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TMI Blog2025 (2) TMI 154X X X X Extracts X X X X X X X X Extracts X X X X ..... ubsequent year. Therefore, Ground No. 2 is allowed for statistical purposes. Addition on account of corporate guarantee fee in respect of guarantee by the assessee in favour of AE - TPO confirming the rate of guarantee fee of 1.90% based on the rates charged by the banks to its customers as against 0.53% charged by the assessee to its AEs - HELD THAT:- Interest of corporate guarantee or the charges of corporate guarantee is required to computed on the basis of actual period, instead of one year, as the actual periods were available in the form of chart with the Ld. AO / TPO. Therefore, we are of the considered opinion that the TPO / DRP are required to restrict the charging of the corporate guarantee charges for the actual period as against one year. We issue the direction to TPO/AO to restrict the charging of the corporate guarantee only for the period for which it was issued. The TPO is directed to recompute the corporate guarantee charges for actual period only. Computation of rate the corporate guarantee charges - If we look into the document and the show-cause notice issued by the TPO then it is clear that the ALP of interest as applied for ECB loan was computed at 1.67%. W ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ort".
We are of the opinion that the order of the TPO is required to be modified and accordingly we held that the charges for letter of support / letter of comfort is required to be computed @0.53%. X X X X Extracts X X X X X X X X Extracts X X X X ..... dverse inference is being drawn in respect of the transaction declared under provision of services to the AE. 4. Ld.AR therefore drawn our attention to the Para No. 2.1.2 of the Ld. DRP direction which is to the following effect :-. 2.1.2 Having considered the submissions, it is seen that the assessee is involved in wide range of services. It is seen that the some of the services provided by the assessee such as engineering services, computer aided design/engineering, design and modelling, etc. are in the nature of KPO services. However, in view of the comments of the TPO, the Panel deems that adjudication on this ground is unnecessary, as no variation has been proposed by the TPO for these services as the same are found to be at arm's length. The relevant extract of the TP order is reproduced below: "3.2.3. The assessee's characterization of its services was examined carefully and the relevant details were examined from the TP Document. The observations of TPO were brought to the attention of the assessee seeking detailed replies and information. The replies and relevant documentary evidences were submitted on behalf of the assessee. Accordingly, after a careful per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4 of the assessee's appeal reads as under: -- "3) Ld TPO/DRP/A.O. has erred in proposing/confirming the addition of Rs. 8,13,50,422/- on account of corporate guarantee fee in respect of guarantee by the assessee in favour of AE 4) The Ld. TPO/DRP/A.O, has erred in proposing/confirming the rate of guarantee fee of 1.90% based on the rates charged by the banks to its customers as against 0.53% charged by the assessee to its AEs." 9. In this regard Ld.AR had drawn our attention to the order of the TPO wherein the TPO at Page No. 5 to 7 had decided the issue as under: - "3.3.1. On perusal of the details furnished in the TP Document, it is observed that the assessee had provided corporate guarantees on behalf of its AE s and in respect of the same it was argued that it charged corporate guarantee fee @ 0.53%. In respect of the same it was stated that the same was as per the judgment of Hon'ble jurisdictional ITAT in assessee's own case without carrying out any benchmarking analysis. In this respect it is important to note that the questions of Transfer Pricing comparability are questions of fact and results of one year cannot be applied as such on the facts of the subs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... benchmarking, the same is being adopted. Accordingly an adjustment of Rs. 8.13,50,422/, as brought out above is being made in respect of the transaction of Corporate Guarantee Fee'. 