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Income Tax Appellate Tribunal, VISAKHAPATNAM BENCH, VISAKHAPATNAM
Before: SHRI DUVVURU RL REDDY, HON’BLE & SHRI S BALAKRISHNAN, HON’BLE
PER DUVVURU RL REDDY, Judicial Member :
This appeal is filed by the assessee against the order of the Ld. Assessing Officer in DIN No. ITBA/AST/S/143(3)/2024- 25/1065988641(1), dated 24/06/2024 passed U/s. 143(3) r.w.s 144C(13) r.w.s. 144B of the Income Tax Act, 1961 [“the Act”] for the AY 2020-21.
2 2. Brief facts of the case are that the assessee-company is engaged in the business of manufacture and trading of edible oils and its by-products, bakery shortenings and margarine, specialty fats by importing raw material from its Associated Enterprises, filed its original return of income on 30/12/2020 for the AY 2020-21 declaring an income of Rs. 39,08,11,110/- and book profit under MAT is shown at Rs. 57,79,23,496/-. The return was initially processed U/s. 143(1) of the Act. Subsequently, the case was selected for scrutiny under CASS and a notice U/s. 143(2) was issued to the assessee and in response the assessee’s Authorized Representative appeared from time to time and furnished the details as called for by the Ld. AO. During the assessment proceedings, on examining the details furnished by the assessee-company, the Ld. AO noted that the assessee- company has entered into various transactions during the AY 2020-21 with its Associated Enterprises being the subsidiary companies situated outside India. Accordingly, as per the provisions of section 92E, the assessee-company was requested to furnish the details of international transaction in Form No. 3CEB. On receiving the report from the assessee in Form No.3CEB, the same was forwarded to the TPO on 17/11/2021 with the prior approval of the Ld. Pr. CIT for computation of 3 Arm’s Length Price [ALP] of the transactions entered into by the assessee with its Associated Enterprises [AEs] outside India. The Ld. TPO in his report made U/s. 92CA(3) of the Act observed that during the year, the assessee has provided Corporate Guarantee on behalf of its subsidiaries. The Ld. TPO also observed that the assessee has reported the same in Form 3CEB as “shareholder activity” by using other method. The assessee further submitted that 3F India has provided shareholder corporate guarantee on behalf of its overseas subsidiaries in the capacity of a holding company. The guarantee provided by the company is due to the AEs being subsidiaries to 3F India, which is provided for the benefit of the Group and not as a revenue earning service and hence no guarantee fee should be computed. The assessee’s contention before the Ld. TPO was in order to attract the ALP adjustment, the transaction has to qualify as an ‘international transaction’ in the first stage. Referring to section 92B(1) the assessee submitted before the Ld. TPO that the said section provides for computation of income arising from international transaction by applying arm’s length principle. The assessee also submitted that no service has been rendered by 3F India and further when a parent company extends an assistance to the subsidiary, being an AE, such as corporate guarantee to a 4 financial institution for lending money to the subsidiary, which does not cost anything to the parent company and which does not have any bearing on its profits, income losses or assets, it will be outside the ambit of international transaction u/s. 92B(1) of the Act. Thus, the assessee submitted that the transaction can be said to be one of quasi-equity or shareholder activity. Therefore, it is in the interest of the group that the assessee has provided corporate guarantee to its AEs. It is the submission of the assessee that as the AEs are not benefitted by the guarantee so given and it was the assessee who benefitted as a result of commercial benefits secured for future and that the business strategy should be taken into consideration while making any TP adjustments in respect of such transaction.
