2022 (8) TMI 1342 - AT - Income Tax

Setting benchmark for corporate guarantee fees & importance of comparability in transfer pricing under CUP Method.

The Tribunal partly allowed the Revenue's appeal by setting a benchmark of 0.5% for corporate guarantee fees and dismissed the Revenue's appeal regarding ... TP Adjustment on account of corporate guarantee fees - TPO held that five external loan comparables from loan connector database as identified by the assessee are same rated companies, i .e. BB - CIT(A) rejected the TPO’s proposition for upward adjustment on the ground that the ld. TPO has erred in selecting these seven more comparables by ignoring the basic principle to be followed while applying the CUP Method - HELD THAT:- CIT(A) finally held that since the margin of the assessee as stated by the TPO as 300 basis point, which is falling within the above medium range and, therefore, the international transaction involving issuance of corporate guarantee is at arm’s length and corporate guarantee fees of 30 bps as benchmark by the assessee is held to be fair and reasonable and accordingly directed the TPO/AO to delete the adjustment. We also carefully perused the decision furnished by the ld. DR in the case of M/S. ROSY BLUE (INDIA) PVT. LTD. [2021 (2) TMI 1018 - ITAT MUMBAI] wherein the Coordinate Bench has held that where a corporate guarantee to benchmark was issued by on behalf of the AE, the arm’s length guarantee fees would be 0.5%. Considering the facts on record and perusing the rival submissions, we are of the view that it would be reasonable if corporate guarantee fee of 0.5% is appl ied to benchmark the international transactions. Accordingly we set aside the impugned order of ld. CIT(A) on this issue and direct the ld. AO to benchmark the transactions by applying 0.5%. Thus Ground No. 1 raised by the Revenue in respect of corporate guarantee fees is partly allowed. Adjustment for transactions with respect to transfer of power/electricity - HELD THAT:- The power supplied by the CPPs to non eligible units was business to consumer (commonly known As B2C) meaning thereby the rate at which the ultimate consumers can purchase the power for their consumption is relevant. In the instant case before us, the B2C market comprises the sale of power by SEB and other distribution companies to different categories of consumers. Thus the power sold by other CPPs/IPPs to unrelated parties was in altogether different market conditions which is business to business commonly known as B2B model and the said rate represented the rate at which the distribution companies purchased power from generation companies. Further no consumer can buy the power in the open market at a rate generation companies sell power to distribution companies. Thus we do not find any force in the contentions of the ld DR that rate at which the power was sold to unrelated parties by the CPP is the ALP. We also note that decision of the Calcutta High court in the case of CIT Vs ITC 236 Taxman 612 which was relied by the TPO/AO and the functional dissimilarity between CPPs and SEB have been considered by the coordinate bench of the tribunal in the case of Star Paper Mills Ltd [2021 (11) TMI 1 - ITAT KOLKATA]. Therefore , we are inclined to uphold the order of Ld. CIT(A) by holding that the ALC at which the power is procured by non-eligible units from SEB is the most appropriate ALP to bench mark the specified domestic transactions and accordingly the order passed by CIT(A) is upheld by dismissing the revenue’s appeal on this issue. The grounds of appeal pertaining to this issue are dismissed. Issues Involved:1. Corporate Guarantee Fees Adjustment2. Transfer of Power/Electricity AdjustmentIssue-wise Detailed Analysis:1. Corporate Guarantee Fees Adjustment:The first issue concerns the deletion of an addition of Rs. 28,56,796/- by the CIT(A) related to corporate guarantee fees. The assessee had provided a corporate guarantee to Standard Chartered Bank, Singapore Branch for a loan taken by its AE, Dhunsari Petrochem and Tea Pte. Limited (DPTPL). The assessee benchmarked the transaction using the CUP Method at 30 bps based on interest savings. The TPO accepted the methodology but included comparables with BB+ and BB- ratings, resulting in an adjustment to 69 bps. The CIT(A) held that the TPO was unjustified in broadening the search to include BB+ and BB- ratings, as CUP requires strict comparability. The CIT(A) concluded that the corporate guarantee fee of 30 bps was fair and reasonable. However, the Tribunal found it reasonable to apply a corporate guarantee fee of 0.5% to benchmark the transaction, thus partly allowing the Revenue's appeal on this issue.2. Transfer of Power/Electricity Adjustment:The second issue pertains to the deletion of an adjustment of Rs. 6,75,22,000/- related to the transfer of power/electricity. The assessee, having two captive power plants (CPPs), transferred power to its non-eligible units and claimed profits under section 80IA of the Act. The TPO determined the ALP based on the average tariff orders issued by the SEB, proposing an adjustment. The CIT(A) allowed the appeal, stating that the internal CUP method, using the rate at which the non-eligible units procured power from SEB, was appropriate. The CIT(A) found that the TPO's methodology was flawed and that the SEB rates were regulated and not determined under uncontrolled conditions. The Tribunal upheld the CIT(A)'s decision, concluding that the ALC at which the non-eligible units procured power from SEB was the most appropriate ALP. The Tribunal dismissed the Revenue's appeal on this issue, affirming the CIT(A)'s comprehensive and reasoned order.Conclusion:The Tribunal partly allowed the Revenue's appeal on the issue of corporate guarantee fees by setting a benchmark of 0.5% and dismissed the Revenue's appeal on the issue of power transfer, upholding the CIT(A)'s order. The judgment emphasizes the importance of strict comparability in the application of the CUP Method and the relevance of internal CUP data in benchmarking specified domestic transactions.