10. In this regard, Ld.AR drawn our attention to the order of the DRP and our attention was drawn to the Paragraph 2.2.3 to 2.2.12 which is to the following effect: - "2.2.3 Some of decisions where Corporate Guarantee is treated as an international transaction and transfer pricing adjustments upheld are as under: - ▪ In this case, for the guarantee given to the bank against the financial assistance given to Its AEs, no commission was charged by the assessee-company on the ground that the said AEs were not benefited by the guarantee so given and it was the assessee who benefited as a result of commercial benefits secured for future. ITAT held that since there was a clear benefit accrued to AE by guarantee provided by assessee as it improved credit worthiness and hence lower interest rate, guarantee commission should had been charged at arm's length price (Nimbus Communications Ltd. [2013] 34 taxmann.com 298 (Mumbai - Trib.)) ▪ Provision of guarantee always involve risk and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ull; The Tribunal in Mumbai in the case of Everest Kento Cylinder P Ltd (TS-309-ITAT-2014(Mum)-TP), considered and distinguished, namely the cases of Bharti Airtel Limited vs. ACIT and Redingtan (India) Limited Vs. ACIT and held that corporate guarantee is an international transaction. • It was held by the Hon'ble ITAT. Mumbai in the case of Omni active Health Technologies Ltd in 92 taxmann.com 88 that: "transaction relating to provision for guarantee and payment of commission for services by AE to assessee would fall within definition of term 'interational transaction' under section 92B as retrospective amendment brought in by Finance Act, 2012 to section 92B has now set at rest all ambiguities about status of guarantee being an international transaction". 2.2.4 There is no dispute that corporate guarantee is an international transaction. This has been so held in various judgements of the Tribunals such as: i) Zee Entertainment Enterprises Ltd. vs Ad. CIT, Range 11(1). Mumbai in 81 Taxmann.com 379( Mumbai-Tri)( AY. 08-09) ii) Aster (P) Ltd. Vs DCIT, Circle -1(1). Hyderabad in 81 taxmann.com 297 (Hyderabad-Tri) (A.Y. 10-11 & 11-12) ii) M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nk guarantees whose rates were found to be inapplicable for comparison due to their commercial and higher-risk nature. Additionally, in Manugraph India Ltd. v. Dy. CIT, a rate of 0.5% was again justified reinforcing the view that lower rates are appropriate for CGs comparable to the higher rates for bank guarantee. 2.2.8 However, these cases also reveal that different tribunals and courts have varied in their determination of the appropriate rate for corporate guarantees. In Asst. CIT v. Glenmark Generics Ltd., the ITAT upheld a rate of 1% for the corporate guarantee commission, which contrasts with the lower rates in . other cases. This variability illustrates the lack of a standardized approach by the several judicial authorities, in determining the ALP for CGs. 2.2.9 Further, the Panel notes that as stated in preceding paras, the Issue of Corporate Guarantee Commission has been examined by various courts and variable rates have been prescribed. The Rate of ALP for computing Corporate Guarantee Commission depends on the facts of each individual case. The amount of guarantee commission on a corporate guarantee can depend on several factors such as the perceived risk associat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to Subsidiary Company." 11. Ld.AR had submitted that the TPO / DRP had decided and held that the Corporate Guarantee Fees "subject matter of the grounds of appeal before us" are the international transactions withing the meaning of law. It was submitted by the Ld.AR that in the present case, the TPO has benchmarked the interest on corporate guarantee @1.9%, the assessee in response to the notice has mentioned that instead of 1.9%, the corporate guarantee rate is required to be computed @0.53% and for that purpose the assessee relied upon the decision of the coordinate bench in the case of the assessee. The assessee further submitted that 19 corporate guarantees were given by the assessee for various amounts for periods ranging from the period of 365 days to 91 days. Our attention was drawn to following table giving the details of the corporate guarantee, the term and rate of interest charged on the amount, is mentioned as under : Sr.No. Name of the subsidiary (borrower) Period No. of days Guarantee amount as on 31.03.2020 (in foreign currency) Guarantee Commission Rate of interest charged on loan In Foreign Currency In INR 1. Cyient Inc USA 01.04.2019 to 31.0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee had received a notice for providing the details and the assessee has written a letter which is available at Page No. 13 of the paper book and in the said letter our attention was drawn at Page No 14 which is to the following effect. "Further to the above, we have enclosed to this letter, the agreement copies of the corporate guarantee issued during the year - Annexure 4B and also the agreements of the guarantees liquidated during the year- Annexure 4C". 