2021 (9) TMI 1393 - AT - Income Tax

Tribunal adjusts corporate guarantee principle & interest on receivables in appeal decision

The tribunal upheld the corporate guarantee adjustment principle, citing a decision by the Madras High Court. However, it reduced the quantification of ... Corporate guarantee adjustment @2% commission rate - AR contention before us is that the assessee has not derived any income since the corresponding corporate guarantee’s object was to help the overseas associated enterprise ‘AE’ which nowhere yielded any returns thereupon - HELD THAT:- We express our inability to accept the assessee’s instant former substantive grievance. We make it clear that we are dealing with Chapter-X of the Act which is in the nature of a “Special Provision” not dependent upon actually derived income component; whatsoever. Coupled with this, hon'ble Madras high court’s decision PCIT Vs. M/s.Redington (India) Ltd., [2020 (12) TMI 516 - MADRAS HIGH COURT] holds that a corporate guarantee to be an international transaction u/s.92B, Explanation-(c) with retrospective effect from 01-04-2001. We thus, affirm the impugned corporate guarantee adjustment in principle. Quantification of the impugned guarantee - We affirm the impugned adjustment @0.875% as against the assessee’s stand that the same ought to be taken as 0.5% only. We therefore partly accept both the learned representatives’ arguments against and in favour @2% commission in issue to this limited extent. The assessee’s instant former substantive ground succeeds in above terms. ALP adjustment pertaining to interest on receivables emanating from the order of TPO’s and DRP’s directions going by interest rate @7.5% as per SBI domestic term deposits returns - As we need not delve much deeper qua the relevant facts pertaining to the instant issue. We find that assuming but not accepting that the ld.lower authorities have rightly found the assessee’s interest receivables as beyond the period involving uncontrolled transactions, the impugned adjustment is not liable to be sustained for the sole reason that the same has not only been made as per ‘LIBOR’ rate applicable in case of international transactions after taking State Bank of India’s term deposit(s) rate only but also no comparable to this effect in the very segment has been found so as to form the necessary benchmarking in uncontrolled circumstances. The impugned ALP adjustment is directed to be deleted therefore. Issues involved:1. Correctness of corporate guarantee adjustment2. Quantification of the corporate guarantee adjustment3. ALP adjustment regarding interest on receivablesAnalysis:Issue 1: Correctness of corporate guarantee adjustmentThe appeal for AY.2016-17 was against an assessment framed by the National Faceless Assessment Centre, Delhi, following directions from the Dispute Resolution Panel in Bengaluru. The primary issue was the correctness of the lower authorities' action in making a corporate guarantee adjustment of Rs.1,52,39,800 at a 2% commission rate. The authorized representative argued that since the corporate guarantee did not yield any income, no adjustment should have been made. However, the tribunal clarified that Chapter-X of the Income Tax Act is a 'Special Provision' not dependent on actual income. Referring to a decision by the Madras High Court, it affirmed the corporate guarantee adjustment in principle.Issue 2: Quantification of the corporate guarantee adjustmentThe tribunal considered the quantification of the corporate guarantee adjustment, citing a previous decision in a similar case. The adjustment of Rs.3,51,06,335 was deleted based on the appellant's charge of 0.875%, which was considered reasonable. Despite the appellant's argument for a 0.5% adjustment, the tribunal upheld the adjustment at 0.875% due to the appellant's recorded comparable guarantee commission at 8.75%. The tribunal partly accepted arguments from both sides, affirming the adjustment at 2% commission to a limited extent.Issue 3: ALP adjustment regarding interest on receivablesThe third issue involved an ALP adjustment of Rs.82,66,546 related to interest on receivables. The adjustment was based on the Transfer Pricing Officer's and DRP's directions using a 7.5% interest rate. The tribunal found that the adjustment was not sustainable as it was based on the LIBOR rate applicable to international transactions, with no comparable found for benchmarking in uncontrolled circumstances. Consequently, the ALP adjustment was directed to be deleted.In conclusion, the tribunal partly allowed the appeal, addressing each issue raised and providing detailed reasoning for its decisions. The order was pronounced on 23rd September 2021.