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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 ..... ecessary. 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. 5) Ld TPO/DRP/A.O, has erred in proposing/confirming the addition of Rs. -1,12,21,130/- on account of fees for letter of comfort given by the assessee in favour of AES 6) The Ld. TPO/DRP/A.O. has erred in proposing/confirming the rate of fee for letter of comfort at 1.90% based on the rates of guarantee fees charged by the banks to its customers. 7) The Ld. TPO/DRP/A.O. has erred in not providing copy of the information gathered by the TPO u/s. 133(6) of the Act from various banks. 8) The Ld. TPO/DRP/A.O. has failed to appreciate that the reference made to the TPO by the A.O. is bad in law. The Ld. TPO/DRP/A.O. ought to have appreciated that the mandatory conditions to invoke the jurisdiction u/s. 92CA of the Act did not exist. 9) The appellant craves to add, modify or amend the ab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sal of the information available on record and submissions made on behalf of the assessee, the claims of the assessee in respect of the characterization of the services were rejected. However, since the margins of the assessee in respect of the International Transaction of Provision of Services to the AE' were with in the Arm's Length Range, as calculated by TPO, no adverse inference is being drawn in respect of the transaction declared under provision of services to the AE." 2.1.3 Therefore, this ground is dismissed." 5. It is the contention of the Ld.AR of the assessee before us that TPO / DRP have decided the ground without giving any reasons for concluding that the assessee was rendering Knowledge Process Outsourcing [in short "KPO"] services and was not a software developer. It was further submitted that the TPO has merely rejected the contention of the assessee that it is SDS and not KPO for that Assessing Officer noted that the Arm's length price of the assessee was within the range and no adverse inference could be drawn in respect to the transaction. It was submitted by the Ld.AR that the finding of the DRP/TPO which is to the similar effect will be binding on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quent years. In other words the process of bench-marking cannot be bypassed unless the same has specifically been directed by Hon'ble bench. 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: - Guarantee Fees for AY 2020-21: 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 1.90% 65th Percentile 2% 3.3.2 Accordingly, the arm's length rate of corporate guarantee fee is taken at 1.90% under CUP and it is proposed to determine the arm's length price of the transaction as under: Amount of Corporate Guarantee at the end of the year under examination in INR 567,64,11,550/- Arm's length rate of guarantee fee 1.9% Arm's Length price of Corporate Guarantee fees 10,78,51,819/- Corporate Guarantee fees received by the assessee 2,65,01,397/- Adjustment proposed 8,13,50,422/- 3.3.2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sk and there is a service provided to AE in increasing is creditworthiness in obtaining loans in market, be from Financial institutions or from others. There may not be immediate charge on Profit & Loss account but inherent risk cannat be ruled out in providing guarantees. Transaction of providing corporate guarantee involves service rendered to AE and, therefore, provisions of transfer pricing can be invoked in respect of such a transaction (Prolifics Corporation Ltd. v. Dy. CIT [20151 55 taxmann.com 226 (Hyderabad - Trib.) * ITAT held that the assessee did incur costs on issuance of the guarantee to its subsidiary and, for that reason, the issuance of guarantee indeed had a bearing on the profits and income of such enterprise. And hence the issuance of guarantees, on the facts and in the circumstances of this case, constituted an 'international transaction' (Advanta india Ltd. [2015] 64 taxmann.com 251 (Bangalore - Trib.)) ▪ Corporate guarantees issued by assessee to Indian bank for benefit of Its US subsidiary is an international transaction within meaning of section 928. Though immediate transaction was between assessee and CIT Bank of India. benefit of guar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mumbai in 62 taxmann.com 347 (Mumbai- Tri)( A.Y. 10-11) iv) Ladshya Media (P) Ltd. vs DCIT 10(2)(1) . Mumbai in 80 taxmann.com 309 (A.Y. 10-11) 2.2.5 In view of the above discussion and decisions, we hold that the provision of corporate guarantee by the assessee to its AE constitutes international transaction and has to be benchmarked as per the TP provisions. 