CORPORATE GUARANTEE – AN INTERNATIONAL TRANSACTION?

[Mr. M. GOVINDARAJAN]

In AUROBINDO PHARMA LTD HYDERABAD VERSUS A.C.I.T CENTRAL CIRCLE 1 (2) , HYDERABAD AND (VICE-VERSA) - 2024 (7) TMI 1372 - ITAT HYDERABAD the appellant is engaged in manufacture and sale of bulk drugs, Active Pharmaceutical Ingredients (APIs) and other pharmaceutical products. The appellant filed the return of income for the assessment year 2017 – 18 on 28.11.2017. The Transfer Pricing Officer (‘TPO’ for short) suggested upward adjustments in respect of the international transactions of Corporate Guarantee fee and interest on receivables.  The appellant did not object the same.  Therefore, the Assessing Officer passed an order.  The same was challenged by the appellant.  The Revenue also filed appeal against the said order before the Appellate Tribunal. 

The Tribunal analyzed the case and found that there are three issues to be decided in this appeal as detailed below-

• Corporate guarantee commission;
• Interest on receivables;
• Disallowance of weighted deduction claimed under section 35(2AB) of the Income Tax Act, 1961.

Corporate guarantee commission

Before the TPO the appellant contended that the corporate guarantee inot an international transaction.  It does not require any benchmarking at all on the ground that it is the responsibility of the parent company to provide guarantee to its subsidiary companies. Therefore, it is to be categorized as shareholders activity.  The TPO rejected the same and charged the same at 2% for the corporate guarantee of above Rs. 10 crores and suggested upward adjustment. On appeal the Commissioner of Income Tax (Appeals) upheld the view taken by the learned TPO that such a transaction would be covered within the meaning of an international transaction.

The appellant submitted the following before the Tribunal-

• The corporate guarantee was given by the assessee as a procedural compliance for availing of credit facilities by its subsidiaries and for the overall benefit of the group 
• It was provided as a part of the parental obligation to its subsidiaries and therefore, it is in the nature of shareholding service.
• The corporate guarantee commission at the rate 0.53% as directed by the Commissioner of Income Tax (Appeals) [‘CIT(A)’ for short] on the guarantees provided by the assessee is excessive since the assessee had already offered commission at 0.50% on the guarantees given the same may be accepted.

The Revenue contended the following before the Tribunal on his issue-

•  The transaction relating the issue of corporate guarantee does not involve any costs to the assessee 
• It does not fall within the scope of the term ‘international transaction’ even after the insertion of explanation to section 92B of the Act by Finance Act, 2012 with effect from 01.04.2002.
• There is no requirement of such transaction to be reported in Form No. 3CEB. 
• The corporate guarantee at 0.53% determined by the learned CIT(A) is too high and cannot be sustained.
• The Arm Length Price (‘ALP’ for short) in respect of Corporate Guarantee fee may be determined at 0.25%.
• The guarantee fees charged by SEBI from the assessee in respect of guarantee extended on its behalf was only 0.20%.

The Tribunal observed that a Coordinate Bench of Hyderabad Tribunal in assessee’s own case for the assessment year 2018-19 in M/S. AUROBINDO PHARMA LIMITED VERSUS ASST. COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE-1 (2) , HYDERABAD - 2023 (4) TMI 1254 - ITAT HYDERABAD considered this issue in extenso and held that ALP on account of corporate guarantee at the 0.50% on the amount guaranteed is proper commission.  Therefore, the Tribunal directed the Assessing Officer/TPO to adopt the same at 0.50% on the guaranteed amount.

Interest on receivables

In this issue also the appellant and the Department took the same stand as taken in the first issue.  TPO thought it proper to consider the SBI short term deposit rate as appropriate CUP to determine the ALP of the interest on outstanding receivables.  The CIT(A) observed that post amendment by Finance Act, 2012 introducing explanation to section 92B  of the Act, if there is any delay in realization of a trade debt arising from the sale of goods or services rendered in the course of carrying on the business, it is liable to be visited with Transfer Pricing adjustment on account of interest income short charged/uncharged. The Commissioner of Income Tax further directed the TPO to apply the SBI short term deposit rates for the period beyond the period mentioned in the invoices.

The Revenue relied on the judgement of Delhi High Court  M/S. MCKINSEY KNOWLEDGE CENTRE INDIA PVT. LTD. VERSUS PR. COMMISSIONER OF INCOME TAX, DELHI-6 - 2018 (8) TMI 592 - DELHI HIGH COURT, which held that with the introduction of the explanation to section 92B  of the Act by Finance Act, 2012 it is a determinable that if there is any delay in the realization of credit arising from the sale of goods or services rendered in the course of carrying on the business, it is liable to be visited with the transfer pricing adjustment on account of interest income short charged/uncharged. It is incumbent upon the taxpayer to separately benchmark the arm’s length price of the international transaction relating to interest on overdue receivables from the AE by way of analysis of functions, assets and risks.

