TaxTMI 
TaxTMI 
2025 (2) TMI 154
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....bserving that the adjudication on this ground is unnecessary. 3) Ld TPO/DRP/A.O. has erred in proposing/confirming the addition of Rs. 8,13,50,422/- on account of corporate guarantee fee in respect of guarantee by the assessee in favour of AE 4) The Ld. TPO/DRP/A.O, has erred in proposing/confirming the rate of guarantee fee of 1.90% based on the rates charged by the banks to its customers as against 0.53% charged by the assessee to its AEs. 5) Ld TPO/DRP/A.O, has erred in proposing/confirming the addition of Rs. -1,12,21,130/- on account of fees for letter of comfort given by the assessee in favour of AES 6) The Ld. TPO/DRP/A.O. has erred in proposing/confirming the rate of fee for letter of comfort at 1.90% based on the rates of guarantee fees charged by the banks to its customers. 7) The Ld. TPO/DRP/A.O. has erred in not providing copy of the information gathered by the TPO u/s. 133(6) of the Act from various banks. 8) The Ld. TPO/DRP/A.O. has failed to appreciate that the reference made to the TPO by the A.O. is bad in law. The Ld. TPO/DRP/A.O. ought to have appreciated that the mandatory conditions to invoke the jurisdictio....
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....on. The replies and relevant documentary evidences were submitted on behalf of the assessee. Accordingly, after a careful perusal of the information available on record and submissions made on behalf of the assessee, the claims of the assessee in respect of the characterization of the services were rejected. However, since the margins of the assessee in respect of the International Transaction of Provision of Services to the AE' were with in the Arm's Length Range, as calculated by TPO, no adverse inference is being drawn in respect of the transaction declared under provision of services to the AE." 2.1.3 Therefore, this ground is dismissed." 5. It is the contention of the Ld.AR of the assessee before us that TPO / DRP have decided the ground without giving any reasons for concluding that the assessee was rendering Knowledge Process Outsourcing [in short "KPO"] services and was not a software developer. It was further submitted that the TPO has merely rejected the contention of the assessee that it is SDS and not KPO for that Assessing Officer noted that the Arm's length price of the assessee was within the range and no adverse inference could be drawn in respec....
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....t to note that the questions of Transfer Pricing comparability are questions of fact and results of one year cannot be applied as such on the facts of the subsequent years. In other words the process of bench-marking cannot be bypassed unless the same has specifically been directed by Hon'ble bench. In absence of any benchmarking carried out by the assessee with respect to said international transaction, information was gathered u/s. 133(6) from various banks information with regard to the guarantee fees charged on bank guarantees provided and the details are as under: - Guarantee Fees for AY 2020-21: S.No. Name of the Bank Guarantee Fees 1. SBI 1.30% 2. Canara Bank 1.50% 3. HDFC Bank 1.80% 4. Axis bank 2% 5. Union Bank of India 3% 6. Punjab National Bank 3% 35th Percentile 1.80% Median 1.90% 65th Percentile 2% 3.3.2 Accordingly, the arm's length rate of corporate guarantee fee is taken at 1.90% under CUP and it is proposed to determine the arm's length price of the transaction as under: Amount of Corporate Guarantee at the end of the year under examination in INR ....
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....ded by assessee as it improved credit worthiness and hence lower interest rate, guarantee commission should had been charged at arm's length price (Nimbus Communications Ltd. [2013] 34 taxmann.com 298 (Mumbai - Trib.)) ▪ Provision of guarantee always involve risk and there is a service provided to AE in increasing is creditworthiness in obtaining loans in market, be from Financial institutions or from others. There may not be immediate charge on Profit & Loss account but inherent risk cannat be ruled out in providing guarantees. Transaction of providing corporate guarantee involves service rendered to AE and, therefore, provisions of transfer pricing can be invoked in respect of such a transaction (Prolifics Corporation Ltd. v. Dy. CIT [20151 55 taxmann.com 226 (Hyderabad - Trib.) * ITAT held that the assessee did incur costs on issuance of the guarantee to its subsidiary and, for that reason, the issuance of guarantee indeed had a bearing on the profits and income of such enterprise. And hence the issuance of guarantees, on the facts and in the circumstances of this case, constituted an 'international transaction' (Advanta india Ltd. [2015] 64 t....
