2021 (4) TMI 203 - AT - Income Tax

Corporate Guarantee Deemed International Transaction; Case Remanded for Further Examination and Adjustment Computation.

The Tribunal confirmed that a corporate guarantee qualifies as an international transaction under Section 92B of the Income Tax Act. It remanded the case ... Corporate guarantee as international transaction - retrospective application of Explanation to section 92B - letter of comfort versus bank guarantee - arm's length price of guarantee fee - transfer pricing adjustment on guarantee commissionCorporate guarantee as international transaction - retrospective application of Explanation to section 92B - arm's length price of guarantee fee - Corporate guarantees provided to associated enterprises constitute an international transaction and are amenable to transfer pricing adjustment; the Explanation to section 92B (inserted by Finance Act, 2012) applies retrospectively. - HELD THAT: - The Tribunal examined the nature of corporate guarantees and concurred with coordinate decisions holding that guarantees improve the creditworthiness of AEs and involve inherent risk and a service element, thereby falling within the definition of 'international transaction'. The decision further accepted the legal position that the Explanation inserted into section 92B by the Finance Act, 2012 is clarificatory and is to be given retrospective effect from 01/04/2002. On these bases, the Tribunal affirmed in principle the TPO/DRP finding that an upward transfer pricing adjustment on guarantee fees is permissible and that the guarantee fee must be determined at arm's length. The Tribunal noted conflicting case law relied upon by the assessee was distinguishable and declined the assessee's contention that guarantees are outside the scope of section 92B. [Paras 8]Affirmed that corporate guarantees are international transactions; Explanation to section 92B applies retrospectively; impugned adjustment on corporate guarantee upheld in principle and TPO/AO directed to finalise ALP computation accordingly.Letter of comfort versus bank guarantee - transfer pricing adjustment on guarantee commission - Whether the amount described as a 'letter of comfort' constitutes a bank/corporate guarantee (and thus an international transaction) was left for factual verification and fresh computation by the TPO. - HELD THAT: - The Tribunal found prima facie merit in the assessee's contention that the sum characterised as a letter of comfort may not attract the same treatment as a corporate/bank guarantee if no liability is fastened on the assessee. Consequently, while upholding the adjustment in principle, the Tribunal remitted the matter to the TPO/AO to obtain information from the bank regarding the impact and any liability arising from the counter bank guarantee; if liability is established, the adjustment stands, otherwise the instrument may be treated as a mere letter of comfort and no addition would be warranted. The Tribunal directed the TPO to finalise consequential computations after affording the assessee a reasonable opportunity of being heard. [Paras 8]Remitted to the TPO/AO for verification from the bank on the nature and liability of the counter bank guarantee and for recomputation of the ALP/adjustment accordingly; assessee to be heard.Final Conclusion: The Tribunal upheld in principle the transfer pricing adjustment on corporate guarantees for AY 2011-12 by treating such guarantees as international transactions under the retrospective Explanation to section 92B, but remitted the question of the sum characterised as a letter of comfort to the TPO/AO to verify whether any enforceable liability exists and to compute the consequential ALP; the appeal is treated as allowed for statistical purposes. Issues Involved:1. Adjustment of Rs. 2,43,30,447/- on the corporate guarantee/letter of comfort provided to banks for loan/credit limits availed by wholly owned subsidiaries/JVs.2. Definition of shareholder's corporate guarantee under international transaction as per Section 92B of the Income Tax Act.3. Beneficial nature of shareholder's corporate guarantee to the parent company.4. Objective analysis for determining Arm's Length Price (ALP) on the shareholder's corporate guarantee.5. Discrimination under Article 26 of India-Singapore Double Taxation Avoidance Agreement (DTAA) in determining ALP for corporate guarantee.6. Distinction between letter of comfort and corporate guarantee under Section 92B of the Act.7. Objective analysis for determining ALP based on bank guarantee rates from State Bank of India (SBI) website.8. Consideration