2023 (1) TMI 258 - AT - Income Tax

TP Adjustment - corporate guarantee provided on behalf of Associated Enterprises - TPO ascertained the ALP of corporate guarantee at 1.5%, accordingly, an ALP adjustment - CIT(A) who restricted the ALP adjustment to 0.5% - HELD THAT - The stand of the authorities below on this point, is thus not legally sustainable. As for the riders placed in quote, which have been extracted above and which have been heavily relied upon by the learned TPO, these are usual features of legally guarded business quotations, and the presence of such rider do not vitiate the nature of quotation for indicating approximate prevailing rates. Nothing, therefore, turns on this cautious language which is quite common in the commercial documents anyway, either. In this view of the matter, we are unable to see any legally sustainable merits in the objections taken by the authorities below to the yield spread approach adopted by the assessee. The rejection of this method does not, therefore, meet our approval. As for the quotations obtained from HDFC Bank and State Bank of India, these quotations are for the bank guarantees simplicitor and not corporate guarantees given to bank to support the bank guarantees. These two kinds of guarantees are materially different, as has been held by a series of co-ordinate bench decisions. The right comparable, for application of CUP in this case, would have been the consideration for which corporate counter guarantees are issued, for the benefit of an associated enterprise, to a bank. In any event, once we come to the conclusion that the yield spread approach adopted by the assessee has been wrongly rejected, there is no need to deal with this clearly defective application of CUP method. No such inputs have been referred to, or relied upon, by the authorities below. We uphold the plea of the assessee. The benchmarking of corporate guarantee, on the peculiar facts of this case and in the light of yield spread method adopted by the assessee which has not been faulted by the authorities below for any legally sustainable reasons, is upheld at 0.35%. Accordingly, plea of the assessee is upheld and plea of the Assessing Officer is rejected as infructuous.

Summary

Issues:
1. Assessment under section 143(3) of the Income Tax Act 1961 for the assessment year 2013-14.
2. Dispute over the treatment and arm's length price (ALP) of guarantee commission charged in respect of corporate guarantees provided on behalf of Associated Enterprises.

Analysis:
1. The judgment deals with cross appeals against the order dated 6th September 2021 regarding assessment under section 143(3) of the Income Tax Act 1961 for the assessment year 2013-14. The grievances raised by the parties are interconnected and revolve around the treatment and ALP determination of guarantee commission charged for corporate guarantees provided on behalf of Associated Enterprises. The assessee contested the order of the AO/TPO treating the guarantee as an international transaction and determining the ALP at 0.50% instead of the assessee's proposed 0.35%. On the other hand, the Assessing Officer challenged the CIT(A)'s decision to restrict the TP adjustment of corporate guarantee fee to 0.5% instead of 1.5% charged by the TPO without discussing the case's facts thoroughly.

2. The factual background reveals that the assessee engaged in international transactions with associated enterprises abroad, including providing corporate guarantees to third parties on behalf of its associated enterprises. The Transfer Pricing Officer (TPO) adopted the "yield spread approach" to benchmark the guarantee commission, considering the difference in current market interests for the guarantor and the guarantee recipient. The TPO's ALP determination was based on quotes from HDFC Bank and State Bank of India, resulting in an adjustment of Rs. 2,81,99,740/- at 1.5%. The CIT(A) disagreed with the TPO's approach, restricting the ALP adjustment to 0.5% based on the yield spread method adopted by the assessee.

3. The Tribunal analyzed the contentions raised by both parties, emphasizing the legal aspects and factual considerations. It observed that the yield spread approach adopted by the assessee was reasonable, and variations in interest rates need not affect the rate differential between with and without guarantee scenarios. The Tribunal found the objections to the yield spread method by the authorities below legally unsustainable and upheld the plea of the assessee, maintaining the benchmarking of corporate guarantee at 0.35%. The Tribunal rejected the Assessing Officer's plea as infructuous in light of the upheld method.

4. In conclusion, the Tribunal allowed the appeal of the assessee and dismissed the appeal of the Assessing Officer. The judgment highlights the importance of a thorough analysis of legal provisions, factual circumstances, and the appropriateness of the adopted benchmarking methods in transfer pricing disputes related to corporate guarantees provided to associated enterprises.