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Facts
The assessee, an engineering procurement and construction contracting company, filed its return for AY 2020-21. During scrutiny, a reference was made for the computation of Arm's Length Price (ALP) for international transactions. The issue pertains to the corporate guarantee provided by the assessee to its AE, NESMA TPL, which had taken a loan.
Held
The Tribunal noted that Indian banks' rates adopted by the TPO were not accepted. It was found that Co-ordinate Benches consistently hold guarantee fees in the range of 0.25% to 0.50%. The Tribunal directed the AO to restrict the ALP adjustment to 0.5%.
Key Issues
Whether the corporate guarantee provided by the assessee to its AE is an international transaction and what should be the Arm's Length Price (ALP) for it?
Sections Cited
143(3), 144C(13), 92CA, 92B, 133(6)
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Income Tax Appellate Tribunal, “H” BENCH, MUMBAI
Before: SHRI NARENDRA KUMAR BILLAIYA, HON’BLE & SHRI SUNIL KUMAR SINGH, HON’BLE
सुनवाई की तारीख/Date of Hearing : 30/09/2024 घोषणा की तारीख/Date of Pronouncement : 08/10/2024 आदेश/O R D E R
PER NARENDRA KUMAR BILLAIYA, AM:
This appeal by the assessee is preferred against the order dated 31/05/2024 framed u/s 143(3) r.w.s. 144C(13) of the Act pertaining to AY 2020-21.
Representatives of both the sides were heard at length. Case records were carefully perused and the relevant documentary evidence duly considered in the light of Rule 18(6) of the ITAT Rules, 1963. 3. Briefly stated the facts of the case are that the assessee is an engineering procurement and construction contracting company established in 1979. It provides turnkey solutions for the construction of roads, bridges, fully integrated rail & metro systems, commercial building & airports and setting up power generation plants, power transmission & 2 distribution systems, chemical process plants, water and waste management and complete mining and metal purification systems. 3.1. Return for the year was filed electronically on 15/02/2021 declaring total income of Rs.174,06,88,920/-. The return was selected for scrutiny and accordingly statutory notices were issued and served upon the assessee. A reference u/s 92CA of the Act was made for computation of Arm’s length price (ALP) in relation to international transactions as reported in Form 3CEB filed by the assessee. The assessee is having following AEs with whom it had international transactions during the year:-
The international transactions with AEs reported by the assessee are as under:-
While scrutinizing the TP study report, the TPO gathered that NESMA Tata Projects Ltd. (NESMA TPL) is an entity based in Saudi Arabia, which is jointly controlled by the assessee and Nesma Telecom and Technology Company Ltd., has taken a loan from Alawwal Bank against which the assessee had extended corporate guarantee in proportion to its shareholding. The facility with banks includes both fund- based and non-fund-based facilities. The TPO noticed that the assessee has not charged any Corporate Guarantee fee from its AE NESMA TPL.
5.1. The TPO issued notice u/s 133(6) of the Act to different banks and collected data pertaining to the guarantee fee that has been charged during the relevant year. The result of the notices sent u/s 133(6) of the Act is as under:-
Bank Name Rate Standard Chartered Bank 0.75% CITI Bank 0.90% Union Bank of India 1.20% HDFC 1.80% IDBI 2.00% State Bank of India 2.10% ICICI 2.50% Count 7 Median 1.80% 35th Percentile 1.20% 65th Percentile 2.00% 5.1.1. The TPO found that the average bank guarantee rates are 1.80%. Accordingly, a showcause notice was issued to the assessee explaining it to showcause as to why adjustments should not be made @1.80% on corporate guarantee provided by the assessee to its AE. The assessee filed detailed reply strongly contending that the relationship between the parent and the subsidiary is significant and economically relevant. In the interest of protecting the goodwill and reputation of the group, it is strategically important for the parent to support the subsidiary and ensure that there is no default committed by the subsidiary in meeting its financial obligation. Effectively, the consequences of providing explicit guarantee are no different compared to implicit obligation which the parent undertakes in its own business interest. The consequences arising on account of default by the subsidiary resulting in deterioration in the credit rating of the group would be far more onerous. It was strongly contended that the underlying facts in the issue do not require benchmarking of the corporate guarantee since it is a transaction between subsidiary and holding company. 5.2. The contention of the assessee did not find any favour with the TPO who proposed adjustment of corporate guarantee @1.80% at Rs.61,66,891/-. 5.2.1. The assessee strongly objected before the DRP and reiterated what has been stated before the TPO but the objections raised by the assessee were dismissed by the DRP and pursuant to the directions of the DRP, the AO made adjustment of Rs.61,66,891/-.
Before us the ld. Counsel for assessee reiterated what has been stated before lower authorities. The ld. D/R strongly supported the findings of the AO/DRP.
