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Facts
The Revenue filed an appeal against the order of the CIT(A) concerning the assessment year 2021-22. The appeal involves two primary issues: corporate guarantee fees and interest on delayed trade receivables. The assessee is engaged in the manufacturing and marketing of pharmaceutical products.
Held
The Tribunal held that a corporate guarantee fee of 0.50% is an appropriate arm's length rate, consistent with previous decisions in the assessee's own cases. For interest on delayed trade receivables, the Tribunal upheld the benchmarking at LIBOR + 200 bps and affirmed that the credit period should be determined based on actual invoice terms, not a standard 60-day assumption.
Key Issues
Whether the CIT(A) was justified in benchmarking corporate guarantee fees at 0.50% and interest on delayed trade receivables at LIBOR + 200 bps, and determining the credit period based on invoice terms, contrary to the TPO's analysis.
Sections Cited
Section 92B of the Income Tax Act, 1961, Rule 10B(1)(a) of the Income Tax Rules, 1962, Section 115JB of the Income Tax Act, 1961, Section 143(2) of the Income Tax Act, 1961, Section 143(3) r.w.s. 144C(3) of the Income Tax Act, 1961
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Income Tax Appellate Tribunal, Hyderabad ‘B’ Bench, Hyderabad
Before: SHRI RAVISH SOOD & SHRI MADHUSUDAN SAWDIA
(निर्धारण वर्ा/Assessment Year:2021-22) Asst. Commissioner of Income Tax, M/s. Aurobindo Pharma Ltd., Vs. Central Circle 1(2), Hyderabad. Hyderabad. PAN: AABCA7366H (Appellant) (Respondent) निर्धाररती द्वधरध/Assessee by: Shri B.G. Reddy, Advocate रधजस् व द्वधरध/Revenue by:: Shri Narendra Kumar Naik, CIT-DR सुिवधई की तधरीख/Date of hearing: 30/07/2025 घोर्णध की तधरीख/Pronouncement: 06/08/2025 आदेश/ORDER PER MADHUSUDAN SAWDIA, A.M.: This appeal is filed by Revenue, feeling aggrieved by the order passed by the Learned Commissioner of Income Tax (Appeals), Hyderabad (“Ld. CIT(A)”), dated 24.02.2025 for the A.Y. 2021-22.
The Revenue has raised the following grounds of appeal :
3. The brief facts of the case are that the assessee is a company engaged in the business of manufacturing and marketing of active pharmaceutical ingredients, generic pharmaceuticals, injectables and related products. The assessee filed its return of income for the Assessment Year 2021–22 on 11.03.2022, declaring total income of Rs.2980,81,43,750/- under the normal provisions of the Income Tax Act, 1961 (“the Act”) and book profit of Rs.4152,70,06,040/- under Section 115JB of the Act. The case of the assessee was selected for scrutiny under CASS, and accordingly, notice under Section 143(2) of the Act was issued on 27.06.2022. In view of the international transactions entered into by the assessee during the relevant previous year, the case was referred to the learned Transfer Pricing Officer (“Ld. TPO”) for determination of the Arm’s Length Price (“ALP”). The Ld. TPO, vide order dated 30.10.2023, proposed the adjustments for Rs.30,86,07,356/- on account of corporate guarantee fee and Rs.68,12,81,218/- on account of interest on delayed trade receivables. Based on the said adjustments, the Learned Assessing Officer (“Ld. AO”) passed the draft assessment order dated 28.12.2023. The assessee chose not to file objections before the Learned Dispute Resolution Panel (“Ld. DRP”) and requested the Ld. AO to pass the final order. Accordingly, the final assessment order was passed on 26.02.2024 under Section 143(3) r.w.s. 144C(3) of the Act, incorporating the transfer pricing adjustments suggested by the Ld. TPO.
4. Aggrieved by the additions made by Ld. AO in the final assessment order, the assessee filed an appeal before the Ld. CIT(A). On the issue of corporate guarantee fee, the Ld. CIT(A), relying on the decision of this Tribunal in assessee’s own case for AY 2017-18 in & 352/Hyd/2023 dated 25.07.2024, directed the Ld. TPO to adopt the corporate guarantee fee at 0.50%. Further, on the issue of interest on delayed trade receivables, the Ld. CIT(A), relying on the same decision of this Tribunal in assessee’s own case for AY 2017–18 (supra), directed the Ld. TPO to calculate interest on overdue receivables at LIBOR + 200 bps. Further, the Ld. CIT(A) held that the credit period should be determined as per the invoice terms agreed between the assessee and its AEs and not on a standard 60-day benchmark.
