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AMICUS AI
Citation Codes
Equivalent Citations
citation codes
Case Number
Attorney(S)
  • Vijay Mehta
Judges
  • D. KARUNAKARA RAOVIVEK VARMA
Acts
  • section 92C(2) of IT Act, 1961 and Rule - 10B(1)(a) of IT Rules, 1962.
  • provisions of the Rule-10B(l)(a) of IT Rules, 1962,
  • FINANCE ACT 2009
  • section 80-1/80-[A/80- IB].
  • FINANCE ACT 2002
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Cites
Cited by
Citation Codes
Equivalent Citations
citation codes
Case Number
Attorney(S)
  • Vijay Mehta
Judges
  • D. KARUNAKARA RAOVIVEK VARMA
Acts
  • section 92C(2) of IT Act, 1961 and Rule - 10B(1)(a) of IT Rules, 1962.
  • provisions of the Rule-10B(l)(a) of IT Rules, 1962,
  • FINANCE ACT 2009
  • section 80-1/80-[A/80- IB].
  • FINANCE ACT 2002
See more information ...
Smart Summary

Factual and Procedural Background

This consolidated order addresses two cross appeals related to the Assessment Year 2008-2009: ITA No. 5031/M/2012 filed by the assessee and ITA No. 5488/M/2012 filed by the Revenue. The assessee is engaged in manufacturing and marketing pharmaceutical products along with related R&D activities. The dispute centers primarily on transfer pricing (TP) adjustments regarding the arm's length price (ALP) of guarantee commission charged on loans and letter of credit (L/C) facilities guaranteed by the assessee to its Associated Enterprises (AEs) abroad.

The assessee filed its return declaring total income and book profits under section 115JB. The Assessing Officer (AO) referred certain international transactions to the Transfer Pricing Officer (TPO), who proposed an addition based on benchmarking the guarantee commission at 3% of the guaranteed amount, rejecting the assessee's benchmarked rate of 0.53%. The assessee contested the addition before the Commissioner of Income Tax (Appeals) [CIT(A)], who upheld the AO/TPO's addition. Both parties filed cross appeals before the Tribunal, which are consolidated in this order.

Legal Issues Presented

  1. Whether the addition of Rs. 11,51,24,333/- by AO/TPO towards adjustment of ALP for guarantee commission charged by the assessee is justified.
  2. Whether the benchmarking of guarantee commission at 3% by AO/TPO is appropriate as opposed to the assessee's claimed rate of 0.53%.
  3. Whether the methods adopted by AO/TPO for determining ALP comply with section 92C(2) of the Income Tax Act and Rule 10B(1)(a) of the Income Tax Rules.
  4. Whether the comparables rejected by the CIT(A) and AO/TPO for determining ALP were appropriate and legally sustainable.
  5. Whether depreciation on product development expenses and deduction under section 80-IB on export benefits in the form of DEPB licenses are rightly disallowed.
  6. Whether interest under section 234B on enhanced book profits under section 115JB is chargeable considering retrospective amendments.
  7. Whether additions made by AO under section 41(1) for cessation of liabilities and disallowance of depreciation on royalty payments are justified.

Arguments of the Parties

Assessee's Arguments

  • The assessee contended that the guarantee commission charged at 0.53% of the loan guaranteed is at arm's length and the AO/TPO's benchmarking at 3% is excessive and not justified.
  • The assessee argued that the comparables used by AO/TPO (Allahabad Bank, HSBC Ltd., Dutch State-FMO, EXIM Bank of USA) pertain to bank guarantees and not corporate guarantees, which differ significantly in risk and commercial nature, thus making them inappropriate for CUP method benchmarking.
  • The assessee highlighted that the bank guarantee rates are 'naked quotes' from websites without adjustments for risk, currency, volume, or other relevant factors, and hence legally unsustainable.
  • The assessee relied on Tribunal decisions approving corporate guarantee commission rates in the range of 0.25% to 0.6% and submitted that their rate of 0.53% is consistent with these precedents.
  • The assessee submitted that interest savings and risk factors justify the lower guarantee commission charged.
  • Regarding non-TP issues, the assessee argued for allowance of depreciation on product development expenses and deduction under section 80-IB on export benefits, citing binding judicial precedents.
  • On the issue of interest under section 234B, the assessee relied on retrospective amendment principles and judicial decisions to argue that such interest should not be levied.

Revenue's Arguments

  • The Revenue supported the AO/TPO and CIT(A) orders confirming the addition on transfer pricing grounds based on benchmarking guarantee commission at 3% using the cited comparables.
  • The Revenue acknowledged the difference between bank and corporate guarantees but justified the use of bank guarantee rates due to lack of better comparables from the assessee.
  • Reliance was placed on the Tribunal decision in Tecnimont ICB (P.) Ltd. where a 3% bank guarantee commission was upheld due to lack of evidence from the assessee.
  • On non-TP issues, the Revenue relied on AO orders and did not dispute the binding nature of judicial precedents cited by the assessee.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Asstt. CIT v. Asian Paints Ltd. [ITA No. 1937 (Mum.) of 2010] Rejection of bank guarantee "naked quotes" as comparables for CUP method in TP studies Tribunal held bank guarantee rates vary widely and are not sustainable without adjustment; upheld lower corporate guarantee commission rates as arm's length.
Everest Kanto Cylinder Ltd. v. Dy. CIT [2013] 34 taxmann.com 19 (Bom.) Corporate guarantee commission rates as arm's length; rejection of bank guarantee rates as comparables Tribunal upheld corporate guarantee commission at around 0.5% and dismissed additions based on bank guarantee rates at 3%.
Reliance Industries Ltd. v. ACIT [ITA No. 4475 (Mum.) of 2011] Benchmarking corporate guarantee commission rate at 0.38% Tribunal rejected TPO's 2.5% rate based on external comparables and upheld lower corporate guarantee commission rate.
Aztec Software & Technology Services Ltd. v. Asstt. CIT [2007] 15 SOT 49 (Bang.) (SB) Use of comparables in benchmarking international transactions CIT(A) relied on this case to accept TPO's comparables when assessee failed to furnish appropriate comparables.
Liberty India v. CIT [2009] 317 ITR 218 (SC) DEPB benefits not eligible for deduction under section 80-IB Held that export benefits in form of DEPB licenses do not form part of net profits eligible for deduction under section 80-IB.
Emami Ltd. v. CIT [2011] 337 ITR 470 (Cal.) Interest under section 234B not leviable on enhanced book profits due to retrospective amendment Held that interest under section 234B cannot be charged when return filed before retrospective amendment; applied in favour of assessee.
Tecnimont ICB (P.) Ltd. v. Dy. CIT [2013] 145 ITD 388 (Mum.) Use of bank guarantee commission rate at 3% upheld due to lack of evidence Tribunal sustained TPO's use of SBI bank guarantee commission rate of 3% for benchmarking in absence of contrary evidence.
Arvind Mills Ltd. v. Assistant Commissioner of Income Tax [2011] 11 taxmann.com 67 (Ahd.) Differences between bank and corporate guarantees relevant for FAR analysis in CUP method Held that bank guarantee rates without adjustments are not good CUPs for benchmarking corporate guarantee rates.

Court's Reasoning and Analysis

The Tribunal undertook a detailed analysis of the transfer pricing issue concerning the guarantee commission charged by the assessee to its AEs. It accepted that the CUP method is the appropriate method for benchmarking such transactions but emphasized that comparables must be carefully selected and adjusted.

The Tribunal distinguished between bank guarantees (BG) and corporate guarantees (CG), explaining that BG are commercial products offered by banks, often with higher risk premiums, customer-specific conditions, and negotiable rates, whereas CG are corporate undertakings with different risk profiles and legal consequences. Consequently, the Tribunal held that using bank guarantee rates as comparables for corporate guarantee commission without proper adjustments is legally unsustainable.

The Tribunal reviewed the comparables used by the AO/TPO (Allahabad Bank, HSBC Ltd., Dutch State-FMO, EXIM Bank of USA) and found them to be “naked quotes” from bank websites lacking proper adjustments for risk, currency, volume, and other relevant factors. The Tribunal noted that these comparables had been rejected in prior Tribunal decisions and were thus not appropriate external CUPs.

Furthermore, the Tribunal examined various precedents where corporate guarantee commission rates ranging from 0.25% to 0.6% were accepted as arm's length. The assessee’s rate of 0.53% fell within this range and was supported by expert TP studies. The Tribunal found the TPO’s 3% benchmark excessive and unjustified, dismissing the AO/TPO/CIT(A) conclusions and ordering deletion of the transfer pricing additions.

On non-TP issues, the Tribunal upheld the CIT(A)’s dismissal of the assessee’s alternative claim for depreciation on product development expenses due to prior allowance of deduction under section 35(2AB) in an earlier year, following principles of judicial consistency. The Tribunal also dismissed the claim for deduction under section 80-IB for export benefits in the form of DEPB licenses, relying on binding Supreme Court precedent.

Regarding interest under section 234B on enhanced book profits, the Tribunal accepted the assessee’s contention based on retrospective amendment principles and judicial decisions that such interest is not leviable when returns were filed before the amendment, granting relief to the assessee.

In the Revenue’s appeal concerning addition under section 41(1) for cessation of liabilities and disallowance of depreciation on royalty payments, the Tribunal upheld the CIT(A)’s decisions in favor of the assessee, relying on consistency with prior Tribunal rulings in the assessee’s own case.

