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Income Tax Appellate Tribunal, KOLKATA BENCH ‘C’ KOLKATA
Before: Shri J. Sudhakar Reddy, AM & Shri S.S. Viswanethra Ravi, JM]
Date of concluding the hearing : May 02, 2018 Date of pronouncing the order May 18, 2018 ORDER
Per J. Sudhakar Reddy, AM
This is an appeal filed by the assessee directed against the assessment order passed by the Assessing Officer under section 144C(13) read with section 143(3) of the Income Tax Act, 1961 (‘the Act’).
The assessee is a public limited company and is engaged in the business of manufacturing and trading of bakery and dairy products. The issue before us is the transfer pricing adjustment made on a corporate guarantee given by the assessee-company to its AEs BAMPL, Mauritius, and Strategic Food International Co. LLC, Dubai. The assessee had provided guarantee to ABN and AMRO Bank NV (now, The Royal Bank of Scotland NV). The assessee has determined
Assessment Year: 2012-13 M/s. Britannia Industries Ltd. arm’s length price at 0.2%. Based on free quotes obtained from Royal Bank of Scotland which was 0.25% and Indusind Bank which was 0.15% and hence the average of 0.2% was adopted as ALP by the asssessee. The T.P.O. determined at an ALP of 3%. The DRP in its order dated 13.12.2016 considered the submissions of the assessee and directed the TPO to adopt interbank lending rate as a benchmark for determination of ALP. The DRP considered it reasonable to impute a percentage of 150 bps as the interbank lending rate varied between 150 and 2bps, as found by the TPO. It also took into account the factor that BAMPL had low credit rating. It directed the TPO to substitute 150 bps i.e. 1.5% in place of 3%. Aggrieved the assessee is in appeal on the following grounds . “1. For that on the facts and in the circumstances of the case and in law, the TPO as well as the Hon'ble DRP failed to appreciate that the issuance of corporate guarantees did not have any bearing on profits, incomes, losses or assets of the appellant and therefore it was not covered within the purview of international transactions' under Section 92B of the Income-tax Act, 1961 and in that view of the matter the transfer pricing adjustment of Rs.2,27,19,4311- was impermissible and be cancelled.
2. For that on the facts and in the circumstances of the case and in law and without prejudice to the preceding ground, the TPO as well as the Hon'ble DRP failed to appreciate that the amendment brought in the definition of ‘international transaction' by the Finance Act, 2012 in Explanation to Section 92B, is applicable prospectively from FY 2012-13 and onwards and therefore not applicable in the relevant FY 2011-12 and in that view of the matter the issuance of corporate guarantees by the appellant to its AE could not be treated to be "international transaction" under Section 928 and accordingly the upward adjustment of Rs. 2,27,19,431/- be deleted.
3. For that on the facts and in the circumstances of the case and in law and without prejudice to the preceding grounds, the TPO as well the Hon'ble DRP failed to appreciate that the corporate guarantees were given by the appellant to AE for pure business considerations and it was Assessment Year: 2012-13 M/s. Britannia Industries Ltd. in the nature of an owner-shareholder activity and hence no transfer pricing adjustment was warranted in this regard.
For that on the facts and in the circumstances of the case and in law and without prejudice to the preceding grounds, the manner & methodology adopted by the Hon'ble DRP to ascertain the fees for corporate guarantee at 150 bps was unjustified, flawed & incorrect and therefore the upward adjustment of Rs. 2,27,19,431/- is liable to be deleted and/or reduced.
For that on the facts and in the circumstances of the case and in law and without prejudice to the preceding grounds, the CG Commission quote of 0.20% obtained by the appellant from banking institution was a good parameter to benchmark the corporate guarantee commission of 0.20% charged from the AE and in that view of the matter the upward adjustment of Rs. 2,27,19,431/- made on account of corporate guarantee commission may kindly be deleted in full and/or reduced.”
The learned counsel for the assessee Mr. Akkal Dudhewala submitted that the assessee does not press ground no 1 to 3, which are on the issue as to whether issuance of a corporate guarantee to AE falls within the definition of the term ‘international transaction’ under section 92B of the Act and whether the explanation inserted to section 92B by Finance Act, 2012 as prospective and not retrospective in nature. As well as the argument that the corporate guarantee in question was given as part of “share-holder activity” by the assessee and hence no service fee is to be determined. Thus we dismiss ground no 1 to 3 as not pressed.
4. Coming to ground no 4 & 5, we find that interbank lending rate adopted by DRP as a bench mark for determination the ALP of the charge for giving a corporate guarantee, is not appropriate, as these rates are for fund based transaction. Issuance of a corporate
Assessment Year: 2012-13 M/s. Britannia Industries Ltd. guarantee is a non-fund based transaction. The assessee in this case has obtained the quotes from RBS and as well as from Indusind Bank. The credit rating of the assessee and other financial data were considered by the banks, before giving a free quote to the assessee. Thus in our view the free quotes taken by the assessee for the very same transactions do constitute material for determination of ALP. Though the assessee has quoted a decision in the case of Asian Paints of the ITAT in support of its contention that the CUP method should be used for determination of arm’s length price and that such exercise would result in determination of ALP at 0.20%, we do not apply the same, as factually they are variations in facts. The credit rating of an organisation etc. plays an important role in determination of the rate. Geographical location, local government regulations etc. are also to be considered.
5. In this case, corporate guarantee has been provided by the assessee to ABN AMRO Bank for AE BAMPL Mauritius and Strategic Food International Co. LLC, Dubai.
Royal Bank of Scotland has given a free quote of 0.25%. In our view, this quote constitutes the ALP of this International Transaction in question. The average adopted by the assessee as ALP is in our view not the right approach as averages do not always give logical results. As this quote is the basis on which this transaction has taken place, we are of the opinion that this should be taken as the ALP. Hence, we direct the TPO as well as the Assessing Officer to adopt 0.25% as the ALP.