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....en so held in various judgements of the Tribunals such as: i) Zee Entertainment Enterprises Ltd. vs Ad. CIT, Range 11(1). Mumbai in 81 Taxmann.com 379( Mumbai-Tri)( AY. 08-09) ii) Aster (P) Ltd. Vs DCIT, Circle -1(1). Hyderabad in 81 taxmann.com 297 (Hyderabad-Tri) (A.Y. 10-11 & 11-12) ii) Manugraph India Ltd vs DCIT 3(2), Mumbai in 62 taxmann.com 347 (Mumbai- Tri)( A.Y. 10-11) iv) Ladshya Media (P) Ltd. vs DCIT 10(2)(1) . Mumbai in 80 taxmann.com 309 (A.Y. 10-11) 2.2.5 In view of the above discussion and decisions, we hold that the provision of corporate guarantee by the assessee to its AE constitutes international transaction and has to be benchmarked as per the TP provisions. 2.2.6 Further, the Panel is of the opinion that the corporate guarantees (CGs) are fundamentally different from bank guarantees in their nature, risk profile, and purpose. Corporate guarantees are typically issued by a parent company to support the financial obligations of its subsidiary (associated enterprise or AE). These guarantees are often not issued for commercial consideration but to ensure the financial stability of the corporate group. ....
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.... paras, the Issue of Corporate Guarantee Commission has been examined by various courts and variable rates have been prescribed. The Rate of ALP for computing Corporate Guarantee Commission depends on the facts of each individual case. The amount of guarantee commission on a corporate guarantee can depend on several factors such as the perceived risk associated with providing the guarantee, the financial stability of the company receiving the guarantee and the likelihood of default, Duration and Size of Guarantee, Creditworthiness of the Guarantor and other relevant factors. The Panel is of the view that in calculating the guarantee commission, there cannot be an approach of one size fits all and the amount of commission will depend upon the relevant factors in each case. 2.2.10 Furthermore, the Panel notes from the Assessee's submissions, that the assessee has not provided the facts in support of its arguments as to why a lower rate of interest for corporate guarantee shall be applied. The assessee has not made supporting submissions such as credit rating of its A and its credit worthiness, which would help support the assessee's claim for a lower rate. The Panel ....
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....ng table giving the details of the corporate guarantee, the term and rate of interest charged on the amount, is mentioned as under : Sr.No. Name of the subsidiary (borrower) Period No. of days Guarantee amount as on 31.03.2020 (in foreign currency) Guarantee Commission Rate of interest charged on loan In Foreign Currency In INR 1. Cyient Inc USA 01.04.2019 to 31.03.2020 365 88,00,000 1,67,200 2,84,10,696 LIBOR +100 POINTS (1.92% TO 3.43%) 2. Cyient Inc USA 01.04.2019 to 31.03.2020 365 66,00,000 1,25,400 3. Cyient Inc Usa 01.04.2019 to 31.03.2020 365 55,00,000 1,04,500 4. Cyient Defence Services Inc Usa 01.04.2019 to 31.03.2020 365 33,00,000 62,700 45,10,202 LIBOR +100 POINTS (3.36%) 5. Cyient GmBH 01.04.2019 to 31.03.2020 365 46,00,000 87,400 69,61,837 Euribor + 150points (1.50%) 6. Cyient Europe Ltd. 01.04.2019 to 17.08.2019 139 NIL (Op. Balance 10,00,00) 7,236 4,16,20,575 Term Loan 1- Euribor +78 points (0.78%) Term Loan 2 - LIBOR + 115 POINTS (2.95%) Working capital loan 1 - 2.26% Working capital Loan 2 - 1.29....
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.... Ld.AR had submitted quite contrary to record (supra) the finding was given by the TPO that the assessee has not provided any information. As mentioned in the paragraphs reproduced above, Ld.AR submitted that the finding by TPO is factually incorrect as the assessee has provided the necessary details for the period in which the guarantees have been given. In the same letter which is at Page No 13 the assessee has submitted the reason for coming to the conclusion why the 0.53% is required to be applied and our attention was drawn to Page No.15 and 16 of the Paper Book. It was submitted that there is a rational behind as to why the Tribunal had benchmarked interest on corporate guarantee of 0.53% and our attention was drawn to the reasoning given by the coordinate benches in the case of Dabar India Limited v. Addl. CIT in ITA No. 3241 & 6525/MUM/2014 dated 18.02.2021 wherein the Tribunal in Paragraph No.127 had held as under: - "127. So far as the corporate guarantee issued on behalf of Naturalle LLC, UAE is concerned, a perusal of the details furnished by the assessee in the paper book shows that the assessee has saved incremental interest of 1.025% due to guarantee provide....