Holding and Implications

ITA No. 5031/M/2012 (Assessee’s Appeal): The Tribunal allowed grounds 1 to 5 relating to transfer pricing adjustments by holding that the guarantee commission rates of 0.53% and 1.47% benchmarked by the assessee are at arm's length. The Tribunal set aside the additions made by AO/TPO/CIT(A) based on inappropriate comparables and rejected the 3% benchmarked rate.

Ground 6 (depreciation on product development expenses) and Ground 7 (deduction under section 80-IB) were dismissed, confirming the CIT(A)’s decisions based on prior judicial rulings. Ground 8 (interest under section 234B) was allowed in favor of the assessee based on retrospective amendment principles and judicial precedents.

ITA No. 5488/M/2012 (Revenue’s Appeal): The Tribunal dismissed the Revenue’s appeal relating to addition under section 41(1) for cessation of liabilities and disallowance of depreciation on royalty payments, upholding the CIT(A)’s orders consistent with prior Tribunal decisions.

Implications: The decision reinforces the principle that bank guarantee rates cannot be mechanically used as comparables for corporate guarantee commission rates without proper adjustments under Rule 10B of the Income Tax Rules. It underscores the importance of selecting appropriate comparables in transfer pricing studies and adhering to judicial precedents. The ruling limits the Revenue’s ability to rely on “naked quotes” from banks for transfer pricing adjustments and affirms the applicability of retrospective amendment protections in interest levy cases. No new precedent was set beyond the application of existing principles and prior Tribunal decisions. The immediate effect is the deletion of transfer pricing additions and dismissal of certain Revenue appeals, favoring the assessee.

Show full summary ...

    Glenmark Pharmaceuticals Ltd. v. Additional Commissioner of Income-tax, Central Range -VIII

    ORDER

    D Karunakara Rao, Accountant Member - There are two appeals under consideration and they are cross appeals. ITA No.5031/M/2012 is filed by the assessee and ITA No. 5488/M/2012 is filed by the Revenue for the Assessment Year 2008-2009. Both these appeals are clubbed, heard combinedly and being disposed of in this consolidated order as per the procedure set for the cross-appeals.

    ITA No.5031/M/2012 by the Assessee for the A Y 2008-2009

    2. Firstly, we shall take up ITA No.5031/M/2012, which is filed by the assessee on 6.8.2012 against the order of CIT(A)-17, Mumbai for the assessment year 2008-2009 and the grounds raised by the assessee in this appeal read as under:

  • "1. On the facts and in the circumstances of the case, the ld CIT(A) has erred in law and in facts in upholding the addition of Rs. 11,51,24,333/- made by the AO/TPO towards adjustment on account of Arm's Length Price (ALP) of the Guarantee Commission of Loan and LC facility guarantees provided by the assessee-company to its Associated Enterprises (AE).
  • 2. On the facts in rejecting the benchmark of the guarantee commission by the assessee @ 0.53% of the loan guaranteed and upholding the ALP of guarantee commission determined by the AO/TPO @ 3% of loan guaranteed.
  • 3. On the facts and in the circumstances of the case, the ld CIT(A) has erred in law and in facts in upholding the methods adopted by the AO/TPO for determining the ALP of guarantee @ 3% of loan guaranteed, although the said method adopted by the AO/TPO is not in accordance with the first Proviso to section 92C(2) of IT Act, 1961 and Rule - 10B(1)(a) of IT Rules, 1962.
  • 4. On the facts and in the circumstances of the case, the ld CIT(A) has erred in law and in facts in rejecting some comparable uncontrolled transactions of guarantee fees/commission cited by the assessee before the AO/TPO as well as before the CIT(A) for determination Arithmetical Means of ALP of guarantee fee / commission as provided in the 1st Proviso to section 92C(2) of the Act.
  • 5. On the facts and in the circumstances of the case, the ld CIT(A) has erred in law and in the facts in considering irrelevant materials and un-comparable transactions of guarantees and has ignored some relevant comparable transactions cited before him in course of appeal hearing, while wrongly upholding the ALP of guarantee @ 3% of loans guaranteed.
  • 6. On the facts and in the circumstances of the case and without prejudice to the Hon'ble ITAT for AY 2005-2006, the ld CIT(a) has erred in law and facts in upholding AO's action in disallowing of depreciation of Rs. 3,80,35,331/- on product development expenses.
  • 7. On the facts and in the circumstances of the case, the ld CIT(A) has erred in law and in facts in upholding AO's action in disallowing deduction u/s 80-IB on export benefits in the form of DEPB licences amounting to Rs. 2,81,75,586/-.
  • 8. On the facts and in the circumstances of the case, the ld CIT(A) has erred in law and in facts in dismissing the appeal against AO's action in charging interest u/s 234B amounting to Rs. 54,86,525/- on enhanced assessed book profit u/s 115Jb due to amendment in section 115Jb by Finance Act, 2009 with retrospective effect from 1.4.2001, which amendment was introduced after filing of the return for AY 2008-2009".

    • 3. Briefly stated relevant facts of the case are that the assessee is engaged in the business of manufacturing and marketing the pharmaceutical products and the related Research and Development (R&D) activities. Assessee filed the return of income declaring the total income of Rs. 25,78,93,610/- and the book profits u/s 115JB is at Rs. 4,22,66,10,367/-. There are international transactions involved in this case. The details of international transactions showing the details of the AEs, amounts of loan guaranteed, interest rates, rate of guarantee fee charged by the assessee on the AEs and others are tabulated as under:

    Nature transaction Associated Enterprise Amount of Loan guaranteed Rate Interest charged by bank Rate of guarantee fee charged Rate of guarantee fee taken by TPO
    Guarantee of loan from Citibank Bahrain to AE Glenmark Holding SA Switzerland US$ 100M LIBOR (3.24%)+1.17%=4.41% 0.53% 3%
    Guarantee of loan from ICICI Bank Bahrain to AE -Do- US$ 13M LIBOR (3.24%)+0.95%=4.19% 0.53% 3%
    Guarantee of L/C facility to AE Glanmark Generies SA, Argentina US$ 3M NA 1.47% 3%

    4. Assessee has Associated Enterprises (AEs) namely Glenmark Holding SA, Switzerland and Glenmark Generics SA, Argentina. In addition, assessee has various other international transactions with different AEs relating to exports of API and export of finished formulation, contract research services etc. There is dispute about the ALP many of these transactions. However, the transactions of charging of guarantee fee on the AEs in connection with (i) the bank loans and (ii) the L/C facilities guaranteed to the said AEs are the disputed international transactions. Assessee conducted TP studies on the said 'guarantee fee' linked international transactions with the AEs and arrived to the conclusion that the rate of guarantee fee charged from the AEs @ 0.53% of the guaranteed amounts is at Arm's Length. However, during the assessment proceedings, AO referred these transactions to the TPO as per the procedure laid down in the Act. The details of guarantee commission charged at the rate of 0.53% of the guaranteed amounts and the methods adopted by the assessee in the TP study are as under:

    Transaction AE Value in Rs Method
    Guarantee Commission Glenmark Holding SA, Switzerland 2,46,75,600/- CUP
    Guarantee Commission Glenmark Generics SA, Argentina 1,97,673/- CUP

    5. Further details of the international transactions with AEs include that the assessee's AEs at Switzerland and Argentina raised finance from ICICI Bank and Citibank for which, the assessee stood as guarantor. For these services, assessee received sums of Rs. 2,46,75,600/- from Glenmark Holding SA, Switzerland and Rs. 1,97,673/- from Glenmark Generics SA, Argentina. Assessee benchmarked these transactions and came to the conclusion that they are at the Arm's Length. TPO rejected the said TP study of the assessee by mentioning that the assessee failed to discharge its primary onus of benchmarking the transactions and issued a show-cause notice dated 17.3.2011. In the show-cause notice, the TPO proposed to consider (i) Allahabad Bank (charges guarantee fee @3% per annum); (ii) Dutch State, FMO (charges 2.5% per annum); (iii) HSBS Ltd (charges 0.15% to 3% per annum); and (iv) EXIM Bank of USA (charges 3% per annum). Finally, the TPO proposed to benchmark the ALP for guarantee commission given to the banks for the benefit of AEs @ 3% of the guaranteed amount.

    6. Assessee replied objecting to the same, regarding 3% of the guarantee commission charged by the Allahabad Bank and HSBS Ltd, it is submitted that with the increase in the guaranteed amount there is a fall in the guaranteed commission. The said proposal of the TPO to benchmark the impugned transactions at the rate of 3% should not be applied to the case of the assessee. As per the assessee, the corporate guarantee and Bank guarantee are different. Further the guaranteed amounts in the present case are to the magnitude of around Rs. 450 crs (equivalent to USD 114.30 million) and the said bank rate of 3% adopted by the Banks are applicable to the smaller amounts. Assessee informed that the rate applicable to Allahabad Bank is 0.24% pa and not 3% as mentioned by the TPO. He has also defended the rate of 0.53% charged by the assessee on the AEs on the grounds of risk analysis, absence of any finance cost interest savings etc. Further, citing the guarantee rates announced by the Bank of India (BOI), assessee financier, assessee submitted that BOI charges the guarantee commission @ 0.31% per quarter i.e. 1.21% per annum and it is negotiable up to the limit of 30% and final figures vary from one customer to the other. As a result of the discount for said negotiations @ 30%, the guarantee commission by the bank may go down 0.88% against aforementioned figure of 1.21%. This elucidation applied to the cases of guaranteed amount exceeding the sum of Rs. 4 crs. As per the assessee, considering the guaranteed sum in this case is Rs. 450 crs, the commission charged @ 0.53%, benchmarked by the assessee is at Arm's Length. He has also reasoned out on the basis of the saving in interest. As per the assessee, 5% is charged when there is no guarantee is given and with guarantee, the Citibank charged grossly @ 4.41%. Thus, the interest saving worked out to 0.59%. He also tried to made out all the objections raised by the TPO as mentioned in para 4 and its sub-paras of his order. Finally, the TPO rejected the submission of the assessee and benchmarked the ALP for the bank guarantee @ 3% of the amount guaranteed and para 5 of the TPO order is relevant in this regard. The said para 5 of the TPO's' order mentions that the impugned international transactions are to be benchmarked using CUP method. HSBC Ltd, Allahabad Bank, Dutch State - FMO, EXIM Bank of USA are the external comparables to support the benchmarking done by the TPO.

