ITAT upholds 2% risk adjustment on exports and commission on gross loan limit under tax rules

The ITAT Cochin upheld the CIT(A)'s decision allowing the risk adjustment on exports at 2% instead of 1% as determined by the TPO. It affirmed that the commission on corporate guarantee should be calculated on the gross loan limit rather than the actual loan availed, following precedent from ITAT Mumbai. The tribunal found no reason to interfere with the CIT(A)'s ruling and dismissed the revenue's appeal on this ground.

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ISSUES:

Whether the risk adjustment on exports should be allowed at 2% as opposed to 1% as determined by the Transfer Pricing Officer (TPO).Whether commission on corporate guarantee should be calculated on the gross loan limit sanctioned by the bank or on the actual loan amount availed by the assessee.

RULINGS / HOLDINGS:

The risk adjustment on exports was correctly allowed at 2% by the Commissioner of Income Tax (Appeals) (CIT(A)) instead of 1% as allowed by the TPO, given the presence of higher market risk for exports to non-associated enterprises and the precedent of acceptance of similar claims in earlier years; the decision to restrict it to 1% by the Assessing Officer (AO) was not upheld.The commission on corporate guarantee is to be allowed on the gross loan limit sanctioned by the bank and not on the actual loan availed by the assessee, following the binding precedent that "commission on corporate guarantee is to be provided on the gross loan sanctioned by the bank" and not on the basis of actual loan availed.

RATIONALE:

The legal framework applied includes the provisions under section 92CA(3) of the Income-tax Act relating to transfer pricing adjustments and the principles governing risk adjustments in export transactions. The court relied on factual findings that the TPO had considered factors such as sale commission, credit risk, and volume discounts, and that the assessee had not conducted a meaningful study on volume discounts, but the CIT(A) correctly recognized the higher risk in exports to unrelated parties compared to associated enterprises.Regarding commission on corporate guarantee, the court applied principles established in prior ITAT decisions, notably the decision in Laqshay Medica Pvt. Ltd. vs DCIT, which held that the quantum of exposure for corporate guarantee commissions should be based on the gross loan sanctioned rather than the actual loan utilized. The guarantee agreements explicitly stipulated that the guarantee covers the outstanding balance due at any point, which supports the calculation on the gross sanctioned amount.No dissenting or differing opinions were recorded. The court followed consistent prior rulings and did not indicate any doctrinal shift.

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