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Facts
The assessee, a commercial bank, issued guarantees to Indian clients based on counter-guarantees from its overseas branches. The Assessing Officer (AO) and Transfer Pricing Officer (TPO) re-computed the Arm's Length Price (ALP) of the processing fees charged by the assessee for these guarantees, applying the CUP method and making an upward adjustment. The assessee had used the TNMM method.
Held
The Tribunal held that the TNMM method was the most appropriate method, not CUP, due to lack of comparable data for CUP. It found that the assessee merely provided support services and bore no significant risk, as it was protected by overseas counter-guarantees. The Tribunal followed its own previous decisions on similar issues.
Key Issues
Whether the CUP method was appropriate for benchmarking the processing fees for guarantees, or if TNMM was more suitable, and whether the upward adjustment made by the AO/TPO was justified given the nature of the transaction and the assessee's role.
Sections Cited
144C(5), 133(6), 153, 270A, 234A, 92CA(3), 143(3), 10B(1)(a)
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Income Tax Appellate Tribunal, “K” BENCH MUMBAI
Before: SHRI PAWAN SINGH & SHRI GIRISH AGRAWAL
PER GIRISH AGRAWAL, ACCOUNTANT MEMBER:
This appeal filed by the assessee is against the order of Dispute Resolution Panel -1, Mumbai, vide order no. ITBA/DRP/F/144C(5)/2024-25/1065485171(1) dated 07.06.2024, passed u/s. 144C(5) of the Income-tax Act, 1961 (hereinafter referred to as the “Act”), for Assessment Year 2020-21.
Grounds taken by the assessee are reproduced as under:
“Ground no 1: Determination of the arm's length price (ALP) of the international transaction relating to processing fees received on account of guarantees Issued to Indian companies based on counter-guarantee from overseas branches
The learned AO, based on the directions of the Hon'ble DRP, has erred in law and on facts in re-computing the ALP of the international transaction pertaining to processing fees received on account of guarantees issued by the Appellant to Indian beneficiaries (based on back-to-back guarantee provided by the overseas AE) and thereby making an upward adjustment of INR 2,25,13,339.
Ground 2: Rejecting the Transactional Net Margin Method (TNMM) used by the Appellant and adopting External Comparable Uncontrolled Price (CUP) method as the most appropriate method
The learned AO, based on the directions of the Hon'ble DRP, erred in determining the ALP of the international transaction pertaining to processing fees received on account of guarantees issued by the Appellant, on following grounds: a) In rejecting the TP documentation maintained and the benchmarking analysis conducted by the Appellant without providing any cogent reasons; b) In erroneously comparing the administrative and low-end functions performed and risks assumed by the Appellant in relation to processing services rendered in issuance of guarantees with the guarantees issued by the seven selected banks in India without obtaining adequate information with respect to the actual guarantees issued by these banks; c) In rejecting the Transaction Net Margin Method ('TNMM') adopted by the Appellant and incorrectly concluding that the Appellant has adopted aggregation approach for benchmarking; d) in adopting external Comparable Uncontrolled Price ('CUP') method as the MAM, the learned AD/TPO erred in law and on facts, inter-alia on the following grounds: • Considering the information sought under section 133(6) of the Act from third party banks that was not available in the public domain for the purpose of benchmarking the transaction is unjust and unfair; • Arbitrarily considering details obtained from only seven banks under section 133(6) of the Act and determining the ALP without following a scientific search process. • Using the information obtained under section 133(6) of the Act from the seven third party banks for determining the ALP of the transaction without appreciating that the data obtained under section 133(6) of the Act was generic and incomplete which did not include several commercial and economic aspects which impact the pricing, and • In not providing the copies of details received from other banks under section 133(6) of the Act. e) Without prejudice to the fact that the local guarantees issued by the Appellate to third parties (without any counter guarantee) are not comparable for benchmarking the back-to-back guarantee transaction, the learned AO/TPO erred in ignoring the Appellant's contention that even in case of such local guarantees where credit risk is borne by the Appellant, the fee received by the Appellant is lower than the ALP of 1.3% percent as determined by the learned TPO; f) In erroneously concluding that the Appellant is involved in providing significant administrative and managerial services in connection with the processing of loans and incorrectly comparing the fees to be earned by the Appellant with the fees charged by two banks for processing of loans g) Without prejudice to (f) above, in not providing an opportunity to the Appellant to make any response to rebut the above comparison, thereby violating the principles of natural justice. Ground no 3: Validity of final order passed beyond timelines prescribed u/s 153 of the Act The learned AO has erred in not appreciating the fact that the final order passed under section 143(3) read with section 144C(3) of the Act is time barred under section 153 of the Act which prescribes the outer time limit for passing the final assessment order. Ground no 4: Initiation of penalty proceedings under section 270A of the Act The learned AO has erred in initiating penalty proceedings under section 270A of the Act for under-reporting of income. Ground no 5: Levy of interest under section 234A of the Act The learned AO erred in levying interest amounting to INR 1,91,277 under section 234A of the Act.”
