JVs.
2. Definition of shareholder's corporate guarantee under international transaction as per Section 92B of the Income Tax Act.
3. Beneficial nature of shareholder's corporate guarantee to the parent company.
4. Objective analysis for determining Arm's Length Price (ALP) on the shareholder's corporate guarantee.
5. Discrimination under Article 26 of India-Singapore Double Taxation Avoidance Agreement (DTAA) in determining ALP for corporate guarantee.
6. Distinction between letter of comfort and corporate guarantee under Section 92B of the Act.
7. Objective analysis for determining ALP based on bank guarantee rates from State Bank of India (SBI) website.
8. Consideration of judicial precedents on similar corporate guarantees.
9. Acceptance of internal comparable guarantee transactions for benchmarking purposes.
10. Adjustments for differences in comparable transactions vis-à-vis shareholder's corporate guarantee.
11. Short credit of TDS and Advance tax paid.
12. Levying of interest under Sections 234A, 234B, and 234C.

Detailed Analysis:

1. Adjustment of ?2,43,30,447/- on Corporate Guarantee:
The Tribunal addressed the adjustment made by the TPO, who determined the arm's length price (ALP) for the corporate guarantee fee at ?2,43,30,447/-. The TPO's calculations were based on the rates applicable to various subsidiaries. The AO passed the draft assessment order enhancing the total income of the assessee by the adjustments suggested by the TPO.

2. Definition of Shareholder's Corporate Guarantee:
The assessee argued that the shareholder's corporate guarantee is not covered under the definition of international transaction as per the retrospective and clarificatory amendment in 2012 under Section 92B of the Act. However, the Tribunal, referencing various case laws, upheld that corporate guarantees indeed form an international transaction under Section 92B.

3. Beneficial Nature of Shareholder's Corporate Guarantee:
The assessee contended that the corporate guarantee is beneficial and in the interest of the parent company. The Tribunal, however, emphasized that the issuance of guarantees has a bearing on the profits and income of such enterprises, thereby constituting an international transaction.

4. Objective Analysis for Determining ALP:
The assessee claimed that an objective analysis was not undertaken while determining the ALP on the corporate guarantee. The Tribunal noted that the TPO had computed the upfront fee and credit rating on the corporate guarantee extended to the subsidiary companies, and the DRP had directed the AO to re-compute the ALP at 1.75%.

5. Discrimination under Article 26 of India-Singapore DTAA:
The assessee argued discrimination in determining the ALP for corporate guarantees provided to AEs vis-à-vis similar guarantees provided to subsidiaries and others in India. The Tribunal did not find merit in this argument, referencing the DRP's directions and the TPO's analysis.

6. Distinction between Letter of Comfort and Corporate Guarantee:
The Tribunal examined whether the letter of comfort issued by the assessee could be distinguished from a corporate guarantee. The DRP concluded that the letter of comfort issued to Ramky Cleantech Services Pvt. Ltd. amounted to giving a bank guarantee, and thus, it was treated as such for examination.

7. Objective Analysis for Determining ALP Based on SBI Rates:
The Tribunal noted that the TPO had relied on information from the SBI website and other banks to work out a fee for the corporate guarantee. The DRP directed the AO to apply an ALP of 1.75%, as per the TPO's findings.

8. Consideration of Judicial Precedents:
The Tribunal referenced several judicial precedents where corporate guarantees were treated as international transactions, including cases such as Nimbus Communications Ltd., Advanta India Ltd., and Infotech Enterprises Ltd. The Tribunal upheld that corporate guarantees involve service rendered to AEs and thus fall under transfer pricing provisions.

9. Acceptance of Internal Comparable Guarantee Transactions:
The Tribunal did not find the internal comparable guarantee transactions of the assessee relevant for benchmarking purposes, as the case law relied upon by the assessee was distinguishable on facts.

10. Adjustments for Differences in Comparable Transactions:
The Tribunal directed the AO/TPO to examine the issue of corporate guarantee by calling for information from the bank regarding the impact of the counter bank guarantee given by the assessee. If there is no liability, it would be considered a mere letter of comfort, and no addition would be called for.

11. Short Credit of TDS and Advance Tax Paid:
The issue of short credit of TDS and advance tax paid was not specifically addressed in the detailed analysis.

12. Levying of Interest under Sections 234A, 234B, and 234C:
The Tribunal did not specifically address the issue of levying interest under Sections 234A, 234B, and 234C in the detailed analysis.

Conclusion:
The Tribunal affirmed that a corporate guarantee forms an international transaction under Section 92B of the Act. The matter was remanded to the AO/TPO for re-examination regarding the letter of comfort and to finalize the computation of the corporate guarantee adjustment. The appeal of the assessee was treated as allowed for statistical purposes.

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