14. Ld.AR had submitted quite contrary to record (supra) the finding was given by the TPO that the assessee has not provided any information. As mentioned in the paragraphs reproduced above, Ld.AR submitted that the finding by TPO is factually incorrect as the assessee has provided the necessary details for the period in which the guarantees have been given. In the same letter which is at Page No 13 the assessee has submitted the reason for coming to the conclusion why the 0.53% is required to be applied and our attention was drawn to Page No.15 and 16 of the Paper Book. It was submitted that there is a rational behind as to why the Tribunal had benchmarked interest on corporate guarantee of 0.53% and our attention was drawn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... djustment of Rs. 40,39,46,916. The learned CIT(A) vide impugned order by following the decision of coordinate bench of Tribunal in assessee's own case in preceding assessment years, accepted the benchmarking done by the assessee by following the yield spread approach with split of 50:50 in respect of both short-term and long-term guarantee. Being aggrieved, the Revenue is in appeal before us. 75. Having heard both the parties and perused the material available on record, we find that this is a recurring issue and has been decided in favour of the assessee in preceding assessment years. We further find that in assessment years 2014-15 and 2015-16, coordinate bench of the Tribunal vide order dated 08/03/2022, observed as under: "82. Having heard the rival contentions and having perused the material on record, we find that this is a purely factual matter, which permeates from year to year, and once the coordinate benches have consistently held, right from 2011-12 onwards, that 50:50 allocation is reasonable, and there is no change in the material facts, we see no reasons to take any other view of the matter than the view so taken by the coordinate benches in assessee's own cases ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsidered as international transaction. Undoubtedly, the assessee has given Corporate Guarantee on behalf of its AE, which fact has not been disputed by the assessee either before the TPO or before the DRP and, therefore, we are of the opinion that the corporate guarantee given by the assessee is an international transaction and, therefore, the same has rightly been held so by the lower authorities. 8.1 Having held that the corporate guarantee issued by the assessee on behalf of its AE is an international transaction, the sequator to that is whether the corporate guarantee estimated by the DRP to the tune of 1% on the amount guaranteed as a corporate guarantee commission as against 0.10% was justified or not. 8.2 In this regard, the assessee had made elaborate submissions which are reproduced elsewhere and submitted that the assessee is taking the financial facilities from the SBI and is paying 0.10% as schedule of fees and charges to the bank. 8.3. We have considered the submissions and found that the charges paid by the assessee cannot be compared for the purposes of determining the ALP of corporate guarantee commission. In our view, no third party would provide similar t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aspect on which the Ld.CIT(A) has granted relief is that the assessee has only provided the corporate guarantee to its AE to the extent of 30.50% on the outstanding loan balance of US $ 10 million advance to its AE. In our view, the pro rata corporate guarantee is required to be calculated as directed by the Ld.CIT(A) on the amount for which the assessee has sought which would be 30.50% of the total amount of US $ 10 million advanced to its AE. Therefore, the corresponding corporate guarantee commission @ 0.53% is required to be computed on the amount of 30.50% of assessee's share on the outstanding loan balance of US $ 93,05,376. Accordingly, grounds 2 to 4 of the Revenue appeal are dismissed." 17. It was submitted that the Ld. AO / TPO have wrongly applied the rate at which the banks were issuing corporate guarantee and it was submitted that the said rates of interest applied by TPO/DRP as the guarantee fess by the various banks is not applicable in the present case as the risk rewards and assets employed by the banks and that of the assessee were not identical. It was further submitted by the Ld.AR that it is the duty of the TPO to brought on record the comparable instance by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the median of the 35 percentile and 65 percentiles as bank charges and computed at 1.90%. If we look into the document and the show-cause notice issued by the TPO which is available at Page No. 18 then it is clear that the ALP of interest as applied for ECB loan was computed at 1.67%. At Page No. 20 of the paper book, in paragraph No.21.6 it was mentioned as under: - "21.6 As the taxpayer had not received any interest amount on the financial commitment / loan provided to the AE, adjustment is warranted in the said issue and computation of the adjustment with respect to interest to be received on ECB is as under: Sl.No Description Amount 1. ECB loan / financial commitment Rs. 59,05,85,810/- 2. Interest Received by the assessee (A) NIL 3. Arm's Length Interest rate 1.67% 21. Now the question arises whether the ALP computed for external commercial borrowing @1.67% can be juxtapose or applied to the corporate guarantee @1.9%. In our view the answer is no, and this Tribunal while deciding the issue in the case of Hetero Labs Limited, v. ACIT (supra), as relied upon by the assessee, held that the rate of interest required to be applied is 0.53% and not 1.9%. For that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Para No.3.4.1 to 4. "3.4.1. On perusal of the TP Document of the assesses it was noted that an amount of Rs. 68,05,86.810/- has been declared as 'Financial Support to subsidiary company. It has been described in the TP Document itself that the amount was in fact financial commitment provided in earlier years to its subsidiary Cylent Europe Limited and it was argued that it is in the nature of shareholder activity. 