2.2.6 Further, the Panel is of the opinion that the corporate guarantees (CGs) are fundamentally different from bank guarantees in their nature, risk profile, and purpose. Corporate guarantees are typically issued by a parent company to support the financial obligations of its subsidiary (associated enterprise or AE). These guarantees are often not issued for commercial consideration but to ensure the financial stability of the corporate group. Therefore, a corporate guarantee is a commitment by the parent company to fulfil financial obligations of the AE, in case it defaults. This kind of financial backing often does not involve an immediate cash outflow and is primarily a measure of internal financial support within the corporate structure. On the contrary, bank guarantees are commercial products provided by fin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the financial stability of the company receiving the guarantee and the likelihood of default, Duration and Size of Guarantee, Creditworthiness of the Guarantor and other relevant factors. The Panel is of the view that in calculating the guarantee commission, there cannot be an approach of one size fits all and the amount of commission will depend upon the relevant factors in each case. 2.2.10 Furthermore, the Panel notes from the Assessee's submissions, that the assessee has not provided the facts in support of its arguments as to why a lower rate of interest for corporate guarantee shall be applied. The assessee has not made supporting submissions such as credit rating of its A and its credit worthiness, which would help support the assessee's claim for a lower rate. The Panel opines that the rate of corporate guarantees is directly related to the risk assumed in providing such guarantees. It is seen that the Assessee has neither demonstrated nor ascertained the amount of risk involved in giving these corporate guarantees to its AE. Therefore, in the absence of both the credit rating and the quantified amount of risk, the Panel is constrained to infer that the risk invo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2,84,10,696 LIBOR +100 POINTS (1.92% TO 3.43%) 2. Cyient Inc USA 01.04.2019 to 31.03.2020 365 66,00,000 1,25,400 3. Cyient Inc Usa 01.04.2019 to 31.03.2020 365 55,00,000 1,04,500 4. Cyient Defence Services Inc Usa 01.04.2019 to 31.03.2020 365 33,00,000 62,700 45,10,202 LIBOR +100 POINTS (3.36%) 5. Cyient GmBH 01.04.2019 to 31.03.2020 365 46,00,000 87,400 69,61,837 Euribor + 150points (1.50%) 6. Cyient Europe Ltd. 01.04.2019 to 17.08.2019 139 NIL (Op. Balance 10,00,00) 7,236 4,16,20,575 Term Loan 1- Euribor +78 points (0.78%) Term Loan 2 - LIBOR + 115 POINTS (2.95%) Working capital loan 1 - 2.26% Working capital Loan 2 - 1.29% 7. Cyient Europe Ltd 01.04.2019 to 17.08.2019 139 NIL (Op. Balance 15,00,000) 10,853 8. Cyient Europe Ltd 01.04.2019 to 31.03.2020 365 1,65,000 3,13,500 9. Cyient Europe Ltd 01.04.2019 to 31.03.2020 365 55,00,000 1,04,500 10. Cyient Europe Ltd 05.12.2019 to 31.03.2020 117 20,00,000 12,181 11. Cyient Europe Ltd 20.09.2019 to 31.03.2020 193 69,00,000 69,321 12. Cyient SRO 01.04.2019 to 17.08.2019 139 NIL (Op. Balance 13,25,54,000) 3,18,367 25,94,748 Working capital Loan - 2.68% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... our attention was drawn to the reasoning given by the coordinate benches in the case of Dabar India Limited v. Addl. CIT in ITA No. 3241 & 6525/MUM/2014 dated 18.02.2021 wherein the Tribunal in Paragraph No.127 had held as under: - "127. So far as the corporate guarantee issued on behalf of Naturalle LLC, UAE is concerned, a perusal of the details furnished by the assessee in the paper book shows that the assessee has saved incremental interest of 1.025% due to guarantee provided by the assessee which was only with effect from September, 2007. Therefore, we find merit in the argument of the ld. Counsel that the proportionate interest saved by the Naturalle, LLC was only for a period of 7 months and accordingly, interest saving on only 0.60% was made by Naturalle, LLC. We have held in the preceding years that interest benefit be split between the guarantor and borrower on 50:50 basis. Therefore, applying the said rule, the benefit can be attributed to the service fee on account of guarantee at 0.30%. We accordingly modify the order of the CIT(A) and direct the AO to restrict the service fee/commission for providing such corporate guarantee at 0.30% o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aken by the coordinate benches in assessee's own cases for the preceding assessment years. We, therefore, approve the conclusions arrived at by the learned CIT(A) and decline to interfere in the matter." 