M/S. ESSAR SHIPPING LTD,MUMBAI vs. DCIT, CIRCLE 5(1)(1), MUMBAI

S.NO Description Additions Additions (in INR) (in INR) 1 T.P additions on account of Guarantee Commission T.P additions on account of Guarantee Commission 3,42,83,120/- 3,42,83,120/ 2 Interest income from income tax refund (arises due to Interest income 1,27,00,000/- 1,27,00,000/ excess of TDS over-assessed tax liability) is excess of TDS over assessed as income from other sources instead of assessed as income from other sources instead of Business Income Business Income Grand Total (1+2) Grand Total (1+2) 4,69,83,120/- 4,69,83,120/

3. Aggrieved, the assessee is in appeal before the Tribunal by way the assessee is in appeal before the Tribunal by way the assessee is in appeal before the Tribunal by way of grounds reproduced above. of grounds reproduced above.

Name of the Amount Guarantee Amount Guarantee Rate Charged Guarantee Guarantee AE Commission Commission received (in Rs.) received (in Rs.) OGDShIL 29,22,00,000 29,22,00,000 0.5% 14,70,094 14,70,094 Varada 226,16,00,000 226,16,00,000 NIL NIL 5.1 Under the first transactions nder the first transactions, the company entered into a , the company entered into a guarantee agreement where it had provided a performance guarantee agreement where it had provided a performance guarantee agreement where it had provided a performance guarantee on behalf of its subsidiary i.e. guarantee on behalf of its subsidiary i.e. OGDSHIL( OGDSHIL(EOSL to third party bank i.e. Axis Bank in relation to credit facilities availed by party bank i.e. Axis Bank in relation to credit facilities availed by party bank i.e. Axis Bank in relation to credit facilities availed by EOSL from the Indonesian third party EOSL from the Indonesian third party bank amounting to Rs.USD bank amounting to Rs.USD 00,000 (equivalent to Indian Rs. 29.22 crores). Under the second 65,00,000 (equivalent to Indian Rs. 29.22 crores). Under the second transaction, the assessee had provided an assurance for execution the assessee had provided an assurance for execution the assessee had provided an assurance for execution of one transaction of transfer of rigs from its group companies to of one transaction of transfer of rigs from its group companies to of one transaction of transfer of rigs from its group companies to parties identified by the third party bank parties identified by the third party bank and pursuant to said pursuant to said arrangement the assessee had provided put options to buy certain arrangement the assessee had provided put options to buy certain arrangement the assessee had provided put options to buy certain preference share worth USD 30 million to be issued by Special ence share worth USD 30 million to be issued by Special ence share worth USD 30 million to be issued by Special Purpose Vehicle.

5.2 The learned TPO noted that the assessee charged corporate The learned TPO noted that the assessee charged corporate The learned TPO noted that the assessee charged corporate guarantee fee of 0.5% for international transactions in relation to of 0.5% for international transactions in relation to of 0.5% for international transactions in relation to Associated Enterprise(AE) namely nterprise(AE) namely ‘OGDSHIL’ and NIL ‘OGDSHIL’ and NIL in respect of another AE namely another AE namely ‘Varada’, applying ‘other method other method’ as ‘most appropriate method’ appropriate method’ for benchmarking. The learned TPO rejected The learned TPO rejected the benchmarking carried out by the assessee as same was not in the benchmarking carried out by the assessee as same was not in the benchmarking carried out by the assessee as same was not in accordance with the provisions of the Act. accordance with the provisions of the Act. The learned The learned TPO however, invoking section 133(6) of the A invoking section 133(6) of the Act gathered information ct gathered information from various banks with respect to guarantee commission charged from various banks with respect to guarantee commission charged from various banks with respect to guarantee commission charged by them. A list of information gathered is reproduced as under: by them. A list of information gathered is reproduced as under: by them. A list of information gathered is reproduced as under:

S. No. Bank Name Rate Rate 1. Kotak Mahindra Bank 0.45% 0.45% 2. Standard Chartered Bank 0.75% 0.75% 3. Citi Bank 0.90% 0.90% 4. HDFC Bank 1.80% 1.80% 5. IDBI 2.00% 2.00% 6. SBI 2.40% 2.40% 7. Union Bank of India 3.00% 3.00% 8. ICICI 3.00% 3.00% 35th Percentile 0.90% Median 1.90% 1.90% 65th percentile 2.40% 2.40% 5.3 The learned TPO observed that banks have charged average The learned TPO observed that banks have charged average The learned TPO observed that banks have charged average rate of 1.90% for charging guarantee commission. The learned TPO rate of 1.90% for charging guarantee commission. The learned TPO rate of 1.90% for charging guarantee commission. The learned TPO proposed proposed proposed comparable comparable comparable uncontrolled uncontrolled uncontrolled price(CUP) price(CUP) price(CUP) method method method for for for benchmarking using the benchmarking using the mean or average bank guarantee average bank guarantee commission, which is the commission, which is the rate at which banks provide corporate rate at which banks provide corporate guarantee to their customers. The learned TPO noted that no guarantee to their customers. The learned TPO noted that no guarantee to their customers. The learned TPO noted that no internal CUP was available and therefore external CUP approach internal CUP was available and therefore external CUP internal CUP was available and therefore external CUP was applied under which the guarantee fee was quantified through was applied under which the guarantee fee was quantified through was applied under which the guarantee fee was quantified through a comparison of arm’s a comparison of arm’s-length guarantee fee rates charged by uarantee fee rates charged by unrelated third parties providing similar guarantees under similar unrelated third parties providing similar guarantees under similar unrelated third parties providing similar guarantees under similar terms and conditions. terms and conditions.