2. The ground No.1 raised by the assessee is with regard to determination of Arm’s Length Price (ALP) of the international transaction relating to processing fees received on account of guarantees issued to Indian companies based on counter guarantee from overseas branches. The ground No.2 raised by the assessee is challenging the rejection of Transactional Net Margin Method (TNMM) used by the assessee and adopting external Comparable Uncontrolled Price (CUP) method as the Most Appropriate Method (MAM).
We have heard rival submissions and perused the materials available on record. We find that assessee is a commercial bank having its head office in Melbourne, Australia. Australia and New Zealand Banking Group (ANZ) commenced its banking operations in India with the opening of its first branch in Mumbai pursuant to the receipt of the banking license from Reserve Bank of India (RBI). During the relevant year, ANZ has a single branch in India operating in Mumbai. It is involved in normal banking activities including financing of foreign trade and foreign exchange transactions. The list of Associated Enterprises (AEs) with whom the assessee had carried out international transactions are as under:-
The Australia and New Zealand Banking Group Limited - Singapore Branch (ANZ Singapore) ANZ Capital Private Limited (ANZ Capital) ANZ Support Services India Private Limited (ANZSS) ANZ Operations and Technology Private Limited (ANZOT) The Australia and New Zealand Banking Group Limited - Hong Kong Branch Australia and New Zealand Bank (China) Company Limited ANZ Bank (Vietnam) Limited ANZ Panin Bank The Australia and New Zealand Banking Group Limited - USA Branch The Australia and New Zealand Banking Group Limited - Melbourne Branch ANZ Royal Bank (Cambodia) Limited The Australia and New Zealand Banking Group Limited - Japan Branch The Australia and New Zealand Banking Group Limited - London Branch The Australia and New Zealand Banking Group Limited - Taiwan branch ANZ Bank New Zealand Limited
During the year, assessee had issued guarantee to customer based on the counter guarantee issued by its AEs. The assessee had benchmarked this transaction using TNMM as the MAM. Assessee was asked to provide the details relating to the amount of guarantee issued by it on behalf of the clients based on counter guarantee issued by overseas branches of ANZ. Assessee was also asked to provide back-up document in respect of the above transaction and the average rate at which guarantee fees has been charged by the assessee to its AEs. All these details were submitted by the assessee. The TPO was not satisfied either with the method followed by the assessee nor the rate of guarantee fee adopted. Hence, he took CUP method as the MAM and after obtaining naked bank quotes reduced 0.5 per centage from the same and arrived at the rate of 1.3 per cent.
2.1. The ld. TPO observed that assessee had earned processing fees for issuing guarantees on behalf of its AEs at an average rate of 0.02%. The ld. TPO observed that assessee had used comparables that are pertaining to support services industry which are not comparable with the activity of the assessee issuing guarantee for commission. Accordingly, the ld. TPO rejected those comparables and also TNMM method adopted by the assessee and proceeded to benchmark the guarantee transaction using external CUP method.
2.2. In order to apply the CUP method, information regarding the rates charged for giving 'bank guarantee’ was called from various banks u/s 133(6) of the Act, which is summarized as below: Sr. Name of the Bank Rate No 1. Standard Chartered Bank 0.75% 2. Citi Bank 0.90% 3. Union Bank of India 1.20% 4. HDFC Bank 1.80% 5. IDBI Bank 2.00% 6. State Bank of India 2.10% 7. ICICI Bank 2.50% 35th Percentile 1.20% Median 1.80% 65th Percentile 2.00% 2.3. From the perusal of the information received from the banks, it is seen that the bank guarantee rates are 1.80%.