5. Aggrieved by the order of Ld. CIT(A), the Revenue is in appeal before us. The Learned Departmental Representative (“Ld. DR”) submitted that the Revenue has raised two principal issues in this appeal i.e. (a) firstly, the direction of the Ld. CIT(A) to restrict the corporate guarantee fee rate to 0.50% and (b) secondly, the direction of the Ld. CIT(A) to benchmark the interest on delayed trade receivables at LIBOR + 200 bps, and to compute interest only for the period beyond the actual credit period as per invoice terms rather than adopting a uniform 60-day period as applied by the Ld. TPO.
6. On the first issue, the Ld. DR submitted that the Ld. TPO had rightly proposed a corporate guarantee fee of 1.95% based on third- party data and credit risk parameters. However, the Ld. CIT(A), without adequate reasoning or analysis, reduced the same to 0.50%, which is arbitrary and contrary to arm’s length principles.
7. On the second issue, the Ld. DR submitted that the Ld. TPO adopted the SBI short-term deposit rate for interest calculation beyond a standard 60-day credit period, which reflects an industry-wide acceptable benchmark. The Ld. CIT(A), however, substituted this with LIBOR + 200 bps and directed the Ld. TPO to restrict interest calculation only to the period beyond the credit terms as per invoices, which in the revenue’s view, lacks proper justification and ignores standard practice.
The Ld. DR finally prayed that the impugned order of the Ld. CIT(A) be set aside and the additions as proposed by the Ld. TPO be restored.
9. Per contra, the Learned Authorised Representative (“Ld. AR”) submitted that both issues raised by the Revenue are squarely covered in favour of the assessee by the decisions of this Tribunal in assessee’s own cases for assessment year 2016-17 in & 351/Hyd/2023 dated 23.07.2024 and assessment year 2017-18 (supra). On the issue of corporate guarantee fee, the Ld. AR referred to the order of this Tribunal in assessee’s own case for AYs 2016–17 and 2017-18 (supra), wherein this Tribunal has consistently held that 0.50% is an appropriate arm’s length rate for corporate guarantee fee under the same facts and circumstances. Further, on the issue of interest on delayed trade receivables, the Ld. AR referred to the same order of this Tribunal in assessee’s own case for AYs 2016–17 and 2017-18 (supra), wherein this Tribunal has consistently held that interest rate for benchmarking delayed receivables should be LIBOR + 200 bps, and Credit period should be determined based on the actual invoice terms between the assessee and AEs, not on any presumptive 60-day norm. The Ld. AR further submitted that the Ld. CIT(A), while passing the impugned order, has faithfully followed the reasoning and directions given by this Tribunal in the assessee’s own cases and that the principle of consistency must be followed when there is no change in facts or law. Accordingly, the Ld. AR prayed that the appeal of the Revenue be dismissed.
We have heard the rival submissions and perused the orders of the authorities below as well as the decisions of this Tribunal in the assessee’s own cases placed on record. It is an undisputed fact that both issues raised in the present appeal have been adjudicated by this Tribunal in assessee’s own cases for earlier years. As far as the bench marking of corporate guarantee fee is concerned, we have gone through the decision of this Tribunal in assessee’s own case for A.Y. 2017-18 (supra) where at para nos.6 to 12 of its order, this Tribunal has held as under :
“6. Assessee, vide ground No. 1 and 2 of its appeal, contended that corporate guarantee was given by the assessee as a procedural compliance for availing of credit facilities by its subsidiaries and for the overall benefit of the group and it was provided as a part of the parental obligation to its subsidiaries and therefore, it is in the nature of shareholding service. By way of ground No. 3 assessee further contended that the corporate guarantee commission at the rate 0.53% as directed by the Ld. CIT(A) on the guarantees provided by the assessee is excessive and since the assessee had already offered commission at 0.50% on the guarantees given the same may be accepted. Finding of the learned CIT(A) is challenged by the Revenue on the ground that adoption of 0.53% as commission on corporate guarantee relying on the rates determined in assessment year 2007-08 in the case of Mylan Laboratories Ltd., (supra), is incorrect.
On this issue it is vehemently argued by the learned AR before us that the transaction relating the issue of corporate guarantee does not involve any costs to the assessee and does not fall within the scope of the term ‘international transaction’ even after the insertion of explanation to section 92B of the Act by Finance Act, 2012 with effect from 01/04/2002, and, therefore, there is no requirement of such transaction to be reported in form No. 3CEB. Learned DR, however, submitted that this issue is no longer available to be agitated by the assessee and it is descended by the Hon’ble Madras High Court in the case of PCIT Vs. Redington (India) Ltd., (2020) 122 taxmann.com 136 (MAD).
