PRECISION CAMSHAFTS LIMITED,PUNE vs. DCIT CIRCLE 1, SOLAPUR

2. Corporate Guarantee as an international transaction On the facts and in the circumstances of the case and in law, while erred in arriving at arm’s length price of corporate guarantee provided by the Appellant, the Ld. AO/Ld. TPO has erred in the following - ignored the fact that the corporate guarantee provided to • subsidiary is in the nature of shareholders activity and does not fall within the ambit of definition of international transaction as defined under Section 92B of the Act disregarding the fact that the provision of corporate • guarantee to the subsidiary was intended to facilitate an acquisition of two companies in the European jurisdiction by the Appellant, and consequently “the guarantee was in the nature of shareholder services and thus a separate charge is not warranted; not appreciating the fact that the Appellant has entered a • corporate guarantee agreement signed with bank wherein it 2 Appellant will not charge a corporate guarantee commission from its subsidiary company against provision of corporate guarantee. The corporate guarantee provided by the Appellant does not • involve any cost to the Appellant and therefore, the transaction does not have bearing on profit, income, losses or assets of the Appellant and hence, outside the ambit of the provisions of Chapter X. The corporate guarantee issued by the Appellant purely with • anticipation of significant future benefit in the form of profit or dividend income in the later years and to protect the interest of the Appellant.

3. Determination of ALP on the basis of Bombay High Court Judgment in the case of Everest Kanto – On the facts and in the circumstances of the case and in law, while determining ALP of corporate guarantee on the basis of the judgement of Everest Kanto, the Ld. AO/Ld. TPO erred in the following- Disregarding the fact that the decision in the case of Everest • Kanto Cylinders Ltd., cannot be standard for every Appellant as benchmarking for different Appellant’s is a factual exercise dependent upon number of factors including credit rating, financial strength, country of AE risks, etc. the financial guarantee issued by the Appellant for the loans • availed by the AE from banks should be charged at 0.50%, without realizing the fact that the transfer pricing study is highly facts based and it differs from case to case and that all the factors in Rule 10B have to be considered for every case and every year independently and that a rate decided in a different case for different set of facts and for different year cannot be adopted as such to the instant Appellant, which would be violative of the specific provisions in Rule 10B. whether the Ld. TPO/AO is correct in arriving at the ad-hoc • rate of 0.50%, without conducting any benchmarking analysis prescribed in Section 92C which is violation of law? Whether the rate of guarantee commission determined in the • judgement can be adopted as a valid comparable using other method under Rule 10AB? 3 4. Charging of corporate guarantee commission would attract provision of section 92(3) of the act. On the facts and in the circumstances of the case and in law, the Ld. AO/Ld. TPO has erred in not appreciating the fact that the charging of guarantee commission to subsidiary required to be reimburse by the Assessee along with the mark-up as subsidiary company was set up as a cost-plus entity to provide support services to the Assessee. Therefore, charging of corporate guarantee commission would lead to attraction of Proviso of Section 92 (3) of the Act. The appellant company craves leave to add, alter, amend or delete any of the above grounds of appeal.” 1.1 Additional Ground filed : “1] The learned A.O. / DRP erred in making an addition on protective basis of Rs.13,81,700/- by adopting the Arm's Length interest rate @ 2.40% as against 1.90% adopted by the assessee in respect of loan tranche No. 7 and loan tranche No. 9 advanced by the assessee company to PCL Netherlands.

2] The assessee submits that the protective addition on account of interest income of Rs.13,81,700/- is not justified since the same has been made without adopting any of the prescribed methods and therefore, the said protective addition may kindly be deleted.

3] The learned A.O. / DRP failed to appreciate that the assessee had charged interest @ 1.90% being the actual rate charged by independent third party lender and the assessee had considered the Other Method as the most appropriate method and hence, there was no reason to make any further addition in respect of the interest income on the above referred loan given to PCL Netherlands.

The assessee submits that the additional ground raised is legal in nature and as all the facts are on record, the assessee requests for admission of the above ground.” 4 Findings & Analysis :

2. We have heard both the parties and perused the records. In this case, Assessee filed its return of income for A.Y.2021-22 on 20.12.2021 declaring total income at Rs.74,22,18,250/-. Then, Assessee filed a revised return of income declaring total income at Rs.74,47,38,250/-. Assessee is a listed company having its headquarter situated at Solapur, Maharashtra, India.

