HASHAM TRADERS,BANGALORE vs. THE COMMISSIONER OF INCOME TAX (APPEALS)- 3, BENGALURU

The assessee has filed this appeal challenging the assessment order dated 4.11.2020 passed by the A.O. for assessment year 2016-17 u/s 143(3) r.w.s. 144C(13) of the Income-tax Act,1961 ['the Act' for short] in pursuance of directions given by Ld. Dispute Resolution Panel (DRP).

In the grounds of appeal, the only issue urged by the assessee relates to the transfer pricing adjustment of Rs.1.19 crores relating to guarantee given to the loan taken by Associated Enterprise.

The facts relating to the above said issue are stated in brief. The assessee is a partnership firm engaged in investment activities. The assessee has got a wholly owned subsidiary concern by name M/s. PI International Holdings LLC. The above said subsidiary availed a loan of USD 43 Million from M/s. Standard Chartered Bank, Singapore. The assessee stood as a guarantor by giving standby letter to the Standard Chartered Bank. Hence the above said bank charged guarantee commission @ 0.50% p.a. on the credit facility availed by M/s. PI International Holdings LLC. The assessee, in turn, charged 0.60% of the value of credit facility on its subsidiary towards its guarantee charges. The Ld. A.R. submitted that the rate charged by the assessee was actual plus mark up @ 20%. The assessee submitted before TPO that it has bench marked the international transactions of guarantee fee by adopting internal CUP method. Since the rate of 0.60% charged by it was more than the commission of 0.50% charged by the bank, the assessee contended that the guarantee fee charged by it on its AE is at arms length.

The TPO, however, took the view that the ALP of guarantee fee should be taken @ 2%. Accordingly, he determined the ALP of guarantee fee at 2% and made transfer pricing adjustment of Rs.1.37 crores. The Ld. DRP granted partial relief to the assessee by directing the TPO to adopt ALP rate at 1.75%. Accordingly, the A.O. passed the assessment order by determining the transfer pricing adjustment at Rs.1.19 crores. Aggrieved by the order passed by A.O. on this issue, the assessee has filed this appeal before us.

The Ld. A.R. submitted that the coordinate bench in the case of M/s. Medreich Limited Vs. ACIT (ITA No.1574/Bang/2019 &

We heard Ld. D.R. on this issue and perused the record. We notice that the Tribunal, in the case of M/s. Medreich Limited (supra), has followed the decision rendered by coordinate bench in the case of M/s. Manipal Global Education Services Pvt. Ltd. (ITA Nos.163 to 165/Bang/2016), which in turn followed the decision rendered by Hon’ble Bombay High Court in the case of CIT Vs. Everest Canto Cylinders Ltd. (ITA No.1165/2013 dated 8.5.2015), wherein the Hon’ble Bombay High Court had restricted the ALP of corporate guarantee to 0.50%. Accordingly, the coordinate bench in the case of M/s. Medreich Limited (supra) held as under: “9. We have heard rival submissions and perused the material on record. The learned AR has not disputed the fact that corporate guarantee commission is an international transaction. The AR only disputes 2% attributed for imputing ALP of corporate guarantee commission. On identical facts in the case of Manipal Global Education Services Pvt. Ltd. v. DCIT (supra), the Bangalore Bench of the Tribunal had imputed 0.50% as cost, instead of 2% arrived by the TPO. (A copy of TPO’s order u/s 92CA in the case of Manipal Global Education Services Pvt.Ltd. is placed on record). The TPO in the cited case also arrived at 2% by taking the credit rating of the tax payer just like this case. The relevant finding of the ITAT in the case of Manipal Global Education Services Pvt. Ltd. v. DCIT (supra), reads as follow:-

In the light of the above order of the Bangalore Bench of the Tribunal in the case of Manipal Global Education Services Pvt. Ltd. v. DCIT (supra), which is identical to the facts of the instant case, we direct the AO/TPO to make TP adjustment in respect of corporate guarantee at 0.50% for the assessment years under consideration. It is ordered accordingly.”

In the instant case, the assessee had paid guarantee fee of 0.50% to Standard Chartered Bank and in turn recouped 0.60% from its AE. In the decisions relied upon by Ld A.R (supra), the coordinate bench held that corporate guarantee commission charged @ 0.50% would be at arm’s length. We noticed earlier that the guarantee fee recouped by the assessee from its A.E was 0.60% and hence the same is required to be accepted to be at arm’s length. Accordingly, we direct the A.O. to delete the transfer pricing adjustment made in respect of corporate guarantee fee.

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