    7. As a result of such benchmarking resulting the addition by way of adjustment at Rs. 13,99,97,606/-. Relevant conclusions of the additions are as under:

    "Considering the facts and circumstances of the case and in view of the discussion made above, I benchmark the Arm's Length Price for the bank guarantee at 3% of the amount of Guarantee. The relevant calculations are as under:

      Sr. No. Name of the lender to whom guarantee is given Name of the beneficiary AE Amount of loan for which guarantee was given (in USD) Date of giving guarantee No. of days for which this guarantee was existent during the year Arm's lenght price @ 3% for No. of days that the guarantee was existent in the year Terms of loan
      1 Citibank N. A. Bahrain Glenmark Holdings S.A. Switzerland 100,000,000 1-4-2007 365 122,129,652 Term Loan
      2 ICICI Bank, Bahrain Glenmark Holdings S.A. Switzerland 14,300,000 l-4-2007 365 77,464,540 Term Lon
      3 Citibank N.A. Argentina Glenmark Generics S.A. Argentina 1,195,000 403,000 16-1-2008 14-1-2008 75 77 299,662 103,752 Letter of Credit
      Total 139,997,606  

    6. From the table above, it can be seen that the arm's length price of the bank guarantee at 3% commission comes to Rs. 13,99,97,606/- on the loan and LC facility available by the AEs of the assessee. The assessee has charged guarantee commission @ 0.53% on loan and 1.47% on LC facility for aggregate of Rs. 2,48,73,273/-. Therefore, the adjustment on this account comes to Rs. 11,51,24,333/-.

    7. Details and information were furnished, and issues relating to the arm's length price of the other international transactions were discussed, and in view of assessee's submissions and facts of the case, the Arm's Length Price of the other transactions as reported by the assessee, seems to be reasonable, and is not disturbed."

    8. Further, AO / TPO also made other additions on various accounts unrelated to the TP provisions. They shall be discussed when relevant grounds are taken up for adjudication. Finally, the assessment was finally completed determining the total income under normal provisions at Rs. 42,66,34,740/- and the book profit as per the special provisions u/s 115JB of the Act at Rs. 48,39,73,455/-. Since, the tax payable under section 115JB of the Act is higher than that of the normal provisions, assessment was completed applying the provisions of section 115JB of the Act. Aggrieved with the said assessment, the assessee filed an appeal before the CIT(A).

    9. During the proceedings before the CIT(A), assessee raised the issue of treating the impugned transactions i.e. charging of guarantee commission from AEs as 'international transactions'. CIT(A) dismissed the same. At the outset, ld Counsel mentioned that the said issue is not pressed here. Therefore, we leave it there.

    10. Further on the merits of the TPO's comparable, Assessee submitted that on the ground of interest savings and on the ground of adjustments towards the negotiations/the guaranteed commission benchmarked by the assessee is at Arm's Length. The discussion given above quoting the case of a bank guarantee using the Bank of India rates is relevant. Assesses took objection to the case of "General Electric Capital Canada Inc. v. Her MajestyThe Queen" 2009 TCC 563, where, on the higher purchase transactions, guarantee commission @ 1 % was paid by the GE to GECUS and it was found to be at Arm's Length. Of course, there aren't many details available in the public domain. Further, in the impugned order, there was some discussion on the risk factors and as per the assessee, in this corporate guarantee, the assessee has borne which is almost NIL when the AEs capital rich and in this regard, the assessee submitted that the AEs made substantial repayments to the said Banks in the subsequent years. Assessee was extremely critical of the TPO's conclusions on all the 4-5 comparables cited by the TPO and also critical of benchmarking the transactions of guarantee fee @ 3%. Further, assessee justified the guarantee commission charged on the AEs relying on the German Model of Risk calculations and also narrated the interest savings (i.e., the difference between PLI and the bank rate). Without prejudice to the above, assessee pointed out the CIT(A) that the 1.6% is correct figure of average of the comparable ie BOI, ECGC, Allahabad Bank, HSBC and not 3% considered by the AO and benchmarking at 3% is on very high side. Of course, CIT(A) silently dismissed the said submissions. However, CIT(A) rejected the cases of ECGC holding that it is case of the 'fee' and not the commission and also HSBC holding that averaging of the range of charges ie 0.15% to 3% per annum is legally unsustainable.

    11. The CIT(A) considered the above submissions of the assessee and held that the impugned transactions constitute international transactions. CIT(A) opined that the assessee benchmarking of the (i) guarantee commission @ 0.53% on the guaranteed loan amount and (ii) guarantee commission of @ 1.47% in respect of letter of credit facilities granted to the AEs, are not at Arm's Length. On the issue of interest savings, CIT(A) noted that there is absence of relevant facts relating to the rate of interest and the PLI at the relevant point of time involving the transactions with the AE on standalone basis. He also distinguished certain decisions filed by the assessee. Eventually, CIT(A) rejected the assessee's comparables taking the details of Allahabad Bank and the Robo India Finance Ltd by stating that initially the assessee failed to furnish any comparables for benchmarking impugned transactions. In that case, the examples given by the TPO should be accepted. In this regard, he relied on the decision of the ITAT in the case of Aztec. Software & Technology Services Ltd. v. Asstt. CIT [2007] 15 SOT 49/107 ITD 141/162 Taxman 119 (Bang.) (SB) . Further, CIT(A) also referred to the transactions between the GE Capital Canada Inc. and GECUS (supra), where the guarantee commission @ 1% is held to be at Arm's Length. Finally, the CIT(A) rejected the guarantee commission data followed by the HSBC Ltd, where the commission rate varies from 0.15% to 3%. At the end, the CIT(A) confirmed the decision of the TPO and AO. Relevant discussion was given item no. xxiii to xxiv and the same read as under:

    "xxiii. The appellant in its submission has also contended to take average rates charged by the various banks. In this regard it is mentioned that such computation of the average rates cannot be considered for the benchmarking. As the rate of ECGC is not in respect of the fee and rate of HSBC cannot be taken as average of 0.15% to 3%. Further, the rate of HSBC actually speaks of guarantee fee and not commission.

    Further such rates are or /and inclusive of the guarantee commission is not clear. Further in such average computation the risk evaluation by considering the ordinary lending rate and the bank rate has not been mentioned either for India or of the country of AE. Accordingly, the submission of the appellant to consider average of various rates that it has submitted is not found to be acceptable.... The premium of 350 basis point above LIBOR is for the loan above the period of 5 years. In the facts of the ease while searching comparables the maturity of the loan by the AE has been taken as 5 years. Accordingly the such interest spread between interbank rate and interest on loan / ECB has to be considered at 350 basis point. Accordingly also the consideration of 3% as guarantee commission by the TPO is found to be reasonable and justified.

    xxiv. In the facts of the case and in view that the appellant has not properly benchmarked this transaction and further the elaborate discussion that the TPO has done in his order arriving at the fact that the transaction needs to be benchmarked and further a show-cause notice that was issued for the proposed determination of ALP and the reply to the appellant has further reasoned out fact as to why 3% of the charged is at arm's length, and also in view of the discussion hereinabove, and especially in view when the rates charged by the Allahabad bank is 0.75% per quarter i.e. 3% per annum, the rate charged by Rabo was 2.5%. the rate of guarantee commission charged by EXIM Bank USA to Jet Airways India is 3% plus commitment charges, further the difference in the bank rate and the PLR, which is in the vicinity of 4.5%, and further more the interest spread between the Inter-banking rate in LIBOR and rates/premium prescribed by the RBI in respect of all in cost ceiling for ECB by the Indian companies being 350 basis points above LIBOR for loan above five year period, the ALP determined by the TPO of guarantee commission at 3% is found to be justified and accordingly the contention of the appellant in this regard are not found to be acceptable. This ground of appeal is... dismissed."

    12. Aggrieved with the above conclusion of the CIT(A), assessee filed the - present appeal before the Tribunal by raising the abovementioned grounds and the groundwise adjudication is given in the following paragraphs.

