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2019 (1) TMI 845 - AT - Income TaxTPA - Addition on account of corporate guarantee - application of CUP method for benchmarking the transactions relating to corporate guarantee - Held that - We are of the considered view that in order to benchmark the international transactions qua corporate guarantee appropriate comparable data needs to be adopted and benchmarking made in this case on the basis of bank quotes is not sustainable, hence, the TP adjustment made by the TPO/DRP is not sustainable in the eyes of law. We are also not agreed with the contentions raised by the ld. AR for the taxpayer that providing corporate guarantee in case of its loan to its AE is not an international transaction and this issue has been rightly decided by the JTPO/DRP by treating the provision of corporate guarantee as international transaction. We are not inclined to agree with the contentions raised by the taxpayer that since no benefit has been passed on to its AE, there is no need to compensate the taxpayer because in a business transaction there is no concept of free lunch. Because without providing corporate guarantee by the taxpayer no loan would have been given to the AE; that the taxpayer has taken the risk on behalf of its AE which would not have been taken by any third party without consideration and that keeping in view the high risk involved in giving loan by any lender to the AE, the cost needs to be charged from the AE and as such, the commission received by the taxpayer for providing corporate guarantee has to be at arm s length. However, the amount received by the taxpayer on account of commission charged for providing corporate guarantee to its AE needs to be at arm s length price in view of the ratio of the order passed by the coordinate Bench of the Tribunal in Glenmark Pharmaceuticals Ltd. (2013 (11) TMI 1583 - ITAT MUMBAI) Transfer pricing adjustment qua SDT of payment of interest - since the rate of interest paid by the taxpayer to its related party is lower than the rate of interest paid by it to the third party lender the transaction of payment of interest by the taxpayer to its related party was at arm s length - Held that - When internal CUP was available and the complete data has been supplied for comparable study to the TPO/DRP, the same was required to be applied by providing an opportunity of being heard to the taxpayer. But the TPO has not preferred to make any comment on the rejection of plea of applying internal CUP raised by the taxpayer. Consequently, transfer pricing made by the TPO in respect of SDT payment of interest is not sustainable. When opportunity of being heard is not provided to the taxpayer that as to why internal CUP is not applied by the TPO, the issue is required to be set aside to the TPO to decide afresh after providing an opportunity of being heard to the taxpayer.
Issues Involved:
1. Enhancement of returned income. 2. Addition to income due to corporate guarantee provision. 3. Directions from DRP on corporate guarantee commission. 4. Addition to income due to payment of interest on inter-corporate deposit/loan. 5. Charging of interest under sections 234B and 234C. 6. Initiation of penalty under section 271(1)(c). Detailed Analysis: Issue 1: Enhancement of Returned Income The taxpayer contested the enhancement of its returned income by ?20,57,19,110/- by the AO/TPO, which was initially ?16,52,19,000/-. This enhancement was primarily due to the addition of ?20,09,07,000/- related to the provision of corporate guarantees and ?48,12,110/- related to the payment of interest on inter-corporate deposits/loans. Issue 2: Addition to Income Due to Corporate Guarantee Provision The taxpayer provided corporate guarantees to its AE, which the TPO considered an international transaction under section 92B of the Act. The TPO applied the Comparable Uncontrolled Price (CUP) method using bank guarantee rates to determine the Arm's Length Price (ALP), resulting in an addition of ?20,09,07,000/- to the taxpayer's income. The taxpayer argued that the provision of corporate guarantees was a shareholder activity and should not attract any compensation. The Tribunal found the TPO's use of bank guarantee rates inappropriate for benchmarking corporate guarantees, as they are conceptually different. The Tribunal directed the TPO to re-benchmark the transaction using appropriate comparables and provide an opportunity for the taxpayer to be heard. Issue 3: Directions from DRP on Corporate Guarantee Commission The DRP had directed the TPO to revise the corporate guarantee commission rate from 4.60% to 4.1% and the corresponding adjustment to ?20,09,07,000/-. The Tribunal upheld the DRP's decision to treat the provision of corporate guarantees as an international transaction but directed the TPO to benchmark the transaction appropriately. Issue 4: Addition to Income Due to Payment of Interest on Inter-Corporate Deposit/Loan The TPO made an adjustment of ?48,12,110/- by comparing the interest rate paid by the taxpayer to its related party with the prime lending rate of the State Bank of India (SBI). The taxpayer argued that the internal CUP method should be applied, as the interest rate paid to the related party was lower than that paid to an unrelated lender. The Tribunal agreed with the taxpayer and directed the TPO to reconsider the adjustment by applying the internal CUP method and providing an opportunity for the taxpayer to be heard. Issue 5: Charging of Interest Under Sections 234B and 234C The Tribunal noted that the issue of charging interest under sections 234B and 234C was consequential in nature and did not require a specific finding. Issue 6: Initiation of Penalty Under Section 271(1)(c) The Tribunal found the initiation of penalty under section 271(1)(c) to be premature and did not provide a specific finding on this issue. Additional Grounds: Disallowance Under Section 14A The taxpayer had suo motu disallowed ?21 crores under section 14A, which was more than the dividend income earned during the year. The Tribunal directed the AO to recompute the disallowance under section 14A in light of the decision in Maxopp Investments Limited vs. CIT, ensuring it did not exceed the exempt income received. Conclusion: The appeal filed by the taxpayer was allowed for statistical purposes, with directions for the TPO to re-benchmark the corporate guarantee transaction and reconsider the interest payment adjustment, providing an opportunity for the taxpayer to be heard. The AO was also directed to recompute the disallowance under section 14A.
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