16. It was submitted that the coordinate Benches of Hyderabad had uniformly applying the rate of 0.53%. Ld.AR drawn our attention to the to the decision of the Co-ordinate Bench in the case Hetero Labs Limited, v. ACIT in ITA No. 312 & 313/HYD/2023 dated 21.05.2024, wherein the Tribunal has held in Para No. 9 to 9.2.1 as under: - "9. We have heard the rival arguments and perused the material on record. The TPO at pages 22 to 24 of the order had made the adjustment of Rs.1.48 crore in the hands of the assessee on account of Corporate Guarantee. While computing the same, the TPO/Assessing Officer had captured the Corporate Guarantee fee at 1.8% at the outstanding loan amount. The Ld.CIT(A) while hearing the appeal of the assessee has granted the relief to the assessee on the ground no.1 that the TPO is not correct in comparing that Corporate Guarantee with the Bank guarantee and determined the Arm's Length Price of corporate guarantee based on bank guarantee rate. The Ld.CIT( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n. In our view, no third party would provide similar type of services/corporate guarantee on behalf of its AE and expose itself to the risk of giving the corporate guarantee. Therefore, the charges paid by the assessee to SBI cannot be compared for the purpose of determining the ALP of corporate guarantee commission. The Coordinate Bench in the case of Vivimed Labs vide its decision dated 12-04-2022 had adjudicated corporate guarantee commission @ 0.5% qua the extent of the amount of the assessee's corporate guarantee actually utilised in these four assessment years. Thereafter, similar view had been taken by various Tribunals restricting the addition to 0.5% of the amount guaranteed as corporate guarantee commission. Recently, Delhi Tribunal in the case of Havells India Ltd. Vs. ACIT (LTU) in ITA No.6509/Del/2018 dt.09.05.2022 had also echoed the above said view and held that the addition of 0.5% on the amount guaranteed would be the appropriate benchmark to determine the ALP. Similar decision was also passed by the Bangalore and Pune Benches of the Tribunals in the case of GMR Infrastructure Ltd in ITA No.344/Pun/2022 dt.25.05.2022 and Jain Irrigation Systems in ITA 822/Pun/2022 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he TPO to brought on record the comparable instance by citing at what rate the similarly situated comparable is charging the corporate guarantee from its AE. It was submitted by the assessee in the present case, the approach of the TPO / DRP is not in consonance with decision of the Tribunal and thereby the decision of the DRP / TPO is required to be reversed. 18. Per contra, Ld. DR had drawn our attention to the decision of the DRP and the Paragraph No. 2.2.7 of the DRP order and it was submitted that since there is inconsistence and incoherent approach of the Tribunal / High Court in benchmarking corporate guarantee charges, therefore, the decision rendered by the Mumbai Tribunal in ACIT v. M/s. Glenmark Generics Ltd., in ITA No. 5840/MUM/2017 was required to be applied and he has drawn our attention to Paragraph No.5 of the order. Ld. DR has submitted that it is the duty of the assessee to provide the comparable instances by maintaining the record as per Form 3CB and therefore lower authorities were right in applying the rate of guarantee charged by the bank financial institutions. 19. We have heard both the sides and perused the material available on record. In the present ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equired to be applied is 0.53% and not 1.9%. For that purpose, the Tribunal has relied upon another Co-ordinate Bench decision in the case of Mylon Laboratories Ltd v. ACIT in ITA No.2123/Hyd/2011 and held that 0.5% is required to be applied. Accordingly, respectfully following the decision of the Co-ordinate Bench in the case of Hetero Labs Limited, v. ACIT (supra) we direct the TPO to compute the charges at 0.53% as corporate guarantee charges. 22. The question whether the approach of the Tribunal by restricting the corporate guarantee at 0.53% is correct. For that purpose, we have to see what benefit the assessee would have been passing to the AE by giving the corporate guarantee. In fact, corporate guarantee charges paid for the corporate guarantee cannot be equated with the rate of interest at what the external commercial borrowings has been borrows. In the case of ECB loans, risk and rewards are more than the corporate guarantees. The Corporate guarantee is required to be enforced in case of failure on the part of part of borrower. In case of ECB, not only the principle borrowed, is required to pay borrowed sum beside that other action can also be taken. Moreover, the Co-ord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es (Holdings) Lid. vs. Karnataka Industrial Investment and Development Corporation (no citation provided) wherein the letter of comfort was provided as a document that indicates one party's intention to try to ensure that another party complies with the terms of financial transaction without guaranteeing performance in the event of the default. The attention was further invited to the judgment of ITAT Mumbai Bench in case of Asian Paints Limited vs. Addi. Commissioner of Income Tax LTU (ITA No. 2754 & 4203 of 2014) wherein it was pointed out that in a letter of comfort there is no liability or responsibility fastened with the assessee for making good the liability of the AE in case of default by the AE. Hon'ble bench further noted that it is apparent from perusal of the letter of comfort' that it is not a guarantee of any kind as there is no financial implication on the assessee. 