of judicial precedents on similar corporate guarantees.9. Acceptance of internal comparable guarantee transactions for benchmarking purposes.10. Adjustments for differences in comparable transactions vis-à-vis shareholder's corporate guarantee.11. Short credit of TDS and Advance tax paid.12. Levying of interest under Sections 234A, 234B, and 234C.Detailed Analysis:1. Adjustment of Rs. 2,43,30,447/- on Corporate Guarantee:The Tribunal addressed the adjustment made by the TPO, who determined the arm's length price (ALP) for the corporate guarantee fee at Rs. 2,43,30,447/-. The TPO's calculations were based on the rates applicable to various subsidiaries. The AO passed the draft assessment order enhancing the total income of the assessee by the adjustments suggested by the TPO.2. Definition of Shareholder's Corporate Guarantee:The assessee argued that the shareholder's corporate guarantee is not covered under the definition of international transaction as per the retrospective and clarificatory amendment in 2012 under Section 92B of the Act. However, the Tribunal, referencing various case laws, upheld that corporate guarantees indeed form an international transaction under Section 92B.3. Beneficial Nature of Shareholder's Corporate Guarantee:The assessee contended that the corporate guarantee is beneficial and in the interest of the parent company. The Tribunal, however, emphasized that the issuance of guarantees has a bearing on the profits and income of such enterprises, thereby constituting an international transaction.4. Objective Analysis for Determining ALP:The assessee claimed that an objective analysis was not undertaken while determining the ALP on the corporate guarantee. The Tribunal noted that the TPO had computed the upfront fee and credit rating on the corporate guarantee extended to the subsidiary companies, and the DRP had directed the AO to re-compute the ALP at 1.75%.5. Discrimination under Article 26 of India-Singapore DTAA:The assessee argued discrimination in determining the ALP for corporate guarantees provided to AEs vis-à-vis similar guarantees provided to subsidiaries and others in India. The Tribunal did not find merit in this argument, referencing the DRP's directions and the TPO's analysis.6. Distinction between Letter of Comfort and Corporate Guarantee:The Tribunal examined whether the letter of comfort issued by the assessee could be distinguished from a corporate guarantee. The DRP concluded that the letter of comfort issued to Ramky Cleantech Services Pvt. Ltd. amounted to giving a bank guarantee, and thus, it was treated as such for examination.7. Objective Analysis for Determining ALP Based on SBI Rates:The Tribunal noted that the TPO had relied on information from the SBI website and other banks to work out a fee for the corporate guarantee. The DRP directed the AO to apply an ALP of 1.75%, as per the TPO's findings.8. Consideration of Judicial Precedents:The Tribunal referenced several judicial precedents where corporate guarantees were treated as international transactions, including cases such as Nimbus Communications Ltd., Advanta India Ltd., and Infotech Enterprises Ltd. The Tribunal upheld that corporate guarantees involve service rendered to AEs and thus fall under transfer pricing provisions.9. Acceptance of Internal Comparable Guarantee Transactions:The Tribunal did not find the internal comparable guarantee transactions of the assessee relevant for benchmarking purposes, as the case law relied upon by the assessee was distinguishable on facts.10. Adjustments for Differences in Comparable Transactions:The Tribunal directed the AO/TPO to examine the issue of corporate guarantee by calling for information from the bank regarding the impact of the counter bank guarantee given by the assessee. If there is no liability, it would be considered a mere letter of comfort, and no addition would be called for.11. Short Credit of TDS and Advance Tax Paid:The issue of short credit of TDS and advance tax paid was not specifically addressed in the detailed analysis.12. Levying of Interest under Sections 234A, 234B, and 234C:The Tribunal did not specifically address the issue of levying interest under Sections 234A, 234B, and 234C in the detailed analysis.Conclusion:The Tribunal affirmed that a corporate guarantee forms an international transaction under Section 92B of the Act. The matter was remanded to the AO/TPO for re-examination regarding the letter of comfort and to finalize the computation of the corporate guarantee adjustment. The appeal of the assessee was treated as allowed for statistical purposes.