5.4 The learned TPO referred to the decision of coordinate bench The learned TPO referred to the decision of coordinate bench The learned TPO referred to the decision of coordinate bench of the Tribunal in the case of Glenmark Pharmaceuticals Ltd in Glenmark Pharmaceuticals Ltd in of the Tribunal in the case of 5031/Mum/2012, wherein the Tribunal differentiated wherein the Tribunal differentiated ‘Bank Guarantee(BG) with the Corporate G (BG) with the Corporate Guarantee uarantee(CG) and held that TPO was not justified in mechanically picking up the BG rates that TPO was not justified in mechanically picking up the that TPO was not justified in mechanically picking up the as external CUP for benchmarking. The Tribunal held that BG as external CUP for benchmarking. The Tribunal held that as external CUP for benchmarking. The Tribunal held that commission rates could be appropriate CUP if those are properly could be appropriate CUP if those are properly could be appropriate CUP if those are properly benchmarked after making due adjustment in accordance with the benchmarked after making due adjustment in accordance with the benchmarked after making due adjustment in accordance with the provisions of the relevant rules provisions of the relevant rules i.e. Rule 10B (relating to CUP i.e. Rule 10B (relating to CUP method) of income tax rules, 1962. method) of income tax rules, 1962.

5.5 The learned TPO rejected the rate of 0.5% The learned TPO rejected the rate of 0.5% for benchmarking for benchmarking corporate guarantee commission as per the decisi corporate guarantee commission as per the decision of the T on of the Tribunal in in the the case case of of a a Everest Everest Kanto Kanto cylinder cylinder Ltd Ltd in ITA no.1131/Mum./2015, dated 7th October 201 no.1131/Mum./2015, dated 7th October 2016, w which has been further upheld by Hon’ble Bombay High Court , by way of the upheld by Hon’ble Bombay High Court , by way of the upheld by Hon’ble Bombay High Court , by way of the detailed reasoning in para seven of his order, relevant part of this is detailed reasoning in para seven of his order, relevant part of this is detailed reasoning in para seven of his order, relevant part of this is reproduced as under: reproduced as under:

5. It may be noted that in the case of Everest Kanto, the Indian 5. It may be noted that in the case of Everest Kanto, the Indian 5. It may be noted that in the case of Everest Kanto, the Indian entity had taken a quote from ICICI Bank of India for guarantee. entity had taken a quote from ICICI Bank of India for guarantee. entity had taken a quote from ICICI Bank of India for guarantee.

The Bank in India had given the q The Bank in India had given the quote to the Indian entity whereas uote to the Indian entity whereas the actual transaction was obtaining loan by the assessee's foreign the actual transaction was obtaining loan by the assessee's foreign the actual transaction was obtaining loan by the assessee's foreign entity from a bank situated in a foreign jurisdiction. In the case of entity from a bank situated in a foreign jurisdiction. In the case of entity from a bank situated in a foreign jurisdiction. In the case of Everest Kanto, the Indian company EKCL(India)was standing as a Everest Kanto, the Indian company EKCL(India)was standing as a Everest Kanto, the Indian company EKCL(India)was standing as a guarantor for entity guarantor for entity in foreign jurisdiction which was a need of in foreign jurisdiction which was a need of funds and had approached foreign bank. The quotation obtained by funds and had approached foreign bank. The quotation obtained by funds and had approached foreign bank. The quotation obtained by EKCL (India) was the rate to be charged for guarantee for EKCL EKCL (India) was the rate to be charged for guarantee for EKCL EKCL (India) was the rate to be charged for guarantee for EKCL India Ltd. and was not for standing guarantee for EKC (Foreign AE) India Ltd. and was not for standing guarantee for EKC (Foreign AE) India Ltd. and was not for standing guarantee for EKC (Foreign AE) situated in the f situated in the foreign jurisdiction. Therefore, examined from this oreign jurisdiction. Therefore, examined from this angle the CUP was defective and could not have been used. angle the CUP was defective and could not have been used. angle the CUP was defective and could not have been used. However, this important aspect went unnoticed in the litigation However, this important aspect went unnoticed in the litigation However, this important aspect went unnoticed in the litigation process. It may be noted that assessee (EKCL) had used rate of process. It may be noted that assessee (EKCL) had used rate of process. It may be noted that assessee (EKCL) had used rate of Bank Guarantee as st Bank Guarantee as starting point.

6. Another important point to be noted is that EKCL India had used 6. Another important point to be noted is that EKCL India had used 6. Another important point to be noted is that EKCL India had used the bank guarantee rate of 0.6% (i.e. a quotation by ICICI Bank to the bank guarantee rate of 0.6% (i.e. a quotation by ICICI Bank to the bank guarantee rate of 0.6% (i.e. a quotation by ICICI Bank to EKCL) as the starting point after making a slight downward EKCL) as the starting point after making a slight downward EKCL) as the starting point after making a slight downward adjustment. The EKCL (India) had charged guarante adjustment. The EKCL (India) had charged guarantee commission of e commission of 0.5% as against quotation rate of 0.6%. This guarantee commission 0.5% as against quotation rate of 0.6%. This guarantee commission 0.5% as against quotation rate of 0.6%. This guarantee commission of 0.5% was accepted by the Tribunal and was not disturbed by the of 0.5% was accepted by the Tribunal and was not disturbed by the of 0.5% was accepted by the Tribunal and was not disturbed by the Hon'ble High Court of Bombay. The Hon'ble High Court also made Hon'ble High Court of Bombay. The Hon'ble High Court also made Hon'ble High Court of Bombay. The Hon'ble High Court also made observations on Corporate Guarantee and Bank observations on Corporate Guarantee and Bank Guarantee. It may Guarantee. It may also be noted that even in the case of EKCL (India), the assessee also be noted that even in the case of EKCL (India), the assessee also be noted that even in the case of EKCL (India), the assessee could not give any comparable of Corporate Guarantee. The reason could not give any comparable of Corporate Guarantee. The reason could not give any comparable of Corporate Guarantee. The reason is simple because Corporate Guarantee is extended only in the is simple because Corporate Guarantee is extended only in the is simple because Corporate Guarantee is extended only in the related party scenario and there will not be related party scenario and there will not be any uncontrolled any uncontrolled comparable transaction. Therefore, even in that case comparable transaction. Therefore, even in that case comparable transaction. Therefore, even in that case the starting point for benchmarking of corporate guarantee was rate of point for benchmarking of corporate guarantee was rate of point for benchmarking of corporate guarantee was rate of commission charged by the banks on Bank Guarantee which was commission charged by the banks on Bank Guarantee which was commission charged by the banks on Bank Guarantee which was used by making some adjustments. Therefore, it is admit used by making some adjustments. Therefore, it is admit used by making some adjustments. Therefore, it is admitted fact that nearest comparable transaction is that of Bank Guarantee. that nearest comparable transaction is that of Bank Guarantee. that nearest comparable transaction is that of Bank Guarantee.

