2019 (10) TMI 831 - AT - Income Tax

Tribunal upholds 1% guarantee fee as arm's length, dismisses revenue's challenge. Export transaction benchmarking grounds not considered. Appeal dismissed.

Asst. Commissioner of Income Tax, (Large Taxpayer Unit) -2, Mumbai Versus M/s. Glenmark Generics Ltd.

The Tribunal upheld the CIT(A)'s decision to accept the 1% guarantee fee charged by the assessee as being at arm's length, dismissing the revenue's ... TP Adjustment - adjustment made on account of corporate guarantee given by the assessee on behalf of its AE by accepting 1% guarantee fee charged by the assessee to be at arm’s length - HELD THAT:- This Tribunal in assessee’s own case for A.Yrs.2011-12 and 2012-13 [2019 (5) TMI 337 - ITAT MUMBAI] respectively had adjudicated the very same issue wherein by following the decision of Hon’ble Jurisdictional High Court, in the case of Everest Kanto Cylinders [2015 (5) TMI 395 - BOMBAY HIGH COURT] this Tribunal directed the ld. AO to determine the ALP of corporate guarantee commission at 0.5%. However, for the year under consideration, the assessee had actually charged 1% guarantee fee from its AE which is more than 0.5% fixed by this Tribunal in assessee’s own case for earlier years, we hold that charging of 1% is guarantee fee from its AE should be accepted to be at arm’s length, which has been rightly done by the ld. CIT(A) in the instant case. Accordingly, we do not find any infirmity in the order of the ld. CIT(A) in this regard. Accordingly, the ground Nos. 1-3 raised by the revenue are dismissed. Issues Involved:1. Adjustment on account of corporate guarantee given by the assessee on behalf of its AE.2. Determination of the most appropriate method for benchmarking export transactions.Detailed Analysis:Issue 1: Adjustment on Account of Corporate GuaranteeThe primary issue raised by the assessee pertains to the action of the ld. CIT(A) in deleting the adjustment made on account of the corporate guarantee given by the assessee on behalf of its Associated Enterprises (AE) by accepting a 1% guarantee fee charged by the assessee to be at arm's length.Facts:- The assessee is engaged in the business of manufacturing and marketing pharmaceuticals and carrying out R&D activities.- During the year under consideration, the assessee provided guarantees to facilitate its Swiss subsidiary (GGFSA) in availing loans from third-party banks.- The assessee determined the Arm's Length Price (ALP) of the financial guarantees using an external Comparable Uncontrolled Price (CUP) method based on the interest saved approach.- The Transfer Pricing Officer (TPO) determined the ALP at 1.5% of the guarantee amount, leading to an adjustment of Rs. 98,62,989 towards the guarantee fee.Contentions:- The assessee argued that the bank rate used by the TPO cannot be compared with a corporate guarantee due to differences in functions, assets, and risks.- The assessee cited the decision of the Hon'ble Jurisdictional High Court in CIT vs. Everest Kanto Cylinders Ltd. and other Tribunal decisions to support its benchmarking.- The assessee also referenced the Tax Court of Canada's judgment in General Electric Capital Canada INC vs. Her Majesty, the Queen, to validate the interest-saving method for benchmarking guarantee commissions.- The assessee further argued that the guarantee commission rate of 1% charged to its AE is higher than the 0.5% rate upheld by the Hon'ble Bombay High Court in similar cases.Decision:- The ld. CIT(A) accepted the assessee's contentions, noting that the TPO cannot reject the benchmarking without identifying defects.- The CIT(A) held that a guarantee commission rate of 0.5% is appropriate, based on previous Tribunal decisions and the Bombay High Court's approval.- Since the assessee had already charged a 1% guarantee commission, no adjustment was required.Tribunal's Findings:- The Tribunal upheld the CIT(A)'s decision, referencing its own earlier decisions in the assessee's case for previous years.- The Tribunal confirmed that charging a 1% guarantee fee is at arm's length and dismissed the revenue's grounds.Issue 2: Determination of the Most Appropriate Method for Benchmarking Export TransactionsThe revenue raised grounds regarding the preference of the Transactional Net Margin Method (TNMM) over the CUP method for benchmarking export transactions.Facts:- The revenue argued that the TPO's use of the CUP method, based on TIPS data from a government body, was appropriate for benchmarking the export of Active Pharmaceutical Ingredients (API) to Glenmark USA.- The CIT(A) preferred the TNMM method, which was found to be the most appropriate for benchmarking the transactions.Decision:- The Tribunal noted that these grounds did not arise from the CIT(A)'s order and were inadvertently raised by the revenue.- Consequently, the Tribunal dismissed these grounds.General Grounds:- The ground No.6 raised by the revenue was general in nature and did not require specific adjudication.Conclusion:- The appeal of the revenue was dismissed in its entirety.- The Tribunal upheld the CIT(A)'s decision to accept the 1% guarantee fee as being at arm's length and dismissed the revenue's grounds regarding the benchmarking method for export transactions.Order Pronounced:- The order was pronounced in the open court on 17/07/2019.