    Before Hon'ble Tribunal on TP related Addition

    13. Grounds No.l to 5 relate to the TP adjustments-oriented net addition of Rs. 11,51,24,333/-. In this regard, Sri Vijay Mehta, Ld Counsel for the assessee submitted that there is no dispute about the Comparable Uncontrolled Price - CUP method used for benchmarking the transactions relating to 'guarantee commission price' charged on the AEs. Ground No. 3 is relevant here. Further, referring to the issue relating to if the said transactions are of the nature of 'international transactions' or not, he mentioned that the said issue raised before the CIT(A) is no longer pressed. Later, Sri Mehta is extremely critical of the comparables, used by the TPO for benchmarking the ALP of the said international transactions of guarantee commission price charged by the assessee, are improper as these comparables are either rejected by the Tribunal in other cases or they are not property adjusted as per the provisions of the Rule-10B(l)(a) of IT Rules, 1962, Further, he is very critical of the conclusion given by the CIT(A) in confirming the above additions. Further, he took objection not only for rejecting the assessee's guarantee commission @ 0.53% of the loan guaranteed without any sustainable reasons but also for upholding the CU Price at 3% of the TPO. However, he fairly mentioned that for the sake of settlement of the litigation, he has not pressed certain related issues raised before the CIT(A) ie (i) whether the impugned transactions constitute international transactions or not; (ii) whether the CUP Method is an appropriate method or not and (iii) whether the comparables cited by the assessee are meritorious or not with the exception of Bank of India, which is the assessee's bank. Further, referring to the comparables submitted without prejudice, ld Counsel mentioned that they are since rejected by the CIT(A), the said submission is no longer relevant as neither the assessee nor the revenue raised the same in these appeals for adjudication. Therefore, what is left for adjudication by us relates to the merits of the comparables used by the TPO in the CUP study. In this regard ld Counsel summed up by stating that the TPO used four transactions of Comparable Unparable Uncontrolled Price for benchmarking purpose. They are: (i) Allahabad Bank with the customers with guarantee commission @3% per annum; (ii) HSBC Ltd with its customers with guarantee commission rate ranging from 0.15% to 3% per annum; (iii) Dutch State - FMO transaction with Rabo India Finance Ltd with guarantee commission of 2.5% per annum; and (iv) US-EXIM Bank transaction with Jet Airways Ltd where Bank's annual guarantee commission was @ 3%.

  • (i) Allahabad Bank charges the guarantee commission @3% per annum:
  • This is the case of the bank guarantee offered to its customers. TPO used this as the comparable Uncontrolled Price in CUP method. On this comparable, ld Counsel mentioned that Allahabad Bank provides bank guarantee to the customers and charges 0.60% per quarter, which comes to 2.4% per quarter and not 3% as considered by the Revenue Authorities. These rates are applicable to the rupee loans and not foreign currency loans and they apply to the guarantee up to Rs. 10 lakh. These rates are subject to negotiations and vary from one customer to the other. The guarantees given by the bank since they do not fall into corporate guarantees which is the subject-matter in this case. The transactions between the AEs and the assessee, since the risk factor is lower side, are incomparable with that of the other bank guarantees. The fact that the Allahabad Bank which was rejected as an extra CUP, was brought to our notice. In this regard. Ld Counsel relied on the order of the Tribunal in the case of Asstt. CIT v. Asian Paints Ltd. [IT Appeal No. 1937 (Mum.) of 2010, dated 31-10-2011] and Everest Kanto Cylinder Ltd. v. Dy. CIT (LTU) [2013] 34 taxmann.com 19 (Bom.).
  • Thus, as far as the case of Allahabad Bank as a comparable is concerned, it is the case of ld Counsel that rate of 3% is factually wrong as the correct figure works out to only 2.4% ie 0.60 multiplied by 4. Further, the said 2.4% needs to be adjusted downwards because of various factors namely,- (a) guarantee commission rates applicable to rupee loan vs impugned Foreign currency loans; (b) guaranteed amount of Rs 10 cr vs Rs 450 cr applicable to assessee's transaction; (c) Bank Guarantee given to its customers vs Corporate guarantee given to the AEs of the assessee; (d) extent of Risk involved and the AEs are strong financially and therefore, the risk is minimum; and (e) In similar circumstances, Allahabad Bank is rejected by the Tribunal as the comparable in CUP method in the cases of Asian Paints Ltd. and Everest Kanto Cylinder Ltd etc.
  • (ii) FMO (Netherland Financier) charged Guarantee Commission @ 2.5 in the case of Rabo India Finance (P.) Ltd (Rabo): FMO is JV of the Netherland Government with 51% share. TPO used this transaction for benchmarking the impugned international transaction. On this comparable, Ld Counsel submitted that the essential facts relating to this comparable are not available in the public domain. In that case, it is not proper to use this transaction as Comparable Uncontrolled one. It is the submission of the assessee's counsel that considering the absence of full details in the public domain, the comparable should not be considered for CUP method, which is rated as the direct method for ALP study. Further, ld mentioned that the said transaction is not found to be. good comparable by the Tribunal While adjudicating the case of Reliance Industries Ltd. v. Addl. CIT [IT Appeal No. 4475 (Mum.) of 2011, dated 3-9-2013] and Asian Paints Ltd. ( supra). Considering the absence or the relevant facts in the public domain and binding nature of the coordinate bench order directly on FMO-Rabo transaction, the same should not be considered as good comparable for CUP analysis.
  • (iii) HSBC charges annual guarantee commission @ rates varying from 0.15% to 3%: Ld TPO considered the above rates for the CUP study of the impugned international transactions. Assessee objected to the same on many counts and the details are discussed above. The critical analysis given above in the context of the Allahabad Bank is equally relevant to this bank too. CIT(A) rejected the concept of arithmetic mean of the above range of figures. It is the submission of the assessee, on the minimum side, there is a case of 0.15% per year and it may go up to 3% depending the customers and commercial consideration. Further, he mentioned that the said comparable was rejected by the CIT(A) himself and brought our attention to item No. xxiii at page 30 of the impugned order. Further, for the proposition that HSBC is not a good comparable in CUP study, he relied on the following decisions namely (i) Asian Paints Ltd. ( supra) and (ii) Everest Kanto Cylinder Ltd., ( supra).
  • (iv) EXIM Bank of USA charged Guarantee commission @ 3% from Jet Airways Ltd: In connection with the commercial deals of hire purchase of Aircrafts by the Jet Airways from the Boeing Company of USA, the said Bank provided the guarantee to the Jet Airways and charged commission @ 3% of the agreement value. In this regard, Id counsel for the assessee mentioned that it is not the case of corporate guarantee between the AEs. Considering the fact full details of negotiations were not available in the public domain, this comparable is no longer good one. Further, ld Counsel demonstrated that when the rate of LIBOR is nearly 3%, the guarantee commission charged by the said bank cannot be 3%. The LIBOR (London Inter-bank offered rate) is the world's most widely used benchmark for short-term interest rates. Therefore, there must be many other reasons for charging the said rate of 3% in that case, which are not available in the public domain. Further, he also narrated the fact that this comparable was rejected by the Tribunal as good comparable again in the case of Everest Kanto Cylinder Ltd., ( supra)

    • 14. During the proceedings before the CIT(A), the Assessee cited the case of BANK OF INDIA as a good comparable: We find relevant to discuss this case too if it fits into the scheme of CUP method of TP studies. In this regard, Ld Counsel submitted that the Bank of India (BOI) is the financier for the assessee and the guarantee commission rates announced by the BOI to its customers can also be used as the good comparable. In connection with the Bank of India as good comparable, Ld Counsel mentioned that the rate of guarantee fee charged by this bank is 2.48% per an (page 13 of the paper book) for guaranteed amount exceeding Rs. 4 Crs. However, the Bank Manager has discretion to reduce up to 70% of such rate of guarantee specified. In that case, the guarantee rate is amenable to downward revision up to 0.75% (i.e. 2.48% X 3%) (page 11 of the letter as annexure-IV), Further, he mentioned that the figure of rate of guarantee can be reduced further by 50% of the rates, if the guarantee by way of 100% of the cash deposit is provided. Therefore, Bank guarantees are customer specific and the published rates are subjected to many factors such as interest rates, risk factors, guarantee amounts, nature of transactions, past history of the customers etc. Further, he mentioned that the rates applicable to Rs. 4 crs, should not apply to the present case, where it is Rs. 465.32 crs. Hence, as per the assessee, the rate of 0.53% benchmarked by the assessee using the expert services of the PWC is at arm's length. In any case, in principle, it is a case of Bank Guarantee rate with adjustments as per the rules 10B(I) of the IT Rules, 1962.

    15. Finally, Ld Counsel submitted that the CIT(A) erred in considering the gross rate of 3% announced by the Banks without considering the principles applicable to the CUP method in the TP studies. Sri Mehta reasoned as to how the Bank guarantee prices/rates are comparable to the corporate guarantee transactions. He summed up by stating that none of the four comparables used by the AO/TPO/CIT(A) in the CUP studies are good comparables as they are the cases of the Bank guarantee transactions and not of 'corporate guarantee'. Therefore, the comparables used for benchmarking the impugned international transaction are not legally sustainable considering the method used.