7. It is also relevant to state another point that the application of 7. It is also relevant to state another point that the application of 7. It is also relevant to state another point that the application of rate as decided in Everest Kanto cannot be the standard for every rate as decided in Everest Kanto cannot be the standard for every rate as decided in Everest Kanto cannot be the standard for every assessee. It is very well assessee. It is very well-known fact that rate of interest charged by f interest charged by the lending bank institution is different for different customers the lending bank institution is different for different customers the lending bank institution is different for different customers depending upon various factors such as repayment capacity, asset, depending upon various factors such as repayment capacity, asset, depending upon various factors such as repayment capacity, asset, credit rate etc. and similar for bank guarantee. Therefore, the banks credit rate etc. and similar for bank guarantee. Therefore, the banks credit rate etc. and similar for bank guarantee. Therefore, the banks also give different quotation an also give different quotation and charged differently to different d charged differently to different clients in bank guarantee case which may be more than in addition clients in bank guarantee case which may be more than in addition clients in bank guarantee case which may be more than in addition most of the banks also charge processing fees in addition to the rate most of the banks also charge processing fees in addition to the rate most of the banks also charge processing fees in addition to the rate of Bank Guarantee. The processing charge effectively increases the of Bank Guarantee. The processing charge effectively increases the of Bank Guarantee. The processing charge effectively increases the rate of guarantee. guarantee.”

5.6 After considering submission of the assessee and discussion of fter considering submission of the assessee and discussion of fter considering submission of the assessee and discussion of the decisions relied upon, the learned TPO proposed transfer the decisions relied upon, the learned TPO proposed transfer the decisions relied upon, the learned TPO proposed transfer pricing adjustment of pricing adjustment of ₹ 3, 42, 83, 120/-as under:

Name of the AE Amount Rate Charged Guarantee Corporate Corporate Adjustment (in Guaranteed Commission Guarantee Guarantee @ @ Rs.) received (in Rs.) 1.4% OGDSHIL 29,22,00,000 0.5% 14,70,094 40,90,800 40,90,800 26,20,706 Varada 226,16,00,000 226,16,00,000 NIL NIL 3,16,62,400 3,16,62,400 3,16,62,400 In view of the above, the amount of Rs. 3,42,83,120/ is being treated as an In view of the above, the amount of Rs. 3,42,83,120/ is being treated as an In view of the above, the amount of Rs. 3,42,83,120/ is being treated as an adjustment u/s.92CA of the I.T Act, 1961 in respect of Guarantee fee chargeable u/s.92CA of the I.T Act, 1961 in respect of Guarantee fee chargeable u/s.92CA of the I.T Act, 1961 in respect of Guarantee fee chargeable on the Guarantee given on behalf of AEs based on the above discussion. on the Guarantee given on behalf of AEs based on the above discussion. on the Guarantee given on behalf of AEs based on the above discussion. 6.CONCLUSION: In view of the above the following Transfer Pricing Adjustments are made to the In view of the above the following Transfer Pricing Adjustments are made to the In view of the above the following Transfer Pricing Adjustments are made to the International Transac International Transactions entered into by the Assessee Company for tions entered into by the Assessee Company for A.Y. 2021- 22. Sr. No. Nature Nature of of International International Adjustment in Rs. /- Adjustment in Rs. / Transaction Transaction 3,42,83,120 3,42,83,120 1. Guarantee Commission Guarantee Commission Total Total 3,42,83,120/- 3,42,83,120/ Accordingly, an adjustment of Rs. 3,42,83,120/ Accordingly, an adjustment of Rs. 3,42,83,120/- is made to the is made to the International Transactions. The Assessing Officer may consider penalty proceedings applicable Transactions. The Assessing Officer may consider penalty proceedings applicable Transactions. The Assessing Officer may consider penalty proceedings applicable as per law against the said adjustments while framing the assessment order.” as per law against the said adjustments while framing the assessment as per law against the said adjustments while framing the assessment 5.7 Before the learned DRP, the assessee submitted that the efore the learned DRP, the assessee submitted that the efore the learned DRP, the assessee submitted that the guarantee on behalf of AE guarantee on behalf of AE was provided as part of shareholding was provided as part of shareholding activity and it was not an international activity and it was not an international transactions. transactions. The learned DRP, however, rejected contention rejected contentions of the assessee in view of of the assessee in view of provision of corporate guarantee brought into ambit of the provision of corporate guarantee brought into ambit of the provision of corporate guarantee brought into ambit of the international transactions by international transactions by way of explanation to section 92B by way of explanation to section 92B by the Finance Act with effect from 01/04/2002 and judicial the Finance Act with effect from 01/04/2002 and judicial the Finance Act with effect from 01/04/2002 and judicial precedents.

5.8 Aggrieved with the finding of the learned DRP, the as with the finding of the learned DRP, the assessee is with the finding of the learned DRP, the as in appeal before the T in appeal before the Tribunal by way of raising grounds a unal by way of raising grounds as reproduced above. The assessee filed a paper book containing pages reproduced above. The assessee filed a paper book containing pages reproduced above. The assessee filed a paper book containing pages 1-449.