We have given a thoughtful consideration to the orders of the authorities below. The undisputed fact is that AE, NESMA TPL has taken a loan from Alawwal Bank which later merged with Saudi British Bank in Saudi Arabia. Therefore, at the very outset, the bank rates adopted by the TPO pertaining to the Indian banks are not accepted. We find that the Co- ordinate Benches across the country have been consistently taking the guarantee fee charged in the range of 0.25% to 0.50%, to name few of such cases:- Order of the Hon’ble Bench of the Tribunal Assessment Year Commission for guarantee fee Thomas Cook (India) Limited TS-307-ITAT-2016(Mum)- TP 2008-09 0.50% I. T.A./1261 & 1238/Mum/2015 Thomas Cook (India) Limited 2009-10 0.50% The DCIT-1(3) TS-227-ITAT-2016(Mum)-TP ITA No. 768/MUM/2014 Godrej Consumer Products Ltd. TS-222-ITAT-2016(Mum)-TP ITA 2010-11 0.50% No. 1299/Mum/2013 Grabal Alok Impex Limited 2009-10 0.50% TS-532-ITAT-2016(Mum)-TP ITA No. 1776/Mum/2015 Nimbus Communications Ltd. 2009-10 0.50% Asst. Commissioner of Income Tax-11(1) TS-43-ITAT- 2016(Mum)-TP, ITA:: 1424/Mum/2014; ITA:. 1332/Mum/2014 Everest Kanto Cylinder Ltd. vs ACIT 2008-09 0.50% TS-105-ITAT-2015(Mum)-TP ITA NO. 1386/Mum2014 Manugraph India Lid: OME 2007-08 0.50% TS-113-ITAT-2015(Mum)-TP ITA No. 4761/Mum/2013 Aditya Birla Minacs Worldwide Ltd. vs DCIT 2008-09 0.50% TS-114-ITAT-2015(Mum)-TP ITA No. 7033/Mum/2012 Rain Commodities Limited 2009-10 0.50% TS-594-ITAT-2015(HYD)-TP ITA No. 157/Hyd/2014 and 2010-112008-09 Cox and Kings Ltd 2010-11 0.50% TS-540-ITAT-2015(Mum)-TP I.T.A. No. 1354/M/2014 I.T.A. No. 7770/M/2014 Manugraph India Ltd vs DCIT 2007-08 0.50% TS-463-ITAT-2015(Mum)-TP ITA No. : 491/Mum/2015 ITA No. : 1072/Mum/2015 M/S Everest Kento Cylinders Ltd 2006-07 0.50% TS-200-HC-2015(BOM)-TP INCOME TAX APPEAL And NO. 1165 OF 2013 2007-08 Godrej Sara Lee Ltd vs. ACIT ITA No. : 7227/Mum/2011 2005-06 0.50% Godrej Household Products Ltd. (TS-330-ITAT- 2006-07 0.50% 2013(Mum)-TP) Reliance Industries Limited vs. ACIT in ITA No.4475/Mum/2007 2006-07 0.38% M/s. Asian Paints Ltd. v. ACIT, LTU ITA No. 2005-06 0.25% 408/Mum/2010 M/s. Everest Kanto Cylinder Ltd. vs. DCIT 2007-08 0.60% Asst. CIT v M/s Nimbus Communications Ltd. 2005-06 0.50% Asst. CIT v M/s Nimbus Communications Ltd. 2006-07 and 2007-08 0.50%
It would be pertinent to refer to the decision of the Co-ordinate Bench in the case of II & Fs Technololgies Ltd. Mumbai vs. Asst. Cir -14(2)(1), Mumbai in & 1551/Mum, wherein the Co-ordinate Bench held as under:- “11. The sum and substance of the ratio laid down by the Hon'ble jurisdictional High Court and also various benches of Tribunal is that corporate guarantee is international transaction which needs to be benchmarked to determine the ALP of said transaction whether or not the assessee has charged any commission on such guarantee. Although, there are divergence view from various bench of Tribunal in the light of Explanation to section 92B of the Act, on corporate guarantee to be not international transaction, but the Hon'ble jurisdictional High Court has taken view that corporate guarantee is an international transaction and accordingly bound by the judicial decision and also to follow the jurisdictional High Court decision, we are of the considered view that corporate guarantee issued by the assessee on behalf of its AE subsidiary company is an 7 international transaction. However, while arriving at rate the AO has taken comparables from commercial banks to at arrive at mean margin of 1.04% and adopted such rate to determine the ALP of corporate guarantee issued by the assessee. Since, the jurisdictional High Court in the case of CIT vs Everest Kanto Cylinder Ltd. has considered the issue and upheld the findings of the Tribunal in estimating 0.5% commission on guarantee. We are of the considered view that the Ld. AO as well as the Ld. CIT(a)/DRP IL & FS Technology Limited erred in adopting 1.04% commission on corporate guarantee issued by the assessee for both assessment years. Hence by following jurisdictional High Court decision, we direct the Ld. AO to adopt 0.5% commission on guarantee issued by the assessee on behalf of its AE a subsidiary company, in the result, appeals filed by the assessee for AY 2010-11 and 2011-12 are partly allowed.”
Further the Co-ordinate Bench of ITAT Bangalore in the case of Medreich Limited [TS-181-ITAT-2021(Bang)-TP], has held as follows:- “9. 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 of Manipal Global Education Services Pvt. Ltd. v. DCIT (supra), reads as follow:- "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.