    16. List of Decisions of Tribunal - Approved Corporate Guarantee rates:

    Further, to substantiate assessee's Guarantee commission rate at 0.53% is competent and is at arm's length, Ld Counsel tabulated the list of the decisions of the Tribunal and the GC rates as approved in the said decisions and the same is reproduced as under:

    Sr. No. Order of Hon'ble Mumbai Bench of Tribunal A.Y. Guarantee fee commission Remarks
    1 Asst. CIT v. Reliance Industries Ltd. 2006-07 0.38% Based on 10 instances given on page No. 66 of order
    2 ACIT v. Asian Paints Ltd. 2005-06 0.25% 0% 0.35% Citibank - Page No. 17 of order HSBC - Page No. 19 of order
    3 Everest Kanto Cylinder Ltd. v. Dy. CIT 2007-08 0.60% ICICI bank - Page No. 21 of order.
    4 Asst. CIT v. M/s. Nimbus Communication Ltd. 2005-06 0.5% M/s Everest Kanto has been taken as an external comparable - Page No 10 of order.
    5 Asst. CIT v. M/s. Nimbus Communication Ltd. 2006-07 and 2007-08 0.5% Based on rate approved in assessee's own case for A.Y. 2005-06

    Thus, Ld Counsel's summed up and stated that Ld TPO's CUPs (Allahabad Bank, HSBC Bank, US- EXIM Bank etc.) are neither internal nor external CUPs and he failed to pick up a single appropriate 'Comparable Uncontrolled Price'. He also asserted the fact of the Tribunal has already approved the above CUPs with Corporate Guarantee commission prices/rates in the range of 0.25% to 0.6% as the benchmarked rates. In the Everest Kanto case, ICICI provides the Bank GC rate (in short, BGCR) of 0.6% and if the adjustments are made to this rate, the corporate GC rate (in short, CGCR) may fall below the said mark up of 0.53%. Further, Ld Counsel took objection to the justification given by the CIT(A) on the 'interest savings based argument' of the revenue and mentioned the impugned transactions being outside India, cannot be benchmarked based on the interest savings of the Indian interest rates and therefore, it is unsustainable. Therefore, the guarantee commission rate @ 0.53% of the instant case, as benchmarked by the assessee, is at Arm's Length. Therefore, the orders of the AO/TPO/CIT(A) should be set aside deleting impugned addition.

    17. Per contra, Sri Ajeet Jain, Ld CTT-DR for the revenue relied heavily on the orders of the AO/TPO and the CIT(A). Before rebutting the arguments of the Ld AR for the assessee, Sri Jain obtained confirmation from the Sri Mehta about the concessions given by him on the issues relating to the nature of international transactions of the impugned transactions on one side and the use of the CUP method as most appropriate method for benchmarking the said transaction. On the defects pointed out by Ld AR, namely,- A annual rate of BC of 2.4% and B. the non-granting of the adjustments on accounts of (i) risk; (ii) foreign currency loan transactions; (iii) high volume of guaranteed loan amounts etc., Sri Jam relied on the orders of the Revenue. Further, on picking up the 'price/rate' of the "bank guarantee" for benchmarking the 'price/rate' of the "corporate guarantee", Sri Jain merely mentioned that when the assessee has not provided the comparables, the TPO is justified in picking up the four comparables discussed above. Without admitting, Ld DR fairly pointed out the notable difference between the bank's guarantee commission and the corporate guarantee commission rates. Referring to the cited decisions of the Tribunal, Ld DR opined that the guarantee commission rate are basically (transaction specific and therefore the said decisions are distinguishable on facts. Further, Ld DR brought our attention to the order of the Tribunal in case of Tecnimont ICB (P.) Ltd v. Dy. CIT [2013] 145 ITD 388/37 taxmann.com 415 (Mum.) and mentioned that, in this case, TPO gathered information from SBI and applied 3% guarantee commission on the guaranteed amount of Rs. 2.9 Crs. and Tribunal sustained the same for want of evidences from the assessee. Of course, he fairly mentioned that Tecnimont ICB Ltd. (supra) was decided using Bank GCR of SBI and not the Corporate BGC rates and for want of other evidences.

    18. During the rebuttal time, as per the Ld. Counsel the transactions referred to in the said order or the Tribunal in the case of Tecnimont ICB (P.) Ltd. (supra) are not covered by the RBI approvals and this fact was not brought to the notice of the Tribunal at the time of adjudication. Therefore, this case is distinguishable. In any case, this is the case of the 'bank guarantee' and not the "corporate guarantee' and therefore, the bank guarantee prices/rates with 'naked quotes' are not good comparables. Ld. Counsel stated that the 'naked quotes' of guarantee commission published by the banks/websites of the Banks should not be adopted without granting adjustments as the differences have materially impact on the price Further, bringing our attention to the decision of the ITAT cited above., Ld. Counsel mentioned that the Tribunal has been consistently approving the guarantee commission @ 0.5% of the guaranteed amount, therefore, the guarantee commission @ 0.53% charged by the assessee from the AEs is at Arm's Length.

    Decisions of Tribunal on the TP addition

    19. We have heard both the parties, perused the orders of the Revenue Authorities, paper book filed before us along with the copies of the judgments furnished by both the parties were also considered.

  • A. The case of the assessee is that the guarantee commission @ 0.53% of the guaranteed amount is benchmarked at Arm's Length and therefore, the 'naked quotes' applicable to the bank guarantees published (i.e., Allahabad Bank @ 2.40%; HSBC Ltd. @ 0.15% to 3%), should not be applied to the impugned international transactions, which are basically 'corporate guarantees'. There is legitimate need for providing adjustment to various factors such as (i) risk profiles of the respondents for the guarantee, (ii) financial position of the loan applicants, (iii) terms of the guarantee, (iv) securities involved, (v) quantum of guaranteed amount, (vi) period of guarantee, (vii) past history of the customers, (viii) Bank guaranty v. corporate guaranty etc. Further, it is the case of the assessee that such bank guarantee commission rates vary from one customer to the other. Further, conceptually, the bank guarantees differ from the corporate guarantees both in nature and operation. The corporate guarantees, given to the Banks for safeguarding the interests of the AEs, are not given on commercial consideration unlike the banks. For banks, providing bank guaranty is a business and their charges/rates are always on the higher side. Therefore, TPO should have discounted the said naked quotes of rate of 3%. If such adjustments are granted, the rates invoked by the another bank i.e., Bank of India, which is the assessee's bank, is at Arm's Length with that of the rates charged by the assessee from its AEs. Further, it is the case of the assessee 'naked quotes' when applied in many other cases, the Tribunal held in principle, the additions made based on such naked quotes are not sustainable. Regarding SBI as a good comparable as made out by Ld DR, the stand of the assessee is that the same was not considered either by the assessee or by the revenue in their respective TP studies, the Ld DR cannot now rope in this case during the appellate proceedings before the Tribunal. He also demonstrated how it is the case of 'naked quotes' pertaining to the Bank Guarantee and not to the corporate guarantee and TP study based on such naked quotes are unsustainable in law as held by the Tribunal. He also mentioned that the tribunal accepted the CG rate of 0.38% as valid in case of Reliance Industries Ltd. ( supra).
  • B. Per contra, the case of the Revenue is that the decision of the CIT(A)/TPO/AO is proper and should be confirmed without any changes. However, the Revenue has nothing to counter on the fact of relying on the "naked quotes', which are unadjusted before using them in the TP study of the TPO. Of course, Sri Jain, in principle, agreed with the existence of the difference between the Bank and Corporate guarantees. Further on the issue of considering the Allahabad Bank or HSBC or Bank of India or the SBI, Ld Counsel fairly mentioned that if the Bank of India is considered as good comparable, SBI should also be taken into account as a good comparable. On the cases cited by the Ld Mehta, it is the argument of the Ld DR that the guarantee commission rate @ 0.5% is considered at Arm's Length.

    • Regarding SBI as the good comparable, Ld DR mentioned it is another case of bank guarantee and Tribunal approved the same for TP study in the case of Tecnimont ICB (P.) Ltd. (supra).

    20. We have considered the above divergent stands of both the parties. Undisputed facts are that the assessee started with the presumption that the transactions of providing corporate guaranty to the Bank for the loans granted to its AEs are not 'international transactions'. Of course, Ld Counsel for the assessee submitted concessions on this issue before us and therefore, we do not intend to go into the judicial expedition on this issue. There is no dispute on the fact that the assessee has not filed the TP Study Report to the TPO. However, he submitted that the guarantee commission (GC) rate of 0.53% of the loan amount and the 1.47% in respect of the L/C provided by the Bank to the AEs are at 'arm's length'. However, when the TPO assumed jurisdiction and picked up four comparables namely, Allahabad Bank, HSBC, EXIM BANK of USA and the Dutch State, FMO-Rabo India Finance Co. Ltd, and proposed to benchmark the impugned international transactions, Ld Counsel for the assessee started being critical of them as 'good comparables', Assessee filed plethora of decisions of the tribunal to demonstrate that the 'naked quotes' applicable to the Bank Guarantee are not to be considered in the TP studies. Further, in principle, the BG are different from the corporate guarantees. Further, relying of various said decisions of the Tribunal, Ld Counsel mentioned that the corporate GC rates of 0.25% or 0.35% or 0.38% or 0.5% as tabulated above are considered to be at Arm's length in the cases of Asian Paints Ltd. (supra) and Reliance Industries Ltd. (supra) etc. Before, we undertake the brief summary of some of the decisions of the Tribunal who held that the CGC rate of below the mark up of 0.53% is at Arm's length, we shall briefly analyse the CUP method and the differences between the Bank Guaranty and the Corporate Guaranty.

    Bank Guarantee Rates (BGR) v Corporate Guarantee Rates (CGR) - Differ substantially to effect the price -Adjustments are called for u/s 10B(1):

    21.Are BGCRs are good CUPs for benchmarking the CGCRs?: Comparable Uncontrolled Price/rate - CUP method, undisputedly applicable to this case, is the most direct assessment of whether the ALP is complied with as it compares the price or rate or value of the transactions. This method uses comparable rates concluded by the uncontrolled parties of a transaction. Depending on parties to the transaction, the CUP may be of two types: (i) Internal CUP or the (ii) External CUP. Internal CUP involves the transaction between the assessee and the unrelated or Independent third party, who does not belong to the controlled group. The External CUP involves the comparison to the price of a comparable transaction between third party enterprises. In the instant case, admittedly, there are no internal CUPs. Therefore, the external CUPs have to be identified ideally for the TP study. It is in this background, we need to study the Bank GC prices are good external CUPs.

