Corporate guarantee qualifies as international transaction under Transfer Pricing rules. Tribunal determines arm's length price.

The Tribunal held that the corporate guarantee provided by the assessee qualifies as an international transaction under Transfer Pricing regulations. The arm's length price was determined by applying a 0.5% commission rate on the corporate guarantee, deviating from the 1.04% rate imposed by the Transfer Pricing Officer. The use of data obtained under section 133(6) of the Act was upheld, emphasizing the TPO's duty to correctly determine the arm's length price. The penalty proceedings under section 271(1)(c) were not specifically addressed. The appeals for AY 2010-11 and 2011-12 were partly allowed in favor of the assessee.

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Issues Involved:
1. Legality of corporate guarantee as an international transaction.
2. Determination of arm's length price (ALP) for corporate guarantee.
3. Appropriateness of the rate of commission on corporate guarantee.
4. Use of data obtained under section 133(6) of the Act.
5. Initiation of penalty proceedings under section 271(1)(c) of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Legality of Corporate Guarantee as an International Transaction:
The assessee contested that the provision of a corporate guarantee does not qualify as an international transaction under the Transfer Pricing (TP) regulations. The assessee argued that the guarantee was a shareholder activity and did not have any substantial impact on the profits, income, losses, or assets of the company. However, the Tribunal referred to the jurisdictional High Court decision in the case of CIT v. Everest Kanto Cylinders Ltd., which held that a corporate guarantee issued by a holding company for the benefit of its AE (subsidiary) is indeed an international transaction. Therefore, the Tribunal concluded that the corporate guarantee provided by the assessee qualifies as an international transaction.

2. Determination of Arm's Length Price (ALP) for Corporate Guarantee:
The Transfer Pricing Officer (TPO) made additions to the arm's length price of the international transactions by imputing a commission on the corporate guarantee provided by the assessee. The TPO used data obtained from various banks under section 133(6) of the Act to determine a mean margin of 1.04% per annum and applied this rate to the total corporate guarantee given by the assessee. The CIT(A) and DRP upheld the TPO's findings, stating that the corporate guarantee provides a benefit to the AE and thus a guarantee fee is to be charged.

3. Appropriateness of the Rate of Commission on Corporate Guarantee:
The assessee argued that the 1.04% rate applied by the TPO was too high and not comparable to the nature of the corporate guarantee provided. The Tribunal noted that the jurisdictional High Court in the case of Everest Kanto Cylinders Ltd. held that the considerations for a corporate guarantee are distinct from those of a bank guarantee. The Tribunal concluded that the rate of 1.04% adopted by the TPO was not appropriate and directed the AO to adopt a 0.5% commission on the corporate guarantee, as per the jurisdictional High Court's decision.

4. Use of Data Obtained Under Section 133(6) of the Act:
The assessee contended that the TPO erred in using data obtained from various banks under section 133(6) of the Act without providing adequate opportunity for the assessee to be heard. However, the Tribunal upheld the use of such data, stating that there is no bar in using information collected under section 133(6) for determining the ALP. The Tribunal emphasized that the TPO is obligated to determine the ALP correctly and can use all powers available for this purpose.

5. Initiation of Penalty Proceedings Under Section 271(1)(c) of the Income Tax Act, 1961:
The assessee argued that the initiation of penalty proceedings for concealment of income or furnishing inaccurate particulars of income was erroneous, as the assessee had fully disclosed all material facts and documents during the assessment proceedings. The Tribunal did not specifically address this issue in the detailed analysis, focusing instead on the primary issues related to the corporate guarantee and its ALP.

Conclusion:
The Tribunal concluded that the corporate guarantee provided by the assessee qualifies as an international transaction and must be benchmarked to determine the ALP. However, the Tribunal directed the AO to adopt a 0.5% commission rate on the corporate guarantee, aligning with the jurisdictional High Court's decision. Consequently, the appeals filed by the assessee for AY 2010-11 and 2011-12 were partly allowed.

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