2024 (12) TMI 420 - AT - Income Tax

Corporate guarantee fees to associated enterprise reduced from 1.80% to 0.5% following established precedents

The ITAT Mumbai held that corporate guarantee fees charged by the assessee to its associated enterprise were excessive. The TPO's proposed adjustment at ... TP Adjustment - international transactions - Benchmarking of corporate guarantee fees - bank rates adopted by the TPO pertaining to the Indian banks are not accepted - contention of the assessee did not find any favour with the TPO who proposed adjustment of corporate guarantee @1.80% HELD THAT:- We have given a thoughtful consideration to the orders of the authorities below. The undisputed fact is that AE, NESMA TPL has taken a loan from Alawwal Bank which later merged with Saudi British Bank in Saudi Arabia. Therefore, at the very outset, the bank rates adopted by the TPO pertaining to the Indian banks are not accepted. We find that the Co- ordinate Benches across the country have been consistently taking the guarantee fee charged in the range of 0.25% to 0.50%, We direct the AO to restrict the ALP adjustment to 0.5%. Appeal of the assessee is partly allowed. Issues Involved:1. Determination of Arm's Length Price (ALP) for international transactions.2. Benchmarking of corporate guarantee fees.3. Validity of assessment proceedings being challenged as barred by limitation.Detailed Analysis:1. Determination of Arm's Length Price (ALP) for International Transactions:The primary issue in the appeal was the determination of the Arm's Length Price (ALP) concerning international transactions reported by the assessee with its Associated Enterprises (AEs). The assessee, an engineering procurement and construction contracting company, engaged in various international transactions during the assessment year 2020-21. These transactions included secondment of technical personnel, sub-contracting of quality and inspection services, corporate guarantees, and recovery of expenses. The Transfer Pricing Officer (TPO) scrutinized these transactions and made adjustments, particularly focusing on the corporate guarantee provided to NESMA Tata Projects Limited (NESMA TPL), a joint venture entity in Saudi Arabia.2. Benchmarking of Corporate Guarantee Fees:The TPO identified that the assessee provided a corporate guarantee to NESMA TPL without charging a fee, which was deemed an international transaction requiring benchmarking. The TPO gathered data from various banks, noting that the average bank guarantee rate was 1.80%. Consequently, a show cause notice was issued to the assessee to justify why an adjustment should not be made at this rate. The assessee contended that the corporate guarantee was a strategic decision to protect the group's goodwill and reputation, arguing against the necessity of benchmarking. However, the TPO, supported by the Dispute Resolution Panel (DRP), proposed an adjustment of Rs. 61,66,891/- at 1.80%.Upon appeal, the Tribunal considered the consistent approach of various Co-ordinate Benches, which had determined corporate guarantee fees in the range of 0.25% to 0.50%. The Tribunal referred to precedents where similar transactions were benchmarked at 0.50%, including cases like Everest Kanto Cylinder Ltd. and Manipal Global Education Services Pvt. Ltd. Consequently, the Tribunal directed the Assessing Officer to restrict the ALP adjustment to 0.50% for the corporate guarantee provided by the assessee.3. Validity of Assessment Proceedings Being Challenged as Barred by Limitation:The assessee raised an additional ground challenging the validity of the assessment proceedings, arguing they were barred by limitation based on a precedent set by the Hon'ble Madras High Court in the case of M/s. Roca Bathroom Products Private Limited. However, during the proceedings, the assessee chose to withdraw this legal ground, and the Tribunal dismissed it as withdrawn.Conclusion:The appeal was partly allowed, with the Tribunal directing the adjustment of the corporate guarantee fee to 0.50%, aligning with established precedents. The additional ground concerning the validity of assessment proceedings was dismissed as withdrawn. The judgment underscores the importance of consistent application of legal principles in transfer pricing cases and highlights the Tribunal's reliance on precedents to ensure equitable outcomes.