3.4.3. Thus it appears that whether a 'Letter of Comfort' (LoC) would form an International Transaction of Corporate Guarantee or not would depend on the language of the letter. If the letter casts a financial responsibility on the assessee, which means that the assessee will have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... njab National Bank 3% 35th Percentile 1.80% Median 1.90% 65th Percentile 2% Since no specific objections in respect of the comparable selected by TPO, the Calculation of the adjustment in respect of the international Transaction of 'Financial Support to AE, holding the transaction to be that of a corporate guarantee, is as below Amount of commitment outstanding at the end of the year under examination in INR 59,05,85,810/- Arm's length rate of guarantee fee 1.9% Arm's Length price of Corporate Guarantee fees 1,12,21,130/- Corporate Guarantee fees received by the assessee 2,65,01,397/- Adjustment proposed 1,12,21,130/- 25. Ld.AR submitted that the assessee had issued a letter of comfort which is available at Page No. 27 which reads as under: - 26. On the basis of the above said "letter of comfort" it was submitted that there is no binding obligation of the assessee while granting letter of comfort and no cost has been incurred by the assessee for this letter of comfort. It was submitted that issuance of letter of comfort cannot be said to be an international transaction perse and it cannot be said to be subject matter of TP provision. It was further ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... intention expressed by assessee not being bilateral, is not a transaction and letter is a private affair between the assessee and the lender/banker (non associate and is not a transaction between two associate). The contention of assessee was not accepted by TPO by taking view that transaction relating to provision for Letter of Comfort and payment of commission for the services by AE to the assessee would fall within the definition in term of international transaction 92B of the Act. The TPO made adjustment of Rs. 8.70 crore on account of issuance of Letter of Comfort. The ld. CIT(A) after appreciating the contention of assessee concluded that issuance of Letter of Comfort does not constitute an international transaction. The ld. CIT(A) appreciated the difference between corporate guarantee and Letter of Comfort. The ld. AR further submits that there is a basic difference between corporate guarantee and Letter of Comfort. In a Letter of Comfort, the party issues only a letter that a subsidiary or group company would comply term of financial transaction and have no obligation to indemnify, however, in case of corporate guarantee, the party issuing guarantee is under obligation to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... whether Voluntary or compulsory); b) to enter into an arrangement with its creditors without its liability to the bank and its subsidiary and / or Associated companies being completely discharged; c) the assessee will not dispose off any shares in the AE which would result in its shareholding in the AE being reduced to a minority and non-controlling shareholding without first having received the Bank's written consent or having ensured that the AE's liability to the bank is discharged in full; d) it would be its endeavor that AE at all times has' .adequate financial resources to meet its obligations promptly and it shall be its endeavor that AE will be in a financial position to pay the moneys from time to time due to the bank; e) it would agree not to press for repayment of amounts due to it, in preference to the amounts due by the AE to the bank, from time to time; f) The assessee would furnish its annual audited financial statement of accounts and will procure that the AE will also furnish with annual audited information as may be reasonably required 23. The TPO concluded that this Letter of Comfort provide benevolent advantage to the AEs in obtaini ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... did not incur any cost or expenditure for issuing such Letter of Comfort and it does not constitute international transaction under section 92B of the Act. The ld. CIT(A) concluded that there is a fundamental between