7. We have heard rival submission of the parties and perused the We have heard rival submission of the parties and perused the We have heard rival submission of the parties and perused the relevant material on record. With respect to objection of the relevant material on record. With respect to objection of the relevant material on record. With respect to objection of the assessee that guarantee commission is not an international assessee that guarantee commission is not an international assessee that guarantee commission is not an international transaction, we find that same transaction, we find that same has already been rejec rejected by the Ld. DRP. The Ld. DRP DRP. The Ld. DRP referred to the Explanation to section 92B Explanation to section 92B introduced by way of Finance Act w.e.f. 01.04.2002, wherein the introduced by way of Finance Act w.e.f. 01.04.2002, wherein the introduced by way of Finance Act w.e.f. 01.04.2002, wherein the guarantee has been specifically brought into the definition of the guarantee has been specifically brought into the definition of the guarantee has been specifically brought into the definition of the International Transaction Transaction. The relevant Explanation is reproduced n is reproduced as under:

“Explanation-for the removal of doubts, it is hereby clarified that -for the removal of doubts, it is hereby clarified that for the removal of doubts, it is hereby clarified that- (i) the expression "international transaction" shall include (i) the expression "international transaction" shall include (i) the expression "international transaction" shall include- (c) Capital financing, including any type of long term or short term Capital financing, including any type of long term or short term Capital financing, including any type of long term or short term borrowing, lending or guarantee, purchase or sale of mark borrowing, lending or guarantee, purchase or sale of mark borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment securities or any type of advance, payments or deferred payment securities or any type of advance, payments or deferred payment or or or receivable receivable receivable or or or any any any other other other debt debt debt arising arising arising during during during the the the course of business: business:” 7.1 Further, we find that we find that coordinate bench of the T coordinate bench of the Tribunal in the case of Foursoft P Ltd Vs DCIT in P Ltd Vs DCIT in 1903/Hyd/2011 held that the guarantee given to associated enterprises located abroad the guarantee given to associated enterprises located abroad is the guarantee given to associated enterprises located abroad in the nature of international transactions. In the case of Avanta in the nature of international transactions. In the case of in the nature of international transactions. In the case of India ltd Vs ACIT in I India ltd Vs ACIT in IT(TP)(A No. 1643/Ban/2012, T(TP)(A No. 1643/Ban/2012, the Tribunal after considering the decision of the after considering the decision of the coordinate bench oordinate bench in the case of Bahrti Airtel ltd Vs ACIT (2014) 43 taxmann.com 150 ( Delhi Vs ACIT (2014) 43 taxmann.com 150 ( Delhi –Trib) Vs ACIT (2014) 43 taxmann.com 150 ( Delhi upheld the transactions of guarantee to associated enterprises as in pheld the transactions of guarantee to associated enterprises as in pheld the transactions of guarantee to associated enterprises as in the nature of international transactions. Thu international transactions. Thus, in view of the statutory provisions and the various precedents as mentioned statutory provisions and the various precedents as mentioned statutory provisions and the various precedents as mentioned above, we do not find find any error in the finding of the Ld. DRP that any error in the finding of the Ld. DRP that providing corporate guarantee to associated enterprises in relation providing corporate guarantee to associated enterprises in relation providing corporate guarantee to associated enterprises in relation to to to borrowing borrowing borrowing is is is an an an international international international transaction. transaction transaction We uphold accordingly.

7.2 With respect to the respect to the second arguments of the Ld. counsel for of the Ld. counsel for the assessee, that the issue of corporate guarantee commission is that the issue of corporate guarantee commission is that the issue of corporate guarantee commission is covered in favour of the assessee by way of decision in earlier years covered in favour of the assessee by way of decision in earlier years covered in favour of the assessee by way of decision in earlier years , we may would like to refer fi may would like to refer firstly the decision of the decision of the ITAT in for No. 7371/Mum/2017 for AY 2013-14. In said assessment year, the . In said assessment year, the holding company of the assessee M/s Essar Global Ltd(EGL) had holding company of the assessee M/s Essar Global Ltd(EGL) had holding company of the assessee M/s Essar Global Ltd(EGL) had taken loan from ICICI bank Hong Kong branch and Singapore taken loan from ICICI bank Hong Kong branch and Singapore taken loan from ICICI bank Hong Kong branch and Singapore branch. The assessee given a letter branch. The assessee given a letter to the ICICI Bank undertaking to the ICICI Bank undertaking not to transfer, assign and dispose assign and dispose of 49% of equity shares in Essar of 49% of equity shares in Essar Logistics Ltd (ELL) without prior written approval of lenders during Logistics Ltd (ELL) without prior written approval of lenders during Logistics Ltd (ELL) without prior written approval of lenders during pendency of loan i.e. a pendency of loan i.e. a lien was provided on transfer of shares . In transfer of shares . In the circumstances , the Tribunal (supra) was of the view that the s , the Tribunal (supra) was of the view that the s , the Tribunal (supra) was of the view that the transaction was not of a guarantee but it was negative lien but transaction was not of a guarantee but it was negative lien but transaction was not of a guarantee but it was negative lien but keeping in view totally to of the circumstances, the tribunal keeping in view totally to of the circumstances, the tribunal keeping in view totally to of the circumstances, the tribunal restricted the adjustment to 0.25% of the said transactions instead restricted the adjustment to 0.25% of the said transactions instead restricted the adjustment to 0.25% of the said transactions instead of 0.5% applied by the Assessing Officer. lied by the Assessing Officer. The facts of the instant The facts of the instant year under consideration are distinguishable as in the instant year year under consideration are distinguishable as in the instant year year under consideration are distinguishable as in the instant year under consideration the transaction is a corporate guarantee and under consideration the transaction is a corporate guarantee and under consideration the transaction is a corporate guarantee and therefore ratio in the decision for the assessment year 2013-14 is therefore ratio in the decision for the assessment year 2013 therefore ratio in the decision for the assessment year 2013 not applicable or the facts of the instant year. not applicable or the facts of the instant year.

