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Income Tax Appellate Tribunal, “K” BENCH, MUMBAI
This appeal by the assessee is arising out of the order of Commissioner of Income Tax (Appeals)-55, Mumbai, [in short CIT(A)] in appeal No. CIT(A)-55/IT-147/16-17 dated 22.12.2016. The Assessment was framed by the Deputy Commissioner of Income Tax, CC,6(1), Mumbai (in short DCIT) for the assessment year 2012-13 order dated 10.02.2016 under section 143(3) of the Income Tax Act, 1961(hereinafter ‘the Act’).
The only issue in this appeal of assessee is against the order of CIT(A) confirming the action of the AO in making the addition of commission of corporate guarantee. For this assessee has raised the following ground: - “1. Addition of Rs. 89,04,600/- on account of commission on corporate guarantee given for AE as per order u/s 92CA(3) of the Income Tax Act:
1.1 On facts and circumstances of the case and in law, the learned CIT(A) erred in confirming the addition of Rs. 89,04,600/- made by AO on account of Commission of Corporate Guarantee. The learned CIT(A) erred in not appreciating the fact that MIs Petroleum Speciality Pte Ltd(PSPL) a Singapore based company, is the wholly owned subsidiary of the appellant and that liability of the appellant is contingent and arises only in the event of default by PSPL. Thus charge of any commission on notional basis wherein there is no liability and no change in assets given as security is bad-in-law and must be deleted.
1.2 Without prejudice to the above and without admitting, on facts and circumstances of the case and in law, the learned CIT(A) erred in not appreciating that the issuance of Corporate guarantee for PSPL is inextricably linked with the transaction of import of oil from PSPL. Thus the learned CIT(A) erred in not appreciating that when the price at which imports are made is at arm's length then issuance of corporate guarantee will also be at arm's length.
1.3 Without prejudice to the above and without admitting, on facts and circumstances of the case and in law, the learned CIT(A) erred in confirming the benchmarking rate of guarantee commission @ 1.75% p.a. when similar guarantee commission is paid by the appellant on other transactions @ 0.3%.
1.4 Without prejudice to the above and without admitting, on facts and circumstances of the case and in law, the learned CIT(A) erred in not appreciating that the calculation of guarantee commission should be for the period of utilization of the said guarantee to avail credit facilities and not for the entire year.”
Brief facts are that the AO following the decision of Hon’ble Bombay High Court in the case of CIT vs Everest Kento Cylinders Ltd. computed the guarantee commission at the rate of 1.75% by observing in Para 7 as under: - “7. In this regard, attention is invited to the recent decision of Hon’ble Bombay High Court in the case of Everest kanto, wherein their lordships have held that the consideration for the issue of a bank guarantee and Corporate Guarantee are different However, their lordships have also held that if the guarantee was obtained from a bank, higher commission would be justified. Further, in the case of Glenmark Pharmaceuticals Ltd. in Mumbai/ 2012 dated 13.11 2013 (A Y. 2008-09), the Hon'ble ITAT has held that the naked quote rates applicable to the bank guarantee can be made comparable to the corporate guarantee only after downward adjustments (Para 22). However, following the judicial rulings, a downward adjustment to the naked quotes of the rates of bank Guarantee has been done in this year, while benchmarking the transaction.
In view of the detailed discussion above, following the recent decision of Hon’ble Bombay High Court in the case of Everest kanto and Mumbai ITAT in Glenmark Pharmaceuticals No.5031/Mumbai/2Ol2 dated 13.11.2013 (A.Y. 2008-09), a downward adjustment quotes of the rates of bank Guarantee has been done in this year, while benchmarking the transaction It is seen that the bank guarantee rates vary generally between 2 % to 3% giving an average of about 225%. Similarly, based on assessee's internal comparable also the guarantee commission rate works out to 2 2%. As per the decision of Bombay High Court, a corporate guarantee commission rate has to be slightly lower than bank guarantee rate. Accordingly, the rate of 2.2% arrived on the basis of internal comparable and rate of 2.25% arrived on the basis of external CUP obtained from bank is further reduced by 05%. Therefore, guarantee commission is charged @ 1.75%.”
Aggrieved, assessee preferred the appeal before CIT(A).
The CIT(A) confirming the action of the AO by observing in Para 2.6 as under: - “2.6: I have considered the order of the AO and submissions of the assessee. It is assessee's submission that the subsidiary AE has charged less margin from the assessee on sale of goods, that is, oils as compared to the margins charged from third parties for the supply of oil in India and hence the portion of guarantee commission if chargeable, is already taken into consideration while billing the goods to the assessee and therefore the guarantee commission should not be charged. And It has also been submitted that even if it has to be charged, It should be charged at the rate of 0.3% as per the details gathered by the assessee from Union Bank of India from which assessee had obtained independent letter of sanction for giving of bank guarantee and which was subsequently obtained by the assessee. Thus it becomes very clear that the rate of corporate guarantee should not be more than the rate of bank guarantee commission of 0.3% charged by the Union Bank of India to the assessee since a bank guarantee stands at a higher level than the corporate guarantee in the level of security and risks. Hence the entire exercise of working out the guarantee commission worked out by the TPO is unjustified and unreasonable from the facts of the case. Moreover, assessee has already derived benefit of lower margins in respect of purchases effected by it from its subsidiary PSPL in Singapore and has already benefited in this regard. Assessee has worked out, without prejudice to its contention the guarantee commission which should be charged on the basis of bank guarantee rates prevailing during F.Y.201 112 as follows: and requested to consider the above for arriving at the guarantee commission to he chargeable. The above submission of the assessee cannot he considered in view of decision of predecessor CIT(A) on similar facts for the A.Y.2009-10 (dated 24.02.20I5) in para no.3 & 4 as the assessee's submissions were dealt by my predecessor comprehensively while deciding the appeal against the assessee. Also on similar issue for A.Y.201112, the appeal was dismissed by the undersigned. In view of the above, as the facts remain similar in this appeal also, the assessee's grounds of appeal Nos.1.1, 1.2 and 13 dismissed.”
Aggrieved, now assessee is in appeal before Tribunal.
At the outset, the learned Counsel for the assessee filed copy of Tribunals order in assessee’s own case in for AY 2009-10 vide order dated 04.05.2018, wherein Tribunal vide Para 4 restricted the disallowance at 0.5% by observing in Para 4 as under: - “4. We have heard carefully heard the rival contentions and perused relevant material on record. In our opinion corporate guarantee provided by the assessee brought certain benefits to its AE by way of credit facility and therefore, the same was required to be compensated by its AE. Our view is duly supported by the decision of this Tribunal rendered in Everest Kanto Cylinders Ltd. Vs. DCIT [34 Taxmann.com 19] as affirmed by Hon’ble Bombay High Court on 08/05/2015 [58 Taxmann.com 254] wherein the rate of commission has been adopted @0.5%. Respectfully, following the same, we estimate the impugned additions @0.5% per annum. The Ld. AO is directed to quantity the addition and re-compute the income of the assessee in terms of our above order.”
As the issue is squarely covered and respectfully following the same, we direct the AO to recompute the corporate guarantee commission at the rate of 0.5%. The appeal of the assessee is partly allowed.
In the result, the appeal assessee is partly allowed.
Order pronounced in the open court on 06-06-2018.