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2021 (10) TMI 754 - AT - Income TaxTP Adjustment - arm s length price adjustment in respect of the corporate guarantee issued by the assessee in respect of its associated enterprise - international transaction or not? - HELD THAT - As in the light of the above judicial development, the ratio of a series of decisions of this Tribunal, including in the cases of assesse s own case 2016 (5) TMI 633 - ITAT MUMBAI and in the case of Micro Ink Ltd 2015 (12) TMI 143 - ITAT AHMEDABAD and Bharati Airtel Ltd Vs ACIT 2014 (11) TMI 10 - ITAT HYDERABAD holding that issuance of corporate guarantees does not constitute international transaction under section 92B does not hold good in law any longer. The fact that these words are of non-jurisdictional High Court, in view of anything contrary thereto having been expressed by Hon ble jurisdictional High Court and for the detailed reasons set out in our analysis earlier, does not make any material difference. Many of these decisions are authored by one of us (i.e. the Vice President) but that does not make any difference either. Once a higher judicial forum has expressed it s views on an issue, our views have to make way for the same. We, therefore, hold that the issuance of corporate guarantee by the assessee did constitute an international transaction, and, to that extent, reject the plea of the assessee. Whether determination of arm s length price at 3% is sustainable in law? - As held by Hon ble jurisdictional High Court in the case of CIT Vs Everest Kento Cylinders Ltd 2015 (5) TMI 395 - BOMBAY HIGH COURT rejected similar comparison of corporate guarantees with bank guarantees and upheld determination of arm s length price at 0.5% - We, therefore, reject the determination of 3% arm s length price by the authorities below and direct the Assessing Officer to adopt 0.5% as an arm s length consideration for the corporate guarantee issued by the assessee in favour of its AE. To this limited extent, we uphold the plea of the assessee. TP Adjustment on account of clinical trial services provided by the Appellant to its AE - Whether entity level margins are required to be compared, or whether margins on the basis of split profit and loss account are required to be compared with the margins on transactions with AEs? - TPO has taken the entity level margins and when the objection was raised before the DRP, the DRP also confirmed the said action - HELD THAT - We find that it is a well settled legal position that when relevant segmental results are available, and the segment computations are not in dispute, the entity level results have to make way for the segmental profit computations. We have also noted that in a subsequent year, i.e. assessment year 2013-14, the TPO himself has accepted this approach of the assessee- as evident from the TPO s order placed , and the transfer pricing study report. There is thus no justification for disregarding segmental results for the present assessment year. In this view of the matter, we uphold the plea of the assessee in principle, and remit the matter to the file to the assessment stage for reconsideration in the above light.
Issues Involved:
1. Transfer Pricing Adjustment for Corporate Guarantees. 2. Transfer Pricing Adjustment for Clinical Trial Services. Detailed Analysis: 1. Transfer Pricing Adjustment for Corporate Guarantees Background: The assessee appealed against an order confirming a transfer pricing adjustment of ?1,19,82,672/- related to corporate guarantees provided to its overseas subsidiaries. The appellant argued that the corporate guarantees should not be considered international transactions under Transfer Pricing regulations and that the 1.75% commission already charged should suffice. Arguments: - Assessee's Argument: The assessee contended that the issue was previously decided in their favor for earlier assessment years, where it was held that corporate guarantees do not constitute international transactions under section 92B of the Income Tax Act. They also argued that the non-jurisdictional High Court's decision in Redington India Ltd should not bind the Tribunal. - Department's Argument: The Department argued that higher judicial forums' decisions must be followed, and the 3% adjustment should be upheld. Tribunal's Observations: - The Tribunal emphasized the principle of judicial hierarchy, quoting the Supreme Court's stance that lower courts must accept higher courts' decisions. - The Tribunal noted that while non-jurisdictional High Court decisions are not binding, they carry persuasive value and should be followed unless there are strong reasons not to. - The Tribunal concluded that the issuance of corporate guarantees does constitute an international transaction, aligning with the Madras High Court's decision in Redington India Ltd. Decision: - The Tribunal rejected the assessee's plea that corporate guarantees are not international transactions. - However, it disagreed with the 3% arm's length price adjustment, citing the jurisdictional High Court's precedent in CIT Vs Everest Kento Cylinders Ltd, which upheld a 0.5% adjustment for corporate guarantees. - The Tribunal directed the Assessing Officer to adopt 0.5% as the arm's length consideration for the corporate guarantees. 2. Transfer Pricing Adjustment for Clinical Trial Services Background: The assessee contested a transfer pricing adjustment of ?3,43,42,062/- related to clinical trial services provided to its Associated Enterprises (AEs). The dispute centered on whether entity-level margins or segmental margins should be used for comparison. Arguments: - Assessee's Argument: The assessee argued that segmental margins should be used for comparison, as they better reflect the transactions with AEs. - Department's Argument: The Department maintained that entity-level margins should be used, as the functions and activities of AEs and non-AEs are not comparable. Tribunal's Observations: - The Tribunal noted that when segmental results are available and undisputed, they should be preferred over entity-level results. - It was observed that in a subsequent assessment year, the TPO accepted the segmental approach, indicating inconsistency in the Department's stance. Decision: - The Tribunal upheld the assessee's plea in principle, directing the Assessing Officer to reconsider the matter using segmental results. - The issue was remitted back to the assessment stage for reevaluation in light of the Tribunal's observations. Conclusion: The appeal was partly allowed. The Tribunal directed a 0.5% arm's length adjustment for corporate guarantees and remitted the issue of clinical trial services for reconsideration using segmental results.
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