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TMI Blog2019 (2) TMI 1778X X X X Extracts X X X X X X X X Extracts X X X X ..... the light of provision of section 92B and explanation to come to the conclusion that guarantee issued by an entity on behalf of its AEs a subsidiary is international transactions. However, while benchmarking the rate of commission, no comparison can be made between guarantee issued by the commercial bank as against corporate guarantee issued by holding company for benefit for its AE subsidiary company for computing ALP of guarantee commission. Corporate guarantee is international transaction which needs to be benchmarked to determine the ALP of said transaction whether or not the assessee has charged any commission on such guarantee. Although, there are divergence view from various bench of Tribunal in the light of Explanation to section 92B of the Act, on corporate guarantee to be not international transaction, but the Hon ble jurisdictional High Court has taken view that corporate guarantee is an international transaction and accordingly bound by the judicial decision and also to follow the jurisdictional High Court decision, we are of the considered view that corporate guarantee issued by the assessee on behalf of its AE subsidiary company is an international transaction. Howev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct by the Ld. Transfer Pricing Officer (TPO) 3. The Ld. AO/TPO erred on facts and in law in disregarding that: (a) The issue of corporate/performance guarantee to AE does not qualify to be an international transaction under the TP regulations. (b) Provision of corporate/performance guarantee on behalf of the Associated Enterprise was not having any bearing on profits, income, losses or assets of the assessee company. The impact on the profits has to be on the real basis whether in the present or future and not on contingent or hypothetical basis. (c) In the provision of guarantee on behalf of the Associated Enterprise, no substantial costs have been incurred and moreover, the guarantee is a type of zero cost, strategic investment for the ultimate sole business interests of the assessee which were duly compensated in the form of high profit margins of the assessee company. (d) That the guarantee provided is incidental to the business of the assessee company and hence cannot be compared to the transaction of providing guarantee by the bank. The factors/consideration which applies for the issuance of a corporate/performance guarantee is distinct and separate from that of ban ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sequent amendment to the aforesaid loan agreement, LARES was required by the lenders to provide good and sufficient performance bond to ensure completion of the project. The required performance bond was arranged by the LARES from Asia United Bank and PNB General Insurance Co. Inc. Philipines for PHP 294.5 Million and 105.5 million respectively. In turn, the assessee issued corporate guarantee in favour of Asia United Bank and PNB General Insurance Co. Inc. for an amount equivalent to performance bond issued by Asia United Bank and PNB General Insurance Co. Inc. 3. During the relevant years, the assessee has reported following international transactions with its AEs:- For the AY 2010-11 (TABLE-1) Sl. No. Associated Enterprise Description of transaction Method(s) used Transaction Value (INR) 1. LARES Providing technical services to LARES TNMM 69,93,33,976 2. IL & FS Technologies Philipines Inc. Reimbursement of expenses Since reimbursement is on actual cost basis, the same is on Arm's Length Price 1,327,802 3. IL & FS Technologies Philipines Inc. Interest income CUP 4,48,11,465 For the AY 2011-12 (TABLE-2) Sl. No. Associated Enterprise Description of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ground No.06 are inter related they are taken up together. I have carefully considered the written submissions made by the appellant vis-à- vis the observations of the AO/TPO in this regard. The grounds of appeal are decided hereunder:- The appellant in the above grounds have contested the action of the Assessing officer in making adjustments of ₹ 31,41,729/- to the arm's length price of the 'international transactions' pertaining to providing of performance guarantee/bond/standby letter of credit on behalf of the Associated. Enterprise in Philippines on the basis of the order passed under section 92CA(3) of the Act by the 1,d. Transfer Pricing Officer (TPO). Such addition was made by the ITO by relying on the basis of the information obtained by him by issuing notice u/s 133(6) of the Act since the documents were not available in public domain. * An upward adjusitnent is made at the rate of 1.04% on the basis of the data obtained, from various banks by him u/s 133(6) of the Act. The appellant however contested that TPO by applying any incomparable rate of 1.04% which is not only -too high but is applicable in the case of commercial banks whose fun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PO is upheld. As a result of the above discussion, this ground of appeal is dismissed." 5.1 The Ld. DRP has also confirmed the findings of the TPO for AY 2011-12 and relevant findings of the DRP are as under:- "2.3 Discussions and Directions of DRP: We have considered the submission made by the assessee and the reasons recorded by the AO/TPO. Various grounds of objection raised by the assessee are decided as hereunder - 2.3.1 The first ground of objection is general in nature and does not require a separate decision 2.3.2 Grounds No. 2 to 6 are related to each other and they are directed against adjustment of ₹ 38,22,437/ made by the TPO in respect of commission towards guarantee of Phillipine Peso 400 million (₹ 383 million) issued by the assessee on behalf of the Associated Enterprise in Phillipines (LARES). it is now settled position of law that corporate guarantee provides a benefit to the AE and therefore guarantee fee is to he charged from the AE. As per amended provision of Section 926(1) Explanation (c), any type of guarantee constitutes an international transaction. A reference is hereby made to the order of ITAT, Mumbai In the case of Mahi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has