7.3 Further for assessment year 2016 for assessment year 2016-17, the transaction being of 17, the transaction being of a lien on shares of ELL, the Tribunal in a lien on shares of ELL, the Tribunal in a lien on shares of ELL, the Tribunal in ITA No. 2014/Mum/2022, following the finding of the Tribunal in assessment year 2013-14, following the finding of the Tribunal in assessment year 2013 following the finding of the Tribunal in assessment year 2013 restricted the transfer pricing adjustment to 0.25% of the restricted the transfer pricing adjustment to 0.25% of the restricted the transfer pricing adjustment to 0.25% of the transaction, which we have already distinguished above. which we have already distinguished above. which we have already distinguished above.

7.4 Further Further in in assessment assessment year year 2017 2017-18, 18, two two different different transactions of were subjected to transfer pricing adjustment. The transactions of were subjected to transfer pricing adjustment. The transactions of were subjected to transfer pricing adjustment. The first transaction was of negative lien on shares of ELL as was in first transaction was of negative lien on shares of ELL as was in first transaction was of negative lien on shares of ELL as was in assessment year 2013 assessment year 2013-14, therefore the tribunal following is finding therefore the tribunal following is finding in the earlier year restricted the adjustment to 0.25% of the in the earlier year restricted the adjustment to 0.25% of the in the earlier year restricted the adjustment to 0.25% of the transaction. The second transaction was of guarantee issue to transaction. The second transaction was of guarantee issue to transaction. The second transaction was of guarantee issue to lenders who issued a standby letter of credit in favour of the AE, lenders who issued a standby letter of credit in favour of the AE, lenders who issued a standby letter of credit in favour of the AE, who was engaged in th who was engaged in the sale and lease transactions of the vessels e sale and lease transactions of the vessels with the assessee. The assessee extended guarantee to third-party with the assessee. The assessee extended guarantee to third with the assessee. The assessee extended guarantee to third bank on behalf of the AE of which 350 crores. The AE obtained a bank on behalf of the AE of which 350 crores. The AE obtained a bank on behalf of the AE of which 350 crores. The AE obtained a standby letter of credit from bank which in turn was ultimately standby letter of credit from bank which in turn was ultimately standby letter of credit from bank which in turn was ultimately guaranteed by the assessee. The assessee did not charge any The assessee did not charge any guarantee commission. The assessee claim it to be part of guarantee commission. The assessee claim it to be part of guarantee commission. The assessee claim it to be part of shareholder activity. The learned TPO applied internal CUP and shareholder activity. The learned TPO applied internal CUP and shareholder activity. The learned TPO applied internal CUP and benchmark rate of the 2% as guarantee commission. The Tribunal benchmark rate of the 2% as guarantee commission. The Tribunal benchmark rate of the 2% as guarantee commission. The Tribunal however rejected the internal however rejected the internal CUP due to functional differences and CUP due to functional differences and observed that in the information was not available on record for observed that in the information was not available on record for observed that in the information was not available on record for invok is ing external CUP, but for closing the matter restricted the ing external CUP, but for closing the matter restricted the ing external CUP, but for closing the matter restricted the adjustment to 0.5%, which was not objected by the revenue. The adjustment to 0.5%, which was not objected by the revenue. The adjustment to 0.5%, which was not objected by the revenue. The relevant finding of the Tribunal is reproduced as under: the Tribunal is reproduced as under: the Tribunal is reproduced as under:

“064. We have carefully considered the rival contentions and perused 064. We have carefully considered the rival contentions and perused 064. We have carefully considered the rival contentions and perused the orders of the lower authorities. The assessee has given a guarantee the orders of the lower authorities. The assessee has given a guarantee the orders of the lower authorities. The assessee has given a guarantee for stand by letter of credit for 358 crores wherein the associated for stand by letter of credit for 358 crores wherein the associated for stand by letter of credit for 358 crores wherein the associated enterprises in the UAE has availed loan from banks of US$ 53.44 s in the UAE has availed loan from banks of US$ 53.44 s in the UAE has availed loan from banks of US$ 53.44 million. The banks are of United States and of Sri Lanka. The learned million. The banks are of United States and of Sri Lanka. The learned million. The banks are of United States and of Sri Lanka. The learned TPO benchmarked this transaction taking the average bank guarantee TPO benchmarked this transaction taking the average bank guarantee TPO benchmarked this transaction taking the average bank guarantee rate at the rate of 2.18% by comparing state bank of India, Union Bank rate at the rate of 2.18% by comparing state bank of India, Union rate at the rate of 2.18% by comparing state bank of India, Union of India and HDFC bank, bank guarantee rates and then deriving of India and HDFC bank, bank guarantee rates and then deriving of India and HDFC bank, bank guarantee rates and then deriving average at the rate of 2.18%. average at the rate of 2.18%. The assessee has also entered into a The assessee has also entered into a guarantee agreement where it has provided a performance guarantee guarantee agreement where it has provided a performance guarantee guarantee agreement where it has provided a performance guarantee on behalf of its subsidiary to third on behalf of its subsidiary to third-party bank where assessee has assessee has charged guarantee commission at the rate of 2% therefore the learned charged guarantee commission at the rate of 2% therefore the learned charged guarantee commission at the rate of 2% therefore the learned TPO adopted 2 percent per annum as internal cup and computed the TPO adopted 2 percent per annum as internal cup and computed the TPO adopted 2 percent per annum as internal cup and computed the arm's-length price of guarantee commission at length price of guarantee commission at ₹ 42,251,637. The ₹ 42,251,637. The learned dispute resolution panel approved the learned dispute resolution panel approved the above arm's-length price. length price. The comparison of the bank guarantee rate with the corporate The comparison of the bank guarantee rate with the corporate The comparison of the bank guarantee rate with the corporate guarantee rate as such is not acceptable therefore the action of the guarantee rate as such is not acceptable therefore the action of the guarantee rate as such is not acceptable therefore the action of the learned transfer-pricing officer in computing the average bank rate of pricing officer in computing the average bank rate of pricing officer in computing the average bank rate of guarantee at 2.18% is devoid guarantee at 2.18% is devoid of any merit. Now the issue remains that of any merit. Now the issue remains that the assessee has an internal cup where loan availed by the associated the assessee has an internal cup where loan availed by the associated the assessee has an internal cup where loan availed by the associated enterprises, assessee has stood guarantor, assessee charged guarantee enterprises, assessee has stood guarantor, assessee charged guarantee enterprises, assessee has stood guarantor, assessee charged guarantee commission at the rate of 2%, which is held to be at arm's commission at the rate of 2%, which is held to be at arm's-length by the length by the assessee itself. This is used by the learned TPO to benchmark the ssessee itself. This is used by the learned TPO to benchmark the ssessee itself. This is used by the learned TPO to benchmark the transaction of Guarantee for standby letter of credit. Guarantee against transaction of Guarantee for standby letter of credit. Guarantee against transaction of Guarantee for standby letter of credit. Guarantee against standby letter of credit is issued by Assessee in favour of the bankers standby letter of credit is issued by Assessee in favour of the bankers standby letter of credit is issued by Assessee in favour of the bankers who issued stand by letter of credit to the th who issued stand by letter of credit to the third parties who transacted ird parties who transacted with the AE. From AE assessee has obtained vessels on sale and lease From AE assessee has obtained vessels on sale and lease From AE assessee has obtained vessels on sale and lease back. Thus, the guarantee issued by the assessee in favour of bankers back. Thus, the guarantee issued by the assessee in favour of bankers back. Thus, the guarantee issued by the assessee in favour of bankers of its AE clearly shows that the vehicles are bought by the AE in UAE, of its AE clearly shows that the vehicles are bought by the AE in UAE, of its AE clearly shows that the vehicles are bought by the AE in UAE, which are leasee ba which are leasee back to the assessee and assessee is earning rental ck to the assessee and assessee is earning rental on them. Therefore, the guarantee itself is for the purpose of the on them. Therefore, the guarantee itself is for the purpose of the on them. Therefore, the guarantee itself is for the purpose of the business of the assessee. It has facilitated the assessee to obtain business of the assessee. It has facilitated the assessee to obtain business of the assessee. It has facilitated the assessee to obtain vessels on lease from its AE in the business of operation of shipping at vessels on lease from its AE in the business of operation of shipping a vessels on lease from its AE in the business of operation of shipping a much lesser interest rates. The internal cup adopted by the learned TPO much lesser interest rates. The internal cup adopted by the learned TPO much lesser interest rates. The internal cup adopted by the learned TPO did not have any such functions, assets and risk distribution. In the did not have any such functions, assets and risk distribution. In the did not have any such functions, assets and risk distribution. In the present case, Standby letter of credit given of its AE, in substance is present case, Standby letter of credit given of its AE, in substance is present case, Standby letter of credit given of its AE, in substance is used by the assessee for its own busines used by the assessee for its own business. Further the guarantee s. Further the guarantee commission rate of 2% charged from its associated enterprise on commission rate of 2% charged from its associated enterprise on commission rate of 2% charged from its associated enterprise on altogether different transaction which is also near to average rate of altogether different transaction which is also near to average rate of altogether different transaction which is also near to average rate of bank guarantee of 2.18%, clearly proves that guarantee commission bank guarantee of 2.18%, clearly proves that guarantee commission bank guarantee of 2.18%, clearly proves that guarantee commission rate of 2% for this transactio rate of 2% for this transaction is on higher side. Further, the associated n is on higher side. Further, the associated enterprise has taken the standby letter of credit for supply of vessel, the enterprise has taken the standby letter of credit for supply of vessel, the enterprise has taken the standby letter of credit for supply of vessel, the same is guaranteed by the assessee to the bankers who have issued same is guaranteed by the assessee to the bankers who have issued same is guaranteed by the assessee to the bankers who have issued the standby letter of credit. Therefore, it is apparent that it is a short- the standby letter of credit. Therefore, it is apparent that it is a the standby letter of credit. Therefore, it is apparent that it is a term arrangement ( it does not exist in subsequent year], which cannot term arrangement ( it does not exist in subsequent year], which cannot term arrangement ( it does not exist in subsequent year], which cannot be compared with the long be compared with the long-term continuance of guarantee tenure term continuance of guarantee tenure Accordingly, we reject the internal cup applied by the learned transfer- Accordingly, we reject the internal cup applied by the learned transfer Accordingly, we reject the internal cup applied by the learned transfer pricing officer and upheld by the learned di pricing officer and upheld by the learned dispute resolution panel. Now spute resolution panel. Now the question that arises what should be the arm's the question that arises what should be the arm's-length price of the length price of the guarantee commission. This is the transaction for oniy this year. Neither guarantee commission. This is the transaction for oniy this year. Neither guarantee commission. This is the transaction for oniy this year. Neither the assessee nor the learned transfer the assessee nor the learned transfer-pricing officer has looked at the pricing officer has looked at the creditworthiness of the associated enterprises or the assessee. Nor the ness of the associated enterprises or the assessee. Nor the ness of the associated enterprises or the assessee. Nor the tenure of the guarantee for standby letter of credit was determined. tenure of the guarantee for standby letter of credit was determined. tenure of the guarantee for standby letter of credit was determined. Neither the terms nor conditions of the guarantee to the bankers who Neither the terms nor conditions of the guarantee to the bankers who Neither the terms nor conditions of the guarantee to the bankers who provided standby letter of credit were brought on record. provided standby letter of credit were brought on record. The claim of The claim of the assessee is that it is the business of the assessee, which has the assessee is that it is the business of the assessee, which has the assessee is that it is the business of the assessee, which has gained because of this guarantee commission therefore the major benefit gained because of this guarantee commission therefore the major benefit gained because of this guarantee commission therefore the major benefit has accrued to the assessee and not to the AE, is not denied. The has accrued to the assessee and not to the AE, is not denied. The has accrued to the assessee and not to the AE, is not denied. The Assessee, Id TPO and Ld DRP without lo Assessee, Id TPO and Ld DRP without looking at the economics of oking at the economics of transaction itself, proceeded to decide the issue on the basis of judicial transaction itself, proceeded to decide the issue on the basis of judicial transaction itself, proceeded to decide the issue on the basis of judicial precedents. Such information is also not brought before us by either precedents. Such information is also not brought before us by either precedents. Such information is also not brought before us by either party. Even the full facts of the transactions are also not forthcoming. party. Even the full facts of the transactions are also not forthcoming. party. Even the full facts of the transactions are also not forthcoming. Therefore, in absence of any information about the guarantee and the absence of any information about the guarantee and the absence of any information about the guarantee and the functions assets and risk of both the contracting parties, and being one functions assets and risk of both the contracting parties, and being one functions assets and risk of both the contracting parties, and being one of transaction, the alternative plea raised by the assessee of adopting of transaction, the alternative plea raised by the assessee of adopting of transaction, the alternative plea raised by the assessee of adopting the guarantee commission rate at the rate of 0.5% follo the guarantee commission rate at the rate of 0.5% following the decision wing the decision of the honourable Bombay High Court in case of CIT versus Everest of the honourable Bombay High Court in case of CIT versus Everest of the honourable Bombay High Court in case of CIT versus Everest Kanto cylinders Ltd and nimbus common occasions Ltd, as same is not Kanto cylinders Ltd and nimbus common occasions Ltd, as same is not Kanto cylinders Ltd and nimbus common occasions Ltd, as same is not objected by the revenue, we direct the learned transfer pricing officer to objected by the revenue, we direct the learned transfer pricing officer to objected by the revenue, we direct the learned transfer pricing officer to adopt 0.5% as the appropriate adopt 0.5% as the appropriate guarantee commission arm's-length price. length price.

