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Facts
FirstRand Bank Ltd. (India branch) is a banking company incorporated in South Africa. The assessee filed its return of income reporting nil total income after set-off of brought forward losses. An upward adjustment was proposed by the TPO/AO/DRP concerning the determination of arm's length value of a guarantee transaction. The assessee contested this, stating that the entire risk exposure was on its AE, and it performed only limited functions.
Held
The Tribunal noted that the issue was identical to the one dealt with in the assessee's own case for AY 2018-19. Following the previous decision, the Tribunal held that the allocation of guarantee commission which constitutes about 57% in the hands of the assessee is acceptable considering its FAR. Consequently, the upward adjustment made by the TPO/DRP was deleted.
Key Issues
Determination of arm's length guarantee commission rate and upward adjustment made by the TPO/DRP.
Sections Cited
Sec. 144C(5), Sec. 92CA(3), Sec. 133(6)
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Income Tax Appellate Tribunal, “K” BENCH MUMBAI
Before: SHRI PAWAN SINGH & SHRI GIRISH AGRAWAL
Present for: Assessee : Shri Paras Savla, Advocate Revenue : Shri Bhagirath Ramawat, Sr. DR Date of Hearing : 24.12.2025 Date of Pronouncement : 10.03.2026 O R D E R
PER GIRISH AGRAWAL, ACCOUNTANT MEMBER:
This appeal filed by the assessee is against the final assessment order passed pursuant to the directions of the Dispute Resolution Panel-1, Mumbai, (DRP) vide order No. ITBA/DRP/F/144C(5)/2024- 25/1065484084(1) dated 07.06.2024, u/s. 144C(5) of the Income-tax Act, 1961 (hereinafter referred to as the “Act”), for Assessment Year 2020-21.
Grounds taken by assessee are reproduced as under: “1:0 Re.: Erroneous determination of quarantee commission without evaluating the true essence of transaction
FirstRand Bank Ltd. AY 2020-21 1.1. The learned Transfer Pricing Officer ("TPO")/ Assessing Officer ("AO") under the directions of Hon'ble Dispute Resolution Panel ("DRP") has erred in making upward adjustment of Rs. 4,46,66,174/- without appreciating the detailed analysis carried out by the assessee in terms of determination of arm's length value of guarantee transaction; 1.2. The TPO/ AO/ DRP has erred in not prescribing any specific method of benchmarking and usage of non-comparable data; 1.3. The TPO/ AO/ DRP has erred in not appreciating the fact that no scientific tool has been applied by the TPO to determined arm's length commission percentage; 1.4. The TPO/ AO/ DRP has erred in not appreciating the fact that no structured search process process data has been adopted by the TPO thus resulting into cherry picking of comparable data; 1.5. The TPO/ AO/ DRP has erred in making erroneous use of data collected u/s 133(6) of the Income Tax Act, 1961; 1.6. The TPO/ AO/ DRP has disregarded the fact that the fresh search is not conducted on the basis of contemporaneous data available in the public domain; 1.7. The AO/DRP has erred in determining arm's length guarantee rate at 1.80% for benchmarking guarantee transaction; 1.8. The AO/ DRP has erred in disregarding the downward adjustment of 0.25% as proposed by the TPO for determining rmining the the arm's length commission, thereby making enhancement of Rs. 75,00,000 to the th transfer transfer pricing adjustment.”
2.1. The only issue involved in the present appeal is in respect of determination of guarantee commission for which an upward adjustment has been made by the ld. Transfer Pricing Officer (TPO) for the purpose of arriving at arm's length commission.
Brief facts of the case are that assessee is a banking company incorporated in South Africa with limited liability having a branch in India. Thus, the India branch, i.e., First Rand Bank Ltd. is a licenced service provider and a full-fledged branch of First Rand Bank-South Africa (FRB-SA) set up in Mumbai. India branch is a member of Indian banking fraternity offering corporate banking, investments banking, fixed deposits, currency and commodity and structured products with the objective of facilitating business in the Indo-Africa corridor, supporting South African clients in India and vice versa. Assessee filed its return of income on 12.02.2021, reporting total income at nil. In the FirstRand Bank Ltd. AY 2020-21 return furnished for the year, assessee had declared income under the head ‘business in profession’, amounting to Rs. 21,78,53,227/- which was set off against the brought forward losses of the previous years.
3.1. Assessee had entered into several international transactions with its Associated Enterprise (AE) duly reported in Form 3CEB. Reference was made to ld. TPO against which order u/s.92CA(3) was received by the ld. Assessing Officer, proposing an upward adjustment for the arm's length price (ALP) of the international transaction entered into by the assessee, detail of which is tabulated below: Nature of transaction Adjustment Amount (Rs.) Guarantee commission charged by assessee @ 93,33,826 0.31% (INR 300Cr/1.11Cr) (A) Guarantee commission as per ALP @ 1.55 (B) 4,65,00,000
Transfer Pricing Adjustment (B-A) 3,71,66,174 3.2. Assessee raised its objections before the ld. DRP, who after considering the submissions, rejected the same. In fact, ld. DRP went ahead on this issue for enhancement by observing that the matter is that of bank guarantee and therefore, in its opinion case of any downward adjustment does not arise. It accordingly withdrew the reduction of 0.25% given by ld. TPO while computing the rate of guarantee commission and directed to compute the ALP for the same by applying a rate of 1.80%. Pursuant to the said directions, final assessment order was passed, determining the total income at nil but with the balance losses at a reduced amount, for carry forward at Rs.190,23,98,545/-.
