2024 (12) TMI 547 - AT - Income Tax

ITAT deletes transfer pricing addition as no subsisting corporate guarantee existed during assessment year

The ITAT Delhi held that no international transaction existed for corporate guarantee benchmarking purposes in the assessment year. The assessee had ... TP Adjustment - Corporate Guarantee (CG) for the two loan arrangements between its AEs of USD 50 Millions and 45 Millions and EXIM bank - international transaction or not? - HELD THAT:- The assessee has given corporate guarantee to its step down subsidiaries while availing the loan by them in the past. In order to bench mark the transaction, it has to be evaluated every year and it cannot be held that once the guarantee is given in the past, it continued to have impact on every assessment year subsequently. In this case, the assessee has given guarantee towards the loan and primary obligation of servicing the loan to the bank when they granted loan to the step down subsidiaries. No doubt the assessee also collected fees for providing the guarantee in the past, as per records, the assessee has collected Rs. 2.7 crores in the AY 2013-14. It was adjudicated in AY 2013-14 that this transaction falls within definition of the international transaction The facts are different in this AY considering the fact that the step down subsidiaries had not serviced the obligation towards the loan taken by them and the same were classified as non-performing assets (NPA) by EXIM bank. The same was intimated to the assessee on May 2016 and initiated the recovery proceedings from the assessee being the primary guarantor. The assessee being the holding company, it is aware of the situation prior to the intimation received from the bank ie., in the previous year itself. The liability of the assessee towards the guarantee are restricted to the extent of its investments in the subsidiaries and to the extent of recovery of the assets held by the subsidiaries. Therefore, the liabilities of the assessee was converted from guarantor to the actual liabilities to the extent of default by the step down subsidiaries, absolutely nothing left for the assessee itself to recover from its subsidiaries till the bank recovers their dues. Similar submissions were made by the Ld DR and are not in agreement of the views. No doubt, as per the submissions of the Ld DR, the statutory provisions may cause hardship or inconvenience but court has no choice but to enfore it, irrespective of the situation, the transaction has to be bench marked. After considering the facts on record, what is relevance is whether the guarantee existed at the commencement of the impugned AY, in this case, in our opinion, the assessee was aware as well as the intimation received from the bank in the month of May itself, therefore, there was no guarantee existed as soon as the intimation of classification of NPA. It is crystallized/non-existence of the guarantor in the beginning of the year itself, therefore, we cannot presume that the corporate guarantee existed, hence, there is no possibility that the assessee has continued the guarantee, in our view for this AY, there is no international transaction. Therefore, the TPO was wrong in initiating proceedings to bench mark corporate guarantee as there is no international transaction at the first place. Method adopted by the TPO is proper or not, since we held that there is no international transaction existed relating to corporate guarantee in this assessment year, it is irrelevant at this stage to adjudicate on the issue of proper method adopted by the TPO or not. Accordingly, we direct the AO/TPO to delete the addition proposed in this AY. Issues Involved:1. Whether the provision of a corporate guarantee constitutes a separate international transaction.2. Whether the corporate guarantee is a shareholder service and not subject to arm's length pricing.3. The appropriateness of the method used by the Transfer Pricing Officer (TPO) for benchmarking the corporate guarantee.4. The initiation of penalty proceedings under section 270A.5. The computation of interest under sections 234A, 234B, 234C, and 234D.Detailed Analysis:1. Corporate Guarantee as an International Transaction:The core issue is whether providing a corporate guarantee falls under the definition of an international transaction as per Section 92B of the Income Tax Act. The Tribunal noted that the issue of corporate guarantee as an international transaction is settled by the retrospective amendment to the IT Act effective from 01/04/2002. This position is supported by various judicial precedents, including the decision of the Hon'ble Madras High Court in the case of PCIT vs. Redington (India) Ltd., which upheld the retrospective validity of the provision. Thus, the Tribunal rejected the assessee's argument that the provision of a corporate guarantee does not constitute an international transaction.2. Corporate Guarantee as Shareholder Service:The assessee contended that the corporate guarantee was a shareholder activity, not warranting arm's length compensation. However, the Tribunal referred to previous decisions, including the assessee's own case for AY 2013-14, where it was held that providing corporate guarantees involves risk and should be compensated at arm's length. The Tribunal emphasized that the notion of providing corporate guarantees as a shareholder activity was not accepted, and the assessee's approach of treating the guarantee as a non-chargeable service was rejected.3. Methodology for Benchmarking Corporate Guarantee:The TPO applied the Hull-White model to determine the arm's length price of the corporate guarantee, which the assessee contested. The Tribunal noted that the facts for the current assessment year were different due to the default of the step-down subsidiaries, leading to the classification of the loans as non-performing assets (NPA) by EXIM Bank. Consequently, the Tribunal held that the corporate guarantee ceased to exist at the beginning of the assessment year, rendering the TPO's benchmarking exercise irrelevant for the year in question. Therefore, the Tribunal directed the deletion of the addition proposed by the TPO.4. Penalty Proceedings under Section 270A:The Tribunal found the ground regarding the initiation of penalty proceedings under section 270A to be premature. As such, this ground was dismissed.5. Computation of Interest under Sections 234A, 234B, 234C, and 234D:The issue of computing interest under the aforementioned sections was deemed consequential and not adjudicated at this stage. The Tribunal remitted this matter to the file of the assessee for further consideration.Conclusion:The appeal was partly allowed, with the Tribunal directing the deletion of the addition related to the corporate guarantee for the assessment year under consideration, acknowledging that no international transaction existed due to the default and subsequent NPA classification of the loans. The Tribunal also dismissed the grounds related to penalty proceedings and interest computation as either premature or consequential.