8. Learned AR in the alternative, pleaded that corporate guarantee at 0.53% determined by the learned CIT(A) is too high and cannot be sustained. Basing on the view taken by the Co-ordinate Benches of this Tribunal in the cases of Aster Private Limited Vs. DCIT in and DCIT Vs. Lanco Infratech Limited, 81 taxmann.com 381 (Hyderabad Tribunal) he prayed that the ALP in respect of Corporate Guarantee fee may be determined at 0.25%. He further submitted that the guarantee fees charged by SEBI from the assessee in respect of guarantee extended on its behalf was only 0.20%. On this aspect, the learned DR submitted that the ALP at 0.20% and also 0.53%, as determined by the learned CIT(A) is absurdly low. In the alternative he submitted that following the view taken by the Hon’ble Bombay High Court in the case of Glenmark Pharmaceuticals Ltd. Vs. Addl. CIT [2014] 43 taxmann.com 191 (Mumbai - Trib.) may be followed.
In view of the decision of the Hon’ble Madras High Court in the case of Redington (India) Ltd. (supra), we have no second thought, and this decision is applicable to the facts of the case. No further debate by the Tribunal is permissible, when the higher forum decided the issue. Corporate guarantee is an international transaction, requiring benchmarking.
10. Though the learned DR argued that adoption of 0.53% as commission on corporate guarantee relying on the rates determined in assessment year 2007-08 in the case of Mylan Laboratories Ltd., (supra) is incorrect, no useful guidance is provided with reference to any latest decisions or other material, so as to take a different approach in respect of the quantification of the commission on corporate guarantee.
11. On the other hand, a Coordinate Bench of this Tribunal in assessee’s own case for the assessment year 2018-19 in 2022 considered this issue in extenso and held that ALP on account of corporate guarantee at the 0.50% on the amount guaranteed is proper commission.
For the sake of completeness, relevant observations of the Coordinate Bench are extracted hereunder,- We have considered the submissions and found that the charges paid by the assessee cannot be compared for the purposes of determining the ALP of corporate guarantee commission. 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 Co-ordinate 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 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 ITA-TP No. 1860/Hyd/2019 Benches of the Tribunals in the case of GMR Infrastructure Ltd in dt.25.05.2022 and Jain Irrigation Systems in ITA 822/Pun/2022 dt.22.12.2022, respectively. Respectfully following the view taken by the Delhi, Bangalore and Pune Benches of the Tribunals in the above cited cases and also in the case of Vivimed Labs (supra), we partly allow the ground of the assessee and restrict the addition to the tune of 0.5% on the amount guaranteed as corporate guarantee commission.
12. Following the above decision of the coordinate Bench, we direct the learned Assessing Officer/learned TPO to adopt the same at 0.50% on the guaranteed amount. Relevant grounds are answered accordingly.”
On perusal of above, we found that this Tribunal upheld the adoption of 0.50% as the appropriate arm’s length rate for corporate guarantee fees.
As far as the bench marking of interest on trade receivables is concerned, we have gone through the decision of this Tribunal in assessee’s own case for A.Y. 2017-18 (supra) where at para nos.21 to 31 of its order, this Tribunal has held as under :
“ 21. We have considered the submissions on either side. In the case of the DCIT vs. McKensey knowledge Centre India Pvt. Ltd [2018] 96 taxmann.com 237 (Delhi) Hon'ble Delhi High Court and in the case of Bhatia Airtel services Ltd vs. DCIT, [2021] 126 taxmann.com 315 (Delhi - Trib.) the Co-ordinate Bench of the Delhi Tribunal it was held that with the introduction of the explanation to section 92B of the Act by Finance Act, it is determinable that if there is any delay in the realization of credit arising from the sale of goods or services rendered in the course of carrying on the business, it is liable to be visited with the transfer pricing adjustment on account of interest income short charged/uncharged. It is, therefore, not open for the assessee to agitate this question as to whether the interest on outstanding receivables is an international transaction requiring separate benchmarking time and again.
