SBS TRANSPOLE LOGISTICS PVT. LTD.,GURGAON vs. ACIT, CIRCLE- 22(2), NEW DELHI

In various grounds of appeal, the effective issue which has been raised is with regard to firstly, the DRP has erred on law and fact in upholding the action of the TPO for enhancing the income of the assessee by commission @ 4.65% as against ‘nil’ shown by the assessee; and secondly, TP adjustment of Rs.63,31,572/- on account of interest receivables on loan given to AE by applying the rate of LIBOR + 550 BPS on interest free loans advances to Associated Enterprises (AES). The other grounds have not been pressed or argued.

Facts in brief are that the assessee company is engaged in the business of international freight forwarding by air freight services, sea freight services, international railway services and transportation. The main dispute regarding the transfer pricing adjustment in the international transaction with AE was with regard to providing guarantee to AE, Transpole Logistics, Singapore which was as under :-

The assessee has provided guarantee to enable SBI Singapore to lend working capital loan to subsidiary, Transpole Logistics Pte Ltd., Singapore, for which it was stated that it has not incurred any cost for issuing guarantee nor has charged any commission from its subsidiary. In the TP analysis, it was stated that there was no impact on the profit, income, loss or assets of either of the company on account of providing guarantee. external CUP and called for data from various banks u/s 133(6) which are as under :-

Accordingly, he made adjustment by taking arm’s length of computation of commission of the corporate guarantee fee in the following manner :-

Thereafter, ld. TPO noted that assessee has provided loans to various AEs in the previous years but no interest has been charged, the details of which are as under :- ./2017 Transpole Container Lines Loan Opening – 39,93,500 5,53,78,729 Ltd., India Advanced 5,93,72,229 Closing – 5,09,93,554 Transpole Logistics, - 2,22,36,500 2,22,36,500 Singapore Transpole Logistics, - Opening – 1,24,26,000 Hongkong 1,24,26,000 Transpole Logistics, - Opening 91,74,600 Malaysia 91,74,600 Closing – Nil Transpole Logistics, Korea - Opening – Nil 1,31,68,100 Closing – 1,31,68,100 Transpole Logistics - Opening 4,85,21,000 Holdings, Hongkong 1,26,50,000 Closing – 4,85,21,000

The ld. TPO had taken US LIBOR + 550 basis points for benchmarking the interest and applied 6% interest rate to make the adjustment and computed in the following manner :-

Before us, ld. Counsel for the assessee on the issue of guarantee commission, apart from stating that it was not an international transaction and there is not an impact on the profit, income, loss or assets of either of the company due to this transaction based on certain judgments cited before us, ultimately agreed that commission on corporate guarantee as charged by the TPO is much higher. It was stated that, now there are umpteen numbers of judgments wherein it has been held that bank rates cannot be considered as a comparable arm’s length rate to corporate guarantee rate, for which reliance was placed on the following decisions where 0.5% guarantee commission has been held to be reasonable :-

On the issue of interest, ld. counsel for the assessee submitted that TPO/DRP has added higher rate of interest i.e. LIBOR + 550 BPS for calculating interest on loan to subsidiaries and stated that suitable benchmark is only to be taken as LIBOR as held by Hon’ble Delhi High Court in the case of CIT vs. Cotton Naturals (I) Pvt. Ltd. 55 taxmann.com 523. In any case, it is stated that if at all, in order to take risk adjustment, at best it would be added at 2% and not 5.5% as has been held in the case of Tata Autocomp Systems Ltd. 374 ITR 516. He further relied upon the following judgments wherein following rates have been applied :-

On the other hand, ld. DR for the Revenue strongly relied upon the order of the DRP stating that detailed reasoning has been given for confirming the TPO action.

We have heard the rival submission and also perused the relevant finding given in the impugned orders. The controversy before us which has been argued by the parties is limited to, whether how much guarantee commission should be charged for providing guarantee to AE and how much interest should be charged on the loan given to AEs. Insofar as guarantee commission is concerned, admittedly assessee has not shown any commission, however the argument that guarantee commission of 4.56% charged by the TPO is on higher side and external CUP for using the data from the guarantee profit by the bank cannot be used in intra-group guarantees appears to be acceptable on the facts of the case. We find that there has been consistent view by various Benches of the Tribunal and Hon’ble Bombay High Court in the case of Everest Kanto Cylinders 58 taxmann.com 254 and Glenmark Pharmaceuticals Ltd. 43 taxmann.com 191 (supra)wherein 0.5% of the guarantee commission has been held to be at arm’s length. Accordingly, respectfully following the aforesaid decisions which is also in consistent with various decision of the coordinate Benches of the Tribunal as cited supra, we hold that the guarantee commission of 0.5% will be at arm’s length and accordingly, TPO 0.5%. Accordingly, grounds no.1 & 2 are partly allowed.

Insofar as the issue of adjustment on account of interest, the TPO/DRP has held that LIBOR + 550 BPS on interest free loan advanced to AEs should be at arm’s length price. It is not in dispute that assessee has not charged any interest on loan given to foreign AEs. Application of LIBOR should be a suitable benchmark which also has been admitted by the TPO.

Ground no.4 is not pressed, hence the same is dismissed as not pressed.

In the result, the appeal filed by the assessee is partly allowed.