Corporate guarantee fee and excise duty exemption: guarantee commission capped at 0.5% and exemption treated as capital receipt

Corporate guarantee fee: the arm's length guarantee commission is restricted to 0.5% of the guaranteed amount, and that limitation is affirmed. Excise duty exemption: the receipt arising from excise duty exemption is to be characterised as a capital receipt, and that characterisation is affirmed. Consequent relief: the departmental appeal against these findings is dismissed, leaving the 0.5% cap on guarantee commission and the capital receipt treatment of the excise duty exemption operative.

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Issues: (i) Whether the arm's length corporate guarantee fee should be restricted to 0.5% of the guaranteed amount; (ii) Whether excise duty exemption is a capital receipt and whether it must be included in book profit for computation of tax under section 115JB of the Income-tax Act, 1961.

Issue (i): Whether the corporate guarantee fee charged for inter-company guarantees should be benchmarked at 0.5% of the guaranteed amount.

Analysis: Relevant transfer pricing provisions and available judicial precedents were applied to determine appropriate benchmarking where comparables relied upon by the Transfer Pricing Officer were drawn from jurisdictions (USA) not matching the economic region of the Associated Enterprises. Co-ordinate Bench decisions and a body of Tribunal precedents establish a consistent arm's length range for corporate guarantee fees around 0.3%0.5%; in absence of appropriate comparables from the relevant region, the established tribunal benchmarking was followed.

Conclusion: The corporate guarantee fee is to be restricted at 0.5% of the guaranteed amount in favour of the assessee.

Issue (ii): Whether excise duty exemption received under Notification No.50/2003 is a capital receipt and whether it is includible in book profit for computation under section 115JB.

Analysis: The excise duty exemption was examined in light of statutory provisions, relevant office memorandum and settled judicial decisions. The exemption is an incentive/subsidy for establishing units in backward areas and has been treated as a capital receipt not chargeable under normal provisions. The question of inclusion in book profit under section 115JB was considered consequentially and resolved by applying precedent holding such capital receipt not to be included in book profit for MAT computation.

Conclusion: The excise duty exemption is a capital receipt and shall not be included in book profit for computation under section 115JB; conclusion is in favour of the assessee.

Final Conclusion: The Revenue's appeal is dismissed on both issues; the tribunal affirms the lower authority's restriction of corporate guarantee fee to 0.5% and the treatment of excise duty exemption as a capital receipt excluded from book profit under section 115JB.

Ratio Decidendi: Where appropriate comparables from the relevant economic region are unavailable, consistent tribunal precedent fixing an arm's length corporate guarantee commission at 0.5% is authoritative for benchmarking; and excise duty exemptions granted as incentives under enabling notifications constitute capital receipts that are not includible in book profit for computation under section 115JB of the Income-tax Act, 1961.

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