2.4. Accordingly, ld. TPO benchmarked the guarantee fee transaction of the assessee after taking into account the judicial precedent in the case of Hon'ble Jurisdictional High Court of Bombay in the case of CIT vs. Everest Kanto Cylinders Ltd [2015] 58 taxmann.com 254 (Bom), concluded that it would be appropriate to charge 1.3% (median of bank guarantee rate charged by bank at the rate of 1.8% less 0.5% or downward adjustment) from the AE for the corporate guarantee given on behalf of assessee to third party financial institutions. According to him, since the assessee charged guarantee fee at the average rate of 0.33% per annum, the same was found to be inadequate and not meeting Arm’s Length test. He thus, computed an upward adjustment of Rs.2,25,13,339/- while passing the order u/s.92CA(3). The working for the adjustment proposed, is tabulated below:
Particulars Amount(INR) Guarantee fees based on (1.8% - 0.5%) p.a. of 3,37,25,165 the guarantee amount Less: Guarantee fees earned by the assessee 1,12,11,826 Adjustment amount 2,25,13,339 2.5. The very same TP adjustment was incorporated in the final assessment order passed by the ld. AO u/s.143(3) r.w.s. 144(C) (13) of the Act dated 24.07.2024 pursuant to the directions of the ld. DRP.
3. During the course of hearing, Shri Madhur Agarwal, ld. counsel for the assessee submitted that similar issue has been decided in favour of the assessee by the Co-ordinate Bench of the Tribunal rendered in assessee's own case.
4. On the other hand, Shri Kiran Unavekar, ld. Sr. DR vehemently relied upon the orders passed by the lower authorities.
We have considered the rival submissions and perused the material available on record. We find that the Co–ordinate Bench of the Tribunal in assessee’s own case in M/s. Australia and New Zealand Banking Group Ltd. v/s DCIT, in for the Assessment Year 2012–13, vide order dated 13.04.2022, had dealt with this identical issue. Further the same issue was also dealt by the Coordinate Bench in assessee’s own case for Assessment Year 2013-14 in dated 10.08.2022. The Coordinate Bench in ITA No.1106/Mum/2017 for Assessment Year 2012-13, while deleting the transfer pricing adjustment made in respect of guarantee fees, observed as under: “3.5. At the outset, we find that overseas branches of ANZ have clients who require guarantees to be issued to the beneficiaries in India. Since the beneficiaries are situated in India, the overseas branches of ANZ are situated in India. The overseas branches of ANZ request the assessee to provide such guarantees to the beneficiaries and inturn provide a back to back inter-bank guarantee / indemnity to assessee to cover any financial liability that assessee may incur in connection with guarantees issued to Indian beneficiaries on behalf of overseas ANZ branches. This is the prime function / activity carried out by the assessee with regard to the impugned international transaction. In case where the client of the overseas branch defaults and the guarantee would be invoked then, under the back to back guarantee issued to assessee, the overseas branch would make payments to assessee which would onward then make the payment to the beneficiary in India. 3.6. Hence, from the aforesaid modus operandi, it could be concluded that assessee acts as a beneficiary bank i.e. issue guarantee in India on behalf of clients of overseas branches of ANZ based on the counter guarantee issued by such overseas ANZ branches. Since assessee is acting as the beneficiary, the entire risk of discharging the bank guarantees is borne by overseas ANZ branch issuing the counter guarantee. The assessee merely
provides support service in connection with processing of the guarantees, typing out the guarantee agreement based on swift message received and issuing the said agreement to the beneficiary. The aforesaid functions performed by the assessee are not disputed by the lower authorities. When assessee is fully protected by overseas counter guarantee, we are unable to comprehend ourselves as to how CUP method could be applied therein as it would be impossible to make adjustment for the differences as per Rule 10B(1)(a) of the Income Tax Rules. In effect, we find that assessee is merely providing secretarial services or which can be loosely called as carrying out administrative functions. It is not in dispute that the assessee does not bear any risk in its books as it is fully protected by overseas counter guarantee / indemnity. In fact even assessee would not have to face the foreign exchange risk in view of the fact that whenever assessee is called upon to discharge the guarantee on behalf of the overseas branches, the assessee would first receive the monies from overseas branch because of the existing counter guarantee, and then discharge the same. The assessee is receiving processing fees from its AEs in foreign currency and the said fee is received immediately after the invoice is raised for the same, thereby the risk of exchange fluctuation would be very very negligible due to reduced time span involved therein. Given these undisputed facts, it would be appropriate to consider assessee as the tested party as it would be the least complex entity and its profitability could be reliably ascertained. Admittedly, the transaction which requires to be benchmarked is the receipt of processing fees by the assessee for the guarantees issued by rendering the aforesaid