FirstRand Bank Ltd. AY 2020-21 4. At the outset, ld. Counsel for the assessee pointed out that identical issue arising from the same leg of transaction has been dealt by the Coordinate Bench in assessee's own case for Assessment Year 2018-19 in for which the order was yet to be pronounced. The matter was heard before the same Constituing Bench, for which subsequently, the order has been pronounced on 12.02.2026.
The issue in the present appeal is identical to the one already dealt by this bench in assessee's own case for Assessment Year 2018-19. In this respect, reference was made to Para 5.1 of the order of ld. TPO passed u/s. 92CA(3) for Assessment Year 2018-19 which is similarly worded in the present case before us, having the same Para number at 5.1 in the order of ld. TPO. Relevant portion from the order of ld. TPO contained in Para 5.1 for the year under consideration is extracted below for ready reference. “5.1 Receipt of counter guarantee fees(INR 93,33,826) The International Transaction of Guarantee transaction is entered into in order to facilitate third party customers in AE's country who propose to enter into transaction with a third party in India. 5.1.1 Airports Company South Africa (ACSA) is a customer of Firstrand Bank South Africa, ACSA needed to furnish a guarantee of INR 300 crore favoring Mumbai International Airport Limited (MIAL) for their performance as an investor in MIAL. As a requirement of the beneficiary, the guarantee was supposed to be from a local commercial bank in India. FRB SA reached out to FRB India and requested for feasibility of reissuance of the guarantee. The pricing quoted by FRB India was based on the rating and risk associated with FRB SA and is at par with the market pricing for a similar rated and similar value transaction. Basis the response time, ease of doing business and pricing provided, FRB SA awarded the reissuance to FRB India. 5.1.2 Assessee states that FRB India received a counter guarantee from FRB SA like any other bank and against that counter guarantee re-issued the guarantee locally. The fee arrangement is in line with the market practice of charging quarterly. FRB India on quarterly basis claims fees from FRB SA and FRB SA recovers the same from ACSA and pays the amount to FRB India. However, no other details related to guarantee fee charged or benchmarking etc were made available by the assessee.”
FirstRand Bank Ltd. AY 2020-21 5.1. On the above contentions of the ld. TPO, assessee made its submission, details of which are noted by the ld. TPO in Para 5.1.4 which is extracted below. These submissions are on identical footing as contained in appeal for AY 2018-19. Ld. TPO considered the same but did not accept it based on certain observations which are also on similar footing as compared to appeal for Assessment Year 2018-19. Relevant portion is extracted below for ready reference.
“The assessee was asked to show cause as to why the corporate guarantee @1.80% should not be used for benchmarking the above said transaction.
5.1.4. Assessee has filed its reply vide letter dated 18.05.2023 and 29.05.2023. The assessee has submitted that the assessee receives 0.31% p.a. of guarantee amount as commission which is over and above the mark-up charged for provision of marketing support services to FRB SA. In this regard, it has been submitted that the assessee performs very limited functions such as processing the request of guarantee from AE, seeking confirmation from the AE for cancellation/extension of the guarantee etc. Also, it does not perform any function apart from issuing the guarantee in favour of the beneficiary and it does not undertake any separate evaluation of the beneficiary and all background and creditworthiness checks were performed by the AE only. Thus, FRB India performs minimal function pertaining to execution/processing of the guarantee. Further, in case a guarantee is invoked, assessee is fully protected by the counter guarantee issued by the AE and associated cost and risk is passed on back-to- back by the assessee to its AE. Therefore, the entire risk of default by the borrower is completely assumed by the AE and the assessee does not bear any risk in the entire arrangement or transaction. Thus, in view of the above, as per the assessee, the said transaction is considered to be arm’s length, and no further adjustment is warranted.”