guarantee and Letter of Comfort. Guarantee is a legal enforceable; however, Letter of Comfort is not. We have noted that Hon'ble Karnataka High Court in United Braveries (Holding) Ltd. vs. Karnataka State Industrial Investment and Development Corporation (supra) held that Letter of Comfort merely indicates the appellant's assurance that respondent would comply the term of financial transaction without guaranteeing performance in the event of default. The co-ordinate bench of Tribunal in India Hotels Co. Ltd. (supra) on similar ground of appeal by following the decision of Hon'ble Karnataka High Court held that Letter of Comfort does not constitute international transaction. So far as contention of ld. DR for the revenue that after amendment in Explanation to section 92B is concerned, we have noted that co-ordinate bench in SIRO Clinpharm P. Ltd. (supra) held that amendment in Explanation to section 92B by Finance Act, effective from 01.04.2002 is to be treated as effe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing a part of the adjustment made by the TPO, learned Commissioner (Appeals) has equated the letter of comfort / support to corporate guarantee. In our view, on perusal of the letter of comfort / support, it cannot be construed to be in the nature of any sort of guarantee in respect of the loan liability of the AE. The only promise made by the assessee is, it will not make any divestment of the shares during the currency of the loan. In our view, in no way it makes the letter of comfort / support a guarantee of any kind as there is no financial implication on the assessee. On a careful reading of section 92B of the Income Tax Act, 1961 (in short, 'the Act'), more particularly Explanation I(c), we are of the considered opinion that provision of letter of comfort / support cannot be termed as an international transaction within the meaning of the aforesaid provision. Our aforesaid view is well supported by the decisions cited by the learned Counsel for the assessee. Accordingly, we delete the addition of Rs.3,28,280/-. This ground is allowed." 30. Ld.AR had also drawn our attention to the to the OCD commentary in this respect and drawn our attention to the page No. 98 of the paper ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat assessee has not challenged the corporate letter of comfort as an international transaction before Tribunal and hence not permissible for the assessee to raise above said issue before us. 34. Further, Ld. DR has drawn our attention to the order of the TPO/DRP and also drawn our attention to the Explanation inserted under the Act in 92B and it was submitted that after insertion of the Explanation 92B this issue is no more debatable and argued that letter of support would be an international transaction. He relied upon the decision of the Mumbai Bench of the Tribunal in the case of 5363/Mum/2017 dated 01.03.2024 whereby in earlier decision of the Tribunal in the case of Asian Paint Limited, have been distinguished by the subsequent bench and it was held by the Tribunal that the letter of support is an international taxation. 35. We have heard both the sides and perused the material available on record. In the present case admittedly, the assessee has not raised the specific ground before us challenging the fact whether the "letter of comfort" given by the assessee to its AE is not an international transaction. We find that this specific ground was raised by the assessee before ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion to receive the payment to lender on behalf of borrower. 37. Now the question is the international transaction is required to be benchmarked at the rate determined by the TPO @1.9% or at any other rate. The order of the TPO as mentioned hereinabove, clearly shows that at the end of the financial year the financial commitment of the assessee was Rs.59,05,85,810/- this is co-existent with the financial commitment as committed by the assessee while issuing the letter of comfort to its subsidy in terms which is available at Page No. 27. If we look into the loan agreement between Cylent GmbH and Cylent Europe Limited then it is clear that the loan amount of Euro 710000000 was given by the lender to the borrower at the interest rate of 3% and the said loan is required to be repaid in a period of 20 instalments. At Page No. 24 it is mentioned that borrower was provided the lender the guarantee for the payment of loan in the form of "letter of support by the parent company of the lender and the borrower for the loan as attached in annexure 2 of the loan agreement" the clause at Page No 24 clearly provides that this letter of support or any other letter of comfort is nothing but a secur ..... X X X X Extracts X X X X X X X X Extracts X X X X
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