    22. Now we shall address to the contangurous issue of equating the BG with the CG for TP studies and use of the BG rates for benchmarking the CG rates in CUP method. In most of the TP studies, the TPOs are frequently using the BG rates, that to, the naked quotes for benchmarking the CG Rates without making requisite downward adjustments to the said BG Rates by factoring the obvious differences. List of differences are detailed in the preceding paragraphs of this order. The Tribunal is consistently disapproving this trend as evident from the plethora of cited decisions. We shall now discuss if the BGR and CGR are equal and comparable.

    23. It is in this background, we take out some time to distinguish these types of Guarantees. Normally, the Bank Guarantee or Corporate Guarantee is given by a Bank or the Company as the case may be to the financing Bank for acknowledging obligation to the Terms of Contract. Bank Guarantee is provided by the Company's Banker on behalf of the Company for a certain sum of money to the Customer. If all the terms of the Contract is not fulfilled by the Company then the Customer can claim that amount from the Bank and the Bank is obligated to pay and recover from the Company. Bank Guarantee is a foolproof instrument of security for the Customer and failure to honor the guarantee is treated as deficiency of services of the Bank under the Banking Laws. On the other hand, the CG - Corporate Guarantee is provided by the Company either to the Customer for the same or to the Bank for giving loans to the sister concerns/AEs of the said company; but it is not foolproof. Failure to honor the guarantee may attract contract laws and it is however a legally valid document and the Customer/Bank can sue the Company in Court if it does not pay up. In the Corporate Guaranty, a guarantee of payment is made by a corporation on behalf of another business entity. The guarantee is provided in consideration of a vendor providing credit to a business on whose behalf the guarantee is made. In the Bank guaranty, a surety, surety bond or guaranty, in finance, is a promise by one party to assume responsibility for the debt obligation of a borrower if that borrower defaults. The person or company providing this promise is also known as a "surety" or as a "guarantor". Under banking regulation, the case of dishonored guaranty is considered as service deficiency. In fixing the charges, the type of Guarantee, track record of customers and their financial position are the guiding factors in deciding the Guarantee limit, security and margin are often considered on case to case basis. Therefore, there is conceptual differences in these two types of the guarantees. Hence, TPO's are not justified in mechanically picking up the BG rates as the external/internal CUPs, as the case may be. Yes, they may turn out to be appropriate good CUPs if they are properly bench marked after making due adjustments in accordance with the provisions of the relevant rules 10B (relating to CUP method) of the Income tax Rules, 1962. Since the TPOs have not been benching the naked quotes of the BG rates with proper and sustainable adjustments, Tribunal is constantly disapproving the said quotes. The case of Tecnimont ICB (P.) Ltd. (supra) is an aberration and the background facts this case are distinguishable. Therefore, unless the 'naked quotes' of the bank guarantee rates as given in the websites for public, are adjusted to various controlling factor narrated above, these rates are no good CUPs. AO/TPO/CIT(A) have not provided adjustments to such factors in benchmarking the impugned international transactions.

    Discussion on the Tribunal Orders on the Corporate Guarantee Rate- CGR:

  • A. Asia Paints Ltd - Order of the Tribunal: We shall first take up the facts relating to the case of CGR and the decision in the case (ITA No. 408 & 1937/M/2010). In this case, Asia Paints Ltd. ( supra) gave a corporate guarantee to HSBC Bank, Singapore and Citibank, Singapore in connection with loans granted by the Bank to its AE (Berger International Ltd). 0.35% and nil are the guarantee rate charged by the HSBC and Citibank of India in year 2004-2005. Thus, it is the case of charge of CG by the Indian branches of the bank on the assessee for providing guarantee to the foreign banks. On these facts, the TPO rejected the said rates and picked the 'naked quotes' at 3% available in the website of ICICI Bank. TPO also considered the guarantee commission rates of (i) Allahabad Bank, (ii) HSBC Bank (iii) ICICI and (iv) Dutch State/FMO - Robo India Finance Ltd and rejected the same by holding that the same is unsustainable. CIT(A) reasoned that bank commission rate never higher them the interest rates charged on the loans. He, however, deleted the addition in this case. The same confirmed by the Tribunal vide its order dated 31.10.2011 and the relevant portion from the said order of the Tribunal (para 38) reads as under:
  • "38.... Therefore, in view of the above facts of the 'naked quote' available in the website of the Allahabad Bank, HSBC Bank and ICICI Bank, where even the report itself indicate that the rates varied from 0.15% to 3%. In view of the facts of the case,.... there is no need to make any adjustment in the transfer pricing ... and the order of the CIT(A) required to be confirmed. Accordingly, the ground raised by the Revenue is rejected."
  • B. Reliance Industries Ltd. ( supra).
  • Benchmarking of CGC rate is the issue in this case too for the AY 2003-2004, Assessee provided a corporate guarantee to Bank of America in connection with loans of Euro 80 Million taken by its AE (i.e., Trevira GmbH). Parent company did not charge any guarantee commission to Trevira GmbH. Here also, Ld TPO did not accepted the same and again relied on the transactions with Robo India Finance Pvt Ltd, where 2.5% of Grantee commission was charged by the Dutch State FMO. During the assessment it, assessee cited BGR of ICICI with guarantee commission rate of 0.25%. However, for TPO, 2.5% of the guarantee commission of Euro 80 Million is at Arm's Length Price and made addition of Rs. 11.27 crs in this case. Assessee took an argument that it is the responsibility of the parent company to provide guarantee to its subsidiaries / AEs, therefore, in principle, no commission is chargeable. In this case, assessee also relied on the guarantee commission rate of Bank of India, which varies 0.25% to 0.6%. The guarantee commission should never exceed 0.25% in any case and relied on the bank guarantee rates of HSBC Bank, HDFC Bank, ICICI Bank, ABN AMRO Bank, Standard Chartered Bank, Bank of America etc. At the end, CIT(A) dismissed the TPO's guarantee commission rate of 2.% and benchmarked the international transactions applying the rate of 0.38% instead of 2.5%. The Tribunal confirmed the same and paras 52.10 to 52.12 of the order of the Tribunal dated 13.9.2013 are relevant in this regard. Relevant paras 52.10 to 52.12 of the order of the Tribunal read as under:
  • "52.10.... However, It is a fact that while applying the external comparables, the TPO has not brought out anything on record that under which terms and conditions and circumstances the said public company has charged 2.5% rate of guarantee commission for providing guarantee on behalf of the Finance Company. The charging of a guarantee commission depends upon transactions to transaction and mutual understanding between the parties. There may by a case where bank may not charge any guarantee commission, depending upon its evaluation of relationship and with a guarantee commission, depending upon its evaluation of relationship with a particular client. Therefore, universal application of rate of 2.5% for guarantee commission cannot be considered a market rate as it largely depends upon the terms and conditions on which loan has been given, risk undertaken, relationship between bank and the client, economic and business interest etc. In the case, before us when the assessee has itself paid guarantee commission at the rate varying from 0.25% to 0.6% per annum to third party and considering the fact that the assessee has stated that it has not incurred any cost for providing guarantee to the bank for the loan given to its subsidiary, we are of the considered view that applying the rate of 2.5% by TPO based on external comparables is not justifiable and cannot be confirmed.
  • 52.11.
  • 52.12. We are of the considered view that the Ld CIT(A) on the facts and circumstances of the case has rightly taken average rate on which the assessee has paid guarantee commission to third party, which comes to 0.38%. Hence, we uphold the order of the CIT(A) to charge guarantee commission at the rate of 0.38% being ALP for guarantee given by the assessee to Bank of America on behalf of its AE Trevira GmbH. In view of the above, we reject ground no.9 of the appeal taken by assessee as well as ground no. 6 of the appeal taken by the department."
  • C. Everest Kanto Cylinder Ltd. ( supra)
  • This is the case where the assessee provided the corporate guarantees to the Bank of Bahrain for obtaining the working capital facilities to its sister concerns up to USD 5 million and also for itting capital loans. Assessee charged 0.5% as guarantee commission from its subsidiary. Holding the said CGC rate is not at ALP, Ld TPO picked up BGCR of Allahabad Bank, Dutch State FMO - Robo India Finance (P.) Ltd. ( supra) and benchmarked the transactions @ 3% against the assessee's guarantee rate of 0.5%. CIT(A) held that the guarantee rate charged by the assessee have to be seen from the perspective of the international transactions and held that the BGCR of 3% is good comparable i.e. 'Incomparable Uncontrolled Price' - IUP. Finally, relying on the decision of Mumbai Bench, ITAT in the case of Asia Paints Ltd. ( supra) and other decisions of the Tribunal held that the guarantee commission of 0.5% is at Arm's Length. The decision of the Tribunal is given vide para 21 of its order dated, 23.11.2012 and the relevant portion from the said para reads as under;
  • "21.... Thus, on these facts, we do not find any reason to uphold any kind of upward adjustment in ALP in relation to charging of guarantee commission. Hence, the addition of Rs, 28,50,353/- on account of TP adjustment on guarantee commission is hereby deleted and the order of the CIT(A) is set aside...."