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.... material available on record, we find that this is a recurring issue and has been decided in favour of the assessee in preceding assessment years. We further find that in assessment years 2014-15 and 2015-16, coordinate bench of the Tribunal vide order dated 08/03/2022, observed as under: "82. Having heard the rival contentions and having perused the material on record, we find that this is a purely factual matter, which permeates from year to year, and once the coordinate benches have consistently held, right from 2011-12 onwards, that 50:50 allocation is reasonable, and there is no change in the material facts, we see no reasons to take any other view of the matter than the view so taken by the coordinate benches in assessee's own cases for the preceding assessment years. We, therefore, approve the conclusions arrived at by the learned CIT(A) and decline to interfere in the matter." 16. It was submitted that the coordinate Benches of Hyderabad had uniformly applying the rate of 0.53%. Ld.AR drawn our attention to the to the decision of the Co-ordinate Bench in the case Hetero Labs Limited, v. ACIT in ITA No. 312 & 313/HYD/2023 dated 21.05.2024, wherein the Tribunal h....
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....held that the corporate guarantee issued by the assessee on behalf of its AE is an international transaction, the sequator to that is whether the corporate guarantee estimated by the DRP to the tune of 1% on the amount guaranteed as a corporate guarantee commission as against 0.10% was justified or not. 8.2 In this regard, the assessee had made elaborate submissions which are reproduced elsewhere and submitted that the assessee is taking the financial facilities from the SBI and is paying 0.10% as schedule of fees and charges to the bank. 8.3. We have considered the submissions and found that the charges paid by the assessee cannot be compared for the purposes of determining the ALP of corporate guarantee commission. In our view, no third party would provide similar type of services/corporate guarantee on behalf of its AE and expose itself to the risk of giving the corporate guarantee. Therefore, the charges paid by the assessee to SBI cannot be compared for the purpose of determining the ALP of corporate guarantee commission. The Coordinate Bench in the case of Vivimed Labs vide its decision dated 12-04-2022 had adjudicated corporate guarantee commission @ 0.5% q....
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....total amount of US $ 10 million advanced to its AE. Therefore, the corresponding corporate guarantee commission @ 0.53% is required to be computed on the amount of 30.50% of assessee's share on the outstanding loan balance of US $ 93,05,376. Accordingly, grounds 2 to 4 of the Revenue appeal are dismissed." 17. It was submitted that the Ld. AO / TPO have wrongly applied the rate at which the banks were issuing corporate guarantee and it was submitted that the said rates of interest applied by TPO/DRP as the guarantee fess by the various banks is not applicable in the present case as the risk rewards and assets employed by the banks and that of the assessee were not identical. It was further submitted by the Ld.AR that it is the duty of the TPO to brought on record the comparable instance by citing at what rate the similarly situated comparable is charging the corporate guarantee from its AE. It was submitted by the assessee in the present case, the approach of the TPO / DRP is not in consonance with decision of the Tribunal and thereby the decision of the DRP / TPO is required to be reversed. 18. Per contra, Ld. DR had drawn our attention to the decision of the DRP and the Par....
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....e taxpayer had not received any interest amount on the financial commitment / loan provided to the AE, adjustment is warranted in the said issue and computation of the adjustment with respect to interest to be received on ECB is as under: Sl.No Description Amount 1. ECB loan / financial commitment Rs. 59,05,85,810/- 2. Interest Received by the assessee (A) NIL 3. Arm's Length Interest rate 1.67% 21. Now the question arises whether the ALP computed for external commercial borrowing @1.67% can be juxtapose or applied to the corporate guarantee @1.9%. In our view the answer is no, and this Tribunal while deciding the issue in the case of Hetero Labs Limited, v. ACIT (supra), as relied upon by the assessee, held that the rate of interest required to be applied is 0.53% and not 1.9%. For that purpose, the Tribunal has relied upon another Co-ordinate Bench decision in the case of Mylon Laboratories Ltd v. ACIT in ITA No.2123/Hyd/2011 and held that 0.5% is required to be applied. Accordingly, respectfully following the decision of the Co-ordinate Bench in the case of Hetero Labs Limited, v. ACIT (supra) we direct the TPO to compute the charges at 0.5....