On the quantification of the interest on trade receivables, the Revenue, while placing reliance on the view taken by a coordinate Bench in assessee’s own case for the assessment year 2018-19 in M/S. AUROBINDO PHARMA LIMITED VERSUS ASST. COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE-1 (2) , HYDERABAD - 2023 (4) TMI 1254 - ITAT HYDERABAD, submitted that the rate of interest chargeable on the trade receivables at 6% was held to be reasonable.

In respect of the credit period, assessee contended before the Commissioner of Income Tax (Appeals) that instead of considering an ad hoc credit period of 90 days, as adopted by the TPO, the credit period as agreed in the invoice should be considered for computing interest on delayed receivables beyond the credit period agreed as per invoice.  In this case Commissioner of Income Tax (Appeals) directed the Assessing Officer to verify the invoices and compute the interest considering the credit period as per the invoices instead of 90 days period as adopted by the TPO. The Commissioner of Income Tax (Appeals) also directed the assessee to furnish the information if required. 

The decision in the decision of the Mumbai Bench of the Tribunal in the case of DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE 9 (2) VERSUS INDO AMERICAN JEWELLERY LIMITED - 2012 (2) TMI 366 - ITAT MUMBAI.  In this case it was held that if an entity is engaged in commercial transactions with the group entity as well as third-party unrelated customers, and if the entity is giving credit facility ranging up to 352 days to both group entity as well as the third-party unrelated customers, in such case, no addition on account of interest adjustment can be made.  The assessee extended credit period ranging between 60 days and 240 days for realization of sale proceeds from the non-AEs depending on many factors including terms of payment in respect of a commercial transaction and the normal business practice. 

The Tribunal observed that when the assessee is extending the credit period between 60 days and 240 days to the non-AEs, and basing on this the DRP in the assessment year 2018-19 took a view that the credit period as agreed between the parties shall be respected and followed and such a finding of the DRP has become final without the Revenue challenging the same, the credit period which is extended to the non-AEs by the assessee shall be extended to the AEs also. On this reasoning the Tribunal did not find any illegality or irregularity in the findings returned by the Commissioner of Income Tax (Appeals) that the interest shall be record beyond the credit period as agreed between the parties.

The High Court observed that the loan attributable to the AE, is deemed to have been consumed in a country outside India and, therefore, the interest at LIBOR rates as the rate prevailing in country where the loan is received/consumed by the AE cannot be said to be incorrect and such a view is in line with the decision of the Bombay High Court in the case of Tecnimont (P.) Ltd.  The appellant also relied on the judgment Delhi High Court in Cotton Naturals (I) Private Limited.  The Tribunal observed that the said decisions are no doubt binding precedents and should be preferred to the decisions of the Co-ordinate Benches of the Tribunal.

The Tribunal following the judicial opinion stated supra was the considered opinion that the ends of justice would be met by accepting the interest rate on similar foreign currency receivables/advances as LIBOR+200 points. The Tribunal directed the Assessing Officer / TPO to adopt the same. Grounds are partly allowed accordingly.  The Tribunal allowed the grounds partly.

Disallowance of weighted deduction

This issue relates to the weighted deduction claimed by the assessee in respect of the expenditure incurred on the expenditure not quantified in the expenditure approved by the DSIR reflected in part B of form 3CL, and on clinical trials.  The Tribunal observed that the expenditure that is not quantified in the approval by the DSIR, such an expenditure was incurred towards rates and taxes, travelling expenses of research units. Such an expenditure must have been approved by the prescribed authority and that no exceptions to this rule are provided in the Act.  Though such an expenditure was incurred in relation to the scientific research and development, the requirement of approval by the prescribed authority is not fulfilled in this case and therefore, it is not qualified for weighted deduction, but at the same time since there is no dispute as to the incurring of such expenditure by the assessee, the said expenditure is qualified for hundred percent deduction. To the extent the Tribunal took the view taken in the impugned order.

The Tribunal relied on the judgment of Gujarat High Court COMMISSIONER OF INCOME-TAX – I VERSUS CADILA HEALTHCARE LTD. - 2013 (3) TMI 539 - GUJARAT HIGH COURT.  In this case the Gujarat High Court held that the clinical trials may not always be possible to be conducted in the closed laboratory or in house like facilities and are required to be conducted outside the approved facility and, therefore, the restrictive meaning suggested by the Revenue to the expenses mentioned in the explanation to the section such as a clinical drug trials and obtaining approvals from the regulatory authorities, which normally happens outside the approved R&D facility, make the explanation meaningless.

The Tribunal dismissed the appeal filed by the Revenue and allowed the appeal filed by the appellant in part.