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Income Tax Appellate Tribunal, BANGALORE BENCHES “A”, BANGALORE
Before: Shri George George K, JM & Shri B.R.Baskaran, AM
O R D E R Per George George K, JM : These appeals at the instance of the assessee are directed against three orders of the CIT(A). Two orders of CIT(A) are dated 03.04.2019 and one is dated 06.05.2019. The relevant assessment years are 2012-2013 to 2014-2015.
Common issue is raised in these appeals, hence, they were heard together and are being disposed of by this consolidated order.
The solitary issue argued is whether the CIT(A) has erred in confirming the A.O./TPO’s action in holding that there was international transaction insofar as bank guarantee is
The brief facts of the case are as follow: The assessee is a company engaged in the business of manufacture and sale of pharmaceutical formulations. The assessee has a 100% subsidiary / Associate Enterprise (AE) in United Kingdom by the name Medreich PLC, UK (Medreich PLC). The Medreich PLC is engaged in the marketing abroad the products manufactured by the assessee. The assessee during the relevant assessment year had given corporate guarantee on behalf of Medreich PLC of Rs.25,76,50,000. Medreich PLC had availed a working capital loan of US$ 5 Million from EXIM Bank in India. The assessee had given guarantee for this loan by pledging movable and immovable properties of one of the plant located in Bangalore.
During the course of assessment proceedings for assessment years 2012-2013 to 2014-2015, the Assessing Officer made a reference to Transfer Pricing Officer (TPO) u/s 92CA(3) of the I.T.Act in order to determine the Arms Length Price (ALP) of international transactions. The TPO passed an orders u/s 92CA(3) of the I.T.Act, rejecting the ALP analysis undertaken by the assessee and proposed an aggregate transfer pricing adjustment of Rs.51,53,000, 53,80,000 and 59,95,000 being as 2% on corporate guarantee given by the assessee for the loan taken by the AE for A.Y’s 2012-2013 to 2014-2015. The TPO had imputed the guarantee fee of 2% by adopting the commission charged by bank to similar entities (by taking credit rating of the tax payer).
3 M/s.Medreich Limited. . 6. Aggrieved by the orders passed by AO/TPO for A.Y’s 2012- 2013 to 2014-2015, , the assessee preferred appeals to the first appellate authority. The CIT(A) confirmed the view taken by the AO/TPO. The relevant finding of the CIT(A) reads as follow:-
“11. In this context, it may be noted that undisputed facts show the appellant had provided security for its AE to obtain Bank Guarantee. The appellant had not also not charged its AE any amount for doing so. The same involves an element of commercial cost and the same will not be provided to any third party, irrespective of the presence of a commercial relationship or otherwise with the said party, free of cost. There is a huge commercial risk that is run by the provider, in this case., the appellant. The appellant has relied upon the decision of the Mumbai ITAT in the case of Nimbus Commercials & Godrej Household Products Ltd. In both these cases the ITAT looking into the facts involved sustained addition @ 0.5% of the Value of Bank Guarantee. In the present case, the AO has determined the cost @ 2% of the bank Guarantee Value, which is found not to be unreasonable. The addition made by the AO, based on the TPO order is therefore sustained.”
Aggrieved by the orders of the CIT(A), the assessee has preferred these appeals before the Tribunal. The learned AR has no objection treating corporate guarantee as an international transaction. The learned AR’s grievance is only adoption at the rate of 2% by the TPO for arriving at ALP of the international transaction. The AR relied on the order of Bangalore Bench of the Tribunal in the case of Manipal Global Education Services Pvt. Ltd. v. DCIT in 2016, which had in turn followed the judgment of the Hon’ble Bombay High Court in the case of CIT v. Everest Kento Cylinders Ltd (IT Appeal No.1165 of 2013 – judgment dated 08.05.2015).
4 M/s.Medreich Limited. .
The learned Departmental Representative, on the other hand, relied on two orders of the Hyderabad Bench of the Tribunal in the case of (i) Infotech Enterprises Ltd. v. Addl.CIT (2014) 41 taxmann.com 364 (Hyd.Trib.) and (ii) Prolific Corporation Ltd. v. DCIT(2015) 55 taxmann.com 225 (Hyd.Trib.). The learned DR submitted that the orders of the Hyderabad Bench of the Tribunal is essentially on the question whether the corporate guarantee given to the bank on behalf of the AE, whether it is an international transaction or not. In this context the Hyderabad Bench of the Tribunal had decided that the corporate guarantee on behalf of an AE is an international transaction. The learned DR submitted that the Hyderabad Bench had imputed the cost of 0.53% for the corporate guarantee stood by the assessee’s in those case on behalf of its AE.
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
“8. We have heard the parties on this issue and perused the record. We notice that the Tribunal is consistently holding the transaction of providing Corporate Guarantee as an international transaction. Hence the same is required to be examined under Arms length principles. There should not be any dispute that the provision of Corporate guarantee to its subsidiary in order to enable it to avail loans would bring benefit to the subsidiary, in which case, it is proper to compensate the assessee for those benefits under Arms length principles. We notice that the TPO has made an adjustment of 2%, considering the interest benefit @ 4% and taking the view that half of the same should be attributed to the benefit of the assessee. However, we notice that the Hon’ble Bombay High Court has approved the T.P. adjustment of 0.50% in respect of Corporate guarantee given in the case of Everest Kento Cylinders Ltd. (supra). Though the Ld AR has pleaded for an adjustment of 0.20% by placing reliance on the decision of Asian Paints Ltd. (supra), yet we notice that the Ld.AR did not highlight the parity of facts between the assessee and the case of Asian Paints Ltd. Hence, on the conspectus of the matter, we are of the view that the T.P. adjustment in respect of Corporate Guarantee may be made @ 0.50% as per other decisions of Tribunal and Hon’ble Bombay High Court referred above. Accordingly we set aside the order passed by the A.O. on this issue and direct the AO/TPO to make T.P adjustment in respect of Corporate Guarantee @ 0.50% in all the years under consideration.”
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.