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....Limited and it was argued that it is in the nature of shareholder activity. 3.4.2. On being asked the details of the transaction, it was replied that the transaction is in the form of a letter of comfort issued by the assessee company to one of its subsidiaries named M/s Gylent GmbH, which has advanced a loan to another AE named Oylent Europe Limited. it was submitted that in connection to the said loan the assessee issued a letter of comfort addressed to Cylent GmbH, wherein the assessee has undertaken that the borrower AE will receive adequate funding until the repayment of loan to Cylent GmbH. It was argued that a letter of comfort is different from a corporate guarantee and is a mere reassurance of performance. The reliance was placed on the judgment in case of M/s United Breweries (Holdings) Lid. vs. Karnataka Industrial Investment and Development Corporation (no citation provided) wherein the letter of comfort was provided as a document that indicates one party's intention to try to ensure that another party complies with the terms of financial transaction without guaranteeing performance in the event of the default. The attention was further invited to ....
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.... AE is unable to pay the loans the assessee will have to ensure the funding to ensure the repayment. Thus the ultimate obligation to repay the loans, in case the AE is unable to do the same, would fall on the assessee in the event of a default. Accordingly, the undertaking is in the nature of Corporate Guarantee and in response to TPO's proposal to bench-mark the guarantee in absence of any benchmarking carried out by the assessee with respect to said international transaction, information was gathered u/s. 133(6) from various banks information with regard to the guarantee fees charged on bank guarantees provided and the details are as under : S.No. Name of the Bank Guarantee Fees 1. SBI 1.30% 2. Canara Bank 1.50% 3. HDFC Bank 1.80% 4. Axis bank 2% 5. Union Bank of India 3% 6. Punjab National Bank 3% 35th Percentile 1.80% Median 1.90% 65th Percentile 2% Since no specific objections in respect of the comparable selected by TPO, the Calculation of the adjustment in respect of the international Transaction of 'Financial Support to AE, holding the transaction to be that of a corp....
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....kers of Associated Enterprises (AE) of assessee. The assessee not reported this transaction (issuance of Letter of Comfort) in its Transfer Pricing Study Report (TPSR). The Assessing Officer made reference to Transfer Pricing Officer (TPO) for computation of Arms Length Price (ALP) of transaction reported by assessee with its AE in its report furnished under Form 3CEB. The TPO noted that the assessee has not reported about issuance of Letter of Comfort to the Banker of AE. The TPO issued show cause notice for determination of ALP with regard to issuance of Letter of Comfort. The assessee filed its reply vide reply dated 07.01.2008 & 18.01.2008. In reply to the show-cause, the assessee submitted that no adjustment is ought to be made as Letter of Comfort would not represent international transaction within the meaning of section 92B(1). It was further stated that merely an unequivocal statement of intention expressed by assessee not being bilateral, is not a transaction and letter is a private affair between the assessee and the lender/banker (non associate and is not a transaction between two associate). The contention of assessee was not accepted by TPO by taking view that transac....
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....ansaction or not. In without prejudice submission, the ld. AR further submits that the coordinate bench of Mumbai Tribunal in SIRO Clinpharm (P.) Ltd. vs. DCIT [(2017) 88 taxmann.com 338 (Mum. Trib.)] that amendment in Explanation to section 92B by Finance Act is to be treated as effective at the best from A.Y. 2013-14 and so issuance of corporate guarantee prior to 01.04.2012 does not come within the definition of international transaction. 22. We have considered the submission of ld. representative of the parties and perused the order of lower authorities. During the reference pending before TPO, it was noted by TPO that assessee has issued a letter of Comfort to the banker of AE of assessee. The TPO has noted the relevant clause of Letter of Comfort in para-3.5.8 of its order, consisting the following undertaking/assurance: a) it would be its endeavor not to permit the AE to enter into liquidation (whether Voluntary or compulsory); b) to enter into an arrangement with its creditors without its liability to the bank and its subsidiary and / or Associated companies being completely discharged; c) the assessee will not dispose off any shares in t....
