2022 (6) TMI 1300 - AT - Income Tax

Partial Win in Income Tax Appeal: International Transaction Rate Adjusted

The appeal challenging the final assessment order under the Income Tax Act for the assessment year 2014-15 was partly allowed. The Dispute Resolution ... Corporate guarantee as an international transaction - definition of international transaction under Section 92B - arm's length pricing of corporate guarantees - non-comparability of bank guarantee rates with corporate guarantee rates - benchmarked rate for corporate guarantee - non-pressing of grounds and dismissal as not pressedCorporate guarantee as an international transaction - definition of international transaction under Section 92B - Providing corporate guarantee to an associated enterprise qualifies as an international transaction requiring benchmarking to determine arm's length price. - HELD THAT: - The Tribunal examined the amended definition of international transaction under Section 92B and held that lending or borrowing of money and arrangements affecting profits, income, losses or assets between associated enterprises fall within the scope of international transactions. When the assessee provided a guarantee for its AE's loan facility, that transaction affected its profits and therefore required determination of arm's length price. The assessee's contention that corporate guarantee is not an international transaction was rejected on this statutory interpretation and application to the facts of the case. [Paras 7]Provision of corporate guarantee is an international transaction and is required to be benchmarked for ALP.Arm's length pricing of corporate guarantees - non-comparability of bank guarantee rates with corporate guarantee rates - benchmarked rate for corporate guarantee - Rate of commission for corporate guarantee cannot be equated with bank guarantee rates; a reasonable benchmark rate is 0.5% in the facts of this case. - HELD THAT: - Relying on judicial precedent that commercial bank guarantee charges are not comparable with corporate guarantees issued by a holding company for the benefit of its subsidiary, the Tribunal held that benchmarking must adopt a reasonable rate specific to the case. The Tribunal considered the authorities and facts and, applying that principle, concluded that 0.5% is a reasonable rate for benchmarking the corporate guarantee given by the assessee to its subsidiary. Consequently, the upward adjustment made by the TPO/AO at a higher rate was reduced and the AO was directed to make the adjustment at 0.5% of the total corporate guarantee. [Paras 8]Apply a benchmarked corporate guarantee fee of 0.5% of the total guarantee; AO directed to give effect accordingly.Non-pressing of grounds and dismissal as not pressed - Grounds challenging disallowance under section 14A read with Rule 8D were not pressed by the assessee and are accordingly dismissed as not pressed. - HELD THAT: - At the hearing the assessee's counsel expressly stated that Grounds Nos.6 and 7 (challenging disallowance under section 14A r.w.r.8D) were not to be pressed. The Tribunal recorded that omission and dismissed those grounds as not pressed without adjudicating them on merits. [Paras 9]Grounds Nos.6 and 7 dismissed as not pressed.Final Conclusion: Appeal partly allowed: corporate guarantee held to be an international transaction; corporate guarantee fee to be benchmarked at 0.5% and AO directed to give effect; grounds challenging section 14A disallowance dismissed as not pressed. Issues Involved:1. Assessment order challenged by the assessee.2. Addition made without considering evidence.3. Disallowance of interest payment savings.4. Disallowance of guarantee commission claim.5. Error in calculating presumptive valuation.6. Disallowance under section 14A.7. Disallowance of routine payment for bank facilities.Detailed Analysis:1. The appeal challenges the final assessment order passed by the Assessing Officer under sections 143(3), 92CA, and 144C(13) of the Income Tax Act for the assessment year 2014-15. The Dispute Resolution Panel directed the assessment following which the appeal was filed by the assessee.2. The assessee raised multiple grounds of appeal, including contentions that the assessment order was against the law and facts, and the addition of Rs.32,47,200 was made without considering the evidence presented by the appellant.3. The Transfer Pricing Officer (TPO) made an upward adjustment of Rs.32,47,200 towards guarantee fee charged by the assessee to its subsidiary for providing a corporate guarantee. The TPO considered the guarantee fee as an international transaction and applied a rate of 1.98% based on the total guarantee amount.4. The Dispute Resolution Panel confirmed the TPO's adjustments and held that providing a corporate guarantee is indeed an international transaction. The Panel rejected the arguments of the assessee regarding the rate of guarantee fee and sustained the additions made by the Assessing Officer.5. The arguments presented by the assessee regarding the nature of corporate guarantee as an international transaction and the appropriate rate for guarantee commission were considered. The Tribunal upheld that providing a corporate guarantee falls under the definition of an international transaction and directed the AO to adjust the guarantee fee at a reasonable rate of 0.5%.6. The issue of disallowance under section 14A was also raised by the assessee but was dismissed as not pressed during the hearing. The Tribunal partially allowed the appeal based on the above considerations.7. The judgment was pronounced on June 15, 2022, in Chennai, with the appeal being partly allowed based on the Tribunal's findings and directions regarding the assessment issues raised by the assessee.