After considering the submissions of the assessee as well as on perusal of the relevant information obtained from 6 commercial banks u/s. 133(6) of the Act and the fee charged by them on the Financial Guarantee, the Ld. TPO observed that the various banks charge fee ranging from 1.3% to 3%. Hence, for computation of ALP the median of the various rates was adopted as the ALP as provided in Rule 10B of the IT Rules, 1962 and thus the Ld. TPO worked out the ALP to 1.9% for the corporate
5 guarantee of above Rs. 10 Crs. Accordingly, the Ld. TPO computed the corporate guarantee at Rs. 2,08,11,742/- and made the TP adjustment u/s. 92CA of the Act. Thus, the Ld. TPO observed that the Ld. AO is required to enhance the total income of the taxpayer by Rs. 2,08,11,742/- by way of TP adjustment U/s. 92CA(3) of the Act and passed the order dated 23/07/2023. Aggrieved by the adjustment made by the Ld. TPO and against the draft assessment order dated 29/09/2023, the assessee raised its objections before the Ld. Dispute Resolution Panel, Bengaluru [“Ld. DRP”]. The Ld. DRP, after hearing the submissions of the assessee and on perusal of the objections raised against the TP adjustment made by the Ld. TPO, observed that they do not find any merit in the contentions raised by the assessee and the grounds raised by the assessee are rejected and accordingly passed the directions dated 29/05/2024. Giving effect the directions of the Ld. DRP, the Ld. AO passed the final assessment order on 24/06/2024 and determined the total income of the assessee at Rs. 41,47,47,932/-. Thereafter, the Ld. AO [Deputy Commissioner of Income Tax, Circle-1(1), Hyderabad passed order U/s. 143(3) r.w.s 254 of the Act dated 31/07/2024. Aggrieved by the final assessment order of the Ld. AO, the assessee is in appeal before us.
The assessee has raised the following grounds of appeal: “Based on the facts and circumstances of the case, 3F India respectfully submits that in the order passed by Hon’ble Deputy Commissioner of Income Tax, Circle-1(1), Hyderabad U/s. 143(3) r.w.s 254 of the Act dated 31/07/2024 the Ld. AO / Ld TPO and the Hon’ble DRP erred in :
1. Notional Guarantee fee on shareholders guarantee. Making adjustment on the shareholders corporate guarantee provided to the banks for loans availed by the AE without appreciating the fact that guarantee was provided for the benefit of the 3F Group.
2. Without prejudice to the above ground, failed to follow directions given by the ITAT for the same issue in the assessee’s own case for the AY 2014-15 and 2016-17.
3. Without prejudice to the above ground, not undertaking appropriate benchmarking analysis and upholding the ad-hoc approach adopted by Ld. TPO ie., (a) no method chosen by the Ld. TPO to benchmark the corporate guarantee transaction. (b) Not undertaking a detailed benchmarking analysis and considering the financial guarantee as bank guarantee.
4. Without prejudice to the above ground, the Hon’ble DRP erred in not providing directions basis various judicial precedents of considering a lower rate to benchmark corporate guarantee transaction.
5. Without prejudice to the above ground, the Hon’ble DRP erred in not appreciating the fact that corporate guarantee fee @ 0.5% has been computed by the company for AY 2020-21 and is offered to tax in computation of income for the AY 2023-24.
6. Other grounds: a. Levy of Interest U/s. 234B of the Act. b. Levy of interest U/s. 234C of the Act. c. initiating penalty proceedings U/s. 271(1)(c) of the Act. “
In the grounds of appeal, though the assessee has raised six grounds, but the only issue involved is:
(i) Whether the TP adjustment made by the Ld. TPO in the corporate guarantee commission @ 1.9% on the amount guaranteed as corporate guarantee given to AEs is justifiable or not?
At the outset, the Ld. AR argued that the Ld. TPO has considered 1.9% towards corporate guarantee fee as TP adjustment during the impugned assessment year. The Ld. AR pleaded that this Bench of the Tribunal in the assessee’s own case for the AYs 2014-15 and 2016-17 has taken a view that the corporate guarantee fee should be charged @ 0.50% on the corporate guarantee given to the Associated Enterprises. It was also admitted by the Ld. AR that the assessee has already computed 0.50% as corporate guarantee fee and declared the same while filing the return of income. The Ld. AR therefore pleaded that the additions made based on the directions of the Ld. DRP shall be deleted.
On the other hand, the Ld. DR relied on the orders of the Ld. Revenue Authorities and argued in support of the same.