3.4.2. On being asked the details of the transaction, it was replied that the transaction is in the form of a letter of comfort issued by the assessee company to one of its subsidiaries named M/s Gylent GmbH, which has advanced a loan to another AE named Oylent Europe Limited. it was submitted that in connection to the said loan the assessee issued a letter of comfort addressed to Cylent GmbH, wherein the assessee has undertaken that the borrower AE will receive adequate funding until the repayment of loan to Cylent GmbH. It was argued that a letter of comfort is different from a corporate guarantee and is a mere reassurance of performance. The reliance was placed on the judgment in case of M/s United Breweries (Holdings) Lid. vs. Karnataka Industrial Investment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terest) at any point of time. One of the conditions mentioned is that the Loan Agreement is that the lender AE may terminate the agreement at any point of time making the borrower AE to repay the loan amount immediately. Thus assessee may even be responsible for repayment. Also the language clearly means that in case the borrower AE is unable to pay the loans the assessee will have to ensure the funding to ensure the repayment. Thus the ultimate obligation to repay the loans, in case the AE is unable to do the same, would fall on the assessee in the event of a default. Accordingly, the undertaking is in the nature of Corporate Guarantee and in response to TPO's proposal to bench-mark the guarantee in absence of any benchmarking carried out by the assessee with respect to said international transaction, information was gathered u/s. 133(6) from various banks information with regard to the guarantee fees charged on bank guarantees provided and the details are as under : S.No. Name of the Bank Guarantee Fees 1. SBI 1.30% 2. Canara Bank 1.50% 3. HDFC Bank 1.80% 4. Axis bank 2% 5. Union Bank of India 3% 6. Punjab National Bank 3% 35th Percentile 1.80% Median ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts cross appeal. The ld. AR of the assessee submits that ld. CIT(A) deleted the adjustment against which the revenue has filed its cross appeal. The ld. AR of the assessee submits that the assessee issued Letter of Comfort to Bankers of Associated Enterprises (AE) of assessee. The assessee not reported this transaction (issuance of Letter of Comfort) in its Transfer Pricing Study Report (TPSR). The Assessing Officer made reference to Transfer Pricing Officer (TPO) for computation of Arms Length Price (ALP) of transaction reported by assessee with its AE in its report furnished under Form 3CEB. The TPO noted that the assessee has not reported about issuance of Letter of Comfort to the Banker of AE. The TPO issued show cause notice for determination of ALP with regard to issuance of Letter of Comfort. The assessee filed its reply vide reply dated 07.01.2008 & 18.01.2008. In reply to the show-cause, the assessee submitted that no adjustment is ought to be made as Letter of Comfort would not represent international transaction within the meaning of section 92B(1). It was further stated that merely an unequivocal statement of intention expressed by assessee not being bilateral, is not a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 21. In the rejoinder submission, the ld. AR of the assessee submits that in Everest Kento Cylinders Ltd. there was no question before the Hon'ble High Court, if giving a corporate guarantee is an international transaction or not. In without prejudice submission, the ld. AR further submits that the coordinate bench of Mumbai Tribunal in SIRO Clinpharm (P.) Ltd. vs. DCIT [(2017) 88 taxmann.com 338 (Mum. Trib.)] that amendment in Explanation to section 92B by Finance Act is to be treated as effective at the best from A.Y. 2013-14 and so issuance of corporate guarantee prior to 01.04.2012 does not come within the definition of international transaction. 