Corporate guarantee transactions require transfer pricing adjustments under Section 92B despite reduced rates for government-backed securities

ITAT Mumbai held that corporate guarantee transactions constitute international transactions requiring transfer pricing adjustments under Section 92B. The tribunal confirmed that advances given without interest to joint venture partners were not loans but fulfillment of JV obligations, directing deletion of adjustments. For performance guarantees, the tribunal accepted 0.93% as arm's length rate based on bank charges. Corporate guarantee fee was determined at 0.6% instead of TPO's 2% rate, considering reduced default risk due to government undertaking security. The tribunal allowed mark-to-market losses on hedging contracts as deductible expenditure but denied education cess deduction following SC precedent in Chambal Fertilizers case.

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Issues Involved:
1. Transfer Pricing (TP) Issues
2. Non-TP Issues
3. Corporate Guarantee
4. Mark-to-Market (MTM) Losses
5. Education Cess and Higher & Secondary Education Cess
6. Interest on Advances given to AE
7. Performance Guarantee
8. Computation of Interest under Section 244A

Summary:

Transfer Pricing (TP) Issues:
Interest on Advances given to AE:
The Revenue challenged the deletion of an upward transfer pricing adjustment of INR 6,06,09,173/- made by the CIT(A) for advances given to EJP KEC JV, South Africa without charging any interest. The Tribunal upheld the CIT(A)'s decision, referencing the Tribunal's earlier ruling that such advances were made out of business expediency and were not akin to loans.

Performance Guarantee:
The Revenue's grounds challenging the deletion of transfer pricing adjustments related to performance guarantees were dismissed. The Tribunal upheld the CIT(A)'s decision that the rates of 0.93%, 0.60%, and 0.70% accepted in previous years were arm's length.

Corporate Guarantee:
The Revenue's appeal against the CIT(A)'s decision to restrict the arm's length rate of corporate guarantee fee to 0.2% was dismissed. The Tribunal confirmed the CIT(A)'s decision based on previous rulings that a lower rate was justified due to the nature of the transactions and the low risk involved.

Non-TP Issues:
Mark-to-Market (MTM) Losses:
The Revenue's appeal against the deletion of disallowance of INR 10,52,37,427/- for unrealized foreign exchange losses was dismissed. The Tribunal upheld the CIT(A)'s decision, which followed the Supreme Court's ruling in the case of Woodward Governor India Pvt. Ltd., allowing such losses on an accruable basis.

Education Cess and Higher & Secondary Education Cess:
The Revenue's appeal was allowed, and the Tribunal held that education cess and higher & secondary education cess are not deductible under Section 37 of the Act, following the Supreme Court's judgment in JCIT Vs. Chambal Fertilizers & Chemicals Limited.

Corporate Guarantee:
Assessment Year 2017-18:
The Assessee's appeal against the transfer pricing adjustment of INR 13,40,33,405/- for corporate guarantee fees was partly allowed. The Tribunal held that the transaction qualifies as an international transaction and directed the TPO/Assessing Officer to recompute the adjustment using a rate of 0.6% for most guarantees and 0.2% for specific guarantees given to wholly owned subsidiaries.

Computation of Interest under Section 244A:
The Tribunal directed the Assessing Officer to recompute interest under Section 244A of the Act as per law while passing the appeal effect order.

Conclusion:
For the Assessment Year 2013-14, the Revenue's appeal was partly allowed, and the Assessee's appeal was dismissed. For the Assessment Year 2017-18, the Assessee's appeal was partly allowed. The Tribunal upheld several decisions of the CIT(A) and previous Tribunal rulings, emphasizing consistency in the application of arm's length principles and the non-deductibility of education cess as per the Supreme Court's ruling.

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