    • From the above orders of the Tribunal, it is adequately clear that the "naked quotes" of the bank guarantee commission rates kept in the website of the banks should not be applied in the TP studies without adjustments to various factors of the transactions. These factors may be risk related ones, time related guaranteed amount, financial strength of the AEs, background of the customers and the relationship of the AEs with the parental companies etc. The additions made are legally unsustainable, if the additions are made solely based on the website information of the banks, In principle, bank guarantees (in short - BG) are different from that of the corporate guarantee. Though untested in this case, in our prima facie opinion, a Bank Guarantee comparable may not clear the test of FAR analysis, which applies equally and relevant for the CUP method of ALP studies. Reliance is placed in the case of Arvind Mills Ltd. v. Assistant Commissioner Of Income Tax [2011] 11 taxmann.com 67 (Ahd.) . The commercial considerations are paramount in fixing the charges when providing guarantees to its customers. On the other hand, a corporate guarantee operates not for business considerations but to provide adequate safeguards for the financial health of its sister concerns / AEs, Guarantor, like the present assessee, sometimes duty-bound to provide guarantee to the loans given by the financial institutions to the sister concerns abroad, Bank rates are mostly customer-specific and they vary downward., if cash deposits equallent of loan are given to the Bank. Thus, comparing the bank guarantee commission transactions with the that of the corporate bank guarantee transactions is prima facie incorrect so long as the FAR analysis is applied successfully and the CUP are appropriately adjusted in accordance with the Rule 10B of the IT Rules, 1962. Therefore, applying the 'quote' available on the website of the banks without making adjustments, duly necessary, makes ALP studies erroneous.

    24. Summary: Therefore, there is no dispute on the use of CUP method as most appropriate method to these GC transactions. Controllable Uncontrolled Price - CUP method is applied when a price is charged for a product or service and service is the case here. Further, academically, the CUP can be internal or external. Internal CUP, being the comparability of the similar transaction between the assessee and the unrelated party, are admittedly not available to either parties of the dispute. Therefore, the exploration is for external CUP Revenue authorities have roped in four, or such CUPs and mostly Banks with bank guarantee transaction prices/rates. As detailed above the GC transaction rates available on the websites of Bank of India, Allahabad Bank, HSBC, EXIM BANK OF USA and the Rabo India Finance (P.) Ltd, are held by the Tribunal as not good comparables on comparable facts. On this facts of the present case too, we are of the opinion, they are not appropriate external CUPs. The 'external CUP' by definition is a price charged in comparable Uncontrolled price between third parties when compared to the price of a controlled transaction with the AE. None of the CUPs used by the TPO falls within the said definition of external CUP. Thus, there are no 'internal CUP' on one side and the CUPs used by the TPO/CIT(A) are also outside the scope of the definition of the 'external CUP'. Further, as stated earlier, we find that the 'bank guarantee' rates are practically different from that of the 'corporate guarantee'

    25. Further, we find there are various GC rates in existence. While there is GC rate of 0.38% which is approved by the Tribunal in the case of Reliance Industries Ltd. (supra) there is GC rate of 0.5% as approved by the Tribunal in the case of Everest Kanto Cylinders Ltd. (supra) and Asstt. CIT v. Nimbus Communications Ltd. v. [2013] 34 taxmann.com 298/145 ITD 502 (Mum.) there is GC rate of 0.25% as approved by the Tribunal in the case of the Asian Paints Ltd. (supra). The GC rate of 3% as announced by the Bank for the Bank guarantee Transactions stand dismissed by Tribunal in all the above cases. Reasons for such rejection include: these are the 'naked quotes'; and (ii) the said 3% is always subjected to negotiations between the Bank and its customer; (iii) TPO has not provided adjustments at all before benchmarking the impugned transactions at 3%, etc. In any case, it is our opinion that the Bank Guarantee Commission Prices cannot be used as External CUPs to benchmark the Corporate Guarantee Commission Prices. Further, we find that, unlike in other cases of NIL corporate guarantee commission, the present assessee has charged the GC Rate of 0.53% and 1.47% from its AEs. Therefore, in our opinion, these rates are competent given the facts of the present case qua the rates discussed and approved by the Tribunal in adjudicating the other cases relating to the Guarantee commission transactions benchmarked using the CUP method. Therefore, the TPO's comparables are IUPs' i.e. Incomparable Uncontrolled Prices. Therefore, .we are of the opinion, the GC rates of 0.53% and 1.47% benchmarked by the assessee are fair and reasonable and they should be accepted without any modification. Therefore', we dismiss the TPO's CUP and order deletion of the additions made by the AO on account of Transfer pricing, provisions. In the result, the order of the CIT(A)/TPO/AO on the TP adjustments is set aside. Thus, the grounds 1 to 5 are allowed as above.

    Decisions of the Tribunal on Non-TP additions

    26. Ground no.6 relates to claim of depreciation of Rs. 3,80,35,331/- in connection with the capitalized product development charges incurred in the AY 2005-2006. Assessee raised this claim without prejudice to the original claim of expenditure u/s 35(2AB) of the Act. Assessee capitalized the above expenditure to the Goa unit and claimed depreciation since the AY 2005-06 onwards. The claim of depreciation of Rs. 3.8 Crs (rounded off to nearest lakh) is part of the said claim for the current year. On the initial claim of deduction u/s 35(2AB) of the Act, the Tribunal finally allowed the same in favour of the assessee and the contents of para 34 of the order of the Tribunal - ITA No.6916/M/2008, is relevant. Since, the said order of the Tribunal was not accepted by the Revenue, the issue was pending before the Hon'ble High Court of Bombay for the AY 2005-2006, assessee continues to make this parallel claim of depreciation without prejudice, During the proceedings before the first appellate authority, in connection with the claim of depreciation of Rs. 3.8 Crs for AY under consideration 2008-2009, the assessee submitted and reiterated the abovementioned facts and the arguments. On hearing the assessee, CIT(A) dismissed the claim of the assessee considering the binding nature of the order of the Tribunal (supra) and also the relief granted by the Tribunal to the assessee u/s 35(2AB) of the Act. In this regard, para 12.3 of the order of the CIT(A) is relevant here. Per contra, Ld DR relied on the orders of Revenue Authorities.

    27. We have heard both the parties on this issue and perused the orders of the Revenue Authorities, in general, and para 12.3 of the CIT(A)'s order in particular. We have also perused the cited decision of the Tribunal. On perusal of the CIT(A)'s order, we find the said para 12.3 is relevant here and the same is reproduced hereunder.

    "12.3. The facts of the case have been considered together with the submissions of the appellant as against the observations / findings of the AO, in his order. As in the facts of the case as it stands today, the entire expenditure as incurred by the appellant of Rs. 20,28,55,097/- has been allowed by the Hon'ble ITAT u/s 35(2AB) in the AY 2005-2006, the question of such expenses being capital in nature and allowing of consequent depreciation as would be otherwise admissible for the A Y under consideration, does not arise. Accordingly, this ground of appeal is dismissed."

    28. The original claim of deduction u/s 35(2AB) in the AY 2005-2006 is allowed and therefore, the alternate claim of depreciation is rightly rejected. Considering the relief granted by the Tribunal, allowing depreciation on the said amount is not sustainable. Therefore, we are of the considered opinion that the order of the CIT(A)j is fair and reasonable-and it does not call for any interference. Accordingly, ground no.6 raised by the assessee is dismissed.

    29. Ground no.7, relates to granting of deduction u/s 80-IB of the Act in respect of export benefits in the form of DEPB licenses amounting to Rs. 2,81,75,586/-. In this regard, Ld Representatives of both the parties fairly mentioned that this issue is to be decided against the assessee in view of the binding judgment in the case of Liberty India v. CIT [2009] 317 ITR 218/183 Taxman 349 (SC) , which is relevant for the proposition that the benefit in the form of DEPB licenses are not entitled for deduction u/s 80-IB of the Act. In this regard, the conclusion given in the said case of Liberty India (supra) is reproduced as under:

    "The duty drawback receipt/DEPB benefits do not form part of the net profits of eligible industrial undertaking for the purposes of section 80-1/80-[A/80- IB]. [ Para 24]"

    29.l On hearing both the parties and after considering the settled nature of the issue at the level of Hon'ble Supreme Court in the case of Liberty India (supra), we are of the opinion that the assessee is not entitled for claim of deduction of such receipts. Accordingly, ground no.7 raised by the assessee is dismissed.

    30. Ground no.8 relates to charging of interest u/s 234B of the Act on the enhanced book profits u/s 115JB of the Act. In this regard, it is the argument of the Ld Counsel that the said interest cannot be charged on the assessee in view of the amendment brought in by the Finance Act, 2009 with retrospective effect from 1.4.2001. In this connection, assessee relied on the factual matrix of the case that the return of income was filed before the said retrospective amendment and the assessee is not expected to do the impossible. In this regard, Ld Counsel brought our attention to the judgment/of the Hon'ble Calcutta High Court in the case of Emami Ltd. v. CIT [2011] 337 ITR 470/200 Taxman 326/12 taxmann.com 64 the proposition that the interest u/s 234 need not be charged when the returns are filed prior to the amendment and the assessee cannot be expected to do the impossible by expecting such amendments. Paras 15 & 16 of the said judgment of the Hon'ble Calcutta High Court (supra) is relevant in this regard. We have perused the ratio of the said judgment and the held portion of the said judgment of the High Court reads as under:

    "Held, that the last date of the relevant financial year was 31-3-2001 and on that day, admittedly, the assessee had no liability to pay any amount of advance tax in accordance with the law then prevailing in the country. Consequently, the assessee paid no advance tax and submitted its regular return on 31 10-2001 within the rime fixed by law wherein it declared its total income and the book profit both as nil. However, consequent to the amendment of the provisions contained in section 11SJB by virtue of the Finance Act, 2002 which was published in the official gazette on 11-5-2002 giving retrospective effect to the amendment from 1-4-2001, the assessee first voluntarily paid a sum of Rs. 1,55,62,511 on account of the tax payable on book profit as provided in amended provision of section 115JB and then filed its revised return 31-3-2003 declaring its business income as nil but the book profit under section 11530 as Rs. 20,63,65,711. The Assessing Officer accepted such return of income but imposed interest under sections 234B and 234'C. "

    30.1 Further, in support, Ld AR filled the decision of the ITAT, Mumbai in the case of Essar steel India Ltd. v. Addl. CIT [IT Appeal No. 7013 (Mum.) of 2011, dated 27-9-2013] wherein, by relying on the judgment of the Hon'ble Calcutta High Court in the case of Emami Ltd. (supra), the Tribunal decided the case in favour of the assessee and against levy of interest u/s 234B of the Act in respect of such enhanced amounts to book profits u/s 115JB of the Act. On the other hand, Ld DR relied on the order of the AO.