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....ternational (PTY) Ltd., Australia 9.00 39,42,45,000 59,13,675 4 Bank of India Tata South East Asia Ltd., Hongkong 22.50 98,56,12,500 1,47,84,187.5 5 State Bank of India Tata Africa Holdings Ltd., South Africa 30.00 131,41,50,000 1,97,12,250 6 HSBC Tata South Asia Ltd., Hongkong 48.00 210,26,40,000 3,15,39,600 7 HSBC Tata West Asia FZE, UAE 6.50 28,47,32,500 42,70,987.5 8 Bank of Baroda Tata South East Asia Ltd., Hongkong 5.00 21,90,25,000 32,85,375 Total 132.50 580,41,62,500 8,70,62,437.5 R/o 8,70,62,438 24. Before ld. CIT(A), the assessee made elaborate submission and explained the difference between Letter of Comfort within Intra Group as well as the corporate guarantee. The ld. CIT()A) after considering the submission of assessee concluded that by issuing Letter of Comfort to the Bankers of AE, the assessee did not incurred any cost. The issuance of Letter of Comfort by assessee have no bearing on the profit, income or loss as the assessee did not incur any cost or expenditure for issuing such Letter of Comfort and it does not constitute int....
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..... Lastly, Ld.AR had drawn our attention to the to the decision in the case of 2754/MUM/2014 dated 7.8.2021 and drawn our attention to the Paragraph Nos. 6 & 7 which is to the following effect:- "6. The learned Departmental Representative strongly relying upon the observations of learned Commissioner (Appeals) submitted, by providing letter of comfort / support to the AE, the assessee has facilitated the loan availed by AE. Therefore, it has to be treated at par with corporate guarantee. Hence, the decision of learned Commissioner (Appeal) should be upheld. 7. We have considered rival submissions in light of the decisions relied upon and perused materials on record. After going through sample copy of letter of comfort / support given to the bank towards loan availed by the AE, we have noticed that there is no liability or responsibility fastened with the assessee for making good the liability of the AE in case of any default. There is nothing on record to suggest that in case of any default by the AE, the outstanding loan will be recovered from the assessee. Pertinently, while sustaining a part of the adjustment made by the TPO, learned Commissioner (Appeals) has e....
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....tment. The benefit of any such support attributable to the borrower's MNE group member status would arise from passive association and not from the provision of a service for which a fee would be payable. See paragraph 7.13 on passive association." 31. Based on above submissions, Ld.AR submitted that the approach of the Ld.AO / TPO in benchmarking the letter of comfort is erroneous and required to be deleted. 32. Ld. DR relied upon the order passed by the TPO / DRP. At the outset it was submitted that assessee has not raised, this specific ground before the Tribunal even though it has raised the ground before DRP and for that purpose Ld. DR has drawn our attention to Page No. 9 of the DRP order wherein at objection No 3.3 it was mentioned as under: - "Objection No. 3.3; Without prejudice, assuming but not accepting that the transaction of letter of comfort is in the nature of corporate guarantee, the authorities below failed to appreciate that it is outside the ambit of international transaction and therefore no adjustment is warranted on the facts of the case." 33. On the basis of the above it was submitted that assessee has not challenged the corporate lette....
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....ded or to be provided to any one or more of such enterprises. (2) A transaction entered into by an enterprise with a person other than an associated enterprise shall, for the purposes of sub-section (1), be deemed to be a transaction entered into between two associated enterprises, if there exists a prior agreement in relation to the relevant transaction between such other person and the associate enterprise, or the terms of the relevant transaction are determined in substance between such other person and the associated enterprise." 36. From the perusal of the above, it is apparently clear that the financial transaction which is in the nature of guarantee would fall and would be covered by the international transaction and therefore we have no hesitation to held that "letter of comfort" which is akin to corporate guarantee would be international transaction. Corporate guarantee in financial world can be worded differently one which is given to bank / financial institutions is called as "corporate guarantee fee" when given by assessee to its related party or to business entity it is called letter of comfort. But both are having inbuilt obligation to receive the payment ....