Corporate guarantee ruled international transaction, fee computed at 0.5% rate following precedent, excess addition deleted

ITAT Kolkata held that corporate guarantee constitutes an international transaction, rejecting the assessee's argument. However, following precedent from the assessee's own case for AY 2018-19, the Tribunal granted partial relief by directing computation of corporate guarantee fee at 0.5% rate and deletion of excess addition. Regarding interest under section 244A, the Tribunal ruled this is an administrative matter to be decided by the AO in accordance with law, requiring the assessee to approach the appropriate authority.

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1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal are:

(a) Whether the assessment order passed by the Assessing Officer (AO) under sections 143(3), 144C, and 144B read with the Transfer Pricing Officer's (TPO) order under section 92CA(3) is valid and not void ab initio, particularly with respect to the transfer pricing proceedings.

(b) Whether the issuance of corporate guarantee on behalf of an Associated Enterprise (AE) constitutes an international transaction under section 92B of the Income Tax Act, 1961.

(c) Whether the determination of the arm's length price (ALP) for the corporate guarantee commission by the TPO, AO, and Dispute Resolution Panel (DRP) is correct, including the applicability of the Comparable Uncontrolled Price (CUP) method and the rate of guarantee commission applied.

(d) Whether the AO erred in not granting interest under section 244A of the Act to the assessee consequent to the transfer pricing adjustments.

(e) Ancillary issues related to the levy of interest under sections 234B and 234C, which were considered consequential and not separately adjudicated.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a): Validity of the Assessment and Transfer Pricing Orders

Legal Framework and Precedents: The assessment order under sections 143(3), 144C, and 144B of the Income Tax Act must be passed in accordance with procedural and substantive requirements. The TPO's order under section 92CA(3) must comply with the conditions prescribed under section 92C(3) regarding transfer pricing adjustments. The DRP's directions under section 144C(5) are binding on the AO.

Court's Interpretation and Reasoning: The Tribunal observed that the general ground challenging the validity of the assessment order (Ground No. 1) was broad and did not require separate adjudication. The Tribunal implicitly accepted the procedural correctness of the assessment and transfer pricing proceedings, subject to the merits of the transfer pricing adjustments challenged in subsequent grounds.

Application of Law to Facts: Since no specific procedural irregularity or failure to satisfy statutory conditions under section 92C(3) was demonstrated, the Tribunal did not find the assessment or transfer pricing orders void ab initio.

Conclusion: The challenge to the validity of the assessment and transfer pricing orders was dismissed.

Issue (b): Whether Corporate Guarantee Constitutes an International Transaction

Legal Framework and Precedents: Section 92B(1) defines "international transaction" to include transactions between associated enterprises involving purchase, sale, lease of property, provision of services, lending or borrowing of money, or any transaction affecting profits, income, losses or assets. The Explanation to sub-section (2) of section 92B explicitly includes capital financing transactions such as guarantees, borrowings, and advances.

The Tribunal relied on the coordinate bench's earlier decision in the assessee's own case for AY 2018-19 and the judgment of the Hon'ble Madras High Court in Principal Commissioner of Income Tax vs. M/s. Redington (India) Limited, which held that corporate guarantees issued on behalf of an AE constitute international transactions.

Court's Interpretation and Reasoning: The Tribunal held that corporate guarantees fall within the ambit of capital financing transactions under section 92B and thus qualify as international transactions. It rejected the assessee's contention that issuance of corporate guarantee as a shareholder function does not amount to a service or international transaction.

Key Evidence and Findings: The assessee had issued corporate guarantees for loans taken by its subsidiary (Tega Chile), resulting in interest savings for the AE. The Tribunal noted that such guarantees have a direct bearing on the profits of the AE and therefore attract transfer pricing provisions.

Application of Law to Facts: The Tribunal applied the inclusive definition of international transactions to hold that the corporate guarantee transaction qualifies as an international transaction.

Treatment of Competing Arguments: The assessee argued that the guarantee was a shareholder function and not a service warranting a separate charge. The Tribunal rejected this, emphasizing the economic benefit derived by the AE and the statutory definition.

Conclusion: The corporate guarantee transaction is an international transaction within the meaning of section 92B of the Act.

Issue (c): Determination of Arm's Length Price and Appropriate Guarantee Commission Rate

Legal Framework and Precedents: Section 92C(2) mandates determination of arm's length price using the most appropriate method as per Rule 10B of the Income Tax Rules. The CUP method is one such method but must be applied in accordance with the provisos to section 92C(2) and Rule 10B(1)(a).

Judicial precedents, including the Hon'ble Bombay High Court's decision in CIT v. Everest Kento Cylinders, and various tribunal orders, have recognized that the arm's length rate for corporate guarantee fees typically ranges between 0.20% and 0.53% of the guaranteed amount.