In respect of the credit period, assessee contended before the learned CIT(A) that instead of considering an ad hoc credit period of 90 days, as adopted by the learned TPO, the credit period as agreed in the invoice should be considered for computing interest on delayed receivables beyond the credit period agreed as per invoice. Assessee relied upon the view taken by the learned DRP in assessee’s own case for the assessment year 2018-19 where the learned DRP directed the learned TPO to consider the credit period agreed as per the invoices. In that year learned DRP directed the learned TPO to verify the credit period invoice price
and to charge the interest for the period beyond such credit period agreed in the invoices. Since the Revenue accepted such findings of the learned DRP and such findings of learned DRP became final, learned CIT(A) in this case followed the same and directed the learned Assessing Officer to verify the invoices and compute the interest considering the credit period as per the invoices instead of 90 days period as adopted by the learned TPO. Learned CIT(A) directed the assessee to furnish the information if required. In the decision of the Mumbai Bench of the Tribunal in the case of DCIT vs. Indo American Jewellery Ltd in it was held that if an entity is engaged in commercial transactions with the group entity as well as third-party unrelated customers, and if the entity is giving credit facility ranging up to 352 days to both group entity as well as the third-party unrelated customers, in such case, no addition on account of interest adjustment can be made.
Though the learned DR opposed the prayer of the assessee on this aspect, he could not contradict the fact that in assessee’s own case for the assessment year 2018-19 the learned DRP took a view that the credit period should be considered as per the agreement between the parties as reflected in the invoices and directed the learned TPO to verify credit period invoice voice and to charge the interest for the period beyond such credit period agreed in the invoices.
Apart from this learned AR submitted that the assessee extends credit period ranging between 60 days and 240 days for realisation of sale proceeds from the non-AEs depending on many factors including terms of payment in respect of a commercial transaction and the normal business practice and submitted that whatever the credit period that is extended by the assessee to the non-AEs may be applied to the case of AEs also because it is the best comparable available in this case.
In the circumstances, we are of the considered opinion that when the assessee is extending the credit period between 60 days and 240 days to the non-AEs, and basing on this the learned DRP in the assessment year 2018-19 took a view that the credit period as agreed between the parties shall be respected and followed and such a finding of the learned DRP has become final without the Revenue challenging the same, the credit period which is extended to the non-AEs by the assessee shall be extended to the AEs also. On this reasoning we do not find any illegality or irregularity in the findings returned by the learned CIT(A) that the interest shall be record beyond the credit period as agreed between the parties.
Next issue remains to be considered is in respect of the rate of interest. While placing reliance on the decisions reported in Tecnimont ICB House Vs. DCIT [2015] 60 taxmann.com 143 (Mumbai - Trib.), Hon'ble Bombay High Court in PCIT Vs. Tecnimont (P) Ltd., (supra) and CIT Vs. Cotton Naturals (I) (P.) Ltd. [2015] 55 taxmann.com 523 (Delhi), learned AR prayed that LIBOR+200 basis points may be adopted. This aspect is no longer res integra and dealt with by the Mumbai Bench of the Tribunal in the case of Tecnimont ICB House (supra) and confirmed by the Hon'ble Bombay High Court. Cotton Naturals (I) (P.) Ltd. (supra) is also on the same aspect.
In the case of the Tribunal, Tecnimont ICB House Vs. DCIT [2015] 60 taxmann.com 143 (Mumbai - Trib.) considered the view taken in Everest Kanto Cylinder Ltd. v. Asstt. CIT (LTU) [2014] 52 taxmann.com 395 (Mum.); PMP Auto Components (P.) Ltd. v. [IT Appeal No. 1484 (Mum.) of 2014, dated 22-8-2014]; Hinduja Global Solutions Ltd. v. Addl. CIT [2013] 145 ITD 361/35 taxmann.com 348 (Mum.); Tata Autocomp Systems Ltd. v. Asstt. CIT [2012] 52 SOT 48/21 taxmann.com 6 (Mum.); CIT v. Tata Autocomp Systems Ltd. [2015] 56 taxmann.com 206 (Bom.); Four Soft Ltd. v. Dy. CIT [2011] 142 TTJ 358 (Hyd.); and Everest Kanto Cylinder Ltd. v. Asstt. CIT (LTU) [2015] 56 taxmann.com 361 (Mum.) and upheld use of LIBOR for the purpose of benchmarking loan/advance given to foreign AE's, and held that the notional interest has to be worked out for so called amount receivable from AE, by applying LIBOR interest rate for the purpose of computation of transfer pricing adjustment, if any. This view is affirmed by the Hon'ble Bombay High Court in PCIT vs. Tecnimont (P.) Ltd. [2018] 96 taxmann.com 223 (Bombay) observing that in cases where any business enterprise is required to pay interest on delayed payment, it would examine the cost of interest and if the same is higher than the amount of interest payable on funds obtained locally, it would take a loan from local sources and pay the amounts payable for exports and expenses within time. Therefore, extending of credit beyond the agreed period is in substance a granting of loan to an AE so as to enjoy the funds, which the AE would otherwise have to repay within the time agreed. On this premise the Hon'ble High Court upheld the Tribunal computing interest at LIBOR rates as the rate prevailing in country where the loan is received/consumed by the AE by observing that the same cannot be faulted.