8 8. We have heard both the sides and perused the material available on record. We have also gone through the orders of the Ld. Revenue Authorities. The only issue raised by the assessee in this appeal is with respect to charging the corporate guarantee commission @ 1.9% of the corporate guarantee estimated at Rs. 2,08,11,742/-. The Ld. DRP while confirming the order of the Ld. TPO has observed that the doctrine of res judicata is not applicable to the tax matters and thereby upheld the TP adjustment of Rs. 2,08,11,742/- being 1.9% of the corporate guarantee fees. However, in the assessee’s own case in the earlier AYs 2014-15 and 2016-17 by relying on various case laws including the decision of the Hon’ble Bombay High Court in the case of CIT vs. Everest Kanto Ltd reported in 378 ITR 57 this Bench of the Tribunal has held as under:
“8. We have heard both the sides and perused the material available on record and the orders of the Ld. Revenue Authorities. We have also gone through the decision of this Tribunal in the assessee’s own case for the AY 2014-15 (ITA No.473/Viz/2017, dated 16/2/2023) wherein the Tribunal, after analyzing the issues at length, held that the corporate guarantee commission is an international transaction and should be charged @ 0.50% on the corporate guarantee amount given to the AEs. For the sake of reference and brevity, we hereby extract the relevant paragraphs of the said Tribunal’s order for the AY 2014-15 (supra) which reads as under: “6. We have heard the rival submissions and perused he material available on record and the orders of the Ld. Revenue Authorities. It is observed from the order of the Ld. TPO that the Ld. TPO has obtained a rate of fees
9 charged by State Bank of India on the issuance of financial guarantees given for the computation of ALP and the tested party with respect to the guarantees given to the AEs. The Ld. TPO has thus concluded that the median of the ALP works out to 1.60% on the corporate guarantee given to AEs. In the case of CIT vs. Redington India Ltd [2021] 430 ITR 298, Hon’ble Madras High Court held that corporate guarantee given to the AE is covered by the retrospective amendment made by the Finance Act, 2012. In the case of CIT vs. Everest Kanto Ltd reported in 378 ITR 57 the Hon’ble Bombay High Court held that the corporate guarantee commission is an international transaction and should be charged @ 50% on the corporate guarantee amount given to the AEs. In the case of M/s. Devi Sea Foods Limited vs. DCIT, Circle-3(1), Visakhapatnam in (AY; 2017-18), dated 09/09/2022 this Bench of the Tribunal has held that the corporate guarantee given to the AE is an international transaction and shall be chargeable @ 0.50% on the amount of corporate guarantee given to the AEs. In view of the above discussions and by respectfully following the ratio laid down in various judicial pronouncements as discussed above, we are of the considered view that the corporate guarantee commission is an international transaction and should be charged @ 0.50% on the corporate guarantee amount given to the AEs. We therefore partly allowed the grounds raised by the assessee.”
9. Considering the identical facts and circumstances of the instant case with that of the assessee’s own case decided by this Tribunal in (supra) as well as following the principles of consistency and respectfully following the decision of this Tribunal, we hereby hold that the corporate guarantee commission is an international transaction and should be charged @ 0.50% on the corporate guarantee amount given to the AEs. It is ordered accordingly. Thus, the Ground No.1 raised by the assessee in its grounds of appeal is partly allowed.”
9. Considering the identical facts and circumstances of the instant case with that of the assessee’s own case for the earlier AYs 2014-15 and 2016-17 as well as following the principle of consistency and respectfully following the decision of this Tribunal (supra), we hereby hold that the corporate guarantee
10 commission is an international transaction and accordingly should be charged @ 0.50% on the corporate guarantee amount given to the AEs. Therefore, we have no hesitation to delete the addition confirmed by the Ld. DRP amounting to Rs. 2,08,11,742/- being 1.9% of the corporate guarantee amount. Thus, the grounds No. 1 to 5 raised by the assessee are allowed. Ground No. 6 raised by the assessee is consequential in nature and therefore needs no separate adjudication. It is ordered accordingly.