Court's Interpretation and Reasoning: The Tribunal found that the TPO and AO erred in applying the CUP method arbitrarily without considering the first proviso to section 92C(2) and Rule 10B(1)(a). The Tribunal also noted that the rate of guarantee commission adopted by the AO/TPO/DRP was higher than the range established by judicial pronouncements.

Key Evidence and Findings: The AO/TPO made an adjustment of INR 24,79,701 based on a guarantee commission rate exceeding 0.5%. The assessee relied on its own earlier case (AY 2018-19) where the Tribunal had upheld a 0.5% rate.

Application of Law to Facts: The Tribunal directed that the guarantee fee be recalculated at 0.5%, consistent with earlier decisions, and ordered deletion of the excess amount added to the income.

Treatment of Competing Arguments: The assessee argued for non-applicability of transfer pricing provisions to corporate guarantees and alternatively for a lower rate of 0.5%. The Tribunal rejected the former but accepted the latter, granting partial relief.

Conclusion: The Tribunal held that the corporate guarantee fee is an international transaction and must be benchmarked at 0.5%, directing recalculation accordingly and partially allowing the appeal.

Issue (d): Non-Grant of Interest under Section 244A

Legal Framework and Precedents: Section 244A(2) provides for payment of interest on refunds arising from assessment orders. Sub-section (1A) deals with additional interest payable on refunds resulting from appellate orders under section 254. The determination of interest is an administrative matter to be decided by the Principal Chief Commissioner or Commissioner, whose decision is final.

Court's Interpretation and Reasoning: The Tribunal observed that the grant of interest under section 244A is an administrative issue and not a matter for adjudication by the Tribunal. It noted that the assessee should approach the AO or appropriate authority for consideration in accordance with law.

Application of Law to Facts: Since the interest claim arises from the transfer pricing adjustment and refund, the Tribunal declined to grant interest but clarified the procedure for the assessee to seek it administratively.

Conclusion: The Tribunal did not grant interest under section 244A but left the matter to be decided by the revenue authorities as per law.

Issue (e): Levy of Interest under Sections 234B and 234C

These grounds were consequential and were not separately adjudicated by the Tribunal.

3. SIGNIFICANT HOLDINGS

"Now, from perusal of the explanation to sub-Section (2) of Section 92B, the expression international transaction includes capital financing, include any type of long-term or short-term borrowings, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business. Since inclusive definition of international transaction includes the activities relating to capital financing and borrowings, in our view now corporate guarantee transaction also falls under the category of international transactions."

"Though, it is contended by the assessee that it had saved immediate use of its own funds and the interest on the said borrowings has also been paid by the AE but this plea will not apply in the said transactions because, we are dealing specifically with the transactions of corporate guarantee and that with the help of such corporate guarantee, the AE has gained and then as per the TP provisions, the assessee is required to offer the corporate guarantee fee as income."

"We find support from the judgment of the Hon'ble Bombay High Court in the case of CIT v. Everest Kento Cylinders reported in (2015) 378 ITR 57 (Bom), and are inclined to give part relief to the assessee directing the TPO to compute corporate guarantee fee @ 0.5% and delete excess amount added in the hands of the assessee."

"As regards interest u/s 244A of the Act, the same is allowable as per the provisions of sub-section (2) of section 244A of the Act and the dispute relating to the period of interest etc. is to be decided by the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner whose decision thereon shall be final. Further, subsection (1A) of section u/s 244A of the Act refers to additional interest payable on account of a refund arising as a result of giving effect to an order u/s 254 wholly or partly, otherwise than by making a fresh assessment or reassessment and the provision in this regard. The assessee is required to approach the Ld. AO, who shall consider the same in accordance with law as the granting of interest u/s 244A of the Act is an administrative issue and the same has to be done in accordance with law."

Core principles established include:

• Corporate guarantees issued on behalf of associated enterprises constitute international transactions under section 92B of the Income Tax Act.
• The arm's length price for corporate guarantee fees should be benchmarked within judicially recognized ranges (0.20% to 0.53%), with 0.5% accepted as reasonable in this case.
• The CUP method must be applied in accordance with statutory provisions and not arbitrarily.
• Interest under section 244A is an administrative matter and not subject to Tribunal adjudication.
• Challenges to the validity of assessment and transfer pricing orders require specific procedural infirmities to succeed and cannot be sustained on general grounds.

Final determinations:

• The appeal was partly allowed by holding the corporate guarantee transaction as an international transaction and directing recalculation of guarantee fee at 0.5%, deleting excess assessment.
• The claim for interest under section 244A was not allowed by the Tribunal but left open for administrative consideration.
• The validity challenge to the assessment and transfer pricing orders was dismissed.

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