2024 (5) TMI 1108 - AT - Income Tax

Corporate guarantee commission rate reduced from 1.8% to 0.53% following transfer pricing benchmarking analysis

Hetero Labs Limited, Hyderabad. Versus The Assistant Commissioner of Income Tax, Central Circle – 3 (4), Hyderabad. And (Vice-Versa)

Hetero Labs Limited, Hyderabad. Versus The Assistant Commissioner of Income Tax, Central Circle – 3 (4), Hyderabad. And (Vice-Versa) - TMI Issues Involved:1. Corporate Guarantee Fee2. Interest on Outstanding Trade Receivables3. Inclusion of Comparables (Sun Pharma Laboratories Ltd. and Macleods Pharmaceuticals Ltd.)4. R&D, Head Office & Marketing Office Expenses in PLI ComputationSummary:Corporate Guarantee Fee:The Tribunal addressed the issue of corporate guarantee fees where the TPO had determined the ALP of the fee on corporate guarantee at 1.9% based on bank guarantee rates. The CIT(A) reduced this to 0.53%, citing decisions in Mylan Laboratories Ltd. and Rain Commodities Ltd. The Tribunal upheld the CIT(A)'s decision to compute corporate guarantee commission at 0.53%, noting that corporate guarantees cannot be equated with bank guarantees. The Tribunal also agreed with the CIT(A) that the fee should be calculated proportionately for the appellant's share of the guarantee.Interest on Outstanding Trade Receivables:The TPO treated outstanding trade receivables as separate international transactions and computed interest using SBI short-term deposit rates. The CIT(A) directed the TPO to use LIBOR + 200 basis points instead, based on the decision in Albany Molecular Research. The Tribunal, however, followed its consistent stance in similar cases, directing the use of a 6% interest rate on delayed receivables beyond 60 days, rejecting the assessee's claim for a 180-day credit period.Inclusion of Comparables:The CIT(A) included Sun Pharma Laboratories Ltd. and Macleods Pharmaceuticals Ltd. as comparables, which the TPO had excluded based on RPT filters. The Tribunal directed the exclusion of these two comparables, agreeing with the Revenue's contention and the assessee's concession.R&D, Head Office & Marketing Office Expenses in PLI Computation:The CIT(A) excluded R&D and marketing expenses from the comparables' margins to maintain consistency with the unit-level PLI of the assessee, which did not include these expenses. The Tribunal noted that the CIT(A) had not given the AO an opportunity to comment on this adjustment, violating Rule 46A. The Tribunal remanded the issue back to the AO/TPO for fresh consideration after affording the assessee an opportunity to provide segmental accounts and any other relevant documents.Conclusion:The Tribunal partly allowed the Revenue's appeal and dismissed the assessee's appeal for both assessment years 2017-18 and 2018-19, directing fresh consideration on the issue of R&D and marketing expenses in PLI computation and excluding Sun Pharma Laboratories Ltd. and Macleods Pharmaceuticals Ltd. as comparables.