    31. We have heard both the parties and perused the orders of the Revenue Authorities as well as the cited decisions and the relevant material placed before us. On hearing both the parties, we are of the opinion that it is a settled legal proposition that the interest could not be levied u/s 234B of the Act in respect of such enhanced book profits under section 115JB of the Act, The said judgment of the Hon'ble Calcutta High Court and also the order of the Tribunal is squarely applicable to the facts of the present case. Considering the settled nature of the issue, we are of the opinion that the assessee is entitled to relief and the ground no.8 raised by the assessee is allowed.

    I.T.A. NO.5488/M/2012 (AY: 2008-2009)

    (By Revenue)

    32. This appeal filed by the Revenue on 30.8,2012 is against the order of the CIT(A)-1.5, Mumbai dated 20.6.2012 for the assessment year 2008-2009, In this appeal, Revenue raised the following grounds which read as under:

  • "1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition of Rs. 6,88,842/- made by the AO u/s 41(1) of the Act on account of cessation of liabilities towards payment of sundry creditors.
  • 2. On the facts and in the circumstances of the case and in law, the CIT(A) erred in deleting the disallowance of depreciation of Rs. 8,32,320/- on royalty payments made to M/s. Lyka Labs for acquiring trademark."

    • 33. Ground no. l relates to the addition of Rs. 6,88,842/- on account of creditors outstanding for more than three years. Briefly stated relevant facts in this regard are that the during the assessment proceedings AO observed that a list of 281 creditors was furnished by the assessee, where Rs. 38,56,464/- was shown outstanding for more than 3 years. AO further noticed that out of the said amount, Rs. 31,67,622/- pertains to 232 creditors, which had been taxed in the AYs 2005-06; 2006-07 and 2007-08. The remaining amount of Rs. 6,88,842/- pertains to 49 creditors and there was no movement in the creditors account in the books of the assessee. In this regard, assessee contended before the AO that some of the creditors have been subsequently paid off but no evidences were furnished to support his contention. After considering the assessee's submission, AO came to the conclusion that since, these liabilities are outstanding for a period of 3 years, the same ceases to exist and AO made addition u/s 41(1) of the Act and the said amount of Rs. 6,88,842/- was brought to tax. Aggrieved with the decision of the AO, assessee filed an appeal before the first appellate authority.

    34. During the proceedings before the first appellate authority, assessee submitted that in the earlier assessment years the Revenue Authorities have considered the assessee's argument and deleted the addition made u/s 41(1) of the Act by following the decision of the Tribunal in the assessee's own case for the AY 2005-2006 vide ITA NO.6916/M/2008, dated 20.10.2010 (paras 35 to 37 of the said order of the Tribunal are relevant in this regard). After considering the assessee's submissions and perusing the order of the Tribunal, CIT(A) granted relief to the assessee and allowed the appeal on this ground vide para 5.3 of his order, Aggreved with the above decision of the CIT(A), Revenue is in appeal before the Tribunal by raising the abovementioned ground no.l.

    35. During the proceedings before us, Ld DR dutifully relied on the order of the AO and mentioned That the assessee could not substantiate the 49 outstanding creditors has been subsequently paid off except relying on the earlier AYs' orders of the Revenue Authorities as well as the order of the Tribunal. On the other hand, Ld Counsel heavily relied on the order of the CIT(A) as well as the order of the Tribunal in the assessee's own case for the AY 2005-2006 and reiterated the submissions made before the lower authorities.

    36. We have heard both the parties on this issue, perused the orders of the Revenue Authorities and the relevant material placed before us. We have also perused the order of the Tribunal for the AY 2005-2006 (supra) and the order of the CIT(A) in general, para 5.3 in particular. On perusal of the said para 5.3 of the impugned order, we find it relevant and the same is reproduced here under:

    "5.3. I have considered the facts of the case and submissions of the appellant as above against the observation/finding of the AO in this regard. This issue is covered by the order of the ITAT in appellant's own case for the AY 2005-2006, After discussing facts of the case, provisions of section 41(1) of the Act and further following the order of the Hon'ble ITAT, the Ld CIT'(A)-24, in the appellant's case for AY 2007-2008, held that the addition made by the AO was not justified. In the year under consideration also the AO has not been able to bring any evidence on record to prove that liability in respect of such amounts have ceased to exist. Accordingly, keeping in mind the facts of the case and following principles of judicial discipline and judicial consistency, the addition made by the AO cannot be sustained. Accordingly, this ground of appeal filed by the appellant is allowed."

    37. Considering the above settled position, we are of the opinion that the issue under consideration is squarely covered by the order of the Tribunal for the AY 2005-2006, dated 20.10.210 (supra) and the CIT(A) has rightly adjudicated the issue in favour of the assessee by following the said order of the Tribunal. Therefore, in our view the order of the CIT(A) is fair and reasonable and it does not call for any interference. Accordingly, ground no. l raised by the Revenue is dismissed.

    38. Referring to ground no.2, at the outset, Ld Counsel brought our attention to the order of the Tribunal in the assessee's own case for the AY 2005-2006 vide ITA No.6831/M/2008 and mentioned that the ground no.6, in the said appeal for the AY 2005-2006, is exactly similar to the ground no.6 in the present appeal. Further, he mentioned that this issue has to be decided in favour of the assessee. Paras 5 & 6 of the said order of the Tribunal (supra) for the AY 2005-06 dated 20.10.2010 are relevant in this regard. Ld DR also fairly mentioned that the ground no.2 is similar to that the ground no.6 and the same may be decided in favour of the assessee.

    39. We have heard both the parties and perused the orders of the Revenue Authorities as well as the cited decisions of the Tribunal (supra). We have also perused the relevant facts in the assessee's own case as well as the finding of the Tribunal in the earlier assessment years on this issue. We have noticed that the issue raised in ground no.2, is exactly identical to that of the ground no.6 adjudicated by the Tribunal vide its order dated 20.10.2010 (supra). Considering the relevance of the finding of the Tribunal for the AY 2005-06 vide paras 5 & 6, for the completeness of this order, we reproduce the said paras hereunder:

    '5. Ground no. 6 is in respect of deleting the disallowance of depreciation of Rs. 19,72,907/- on royalty payment made to M/s. Lyka Laboratories Ltd. without appreciating the fact that such royalty payment is not a depreciable asset and that similar relief allowed in the earlier years has not been accepted by the department.

    5.1 The learned representatives of the parties submitted that similar issue arose in A. Y. 2002-03 by ground no. 3 of grounds of appeal filed by the revenue. We find that similar issue has been decided by ITAT in assessee's appeal for the A. Y. 2002-03 vide order dated 30/09/2010. The relevant findings are reproduced as under:

    39. The learned representative for the assessee submitted that the issue is covered by the order of the Tribunal in assessee's own case for the assessment year 2001-02 in ITA No, 6477/M/04 and others order dated 9th July, 2008 = (2008-TIOL-531-ITAT-Mum). The relevant facts and findings of the ITAT are as under:

    "16. The next dispute in the Revenue's appeal relates to allowing of depreciation of Rs 69,97,585/- in respect of royalty payments. We have heard the learned counsel for the assessee and gone through the discussions in para 13.6 to 13.10 and agree with the view of the learned CIT(A) that the examination of the agreement as a whole shows that in substance the royalty in payment has been made to acquire the brands and it is evident that such payment forms part of the cost of acquisition of brands and therefore, forms part of the total cost of the asset In respect of the expenditure incurred on technical know-how, the assessee entitled to depreciation under section 32 of the Act. We decline to interfere.

    AO followed the detailed discussion made in the assessment year 2001-02 the CIT(A) also allowed the assessee's claim following the order of the CIT(A) for the assessment year 2001. Since, the facts are identical we respectfully follow the order of the ITAT and in the light of that the order of the CIT(A) is confirmed."

    6. Since facts are identical in this year, therefore, it is covered by the order of ITAT in assessee's own case, we accordingly following the order cited supra confirm, the order of the CIT(A) on this issue.'

    40. Considering the above settled nature of the issue and following the 'principle of consistency', we are of the opinion that the assessee is entitled to get relief in this present AY 2008-09 also, as allowed by Tribunal for the earlier AYs. Accordingly, ground no.2 raised in the appeal is decided in favour of the assessee and the ground raised by the Revenue stands dismissed.

    41. In the result, the appeal of the revenue is dismissed.

    SHURTI

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