Restriction by banker for charging any guarantee commission:

Assessee contends as follows 1.3.1 The Assessee submits that the corporate deed agreement between PCL and BOB, London, submitted as Annexure 2, restricts PCL to charge any kind of guarantee commission to PCL NL in any form. This was one of the key covenants of the facility agreement between PCL PCL NL. and BOB, London The extract of the same is as below (page 9 of the corporate guarantee deed)

GUARANTEE COMMISSION AND DEFAULT INTEREST 5.1 The Guarantor hereby declares and agrees that it has not received and shall not receive any security or commission from the Borrower for giving this Guarantee.

TPO Comments:

The issue before this office is determining the ALP of the transaction. The condition mentioned in loan facility agreement may be a reason for not charging guarantee fee from AE but the same in no way automatically translates to that ALP of guarantee fee being zero.

Assessee contends that "agreement between PCL and Bank of Baroda itself becomes like a CUP/Other method. The contention of assessee is misleading The transaction being benchmarked is fee chargeable for corporate guarantee extended and therefore, agreement between a bank and the guarantor of its customers is not the correct comparable uncontrolled transaction Contention of assessee is therefore rejected.” ……………………………………… “TPO Comment: Assessee’s argument about alternate scenarios where tax base of Indian exchequer is eroded is considered but not found to be acceptable. Assessee is merely stating possible reasons for not charging corporate guarantee fees. The mandate of this office is to determine ALP of this international transaction that has taken place in fact and not to consider alternate possible scenarios Fact of the case is corporate guarantee has been provided by assessee to its AE and the same falls 7 In light of above, assessee's contention that 'no charge for corporate guarantee was warranted is rejected as per sec 92C(3) and guarantee commission is proposed to be taken at 0.5% of the corporate guarantee given in light of decision of Hon. High Court of Bombay in case of M/s. Everest Kanto Cylinder Ltd. Vs. CIT, Mumbai (INCOME TAX APPEAL NO.1165 OF 2013).

Once it is established that guarantee is an international transaction, the next issue is determination of the ALP of the fees for the above service. It is difficult to get the information related to uncontrolled prices of the corporate guarantee fee as usually AEs give these types of guarantee Considering the nature of transaction under consideration and considering the legal position on issue of corporate guarantee in light of decision of Hon.

High Court of Bombay in The Commissioner of Income Tax vs M/S Everest Kanto Cylinders Ltd (INCOME TAX APPEAL NO.1165 OF 2013), "such other method as mentioned in section 92C(f) is considered as most appropriate method to benchmark this transaction As per Rule 10AB. the determination of ALP in relation to international transaction shall be the price which has been charged or would have been charged or paid for the same or similar uncontrolled transaction, with or between non-associated enterprises, under similar circumstances, considering all the relevant facts.

In light of decision in Everrest Kanto (supra), ALP of corporate guarantee fees is being calculated at 0.5% as follows Corporate Guarantee given during FY 2020-21 4293.19 lakhs ALP of corporate guarantee fees 0.5% of 4293.19 lakhs = 21.46 lakhs In view of above, Adjustment of Rs. 21.46 lakhs is made to the international transaction of corporate guarantee.”

4.1 TPO finally proposed an adjustment of Rs.21,46,000/- on account of corporate guarantee commission @0.5%.

4.2 TPO alternatively proposed an adjustment on account of interest charged. TPO has noted in the order that Assessee had provided PCL Netherlands cash advance facility. The said cash advance facility was provided mainly to make repayment of the loan taken by PCL Netherlands from Bank of Baroda-London. The Assessee had charged interestatrate of 1.9% to its AE which was the same as charged by Bank of Baroda-London. The Assessee relied on the said rate of interest as CUP Method. However, TPO was not convinced. Alternatively, Assessee also submitted that for determination of Arm‟s Length Price(ALP) of interest charged ECB 9 Rates published by European Central Bank may be considered for benchmarking. The European Central Bank had published ECB Rates for that period which was 0.25%. Assessee further submitted that even if 1% is added as margin with the ECG rates, interest chargeable would have become 1.25% per annum. Assessee further submitted that Assessee had actually charged interest @1.9% which was higher than the comparable i.e.ECB Rates. Therefore, Assessee concluded that its transactions are at Arm‟s Length Price. However, TPO was not convinced. TPO held that the rate of interest of 1.9% charged by Bank of Baroda-London was because of the corporate guarantee. Therefore, TPO proposed a markup of 0.5% to 1.9%. Thus, TPO proposed interest rate of 1.9%.