Accordingly, ground number 2 of the appeal of the AO is partly allowed. Accordingly, ground number 2 of the appeal of the AO is partly allowed. Accordingly, ground number 2 of the appeal of the AO is partly allowed. The learned TPO is a directed to compute the arm's The learned TPO is a directed to compute the arm's-length price length price adjustment accordingly accordingly.” 7.6 Thus the facts of the above case are different fr Thus the facts of the above case are different fr Thus the facts of the above case are different from the facts of the instant case.

7.7 Before as the learned counsel for the assessee also relied on Before as the learned counsel for the assessee also relied on Before as the learned counsel for the assessee also relied on the decision of the coordinate bench in the case of Tata consultancy the decision of the coordinate bench in the case of Tata consultancy the decision of the coordinate bench in the case of Tata consultancy services ltd in for assess services ltd in for assessment year 2014 ment year 2014- 15, wherein the Tribuna ribunal following the finding in the case of the l following the finding in the case of the assessee for assessment year 2012 assessee for assessment year 2012-13, restricted the guarantee restricted the guarantee commission and the rate of 0.5%. The learned counsel also relied on commission and the rate of 0.5%. The learned counsel also relied on commission and the rate of 0.5%. The learned counsel also relied on the decision of the coordinate bench in the case of Greatship (India) the decision of the coordinate bench in the case of Greatship (India) the decision of the coordinate bench in the case of Greatship (India) Ltd in ITA No. 753/Mum/2024 for assessment year 2016 o. 753/Mum/2024 for assessment year 2016 o. 753/Mum/2024 for assessment year 2016-17, wherein also followed in the case of the assessee for earlier year. wherein also followed in the case of the assessee for earlier year. wherein also followed in the case of the assessee for earlier year. The facts and circumstances of those cases as well as risk The facts and circumstances of those cases as well as risk The facts and circumstances of those cases as well as risk parameters associated with the guarantee transaction being parameters associated with the guarantee transaction being parameters associated with the guarantee transaction being different in each case, t different in each case, the ratio of the decisions relied upon by the he ratio of the decisions relied upon by the assessee are not applicable or the facts of the instant case. assessee are not applicable or the facts of the instant case. assessee are not applicable or the facts of the instant case.

7.8 Further we note that Further we note that the Ld. TPO has also rejected the prayer has also rejected the prayer of the assessee for restricting of the assessee for restricting corporate guarantee commission to corporate guarantee commission to 0.5% as per the decision in th decision in the Everest Canto Cylinder Ltd (supra) e Everest Canto Cylinder Ltd (supra) holding that guarantee rates vary by client due to credit risk and guarantee rates vary by client due to credit risk and guarantee rates vary by client due to credit risk and additional fees, so Everest Kanto's rate cannot be applied uniformly. additional fees, so Everest Kanto's rate cannot be applied uniformly. additional fees, so Everest Kanto's rate cannot be applied uniformly.

7.9 Subsequently, the Ld. TPO taken into consideration different Subsequently, the Ld. TPO taken into consideration different Subsequently, the Ld. TPO taken into consideration different bank rates and considering the medium rate of 1.90% of bank bank rates and considering the medium rate of 1.90% of bank bank rates and considering the medium rate of 1.90% of bank guarantees, he made a downward adjustment of 0.5% and proposed guarantees, he made a downward adjustment of 0.5% and proposed guarantees, he made a downward adjustment of 0.5% and proposed rate of 1.40% in respect of both the transaction of the corporate rate of 1.40% in respect of both the transaction of the corporate rate of 1.40% in respect of both the transaction of the corporate guarantee commission as under: guarantee commission as under:

Name of the AE Amount Rate Charged Guarantee Corporate Corporate Adjustment (in Guaranteed Commission Guarantee Guarantee @ @ Rs.) received (in Rs.) 1.4% OGDSHIL 29,22,00,000 0.5% 14,70,094 40,90,800 40,90,800 26,20,706 Varada 226,16,00,000 226,16,00,000 NIL NIL 3,16,62,400 3,16,62,400 3,16,62,400 6.3 We find that the assessee itself had adopted a guarantee We find that the assessee itself had adopted a guarantee We find that the assessee itself had adopted a guarantee commission rate of 0.5% in respect of the first transaction. It is a commission rate of 0.5% in respect of the first transaction. It is a commission rate of 0.5% in respect of the first transaction. It is a well-settled principle in transfer pricing jurisprudence that settled principle in transfer pricing jurisprudence that settled principle in transfer pricing jurisprudence that adjustments are to be made with reference to comparable adjustments are to be made with reference to comparable adjustments are to be made with reference to comparable transactions relevant to the assessment year under consideration. relevant to the assessment year under consideration. relevant to the assessment year under consideration. Consequently, the rate applied in an earlier assessment year does Consequently, the rate applied in an earlier assessment year does Consequently, the rate applied in an earlier assessment year does not constitute a binding precedent for determining the arm’s length not constitute a binding precedent for determining the arm’s length not constitute a binding precedent for determining the arm’s length price in a subsequent year. In the present case, the Transfer Pricing price in a subsequent year. In the present case, the Transfer Pricin price in a subsequent year. In the present case, the Transfer Pricin Officer (TPO) has adopted a methodology consistent with the Officer (TPO) has adopted a methodology consistent with the Officer (TPO) has adopted a methodology consistent with the provisions of the Income Tax Act and the Rules framed thereunder provisions of the Income Tax Act and the Rules framed thereunder provisions of the Income Tax Act and the Rules framed thereunder for computing the arm’s length price. The learned counsel for computing the arm’s length price. The learned counsel for computing the arm’s length price. The learned counsel appearing for the assessee was unable to demonstrate any infirmity appearing for the assessee was unable to demonstrate any infirmity appearing for the assessee was unable to demonstrate any infirmity either in the method of computation employed by the TPO or in the er in the method of computation employed by the TPO or in the er in the method of computation employed by the TPO or in the selection of comparables. It is pertinent to note that while bank selection of comparables. It is pertinent to note that while bank selection of comparables. It is pertinent to note that while bank guarantees guarantees guarantees issued issued issued by by by financial financial financial institutions institutions institutions to to to third third-party third independent entities are distinct in terms of risk profile from independent entities are distinct in terms of risk profile from independent entities are distinct in terms of risk profile from corporate guarantees issued between related parties, they are rate guarantees issued between related parties, they are rate guarantees issued between related parties, they are nonetheless nonetheless nonetheless functionally functionally functionally comparable, comparable, comparable, albeit albeit albeit with with with certain certain certain differentiating factors on the risk front. Corporate guarantees, differentiating factors on the risk front. Corporate guarantees, differentiating factors on the risk front. Corporate guarantees, though not identical, share substantial functional similarity with though not identical, share substantial functional similarity with though not identical, share substantial functional similarity with bank guarantees, necessitating suitable adjustments for risk ntees, necessitating suitable adjustments for risk ntees, necessitating suitable adjustments for risk differentials. In the case at hand, the TPO has relied upon the bank differentials. In the case at hand, the TPO has relied upon the bank differentials. In the case at hand, the TPO has relied upon the bank guarantee commission rates charged by various banks during the guarantee commission rates charged by various banks during the guarantee commission rates charged by various banks during the relevant financial year as a comparable uncontrolled price (CUP), relevant financial year as a comparable uncontrolled price (CUP), relevant financial year as a comparable uncontrolled price (CUP), and has prudently applied a downward adjustment of 0.5% to prudently applied a downward adjustment of 0.5% to prudently applied a downward adjustment of 0.5% to account for differences in risk and other qualitative factors. We account for differences in risk and other qualitative factors. We account for differences in risk and other qualitative factors. We further note that the Hon’ble Tribunal in further note that the Hon’ble Tribunal in Glenmark Pharmaceuticals Glenmark Pharmaceuticals Ltd. (supra) has endorsed the approach of considering the average (supra) has endorsed the approach of considering the average (supra) has endorsed the approach of considering the average bank guarantee commission rates as a valid CUP, subject to guarantee commission rates as a valid CUP, subject to guarantee commission rates as a valid CUP, subject to appropriate adjustments for the unique features of corporate appropriate adjustments for the unique features of corporate appropriate adjustments for the unique features of corporate guarantees. We find no reason to depart from the said reasoning. In guarantees. We find no reason to depart from the said reasoning. In guarantees. We find no reason to depart from the said reasoning. In view of the foregoing, and respectfully following the decision of the view of the foregoing, and respectfully following the decision of the view of the foregoing, and respectfully following the decision of the Tribunal in Glenmark Pharmaceuticals Ltd. Glenmark Pharmaceuticals Ltd. (supra), we are of the (supra), we are of the considered opinion that the transfer pricing adjustment made by considered opinion that the transfer pricing adjustment made by considered opinion that the transfer pricing adjustment made by the learned TPO is in accordance with law and is, therefore, upheld. the learned TPO is in accordance with law and is, therefore, upheld. the learned TPO is in accordance with law and is, therefore, upheld. The ground No. 1 of the appeal of the assessee is accordingly The ground No. 1 of the appeal of the assessee is accordingly The ground No. 1 of the appeal of the assessee is accordingly dismissed.

7. The ground No. 2 of the appeal of the assessee relates to The ground No. 2 of the appeal of the assessee relates to The ground No. 2 of the appeal of the assessee relates to considering interest from income considering interest from income-tax refund under the head tax refund under the head business income as against considered by the AO under the head business income as against considered by the AO under the head business income as against considered by the AO under the head ‘income from other sources’. ‘income from other sources’.

Order pronounced under Rule 34(4) of the IT Order pronounced under Rule 34(4) of the ITAT Rules, 1963 AT Rules, 1963 by way of placing result on notice board on ng result on notice board on 30.05.2025. .05.2025.