22. We have considered the submission of ld. representative of the parties and perused the order of lower authorities. During the reference pending before TPO, it was noted by TPO that assessee has issued a letter of Comfort to the banker of AE of assessee. The TPO has noted the relevant clause of Letter of Comfort in para-3.5.8 of its order, consisting the following undertaking/assurance: a) it would be its endeavor not to permit the AE to enter into liquidation (whether Voluntary or compulsory); b) to enter into an arran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3 2 Standard Chartered Bank Tata Zambia Ltd., Zambia 6.50 28,47,32,500 42,70,387.5 3 Standard Chartered Bank Tata International (PTY) Ltd., Australia 9.00 39,42,45,000 59,13,675 4 Bank of India Tata South East Asia Ltd. , Hongkong 22.50 98,56,12,500 1,47,84,187.5 5 State Bank of India Tata Africa Holdings Ltd. , South Africa 30.00 131,41,50,000 1,97,12,250 6 HSBC Tata South Asia Ltd., Hongkong 48.00 210,26,40,000 3,15,39,600 7 HSBC Tata West Asia FZE, UAE 6.50 28,47,32,500 42,70,987.5 8 Bank of Baroda Tata South East Asia Ltd., Hongkong 5.00 21,90,25,000 32,85,375 Total 132.50 580,41,62,500 8,70,62,437.5 R/o 8,70,62,438 24. Before ld. CIT(A), the assessee made elaborate submission and explained the difference between Letter of Comfort within Intra Group as well as the corporate guarantee. The ld. CIT()A) after considering the submission of assessee concluded that by issuing Letter of Comfort to the Bankers of AE, the assessee did not incurred any cost. The issuance of Letter of Comfort by assessee have no bearing on the profit, income or loss as the assessee did not incur any cost or expenditure for issuing such Letter of Comfort and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he revenue." 29. Lastly, Ld.AR had drawn our attention to the to the decision in the case of 2754/MUM/2014 dated 7.8.2021 and drawn our attention to the Paragraph Nos. 6 & 7 which is to the following effect:- "6. The learned Departmental Representative strongly relying upon the observations of learned Commissioner (Appeals) submitted, by providing letter of comfort / support to the AE, the assessee has facilitated the loan availed by AE. Therefore, it has to be treated at par with corporate guarantee. Hence, the decision of learned Commissioner (Appeal) should be upheld. 7. We have considered rival submissions in light of the decisions relied upon and perused materials on record. After going through sample copy of letter of comfort / support given to the bank towards loan availed by the AE, we have noticed that there is no liability or responsibility fastened with the assessee for making good the liability of the AE in case of any default. There is nothing on record to suggest that in case of any default by the AE, the outstanding loan will be recovered from the assessee. Pertinently, while sustaining a part of the adjustment made by the TPO, learned Commissioner (Appeals) h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enefit of any such support attributable to the borrower's MNE group member status would arise from passive association and not from the provision of a service for which a fee would be payable. See paragraph 7.13 on passive association." 31. Based on above submissions, Ld.AR submitted that the approach of the Ld.AO / TPO in benchmarking the letter of comfort is erroneous and required to be deleted. 32. Ld. DR relied upon the order passed by the TPO / DRP. At the outset it was submitted that assessee has not raised, this specific ground before the Tribunal even though it has raised the ground before DRP and for that purpose Ld. DR has drawn our attention to Page No. 9 of the DRP order wherein at objection No 3.3 it was mentioned as under: - "Objection No. 3.3; Without prejudice, assuming but not accepting that the transaction of letter of comfort is in the nature of corporate guarantee, the authorities below failed to appreciate that it is outside the ambit of international transaction and therefore no adjustment is warranted on the facts of the case." 33. On the basis of the above it was submitted that assessee has not challenged the corporate letter of comfort as an inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ne or more of such enterprises. (2) A transaction entered into by an enterprise with a person other than an associated enterprise shall, for the purposes of sub-section (1), be deemed to be a transaction entered into between two associated enterprises, if there exists a prior agreement in relation to the relevant transaction between such other person and the associate enterprise, or the terms of the relevant transaction are determined in substance between such other person and the associated enterprise." 36. From the perusal of the above, it is apparently clear that the financial transaction which is in the nature of guarantee would fall and would be covered by the international transaction and therefore we have no hesitation to held that "letter of comfort" which is akin to corporate guarantee would be international transaction. Corporate guarantee in financial world can be worded differently one which is given to bank / financial institutions is called as "corporate guarantee fee" when given by assessee to its related party or to business entity it is called letter of comfort. But both are having inbuilt obligation to receive the payment to lender on behalf of borrower. 37. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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