Revenue's appeal dismissed as guarantee commission requires no transfer pricing adjustment under precedent

ITAT Mumbai dismissed Revenue's appeal regarding TP adjustment on guarantee commission. Following its own precedent from 2016, the Tribunal deleted the Transfer Pricing Officer's adjustment made on account of Corporate Guarantee. The assessee's position was upheld, confirming that no TP adjustment was warranted for the guarantee commission arrangement.

---

---

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in this appeal are:

• Whether the Transfer Pricing Officer (TPO) was justified in making an addition on account of transfer pricing adjustment relating to guarantee commission charged by the assessee on corporate guarantees extended to its Associate Enterprises (AEs)Rs.
• Whether the arm's length price (ALP) for guarantee commission should be determined by reference to comparable uncontrolled price (CUP) method based on commissions charged by commercial banks for bank guarantees, or whether the corporate guarantee commission charged by the assessee to its AEs is to be treated differentlyRs.
• Whether the findings and precedent decisions of the Coordinate Bench of the Tribunal and the Hon'ble Jurisdictional High Court in the assessee's own earlier years are applicable and binding for the assessment year under considerationRs.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Justification of Transfer Pricing Adjustment on Guarantee Commission

Relevant legal framework and precedents: The transfer pricing provisions require that international transactions between associated enterprises be priced at arm's length. The ALP is to be determined using methods such as the CUP method. The TPO made an adjustment based on the premise that the guarantee commission charged by the assessee was not at arm's length, relying on commissions charged by commercial banks for bank guarantees as comparables.

Court's interpretation and reasoning: The Tribunal examined the facts that the assessee had extended corporate guarantees to its AEs for loans taken from banks abroad. The TPO's adjustment was based on comparing the commission charged by the assessee with the commission charged by commercial banks for bank guarantees. However, the Tribunal noted that corporate guarantees issued by a holding company to its subsidiary AEs are fundamentally different from bank guarantees issued by commercial banks. The latter are "easily encashable" and carry different risk profiles and commercial considerations.

Key evidence and findings: The Tribunal relied on the assessee's transfer pricing report which applied the CUP method and determined an ALP of 0.5% for guarantee commission. The TPO suggested a higher adjustment, restricting the rate to 3% for certain AEs based on DRP directions. The Tribunal observed that the facts and the nature of guarantees in the current year were identical to those in earlier years where similar adjustments were deleted.

Application of law to facts: The Tribunal applied the principle that comparisons for determining ALP must be made between like transactions. Since the TPO compared corporate guarantees with bank guarantees, the comparison was not between comparable transactions. The Tribunal also relied on the precedent set by the Hon'ble Jurisdictional High Court which upheld the Tribunal's deletion of such adjustments in earlier years.

Treatment of competing arguments: The Revenue argued that the TPO's adjustment was justified and relied on the DRP's directions and earlier Tribunal orders upholding some additions. The assessee contended that the corporate guarantee commission was correctly determined at 0.5% and that the TPO's comparison with bank guarantees was inappropriate. The Tribunal found the assessee's arguments convincing and consistent with judicial precedents.

Conclusions: The Tribunal concluded that the TPO's adjustment on account of guarantee commission was not justified. The ALP determined by the assessee using the CUP method at 0.5% was accepted. The Tribunal reversed the order of the AO and upheld the deletion of the transfer pricing adjustment on guarantee commission.

Issue 2: Applicability of Precedent Decisions in Earlier Assessment Years

Relevant legal framework and precedents: The Tribunal referred to its own earlier decisions for AY 2010-11 and the Hon'ble Jurisdictional High Court's decision for AY 2007-08 in the assessee's own case. These decisions dealt with similar facts and issues relating to transfer pricing adjustments on corporate guarantee commission.

Court's interpretation and reasoning: The Tribunal emphasized that the facts for the year under consideration were identical to those in earlier years. The High Court had held that the comparison made by the TPO between corporate guarantees and bank guarantees was not appropriate and that the commission charged by the assessee could not be questioned in the manner done by the TPO.

Key evidence and findings: The Tribunal noted the absence of any material difference in facts between the years. The High Court's decision was binding and had dismissed the Revenue's appeal on this issue.

Application of law to facts: The Tribunal applied the principle of consistency and judicial discipline in following the binding precedent set by the High Court and the Coordinate Bench of the Tribunal.

Treatment of competing arguments: The Revenue acknowledged the existence of the precedent but sought to distinguish the facts or the applicability. The Tribunal found no basis for such distinction.

Conclusions: The Tribunal held that the precedent decisions were fully applicable and binding, and accordingly upheld the deletion of the transfer pricing adjustment on guarantee commission.

3. SIGNIFICANT HOLDINGS

The Tribunal held:

"In the matter of guarantee commission, the adjustment made by the TPO were based on instances restricted to the commercial banks providing guarantees and did not contemplate the issue of a Corporate Guarantee. No doubt these are contracts of guarantee, however, when they are Commercial banks that issue bank guarantees which are treated as the blood of commerce being easily encashable in the event of default, and if the bank guarantee had to be obtained from Commercial Banks, the higher commission could have been justified. In the present case, it is assessee company that is issuing Corporate Guarantee to the effect that if the subsidiary AE does not repay loan availed of it from ICICI, then in such event, the assessee would make good the amount and repay the loan. The considerations which applied for issuance of a Corporate guarantee are distinct and separate from that of bank guarantee and accordingly we are of the view that commission charged cannot be called in question, in the manner TPO has done. In our view the comparison is not as between like transactions but the comparisons are between guarantees issued by the commercial banks as against a Corporate Guarantee issued by holding company for the benefit of its AE, a subsidiary company."

The Tribunal established the core principle that for transfer pricing adjustments, the comparables used must be truly comparable transactions. Corporate guarantees issued by a holding company to its subsidiary cannot be equated with bank guarantees issued by commercial banks for the purpose of determining guarantee commission at arm's length.

The Tribunal finally determined that the addition made by the TPO on account of transfer pricing adjustment on guarantee commission was not justified and upheld the deletion of such addition by the CIT(A). The appeal filed by the Revenue was dismissed.

---