held that a corporate guarantee cannot be compared with bank guarantee. Hence, mean of guarantee rates, charged by banks cannot be taken as CUP but can be taken as a guide for bench marking the unsecured guarantees issued by the assessee. Looking to the mean of secured guarantee rates and considering the fact that the financial position of other to AE is still weaker and also considering the fact that the assessee has issued unsecured performance guarantees we are of the opinion that charging guarantee commission at the rate of 1.04% by the TPO is very reasonable. Adjustment of ₹ 38,22,437/- made by the TPO is upheld. So far as use by the TPO of information collected under section 133(6) of the IT Act is concerned, there is no bar in use of such information. There is no obligation on TPO to consider data available in public domain only. It is the duty of the TPO to determine the ALP correctly, in accordance with the provisions of law and it can use all powers available to him for this purpose. Reliance is placed in this regard on the decisions of honourable tribunals in the cases of Centillium India (P.) Ltd and Genisys Integrated Systems (Bangalore)." 6. The Ld. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DR by referring to the decision of the Ahmedabad ITAT Bench in the case of Micro Ink. Ltd. v. Addl. CIT [2015] 63 taxmann.com 353/[2016] 157 ITD 132 to argue that the ITAT has considered various cases laws relied by the Ld. DR to arrive at conclusion that corporate guarantee is not an international transaction before insertion of explanation to section 92B of the Act, by the Finance Act, 2012. The Ld. AR for the assessee alternatively submitted that if at all corporate guarantee is to be considered as international transaction, then the ALP determined by the AO by taking comparable cases of bank guarantee commission charged by the banks as the bank guarantee as well as corporate guarantee are two different transactions and hence commission charged by bank for issuing bank guarantee cannot be the basis for benchmarking transactions in corporate guarantee. He further submitted that a suitable rate may be adopted to determine commission on corporate guarantee. In this regard, he relied upon following judgments:- i. Siro Clinpharm (P.) Ltd. (supra) ii. EIH Ltd. v. CIT [IT Appeal No. 530 (kol.) of 2015, dated 6-9-2017] iii. Vivimed Labs Ltd. v. Dy. CIT [IT Appeal No. 404 (Hyd.) o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. Accordingly, there is no error in the findings recorded by the Ld. DRP as well as the AO in estimating commission on the corporate guarantee issued by the assessee on behalf of its AEs and their order should be upheld. 8. We have heard both parties, perused the material available on record and gone through the orders of the authorities below. The only solitary issue that needs to be resolved is whether corporate guarantee issued by entity on behalf of its AEs comes within the definition of international transactions before insertion of explanation to section 92B of Act, by the Finance Act, 2012. No doubt the Finance Act, 2012 has inserted Explanation to section 92B with retrospective effect from 01 April 2002 to include the term guarantee within the definition of international transaction. But various benches of the Tribunal have taken view that insertion of explanation to section 92B by the Finance Act, 2012 is considered to be prospective in nature therefore, held that corporate guarantee issued by an entity on behalf of its AEs is not an international transaction and accordingly no need to compute ALP of said transactions. However, we find that the jurisdictional High Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of a guarantee commission depends upon transaction to transaction and mutual understanding between the parties. There may be a case where the bank may not charge any guarantee commission, depending upon its evaluation of relationship with a particular client. * Even otherwise also the TPO himself has noted that guarantee commission ranges between 0.15 per cent to 3 per cent in case of HSBC. The universal application of rate of 3 per cent for guarantee commission cannot be upheld in every case as it is largely dependent upon the terms and conditions, on which loan has been given. Risk undertaken, relationship between the bank and the client, economic and business interest are some of the major factors which has to be taken into consideration. * In the present case, when the assessee has specifically stated that neither it has incurred any cost for providing the guarantee to the bank for loan taken by its subsidiary nor has undertaken any kind of risk, as it was the subsidiary company which has hypothecated its assets against the loan, the TPO has not brought anything on the record to controvert the same. He has proceeded on the premise that there is always a risk in providing t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid transaction whether or not the assessee has charged any commission on such guarantee. Although, there are divergence view from various bench of Tribunal in the light of Explanation to section 92B of the Act, on corporate guarantee to be not international transaction, but the Hon'ble jurisdictional High Court has taken view that corporate guarantee is an international transaction and accordingly bound by the judicial decision and also to follow the jurisdictional High Court decision, we are of the considered view that corporate guarantee issued by the assessee on behalf of its AE subsidiary company is an international transaction. However, while arriving at rate the AO has taken comparables from commercial banks to at arrive at mean margin of 1.04% and adopted such rate to determine the ALP of corporate guarantee issued by the assessee. Since, the jurisdictional High Court in the case of Everest Kanto Cylinder Ltd. (supra) has considered the issue and upheld the findings of the Tribunal in estimating 0.5% commission on guarantee. We are of the considered view that the Ld. AO as well as the Ld. CIT(a)/DRP erred in adopting 1.04% commission on corporate guarantee issued by the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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