In the case of CIT Vs. Cotton Naturals (I) (P.) Ltd. [2015] 55 taxmann.com 523 (Delhi) the Hon'ble Delhi High Court considered the question - whether the interest rate prevailing in India should be applied, for the lender was an Indian company/assessee, or the lending rate prevalent in the United States should be applied, for the borrower was a resident and an assessee of the said country, observed that such a question must be answered by adopting and applying a commonsensical and pragmatic reasoning and held that the interest rate should be the market determined interest rate applicable to the currency concerned in which the loan has to be repaid; that the interest rates should not be computed on the basis of interest payable on the currency or legal tender of the place or the country of residence of either party. It is further observed that the interest rates applicable to loans and deposits in the national currency of the borrower or the lender would vary and are dependent upon the fiscal policy of the Central bank, mandate of the Government and several other parameters; that the interest rates payable on currency specific loans/ deposits are significantly universal and globally applicable; that the currency in which the loan is to be re-paid normally determines the rate of return on the money lent, i.e. the rate of interest. While referring to the Klaus Vogel on Double Taxation Conventions (Third Edition) under Article 11 in paragraph 115, the Hon'ble High Court held that the PLR rate, therefore, would not be applicable and should not be applied for determining the interest rate and the PLR rates are not applicable to loans to be re-paid in foreign currency. Hon'ble Court accordingly held that whatever the principle that is applicable to the case of outbound loans, would be equally applicable to inbound loans given to Indian subsidiaries of foreign AEs, that the parameters cannot be different for outbound and inbound loans, and a similar reasoning applies to both inbound and outbound loans.
In the case of PCIT vs. Tecnimont (P.) Ltd. [2018] 96 taxmann.com 223 (Bombay) AY. 2009-10, Hon’ble Bombay High Court held that interest chargeable on delayed recovery of export receivables from AEs should be taken at LIBOR rates for determining ALP of notional interest on delayed recovery.
In this case, the loan attributable to the AE, is deemed to have been consumed in a country outside India and, therefore, the interest at LIBOR rates as the rate prevailing in country where the loan is received/consumed by the AE cannot be said to be incorrect and such a view is in line with the decision of the Bombay High Court in the case of Tecnimont (P.) Ltd (supra). Reasons for not bringing the decisions of the Hon’ble Bombay High Court and Delhi High Court to the notice of the Bench when the matter for the assessment year 2018-19 was heard, are not known. Be that as it may, now the assessee brings to our notice the decision of the Hon’ble Bombay High Court in the case of Tecnimont (P.) Ltd (supra) and the decision of the Hon’ble Delhi High Court in the case of Cotton Naturals (I) (P.) Ltd. (supra), and such decisions are no doubt binding precedents and should be preferred to the decisions of the Co- ordinate Benches of the Tribunal. We, therefore, do not wish to enter into a fresh debate on that aspect and respectfully follow the directions of the higher fora.
Respectfully following the judicial opinion stated supra, we are of the considered opinion that the ends of justice would be met by accepting the interest rate on similar foreign currency receivables/advances as LIBOR+200 points. We direct the learned Assessing Officer / learned TPO to adopt the same. Grounds are partly allowed accordingly.”
On perusal of above, we found that this Tribunal upheld the benchmarking of interest on delayed receivables at LIBOR + 200 bps, and further held that the actual credit period agreed in invoices should be considered, rather than a standard 60-day assumption.
We also found that, the Ld. CIT(A), in the impugned order, has followed the directions and ratio laid down by this Tribunal in the aforesaid decisions. The facts for the year under consideration are identical to those in the earlier years and there is no change in law that would justify a different view. Therefore, in the interest of judicial discipline and consistency, we respectfully follow the earlier orders of this Tribunal in the assessee’s own case and uphold the decision of the Ld. CIT(A). In view of the foregoing discussion, we find no merit in the appeal filed by the Revenue. The same is accordingly dismissed.