secretarial services. Hence, what is to be looked into is under similar terms and conditions and under similar circumstances what is the guarantee fee charged by the third party comparables from their AEs. This is what precisely assessee has done in the instant case. The assessee had taken into account the third party comparable margins and compared the same with its margins using Transactional Net Margin Method. For this purpose, the assessee had taken the third party comparables which are engaged in providing liasoning services, managerial services, marketing services, administrative services and information services. Effectively all these services could be loosely termed as business support services. Hence, when the data under CUP method is not available and data of margins under TNMM is readily available, then it would be appropriate to apply TNMM method as the Most Appropriate Method (MAM) in the facts and circumstances of the instant case. 3.7. We find that assessee had explained the entire transactions and the modus operandi applied by it in respect of the guarantee transactions before the ld. TPO which are evident vide letter dated 09/10/2015 together with the fee charged for each type of services rendered by it. These details are enclosed in pages 316 to 322 of the paper book filed before us. We also find the assessee vide its letter dated 28/10/2015 had filed a detailed annexure enclosed in pages 328-331 of the paper book listing the guarantees issued by it based on counter guarantee received from overseas branches of ANZ. The assessee also furnished the sample documents enclosing the copy of swift message received from ANZ New York advising the assessee to issue guarantee to Indian beneficiaries like Reliance Infrastructure Ltd., and providing counter guarantee. 3.8. The assessee also placed on record the copy of the swift message from assessee to ANZ New York confirming that guarantee has been issued to Reliance Infrastructure Ltd., confirming that guarantee has been issued by ANZ Mumbai. By all these documents, the ld. AR was vociferous in driving home the point that the entire risk of discharging the bank guarantees is borne by the overseas ANZ branch issuing the counter guarantees wherein the assessee merely provides support services in connection with processing of the guarantees. The ld. AR also referred to page 380 of the paper book containing various swift messages received. The assessee also placed on record the reply letter dated 18/12/2015 filed before the ld. TPO in response to show-cause notice as to why 1% guarantee fee charged by third party Indian banks should not be considered as the arm’s length price, placed reliance on the decision of the Mumbai Tribunal in the case of Asian Paints Ltd., vs. ACIT in & 2178/Mum/2012 wherein specifically in the context of guarantee fees, this Tribunal had deleted the adjustment made as the said judgement was rendered simply relying on certain data from the market. The facts of the case before us squarely fit into the facts prevailing in the case of Asian Paints Ltd. 3.9. The assessee before the ld. DRP made an alternative submission that the fee of 1% proposed by the ld. TPO may be applied in respect of fresh guarantees issued during the year. The details of fresh guarantees issued during the year were also furnished before the ld. DRP in pages 577-579 of the paper book vide letter dated 27/04/2016. But we find that the ld. DRP had merely brushed aside the same and grossly erred in stating that no details were filed by the assessee. 3.10. In view of the aforesaid observations, we hold that TNMM method would be the Most Appropriate Method in the facts and circumstances of the instant case and CUP could not be applied herein because of nonavailability of data. In any case in respect of adjustment made simply relying on 133(6) information from the market had been deleted by this Tribunal in the case of Asian Paints Ltd., referred to supra. It is also prudent to note that the same transactions were accepted by the ld. TPO upto A.Y.2012-13 in the case of the assessee. Hence, even going by the rule of consistency as has been held by the Hon’ble Supreme Court in the case of Radhasoami Satsang reported in 193 ITR 321, there is no need for the ld. TPO to take a divergent stand when there is no change in the facts and circumstances during the year with that of earlier years. Hence, we direct the ld. TPO to delete the adjustment made in respect of guarantee fees in the sum of Rs.10,94,55,035/-. Accordingly, the ground Nos. 1 & 2 raised by the assessee are allowed.”
The learned Departmental Representative could not show us any reason to deviate from the aforesaid order and no change in facts and law was alleged in the relevant assessment year. Thus, respectfully following the order passed by the Co–ordinate Bench of the Tribunal in assessee’s own case cited (supra), we uphold the plea of the assessee and delete the impugned transfer pricing adjustment. Accordingly, grounds no. 1 and 2 raised in assessee’s appeal are allowed.
Ground No.3 is on a legal issue relating to order passed beyond limitation. Since the appeal has been held in favour of assessee on the merits of the case, this issue is left open for adjudication. Ground No. 4 and 5 are consequential in nature.
In the result, appeal by the assessee is allowed.
Order is pronounced in the open court on 28th May, 2025