Ground No.A : 8. This ground is regarding time limit to pass final assessment order u/s.153 of the Act. This ground was not pressed by the ld.AR. Accordingly, Ground No.A is dismissed as not pressed.

Ground No.B : 9. This ground is regarding adjustment of Rs.21,46,000/- on account of corporate guarantee commission.

“…………..Further since the non-charging of guarantee commission is pursuant to the conditions stipulated by the sanctioning Bank, we are of the view that no addition on account of non-receipt of guarantee commission is called for in the present case. We therefore direct the deletion of the addition made by the AO in the hands of assessee”

4.5 No contrary decision has been brought to our notice, therefore, respectfully following ITAT Mumbai’s Decision(supra), we hold that no guarantee commission needs to be charged. Accordingly, we direct the AO/TPO to delete the addition.

4.6 In the Transfer Pricing Order the TPO has relied on the decision of Hon’ble Bombay High Court in the case of CIT Vs. Everest Kanto Cylinders Ltd., in of 2013. We have studied the order of the Hon’ble Bombay High Court and it is distinguishable on facts. The relevant paragraphs of Hon’ble Bombay High Court’s order are reproduced here as under :

Quote, “In the matter of guarantee commission, the adjustment made by the TPO were based on instances restricted to the commercial banks providing guarantees and did not contemplate the issue of a Corporate Guarantee. No doubt these are contracts of guarantee, however, when they are Commercial banks that issue bank guarantees which are treated as the blood of commerce being easily encashable in the event of default, and if the bank guarantee had to be obtained from Commercial Banks, the higher commission could have been justified. In the present case, it is assessee company that is issuing Corporate Guarantee to the effect that if the subsidiary AE does not repay loan availed of it from ICICI, then in such event, the assessee would make good the amount and repay the loan. The considerations which applied for issuance of a Corporate guarantee are distinct and separate from that of bank guarantee and accordingly we are of the view that commission charged cannot be called in question, in the manner TPO has done. In our view the comparison is not as between like transactions but the comparisons are between guarantees issued by the commercial banks as against a Corporate Guarantee issued by holding company for the benefit of its AE, a subsidiary company. In view of the above discussion we are of the view that the appeal does not raise any substantial question of law.” Unquote.

4.7 Thus, it can be noted from the order of the Hon’ble Bombay High Court that the facts in the case of the assessee are distinguishable. In the case of the assessee, Bank of Baroda has specifically imposed the condition that no guarantee commission will be charged, however, in the case referred by TPO of Hon’ble Bombay High Court(supra), there was no such condition imposed by ICICI Bank, hence the said decision is distinguishable on facts and not applicable to the case of the assessee.”Unquote.

Additional Ground: 13. Assessee has raised an additional ground which is emanating from a protective addition of Rs.13,81,700/-. During the year, the PCL i.e.Assessee, has provided cash Advance facility to PCL Netherlands(AE). This loan was primarily provided to PCL Netherland by assessee to repay Loan taken from Bank of Baroda by PCL Netherlands. Admittedly assessee has charged Interest rate of 1.9 % on the said loanwhich was the same Rate of Interest charged 14 Bank of Baroda to PCL Netherlands. Therefore, Assessee submitted that the Transaction was at Arm‟s Length. However, the TPO added 0.5% as Risk mitigation factor to the rate of 1.9% and held that in such scenario the Arm‟s Length Interest should be 1.95%. Assessee filed objections before the Dispute Resolution Panel.

“Assessee has failed to substantiate that transaction of cost sharing arrangement/intra group services is intrinsically linked to manufacturing activity by way of a package deal. Therefore, aggregation approach taken by assessee was found to be not reliable and considering facts of the case and nature of transaction, 'Other Method' is taken as MAM by the TPO.”

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17. In these facts and circumstances of the case, the Additional ground and Ground No.B are allowed in above terms. Ground No.A is not pressed by the Assessee, hence, dismissed as not pressed.