Ld. TPO rejected the benchmarking done by the assessee and issued a show cause on the assessee to explain as to why the guarantee commission should not be benchmarked as per market rates using CUP method. In order to apply the CUP, he called information from various banks u/s. 133(6), details of which is tabulated below to arrive at the median rate of 1.80%. Bank name Rate Standard Chartered Bank 0.75% Citi Bank 0.90% 6.1. He thus, after considering the decision of Hon'ble High Court of Bombay in the case of Everest Canto Cylinders Ltd. 378 ITR 57 2015 (Bom) and the decision of Coordinate Bench of ITAT, Mumbai in the case of Glenmark Pharmaceuticals Ltd. vs. ACIT [2014] 43 taxmann.com 191 (Mum) made a downward adjustment of 0.25% to the naked quotes of the rates of bank guarantee of 1.8%, to arrive at the benchmarking of the transaction. He thus, arrived at a rate of 1.55% as the average bank guarantee rate (that is 1.80% less 0.25%) for downward adjustment from the AEs for the corporate guarantee given on assessee's behalf to third party financial institutions. This downward adjustment of 0.25% considered by ld. TPO based on the judicial precedents was negated by the ld. DRP to make an enhancement and direction was given to adopt the rate of 1.80% while passing the final assessment order. On these above stated factual position, ld. Counsel for assessee submitted that the outcome of the appeal heard for Assessment Year 2018-19 in assessee's own case has a direct bearing on the disposal of the present appeal before the Bench as the transaction under consideration arise from the same factual position.
We note that the issue refers to determination of guarantee commission on the guarantee furnished by the assessee to an Indian party on behalf of the customer of FRB-SA for which an upward adjustment was made by the ld. TPO. The underlying transaction in FirstRand Bank Ltd. AY 2020-21 respect of guarantee commission as explained by the assessee is that Airports Company South Africa (ACSA), a customer of FRB-SA was required to furnish a performance guarantee of Rs.300 crore in favour of Mumbai International Airport Limited (MIAL). The said guarantee to MIAL was further directed to the Airports Authority of India, AAI as proof of ACSA's capital commitment to MIAL. As a requirement of the beneficiary, the guarantee was supposed to be from a local commercial bank in India. FRB-SA reached out to its correspondent banks in India including FRB India and requested for feasibility of reissuance of the guarantee. The pricing quoted by FRB India was based on the rating and risk associated with FRB-SA and was at par with the market pricing for a similarly rated and similar value transaction. Basis response time, ease of doing business and pricing provided, FRB-SA awarded the reissuance to FRB India. In this regard, assessee received a counter guarantee from FRB-SA and reissued the guarantee locally in favour of MIAL. The fee arrangement was structured in line with market practice, as per which assessee raised quarterly fee claims on FRB-SA, which in turn recovered the same from ACSA and remitted the amount to the assessee.
On the above factual position, we note that this issue is squarely covered by the decision of the Coordinate Bench in assessee's own case for Assessment Year 2018-19 (supra) which has elaborately dealt with it. Relevant observations and findings on this issue from the order for Assessment Year 2018-19 is extracted below. 11. The moot point contested by the assessee in this regard is that the combined commission earned on the entire transaction both, by the assessee and FRB-SA is only 0.69%. It is out of this total commission of 0.69%, assessee has received 0.40% as its share. This receipt in the hands of the assessee amounts to approximately 57% of the total commission. Computation in this regard is tabulated as under:
FirstRand Bank Ltd. AY 2020-21 Calculation of guarantee % Quarterly Annually Proportion FirstRand South Africa 0.07456% 0.29824% 42.71% FirstRand India 0.10000% 0.40000% 57.29% Total 0.17456% 0.69824% 100.00%
11.1. For the above computation, assessee placed on record a sample copy of invoice for one quarter of the relevant year, which is also extracted below for ready reference:
11.2. Assessee thus, contented that when the total commission earned on the entire transaction is only 0.69%, ad hoc rate of 1.55% adopted by the ld. TPO is untenable and is far beyond the reality. It is important to take note of the fact that the entire risk exposure of the assessee is solely on its AE., i.e., FRB-SA. What assessee performed is only a limited function of executing and processing of guarantee. Assessee is fully protected by the counter guarantee issued by its AE, i.e., FRB-SA and all associated risks and costs are passed on to it on a back- to-back basis. Furthermore, any default on the part of ACSA is entirely assumed by FRB-SA and assessee does not have to bear any credit or performance risk for the same. Also, the external credit rating of FRB-SA was considered while quoting the bank guarantee rate and did not undertake any independent valuation of ACSA. 11.3. In the above factual matrix, corroborated by documentary evidence, as well as agreement placed on record, we hold that the allocation of guarantee commission which constitutes about 57% in the hands of assessee, finds favour for the assessee by taking into account its FAR. Accordingly, the guarantee commission rate arrived at by ld. TPO/DRP at 1.55% and upward adjustment made based thereon, is deleted. Ground no.2 is thus, allowed.”
There being nothing contrary to the above factual position, we respectfully following the decision for Assessment Year 2018-19 in assessee's own case (supra), delete the upward adjustment made in this regard. Accordingly, ground raised by the assessee is allowed.
In the result, appeal of the assessee is allowed.
Order is pronounced in the open court on 10 March, 2026 Sd/- Sd/- (Pawan Singh) (Girish Agrawal) Judicial Member Accountant Member
Dated: 10 March, 2026 MP, Sr.P.S.
(Dy./Asstt.Registrar) ITAT, Mumbai